836 F.3d 1282
10th Cir.2016Background
- Corbin McNeill, a wealthy ex-Navy officer and utility executive, participated in a partnership tax shelter that shifted losses from foreign debt holders to partnerships he controlled so he could offset ~$18 million in income with ~ $20 million in losses.
- The IRS issued Final Partnership Administrative Adjustments (FPAAs) concluding the transfers were sales, McNeill’s basis was minimal, and penalties and interest applied; the partnerships challenged those FPAAs under TEFRA but McNeill let the partnership-level suit be dismissed without obtaining a favorable judicial ruling.
- Under TEFRA, the IRS first determines partnership-level adjustments and penalties, then issues partner-level assessments; partners who pay may sue for refunds and assert partner-level defenses (including the §6664(c)(1) reasonable-cause/good-faith defense).
- McNeill paid his partner-level assessment (~$7.75M) and sued for a refund of penalties/interest (~$4.6M), asserting reasonable cause/good faith based on professional opinion letters he received.
- The district court held McNeill precluded by TEFRA from asserting the partner-level reasonable-cause/good-faith defense because the IRS had already rejected that defense at the partnership level in the FPAA; the Tenth Circuit majority reversed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an adverse partnership-level FPAA penalty determination bars a managing (or tax-matters) partner from asserting the §6664(c)(1) reasonable-cause/good-faith defense at partner level | McNeill: §6230(c)(4) allows any partner to assert partner-level defenses (including reasonable cause/good faith) notwithstanding partnership-level determinations | Government: FPAA penalty determinations are "conclusive" under §6230(c)(4) and should preclude partners (especially managing/tax-matters partners) from relitigating the same defense at partner level | Reversed district court: statute, regulations, and precedent allow partners (including managing/tax-matters partners) to assert partner-level reasonable-cause/good-faith defenses even if partnership-level proceedings rejected that defense; partner-level facts may differ and statute does not carve out managing partners |
Key Cases Cited
- United States v. Woods, 134 S. Ct. 557 (2013) (TEFRA partnership/partner proceeding structure and partner-level defenses explanation)
- Stobie Creek Invs., LLC v. United States, 608 F.3d 1366 (Fed. Cir. 2010) (discussing scope of partner-level reasonable-cause defenses under TEFRA)
- Klamath Strategic Inv. Fund ex rel. St. Croix Ventures v. United States, 568 F.3d 537 (5th Cir. 2009) (partner-level reasonable-cause defense may be appropriate)
- Am. Boat Co. v. United States, 583 F.3d 471 (7th Cir. 2009) (partnership may assert reasonable-cause defense based on managing partner conduct)