Ward v. C.I.R.

• Decision Date: 01 August 1990
• Docket Number: No. 89-4580,89-4580
• Citation: 907 F.2d 517
• Parties: -5298, 90-2 USTC P 50,430 Gerald D. WARD and Joan Ward (Deceased), Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 517

907 F.2d 517

66 A.F.T.R.2d 90-5298, 90-2 USTC P 50,430

Gerald D. WARD and Joan Ward (Deceased), Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 89-4580.

United States Court of Appeals Fifth Circuit.

Aug. 1, 1990.

Robert D. Grossman, Jr., Grossman & Flask, Washington, D.C., for petitioners-appellants.

William F. Nelson, Chief Counsel, I.R.S., Gilbert S. Rothenberg, Roger M. Olsen Gary R. Allen, Chief, Janet K. Jones, Michael L. Paup, Chief, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from the Decision of the United States Tax Court.

Before REAVLEY, JONES and DUHE, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Gerald Ward appeals from an order of the Tax Court dismissing for untimeliness of his petition for redetermination of a deficiency, 92 T.C. 949. 26 U.S.C. Sec. 6213(a). When issuing its final order, the Tax Court set aside a prior default judgment favoring petitioners. Although we conclude that the Tax Court did not abuse its discretion by setting aside its prior ruling, we find that the IRS failed to exercise reasonable diligence in ascertaining Ward's "last known address." Accordingly, we reverse the Tax Court's decision on the merits, and remand with instructions to dismiss for lack of jurisdiction and to reconsider Ward's oral motion for litigation costs under 26 U.S.C. Sec. 7430.

The factual maze presented by this case began in 1981 when Gerald Ward and his wife Joan ("Ward") filed the tax return at issue. That return listed the Wards' address as 2927 Ella Lee Lane, Houston, Texas. Joan Ward died in 1982. Two years later, the Internal Revenue Service's ("IRS") Houston Office initiated an investigation of business deductions claimed on Ward's 1981 tax return. ¹ Pursuant to this investigation, Ward executed a waiver of the statute of limitations for this tax year. Ward remained in frequent contact with the Houston office until July, 1986.

In late October, 1986 Ward moved from Houston to Kingwood, Texas. He mailed a letter to the central IRS Service Center in Austin, Texas on November 6, 1986 notifying them of his new address. The Austin office is the administrative center for the Houston branch office. Although the IRS received the letter on November 10, and input the address to its local computer, the agency could not update the history portion of Ward's tax module on the central computer for 45 days. ² See Rev.Proc. 90-18, 1990-13 I.R.B. ---. Before the central computer reflected the address change, no computer search would reveal Ward's new address.

Nevertheless, IRS employees in Houston could have discovered that an address change was pending. Several days after the Austin office input the modification, the letters "PN" would appear on the history portion of Ward's file, indicating a pending change. The computer would also display a posting code to reflect the type of modification that would occur. The IRS estimates that this information could have been available as early as November 12, 1986. Affidavit of Lorna Bradford, September 27, 1988. On November 18, 1986, the IRS mailed Ward a letter thanking him for notifying the service of his new address, indicating that IRS had entered the modification into their records, and explaining that Ward should mail any further correspondence regarding this modification to the Austin office. Ward never communicated the address change directly to the Houston office.

While the Austin office processed Ward's new address, the Office of District Counsel in Houston prepared a notice of deficiency regarding Ward's 1981 tax return, to be mailed to Ward's Houston address. Before dispatching the notice, the Office assigned the file to a "90-day reviewer", Douglas Brown, to verify the taxpayer's name, address and social security number, as well as the notice's substantive contents. Brown received the file on November 7, 1986. Sometime between November 7 and November 20, Brown conducted a computer search to ascertain whether the taxpayer had changed his address. The computer module still reflected the Houston residence; however, Brown did not know that he could ascertain whether a change was pending via the "PN" notification and the posting code. Affidavit of Douglas Brown, September 28, 1988. Brown signed the deficiency notice and mailed it to the taxpayers on November 20, 1986.

Although Ward received other mail forwarded by the post office, he never received this deficiency notice. Since the post office did not return the notice to the IRS, the IRS remained unaware that Ward had not received it. On April 6, 1987, the IRS mailed a Statement of Tax Due for the 1981 tax year to Ward's Houston address. Ward did receive this Statement, and promptly forwarded it to his attorney.

Ward's attorney wrote three different letters to the IRS informing them that Ward never received the requisite deficiency notice, and that the IRS had incorrectly mailed subsequent correspondence to petitioner's former address. ³ In response, the IRS mailed two Notices of Overdue Taxes to Ward at the Kingwood address. Finally, on September 24, 1987, the IRS forwarded a copy of the original Notice of Deficiency to Ward in Kingwood. This copy still bore the Houston address. On April 5, 1988, the IRS notified Ward that it intended to levy against Ward's property to satisfy the tax debt.

Ward filed his petition with the Tax Court on May 25, 1988. Simultaneously, he filed a Motion to Dismiss for Lack of Jurisdiction on the grounds that the IRS failed to mail the Deficiency Notice to petitioner's "last known address." The motion did not yet contain a docket number, since Ward filed it simultaneously with the petition. Ward served a copy of this motion on the IRS attorney in Austin who had coordinated the investigation of Ward's joint venture. ⁴ However, the IRS assigned this case to a different attorney at the field office in Houston. The Austin lawyer received no further communications concerning the undocketed case and did not realize that the case had been assigned to another office.

In the meantime, pursuant to the Tax Court's rules, the Clerk of the Court served Ward's petition on the IRS' Chief Counsel in Washington D.C. Because the motion already contained the erroneous certificate of service listing the Austin attorney, the Clerk did not forward it to the IRS. The IRS created a case file containing just the petition and sent it to the Houston office. At about the same time, the Clerk of the Court served a Notice of Filing on the IRS' Washington office indicating that petitioner had filed a motion to dismiss, and reminding the IRS to file objections to that motion by June 21, 1988. The Houston office either did not receive this notice or failed to associate it with the newly-opened file. Since the IRS filed no objections, the Tax Court granted Ward's motion on June 30, 1988, and forwarded a copy of the order to the IRS.

Twenty-two days later, the IRS filed a motion to vacate the Tax Court's judgment on the ground that the service failure to object to petitioner's motion amounted to excusable neglect. The Court requested the IRS to file a supplemental brief detailing its position on Ward's jurisdictional motion. The IRS then filed its objections to petitioner's motion, as well as a cross-motion to dismiss for lack of jurisdiction on the ground that petitioner filed his petition with the Tax Court more than 90 days after the IRS issued the notice of deficiency.

The Tax Court's opinion adjudicating these motions provides the basis for this appeal. Treating the IRS' motion to vacate as a motion to set aside the Tax Court's dismissal, the Court granted the motion because (1) inadvertent mishaps caused the IRS to overlook the filing deadline; (2) in imposing the dismissal the Court never considered the claim's merits; and (3) dismissal was a harsh sanction in response to the IRS' failure to file. On the merits the Court found that the IRS had exercised reasonable diligence in ascertaining petitioner's "last known address," and that Ward had filed his petition well beyond the 90-day jurisdictional limit. Therefore, the Court granted the IRS' motion to dismiss for lack of jurisdiction, denied Ward's motion to dismiss on the same grounds, and disallowed a cost award for the petitioners. Ward raises two challenges on appeal.

I.

First, Ward argues that the Tax Court abused its discretion by setting aside its original order. Ward adequately complied with the Tax Court's rules for filing and service of process. He contends that the IRS failed to receive notice only because its cumbersome office procedures prevented the agency from associating the Tax Court's notice with the file. Given that the IRS requires taxpayers to comply strictly with notice requirements and filing deadlines, Ward concludes that it would be inequitable to permit the IRS, a regular litigator in the Tax Court, to sidestep procedural requirements because of its own administrative irregularities. Although we sympathize with Ward's concerns regarding strict compliance with procedural requirements, we conclude that the Tax Court did not abuse its discretion when it set aside its original dismissal.

While the IRS filed its motion as a motion to vacate the judgment, the Tax Court treated it as a motion to set aside a default or dismissal and reviewed the motion under Tax Court Rule 123. Rule 123(a) provides:

(a) Default--When any party has failed to plead or otherwise proceed as provided by these Rules or as required by the Court, he may be held in default by the Court either on the motion of another party or on the initiative of the Court. Thereafter, the Court may enter a decision against the defaulting party, upon such terms and conditions as the Court may deem proper ...

In this case, when the IRS failed to file any objections to Ward's motion, the Tax Court adopted Ward's allegations that the IRS neglected to...