Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-90-09008/USCOURTS-ca10-90-09008-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
Sidney A. Erickson
Appellant

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

SIDNEY A. ERICKSON, ) 

) 

Petitioner-Appellant, ) 

) 

FILED 

United State~ Coute of Appeals 

Tenth Circuit 

JUL - 9 1991 

ROBERT L. HOECKER 

Clerk 

v. ) 

) 

COMMISSIONER OF INTERNAL REVENUE, ) 

) 

No. 90-9008 

Respondent-Appellee. ) 

APPEAL FROM THE UNITED STATES TAX COURT 

DOCKET NO. 31269-84 

Mark H. Scheffel (John D. Moats with him on the briefs), John D. 

Moats & Associates, P.C., Denver, Colorado, Attorneys for 

Petitioner-Appellant. 

Joy Pritts (Shirley D. Peterson, Assistant Attorney General, Gary 

R. Allen and Charles E. Brookhart, Attorneys, with her on the 

brief), Tax Division, Department of Justice, Washington, D.C., 

Attorneys for Respondent-Appellee. 

Before ANDERSON, MCWILLIAMS, Circuit Judges, and ALLEY,* District 

Judge. 

ANDERSON, Circuit Judge. 

Sidney A. Erickson appeals from a decision of the United 

States Tax Court sustaining an income tax deficiency for the taxable year 1983 in the amount of $135,379 plus additions to tax 

under 26 u.s.c. SS 6651(a)(1), 6653(a)(l) and 6654, totalling 

$23,412. R. at Tab 19; see Erickson v. Commissioner, 58 T.C.M. 

* Honorable Wayne E. Alley, United States District Court for 

the Western District of Oklahoma, sitting by designation. 

Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 1 
352 (CCH) (Memo. 1989-552 filed Oct. 10, 1989). We affirm. 

On May 9, 1983, Erickson flew a Cessna 404 containing approximately 2,420 pounds of marijuana over the Gulf of Mexico and 

into the United States. Documents and other items on the plane 

indicated that the flight originated in Belize. United States 

customs officers monitored the flight, pursued Erickson, and arrested him after he landed in Union County, New Mexico. He was 

the sole occupant of the plane. After his arrest, Erickson posted 

a $50,000 appearance bond which he paid in cash, in $20 bills. 

Subsequently, Erickson was convicted in federal court of importing 

marijuana and possessing it with intent to distribute, in violation of 21 u.s.c. SS 952(a), 960(a)(l) and 841(a)(l). That 

conviction was affirmed by this court in United States v. 

Erickson, 732 F.2d 788 (lOth Cir. 1984). 

During the course of the criminal proceedings, Erickson filed 

a motion to suppress which turned on his allegation that he had a 

right of privacy in the airplane that had been violated by the 

government when it installed a transponder. After a hearing, the 

district court determined that Erickson failed to establish a 

legitimate expectation of privacy by proving lawful ownership or a 

sufficient possessory interest in the plane containing the 

marijuana. Id. at 790. However, the Tax Court found as a fact 

that Erickson admitted having an ownership or possessory interest 

in the marijuana itself. 1 58 T.C.M. at 353. 

1 At the suppression hearing in the district court the following exchange occurred between the Prosecutor and Erickson: 

Q Sir, were you flying that aircraft on May 9, 1983 

[footnote continued] 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 2 
The Commissioner introduced evidence before the Tax Court 

showing that Erickson conducted substantial business in cash in 

1983, and had low balances in the three bank accounts located by 

the government. Cash transactions, including cash paid for the 

appearance bond, totalled approximately $75,000. The evidence 

further established that Erickson had a hanger and another plane. 

He stated he was in business with an individual who, to Erickson's 

knowledge, was using a fictitious name for business purposes; the 

business had an address in Texas which was just a private post 

office drop box; Erickson admitted falsifying the address of the 

business. Transcript at 19. Erickson stated that he had possession of and maintenance responsibility for the Cessna 404 for a 

period of time before the flight in question, using his facilities 

in Grand Junction, Colorado, and spent $14,000 for repairs, id. at 

79. Following the suppression hearing in the district court, the 

court expressly found that in important respects Erickson's 

testimony was not credible, Transcript at 114, and the record 

[footnote continued] 

with a load of marijuana when it landed at Moses, New 

Mexico? 

A Yes. 

Q Did you have any ownership or possessory interest 

in the marijuana cargo in that plane at the time? 

A Huh --

Q Or was it somebody else? 

A Yes, I did. 

Transcript of Proceedings of the United States District Court, 

July 13, 1983 at 65 (hereinafter "Transcript"). 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 3 
amply discloses that his aircraft operations, and conduct were 

characterized by falsehoods, deception and concealment. 

Mr. Erickson has never filed a federal income tax return for 

the taxable year 1983. On June 14, 1984, the Commissioner issued 

a statutory notice of deficiency to Erickson which stated, in 

part, "In the absence of adequate records, your taxable income for 

the taxable year ended December 31, 1983 is figured by reference 

to specific expenditures as shown at Exhibit 1." Notice of 

Deficiency at 3. That exhibit contained the cash expenditures 

referred to above, plus the amount of $200,000 estimated to be the 

purchase price of the marijuana in Erickson's possession. The 

exhibit to the notice of deficiency sets forth the following 

relevant items of charged expenditures: 

1983 Application of Funds 

2. Avionics Aviation bill dated 3-1-83 

3. Cashier's check #141422 dated 3-31-83 

5. Purchase price of 2,420 pounds of marijuana 

purchased in Belize 5-9-83 

6. Cash bond paid in $20 bills to clerk of court - Albuquerque, New Mexico 5-83 

7. Cashier check #387093 dated 3-14-83 

8. Jamaica plane ticket 2-21-83 

9. Jamaica hotel bill 3-27-83 

11. Cash receipt 3-6-83 

12. Increase (Decrease) in Bank Balances 

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8,000 

5,000 

200,000 

50,000 

4,395 

1,963 

1,481 

1,311 

Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 4 
A) Bank of Aspen 

Acct # 70-986-7 

B) Intrawest Bank 

Acct # 627-741-2 

C) Texas Commerce Bank 

Acct # 0319996 

Beginning Bal. 

1-1-83 

$ 239 

$1,320 

$ ( 155) 

Ending Bal. 

4-30-83 

$3,565 

$ 547 

$ 221 

3,326 

(773) 

376 

TOTAL $421,0792 

Erickson petitioned the United States Tax Court challenging 

the Commissioner's determination, especially that part of the 

determination attributing the cost of the marijuana to unreported 

income. In the Tax Court, Erickson did not testify and presented 

no defense on the merits. Rather, he argued: (1) that the 

Commissioner's notice of deficiency was not entitled to the usual 

presumption of correctness in a civil proceeding because the Commissioner failed to substantively link Erickson to an income 

producing activity; and (2) the Commissioner erroneously used the 

cash expenditures method for reconstructing income because he 

failed to establish an opening and closing net worth, or to 

identify or quantify nontaxable sources of funds available to 

Erickson. The Tax Court rejected both of those arguments. 

Because Erickson offered no evidence, and in view of the evidence 

introduced by the Commissioner, the Tax Court found that Erickson 

failed to carry his burden of proving that the deficiency 

determination, as modified by certain concessions and adjustments, 

was incorrect, and judgment was entered against him. Erickson 

reasserts both of his arguments on appeal. 

2 The total included the value of the Cessna flown by Erickson. 

The Commissioner later dropped that item. 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 5 
DISCUSSION 

It is well-established that the Commissioner's deficiency 

determination in a civil case is presumptively correct, and that 

the taxpayer bears the burden of coming forward with sufficient 

evidence to overcome the presumption. Welch v. Helvering, 290 

U.S. 111, 115 (1933); Jones v. Commissioner, 903 F.2d 1301, 1303 

(lOth Cir. 1990); Zell v. Commissioner, 763 F.2d 1139, 1141 (lOth 

Cir. 1985). However, the presumption of correctness "is only as 

strong as its rational underpinnings. Where it lacks a rational 

basis the presumption evaporates." Llorente v. Commissioner, 649 

F.2d 152, 156 (2d Cir. 1981). Some reasonable foundation for the 

assessment is necessary to preserve the presumption of correctness. Jones v. Commissioner, 903 F.2d at 1304. See United States 

v. Janis, 428 u.s. 433, 442 ("Certainly, proof that an assessment 

is utterly without foundation is proof that it is arbitrary and 

erroneous."), reh'g denied, 429 U.S. 874 (1976); Gerarado v. Commissioner, 552 F.2d 549, 554 (3d Cir. 1977) ("[I]n order to give 

effect to the presumption on which the Commissioner relies, some 

evidence must appear which would support an inference of the 

taxpayer's involvement in [illegal] activity during the period 

covered by the assessment. Without that evidentiary foundation, 

minimal though if [sic] may be, an assessment may not be supported 

even where the taxpayer is silent."); De Cavalcante v. Commissioner, 620 F.2d 23, 28 (3d Cir. 1980) (presumption of correctness 

requires "a minimal factual basis"); Carson v. United States, 560 

F.2d 693, 696 (5th Cir. 1977) (some factual foundation necessary 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 6 
for presumption of correctness to attach). Cf. Weimerskirsch v. 

Commissioner, 596 F.2d 358, 360 (9th Cir. 1979) ("[B]efore 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.") (emphasis 

added). Naked or purely arbitrary assessments are not entitled to 

a presumption of correctness. See Llorente v. Commissioner, 649 

F.2d at 156. The Commissioner does not have "carte blanche for 

imposing Draconian absolutes." Webb v. Commissioner, 394 F.2d 

366, 373 (5th Cir. 1968). 

Erickson contends that the notice of deficiency in this case 

is utterly arbitrary. His briefs concentrate on the marijuana. 

As to the proposed deficiency based upon the assumption that he 

received taxable income in 1983 in an amount sufficient to buy the 

marijuana in his possession, Erickson argues that the Commissioner 

must link him to an illegal income producing activity, i.e., proof 

of drug sales or, at the very least, proof that he actually 

purchased the marijuana. He cites Weimerskirsch v. Commissioner, 

596 F.2d 358 (9th Cir. 1979): Llorente v. Commissioner, 649 F.2d 

152 (2d Cir. 1981): and Jackson v. Commissioner, 73 T.C. 394 

(1979), to support his argument that the Commissioner must connect 

him to a business as a source of taxable funds. Those cases, as 

noted by the Tax Court, are distinguishable. Deficiencies were 

proposed in those cases largely on the word of informants or the 

mere presence of the taxpayer on the fringes of illegal activity. 

Something more was required in such situations to add sufficient 

plausibility to the notices of deficiency. The situation here is 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 7 
more closely aligned with Delaney v. Commissioner, 743 F.2d 670 

(9th Cir. 1984); Schad v. Commissioner, 87 T.C. 609 (1986); aff'd 

without published opinion, 827 F.2d 774 (11th Cir. 1987); and 

Tokarski v. Commissioner, 87 T.C. 74, 76 (1986). In each of those 

cases, taxpayers possessed liquid assets, or were shown to have 

expended funds during the tax year. The key was connecting the 

taxpayers to the assets, not to a business. Once the Commissioner 

demonstrated sufficient minimal facts to show an ownership interest in assets possessed by the taxpayers, the presumption of correctness remained with the notice of deficiency and the taxpayers 

had the burden of satisfactorily explaining how they came to possess the liquid assets, and to show why the assets did not 

represent taxable income in the year in question. 

In this case, Erickson's implied argument that he was merely 

a pilot-for-hire, or mule, and did not have an interest in the 

marijuana, is negated by an express factual finding to the 

contrary by the Tax Court. On the record which we have outlined 

above, 3 we cannot say that finding is clearly erroneous. The 

problem lies in comparing marijuana to the cash and cash 

equivalents possessed by the taxpayers in Delaney, Schad, and 

Tokarski. However, we think there is no practical difference once 

a minimal showing of ownership has been made. Considering the 

Byzantine ways of drug trafficking, it is just as easy to argue 

that cash in one's possession belongs to someone else, as the 

taxpayer did in Schad, as it is to argue that marijuana in one's 

3 Erickson's cash transactions and his possession of a hanger 

and several planes are consistent with a proprietary interest in 

the planes' cargo. 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 8 
possession belongs to someone else. The only real difference we 

must address is the necessary assumption that the taxpayer 

purchased the drugs with cash or cash equivalents in the taxable 

year. Once that assumption is made we are squarely within the 

Delaney-Schad-Tokarski rule that taxpayers retain the burden of 

explaining the source and nontaxability of funds in their 

possession. 4 

The drug trade is a cash-intensive business. Drugs are very 

close to being cash equivalents. We do not think it an impermissible stretch to assume that someone who is importing more than a 

ton of marijuana into the United States by air paid for the drugs 

in cash at a time proximate to the date of the shipment. This is 

enough to provide a rational underpinning for the notice of 

deficiency and place the burden on Erickson who, after all, is the 

one in possession of all the facts concerning the transaction. As 

the Tax Court said in Schad v. Commissioner, 87 T.C. at 619-20: 

We do not think the Weimerskirsch line of cases was 

intended to exempt narcotics dealers from these long 

established legal principles and create a safe haven for 

them, permitting them to be taxed on money in their possession only if they are caught in the act of buying or 

selling narcotics for a profit. We think connecting 

petitioner to the funds that form the basis of the 

deficiency is sufficient to give him the burden of proving the deficiency determination erroneous. 

Our holding on this point is dispositive, since either the 

evidence just outlined or the cash expenditures approach would 

provide a sufficient basis to preserve the presumption of 

4 We need not address the situation where a taxpayer is in 

possession of, and has some indicia of proprietary interest in 

illiquid assets. In a proper case such evidence may provide 

sufficient linkage or support to other evidence to justify a 

notice of deficiency. 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 9 
correctness in the notice of deficiency. However, the Tax Court 

and the parties on appeal address both issues as if each must be 

resolved in favor of the government to sustain the notice. 

Furthermore, the notice of deficiency itself refers to the cash 

expenditures method of income reconstruction, not to possession of 

liquid assets. The Commissioner has made no effort to harmonize 

the principles involved. Accordingly, we consider Erickson's 

second argument. 

The second issue in this case relates to the Commissioner's 

determination of income based on cash expenditures. It is well 

established that taxpayers are required to keep adequate records 

or books from which their correct tax liability may be determined. 

See 26 u.s.c. § 6001; 26 C.F.R. 1.6001-1; Jones v. Commissioner, 

903 F.2d at 1303 (lOth Cir. 1990); Anson v. Commissioner, 328 F.2d 

703, 705 (lOth Cir. 1964) ("[T]he privilege of original selfassessment accorded the taxpayer carries with it the burden 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 his income by any reasonable means. 

Carson v. United States, 560 F.2d 693, 696 (5th Cir. 1977); 

Petzoldt v. Commissioner, 92 T.C. 661, 687 (1989): 

The absence of statutory guidelines suggests that 

Congress intended that respondent should have great 

latitude in making determinations of liability, 

particularly where the taxpayer files no returns and 

refuses to cooperate in the ascertainment of his income. 

Thus, 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 the taxpayer has failed to file a return and 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 10 
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." 

Id. at 693-94 (quoting Llorente v. Commissioner, 74 T.C. at 266, 

and United States v. Johnson, 319 u.s. 503, 517-1B, reh'g denied, 

320 U.S. BOB (1943)). 

In general, the cash expenditures method of reconstruction 

assumes, absent some explanation by the taxpayer, that the amount 

by which a taxpayer's expenditures during a taxable period exceed 

his reported income has taxable origins. Burgo v. Commissioner, 

69 T.C. 729, 742 (197B). See Cohen v. Commissioner, 176 F.2d 394, 

397 (lOth Cir. 1949). 

Erickson argues that the Commissioner's specific expenditures 

approach in this case was fatally deficient because the Commissioner failed to establish an opening and closing net worth for 

Erickson, or to identify and quantify funds available to him. 

Opening Brief for Appellant at 20-22; Reply Brief for Appellant at 

6. Without such figures, according to Erickson, "the Internal 

Revenue Service was unable to rule out or account for the use of 

taxpayer's capital to pay for alleged purchases which served as 

the basis for an assessment," and the Commissioner's "termination 

assessment ignore[d] the possibility that purchases were made with 

either a nontaxable or previously taxed source of funds." Id. at 

5. 

In support of his position, Erickson cites a number of cases 

which are distinguishable from the type of situation before us 

largely because they involved criminal tax fraud prosecutions in 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 11 
which the burden of proof is on the government. See, ~' 

Holland v. United States, 348 u.s. 121 (1954), reh'g denied, 348 

u.s. 932 (1955); and Taglianetti v. United States, 398 F.2d 558 

(1st Cir. 1968), aff'd per curiam, 394 u.s. 316 (1969). He also 

cites cases in which courts have attempted to equate the opening 

net worth and similar requirements of Holland to all civil tax 

cases, ~' Hoffman v. Commissioner, 298 F.2d 784, 786-87 (3rd 

Cir. 1962), United States v. Caserta, 199 F.2d 905 (3rd Cir. 

1952), Friedberg v. United States, 207 F.2d 777 (6th Cir. 1953), 

aff'd 348 U.S. 142 (1954). Cf. Petzoldt v. Commissioner, 92 T.C. 

661, 694 (1989) ("We agree with petitioner that the requirements 

set forth in Holland v. United States ... are applicable to 

cases involving the cash expenditures method of income 

reconstruction."). 

In response, the Commissioner cites civil tax cases which 

hold that the cash expenditures method does not necessitate a 

determination of the total net worth of the taxpayer at any time. 

See Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964); 

Olinger v. Commissioner, 234 F.2d 823 (5th Cir. 1956). 

In Petzoldt v. Commissioner, 92 T.C. 661 (1989), the Tax 

Court concluded that Holland did not always require an opening and 

closing net worth in order to employ the cash expenditures method. 

The court apparently required the Commissioner to identify sources 

of available nontaxable funds, but went on to state that 

"respondent does not have to negate every possible source of 

nontaxable income if he proves a likely source of income." Id. at 

696 (emphasis added). The court then stated as to the facts of 

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that case, that the petitioner had the burden of proof "where 

respondent has connected petitioner through substantive evidence 

to a likely source for the expenditures and has shown petitioner 

had no likely source for a decrease in net worth .•.• " Id. 

(emphasis added). 

The Tax Court in Petzoldt was not obliged to harmonize its 

analysis with the Delaney-Schad-Tokarski rule relating to specific 

assets, because the income reconstruction from drug trafficking in 

that case was, for the most part, not tied directly to specific 

assets in the taxpayers's possession. And, of course, the assetin-possession cases did not deal with expenditures since the assets in those cases were cash or precious coins. The Tax Court in 

this case did not attempt to rationalize the analysis in Petzoldt 

with Delaney, Schad and Tokarski, although it relied on later 

cases. In fact, the court did not even address the requirements 

Petzoldt listed as alternatives to an opening net worth. 

The problem facing the Commissioner where criminal activity 

of the type involved in drug trafficking is concerned, is that the 

activity is characterized by cash transactions and a lack of 

records, or concealed or deceptive records. Attempting to 

establish an opening net worth or quantify sources of nontaxable 

funds, or other such accounting constructs, for drug traffickers 

who specialize in secrecy, deception, and evasion, is not only a 

daunting burden, it is likely to be so wildly inaccurate through 

no fault of the Commissioner as to be of little real probative 

value. The situation is even more aggravated where, as here, the 

taxpayer is uncooperative. 

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Appellate Case: 90-9008 Document: 01019293862 Date Filed: 07/09/1991 Page: 13 
Regardless, it is not necessary for us to decide whether, in 

a case like the one before us, the Commissioner is required to do 

more than reasonably link the taxpayer to specific expenditures in 

order for a notice of deficiency based on those expenditures to 

retain the presumption of correctness. The Commissioner produced 

evidence, which, taken as a whole, sufficiently connected Erickson 

to a likely source of income, the drug trade, to explain possession of enough money to purchase the marijuana. See Petzoldt v. 

Commissioner, 92 T.C. at 696. Furthermore, the Commissioner 

introduced evidence of Erickson's bank accounts showing insufficient assets on hand at the beginning of 1983 to account for 

$75,000 in cash and cash expenditures, much less an amount necessary to purchase more than a ton of marijuana. Thus, the most 

logical source for nontaxable funds was ruled out. See id. The 

evidence introduced by the Commissioner was enough to satisfy accepted variations of the cash expenditures method. We agree with 

those courts which have held that the Commissioner is not obliged 

to establish a net worth when employing the cash expenditures 

method for notices of deficiency in civil tax cases. 

There was a reasonable foundation for the notice of 

deficiency in this case and it was entitled to a presumption of 

correctness. Furthermore, the Commissioner did not just rely upon 

the notice but introduced evidence in support of his position. 

The source of the funds necessary to acquire the assets in question, or information showing purchase and ownership by another 

individual, were matters peculiarly within Erickson's knowledge. 

We decline to reward a taxpayer who, like Erickson, fails to file 

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a return, keep adequate books or records, provide leads or other 

information from which the Internal Revenue Service can make an 

independent determination of his actual tax liability, or present 

competent, persuasive evidence in court. 

This court has stated that in unreported income cases, the 

taxpayer bears the burden of proving that the Commissioner's 

determination is arbitrary or erroneous. Jones v. Commissioner, 

903 F.2d 1301, 1304 (lOth Cir. 1990); Ruidoso Racing Assn., Inc. 

v. Commissioner, 476 F.2d 502, 507-08 (lOth Cir. 1973). The Tax 

Court's finding that the taxpayer has failed to carry his burden 

of proof is factual and may not be set aside unless clearly erroneous. See Marathon Oil Co. v. Commissioner, 838 F.2d 1114 

(lOth Cir. 1987); Dolese v. Commissioner, 811 F.2d 543 (lOth Cir. 

1987); Smith v. Commissioner, 800 F.2d 930, 934 (9th Cir. 1986). 

In the present case, the Tax Court's determination that Erickson 

failed to carry his burden of proof is well substantiated by the 

record. 

CONCLUSION 

In many respects this is a case which has been searching for 

a coherent legal theory in the wrong places. In testing the 

minimum requirements for a notice of deficiency the emphasis 

should not be on the technical requirements of various income 

reconstruction methods. There is only one rule, that there be 

some rational underpinning. Establishing a minimal evidentiary 

foundation can be done in a variety of ways, and no rigid 

formalisms are required. The Commissioner has established a 

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rational basis for the notice of deficiency in this case, thus 

preserving the presumption of correctness. The taxpayer offered 

no evidence to overcome that presm,lption. Accordingly, the 

judgment of the Tax Court in favor of the Commissioner is 

AFFIRMED. 

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