De Cavalcante v. C. I. R.

• Citation: 620 F.2d 23
• Decision Date: 21 March 1980
• Docket Number: 79-2197,Nos. 79-2196,s. 79-2196
• Parties: 80-1 USTC P 9363 Simone and Mary DE CAVALCANTE, Appellants-Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellee-Cross-Appellant. . Submitted under Third Circuit Rule 12(6)
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 23

620 F.2d 23

80-1 USTC P 9363

Simone and Mary DE CAVALCANTE, Appellants-Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellee-Cross-Appellant.

Nos. 79-2196, 79-2197.

United States Court of Appeals, Third Circuit.

Submitted under Third Circuit Rule 12(6) March 21, 1980.

Decided April 16, 1980.

Fred Randall, Livingston, N. J., for appellants.

M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Chief App. Section, Carleton D. Powell, Gayle P. Miller, Attys., Tax Div., Dept. of Justice, Washington, D. C., Lester Stein, Acting Chief Counsel, I.R.S., Washington, D. C., for appellee.

Before SEITZ, Chief Judge, and GARTH and HIGGINBOTHAM, Circuit Judges.

OPINION OF THE COURT

GARTH, Circuit Judge.

The Commissioner assessed the De Cavalcantes ¹ for unpaid income taxes on more than 2.5 million dollars of illegal gambling income allegedly earned between 1965 and 1969. Upon the taxpayer's petition for review, the United States Tax Court, in an opinion dated October 31, 1978, upheld the Commissioner's assessment for one half of the tax year 1968 and for 1969, but it did not find any deficiencies in tax for the years 1965 to the middle of 1968. ² Both parties appeal from the Tax Court's decision. De Cavalcante claims that there is no evidence to support the deficiencies which were upheld. The Commissioner claims that the Tax Court misallocated the burden of proof in refusing to sustain the assessments charged against income allegedly earned between 1965 and the middle of 1968. After reviewing both of these contentions, we conclude that the decision of the Tax Court should be affirmed in all respects. ³

I.

The critical evidence in the Commissioner's case is the fact that on October 23, 1970, De Cavalcante pled guilty in federal district court to an indictment which charged him with conspiracy to violate 18 U.S.C. § 1952, by operating an illegal gambling enterprise. ⁴ One of the overt acts of conspiracy listed in the indictment charged that De Cavalcante "did supervise and control the business of accepting wagers and bets." ⁵ In addition, at the Rule 11 proceeding, taken in connection with De Cavalcante's guilty plea, De Cavalcante made further remarks in regard to the scope of his connection with the gambling operation. As part of its effort to establish a factual basis for the guilty plea, the district court specifically called De Cavalcante's attention to the fact that the indictment charged that he had "supervised" the gambling operations. Immediately after this, De Cavalcante abruptly stated, "I plead guilty."

The remainder of the Commissioner's evidence consisted of testimony about the investigation of De Cavalcante's gambling operations which had been conducted jointly by the FBI and the Internal Revenue Service during 1968 and 1969 and which led to the indictment against De Cavalcante. From extensive wiretaps conducted in 1968 and 1969, and from personal surveillance of De Cavalcante and his associates, government agents testified that they were able to establish not only the existence of the gambling operation but they were also able to estimate the gross receipts from gambling and the approximate net returns to the principal operators of the gambling ring. ⁶ Moreover, John A. Bartels, Jr., the Justice Department Attorney in charge of the investigation testified that De Cavalcante had been identified as the ringleader of the gambling operation on the basis of statements given to the FBI by a confidential informant. But, in a statement which proved crucial to the government's case before the Tax Court, Mr. Bartels admitted that the investigation had focused exclusively on 1968 and 1969 and that the government had no evidence of any illegal gambling prior to 1968.

De Cavalcante's evidence before the Tax Court consisted primarily of his own testimony and the testimony of others who stated that De Cavalcante had never had any connection with gambling. In addition, De Cavalcante tried to undercut the impact of his guilty plea, claiming that he pled guilty solely out of duress ill health, fear of the adverse publicity which would attach to a The Tax Court found that because of his guilty plea, coupled with his statement at the Rule 11 proceeding, De Cavalcante was estopped from denying his connection with gambling activities. Moreover, the Tax Court, after examining the testimony presented on De Cavalcante's behalf, determined that it lacked credibility. Thus, the court concluded that De Cavalcante had not met his burden of adducing facts to show the arbitrariness of the Commissioner's assessment. Nonetheless, relying on the admission by Mr. Bartels, the Tax Court concluded that the Commissioner had produced no evidence whatsoever which indicated that a gambling operation had existed prior to the 1968 tax year or which implicated De Cavalcante in such an activity. Consequently, the Tax Court only sustained the taxes assessed against deficiencies determined for the latter half of 1968 and for 1969. ⁸ Both De Cavalcante and the Commissioner appealed from the Tax Court's decision. Their arguments will be discussed in turn.

long trial and fear of a long sentence. ⁷ Thus, despite his guilty plea, De Cavalcante maintained that he had no connection with gambling.

II.

De Cavalcante's Appeal (No. 79-2196)

De Cavalcante argues on appeal that the Tax Court erred in concluding that there was credible evidence which connected him with any gambling activity. The scope of appellate review of factual determinations of the Tax Court, such as the ones challenged here by De Cavalcante, is quite limited. This court described the applicable standards of review in Gerardo v. Commissioner, 552 F.2d 549, 552 (3d Cir. 1977):

In the Tax Court, the Commissioner's determination carries a presumption of correctness, see Baird v. Commissioner of Internal Revenue, 438 F.2d 490, 492 (3d Cir. 1971), and the taxpayer has the burden of proving that determination "to be arbitrary (i. e., without rational foundation in fact and based upon unsupported assumptions) . . . ." Harry Gordon, 63 T.C. 51, 73 (1974), modified, 63 T.C. 501 (1975) appeal pending; see Baird v. Commissioner of Internal Revenue, supra at 492. On appeal, our scope of review "is limited by the general principle that all findings of facts made by the Tax Court and all inferences drawn by it from these facts are binding on the appellate courts unless 'clearly erroneous.' " Costantino v. Commissioner of Internal Revenue, 445 F.2d 405, 407 n. 5 (3d Cir. 1971).

Thus, in order to prevail, De Cavalcante must show that the Tax Court made clearly erroneous findings of fact.

Our review of the record indicates that De Cavalcante has not met this burden. The Tax Court had before it ample evidence of De Cavalcante's involvement with gambling: the guilty plea, Mr. De Cavalcante's admission during the guilty plea proceeding, ⁹ and the testimony of the Thus, we cannot conclude that the Tax Court erred in its determination that De Cavalcante had failed to introduce evidence sufficient to prove that the Commissioner's tax assessments for late 1968 and 1969 were arbitrary.

government agents. De Cavalcante's proof in rebuttal consisted largely of his own self-serving testimony by himself and others. The district court rejected this testimony on credibility grounds. The Tax Court was empowered to disregard this testimony, see Gerardo, 552 F.2d at 553, and on this record, we are bound by such credibility findings.

III.

The Commissioner's Appeal (No. 79-2197)

In his cross appeal, the Commissioner argues that the Tax Court misapplied this court's decision in Gerardo v. Commissioner, supra, when it refused to uphold the full amount of tax assessed. The Commissioner claims that the tax assessed for the period between January 1965 and July 1968 was not without rational basis and that the Tax Court erred by requiring the government to come forward with evidence of De Cavalcante's involvement in gambling activities during that period. We conclude that the Tax Court correctly applied the law of this Circuit.

In Gerardo, the IRS had conducted an investigation of a lottery operation between August 5, 1966 and February 3, 1967, which provided ample evidence that the taxpayer acted as a principal in the lottery operation throughout that time. The deficiency assessed against Gerardo, however, went back past August 5, 1966 to April 4, 1966. The only evidence connecting Gerardo to any gambling activity prior to the period when surveillance of him began was an April 4, 1966 raid of another gambling location where the government found betting slips similar to those used in Gerardo's lottery operation. This court found that this evidence was not sufficient to sustain the inference that Gerardo was engaged in gambling activities prior to August 5, 1966. Consequently, in the following passage, the court concluded that the Commissioner was not entitled to the presumption of correctness for that period:

(I)n order to give effect to the presumption on which the Commissioner relies, some evidence must appear which would support an inference of the taxpayer's involvement in gambling activity during the period covered by the assessment. Without that evidentiary foundation, minimal though it may be, an assessment may not be supported even where the taxpayer is silent. See Pizzarello v. United States, supra (408 F.2d) at 583.

While we realize the difficulties which the Commissioner encounters in assessing deficiencies in circumstances such as are presented here, we nevertheless must insist that the Commissioner provide some predicate evidence connecting the taxpayer to the charged activity if effect is to be given his presumption of correctness.

552 F.2d at 554.

Gerardo, therefore, stands for the proposition that the "Commissioner (must) provide some predicate evidence connecting the taxpayer to the charged activity." 552 F.2d at 554. The Commissioner correctly points out that this was not...