Weimerskirch v. C. I. R.
| Citation | 596 F.2d 358 |
| Decision Date | 02 May 1979 |
| Docket Number | No. 77-2129,77-2129 |
| Parties | 79-1 USTC P 9359 Johnny WEIMERSKIRCH, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Richard P. Algeo, Spokane, Wash., for petitioner-appellant.
Myron C. Baum, Washington, D.C., for respondent-appellee.
Appeal from the United States Tax Court.
Before GOODWIN and ANDERSON, Circuit Judges, and JAMESON, * District Judge.
The Commissioner issued a 90-day letter claiming that Weimerskirch had not reported income he allegedly received from selling heroin. Weimerskirch petitioned the Tax Court for redetermination of the deficiency. 26 U.S.C. § 7442, Et seq. After the Tax Court upheld the deficiency determination, Weimerskirch appealed to this court. 26 U.S.C. § 7482.
The Tax Court held that Weimerskirch had failed to rebut the Commissioner's presumption of correctness which attaches to a deficiency determination. Johnny Weimerskirch, 67 T.C. 672 (1977). We find that the Commissioner was not entitled to rely solely upon the presumption of correctness and reverse.
Weimerskirch reported income of $5,762.00 on his income tax return for 1972. The Commissioner issued a statutory notice of deficiency claiming that Weimerskirch had $24,608.00 of additional income which he had failed to report. This resulted in a total tax liability of $8,994.00 plus a penalty of $1,453.75. Weimerskirch petitioned the Tax Court for a redetermination of the deficiency.
Little in the way of substantive evidence was introduced at trial to either prove or disprove what Weimerskirch's taxable income was for 1972. Weimerskirch called four witnesses and by stipulation introduced the tax return which he had filed for 1972. The Commissioner called no witnesses and introduced no evidence.
Weimerskirch's mother testified that she and her husband gave him at least $1,900.00, including $370.00 in wages, as well as gifts or groceries, during 1972. The tax return which Weimerskirch had filed showed his 1972 income as $5,762.00, with $370.00 from wages and $5,392.00 from other income. This was the only substantive evidence which tended to prove or disprove what Weimerskirch's income was for 1972. 1
On appeal, findings of fact made by the Tax Court are not overturned unless they are "clearly erroneous." Rockwell v. C.I.R., 512 F.2d 882, 884 (9th Cir. 1975), Cert. denied, 423 U.S. 1015, 96 S.Ct. 448, 46 L.Ed.2d 386; Caratan v. C.I.R., 442 F.2d 606, 609 (9th Cir. 1971). A finding is clearly erroneous when this court is "left with the definite
and firm conviction that a mistake has been committed." C.I.R. v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1200, 4 L.Ed.2d 1218 (1960). The determination by the Tax Court that Weimerskirch received income from the heroin sales was a finding of fact, and as such may only be overturned on review if it is clearly erroneous. See Gerardo v. C.I.R., 552 F.2d 549, 552 (3d Cir. 1977); Herbert v. C.I.R., 377 F.2d 65, 71 (9th Cir. 1967).
The only issue which we address is whether the Commissioner was entitled to rely upon the presumption of correctness on the facts of this particular case. 2 The Tax Court upheld the Commissioner's deficiency determination on the basis that Weimerskirch had failed to overcome the presumption of correctness. On appeal, the Commissioner argues that "(i)t is elementary that in a Tax Court suit, the Commissioner's deficiency determination is presumptively correct. . . ." 3 Commissioner's brief at 13. However, before the Commissioner can rely on this presumption of correctness, the Commissioner must offer some substantive evidence showing that the taxpayer received income from the charged activity. United States v. Janis, 428 U.S. 433, 441-442, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976); Suarez v. United States, 582 F.2d 1007, 1010 n. 3 (5th Cir. 1978); Carson v. United States, 560 F.2d 693, 696-698 (5th Cir. 1977); Gerardo, supra, 552 F.2d at 554-555. This was not done in the present case.
In Janis, supra, the Supreme Court decided that the exclusionary rule did not prevent the Internal Revenue Service (IRS) from using illegally-seized evidence as the basis from which to extrapolate a taxpayer's unreported income from wagering activities. Prior to addressing the exclusionary question, the Court stated that if the illegally-seized evidence could not be used, then the result would be:
(citations and footnotes omitted)
428 U.S. at 441, 96 S.Ct. at 3026. The Court noted that there was apparently some conflict between the Federal Courts of Appeals as to the burden of proof in tax cases, and then went on to make these observations:
428 U.S. at 442, 96 S.Ct. at 3026. While the quoted language may not have been dispositive of the issue decided in Janis, supra, it certainly is a strong indication that the Commissioner must offer some foundational support for the deficiency determination before the presumption of correctness attaches to it. After all, as the Court observed in Elkins v. United States, 364 U.S. 206, 80 S.Ct. 1437, 4 L.Ed.2d 1669 (1960), ". . . as a practical matter it is never easy to prove a negative . . . ." 364 U.S. at 218, 80 S.Ct. at 1444. See also Flores v. United States, 551 F.2d 1169, 1175 (9th Cir. 1977).
A Tax Court decision finding unreported income from gambling activities was reversed in Gerardo, supra, because of the lack of any evidence to support the Commissioner's presumption of correctness. 4 The court reasoned as follows:
552 F.2d at 554-555. Even though Weimerskirch did not testify in the present case, following the teachings of Gerardo, supra, the Commissioner still cannot rely on the presumption in the absence of a minimal evidentiary foundation.
In another case involving failure to report income from wagering activities, the Fifth Circuit was faced with a factual situation analogous to that presented here. Carson, supra. The court rejected the government's attempt to rely solely upon the presumption of correctness 5 and said:
"Such a position, which would support the most arbitrary of assessments so long as the taxpayer found himself unable to prove a negative, frequently difficult in quite innocent circumstances, does not become the government's agents, and we readily reject it."
560 F.2d at 698. Even the most innocent of persons would have difficulty in disproving such a serious charge as selling heroin, when the party making the charge was not required to present Any evidence. 6
The Commissioner offered no evidence linking Weimerskirch to the sale of narcotics, or to the sale of heroin. There was no evidence from which it could even be inferred that he engaged in these activities, let alone for a 25-week period during 1972. No records were introduced to substantiate the computations made by the IRS agent. Additionally, the Commissioner did not attempt to substantiate the charge of unreported income by any other means, such as by showing Weimerskirch's net worth, bank deposits, cash expenditures, or source and application of funds. Instead, the Commissioner merely chose to rely upon the naked assertion that Weimerskirch made $30,000.00 from the sale of heroin during 1972. In view of the total absence of any substantive evidence in the record which could support the Commissioner's deficiency determination, we are left with the firm conviction that the Tax Court erred in finding that the presumption of correctness attached to the deficiency determination. 7 A deficiency determination which is not supported by the proper foundation of substantive evidence is clearly arbitrary and erroneous. 8
The reason for the requirement that there must be some evidentiary foundation linking the taxpayer to the alleged income-producing activity is especially acute where, as here, the government asserts that the taxpayer was engaged in an activity which is otherwise illegal. This is particularly true when the illegal activity is not only morally reprehensible, but also punishable by an extended prison sentence. By its allegation that a taxpayer has unreported income from the sale of narcotics, the government is affixing a label, a label which in this case reads "heroin pusher." To allow the government to do this without offering any probative evidence linking the taxpayer to the activity runs afoul of every notion of fairness in our system of law.
The decision of the Tax Court is REVERSED.
* The Honorable William J. Jameson, Senior United States District Judge for the District of Montana, sitting by designation.
1 At the trial Weimerskirch called an Internal Revenue Service (I...
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