T.C. Memo. 1997-299
UNITED STATES TAX COURT
BENNESS M. RICHARDS AND JANE RICHARDS, Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 8922-87. Filed June 30, 1997.
Robert Alan Jones, for petitioners.1
Milton J. Carter, Jr., for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
*
This opinion supplements our previous Memorandum Opinion
in Richards v. Commissioner, T.C. Memo. 1997-149, filed March 24,
1997.
1
Although Luis C. DeCastro, Esq., continues to be listed as
counsel of record in docket No. 8922-87, he did not participate
in the filing or prosecuting of the motion that is the subject of
this opinion.
- 2 -
BEGHE, Judge: In Richards v. Commissioner, T.C. Memo. 1997-
149, the Court denied petitioners' Motion for Leave To File
Motion To Vacate Decision. This matter is now before the Court
on petitioners' Motion for Reconsideration and attached Motion To
Consolidate.
Background2
1. Petitioners' Case
On or about June 25, 1979, Benness M. Richards and Jane
Richards filed a joint Federal income tax return for 1978
reporting adjusted gross income of $86,574, taxable income of
$11,975, and tax due of $3,495. In computing their taxable
income, petitioners claimed an interest deduction attributable to
their participation in certain programs managed by Henry
Kersting. Because petitioners' 1978 tax return is not part of
the record in this case, we are unable to determine the specific
amount of the Kersting-related interest deduction that
petitioners claimed on their return.
On January 22, 1981, following an undercover investigation,
the Internal Revenue Service (IRS) searched Mr. Kersting's
offices pursuant to a search warrant issued by the U.S. District
Court for the District of Hawaii. Among the materials seized
during the search were lists identifying, by name and address,
2
Although the background of this case is set forth in
Richards v. Commissioner, T.C. Memo. 1997-149, for the sake of
completeness and convenience we will repeat the background here.
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approximately 1,800 of Mr. Kersting's clients, and schedules
showing the amount of interest purportedly paid by each client to
one of several Kersting companies during the taxable years 1977,
1978, and 1979. The circumstances of the search of Mr.
Kersting's offices are described in the Court's opinion in Dixon
v. Commissioner, 90 T.C. 237 (1988) (Dixon I).
On April 15, 1982, respondent issued a joint notice of
deficiency to petitioners determining a deficiency in their
Federal income tax for 1978 in the amount of $47,580.75 and an
addition to tax under section 6653(a)3 in the amount of $2,379.4
The notice of deficiency, a form of notice apparently issued to a
number of taxpayers with Kersting-related adjustments, states
that respondent was disallowing $67,972.50 in interest deductions
that petitioners purportedly paid to any entity owned, associated
with, or controlled, either directly or indirectly, by Henry
Kersting.
3
Section references are to the Internal Revenue Code, as
amended. Rule references are to the Tax Court Rules of Practice
and Procedure.
4
The notice of deficiency was issued approximately 70 days
prior to the expiration of the normal 3-year period of
limitations applicable to the assessment of Federal income taxes.
Sec. 6501(a).
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A simple arithmetical calculation reveals that respondent
computed petitioners' tax deficiency by applying a tax rate of 70
percent, which was the highest tax rate imposed for 1978.5
On July 12, 1982, Lu N. Nevels, Jr., Esq., filed a joint
petition for redetermination (assigned docket No. 17445-82) on
behalf of a large group of taxpayers, including petitioners, who
had received notices of deficiency with Kersting-related
adjustments.6 Disputing the $67,972.50 figure used in the notice
of deficiency, the petition includes an allegation that the
interest deduction reported on petitioners' 1978 income tax
return attributable to their participation in Kersting programs
was only $38,523.7 In addition, the petition includes an
allegation that the notice of deficiency issued to petitioners is
arbitrary and capricious.
On September 13, 1982, respondent filed an answer to the
petition. Specifically, respondent denied for lack of sufficient
information the allegation respecting the specific amount of the
5
Inasmuch as there were no other adjustments in the notice
of deficiency, and assuming that the adjusted gross income that
petitioners reported is correct, respondent erred in computing
petitioners' tax liability for 1978 using a 70-percent tax rate,
which was only applicable with respect to taxable income
exceeding $203,200 for joint filers.
6
Petitioners resided in Woodland Hills, California, at the
time the petition was filed.
7
The petition identifies the payees as Atlas Funding Corp.,
Fargo Acceptance Corp., Federated Finance Co., Forbes Acceptance
Corp., and Mahalo Acceptance Corp.
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interest deduction reported on petitioners' 1978 tax return and
denied without qualification the allegation that the notice of
deficiency is arbitrary and capricious.
On January 27, 1987, Luis C. DeCastro, Esq. (Mr. DeCastro),
filed an entry of appearance on behalf of petitioners in docket
No. 17445-82. In the interim, on December 23, 1986, respondent's
counsel assigned to the Kersting project, Kenneth McWade, Esq.
(Mr. McWade), had mailed Mr. DeCastro a letter enclosing proposed
decision documents for petitioners and several other taxpayers
with cases before the Court involving Kersting-related
adjustments. On December 30, 1986, Mr. DeCastro executed a
stipulated decision on behalf of petitioners which states that
petitioners are liable for a deficiency in income tax for the
taxable year 1978 in the amount of $23,000 and that petitioners
are not liable for additions to tax under section 6653(a) or
6621(d). On the same date, Mr. DeCastro mailed a check to Mr.
McWade, signed by petitioners and made payable to the IRS in the
amount of $53,571, representing $23,000 in tax and $30,571 in
interest. Mr. McWade executed the stipulated decision on April
27, 1987, and mailed the document to the Court.
On March 30, 1987, Mr. McWade filed a Motion to Sever
petitioners' case from docket No. 17445-82. Shortly thereafter,
the Court granted the motion, severed petitioners' case from
docket No. 17445-82, and assigned the case docket No. 8922-87.
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On May 8, 1987, the Court entered the parties' stipulated
decision as described above in docket No. 8922-87.
Petitioners did not file a notice of appeal or a timely
motion to vacate or revise the decision entered May 8, 1987.
Consequently, the decision became final on August 6,
1987, 90 days after the decision was entered. Sec. 7481(a)(1).
2. The Test Cases
During the period that petitioners' case was docketed with
the Court, 14 dockets and eight petitioners with Kersting-related
adjustments were selected as test cases for trial.
On January 12, 1987, during the same period that
Mr. DeCastro was negotiating petitioners' settlement, the test
case taxpayers filed a motion for leave to file an amendment to
their petitions to raise various evidentiary issues based upon
their contention that the search of Mr. Kersting's offices was
illegal. On January 14, 1987, the Court granted the test case
taxpayers' motion for leave to file. The evidentiary issues
raised in the amendment to petition were resolved in the Court's
opinion in Dixon I.8
8
In Dixon v. Commissioner, 90 T.C. 237 (1988), the test
case taxpayers argued that the search of Mr. Kersting's office
was illegal, that the materials seized during the search should
be suppressed in the test case proceedings, and that the burden
of proof and burden of going forward with the evidence should be
shifted to respondent. The Court rejected these contentions on
the ground that the test case taxpayers failed to establish
(continued...)
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Mr. McWade served as respondent's lead counsel during the
trial of the test cases. One of the taxpayers selected as a test
case, John Thompson, was represented by Mr. DeCastro at trial.
The Kersting test cases went to trial in January 1989 in
Hawaii. Following the trial, the Court issued its Memorandum
Opinion in Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon II),
sustaining virtually all of respondent's determinations in each
of the test cases.
The Court's decision in Dixon II subsequently was vacated
and remanded on appeal to the Court of Appeals for the Ninth
Circuit in Dufresne v. Commissioner, 26 F.3d 105 (9th Cir. 1994).
Specifically, in response to respondent's posttrial admission
that, prior to the trial of the test cases, Mr. McWade had
entered into secret settlement agreements with two of the test
case taxpayers, John Thompson and John Cravens, the Court of
Appeals remanded the test cases to this Court with instructions
to conduct an evidentiary hearing “to determine the full extent
of the admitted wrong done by the government trial lawyers.” Id.
at 107. The Court of Appeals, citing Arizona v. Fulminante, 499
U.S. 279, 309 (1991), directed the Court to consider “whether the
8
(...continued)
standing to contest the search and seizure in question.
We further note that Mr. Kersting's claims that the
search and seizure were illegal have been repeatedly rejected by
the U.S. District Court for the District of Hawaii. See Kersting
v. United States, 865 F. Supp. 669, 674-675 (D. Haw. 1994).
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extent of the misconduct rises to the level of a structural
defect voiding the judgment as fundamentally unfair, or whether,
despite the Government's misconduct, the judgment can be upheld
as harmless error.” Id. In carrying out this mandate, we also
were directed to consider on the merits all motions of
intervention filed by parties affected by Dixon II. Id.9
Upon remand, the Court gave effect to the direction of the
Court of Appeals regarding intervention by allowing a number of
non-test-case taxpayers who had previously signed stipulations to
be bound by the decision in Dixon II to participate in the
evidentiary hearing. Robert Alan Jones, Esq. (Mr. Jones),
entered his appearance on behalf of a group of non-test-case
taxpayers allowed to participate in this fashion.
During the evidentiary hearing, which was held at a special
trial session of the Court in Los Angeles in May-June 1996, Mr.
Jones expressed concern that, in addition to the settlement with
John Thompson, Mr. McWade may have entered into settlements with
other clients of Mr. DeCastro on terms more favorable than the
standard Kersting project settlement offer. In this regard, Mr.
Jones requested respondent's counsel, Mary Elizabeth Wynne, Esq.
(Ms. Wynne), to disclose the details of settlements entered into
9
The appellate panel in Dufresne v. Commissioner, 26 F.3d
105 (9th Cir. 1994), vacating and remanding Dixon v.
Commissioner, T.C. Memo. 1991-614, issued an order stating that
the panel would retain jurisdiction over any subsequent appeal.
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with Mr. DeCastro's clients, including petitioners. In a letter
to Mr. Jones dated September 3, 1996, Ms. Wynne attempted to
explain that petitioners did not receive special treatment from
Mr. McWade in the settlement of their case as follows:
As we discussed on the telephone, I have received
authorization from Mr. and Mrs. Richards to disclose
the attached copy of the computer transcript of the
Richards' account for 1978. As you are aware, neither
the government nor the Richards has a copy of the
Richards' 1978 return. But the information on the
enclosed transcript reflects the following information
concerning the 1978 return filed by the Richards.
The 1978 tax return was filed June 25, 1979, and
showed an income tax liability of $3,495. Advance or
estimated payments of $8,931 were credited to the
account on April 15, 1979. On June 25, 1979, a refund
of $5,489.09 was generated to the Richards (along with
interest of $53.09). On December 31, 1986, the
Richards's account was credited with a tax payment of
$23,000 and interest of $30,571. The tax of $23,000
and interest of $30,571 were assessed on October 5,
1987 (which date was within 60 days of the date the Tax
Court decision became final).
In addition to showing the above information, the
enclosed transcript also shows that the Richards's
reported adjusted gross income of $86,574 on their 1978
return, and taxable income of $11,975. The maximum tax
rate in 1978 was 70 percent, but that rate did not
apply until taxable income reached $203,200 for joint
filers. Accordingly, even without allowance of the
Kersting related deductions, the Richards's taxable
income in 1978 was not high enough to trigger the
maximum tax rate of 70 percent that was used in the
notice of deficiency. Thus, any comparison of the
amount asserted in the notice with the amount on
decision must be made after adjusting for the proper
tax rate.
As the Court noted during the hearing, the
petition filed on behalf of the Richards alleged that
Kersting related deductions were only $38,523.
Assuming the petition is correct, the tax on taxable
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income of $50,498 ($11,975 per the return and $38,523
disallowed Kersting deductions) is $15,709, which
produces a deficiency of $12,214 ($15,709 less the
$3,495 reported on the return). A seven percent
reduction of this deficiency results in a deficiency of
$11,359, far less than the deficiency in the decision
of $23,000.
The explanation for this discrepancy lies in the
fact that several Kersting participants received
notices of deficiency based on a reconstruction of
records obtained from Mr. Kersting's office in 1981.
For the year 1978, the statute of limitations would
have expired in 1982. Thus, the notice may have been
issued without access to the original return. Whatever
the reason for the discrepancy, it is clear that the
Richards did not receive any kind [of] special
treatment from Mr. McWade.
On November 8, 1996, Mr. Jones filed an entry of appearance
on behalf of petitioners and a Motion for Leave To File Motion To
Vacate Decision (motion for leave). On that same date, the Court
lodged petitioners' Motion To Vacate Decision and Set Aside
Settlement and petitioners' Memorandum of Points and Authorities.
Petitioners' Motion To Vacate Decision was based upon the theory
that the notice of deficiency issued to petitioners was invalid
under Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), revg.
81 T.C. 855 (1983), and, therefore, the Court lacked jurisdiction
to enter the stipulated decision in their case.
On November 14, 1996, the Court issued a Notice of Filing
directing respondent to file an objection, if any, to
petitioners' motion for leave on or before December 5, 1996.
On November 29, 1996, respondent filed a Motion to Extend Time To
File Respondent's Objection to petitioners' motion for leave. In
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an Order dated December 4, 1996, the Court granted respondent's
motion and extended the date for respondent to file an objection
to January 6, 1997.10 On January 6, 1997, the Court filed
respondent's Response in opposition to petitioners' motion for
leave.
On March 24, 1997, the Court filed its Memorandum Opinion,
Richards v. Commissioner, T.C. Memo. 1997-149 (Richards I),
rejecting petitioners' Scar argument and denying petitioners'
motion for leave. Mr. Jones subsequently was served with the
Court's Memorandum Opinion as well as respondent's Response to
petitioners' motion for leave.
On April 9, 1997, the Court filed petitioners' Motion for
Reconsideration with attached Motion To Consolidate and
petitioners' Memorandum of Points and Authorities. Petitioners
contend that the Court should reconsider its denial of
petitioners' motion for leave on the grounds that the Court
“misinterpreted” petitioners' Motion To Vacate Decision, and the
Court incorrectly denied petitioners' motion for leave without
first allowing petitioners to file their Motion To Vacate
Decision, conduct necessary discovery, and have a hearing.
Petitioners maintain that the Court misinterpreted their
Motion To Vacate Decision insofar as the Court treated the motion
10
The Court's Dec. 4, 1996, Order expressly directed that
the Order be served on Mr. Jones.
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as an attempt to challenge the validity of the notice of
deficiency under Scar v. Commissioner, supra. Petitioners assert
that their Motion To Vacate Decision was based upon the theory
that the stipulated decision entered in their case was the result
of a fraud upon the Court. Petitioners also contend that the
Court incorrectly allowed respondent to file a response in
opposition to petitioners' motion for leave without serving
petitioners with the response and allowing petitioners to file a
reply to the same.
In conjunction with their Motion for Reconsideration,
petitioners contend that their case should be consolidated with
Dixon v. Commissioner, docket No. 9382-83--the group of cases
that the Court previously consolidated pursuant to the mandate of
the Court of Appeals for the Ninth Circuit in Dufresne v.
Commissioner, 26 F.3d 105 (9th Cir. 1994). Petitioners argue
that
it is an abuse of discretion under the circumstances of
the Kersting cases including the massive and continuing
fraud committed and condoned by representatives of
Respondent and its Office of Chief Counsel for the
Office of Chief Counsel, and this Honorable Court, to
further attempt to “split off and contain” the illegal
and improper fraudulent conduct of Respondent by
attempting to deal with the overall conspiracy by
ruling on improper actions one at a time, thus
preventing their consolidation into a single action
which may be properly ruled upon by the panel of United
States Court of Appeals for the Ninth Circuit which has
retained jurisdiction over these matters.
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In an order dated April 11, 1997, the Court directed
respondent to file a response to petitioners' motion, while
allowing Robert Patrick Sticht, Esq. (Mr. Sticht), counsel for
non-test-case taxpayers participating in the Dixon evidentiary
hearing, and Joe Alfred Izen, Jr., Esq. (Mr. Izen), counsel for
test-case and non-test-case taxpayers participating in the Dixon
evidentiary hearing, to file a response to petitioners' motion in
their discretion.
On May 12, 1997, respondent filed a response in opposition
to petitioners' Motion for Reconsideration with attached Motion
To Consolidate.
On May 30, 1997, pursuant to the Court’s order dated
April 11, 1997, Mr. Sticht filed a response in opposition to
petitioners' motion insofar as petitioners seek to have their
case consolidated with the Dixon group of cases. Mr. Izen did
not file a response to petitioners' motion.
Discussion
1. Petitioners' Motion for Leave To File Motion To Vacate
Decision
Section 7481(a)(1) provides the general rule that a decision
of the Tax Court becomes final upon expiration of the time to
file a notice of appeal. Section 7483 provides that a notice of
appeal generally must be filed within 90 days after a decision is
entered. However, the 90-day appeal period may be extended if
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the taxpayer files a timely motion to vacate or revise the
decision. Fed. R. App. P. 13(a). Pursuant to Rule 162, a motion
to vacate or revise a decision must be filed within 30 days after
the decision is entered, unless the Court allows otherwise.
Petitioners did not file a notice of appeal or a timely
motion to vacate or revise the stipulated decision that was
entered in this case on May 8, 1987, and the decision became
final on August 6, 1987. See secs. 7459(c), 7481(a)(1). As a
consequence, petitioners were required to file a motion for leave
to file their motion to vacate the stipulated decision entered in
their case.
Petitioners' assertion that the Court incorrectly denied
their motion for leave without first permitting petitioners to
file their Motion To Vacate Decision, conduct necessary
discovery, and have a hearing, is misconceived. In deciding
whether to grant or deny a motion for leave to file a motion to
vacate a final decision, it is ordinarily the Court’s practice to
consider the merits of the underlying (lodged) Motion To Vacate
Decision to determine whether the moving party has alleged
sufficient facts to properly question the validity of the
decision. See Brannon's of Shawnee, Inc. v. Commissioner, 69
T.C. 999, 1002 (1978); see also Toscano v. Commissioner, 52 T.C.
295, 296 (1969), vacated on another issue 441 F.2d 930 (9th Cir.
1971); Kenner v. Commissioner, 387 F.2d 689, 690-691 (7th Cir.
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1968); Campbell v. Commissioner, T.C. Memo. 1988-105. However,
the disposition of a motion for leave to file a motion to vacate
or revise a decision lies within the sound discretion of the
Court. Heim v. Commissioner, 872 F.2d 245, 246 (8th Cir. 1989),
affg. T.C. Memo. 1987-1.
In the present case, the Court thoroughly considered the
arguments contained in petitioners' supporting Memorandum of
Points and Authorities as reflected in the detailed analysis set
forth in the Court's Memorandum Opinion in Richards I.
Specifically, based upon petitioners' clear reliance on Scar v.
Commissioner, supra, the Court analyzed the controlling case law,
applied the law to the relevant facts, and concluded that the
notice of deficiency issued to petitioners is valid. Implicit in
the Court's analysis is the determination that petitioners failed
to allege sufficient facts to properly question our jurisdiction
to enter the stipulated decision in this case. Brannon's of
Shawnee, Inc. v. Commissioner, supra.
Petitioners also complain that they were not timely served
with respondent's Response to their motion for leave, and that
the Court denied their motion for leave without first allowing
them to reply thereto. Any prejudice to petitioners occasioned
by the delay in service of respondent's Response, which was made
in accordance with Rule 21(b), has been obviated by our
consideration of petitioners' Motion for Reconsideration
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articulating their position respecting respondent's Response to
their motion for leave, to which we now turn.
2. Petitioners' Motion for Reconsideration
The Tax Court generally lacks jurisdiction to vacate a final
decision. Abatti v. Commissioner, 859 F.2d 115, 117 (9th Cir.
1988), affg. 86 T.C. 1319 (1986); Lasky v. Commissioner, 235 F.2d
97, 100 (9th Cir. 1956), affd. per curiam 352 U.S. 1027 (1957).
The Court will vacate a final decision only in certain narrowly
circumscribed situations. For instance, this Court and some
Courts of Appeals, including the Court of Appeals for the Ninth
Circuit, have ruled that this Court may vacate a final decision
if that decision is shown to be void, or a legal nullity, for
lack of jurisdiction over either the subject matter or the party,
see Billingsley v. Commissioner, 868 F.2d 1081, 1084-1085 (9th
Cir. 1989); Abeles v. Commissioner, 90 T.C. 103, 105-106 (1988);
Brannon's of Shawnee, Inc. v. Commissioner, supra at 1002, or if
the decision was obtained through fraud upon the Court, see
Abatti v. Commissioner, supra; Senate Realty Corp. v.
Commissioner, 511 F.2d 929, 931 n.1 (2d Cir. 1975); Stickler v.
Commissioner, 464 F.2d 368, 370 (3d Cir. 1972); Toscano v.
Commissioner, 441 F.2d at 933; Kenner v. Commissioner, supra;
Casey v. Commissioner, T.C. Memo. 1992-672.
As previously mentioned, in Richards I we rejected
petitioners' contention that the notice of deficiency issued to
them was invalid and that the Court lacked jurisdiction to enter
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the stipulated decision in their case. In so holding, we
determined that the notice of deficiency issued to petitioners
was not invalid on its face. We see no benefit to revisiting
that issue in any detail here.
Petitioners contend that we should reconsider our decision
denying their Motion for Leave To File Motion To Vacate Decision
on the ground that we misinterpreted the basis for the motion.
Although we are confident that we did not “misinterpret” the
basis for petitioners' motion,11 we nevertheless will address
petitioners' Motion for Reconsideration insofar as they now
contend that the stipulated decision entered in their case should
be vacated due to fraud upon the Court. In particular, we will
consider the merits of petitioners' allegations that the
stipulated decision entered in their case is the result of fraud
upon the Court. We will grant petitioners' motion for leave only
11
Petitioners' Motion for Leave to File Motion To Vacate
Decision states that the holding in Scar v. Commissioner, 814
F.2d 1363 (9th Cir. 1987), establishes that the notice of
deficiency issued to petitioners “was wrongfully and fraudulently
issued.” Any ambiguity with respect to the ground for
petitioners' motion for leave was eliminated by petitioners'
Memorandum of Points and Authorities, which contains multiple
references to the Scar case and states “it is abundantly clear
that the tests set forth in Scar v. C.I.R., supra were not met by
the Respondent when Petitioners' statutory notice was issued for
1978. We submit that no determination of deficiency was made by
the Commissioner in the case of * * * [petitioners'] 1978 tax
return”.
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if we are satisfied that petitioners have alleged sufficient
facts to support further inquiry into the matter.
In Abatti v. Commissioner, supra at 118-119, the Court of
Appeals for the Ninth Circuit defined the phrase “fraud on the
court” as “an unconscionable plan or scheme which is designed to
improperly influence the court in its decision” or a fraudulent
act that “prevents the opposing party from fully and fairly
presenting his case”. See Toscano v. Commissioner, supra at 933;
Kenner v. Commissioner, supra at 691. A party moving to vacate a
final decision of the Tax Court bears a heavy burden of
particularized pleading and proof. Drobny v. Commissioner, 113
F.3d 670, ___ (7th Cir. 1997), affg. T.C. Memo. 1995-209, and
cases cited therein; Abatti v. Commissioner, supra at 118.
Petitioners' allegations of fraud upon the Court are
summarized in petitioners' Memorandum of Points and Authorities
in support of petitioner's Motion for Reconsideration as follows:
1. Respondent committed fraud upon the United
States Tax Court by a series of actions as set out in
paragraphs 1-4 herein, beginning by conducting an
illegal search and seizure of the promoter Henry
Kersting's offices and records in January 19811; then
she utilized the seized materials to, without rational
basis, issue statutory notices of deficiency to
fraudulently toll the statute of limitations respecting
the tax liabilities of Petitioners and many other
taxpayers similarly situated.
2. Respondent and her Office of Chief Counsel
then deliberately concealed their actions from
Petitioners and other taxpayers; they then forced the
many taxpayers so affected into settlement or trial
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without revealing that Respondent had fraudulently
obtained “jurisdiction” over them.
3. The same counsel for Respondent, who obtained
the fraudulent settlement from Petitioners, Kenneth
McWade also, with others, committed a further series of
frauds on the Court in the related consolidated
Kersting test cases of Petitioners Thompsons and
Cravens, and the settlement of the cases of non-test
case petitioner Denis Alexander.
4. The fraud on the Court regarding the specifics
pertaining to Petitioners Richards was undiscovered
until the facts were partially admitted in a letter
from IRS Special Trial Attorney to Petitioner's counsel
on September 3, 1996.
1
Petitioners do not agree with Judge Goffe's
decision regarding Kersting investors' standing under
the Fourth Amendment to contest the illegal search and
seizure (Dixon v. Commissioner, 90 T.C. 237 (1988));
however, these Motions do not per se include any claim
of Petitioners' Fourth Amendment rights being violated.
Mr. Jones' affidavit in support of petitioners' Motion for
Reconsideration includes a statement that Mr. Jones is attempting
to obtain an affidavit submitted by an IRS employee to the Court
“in a related proceeding” purportedly stating that the materials
seized from Mr. Kersting were not used in the preparation of
notices of deficiency issued to Kersting investors--a statement
that would be inconsistent with statements made in Ms. Wynne's
letter dated September 3, 1996.
We have considered petitioners' various contentions, and we
are not persuaded that they have satisfied their heavy burden of
particularized pleading and proof that the stipulated decision
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entered in their case is the result of a fraud upon the Court.
We will address each of petitioners' allegations of fraud in
turn.
Petitioners first assert that respondent conducted an
illegal search and seizure in Mr. Kersting's office in January
1981. We note, however, that Mr. Kersting's various challenges
to the legality of the January 1981 search and seizure have been
repeatedly rejected by the U.S. District Court for the District
of Hawaii. See Kersting v. United States, 865 F. Supp. 669, 674-
675 (D. Hawaii 1994). In addition, in Dixon I, the Court
rejected the Kersting test case taxpayers' arguments that the
search of Mr. Kersting's office was illegal, that the materials
seized during the search should be suppressed in the test case
proceedings, and that the burden of proof and burden of going
forward with the evidence should be shifted to respondent.
Specifically, the Court held that the test case taxpayers failed
to establish standing to contest the search and seizure in
question. Although petitioners state that they disagree with the
Court's holding in Dixon I, they also state that they do not
assert that their Fourth Amendment rights were violated. In sum,
we are left with nothing more than a bald assertion that the
Kersting search was illegal. Under the circumstances, we fail to
see how the Kersting search and seizure should be considered as
an element of a fraud perpetrated upon the Court in connection
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with the case at hand, which was disposed of by decision entered
upon the stipulation of the parties.
Petitioners further allege that respondent used the
materials that were seized from Mr. Kersting to issue statutory
notices of deficiency to Kersting investors, including
petitioners, without a rational basis, and thereby fraudulently
tolled the statute of limitations. We find it necessary to break
this allegation down into its component parts.
It has been evident for some time that the materials that
were seized from Mr. Kersting's offices were made available to
respondent's agents for purposes of conducting civil audits of
Kersting investors. See Dixon v. Commissioner, 90 T.C. at 242.
For the sake of argument, we will assume that respondent's agents
used such materials in preparing the notice of deficiency issued
to petitioners in April 1982.12 Notwithstanding this assumption,
we are unable to conclude that the notice of deficiency issued to
petitioners lacks a rational basis.
12
Sec. 7602(a)(1) authorizes the Secretary to examine any
books, papers, records, or other data that may be relevant for
the purpose of ascertaining the correctness of any tax return.
In the absence of any allegations of fact that would support a
finding that the Kersting search was illegal, respondent's use of
the materials seized from Mr. Kersting in preparing the notice of
deficiency issued to petitioners is not per se illegal or
fraudulent, nor would it render the notice of deficiency invalid.
See, e.g., Proesel v. Commissioner, 73 T.C. 600 (1979); Petrie v.
Commissioner, T.C. Memo. 1990-168. Consistent with the
foregoing, the production of the document referred to in
Mr. Jones' affidavit is not necessary for the disposition of
petitioners' Motion for Reconsideration.
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Normally, an allegation that a notice of deficiency lacks a
rational basis is tantamount to an argument that the notice is
arbitrary.13 However, petitioners' argument that the notice of
deficiency issued to them lacks a rational basis, when considered
in conjunction with petitioners' argument that the notice served
to fraudulently toll the period of limitations, indicates that
petitioners continue to assert that the notice of deficiency is
invalid. We rejected this contention in Richards I where we
observed that
the notice of deficiency concerns petitioners' tax
liability for 1978 and that the deficiency is
attributable to respondent's determination to disallow
an interest deduction in the amount of $67,972.50 with
respect to petitioners' participation in Kersting
programs. Petitioners do not dispute that they
reported a Kersting-related interest deduction on their
1978 income tax return. Consequently, we find that
respondent considered information relating to
petitioners' 1978 tax liability in preparing the notice
of deficiency. Scar v. Commissioner, 814 F.2d at 1370.
In addition, unlike Scar, * * * the notice does not
contain a statement that respondent issued the notice
without examining petitioners' tax return in order to
protect the Government's interest. Under the
circumstances, the notice of deficiency does not reveal
on its face that respondent failed to make a
determination with respect to petitioners' tax
liability, and we so hold. [Richards v. Commissioner,
T.C. Memo. 1997-149, slip op. at 18.]
13
A finding that a notice of deficiency was issued on an
arbitrary basis does not render the notice invalid, see Clapp v.
Commissioner, 875 F.2d 1396, 1402-1403 (9th Cir. 1989), and would
not per se constitute a fraud upon the Court.
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In sum, in Richards I we held that the notice of deficiency
issued to petitioners is facially valid. Petitioners have
offered no evidence to the contrary.
Although petitioners' Motion for Reconsideration does not
clearly state the proposition, we assume that petitioners seek
discovery and an evidentiary hearing in part to attempt to
develop evidence that the notice of deficiency is invalid.
However, to permit the use of such procedures under the
circumstances presented would run counter to the well-settled
principle that we generally will not look behind a notice of
deficiency to examine the evidence used by the Commissioner in
the determination of a deficiency. Scar v. Commissioner, 814
F.2d at 1368; Greenberg's Express v. Commissioner, 62 T.C. 324,
327-328 (1974), and cases cited therein. Considering that the
disputed notice of deficiency is facially valid, and in light of
petitioners' failure (as discussed above) to allege any facts
that would support a finding that respondent's agents engaged in
unconstitutional conduct, we will not look behind the notice of
deficiency in this case.
Because we reject petitioners' argument that the notice of
deficiency lacks a rational basis, it follows that petitioners'
contention that the notice of deficiency served as the means for
respondent to fraudulently toll the period of limitations
likewise fails.
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The remaining elements of petitioners' theory of fraud upon
the Court merit little discussion. Petitioners assert that
respondent deliberately concealed that respondent had
fraudulently obtained “jurisdiction” over Kersting investors,
including petitioners, and then forced the many taxpayers so
affected into settlement or trial. As discussed above, we reject
the notion that respondent fraudulently obtained jurisdiction
over petitioners. We have no reason to doubt that all
information necessary for petitioners to contest the validity of
the notice of deficiency, i.e., petitioners' 1978 tax return and
the notice of deficiency, was readily available to petitioners at
the time the notice of deficiency was issued.14 Finally, it is
evident that any misconduct of Mr. McWade in arranging
settlements with Messrs. Thompson, Cravens, and Alexander as part
of the test case proceedings bears no relation to the stipulated
settlement that petitioners entered into in this case.
14
Indeed, Mr. Nevels included allegations in the petition
that the notice of deficiency was arbitrary. Further,
allegations were raised in the test cases that the notices of
deficiency issued to the test case taxpayers were invalid due to
the use of materials seized from Mr. Kersting at the same time
that Mr. DeCastro was engaged in settlement negotiations with Mr.
McWade respecting petitioners' case. Although the record does
not disclose whether Mr. DeCastro pursued this particular point
with Mr. McWade, we note that petitioners do not allege, and
there is no evidence in the record, that the issue was not raised
because of any collusion or fraud.
- 25 -
The stipulated decision that Mr. DeCastro executed on
petitioners' behalf is now final. Petitioners have failed to
persuade us that the stipulated decision entered in their case
was the result of an unconscionable plan or scheme that was
designed to improperly influence the Court in its decision or
that any act was committed that prevented petitioners from fully
and fairly presenting their case to the Court. Consequently, it
follows that we lack jurisdiction to vacate the decision in this
case.
We now turn to petitioners' motion to consolidate their case
with the Dixon, et al., group of cases. Petitioners argue that
their case should be consolidated with the Dixon cases so that
all cases involving respondent's alleged improper and illegal
conduct in the handling of the Kersting tax shelter project may
be presented to the Court of Appeals for the Ninth Circuit in one
appeal. It is worth noting that petitioners did not request such
consolidation at the time they filed their Motion for Leave To
File Motion To Vacate Decision. In any event, having denied
petitioners' Motion for Leave To File Motion To Vacate Decision
on the ground that we lack jurisdiction to vacate the decision
entered in this case, it follows that we likewise lack
jurisdiction to consolidate petitioners' case with the Dixon
cases. Therefore, we will deny petitioners' request for
consolidation.
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To reflect the foregoing,
An order will be issued
denying petitioners' Motion for
Reconsideration with attached
Motion To Consolidate.