Medical & Business Facilities Ltd. v. C.I.R. ( 1995 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 94-40453
MEDICAL & BUSINESS FACILITIES,
LTD., GERALD STEVENS, TAX MATTERS
PARTNER,
Petitioner-Appellant,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
No. 94-40527
MEDICAL & BUSINESS FACILITIES,
LTD., PHILLIP S. BROOKS,
TAX MATTER PARTNER,
Petitioner-Appellee,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant.
________________________________________________________________
Appeals from the United States Tax Court
________________________________________________________________
(July 25, 1995)
Before REYNALDO G. GARZA, HIGGINBOTHAM, and PARKER, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
A general partner of Medical & Business Facilities, Ltd.
signed consent forms for tax years 1983 through 1986, agreeing to
extend the period of limitations during which the Internal Revenue
Service could assess a deficiency. MBFL is now arguing that the
general partner was not authorized to execute the consents and the
IRS's assessment is time barred. We agree and reverse the Tax
Court's finding in favor of the Commissioner.
I.
Medical & Business Facilities, Ltd. was a partnership engaged
in the business of buying medical assets and leasing those assets
to medical enterprises. The partnership was initially formed by
Gerald Stevens and James Wyllie in 1980 as a general partnership.
In 1981, additional partners were admitted and an amendment to the
partnership agreement was filed with the State of Louisiana,
registering the partnership as a partnership in commendam. A
partnership in commendam is similar to a common law limited
partnership. See La. Civ. Code Ann. art. 2837 (West 1994).
The amended partnership agreement vested management and
control of the business in a managing general partner and a
management committee that was made up of the firm's general
partners. The managing general partner and the management
committee were to act collectively on all decisions with respect to
the management and control of the business, and their actions were
binding on the partnership and all of the partners. Gerald Stevens
was the managing general partner and owned the largest single
profit interest in MBFL.
In September 1982, Stevens moved to California. Phillip
Brooks, a general partner, was appointed the assistant managing
2
general partner. His responsibility was to carry on the
partnership's business activities in Stevens' absence. Brooks
resigned from this position on June 25, 1983, although he remained
a member of the management committee. In June 1983, Stevens
resigned as managing general partner.
In 1983, Brooks prepared a second amendment to the partnership
agreement. This amendment purported to vest management and control
of the business in a management committee consisting of five
general partners. Although the amendment lacked the signatures of
some of the general and limited partners, it was filed with the
State of Louisiana on January 28, 1986 and MBFL operated under the
new management structure. Brooks was one of the five members of
the firm's new management committee. The committee hired Albert J.
Derbes, III, a tax lawyer and certified public accountant, to act
as manager of the partnership.
Stevens executed the partnership's tax information return for
1983, and Brooks executed the 1984, 1985, and 1986 returns. In
1985, the IRS discovered that MBFL had claimed too high a
depreciation deduction for tax years 1983, 1984, and 1985. On May
6, 1985, IRS agent Joette Pfeiffer contacted the accountant who
prepared MBFL's 1983 tax return to find out who was MBFL's tax
matters partner for 1983. The accountant contacted Derbes, who
informed Pfeiffer that Brooks was the TMP.
On April 8, 1986, Pfeiffer met with Derbes and Brooks. During
that meeting, Brooks executed a form authorizing Derbes to
represent MBFL before the IRS. Pfeiffer also asked Derbes to have
3
the partnership's TMP execute a form consenting to the extension of
time to assess tax. Brooks indicated that he was not certain
whether he could execute the form because he did not know which
partner was going to act as MBFL's TMP. Pfeiffer then informed
Derbes and Brooks that if the partnership failed to designate a
TMP, the IRS would designate one for it. Derbes and Brooks left
the room, and Pfeiffer inspected MBFL's books and records,
including the original and amended partnership agreements. Before
Pfeiffer left that day, Derbes produced a consent signed by Brooks
extending the limitations period for the 1983 tax year to December
31, 1987. Both Derbes and Brooks believed that Brooks had the
authority to sign the consent.
Over the next few years, Brooks executed consents further
extending the limitations period for tax years 1983 through 1986.
On each form, Brooks signed on the line designated for the TMP.1
Brooks executed the consents in an effort to gain time to
substantiate the deductions and avoid involvement in a complicated
tax dispute at a time of severe financial difficulty for the
partnership.
On June 28, 1991, Derbes filed a Freedom of Information Act
request with the IRS, seeking documents pertaining to MBFL's tax
years 1983 through 1986. One of the documents that the IRS
produced was a memorandum prepared in July 1989 by an attorney at
1
On a few of the forms, Brooks signed his name in the
space labelled "Authorized Representative." In those instances,
however, Brooks' name was typed directly above his signature in the
space labelled "Tax Matters Partner."
4
the IRS. The memorandum questioned the validity of the consents
executed by Brooks for tax years 1983, 1984, and 1985, concluding
that Brooks had not been properly designated as the TMP and,
accordingly, lacked the authority to execute the consents.
On August 15, 1991, MBFL filed a protest with the IRS,
claiming that the period of limitations for assessment had expired
for tax years 1983, 1984, and 1985 because Brooks lacked the
authority to execute the consent forms extending the period of
limitations. On December 26, 1991, the Commissioner mailed notices
of final partnership administrative adjustment for years 1983
through 1986. MBFL filed a petition in the Tax Court contesting
the adjustments on their merits and on the basis that the period of
limitations had expired for years 1983 through 1985. MBFL
subsequently conceded the merits of the adjustments, leaving only
the issue of whether the adjustments were barred by limitations.
On May 17, 1993, the Tax Court held a trial. On January 31, 1994,
the Tax Court ruled that the consents executed by Brooks were
effective and, therefore, the period of limitations for tax years
1983, 1984, and 1985 had not expired. MBFL filed a timely notice
of appeal.
II.
The statutory period for assessing any income tax attributable
to partnership items for a partnership's tax year expires three
years after the partnership files its partnership information
return or three years after the last day for filing such return,
5
whichever is later. I.R.C. § 6229(a). Section 6229(b)(1)(B),
however, permits extension of that time "with respect to all
partners, by an agreement entered into by the Secretary and the tax
matters partner (or any other person authorized by the partnership
in writing to enter into such an agreement)." The parties both
agree that for the periods relevant to this appeal, Brooks was not
the TMP. See id. § 6231(a)(7) (defining TMP). Thus, the issue is
whether the partnership authorized Brooks in writing to execute the
consents. While there was no specific agreement authorizing Brooks
to execute the consents, the Tax Court concluded that MBFL's
partnership agreement provided the requisite writing and that
Brooks' authority under that agreement encompassed execution of the
consents. We disagree.
We first consider whether Brooks' status as a general partner
in MBFL vested him with either actual or apparent authority to
execute the consents extending the limitations period. Second, we
address the Commissioner's argument that MBFL should be estopped
from disclaiming Brooks' authority as the TMP.
A.
In order to vest Brooks with actual authority to sign the
consents, the partnership had to have executed a document providing
Brooks with that authority. I.R.C. § 6229(b)(1)(B). A number of
Tax Court cases have held that a partnership agreement is a
sufficient writing under § 6229(b)(1)(B). See Georgetown
Petroleum-Edith Forrest v. Commissioner, 67 T.C.M. (CCH) 1952(1994); Iowa Investors Baker v. Commissioner, 64 T.C.M. (CCH) 6116
(1992); Cambridge Research & Dev. Group v. Commissioner, 97 T.C.
287 (1991). In the above cases, however, the partnership
agreements expressly granted the general partners broad authority
to act for the partnership. In Iowa Investors, for example, the
partner that signed the consents had the authority to "'manage all
partnership affairs, including . . . tax services . . . on behalf
of the partnership to individual partners.'" 64 T.C.M. 611.
Similarly, in Cambridge Research, the general partners, one of whom
signed the contested consent, were authorized to "'manage and
conduct the Partnership business. They may, for the furtherance of
the business of the Partnership, borrow or lend money and pledge,
mortgage, sell, assign, license or otherwise dispose of any or all
of the Partnership property and in general take any action or do
anything in furtherance of the partnership business.'" 97 T.C. at
289 (emphasis added by Tax Court). Finally, in Georgetown
Petroleum, the partnership agreement authorized the general
partner, who executed the consent form, "to make such tax elections
and determinations as appear to be appropriate, and grant[ed] the
general partner exclusive management and control of the business of
the Partnership." 67 T.C.M. 1952.
MBFL's partnership agreement, by contrast, does not contain a
broad grant of authority to any individual general partner.
Indeed, there was significant trial testimony that general partners
were not permitted individually to make decisions binding on the
partnership. Section 2.01 of the first amendment to the
partnership agreement states:
7
The overall management and control of the business and
affairs of the Partnership shall be vested in the Managing
General Partner and the Management Committee consisting of the
Managing General Partner and the General Partners, all of whom
will be collectively referred to as "The Management". The
Management will act collectively on all decisions with respect
to the management and control of the Partnership and their
actions shall be binding on the Partnership and all Partners
provided that they act within the scope of their authority as
granted by these partnership articles.
Below, MBFL argued that because the only way in which the
general partners were authorized to act was collectively and
because Brooks' signing of the consents did not meet this
requirement, the consents were invalid. The Tax Court disagreed.
It read section 2.01 in conjunction with Article VII of the
partnership agreement and with Louisiana law. Under Louisiana law,
a general partner is a mandatary and may bind the partnership for
actions taken within the ordinary course of business. La. Civ.
Code Ann. art. 2814 (West 1994). Article VII of the partnership
agreement restricts the authority of MBFL's general partners.
Under that article, a general partner may not, without the approval
of the management:
(a) Assign, transfer, pledge, compromise, or release any
of its claims or debts, except upon payment in full, or
arbitrate or consent to arbitration of any of its disputes or
controversy;
(b) Borrow money in the Partnership name or use
collateral owned by the Partnership as security for loans
except as provided in Article II Section 2.01 hereof;
(c) Lease or mortgage any Partnership real estate or
interest therein or enter into any contract for such purposes.
The Tax Court concluded that since Article VII of the
partnership agreement restricted a general partner's mandatary
authority under only three circumstances, section 2.01's collective
8
decision making mandate applied only to those three circumstances.
If this is true, then section 2.01 cannot be the source in the
partnership agreement of a grant of general authority to an
individual general partner for matters outside the scope of Article
VII.
Even if we were to disagree with the Tax Court and adopt the
view that section 2.01 applied to decisions beyond the scope of
Article VII, the partnership agreement still could not be read as
granting broad authority to any single general partner. Under this
view, section 2.01 would instead require collective decision making
for all decisions concerning the "management and control of the
business and affairs of the Partnership."2
The only remaining source of actual authority that would
permit Brooks, as a general partner, to bind the partnership is
found in article 2814 of the Louisiana Civil Code. This provision
grants agency authority to general partners acting in the ordinary
course of the partnership's business. A statute, however, is not
a sufficient written authorization. See I.R.C. § 6229(b)(1)(B)
2
The foregoing analysis would not change if the second
amendment to the partnership agreement were found to be valid. The
second amendment does not purport to amend Article VII; nor does it
broadly grant authority to any single general partner:
The overall management and control of the business and
affairs of the Partnership shall be vested in the Management
Committee comprised of five (5) General Partners serving one
(1) year terms. The Management Committee will act
collectively on all decisions with respect to the management
and control of the Partnership and its actions shall be
binding on the Partnership and all Partners provided that they
act within the scope of their authority as granted by these
partnership articles.
9
(consent may be executed by "any other person authorized by the
partnership in writing to enter into such an agreement") (emphasis
added).
B.
The Tax Court held that Louisiana law "empower[s] every
general partner of a Louisiana partnership with the authority to
bind the partnership when dealing with a third party in all
transactions (other than those transactions involving the
alienation, lease, or encumbrance of the partnership immovables),
where a partner makes a manifestation of his authority to bind the
partnership and the third party relies, in good faith, on the
partner's purported authority." We find this reliance on Brooks'
apparent authority to be unavailing.
When a person other than the partnership's TMP is executing a
consent to extend the limitations period, § 6229(b)(1)(B) requires
that person to be authorized in writing by the partnership to
execute the consent. As discussed above, the partnership agreement
does not vest Brooks with actual authority to sign the consents.
Nor do we find in the record any written document by the
partnership that would vest Brooks with the apparent authority to
execute the consents. See Restatement (Second) of Agency § 8 cmt.
a (1958) ("Apparent authority results from a manifestation by a
person that another is his agent, the manifestation being made to
a third person and not, as when [actual] authority is created, to
the agent."); see also Independent Fire Ins. Co. v. Able Moving &
10
Storage Co., 650 So. 2d 750, 752 (La. 1995) (applying Restatement
(Second) of Agency § 8).
C.
For the first time on appeal, the Commissioner contends that
MBFL is estopped from arguing that Brooks was not its TMP. In
order for equitable estoppel to apply, the government must show
that MBFL was aware of the facts, that MBFL intended the IRS to act
on its representation that Brooks was the TMP, that the government
did not know of the facts, and that the government reasonably
relied on MBFL's representations to its substantial detriment. See
Keado v. United States, 853 F.2d 1209, 1217-18 (5th Cir. 1988)
(quoting Moody v. United States, 783 F.2d 1244, 1246 (5th Cir.
1986)).
Section 6231(a)(7), in relevant part, provides that "[t]he
[TMP] of any partnership is . . . the general partner designated as
the tax matters partner as provided in regulations."3 The
regulations, promulgated March 5, 1987, provide that the TMP is
designated when, among other things, a designation is filed with
the IRS. See Treas. Reg. § 301.6231(a)(7)-1T (if designation is
made at the time return is filed, designation is on or attached to
the partnership return; otherwise, statement designating TMP is
filed at the service center in which the partnership return was
filed).
3
The parties stipulated that Gerald Stevens was the
largest shareholder. Thus, the IRS could not have been relying on
the statutory provision that states that in the absence of a
designation, the partner with the largest profits interest is the
TMP. See I.R.C. § 6231(a)(7)(B).
11
Because any designation of a TMP would be filed with the IRS
itself, the IRS cannot reasonably rely on the representations of a
third party as to the identity of a TMP. Cf. Herrington v.
Commissioner, 854 F.2d 755, 758 (5th Cir. 1988) (duty of taxpayer
to report consistently "does not apply when the inconsistency
concerns a pure question of law and both the taxpayer and the
Commissioner had equal access to the facts"), cert. denied, 490
U.S. 1065 (1989); see also Lewis v. Commissioner, 18 F.3d 20, 26
(1st Cir. 1994) ("[T]he misstatement must be one on which the
government reasonably relied.") (emphasis added). Thus, the
Commissioner's estoppel argument applies to only one of the
consents executed by Brooks. On April 8, 1986, Brooks executed a
consent for the tax year 1983. At that time, there was no
regulation dictating the way in which a partnership designated its
TMP. The fact that estoppel applies to that consent, however, does
not change the result in this case. The 1986 consent merely
extended the limitations period to December 31, 1987 for tax year
1983. Subsequent consents extended that period to December 31,
1991. The final partnership administrative adjustment was issued
on December 26, 1991, far beyond the valid consent's extension
date.
III.
The final issue in this appeal was raised by the Commissioner
and is not contested by the parties. The assessments for 1983,
1984, and 1985 involve reduction of claimed depreciation
12
deductions. In 1986, MBFL sold its assets and based its report of
long-term capital gains on the pre-assessment bases of the assets.
When the Tax Court found that the statute of limitations had not
run and that the assessments were permitted, it also found that
MBFL had concomitantly lower long-term capital gains and was
entitled to a reduction in its 1986 tax liability. Because we
conclude that the assessments are barred, MBFL's claimed
depreciation deductions do not change, the bases of MBFL's assets
do not change, and any long-term capital gain treatment resulting
from the sale of those assets does not change.
IV.
For the foregoing reasons, we REVERSE the judgment of the Tax
Court and RENDER judgment for MBFL.
13