Llorente v. Commissioner

Tannenwald, J., 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 confusion reflected in the decided cases, over the years and particularly in recent times, with respect to the so-called presumption of correctness of respondent’s determination and with respect to the burden of proof and burden of going forward with the evidence. See 2 L. Casey, Federal Tax Practice, secs. 7.7 and 7.8 (1955 ed. and 1979 supp.).

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, 424 U.S. 614, 628-629 (1976); United States v. Janis, 428 U.S. 433, 442-443 (1976); 1 Helvering v. Taylor, 293 U.S. 507 (1935); Carson v. United States, 560 F.2d 693 (5th Cir. 1977); United States v. Rexach, 482 F.2d 10, 15-17 (1st Cir. 1973); Pizzarello v. United States, 408 F.2d 579 (2d Cir. 1969); United States v. Lease, 346 F.2d 696, 698-701 (2d Cir. 1965); United States v. Molitor, 337 F.2d 917 (9th Cir. 1964).

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. 2 The phrase “presumption of correctness” has curious roots. It first appeared in haec verba in Welch v. Helvering, 290 U.S. 111 (1933) (involving a proceeding originally initiated by the taxpayer in the Board of Tax Appeals after the issuance of a notice of deficiency), where the Court stated, “His [the Commissioner’s] ruling [deficiency notice] has the support of a presumption of correctness and the petitioner [taxpayer] has the burden of proving it wrong.” The authorities relied upon for this pronouncement are questionable because the initial link in the chain of those authorities is United States v. Rindskopf, 105 U.S. 418 (1881) (a case involving a suit by the Government to collect an assessment) which the Supreme Court later said had “no bearing” on a situation such as that involved herein. See Helvering v. Taylor, supra at 514 . See also United States v. Rexach, supra at 17 n. 4.

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, 316 F.2d 701 , 704 n. 4 (1st Cir. 1963). It seems to me that the Court intended to do no more than to counterbalance a possible argument that the issuance of a notice of deficiency made the respondent the moving party and to reinforce its pronouncement that the taxpayer had the burden of proof. 3 Nevertheless, the fact remains that the phrase “presumption of correctness” has been utilized in differing fashions in later judicial opinions and has resulted in differing treatment of the burden of proof. See United States v. Janis, supra at 443-444 ; Rockwell v. Commissioner, 512 F.2d 882, 885-887 (9th Cir. 1975), affg. a Memorandum Opinion of this Court; Foster v. Commissioner, 391 F.2d 727, 734-736 (4th Cir. 1968), affg. in part and revg. and remanding in part a Memorandum Opinion of this Court; United Aniline Co. v. Commissioner, supra at 704. See also United States v. Rexach, supra at 15-17 .

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, 217 F.2d 462, 465-466 (6th Cir. 1954)), and that, at least initially, the taxpayer has the burden of proof. Where they part company is where the taxpayer comes forward with countervailing evidence. Thus, the Second Circuit Court of Appeals states its position as follows (see Bernuth v. Commissioner, 470 F.2d 710, 714 (2d Cir. 1972), affg. 57 T.C. 225 (1971)):

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, 391 F.2d at 735 .

The Ninth Circuit Court of Appeals states the rule where deductions are involved as follows (see Rockwell v. Commissioner, 512 F.2d at 885 ):

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, 377 F.2d 65, 69, 71 (9th Cir. 1967), revg. a Memorandum Opinion of this Court):

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 no income. 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, 482 F.2d at 16 ):

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, 179 F.2d 938, 942 (1st Cir. 1950). Indeed, I observe that, in view of the difficulties which that phrase “presumption of correctness” has caused, it would be better if it were expunged from the case law, although I recognize that it is probably too late to attempt to do so. At the very least, however, we should recognize that the only function of that phrase is to make clear in the usual tax case, 4 that the burden of proof is and remains upon the taxpayer regardless of what he does in respect of his initial burden of going forward with the evidence. 5

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, 283 F.2d 675, 679 (6th Cir. 1960), revg. and remanding a Memorandum Opinion of this Court; Cohen v. Commissioner, 266 F.2d 5 (9th Cir. 1959), remanding a Memorandum Opinion of this Court. See also 9 J. Mertens, Law of Federal Income Taxation, sec. 50.61 (1977 rev.). Indeed, in such situations, where, by hypothesis, there may be no documentary evidence, a court perhaps should be more willing to accept a taxpayer’s uncorroborated testimony as satisfying his initial burden. See Demkowicz v. Commissioner, 551 F.2d 929 (3d Cir. 1977), revg. a Memorandum Opinion of this Court. See L. Casey, Federal Tax Practice, sec. 7.8 (1979 supp.). But, whatever the degree of relaxation of the level of proof required, the taxpayer’s credibility must still be on the line and the difficulties inherently involved in such a situation ought not to be an excuse for shifting the burden of proof. Obviously, if the taxpayer’s testimony is accepted, he will have made a prima facie case and the failure of the respondent to come forward with adequate countervailing evidence, i.e., to overcome or to put in equilibrium such a prima facie case, will result in a decision for the taxpayer on the ground that he has carried his burden of proof. See Schildhaus v. Commissioner, 442 F.2d 1343 (2d Cir. 1971), affg. per curiam T.C. Memo. 1969-283 .

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 heavy. But he is not entirely without means to elicit the underlying facts which respondent used to develop his notice of deficiency. Title YII of the Tax Court Rules of Practice and Procedure is available to him for this purpose, although he must recognize that resort to discovery under that title has its limitations because of the rule that we generally do not look behind a deficiency notice. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). See, e.g., Barger v. Commissioner, 65 T.C. 925 (1976); Industrial Electric Sales & Service, Inc. v. Commissioner, 65 T.C. 844 (1976); Morris v. Commissioner, 65 T.C. 324 (1975); Dvorak v. Commissioner, 64 T.C. 846 (1975); Branerton Corp. v. Commissioner, 64 T.C. 191 (1975). The rule of Greenberg’s Express, Inc. v. Commissioner, supra—a rule fashioned to deal with the usual case where the basis of respondent’s determination of a deficiency will be obvious, with its factual foundation known or independently available to the taxpayer — does not stand as a barrier to the use of discovery procedures, where the burden on the taxpayer is a heavy one. 6 See Branerton Corp. v. Commissioner, supra at 200.

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, 7 e.g., without “factual foundation” or “rational basis,” and that therefore the burden of proof should be placed upon respondent. Cf. Helvering v. Taylor, 293 U.S. 507 (1935); Gordon v. Commissioner, 63 T.C. 51, 73 (1974). To take a contrary view and preclude ourselves from ever inquiring into the factual foundations of a deficiency notice would stultify the judicial process and make a mockery out of the Court’s power to take necessary remedial action.

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. 8 See Kentucky Trust Co. v. Glenn, 217 F.2d at 467 . Where, however, there is a strong and clear potential basis for the claim of arbitrariness on the part of respondent, primarily but not necessarily confined to the constitutional arena, inquiry prior to trial may be in order. Suarez v. Commissioner, 58 T.C. 792 (1972).

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, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977), and Gerardo v. Commissioner, 552 F.2d 549 (3d Cir. 1977), revg. a Memorandum Opinion of this Court, and may have struck the Courts of Appeals as being so egregious 9 as to justify their reversal of our decisions. I will not attempt to sit in judgment on the correctness of the results in those cases; they are clearly distinguishable from the instant case, where no such projection is involved. 10 My disagreement with the Courts of Appeals in those cases need only extend — at the moment— to the fact that they reached their conclusions by what I consider to be an erroneous and unfortunate application of the burden-of-proof rule. 11

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.

Featherston and Hall, JJ., agree with this concurring opinion. 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, 61 T.C. 841 (1974). See Jackson v. Commissioner, 73 T.C. 394 (1979).

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, 482 F.2d 10, 16 (1st Cir. 1973).

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, 560 F.2d 693, 695-696 (5th Cir. 1977), where the Fifth Circuit Court of Appeals said, “The burden [of proof] and the presumption [of correctness], which are for the most part but the opposite sides of a single coin, combine to require the taxpayer always to prove by a preponderance of the evidence that the Commissioner’s determination was erroneous.” (Emphasis added.)

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, 276 F.2d 122 (5th Cir. 1960), affg. a Memorandum Opinion of this Court; Marcus v. Commissioner, 70 T.C. 560 , 577 (1978)), the taxpayer would at least have the opportunity of knowing, at the outset, the parameters of the respondent’s case.

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, 293 U.S. 507 (1935), used the words “arbitrary” and “excessive” conjunctively. The implications of Helvering v. Taylor are far from clear. Some courts have used it to shift to respondent the burden of proof, others only to shift the burden of going forward with the evidence on the ground that a showing of arbitrariness in respondent’s determination removes the presumption of correctness. In United States v. Janis, 428 U.S. 433, 441 (1976), the Supreme Court indicated only that Taylor stood for the proposition that, where the respondent’s determination was without rational foundation and excessive, the determination was “not properly subject to the usual rule with respect to the burden of proof in tax cases” and commented (n. 8) that the case had never previously been cited by the Supreme Court on the burden-of-proof issue. See also 2 L. Casey, Federal Tax Practice, sec. 7.7, n. 47 (1955 ed.), where it is suggested that Helvering v. Taylor did no more than assure a further hearing to the taxpayer.

Indeed, this is precisely what occurred in Jackson v. Commissioner, 73 T.C. 394 (1979), where respondent, apparently concerned that the Court might believe the taxpayer’s testimony, chose to disclose the basis of his deficiency notice and revealed its utterly flimsy foundation. The Court specifically reserved its position as to what it would have done if respondent had not taken this step.

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, 73 T.C. 394 , 403 n. 4 (1979).

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, 428 U.S. 433 (1976), although the Supreme Court specifically refused to resolve the burden-of-proof issue as to the ultimate liability for tax. (See 428 U.S. at 442-443 .)