Opinion
Civil Action No. SA-01-CA-1096-EP
January 15, 2003
ORDER
On this date, the Court considered Plaintiff's motion for summary judgment, filed September 05, 2002, Defendant's response and partial motion for summary judgment and Plaintiff's reply. After careful consideration, the Court will DENY Plaintiff's motion for summary judgment and GRANT the Defendant's cross-motion for partial summary judgment based upon the following analysis.
Nature of the Case
Plaintiff DAVMY Corporation (DAVMY), as the tax matters partners of Natalie Holdings, Ltd. (Natalie), petitions Defendant United States of America acting through the Commissioner of Internal Revenue Service (IRS) for the readjustment of the partnership items set forth in a Notice of Final Partnership Administrative Adjustment (the FPAA). The FPAA was dated and mailed to Plaintiff on September 7, 2001, by the IRS pursuant to 26 U.S.C. § 6226(a)(2) .
Plaintiff is a TEFRA partnership subject to the 26 U.S.C. § 6221-6234 which requires that the IRS to address proposed adjustments to partnership items in one proceeding by providing notice to tax matters partners as identified by the partnership.
DAVMY is a Texas corporation owned by Amy and David Perez, who each own 50% of the corporation. Natalie is a Texas limited partnership. DAVMY holds a one percent interest in Natalie and is the sole general partner of NATALIE. NATALIE deposited its 1997 tax returns in the mail in an envelope, certified postage prepaid, and addressed to the IRS Service Center in Philadelphia, Pennsylvania on September 3, 1998. The IRS received the NATALIE return on September 10, 1998.
NATALIE received two valid extensions, one to August 15, 1998 and the second to October 15, 1998.
In March 2001, the IRS alerted various IRS executives, agents and managers of an emerging potentially abusive tax shelter. In April 2001, the IRS requested a list of shelter investors from the Seattle based firm involved in the promotion of the shelter. This list was forwarded to the IRS, Office of Tax Shelter Analysis (OTSA), the focal point for IRS investigations of abusive corporate tax shelter issues. Using the list, OTSA retrieved information from the IRS's Integrated Document Retrieval System to order tax returns for the tax shelter participants. In July 2001, an IRS agent with OTSA, an IRS manager and a tax shelter coordinator for this tax shelter reviewed the information and prepared an investor list and determined that entities on the list were involved in a Foreign Leverage Investment Program (FLIP).
In July 2001, IRS agents, financial products specialists and an economist attended a training session in Washington D.C. regarding the examination of this tax shelter program. Using their expertise and training, upon analyzing the available information, the IRS decided to assign a group of experts to examine Natalie's tax liabilities. The group examined the tax returns for all entities involved in the FLIP except for Natalie's and one other entity's, which were unavailable. After hours of analysis, the group was able to develop an organizational chart showing the ownership of the various entities and the flow through of the various tax attributes of the shelter. Based upon this analysis and advice of IRS counsel, the IRS manager assigned to this case decided to issue an FPAA to Plaintiff's based upon the correct determination of Natalie's participation in the tax shelter under review.
The IRS mailed the FPAA to Plaintiff on September 7, 2001 disallowing $5,002,941 in capital losses, Plaintiff filed a petition in this Court to contest the FPAA as provided in 26 U.S.C. § 6226(a)(2).
As a prerequisite to filing a petition disputing an FPAA, 26 U.S.C. § 6226(e)(1) requires the tax matters partner to deposit with the Secretary of the Treasury the amount by which the tax liability of the tax matters partner would be increased if the FPAA's adjustments to partnership tax returns were correct. Because the tax matters corporation, DAVMY, is an "S-Corporation," the shareholders, David and Amy Perez, are required to make tax deposits rather than the corporation pursuant to 26 U.S.C. § 1366-1368. The Perezes deposited $1,624,000 with the IRS's Secretary of the Treasury.
Summary Judgment Standard
Federal Rule of Civil Procedure 12(b) provides that if, on a motion to dismiss for failure to state a claim, "matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56." Because the Court relied on the Defendant's documentary evidence to resolve this dispute, the Court treated Defendant's motion as one for summary judgment.In the usual case, the party who seeks summary judgment must show by affidavit or other evidentiary materials that there is no genuine dispute as to any fact material to resolution of the motion. See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986); Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 250 n. 4 (1986); Lavespere v. Niagra Machine Tool Works, Inc., 910 F.2d 167, 178 (5th Cir. 1990); Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986). To satisfy this burden, the movant must either submit evidentiary documents that negate the existence of some material element of the nonmoving party's claim or defense or, if the crucial issue is one for which the nonmoving party will bear the burden of proof at trial, merely point out that the evidentiary documents in the record contain insufficient proof concerning an essential element of the nonmoving party's claim or defense. See Celotex Corp., 477 U.S. at 325; Lavespere, 910 F.2d at 178.
Once the moving party has carried that burden, the burden shifts to the nonmoving party to show that summary judgment is not appropriate. See Fields v. City of South Houston, 922 F.2d 1183, 1187 (5th Cir. 1991). The nonmoving party cannot discharge this burden by referring to the mere allegations or denials of the nonmoving party's pleadings; rather, that party must, either by submitting opposing evidentiary documents or by referring to evidentiary documents already in the record, set out specific facts showing that a genuine issue exists. See Celotex, 477 U.S. at 324; Fields, 922 F.2d at 1187. In order for a court to find there are no genuine material factual issues, the court must be satisfied that no reasonable trier of fact could have found for the nonmoving party or, in other words, that the evidence favoring the nonmoving party is insufficient to enable a reasonable jury to return a verdict for the nonmovant. See Liberty Lobby, 477 U.S. at 249-50; FED.R.Civ.P. 56(e).
Statute of Limitations
Plaintiff argues it is entitled to summary judgment because the IRS issued the FPAA after the governing statute of limitations expired. The statute of limitations for issuing an FPAA expires three years after the later of (i) the date on which the partnership return for such taxable year was filed or (ii) the last day for filing such return for such year, without regard to extensions. 26 U.S.C. § 6229(a). Here, the Natalie return was mailed on September 3, 1998 by certified mail and received by the IRS on September 10, 1998. Dep. David Perez, ¶ 5 and Ex. G, stipulation No. 5. The resolution of this issue turns on whether the Natalie return was "filed" on the date it was postmarked or the date it was received where it was both timely mailed and timely received.
Normally, a return is considered "filed" with the IRS on the date that it is received by the appropriate office of the IRS. United States v. Lombardo, 241 U.S. 73, 76 (1916); Phinney v. Bank of Southwest Nat'l Ass'n, Houston, 335 F.2d 266, 268 (5th Cir. 1964); Poynor v. Comm'r, 81 F.2d 521, 522 (5th Cir. 1936); Chasar v. Internal Revenue Serv., 733 F. Supp. 48, 49 (N.D. Tex. 1990). Here, Plaintiff's returns were due on October 15. 1998. The returns were received by the IRS on September 10, 1998. The statute of limitations thus began to run on September 10, 1998. The FPAA was mailed on September 7, 2001, within the three-year statute of limitations under 26 U.S.C. § 6229(a).
Plaintiff argues that under 26 U.S.C. § 7502 the postage date of a timely mailed return is the date of filing and that here, the statute of limitations began to run on September 3, 1998 and thus the FPAA mailed on September 7, 2001 was time-barred by the three-year statute of limitations. Section 7502 states in relevant part:
(a) General rule. —
(1) Date of delivery. — If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be. (2) Mailing requirements. — This subsection shall apply only if — (A) the postmark date falls within the prescribed period or on or before the prescribed date — (i) for the filing (including any extension granted for such filing) of the return, claim, statement, or other document, or . . .26 U.S.C. § 7502. The plain language of the statute states that § 7502 only applies to situations where a return is timely mailed but delivered to the IRS after a prescribed date. Interpreting this provision, the United States Court of Appeals for the Sixth Circuit has held:
Section 7502 was enacted as a remedial provision to alleviate inequities arising from differences in mail delivery from one part of the country to another. . . . This "mailbox rule," both by its terms and as revealed in the legislative history, applies only in cases where the document is actually received by the I.R.S. after the statutory period.Miller v. United States, 784 F.2d 728, 730. In this case, Plaintiff wants to avail itself of the postage date equals filing date rule in § 7502. The problem is, however, that Plaintiff's return was timely mailed and timely received. There is no reason for the Court to depart from the general rule that delivery date equals filing date and apply the exceptions in § 7502 to the facts here. If timely mailing equals filing even when the return is timely delivered, there would be no need for § 7502 since all returns that were timely mailed would be considered timely filed on the date of postage, not delivery.
Plaintiff relies on Emmons v. Comm'r, 898 F.2d 50 (5th Cir. 1990), for the proposition that the filing date of a timely filed return is the date of mailing. Plaintiff cites the language, "We decline to ignore the statute's plain words. Thus, all timely [mailed] returns are considered filed as of the postmark date and all late [mailed] returns are considered filed as of the date of delivery." Emmons, 898 F.2d at 51. The facts in Emmons, however, involve returns that were mailed late and received late. Id. at 50. The issue in Emmons is on what date, post date or receipt date, did the statute of limitations run. The court simply noted that timely mailed and late received returns get the benefit of the mailing equals filing rule of § 7502 while late mailed and late received returns are determined by the general rule that delivery equals filing. In both instances the Emmons court referred to late received returns. This Court will not ignore the statute's plain words, ". . . after such period or date, delivered . . ." and finds that § 7502 is inapplicable to these facts since the FPAA in this case was timely delivered. The Court finds that the Natalie returns were delivered to the IRS on September 10, 1998, that they were due on October 15, 1998 and thus the filing date is September 10, 1998. As such, the FPAA mailed on September 7, 2001 was mailed within the three-year statute of limitations as prescribed by 26 U.S.C. § 6229(a). As a result, Plaintiff is not entitled to summary judgment on the grounds of limitations.
Considered Determination
Plaintiff's argue that the FPAA issued by the Defendant is invalid because it is not a "considered determination" as required by 26 U.S.C. § 6212(a). The United States Court of Appeals for the Fifth Circuit held that "courts have interpreted the term `determination' to mean, for purposes of Section 6212(a), a `thoughtful and considered determination that the United States is entitled to an amount not yet paid." Sealy Power v. Comm'r, 46 F.3d 382, 387-88 (5th Cir. 1995) (citing Portillo v. Commissioner, 932 F.2d 1128, 1132 (5th Cir. 1991) (quoting Scar v. Comm'r, 814 F.2d 1363, 1369 (9th Cir. 1987)). "The Internal Revenue Code does not specify the form or content of a valid notice of deficiency. Courts have held, however, that the notice generally must advise the taxpayer that the Commissioner has determined a deficiency for a particular year and must specify the amount of the deficiency or provide the information necessary to compute the deficiency." Sealy, 46 F.3d at 386. (citing Portillo, 932 F.2d at 1132) (citations omitted). The "notice of deficiency, which merely serves as a warning to the taxpayer that the Commissioner has assessed a deficiency and plans to hale the taxpayer into court, need not give any reasons for the assessment of a deficiency." Sealy, 46 F.3d at 388; see Scar, 814 F.2d at 1396.
An FPAA issued in relation to a partnership's tax return is the functional equivalent of a notice of deficiency. Sealy, 46 F.3d at 382 (5th Cir. 1995).
There is a general rule that a determination of deficiency issued by the Commissioner is given a presumption of correctness. Sealy, 46 F.3d at 386 (citing U.S. v. Janis, 428 U.S. 433, 441, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046, 1053 (1976)). That is, courts will not look behind the notice of deficiency to determine whether it is arbitrary. Sealy, 46 F.3d at 387. "On rare occasions, as in Scar, however, the reason given on the face of the notice reveals that the Commissioner failed to make a determination." Id. at 387-88; see Scar, 814 F.2d at 1367; Clapp v. Comm'r, 875 F.2d 1396, 1403 (9th Cir. 1989). The issue here is whether the FPAA is void on its face.
Plaintiff asserts that under Scar, the IRS must have in fact examined the taxpayer's return in order for an FPAA to be valid. Pl.'s Mot. for Summ. J. at 17, Pl.'s Reply to Def.'s Resp. in Opp'n to Pl.'s Mot. for Summ. J. at 8. Scar establishes no such requirement. Clapp, 875 F.2d 1396, 1402 ("As the Tax Court has since pointed out, Scar did not even require any affirmative showing by the Commissioner that a determination set forth in an alleged notice of deficiency was made on the basis of the taxpayers' return."). In Scar, the notice had no relation to the taxpayers and on its face stated that because the taxpayers' return was not available, the Commissioner was imposing the maximum tax rate to the adjustment amount. Scar, 814 F.2d at 1364-65. Further, the notice referred to a tax shelter that had no connection to the taxpayers. Id. In this case, the notice properly identified tax shelters and related entities and explained why the adjustments were being made. Unlike in Scar, there was no language indicating that the Commissioner imposed the maximum tax rate until the proper rate could be determined. Although the notice contained mistakes, the notice clearly contained information that related to the taxpayer. Therefore, under Scar, the FPAA in this case is not void on its face.
Plaintiff's assert that the FPAA in this case is void under Sealy because the Commissioner did not examine the Natalie returns. The Court disagrees. In Sealy, taxpayers challenged an FPAA disallowing several deductions and credits. Sealy, 46 F.3d at 385. The FPAA set out adjustments for each year involved and explained in an attachment the reasons for the adjustments. Id. at 388. The court concluded that the Commissioner did consider the taxpayer's return and that the FPAA on its face reflected that the Commissioner made a "determination" for purposes of the Tax Court's jurisdiction. Id. Nowhere, however, does the Sealy court state that there is an affirmative duty of the Commissioner to consider the taxpayer's tax return in order for a determination to be valid. In Sealy, the Fifth Circuit found a FPAA that set out the adjustment items for each year involved and explained the adjustments in an attachment to be a considered determination. Id. Here, the Commissioner also set out adjustments and explained the adjustments in an attachment. The Commissioner considered Danmar's tax returns and traced the losses arising from the tax shelter from the partner's returns back up the chain to Natalie. The Sealy court focused on the substantive information contained in the underlying determination, not a bright line rule of whether the Commissioner had the partnership's tax returns. Therefore, the Court finds that under Sealy, the FPAA in this case is valid
Logically, reviewing the taxpayer's return is the ideal way to make a determination because most of the relevant information would be contained in the return. It is conceivable, however, that in rare instances such as this one, the Commissioner could make a valid determination through an IRS, OTSA investigation, which examines sufficient information related to the taxpayer.
Plaintiff also relies on Estate of Weller v. United States, 58 F. Supp.2d 734 (S.D. Tex. 1998) to support its position that the FPAA in this case is void. The Court disagrees. Two of the determinations in Weller stated, "we have been unable to determine the exact deficiency to which the proposed penalties for this adjustment apply. Since we are required to provide you with appeal rights for the proposed penalties, we have based our penalty computations on an estimated deficiency of $100,000." Weller, 58 F. Supp.2d at 736. The other determination, which did not contain the estimation language, was also invalidated. The court pointed out, however:
Significantly, this is a case where the IRS had in its possession all the information it needed to make a determination of a tax deficiency as required by the Code, yet failed to do so within the limitations. Therefore, the present facts can be distinguished from cases in which the illegal source of income, or lack of taxpayer records, prevented the Commissioner from making an assessment with mathematical precision. . . . The August 20, 1992 assessments on the 1983 and 1985 tax years were made without any substantive basis, are arbitrary and erroneous, and are void.Id. at 741-42. In Weller, the IRS had the returns and failed to look at them, sending a "Protective Manual Assessment" instead. Id. at 737. The IRS did not review any information related to the taxpayer. Id. Here, the IRS did not have the returns which would have allowed it to make a determination with mathematical precision. It did, however, act in good faith by analyzing all of the available information that related to the taxpayers in order to make a substantive determination. The Court therefore finds that the FPAA is valid under Weller.
Plaintiff relies on Abrams v. Commissioner, 787 F.2d 939, 941 (4th Cir. 1986), for the proposition that the IRS must have in fact examined a return in order to be valid. The Court finds the facts of Abrams inapplicable to this case. In Abrams, the IRS sent the taxpayers a letter warning them that their claims would be denied if they attempted to utilize a specific tax shelter. Abrams 787 F.2d at 940. The taxpayers later tried to claim that the letter was a notice of deficiency in order to receive a tax liability determination at a preferentially early date. Id. at 942. The court noted:
The most important observation to be made about the letter is that it left no doubt that, as yet, there had been no general review of any return, no computation of any deficiency nor any reduction in refunds to which the taxpayers might otherwise be entitled to. It was in essence only fair warning of what the taxpayers sheltering income through . . . the tax shelter in question . . . `might expect.'"Abrams 787 F.2d 939 at 941. Here, the IRS, reviewed the partnership tax returns for Danmar, the individual tax returns for David Perez and Amy Perez, the partners involved in Natalie and other information related to the Plaintiff pursuant to the OTSA review of the tax shelter. Based upon the information it had, the IRS group was able to develop an organizational chart detailing the loss disallowance attributable to the Plaintiff. The Court therefore finds the facts of Abrams unpersuasive. Consequently, Plaintiff is not entitled to summary judgment on the grounds that the IRS failed to make a considered determination.
Conclusion
Accordingly, the Court DENIES Plaintiff's Motion for Summary Judgment (Docket entry #14) on each of Plaintiff's claims. And because Defendant has moved for partial summary judgment on the grounds that the FPAA was both timely mailed and a considered determination, the Court GRANTS Defendant's Cross Motion for Partial Summary Judgment (Docket entry #18).