Seven W. Enterprises, Inc. & Subsidiaries v. Commissioner , 723 F.3d 857 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 12-2099 & 12-2100
S EVEN W. E NTERPRISES, INC. AND
S UBSIDIARIES and H IGHLAND SUPPLY
C ORPORATION AND SUBSIDIARIES,
Petitioners-Appellants,
v.
C OMMISSIONER OF INTERNAL R EVENUE,
Respondent-Appellee.
Appeals from the United States Tax Court.
Nos. 13594-08, 13595-08
A RGUED F EBRUARY 12, 2013—D ECIDED JULY 24, 2013
Before R IPPLE and T INDER, Circuit Judges, and Z AGEL,
District Judge.Œ
R IPPLE, Circuit Judge. Seven W. Enterprises, Inc. and
Subsidiaries (“Seven W”) and Highland Supply Corpora-
Œ
The Honorable James B. Zagel, of the United States
District Court for the Northern District of Illinois, sitting
by designation.
2 Nos. 12-2099 & 12-2100
tion and Subsidiaries (“Highland”) (collectively “the
Taxpayers”) filed petitions for redetermination with
the United States Tax Court. The petitions were consoli-
dated for trial, and the Tax Court issued a decision with
respect to each petition. Those decisions, however, inad-
vertently attributed Seven W’s tax liability to Highland,
and Highland’s tax liability to Seven W. The Commissioner
of the Internal Revenue Service (“Commissioner”) later
discovered the errors and filed motions to vacate the
prior decisions. The Tax Court granted the motion,
vacated its initial decisions and issued new, corrected
decisions. The Taxpayers moved for reconsideration. Their
motion was denied, and they timely appealed. For the
reasons set forth in the following opinion, we vacate
the new decisions of the Tax Court and remand with
instructions to reinstate and correct its original decisions.
I
BACKGROUND
On June 4, 2008, Seven W and Highland filed petitions
for redetermination with the Tax Court based on notices
of deficiency that had been issued on March 7, 2008.1 The
cases were consolidated for trial, and a trial was
conducted on April 28, 2009. The Tax Court issued opin-
ions on June 7, 2011. With respect to Seven W, a calen-
dar-year taxpayer, the Tax Court rejected the deficiency
1
The Tax Court had jurisdiction of the redetermination
petitions pursuant to 26 U.S.C. § 6213(a).
Nos. 12-2099 & 12-2100 3
for calendar year 2000, but affirmed the deficiencies for
the years 2001 through 2003. With respect to Highland, a
fiscal-year taxpayer, the Tax Court affirmed deficiencies
for the fiscal years ending on April 30, 2003, and April 30,
2004. Although the Tax Court’s opinions correctly identified
the taxpayer with its respective tax liability, the Tax
Court’s decisions, entered on June 8, 2011, incorrectly
stated that Seven W was responsible for deficiencies in
fiscal years ending on April 30, 2003, and April 30, 2004,
and that Highland was responsible for deficiencies for
calendar years 2001 through 2003.
The Commissioner subsequently discovered the
clerical error and, on December 8, 2011, sought leave
from the Tax Court to file a motion to vacate the Tax
Court’s June 8, 2011 decisions.2 According to the Com-
missioner, the Tax Court “ha[d] no jurisdiction” over
the years purportedly covered by the decisions.3 The
Commissioner argued that our decision in Michaels v.
Commissioner, 144 F.3d 495, 496-97 (7th Cir. 1998), autho-
rized the Tax Court to “vacate or correct the Decision,
notwithstanding that more than 90 days ha[d] passed
2
The rules of the Tax Court require the Commissioner to seek
leave of court to file a motion to vacate a decision that was
entered more than thirty days prior to the motion. See Tax
Court Rule 162 (“Any motion to vacate or revise a decision,
with or without a new or further trial, shall be filed within
30 days after the decision has been entered, unless the Court
shall otherwise permit.”).
3
Sep. App’x 83-84.
4 Nos. 12-2099 & 12-2100
since the Decision was entered, and that the Decision . . .
otherwise ha[d] become final under section 7481.” 4
The Taxpayers did not object to the Tax Court cor-
recting the errors; they did object, however, to the
vacatur of the original decisions. The Taxpayers observed
that, in Michaels, a case that also involved a clerical error
in the decision, the Tax Court had not vacated the
earlier decision, but simply had issued an order cor-
recting the prior decision. “The error in the present case,”
the Taxpayers urged, “is identical to the error in Michaels.
Therefore, the most appropriate remedy in this case is
to deny the motion to vacate but enter an order correcting
the decision . . . .”5
On February 3, 2012, the Tax Court, “for the reasons
set forth in [the Commissioner’s] motion for leave,”
vacated its June 8 decisions and entered new decisions
correctly setting forth the respective deficiencies of
Seven W and Highland.6 The Taxpayers moved for the
Tax Court to reconsider and to vacate this new decision.
According to the Taxpayers, the Tax Court’s original
decisions, issued on June 8, 2011, had become final on
September 6, 2011. Absent fraud on the court, they main-
tained, the Tax Court lacked the authority to vacate a
4
Id. at 84.
5
Id. at 110-11.
6
App’x 1, 2.
Nos. 12-2099 & 12-2100 5
decision that had become final.7 The Tax Court denied
the Taxpayers’ motion without opinion on March 16, 2012,
and the Taxpayers timely appealed.
II
ANALYSIS
In the present appeal, we are called upon to determine
whether the Tax Court had the authority to grant the
Commissioner’s motion to vacate, which is a question of
law that we review de novo. See Abatti v. Comm’r, 859
F.2d 115, 117 (9th Cir. 1988).8
Before us, the parties renew the arguments made to
the Tax Court. Namely, the Taxpayers maintain that,
absent fraud on the court, which is not alleged here, the
Tax Court does not have the authority to vacate a
decision that has become final. The Commissioner main-
tains in response that the June 8 decisions of the Tax
Court were not final because they “did not dispose of all
of the claims of all the parties.” 9 Specifically, the Com-
missioner notes that “the finality principle that governs
the jurisdiction to review decisions by district courts
7
See Sep. App’x 121-22 (citing Drobny v. Comm’r, 113 F.3d 670,
677 (7th Cir. 1997), and Kenner v. Comm’r, 387 F.2d 689, 690-
91 (7th Cir. 1968)).
8
We have jurisdiction over the decisions of the Tax Court
pursuant to 26 U.S.C. § 7482(a)(1).
9
Resp’t’s Br. 19.
6 Nos. 12-2099 & 12-2100
also applies to decisions of the Tax Court.” 1 0 In the Tax
Court, as in the district courts, a judgment that disposes
of fewer than all of the claims is nonfinal and, absent
an express determination pursuant to Federal Rule of
Civil Procedure 54(b),1 1 is not immediately appealable.
See Shepherd v. Comm’r, 147 F.3d 633, 635 (7th Cir. 1998).
Here, the Commissioner continues, the June 8 decisions
did not dispose of any of the claims raised by the Taxpay-
ers in their petitions. Consequently, because they did
not dispose of the Taxpayers’ claims, the June 8 deci-
sions were nonfinal.
We do not believe, however, that the present case is
governed by our decision in Shepherd. In Shepherd, the
issue before the court was “whether an order of the
Tax Court finally resolving the disputes between the
10
Id. at 18.
11
Federal Rule of Civil Procedure 54(b) provides:
When an action presents more than one claim for re-
lief--whether as a claim, counterclaim, crossclaim, or
third-party claim--or when multiple parties are in-
volved, the court may direct entry of a final judgment as
to one or more, but fewer than all, claims or parties only
if the court expressly determines that there is no just
reason for delay. Otherwise, any order or other decision,
however designated, that adjudicates fewer than all the
claims or the rights and liabilities of fewer than all
the parties does not end the action as to any of the claims
or parties and may be revised at any time before the
entry of a judgment adjudicating all the claims and all the
parties’ rights and liabilities.
Nos. 12-2099 & 12-2100 7
taxpayer and the IRS relating to some but not all of the tax
years involved in the case before the court is appealable.”
Id. at 634 (emphasis added). Here, however, the Tax
Court’s decisions are not partial decisions; they purport
to address all of the claims, but due to a clerical error,
address all of the claims related to a different taxpayer.
We addressed a similar clerical error in Michaels.
In Michaels, the Tax Court entered a decision stating
that the taxpayers were due an overpayment for tax
years 1979 and 1980, but incorrectly stated that there
was a tax deficiency for tax year 1982, while the
deficiency actually was for tax year 1976. The Commis-
sioner later assessed a tax deficiency for tax year
1976, which was consistent with the Tax Court’s
opinion, but not its decision. Following the assessment,
the taxpayers informed the Commissioner “of their view
that no assessment could properly be made against them
for the 1976 tax year.” Michaels, 144 F.3d at 496. The
Commissioner became aware of the error and, just as in
the present case, “filed a document with the court styled
a ‘motion for leave to file a motion to vacate and
correct decision.’ ” Id. The Tax Court subsequently
entered an order denying the motion, but correcting the
decision so that it referenced the correct tax year for
the deficiency. The Michaelses then appealed “arguing
that the Tax Court lacked the power to correct the error
in its original decision and therefore that the Commis-
sioner’s assessment for the 1976 tax year [wa]s not
based upon any valid decision of the Tax Court.” Id. We
affirmed. Noting that there was no Tax Court rule dealing
8 Nos. 12-2099 & 12-2100
with clerical errors,1 2 we nevertheless observed that Tax
Court Rule 1(a) allowed the Tax Court to draw upon
the Federal Rules of Civil Procedure as a “source of
persuasive authority . . . in filling any gaps in its own
rules of procedure” and that Rule 60(a) allowed a court
to correct clerical errors at any time. Id. at 497. We
noted that
[t]he Michaelses point out that the substance of a
decision becomes final and unappealable once
the statutory period for filing an appeal has ex-
pired. But the same is largely true of district
court decisions, subject to such extraordinary
remedies as those contained in Rule 60(b), and yet
the expiration of the time for filing a notice of
appeal does not prevent a district court from
acting under Rule 60(a) to correct a clerical error
in its judgment. The Michaelses’ arguments that
the Tax Court should be prevented from taking
the same action because it is a creation of Article I
rather than Article III of the Constitution, or be-
cause it is a court of limited jurisdiction, are not
persuasive.
Id. (footnote omitted) (citation omitted). We concluded,
therefore, that
there is no obstacle to the course the Tax Court took
in this case. It was within the court’s power to
12
See Michaels v. Comm’r, 144 F.3d 495, 497 (7th Cir. 1998)
(“None of the rules the [tax] court has promulgated under that
authority explicitly allows for the correction of clerical or
typographical errors in decision documents.”).
Nos. 12-2099 & 12-2100 9
correct its own clerical error, at least in this case
where nobody can plausibly claim to have been
misled or to have detrimentally relied on the inaccu-
rate decision document.
Id. at 498.
Michaels, we believe, governs the situation before us.
As in the present case, the Tax Court decision in Michaels
contained a clerical error. To remedy that situation, the
Tax Court entered an order correcting the error. Nothing
in Michaels suggests that there was an alternative to
the Tax Court’s approach, such as vacating its prior,
incorrect decision. Indeed, in Michaels the Tax Court had
denied the Commissioner’s motion to vacate. See id. at
496; see also Carroll v. United States, 339 F.3d 61, 71, 65
(2d Cir. 2003) (holding that, once the decision became
final, “the Tax Court had no jurisdiction to vacate” it on the
basis of a “clerical error,” namely that the signature page
of the initial decision lacked “the requisite ‘Entered’ date”).
The Commissioner argues, nonetheless, that, in
Michaels, we left open the possibility that the Tax Court
may vacate an incorrect decision: “The Tax Court in
Michaels, however, did not hold that an order is the
only method for correcting an erroneous decision.” 1 3
Although Michaels may not foreclose that possibility,
other cases from this circuit do. In Drobny v. Commissioner,
113 F.3d 670 (7th Cir. 1997), we noted our precedent that
“the Tax Court could set aside an otherwise final decision
13
Resp’t’s Br. 25-26.
10 Nos. 12-2099 & 12-2100
only if the party seeking to vacate the decision could
convincingly establish that the decision resulted from
a ‘fraud upon the court.’ ” Id. at 677 (quoting Kenner v.
Comm’r, 387 F.2d 689, 689 (7th Cir. 1968)). Moreover, the
fraud must have “induced, caused, or had a material
effect upon the decision,” in order for the Tax Court to
vacate the decision on that basis. Id. at 678. Here, there
simply is no evidence, indeed no allegation, that the
Tax Court’s June 8 decisions were the result of fraud on
the court.
Despite our holding in Drobny, the Commissioner
nonetheless maintains that the Tax Court was without
jurisdiction to render the June 8 decisions, and, therefore,
those decisions are “legal nullit[ies].” 1 4 The cases cited
by the Commissioner in support of this proposition,
however, concern situations in which the Tax Court
never acquired jurisdiction over the taxpayers’ claims;1 5
14
Id. at 27 (quotation marks omitted).
15
See, e.g., Billingsley v. Comm’r, 868 F.2d 1081, 1084-85 (9th Cir.
1989) (holding that Tax Court had the authority to reopen a
decision once it becomes final if it lacked jurisdiction to issue the
initial decision); Shutts v. Comm’r, 100 T.C.M. (CCH) 57 (2010),
2010 WL 2901706, at *2-3 (holding that Tax Court had the
authority to vacate a decision entered in violation of an auto-
matic stay because “actions in violation of the automatic stay
are void”); Levitt v. Comm’r, 66 T.C.M. (CCH) 40 (1993), 1993
WL 246240, at *7 (holding that Tax Court had the authority to
vacate a decision when it was discovered that the taxpayer
(continued...)
Nos. 12-2099 & 12-2100 11
they do not concern situations, such as we have here,
where the Tax Court clearly had jurisdiction over the
redetermination petitions of the Taxpayers, but simply
misstated its rulings on those petitions in its written
decisions. Indeed, one of the cases relied upon by the
Commissioner, Billingsley v. Commissioner, 868 F.2d 1081,
1084 (9th Cir. 1989), distinguishes between “a decision
which never becomes final, as opposed to a decision
which is final but was entered erroneously”; only the
first type of decision “can be the subject of a motion to
vacate even after the expiration of the time for appeal.”
Our case law makes it clear that, absent a fraud that
infected the Tax Court’s decision, the Tax Court cannot
vacate a decision that has become final. Here, the
Tax Court issued its decisions on June 8, and those de-
cisions became final on September 6, 2011. The Com-
missioner does not contend that the June 8 decisions
were the result of fraud. Consequently, the Tax Court
did not have the authority to vacate those decisions.
Instead, as was done in Michaels, the Tax Court
should have corrected the initial decisions without va-
cating them.
Conclusion
The decisions of the Tax Court entered on February 3,
2012, are reversed, and the case is remanded to the Tax
15
(...continued)
never signed or ratified a petition, which was necessary to
invoke the Tax Court’s jurisdiction).
12 Nos. 12-2099 & 12-2100
Court with instructions to reinstate its earlier decisions
dated June 8, 2011. The Tax Court then must amend the
decisions of June 8, 2011, to reflect the correct liability
of each taxpayer. No other issue is presented properly
in this appeal.16 The taxpayers shall recover their costs in
this court.
V ACATED and R EMANDED
WITH INSTRUCTIONS
16
In addition to seeking vacatur of the Tax Court’s February 3,
2012 decisions, the Taxpayers “[a]lternatively” request that
we determine that those decisions “did not alter or extend the
statute of limitations for assessment and that the statute
of limitations for assessment expired on November 7, 2011.”
Pet’rs’ Br. 24. The Taxpayers never raised the issue of the
statute of limitations before the Tax Court, and the Tax Court
did not rule on the issue. “As a general rule, a taxpayer may
not address an issue on appeal which it has not first pre-
sented to the Tax Court.” Grant v. Comm’r, 103 F.3d 948, 952
(11th Cir. 1996). Indeed, at oral argument, counsel for the
Taxpayers was at a loss to provide us with a basis for our
authority to decide this issue in the first instance. We there-
fore decline to do so.
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