Lead Opinion
By letter dated September 17, 1976, respondent determined a deficiency in petitioner’s income taxes for the taxable year ended December 31, 1974, in the amount of $29,403.76. Respondent has also determined additions to tax pursuant to sections 6651(a), 6653(a), and 6654(a), I.R.C. 1954, in the amounts of $7,350.94, $1,470.19, and $940.93, respectively. After concessions, the primary issue remaining is whether petitioner had unreported income evidenced by his mortgage payments and purchase of cocaine in 1974, as determined by respondent utilizing the expenditures method to reconstruct petitioner’s income for taxable year 1974. The other issues presented are (1) whether petitioner is liable for the following additions to tax for the taxable year 1974: section 6651(a) failure to file, section 6653(a) negligent underpayment of income tax, and section 6654(a) failure to make estimated tax payments, and (2) whether petitioner is entitled to dependency exemption deductions for two of his sons.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
At the time Raul Llorente (petitioner) filed his petition herein he resided in Jamaica, N.Y. Petitioner did not file a Federal income tax return for calendar year 1974. Petitioner’s wife, Cristina Llorente, filed a Federal income tax return for 1974 utilizing the filing status of married filing separately on which she reported gross income of $779. Two of petitioner’s children, Carlos and Nestor, were students and lived with their parents during 1974. Petitioner’s wife claimed Nestor as a dependent on her 1974 tax return.
Petitioner was born in Colombia, South America, and first came to the United States on February 2, 1965. Upon immigrating to the United States, petitioner brought with him $1,500 in
Petitioner and his wife reported gross income in the amount of $13,020, of which $565 represented interest income, on their joint Federal income tax return for calendar year 1973.
Petitioner’s and his wife’s cost of living for 1974 was between $900 and $1,000 per month. That amount included the one or two trips made by petitioner to Colombia at a cost of approximately $380 per trip. In January 1974, petitioner purchased the LaPaz Bar and Grill for $9,000 cash.
During 1974 and part of 1975, the New York City Police Department maintained an undercover investigation of illegal narcotics activity. As a result of that investigation, petitioner was arrested on March 8, 1975. At the time of his arrest, petitioner’s bail was set at $1 million but was subsequently reduced to $300,000. Petitioner never raised the bail. On April 1, 1975, an indictment was filed in the Supreme Court of the State of New York against petitioner, accusing him of the crime of conspiracy in the first degree to commit the crimes of criminal possession of a controlled substance in the first degree, criminal possession of a controlled substance in the third degree, and criminal sale of a controlled substance in the first degree for the period from February 1974 to March 8, 1975.
On May 24, 1977, petitioner entered a plea of guilty to the crime of attempted conspiracy in the first degree to cover the indictment, and was sentenced on September 6, 1977, to time served, i.e., the time petitioner had spent in jail following his arrest on March 8, 1975, to his sentencing on September 6, 1977.
Hugo Sossa, Alvaro Doronzoro, and Louis Irving Taylor were patrons of petitioner’s bar and grill and were known by him. During 1974, a police department undercover agent purchased cocaine and engaged in conversation and other transactions involving the purchase of cocaine with Louis Irving Taylor (Taylor) and Alvaro Doronzoro (Doronzoro) at petitioner’s bar and grill. During one such transaction, the undercover agent was informed by Taylor that he would have to check to see if his shipment had arrived. Following that statement to the agent, Taylor left the table at which they were sitting and engaged in a conversation with petitioner. Upon returning, he informed the agent that his shipment had not arrived. On another occasion, the undercover agent entered petitioner’s bar and grill to
The undercover agent was informed by a confidential informant that petitioner, the informant, and Doronzoro had gone to Alfonso Velasco’s house in Queens, N.Y., where there were 6 kilos of cocaine. According to the informant, at that time and location, petitioner examined the package because some of the merchandise had been delivered in a damp condition.
Upon completion of his investigation, the undercover agent advised respondent that petitioner had purchased 6 kilos of cocaine. He further advised respondent that the cost of a kilo of cocaine to petitioner was in the $9,000 to $14,000 range.
Based upon the information received from the undercover agent and a conversation with an assistant district attorney who worked on the criminal case, respondent determined that petitioner expended $54,000 for cocaine in 1974. In 1974, petitioner made payments with respect to a mortgage on his residence in the amount of $3,156. Petitioner, in the same year, received $5,300 as remuneration from Caveman Lounge, Inc. Petitioner was president of Caveman Lounge, Inc., and apparently the corporation was the legal owner of the LaPaz Bar and Grill.
OPINION
Petitioner argues that respondent’s determination that he purchased illegal drugs is arbitrary, that the information used by respondent in reconstructing his income was insufficient to establish the correctness of the deficiency, thereby shifting the burden of going forward with the evidence to respondent. Petitioner argues in the alternative that, if the burden of going forward with the evidence is not shifted, he has met his burden.
Respondent argues that the statutory notice of deficiency is entitled to the ordinary presumption of correctness. Further, he argues that petitioner’s testimony, which was the only evidence presented to support petitioner’s argument, lacks sufficient credibility to shift the burden of going forward.
A statutory notice ordinarily carries with it a presumption of correctness that, except where provided in the Internal Revenue Code or the Tax Court Rules of Practice and Procedure, places
When petitioner asks the Court to find a statutory notice arbitrary, he is asking the Court to look behind the statutory notice. As a general rule, we will not honor such a request. Greenberg’s Express, Inc. v. Commissioner,
Petitioner argues that the instant case meets this exception and is therefore controlled by Jackson v. Commissioner, supra, and Weimerskirch v. Commissioner,
In Weimerskirch, the Circuit Court for the Ninth Circuit held that the Government must introduce substantive evidence linking the taxpayer with the charged activity. In so holding, the Circuit Court relied heavily upon the Supreme Court decision in United States v. Janis,
Thus, we must bear in mind that the Supreme Court’s reference to a “naked assessment” was in the context of illegally obtained evidence. Therefore, the discussion by the Ninth Circuit of the Janis case is not helpful to this petitioner since there is no suggestion here that the statutory notice in issue was predicated on such evidence.
While, as we will emphasize later, we find that the Llórente notice was supported by substantive evidence, we point out that a statutory notice may be based in whole or in part upon inadmissible evidence.
The essence of the matter is that petitioner’s reliance on our decision in Jackson v. Commissioner, supra, and the decision of the Court of Appeals in Weimerskirch is misplaced because the facts in both cases differ so significantly from those present here. The deficiency in Jackson was premised on respondent’s conclusion that the taxpayer was in the drug business. Yet, there was no firsthand testimony introduced at the trial by respondent to support such a conclusion, and he was compelled to admit that the deficiency was based upon what an informant, who did not testify, had told his agent. Thus, there was no evidence to put Jackson in the drug business, much less any evidence relevant to drug income. Similarly, the facts in Weimerskirch are inappo-site. There, there was a notice of deficiency based upon
In the instant case there was testimony from a witness, whom the Court believed, that he personally heard petitioner refer to a drug shipment. Furthermore, petitioner was indicted (and subsequently pled guilty to cover the indictment as it related to attempted conspiracy) for the crime of conspiracy in the first degree to commit the crimes of criminal possession of a controlled substance in the first degree, criminal possession of a controlled substance in the third degree, and criminal sale of a controlled substance in the first degree for the period from February 1974 to March 8, 1975. With these facts, respondent cannot be deemed to have arbitrarily placed petitioner in the drug business, a business not noted for its nonprofit purpose. In view of the foregoing factual distinctions, we need not address ourselves to the precise arguments made by the Court of Appeals in the Ninth Circuit in reversing our decision in Weimerskirch. We find that the notice of deficiency was not arbitrarily issued. Accordingly, petitioner has the burden of proof of going forward.
Petitioner impliedly challenges the methodology utilized by respondent to determine the deficiency. Respondent is entitled to use any reasonable means of reconstructing income. Further, he is given greater latitude in determining which method of reconstruction to apply where the case involves an illegal enterprise in which petitioner has failed to file a return and has kept no records. Nor is mathematical exactitude required of respondent, for if it were it “would be tantamount to holding that skillful concealment is an invincible barrier to proof.” United States v. Johnson,
Respondent used the expenditure method to determine that petitioner has expended $54,000 for 6 kilos of cocaine and $3,156
Finally, petitioner contends that, if he had the burden of going forward, his own testimony was sufficient to carry this burden.
Nonetheless, our agreement with respondent’s determination, that petitioner was in some manner connected with the illegal narcotics business, does not require us to accept in its entirety his finding that petitioner purchased 6 kilos of cocaine. The undercover agent testified that Alvaro Doronzoro, the informant, and petitioner were at Velasco’s house where the cocaine was located. Doronzoro was a known dealer in cocaine and a person from whom the undercover agent had, in the past, purchased cocaine. Further, the informant’s statement indicated that some of the cocaine was damp and may well have been damaged. Therefore, it can reasonably be assumed that petitioner was not the purchaser of the entire shipment for lack of need or that he was only one of several purchasers or that a portion thereof was not purchased because of the possible damage.
Petitioner testified that he paid $9,000 for the bar in January 1974, and that his family’s cost of living was $900 to $1,000 per month. Petitioner has stipulated that his wife’s income for 1974 was only $779. Petitioner concedes income of only $5,300. Thus,
For the reasons previously expressed, we find that petitioner had unreported taxable income during 1974. It is obvious from the facts herein that the precise amount of unreported income cannot be determined with exactitude. However, this difficulty is not of respondent’s or the Court’s making. We calculate the unreported income in the following manner: taking the lower estimate by petitioner of his cost of living, $10,800 for such expenses; purchase of the bar in January of 1974, $9,000; and bearing in mind that there were three possible purchasers present when the 6 kilos were examined and that some of the cocaine may have been damaged, and applying principles analogous to those expounded in Cohan v. Commissioner,
Respondent determined additions to tax under sections 6651(a), 6653(a), and 6654(a). The burden of proof is upon petitioner. Welch v. Helvering,
Petitioner contends that his incarceration at the time his return was due is reasonable cause within the meaning of section 6651(a)(1) for failure to file. This is the only evidence presented
The final issue presented is whether petitioner is entitled to claim two of his sons as dependents during 1974. Respondent contends that he was not given fair notice of this matter being in issue. Further, respondent argues that, since the issue was not pleaded in the petition, this Court should not consider it. Estate of Horvath v. Commissioner,
Petitioner did not raise the dependency issue in the stipulation or pursue it in his briefs. He first raised the issue at the trial and respondent did not object. To the contrary, respondent implied at trial that petitioner could not have supported his wife and the two children on the income alleged by petitioner and his wife. We find that the issue of dependency of the two children was properly raised and that respondent was not placed at a disadvantage by petitioner’s raising the issue at trial.
Petitioner testified that he was the sole support of his two children, Carlos and Nestor Llorente, for 1974. Petitioner’s wife claimed dependency exemption deduction for their son, Nestor, on her 1974 return. The issue of which parent is entitled to the deduction when the parents are married but elect to file separate returns does not appear to have been previously raised in this Court. Cf. Maley v. Commissioner,
Resolution of the issue is controlled by determining which parent in fact provided the child’s support. The parties have stipulated that the wife’s income for 1974 was less than $800, and we have found that petitioner’s income was some $37,000. It is obvious from the stipulation that petitioner’s wife could not have supported either of her two children. Petitioner testified that both children were students who lived with petitioner and had no earned income during 1974.
Petitioner’s testimony on this point was credible and he carried his burden of proof. Therefore, we find that petitioner is
Decision will be entered under Rule 155.
Reviewed by the Court.
Notes
Jackson v. Commissioner,
The above statement is not intended to imply a position with respect to the applicability of the exclusionary rule in tax cases in this Court. We have left that question open. Proesel v. Commissioner,
While hearsay evidence is inadmissible as substantive evidence, such evidence is hearsay only when offered to prove the truth of the matter asserted. Rule 801(c), Federal Rules of Evidence. Accordingly, such evidence is admissible when offered, not for the truth of the matter asserted, but to establish that respondent did not act arbitrarily in formulating the deficiency. Avery v. Commissioner,
The above is not intended to imply an acceptance of the legal position stated by the Ninth Circuit in Weimerskirch v. Commissioner,
The Court is not unsympathetic to petitioner’s burden. “The law imposes much less of a burden upon a taxpayer who is called upon to prove a negative — for example, that he did not receive the income which the Commissioner claims — than it imposes on a taxpayer who is attempting to sustain a deduction on his return.” Schildhaus v. Commissioner,
More often, the expenditures method has been applied to those situations where the items purchased by expenditures are shown to be in the possession of the petitioner. See Burgo v. Commissioner,
A petitioner’s uncorroborated testimony may be sufficient to carry his burden in an unreported income case in which respondent has failed to produce any evidence to support the deficiency. Demkowicz v. Commissioner,
Petitioner had not reported his income of $5,300 from Caveman Lounge.
Concurrence Opinion
concurring: I concur with the result reached by the majority in this case because I believe that Judge Sterrett, as the trier of fact, is in the best position to evaluate as a whole the testimony and other evidence upon which his report is based. I write separately to express my concern that this case and Weimerskirch v. Commissioner,
In Weimerskirch v. Commissioner, supra, Jackson v. Commissioner,
A contributing problem stems from the assumption that the burden of producing evidence can somehow be disassociated from the burden of proof.
Helvering v. Taylor,
I recognize that a petitioner trying to disprove unreported income has a difficult task. See Weir v. Commissioner,
See Grove v. Commissioner,
See J. McNaughton, “Burden of Production of Evidence: A Function of a Burden of Persuasion,” 68 Harv. L. Rev. 1382 (1955). See generally J. Thayer, “The Burden of Proof,” 4 Harv. L. Rev. 45 (1890).
Compare Suarez v. Commissioner,
“Petitioner, being the moving party, should provide sufficient evidence to make a prima facie case; otherwise his petition will fail from inertia. Unless the respondent has the burden of proof, I see little reason for him to move forward.”
We are not here concerned with any of the well-defined exceptions to this general rule. E.g., sec. 534 (accumulated earnings tax); sec. 6902(a) (transferee liability); sec. 7454(a) (fraud); Rule 142(a), Tax Court Rules of Practice and Procedure (new matter).
Concurrence Opinion
concurring: I have no quarrel with the ultimate conclusions reached by the majority. Those conclusions stem essentially from factual determinations by the trier of the facts based upon his evaluation of the evidence of record (including the testimony of the witnesses whom he saw and heard), and I am satisfied that it would be inappropriate for me to substitute my judgment for his. Nor do I have any quarrel with the standard of proof which the trier of the facts (and the majority), in the final analysis, applied in reaching those factual determinations and the ultimate conclusions to be drawn therefrom. I say “in the final analysis” because I have considerable difficulty with the articulation of that standard, and I am concerned that the majority opinion may contribute to the
Initially, I note that we are not concerned herein with a suit for refund by a taxpayer or an action by the Government to collect on an assessment or an attempt by a taxpayer to enjoin the collection of an assessment. These situations pose questions regarding the burden of proof and the burden of going forward in a different context than that involved herein. I therefore consider that the decided cases in these arenas do not furnish us with definitive guidance insofar as the situation before us is concerned, especially since the opinions in such cases also reflect confusing and contradictory articulations. See, e.g., Commissioner v. Shapiro,
The instant case involves the proper application of the concepts of the so-called presumption of correctness of respondent’s determination of deficiency, burden of proof, and burden of going forward with the evidence to proceedings in this Court based upon the filing by the taxpayer of a petition for the redetermination in respect of a notice of deficiency.
One can only speculate as to what the Supreme Court had in mind when it used the phrase “presumption of correctness,” particularly since it appears in the same sentence which imposes the burden of proof on the taxpayer. See United Aniline Co. v. Commissioner,
All of the decided cases are in agreement that the presumption of correctness of a notice of deficiency does not cause the notice to be evidence as such (see, e.g., Kentucky Trust Co. v. Glenn,
It is black-letter law that deficiency determinations by the Commissioner of Internal Revenue carry with them a presumption of correctness. * * * The burden is on the taxpayer to show that the Commissioner is wrong. * * * Once the taxpayer shows that the deficiency assessment is wrong, the burden shifts back to the Commissioner to show the existence and amount of the deficiency. [Citations omitted.]
See also Foster v. Commissioner,
The Ninth Circuit Court of Appeals states the rule where deductions are involved as follows (see Rockwell v. Commissioner,
The presumption in favor of the Commissioner is a procedural device which requires the taxpayer to come forward with enough evidence to support a finding contrary to the Commissioner’s determination. * * *
The burden of proof is yet another hurdle. After satisfying the procedural burden of producing evidence to rebut the presumption in favor of the Commissioner, the taxpayer must still carry his ultimate burden of proof or persuasion. * * * [Citations omitted.]
Where an omission from gross income is involved, the Ninth Circuit Court of Appeals takes a somewhat different position (see Herbert v. Commissioner,
The general rule is that the burden of proof is on the Commissioner to establish that the taxpayer received income. However, the Commissioner’s determination of a deficiency satisfies such burden since the determination made by the Commissioner is presumptively correct. The taxpayer then has the burden of overcoming this presumption by a preponderance of the evidence. * * * When the taxpayer has overcome the presumption by competent and relevant evidence, the presumption disappears and drops out of the case. * * *
* * * * * * *
The burden of proof was not upon the taxpayer to show that he had noincome. The burden was upon the Commissioner to establish that the taxpayer received the money as income. It appears to us that the Tax Court has confused the burden of establishing receipt of income with the burden of supporting allowable deductions from income. In the former case the burden is on the Commissioner, and in the latter case the burden is upon the taxpayer. * * *
[Citations omitted.]
See also Rockwell v. Commissioner, supra at 885-886.
The First Circuit Court of Appeals, in a case which involved a suit by the Government on an assessment, sets forth succinctly its position where a proceeding in this Court is involved (United States v. Rexach,
Whatever uncertainty may once have existed because of our use of the general phrase “burden of proof” was dispelled by our opinion in United Aniline Co. v. C. I. R.,316 F.2d 701 (1st Cir. 1963) [a case involving constructive receipt of income and a petition to this Court for redetermination in respect of a notice of deficiency]. We there explicitly rejected the suggestion of the Fourth Circuit in Stout v. C. I. R.,273 F.2d 345 , 350 (4th Cir. 1959), that the Commissioner’s assessment merely shifts to the taxpayer the burden of going forward with evidence, and disapproved the use of the term “presumption” because of the danger, illustrated in Clark v. C. I. R.,266 F.2d 698 (9th Cir. 1959), of misleading courts into believing that if the taxpayer introduced evidence from which it “could” be found that the assessment was erroneous, the burden of proof was placed on the Commissioner. We unambiguously stated that whether or not reference was made to a presumption, it must be made clear that “the taxpayer never loses the burden of proving the Commissioner’s determination erroneous.”316 F.2d at 704 ; see also n. 4, “Presumption or no, the burden of proof never shifts.”
My own view is that the foregoing articulation by the First Circuit Court of Appeals is clearly correct, although, as will subsequently appear (see pp. 278 - 279 infra), there may be limited exceptions which the First Circuit, at least impliedly, itself recognizes. See Marx v. Commissioner,
Nor do I believe that any distinctions as to the location of the burden of proof should be made between cases involving deductions and those involving omissions from gross income. In this connection, however, I am prepared to recognize that, where an omission from gross income is involved, the burden of proof on the taxpayer is accentuated by the fact that he is required to prove a negative and that perhaps the standard of required proof to make a prima facie case of nonreceipt of such income and thereby shift the burden of going forward with the evidence to respondent should be relaxed. See Weir v. Commissioner,
I am not unaware of the fact that the instant case involves alleged unreported income from trafficking in narcotics and that the burden on the taxpayer to prove a negative may indeed be
Similarly, the protective shield of a deficiency notice is not so absolute that we will not at the appropriate time permit evidence to be brought to our attention which could cause us to conclude that the respondent’s determination was arbitrary and excessive,
What is the appropriate time and what are the limited circumstances can only be determined on a case-by-case basis. I note, however, that in the landmark case of Helvering v. Taylor, supra, the determination was made — albeit on appeal — after a full trial, and it would appear that this should be the normal procedure.
Finally, I recognize that, where projections of income based only upon evidence of isolated transactions are involved, the potential for arbitrariness and capriciousness in respondent’s deficiency notice is great. In fact, this was the situation in Weimerskirsch v. Commissioner,
In sum, we run on a muddy track with respect to the decided cases regarding the so-called presumption of correctness and its impact on the burden of proof and the burden of going forward with evidence. What has developed seems to be a different standard for taxpayers allegedly engaged in illegal activities than for other types of taxpayers. The result is a more lenient rule in tax cases for those who may well have violated laws not involving taxes. With this result I am in strong disagreement. Such persons are entitled to have the tax laws applied to them in the same manner as others, but such treatment is all they are entitled to expect or receive.
Although Janis involved the applicability of the exclusionary rule to illegally seized evidence, I have serious doubts that the Supreme Court’s comments on the “naked assessment” issue were intended to operate within the narrow confines suggested by the majority (see p. 265 of the majority opinion).
The location of the burden of proof has potentially differing consequences — important at least in theory. Where the burden is on the Government, if the evidence before the court is in equilibrium, the Government will lose because of failure to carry its burden of proof. If the burden is on the taxpayer, such equilibrium causes the taxpayer to lose because of failure to carry his burden of proof. This distinction can account, at least in part, for the confusion in the decided cases regarding the language used in discussing the so-called presumption of correctness of the respondent’s determination reflected in his notice of deficiency. In this connection, I note that, if all that a court does is to cause the presumption of correctness of a notice of deficiency to disappear, the taxpayer should still lose (where there is equilibrium in the evidence) because he still has the burden of proof, which he has not carried. To shift only the burden of going forward to the Government, where the taxpayer has offered no evidence on the substantive issues, is not enough unless, when it fails to do so, one is also prepared to say that such failure causes the Government not to prevail — a line of reasoning that in effect shifts to the Government the burden of proof because of its failure to go forward with sufficient evidence. Cf. Suarez v. Commissioner,
It has been stated that the reasons for imposing the burden of proof on the taxpayer “other than the normal evidentiary rule imposing proof obligations on the moving party” are “the relevant prior Supreme Court precedent indicative, if not determinative of the issue. * * * 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.” See United States v. Rexach,
I say “usual” because I recognize that in several situations, notably in respect of the issue of fraud, the burden of proof is on the respondent. See sec. 7464; Rule 142, Tax Court Rules of Practice and Procedure.
See Carson v. United States,
Indeed, in many cases such as the one before us, the claimed amounts of omitted income are so large that one would have expected the respondent to assert an addition to tax for fraud, as to which he would have the burden of proof and, in the usual case, the burden of going forward first with his evidence at the trial. Under such circumstances, although the burden of proof as to the underlying deficiency would still be on the taxpayer (e.g., Cefalu v. Commissioner,
It should be noted that mere excessiveness never is sufficient, since this is the situation in many cases where the courts determine that the respondent is entitled to a deficiency in a lesser amount than that set forth in his deficiency notice. Helvering v. Taylor,
Indeed, this is precisely what occurred in Jackson v. Commissioner,
I note that, as the majority points out, the respondent has broad authority to reconstruct income. Moreover, the projection method has passed muster on several occasions. See cases cited in Jackson v. Commissioner,
In the instant case, there was neither a projection nor reconstruction but an expenditure for the purchase of a specific quantity of drugs. It was petitioner’s burden to convince us that he did not make such purchase.
I note that the Courts of Appeals in both Weimerskirsch and Gerardo relied upon United States v. Jarnis,
Dissenting Opinion
dissenting: In a case involving allegations of unreported income, when it appears that the taxpayer has established that respondent’s determination is without rational foundation in fact and based on unsupported assumptions, he will be relieved of his burden of proof as to the amount of tax due, and the burden will be on respondent to move forward with the evidence. Helvering v. Taylor,
A question arises in a case such as this whether, in determining
Based on its conclusion that respondent did not arbitrarily determine that petitioner was in the drug business, the majority allows the barrier of the presumption of correctness to be erected upon this conclusion. In doing so, it makes an effort to distinguish Weimerskirch v. Commissioner,
The evidence relied on by the majority (petitioner’s statement overheard by the undercover agent and the indictment) may suggest that petitioner had some peripheral association with the drug business, but from this, alone, it is unreasonable to conclude that petitioner either spent $54,000 to purchase drugs or had income in that amount. The overheard statement, while probably admissible, does not prove that petitioner either bought or sold drugs or received any income from that source; an indictment, alone, does not prove the charge contained therein. Respondent obviously relied on the testimony of the informer, who was not produced as a witness, to conclude that petitioner had $54,000 in income. If this is not arbitrary, I think justice demands that petitioner be given an opportunity to cross-examine the witness upon whose testimony respondent bases his determination. If, for reasons of his own, respondent chooses not to produce the witness, I believe respondent must either produce other evidence or forego the presumption of correctness. See Weimerskirch v. Commissioner, supra at 360 n.2. In my opinion,
Nor do I believe that the attempted linking of petitioner with drug activities, in this fashion, distinguishes this case from Weimerskirch or Jackson. If, as the majority concludes, the notice of deficiency can be grounded totally on inadmissible evidence, then there was ample evidence,
The deficiency in Jackson was premised on respondent’s conclusion that the taxpayer was in the drug business. Yet, there was no firsthand testimony introduced at the trial by respondent to support such a conclusion, and he was compelled to admit that the deficiency was based upon what an informant, who did not testify, had told his agent. Thus, there was no evidence to put Jackson in the drug business, much less any evidence relevant to drug income. Similarly, the facts in Weimerskirch are inapposite. There, there was a notice of deficiency based upon statements of unidentified informers and information supplied by law enforcement agencies. There was no evidence linking the petitioner to the drug business. [Fn. ref. omitted.]
I can think of no better description of the circumstances in this case.
Respondent’s determination as to the amount of unreported income was entirely based on a statement by an unidentified informer to the effect that petitioner, with others, traveled to a house in which was stored 6 kilos of cocaine. From this, respondent concluded petitioner bought all 6 kilos and determined that he made an expenditure of $54,000 for this purchase which was charged to petitioner as taxable income. The missing link, one which I believe is fatal, is that the record is devoid of evidence indicating that petitioner made this purchase. (The fact that the unidentified informer did not tell the undercover agent that petitioner purchased any cocaine on this occasion would tend to belie the fact.) Indeed, the majority could not even
I cannot say that respondent has carried that burden, as the only admissible evidence introduced was petitioner’s plea of guilty to an attempted conspiracy to possess and sell the cocaine.
Additionally, although the evidence indicates expenditures, other than for purchase of cocaine, in excess of acknowledged income in the approximate amount of $13,700, the record indicates petitioner reported $565 of interest income and claimed an interest deduction of $531 in the previous taxable year. Taken together, the principal amount to which this interest relates more than adequately accounts for the source of the funds. Though the majority discounts this evidence, citing Wichita Terminal Elevator Co. v. Commissioner,
I believe the holding today is a significant retreat from our position in Jackson and gives carte blanche to the Government to seek assessments against taxpayers who, like petitioner, are on the periphery of illegal activities, based on suspicion alone.
In Weimerskirch v. Commissioner,
The majority appears to rely on the indictment, alone, rather than the plea. An indictment, alone, certainly does not prove that petitioner was either in the drug business or that he received income therefrom.