U.S. v. Martinez
| Decision Date | 15 November 2007 |
| Docket Number | Civil Action No. 07-3264. |
| Citation | 382 B.R. 285 |
| Parties | UNITED STATES of America v. Elvin L. MARTINEZ. |
| Court | U.S. District Court — Eastern District of Louisiana |
Candice M. Turner, Rebeccah L. Bower, U.S. Department of Justice, Carol Koehler Ide, John M. Bilheimer, U.S. Department of Justice, Tax Division, Washington, DC, for Appellant.
Eric Joseph Derbes, Frederick L. Bunol, Derbes Law Firm, LLC, Metairie, LA, for Appellee.
ORDER AND REASONS
Before the Court is an appeal from a trial and subsequent memorandum opinion (Rec.Doc. No. 1) by the bankruptcy court (Brown, J:).1
The case at hand presents the most recent installment in what has become the long and colorful history of litigation concerning the Walter Hoyt partnerships. The following are the background facts as found by the bankruptcy judge. Over approximately 30 years, Hoyt formed numerous partnerships that were created to own, breed and manage sheep and cattle. These partnerships were used by Hoyt as illegal tax shelters and to defraud his partners. The IRS investigated Hoyt during the 1980's and 1990's, even attempting to invalidate transactions involving the Hoyt partnerships in 1989, but to no avail. See Bales v. Comm'r, 58 T.C.M. (CCH) 431 (1989). It was not until 1999 that Hoyt was convicted of various fraud, conspiracy, and money laundering charges. In his wake, Hoyt has left a trail of litigation regarding his partnerships, among them is the case at hand.2
Debtor Elvin Martinez first joined Hoyt's partnerships in December 1985 after meeting with a Hoyt representative. Martinez signed three subscription agreements himself, and a fourth agreement was signed by Hoyt on behalf of Martinez. Martinez remained in these partnerships until 1994. Hoyt was designated as tax matters partner ("TMP") for all of the Hoyt partnerships.
As to the 1987-1989 tax years, the Internal Revenue Service (IRS) sought Hoyt's consent as TMP for the partnerships to receive extensions of the three-year statute of limitations for issuing notices of final partnership administrative adjustment ("FPAA"). These extensions were signed by Hoyt between February 1991 and March 1993. These extensions gave the IRS until December 31, 1993 to issue notices of FPAA. In late 1993, the IRS sent notices of FPAA to Hoyt as TMP for the partnerships for the tax years 1987-89. The parties agreed that these FPAAs are timely only if the extensions signed by Hoyt are valid.
As to the 1990-1993 tax years, the IRS sent timely notices of FPAA to Hoyt, i.e., no extensions of the statute of limitations were needed by the IRS. In response, Hoyt filed timely petitions in tax court contesting all of the FPAAs for the partnerships for the years 1987 through 1993.3 At the time of the bankruptcy court's opinion, all of these petitions filed by Hoyt were still being litigated in tax court. Hoyt was eventually removed as the TMP of all of the relevant partnerships by motion of the IRS in 2003.
Debtor Martinez filed a petition under Chapter 7 of the Bankruptcy Code on August 2, 2002. The case was designated as a "no asset" case, a discharge order was entered and the case closed on. November 14, 2002. On October 3, 2003, the case was reopened to allow Martinez to file a complaint against the IRS seeking a determination that the income tax liabilities owed by Martinez for the years 1987 through 1993 were discharged under the Bankruptcy Code.
The bankruptcy court first ruled on Martinez's petition in February 2005, finding that none of Martinez's taxes were discharged and granting summary judgment in favor of the IRS. In re Martinez, 323 B.R. 650 (Bankr.E.D.La.2005) (Brown J.). On appeal, this Court affirmed the bankruptcy court's holding that the government's "mere criminal investigation" of Hoyt did not immediately create a conflict of interest that would "automatically invalidate[ ] his acts." Martinez v. United States, No. Civ. A. 05-1396, 2005 WL 2065307, at *3 (E.D.La. June 30, 2005) (Duval J.). However, this Court remanded for consideration of whether an actual conflict of interest existed between Hoyt and his partners, regardless of any criminal investigation, and whether the IRS knew of such conflict of interest. Id. This remand was made in light of a similar remand issued by the Ninth Circuit in another case involving Hoyt, in which that court found that a "disabling conflict of interest may have existed in the Hoyt cases ... not only because of past criminal investigations of Hoyt by the IRS, but also by Hoyt's ongoing fraud and theft, committed against his partners." Id. (quoting River City Ranches # 1 Ltd. v. Comm'r, 401 F.3d 1136, 1141-42 (9th Cir.2005) (hereinafter "River City Ranches II")).4
In March 2006, the bankruptcy court on remand denied cross motions for summary judgment, finding that indeed an issue of material fact existed regarding whether Hoyt had a conflict of interest when he performed acts on behalf of the partnership between 1987-1993. In re Martinez, 341 H.R. 568 (Bankr.E.D.La.2006) (Brown, J.). Consequently, the bankruptcy court then held a two-day trial, and on April 13, 2007 it issued its memorandum opinion, dividing its holding into two time periods: tax years 1990-1993 and tax years 1987-1989. In re Martinez, 366 B.R. 604 (Bankr.E.D.La.2007). With regards to the 1990-93 tax years, Judge Brown held that Martinez's taxes were not discharged for those tax years because the IRS had filed timely FPAAs, and Hoyt responded by filing tax court petitions contesting the FPAAs. Id. at 611-12. Judge Brown concluded that, under present statutory and case law, a petition contesting an FPAA immediately tolls the running of any statute of limitations because the IRS is "prevented from assessing a tax while a petition is pending before the tax court." Id. at 610 (), With regards to the earlier tax years of 1987-1989, however, Judge Brown found that the taxes were discharged and the IRS could no longer assess taxes for those years. The court reasoned that the extensions of the statute of limitations signed by Hoyt for, those tax years were invalid because Hoyt had a "disabling conflict of interest" that extinguished his authority to sign those extensions on behalf of the partnership. Id. at 618.
On June 12, 2007, the United States and Martinez cross-appealed the bankruptcy court's decision to this Court.
This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a).5 In reviewing an appeal from the bankruptcy court, "fact findings of the bankruptcy court are reviewed under a clearly erroneous standard and issues of law are reviewed de novo." In re Soileau, 488 F.3d 302, 305 (5th Cir.2007). Mixed questions of law and fact are also reviewed by this Court de novo. In re Stonebridge Technologies, Inc., 430 F.3d 260, 265 (5th Cir.2005). As stated by the bankruptcy court, in suits regarding the dischargeability of a debt under § 523(a), the creditor seeking to have its debt excepted from discharge bears the burden of proof by a preponderance of the evidence. In re Keaty, 397 F.3d 264, 270 (5th Cir.2005) (citing Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). In determining whether a particular debt falls within one of the exceptions of § 523, the statute should be "`narrowly construed against the creditor and in favor of the bankrupt.'" Matter of Boyle, 819 F.2d 583, 588 (5th Cir.1987) (quoting In re Cross, 666 F.2d 873, 879-80 (5th Cir.1982)).
As set forth by the bankruptcy court, "The expiration of the period of limitation on assessment is an affirmative defense, and the party raising it must specifically plead it and carry the burden of proving its applicability.'" Madison Recycling Assoc. v. Comm'r, 295 F.3d 280, 286 (2d Cir.2002) (quoting Amesbury Apartments, Ltd. v. Comm'r, 95 T.C. 227, 240, 1990 WL 128878 (1990)). The taxpayer must first establish a prima facie case "establishing the filing of the partnership return, the expiration of the statutory period, and receipt or mailing of the notice after the running of the period." Madison Recycling, 295 F.3d at 286. If this showing is made, "the burden of the production then shifts to the Commissioner to show that the bar of the limitations period is not applicable." Id. (citations omitted). Finally, if the Commissioner succeeds, the burden shifts back to the taxpayer to show that the alleged exception to the expiration of the limitations period is ineffective or otherwise inapplicable. Id. (citing Amesbury Apartments, 95 T.C. at 241). The burden of persuasion always remains on the taxpayer. Id.
This Court will address the following issues on appeal as presented by the parties: (1) Whether the bankruptcy court erred in finding that Walter Hoyt had a disabling conflict of interest with his fellow partners such that extensions signed by him were invalid and did not toll the statutes of limitations for assessment of taxes for tax years 1987-1989, and (2) whether the bankruptcy court erred in finding that the tax court petitions filed by Walter Hoyt tolled the statute of limitations for the assessment of taxes for the tax years 1990-1993, at which time again Martinez alleges that Hoyt had a disabling conflict of interest.
As a general overview prior to addressing the disposition of this case, § 523(a)(1)(A) of the Bankruptcy Code provides that, where a debtor has been granted a discharge of debts, that discharge does not apply to certain kinds of debts, including debts listed under § 507(a)(8) of the Code.6 Section 507(a)(8)(A)(iii) of the Code states that debts that are not discharged under § 523 include ...
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