Sauers v. C.I.R.

Decision Date20 May 1985
Docket NumberNo. 84-5793,84-5793
Citation771 F.2d 64
Parties, 56 A.F.T.R.2d 85-5767, 54 USLW 2148, 85-2 USTC P 9608 Paul SAUERS, Box 1573, Atlantic City, NJ 08404 v. COMMISSIONER OF INTERNAL REVENUE. Appeal of Paul SAUERS. . Submitted under Third Circuit Rule 12(6)
CourtU.S. Court of Appeals — Third Circuit

Paul Sauers, Atlantic City, N.J., pro se.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Richard Farber, Laurie A. Snyder, Tax Div., Dept. of Justice, and Robert B. Miscavich, Tax Litigation Div., I.R.S., Washington, D.C., for appellee.

Before ADAMS, GARTH and BECKER, Circuit Judges.

BECKER, Circuit Judge.

This appeal from a decision and order of the Tax Court dismissing appellant Paul Sauers's petition for review of a statutory notice of deficiency raises the question, inter alia, whether 26 U.S.C. Sec. 6673 (1982), which gives the Tax Court discretion to award "damages" for frivolous and vexatious appeals, is actually a penalty statute that may be applied without a formal determination of the expenses incurred by the United States in defending the suit and those incurred by the Tax Court in adjudicating it. We conclude that the statute is, in fact, a penalty statute. We also conclude that the Tax Court properly exercised its discretion in awarding the Commissioner of Internal Revenue $5,000 in damages under Sec. 6673. On the underlying merits, we hold that the Tax Court properly exercised its discretion in dismissing the taxpayer's petition for failure properly to prosecute his case where the taxpayer raised only frivolous arguments in the petition and refused to stipulate to facts in preparation for trial. We therefore will affirm the judgment.

I.

The relevant facts are as follows. Sauers failed to report on his federal income tax return for 1980 (Form 1040) the total amount of wages reported on his Form W-2. 1 In due course the Internal Revenue Service mailed Sauers a notice of deficiency for the unpaid taxes, and of additions to tax: (a) for failure timely to file under 26 U.S.C. Sec. 6651(a); and (b) for negligent or intentional disregard of tax rules and regulations under 26 U.S.C. Sec. 6653(a). Sauers thereupon petitioned the Tax Court for review pursuant to 26 U.S.C. Sec. 6213. In his briefs and motions supporting this petition, Sauers did not dispute the assessment of tax deficiency and additions to tax alleged in the IRS's notice but raised a litany of legal arguments typical of those asserted by "tax protesters." 2 The Commissioner, contending that Sauers's arguments were frivolous, moved for summary judgment and for damages under Sec. 6673. A hearing on the motion was scheduled for April 24, 1984, and the case was listed for trial, if one proved necessary, on the same day.

At the summary judgment hearing, Sauers, represented by counsel, rested his case entirely on the arguments made in his pre-trial papers. He refused to engage in a stipulation of facts, in violation of Rule 91(a) of the Rules of Practice and Procedure of the United States Tax Court [hereinafter cited as Tax Court Rules], and, when pressed by the court, admitted that he would have no evidence to present at trial. On the court's suggestion, the Commissioner moved orally to dismiss the petition for failure properly to prosecute, in view of Sauers's lack of cooperation and the lack of merit of his legal claims. See Tax Court Rule 123(b). The court granted this motion, 3 sustained the assessments of deficiency and additions to tax, and--without conducting an assessment of damages--awarded $5,000 to the IRS pursuant to Sec. 6673. 4

In its memorandum opinion dismissing the petition and awarding damages, the court characterized Sauers as a "tax protester" and summarily rejected his claim. Regarding the damage award, the court stated: "we are satisfied [Sauers] knew that his arguments were frivolous but nevertheless wanted to abuse the process of this Court and waste its resources and those of respondent." Sauers v. Commissioner, T.C.M. (CCH) 536 (1984). Sauers appeals.

II.
A.

We address first appellant's contention that the Tax Court erred in dismissing his petition for failure to prosecute. We review the dismissal for failure to prosecute under an abuse of discretion standard. See Link v. Wabash Railroad Co., 370 U.S. 626, 633, 82 S.Ct. 1386, 1390, 8 L.Ed.2d 734 (1962); Titus v. Mercedes Benz of North America, 695 F.2d 746, 746-47 (3d Cir.1982); Spering v. Texas Butadiene & Chemical Corp., 434 F.2d 677, 680 (3d Cir.1970), cert. denied, 404 U.S. 854, 92 S.Ct. 97, 30 L.Ed.2d 95 (1971).

The merits of appellant's case need not detain us long. Sauers admitted before the Tax Court that he could present no evidence on his own behalf. Moreover, we agree with the Tax Court that Sauers's legal contentions were patently frivolous. See supra note 6. The Fifth Circuit's characterization of the taxpayer's case in Crain v. Commissioner, 737 F.2d 1417 (5th Cir.1984) is applicable here: "[i]t is a hodgepodge of unsupported assertions, irrelevant platitudes, and legalistic gibberish." Id. at 1418. We therefore hold that the Tax Court did not abuse its discretion in granting the Commissioner's motion to dismiss. Cf. United States v. Isenhower, 754 F.2d 489, 490 (3d Cir.1985) (dismissing similar claims as "plainly frivolous"). 5

B.

The issue that prompts us to write is one of first impression in this circuit: whether the Tax Court erred by awarding damages under 26 U.S.C. Sec. 6673 without first receiving evidence on the amount of damages, i.e., the expenses incurred by the United States in defending the suit before the Tax Court (and, perhaps, the resources of the court itself expended in entertaining the suit), and without relating the award to an assessment of these damages. For the reasons that follow, we hold that a formal assessment of damages is not required by the statute.

We begin our analysis with the language of the provision itself. Section 6673 provides, in full:

Whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless, damages in an amount not in excess of $5,000 shall be awarded to the United States by the Tax Court in its decision. Damages so awarded shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Secretary or his delegate and shall be collected as a part of the tax.

By referring to "damages" that may be "awarded to the United States," the statute suggests that the award is being made as compensation to the United States as the opposing and prevailing party. If the statute is compensatory, a hearing on the appropriate amount of compensation presumably would be required. We note, however, that the language of the statute neither requires a hearing to assess damages nor provides for a hearing to be held at the Tax Court's discretion.

Read as a whole, it appears to us that the primary purpose of the statute is not to compensate the United States as opposing party but instead to penalize taxpayers who raise frivolous claims in the tax court. A penalty is "not [ ] a 'pre-estimate of probable actual damages, but [ ] a punishment, the threat of which is designed to prevent [a] breach.' Westmount Country Club v. Kameny, 82 N.J.Super. at 205, 197 A.2d at 382 [ (N.J.Super.A.D. 1964) ]." In re Plywood Co., 425 F.2d 151, 155 (3d Cir.1970). Therefore, unlike a situation involving an award of compensatory damages, an assessment of damages is not required before a penalty may be imposed. United States v. Dieckerhoff, 202 U.S. 302, 311-12, 26 S.Ct. 604, 607-08, 50 L.Ed. 1041 (1906); Clark v. Barnard, 108 U.S. 436, 459, 2 S.Ct. 878, 891, 27 L.Ed. 780 (1883); United States v. Glidden Co., 119 F.2d 235, 242 (6th Cir.1941).

Conceding that the statutory language is not explicit, however, we draw instruction from the Supreme Court's statement in Helwig v. United States, 188 U.S. 605, 23 S.Ct. 427, 47 L.Ed. 614 (1903):

Whether the statute defines [the assessment] in terms as a punishment or penalty is not important, if the nature of the provision itself be of that character.

....

[I]t is the duty of the court to be governed by such statutory direction, but the intrinsic nature of the provision remains, and, in the absence of any declaration by Congress affecting the manner in which the provision shall be treated, courts must decide the matter in accordance with their views of the nature of the act.... [T]he failure of the statute to designate it as a penalty, ... will not work a statutory alteration of the nature of the imposition, and it will be regarded as a penalty when by its very nature it is a penalty.

Id. at 611-13, 23 S.Ct. at 429-30. State courts have held statutes referring to "damages" as in fact providing for a penalty. Joyce v. Means, 41 Kan. 234, 235, 20 P. 853, 853 (1889); Spence v. Thompson, 11 Ala. 746, 750 (1847). Moreover, the legislative history of Sec. 6673 supports the view that it is a penalty statute designed to deter taxpayers from bringing frivolous or dilatory suits, and not a damage provision enacted to compensate the IRS. The statute, enacted as part of the Revenue Act of 1926, ch. 27, 44 Stat. 106, and incorporated into the 1939 and 1954 tax codes, originally allowed damages for claims brought by the taxpayer merely for delay. The Senate committee report on the 1926 act stated that the damages are "to prevent advantage being taken of review proceedings before" the Board of Tax Appeals (now the Tax Court), indicating the provision's deterrent--rather than compensatory--purpose. S.Rep. No. 52, 69th Cong., 1st Sess. 36 (1926).

In 1982, the Tax Equity and Fiscal Responsibility Act, Pub.L. 97-248, 96 Stat. 574, amended Sec. 6673 by adding a provision for damages for frivolous and...

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