Diane S. Blodgett,
No. 03-3917
United States Court of Appeals FOR THE EIGHTH CIRCUIT
Submitted: October 22, 2004 Filed: January 12, 2005
Before BYE, LAY, and GRUENDER, Circuit Judges.
Appeal from the United States Tax Court.
Diаne Blodgett, a special education teacher, appeals from a tax court determination in favor of the Internal Revenue Service. We affirm.
I
We adopt the facts as set forth in the tax court‘s opinion, T.C.M. 2003-212 (2003), and simply restate some critical facts so as to make understandable the legal issues presented herein. In the 1970‘s, Ms. Blodgett‘s ex-husband Michael Blodgett founded T.G. Morgan, Inc., a business engaged in the buying and selling of rare coins. The enterprise began as a sole proprietorship, later incorporated, utilizing a subchapter S election designation fоr income tax purposes, in 1985. As of 1992, Mr. and Ms. Blodgett each owned 27.5 percent of the business. Their three children owned 15 percent each.
Mr. Blodgett operated the business similar to a ponzi scheme. By all accounts, it was successful and enabled the Blodgetts to lead a lavish lifestyle. As examples, the Blodgetts, personally or through their business entity, held rare coins and historical documents with a collective value of more than $20 million, a condominium and docking space in Key Largo, Florida, purchased for $583,379, а Mercedes 560 SL, a 23-foot Cutty Cabin Sunrunner boat and a Simbari oil painting worth approximately $85,000.
Eventually, the long arm of the law caught up with Mr. Blodgett as he was charged with and convicted of several counts of fraud. His wife was not charged with any criminal wrongdoing. In addition to the criminal troubles, the Federal Trade Commission (FTC) initiated a civil action against T.G. Morgan and Mr. Blodgett, alleging deceptive trade practices and seeking permanent injunctive relief and consumer redress. T.G. Morgan, Mr. Blodgett and the FTC reached a settlеment which was memorialized in a consent order signed March 4, 1992. Diane Blodgett signed the consent order as a nonparty spouse.
The consent order provided for the creation of a “settlement estate” and a “litigation estate,” to include assets transferred from T.G. Morgan and the Blodgetts. A receiver was appointed to liquidate the assets in both estates and disburse the money. The litigation estate was used to pay litigation expenses for the defense of actual or reasonably anticipatеd governmental enforcement actions against the Blodgetts. The settlement estate was used to pay claims of defrauded customers of the business. The litigation estate was established with $300,000, funded solely by virtue of the liquidation of a so-called Coin Fund. The remaining proceeds from the liquidation of the Coin Fund were transferred to the settlement estate. The settlement estate also included the Florida property and the Simbari painting, among other assets.
After the onset of the FTC case but prior to the consent ordеr, creditors of the business filed an involuntary bankruptcy petition against the business. On August 21, 1992, the district court ordered the receiver in the FTC case to turn over all assets held in the settlement estate to the bankruptcy trustee (turnover order). The turnover order specified those assets determined in the bankruptcy proceeding not to be the property of the T.G. Morgan bankruptcy estate to be returned to their rightful owners. After the turnover order, the Florida condominium and Simbari painting each became parts of the bankruрtcy estate and were not returned to the settlement estate.
As part of the liquidation proceedings, the bankruptcy trustee prepared and filed
The document at issue on appeal is Ms. Blodgett‘s 1998 personal federal income tax return prepared by her ex-husband from prison. It reported wage income of $45,788.24 and income tax withheld of $5,582.56. The return also included a $38,046,524 carryover business loss deduction. Such figure reportedly represented the amount described on the proof of claim filed by the FTC in the bankruptcy case against T.G. Morgan. The return clаimed a refund of all of her withholdings for 1998. Ms. Blodgett attached a letter to her tax return explaining the large loss carryovers stemmed from the loss of property arising out of the consent agreement she signed as a nonparty spouse.1
On February 15, 2000, the I.R.S. sent Ms. Blodgett a notice of deficiency disallowing the claimed deduction. She then petitioned the tax court for a redetermination. At trial, the tax court characterized the primary issue for decision as whether she was entitled to all or part of the $38,046,524 loss deduсtion claimed on her 1998 return as the carryover of a 1992 business loss.2 Ms. Blodgett also claimed the following specific items as deductible losses: (1) $733,500 for the theft loss of a pension fund; (2) $225,000 as carryforward legal expenses; (3) a $142,482 investment loss on a condominium and lot in Florida; (4) a $42,500 investment loss on a Simbari painting; (5) a $561,375 carryforward business or investment loss on rare coins; and (6) a $125,403 carryforward business or investment loss on historical documents.
The tax court entered a decision in favor of the I.R.S., finding Ms. Blodgett failed to meet her burden of proof on the issues of ownership, loss, value and deductibility of the items contributed to the settlement. She subsequently filed the current appeal. On appeal, she contends the tax court erred in not shifting the burden of proof to the Commissioner of Internal Revenue, pursuant to
II
We apply different stаndards of review to different components of a tax court‘s decision. We review a tax court‘s factual determinations under a clearly erroneous
A. Shifting Burden of Proof on Tax Loss
The question of whether a taxpayer produced evidence sufficient to shift the burden of proof to the I.R.S. under
We begin with a discussion of credible evidence. In Griffin, we defined “credible evidence” for purposes of
1. Business Carryover Expenses
Ms. Blodgett claimed a deduction for a $38,046,524 net operating loss suffered by T.G. Morgan in 1992 stemming from the turnover of assets to the FTC. Sub-S corporation losses are generally deductible by its shareholders to the extent of the shareholder‘s basis.
The testimony establishes the FTC made a claim, but it does not establish the claim was actually paid. Assuming the claim was paid, the loss would only be deductible to the extent of Ms. Blodgett‘s basis in the corporation. Oren v. C.I.R., 357 F.3d 854, 857 (8th Cir. 2004). Relying upon T.G. Morgan‘s 1992 tax return, the tax court concluded her basis in the corporation was zero. While she disputes the accuracy of the return and argues the personal assets turned over to the FTC as part of the $38 million settlement increased her basis in the corporation, we find the tax court did not clearly err in reaching its basis conclusion in light of the bankruptcy trustee‘s notice and the lack of certainty as to the ownership of the assets contributed to the settlement. However, even if we assume the claim was paid and further assume she had sufficient basis in the corporation, the deduction is only allowed if she did not already deduct the loss
Furthermore, she failed to maintain and produce the proper records to substantiate her claim, thus she did not meet the burden shifting requirements. See
2. Theft Loss of Pension Fund
Ms. Blodgett claimed a deduction of $733,500 for the theft loss of a pension fund, which she alleged was stolen by the FTC and other governmental agencies and officials.4 The only evidence this loss occurred as a result of theft was her testimony. She argues her testimony is sufficient to shift the burden of proof. Griffin, 315 F.3d at 1020-21 (reversing a tax cоurt finding that the taxpayer‘s uncorroborated and self-serving testimony was not enough to shift the burden to the I.R.S.). If all she needed to show to support the deduction was evidence of theft, then she may be correct. However, in addition to evidence of an actual theft, theft losses are deductible only in the year discovered.
3. Carryforward Legal Expenses
Ms. Blodgett claimed a deduction of $225,000 for carryforward legal expenses. Legal expenses incurred as an ordinary and necessary business expense are deductible, but legal expenses incurred as a personal expense are nondeductible.
4. Loss of Condominium
Ms. Blodgett testified to the purchase of a condominium in Florida for the purpose of renting it out and sustained a $142,482 investment loss when the property was transferred to the settlement estate and later the bankruptcy trustee. The Tax Code allows a deduction for a loss incurred in connection with a transactiоn
5. Loss on Simbari Painting
Ms. Blodgett testified she purchased an $85,000 Simbari oil painting as an investment and claimed to suffer a $42,500 loss (one-half of its cost) when the painting was transferred to the settlement estate. The Tax Code allows a deduction for a loss incurred in conneсtion with a transaction conducted for profit, but does not allow a deduction for a personal, living or family expense.
6. Loss on Rare Coins and Historical Documents
Ms. Blodgett testified she suffered deductible carryforward business or investment losses on $561,375 in rare coins and $125,403 in historical documents. Thе tax court, however, found her self-serving testimony incredible. She produced no other specific evidence regarding the ownership, value and transfer of the rare coins and historical documents claimed as carryforward business or investment losses. Accordingly, the tax court found she did not meet her burden of proof with respect to the ownership, value, and transfer of the rare coins and historical documents. Considerable evidence existed showing the Blodgetts did not own the coins and documents, rather T.G. Morgan and its customers did. Moreover, if she claimed the losses as theft losses, such are only deductible in the year discovered, and she did not
7. Significance of the Burden Shift
According to Ms. Blodgett, any failure to shift the burden of proof would require us to reverse the decision of the tax court and remand the case with instructions to retry it with the burden assigned to the I.R.S. Once again, she relies on Griffin. See 315 F.3d at 1022 (reversing and remanding for failure to shift the burden of proof). In Griffin, like the instant case, the tax court declined to shift the burden of proof to the I.R.S. under
In contrast to Griffin, another panel of this Court has found a tax court does not commit error in not addressing the burden of proof because “‘[t]he shifting of the evidentiary burden of preponderance is of practical consequence only in the rare event of an evidentiary tie.‘” Polack v. C.I.R., 366 F.3d 608, 613 (8th Cir. 2004) (quoting Cigaran v. Heston, 159 F.3d 355, 357 (8th Cir. 1998)). While the Polack panel addressed the burden shift in the context of a new matter rather than under
“When faced with conflicting precedents we are free to choose which line of cases to follow.” Graham v. Contract Transp., Inc., 220 F.3d 910, 914 (8th Cir. 2000). We choose to follow the guidance of Polack. There is a simple reason for our choice. In a situation in which both parties have satisfied their burden of production by offering some evidence, then the party supported by the weight of the evidence will prevail regardless of which party bore the burden of persuasion, proof or preponderance. See Philip N. Jones, The Eighth Circuit Weighs In on the Burden of Proof–Will It Change the Outcome After All?, 98 J. Tax‘n 226, 230 (2003). Therefore, a shift in the burden of preponderance has real significance only in the rare event of an evidentiary tie. Id. Here, the record is clear, if the tax court did err in failing to shift the burden of proof, any error was harmless because the weight of the evidence supported a decision for the Commissioner.
B. Shifting Burden of Proof on New Evidence
Ms. Blodgett claims the tax court erred by not shifting the burden of proof to the I.R.S. on an alleged new issue on
We review de novo the question of whether the alleged new issue is considered a “new matter” for Rule 142 burden shifting рurposes. Id. The asserted “new matter” involves the 1992 tax return of the T.G. Morgan bankruptcy estate, discovered and disclosed five days before trial, which allegedly uncovered evidence there was insufficient basis to support the claimed deductions. However, the discovery of the tax return and the I.R.S.‘s subsequent reliance on the tax return does not constitute a “new matter.” In its first trial memorandum fourteen months before trial, the I.R.S. alleged Ms. Blodgett did not have sufficient basis in the corporation to support the deduction. Thе discovery of the tax return only supplements the Commissioner‘s original allegation. Furthermore, the discovery of the tax return did not increase the amount of the deficiency, but was merely evidence tending to disprove her entitlement to the deduction. Thus, the matter was not new and the tax court did not err by failing to shift the burden of proof.
C. Admission of Trustee‘s Tax Return
Finally, Ms. Blodgett argues the contents of the tax return prepared by the trustee represent inadmissible hearsay; thus, the tax court‘s treatment of the return as presumptively correct was revеrsible error. A tax return is generally considered inadmissible hearsay with the exception that the return may constitute an admission by the taxpayer or someone on the taxpayer‘s behalf. Greenbaum v. United States, 80 F.2d 113, 125 (9th Cir. 1935). We express no opinion on the possible hearsay nature of the return, but note she failed to raise this hearsay objection at trial. An argument not raised at trial cannot be raised for the first time on appeal “unless the obvious result would be a plain miscarriage of justice.” United States v. Gutierrez, 130 F.3d 330, 332 (8th Cir. 1997) (plain error review) (quoting Davis v. Wyrick, 766 F.2d 1197, 1204 (8th Cir. 1985)). Ms. Blodgett, however, not only failed to raise a hearsay objection at trial, she stipulated to the authenticity and admissibility of the return. Although she did not stipulate to the return‘s accuracy, relevancy or materiality, by stipulating to the return‘s admissibility without further reservation she waived any hearsay objection and thus forfeited any right to appellate plain error review. See United States v. Olano, 507 U.S. 725, 732-33 (1991) (finding an intentional relinquishment of a right extinguishes plain error review); United States v. Tulk, 171 F.3d 596, 600 (8th Cir. 1999) (finding plain error review of the trial court‘s admission of a prior misdemeanor conviction wаs precluded because of the defendant‘s deliberate waiver).
III
We affirm the judgment of the tax court.
Notes
(1) General rule--If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue.
(2) Limitations--Paragraph (1) shall apply with respect to an issue only if--
(A) the taxpayer has complied with the requirements under this title to substantiate any item;
(B) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and
(C) in the case of a partnership, corporation, or trust, the taxpayer is described in
(3) Coordination--Paragraph (1) shall not apply to any issue if any othеr provision of this title provides for a specific burden of proof with respect to such issue.