Mailman v. Comm'r of Internal Revenue
| Decision Date | 15 December 1988 |
| Docket Number | Docket No. 6243-87. |
| Parties | ALAN H. MAILMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P, a compulsive gambler, failed to report embezzled funds used for his gambling on his Federal income tax returns for taxable years 1981, 1982 and 1983. P concedes liability for income tax deficiencies and additions to tax for negligence. P contends that R acted unreasonably in failing to waive the addition to tax pursuant to section 6661. R contends his discretion is absolute and not subject to judicial review. HELD, R's refusal to grant a waiver of the section 6661 addition to tax pursuant to section 6661(c) is subject to judicial review. HELD FURTHER, the appropriate standard of review is whether R has abused his discretion. HELD FURTHER, R has not abused his discretion in this case. P is liable for the addition to tax pursuant to section 6661.
The Commissioner determined deficiencies and additions to tax in petitioner's Federal income taxes as follows:
+-------------------------------------------------------+
¦ ¦ ¦Additions to tax ¦
+----+----------+---------------------------------------¦
¦ ¦ ¦Sec. ¦ ¦ ¦
+----+----------+-------------+---------------+---------¦
¦Year¦Deficiency¦6653(a)(1)1 ¦Sec. 6653(a)(2)¦Sec. 6661¦
+----+----------+-------------+---------------+---------¦
¦1981¦$8,261 ¦$413 ¦50 percent of ¦--- ¦
+----+----------+-------------+---------------+---------¦
¦ ¦ ¦ ¦the interest ¦ ¦
+----+----------+-------------+---------------+---------¦
¦ ¦ ¦ ¦on $8,261 ¦ ¦
+----+----------+-------------+---------------+---------¦
¦1982¦88,746 ¦4,437 ¦50 percent of ¦$22,187 ¦
+----+----------+-------------+---------------+---------¦
¦ ¦ ¦ ¦the interest ¦ ¦
+----+----------+-------------+---------------+---------¦
¦ ¦ ¦ ¦on 88,746 ¦ ¦
+----+----------+-------------+---------------+---------¦
¦1983¦11,144 ¦557 ¦50 percent of ¦2,786 ¦
+----+----------+-------------+---------------+---------¦
¦ ¦ ¦ ¦the interest ¦ ¦
+----+----------+-------------+---------------+---------¦
¦ ¦ ¦ ¦on 11,144 ¦ ¦
+-------------------------------------------------------+
After concessions the sole issue we must address is whether petitioner is liable for the additions to tax pursuant to section 6661.
Some of the facts in this case have been stipulated and are so found. Petitioner resided in Philadelphia, Pennsylvania at the time he filed the petition in this case.
From 1973 to 1983 petitioner was employed as the credit manager for Fishman & Tobin, Inc. (‘Fishman & Tobin‘). His duties included determining whether to extend credit to retailers, department stores and chain stores, and analyzing financial statements and other information. During the years in issue petitioner, a compulsive gambler, embezzled from Fishman & Tobin the following amounts:
+----------------------+
¦Year¦Embezzled amount ¦
+----+-----------------¦
¦1981¦$19,988 ¦
+----+-----------------¦
¦1982¦155,386 ¦
+----+-----------------¦
¦1983¦43,870 ¦
+----------------------+
He used the embezzled money to fund his gambling habit. Petitioner failed to report any of this embezzled income on his 1981, 1982, or 1983 Federal income tax returns and did not keep any books, records or make any accounting of the funds he embezzled from Fishman & Tobin.
During 1981 and 1982 petitioner operated a stall at a flea market from which he received net income of $4,950 and $11,018, respectively. Petitioner kept no books and records of his income and expenses from the flea market business and did not report his income from this activity on his 1981 or 1982 Federal income tax returns.
Petitioner concedes his liability for Federal income tax on the unreported income in 1981, 1982 and 1983. Petitioner stipulated that his net income from the flea market activity is subject to self- employment tax. Petitioner also concedes his liability for additions to tax pursuant to sections 6653(a)(1) and 6653(a)(2) for the taxable year 1981 through 1983.
OPINIONThe sole issue we must decide is whether petitioner is liable for additions to tax pursuant to section 6661 which provides for an addition to tax in the amount of 25 percent of the amount of any underpayment attributable to a substantial understatement of income tax. Sec. 6661(a); Pallottini v. Commissioner, 90 T.C. 498 (1988). An understatement is the amount by which the correct tax exceeds the reported tax. Section 6661(b)(2). An understatement is substantial if it exceeds the greater of ten percent of the correct tax or $5,000. Section 6661(b)(1)(A). Petitioner agrees that he substantially understated his Federal income tax for 1982 and 1983. There is no substantial authority for petitioner's failure to report his income, and petitioner failed to disclose any relevant facts on his return or on an attached statement. See section 6661(b)(2)(B). Consequently, petitioner is liable for the section 6661 addition to tax unless some or all of the addition to tax should have been waived by respondent. 2
Petitioner contends that respondent acted arbitrarily and unreasonably in refusing to grant petitioner a waiver of the section 6661 addition to tax. Petitioner argues that he had reasonable cause for the understatements on his 1982 and 1983 returns and that he acted in good faith in failing to report embezzled funds as income for 1982 and 1983. Petitioner's position is grounded on his alleged lack of knowing that embezzled funds are includable in gross income. James v. United States, 366 U.S. 213 (1961). Petitioner also points to his intense preoccupation with pending criminal charges, proceedings and penalties against him. He also seeks relief because of the three-year period of his claimed pathological gambling.
Respondent argues that his discretion is absolute and is not subject to our review under any standard.
We recognize that Congress made respondent's waiver a discretionary act, and we should certainly give due deference to the administrator's discretion. Nowhere, however, did Congress express a desire to grant respondent unfettered discretion. As we stated in Estate of Gardner v. Commissioner, 82 T.C. 989, 994 (1984): ‘There is a strong presumption that the actions of an administrative agency are subject to judicial review.‘ See also Dunlop v. Bachowski, 421 U.S. 560, 567 (1970); Abbott Laboratories v. Gardner, 387 U.S. 136, 140- 141 (1967); Administrative Procedure Act, 5 U.S.C. secs. 701-706 (1982). Agency action is only exempt from judicial review where the governing statutes expressly preclude review or where the action is committed to agency discretion by law. Estate of Gardner v. Commissioner, supra; 5 U.S.C. section 701(a). Section 6661(c) does not on its face preclude judicial review of a denial of waiver of the section 6661 addition to tax. The legislative history of section 6661(c) reveals no such intent on the part of Congress.
To determine whether an action has been committed solely to agency discretion we have followed the standards followed in other Federal courts. Only in cases in which it can be found that the existence of broad discretionary power is not appropriate for judicial review, or that the agency determination involves political, economic, military, or other managerial choices not susceptible to judicial review, or that the agency determination requires experience or expertise for which legal education or the lawyer's skills provide no particular competence for resolution and for which there are no ascertainable standards against which the expertise can be measured have the courts refrained from reviewing administrative discretion. Estate of Gardner v. Commissioner, supra at 996. See also Hondros v. United States Civil Service Commission, 720 F.2d 278, 293 (3d Cir. 1983); Local 1219, Am. Fed. of Gov. Employees v. Donovan, 683 F.2d 511, 515 (D.C. Cir. 1982); American Federation of Gov. Emp. Etc. v. Brown, 680 F.2d 722, 725 (11th Cir. 1982); Peoples Gas, Light & Coke Co. v. U.S. Postal Service, 658 F.2d 1182, 1190-1191 (7th Cir. 1981).
The narrow category of circumstances warranting our refraining from reviewing administrative discretion does not exist here. Indeed, the statute and regulations provide ascertainable standards upon which to review respondent's action. This review does not involve political, economic, military, or other managerial choices not susceptible to judicial review. The...
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