Weiner v. United States

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transactions” pursuant to now-repealed § 6621(c).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).

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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:

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 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,

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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.

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