GORDON W. BUSH, REOLA BUSH, LAWRENCE R. CATUZZI, BARBARA V. CATUZZI, GORDON R. COOKE, JENNIFER L. COOKE, GOPALA K. DEREBAIL, MEMALATHA DEREBAIL, ALBERT V. GUDE, DONNA C. GUDE, LAWRENCE S. LEWIN, ROBERT V. MCQUILLAN, CATHERINE D. MCQUILLAN, KIKUO NAKAHARA, JEANETTE T. NAKAHARA (DECEASED), LESLIE A. SPITZACK, MARY C. SPITZACK, BARRY S. STRAUCH, AND EVELYN M. STRAUCH, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.
2012-5051
United States Court of Appeals for the Federal Circuit
May 30, 2013
Decided: May 30, 2013
THOMAS E. REDDING, Redding & Associates, P.C., of Houston, Texas, argued for plaintiff-appellant. With him on the brief was SALLIE E. GLADNEY.
Before RADER, Chief Judge, NEWMAN and MAYER, Circuit Judges.
NEWMAN, Circuit Judge.
The appellants are nineteen individual taxpayers who were partners of the Denver-based Dillon Oil Technology Partnership in tax years 1983 and 1984. In 2003, after over a decade of litigation, the IRS assessed penalties in accordance with now repealed
BACKGROUND
In tax years 1983 and 1984, the Dillon Oil partnership reported significant losses on its oil and gas technology
In 1987 and 1988, the IRS determined, with respect to the partnership tax returns, that most of the Dillon Oil losses claimed in 1983 and 1984 were not deductible, and issued Final Partnership Administrative Adjustments (“FPAAs“) stating several reasons for its decision, including:
(a) It has not been established that the underlying events, transactions and expenditures occurred in fact or in substance;
(b) It has not been established that the claimed deductions originated in a trade or business or in a transaction entered into for profit;
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(e) It has not been established that the notes executed by the partners in favor of the partnership are not non-recourse, are not contingent, are not speculative and have economic substance;
* * *
In the event the transactions are substantiated as to amount and nature of the item and it is held that the transactions have economic-substance, it is determined that the partners are not at risk within the meaning of
Internal Revenue Code Section 465 for any amounts in excess of those actually paid in cash to the partnership, and thus said losses are in excess of the partners adjusted basis.
See 1983 FPAA ¶1, J.A. 67–68; see also 1984 FPAA ¶1, J.A. 162–63 (stating similar reasons).
The IRS also sent FPAAs to other similarly situated Denver-based partnerships. Dillon Oil, along with these
Dillon Oil‘s Tax Court cases were stayed pending resolution of Krause v. Commissioner, a test case for over 2,000 related cases. Krause involved oil and gas transactions, primarily trades in debt obligations and license fees, claimed as losses on partners’ tax returns. After a fifteen week trial, the Krause court found that these transactions lacked “profit objective” as required of deductible losses under
By regulation, among the types of transactions that are considered to be tax-motivated transactions within the meaning of section 6621(c) are those with respect to which the related tax deductions are disallowed under section 183 for lack of profit objective. In light of our findings as to the lack of profit objective, petitioners are liable for increased interest under section 6621(c).
The Krause decision had a predictable effect on the Vulcan Oil suits. In 1998, several Vulcan Oil partnerships moved the Tax Court to require the IRS to settle on pre-Krause terms. See Vulcan Oil Tech. Partners v. C.I.R., 110 T.C. 153 (1998). The terms the partnerships sought would have permitted tax deductions
for the amount of cash that investors had invested in the [ ] tax shelters and no additions to tax or penalties . . . other than increased interest under section 6621(c) or its predecessor section 6621(d).
Id. at 155. But the partnerships’ motions were denied as untimely. Id. at 164. The Tax Court held that the partners who had not settled their cases with the IRS prior to the decision in Krause “were to be bound by the opinion in Krause.” Id. at 154-55.
After this ruling, Dillon Oil‘s TMP “disappeared” and ceased performing his duties to the partners. Appellants’ Br. 11. On November 28, 2001, and December 20, 2001, the IRS moved to dismiss the Vulcan Oil suits for lack of prosecution. The motions stated that the IRS would make adjustments to Dillon Oil‘s FPAA in accordance with Krause. The Tax Court sent Orders to Show Cause to the Dillon Oil partners, asking “why this case should not be dismissed for failure properly to prosecute and that there are adjustments to partnership items [consistent with Krause].” Show Cause Order 2. The Dillon Oil partners did not respond, and on June 13, 2002, the Vulcan Oil suits were dismissed. E.g., Order of Dismissal and Decision, No. 16768–88 (June 13, 2002). The Dillon Oil partners did not appeal.
On April 5, 2006, the appellants initiated this lawsuit in the Court of Federal Claims. The complaint alleged that Krause “was wrong as a matter of law,” and that the Dillon Oil partners “are not bound by [its] outcome.” Compl. ¶¶21(j), 32(j). The government moved to dismiss for lack of jurisdiction, citing this court‘s decisions in Keener v. United States, 551 F.3d 1358 (Fed. Cir. 2009),
The Court of Federal Claims granted the government‘s motion to dismiss, explaining that “it is clear that the Vulcan Oil court understood that the Dillon Oil partnership would be bound by the Krause decision, including the imposition of TMT penalties under §183.” 101 Fed. Cl. 791, 797 n.9. The court further explained that
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.
. . . 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.
Id. at 798. The appellants timely appealed.
A dismissal for lack of subject matter jurisdiction is a ruling of law, and receives plenary determination. Ferreiro v. United States, 350 F.3d 1318, 1324 (Fed. Cir. 2003). As the party seeking the exercise of jurisdiction, the appellants have the burden of establishing that jurisdiction exists. Keener, 551 F.3d at 1361.
TEFRA statute
Under TEFRA, the term “partnership item” generally encompasses items “required to be taken into account for the partnership‘s taxable year,” and those “more appropriately determined at the partnership level than at the partner level.” Schell, 589 F.3d at 1381 (quoting
I.
Appellants state that although Dillon Oil and its partners were bound by the opinion in Krause,6 the IRS had no authority to impose TMT penalty interest following Vulcan Oil because “no partnership-level TMT was ever made” in Krause. Appellants’ Br. 28. Appellants state that they “do not seek to relitigate Krause,” because Krause was a “non-TMT determination” and they had no reason to appeal it. Reply Br. 3. For support, appellants rely on Copeland v. Commissioner, 290 F.3d 326 (5th Cir. 2002), wherein the Fifth Circuit held that Krause erred in imposing §6621(c) penalty interest “under §183.” Id.
The government states that “[s]ince both the FPAAs and Krause determined that the transactions in issue were tax-motivated, the effect of the dismissal of Dillon Oil‘s petition [in Vulcan Oil] was to make final the determination that the partnership transactions were tax-motivated.” Gov‘t Br. 11. According to the government, this case is not materially different from this court‘s dismissals in Keener and Prati, because there is no meaningful difference between dismissal for failure to prosecute as compared to a settlement between the IRS and an individual partner, such as in Prati, 603 F.3d at 1308, and Keener, 551 F.3d at 1360. Gov‘t Br. 14.
II.
The appellants’ representation that they are not attempting to relitigate Krause is not accurate. The Court of Federal Claims correctly noted that the appellants’ complaint in this case specifically stated that Krause “was wrong as a matter of law.” Bush, 101 Fed. Cl. at 794 n.6. Moreover, despite the appellants’ attempts to recharacterize Krause as a “non-TMT determination,” it is inescapable that “[t]he Krause Court . . . expressly imposed enhanced interest under §6621(c)” as the Court of Federal Claims found. Id. at 794 (citing Krause, 99 T.C. at 180).
The question that remains is whether the appellants were bound by all of Krause, including its conclusion that “petitioners are liable for increased interest under section 6621(c),” or whether the appellants can potentially escape the Krause TMT finding if it was incorrectly decided. The Court of Federal Claims held that Krause was binding in all respects, “including the imposition of TMT penalties under §183,” and that plaintiffs’ arguments regarding the Krause decision would require re-examination of Dillon Oil partnership transactions “to determine if the transactions identified in the modified calculations are not covered by §183.” 101 Fed. Cl. at 798.
We agree with the Court of Federal Claims. The Vulcan Oil court held that Dillon Oil was bound by “the opinion” in Krause—not merely a portion of the opinion as now interpreted by the appellants. The appellants’ opportunity to challenge Krause passed when Vulcan Oil was dismissed. “When a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.” C.I.R. v. Sunnen, 333 U.S. 591, 597 (1948).
Copeland is of no assistance to appellants. In Copeland, the taxpayers stipulated that Krause generally “controlled,” but specifically carved out an exception for “the conclusion that I.R.C. §6621(c) applies” and adjudicated that issue separately. 290 F.3d at 328–29. The taxpayers then litigated §6621(c) to the Court of Appeals for the Fifth Circuit without ever failing to prosecute or having their case dismissed. See Copeland v. C.I.R., 79 T.C.M. (CCH) 2127 (T.C. 2000), aff‘d in part, rev‘d in part, 290 F.3d 326 (5th Cir. 2002). Unlike the taxpayers in Copeland, the Dillon Oil partners did not challenge or appeal any aspect of the Krause decision in the then-pending Vulcan Oil suit. When Vulcan Oil was dismissed, the TMT finding in Krause became binding on Dillon Oil at the partnership-level, just as the taxpayers in Copeland would have been bound had they not appealed.
Copeland also serves to undermine the appellants’ argument that Krause was a “non-TMT determination.” If that were true, the taxpayers in Copeland would not have separately litigated the imposition of §6621(c) penalty interest and appealed to the Fifth Circuit. The Copeland taxpayers knew Krause was a TMT determination and challenged it accordingly.
For these reasons, we agree with the Court of Federal Claims that in order to set aside the IRS‘s imposition of TMT penalty interest, it would be necessary to relitigate the Vulcan Oil court‘s decision to bind Dillon Oil to “the opinion of Krause.” 101 Fed. Cl. at 798. That is a partnership level issue; it affects the entire partnership, and there are no “partner-specific determinations that must be made at the individual partner level.” Duffie, 600 F.3d at 366. Simply put, the appellants’ claim is “more appropriately determined at the partnership level than at the
III.
The Court of Federal Claims held that our decisions in Keener and Prati are not meaningfully distinguishable from the present case, and we agree.
In Prati, we held that a partner-level suit claiming a refund for §6621(c) interest was barred by TEFRA
Likewise, in Keener, we held that a partner-level suit seeking refund of §6621(c) penalty interest was barred under
Here, the Court of Federal Claims found Prati and Keener unavoidable on the basis that a challenge to a §6621(c) penalty interest assessment is “inherently” a dispute over the proper characterization of the partnerships’ transactions, and barred by
To the extent that the Court of Federal Claims held that a challenge to the imposition of §6621(c) penalty interest is always inherently a dispute over the proper characterization of the partnerships’ transactions, we disagree. In Keener, we explicitly declined to “decide whether §7422(h) precludes jurisdiction over every claim for a refund of penalty interest imposed pursuant to §6621(c).” 551 F.3d at 1366 n.7. In Prati and Keener, the FPAAs stated that the taxpayers’ transactions were “shams,” and therefore TMTs by statute. If that were not the case, it may have been necessary to point to some other TMT determination to resolve the jurisdictional question.
In this case, the FPAAs did not use the term “sham” to characterize Dillon Oil‘s transactions. The FPAAs stated that the transactions lacked “profit-motive” and “economic substance,” and possibly lacked “risk within the meaning of Internal Revenue Code Section 465.” Thus, it was necessary for the Court of Federal Claims to point to a TMT determination other than the “sham” language of Keener and Prati. The court did so in finding it “clear that the Vulcan Oil court understood that the Dillon Oil partnership would be bound by the Krause decision, including the imposition of TMT penalties under §183.” 101 Fed. Cl. at 797 n.9.
On this record, it is irrelevant whether Krause was rightly or wrongly decided. Dillon Oil‘s partners did not appeal the dismissal of their partnership-level suit in Vulcan Oil. Although appellants argue that “[t]here was no reason” to appeal the Vulcan Oil dismissal because “there was no determination in that dismissal of a TMT,” we are not persuaded. See Oral Argument 11:00–11:18, available at http://www.cafc.uscourts.gov/oral-argument-recordings/all/bush.html. The Krause decision unambiguously imposed TMT penalty interest. See 99 T.C. at 180 (“In light of our findings as to the lack of profit objective, petitioners are liable for increased interest under section 6621(c)“). Indeed, that specific portion of Krause was appealed in no fewer than three circuits. Hildebrand, 28 F.3d 1024; Hill v. C.I.R., 204 F.3d 1214 (9th Cir. 2000); Copeland, 290 F.3d 326. It is not reasonable to read Krause as a “non-TMT determination” as appellants urge.
IV.
To the extent the Court of Federal Claims stated that it does not have jurisdiction to determine whether “there was ever a finding supporting TMT penalty interest,” we conclude that the court misspoke. A court always has jurisdiction to determine whether it has jurisdiction. See Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 747 (Fed. Cir. 1988) (“If a motion to dismiss for lack of
Here, the court made several findings relating to the jurisdictional question of whether a TMT determination was ever made. The court found that the appellants were bound by Krause, and found that Krause expressly imposed §6621(c) penalty interest under §183. Based on these findings, the court concluded that this case was not materially different from Keener and Prati, and dismissed. 101 Fed. Cl. at 797–98 (“the present case involves a partnership-level determination one step removed from the determinations made in Prati and Keener. However, this difference does not alter the outcome.“). We affirm on these grounds.
Precedent does not, as the Court of Federal Claims stated, preclude the court from examining whether a TMT finding was made. To the contrary, in both Keener and Prati, this court relied on TMT findings of “sham” transactions in order to affirm the dismissal of partner-level suits under
CONCLUSION
The appellants’ refund claims were properly dismissed under
AFFIRMED