Sliwa v. C.I.R., 86-7430

• Decision Date: 12 February 1988
• Docket Number: No. 86-7430,86-7430
• Citation: 839 F.2d 602
• Parties: -641, 88-1 USTC P 9184 Sylvia A. SLIWA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 602

839 F.2d 602

61 A.F.T.R.2d 88-641, 88-1 USTC P 9184

Sylvia A. SLIWA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 86-7430.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 11, 1987.

Decided Feb. 12, 1988.

Paul J. Mooney and Marc L. Spitzer, Phoenix, Ariz., for petitioner-appellant.

Michael L. Paup, Gilbert S. Rothenberg and John A. Dudeck, Jr., Washington, D.C., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before POOLE and BOOCHEVER, Circuit Judges, and DIMMICK, ^* District Judge.

POOLE, Circuit Judge:

This case arises out of alleged deficiencies in the 1975, 1976, and 1977 federal income tax paid by appellant Sylvia Sliwa. After Ms. Sliwa filed a petition in the tax court seeking a re-determination of the deficiencies set forth by the Commissioner, the Commissioner of Internal Revenue conceded that Sliwa's return was not in fact deficient, and stipulated to the dismissal of the Notice of Deficiency against her.

Sliwa then applied to the Tax Court for an award of attorney's fees under section 7430 of the Internal Revenue Code, 26 U.S.C. Sec. 7430. Under the statute, a prevailing party may be awarded attorney's fees upon proof that the "position of the United States in the civil proceeding" was unreasonable. The Tax Court, examining the government's conduct only after Sliwa had filed her petition, found the Commissioner's position to have been reasonable and denied fees. Sliwa argues on appeal that the Tax Court should have considered the pre-litigation conduct of the agency in determining the "reasonableness" of the government's position in the civil proceeding, and further that the government's position was unreasonable both before the litigation and after the filing of her Tax Court petition. We have jurisdiction over the appeal pursuant to 26 U.S.C. Sec. 7482(a) and affirm.

FACTS AND PROCEEDINGS

During the tax years 1975-1977, while Sylvia and Kenneth Sliwa were married and filed joint income tax returns, Kenneth embezzled money from his employer, Marriott Corporation, to cover accrued gambling debts. None of Kenneth's illegal embezzlement income was reported on the Sliwas' joint returns for 1975, 1976, and 1977.

Sylvia began divorce proceedings against her husband in October 1978, and they ultimately entered into a separation agreement under which Sylvia retained possession of the couple's personal residence in Phoenix. In November 1978, Kenneth executed and recorded a quitclaim deed conveying his interest in the property to his wife.

In 1981, the Commissioner issued a joint Notice of Deficiency against both Sliwas for the tax years 1975, 1976, and 1977, asserting deficiencies arising out of Kenneth's unreported embezzlement income. The Commissioner mailed a notice of deficiency to Kenneth at his new address, but failed to send a notice to Sylvia, who continued to reside at the old Sliwa residence. The Commissioner later conceded that this notice was ineffective as to Sylvia.

Following tax assessments against Kenneth in October and November 1981, the Commissioner filed notice of federal tax liens on the Sliwa residence, based on the position that Kenneth had not effectively conveyed his interest in the residence to Sylvia until February 1982, after federal tax liens had attached to the property. This position was apparently founded on the notary public's failure to sign the verification on Kenneth's 1978 quitclaim deed.

In November 1983, Sylvia met with IRS agent Allene Hartley, at the latter's request, to discuss what knowledge she might have had of Kenneth's illegal income and her qualification as an "innocent A month later, in December, 1983, Sylvia filed an action against the United States in the Arizona district court to quiet title to the Sliwa residence. Her verified complaint asserted both that any defect in the notarization of her husband's release of the property had been cured, ¹ and that she qualified as an "innocent spouse" under Code Sec. 6013(e).

spouse" under Code Sec. 6013(e). At this meeting, Sylvia provided agent Hartley with a copy of a sworn statement by Kenneth Sliwa of April 1978, stating that at no time during the tax years at issue was Sylvia aware of Kenneth's embezzlement activities, and that she had not benefited in any way from the income derived therefrom.

The district court granted Sylvia's motion for partial summary judgment, ruling that Kenneth had indeed conveyed all of his interest in the Sliwa residence in 1978 rather than in 1982, and quieting title to the residence in favor of Sylvia. ²

On July 10, 1984, the Commissioner issued Sliwa a statutory notice of deficiency, similar to the joint notice issued in 1981, asserting deficiencies in her income for 1975, 1976, and 1977 based on Kenneth's embezzlement activities. Sliwa filed a Tax Court Petition on September 27, 1984, claiming that the notice of deficiency was barred by the statute of limitations, and that she was relieved of any liability as an innocent spouse.

The case was assigned to the IRS Appeals Division for settlement discussions. An Appeals Officer, Robert Desiderati, suggested that information contained in Sylvia's bank records would be useful in resolving the case, and advised her counsel that it was her burden to produce the records. Although counsel believed that these documents were irrelevant and that documents already in the IRS files would confirm the allegations of the petition, he nevertheless subpoenaed and received the bank records. In May 1985 counsel for Sliwa informed Desiderati that he had the documents, but apparently no one from the Appeals Office ever requested or inspected the records at that time.

On June 28, 1985, Sliwa served formal discovery requests on the Commissioner, including interrogatories, a request for admissions, and a request for production of documents. The Commissioner responded by letter July 18, 1985, stating that discovery was premature because the parties had not yet had an opportunity to exchange information on an informal basis, as provided in Branerton Corp. v. Commissioner, 61 T.C. 691 (1974), and because the case was still under the jurisdiction of the IRS Appeals Division for purposes of settlement negotiations. Sliwa responded that Branerton was not controlling because she had made "exhaustive, albeit unsuccessful" efforts to obtain informal discovery, and because the case was already set for trial in the Tax Court at the time the discovery requests were served. The Commissioner moved for a protective order, arguing that Sliwa was premature in undertaking formal discovery. Sliwa filed a response and a motion for summary judgment. On September 25, 1985, the Tax Court held a hearing at which all motions were taken under advisement. Some time thereafter the Commissioner conceded all the issues in the case, stipulating to a dismissal of his notice of deficiency in November 1985.

On December 4, 1985, Appellant moved for litigation costs pursuant to Internal

                Revenue Code section 7430.  That section 3 provides for an award of reasonable litigation costs when the taxpayer has "substantially prevailed with respect to the amount in controversy," Sec. 7430(c)(2)(A)(ii)(I) and "establishes that the position of the United States in the civil proceeding was unreasonable," Sec. 7430(c)(2)(A)(i) (emphasis supplied); 4  Baker v. Commissioner, 787 F.2d 637, 638 (D.C. Cir.1986).  The Commissioner conceded that Sliwa had substantially prevailed in the proceeding, but disagreed that the position of the United States had been unreasonable.  The Tax Court denied Sliwa's motion for fees and her subsequent motion for reconsideration.  That court's final decision was entered on June 12, 1986, from which Sliwa now timely appeals
                

STANDARD OF REVIEW

In denying Sliwa's motion for fees and her subsequent motion for reconsideration, the Tax Court held that the Commissioner's pre-litigation conduct was irrelevant to the determination whether the Commissioner's position "in the civil proceeding" was reasonable, and concluded that the "position of the United States" in the post-petition Tax Court litigation was reasonable.

We review decisions of the Tax Court on the same basis as decisions in civil bench trials in the district courts. Mayors v. C.I.R., 785 F.2d 757 (9th Cir.1986). The Tax Court's construction of section 7430 determines a question of law and is reviewed de novo. Betson v. C.I.R., 802 F.2d 365 (9th Cir.1986); Orvis v. C.I.R., 788 F.2d 1406 (9th Cir.1986). The Tax Court's determination of the reasonableness of the Commissioner's position under section 7430 presents a mixed question of law and fact, also subject to de novo review. McConney v. United States, 728 F.2d 1195, 1199-1203 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984); see also Franklin v. Commissioner, 544 F.2d 1045, 1047 n. 3 (9th Cir.1976). The Tax Court's findings of fact are reversed only if clearly erroneous.

DISCUSSION

Construction of Section 7430

This case presents an interesting issue of statutory construction. Appellant contends that section 7430 would be rendered ineffective were courts not permitted to consider the government's pre-litigation conduct in determining the reasonableness of the "position of the United States in the civil proceeding," and that the government's conduct in this case, which in fact ultimately compelled Appellant to file her Tax Court petition, was unreasonable. The Commissioner, on the other hand, asserts This circuit has yet to interpret the meaning of the phrase "the position of the United States in the civil proceeding" in section 7430, and those circuit courts which have addressed the issue are divided on their construction of the statute. ⁵ The District of Columbia, Tenth, and Eleventh Circuits have held that the "position of the United States" which must be examined is limited to the government's in-co...