Opinion ID: 473746
Heading Depth: 1
Heading Rank: 2

Heading: Deficiency Assessment

Text: 6 In an action to collect taxes, the government bears the burden of proving that the taxes are owing.... Once the government introduces its assessment of tax due, a presumption usually arises that the assessment is correct. Adamson v. Commissioner, 745 F.2d 541, 547 (9th Cir.1984) (citation omitted). This presumption must have some factual basis, id. that is, the Government must produce some substantial evidence ... demonstrating that the taxpayer received unreported income. Delaney v. Commissioner, 743 F.2d 670, 671 (9th Cir.1984) (citation omitted); Adamson, 745 F.2d at 547. Once the Government has done so, the taxpayer must establish by a preponderance of the evidence that the determination is arbitrary or erroneous. Delaney, 743 F.2d at 671. See also Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir.1985); Larsen v. Commissioner, 765 F.2d 939, 941 (9th Cir.1985); United States v. Stonehill, 702 F.2d 1288, 1293, 1294 (9th Cir.1983), cert. denied, 465 U.S. 1079, 104 S.Ct. 1440, 79 L.Ed.2d 761 (1984). 7 Here Bradford freely admits that he received unreported income from his laetrile-smuggling operations. He contests the Commissioner's deficiency assessment essentially on three grounds: First, he argues that the Commissioner improperly used a weighted average unit cost rather than one fixed unit cost in computing the costs of goods sold. Second, he claims that the Commissioner did not adequately take into account his expenses in connection with the Committee's activities. Third, he contends that the Commissioner improperly increased the tax assessments for 1976 and 1977 by extrapolating sales figures from a record of three months' sales and from information developed through Food and Drug Administration (FDA) surveillance of his laetrile-importing activities. The Commissioner argues, in essence, that because Bradford dealt mostly in cash and kept inadequate records and supporting documentation, his attempt to reconstruct Bradford's income and expenses was reasonable, given the circumstances. 8 In a recent series of cases, this court has reiterated its long-standing approach to the type of situation presented by Bradford's appeal, where the taxpayer kept inadequate records or no records at all, and then relied mainly on testimony to challenge the Commissioner's reconstruction of income and deductions or assessments. Adamson v. Commissioner, 745 F.2d 541 (9th Cir.1984); Keogh v. Commissioner, 713 F.2d 496 (9th Cir.1983); United States v. Stonehill, 702 F.2d 1288 (9th Cir.1983). All three cases reach the same result, which was explained in Adamson as follows: 9 Where the government has introduced evidence linking the taxpayer to the illegal activity, the taxpayer should not be allowed to avoid paying taxes simply because he keeps incomplete records. The absence of tax records cannot automatically deprive the Commissioner of a rational foundation for the income determination. As the Fifth Circuit recognized in Webb v. C.I.R., 394 F.2d 366, 373 (5th Cir.1968): 10 [T]he absence of adequate tax records does not give the Commissioner carte blanche for imposing Draconian absolutes.... [However,] such absence does weaken any critique of the Commissioner's methodology. 11 Arithmetic precision was originally and exclusively in [the taxpayer's] hands, and he had a statutory duty to provide it.... [H]aving defaulted in his duty, he cannot frustrate the Commissioner's reasonable attempts by compelling investigation and recomputation under every means of income determination. Nor should he be overly chagrined at the Tax Court's reluctance to credit every word of his negative wails. 12 Adamson, 745 F.2d at 548; see also Keogh, 713 F.2d at 502; Stonehill, 702 F.2d at 1296. 13 As to Bradford's first contention, concerning the computation of cost of goods sold, Bradford's own records show a fluctuation in the prices he paid for laetrile; thus, the weighted average approach used by the Commissioner to compute the cost of goods sold appears, if anything, more reasonable than Bradford's single unit cost method. 14 Bradford's second contention is that the Tax Court should have permitted the deduction of expenses he contends he paid on behalf of the Committee in conducting the seminars because the seminars promoted the sales of laetrile. Even if we were to make the doubtful assumption that these expenses could somehow be deducted as his personal business expenses, Bradford had the burden of producing evidence to support these claimed expenses. Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir.1985). There was no substantiation for these expenses other than the reports of the Committee's activities, some brief summaries and vague testimony of Committee members, and Bradford's own testimony. 15 Bradford further argues that the Tax Court improperly excluded his Exhibit 99, which was apparently a summary of his testimony as to his claimed expenditures on the Committee's behalf. The Tax Court's evidentiary decisions are reviewed for an abuse of discretion. Keogh, 713 F.2d at 499. Contrary to Bradford's assertion, a review of the transcript shows that the tax judge did, in fact, allow Bradford to testify about this issue and allowed into evidence all of the other exhibits offered by Bradford to support his claims. The exclusion of the summary was not an abuse of discretion. The Tax Court's finding that Bradford had failed to establish his entitlement to the expenses or deductions was adequately supported by the record. See id. at 502. 16 Bradford's third contention questions the Commissioner's increased assessments for tax years 1976 and 1977. For 1976, he argues that the Commissioner's extrapolation of his annual income from a receipt book covering the last three months of the year was improper because it did not adequately consider the time, such as weekends and holidays, when Bradford was not engaged in smuggling laetrile, and other factors which may have affected the income generated by Bradford's operations. Our review of the record convinces us that the Commissioner's extrapolation did take these factors into consideration. Thus, as in Keogh, 713 F.2d at 502, we reject Bradford's arguments that the 1976 income projections were unreasonable. 17 For 1977, the Commissioner determined Bradford's income by extrapolating the total sales of laetrile from a sample generated by the FDA surveillance of Bradford's activities. Bradford argues that this extrapolation is inaccurate because it did not take into account the time that he was on trial for laetrile smuggling and, thus, presumably not then involved in the laetrile operations. This argument is meritless. The figures were derived from surveillance of shipments that occurred during Bradford's trial on the smuggling charges, and the Commissioner presented independent evidence in the form of receipts, also contemporaneous with the trial, which support the income projections. The Tax Court's finding that Bradford had failed to show that the Commissioner's assessment was unreasonable was not clearly erroneous.