1 CA-TX 96-0005

(Not for Publication -
Rule 28, Arizona Rules
of Civil Appellate

Appeal from the Arizona Tax Court
Cause No. TX 94-00972
The Honorable William J. Schafer, III, Judge



Grant Woods, Attorney General
by David J. Dir, Assistant Attorney General
Attorneys for Appellee Arizona
Department of Revenue Phoenix

Fennemore Craig
by Ray K. Harris
Attorneys for Appellant William Wentworth Phoenix

Robins, Kaplan, Miller & Ciresi
by Thomas J. Gallo and Sheri L. Gates Atlanta, GA
and Gammage & Burnharn P.L.C.
by Richard K. Mahrle Phoenix
Attorneys for Appellants Richard J. Elias, Jr.,
and Jorrmird, Inc.,


E H R L I C H, Judge

William M. Wentworth, Richard J. Elias, Jr., and Jorrmird each appeal from summary judgment for the Arizona Department of Revenue ("ADOR") on ADOR*s claim to recover delinquent transaction privilege taxes, penalties and interest assessed against Arby*s Construction and Equipment Company ("ACE") for the period April 1, 1986, through June 30, 1990. The dispositive issues are these:

Whether the tax court erred in declining to dismiss .ADOR*s action against ACE for insufficient process or insufficient service of process;

Whether the final, unappealed administrative decision. rendered against ACE precluded Elias from contesting his status as an ACE partner in the tax court; and

Whether the tax court erred in holding that Wentworth*s and Elias*s signatures as "partners" on the Arizona transaction privilege tax license application for ACE rendered them personally liable for the delinquent transaction privilege taxes assessed against ACE.


General Background

S & D Construction and. Equipment Company ("S & D") was a partnership formed in 1981 by agreement between two Michigan corporations, Jorrmird and William N. Wentworth ("Wentworth, Inc."). Elias was president of Jorrmird. Wentworth was president of Wentworth, Inc.

In 1986, S & D entered a joint-venture agreement with Arby*s Building and Construction Company, a Georgia corporation. The joint-venture entity was named Arby*s Construction and Equipment Company or ACE. Neither Wentworth nor Elias as an individual was ever a Partner in S & D or joint-venturers in ACE.

Wentworth, acting on behalf of Wentworth, Inc. and. S & D, managed the business of ACE between 1986 and 1989. Jorrmird did not participate in managing either S & D*s or ACE*s business activities during that time.

ACE continued, to operate until May 1989, when S & D and Arby*s Building and Construction agreed to dissolve it. The following month, Jorrmird and Wentworth, Inc., amended their S & D co-partnership agreement to retire the partnership interest of Wentworth, Inc. Thereafter, Jorrmird did business as "A.C.E. Companies (formerly Arby*s Construction and Equipment)".

Events Leading to this Litigation

In 1985, Wentworth and Elias signed and filed an "Arizona Joint Tax Application Questionnaire" on S & D*s behalf. The names of both individuals and. a corresponding title of "Partner" for each were typed on the application. The second page of the application listed Wentworth*s and Elias*s names under "Ownership" but there was no mark in the box next to any of four types of organization listed as choices on the form. ADOR issued a transaction-privilege-tax license in the name of S & D.

In 1986, Wentworth and Elias signed another Arizona tax-license application, this one for ACE. The word "Partner" was handwritten on the "title" line next to each signature. The second. page of the application listed Wentworth*s and Elias*s individual names under "Ownership" and designated "partnership" as the type of organization. ADOR issued a transaction-privilege~tax license in the name of ACE.

ACE conducted business in Arizona during the period April 1, 1986, through June 30, 1990. It allegedly failed to pay ADOR a substantial portion of the transaction-privilege taxes it owed as a result of its Arizona business activities.

ADOR audited ACE for the relevant period. On March 1, 1991, it issued a deficiency assessment of $97,S98.48, including penalties and interest. Two notices of deficiency assessment were issued, one to "Arbys Construction & Equipment/Attn: Richard James

Elias" and one to "Arbys Construction & Equipment/Attn: William Wentworth." Apart from the addressees’ names, the two notices were identical.

The notice that was sent to Elias*s attention included. a copy of a "Sales Tax Deficiency Assessment" naming "Elias, Richard James (General Partner) dba Arbys Construction & Equipment." The notice sent to Wentworth*s attention included an otherwise- identica1 assessment naming "Wentworth, William (General Partner)" instead of Elias.

Both notices and their attachments were sent to the addresses that the 1986 tax license app1ication gave for ACE. R. Hargrove signed the return receipt for the mailing that ADOR sent to Elias*s attention. The mailing that ADOR sent to Wentworth*s attention was refused and returned to ADOR with. the notation, "Person no longer with the company."

A form "Notice of Protest" that had evidently been included in the mailing ADOR sent to Elias*s attention was filled. out, signed by Earl Kennedy and returned to ADOR. On August 1, 1991, ADOR issued an amended assessment in the total amount of $84,421.06, a reduction in excess of $13,000. Conies of a Notice of Amended Assessment and an Amended Assessment were sent to the attention of Elias and Wentworth at two addresses in Georgia different from that listed for ACE in its 1986 tax-license application. Unlike the original assessments, neither of the amended assessments named Elias or Wentworth as "General Partner" "dba Arbys Construction & Equipment." Instead, they named "Arbys Construction & Equipment/dba Same/Attn to William Wentworth [or Richard James Elias, Jr.]". Elias signed the return receipt for the copy sent to his attention. Neither the copy sent to Wentworth*s .attention nor the return receipt was returned. to ADOR.

On September 10, 1991, ADOR received a request for hearing on a form that had evidently accompanied the Notice of Amended Assessment mailed to Elias*s attention. It was signed by Timothy Bonner as attorney for "Arby*s Const. & Equipment.

ADOR set a hearing for January 6, 1992, and mailed a notice to Elias at the address to which the amended assessment had been sent. No one appeared for ACE on that date. The hearing officer sustained the amended assessment. No further appeal was taken.

Proceedings in Tax Court

In December 1994, ADOR brought this collection action against ACE, Wentworth and Elias. The complaint alleged that Wentworth and Elias were general partners in ACE and liable as such pursuant to ARIZ. REV. STAT. ("A.R.S.") sections 29-104 and 29-213 through 29-215. It demanded judgment against ACE, Wentworth and Elias for $64,169.24 in delinquent taxes, $10,604.60 in penalties and interest.

Wentworth and Elias were served with process and did not contest the tax court*s jurisdiction. ADOR later had an "Alias Civil Summons" issued and served on "Richard Joseph Elias, Jr., Partner/ARBY’S CONSTRUCTION AND EQUIPMENT." ACE made no appearance in the action as such. Instead, Jorrmird appeared for the first time in the action by filing a motion to dismiss the action as against ACE. Jorrmird did not move to intervene pursuant to Rule 24, ARIZ. R. CIV. P., or for substitution in place of ACE pursuant to Rule 25(d), ARIZ. R. Civ. P. The court denied the motion.

ADOR moved for summary judgment. The tax court ruled for ADOR but it did not give its reasons. From judgment in accordance with its rulings, Wentworth, Elias and Jorrmird appeal.


Jorrmird*s Motion to Dismiss

Jorrmird argues that the tax court erred in denying its motion to dismiss ADOR*s action as against ACE. It first contends that ADOR*s alias summons to ACE was insufficient because, by the time it was served, ACE no longer existed. We disagree.

Upon dissolution, neither a partnership nor its liabilities simply disappear. A partnership continues to exist as to a third person who dealt with the partnership before dissolution or as to one who dealt with the partnership after dissolution but before receiving notice thereof. See Olds Bros. Lumber Co. v. Marley, 72 Ariz. 392, 396, 236 P.2d 464, 466 (1951); Sta-Rite Industries, Inc. v. Taylor, 16 Ariz.App. 230, 231, 492 P.2d 726, 727 (App. 1972) see also A.R.S. § 29-240 (2) (a) (when settling accounts among partners after dissolution, non-partner creditors have first priority

claim to partnership assets). A partnership may be sued in its own name on partnership debts and served accordingly. See Clogher v. Winston and Strawn, 181 Ariz.372, 374, 891 P.2d 240, 242 (App. 1995). This principle equally applies to a dissolved partnership like ACE with continuing liabilities to third persons.

Jorrmird also contends that ADOR*s service of process on Elias as an ACE "partner" was defective because the process ADOR used in doing so was an "alias summons." Jorrrnird urges that the tax court never obtained jurisdiction over ACE because an alias summons was not valid process under Rule 4(b), Ariz. R. Civ. P., and service of an alias summons did not constitute valid service of process under the rule. We disagree.

Before it was amended effective July 1, 1991, Rule 4(b) permitted the issuance of an "alias summons" in the same form as the original summons if the original were lost or returned without having been served. As amended in 1991, Rule 4(b) now refers to the "alias summons" as a "replacement summons."

Rule 1, Ariz. R. Civ. P., enjoins us to construe the Rules of Civil Procedure "to secure the just, speedy, and inexpensive determination of every action." The "alias summons" issued here bore an obsolete name and was not issued as a replacement for an original. Jorrmird does not contend, however, that the alias summons lacked required substantive information or tended to mislead or prejudice ACE. Absent a showing to that effect, we cannot agree that the hypertechnical Rule 4(b) application for which Jorrmird argues is aimed at securing a just determination here.

The contrasts between this case and those on which Jorrrnird relies reinforce this point. In Smith v. Smith, 117 Ariz. 249, 252, 572. P.2d 1045, 1048 (App. 1977), the wife was served with a New Mexico order to show cause why the custody and support provisions of a divorce decree should. not be modified. Omitted from the service package was a copy of the verified petition on which the order to show cause was based. We upheld the trial court*s determination that the New Mexico court*s modification order was rendered without jurisdiction over the wife due to insufficient service of process. Similarly, in Spudnuts v. Lane, 139 Ariz. 35, 36, 676 P.2d 669, 670 (App. 1984), this court held that the post-judgment addition of the defendant*s wife as a party defendant, without service of process on her, violated the wife*s right to due process and conferred no jurisdiction on the trial court to enter a personal judgment against the wife and the marital community.

In both Smith and Spudnuts, the defect in service of process deprived the defendant of a significant procedural right: notice of the claim on which relief was being sought. In contrast, nothing about the technical flaw in the issuance and labeling of the "alias summons" by which ACE was served suggests any comparable disadvantage to ACE and Jorrmird does not attempt to call one to our attention. The tax court did not err in denying Jorrmird*s motion to dismiss the action as against ACE.

E1ias*s Entitlement to Contest Liability as a "Partner" of ACE

ADOR contends that the final, unappealed administrative decision on ACE*s protest precluded Elias from later denying he was an ACE Partner. This is so, ACE reasons, because, unlike Wentworth, Elias was served with the Notice of Amended Assessment and the hearing officer*s decision on ACE*s protest. We do not agree.

Nothing in the record indicates that Elias ever received ADOR*s original deficiency assessment, which named "Elias, Richard James (General Partner) /dba Arbys Construction & Equipment." The Amended Assessment, for which Elias personally signed, named "Arbys Construction & Equipment/dba Same/Attn to Richard James Elias, Jr." Accordingly, as far as this record shows, Elias never received personal notice that ADOR considered him to be a partner in ACE individually. Moreover, the hearing officer*s ruling does not discuss the legal status of ACE with respect to its partners; it does not mention Wentworth or Elias.

With the exception of the heading of the original assessment, which was received by the unidentified Hargrove and not Elias, ADOR*s administrative process treated ACE as the only "taxpayer" whose liability was in issue. The administrative process did not concern itself with Elias or Wentworth or their legal status with respect to ACE. We therefore see no legal basis for holding that ADOR*s final, unappealed administrative decision on ACE*s protest precludes Elias from challenging ADOR*s theory that he was a "partner" in the ACE joint-venture and therefore personally liable on ACE*s transaction-privi1ege-tax assessment.

Individual Personal Liability of Wentworth and Elias

ADOR*s complaint relied on the assertion that Wentworth and Elias were liable jointly and severally on ACE*s tax obligation as the "partners" who constituted the ACE partnership. A.R.S. § 29-215(A) ("All partners are liable jointly and severally for . . . .. all . . . debts and obligations of the partnership"). When Elias*s and Wentworth*s responses to ADOR*s motion for summary judgment were filed, however, it became clear that the ACE joint-venturers were not Elias and Wentworth but rather S & D and Arby*s Building and Construction Equipment.

ADOR then shifted the focus of its case to the question whether Wentworth*s and Elias*s signatures on the 1986 tax-license application nevertheless imposed partnership liability on them via some other theory. As it did. in the tax court, ADOR argues on appeal:

With respect to taxing authorities, courts have held that. the taxpayer is bound by the representations made to those authorities. Accordingly, if the taxpayer represents himself to be in a partnership and a partner thereof, he may not later deny the same. See In re Sullivan, 127 B.R. 162 (Bkrtcy. E.D. Ky. 1990); Johnson v. United States, 632 F.Supp. 172 (W.D. N.C. 1986); Halstead v. C.I.R., 296 F.2d 61 (2nd Cir. 1961); Maletis v. United States, 200 F.2d 57 (9th Cir. 1952), cert. denied, 345 U.S. 924 (1953); see also, In re Bell & Beckwith, 112 B.R. 858 (Bkrtcy. N.D. Ohio 1990); Frye v. Anderson, 80 N.W.2d 593 (Minn. 1957)

We do not agree that these decisions support the principle that ADCR asks us to apply.

In re Sullivan, 127 B.R. 162 (Bkrtcy. E.D. Ky. 1990), is a Bankruptcy Court decision that relies on general principles loosely supported by reference to Kentucky*s coal-severance taxing statutes. Although a version of the Uniform Partnership Act ("U.P.A.") was in effect in Kentucky when Sullivan was decided, Ken. Rev. Stat. §§ 362.150 through 362.360, the court*s opinion did not mention it. The court relied instead on the broad Kentucky case-law princip1e that a person may not deny today what he solemnly swore was true yesterday, citing Nunnelle v. Nunnellee, 415 S.W.2d 114, 116 (Ky. 1967). Id. at 162.

In Johnson v. United States, 632 F.Supp. 172 (W.D. N.C. 1986), the principal question was whether the evidence about the actual business relationship between the taxpayer and her brother supported a finding that a partnership agreement existed on which the taxpayer*s individual liability could be based. The court held that it did. Id. at 175. The court also stated, but did not hold, that the prior-year tax benefits the taxpayer had derived from the partnership estopped her from denying that she was a partner in the current taxable year. Id.

In Halstead v. C.I.R., 296 F.2d El (2d Cir. 1961), the taxpayer denied that he had done business as a partnership but his partnership return for the tax year in question and other evidence led the court to conclude that a partnership existed. Id. at 62. The court also stated, but did not hold, that the taxpayer*s representation to the Internal Revenue Service concerning the form in which his business was conducted prevented him from later denying the validity of that form. Id.

The taxpayer in Maletis v. United States, 200 F.2d 97 (9th Cir. 1952), cert. denied, 345 U.S. 924 (1953), formed a partnership in 1945. He successfully claimed a personal tax benefit in 1946 from the existence of the partnership, then sought to disclaim the validity of the partnership in 1947 to enable himself to file a revised 1945 return in which he would claim the partnership*s net operating loss as an individual deduction. The court held that a partnership had actually been formed under Oregon law. Id. at 98. Relying on federal tax cases and statutes, it also stated that the taxpayer*s partnership filing in 1946 estopped him from disclaiming the Partnership for 1945. Id.

Frye v. Anderson, 80 N.W.2d 593, 595-99 (Minn. 1957), concerned whether the defendant*s conduct in procuring a renewal of an ash-hauler*s license issued in his and his son*s name would support a finding that the defendant and his son had been engaging in business as Partners, and that the defendant owned a truck driven by an emp1oyee which was involved in an accident. Contrary to ADOR’s statement, the court did not hold that the defendant and his son were "partners by estoppe1." Id. at 603. The court instead held that, because the case would be retried on the issue whether an actual Partnership existed, the court would leave the application of the estoppel theory to the trial court*s discretion. Id.

Despite the implication of ADOR*s citation to Frye, the tax court in the matter before us indicated that an element of the doctrine of estoppel was that the defendant*s earlier representation have caused the plaintiff to change his position such that he would suffer substantial injury if the defendant were permitted to disclaim it. The cases on which ADOR relies tail to support the existence of a special rule of estoppel per se for representations to taxing authorities. With one exception, these cases either express this notion off-handedly and without meaningful analysis as in In re Sullivan and Halstead, or actually apply the more traditional rule of estoppel that conditions relief on the plaintiff*s detrimental reliance as in Johnson, Maletis and Frye.

The exception is the Bankruptcy Court*s decision in Bell & Beckwith, 112 B.R. 858 (Bkrtcy. N.D. Ohio 1990), which tends to support Elias*s and Wentworth*s position on appeal rather than that of ADOR. Be11 & Beckwith referred to a type of estoppel with no requirement of detrimental reliance by the plaintiff. Contrary to ADOR*s implication, however, it did not do so as a matter of developing common law. The court instead applied Ohio Revised Code ("O.R.C..") section 1775.38, the Ohio enactment of section 39 of the U.P.A. Section 39 is in effect in Arizona as A.R.S. section 29-239. That statute presupposes the special situation when a partnership contract is rescinded because of fraud or misrepresentation of one one of the parties. That situation. is not present here and is entirely irrelevant on the facts of this case.

Significantly for the instant case, the Bell & Beckwith court distinguished situations of the kind before us, in which the parties against whom liability as "partners" was sought were not members of any actual partnership. Id. at 862. The court indicated that, in such a case, the bankruptcy trustee could seek to hold an apparent partner liable under C.R.C. section 1775.15. Id. Section 1775.15 is the Ohio enactment of U.P.A. section 16 in effect in Arizona as A.R.S. section 29-216 (1989). Section 29-216 provides in relevant part:

A. When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith off such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been, made or communicated to such person so giving credit by or with the knowledae of the apparent partner making the representation or consenting to its being made.

When a partnership liability results, he is liable as though he were an actual member of the partnership. [Emphasis added.]

As it did in the tax court, ADOR argues that A.R.S. section 29-216 is inapposite here. It urges us instead to affirm the judgment against Elias and Wentworth based on ADOR*s rule of partnership by estoppel, which does not require detrimental reliance by a taxing authority to which a representation is made. We decline to do so. As we observed above, ADOR*s cases provide scant support for any such rule. Moreover, by enacting A.R.S. section 29-216, our legislature has clearly made known the specific combination of elements that it intends will support liability on a theory of partnership by estoppel. Under those circumstances, it is not our prerogative to vary the legislative formula.

By distinguishing A.R.S. section 29-216 and urging a legally-distinct alternative to it, ADOR is tacitly admitting that it has no evidence of detrimental reliance here. The record certainly bears that out. ADOR presented no evidence tending to show that ACE would not have obtained .a transaction-privi1ege~tax license in 1986 if ADOR had been aware that Elias and Wentworth were officers of ACE*s corporate partners rather than partners in ACE individually. ADOR also presented nothing suggesting that the incorrect information about Elias*s and Wentworth*s relationship to ACE caused it to miss an opportunity to proceed against an entity that was actually a partner in ACE, non-party Arby*s Building and Construction Equipment Company, for example.

Attorneys* Fees

Elias and Wentworth request an award of attorneys* fees pursuant to A.R.S. section 12-348(A)(1). In Cypress Bagdad Copper v. Arizona Department of Revenue, 233 Ariz. Adv. Rep. 40 (App. Jan. 9, 1997), pet., for rev, and cross-pet. for rev. pending, we held that A..R.S. section 12-348 (B) applies in tax litigation to the exclusion of other potentially applicable subsections of section 12-348, without regard to which party commenced the tax court proceedings. Id. at 42. We grant Elias*s and Wentworth*s requests pursuant to A.R.S.. section 12-34~(B) subject to the limitations contained in A.R.S. section 12-348(E) (3) and (5). Elias and Wentworth may establish the amounts of their awards by complying with Rule 21 (C), Ariz. R. Civ. App. P.


The judgment is affirmed as against ACE. However, the tax court erred in granting summary judgment against Elias and Wentworth. The judgment against them is reversed and the matter is remanded with directions to enter summary judgment in favor of them on ADOR*s complaint.



© 1996 Michael G. Galloway

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