Court Opinion

ID: 9454340
Source: CourtListenerOpinion
Date Created: 2023-08-04 18:43:57.328332+00
Date Added: 2024-06-11T17:34:04.958221
License: Public Domain

SWYGERT, Circuit Judge
(dissenting).
I dissent for two reasons. First, despite the majority’s statement that “We have found no authority justifying a departure from the well-established rule of presumption of correctness,” I believe that under the circumstances here presented the weight accorded by the Tax Court to the Commissioner’s deficiency notice was erroneous. Secondly, I am of the opinion that the majority’s position, if logically extended, could lead in the future to an unfortunate level of high-handedness on the part of the Commissioner.
My difficulty with the majority’s opinion begins with what I believe to be a mistaken statement of the contested issue. The real question presented by this case is what effect should be given by the Tax Court to the Commissioner’s notice of deficiency in a situation where the taxpayer asserts that the notice is incomplete and arbitrary. As the majority recognizes it is settled that as a general rule a presumption of correctness attaches o the Commissioner’s deficiency notice. It is my view that, although this presumption is one which places on the taxpayer the burden of going forward with evidence, by no stretch of the imagination can it be the basis of a judgment favorable to the Commissioner when the notice is arbitrary, even if the taxpayer’s books cannot disprove every possible theory of taxation.
Stated simply, the majority’s position is that once the Commissioner’s deficiency notice is introduced into evidence and the production burden consequently moves to the taxpayer, he can shift this burden back to the Commissioner only when his books can conclusively disprove the asserted deficiency. This construction oversimplifies the functioning of the correctness presumption. Although I agree that if at trial the taxpayer offers no evidence, the Commissioner’s deficiency notice is sufficient evidence to find in his favor, I do not believe that this Commissioner-wins rule should operate if the taxpayer produces competent evidence on the issue of the arbitrariness of the asserted deficiency. If the taxpayer offers some competent evidence on this point, then the question of the existence of a deficiency must be decided on all the evidence submitted at the trial.
The law is clear that the presumption of correctness which ordinarily attaches to the action of the Commissioner vanishes if his action is arbitrary. Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935). See also Gasper v. Commissioner of Internal Revenue, 225 F.2d 284 (6th Cir. 1955) ; Welch v. Commissioner of Internal Revenue, 297 F.2d 309 (4th Cir. 1961). The deficiency notice in the instant case contained the asserted tax deficiencies which were based on the alleged overstated costs of the taxpayers’ operations, spelled out to the penny. This is not a case where the Commissioner with proper candor acknowledges that because of a taxpay*71er’s inadequate records an admittedly arbitrary deficiency figure has been chosen. What happened here was that after introduction of the deficiency notice with its apparently meticulously calculated figures, the taxpayers sought through the introduction of their books and records to establish the fact not only that they owed no additional tax, but also to demonstrate that the Commissioner’s deficiency notice had no ascertainable empirical basis. The Commissioner offered no evidence to rebut the taxpayers’ contention. In effect, what the taxpayers sought to do was to elicit from the Commissioner precisely what costs of operation he concluded they had erroneously included in their tax computations. The taxpayers’ request to know what cost items were being disallowed was surely reasonable.
Nonetheless, the Tax Court disregarded the taxpayers’ attack on the deficiency notice and invoked the correctness presumption on the ground that the taxpayers had failed to show that their books and records accurately reflected the ticket agency’s cost of operation. Likewise, this court holds that because the taxpayers’ books were not suitable to disprove all the Commissioner’s theories of cost and taxation, the taxpayers cannot attack the arbitrariness of the Commissioner’s deficiency notice. This approach is tantamount to saying that a taxpayer whose books are not one hundred per cent accurate has no standing to challenge or question a deficiency notice, however arbitrary.
Nothing in the prior case law justifies a holding that the maintenance of perfect account books is a prerequisite to the taxpayer’s right to challenge the arbitrariness of a deficiency notice. In my opinion a court should not reach the question of the quality of a taxpayer’s books if the taxpayer asserts and demonstrates that the Commissioner’s deficiency is arbitrary. As the Sixth Circuit said in Durkee v. Commissioner of Internal Revenue, 162 F.2d 184, 187, 173 A.L.R. 553(6th Cir. 1947): “But where it is apparent from the record that the Commissioner’s determination is arbitrary and excessive, the taxpayer is not required to establish the correct amount that lawfully might be charged against him, and he is not required to pay a tax that he obviously does not owe. In proceedings before the Tax Court * * it is sufficient to show that the Commissioner’s determination is invalid. Upon such a showing the case should be remanded to the Tax Court for further hearings on the point involved.” Such an approach should be followed here. In the instant case, the Commissioner had an opportunity to offer evidence as to the basis, if any, of his deficiency assessment. Agent George Mowdry, who conducted the special income tax investigation into the Barnes’ tax matter, was never called to the stand by the Commissioner to explain how the deficiency had been computed.
In reality the Tax Court by casting doubt on the reliability of the taxpayers' evidence ruled that they had produced no evidence at all. This conclusion was unwarranted. Once competent evidence is proffered which indicates the incompleteness or arbitrariness of the deficiency notice, the presumption of correctness disappears regardless of the absolute reliability of the taxpayer’s evidence. At this point the production burden shifts back to the Commissioner to show how he arrived at his determination. The Commissioner cannot avoid his burden by merely discrediting the taxpayer’s evidence. In an analogous factual situation, this court said: “The disbelief of * * * testimony [of the witness] cannot support an affirmative finding that the reverse of his testimony is true, that is, it cannot supply a want of proof.” Bankers Life and Casualty Co. v. Guarantee Reserve Life Ins. Co., 365 F.2d 28, 34 (7th Cir. 1966), cert. denied, 386 U.S. 913, 87 S.Ct. 862, 17 L.Ed.2d 785 (1967). Similarly here, it does not follow that because the taxpayers’ books cannot disprove the theory of taxation selected by the Commissioner, the Commissioner’s assessment is correct and cannot be shown to be arbitrary.
*72Additionally, I am concerned with what the majority’s decision might permit the Commissioner to do with future taxpayers. If the Commissioner knows that a particular taxpayer’s books and records are not any more accurate or all encompassing than those kept by the Barnes’ ticket agency, as a result of our decision, there is nothing to prevent the Commissioner from selecting an arbitrary figure, putting it in a tax deficiency notice, and then proceeding to enforce the deficiency. Our decision would allow the Commissioner to prevail, despite the completely arbitrary nature of his assessment, because the taxpayer’s insufficient books would preclude him from attacking the deficiency. On account of his imperfect bookkeeping, a taxpayer would be deprived of his standing just as the taxpayers here were unable to pierce the veil of the correctness presumption in the instant case.