T.C. Memo. 1998-81
UNITED STATES TAX COURT
BRUCE L. CARPENTER AND CAROLYN L. CARPENTER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23735-94. Filed February 25, 1998.
Alan R. Herson, for petitioners.
Gerald W. Douglas, for respondent.
MEMORANDUM OPINION
CHIECHI, Judge: This case is before the Court on petition-
ers' motion for leave to file a motion to vacate decision out of
time embodying petitioners' motion to vacate decision (petition-
ers' motion). Respondent filed a response to petitioners' motion
in which respondent objects to the granting of that motion. We
shall deny petitioners' motion.
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Background
On September 23, 1994, respondent issued a notice of defi-
ciency (notice) to petitioners that determined certain deficien-
cies in, additions to, and accuracy-related penalties on their
Federal income tax (tax) for 1988, 1989, and 1990. Respondent
determined in the notice, inter alia, that petitioners received a
constructive dividend (constructive dividend) during each of the
years 1989 and 1990 from an entity called East Oregon Cattle
Company (EOCC) in an amount equal to the fair rental value of a
house located on property in Jackson County, Oregon (Modoc
property), which respondent determined EOCC owned and in which
petitioners lived without paying rent during each of those years.
This case was calendared for trial at the Court's trial
session in Portland, Oregon, that began on October 2, 1995. On
October 4, 1995, the parties submitted to the Court a stipulated
decision document (stipulated decision document) that was signed
by counsel for respondent and by petitioners, who were not at
that time represented by counsel, and that reflected the agree-
ment of the parties as to the amounts, if any, of petitioners'
deficiencies in, additions to, and accuracy-related penalties on
their tax for the years at issue. On October 16, 1995, the Court
entered a decision in this case pursuant to the agreement of the
parties as reflected in the stipulated decision document.
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Although no stipulation of settled issues or other similar
document was filed with the Court in this case which shows the
agreement of the parties with respect to each of respondent's
determinations in the notice, petitioners contend in petitioners'
motion, and respondent agrees, that, as part of the parties'
agreement resolving the issues in this case, petitioners conceded
that they received a constructive dividend during each of the
years 1989 and 1990, as determined by respondent in the notice.
As part of its efforts to collect the liability resulting
from the decision that was entered by the Court in this case, the
Internal Revenue Service (IRS) filed a nominee notice of Federal
tax lien (nominee lien notice) on July 2, 1996. Different
attorneys employed by the IRS were responsible for handling the
instant case and the nominee lien notice. The IRS' attorney
responsible for the nominee lien notice approved that notice on
June 20, 1996. In the nominee lien notice, the IRS alleged that
the Colby B. Foundation (foundation) was a nominee of petitioners
and of EOCC and that the Modoc property, which was titled at the
time of that notice in the name of the foundation, was held by
the foundation as nominee of petitioners and EOCC.
On or about September 9, 1996, the IRS issued a levy on the
Modoc property (Modoc levy). On or about September 19, 1996, the
IRS issued a notice of seizure of that property. On October 3,
1996, the IRS issued a notice of sealed bid sale, which indicated
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the IRS' intent to sell the Modoc property in order to satisfy
the respective tax liabilities of petitioners and EOCC. That
notice scheduled the commencement of the sale of the Modoc
property on November 6, 1996.
On October 3, 1996, the foundation filed a complaint in the
U.S. District Court for the District of Oregon (District Court
case), naming the United States as the defendant, alleging that
the Modoc levy constituted a wrongful levy under section
7426(a)1, and seeking injunctive relief from the imminent sale of
the Modoc property. The foundation filed a motion for summary
judgment in the District Court case (foundation's motion) that
the United States wrongfully levied against the Modoc property in
order to collect taxes owed by petitioners and/or EOCC. The
United States filed a motion for summary judgment (defendant's
motion) in the District Court case that the Modoc levy was
proper. On October 22, 1997, the U.S. District Court for the
District of Oregon (District Court) issued a detailed order
(order) denying the foundation's motion and granting defendant's
1
All section references are to the Internal Revenue Code in
effect at relevant times. Unless otherwise indicated, all Rule
references are to the Tax Court Rules of Practice and Procedure.
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motion.2 The foundation has filed a notice of appeal, appealing
the judgment in the District Court case.
As pertinent here, the foundation contended in the founda-
tion's motion (1) that the United States was precluded from
asserting that petitioners owned the Modoc property based on
the principles of issue preclusion and/or judicial estoppel and
(2) that the foundation cannot simultaneously own the Modoc
property on behalf of petitioners and EOCC. The United States
contended in defendant's motion, inter alia, (1) that the United
States is entitled to levy on the Modoc property to satisfy
EOCC's tax liability because the foundation's "interest in the
property derives from a fraudulent conveyance" and (2) that the
United States is entitled to levy on the Modoc property to
satisfy petitioners' tax liability because the foundation quali-
fies as petitioners' nominee and also "is so thoroughly dominated
by * * * [petitioners] as to render it a sham entity."
The District Court found in its order that on September 23,
1994, respondent issued a notice of deficiency to EOCC, which set
forth respondent's determinations of deficiencies in, and penal-
ties on, EOCC's tax for 1988, 1989, and 1990. The District Court
further found in its order that on December 23, 1994, EOCC filed
2
A U.S. magistrate judge of the District Court entered the
District Court order and judgment in the District Court case in
accordance with the consent of the parties in that case pursuant
to Fed. R. Civ. P. 73 and 28 U.S.C. sec. 636(c) (1994).
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a petition with this Court, that EOCC and respondent settled the
case pending in this Court, and that that settlement was re-
flected in a decision entered by this Court.
The District Court further recited the following facts in
its order: (1) On December 31, 1985, petitioners purchased the
Modoc property on behalf of EOCC; (2) on September 16, 1994,
petitioners executed a "Bill of Sale" that purported to convey
for $10 the Modoc property and all personal property located
thereon to a new entity that petitioners established, called New
EOCC (New EOCC); (3) sometime after September 1994, EOCC no
longer existed, and all that remained of that entity was its
unpaid tax liability; (4) on September 16, 1994, petitioners
created the foundation; and (5) around October or November 1995,
petitioners purported to transfer the Modoc property to the
foundation on behalf of New EOCC for no consideration.
With respect to the foundation's assertion of issue preclu-
sion, the District Court held that nonmutual issue preclusion is
not available against the United States and that there was no
mutuality between the parties to the District Court case and the
parties to the respective cases of petitioners and EOCC before
this Court because the foundation was not a party to either of
those latter cases.
With respect to the foundation's assertion of judicial
estoppel, the foundation argued that the United States was
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precluded from asserting that "EOCC had title to the Modoc
property as the nominee of * * * [petitioners] between 1989 and
1990" since petitioners conceded as part of their agreement with
respondent resolving the case that petitioners brought before
this Court that they had a constructive dividend which was
subject to tax because EOCC, and not petitioners, owned the Modoc
property, and petitioners lived on that property rent free. The
United States contended (1) that its position was not inconsis-
tent with any prior positions taken by respondent in petitioners'
case before this Court and (2) that the issues in the District
Court case were being presented for the first time and had not
been litigated in petitioners' case before this Court. The
District Court agreed with the United States and held:
'Judicial estoppel, an equitable doctrine invoked in
the discretion of a court, is intended to protect
against a litigant playing fast and loose with the
courts.' In this case, the court finds that the * * *
[United States] is not 'playing fast and loose with the
courts'. As pointed out by * * * [the United States],
the issues in this case were not and could not have
been litigated in the tax court case. The issues in
this case involve the relationship between the Carpen-
ters [petitioners] and plaintiff [the foundation] and
the EOCC entities and plaintiff [the foundation]. This
case involves the propriety of certain tax levies,
rather than the assessment of taxes. The court will
not apply the doctrine of judicial estoppel in this
case. [Citations omitted; emphasis added.]
With respect to the United States' contention that the Modoc
levy for EOCC's tax liability was proper, the District Court held
that the transfer of the Modoc property from EOCC to New EOCC and
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from New EOCC to the foundation constituted a fraudulent convey-
ance under applicable Oregon law and that therefore the United
States had demonstrated a sufficient nexus between EOCC and that
property to make the levy on that property valid for the purpose
of collecting EOCC's tax liability.
With respect to the United States' contention that the Modoc
levy for petitioners' tax liability was proper, the District
Court explained that if it were to find that the foundation was
either a nominee of petitioners or a sham entity, there would be
a sufficient nexus between petitioners and the Modoc property to
make the Modoc levy valid for the purpose of collecting petition-
ers' tax liability. The District Court found on the record
before it that the foundation was both a nominee of petitioners
and a sham entity and that there was a sufficient nexus between
petitioners and the Modoc property to make the levy on that
property valid for the purpose of collecting petitioners' tax
liability. The District Court stated in pertinent part:
It is clear from the facts, cited in defendant's
memorandum and reply memorandum and contained in the
statement of facts, that * * * [petitioners], espe-
cially [petitioner] Bruce Carpenter, maintained total
control over the * * * [foundation]. It is also clear
from the facts that * * * [petitioners] transferred the
Modoc property from * * * EOCC to New EOCC and from New
EOCC to * * * [the foundation] in anticipation of the
income tax deficiencies. * * * It is also clear from
the facts that the funds used to purchase the Modoc
property are properly attributed to * * * [petitioners]
as set forth in defendant's reply memorandum. * * *
[Petitioners] continue to enjoy possession, control,
and the benefits of * * * [the foundation's] assets,
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including the Modoc property. Defendant has demon-
strated that * * * [petitioners] and * * * [the founda-
tion] share a 'close relationship'. * * * [Petitioners]
have continued to use the property despite the transfer
of the property among different entities. * * * [Peti-
tioners] continue to pay the bills associated with the
maintenance of the property. It is clear from the
facts that * * * [the foundation] is * * * [petition-
ers'] nominee. [Citations omitted.]
Discussion
The Court's decision in this case was entered on October 16,
1995. No notice of appeal or timely motion to vacate or revise
the decision was filed in this case, see sec. 7483; Rule 162, and
the decision herein became final on January 15, 1996, see sec.
7481(a)(1); Fed. R. App. P. 13(a).
Petitioners' motion was filed on December 2, 1997, over two
years after the Court entered the decision in this case. Once a
decision becomes final, the Court may vacate it only in narrowly
circumscribed situations, such as where the decision was obtained
through fraud on the Court, see Abatti v. Commissioner, 859 F.2d
115, 118 (9th Cir. 1988), affg. 86 T.C. 1319 (1986); Senate
Realty Corp. v. Commissioner, 511 F.2d 929, 931 n.1 (2d Cir.
1975), or where the decision is void or a legal nullity for lack
of this Court's jurisdiction over either the subject matter or
the party, see Billingsley v. Commissioner, 868 F.2d 1081, 1084-
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1085 (9th Cir. 1989); Abeles v. Commissioner, 90 T.C. 103, 105-
106 (1988).3
The Court of Appeals for the Ninth Circuit (Ninth Circuit)
has defined the phrase "fraud on the court" to be "'an unconscio-
nable plan or scheme which is designed to improperly influence
the court in its decision.'" Toscano v. Commissioner, 441 F.2d
930, 934 (9th Cir. 1971) (quoting England v. Doyle, 281 F.2d 304,
309 (9th Cir. 1960)); see Abatti v. Commissioner, supra at 118.
In order to prove fraud on the Court, petitioners must
establish that "an intentional plan of deception designed to
improperly influence the Court in its decision has had such an
effect on the Court." Abatti v. Commissioner, 86 T.C. at 1325;
see Drobny v. Commissioner, 113 F.3d 670, 677-678 (7th Cir.
1997), affg. T.C. Memo. 1995-209, and cases cited therein.
Petitioners make, inter alia, the following contentions in
an affidavit attached to and incorporated as part of petitioners'
motion:
The * * * [United States] filed a motion for summary
judgment in the District Court Case. The * * * [United
States] contended that the funds used to purchase Modoc
Property [sic] were properly attributed to Petitioners,
not to * * * EOCC. According to the * * * [United
3
The Court of Appeals for the Fifth Circuit has indicated that
in extraordinary circumstances this Court has the power in its
discretion to vacate and correct a final decision where it is
based on a mutual mistake of fact. See La Floridienne J.
Buttgenbach & Co. v. Commissioner, 63 F.2d 630 (5th Cir. 1933).
But see Harbold v. Commissioner, 51 F.3d 618, 621-622 (6th Cir.
1995).
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States], * * * EOCC had held mere record title to the
Modoc Property, with Petitioners being the beneficia-
ries of the title. Accordingly, the * * * [United
States] argued that economic interest in the Modoc
Property had, since its purchase in the name of * * *
EOCC, and including 1989 and 1990, belonged to peti-
tioners, not to * * * EOCC.
Petitioners further contend, inter alia, in petitioners' motion:
9. Respondent perpetrated a fraud upon this
court in failing to disclose that its true determina-
tion was that Petitioners had been the owners of the
Modoc Property in 1989 and 1990, and requesting the
court to enter its Decision which included deficiencies
against Petitioners on the basis, in part, that * * *
EOCC was the true owner of the Modoc Property.
10. Had Respondent's true determination been
disclosed to Petitioners and to this court, Petitioners
would not have agreed to the settlement, and this court
would not have entered its Decision. Had Respondent
disclosed to Petitioners that its true determination
was that Petitioners were the owners of the Modoc
Property in 1989 and 1990, Petitioners would not have
agreed to the settlement which imposed a constructive
dividend on them for their occupancy of the residence
located on the Modoc Property.
Respondent argues that petitioners have not established that
this Court should exercise its discretion under Rule 162 to grant
them leave to file a motion to vacate the decision in this case.
We agree with respondent.
There is no evidence in the instant record showing that
during the time petitioners' case was pending before us respon-
dent's determination with respect to the Modoc property was that
petitioners, and not EOCC, were the owners of that property
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during the years at issue.4 Indeed, the only determination of
respondent regarding the Modoc property that was in the record in
this case at the time we entered the decision is that set forth
in the notice, viz., petitioners received a constructive dividend
from EOCC during each of the years 1989 and 1990 in an amount
equal to the fair rental value of the Modoc property which
respondent determined was owned by EOCC and in which petitioners
lived rent free.
Moreover, during the time this case was pending before the
Court the parties did not file a stipulation of settled issues or
other similar document showing the agreement of the parties with
respect to each of respondent's determinations in the notice.
Consequently, at the time the Court entered the decision in this
case it was unaware of what that agreement was. Thus, the Court
did not enter its decision in this case based on respondent's
determination in the notice that petitioners received construc-
tive dividends for 1989 and 1990 because they lived on the Modoc
4
Nor do we read the District Court's order as establishing that
the United States contended in defendant's motion in the District
Court case that petitioners were the owners of the Modoc property
during the years at issue in petitioners' case before this Court.
As we read the District Court's order, the United States con-
tended, and the District Court found, that the foundation, which
was not even created until after the years at issue in the
instant case (i.e., on Sept. 16, 1994) and which purportedly held
title to the Modoc property since around Oct. or Nov. 1995, was
both a nominee of petitioners and a sham entity and that, conse-
quently, the levy on the Modoc property, which the IRS issued on
Sept. 9, 1996, was valid.
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property which respondent determined was owned by EOCC, or on any
other determination that respondent made in the notice. The
Court entered its decision in this case based on the agreement of
the parties reflected in the stipulated decision document as to
the amounts of any deficiencies in, additions to, and accuracy-
related penalties on petitioners' tax for 1988, 1989, and 1990.
On the record before us, we find that petitioners have
failed to establish that respondent's conduct while petitioners'
case was pending before this Court rises to the level of "an
intentional plan of deception designed to improperly influence
the Court in its decision", Abatti v. Commissioner, 86 T.C. at
1325, let alone that any such plan, if it had been established by
petitioners, "has had such an effect on the Court", id. We
further find that petitioners have failed to show that the
decision entered in this case is the result of any other situa-
tion that warrants our exercise of our discretion under Rule 162
to grant petitioners' motion.
To reflect the foregoing,
An order will be issued
denying petitioners' motion
for leave to file a motion to
vacate decision out of time
embodying petitioners' motion
to vacate decision.