Court Opinion

ID: 221402
Source: CourtListenerOpinion
Date Created: 2011-07-21 00:02:23+00
Date Added: 2024-06-11T17:28:50.177879
License: Public Domain

NOT FOR PUBLICATION

                    UNITED STATES COURT OF APPEALS                            FILED
                           FOR THE NINTH CIRCUIT                               JUL 20 2011

                                                                          MOLLY C. DWYER, CLERK
                                                                            U.S. COURT OF APPEALS

THOMAS INVESTMENT PARTNERS,                      No. 09-55638
LTD.; et al.,
                                                 D.C. No. 2:06-cv-07376-JFW-RZ
              Plaintiffs - Appellants,

  v.                                             MEMORANDUM*

UNITED STATES OF AMERICA,

              Defendant - Appellee.

THOMAS DIVISION PARTNERSHIP,                     No. 09-55639
L.P.; et al.,
                                                 D.C. No. 2:06-cv-07374-JFW-RZ
              Plaintiffs - Appellants,

  v.

UNITED STATES OF AMERICA,

              Defendant - Appellee.

THOMAS MASTER INVESTMENTS,                       No. 09-55641
L.P.; et al.,
                                                 D.C. No. 2:06-cv-07377-JFW-RZ

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Circuit Rule 36-3.
         Plaintiffs - Appellants,

 v.

UNITED STATES OF AMERICA,

         Defendant - Appellee.

HUNTINGTON/FOX INVESTMENTS,               No. 09-55642
L.P.; et al.,
                                          D.C. No. 2:06-cv-07380-JFW-RZ
         Plaintiffs - Appellants,

 v.

UNITED STATES OF AMERICA,

         Defendant - Appellee.

MAGUIRE PARTNERS MASTER                   No. 09-55650
INVESTMENTS, LLC and MAGUIRE
PARTNERS, INC., as Tax Matters            D.C. No. 2:06-cv-07371-JFW-RZ
Partner,

         Plaintiffs - Appellants,

 v.

UNITED STATES OF AMERICA,

         Defendant - Appellee.

              Appeal from the United States District Court

                                    2
                           for the Central District of California
                         John F. Walter, District Judge, Presiding

                           Argued and Submitted July 11, 2011
                                  Pasadena, California

Before: FERNANDEZ, RYMER, and TALLMAN, Circuit Judges.

        Plaintiffs - Appellants appeal the district court’s judgment in favor of the

United States after a consolidated bench trial on their respective challenges to final

partnership administrative adjustments (“FPAA”) the IRS issued to each for tax

years 2001 and 2002. 26 U.S.C. § 6226. We have jurisdiction pursuant to 28

U.S.C. § 1291, and we affirm.1

                                             I

        The district court did not abuse its discretion in admitting evidence

demonstrating that the transactions at issue were Arthur Andersen proprietary tax

products. Sochin v. Comm’r, 843 F.2d 351, 355 (9th Cir. 1988) (“We review the

trial court’s decision to admit or exclude evidence based on the issue of relevancy

for an abuse of discretion.”), abrogated on other grounds by Landreth v. Comm’r,

859 F.2d 643, 648–49 (9th Cir. 1988), as recognized by Keane v. Comm’r, 865

F.2d 1088, 1092 n.8 (9th Cir. 1989). Such evidence is highly relevant to the

        1
            The parties are familiar with the facts of the case so we do not repeat them
here.

                                             3
resolution of both factors of the economic substance inquiry applied by the court in

this case. Goldberg v. United States, 789 F.2d 1341, 1344 (9th Cir. 1986); Karme

v. Comm’r, 673 F.2d 1062, 1064 (9th Cir. 1982); accord Stobie Creek Invs., LLC v.

United States (Stobie I), 82 Fed. Cl. 636, 658–59 (2008), aff’d, 608 F.3d 1366

(Fed. Cir. 2010) (Stobie II).

      Neither did the court abuse its discretion by requiring that the parties submit

their direct testimony by declaration. FTC v. Enforma Natural Prods., Inc., 362

F.3d 1204, 1212 (9th Cir. 2004) (“We review issues relating to the district court’s

management of trial for abuse of discretion.”). The practice is explicitly authorized

by Local Rule 43-1 of the Central District of California, and we have previously

approved of its use in other cases. Kearney v. Standard Ins. Co., 175 F.3d 1084,

1094–95 (9th Cir. 1999) (en banc) (citing In re Adair, 965 F.2d 777, 779 (9th Cir.

1992), with approval).

      Neither did the court abuse its “broad discretion” by consolidating the

Appellants’ largely identical cases. Pierce v. Cnty. of Orange, 526 F.3d 1190,

1203 (9th Cir. 2008). The court appropriately determined that “the saving of time

and effort consolidation would produce” outweighed “any inconvenience, delay, or

expense that it would cause.” Huene v. United States, 743 F.2d 703, 704 (9th Cir.

1984) (citing Fed. R. Civ. P. 42(a)); see United States v. Howard, 480 F.3d 1005,

                                         4
1012 (9th Cir. 2007) (“We traditionally assume that judges, unlike juries, are not

prejudiced by impermissible factors.” (citation omitted)).

      We also reject Appellants’ claim that the court “ignored” their evidence and

thereby abused its discretion. The record convinces us that the court appropriately

considered the evidence Appellants offered both at trial and by post-trial filings

and simply resolved the disputed facts in the Government’s favor. Appellants’

disagreement with that resolution, without more, does not establish reversible

error. See Casebeer v. Comm’r, 909 F.2d 1360, 1365 (9th Cir. 1990) (rejecting the

taxpayer’s claim that the court erred by not crediting his testimony because, while

“such testimony [wa]s necessary ‘to prove that he had a bona fide profit motive,’

there is no requirement that the tax court believe him”).

      Finally, we agree with the court’s conclusion that Appellants were not

legally entitled to a jury trial. Suits filed against the United States must strictly

comport with the terms under which sovereign immunity has been waived.

Lehman v. Nakshian, 453 U.S. 156, 160–61 (1981). In authorizing FPAA suits,

Congress expressly provided that such suits “be tried by the court without a jury.”

Compare 28 U.S.C. § 2402, with 26 U.S.C. § 6226 (FPAA cause of action), and 28

U.S.C. § 1346(e) (jurisdiction for § 6226 suits). Appellants’ attempt to recast their

claims as “action[s] in the nature of a refund” in order to fall within the jury trial

                                            5
provision of § 2402 is contradicted not only by the clear terms of § 1346(e), but by

the jurisdictional statement each pled in their respective complaints.

                                           II

      We likewise find no error in the district court’s conclusion under the

economic substance doctrine that Appellants’ transactions were legal shams. Sacks

v. Comm’r, 69 F.3d 982, 986 (9th Cir. 1995) (reviewing de novo the legal

standards applied and the court’s application of the law to the facts, but reviewing

the court’s factual findings for clear error).

      First, the court appropriately considered (1) whether Appellants

demonstrated that either of the principals directing their respective transactions had

a business purpose for engaging in the transaction other than tax avoidance and (2)

whether either transaction had economic substance beyond the creation of tax

benefits. Casebeer, 909 F.2d at 1363 (quoting Bail Bonds by Marvin Nelson, Inc.

v. Comm’r, 820 F.2d 1543, 1549 (9th Cir. 1987)); see id. (rejecting the argument

that both inquiries must be concluded against the taxpayer “in order to hold that a

transaction is a sham”). Further, in evaluating the legal import of “economic

substance,” it correctly considered whether the transactions were “likely” to

produce a non-tax economic benefit. Id. at 1365 (citation omitted); see Knetsch v.

United States, 364 U.S. 361, 366 (1960) (concluding that a transaction was a sham

                                            6
because it “did not appreciably affect [the taxpayer’s] beneficial interest except to

reduce his tax” (internal quotation marks omitted) (citation omitted)); Stobie II,

608 F.3d at 1377 (“[Transaction] lacked economic reality . . . [because] there was

no reasonable possibility that the FXDOTs would return a profit.).

      Second, we find no error, let alone clear error, in any of the court’s factual

determinations. Sacks, 69 F.3d at 986. We reject Appellants’ overstated

contention that “the real world refutes the Government’s case.” The other price

quotes Appellants received did not contemplate inclusion of the return-minimizing

“Asian-style feature,” a material distinction. Moreover, the fact that Appellants

must rely on a market downturn that occurred nearly seven years after they entered

into their transactions to show that their call-option spread transactions would ever

have conferred a real-world benefit only bolsters the Government’s position. It

underscores the district court’s determination that the transactions were “extremely

unlikely” to confer a non-tax economic benefit on Appellants. See, e.g., Casebeer,

909 F.2d at 1365.

      Finally, we conclude that the court appropriately applied the law to the facts.

Sacks, 69 F.3d at 986. The evidence demonstrated that the transactions were

extremely unlikely to confer a non-tax benefit and that both principals engaged in

the transactions solely to create tax benefits. As such, the transactions amounted to

                                          7
legal shams, and the FPAAs were appropriate. Stobie II, 608 F.3d at 1375 (“The

economic substance doctrine seeks to distinguish between structuring a real

transaction in a particular way to obtain a tax benefit, which is legitimate, and

creating a transaction to generate a tax benefit, which is illegitimate.”).

                                          III

      Because we affirm the district court’s conclusion that the Appellants’

transactions were legal shams under the economic substance doctrine, we do not

reach the merits of its alternative holdings.2

      AFFIRMED.

      2
         Appellants waived their right to challenge the district court’s amended
determination that a 20% negligence penalty should apply by not adequately
contesting that determination in their opening briefs. Martinez-Serrano v. INS, 94
F.3d 1256, 1259 (9th Cir. 1996) (“Issues . . . not supported by argument are
deemed abandoned.”).
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