T.C. Memo. 1997-127
UNITED STATES TAX COURT
JOHN J. BURKE AND VIVIAN BURKE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18772-93. Filed March 11, 1997.
Vincent R. Barrella, for petitioner Vivian Burke.
Catherine R. Chastanet and Mark A. Ericson, for respondent.
MEMORANDUM OPINION
RUWE, Judge: In Burke v. Commissioner, T.C. Memo. 1995-608,
we sustained respondent's determination of Federal income tax
deficiencies and additions to tax for fraud, delinquent filing,
and substantial understatement against petitioner John J. Burke
for the taxable years 1985, 1986, and 1987. We also found that
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petitioner Vivian Burke did not tacitly consent to the filing of
joint Federal income tax returns and, therefore, was not jointly
and severally liable for the taxes in issue. We now consider
petitioner1 Vivian Burke's Motion for an Award of Litigation
Costs pursuant to section 74302 and Rule 231.
Background3
In May 1987, the Suffolk County District Attorney's Office
indicted John Burke on two counts of grand larceny for embezzling
more than $1.2 million in insurance premiums from U.S. Life
Insurance Co. between 1985 and 1987. Pursuant to a plea
agreement, Mr. Burke pled guilty to Grand Larceny 4, a felony,
for his failure to remit sales taxes, which were owing from a
restaurant owned by Mr. Burke, to the New York State Department
of Taxation and Finance.
1
Hereinafter, all references to petitioner are to petitioner
Vivian Burke.
2
The petition in this case was filed on Aug. 30, 1993;
therefore, the motion has been considered under sec. 7430 as
amended by sec. 6239(a) of the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3743-3744,
effective for all civil tax proceedings commenced after Nov. 10,
1988. All Rule references are to the Tax Court Rules of Practice
and Procedure.
3
Neither party has requested an evidentiary hearing
regarding the Motion for an Award of Litigation Costs. The
relevant facts are taken from the parties' memoranda and our
opinion in Burke v. Commissioner, T.C. Memo. 1995-608.
- 3 -
On March 29, 1991, Mr. Burke filed untimely Federal income
tax returns for 1985, 1986, and 1987. The returns reported tax
liabilities of $34,262, $4,359, and $4,557, respectively. The
returns also purported to be joint returns, and a signature
purporting to be that of petitioner appeared on each return.
Petitioner, individually, was not required to file a return of
her own for any of the years in issue. At the time Mr. Burke
filed the returns, petitioner was aware of the financial and
legal problems Mr. Burke had encountered during the taxable years
in issue. The returns in question were filed long after their
due dates, at which time petitioners were experiencing severe
marital difficulties.
On June 21, 1991, respondent sent a Letter 904(DO) to
petitioners at their home address in Setauket, New York. The
letter informed petitioners that their 1986 and 1987 Federal
income tax returns were under investigation and requested
information regarding a claimed theft loss and a small business
corporation (S corporation) loss, as well as copies of
petitioners' 1985 and 1988 Federal income tax returns.
In a letter dated June 28, 1991, Kenneth S. Silver, the
accountant for two insurance agencies owned by Mr. Burke (the
Burke Insurance Agencies), provided respondent with a Form 2848
(Power of Attorney and Declaration of Representative) and
confirmed a meeting with respondent for July 31, 1991. The power
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of attorney authorized Mr. Silver to represent both Mr. Burke and
petitioner in respondent's audit.
Mr. Silver and respondent's examining agents met on July 31,
1991, and February 11, 1992, and had several telephone
conversations prior to May 1, 1992. There is no evidence of any
discussion regarding the purported joint filing status of the
returns.
During the audit process, respondent served summonses upon
various banks where petitioners had their business and personal
accounts. Pursuant to section 7609(a)(2), respondent sent a
certified letter to the account holder(s) within 3 business days
of the issuance of the summonses to notify the account holder(s)
of the existence of the summonses.
On May 15, 1992, respondent issued to petitioners a Letter
950 (30-day letter),4 which proposed the following adjustments:
Addition to Tax
Year Deficiency Sec. 6651(a)(1)
1985 $14,752 $4,523
1986 142,690 35,781
1987 476 233
Respondent disallowed deductions for losses allegedly incurred by
Ard Rhei, Inc., an S corporation owned by Mr. Burke, and
deductions for losses resulting from the alleged embezzlement of
4
Respondent also sent a copy of the 30-day letter to Mr.
Silver.
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funds from the Burke Insurance Agencies by several of Mr. Burke's
employees. Respondent also determined an addition to tax for
delinquent filing of the returns in issue.
The 30-day letter also stated as follows:
IF YOU DO NOT AGREE and wish a conference with the
Office of the Regional Director of Appeals, you MUST
LET US KNOW within 30 days.
* * * * * * *
An appeals officer, who has not examined your
return previously, will review your case. The appeals
office is independent of the district director and
resolves most disputes informally and promptly.
By going to the appeals office, you may avoid
court costs, resolve the matter sooner, and prevent
interest from compounding. * * *
On May 20, 1992, respondent received another Form 2848 Power
of Attorney from Mr. Silver, which appointed Mr. Silver and
Robert Nicolai, C.P.A., as petitioners' representatives for the
taxable years 1985 through 1989. Both petitioners had signed
this form on May 11, 1992.
On June 16, 1992, Mr. Silver informed respondent that
petitioners would not be filing a protest. Neither petitioners
nor Mr. Silver ever requested an Appeals Office conference with
respondent.
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On June 11, 1993, respondent issued a notice of deficiency,
which determined deficiencies in petitioners' Federal income
taxes and additions to tax as follows:5
Additions to Tax
Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
1985 $38,140 $36,201 50 percent of $5,847
the interest due
on $23,388
Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6661
1986 $256,295 $34,692 $88,473 50 percent of the $28,401
interest due on
$113,605
1987 12,973 -- 12,791 50 percent of the 3,124
interest due on
$12,497
In addition to the adjustments contained in the 30-day letter,
respondent determined that Mr. Burke had failed to report
$330,615 in premium funds which he had embezzled from U.S. Life.
Respondent also determined additions to tax for delinquent
filing, fraud, and substantial understatement. Respondent did
not issue a second 30-day letter prior to issuance of the notice
of deficiency.
On August 30, 1993, Attorney Michael N. Balsamo filed the
original petition in this case on behalf of both petitioners.
The petition stated in several places that the returns were
jointly filed:
5
In her answer, respondent asserted an increased deficiency
and additions to tax for 1986.
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5. The facts upon which petitioners rely are as
follows:
(a) Petitioners filed their tax returns for the
1985, 1986, and 1987 [taxable years] on or about March
28, 1991.
* * * * * * *
(d) The deficiencies herein have been asserted
against Petitioner, Vivian Burke, for the sole reason
that she executed joint tax returns with Petitioner,
John J. Burke.
* * * * * * *
(i) Petitioner, Vivian Burke, is not responsible
for any of the tax, interest, or penalties asserted by
the Commissioner, since she is an innocent spouse as
defined in Section 6013(e). In support thereof,
Petitioner Vivian Burke states as follows:
1) A joint return was filed by Vivian Burke and
John J. Burke for each of the years at issue herein,
* * *
* * * * * * *
3) At the time Petitioner, Vivian Burke, signed
the returns at issue herein, she did not know, and had
no reason to know that there was such alleged
substantial understatement, * * * [Emphasis added.]
On April 18, 1994, the parties were served with notice that
petitioners' case was scheduled for trial at the Court's
September 19, 1994, session in New York City. On May 23, 1994,
Attorney Vincent R. Barrella entered an appearance on behalf of
petitioner Vivian Burke. On June 29, 1994, following her initial
examination of the returns in issue, petitioner informed Mr.
Barrella that she had not signed the returns. On July 11, 1994,
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Mr. Barrella informed respondent who requested handwriting
exemplars from petitioner. On July 26 or 27, 1994, respondent
received the report of the Internal Revenue Service Criminal
Investigation National Forensic Laboratory, which concluded that
petitioner had not signed the returns.
On July 26, 1994, petitioner filed an amended petition,
which asserted that the signatures on the returns, purporting to
be hers, were not those of Vivian Burke. On or about September
8, 1994, respondent conceded the addition to tax for fraud
against petitioner.
A trial was conducted on September 27, 28, and 29, 1994. In
Burke v. Commissioner, T.C. Memo. 1995-608, we upheld the income
tax deficiencies and additions to tax determined against Mr.
Burke in the notice of deficiency, as well as the increased
deficiencies and additions to tax asserted by respondent in her
answer. We also concluded that petitioner Vivian Burke did not
tacitly consent to the filing of joint Federal income tax returns
and, therefore, was not jointly and severally liable for the
taxes in issue.
On February 12, 1996, petitioner filed her Motion for An
Award of Litigation Costs.
Discussion
Section 7430(a)(2) provides that a party that has prevailed
in any court proceeding against the United States may recover
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reasonable litigation costs. To obtain such an award, the
prevailing party must establish that: (1) She has exhausted the
administrative remedies available; (2) she has "substantially
prevailed" in the controversy; (3) she satisfies certain net
worth requirements; (4) the position of the United States in the
proceeding was not substantially justified; (5) she has not
unreasonably protracted the proceedings; and (6) the amount of
the costs sought is reasonable. Sec. 7430(b) and (c).
Petitioner bears the burden of proving that she satisfies each of
these requirements. Rule 232(e).6
Respondent concedes that petitioner has substantially
prevailed and that she satisfies the net worth requirements.
Exhaustion of Administrative Remedies
The threshold requirement imposed on a taxpayer asserting a
claim pursuant to section 7430 is the exhaustion of
administrative remedies before suit is filed. Section 301.7430-
1(b)(1), Proced. & Admin. Regs., provides that where an Appeals
Office conference is available, administrative remedies are
exhausted only if the taxpayer (1) participated7 in such a
6
In the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec.
701(b), 110 Stat. 1452, 1463 (1996), sec. 7430(c)(4) was amended
to require the Government to establish that its position was
substantially justified. This amendment is effective for
proceedings commenced after July 30, 1996.
7
A taxpayer or her representative "participates" in an
Appeals conference "if the party or qualified representative
(continued...)
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conference prior to filing a petition, or (2) requested an
Appeals Office conference and the request was denied. Cole v.
Commissioner, T.C. Memo. 1996-375. This requirement aims "to
preserve the role that the administrative appeals process plays
in the resolution of tax disputes by requiring taxpayers to
pursue such remedies prior to litigation." H. Rept. 97-404, at
13 (1981); see also Technical Explanation of Committee Amendment,
127 Cong. Rec. sec. 15594 (daily ed. Dec. 16, 1981).8
In the instant case, the following facts are not in dispute:
On May 15, 1992, respondent issued to petitioners (and their
representative, Mr. Silver) a 30-day letter, which afforded
petitioners an opportunity for an Appeals conference with
respondent's Office of the Regional Director of Appeals.
However, neither petitioners nor their representative requested
7
(...continued)
discloses to the Appeals office all relevant information
regarding the party's tax matter to the extent such information
and its relevance were known or should have been known to the
party or qualified representative at the time of such
conference." Sec. 301.7430-1(b)(2), Proced. & Admin. Regs.
8
The House report also stated:
A taxpayer who actively participates in and discloses
all relevant information during the administrative
stages of the case will be considered to have exhausted
the available administrative remedies. Failure to so
participate and disclose information may be sufficient
grounds for determining that the taxpayer has not
exhausted administrative remedies and, therefore, is
ineligible for an award of litigation costs. [H. Rept.
97-404, at 13 (1981).]
See also Minahan v. Commissioner, 88 T.C. 492, 508 (1987).
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an Appeals Office conference with respondent. Petitioner now
posits several arguments in an attempt to circumvent her failure
to proceed to Appeals. We shall address each one in turn.
First, petitioner argues that she did not have the
opportunity to exhaust her administrative remedies, because
respondent's determination in the 30-day letter, which afforded
petitioners the opportunity for an Appeals conference, was
"entirely different" than that contained in the notice of
deficiency. In the notice of deficiency, respondent determined
deficiencies in petitioners' Federal income taxes that were
$149,490 greater than the deficiencies determined in the 30-day
letter. In the notice of deficiency, respondent determined
additions to tax for delinquent filing,9 fraud,10 and substantial
understatement as well.
Despite these additional determinations in the notice of
deficiency, the fact remains that the 30-day letter asserted
substantial Federal income tax deficiencies and additions to tax
for the years in issue against both petitioners. These
deficiencies totaled $157,918, and the additions to tax for
delinquent filing totaled $40,537. Petitioner was not required
9
In the 30-day letter, respondent determined an addition to
tax for delinquent filing for each of the years in issue. In the
notice of deficiency, respondent determined this addition to tax
for 1986 only, and this amount was less than the total amount
asserted for delinquent filing in the 30-day letter.
10
As an alternative to the additions to tax for fraud,
respondent determined additions to tax for negligence.
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to file a Federal income tax return of her own for any year in
issue. Any tax deficiencies attributable to her could only be
due to a determination by respondent that she had elected to file
joint returns. Thus, when the 30-day letter was sent, the
central issues for petitioner Vivian Burke were whether she
signed the purported joint returns, and, if not, whether she
tacitly consented to their filing.11
Second, petitioner maintains that even if she had availed
herself of the available administrative remedies, it would have
been of no consequence. In discussing the importance of the
exhaustion of administrative remedies requirement, the report of
the House Ways and Means Committee stated that
The committee recognizes that the exhaustion of
remedies requirement may be inappropriate in some
cases. For example, if a notice of deficiency is
issued to a taxpayer in connection with an issue which
the Internal Revenue Service has identified as one
which it will litigate in all cases, then it would be
inappropriate to require an administrative appeal.
11
These were the central and, ultimately, decisive issues,
notwithstanding that neither petitioner nor her representatives
alleged that she had not filed joint returns until Mr. Barrella
entered his appearance on petitioner's behalf after the case was
set for trial. Prior to that time, petitioner had affirmatively
alleged that she filed joint returns with Mr. Burke. Indeed,
joint return filing was a requirement for petitioner to prevail
on her claim that she was an innocent spouse. See sec.
6013(e)(1)(A). Petitioner has consistently maintained, even when
she alleged that the returns were jointly filed, that she had no
knowledge of her husband's income-producing activities. She
maintained this position even after amending her petition. The
amount of tax in question was never the focus of petitioner's
individual position. At trial, petitioner's counsel indicated
that petitioner was not interested in issues other than joint
return and innocent spouse status.
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Therefore, taxpayers are required to exhaust available
administrative remedies unless the court determines
that, under the circumstances of the case, such
requirement is unnecessary. [H. Rept. 97-404, supra at
13.]
In this case, petitioner contends that respondent's position was
"set in stone", and petitioners could have agreed to respondent's
proposed adjustments or else proceeded to trial. We disagree.
Nothing in the record suggests that respondent would not have
considered petitioner's claims had she proceeded to Appeals in
1992 and submitted relevant information regarding the joint
return issue.12 The fact that respondent refused to concede the
joint return issue after learning 2 years later that petitioner
had not signed the returns does not persuade us to the contrary.
By then, petitioner had affirmatively alleged in her petition
that she had jointly filed the returns in question. In light of
this, it was respondent's position that petitioner had consented
to her husband's filing of joint returns.
Petitioner also seeks to excuse her failure to pursue
administrative remedies on the grounds that she did not learn
that respondent was seeking to hold her liable for deficiencies
until after the issuance of the notice of deficiency. However,
petitioners received notification from respondent that she would
be conducting an examination of their Federal income tax returns.
12
Respondent conceded the addition to tax for fraud against
petitioner shortly after receipt of her forensic report, which
concluded that the signatures on the returns were not
petitioner's.
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Petitioner signed two powers of attorney granting Mr. Silver's
accounting firm the authority to represent her for purposes of
respondent's audit. Moreover, through her original attorney,
petitioner maintained in the petition, and until shortly before
trial in this case, that the returns were jointly filed.13 See
supra pp. 6-7.
Petitioner's reliance on our opinion in Lomanno v.
Commissioner, T.C. Memo. 1994-426, granting the taxpayer's motion
for an award of attorney's fees and litigation costs, is
misplaced. In Lomanno, we determined that the taxpayer had
exhausted her administrative remedies, despite the fact that no
Appeals conference was held. However, in contrast to the instant
case, the taxpayer in Lomanno never received a 30-day letter. As
a result, we concluded that section 301.7430-1(e), Proced. &
Admin. Regs., "would allow * * * [her] to be excepted from having
to participate in a prepetition appeals office conference."
Lomanno v. Commissioner, supra.14 In addition, we found that
13
Respondent is not required to question and investigate the
authenticity of every return signature. Sec. 6064 provides that
"The fact that an individual's name is signed to a return,
statement, or other document shall be prima facie evidence for
all purposes that the return, statement, or other document was
actually signed by him."
14
Pursuant to sec. 301.7430-1(e)(2), Proced. & Admin. Regs.,
in the case of a petition in the Tax Court, a party's
administrative remedies shall be deemed to be exhausted if:
(i) The party did not receive a notice of proposed
deficiency (30-day letter) prior to the issuance of the
(continued...)
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prior to the filing of the petition, the taxpayer's counsel had
not turned his back on any opportunity that was afforded him to
present evidence to support the taxpayer's position. Counsel
made both written and oral requests to meet with the
Commissioner's agents, although these were to no avail. On these
facts, we held that the taxpayer had exhausted her available
administrative remedies.
The instant case is also distinguishable from Phillips v.
Commissioner, 88 T.C. 529 (1987), revd. 851 F.2d 1492 (D.C. Cir.
1988). In Phillips, the taxpayer failed to request consideration
of his case by Appeals, despite the Commissioner's issuance of a
preliminary notice informing him that he was entitled to
administrative review. Nevertheless, we concluded that the
taxpayer had exhausted his administrative remedies, because the
issue in question did not arise until after the Commissioner had
mailed the notice of deficiency.15 Thus, there was no possible
opportunity for an administrative Appeals conference regarding
that issue. Id. at 532. Subsequent to the docketing of the
14
(...continued)
statutory notice and the failure to receive such notice
was not due to actions of the party * * *; and
(ii) The party does not refuse to participate in an
Appeals office conference while the case is in docketed
status.
15
The issue concerned the validity of a joint filing status
election made on a return filed after the notice of deficiency
for the same year had been mailed. See Phillips v. Commissioner,
86 T.C. 433, 434-435 (1986), affd. 851 F.2d 1492 (D.C. Cir.
1988).
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case, the taxpayer's accountant had communicated regularly with
the Commissioner's Appeals Office, and his attorney had
communicated with the Commissioner's counsel on all matters.
In Phillips, we also found that the Commissioner's
insistence on pursuing the matter through litigation and her
refusal to consider the impact of two prior revenue rulings on
her litigating position demonstrated that any discussion of the
relevant issue that the taxpayer attempted was futile. In
support of our conclusion, we relied upon the report of the House
Ways and Means Committee, which recognized that under
circumstances indicating an unwillingness on the part of the
Commissioner to compromise, the standard of exhaustion of
administrative remedies should be applied less strictly. Id. at
533; see also H. Rept. 97-404, supra at 13.
In contrast, the dispositive issue in petitioner's case has
always been the same: whether petitioner signed the returns in
issue or tacitly consented to their filing. In addition, we do
not find evidence of intransigence by respondent as we did in
Phillips. In the instant case, petitioner failed to allege that
she had not filed joint returns until shortly before trial.
After concluding that petitioner had not signed the returns in
issue, respondent was confronted with the fact that petitioner
had filed joint returns with Mr. Burke for years prior and
subsequent to the years in issue and had alleged in her pleadings
that the returns for the years in issue were joint returns. Had
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petitioner and her representatives originally come forward at the
administrative Appeals conference, offered in May 1992, with the
relevant facts to demonstrate that she had not filed joint
returns for the years in issue, we have every reason to believe
that her case could have been resolved without the need for this
litigation.16
We hold that petitioner did not exhaust her administrative
remedies, since she failed to request an Appeals office
conference which was offered by respondent in the 30-day letter.
Kenlin Indus., Inc. v. United States, 927 F.2d 782, 788 (4th Cir.
1991); see also Minahan v. Commissioner, 88 T.C. 492, 508 (1987).
Therefore, petitioner is not entitled to an award of reasonable
litigation costs. As a result of our disposition, we express no
opinion as to whether any of the remaining requirements of
section 7430 have been satisfied.
An appropriate order
will be issued.
16
Even an Appeals conference regarding petitioner's initial
position that she was an innocent spouse would have had to
explore the issues of whether the 1985, 1986, and 1987 returns
were joint returns, petitioner's involvement in their
preparation, and her involvement in and knowledge of the
underlying transactions.