Court Opinion

ID: 9475677
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:35:31.22624+00
Date Added: 2024-06-11T17:44:52.024223
License: Public Domain

WILKINS, Circuit Judge,
dissenting:
The Tax Court found the taxpayer’s testimony to be credible and believable. Then, notwithstanding the fact that the Commissioner of Internal Revenue (Commissioner) presented no contradictory evidence, it ruled against the taxpayer. I would follow the rationale of Demkowicz v. Commissioner, 551 F.2d 929 (3rd Cir.1977) and reverse.
I.
At trial Liddy testified that in 1972 he received $386,000.00 from his employers for use in political intelligence operations. This was $11,700.00 more than the $374,-300.00 the Commissioner originally claimed he had received. Liddy initially obtained cash from Bart Porter, who required him to acknowledge receipt of the money in writing. He made expenditures and returned the remaining cash, with receipts for the disbursements, to Porter in a sealed envelope. He also received cash from Hugh Sloan, who did not require him to acknowledge receipt or justify expenditures. Nevertheless, Liddy did keep detailed records of the receipt and disbursement of the money given him by Sloan. Liddy testified that when the Watergate activities were discovered, he destroyed all of his records.
Appearing before the Tax Court in 1983, over ten years after the fact, Liddy was able to recall the manner in which he disbursed $340,370.00. He could not specifically account for the expenditure of the remaining $45,630.00, but he unequivocally testified that none of the $386,000.00 was diverted to his personal use.
I.R.S. Agent John Stanley testified he had no knowledge of any diversion of funds by Liddy, he had not spoken with anyone during his investigation who indicated Liddy had diverted funds to his personal use, and he had never seen any documents evidencing Liddy had diverted funds to his personal use. Moreover, the Commissioner stipulated in writing that he had “no specific knowledge, information or evidence that either petitioner1 maintained a life style, mode or standard of living in excess of that which would be appropriate to the income reported on their 1972 tax return.”
The Tax Court made the following critical finding:
Although we obviously do not condone petitioner’s involvement in illegal activities, we found him to be a credible witness with respect to the issue at hand. He was frank in describing how he obtained the funds for the intelligence operation, and was able to give a reasonably detailed accounting regarding most of his expenditures. In a rather odd twist, petitioner’s testimony was all the more believable and plausible by reason of his bizarre view of right and wrong. Simply put, the old adage, the end justifies the means, seems a fair description of his approach to life.
It further found that it was “plausible” that Liddy would have destroyed all political intelligence records in his possession once the Watergate activities were discovered. The Tax Court also noted that Liddy’s financial records for the year in question showed no unusual or large deposits or transactions. Nevertheless, it ruled:
He was not able, however, to explain adequately what he did with the other $45,630 in funds that he received. His general statement that these funds were also expended is insufficient to carry his burden, and we therefore find that this amount was diverted by him for his personal use and thus constitutes income.
The Tax Court assessed Liddy an additional income tax of $20,449.00 but declined *318to impose the fraud penalty sought by the Commissioner.
II.
The law is well settled that the Commissioner’s notice of deficiency carries a presumption of correctness. When contesting the deficiency, the ultimate burden of proof rests with the taxpayer. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933). Applying the rationale of Demkowicz v. Commissioner, 551 F.2d 929 (3rd Cir.1977) to the present facts will violate neither of these principles.
In Demkowicz the Commissioner determined that the taxpayer diverted to his personal use the proceeds of a loan made to a corporation of which he was the principal stockholder. The taxpayer testified that the loan proceeds were used only to satisfy corporate debts and that no proceeds were diverted to his personal benefit. As in the present case, the Commissioner presented no evidence to contradict the taxpayer’s testimony. The Tax Court upheld the determination of the Commissioner. The Court of Appeals for the Third Circuit reversed. It held that the taxpayer’s testimony overcame the presumption of correctness, Demkowicz, 551 F.2d at 931, and the burden of going forward then shifted to the Commissioner, requiring him to present evidence supporting the notice of deficiency. As the Commissioner elected to present no evidence, the Third Circuit held that the taxpayer’s testimony was sufficient to meet his burden of proof since it was not found to be “improbable, unreasonable or questionable.” Demkowicz, id.
I do not construe Demkowicz to hold that a taxpayer’s uncontradicted testimony alone is always sufficient to rebut the presumption of correctness. Merely offering testimony which is uncontradicted is not sufficient. If, for whatever reason, it is judged by the trier of fact to be incredible, unreasonable, improbable or even self-serving to the point of being questionable, then it is' insufficient to rebut the presumption of correctness. See Geiger v. Commissioner, 440 F.2d 688, 689-90 (9th Cir.), cert. denied, 404 U.S. 851, 92 S.Ct. 88, 30 L.Ed.2d 90 (1971) (uncontradicted evidence from taxpayer does not necessarily operate to overcome the presumption of correctness). On the other hand, if the testimony of the taxpayer is found to be credible, reasonable and worthy of belief, then it defeats the presumption of correctness. If the Commissioner elects to present no contradictory evidence, then the testimony also serves to satisfy the ultimate burden of proof.
The majority attempts to distinguish Demkowicz by asserting that it dealt with the issue of whether the taxpayer had received funds, while Liddy acknowledged receipt of the money. However, nothing in Demkowicz indicates that the taxpayer’s receipt of funds was disputed. The fundamental issue was whether the taxpayer expended the proceeds of a loan made to his corporation — proceeds within his dominion and control — for corporate purposes or whether he diverted the proceeds to his personal benefit. This is the identical question here.
The Commissioner incorrectly argues that Demkowicz should not be followed because it effectively abrogates the burden of proof placed upon the taxpayer by Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933). He misreads Demkowicz for it does not shift the ultimate burden of proof to the Commissioner in violation of Supreme Court precedent. It merely establishes what I consider to be the appropriate method by which a taxpayer may meet his burden on a limited set of facts.
III.
Liddy unequivocally testified that none of the funds were diverted to his personal use. The Tax Court expressly found Liddy to be a credible and believable witness. It also recognized the absence of any nexus between the destruction of records and an attempt to avoid income tax. Furthermore, as conceded by the Commissioner’s stipulation, there was no evidence, either in Liddy’s financial records or otherwise, to indi*319cate that he utilized any money, other than that reported on his tax return, for his personal benefit. The record also reflects that Liddy’s family was in dire financial straits following his incarceration.
As found by the Tax Court, Liddy explained the disbursement of several hundred thousands of dollars through credible and believable testimony. If he had been willing to offer false testimony, how easy it would have been to conceal the $45,630.00 by merely adding a few thousand dollars to various categories about which he testified. Among others, a prime category for artificial inflation was “shredded cash,” a category to which Liddy attributed only $1,300.00 and which the Tax Court accepted as a true fact. Also, he candidly admitted receiving and disbursing $11,700.00 more than the Commissioner believed he had received.
The majority focuses on a statement taken from Liddy’s testimony, “Some of that amount was subsequently expended, too, for committee purposes,” concluding that this represents an admission by Liddy that only “some” of the $45,630.00 in question was expended for committee purposes. When taken in proper context, however, it is clear that this testimony is referring not to the $45,630.00, but to several thousand dollars in his office safe at the time the Watergate break-in was discovered, some of which was expended and the balance given to Fred LaRue.
At the beginning of the excerpt quoted by the majority, Liddy stated “I didn’t expend all the funds as I just told you.” (Emphasis added.) Liddy was referring to preceding testimony concerning $11,000.00 to $12,000.00 in committee funds which remained in his office safe when the break-in was discovered. Liddy testified that sometime after the break-in he was fired by Fred LaRue. He testified that at this time he turned over all committee funds then in his safe, a balance of $8,500.00, to LaRue. The Tax Court accepted as a fact that LaRue received the $8,500.00. When Liddy testified “Some of that amount was subsequently expended, too, for committee purposes,” he was referring to $2,500.00 to $3,500.00 taken from the safe and expended for committee purposes between the time of the break-in and the time he was fired. In other words, “some” of the $11,-000.00 to $12,000.00 “left over” in the safe was expended for committee purposes, and the balance of $8,500.00 was not expended, but given to LaRue.
In the testimony immediately following this, Liddy was not asked nor did he explain how he disbursed the $2,500.00 to $3,500.00 following the break-in discovery. However, in reply testimony he stated that $1,000.00 of this remaining amount was given to Howard Hunt, who was hiding in California, and $500.00 was paid to Hunt’s attorney, Morton Jackson. The Tax Court accepted as a fact that these expenditures were made. While Liddy did not explain the disbursement of the remaining $1,000.00 to $2,000.00 in detail, he expressly testified none of it was diverted to his personal use.
IV.
The express finding by the Tax Court that Liddy’s testimony was credible, reasonable, believable and plausible rebutted the presumption of correctness. This testimony ultimately met his burden of proof since no contradictory evidence was offered by the Commissioner.
I therefore respectfully dissent.

. As the majority points out, Liddy’s wife was found to be an innocent spouse under the provisions of 26 U.S.C.A. § 6013(e).