717 F.3d 920
Fed. Cir.2013Background
- Nineteen taxpayers were partners in Dillon Oil Technology Partnership (1983–1984 losses passed to partners).
- IRS issued Final Partnership Administrative Adjustments (FPAA) in 1987–1988 disallowing most Dillon Oil losses and addressing profit- objective, economic substance, and at-risk issues.
- Krause v. Commissioner found lack of profit objective and imposed §183-based TMT penalties, guiding related Vulcan Oil suits.
- Vulcan Oil suits bound Dillon Oil to Krause’s conclusions via dismissal; partnership-level issues determined Krause’s outcomes.
- Dillon Oil’s TMP ceased functioning; IRS later assessed §6621(c) TMT penalty interest (120%) for 1983–1984; plaintiffs paid and sued in 2006 in the Court of Federal Claims.
- Court of Federal Claims dismissed for lack of jurisdiction under TEFRA §7422(h), holding plaintiffs were bound by Krause via Vulcan Oil and cannot relitigate partnership-level determinations at the partner level.
- Appeal followed, challenging whether Krause could be binding and whether a TMT finding was ever properly made.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether TEFRA §7422(h) bars partner-level challenges to TMT penalties | Dillon Oil partners not bound by Krause’s TMT finding; no partnership-level TMT determination. | Vulcan Oil bound Dillon Oil to Krause; the TMT finding was made at partnership level. | Yes, TEFRA bars; Dillon Oil bound by Krause through Vulcan Oil; dismissal affirmed. |
| Whether Krause’s TMT finding can be challenged at the partner level | Krause was wrongly decided; no TMT finding applicable to Dillon Oil at partner level. | Krause imposed TMT penalties; binding through Vulcan Oil; re-litigation at partner level inappropriate. | Krause binding; cannot relitigate at partner level; partnership-level determination governs. |
| Whether Keener/Prati control, and whether Dillon Oil can avoid Krause-based disposition | Keener/Prati distinguish this case; not a sham-transaction context. | Keener/Prati align with TEFRA dismissal for partnership-level determinations. | Keener/Prati not controlling here; Krause binding via Vulcan Oil; dismissal affirmed. |
Key Cases Cited
- Krause v. Commissioner, 99 T.C. 132 (Tax Court, 1992) (TMT penalties under §183 affirmed; lack of profit objective)
- Copeland v. Commissioner, 290 F.3d 326 (5th Cir., 2002) (Copeland distinguished; Krause issue litigated separately)
- Keener v. United States, 551 F.3d 1358 (Fed. Cir., 2009) (TEFRA §7422(h) precludes partner-level refunds where partnership-level determinations exist)
- Prati v. United States, 603 F.3d 1301 (Fed. Cir., 2010) (Keener/Prati hold that partner-level review barred when issue stems from partnership-level findings)
- Schell v. United States, 589 F.3d 1378 (Fed. Cir., 2009) (Defines ‘partnership item’; TEFRA scope)