Kelley v. C.I.R., s. 93-70867

Citation45 F.3d 348
Decision Date23 January 1995
Docket NumberNos. 93-70867,94-70113,s. 93-70867
Parties-758, 95-1 USTC P 50,062 David M. KELLEY; David M. Kelley, Executor; Estate of Nancy I. Kelley, Deceased, Petitioners-Appellants, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellee. David M. KELLEY; Mary L. Kelley, Petitioners-Appellants, v. COMMISSIONER INTERNAL REVENUE SERVICE, Respondent-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Arthur H. Boelter, Boelter & Gale, Seattle, WA, for petitioners-appellants.

Bridgett M. Rowan and Marion E.M. Erickson, Tax Div., U.S. Dept. of Justice, Washington, DC, for respondent-appellee.

Appeals from a Decision of the United States Tax Court.

Before: NOONAN, O'SCANNLAIN, and LEAVY, Circuit Judges.

LEAVY, Circuit Judge:

In these consolidated appeals we are called upon to determine whether the United States Tax Court ("Tax Court") possesses the equitable power to reform consent-to-extend agreements entered into between taxpayers and the revenue collecting arm of the federal government. For the reasons which follow, we conclude that the Tax Court has a limited equitable power to reform such agreements, so long as they are properly before the Tax Court in the exercise of its subject matter jurisdiction.

FACTS AND PRIOR PROCEEDINGS

David M. Kelley ("Kelley") and his former wife, Nancy, filed joint federal income tax returns for 1976 and 1977. Following Nancy's death, Kelley filed an individual federal income tax return for 1978 as a qualifying widower. For 1979 and 1980, Kelley and his new wife, Mary ("Taxpayers"), filed joint federal income tax returns. The Internal Revenue Service ("IRS") audited Kelley's and Taxpayers' returns for tax years 1976 through 1980. During the course of this audit, Kelley and the IRS executed various standard form agreements which extended the normal running of the three-year statutory limitations period for assessing and collecting unpaid taxes. See 26 U.S.C. Secs. 6501(a), 6501(c)(4). 1 In one instance, Kelley executed an IRS Form 872, which extended until September 30, 1983, the limitations period for assessing taxes for 1978. In May 1983, Taxpayers executed an IRS Form The following month the IRS sent another two IRS Forms 872-A to Taxpayers. Although tax year 1979 was printed at one point in each of the bodies of the two computer-generated forms, the one directed to Kelley had handwritten lines across the top of both pages stating, "For the period ended December 31, 1978[,]" while the one directed to Taxpayers had similarly handwritten lines atop both pages stating, "For the period ended December 31, 1980." Kelley executed the first form, and Taxpayers executed the second form. They then forwarded the documents to their accountant, 2 who sent them on to the IRS with a transmittal letter explaining that the form signed by Kelley was for tax year 1978, while the form signed by Taxpayers was for tax year 1980. The accountant mailed a copy of his cover letter to Taxpayers.

872-A, which indefinitely extended the limitations period for assessing taxes for 1979.

In May 1984, Taxpayers executed two IRS Forms 872-T, 3 the first covering tax years 1978 and 1979, the second covering tax year 1980. Less than ninety days later (i.e., within the time period stipulated to in the IRS Forms 872 and 872-A), the IRS issued statutory notices of deficiency against Kelley and his first wife's estate for tax years 1976, 1977, and 1978, and against Taxpayers for tax years 1979 and 1980.

On November 13, 1984, Kelley petitioned the Tax Court to redetermine the assessed deficiencies for tax years 1976 through 1978. That same day, Taxpayers jointly filed a separate petition with the Tax Court concerning the notices of deficiency for tax years 1979 and 1980. The two cases were consolidated and, over the course of the next several years, the parties successfully resolved all but one question in the two petitions, viz., did the IRS timely mail the notices of deficiency for tax years 1978 and 1980? The IRS argued that, because the parties had mutually agreed to extend the statutory limitations period for those two tax years, as evidenced by the two IRS Forms 872-A signed by Kelley and Taxpayers in June 1983, the notices were timely mailed. Taxpayers contended that, by signing the IRS Forms 872-A, they only agreed to extend the running of the statutory limitations period for tax year 1979. The Tax Court found that the parties had mutually intended the two IRS Forms 872-A to apply to tax years 1978 and 1980, respectively, and equitably reformed the two agreements 4 to reflect those dates. The Tax Court entered judgment in favor of the IRS, and Taxpayers have timely appealed.

ANALYSIS
Standard of Review

We review decisions of the Tax Court on the same basis as decisions in civil bench trials in United States District Court. Schmitz v. C.I.R., 34 F.3d 790, 791 (9th Cir.), petition for cert. filed, 63 U.S.L.W. 3462 (U.S. Nov. 23, 1994) (No. 94-944). Thus, the Tax Court's conclusions of law are examined de novo, Ann Jackson Family Found. v. C.I.R., 15 F.3d 917, 920 (9th Cir.1994); its factual findings are reviewed for clear error, Doherty v. C.I.R., 16 F.3d 338, 339 n. 2 (9th Cir.1994); and its discretionary rulings are examined for an abuse of discretion. Alexander Shokai, Inc. v. C.I.R., 34 F.3d 1480, 1485 (9th Cir.1994) (general conduct of trial).

Discussion
I. Tax Court's Equitable Power

This appeal largely stands or falls on the answer to the question of whether or not It is undisputed that, as an Article I court designed to handle cases of a specialized nature, "The Tax Court is a court of limited jurisdiction and lacks general equitable powers." C.I.R. v. McCoy, 484 U.S. 3, 7, 108 S.Ct. 217, 219, 98 L.Ed.2d 2 (1987) (per curiam); accord C.I.R. v. Gooch Milling & Elevator Co., 320 U.S. 418, 421, 64 S.Ct. 184, 186, 88 L.Ed. 139 (1943). However, the Tax Court has always understood this proposition to mean that, while it cannot act, equitably or otherwise, in a case over which it lacks or has lost jurisdiction, see Woods v. C.I.R., 92 T.C. 776, 785-87, 1989 WL 32907 (1989), the Tax Court can act equitably in a case in which it has jurisdiction. See id. at 784 and cases collected at nn. 3-9.

the Tax Court can equitably reform a consent-to-extend agreement to toll the running of the statutory limitations period. For the reasons which follow, we answer this question in the affirmative.

Numerous decisions from this Circuit have touched on the issue of the Tax Court's equitable power and/or jurisdiction. See e.g. Billingsley v. C.I.R., 868 F.2d 1081, 1084 (9th Cir.1989); Abatti v. C.I.R., 859 F.2d 115, 117, 118 (9th Cir.1988); Russell v. C.I.R., 678 F.2d 782, 784 (9th Cir.1982); First Sec. Bank of Idaho, N.A. v. C.I.R., 592 F.2d 1046, 1048 (9th Cir.1979); Feistman v. C.I.R., 587 F.2d 941, 943 (9th Cir.1978); Morse v. United States, 494 F.2d 876, 879 (9th Cir.1974); Flood v. C.I.R., 468 F.2d 904, 904-905 (9th Cir.1972), cert. denied, 411 U.S. 906, 93 S.Ct. 1529, 36 L.Ed.2d 195 (1973); Toscano v. C.I.R., 441 F.2d 930, 933 (9th Cir.1971); Lasky v. C.I.R., 235 F.2d 97, 100 (9th Cir.1956), aff'd by mem., 352 U.S. 1027, 77 S.Ct. 594, 1 L.Ed.2d 598 (1957). The gist of these decisions may be summarized as holding, in part at least, that the Tax Court is a court of strictly limited jurisdiction and cannot assert equitable powers in any way that could be construed as extending its jurisdiction. 5

While none of the above cases dealt with the precise question raised by the instant appeals, viz., whether and to what extent the Tax Court may act equitably in a matter over which it has jurisdiction, decisions from other Circuits provide helpful guidance. Indeed, the clear weight of authority from other jurisdictions holds that, except in the rare instance when a decision of the Tax Court was obtained either by way of a fraud on the court or through mutual mistake of the parties, the Tax Court has no equitable jurisdiction to act on a matter that is not the subject of a case properly before it (e.g., as the result of an untimely filing of a petition for redetermination of tax assessment, or when the time for filing a notice of appeal has passed after final judgment has been rendered, etc.), but it does have a limited equitable power to act in a case that is properly before it.

A good example of this distinction between equitable jurisdiction and equitable power appears in the recent decision of Buchine v. C.I.R., 20 F.3d 173 (5th Cir.1994). In that case the Court of Appeals for the Fifth Circuit confronted a case involving a factual situation nearly on all fours with the instant appeal. Citing the Supreme Court's decisions in McCoy and Gooch Milling, supra, as well as the Tax Court's holding in Woods, supra, the Fifth Circuit upheld the Tax Court's equitable reformation of the parties' IRS Form 872-A to reflect a date different from that argued by the taxpayers.

This court has acknowledged the distinction, espoused by the Tax Court, between exercising "general equitable powers" to take jurisdiction over a matter not provided for by statute and applying "equitable principles." In Continental Equities, Inc. v. C.I.R., 551 F.2d 74 (5th Cir.1977), the question presented was whether the Tax Court could exercise general equitable powers to assume jurisdiction to review the Commissioner's denial of a refund claim, and order that a refund be given. This court held that the Tax Court, being a court of limited jurisdiction, did not have equitable power to expand its jurisdiction to adjudicate a tax refund claim. Id. at 79.

However, in Mayfair Minerals, Inc. v. C.I.R., 456 F.2d 622 (5th Cir.1972), this court held that the Tax Court properly concluded that when the Commissioner allowed the statute of limitations to run on adjustments of income because of the taxpayer's misleading returns, the equitable principle of estoppel prohibited the...

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