Blodgett v. C.I.R.

• Decision Date: 12 January 2005
• Docket Number: No. 03-3917.,03-3917.
• Citation: 394 F.3d 1030
• Parties: Diane S. BLODGETT, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

394 F.3d 1030

Diane S. BLODGETT, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 03-3917.

United States Court of Appeals, Eighth Circuit.

Submitted: October 22, 2004.

Filed: January 12, 2005.

COPYRIGHT MATERIAL OMITTED

Counsel who presented argument on behalf of the appellant was Denial W. Schermer of Minneapolis, MN.

Counsel who presented argument on behalf of the appellee was Samuel A. Lambert, Tax Div., Dept. of Justice, Washington, D.C. Kenneth L. Greene of the Tax Div., DOJ appeared on the brief.

Before BYE, LAY, and GRUENDER, Circuit Judges.

BYE, Circuit Judge.

Diane Blodgett, a special education teacher, appeals from a tax court determination in favor of the Internal Revenue Service. We affirm.

I

We adopt the facts as set forth in the tax court's opinion, T.C.M.2003-212 (2003), and simply restate some critical facts so as to make understandable the legal issues presented herein. In the 1970's, Ms. Blodgett's ex-husband Michael Blodgett founded T.G. Morgan, Inc., a business engaged in the buying and selling of rare coins. The enterprise began as a sole proprietorship, later incorporated, utilizing a subchapter S election designation for income tax purposes, in 1985. As of 1992, Mr. and Ms. Blodgett each owned 27.5 percent of the business. Their three children owned 15 percent each.

Mr. Blodgett operated the business similar to a ponzi scheme. By all accounts, it was successful and enabled the Blodgetts to lead a lavish lifestyle. As examples, the Blodgetts, personally or through their business entity, held rare coins and historical documents with a collective value of more than $20 million, a condominium and docking space in Key Largo, Florida, purchased for $583,379, a Mercedes 560 SL, a 23-foot Cutty Cabin Sunrunner boat and a Simbari oil painting worth approximately $85,000.

Eventually, the long arm of the law caught up with Mr. Blodgett as he was charged with and convicted of several counts of fraud. His wife was not charged with any criminal wrongdoing. In addition to the criminal troubles, the Federal Trade Commission (FTC) initiated a civil action against T.G. Morgan and Mr. Blodgett, alleging deceptive trade practices and seeking permanent injunctive relief and consumer redress. T.G. Morgan, Mr. Blodgett and the FTC reached a settlement which was memorialized in a consent order signed March 4, 1992. Diane Blodgett signed the consent order as a nonparty spouse.

The consent order provided for the creation of a "settlement estate" and a "litigation estate," to include assets transferred from T.G. Morgan and the Blodgetts. A receiver was appointed to liquidate the assets in both estates and disburse the money. The litigation estate was used to pay litigation expenses for the defense of actual or reasonably anticipated governmental enforcement actions against the Blodgetts. The settlement estate was used to pay claims of defrauded customers of the business. The litigation estate was established with $300,000, funded solely by virtue of the liquidation of a so-called Coin Fund. The remaining proceeds from the liquidation of the Coin Fund were transferred to the settlement estate. The settlement estate also included the Florida property and the Simbari painting, among other assets.

After the onset of the FTC case but prior to the consent order, creditors of the business filed an involuntary bankruptcy petition against the business. On August 21, 1992, the district court ordered the receiver in the FTC case to turn over all assets held in the settlement estate to the bankruptcy trustee (turnover order). The turnover order specified those assets determined in the bankruptcy proceeding not to be the property of the T.G. Morgan bankruptcy estate to be returned to their rightful owners. After the turnover order, the Florida condominium and Simbari painting each became parts of the bankruptcy estate and were not returned to the settlement estate.

As part of the liquidation proceedings, the bankruptcy trustee prepared and filed T.G. Morgan's tax returns for the years 1990 through 1998. Diane Blodgett did not participate in the preparation of these returns. On the 1992 return, filed by the trustee in February 1999, T.G. Morgan reported an ordinary loss in the amount of $17,202. The trustee prepared and issued to the shareholders a notice indicating each respective share of the loss amount and the fact such loss was deductible only to the extent of shareholder basis in the corporation, which the trustee determined was zero.

The document at issue on appeal is Ms. Blodgett's 1998 personal federal income tax return prepared by her ex-husband from prison. It reported wage income of $45,788.24 and income tax withheld of $5,582.56. The return also included a $38,046,524 carryover business loss deduction. Such figure reportedly represented the amount described on the proof of claim filed by the FTC in the bankruptcy case against T.G. Morgan. The return claimed a refund of all of her withholdings for 1998. Ms. Blodgett attached a letter to her tax return explaining the large loss carryovers stemmed from the loss of property arising out of the consent agreement she signed as a nonparty spouse.¹

On February 15, 2000, the I.R.S. sent Ms. Blodgett a notice of deficiency disallowing the claimed deduction. She then petitioned the tax court for a redetermination. At trial, the tax court characterized the primary issue for decision as whether she was entitled to all or part of the $38,046,524 loss deduction claimed on her 1998 return as the carryover of a 1992 business loss.² Ms. Blodgett also claimed the following specific items as deductible losses: (1) $733,500 for the theft loss of a pension fund; (2) $225,000 as carryforward legal expenses; (3) a $142,482 investment loss on a condominium and lot in Florida; (4) a $42,500 investment loss on a Simbari painting; (5) a $561,375 carryforward business or investment loss on rare coins; and (6) a $125,403 carryforward business or investment loss on historical documents.

The tax court entered a decision in favor of the I.R.S., finding Ms. Blodgett failed to meet her burden of proof on the issues of ownership, loss, value and deductibility of the items contributed to the settlement. She subsequently filed the current appeal. On appeal, she contends the tax court erred in not shifting the burden of proof to the Commissioner of Internal Revenue, pursuant to 26 U.S.C. § 7491, as to whether there was a loss; in failing to likewise shift the burden of proof when the Commissioner introduced new evidence on the eve of trial; and in treating the trustee's tax return as presumptively correct without further authentication.

II

We apply different standards of review to different components of a tax court's decision. We review a tax court's factual determinations under a clearly erroneous standard. Clajon Gas Co. v. C.I.R., 354 F.3d 786, 789 (8th Cir.2004). Under this standard, "[w]e will uphold the Tax Court's finding unless we are `left with a definite and firm conviction' that the Tax Court has committed a mistake." Estate of Ford v. C.I.R., 53 F.3d 924, 926-27 (8th Cir.1995) (quoting Estate of Palmer v. C.I.R., 839 F.2d 420, 423 (8th Cir.1988)). When the tax court's fact finding is based on a credibility determination, such finding is nearly unreviewable. See Anderson v. City of Bessemer City, 470 U.S. 564, 575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (stating a fact finder's determination on credibility can virtually never be considered clearly erroneous). In contrast, a tax court's legal conclusions and mixed questions of law and fact are subject to de novo review. Clajon Gas, 354 F.3d at 789.

A. Shifting Burden of Proof on Tax Loss

The question of whether a taxpayer produced evidence sufficient to shift the burden of proof to the I.R.S. under 26 U.S.C. § 7491 is a legal one which we review de novo. Estate of Mitchell v. C.I.R., 250 F.3d 696, 701 (9th Cir.2001). We evaluate the sufficiency of the evidence under the applicable standard of review against a backdrop of each party's burden of proof. Limited, Inc. v. C.I.R., 286 F.3d 324, 331 (6th Cir.2002). Generally, the I.R.S. determination on the existence of a tax deficiency is presumed correct; thus, the taxpayer generally bears the burden of proving entitlement to a claimed deduction by a preponderance of the evidence. Griffin v. C.I.R., 315 F.3d 1017, 1021 (8th Cir.2003). This burden, however, may shift to the I.R.S. to disprove entitlement to a claimed deduction if the taxpayer introduces "credible evidence" complete with the necessary substantiation and documentation sufficient to fulfill the requirements of § 7491.³ Interex, Inc. v. C.I.R., 321 F.3d 55, 58 (1st Cir.2003).

We begin with a discussion of credible evidence. In Griffin, we defined "credible evidence" for purposes of § 7491 as "the quality of evidence, which after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness)." 315 F.3d at 1021. Ms. Blodgett contends the tax court ignored § 7491 by failing to shift the burden of disproving her loss to the Commissioner after she introduced uncontroverted testimony, which she alleges was thoroughly corroborated by documentary evidence, that, as part of the settlement agreement, she irrevocably lost millions of dollars in assets when she turned over the assets to the FTC receiver. Ms. Blodgett's argument, however, fails to the extent she relies on Griffin for the proposition any testimony offered by the taxpayer tending to support a claimed deduction is sufficient to shift the burden of proof to the I.R.S. While a tax court must consider the testimony as "if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness)," a tax court has the right in the first instance to reject the testimony as incredible. See Marcella...