Opposition Brief — Webb v. Commissioner

Supreme Court, U.S.

: ‘ eo a

Ti MAY: 9 1996

No. 95-1538 i

4

In the Supreme Court of the Gnited States

OCTOBER TERM, 1995

Roscoe C. WEBB, JR., PETITIONER

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORAR!

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

Drew S. Days, Il

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

DAVID I. PINCUS

DAVID A. SHUSTER

Attorneys

Department of Justice

Washington, D.C. 20530

~

(202) 514-22 a

QUESTION PRESENTED

Whether a Tax Court decision may be vacated on

the ground that it is inconsistent with a previously

executed closing agreement when the taxpayer did

not bring the closing agreement to the attention of

either the court or the government attorneys

handling the case until five months after the Tax

Court decision became final.

(I)

TABLE OF CONTENTS

Opinions and orders below .........cccccsecesessrrerereerereeeeeeeeess

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‘TABLE OF AUTHORITIES

Cases:

Abeles v. Commissioner, 90 T.C. 103 (1988) ............

Aetna Life Insurance Co. v. Eaton, 43 F.2d 711

(2d Cir.), cert. denied, 282 U.S. 887 (1930) ..............

Bankers’ Reserve Life Co. v. United States, 42

F.2d 313 (Ct. Cl.), cert. denied, 282 U.S. 871

atlas sack ae aie Teale seh bbahahedthetsinessneheacceneets

Billingsley v. Commissioner, 868 F.2d 1081 (9th

acd he a adh makbeiepetabnnbagehabeeneoen

Brannon’s of Shawnee, Inc. v. Commissioner, 69

I Sasi aatbaalisepiesabeubrennes

Browning v. Commissioner. 33 T.C.M. (CCH) 429

I Re eee Es nabadisuntinensactavecsotianece

Chicot County Drainage Dist. v. Baxter State

Bank, BOG U.S. S71 (1G4O) ....c.ccrrccccccccccccessercsccsscnees

Cromwell v. County of Sac, 94 U.S. 351

tesa es a saphebbamasenancueneanauseseee

Commissioner v. Sunnen, 333 U.S. 591 (1948) .........

Denholm & McKay Co. v. Commissioner, 132 F.2d

hh La can cphneacdunenstetbenteseceass

Federated Department Stores, Inc. v. Moitie,

1 a ds senengabedbnencenenesenen

Harbold v. Commissioner, 51 F.3d 618 (6th Cir.

a ai so oa cea pebnbauseatnnentvennscececes

Honneus v. Donovan, 691 F.2d 1 (1st Cir. 1982) ......

Insurance Corp. of Ireland v. Compagnie des

Bauwxites de Guinee, 456 U.S. 694 (1982) ................

(IIT)

IV

Cases—Continued: Page

Jackson v. Irving Trust Co., 311 U.S. 494

CROET) sccccvescieccoascnnvsdsatasenesuvieetsedeennsuertasdsiaisabinvisesnes ll

Jones v. Giles, 741 F.2d 245 (9th Cir. 1984) ............. 7

Lasky v. Commissioner, 352 U.S. 1027 (1957) ......... 7

R. Simpson & Co.-v. Commissioner, 321 U.S. 225

CEDOA) ccccercocctrcssseswnceissucceruveescsssntnanscqpeanabneupectadeenenes 7

United States v. Walker, 109 U.S. 258 (1883) ......... 12

Vallely v. Northern Fire & Marine Ins. Co., 254

U.S. S48 (1GBG) neccdcsciccccencccceccsciissvessssvncesenssinnsssnedcedes 11

Watts v. Pinckney, 752 F.2d 406 (9th Cir. 1985) ..... 11

Statutes and rule:

Internal Revenue Code (26 U.S.C.):

OS IO icc sacosncsoncnneiedncsddcessscntesnenceninmeeessienmnenns 3, 4

OD eviiaicisiicidinptasscereeetinicitierueaienes 3, 4

OI riarniivsccescinasenetedsaceantachanessitiianta tereeeiniions 3

TROD oioivcscnccncnicovactesscnsdvechenchdnbetocesrnsventbamnasens 10

© FEC \cacccncicnssnaciccscecatedccoséssansrsssnstacontineterees 8

DOD icc ukacvertscrenemccineiatntnnt pcsbahc bepawhsehananes 4,7

© FORO mech cccisahaianadescecsatiscsensacvasecosdionsenvciicundes 4

© GO svc cscansncekscacinacsiatcoeednabsbassbavsetimadbectsnataveniian 4,7

Fed. R. Civ. P. GOCE) ..cccccosccccsccsescsoscvcccvesvccictescccens 7

Miscellaneous:

7 James Wm. Moore, Moore’s Federal Practice (2d

Wl, SUID is ashccecunctesscastatantecinadianeneaentessbhsnsaenese 7

11 Charles A. Wright, Arthur R. Miller & Mary K.

Kane, Federal Practice and Procedure (1995) ........ 11

In the Supreme Court of the Gnited States

OCTOBER TERM, 1995

No. 95-1538

Roscoe C. WEBB, JR., PETITIONER

Vv.

_ COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS AND ORDERS BELOW

The opinion of the court of appeals (Pet. App. la-4a)

is unofficially reported at 76 A.F.T.R.2d (RIA) 95-6897

and is noted at 68 F.3d 482 (Table). The opinion of the

Tax Court (Pet. App. 6a-28a) is reported at 68 T.C.M.

(CCH) 1106. :

The prior opinion of the court of appeals (Pet. App.

29a-30a) is unofficially reported at 73 A.F.T.R.2d

(RIA) 94-1209 and is noted at 17 F.3d 398 (Table). The

prior opinion of the Tax Court (Pet. App. 33a-34a) is

unreported.

(1)

JURISDICTION

The judgment of the court of appeals was entered on

October 12, 1995. The petition for rehearing was

denied on January 5, 1996. Pet. App. 10la. The peti-

tion for a writ of certiorari was filed on March 25,

1996. The jurisdiction of this Court is invoked under

28 U.S.C. 1254(1).

STATEMENT

1. On February 1, 1985, the Commissioner of Inter-

nal Revenue disallowed losses exceeding $104,000 that

petitioner had claimed on his 1981 income tax return

as his alleged distributive share of the losses of the

Far West Drilling Associates Partnership. Peti-

tioner sought review of the Commissioner’s deter-

mination by filing a petition in Tax Court on May 6,

1985 (Pet. App. 6a, 9a).

On February 3, 1988, while that case was pending,

an Internal Revenue agent from the Los Angeles

District Office sent a letter to petitioner that in-

formed him that his 1982 tax return was being

examined because of his investment in the Far West

partnership. The letter invited petitioner to settle

the tax issues relating to that investment.’ The offer

stated that petitioner

will be allowed a deduction in the initial year of the

partnership [which, for petitioner, was 1981, the

year already before the Tax Court] in the amount

of 75% of [petitioner’s] total out-of-pocket; [peti-

tioner] will concede all [other] deductions arising

from the partnership for all years. The govern-

1 The Far West partnership was one of six limited partner-

ships that composed what the Commissioner called the “Petro-

Tech National Litigation Project” (Pet. App. 6a, 9a-10a).

3

ment will concede the penalties pursuant to [26

U.S.C.] 6653(a), 6659 and 6661; [petitioner] must

concede the increased interest rate pursuant to

[26 U.S.C.] 6621(c).

The letter also informed petitioner that the IRS “will

furnish [him] with either a Form 870-AD and/or

Closing Agreement” if he decided to accept the offer

(Pet. App. 10a-11a).

On May 26, 1988, petitioner signed a “Closing

Agreement on Final Determination Covering Specific

Matters” (Pet. App. lla). An internal revenue agent

and a section chief in the Los Angeles district office

of the Internal Revenue Service signed the agree-

ment on June 3, 1988 (ibid.). The substantive terms of

the agreement were consistent with the offer

described above (ibid.). There is no indication in the

record that the revenue agent who sent the offer

knew that petitioner’s 1981 tax year was then

involved in a case pending before the Tax Court (id. at

lla n.6). And, the government attorneys handling the

Tax Court litigation “apparently had no knowledge of

the existence of the closing agreement” at that time

(id. at 12a n.9). Indeed, petitioner previously had

declined to accept a settlement offer made by the

attorneys handling the Tax Court case, and petitioner

had been informed that that offer would not be

renewed (id. at 9a-10a).

On June 8, 1988, the Tax Court set August 8, 1988,

as the trial date for petitioner’s case. Prior to trial,

the Commissioner obtained leave to file an amended

answer to assert that penalties should be imposed

against petitioner under 26 U.S.C. 6653(a) and 6659

and additional interest imposed under 26 U.S.C.

6621(c) (Pet. App. 12a).

4

Petitioner has resided in California throughout

this litigation (Pet. 3-4; Pet. App. 42a). He was sub-

poenaed to testify at trial by attorneys from the

Manhattan District Counsel’s Office of the Internal

Revenue Service (the attorneys handling the Tax

Court case) and appeared and testified at the trial

(Pet. App. 12a). Petitioner did not bring the closing

agreement to the attention of the Tax Court or the

government attorneys (ibid.). There is also no evi-

dence that his New York counsel in the Tax Court

case was aware of the closing agreement (Pet. 4-5;

Pet. App. 12a)).?

The Tax Court sustained the Commissioner’s

determination. The court found that the Far West

partnership was “not engaged with an actual and

honest objective of making a profit within the mean-

ing of [26 U.S.C.] section 183” (Pet. App. 86a). The

court further held that petitioner was liable for

penalties under 26 U.S.C. 6653(a) and increased

interest under 26 U.S.C. 6621(c) (Pet. App. 88a, 91a,

99a-100a).

The Tax Court entered its decision on April 10,

1991. No appeal was taken within the 90 days provided

by 26 U.S.C. 7483 (Pet. App. 6a). Pursuant to 26

U.S.C. 7481(a) and 7483, the Tax Court decision

therefore became final on July 9, 1991 (Pet. App. 2a,

22a).

2 Although petitioner asserted that he did not understand

the significance of the closing agreement, the Tax Court

pointed out in ruling on petitioner’s motion to vacate that peti-

tioner “is a highly educated person (a surgeon) with knowledge

of business and financial affairs” (Pet. App. 25a). The court

stated that it “does not accept his explanation that he was

unable to comprehend the meaning and consequences of the

closing agreement at the time he executed it” (ibid.).

2. On December 27, 1991—more than eight months

after entry of the decision—petitioner obtained new

counsel and filed a rmotion for leave to file a motion to

vacate the decision (Pet. App. 12a). In that motion,

petitioner informed the Tax Court for the first time

of the existence of the closing agreement. Peti-

tioner’s new counsel also informed government

counsel of the existence of the agreement on Decem-

ber 2, 1991 (id. at 12a n.9).

In this motion, petitioner asserted that the Tax

Court lacked jurisdiction over the case and could not

“disregard[]” the closing agreement (Pet. App. 12a-

13a). The Commissioner responded that the Tax

Court’s decision was not jurisdictionally infirm and

that, in any event, the closing agreement was invalid

because it was executed by IRS personnel lacking

sufficient authority to bind the IRS (id. at 13a). In

support of the latter contention, the Commissioner

submitted that, under the applicable delegation

orders, the IRS personnel who executed the closing

agreement did not have authority to settle cases that

had been docketed in the Tax Court (ibid.).

3. The Tax Court denied petitioner leave to file his

untimely motion to vacate (Pet. App. 7a, 3la-32a). The

court reasoned that its decision had become final

before the motion was filed and that petitioner had

failed to show any appropriate legal or factual basis

for vacating a final decision (ibid.). On appeal, the

court of appeals held that, because petitioner had

alleged the absence of subject matter jurisdiction, the

Tax Court should have filed the motion to vacate and

considered it on the merits (id. at 29a-30a). The court

of appeals remanded the case for that purpose (ibid.).

4. On remand, the Tax Court filed petitioner’s

motion to vacate and then denied it on the merits.

6

The court determined that the closing agreement was

not binding on the Commissioner—and was therefore

unenforceable—because the individuals who executed

the agreement on the Commissioner’s behalf lacked

authority to execute closing agreements with respect

to cases that were docketed in the Tax Court.’ The

court further held that it could not vacate a final

decision even if the closing agreement were valid

because a closing agreement that is not timely

brought to the court’s attention does not deprive the

court of jurisdiction to enter a decision in a pending

case (Pet. App. 14a-28a).

5. The court of appeals affirmed. The court

assumed, without deciding, that the closing agree-

ment was valid. But the court heid that closing

agreements are not jurisdictional and do not deprive

courts of the power to determine pending tax dis-

putes. The court further held that, even if a closing

agreement imposed a jurisdictional limitation on the

Tax Court, a final judgment is not subject to collat-

eral attack on that basis. The court noted (Pet. App.

4a) that, in Chicot County Drainage Dist. v. Baxter

State Bank, 308 U.S. 371 (1940), this Court concluded

that a challenge to a court’s jurisdiction was barred

when the plaintiff failed to attack jurisdiction on

direct review and instead raised the issue only as a

collateral attack on the judgment after it became

final.

8’ The Tax Court determined that the delegation orders

were “unambiguous” (Pet. App. 17a) and “clear” (id. at 19a) in

denying such authority to the officers who signed the

agreement involved in this case.

7

Ls

ARGUMENT

The decision of the court of appeals is correct and

does not conflict with any decision of this Court or

any other court of appeals. Further review is

therefore not warranted.

1. a. In the absence of an appeal, a Tax Court de-

cision becomes final 90 days after entry of the

decision. 26 U.S.C. 7481, 7483; Harbold v. Commis-

sioner, 51 F.3d 618 (6th Cir. 1995). The Tax Court

entered its decision in this case on April 10, 1991 (Pet.

App. 6a). No appeal was taken within the 90 days

permitted by 26 U.S.C. 7483. The decision thus be-

came final on July 9, 1991 (Pet. App. 6a).

Once a Tax Court decision becomes final, neither

the Tax Court nor any other court has jurisdiction to

reconsider it. Lasky v. Commissioner, 352 U.S. 1027

(1957); R. Simpson & Co. v. Commissioner, 321 U.S.

225 (1944); Harbold v. Commissioner, 51 F.3d at 621-

622. In Billingsley v. Commissioner, 868 F.2d 1081

(9th Cir. 1989), however, the Ninth Circuit concluded

that the Tax Court could entertain a belated motion

to vacate a decision that was entered without

jurisdiction. See also Abeles v. Commissioner, 90

T.C. 103, 105 (1988). But, a challenge to the legal

validity of an otherwise final Tax Court decision on

jurisdictional grounds may be maintained only if the

decision is “void.” Brannon’s of Shawnee, Inc. v.

Commissioner, 69 T.C. 999, 1001 (1978); see

Billingsley, 868 F.2d at 1085; Fed. R. Civ. P. 60(b)(4).

“In the interests of finality, the concept of void judg-

ments is narrowly construed.” Jones v. Giles, 741

F.2d 245, 248 (9th Cir. 1984). See 7 James Wm. Moore,

Moore’s Federal Practice ¥ 60.25[2] (2d ed. 1995).

This principle applies to Tax Court decisions, as it

8

does to other types of judgments, because the

assessment and collection procedure is directly

dependent upon the finality of the decision. See

Denholm & McKay Co. v. Commissioner, 132 F.2d

248, 248 (1st Cir. 1942).

b. The decision entered by the Tax Court in this

ease was not “void” for lack of jurisdiction. There is

no dispute that the Tax Court properly acquired

jurisdiction when petitioner commenced this case by

filing a timely petition for review of the notice of

deficiency issued by the Commissioner. More than

five months after the Tax Court’s decision became

final and non-appealable, however, petitioner filed a

motion to vacate the court’s decision, claiming that

the Tax Court lacked jurisdiction over the case (Pet.

App. 12a-18a).

That motion was correctly denied. Section

7121(b)(2) of the Internal Revenue Code provides that

“in any suit, action or proceeding, such [closing]

agreement * * * shall not be annulled, modified, set

aside, or disregarded.” 26 U.S.C. 7121(b\(2). The

__specific terms chosen by Congress—annul, modify,

set aside, and disregard—do not deprive courts of

jurisdiction; instead, they instruct courts how to

exercise their jurisdiction. When, as in the present

case, a closing agreement is not called to the

attention of a court that properly possessed and

exercised jurisdiction over the case, the court could

not be said to have “annulled, modified, set aside, or

disregarded” the agreement. Cf. Browning v. Com-

missioner, 33 T.C.M. (CCH) 429, 430 (1974) (“an

agreement by the parties on the amount of the

deficiencies does not deprive [the Tax Court] of power

to determine the amount of the deficiencies, if any,

unless and until the settlement agreement is filed

9

the Court and decision is entered in accordance

therewith”).

c. Petitioner errs in asserting (Pet. 9) that a

conflict exists between the decision in this case and

the 1930 decision of the Court of Claims in Bankers’

Reserve Life Co. v. United States, 42 F.2d 313, cert.

denied, 282 U.S. 871 (1930). In Bankers’ Reserve, the

court interpreted the predecessor to Section

7121(b)(2) as a jurisdictional provison when the clos-

ing agreement had been pled as a defense prior to the

disposition of the case. The court stated that a “suit

* * * brought for the express purpose of setting

aside the [closing agreement] * * * is prohibited by

the positive provisions of [the predecessor of Section

7121(b)(2)).” 42 F.2d at 315. The court in Bankers’

Reserve did not address the application of this statute

in the context of the present case, where the taxpayer

properly commenced the case in Tax Court and where

the agreement was not brought to the attention of the

court until after its decision on the merits of the tax

dispute became final. The decision of the court of

appeals on the facts of this case thus does not conflict

with the decision entered upon the different facts that

existed in Bankers’ Reserve.

As petitioner points out (Pet. 10-11), in Aetna Life

Insurance Co. v. Eaton, 43 F.2d 711, cert. denied, 282

U.S. 887 (1930), the Second Circuit disagreed with the

reasoning of Bankers’ Reserve. In Aetna Life, the

court held that the statute is not jurisdictional but

instead affords only an affirmative defense. 43 F.2d at

715. The Aetna Life case, like Bankers’ Reserve (but

unlike the present case), involved a situation where

the closing agreement was brought to the court’s

attention before its decision on the merits became

final. The decisions in Aetna Life and Bankers’

10

Reserve both recognize that an agreement brought to

the court’s attention before its decision becomes final

must be respected. But, neither of those cases

involves application of the statute to the situation

presented in this case, where the decision on the

merits was entered by a court that properly possessed

jurisdiction and that acted without knowledge of the

existence of the closing agreement. The decision in

the present case thus does not conflict with Bankers’

Reserve or with any other appellate decision.’

2. In addition to holding that 26 U.S.C. 7121(b) is

not a jurisdictional provision, the court of appeals

further held that a final decision of the Tax Court is

not subject to collateral attack for jurisdictional

reasons (Pet. App. 3a-4a, citing Chicot County Drain-

age Dist. v. Baxter State Bank, 308 U.S. 371 (1940)).

Petitioner contends that the court of appeals erred in

relying on Chicot County Drainage, asserting that

“Chicot County Drainage cannot stand for the

proposition that jurisdictional challenges are barred,

even if not raised” (Pet. 20).

It is well settled, however, that res judicata “pre-

cludes the parties or their privies from relitigating

issues that were or could have been raised.” Fed-

erated Department Stores, Inc. v. Moitie, 452 U.S.

394, 398 (1981) (emphasis added, citing Commissioner

v. Sunnen, 333 U.S. 591, 597 (1948); Cromwell v.

County of Sac, 94 U.S. 351, 352-353 (1877)). As this

Court observed in Jnsurance Corp. of Ireland v.

Compagnie des Bauxites de Guinee, 456 US. 694,

702 n.9 (1982):

4 Moreover, the paucity of decisions on this issue reflects

that the issue lacks administrative importance.

semen

11

A party that has had an opportunity to litigate

the question of subject-matter jurisdiction may

not, however, reopen that question in a collateral

attack upon an adverse judgment. It has long been

the rule that principles of res judicata apply to

jurisdictional determinations—both subject mat-

ter and personal. See Chicot County Drainage

Dist. v. Baxter State Bank, 308 U.S. 371 (1940);

Stoll v. Gottlieb, 305 U.S. 165 (1938).

See also 11 Charles A. Wright, Arthur R. Miller &

Mary K. Kane, Federal Practice and Procedure,

§ 2862, at 331 (1995) (“[A] court’s determination that it

has jurisdiction of the subject matter is binding on

that issue, if the jurisdictional question actually was

litigated and decided, or if a party had an

opportunity to contest subject matter jurisdiction

and failed to do so.” (emphasis added; footnote

omitted)).

Petitioner further errs in claiming (Pet. 18, 23)

that the decision in this case conflicts with other

decisions in which a final judgment was later held to

be void. That contention ignores the factual distinc-

tions that exist among the various cases. A juris-

dictional attack on a judgment is routinely rejected if

the record is sufficient to show that the court

originally had subject matter jurisdiction over the

case. Jackson v. Irving Trust Co., 311 U.S. 494 (1941);

Honneus v. Donovan, 691 F.2d 1 (1st Cir. 1982). A

judgment is void only when the record affirmatively

establishes that the court did not acquire

jurisdiction. See, e.g., Vallely v. Northern Fire &

Marine Ins. Co., 254 U.S. 348 (1920); Watts v.

Pinckney, 752 F.2d 406 (9th Cir. 1985). In the present

case, the record demonstrates that the Commissioner

12

issued a timely notice of deficiency to petitioner and

that petitioner filed a timely Tax Court petition (Pet.

App. 9a, 23a-24a). The record thus affirmatively

establishes that the Tax Court properly acquired

jurisdiction in this case. The decision of the court of

appeals properly applies well-established principles

and does not conflict with any other appellate de-

cision.

8. Petitioner expresses the concern that upholding

the decision in this case would encourage parties “to

litigate settled matters in the hope that a better

result would be obtained and that the other party

would fail to timely assert his/her rights under the

closing agreement” (Pet. 25). That contention is

facially implausible. It is petitioner who knowingly

proceeded to litigate his claim after reaching a

pertinent closing agreement (that emanated from an

audit for a different tax year) and who failed to bring

that agreement to the attention of counsel or the

court. While there is no indication that petitioner’s

counsel in the Tax Court was aware of the closing

agreement, petitioner (who signed the agreement)

was unquestionably aware both of the closing

agreement and of the fact that he had not disclosed

that agreement in the course of the pending Tax

Court case. As the-courts below concluded, this case

involves a litigant who “who had a duty to the Court

5 Petitioner’s reliance (Pet. 20) on United States v.

Walker, 109 U.S. 258 (1883), is misplaced. The record in that

case affirmatively established that the court lacked subject

matter jurisdiction to provide the relief that was granted. See

id. at 266 (noting that lack of jurisdiction was “app[arent] from

the pleadings”). Petitioner, by contrast, seeks to inject new

facts into the record after the decision against him became

final. That effort was properly rejected.

13

* * * to disclose the existence of the closing agree-

ment” (Pet. App. 25a) (footnote omitted)) and who

failed to carry out that duty.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

Drew S. Days, III

Solicitor General

LORETTA C,. ARGRETT

Assistant Attorney General

DAVID I. PINCUS

DAVID A. SHUSTER

Attorneys

MAY 1996