Birth v. Commissioner, 92 T. C. 795 (1989)

The Tax Court may award damages to the United States for a taxpayer’s unreasonable failure to pursue available administrative remedies before filing a petition.

Summary

In Birth v. Commissioner, the Tax Court awarded $5,000 in damages to the United States due to the taxpayers’ refusal to engage in the IRS appeals process before filing a petition. The taxpayers, Robert and Lorraine Birth, initially refused to substantiate their deductions and ignored multiple IRS requests for an appeals conference. Despite eventually providing substantiation that led to concessions by the IRS, their failure to pursue administrative remedies led to judicial penalties. The case underscores the importance of exhausting administrative options before resorting to court action and the potential consequences of frivolous litigation.

Facts

Robert E. Birth and Lorraine J. Birth, residents of Millville, Pennsylvania, filed a joint federal income tax return for 1984. The IRS issued a notice of deficiency in 1987, disallowing $183,359 in deductions due to the Births’ failure to attend an audit and substantiate their expenses from their pharmacy and Amway businesses. After refusing multiple requests for an appeals conference and only providing substantiation on the eve of trial, the IRS conceded most of the deficiency. However, the Births had previously been penalized under section 6673 for frivolous litigation in other years.

Procedural History

The IRS issued a notice of deficiency on September 21, 1987. The Births filed a petition in the U. S. Tax Court on December 21, 1987. After numerous failed attempts by the IRS to schedule an appeals conference, the case proceeded to trial on October 12, 1988. The IRS moved for damages under section 6673 for the Births’ unreasonable failure to pursue administrative remedies. The Tax Court awarded $5,000 in damages to the United States.

Issue(s)

1. Whether the petitioners are liable for additions to tax for negligence or intentional disregard of rules and regulations under section 6653(a).
2. Whether the Tax Court should award damages to the United States because the petitioners unreasonably failed to pursue available administrative remedies under section 6673.
3. Whether the petitioners should be awarded reasonable litigation costs under section 7430.

Holding

1. Yes, because the petitioners failed to meet their burden of proof regarding the underpayment of taxes, and the entire remaining underpayment was attributable to negligence.
2. Yes, because the petitioners unreasonably failed to pursue available administrative remedies, leading to a waste of judicial resources.
3. No, because the petitioners did not comply with the procedural requirements for claiming litigation costs under Rule 231.

Court’s Reasoning

The Tax Court applied section 6653(a) to impose additions to tax for negligence, as the petitioners did not present evidence to counter the underpayment of taxes. For the damages under section 6673, the court relied on the legislative history of the Tax Reform Act of 1986, which added provisions to penalize taxpayers who bypass the IRS Appeals Division. The court noted the Births’ pattern of frivolous litigation and their refusal to engage in the appeals process despite having substantiation that could have resolved the case administratively. The court emphasized the inefficiency caused by the Births’ actions, quoting the General Explanation of the Tax Reform Act of 1986: “Congress consequently believed that it is appropriate to provide a penalty for failure to exhaust administrative remedies. ” The court rejected the petitioners’ claim for litigation costs due to non-compliance with procedural rules.

Practical Implications

Birth v. Commissioner serves as a warning to taxpayers about the importance of engaging with the IRS Appeals Division before filing a petition in Tax Court. The decision reinforces the policy of encouraging settlement and efficient use of judicial resources. Practitioners should advise clients to exhaust all administrative remedies, as failure to do so can result in significant penalties. This case has influenced subsequent cases involving similar issues, emphasizing the need for taxpayers to substantiate claims early and engage in good faith negotiations with the IRS. It also highlights the procedural requirements for claiming litigation costs, reminding attorneys of the strict timelines and content requirements under Rule 231.