IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 12, 2009
No. 06-60697 Charles R. Fulbruge III
Clerk
SEARCY M. FERGUSON, JR.; ELIZABETH L. FERGUSON,
Petitioners–Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent–Appellee.
Appeal from a Decision
of the United States Tax Court
Before DeMOSS, DENNIS, and OWEN, Circuit Judges.
PRISCILLA R. OWEN, Circuit Judge:
Searcy and Elizabeth Ferguson appeal from a decision of the Tax Court in
a redetermination proceeding that denied two tax deductions, found the
Fergusons liable for penalties for late filing of a return and substantially
understating income, and concluded that it had no jurisdiction to consider
whether certain tax debts had been discharged in bankruptcy. We affirm.
I
The Fergusons filed a joint tax return for 2000 in December of 2001,
approximately two months beyond the extended deadline they had received upon
earlier request. The Internal Revenue Service (IRS) determined that the
No. 06-60697
Fergusons owed additional tax and sent a notice of deficiency. The Fergusons
filed a timely petition in the United States Tax Court for redetermination of
their 2000 tax. Searcy Ferguson had petitioned for bankruptcy in 1999 and was
discharged in 2004. The Tax Court thereafter held that the Commissioner’s
assessment of the 2000 deficiency was correct and that the Fergusons were liable
for a deficiency of $23,473.00, a 10% late filing penalty of $2,347.30, and a 20%
underpayment penalty of $4,694.60. The Fergusons contended that all 2000 tax
liability has been discharged in the bankruptcy proceedings, but the Tax Court
concluded that it did not have jurisdiction to resolve that question in a
redetermination proceeding.1
The Fergusons have pursued an appeal to this court. Additional facts will
be discussed in considering each of the Fergusons’ contentions.
II
The Fergusons assert that they were entitled to a deduction on their 2000
return for “loss” of farm property. The property consisted of three tracts of land
near Vernon, Texas that Searcy Ferguson had purchased and later used as
collateral for a loan from Herring National Bank. When Searcy Ferguson filed
for bankruptcy in 1999, an automatic stay went into effect, but in 2001, the
bankruptcy court lifted the stay, and Herring Bank foreclosed on the Vernon
property.
The Fergusons contended that the bankruptcy estate trustee had
abandoned the Vernon property in 2000 and that they were therefore entitled
to deduct the value of the lien as a loss for that tax year. Searcy Ferguson had
1
Ferguson v. Comm’r, 91 T.C.M. (CCH) 785, 2006 WL 469688, at *8 (2006).
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No. 06-60697
initially filed for bankruptcy under Chapter 11, but in 2000 his petition was
involuntarily converted to a Chapter 7 proceeding. This conversion, the
Fergusons contend, amounted to an abandonment of the Vernon tracts to
Herring Bank. The Tax Court found that the property was not abandoned by the
trustee in 2000.
The parties stipulated in the Tax Court that the bankruptcy court did not
lift the stay as to the Vernon property until 2001, and Herring Bank foreclosed
that same year, not in 2000. The Commissioner correctly points out that the
conversion of bankruptcy proceedings in 2000 did not cause the taxpayers to
realize any loss or gain in that year. Additionally, the trustee did not abandon
any property of the estate until 2003, after the Vernon property had been sold
at a foreclosure sale. The Fergusons were not entitled to the deduction that they
claimed.
III
Searcy Ferguson was married to Elizabeth Robertson Smith prior to his
marriage to Elizabeth Ferguson, and he and Smith owned real property in
Southampton, New York. As part of their divorce agreement, Smith was
awarded the Southampton property. The divorce agreement included an
indemnity provision in which Searcy Ferguson and Smith agreed to indemnify
each other for claims deriving from this property. Shortly before the divorce
became final, Searcy Ferguson encumbered the Southampton property by using
it as security for loans he obtained from Union Bank & Trust of Dallas.
Following the divorce, Union Bank agreed with Smith that its liens on the
Southampton property were improper (because they violated an injunction in the
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No. 06-60697
divorce proceeding) and released the liens. Searcy Ferguson subsequently repaid
the loans from Union Bank and unsuccessfully sued Smith for violation of the
indemnification agreement. Searcy and Elizabeth Ferguson then claimed a
deduction on their 2000 tax return for the Union Bank loan repayment amount
as an ordinary business bad debt loss.
The Tax Court correctly determined that this debt was “nonbusiness debt”
within the meaning of I.R.C. § 166(d)(2), and that a worthless nonbusiness bad
debt must be treated as a short-term capital loss, not a deduction.2
IV
In 2001, the Fergusons filed a request to extend their 2000 tax filing date
for six months, to October 15, 2001. This request was granted. At some point
prior to that deadline, the Fergusons were involved in other litigation and
surrendered some or all of their property and tax records in response to a
subpoena in that litigation. The Fergusons regained possession of their records
during 2001. They filed their 2000 tax return on December 12, 2001, nearly two
months past the extended filing deadline. The IRS calculated a late filing
penalty. The Fergusons challenged that penalty before the Tax Court, claiming
their delay was reasonably caused by the absence of their records in response to
a subpoena. The Tax Court affirmed the penalty.
We review the Tax Court’s findings regarding the existence of reasonable
cause for the untimely filing of a tax return for clear error.3 Section 6651(a) of
the Internal Revenue Code provides for a late filing penalty (5% per month, up
2
See I.R.C. § 166(a)(1), (d)(1).
3
Roberts v. Comm’r, 860 F.2d 1235, 1242 (5th Cir. 1988).
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No. 06-60697
to 25% total) unless the delay was due to reasonable cause.4 Reasonable cause
is defined by regulation: “If the taxpayer exercised ordinary business care and
prudence and was nevertheless unable to file the return within the prescribed
time, then the delay is due to a reasonable cause.” 5 Under the Tax Court’s
precedent, unavailability (to the taxpayer) of “information or records does not
necessarily establish reasonable cause for failure to file timely a tax return,” 6
because even without full information, “[a] taxpayer is required to file timely
based upon the best information available and to file thereafter an amended
return if necessary.”7
Searcy Ferguson testified that he did not have his records for several
months because of a subpoena, but there is no evidence of specific dates the
records were unavailable or of whether all or only a part of the Fergusons’
records were out of their control. Nor was there an explanation why the
Fergusons did not retain or acquire copies of their records to complete their
return on time. The Tax Court held that the facts in the record did not
constitute reasonable cause because the Fergusons could have filed a timely
return with what information they did have and could later have filed an
amended return once their records were returned. The Tax Court did not
commit clear error in upholding the late filing penalty.
4
I.R.C. § 6651(a).
5
26 C.F.R. § 301.6651-1(c)(1).
6
Jacobson v. Comm’r, 86 T.C.M. (CCH) 204, 2003 WL 21752458, at *2 (2003).
7
Id.
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No. 06-60697
V
Because the IRS believed the Fergusons had taken improper deductions
on their 2000 tax return (regarding the Vernon and Southampton properties,
and other deductions not at issue here), it found that the Fergusons had
under-reported their income significantly and were liable for an accuracy-related
penalty allowed by sections 6662(a) and (b)(2) of the Internal Revenue Code.8
Before the Tax Court, the Fergusons challenged this penalty, arguing they had
acted in good faith, with full disclosure, and had reasonable cause for their
under-reporting. The Tax Court disagreed, finding no evidence that would
exculpate the Fergusons from the penalty, and held that the Fergusons were
liable.
On appeal, the Fergusons challenge the amount of the deficiency on which
the 20% penalty was calculated. The Fergusons believe their penalty was
calculated from a $91,763.00 base tax amount. This was the amount initially
alleged by the IRS in the original notice of deficiency. However, in the Tax
Court’s final decision, the base tax liability was $23,473.00, and the
underpayment penalty was $4,694.60, which is 20% of the base tax liability. The
Tax Court did not err in this regard.
VI
Finally, we consider the Fergusons’ argument that the Tax Court erred in
concluding that it did not have jurisdiction in a redetermination proceeding
pursuant to 26 U.S.C. §§ 6213 and 6214 to determine whether the taxpayers’
2000 tax liability was discharged in bankruptcy. All parties agree that in other
8
I.R.C. § 6662(a), (b)(2).
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No. 06-60697
proceedings that might be initiated pursuant to 26 U.S.C. § 6330, regarding levy
on property to satisfy unpaid taxes, the Tax Court would have jurisdiction in an
appeal9 from an IRS Office of Appeals ruling to resolve whether tax liability had
been discharged in bankruptcy.10 The question before us is whether the Tax
Court had the authority to consider the discharge issue in redetermining a
deficiency under 26 U.S.C. §§ 6213 and 6214. The jurisdiction of the Tax Court
is a question of law that we review de novo.11
The general grant of jurisdiction to the Tax Court is established by 26
U.S.C. § 7442, which states in its entirety:
The Tax Court and its divisions shall have such jurisdiction as is
conferred on them by this title, by chapters 1, 2, 3, and 4 of the
Internal Revenue Code of 1939, by title II and title III of the
Revenue Act of 1926 (44 Stat. 10-87), or by laws enacted subsequent
to February 26, 1926.
Since at least 1980, when the Tax Court’s decision in Graham v.
Commissioner issued, the Tax Court has held that it does not have jurisdiction
in deficiency redetermination proceedings to resolve whether a tax deficiency
was discharged in a prior bankruptcy proceeding.12 In Graham, the bankruptcy
9
26 U.S.C. § 6330(d)(1) (“Judicial review of determination.–The person may, within 30
days of a determination under this section, appeal such determination to the Tax Court (and
the Tax Court shall have jurisdiction with respect to such matter).”).
10
26 U.S.C. § 6330(c)(2) (providing that a taxpayer may raise before the IRS hearing
officer “any relevant issue relating to the unpaid tax or the proposed levy” and “may also raise
at the hearing challenges to the existence or amount of the underlying tax liability for any tax
period if the person did not receive any statutory notice of deficiency for such tax liability or
did not otherwise have an opportunity to dispute such tax liability.”).
11
Estate of Smith v. Comm’r, 429 F.3d 533, 537 (5th Cir. 2005).
12
75 T.C. 389, 399 (1980).
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No. 06-60697
proceeding was concluded and closed before the deficiency at issue was asserted.
The Tax Court considered various then-governing bankruptcy statutes that
obtained prior to the effective date of the 1978 Bankruptcy Code.13 The Tax
Court concluded that the bankruptcy court had jurisdiction to decide
dischargeability 14 and that the Tax Court did not.15 The court reasoned that its
statutory jurisdiction was limited and that “its powers do not exceed those
conferred by statute.” 16 The Tax Court observed that “in exercising its
jurisdiction to redetermine deficiencies,” it “cannot ‘allow or disallow a claim
against a debtor’s estate based on a deficiency in taxes or to discharge taxes as
a bankruptcy court might.’” 17 The Tax Court concluded “that this Court lacks
the requisite subject matter jurisdiction to decide whether the petitioner’s
deficiencies and additions to tax were discharged in the bankruptcy proceeding.
13
Id. at 396-97.
14
Id. at 397-98.
15
Id. at 399.
16
Id. (citing Cont’l Equities, Inc. v. Comm’r, 551 F.2d 74, 79-80 (5th Cir. 1977) (holding
that the Tax Court did “not have the authority to order that a refund be given, or to review the
Commissioner’s denial of a refund claim . . . or to state that [related corporations] are entitled
to such refunds” based on the Commissioner’s section 482 allocation) and Transp. Mfg. &
Equip. Co. v. Comm’r, 434 F.2d 373, 380 (8th Cir. 1970) (holding that “273(c) gives jurisdiction
to the Tax Court to redetermine the amount of the deficiency and ‘of all amounts assessed at
the same time in connection therewith.’ This provision contemplates a specified ‘amount’
actually assessed. The assessment is not open-ended and does not in any way reflect
assessment for post-assessment interest that has yet to accrue. The interest actually assessed
a the time of the deficiency relates only to simple interest due on the alleged deficiency at that
time. It is not until the Tax Court has made a final judgment that the statutory scheme under
both 273(i) and 294(b) contemplates the imposition of post-assessment interest.”).
17
Id. (quoting Fotochrome, Inc. v. Comm’r, 57 T.C. 842, 847 (1972)).
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No. 06-60697
That is a matter which falls within the general jurisdiction of the bankruptcy
court.” 18
The court in Graham also stated, “[t]he redetermination of an income tax
deficiency has ‘nothing to do with collection of the tax nor any similarity to an
action for collection of a debt, nor does it involve any rights and remedies of the
sort traditionally enforced in an action at law.” 19 The quotation in this sentence
was from the Tax Court’s opinion in Swanson v. Commissioner,20 in which the
issue was whether the Seventh Amendment 21 required a jury trial in a
redetermination proceeding. In Swanson, the court discussed other types of
actions “similar to actions for damages or for collection of debts[,] which were
actions requiring trial by jury at common law.”22 The court concluded, in
contrast to those actions, that “[a]n action brought in the Tax Court for
redetermination of a deficiency had no counterpart in actions at common law,”23
and thus the petitioner had no right to a trial by jury in the Tax Court.24 That
conclusion has no bearing on whether the Tax Court has jurisdiction under 26
18
Id.
19
Id. (quoting Swanson v. Comm’r, 65 T.C. 1180, 1184 (1976).
20
65 T.C. 1180 (1976).
21
U.S. CONST . amend. VII (“In Suits at common law, where the value in controversy
shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by
a jury, shall be otherwise reexamined in any Court of the United States, than according to the
rules of the common law.”).
22
Swanson, 65 T.C. at 1183.
23
Id.
24
Id. at 1185.
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U.S.C. §§ 6213 and 6214 to determine whether a tax debt has been discharged.
The inclusion of the discussion in Graham of how common-law actions differ
from redeterminations is confusing, at best.
The Graham decision has been criticized by at least one scholar,25 and he
has submitted a thoughtful amicus brief in the present case. This scholar and
author notes, as we do, that the discussion of common-law debt actions in
Graham has no relevance to whether § 6213 or § 6214 permits the Tax Court to
decide, in redetermination proceedings, if a tax liability was discharged in
bankruptcy. However, another argument advanced by Professor Germain is
more to the point. He examines floor statements made by Representative
Edwards regarding the Bankruptcy Reform Act of 1978.26 The Supreme Court
has considered similar statements “as persuasive evidence of congressional
intent” in construing this Act “[b]ecause of the absence of a conference and the
key roles played by Representative Edwards and his counterpart floor manager
Senator DeConcini.” 27 Specifically, Representative Edwards stated:
If the Internal Revenue Service does not file a complaint to
determine dischargeability and the automatic stay on a pending Tax
Court proceeding is not lifted, the bankruptcy court could determine
the merits of any tax claim against the estate. That decision will
not bind the debtor personally because he would not have been
personally before the bankruptcy court unless the debtor himself
asks the bankruptcy court to rule on his personal liability. In any
such situation where no party filed a dischargeability petition, the
25
See Gregory Germain, Discharging Their Duty: A Critical Assessment of the Tax
Court’s Refusal to Consider Bankruptcy Discharge Questions, 23 VA . TAX REV . 531 (Winter
2004).
26
See 124 CONG . REC . 32392, 32414 (1978).
27
Begier v. Internal Revenue Serv., 496 U.S. 53, 64 n.5 (1990).
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No. 06-60697
debtor would have access to the Tax Court to determine his personal
liability for a nondischargeable tax debt. While the Tax Court in
such a situation could take into account the ruling of the bankruptcy
court on claims against the estate in deciding the debtor’s personal
liability, the bankruptcy court’s ruling would not bind the Tax Court
under principles of res judicata, because the debtor, in that
situation, would not have been personally before the bankruptcy
court.
If neither the debtor nor the Internal Revenue Service files a
claim against the estate or a request to rule on the debtor’s personal
liability, any pending tax court proceeding would be stayed until the
closing of the bankruptcy case, at which time the stay on the tax
court would cease and the tax court case could continue for purposes
of deciding the merits of the debtor’s personal liability for
nondischargeable taxes.28
This statement indicates that Representative Edwards intended for the
Tax Court to determine, in some circumstances, whether a debtor had been
discharged from personal liability for a tax debt. However, nothing in the
Bankruptcy Reform Act of 1978 expressly gave this authority to the Tax Court,
and more importantly, neither § 6213 nor § 6214 was amended to give the Tax
Court authority to make such a determination when redetermining the amount
of an alleged deficiency.
When Congress has thought it necessary to expand the authority of the
Tax Court in redetermination proceedings under §§ 6213 and 6214, it has done
so expressly. For example, the Tax Court may determine if an assessment of a
tax debt is barred by limitations. Taxes generally must be assessed within three
years after a return was filed,29 and “[i]f the assessment or collection of any tax
28
124 CONG . REC . at 32414.
29
26 U.S.C. § 6501(a).
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No. 06-60697
is barred by any statute of limitations, the decision of the Tax Court to that
effect shall be considered as its decision that there is no deficiency in respect of
such tax.” 30 Congress has also expressly provided that if a deficiency is asserted
against spouses, in some circumstances one or both may petition the Tax Court
to allocate the deficiency between the two spouses.31
Prior to 2006, at least one circuit court had held that the Tax Court had
no jurisdiction to consider equitable recoupment in redetermining a deficiency.32
The Supreme Court explained in United States v. Dalm that equitable
recoupment may be asserted “only where the Government has taxed a single
transaction, item, or taxable event under two inconsistent theories,” 33 but
expressly left open whether the taxpayer “could have raised a recoupment claim
in the Tax Court.” 34 (The taxpayer in Dalm had not raised a claim for a gift tax
refund in her income tax redetermination proceedings but instead, after losing
that litigation, brought a separate suit for refund of the gift tax. The Supreme
Court held that the district court did not have jurisdiction over a separate action
for equitable recoupment.35 ) Congress acted in 2006 to amend § 6214 to permit
the Tax Court to entertain claims for equitable recoupment by adding the
following sentence to subsection (b) regarding the Tax Court’s jurisdiction in
30
Id. § 7459(e).
31
Id. § 6015.
32
See Estate of Mueller v. Comm’r, 153 F.3d 302, 306 (6th Cir. 1998).
33
494 U.S. 596, 605 n.5 (1990).
34
Id. at 611 n.8.
35
Id. at 606.
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redetermination proceedings: “Notwithstanding the preceding sentence, the Tax
Court may apply the doctrine of equitable recoupment to the same extent that
it is available in civil tax cases before the district courts of the United States and
the United States Court of Federal Claims.” 36
Congress has not acted to grant express permission to the Tax Court to
resolve, in a redetermination proceeding, whether a tax debt has been
discharged in bankruptcy. All parties agree, however, that Congress gave the
Tax Court authority to determine if a tax debt has been discharged when it
amended § 6330 in 1998. Section 6330 now provides that in a collection due
process hearing before an officer or employee of the IRS Office of Appeals, to
which a taxpayer is entitled after notice of levy, the taxpayer “may also raise at
the hearing challenges to the existence or amount of the underlying tax liability
for any tax period if the person did not receive any statutory notice of deficiency
for such tax liability or did not otherwise have an opportunity to dispute such
tax liability.” 37 The Tax Court has jurisdiction over appeals from such rulings.38
At least one other circuit court has held that the Tax Court has no
jurisdiction in a redetermination proceeding “to consider whether [a taxpayer’s]
tax debt was dischargeable in bankruptcy,” although it abrogated its own prior
ruling in so holding.39 The Seventh Circuit had held in a prior appeal from a
redetermination proceeding involving the same parties, Cassidy v. Commissioner
36
26 U.S.C. § 6214(b).
37
Id. § 6330(c)(2)(B).
38
Id. § 6330(d)(1).
39
In re Cassidy (Cassidy II), 892 F.2d 637, 640 (7th Cir. 1990) (citing Graham v.
Comm’r, 75 T.C. 389 (1980)).
13
No. 06-60697
(Cassidy I), that a particular tax debt was not dischargeable in bankruptcy.40
The taxpayer then returned to bankruptcy court seeking a determination that
this tax debt was discharged.41 The bankruptcy court dismissed the action,
concluding that the Seventh Circuit’s decision in Cassidy I was res judicata.42
The district court affirmed the bankruptcy court on other grounds.43 In the
ensuing appeal to the Seventh Circuit, that court examined whether it had had
jurisdiction in Cassidy I to decide whether the debt was dischargeable. 44 It
concluded that the Tax Court did not have jurisdiction to make that
determination and therefore that the appellate court had not had jurisdiction
either.45
The amicus brief filed in the present proceeding contends that to require
a taxpayer to wait until a notice of levy has been issued and a collection due
process hearing occurs to raise the issue of dischargeability is a waste of time
and resources. The amicus may be correct. But that does not permit us to re-
write §§ 6213 or 6214. The Tax Court did not err in declining to adjudicate
whether the Fergusons’ 2000 tax debt had been discharged in bankruptcy.
40
814 F.2d 477 (7th Cir. 1987).
41
Cassidy II, 892 F.2d at 639.
42
Id.
43
Id.
44
Id. at 640-41.
45
Id. at 641-42; see also Meadows v. Comm’r, 405 F.3d 949, 952 (11th Cir. 2005)
(observing that “[t]he Tax Court has consistently held that it does not have jurisdiction under
26 U.S.C. § 6213 (redetermination of deficiencies) to determine whether or not a bankruptcy
court ‘had discharged a taxpayer from an unpaid tax liability in a bankruptcy proceeding
instituted by such taxpayer.’” (quoting Washington v. Comm’r, 120 T.C. 114, 120 (2003))).
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* * *
For the reasons considered, we AFFIRM.
15