Jоhn A. IRVINE; Lynda Irvine; Kenneth L. Kraemer; Billy J. White; Ina J. White, Plaintiffs-Appellants v. UNITED STATES of America, Defendant-Appellee.
No. 12-20523.
United States Court of Appeals, Fifth Circuit.
Sept. 5, 2013.
729 F.3d 455
Respectfully, I dissent.
Thomas E. Redding, Sallie W. Gladney, Redding & Associates, P.C., Houston, TX, for Plaintiffs-Appellants.
Bethany Buck Hauser, Esq., Michael J. Haungs, Esq., Supervisory Attorney, U.S. Department of Justice, Washington, DC, Michael D. Powell, U.S. Department of Justice, Dаllas, TX, for Defendant-Appellee.
Before SMITH, HAYNES, and GRAVES, Circuit Judges.
Billy and Ina White, John and Lynda Irvine, and Kenneth Kraemer1 (collectively “Taxpayers“) assert that the Internal Revenue Service (“IRS“) erroneously assessed additional taxes and interest against them in connection with their investments in various partnerships in the 1980s. Taxpayers seek refunds of the federal income taxes and penalty interest paid. Taxpayers assert that the IRS‘s assessment of additional taxes fell outside the applicable statute of limitations and that the IRS erroneously applied penаlty interest. We hold that the district court lacked jurisdiction over the statute of limitations claims but did have jurisdiction over the penalty interest claims and that penalty interest was erroneously assessed.
I. Factual and Procedural Background
This tax refund suit is one among several arising from a series of limited partnerships managed by American Agri-Corp (“AMCOR“) in the 1980s. In an earlier AMCOR-related case, we explained the background:
In the early 1980s, AMCOR organized a number of limited partnerships for which it acted as general partner. These partnerships had as stated goals acquiring agricultural land, investing in agriсultural ventures, and growing crops. AMCOR solicited investments from high income professionals across the country. Each partner in an AMCOR partnership would receive a projected tax loss from crops planted in the first year of roughly twice that partner‘s investment. Investors paid the farming expenses up front and deducted the
amount invested on their tax returns. The next year, when the crops were harvested, the amount of loss in excess of the amount invested would be subject to taxes. However, the farming expenses typically exceeded any income realized from the farming activities. In 1987, the IRS began an investigation and audit into the AMCOR partnerships to determine whether they were impermissible tax shelters.
Duffie v. United States, 600 F.3d 362, 367 (5th Cir. 2010) (footnote omitted); see also Weiner v. United States, 389 F.3d 152, 153 (5th Cir. 2004) (describing similar AMCOR partnerships).
These Taxpayers were partners in AMCOR limited partnerships in the 1980s. Billy White invested as a limited partner in Texas Farm Venturers in 1984 and in Houston Farm Associates-II in 1985. John Irvine invested as a limited partner in Agri-Venture Fund in 1985.2 Kenneth Kraemer invested as a limited partner in Rancho California Partners II in 1986. All Taxpayers reported their proportionate share of their respective partnerships’ losses in the relevant tax years.
In 1990 and 1991, the IRS issued a Notice of Final Partnership Administrative Adjustment (“FPAA“) for the relevant tax years to the tax matters partners (“TMP“) 3 of each of the partnerships. The FPAAs disallowed 100% of each partnership‘s farming expenses and other deductions. The FPAAs listed several reasons for disallowing the partnerships’ deductions, including, inter alia, IRS determinations that the partnerships engaged in a series of sham transactions, that the partnerships’ activities lacked economic substance, that the partnerships did not actually engage in farming activities, and that the partnerships had not substantiated their expenses. The TMPs for the partnerships did not challenge the FPAAs but other partners filed Tax Court suits contesting each FPAA, including claiming that the FPAAs were untimely. All partners initially became parties to the partnership-level suits. See
In 1999 and 2000, during the pendеncy of the Tax Court suits and before the partnership-level stipulated settlements, the Whites, the Irvines and Kraemer individually settled with the IRS. The settlement agreements disallowed only a portion of the farming deductions, as opposed to 100% disallowance. After accepting Taxpayers’ settlements, the IRS assessed additional tax liability against each Taxpayer, including penalty interest under
In their refund actions, the Whites and Irvines claimed that the additional taxes had been assessed after the statute of limitations for making such assessments had expired (“the statute of limitations claim“), and all Taxpayers claimed that the interest should not have been computed at the enhanced § 6621(c) penalty rate (“the penalty interest claim“). Taxpayers and the government moved fоr summary judgment. The district court granted summary judgment to the government on both claims, concluding that it lacked jurisdiction to consider the statute of limitations claim and that Taxpayers’ claims for refund of penalty interest were untimely. Taxpayers timely appealed.
II. Statutory Background
This case is governed by the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA“), generally codified at
If the IRS adjusts any partnership items on a partnership‘s informational income tax return, it must notify the individual partners by issuing an FPAA.
District courts generally have subject matter jurisdiction over an individual partner‘s refund claim.
Against this statutory backdrop, we turn to the specific claims at issue.
III. Discussion
This court reviews a district court‘s grant of summary judgment de novo and considers the same criteria that the district court relied upon when deciding the motion. Weiner, 389 F.3d at 155-56 (citing Mongrue v. Monsanto Co., 249 F.3d 422, 428 (5th Cir. 2001)). Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is еntitled to judgment as a matter of law.”
A. The Statute of Limitations Claim
The Whites and the Irvines first assert that the taxes and interest must be refunded because they were assessed by the IRS after the
The dispositive question is whether the Whites’ and the Irvines’ claim that the additional tax assessments were time-barred is a сlaim for a refund attributable to partnership or nonpartnership items. “If the refund is attributable to partnership items, section 7422(h) applies and deprives the court of jurisdiction. If, on the other hand, the refund is attributable to nonpartnership items, then section 7422(h) is irrelevant, and the general grant of jurisdiction is effective.” Alexander v. United States, 44 F.3d 328, 331 (5th Cir. 1995). This claim also involves the significant interplay between § 6501(a) and § 6229(a), a separate provision that can extend the § 6501(a) period for partnership items. See Curr-Spec Partners, 579 F.3d at 396. “For partnership items, the otherwise applicable limitations period of IRC § 6501(a) shall not expire before the date which is 3 years after the later of the date on which the partnership return was filed or the date on which it was due.” Id. (internal quotations and alterations omitted);
In Weiner, this court held that the § 6229 assessment period is a partnership item that cannot be raised in partner-level litigation. 389 F.3d at 157-58; accord Keener v. United States, 551 F.3d 1358, 1363-64 (Fed. Cir. 2009). The Weiner court explained that because the § 6229 limitations issue “affects the partnership as a whole, it should not be litigatеd in an individual partner proceeding, as such a result would contravene the purposes of TEFRA.” Weiner, 389 F.3d at 157. Taxpayers argue that they have not raised a § 6229 argument, but instead rely only on § 6501. However, all of Taxpayers’ attempts to distinguish Weiner ignore the fact that where a basis for a § 6229 extension is asserted, any limitations determination with regard to § 6501(a) must also involve the resolution of § 6229, a partnership item. Where both are at issue, the § 6501 period cannot be separated from the § 6229 period.
The Federal Circuit has issued a decision resolving this exact issue involving another AMCOR partnership with reasoning that we find logical and persuasive. See Prati v. United States, 603 F.3d 1301, 1307 (Fed. Cir. 2010). As the Prati court explained, “[s]ections 6501 and 6229 operate in tandem to provide a single limitations period. When an assessment of tax involves a partnership item or an affected item, section 6229 can extend the time period that the IRS otherwise has available under section 6501 to make that assessment.” Id. (citing Andantech L.L.C. v. Comm‘r, 331 F.3d 972, 976-77 (D.C. Cir. 2003); Grapevine Imports, Ltd. v. United States, 71 Fed. Cl. 324, 328-39 (2006)). The Federal Circuit rejected the argument that a taxpayer could avoid the jurisdictional bar of § 7422(h) by raising a statute of limitations argument under § 6501 and failing to mention § 6229. Id. “Sеctions 6501 and 6229 do not operate independently to allow a taxpayer to assert one in isolation and thereby render an otherwise timely assessment untimely.” Id. An unpublished decision of this court has already expressed approval of this reasoning. See Matthews v. United States, Civ. No. 00-4131, 2010 WL 2305750 (S.D. Tex. June 8, 2010), aff‘d sub nom. Scott v. United States, 437 Fed. Appx. 281 (5th Cir. 2011) (“essentially” approving the district court‘s opinion). We agree with the Federal Circuit that where the government asserts
Taxpayers argue that the IRS did not actually “assert” any basis for § 6229 extensions of the § 6501 limitations period. This is incorrect. The government has asserted that
Taxpayers also argue that jurisdiction is not barred because the limitations issue was converted to a nonpartnership item in their settlement agreements. See Alexander, 44 F.3d at 331. Taxpayers’ argument here is foreclosed by Weiner. In Weiner, this court held that the assessment period was not converted to a nonpartnership item by the taxpayers’ settlement with the IRS where it was not specifically mentioned in the settlement. Weiner, 389 F.3d at 156 n. 2. As in Weiner, the settlement agreements here do not mention § 6229 and thus the item was not converted by the settlement agreements. Id.
In sum, because the § 6501 limitations period applicable to an individual partner cannot be determined without reference to the asserted bases for extensions under § 6229, which is a partnership item, the district court lacked jurisdiction over the statute of limitations claim under
B. The Penalty Interest Claims
Taxpayers next challenge the penalty interest assessed against them under
Taxpayers assert that § 6621(c) penalty interest cannot be imposed as a matter of law because there was no prior binding determination that any of the partnerships’ transactions were “tax motivated transactions.” The government again argues that the district court lacked jurisdiction to consider this issue because whether a partnership engaged in tax-motivated transactions is a partnership item, and that even if the court had jurisdiсtion, the claims for refund are computational adjustments governed by a shortened statute of limitations and were not timely filed. After initially agreeing with the Taxpayers that the court had jurisdiction and that circuit precedent required refund of Taxpayers’ § 6621(c) interest, the district court reconsidered and granted summary judgment to the government on the grounds that the claims for refund were untimely.
The government is correct that whether a partnership‘s transaction is tax-motivated is a partnership item which a refund court does not have jurisdiction to determinе. Duffie, 600 F.3d at 378-79. However, the question Taxpayers raise is different; they argue that no tax-motivated determination was actually made in an applicable partnership proceeding or in their settlements, and thus that there has been no tax-motivated transaction determination at all. The government relies on Duffie to essentially argue that the district court lacked jurisdiction even to determine whether a tax-motivated determination was made. Duffie does not support this conclusion. The Duffie court looked to the partnership-level merits decision in the Tax Court, which found that the partnership‘s transactions were shams and lacked econоmic substance, and concluded that the determination was a sufficient finding that the transactions were tax-motivated and was binding on the unsettled partners seeking refunds. 600 F.3d at 378-80, 383. The court then explained that the Duffies’ claim was attributable to the Tax Court‘s determination that the transactions were shams, and, “Because the nature of a partnership‘s activities—whether they are sham transactions—is the partnership-item component of an affected item, the Duffies’ refund claim is based on the determination of a partnership item.” Id. at 383. The court‘s holding that it lacked jurisdiction over the refund claims clearly hinged on its finding that a sufficient tax-motivated transaction determination was already made at the partnership level. See id.
This situation is not like the one in Duffie. A refund court need not litigate the merits of any partnership item to decide whether the required tax-motivated determination has been made. See Duffie, 600 F.3d at 383; Weiner, 389 F.3d at 162-63; see also Bush v. United States, 717 F.3d 920, 928-29 (Fed. Cir. 2013) (explain-
Next, the government argues that even if the district court had jurisdiction, Taxpayers’ refund claims were not timely filed. Failure to timely file a refund claim deprives the court of subject matter jurisdiction for lack of a valid waiver of sovereign immunity. Duffie, 600 F.3d at 384. The regular deadline for filing a refund claim is two years from the date of payment or three years from the date of filing of a tax return, whichever is later.
The question of whether the penalty interest refund claims were covered by the shortened deadlines in § 6230 is dependent on the question of whether the challenged adjustments including penalty interest are computational or substantive. See Duffie, 600 F.3d at 385. A computational adjustment to an individual partner‘s tax liability can be made at the conclusion of the partnership level proceeding “without any factual determination at the partner level.” Duffie, 600 F.3d at 366; see
Where, as here, Taxpayers’ refund claim is dependent on whether there was a sufficient tax-motivated transaction determination, and thus whether their underpayment was “attributable to” a tax-motivated transaction, see Weiner, 389 F.3d at 159-60, we find that § 6621(c) interest is a substantive affected item. This holding is supported by relevant case law. See Duffie, 600 F.3d at 386 (analyzing whether penalty interest was computational in that case); see also Weiner, 389 F.3d at 159-62 (analyzing whether an underpayment is “attributable to” disallowed deductions); McGann v. United States, 76 Fed. Cl. 745, 751, 754-59 (Fed. Cl. 2007). In Duffie, though ultimately determining that the adjustments at issue in that case were computational, this court first determined whether the Tax Court‘s tax-motivated
Both parties agree that if the district court had jurisdiction over Taxpayers’ penalty interest claims and those claims were timely, Weiner dictates that Taxpayers win on the merits of those claims. The FPAAs in Weiner listed several independent bases for disallowing the deductions, only some of which were tax-motivated transaction findings, the taxpayers settled and thus removed the need for a binding merits determination on any of the grounds for disallowance, and the settlements included no specific findings regarding the tax-motivated transaction issue. See Weiner, 389 F.3d at 162-63. The Weiner court found that in such a situation, “[t]here is no way, given the multiple reasons provided for the disallowance in the FPAAs, to determine whether the underpayments are ‘attributable to’ a tax motivated transaction.” Id. at 163. The situation is identical here. Weiner thus dictates that the assessment of § 6621(c) penalty interest against Taxpayers was erroneous as a matter of law. Although other circuits have taken a different approach, see e.g., Keener, 551 F.3d at 1367, Weiner is controlling in this circuit. We therefore reverse the grant of summary judgment to the government and render judgment in favor of Taxpayers on this issue.
IV. Conclusion
For the foregoing reasons, we AFFIRM the district сourt‘s grant of summary judgment to the government on Taxpayers’ statute of limitations claims. We REVERSE the district court‘s grant of summary judgment to the government and RENDER judgment in favor of Taxpayers’ on their penalty interest claims. We REMAND for any further necessary proceedings, such as whether there is any remaining issue regarding the amount to be refunded to Taxpayers.
JAMES E. GRAVES, JR.
UNITED STATES CIRCUIT JUDGE