Leonard W. Harbin, and Bernice Nalls, Intervenor v. Commissioner , 137 T.C. 93 ( 2011 )

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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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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