Davenport Recycling v. Comr.,IRS , 220 F.3d 1255 ( 2000 )

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
AUGUST 2, 2000
No. 99-10679
THOMAS K. KAHN
________________________ CLERK
Tax Court No. 12801-89
DAVENPORT RECYCLING ASSOCIATES
and SAM WINER, TAX MATTERS PARTNER,
Petitioners,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee,
ERNEST C. KARRAS,
MARION K. KARRAS,
Appellants.
________________________
Appeal from the United States Tax Court
_________________________
(August 2, 2000)
Before COX, BIRCH and BARKETT, Circuit Judges.
BARKETT, Circuit Judge:
Ernest C. Karras and Marion K. Karras (“the Karrases”) appeal from an
order of the United States Tax Court, issued after an evidentiary hearing, denying
them leave to file a motion to vacate the assessment of tax liability arising from a
partnership in which they were limited partners.1 On appeal, the Karrases argue
that the denial should be reversed because the Tax Court lacked jurisdiction to
assess the tax in the first instance and because the order was procured by fraud on
the court. Because we conclude that the Tax Court did not abuse its discretion, we
affirm.
BACKGROUND
In 1982, the Karrases purchased an interest in a limited partnership known as
Davenport Recycling Associates (“Davenport”). Sam Winer was the sole general
partner of Davenport and served as its Tax Matters Partner (“TMP”) -- the person
empowered to act as an agent on behalf of the partners in connection with an
Internal Revenue Service (“IRS”) audit or in any ensuing judicial proceeding. See
26 U.S.C. § 6231(a)(7). In 1984, after the Karrases became a limited partner, the
IRS determined that Winer had violated 26 U.S.C. § 6700 by promoting or selling
recycling partnerships, including Davenport, based on gross valuation
1
Davenport Recycling Associates v. Commissioner (Davenport), No. 18417-89 (T.C. Feb. 23,
1994).
2
overstatements. On April 13, l984, the government sought an injunction under
Section 7408 of the Internal Revenue Code (the “Code” or “IRC”) to preclude
Winer from representing any partnership, including Davenport, and from engaging
in marketing these recycling partnerships. In addition, in 1984, 1986, and 1987,
the IRS notified all of the Davenport partners that their tax returns for 1982, 1983,
1984, and 1985 were to be audited pursuant to the uniform partnership audit
procedures (the “TEFRA Audit Rules”) of the Code, 26 U.S.C. §§ 6221-6233.2
During this period, Winer consented to the injunction, and on February 18, l986,
the district court enjoined him from taking any action to organize, promote, or sell
tax shelters. The order also required Winer to resign as TMP of all partnerships
including Davenport, to send notice of his resignation to the limited partners, and
to waive his right to intervene in any court proceedings as TMP. Winer complied,
and advised the other Davenport partners about the provisions of the order. The
government selected DL & Associates (“DL”), one of the limited partners in
Davenport, to serve as the replacement TMP.
2
In 1982, as part of the Tax Equity and Fiscal Responsibility Act (“TEFRA”), see Pub.L. No.
97-248, § 402(a), 96 Stat. 324, Congress enacted the unified partnership audit examination and
litigation provisions of the Code, now found at 26 U.S.C. §§ 6221-6234. These provisions
centralized the treatment of partnership taxation issues, and “ensure[d] equal treatment of partners
by uniformly adjusting partners’ tax liabilities.” Kaplan v. United States, 133 F.3d 469, 471 (7th
Cir.1998).
3
In May 1986, however, Winer became aware of a recently-published
proposed Treasury regulation, Prop. Reg. § 301.6231(a)(7)-1, 51 Fed. Reg. 13231,
13245 (Apr. 18, 1986), which stated that only a general partner could serve as
TMP. Because DL was only a limited partner the partnership lacked a functioning
TMP with whom the IRS could transact official business. Thus, the IRS and
Winer, through a joint motion, obtained permission from the court for Winer to act
as TMP for the purpose of providing “administrative services” to the partnership.
In conjunction with these “administrative services,” Winer signed consents to
extend the statute of limitations on audits for Davenport’s taxable years l982-l985,
and the IRS proceeded to audit Davenport for those years.3
On May 15, 1989, the IRS issued its Final Partnership Administrative
Adjustments (“FPAA”) report for Davenport’s taxable years l982-l985 to Winer
and to all of Davenport’s partners, disallowing deductions and credits claimed by
3
Generally, there is a three-year statute of limitations for the assessment and collection of
federal income taxes. See IRC § 6501(a). This statute of limitations can be extended by the
execution of an agreement between the IRS and the taxpayer or the taxpayer’s authorized
representative. See IRC § 6501(c). The Davenport partnership filed its l982 return on April 15,
l983, and the statue of limitations would have expired on April 15, l986. On October 8, l985, Winer
signed a consent extending the statute of limitations for the 1982 return to December 31, l987; on
November 19, 1987, Winer again signed consents extending the statute of limitations for the 1982-
84 returns to December 31, 1989; and on November 1, 1988, Winer signed a consent extending the
statute of limitations on the 1985 return to December 31, 1989.
4
Davenport for its 1982-1985 taxable years.4 Winer filed a protest with the IRS, in
response to which the IRS proposed a settlement which was rejected by the
Davenport partners, including the Karrases. Winer then appealed the assessment to
the Tax Court.5 Although Winer informed the other partners that a petition for
appeal was filed, no other partner filed a petition, and no partner moved to
participate in Winer’s appeal under IRC § 6226(c).6
Before the Tax Court, both Winer and the IRS alleged that Winer was the
TMP of the partnership, and Winer, on behalf of Davenport, subsequently
conceded the adjustments proposed by the IRS. The IRS moved for an entry of
decision. On February 23, l994, the Tax Court entered its order affirming the
adjustments and assessing the tax as established in the IRS audit report. Although
he was required to do so by Tax Court Rule 248(b)(3), Winer failed to serve the
4
Under TEFRA, the Commissioner must notify partners of the beginning and end of
partnership-level administrative proceedings, and if the Commissioner disagrees with the
partnership’s reporting of any partnership item, he must send all notice partners a notice of the
FPAA before making any assessment attributable to this item. See IRC § 6223.
5
Under Section 6226(b)(1), the TMP may, within 90 days, contest the FPAA by filing a petition
for readjustment of partnership items in the Tax Court, the Court of Federal Claims, or the
appropriate federal district court. If no such petition is filed by the TMP within that period, any
notice partner or five-percent group may file a petition within the next 60 days. See IRC §
6226(b)(1).
6
Under Section 6226(c), any partner with an interest in the outcome of the proceeding is entitled
to participate in an action brought by the TMP or a notice partner, thereby ensuring that all partners
may litigate a dispute with the IRS in a single proceeding.
5
Davenport partners with a copy of the IRS’s motion for entry of decision, the
proposed decision, the certificate of filing, or a copy of Tax Court Rule 248.7 On
December 1, 1994, the Davenport partners, including the Karrases, received a
notice of deficiency from the IRS for the tax, penalties, and interest due.
On January 23, 1996, almost two years after the Tax Court’s decision, the
Karrases sought leave to file a motion to vacate the decision in the Davenport case.
The Karrases claimed that the Tax Court did not have jurisdiction in the Davenport
proceeding because Winer lacked the authority either to consent to extend the
statute of limitations or to represent the partnership in the Tax Court because he
had been previously ousted as TMP. Finally, the Karrases argued that the Tax
Court’s decision should be vacated because it was procured by fraud on the court
because the IRS had failed to inform the court that Winer had been enjoined from
acting as Davenport’s TMP.
The Tax Court denied relief, holding that “allegations concerning the period
of limitations constitute an affirmative defense, not a plea to the jurisdiction of this
Court,” that the Davenport partners ratified the filing of the petition by Winer, and
that Winer’s failure to notify the limited partners of his decision to enter into a
7
While the TMP is required to notify nonparticipating partners of a motion for entry of decision,
see IRC § 6223(g), the TMP’s failure to do so “does not affect the applicability of any proceeding
or adjustment under this subchapter to such partner.” IRC § 6230(f).
6
settlement with the IRS “does not justify the extraordinary relief of vacating the
final decision in this case.” The court also rejected the Karrases’ argument that the
IRS’s attorneys committed fraud on the court. The Karrases now appeal.
We agree with our sister circuits that we must review the Tax Court’s denial
of leave to file a motion to vacate for abuse of discretion.8 Harbold v.
Commissioner, 51 F.3d 618, 621 (6th Cir. 1995); Abatti v. Commissioner, 859
F.2d 115, 117 (9th Cir. 1988); Senate Realty Corp. v. Commissioner, 511 F.2d
929, 931 (2d Cir. 1972); see also Drobny v. Commissioner, 113 F.3d 670, 676 (7th
Cir. 1997) (“a Tax Court ruling denying a motion to vacate is reviewed under the
abuse of discretion standard”). We will reverse for abuse of discretion only if we
have a definite and firm conviction that the Tax Court committed a clear error of
judgment in the conclusion it reached. Abatti, 859 F.2d at 117; Fjelstad v.
8
The Karrases’ brief states that “[w]hether the Tax Court applied the correct legal standard in
denying Taxpayers’ Motion for Special Leave to File Motion for Reconsideration Decision or to
Vacate Decision in this case is a question of law subject to de novo review. Billingsley v.
Commissioner, 868 F.2d 1081 (9th Cir. 1989); Abeles v. Commissioner, 90 T.C. 103, 105, 106
(1988); Brannon’s of Shawnee, Inc. v. Commissioner, 69 T.C. 999, 1002 (1978); Abatti v.
Commissioner, 854 F.2d 115 (9th Cir. 1988), aff’g 86 T.C. 1319 (1986); Senate Realty Corp. v.
Commissioner, 511 F.2d 929, 931 (2d Cir. 1975).” However, the above cases do not stand for this
proposition. Rather, these cases establish that we review de novo the question whether the Tax
Court had jurisdiction to grant a motion for leave to vacate, and not the Tax Court’s denial of such
leave. See Abatti, 859 F.2d 117. In the case at hand, the IRS does not argue that the Tax Court did
not have jurisdiction to grant the motion for leave to vacate the Davenport decision, rather it argues
that while the Tax Court had jurisdiction to grant the motion, the Tax Court properly refused to do
so.
7
American Honda Motor Co., 762 F.2d 1334, 1337 (9th Cir. 1985). The Tax
Court’s factual findings are reviewed for clear error. Blohm v. Commissioner, 994
F.2d 1542, 1548 (11th Cir. 1993); Atlanta Athletic Club v. Commissioner, 980
F.2d 1409, 1411 (11th Cir. 1993). The Tax Court’s rulings on the interpretation
and application of the Code are conclusions of law which we review de novo.
Blohm, 994 F.2d at 1548.
DISCUSSION
The basic question before us in this case is whether the Tax Court abused its
discretion in denying the Karrases’ motion for leave to file a motion to vacate its
decision. Sections 7481(a)(1) and 7483 of the Code provide that a decision of the
Tax Court becomes final 90 days after entry if no party files a notice of appeal.
See IRC §§ 7481(a)(1), 7483; Roberts v. Commissioner, 175 F.3d 889, 892 (11th
Cir. 1999). A motion to vacate must be filed “within 30 days after the decision has
been entered unless the Court shall otherwise permit.” Tax Court Rule 162.
Courts that have applied these provisions have uniformly held that, as a general
rule, the Tax Court lacks jurisdiction to vacate a decision once it becomes final.
See Arkansas Oil & Gas, Inc. v. Commissioner, 114 F.3d 795, 798 (8th Cir.1997);
Abatti, 859 F.2d at 117; see also Commissioner v. McCoy, 484 U.S. 3, 6 (1987)
(“The Tax Court is a court of limited jurisdiction,” and, unlike an Article III federal
8
court, “lacks general equitable powers.”); Drobny, 113 F.3d at 677 (“The authority
of a court of limited jurisdiction to vacate final judgments has been narrowly
construed”); Curtis v. Commissioner, 72 T.C.M. 369, 371 (1996) (holding
that once a decision of the Tax Court has become final, it may be vacated “only in
certain narrowly circumscribed situations”). However, narrow exceptions to this
rule have been permitted when: (1) the decision is shown to be void or a legal
nullity for lack of jurisdiction over either the subject matter or a party; (2) there has
been fraud on the court; or (3) the decision was based on mutual mistake. See
Billingsley v. Commissioner, 868 F.2d 1081, 1084-85 (9th Cir. 1989); Abatti, 859
F.2d at 118; La Floridienne J. Buttgenbach & Co. v. Commissioner, 63 F.2d 630,
631 (5th Cir. 1933); see also Roberts, 175 F.3d 889, 893 n.3 (citing exceptions
which have been permitted). The Karrases argue that the first two exceptions
apply, rendering the denial of the motion for leave to file a motion to vacate an
abuse of discretion. We address each exception in turn.
1. The Tax Court’s Jurisdiction
a. Subject Matter Jurisdiction
The Karrases claim that the Tax Court lacked subject matter jurisdiction
over the Davenport case because the statute of limitations barred any tax
assessments for the years at issue and Winer lacked the authority to consent to
9
extend the limitations period.9 We agree with the Tax Court that expiration of the
statute of limitations is an affirmative defense that does not implicate the
jurisdiction of the court.
Subject matter jurisdiction defines a court’s authority to hear a particular
type of case. United States v. Morton, 467 U.S. 822, 828 (1984). The expiration
of a statute of limitations is an affirmative defense that may be pled in a case which
is already within the court’s authority to decide, and the ability of a party to assert
such a defense has nothing to do with the court’s power to resolve the case. See
Compagnoni v. United States, 173 F.3d 1369, 1370 n.3 (11th Cir. 1999) (“In most
cases, a defense based on a statute of limitations does not implicate the court’s
subject matter jurisdiction.”); Chimblo v. Commissioner, 177 F.3d 119, 125 (2d
Cir. 1999); see also Pugh v. Brook (In re Pugh ), 158 F.3d 530, 533-34 (11th
Cir.1998) (noting that “true statutes of limitations” do not constitute grants of
subject matter jurisdiction, but rather “restrict the power of a court to grant certain
remedies in a proceeding over which it has subject matter jurisdiction”). This
precedent is clearly applicable to tax matters. Expiration of a statute of limitations
is an affirmative defense that must be pleaded; it is not jurisdictional. See
9
Under § 6229(b)(1)(B), the statute of limitations on assessment of a partnership may be
extended “with respect to all partners, by an agreement entered into by the Secretary and the tax
matters partner” before the expiration of such period. IRC § 6229(b)(1)(B).
10
Columbia Bldg., Ltd. v. Commissioner, 98 T.C. 607, 611 (1992); see also Stange v.
United States, 282 U.S. 270, 276 (1931) (finding that a consent to extend the
statute of limitations under § 6501 “is essentially a voluntary, unilateral waiver of a
defense by the taxpayer”); Robinson v. Commissioner, 57 T.C. 735, 737 (1972)
(“The statute of limitations is a defense in bar and not a plea to the jurisdiction of
this court.”). In addition, Rule 39 of the Tax Court Rules and Procedure
recognizes that passage of the statute of limitations is an affirmative defense: “[a]
party shall set forth in the party’s pleading any matter constituting an avoidance or
affirmative defense, including res judicata, collateral estoppel, estoppel, waiver,
duress, fraud, and the statute of limitations.”
The Karrases contend that they should prevail on this issue under the
rationale of Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221
(2d Cir. 1998). This reliance is misplaced. First, Transpac did not involve a
question of jurisdiction. The Karrases argue that because the court in Transpac
determined that TMPs who were under criminal investigation by the IRS did not
have the authority to extend the statute of limitations, the Karrases should likewise
prevail here. However, the procedural posture of Transpac is vastly different from
that of this case. Unlike the present case, the limited partners in Transpac, after
receiving the FPAAs, filed a timely petition with the Tax Court, arguing that the
11
consents to extend the statute of limitations were invalid. Under those
circumstances, we agree with the Second Circuit that, as a result of being placed
under criminal investigations, the TMPs of the various partnerships labored under
a conflict of interest and thus could not bind the partnerships to consents to extend
the statute of limitation. If this were a direct and timely appeal of the Tax Court’s
original order, we may well have agreed that Winer had a conflict of interest which
would have precluded him from acting on behalf of the partnership. But that is not
the issue before us. The statute of limitations challenge in Transpac was timely
and did not arise in the context of a motion for leave to file a motion to vacate a
final Tax Court decision. In contrast to the present case, in which no limited
partner raised the issue until two years after the Tax Court’s decision became final,
numerous limited partners of Transpac “duly objected to the FPAA and requested
the appropriate administrative and judicial review.” Id. at 224.
Moreover, even if the Karrases had filed a timely petition to vacate the Tax
Court’s order, they would still have to overcome their failure to raise the statute of
limitations defense at the partnership-level proceeding. As the Second Circuit held
in Chimblo v. Commissioner, taxpayers must raise the statute of limitations
defense within the context of a partnership-level proceeding. 177 F.3d at 125. In
Chimblo, the Tax Court had upheld the IRS’s assessment against a partnership.
12
Later, individual partners who had not participated in partnership-level
proceedings challenged penalties asserted against them, arguing that the statute of
limitations had expired prior to the issuance of the assessment. Id. at 123. The
Second Circuit held that:
In the context of this case, one involving the application of TEFRA,
petitioners had a right to raise the partnership’s statute of limitations
defense in the earlier partnership-level proceeding but failed to do so.
We join the Seventh Circuit, as well as the numerous lower courts that
have held that, under TEFRA, a statute of limitations defense
concerns a “partnership item,” see IRC § 6231(a)(3), that must be
raised at the partnership level. . . . Allowing individual taxpayers to
raise a statute of limitations defense in multiple partner-level
proceedings would undermine TEFRA’s dual goals of centralizing the
treatment of partnership items and ensuring the equal treatment of
partners.
Id. at 125 (citations omitted).
In the case at hand, as in Chimblo, the Karrases received copies of the
FPAAs, and they could have appeared in the partnership proceeding and contested
the assessment. See IRC § 6226(c). It is not disputed that Winer advised all
partners within the statutory time for appealing the assessment that he was filing an
appeal on behalf of the partnership. In fact, in the proceedings before the Tax
Court, Ernest Karras testified that when he received the assessment notice he chose
not to file a petition challenging the assessment in the Tax Court because he knew
that Winer had done so.
13
We conclude that the Tax Court did not abuse its discretion in finding that it
had jurisdiction to uphold the assessments levied by the IRS.
b. Jurisdiction Over the Party
Alternatively, the Karrases argue that, even if the statute of limitations was
properly extended, the Tax Court lacked jurisdiction in the Davenport case because
Winer had no authority to appear in the Tax Court on behalf of Davenport.10 The
Karrases argue that the Tax Court erred in concluding that it had jurisdiction on the
basis of the doctrine of implied ratification. Davenport is a New York limited
partnership, and the doctrine of implied ratification is recognized in New York.
See IBJ Schroder Bank & Trust Co. v. Resolution Trust Corp., 26 F.3d 370, 375
(2d Cir. 1994). Ratification “occurs when the benefits of the purportedly
unauthorized acts are accepted with full knowledge of the facts under
circumstances demonstrating the intent to adopt the unauthorized arrangement.”
Dayton Securities Associates v. Morgan Guaranty Trust Co. (In re The Securities
Group), 926 F.2d 1051, 1055 (11th Cir. 1991) (applying New York law); see also
57 N.Y. Jur.2d Estoppel, Ratification and Waiver, § 76 (1986) (“Acquiescence
may give rise to an implied ratification, as where one’s conduct subsequent to the
10
The Tax Court held that Winer had been authorized to file the petition and appear on behalf
of Davenport because Winer was the sole general partner of Davenport and had been reinstated as
TMP for “administrative services.” The Tax Court alternatively held that, even if Winer was not
so authorized, the Karrases impliedly ratified Winer’s representation.
14
transaction complained of supports the conclusion that he has by his assent and
acquiescence accepted and adopted it.”).
In Mishawaka Properties Co. v. Commissioner, 100 T.C. 353 (1993), the
Tax Court applied the doctrine of implied ratification to the filing of a petition on
behalf of a partnership under TEFRA. Mishawaka involved a TEFRA real estate
partnership which had no designated TMP. Sol Finkelman, the managing partner,
did not have the largest profit interest in the partnership but was the only partner
who dealt with the IRS in connection with the audits of the partnership. Because
there was a question about the identity of the TMP, the IRS issued copies of the
FPAAs to Finkelman, to the partner with the largest profit interest, and to the
partnership. Finkelman, identifying himself as the TMP, filed a petition contesting
the FPAA within the 90 days reserved for filing a petition by the TMP. Before
filing the petition, Finkelman had prepared and signed all of the partnership
returns, acted as its accountant and managing partner, identified himself as the
TMP to the other partners, and advised the other partners that he would file a
petition in the Tax Court on their behalf. Id. at 356-58.
One year after filing the petition, Finkelman informed the other partners that
he could no longer finance the litigation with the IRS and advised them to form
committees to finance the litigation. Id. at 368. No partner took any action to
15
disavow, repudiate or manifest objection to Finkelman’s filing of the petition until
four years later, when a participant moved to dismiss the case for lack of
jurisdiction on grounds that Finkelman was not the proper TMP and that the statute
of limitations on assessment had expired. Id. at 358-59. The Tax Court denied the
participant’s motion to dismiss for lack of jurisdiction, holding that the partners
had impliedly ratified Finkelman’s imperfect petition when they failed to object to
it despite knowing of the assessment, of Finkelman’s representation of the
partnership before the IRS, and of Finkelman’s petition on the partnership’s behalf.
In this case, Winer signed Davenport’s tax returns, represented the
partnership during the audit, notified the partners of the IRS’s settlement offer and
of his intention to file a petition on behalf of the partnership, and filed an appeal to
the Tax Court on behalf of the partnership. The Karrases and the other partners
were notified at the beginning of the audit of Davenport and received copies of the
audit report and the assessment. The Karrases also knew that Winer was
representing the partnership before the IRS and the Tax Court. In fact, when, after
informing the partners of the injunction against him, Winer informed the partners
of his intention to appeal to the Tax Court, none of the partners questioned his
authority to do so. We conclude that the Tax Court did not abuse its discretion in
concluding that the Karrases, who waited until 1996 to repudiate the petition that
16
they knew Winer had filed in 1989, accepted the benefit of Winer’s allegedly
unauthorized act and impliedly ratified it.
2. Fraud on the Court
The Karrases’ final argument is that because the decision was procured by
fraud on the court, the Tax Court erred in refusing to grant leave to file a motion to
vacate its decision. In the context of a motion to vacate a final Tax Court decision,
“fraud upon the court” is narrowly construed. See Drobny, 113 F.3d at 678;
Harbold, 51 F.3d at 622; Aoude v. Mobil Oil Corp., 892 F.2d 1115, 1118 (1st
Cir.1989); Abatti, 859 F.2d at 118. It has been found only in those instances where
the fraud vitiates the court’s ability to reach an impartial disposition of the case
before it. See Harbold, 51 F.3d at 622. “Fraud on the court must involve an
unconscionable plan or scheme which is designed to improperly influence the court
in its decision,” preventing the opposing party “from fully and fairly presenting his
case.” Abatti, 859 F.2d at 118; see also Heim v. Commissioner, 872 F.2d 245, 256
(8th Cir. 1989) (finding no fraud upon the court found where taxpayers claimed
that their attorney entered into misleading and inadequate stipulations); Anderson
v. Commissioner, 693 F.2d 847, 848 (9th Cir. 1982) (finding no fraud upon the
court where taxpayer’s tax advisors misrepresented themselves as lawyers admitted
to practice before the Tax Court); Senate Realty Corp. v. Commissioner, 511 F.2d
17
929, 931 (2d Cir.1975) (holding that although the attorney representing a corporate
taxpayer was unauthorized to settle IRS claim against the corporation, the
attorney’s action in filing settlement stipulation in Tax Court on which judgment
was entered did not represent a fraud upon the Tax Court). In this case, based on
the totality of the facts, we cannot say that the Tax Court abused its discretion in
finding that no fraud was perpetrated on the court.
For all of the foregoing reasons, we conclude that the Tax Court did not
abuse its discretion in denying the Karrases leave to file a motion to vacate the Tax
Court’s order upholding the IRS’s assessments against the Davenport partnership.
AFFIRMED.
18