Harbin v. Comm'r of Internal Revenue, 9994–07.

• Decision Date: 26 September 2011
• Docket Number: No. 9994–07.,9994–07.
• Citation: 137 T.C. 93,137 T.C. No. 7
• Parties: Leonard W. HARBIN, Petitioner,andBernice Nalls, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

137 T.C. 93

137 T.C. No. 7

Leonard W. HARBIN, Petitioner,andBernice Nalls, Intervenor

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 9994–07.

United States Tax Court.

Sept. 26, 2011.

P filed a petition seeking relief from joint and several liability under sec. 6015, I.R.C. R contends that P is barred, under sec. 6015(g)(2), I.R.C., from seeking relief because P was involved and participated in the prior deficiency proceeding. P contends that he did not participate meaningfully in the prior deficiency proceeding. P's attorney in the prior deficiency proceeding also represented P's former spouse in that proceeding. P's attorney had a conflict of interest while representing P in the prior deficiency proceeding.

Held: P did not participate meaningfully in the prior deficiency proceeding. P is therefore not barred under sec. 6015(g)(2), I.R.C., from claiming relief from joint and several liability.

Andrew R. Roberson and Patty C. Liu, for petitioner.

Bernice Nalls, pro se.

Gorica B. Djuraskovic, for respondent.KROUPA, Judge:

This case arises from a petition for relief from joint and several liability under section 6015 ¹ after respondent issued a Final Notice of Determination Concerning Your Request for Relief From Joint and Several Liability under section 6015 denying petitioner relief from deficiencies for 1999 and 2000 (years at issue). Petitioner argues that he is entitled to relief under section 6015 from liability for the portions of the deficiencies for the years at issue that are attributable to his former wife's (intervenor) gambling activities (deficiencies at issue). We must decide whether petitioner is barred from obtaining any relief from liability under section 6015(g)(2) and whether petitioner is entitled to relief from liability under section 6015(b), (c) or (f) for the deficiencies at issue. We hold he is not barred and further hold that he is entitled to relief under section 6015(b).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We incorporate the stipulation of facts and the accompanying exhibits by this reference.

Petitioner and intervenor were married in the 1990s and divorced in 2004. Intervenor gambled at casinos and played the lottery during their marriage. Intervenor maintained calendars and diaries related to her gambling activities for the years at issue. In addition, intervenor retained some of the receipts related to her gambling activities.

Petitioner prepared and filed a joint Federal income tax return for petitioner and intervenor for each of the years at issue. He gathered documents for purposes of substantiating intervenor's gambling winnings and losses that they reported on the returns. They reported all of her $45,540 of gambling winnings for 1999 and $113,445.50 for 2000. They also reported the corresponding gambling losses of $45,540 for 1999 and $108,945.50 for 2000. Petitioner reviewed the gambling records that he understood intervenor kept, and he also discussed with intervenor her gambling winnings and losses when preparing the returns. Petitioner did not know or have reason to know at the time each return was prepared that intervenor's gambling losses were inaccurately reported.

Respondent began in 2001 an examination for the years at issue and focused primarily on whether the claimed deductions for certain rental expenses and intervenor's gambling losses were allowable. Intervenor stopped cooperating during the examination and provided the examiner with documents different from those she had provided petitioner. Respondent issued a deficiency notice to petitioner and intervenor for the years at issue.

The deficiency case was docketed at docket No. 10774–04 (prior deficiency case). Petitioner was over 60 years old and was retired at the time of the prior deficiency case. James E. Caldwell (Mr. Caldwell) represented both petitioner and intervenor in the prior deficiency case. He signed all of the filings with the exception of the petition and the amended petition. Respondent corresponded with, requested documents from and attempted to scheduled meetings with Mr. Caldwell, not petitioner.

Petitioner depended on intervenor to contest the deficiencies at issue. It was intervenor who engaged in the gambling activities that gave rise to the deficiencies at issue, and she was the one with personal knowledge about the winnings and losses associated with the gambling activities. It also was intervenor who was responsible for maintaining and providing information regarding the gambling activities.

The parties executed a stipulated decision that petitioner and intervenor owed deficiencies and accuracy-related penalties for the years at issue. Neither petitioner nor intervenor requested relief under section 6015 during the prior deficiency case for either year at issue. No party to the prior deficiency case filed a notice of appeal, and the decision of the Tax Court became final on June 19, 2005. See secs. 7481(a)(1), 7483.

While the prior deficiency case was going forward, Mr. Caldwell also represented petitioner and intervenor in their contentious divorce. Mr. Caldwell represented both petitioner and intervenor in the prior deficiency case and the divorce proceeding until the divorce was finalized shortly before trial in the prior deficiency case. Petitioner's and intervenor's financial interests and interests in the allocation of liability for the deficiencies at issue were adverse in the prior deficiency case. Mr. Caldwell's joint representation of petitioner and intervenor in the prior deficiency case created a conflict of interest.

Mr. Caldwell did not explain the advantages and risks of joint representation to petitioner. Mr. Caldwell failed to disclose the conflict of interest to petitioner. He never asked petitioner to waive the conflict of interest, and petitioner never did. Mr. Caldwell proceeded with the joint representation of petitioner and intervenor despite the conflict of interest.

Respondent applied an overpayment credit for 2004 to petitioner's unpaid tax liability for 1999. Petitioner contested respondent's action. Specifically, petitioner contested that he owed the deficiencies at issue.

Petitioner requested relief under section 6015 from the deficiencies at issue. Petitioner followed numerous formalities, including submitting a Form 8857, Request for Innocent Spouse Relief. Petitioner also submitted a Form 12510, Questionnaire for Requesting Spouse, and an 18–page facsimile from intervenor. Petitioner was 70 years old and retired at the time he sought innocent spouse relief.

Respondent sent a preliminary determination letter proposing to deny petitioner's claim for relief under section 6015(b), (c) and (f). Petitioner filed a Form 12509, Statement of Disagreement, with an attached statement explaining why he believed he was entitled to relief. He also contacted respondent's innocent spouse call unit. Approximately 4 months later, he received a letter from respondent sustaining the preliminary determination to deny relief under section 6015(b), (c) or (f), yet the cover sheet referenced only relief sought under section 6015(b). Throughout all this correspondence between petitioner and respondent there was no mention of petitioner's claim's being barred by section 6015(g)(2) and res judicata. The deficiency examination began in 2001. Petitioner's petition under section 6015 was filed on May 7, 2007.

Respondent issued a Final Notice of Determination Concerning Your Request for Relief From Joint and Several Liability denying petitioner's request for innocent spouse relief under section 6015 for the years at issue. Petitioner had sought relief under section 6015(b), (c) and (f), yet the determination letter stated that petitioner was denied relief under section 6015(b) and did not reference subsection (c) or (f). Respondent denied petitioner relief under section 6015(b), stating petitioner knew of his wife's gambling winnings and losses.

Mr. Caldwell, petitioner's counsel at the time, prepared the petition contesting the denial of relief under section 6015(b) on May 7, 2007. Respondent informed Mr. Caldwell of his conflict of interest resulting from his representation of both petitioner and intervenor in the prior deficiency case. Mr. Caldwell had apparently never encountered such a situation and was unaware of any ethical violations or issues. Mr. Caldwell withdrew from representing petitioner.

This Court allowed petitioner leave to amend his petition to request relief under section 6015(c) and (f). Respondent had still not asserted that petitioner's claim was barred by section 6015(g)(2) and res judicata.

Respondent filed a motion for summary judgment asking that petitioner be barred by res judicata under section 6015(g)(2) because he “ participated meaningfully” in the prior deficiency case. The Court denied respondent's motion.

Respondent's counsel requested additional information about the gambling losses and activities but never raised res judicata as a defense until 2 years after petitioner had requested relief under section 6015.

We held a trial in Chicago, Illinois, in March 2011 to decide whether petitioner is barred from relief.

OPINION

Petitioner seeks to be relieved from joint liability regarding the deficiencies at issue. Petitioner participated in the prior deficiency case for the years at issue in that he prepared the tax returns for those years and started negotiating with respondent when the audit began. Petitioner hired an attorney who represented him as well as intervenor in the prior deficiency case and in their contentious divorce proceedings at the same time while their interests were adverse.

Respondent argues that res judicata bars petitioner's claim for relief under section 6015. We disagree.

We first explain how res judicata applies in joint and several liability tax cases; then we explain our holding. Res judicata requires that when a court of competent jurisdiction enters a final...