Opinion
10273-15
01-21-2022
HAMDI RIFAI & NANCY RIFAI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph H. Gale, Judge
This case was assigned to the undersigned for disposition of petitioners' Motion to Vacate, pursuant to Rule 162, the Stipulated Decision entered by the Court on May 18, 2016. The Motion to Vacate was filed on October 17, 2018, in accordance with the Court's Order served on that date granting petitioners' Motion for Leave to File Motion to Vacate filed August 13, 2018. The Motion to Vacate is supported by an Affidavit of petitioners Hamdi Rifai and Nancy Rifai. On November 6, 2018, petitioners filed a First Supplement to their Motion to Vacate, together with a Supplemental Affidavit of petitioner Nancy Rifai. Although we have not directed respondent to file a response to petitioners' Motion to Vacate, respondent's position on the issues raised therein is set forth in his Objection, filed October 12, 2018, to petitioners' Motion for Leave. We are satisfied that no further briefing or argument is necessary to our disposition of petitioners' Motion to Vacate, as supplemented, which on its face fails to establish that the Court has jurisdiction to vacate the now-final Stipulated Decision entered in this case. We will accordingly deny the Motion to Vacate.
Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect at all relevant times.
Petitioners allege in their Motion to Vacate that, in response to a notice of deficiency issued to them for their 2011 and 2012 taxable years, they retained counsel (hereinafter, their "former counsel") to file a petition for redetermination on their behalf. Petitioners' former counsel accordingly filed the Petition that commenced this case. According to petitioners, their former counsel thereafter negotiated with respondent and accepted a settlement of the issues in the case without petitioners' knowledge or authorization. That settlement is reflected in the Stipulated Decision, executed by petitioners' former counsel and respondent's counsel, that petitioners now ask us to set aside. Under the Stipulated Decision, petitioners are liable for a total deficiency, addition to tax, and accuracy-related penalty for 2011 of $14,325, reduced from $58,094.59 as determined in the notice of deficiency. For 2012, petitioners are liable under the Stipulated Decision for a total deficiency and accuracy-related penalty of $102,055, reduced from $381,702 as determined in the notice of deficiency. Petitioners contend in their Motion, as originally filed, that they did not become aware that this case had been resolved until more than a year after the Court entered the Stipulated Decision, when respondent in November 2017 filed a notice of Federal tax lien to collect the tax liabilities due from petitioners for three taxable years including 2011 and 2012.
We observe that petitioners' First Supplement to their Motion to Vacate and Ms. Rifai's Supplemental Affidavit, although vague, demonstrate that Ms. Rifai had at least some awareness of the resolution of this case before respondent began collection activity. For example, the First Supplement to petitioners' Motion to Vacate concedes the existence of evidence that the firm that employed petitioners' former counsel provided a copy of the unsigned decision documents to Ms. Rifai on April 12, 2016 (although it also contends that Ms. Rifai "did not understand the implications of those unsigned documents" and did not receive an executed copy of them until around the time that collection activity began). As explained herein, however, petitioners would not be entitled to relief even if it were true, as alleged in the Motion to Vacate as originally filed, that neither petitioner had any knowledge of the settlement until collection activity began. We therefore need not determine the precise extent of Ms. Rifai's knowledge or understanding of the settlement or the extent to which her knowledge should be imputed to Mr. Rifai.
Petitioners thereafter retained new counsel, who filed on their behalf the Motion to Vacate now pending before the Court. Petitioners contend in their Motion to Vacate that the decision in this case should be vacated in accordance with Keil v. Commissioner, T.C. Memo. 2005-76, 89 T.C.M. (CCH) 1026 (2005), where the Court vacated a stipulated decision on the ground that the taxpayers' counsel had not been authorized to settle the case. In their First Supplement to their Motion to Vacate, petitioners state that their "arguments remain unchanged, in that . . . [petitioners' former counsel] committed fraud against the Court by settling their case without [p]etitioners' knowledge or authority, for a tax assessment that was substantially higher than what [p]etitioners actually owed."
Respondent contends that because the decision in Keil, unlike the Stipulated Decision in this case, was not final when the taxpayers moved to vacate it, the holding in Keil does not imply that the Court has jurisdiction to grant the relief petitioners seek in this case. Respondent also argues that petitioners' allegations, even if true, cannot support our finding an exception to the finality of the decision in this case that would establish our jurisdiction to vacate it. We agree with respondent.
The decision to grant or deny a motion to vacate under Rule 162 generally lies within the Court's discretion. See, e.g., Taylor v. Commissioner, T.C. Memo. 2017-212, at *6-7, supplementing T.C. Memo. 2017-132, aff'd in part, appeal dismissed in part, 731 Fed.Appx. 239 (4th Cir. 2018) (per curiam). We may vacate a non-final decision if the moving party shows "unusual circumstances or substantial error, such as mistake, inadvertence, surprise, excusable neglect, newly discovered evidence, fraud, or other reason justifying relief." See id. at *7. However, "[o]ur jurisdiction in a case where our previous decision has become final is severely limited by both statute and caselaw." Snow v. Commissioner, 142 T.C. 413, 419 (2014); see also Davenport Recycling Assocs. v. Commissioner, 220 F.3d 1255, 1259 (11th Cir. 2000) ("Courts . . . have uniformly held that, as a general rule, the Tax Court lacks jurisdiction to vacate a decision once it becomes final.") (collecting cases), aff'g T.C. Memo. 1998-347; Tolbert v. Commissioner, 166 F.3d 334 (4th Cir. 1998) (unpublished table decision) (affirming denial of taxpayers' motion to vacate "[b]ecause the tax court had no jurisdiction to vacate its decision based on the grounds asserted" in the motion). A decision of this Court becomes final 90 days after its entry, absent an appeal. See §§ 7481(a)(1), 7483. Exceptions to the otherwise absolute finality of our decisions have been recognized only in cases where (1) there was fraud on the court, (2) the decision was entered without jurisdiction, (3) the decision contained a clerical error, or (4) the parties made a mutual mistake. Snow, 142 T.C. at 419-24.
As respondent points out, Keil, on which petitioners rely, is inapplicable to the Motion to Vacate presently before us because that case involved a motion to vacate that was filed before the 90th day after entry of the Court's decision. See Keil, 89 T.C.M. (CCH) at 1026. The decision was therefore not final, and the Court had broad discretion to grant relief. In this case, however, the Stipulated Decision is final because petitioners did not appeal it and it was entered more than two years before petitioners filed their Motion for Leave to file the Motion to Vacate. Petitioners consequently must show the existence of an exception to the finality of the Stipulated Decision in order to prevail. But the only basis on which they have attempted to do so is by alleging fraud on the court, and even if we assume as true all facts alleged in petitioners' Motion to Vacate, see Cinema '84 v. Commissioner, 122 T.C. 264, 270 (2004), aff'd, 412 F.3d 366 (2d Cir. 2005); Taub v. Commissioner, 64 T.C. 741, 747-48 (1975), aff'd without published opinion, 538 F.2d 314 (2d Cir. 1976); Hartman v. Commissioner, T.C. Memo. 2008-124, 95 T.C.M. (CCH) 1448, 1452 n.8 (2008), reconsidering and superseding Lewis v. Commissioner, T.C. Memo. 2005-205, the Motion to Vacate fails to make a prima facie case of fraud on the court.
Although the Court of Appeals for the Fourth Circuit, to which an appeal in this case would presumably lie under section 7482(b)(1)(A), does not appear to have directly addressed when relief from a final decision is available under our Rule 162, that court has outlined the contours of fraud on the court in the analogous context of motions for relief from final judgments under rule 60(b) and (d) of the Federal Rules of Civil Procedure. See, e.g., Fox ex rel. Fox v. Elk Run Coal Co., 739 F.3d 131, 135-37 (4th Cir. 2014). In that context, the Fourth Circuit has explained that "not only must fraud on the court involve an intentional plot to deceive the judiciary, but it must also touch on the public interest in a way that fraud between individual parties generally does not." Id. at 136. Consequently, fraud on the court is a narrow doctrine, "limited to situations such as 'bribery of a judge or juror, or improper influence exerted on the court by an attorney, in which the integrity of the court and its ability to function impartially is directly impinged.'" Id. (quoting Great Coastal Express, Inc. v. Int'l B'hood of Teamsters, 675 F.2d 1349, 1356 (4th Cir. 1982)).
The notice of deficiency upon which this case is based indicates that petitioners resided in Virginia, and thus within the Fourth Circuit, when the Petition was filed. Petitioners' Motion to Change Place of Trial filed November 6, 2018, confirms that petitioners reside in Virginia. We generally follow the precedent of the Court of Appeals to which an appeal would lie if that court has resolved the particular issue before us. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
We may, in some instances, look to the Federal Rules of Civil Procedure (in particular, Fed.R.Civ.P. 60(b)) for guidance in considering a motion to vacate under Rule 162. See, e.g., Brannon's of Shawnee, Inc. v. Commissioner, 69 T.C. 999, 1000-02 (1978). In their Motion to Vacate, as supplemented, petitioners do not rely on Fed.R.Civ.P. 60(b) or any authority interpreting that rule. We accordingly will not expand our consideration of petitioners' Motion to Vacate beyond deciding whether they have made a prima facie case of fraud on the court, which is the only basis on which they seek relief.
Other courts, including ours, have likewise described the limited application of this doctrine and the high bar for invoking it. For example, fraud on the court must be proved by clear and convincing evidence. Kraasch v. Commissioner, 70 T.C. 623, 626 (1978); see also Kenner v. Commissioner, 387 F.2d 689, 691 (7th Cir. 1968) ("[T]here is a heavy burden both of particularized pleading and of proof upon the one who seeks to impeach an order or decree of a court."). It encompasses "only that species of fraud which does, or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery can not [sic] perform in the usual manner its impartial task of adjudging cases that are presented for adjudication." Taub, 64 T.C. at 751 (quoting Kenner, 387 F.2d at 691, and Toscano v. Commissioner, 441 F.2d 930, 933 (9th Cir. 1971), vacating 52 T.C. 295 (1969)). To demonstrate such fraud, the moving party "must show that an intentional plan of deception designed to improperly influence the Court in its decision has had such an effect on the Court." Abatti v. Commissioner, 86 T.C. 1319, 1325 (1986), aff'd, 859 F.2d 115 (9th Cir. 1988).
Of particular significance here, unauthorized acts of a taxpayer's counsel, including unauthorized settlement of a claim, generally do not constitute fraud on the court. For example, in Heim v. Commissioner, 872 F.2d 245 (8th Cir. 1989), the Court of Appeals for the Eighth Circuit rejected a fraud on the court claim where the taxpayers alleged that their attorney had distorted and omitted facts in the course of submitting their case for decision on stipulated facts, and had failed to notify them that the Tax Court had rendered a decision. Id. at 246, 249. Noting that "allegations that an attorney was grossly negligent or that he lacked authority do not support a finding of fraud on the court," the court explained that it could "find no effort by . . . [the attorney] to improperly influence the court, nor any motive to do so." Id. at 249. The court concluded that "[i]f there were wrongful acts, they [we]re claimed to be at most grossly negligent or without authority, and were directed toward . . . [the attorney's clients], not the court." Id.
In this regard, we observe that an attorney who has entered an appearance for a taxpayer is generally presumed to have authority to act on the taxpayer's behalf. See Gray v. Commissioner, 73 T.C. 639, 646-47 (1980); Keil, 89 T.C.M. (CCH) at 1030; Backstrom v. Commissioner, T.C. Memo. 1997-211, 73 T.C.M. (CCH) 2723, 2730 (1997), aff'd without published opinion, 168 F.3d 489 (6th Cir. 1998); Deutsch v. Commissioner, T.C. Memo. 1975-76, 34 T.C.M. (CCH) 387, 389 (1975).
Even more to the point, in Senate Realty Corp. v. Commissioner, 511 F.2d 929 (2d Cir. 1975), the Court of Appeals for the Second Circuit held that an attorney's unauthorized settlement of a Tax Court case did not amount to fraud on the court, noting that it was not aware of "any case where a court has found the mere settlement of a suit by counsel without authorization to constitute a fraud upon the court which would support a setting aside of a final judgment." Id. at 932-33. The court observed that there was "no indication or claim" that the taxpayer's attorney had "made any misrepresentation of the facts in issue, that he had any improper motive, that [the] IRS in any way cooperated with him in deceiving or defiling the court, or even indeed that the compromise itself [which reduced the total deficiency and penalties to $176,000 from $352,000 as originally determined by the Commissioner] was unreasonable." Id. at 931-32. "The point," in the court's view, was "that vis-a-vis the Tax Court there was no conduct on the part of . . . [the taxpayer's attorney] which compromised the merits of the negotiated settlement or which precluded the court from adjudging the matter impartially." Id. at 932.
We have likewise found claims that an attorney lacked authority to settle a case on a client's behalf insufficient to establish fraud on the court. In Deutsch v. Commissioner, T.C. Memo. 1975-76, 34 T.C.M. (CCH) 387 (1975), for instance, we explained that the inherent authority of a taxpayer's counsel of record, unless specifically limited by the taxpayer, "includes the power to settle the case on behalf of the . . . [taxpayer]." Id. at 389. Although the taxpayer had not shown that his counsel's authority had been limited, "we assume[d] the truth of . . . [the taxpayer's] allegations that . . . [his counsel] exceeded the scope of his authority in signing the stipulated decision." See id. We concluded that even on that assumption, "there would still be no 'fraud on the court' as that phrase has been judicially interpreted" because the taxpayer had shown, at most, a mistake-namely, that his counsel may have misunderstood the law as it applied to one of the issues addressed in the stipulated decision. See id. Similarly, in All Community Walk In Clinic v. Commissioner, T.C. Memo. 2005-190, 90 T.C.M. (CCH) 127 (2005), aff'd per curiam, 223 Fed.Appx. 949 (11th Cir. 2007), we declined to vacate two stipulated decisions for fraud on the court where there had been some question whether, in the course of attempting to retain new counsel, the taxpayers had limited the authority of or had discharged their original counsel, who ultimately signed the decisions on their behalf. Id. at 129-33. We pointed out that "the mere fact that counsel might settle a suit without the client's authorization does not establish fraud on the court so as to support vacating a final decision," id. at 131, and we concluded that the taxpayers had failed to show that the attorney who signed the decisions lacked authority to do so or that the Commissioner's counsel unreasonably believed that the attorney had such authority, id. at 133.
On the other hand, the Court of Appeals for the Ninth Circuit held that the Tax Court erred in concluding that a taxpayer (Josephine) had not made a prima facie case of fraud on the court where she alleged that not only had she not authorized the settlement of her case, but she had not even retained the attorney who negotiated the settlement, did not knowingly participate in any Tax Court proceedings, and did not learn that deficiencies had been assessed against her until the Commissioner began collection activities. See Toscano, 441 F.2d at 931-33, 936. According to Josephine, the Commissioner had determined deficiencies against her and a man who claimed to be her husband (John) based on joint Federal income tax returns on which John had either forged Josephine's signature or had obtained it from her under duress. Id. at 931. John subsequently filed a joint petition for redetermination with the Tax Court and eventually directed his attorney (to whom he had represented that he and Josephine were married) to stipulate to deficiencies that formed the basis of the Tax Court's decision. Id. In seeking leave to file a motion to vacate the decision, however, Josephine had "submitted considerable documentary evidence to support her allegations" that she was never married to John. Id. The Ninth Circuit concluded that these alleged facts could constitute fraud on the court inasmuch as they would establish that John had defrauded the Commissioner by improperly filing joint returns based on his misrepresented marital status, and had similarly defrauded Josephine by contriving to make her jointly liable for his taxes, which frauds he then "carried . . . into the Tax Court" to obtain a judicial determination of joint deficiencies. See id. at 933, 935.
In this case, the allegations in petitioners' Motion to Vacate do not suggest that their former counsel engaged in misconduct that defiled the Court or that impacts the public interest in a manner that could amount to fraud on the court. Unlike the situation in Toscano, petitioners have not alleged that their former counsel was totally unauthorized to represent one or both of them before the Tax Court. To the contrary, their Motion to Vacate concedes that they jointly retained their former counsel to file the Petition that commenced this case. Nor have petitioners alleged that their former counsel caused the Court to ratify the effects of some fraud perpetrated outside the Tax Court proceeding, as occurred in Toscano. Petitioners merely contend that their former counsel acted without authority, and possibly without fully informing them, with respect to the settlement of this case. In that regard, petitioners have not alleged that respondent's counsel, or the Court for that matter, could or should have known that their former counsel did not have full authority to act on their behalf. Furthermore, far from suggesting that petitioners' former counsel colluded with respondent or otherwise acted against petitioners' interests in settling this case, the Stipulated Decision reflects that petitioners' former counsel obtained concessions from respondent of nearly 75% of the aggregate deficiencies, addition to tax, and penalties he originally determined in the notice of deficiency. The presentation of such a favorable settlement to the Court, by counsel acting with apparent authority on petitioners' behalf, could not have deceived the Court in such a way as to preclude it from judging this case impartially. Petitioners consequently cannot establish, based on the allegations before the Court, improper behavior by their former counsel rising to the level of the "evil intent, deceit or collusion which have marked those cases where final verdicts have been set aside." See Senate Realty Corp., 511 F.2d at 932.
Instead, the allegations in petitioners' Motion to Vacate, if true, establish at most that petitioners' former counsel may have handled this case negligently or may have otherwise breached professional duties owed to petitioners by acting without authority. But neglect-even gross neglect-by a party's counsel does not justify relief from a final decision for fraud on the court. See Heim, 872 F.2d at 249; Backstrom, 73 T.C.M. (CCH) at 2732; Gazdak v. Commissioner, T.C. Memo. 1993-381, 66 T.C.M. (CCH) 479, 481 (1993); Disanza v. Commissioner, T.C. Memo. 1993-142, 65 T.C.M. (CCH) 2300, 2305 (1993). Petitioners' former counsel may be liable to them in a malpractice action or may be at risk of professional discipline as a result of any negligence or ethical failures that may have occurred in the course of representing petitioners in this case, but as a matter of law such shortcomings would not amount to fraud on the court. See Heim, 872 F.2d at 249; Senate Realty Corp., 511 F.2d at 932; Pulitzer v. Commissioner, T.C. Memo. 1987-408, 54 T.C.M. (CCH) 167, 169 & n.7 (1987). We will accordingly deny petitioners' Motion to Vacate.
The foregoing considered, it is
ORDERED that petitioners' Motion to Vacate filed October 17, 2018, as supplemented, is denied.