Opinion
21908-19
01-13-2023
HARBINDER S. BRAR & BARBARA P. BRAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth A. Copeland Judge.
Petitioners Harbinder S. Brar and Barbara P. Brar currently have two cases pending before this Division of the Court: this case (docket No. 19657-18) and a related case (docket No. 21908-19). This case involves tax year 2014 and the related case involves tax year 2015; the issues in both cases are the same. The two cases are not consolidated for purposes of briefing, trial, or opinion.
On November 4, 2021, the Brars filed a Motion to Impose Sanctions (the "Motion") in both cases. On February 14, 2021, Respondent filed a Notice of Objection to Motion to Impose Sanctions in both cases, and the Brars (also in both cases) filed a reply to that Objection on February 28, 2022. Aside from different tax years and docket numbers, the contents of the aforementioned filings in both cases are the same. Thus, for the sake of efficiency and judicial economy, we will address the Motion by filing this Order in both cases.
The Brars ask us to award them litigation and administrative costs under Rule 33(b), Rule 121(f), section 6673(a)(2), and our inherent powers to regulate litigation before our Court. At the heart of this request are recharacterizations of S corporation distributions as officer's compensation (i.e., wages). The Brars are both medical doctors and in tax years 2014 and 2015 (the years at issue in docket Nos. 19657-18 and 21908-19, respectively), they each owned S corporations through which they operated their respective medical practices. The Internal Revenue Service (IRS) audited both S corporations and determined that a portion of the S corporations' distributions should have been reported as officer's compensation. As such, the IRS recharacterized some of the distributions as officer's compensation but did not give either S corporation corresponding wage deductions, which led to its determination that both S corporations had unreported income. The parties settled these officer's compensation issues in a Stipulation of Settled Issues filed on October 21, 2021 (for docket No. 19657-18) and October 27, 2021 (for docket No. 21908-19).
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Simply put, the Brars believe that the officer's compensation issues should never have become issues. They assert that had the IRS given the S corporations a corresponding wage deduction, the deduction would have offset the increased compensation and no unreported income determination would have been made (and thus, no income tax deficiency from these issues would have been generated). They further assert that the S corporations' entitlement to wage deductions is such an obvious conclusion that Respondent's counsel's defense of the officer's compensation determinations was sanctionable conduct. Below we review each authority relied on by the Brars and why they believe sanctions are appropriate under that authority and then make our determinations under each authority.
I. Rule 33(b)
Rule 33(b) states:
The signature of counsel or a party constitutes a certificate by the signer that the signer had read the pleading; that, to the best of the signer's knowledge, information, and belief formed after reasonable inquiry, it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. . . . If a pleading is signed in violation of this Rule, the Court, upon motion or upon its own initiative, may impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of reasonable expenses incurred because of the filing of the pleading, including reasonable attorney's fees.
In their Petitions in both cases, the Brars assigned error to the IRS's officer's compensation determinations. In the Answers filed in both cases, Respondent denied that the IRS erred in making its officer's compensation determinations. The Brars believe that Respondent's denials in both Answers amount to sanctionable conduct, because Respondent knew or should have known that the officer's compensation determinations were clearly erroneous, and his denial of the Brars' assignments of error was not well grounded in fact and not warranted under existing law.
In reviewing whether there may have been a violation of Rule 33(b), we inquire as to what the facts and law were at the time the pleading was filed. See Versteeg v. Commissioner, 91 T.C. 339, 342 (1988). We then weigh our inquiry "against the standard of reasonableness under the circumstances." Id. That means that we:
avoid using the wisdom of hindsight and . . . test the signer's conduct by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted. Thus, what constitutes a reasonable inquiry may depend on such factors as how much time for investigation was available to the signer; whether he had to rely on a client for information as to the facts underlying the pleading, motion, or other paper; whether the pleading, motion, or other paper was based on a plausible view of the law; or whether he depended on forwarding counsel or another member of the bar.Id. (citing 28 U.S.C.A. 391, Fed.R.Civ.P. 11, advisory committee's note, 1983 amendment (Supp. 1988)).
We do not think that, in denying the Brars' assertion that the IRS's officer's compensation determinations were erroneous, Respondent engaged in conduct sanctionable under Rule 33(b). Respondent may have been aggressive in certain of his actions and positions, but we do not think those actions and positions rise to a level that necessitates sanctions. We therefore reject the Brars' argument that Respondent engaged in conduct sanctionable under Rule 33(b).
II. Rule 121(f)
Rule 121(f) states:
If it appears to the satisfaction of the Court at any time that any of the affidavits or declarations presented pursuant to this Rule are presented in bad faith or for the purpose of delay, then the Court may order the party employing them to pay to the other party the amount of the reasonable expenses which the filing of the affidavits or declarations caused the other party to incur, including reasonable counsel's fees, and any offending party or counsel may be adjudged guilty of contempt or otherwise disciplined by the Court.
After the pleadings in the two cases had closed (i.e., after the Petitions, Answers, and Replies to Answer had been filed), the Brars filed a Motion for Partial Summary Judgment on February 1, 2021. Respondent filed a Response to Motion for Partial Summary Judgment on March 25, 2021, and the Brars filed their Reply to Response to Motion for Partial Summary Judgment on April 12, 2021. The Brars' February 1, 2021, Motion for Partial Summary Judgment sought summary adjudication in their favor as to the officer's compensation issues in both cases. The parties then settled the officer's compensation issues. As such, in an Order dated January 6, 2023, we denied the Brars' February 1, 2021, Motion for Partial Summary Judgment "as moot insofar as it related to the settled issues and without prejudice as to the computational issue."
The Brars argue that Respondent, in opposing their February 1, 2021, Motion for Partial Summary Judgment, engaged in conduct sanctionable under Rule 121(f). In particular, they argue that:
Respondent opposed Petitioners' motions with citations to inapplicable case law and legal authority in bad faith and for the purpose of multiplying and delaying these proceedings and with the intent to further dissuade petitioners from exercising their legal recourse with judicial review. It was only after Petitioners had expended an inordinate amount of time and resources, including finally, prosecuting and fully briefing [the February 1, 2021,] Motions for Partial Summary Judgment on the [officer's compensation] issue[s] that Respondent ultimately gave up his pursuit of his meritless and baseless adjustments.
We have two issues with the Brars' argument. First, Rule 121(f) applies to "affidavits or declarations . . . presented in bad faith or for the purpose of delay." It does not apply to an objection to a motion for partial or full summary judgment. Respondent did not file an affidavit or declaration in support of his objection to the Brars' February 1, 2021, Motion for Partial Summary Judgment. Thus, Rule 121(f) is inapplicable in this instance.
Second, the Brars would have our Court sanction Respondent for simply responding to their February 1, 2021, Motion for Partial Summary Judgment. We ordered Respondent to respond to the Motion, and he did so. He would otherwise have risked violating our Order and possibly defaulting on the motion, see Rule 121(d) ("If the adverse party does not [respond to a motion for partial or full summary judgment], then a decision, if appropriate, may be entered against such party."). We reject the Brars' argument that Respondent engaged in conduct sanctionable under Rule 121(f).
III. Section 6673(a)(2)
If an attorney appearing on Respondent's behalf has multiplied the proceedings in any case unreasonably and vexatiously, our Court is authorized to require the United States to "pay such excess costs, expenses, and attorneys' fees in the same manner as such an award by a district court." I.R.C. § 6673(a)(2)(B); see also Dixon v. Commissioner, 132 T.C. 55, 68-69 (2009).
Section 6673(a)(2) is meant to sanction behavior that violates "the attorney's professional duty not only to the opposing party but also to opposing counsel and the court." Dixon, 132 T.C. at 72 (footnote omitted). A high degree of culpability is required: the attorney's behavior must sink "so low in the case at hand as to amount to a fraud on the court, a level of seriousness requiring that the punishment be certain if it is to have the necessary deterrent effect." Id. at 72-73.
The Brars' argument is replete with unsupported conclusions. Their argument is as follows:
Since approving the notices of deficiency and their fictitious unreported income adjustments, Respondent has defended them tooth and nail with knowledge that they were unsupported by the law. The only conclusion can be that he did so to harass Petitioners and unreasonably multiply these proceedings at the expense of Petitioners and the Court. He has abused the judicial process by asking the Court to uphold artificial income adjustments and fraud penalties that have no basis in fact or in existing law. He has engaged in frivolous and abusive litigation and he should be penalized for doing so.
We disagree. Respondent's actions in these two cases have not risen to the level necessary for sanctions under section 6673(a)(2)(B). As we stated above, while respondent's actions and positions might be considered aggressive, we do not find them sanctionable under section 6673(a)(2)(B). In other words, his behavior has not sunk "so low . . . as to amount to a fraud on the court." Dixon, 132 T.C. at 72.
IV. Our Court's Inherent Power to Regulate Litigation Before Our Court
We have the inherent power to regulate and supervise proceedings in any case in our Court to ensure the integrity of the judicial process. See Dixon, 132 T.C. at 102-03; Williams v. Commissioner, 119 T.C. 276, 282 (2002). We may rely on our inherent power to impose a sanction where other sources of the power to sanction are not "up to task" to do so or even if existing statutes or procedural rules sanction the same conduct. Chambers v. NASCO, Inc., 501 U.S. 32, 49-50 (1991); Dixon, 132 T.C. at 102-03.
The Brars contend that Respondent's sanctionable conduct began before the notices of deficiency were ever issued-namely, when his counsel was collaborating with the IRS's revenue agent during the examination. They further contend that his sanctionable conduct continued in filing pleadings that are not well grounded in fact or law. The Brars conclude by stating that Respondent's "sanctionable actions have culminated in his refusal to stipulate" to the tax effects of their settlement of the officer's compensation issues.
We decline the Brars' invitation to exercise our inherent power to sanction Respondent. We do not see evidence of wrongdoing and the Brars have not shown us any. While we understand that the Brars feel that the IRS's officer's compensation determinations were egregiously erroneous, that alone is not sanctionable. Rather, that is a primary reason that Congress created judicial review for notices of deficiency: so taxpayers would have a prepayment forum to contest determinations that they believe are erroneous. In fact, as a result of the Brars taking advantage of their right under section 6213 to de novo judicial review of their notice of deficiency, they have settled the officer's compensation issues on terms favorable to them. Further, it is not sanctionable conduct for Respondent to decline to stipulate to the tax effects of the parties' settlement of the officer's compensation issues. As we explained in our January 6, 2023, Order denying Petitioner's Motion for Partial Summary Judgment, the tax effect of the settled compensation issues is computational and best left to be decided under Rule 155 once all issues in these two cases have been resolved.
After due consideration, and for cause, it is
ORDERED that Petitioners' Motion to Impose Sanctions, filed on November 4, 2021, is denied.