Clapp v. C.I.R.

• Decision Date: 24 May 1989
• Docket Number: No. 88-7083,88-7083
• Citation: 875 F.2d 1396
• Parties: -1451, 89-1 USTC P 9357 George C. CLAPP, Jr., Margaret Clapp; Life Health Services; Double D. Donuts Company; Gowing Enterprises, George Clapp, Trustee; John F. Dement; Margaret A. Dement; Jim Standley; Sharon F. Standley; Sucaba Enterprises, Inc. Trust, Jim & Sharon Standley, Trustee; Aeri Trust Organization, Jim & Sharon Standley, Trustee; John F. Dement; Margaret A. Dement; New Life Health Center, Eugene A. Burns and Linda H. Burns; Sheldon C. Deal; Reva C. Deal; Sucaba Enterprises Trust, a Business Trust Organization; Mogollon Trust Organization, a Business Trust Organization; Mule Creek Trust Organization, a Business Trust Organization; Jim Standley, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1396

875 F.2d 1396

63 A.F.T.R.2d 89-1451, 89-1 USTC P 9357

George C. CLAPP, Jr., Margaret Clapp; Life Health Services Double D. Donuts Company; Gowing Enterprises, George Clapp, Trustee; John F. Dement; Margaret A. Dement; Jim Standley; Sharon F. Standley; Sucaba Enterprises, Inc Trust, Jim & Sharon Standley, Trustee; Aeri Trust Organization, Jim & Sharon Standley, Trustee; John F Dement; Margaret A. Dement; New Life Health Center, Eugene A. Burns and Linda H. Burns; Sheldon C. Deal; Reva C Deal; Sucaba Enterprises Trust, a Business Trust Organization; Mogollon Trust Organization, a Business Trust Organization; Mule Creek Trust Organization, a Business Trust Organization; Jim Standley, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 88-7083.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 6, 1989.

Decided May 24, 1989.

William A. Cohan, La Jolla, Cal., for petitioners-appellants.

Stuart E. Horwich, Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from the United States Tax Court.

Before Alfred T. GOODWIN, Chief Judge, ALARCON and NELSON, Circuit Judges.

GOODWIN, Chief Judge:

The issues in these consolidated appeals are: (1) whether a taxpayer can enter into a stipulated settlement with the Commissioner and then appeal from the judgment entered thereon, claiming that the court did not have subject matter jurisdiction; and (2) whether the Commissioner issued valid notices of deficiency.

FACTS AND PROCEEDINGS BELOW

This consolidated appeal involves a tax shelter promoted by the American Law Association ("ALA"). Appellants Burns, DeMent, Clapp and Standley all operated businesses as corporations. After joining ALA they reorganized their respective businesses as "irrevocable Massachusetts-type trust entities." Under the basic ALA program, the taxpayer would transfer her business to a foreign trust. The trust would distribute its income to another foreign trust. That second trust would distribute the income to the taxpayer.

In 1978 the Commissioner began an investigation of ALA, its principals and members. The details of the ALA tax evasion program and IRS investigation are spelled out in United States v. Dahlstrom, 713 F.2d 1423 (9th Cir.1983). As part of the effort to expose the ALA scheme, the Commissioner took an aggressive enforcement stance, identifying ALA members and issuing statutory notices of deficiency.

Beginning in July 1981, the Commissioner issued audit notices to the appellants. Appellants complain that these audits were unfairly terminated without a review of their records. The Commissioner responds that the audits were terminated because appellants refused to cooperate.

From May 1982 to April 1986 the Commissioner issued notices of deficiency to appellants. The notices of deficiency disallowed numerous deductions as unsubstantiated, including all ordinary and necessary business expenses claimed by the individuals and business entities. Separate notices were sent to the individuals and to the trusts, with many of the same items of income being attributed both to the individual taxpayers and to the trusts. The notices were drafted in this manner in order to ensure that the IRS would be able to proceed regardless of whether the trusts were later found to be legitimate entities. At the same time, however, the Commissioner advised the trusts that if it was later determined that they were sham entities and that the income was therefore taxable to the individuals, then the trusts would be entitled to refunds of any overassessments.

Appellants claim these notices of deficiency demonstrate the Commissioner's willful disregard of information which was then in the custody of the IRS or readily obtainable, relating to ordinary and necessary business expenses and other itemized deductions. The Commissioner claims that the notices of deficiency merely disallowed the deductions for lack of substantiation.

The individual taxpayers and the trusts petitioned the Tax Court for a redetermination of the asserted deficiencies. During these proceedings, counsel for the taxpayers and trusts provided the Commissioner with information and documents they had earlier refused to provide, and the parties were able to negotiate settlements in the form of stipulated entries of judgment. Under the proposed settlements the trusts were treated as shams. Also, based on the documentation provided, most of the previously disallowed deductions were substantiated.

Before stipulating to entry of judgment, the taxpayers filed a motion to dismiss. This motion claimed that the notices of deficiency were invalid, as the Commissioner had not "determined" the amount of the deficiencies in accordance with Scar v. Commissioner, 814 F.2d 1363 (9th Cir.1987). Because the Tax Court can exercise jurisdiction over a case only following the issuance of a valid notice of deficiency, this argument took the form of a motion to dismiss for lack of subject matter jurisdiction. The Tax Court denied the motion, finding that the Commissioner had made "specific determinations with respect to items reported on [appellants'] respective returns, to items which should have been reported on those returns, and to related adjustments," thereby making Scar inapplicable.

Following denial of their motion, appellants stipulated to entry of judgments against them. Given the large number of entities determined to be shams and therefore not assessed tax, and given the large size of the deductions initially disallowed but later substantiated, the total amount of the stipulated judgments was $215,376.14, compared with notices of deficiency totalling $3,432,197.52.

These stipulated judgments do not address the right to appeal the Tax Court's exercise of subject matter jurisdiction, neither expressly reserving that right nor giving it up.

I. APPEALABILITY OF THE STIPULATED JUDGMENTS

(a) Standing to Appeal the Stipulated Judgments Involving the Trusts

The stipulated judgments determined that no deficiencies or penalties were due from any of the trusts. The trusts received all the relief which they can seek from the Tax Court. See Handeland v. Commissioner, 519 F.2d 327 (9th Cir.1975) (in the absence of issues concerning recurring liability only relief Tax Court can provide is finding of no deficiency). Accordingly, they have no interest in this appeal other than in ensuring the finality of the Tax Court decision.

Generally, a party cannot appeal a favorable decision. Electrical Fittings Corp. v. Thomas & Betts Co., 307 U.S. 241, 242, 59 S.Ct. 860, 860, 83 L.Ed. 1263 (1939). This rule has been applied to Tax Court decisions as well. Ryan v. Commissioner, 680 F.2d 324, 325 (3d Cir.1982); W.W. Windle Co. v. Commissioner, 550 F.2d 43, 45-46 (1st Cir.1977). Given the trusts' lack of an appealable interest, they are dismissed from the appeal.

(b) Appealability of Stipulated Judgments in Order to Challenge Subject Matter Jurisdiction

A party consenting to entry of judgment generally waives the right to appeal. This rule applies to stipulated judgments of the Tax Court. Tapper v. Commissioner, 766 F.2d 401, 403 (9th Cir.1985). The relevant exception to this rule is that a party consenting to entry of judgment can appeal "where the court lacked subject matter jurisdiction to enter the judgment." Id. (citing United States v. Bechtel Corp., 648 F.2d 660, 663 (9th Cir.1981)); see also White v. Commissioner, 776 F.2d 976, 977 (11th Cir.1985); Swift & Co. v. United States, 276 U.S. 311, 324, 48 S.Ct. 311, 314, 72 L.Ed. 587 (1928). Even if seldom used, this exception is often stated, and remains basic, black letter law. See 4 Am.Jur.2d., Appeal and Error Sec. 243 (1962); 4 C.J.S., Appeal and Error Sec. 213, at 631 (1957); Note, The Consent Judgment as an Instrument of Compromise and Settlement, 72 Harv.L.Rev. 1314, 1322 (1959). Subject matter jurisdiction cannot be conferred upon the court by consent or waiver. Mansfield, C. & L. Mich. Ry. Co. v. Swan, 111 U.S. 379, 384, 4 S.Ct. 510, 512, 28 L.Ed. 462 (1884).

The Commissioner claims there is no hard and fast rule that a stipulated judgment is always subject to review or reversal on jurisdictional grounds; rather, the answer depends on the facts and circumstances of each case. Stated that broadly, however, the claim means little. The Commissioner argues that to allow appeals from settlements would undermine the settlement process, limiting the utility of stipulated judgments and resulting in numerous appeals. Because of the narrow grounds for review available, and the limited scope of review under Scar, the danger to the settlement process seems exaggerated.

The Commissioner points out the contrast between the stipulated judgments entered into with appellants and the stipulated judgment in Scar v. Commissioner, 814 F.2d at 1366. In Scar, the judgment expressly reserved the taxpayers' right to seek review of the Tax Court's exercise of jurisdiction. Here the Commissioner claims that the bargain did not include an appeal, that the Commissioner gave up much in return for avoiding the expense of further proceedings, and that the taxpayers are not living up to their bargain. This argument might be helpful to a court sitting on the woolsack, but has little value in tax cases.

While we are not unsympathetic to the Commissioner's concerns, he has cited no cases which directly support his position, and we are bound to apply the rule stated in Tapper and United States v. Bechtel Corp.

There is no clear support in the record for the Commissioner's assertion that appellants are breaking the terms of their bargain. Further, any ambiguity in the stipulations concerning waiver of the right to appeal subject matter jurisdiction must be resolved against the Commissioner as the party who prepared the stipulations. Interpetrol Bermuda Ltd. v. Kaiser Aluminum Int'l. Corp., 719 F.2d 992, 998 (9th Cir.1984); Timms v. United States, 678 F.2d...