Court Opinion

ID: 4338828
Source: CourtListenerOpinion
Date Created: 2018-11-14 04:06:02.557144+00
Date Added: 2024-06-11T10:10:01.795903
License: Public Domain

LEONARD W. HARBIN, PETITIONER, AND BERNICE NALLS,
                                                INTERVENOR v. COMMISSIONER OF INTERNAL
                                                        REVENUE, RESPONDENT
                                                        Docket No. 9994–07.                Filed September 26, 2011.

                                                  P filed a petition seeking relief from joint and several
                                               liability under sec. 6015, I.R.C. R contends that P is barred,
                                               under sec. 6015(g)(2), I.R.C., from seeking relief because P
                                               was involved and participated in the prior deficiency pro-
                                               ceeding. P contends that he did not participate meaningfully
                                               in the prior deficiency proceeding. P’s attorney in the prior
                                               deficiency proceeding also represented P’s former spouse in
                                               that proceeding. P’s attorney had a conflict of interest while
                                               representing P in the prior deficiency proceeding. Held: P did
                                               not participate meaningfully in the prior deficiency pro-
                                               ceeding. P is therefore not barred under sec. 6015(g)(2), I.R.C.,
                                               from claiming relief from joint and several liability.

                                           Andrew R. Roberson and Patty C. Liu, for petitioner.
                                           Bernice Nalls, pro se.
                                           Gorica B. Djuraskovic, for respondent.
                                         KROUPA, Judge: This case arises from a petition for relief
                                      from joint and several liability under section 6015 1 after
                                      respondent issued a Final Notice of Determination Con-
                                      cerning Your Request for Relief From Joint and Several
                                      Liability under section 6015 denying petitioner relief from
                                      deficiencies for 1999 and 2000 (years at issue). Petitioner
                                      argues that he is entitled to relief under section 6015 from
                                      liability for the portions of the deficiencies for the years at
                                      issue that are attributable to his former wife’s (intervenor)
                                      gambling activities (deficiencies at issue). We must decide
                                      whether petitioner is barred from obtaining any relief from
                                      liability under section 6015(g)(2) and whether petitioner is
                                      entitled to relief from liability under section 6015(b), (c) or (f)
                                      for the deficiencies at issue. We hold he is not barred and
                                      further hold that he is entitled to relief under section
                                      6015(b).

                                        1 All section references are to the Internal Revenue Code as amended, and all Rule references

                                      are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.

                                                                                                                                      93

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                                      94                 137 UNITED STATES TAX COURT REPORTS                                         (93)

                                                                          FINDINGS OF FACT

                                         Some of the facts have been stipulated and are so found.
                                      We incorporate the stipulation of facts and the accompanying
                                      exhibits by this reference.
                                         Petitioner and intervenor were married in the 1990s and
                                      divorced in 2004. Intervenor gambled at casinos and played
                                      the lottery during their marriage. Intervenor maintained cal-
                                      endars and diaries related to her gambling activities for the
                                      years at issue. In addition, intervenor retained some of the
                                      receipts related to her gambling activities.
                                         Petitioner prepared and filed a joint Federal income tax
                                      return for petitioner and intervenor for each of the years at
                                      issue. He gathered documents for purposes of substantiating
                                      intervenor’s gambling winnings and losses that they reported
                                      on the returns. They reported all of her $45,540 of gambling
                                      winnings for 1999 and $113,445.50 for 2000. They also
                                      reported the corresponding gambling losses of $45,540 for
                                      1999 and $108,945.50 for 2000. Petitioner reviewed the gam-
                                      bling records that he understood intervenor kept, and he also
                                      discussed with intervenor her gambling winnings and losses
                                      when preparing the returns. Petitioner did not know or have
                                      reason to know at the time each return was prepared that
                                      intervenor’s gambling losses were inaccurately reported.
                                         Respondent began in 2001 an examination for the years at
                                      issue and focused primarily on whether the claimed deduc-
                                      tions for certain rental expenses and intervenor’s gambling
                                      losses were allowable. Intervenor stopped cooperating during
                                      the examination and provided the examiner with documents
                                      different from those she had provided petitioner. Respondent
                                      issued a deficiency notice to petitioner and intervenor for the
                                      years at issue.
                                         The deficiency case was docketed at docket No. 10774–04
                                      (prior deficiency case). Petitioner was over 60 years old and
                                      was retired at the time of the prior deficiency case. James E.
                                      Caldwell (Mr. Caldwell) represented both petitioner and
                                      intervenor in the prior deficiency case. He signed all of the
                                      filings with the exception of the petition and the amended
                                      petition. Respondent corresponded with, requested docu-
                                      ments from and attempted to schedule meetings with Mr.
                                      Caldwell, not petitioner.

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                                      (93)                           HARBIN v. COMMISSIONER                                          95

                                         Petitioner depended on intervenor to contest the defi-
                                      ciencies at issue. It was intervenor who engaged in the gam-
                                      bling activities that gave rise to the deficiencies at issue, and
                                      she was the one with personal knowledge about the winnings
                                      and losses associated with the gambling activities. It also
                                      was intervenor who was responsible for maintaining and pro-
                                      viding information regarding the gambling activities.
                                         The parties executed a stipulated decision that petitioner
                                      and intervenor owed deficiencies and accuracy-related pen-
                                      alties for the years at issue. Neither petitioner nor intervenor
                                      requested relief under section 6015 during the prior defi-
                                      ciency case for either year at issue. No party to the prior
                                      deficiency case filed a notice of appeal, and the decision of
                                      the Tax Court became final on June 19, 2005. See secs.
                                      7481(a)(1), 7483.
                                         While the prior deficiency case was going forward, Mr.
                                      Caldwell also represented petitioner and intervenor in their
                                      contentious divorce. Mr. Caldwell represented both petitioner
                                      and intervenor in the prior deficiency case and the divorce
                                      proceeding until the divorce was finalized shortly before trial
                                      in the prior deficiency case. Petitioner’s and intervenor’s
                                      financial interests and interests in the allocation of liability
                                      for the deficiencies at issue were adverse in the prior defi-
                                      ciency case. Mr. Caldwell’s joint representation of petitioner
                                      and intervenor in the prior deficiency case created a conflict
                                      of interest.
                                         Mr. Caldwell did not explain the advantages and risks of
                                      joint representation to petitioner. Mr. Caldwell failed to dis-
                                      close the conflict of interest to petitioner. He never asked
                                      petitioner to waive the conflict of interest, and petitioner
                                      never did. Mr. Caldwell proceeded with the joint representa-
                                      tion of petitioner and intervenor despite the conflict of
                                      interest.
                                         Respondent applied an overpayment credit for 2004 to peti-
                                      tioner’s unpaid tax liability for 1999. Petitioner contested
                                      respondent’s action. Specifically, petitioner contested that he
                                      owed the deficiencies at issue.
                                         Petitioner requested relief under section 6015 from the
                                      deficiencies at issue. Petitioner followed numerous formali-
                                      ties, including submitting a Form 8857, Request for Innocent
                                      Spouse Relief. Petitioner also submitted a Form 12510,
                                      Questionnaire for Requesting Spouse, and an 18-page fac-

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                                      96                 137 UNITED STATES TAX COURT REPORTS                                         (93)

                                      simile from intervenor. Petitioner was 70 years old and
                                      retired at the time he sought innocent spouse relief.
                                         Respondent sent a preliminary determination letter pro-
                                      posing to deny petitioner’s claim for relief under section
                                      6015(b), (c) and (f). Petitioner filed a Form 12509, Statement
                                      of Disagreement, with an attached statement explaining why
                                      he believed he was entitled to relief. He also contacted
                                      respondent’s innocent spouse call unit. Approximately 4
                                      months later, he received a letter from respondent sustaining
                                      the preliminary determination to deny relief under section
                                      6015(b), (c) or (f), yet the cover sheet referenced only relief
                                      sought under section 6015(b). Throughout all this cor-
                                      respondence between petitioner and respondent there was no
                                      mention of petitioner’s claim’s being barred by section
                                      6015(g)(2) and res judicata. The deficiency examination
                                      began in 2001. Petitioner’s petition under section 6015 was
                                      filed on May 7, 2007.
                                         Respondent issued a Final Notice of Determination Con-
                                      cerning Your Request for Relief From Joint and Several
                                      Liability denying petitioner’s request for innocent spouse
                                      relief under section 6015 for the years at issue. Petitioner
                                      had sought relief under section 6015(b), (c) and (f), yet the
                                      determination letter stated that petitioner was denied relief
                                      under section 6015(b) and did not reference subsection (c) or
                                      (f). Respondent denied petitioner relief under section 6015(b),
                                      stating petitioner knew of his wife’s gambling winnings and
                                      losses.
                                         Mr. Caldwell, petitioner’s counsel at the time, prepared the
                                      petition contesting the denial of relief under section 6015(b)
                                      on May 7, 2007. Respondent informed Mr. Caldwell of his
                                      conflict of interest resulting from his representation of both
                                      petitioner and intervenor in the prior deficiency case. Mr.
                                      Caldwell had apparently never encountered such a situation
                                      and was unaware of any ethical violations or issues. Mr.
                                      Caldwell withdrew from representing petitioner.
                                         This Court allowed petitioner leave to amend his petition
                                      to request relief under section 6015(c) and (f). Respondent
                                      had still not asserted that petitioner’s claim was barred by
                                      section 6015(g)(2) and res judicata.
                                         Respondent filed a motion for summary judgment asking
                                      that petitioner be barred by res judicata under section

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                                      (93)                           HARBIN v. COMMISSIONER                                          97

                                      6015(g)(2) because he ‘‘participated meaningfully’’ in the
                                      prior deficiency case. The Court denied respondent’s motion.
                                        Respondent’s counsel requested additional information
                                      about the gambling losses and activities but never raised res
                                      judicata as a defense until 2 years after petitioner had
                                      requested relief under section 6015.
                                        We held a trial in Chicago, Illinois, in March 2011 to
                                      decide whether petitioner is barred from relief.

                                                                                  OPINION

                                         Petitioner seeks to be relieved from joint liability regarding
                                      the deficiencies at issue. Petitioner participated in the prior
                                      deficiency case for the years at issue in that he prepared the
                                      tax returns for those years and started negotiating with
                                      respondent when the audit began. Petitioner hired an
                                      attorney who represented him as well as intervenor in the
                                      prior deficiency case and in their contentious divorce pro-
                                      ceedings at the same time while their interests were adverse.
                                         Respondent argues that res judicata bars petitioner’s claim
                                      for relief under section 6015. We disagree.
                                         We first explain how res judicata applies in joint and sev-
                                      eral liability tax cases; then we explain our holding. Res judi-
                                      cata requires that when a court of competent jurisdiction
                                      enters a final judgment on the merits of a cause of action,
                                      the parties to the action are bound by that decision as to all
                                      matters that were or could have been litigated and decided
                                      in the proceedings. Commissioner v. Sunnen, 333 U.S. 591
                                      (1948). The doctrine serves to promote judicial economy by
                                      precluding repetitious lawsuits. Gustafson v. Commissioner,
                                      97 T.C. 85, 91 (1991). Federal income taxes are determined
                                      annually with each year a separate cause of action. Res judi-
                                      cata is applied to bar subsequent proceedings involving the
                                      same tax year. Commissioner v. Sunnen, supra at 597–598.
                                         Res judicata would bar a party to a prior proceeding for
                                      the same tax year from seeking relief from joint and several
                                      liability regardless of whether the claim had been raised in
                                      the prior proceeding. Vetrano v. Commissioner, 116 T.C. 272,
                                      280 (2001). The common law doctrine of res judicata, how-
                                      ever, is limited by section 6015(g)(2). Res judicata will bar a
                                      taxpayer from requesting relief from joint and several
                                      liability only if (1) such relief was an issue in the prior pro-

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                                      98                 137 UNITED STATES TAX COURT REPORTS                                         (93)

                                      ceeding, or (2) the Court decides that the taxpayer partici-
                                      pated meaningfully in the prior proceeding. Sec. 6015(g)(2);
                                      see Deihl v. Commissioner, 134 T.C. 156, 162 (2010); Vetrano
                                      v. Commissioner, supra at 278; sec. 1.6015–1(e), Income Tax
                                      Regs. Put more simply, a taxpayer that participated mean-
                                      ingfully in a prior proceeding is barred from requesting relief
                                      under section 6015 for the same taxable year after the deci-
                                      sion of the Court has become final. See Vetrano v. Commis-
                                      sioner, supra at 278.
                                        Relief from joint and several liability was not an issue in
                                      the prior deficiency case. Accordingly, petitioner will be
                                      barred under section 6015(g)(2) from requesting relief under
                                      section 6015 only if he participated meaningfully in the prior
                                      deficiency case. We now turn our attention to this issue.
                                        The requesting spouse bears the burden of proving that he
                                      or she did not participate meaningfully in the prior pro-
                                      ceeding. See Diehl v. Commissioner, supra at 162. ‘‘Meaning-
                                      ful participation’’ has not been defined in statutes or by the
                                      courts. See id. This Court has looked to the totality of the
                                      facts and circumstances to determine whether a taxpayer has
                                      participated meaningfully in a prior proceeding. See id. We
                                      have previously indicated that exercising exclusive control
                                      over the handling of the prior proceeding, having a high level
                                      of participation in the prior proceeding (e.g., signing court
                                      documents and participating in settlement negotiations), and
                                      having the opportunity to raise a claim for relief from joint
                                      and several liability in the prior proceeding are all probative
                                      of meaningful participation under section 6015(g)(2). See id.;
                                      Thurner v. Commissioner, 121 T.C. 43, 53 (2003); Huynh v.
                                      Commissioner, T.C. Memo. 2006–180, affd. 276 Fed. Appx.
                                      634 (9th Cir. 2008).
                                        Here, intervenor, not petitioner, effectively exercised exclu-
                                      sive control over the prior deficiency case as it related to the
                                      deficiencies at issue. The deficiencies at issue stemmed from
                                      intervenor’s gambling activities. Consequently, intervenor
                                      was the one with personal knowledge of the winnings and
                                      losses from the gambling activities. This knowledge was crit-
                                      ical to contesting the deficiencies at issue. It was also inter-
                                      venor who maintained and provided all of the documentation
                                      relating to the gambling activities. Accordingly, petitioner
                                      depended on intervenor to contest the deficiencies at issue.

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                                      (93)                           HARBIN v. COMMISSIONER                                          99

                                         Petitioner did not have a high level of participation in the
                                      prior deficiency case. Petitioner was over 60 years old and
                                      was retired at the time of the prior deficiency case. He
                                      participated in the prior deficiency case through Mr.
                                      Caldwell’s representation. Mr. Caldwell represented peti-
                                      tioner from the beginning of the prior deficiency case until its
                                      conclusion. Mr. Caldwell signed all of the filings with the
                                      exception of the petition and the amended petition.
                                      Respondent communicated solely with Mr. Caldwell in the
                                      development and resolution of the controversy.
                                         Petitioner’s opportunity to raise a claim for relief from joint
                                      and several liability in the prior deficiency case was obscured
                                      and obstructed by Mr. Caldwell’s continued concurrent rep-
                                      resentation of petitioner and intervenor, whose interests
                                      were adverse. Petitioner and intervenor were also involved in
                                      a concurrently pending contentious divorce proceeding, and
                                      both of them were represented by Mr. Caldwell.
                                         Mr. Caldwell’s joint representation of petitioner and inter-
                                      venor involved an actual conflict of interest. Petitioner had
                                      a viable claim for relief from joint and several liability under
                                      section 6015(b) with respect to the deficiencies at issue, dis-
                                      cussed infra, during the prior deficiency case. Petitioner’s
                                      claim was directly adverse to the interest of intervenor, who
                                      was contesting the deficiencies at issue. 2
                                         Mr. Caldwell never obtained informed written consent
                                      waiving the conflict of interest, as required under this
                                      Court’s Rules. See Rule 24(g). Moreover, Mr. Caldwell did not
                                      disclose the conflict of interest to petitioner. Instead, he pro-
                                      ceeded with the representation despite the conflict of
                                      interest. We believe this materially limited Mr. Caldwell’s
                                      ability to represent petitioner’s interest in bringing a claim
                                      for relief from joint and several liability.
                                         Finally, petitioner was not informed of his opportunity to
                                      and consequently did not raise a claim for relief from joint
                                      and several liability in the prior deficiency case.
                                         We find on the totality of the facts and circumstances that
                                      petitioner did not participate meaningfully in the prior defi-
                                      ciency case within the meaning of section 6015(g)(2). We
                                        2 Petitioner’s claim for relief from joint and several liability under sec. 6015(b) was adverse

                                      to intervenor’s interest in contesting the deficiencies at issue because it required him to prove
                                      that the deficiencies at issue were attributable to ‘‘erroneous items’’ of intervenor. See sec.
                                      6015(b).

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                                      100                137 UNITED STATES TAX COURT REPORTS                                         (93)

                                      therefore hold that petitioner is not barred from requesting
                                      relief from joint and several liability with respect to the defi-
                                      ciencies at issue.
                                         We accept petitioner’s and respondent’s stipulation that if
                                      petitioner’s claim is not barred by section 6015(g)(2), then
                                      petitioner meets all the requirements under section
                                      6015(b)(1)(A), (B) and (E) regarding intervenor’s disallowed
                                      gambling losses. We further find for purposes of section
                                      6015(b)(1)(C) that petitioner did not know or have reason to
                                      know that there was an understatement of tax attributable
                                      to intervenor’s disallowed gambling losses at the time he
                                      signed the returns for the years at issue. The record suggests
                                      intervenor showed respondent records that she had not
                                      shown to petitioner. We find this compelling.
                                         We need not analyze all the facts and circumstances for
                                      relief under section 6015(c) and (f) because of our holding
                                      regarding petitioner’s qualification for relief under section
                                      6015(b). We note, however, that petitioner and respondent
                                      agree that petitioner meets all the threshold conditions of
                                      Rev. Proc. 2003–61, sec. 4.03, 2003–2 C.B. 296, 298.
                                         We have considered all arguments the parties made in
                                      reaching our holdings, and, to the extent not mentioned, we
                                      find them to be irrelevant or without merit.
                                         To reflect the foregoing,
                                                                               Decision will be entered for petitioner.

                                                                               f

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