Jackson v. Comm'r of Internal Revenue

• Decision Date: 28 November 1979
• Docket Number: Docket No. 8667-71.
• Citation: 73 T.C. 394
• Parties: LEONARD JACKSON, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

73 T.C. 394

LEONARD JACKSON, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 8667-71.

United States Tax Court

Filed November 28, 1979.

Respondent determined that petitioner received taxable income from drug trafficking activities, based solely upon information furnished by an unreliable informant. Petitioner's testimony lacked credibility and respondent offered no substantive evidence. Held, respondent may not rely upon the usual presumption of correctness attaching to the notice of deficiency because respondent's determination was shown to be arbitrary and excessive. Weimerskirch v. Commissioner, 67 T.C. 672 (1977), revd. 596 F.2d 358 (9th Cir. 1979), distinguished. Alvin Geller, for the petitioner.

Michael P. Casterton, for the respondent.

NIMS, Judge:

Respondent determined a deficiency in petitioner's income tax for the calendar year 1970 of $94,080 and additions thereto under sections 6651(a),¹ 6653(a), and 6654(a) of $23,520, $4,704, and $3,011,² respectively

The only issues presented are whether petitioner received unreported profits of $153,475 from illegal activities in 1970 and whether he is liable for additions to tax.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Petitioner Leonard Jackson maintained his legal residence in New York, N.Y., at the time he filed his petition herein. Petitioner has never filed an income tax return for the taxable year 1970. Petitioner maintained no books or records for 1970.

Petitioner has led a life of crime since his first juvenile offenses at age 11 in 1945. His first conviction on drug-related offenses was for possession of drugs in 1959. On July 29, 1965, petitioner was convicted of unlawfully, willfully, and knowingly receiving, concealing, selling, and facilitating the transportation, concealment, and sale of heroin. United States v. Jackson, Crim. No. 63-211 (S.D. N.Y., filed July 29, 1965), affd. by unpublished opinion (2d Cir. 1966). Petitioner was arrested again on July 8, 1971, but this case was dismissed. Later, he was convicted by a jury on December 15, 1972, of conspiracy to unlawfully and knowingly distribute and possess with intent to distribute Schedules I and II narcotic drug-controlled substances in violation of title 21 U.S.C. secs. 812, 841(a)(1), 841 (b)(1)(A), and 846. United States v. Jackson, Crim. No. 72-940 (S.D. N.Y., filed Dec. 15, 1972). He was serving a 10-year sentence received as a result of this conviction at the time of trial.

Petitioner was released from prison in August 1968 after serving the sentence resulting from the 1965 conviction. He obtained employment with Bethlehem Steel in Hoboken, N.J., but was laid off from the job in late 1969. For 6 to 8 weeks in 1970, he collected unemployment benefits of $50 per week from New York State. Petitioner did not hold any other jobs during the year. He had no savings when he was released from prison in 1968 or when he was laid off from Bethlehem Steel in 1969.

Two reports based upon the following information were prepared and forwarded to the revenue agent auditing petitioner.

In 1971, an informant provided information to a special agent of the Drug Enforcement Administration (hereafter DEA) and to other agents with whom the special agent worked concerning petitioner's alleged drug activities. The informant gave the agents detailed information concerning an organization in Harlem known as “Red Jackson's” which petitioner allegedly headed and which allegedly sold and distributed heroin during a period including November and December 1970. The informant claimed he was a member of petitioner's organization from the summer of 1970 until June or July 1971, when he was arrested by agents of the New York Task Force, a combined effort of DEA agents, New York City Police, and New York State Police, formed to combat narcotics trade in New York City. The DEA special agent who provided the information to the revenue agent in this case was a group supervisor with this force.

The informant told the task force that he was familiar with several “lieutenants” apparently in charge of distributing heroin in petitioner's organization. The informant stated that petitioner was the controller of the organization and that each “lieutenant” had as many as 10 or 11 street distributors. The informant's primary function was to supervise the street distributors of one of the “lieutenants.” The informant claimed that the “lieutenant” for whom he distributed sold approximately 500 quarter ounce bags of heroin daily at $50 per bag. The informant also had two or three distributors who worked directly for him. The informant never told the agents that he had seen any of the “lieutenants” give petitioner money. He also did not state whether petitioner had ever given him heroin or if he had seen petitioner with heroin during 1970. The informant did tell the agents, however, that he had seen petitioner in the cutting mills during 1971.

The revenue agent prepared his report, upon which respondent determined that petitioner realized taxable income for the taxable year 1970 in the amount of $153,474,³ relying solely upon the two reports and on conversations with the special agent. The information regarding petitioner's alleged involvement in the narcotics ring during November and December 1970 was based entirely on what the informant told the special agents and other agents. The informant did not testify during the trial of this case although a writ of habeas corpus ad testificandum was issued by this Court on June 3, 1976, commanding his presence in order that he might testify.

After the informant was arrested in mid-1971 on drug-related charges, he hoped that by cooperating with the task force he would obtain a lighter sentence. Nonetheless, before his trial, he jumped bail and fled New York. After being rearrested in Detroit, the informant refused to cooperate further. The informant was later convicted of the charges for which he was arrested; however, the special agent believed the information provided him by the informant was credible. Other information provided by the informant resulted in a conviction against a member of petitioner's organization.

OPINION

Petitioner generally contends that respondent's determination that he received income from illegal activities is erroneous; that the information used by respondent in reconstructing his income was insufficient to establish the correctness of the deficiency, thereby shifting the burden of going forward with the evidence to respondent. Petitioner argues in the alternative that if the burden of going forward with the evidence rests upon him, he has met his burden of proof.

Respondent contends that the notice of deficiency is entitled to the ordinary presumption of correctness. Respondent's position is that the only question presented is whether petitioner has met his burden of proof, not whether respondent has introduced any evidence of petitioner's illegal activities. Respondent then maintains that petitioner's testimony, which was the only evidence offered to support petitioner's position, was not credible, and that petitioner has, therefore, failed to carry his burden of proof.

Preliminarily, some attention must be given to certain items which make up the meager record in this case:

The deficiency notice. —-Respondent's determination was explained as follows:

EXPLANATION OF ADJUSTMENTS

(a) It is determined that you realized taxable income in the amount of $153,475.00, computed in detail below, from your activity as a dealer in narcotics. You did not report this income for Federal income tax purposes.

+------------------------------------------+
                ¦Gross income from heroin sales ¦$1,525,000¦
                +-------------------------------+----------¦
                ¦Cost of the heroin sold        ¦1,350,000 ¦
                +-------------------------------+----------¦
                ¦Gross profit                   ¦175,000   ¦
                +------------------------------------------+
                

Allowable expenses as determined
                Salaries of distributors          $8,000
                Salaries of millworkers           4,000
                Equipment                         1,025
                Glassine envelopes                150
                Rent                              2,700
                Transportation                    1,000
                Miscellaneous                     4,650  21,525
                Net profit from this activity            153,475
                

(b) You are allowed one exemption, for yourself, as provided by Code section 151.

(c) You are allowed the standard deduction provided by Code Section 151.

From the foregoing, it will be observed that, on its face, the basis of the determination was set forth with substantial particularity but, as we will indicate subsequently, that proved to be deceptive.

The deficiency notice also contains the statement that “An assessment of the deficiency and additions to the tax mentioned has been made to the extent of $60,007.39 under the provisions of the internal revenue laws applicable to jeopardy assessments.”

Stipulation of facts. —-The parties stipulated copies of the judgments reflecting petitioner's criminal convictions in 1965 and 1972. They also stipulated that petitioner was a resident of New York City at the time the petition herein was filed, that he filed no tax return for 1970, and that respondent determined that petitioner realized taxable income in the amount of $151,850 for the taxable year December 31, 1970, from petitioner's activities as a dealer in narcotics, and further determined a tax deficiency plus penalties as indicated above. Nothing further of substance was stipulated.

Petitioner's evidence. —-Petitioner's evidence consisted of the foregoing stipulated facts plus his own uncorroborated testimony that his only source of funds during 1970 was unemployment compensation in the amount of $50 per week and $1,000, which he borrowed from Manufacturer's Hanover Bank in New York. He denied categorically dealing in or using...