Opinion ID: 174551
Heading Depth: 3
Heading Rank: 3

Heading: Calculation of the Tax Court's Remedy

Text: Taxpayers also argue that the Tax Court's calculation of the 63.37 percent figure did not take into account the full benefits offered to Thompson. Specifically, the Hongsermeiers argue that the Court should order a 90.1 percent reduction of their deficiencies, and the Adairs, Owens, and Youngs argue that the Court should order a 98 percent reduction of their deficiencies. The Hongsermeiers base their calculation of the terms of the Thompson settlement on a letter from Sims to Thompson's attorney, dated May 29, 1992, estimating that the taxes Thompson owed, plus statutory additions and interest, would be approximately $302,396.12. The Hongsermeiers used the numerator of $30,000, representing the total deficiencies paid by Thompson over the 1979-1981 period, and divided that number by a denominator of $302,396.12 to produce the 90.1 percent figure. It is undisputed that the total tax deficiencies asserted against Thompson for the years 1979-1981 was $79,294, and that Thompson's final settlement reduced those deficiencies to $30,000. The alternative denominator offered by the Hongsermeiers in this appeal is based on their vague contention that various additions, interest, and penalties should be included in the denominator of the Thompson settlement fraction. As discussed above, the Tax Court did add two figures to the denominator based on additional benefits received by Thompson: (a) $980 to represent the unpaid deficiency in Thompson's 1983 tax, and (b) $1,624 to represent Thompson's tax savings due to the Commissioner's allowance of an overstated personal interest deduction for 1987. The Tax Court therefore determined that the appropriate denominator was $81,898. The $302,396.12 figure asserted by the Hongsermeiers does not represent the reduction in Thompson's actual liability in comparison to the amount they were able to pay in settlement because it does not take into account advance payments that Thompson made in 1986 and 1987 of $121,770 in both tax and interest owed. Thompson did not save amounts he actually paid. The Tax Court did not relieve the taxpayers of interest liability because, as discussed below, Thompson paid his interest in full. See infra Part II, E. The Hongsermeiers also separately assert that the Tax Court should have increased the denominator of the Thompson settlement fraction by $4,934.32 to include the late filing addition in Thompson's statutory notice of deficiency for 1981, which Thompson would have been required to pay had he not settled his tax liabilities. Rather than give a credit or add this figure to the denominator of the Thompson settlement fraction, the Tax Court instead chose to eliminate all penalties related to non-Kersting additions for all affected taxpayers. Noting that taxpayers' proposed application of non-Kersting penalties and additions was specific to individual taxpayers, unlike the Kersting-related deficiencies and additions for which all affected taxpayers are liable, the Tax Court found that it was appropriate to limit the benefit of relief from non-Kersting additions to those affected taxpayers who, like Thompson, were subject to non-Kersting additions. Dixon, 91 T.C.M. (CCH) 1086, 2006 WL 1157520, at . Certain taxpayers, including the Hongsermeiers, did not have any additional non-Kersting-related penalties asserted against them. The Tax Court's decision to eliminate all non-Kersting penalties was well within the Tax Court's mandated discretion, however, for the Tax Court was not required to fashion individual remedies for taxpayers based on their lack of non-Kersting-related additions. The Tax Court noted in its decision that memories have faded and records have been lost or destroyed during the long delay in resolution of the Kersting issues, making it difficult to assess the status of each taxpayers' non-Kersting related issues and thus inherently unfair to impose upon those petitioners the burden of proving those deficiencies to be erroneous. Id. at 47. Furthermore, the court stated that the non-Kersting issues are relatively minor when compared to the Kersting-related deductions that are at issue in all these cases. Id. The court therefore concluded that the appropriate remedy was to eliminate all non-Kersting related penalties, additions, and deficiencies for all affected taxpayers. That determination was not an abuse of discretion. The Adairs, Owens, and Youngs argue that the Tax Court did not take into account tax benefits Thompson received in tax years 1982 and 1983 in its determination of the denominator in the Thompson settlement fraction, which, by their calculations, allowed Thompson to pay less than two percent of his taxes. This argument is premised on the incorrect assumption that the Commissioner's treatment of Thompson's 1982 tax return was part of the Thompson settlement agreement, as well as on an incorrect calculation of Thompson's savings for tax year 1983. The argument is based on an August 3, 1989 letter sent from Thompson's attorney, DeCastro, to McWade, which states: We have agreed that the total taxes due for all the open years are $15,000 for 1980 and $15,000 for 1981. The Tax Court determined, however, that the statutory period of limitations for 1982 had expired in 1986, and therefore Thompson's 1982 taxable year was not an open year to which the letter could have applied. Thompson filed his 1982 tax return on May 6, 1983, and on this tax return he claimed Kersting-related tax deductions which reduced his adjusted gross income of $99,362 to $4,336 for tax purposes. No action was taken concerning this tax return, and the statute of limitations under I.R.C. § 6501 expired in May 1986. The settlement which this court held to be a fraud on the court was negotiated on behalf of Thompson by DeCastro, and Thompson did not retain DeCastro as his attorney until November 1986. Therefore, the Tax Court reasonably determined that the Commissioner's failure to act on the 1982 tax return could not have been part of the Thompson settlement agreement between DeCastro and McWade. The Adairs, Owens, and Youngs also assert that Thompson's 1982 tax year should be considered an open year because fraud on the part of Thompson rendered the statute of limitations inapplicable pursuant to I.R.C. § 6501(c)(1). Fraud implies bad faith, intentional wrongdoing and a sinister motive. Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958) (quotation marks omitted). The Tax Court did not find, based on its evaluation of the credibility of Thompson during the evidentiary hearing mandated by DuFresne, that Thompson specifically intended to evade a tax known to be owing. There is no evidence that the Tax Court clearly erred in finding that Thompson's 1982 tax year was not an open year to which DeCastro's 1989 letter could have applied. Consequently, the Tax Court's determination that any benefits Thompson received from that year should not be included in the Thompson settlement fraction was not an abuse of the Tax Court's discretion. The Adairs, Owens, and Youngs also argue that the Tax Court erred in failing to include in its Thompson settlement calculation savings in the amount of $19,717.99 as a benefit for tax year 1983. The Tax Court agreed with the taxpayers that the treatment of tax year 1983 should be included within the benefits obtained by Thompson as part of the settlement. [11] It found, however, that Thompson received a benefit from the settlement of only $980 for tax year 1983. The argument that Thompson received tax savings of $19,717.99 instead of $980 for tax year 1983 erroneously assumes that Thompson had sufficient income for that year to make complete use of his Kersting deductions. He did not. The tax deficiency which he avoided based on the disallowance of $67,620 of Kersting deductions totaled only $980. That is all he actually saved. It was not an abuse of discretion for the Tax Court to use that amount in calculating the benefit obtained by Thompson from the settlement. The Adairs, Owens, and Youngs argue that the IRS failed to preserve critical documents, including Thompson's 1982 tax return and the administrative files for tax years 1982 and 1983, which would prove that the IRS granted Thompson audit forbearance for other open tax years not before the Tax Court, allowed all of Thompson's Kersting deductions, and settled the validity of the Kersting deductions, in favor of Thompson, for all open tax years as part of the Thompson settlement. Particularly at a time when tax filings were made on paper rather than electronically, the IRS could not and did not keep all records for all years. There is no evidence that the IRS destroyed documents to cover up its attorneys' misconduct or to hinder the calculation of the benefits obtained by Thompson. Nor have we been given any reason to believe that the destroyed records would prove any of the taxpayers' assertions. The Tax Court did not abuse its discretion in relying on the materials available to determine the Thompson settlement fraction.