Felt v. Commissioner , 433 F. App'x 293 ( 2011 )

Case: 10-60512 Document: 00511547981 Page: 1 Date Filed: 07/21/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 21, 2011
No. 10-60512 Lyle W. Cayce
Clerk
DAVID J. FELT, SHARON A. FELT
Petitioners-Appellants
v.
COMMISSIONER OF INTERNAL REVENUE
Respondent-Appellee
Appeal from the Decision of
the United States Tax Court
(3735-06)
Before DAVIS, PRADO, and OWEN, Circuit Judges.
PER CURIAM:*
Petitioners David and Sharon Felt appeal the judgment of the Tax Court
assessing taxes and penalties related to notices of tax deficiency issued by the
Commissioner for tax years 1986, 1987, 1989, 1994, 1995, 1996, 1997, and 1998,
for which years the Felts did not file returns. The legal principal that ultimately
controls most of the issues in this appeal is the settled rule that the
Commissioner’s findings of tax deficiency have a presumption of correctness and
the taxpayer has the burden of proof of showing them to be wrong. Welch v.
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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No. 10-60512
Helvering, 290 U.S. 111, 115 (1933); Reese v. Comm’r, 615 F.2d 226, 233 (5th Cir.
1980). With respect to several of the issues raised in this appeal, the Tax Court
found that the taxpayers failed to present evidence to dispute the deficiency
notice or additions to the tax. We agree with these determinations and affirm
the Tax Court’s judgment.
I.
We review the judgment of the Tax Court using the same standards of
review that apply to our review of district court judgments. Green v. Comm’r,
507 F.3d 857, 866 (5th Cir. 2007). Findings of fact are reviewed for clear error
and issues of law are reviewed de novo. Id. We consider below the various
challenges the taxpayers assert in this appeal to the tax court’s factual and legal
conclusions.
II.
A. Sale of stock in Reliance Savings Association
In 1986, the Felts sold 450,000 shares of stock in Reliance Savings
Association for $10 per share, receiving in part notes from Specialty Finance, a
d/b/a of David Felt, which were secured by the Reliance stock. The Tax Court
treated the notes as cash equivalents and valued the notes at face value, which
was the only measure of value it had before it. Based on this valuation, the Tax
Court ruled that the Felts should have reported a capital gain on this
transaction.
The Felts challenge the treatment of the notes received in the sale of
Reliance Savings Association stock as cash equivalents valued at face value and
the taxable gain resulting. A promissory note may be treated as the equivalent
of cash and taxable in the manner of cash unless the taxpayer can establish facts
that support an exception to this general rule. Cowden v. Comm’r, 289 F.2d 20,
24 (5th Cir. 1961). The relevant exceptions are that the note was not made by
a solvent obligor, was conditional and unassignable, subject to set-off, or not of
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a type frequently transferred to lender or investors at a discount not
substantially greater that than the generally prevailing premium for the use of
money. Id. The taxpayers had the burden of proving facts that support an
exception to the general rule and failed to present any evidence on these issues.
See Olser v. Comm’r, 79 T.C. 456, 469, aff’d, 751 F.2d 1168 (11th Cir. 1985).
The taxpayers argue also that the value of the Special Finance notes
should be limited to the value of the collateral securing them, i.e. the Reliance
Savings stock. The taxpayers did not make this argument to the Tax Court and
we decline to consider it here. City of Waco, Tex. v. Bridges, 710 F.2d 220, 227-
28 (5th Cir. 1983); Dennis v. Comm’r, 473 F.2d 274, 282 (5th Cir. 1973). We also
reject the taxpayers’ argument that no income should be recognized on the sale
of stock in 1986 because regulators successfully prevailed in a suit to rescind the
sale in 1988. The later rescission does not affect the taxpayers’ obligation to
recognize the sale when it occurred in 1986. See N. Am. Oil Consol. v. Burnet,
286 U.S. 417, 424 (1932).
B. Cancellation of Indebtedness Income
Gross income that is subject to taxation includes income from the
cancellation of indebtedness. Under I.R.C. § 61(a)(12), a taxpayer realizes
income from the cancellation of indebtedness where a debt is canceled, forgiven,
or otherwise discharged for less than the full amount. 2925 Briarpark, Ltd. v.
Comm’r, 163 F.3d 313, 318 (5th Cir. 1999). The Tax Court found that the Felts
must recognize $2 million in cancellation of indebtedness income in 1987 from
the cancellation of debts that the taxpayers stipulated were reflected in the
records of David Felt d/b/a American Guaranty, Inc. (AGI) and which they had
not repaid.
The taxpayers argue that any debt David Felt owed to AGI was setoff by
the debt AGI owed him and that the income, if any, should not be recognized in
1987 as found by the Tax Court, but in a later year. However, the taxpayers
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failed to present any evidence to establish they took any of the steps required
under Texas law to set off a debt. See Tex. Commerce Bank-Hurst, N.A. v.
United States, 703 F.Supp. 592, 594-95 (N.D. Texas, 1988), aff’d. sub nom., Texas
Commerce Bank-Fort Worth, N.A. v. United States, 896 F.2d 152 (5th Cir. 1990);
In re Archer, 34 B.R. 28, 30 (Bankr. N.D. Tex. 1983); Shearson Lehman Bros.,
Inc. v. Resolution Trust Corp., No. 05-93-00527-CV, 1994 WL 60907, *3 (Tex.
App. - Dallas, Feb. 23, 1994, no pet.)(not designated for publication).
The Tax Court held that the debt was cancelled in 1987, the year the
maturity date of the latest AGI note passed with no payment on the loan. The
test for determining when cancellation occurs depends on a practical assessment
of the facts and circumstances relating to likelihood of repayment. Cozzi v.
Comm’r, 88 T.C. 435, 445 (T.C. 1987). Under Cozzi, “[a]ny ‘identifiable’ event
which fixes the loss with certainty may be taken into consideration.” Id. at 445.
Cozzi specifically found that the year of the scheduled final payment under a
loan agreement was an identifiable event sufficient to indicate cancellation of
indebtedness. Id. at 447. Since the law recognizes that there may be more than
one identifiable event that triggers the cancellation, the Tax Court’s fact-bound
finding is not clearly erroneous.
C. Innocent Spouse relief for Sharon Felt
Because the Felts live in Texas, a community property state, Sharon Felt
is liable for federal income tax on one-half of their community income. United
States v. Mitchell, 403 U.S. 190, 196 (1971). Sharon Felt sought relief under §
66(c) of the I.R.C., which provides relief from income tax liability resulting from
the operation of community property law to taxpayers domiciled in a community
property state who do not file a joint tax return. The record establishes that the
Tax Court did not clearly err in finding that Sharon Felt either benefitted from
the income or knew the source of all the income producing activities on which the
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taxes were based for all relevant periods. These facts preclude relief under §
66(c).
Sharon Felt also argues that she is entitled to equitable relief under §
66(c), which is available despite failure of the statutory requirements above if it
would be inequitable under all the facts and circumstances to hold the individual
liable for the unpaid tax and deficiency. Rather than looking at the facts at the
time income became taxable, the equitable defense looks at the present –
whether it would be inequitable to make the spouse pay the liability today. This
defense was not presented to or decided by the Tax Court, and we decline to
consider it for the first time on appeal.
Sharon Felt also argues that she should be relieved from the penalties
assessed against her for failure to file returns and failure to pay the tax
deficiencies. She argues that she was unable to file her own tax returns because
she was unaware of the income from David’s businesses. As established above,
the Tax Court did not clearly err in finding that Sharon Felt knew the source of
all of the income producing activities on which the tax deficiencies were based
for all relevant periods. Also she failed to present any evidence to demonstrate
that she had reasonable cause for failing to file under I.R.M. 20.1.1.3.1.2.5.1
II.
For the above reasons and the thorough reasons stated in the
Memorandum Findings of Fact and Opinion of the Tax Court filed October 28,
2009, we affirm the Tax Court’s judgment.
AFFIRMED.
1
This regulation lists several factors a taxpayer needs to explain in order to allow the
IRS to determine whether reasonable cause exists.
5