Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-71504/USCOURTS-ca9-14-71504-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
M.A. Katz
Appellant
MK Hillside Partners
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MK HILLSIDE PARTNERS; M.A.

KATZ, a partner other than the Tax

Matters Partner,

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 14-71504

Tax Ct. No.

13171-08

OPINION

Appeal from a Decision of the

United States Tax Court

Argued and Submitted May 5, 2016

Pasadena, California

Filed June 23, 2016

Before: RAYMOND C. FISHER, MILAN D. SMITH, JR.,

and JACQUELINE H. NGUYEN, Circuit Judges.

Opinion by Judge Milan D. Smith, Jr.

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2 MK HILLSIDE PARTNERS V. CIR

SUMMARY*

Tax

In an action brought by a partner seeking judicial review

of the IRS’s adjustment of a partnership’s tax return, the

panel held that the tax court had jurisdiction to reject the

partner’s assertion of the statute of limitations, and affirmed. 

Marcus Katz, a partner in MK Hillside Partners, filed a

petition for review in tax court contesting the IRS’s finding

that MK Hillside was a sham, lacked economic substance,

and was formed and used principally to avoid taxes; and

asserting the statute of limitations. The tax court rejected the

partner’s assertion of the statute of limitations. The panel

held that because the tax court had jurisdiction to consider

Katz’s argument regarding the statute of limitations, it

necessarily had jurisdiction to reject it, at least for the

purposes of the partnership proceeding. The panel affirmed

the tax court’s determination that the limitations period

remained open as to Katz.

COUNSEL

Charles E. Hodges, II (argued) and Antoinette L. Ellison,

Kilpatrick Townsend & Stockton LLP, Atlanta, Georgia;

Adam H. Charnes, Kilpatrick Townsend & Stockton LLP,

Winston-Salem, North Carolina, for Petitioners-Appellants

* 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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MK HILLSIDE PARTNERS V. CIR 3

Joan I. Oppenheimer (argued) and Damon W. Taaffe,

Attorneys, Tax Division; Tamara W. Ashford, Acting

Assistant Attorney General; United States Department of

Justice, Washington, D.C.; for Respondent-Appellee.

OPINION

M. SMITH, Circuit Judge:

In an action seeking judicial review of the IRS’s

adjustment of a partnership’s tax return, the tax court has

jurisdiction, pursuant to 26 U.S.C. § 6226(d)(1),1to

“consider” an assertion by any of the partners that the

applicable statute of limitations has expired for that particular

partner. Here, a partner made such an assertion, and the tax

court rejected it, holding that the limitations period remained

open as to the partner. The partner seeks reversal, arguing that

although the tax court had jurisdiction to accept his assertion,

it lacked jurisdiction to reject it. We hold that the tax court

had jurisdiction to reject the partner’s assertion of the statute

of limitations, and we affirm.

FACTS AND PRIOR PROCEEDINGS

In 1998, Appellant Marcus Katz entered into two “collar”

option contracts covering stock shares he owned.2 Katz

1 All further statutory references are likewise to Title 26 of the United

States Code.

2 A “collar” on stock shares consists of simultaneously purchasing a put

option and selling a call option, both covering the same shares. The put

option allows the option holder to sell shares at a set price, guaranteeing

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4 MK HILLSIDE PARTNERS V. CIR

terminated the collars in September of 1999, which generated

a credit of $198,000. In October of 1999, Katz contributed

stock to MK Hillside Partners (MK Hillside), a partnership

between Katz and his wholly owned corporation, MK

Hillside Investors, Inc. Katz also contributed real estate to the

partnership. The partnership then sold the stock and real

estate.

Katz’s and MK Hillside’s 1999 tax returns were received

on September 25, 2000. Katz’s return did not list the

$198,000 credit from the collar termination, and MK

Hillside’s return reported no gain on the real estate sale. The

IRS did not issue a notice of deficiency for Katz’s 1999

taxes.3In July of 2006, Katz agreed to extend the time to

assess his 1999 tax liability, including tax attributable to

partnership items, until January 31, 2008. The IRS issued a

Final Partnership Administrative Adjustment (FPAA) to MK

Hillside on January 2, 2008, finding that MK Hillside was a

sham, lacked economic substance, and was formed and used

principally to avoid taxes.

a floor on the price received. Selling the call option produces income to

cover the cost of the put option, but sets a ceiling on the price received for

the shares. See Levy v. Bessemer Trust Co., 97 Civ. 1785, 1997 U.S. Dist.

LEXIS 11056, at *4 (S.D.N.Y. July 30, 1997).

3 The IRS argues that there would have been no purpose in doing so

because Katz “amended his 2000 tax return to reduce his claimed

carryover losses flowing from his 1999 return, thereby effectively

recognizing the unreported income.”

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MK HILLSIDE PARTNERS V. CIR 5

Katz filed a petition in the tax court contesting that

finding and asserting the statute of limitations.4 The IRS

responded that the Section 6501(e)(1) six-year statute of

limitations applied because Katz’s omission of the $198,000

on his 1999 return constituted more than 25% of the gross

income reported on the return. Katz moved for summary

judgment, arguing, inter alia, that he no longer had an interest

in the partnership proceeding under Section 6226(d)(1), and,

in the alternative, that the tax court lacked jurisdiction to

consider at the partnership stage whether, due to a gross

understatement of nonpartnership income, his 1999 tax year

remained open at the time he agreed to extend his assessment

period.

The tax court denied summary judgment, holding that a

trial would be necessary to determine whether Katz in fact

omitted substantial income from his 1999 return, in which

case his personal limitations period would have been six

years and would have remained open at the time Katz agreed

to extend his limitations period. To avoid a trial, the parties

 

4

 Katz filed as “a partner other than the Tax Matters Partner,” which is

why this appeal is so captioned. In fact, Katz is the tax matters partner.

The tax court noted that Katz did not explain why he filed the petition in

his capacity as a partner other than the tax matters partner, and neither did

he do so on appeal. It appears, however, that at the time of filing, Katz was

statutorily barred from filing as the tax matters partner. Under § 6226(a),

a tax matters partner may petition for readjustment of partnership items

within 90 days after a notice of FPAA is mailed. Here, the notice of FPAA

was mailed on January 2, 2008, so the window for a petition by the tax

matters partner closed April 1, 2008. Katz filed on May 30, 2008, one day

before the window for a partner other than the tax matters partner to

petition for readjustment closed under § 6226(b). See Barbados #6 Ltd. v.

Comm’r., 85 T.C. 900, 904 (1985) (holding that a notice partner who was

also the tax matters partner could file petition during the longer § 6226(b)

window for notice partners).

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6 MK HILLSIDE PARTNERS V. CIR

agreed to a Stipulation of Facts and a Second Stipulation of

Settled Issues. Based on those stipulations, the tax court held

that the period for assessing tax on the 1999 MK Hillside

partnership items was open as to Katz.

STANDARD OF REVIEW

“Decisions of the tax court are reviewed on the same basis

as decisions from civil bench trials in the district court. Thus,

we review the tax court’s conclusions of law de novo and its

factual findings for clear error.” DHL Corp. & Subsidiaries

v. Comm’r, 285 F.3d 1210, 1216 (9th Cir. 2002) (citations

omitted). Similarly, because we review a district court’s

application of the doctrine of judicial estoppel for abuse of

discretion, Hamilton v. State Farm Fire &Cas. Co., 270 F.3d

778, 782 (9th Cir. 2001), we likewise review the tax court’s

application of judicial estoppel to the facts of this case for

abuse of discretion.

ANALYSIS

I. Legal Standards

A. Partnership Taxation

“A partnership does not payfederal income taxes; instead,

its taxable income and losses pass through to the partners.”

United States v. Woods, 134 S.Ct. 557, 562 (2013) (citing

§ 701). Partnerships are required to file an informational tax

return, and the partners are required to report their shares of

the partnership’s tax items on their individual tax returns. Id.

(citing §§ 702, 704, 6031(a)). Before the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA), the IRS disputed

partnership tax matters through deficiency proceedings

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MK HILLSIDE PARTNERS V. CIR 7

concerning individual taxpayers. Id. This led to “duplicative

proceedings and the potential for inconsistent treatment of

partners in the same partnership.” Id. at 563. TEFRA

addressed these problems byestablishinga two-stage process.

Id. First, the IRS issues an FPAA notifying the partners of

any adjustments to the partnership items, and the partners

may seek judicial review of the FPAA. Id. (citing

§§ 6223(a)(2), 6226(a)–(b)). Second, once the adjustments

are final, the IRS may make the resulting “computational

adjustments” to the individual partners’ tax liability, usually

without a deficiency proceeding, in which case the partners’

only opportunity for further challenge is by way of postpayment refund action. Id. (citing §§ 6230(a)(1), (c);

6231(a)(6)).5

Generally, an individual’s tax return remains open for

three years after the return is filed. § 6501. For partnership

items, the period for assessing tax expires no earlier than the

later of three years after (1) the date the partnership return

was filed, or (2) the last day for filing the partnership return.

§ 6229(a). The mailing of a notice of FPAA tolls the statute

of limitations until one year after the adjustment becomes

final. § 6229(d).

B. A Partner’s Ability to Assert a Personal Statute of

Limitations in an FPAA Proceeding

Partners are treated as parties to a petition for

readjustment of the FPAA if they have an interest in the

5 Deficiency proceedings are required for certain computational

adjustments attributable to “affected items,” which are those affected by,

but not themselves, partnership items. Woods, 134 S.Ct. at 563 (citing

§§ 6230(a)(2)(A)(i), 6231(a)(5)).

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8 MK HILLSIDE PARTNERS V. CIR

outcome. § 6226(c)–(d). Such an interest exists if the items at

issue remain partnership items for that partner and the period

within which any tax attributable to the partnership may be

assessed against that partner has not yet expired. § 6226(d).

However, even if a partner no longer has an interest in the

outcome, it has a limited right specifically to “participate in

such action . . . solely for the purpose of asserting that the

period of limitations for assessing any tax attributable to

partnership items has expired with respect to such person, and

the court having jurisdiction of such action shall have

jurisdiction to consider such assertion.” § 6226(d)(1) (flush

language).

This language is the primary focus of the parties’ dispute.

Katz contends that “to consider” cannot mean “to determine,”

except perhaps if the determination is based on certain

undisputed facts. The IRS contends that “to consider” an

assertion that the statute of limitations has run necessarily

requires either accepting or rejecting the assertion.

C. The Tax Court’s Jurisdiction

“[T]he Tax Court, as an Article I court, is a court of

limited jurisdiction and may only exercise jurisdiction to the

extent authorized byCongress.” Adkison v. Comm’r, 592 F.3d

1050, 1052 (9th Cir. 2010) (citing Estate of Branson v.

Comm’r, 264 F.3d 904, 908 (9th Cir. 2001)). TEFRA

provides that:

A court with which a petition is filed in

accordance with this section shall have

jurisdiction to determine all partnership items

of the partnership for the partnership taxable

year[,] . . . the proper allocation of such items

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MK HILLSIDE PARTNERS V. CIR 9

among the partners, and the applicability of

any penalty, addition to tax, or additional

amount which relates to an adjustment to a

partnership item.

26 U.S.C. 6226(f). “Whether the TaxCourt has subject matter

jurisdiction is a question of law and thus reviewed de novo.”

Adkison, 592 F.3d at 1052 (citing Crawford v. Comm’r,

266 F.3d 1120, 1123 (9th Cir. 2001)). “We are reluctant to

read limitations on jurisdiction into a statutory scheme that

does not clearly divest a court of jurisdiction.” Id. at 1054–55.

II. Because the Tax Court Had Jurisdiction to

“Consider” Katz’s Argument, it Necessarily Had

Jurisdiction to Reject It, At Least for Purposes of the

Partnership Proceeding

A. Katz’s Statutory Construction Argument Fails

“If the statutory language is unambiguous, its plain

meaning controls unless Congress has ‘clearly expressed’ a

contrary legislative intention.” Price v. Comm’r, 887 F.2d

959, 963–64 (9th Cir. 1989) (quoting United States v.

594,464 Pounds of Salmon, 871 F.2d 824, 826 (9th Cir.

1989)). Conversely, if we find the statutory language

indeterminate, we resolve the dispute “by looking to ‘the

structure of [TEFRA] and its other provisions.’” Woods,

134 S.Ct. at 563 (quoting Maracich v. Spears, 133 S.Ct. 2191,

2200 (2013) (alteration in Woods)).

Katz grounds his argument on the difference in word

choice between statutory subsections. While Section 6226(f)

grants “jurisdiction to determine” all partnership items,

Section 6226(d)(1) grants “jurisdiction to consider” a

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10 MK HILLSIDE PARTNERS V. CIR

partner’s assertion of its statute of limitations. Katz, citing

Porter v. Commissioner, 130 T.C. 115, 118–19 (2008), argues

that Congress used “determine” jurisdictionally in Sections

6015(e), 6214(a), 6404(h), 7436, and 7429(b)(3), and that

courts have interpreted “determinations” in those sections to

involve de novo findings. But the standard of review the tax

court applies to “determinations” or “redeterminations” is not

illuminating here, where the dispute does not concern the

standard of review, but rather the scope of the tax court’s

jurisdiction.

Katz next argues that dictionarymeanings apply, and cites

the following definitions of “consider”: to “think carefully

about,” to “think or deem to be; regard as,” to “take into

account; bear in mind.” The American Heritage Dictionary of

the English Language 392 (4th ed. 2000). Those definitions,

listed first, second, and fourth, respectively, do not fit the

context of the statute nearly as well as the third definition,

which Katz neglected to mention: to “form an opinion about;

judge.” Id. As the government observes, it is unlikely that

Congress enacted “§ 6226(d)(1) to enable a partner to raise an

argument pertaining to timeliness about which the Tax Court

may only ruminate.”

Katz also raises a meritless argument based on a

dictionary’s usage example: “[h]e considered the cost before

buying the new car.” The Random House Dictionary of the

English Language 312 (1967). Katz argues from this example

that “[l]ike the fixed cost of a car, a court can consider

established facts (the filing date of a return, etc.) but must not

‘determine’ if a tax return position is accurate for statute of

limitations or deficiencyprocedures.” Car salespersons might

dispute the argument’s premise that the cost of a car is

“fixed.” But even if the example given had involved

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MK HILLSIDE PARTNERS V. CIR 11

consideration of an immutable item, it would still be just

that—a single nonlimiting example. It would not show that

one can consider only “fixed” items.

The closest analogy Katz draws is to Sections 6214(b)

and (c), both of which discuss considering facts for the

purpose of redetermining a deficiency for one period without

making a determination as to another period. Section 6214(b)

provides:

The Tax Court in redetermining a deficiency

of income tax for any taxable year or of gift

tax for any calendar year or calendar quarter

shall consider such facts with relation to the

taxes for other years or calendar quarters as

may be necessary correctly to redetermine the

amount of such deficiency, but in so doing

shall have no jurisdiction to determine

whether or not the tax for any other year or

calendar quarter has been overpaid or

underpaid.

Section 6214(c) includes the same idea. While these sections

limit the use of the “considered” information, they do not

support Katz’s argument. First, the considered information is

actually used. Second, Section 6214 expressly limits the Tax

Court’s jurisdiction in a manner that Section 6226(d) does

not. Moreover, Katz’s reading does not make much sense in

the context of Section 6226(d), which, to be useful to any

taxpayer, requires the court to be able to act on a petitioner’s

assertion that the statute of limitations has run.

Indeed, Katz ultimately does not propose a “pure

contemplation” interpretation. Instead, Katz argues that the

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12 MK HILLSIDE PARTNERS V. CIR

tax court should dismiss partners from the partnership case

based on consideration of:

any undisputed fact, including but not limited

to: (1) whether a partner filed a personal

return for the tax year in issue; (2) the date of

the filing of the return; (3) whether the IRS is

currently examining the partner for the tax

year at issue in the partnership-level

proceeding; (4) whether the IRS issued a

notice of deficiency to the partner; and

(5) whether the partner executed any

extension of the applicable statute of

limitations.

This “undisputed facts” interpretation follows from none of

the bases Katz asserts: the plain language of the statute,

dictionary meanings and examples, or analogy to Section

6214(b) and (c).

Katz’s argument is also in tension with Woods, which

held that “[p]rohibiting courts in partnership-level

proceedings from considering the applicability of penalties

that require partner-level inquiries would be inconsistent with

the nature of the ‘applicability’ determination that TEFRA

requires.” 134 S.Ct. at 563–64. Woods also made clear that a

partnership-level applicability determination is not the same

as determining whether a partner will be required to pay a

penalty, which must occur at the partner-level stage. Id. at

564.

While Woods did not involve Section 6226(d), “[w]e are

‘bound not only by the holdings of [the Supreme Court’s]

decisions but also by their mode of analysis.’” United States

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MK HILLSIDE PARTNERS V. CIR 13

v. Van Alstyne, 584 F.3d 803, 813 (9th Cir. 2009) (quoting

Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en

banc) (alteration in Van Alstyne)). By holding that a

partnership proceeding is applicable to Katz because his

limitations period is open, without purporting to determine

whether Katz in fact must pay any penalty or adjustment, the

Tax Court’s decision is consistent with Woods’s mode of

analysis. Consistent with Woods, the procedure followed here

contemplates further partner-level proceedings.

B. Katz’s Judicial Estoppel Argument Fails

Katz argues that the IRS is judicially estopped from

arguing that omission of a nonpartnership item can extend the

time to assess tax on partnership items due to a purportedly

contrary position it took in oral argument in Curr-Spec

Partners, L.P. v. Commissioner, 579 F.3d 391 (5th Cir. 2009).

The tax court, citing New Hampshire v. Maine, 532 U.S. 742,

755–56 (2001), rejected this argument, “declin[ing] to apply

the doctrine in this case based solely on the statement of an

attorney made during oral argument in a different case.”

Although “[a]dditional considerations may inform the

doctrine’s application in specific factual contexts,” “several

factors typically inform the decision whether to apply”

judicial estoppel:

First, a party’s later position must be “clearly

inconsistent” with its earlier position. Second,

. . . whether the party has succeeded in

persuading a court to accept that party’s

earlier position, so that judicial acceptance of

an inconsistent position in a later proceeding

would create “the perception that either the

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14 MK HILLSIDE PARTNERS V. CIR

first or the second court was misled.” . . . A

third consideration is whether the party

seeking to assert an inconsistent position

would derive an unfair advantage or impose

an unfair detriment on the opposing party if

not estopped.

New Hampshire, 532 U.S. at 750–51 (citations omitted).

Whether or not counsel’s answer to a question at oral

argument in Curr-Spec was inconsistent with the IRS’s

position here, the statutory construction the tax court adopted

here is consistent with the decision in Curr-Spec, which held

that “the Tax Court does not overreach its jurisdiction in

partnership-level proceedings when, for limitations purposes,

it considers whether a partner’s individual tax return remains

open to assessment.” 579 F.3d at 401. Curr-Spec is thus not

in conflict with the IRS’s position or the Tax Court’s holding

here that “in a partnership-level proceeding we may consider

the partner’s period of limitations for the narrow purpose of

determining whether the partnership-level action may

proceed.”

Katz points to language in Curr-Spec stating that “[a]s

counsel for the Commissioner represented at oral argument

. . . ‘[i]t’s only to the extent that a partner’s individual statute

of limitations is still open that we could do an assessment.’”

579 F.3d at 398–99. This language does not address Katz’s

purported distinction between “considering” and

“determining” a partner’s assertion that the statute of

limitations has expired. Accordingly, there is no perception

that either the first or second court was misled on this issue.

For the same reason, it is unclear what “unfair advantage” the

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MK HILLSIDE PARTNERS V. CIR 15

IRS would garner from any purported inconsistency between

its positions in Curr-Spec and here.

Curr-Spec concluded that the practical result of its

holding was that the IRS “may issue an FPAA at any time,

subject only to the practical limitation that the FPAA may

affect only those partners whose individual returns remain

open.” Id. at 399. That holding in no way conflicts with the

IRS’s position here.

We need not, and do not, reach the IRS’s other arguments

for affirmance.6 Nor do we make any prediction regarding

the preclusive effect of the tax court’s holding in the

partnership-level proceeding on any subsequent partner-level

proceedings.7

6 The IRS did not raise Article III’s case or controversy requirement

below, but does so here as an alternative ground for affirmance. The IRS’s

theory is that because an FPAA proceeding would be purely theoretical if

no partnership returns remained open, the case or controversy requirement

would not be satisfied for such a proceeding. The IRS also argues in a

footnote that “[t]he omitted income ($198,000) may be a partnership item”

because the determination of whether a partnership is a sham is a

partnership item, and the facts relating to how the collar transactions were

used to inflate the basis of stock that was contributed to the partnership

“are underlying factual determinations as to the sham nature of the

partnership and thus may be partnership items.”

 

7 The parties apparently agree that accepting the IRS’s position means

that “the doctrine of res judicata or collateral estoppel would apply in the

[subsequent individual] deficiency proceeding,” but we do not adopt this

position as a holding. “Ordinarily both issue preclusion and claim

preclusion are enforced by awaiting a second action in which they are

pleaded and proved by the party asserting them. The first court does not

get to dictate to other courts the preclusion consequences of its own

judgment . . . .” 18 Charles Alan Wright & Arthur R. Miller, Federal

Practice and Procedure § 4405 (2d ed. 2016) (citing Smith v. Bayer

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16 MK HILLSIDE PARTNERS V. CIR

CONCLUSION

The decision of the Tax Court is

AFFIRMED.

Corp., 564 U.S. 299, 307 (2011) (“Deciding whether and how prior

litigation has preclusive effect is usually the bailiwick of the second court

. . . .”)).

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