Central de Gas de Chihuahua, SA v. US, EP-91-CA-310R to EP-91-CA-312R. No. 91-0854R-01

• Decision Date: 29 April 1992
• Docket Number: No. EP-91-CA-310R to EP-91-CA-312R. No. 91-0854R-01,91-082R-01 and 91-0855R-01.,EP-91-CA-310R to EP-91-CA-312R. No. 91-0854R-01
• Citation: 790 F. Supp. 1302
• Parties: CENTRAL DE GAS DE CHIHUAHUA, S.A., Plaintiff, v. UNITED STATES of America, Defendant. HIDRO GAS JUAREZ, S.A., Plaintiff, v. UNITED STATES of America, Defendant. ATLAS LEASING, INC., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Texas

790 F. Supp. 1302

CENTRAL DE GAS DE CHIHUAHUA, S.A., Plaintiff, v. UNITED STATES of America, Defendant.

HIDRO GAS JUAREZ, S.A., Plaintiff, v. UNITED STATES of America, Defendant.

ATLAS LEASING, INC., Plaintiff, v. UNITED STATES of America, Defendant.

Nos. EP-91-CA-310R to EP-91-CA-312R. Nos. 91-0854R-01, 91-082R-01 and 91-0855R-01.

United States District Court, W.D. Texas, El Paso Division.

April 29, 1992.

George W. Connelly, Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Tex., for plaintiffs.

Mary C. Vance, Tax Div., Dept. of Justice, Dallas, Tex., for defendant.

MEMORANDUM OPINION AND ORDER

RUESCH, United States Magistrate Judge.

Plaintiffs filed these three cases seeking judicial review, under 26 U.S.C. § 7429(b), of jeopardy assessments imposed by the Internal Revenue Service (IRS). The parties consented to Magistrate Judge jurisdiction under 28 U.S.C. § 636(c) and requested consolidation of the evidentiary hearings. The consolidated evidentiary hearings were held on April 16 and 17, 1992. Plaintiffs were represented by George W. Connelly of Houston, Texas and the Government was represented by Mary C. Vance, an attorney in the Tax Division of the Department of Justice. The jeopardy assessments were issued by the IRS on April 15, 1991.¹

The taxpayers and the kinds of taxes assessed against each are as follows:

1. HIDRO GAS JUAREZ, S.A., ("HIDRO") is a Mexican corporation owned by Miguel Zaragoza Fuentes, a citizen and resident of Mexico. During the years in question and up to the present, HIDRO has purchased LPG (liquified petroleum gas or liquid propane gas) in the United States and has transported it in trucks to Mexico where the LPG has been sold. The jeopardy assessment is based on HIDRO's failure to pay diesel fuel tax and leaking underground storage tank excise tax for the quarters beginning March 31, 1980 and ending June 30, 1990. The Government alleges that, although HIDRO has purchased the diesel fuel for its transport trucks in Mexico, the diesel fuel tax is due because the Mexican diesel fuel is used to operate the trucks on public streets and highways in the United States. The assessed tax, penalties, and interest total more than $2 million.

2. ATLAS LEASING, INC. ("ATLAS") is a Texas corporation also owned by Miguel Zaragoza Fuentes. ATLAS was created in 1985 for the purpose of purchasing from HIDRO, and leasing back to HIDRO, the trucks used by HIDRO to transport the LPG. Two jeopardy assessments were issued against ATLAS: one for failure to pay withholding tax for the years 1985 to and including 1989, and the other for failure to pay income tax for the years 1988 and 1989. The assessed taxes, penalties, and interest total more than $2 million.

3. CENTRAL DE GAS DE CHIHUAHUA, S.A., ("CENTRAL") is a Mexican corporation also owned by Miguel Zaragoza Fuentes. In 1989 and 1990, CENTRAL became the owner of the trucks used by HIDRO to transport LPG. The jeopardy assessment is based on CENTRAL's failure to pay income tax for the year 1990. Because CENTRAL leased the trucks to HIDRO but claimed no rental income; the IRS imputed rental income to CENTRAL. The assessed tax and interest total more than $700,000.

The IRS is authorized to make jeopardy assessments and thereby immediately collect taxes when it believes that delay, which is part of the normal assessment and collection procedure, will jeopardize collection of the tax. 26 U.S.C. §§ 6861, 6862; Walker v. United States, 650 F.Supp. 877, 880-881 (E.D.Tenn.1987). Judicial review of the IRS's decision is obtained in a suit filed by the taxpayer in federal district court after the taxpayer has requested administrative review of the assessment. 26 U.S.C. § 7429(b); Felkel v. United States, 570 F.Supp. 833, 835 (D.S.C. 1983); DeLauri v. United States, 492 F.Supp. 442, 443-444 (W.D.Tex.1980); Loretto v. United States, 440 F.Supp. 1168, 1170 (E.D.Pa.1977). The court is required to make a de novo determination of two issues and its decision cannot be appealed. 26 U.S.C. § 7429(b)(3) & (f); Walker, 650 F.Supp. at 881; Loretto, 440 F.Supp. at 1170 n. 2, 1171-1172. The two issues are: (1) whether the making of the jeopardy assessment "is reasonable under the circumstances," and (2) whether the amount assessed "is appropriate under the circumstances." 26 U.S.C. § 7429(b)(3)(A)(i) & (ii); Harvey v. United States, 730 F.Supp. 1097, 1104 (S.D.Fla.1990); Walker, 650 F.Supp. at 881; Felkel, 570 F.Supp. at 838; Barry v. United States, 534 F.Supp. 304, 307 (E.D.Pa.1982); DeLauri, 492 F.Supp. at 445; Fidelity Equip. Leasing Corp. v. United States, 462 F.Supp. 845, 849, 850 (N.D.Ga.1978). The Government has the burden of proof on the first issue and the taxpayer has the burden of proof on the second. 26 U.S.C. § 7429(g)(1) & (2); see, eg., Harvey, 730 F.Supp. at 1105; Walker, 650 F.Supp. at 881; DeLauri, 492 F.Supp. at 445, 446. These three Plaintiffs are not contesting the second issue and have presented no evidence or arguments on that issue. Thus, the only question is whether the making of each jeopardy assessment was reasonable under the circumstances.

The standard of proof by which reasonableness must be established is described as something more than "not arbitrary or capricious" and something less than "substantial evidence." Harvey, 730 F.Supp. at 1104; Walker, 650 F.Supp. at 881; Felkel, 570 F.Supp. at 838; Barry, 534 F.Supp. at 308; DeLauri, 492 F.Supp. at 445; Loretto, 440 F.Supp. at 1172; but see George F. Harding Museum v. United States, 674 F.Supp. 1323, 1326 (N.D.Ill. 1987) (the standard is similar to probable cause in a preliminary hearing in a criminal case).

The evidence which is admissible and on which the court can rely includes evidence that would not be admissible in a civil or criminal trial. See Harvey, 730 F.Supp. at 1104; Billig v. United States, 1981 WL 1898, at *3, 49 A.F.T.R.2d (P.-H.) 82-479, 82-480, 81-2 U.S.T.C. (CCH) para. 9792 at 88,635 (N.D.Ga.1981). Such evidence includes affidavits, McAvoy v. IRS, 475 F.Supp. 297, 299 (W.D.Mich.1979); Bremson v. United States, 459 F.Supp. 121, 122 & n. 2, 123, 125 & n. 11, 127 & n. 15 (W.D.Mo.1978); Loretto, 440 F.Supp. at 1171 & n. 4, even affidavits containing Government agents' conclusions and opinions, Bremson, 459 F.Supp. at 127, 128, hearsay, Id.; French v. United States, 1979 WL 1430, at *2, 44 A.F.T.R.2d (P.-H.) 79-5653, 79-5654, 79-2 U.S.T.C. (CCH) para. 9538, at 87,948 (E.D.Okla.1979) (information that the revenue agent learned from individuals); Bean v. United States, 618 F.Supp. 652, 656-657 (N.D.Ga.1985) (information that the IRS agent learned from other IRS personnel), including hearsay from confidential sources, Bean, 618 F.Supp. at 656 (information that the IRS agent learned from "reliable sources"), documents submitted as exhibits, Loretto, 440 F.Supp. at 1171, and, of course, testimony, Welch v. United States, 575 F.Supp. 464, 466 (S.D.Miss.1983); Bremson, 459 F.Supp. at 122 n. 3. In short, courts "must consider any information that has a bearing" on the two issues the court must address. Bremson, 459 F.Supp. at 125; see also, McAvoy, 475 F.Supp. at 298; Loretto, 440 F.Supp. at 1173. This evidence includes information unknown to the IRS when it made the jeopardy assessment but discovered after that time. Harvey, 730 F.Supp. at 1104; DeLauri, 492 F.Supp. at 445; McAvoy, 475 F.Supp. at 298; Loretto, 440 F.Supp. at 1173-1174.

In these three cases, the evidence consisted of each party's exhibits which were admitted without objection from the opposing party, an affidavit admitted as an exhibit, Plaintiffs' stipulations to which the Government agreed, and Government-offered testimony which included hearsay. Plaintiffs offered nothing other than their stipulations and exhibits.

In order to establish a reason to believe that the collection of a tax is in jeopardy, the IRS typically relies on one of the following three factors:

(1) The taxpayer is or appears to be designing quickly to depart from the United States or to conceal himself;

(2) The taxpayer is or appears to be designing quickly to place his property beyond the reach of the Government either by removing it from the United States, or by concealing it, or by transferring it to other persons, or by dissipating it; or

(3) The taxpayer's financial solvency appears to be imperiled.

Harvey, 730 F.Supp. at 1104; DeLauri, 492 F.Supp. at 445; Fidelity Equip., 462 F.Supp. at 849. In these three cases, the Government relies on the second factor and claims that the taxpayers are designing quickly to place their property beyond the reach of the Government.

To establish this point, the Government offered the same evidence for each of the three corporate Plaintiffs because each is, or during its existence was, owned by the same person, Miguel Zaragoza Fuentes. Specifically, in order to establish jeopardy in the collection of taxes from these corporate Plaintiffs, the Government relies, in part, on the actions Miguel Zaragoza Fuentes took through another corporation he owned. This court has read no jeopardy assessment case in which the taxpayer was a corporation and in which the Government, to establish jeopardy of the taxpayer corporation, relied on acts performed by the corporation's owner through other corporations he owned. In the typical case, the taxpayer is an individual who operates through shell corporations and thereby conceals assets from the IRS. Harvey, 730 F.Supp. at 1101, 1107; Bean, 618 F.Supp. at 655; Felkel, 570 F.Supp. at 835, 836, 838, 839; Haskin v. United States, 444 F.Supp. 299, 302 (C.D.Calif.1977); see Bremson, 459 F.Supp. at 126. Here, the taxpayers are corporations owned by the same person. Thus, the question is whether the acts of Miguel Zaragoza Fuentes, which were performed as the owner of another corporation, can be used to establish jeopardy for Plaintiff corporations which are also owned by Miguel Zaragoza Fuentes. The answer is "yes" because the evidence discloses that Miguel...