Hanley v. Commissioner
U.S. Court of Appeals for the First Circuit
Hanley v. Commissioner
Opinion
USCA1 Opinion
December 16, 1992
[NOT FOR PUBLICATION]
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 92-1035
KENNETH A. HANLEY AND PHYLLIS G. HANLEY,
Petitioner, Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
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APPEAL FROM THE UNITED STATES TAX COURT
[Hon. Peter J. Panuthos, Special Trial Judge]
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Before
Torruella, Cyr and Stahl,
Circuit Judges.
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Kenneth A. Hanley and Phyllis G. Hanley on brief pro se.
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James A. Bruton, Acting Assistant Attorney General, Gary R.
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Allen, David English Carmack and Sara Ann Ketchum, Attorneys, Tax
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Division on brief for appellee.
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Per Curiam. This appeal from a decision of the Tax
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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)
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(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
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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
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also Robinson v. United States, 920 F.2d 1157, 1158 (3d Cir.
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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
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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.
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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
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must be filed within thirty days of entry of decision). The
Hanleys then filed a notice of appeal.3
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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-
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judgment motion has no effect on the time to appeal, see Denholm
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& McKay Co. v. Commissioner of Internal Revenue, 132 F.2d 243,
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248 (1st Cir. 1942), (2) that motions to vacate Tax Court
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The Worthless Debt Deduction
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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
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Court Rule 142(a) ("The burden of proof shall be upon the
petitioner"); see also United States v. Clark, 358 F.2d 892, 895
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(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
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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,
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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,
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934 F.2d 4, 8 n.5 (1st Cir. 1991) (quoting Kotler v. American
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Tobacco Co., 926 F.2d 1217, 1221 (1st Cir. 1990)). See also
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Norton v. Mathews, 427 U.S. 524, 532 (1976).
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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
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Internal Revenue, 871 F.2d 64, 66 (7th Cir. 1989) and cases cited
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therein. We may therefore review the Tax Court's finding only
for "clear error." See Manzoli v. Commissioner of Internal
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Revenue, 904 F.2d 101, 103 (1st Cir. 1990). A finding of fact is
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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
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Gypsum Co., 333 U.S. 364, 395 (1948).
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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
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at 67 (citing Estate of Mann, 731 F.2d 267, 276 (5th Cir. 1984)).
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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
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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
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"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
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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
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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,
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949 F.2d 15, 19 (1st Cir. 1991) (quoting Anderson v. City of
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Bessemer City, 470 U.S. 564, 574 (1985)).
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Alleged Procedural Infirmities
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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).
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Affirmed.
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Reference
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