Harper v. Commissioner

*534 Beghe, Judge:

Respondent determined the following deficiency in and additions to petitioner's Federal income tax for the taxable year 1983:

This case is before us on respondent's motions to dismiss under Rule 123(b)¹ for petitioner's failure properly to prosecute and for monetary sanctions under *84 section 6673(a) against petitioner and petitioner's attorney, Herbert G. Feinson. ² On the basis of the facts and reasons set forth below, we will grant respondent's motions to dismiss and for monetary sanctions against Mr. Feinson, but will not impose any monetary sanction on petitioner.

Petitioner was a resident of New York City at the time he filed his petition.

FINDINGS OF FACT

Petitioner is a composer who has written music for Broadway shows. On September 26, 1989, petitioner, through Mr. Feinson, his attorney, filed a petition with this Court seeking redetermination of respondent's determination of a deficiency in petitioner's 1983 Federal income tax. Respondent's answer was filed on November 14, *85 1989. On July 3, 1990, the Court served notice on the parties that the case was calendared for trial at the Court's New York City trial session beginning December 3, 1990. Attached to the notice was the Court's standing pretrial order. At the calendar call on December 3, 1990, no one appeared on petitioner's behalf. Respondent moved to dismiss under Rule 123(b) for petitioner's failure properly to prosecute. On December 31, 1990, the Court granted respondent's motion and entered decision for respondent.

*535 On February 4, 1991, petitioner moved to vacate the Court's order of dismissal. Over respondent's objection, the Court granted petitioner's motion on the ground that the failure to appear at the calendar call was due to Mr. Feinson's oversight, ³ and that petitioner should not be penalized thereby. The Court then returned the case to the general docket.

*86 On June 6, 1991, the case was recalendared for the Court's New York City trial session beginning on November 12, 1991. The Court again served its standing pretrial order, which requires the parties to exchange facts, documents, and other data necessary to expedite the case for trial or settlement, and to stipulate facts to the maximum extent possible, and that each party prepare a trial memorandum substantially in the form prescribed and submit it to the Court and the opposing party not less than 15 days before the first day of the trial session.

On July 15, 1991, respondent served petitioner, through Mr. Feinson, with a request for production of documents pursuant to Rule 72. Respondent requested that petitioner produce documents for inspection and copying on, or before, September 1, 1991, at District Counsel's office. On August 23, 1991, Mr. Feinson sent respondent a facsimile letter stating that he would not produce the documents as requested, but that respondent's counsel could "roam through the entire file" of some 2,000 documents in his office. In response to Mr. Feinson's refusal to comply with respondent's request, respondent filed a motion under Rules 72(b) and 104(b) *87 to compel production of documents, which we granted on September 17, 1991.

In accordance with our order to compel, Mr. Feinson appeared at the District Counsel's office at the appointed date and time (October 7, 1991, at 9 a.m.), but would not let respondent's counsel examine or copy more than one document at a time. As a result, respondent's counsel was able to copy only about 50 documents in 3 days. Moreover, some of the documents Mr. Feinson produced during this copying session were for other taxable years or had already been seen and used by respondent as substantiating evidence of deductions *536 claimed on petitioner's 1983 Federal income tax return that respondent had allowed prior to determining the deficiency shown in the statutory notice.

On October 24, 1991, pursuant to the Court's standing pretrial order, respondent prepared and timely served her trial memorandum on the Court and petitioner's counsel. Respondent's trial memorandum described the substantive issues in the case as (1) whether petitioner's musical copyright royalty income should be treated as ordinary income or capital gain, (2) whether petitioner had received dividend income, (3) whether petitioner*88 was entitled to various business expense deductions and itemized deductions, and (4) whether petitioner was liable for additions to tax. The issue with respect to the deductions was substantiation.

Respondent's trial memorandum also indicated that respondent's counsel expected to call petitioner as a witness. Neither petitioner nor Mr. Feinson submitted a trial memorandum. Nor did they respond to respondent's proposed stipulations of fact, which included only documents provided by Mr. Feinson at the 3-day copying session.

At the calendar call on November 12, 1991, Mr. Feinson filed a motion for summary judgment under Rule 121 on the grounds that respondent's notice of deficiency was "null and void" because it was not personally signed by the Commissioner of Internal Revenue, and that the 3-year period of limitations had expired because the extension (Form 872-A), which Mr. Feinson had executed on petitioner's behalf, was invalid as not having been personally signed by the Secretary of the Treasury. Mr. Feinson's motion for summary judgment also stated that "The principal issue is a question of fact."

At the calendar call, respondent moved for sanctions under section 6673(a)(1)*89 against petitioner on the grounds that he had instituted and maintained the proceedings primarily for delay and that his positions were frivolous and groundless. Respondent's motion paper set out the facts outlined above, but made no reference to Mr. Feinson. Inasmuch as the delays in this case appeared to have been caused by Mr. Feinson, we inquired whether respondent was also seeking sanctions against him under section 6673(a)(2). Respondent replied that she was requesting sanctions against both petitioner and Mr. Feinson. Mr. Feinson then filed a motion in opposition stating that petitioner had complied with respondent's *537 discovery request and that he had complied with our order to compel.

At the conclusion of the calendar call on November 12, 1991, we arranged for a conference call between the Court and the parties to be held on November 15, 1991, and ordered Mr. Feinson to be prepared for that conference. We again ordered Mr. Feinson to submit a trial memorandum. Mr. Feinson stated in open court that he would be prepared, that he would submit a trial memorandum, and that he would produce petitioner, Wally Harper, as a witness at the trial.

On November 14, 1991, *90 respondent filed a memorandum of law in support of her motion for sanctions. In the memorandum, respondent addressed the standards for imposing sanctions against petitioner under section 6673(a)(1) and against Mr. Feinson under section 6673(a)(2). On the same date, Mr. Feinson filed a "Reply to the Oral Arguments" and a memorandum, both of which set forth arguments identical to those in his earlier memorandum in support of his motion for summary judgment. Neither of these documents was a trial memorandum.

On November 15, 1991, following the conference call, we issued an order denying petitioner's motion for summary judgment, held respondent's motion for sanctions in abeyance pending final disposition of the case, set a date and time certain for trial (November 22, 1991, at 9 a.m.), ordered petitioner to produce for copying and inspection at the office of District Counsel (on November 19, 1991, at 9 a.m.) all documents that he intended to introduce at trial, ordered the parties to stipulate facts to the maximum extent possible, and ordered that petitioner Wally Harper be present in the courtroom at the scheduled trial. There is no indication in the record that Mr. Feinson appeared*91 at District Counsel's office with the documents for copying, as we had ordered him to do.

At the recall of the case on the scheduled trial date, respondent was prepared to try the case. However, Mr. Feinson was not prepared for trial and, contrary to our order of November 15, 1991, petitioner was not present in the courtroom. We asked Mr. Feinson why petitioner was not present. Mr. Feinson replied that he had not attempted to contact petitioner until the previous night, and was unable to reach petitioner then because he was out of town. We then *538 reminded Mr. Feinson of our order requiring petitioner to be present. Mr. Feinson replied that the order was "absolutely illegal."

Respondent then moved to dismiss the case under Rule 123(b) for petitioner's failure properly to prosecute. We ordered Mr. Feinson to respond in writing to respondent's motion to dismiss and ordered respondent to submit a supplement to her motion for sanctions setting forth an accounting of the additional costs, expenses, and reasonable attorney's fees incurred to date as a result of the delays caused by Mr. Feinson. We also set a due date for petitioner's response to respondent's supplement.

*92 On December 5, 1991, respondent filed the supplement to her motion for section 6673(a) sanctions. In that document, respondent's counsel, Marcie B. Harrison, states that from February 13, 1991, to December 4, 1991, she and her supervisor, Assistant District CounselPaulette Segal, spent an estimated 98 additional attorney hours because of Mr. Feinson's misconduct. The statement contains an itemized list of additional tasks that respondent's counsel and her supervisor were required to perform in this case and the number of hours required for each such task. See infra note 13 and accompanying text. Contrary to our order of November 22, 1991, Mr. Feinson did not file any response or objection to this supplement.

On February 4, 1992, having received no response to respondent's motions from petitioner or his attorney, we issued a three-page, single-spaced order detailing the procedural history recounted above. We ordered that

on or before February 21, 1992, petitioner's counsel Herbert G. Feinson and petitioner Wally Harper each file with the Court a separate written signed response to respondent's Motion for Sanctions (as supplemented) and to respondent's motion to dismiss. *93 In this connection, petitioner Wally Harper should understand that, in acting on these motions, the Court will take into account, among other things, petitioner Wally Harper's degree of personal awareness and responsibility for petitioner's counsel's course of conduct in this case.

We ordered further that

in addition to regular service, the Clerk of the Court is to serve petitioner Wally Harper at [his home address] with copies of the following: (1) this order (2) respondent's Motion for Sanctions, (3) respondent's memorandum *539 of law in support of the motion for sanctions, (4) Petitioner's Opposition to the Motion for Sanctions, (5) the Court's order dated November 15, 1991, (6) respondent's Motion to Dismiss for Failure to Prosecute, and (7) respondent's Supplement to Respondent's Motion for Sanctions.

The order was mailed to petitioner at his home address by certified mail, and the post office did not return it to the Court as undeliverable.

The Court has not received any response to this order from petitioner or Mr. Feinson.

ULTIMATE FINDINGS OF FACT

The course of conduct engaged in by petitioner's attorney, as described above, was so completely without merit or*94 justification as to require the conclusion that it must have been undertaken for some improper purpose such as delay. On the basis of this course of conduct, we find that Mr. Feinson has acted in bad faith so as to multiply the proceedings in this case unreasonably and vexatiously.

OPINION

This is a case of attorney and taxpayer misconduct. In response to respondent's motions for dismissal and monetary sanctions, we address important questions about the ways in which the Court will deal with attorneys who culpably fail to follow the Court's Rules and orders and with taxpayers who fail properly to prosecute.

The specific issues presented concern the Court's powers to dismiss petitioner's case under Rule 123(b) for his failure properly to prosecute and to impose monetary sanctions on petitioner and his attorney under section 6673(a), and the standards to be applied in exercising these powers. We will first address the question of dismissal, and then turn to the sanctions issues.

Rule 123(b) provides that:

For failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Court or for other cause which the Court deems sufficient, *95 the Court may dismiss a case at any time and enter a decision against the petitioner. * * *

*540 Sanction by dismissal is exercised in the discretion of the trial court. Link v. Wabash Railroad Co.,370 U.S. 626, 629-632 (1962) (inherent power); Levy v. Commissioner,87 T.C. 794, 803 (1986) (Rule 123(b)). Dismissal may properly be granted where the party's failure to comply with Rules and orders of the Court is due to "willfulness, bad faith, or any fault", as contrasted with mere inadvertence or inability. Societe Internationale v. Rogers,357 U.S. 197, 212 (1958) (Fed. R. Civ. P. 37(b)(2)); Dusha v. Commissioner,82 T.C. 592, 599 (1984) (Rule 104(c)). A case may be dismissed for failure properly to prosecute when petitioner, or counsel on petitioner's behalf, fails to appear at trial and does not otherwise participate in the resolution of petitioner's claim. Basic Bible Church v. Commissioner,86 T.C. 110, 114 (1986).

We exercise our authority to dismiss cautiously and, where fault has been manifested through the *96 acts and omissions of petitioner's counsel, we take special care to assure that dismissal of petitioner's case is warranted. Freedson v. Commissioner,67 T.C. 931, 937 (1977), affd. 565 F.2d 954 (5th Cir. 1978).

The legal standard for involuntary dismissal under Rule 123(b) derives from the standard used for dismissal under rule 41(b) of the Federal Rules of Civil Procedure. Basic Bible Church v. Commissioner, supra at 113; Explanatory Note to Rule 123(b), 60 T.C. 1130. The U.S. Court of Appeals for the Second Circuit, to which our dismissal of this case would be appealable, barring agreement to the contrary, has held that a court considering whether to dismiss a case under rule 41(b) of the Federal Rules of Civil Procedure for failing to prosecute must consider the following factors: (1) The duration of a petitioner's ⁴ failures; (2) whether the petitioner has received notice that further delays would result in dismissal; (3) whether respondent would likely be prejudiced by further delay; (4) a balancing of the need to alleviate court calendar congestion and a party's*97 right to due process; and (5) the efficacy of lesser sanctions. Alvarez v. Simmons Market Research Bureau, Inc.,839 F.2d 930, 932 (2d Cir. 1988) (quoting Harding v. Federal Reserve Bank of New York,707 F.2d 46, 50 (2d Cir. 1983)). ⁵

*98 *541 Applying these five factors, we conclude that this case should be dismissed under Rule 123(b). We recognize that dismissal is a harsh remedy, but in our view this ultimate sanction is appropriate here, and, in the exercise of our discretion, we will grant respondent's motion to dismiss.

This matter has been pending for more than 2 1/2 years since issue was joined, and the process of discovery has hardly begun on what should be the cut-and-dried issues of substantiation of claimed business expenses and itemized deductions. Even if Mr. Feinson's failure to answer the first calendar call in December 1990 was inadvertent, he thereby incurred an increased obligation not to delay the proceedings further, and to cooperate with his opponent in taking the steps necessary to enable the case to be tried at the Court's next scheduled trial session in November 1991. By refusing to cooperate in the discovery process, Mr. Feinson prevented a stipulation of facts from being prepared and executed, and averted the trial of the case at that next session. Moreover, Mr. Feinson belatedly filed a spurious motion for summary judgment at the November 12 calendar call.

We have dismissed cases*99 under Rule 123(b) for similar reasons where parties refused to cooperate during the discovery phase and have disobeyed the Rules and orders of the Court. Long v. Commissioner,742 F.2d 1141 (8th Cir. 1984), affg. per curiam an order of this Court; Rollercade, Inc. v. Commissioner,97 T.C. 113, 116-117 (1991); Van Duyn v. Commissioner,T.C. Memo. 1991-247; Wallis v. Commissioner,T.C. Memo. 1991-246.

In our order of February 4, 1992, which was mailed to petitioner at his residence in New York City, we set forth a detailed procedural history of the case, attached copies of the relevant documents, and specifically ordered petitioner to respond personally in writing to the motions for dismissal and sanctions. After having been fully informed of the procedural history of this case and having been given ample time to respond, petitioner neither offered an explanation nor took *542 any steps to ensure that his case would be properly prosecuted.

When it comes to a petitioner's attention that his case is not being properly prosecuted and that the Court is considering*100 dismissal and monetary sanctions, the petitioner cannot sit idly by and expect the Court to allow the case to continue to wander in the wilderness without any provision for its resolution. Petitioner chose Mr. Feinson as his legal representative and cannot now avoid the consequences of the acts and omissions of his attorney on the grounds that petitioner was not personally at fault, Link v. Wabash Railroad Co., supra at 633-634, or that he did not know what was going on. By informing petitioner what had been happening to his case and giving him opportunities to be heard, we have afforded him due process of law. However, petitioner has not taken advantage of these opportunities, even after we ordered him to personally appear in the courtroom and then ordered him to respond in writing to respondent's motions.

When deciding whether to dismiss a case under Rule 123(b), we also consider the prejudice to respondent in allowing the case to continue. The Commissioner of Internal Revenue has the congressionally mandated function of collecting tax revenue and has the right to obtain judicial resolution of tax disputes within a reasonable period of time. *101 Freedson v. Commissioner, supra at 935. We believe that respondent would be prejudiced if we allowed this case to continue any further.

In deciding to dismiss this case, we have balanced the need to alleviate Court calendar congestion against petitioner's right to due process. Inasmuch as petitioner has been afforded ample opportunity to be heard and explain, dismissing his case will not deny him due process. Despite our efforts and the efforts of District Counsel, the case is no closer to resolution on the merits than it was 18 months ago when it was reinstated after being dismissed for petitioner's failure to appear at the December 1990 calendar call. This case has also unduly burdened the resources of the Court by occupying the attention of two judges on two separate New York City trial calendars without making any headway. The Court has almost 45,000 cases on its docket; if petitioners in all these cases carried on in this fashion, the Court would not *543 only be dead in the water, but would quickly sink as new cases poured in.

Finally, in assessing the efficacy of lesser sanctions, we do not impose a sanction less drastic than dismissal*102 because petitioner has, through his own fault, neglected properly to prosecute his case. One effect of lesser sanctions is to alert the offender that more severe penalties will result if his misconduct persists. By personally notifying petitioner, in our order of February 4, 1992, that respondent had moved to dismiss and sending him a copy of that motion, we alerted petitioner that he was in danger of having his case dismissed with prejudice. We therefore believe that no sanction other than dismissal would be appropriate in light of the case's protracted history of delay and petitioner's total failure to display any interest in having it properly prosecuted to disposition through trial or settlement.

We remind Mr. Feinson and the bar that the justification for the ultimate sanction of dismissal is deterrence. Levy v. Commissioner,87 T.C. at 804; Dusha v. Commissioner, 82 T.C. at 605-606, 608 (citing National Hockey League v. Metropolitan Hockey Club,427 U.S. 639, 643 (1976)). No lesser sanction will effectively convey the message to petitioner's counsel, the Tax Court bar, and their*103 clients, that we will not tolerate, in this or any other case, the delaying tactics that we have encountered in this case.

The remaining issues are whether we should impose monetary sanctions under section 6673(a) on petitioner for instituting and maintaining these proceedings primarily for delay or taking frivolous and groundless positions, and on his attorney for unreasonably and vexatiously multiplying the proceedings. We will first discuss respondent's motion for sanctions against petitioner's attorney.

The so-called "American Rule" is that a "prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser." Alyeska Pipeline Service Co. v. Wilderness Society,421 U.S. 240, 247 (1975). However, the rule has exceptions. We have power to assess attorney's fees against *544 counsel for misconduct and abuse of process. These powers are derived from a variety of sources, including the Internal Revenue Code, the Tax Court Rules of Practice and Procedure, and the Federal Rules of Civil Procedure. ⁶*104

*105 Respondent has moved for sanctions against Mr. Feinson under section 6673(a)(2). Because we have not discussed the standards for imposing such sanctions in a reported opinion, we take this occasion to outline the scope and applicability of the statutory provision.

Section 6673(a)(2)⁷ provides that

(2) Counsel's liability for excessive costs. -- Whenever it appears to the Tax Court that any attorney or other person admitted to practice before the Tax Court has multiplied the proceedings in any case unreasonably and vexatiously, the Tax Court may require --

(A) that such attorney or other person pay personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct, * * *