U.S. v. Besase, 78-3047

Decision Date25 July 1980
Docket NumberNo. 78-3047,78-3047
Citation623 F.2d 463
Parties80-2 USTC P 16,343 UNITED STATES of America, Plaintiff-Appellant. v. John BESASE, George Besase, Sam Besase, Angelo Perna, Sam Rappaport, Ted Maison, Defendants-Appellees, Estate of Joseph Besase, Josephine Besase, Lucas County State Bank, Cissie Rappaport, First Federal Savings and Loan Association, Anna Perna, Toledo Home Federal Savings and Loan Association, Thelma Kritzer, Sylvania Savings Bank, Rosemarie Besase, Anthony Besase, Jr., George S. West, and Pauline A. West, Defendants.
CourtU.S. Court of Appeals — Sixth Circuit

James R. Williams, U. S. Atty., Patrick J. Foley, Asst. U. S. Atty., Toledo, Ohio, M. Carr Ferguson, Gilbert E. Andrews, Francis J. Gould, Carleton D. Powell, Dept. of Justice, App. Section, Tax Div., Washington, D. C., for plaintiff-appellant.

John Kennedy Lynch, Cleveland, Ohio, David G. Wise, Lawrence E. Duffey, Toledo, Ohio, Norman E. Bischoff, Sylvania, Ohio, for defendants-appellees.

Before CELEBREZZE, MERRITT and JONES, Circuit Judges.

MERRITT, Circuit Judge.

The government appeals the dismissal of its civil action to collect wagering excise taxes, fraud penalties, and interest from the defendants. The government contends the defendants failed to report and pay tax on all of their gross income from a numbers operation. Two issues are presented: (1) did the District Court correctly allocate the burden of proof between the parties; and (2) did the District Court correctly conclude that the government had failed to carry its burden with respect to any of the defendants. We affirm with respect to all of the defendants except three. In those three cases we reverse.

I.

During the tax years involved in this case, the Internal Revenue Code imposed an excise of ten per cent on the gross amount of wagers. 26 U.S.C. § 4401(a). For fraudulent deficiencies, the Code additionally affixed a civil penalty amounting to fifty per cent of the excise. 26 U.S.C. § 6653(b). All persons engaged in the business of accepting wagers were subject to the tax. 26 U.S.C. § 4401(c). Such persons were required to identify themselves yearly by registering with the Internal Revenue Service. 26 U.S.C. § 4412(a).

The defendants, each of whom was a self-avowed numbers operator, registered annually in the form of three separate partnerships. George Besase and John Besase filed their registration form as partners. Joseph Besase joined them until his mid-1963 death. Sam Besase and Angelo Perna likewise registered together as partners. Sam Rappaport and Ted Maison filed as a third partnership. Each partnership claimed to operate a separate numbers game.

At stake for players of the numbers games was a jackpot that could be won by correctly guessing a three-digit number. The winning number would be derived from afternoon stock market reports. After the number and winners were determined, and payoffs made, the partners would split the remaining proceeds.

The three partnerships each filed separate monthly wagering tax returns. Between January 1, 1961, and October 23, 1963, the combined monthly gross income reported by the three partnerships ranged from approximately $5,000 to $10,000.

The government claims that the defendants actually operated a single partnership which earned a monthly gross income of approximately $145,000. According to the government, the alleged partnership was in business from January 1, 1961, through October 23, 1963, but did not report or pay any wagering tax liability. The government assessed over one million dollars in wagering excise taxes, fraud penalties and interest 1 on the income allegedly derived from the unregistered single partnership, and sought to reduce this amount to judgment in the District Court. 2

II.

The District Court, at a bench trial, placed the ultimate burden of persuasion on the government. An initial presumption of correctness applies to assessments. Sharwell v. Commissioner of Internal Revenue, 419 F.2d 1057, 1060 (6th Cir. 1969). At the outset, therefore, taxpayers usually have the burden of producing evidence to refute the validity of an assessment. See Foster v. Commissioner of Internal Revenue, 391 F.2d 727, 735 (4th Cir. 1968).

The District Court allowed the defendants to shift the burden of proof back to the government simply by producing evidence from which it could be found that the assessment was incorrect. Thereafter the government had to substantiate the validity of its claims, and bore the risk of non-persuasion. The impracticality and inequity of requiring a taxpayer to prove a negative allegation such as the non-existence of a common partnership, said the District Court, warranted the lighter burden of defendants' proof.

The government challenges two aspects of the burden of proof formula. First the government argues that, regardless of the nature of a taxpayer's proof, taxpayers always must disprove the validity of an assessment by a preponderance of the evidence. Only with respect to fraud penalties does the government concede that it bears the ultimate burden of persuasion by a preponderance of the evidence. Secondly, the government insists that it was not the existence of a common partnership that the defendants had to disprove, but rather the non-receipt of income. The proof tied each defendant to the underlying gambling operation, says the government, and thus made each defendant individually and personally liable for the taxes due. According to the government, then, both the formulation and the stated object of the burdens of proof were wrong.

The District Court correctly allocated the relative burdens of proof. This is an action to collect a tax assessment. In such cases, this Court consistently has given the assessment an initial presumption of validity. See Sharwell v. Commissioner of Internal Revenue, 419 F.2d at 1060. It devolves at once upon the taxpayer to challenge the assessment. Id. Where it is a negative assertion that a successful taxpayer would have to prove though, the "law imposes much less of a burden upon a taxpayer." Weir v. Commissioner of Internal Revenue, 283 F.2d 675, 679 (6th Cir. 1960). Reasonable denials of the assessment's validity have sufficed in such cases to shift the burden back to the government. Id. The government then bears the task of substantiating its assessment in cases of this type.

As in Weir the defendants ultimately had to prove their non-receipt of income in order to prevail. They denied the existence of, and the receipt of income from, a common partnership. They characterized the nature of their relationship as social, and offered testimony to support the explanation. The nature of their proof justified use of the lighter burden and allocation of the ultimate risk of non-persuasion to the government. See generally C. McCormick, Handbook of the Law of Evidence § 378; J. Wigmore, Evidence § 2485 (discussing apportionment considerations).

Indeed, the burden of proof could not otherwise have been allocated without risking a violation of defendants' privilege against self-incrimination. In Grosso v. United States, 390 U.S. 62, 65-69, 88 S.Ct. 709, 19 L.Ed.2d 706 (1968), the Supreme Court ruled that the Fifth Amendment privilege against self-incrimination precluded federal criminal prosecution for failure to file the required wagering tax forms. At the basis of the Court's decision was the Hobson's choice that federal wagering tax laws pose to gamblers. Before the Grosso decision, a gambler had no choice but to file returns and pay the tax and possibly incriminate himself under state law, or not comply and possibly incur a federal penalty. To preserve the efficacy of the self-incrimination privilege, the Court prohibited the imposition of certain criminal sanctions for failure to comply with the wagering tax laws.

The choice between self-incrimination and undue forfeiture looms no less ominously in the context of a civil action to collect the wagering excise. A gambler who wants to challenge the correctness of an assessment runs a high risk of incriminating himself under state law. The government, for example, erroneously may impose a wagering tax assessment of $20,000 when, in fact, the taxpayer owes only $10,000. To show error in the assessment, the taxpayer may have no choice but to divulge the inculpating details of his wagering operation and thus expose himself to state prosecution. 3 If a prudent gambler decides not to challenge the assessment lest he invite a state criminal prosecution, he often averts self-incrimination only at the cost of unwarranted tax liability. To allow a gambler to disprove the validity of a wagering tax assessment only by a preponderance of the evidence could penalize the exercise of the privilege against self-incrimination in a manner that the Supreme Court outlawed in Grosso.

The burden of proof used by the District Court accommodates both the privilege against self-incrimination and the presumption of accuracy normally accorded to government tax assessments. It neither forces the protesting taxpayer to expose himself to state criminal liability nor robs the government of the advantage gained by the initial presumption. It merely spares the taxpayer from the threat of self-incrimination by requiring the government to justify its claim. Accordingly, we find no error in the apportionment of the burden of proof by the District Court.

III.

At trial, the ultimate factual question was whether the defendants had operated a common gambling partnership that received wagering income from January 1, 1961, through October 23, 1963. The District Court found the evidence insufficient to establish the existence of the alleged syndicate, and dismissed the case on the merits. We believe that portions of this finding were clearly erroneous.

The government based its income estimate and common partnership theory on evidence seized in a surprise raid by...

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