Saturday, June 27, 2015

Fraud Upon The Tax Court


Fraud upon the court consists of a pattern of deceit and dishonesty directed at the court, so as to interfere with its ability to impartially adjudicate a dispute.  Kenner v. Commissioner, 387 F.2d 689, 691 (7th Cir. 1968).  It occurs where it can be clearly and convincingly demonstrated that a party has set in motion an unconscionable scheme calculated to interfere with the judicial system’s ability to impartially adjudicate a matter.  Aoude v. Mobile Oil Corp., 892 F.2d 1115, 1118 (1st Cir. 1989).  It is a special species of fraud regarded not only as harmful to adverse parties, but to the judicial process itself.  Kenner, 387 F.2d at 691. 
The leading case on fraud upon the court is Hazel-Atlas v. Hartford-Empire, in which the Supreme Court held that a judgment based on fraud upon the court can, and should, be vacated, regardless of its age.  Hazel-Atlas Glass Co. v. Hartford-Empire, 322 U.S. 238, 250 (1944).  The facts of Hazel-Atlas revealed an extensive fraudulent scheme directed not only against the adverse party, but also against both the trial and appellate courts.  The U.S. Supreme Court referred to this particular species of fraud as not only “an injury to a single litigant. It is a wrong against the institutions set up to protect and safeguard the public, institutions in which fraud cannot complacently be tolerated consistent with the good order of society.” 
The Tax Court possesses the authority to vacate or modify its judgment, despite its finality under section 7481.  The balancing of the statutory finality rule and the implied judicial power to review and vacate fraudulently obtained judgments led the Seventh Circuit to conclude that a judgment obtained through fraud upon the court is not a judgment at all, and thus never becomes final.  Expressly rejecting the Eighth Circuit’s decision in Jefferson Loan, the Seventh Circuit concluded that the Tax Court possesses the power to inquire into the integrity of its own decisions, even when such decisions have become final and immutable in all other respects.  However, the taxpayer’s victory in Kenner was incomplete. While the court held that the Tax Court did possess the authority to review an otherwise final judgment for alleged fraud upon the court, it also held that the taxpayer failed to substantiate his fraud claim.  Fraud upon the court is limited to “that species of fraud which does, or attempts to, defile the court itself, or is fraud perpetrated by officers of the court, so that the court cannot perform its task of impartially adjudicating cases.”  The taxpayer was unsuccessful in establishing a pattern of conduct that met the above definition of fraud upon the court.
 The year following the Seventh Circuit’s opinion in Kenner, Congress enacted the Tax Reform Act of 1969.  One of the provisions in that legislation “elevated” the status of the Tax Court to that of an Article I court, as opposed to an independent executive agency.  Congress’ enactment of this provision could be seen as tacit approval of the Seventh Circuit’s holding in Kenner. By clearly defining the Tax Court as a court, Congress bestowed upon them judicial  authority. The authority to review otherwise final judgments for alleged fraud upon the court would seemingly fall into that category. 
Three years later, the Ninth Circuit in Toscano, citing Kenner, held that the Tax Court possessed the authority to review and vacate an otherwise final judgment on the grounds of fraud upon the court.  Toscano v. Commissioner, 441 F.2d 930, 935 (9th Cir. 1971).  The Ninth Circuit subsequently addressed one of the most notorious claims of fraud upon the Tax Court in Dixon, which involved a fraudulent scheme carried out by counsel for the government.  Dixon v. Commissioner, 316 F.3d 1041 (9th Cir. 2003).
Proof of fraud by itself is insufficient. The taxpayer must substantiate an intentional plan of deception designed to influence the court in rendering its decision. 
The Tax Court in Abeles held that it possessed the authority to vacate a judgment rendered against a taxpayer over whom it had acquired no jurisdiction.  A prerequisite to Tax Court jurisdiction is the issuance by the Internal Revenue Service of a statutory notice of deficiency.  The IRS had delivered a notice to the taxpayer’s exspouse, proposing a deficiency on a joint return filed by both the taxpayer and her spouse.  However, the taxpayer in Abeles had recently divorced from her husband and never received the notice.  The husband subsequently filed a Tax Court petition in his own name, later filing an amended petition purportedly containing the taxpayer’s signature as well.  After the Tax Court rendered judgment for the government, the taxpayer challenged the court’s judgment on jurisdictional grounds, claiming that she was never a party to the case or the resulting judgment.  The taxpayer successfully asserted that she never filed a petition, stating that the signature on the amended petition was a forgery.  Accordingly, the judgment rendered against the taxpayer was void.  Abeles v. Commissioner, 90 T.C. 103, 109 (1988).
As an Article I court, the Tax Court does not possess implied judicial authority, including the equitable power to revisit a final judgment to achieve a just result. Accordingly, section 7481’s finality rule has been strictly construed. Exceptions to this rule have slowly developed. Two exceptions that have developed without much contention are correction of clerical errors and lack of jurisdiction. However, fraud upon the court is a third exception that has been, and remains, quite contentious. The Supreme Court held in 1944 that a district court possesses the authority to revisit an otherwise final judgment on grounds of fraud upon the court. However, it was more than twenty years before that exception was extended to the Tax Court.