Freytag v. Comm'r of Internal Revenue

• Decision Date: 05 February 1998
• Docket Number: No. 13538–86.,13538–86.
• Citation: 110 T.C. 35,110 T.C. No. 5
• Parties: Thomas L. FREYTAG and Sharon N. Freytag, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

110 T.C. 35

110 T.C. No. 5

Thomas L. FREYTAG and Sharon N. Freytag, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13538–86.

United States Tax Court.

Feb. 5, 1998.

William D. Elliott, for petitioner Sharon N. Freytag.

James R. Turton, for respondent.

OPINION

DAWSON, Judge:

This case was assigned to Special Trial Judge Carleton D. Powell pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. ¹ The Court agrees with and adopts the opinion of the Special Trial Judge that is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

POWELL, Special Trial Judge:

This matter is before the Court on the motion for summary judgment of petitioner Sharon N. Freytag (Mrs. Freytag or petitioner), filed August 20, 1996. The facts may be summarized as follows.

By notice of deficiency issued February 10, 1986, respondent determined deficiencies in petitioners' Federal income taxes and additions to tax as follows:

+--------------------------------------+
                ¦         ¦         ¦Additions to Tax  ¦
                +--------------------------------------+
                

Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2)  
                1978                $ 5,000             $ 250               -0-
                1981                53,598              2,680               50 of the interest
                                                                            due on $53,598
                1982                36,901              1,845               50% of the interest
                                                                            due on $36,901
                

On May 12, 1986, petitioners filed a petition for redetermination of the deficiencies and additions to tax. At that time, petitioners were husband and wife and resided in Dallas, Texas. Respondent filed an answer to the petition on June 26, 1986.

The primary issue involved deductions claimed for losses on transactions between petitioner Thomas L. Freytag (Mr. Freytag) and First Western Government Securities, Inc. (First Western) At that time there were more than 3,000 cases involving the same issues. Test cases had been selected, and this case was held in abeyance. The First Western issues were resolved in Freytag v. Commissioner, 89 T.C. 849, 1987 WL 45307 (1987), affd. 904 F.2d 1011 (5th Cir.1990), affd. on other grounds 501 U.S. 868, 111 S.Ct. 2631, 115 L.Ed.2d 764 (1991).

On January 5, 1990, petitioners filed a petition in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division. Respondent filed a proof of claim that was amended several times to include, inter alia, the income taxes and additions to tax for the years at issue in this case. Respondent notified the Court of the bankruptcy proceedings, and pursuant to 11 U.S.C. sec. 362(a)(8) (1994) (Bankruptcy Code), this Court, on May 2, 1991, stayed all proceedings in this case.

In the bankruptcy court, Mrs. Freytag objected to respondent's amended proofs of claim. She did not contest the underlying deficiencies for 1981 and 1982, and the parties stipulated that the challenged deductions for 1981 and 1982 were in fact grossly erroneous and had no basis in fact or law. See Freytag v. Commissioner, supra. Rather, she sought a determination from that court that she was not liable for the taxes and addition to taxes at issue solely because she was an “innocent spouse” under section 6013(e) and section 6004 of the Technical and Miscellaneous Revenue Act of 1988, Pub.L. 100–647, 102 Star. 3342, 3685.

On August 12, 1993, the bankruptcy court issued a “Memorandum Opinion Regarding Sharon N. Freytag's Objection to IRS Claim”. The court stated that it could “find no reason why it would be inequitable to hold Sharon liable for the consequences of the understatements.” It accordingly decided that Mrs. Freytag was liable for the taxes for 1981 and 1982 and could not rely successfully upon the “innocent spouse” defense. On May 31, 1994, the bankruptcy court entered an “Agreed Order Pertaining to Dischargeability” in which it discharged: (1) Penalties and interest on penalties claimed by the IRS for the Freytags' taxable years 1978–1982; (2) penalty interest imposed by section 6621(c) to the extent it exceeded the normal rate of interest; and (3) $5,000 in tax and $10,941.89 in interest for the year 1978. With regard to the amounts not discharged, the parties seem to agree that while no dollar amount was stated in the order, the amount of the tax debts for 1981 and 1982 could be determined by reference to that order and the proof of claim, as amended, for the years at issue in this case.

In view of the bankruptcy court's order of discharge, this Court lifted the stay of proceedings. On August 20, 1996, petitioner filed a motion for summary judgment asking that this case “be dismissed for lack of subject matter jurisdiction”. Consistent with the order of the bankruptcy court, Mr. Freytag and respondent filed a stipulation of settled issues in which it is agreed that there is no deficiency for 1978; there are no additions to tax for the years 1978, 1981, and 1982; and there are deficiencies in the amounts of $53,598 and $36,901 for the years 1981 and 1982, respectively.

Summary Judgment

Rule 121 provides that either party may move for summary judgment on all or any part of the legal issues in controversy where there is no genuine issue as to any material fact and a decision may be entered as a matter of law. As we understand Mrs. Freytag's position, she does not seek an entry of a decision, but rather a dismissal of the case for lack of jurisdiction with respect to her. Summary judgment, therefore, would not be an appropriate vehicle to obtain the relief that she seeks. Nonetheless, as we shall see, there is an aspect of petitioner's argument that is appropriate for summary judgment resolution. In these circumstances, initially for discussion purposes, we treat petitioner's motion as a motion to dismiss for lack of jurisdiction, which we deny, and then proceed with an analysis for the proper disposition of this case.

Jurisdiction of the Tax Court

As a general proposition, this Court has jurisdiction to redetermine a taxpayer's Federal tax liabilities as long as respondent has sent the taxpayer a valid notice of deficiency and the taxpayer has filed a timely petition in this Court to review the deficiencies asserted in the notice. Secs. 6212 and 6213; Gustafson v. Commissioner, 97 T.C. 85, 89, 1991 WL 137844 (1991). Section 6213(a) further provides that in general the filing of such a petition prevents the assessment or collection of the taxes at issue. While the normal period of limitations within which an assessment may be made expires 3 years after the return was filed (sec.6501(a)), section 6503(a)(1) provides that the period of limitations is “suspended” for the period that there is a proceeding in the Tax Court and for 60 days after the decision of the Tax Court becomes final.

A proceeding before the Tax Court is an in personam action. Morris Plan Industrial Bank of N.Y. v. Commissioner, 151 F.2d 976 (2d Cir.1945), affg. a Memorandum Opinion of this Court dated Oct. 5, 1944; Hemmings v. Commissioner, 104 T.C. 221, 230, 1995 WL 44587 (1995). Furthermore, once this Court acquires jurisdiction over the dispute between a taxpayer and respondent, that jurisdiction remains unimpaired until the controversy is decided. Dorl v. Commissioner, 57 T.C. 720, 722, 1972 WL 2407 (1972), affd. 507 F.2d 406 (2d Cir.1974); see also sec. 7459(d) (if a case is dismissed the decision will be entered in the amount determined by the Secretary).

If, after this Court acquires jurisdiction over a controversy, the petitioner files a petition in the bankruptcy court, 11 U.S.C. sec. 362(a)(8) (1994) (Bankruptcy Code) provides that “a petition filed * * * operates as a stay, applicable to all entities” including “the commencement or continuation of a proceeding before the United States Tax Court”. At the request of a party in interest the bankruptcy court may lift the stay. See 11 U.S.C. sec. 362(d), (e), and (f). And, unless previously lifted, such a stay terminates at the earliest of the closing or dismissal of the bankruptcy case or at the time a discharge is granted or denied to an individual. 11 U.S.C. sec. 362(c); Smith v. Commissioner, 96 T.C. 10, 1991 WL 2878 (1991). Once a stay has been lifted or terminated this Court will proceed to resolve the dispute, unless a stay is affirmatively reimposed by the bankruptcy court. Kieu v. Commissioner, 105 T.C. 387, 394–395, 1995 WL 729408 (1995). However, 11 U.S.C. sec. 505(a)(1) (1994), provides:

Except as provided in * * * [11 U.S.C. sec. 505(a)(2) ], the [bankruptcy] court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.²

The enactment of 11 U.S.C. secs. 362 and 505 was part of the major reform of the bankruptcy laws accomplished by the Bankruptcy Reform Act of 1978, Pub.L. 95–598, 92 Star. 2549. The legislative history clearly shows that Congress understood that the bankruptcy courts and this Court would have concurrent jurisdiction in cases regarding common issues of Federal tax liability of bankrupts who are properly before both courts.³ United States v. Wilson, 974 F.2d 514, 517 (4th Cir.1992). If the bankruptcy court first decides the common tax issue, its decision is to be binding under principles of res judicata upon this Court:

the bankruptcy judge will have authority to determine which court will determine the merits of the tax claim both as to claims against the estate and claims against the debtor concerning his personal liability for nondischargeable taxes. Thus, * * * the bankruptcy judge can either rule on the merits of the claim and continue the stay on any pending Tax Court proceeding or lift the stay * * *. If he rules on the merits of the complaint before the decision of the Tax Court is...