Medical & Business Facilities Ltd. v. C.I.R. ( 1995 )


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  •               IN THE UNITED STATES COURT OF APPEALS
    FOR THE FIFTH CIRCUIT
    No. 94-40453
    MEDICAL & BUSINESS FACILITIES,
    LTD., GERALD STEVENS, TAX MATTERS
    PARTNER,
    Petitioner-Appellant,
    versus
    COMMISSIONER OF INTERNAL REVENUE,
    Respondent-Appellee.
    No. 94-40527
    MEDICAL & BUSINESS FACILITIES,
    LTD., PHILLIP S. BROOKS,
    TAX MATTER PARTNER,
    Petitioner-Appellee,
    versus
    COMMISSIONER OF INTERNAL REVENUE,
    Respondent-Appellant.
    ________________________________________________________________
    Appeals from the United States Tax Court
    ________________________________________________________________
    (July 25, 1995)
    Before REYNALDO G. GARZA, HIGGINBOTHAM, and PARKER, Circuit Judges.
    PATRICK E. HIGGINBOTHAM, Circuit Judge:
    A general partner of Medical & Business Facilities, Ltd.
    signed consent forms for tax years 1983 through 1986, agreeing to
    extend the period of limitations during which the Internal Revenue
    Service could assess a deficiency.            MBFL is now arguing that the
    general partner was not authorized to execute the consents and the
    IRS's assessment is time barred.              We agree and reverse the Tax
    Court's finding in favor of the Commissioner.
    I.
    Medical & Business Facilities, Ltd. was a partnership engaged
    in the business of buying medical assets and leasing those assets
    to medical enterprises.          The partnership was initially formed by
    Gerald Stevens and James Wyllie in 1980 as a general partnership.
    In 1981, additional partners were admitted and an amendment to the
    partnership agreement was filed with the State of Louisiana,
    registering the partnership as a partnership in commendam.                         A
    partnership    in    commendam    is   similar    to    a   common      law   limited
    partnership.    See La. Civ. Code Ann. art. 2837 (West 1994).
    The    amended    partnership       agreement     vested     management     and
    control of the business in a managing general partner and a
    management    committee    that    was    made   up    of   the   firm's      general
    partners.      The    managing     general    partner       and   the    management
    committee were to act collectively on all decisions with respect to
    the management and control of the business, and their actions were
    binding on the partnership and all of the partners. Gerald Stevens
    was the managing general partner and owned the largest single
    profit interest in MBFL.
    In September 1982, Stevens moved to California.                          Phillip
    Brooks, a general partner, was appointed the assistant managing
    2
    general    partner.      His   responsibility          was   to   carry    on   the
    partnership's business activities in Stevens' absence.                     Brooks
    resigned from this position on June 25, 1983, although he remained
    a member of the management committee.                  In June 1983, Stevens
    resigned as managing general partner.
    In 1983, Brooks prepared a second amendment to the partnership
    agreement. This amendment purported to vest management and control
    of the business in a management committee consisting of five
    general partners.     Although the amendment lacked the signatures of
    some of the general and limited partners, it was filed with the
    State of Louisiana on January 28, 1986 and MBFL operated under the
    new management structure.        Brooks was one of the five members of
    the firm's new management committee. The committee hired Albert J.
    Derbes, III, a tax lawyer and certified public accountant, to act
    as manager of the partnership.
    Stevens executed the partnership's tax information return for
    1983, and Brooks executed the 1984, 1985, and 1986 returns.                       In
    1985,   the   IRS   discovered   that       MBFL   had   claimed     too   high    a
    depreciation deduction for tax years 1983, 1984, and 1985.                  On May
    6, 1985, IRS agent Joette Pfeiffer contacted the accountant who
    prepared MBFL's 1983 tax return to find out who was MBFL's tax
    matters partner for 1983.        The accountant contacted Derbes, who
    informed Pfeiffer that Brooks was the TMP.
    On April 8, 1986, Pfeiffer met with Derbes and Brooks. During
    that    meeting,    Brooks   executed       a   form   authorizing    Derbes      to
    represent MBFL before the IRS.      Pfeiffer also asked Derbes to have
    3
    the partnership's TMP execute a form consenting to the extension of
    time to assess tax.        Brooks indicated that he was not certain
    whether he could execute the form because he did not know which
    partner was going to act as MBFL's TMP.            Pfeiffer then informed
    Derbes and Brooks that if the partnership failed to designate a
    TMP, the IRS would designate one for it.           Derbes and Brooks left
    the   room,   and    Pfeiffer   inspected    MBFL's   books    and    records,
    including the original and amended partnership agreements.              Before
    Pfeiffer left that day, Derbes produced a consent signed by Brooks
    extending the limitations period for the 1983 tax year to December
    31, 1987.     Both Derbes and Brooks believed that Brooks had the
    authority to sign the consent.
    Over the next few years, Brooks executed consents further
    extending the limitations period for tax years 1983 through 1986.
    On each form, Brooks signed on the line designated for the TMP.1
    Brooks    executed   the   consents   in    an   effort   to   gain   time   to
    substantiate the deductions and avoid involvement in a complicated
    tax dispute at a time of severe financial difficulty for the
    partnership.
    On June 28, 1991, Derbes filed a Freedom of Information Act
    request with the IRS, seeking documents pertaining to MBFL's tax
    years 1983 through 1986.          One of the documents that the IRS
    produced was a memorandum prepared in July 1989 by an attorney at
    1
    On a few of the forms, Brooks signed his name in the
    space labelled "Authorized Representative." In those instances,
    however, Brooks' name was typed directly above his signature in the
    space labelled "Tax Matters Partner."
    4
    the IRS.     The memorandum questioned the validity of the consents
    executed by Brooks for tax years 1983, 1984, and 1985, concluding
    that Brooks had not been properly designated as the TMP and,
    accordingly, lacked the authority to execute the consents.
    On August 15, 1991, MBFL filed a protest with the IRS,
    claiming that the period of limitations for assessment had expired
    for tax years 1983, 1984, and 1985 because Brooks lacked the
    authority to execute the consent forms extending the period of
    limitations. On December 26, 1991, the Commissioner mailed notices
    of final partnership administrative adjustment for years 1983
    through 1986.    MBFL filed a petition in the Tax Court contesting
    the adjustments on their merits and on the basis that the period of
    limitations    had   expired   for   years   1983   through   1985.   MBFL
    subsequently conceded the merits of the adjustments, leaving only
    the issue of whether the adjustments were barred by limitations.
    On May 17, 1993, the Tax Court held a trial.         On January 31, 1994,
    the Tax Court ruled that the consents executed by Brooks were
    effective and, therefore, the period of limitations for tax years
    1983, 1984, and 1985 had not expired.         MBFL filed a timely notice
    of appeal.
    II.
    The statutory period for assessing any income tax attributable
    to partnership items for a partnership's tax year expires three
    years after the partnership files its partnership information
    return or three years after the last day for filing such return,
    5
    whichever is later.      I.R.C. § 6229(a).     Section 6229(b)(1)(B),
    however, permits extension of that time "with respect to all
    partners, by an agreement entered into by the Secretary and the tax
    matters partner (or any other person authorized by the partnership
    in writing to enter into such an agreement)."         The parties both
    agree that for the periods relevant to this appeal, Brooks was not
    the TMP.    See id. § 6231(a)(7) (defining TMP).     Thus, the issue is
    whether the partnership authorized Brooks in writing to execute the
    consents. While there was no specific agreement authorizing Brooks
    to execute the consents, the Tax Court concluded that MBFL's
    partnership agreement provided the requisite writing and that
    Brooks' authority under that agreement encompassed execution of the
    consents.    We disagree.
    We first consider whether Brooks' status as a general partner
    in MBFL vested him with either actual or apparent authority to
    execute the consents extending the limitations period.        Second, we
    address the Commissioner's argument that MBFL should be estopped
    from disclaiming Brooks' authority as the TMP.
    A.
    In order to vest Brooks with actual authority to sign the
    consents, the partnership had to have executed a document providing
    Brooks with that authority.     I.R.C. § 6229(b)(1)(B).      A number of
    Tax Court cases have held that a partnership agreement is a
    sufficient    writing   under   §   6229(b)(1)(B).     See    Georgetown
    Petroleum-Edith Forrest v. Commissioner, 
    67 T.C.M. (CCH) 1952
    (1994); Iowa Investors Baker v. Commissioner, 
    64 T.C.M. (CCH) 611
    6
    (1992); Cambridge Research & Dev. Group v. Commissioner, 
    97 T.C. 287
       (1991).         In   the     above    cases,      however,   the     partnership
    agreements expressly granted the general partners broad authority
    to act for the partnership. In Iowa Investors, for example, the
    partner that signed the consents had the authority to "'manage all
    partnership affairs, including . . . tax services . . . on behalf
    of the partnership to individual partners.'"                         
    64 T.C.M. 611
    .
    Similarly, in Cambridge Research, the general partners, one of whom
    signed the contested consent, were authorized to "'manage and
    conduct the Partnership business. They may, for the furtherance of
    the business of the Partnership, borrow or lend money and pledge,
    mortgage, sell, assign, license or otherwise dispose of any or all
    of the Partnership property and in general take any action or do
    anything in furtherance of the partnership business.'"                      
    97 T.C. at 289
       (emphasis       added   by    Tax    Court).        Finally,    in    Georgetown
    Petroleum,      the    partnership         agreement     authorized      the    general
    partner, who executed the consent form, "to make such tax elections
    and determinations as appear to be appropriate, and grant[ed] the
    general partner exclusive management and control of the business of
    the Partnership."          
    67 T.C.M. 1952
    .
    MBFL's partnership agreement, by contrast, does not contain a
    broad   grant    of    authority      to    any    individual      general     partner.
    Indeed, there was significant trial testimony that general partners
    were not permitted individually to make decisions binding on the
    partnership.          Section      2.01    of     the   first   amendment       to   the
    partnership agreement states:
    7
    The overall management and control of the business and
    affairs of the Partnership shall be vested in the Managing
    General Partner and the Management Committee consisting of the
    Managing General Partner and the General Partners, all of whom
    will be collectively referred to as "The Management". The
    Management will act collectively on all decisions with respect
    to the management and control of the Partnership and their
    actions shall be binding on the Partnership and all Partners
    provided that they act within the scope of their authority as
    granted by these partnership articles.
    Below, MBFL argued that because the only way in which the
    general partners were authorized to act was collectively and
    because    Brooks'   signing   of    the   consents   did   not    meet       this
    requirement, the consents were invalid.          The Tax Court disagreed.
    It read section 2.01 in conjunction with Article VII of the
    partnership agreement and with Louisiana law. Under Louisiana law,
    a general partner is a mandatary and may bind the partnership for
    actions taken within the ordinary course of business.                   La. Civ.
    Code Ann. art. 2814 (West 1994).           Article VII of the partnership
    agreement restricts the authority of MBFL's general partners.
    Under that article, a general partner may not, without the approval
    of the management:
    (a) Assign, transfer, pledge, compromise, or release any
    of its claims or debts, except upon payment in full, or
    arbitrate or consent to arbitration of any of its disputes or
    controversy;
    (b) Borrow money in the Partnership name or use
    collateral owned by the Partnership as security for loans
    except as provided in Article II Section 2.01 hereof;
    (c) Lease or mortgage any Partnership real estate or
    interest therein or enter into any contract for such purposes.
    The   Tax   Court   concluded    that    since   Article     VII    of    the
    partnership agreement restricted a general partner's mandatary
    authority under only three circumstances, section 2.01's collective
    8
    decision making mandate applied only to those three circumstances.
    If this is true, then section 2.01 cannot be the source in the
    partnership   agreement   of   a   grant   of    general   authority   to   an
    individual general partner for matters outside the scope of Article
    VII.
    Even if we were to disagree with the Tax Court and adopt the
    view that section 2.01 applied to decisions beyond the scope of
    Article VII, the partnership agreement still could not be read as
    granting broad authority to any single general partner. Under this
    view, section 2.01 would instead require collective decision making
    for all decisions concerning the "management and control of the
    business and affairs of the Partnership."2
    The only remaining source of actual authority that would
    permit Brooks, as a general partner, to bind the partnership is
    found in article 2814 of the Louisiana Civil Code.           This provision
    grants agency authority to general partners acting in the ordinary
    course of the partnership's business.           A statute, however, is not
    a sufficient written authorization.         See I.R.C. § 6229(b)(1)(B)
    2
    The foregoing analysis would not change if the second
    amendment to the partnership agreement were found to be valid. The
    second amendment does not purport to amend Article VII; nor does it
    broadly grant authority to any single general partner:
    The overall management and control of the business and
    affairs of the Partnership shall be vested in the Management
    Committee comprised of five (5) General Partners serving one
    (1) year terms.        The Management Committee will act
    collectively on all decisions with respect to the management
    and control of the Partnership and its actions shall be
    binding on the Partnership and all Partners provided that they
    act within the scope of their authority as granted by these
    partnership articles.
    9
    (consent may be executed by "any other person authorized by the
    partnership in writing to enter into such an agreement") (emphasis
    added).
    B.
    The Tax Court held that Louisiana law "empower[s] every
    general partner of a Louisiana partnership with the authority to
    bind the partnership when dealing with a third party in all
    transactions     (other     than     those     transactions    involving     the
    alienation, lease, or encumbrance of the partnership immovables),
    where a partner makes a manifestation of his authority to bind the
    partnership and the third party relies, in good faith, on the
    partner's purported authority."             We find this reliance on Brooks'
    apparent authority to be unavailing.
    When a person other than the partnership's TMP is executing a
    consent to extend the limitations period, § 6229(b)(1)(B) requires
    that person to be authorized in writing by the partnership to
    execute the consent. As discussed above, the partnership agreement
    does not vest Brooks with actual authority to sign the consents.
    Nor   do   we   find   in   the    record    any   written   document   by   the
    partnership that would vest Brooks with the apparent authority to
    execute the consents.       See Restatement (Second) of Agency § 8 cmt.
    a (1958) ("Apparent authority results from a manifestation by a
    person that another is his agent, the manifestation being made to
    a third person and not, as when [actual] authority is created, to
    the agent."); see also Independent Fire Ins.            Co. v. Able Moving &
    10
    Storage Co., 
    650 So. 2d 750
    , 752 (La. 1995) (applying Restatement
    (Second) of Agency § 8).
    C.
    For the first time on appeal, the Commissioner contends that
    MBFL is estopped from arguing that Brooks was not its TMP.            In
    order for equitable estoppel to apply, the government must show
    that MBFL was aware of the facts, that MBFL intended the IRS to act
    on its representation that Brooks was the TMP, that the government
    did not know of the facts, and that the government reasonably
    relied on MBFL's representations to its substantial detriment. See
    Keado v. United States, 
    853 F.2d 1209
    , 1217-18 (5th Cir. 1988)
    (quoting Moody v. United States, 
    783 F.2d 1244
    , 1246 (5th Cir.
    1986)).
    Section 6231(a)(7), in relevant part, provides that "[t]he
    [TMP] of any partnership is . . . the general partner designated as
    the   tax   matters   partner   as   provided   in   regulations."3   The
    regulations, promulgated March 5, 1987, provide that the TMP is
    designated when, among other things, a designation is filed with
    the IRS.    See 
    Treas. Reg. § 301.6231
    (a)(7)-1T (if designation is
    made at the time return is filed, designation is on or attached to
    the partnership return; otherwise, statement designating TMP is
    filed at the service center in which the partnership return was
    filed).
    3
    The parties stipulated that Gerald Stevens was the
    largest shareholder. Thus, the IRS could not have been relying on
    the statutory provision that states that in the absence of a
    designation, the partner with the largest profits interest is the
    TMP. See I.R.C. § 6231(a)(7)(B).
    11
    Because any designation of a TMP would be filed with the IRS
    itself, the IRS cannot reasonably rely on the representations of a
    third party as to the identity of a TMP.                 Cf. Herrington v.
    Commissioner, 
    854 F.2d 755
    , 758 (5th Cir. 1988) (duty of taxpayer
    to report consistently "does not apply when the inconsistency
    concerns a pure question of law and both the taxpayer and the
    Commissioner had equal access to the facts"), cert. denied, 
    490 U.S. 1065
     (1989); see also Lewis v. Commissioner, 
    18 F.3d 20
    , 26
    (1st Cir. 1994) ("[T]he misstatement must be one on which the
    government    reasonably   relied.")    (emphasis    added).      Thus,    the
    Commissioner's    estoppel   argument    applies    to   only   one   of   the
    consents executed by Brooks.     On April 8, 1986, Brooks executed a
    consent for the tax year 1983.           At that time, there was no
    regulation dictating the way in which a partnership designated its
    TMP. The fact that estoppel applies to that consent, however, does
    not change the result in this case.           The 1986 consent merely
    extended the limitations period to December 31, 1987 for tax year
    1983.   Subsequent consents extended that period to December 31,
    1991.   The final partnership administrative adjustment was issued
    on December 26, 1991, far beyond the valid consent's extension
    date.
    III.
    The final issue in this appeal was raised by the Commissioner
    and is not contested by the parties.         The assessments for 1983,
    1984,   and   1985   involve   reduction     of     claimed     depreciation
    12
    deductions.   In 1986, MBFL sold its assets and based its report of
    long-term capital gains on the pre-assessment bases of the assets.
    When the Tax Court found that the statute of limitations had not
    run and that the assessments were permitted, it also found that
    MBFL had concomitantly lower long-term capital gains and was
    entitled to a reduction in its 1986 tax liability.          Because we
    conclude   that   the   assessments    are   barred,   MBFL's   claimed
    depreciation deductions do not change, the bases of MBFL's assets
    do not change, and any long-term capital gain treatment resulting
    from the sale of those assets does not change.
    IV.
    For the foregoing reasons, we REVERSE the judgment of the Tax
    Court and RENDER judgment for MBFL.
    13