dissenting: In a case involving allegations of unreported income, when it appears that the taxpayer has established that respondent’s determination is without rational foundation in fact and based on unsupported assumptions, he will be relieved of his burden of proof as to the amount of tax due, and the burden will be on respondent to move forward with the evidence. Helvering v. Taylor, 293 U.S. 507 (1935); see Gordon v. Commissioner, 63 T.C. 51, 73 (1974); Human Engineering Institute v. Commissioner, 61 T.C. 61, 66 (1973), appeal dismissed (6th Cir., Apr. 1, 1975), cert. denied 423 U.S. 860 (1975). As I believe this to be the case here, I respectfully dissent.
A question arises in a case such as this whether, in determining if respondent’s notice of deficiency is arbitrary and excessive, we should look only at the evidence in respondent’s possession at the time the notice is issued or at the evidence presented at the trial as well. This is important because on this conclusion may ride the decision as to which party must go first with its evidence. However, I will not explore that question here because the evidence is before us and the conclusion can be drawn from all the evidence.
Based on its conclusion that respondent did not arbitrarily determine that petitioner was in the drug business, the majority allows the barrier of the presumption of correctness to be erected upon this conclusion. In doing so, it makes an effort to distinguish Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977), and Jackson v. Commissioner, 73 T.C. 394 (1979). Initially, I believe those cases are indistinguishable and that respondent must produce some direct evidence of petitioner’s involvement in the sale of narcotics before the presumption can be relied upon. See Avery v. Commissioner, 574 F.2d 467 (9th Cir. 1978). However, that analysis begs the point, as the primary question to be answered is not whether petitioner was associated with the drug business but whether respondent was reasonable in his assertion that petitioner had $54,000 of unreported income from that source.
The evidence relied on by the majority (petitioner’s statement overheard by the undercover agent and the indictment) may suggest that petitioner had some peripheral association with the drug business, but from this, alone, it is unreasonable to conclude that petitioner either spent $54,000 to purchase drugs or had income in that amount. The overheard statement, while probably admissible, does not prove that petitioner either bought or sold drugs or received any income from that source; an indictment, alone, does not prove the charge contained therein. Respondent obviously relied on the testimony of the informer, who was not produced as a witness, to conclude that petitioner had $54,000 in income. If this is not arbitrary, I think justice demands that petitioner be given an opportunity to cross-examine the witness upon whose testimony respondent bases his determination. If, for reasons of his own, respondent chooses not to produce the witness, I believe respondent must either produce other evidence or forego the presumption of correctness. See Weimerskirch v. Commissioner, supra at 360 n.2. In my opinion, the majority bootstraps the evidence which it claims is admissible to show that the notice of deficiency was not arbitrary in order to establish a presumption based on evidence which would not be admissible to prove the deficiency.
Nor do I believe that the attempted linking of petitioner with drug activities, in this fashion, distinguishes this case from Weimerskirch or Jackson. If, as the majority concludes, the notice of deficiency can be grounded totally on inadmissible evidence, then there was ample evidence,1 albeit inadmissible, to place the taxpayers in each of those cases in the drug business. I quote from page 265 of the majority opinion to make my point:
The deficiency in Jackson was premised on respondent’s conclusion that the taxpayer was in the drug business. Yet, there was no firsthand testimony introduced at the trial by respondent to support such a conclusion, and he was compelled to admit that the deficiency was based upon what an informant, who did not testify, had told his agent. Thus, there was no evidence to put Jackson in the drug business, much less any evidence relevant to drug income. Similarly, the facts in Weimerskirch are inapposite. There, there was a notice of deficiency based upon statements of unidentified informers and information supplied by law enforcement agencies. There was no evidence linking the petitioner to the drug business. [Fn. ref. omitted.]
I can think of no better description of the circumstances in this case.
Respondent’s determination as to the amount of unreported income was entirely based on a statement by an unidentified informer to the effect that petitioner, with others, traveled to a house in which was stored 6 kilos of cocaine. From this, respondent concluded petitioner bought all 6 kilos and determined that he made an expenditure of $54,000 for this purchase which was charged to petitioner as taxable income. The missing link, one which I believe is fatal, is that the record is devoid of evidence indicating that petitioner made this purchase. (The fact that the unidentified informer did not tell the undercover agent that petitioner purchased any cocaine on this occasion would tend to belie the fact.) Indeed, the majority could not even accept this contention as reasonable and decreased respondent’s adjustment by 66 percent. By making such a large adjustment, I believe the majority concedes that respondent’s determination was arbitrary and excessive. Under such circumstances, petitioner should be treated as having met his burden, respondent’s determination should be stripped of any presumption .of correctness, and the burden should be on respondent to support his determination of deficiency. Cohen v. Commissioner, 266 F.2d 5 (9th Cir. 1959).
I cannot say that respondent has carried that burden, as the only admissible evidence introduced was petitioner’s plea of guilty to an attempted conspiracy to possess and sell the cocaine.2 If conspiracy is an agreement or plan among two or more persons to commit a crime in the future, together with one overt act in furtherance thereof (see People v. Epton, 19 N.Y.2d 496, 227 N.E.2d 829 (1967), cert. denied 390 U.S. 29 (1968)), then attempted conspiracy must be merely an agreement, hardly an appropriate event to tax.
Additionally, although the evidence indicates expenditures, other than for purchase of cocaine, in excess of acknowledged income in the approximate amount of $13,700, the record indicates petitioner reported $565 of interest income and claimed an interest deduction of $531 in the previous taxable year. Taken together, the principal amount to which this interest relates more than adequately accounts for the source of the funds. Though the majority discounts this evidence, citing Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), this does not change the highly probative fact that petitioner reported and paid tax on the interest relating to the principal amount, a fact that strongly suggests the existence of his savings accounts.
I believe the holding today is a significant retreat from our position in Jackson and gives carte blanche to the Government to seek assessments against taxpayers who, like petitioner, are on the periphery of illegal activities, based on suspicion alone.
Goffe, Wiles, Wilbur, and Nims, JJ., agree with this dissenting opinion.In Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977), the notice was based on information provided by two informers, the Drug Enforcement Administration and the Yakima and Spokane Police. The notice in Jackson v. Commissioner, 73 T.C. 394 (1979), was based on information obtained from the Drug Enforcement Administration which relied on information provided by an informant (who the agent believed to be credible, though this Court did not), in the taxpayer’s organization Additionally, the taxpayer had previously been convicted on drug-related charges.
The majority appears to rely on the indictment, alone, rather than the plea. An indictment, alone, certainly does not prove that petitioner was either in the drug business or that he received income therefrom.