Hanley v. Commissioner

• Court: Court of Appeals for the First Circuit
• Decided: December 16, 1992
• Docket: 92-1035
• Status: Published

Opinion

USCA1 Opinion

December 16, 1992
                                [NOT FOR PUBLICATION]

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ___________________

No. 92-1035

KENNETH A. HANLEY AND PHYLLIS G. HANLEY,

                               Petitioner, Appellants,

                                          v.

                          COMMISSIONER OF INTERNAL REVENUE,

                                Respondent, Appellee.

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                       APPEAL FROM THE UNITED STATES TAX COURT

[Hon. Peter J. Panuthos, Special Trial Judge]
                                             ___________________

                                 ___________________

                                        Before

                              Torruella, Cyr and Stahl,
                                   Circuit Judges.
                                   ______________

                                 ___________________

               Kenneth A. Hanley and Phyllis G. Hanley on brief pro se.
               _________________     _________________
               James A. Bruton, Acting  Assistant Attorney General, Gary R.
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          Allen, David English Carmack and Sara Ann Ketchum, Attorneys, Tax
          _____  _____________________     ________________
          Division on brief for appellee.

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                                 __________________ 

Per Curiam.   This appeal from a decision  of the Tax
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          Court finds  its  origin in  a  dispute between  the  appellants,

          Kenneth  and Phyllis  Hanley, and  the Internal  Revenue Service,

          over the Hanleys' income tax liability for 1986.  In  April 1987,

          the Hanleys  filed income tax  returns indicating that  they were

          entitled to  a tax refund of  $53.85 for the previous  year.  The

          Hanleys' calculation was  based, among other things, on a $28,000

          deduction  for a debt, owed to them  by their daughter, which the

          Hanleys claimed had become  "worthless."  See 26 U.S.C.    166(a)
                                                    ___

          (allowing  deductions for  business  debts that  become worthless

          during taxable year).

                 The IRS disagreed  with the Hanleys' computation.   An IRS

          officer  prepared a  substitute  return and  calculated that  the

          Hanleys actually owed  the government $3,041 in  income taxes for

          1986.  In May 1987, however,  the IRS assessed the Hanleys in the

          amount of only $1,824.  How the IRS arrived at the latter figure,

          and  under what authority  it made the  assessment, are questions

          left  unanswered by the record.1  What does seem reasonably clear

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          1.  With  few exceptions, the IRS  is required by  law to provide
          the  taxpayer with  a  notice of  deficiency,  and to  allow  the
          taxpayer ninety  days to  petition for a  redetermination of  the
          deficiency in the Tax Court, before it can make an assessment and
          begin collecting  the taxes due.  26 U.S.C.     6212, 6213.   See
                                                                        ___
          also  Robinson v.  United States,  920 F.2d  1157, 1158  (3d Cir.
          ____  ________     _____________
          1990)  (notice of deficiency "serves as a prerequisite to a valid
          assessment by the  IRS").  The record in this  case does not make
          clear whether the  IRS sent  the Hanleys a  notice of  deficiency
          before  making the 1987 assessment. No such notice appears in the
          record,  and the  government  seems to  concede in  its appellate
          brief that  it  failed to  send  one, but  the  Hanleys --  in  a
          document  they submitted to the  Tax Court entitled "Petition for
          Reargument  and Redetermination/Appeal"  -- state that  "[o]n May
          25, 1987  the  Internal Revenue  Service  sent the  Petitioner  a

is that on several occasions in 1988 and 1990, the  IRS levied on

          the Hanleys' property to satisfy this assessment.

                 In  January 1990,  the IRS  issued a  statutory notice  of

          deficiency for  tax year  1986  in the  amount of  $1,217.2   The

          Hanleys petitioned  the Tax  Court for  a redetermination  of the

          deficiency.  Their amended petition made two claims: (1) that the

          IRS had violated  the Hanleys' Fifth Amendment rights and various

          provisions  of  the  Internal  Revenue  Code  by levying  on  and

          confiscating their  property without "just cause,"  and (2), that

          the  $1,217 figure  stated in  the notice  of deficiency  was, in

          several respects, "substantially incorrect." 

                 By the time the matter came to trial in the Tax Court, the

          parties had  narrowed the issues considerably.   They had settled

          their differences with respect to all  but one of the elements in

          the  IRS's calculation of the deficiency.   Therefore, they asked

          the Tax Court to determine only whether the Hanleys were entitled

          to  take  a  deduction for  the  allegedly  worthless  debt.   In

          addition, at the beginning of the trial, Mr. Hanley asked the Tax

          Court to eliminate  that portion  of the  amended petition  which

          accused the IRS of making an unlawful levy.

                 The parties submitted a number of exhibits, and Mr. Hanley

          and  his  daughter  testified   at  the  trial,  confining  their

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          Notice of Deficiency in the amount of $1,824.00. . . ."

          2.  $1,217  appears  to be  the  difference  between the  initial
          calculation of $3,041 in  taxes owed, and the $1,824  assessed in
          1987 and collected in 1988 and 1990.

                                         -3-

testimony to matters concerning the allegedly worthless debt.  At

          the  close of trial, the  Tax Court judge  announced his decision

          from the  bench.  He found  that the Hanleys had  failed to carry

          their  burden  of  proving  that  the  debt  was  worthless,  and

          instructed the  parties to recompute the  deficiency, pursuant to

          Tax Court Rule  155, in  light of  this finding  and the  various

          adjustments made by agreement before trial.

                 The  government  recalculated the  deficiency to  be $524.

          The  Hanleys  disputed  this  figure,  and  submitted  their  own

          computation which said  that they  were entitled to  a refund  of

          $849.   The Tax Court rejected the Hanleys' computation, accepted

          that of the IRS, and entered a decision on June 27, 1991.

                 Almost  three months  later,  on September  23, 1991,  the

          Hanleys filed a "Petition for Argument and Redetermination/Appeal

          of Court Order  Dated June 27,  1991."  The Tax  Court identified

          the document as a motion to vacate the decision, and denied it as

          untimely.  See  Tax Court Rule 162  (motions to vacate or  revise
                     ___

          must be  filed within  thirty days of  entry of  decision).   The

          Hanleys then filed a notice of appeal.3

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          3.  The government  says that  we should dismiss  the appeal  for
          lack of  jurisdiction because  notices of  appeal from Tax  Court
          decisions  must be  filed  within ninety  days  of entry  of  the
          decision, 26 U.S.C.    7483, and the  Hanleys did not file  their
          notice of appeal until December  24, some 181 days after  the Tax
          Court entered its decision.  The government acknowledges that the
          filing of  a timely motion to vacate will re-set the clock on the
          time to appeal, but says (1) that the filing of an untimely post-
                                                             ________
          judgment motion has no effect on the time to appeal,  see Denholm
                                                                ___ _______
          &  McKay Co. v. Commissioner  of Internal Revenue,  132 F.2d 243,
          ____________    _________________________________
          248  (1st  Cir.  1942), (2)  that  motions  to  vacate Tax  Court

                                         -4-

The Worthless Debt Deduction
                             ____________________________

                 Under  26 U.S.C.   166(a), a taxpayer may take a deduction

          for business debts that become worthless during the taxable year.

          In  order to  qualify for  that deduction,  the Hanleys  bore the

          burden of proving (1) that their  daughter owed them a debt,  and

          (2) that the  debt became worthless  sometime in  1986.  See  Tax
                                                                   ___

          Court  Rule  142(a)  ("The burden  of  proof  shall  be upon  the

          petitioner");  see also United States v. Clark, 358 F.2d 892, 895
                         ________ _____________    _____

          (1st Cir. 1966)  ("It is well settled that the  burden was on the

          taxpayer  to  show   that  he   was  entitled   to  the   claimed

          deductions").    The government  did  not  seriously dispute  the

          existence  of the debt; the  Hanleys showed that  they had loaned

          their  daughter,  Geraldine,  a  total  of  $29,550  to  start  a

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          decisions must be filed  within thirty days of the  decision, and
          (3)   that    the   Hanleys'    "Petition   for    Argument   and
          Redetermination/Appeal"  was  a motion  to  vacate, filed  almost
          ninety days  after  the  Tax  Court  entered  its  decision,  and
          therefore well beyond the time limit set forth in the Rule.
                 The  Hanleys  say  that  the "Petition  for  Argument  and
          Redetermination/Appeal" was not a motion to vacate,  but a notice
          of appeal, albeit an informal one.  They point to Fed. R. App. P.
          3(c), which counsels that "[a]n appeal shall not be dismissed for
          informality of form or title of the notice of appeal."
                 Because we affirm the Tax Court decision on the merits, we
          need  not  determine  in  this  case  whether  the "Petition  for
          Argument and  Redetermination/Appeal"  so "clearly  evinced"  the
          Hanleys'  intention to appeal, see Mosley v. Cozby, 813 F.2d 659,
                                         ___ ______    _____
          660 (5th Cir. 1987) (per curiam), as to justify  construing it as
          a valid notice of appeal.  It is a "familiar principle that where
          an  appeal presents  a  difficult jurisdictional  issue, yet  the
          substantive merits underlying the  issue are facilely resolved in
          favor of the party  challenging jurisdiction, the  jurisdictional
          inquiry may be avoided."  Narragansett  Indian Tribe v. Guilbert,
                                    __________________________    ________
          934 F.2d 4,  8 n.5 (1st  Cir. 1991) (quoting  Kotler v.  American
                                                        ______     ________
          Tobacco  Co., 926  F.2d 1217,  1221 (1st Cir.  1990)).   See also
          ____________                                             ___ ____
          Norton v. Mathews, 427 U.S. 524, 532 (1976).
          ______    _______

                                         -5-

business.  The  government contended,  and the  Tax Court  found,

          however, that  the debt did not  become worthless at  any time in

          1986.

                 "'Worthlessness' is a question of fact to be determined by

          the Tax Court  in the first instance."   Cole v.  Commissioner of
                                                   ____     _______________

          Internal Revenue, 871 F.2d 64, 66 (7th Cir. 1989) and cases cited
          ________________

          therein.   We may therefore  review the Tax  Court's finding only

          for "clear  error."   See  Manzoli  v. Commissioner  of  Internal
                                ___  _______     __________________________

          Revenue, 904 F.2d 101, 103 (1st Cir. 1990).  A finding of fact is
          _______

          clearly  erroneous  when  "the  reviewing  court  on  the  entire

          evidence is left  with the  definite and firm  conviction that  a

          mistake  has been  committed."   United States  v. United  States
                                           _____________     ______________

          Gypsum Co., 333 U.S. 364, 395 (1948).
          __________

                 We can detect no such error here.  "Proof of worthlessness

          generally requires a showing of identifiable events demonstrating

          the valuelessness of  the debt and justifying abandonment of hope

          of recovery."  Cole v. Commissioner of Internal Revenue, 871 F.2d
                         ____    ________________________________

          at 67 (citing Estate of Mann, 731 F.2d 267, 276 (5th Cir. 1984)).
                        ______________

          The  Hanleys point,  we take  it, to  the failure  of Geraldine's

          business in late 1986 as  such an "identifiable event."  The  Tax

          Court, however, had good  reason to conclude that this  event did

          not demonstrate that the debt had become valueless before the end
          ___

          of the year.

                 First, the  record contains evidence which  could have led

          the Tax Court to find that, at the close of 1986, the Hanleys had

-6-

"repossessed,"  and  still held,  certain  assets  of Geraldine's

          business  the sale  of  which might  have  resulted in  at  least

          partial  repayment.   In fact,  Mr. Hanley  did later  sell these

          assets at a series of "tag sales."

                 Second, and more important,  Geraldine testified that  she

          had  promised to  repay  the debt  whether  or not  her  business

          failed.   The failure of the business alone, therefore, could not

          have  demonstrated the valuelessness  of the  debt.   Rather, the

          Hanleys might  have justifiably abandoned hope  of repayment only

          if  some other event had  led them to  believe that Geraldine was
                   _____

          unable or unwilling to keep her promise.  The record describes no

          such  event.     It  contains  no  evidence   at  all  concerning

          Geraldine's financial status or job prospects in late 1986.  And,

          far from  suggesting that Geraldine  had renounced the  debt, the

          evidence shows that she continued to make payments on it, perhaps

          in 1987, and certainly in 1988, 1989, and 1990.

                              The Recomputed Deficiency
                              _________________________

                 The Tax Court's decision  to accept the IRS' recomputation

          of  the   deficiency,  and  to  reject   the  Hanleys'  competing

          recomputation,  was also a finding  of fact which  we review only

          for  clear  error.   Again,  we  can find  no  such  error.   The

          government's calculation of the deficiency was, to say the least,

          plausible.   "It is firmly settled . . . that, '[w]here there are

          two permissible  views of  the evidence, the  factfinder's choice

          between them cannot be clearly erroneous.'"  DesRosiers v. Moran,
                                                       __________    _____

-7-

949 F.2d  15, 19 (1st  Cir. 1991)  (quoting Anderson  v. City  of
                                                      ________     ________

          Bessemer City, 470 U.S. 564, 574 (1985)).
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                            Alleged Procedural Infirmities
                            ______________________________

                 Finally, the Hanleys seek to revive a vaguely stated claim

          that the  IRS deprived  them of due  process of law  by violating

          several  statutes regulating  the  procedures  for assessing  and

          collecting unpaid taxes.   The Hanleys had set forth  a similarly

          worded  procedural claim in  the first  paragraph of  the amended

          petition they submitted to the Tax Court.  However, on the day of

          trial, Mr. Hanley asked  the judge to "eliminate" the  claim, and

          the judge did so both physically and analytically, putting an "X"

          through the first  paragraph of the amended  petition (and noting

          "Omit per pet[itioner]"), and  making no mention of the  claim in

          his decision.  

                 Whatever  Mr.  Hanley's  motivation  might have  been  for

          abridging  his  petition in  this fashion,  on  the basis  of the

          record this court can conclude only that the procedural claim was

          withdrawn  from  the  Tax  Court's attention  before  trial,  and

          therefore  was not presented to it for  decision.  That being the

          case,  we have no  occasion to assess the  claim's merits.  "[I]n

          reviewing  a Tax Court decision, the duty of the court of appeals

          is to consider whether  the Tax Court committed error.   Plainly,

          the court of appeals  lacks jurisdiction to decide an  issue that

          was  not  the subject  of  the  Tax Court  proceeding  .  . .  ."

          Commissioner of Internal Revenue v. McCoy, 484 U.S. 3, 6 (1987).
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Affirmed.
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