Court Opinion

ID: 4333142
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:03:42.324402+00
Date Added: 2024-06-11T13:29:09.021378
License: Public Domain

116 T.C. No. 10

                     UNITED STATES TAX COURT

                SHIRLEY L. JOHNSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

   NJSJ ASSET MANAGEMENT TRUST, SHIRLEY L. JOHNSON, TRUSTEE,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket Nos. 6452-99, 6453-99.     Filed February 27, 2001.

          Held: Petitions by J, individually and as
     trustee, are dismissed for lack of prosecution.
     Attorney’s fees are awarded under I.R.C. sec.
     6673(a)(2) against petitioners’ counsel, who multiplied
     the proceedings unreasonably and vexatiously.

     Joe Alfred Izen, Jr., and Jane Afton Izen, for petitioners.

     Christina D. Moss, Elizabeth Girafalco Chirich, and

Marion S. Friedman, for respondent.
                                - 2 -

                               OPINION

     COHEN, Judge:    In the case at docket No. 6452-99, respondent

determined deficiencies of $12,476 and $15,260 and accuracy-

related penalties under section 6662(a) of $2,495.20 and $3,052,

with respect to Federal income taxes of petitioner Shirley L.

Johnson (Johnson) for 1996 and 1997, respectively.     The

deficiencies and penalties were attributable to adjustments

related to Johnson’s receipt of income from NJSJ Asset Management

Trust (NJSJ Trust).

     In the case at docket No. 6453-99, respondent determined

deficiencies of $14,056 and $17,593 and accuracy-related

penalties under section 6662(a) of $2,811 and $3,519 with respect

to petitioner NJSJ Trust’s tax liability for 1996 and 1997,

respectively.   Those deficiencies were attributable to

respondent’s disallowance of Schedule C, Profit or Loss From

Business, expenses, charitable contributions, and an income

distribution deduction claimed by NJSJ Trust.

     The primary issue in these consolidated cases is whether

income reported by NJSJ Trust is taxable to Johnson on

alternative grounds of lack of economic substance, assignment of

income, or grantor trust principles.     The cases are now before

the Court, however, on respondent’s motions to dismiss each of

the cases for lack of prosecution and for the Court to determine

the penalty to be awarded to the United States against
                                 - 3 -

petitioners’ counsel, Joe Alfred Izen, Jr. (Izen), under section

6673(a)(2)(A).    Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the

years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

                             Background

     The petitions in these cases were filed by Johnson,

individually and as trustee of the NJSJ Trust, on April 5, 1999.

In each case, Houston, Texas, was designated by petitioners as

the place of trial, although Johnson resided in Indiana at the

time.   The cases were first set for trial at a session set for

Houston on October 25, 1999.    Izen entered his appearances in

these cases on August 4, 1999, and October 18, 1999,

respectively.    Izen is a resident of Texas.

     On or about 75 days before the October 25, 1999, trial date,

the last day for serving formal discovery in accordance with Rule

70(a)(2), respondent served first sets of interrogatories and

requests for production of documents on petitioners.      Thirty days

later, on the last day for filing motions to compel discovery,

respondent filed motions to compel responses to the first sets of

interrogatories and requests for production of documents,

requesting sanctions in the event that petitioners failed to

comply with Court-ordered discovery.      Respondent’s motions to

compel discovery were granted.
                                - 4 -

     Although petitioners served responses to the interrogatories

and requests for production, the response to most of the

interrogatories and requests consisted of the words “Fifth

Amendment” in lieu of the requested information.     Thereafter, in

replying to respondent’s status report questioning the good faith

of petitioners’ responses, petitioners filed Motions for In

Camera Review of Discovery Responses and Entry of Order Abating

Case.   Petitioners asserted that an ongoing criminal

investigation of abusive trusts justified petitioners’ assertion

of the Fifth Amendment privilege.

     Petitioners’ motions for in camera review and for

“abatement” and respondent’s subsequent motions to impose

sanctions were heard in Houston on October 25, 1999.

Petitioners’ motions were denied.    Petitioners were ordered to

turn over to respondent certain documents, and respondent’s

motions for sanctions were denied.      The cases were continued, and

the parties were ordered to file status reports describing the

status of discovery and proposing mutually acceptable dates for

trial in Washington, D.C.   After the reports were filed, the

cases were calendared for trial in Washington, D.C., on May 3,

2000.

     As anticipated by the Court’s order setting the cases for

trial in Washington, D.C., further discovery requests were served

by respondent on petitioners.   The Court was involved in attempts
                               - 5 -

to encourage informal exchange of information and informal

discovery, through conference telephone calls and status reports

from the parties.   Petitioners failed to comply, and respondent

filed motions to compel responses.     Respondent’s motions were

granted, and petitioners were ordered to provide responses on or

before April 7, 2000.   The Court’s order included the following:

          ORDERED that in the event petitioners do not fully
     comply with the provisions of this Order, this Court
     may impose sanctions pursuant to Tax Court Rule 104,
     which may include dismissal of these cases and entry of
     a decision against petitioners.

     Petitioners failed to comply, and a Motion to Impose

Sanctions was filed by respondent.     Johnson filed a Notice of

Petitioner’s Temporary Incapacity, claiming that Johnson’s

physical condition precluded her participation in the trial set

in Washington, D.C.   The Court continued the cases for trial to

the December 4, 2000, regular trial session previously set in

Houston, but the cases remained calendared for hearing on

respondent’s Motion to Impose Sanctions on May 3, 2000, in

Washington, D.C.

     At the May 3, 2000, hearing, Izen’s associate, Jane Afton

Izen, appeared for petitioners.   Petitioners were directed to

provide further answers to interrogatories and to produce certain

documents.   Specifically, with respect to interrogatory No. 38 of

the second set of interrogatories, the following colloquy

occurred:
                         - 6 -

     THE COURT: The respondent has asked for
universities and colleges attended. Have you been able
to provide that information?

     MS. IZEN: I suppose that we could supplement that
with the names of the universities.

     THE COURT: Respondent has asked for that
information, the areas of study and degrees awarded.
Have you provided that information?

     MS. IZEN: I don’t see the specific names of the
university. It says she had two years of college, and
it does say colleges attended. So we could get the
name of that.

     THE COURT: I would direct that within two weeks
you provide that supplemental information to
respondent.

     Are there other specific aspects of Interrogatory
No. 38 that you feel have not been satisfied,
Ms. Chirich?

     MS. CHIRICH: No. We were just curious about
whether she had training in accounting. She either
does or doesn’t. It’s not specific enough on her
resume to let us know what kind of training she has had
to do the job she is doing for this company that we
think is selling the trusts. We don’t know whether she
is a sales person in that company. That is why we are
looking to see what her duties are. Or whether she
merely just types letters and envelopes or whether she
actually promotes and gives seminars herself on these
trusts.

     MS. IZEN: Your Honor, I respectfully submit that
that really doesn’t get to the basics of this lady’s
tax stuff. The types of questions that they are asking
appear to be for other reasons. What they did was took
her information and they disallowed all of her business
expenses. The issue of whether or not she should have
gone into a trust is totally separate from
substantiating her business deductions. The way they
phrased that, that they want to know whether she had
accounting experience, doesn’t have anything to do with
the issue.
                                 - 7 -

          THE COURT: I cannot say that it’s not likely to
     lead to discovery of admissible evidence, Ms. Izen. So
     I do not view the interrogatory as seeking irrelevant
     information. The information, it seems to me, ought to
     be readily at her disposal. I would direct that you
     provide respondent a complete answer to Interrogatory
     No. 38, including areas of study and universities and
     colleges attended, within two weeks.

          MS. IZEN:   We’ll do that, Your Honor.

     In an Order dated May 30, 2000, the Court stated, among

other things:

          At the hearing on May 3, 2000, the Court
     questioned petitioners’ good faith in complying with
     the Court’s Orders. Those doubts are reinforced by
     petitioners’ May 22, 2000, motion [requesting a 14-day
     extension of the May 17, 2000, due date]. The
     allegedly heavy workload of petitioners’ counsel is not
     a valid ground for failing to comply with the Court’s
     Orders. If petitioners’ counsel is too busy to
     prosecute * * * [these cases] properly, then
     petitioners’ counsel should consider withdrawing. Upon
     due consideration, it is

          ORDERED that petitioners’ motion for enlargement
     of time within which to respond to respondent’s second
     set of interrogatories is granted, in that petitioners
     are ordered no later than June 1, 2000, to serve on
     respondent’s counsel, and provide to the Court, full,
     complete, and responsive answers, made under oath and
     in good faith, to interrogatories numbered 37, 38, and
     39, as set forth in respondent’s second interrogatories
     to petitioners.

          If petitioners fail to comply with this Order, the
     Court shall impose sanctions, which may include,
     without limitation, sanctions under I.R.C. section
     6673(a) and Tax Court Rule 202, and precluding
     petitioners from introducing evidence with regard to
     respondent’s determination that petitioners are liable
     for additions to tax under I.R.C. section 6662(a).

Despite further extensions and delays, petitioners have never

answered interrogatory No. 38.
                              - 8 -

     In an Order and Order to Show Cause dated July 20, 2000, the

Court ordered that respondent supplement his Motion to Impose

Sanctions with a detailed statement of any responses not yet

provided by petitioners and the manner in which petitioners’

failure to provide such responses prejudices respondent in

preparation of these cases for trial.   The Court further ordered

that petitioners show cause in writing why sanctions should not

be imposed upon petitioners in accordance with the Court’s Order

dated May 30, 2000.

     In respondent’s Supplement to Motion to Impose Sanctions,

respondent contended that petitioners’ failure to provide a

response to interrogatory No. 38 interferes with respondent’s

preparation of the negligence penalties issues in these cases.

In response to the order to show cause, petitioners persisted in

the unpersuasive contention that Johnson’s health problems

prevented compliance with the Court’s orders.   Petitioners’

counsel, Izen, asserted that he inadvertently failed to comply

with the order with respect to interrogatory No. 38.

     By Order dated August 21, 2000, the Court’s Order and Order

to Show Cause was made absolute.   Respondent’s motion for

sanctions as supplemented was granted in that petitioners were

precluded at trial from introducing evidence with regard to

penalties under section 6662(a).   The Court Order provided:

     as a further sanction, because it appears to the Court
     that petitioners’ counsel, Joe Alfred Izen, Jr., has
                               - 9 -

     multiplied the proceedings in these cases unreasonably
     and vexatiously, Joe Alfred Izen, Jr., shall pay
     personally the excess costs, expenses, and attorney’s
     fees reasonably incurred because of his conduct in
     these cases. * * *

The Order also provided that, at the time of trial in Houston on

December 4, 2000, respondent would present evidence as to the

excess costs, expenses, and attorney’s fees reasonably incurred

because of the conduct of Izen by which he multiplied the

proceedings unreasonably and vexatiously.

     Although, in seeking various delays throughout these cases,

Izen has represented that he had trial commitments in Seattle,

Washington; San Diego, California; Portland, Oregon; Denver,

Colorado; Cleveland, Ohio; Salt Lake City, Utah; Chicago,

Illinois; Phoenix, Arizona; and various places in Texas, and

notwithstanding Johnson’s claims that she could not appear at

trial because of illness, Johnson never sought to change the

place of trial to Indianapolis, closer to her home in Indiana.

Instead, on or about November 17, 2000, Izen sent to the Court

and to respondent a motion for leave to take Johnson’s deposition

“under Rule 75”.   The motion was returned unfiled because it was

untimely and improper under the Court’s Rules.   (There was no

attempt to comply with Rule 81, dealing with depositions to

perpetuate testimony.)   Respondent served a notice of objection

on Johnson, pointing out noncompliance with the Tax Court Rules

and inadequate notice to respondent.
                              - 10 -

     Nonetheless, Izen proceeded to take Johnson’s ex parte

statement in the form of a deposition and sought to use it as

evidence in these cases.   Petitioners’ trial memorandum, due

November 17, 2000, and mailed November 27, 2000, with a false

certificate of service representing that it was mailed on

November 22, 2000, indicated that Johnson would testify “through

deposition testimony” concerning the NJSJ Trust, discovery, ill

health, and an ongoing criminal investigation.   (The dates are

mentioned because they are consistent with Izen’s chronic

delinquency in filings and misrepresentations in these cases and

in the other cases mentioned below.)   In attempting to justify

his noticing of a deposition of his own client, a party, contrary

to the Rules of the Court, Izen claims that the pendency of a

sanctions order against him makes Johnson “not a party” to a

“proceeding within a proceeding”.   The statement that he secured

from Johnson dealt solely with her health, her efforts to secure

certain bank checks in response to discovery requests, her

assertion of the Fifth Amendment privilege, and her desire to

withdraw the petition and instruction to Izen not to pursue the

case.   No testimony was attempted with respect to the merits of

the within cases.

     At the time of trial, petitioners were not ready and did not

intend to proceed.   Izen objected to the attorney’s fees claimed

by respondent to the extent that they included fees incurred in
                                - 11 -

relation to the rejected Fifth Amendment claims by Johnson.     He

again admitted fault in failing to answer interrogatory No. 38.

He stated:

     I’d like it established how much of this work has to do
     with the Fifth Amendment and other impermissible
     concerns, and how much of it has to do with the
     Washington, D.C., hearing. If I pay for the
     Washington, D.C., hearing, that’s 4-, $5,000. If I’m
     at fault for that, I’ll pay that. I mean, that’s the
     position that I’m taking.

                *     *   *     *    *     *   *

     * * * I think I have made a mistake, based on what you
     have said, and I always believe somebody should own up
     and pay for their mistakes, whatever they are, whether
     it’s paying interest or whatever.

Although respondent’s counsel conceded amounts of fees incurred

on dates prior to October 25, 1999, the parties were unable to

reach agreement as to the amount of fees to be ordered.

                              Discussion

     Petitioners never fully complied with the outstanding

discovery orders, were not prepared for trial, and Johnson

indicated through Izen that she wanted to withdraw her petition.

The petitions cannot be “withdrawn” without decisions against

petitioners.   See sec. 7459(d); Estate of Ming v. Commissioner,

62 T.C. 519 (1974).   Dismissal for failure to prosecute, as

sought by respondent’s motions, is appropriate.    See Rules

104(c)(3), 123(b), 149.   Respondent’s motion with respect to

Johnson seeks determination of deficiencies in amounts that have

been adjusted downward from the notice of deficiency due to
                              - 12 -

concessions by respondent.   Respondent has agreed that, inasmuch

as the deficiencies determined against the NJSJ Trust are in the

alternative as a means of protecting respondent against whipsaw,

entry of a decision that there are no deficiencies against the

NJSJ Trust may await either an appeal by Johnson or finality of

the decision in Johnson’s case without an appeal.

     We have no doubt that dismissal of the petitions and entry

of decisions against petitioners is not an unjust result in these

cases.   The record supports the inference that petitioners never

intended to try these cases on the merits.   Petitioners have

brought into the record indications of criminal investigations of

trusts similar to the one involved here, and petitioners’ counsel

has, in effect, represented that these cases are

indistinguishable from Muhich v. Commissioner, T.C. Memo. 1999-

192, affd. ___ F.3d ___ (7th Cir., Jan. 25, 2001).   In that case,

the Court held, among other things, that certain trusts should be

disregarded for tax purposes because they lacked economic

substance and that the taxpayers were liable for accuracy-related

penalties under section 6662(a).   This Court declined to impose a

penalty under section 6673(a), stating:

          We decline to impose a penalty under section 6673.
     Although the Muhichs’ position that the trusts had
     economic substance was frivolous, we have rejected
     respondent’s position [that] the “consulting fees” were
     dividends, holding instead the “fees” were
     compensation. The Muhichs’ position in this proceeding
     was somewhat meritorious to the extent they were
     defending against respondent’s determination of
                                - 13 -

     constructive dividends. We admonish the Muhichs that
     we shall not be inclined to exercise our discretion
     under section 6673 so favorably in the future if
     presented with similar arguments by them, and we may
     impose a penalty.

Also in the record in these cases is a transcript and a copy of a

stipulated decision in Crockett v. Commissioner, docket No.

20759-97, which also involved a sham or abusive trust.      In that

case, the decision entered pursuant to stipulation of the parties

included a penalty under section 6673 against Izen’s client.

     In these cases, in view of Izen’s express admissions that he

was responsible for the failure to comply with discovery orders,

we believe that the penalty should be imposed on him.      Although

he conceded at the time of hearing that he was wrong and that he

would pay, he has argued in written documents that “mere

negligence” was not enough to justify a sanction.      There may be

some question as to whether, before we impose costs, we must find

that Izen acted in bad faith.    See The Nis Family Trust v.

Commissioner, 115 T.C. 523 (2000).       We have no trouble finding

that, in these cases, he did.

     Izen has a long history of involvement with sham trusts,

both as counsel of record and as counsel rendering an opinion on

which taxpayers unfortunately relied.      See, e.g., United States

v. Buttorff, 761 F.2d 1056 (5th Cir. 1985), affg. 563 F. Supp.

450 (N.D. Tex. 1983); Watson v. Commissioner, 690 F.2d 429 (5th

Cir. 1982); Lund v. Commissioner, T.C. Memo. 2000-334; Para
                             - 14 -

Techs. Trust v. Commissioner, T.C. Memo. 1994-366, affd. without

published opinion sub nom. Anderson v. Commissioner, 106 F.3d 406

(9th Cir. 1997); Ripley v. Commissioner, T.C. Memo. 1987-114.    In

Trenerry v. Commissioner, T.C. Memo. 1994-500, the taxpayer

appeared pro se in a case in which the Court held that a trust

was to be disregarded for tax purposes.   The Court stated:

          Petitioner relies on two legal opinion letters of
     Joe Alfred Izen, Jr. (hereinafter sometimes referred to
     as Izen) which she had obtained from Century. Izen’s
     opinion letters, addressed to Century, dated
     September 25, 1986, discuss the legal status and tax
     status of contractual trust companies. Although Izen’s
     opinion letters are dated almost 4 years after our
     published opinion in Zmuda [v. Commissioner, 79 T.C.
     714 (1982), affd. 731 F.2d 1417 (9th Cir. 1984)] (and
     more than 2 years after the published Court of Appeals
     affirmance), neither of his opinion letters refers to
     Zmuda. We note the August 15, 1984, changes to the
     Trenerry Trust, in which petitioner (as grantor) warned
     herself (as trustee) “to beware of attorneys and to
     avoid them whenever at all possible.” Perhaps this was
     one instance in which petitioner should have followed
     her own advice. The Izen opinion letters do not help
     petitioner on the evidence in the instant case. [Fn.
     ref. omitted.]

See also Para Techs. Trust v. Commissioner, T.C. Memo. 1992-575.

     Cases in which Izen was counsel also reflect chronic failure

to comply with discovery orders or Court Rules.   In Oelze v.

Commissioner, 723 F.2d 1162 (5th Cir. 1983), the Court of Appeals

affirmed dismissal of petitions where, in response to the Tax

Court’s repeated orders to comply with the Commissioner’s

discovery requests and admonishments that failure to comply would
                               - 15 -

result in dismissal, the taxpayer only partially complied with

the orders.   The Court of Appeals stated:

     Numerous delays caused by the Oelzes, including their
     repeated failure to provide the requested information
     based on their unsupported fifth amendment claim,
     required the tax court to issue at different times
     three more discovery orders. None of these ever
     resulted in the Commissioner’s obtaining the
     information he needed. [Id. at 1163.]

In response to a petition for rehearing filed by Izen in Oelze,

the Court of Appeals stated:

     The taxpayer’s continued failure to cooperate with the
     Commissioner, the necessity for four orders to comply
     with the Commissioner’s discovery requests, the
     taxpayer’s continuous reliance on a baseless fifth
     amendment claim, and the taxpayer’s last-minute attempt
     to comply with the discovery order all demonstrate that
     Oelze acted wilfully. Additionally, the Tax Court
     issued four separate discovery orders, some explicitly
     warning the taxpayer that failure to comply would
     result in dismissal of the case. Though the taxpayer
     finally did partially comply with one of the orders, he
     did so only after repeated and total failure to supply
     the Commissioner with the information he requested.
     Such partial compliance under these circumstances
     cannot serve to exonerate the taxpayer from willful
     failure to comply with the orders of the Court. [Oelze
     v. Commissioner, 726 F.2d 165, 166 (5th Cir. 1983).]

Similarly, see Watson v. Commissioner, supra; Ripley v.

Commissioner, supra.

     Izen’s persistence in unproductive tactics sometimes has the

unfortunate effect of reducing the quality of practice before

this Court on both sides.   In Tumlinson v. Commissioner, T.C.

Memo. 1983-92, the Court faced various procedural questions as a
                              - 16 -

result of the taxpayers’ failure to respond to requests for

admissions or to comply with other Rules.    The Court stated:

          We have not found this case to be particularly
     satisfying. The record before us is sketchy. The case
     appears to revolve around a family trust but we have
     been told very little about it. In addition, the
     various returns filed by petitioners are confusing
     because of the inconsistent treatment of the items
     reported therein. All of this is compounded by the
     seemingly contradictory positions taken by petitioners
     before this Court and by respondent’s failure to be
     more precise in his requests for admissions. Be this
     as it may, we have tried our best to reach a just
     result.

See also Ripley v. Commissioner, T.C. Memo. 1985-555.     Izen’s

tactics demean the process and those involved in it and

accomplish nothing.   In the language of section 6673(a)(2), it

appears to the Court that Izen “has multiplied the proceedings in

* * * [these cases] unreasonably and vexatiously”.    He has

persisted in these tactics despite warnings and sanctions imposed

on his clients in similar cases.   He has pursued claims that have

been rejected so frequently that they are “entirely without

colorable pretext or basis and are taken for reasons of

harassment or delay or for other improper purposes.”    The Nis

Family Trust v. Commissioner, supra at 548; see Harper v.

Commissioner, 99 T.C. 533, 546-549 (1992).    An award under

section 6673 is fully justified.

     Although the Court rejected Johnson’s Fifth Amendment

claims, we exclude from the award the fees that are attributable

to those and to the first round of discovery motions.    Our
                              - 17 -

calculations begin with March 15, 2000, when respondent’s counsel

was required to draft motions to compel responses to the second

sets of interrogatories and requests for production of documents,

and after the Court had engaged in several attempts to secure

Johnson’s cooperation in informal discovery.    Izen has conceded

that he would pay the expenses relating to respondent’s counsel’s

trip to Washington, D.C., for the sanctions hearing in May 2000.

He has not challenged respondent’s submitted time records nor the

$150 hourly rate requested.   In addition, respondent should be

compensated for time spent subsequent to the May 3, 2000, hearing

as a consequence of petitioners’ continued failure to comply with

the Court’s order issued at the conclusion of that hearing.       In

that regard, the records reflect a total of 31.5 hours by

Christina D. Moss and 25.75 hours by Elizabeth Girafalco Chirich.

We believe that the fees requested for these services are

reasonable.   The amount to be awarded is, therefore, a total of

57.25 hours at $150 per hour, or $8,587.50, plus $807.06 in

travel expenses for respondent’s counsels’ trip to Washington.

     To reflect the foregoing,

                                      Appropriate orders of

                                 dismissal and decision will be

                                 entered.