Lennox v. C.I.R., No. 92-4826

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Writing for the CourtBefore POLITZ, Chief Judge, REAVLEY, and BARKSDALE; BARKSDALE
Citation998 F.2d 244
Decision Date04 August 1993
Docket NumberNo. 92-4826
Parties-5710, 93-2 USTC P 50,444 Michael L. LENNOX and Glenda J. Lennox, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Page 244

998 F.2d 244
72 A.F.T.R.2d 93-5710, 93-2 USTC P 50,444
Michael L. LENNOX and Glenda J. Lennox, Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 92-4826.
United States Court of Appeals,
Fifth Circuit.
Aug. 4, 1993.

Page 245

John D. Copeland, Gary Allan Moreland, Dallas, TX, for petitioners.

Abraham N.M. Shashy, Jr., Chief Counsel, IRS, Jonathan A. Wasserman, Gary R. Allen, Chief, Appellate Sec., Paula K. Speck, Teresa E. McLaughlin, Shirley D. Peterson, Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, DC, for respondent.

Appeal from the Decision of the United States Tax Court.

Before POLITZ, Chief Judge, REAVLEY, and BARKSDALE, Circuit Judges.

BARKSDALE, Circuit Judge:

In reviewing the Tax Court's denial of costs to the Lennoxes, after the government conceded their challenge to its notice of deficiency, we consider for the first time the definition of the "position of the United States" on "the date of the notice" as contained in 26 U.S.C. § 7430(c)(7)(B)(ii), as amended by the Technical and Miscellaneous Revenue Act of 1988, Pub.L. No. 100-647, § 6239(a), 102 Stat. 3342, 3743. Concluding that a determination of the reasonableness of that position must include a review of the actions leading to its establishment, we hold that the government's position was not substantially justified. Therefore, we REVERSE the denial of costs and REMAND to the Tax Court for their determination.

I.

The Internal Revenue Service began to question the Lennoxes' tax returns during the course of its investigation of Ron Piperi, an attorney who had represented Glenda Lennox's family since the early 1970's. Michael Lennox first met Piperi in 1981, when Piperi handled the probate of Glenda's mother's estate, from which Glenda Lennox and her children inherited property worth approximately $1 million. Piperi advised the Lennoxes that they needed a tax shelter and recommended investing some of the inheritance in apartment projects.

The first project was the Quail Creek Apartments (the apartments) in Killeen, Texas, which Piperi was already developing, and in which he offered to sell the Lennoxes an interest. In 1983, he sold his interest to Michael Lennox, making him the sole owner. At the closing, Lennox executed, among other documents, a $6.25 million note on which he was personally liable. The loan was arranged by Piperi through a savings and loan for which he served as chairman of the board. 1 Title was recorded in the county records.

After experiencing some difficulty with the company managing the apartments, Lennox contracted with Asset Plus, a management company in which Piperi held an interest. Lennox visited the property regularly and handled the insurance and major repairs, but Asset Plus was to provide him with monthly reports, collect rents, and administer all expenditures, including making interest payments on the $6.25 million note. At the hearing on costs, Lennox testified that, as far as he knew, those payments were made. Within the first two years, Lennox realized that the apartments were not going to generate enough income to service the interest on the note. Piperi then approached him with an offer: his savings and loan would refinance the loan at a lower rate, but the existing loan must first be placed in default. Lennox testified that he understood Asset Plus was taking the amount it had been paying toward the interest and placing it in escrow. However, Lennox began to have difficulty obtaining an accounting or other records from Asset Plus. The new financing did not go through, the savings and loan foreclosed on the apartments, 2 and Lennox filed bankruptcy.

Page 246

Meanwhile, IRS agent George Gilbert, in El Paso, was investigating Piperi. During the course of that investigation, he discovered that Piperi was receiving the rental income from the apartments and using it for personal expenses, that no principal or interest payments had been made on Lennox's $6.25 million note, and that Piperi had arranged other similar loans, assuring the "borrowers" that they would never have to pay, and in some cases, paying them $20,000 for signing the notes. This information caused Gilbert to suspect that Lennox was only a nominee owner of the apartments, and he concluded that Lennox should be investigated to determine the true ownership. On August 10, 1990, Gilbert sent a memorandum to his branch chief, alerting him to these concerns and suggesting that the Lennoxes' tax returns be examined.

On August 22, having received a copy of Gilbert's memorandum, IRS agent Phelps Brookshire, in Waco, began an examination of the Lennoxes' returns for 1983, 1984 and 1985. For each of those years, the Lennoxes had claimed deductions related to the apartments, including large net operating losses. Brookshire examined those returns and spoke with Gilbert, but did not conduct an investigation of his own. When Brookshire realized, in late August, that the limitations period would expire that October 27, he determined that he would "have to do something fast".

On September 11, Brookshire telephoned Lennox and explained that all losses associated with the apartments would be disallowed. Lennox and Brookshire spoke again the following day, and Brookshire stated that he would have to issue a notice of deficiency unless Lennox agreed to extend the limitations period. Several days later, Lennox's accountant called Brookshire, advised him that the tax rolls listed Lennox as the owner of the apartments and that Lennox had filed bankruptcy because of his debt on them, and offered, on behalf of Lennox, to sign a limited extension, extending the period only as to questions related to the apartments. Brookshire refused. He later testified that his manager said that there was not enough time (in the approximately 35 days remaining in the limitations period) to get approval for the specific language for a limited extension.

Not having received an extension, Brookshire issued a statutory notice of deficiency on October 2, disallowing the losses claimed on the apartments due to questions of actual ownership. On January 3, 1991, the Lennoxes petitioned the Tax Court for a redetermination of the deficiencies. The Commissioner of Internal Revenue answered on March 5, denying all facts of ownership as alleged in the petition. On April 10, the Lennoxes' attorney, John D. Copeland, had a one-hour telephone conversation with an IRS appeals officer and discussed evidence that Michael Lennox was the true owner. (Nothing in the record, however, describes that evidence.)

Eight months later, Copeland received settlement documents from the IRS. He testified that, after the April telephone conversation, he intended to send the appeals officer copies of documents showing ownership but "never got around to sending them to him, but [the IRS] went ahead and dropped the case, even without...

To continue reading

Request your trial
35 practice notes
  • Wilkerson v. U.S., No. 94-40713
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • October 23, 1995
    ...120, 123. We can only reverse "if we have a definite and firm conviction that an error of judgment was committed." Lennox v. Commissioner, 998 F.2d 244, 248 (5th Substantially justified means "justified to a degree that could satisfy a reasonable person." Id.; Nalle v. Commissioner, 55 F.3d......
  • Marre v. U.S., HP-84
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • July 22, 1997
    ...as to whether the government's litigation position with respect to Agritech was substantially justified. See, e.g., Lennox v. C.I.R., 998 F.2d 244, 248 (5th Cir.1993) (explaining that "the ultimate failure of the government's legal position does not necessarily mean that it was not substant......
  • Cellar v. Commissioner, Docket No. 11758-92.
    • United States
    • United States Tax Court
    • August 18, 1994
    ...position may be unreasonable if the Commissioner failed to adequately investigate the case. Lennox v. Commissioner [93-2 USTC ¶ 50,444], 998 F.2d 244, 248 (5th Cir. 1993), revg. and remanding [Dec. 48,331(M)] T.C. Memo. 1992-382; Powers v. Commissioner, supra at The fact that the Commission......
  • Williford v. Commissioner, Docket No. 26613-89.
    • United States
    • United States Tax Court
    • March 30, 1994
    ...is respondent's position for purposes of the motion for administrative and litigation costs. Lennox v. Commissioner [93-2 USTC ¶ 50,444], 998 F.2d 244, 247-248 (5th Cir. 1993), revg. in part and remanding [Dec. 48,331(M)] T.C. Memo. 1992-382 (the Government's position on the date of the not......
  • Request a trial to view additional results
35 cases
  • Wilkerson v. U.S., No. 94-40713
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • October 23, 1995
    ...120, 123. We can only reverse "if we have a definite and firm conviction that an error of judgment was committed." Lennox v. Commissioner, 998 F.2d 244, 248 (5th Substantially justified means "justified to a degree that could satisfy a reasonable person." Id.; Nalle v. Commissioner, 55 F.3d......
  • Marre v. U.S., HP-84
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • July 22, 1997
    ...as to whether the government's litigation position with respect to Agritech was substantially justified. See, e.g., Lennox v. C.I.R., 998 F.2d 244, 248 (5th Cir.1993) (explaining that "the ultimate failure of the government's legal position does not necessarily mean that it was not substant......
  • Cellar v. Commissioner, Docket No. 11758-92.
    • United States
    • United States Tax Court
    • August 18, 1994
    ...position may be unreasonable if the Commissioner failed to adequately investigate the case. Lennox v. Commissioner [93-2 USTC ¶ 50,444], 998 F.2d 244, 248 (5th Cir. 1993), revg. and remanding [Dec. 48,331(M)] T.C. Memo. 1992-382; Powers v. Commissioner, supra at The fact that the Commission......
  • Williford v. Commissioner, Docket No. 26613-89.
    • United States
    • United States Tax Court
    • March 30, 1994
    ...is respondent's position for purposes of the motion for administrative and litigation costs. Lennox v. Commissioner [93-2 USTC ¶ 50,444], 998 F.2d 244, 247-248 (5th Cir. 1993), revg. in part and remanding [Dec. 48,331(M)] T.C. Memo. 1992-382 (the Government's position on the date of the not......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT