Opinion
3483-19
08-25-2021
Melvyn G. Pacol & Tereza J. Pacol, Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
Michael B. Thornton Judge
This case was previously calendared for trial at the session of the Court scheduled to commence in Honolulu, Hawaii, on May 18, 2020. By order dated April 2, 2020, this trial session was canceled because of concerns relating to coronavirus (COVID-19).
After various status reports in which respondent indicated that petitioners have been unresponsive, on May 3, 2021, respondent filed a motion for default and dismissal. On May 10, 2021, the Court ordered that petitioners file on or before June 7, 2021, a response to respondent's motion for default and dismissal. Petitioners did not file any response. On June 29, 2021, the Court directed petitioners to show cause, on or before July 28, 2021, why respondent's motion for default and dismissal should not be granted. Petitioners have not filed any response to the Court's order to show cause.
Background
Petitioners, husband and wife, failed to file individual income tax returns for tax year 2016. Pursuant to section 6020(b), respondent prepared substitutes for return for both petitioners. Respondent issued notices to petitioner Melvyn G. Pacol and Tereza Pacol on December 24, 2018, and November 13, 2018, respectively. Each notice of deficiency includes in each petitioner's taxable income various items of income as reported by third parties, including--identically in each notice of deficiency--$20, 313 of "DEBT DISCHARGED" as reported by Bank of America N.A. on Form 1099 C, Cancellation of Debt. Each notice of deficiency states identically, "We've calculated the assessment assuming a filing status of 'single' or 'married filing separate', only one personal exemption, and the standard deduction."
All section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.
On February 11, 2019, while residing in California, petitioners timely mailed their petition, which the Court received on February 14, 2019. The petition asserts that petitioners are entitled to various deductions and states "OUR TAX YEAR 2016 TAX RETURN WILL BE EPOSTMARKED WITH THE IRS ON 2/11/19."
On February 11, 2019, petitioners filed with the Internal Revenue Service (IRS) a joint income tax return for tax year 2016, reporting various deductions. According to Form 4340, Certificate of Assessments, Payments, and Other Specified Matters, as attached to respondent's motion for default and dismissal, it appears that the IRS processed this joint income tax return, assessed the income tax reported thereon, and subsequently abated this assessment as premature.
Discussion
The Court may hold a party in default if he or she fails to plead or otherwise proceed as provided by our Rules or as required by the Court. Rule 123(a). We have construed Rule 123 to permit default or dismissal consistent with our sound discretion and the interests of justice. See Stringer v. Commissioner, 84 T.C. 693, 706 (1985), aff'd without published opinion, 789 F.2d 917 (4th Cir. 1986).
The IRS' determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving them erroneous. See Rule 142(a). In cases involving failure to report income, however, the U.S. Court of Appeals for the Ninth Circuit has held that the Commissioner must establish "some evidentiary foundation" linking the taxpayer to an alleged income-producing activity before the presumption of correctness attaches to the deficiency determination. Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), rev'g 67 T.C. 672 (1977). Once the Commissioner has established such a foundation, the burden of proof shifts to the taxpayer to prove by a preponderance of the evidence that the IRS' determinations are arbitrary or erroneous. See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff''g T.C. Memo. 1997-97. Respondent's motion for default and dismissal does not address whether he has discharged his burden of production in this regard. Also, respondent's motion for default and dismissal does not address the seemingly duplicative adjustments of $20, 313 for "DEBT DISCHARGED" as reported by the Bank of America N.A. or whether the deficiencies and resulting additions to tax should be adjusted to eliminate any double counting.
Respondent's motion for default and dismissal also does not address the effect, if any, of petitioners' filing a joint 2016 tax return, which the IRS apparently accepted and processed, and in particular whether petitioners' 2016 tax liability should be calculated with tax rates applicable to married individuals filing joint returns. Cf. Adler v. Commissioner, T.C. Memo. 2010-47 (holding that taxpayer who filed joint tax returns, which the IRS accepted as late-filed returns, after the IRS had prepared substitutes for return and issued a notice of deficiency, was entitled to calculate his tax under section 1(a)(1) as married filing jointly), aff'd, 443 Fed.Appx. 736 (3d Cir. 2011).
From the statement in the notices of deficiency that "[w]e've calculated the assessment assuming a filing status of 'single' or 'married filing separate', only one personal exemption, and the standard deduction", we are left uncertain as to the exact manner in which petitioners' tax liabilities were calculated in the notices of deficiency. This matter is not addressed in respondent's motion for default and dismissal.
Respondent's motion for default and dismissal asks us to sustain additions to tax under sections 6651(a)(1), 6651(a)(2), and 6654. Respondent bears the burden of production with respect to these additions to tax. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Respondent's motion for default and dismissal does not address whether he has discharged his burden of production in this regard.
Upon due consideration, it is
ORDERED: That on or before September 24, 2021, respondent shall file a supplement to respondent's motion for default and dismissal, filed May 3, 2021, addressing the matters discussed above and describing his efforts to communicate with petitioners about this case since the filing of his motion for default and dismissal on May 3, 2021.
The parties are strongly encouraged to work with each other in an effort to resolve this case.