U.S. v. Stonehill
| Decision Date | 08 April 1983 |
| Docket Number | Nos. CA,s. CA |
| Citation | 702 F.2d 1288 |
| Parties | 83-1 USTC P 9285 UNITED STATES of America, Plaintiff-Appellee, v. Harry S. STONEHILL, Individually and as Trustee of the Lourdes Blanco Stonehill Children's Trust, The Elizabeth Anne Stonehill Trust, and The Susan J. Stonehill Trust, et al., Defendants-Appellants, Trammell, Rand, Nathan & Lincoln, a Partnership, and Pacita Carrion Brooks, Intervenors-Appellants. 80-4590, 80-4598, 80-4599 and 80-6062. |
| Court | U.S. Court of Appeals — Ninth Circuit |
James R. Moore, Schwabe, Williamson, Wyatt, Moore & Roberts, Portland, Or., Trammell, Rand, Nathan & Lincoln, P.C., Washington, D.C., William W. Saunders, Honolulu, Hawaii, for appellants.
Appeal from the United States District Courts for the Central and Northern Districts of California, and the District of Hawaii.
Before CANBY, NORRIS and REINHARDT, Circuit Judges.
The government initiated this action to foreclose income tax liens. After trial to the court, the district judge granted judgment in favor of the government. United States v. Stonehill, 420 F.Supp. 46 (C.D.Cal.1976). The taxpayers, their wives, their lawyers and certain other parties appeal.
Appellants Harry S. Stonehill and Robert P. Brooks (the taxpayers) are United States citizens who entered business in the Philippines after World War II. They settled in the Philippines and both married Filipino women. They prospered, eventually controlling many successful corporations and In 1950, the taxpayers branched out into the cigarette manufacturing business by establishing the United States Tobacco Company (USTC). Their fortunes brightened considerably after 1958 when one of their companies obtained the first and only exclusive license (barter permit) to import American tobacco into the Philippines. For the license, the taxpayers made payments totalling ten million pesos (three million dollars at the black market exchange rate) to the ultimately victorious Philippine presidential candidate. The license gave the taxpayers a monopoly on Philippine sales of American tobacco, which consumers greatly preferred. USTC, controlled and largely owned by the taxpayers, was the principal beneficiary of the license. USTC bought the American tobacco and manufactured cigarettes for sale in the Philippines. 1 In the first fourteen months after the acquisition of the license, USTC's share in the Philippine cigarette market increased by some 1500% (from a 3.7% share to 58%).
wielding great influence in Philippine politics.
The district court found that, between 1958 and 1961, millions of dollars from various Philippine business dealings passed through the taxpayers' hands. Much of this money came from illegal and unrecorded sources. 2 The taxpayers extracted commissions and rebates from exporters and shippers of the American tobacco. They received kickbacks from Philippine manufacturers who were permitted to buy imported tobacco, and they siphoned off large sums from USTC and other controlled corporations. Neither the corporate books nor the taxpayers' individual records reflected these transactions. Over nine million dollars flowed through black market channels to secret Swiss bank accounts and "shell" companies. Some of this money paid expenses of USTC in the United States. 3 About four million of these dollars were invested in American real estate and securities. During these years the taxpayers reported combined incomes of less than $200,000.
In about 1960, both American and Philippine officials became interested in the taxpayers' activities. The United States State Department believed that Stonehill was a corrupt influence on the Philippine government and wanted to get him out of that country. 4 Consequently, the United States Internal Revenue Service began to investigate the taxpayers' affairs.
On March 3, 1962, some 200 agents of the Philippine National Bureau of Investigation raided the offices of the taxpayers and seventeen of their corporations. The agents illegally seized thirty-five truckloads of documents. Representatives of the United States Internal Revenue Service were permitted to examine these documents, and over 35,000 were eventually copied by the Internal Revenue Service. 5 A three year, worldwide audit ensued. More than fifty revenue agents audited some twenty-five business entities in the United States, the Philippines, Hong Kong, Australia, Japan, Canada, France, England and Germany. Because the taxpayers' records did not accurately reflect income, the Commissioner used the audit information to estimate unreported income by calculating the increase in the taxpayers' net worth. The Commissioner computed tax deficiencies (including interest and penalties) of $13,613,721.51 against Stonehill and $11,182,966.73 against Brooks.
Fearing that the taxpayers, if given time, would try to remove their assets from this country, the Commissioner issued "jeopardy" assessments pursuant to 26 U.S.C. Sec. 6861 against the taxpayers on January 18, 1965. 6 Section 6861 permits the Commissioner to issue an assessment without first sending the usual notice of deficiency (90 day letter) when collection would be "jeopardized by delay." The filing of the jeopardy assessments created tax liens on the property of the taxpayers. 26 U.S.C. Sec. 6321. 7 One week later, the United States commenced these actions to foreclose tax liens on certain of the taxpayers' properties in the United States. 8
Years of litigation ensued, involving hundreds of depositions all over the world, dozens of hearings, and three successive judges. Resolution was complicated by the absence of crucial documents and witnesses (including the taxpayers themselves), by sensitive diplomatic and political considerations, and by many charges of misconduct made by both sides. In 1967, the taxpayers made a motion to suppress the evidence illegally seized in the Philippine raids. The district court concluded that the United States had not instigated or participated in the illegal searches and denied the motion. 274 F.Supp. 420 (S.D.Cal.1967). We affirmed. 405 F.2d 738 (1968), cert. denied, 395 U.S. 960, 89 S.Ct. 2102, 23 L.Ed.2d 747 (1969).
After pre-trial hearings in 1974, the government conceded that half of the taxpayers' income constituted income to their wives under Philippine community property laws. The wives are not subject to United States income taxation. Therefore, the amount of tax assessed against the taxpayers was halved.
Ten years after the action commenced, on May 27-30, 1975, it was tried before Judge Solomon. The government introduced many documents and depositions to prove fraud. To support the asserted tax deficiencies, however, the government introduced only the jeopardy assessments. The government thus chose to rely on the presumption that the assessments are correct, rather than proving each item of the underlying net worth computations. The jeopardy assessments themselves contained only bare assertions of tax due plus interest and The district court upheld the validity of the tax liens. The court adjusted the assessments to correct the treatment of the ten million peso bribe, and to reflect the conceded community property split. Although these adjustments greatly reduced the assessments, the district court held that the taxpayers had not rebutted the presumption of correctness. The district judge also rejected the wives' claim that the tax liens did not encumber their community half interest in the properties. United States v. Stonehill, 420 F.Supp. 46 (C.D.Cal.1976).
penalties in each of the four years. Apparently by oversight, the net worth computations were never put into evidence at all.
After the main trial, Trammell, Rand, Nathan and Lincoln (TRNL), the lawyers representing the taxpayers, intervened to foreclose liens securing legal fees against some of the properties subject to litigation. The district judge rejected their claim, ruling that the TRNL's rights were ineffective against or inferior to the government's tax liens.
Four groups of defendants appeal:
(1) The taxpayers, Harry S. Stonehill and Robert P. Brooks, appeal the finding of tax liability.
(2) Their wives, Lourdes Blanco Stonehill and Pacita C. Brooks, appeal the decision that the liens encumber their community property interest in the properties.
(3) Trammell, Rand, Nathan and Lincoln, the law firm that defended the taxpayers, appeals the district court's ruling that any liens for attorneys' fees that they have upon these properties are invalid against the government.
(4) Finally, certain third parties appeal the judgment on the ground that it extinguished their interests in the property without their having an opportunity to litigate the issue.
In the trial to foreclose tax liens, the government produced no evidence on the amount of tax liability, but chose instead to rely upon the presumption of correctness which applied to the assessments of tax. The taxpayers contend that the district court erred in awarding judgment on the basis of the presumption. They argue that the presumption never arose, or was destroyed by the substantial errors in the original assessments.
In an action to collect tax, the government bears the burden of proof. The government can usually carry its initial burden, however, merely by introducing its assessment of tax due. Normally, a presumption of correctness attaches to the assessment, and its introduction establishes a prima facie case. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933); United States v. Molitor, 337 F.2d 917, 922 (9th Cir.1964). The presumption does not arise unless it is supported by a minimal evidentiary foundation. Weimerskirch v. Commissioner, 596 F.2d 358, 360 (9th...
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