836 F.3d 1282
10th Cir.2016Background
- McNeill, a wealthy taxpayer and managing/tax‑matters partner of a partnership (Dulwich → Livrpol), participated in a tax‑avoidance scheme that shifted realized losses in underwater foreign debt from foreign holders to partnerships he controlled so he could offset $18M income with ~ $20M losses.
- The IRS issued Final Partnership Administrative Adjustments (FPAAs) disallowing the transactions and finding lack of reasonable cause and good faith; it assessed McNeill $7.75M (tax) plus ~$4.6M penalties/interest for his share.
- Under TEFRA, the IRS first adjusts partnership items at the partnership level (FPAA) and then issues partner‑level assessments; partners may pay and sue for refunds asserting partner‑level defenses (including reasonable cause/good faith under 26 U.S.C. § 6664(c)(1)).
- McNeill (as tax‑matters partner) filed and later voluntarily dismissed partnership‑level litigation challenging the FPAA; he then paid his assessment and sued for refund of penalties/interest asserting partner‑level reasonable cause/good faith relying on advisor opinion letters.
- The district court held McNeill barred by TEFRA from asserting reasonable cause/good faith at the partner level because the partnership FPAA had already rejected that defense; the Tenth Circuit majority reversed, holding TEFRA permits partners (including managing/tax matters partners) to raise partner‑level reasonable cause/good faith defenses despite earlier partnership‑level FPAA determinations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an adverse FPAA partnership‑level determination that partnership lacked "reasonable cause/good faith" precludes a managing/tax‑matters partner from asserting the same defense in a later partner‑level refund action | McNeill: TEFRA §6230(c)(4) allows any partner to assert partner‑level defenses (including §6664(c)(1) reasonable cause/good faith) at the partner level even if partnership FPAA already rejected that defense | United States: FPAA penalty determinations are "conclusive" and should bind partners (including managing/tax matters partners) so partners cannot relitigate reasonable cause/good faith at partner level when partnership already raised and lost it | Reversed district court. The statute and Treasury regulations treat reasonable cause/good faith as a partner‑level defense; an adverse FPAA at the partnership level does not categorically preclude a partner (including managing/tax matters partners) from asserting that defense in partner‑level refund proceedings (though preclusion doctrines or specific final judicial decisions may still bind in other circumstances) |
Key Cases Cited
- United States v. Woods, 134 S. Ct. 557 (2013) (TEFRA partners may still assert reasonable cause/good faith at partner level)
- Entek GRB, LLC v. Stull Ranches, LLC, 763 F.3d 1252 (10th Cir. 2014) (discusses issue preclusion and privy concepts in partnership litigation)
- Stobie Creek Investments, LLC v. United States, 608 F.3d 1366 (Fed. Cir. 2010) (partnership‑level proceedings should not decide partner‑level defenses; reasonable cause often partner‑level)
- Klamath Strategic Inv. Fund ex rel. St. Croix Ventures v. United States, 568 F.3d 537 (5th Cir. 2009) (reasonable cause/good faith is typically a partner‑level defense)
- Am. Boat Co. v. United States, 583 F.3d 471 (7th Cir. 2009) (partnership may assert reasonable cause based on managing partner; distinction between partnership and partner defenses)
- Southgate Master Fund, L.L.C. ex rel. Montgomery Capital Advisors, LLC v. United States, 659 F.3d 466 (5th Cir. 2011) (when partnership asserts reasonable cause, courts may examine managing partner’s conduct)