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LOPEZ v. IRS

April 1, 1985

ERNESTO LOPEZ, Plaintiff, against INTERNAL REVENUE SERVICE and the UNITED STATES OF AMERICA, Defendants.


The opinion of the court was delivered by: PLATT

MEMORANDUM AND ORDER

PLATT, D.J.

This is a civil action under 26 U.S.C. § 7429 to review the reasonableness of jeopardy termination proceedings brought against plaintiff Lopez by the Internal Revenue Service (IRS) in determining plaintiff's 1984 tax liability. For the reasons stated herein, this Court finds that the IRS's actions were both reasonable and appropriate under the circumstances and that plaintiff has failed to demonstrate that the amount assessed was inappropriate.

 FACTS

 On October 26, 1984, plaintiff was arrested when he allegedly delivered 211.777 ounces of cocaine to an undercover agent. IRS Notice of Termination Assessment, dated December 18, 1984. The following day, pursuant to a warrrant to search certain premises under plaintiff's control, an additional 1,203.525 ounces of high quality cocaine and three handguns were found. Id. The wholesale value of the cocaine was conservatively estimated to be worth $ 995,134.00, or roughly one million dollars. Id.

 On December 18, 1984, the IRS, pursuant to 26 U.S.C. § 6851, *fn1" served Mr. Lopez with a jeopardy termination assessment which closed his 1984 taxable year on November 30, 1984, and assessed him with an income tax liability for that year of $ 492,038.40, which was due and payable immediately. The IRS arrived at this tax liability figure by a practice that it commonly uses. See, e.g., Davis v. United States, 511 F. Supp. 193, 198-99 (D. Kansas 1981). The IRS takes the value of the contraband seized (i.e., its value to the person from whom it was seized) and deems this figure to be his or her taxable income, adds to it any other known income and makes adjustments for dependents. Here, because of the quantity of cocaine found and the size of the initial alleged sale, plaintiff was assumed to be a wholesaler; the wholesale value of the cocaine seized was deemed roughly to be his taxable income for 1984 and his tax liability was set accordingly.

 In seeking to enforce its assessment, Mr. Lopez was served with a levy of assessment which was duly filed with the Suffolk County Clerk in New York and with the banks in which Mr. Lopez was known to maintain accounts.Subsequently, levies were made upon a $ 449.21 account he maintained at Chemical Bank and upon a $2,849.14 account maintained at European American Bank.

 Before turning to an analysis of the reasonableness of this jeopardy assessment, a few additional facts concerning plaintiff's circumstances should be set forth, as well as a statement of how this action came to be heard before this Court.

 Plaintiff was born in Puerto Rico, and has been a resident in the continental United States for 36 years. He served in the United States Armed Forces from 1950 through 1958 and was honorably discharged with the rank of Staff Sergeant.

 He has owned the house in which he currently resides for 17 years. By his attorney's account, he also owns another house which is used for income and investment purposes.

 Mr. Lopez is the sole shareholder of a cleaning business which he operates out of his home. The business is reported to be "quite successful" by his attorney. It has nine employees and seven vehicles. During Mr. Lopez's present absence, his children are currently operating the business. His wife has been employed for the last several years at the Uniflex Laboratories in Westbury, Long Island.

 As previously reported to the IRS, Mr. Lopez's adjusted gross income was $ 25,858 in 1981, $ 27,405 in 1982, and $ 31,557 in 1983.

 In the IRS's notice to Mr. Lopez, it noted that given the amounts of income he had been reporting in contrast with the wholesale value of the cocaine found on his premises and his "alleged illegal activities", a termination jeopardy assessment was "recommended to prevent concealment, dissipation or transfer of assets to others" or, in short, to prevent any actions which would "prejudice" or "render ineffectual" the collection of income tax currently assessed against him.

 Plaintiff was indicted in October 1984 by a Nassau County Grand Jury and is presently being held in the Nassau County Correctional Center on a $ 10,000,000 secured insurance bond or $ 5,000,000 cash bail. To date, ...


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