Bouterie v. C.I.R., 93-5534

• Decision Date: 08 November 1994
• Docket Number: No. 93-5534,93-5534
• Citation: 36 F.3d 1361
• Parties: -6839, 94-2 USTC P 50,580 Rita B. BOUTERIE, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1361

36 F.3d 1361

74 A.F.T.R.2d 94-6839, 94-2 USTC P 50,580

Rita B. BOUTERIE, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 93-5534.

United States Court of Appeals Fifth Circuit.

Nov. 8, 1994.

Michael A. Mayhall, New Orleans, LA, for appellant.

David L. Jordan, Acting Chief Counsel, I.R.S., Shirley D. Peterson, Asst. Atty. Gen., Tax Div., Dept. of Justice, Gary R. Allen, Chief, David A. Shuster, and Kenneth L. Greene, Appellate Section, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellee.

Appeal from a Decision of the United States Tax Court.

Before REYNALDO G. GARZA, WIENER and EMILIO M. GARZA, ^* Circuit Judges.

WIENER, Circuit Judge:

Petitioner-Appellant Rita B. Bouterie ("Taxpayer") appeals an order of the United States Tax Court ("Tax Court") denying her request for the costs incurred in litigating a Petition for Redetermination of Taxes ("Petition for Redetermination"), which she filed in response to a Notice of Deficiency ("Notice") issued by the IRS. The Tax Court found that Taxpayer had failed to establish that the IRS' litigation position was not "substantially justified" and thus held that Taxpayer was not entitled to costs pursuant to 26 U.S.C. Sec. 7430. We find to the contrary that Taxpayer established beyond serious question that the IRS' position was wholly lacking in justification, whether substantial or otherwise, given the absence of any defensible basis for that position in law or in fact. We therefore reverse the decision of the Tax Court and remand for a determination of the reasonable litigation costs that Taxpayer may recover.

I FACTS AND PROCEDURE

The facts and state law issues of this case are no longer in dispute. Taxpayer and William H. Boyle ("Mr. Boyle") were married in 1966 without executing a pre-nuptial agreement. As of November 1978, the spouses were domiciled in Louisiana, and accordingly were subject to the community property laws of that state.

On November 13, 1978, Taxpayer sued her husband in Louisiana for a "separation from bed and board" (legal separation), which was granted on May 31, 1979. Even though the final judgment of divorce was not rendered until 1985, the 1979 judgment granting the legal separation had the effect of terminating the "community of acquets and gains" (marital community) between Taxpayer and Mr. Boyle ipso facto, but retroactively to November 13, 1978, the date Taxpayer had filed her petition for legal separation.

Mr. Boyle was a life insurance agent who was paid on commission. For each insurance policy he sold, he earned both a current "sales commission" and the right to future "renewal commissions" for each subsequent year that the policy remained in force. Mr. Boyle continued to receive renewal commissions on policies he had sold prior to the termination of the marital community with Taxpayer, but he did not share these commissions with her.

Taxpayer subsequently filed a suit in Louisiana to partition all property formerly belonging to the marital community, including the right to receive future renewal commissions on policies sold during the existence of the marital community, i.e., those policies sold prior to November 13, 1979. In 1983, a Louisiana court ruled on the suit, holding, inter alia, that:

Commissions payable to William Boyle on renewal premiums for policies of insurance written prior to November 13, 1978, are community property. Commissions payable to William Boyle on renewal premiums for policies of insurance written on or after November 13, 1978, are the separate property of William Boyle.

This decision was affirmed on appeal. ¹

Even after that judgment became final and executory, though, Mr. Boyle continued to oppose vigorously the payment to Taxpayer of her one-half of any renewal commission income from policies written prior to the date that the marital community was terminated. Beginning September 1, 1985, however, all renewal commission payments on policies written before the termination of the marital community were deposited into an escrow account. On June 17, 1988, pursuant to a partial settlement agreement, all funds in the escrow account were divided equally between the former spouses, who also agreed that all future renewal commissions resulting from policies written before the termination of the marital community would be shared equally. It was not until October 16, 1990, however, that the Louisiana trial court entered an order partitioning the remainder of the assets that had formerly belonged to the marital community, including renewal commissions. As a result, that court ordered Mr. Boyle to pay Taxpayer in excess of $488,000 to equalize the partition; the majority of this amount was required to account for renewal commissions received by Mr. Boyle between 1978 and 1984 (but never shared with Taxpayer) on policies written before November 13, 1978.

In May 1989, while the Louisiana suit was still pending, the IRS issued a Notice to Mr. Boyle, claiming deficiencies of over $400,000 for tax years 1978 through 1984 (except for 1982), ² an eight-year period during which Mr. Boyle apparently had not filed income tax returns. During this same period Taxpayer also had neglected to file two income tax returns. ³ In the Notice, the IRS determined that Mr. Boyle should have reported as ordinary income (1) one-half of the amount of the renewal commissions he was paid in 1978 (before the marital community was terminated), and (2) the total amount of the renewal commissions he was paid thereafter, regardless of when the policies which generated those renewals had been written.

In August 1989, Mr. Boyle filed a Petition for Redetermination in the Tax Court. He alleged, inter alia, that the IRS erred in determining his filing status for tax years 1978 through 1984 and in finding that he owed taxes on the total amount of the renewal commissions for policies written before the termination of the marital community. ⁴

On January 25, 1991--after the Louisiana judgment of partition had been rendered--the IRS for the first time issued a Notice to Taxpayer, claiming that she owed taxes on renewal commissions resulting from policies written up until the marital community ended but paid in full thereafter to Mr. Boyle between 1978 and 1984. Seizing on the 1983 state court decision, which imprecisely characterized the renewal commissions as "community property"--failing to distinguish between the rights to receive such commissions (which had been community assets) and the commissions actually earned and paid wholly to Mr. Boyle after the marital community terminated--the IRS insisted that Taxpayer had an immediately taxable one-half interest in this renewal commission income regardless of her lack of actual receipt and her legal and factual inability to obtain her share. This determination was clearly inconsistent with the position taken by the IRS in its May 1989 Notice to Mr. Boyle, in which the IRS had claimed that Mr. Boyle was required to declare as his income all renewal commission income received after the marital community was terminated. Nevertheless, based on its bald assertion that Taxpayer owned a community property interest in the renewal commissions, the IRS calculated that she owed an income tax deficiency of $289,562.33 for tax years 1978-82 and 1984. ⁵

In April 1991, Taxpayer filed a Petition for Redetermination in the Tax Court, arguing that the deficiencies calculated on the basis of her alleged "community property" interest in the renewal commissions were improper, as they were grounded in an erroneous interpretation of Louisiana law. She also pointed out that any taxes allegedly owed for the 1978 tax year were time barred. In its answer, the IRS conceded that collection efforts for 1978 taxes were barred by the statute of limitations, but reasserted its contention that Taxpayer had a currently taxable community property interest in the renewal commissions when and as they became payable, and that she thus owed taxes on one-half of the amount of the renewal commissions paid by the company to her husband for the years in which he received such payments.

Responding to an informal discovery request in January of 1992, the IRS reiterated its position that Taxpayer owned a community property interest in the renewal commissions paid to Mr. Boyle in years after termination of the marital community on policies written before its termination.

[Taxpayer] is taxable on her share of the income from the Policy renewals in the year in which the Policy Renewals were generated. The divorce court ruled that the insurance policies ... were community assets. Under La. Civil Code Article 2338, the ... revenues from community assets are community property. Therefore, by operation of Louisiana law, [Taxpayer] is taxable on ... one-half of the community income generated by the Policy Renewals in the years in which the income was generated.

In this same letter, the IRS admitted "[a]t this time, we do not have any information to indicate that [Taxpayer] 'actually' physically received the income from the policy renewals in the years 1978 through 1984." But, for the first time, the IRS proffered another rationale purporting to support its contention that Taxpayer owed taxes on this income: "[I]t is [the IRS'] position that [Taxpayer] 'constructively' received the policy renewal income because it was deposited into an escrow account for the benefit of both spouses during the divorce proceedings."

Taxpayer responded promptly by letter dated February 24, 1992, citing authority for the propositions that: (1) after the termination of the marital community, the renewal policies (like every other asset) were no longer community assets but were assets held by the former spouses as co-owners in indivision; (2) the renewal commissions earned after November 13, 1978 were--and could only be--separate income of the co-owners, one-half each; and (3) Taxpayer was not taxable on her...