Alexander v. United States

United States Court of Appeals,

Fifth Circuit.

No. 93-1967.

Thomas E. ALEXANDER, Plaintiff-Appellant,

v.

UNITED STATES of America, Defendant-Appellee.

Feb. 15, 1995.

Appeal from the United States District Court for the Northern
District of Texas.

Before GARWOOD, JOLLY and STEWART, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiff-appellant Thomas Alexander (Alexander) sued

defendant-appellee United States (the Service) for a refund of

federal income taxes assessed and collected after the expiration of

the limitations period on assessment. The Service and Alexander

filed cross-motions for summary judgment. The district court

granted the Service's motion and entered final judgment against

Alexander 829 F.Supp. 199, who now appeals. We reverse.

Facts and Proceedings Below

Alexander was a limited partner in Columbia Building, Ltd.

(Columbia). In his timely 1984 tax return, Alexander included

income attributable to his partnership interest. On May 16, 1988,

the Service mailed Alexander a notice of final partnership

administrative adjustment (FPAA). The FPAA informed him that

adjustments had been made at the partnership level to Columbia's

return for 1984, resulting in an increase in tax liability on

Alexander's individual return for the same year.

1
 Along with the FPAA, the Service enclosed a copy of IRS Form

870-P, then known as a "Settlement Agreement for Partnership

Adjustments."1 The FPAA informed Alexander that his signature on

the 870-P form would constitute an offer to enter into a "binding

settlement" to accept the FPAA adjustments. The 870-P form itself

notified Alexander that the settlement agreement, if executed,

could be avoided only upon a showing of "fraud, malfeasance, or

misrepresentation of fact" and, further, barred any "claim for

refund or credit based on any change in the treatment of

partnership items." On May 18, 1988, Alexander signed the 870-P

form and returned it to the Service, which accepted the settlement

offer and, one year later, assessed a deficiency. Alexander paid

the deficiency, including interest.

Over a year after making this payment, Alexander learned of a

suit brought by another Columbia partner to challenge the FPAA

adjustments made to the firm's 1984 partnership return. In that

proceeding, the Service, after initially defending the adjustments,

conceded that the statute of limitations for assessing any

deficiency had expired on April 15, 1988. The tax court thereafter

entered judgment for the Columbia partners. Columbia Building,

Ltd. v. Commissioner, 98 T.C. 607, 1992 WL 101165 (1992). Upon

learning of the Service's concession, Alexander realized he had

paid the government a deficiency the assessment of which was

time-barred.

1
The Service has since changed the name of this form to
"Agreement to Assessment and Collection of Deficiency in Tax for
Partnership Adjustments."

2
 Alexander timely filed a claim for refund with the Service on

November 20, 1990. Ultimately, the Service disallowed the refund

claim, and Alexander brought this suit in the district court below.

Both parties filed cross-motions for summary judgment. The

district court ruled for the Service, concluding that it had

jurisdiction over the claim and that the parties' settlement

agreement contractually precluded Alexander's refund action.

Alexander appeals.

Discussion

We review an order granting summary judgment de novo. Abbott

v. Equity Group, Inc., 2 F.3d 613, 618 (5th Cir.1993), cert.

denied, --- U.S. ----, 114 S.Ct. 1219, 127 L.Ed.2d 565 (1994).

Summary judgment is appropriate where the record discloses that

"there is no genuine issue as to any material fact and that the

moving party is entitled to a judgment as a matter of law."

Fed.R.Civ.P. 56(c). In reviewing a grant of summary judgment, we

apply the same standard as that to be used by the district court in

ruling on the motion. E.E.O.C. v. Boeing Services International,

968 F.2d 549, 553 (5th Cir.1992).

I. The Statutory Backdrop

In 1982, Congress enacted the Tax Equity and Fiscal

Responsibility Act (TEFRA), Pub.L. No. 97-248, 96 Stat. 324, to

improve the auditing and adjustments of income tax items

attributable to partnerships. TEFRA provides auditing and

litigation procedures which have shifted the Service's focus from

the individual partner to the partnership as a whole, thus creating

3
an important distinction between partnership and nonpartnership

items. The law creates partnership-level procedures to deal with

partnership items, that is, to determine "the tax treatment of

items of partnership income, loss, deductions, and credits ... at

the partnership level in a unified partnership proceeding rather

than in separate proceedings with the partners." H.R.Conf.Rep. No.

97-760, 97th Cong., 2d Sess. at 600 (1982-2 Cum.Bull. at 662).

Under TEFRA, when the Service wishes to adjust the treatment

of partnership items on a partnership return, it must mail the

partners a notice of a final partnership administrative adjustment

(FPAA). Initially, and in order to toll the three-year statute of

limitations on assessment, the Service must mail the FPAA to the

firm's designated tax matters partner. Within sixty days of this

mailing, the Service must also send copies of the FPAA to the

remaining, so-called notice partners.

In this case, although the corporate partner to whom the

timely FPAA was sent had previously been the tax matters partner,

bankruptcy had deprived it of that designation before the FPAA was

issued. Temp.Treas.Reg. § 301.6231(a)(7)-1T(1)(4) and §

301.6231(c)-7T(a). The suspension provision in section 6229(d) was

therefore ineffective, and the statute of limitations on assessment

expired a month before the Service mailed the FPAA to Alexander and

the remaining partners.

II. The Jurisdictional Issue

District courts generally have subject matter jurisdiction

4
over refund claims. 28 U.S.C. §§ 1340, 1346(a)(1).2 In its motion

for summary judgment and on appeal, the Service has argued that

section 7422 of the Internal Revenue Code deprives the district

court of jurisdiction over Alexander's refund claim. Section 7422

provides that "[n]o action may be brought for a refund attributable

to partnership items." I.R.C. § 7422(h). The critical inquiry is

whether the refund action here is attributable to partnership or

nonpartnership items.3 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.

In this case, the refund claimed was at one time attributable

to partnership items, that is, to the adjustments called for in the

FPAA to the Columbia partnership return. The question is whether

these items remained partnership items after Alexander and the

Service entered into a settlement agreement. Because the purpose

of section 7422(h) is evidently to prevent an individual partner's

refund action from interfering with the partnership-level

2
Section 1346(a)(1) gives the district court original
jurisdiction over any "civil action against the United States for
the recovery of any internal-revenue tax alleged to have been
erroneously or illegally assessed or collected...." 28 U.S.C. §
1346(a)(1).
3
Section 6231(a)(3) defines partnership items as "any item
required to be taken into account for the partnership's taxable
year ... to the extent regulations ... provide that ... such item
is more appropriately determined at the partnership level than at
the partner level." I.R.C. § 6231(a)(3). Nonpartnership items
are all other items. I.R.C. § 6231(a)(4).

5
determination of partnership items, that bar becomes unnecessary

when the partnership-level proceeding has in some sense concluded.

Accordingly, section 6231 calls for the conversion of partnership

items into nonpartnership items on the happening of certain events.

Relevant to this case is section 6231(b)(1)(C), which converts

partnership items into nonpartnership items when "the Secretary

enters into a settlement agreement with the partner with respect to

such items." I.R.C. § 6231(b)(1)(C).

Therefore, execution of a valid settlement agreement between

Alexander and the Service would convert partnership items into

nonpartnership items, thereby lifting the jurisdictional bar of

section 7422(h). Because the Service does not dispute the validity

of the agreement, the conversion was effective when the settlement

was made. Accordingly, the district court had jurisdiction over

Alexander's refund action.

Although we believe that the intersection of sections

6231(b)(1)(C) and 7422(h) clearly resolves this jurisdictional

question, we note a consistent holding in our recent decision of

Treaty Pines Investment Partnership v. Commissioner of Internal

Revenue, 967 F.2d 206 (5th Cir.1992), a case which the Service

attempts to distinguish. At issue in Treaty Pines was jurisdiction

over determining partnership items, as opposed to jurisdiction over

refund actions. With regard to determining partnership items, the

conversion of partnership items into nonpartnership items denies,

rather than grants, subject matter jurisdiction. That the

jurisdictional effect of the conversion in Treaty was different

6
from that here, however, does not detract from the case's critical

premise that a conversion indeed occurred. Having merely

identified a difference in the consequences of conversion, the

Service offers no statutory or policy-based rationale to explain

why this distinction matters.

We therefore hold that the district court had subject matter

jurisdiction over Alexander's claim to a refund.

III. The Contractual Issue

The Service does not dispute that the amounts Alexander paid

were assessed and collected after the expiration of the relevant

limitations period on assessment. Under the Code, payments made

after the limitations period are defined as "overpayments" and, as

such, must be refunded. I.R.C. § 6401 (" "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"); I.R.C. § 6402(a) ("[i]n the case of any

overpayment, the [Service] ... shall ... refund any balance"); see

Cohen v. United States, 995 F.2d 205, 207 (Fed.Cir.1993) (holding

that the payment of a time-barred tax liability constitutes an

overpayment subject to mandatory refund); Diamond Gardner Corp. v.

Commissioner, 38 T.C. 875, 881, 1962 WL 1164 (1962) (same).4

The right to a refund, however, may be waived. A party, by

4
We reject the Service's contention that Alexander makes a
new argument on appeal in claiming he is due a refund under
section 6401. Alexander has at all times claimed he is due a
refund for taxes assessed and collected after the expiration of
the limitations period. His failure below to cite sections 6401
and 6402 is not decisive.

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entering into a valid agreement with the Service, may contract away

a refund otherwise available. As the Supreme Court has recognized,

"a settlement ought not to be overthrown, even if the court should

now be of the opinion that the party complaining of it surrendered

rights that the law, if appealed to, would have sustained."

Hennessy v. Bacon, 137 U.S. 78, 82, 11 S.Ct. 17, 19, 34 L.Ed. 605

(1890). Here, if the agreement forbids the refund, then Code

sections 6401 and 6402 are of no avail to Alexander.

The Service formulated the 870-P pursuant to its authority

under section 6224(c) to enter into binding settlement agreements

"with respect to the determination of partnership items." I.R.C.

§ 6224(c)(1). As both sides recognize, these settlement agreements

are closely analogous to the long-established closing agreements

authorized under section 7121 of the Code. I.R.C. § 7121. Like

closing agreements, a section 6224(c) settlement agreement is in

the nature of a contract, binding on all parties absent proof of

"fraud, malfeasance, or misrepresentation of fact."5

Accordingly, whether the district court was correct in

precluding Alexander's claim for a refund depends on the terms of

the form 870-P settlement agreement. If the terms of the agreement

bar the refund, then Alexander may not recover his otherwise

5
In Treaty Pines, this Court noted in the margin that it
"express[ed] no opinion as to whether ... section 6224(c)
provides a statutory source of settlement authority independent
of section 7121." Treaty Pines, 967 F.2d at 212 n. 8. The
district court relied on a tax court opinion, Korff v.
Commissioner, 65 T.C.M. (CCH) 1811, T.C.M. (P-H), ¶ 93,033, 1993
WL 17614 (Jan. 28, 1993), and concluded that section 6224(c) does
provide an independent basis of settlement authority. Neither
party has questioned this conclusion on appeal.

8
refundable overpayments. We agree with Alexander that the

settlement agreement does not by its terms preclude a refund action

for amounts paid after the expiration of the statute of limitations

on assessment; instead its purpose is merely to cement the

treatment of partnership items. Although the adjustments to the

partnership items are firm and binding, any assessment of a

deficiency based on those adjustments was time-barred, and the

agreement does not address such refunds. In other words, Alexander

does not base his refund on the treatment of partnership items at

all, but rather on the time-barred deficiency assessed as a result

of such treatment.

The decision of the Fourth Circuit in Ewing v. United States,

914 F.2d 499 (4th Cir.1990), cert. denied, 500 U.S. 905, 111 S.Ct.

1683, 114 L.Ed.2d 78 (1991), supports our conclusion. In Ewing,

the plaintiff-taxpayer mistakenly paid a time-barred deficiency

after entering into a section 7121 closing agreement with the

Service. The court construed this amount as an "overpayment" under

section 6401, which the Service was ordered to refund. According

to the court, the closing agreement, though valid and enforceable,

did not preclude this particular action; instead, it "simply

agreed to the amount of income, gains, losses, deductions, and

credits attributable to various businesses in which taxpayers were

partners." Id. at 505. Specifically, the court noted that the

taxpayers "did not agree that they would abstain from claiming any

refund that might be available to them under § 6401." Id.

The key distinction between Ewing and this case is the

9
provision in form 870-P prohibiting any "claim for refund ... based

on any change in the treatment of partnership items." The Service

contends that Ewing is distinguishable because Alexander

"specifically agreed not to prosecute any claim for refund or

credit." This interpretation of the settlement agreement

disregards the restrictive, qualifying language emphasized above.

The Service has simply failed to establish how Alexander's refund

claim is in any way based on a change in the treatment of

partnership items.6

This case, like Ewing, is distinguishable from those in which

the settlement or closing agreement specifically barred the refund

6
The Service argues that the Fourth Circuit's recent
decision in Goldstein, Baron & Lewis, Chartered v. United States,
995 F.2d 35 (4th Cir.1993), cert. denied, --- U.S. ----, 114
S.Ct. 684, 126 L.Ed.2d 652 (1994), should modify our
interpretation of Ewing. Goldstein, however, is inapposite. In
that case, the Service timely assessed taxpayer's employment tax
liability. After the taxpayer paid the tax, the Service
erroneously mailed a refund. Later, after the taxpayer had
acknowledged liability for the amount refunded, the Service
recovered the refund, still within the limitations period.
Taxpayer then sued, arguing the recovery constituted an
overpayment under section 6401 because the Service should have
done a reassessment, which had since become time-barred. The
Fourth Circuit, without addressing section 6401, held that the
taxpayer's written acknowledgment that it was not owed the refund
it erroneously received waived any objection to the recovery.

Here, unlike Goldstein, there has never been a timely
assessment. Moreover, in Goldstein, unlike here, the refund
was recovered within the limitations period. Ewing makes
clear the importance of these distinctions because, in that
case, the court refused to allow the refund of taxes
collected before the expiration of the limitations period
despite the Service's failure to make a formal assessment.
In short, nothing in Goldstein modifies the holding in Ewing
that payments made after the expiration of the limitations
period on assessment constitute refundable overpayments.
Indeed, we consider the holding of Ewing to be mandated by
the language of the Code.

10
sought. We recognize that, under a properly drafted agreement, the

Service could bar a refund claim such as that here. There have

been cases in which, under the express terms of the closing

agreement, the taxpayer has explicitly and without limitation

agreed not to seek any refunds. For instance, in Tollerson v.

Internal Revenue Service, 93-1 U.S.T.C. ¶ 50,210, 1993 WL 174884

(S.D.Texas March 4, 1993), aff'd, 21 F.3d 1108 (5th Cir.1994), the

court identified another version of form 870-P, one in which the

taxpayer agreed "to consent to ... assessment and collection" of

the disputed amounts. The case of Staten Island Hygeia Ice & Cold

Storage Co. v. United States, 85 F.2d 68 (2d Cir.1936), provides an

even better example. There, the court held valid a compromise

agreement that expressly waived " "any and all claims to refunds or

overpayments' to which [taxpayer] might be entitled and "the

benefit of any statute of limitations affecting the collection of

the liability sought to be compromised.' " Id. at 70. Such

explicit language critically distinguishes these cases from ours

and from Ewing.

Finally, we note that, in the future, the Service could avoid

this situation by more carefully suspending the statute of

limitations. Here, the Service mailed the FPAA specifically to the

once-designated tax-matters partner of Columbia. Because, at the

receipt of the FPAA, this partner was no longer tax-matters

partner, the mailing failed to suspend the limitations period on

assessment. Besides a more thorough investigation into the status

11
of Columbia's bankrupt partner,7 the Service apparently could have

addressed the FPAA generally to "the tax-matters partner" at the

partnership address as shown on the return, without specifying that

partner's name. I.R.C. §§ 6223(a), (c), 6231(a)(7);

Temp.Treas.Reg. §§ 301.6223(a)-1T, 301.6231(a)(7)-1(1), (m)-1T.

Because of its failure not only to suspend the limitations

period but also to draft an agreement which by its terms would

preclude the action at issue here, the Service must refund

Alexander's money.

Conclusion

For the foregoing reasons, although the district court

correctly ruled that the settlement agreement converted the

partnership items into nonpartnership items and thereby conferred

subject matter jurisdiction, we REVERSE its judgment that the

settlement agreement precludes this action, and we REMAND the case

for entry of judgment in favor of Alexander.

REVERSED and REMANDED.

7
There was some summary judgment evidence suggesting that
the Service knew, or at least should have known, of the
bankruptcy of the partner to whom the FPAA was sent.

12