Unpublished Disposition, 940 F.2d 1536 (9th Cir. 1991)

Nos. 90-70291, 90-70293, 90-70294 and 90-70444.

United States Court of Appeals, Ninth Circuit.

Before REINHARDT and FERNANDEZ, Circuit Judges, and CROCKER, District Judge.^* 

MEMORANDUM^** 

All petitioners appeal the tax court's ruling that they are liable for deficiencies in tax payments for 1980 and 1981. As to all but Arthur and Charlotte Toll ("the Tolls") and Richard and Roberta Leavitt ("the Leavitts"), we affirm the tax court's finding that they did not enter into certain commodities transactions primarily for profit, and are therefore liable for the deficiencies. The Tolls and the Leavitts argue that the tax court had no jurisdiction over their petitions. We agree and order the matter dismissed as to them. Petitioner Lynne Czarneski also argues that she is entitled to a new trial based on her attorney's conflicts of interest. We decline to address this issue, which was not raised before the tax court.

BACKGROUND

Petitioners participated in an investment program offered by F.G. Hunter and Associates ("Hunter"). Through Hunter, petitioners purchased gold futures straddle contracts.¹  Hunter offered innovative methods for closing out the legs of petitioners' straddle contracts.

Instead of offsetting a losing leg, Hunter would sell it outright so as to produce an ordinary loss rather than a capital loss. Ordinary losses allow greater income tax deductions than capital losses. Instead of closing out or offsetting a profitable "short" position on the contract, Hunter would assign or sell the position so as to produce a long-term capital gain rather than a short term capital gain. Long-term capital gains are taxed at a more favorable rate than short-term capital gains.

Petitioners all followed Hunter's methods and claimed ordinary losses on their income tax returns. The Commissioner disallowed the ordinary losses and sent notices of deficiency to petitioners. Each petitioner filed for a redetermination, and a trial was held in November 1985.

The law firm of Hochman, Salkin and DeRoy represented petitioners at trial. Hochman and Salkin were involved in obtaining petitioners' participation in Hunter's program, and were the general partners in the limited partnership through which the Tolls and the Leavitts invested.

The tax court found that the transactions were not primarily for profit, and therefore could not be deducted as ordinary losses under section 108(a) of the Tax Reform Act of 1984. The tax court did, however, allow petitioners to offset their losses against their gains. All petitioners appeal those rulings.

Petitioners, the Tolls and the Leavitts, argue on appeal that there is no jurisdiction over them because the Commissioner failed to make an actual determination that they had a tax deficiency. Ms. Czarneski filed a separate appellate brief arguing that she should be granted a new trial because she did not waive trial counsel's conflicts of interest.

JURISDICTION AND STANDARDS OF REVIEW

We have jurisdiction pursuant to 26 U.S.C. § 7482.

We review the tax court's conclusion that petitioners did not enter the transactions primarily for profit for clear error. Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 727 (9th Cir. 1986). We interpret the meaning of a statute de novo. Batchelor v. Oak Hill Medical Group, 870 F.2d 1446, 1447 (9th Cir. 1989).

DISCUSSION

Section 108 of the Tax Reform Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, as amended by the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085, provides in pertinent part:² 

[I]n the case of any disposition of 1 or more positions which were entered into before 1982 and form part of a straddle, ... any loss from such disposition shall be allowed for the taxable year of the disposition if such loss is incurred ... in a transaction entered into for profit....

We have interpreted this section to mean that petitioners in this case could deduct their "losses" from transactions involving gold futures only if their primary motive was economic profit. Landreth v. Commissioner, 859 F.2d 643, 649 (9th Cir. 1988). The tax court found that petitioners entered the transactions primarily for the purposes of generating losses for tax purposes rather than making a profit.

The tax court's conclusion is supported by evidence that: the principal thrust of Hunter's promotional materials was the favorable tax advantage through unusual closing procedures, the trading practices of petitioners was inconsistent with a primary profit motive, petitioners traded in thin markets which would not allow them to realize profits, petitioners paid higher commissions in order to benefit from Hunter's special closing procedures although there was no corresponding benefit other than tax write-offs, Salkin himself testified he had a specific tax loss in mind. The tax court's conclusion was not clearly erroneous.

The notice of deficiency sent to the Tolls and the notice of deficiency sent to the Leavitts each informed them that a proposed deficiency was being assessed at a 70% rate "since your original income tax return is unavailable at this time." In Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), the notice contained language identical to that on the notice sent to the Tolls and the Leavitts. We held that whether the tax court has jurisdiction over a petition for redetermination of a notice of deficiency is determined under 26 U.S.C. § 6212(a). That section requires the Commissioner to make an actual determination that there is a deficiency before issuing a notice. Scar, 814 F.2d at 1366. " [T]he Commissioner must consider information that relates to a particular taxpayer before it can be said that the Commissioner has 'determined' a 'deficiency' in respect to that taxpayer." Id. at 1368.

In Scar, we found no jurisdiction over taxpayer's petition because the notice of deficiency stated on its face that the Commissioner had not reviewed the taxpayer's actual return, and the notice referred to a tax shelter that had no connection to the petitioner. In the present case, the Commissioner's notice to the Tolls and Leavitts plainly states that their returns were unavailable for review, although it does refer to the correct tax shelter. A mere failure to review the returns is enough to result in a jurisdictionally fatal defect. Id. at 1367 n. 6; Kong v. Commissioner, 60 T.C.M. 696 (1990) (where return not reviewed, that alone is sufficient to require dismissal). Therefore, the same result must obtain here.

The Commissioner suggests that we remand to the tax court so that he can have an opportunity to prove that a proper determination was made. That request is made at this time because, unlike other reported cases, the Tolls and the Leavitts first raised the jurisdiction issue on appeal, and that deprived the Commissioner of an opportunity to demonstrate compliance. In Clapp v. Commissioner, 875 F.2d 1396, (9th Cir. 1989), we indicated, in dicta, that "where the notice of deficiency reveals on its face that the Commissioner failed to make a determination ... the Commissioner [is] required to prove that he did in fact make a determination." Id. at 1402. See also Campbell v. Commissioner, 90 T.C. 110, 112-113 (1988) to the same effect.

While at first blush Clapp might seem to be in conflict with the rigid rule set forth in Scar, it is not. Clapp does not suggest that the Commissioner can establish jurisdiction by a showing short of one that demonstrates that he in fact did conduct an examination of the taxpayer's returns. If that were what the Commissioner sought to present evidence about, we would certainly look favorably upon the request to return the case to the tax court.³  However, the Commissioner makes no such representation to us. Rather, what has been suggested to us by the Commissioner indicates that the returns were not reviewed.⁴  Thus, the tax court lacked jurisdiction over the petitions of the Tolls and the Leavitts.

Ms. Czarneski argues for the first time on appeal that she never waived trial counsel's alleged conflicts of interest, including his own testimony at trial. Indeed, she suggests that she did not even know about them at the time of trial and, thus, could not waive them. She indicates that the trial judge was not informed of the problems and was even misled when he expressed concern about them.

Ms. Czarneski's proper remedy would have been to file a motion in the tax court under Tax Court Rules of Practice & Procedure 161 or 162, 26 U.S.C.A. foll. Sec. 7453 (West 1986 & supp. 1991). Although we express no opinion on whether the tax court can or should grant the motion, we decline to address the new trial issue until the tax court has ruled on the merits of Ms. Czarneski's assertion.⁵  See Slavin v. Commissioner, 932 F.2d 598, 599-600 (7th Cir. 1991). See also Billingsley v. Commissioner 868 F.2d 1081, 1084 (9th Cir. 1989).

Petitioners argue for the first time on appeal that they should be able to deduct their net losses under section 108(c) of the Tax Reform Act of 1984, as amended in 1986. Since the issue was not raised before the tax court, we decline to hear it now. See Andersen v. Cumming, 827 F.2d 1303, 1305 (9th Cir. 1987).

CONCLUSION

We AFFIRM the tax court's ruling that petitioners the Ewings, the Czarneskis and the Leongs are not allowed to deduct losses incurred in Hunter's gold straddles program under section 108(a), and that they are not entitled to deduct their net losses under section 108(c). We grant the petition of the Tolls and the Leavitts since the tax court had no jurisdiction over them. We decline to rule on Ms. Czarneski's request for a new trial, because it is not properly before us. However, our affirmance of the judgment against her is not intended to preclude her rights, if any, to raise her claims of conflict before the tax court. Nor do we intend to indicate if or how the tax court should rule if the claims are hereafter raised before it.

Petitions GRANTED as to the Tolls and the Leavitts and otherwise DENIED.