United States v. Lease

• Decision Date: 09 June 1965
• Docket Number: Docket 28879.,No. 273,273
• Citation: 346 F.2d 696
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Joseph G. LEASE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

346 F.2d 696 (1965)

UNITED STATES of America, Plaintiff-Appellee, v. Joseph G. LEASE, Defendant-Appellant.

No. 273, Docket 28879.

United States Court of Appeals Second Circuit.

Argued March 1, 1965.

Decided June 9, 1965.

Thomas H. Baer, Asst. U. S. Atty. (Robert M. Morgenthau, U. S. Atty. for Southern Dist. of New York, David E. Montgomery, Asst. U. S. Atty., on the brief), for appellee.

Robert Polstein, New York City (Jerome R. Halperin, New York City, of counsel), for appellant.

Before MOORE, KAUFMAN and HAYS, Circuit Judges.

MOORE, Circuit Judge.

After investigation in 1945 and 1946 into the fiscal affairs of Joseph G. Lease, the Internal Revenue Service advised Lease that it had determined a tax deficiency for 1943 and 1944, with penalties (1) for fraud in each year and (2) for failing to file a return for 1944. After consultation with IRS in 1949 Lease consented to the assessment of a deficiency against him for those years. Accordingly, assessments were made, which by Int.Rev.Code of 1939 § 3670 (now Int.Rev.Code of 1954 § 6321) gave rise to a lien on all of Lease's property and rights to property. Lease neither paid the amounts due and sought a refund in the district court, nor petitioned for Tax Court review of the deficiency. He admits that his "net worth is in excess of $500,000," but the Government was able to collect only about $6,000 by distraint; most of his assets are outside the United States. This action was brought in 1962 to foreclose the tax lien and to collect a judgment of $120,000 including interest.¹ Lease contended that the Commissioner's assessments were erroneous and that there was neither fraud nor failure to file. After a trial before Judge Levet and a jury, a special verdict was rendered finding Lease liable for fraud and failure to file, but also finding the assessment partially erroneous. Consequently, a verdict for only $32,462 was rendered against Lease. Lease made the usual post-trial motions, which were denied by Judge Levet, and he now appeals.

There is no longer any doubt in this circuit that in an action to enforce a lien the taxpayer may challenge the underlying merits of the assessment. See Falik v. United States, 343 F.2d 38, 40 (2d Cir. 1965); United States v. O'Connor, 291 F.2d 520, 526-28 (2d Cir. 1961). The same certainty does not exist as to how strong an attack on the correctness must be to carry the day. Lease does not quarrel with the well established rule that "the assessment of the Commissioner * * * was only prima facie evidence of the amount due as taxes * * * It establishes a prima facie case of liability * * * and nothing more. If not impeached, it was sufficient to justify a recovery * * *" United States v. Rindskopf, 105 U.S. 418, 422, 26 L.Ed. 1131 (1881). Lease does, however, take issue with the operation of this "presumption" of correctness under Judge Levet's charge. The Government contends, on the other hand, not only that the "assessments received in evidence constituted the Government's prima facie case" but also that they "placed upon Lease the burden of proving the assessments wrong."

Our initial question, therefore, concerns the proper allocation or placement of the burden of coming forward and the burden of persuasion as to the correctness of a tax assessment. Oddly enough, the matter has not been given satisfactory airing. In Rindskopf itself the Court did not discuss it, being more concerned with an erroneous charge that the assessment must stand or fall in its entirety.² Subsequent Supreme Court cases have not spoken to the point.³ And most of the pertinent cases we have found tend merely to state without discussion that: the assessment establishes a prima facie case or is prima facie correct;⁴ the taxpayer must overcome the presumption of correctness;⁵ the taxpayer must show, demonstrate or establish the assessment to be erroneous;⁶ or, the taxpayer has the burden of proving the assessment incorrect.⁷ How much the taxpayer must "show" or the weight of the "burden" that must be carried is not adequately answered.⁸ Some cases seem to suggest that while the Government's proof of the assessment establishes a prima facie case, thereby shifting to the taxpayer the burden of coming forward with evidence tending to undermine the assessment, the burden of persuasion as to the overall correctness of the assessment is always on the Government. See United States v. Szerlip, 169 F.Supp. 529, 531 (E.D.N.Y.1959) (alternative holding); cf. United States v. Molitor, 337 F.2d 917, 922-23 (9th Cir. 1964). In Szerlip Judge Zavatt had been sufficiently persuaded by the taxpayer's case showing the assessment to be erroneous that he granted judgment for the taxpayer when the Government failed to prove anything beyond the assessment. In Molitor the taxpayer⁹ had sued for a refund of certain amounts already collected on his Social Security and income tax withholding liability. The Government counterclaimed for the unpaid balance of the assessment. Both complaints were dismissed for failure of the respective claimants to meet their burdens of proof. On the Government's appeal from the dismissal of its counterclaim, the court there apparently thought the rule to be that the taxpayer must "come forward with sufficient evidence to establish that he was not responsible for the tax or that he did not wilfully fail to pay it, and if that were done then the Government would have had to come forward with evidence to justify the assessment." Id. at 923. Because the District Court's treatment of the problem was unclear, the Court remanded for amplification as to the weight given by the District Court to the taxpayer's evidence challenging the assessment and to the presumption of administrative regularity attaching to the assessment.

Neither of these cases, then, is inconsistent with the proposition that a taxpayer challenging the correctness of a tax assessment, as a defense in a collection case, has the burden of persuading the fact finder by a preponderance of the evidence that the assessment is incorrect, a proposition that we find quite compelling upon consideration of the underlying policies and alternatives.

Had Lease chosen to follow either of the more typical methods available for questioning his tax liability — Tax Court review of the asserted deficiencies or suit for refund of asserted overpayments — he would clearly have been obliged to present evidence contradicting the Commissioner's view of his tax liability and thus tending to rebut the presumption of correctness attaching to the assessment. See Niederkrome v. Commissioner of Internal Revenue, 266 F.2d 238, 241 (9th Cir. 1958), cert. denied sub nom. Royce v. Commissioner of Internal Revenue, 359 U.S. 945, 79 S.Ct. 725, 3 L.Ed.2d 678 (1959); cf. Flomarcy v. Commissioner of Internal Revenue, 324 F.2d 730 (2d Cir. 1963). As a plaintiff or petitioner, he would also have had the burden of persuading the trier by a preponderance of the evidence that the deficiency was factually incorrect or that the amount paid exceeded the true tax liability. Cf. Horwitz v. United States, 339 F.2d 877 (2d Cir. 1965). We can see no reason why the taxpayer should be in any better position when he takes advantage of none of the available procedures and rather waits until the Government has to resort to enforcing its lien before he attempts to cast doubt upon the underlying tax liability.¹⁰ We note the Court's observation in Bull v. United States, 295 U.S. 247, 259, 55 S.Ct. 695, 79 L.Ed. 1421 (1935), that "taxes are the life-blood of the Government, and their prompt and certain availability an imperious need."

The taxpayer is the one initially in the best position to know what income he had and how he disposed of it. Good records will go far to overcome the presumption of correctness attaching to the assessment. A strong enough showing will induce a prudent Government attorney to back up the assessment with the basis on which it was made, so that the factual differences may be resolved by the factfinder. Of course, to the extent that good records are unavailable, the taxpayer will be forced to rely more on the credibility of witnesses who can fill in the gaps in information; the taxpayer himself will no doubt be a prime witness. Where no records have been kept the taxpayer will have an understandably more difficult task in demonstrating to and persuading the trier that the Government's assessment is not as reliable as his word or recollection. The Government, as here, will normally have made its determination at a time when more evidence was available and facts were fresher in the minds of those who are knowledgeable, such as Lease, who was questioned then. That this burden of persuasion placed on the taxpayer is not insuperable is suggested by the considerable success had by Lease in this case, even after twenty years. He was able to persuade the jury that some of the Commissioner's assessments were wrong and his liability was accordingly reduced from the $120,000 sought to the $32,462 awarded.¹¹

Viewed with reference to this standard, Judge Levet's charge was entirely proper. He instructed the jury that:

the burden is therefore on the taxpayer in the first instance to disprove the computations made by the Commissioner by a fair preponderance of the credible evidence * * *

Should you find that the defendant has shown error with respect to a particular item the presumption of correctness of the computation by the Commissioner and assessment with respect to that item disappears and then the burden shifts to the government to prove whether any deficiency exists and if so in what amount.

It is not incumbent * * * upon the taxpayer under these circumstances to prove that he owed no tax or the correct amount of the tax which he did owe or the correctness of the item concerned. The burden in each instance is upon the government to prove the correct item.

Thus, overall, the Government has the burden of coming forward...