Luca v. Commissioner , 80 T.C.M. 435 ( 2000 )

T.C. Memo. 2000-307
UNITED STATES TAX COURT
FRANK A. LUCA AND SHERRY L. LUCA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15059-97. Filed September 27, 2000.
Steven D. Morford, for petitioners.
Ann M. Welhaf, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: This case is before the Court on
respondent’s motion to dismiss for lack of prosecution.
Respondent determined deficiencies of $124,429 and $266,217 in
petitioners’ Federal income tax for 1993 and 1994, respectively,
and accuracy-related penalties under section 6662(a)1 of $24,886
1
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.
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and $53,243, respectively.2 The determined deficiencies are
largely attributable to respondent’s disallowance of all
deductions claimed by petitioners on Schedule C, Profit or Loss
From Business.3 Respondent disallowed the claimed deductions on
the grounds that the expenses supporting such deductions (1) were
not incurred or (2) if incurred, were not paid for ordinary and
necessary business purposes.
We shall grant respondent’s motion to dismiss for lack of
prosecution, and we shall enter a decision against petitioners
for the stated deficiencies and penalties. In light of our
action, we consider it appropriate to explain the events in this
case.
Background
On July 14, 1997, petitioners filed their petition in this
case and requested that the trial be held in Phoenix, Arizona.
In addition to being signed by counsel for petitioners, the
petition was also executed by each petitioner individually. The
address for petitioners listed therein was 8502 East Sutton
Drive, Scottsdale, Arizona.
2
Respondent later revised his determination to reflect
deficiencies in petitioners’ Federal income tax of $121,661 and
$256,860 for 1993 and 1994, respectively, and accuracy-related
penalties of $24,332 and $51,372, respectively.
3
Respondent disallowed $314,678 and $424,993 of Schedule
C, Profit or Loss From Business, deductions for taxable years
1993 and 1994, respectively.
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Trial was originally scheduled to take place during the
Court’s trial session commencing October 19, 1998. At the
calendar call for such trial session, counsel for petitioners
submitted an unopposed motion to continue. Through the motion,
counsel for petitioners represented to the Court that (1)
petitioner Frank A. Luca (Mr. Luca) had been convicted on several
counts of fraud on January 5, 1998, and at the time was serving a
160-month sentence in a Federal facility, (2) the whereabouts of
petitioner Sherry L. Luca (Ms. Luca) were unknown, and attempts
by petitioners’ counsel to contact her had been unsuccessful, and
(3) Mr. Luca’s business records had been seized by the Arizona
Attorney General’s office. The motion also indicated that there
existed 16 boxes of incomplete and unorganized copies of Mr.
Luca’s business records and further suggested that petitioners
could substantiate the disallowed deductions once Mr. Luca had an
opportunity to review and organize such copies.4 We granted the
motion to continue, and the trial was rescheduled to take place
during the Court’s trial session commencing April 19, 1999.
On January 4, 1999, petitioners’ counsel filed a motion to
withdraw from the case, citing his continued inability to contact
Ms. Luca and the lack of cooperation on the part of Mr. Luca.
4
The motion also stated that Mr. Luca had recently
undergone coronary artery bypass surgery, and that he had
required repeated hospitalization. No documentation of these
facts, however, was provided.
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The Court ordered each petitioner to respond to counsel’s motion
by February 10, 1999, and served a copy of such order on each
petitioner by certified mail. The copy of the order sent to Ms.
Luca was returned with the envelope marked “Undeliverable as
Addressed. Forwarding Order Expired”.5
Mr. Luca responded to the Court’s order by letter dated
January 21, 1999, in which he informed the Court that he was no
longer married to Ms. Luca and that he had no one to assist him
in locating the documents necessary to substantiate the disputed
deductions. Mr. Luca requested that the case be postponed until
he was released from prison and was in a position to obtain his
business records. Accordingly, we treated Mr. Luca’s response as
a motion for continuance.6
By order of February 26, 1999, the Court denied counsel’s
motion to withdraw without prejudice and granted Mr. Luca’s
motion for continuance insofar as the trial was stricken from the
April 19, 1999, trial calendar. The order further required Mr.
5
This copy was sent to the Scottsdale, Arizona, address
listed for Ms. Luca on the petition.
6
Respondent filed a response to Mr. Luca’s motion for
continuance, in which respondent stated that he had no objection
to the motion but requested the Court order Mr. Luca to (1)
“diligently undertake all steps that he can reasonably pursue,
given his incarceration, to secure the documents by March 31,
1999;” (2) keep respondent informed of his efforts; (3) provide
any documents obtained to respondent for review; and (4) provide
a status report to the Court every 4 months until the matter is
resolved.
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Luca to:
(1) diligently undertake all steps that he can
reasonably pursue, given his incarceration, to obtain
by April 30, 1999, the documents needed to try this
case or settle it; (2) keep respondent informed about
the steps he is taking to secure the documents; (3)
once the documents are secured, make every effort to
organize them and to deliver them to respondent for
review; and (4) file a written status report with the
Court on or before June 25, 1999.
Respondent was also ordered to file a written status report with
the Court by June 25, 1999.
On April 30, 1999, respondent sent Mr. Luca a letter
reminding him of his obligations under the Court’s order and
requesting that he inform respondent of his efforts to secure the
necessary documentation. Mr. Luca replied by letter dated May
10, 1999, but his reply merely referenced an attached copy of his
above-described motion for continuance. Respondent received no
further correspondence from Mr. Luca prior to the due date of the
status reports.
On June 22, 1999, respondent filed his status report in
which respondent noted his limited correspondence with Mr. Luca
and Mr. Luca’s apparent lack of success in obtaining the
necessary documentation. Respondent further requested that the
case be placed on the calendar for the next trial session and
that petitioners not be given any further continuances. Mr. Luca
failed to file the status report required of him. The Court then
ordered the case to be restored to the general docket for trial,
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and the case was rescheduled for the Court’s June 5, 2000, trial
session.
On May 31, 2000, petitioners’ counsel filed another motion
to continue. In addition to reciting information contained in
previous motions, this motion provided that new information
regarding the whereabouts of Ms. Luca had been obtained and that
an effort to contact her was underway. The motion was calendared
for hearing on June 5, 2000. Prior to such hearing, respondent
filed a motion to dismiss for lack of prosecution.
At the hearing on the respective motions, the Court was
notified that both petitioners’ counsel and respondent had
attempted to contact Ms. Luca at addresses different from the
Scottsdale, Arizona, address listed on the petition. Counsel for
petitioners had unsuccessfully attempted to contact Ms. Luca at
2101 West Warm Springs Road, Apartment 3216, Henderson, Nevada,
89014 (Warm Springs address), the address listed for her on
petitioners’ divorce decree. Respondent had unsuccessfully
attempted to contact Ms. Luca at 1457 Harmony Hills Drive,
Henderson, Nevada, 89014 (Harmony Hills address), her last known
address of record with respondent.
In addition to the addresses described above, the existence
of a third potential address for Ms. Luca was mentioned at the
hearing. Counsel for petitioners informed the Court that he had
received a phone message from Mr. Luca in which Mr. Luca claimed
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to have a new address for his former spouse, who (according to
Mr. Luca) had remarried and taken the last name of “London”.7
While Mr. Luca did not provide such address on the phone
message,8 petitioners’ counsel stated that he expected to have
such address within a week and that he would provide it to the
Court and respondent at that time.
In addition to information regarding potential addresses for
Ms. Luca, counsel for petitioners further represented to the
Court that (1) Ms. Luca at one point had possession of the 16
boxes of copied business records, (2) Mr. Luca had been informed
by his attorney in the divorce proceeding that Ms. Luca had
destroyed such copies, and (3) the records pertaining to Mr.
Luca’s business (originally seized by the Arizona Attorney
General’s office) allegedly had been turned over to Federal
prosecutors.
At the conclusion of the hearing, the Court continued the
case and took respondent’s motion to dismiss under advisement.
The Court also ordered respondent to serve the motion to dismiss
on Ms. Luca using the Warm Springs address. This attempted
service by certified mail was returned to respondent as
undeliverable with a notation of “Forwarding Order Expired”.
7
Petitioners’ counsel was unsure of whether Ms. Luca’s new
last name was spelled “London” or “Londen”.
8
Petitioners’ counsel indicated that this failure was due
to the time constraints imposed by his answering machine.
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On June 27, 2000, the Court ordered petitioners’ counsel,
Mr. Luca, and Ms. Luca each to file a response to respondent’s
motion to dismiss on or before July 18, 2000. The Court further
required that a copy of such order be served on Mr. Luca, using
his address at the Federal prison facility, and on Ms. Luca,
using both the Harmony Hills and Warm Springs addresses. Both
copies of the order sent to Ms. Luca were returned as
undeliverable.9 Neither Mr. Luca, Ms. Luca, nor petitioners’
counsel filed the required response to the motion to dismiss.
Furthermore, the Court was never provided with details of the
third potential address for Ms. Luca to which counsel for
petitioners alluded at the hearing.
Discussion
Respondent’s deficiency determinations are entitled to a
presumption of correctness, and the burden is on petitioners to
prove that the determinations are erroneous. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Similarly,
petitioners carry the burden of proving that they are not liable
for the section 6662(a) accuracy-related penalties at issue. See
Rule 142(a); Compaq Computer Corp. v. Commissioner, 113 T.C. 214,
226 (1999).
Rule 123(b) provides for dismissal of a case when a taxpayer
9
The copy sent to the Harmony Hills address was marked
“Unclaimed”, while the copy sent to the Warm Springs address was
marked “Forwarding Order Expired”.
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fails properly to prosecute his or her case, fails to comply with
the Court’s Rules or any order of the Court, or for other cause
which the Court deems sufficient. Dismissal of a case is a
sanction resting in the discretion of the trial court. See Levy
v. Commissioner, 87 T.C. 794, 803 (1986). In determining whether
dismissal under Rule 123(b) is appropriate, the Court must
balance two potentially rival considerations: “the policy in
favor of having cases heard on their merits with the policy in
favor of avoiding harassment to the defending party arising from
unjustifiable delay.” Freedson v. Commissioner, 67 T.C. 931, 935
(1977), affd. 565 F.2d 954 (5th Cir. 1978). Given the varied
circumstances faced by petitioners in this case and their
subsequent divorce, we analyze the motion to dismiss separately
with respect to each.
Motion To Dismiss as to Petitioner Sherry L. Luca
The balance of the considerations in this case inclines
against Ms. Luca. Having executed the petition which commenced
this proceeding, she was clearly aware of the existence of the
present litigation. Signing the petition, however, appears to
have been Ms. Luca’s only effort to prosecute the matter.
Although represented by counsel, Ms. Luca not only failed to
provide her counsel with information necessary for him to
prosecute the case on her behalf; she failed to correspond with
him whatsoever. She further neglected to provide her counsel
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with an updated address at which she could be reached. Based on
the record before us, we are satisfied that Ms. Luca has no
intention of prosecuting this case. We shall therefore grant
respondent’s motion to dismiss as to her.
Motion To Dismiss as to Petitioner Frank A. Luca
The balancing of considerations with respect to Mr. Luca is
admittedly more difficult. Mr. Luca has been incarcerated during
the principal part of the litigation herein, and records
necessary for him to substantiate the deductions at issue are
allegedly in the custody of prosecutorial authorities. We note,
however, that incarceration does not alleviate the taxpayer of
his or her burden of prosecuting a case before this Court. See
Gray v. Commissioner, T.C. Memo. 1989-666; Taylor v.
Commissioner, T.C. Memo. 1989-186; Amato v. Commissioner, T.C.
Memo. 1977-305.
The Court has been cognizant of Mr. Luca’s predicament, as
evidenced by the continuances that have been granted thus far.
Nonetheless, the Court has made it clear that it is not willing
to continue the case indefinitely. Rather, we have ordered Mr.
Luca to “diligently undertake all steps that he can reasonably
pursue, given his incarceration,” to obtain the documents
necessary to try or settle the case, and to report to the Court
regarding his efforts. Given that Mr. Luca has demonstrated his
ability to communicate in writing with the Court and respondent,
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at a minimum we would have expected Mr. Luca to provide us with
copies of correspondence to authorities allegedly in possession
of his business records. Instead, Mr. Luca failed to file the
required status report, and we have no indication that Mr. Luca
has undertaken any efforts to obtain the documentation necessary
to support his case. In addition, Mr. Luca failed to comply with
our order that he respond to the motion to dismiss presently
before us.
While a taxpayer has an interest in having his or her case
heard on the merits, the Commissioner has the right to obtain
judicial resolution of tax disputes within a reasonable period of
time. See Freedson v. Commissioner, supra at 935. As this case
heads into its fourth year before the Court, respondent’s
interest in obtaining a resolution of the tax liabilities at
issue becomes increasingly compelling.
In balancing the interests of Mr. Luca against those of
respondent, we find that the considerations in this case favor
respondent. Simply put, Mr. Luca has not provided the Court with
any indication that he intends to move this case forward in the
foreseeable future. The remedy of dismissal is admittedly harsh,
but we see no alternative that will adequately protect the
interests of respondent. “Although a court must explore
meaningful alternatives prior to dismissing a case, it need not
always exhaust every sanction short of dismissal before final
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action.” Edelson v. Commissioner, 829 F.2d 828, 831 (9th Cir.
1987), affg. T.C. Memo. 1986-223. Accordingly, we shall grant
respondent’s motion to dismiss as to Mr. Luca as well.
To reflect the foregoing,
An appropriate order of
dismissal and decision will be
entered.