Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02811/USCOURTS-ca10-88-02811-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellant
Cornell M. Jones
Appellee

Document Text:

PUBLISH 

IN THE UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

CORNELL M. JONES, ) 

) 

Petitioner-Appellant, ) 

Cross-Appellee, ) 

FI LED 

United Statos Courc of Appeals 

Tenth Circuit 

M.~Y 211990 

ROBERT L. HOECKER 

Clerk 

) 

V • ) 

Nos. 88-2948 

88-2811 

) 

COMMISSIONER OF INTERNAL REVENUE, ) 

) 

Respondent-Appellee, ) 

Cross-Appellant. ) 

APPEAL FROM THE UNITED STATES TAX COURT 

DOCKET NO. 36601-86 

Mark J. Rochon (W. Gary Kohlman on the briefs), Kohlman & Fitch, 

Washington, D.C., Attorneys for Petitioner-Appellant, CrossAppellee. 

Charles E. Brookhart (James I. K. Knapp, Acting Assistant Attorney 

General, Shirley D. Peterson, Assistant Attorney General, Gary R. 

Allen and Laura Marie Conley O'Hanlon, with him on the briefs), 

Tax Division, Department of Justice, Washington, D.C., Attorneys 

for Respondent-Appellee, Cross-Appellant. 

Before McKAY, ANDERSON and BALDOCK, Circuit Judges. 

ANDERSON, Circuit Judge. 

Cornell Jones appeals a decision of the United States Tax 

Court sustaining an income tax deficiency for the calendar year 

1985 in the amount of $16,490,402 together with additions to tax 

under 26 U.S.C. SS 665l(a)(l), 6653(a)(l), 6654, and 6661 

Appellate Case: 88-2811 Document: 010110560507 Date Filed: 05/21/1990 Page: 1
totalling $4,125,107. Jones v. Commissioner, No. 36601-86 (T.C. 

Aug. 18, 1988) (Decision); R. Vol. I, Tab 27. 1 The Tax Court made 

no mention in its opinion of the Commissioner's asserted addition 

to Jones' 1985 tax under 26 U.S.C. § 6653(a)(2), and only 

partially sustained the asserted addition under§ 6661. Jones v. 

Commissioner, 55 T.C.M. (CCH) 1556 (1988). The Commissioner 

cross-appeals as to these two items. We affirm the Tax Court's 

decision concerning the tax deficiency, and remand for further 

proceedings to determine the correct amount of additions to the 

tax. 

BACKGROUND 

Jones was arrested on October 29, 1985 by the Washington, 

D.C. Metropolitan Police Department after having participated in 

the purchase of what he then believed to be one kilogram of 

cocaine from undercover police officers. Jones pled guilty to 

conspiracy to possess with intent to distribute cocaine in violation of 21 U.S.C. § 846 (1982) and he was sentenced to a term of 9 

to 27 years imprisonment. 

1 On October 18, 1988 the Tax Court issued an "Order" sua 

sponte which purported to amend its decision by increasingthe 

addition to tax under 26 u.s.c. § 665l(a)(l) and by assessing a 

final addition to tax related to interest on the deficiency 

pursuant to 26 U.S.C. § 6653(a)(2). Jones filed his notice of 

appeal on September 8, 1988; after that date the Tax Court lacked 

jurisdiction to is.sue its "Order." It therefore has no effect on 

the Tax Court's decision dated August 18, 1988. See,~' United 

States v. 397.51 Acres of Land, 692 F.2d 688, 693 (10th Cir. 1982) 

(with two recognized exceptions, "[t]he filing of a notice of 

appeal divests the district court of jurisdiction .... "); SEC 

v. Investors Security Corp., 560 F.2d 561, 568 (3d Cir. 1977)-.-

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Jones' arrest was the result of a lengthy investigation of 

large scale drug trafficking taking place at a small area known as 

Hanover Place in the District of Columbia. Searches of Jones' 

residence and of several apartments in and around D.C. produced 

assets worth millions of dollars, including $870,000 cash at his 

residence and $643,900 cash in bank deposit boxes; three gold 

ingots; two Mercedes Benz automobiles; jewelry; furs; 28 airline 

tickets from Washington, D.C. to Las Vegas, Nevada; tickets to a 

championship fight in Las Vegas; five handguns; over 10.5 

kilograms of cocaine; drug packaging paraphernalia; a bill counting machine; communications equipment; and a drug identification 

kit; all of which convincingly linked Jones to the cocaine trade 

at Hanover Place. Furthermore, statements by certain individuals 

to police officers investigating the Hanover Place operation 

identified Jones as the organizer behind the significant drug 

activity taking place. 

In January 1986 the IRS made a termination assessment against 

Jones of $33,990,402 based on $68 million in unrepor~ed income 

from drug related activities which the IRS estimated Jones 

received in the first ten months of 1985 prior to his arrest. The 

government later modified its estimate of Jones' drug related 

income, asserting in its statutory notice of deficiency that Jones 

received unreported income of $33 million in 1985. Jones kept no 

records of income from drug sales, and he did not file an income 

tax return for 1985. 

Jones petitioned the Tax Court which upheld the deficiency 

based on the asserted $33 million income for 1985 and certain 

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additions to tax based on the amount of the resulting deficiency. 

Jones now appeals the Tax Court's ruling on several grounds, the 

most relevant of which is that the assessment based on $33 million 

income is unreasonable and arbitrary. 2 

DISCUSSION 

Ordinarily, the statutory notice of deficiency is presumed 

correct; the burden rests on the taxpayer to establish that the 

determination of income is erroneous. Zell v. Commissioner, 763 

F.2d 1139, 1141 (10th Cir. 1985). 3 As a taxpayer, Jones has the 

duty to maintain adequate and accurate records to enable him to 

file a tax return. See 26 U.S.C. § 6001; Anson v. Commissioner, 

328 F.2d 703, 705 (10th Cir. 1964) ("[T]he privilege of original 

self-assessment accorded the taxpayer carries with it the burden 

2 Jones' other contentions relate to hearsay evidence which the 

Tax Court admitted at trial. Although much of the government's 

evidence consisted of numerous layers of hearsay evidence, most of 

these otherwise hearsay statements were admitted for very limited 

purposes, not to prove their truth. Hearsay is admissible to 

support the methodology used by the Commissioner in arriving at 

his deficiency assessment. See DiMauro v. Commissioner, 706 F.2d 

882, 885 (8th Cir. 1983); Avery v. Commissioner, 574 F.2d 467, 468 

(9th Cir. 1978). Furthermore, Jones waived most of his objections 

to the admissibility of evidence by failing to properly object at 

trial. The fact that he chose to represent himself at trial in no 

way excuses this waiver. Wallis v. Commissioner, 357 F.2d 313, 

314 (10th Cir. 1966) (prose appearance before Tax Court, "whether 

by choice or circumstance, does not lessen the impact of 

applicable rules"). 

3 At trial, Jones disclaimed any involvement with the drug 

trade other than the single purchase for which he was arrested. 

He now claims that the Commissioner's assertion that he received 

unreported income from illegal drug sales lacks any foundation in 

fact, thereby making any assessment for such income improper. The 

evidence produced at trial supports the Tax Court's determination 

that Jones was in fact involved in drug sales and that he did 

receive substantial income from sales which he did not report. 

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of support through the maintenance of records which clearly and 

accurately reflect income."}. Where, as here, the taxpayer keeps 

inadequate records or no records at all the Commissioner is 

entitled to reconstruct the taxpayer's gross receipts and costs to 

arrive at an assessment for the unreported income. See Anson, 328 

F.2d at 705-06; Adamson v. Commissioner, 745 F.2d 541, 548 (9th 

Cir. 1984} ("The absence of tax records cannot automatically 

deprive the Commissioner of a rational foundation for the income 

determination."}. Thus a taxpayer who has abandoned the advantage 

of mathematical precision by failing to keep adequate records cannot complain that the Commissioner's assessment is based on 

estimates rather than proven amounts of unreported income. See 

Anson, 328 F.2d at 707 (calculation of unreported tip income by 

use of arithmetic formula acceptible even though such a method 

"cannot produce exactness"}. 

Jones offered almost no real evidence to prove that the 

Commissioner's assessment was erroneous except his weak attempts 

to distance himself from all drug sales. He made no attempt to 

suggest a more appropriate or more accurate estimate of his drug 

related income, nor did he suggest who, if not he, was receiving 

the majority of income arising from drug trafficking at Hanover 

Place in 1985. Where no such evidence of error is produced, we 

might ordinarily rely solely on the presumptive correctness of the 

deficiency notice and dispose of the case without further discussion. As we stated in Ruidoso Racing Ass'n, Inc. v. Commissioner, 

476 F.2d 502, 507-08 (10th Cir. 1973), "With regard to unreported 

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income, the taxpayer must prove that the determination is 

arbitrary and erroneous II 

We pause, however, to discuss Jones' contention that the 

sheer magnitude of the government's assessment is itself sufficient to demonstrate that it is arbitrary and erroneous. The 

$33 million income which the government assigned to Jones over a 

ten-month period is indeed a figure which almost defies credibility. This court has never directly addressed the outer boundary of reasonableness at which point the bare presumption afforded 

the Commissioner's assessment must ultimately give way; nevertheless, we believe that such a point probably does exist. The Fifth 

Circuit has concluded that "[T]he absence of adequate tax records 

does not give the Commissioner carte blanche for imposing I 

Draconian absolutes •.. [even though] such absence does weaken 

any critique of the Commissioner's methodology." Webb v. Commissioner, 394 F.2d 366, 373 (5th Cir. 1968); see Bradford v. Commissioner, 796 F.2d 303, 306 (9th Cir. 1986); Walker v. Commissioner, 

757 F.2d 36, 37 (3d Cir. 1985) ("The Internal Revenue Service has 

sometimes overreacted [to unreported income from illegal sources] 

by imposing arbitrary assessments."); United States v. Carson, 560 

F.2d 693, 698 (5th Cir. 1977) (unlimited reliance entirely on a 

bare presumption of correctness is a position ''which would support 

the most arbitrary of assessments" and "does not become the 

government's agents .... "). 

Jones has not satisfied any evidentiary burden in contesting 

the Commissioner's assessment. Had he met such a burden, the 

presumption of correctness afforded the Commissioner's assessment 

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would disappear and the government would be required to prove the 

accuracy of its determination. Cf. Ruidoso Racing Ass'n, Inc. v. 

Commissioner, 476 F.2d at 508 (where the government's determination is demonstrably arbitrary .•. "the Commissioner must 

satisfy the court as to the existence and amount of unreported 

income."). Rather than offering any explanation or other evidence 

concerning the amount of drug-related income he received, Jones 

merely attempted to prove that he received no income from drug 

sales. His attempt to distance himself from illegal income failed 

miserably. He therefore has not demonstrated that the government's estimate is exaggerated or arbitrary, nor has he proved 

that the government lacks factual basis for its assessment. See 

United States v. Janis, 428 U.S. 433, 442 (1976) ("Certainly, 

proof that an assessment is utterly without foundation is proof 

that it is arbitrary and erroneous."). 

After reviewing the entire record before us, we cannot 

conclude that the government's assessment lacks any reasonable 

foundation. The formula used to estimate Jones' income from drug 

sales is sufficiently related to the amount of drug activity 

taking place at Hanover Place to withstand review. As we stated 

in Anson v. Commissioner, 328 F.2d at 707: 

"Although assessment by formula cannot produce exactness, it can, when adapted and adjusted to particular 

facts, be expected to reach substantial correctness 

•... We agree with the Tax Court that the 

Commissioner ... adopted a reasonable method to 

compute [the unreported] income." 

The record clearly demonstrates that Jones was involved in the 

cocaine trade taking place at Hanover Place for some indeterminate 

period of time prior to his arrest in October 1985. At trial, a 

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Metropolitan Police Department sergeant testified that in the oneblock area known as Hanover Place, "there were several locations 

• being used for the distribution of the drugs." R. Vol. I, 

Tab 22 at p. 83. The sergeant stated further: "[t]here was 

hundreds of people lining the street selling drugs. 114 

As to Jones' involvement in this massive operation, the 

police sergeant testified that beginning in mid to late 1984, 

"What we did was, we were making arrests. Officers out 

of my unit were making arrests in the area of the people 

who were s~lling right there on the street. The people 

were brought in and they were interviewed, and they were 

interrogated as to who was behind the operation on 

Hanover Place. Several of the individuals that were 

arrested informed the investigating officers and myself 

that the person behind the drugs on Hanover Place was 

Mr. Cornell Jones." 

R. Vol. I, Tab 22 at p. 81. In setting up the undercover sale of I 

cocaine substitute to Jones, the police gained further knowledge 

of his role: 

"Q. How did the police department, in its reverse sale 

operation with Mr. Jones, how did it initially make 

contact with Mr. Jones? 

A. We did not know that we were actually making contact 

with Mr. Jones. We had a cooperating individual who 

said that it had been selling drugs to an individual who 

identified himself as the Czar of Hanover Place. This 

individual, to us, was believed to be Mr. Cronell Jones 

[sic]." 

4 The testimony of the Metropolitan Police sergeant includes 

descriptions of the drug trade at Hanover Place as "operating 24 

hours a day," with "hundreds" of people working three eight-hour 

shifts. Money and drugs were located in various apartments along 

the dead end street making up Hanover Place, and the officer 

testified that "during 1985 the vehicle traffic was so bad [near 

Hanover Place] that the traffic couldn't get through the block and 

they would often times double park for blocks away to get into 

Hanover Place to purchase drugs." R. Vol. I, Tab 22, pp. 78-99. 

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Id. at p. 90. 

The government originally estimated Jones' unreported income 

based on an assumption that drug sales at Hanover Place totalled 

20 kilograms per week, or 20,000 weekly sales of one-gram bags at 

the street price of $100 each. The government's revenue agent 

testified that in preparing the statutory notice of deficiency he 

had halved the original sales volume "in an effort to come up with 

what I thought was a more reasonable and conservative estimate 

II Id. at 57. The government's assumption concerning the 

quantity of drugs being sold at Hanover Place in 1985 is primarily 

based on the following statement by the Metropolitan Police 

Department sergeant: 

"It was our conservative estimate from the amount of 

drugs we were seizing from the street, the amount of 

money we were seizing from the street, the amount of 

vehicle traffic and pedestrian traffic we were seeing on 

the street, we came to the determination that there was 

approximately one kilo per shift going out of Hanover 

Place. That would be three kilos a day, seven days a 

week. The street was running constantly. There was 

hundreds of people lining the street selling drugs." 

R. Vol. I, Tab 22 at p. 85. The other basis for the sales 

quantity figure arises from two statements, one by Jones during 

the October purchase of cocaine substitute, and the other by 

Jones' coconspirator in the course of discussions between the 

coconspirator and government agents leading up to the purchase. 

The government's undercover agent who negotiated the purchase 

testified at trial that "He [Jones] said that he could do 20 keys 

per week." R. Vol. I, Tab 22, at p. 146. The same undercover 

agent testified that Jones' coconspirator had told him that "he 

and Cornell were doing approximately 50 kilos per month and they 

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could handle the 10 kilos [we proposed to sell them.]" Id. at 

133. The Tax Court credited the statements, concluding that they 

were not mere "puffery." We must accept the Tax Court's factual 

determinations unless they are not supported by substantial 

evidence or are clearly erroneous. House Beautiful Homes, Inc. v. 

Commissioner, 405 F.2d 61, 65 (10th Cir. 1968). 

It is almost certain that the Commissioner's assessment of 

unreported income is inaccurate. The inaccuracy results, however, 

· not from uncertainty concerning Jones' significant involvement in 

this massive drug scheme, but from his failure to maintain any 

records whatsoever reflecting drug related income, and his refusal 

to even suggest a more accurate amount or more reasonable basis to 

compute his income. There is simply too much evidence supporting 

the government's assessment of enormous income derived from 

illegal sources to sustain Jones' attack which in turn is totally 

devoid of any evidentiary foundation. We conclude that the 

government's assessment is entitled to a presumption of correctness; therefore, we affirm the Tax Court's decision as to the 

income tax deficiency for the calendar year 1985. 

The only remaining issue is whether the Tax Court correctly 

computed the additions to the tax deficiency. The Commissioner 

contends that the Tax Court erroneously omitted additions under 26 

U.S.C. §§ 665l(a)(l) and 6653(a)(2), and that the court 

incorrectly assessed the addition under§ 6661 at ten percent of 

the tax liability rather than at twenty-five percent. Indeed, 

from the record before us, it appears that the Tax Court attempted 

to correct its order by issuing an "amendment" thereto which 

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reflected to some degree the Commissioner's allegations concerning 

the additions. 5 Because there appears to have been confusion 

concerning the additions requested by the Commissioner and the 

appropriate legal standards which apply to those requests, we 

reverse that part of the Tax Court's decision concerning the 

additions to the tax deficiency and remand for further proceedings 

to determine the appropriate additions. 

CONCLUSION 

The government has no burden of proof as to its notice of 

deficiency in the face of Jones' silence at trial except that the 

assessment it makes must be reasonably based on facts appearing in 

the record. The record before us amply demonstrates that Jones 

was significantly involved in a massive drug selling operation for 

some period preceding his arrest in 1985. The evidence produced 

at trial supports the Tax Court's conclusion that the assessment 

of unreported income was reasonable in light of the enormous 

proceeds which were generated by the Hanover Place drug operation. 

We therefore affirm the Tax Court's decision sustaining the income 

tax deficiency. We reverse the assessment of additions to the tax 

deficiency and remand the case for further proceedings to 

determine the appropriate amount of the additions. 

AFFIRMED in part and REVERSED in part. 

5 The Commissioner concedes that the Tax Court lost jurisdiction to substantively alter its order upon the filing of a 

notice of appeal. Brief of Appellee-Cross Appellant at 39. 

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