T.C. Memo. 2001-6
UNITED STATES TAX COURT
TRANS WORLD TRAVEL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12390-96. Filed January 17, 2001.
Steven S. Brown and Daniel T. Hartnett, for petitioner.
Patricia Pierce Davis, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: This case was assigned to Special Trial
Judge Robert N. Armen, Jr., pursuant to the provisions of section
7443A(b)(5) and Rules 180, 181, and 183.1 The Court agrees with
and adopts the opinion of the Special Trial Judge, which is set
forth below.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
- 2 -
OPINION OF THE SPECIAL TRIAL JUDGE
ARMEN, Special Trial Judge: This matter is before the
Court on petitioner’s motion for leave to file a motion to vacate
the stipulated decision of this Court entered on March 26, 1997.
At issue is whether the Court lacked jurisdiction to enter the
stipulated decision because petitioner neither authorized nor
ratified the filing of the petition by its accountant. As
explained in detail below, we shall deny petitioner’s motion for
leave.
FINDINGS OF FACT
Some of the facts have been stipulated, and they are so
found. The stipulated facts and attached exhibits are
incorporated herein by this reference.
Petitioner’s sole office was located in Highland Park,
Illinois, at the time that its petition was filed with the Court.
A. Trans World Travel, Inc.
Trans World Travel (petitioner) is a C corporation that was
formed in 1966. Since 1984, it has maintained a single office
located at 734 Central Avenue, Highland Park, Illinois 60035 (the
Highland Park office).
Petitioner is engaged in the group tour travel business.
Its clientele consists of approximately 200 churches of different
denominations located throughout the United States.
- 3 -
Petitioner’s officers and shareholders are two brothers,
James M. Gibbs (James) and John W. Gibbs (John). James and John
each own 50 percent of petitioner’s stock. James is petitioner’s
vice president and secretary, and John is petitioner’s president
and treasurer. James is primarily responsible for
administrative, financial and tax matters, and his duties include
running the office and dealing with the accountants. In
contrast, John is primarily responsible for sales and promotion.
James and John each attended college for 2 years.
Other than James and John, petitioner employs approximately
8 to 10 individuals. None of these individuals exercises any
managerial responsibility; rather, these individuals perform only
clerical and sales-related duties.
Both James and John spend much of their time traveling on
business. John in particular spends between 30 to 50 percent of
his time traveling, both domestically and internationally.
Although James travels less frequently than John, some of his
destinations are also outside of the United States.
B. Steven Jaffe and the Firm of Coleman, Joseph & Jaffe
Neither James nor John, nor any of petitioner’s other
employees, possessed any expertise in either accounting or
Federal tax matters. Accordingly, from 1991 through 1998,
petitioner retained the accounting and consulting firm of
Coleman, Joseph & Jaffe (CJ&J) to provide both accounting and tax
- 4 -
services, specifically including the preparation of periodic
financial statements and various tax returns.
Steven Jaffe (Jaffe) was one of the named partners of CJ&J.
Jaffe is a graduate of the University of Illinois, where he
earned a bachelor of science degree in communications and
political science. Jaffe also attended DePaul University for 2
years, where he studied accounting. Jaffe is neither a certified
public accountant nor a licensed public accountant, nor is he
enrolled to practice before the Internal Revenue Service or
admitted to practice before this Court.
From 1991 through July 1998, Jaffe was the CJ&J partner who
was responsible for servicing the Trans World Travel account.
Jaffe prepared periodic financial statements, as well as various
tax returns, specifically including Federal corporate income tax
returns (Forms 1120). Jaffe also represented petitioner before
the Internal Revenue Service.2
Seymour Coleman (Coleman) was another of the named partners
in CJ&J. Coleman is a graduate of the University of Illinois,
where he earned a bachelor of science degree in accounting, and a
graduate of DePaul University, where he earned a master of
science degree in tax. Coleman is a certified public accountant;
he is not admitted to practice before this Court. From 1991
2
Jaffe also prepared individual income tax returns for
James and John and represented them before the Internal Revenue
Service.
- 5 -
through July 1998, Coleman devoted relatively little time to the
Trans World Travel account.
James and John relied on CJ&J, and particularly on Jaffe, to
handle all of petitioner’s accounting and tax matters, and James
and John had confidence that CJ&J, and particularly Jaffe, would
do so in a professional, competent, and timely manner.
James and John placed a very high level of trust in Jaffe,
and they also regarded him as their friend. James and John gave
Jaffe full and unfettered access to petitioner’s books and
records, and they authorized him to contact directly the vice
president of the financial institution with which petitioner
banked.
Because of their trust in, and reliance on, Jaffe, neither
James nor John paid close attention to petitioner’s tax matters.
Rather, James and John adopted a hands-off approach, essentially
delegating responsibility for petitioner’s tax matters to Jaffe.
Both James and John frequently signed, without scrutiny or
inquiry, tax-related documents that were presented to them by
Jaffe for their signature.
C. Petitioner’s Office Procedures Related to Mail
Mail addressed to petitioner at its Highland Park office was
received and sorted by petitioner’s receptionists. Mail routed
to John was opened and read by him. Tax-related mail was routed
to James’ office, where it was placed in a box reserved for
- 6 -
Jaffe’s use. Such mail was, on occasion, opened by James;
generally, however, it was left unopened until it was picked up
by Jaffe, who regularly visited petitioner’s office, often as
frequently as two or three times per week. Any legal mail that
might be received was routed to James and opened by him.
D. The IRS Examination
In 1991, respondent commenced an examination of one of
petitioner’s corporate income tax returns. The examination was
subsequently expanded to specifically include petitioner’s income
tax returns for the fiscal years ended August 31, 1990 through
1993.
Jaffe represented petitioner during the course of the IRS
examination, with some participation by Coleman.3 Although James
was aware of the examination, he did not participate in it, other
than to attend the brief, initial meeting between Jaffe and the
revenue agent in 1991 and to execute the written protest to the
agent’s report, see infra, that was prepared by CJ&J and
submitted to IRS Appeals Office in October 1994.
3
The record in this case includes a copy of a Power of
Attorney and Declaration of Representative (Form 2848) naming
Jaffe and Coleman as petitioner’s representatives. This
document, which was executed by James in Oct. 1993, is limited to
the fiscal years ended Aug. 31, 1991 through 1993. We are
satisfied, however, that petitioner also named Jaffe and Coleman
as its representatives for the fiscal year ended Aug. 31, 1990,
as well as for the initial year of the examination.
- 7 -
In 1993, Jaffe complained to James about the revenue agent.
In or about 1994 or 1995, Jaffe told James that the examination
had been resolved and that petitioner would be liable for
additional taxes; Jaffe also told James that any amounts paid by
petitioner would be refunded by the IRS or reimbursed by CJ&J.
James apparently accepted these statements at face value and did
not question Jaffe about them.
John was also aware of the examination of petitioner’s
income tax returns. John would periodically ask Jaffe, typically
at a social occasion such as during a round of golf, how the
examination was going. Jaffe would assure him that there was
nothing to worry about, and John would not inquire further.
In October 1994, CJ&J filed a protest on petitioner’s behalf
with the Internal Revenue Service. The protest served to
administratively appeal the determination of the revenue agent as
set forth in his report. The taxable years covered by the
protest were the fiscal years ended August 31, 1990 through 1993.
The protest was signed first by Coleman and then by James under
penalties of perjury.
In or about 1995, Jaffe and Coleman met with an IRS Appeals
Officer in Milwaukee to discuss petitioner’s protest of the
revenue agent’s report.
- 8 -
E. The Tax Court Proceeding
On March 15, 1996, respondent’s Milwaukee Appeals Office
mailed a notice of deficiency to petitioner. The notice was
addressed to petitioner at its Highland Park office. The notice
determined deficiencies in petitioner’s Federal income taxes and
accuracy-related penalties under section 6662(c) as follows:
Accuracy-related Penalty
I.R.C.
Year Deficiency Sec. 6662
1990 $66,194 $53,620
1992 129,526 25,905
1993 96,884 22,048
On June 14, 1996, a petition was filed with this Court
disputing the deficiencies and penalties determined by respondent
in the notice of deficiency. The petition was purportedly signed
by John in his capacity as petitioner’s president. However, the
petition was actually signed by Jaffe. Jaffe had not been
expressly authorized by John to sign John’s name on the petition.
On June 17, 1996, the Court sent petitioner a Notification
of Receipt of Petition (notification). The notification was
mailed to petitioner at its Highland Park office. The
notification served to confirm the receipt of a petition, its
filing date, and the payment of the filing fee. The notification
also disclosed the docket number that had been assigned by the
Court to the petition. Finally, the notification advised that a
- 9 -
designation of place of trial had not been received.4 See Rule
140.
On June 25, 1996, the Court received and filed a Designation
of Place of Trial (DPT), a simple, one-page document that
designated Chicago, Illinois, as the place of trial. The DPT was
signed and dated by James.5 The Court served the DPT on
petitioner at its Highland Park office in order to confirm the
receipt and filing of the document.
On July 9, 1996, respondent served his answer to the
petition, see Rule 36, by mailing a copy to petitioner at its
Highland Park office. The envelope containing the answer was
delivered to petitioner and opened by James. James printed
“Attn: Steve Jaffe” in the upper right corner of the answer and
placed it in the box in his office reserved for Jaffe’s use.
On October 17, 1996, the Court sent petitioner a Notice
Setting Case For Trial (the trial notice). The trial notice
was mailed to petitioner at its Highland Park office by certified
mail. The trial notice served to notify petitioner that its Tax
Court case had been calendared for trial at the Trial Session
4
Consistent with its regular practice, the Court enclosed
with the notification, for petitioner’s use, the form designed to
designate a place of trial. See Form 5 in Appendix I to the Tax
Court Rules of Practice and Procedure.
5
It was Jaffe, however, and not James who printed
“Chicago, Illinois” on the DPT and added “Vice President”
immediately to the right of James’ signature.
- 10 -
beginning on March 17, 1997, in Chicago, Illinois.
In October 1996, at or about the time that the trial notice
was sent to petitioner, Jaffe and Coleman met with respondent’s
District Counsel attorney in Chicago to discuss the issues raised
by the notice of deficiency.
On March 12, 1997, shortly before the scheduled trial
session, John signed and dated a stipulated decision. The
stipulated decision reflected a complete concession of the
deficiencies and penalties determined by respondent in the notice
of deficiency. The Court entered the stipulated decision on
March 26, 1997, and so notified petitioner by mailing a conformed
copy on that date to petitioner at its Highland Park office.
F. Post-Decision Developments
In July 1998, CJ&J terminated Jaffe’s status as a partner in
the firm.
In August 1998, CJ&J6 commenced a civil action against Jaffe
in the Circuit Court for Cook County, Illinois. The complaint
included counts for fraud, embezzlement, and forgery. This
action was apparently still pending at the time of the
evidentiary hearing in the present case.
In or about July or August 1998, petitioner retained an
attorney for the purpose of addressing its tax liabilities for
fiscal years for which Jaffe, as well as Coleman and CJ&J, had
6
Actually, the successor firm to CJ&J.
- 11 -
provided representation. In December 1998, the attorney filed an
application with the IRS for audit reconsideration of the 3
taxable years that were the subject of the Tax Court proceeding
and the stipulated decision entered on March 26, 1997. In
September 1999, the attorney was advised by representatives of
the IRS District Director’s Office in Chicago, Illinois, that
audit reconsideration could not be granted.
On February 14, 2000, petitioner filed its Motion For Leave
To File Petitioner’s Motion To Vacate in respect of the
stipulated decision entered on March 26, 1997, and lodged its
Motion to Vacate.
In March 2000, petitioner, James, and John filed a civil
action against (inter alia) Jaffe, Coleman, and CJ&J (see supra
note 6) in the circuit court for Lake County, Illinois. The
complaint includes counts for breach of contract, breach of
fiduciary duty, and malpractice. The complaint’s “Statement of
Facts” includes the following allegations:
On March 13 [sic], 1996, the IRS sent Trans World
a notice of deficiency of income tax for tax years
ended August 31, 1990, August 31, 1992, and August 31,
1993, claiming an increase in tax to be paid by Trans
World for such years of $292,604.00 and penalties of
$101,573.00, a copy of which notice is attached hereto
as Exhibit A.
Upon Plaintiffs’ receipt of Exhibit A they
immediately gave the same to Jaffe who advised them
that the notice was not a problem and that the Audit
would eventually be resolved in Plaintiffs’ favor.
[Emphasis added.]
- 12 -
This action was still pending at the time of the evidentiary
hearing in the present case.
OPINION
The question presented is whether grounds exist in this case
for vacating what is otherwise a final decision. As explained
in greater detail below, we shall deny petitioner’s
Motion For Leave To File Petitioner’s Motion to Vacate Decision.
The decision in this case was entered on March 26, 1997.
See sec. 7459(c). A decision of this Court becomes final upon
expiration of the time to file a notice of appeal with respect to
such decision. See sec. 7481(a)(1). Generally, a notice of
appeal must be filed within 90 days after the decision is entered
by this Court. See sec. 7483; Fed. R. App. P. 13(a). The 90-day
appeal period may be extended with the timely filing of a motion
to vacate or revise the decision. See Fed. R. App. P. 13(a).
Absent special leave of the Court, such a motion must be filed
within 30 days after the decision has been entered. See Rule
162. 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. See Heim v. Commissioner, 872 F.2d 245, 246 (8th Cir.
1989), affg. T.C. Memo. 1987-1.
In the present case, petitioner did not file a notice of
appeal or a timely motion to vacate or revise the decision
entered on March 26, 1997. Thus, the decision became final on
- 13 -
Tuesday, June 24, 1997, 90 days after the decision was entered.
See sec. 7481(a)(1).
Once a decision of this Court becomes final, we may vacate
the decision only in certain narrowly circumscribed situations.
See Helvering v. Northern Coal Co., 293 U.S. 191 (1934); Drobny
v. Commissioner, 113 F.3d 670, 677 (7th Cir. 1997), affg. T.C.
Memo. 1995-209; Curtis v. Commissioner, T.C. Memo. 1996-371. The
Court of Appeals for the Seventh Circuit, the court to which this
case is appealable, has held that the Tax Court lacks general
equitable powers, and, therefore, lacks the authority to vacate
or revise an otherwise final decision on grounds such as
“mistake, newly discovered evidence, and the like.” Kenner v.
Commissioner, 387 F.2d 689, 690 (7th Cir. 1968). Indeed, the
Court of Appeals has recently stated that “this circuit has
continued to recognize only a single, narrow exception to the
general rule of finality prescribed by Congress in 26 U.S.C.
§7481", namely, that the decision resulted from fraud on the
court. Drobny v. Commissioner, supra.
Other courts 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 (9th
Cir. 1989); Abeles v. Commissioner, 90 T.C. 103, 105-106 (1988);
Brannon's of Shawnee, Inc. v. Commissioner, 71 T.C. 108, 111-112
- 14 -
(1978); or if the decision was obtained through fraud on the
Court, see Abatti v. Commissioner, 859 F.2d 115 (9th Cir. 1988),
affg. 86 T.C. 1319 (1986); Senate Realty Corp. v. Commissioner,
511 F.2d 929, 931 (2d Cir. 1975); Stickler v. Commissioner, 464
F.2d 368, 370 (3d Cir. 1972); Casey v. Commissioner, T.C. Memo.
1992-672. In addition, some courts have indicated that the Tax
Court has the power in its discretion, in extraordinary
circumstances, to vacate and correct a final decision where it is
based on a mutual mistake of fact. See LaFloridienne J.
Buttgenbach & Co. v. Commissioner, 63 F.2d 630 (5th Cir. 1933).7
In the present case, petitioner contends that the decision
entered on March 26, 1997, is a legal nullity and is therefore
not final, because the Tax Court lacked jurisdiction over
petitioner. In support of its contention, petitioner cites and
relies on Billingsley v. Commissioner, supra; Abeles v.
Commissioner, supra; and Brannon's of Shawnee, Inc. v.
Commissioner, supra. Notably, petitioner does not contend that
fraud on the court was committed and provides an exception to the
general rule of finality.
7
Although the U.S. Court of Appeals for the Sixth Circuit
cited mutual mistake of fact as a grounds for vacating a final
decision of this Court in Reo Motors, Inc. v. Commissioner, 219
F.2d 610 (6th Cir. 1955), that Court of Appeals more recently
concluded that Reo Motors, Inc. was effectively overruled by
virtue of the Supreme Court's affirmance of Lasky v.
Commissioner, 235 F.2d 97 (9th Cir. 1956), affd. per curiam 352
U.S. 1027 (1957). See Harbold v. Commissioner, 51 F.3d 618, 621-
622 (6th Cir. 1995).
- 15 -
If we were to construe literally the statement of the Court
of Appeals that fraud on the court is the only exception to the
general rule of finality in the Seventh Circuit, then we could
dispose of petitioner’s motion for leave in short order. After
all, petitioner has not alleged, much less demonstrated, any
fraud on the court. However, the statement of the Court of
Appeals was made in the context of the Tax Court’s lack of
general equitable powers, and one might question whether vacating
an otherwise final decision for lack of jurisdiction is
equivalent to vacating such a decision on grounds such as
“mistake, newly discovered evidence, and the like.” Kenner v.
Commissioner, supra.
In the present case, the parties have proceeded as if lack
of jurisdiction is an exception to the general rule of finality
in the Seventh Circuit. Because such an approach is not flatly
inconsistent with Drobny v. Commissioner, supra, we have chosen
to address petitioner’s contentions on their merits.
Petitioner contends that this Court lacks jurisdiction to
bind petitioner because the petition was filed without proper
authorization from petitioner. See Hoj v. Commissioner, 26 T.C.
1074 (1956). Whether the filing of the petition was authorized
or later ratified by petitioner is a question of fact to be
determined based on principles of the law of agency, as
applicable under Illinois law. See Mishawaka Properties Co., 100
- 16 -
T.C. 353, 363-367 (1993); Adams v. Commissioner, 85 T.C. 359,
369-372 (1985); Kraasch v. Commissioner, 70 T.C. 623, 627-629
(1978); John Arnold Executrak Sys., Inc. v. Commissioner, T.C.
Memo. 1990-6. Petitioner bears the burden of proof. See Kenner
v. Commissioner, supra at 691; Kraasch v. Commissioner, supra at
626.
A. Jaffe’s Authority To File a Tax Court Petition
Under the common law of agency, authority may be granted by
an express statement or may be derived from implication of the
principal’s words or deeds. See John Arnold Executrak Sys., Inc.
v. Commissioner, supra (citing Restatement, Agency 2d, sec. 26
(1957)). Therefore, it is the principal who is the source of the
agent’s power, and the agent’s authority is traced back to the
word or act of the principal. See Yugoslav-Am. Cultural Ctr. v.
Parkway Bank and & Co., 289 Ill. App. 3d 728 (1997). Moreover,
the scope of an agent’s authority is evaluated in an objective
manner, taking into consideration what a reasonable person in the
agent’s position would conclude that the principal intended,
regardless of whether that is what the principal actually
intended. See John Arnold Executrak Sys., Inc. v. Commissioner,
supra (citing Restatement, supra).
In order to bind the principal, the agent must either have
actual or apparent authority, or the principal must ratify the
agent’s acts. Authority is examined taking into account all the
- 17 -
circumstances, including the relationship of the parties, the
common business practices, the nature of the subject matter, and
the facts of which the agent has notice concerning objects the
principal desires to accomplish. See id. (citing Restatement,
supra sec. 34).
The existence and scope of an agency relationship are
questions of fact, unless the relationship is so clear as to be
undisputed. See Anetsberger v. Metropolitan Life Ins. Co., 14 F.
3d 1226, 1234 (7th Cir. 1994). As the trier of fact, “it is our
duty to listen to the testimony, observe the demeanor of the
witnesses, weigh the evidence, and determine what we believe.”
Kropp v. Commissioner, T.C. Memo. 2000-148; cf. Diaz v.
Commissioner, 58 T.C. 560, 564 (1972).
Petitioner first contends that the Court lacked jurisdiction
to enter the stipulated decision because petitioner never
authorized Jaffe to file a petition on its behalf. We disagree.
In our view, the record demonstrates that Jaffe acted as
petitioner’s authorized agent in filing the petition and that
Jaffe acted within the general scope of his employment when he
signed the petition. In this regard, two prior cases of this
Court are particularly instructive. See Kraasch v. Commissioner,
supra; Shopsin v. Commissioner, T.C. Memo. 1984-151, affd.
without published opinion 751 F.2d 371 (2d Cir. 1984).
In Kraasch v. Commissioner, supra, a petition was filed and
- 18 -
signed in the taxpayers’ names by the taxpayers’ accountant and
tax consultant, an individual who was neither an attorney nor
admitted to practice before this Court. The Commissioner filed a
motion to dismiss for failure to state a claim upon which relief
could be granted. After the taxpayers failed to file a proper
amended petition, the Court entered an order of dismissal and
decision. Thereafter, the taxpayers filed a motion to modify the
order, alleging that the Court lacked jurisdiction because the
taxpayers neither signed the petition nor authorized anyone to
file a petition on their behalf.
After an evidentiary hearing, the Court found that the
taxpayers’ accountant had acted within the scope of his
employment when he filed the petition and signed it in the
taxpayers’ names. Among the facts and circumstances that the
Court found particularly relevant in reaching its conclusion were
the following: The taxpayers permitted their accountant to
handle their tax affairs generally, and they had knowledge that
he did so; over a period of years, the taxpayers routinely
forwarded any tax information that they received to their
accountant and relied on him to handle such material; and the
conduct of petitioners’ accountant and tax consultant, in signing
and filing the petition, was of the same general nature as, or
incident to, that which he was employed to perform.
In Shopsin v. Commissioner, supra, a petition was filed and
- 19 -
signed in the taxpayers’ names by the taxpayers’ accountant and
bookkeeper, an individual who was neither an attorney nor
admitted to practice before this Court. There was no evidence
that the taxpayers ever saw the contents of the petition. In any
event, after it was filed, the accountant engaged in negotiations
with the Commissioner’s Appeals Office and was successful in
reaching a settlement that reduced the deficiency. A stipulated
decision was signed by the taxpayers and the Commissioner and
then entered by the Court. Thereafter, petitioners filed a
motion to vacate the decision on the ground that the taxpayers
neither authorized nor ratified the filing of the petition on
their behalf by their accountant.
After an evidentiary hearing, the Court found that the
taxpayers’ accountant had acted within the general scope of his
employment in signing the petition and as petitioners’ authorized
agent in filing the petition. In so finding, the Court stated as
follows:
It is clear from the record in this case that
petitioners routinely and without question placed their
tax affairs in the hands of Levy [petitioners’
accountant]. Time and again at the hearing petitioners
testified that, when they received tax-related
documents, their practice was to forward them to Levy
or telephone Levy for his instructions with respect to
what to do with the documents. Further, petitioners
invariably deferred to Levy’s judgment, signing without
necessarily reading, or certainly understanding,
whatever document Levy advised that they sign. In
other words, petitioners permitted Levy to handle their
tax affairs generally and knew that he did so. In
essence, Levy was petitioners’ general agent authorized
- 20 -
to perform on a continuing basis all necessary acts
with respect to petitioners’ tax affairs. Levy’s
conduct in filing the petition was of the same general
nature as, and incident to, those functions that he was
employed to perform. [Id.]
In the present case, the record clearly demonstrates that
neither James nor John, nor any of petitioner’s other employees,
possessed any expertise in Federal tax matters and that, as a
consequence, James and John retained, and relied on for a period
of 7 or 8 years, CJ&J, and particularly Jaffe, to provide tax
services, including the representation of petitioner before the
Internal Revenue Service. The record also clearly demonstrates
that James and John trusted Jaffe and had confidence in him.
Indeed, they regarded Jaffe as their friend, and they gave him
full and unfettered access to petitioner’s books and records;
Jaffe was even authorized to deal directly with the vice
president of petitioner’s bank.
Because James and John trusted and relied on Jaffe, neither
brother paid close attention to petitioner’s tax matters.
Rather, they adopted a hands-off approach and essentially
delegated responsibility for petitioner’s tax matters to Jaffe.
They also instituted, or acquiesced in, an office procedure
whereby tax-related mail was routed to James’ office, where it
was placed, generally unopened and unread by James, in a box
reserved for Jaffe’s use. They also frequently signed, without
scrutiny or inquiry, tax-related documents that were presented to
- 21 -
them by Jaffe for their signature.
The lack of involvement by James and John in the tax affairs
of their corporation, and the degree to which James and John
relied on Jaffe to handle those affairs, is aptly demonstrated by
the following colloquies between counsel and John and then James:
PETITIONER’S COUNSEL: And why would you sign
these documents?
JOHN GIBBS: I just totally trusted Steve. I
would sign the papers, he’d put them down. I wouldn’t
look at them.
* * * * * * *
PETITIONER’S COUNSEL: Before July ‘98, did you
ever execute any tax document, returns, or financial
statements for Trans World at the direction of Jaffe?
JAMES GIBBS: Yes, I did.
PETITIONER’S COUNSEL: Would you review these
documents?
JAMES GIBBS: No. Basically, again, he would just
present them to me for my signature.
PETITIONER’S COUNSEL: Now why would you just
execute documents?
JAMES GIBBS: One, again, he was a friend. We
trusted him. And for the most part, I wouldn’t have
understood the documents that are given to me
pertaining to the taxes.
* * * * * * *
RESPONDENT’S COUNSEL: Did you ask Steve Jaffe
what this document [the designation of place of trial]
was?
JAMES GIBBS: No, I did not.
RESPONDENT’S COUNSEL: You didn’t ask him what it
- 22 -
meant?
JAMES GIBBS: I didn’t read it as I didn’t ask
him. No.
RESPONDENT’S COUNSEL: You didn’t even read the
part under your signature that says, Signature of
Petitioner or Counsel?
JAMES GIBBS: I’m sorry. I didn’t.
* * * * * * *
RESPONDENT’S COUNSEL: The fact is you didn’t pay
close attention to your tax matters, did you, sir?
JAMES GIBBS: No, I relied on Steve Jaffe.
In sum, James and John abdicated their responsibility as
petitioner’s sole corporate officers and shareholders for making
any tax-related decisions for petitioner and instead placed that
responsibility squarely on Jaffe. The message from James and
John was clear: “We are not interested in tax matters.” The
mandate to Jaffe was equally clear: “You handle those matters for
us.”
Petitioner argues that neither James nor John was
knowledgeable about tax matters and that neither would have
understood what they were signing even if they had bothered to
read the particular document that was presented for their
signature. Petitioner apparently thinks that corporate officers
have no duty to read any document before signing it, nor any duty
to educate themselves about matters of consequence to the
corporation, nor even any duty to ask fundamental questions about
- 23 -
actions being taken by their agents. We categorically reject any
such view. See Shopsin v. Commissioner, T.C. Memo. 1984-151,
wherein we stated:
Had petitioners attempted to ascertain the precise
status of their case at any particular point in time,
we believe petitioners had the wherewithal to do so.
Petitioners cannot avoid their responsibility on the
basis of their failure to press the matter.
See also Kraasch v. Commissioner, 70 T.C. at 627-628, wherein we
stated: “That * * * [the taxpayers] might not have understood the
contents or chose at times not to read their mail before sending
it to * * * [their accountant] in no way absolves them of
responsibility or knowledge in this matter.”
Petitioner also argues that Jaffe made it difficult for
James and John to appreciate what they were signing because he
typically presented them with a stack of documents, pointed to
where they were expected to sign, and stood over them while they
signed each document. However, any suggestion of undue influence
is belied by the following colloquy between the Court and James:
THE COURT: * * * Now, you said that Steve Jaffe
typically would present you with documents to sign and
basically say, Sign here.
JAMES GIBBS: That’s correct.
THE COURT: If you had expressed an interest in a
document, would he have precluded you from examining
it?
JAMES GIBBS: I don’t think so.
THE COURT: Did you feel free to examine the
document should you have so chosen to do so?
- 24 -
JAMES GIBBS: I would say yes.
The truth of the matter is that James and John simply had no
interest in what they were signing when it came to tax-related
matters. For all intents and purposes, they had even delegated
their signature authority to Jaffe.
B. Ratification
If, on the other hand, Jaffe acted without authority in
signing and filing the petition, petitioner contends that the
Court lacked jurisdiction to enter the stipulated decision
because petitioner never ratified such unauthorized act. Again,
we disagree.
A finding of ratification under Illinois agency law is a
complex, fact-intensive inquiry. A wholly unauthorized act may
nevertheless be made valid by a subsequent ratification, in that
such subsequent assent would confirm what was originally an
unauthorized and illegal act. See Hefner v. Vandolah, 62 Ill.
483, 485 (1872); see also Middle W. Tel. Co. v. U.S. Fire Ins.
Co., 296 Ill. App. 260, 265 (1938). As applicable herein,
ratification means retroactive adoption of an unauthorized
signature by the person whose name is signed.
Ratification may be found from express statements or it may
be inferred from the surrounding circumstances, for example,
where the principal takes a position inconsistent with
nonaffirmation of the transaction, see Hofner v. Glenn Ingram &
- 25 -
Co., 140 Ill. App. 3d 874, 883 (1st Dist. 1985), or fails to
repudiate the agent’s acts, see Chalet Ford, Inc. v. Red Top
Parking, Inc., 62 Ill. App. 3d 270 (1st Dist. 1978), or retains
the benefits of the unauthorized transaction, see Stathis v.
Geldermann, Inc., 295 Ill. App. 3d 844, 858 (1998); George F.
Mueller & Sons, Inc. v. Northern Ill. Gas Co., 12 Ill. App.3d 362
(1st Dist. 1973). In contrast, ratification will not be implied
from acts or conduct that clearly evidences an intent not to
ratify. See Evanston Bank v. Conticommodity Servs., Inc., 623 F.
Supp. 1014, 1037 (N.D. Ill. 1985).
Our analysis continues with the specific circumstances that
support our conclusion that petitioner ratified the filing of the
petition by Jaffe on its behalf.
Although not familiar with tax procedure, James and John
were aware, or should have been aware, that petitioner’s case was
before the Tax Court. Evidence of this is found from various
events that occurred after the filing of the petition.
First, the Designation of Place of Trial (DPT) was mailed to
petitioner at its Highland Park office by the Court. More
importantly, James admitted that he signed and dated the DPT.
James testified that he did not review the DPT before
signing it, but that if he had noticed it was a Tax Court
document, he would have questioned Jaffe about it. We do not
find this testimony particularly convincing, however, given the
- 26 -
fact that the DPT is a simple, one-page document, with the words
UNITED STATES TAX COURT
WASHINGTON, D.C. 20217
prominently displayed in capital letters at the very top of the
page. Surely, too, even a cursory glance at the document’s
heading, “DESIGNATION OF PLACE OF TRIAL” only a few lines above
the signature line, would have revealed the document’s nature and
origin. Moreover, immediately below the signature line and
immediately above the “Dated” line was the preprinted
designation: “Signature of Petitioner or Counsel”. This should
have alerted James to the fact that he was signing a document
related to a legal proceeding.
Thus, at this early juncture, James either knew or should
have known that a petition had been filed in the Tax Court. See
Kraasch v. Commissioner, supra at 628, concluding that
ratification occurred where the taxpayers “had, or reasonably
should have had, knowledge of the material facts of the case at
all times.” Moreover, James’ act in signing the Designation of
Place of Trial constituted a ratification of Jaffe’s prior act in
filing the petition in the first instance.
Second, when petitioner received respondent’s answer to the
petition, petitioner either knew, or reasonably should have
known, that it had a case pending before this Court. See id. In
fact, James opened the envelope containing the copy of
respondent’s answer and wrote “Attn: Steve Jaffe” in the upper
- 27 -
right corner of the document, immediately opposite “UNITED STATES
TAX COURT” and immediately above “Docket No. 12390-96". At
trial, James admitted that he bears responsibility for reading
his mail. He also bears responsibility for reading his mail with
reasonable care. By placing respondent’s answer in the box in
his office reserved for Jaffe’s use, James obviously knew that
the document was tax related. At the very least, James saw, or
should have seen, the Tax Court designation and knew, or should
have known, that the case had escalated beyond the audit phase.
See id. James’ act of opening the envelope, annotating
respondent’s answer, and then forwarding it to Jaffe constituted
a ratification of the filing of the petition.
Third, John signed and dated the stipulated decision. The
decision is a relatively straightforward, two-page document that
sets forth the amount of the tax deficiencies and accuracy-
related penalties for which petitioner is liable. The words
“UNITED STATES TAX COURT” appear prominently at the top of the
first page, followed by the caption and docket number, which
together clearly indicate that the document pertains to a court
case. Immediately below the signature line on the second page of
the decision was the typewritten designation:
JOHN W. GIBBS, PRESIDENT
TRANS WORLD TRAVEL
Petitioner
which also indicated that the document pertained to a court case.
- 28 -
Thus, John either knew or should have known that he was
concluding a case that was in litigation. See id. By signing
and dating the stipulated decision, without even asking for
clarification about the nature of the document, John ratified the
filing of the petition. See, e.g., Chalet Ford, Inc. v. Red Top
Parking, Inc., supra.
C. Conclusion
In summary, we hold that petitioner failed to satisfy its
burden of proving that the filing of the petition by Jaffe was
unauthorized. We also hold that, in any event, subsequent
conduct by James and John ratified Jaffe’s action in filing the
petition. Accordingly, the Court had jurisdiction, and it
properly entered the stipulated decision on March 26, 1997.
In order to give effect to our holdings,
An appropriate order
denying petitioner’s motion
for leave to file a motion to
vacate will be issued.