Opinion ID: 545523
Heading Depth: 2
Heading Rank: 2

Heading: Net Worth Determinations for 1977

Text: 29 The IRS determined that Walton's personal net worth was $96,917.82 at the beginning of 1977 and $364,491.48 at year's end, reflecting an income of $267,573.66. Walton challenges $196,914.61 of this increase based on the inclusion of three assets in his net worth at the end of 1977: (1) accounts receivable from the Academy of $140,414.61; (2) $21,500 as the selling price of an airplane; and (3) $35,000 as the selling price of real estate on Strathcona Drive, Detroit. We address each claim of error in turn. 30
31 The defendant argues that inclusion in the net worth calculation of $140,414.61 in accounts receivable from BIRA is an arbitrary figure that is flatly contradicted by the only relevant evidence in the record--BIRA's general journal entry for 1977. 4 The journal for 1977 indicates that the only account payable to Walton in 1977 was in the amount of $24,000. We agree that, on the record now before us, the figure appears arbitrary. The government did not come forward with any foundation for the figure at trial and, on appeal, contends only that [t]he record is inconsistent and inconclusive with regard to the amounts the Academy owed Walton. Simply because a figure in a net worth analysis appears arbitrary on appeal, however, is not sufficient to merit reversal. 32 As set out at length above, an assessment is presumed correct, and the plaintiff bears the initial burden of producing evidence at trial to show that an assessment is arbitrary or excessive. We do not doubt that this burden may be met by the defendant pointing out that an element of a net worth calculation is wholly without foundation or is flatly contradicted by another of the government's exhibits. The government would then bear the burden of coming forward with a minimal evidentiary foundation for the assessment. In this case, however, the defendant never met his minimal burden of production. Walton's attorney never cross-examined Agent Backaitis to determine how he arrived at the figure of $140,414.61 in accounts receivable from BIRA. Nor did he bring the conflict between the assessment and the journal entries to the attention of the court or the government, which would have afforded the government an opportunity to explain or reconcile the difference. In fact, the only challenge to this figure appearing in the record is a colloquy between the defendant and his attorney on direct-examination occurring after Backaitis had been called and cross-examined: 33 Q. Do you have any additional objections to the net worth assessment made by Mr. Algis A. Backaitis with respect to yourself with respect to the years 1976 and 1977? 34 A. 1977, as I stated, the $132,000 was not correct, the accounts receivable, Belle Isle Riding Academy he has an amount of $140,414.61 owed me and I don't know what that's for. I know they don't owe me nothing. 35 This vague denial, which was modified moments later when Walton acknowledged that BIRA did owe him $24,000, was certainly not sufficient to meet the defendant's burden of production on the issue of arbitrariness. Had BIRA's general journal entry for 1977 been brought to the attention of the court on this particular issue at trial, and had Agent Backaitis been unable to explain how he had arrived at the figure of $140,414.61 in accounts receivable, we would agree with Walton's contention that the figure is arbitrary and excessive. As the case stands, however, the defendant did not meet his initial burden, and the court properly found in favor of the government on this issue.
36 Walton alleges two grounds of error in the Commissioner's inclusion of a Grumman-American Cheetah aircraft with a cost of $21,500 in Walton's net worth for 1977: first, that he did not own the airplane which belonged to the Academy; and second, that the asset was listed free from any liabilities in the Commissioner's net worth calculation in the face of documentation proving that $22,976.40 was owed on it. 37 In support of his first argument, Walton notes that the Academy's name is listed on the application for the plane's registration, that the Academy is referred to as the purchaser on a financing agreement, and that the plane was paid for with checks from the Academy's account. While acknowledging that the airplane was legally titled in the name of the Academy, the Commissioner maintains that the aircraft served no legitimate business purpose, and that it therefore must be considered as Walton's personal property for purposes of net worth calculation. Walton responds that he used the plane in his capacity as president of BIRA to attend feed sales. Acknowledging that he was not obliged to personally attend the sales in order to purchase feed, Walton claims that his presence allowed him to obtain the telephone numbers of feed dealers who gave him a better price on hay for the Academy's horses. The defendant's testimony to this effect at trial was flatly contradicted by his prior deposition testimony. 5 38 The district court found in favor of the government, writing: 39 First, the Court is hard pressed to accept that the cost of operating a plane and the time expended in travelling from the Northwest side of Detroit to Detroit City Airport and then to Ann Arbor, Michigan to be picked up and transported to Howell, then back to Ann Arbor airport to be flown to Bad Axe justified the expenditures for the plane. Walton testified that the plane saved the Academy money by allowing him to get phone numbers of individual dealers and to negotiate sales with them individually. Yet, he provides the Court with absolutely no proof of the costs saved by these endeavors. In absence of documentation, the Court finds this explanation to be not merely implausible but absurd. 40 The defendant argues that this finding is clearly erroneous in that the government's own assessments for BIRA show that its expenses for feed decreased steadily from 1977 through 1979. Walton's argument that the plane was the cause of reduced feed prices in 1979 is disingenuous, to say the least, in light of the fact that Walton sold the plane in August 1978. In any event, numerous reasons, totally unrelated to the purchase of the airplane, could have accounted for the reduction in the total expenditures for feed in 1978. In light of the fact that Walton has come forward with absolutely no evidence besides his own contradictory testimony, the district court properly found that the asset belonged to Walton rather than BIRA. 41 Walton's second claim of error with regard to the airplane has more merit. In the government's net worth calculation, the plane was listed as an asset, acquired in 1977, with a value of $21,500. The calculation does not include any liabilities attached to the airplane. It is evident, therefore, that the IRS computed Walton's net worth with the understanding that he had paid the entire cost of the airplane in 1977. Walton produced convincing evidence at trial that the airplane was in fact purchased by way of a security agreement. According to a conditional sales contract with Grumman Credit Corporation, dated December 26, 1977, Walton paid $4,300 in cash for the airplane on that date and agreed to pay the remainder of the $21,500 purchase price in 60 equal successive monthly installments of $382.94 each, beginning February 1, 1978. Walton also entered into evidence four checks, each for $382.94, made payable to the Grumman Credit Corporation and bearing the dates of the first four months in 1978. 42 This evidence was clearly sufficient to shift the burden to the government to produce evidence that inclusion of the total purchase price was not arbitrary or excessive. It is apparent that the government never met this burden; in fact the government appears not to have addressed the issue at all during the remainder of the trial. Under these facts, we believe that the district court abused its discretion by refusing, sub silentio, to reduce the defendant's tax burden to reflect the liabilities owed on the airplane. 6 The court's judgment should be modified accordingly on remand. See Gerardo v. Commissioner, 552 F.2d at 555.
43 Walton's final challenge to his personal net worth calculation is that it includes $35,000, representing the purchase price of a house on Strathcona Drive in Detroit. Walton argues that BIRA had legal title to the property and that it was therefore improper for the Commissioner to consider the price of the house in Walton's personal net worth calculation. The government contends that the legal ownership of the house is irrelevant. It maintains that the dispositive fact is that the property was purchased and maintained solely for Walton's personal use. Walton responds that the property was purchased by BIRA purely as an investment, and that he personally never lived there. 44 The government's evidence is overwhelming. At trial, the defendant admitted that the house was furnished as a residence and that much of his personal and business correspondence was delivered there. Although Walton denied actually living at the Strathcona residence, he testified that he had slept there on occasion, had met acquaintances at the house, and had cooked some of his meals there. The defendant claims that these actions can be explained by the fact that he wanted to give the house a lived in appearance in order to prevent vandalism. The district court was understandably impatient with this explanation. 45 The defendant listed the house as his personal residence on the Academy's 1979 annual report to the State of Michigan, on his application for a State of Michigan driver's license, and on a promissory note given to a lending institution in exchange for financing on a boat. A female companion of Walton's recorded the property as her home address on the registration of her own automobile. Walton explained that the woman had never lived there, but that he had given her the car as a gift and that the Strathcona address had been used because the woman's daughter was the housekeeper there. Walton never explained why BIRA required a housekeeper to maintain a piece of property that was not being used as a residence. 46 BIRA's purported business purpose in purchasing the house as an investment is belied by the fact that the property was never rented out. 7 Based on this record, the district court found that: 47 The Strathcona property is a classic example of an asset that served no legitimate purpose whatsoever for the Academy.... 48 ... Walton was using the Strathcona house as his personal residence.... The Court finds incredulous defendant's expectation that the Court would believe that Walton did not live there even though he directed his mail to that address, and never received any rental income from it. 49 Our review of the record convinces us that the district court's finding with respect to the Strathcona property was fully supported by the great weight of the evidence. Having disposed of Walton's complaints with regard to the assessments levied against him personally, we proceed to a consideration of BIRA's tax liability. 50