Abatti v. Comm'r of Internal Revenue

• Decision Date: 25 June 1986
• Docket Number: 21463-81,11503-80,21413-81,29508-81,11300-80,11505-80,1697-81,11511-80,Docket Nos. 11112-80,30280-81,21412-81,30545-81.,4250-81,4249-81
• Citation: 86 T.C. No. 78,86 T.C. 1319
• Parties: BEN AND MARGARET ABATTI, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

86 T.C. 1319

86 T.C. No. 78

BEN AND MARGARET ABATTI, ET AL.,1 Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 11112-80

11300-80

11503-80

11505-80

11511-80

1697-81

4249-81

4250-81

21412-81

21413-81

21463-81

29508-81

30280-81

30545-81.

United States Tax Court

Filed June 25, 1986.

Ps were part of a group of taxpayers who agreed to be bound by the opinion of this Court in a lead case. In such case, summary judgment was granted for the Commissioner, and decisions were entered in all cases subject to the agreement. Some taxpayers in the group, not Ps, timely filed notices of appeal of such decisions. The Court of Appeals for the Ninth Circuit reversed and remanded the appealed decisions.

HELD: (1) The decisions in the cases not appealed became final in accordance with sec. 7481, I.R.C. 1954.

(2) There has been no showing of ‘fraud on the court.‘

(3) The reversal by the Court of Appeals of the appealed cases did not void the decisions in the cases not appealed. Willian K. Hogan, for the petitioners in all dockets.

George Mac Vogelei, for the petitioners in all dockets except 30545-81.

Claire Priestley-Cady, for the respondent.

OPINION

SIMPSON, JUDGE:

This matter is before the Court on the petitioners' motion for leave to file motion to vacate decisions, pursuant to Rule 162, Tax Court Rules of Practice and Procedure.² The petitioners are limited partners in five California limited partnerships formed on October 28, 1976, with the stated purpose of leasing property and mining for coal. On the same day, such partnerships formed a joint venture known as Boone Powellton Coal Partners, Ltd. (the joint venture). Acting on behalf of its constituent partnerships, the joint venture entered into a contract with the Boone Powellton Coal Co. (the corporation) to execute mineral subleases to certain West Virginia property with respect to which the corporation had acquired the right to mine coal. The partnerships executed such mineral subleases with the corporation on December 31, 1976. Each sublease provided that the limited partnership would pay an advanced minimum royalty to the corporation—one-third in cash and the balance by a nonrecourse note. Each of the taxpayers joined his partnership after November 20, 1976, but before December 31, 1976.

Each of the partnerships chose the accrual method of accounting and the calendar year as its tax year. Each reported advanced royalty losses for 1976. The taxpayers claimed deductions for their distributive shares of the partnership advanced royalty losses for such year. The Commissioner denied such deductions, and the taxpayers petitioned this Court for review of their deficiencies.

Thereafter, 113 taxpayers signed agreements to be bound by the Court's opinion in a lead case (the agreement). Such agreement stated in part:

5. The parties intend that the trial of the five consolidated cases be determinative of all the issues relating to the five partnerships, with respect to all of the petitioners subject to this agreement.

6. * * *

b. That all of the subject cases will be bound by this Court's opinion in the five consolidated cases listed above, and decisions may be entered in accordance therewith.

c. That all of the subject cases except the five consolidated cases listed above will be continued generally until such time as an opinion is issued with respect to the consolidated cases.

On July 15, 1983, the Commissioner filed a motion for partial summary judgment under Rule 121. In support of his motion, the Commissioner argued: (1) that because the taxpayers were not members of their partnerships as of October 29, 1976, the new rule of section 1.612- 3(b)(3), Income Tax Regs., as amended, applied to disallow deduction of advanced royalties since no coal was sold during 1976, and (2) that no loss accrued by the partnerships prior to the taxpayers' entry into their partnerships can be allocated to the taxpayers, even if the obligation previously accrued was paid after the admission of the taxpayers as new partners.

During the pendency of such motion, the Court decided Elkins v. Commissioner, 81 T.C. 669 (1983), holding that the new rule of section 1.612-3(b)(3), Income Tax Regs., is not applicable if the partnership was obligated on October 29, 1976, to pay the advanced royalties; the partner need not be so obligated. Thereafter, the Court required the parties to file simultaneous supplemental memorandums regarding the effect of such opinion on the Commissioner's first argument. The Commissioner, in his supplemental memorandum, argued that the agreements to sublease were illusory and not binding on the partnerships prior to October 29, 1976.

In Gauntt v. Commissioner, 82 T.C. 96 (1984), revd. and remanded sub nom. Heinz v. Commissioner, 770 F.2d 874 (9th Cir. 1985), revd. and remanded sub nom. Alexander v. Commissioner, ____ F.2d ____ (9th Cir., Jan. 8, 1986), we granted the Commissioner's motion on the ground that the partnerships' obligations under the agreement to sublease were illusory. Consequently, the Commissioner filed motions for entry of decisions in accordance with the agreement. In some cases, there was a dispute over the amount of the deficiency, but in no case did the taxpayer object to entry of decision on the ground that the decision in Gauntt was not yet final. After resolving he disputes that did exist over the amounts of the deficiencies, the Court entered decisions in all the cases. In the cases now before the Court, the petitioners made no objection to the entry of a decision.

At least 51 cases which were subject to the agreement were properly appealed. On September 9, 1985, in Heinz, the Court of Appeals reversed and remanded Gauntt. The opinion contained a one sentence legal conclusion: ‘Taxpayers were not given a 'full and fair opportunity to ventilate the issues involved in the motion.’ Cool Fuel, Inc. v. Connett, 685 F.2d 309, 312 (9th Cir. 1982). ‘ 770 F.2d at 876. The appellate court believed that the taxpayers had not been given fair notice that the Commissioner would challenge the binding nature of the agreement made by the partnerships on October 28, 1976.

The petitioners in the case at hand did not appeal the decisions entered against them as a result of Gauntt. On February 18, 1986, they attempted to file a motion to vacate decisions, pursuant to Rule 162. Because any such motion filed more than 30 days after entry of decision requires leave of Court, it was filed as a motion for leave to file motion to vacate decisions.

The internal revenue laws establish procedures for judicial review of deficiencies claimed by the Commissioner before payment is required. Under such procedures, the Commissioner must notify a taxpayer of a deficiency determined by him, and the taxpayer has a limited opportunity to seek judicial review of that deficiency in the Tax Court. If the dispute is submitted to the Tax Court for adjudication, the parties have an opportunity to seek appellate review of any decision by the Tax Court. While the judicial review is taking place, the Commissioner must suspend his activities with respect to assessment and collection of the tax, but when those proceedings are completed, he may then proceed to assess and collect any tax found to be due. Section 7481 declares when a decision becomes final so that the Commissioner knows that he is free to go ahead with the collection of the tax. Under that section, a decision of the Tax Court becomes final in 90 days if it is not appealed. Once a decision is final, it cannot generally be attacked. Lasky v. Commissioner, 352 U.S. 1027 (1957), affg. 235 F.2d 97 (9th Cir. 1956), dismissing petition for review of 22 T.C. 13 (1954); see R. Simpson & Co. v. Commissioner, 321 U.S. 225 (1944); Helvering v. Northern Coal Co., 293 U.S. 191 (1934). ³ Yet, this Court has ‘in keeping with the inherent power of all courts, the power to vacate a void decision‘ ( Brannon's of Shawnee, Inc. v. Commissioner, 71 T.C. 108, 112 (1978)), and we have jurisdiction to set aside a decision which would otherwise be final where there is ‘fraud on the court‘ ( Toscano v. Commissioner, 441 F.2d 930 (9th Cir. 1971), vacating 52 T.C. 295 (1969); Kenner v. Commissioner, 387 F.2d 689 (7th Cir. 1968), affg. an unreported order of dismissal of this Court), or where it is based on mutual mistake ( Reo Motors v. Commissioner, 219 F.2d 610 (6th Cir. 1955)).

The petitioners claim that it was the intention of the parties to the agreement that every participating taxpayer would be bound by the final decision in the lead case. Because some decisions were properly appealed and reversed and remanded, those decisions are not final. Therefore, the petitioners maintain that the decisions in their cases should not be considered final and should be vacated to carryout their understanding of the agreement. In effect, they argue that the agreement provides them with all the benefits of an appeal without incurring the expense and without complying with the statutory procedural requirements.

The agreement states that ‘the subject cases will be bound by this Court's opinion‘ in the lead case and that all subject cases except the lead case ‘will be continued generally until such time as an opinion is issued‘ in the lead case. Additionally, it states that the ‘trial‘ of the lead case will determine all issues relating to the five partnerships in the subject cases. The agreement contains no reference to an appeal or to a final decision of the Tax Court in the lead case, and the only court referred to is the Tax Court. Thus, nothing in the agreement supports the petitioners' position. After carefully reviewing the entire agreement, the only reasonable interpretation is that it did not affect the rights and duties of the petitioners to appeal their cases individually.

Such interpretation is supported by the fact that timely notices of appeal were filed in 51 cases subject to the agreement. Clearly, the taxpayers in those 51 cases believed...