Or, How Not To Try A Tax Court Case

I’ll repeat the mantra: “I don’t cite the 7463 small tax cases. They’re often entirely fact-driven and rarely if ever raise interesting points of law. Finally, they’re useless to practitioners who need precedents they can cite, even if they provided fresh legal insights.”

But every so often, for want of better material which has been absent from Tax Court reported decisions of late, I do comment on a 7463. And Jennifer M. Dulaney, Petitioner, and Walter Dulaney, Intervenor, T.C. Sum.Op. 2011-38, released 3/29/11, is a prime example of bad IRS lawyering.

Special Trial Judge Lewis Carluzzo (right way to spell “Lewis”, Judge) drew this one, and it was tried by him and tried his patience. The petitioner and the intervenor were divorced when the case came on, although married and filing jointly for the two years at issue. Petitioner sought 6015 innocent spouse relief, although she ran the family finances and kept all the records from which tax returns were prepared. She did not herself prepare the returns; for one year at issue a professional preparer prepared the returns; for the other year, intervenor prepared the return and filed electronically.

Both IRS and intervenor opposed petitioner’s 6015 relief.  The Court found it unclear whether petitioner reviewed the returns, although she signed them both,  “albeit reluctantly” for the second of the two years. IRS assessed deficiencies, apparently related to Schedule A deductions in both years. However, the record did not indicate which of the deductions were disallowed. How an attorney would not enter into evidence the notices of assessment and the bases for disallowance of each deduction eludes me; one would think these were elements of a prima facie case in response to any allegations made by a petitioner.

However, as Judge Carluzzo states: “Respondent’s opening statement suggests that the deficiency for each year results from the disallowance of  ‘all of the itemized deductions’  claimed on the joint return for each of those years, but Evidence 101 informs us that statements made during an opening statement do not constitute evidence. Furthermore, the only evidence on the point, petitioner’s testimony, does nothing more than demonstrate the uncertainty regarding what deductions were disallowed for either year.” T.C. Sum.Op. 2011-38, at pp. 6-7.

Thus, petitioner fails to get the 6015(b) “all or apportioned” relief because she cannot show that the items giving rise to the deficiency were items of the non-requesting spouse (the intervenor), as she put in no evidence on that score.

Turning to the 6015(c) “my bad” request for relief as to items other than those for which the requesting party admits responsibility, the Court holds “what’s sauce for the goose is sauce for the gander.” Apparently petitioner provided IRS with a schedule of items that she admitted were her responsibility, but that schedule, though attached to the statement of claim, never got into evidence either, and IRS counsel never challenged that schedule. So the Court assumed, without finding (and Judge Carluzzo stresses “without finding”), that IRS had no objection to that itemization, notwithstanding IRS counsel’s assertion that petitioner had actual knowledge that all the deductions were bogus.

Because IRS has the burden of proof as regards actual knowledge to defeat a 6015(c) claim, and since IRS introduced no evidence as to which specific deductions were bogus and what was the basis for their bogusity (to coin a word), petitioner must prevail. As Judge Carluzzo said with a reasonableness born of lack of patience with incompetence, “After all, if we cannot tell from the record what the items giving rise to the deficiency for each year were, we can hardly find that petitioner had actual knowledge of any of those items.” T.C. Sum.Op. 2011-38, at p. 9. So enter judgment for petitioner, with a Rule 155 computation to follow.

Now to look at the basics: Tax Court Rule 174(b) says that any evidence deemed by the Court to have probative value shall be admissible in a small tax case such as this. How did IRS trial counsel not have the original of the complete statement of claim? How did IRS trial counsel not have the audit report that gave rise to the assessment of tax? How could IRS trial counsel assert in the opening statement that all the deductions claimed were disallowed, without being able to prove a valid basis for each and every disallowance?

Moreover, Tax Court Rule 91(a)(1), applicable to all Tax Court cases, great or small, states: “The parties are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact. Included in matters required to be stipulated are all facts, all documents and papers or contents or aspects thereof, and all evidence which fairly should not be in dispute.” Though the Court states that some facts were stipulated, apparently the most critical documents, namely, the attachment to the statement of claim, the 90-day statutory notice of deficiency, and any written statement of the basis for disallowance of any deductions claimed for either year, were not stipulated or introduced into evidence.

As petitioner and intervenor were both self-represented, it would be unfair for me to demand knowledge of them that they do not have. Petitioner was at time of filing the returns at issue a registered respiratory therapist, and intervenor was a firefighter. Neither could be expected to know how to try a tax court case.

But IRS trial counsel is another story altogether. I do not wish to disparage another lawyer; I know that there but for the grace of you-know-Who go any of us. So I will refrain from mentioning IRS trial counsel by name here. But I hope she learns from this experience to be better prepared for the next trial.