Jonathan Zuhovitzky & Esther Zuhovitzky v. Commissioner

T.C. Memo. 2018-158UNITED STATES TAX COURT
JONATHAN ZUHOVITZKY AND ESTHER ZUHOVITZKY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3489-16. Filed September 20, 2018.
Ronald J. Cohen and Melissa A. Perry, for petitioners.
Mimi M. Wong, Peter N. Scharff, Shawna A. Early, Stephen C. Huggs,
Gerard Mackey, and Lyle B. Press, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: This matter is presently before the Court on
respondent’s motion for partial summary judgment.1 The issue for decision is
1
Unless otherwise indicated, all section references are to the Internal
(continued...)
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[*2] whether petitioner Esther Zuhovitzky is subject to U.S. tax on her worldwide
income in the absence of a section 6013(g) election.
Background
The following facts are based on the parties’ pleadings, motion papers, and
their stipulation of fact, including the declarations and exhibits attached thereto.
See Rule 121(b). Petitioners are married and resided in Germany together when
they filed their petition.
During the years at issue, petitioner Jonathan Zuhovitzky was a citizen of
both Israel and the United States; petitioner Esther Zuhovitzky was a citizen of
both Israel and Austria. Esther has never resided in the United States. Petitioners
filed joint tax returns for 1992 through 2008 but never filed an election under
section 6013(g) to treat Esther as a resident of the United States during these
years.2
Respondent issued a notice of deficiency for the years at issue, in which
respondent determined the following:
1
(...continued)
Revenue Code (Code) in effect for the years at issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
2
The period for assessment of income tax has expired with respect to
petitioners’ income tax liabilities for 1992 through 1999.
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[*3] Fraud penalty
Year Deficiency sec. 6663
2000 $276,596.00 $207,447.00
2001 265,143.00 198,857.25
2002 244,427.00 183,320.25
2003 337,244.00 252,933.00
2004 299,062.00 224,296.50
2005 174,870.00 131,152.50
2006 308,746.00 231,559.50
2007 124,137.00 93,102.75
2008 137,467.00 103,100.25
These deficiencies and penalties stem from determined unreported interest and
dividend income from a UBS account in Esther’s name.
On February 9, 2018, respondent filed a motion for partial summary
judgment. Therein, respondent argues that petitioners’ filing of joint returns for
the years at issue subjected them to U.S. tax on Esther’s foreign-source income
despite petitioners’ failure to file a section 6013(g) election.
Discussion
I. Burden of Proof
The purpose of summary judgment is to expedite litigation and avoid costly,
time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90
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[*4] T.C. 678, 681 (1988). The Court may grant summary judgment “upon all or
any part of the legal issues in controversy” when there is no genuine dispute as to
any material fact and a decision may be rendered as a matter of law. Rule 121(a)
and (b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17
F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we
construe factual materials and inferences drawn from them in the light most
favorable to the nonmoving party. Sundstrand Corp. v. Commissioner, 98 T.C. at
520. However, the nonmoving parties “may not rest upon the mere allegations or
denials” of their pleadings but instead “must set forth specific facts showing that
there is a genuine dispute for trial.” Rule 121(d); see Sundstrand Corp. v.
Commissioner, 98 T.C. at 520.
II. Statutory Framework
Section 6013(a) permits married couples to file joint returns, except that “no
joint return shall be made if either the husband or wife at any time during the
taxable year is a nonresident alien”. Sec. 6013(a)(1). However, section 6013(g)
provides an exception to this exception. Under section 6013(g) a nonresident
alien spouse may elect treatment as a U.S. resident for the purposes of U.S.
Federal income tax. Sec. 6013(g)(1). After making this election the couple may
then file jointly. See sec. 6013(g). As the election treats the nonresident spouse as
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[*5] a U.S. resident for purposes of chapters 1 and 24 of the Code, it also subjects
that spouse’s foreign-source income to U.S. taxation. See secs. 1, 61; sec. 1.6013-
6(a), Income Tax Regs.
To make the section 6013(g) election, taxpayers must attach a statement to
their joint return for the first taxable year for which the election will be in effect.
Sec. 1.6013-6(a)(4), Income Tax Regs. This statement must include a declaration
that the election is being made and that the requirements of the regulation are met
for the taxable year. Id. subdiv. (ii). The statement must contain the name,
address, and taxpayer identifying number of each spouse and must be signed by
both persons making the election. Id.In this case the parties have stipulated that petitioners never made an
election under section 6013(g).
III. Respondent’s Motion for Partial Summary Judgment
Respondent argues that Esther’s worldwide income should be subject to
U.S. income tax despite petitioners’ failure to meet the technical requirements of
the section 6013(g) election. Respondent relies upon the doctrines of substantial
compliance and the duty of consistency. There are factual determinations required
by both doctrinal analyses that remain in dispute, and so we will deny
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[*6] respondent’s motion for partial summary judgment. We address each of
respondent’s arguments below.
A. Substantial Compliance
The substantial compliance doctrine is a narrow equitable doctrine that we
may apply to avoid hardship where one party establishes that the other party
intended to comply with a provision, did everything reasonably possible to comply
with the provision, but did not comply with the provision because of a failure to
meet the provision’s specific requirements. Samueli v. Commissioner, 132 T.C.
336, 345 (2009) (citing Sawyer v. County of Sonoma, 719 F.2d 1001, 1007-1008
(9th Cir. 1983); Fischer Indus., Inc v. Commissioner, 87 T.C. 116, 122 (1986),
aff’d, 843 F.2d 224 (6th Cir. 1988); Credit Life Ins. Co. v. United States, 948 F.2d
723, 726-727 (Fed. Cir. 1991); Prussner v. United States, 896 F.2d 218 , 224 (7th
Cir. 1990); and Estate of Chamberlain v. Commissioner, T.C. Memo. 1999-181,
aff’d, 9 F. App’x 713 (9th Cir. 2001)).
Under the substantial compliance doctrine, petitioners must have both
intended to make the section 6013(g) election and substantially complied with the
requirements for the election. See Samueli v. Commissioner, 132 T.C. at 345-346;
Phillips v. Commissioner, 86 T.C. 433, 438 (1986), aff’d in part, rev’d in part, 851
F.2d 1492 (D.C. Cir. 1988). Respondent contends that by filing joint returns,
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[*7] petitioners expressed their intent to make a section 6013(g) election.3
Petitioners, on the other hand, argue that they had no intent to make a section
6013(g) election. Petitioners’ intent is a matter of material fact in dispute, and
thus, the issue of substantial compliance is inappropriate for summary judgment
and requires trial.4
B. Duty of Consistency
We may also apply the equitable doctrine of “quasi-estoppel” or “the duty of
consistency.”5 LeFever v. Commissioner, 103 T.C. 525, 541 (1994), aff’d, 100
F.3d 778 (10th Cir. 1996). The “duty of consistency” is based on the theory that
3
We note that in a Chief Counsel Advisory, respondent previously stated
that taxpayers were not treated as making an election under sec. 6013(g) based on
their mere filing of joint returns. See Chief Counsel Advisory 201325013, 2013
WL 3126531 (Feb. 14, 2013).
4
Because whether petitioners intended to make the sec. 6013(g) election is
unclear, we do not have to reach the issue of petitioners’ compliance with the
election. We note, however, that this analysis would be difficult, if not
inappropriate, to make at the summary judgment stage as petitioners’ returns for
the years at issue have not been entered into the record before us.
5
Petitioners contend that their case is appealable to the U.S. Court of
Appeals for the Second Circuit. That Court of Appeals does not seem to recognize
the duty of consistency. See Bennet v. Helvering, 137 F.2d 537 (2d Cir. 1943).
However, because petitioners resided in Germany when they filed their petition, an
appeal for this case lies with the U.S. Court of Appeals for the D.C. Circuit absent
a stipulation to the contrary. See sec. 7482(b). There does not appear to be a bar
against the application of the duty of consistency in the D.C. Circuit.
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[*8] the taxpayer owes the Commissioner the duty to be consistent with his tax
treatment of items and will not be permitted to benefit from his own prior error or
omission. S. Pac. Transp. Co. v. Commissioner, 75 T.C. 497, 838-839 (1980).
The duty of consistency doctrine prevents a taxpayer from taking one position one
year and a contrary position in a later year after the limitations period has run on
the first year. Herrington v. Commissioner, 854 F.2d 755, 757 (5th Cir. 1988),
aff’g Glass v. Commissioner, 87 T.C. 1087 (1986).
A taxpayer is placed under a duty of consistency when: (1) the taxpayer has
made a representation or reported an item for tax purposes in one year, (2) the
Commissioner has acquiesced in or relied on that fact for that year, and (3) the
taxpayer desires to change the representation, previously made, in a later year after
the statute of limitations on assessments bars adjustments for the initial year.
Lefever v. Commissioner, 103 T.C. at 543. The second of these requirements is
satisfied when a taxpayer files a return that contains an inadequately disclosed
item of which the Commissioner was not otherwise aware, the Commissioner
accepts that return, and the time to assess tax expires without an audit of that
return. Estate of Letts v. Commissioner, 109 T.C. 290, 300 (1997). To avoid
meeting the second requirement, the taxpayer must provide the Commissioner
with sufficient facts to supply him with actual or constructive knowledge of a
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[*9] possible mistake in the reporting of the erroneously disclosed item. Hughes
& Luce, LLP v. Commissioner, T.C. Memo. 1994-559, aff’d, 70 F.3d 16 (5th Cir.
1995).
Respondent contends that the Court should treat petitioners as if they had
made a section 6013(g) election under the duty of consistency. Respondent argues
that petitioners represented that they were eligible to file joint returns by filing
joint returns from 1992 through 2008. Respondent further argues that because
Esther was a nonresident alien, petitioners were entitled to file joint returns only
if: (1) they made a section 6013(g) election or (2) Esther satisfied the substantial
presence test under section 7701(b)(3). Respondent reasons that, in the absence of
a section 6013(g) election, respondent still could have concluded from petitioners’
returns that Esther was a U.S. resident by way of the substantial presence test.
Respondent contends that he relied upon this representation by accepting
petitioners’ joint returns and that petitioners are now trying to change their
representation about their joint-filing eligibility after the expiration of the period
of limitations for 1992 through 1999.6
6
Respondent surmises that petitioners enjoyed favorable tax rates on
Jonathan’s worldwide income and Esther’s U.S.-source income by filing joint
returns.
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[*10] Petitioners argue that respondent’s acceptance of their joint returns cannot
constitute reliance because respondent was well aware that petitioners had not
filed a section 6013(g) election. Petitioners also contend that respondent was well
aware of the need for a section 6013(g) election in this case.
Like the substantial compliance analysis, the duty of consistency analysis
requires factual determinations. Without access to petitioners’ returns for the
years at issue, we cannot discern what facts petitioners provided to respondent
about Esther’s residency. Accordingly, we are not able to determine the nature of
petitioners’ representation or whether respondent had actual or constructive
knowledge that petitioners erroneously filed joint returns. Therefore, matters of
material fact are in dispute, and this issue is inappropriate for summary judgment.
As we cannot proceed with our analysis under either the duty of consistency or
substantial compliance, we will deny respondent’s motion for partial summary
judgment as a whole.
To reflect the foregoing,
An appropriate order will be issued.