Carroll v. U.S., Docket No. 02-6083.

• Decision Date: 05 August 2003
• Docket Number: Docket No. 02-6083.,No. 02-6117(XAP).,02-6117(XAP).
• Citation: 339 F.3d 61
• Parties: Daniel L. CARROLL and Ingrid N. Carroll, Plaintiffs-Appellees-Cross-Appellants, v. UNITED STATES of America, Defendant-Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

339 F.3d 61

Daniel L. CARROLL and Ingrid N. Carroll, Plaintiffs-Appellees-Cross-Appellants, v. UNITED STATES of America, Defendant-Appellant-Cross-Appellee.

Docket No. 02-6083.

No. 02-6117(XAP).

United States Court of Appeals, Second Circuit.

Argued: January 28, 2003.

Decided: August 5, 2003.

David G. Ebert, Ingram Yuzek Gainen Carroll & Bertolotti, LLP, New York, NY, for Plaintiffs-Appellees-Cross-Appellants.

Kenneth W. Rosenberg, Tax Division, Department of Justice, Washington, DC (Eileen J. O'Connor, Assistant Attorney General, Richard Farber, Tax Division, Department of Justice, Alan Vinegrad, United States Attorney General for the Eastern District of New York, of counsel), for Defendant-Appellant-Cross-Appellee.

Before: OAKES, CALABRESI, and SACK, Circuit Judges.

SACK, Circuit Judge.

This case arises out of the plaintiff Daniel L. Carroll's investment in a limited partnership — Stevens Recycling Associates ("Stevens" or "Stevens partnership"). On the basis of a $16,667 investment in 1982, Plaintiffs-Appellees Daniel L. and Ingrid N. Carroll ("the Carrolls") reduced the amount of the income tax liability that they reported for that year by $32,152. After the Tax Court held in a related case in 1992 that transactions of the kind employed by the Stevens partnership were a sham, the tax matters partner of the Stevens partnership entered into a settlement with the IRS reducing the deductions and credits claimed by Stevens to zero.

This settlement, which cost the Carrolls all of their Stevens-related deductions and credits for 1982, was confirmed by an order and decision signed by the Chief Judge of the United States Tax Court that bore a date stamp indicating that it was served on February 23, 1994. At the bottom of the order and decision, after the signature of the Chief Judge, there appears the word "Entered:", but the line thereafter is blank — no entry date appears. The Tax Court vacated that decision some four months later and issued a second order and decision, identical to the first except that it included (1) an introductory section explaining the purpose of the second order and decision; (2) a new "served" date; and (3) a date stamp on the "entered" line at the foot of the decision so that it reads, "Entered: JUN 6, 1994." The IRS thereafter filed a notice of deficiency against the Carrolls within the statutory limitations period applicable to the second order and decision, but after the expiration of the statutory limitations period applicable to the first.

On September 11, 1998, having paid the taxes and penalties assessed against them and filed refund claims with the IRS, the Carrolls brought suit in the United States District Court for the Eastern District of New York contending, inter alia, that the notices of deficiency were untimely because the initial decision without the "Entered:" date started the statutory limitations period running. The district court (Denis R. Hurley, Judge) initially ruled against the Carrolls. Carroll v. United States, No. CV 98-5740, 1999 WL 1090814, 1999 U.S. Dist. LEXIS 17999 (E.D.N.Y. Oct.19, 1999) ("Carroll I"). On reconsideration, however, the court decided in the Carrolls' favor as to the untimeliness of the notices of deficiency. Carroll v. United States, No. CV 98-5740, 2000 WL 1819419, 2000 U.S. Dist. LEXIS 17582 (E.D.N.Y. Oct.23, 2000) ("Carroll II"). On further reconsideration, the court granted the IRS's motion to deny the Carrolls relief in excess of $20,000, the amount of the penalties paid by the Carrolls in the two years immediately preceding the date of their refund claim, pursuant to 26 U.S.C. § 6511(b)(2)(B). Carroll v. United States, 198 F.Supp.2d 328 (E.D.N.Y.¹ 2001) ("Carroll III").

The IRS appeals from the entry of partial summary judgment for the Carrolls. It argues that the initial Tax Court decision without the entry date was not validly rendered under section 7459(c) and therefore did not start the statutory limitations period running. The IRS also argues that res judicata bars the district court from ruling on the matter because the matter should have been raised as an appeal from the second Tax Court decision. In a cross-appeal, the Carrolls assert that they are entitled to a full refund of the disputed penalties.

Like the district court, we conclude that the IRS's notice of deficiency was untimely and that this suit is not barred by principles of res judicata. We disagree with the district court, however, as to the amount refundable to the Carrolls, concluding that the "look-back" provision of section 6511(b)(2)(B) does not prevent the Carrolls from recovering the full amount of the penalties that they paid for 1982. We therefore affirm in part and vacate and remand in part.

BACKGROUND

The relevant facts, which are set forth in detail in Carroll I, Carroll II, and Carroll III, are undisputed. We rehearse them here only insofar as we think it necessary to explain our resolution of this appeal.

In 1982, plaintiff Daniel L. Carroll paid $16,667 for one-third of a unit interest in a limited partnership known as Stevens Recycling Associates. Carroll III, 198 F.Supp.2d at 334-35. The Stevens partnership was one of seven substantially identical plastics recycling programs that purported to lease machines designed to grind waste polyethylene and similar material into usable plastic form. Based on this investment, on their 1982 joint federal income tax return, the Carrolls claimed a deduction for advance rentals in the amount of $13,064, an investment tax credit of $12,810, and a business energy credit of $12,810. Id. at 335. Their overall tax liability was reduced by $32,138. Id.

The Tax Matters Partner

Sam Winer was the promoter and tax matters partner² of Stevens, as well as various similar recycling limited partnerships. Id. at 334-35. On August 17, 1984, the United States filed a complaint against Winer in the United States District Court for the Middle District of Florida alleging that he had organized and promoted several abusive tax shelters, including Stevens, and had made gross valuation overstatements in connection with Stevens. Id. at 335. After obtaining a judgment enjoining Winer from representing Stevens and its partners but failing to find another Stevens partner willing to replace him, the IRS obtained Winer's reinstatement as the tax matters partner for the limited purpose of providing administrative services for Stevens and its partners.³ Id.; see also Hirshfield v. United States, No. 99 Civ. 1828, 2001 WL 579783, at *4, 2001 U.S. Dist. LEXIS 6955, at *13-*14 (S.D.N.Y. May 30, 2001) ("Hirshfield I").⁴

Events Leading to the Winer/IRS Settlement

On June 5, 1989, the IRS issued a Notice of Final Partnership Administrative Adjustment for the Stevens partnership for the years 1982 through 1985, which significantly altered Stevens's income and deductions to the detriment of its partners. Carroll III, 198 F.Supp.2d at 336. On July 24, 1989, Winer brought an action on behalf of Stevens in the United States Tax Court pursuant to 26 U.S.C. § 6226 seeking a redetermination of the adjustments against Stevens for the tax years 1982 through 1985. Carroll III, 198 F.Supp.2d at 336.

On March 25, 1992, in a related proceeding, the Tax Court held that the lease transactions conducted by six recycling partnerships similar to Stevens, in which Winer was also a general partner, were a sham. Provizer v. Comm'r, 63 T.C.M. (CCH) 2531 (1992), aff'd, 996 F.2d 1216 (6th Cir.1993), cert. denied, 510 U.S. 1163, 114 S.Ct. 1187, 127 L.Ed.2d 538 (1994); see Hirshfield I, 2001 WL 579783, at *5, 2001 U.S. Dist. LEXIS 6955, at *15. After the Tax Court had concluded that one of these recycling partnerships owed penalties, Winer conceded the IRS's position in the pending Stevens section 6226 action. See id. On November 9, 1993, the IRS moved in Tax Court for entry of a decision that Winer, as the tax matters partner for Stevens, had thus "`entered into a settlement agreement' with the IRS." Carroll III, 198 F.Supp.2d at 336.⁵

The First Tax Court Decision

On February 17, 1994, Tax Court Special Trial Judge Norman H. Wolfe granted the IRS motion by endorsing it with the stamp: "granted." On February 23, 1994, the decision was served on the parties. Also on February 23, 1994, Tax Court Chief Judge L.W. Hamblen, Jr., signed an Order and Decision (the "first Tax Court decision" or the "first decision") resolving all of the issues relating to Stevens's income for the tax years 1982 through 1985. Carroll II, 2000 WL 1819419, at *1, 2000 U.S. Dist. LEXIS 17582, at *3. This decision bore no date in the space after the word "Entered:" at the bottom of the document, following Chief Judge Hamblen's signature. Id. The only date on the decision was a stamp on its first page: "SERVED FEB 23, 1994." Id. The Tax Court docket sheet reflected the entry, "DECISION ENTERED, Judge Hamblen," on the date "02/23/94," and indicated service of the decision upon all parties on the same date. Id.

The Second Tax Court Decision

On June 6, 1994, 103 days after the first decision was, according to the docket sheet, entered, Chief Judge Hamblen issued another Order and Decision in this case (the "second Tax Court decision" or the "second decision") which began by stating:

On February 23, 1994, through inadvertent clerical error, the Court served on the parties a Decision which did not bear the requisite "Entered" date. Accordingly, it is

ORDERED that the Decision served on February 23, 1994, is vacated and set aside.

See id., 2000 WL 1819419, at *2, 2000 U.S. Dist. LEXIS 17582, at *3-*4 (alterations omitted). At the bottom of the order, next to the word "Entered:", the date "JUN 6 1994" was stamped. Other than the preamble quoted above, the date of service (June 6, 1994, instead of February 23, 1994), and the date stamp at the foot of the document, the second Tax Court decision was identical to the first. See id., 2000 WL 1819419, at *2, 2000 U.S. Dist. LEXIS 17582,...