Emmanuel FELLOUZIS and Mary Margaret Fellouzis, Plaintiffs, v. UNITED STATES of America, Defendant., United States District Court, M.D. Florida, Tampa Division., 896 F.Supp. 1166, Civ. A. No. 91-1251-Civ-T-21C., April 19, 1995
Emmanuel FELLOUZIS and Mary Margaret Fellouzis, Plaintiffs, v. UNITED STATES of America, Defendant.
United States District Court, M.D. Florida, Tampa Division.
896 F.Supp. 1166
Civ. A. No. 91-1251-Civ-T-21C.
April 19, 1995.
George J. Felos, Felos & Felos, Dunedin, FL, for plaintiffs.
David N. Geier, Ann Reid, U.S. Dept. of Justice, Tax Division, Washington, DC, for defendant.
ALAIMO, District Judge, sitting by Designation.
Plaintiffs, Emmanuel and Mary Margaret Fellouzis (the "Taxpayers"), filed this tax refund action against Defendant, United States of America (the "Government"), after the Internal Revenue Service (the "Service") partially, disallowed the Taxpayers' charitable deductions. A jury trial began on February 8, 1995 and ended on February 10, 1995.
Pending before the Court is the Government's post-trial Motion for Judgment as a Matter of Law under Rule 50 of the Federal Rules of Civil Procedure with respect to the Taxpayers' liability for substantial understatement penalties. As discussed below, the motion will be DENIED.
During 1979, 1980, and 1981, Mr. and Mrs. Fellouzis donated several art objects to the Carnegie Institute in Pittsburgh, Pennsylvania. They then claimed the fair market value of the items as charitable deductions on their joint income tax returns for 1979 through 1981. In 1982 and 1983, the Taxpayers claimed charitable deductions as a carryover pursuant to Internal Revenue Code ╖ 170(b), 26 U.S.C. ╖ 170(b).
After an audit, the Service partially disallowed the Taxpayers' charitable deductions for 1979 through 1983. In addition, the Service imposed negligence penalties for 1979 through 1983, and substantial understatement penalties for 1982 and 1983. After paying all taxes and penalties as determined by the Service, the Taxpayers filed this refund action in the United States District Court for the Middle District of Florida.
At trial, Mr. Fellouzis testified about the appraisals he had obtained for the donated art objects. He also testified that his accountant attached the appraisals to his tax returns. In addition, the Government's witness, Revenue Agent William Reddy, testified as follows:
Q: Now is it correct that Mr. and Mrs. Fellouzis identified what they were doing on their tax returns? In other words, the tax returns showed that they were taking these deductions, that they were making charitable donations?
A: Yes, it did.
Q: They were not trying to hide that on the return, were they?
A: No, they were not.
(Cross-Examination of William Reddy)
At the close of the evidence, the Government moved for a directed verdict on the issue of substantial understatement penalties. The Court denied the motion. The Government also objected to the jury charge on substantial understatement penalties and to the following interrogatory which the Court submitted to the jury:
Did Plaintiffs have substantial authority upon which to base their charitable deduction, or did Plaintiffs disclose on their return, or in a statement attached to the tax return, the relevant facts upon which they based their charitable deductions?
The jury answered ▒yes' to the above interrogatory.
I. ═ Motion for Judgment as a Matter of Law
The Government has moved for a judgment as a matter of law under Rule 50(b) of the Federal Rules with respect to the Taxpayers' liability for substantial understatement penalties. A court may grant a motion for judgment as a matter of law only if "there is no legally sufficient evidentiary basis" to support the jury's verdict. Fed.R.Civ.P. 50(a).
In ruling on a motion for judgment as a matter of law, the trial court must consider the record as a whole, viewing the evidence in the light most favorable to the party against whom the motion is made and giving that party the benefit of all reasonable inferences which arise from the evidence. Sherrin v. Northwestern Nat ' l Life Ins. Co ., 2 F.3d 373, 377 (11th Cir.1993). As the Eleventh Circuit recently noted, "[j]udgment as a matter of law after the verdict may be granted only when, without weighing the credibility of the evidence, there can be but one reasonable conclusion as to the proper judgment." Bryan v. James E. Holmes Regional Medical Center , 33 F.3d 1318, 1333 (11th Cir.1994) (quoting 5A Moore ' s Federal Practice ╤ 50.07 (1994)). Stated another way, if there is substantial evidence upon which a jury could reasonably find a verdict for the nonmoving party, the motion should be denied.
II. ═ Substantial Understatement Penalties
Section 6661 of the Internal Revenue Code imposes a penalty if "there is a substantial understatement of income tax for any taxable year." 26 U.S.C. ╖ 6661(a) (repealed 1989). The penalty is reduced, however, by the items for which the taxpayer (1) had "substantial authority" for the position taken on the return or (2) "adequately disclosed" the relevant facts in the return or in a statement attached to the return. 26 U.S.C. ╖ 6661(b)(B). The purpose of the substantial understatement penalty is "to deter taxpayers from playing the ▒audit lottery;' that is, taking undisclosed questionable reporting positions and gambling that they [will] not be audited." Caulfield v. Commissioner , 33 F.3d 991, 994 (8th Cir.1994) (quoting Karpa v. Commissioner , 909 F.2d 784, 786 (4th Cir.1990)).
As mentioned above, the jury determined that the Taxpayers either had (1) substantial authority for their position, (2) adequately disclosed their position in their return or in a statement attached to the return, or (3) both. According to the Government, however, the issue of substantial understatement penalties should have never gone to the jury because the Taxpayers produced no evidence of substantial authority or adequate disclosure. As discussed below, however, the evidence supports the jury's verdict with respect to adequate disclosure. Accordingly, the Court need not reach the issue of substantial authority.
III. ═ Adequate Disclosure
Under Section 6661(b)(2)(B)(ii) of the Internal Revenue Code, a taxpayer's disclosure is adequate if the taxpayer provides sufficient information on the return or in a statement attached to the return to enable the service to identify a potential controversy. Isaacs v. Commissioner , 62 T.C.M. (CCH) 827 (1991). The Government contends that the Taxpayers claimed charitable deductions on their tax return for 1982 and 1983, but did not submit any other additional information. Mr. Fellouzis, however, testified that his accountant attached the appraisals of the art objects to his tax returns for 1979 and 1980. The appraisals listed each art object and the amount the Taxpayers deducted for each item. Furthermore, the Government's witness testified that the Taxpayers did not attempt to hide what they were doing. In view of this evidence, a reasonable jury could find that the Taxpayers' disclosure was sufficient to enable the Service to identify a potential controversy. See Stein v. Commissioner , 64 T.C.M. (CCH) 1262 (1992) ("Petitioner did not try to hide the position she had taken on her 1988 tax return as is often done by those attempting to play the ▒audit lottery.'").
The Government contends that because the Taxpayers did not attach appraisals to the 1982 and 1983 returns, the jury could not find that the Taxpayers adequately disclosed a potential controversy for those years. The evidence showed, however, that the deductions for 1982 and 1983 were carryover deductions from items donated in 1979 through 1981. As stated previously, the Taxpayers presented evidence that the appraisals were attached to their returns for 1979 and 1980. Under these circumstances, a reasonable jury could find that in view of the disclosure documents attached to the returns for 1979 and 1980, merely listing a carryover charitable contribution for 1982 and 1983 in the appropriate section of the tax return constitutes adequate disclosure "in the return." 26 U.S.C. ╖ 6661(b)(2)(B)(ii).
The Court notes further that the jury's verdict does not contravene Accardo v. Commissioner , 94 T.C. 96 (1990) or Schirmer v. Commissioner , 89 T.C. 277 (1987) wherein the court held that merely listing an item on the tax return does not constitute adequate disclosure. The taxpayers in Accardo and Schirmer merely listed their deduction without further explanation, as the Taxpayers did in this case for 1982 and 1983. In Accardo and Schirmer , however, the deductions were not carryover deductions from previous years. Accordingly, the taxpayers did not disclose their position on previous tax returns, as the Taxpayers did in the instant case.
The jury's verdict is also supported by Treas.Reg. ╖ 1.6661-4 which defines adequate disclosure for the purposes of substantial understatement penalties. This regulation did not become effective until 1985, so it does not apply to the tax years in question here. Nevertheless, the regulation supports the proposition that disclosure in prior years with respect to a carryover deduction satisfies the adequate disclosure requirement under 26 U.S.C. ╖ 6661(b)(2)(B)(ii):
In the case of a carryover or carryback attributable to the tax treatment of an item on a return to which section 6661 applies . . ., disclosure is adequate with respect to the item only if it is made on the return for the taxable year in which the item arises or in a statement attached thereto. In such a case, disclosure with respect to the item is not required on the return for the taxable year in which the carryover or carryback attributable to the item is taken into account.
Treas.Reg. ╖ 1.6661-4(d) (1985) (emphasis added).
For the reasons stated above, the Court finds that the jury's verdict is reasonable in light of the evidence produced at trial. Accordingly, the Government's Motion for Judgment as a Matter of Law is DENIED.