Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-70037/USCOURTS-ca9-12-70037-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellant
JT USA, LP
Appellee
JTR-LLC
Appellee
Tax Matters Partner
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JT USA, LP; JTR-LLC; TAX

MATTERS PARTNER,

Petitioners-Appellees,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 12-70037

Tax Ct. No.

5282-05

OPINION

Appeal from a Decision of the

United States Tax Court

Argued and Submitted

June 2, 2014—Pasadena, California

Filed November 14, 2014

Before: Stephen S. Trott and Consuelo M. Callahan, Circuit

Judges, and Mark W. Bennett, District Judge.*

Opinion by Judge Trott;

Dissent by Judge Callahan

 

* The Honorable Mark W. Bennett, District Judge for the U.S. District

Court for the Northern District of Iowa, sitting by designation.

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2 JT USA V. CIR

SUMMARY**

Tax

The panel remanded an appeal by the Commissioner of

Internal Revenue and held that the tax court erred in

concluding that taxpayers could opt out of a partnership

administrative proceeding under the Tax Equity and Fiscal

Responsibility Act.

The panel held that the meaning of 26 U.S.C.

§ 6223(e)(3)(B) is clear and unambiguous that unless a

partner elects to have all of his or her partnership items

treated as nonpartnership items, the partner cannot elect out

of proceeding under the Tax Equity and Fiscal Responsibility

Act.

Dissenting, JudgeCallahan wrote that TEFRA allows one

partner to make one election and another partner to make a

different election, and that a partner who has both direct and

indirect interests should have the same option, at least where

the IRS fails to timely notify the taxpayer that a bifurcated

election is not allowed.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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JT USA V. CIR 3

COUNSEL

Joan I. Oppenheimer (argued), Tamara W. Ashford, Deputy

Assistant Attorney General, Teresa E. McLaughlin, Tax

Division Department of Justice, Washington, D.C., for

Respondent-Appellant.

Richard V. Vermazen (argued), Law Office of Richard V.

Vermazen, San Diego, California; Ernest S. Ryder and

Lauren A. Rinsky, Ernest S. Ryder & Associates, Inc., APLC,

San Diego, California, for Petitioners-Appellees.

OPINION

TROTT, Circuit Judge:

We review de novo the Tax Court’s reading and

application of aTEFRA statute1

in a convoluted action arising

from (1) a partnership’s attempted use of a bogus tax shelter

to offset capital gains, and (2) the Commissioner of Internal

Revenue’s subsequent denial of a $32.5 million “loss”

claimed by the partnership to eliminate income tax liability

on an asset sale resulting in a $28 million capital gain. The

Tax Court ruled that a taxpayer holding both direct and

indirect interests in a partnership may elect under 26 U.S.C.

§ 6223(e)(3)(B) not to be bound by the results of a

1 Congress enacted the Tax Treatment of Partnership Items Act of 1982

as Title IV of the Tax Equity and Fiscal Responsibility Act of 1982

(“TEFRA”), Pub. L. No. 97-248, §§ 401-406, 96 Stat. 324 (codified as

amended at 26 U.S.C. §§ 6221-6232 (2012)).

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partnership proceeding – or partnership audit

2

– as to some,

but not all, of those interests held during the relevant taxable

year. In other words, that § 6223(e)(3)(B) permits taxpayers

to opt out of the partnership proceeding with respect to their

indirect interests but to leave in that proceeding their alleged

remaining direct partnership interests. The Commissioner

concedes that “[i]f taxpayers’ elections to opt out, but only as

indirect partners, are effective, then the assessment of

deficiencies flowing from about $36.6 million in adjustments

(or on the order of $10 million in tax) is time-barred.” 

Accordingly, it appears that if the IRS prevails, the taxpayers

will be liable for additional taxes. Thus, their claim that this

case is now moot for the lack of a controversy is groundless.

We have jurisdiction over this timely appeal pursuant to

26 U.S.C. § 7482(a)(1), and we conclude that the Tax Court’s

reading of the disputed statute was incorrect.3 We also

conclude that the IRS’s sloppy administrative errors,

including mailing the wrong form letter to the taxpayers, were

 

2

 26 U.S.C. §§ 6221, 6231(a)(3); 26 C.F.R. § 301.6221-1.

3 When this controversy first came to us pursuant to 26 U.S.C.

§ 7482(a)(2)(A) on a failed attempt by the IRS to secure an interlocutory

decision on this issue, we said,

If the Tax Court ultimately determines that the

Gregorys did not retain a direct interest in JT USA at

the relevant time, and therefore do not have tax

liability, the IRS will be able to appeal that ruling along

with the Tax Court’s prior interlocutory order that the

Gregorys had authority to bifurcate their election in the

TEFRA proceeding.

Comm’r v. JT USA, LP, 630 F.3d 1167, 1173 (9th Cir. 2011) (emphasis

added).

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not sufficient either to require a different outcome or to stop

the IRS from pursuing this matter and its claims. Thus,

because we hold that the taxpayers’ disputed elections to opt

out were invalid, we remand for further proceedings

consistent with this opinion.

Background

The facts and circumstances of this case are available in

the Tax Court’s decision, JT USA LP v. Comm’r, 131 T.C. 59

(2008), and in our previous opinion in Comm’r v. JT USA,

LP, 630 F.3d 1167, 1169–70 (9th Cir. 2011). We attach the

Tax Court’s opinion as an appendix and repeat the facts only

as necessary to illuminate our decision. For the best

“explanation of the statutory scheme for dealing with

partnership matters,” we refer the reader to and incorporate

Justice Scalia’s opinion in United States v. Woods, 134 S. Ct.

557, 562–63 (2013).

26 U.S.C. § 6223(e)(3)(B)

26 U.S.C. § 6223(e)(3)(B), entitled “Notice to Partners of

Proceedings,” reads in pertinent part, “In any case to which

this subsection applies, if paragraph (2) does not apply, the

partner shall be a party to the proceedings unless such partner

elects – . . . (B) to have the partnership items of the partner

for the partnership taxable year to which the proceeding

relates treated as nonpartnership items.”

In Carson Harbor Village, Ltd. v. Unical Corp., 270 F.3d

863, 878 (9th Cir. 2001) (quoting Caminetti v. United States,

242 U.S. 470, 485 (1993)), we said,

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It is elementary that the meaning of a statute

must, in the first instance, be sought in the

language in which the act is framed, and if

that is plain, . . . the sole function of the courts

is to enforce it according to its terms.

Where the language is plain and admits of no

more than one meaning, the duty of

interpretation does not arise, and the rules

which are to aid doubtful meanings need no

discussion.

The statute at the core of this dispute, § 6223(e)(3)(B),

provides that a “partner” may elect “to have the partnership

items of the partner for the partnership year to which the

administrative proceedings relate treated as nonpartnership

items.” The statute says “the partner,” not an indirect partner

or any other subset of the term “partner” as defined in

26 U.S.C. § 6231(a)(2). Moreover, § 6223(e)(3)(B) allows

the partner to have “the partnership items”(plural) of that

partner to be treated as nonpartnership items, not some of that

partner’s items to be treated as such.

The meaning of this language is clear and unambiguous,

and it means – as the Commissioner argues – that unless a

partner elects to have all of his or her partnership items

treated as nonpartnership items, the partner cannot elect out

of the TEFRA proceeding. See Exxon Mobil Corp. v.

Comm’r, 484 F.3d 731, 734 (5th Cir. 2007) (“Use of the

definitive article ‘the’ in the statute supports a conclusion that

there is one overpayment rate for each overpayment

situation.”). In the vernacular, § 6223(e)(3)(B) is an all-ornothing rule, and that ends our primary inquiry.

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The Tax Court’s and the taxpayers’ excursions into other

sections of TEFRA are irrelevant. All the other TEFRA

sections to which the taxpayers refer demonstrate that when

Congress chose to differentiate between types of partners,

they knew how to do so. As the Supreme Court remarked in

Loughrin v. United States, ___ U.S. ___ , 134 S. Ct. 2384,

2390 (2014), “We have often noted that when ‘Congress

includes particular language in one section of a statute but

omits it in another’ – let alone the very next provision – this

Court ‘presume[s]’ that Congress intended a different

meaning.” Indeed, the absence in § 6223(e)(3)(B) of the

language the taxpayers would like us to read into it “provides

strong affirmative evidence” that Congress did not intend it

to be construed or implemented as the taxpayers wish. 

United States v.Naftalin, 441 U.S. 768, 774–75(1979). 

Accordingly, a partner in a TEFRA proceeding such as this is

limited under § 6223(e)(3)(B) to a single election: either all

in, or all out.

Here, the taxpayers tried to have their cake and eat it too. 

Their multiple simultaneous statements of election were

entitled respectively “Statement of Election by Direct Partner

Under Section 6223(e)(3),” and “Statement of Election by

Indirect Partner Under Section 6223(e)(3).” Each “Indirect”

partner’s statement of election said that “[t]he undersigned

who is an Indirect Partner is also a Direct Partner of the

Partnership” and that “[t]his election does not apply to the

undersigned as a Direct Partner.” The statute does not permit

such slight-of-hand, and the taxpayers’ current claim that they

did not attempt to bifurcate any partnership items in dispute

going into the partnership proceeding is impeached by the

record. Equally unavailing were their indisputably untimely

attempts two years later to have their “elections out” cover

both their indirect and direct partnership interests.

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Legislative History

Although not necessary to support our conclusion, we

note that it is consistent with the official legislative history

behind the statute. See Salinas v. United States, 522 U.S. 52,

57–58 (1997). The House Conference Report on § 6223(e)

says that “the partner will be a party to the proceeding [under

TEFRA] unless he elects . . . to have all partnership items

treated as nonpartnership items.” H.R. Conf. Rep. No. 97-

760, at 602(1982), reprinted in 1982 U.S.C.C.A.N. 1190,

1374 (emphasis added).

TEFRA

Although it dealt with a different TEFRA issue, our

reading of § 6223(e)(3)(B) is also consistent with the purpose

of TEFRA’s partnership provisions recently reiterated by the

Supreme Court in United States v. Woods, 134 S. Ct. 557

(2013). These provisions were enacted inter alia to prevent

the waste of time, effort, and resources occasioned by a

multiply of proceedings such as would occur if the Tax

Court’s construction of § 6223(e) were to prevail. In a

normal case the Tax Court’s ruling here would permit

“duplicative proceedings and the potential for inconsistent

treatment to partners in the same partnership,” thus hindering

the purpose and policy justifications that produces TEFRA. 

Woods, 134 S. Ct. at 563. Citing Kligfeld Holdings, 128 T.C.

192, 199–200 (2007), the TaxCourt correctlyrecognized also

that “[t]he goal of TEFRA is to have a single point of

adjustment for all partnership items at the partnership level,

thereby making any adjustments to a particular partnership

item consistent among all the various partners.” And the Tax

Court acknowledged that it’s reading of the statute would

seem “to be at odds with TEFRA’s overall goal to consolidate

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partnership proceedings and increase consistency.” On these

points, the Tax Court was correct. Accordingly, we conclude

under a proper reading of § 6223(e)(3)(B), that the taxpayers’

attempted elections were ineffective.

The Pertinent Treasury Regulation

Even if we were to agree that § 6223(e)(3)(B)’s meaning

is ambiguous, which we do not, we would still be compelled

to reach the same conclusion. After the enactment of

§ 6223(e)(3)(B), the Treasury Department issued Temp.

Treas. Reg. § 301.6223(e)-2T(c)(1), 52 Fed. Reg. 6779 (Mar.

5, 1987), which was effective for the year of this controversy. 

The regulation tracks the language of the House Conference

Report, and it provides that “the election shall apply to all

partnership items for the partnership taxable year to which the

election relates.” 52 Fed. Reg. at 6785 (emphasis added). 

We agree with the government’s argument that the regulation

– which uses the words of the House Conference Report –

represents a reasonable reading of the statute and,

accordingly, is entitled to Chevron deference. Chevron,

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837

(1984); Mayo Found. for Medical Educ. & Research v.

United States, 131 S. Ct. 704, 713 (2011) (“The principles

underlying our decision in Chevron apply with full force in

the tax context.”).

The taxpayers’ attempt to avoid Chevron deference by

simply offering a different interpretation of the statute and the

regulation misses the point of Chevron deference. If the

agency’s reading of a statute is “a permissible construction of

the statute,” that reading and interpretation stands and is

entitled to respect. Alarcon v. Keller Industries, Inc., 27 F.3d

386, 389 (9th Cir. 1994). Such is the case here. Thus, we

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remand to the tax court for further proceedings consistent

with this opinion, and to determine the validity of the

adjustments in the “final partnership administrative

adjustment,” known as the FPAA.

REMANDED for further proceedings.4

CALLAHAN, Circuit Judge, dissenting:

I respectfully dissent. We are here because the IRS

1) waited too long to give notice to the taxpayers of a TEFRA

partnership proceeding, 2) said nothing when the taxpayers

attempted to opt out of the TEFRA proceeding with respect

to their indirect interests but not with respect to their direct

interests,1and 3) then failed to bring proceedings against the

taxpayers outside the TEFRA proceeding within the one-year

statute of limitations. Having struck out, in effect, the IRS

now seeks a do-over by disallowing the taxpayers’ election to

opt out of the TEFRA proceeding in order to pull the

taxpayers back into the proceeding. Contrary to the

majority’s contention, the statute does not prohibit such a

split election. TEFRA allows one partner to make one

election and another partner to make a different election. I

4 We find unpersuasive the taxpayers’ remaining contention that (1) they

are entitled to the benefits of substantial compliance, Baccei v. United

States, 632 F.3d 1140, 1145 (9th Cir. 2011), and (2) that the IRS by its

delay impliedly ratified their defective elections, Office of Personnel

Management v. Richmond, 496 U.S. 414, 419, 422 (1990) (en banc).

 

1

 For convenience, I refer to the taxpayers’ election out with respect to

their indirect interests but not with respect to their direct interests as a

“split” or “bifurcated” election.

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think that a partner who has both direct and indirect interests

should have the same option, at least where the IRS fails to

timely notify the taxpayer that a bifurcated election is not

allowed. On the facts of this case, any ambiguity in the

statute as to whether a taxpayer can make separate elections

based on different ownership interests should be construed in

favor of the taxpayer. I would affirm the Tax Court.

I

This case concerns the IRS’s attempts to recover capital

gains taxes from Jon Ross Gregory and his wife Rita.2 The

Gregorys held both direct and indirect interests in JT USA,

LP (“JT USA”), a limited partnership. The IRS issued a

notice of final partnership administrative adjustment

(“FPAA”) to JT USA for the 2000 tax year, initiating a

TEFRA proceeding. However, the IRS did not notify the

Gregorys of the proceeding, as required by statute under 26

U.S.C. § 6223(d)(1). Because of this error, the Gregorys had

the right to opt out of the TEFRA partnership proceeding

under 26 U.S.C. § 6223(e)(3)(B). The Gregorys then notified

the IRS that they were opting out of the TEFRA proceeding

with respect to their indirect interests but that they had

elected to participate in the proceeding with respect to their

direct interests.3

2 This background is taken from our prior decision regarding this

dispute, Commissioner v. JT USA, LP, 630 F.3d 1167 (9th Cir. 2011).

 

3

 Once the Gregorys began to suspect that their split election would be

disallowed, they sought to opt out of the TEFRA proceeding with respect

to both their direct and indirect interests, with no response from the IRS.

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12 JT USA V. CIR

After the Gregorys’ election out of the TEFRA

proceeding with respect to their indirect interests in JT USA,

the IRS could have brought an action against the Gregorys

outside of the TEFRA proceeding. However, the IRS failed

to do so within the one-year statute of limitations, see

26 U.S.C. § 6229(f)(1), and the limitations period ran out at

the end of 2005. Thus, “by 2006, the IRS had only two

options to recover the alleged tax deficiency”: either “show

that the Gregorys had a direct interest in JT USA at the

relevant time during 2000,” or “invalidate the Gregorys’

election out of the TEFRA proceeding with respect to their

indirect interests.” JT USA, 630 F.3d at 1170.

The Gregorys filed a petition with the Tax Court in 2006,

arguing that they were only indirect partners of JT USA

during the period at issue and that they had no tax liability

because the IRS had not assessed a tax deficiency before the

one-year statute of limitations had run. In response, the IRS

argued that taxpayers were not authorized to “bifurcate” their

election to participate in TEFRA proceedings, and therefore

the Gregorys’ election to opt out with respect to their indirect

interest in JT USA was invalid. The Tax Court, however,

found that the bifurcated election was valid and dismissed the

Gregorys as indirect partners from the TEFRA proceeding.

The IRS then filed an interlocutory appeal, which we

dismissed for lack of appellate jurisdiction. Id. at 1169. On

remand, the Tax Court determined that all of the disputed

adjustments related to the Gregorys’ interests as indirect

partners. As the Tax Court had already ruled that the

Gregorys had validly elected out of the partnership

proceeding in their capacity as indirect partners, it held that

none the adjustments in the final partnership administrative

adjustment would pass through to any individual partner’s

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return, and therefore the adjustments were moot. The

Commissioner then timely appealed the Tax Court’s final

judgment.

II

A

The statute at issue here, 26 U.S.C. § 6223(e)(3)(B),

provides that where the IRS fails to provide proper notice of

a TEFRA proceeding to a partner, the partner may elect “to

have the partnership items of the partner for the partnership

taxable year to which the proceeding relates treated as

nonpartnership items.” The majority and the IRS claim that

this language unambiguously states that a taxpayer maymake

only one election – either you opt out completely, or not at

all. The majority and the IRS err in their characterization of

this statute and the applicable regulations.

The tax code expressly provides that a single individual

or entity may have dual capacities as direct and indirect

partners and separate rights under each capacity. In other

words, an individual may wear different “hats” and exercise

its rights differently with respect to each hat. See, e.g.,

Barbados #6 Ltd. v. Comm’r, 85 T.C. 900, 904-05 (1985)

(discussing IRC § 6226(a) and (b)). Thus, the Gregorys were

not required to make a single election with respect to their

interests as direct and indirect partners. If different partners

can make their own separate elections to opt out from a

TEFRA proceeding (or to stay in the proceeding) under

§ 6223, a single individual holding these exact same interests

should be treated similarly.

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The fact that the statute says “the partner” may elect out

of the partnership proceeding does not show that parties with

multiple partnership interests have to make a single election. 

The language just shows that partners may elect out of the

TEFRA proceeding, regardless of whether they are direct

partners, indirect partners, or otherwise. Thus if a taxpayer

wearing his direct partner hat opts out, he opts out with

respect to all of his direct interests. However, this need not

affect his interests as an indirect partner. If the taxpayer

wearing his indirect partner hat opts out, he opts out with

respect to all of his interests as an indirect partner,

independent of his interests as a direct partner. Such

interpretation is not contrary to the statute.4

Nor does the pertinent Treasury regulation decide this

issue. The regulation states that “[t]he election shall apply to

all partnership items for the partnership taxable year to which

the election relates.” Miscellaneous Provisions Relating to

the Tax Treatment of Partnership Items, 52 Fed. Reg. 6779,

6785 (Mar. 5, 1987). However, this regulation, just like the

statute, is susceptible to an interpretation that the election

applies to all the partnership items of that particular partner,

not all of the individual taxpayer’s interests, whether direct or

indirect.

Further, as the IRS conceded at oral argument, this issue

has never come up before. Thus, the IRS’s position in this

 

4 The conference report’s language stated that the statute provided that

a partner could opt out of the partnership proceeding with respect to all

partnership items. Tax Equity and Fiscal Responsibility Act of 1982,

1982-2 C.B. 600, 602 (Aug. 17, 1982). However, the removal of “all”

from the final language of the statute could also suggest that the drafters

did not want to prohibit split elections.

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appeal is only a litigating position which is not entitled to

Chevron deference. Accord Price v. Stevedoring Servs. of

Am., Inc., 697 F.3d 820, 825–31 (9th Cir. 2012) (en banc)

(litigating position of agency director in interpreting statute

was not entitled to Chevron deference). Finally, we should

interpret the tax code “consistent with the general rule of

construction that ambiguous tax statutes are to be construed

against the government and in favor of the taxpayer.” See

Royal Caribbean Cruises, Ltd. v. United States, 108 F.3d 290,

294 (11th Cir. 1997) (citations omitted). The majority’s

interpretation of the statute runs contrary to this general rule.

B

The majority also errs in holding that TEFRA’s general

policy mandates reversing the Tax Court. It is true that

TEFRA was enacted to avoid duplicative proceedings and

inconsistent treatment of partners in the same partnership. 

See United States v. Woods, 134 S. Ct. 557, 562–63 (2013). 

However, this general policy does not resolve the question of

whether split elections are allowed. When Congress provided

for § 6223(e)(3)’s opt-out provision, Congress determined

that TEFRA’s general policy against multiple proceedings

should yield when the IRS does not give proper notice, as

happened here. In other words, the opt-out provision is a

statutorily-provided exception to the general policy. If the

general policy was paramount, Congress never would have

enacted § 6223(e)(3) in the first place. Allowing a split

election does not thwart TEFRA’s general policy any more

than the statute’s express provision allowing a partner to opt

out due to improper notice.

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III

The IRS struck out in this case: one, it failed to give the

Gregorys proper notice of the TEFRA proceeding; two, it

failed to object to the taxpayers’ election out as indirect

partners; and three, it failed to bring a proceeding against the

Gregorys outside the TEFRA proceeding. Congress

specifically allows taxpayers to opt out of the TEFRA

proceeding in this context, and the taxpayers did so in their

capacities as indirect partners. Moreover, especially in light

of the IRS’s failures, any ambiguity in the statute should be

resolved in favor of the taxpayer. I would therefore affirm

the Tax Court.

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Appendix

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