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In Kraemer v. United States, Civil No. H-00-2948, 2002 WL 575791, Magistrate Judge Nancy Johnson, held that the District Courts lack jurisdiction over Weiner's limitations claims.
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Civil No. H-00-2948
February 11, 2002
MEMORANDUM OPINION
Pending before the court are the following motions: 1) Defendant's Motion for Partial Dismissal of Plaintiffs' Complaint; 2) Plaintiffs' Motion for Partial Summary Judgment Based on Statute of Limitations for 1984; 3) Defendant's Cross-Motion for Partial Summary Judgment Based on Statute of Limitations; and 4) Plaintiffs' Motion for Partial Summary Judgment with Respect to the 26 U.S.C. § 6621(c) Claims. Also pending are three motions requesting extensions of time to file.
The parties consented to proceed before the undersigned magistrate judge for all proceedings, including trial and final judgment, pursuant to 28 U.S.C. § 636(c) and FED. R. CIV. P. 73. Docket Entry No. 16.
For the reasons discussed below, the court GRANTS Defendant's Motion for Partial Dismissal of Plaintiffs' Complaint based on 26 U.S.C. § 6404(e) (Docket Entry No. 20). The court DENIES Plaintiffs' and Defendant's cross-motions for partial summary judgment on the statute of limitations issue (Docket Entry Nos. 22 and 29), but dismisses this claim sua sponte for lack of subject matter jurisdiction. The court DENIES Plaintiffs' Motion for Partial Summary Judgment with Respect to the 26 U.S.C. § 6621(c) Claims (Docket Entry No. 23). The court GRANTS Plaintiffs' Motion for Leave to File Motion for Partial Summary Judgment Out of Time (Docket Entry No. 21), Plaintiffs' Motion to Extend Time to Reply to Response in Opposition to Plaintiffs' Motion for Partial Summary Judgment (Docket Entry No. 26), and Defendant's Motion for Leave to File Cross-Motion for Partial Summary Judgment with Respect to the Statute of Limitations Issue Out of Time (Docket Entry No. 28). Plaintiffs' objections to the Declaration of Jerry Gossett are noted, but the declaration has no bearing on this opinion.
I. Case Background
Plaintiffs, a married couple, bring the present action to recover federal income tax, interest, and penalties which they assert were illegally assessed and collected for calendar years 1984 and 1986. Plaintiffs also seek an abatement of interest under 26 U.S.C. § 6404 (e).
Plaintiff Marion Kraemer was a partner in two limited partnerships. The tax assessment with regard to his partner shares of these partnerships is the subject of this refund action. Oasis Date Associates ("ODA") was a California limited partnership organized on or about July 1, 1984. The certificate of limited partnership listed Fred Behrens, Robert Wright, and George Schreiber as the only general partners of ODA. American Agri-Corp. ("AMCOR") was the managing agent of ODA and was responsible for the private placement offering of partnership units. Plaintiff Marion Kraemer became a limited partner of ODA in 1984.
In fact, AMCOR claimed to be responsible for private placement offerings of at least thirty other farming entities and also claimed to be the managing agent for these entities. See Plaintiffs' Motion for Partial Summary Judgment, Docket Entry No. 22, Ex. D, Confidential Private Placement Memorandum, pp. 36-40.
On March 22, 1985, the Internal Revenue Service ("IRS") Service Center at Fresno, California, received what purported to be the 1984 U.S. Partnership Return of Income (Form 1065) for ODA. That return was signed by Joseph O. Voyer ("Voyer") as "Treasurer" on January 25, 1985. In fact, Voyer was treasurer of AMCOR, not ODA. The ODA partnership return neither identified AMCOR as the managing agent of ODA nor disclosed any relationship between AMCOR and ODA. On April 15, 1985, Plaintiffs filed their U.S. Individual Income Tax Return (Form 1040) for the year 1984. On that return Plaintiffs included a deduction with respect to ODA.
By letter dated December 12, 1985, AMCOR agreed to purchase a .5% general partnership interest in ODA from general partners Behrens, Wright, and Schreiber. This was officially recorded on December 23, 1985, in the records of the Secretary of State for the State of California when an Amendment to the Certificate of Limited Partnership (Form LP-2) was filed.
Plaintiff Marion Kraemer was a limited partner of another partnership, Coachella Fruit Growers ("Coachella"), for 1986. Plaintiffs timely filed their U.S. Individual Income Tax Return (Form 1040) for the year 1986, in which they claimed a deduction related to Coachella. Coachella filed its partnership return (Form 1065) for 1986.
On March 14, 1990, the IRS issued a Notice of Final Partnership Administrative Adjustment ("FPAA") with respect to Coachella for the 1986 tax year. In that document, the IRS explained that the partnership losses that Coachella had reported ($7,832,935 of farming expenses and $208,526 of other expenses) were disallowed because, in part, "[t]he partnership's activities constituted a series of sham transactions lacking economic substance." A partnership level proceeding challenging the proposed partnership item adjustments for Coachella was commenced later that year in Tax Court.
Defendant's Response to Plaintiffs' Motion for Summary Judgment with Respect to the 26 U.S.C. § 6621(c) Claims, Docket Entry No. 25, Ex. 8, FPAA for Coachella.
Subsequently, on April 10, 1991, the IRS also issued to the Tax Matters Partner of ODA a FPAA for the years 1984 and 1985. Again, the attached Explanation of Adjustments noted that the 1984 losses that ODA had reported ($4,696,859 of farming expenses, $113,071 of other expenses, and $288 for interest expense) were disallowed because ODA's activities constituted a series of sham transactions. On July 10, 1991, a partner of ODA filed a petition in Tax Court challenging the proposed tax assessments. One of the defenses asserted was that the assessment for 1984 was time-barred.
Defendant's Response to Plaintiffs' Motion for Summary Judgment with Respect to the 26 U.S.C. § 6621(c) Claims, Docket Entry No. 25. Ex. 9, FPAA for ODA.
Plaintiffs filed an Amended U.S. Individual Income Tax Return (Form 1040X) for the year 1986. On the amended return, filed in October 1991, Plaintiffs reduced the amount of their Coachella deduction. Shortly thereafter, Plaintiffs paid the tax and interest as assessed based on the amended return for 1986. In March 1992, Plaintiffs submitted a cash bond in the amount of $37,860 with respect to any liability for increased income tax resulting from the FPAA for ODA.
While the ODA petition lingered in Tax Court, Plaintiffs attempted to settle their individual liability. On December 20, 1996, the IRS sent to Plaintiffs, in care of their attorney, proposals for resolving their income tax liabilities for 1984 as it related to ODA and for 1986 as it related to Coachella. According to Defendant, included in the packet soliciting an offer of settlement was a Summary of the AMCOR Appeals Settlement Offer ("SAASO") which included a statement that interest would be computed under 26 U.S.C. § 6621(c). On March 27, 1997, Plaintiffs, through their accountant, executed the requisite Forms 870-P(AD) to the IRS, and the IRS accepted Plaintiffs' settlement offers on April 28, 1997. The letter included with the Forms 870-P(AD) stated:
See Defendant's Response to Plaintiffs' Motion for Summary Judgment with Respect to the 26 U.S.C. § 6621(c) Claims, Docket Entry No. 25, Ex. 12, Letter (with enclosures) dated Dec. 20, 1996, from Deborah S. Decker, Director of IRS Service Center, to ODA partners. Plaintiffs dispute that the SAASO was included with this letter or with the settlement solicitation packet for the Coachella partnership items.
We are also concerned that the settlement agreements do not apply to penalties. Although my clients do not
believe they should be subject to any penalties, they have decided to proceed because it is our understanding that the Internal Revenue Service will assert only that the I.R.C. S 6621(c) interest penalty applies and will not assert any other penalties. We understand that the I.R.C. § 6621(c) interest penalty will be assessed.
Defendant's Response to Plaintiffs' Motion for summary Judgment with Respect to the 26 U.S.C. § 6621(c) Claims, Docket Entry No. 25, Ex. 16, Letter (with enclosures) dated Mar. 27, 1997, from Robert W. Vacek to IRS Center.
On November 7, 1997, the IRS advised Plaintiffs of the adjustments to their income that would be made as a result of the settlements. On December 22, 1997, the IRS assessed 1984 tax, interest, and penalty interest against Plaintiffs in the amount of $29,758.25 (including $3,150.90 of 26 U.S.C. § 6621(c) penalty interest). In February 1998, the IRS determined that Plaintiffs had overpaid taxes for 1986 because the settlement allowed greater deductions than those Plaintiffs reported in their amended return. Although the IRS abated tax in the amount of $213 for 1986, it assessed penalty interest under 26 U.S.C. § 6621(c) in the amount of $4,088.26. Applying Plaintiffs' 1992 deposit first to the 1984 assessment, the IRS transferred the remaining deposit balance of $8,101.75 to Plaintiffs' 1986 liability and refunded the balance.
On June 24, 1998, Plaintiffs filed claims for refund (Forms 843) for 1984 in the amounts of $13,159 for tax and $16,599 for interest and for 1986 in the amounts of $14,787 for tax and $12,763 for interest. Plaintiffs checked the boxes on both years' claim forms for abatement of "[i]nterest caused by IRS errors and delays." In August 1998, the IRS denied Plaintiffs' claims for refund.
Plaintiffs' Original Complaint, Docket Entry No. 1, Exs. B and E, Claims for Refund and Request for Abatement (Forms 843) for 1984 and 1986, respectively.
Around December 1999, counsel for the Tax Matters Partner of ODA and counsel for the IRS executed a "Stipulation to be Bound" in which the parties agreed that the outcome of the statute of limitations issue presented in the ODA Tax Court petition would be determined in a manner consistent with the outcome of other limited partnerships managed by AMCOR.
On August 25, 2000, the Kraemers filed the present complaint, asserting numerous grounds of recovery of tax and interest for both years, including: 1) the interest should have been abated under 26 U.S.C. § 6404(e) for errors and delays caused by the IRS; 2) the 1984 assessment was barred by limitations; and 3) the 26 U.S.C. § 6621(c) penalty interest was improperly assessed.
On August 28, 2000, the Tax Court, in the consolidated action entitledAgri-Cal Venture Assocs. v. Comm'r, issued a published opinion on the statute of limitations issue common to the AMCOR limited partnerships. 80 T.C.M. (CCH) 295 (2000). The Tax Court found that the FPAA for 1984 was timely because no valid partnership return had been filed which would have fixed the time to assess a tax under 26 U.S.C. § 6229(a). The Tax Court rejected the petitioners' arguments that the signature of Voyer, the treasurer of AMCOR, a nonpartner, satisfied the statutory requirement that a partnership return be signed by a partner. Without a valid signature, the document was not considered a return which would have commenced the running of limitations. Based on the stipulation by the ODA tax matters partner, ODA' s argument that limitations had run on its 1984 FPAA also failed.
II. Defendant's Motion for Partial Dismissal
Defendant moves the court to dismiss Plaintiffs' interest abatement claim for lack of subject matter jurisdiction.
A. Dismissal Standard
A motion to dismiss for lack of subject matter jurisdiction falls under FED. R. Civ. P. 12(b)(1). The plaintiff bears the burden of demonstrating the district court has subject matter jurisdiction. St. Paul Reinsurance Co., Ltd. v. Greenberg, 134 F.3d 1250, 1253 (5th Cir. 1998). "A court may base its disposition of a motion to dismiss for lack of subject matter jurisdiction on (1) the complaint alone; (2) the complaint supplemented by undisputed facts; or (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts." Robinson v. TCI/US West Communications, Inc., 117 F.3d 900, 904 (5th Cir. 1997).
B. 26 U.S.C. § 6404(e) — Interest Abatement Claim
The IRS may abate deficiency interest under certain circumstances. 26 U.S.C. § 6404(e). Under the version of 26 U.S.C. § 6404(e) which is applicable to taxable years prior to July 30, 1996, interest could be abated if the deficiency resulted from errors or delays caused by IRS employees in the performance of ministerial tasks. Id. The statute was silent on judicial review.
The Taxpayer Bill of Rights 2 ("TBOR2") included an amendment to 26 U.S.C. § 6404(e) which contained two notable changes. See TBOR2, Pub.L. No. 104-168, § 301, 110 Stat. 1452 (1996). Congress added the word "unreasonable" to modify "error or delay" and expanded coverage to IRS managerial, as well as ministerial, acts. Id. These amendments, however, are effective only for tax years after July 20, 1996, the date of enactment. Id. Therefore, the changes do not apply to this case.
Upon consideration of whether district courts had subject matter jurisdiction to review the IRS's denial of a request for abatement pursuant to this code section, several circuit courts took the position that the district courts did not have that power. See Argabright v. United States, 35 F.3d 472 (9th Cir. 1994); Selman v. United States, 941 F.2d 1060 (10th Cir. 1991); Horton Homes, Inc. v. United States, 936 F.2d 548 (11th Cir. 1991). The Eleventh Circuit held that 28 U.S.C. § 1346 conferred jurisdiction on district courts over actions to recover "any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws," including interest. Horton Homes, Inc., 936 F.2d at 550 (quoting 28 U.S.C. § 1346); see also Selman, 941 F.2d at 1061-62. Yet, even though the district courts are able to hear cases for the recovery of interest pursuant to the jurisdictional statute, their power is subject to the Administrative Procedures Act ("APA"), which dictates when a court may review a decision of an agency. Selman, 941 F.2d at 1062; Horton Homes, Inc., 936 F.2d at 550-51. The three circuit courts found that review of 26 U.S.C. § 6404 decisions fell within the exceptions to the application of the APA. Argabright, 35 F.3d at 476; Selman, 941 F.2d at 1064; Horton Homes, Inc., 936 F.2d at 553, 554. Because 26 U.S.C. § 6404 failed "to provide a court with any substantive standards by which to review the agency's action," the statute committed the abatement decisions absolutely to the discretion of the IRS and barred district courts from exercising jurisdiction over these matters.Selman, 941 F.2d at 1063; see also Argabright, 35 F.3d at 475-76; Horton Homes, Inc., 936 F.2d at 552, 553.
The message derived from this pre-TBOR2 line of cases is clear: Federal district courts lacked the authority to hear cases challenging the IRS's refusal to abate interest under 26 U.S.C. § 6404(e). Argabright, 35 F.3d at 476 ("[J]udicial review is not available for agency action taken pursuant to 26 U.S.C. § 6404(e)(1)."); Selman, 941. F.2d at 1064 ("We thus conclude that the language, structure and legislative history of I.R.C. § 6404(e)(1) indicate that Congress meant to commit the abatement of interest to the Secretary's discretion and therefore, 5 U.S.C. § 701(a)(2) precludes judicial review."); Horton Homes, Inc., 936 F.2d at 554 ("[E]ach of 5 U.S.C. § 701(a)(1) and (a)(2) is applicable and bars a federal district court from exercising its jurisdiction to review the failure of the IRS to abate interest pursuant to section 6404(e)(1).")
In 1996, Congress added a provision to 26 U.S.C. § 6404 specifically addressing the taxpayer's right to have the IRS's denial of abatement reviewed. TBOR2, Pub.L. No. 104-168, § 302, 110 Stat. 1452 (1996). "The Tax Court shall have jurisdiction over any action brought by a taxpayer . . . to determine whether the Secretary's failure to abate interest under this section was an abuse of discretion, and may order an abatement." 26 U.S.C. § 6404(i). Unlike the other 1996 amendments to 26 U.S.C. § 6404, this one applies to requests for abatement submitted to the IRS after July 30, 1996, regardless of the coinciding tax year. TBOR2, Pub.L. No. 104-168, § 302(b), 110 Stat. 1452 (1996).
Defendant's motion for partial dismissal of Plaintiffs' claims under 26 U.S.C. § 6404(e) presents four separate arguments under a broader assertion that the court lacks subject matter jurisdiction. Defendant argues that: 1) the waiver of sovereign immunity with respect to 26 U.S.C. § 6404(i) is limited to suits brought in the Tax Court; 2) the 180-day filing requirement is also a condition of the waiver of sovereign immunity; 3) the doctrine of variance precludes this court's review of Plaintiffs' request for refund of interest; and 4) the acts about which Plaintiffs complain do not justify interest abatement because they all occurred prior to the IRS contacting Plaintiffs in writing about their tax deficiencies and are ministerial in nature.
In their response, Plaintiffs argue that the changes imposed by TBOR2 on 26 U.S.C. § 6404 supplant pre-TBOR2 case law. Specifically, they claim that Congress acknowledged that judicial review of abatement denials was not precluded and that Congress provided an "abuse of discretion" standard by which courts could evaluate the Secretary's decision. Additionally, Plaintiffs argue that Congress never intended to give the Tax Court exclusive jurisdiction over 26 U.S.C. § 6404 matters. Plaintiffs also counter each of Defendant's other points; however, because the court finds for Defendant on the issue of judicial review, the court reaches none of the other asserted reasons for dismissal.
To determine whether Congress intended to supersede the previous line of cases, this court turns to the legislative history of TBOR2. The explanation contained within the House Report which accompanied the bill states:
Present law
Federal courts generally do not have the jurisdiction to review the IRS's failure to abate interest.
Reasons for change
The Committee believes that it is appropriate for the Tax Court to have jurisdiction to review IRS's failure to abate interest with respect to certain taxpayers.
Explanation of provision
The bill grants the Tax Court jurisdiction to determine whether the IRS's failure to abate interest for an eligible taxpayer was an abuse of discretion. The Tax Court may order an abatement of interest. The action must be brought within 180 days after the date of mailing of the Secretary's final determination not to abate interest. An eligible taxpayer must meet the net worth and size requirements imposed with respect to awards of attorney's fees. No inference is intended as to whether under present law any court has jurisdiction to review IRS's failure to abate interest.
H.R. REP. No. 104-506, at 28 (1996).
Plaintiffs' arguments notwithstanding, the court finds no indication in this report that Congress intended to grant federal district courts the power to review the IRS's failure to abate interest. The court agrees with Plaintiffs that, by granting the Tax Court the power to review IRS decisions, the statute no longer commits the action absolutely to agency discretion as was the case prior to TBOR2. Unfortunately for Plaintiffs, this does not change the end result. Defendant's motion is not based on the pre-TBOR2 case law, but, rather, on its immunity from suit absent clear waiver. The court has jurisdiction over Plaintiffs' action only to the extent that it conforms not only with 28 U.S.C. § 1346(a)(1), but also "with other statutory provisions which qualify a taxpayer's right to bring a refund suit upon compliance with certain conditions."United States v. Dalm, 494 U.S. 596, 601 (1990). With regard to TBOR2, Congress set very clear limits on the waiver of sovereign immunity with regard to the review of 26 U.S.C. § 6404 decisions.
Plaintiffs glean from the comment, "No inference is intended as to whether under present law any court has jurisdiction to review IRS's failure to abate interest," that congress believed "that judicial review was not previously precluded." See Plaintiffs' Response to Defendant's Motion for Partial Dismissal of Plaintiffs' Complaint, Docket Entry No. 30, p. 4. Congress may have chosen not to offer its opinion on the state of the law regarding judicial review. However, Congress acknowledged that federal district courts generally lack jurisdiction to review abatement decisions and provided no indication that it intended otherwise. See H.R. REP. No. 104-506, at 28 (1996).
The earlier case law is important, but only to the extent that it defines the starting point from which Congress fashioned an exception to the law on judicial review of 26 U.S.C. § 6404 issues. In enacting TBOR2, Congress first acknowledged the district courts' powerlessness to review abatement decisions and then granted the Tax Court, alone, that jurisdictional power. This is the only plausible reading of 26 U.S.C. § 6404(i). Other district courts considering the issue have reached the same conclusion. See Beall v. United States, 170 F. Supp.2d 709, 711 (E.D. Tex. 2001); Davies v. United States, 124 F. Supp.2d 717, 721 (D. Me. 2000).
Plaintiffs suggest that Congress intended jurisdiction be bifurcated between the Tax Court, for prepayment suits, and the district courts, for refund suits. The court finds no support in 26 U.S.C. § 6404 or its legislative history for this position.
Accordingly, the court finds that it lacks subject matter jurisdiction to review Plaintiffs' interest abatement claim. Defendant's motion for partial dismissal is GRANTED as to this claim.
III. Motions for Summary Judgment
Plaintiffs and Defendant have filed cross-motions for summary judgment on the issue of the timeliness of the tax assessment for the 1984 year related to ODA. Plaintiffs also filed a partial summary judgment motion on the issue of their refund claims for 26 U.S.C. § 6621(c) penalty interest for 1984 and 1986.
A. Summary Judgment Standard
Pursuant to FED. R. CIV. P. 56(c), the party moving for summary judgment has the burden of showing that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law.Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The movant must inform the court of the basis for the summary judgment motion and must point to relevant excerpts from pleadings, depositions, answers to interrogatories, admissions, or affidavits which demonstrate the absence of genuine factual issues. FED. R. Cxv. P. 56(c); Celotex Corp., 477 U.S. at 323; Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir. 1992),cert. denied, 506 U.S. 825 (1992). When determining whether any dispute exists, the court must view the "facts and inferences to be drawn therefrom in the light most favorable to the nonmoving party." Meinecke v. H R Block of Houston, 66 F.3d 77, 81 (5th Cir. 1995).
A court may dismiss, sua sponte, a complaint for lack of subject matter jurisdiction, but first should give the plaintiff notice and the opportunity to respond. Benson v. O'Brian, 179 F.3d 1014, 1015 (6th Cir. 1999).
B. Statute of Limitations on Tax Assessment
Generally, a district court has subject matter jurisdiction over refund claims. 28 U.S.C. § 1346(a)(1). However, "[n]o action may be brought for a refund attributable to partnership items." 26 U.S.C. § 7422(h). Thus, this court's jurisdiction depends on whether Plaintiffs' refund claims relate to partnership or nonpartnership items.
A partnership item is "any item required to be taken into account for the partnership's taxable year under any provision of subtitle A to the extent regulations prescribed by the Secretary provide that, for purposes of this subtitle, such item is more appropriately determined at the partnership level than at the partner level." 26 U.S.C. § 6231 (a)(3). Corresponding Treasury Regulations provide specific items including "partnership aggregate and each partner's share of each of the following: . . . [i]tems of income, gain, loss, deduction, or credit of the partnership," all of which are items appearing on the partnership return. 26 C.F.R. § 301.6231(a)(3)-1(a)(1). Conversely, a nonpartnership is an item that is not a partnership item; it is an item that depends upon the circumstances of the individual partner rather than upon variables applicable to the entire partnership. 26 U.S.C. § 6231(a)(4);see also Slovacek v. United States, 40 Fed. Cl. 828, 829 (1998).
The significance of the distinction between partnership items and nonpartnership items is derived from the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub.L. No. 97-248, § 402, 96 Stat. 324 (1982), codified as 26 U.S.C. § 6221-6233. See Alexander v. United States, 44 F.3d 328, 330 (5th Cir. 1995). Partnerships are not directly subject to income tax; rather, partners are liable for the tax in their individual capacities. 26 U.S.C. § 701. Congress specifically designed TEFRA to ensure consistent treatment for all partners in a partnership and to reduce the burden of determining partnership-related tax issues repeatedly at the individual partner level. See Slovacek v. United States, 36 Fed. Cl. 250, 254 (1996) (citing H.R. REP. No. 97-760, at 599-600 (1982)). A key provision of the TEFRA legislation is now codified as 26 U.S.C. § 6221 and provides that the tax treatment of all partnership items must be determined at the partnership level. 26 U.S.C. § 6221. That way, partnership items are adjusted once at the partnership level, and all partners whose tax liability will be affected by the outcome have the opportunity to participate in the administrative proceeding. 26 U.S.C. § 6223; 6224(a).
The administrative proceeding generally includes an audit and internal appeals of the auditor's findings. A partner may request administrative adjustment of the partnership return. 26 U.S.C. § 6227. Rules similar to those applicable to IRS-initiated administrative adjustments apply to judicial review if these requests are not granted in full. See 26 U.S.C. § 6228.
Upon completion of the administrative proceeding, the IRS may adjust items reported on the partnership's information return (Form 1065) by mailing to the tax matters partner and to all "notice" partners an FPAA. 26 U.S.C. § 6223. Any challenges to the FPAA adjustments may be raised in a petition for judicial review. 26 U.S.C. § 6226(a) and (b). As with the administrative proceeding, each partner shall be treated as a party to the court action and shall be bound by its outcome. 26 U.S.C. § 6226(c). Should an individual partner choose to settle with the IRS before the completion of the partnership proceedings, that partner no longer has an interest in the outcome of the partnership level litigation and may not participate in or be bound by the judicial determinations. 26 U.S.C. § 6226(d), see also 26 U.S.C. § 6228(a)(4)(B) (regarding judicial review of administrative adjustments requested by a partner and not granted in full). Rather, the settling partner and the IRS are bound according to the terms of the agreement "to the determination of partnership items for such partnership taxable year." 26 U.S.C. § 6224(c)(1).
26 U.S.C. § 6226(c) provides as follows:
(c) Partners treated as parties. If an action is brought under subsection (a) [petition by a tax matters partner] or (b) (petition by partner other than tax matter partner] with respect to a partnership for any partnership taxable year —
(1) each person who was a partner in such partnership at any time during such year shall be treated as a party to such action, and
(2) the court having jurisdiction of such action shall allow each such person to participate in the action.
When a partner settles, the partner's share of a partnership item becomes a nonpartnership item. 26 U.S.C. § 6231(b)(1)(C). "That is because the value or treatment of the item in the hands of the individual partner is determined solely by the terms of the settlement agreement and the taxpayer's own circumstances, and not by any subsequent tax determination with respect to the partnership." Slovacek, 40 Fed. Cl. at 830. The settling partner is liable in proportion to the partner's share in the partnership item. Id. at 829-30.
The IRS is limited to three years after the later of the date on which the partnership return was filed or the date on which it was due to be filed, if filed early, during which the IRS may assess income tax on a partner attributable to any partnership item. 26 U.S.C. § 6229(a). The limitations period is suspended upon notice of an FPAA or may be extended by agreement between the IRS and an individual partner or the partnership as a whole through the tax matters partner. 26 U.S.C. § 6229 (b) and (d).
In the present case, neither party asserts that the statute of limitations was extended by agreement.
In the present case, ODA filed what purported to be its 1984 partnership return on March 22, 1985; the due date of the return was April 15, 1985. Thus, the IRS had until April 15, 1988, to assess tax against the individual partners or to issue an FPAA to suspend the running of the limitations period.
In his appeal of the FPAA to the Tax Court, the ODA tax matters partner asserted that the FPAA issued on April 10, 1991, was untimely. The IRS countered that the 1984 ODA partnership return was not signed by a partner as required by statute and did not qualify as a return which commenced the limitations period. Because this issue was common to all AMCOR-managed partnership returns, the tax matters partner stipulated that ODA would be bound by a ruling on this issue by the Tax Court in a related case. On August 28, 2000, the Tax Court ruled against the partnerships, finding that the FPAA for the 1984 tax year was not barred by limitations because the purported return was not considered a return for commencing the statute of limitations. Based on the stipulation by the tax matters partner, ODA was bound to accept that ruling.
26 U.S.C. § 6229(c)(3) provides that "[i]n the case of a failure by a partnership to file a return for any taxable year, any tax attributable to a partnership item (or affected item) arising in such year may be assessed at any time."
Plaintiffs argue that they are not bound by the Tax Court ruling for a number of reasons. Instead, they seek an independent decision from this court that the FPAA for the 1984 tax year was untimely. The court need not reach these issues.
It has been held that a statute of limitations challenge related to the administrative adjustment of partnership return is considered a challenge to a partnership item. See, e.g., Chimblo v. Comm'r, 177 F.3d 119, 125 (2d Cir. 1999), cert. denied, 528 U.S. 1154 (2000) (joining other courts in holding that, under TEFPA, a statute of limitations defense is a partnership item); Williams v. United States, 165 F.3d 30 (6th Cir. 1998) (table), 1998 WL 537579, at *3, unpublished disposition, ("It is well established that statute of limitations challenges are considered challenges to a partnership item."); Kaplan v. United States, 133 F.3d 469, 473 (7th Cir. 1998) (holding that statute of limitations issue is a partnership item for which jurisdiction is barred by 26 U.S.C. § 7422 (h)); Clark v. United States, 68 F. Supp.2d 1333, 1344 (N.D. Ga. 1999) (agreeing with other courts that a TEFRA statute of limitations issue should be decided at the partnership level); Thomas v. United States, 967 F. Supp. 505, 506 (N.D. Ga. 1997) (finding that the TEFRA statute of limitations was a partnership item over with the district court did not have jurisdiction); Barnes v. United States, 1997 WL 732594, at *3 (M.D. Fla. 1997), aff'd, 158 F.3d 587 (11th Cir. 1998) (holding that whether a partnership had extended the limitations period was a partnership item under TEFRA).
For the same reason, challenges to the authority of the tax matters partner have also been held to be "partnership items" required to be determined at the partnership level in the Tax Court. See Kaplan, 133 F.3d at 473; Clark, 68 F. Supp.2d at 1345; Klein v. United States, 86 F. Supp.2d 690, 696 (E.D. Mich. 1999).
Otherwise, an individual partner who succeeded on his challenge to the timeliness of the FPAA would cause a landslide of litigation and would affect the tax liability of all of the partnership's partners. This is exactly the type of piecemeal litigation that TEFRA was intended to prohibit and for which the court lacks jurisdiction.
Plaintiffs cite Alexander, as supporting their contention that this court has jurisdiction to resolve the limitations issue because the settlement agreement with the IRS converted the partnership items into nonpartnership items over which the court has jurisdiction. 44 F.3d at 328. Although a difficult case in many respects, Alexander is limited to the facts presented there, facts which distinguish it from the case now before the court.
In Alexander, the plaintiff included on his timely-filed 1984 tax return income attributable to a partnership interest. Id. at 329. On May 16, 1988, the IRS mailed to the plaintiff a FPAA which proposed an increased tax liability on his return. Id. Along with the FPAA, the IRS included a Form 870-P, then known as a "Settlement Agreement for Partnership Adjustments." Id. The plaintiff was informed that, if he signed the form, it would constitute an offer to enter into a "binding settlement" to accept the FPAA adjustments. Id. He signed the form and paid the deficiency. Id. at 330.
Under 26 U.S.C. § 6229, a FPAA was required to have been issued by April 15, 1988, in order to suspend the limitations period.
Over a year after making the payment, the plaintiff learned that another partner had challenged the timeliness of the FPAA issued to the partnership. Id. In that Tax Court proceeding, the IRS conceded that the statute of limitations for assessing any deficiency on the 1984 year had expired on April 15, 1988. Id. Upon learning that his prior payment of the deficiency appeared to be an overpayment in light of the Tax Court decision, the plaintiff timely filed a claim for refund. Id.
The IRS argued that 26 U.S.C. § 7422(h) deprived the court of jurisdiction over the plaintiff's refund claim because it related to the tax treatment of a partnership item. Id. at 331. The critical issue was whether the refund action was attributable to a partnership or nonpartnership item. Characterizing the item to which the refund was attributable as "adjustments called for in the FPAA to the . . . partnership return," the court found that it was a partnership item. Id. However, the court found jurisdiction over the refund action based on the 26 U.S.C. § 6231(b)(1)(C) conversion of partnership items to nonpartnership items at settlement. Id.
The Fifth Circuit did not state specifically that the statute of limitations issue was a partnership item. See Alexander, 44 F.3d at 331.
Accepting the IRS's concession and the decision of the Tax Court that the FPAA was issued after the limitations period for assessment had expired, the court did not make any independent factual determinations or legal conclusions on the issue of the timeliness of the FPAA. Id. at 330. The Fifth Circuit did not render any substantive decision on the limitations issue itself; rather, it applied the Tax Court decision in determining whether the plaintiff's remittance was an overpayment which necessitated a refund. Id. Assuming, then, that the FPAA had been issued outside the limitations period and deciding that the court did have jurisdiction over a post-settlement refund claim, the Fifth Circuit quickly moved to the heart of its opinion, whether the plaintiff had waived his right to refund via the settlement agreement. Id. at 331-33.
As suggested by Alexander, whether the FPAA was timely filed is a partnership item. This is so because the ultimate issue is the "propriety of the adjustments to the partnership's . . . tax return."Kaplan, 133 F.3d at 473. If the FPAA was timely, then the adjustments are valid and the tax and interest is greater for the entire partnership, i.e., for all partners. Any decision on this issue affects all partners' liability in proportion to their share. If each partner is allowed to individually litigate the timeliness of the FPAA, then TEFRA will not have the intended effect of avoiding multiple suits and, potentially, inconsistent decisions at the partner level.
It is important to differentiate between the one-year limitations period for the assessment of tax following the finalization of the adjustment proceedings and the three-year limitations period following the filing of the partnership return. The first is unique to each partner. See Thomas, 967 F. Supp. at 506. The latter affects the entire partnership. See id.
As case in point, Plaintiffs ask the court to issue a decision contrary to that of the Tax court related to this case. If the court did so, then presumably each of the partners remaining in the Tax court proceeding could settle with the IRS in order to seek reconsideration of the statute of limitations issues at the district court level.
In Alexander, the tax court proceedings had concluded, in the partners' favor no less. 44 F.3d at 330. Exercising jurisdiction over the plaintiff's refund claim based on the expiration of the statute of limitations would not interfere with the partnership proceedings and posed no conflict with the aims of TEFRA. Here, of course, the situation is quite the opposite. Plaintiffs ask this court to go behind the settlement agreement in order to reach a conclusion contrary to that reached in the Tax Court. This is the point at which the analysis inAlexander is no longer applicable. This court does not read Alexander so broadly as to allow taxpayers to litigate partnership matters which have been converted to nonpartnership items by settlement agreements. To permit such a result would overturn the TEFRA requirement that partnership items be litigated at the partnership level and would allow multifarious litigation at the individual taxpayer level, the exact scenario which TEFRA was designed to prevent. Cf. Chimblo, 177 F.3d at 125; Kaplan, 133 F.3d at 473. To say the Fifth Circuit intended to undermine the goals of TEFRA by allowing partners to settle with the IRS in order to have the district court review partnership items is far too simplistic a reading of Alexander. This court is, therefore, unwilling to extend Alexander to the present scenario.
The court notes that Plaintiffs' position on the 26 U.S.C. § 6621(c) issue, discussed below, is that this court does not have jurisdiction to make partnership item determinations, despite the conversion upon settlement. "[Plaintiffs'] Forms 870-P(AD) are comprehensive and settled all [their] partnership items. The items affirmatively set out in the agreement are settled on those terms. All others are deemed accepted as filed. . . . The IRS is deemed to have abandoned any adjustment it may have proposed on those bases." Plaintiffs' Supplemental Brief, Docket Entry No. 39, p. 22. The court agrees and finds that the restriction is applicable here as well. By accepting the adjustments, Plaintiffs abandoned their arguments that the adjustments were in any manner incorrect or improper.
Plaintiffs had the right to participate in the partnership level proceeding. Once Plaintiffs entered into a settlement agreement on the partnership items, they relinquished their right to litigate those items as a matter of law because the only forum available by law to do so was in a partnership level proceeding. The partnership chose to litigate the matter before the Tax Court. The conversion of the partnership items to nonpartnership items pursuant to 26 U.S.C. § 6231(b)(1)(C) may not be used to make an "end run" around the jurisdictional prohibition of 26 U.S.C. § 7422(h).
26 U.S.C. § 6226(a) provides that judicial review of the FPAA may be had in the Tax court, the U.S. district court for the district in which the partnership's principal place of business is located, or the court of Federal Claims.
Accordingly, the court finds that, although jurisdiction exists over Plaintiffs' refund claim as a whole, the court lacks jurisdiction to hear the merits of the taxpayers' statute of limitations argument. The court recognizes that the court's decision raises issues not fully briefed by the parties. As this ruling concerns subject matter jurisdiction, it is incumbent upon the court to raise the issue sua sponte. The court's decisions rest on what appear to be undisputed facts. However, the court will allow Plaintiffs ten days to submit, in the form of a motion for reconsideration, additional facts supporting jurisdiction. The court will not entertain briefs based solely on legal arguments derived fromAlexander.
C. 26 U.S.C. § 6621(c) — Tax Motivated Transactions 26 U.S.C. § 6621(c), now repealed, was enacted in 1984 (originally as subsection (d)) to encourage settlement of tax shelter cases. H.R. REP. 98-861, at 985 (1984). During the period of enactment, the section applied to interest accruing between December 31, 1984, and December 31, 1989. The section allowed the IRS to assess interest at 120% of the usual underpayment rate for "any substantial underpayment attributable to tax motivated transactions." 26 U.S.C. § 6621(c)(1). Tax motivated transactions included valuation overstatement, losses disallowed by 26 U.S.C. § 465(a) and credits disallowed by 26 U.S.C. § 46(c)(8), straddles, substantial distortions of income due to specified accounting methods, sham or fraudulent transactions. 26 U.S.C. § 6621(c)(3)(A).
The Fifth Circuit has held that "[a] sham or fraudulent transaction includes transactions that were not entered into for profit and are without economic substance." Lukens v. Comm'r, 945 F.2d 92, 99 (5th Cir. 1991) (citing Patin v. Comm'r, 88 T.C. 1086 (1987), aff'd without opinion sub nom., Hatheway v. Comm'r, 856 F.2d 186 (4th Cir. 1988), and aff'd sub nom., Skeen v. Comm'r, 864 F.2d 93 (9th Cir. 1989), and aff'd without opinion, 865 F.2d 1264 (5th Cir. 1989), and aff'd sub nom., Gomberg v. Comm'r, 868 F.2d 865 (6th Cir. 1989)); see also Durrett v. Comm'r, 71 F.3d 515, 517 (5th Cir. 1996); Chamberlain v. Comm'r, 66 F.3d 729, 732 (5th Cir. 1995); but see Patin, 88 T.C. at 1129 (suggesting that a sham transaction is one that either was not entered into for profit or was without economic substance).
By virtue of Congress's enactment of the statute, the IRS has the authority to assess 26 U.S.C. § 6621(c) penalty interest. A taxpayer challenging the IRS's assessment bears the burden of proving that the assessment was improper. Melton v. Teachers Ins. Annuity Ass'n of Am., 114 F.3d 557, 560 (5th Cir. 1997) (citing Westbrook v. Comm'r, 68 F.3d 868, 876 (5th Cir. 1995)).
Plaintiffs' primary argument is that the IRS cannot assess 26 U.S.C. § 6621(c) interest against them because they did not agree, in the Forms 870-P(AD), either to the assessment of the penalty interest or to facts which would support a finding that the partnerships were tax motivated transactions. They rationalize that the reasons for the adjustments were not outlined in the Forms 870-P(AD); and, therefore, the IRS cannot show that the adjustments were attributable to a tax motivated transaction as defined in 26 U.S.C. § 6621(c). Further, Plaintiffs argue that whether a business transaction is tax motivated is based on determinations at both the partner and partnership level and that this court, pursuant to 26 U.S.C. § 6230(c)(4), is now barred from making a partnership determination. They conclude that the assessment of 26 U.S.C. § 6621(c) interest is improper.
Defendant asserts that Plaintiffs, in fact, did consent to the assessment of 26 U.S.C. § 6621(c) interest. Defendant claims that the SAASO was included with the Forms 870-P(AD) and stated that 26 U.S.C. § 6621(c) penalty interest would be assessed. In the cover letter sent with the Forms 870-P(AD), Plaintiffs' accountant acknowledged that Plaintiffs would be assessed 26 U.S.C. § 6621(c) interest. Defendant argues that this evidence indicates that the interest assessment was part of the settlement or, at the very least, creates a fact issue on whether it was part of the settlement. Regardless of the court's decision with regard to this matter, Defendant contends that the IRS is entitled to a presumption that the assessment is correct. Plaintiffs bear the burden, according to Defendant, to prove otherwise.
The court finds that, although the Forms 870-P(AD) contain the warning that the settlement "may result in an additional tax liability to you plus interest as provided by law," this does not amount to an agreement to the assessment of 26 U.S.C. § 6621(c) penalty interest. Despite the attention given the issue of whether the parties agreed to an assessment of 26 U.S.C. § 6621(c) interest, it is of no import. Clearly, the Forms 870-P(AD) were intended to settle partnership items. As both parties acknowledge, the 26 U.S.C. § 6621(c) interest is an affected item, to be resolved at the partner level. So, the court's agreement that the 26 U.S.C. § 6621(c) assessment was not part of the settlement does not compel the result Plaintiffs propose. The court finds that the IRS had the authority to assess penalty interest after settlement of the partnership items and that Plaintiffs bear the burden of producing facts to show the assessment was improper, i.e., the partnerships were not tax motivated transactions.
Defendant's Response to Plaintiffs' Motion for Summary Judgment with Respect to the 26 U.S.C. § 6621(c) claims, Docket Entry No. 25, Ex. 16, Forms 870-P(AD) for ODA and Coachella. However, the evidence leaves little room for doubt that Plaintiffs were aware that the IRS planned to make the assessment based on a finding that the partnerships were sham transactions. See Defendant's Response to Plaintiffs' Motion for Summary Judgment with Respect to the 26 U.S.C. § 6621(c) claims, Docket Entry No. 25, Ex. 8, FPAA for Coachella; Ex. 9, FPAA for ODA; Ex. 16, Letter (with enclosures) dated Mar. 27, 1997, from Robert W. Vacek to IRS center.
Plaintiffs present Todd v. Comm'r, 862 F.2d 540 (5th Cir. 1988), andMcCrary v. Comm'r, 92 T.C. 827 (1989), in support of their position that the IRS is not allowed, in this case, to assess 26 U.S.C. § 6621(c) interest because the reasons for its assessment are not included in the Forms 870-P(AD). In Todd, the underpayment was not attributable to a valuation overstatement, but to the failure to place the property in service during the period for which deductions were taken. 862 F.2d at 543. Accordingly, the assessment of a 26 U.S.C. § 6659 penalty for overvaluation was improper. Id. Similarly in McCrary, the taxpayers conceded that the investment tax credit was improper because the agreement was a license, not a lease. 92 T.C. at 851. Because their concession precluded a finding that the investment tax credit was attributable to one of the tax motivated transactions described in 26 U.S.C. § 6621(c), the penalty interest was not applicable. Id. at 858. In both of those cases, the taxpayers' violations were attributable to a reason other than one which supported the assessment of 26 U.S.C. § 6621(c) interest. The courts felt it would be "too draconian" to assess the penalty interest in addition to the penalties the taxpayers already would face for their actions. Id.
Here, there has been no finding or concession that precludes the assessment of 26 U.S.C. § 6621(c) interest. Plaintiffs would have this court extend McCrary and Todd to cover situations in which the taxpayers concede liability without stating specific grounds. In a case such as this, however, nothing prevents the IRS from finding that the adjustments were due to tax motivated transactions.
The bottom line is that the IRS did not need Plaintiffs' concession or agreement or a court determination to give it the authority to assess 26 U.S.C. § 6621(c) interest after the settlement was entered. The court finds no law requiring the IRS specifically to identify the reasons for the assessment prior to a challenge by the taxpayer. The IRS still is entitled to the presumption of correctness of its assessment. The court recites the above litany of legal maxims to counter Plaintiffs' multiple statements, which are unsupported by any legal authority, suggesting the opposite. All of Plaintiffs' sophistry, indignation, and hysteria fall far short of proving that the IRS's assessment of 26 U.S.C. § 6621(c) interest was improper as a matter of law. In fact, Plaintiffs present no evidence demonstrating that the partnerships were not tax motivated transactions. If Plaintiffs wish to present evidence on the matter, this court has jurisdiction to consider whether the IRS's assessment of the 26 U.S.C. § 6621(c) interest, a nonpartnership item, was correct.See 26 U.S.C. § 7422(h); 28 U.S.C. § 1346(a)(1).
The situation is rather simple, really. Plaintiffs and the IRS settled the partnership items without any factual concessions by Plaintiffs. As anticipated, Defendant then assessed tax and interest at the partner level. Plaintiffs contest the assessment. Plaintiffs have the burden to show that the assessment was improper. They have not done so, factually or legally. Therefore, Plaintiffs' partial summary judgment motion is DENIED.
IV. Conclusion
Based on the foregoing, the court GRANTS Defendant's Motion for Partial Dismissal of Plaintiffs' Complaint based on 26 U.S.C. § 6404(e). The court DENIES Plaintiffs' and Defendant's cross-motions for partial summary judgment on the statute of limitations issue, but dismisses this claim on the basis that the court lacks subject matter jurisdiction. The court DENIES Plaintiffs' Motion for Partial Summary Judgment with Respect to the 26 U.S.C. § 6621(c) Claims. The court GRANTS Plaintiffs' Motion for Leave to File Motion for Partial Summary Judgment Out of Time, Plaintiffs' Motion to Extend Time to Reply to Response in Opposition to Plaintiffs' Motion for Partial Summary Judgment, and Defendant's Motion for Leave to File Cross-Motion for Partial Summary Judgment with Respect to the Statute of Limitations Issue Out of Time.