Moretti v. C.I.R., 415

Decision Date23 February 1996
Docket NumberD,No. 415,415
Citation77 F.3d 637
Parties-1076, 96-1 USTC P 50,162, 43 Fed. R. Evid. Serv. 1146 Gene L. MORETTI, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ocket 95-4036.
CourtU.S. Court of Appeals — Second Circuit

Gene L. Moretti, petitioner-appellant pro se.

Loretta C. Argrett, Assistant Attorney General, United States Department of Justice, Tax Division (Gary R. Allen, William S. Estabrook, Linda E. Mosakowski, Tax Division Attorneys, on the brief), for respondent-appellee.

Before: ALTIMARI, McLAUGHLIN, and PARKER, Circuit Judges.

ALTIMARI, Circuit Judge:

Petitioner-appellant Gene L. Moretti ("Moretti") appeals from two orders of the United States Tax Court sustaining certain deficiencies and additions to Moretti's 1990 and 1991 federal income taxes, after a bench trial, and denying Moretti's claims to certain tax refunds and carryovers. For the reasons stated below, we affirm in part the rulings of the Tax Court, reverse in part, vacate the judgment, and remand the matter to the Tax Court for a new trial.

Background

Moretti and his wife, Lorraine Moretti ("Mrs. Moretti"), who were married in 1957, failed to file federal income tax returns for the 1990 and 1991 tax years. Pursuant to section 6212(a) of the Internal Revenue Code ("I.R.C."), 26 U.S.C. § 6212(a) (1994), the Commissioner of the Internal Revenue Service ("Commissioner") issued notices of deficiency to the Morettis for the two tax years. The Commissioner determined deficiencies for the years at issue in the amounts of $1,924 and $4,713, respectively, and tax additions in the amounts of $285 and $1,081.36, respectively. In making these determinations, the Commissioner deemed the Morettis' filing status as "married, filing separate."

The Morettis' subsequently filed income tax returns for the two years, claiming a "married, filing joint return" status. Moretti claimed earned taxable income of $17,564 for 1990, and $29,698 for 1991. The Morettis' 1990 return listed Schedule C business losses of $31,763 from Mrs. Moretti's T-shirt and souvenir business. Their 1991 return listed a $14,012 loss of income based on a carryover from the previous year of Mrs. Moretti's business loss, as well as a Schedule C loss of $1,130 from Mr. Moretti's photography business.

After filing the returns, Moretti petitioned the United States Tax Court for a redetermination of the Commissioner's deficiency and tax addition determinations for the two tax years at issue. According to Moretti, the Commissioner used the wrong filing status and should have considered the Morettis' Schedule C losses in determining the tax deficiencies and additions. Moretti also contended that, in light of the Morettis' correct filing status and the claimed losses, he and his wife actually overpaid their taxes in 1990 and 1991 through their employment withholdings, and were due refunds. In addition, Moretti claimed that he had overpaid his 1989 taxes by $698, for which he was entitled to a refund.

A trial of the issues raised in Moretti's petitions was conducted before the Tax Court on October 18, 1994; Moretti appeared pro se. The Tax Court first considered a motion by the Commissioner to dismiss Moretti's claim that he was entitled to a refund for overpaying his 1989 income taxes. The Commissioner argued that the Tax Court lacked jurisdiction to hear the claim, because the Commissioner had not sent a statutory notice of deficiency to Moretti for the 1989 tax year. Moretti contended that a proposed individual income tax assessment letter sent to him by the Commissioner dated April 15, 1993, in which Moretti was notified of the Commissioner's computation of Moretti's estimated tax, penalties and interest for the 1989 tax year, based upon income reported by banks and Moretti's employer, constituted a notice of deficiency within the meaning of I.R.C. § 6212(a). Attached to the proposed tax assessment were the Commissioner's calculations of the proposed deficiency and tax penalties. The Tax Court held that the assessment did not constitute a statutory notice of deficiency, and granted the Commissioner's motion to dismiss the claim for a refund of the alleged 1989 tax year overpayment.

The Tax Court next considered the issue of the Morettis' filing status. Moretti offered his marriage certificate to show that he was legally married. Despite marital difficulties resulting in his wife's moving to Florida, Moretti contended he had gone to live with his wife in Florida in 1989 and 1990. When asked by the court whether he would produce his wife as a witness, he informed the court that he would not because she was ill and he did not want to exacerbate her condition. The Tax Court found Moretti's testimony "most unbelievable," and determined that Moretti failed to overcome the presumption of correctness to which the Commissioner's determination was entitled.

The Tax Court then turned to Moretti's alleged Schedule C business losses. In accordance with a pre-trial order requiring documents proposed for use at trial to be identified and exchanged at least 15 days prior to trial, Moretti had submitted to the Commissioner copies of a "contract of sale" to his wife and various cancelled checks. Moretti claimed that these documents proved the $31,763 loss from his wife's T-shirt and souvenir business. On the day before the trial was to commence, and again on the morning of the trial, Moretti submitted to the Commissioner additional documents which he claimed further supported the loss and also substantiated his contention that his photography business was a for-profit business for which Schedule C business losses could be claimed. The Commissioner opposed the documents' admission.

With regard to the documents exchanged by Moretti immediately before the trial, the Commissioner argued that the documents should not be admitted as evidence because they were not timely provided to him as required by the pre-trial order. Moretti claimed that the documents concerning his wife's business had only recently been obtained from Florida. He also explained that the documents concerning his photography business were produced at such a late stage because the Commissioner had first contended that Moretti's photography business was a not-for-profit business which did not qualify for Schedule C business loss deductions only a week prior to the trial. The Tax Court was not persuaded by Moretti's arguments and excluded all of the documents produced immediately prior to the trial.

With regard to the documents which were timely produced, namely the "contract of sale" and the checks which allegedly documented the $31,763 loss from Mrs. Moretti's business, the Commissioner objected to these documents' admissibility on the grounds that they could not be authenticated, were not original copies, and contained hearsay. The Tax Court agreed with the Commissioner and, over Mr. Moretti's objections, granted the Commissioner's motion to exclude all of the documents.

Frustrated with the Tax Court's ruling excluding all of his documentary evidence, Moretti accused the Tax Court of being partial to the Commissioner. Thereafter, he refused to make any further arguments, stating, "I'm wasting my time in this Court." Accordingly, the case was taken under submission. Later that day, the Tax Court issued a bench opinion in which it summarized its findings and oral rulings, and included further rulings on Moretti's objections to the Commissioner's deficiency and addition determinations. In addition to the rulings that Moretti failed to meet his burden of proof concerning his marital filing status and failed to put in any evidence substantiating the claimed Schedule C losses, the Tax Court (1) held that Moretti was liable for tax additions under I.R.C. § 6651(a) for 1990 and 1991, because he failed to file his tax returns for those years by the prescribed dates and he did not show that his failure was due to reasonable cause rather than willful neglect; (2) held that Moretti was not due a refund for alleged overpayments in the 1990 tax year, because the amount of any such refund was limited to the amount of tax Moretti had paid in the two years prior to receiving his notice of deficiency for the 1990 tax year, which in this case was zero; (3) disallowed Moretti's carryover of a claimed net operating loss for the year 1991; and (4) ruled that Moretti was liable for an addition under I.R.C. § 6654(a) for the year 1991, because of insufficient withholdings of taxes that year. The Tax Court subsequently issued two orders finalizing its decision and judgment.

Moretti then brought the present appeal, challenging each of the Tax Court's rulings.

Discussion

We review each of the Tax Court's rulings, keeping in mind that its "conclusions of law are examined de novo, while findings of fact are upheld unless clearly erroneous." Friedman v. Commissioner of Internal Revenue, 53 F.3d 523, 528 (2d Cir.1995). The Tax Court's application of the Federal Rules of Evidence, as well as its interpretation and application of its own procedural rules, is reviewed for abuse of discretion. See Estate of Shafer v. Commissioner of Internal Revenue, 749 F.2d 1216, 1218-19 (6th Cir.1984) (citing cases).

1. The 1989 Tax Refund

The Tax Court is a court of limited jurisdiction, and its jurisdiction can be exercised only pursuant to statutory authority. Belloff v. Commissioner of Internal Revenue, 996 F.2d 607, 611 (2d Cir.1993). The statutory authority granting the Tax Court jurisdiction to hear a taxpayer's claim for a redetermination of his or her tax liability is found in I.R.C. § 6213(a), which provides in relevant part that, subject to several exceptions not applicable here, "no assessment of a deficiency in respect of any tax imposed ... and no levy or proceeding in court for its collection shall be made" until a notice of deficiency has been sent to the taxpayer...

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