OPINION
The court has pending before it the United States’ motion to dismiss, under Rule 12(b)(1)
In its motion to dismiss, the government argues that pursuant to § 7422(h) this court may not consider plaintiffs’ claims regarding the merits of the penalty assessment.
Based on a careful review of the motions and following oral argument, the court GRANTS the government’s motion to dismiss the plaintiffs’ § 6621(c) claims for lack of jurisdiction and DENIES the plaintiffs’ motion for summary judgment as moot.
I. Background
A. Statutory Background
The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), Pub.L. No. 97-248, § 402(a), 96 Stat. 324, 648-71 (codified in scattered sections of the I.R.C.), was enacted to achieve consistent tax treatment for all partners in the same partnership and to remove the administrative burden of handling partnership matters on the IRS. See H.R.Rep. No. 97-760 at 599-600 (1982) (Conf. Rep.), reprinted in 1982 U.S.C.C.AN. 1190. Under TEFRA, the tax treatment of all “partnership items” is determined at the partnership, rather than the individual partner, level. Bush v. United States,
When the IRS disagrees with a partnership’s reporting of a partnership item, it issues a Notice of Final Partnership Administrative Adjustment (“FPAA”) in advance of making an assessment against the partners with regard to that partnership item. Under TEFRA, the Tax Management Partner (“TMP”) — the partner designated to act as liaison with the IRS and as the representative of the partnership in judicial proceedings — has the exclusive right to challenge the proposed adjustments in the Tax Court, United States District Court, or the Court of Federal Claims. I.R.C. § 6226(a). If a petition challenging the adjustments in the FPAA is filed, each partner with an interest in the outcome of the petition is treated as a party. I.R.C. § 6226(c)-(d). If the TMP does not file suit within the time provided, other partners may file suit within a prescribed time period to challenge the IRS’s FPAA. I.R.C. § 6226(b)(1). In addition, the court reviewing the petition has jurisdiction to determine all partnership items to which the FPAA relates, the proper allocation of such items among partners, and the applicability of any penalty that relates to an adjustment to a partnership item. I.R.C. § 6226(f).
Section 7422(h) was enacted as part of TEFRA. Consistent with TEFRA’s regulatory scheme, § 7422(h), in pertinent part, precludes any individual tax refund action for a refund “attributable to partnership items.” I.R.C. § 7422(h). As noted above, under TEFRA’s statutory scheme the tax treatment of any partnership item “shall be determined at the partnership level.” I.R.C. § 6221.
TEFRA also provides for specific partner-level refund procedures. Under § 6230, if the IRS erroneously computes an adjustment based on partnership items that is then allocated to an individual partner, the partner must file a refund claim within six months after the IRS mails notice of the computational adjustment to the partner. I.R.C. § 6230(c)(2)(A).
B. Factual Background
In 1983 and 1984 Gordon Cooke invested as a limited partner in Dillon Oil Technology Partners-1982 (“Dillon Oil”), one of a group of partnerships that are generally referred to as the Elektra partnerships. On April 15, 1987, the IRS issued an FPAA for Dillon Oil’s 1983 tax year. Between March 30, 1987 and April 15, 1987, the IRS also issued FPAAs for each of six other Elektra partnerships for tax year 1983. In response, the TMP for these seven Elektra partnerships, including Dillon Oil, challenged the adjustments proposed by the IRS in the 1983 FPAAs by filing a single § 6226(a) TEFRA partnership-level case in the Tax Court at Vulcan Oil Tech. Partners v. Commissioner, No. 21530-87.
On April 11, 1988, the IRS issued a combined FPAA for Dillon Oil’s 1984 and 1985 tax years. Between March 28, 1988 and June 30, 1988, the IRS issued FPAAs for each of six other Elektra partnerships for tax years 1984 and 1985. In response, the TMP for these seven Elektra partnerships, including Dillon Oil, challenged the adjustments proposed by the IRS in the 1984 and 1985 FPAAs by filing a single § 6226(a) TEFRA partnership-level case in the Tax Court at Vulcan Oil Technology Partners v. Commissioner, No. 16768-88.
Thereafter, the Vulcan Oil ease was stayed pending the Tax Court decision in
Following the decision in Krause, the Vulcan Oil court considered objections made by the TMPs for certain Elektra partnerships, including Dillon Oil, regarding the IRS’s practices when negotiating with partnerships that had not settled with the IRS before Krause was decided. Vulcan Oil Tech. Partners v. Comm’r,
In [Acierno v. Comm’r,T.C. Memo. 1997-441 ] we found that the Denver-based partnerships that are involved in the instant cases were similar to the Manhattan and Wichita partnerships that were involved in the lead test cases in the Elektra Hemisphere tax shelter project of Krause ... and accordingly that the limited partners of the Denver-based partnerships who had not settled their cases with respondent were to be bound by the opinion in Krause. The settlements that most of the movants herein entered into, during 1994 and later years, are consistent with our decisions in Krause and the above-cited related cases (namely, no deductions are to be allowed to the taxpayers relating to their investments in the Elektra Hemisphere tax shelters, and the taxpayers are not to be held liable for additions to tax or penalties other than increased interest under section 6621(c) or its predecessor section 6621(d)).
Vulcan Oil,
After this ruling, the TMPs in the Vulcan Oil case took no further action, and on November 28, 2001, and December 20, 2001, the IRS filed Motions to Dismiss for Lack of Prosecution the Vulcan Oil Tax Court cases. Each motion requested specified adjustments to partnership items of each partnership on the basis that:
the Petitioners’ [TMP] has failed to perform the duties and responsibilities required of a [TMP] under the Tax Court’s Rules ... and such failure has precluded the further prosecution and ultimate resolution of this case, whether by trial or settlement.
Due to concessions by Respondent, which are based on applying I.R.C. § 183 in accordance with this Court’s opinion in Krause v. Commissioner,99 T.C. 132 (1992), aff'd sub nom., Hildebrand v. Commissioner,28 F.3d 1024 (10th Cir.1994), cert denied,513 U.S. 1078 and 1079 [115 S.Ct. 726 ,130 L.Ed.2d 631 ] (1995), and aff'd sub nom., Hill v. Commissioner,204 F.3d 1214 (9th Cir.2000), certain of the adjustments set forth in the schedules above are less than those determined in the [FPAAs] upon which this case is based.
Pis.’ Exs. J, K. Thereafter, on December 21, 2001, and March 22, 2002, the Tax Court
On or about February 22, 2003, and February 26, 2003, the IRS sent to the Cookes a Letter 2083 with attached Form CG-4549A for each of the tax years 1983 and 1984, respectively, each of which stated, inter alia, as follows:
ALL OR PART OF THE UNDERPAYMENT OF TAX YOU WERE REQUIRED TO SHOW ON YOUR RETURN IS A SUBSTANTIAL UNDERSTATEMENT ATTRIBUTABLE TO A TAX MOTIVATED TRANSACTION, AS DEFINED BY SECTION 6621(c)(3) OF THE INTERNAL REVENUE CODE.
Pis.’ Exs. P, Q. Thereafter, on March 24, 2003 the IRS assessed tax ($19,746.00) and interest ($130,641.26) against the Cookes for tax year 1983, and on May 12, 2003, June 16, 2003, and August 16, 2004, made additional interest assessments of $723.04, $872.22, and $8,246.42, respectively. A portion of the subject interest was assessed at the enhanced § 6621 rate.
On March 24, 2003 the IRS assessed tax ($15,368.00) and interest ($88,689.25) against the Cookes for tax year 1984, and on May 12, 2003, June 16, 2003, and August 23, 2004, made additional interest assessments of $607.37, $603.83, and $5,599.03, respectively. Again, a portion of the interest was assessed at the § 6621 enhanced rate.
On April 12, 2006, the plaintiffs filed claims for a refund of $45,798.41 and $31,132.45, for tax years 1983 and 1984, respectively. In their refund claims they asserted they were due a refund for the “portion[s] of interest assessed due to the penalty rate under § 6621(c).”
The Cookes filed the present action on October 1, 2010, more than six months after they filed their original claims for refund. In their complaint they assert that they are not liable for § 6621(c) penalty interest. The government filed its motion to dismiss the plaintiffs’ § 6621(e) claims for lack of jurisdiction on June 17, 2011. The plaintiffs filed their motion for summary judgment on those same claims on June 18, 2011. Briefing is complete and argument was heard on October 28, 2011.
II. Standard of Review
Whether the court possesses jurisdiction to decide the merits of a case is a threshold matter. See PODS, Inc. v. Porta Stor, Inc.,
III. Section 7422(h) Bars Jurisdiction
It is well-settled that § 7422(h) deprives this court of jurisdiction to hear individual partner refund claims where the refund is “attributable to partnership items.” Keener v. United States,
[Bjecause Taxpayers are requesting a refund based on the nature of the partnerships’ transactions and because the nature of a partnership’s transactions is a partnership item, Taxpayers’ claims are “attributable to” partnership items. Accordingly, the Court of Federal Claims correctly determined that it lacks jurisdiction over Taxpayers’ claim “for a refund attributable to partnership items.” I.R.C. § 7422(h).
Keener,
The plaintiffs attempt to distinguish the jurisdictional status of this case from Keener and Prati on the grounds that no court has ever held that any of the Dillon Oil partnership transactions are tax motivated, and therefore that no court has determined that the IRS properly imposed a tax motivated penalty on the plaintiffs. They argue that Keener and Prati, in contrast, rely on tax court decisions which had affirmed the IRS’s TMT determinations in those cases. According to the plaintiffs, the partners in Keener and Prati were actually barred from litigating their individual tax refund claims based on principles of “res judicata.” More specifically, although res judicata is not mentioned by the Federal Circuit as the basis for its decisions in those cases, the plaintiffs argue that “res judicata is TEFRA’s lynchpin between partnership-level and partner-level cases.” Pis.’ Resp. at 14, ECF No. 37. Thus, they ai-gue that § 7422(h) bars actions only when a partner seeks a “new” partnership item determination where one was previously made in the partnership-level case. Otherwise, they contend, “if res judicata does not bind a partner to a TMT determination in the partnership-level decision, then § 7422(h) cannot bar refund jurisdiction for that partner to assert that no TMT determination was ever made.” Id. at 15. Plaintiffs therefore argue that in Vulcan Oil, the Tax
The government argues that plaintiffs’ effort to distinguish this ease from Keener and Prati on the above-cited grounds must be rejected. The government contends that nothing in Keener or Prati suggests that principles of res judicata were dispositive in those cases. Rather, the government argues, those cases stand for the proposition that § 7422(h) bars the court’s review because the plaintiffs are asking this court to examine the propriety of imposing TMT interest on partnership-level items. The government argues that the IRS imposed TMT penalty interest under § 6621(c) after the decision in Krause was extended to the Dillon Oil partnership through the dismissal orders in Vulcan Oil. In order to set aside that TMT penalty interest, the government argues, this court would have to examine the partnership-level items identified in the Vulcan Oil dismissal orders. The government asserts that in Prati, the Federal Circuit expressly held that this court does not have jurisdiction to make that examination. See Prati
The court agrees with the government. There is no doubt that certain of the procedural facts of this ease are different from the facts in Prati and Keener. For instance, the IRS’s TMT determination at issue in Keener was affirmed after partnership-level Tax Court review.
It is clear that the plaintiffs in this case are asking the court to examine partnership-level items. The plaintiffs are asking this court to rule that the Vulcan Oil court’s dismissal order was not sufficient to impose TMT penalties. The plaintiffs argue that there was never a finding supporting TMT penalty interest. In addition, the plaintiffs argue that none of the partnership transactions undertaken by the Dillon Oil partnership support imposition of TMT penalty interest under § 183. The court finds that to make either ruling the court would have to examine the Dillon Oil partnership-level transactions.
First, to determine whether the Vulcan Oil court erred by failing to make a TMT penalty interest determination and find that its decision cannot serve as the basis for imposing a TMT penalty would require the court to examine the modified partnership calculations the Vulcan Oil court sent to the plaintiffs in the show cause order and later adopted in its final dismissal order. The Vulcan Oil court had previously held that Krause would apply to non-settling partners like the plaintiffs. The Dillon Oil partnership TMP had an opportunity to challenge those calculations at the partnership level by objecting to the show cause order, but elected not to object. At its core, the plaintiffs’ objection is to the IRS’s and Vulcan Oil court’s application of Krause to the Dillon Oil partnership, a partnership-level issue.
Second, the court would need to review partnership-level items to determine whether § 183 may serve as a valid basis for the imposition of TMT penalty interest in this ease. The plaintiffs’ arguments regarding the Krause decision and the Krause court’s misapplication of § 183 plainly would require this court to examine the Dillon Oil partnership transactions to determine if the transactions identified in the modified calculations are not covered by § 183. As discussed above, Federal Circuit precedent precludes this court from examining both of these issues in an individual refund case. See Keener,
IV. Conclusion
For all of the reasons discussed above, the government’s motion to dismiss based on the application of § 7422(h) is GRANTED. The plaintiffs’ motion for summary judgment is DENIED as moot. See 10 Charles Alan Wright & Arthur Miller, Federal Practice and Procedure, Civil § 2713 (3d ed. 2010). The plaintiffs’ § 6221(c) tax motivated interest refund claims are hereby dismissed for lack of jurisdiction. There being no just reason for delay, the clerk is directed to enter final judgment dismissing these claims under RCFC 54(b).
IT IS SO ORDERED.
Notes
. All references to the I.R.C. are in Title 26. Former § 6621(c) was added to the I.R.C. in 1984 to discourage the growth of abusive tax shelters. See Deficit Reduction Act of 1984, Pub.L. No. 98-369, § 144(a), 98 Stat. 682; Staff of the Joint Committee on Taxation, 98th Cong., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 485-86 (Joint Comm. Print 1984). This provision was repealed by the Omnibus Budget Reconciliation Act of 1989, Pub.L. No. 101-239, § 7721(b), 103 Stat. 2399. The repeal was effective for tax returns due after December 31, 1989.
. Pursuant to the parties’ joint stipulation, the Cookes have been designated as the representatives for all of the plaintiffs in this action with respect to all § 6621 (c)-based claims. See Order Granting Joint Mot. to Designate Representative Pis., Jan. 12, 2011, ECF No. 18; Stipulation, Jan. 13, 2011, ECF No. 19. As such, the court's decision will be binding on the Cookes and all remaining plaintiffs.
. Tax Motivated Transaction ("TMT") was defined in § 6621(c)(3)(A) to mean "any sham or fraudulent transaction.” I.R.C. § 6621(c)(3)(A). A "substantial underpayment” was any underpayment exceeding $1,000 per tax year. I.R.C. § 6621(c)(2).
. Section 7422(h) states: "No action may be brought for a refund attributable to partnership items (as defined in § 6231(a)(3)) except as provided in § 6228(b) or § 6230(c).” I.R.C. § 7422(h).
. Examples of these determinations are:
The partnership's method of accounting, taxable year, and inventory method; whether an election was made by the partnership; whether partnership property is a capital asset, § 1231 property, or inventory; whether an item is currently deductible or must be capitalized; whether partnership activities have been engaged in with the intent to make a profit for purposes of § 183; and whether the partnership qualifies for the research and development credit under § 30.
26 C.F.R. § 301.6231 (a)(3) — ! (b).
. The plaintiffs argue that the Krause court misapplied § 183 as a basis for imposing § 6621(c) interest, based on the holdings in Copeland v. Comm'r,
. The plaintiffs rely on language in Keener which leaves open the question whether all individual refund actions involving a partnership item are barred by § 7422(h). Specifically, the Federal Circuit declined to reach the question whether § 7422(h) would bar actions involving partner-only issues arising from the partnership. Keener,
. In Keener, the Tax Court ultimately issued stipulated decisions in the partnership-level proceedings finding that the adjustments to partnership income and expense "were attributable to transactions 'which lacked economic substance,’ as described in former I.R.C. § 6621(c)(3)(A), 'so as to result in a substantial distortion of [partnership income and/or expense],’ as described in I.R.C. § 6621(c)(3)(A).” Keener,
. In this connection, the court finds the plaintiffs' reliance on McGann v. United States,