Hanley v. Commissioner ( 1992 )


Menu:
  • USCA1 Opinion









    December 16, 1992
    [NOT FOR PUBLICATION]

    UNITED STATES COURT OF APPEALS
    FOR THE FIRST CIRCUIT
    ___________________


    No. 92-1035




    KENNETH A. HANLEY AND PHYLLIS G. HANLEY,

    Petitioner, Appellants,

    v.

    COMMISSIONER OF INTERNAL REVENUE,

    Respondent, Appellee.


    __________________

    APPEAL FROM THE UNITED STATES TAX COURT



    [Hon. Peter J. Panuthos, Special Trial Judge]
    ___________________

    ___________________

    Before

    Torruella, Cyr and Stahl,
    Circuit Judges.
    ______________

    ___________________

    Kenneth A. Hanley and Phyllis G. Hanley on brief pro se.
    _________________ _________________
    James A. Bruton, Acting Assistant Attorney General, Gary R.
    _______________ _______
    Allen, David English Carmack and Sara Ann Ketchum, Attorneys, Tax
    _____ _____________________ ________________
    Division on brief for appellee.



    __________________

    __________________


















    Per Curiam. This appeal from a decision of the Tax
    __________

    Court finds its origin in a dispute between the appellants,

    Kenneth and Phyllis Hanley, and the Internal Revenue Service,

    over the Hanleys' income tax liability for 1986. In April 1987,

    the Hanleys filed income tax returns indicating that they were

    entitled to a tax refund of $53.85 for the previous year. The

    Hanleys' calculation was based, among other things, on a $28,000

    deduction for a debt, owed to them by their daughter, which the

    Hanleys claimed had become "worthless." See 26 U.S.C. 166(a)
    ___

    (allowing deductions for business debts that become worthless

    during taxable year).

    The IRS disagreed with the Hanleys' computation. An IRS

    officer prepared a substitute return and calculated that the

    Hanleys actually owed the government $3,041 in income taxes for

    1986. In May 1987, however, the IRS assessed the Hanleys in the

    amount of only $1,824. How the IRS arrived at the latter figure,

    and under what authority it made the assessment, are questions

    left unanswered by the record.1 What does seem reasonably clear


    ____________________

    1. With few exceptions, the IRS is required by law to provide
    the taxpayer with a notice of deficiency, and to allow the
    taxpayer ninety days to petition for a redetermination of the
    deficiency in the Tax Court, before it can make an assessment and
    begin collecting the taxes due. 26 U.S.C. 6212, 6213. See
    ___
    also Robinson v. United States, 920 F.2d 1157, 1158 (3d Cir.
    ____ ________ _____________
    1990) (notice of deficiency "serves as a prerequisite to a valid
    assessment by the IRS"). The record in this case does not make
    clear whether the IRS sent the Hanleys a notice of deficiency
    before making the 1987 assessment. No such notice appears in the
    record, and the government seems to concede in its appellate
    brief that it failed to send one, but the Hanleys -- in a
    document they submitted to the Tax Court entitled "Petition for
    Reargument and Redetermination/Appeal" -- state that "[o]n May
    25, 1987 the Internal Revenue Service sent the Petitioner a















    is that on several occasions in 1988 and 1990, the IRS levied on

    the Hanleys' property to satisfy this assessment.

    In January 1990, the IRS issued a statutory notice of

    deficiency for tax year 1986 in the amount of $1,217.2 The

    Hanleys petitioned the Tax Court for a redetermination of the

    deficiency. Their amended petition made two claims: (1) that the

    IRS had violated the Hanleys' Fifth Amendment rights and various

    provisions of the Internal Revenue Code by levying on and

    confiscating their property without "just cause," and (2), that

    the $1,217 figure stated in the notice of deficiency was, in

    several respects, "substantially incorrect."

    By the time the matter came to trial in the Tax Court, the

    parties had narrowed the issues considerably. They had settled

    their differences with respect to all but one of the elements in

    the IRS's calculation of the deficiency. Therefore, they asked

    the Tax Court to determine only whether the Hanleys were entitled

    to take a deduction for the allegedly worthless debt. In

    addition, at the beginning of the trial, Mr. Hanley asked the Tax

    Court to eliminate that portion of the amended petition which

    accused the IRS of making an unlawful levy.

    The parties submitted a number of exhibits, and Mr. Hanley

    and his daughter testified at the trial, confining their


    ____________________

    Notice of Deficiency in the amount of $1,824.00. . . ."

    2. $1,217 appears to be the difference between the initial
    calculation of $3,041 in taxes owed, and the $1,824 assessed in
    1987 and collected in 1988 and 1990.

    -3-















    testimony to matters concerning the allegedly worthless debt. At

    the close of trial, the Tax Court judge announced his decision

    from the bench. He found that the Hanleys had failed to carry

    their burden of proving that the debt was worthless, and

    instructed the parties to recompute the deficiency, pursuant to

    Tax Court Rule 155, in light of this finding and the various

    adjustments made by agreement before trial.

    The government recalculated the deficiency to be $524.

    The Hanleys disputed this figure, and submitted their own

    computation which said that they were entitled to a refund of

    $849. The Tax Court rejected the Hanleys' computation, accepted

    that of the IRS, and entered a decision on June 27, 1991.

    Almost three months later, on September 23, 1991, the

    Hanleys filed a "Petition for Argument and Redetermination/Appeal

    of Court Order Dated June 27, 1991." The Tax Court identified

    the document as a motion to vacate the decision, and denied it as

    untimely. See Tax Court Rule 162 (motions to vacate or revise
    ___

    must be filed within thirty days of entry of decision). The

    Hanleys then filed a notice of appeal.3


    ____________________

    3. The government says that we should dismiss the appeal for
    lack of jurisdiction because notices of appeal from Tax Court
    decisions must be filed within ninety days of entry of the
    decision, 26 U.S.C. 7483, and the Hanleys did not file their
    notice of appeal until December 24, some 181 days after the Tax
    Court entered its decision. The government acknowledges that the
    filing of a timely motion to vacate will re-set the clock on the
    time to appeal, but says (1) that the filing of an untimely post-
    ________
    judgment motion has no effect on the time to appeal, see Denholm
    ___ _______
    & McKay Co. v. Commissioner of Internal Revenue, 132 F.2d 243,
    ____________ _________________________________
    248 (1st Cir. 1942), (2) that motions to vacate Tax Court

    -4-















    The Worthless Debt Deduction
    ____________________________

    Under 26 U.S.C. 166(a), a taxpayer may take a deduction

    for business debts that become worthless during the taxable year.

    In order to qualify for that deduction, the Hanleys bore the

    burden of proving (1) that their daughter owed them a debt, and

    (2) that the debt became worthless sometime in 1986. See Tax
    ___

    Court Rule 142(a) ("The burden of proof shall be upon the

    petitioner"); see also United States v. Clark, 358 F.2d 892, 895
    ________ _____________ _____

    (1st Cir. 1966) ("It is well settled that the burden was on the

    taxpayer to show that he was entitled to the claimed

    deductions"). The government did not seriously dispute the

    existence of the debt; the Hanleys showed that they had loaned

    their daughter, Geraldine, a total of $29,550 to start a


    ____________________

    decisions must be filed within thirty days of the decision, and
    (3) that the Hanleys' "Petition for Argument and
    Redetermination/Appeal" was a motion to vacate, filed almost
    ninety days after the Tax Court entered its decision, and
    therefore well beyond the time limit set forth in the Rule.
    The Hanleys say that the "Petition for Argument and
    Redetermination/Appeal" was not a motion to vacate, but a notice
    of appeal, albeit an informal one. They point to Fed. R. App. P.
    3(c), which counsels that "[a]n appeal shall not be dismissed for
    informality of form or title of the notice of appeal."
    Because we affirm the Tax Court decision on the merits, we
    need not determine in this case whether the "Petition for
    Argument and Redetermination/Appeal" so "clearly evinced" the
    Hanleys' intention to appeal, see Mosley v. Cozby, 813 F.2d 659,
    ___ ______ _____
    660 (5th Cir. 1987) (per curiam), as to justify construing it as
    a valid notice of appeal. It is a "familiar principle that where
    an appeal presents a difficult jurisdictional issue, yet the
    substantive merits underlying the issue are facilely resolved in
    favor of the party challenging jurisdiction, the jurisdictional
    inquiry may be avoided." Narragansett Indian Tribe v. Guilbert,
    __________________________ ________
    934 F.2d 4, 8 n.5 (1st Cir. 1991) (quoting Kotler v. American
    ______ ________
    Tobacco Co., 926 F.2d 1217, 1221 (1st Cir. 1990)). See also
    ____________ ___ ____
    Norton v. Mathews, 427 U.S. 524, 532 (1976).
    ______ _______

    -5-















    business. The government contended, and the Tax Court found,

    however, that the debt did not become worthless at any time in

    1986.

    "'Worthlessness' is a question of fact to be determined by

    the Tax Court in the first instance." Cole v. Commissioner of
    ____ _______________

    Internal Revenue, 871 F.2d 64, 66 (7th Cir. 1989) and cases cited
    ________________

    therein. We may therefore review the Tax Court's finding only

    for "clear error." See Manzoli v. Commissioner of Internal
    ___ _______ __________________________

    Revenue, 904 F.2d 101, 103 (1st Cir. 1990). A finding of fact is
    _______

    clearly erroneous when "the reviewing court on the entire

    evidence is left with the definite and firm conviction that a

    mistake has been committed." United States v. United States
    _____________ ______________

    Gypsum Co., 333 U.S. 364, 395 (1948).
    __________

    We can detect no such error here. "Proof of worthlessness

    generally requires a showing of identifiable events demonstrating

    the valuelessness of the debt and justifying abandonment of hope

    of recovery." Cole v. Commissioner of Internal Revenue, 871 F.2d
    ____ ________________________________

    at 67 (citing Estate of Mann, 731 F.2d 267, 276 (5th Cir. 1984)).
    ______________

    The Hanleys point, we take it, to the failure of Geraldine's

    business in late 1986 as such an "identifiable event." The Tax

    Court, however, had good reason to conclude that this event did

    not demonstrate that the debt had become valueless before the end
    ___

    of the year.

    First, the record contains evidence which could have led

    the Tax Court to find that, at the close of 1986, the Hanleys had



    -6-















    "repossessed," and still held, certain assets of Geraldine's

    business the sale of which might have resulted in at least

    partial repayment. In fact, Mr. Hanley did later sell these

    assets at a series of "tag sales."

    Second, and more important, Geraldine testified that she

    had promised to repay the debt whether or not her business

    failed. The failure of the business alone, therefore, could not

    have demonstrated the valuelessness of the debt. Rather, the

    Hanleys might have justifiably abandoned hope of repayment only

    if some other event had led them to believe that Geraldine was
    _____

    unable or unwilling to keep her promise. The record describes no

    such event. It contains no evidence at all concerning

    Geraldine's financial status or job prospects in late 1986. And,

    far from suggesting that Geraldine had renounced the debt, the

    evidence shows that she continued to make payments on it, perhaps

    in 1987, and certainly in 1988, 1989, and 1990.

    The Recomputed Deficiency
    _________________________

    The Tax Court's decision to accept the IRS' recomputation

    of the deficiency, and to reject the Hanleys' competing

    recomputation, was also a finding of fact which we review only

    for clear error. Again, we can find no such error. The

    government's calculation of the deficiency was, to say the least,

    plausible. "It is firmly settled . . . that, '[w]here there are

    two permissible views of the evidence, the factfinder's choice

    between them cannot be clearly erroneous.'" DesRosiers v. Moran,
    __________ _____



    -7-















    949 F.2d 15, 19 (1st Cir. 1991) (quoting Anderson v. City of
    ________ ________

    Bessemer City, 470 U.S. 564, 574 (1985)).
    _____________

    Alleged Procedural Infirmities
    ______________________________

    Finally, the Hanleys seek to revive a vaguely stated claim

    that the IRS deprived them of due process of law by violating

    several statutes regulating the procedures for assessing and

    collecting unpaid taxes. The Hanleys had set forth a similarly

    worded procedural claim in the first paragraph of the amended

    petition they submitted to the Tax Court. However, on the day of

    trial, Mr. Hanley asked the judge to "eliminate" the claim, and

    the judge did so both physically and analytically, putting an "X"

    through the first paragraph of the amended petition (and noting

    "Omit per pet[itioner]"), and making no mention of the claim in

    his decision.

    Whatever Mr. Hanley's motivation might have been for

    abridging his petition in this fashion, on the basis of the

    record this court can conclude only that the procedural claim was

    withdrawn from the Tax Court's attention before trial, and

    therefore was not presented to it for decision. That being the

    case, we have no occasion to assess the claim's merits. "[I]n

    reviewing a Tax Court decision, the duty of the court of appeals

    is to consider whether the Tax Court committed error. Plainly,

    the court of appeals lacks jurisdiction to decide an issue that

    was not the subject of the Tax Court proceeding . . . ."

    Commissioner of Internal Revenue v. McCoy, 484 U.S. 3, 6 (1987).
    ________________________________ _____



    -8-















    Affirmed.
    ________



















































    -9-