FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

COMMISSIONER OF INTERNAL 

REVENUE,

No. 09-70219 Appellant,

Tax Court No.

v.  5282-05

JT USA, LP, JTR-LLC, TAX OPINION

MATTERS PARTNER,

Appellees. 

On Appeal from the Order of the

United States Tax Court

Argued and Submitted

October 6, 2010—Pasadena, California

Filed January 14, 2011

Before: Harry Pregerson, Dorothy W. Nelson and

Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Ikuta

805
COUNSEL

Teresa E. McLaughlin and Joan I. Oppenheimer, Department

of Justice, Washington, D.C., for the appellant.

Richard V. Vermazen, Law Office of Richard V. Vermazen,

San Diego, California, for the appellees.

Ernest S. Ryder and Lauren A. Rinsky, Ernest S. Ryder &

Associates, Inc., APLC, San Diego, California, for the appellees. 

OPINION

IKUTA, Circuit Judge:

This is an appeal from a tax court’s interlocutory order in

a partnership tax proceeding. We dismiss the appeal because

we lack appellate jurisdiction under either the practical finality doctrine or the collateral order doctrine.

I

John Ross Gregory and his wife Rita founded JT USA, LP,

a limited partnership, in the 1970s. In 2000, the Gregorys

accepted an offer to sell the company that would result in a

$32 million capital gain. According to the IRS, the Gregorys

decided to engage in a so-called Son-of-BOSS transaction1 to

avoid the capital gains that they would otherwise incur. In furtherance of this scheme, the IRS alleges, the Gregorys trans1For a detailed description of the Son-of-Boss scheme, see Kligfeld

Holdings v. Comm’r, 128 T.C. 192 (2007). In essence, it is a tax shelter

whereby a taxpayer creates an artificial tax loss to offset a taxable gain.

Such transactions lack economic substance and so are disregarded by the

IRS when calculating a taxpayer’s gains and losses. See Coltec Indus., Inc.

v. United States, 454 F.3d 1340, 1357 (Fed. Cir. 2006). 

808 CIR v. JT USA, LP
ferred ownership of JT USA to two different entities (JT

Racing, Inc., an S corporation, and JT Racing, LLC, a limited

liability company), both of which they controlled. That same

year, JT USA engaged in a series of transactions generating

a $32.5 million loss. As a result, JT USA did not pay any capital gains taxes in 2000. 

Under the applicable statute of limitations, see 26 U.S.C.

§§ 6501, 6229(f)(1), the IRS had four years to assess a tax

deficiency against JT USA for the 2000 tax year. In October

2004, a few months before the statute of limitations ran, the

IRS issued a notice of final partnership administrative adjustment (FPAA) to JT USA for the 2000 tax year. An FPAA is

a proposed tax adjustment calculated by the IRS, which initiates a TEFRA2

 proceeding. 

The IRS made a clerical error in its issuance of the FPAA,

however, in failing to notify the Gregorys about the TEFRA

proceeding, as required by statute; instead, it notified only JT

USA. See 26 U.S.C. § 6223(d)(1). Because of this error, the

IRS was obliged to give the Gregorys the right to elect not to

participate in the TEFRA proceeding. See 26 U.S.C.

§ 6223(e)(3)(B). The Gregorys notified the IRS that they

elected to participate in the TEFRA proceeding with respect

to their direct interests in JT USA3 (i.e., their personal ownership interests in JT USA), but not with respect to their indirect

interests4 (i.e., their ownership interests in JT Racing, Inc.,

2TEFRA stands for the Tax Equity and Fiscal Responsibility Act of

1982, which governs partnership taxes. 

3A direct interest is one held by a direct partner, i.e., someone who

holds a partnership interest directly in the partnership, and not through

another entity. 

4An indirect interest is one held by an indirect partner, i.e., someone

who holds a partnership interest “through 1 or more pass-thru partners.”

26 U.S.C. § 6231(a)(10). A partnership or S corporation that owns a partnership interest in another entity is deemed to be a “pass-thru partner,” see

26 U.S.C. § 6231(a)(9), and the owner of that partnership or S corporation

is deemed to be an indirect partner holding only an indirect interest in that

entity, see id. § 6231(a)(10). 

CIR v. JT USA, LP 809
and JT Racing, LLC, which gave the Gregorys an indirect

ownership interest in JT USA). 

After the Gregorys’ election, the IRS could not proceed

against the Gregorys with respect to their indirect interests in

JT USA within the TEFRA proceeding. Although the IRS still

had an additional year to bring such an action outside the proceeding, see 26 U.S.C. § 6229(f)(1), the IRS failed to do so,

and the statute of limitations for bringing such an action ran

at the end of 2005. Nor could the IRS proceed against JT Racing, Inc. and JT Racing, LLC within the TEFRA proceeding,

because these entities were tax immune; the IRS may impose

taxes only on the shareholders of S corporations and limited

liability companies, not on the entities themselves. See generally 26 U.S.C. § 1363(a) (S corporations generally not subject

to income tax); 26 U.S.C. § 701 (partnerships not subject to

income tax); 26 C.F.R. § 301.7701-3 (LLC may be treated as

a partnership). 

Accordingly, by 2006, the IRS had only two options to

recover the alleged tax deficiency. The IRS needed either to

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

relevant time during 2000, or to invalidate the Gregorys’ election out of the TEFRA proceeding with respect to their indirect interests in JT Racing, Inc. and JT Racing, LLC. 

The Gregorys brought this dispute to a head in November

2006, when they filed a petition with the Tax Court to eliminate themselves from the TEFRA proceeding, and substitute

JT Racing, LLC in their place. They argued that when JT

USA executed the alleged Son-of-Boss transaction, they were

only indirect partners of JT USA, and because the IRS had not

assessed a tax deficiency against them before the statute of

limitations had run, they had no tax liability at all. In

response, the IRS argued that taxpayers are not authorized to

“bifurcate” their election to participate in TEFRA proceedings, and therefore the Gregorys’ election out with respect to

their indirect interest in JT USA was invalid. 

810 CIR v. JT USA, LP
The Tax Court rejected the Gregorys’ argument that they

should be dismissed because they had no direct interests in JT

USA at the relevant time, noting that the case was only at the

pretrial stage, and it had not yet reached the merits of that

issue. The Tax Court agreed, however, that the Gregorys’

bifurcated election was valid. Accordingly, in an October 8

order, it dismissed the Gregorys as indirect partners from the

TEFRA proceeding and allowed JT Racing, LLC to intervene.

The IRS asked the Tax Court to certify this October 8 order

for interlocutory appeal under 26 U.S.C. § 7482(a)(2)(A). The

Tax Court declined, acknowledging that as a “practical matter, [the October 8 order] decided the case largely in favor of

the [Gregorys],” but noting that it had not “enter[ed] a final

decision in the case” and that the Gregorys could yet face liability if it turned out they were direct partners at the time of

the alleged Son-of-Boss transaction. Nevertheless, the Tax

Court did not object to the IRS filing a notice of appeal. 

II

[1] The threshold question before us is whether we have

jurisdiction to hear the IRS’s appeal of the Tax Court’s interlocutory ruling. Absent certain exceptions not applicable here,

Congress has given us appellate jurisdiction only over “final

decisions” of the district court and Tax Court. 28 U.S.C.

§ 1291 (appellate review only over “final decisions” of the

district court); Cheng v. Comm’r, 878 F.2d 306, 309 (9th Cir.

1989) (applying the final decision rule to review of Tax Court

decisions). While Tax Court determinations in a partnership

proceeding such as this “have the force and effect of a decision of the Tax Court . . . and [are] reviewable as such,” 26

U.S.C. § 6226(g), they are not deemed final until the “court’s

order entering the decision,” 26 U.S.C. § 7459(c). 

[2] Here the Tax Court’s order decided only whether the

Gregorys’ bifurcated election was valid, and did not address

the merits of the IRS’s claim. In determining whether we have

CIR v. JT USA, LP 811
jurisdiction over such interlocutory orders, we treat our jurisdiction over appeals of Tax Court decisions “as identical to

appellate jurisdiction over district courts.” Brookes v.

Comm’r, 163 F.3d 1124, 1129 (9th Cir. 1998). In Brookes, we

held that a Tax Court order resolving disputes relating to

some but not all of the tax years involved in the case was not

appealable, unless the Tax Court certified its partial decision

under Rule 54(b) of the Federal Rules of Civil Procedure. Id.

By the same token, the Tax Court’s decision here not to certify its interlocutory order deprives us of jurisdiction, unless

the order is suitable for appellate review based on some other

principle applicable to district court decisions. The parties

have identified only two such principles here: the “practical

finality” doctrine articulated in Gillespie v. U.S. Steel Corp.,

379 U.S. 148 (1964), and the collateral order doctrine discussed in Cohen v. Beneficial Industrial Loan Corp., 337 U.S.

541 (1949).

A

We have interpreted the practical finality doctrine narrowly. See Solis v. Jasmine Hall Care Homes, Inc., 610 F.3d

541, 544-46 (9th Cir. 2010) (per curiam). While Gillespie

“departed from the final judgment rule” by allowing federal

courts to treat an “obviously marginal case as final and

appealable” under certain circumstances, the Supreme Court

subsequently “closed the Gillespie door all but a crack” in

Coopers & Lybrand v. Liveway, 437 U.S. 463 (1978). Id. at

544. Accordingly, Solis held that appellate jurisdiction would

lie only: (1) if “the decision appealed was a marginally final

order,” (2) if it “disposed of an unsettled issue of national significance,” (3) if review of the decision “implemented the

same policy Congress sought to promote in § 1292(b)”; (4) if

the parties have alerted the reviewing court to the jurisdictional issue “before the parties and the court waste time analyzing merits”; and (5) the exercise of the practical finality

doctrine does not extend Gillespie “beyond the unique facts

of that case.” Id. at 544-45. In adding the fifth factor to the

812 CIR v. JT USA, LP
four enunciated in Service Employees International Union,

Local 102 v. County of San Diego (SEIU), 60 F.3d 1346 (9th

Cir. 1994), we explained that we are bound by Coopers &

Lybrand’s ruling that the Gillespie doctrine should be exercised only in “exceedingly rare” circumstances, to avoid rendering “the section 1291 finality requirement useless.” Id. at

545 (internal quotation marks omitted). Because Coopers &

Lybrand compelled that restrictive interpretation, we stated

that, even where the first four factors are satisfied, “ordinarily

interlocutory appeal is barred.” Id.

[3] The Tax Court’s order in this case does not meet the

first and second factors of our practical finality test. As to the

first factor, an order is “marginally final” when the “pending

proceedings have little substance and will not affect the

potentially dispositive and obviously central issue.” Wabol v.

Villacrusis, 958 F.2d 1450, 1454 (9th Cir. 1990) (emphasis

added). Here, the Tax Court must still determine, among other

things, whether the Gregorys were in fact no longer direct

partners at the relevant time. This factual issue has significant

consequences, because a determination in the IRS’s favor

could subject the Gregorys to personal tax liability. As to the

second factor, the question whether partners holding both

direct and indirect interests in a partnership may elect to participate in a TEFRA proceeding with respect to their indirect

interests, but not their direct interests, while “unsettled,” is not

an issue of “national significance.” While other partners

might attempt to bifurcate their interests as the Gregorys did,

this case is before us only because the IRS failed to issue the

Gregorys a timely notice of the commencement of a TEFRA

proceeding, and then missed the deadline for bringing a deficiency action against the Gregorys. When it takes the confluence of a clerical error and a missed deadline to make an issue

important to the IRS, it is not an issue of “national significance.” Cf. Gillespie, 437 379 U.S. at 154-55 (considering

whether plaintiffs could seek damages for wrongful death

other than those statutorily provided); SEIU, 60 F.3d at 1350

(considering the applicability of an exemption under the Fair

CIR v. JT USA, LP 813
Labor Standards Act to a county sued for failing to pay

nurses, park rangers, and probation officers overtime for

“standby” time). Finally, the parties do not meet the standard

set by the fifth factor: they have failed to explain why this

appeal represents the sort of “albino black bear that Gillespie

excepts from the ‘final decision’ requirement.” Solis, 610

F.3d at 545. 

Nor does Pauly v. U.S. Dep’t of Agriculture, 348 F.3d 1143

(9th Cir. 2003) (per curiam) weigh against this conclusion. In

Pauly, we held that a district court’s determination that fully

resolved the merits of a case was “practically final” despite

the court’s “extremely narrow” partial remand to an agency

solely for the purpose of “a mechanical recalculation” of the

amount due the plaintiffs. Id. at 1148. Under these circumstances, we concluded that delaying judicial review in order

for an agency to complete “a ministerial task, such as the calculation of damages” was unwarranted. Id. This narrow “practical finality” rule is not applicable here, where the Tax

Court’s determination did not even address, let alone resolve,

the merits of the case. 

B

[4] The Gregorys also argue that we have jurisdiction over

this appeal under the collateral order doctrine, which gives a

federal appellate court authority to review a narrow class of

decisions that does not “terminate the litigation, but must, in

the interest of ‘achieving a healthy legal system,’ nonetheless

be treated as ‘final.’ ” Digital Equip. Corp. v. Desktop Direct,

Inc., 511 U.S. 863, 867 (1994) (internal citation omitted). The

Supreme Court recently cautioned that the collateral order

doctrine “must ‘never be allowed to swallow the general rule

that a party is entitled to a single appeal, to be deferred until

final judgment has been entered.’ ” Mohawk Indus., Inc. v.

Carpenter, 130 S. Ct. 599, 605 (2009) (quoting Digital Equip.

Corp., 511 U.S. at 868). We must be cautious in applying this

doctrine, because once one order is identified as collateral, all

814 CIR v. JT USA, LP
orders of that type must be considered collaterally.

Richardson-Merrell, Inc. v. Koller, 472 U.S. 424, 439-40

(1985). Accordingly, the doctrine applies only if an order “[1]

conclusively determine[s] the disputed question, [2] resolve[s]

an important issue completely separate from the merits of the

action, and [3] [is] effectively unreviewable on appeal from

a final judgment.” In re Copley Press, Inc., 518 F.3d 1022,

1025 (9th Cir. 2008) (bracketed numbers in original) (quoting

Coopers & Lybrand, 437 U.S. at 468) (internal quotation

marks omitted). 

[5] The October 8 order does not meet this stringent standard. Although it undoubtedly resolves an important issue

separate from the merits, namely, whether the Gregorys’

bifurcated election was valid, the Tax Court’s decision on this

issue is not effectively unreviewable on appeal from a final

judgment. 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. “[A]n appeal

from the final judgment draws in question all earlier non-final

orders and all rulings which produced the judgment.” Grand

Canyon Trust v. Tucson Elec. Power Co., 391 F.3d 979, 986

(9th Cir. 2004) (quoting Munoz v. Small Bus. Admin., 644

F.2d 1361, 1364 (9th Cir. 1981) (internal quotation marks

omitted)). Because we conclude that the Tax Court order

qualifies under neither the practical finality doctrine nor the

collateral order doctrine, we lack jurisdiction over this appeal.

DISMISSED.

CIR v. JT USA, LP 815