United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT October 25, 2004
_______________________ Charles R. Fulbruge III
Clerk
No. 03-20174
_______________________
MORRIS A. WEINER,
Plaintiff-Appellant - Cross-Appellee,
versus
UNITED STATES OF AMERICA,
Defendant-Appellee - Cross-Appellant,
Consolidated with No. 03-20176
MARION S. KRAEMER; JOYCE W. KRAEMER,
Plaintiffs - Appellants,
versus
UNITED STATES OF AMERICA,
Defendant - Appellee.
Appeals from the United States District Court
For the Southern District of Texas
Before JOLLY, DAVIS, and JONES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Appealing in two related cases from separate courts,
Morris Weiner, Marion Kraemer, and Joyce Kraemer seek refunds of
federal income taxes and interest paid in connection with their
investments in various partnerships. Three issues are raised.
First is the question whether federal courts have jurisdiction,
notwithstanding 26 U.S.C. § 7422(h), to entertain the taxpayers’
complaints that Notices of Final Partnership Administrative
Adjustments (FPAAs) were untimely filed and cannot be the basis of
assessments against them. Second, the taxpayers challenge
substantial interest charged against them for “tax-motivated
transactions” pursuant to now-repealed § 6621(c). We hold that the
courts lacked jurisdiction over the statute of limitations issue
and that § 6621(c) interest was improperly charged. The third
issue was resolved by a recent decision of this court at odds with
the trial courts’ decisions. See Beall v. United States, 336 F.3d
419 (5th Cir. 2003) (district courts have jurisdiction to resolve
taxpayers’ deficiency interest abatement requests under § 6404(e)).
I. The Factual Background
In the early 1980s, the taxpayers, all high-income
professionals, invested in limited partnerships organized by
American Agri-Corp (“AMCOR”). Weiner was a limited partner in
Travertine Flame Associates (“TFA”); Joyce Kraemer was a limited
partner in Oasis Date Associates (“ODA”); and Marion Kraemer was a
limited partner in Coachella Fruit Growers (“Coachella”). The
partnerships were farming entities that projected tax write-offs of
approximately two hundred percent of the amount invested. The
taxpayers reported their proportionate share of partnership losses
on their 1984, 1985, and 1986 income tax returns.
2
In 1990 and 1991, the Internal Revenue Service (“IRS”)
sent each of the partnerships a Notice of FPAA that disallowed
farming expenses and other deductions for a number of reasons,
including that the partnerships’ transactions were “shams” and
lacked economic substance. Also in 1991, partners in TFA and ODA
commenced a Tax Court action challenging the adjustments as time-
barred. Because Weiner and Joyce Kraemer were partners in TFA and
ODA, they automatically became parties to the suit. See 26 U.S.C.
§ 6226(c).
In early 1997, while the Tax Court cases were still
pending, the taxpayers offered to settle their disputed partnership
item deductions with the IRS through executions of Forms 870-P(AD).
These settlement forms were initially sent to them by the IRS. The
settlement agreement purported to disallow sixty-three percent of
the deductions, as opposed to a total disallowance. The settlement
documents made it clear that the IRS would assess additional tax
liability and interest “as provided by law.”
After accepting the taxpayers’ settlements, the IRS
assessed additional tax liability and interest pursuant to
§ 6621(c) in the following manner: for Weiner in 1984 — $15,851 in
additional tax and $16,663.22 in interest; for the Kraemers in
1984 — $13,159 in additional tax and $16,599 in interest; for the
Kraemers in 1986 — no additional tax (because they had overpaid)
but $4,088 in interest. The taxpayers commenced their separate
refund suits in 2000. They argued in motions for summary judgment:
3
(1) that the statute of limitations prevented the 1984 assessments;
(2) that additional interest under § 6621(c) was improper as a
matter of law; and (3) that the Commissioner had abused his dis-
cretion in denying their § 6404(e) abatement of interest claim.
The Kraemer court did not consider the limitations defense because
it concluded it lacked subject matter jurisdiction over the issue.
The Weiner court, however, concluded that it did have jurisdiction,
and ultimately decided that the statute of limitations had not run.
Both courts also determined that they lacked jurisdiction over the
interest abatement claims. Both courts denied the taxpayers’
summary judgment motions on the § 6621(c) argument and set the
issue for bench trials. The Kraemers conceded the issue before
trial, but Weiner presented evidence on the merits and the court
ultimately concluded that the interest was improper and ruled in
Weiner’s favor. The instant appeals followed.
II. The Statutory Background
This case is governed by the Tax Equity and Fiscal
Responsibility Act of 1982 (“TEFRA”), 26 U.S.C. §§ 6221—6233, which
was enacted to “improve the auditing and adjustments of income tax
items attributable to partnerships.” Alexander v. United States,
44 F.3d 328, 330 (5th Cir. 1995). TEFRA requires partnerships to
file informational returns reflecting the distributive shares of
income, gains, deductions, and credits attributable to its
partners. Kaplan v. United States, 133 F.3d 469, 471 (7th Cir.
4
1998). Accordingly, the individual partners are responsible for
reporting their pro rata share of tax on their income tax returns.
Id.; see also 26 U.S.C. § 701.
TEFRA requires the treatment of all partnership items to
be determined at the partnership level. 26 U.S.C. § 6221. While
TEFRA defines a “partnership item” in technical terms, the
provision generally encompasses items “more appropriately deter-
mined at the partnership level than at the partner level.” Id.
§ 6231(a)(3). All other items are defined as nonpartnership items.
Id. § 6231(a)(4).
If the IRS decides to adjust any “partnership items”
reflected on the partnership’s return, it must notify the
individual partners of the adjustment through a Notice of FPAA.
Kaplan, 133 F.3d at 471. The IRS is given three years from the
later of (1) the date a partnership return is due, or (2) the date
the partnership return is filed, to issue an FPAA. 26 U.S.C.
§ 6229(a). The three-year period may be extended by agreement
(1) between the Secretary and the partnership’s tax matters partner
(“TMP”) (which binds all partners), or (2) between the Secretary
and an individual partner (which binds only that partner). Id.
§ 6229(b)(1). In addition, if the IRS mails an FPAA to the TMP,
the three-year period is tolled. Id. § 6229(d). This three-year
limitations period is at issue in this case.
For ninety days following issuance of an FPAA, the TMP
has the exclusive right to file a petition for readjustment of the
5
partnership items in Tax Court, the Court of Federal Claims, or a
United States District Court. Id. § 6226(a). After expiration of
the ninety-day period, other partners are given sixty days to file
a petition for readjustment. Id. § 6226(b)(1). If a partner’s tax
liability might be affected by the outcome of the litigation of
partnership items, that partner may participate in the proceeding.
Id. § 6224(a), § 6224(c). The IRS may assess additional tax lia-
bility against individual partners within one year of the final
conclusion of the partnership’s tax determination. Id. § 6229(d).
The partner may contest the tax liability by paying the assessment
and filing a refund action in a United States District Court.
However, “[n]o action may be brought [in district court] for a
refund attributable to partnership items.” Id. § 7422(h).
But, if a partner settles his partnership tax liability
with the IRS, the partner will no longer be able to participate in
the partnership level litigation, and will be bound instead by the
terms of the settlement agreement. Id. § 6228(a)(4), § 6224(c)(1).
In addition, partnership items convert to nonpartnership items when
the IRS enters into a settlement agreement with the partner with
respect to such items. Id. § 6231(b)(1)(C). Thus, if a partner
files an action for a refund attributable to partnership items, but
those items have been converted through a settlement agreement, the
jurisdictional bar of § 7422(h) no longer applies. Alexander v.
United States, 44 F.3d 328, 331 (5th Cir. 1995).
6
III. FPAA Statute of Limitations
The Weiner and Kraemer courts reached opposing
conclusions, and the parties disagree on whether district courts
have jurisdiction to decide the FPAA statute of limitations
question in refund actions.1 Generally, district courts have
jurisdiction over a taxpayer’s refund action. 28 U.S.C. §§ 1340,
1346(a)(1). However, as discussed above, with limited exceptions
not applicable here, “[n]o action may be brought for a refund
attributable to partnership items (as defined in § 6231(a)(3)).”
26 U.S.C. § 7422(h). The more precise question in this case, then,
is whether the taxpayers’ refund requests are attributable to any
partnership item such that the district court would be deprived of
jurisdiction.
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. Mongrue v. Monsanto
Co., 249 F.3d 422, 428 (5th Cir. 2001). Summary judgment is only
appropriate when “the pleadings, depositions, answers to interroga-
tories, and admissions on file, together with the affidavits, if
any, show 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 addition, we review a district
1
The taxpayers also appeal the Weiner court’s decision that, because
the 1984 partnership returns were invalid, the statute of limitations did not
begin to run. We need not reach this argument.
7
court’s determination of subject matter jurisdiction de novo.
Calhoun County, Tex. v. United States, 132 F.3d 1100, 1103 (5th
Cir. 1998).
The taxpayers’ refund claims are based entirely on the
theory that the IRS had no authority to assess tax against them in
1990 and 1991 because the FPAA statute of limitations had run for
the years 1984 to 1986. Accordingly, to avoid the jurisdictional
bar of § 7422(h), the taxpayers argue that the FPAA statute of
limitations, found in § 6229(a), is not a “partnership item.”2 As
noted before, TEFRA defines a “partnership item” as
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 the purposes of [subtitle F],
2
Although a partner’s settlement agreement with the IRS converts
partnership items to nonpartnership items and thereby lifts § 7422(h)’s
jurisdictional bar, the conversion did not occur in this case. The Code provides
that only those partnership items encompassed by the settlement agreement are
converted to nonpartnership items. See 26 U.S.C. § 6231(b)(1)(C) (partnership
items of a partner shall convert to nonpartnership items when “the Secretary or
the Attorney General (or his delegate) enters into a settlement agreement with
the partner with respect to such items”) (emphasis added). Section 6229(a) was
not mentioned in the taxpayers’ settlement agreements and thus may not be
considered a converted item.
The holding in Alexander is not to the contrary. In that case, the
taxpayer filed a refund action based on the IRS’s admission, in a separate Tax
Court proceeding, that the FPAA statute of limitations had run. 44 F.3d at 330.
Because it was unnecessary for the court to determine the merits of the statute
of limitations question when examining its jurisdiction to hear the refund suit,
the court did not examine, as we must in this case, whether the FPAA statute of
limitations was a partnership item that deprived the court of jurisdiction.
Instead, the court examined the basis for its general grant of jurisdiction over
the refund suit. In this regard, the court asked whether “the adjustments called
for in the FPAA” were partnership items and determined that the settlement
agreement, which settled those items specifically, converted them to
nonpartnership items. Alexander, 44 F.3d at 331. Thus, the court found that it
had jurisdiction to decide the partner-specific question of whether the
taxpayer’s settlement agreement contractually barred the refund (an issue not
present in this case).
8
such item is more appropriately determined at the
partnership level than at the partner level.
26 U.S.C. § 6231(a)(3). The taxpayers argue that because
§ 6229(a), containing the FPAA statute of limitations provision, is
found in subtitle F, as opposed to subtitle A, it is not a
partnership item. Furthermore, the taxpayers argue that no
treasury regulation specifically refers to the limitations issue as
a partnership item. See 26 C.F.R. § 301.6231(a)(3)-1(a). The
Weiner court reasoned that this omission, coupled with the fact
that § 6229(a) is found only in subtitle F, prevents the FPAA
statute of limitations from attaining partnership item status. We
disagree with this conclusion.
First, the majority of courts to consider this issue have
held that the FPAA statute of limitations issue is a partnership
item that must be litigated in a partnership level proceeding. See
Chimblo v. Comm’r, 177 F.3d 119, 125 (2d Cir. 1999); Kaplan v.
United States, 133 F.3d 469, 473 (7th Cir. 1998); Williams v.
United States, 165 F.3d 30 (6th Cir. 1998) (unpublished table
decision); Barnes v. United States, No. 95-57-Civ-ORL-22, 1997 WL
732594, *3 (M.D. Fla. July 28, 1997), aff’d, 158 F.3d 587 (11th
Cir. 1998); Thomas v. United States, 967 F. Supp. 505, 506 (N.D.
Ga. 1997); Slovacek v. United States, 36 Fed. Cl. 250, 255 (1996).
These courts have reasoned that because the FPAA limitations issue
affects the partnership as a whole, it should not be litigated in
an individual partner proceeding, as such a result would contravene
9
the purposes of TEFRA. See, e.g., Chimblo, 177 F.3d at 125. We
agree with this reasoning and hold that the district courts lack
jurisdiction to consider the taxpayers’ statute of limitations
argument.
Second, responding to the taxpayers’ argument directly,
the treasury regulations provide that, for the purposes of
subtitle F,
[t]he term “partnership item” includes the accounting
practices and the legal and factual determinations that
underlie the determination of the amount, timing, and
characterization of items of income, credit, gain, loss,
deduction, etc.
26 C.F.R. § 301.6231(a)(3)-1(b)(emphasis added). As the court in
Slovacek reasoned, the statute of limitations “might be said to
affect the amount, timing, and characterization of income, etc.,
(partnership items) at the partnership level, if only in a thumbs-
up or thumbs-down manner.” 36 Fed. Cl. at 255. In this way, the
treasury regulations have implicitly included the statute of
limitations determination within the definition of “partnership
item.”3
Third, we find distinguishable two cases the taxpayers
rely on. In Monti v. United States, 223 F.3d 76, 82 (2d Cir.
2000), the court held that a partner’s right to seek consistent
3
That the FPAA statute of limitations does not appear in subtitle A
does not alone defeat this conclusion. The treasury regulations specifically
provide that the term “partnership item” includes the legal and factual
determinations underlying the amount, timing, and characterization of certain
partnership items found in subtitle A. Therefore, this definition is broad
enough to include in its parameters legal and factual determinations not
specifically found in subtitle A.
10
settlement terms from the IRS was more appropriately considered a
nonpartnership item. The Second Circuit relied on several factors
to justify this conclusion, among them the fact that the right to
consistent settlement terms, located in § 6224(c)(2), is found in
subtitle F, as opposed to subtitle A. Id. at 82. However, the
first and arguably most important factor considered by the Monti
court in deciding how to categorize a partner’s right to consistent
settlement terms dealt with the practical realities of that right.
The court noted that
[o]ne partner’s right to settlement terms consistent with
those granted to another partner is not a partnership
item, because the question posed requires consideration
of the relationship between one partner’s situation and
another’s and the individual’s, rather than the partner-
ship’s, communications with the IRS. The facts needed to
determine whether consistent terms were offered are facts
about the partner, not facts about the partnership.
Id. at 82-83 (emphasis added). Conversely, the FPAA statute of
limitations determination challenged in this case deals with facts
specific to the partnership. The court need not consider the
relationship between one partner and another or an individual’s
communications with the IRS.
Likewise, the court in Prochorenko v. United States, 243
F.3d 1359, 1363 (Fed. Cir. 2001), relying on Monti, concluded that
a partner’s right to request consistent settlement terms was not a
partnership item. That court opined that
[w]hether or not the [taxpayers] were entitled to such a
reduction is an issue that is entirely dependent on their
own unique factual circumstances, and has no effect on
and is not affected by the tax liability of any of the
11
other [] partners. Accordingly, this is not the type of
issue that is “more appropriately determined at the
partnership level.”
Id. at 1363 (quoting the treasury regulations). Again, the situa-
tion in this case is quite the opposite. The timeliness of an FPAA
affects the IRS’s ability to make adjustments to partnership items,
which in turn affects all partners alike. This determination is
more appropriately made at the partnership level.
From a practical perspective, a finding of jurisdiction
over the statute of limitations issue would create an absurd result
that contravenes TEFRA. As was the case here, partners could
settle with the IRS and thus eliminate their ability to participate
in and be bound by the result of any partnership-level proceeding.
But if, as here,4 the Tax Court decided the substantive statute of
limitations issue against the partnership, the settling partners
could simply bring individual partner-level suits in the district
courts and attempt to obtain a different ruling on the statute of
limitations issue. Thus, some partners would be required to pay
the assessed deficiency, while others would not. The result advo-
cated by the taxpayers here is at odds with TEFRA’s goal of
consolidating decisions that affect the partnership as a whole.
4
The TMP for TFA and ODA stipulated during the Tax Court litigation
that those partnerships’ limitations arguments would be governed by the decision
in what became known as Agri-Cal Venture Associates, 80 T.C.M. (CCH) 295 (2000).
TFA and ODA thus became bound by the Tax Court’s adverse statute of limitations
decision.
12
Finally, the taxpayers contend that this court’s decision
in Alexander controls the determination whether the FPAA statute of
limitations is a partnership or nonpartnership item. In Alexander,
the taxpayer received an FPAA from the IRS notifying him of an
adjustment to partnership items that would affect his tax
liability. 44 F.3d at 329. The taxpayer and the IRS eventually
entered into a settlement agreement binding the taxpayer to the
IRS’s treatment of the partnership items. Id. at 330. Over a year
after making his deficiency payment, however, the taxpayer learned
that another partner had challenged the IRS’s FPAA adjustments in
Tax Court on the basis of the statute of limitations. Id. In that
proceeding, the IRS conceded that the statute of limitations had
expired, and the court entered judgment for the partners. Id.
Because Alexander had already settled with the IRS, however, the
result in the Tax Court did not apply to him. See 26 U.S.C. §
6231(b)(1)(c). As a result, he filed his own individual refund
action in the district court. The Government defended the suit by
arguing that the parties’ contractual settlement agreement
prevented the taxpayer from bringing any suit for refund. 44 F.3d
at 330.
A panel of this court addressed its jurisdiction to
determine if the settlement agreement barred the refund suit. This
court first noted that § 7422(h) bars suits for refunds that are
“attributable to partnership items.” Id. at 331. The question
then became whether the taxpayer’s refund suit was in fact
13
“attributable to” any partnership item. The court noted that while
the refund was “at one time attributable to partnership items, that
is, to the adjustments called for in the FPAA,” the nature of those
items was altered by the settlement. Id. Section 6231(b)(1)(C)
provides that
[f]or purposes of this subchapter, the partnership items
of a partner . . . shall become nonpartnership items as
of the date . . . the Secretary or the Attorney General
(or his delegate) enters into a settlement agreement with
the partner with respect to such items[.]
Therefore, the settlement agreement converted the partnership items
to nonpartnership items for the purpose of the district court’s
jurisdiction.5 The taxpayers argue here that this analysis
comports with their jurisdictional argument and thus excepts their
case from § 7422(h)’s bar.
However, the Alexander court did not address the question
whether the court had jurisdiction to consider the substantive
statute of limitations issue. In Alexander, as opposed to this
case, the Government conceded that the statute of limitations
barred the assessments. Thus, once the Alexander court found that
it had jurisdiction generally over the refund suit, the only
substantive issue left to be decided was whether the settlement
agreement contractually barred the suit. Id. at 331-32. The
settlement agreement in Alexander, like the one in this case,
required the taxpayers to agree that they would not bring any claim
5
As discussed supra in note 1, conversion does not provide a basis for
jurisdiction in this case.
14
for refund based on the changed treatment of the partnership items.
Id. at 330. The court held that the contractual provision did not
bar the refund suit because the taxpayer “[did] 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.”
Id. at 332. The taxpayers here seize on this language as proof
that the statute of limitations question is a nonpartnership issue.
However, the Alexander court made this statement only in the
context of analyzing the contractual settlement agreement. The
Alexander court did not decide whether it had jurisdiction to reach
the merits of the statute of limitations argument, because that
argument had already been conceded. Thus, Alexander does not
control the question presented in this case, and this court remains
convinced that the district courts lack jurisdiction to decide the
FPAA statute of limitations issue. On this issue, the decision of
the district court in Weiner is therefore incorrect, while the
Kraemer decision is correct.
IV. 6621(c) Increased Interest
Despite its repeal in 1989, the draconian interest
provision enacted as § 6221(c) continues to dog taxpayers for
returns filed during the early 1980s. Consequently, these tax-
payers contest the Government’s imposition of additional interest
15
pursuant to 26 U.S.C. § 6621(c).6 The provision imposes an
interest rate of 120% of the statutory rate on “any substantial
underpayment attributable to tax motivated transactions.”7 26
U.S.C. § 6621(c)(1) (1988). A “substantial underpayment” is any
underpayment exceeding $1,000 per tax year. Id. § 6621(c)(2).
Included in the statutory definition of “tax motivated transaction”
is “any sham or fraudulent transaction.” Id. § 6621(c)(3)(A)(v).
The taxpayers contend that the trial courts are precluded
from upholding the § 6621(c) interest assessment because their
underlying settlement agreements do not establish that their under-
payments were attributable to “tax motivated transactions.” In the
FPAAs, the Government asserted several bases for the disallowance
of certain deductions. Among them was a “sham or fraudulent
transaction,” which qualifies as a “tax motivated transaction” for
the purposes of 6621(c). 26 U.S.C. § 6621(c)(3)(A)(v). Because
the taxpayers settled with the IRS, however, there was never any
need for a court to examine the IRS’s claimed bases for
disallowance and make a determination about their application.
The taxpayers principally rely on Todd v. Comm’r, 862
F.2d 540 (5th Cir. 1988). Todd dealt with the IRS’s imposition of
6
The Kraemers suffered an adverse judgment on this point, while Weiner
prevailed on the court’s finding that he had a profit motive relevant to the
assessment of § 6221(c) interest. We do not reach the issue the district court
found dispositive. Defending against the Government’s appeal, however, Weiner
makes, inter alia, the same argument as the Kraemers.
7
This section was repealed in 1989, but it applies to the tax years
in question in this appeal (1984 to 1986).
16
the § 6659(a) penalty. However, because both sections employ the
same “attributable to” language, the analysis in Todd is
instructive in the § 6621(c) context. In Todd, this court held
that the taxpayers’ underpayment was not “attributable to” a
valuation overstatement and thus § 6659(a)’s penalty did not apply.
The taxpayers in Todd did not settle with the IRS but instead chose
to challenge the IRS’s disallowances in the Tax Court. In that
proceeding, the Tax Court held that the Todds were not entitled to
their deductions and tax credits because the assets had not been
put into service during the tax year. Id. at 541. On appeal, this
court reasoned that because the deductions and credits were
disallowed for a reason totally unrelated to any valuation over-
statement, the resulting underpayment could not be “attributable to
a valuation overstatement.” Id. at 542.
The court then applied a treasury regulation formula that
determines the portion of deductions to which the higher interest
rate applies.8 Because the court had already determined that no
8
The formula for determining the amount of underpayment attributable
to a valuation overstatement is as follows:
(1) “actual tax liability” (i.e., the tax liability that results
from applying all of the IRS’s proper adjustments) with
(2) the “actual tax liability” reduced by the valuation
overstatement adjustment.
The difference between (1) and (2) is the amount of the underpayment
attributable to the valuation overstatement. See Todd, 862 F.2d at 542-43.
Similarly, the amount of tax motivated underpayment for § 6621(c) is
determined in the following manner:
(1) Calculate the amount of the tax liability for the taxable year
as if all items of income, gain, loss, deduction, or credit, had
17
portion of the disallowed deductions and credits were “attributable
to” the valuation overstatement, the two sides of the equation were
equal.9 The court noted that “where the deductions and credits
. . . were inappropriate altogether, the Todds’ valuation of the
property supposedly generating the tax benefits had no impact
whatsoever on the amount of tax actually owed.” Id. at 543. Or,
stated another way, the Todds’ underpayment was not “attributable
to” a valuation overstatement.
In McCrary v. Comm’r, 92 T.C. 827 (1989), a case also
heavily relied on by the taxpayers, the Tax Court adopted the
reasoning in Todd and concluded that the McCrarys were not subject
to § 6659(a) or § 6621(c) interest on the disallowed investment tax
credit. The McCrarys conceded one of the IRS’s grounds for dis-
allowing the investment tax credit, thus eliminating the need for
a trial on these issues in the Tax Court. Id. at 851. The ground
been reported properly on the income tax return of the taxpayer
(“total tax liability”); and
(2) Without taking into account any adjustments to items of
income, gain, loss, deduction, or credit that are attributable to
tax motivated transactions . . ., calculate the amount of the tax
liability for the taxable year as if all other items of income,
gain, loss, deduction, or credit had been reported properly on the
income tax return of the taxpayer (“tax liability without regard to
tax motivated transactions”).
The difference between (1) and (2) is the amount of the tax motivated
underpayment. See 26 C.F.R. § 301.6221-2T, A-5.
9
This is because the formula requires the court to determine the
portion of underpayment attributable to a valuation overstatement “after taking
into account any other proper adjustments to tax liability.” Todd, 862 F.2d at
542 (emphasis added). Therefore, because the Tax Court determined that not
placing the assets in service was a “proper adjustment,” the two sides of the
formula were equal.
18
conceded by the McCrarys (that their agreement was a license and
not a lease) was neither a “valuation overstatement” nor a “tax
motivated transaction.” The Tax Court noted that alternative
grounds could have justified the disallowance, including sham
transaction, which would have qualified for the § 6621(c) addition
to tax. However, the Tax Court declined to address the sham trans-
action issue, which was unnecessary to support the conceded dis-
allowance, for the sole purpose of applying § 6621(c). Id. at 859.
The taxpayers also rely on Heasley v. Comm’r , 902 F.2d
380 (5th Cir. 1990), in which this court relied on and extended the
Todd rule. In Heasley, the IRS relied on a variety of reasons for
disallowing the Heasleys’ claimed tax credits. The Heasleys, like
the taxpayers here, conceded the deficiency, but continued their
suit in the Tax Court to challenge the § 6659(a) and § 6621(c)
additions to tax. The Tax Court concluded that the Heasleys’
underpayment was “attributable to” a valuation overstatement under
§ 6659(a). The Fifth Circuit reversed. With regard to § 6659(a),
this court held that even though the Tax Court specifically found
that the underpayment was “attributable to” a valuation over-
statement, a situation that differed from that in Todd,
[w]henever the IRS totally disallows a deduction or
credit, the IRS may not penalize the taxpayer for a
valuation overstatement included in that deduction or
credit. In such a case, the underpayment is not attri-
butable to a valuation overstatement. Instead, it is
attributable to claiming an improper deduction or credit.
Heasley, 902 F.2d at 383.
19
These cases afford a conceptual lens through which to
view the statutory phrase “attributable to” in the context of
§ 6621(c). In Todd, the Government argued that “attributable to”
really meant “capable of being attributed,” such that any time a
taxpayer’s underpayment was capable of being attributed to a
valuation overstatement, the penalty would apply. 862 F.2d at 542.
However, the Todd court reasoned that the formula indicated that
Congress did not intend for the penalty to apply every time
valuation overstatement was at issue. Likewise, the § 6621(c)
formula, supra, determines the amount of tax motivated underpayment
by first taking into account any other proper, but non-tax-
motivated, deductions. On a theoretical level, the formula
provides the same reinforcement for viewing “attributable to”
narrowly in the § 6621(c) context.10 When so viewed, it follows
that when the FPAA lists several independent reasons for
disallowing the taxpayers’ deductions, there is no way to
10
The Second Circuit rejected this approach and instead adopted the
“capable of being attributed” definition in the § 6621(c) context. See Irom v.
Comm’r, 866 F.2d 545, 547 (2d Cir. 1989). In distinguishing Todd, the Second
Circuit announced a “separability” test: if two grounds for deficiency exist,
one of which qualifies as a tax motivated transaction and the other of which does
not, and the two grounds are “inseparable,” then the formula relied upon in Todd
does not apply. Id. at 547-48. This court in Heasley, again relying on Todd and
the formula, noted Irom as contrary authority only. 902 F.2d at 383 n.5. This
represents this circuit’s only acknowledgment of the Irom rule.
However, even if the Irom rule were to apply, the reasons listed by the IRS
in the FPAA are “separable.” For example, in addition to sham transaction, the
FPAA listed as reasons for disallowing the deductions the following, inter alia:
(1) the partnership did not actively engage in the trade or business of farming,
and (2) the partnership expenses paid or incurred were not ordinary and necessary
trade or business expenses deductible under § 162. The Tax Court has found that
both of these reasons are “separable” from a finding of sham or fraudulent
transaction. Harris v. Comm’r, 58 T.C.M. (CCH) 1441 (1990).
20
determine, without additional superfluous litigation, whether the
taxpayers’ underpayment is “attributable to” a reason that also
qualifies as a tax-motivated transaction (such as a sham).
The Tax Court has twice embraced this narrow view of
“attributable to” in § 6621(c) cases and decided that a taxpayer’s
blanket concession precludes a finding that any underpayment is
“attributable to” a tax motivated transaction. First, in Rogers v.
Comm’r, 60 T.C.M. (CCH) 1386 (1990), the taxpayers conceded the
IRS’s ability to disallow deductions. The Tax Court relied on
McCrary, supra, and reasoned that because “the determination of
whether there was a tax-motivated transaction was made only
concerning the disputes over the additions to tax and increased
interest, we could not conclude that the taxpayer required a trial
that otherwise would have been unnecessary.” Id. at 1397. The
taxpayers also cite Schachter v. Comm’r, 67 T.C.M. (CCH) 3092, 1994
WL 263329, *5 (1994), in which the court noted that because the
taxpayer entered into a stipulation of settled issues and conceded
the disallowance of deductions, these actions “obviated the need
for a trial on the numerous issues raised in the deficiency notice
for the purpose of identifying which, if any of them, provided the
substantive ground or grounds for disallowance . . . .” The
Schachter court was also persuaded that because of the numerous
grounds alleged in the notice of deficiency, it was impossible to
say that the underpayment was “attributable to” any one ground.
The court noted:
21
Here, as in [McCrary] and [Rogers], the melange of
alleged grounds, some of which were “tax motivated”
grounds -- but others were not -- prevent us from saying,
after the concession, that the underpayment was attri-
butable to a particular ground. We are not inclined, in
these circumstances, to rely on petitioners’ burden of
proof to show that the transaction was not tax motivated,
all or in part, for the purpose of section 6621(c). The
objectives of administrative efficiency and judicial
economy have been well served by the closing agreement
and petitioner’s concession. Those objectives would not
be served by requiring a trial on the substantive issues
for the sole purpose of determining whether petitioner is
liable for 20 percent more interest on the deficiency
under section 6621(c).
Id. at *6.
The same situation is present in these cases: the
taxpayers settled or conceded the disallowances and paid the
delinquent taxes, thus removing the need for a trial on the merits
of those issues. This court can conceive of no good reason to
treat the taxpayers in this case differently from the taxpayers in
Todd, McCrary, Heasley, Rogers, or Schachter. There 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. Additionally, § 6621(c) was one of
the provisions enacted by Congress “to deal with the Tax Court
backlog.” Todd, 862 F.2d at 544 n.14. Yet, fifteen years after
the statute’s repeal, imposing the penalty in situations such as
this does nothing to relieve the Tax Court’s backlog, when the
taxpayers have in fact settled with the IRS. Because, under the
circumstances of these cases, the taxpayers’ underpayments are not
“attributable to” a tax motivated transaction as a matter of law,
22
the IRS may not assess the additional interest against them. We
thus endorse the result in Weiner, albeit on different grounds, but
reverse that in Kraemer.
Conclusion
For the foregoing reasons, we conclude that the district
courts lack jurisdiction to consider the taxpayers’ FPAA statute of
limitations arguments. Further, § 6621(c) interest cannot be
assessed against the taxpayers as a matter of law. Finally,
pursuant to Beall, the district courts have jurisdiction to
consider the taxpayers’ § 6404(e) interest abatement claims.
Accordingly, the judgments of the trial courts are
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED FOR
FURTHER PROCEEDINGS.
23
Weiner v. United States
Court: Court of Appeals for the Fifth Circuit
Date filed: 2004-10-25
Citations: 389 F.3d 152
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