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De Cavalcante v. Commissioner of Internal Revenue

decided: April 16, 1980.



Before Seitz, Chief Judge, and Garth and Higginbotham, Circuit Judges.

Author: Garth


The Commissioner assessed the De Cavalcantes*fn1 for unpaid income taxes on more than 2.5 million dollars of illegal gambling income allegedly earned between 1965 and 1969. Upon the taxpayer's petition for review, the United States Tax Court, in an opinion dated October 31, 1978, upheld the Commissioner's assessment for one half of the tax year 1968 and for 1969, but it did not find any deficiencies in tax for the years 1965 to the middle of 1968.*fn2 Both parties appeal from the Tax Court's decision. De Cavalcante claims that there is no evidence to support the deficiencies which were upheld. The Commissioner claims that the Tax Court misallocated the burden of proof in refusing to sustain the assessments charged against income allegedly earned between 1965 and the middle of 1968. After reviewing both of these contentions, we conclude that the decision of the Tax Court should be affirmed in all respects.*fn3


The critical evidence in the Commissioner's case is the fact that on October 23, 1970, De Cavalcante pled guilty in federal district court to an indictment which charged him with conspiracy to violate 18 U.S.C. ยง 1952, by operating an illegal gambling enterprise.*fn4 One of the overt acts of conspiracy listed in the indictment charged that De Cavalcante "did supervise and control the business of accepting wagers and bets."*fn5

In addition, at the Rule 11 proceeding, taken in connection with De Cavalcante's guilty plea, De Cavalcante made further remarks in regard to the scope of his connection with the gambling operation. As part of its effort to establish a factual basis for the guilty plea, the district court specifically called De Cavalcante's attention to the fact that the indictment charged that he had "supervised" the gambling operations. Immediately after this, De Cavalcante abruptly stated, "I plead guilty."

The remainder of the Commissioner's evidence consisted of testimony about the investigation of De Cavalcante's gambling operations which had been conducted jointly by the FBI and the Internal Revenue Service during 1968 and 1969 and which led to the indictment against De Cavalcante. From extensive wiretaps conducted in 1968 and 1969, and from personal surveillance of De Cavalcante and his associates, government agents testified that they were able to establish not only the existence of the gambling operation but they were also able to estimate the gross receipts from gambling and the approximate net returns to the principal operators of the gambling ring.*fn6 Moreover, John A. Bartels, Jr., the Justice Department Attorney in charge of the investigation testified that De Cavalcante had been identified as the ringleader of the gambling operation on the basis of statements given to the FBI by a confidential informant. But, in a statement which proved crucial to the government's case before the Tax Court, Mr. Bartels admitted that the investigation had focused exclusively on 1968 and 1969 and that the government had no evidence of any illegal gambling prior to 1968.

De Cavalcante's evidence before the Tax Court consisted primarily of his own testimony and the testimony of others who stated that De Cavalcante had never had any connection with gambling. In addition, De Cavalcante tried to undercut the impact of his guilty plea, claiming that he pled guilty solely out of duress ill health, fear of the adverse publicity which would attach to a long trial and fear of a long sentence.*fn7 Thus, despite his guilty plea, De Cavalcante maintained that he had no connection with gambling.

The Tax Court found that because of his guilty plea, coupled with his statement at the Rule 11 proceeding, De Cavalcante was estopped from denying his connection with gambling activities. Moreover, the Tax Court, after examining the testimony presented on De Cavalcante's behalf, determined that it lacked credibility. Thus, the court concluded that De Cavalcante had not met his burden of adducing facts to show the arbitrariness of the Commissioner's assessment. Nonetheless, relying on the admission by Mr. Bartels, the Tax Court concluded that the Commissioner had produced no evidence whatsoever which indicated that a gambling operation had existed prior to the 1968 tax year or which implicated De Cavalcante in such an activity. Consequently, the Tax Court only sustained the taxes assessed against deficiencies determined for the latter half of 1968 and for 1969.*fn8 Both De Cavalcante and the Commissioner appealed from the Tax Court's decision. Their arguments will be discussed in turn.


De Cavalcante's Appeal (No. 79-2196)

De Cavalcante argues on appeal that the Tax Court erred in concluding that there was credible evidence which connected him with any gambling activity. The scope of appellate review of factual determinations of the Tax Court, such as the ones challenged here by De Cavalcante, is quite limited. This court described the applicable standards of review in Gerardo v. Commissioner, 552 F.2d 549, 552 (3d Cir. 1977):

In the Tax Court, the Commissioner's determination carries a presumption of correctness, see Baird v. Commissioner of Internal Revenue, 438 F.2d 490, 492 (3d Cir. 1971), and the taxpayer has the burden of proving that determination "to be arbitrary (i. e., without rational foundation in fact and based upon unsupported assumptions) . . . ." Harry Gordon, 63 T.C. 51, 73 (1974), modified, 63 T.C. 501 (1975) appeal pending; see Baird v. Commissioner of Internal Revenue, supra at 492. On appeal, our scope of review "is limited by the general principle that all findings of facts made by the Tax Court and all inferences drawn by it from ...

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