Herrmann v. United States
124 Fed. Cl. 56
| Fed. Cl. | 2015Background
- In late 2008 Paulson Europe LLP (PELLP) directed a payment of £12,764,732 (~$18,748,838) to partner Mina Gerowin Herrmann; the funds were received by her bank on January 6, 2009.
- The Herrmanns filed U.S. returns as cash-basis taxpayers and did not report the $18M payment on their 2008 U.S. return; they paid substantial U.K. tax on that payment in 2009 and claimed large foreign tax credits on their 2009 U.S. return.
- The IRS audited PELLP (partnership-level TEFRA audit), later issued a Schedule K-1 and a Notice of Computational Adjustment treating the $18M as partnership income for 2008 and assessing taxes, interest, and penalties against the Herrmanns.
- Plaintiffs paid the asserted tax/interest (about $7.86M) and submitted a refund claim in October 2012 that included Form 8082 and supporting materials asserting (a) the payment was not partnership income but a non-partner payment under I.R.C. §707(a)(2), (b) they had elected accrual treatment for FTC purposes, or alternatively (c) they were entitled to carry back 2009 foreign taxes to 2008.
- The IRS denied the refund claim; plaintiffs appealed administratively and then sued in the Court of Federal Claims asserting (inter alia) entitlement to a refund (Count One), that the $18M was not partnership income (Count Two), denial of accrual election (Count Three), and TEFRA violations in the partnership audit (Count Four).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court has jurisdiction to review partnership-item issues because plaintiffs submitted a valid administrative adjustment request (AAR) via Form 8082 | Herrmanns: their October 2012 refund claim + Form 8082 constituted a valid AAR under I.R.C. §6227 and Treas. Reg. §301.6227(d)-1; they followed the Form 8082 instructions (checked box for notice of inconsistent treatment) | U.S.: plaintiffs failed to file a valid AAR because they did not check box (b) for "Administrative adjustment request" on Form 8082, so §6228(b) jurisdictional exception does not apply | Court: denied dismissal — Form 8082 complied with the form instructions and Treas. Reg. requirements; IRS treated the submission as an AAR; court has jurisdiction under §6228(b) and §7422(h) to consider partnership-item challenges (Count Two) |
| Whether Count Four (TEFRA participation rights) is jurisdictionally cognizable | Herrmanns: IRS excluded or mishandled Ms. Herrmann’s participation in the partnership-level audit in violation of §6224(a) and TEFRA, entitling them to relief | U.S.: Count Four too vague, seeks no specific monetary relief and thus lacks jurisdiction; alternatively, failure to state a claim | Court: denied dismissal — Count Four is tied to and will be resolved with Counts One and Two in the de novo partner-level refund proceeding; not dismissed |
| Whether partial summary judgment can be entered now on Count One (foreign tax credit / one-year carryback) before resolving partnership-item issues | Herrmanns: even if $18M is includable in 2008, IRS failed to apply the correct foreign tax credit carryback, so refund of ~ $5.2M is due now | U.S.: all tax items for a taxable year must be determined together; entering judgment on one issue would be premature and speculative | Court: denied partial summary judgment — amount of refund depends on resolution of all items for 2008; Federal Circuit precedent bars partial entry of judgment when other issues for the same tax year remain unresolved |
| Motion to strike defendant's jurisdictional defense re: Count Two | Herrmanns: move to strike the affirmative defense that the court lacks jurisdiction over Count Two | U.S.: raised jurisdictional defense | Court: denied as moot because government’s dismissal motion was denied and court found jurisdiction over Count Two |
Key Cases Cited
- Ledford v. United States, 297 F.3d 1378 (Fed. Cir.) (tax refund jurisdiction under Tucker Act and §7422)
- Olson v. United States, 172 F.3d 1311 (Fed. Cir.) (partner’s right to participate in partnership examinations)
- Credit Life Ins. Co. v. United States, 948 F.2d 723 (Fed. Cir.) (narrow application of the substantial-compliance doctrine)
- Houston Indus., Inc. v. United States, 78 F.3d 564 (Fed. Cir.) (no separate claim for a single tax-year issue where other issues remain unresolved)
- United States v. Skelly Oil Co., 394 U.S. 678 (U.S.) (Congress adopted an annual accounting system for tax purposes)
- Bedrosian v. Commissioner, 143 T.C. 83 (Tax Ct.) (criticizing muddled IRS handling of partner-level procedures)