Opinion ID: 299966
Heading Depth: 1
Heading Rank: 2

Heading: The Disputed Transaction

Text: 8 On January 31, 1961, taxpayer MacGuire borrowed $600,000 from the First National Bank of Dallas through the Chelmont State Bank (where Terrenates had an account) and deposited the proceeds in his personal account. He then repaid his total indebtedness to Terrenates, $577,019.66 plus interest of $21,380.97, by depositing his check for $598,390.63 in the Terrenates checking account in the Chelmont State Bank. MacGuire then drew two checks aggregating $700,000 on the Terrenates checking accounts (one in the amount of $655,000 drawn on the Chelmont State Bank; the other for $45,000 drawn on the account at the State National Bank of El Paso) and deposited them to his personal account at the Chelmont State Bank. The next day, MacGuire drew a check on his personal account to the Chelmont State Bank in El Paso in payment of the $600,000 loan of the previous day plus interest for one day in the amount of $83.00. On the same day, he closed out the Terrenates checking account at the State National Bank. It is the taxpayers' receipt of this $700,000 which is the subject of this tax dispute. During the course of this litigation, taxpayers have advanced no fewer than four different explanations of that transaction which would, in their view, qualify the transaction for capital gains treatment. 9 Taxpayers' initial story was that the $700,000 was received as consideration for the sale of 100 shares of Sahuarito stock to Terrenates. At the time of the transaction, MacGuire advised his bookkeeper that such a sale had occurred, and the bookkeeper made the appropriate notations in the taxpayers' accounting records to reflect such a sale. Adhering to the same story, the taxpayers on their joint federal income tax return for the taxable year 1961 reported the $700,000 as a long-term capital gain from the sale of the 100 shares of Sahuarito to Terrenates. However, the Commissioner, on audit, denied the long-term capital gain treatment and determined that the $700,000 was taxable as ordinary income. 10 In September 1964, Internal Revenue Agent Felix Lopez interviewed taxpayer in the presence of his auditor and counsel as well as Lopez's supervisor. At this juncture, the taxpayers' story changed. He stated that the $700,000 was received from the sale of 300 (not 100, as reported on his 1961 tax return) shares of Sahuarito stock to an unknown purchaser (not to Terrenates as originally claimed). Taxpayers' auditor indicated that it was his error that the 1961 return reflected a sale of 100 shares instead of 300 shares. When MacGuire was asked how the sales price of $700,000 was arrived at, he stated that Villalobis had handled the sale, and that the taxpayer did not know who the purchaser was. 11 Agent Lopez then discussed the transactions with Villalobis, who stated that MacGuire's stock in Sahuarito had been purchased by one Jose Terasas, but was unable to explain how the $700,000 sales price was reached. When questioned as to the value of the Sahuarito stock, Villalobis acknowledged to the agent that Sahuarito's land had been expropriated and its cattle sold. Agent Lopez suggested that the stock must have been worthless, and Villalobis replied that Sahuarito might have had money received from the sale of cattle. This was the entire explanation of Villalobis for the $700,000 transaction. Villalobis did not make any contention at this meeting, as was later claimed, that an element in the transaction was the transfer to him from petitioner of an ownership interest in Terrenates. 12 In the Tax Court, MacGuire once again altered his story. There taxpayer claimed that the $700,000 was received in exchange for a transfer of a portion of taxpayers' interest in Terrenates to Villalobis and for the settlement of their interests in Sahuarito. Taxpayer asserted that an oral agreement had been reached with Villalobis on April 9, 1961, under which Villalobis was to receive an enlarged interest in Terrenates and taxpayer was to retain the $700,000 already taken from the Terrenates accounts in El Paso. In return, Villalobis allegedly agreed not to bring suit against MacGuire or Terrenates in Mexico to recover his share of the proceeds from the sale of Sahuarito cattle. Villalobis' share was originally to have been increased from two percent of Terrenates to 50 percent. A petition was filed with the Mexican Foreign Office in November 1961 to effect transfer of interests to Villalobis, but was denied because Mexican citizens did not own at least a 51 percent interest in the business. Thereafter, MacGuire agreed to transfer to Villalobis a 55 percent interest in Terrenates. A second petition was filed with the Mexican Foreign Office on February 20, 1962, and was approved on March 20, 1962. On March 24, 1962, Terrenates' ownership register was changed to reflect a 55 percent interest in Villalobis and his wife, and a 45 percent interest in taxpayer and his wife Betty. In addition, the taxpayers advanced an alternative theory in the Tax Court that the $700,000 was received by MacGuire as a non-taxable distribution in liquidation of Sahuarito, which was liquidated in 1952. 13 In the Tax Court, the Commissioner offered no affirmative theory as to why the $700,000 should be taxed as ordinary income, but rather relied on the presumption of correctness attaching to his determinations. The Tax Court ruled that the burden of proof was on the taxpayers to produce sufficient evidence to justify capital gains treatment. The Tax Court concluded as a finding of fact that the taxpayers had failed to present sufficient evidence to convince the court that the $700,000 was received by MacGuire as consideration for the transfer of his interest in Terrenates to Villalobis and the settlement of interest in Sahuarito. The Tax Court also rejected the taxpayers' theory that the $700,000 was received by MacGuire in liquidation of his interest in Sahuarito. 2 III. Conclusion 14 On appeal, appellant argues that the Tax Court improperly relied upon the presumption of correctness attaching to the Commissioner's determinations. Appellant contends that the presumption of correctness disappears upon the introduction of substantial evidence by the taxpayer. Cf. Stout v. Commissioner of Internal Revenue, 4 Cir. 1959, 273 F.2d 345, 350. Appellant argues that it was fundamental error for the Tax Court to reject substantial evidence that was corroborated and uncontradicted in preference to the Commissioner's presumption. We disagree. 15 As a preliminary matter, it should be noted that we do not have here a case in which the Commissioner offered no evidence and merely rested on the presumption of correctness. The Commissioner called two witnesses. Hugh Gibbons, MacGuire's former bookkeeper, was subpoenaed by the Government and gave testimony which directly contradicted MacGuire's story. The Commissioner also called revenue agent Lopez who testified concerning the contradictions in the taxpayers' stories at the various stages in the case. 16 The Tax Court committed no error with respect to the burden of proof. This was a case in which it was stipulated that the taxpayers withdrew $700,000 from a corporation (Terrenates) controlled by them. The burden was on the taxpayers to establish by a preponderance of the evidence that this income was derived from a transaction which qualified for long-term capital gain taxation, Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 106, 79 L.Ed. 648 (1935). That burden is not shifted by the mere fact that the taxpayers introduced evidence on their behalf. United Aniline Co. v. Commissioner of Internal Revenue, 1 Cir. 1963, 316 F.2d 701. 17 Thus, the sole substantial question in this appeal is whether there was sufficient evidence in the record to support the Tax Court's ruling. Whether the $700,000 was received, as the taxpayers now claim, in consideration for the transfer of interest in Terrenates and the settlement of interests in Sahuarito is a question of fact on which the Tax Court's decision cannot be disturbed unless shown to be clearly erroneous. Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). After a careful review of the record, we conclude that there was ample basis for the Tax Court's refusal to find that the $700,000 was received in consideration for the transfers of taxpayers' interests in Terrenates and settlement of their interest in Sahuarito. The record revealed numerous inconsistencies in the stories advanced by the taxpayers. No purpose would be served by restating those contradictions here since the Tax Court's opinion ably points them out. 3 It is sufficient to observe that the evidence fully supports the Tax Court's conclusion that the record is not at all clear. Indeed it is extremely cloudy and    what emerges is still confused, sketchy and basically highly implausible factual setting on which    [taxpayers] rel[y]. 18 There is no merit in the appellants' contention that the Tax Court was bound to accept the taxpayers' evidence because it was corroborated and uncontradicted. As we have noted, the taxpayers' story was both contradictory and contradicted. Moreover, it is well established that the Tax Court is not bound to believe even uncontradicted testimony of interested parties where the testimony appears highly improbable. Clark v. Commissioner of Internal Revenue, 9 Cir. 1959, 266 F.2d 698; Thomas E. Snyder Sons Co. v. Commissioner of Internal Revenue, 7 Cir. 1961, 288 F.2d 36; Hallabrin v. Commissioner of Internal Revenue, 6 Cir. 1963, 325 F.2d 298; Winters v. Dallman, 7 Cir. 1956, 238 F.2d 912; Pool v. Commissioner of Internal Revenue, 9 Cir. 1957, 251 F.2d 233. As this court held in Boyett v. Commissioner of Internal Revenue, 5 Cir. 1953, 204 F.2d 205, 208: 19 The Tax Court not only may, but should, base its findings on the testimony it believes to be true, rejecting after due consideration that which it believes is false. Although positive and uncontradicted testimony as to a particular fact will ordinarily be accepted, a court may reject testimony which, as here, is inherently improbable or manifestly unreasonable, even though no contradictory testimony is offered. 20 In sum, there was ample basis in the record for the Tax Court's refusal to believe appellants' story that the $700,000 was received in consideration for the transfer of interest in Terrenates and settlement of interests in Sahuarito. Having rejected this explanation, neither the Tax Court nor the Commission was under a duty to offer an alternative theory of the transaction which would result in ordinary income treatment. Taxpayers' receipt of $700,000 income was undisputed. In the absence of a convincing showing otherwise, the $700,000 was properly taxable as ordinary income. 21 Accordingly, the judgment of the Tax Court is 22 Affirmed. 23