Judisch v. United States

Clara Judisch (plaintiff) was an attorney who prepared income-tax returns for her clients. In 1976, the Internal Revenue Service (IRS) amended its rules regarding a home-office deduction—such deduction was only available regarding portions of a residence used exclusively as a home office, and the deduction was limited to the extent of income derived from the home-office use. Judisch’s typical tax-preparation method was to send her clients a four-page questionnaire. Judisch would use the information from the questionnaire to prepare the return. Judisch failed to change her questionnaire regarding the information needed to assess a possible home-office deduction properly. Judisch thus continued to claim those deductions for clients who were not entitled to the deductions. Ultimately, the government (defendant) assessed 58 penalties against Judisch for understating the tax liability of her clients. The government based the penalties on two statutes: (1) 26 U.S.C. § 6694(a), which allowed a penalty on a preparer who understates a taxpayer’s liability by negligently or intentionally disregarding revenue rules and regulations, and (2) 26 U.S.C. § 6694(b), which allowed a penalty for willfully understating a taxpayer’s liability. Judisch filed this suit, and both parties failed to put forth much evidence at trial. The matters were limited to five particular returns, and the government called the agent who audited the returns and Judisch as witnesses to establish Judisch’s method of obtaining tax information. For her part, Judisch called no witnesses but presented a 1980 Congressional Resolution that prohibited the IRS from using any funds or enforcing rules related to determining a taxpayer’s principal place of business. Judisch argued she was entitled to a directed verdict on some counts because the government had to establish under § 6994(b) that “willful” meant purposely disregarding information furnished by the taxpayer. The court ruled in Judisch’s favor on those counts, and the jury found that the government had failed to present enough information to establish violations under § 6994(a). In fact, the government failed to establish that Judisch had prepared one return, failed to establish the amount of underpayment on another return, and allowed the home-office deduction on another return. Nevertheless, the government appealed.