In the United States Court of Federal Claims
No. 01-344 T
Filed: October 31, 2016
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*
* Civil Actions for Tax Refund, 26
ROBERT J. ISLER, et al., * U.S.C. § 7422;
* Tax Equity and Fiscal Responsibility
Plaintiffs, * Act (“TEFRA”), 26 U.S.C. §§
* 6221; 6231–34;
v. * Rules of the United States Court of
* Federal Claims (“RCFC”)
UNITED STATES, * 12(b)(1) (Jurisdiction).
*
Defendant. *
*
*
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Thomas E. Redding, Redding & Associates, P.C., Houston, Texas, Counsel for the Plaintiffs.
Bart Duncan Jeffress, United States Department of Justice, Tax Division, Washington, D.C.,
Counsel for the Government.
MEMORANDUM OPINION AND ORDER GRANTING THE GOVERNMENT’S
MOTION TO DISMISS
BRADEN, Judge.
This tax refund case was pending in the United States Court of Federal Claims before four
separate judges for nine years during final adjudication of jurisdictional issues raised in two related
cases under the new Tax Equity and Fiscal Responsibility Act (“TEFRA”), codified in sections of
the Internal Revenue Code, including 26 U.S.C. §§ 6221–34. See Keener v. United States, 76 Fed.
Cl. 455 (2007), aff’d, 551 F.3d 1358 (Fed. Cir. 2009) (holding that the United States Court of
Federal Claims did not have jurisdiction to adjudicate a taxpayer refund claim under TEFRA,
because whether the Internal Revenue Service (“IRS”) untimely assessed federal taxes is a
“partnership item” and, under 26 U.S.C. § 7422(h) and United States Treasury Regulation §
301.6231(a)(3)–1(b), the court did not have jurisdiction to adjudicate partner-level refund claims,
attributable to partnership items); see also Prati v. United States, 81 Fed. Cl. 422 (2008), aff’d,
603 F.3d 1301 (Fed. Cir. 2010) (holding that a taxpayer’s refund claim, alleging that, the IRS
untimely assessed tax and interest, was a “partnership item” that could not be raised in a partner-
level refund action in the United States Court of Federal Claims under 26 U.S.C. § 7422(h)).
This case, however, inexplicably was allowed to languish for another six years, although
the only remaining issue was whether the United States Court of Federal Claims could adjudicate
whether the IRS timely assessed federal income taxes due and attributable to the adjustment of
partnership items—the precise jurisdictional issue resolved by Keener in 2009.
I. RELEVANT FACTS.1
During the 1984 fiscal year, Mr. Robert J. Isler and Mrs. Susan L. Isler were partners in
Oasis Date Associates (“ODA”), a California limited partnership. Compl. at ¶ 6. On their 1984
federal income tax return, Mr. and Mrs. Isler reported investment deductions related to an
investment in ODA. Compl. Ex. A at 23.
On April 9, 1997, following an IRS examination of ODA’s 1984 partnership return, Mr.
and Mrs. Isler entered into a partner-specific Settlement Agreement with the IRS regarding four
ODA partnership items: (1) ordinary income; (2) total positive income, minus qualified investment
expense; (3) total positive income, minus qualified investment income; and (4) investment interest,
minus investment income. Compl. Ex. A at 23. Under the April 9, 1997 Settlement Agreement,
$4,756,385 of the deductions reported on ODA’s 1984 partnership return were disallowed and Mr.
and Mrs. Isler’s tax liability for 1984 was adjusted accordingly. Compl. Ex. A at 22–23.
Subsequently, Mr. and Mrs. Isler made an advance payment of $16,717 for any deficiency that
may be due to the IRS. Compl. at ¶¶ 7, 9.
On September 29, 1997, the IRS assessed Mr. and Mrs. Isler $4,990 in federal income taxes
for fiscal year 1984, plus $11,682 in interest. Compl. at ¶ 8. On March 30, 1999, Mr. and Mrs.
Isler filed claims with the IRS, requesting a $4,990 refund for the 1984 fiscal year and the $11,682
interest assessment. Compl. at ¶ 10. On June 8, 1999 and May 12, 2000, the IRS disallowed Mr.
and Mrs. Isler’s March 30, 1999 claims. Compl. at ¶ 11.2
II. PROCEDURAL HISTORY.
On June 8, 2001, Mr. and Mrs. Isler (“Plaintiffs”) filed a Complaint in the United States
Court of Federal Claims seeking a federal tax refund of $22,039.06 for taxable year 1984, based
on five claims:
The IRS unlawfully assessed taxes after the relevant statutes of limitations, i.e., 26
U.S.C. § 6501(a)3, and 26 U.S.C. § 6229(a)4, expired. Compl. at ¶ 12a. Any
1
The facts discussed herein were derived from Plaintiff’s June 8, 2001 Complaint (“Compl.
at ¶¶ 1–20”) and Complaint Exhibit A (“Compl. Ex. A at 11–30”).
2
Thereafter, the IRS remitted to Mr. and Mrs. Isler $44.94 of the $16,717 advanced
payment. Compl. at ¶ 9.
3
Section 6501(a) provides the general statute of limitations for tax assessments against
individuals: “[e]xcept as otherwise provided in this section, the amount of any tax imposed by this
title shall be assessed within 3 years after the return was filed[.]” 26 U.S.C. § 6501(a).
4
Section 6229(a) provides the statute of limitations for tax assessment attributable to
partnership or affected items:
2
amount assessed and collected, after the statute of limitations expired, is a
refundable overpayment under 26 U.S.C. § 6401.5 Compl. at ¶ 12b. (“Untimely
Tax Assessment Claim”).
Under the April 9, 1997 Settlement Agreement, Plaintiffs did not concede that any
of the adjustments to ODA partnership items were tax motivated transactions,
(Compl. at ¶ 12d), so, as a matter of law, the IRS improperly imposed interest at
the penalty rate under 26 U.S.C. § 6621(c)6, (Compl. at ¶¶ 12c, 12e). (“Penalty
Interest Claim”).
The IRS was required to abate interest under 26 U.S.C. § 6404(e).7 Compl. at
¶ 12f. (“Interest Abatement Claim”).
Except as otherwise provided in this section, the period for assessing any tax
imposed . . . with respect to any person which is attributable to any partnership item
(or affected item) for a partnership taxable year shall not expire before the date
which is 3 years after the later of . . . (1) the date on which the partnership return
for such taxable year was filed, or . . . (2) the last day for filing such return for such
year (determined without regard to extensions).
26 U.S.C. § 6229(a).
5
Section 6401 provides:
The term “overpayment” includes that part of the amount of the payment of any
internal revenue tax which is assessed or collected after the expiration of the period
of limitation properly applicable thereto.
26 U.S.C. § 6401(a).
6
The June 8, 2001 Complaint cites to the 1986 edition of 26 U.S.C. § 6621(c), providing:
“[i]n the case of interest payable . . . with respect to any substantial underpayment attributable to
tax motivated transactions, the rate of interest established under this section shall be 120 percent
of the underpayment rate established under this section.” 26 U.S.C. § 6621(c). The Omnibus
Budget Reconciliation Act of 1989 repealed the higher interest rate imposed by section 6621(c) on
underpayments attributable to tax-motivated transactions. Pub.L. 101-508, Title XI, § 11341(a).
The repeal, however, only applies to federal tax returns due after December 31, 1989. Pub.L. 101-
508, Title XI, § 11341(b) (“The amendment . . . shall apply for purposes of determining interest
for periods after December 31, 1990.”). Because the tax return in question was due in April 1985,
the Omnibus Budget Reconciliation Act of 1989 does not apply.
7
Section 6404(e)(1) provides:
In the case of any assessment of interest on . . . any deficiency attributable . . . to
any unreasonable error or delay by an officer or employee of the Internal Revenue
Service . . . in performing a ministerial or managerial act . . . the Secretary [of the
Treasury] may abate the assessment of all or any part of such interest for any period
3
The IRS was required to apply a net interest rate of zero, under 26 U.S.C. §
6621(d)8, for the 1984 taxable period, because interest was payable to the IRS and
allowable to Plaintiffs. Compl. at ¶ 12g. (“Interest Netting Claim”).
The IRS was required to apply an offset to Plaintiffs’ 1984 deficiency, because of
their overpayment of federal income tax in 1997. Compl. at ¶ 18a–18e. (“Offset
Claim”).
On December 5, 2003, the Government filed a Motion To Dismiss the Untimely Tax
Assessment, Interest Abatement, Interest Netting, and Offset claims alleged in the June 8, 2001
Complaint, based on Rule 12(b)(1) of the United States Court of Federal Claims (“RCFC”). ECF
No. 52 at 8–6.
On February 2, 2004, Plaintiffs filed a Motion For Summary Judgment regarding the June
8, 2001 Complaint’s Penalty Interest Claim, (ECF No. 57), together with Proposed Findings Of
Uncontroverted Fact, (ECF No. 58). On April 2, 2004, the Government filed a Response stating
that, “[o]n April 9, 1997, [Plaintiffs] settled all of [their] 1984 ODA partnership items with the
IRS,” (ECF No. 73 at ¶ 27), although “[the April 9, 1997] settlement agreement did not address
the limitations period on assessment,” (ECF No. 73 at ¶ 28).
On December 12, 2005, the Government filed a second Motion to Dismiss arguing that the
court does not have jurisdiction to adjudicate the June 8, 2001 Complaint’s Penalty Interest Claim.
ECF No. 102 at 1.
On May 21, 2007, the United States Supreme Court in Hinck v. United States, 550 U.S.
501 (2007), held that the United States Tax Court is the exclusive forum to conduct judicial review
of an IRS decision not to abate interest under 26 U.S.C. § 6404(e). See id. at 506 (“[D]espite
Congress’s failure explicitly to define the [United States] Tax Court’s jurisdiction as exclusive, we
think it quite plain that the terms of § 6404(h) . . . control all requests for review of § 6404(e)(1)
determinations. Those terms include the forum for adjudication.”).
On October 4, 2007, the Government advised the court that, in light of Hinck, the parties
agreed that the United States Court of Federal Claims does not have jurisdiction to adjudicate the
. . . [but] only if no significant aspect of . . . delay can be attributed to the taxpayer
involved[.]
26 U.S.C. § 6404(e)(1) (emphasis added).
In addition, “[t]he Secretary shall abate the assessment of all interest on any erroneous
refund under section 6602 until the date demand for repayment is made, unless . . . the taxpayer
(or a related party) has in any way caused such erroneous refund[.]” 26 U.S.C. § 6621(e)(2).
8
Section 6621(d) provides: “[t]o the extent that, for any period, interest is payable . . . and
allowable . . . on equivalent underpayments and overpayments by the same taxpayer of tax imposed
by this title, the net rate of interest . . . on such amounts shall be zero for such period.” 26 U.S.C.
§ 6621(d).
4
June 8, 2001 Complaint’s interest abatement claim. ECF No. 130 at 1; see also ECF No. 187 at 1
n.3 (“The parties previously agreed that[,] under Hinck v. United States[,] this court lacks
jurisdiction of § 6404(e) interest abatement claims.”).
On August 15, 2011, the parties filed a Joint Admission dismissing the June 8, 2001
Complaint’s Interest Netting Claim and Offset Claim. ECF No. 169 at 1; see also ECF No. 187 at
1 n.3 ([Plaintiffs] stipulated to dismissal of [their] . . . offset grounds, which rendered moot [their]
§ 6221(d) interest netting grounds.”).
* * *
On January 15, 2016, this case was reassigned to the undersigned judge. On February 10,
2016, the court convened a telephone status conference and set a schedule for any supplemental
briefs the parties wanted to file, in light of the inordinate amount of time that passed since the
Government filed a motion to dismiss in 2003. ECF No. 45.
On April 22, 2016, Plaintiffs filed a Supplemental Brief advising the court that “the only
refund ground remaining [in the June 8, 2001 Complaint] is [section] 6501(a) limitations.” ECF
No. 187 at 1. On June 23, 2016, the Government filed a Response, again arguing that, under 26
U.S.C. § 7422(h), the court does not have jurisdiction to adjudicate whether the IRS untimely
assessed federal income taxes, as alleged in the June 8, 2001 Complaint. ECF No. 190 at 1.
On July 8, 2016, Plaintiffs filed a Reply arguing that, 26 U.S.C. § 7422(h) does not apply
to the June 8, 2001 Complaint’s refund claim. ECF No. 194 at 1.
III. DISCUSSION.
A. Standard Of Review For A Motion To Dismiss Pursuant To RCFC 12(b)(1).
A challenge to the United States Court of Federal Claims’ “general power to adjudicate in
specific areas of substantive law . . . is properly raised by a [Rule] 12(b)(1) motion.”
Palmer v. United States, 168 F.3d 1310, 1313 (Fed. Cir. 1999); see also RCFC 12(b)(1) (allowing
defendant to assert, by motion, “lack of subject-matter jurisdiction”). When considering whether
to dismiss an action for lack of subject-matter jurisdiction, the court is “obligated to assume all
factual allegations [of the complaint] to be true and to draw all reasonable inferences in plaintiff’s
favor.” Henke v. United States, 60 F.3d 795, 797 (Fed. Cir. 1995). Nonetheless, plaintiffs bear
the burden of establishing jurisdiction by a preponderance of the evidence. See Reynolds v. Army
& Air Force Exch. Serv., 846 F.2d 746, 748 (Fed. Cir. 1988) (“[O]nce the [trial] court’s subject
matter jurisdiction [is] put in question . . . [the plaintiff] bears the burden of establishing subject
matter jurisdiction by a preponderance of the evidence.”).
B. Jurisdiction.
The Tucker Act, 28 U.S.C. § 1491, authorizes the United States Court of Federal Claims
to adjudicate tax refund claims, if the taxpayer has paid the full assessed federal tax liability and
timely filed a refund claim with the IRS stating the grounds for the claim. See 28 U.S.C. § 1491(a);
5
see also 26 U.S.C. § 6511(a)9; 26 U.S.C. § 7422(a)10; Shore v. United States, 9 F.3d 1524, 1526
(Fed. Cir. 1993) (holding that a tax refund claim must be dismissed, if the “principal tax deficiency
has not been paid in full”). In addition, the taxpayer must comply with the time restrictions in 26
U.S.C. § 6532(a)(1).11 Both of these requirements were met in this case.
Finally, in tax refund cases concerning partnership items, the taxpayer must also comply
with the requirements of TEFRA.
C. Overview Of The 1982 Tax Equity and Fiscal Responsibility Act.
Prior to 1982, partnerships for federal tax purposes were treated as aggregate
entities. See MICHAEL D. ROSE & JOHN C. CHOMMIE, FEDERAL INCOME TAX § 9.02
(3d ed. 1988). Each partner filed a federal tax return and the IRS separately resolved any tax issues
on a partner-by-partner basis. See United States v. Woods, 134 S. Ct. 557, 562 (2013) (“Before
9
Section 6511(a) provides:
Claim for credit or refund of an overpayment of any tax imposed by this title in
respect of which tax the taxpayer is required to file a return shall be filed by the
taxpayer within 3 years from the time the return was filed or 2 years from the time
the tax was paid, whichever [] period[] expires [] later . . . [.]
26 U.S.C. § 6511(a).
10
Section 7422(a) provides:
No suit or proceeding shall be maintained in any court for the recovery of any
internal revenue tax alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Secretary, according
to the provisions of law in that regard, and the regulations of the Secretary
established in pursuance thereof.
26 U.S.C. § 7422(a).
11
Section 6532(a)(1) provides:
No suit or proceeding under section 7422(a) for the recovery of any internal revenue
tax, penalty, or other sum, shall be begun before the expiration of 6 months from
the date of filing the claim required under such section[,] unless the Secretary
renders a decision thereon within that time, nor after the expiration of 2 years from
the date of mailing by certified mail or registered mail by the Secretary to the
taxpayer of a notice of the disallowance of the part of the claim to which the suit or
proceeding relates.
26 U.S.C. § 6532(a)(1).
6
1982, the IRS had no way of correcting errors on a partnership’s return in a single, unified
proceeding. Instead, tax matters pertaining to all the members of a partnership were dealt . . .
through deficiency proceedings at the individual-taxpayer level.”). This, however, led to
“duplicative proceedings and the potential for inconsistent treatment of partners in the same
partnership.” Id. at 562–63.
In 1982, Congress enacted TEFRA “creat[ing] a single unified procedure for determining
the tax treatment of all partnership items at the partnership level, rather than separately at the
partner level.” Keener, 551 F.3d at 1361 (quoting In re Crowell, 305 F.3d 474, 478 (6th Cir.
2002)). Under TEFRA, “[n]o [partner-level] action may be brought for a refund attributable to
partnership items [.]” 26 U.S.C. § 7422(h). “Nonpartnership items” were to be determined at the
partner level. See Crnkovich v. United States, 202 F.3d 1325, 1332 (Fed. Cir. 2000) (“[T]he tax
treatment of nonpartnership items is determined at the individual partner level.”).
1. How “ Tax Items” Are Considered Under TEFRA.
TEFRA defines “tax items” as: “partnership items;” “nonpartnership items;” or “affected
items:”
(3) Partnership item.—The term “partnership item” means, 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 this subtitle, such item is more appropriately
determined at the partnership level than at the partner level.
(4) Nonpartnership item.—The term “nonpartnership item” means an item which
is (or is treated as) not a partnership item.
(5) Affected item.—The term “affected item” means any item to the extent such
item is affected by a partnership item.
26 U.S.C. § 6231(a) (emphasis added).
United States Department of the Treasury (“Treasury”) regulations further define a
“partnership item” to include: “legal and factual determinations that underlie the determination
of the amount, timing, and characterization of [partnership] items of income, credit, gain, loss,
deduction, etc.” Treas. Reg. § 301.6231(a)(3)-1(b) (emphasis added).
The United States Court of Appeals for the Federal Circuit has held that Treasury
Regulation § 301.6231(a)(3)-1(b)’s definition of “partnership item” is entitled to deference. See
Keener, 551 F.3d at 1363 (“[W]e hold that the statute does not unambiguously answer the question
of . . . [what constitutes] a ‘partnership item.’ . . . In light of this ambiguity, we conclude that the
[Treasury’s] interpretation of the statute is, at a minimum, a reasonable one [and] . . . we [therefore]
give deference to the agency’s interpretation of the statute.”) (citing Chevron, U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 843 (1984)).
7
2. How “ Partnership Items” Are Adjudicated.
Generally, “[a] taxpayer seeking a refund of taxes erroneously or unlawfully assessed or
collected may bring an action against the Government either in United States District Court or in
the United States Court of Federal Claims.” United States v. Clintwood Elkhorn Min. Co., 553
U.S. 1, 4 (2008) (citing 28 U.S.C. § 1346(a)(1)). Under TEFRA, however, partners may not bring
a partner-level refund claim, in either forum, if the claim is attributable to “partnership items.” See
26 U.S.C. § 7422(h) (“[N]o action may be brought for a refund attributable to partnership
items[.]”). Section 7422(h), however, contains two exceptions for claims that fall under 26 U.S.C.
§ 6228(b)12 and 26 U.S.C. § 6230(c)13. Neither exception is relevant to the resolution of this case.
12
Section 6228(b)(1)(A-B) concerns administrative adjustment requests:
If the Secretary mails to a partner . . . notice that all partnership items of the partner
for the partnership taxable year to which a timely request for administrative
adjustment under [26 U.S.C. § 6227(d)] relates shall be treated as nonpartnership
items . . . the partner may bring an action under section 7422 with respect to such
claim[.]
26 U.S.C. § 6228(b)(1)(A)–(B). In addition,
[i]f the Secretary fails to allow any part of an administrative adjustment request
filed under [ section 6227(d)] by a partner . . . such partner may, pursuant to section
7422, begin a civil action for refund of any amount due by reason of the adjustments
described in such part of the request[.]
26 U.S.C. § 6228(b)(2)(A)(i).
13
Section 6230(c) applies to claims arising out of erroneous computations:
A partner may file a claim for refund on the grounds that . . . (A) the Secretary
erroneously computed any computational adjustment necessary . . . to make the
partnership items on the partner’s return consistent with the treatment of the
partnership items on the partnership return[;] . . . (B) the Secretary failed to allow
a credit or to make a refund to the partner in the amount of the overpayment
attributable to the application to the partner of a settlement, a final partnership
administrative adjustment, or the decision of a court in an action brought under
section 6226 or section 6228(a)[;] or . . . (C) the Secretary erroneously imposed any
penalty, addition to tax, or additional amount which relates to an adjustment to a
partnership item.
26 U.S.C. § 6230(c)(1).
Section 6230(c)(4) further clarifies:
For purposes of any claim or suit under this subsection, the treatment of partnership
items on the partnership return, under the settlement, under the final partnership
8
3. The Effect Of A Settlement Agreement On The Adjudication Of
“Partnership Items.”
Under TEFRA,
[t]he partnership items of a partner for a partnership taxable year shall become
nonpartnership items as of the date . . . the Secretary [of the United States
Department of the Treasury] or the [United States] Attorney General enters into a
settlement agreement with the partner with respect to such items[.]
26 U.S.C. § 6231(b)(1)(C).
This statute, however, applies on an item-by-item basis, so that only those “partnership
items” resolved by a settlement agreement may be treated as “nonpartnership items.” See Schell
v. United States, 589 F.3d 1378, 1383 (Fed. Cir. 2009) (“When a partner chooses to settle his
individual tax liability with the IRS, the settling individual’s partnership items are converted to
non-partnership items, but only when the IRS enters into a settlement agreement with the partner
with respect to such items.”). “When a partner files an action for a refund attributable to
partnership items that have been converted through a settlement agreement, the jurisdictional bar
of [section] 7422(h) no longer applies.” Id.
D. Whether The United States Court Of Federal Claims Has Jurisdiction To
Adjudicate A Refund Claim, Alleging That The Internal Revenue Service
Assessed Federal Income Taxes After The Relevant Statutes Of Limitations
Expired.
The June 8, 2001 Complaint alleges that the IRS unlawfully assessed federal income taxes
attributable to the adjustment of partnership items, after the relevant statutes of limitations, i.e.,
section 6501 and 6229(a), expired. Compl. at ¶¶ 12a–12b.
1. The Government’s December 5, 2003 Motion To Dismiss.
The Government argues that the June 8, 2001 Complaint’s Untimely Tax Assessment
Claim is attributable to a “partnership item” and, under section 7422(h), the court does not have
jurisdiction to adjudicate this claim. ECF No. 52 at 19. Sections 6501 and 6229(a) apply to
partnership as a whole. ECF No. 52 at 19. Moreover, under section 7422(h), the United States
Court of Federal Claims specifically does not have jurisdiction to adjudicate suits for tax refunds
related to “partnership items.” ECF No. 52 at 16. For these reasons, the court does not have
jurisdiction to adjudicate the June 8, 2001 Complaint’s Untimely Tax Assessment Claim. ECF
No. 52 at 24-25.
administrative adjustment, or under the decision of the [Tax] court . . . shall be
conclusive.
26 U.S.C. § 6230(c)(4).
9
2. Plaintiffs’ April 22, 2016 Responsive Supplemental Brief.
Plaintiffs respond that the Untimely Tax Assessment Claim does not concern a “partnership
item,” because all of Plaintiffs’ partnership items, including the determination of whether the IRS
untimely assessed federal income taxes, were subject to the April 9, 1997 Settlement Agreement.
ECF No. 187 at 4. And, under section 6231(b)(1)(C), “partnership items” are converted to
“nonpartnership items” from the date that they are settled with the IRS. ECF No. 187 at 4.
In addition, on April 2, 2004, the Government filed a Response To Plaintiffs’ Proposed
Findings Of Uncontroverted Facts that contained a number of admissions. Paragraph twenty-seven
therein states that the “[Government’s April 9, 1997] settlement agreement settled all of
[Plaintiffs’] partnership items with the IRS.” ECF No. 187 at 3. Under Keener and Prati, the term
“partnership items” includes a determination of whether the IRS untimely assessed federal income
taxes on a partner, based on adjustments to partnership items. ECF No. 187 at 5. Therefore, the
Government’s April 2, 2004 Response admits that the April 9, 1997 Settlement Agreement settled
the untimely tax assessment issue. ECF No. 187 at 5.
Plaintiffs add that, “when a partner files an action for a refund attributable to partnership
items that have been converted through a settlement agreement, the jurisdictional bar of [section]
7422(h) no longer applies.” ECF No. 187 at 4 (quoting Schell, 589 F.3d at 1383). Because the
issue of whether the IRS untimely assessed federal income tax was resolved in the April 9, 1997
Settlement Agreement, section 7422(h)’s jurisdictional bar does not apply to the June 8, 2001
Complaint’s Untimely Tax Assessment Claim. ECF No. 187 at 4.
3. The Government’s June 23, 2016 Reply To Plaintiffs’ Supplemental
Brief.
The Government replies that, in Keener and Prati, whether the IRS assessed federal income
taxes, after the section 6501 and section 6229(a) statutes of limitations expired, is a “partnership
item.” ECF No. 190 at 1. In Keener, the United States Court of Appeals for the Federal Circuit
held that, under section 7422(h), the United States Court of Federal Claims does not have
jurisdiction to adjudicate claims attributable to “partnership items.” ECF No. 190 at 1. Because
the Plaintiffs’ Untimely Tax Assessment Claim is indistinguishable from the untimely tax
assessment rulings in Keener and Prati, the court no longer has jurisdiction to adjudicate this issue.
ECF No. 190 at 1.
In addition, the April 9, 1997 Settlement Agreement does not address and therefore did not
settle, whether the IRS untimely assessed Plaintiffs’ 1984 federal income taxes. ECF No. 190 at
11. The admission in paragraph twenty-seven of the Government’s April 2, 2004 filing does not
require the court to find otherwise. ECF No. 190 at 11. This is so, because the next paragraph of
the admission states, “[the April 9, 1997] settlement agreement did not address the limitations
period on assessment.” ECF No. 190 at 11.
In sum, the April 2, 2004 admission does not constrain the court as to what “partnership
items” were subject to the April 9, 1997 Settlement Agreement and, in any event, does not bind
the court, as a matter of law. ECF No. 190 at 12.
10
4. Plaintiffs’ July 8, 2016 [Sur] Reply To The United States’ Reply To
Plaintiffs’ Supplemental Brief.
Plaintiff’s July 8, 2016 [Sur] Reply restates that their Untimely Tax Assessment Claim is
not subject to section 7422(h)’s jurisdictional bar, because it was resolved by the April 9, 1997
Settlement Agreement. ECF No. 194 at 1. Furthermore, Plaintiffs continue to insist that this case
is distinguishable from Keener and Prati. ECF No. 194 at 8 n.15. Plaintiffs read these cases to
hold that, under section 7422(h), a taxpayer waives the ability to raise an untimely federal tax
assessment claim in a partner-level tax refund suit at the United States Court of Federal Claims, if
the taxpayer failed to raise that claim at the partnership level before the United States Tax Court.
ECF No. 194 at 8 n.15 (citing Prati, 603 F.3d at 1307). In this case, Plaintiffs raised the Untimely
Tax Assessment Claim at the partnership level in the United States Tax Court. ECF No. 194 at 8.
Therefore, Plaintiffs did not waive the Untimely Tax Assessment Claim and may now raise it in a
partner-level tax refund suit before the court. ECF No. 194 at 8.
5. The Court’s Resolution.
The June 8, 2001 Complaint alleges that the IRS untimely assessed federal income taxes,
after the relevant statute of limitations expired, so that any amount of taxes that the IRS collected,
is a refundable overpayment. Compl. at ¶¶ 12a–12b.
a. The Application Of The Statute Of Limitations Is A
“Partnership Item,” Subject To Section 7422(h).
It is true that Prati held,
[b]ased on Keener . . . the [untimely tax assessment] issue is a partnership item and
. . . the [plaintiffs] were required to raise the limitations issue in the partnership-
level proceeding prior to . . . entering settlement . . . . They did not do so, and we
therefore affirm the trial court’s ruling that section 7422(h) bars them from raising
their [untimely tax assessment] claims in the refund proceedings.
Prati, 603 F.3d at 1307.
Plaintiffs read Prati to hold that an Untimely Tax Assessment Claim that is not raised at
the partnership level, is procedurally barred from being raised at a partner-level proceeding. ECF
No. 194 at 8 n.15. Plaintiffs reason that, because they raised their Untimely Tax Assessment Claim
during partnership-level proceedings before the United States Tax Court, they are now entitled to
raise that claim for a second time in a partner-level refund suit before the court. ECF No. 194 at
8 n.15.
Plaintiffs read Prati, however, as if Keener was not decided and not precedential. Keener,
on which Prati was “based,” afforded deference to Treas. Reg. § 301.6231(a)(3)–1(b)’s definition
of “partnership item”—i.e., the “legal and factual determinations that underlie the determination
of the amount, timing, and characterization of items of income, credit, gain, loss, [and]
deduction”—because that interpretation was reasonable. See Keener, 551 F.3d at 1363 (citing
Chevron, 467 U.S. at 843). Keener also held that, under section 7422(h), the United States Court
of Federal Claims does not have jurisdiction to adjudicate partnership items, including taxpayer
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refund claims alleging that the IRS untimely assessed federal income taxes. See id at 1367 (“The
Court of Federal Claims correctly determined that, under [section] 7422(h), it lacked jurisdiction
over . . . Taxpayers’ claims for refunds of tax and interest on the theory that the IRS assessed tax
and interest after the statute[s] of limitations in section 6229(a) [and section 6501] expired[.]”);
see also Kettle v. United States, 2012 WL 6824087, at *2 (Fed. Cir. 2012) (“In Prati and Keener,
we held that statute of limitations claims . . . are ‘partnership items[.]’”); Dahlberg v. United States,
2012 WL 6839785, at *1 (Fed. Cir. 2012) (“[S]tatute of limitations claims . . . are ‘partnership
items[.]’”).
For these reasons, even if Plaintiffs preserved their Untimely Tax Assessment Claim under
Prati, Congress did not authorize the United States Court of Federal Claims to adjudicate a refund
claim, under section 7422(h), alleging that the IRS improperly assessed federal taxes after the
relevant statutes of limitations expired. See Keener, 551 F.3d at 1367.
b. The April 9, 1997 Settlement Agreement Did Not Resolve
Whether The Internal Revenue Service’s Assessment Of
Federal Income Taxes Against Plaintiffs Was Timely.
Section 6231(b)(1)(C) provides that: “the partnership items of a partner for a partnership
taxable year shall become nonpartnership items as of the date . . . the Secretary . . . enters into a
settlement agreement with the partner with respect to such items[.]” 26 U.S.C. § 6231(b)(1)C).
The United States Court Appeals for the Federal Circuit has held that section 6231(b)(1)(C) applies
on an item-by-item basis so that, only those partnership items that are resolved in a settlement
agreement become nonpartnership items. See Schell, 589 F.3d at 1383 (“When a partner chooses
to settle his individual tax liability with the IRS, the settling individual’s partnership items are
converted to non-partnership items, but only when the IRS enters into a settlement agreement with
the partner with respect to such items.”): see also Weiner v. United States, 389 F.3d 152, 156 (5th
Cir. 2004) (“Although a partner’s settlement agreement with the IRS converts partnership items to
nonpartnership items and thereby lifts [section] 7422(h)’s jurisdictional bar . . . [section
6231(b)(1)(C)] provides that only those partnership items encompassed by the settlement
agreement are converted to nonpartnership items.”); Keener, 76 Fed. Cl. at 464–65 (“[Under
section 6231(b)(1(C),] only those partnership items actually resolved in a settlement agreement
are converted to nonpartnership items.”), aff’d, 551 F.3d 1358 (Fed. Cir. 2009).
The April 9, 1997 Settlement Agreement was executed on an IRS Form 870-P(AD).
Compl. Ex. A at 22. Form 870-P(AD) states, “[u]nder the provision of section 6224(c) of the
Internal Revenue Code, [Plaintiffs] offer[] to enter into a settlement agreement with respect to the
determination of partnership items of the partnership for the year shown on the attached [S]chedule
[O]f [A]djustments.” Compl. Ex. A at 22. The Schedule Of Adjustments attached to the April 9,
1997 Settlement Agreement references four partnership items reported on ODA’s federal tax
return for 1984. See Compl. Ex. A at 22 (adjusting ODA’s ordinary income, total positive income,
minus qualified investment expense; total positive income, minus qualified investment income;
and investment interest, minus investment income for 1984). The April 9, 1997 Settlement
Agreement and Schedule Of Adjustments, however, do not address whether the IRS assessed
federal income taxes after the relevant statutes of limitations expired. Compl. Ex. A at 22–23.
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Plaintiffs counter that, the April 9, 1997 Settlement Agreement resolved whether the IRS’s
assessment of federal income taxes for 1984 was timely, because the Government’s April 2, 2004
Response admitted that “[the] April 9, 1997 [Settlement Agreement] . . . settled all of [Plaintiffs’]
1984 ODA partnership items.” ECF No. 190 at 4. The court also rejects this argument for two
reasons.
First, our appellate court has observed that Form 870-P(AD) settlement agreements are
limited to the partnership items that the parties elect to include. See Schell, 589 F.3d at 1383
(“Taxpayers argue . . . [that Form 870-P(AD)] settlements are comprehensive . . . [.] [This]
argument[] [is] without merit.”). Although the April 9, 1997 Settlement Agreement in this case
identifies adjustments to four partnership items, it did not address whether the IRS assessed federal
income taxes outside the relevant statutes of limitations. Compl. Ex. at 23. The absence of any
language addressing the untimely tax assessment issue, evidences that the parties did not elect to
resolve this issue in the April 9, 1997 Settlement Agreement.
Second, while the Government’s April 2, 2004 filing states that, “[o]n April 9, 1997,
[Plaintiffs] settled all of [their] 1984 ODA partnership items,” ECF No. 73 at ¶ 27, the next
paragraph qualifies the admission, stating that “[Plaintiffs’ April 9, 1997] settlement agreement
did not address the limitations period on assessment,” ECF No. 73 at ¶ 28.
For these additional reasons the court has determined that it does not have jurisdiction to
adjudicate the June 8, 2001 Complaint’s Untimely Tax Assessment Claim.
IV. CONCLUSION.
For the aforementioned reasons, the Government’s December 5, 2003 Motion to Dismiss
is granted. See RCFC 12(b)(1). Accordingly, the Clerk is directed to dismiss the June 8, 2001
Complaint.
IT IS SO ORDERED.
s/ Susan G. Braden
SUSAN G. BRADEN
Judge
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