George Gordon LIDDY, Appellant and Frances Purcell Liddy, Plaintiff, v. COMMISSIONER OF INTERNAL REVENUE, Appellee, 808 F.2d 312

HARRISON L. WINTER, Chief Judge: George Gordon Liddy appeals from the judgment of the Tax Court ruling him liable for income taxes on his conceded receipt of $45,630 in 1972 as director of an intelligence operation, the purpose of which was to acquire information on the capabilities and intentions of the prospective Democratic opponents to then President Richard M. Nixon. The Tax Court also ruled that Mrs. Liddy was an “innocent spouse” under the provisions of 26 U.S.C. § 6013(

e) and therefore was not jointly liable with her husband even though the two of them had filed a joint return, and that Mr. Liddy was not liable for an addition to the tax under 26 U.S.C. § 6653(

b) since it was not proved that he intended to evade taxes. See George Gordon Liddy and Frances Purcell Liddy v. Commissioner of Internal Revenue, T.C. Memo, 1985-107 (March 11, 1985). These latter two rulings are not at issue in this appeal. Liddy appeals and we affirm. I. The Tax Court made full and complete findings which are not contested and which need not be repeated at length.

It suffices to say that Liddy testified that as director of the intelligence operation, disguised as general counsel to the Committee to ReElect the President (CREEP) from December 1971 to April 1972 and thereafter as general counsel to the Finance Committee to Re-Elect the President (FCREEP), he received in cash in 1972 the total sum of $386,000. These funds were to be used to recruit personnel, acquire the necessary surveillance equipment and organize the intelligence activities. At first Liddy was required to account for all funds that he received.

Later he was neither required to acknowledge receipt of the money nor to justify expenditures. He did, however, keep receipts of the expenditures made in furtherance of intelligence activities. The surveillance operation ceased shortly after the June 1972 Watergate break-in, which was discovered while still in progress. Liddy then destroyed all of the records in his possession with respect to the intelligence operation and recommended to one of his superiors that he do the same. After the Watergate break-in was discovered, Liddy was arrested and prosecuted for various offenses.

He was convicted of several offenses, sentenced to imprisonment and fined. Subsequently his sentence was commuted but his fine was not reduced. In filing his income tax return for 1972, Liddy reported as income none of the monies he had received for the illegal endeav- or except the salary he was paid. IRS determined that during 1972, in addition to his salary, Liddy had received $374,300 from FCREEP and various persons, that only $197,500 had been disbursed on behalf of FCREEP, and that the balance of $176,-800 was taxable income.

On this amount the Commission made a deficiency assessment of $103,532.52 and imposed a fraud penalty of $51,766.26. Liddy then petitioned the Tax Court for review of the assessment; after trial, it held that Liddy had received the sum of $386,000 and that $340,370 of the funds received by Liddy were in fact expended in furtherance of intelligence operations. It reduced the deficiency in unreported income to $45,630, excusing the fraud penalty and the liability of Mrs. Liddy.

Although the Tax Court found Liddy to be a credible witness generally — and the government adduced no affirmative evidence that Liddy had diverted the funds to his personal use by showing an increase in net worth or otherwise — it ruled that Liddy had not carried his burden of proving that the $45,630 entrusted to him had been expended for intelligence activities. The Tax Court therefore concluded that this amount was diverted for personal use and consti-. tuted personal income. II. We start with the conceded fact that Liddy received the $45,630 in question.

It is well-settled that a taxpayer who receives monies under a claim of right and without restrictions as to its disposition must include such monies in gross income even though he may be liable for its return. James v. United States, 366 U.S. 213, 219, 81 S.Ct. 1052, 1055, 6 L.Ed.2d 246 (1961); North American Oil Consolidated v. Burnet, 286 U.S. 417, 424, 52 S.Ct. 613, 615, 76 L.Ed. 1197 (1932).

Only if the taxpayer can show that he has no claim of right by reason of a requirement to make prompt payments of amounts received even if such payments are made in the absence of an enforceable obligation, or that he is acting as a mere agent or conduit, is the receipt of monies not deemed gross income. Lashells’ Estate v. Commissioner, 208 F.2d 430, 435 (6 Cir.1953); Goodwin v. Commissioner, 73 T.C. 215, 230 (1979); Diamond v. Commissioner, 56 T.C. 530, 541 (1971), aff'd, 492 F.2d 286 (7 Cir.1974). A determination by the Commissioner that funds have been appropriated for personal use is presumptively correct.

Faulconer v. Commissioner, 748 F.2d 890, 893 (4 Cir.1984); Potito v. Commissioner, 534 F.2d 49, 51 (5 Cir.1976), cert. denied, 429 U.S. 1039, 97 S.Ct. 736, 50 L.Ed.2d 751 (1977); Biltmore Homes, Inc. v. Commissioner, 288 F.2d 336, 339 (4 Cir.1961), cert. denied, 368 U.S. 825, 82 S.Ct. 46, 7 L.Ed.2d 30 (1961). The burden of overcoming this presumption rests on the taxpayer. Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 290, 79 L.Ed. 623 (1935); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933); Faulconer v. Commissioner, supra.

Liddy undertook to meet his burden solely by his own testimony, but the Tax Court held the testimony insufficient to carry the burden with respect to the $45,630. With regard to $340,370, Liddy testified that he acted simply as a conduit in receiving and disbursing these funds. He, however, explained the balance only as follows: Q. Did you spend all of the funds you have discussed on approved committee purposes? A. All the funds that I expended were expended for approved committee purposes, yes. I didn’t expend all the funds as I just told you. Q. You’re referring to the amount that was left over. A.

Left over, yes. Q. That you just described. A. Some of that amount was subsequently expended, too, for committee purposes. Q. Did you divert any of these funds to your own personal use? A. No, sir. Q. Did you spend any for your personal use? A. No, sir. (emphasis added). We note from this testimony that while Liddy disclaimed any personal use or benefit from the remaining money, he testified that only “some”, an undetermined amount, was spent for committee purposes and he offered no explanation of what happened to the balance.

We are thus constrained to hold that to the extent that the finding of the Tax Court that Liddy’s testimony was “insufficient to carry his burden” of rebutting the presumption of correctness of the Commissioner’s determination is a finding of fact, the finding is not clearly erroneous. If treated as a conclusion of law, we think also that the conclusion was correct. Our dissenting brother reads this testimony as applying only to a portion of the $11-12,000 remaining in Liddy’s office safe after the Watergate break-in was discovered.

We concede that the record is not crystal-clear and our brother’s construction may be correct, although we think it significant that during oral argument when Liddy’s counsel was interrogated about this testimony, it having been read to him, he offered no such explanation as that now advanced by Judge Wilkins. In any event, the fact remains that except for a general denial that he or his family derived personal benefit from the funds, Liddy was unable to explain what happened to $45,630.

At most, there was only vague and uncertain testimony of Liddy which could have been verified (or disproved) had Liddy not destroyed the supporting documentation. Laney v. Commissioner, 674 F.2d 342, 349-50 (5 Cir.1982) (general denial of receipt of income insufficient to satisfy taxpayer’s burden of proof); Geiger v. Commissioner, 440 F.2d 688, 690 (9 Cir.1971), cert. denied, 404 U.S. 851, 92 S.Ct. 88, 30 L.Ed.2d 90 (1971) (same); Sharwell v. Commissioner, 419 F.2d 1057, 1060 (6 Cir.1969) (same).

These authorities establish that Liddy’s evidence was insufficient as a matter of law to rebut the presumption of correctness of the Commissioner’s determination of a deficiency. We too hold that a general denial of personal benefit uncorroborated by documentary evidence which was once available is insufficient to carry the taxpayer’s burden of overcoming the presumption of correctness of the Commissioner’s determination with respect to funds which the taxpayer concedes that he received even though generally he has been found to be a credible witness. Liddy argues, in reliance on Demkowicz v.

Commissioner, 551 F.2d 929 (3 Cir.1977), that, having been found generally to be a credible witness, this was enough to entitle him to prevail. We disagree. In Demkowicz, the taxpayer was the principal stockholder of a corporation engaged in the construction business which bore his name—Walter Demkowicz, Inc. (W.D., Inc.). W.D., Inc. constructed and owned a building in Elizabeth, New Jersey, which was subject to a first mortgage. W.D., Inc. then borrowed $54,000 from a private lender, David Checinski, and gave him a second mortgage on the property.

The proceeds of the loan were deposited in W.D., Inc.’s bank account. The Commissioner made a deficiency assessment against taxpayer and his wife asserting that the proceeds of the Checinski loan were diverted to taxpayer’s personal use and thus were taxable to him as dividend income.

When the taxpayer contested the assessment in the Tax Court, he offered documentary proof in the form of a monthly bank statement to show that all but a few hundred dollars of the Checinski loan had been disbursed, and he testified that the disbursements were to pay the corporate debts of W.D., Inc., incurred in the construction of a building, and that he never personally used any of the proceeds. While the Tax Court upheld the Commissioner’s determination, the Court of Appeals reversed.

It held that: By his unequivocal denial that he received any personal benefit from the Checinski loan proceeds, and by his assertion that the proceeds were used by W.D., Inc., to satisfy debts incurred in the construction of a building, taxpayer overcame the presumption of correctness which arises from the Commissioner’s determination.

Furthermore, since the Commissioner offered no evidence to support the deficiency assessment, taxpayer’s testimony was sufficient to meet his ultimate burden of proving the incorrectness of the Commissioner’s determination, unless it was rejected by the Tax Court as being improbable, unreasonable or questionable. 551 F.2d at 931, n. 6.

Later in the opinion, the Court of Appeals also addressed the reliance by the Tax Court on the taxpayer’s lack of proof of identity of the persons to whom W.D., Inc. paid the proceeds of the loan to support the result reached by the Tax Court, saying: We do not believe [that the failure to identify payees] either explicitly or implicitly rejects taxpayer’s testimony that he did not divert the proceeds of the Checinski loan to his personal use and that the proceeds were used by W.D., Inc., to satisfy construction debts. 551 F.2d at 932.

From this précis, we think it manifest that Demkowicz turned on the proof as to whether the taxpayer received the funds which the Commissioner determined was income to him. The case thus differs from the instant case, and the difference renders Demkowicz distinguishable. Here it is conceded that Liddy received the funds which are charged to him. Here the issue is whether Liddy could satisfactorily explain the expenditure of funds which he admits he possessed.

We are not alone in reading Demkowicz to be limited to the rare case where the Commissioner asserted the receipt of monies, denied by the taxpayer, unsupported by any other proof. This is the reading given it by the Fifth Circuit in Laney v. Commissioner of Internal Revenue, 674 F.2d 342, 350 (5 Cir.1982). We are constrained to agree with the Fifth Circuit also that a broader reading of Demkowicz “effectively guts the Welch [Welch v.

Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933) ] burden ... [s]ince the taxpayer will always—absent some suicidal tendencies or masochistic desire to pay taxes he argues are not due—give such testimony ... ” Id. at 350. Finally, we think that when the Tax Court credited Liddy’s testimony with regard to the $340,370 by which it reduced the Commissioner’s determination of a deficiency, it was not foreclosed from reaching a contrary conclusion with respect to the $45,630 balance. Foster v. Commissioner, 391 F.2d 727, 735-36 (4 Cir.1968).

For these reasons and those assigned by the Tax Court, its judgment is AFFIRMED.