Davenport Recycling v. Comm'r Internal Rev., 99-10679

• Citation: 220 F.3d 1255
• Decision Date: 02 August 2000
• Docket Number: No. 99-10679,99-10679
• Parties: (11th Cir. 2000) DAVENPORT RECYCLING ASSOCIATES and Sam Winer, Tax Matters Partner, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee, Ernest C. Karras, Marion K. Karras, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1255

220 F.3d 1255 (11th Cir. 2000)

DAVENPORT RECYCLING ASSOCIATES and Sam Winer, Tax Matters Partner, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee, Ernest C. Karras, Marion K. Karras, Appellants.

No. 99-10679.

United States Court of Appeals Eleventh Circuit.

Aug. 2, 2000.

Appeal from the United States Tax Court.(Tax Court No. 128801-89), Howard Dawson, Jr., Judge.

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 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.

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 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 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 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.1975); 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. 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, 108 S.Ct. 217, 98 L.Ed.2d 2 (1987) ("The Tax Court is a court of limited jurisdiction," and, unlike an Article III federal 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. (CCH) 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 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...