Appeal from the United States District Courtfor the District of IdahoEdward J. Lodge, District Judge, PresidingArgued and SubmittedNovember 4, 1996--Seattle, WashingtonFiled July 2, 1997Before: Eugene A. Wright, Melvin Brunetti, andDiarmuid F. O'Scannlain, Circuit Judges.Opinion by Judge O'Scannlain.
_____________________________COUNSEL Paul B. Palmer, Jr., Kooskia, Idaho, in pro se for the counter-defendant-appellant.John A. Nolet, Tax Division, United States Department ofJustice, Washington, D.C., for the defendant-appellee.
_____________________________OPINION O'SCANNLAIN, Circuit Judge:We must decide whether the Internal Revenue Servicemade proper deficiency determinations and assessments forunpaid taxes against non-cooperative taxpayers.IPaul and Angela Palmer failed to file tax returns fromwhich their income could be determined for the years 1976through 1979. Internal Revenue Service ("IRS") agentsattempted to meet with the Palmers to gather income informa-tion, but the Palmers did not attend the scheduled meeting.IRS employees then conducted an investigation seekingincome information from the four unreported years, with lim-ited success. Agents contacted the Idaho Department ofEmployment, several area employers, and the electrician'sunion. They discovered $2,627 in wages in 1976, and infor-mation suggesting that Paul Palmer worked for wages in1979. The bookkeeper at a local logging company was inter-viewed and informed an agent that she was a neighbor of thePalmers and believed that Paul Palmer worked as a self-employed electrician.Because IRS agents were not able to uncover reliableincome information, they decided to reconstruct the Palmers'income with statistics. The agents found the national "medianhousehold income" as reported by the U.S. Census Bureau forthe years 1976 and 1977, and figured the median income for1978 and 1979 through the use of the Consumer Price Index.These figures were treated as the Palmers' income. Throughthis method, the IRS determined that the Palmers had the fol-lowing taxable income: $12,686 in 1976; $13,572 in 1977;$15,573 in 1978; and $17,495 in 1979.Deficiency notices were prepared and mailed to the Palm-ers' last known address on July 28, 1981. They listed defi-ciencies for unpaid individual income taxes in the amount of$16,558 for Paul Palmer and $3,610 for Angela Palmer, plusa combined total of $5,042 in penalties. The Palmers did notrespond to the deficiency notices, which were returned to theIRS marked "unclaimed."In April 1982, after the statutory period for objecting to thedeficiency notices had passed, the IRS prepared assessmentsagainst the Palmers in the combined amount of $33,794.51representing the couple's unpaid taxes, penalties, and interest.The assessments gave rise to liens for the amounts owed. OnFebruary 12, 1986, the IRS filed liens in the Office of theCounty Recorder for Idaho County, Idaho against a parcel ofreal property owned by the Paul B. Palmer, Jr. Family Preser-vation Trust. Angela Palmer, in her capacity as a trustee, fileda wrongful levy action in the district court on April 23, 1986,on the ground that the property belonged to the Trust, ratherthan to the Palmers.In March 1988, the government filed a counterclaim toenforce the liens and a third-party complaint against Paul andAngela Palmer, in their individual capacities, seeking toreduce to judgment the federal tax assessments. On February9, 1990, the government moved for partial summary judgmentof their third party claim for the amount of the unpaidassessed taxes, penalties, and interest which the district courtgranted on April 4, 1991.Several motions followed, with the Palmers repeatedly rais-ing many objections to the district court's summary judgmentorder, in addition to pre-trial motions regarding the propertyheld in trust.Finally, in early 1995, the parties stipulated to a settlementof all remaining issues not included in the partial summaryjudgment order. On February 6, 1995, the district court issuedan order dismissing the Trust's wrongful levy action and thegovernment's counterclaim regarding the liens. On February9, 1995, the court entered final judgment for the United Statesin the revised amounts of $54,903.68 and $22,791.60, pluscontinuing interest, against Paul and Angela Palmer respec-tively. The Palmers timely appeal.IIAs an initial matter, we must consider the Palmers' argu-ments that the district court lacked subject matter jurisdictionover the government's counterclaim and third party com-plaint. The Palmers argue that the record fails to establish thatthe IRS complied with the procedural requirements for bring-ing a civil action under 26 U.S.C. SS 7401 and 7403.Sections 7401 and 7403 of the Internal Revenue Coderequire that civil actions for the collection of taxes andenforcement of liens be instituted at the direction of delegatesof the Attorney General and the Secretary of the Treasury.The government has produced redacted copies of two letters,which taken together, show that the government compliedwith these statutory requirements. Furthermore, the Palmershave failed to produce any evidence that would counter thenormal presumption of regularity that attaches to the actionsof public officers. See United States v. Chemical Foundation,
272 U.S. 1, 14
-15 (1926). Therefore, the district court prop-erly concluded that the IRS had complied with the applicableprocedural requirements and that the court had jurisdictionover the government's claims.IIIWe next must determine, viewing the evidence in the lightmost favorable to the Palmers, whether there are any genuineissues of material fact precluding summary judgment andwhether the district court correctly applied the relevant sub-stantive law. Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir.1996).The district court granted the government summary judg-ment because the Palmers failed to rebut the presumption ofcorrectness that normally attaches to IRS assessments. U.S. v.Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983), cert. denied,
465 U.S. 1079
(1984). On appeal, the Palmers argue that sum-mary judgment was inappropriate because alleged IRS errorsprevented the presumption of correctness from attaching andbecause of alleged procedural defects. These contentions willbe addressed in turn.A[1] The Palmers first argue that the district court erred ingranting summary judgment because the method used by theIRS in reconstructing their income was unreasonable. In anaction to collect taxes, the government bears the initial burdenof proof. Stonehill, 702 F.2d at 1293. The Commissioner'sdeficiency determinations and assessments for unpaid taxesare normally entitled to a presumption of correctness so longas they are supported by a minimal factual foundation. Id. Thepresumption shifts the burden of proof to the taxpayers toshow that the determination is incorrect. Id. ; Rapp v. Commis-sioner, 774 F.2d 932, 935 (9th Cir. 1985).[2] The Palmers argue that the presumption of correctnessshould not be granted in this case because the attribution tothem of national median household income is not a rationalmethod for reconstructing their income. A showing by thetaxpayer that a determination is arbitrary, excessive or with-out foundation shifts the burden of proof back to the IRS.Helvering v. Taylor,
293 U.S. 507, 515
-516 (1935); Adamsonv. Commissioner, 745 F.2d 541, 547 (9th Cir. 1984).[3] Congress specified no particular methods or evidentiaryburdens on the Commissioner when choosing a method forreconstructing a taxpayer's income under Section 446. TheCommissioner, therefore, has wide discretion in choosing anincome-reconstruction method. Petzoldt v. Commissioner, 92T.C. 661, 693 (1989). Where the Commissioner's method ofcalculating income is rationally based, courts afford a pre-sumption of correctness to the Commissioner's determination.Cracchiola v. Commissioner, 643 F.2d 1383, 1385 (9th Cir.1981) (per curiam). The taxpayer has the burden of provingthe method to be wrong. Id.[4] Courts have long held that the IRS may rationally usestatistics to reconstruct income where taxpayers fail to offeraccurate records. See Edwards v. Commissioner, 680 F.2d1268, 1270-71 (9th Cir. 1982); United States v. McMullin,948 F.2d 1188, 1192, n.3 (10th Cir. 1991). Reasonable meth-ods include the use of cost-of-living statistics for a particularlocale, Wheeling v. Commissioner, 43 T.C.M. (CCH) 1302(1982), or average local income statistics for a particular pro-fession. Horner v. Commissioner, 50 T.C.M. (CCH) 285(1985).[5] When taxpayers have challenged income reconstruc-tions based on statistics, courts have affirmed the determina-tions where the statistics are reasonably employed.Cracchiola, 643 F.2d at 1385; see also Spurgeon v. Commis-sioner, 62 T.C.M. (CCH) 1412 (1991); Giddio v. Commis-sioner, 54 T.C. 1530, 1532 (1970). In the Palmers' case, thegovernment has offered no explanation for its choice ofnational median household income statistics to reconstruct thePalmers' income, nor has it offered any evidence suggestingthat these statistics represent a rational method for approxi-mating the correct amount. The government also concedesthat no court has previously affirmed this method. We wouldtherefore be inclined to agree with the Palmers that simplyattributing median national income statistics to the taxpayersis not a rational method for reconstructing the Palmers'income, were the question properly before us.[6] However, although the government did not object to ourconsideration of the issue, a review of the record reveals thatthe Palmers have waived their right to appeal the districtcourt's conclusion that the deficiency determination was enti-tled to the presumption of correctness. The Palmers firstraised the issue of the method's reasonableness in a motionwhich the district court refused to consider because it wasuntimely and in contravention of local rules. The Palmers didnot appeal this ruling, with the result that the court did notconsider the Palmers' arguments on this question. 1 Generally,matters not properly considered by the district court may notbe raised for the first time on appeal. United States v. Carlton,900 F.2d. 1346, 1349 (9th Cir. 1990). The Palmers havetherefore waived their challenge to the rationality of themethod used to reconstruct their income.BNext, the Palmers argue that the assessment is whollyinvalid because the government has failed to offer sufficientevidence linking the Palmers to income-generating activities.Their protestations are unavailing.[7] Where the IRS bases its assessment on an allegation ofunreported income, the Service must show some minimal evi-dence linking the taxpayer to the source of that income beforethe presumption of correctness will attach. Weimerskirch v.Commissioner, 596 F.2d 358, 360 (9th Cir. 1979). InWeimerskirch, we held that the IRS may not base its defi-ciency determination on an allegation that the taxpayer dealtin illegal drugs where no evidence linking the taxpayer todrug trafficking was offered.2 Most, but not all, of the casesrequiring this evidentiary foundation have involved illegalsources of unreported income. See e.g. Edwards, 680 F.2d at1270 (requiring an evidentiary foundation where a taxpayerhas failed to report legal sources of income).[8] Through investigative efforts, the IRS was able touncover evidence that Paul Palmer worked for wages in atleast part of 1976 and 1979, and evidence suggesting that hewas a self-employed electrician. No information relating tospecific employment was found for the years 1977 and 1978.[9] The Palmers rely on the Weimerskirch line of cases toargue that the IRS must continue its investigative task untilthe exact sources of their income are uncovered for each ofthe four years before the presumption of correctness willarise. Unlike the situation in Edwards or Weimerskirch,however, the IRS has reconstructed the Palmers' income withstatistics alone, based on the reasonable inference that sincethey were able to survive from 1976 to 1979, they must havehad some income. The Palmers have not denied this premise,but instead urge that the government's task is to discover theexact source of the income which they have thus far suc-ceeded in concealing. Nor have the Palmers suggested thatthey had alternative means of support in the absence ofincome for the years at issue.[10] Where the government's deficiency determinationrests on the reasonable inference that the taxpayers must havehad sufficient income to support themselves for years whenno income was reported, and statistics are used to reconstructincome, the evidentiary foundation necessary for the pre-sumption of correctness to attach is minimal. See Pollard v.Commissioner, 786 F.2d 1063, 1066 (11th Cir. 1986); Giddio,54 T.C. at 1532. When this reasonable inference is coupledwith the information linking Paul Palmer to wages for at leastpart of the four-year period, a sufficient evidentiary founda-tion has been established for the presumption of correctnessto attach to the assessments. Of course, this presumptioncreates only a prima facie case, which shifts the burden to thetaxpayers to rebut by showing that the inference is unreason-able in their case. See Pollard, 786 F.2d at 1066.CNext, the Palmers argue that the IRS has failed to offer suf-ficient evidence to prove that agents actually made a determi-nation of deficiency against them, and that the court thereforelacks jurisdiction over this case. This is a frivolous claim.[11] Internal Revenue Code S 6212 requires the IRS to con-sider information relating to a particular taxpayer when mak-ing a determination of deficiency. Scar v. Commissioner, 814F.2d 1363, 1368 (9th Cir. 1987). In Scar, we held that theCommissioner could not show that a deficiency had actuallybeen determined where the face of the deficiency noticerevealed that it was based on erroneous information, and thatthe taxpayers' return had not even been reviewed by the agentmaking the determination. Id. at 1367. We dismissed becausean initial determination of deficiency is a jurisdictionalrequirement. Id. at 1370. The Palmers argue that, since theIRS based its deficiency determination on statistics rather thanon actual evidence of their concealed income, the IRS hasfailed to meet the required showing of Scar, and that we mustdismiss for lack of jurisdiction.Were the Palmers correct, the IRS would never be able tocollect taxes owed by those who, like them, illegally hidetheir income to avoid paying taxes, all the while taking advan-tage of the many privileges enjoyed by law-abiding citizens.The cases approving the reasonable use of statistics in recon-structing the income of non-cooperative taxpayers demon-strate the fallacy of the Palmers' argument.[12] The IRS introduced the working papers, notes, and asigned declaration of the agents who conducted the investiga-tion and prepared the deficiency determinations and assess-ments against the Palmers. The Palmers have offered nothingto counter this evidence showing that a determination wasactually made in their case, but once again, demand more evi-dence. None is necessary under Scar, as the IRS has morethan met the evidentiary standards of that case.IVThe Palmers' remaining arguments, that the IRS failed tomail notices to their last known address, that the assessmentswere not made by delegates of the Secretary, and that they arenot subject to any internal revenue tax, are frivolous. As thegovernment has not requested that we impose costs for thefrivolous nature of these arguments on appeal, we will not suasponte do so.VThe judgment of the district court is AFFIRMED. the end
___________________________FOOTNOTES 1 In ruling on still another of the Palmers' motions, the district court heldthat the IRS reconstruction of the Palmers' income was entitled to the pre-sumption of correctness and that the Palmers had failed to rebut this pre-sumption. It also instructed the IRS to recalculate the Palmers' incomebecause it had incorrectly based its determinations on 150% of Paul Palm-er's estimated income. The Palmers did not appeal the court's ruling onthis motion.2 In Weimerskirch the government sought to shield the identity of infor-mants, with the result that it had no evidence it could offer linking the tax-payer to the illicit source of income. We declined to allow the IRS to reston the presumption of correctness without some minimal evidentiary foun-dation. 596 F.2d at 360.