                                                                        F I L E D
                                                                 United States Court of Appeals
                                                                         Tenth Circuit
                     UNITED STATES COURT OF APPEALS
                                                                         FEB 8 2001
                             FOR THE TENTH CIRCUIT
                                                                    PATRICK FISHER
                                                                             Clerk

    UNITED STATES OF AMERICA,

                Plaintiff-Appellee,

    v.                                                 No. 00-5057
                                                 (D.C. No. 98-CV-526-K)
    TIMOTHY LEE NIPPER, separately                     (N.D. Okla.)
    and as trustee for the Proprietor
    Property Trust; THOMAS EUGENE
    NIPPER, as trustee for the Proprietor
    Property Trust and as nominee of
    Timothy Lee Nipper,

                Defendants-Appellants,

          and

    MELLON MORTGAGE COMPANY,
    as mortgagee,

                Defendant.


                             ORDER AND JUDGMENT         *




Before BRORBY , KELLY , and LUCERO , Circuit Judges.




*
      This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
       After examining the briefs and appellate record, this panel has determined

unanimously that oral argument would not materially assist the determination

of this appeal.   See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is

therefore ordered submitted without oral argument.

       Appellants challenge the   district court ’s rulings in favor of the government,

plaintiff below. The government brought suit in      district court on income tax

assessments against Timothy Nipper for tax years 1981 through 1986, seeking to

set aside certain real property conveyances and foreclose on the property pursuant

to pending tax liens. Timothy and Thomas Nipper each answered the suit

individually, but no answer was filed on behalf of the Proprietor Property Trust.

The district court granted default judgment against the trust, declaring its interest

in the property foreclosed. The government also moved for           summary judgment

against the Nippers, but the Nippers failed to respond. After the       district court

granted summary judgment to the government, the Nippers filed a motion

pursuant to Fed. R. Civ. P. 59 to vacate that ruling, arguing that the government

had not provided sufficient evidentiary support for its tax assessments against

Timothy Nipper under an unreported income exception. The district court denied

the Rule 59 motion largely on the basis that the Nippers had failed to respond to

the government’s summary judgment motion, and without acknowledging the

exception. This appeal followed.


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       We have jurisdiction over this appeal by virtue of 28 U.S.C. § 1291. The

standards of review applicable here depend on the basis of the      district court ’s

ruling. Although the government argues that the      district court deemed the matter

confessed because the Nippers failed to respond to the government’s motion for

summary judgment , we disagree. While noting its apparent authority under its

own local rules to enter the relief requested where a party fails to respond to a

motion, the district court stated that it had “nevertheless conducted an

independent inquiry,” concluding that the government’s motion for        summary

judgment “must be granted.” Rec. Vol. I, doc. 33, at 2. We conclude this ruling

was a grant of summary judgment on the merits, a decision which is reviewed de

novo, applying the same standards as would the      district court pursuant to Fed. R.

Civ. P. 56(c). See Bullington v. United Air Lines, Inc.   , 186 F.3d 1301, 1313 (10th

Cir. 1999). The district court ’s denial of the Nippers’ Rule 59 motion, however,

is reviewed for an abuse of discretion.   See Adams v. Reliance Standard Life Ins.

Co. , 225 F.3d 1179, 1186 n.5 (10th Cir. 2000).

       On appeal, the Nippers contend that, contrary to a recognized exception to

the usual presumption of correctness afforded tax assessments, the government

prevailed despite its failure to present the required minimal evidentiary




                                           -3-
foundation for the assessments.   1
                                      This evidentiary foundation “may consist of

evidence linking the taxpayer with an income-producing activity such that it can

be inferred that the taxpayer received income from the activity, or it may consist

of evidence showing an ownership interest in assets possessed by the taxpayer.”

Sundel v. Comm’r , 75 T.C.M. (CCH) 1853, 1856 (1998) (citations omitted). Our

review of the evidence supporting the government’s tax assessments convinces us

that the Nippers are correct; the government has not met this minimal burden to

satisfy the unreported income exception.

      The totality of the evidence supporting the assessments against Timothy

Nipper are statements which appear in two schedules attached to the Notice of

Deficiency underlying the assessments. The first is: “Based on information

gathered concerning Uptown Trash Service during 1985 and 1986, it has been



1
      This court has summarized the exception as follows:

            In a suit brought by the government to collect taxes resulting
      from unreported income, the government generally establishes a
      prima facie case when it shows a timely assessment of the tax due,
      supported by a minimal evidentiary foundation, at which point a
      presumption of correctness arises. A presumption of correctness
      attaches to the Commissioner’s assessment, once some substantive
      evidence is introduced demonstrating that the taxpayer received
      unreported income.

United States v. McMullin , 948 F.2d 1188, 1192 (10th Cir. 1991) (citation
omitted).


                                            -4-
determined that your 1985 self-employment income was $42,000. Using 1985 as

the base year, income was calculated for all other years . . . .” Suppl. Rec. Vol. I,

Ex. 9, Schedule B.   2
                         The second statement is: “Based on information gathered

concerning Uptown Trash Service during 1985 and 1986, it has been determined

that you had business expenses related to self-employment income. These

expenses for 1985 were calculated to be $12,000. Using 1985 as a base year,

expenses were calculated for all other years . . . .”   Id. , Schedule C. No evidence

supporting these statements was attached to the Notice of Deficiency or presented

to the district court , either in connection with the government’s motion for

summary judgment or in response to the Nippers’ Rule 59 motion.

       On appeal, the government first contends that the assessments should be

given the usual presumption of correctness based on the government’s production

of the Certificates of Assessment. This argument ignores the unreported income

exception which has been recognized in this court,      see McMullin , 948 F.2d at

1192. Without openly disavowing the exception, the government also argues that

the Nippers “could not avoid the entry of judgment against them by merely resting

on general denials of tax liability or the claim that the Commissioner’s

assessments were arbitrary.” Appellee’s Br. at 18. Again, this argument ignores



2
      This court has supplemented the original record on appeal with the
government’s motion for summary judgment and attached exhibits.

                                              -5-
the threshold burden placed on the government by this exception. Without the

required minimal evidentiary foundation, the government’s assessments “may not

be supported even where the taxpayer is silent.”      Erickson v. Comm’r , 937 F.2d

1548, 1551 (10th Cir. 1991). We fail to see how the Nippers’ failure to respond

to the government’s motion for    summary judgment can excuse the government’s

initial burden in district court to come forward with evidence in support of its

claim that Timothy Nipper received unreported income before a presumption of

correctness is afforded its assessments.

      The government seeks to distinguish the cases on which the Nippers rely so

as to narrow or even eliminate the unreported income exception. It cites other

authority in support of its contention that, once it has identified a “likely source

for the income,” the government’s burden to come forward with a minimum

evidentiary foundation has been established.       See Appellee’s Br. at 20 n.10.

Those cases on which the government relies, however, are distinguishable, and do

not establish either the inapplicability of the unreported income exception to this

case or the government’s satisfaction of the exception’s standards. These cases

involve more specific evidence in support of the tax assessments, a taxpayer’s

failure to raise the unreported income exception until appeal, and a failure to

deny, even in general terms, the receipt of unreported income. The government




                                           -6-
here acknowledges Timothy Nipper’s general denial of any involvement with

Uptown Trash Service or receipt of income from it.     See id. at 8. 3

       Unlike the information upon which other courts have concluded that the

government satisfied the required evidentiary foundation in unreported income

cases, the information before the   district court in this case fails to meet even that

minimal standard. The statements in the Notice of Deficiency do not link

Timothy Nipper with an income-producing activity or ownership of an asset

which produced income.    4
                              They do not reveal or describe any supporting

substantive evidence, nor is such evidence attached. They fail to demonstrate any

rational basis for the imputation of unreported income to years before and after

the alleged 1985 income and expense figures.      Cf. Senter v. Comm’r , 70 T.C.M.

(CCH) 54, 58 (1995) (holding failure to present predicate evidence supporting

receipt of alleged unreported income required ruling that government’s deficiency

determination was arbitrary). Without specific evidence connecting Timothy

Nipper to income or assets associated with Uptown Trash Service, the government


3
      We do not address the government’s arguments in support of its use of
Consumer Price Index (CPI) statistics as a calculation tool. The Nippers did not
challenge use of the CPI, only the basis for the alleged 1985 unreported income.
4
       The government’s averment in response to the Nippers’ Rule 59 motion that
the assessments were based on Timothy Nippers “ownership of Uptown Trash
Service,” Rec. Vol. I, doc. 38 at 6, and its later contention on appeal that Timothy
received income from Uptown Trash Service,       see Appellee’s Br. at 14, are not
supported by the statements in the Notice of Deficiency.

                                           -7-
is, in essence, forcing the taxpayer to prove a negative.      See Weimerskirch v.

Comm’r , 596 F.2d 358, 361 (9th Cir. 1979).

       Although the district court did not have the benefit of briefing on the

unreported income exception in its initial determination of the government’s

summary judgment motion, it is clear that the government was not entitled to

“judgment as a matter of law” in light of the exception and the failure of the

government to present the required minimal evidentiary foundation. Fed. R. Civ.

P. 56(c); Carmona v. Toledo , 215 F.3d 124, 134 n.9 (1st Cir. 2000). The grant of

summary judgment to the government was legal error requiring reversal. For

those same reasons, we hold that the     district court ’s subsequent denial of the

Nippers’ Rule 59 motion was an abuse of discretion,         see Phelps v. Hamilton , 122

F.3d 1309, 1323 (10th Cir. 1997) (stating manifest legal error is a proper basis for

Rule 59 relief), and we reject the government’s implicit argument that the       Nippers

have waived their arguments about the unreported income exception because they

failed to respond to the government’s motion for summary judgment.

       Accordingly, we remand this case to the      district court for further

proceedings, wherein the burden will be on the government to prove its tax

assessments. See Erickson , 927 F.2d at 1550 (“Where it lacks a rational basis the

presumption evaporates.”);     cf. McHan v. Comm’r , 71 T.C. M. (CCH) 1724, 1726

(1996) (noting, in similar case before the Tax Court that, on remand, the burden is


                                             -8-
on the government to come forward with evidence to support its tax deficiencies).

We reject the Nippers’ argument that, because the government has not satisfied

the minimal evidentiary burden of the unreported income exception, they should

be granted summary judgment. The Nippers have not demonstrated that they are

entitled to judgment as a matter of law; they have established only that the

presumption of correctness does not attach to the government’s tax assessments.

       In light of our remand of this case for further proceedings on the validity of

the tax assessments, we decline to address the parties’ arguments about the

ownership of the property in question or the government’s claim to foreclose on

its liens. We do note, however, that the   district court ’s grant of a default

judgment against the Proprietor Trust and subsequent foreclosure against the trust

were not appealed to this court.

       The judgment of the United States District Court for the Northern District

of Oklahoma is REVERSED and REMANDED for further proceedings consistent

with this opinion.

                                                       Entered for the Court



                                                       Paul J. Kelly, Jr.
                                                       Circuit Judge




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