United States v. Rexach

Citation482 F.2d 10
Decision Date27 June 1973
Docket NumberNo. 72-1051.,72-1051.
PartiesUNITED STATES of America, Plaintiff-Appellant, v. Felix Benitez REXACH, et al., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John J. McCarthy, Atty., Tax Div., Dept. of Justice, with whom Scott P. Crampton, Asst. Atty. Gen., Julio Morales Sanchez, U. S. Atty., Meyer Rothwacks, and Jerome H. Fridkin, Attys., Tax Div., Dept. of Justice, were on brief, for appellant.

Walter L. Newsom, Jr., San Juan, P. R., with whom Rene Benitez, San Juan, P. R., was on brief, for appellees.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

Certiorari Denied November 19, 1973. See 94 S.Ct. 540.

COFFIN, Chief Judge.

This is an appeal from a district court judgment upholding, except as to a pittance, a taxpayer's defenses against the United States in a substantial suit for taxes and fraud penalties. The background is picaresque, involving a colorful engineer-entrepreneur (taxpayer)1 whose alleged tax liabilities stemmed from his long-enjoyed preferment, by grace of the late dictator of the Dominican Republic (Trujillo), as chief harbor developer of that country. Some of the alleged earnings from various harbor projects for the years 1959 and 1961 were sought to be taxed. Understandably, the records of complex, now receding events in a land where the old order has long ago yielded to a newer one were less than satisfactory. The trial, only the most recent chapter in a decade and a half of litigation, was an anomalous contest between the national government, armed chiefly with scraps of data and surmises and the aging taxpayer, drawing primarily on his memory. The latter was held to be sufficient to withstand the attack. We reverse and, with much dislike for prolonging the perdurable, remand.

The precise issues all involve, except for one pervasive issue of law relating to burden of proof, their own discrete facts. What needs to be set forth as pertinent background for the entire case is as follows. The taxpayer, whose most recent period of work in the Dominican Republic stretched from 1944 to 1962, first encountered United States tax difficulties in a suit begun in 1958, in which the government laid claim to allegedly unreported income for the years 1951-1956, subsequently expanded in a 1960 suit to encompass income for 1957-1958. Records of taxpayer's costs and equipment purchases in connection with various construction contracts being allegedly non-existent, taxpayer and the government finally agreed to a percentage of completion method of computing profit on officially published contracts. See 26 C.F.R. § 1.451-3(b) (1). One-eleventh of receipts (equivalent to costs plus 10 per cent) estimated on all contracts for a given year was deemed profit. This formula would have resulted in substantial tax obligations during the period 1951-1958, see United States v. Rexach, 185 F.Supp. 465 (D.P.R. 1960), but for a single happenstance. In late May of 1961, the taxpayer paid $1,552,000 in taxes to the Dominican Republic for the years 1951-1958 and claimed a tax credit against his United States tax for those same years. This payment and the foreign tax credits it created, see United States v. Rexach, 200 F.Supp. 494 (D.P.R.1961), enabled taxpayer to reduce his tax liabilities to $78,866.01 plus interest (or $121,132.13) for the years 1951-1956, and to bring about the dismissal of the suit for taxes for 1957-1958.

With the dictator's assassination in late May, 1961, a new chapter began. Not only was taxpayer's existing contract with the Dominican Republic cancelled, but he was sued on past contracts and a sequestrator took possession of all of taxpayer's assets. Taxpayer, who had renounced his United States citizenship in 1958 during the earlier litigation, attempted to regain it, claiming that he had been coerced in his renunciation by Trujillo, who feared that taxpayer's continuing involvement in tax litigation with the United States would reveal taxpayer's kickbacks to Trujillo of $10,000,000 of some $30,000,000 of contracts awarded over the prior 25 years. Taxpayer was ultimately successful in regaining his U. S. citizenship and passport, and filed an amended return for 1958 and returns for 1959-1961.

Internal Revenue personnel, attempting to audit these returns, spent several weeks in the Dominican Republic, saw a limited amount of records, learned of several previously unreported contracts and of the circumstances surrounding the $1,552,000 tax credit previously taken. As to the latter it was found that in 1961 Trujillo had paid taxpayer $1,552,000 allegedly claimed as losses on the Boca Chica project, which was completed in 1958, and that it was this same sum which taxpayer paid back to Trujillo and took as a tax credit against his earlier United States tax liability. In fact, the entire transaction was solely on paper; no money ever changed hands. These discoveries led to a suit seeking to reopen the cases for the years 1951-1956 and 1957-1958 because of fraud. The government, which at that trial relied only on the undiscovered contracts, once again was unsuccessful, the court finding that the taxpayer's failure to list the contracts was the result of an honest mistake and made in good faith. United States v. Rexach, 41 F.R.D. 180 (D.P.R. 1966). In the meantime, the United States assessed deficiencies, including fraud penalties, against taxpayer of $662,052.62 for 1959 and $2,272,042.95 for 1961, and brought the instant suit in 1964.

The complaint, amended twice, sought taxes on unreported income and penalties for the tax year 1959 stemming largely from two construction contracts, one for a customs house building and the other for facilities at the port of Azua; and for the tax year 1961 from a dredging project on the Yuna River and the $1,552,000 payment on account of the Boca Chica project. A trial in 1966 produced no decision when the trial judge retired. Subsequent skirmishing and a certified appeal led to our decision that taxpayer was liable for taxes during the period of his later-revoked renunciation of citizenship. Rexach v. United States, 390 F.2d 631 (1st Cir.), cert. denied, 393 U.S. 833, 89 S.Ct. 103, 21 L.Ed.2d 103 (1968). A second trial took place in 1970 on the earlier record, supplemented by additional evidence governed by a stipulation.2 The district court held that the government, having the burden of proof, failed to establish deficiencies in reported income for the customs house, Azua, and Yuna projects; that the 1961 payment for the Boca Chica contract merely offset, as alleged by taxpayer, greater earlier losses on the project; that the taxpayer was entitled to deduct certain additional items for depreciation and theft; and that no fraud on the part of the taxpayer had been proven. United States v. Rexach, 331 F.Supp. 524 (D.P.R.1971).

We shall discuss, in order, the issue of burden of proof, which affects both tax years; the disposition of the major 1959 items—the Azua and customs house projects; the disposition of the major 1961 items—the Boca Chica and Yuna projects; and the remaining issues relating to depreciation, theft loss, and fraud.

I. Burden of Proof

From what has been already said about the protracted nature of this controversy, the remoteness of events, and the difficulty of access to masses of documentary evidence in the Dominican Republic, it is obvious that a determination as to which party is to bear the burden of proof is of fundamental significance.

The district court stated that "It is elementary that in a suit to collect taxes the Government occupies the status of a private litigant and the burden of proof is upon it." 331 F.Supp. at 538. Although recognizing that the Commissioner's assessment itself establishes a prima facie case, the court believed that only "the burden to go forward", with "competent and relevant evidence from which it can be found that he did not receive the income alleged in the deficiency", was imposed on the taxpayer. It ruled that when this burden is met "the burden of proof shifts back to the Commissioner to prove the existence and amount of the deficiency", citing Foster v. C. I. R., 391 F.2d 727, 735 (4th Cir. 1968). Id. The government contends that this ruling is in conflict with long-standing precedent in this and other circuits. We agree.

At least since 1942, it has been the law in this circuit that "where a taxpayer petitions the Board for redetermination of a deficiency found by the Commissioner, the taxpayer has the burden of proving that the Commissioner's determination was wrong." Chicago Stock Yards Co. v. C. I. R., 129 F.2d 937, 948 (1st Cir. 1942), rev'd on other grounds, 318 U.S. 693, 63 S.Ct. 843, 87 L.Ed. 1086 (1943). See also Sharaf v. C. I. R., 224 F.2d 570, 572 (1st Cir. 1955); General Aggregates Corp. v. C. I. R., 313 F.2d 25, 27 (1st Cir. 1963); C. I. R. v. Young Motor Co., 316 F.2d 267, 270 (1st Cir. 1963); Worcester v. C. I. R., 370 F.2d 713, 715 (1st Cir. 1966). This rule for taxpayer-initiated suits is premised on several factors other than the normal evidentiary rule imposing proof obligations on the moving party: the relevant prior Supreme Court precedent indicative, if not determinative of the issue. Wickwire v. Reinecke, 275 U.S. 101, 105, 48 S.Ct. 43, 72 L.Ed. 184 (1927); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L. Ed. 212 (1933); Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 79 L.Ed. 623 (1935); Bull v. United States, 295 U.S. 247, 260, 55 S.Ct. 695, 79 L.Ed. 1421 (1935); the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the Code.

Whatever uncertainty may once have existed because of our use of the general phrase "burden of proof" was...

To continue reading

Request your trial
104 cases
  • Schneider v. Colegio de Abogados de Puerto Rico
    • United States
    • U.S. District Court — District of Puerto Rico
    • September 13, 1982
    ...2978, 53 L.Ed.2d 1095 (1977). Cf. Commissioner v. Sunnen, 333 U.S. 591, 598, 68 S.Ct. 715, 719, 92 L.Ed. 898 (1948); United States v. Rexach, 482 F.2d 10, 19 (C.A. 1, 1973), cert. den., 414 U.S. 1039, 94 S.Ct. 540, 38 L.Ed.2d 330 (1973). Thus claim preclusions cannot apply in settings of co......
  • United States v. Janis, No. 74-958
    • United States
    • U.S. Supreme Court
    • July 6, 1976
    ...is shown to be naked and without Any foundation. The courts then appear to apply the rule of the Taylor case. See United States v. Rexach, 482 F.2d 10, 16-17, n. 3 (CA1), cert. denied, 414 U.S. 1039, 94 S.Ct. 540, 38 L.Ed.2d 330 (1973); Pizzarello v. United States, 408 F.2d 579 (CA2), cert.......
  • Lefebvre v. C.I.R., 86-1966
    • United States
    • U.S. Court of Appeals — First Circuit
    • October 9, 1987
    ...correct, and, in seeking a redetermination, the taxpayer bears the burden of proof and persuasion to show otherwise. United States v. Rexach, 482 F.2d 10, 15-17 (1st Cir.), cert. denied, 414 U.S. 1039, 94 S.Ct. 540, 38 L.Ed.2d 330 (1973); see United States v. Janis, 428 U.S. 433, 440-442, 9......
  • U.S. v. Berk
    • United States
    • U.S. District Court — District of Massachusetts
    • August 17, 2007
    ...to show otherwise." Lefebvre v. Commissioner of Internal Revenue, 830 F.2d 417, 419 n. 3 (1st Cir.1987) (citing United States v. Rexach, 482 F.2d 10, 15-17 (1st Cir.1973)). In terms of tax assessments, a taxpayer must meet this burden by presenting specific evidence sufficient to overcome t......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT