Phillips v. Comm'r of Internal Revenue, 00-70850

• Citation: 272 F.3d 1172
• Decision Date: 04 January 2002
• Docket Number: No. 00-70850,00-70850
• Parties: (9th Cir. 2001) RICHARD K. PHILLIPS AND MARILYN J. PHILLIPS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1172

272 F.3d 1172 (9th Cir. 2001)

RICHARD K. PHILLIPS AND MARILYN J. PHILLIPS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

No. 00-70850

Argued and Submitted November 9, 2001

Filed December 4, 2001

Amended January 4, 2002

Curtis W. Berner, Larkspur, California, for the petitioners.

John A. Dudeck, Jr., United States Department of Justice, Washington, D.C., for the respondent.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 9357-96.

Before: Noonan, Hawkins and Tashima, Circuit Judges.

Noonan, Circuit Judge:

Richard K. Phillips and Marilyn J. Phillips (collectively Phillips) appeal the judgment of the Tax Court holding them liable as limited partners for taxes incurred by three livestock breeding partnerships. Phillips contends that a waiver of the three-year statute of limitations was invalidity executed by Walter Jay Hoyt III (Hoyt) the Tax Matters Partner of each of the partnerships. The principal issue on appeal is whether criminal tax investigation of a statutory Tax Matters Partner (the TMP) does, or must, end the TMP's power to act for a partnership. Holding that there is no automatic termination of TMP status by virtue of such an investigation, we affirm the decision of the Tax Court.

FACTS

The facts were stipulated by the parties in skeletal form sufficient to provide, without much flesh, what was necessary to raise the single issue relied on by Phillips. In 1983, Phillips became a limited partner in the Shorthorn Genetic Engineering 1983-2 partnership and claimed losses through the partnership for the taxable years 1980, 1981 and 1982. Phillips later became a limited partner in the Durham Shorthorn Breed Syndicate 1987-E and the Timeshare Breeding Service Joint Venture Partnership and claimed tax deductions through these partnerships. All three partnerships were organized and marketed by Hoyt, who was the general partner in each and also the TMP, the partner under Internal Revenue Code § 6231(a)(7) charged with representing the partnerships in all dealings with the IRS.

On April 23, 1984, the Examination Division of the IRS requested that the Criminal Investigation Division of the IRS investigate Hoyt for allegedly preparing false tax returns for twelve persons who were limited partners in partnerships formed by Hoyt. The Criminal Investigation Division accepted the referral, entered at once on the investigation, and on April 21, 1986, recommended to the Justice Department that Hoyt be criminally prosecuted under I.R.C. § 7206(2). The Justice Department declined prosecution on August 12, 1987. At least by November 6, 1987, Hoyt was aware of the decision by Justice.

On July 28, 1989, the Examination Division referred another tax fraud matter involving Hoyt to the Criminal Investigation Division, which in turn, on October 17, 1989, began to investigate Hoyt. At the same time, the United States Attorney for Portland, Oregon asked the Criminal Investigation Division to join an ongoing grand jury investigation of Hoyt. As of October 2, 1990, it was decided not to prosecute Hoyt. Although later Hoyt was investigated, indicted and convicted of mail fraud, conspiracy to commit mail fraud, bankruptcy fraud, and money laundering, the record in this case does not include more than the 1984-1987 and the 1989-1990 investigations.

Hoyt executed waivers for the Shorthorn Genetic Engineering 1983-2 Partnership on the following dates when the IRS knew he was under criminal investigation:

9/25/86 for the taxable year ending 12/31/83.

8/1/87 for the taxable year ending 12/31/84.

No other extension affecting any of the three partnerships for the tax years in question was signed by Hoyt at times when it is stipulated that he was under investigation. The record does not show what partnerships were the subject of the 1984-1987 investigation or the 1989-1990 investigation.

PROCEEDINGS

On January 30, 1996, the Commissioner of Internal Revenue notified Phillips of income tax deficiencies for tax years 1980 through 1992. Phillips was already in bankruptcy. On April 29, 1996, the bankruptcy court lifted the automatic stay of litigation and permitted Phillips to file a petition in the Tax Court seeking redetermination of the deficiencies. On May 24, 2000, the Tax Court entered its decision in favor of the Commissioner.

Phillips appeals.

ANALYSIS

A single issue is presented in various forms: that Hoyt was disqualified or should be treated as disqualified from acting as the TMP at the times when he was under criminal investigation by the IRS. The arguments for disqualification will be reviewed in the order they have been presented by counsel.

Due Process. The argument is that it was taking of property without due process of law for the Commissioner, believing that Hoyt had engaged in tax fraud, to continue to treat Hoyt as the statutory TMP, who could act in all tax matters for the partnerships. It is reasonable to attribute to the Commissioner what the Examination Division and the Criminal Investigation Division knew. The waivers executed by Hoyt on September 25, 1986 and August 1, 1987 were executed at times, therefore, when the Commissioner knew, or at least believed firmly, that Hoyt had engaged in tax fraud. Nothing in the record, however, shows that the Commissioner knew or believed Hoyt had committed tax fraud on the partnership in which Phillips participated as a partner. The Commissioner's knowledge or belief that Hoyt had been a crook did not create an obligation to so inform Phillips or to remove Hoyt as TMP of the Shorthorn Genetic Engineering 1983-2 Partnership. The Commissioner has no obligation under the Constitution to apprise investors of the character of their TMPs or even of their criminal propensities. Knowledge that Hoyt had once been a criminal was not knowledge that he was acting criminally in a different partnership. Suspicion that he might have been did not trigger a duty to inform persons who might thereby be harmed.

Formulating the argument as an alternative way of arguing due process, Phillips contends that here Hoyt had a disabling conflict of interest-a fiduciary duty to his partners in conflict with his own self-interest in not antagonizing the IRS at a time when he knew he was under...