Opinion ID: 782888
Heading Depth: 2
Heading Rank: 8

Heading: Naomi Kanter motions

Text: 139 On May 8, 2001, in the midst of the Tax Court's post-trial Rule 155 computations, attorney Karen Hawkins entered an appearance in the Tax Court on behalf of Kanter's wife, Naomi Kanter (Naomi), for the purpose of claiming that Naomi should not be jointly and severally liable for the Tax Court's determined deficiencies against Kanter. Shortly thereafter, Randall Dick, attorney of record for both Kanter and Naomi, moved to withdraw his representation of Naomi. By her new counsel, Naomi first filed a series of objections to the Commissioner's computations because they held Naomi liable for fraud penalties. The Tax Court upheld these objections. (Order, IRA, 6/20/01; App. at 0346.) Naomi then filed seven motions asking the Tax Court to find that she had not meaningfully participated in the litigation as provided in 26 U.S.C. § 6015(g)(2). In the alternative, Naomi asked that the Tax Court reopen the record in order to hear additional evidence that Naomi was an innocent spouse under 26 U.S.C. § 6015(b) and § 6015(f), and not jointly and severally liable with her husband. In response to Naomi's motion, the Commissioner stated that respondent has no objection to petitioner's first request for relief [a finding that Naomi had not meaningfully participated in the litigation]. ( See App. at 0364.) Therefore, the Commissioner felt the alternative request to reopen to hear additional evidence that Naomi was an innocent spouse was moot. 140 In its September 20, 2001 Order, the Tax Court denied Naomi's seven motions. ( See App. at 0224.) The Tax Court found that the language of § 6015(g)(2) required that any finding that a spouse had not meaningfully participated in the litigation must occur in a subsequent, separate proceeding that could properly consider the matter now before us as a prior proceeding. 26 U.S.C. § 6015(g)(2). Therefore, the Tax Court ruled, Naomi would have to wait for a separate proceeding before the Tax Court to have the res judicata effect of the present case adjudicated. Additionally, the Tax Court exercised its discretion not to reopen the record and take additional evidence on the merits of Naomi's claim that she was an innocent spouse. The Tax Court found that, even though the innocent-spouse provisions had been significantly amended in 1998, and clarified in 2000, the underlying availability of innocent-spouse relief had been unchanged since the origination of the present case in the early 1990s. The court refused to reopen a case whose trial had concluded more than five years earlier, especially when there had been no mention of innocent-spouse relief during the period since the trial. Given the possibility of later relief for Naomi in a subsequent proceeding, the Tax Court did not feel the burden on the Commissioner to reopen the present case and litigate the issue was justified.
141 This court reviews the denial of motions to reopen the Tax Court's record for abuse of discretion. Coleman v. Comm'r, 16 F.3d 821, 829 (7th Cir.1994). Whether or not § 6015(g)(2) requires a subsequent proceeding to determine whether Naomi had meaningfully participated in the matter now before us as a prior proceeding is a question of statutory interpretation that we review de novo. Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 467 (7th Cir.2000). 142 The substance of current 26 U.S.C. § 6015 was enacted as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub.L. No. 105-206, 112 Stat 685, § 3201 (IRRRA). Technical corrections to the IRRRA were enacted in 2000, leaving us with the statute as it presently appears. See Community Renewal Tax Relief Act of 2000, Pub.L. No. 106-554, 114 Stat. 2763, App. G. Section 6015 contains the so-called innocent spouse provisions that allow a spouse to avoid joint and several liability for a tax deficiency assessed against both husband and wife based on a joint tax return filing. To avoid joint and several liability, the innocent spouse must show, generally, that (1) a joint return was filed, (2) the return understated the tax owed based on the erroneous items of the other joint filer, (3) she did not know, and had no reason to know, that there was an understatement, (4) it is inequitable to hold her liable for the understatement and (5) she has applied for innocent-spouse protection no later than two years after the Commissioner begins collection activities. See 26 U.S.C. § 6015(b). Section 6015 expanded previous innocent-spouse provisions by removing the requirement that the understatement be substantial and that the return be grossly erroneous in order to receive protection. Additionally, § 6015 provided increased protection for divorced or separated spouses by holding such a spouse liable for only those items on which she would have been liable had she filed a separate return. Finally, the modifications to § 6015 provided for equitable relief for an innocent spouse. 26 U.S.C. § 6015; see also John B. Harper, Federal Tax Relief for Innocent Spouses: New Opportunities Under the IRS Restructuring and Reform Act of 1998, 61 ALA. LAW. 204 (2000). 143 Section 6015 also contemplates the possibility that a court will adjudicate a joint tax liability to completion before an innocent spouse invokes the section's protection. Under § 6015, res judicata will attach to the decision of a court if the innocent spouse participated meaningfully in [the] prior proceeding, even if the innocent-spouse issue was never presented to the adjudicating court. 26 U.S.C. § 6015(g)(2). 144 Naomi first argues that the Tax Court should have determined, under § 6015(g)(2), that she did not meaningfully participate in the Tax Court litigation and that the Tax Court's IRA decision against her husband would have had no preclusive effect with respect to her potential innocent-spouse defense to joint liability. Naomi argues that the record and the Tax Court's decision clearly show that she was not involved in the present case. See IRA, 78 T.C.M.(CCH) at 969 (Petitioner Naomi R. Kanter, Kanter's wife, was not involved in any of the activities giving rise to this litigation. However, she filed joint Federal income tax returns with Kanter for the years at issue.). She further notes that there would likely not be any delay in the course of the present case with such a determination, that there would be no need to reopen the record in order to make such a determination, and that the Commissioner expressly noticed no objection to such a determination. 145 Unfortunately for Naomi, the general principles of res judicata and the language of the statute deny her this relief at this time. Section 6015(g)(2) is only properly invoked in a subsequent judicial proceeding to avoid the preclusive effect of a prior judicial determination, and has no application during the pendency of the initial judicial proceeding whose preclusive effect she wishes to avoid. First, we start with the plain language of the statute. Lara-Ruiz v. INS, 241 F.3d 934, 940 (7th Cir.2001). As the Tax Court observed, the plain language of § 6015(g)(2), which is labeled Res judicata, limits its effect to consideration of a decision of a court in any prior proceeding, to determine if an individual participated meaningfully in such prior proceeding. To us, this language is clear: a decision from a prior proceeding means that this statute is only applicable when the original court proceeding determining tax liability has concluded. We can only conclude that this section is designed to assist innocent spouses in avoiding the preclusive effect of the other spouse's prior, completely adjudicated court case, but that the section has no application internal to the prior judicial proceeding. 146 This reading gains support from the general principle of res judicata. Res judicata prevents parties from relitigating claims that have already been adjudicated by a court to a final judgment on the merits. Of necessity, res judicata requires two proceedings: an original proceeding wherein a final judgment on the merits is rendered, and a subsequent proceeding wherein a party seeks to litigate again a claim decided in the original proceeding. See N.H. v. Me., 532 U.S. 742, 748, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (Claim preclusion [res judicata] generally refers to the effect of a prior judgment in foreclosing successive litigation of the very same claim, whether or not relitigation of the claim raises the same issues as the earlier suit.) (emphasis added); see also BLACK'S LAW DICTIONARY 1305 (6th ed.1990) (defining res judicata as the [r]ule that a final judgment rendered by a court ... constitutes an absolute bar to a subsequent action involving the same claim.) (emphasis added). Therefore, Naomi cannot have the level of her meaningful participation (or lack thereof) in the present case determined until res judicata becomes relevant in a subsequent proceeding. 147 In the alternative, Naomi argues that, if she must wait for a subsequent proceeding before § 6015(g)(2) becomes relevant, she wants to have her innocent-spouse defense to joint liability (under 26 U.S.C. § 6015(b) & (f)) adjudicated on the merits during the pendency of the present case. This would require, she argues, reopening the record and allowing her to introduce the necessary evidence to support her innocent-spouse claim, and she further claims that it was an abuse of discretion for the Tax Court not to allow her to do so. 148 Naomi seeks support in prior Tax Court decisions that, she claims, have bifurcated proceedings in order to allow an innocent spouse to have issues of joint liability tried proximately to the general issues of tax liability. (Pet. Br. at 78.) Yet in none of the cases upon which Naomi relies did the innocent spouse remain silent for the duration of the Tax Court proceedings (with over ten years elapsing from Kanter's petition to Naomi's first motion regarding this issue) and, only after the case was all but closed, raise, for the first time, an innocent-spouse defense to joint liability. In Vetrano v. Comm'r, 116 T.C. 272, 2001 WL 423012 (2001), the innocent-spouse defense was asserted in the original petition to the Tax Court. Id. at 274. Likewise, both spouses in Charlton v. Comm'r, 114 T.C. 333, 2000 WL 626760 (2000), asserted in their original petitions that they qualified for innocent-spouse relief. Id. at 338. In King v. Comm'r, 116 T.C. 198, 2001 WL 356124 (2001), the original petition was, in its entirety, an innocent-spouse defense, and the so-called not-innocent spouse was involved as an intervenor. The one consistent thread running through all of these cases relied upon by Naomi is that the request for innocent-spouse relief was squarely before the Tax Court well before the resolution of the case. Naomi, for whatever reason, never put the Tax Court on notice that she had an innocent-spouse defense to joint liability. 149 Naomi claims her silence was due, in part, to a conflict of interest with respect to the joint representation by counsel of her and her husband. This conflict of interest, she alleges, is the kind of extraordinary circumstance that makes refusing to reopen the record an abuse of discretion. What Naomi fails to argue adequately, however, is that there was an actual conflict of interest. Joint representation, by itself, is not a conflict of interest; the representation of one client must actually conflict with the representation of the other. See United States v. Fox, 613 F.2d 99, 102 (5th Cir.1980) (However, an actual, not merely hypothetical or speculative, conflict must be demonstrated before it can be said that an accused has been deprived of effective assistance of counsel.); cf. Dorchester Indus., Inc. v. Comm'r, 108 T.C. 320, 339, 1997 WL 210795 (1997) (Certainly, one spouse's claim that she (he) is an innocent spouse can present a conflict of interest to counsel trying to represent both spouses. If, indeed, the spouses do have differing interests with respect to any issue in a case, our rules provide that counsel must secure informed consent of the client, withdraw from the case, or take whatever other steps are necessary to obviate the conflict of interest.). Naomi shows no actual conflict in the joint representation of her and her husband during the present case. If Naomi could point us to an innocent-spouse defense that she had at any time during the trial, before a decision by the Tax Court, that would have relied upon arguments in conflict with Kanter's defenses, then she is correct that Tax Court Rule 24(g) may have required separate representation. See Dorchester Indus., 108 T.C. at 339. She has not yet alleged such an argument — in other words, she does not show us that she ever had a viable innocent-spouse defense that she was prevented from raising because it conflicted with Kanter's defense strategy. There does not appear to have ever been a time when she could say that the joint representation faced conflicting interests between Naomi and Kanter. Now, with the Tax Court's having entered a final decision, Naomi would have us engage in hindsight and find that she was inevitably prejudiced by the joint representation because she is now liable for deficiencies for which she is the innocent spouse. Had Kanter's arguments succeeded in the Tax Court, she would not be facing joint liability nor would she be alleging conflict of interest. We cannot, and will not, automatically conclude that her silence was helpless ignorance and not a strategic decision. 150 Naomi is not prejudiced by the Tax Court's refusal to reopen the record. The opportunity to assert innocent-spouse defenses to joint and several liability remains fully available to her for up to two years after the Commissioner's first collection activity. 26 U.S.C. § 6015(b)(1)(E). 34 She will have her asserted defense administratively reviewed by the IRS, and, if necessary and appropriate, judicially reviewed by the Tax Court. 35 151 The Tax Court's decision not to determine that Naomi had not participated meaningfully in the present litigation was proper under § 6015(g)(2), and it was not an abuse of discretion for the court to refuse to reopen the record in order to receive evidence concerning an innocent-spouse defense.