Elizabeth N. CALLAWAY, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Docket No. 99-4022.
United States Court of Appeals, Second Circuit.
Argued: Sept. 16, 1999. Decided: Sept. 15, 2000.
231 F.3d 106
Robert J. Branman (Loretta C. Argrett, Assistant Attorney General and Richard Farber, Attorney, on the brief), Department of Justice, Washington, D.C., for Appellee.
Before: LEVAL, CABRANES and POOLER, Circuit Judges.
JUDGE POOLER concurs, in part, in a separate opinion.
LEVAL, Circuit Judge:
Elizabeth N. Callaway (“the taxpayer” or “Elizabeth“) appeals from so much of the March 10, 1998 Opinion and Order and the November 17, 1998 Decision of the United States Tax Court (Peter J. Panuthos, Chief Special Trial Judge) that held that computational adjustments and subse
This is a case of first impression in the Courts of Appeals, raising an issue of partnership taxation procedure: A husband held a partnership interest as separate property but filed a joint tax return with his wife thereby taking his distributive share of the partnership‘s tax items into account in computing the tax owed on the couple‘s aggregate income. See
Applying these conclusions of law to the facts of this case, we conclude the Commissioner had until December 23, 1992 to issue any statutory notice of deficiency to either taxpayer or her deceased spouse‘s estate. The 1993 “precautionary” assessments, the 1996 computational adjustments and the 1996 affected items notices of deficiency were therefore procedurally invalid and time barred, with respect to both the taxpayer and her deceased spouse‘s estate. We therefore reverse the Tax Court‘s ruling and remand for further proceedings.
BACKGROUND
A. TEFRA‘s Statutory and Regulatory Framework
Under the Internal Revenue Code (the “Code“) partnerships are not taxable entities. See
Prior to 1982, adjustments to the tax liability of the individual partners based on the operations of the partnership were determined at the individual partners’ level. This resulted in duplication of administrative and judicial resources and sometimes in inconsistent results as between partners. See Randell v. United States,
To ameliorate these difficulties, Congress enacted the Tax Treatment of Partnership Items Act of 1982, as Title IV of the Tax Equality and Fiscal Responsibility Act of 1982 (“TEFRA“), Pub.L. No. 97-248, 96 Stat. 324, 648, now codified as amended as subchapter C of Chapter 63 of the Code, at sections 6221 to 6234. The TEFRA provisions establish a single unified procedure for determining the tax treatment of all partnership items at the partnership level, rather than separately at the partner level. See H.R. Conf. Rep. No. 97-760, at 599-600. Under the TEFRA provisions “the tax treatment of any partnership item ... shall be determined at the partnership level.”
The determination whether an item is a “partnership item” or a “nonpartnership item” is the threshold question for the application of the TEFRA procedures. While partnership items are subject to TEFRA‘s centralized audit procedures, see
In certain circumstances a partnership item may be “treated as” a nonpartnership item. See
In general, under subchapter C, a partner must file an income tax return that is consistent with the partnership return. See
Such peremptory adjustments of a partner‘s return are justified because the partner will already have benefitted from notice of and the right to participate in any proceeding under the TEFRA provisions to determine the partnership items at the partnership level. The IRS may adjust partnership items only at the partnership level and only after following the TEFRA procedures. See
Within 90 days of the date the IRS mails the FPAA notice, the partnership‘s “tax matters partner” (TMP)3 may contest the FPAA by filing a petition for readjustment in Tax Court, the Court of Federal Claims or the appropriate federal district court. See
After the FPAA adjustments become final (i.e., after they go unchallenged for 150 days or are judicially resolved in a section 6226 proceeding), the IRS may assess
The TEFRA subchapter also provides the statute of limitations on assessments of tax attributable to a partner‘s partnership items. In general, a three-year limitations period runs from the later of the date of filing of the partnership return or its due date. See
Because, in general, adjustments to partnership items cannot be made except through TEFRA‘s centralized proceedings, to ensure that any person whose tax liability may be affected by those procedures receives due process, TEFRA provides an expanded definition of “partner” and permits all such “partners” certain notice and participation rights. For the purposes of subchapter C, “[t]he term ‘partner’ means” both “(A) a partner in the partnership” and “(B) any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.”
Second, the spouse may own no interest in the member‘s partnership interest. Nonetheless, if the spouse and the member file a joint return, because (1) the member will be required to take his distributive share of the partnership items into account in computing the couple‘s aggregate income, see
The purpose of the TEFRA provisions described above is to ensure that, in general, partnership items are adjusted once at the partnership level. All partners, whose tax liability will be affected by its outcome, have the opportunity to participate in the audit allowing each to be bound by its result. In general, there are few exceptions to these centralized procedures.
However, one way for a partner to avoid being treated under the TEFRA framework is to fall within one of several limited exceptions that “the Secretary determines by regulation to present special enforcement considerations.”
One such regulation promulgated under the Secretary‘s authority pursuant to section 6231(c)(1)(E), provides that, when the estate of a deceased partner files a request for prompt assessment, its partnership items convert to non-partnership items:
The treatment of items as partnership items with respect to a partner on whose behalf a request for prompt assessment of tax under section 6501(d) is filed will interfere with the effective and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending with or within any taxable year of the partner with respect to which a request for a prompt assessment of tax is filed shall be treated as nonpartnership items as of the date that the request is filed.
Against this statutory and regulatory background, we now turn to the facts.
B. Facts.
The facts were stipulated or are otherwise undisputed. Elizabeth Callaway, the taxpayer, is the widow of James Callaway (sometimes “decedent“), who died in 1990. During the taxable years 1986, 1987, and 1988, James was a limited partner in a Pennsylvania limited partnership known as Mountain View Mall Associates (“Mountain View“). Elizabeth was never a partner in Mountain View. Nor did Elizabeth at any time own a joint interest in James‘s partnership interest, whether by way of tenancy in common, joint tenancy, tenancy by the entirety, or otherwise. Elizabeth and James were domiciled in New York, which is not a community property state. See, e.g., Miller v. Miller, 22 N.Y.2d 12, 290 N.Y.S.2d 734, 237 N.E.2d 877, 879 (1968) (“The state of New York ... has not adopted a community property system.“) (quoting Hemingway v. McGehee (In re Estate of Crichton), 20 N.Y.2d 124, 281 N.Y.S.2d 811, 228 N.E.2d 799, 806 (1967)). Accordingly, Elizabeth had no ownership interest in James‘s partnership interest.
Elizabeth and James filed joint federal income tax returns. See
For these taxable years, Mountain View timely filed its information return, pursuant to
On December 8, 1990, James died. Elizabeth was appointed the executrix of his estate.
On February 5, 1991, the IRS mailed an NBAP to James with respect to Mountain View‘s 1988 tax year. The IRS claims it mailed NBAPs to James with respect to Mountain View‘s 1986 and 1987 taxable years.8
On December 23, 1991, acting on her own behalf and as the executrix of James‘s estate, Elizabeth mailed three letters to the IRS Service Center in Brookhaven, New York. The first letter—of crucial importance in these proceedings—was a request on behalf of James‘s estate for a prompt assessment, pursuant to
The second letter included three checks in the amounts of $90,635, $48,846 and $8,439, clearly designated as deposits in the nature of cash bonds11 respecting joint tax liabilities of Elizabeth and the estate for 1986, 1987, and 1988 respectively.12
Meanwhile, in August and September 1993—no doubt recognizing that the request for prompt assessment was valid, with the effect that James‘s distributive share of the partnership items had converted into nonpartnership items—the IRS entered “precautionary” assessments against the Callaways. These assessments, in the amounts of $77,384, $41,981 and $6,541, were for the additional taxes attributable to James‘s distributive shares of the Mountain View losses that the FPAA had determined should be disallowed for 1986, 1987 and 1988, respectively.13 The IRS posted to the Callaways’ accounts the amounts remitted as cash bonds on December 23, 1991.14
Once the decision of the Court of Federal Claims became final, the IRS adjusted the Mountain View partnership return to reflect the adjustments of the FPAA. The IRS then assessed deficiencies against the individual Mountain View partners by computational adjustment. Accordingly, in July 1996, a computational adjustment was made to the Callaways’ accounts. The IRS abated the “precautionary” assessments entered in August and September 1993, and then entered identical assessments against the Callaways’ accounts.
On August 5, 1996, the IRS issued notices of deficiency to the estate and Elizabeth determining various additions to tax, including penalties for delinquent filings of returns, negligence and valuation overstatements for the taxable years 1986, 1987 and 1988. Because these additions to tax were with respect to taxable years ending before August 5, 1997, they were treated as affected items requiring partner level determinations. Therefore, deficiency procedures under subchapter B were required and followed. See
C. Proceedings Below.
On September 11, 1996, James‘s estate and taxpayer Elizabeth (the “original petitioners“) timely filed a petition for redetermination, thereby invoking the jurisdiction of the Tax Court. See
On March 10, 1998, the Tax Court ruled on the original petitioners’ motion for summary judgment. As to James‘s estate, the Tax Court held that because the request for prompt assessment had converted his partnership items into nonpartnership items, the determination of his tax liability for such items was excepted from TEFRA‘s unified partnership audit and litigation procedures pursuant to section 6230(a)(2)(A)(ii). See Callaway, 75 T.C.M. (CCH) at 1960. The court therefore found the notices of deficiency for affected items invalid as to James‘s estate, and dismissed the case against James‘s estate for lack of jurisdiction. It denied as moot the estate‘s summary judgment motion. See id. (relying on Crowell v. Commissioner, 102 T.C. 683, 691-92 (1994)).
As to Elizabeth, relying in part on Dubin v. Commissioner, 99 T.C. 325, 334 (1992), the Tax Court held that her partnership items did not convert to nonpartnership items when decedent‘s partnership items converted to nonpartnership items pursuant to
After the order entered denying taxpayer summary judgment, the parties settled certain issues by agreement, pursuant to which a stipulated decision entered on November 17, 1998 preserving this issue for appeal. Final judgment was entered, and this appeal followed.
DISCUSSION.
We review the Tax Court‘s legal conclusions de novo and its factual findings for clear error. See
The issue is whether, on the filing of the request for prompt assessment on behalf of James‘s estate, the Mountain View tax items taken into account on the Callaways’ joint returns were converted from partnership items into nonpartnership items with respect to James alone or with respect to Elizabeth also.
A. When James‘s partnership items converted into nonpartnership items those same partnership items necessarily became nonpartnership items with respect to Elizabeth
We conclude that because the only partnership items taken into account in the Callaways’ joint returns were James‘s partnership items held by him as separate property, when all of his partnership items converted into nonpartnership items, all the Mountain View items reported in the joint returns necessarily became non-partnership items with respect to Elizabeth also.
1. Before the request for prompt assessment.
It is undisputed that James‘s partnership interest was held as separate property. Only James was a partner as that term is defined in subtitle A. See
We turn now to the classification of those items as either “partnership items” or “nonpartnership items” for the purposes of subtitle F. Before the filing for prompt assessment, it is undisputed that James‘s distributive shares of the various Mountain View tax items were classified as “partnership items.” The Code defines “partnership item” to mean:
with respect to a partnership, any item required to be taken into account for the partnership‘s taxable year under any provision of subtitle A to the extent regulations prescribed by the Secretary provide that, for purposes of [Subtitle F], such item is more appropriately determined at the partnership level than at the partner level.
In sum, as is undisputed, at the time they were originally taken into account on his tax returns, James’ distributive shares of the Mountain View tax items were both (1) his separate property, and (2) classified as “partnership items.”
We next consider James‘s distributive shares of Mountain View tax items with respect to Elizabeth. First, Elizabeth owned no interest in or “share of” these items.
The filing of joint tax returns does not alter property rights between husband and wife. See Zeeman v. United States, 395 F.2d 861, 865 (2d Cir. 1968). In particular, the filing of a joint return does not have the effect of converting the income of one spouse into the income of another. See, e.g., McClelland v. Massinga, 786 F.2d 1205, 1210 (4th Cir. 1986) (“[T]he mere filing of a joint tax return by a husband and wife does not render the property taxed or the tax paid joint property.“). The Callaways’ decision to file jointly, see
However, because the Callaways filed joint returns, their tax was computed on their aggregate income. See
Most importantly, Elizabeth‘s status as a partner arises only by operation of subchapter C and only “for purposes of [subchapter C].”
We conclude that immediately before the request for prompt assessment: (1) all James‘s distributive shares of the Mountain View tax items (including the disputed losses) as taken into account in the Callaways’ joint returns were James‘s separate property, see
For so long as James‘s distributive shares of the Mountain View tax items, as taken into account in their joint returns, were characterized as “partnership items,” they were necessarily partnership items with respect to Elizabeth. However, as we conclude below, when James‘s distributive share of the Mountain View tax items converted into nonpartnership items, they necessarily converted into nonpartnership items with respect to Elizabeth.
2. The results of the conversion.
“A ‘nonpartnership item’ means an item which is (or is treated as) not a partnership item.”
In relevant part the prompt assessment regulation states that the “partnership items of ... a partner [on whose behalf a request for prompt assessment of tax under section 6501(d) is filed] ... shall be treated as nonpartnership items ...”
Our interpretation of the effect of the prompt assessment regulation is not only consistent with its text—which instructs that James‘s distributive share of the Mountain View tax items converted from partnership items into nonpartnership items—but also comports with the overall structure and purpose of the TEFRA provisions. The position adopted by the Tax Court does not.
The position of the Tax Court below creates the anomaly that a single share of tax items taken into account on a single return will be treated simultaneously as a “partnership item” and a “nonpartnership item.” Under this reading, James‘s shares of disputed Mountain View losses, as reported in the Callaways’ joint returns, would be treated as nonpartnership items with respect to James and partnership items with respect to Elizabeth. Consequently, the procedures of subchapter B would apply to assessments against James, while the procedures of subchapter C would apply to assessments against Elizabeth, notwithstanding that any deficiencies were attributable to the identical items. This result contradicts the language and structure of the Code, which make quite clear that partnership item and nonpartnership item are mutually exclusive classifications, see
Both the Tax Court and the Commissioner on appeal place great weight on the fact that Elizabeth was a “partner” for the purposes of subchapter C. See
Because the only partnership items taken into account on the Callaways’ joint return were James‘s partnership items, and because it is undisputed that all of his partnership items converted into nonpartnership items, we conclude that all of the partnership items reported on the Callaways’ returns converted into nonpartnership items. We therefore conclude that after December 23, 1991, to determine deficiencies attributable to James‘s distributive share of Mountain View tax items, as taken into account in the Callaways’ joint returns, and to assess those deficiencies against either spouse, the Commissioner was required to proceed under subchapter B.
Of course, the conversion of James’ partnership items into nonpartnership items
B. The statute of limitations against assessments attributable to James Callaway‘s distributive share of the Mountain View items ran on December 23, 1992.
We disagree with the Commissioner‘s contention and the Tax Court‘s conclusion that by operation of section 6501(d) the statute of limitations on assessment of taxes attributable to the Mountain View losses taken into account on the Callaways’ joint return did not expire until June 23, 1993. That analysis ignores the effect of section 6229(f) and misconstrues section 6501(d) and the regulations promulgated thereunder. We conclude that the limitations period expired on December 23, 1992.
On filing of a valid request for prompt assessment, the limitations period runs for a maximum of eighteen months on any return filed prior to the request, “but not after the expiration of 3 years after the return was filed.”
Here, immediately before the filing of the section 6501(d) request for prompt assessment, only two limitations periods remained open with respect to the Callaways’ tax returns. First, the ordinary limitations period on the Callaways’ 1988 joint return remained open until April 15, 1992—the date three years after that return was filed. See
It does not follow, however, as the IRS has assumed, that by operation of section 6501(d) an eighteen month limitations period began to run on the conversion of the
We conclude that the period for assessing tax attributable to the distributive share of Mountain View losses taken into account on the Callaway‘s 1986, 1987 and 1988 tax returns expired on December 23, 1992. As a consequence, we hold that the “precautionary” assessments entered against the Callaways in July and August 1993, the computational adjustments entered in July 1996 and the affected items notice of deficiencies issued in August 1996 were all time-barred.
The Commissioner contends that it is well-settled law that spouses with joint and several liability may be subject to different limitations periods. See, e.g., Tallal v. Commissioner, 77 T.C. 1291, 1295-96 (1981) (holding where spouses filed joint return, and husband signed extension of statute of limitations and wife did not, IRS was barred from assessing tax against wife but not husband); Garfinkel, 67 T.C. at 1032 (period of limitation on assessment against the surviving party to a joint return is not affected where the decedent‘s representative requests prompt assessment); Rev. Rul. 72-338 (same). Undoubtedly this is true, but it is irrelevant on these facts.
The limitations period on assessments against Elizabeth did not expire because the limitations period on assessments against James expired. Their limitations periods expired simultaneously because as of December 23, 1991—when James‘s distributive share of the Mountain View partnership items converted into nonpartnership items—the limitations periods with respect to assessments against either spouse attributable to those items remained open for a minimum of one year, see
The Commissioner‘s argument that the TEFRA proceedings tolled any statute of limitations on assessments against Elizabeth is misconceived. The filing of an FPAA tolls the limitations period on assessments attributable to partnership items for so long as administrative and judicial proceedings are pending and for one year after the adjustments become final. See
We conclude that (1) as of December 23, 1991, when James Callaway‘s estate requested prompt assessment, all of James‘s Mountain View losses taken into account on the Callaways’ joint returns for the taxable years in issue were converted from partnership items to nonpartnership items; (2) therefore, assessments of deficiencies attributable to those losses were subject to the deficiency procedures of subchapter B, not the TEFRA procedures of subchapter C, regardless whether the deficiencies were assessed against James or Elizabeth; and (3) the period of limitations for assessments of tax attributable to those losses against either Callaway spouse expired on December 23, 1992. Because both the 1993 “precautionary” assessments and the 1996 computational adjustments occurred after that date, and because neither complied with the deficiency procedures of subchapter B, they were both time-barred and procedurally invalid. It follows that the subsequent determination of additions to tax and penalties was also invalid.
C. The pertinence of Dubin v. Commissioner.
Both the Tax Court below and the IRS rely on Dubin v. Commissioner, 99 T.C. 325, 1992 WL 220119 (1992), for the proposition that the conversion of one spouse‘s partnership items does not convert the partnership items of the other spouse. Assuming it was correctly decided, Dubin is distinguishable on its facts. We decline to extend it in the manner advocated by the Commissioner. Such an extension contradicts the basic structure of Chapter 63. Furthermore, even on its own facts, we doubt that Dubin was correctly decided.
At issue in Dubin was the effect of a regulation, also promulgated under the authority delegated to the Secretary by
In this case, the Tax Court reasoned that, just as the bankruptcy provision in Dubin converted only the partnership items of the spouse named in bankruptcy, the prompt assessment regulation converts only the partnership items of the decedent on whose behalf the section 6501(d) request is filed. See Callaway, 75 T.C.M. (CCH) at 1961.
Unlike Jewell Dubin, however, Elizabeth Callaway held no property interest in James‘s distributive share of the partnership items. The Tax Court below noted this distinction, but dismissed it in a conclusory manner:
Although the Dubin case involved the status of a taxpayer holding a joint partnership interest with her husband, whereas the instant case concerns the status of a taxpayer who filed a joint return with her husband, who held a separate partnership interest, we see no meaningful distinction between the controlling statutory and regulatory provisions.
Callaway, 75 T.C.M. (CCH) at 1961.
We disagree. The distinction between the arrangement of the Callaways’ and the Dubins’ property interests is significant. Because Jewell Dubin owned a joint interest in her husband‘s membership interest, she owned a share of the partnership‘s tax items. Jewell was required to take her share of those items into account in determining her tax liability, whether she filed jointly or separately. See
Applying the prompt assessment regulation in the manner the Dubin court applied the almost identical bankruptcy regulation supports our holding on the facts of this case. The Dubin court focused on the conversion of the partnership items “of” the partner named in bankruptcy. See Dubin, 99 T.C. at 334. Further, in Gillilan v. Commissioner, 66 T.C.M. (CCH) 398, 402, 1993 WL 311552 (1993), dealing with the same pattern of material facts as Dubin and speaking through the same judge, the Tax Court clarified that it is only the wife‘s “share of [the partnership‘s] losses” that remains a partnership item after her husband‘s share is converted. Our holding is consistent with the straightforward application of Dubin to the facts of this case, where James Callaway owned all of the losses and Elizabeth Callaway owned none. Dubin and Gillilan teach that Elizabeth‘s “share of” any partnership items would have remained unconverted, notwithstanding the conversion of her husband‘s share; but Elizabeth owned no such share. Dubin and Gillilan have no bearing on this case. In short, the difference between Jewell Dubin, who owned an interest in her husband‘s partnership items and Elizabeth Callaway, who did not, gives suf-
Having ruled as we do, we need not pass on the validity of Dubin‘s reasoning, and do not do so. But having studied that ruling and the statute and regulations on which it is based, we note our doubts about its reasoning. As a matter of statutory interpretation, it seems to us strangely reasoned and wrongly decided.
Where a husband and wife own a joint interest in the partnership, the statutory scheme involves the interplay of two Code provisions. Under section 6231(a)(2), “[f]or purposes of [subchapter C],” a “partner” is defined as:
(A) a partner in the partnership, and
(B) any other person whose income tax liability ... is determined ... by taking into account ... partnership items of the partnership.
On the other hand, Code section 6231(a)(12) instructs that:
Except to the extent otherwise provided in regulations, a husband and wife who have a joint interest in a partnership shall be treated as 1 person.
Because husband and wife share a joint interest in a single membership, this section recognizes the appropriateness, as a general rule, of treating the husband and wife as “1 person.” Regardless of the arrangement of property rights between the spouses, from the perspective of the partnership, which is the focus of TEFRA, their interest constitutes but a single membership. It follows, for example, that notice given to the member-spouse—whose information will be provided on the partnership return—will serve as constructive notice to the non-member spouse. It also follows, as the Commissioner argued in Dubin, that the member‘s distributive share of partnership items should be treated as if it were held by “one person.” In short, under this statutory rule the member‘s distributive share of partnership items is treated as a single set of partnership items.23
The pertinent regulation substantially restates these two statutory provisions and clarifies their application. See
interest” includes tenancies in common, joint tenancies, tenancies by the entirety, and community property.
(b) Notice and counting rules—(1) In general. Except as provided in paragraph (b)(2) of this section, for purposes of applying section 6223 (relating to notice to partners of proceedings) and section 6231(a)(1)(B) (relating to the exception for small partnerships), spouses holding a joint interest in a partnership shall be treated as one person. Except as provided in paragraph (b)(2) of this section, the Service or the tax matters partner may send any required notice to either spouse.
(2) Identified spouse entitled to notice. For purposes of applying section 6223 (relating to notice to partners of proceeding) for a partnership taxable year, an individual who holds a joint interest in a partnership with his or her spouse who is entitled to notice under section 6223 shall be entitled to receive separate notice under section 6223 if such individual:
The regulation thus confirms the statutory scheme. Under paragraph (a), a husband and wife owning a joint interest in a partnership are each treated as partners; each may therefore participate in the TEFRA proceedings that will determine their tax liability. At the same time, paragraph (b)(1) confirms that a husband and wife owning a joint interest in the partner-
(i) Is identified as a partner on the partnership return for that taxable year; or
(ii) Is identified as a partner entitled to notice as provided in § 301.6223(c)-1T(b).
(c) Cross-reference. See § 301.6231(a)(2)-1T(a) for special rules relating to spouses who file joint returns with individuals holding a separate interest in a partnership.
The Tax court in Dubin, however, in effect read the regulation as reversing that scheme. Dubin began its analysis by noting that because Alan and Jewell held a joint interest in a partnership, under Code section 6231(a)(12) they are treated collectively as one person. See Dubin, 99 T.C. at 331. It then immediately noted that “[b]y regulation, however, on account of such joint interests, [Jewell and Alan] are each treated as one partner for purposes of applying the TEFRA procedures.” Id. (citing
The court then embarked on a convoluted argument, relying on the premise that “person” and “partner” mean the same thing in these provisions, to conclude that paragraph (a) “[b]y way of exception ... reverses the general rule [of Code section 6231(a)(12)], setting forth a new general rule that spouses holding a joint interest in a partnership are treated as separate persons (or partners).” Dubin, 99 T.C. at 333 (emphasis added). In effect, Dubin concluded that
We set forth the Tax Court‘s argument in Dubin at some length, before observing why we find it mistaken.
The Tax Court began by framing the question as limited to the interplay between section 6231(a)(12) and paragraph (a) of the regulation.
To understand the interplay between section 6231(a)(12) and paragraph (a), it is necessary to determine whether any distinction exists between the terms “person” and “partner“, as those terms are used in section 6231(a)(12) and paragraph (a). As will be discussed, we believe that the term “partner” (as used in paragraph (a)) means exactly the same thing as the term “person” (as used in section 6231(a)(12)).
Dubin, 99 T.C. at 331. In an effort to support its premise that “partner” and “person” mean exactly the same thing, the court turned first to the use of those terms in the regulations.
Before turning to section 6231(a)(12) and paragraph (a) in particular, it is instructive to note that the terms “partner” and “person” sometimes are used without clear distinction throughout the temporary regulations issued in support of the TEFRA procedures. “Person” sometimes is used as a synonym for “partner.” [examples omitted] A fair generalization is that, except where the context requires otherwise, no distinction was intended, and the terms “person” and “partner” are used interchangeably in the temporary regulations.
Id. at 331-32. The court then undertook to demonstrate that “person” and “partner” are used interchangeably not just in the regulations but that “the same can be said with regard to the ... regulations and the statute.” Id. at 332. It concluded that “except where the context requires otherwise, the term ‘partner’ (or ‘person‘), when used in the ... regulations, was not intended to have any different meaning from, and is used interchangeably with, the term ‘person’ (or ‘partner‘) in the [Code].” Id. The court then drew two conclusions.
First, if personhood and partnerhood were independent concepts, then paragraph (b)(1) [Temp. Treas. Reg. § 301.6231(a)(12)-1T(b)(1) (hereinafter “paragraph (b)(1)“) ] would be meaningless. As stated, section 6223(a) provides that each partner must receive notice. Therefore, since paragraph (a) provides generally that a husband and wife with a
Second, if personhood and partnerhood were independent concepts, then paragraph (b)(1) would be superfluous. Section 6231(a)(12) provides that spouses with a joint interest are generally treated as one person. Thus, the one-person rule of paragraph (b)(1) is superfluous unless the one-person rule of section 6231(a)(12) is superseded by some other Code provision or regulation. We think it unlikely that paragraph (b)(1) is superfluous and therefore conclude that paragraph (b)(1) must be necessitated by some limitation on section 6231(a)(12). Since paragraph (a) is the only provision that arguably limits section 6231(a)(12), we conclude that: (1) Paragraph (a)‘s two-partner rule supersedes section 6231(a)(12)‘s one-person rule, and (2) person and partner must therefore mean the same thing, both as between paragraphs (a) and (b)(1) and paragraph (a) and section 6231(a)(12).
Dubin, 99 T.C. at 332-33 (emphasis added). Having thus purportedly demonstrated that “person” and “partner” are not only used interchangeably but actually “mean the same thing,” the Tax Court proceeded to show how this equivalence stripped the statutory and administrative scheme of its purported “mystery.”
Overall, the statutory and administrative scheme would be quite difficult to fathom if “person” and “partner” were (in the TEFRA context) intended as wholly distinct concepts. If that were so, then [Temporary Treasury Regulation] section 301.6231(a)(1)−1T(a)(1) (which, without explanation, substitutes the term “person” for “partner“) could only be regarded as a stealthy amendment to section 6231(a)(1)(B)(i). Also, paragraph (b)(1) would properly be regarded as both irrelevant and redundant. The weight of those suppositions is too much to bear.
In contrast, once it is accepted that the terms “person” and “partner” mean the same thing in the context of section 6231(a)(12) and paragraphs (a) and (b)(1), the statutory and administrative scheme is stripped of all mystery. Section 6231(a)(12) sets forth a new general rule that, in default of a regulatory exception, spouses with a joint interest in a partnership are treated as one person (or partner). By way of exception, paragraph (a) reverses the general rule, setting forth a new general rule that spouses holding a joint interest in a partnership are treated as separate persons (or partners). Paragraph (b)(1) sets forth exceptions to the new general (default) rule. Thus, by way of exception, spouses holding a joint interest in a partnership are sometimes treated as one partner (person) for purposes of the notice provisions found in section 6223 and always are treated as one partner (person) for purposes of the small partnership exception found in section 6231(a)(1)(B). Paragraph (b)(1) is therefore an exclusive list of exceptions to the general rule imposed by paragraph (a). Of course, pursuant to the authority granted by section 6231(a)(12), the Secretary can expand that list.
Dubin, 99 T.C. at 333-34 (emphases added). On this elaborate reasoning, Dubin based its holding. The “two-partner rule [of paragraph (a) of the Regulation] supersedes [Code] section 6231(a)(12)‘s one-per-
We think the Dubin court‘s analysis of the statutory and regulatory framework is mistaken.
(a) The statutory and regulatory scheme is not in need of being “stripped of its mystery.”
As set out above, the statutory scheme arising from the interplay of sections 6231(a)(2)(B) and 6231(a)(12), while somewhat complex, is clear and logical: a husband and wife who must each take their share of partnership items into account because they own a joint interest (1) are each treated as partners, entitled to participate in the proceedings; but because their joint interest is a single membership in the partnership, (2) they are treated as one person. The pertinent regulation substantially restates and applies this statutory scheme. That two individuals may collectively constitute a single person or entity is a commonplace. There is no illogicality—no “mystery“—no need for reformation.
(b) Paragraph (a) is not an exception to section 6231(a)(12).
From the start, Dubin considers only the “interplay between section 6231(a)(12) and paragraph (a),” Dubin, 99 T.C. at 331. It nowhere considers the interplay between Code sections 6231(a)(12) and 6231(a)(2)(B). It therefore assumes that paragraph (a) of the regulation is the “exception” allowed by section 6231(a)(12) (“Except to the extent otherwise provided in regulations ...“). What the Dubin opinion fails to recognize is that paragraph (a) is simply a restatement and application of the proposition of section 6231(a)(2)(B) that spouses who each must take into account partnership items (because they own a joint interest in the partnership) are treated as partners. Neither section 6231(a)(2)(B), nor paragraph (a) of the Regulation that confirms it, are exceptions to the “1-person” principle of section 6231(a)(12).
In our view, therefore, the fundamental error of the Tax Court in Dubin was to overlook the relationship between paragraph (a) and Code section 6231(a)(2)(B). See, e.g., Dubin, 99 T.C. at 333 (“paragraph (a) is the only provision that arguably limits section 6231(a)(12)“) (emphasis added); id. at 334 (implying that section 6231(a)(2)(B) is of “no relevance“). Had the court focused on that relationship it would have seen that paragraph (a) of the Regulation, far from providing an exception that overturns the general rule of section 6231(a)(12) simply applies the rule of section 6231(a)(2)(B) to a husband and wife whose joint interest in the partnership requires each to take his or her share of partnership items into account. In short, a husband and wife owning a joint interest are both treated as “partners” by independent operation of section 6231(a)(2)(B), not by regulatory exception to section 6231(a)(12).
(c) The premise that “person” and “partner” mean the same thing is insupportable.
We see no justification for Dubin‘s remarkable assertion that the words “person” and “partner” “mean the same thing.” The Dubin opinion concedes this conclusion is essential to support its contention that paragraph (a) (“spouses holding a
We do not dispute that “partner” and “person” are sometimes used interchangeably.26 But this does not prove that they mean the same thing. Of course, because a partner—whether an entity or an individual—is a person and a person can be (or can be treated as) a partner, there are instances where either word could be used without error. In addition, there exist instances where the regulations have used “person” where “partner” would have tracked the statutory language more closely and might have been more precise. Observing one such instance, Dubin contends that unless “partner” and “person” mean the same thing, then Temporary Treasury Regulation section 301.6231(a)(l)-lT(a)(l) “could only be regarded as a stealthy amendment to section 6231(a)(1)(B)(i).” Dubin, 99 T.C. at 333. We disagree.
Code section 6231(a)(l)(B)(i) is a counting rule designed to exclude from the scope of subchapter C small partnerships having ten or fewer partners of specified types. Each partner must be “an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.”
This is a counting rule: the important point, for the purposes of determining whether the partnership may elect out of subchapter C, is that the husband and wife are counted as “one” and not as “two.” In this context, the regulation could have used “partner” or “person” and it would not have changed the meaning. We agree that the regulation would have tracked the statutory language more closely had it used the word “partner” instead of “person,” but the meaning remains clear. At most, the substitution of “person” for “partner” in this context represents a careless slip or stylistic choice. It does not justify the extraordinary conclusion that in the regulatory scheme there is no difference between the meanings of “partner” and “person.”
(d) Should the Regulation be reinterpreted lest paragraph (b)(1) be superfluous?
The Tax Court argued that paragraph (b)(1) of
It is a commonplace for Treasury Regulations to restate the Code‘s propositions
As between tolerating an interpretive repetition that is unnecessary because it restates a proposition already stated in the Code and reinterpreting terminology in order to construe a regulation to avoid such redundancy, with the result that the regulation is read to reverse the general rule established by the Code, it seems clear to us which is the lesser evil.
(e) Dubin reads a purported exception to swallow the rule.
Apart from the other flaws in Dubin‘s reasoning, the exception that it finds in paragraph (a) of the Regulation is so broad that it swallows the statutory rule. In Dubin‘s own words, according to its interpretation, “[paragraph (a)‘s two-partner rule supersedes section 6231(a)(12)‘s one-person rule.” Dubin, 99 T.C. at 333; see also id. (“By way of exception, paragraph (a) reverses the general rule ...“); Gillilan v. Commissioner, 66 T.C.M. (CCH) 398, 402, 1993 WL 311552 (1993) (repeating that paragraph (a) “supérsede[s]” and “reverses the general rule of Section 6231(a)(12) ...“). In two respects, this reasoning is unacceptable. First, the Regulations do not prevail over the Code; here, the Code authorizes only exceptions by regulation. See
In conclusion, in our view, the Dubin court (i) found “mystery” in provisions of the Code and implementing Regulations which in fact stand together in a logical, coherent scheme; (ii) mistook paragraph (a) of the pertinent Regulation to be an exception to Code 6231(a)(12), failing to recognize that this paragraph simply applies Code section 6231(a)(2)(B) to a husband and wife owning a joint interest; (iii) needlessly treated terms of the Code and Regulations as meaning other than what they say; and (iv) unnecessarily distorted the meaning of an entire Regulation, lest one subparagraph be rendered “superfluous” for repeating a general principle established in the Code; all to conclude that (v) a Regulation “[b]y way of exception” “supersedes” and “reverses” a rule established by the Code. While leaving the
D. Deference to the Commissioner‘s litigating position?
The IRS‘s considered view on the interpretation of the Internal Revenue Code and the Regulations adopted under it is generally entitled to considerable deference. See, e.g., Jewett v. Commissioner, 455 U.S. 305, 318, 102 S.Ct. 1082, 71 L.Ed.2d 170 (1982) (canon of construction that Commissioner‘s consistent interpretation of Code is entitled to respect is “even more forceful when applied to the Commissioner‘s interpretation of his own Regulation“); see generally Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413-14, 65 S.Ct. 1215, 89 L.Ed. 1700 (1945) (agency interpretation of its own regulation is entitled to “controlling weight unless it is plainly erroneous or inconsistent with the regulation“). On the other hand, that the Commissioner advocates a certain interpretation in a particular litigation does not alone justify judicial deference to that interpretation. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 213, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) (“Deference to what appears to be nothing more than an agency‘s convenient litigating position would be entirely inappropriate.“); cf. CSI Hydrostatic Testers, Inc. v. Commissioner, 103 T.C. 398, 409 (1994) (no deference due to Commissioner‘s interpretation where it is neither long-standing nor a matter of public record upon which the public is entitled to rely when planning its affairs).
It is not always easy to distinguish the circumstances when deference is due from those in which it is not. The Supreme Court has looked sometimes to the consistency of an agency‘s interpretations as a measure of deference due. See I.N.S. v. Cardoza-Fonseca, 480 U.S. 421, 446 n. 30, 107 S.Ct. 1207, 94 L.Ed.2d 434 (1987) (“An agency interpretation ... which conflicts with the agency‘s earlier interpretation is ‘entitled to considerably less deference’ than a consistently held agency view.“) (citation omitted). However, the Court has instructed that an agency is not “disqualified from changing its mind” nor “estopped from changing ... a mistaken legal interpretation.” Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 417, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). At other times, the Court has accorded deference, even to agency interpretations appearing for the first time in an amicus brief, where there “is simply no reason to suspect that the interpretation does not reflect the agency‘s fair and considered judgment on the matter in question.” Auer v. Robbins, 519 U.S. 452, 462, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997). A new, and therefore inconsistent position, may yet be “fair and considered.” Agency expertise underwrites Chevron‘s theory of deference, see Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 651-652, 110 S.Ct. 2668, 110 L.Ed.2d 579 (1990) (“[P]ractical agency expertise is one of the principal justifications behind Chevron deference.“); as Good Samaritan Hospital recognized, experts will change their minds. However, notwithstanding this recognition, the consistency of an agency‘s position remains a factor to be considered in assessing the deference due that position. See Good Samaritan Hosp., 508 U.S. at 417, 113 S.Ct. 2151; see also Federal Election Comm‘n v. Democratic Senatorial Campaign Comm., 454 U.S. 27, 37, 102 S.Ct. 38, 70 L.Ed.2d 23 (1981) (noting that the “thoroughness, validity, and consistency of an agency‘s reasoning are factors that bear upon the amount of deference” due an agency‘s interpretation). The weight to be given to consistency as a factor in determining how “fair and considered” is the agency‘s position, will ultimately “depend on the facts of individual cases.” Good Samaritan Hosp., 508 U.S. at 417, 113 S.Ct. 2151.
In this case, the Commissioner has taken inconsistent positions before, during
The Commissioner has taken positions contrary to the position he takes in this litigation. The Commissioner argues to us that we should accept and extend the Tax Court‘s ruling in Dubin. But in Dubin, the Commissioner took the opposite position. When Alan Dubin filed for bankruptcy his partnership items were converted to nonpartnership items, see
As recently as October 1999, after the submission of his briefs in this case and less than one month after advocating that we extend Dubin‘s holding, the Commissioner “acquiesced in result only” in the Dubin case. See Actions Relating to Court Decisions, 1999-40 I.R.B. 438, 1999 WL 779941. Such a designation affirmatively indicates the Service‘s “disagreement or concern with some or all of [the court‘s] reasons.” Id. (emphasis added)29 Since Dubin was decided entirely as a matter of interpretation of the Code and regulations, we conclude that the Commissioner disagrees with or at least remains concerned about the interpretation of the TEFRA framework articulated by the Tax Court.
Lastly, in its initial actions in this case, the IRS adopted a position contrary to the one the Commissioner now advocates. In August and September 1993, over eighteen months after James Callaway‘s estate requested prompt assessment, thereby converting his partnership items into non-partnership items, the IRS entered “precautionary” assessments against both James and Elizabeth. However, the Commissioner now contends that the 1996 assessments against Elizabeth were proper and timely because Elizabeth was a Mountain View partner with partnership items, at all times bound as a party to the Mountain View partnership-level proceedings. See Callaway, 75 T.C.M. (CCH) at 1960. But if that were the case, any assessment of tax attributable to her partnership
In view of the positions previously and subsequently taken by the Internal Revenue Service, especially its contrary argument in Dubin and its continued reservation of disagreement with Dubin‘s reasoning, it is difficult to view the position it adopts here as other than a litigating strategy to recover from the error of having allowed the statute of limitations to expire against assessments attributable to James‘s Mountain View items.
Of course, if the IRS decides it wishes to adhere to the position taken in this litigation, it may promulgate rules to that effect.
E. The Commissioner‘s appeals to equity are without merit.
At oral argument, the Commissioner appealed to the equity of the IRS‘s position, reasoning that Elizabeth had enjoyed the benefits of joint filing when the tax losses were first taken into account, and should now bear the burden of their disallowance. We are unpersuaded by this argument.
First, equity plays a very limited role in tax cases. See, e.g., Lewyt Corp. v. Commissioner, 349 U.S. 237, 249, 75 S.Ct. 736, 99 L.Ed. 1029 (1955) (Frankfurter, J., dissenting) (“Where the taxing measure is clear, of course, there is no place for loose conceptions about the ‘equity of the statute.’ ... [O]ne should sail close to the shore of literalness in dealing with the technical problems which are the subject matter of revenue laws.“). The task of an appellate court in such cases is “not that of weighing equities, but of determining technical application of the law [consistent] ... with the well-established view that tax laws are technical and, for the most part, are to be accordingly interpreted.” Ewing v. United States, 914 F.2d 499, 501 (4th Cir. 1990) (citations omitted). As we read the Code, it precludes the Commissioner‘s arguments.
Second, if there is “inequity,” it does not result from our interpretation of these statutes but rather from the fact that the IRS needlessly allowed the statute of limitations to expire. The IRS simply failed to adjust the treatment of decedent‘s partnership losses and assess deficiencies in a timely manner, following the proper procedure. It is in the nature of limitations periods that they prevent the recovery of otherwise valid claims. That is all that happened here.30
James Callaway died on December 8, 1990. His estate filed a timely request for prompt assessment on December 23, 1991, posting nearly $150,000 in cash bonds. That action, in converting his distributive share of partnership items to nonpartnership items put the Service on notice and freed it to determine and to assess any deficiencies under subchapter B of Chapter 63 unconstrained by the TEFRA framework. It had a year in which to so proceed. See
CONCLUSION
For the foregoing reasons so much of the Tax Court‘s order as ruled that the 1996 computational adjustments and 1996 determinations of additions to tax were proper and not time barred with respect to Elizabeth Callaway is REVERSED, and the case is REMANDED to the Tax Court for further proceedings consistent with this opinion.
POOLER, Circuit Judge, concurring in part:
I concur in the result that the majority reaches. However, I write separately to note that I do not join in the majority opinion at pages 106-35, in which the majority undertakes a detailed analysis of Dubin v. Commissioner, 99 T.C. 325 (1992). Expressing no view on the merit of that analysis, I believe that after having stated that Dubin “ha[s] no bearing on this case,” it is best not to discuss the substance of the Dubin opinion. I simply would leave that task to a future panel presented with a case on which Dubin does have bearing.
Notes
(a) In general. For purposes of subchapter C of chapter 63 of the Code, spouses holding a joint interest in a partnership are treated as partners. Thus, both spouses are permitted to participate in administrative and judicial proceedings. The term “joint