Court Opinion

ID: 7805511
Source: CourtListenerOpinion
Date Created: 2022-09-01 00:00:20.306072+00
Date Added: 2024-06-11T16:30:01.755685
License: Public Domain

Case: 21-20258       Document: 00516455110        Page: 1    Date Filed: 08/31/2022

           United States Court of Appeals
                for the Fifth Circuit                           United States Court of Appeals
                                                                         Fifth Circuit

                                                                       FILED
                                                                 August 31, 2022
                                   No. 21-20258                    Lyle W. Cayce
                                                                        Clerk

   Donald E. Baxter; Frances P. Baxter,

                                                            Plaintiffs—Appellees,

                                       versus

   United States of America,

                                                         Defendant—Appellant.

                    Appeal from the United States District Court
                        for the Southern District of Texas
                             USDC No. 4:09-CV-1271

   Before Richman, Chief Judge, and Clement and Engelhardt,
   Circuit Judges.
   Kurt D. Engelhardt, Circuit Judge:
          The United States appeals the district court’s summary judgment
   rulings rendered in this federal income tax refund action filed by Plaintiffs-
   Appellees Donald E. Baxter and Frances P. Baxter. Because the district court
   erred in its jurisdictional determinations, we REVERSE the judgment of the
   district court and REMAND with instructions to dismiss for lack of
   jurisdiction. As stated below, we also deny the motion that has been carried
   with the case.
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                                                I.
           This appeal is the latest in a long line of tax suits involving limited
   partnerships that were organized in the mid-1980s by American Agri-
   Corp (“AMCOR”) and marketed to high-income professionals across
   the country. Our recent decision in one of these actions, Foster v. United
   States, 801 F. App’x 210, 211–12 (5th Cir. 2020)(unpub.), provides a helpful
   explanation of federal taxation of partnership income and the legislation gov-
   erning partnership-related audit and tax adjustment procedures that applies
   here:
                    A partnership is not a taxable entity. United States v.
           Woods, 571 U.S. 31, 38 (2013) (citing 26 U.S.C. § 701). Rather,
           it is a conduit through which “its taxable income and losses
           pass through to the partners.” Id. Even so, a partnership must
           file an informational tax return reflecting its income and losses,
           and the partners report their shares of the partnership’s tax
           items on their own individual returns. Id.; see also Irvine v.
           United States, 729 F.3d 455, 459 (5th Cir. 2013).
                  “Before 1982, examining a partnership for federal tax
           purposes was a tedious process.” Duffie v. United States, 600
           F.3d 362, 365 (5th Cir. 2010). To adjust an item on a
           partnership’s return, the IRS had to audit each partner
           separately, which led to duplicative proceedings and
           inconsistent results. See Woods, 571 U.S. at 38. Recognizing
           these difficulties, 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, §§ 401–07, 96 Stat. 324, 648–71.1 TEFRA created a

   1
     TEFRA’s partnership procedures were codified as amended at 26 U.S.C. §§ 6221–6234
   (2012). The Bipartisan Budget Act of 2015 [“the Act”], Pub. L. No. 114-74, § 1101, 129
   Stat. 584, 625–38, repealed those procedures and struck 26 U.S.C. § 7422(h), the
   jurisdictional provision at issue. But those changes do not apply here because the Act is
   effective only for tax years after 2017. We therefore proceed using the statutory provisions

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           single, unified proceeding for determining the tax treatment of
           all “partnership items,” i.e., those relevant to the partnership
           as a whole,2 at the partnership level. See Irvine, 729 F.3d at 459.
                  Under the TEFRA framework, “partnership-related
           tax matters are addressed in two stages.” Woods, 571 U.S. at 39.
           First, the IRS initiates an administrative proceeding at the
           partnership level to audit the partnership’s return and make
           any necessary adjustments to partnership items. Id. If the IRS
           adjusts any partnership item, it must notify the partners by
           issuing a Notice of Final Partnership Administrative
           Adjustment (“FPAA”). Rodgers v. United States, 843 F.3d 181,
           184 (5th Cir. 2016). The partnership, typically through its
           “tax-matters partner,”3 may challenge the FPAA in the
           United States Tax Court, the Court of Federal Claims, or an
           appropriate district court. Irvine, 729 F.3d at 460 (citing 26
           U.S.C. § 6226(a), (b)). If a partnership-level challenge is filed,
           each partner is deemed a party to the case and is bound by its
           outcome. Rodgers, 843 F.3d at 185 (citing 26 U.S.C.
           § 6226(c)(1)). “Once the adjustments to partnership items
           have become final, the IRS may undertake further proceedings
           at the partner level to make any resulting ‘computational

   applicable to the relevant time period, i.e., tax years 1984 and 1985. All citations to the
   Internal Revenue Code and Treasury regulations refer to the versions applicable to tax
   years 1984 and 1985.
   2
     The term “partnership item” encompasses all items that are “more appropriately
   determined at the partnership level than at the partner level.” Irvine, 729 F.3d at 459
   (quoting Weiner v. United States, 389 F.3d 152, 154 (5th Cir. 2004)). These include “the
   legal and factual determinations that underlie the determination of the amount, timing, and
   characterization of items of income, credit, gain, loss, deduction, etc.” Id. (quoting Treas.
   Reg. § 301.6231(a)(3)-1(b)). “The tax treatment of nonpartnership items,” on the other
   hand, “requires partner-specific determinations that must be made at the individual
   partner level.” Id. (quoting Duffie, 600 F.3d at 366).
   3
    The tax-matters partner is “the partner designated to act as a liaison between the
   partnership and the IRS in administrative proceedings and as the representative of the
   partnership in judicial proceedings.” Duffie, 600 F.3d at 366 n.1.

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           adjustments’ in the tax liability of the individual partners.”
           Woods, 571 U.S. at 39 (citing 26 U.S.C. § 6231(a)(6)). The IRS
           can directly assess most computational adjustments against the
           partners, and the partners can challenge those assessments in
           post-payment refund actions. See id. (citing 26 U.S.C.
           § 6230(a)(1), (c)).
                   District courts generally have subject-matter
           jurisdiction over partner-level refund actions. Rodgers, 843
           F.3d at 186 (citing 28 U.S.C. §§ 1340, 1346(a)(1); Irvine, 729
           F.3d at 460). But, with limited exceptions, TEFRA deprives
           courts of jurisdiction over claims for refunds “attributable to
           partnership items.” Irvine, 729 F.3d at 460 (quoting 26 U.S.C.
           § 7422(h)). In other words, “[i]f the refund is attributable to
           partnership items, section 7422(h) applies and deprives the
           court of jurisdiction. If . . . the refund is attributable to
           nonpartnership items, then section 7422(h) is irrelevant, and
           the general grant of jurisdiction is effective.” Rodgers, 843 F.3d
           at 190 (alteration in original) (quoting Irvine, 729 F.3d at 461).
           By 1987, the United States Internal Revenue Service (“IRS”) had
   begun investigating AMCOR partnerships on suspicion that they were
   “impermissible tax shelters.” Duffie, 600 F.3d at 367. In April 1991, after
   the investigation concluded, the IRS issued Notices of Final Partnership
   Administrative Adjustment (“FPAAs”) to the tax-matters partners of
   each of the partnerships. The IRS determined that the partnerships actu-
   ally engaged in a “a series of sham transactions,” rather than farming ac-
   tivities, and proposed adjustments disallowing several listed farming ex-
   penses and other deductions.
          After various proceedings and negotiations in tax court, 4 stipulated
   tax court decisions were entered, on July 19, 2001, relative to many of the

   4
    This background information is discussed, at length, in our prior cases. See Foster, 801 F.
   App’x at 213; Rodgers, 843 F.3d at 188–90; Irvine, 729 F.3d at 458–59.

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   AMCOR partnerships, including the three partnerships in which Donald
   Baxter (“Baxter”) owned limited partnership interests—Oasis Date Asso-
   ciates (“ODA”), Pump Station III Associates (“PS3”), and Agri-Ven-
   ture 1985 (“AV85”). The decisions set forth the applicable stipulated
   monetary “adjustments to partnership items” for the specified partner-
   ship and state:
                 That the assessment of any deficiencies in income tax
          that are attributable to the adjustments to partnership items
          for tax year 1984 and 1985 are not barred by the provisions
          of I.R.C. § 6229.” 5
   Thereafter, on September 2, 2002, the IRS assessed additional taxes
   against the Baxters for tax years 1984 and 1985 that were attributable to the
   limited partnership interests that Baxter owned in ODA, PS3, and AV85.

   5
    The decision for each partnership accompanied a “Motion for Entry of Decisions
   Pursuant to Rule 248(b),” stating, in paragraphs 8 and 9:
                  8. The respondent and the tax matters partner for each of the
          partnerships whose partnership items are in dispute in the FPAA Cases
          have reached contingent agreements with respect to all of the disputed
          partnership items at issue in the FPAA Cases. The portion of the
          contingent agreement that relates to the partnership items at issue in these
          proceedings is reflected in the Decisions submitted herewith.
                  9. All partners in each partnership whose partnership items are to
          be determined in the FPAA Cases and who meet the interest requirements
          of I.R.C. § 6226(d) are deemed to be parties to those partnership
          proceedings pursuant to the provisions of I.R.C. § 6226(c) and Rule 247(a)
          of the Tax Court’s Rules of Practice and Procedure and upon entry of the
          Decision and that Decision becoming final, will be bound by the
          determination of the partnership items set forth therein, and will be
          assessed any additional tax resulting from the adjustments contained in the
          Decision documents pursuant to the provisions of I.R.C. §§ 6225, 6230(a)
          and 6231(a)(6) within the time period provided by I.R.C. § 6229(d).

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             After promptly paying the additional taxes, the Baxters filed this fed-
   eral tax refund action in August 2004. In support of their refund claims, the
   Baxters contend the 2002 assessment was improper because no preceding
   deficiency notice was issued, in accordance with 26 U.S.C. § 6213, and, ap-
   plying 26 U.S.C. § 6501, the assessment was untimely. The IRS contests the
   merits of the Baxters’ contentions and maintains that subject matter jurisdic-
   tion is precluded by 26 U.S.C. § 7422(h).6 Considering cross motions regard-
   ing these issues, the district court granted summary judgment in the Baxters’
   favor. This appeal followed.
                                                  II.
             On appeal, the IRS argues that the district court’s summary judgment
   rulings cannot be reconciled with our decisions in Foster, 801 F. App’x at
   214–16; Rodgers 843 F.3d at 190–97; Irvine, 729 F.3d at 459–60; Kercher v.
   United States, 539 F. App’x 517, 521–23 (5th Cir. 2013); Scott v. United States,
   437 F. App’x 281 (5th Cir. 2011)(unpub.)(affirming for reasons stated in
   district court’s opinion); Curr-Spec Partners, L.P. v. Comm’r of Internal
   Revenue, 579 F.3d 391, 395–400 & n. 20 (5th Cir. 2009); and Weiner v. United

   6
       Although § 7422(h) was repealed in 2015, it applies to this dispute. See note 1. It states:
             § 7422. Civil Actions for Refund
             (a)-(g) [omitted]
             (h) Special rule for actions with respect to partnership items
               No action may be brought for a refund attributable to partnership items (as
             defined in section 6231(a)(3) except as provided in section 6228(b) or section
             6230(c).
   See 28 U.S.C. § 7422(h) (repealed 2015).

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   States, 389 F.3d 152, 155–59 (5th Cir. 2004). Despite the Baxters’ substantial
   efforts to convince us otherwise,7 we agree.
           As have other AMCOR partners seeking refunds, the Baxters contend
   that the 2002 assessment is time-barred by 26 U.S.C. § 6501, because the
   April 1991 FPAAs for the three partnerships were issued more than three
   years after the filing dates of their joint individual tax returns (reflecting
   partnerships losses) in 1985 (for tax year 1984) and in 1986 (for tax year 1985).
   The Baxters also contend the assessment was invalid because it was not
   preceded, in accordance with 26 U.S.C. § 6213, by the issuance of a notice of
   deficiency.
           A. Untimely Assessment
           We have previously determined that 26 U.S.C. § 7422(h) deprives
   district courts of subject matter jurisdiction over refund actions—whether
   filed by “settled” or “unsettled” AMCOR partners—that are premised on
   § 6501’s time limitation. See Foster, 801 F. App’x at 215–16 (unsettled);
   Rodgers, 843 F.3d at 183, 188-92 (settled); Irvine, 729 F.3d at 462 (settled);
   Kercher, 539 F. App’x at 521-23 (unsettled); Scott, 437 F. App’x at *2-4
   (settled). Our analysis in all of these decisions begins with our holding, in
   Weiner, that the § 6229 assessment period is a “partnership item” for
   purposes of the statutory prohibition, in 26 U.S.C. § 7422(h), against refund
   actions attributable to “partnership items.” See Foster, 801 F. App’x at 215;
   Rodgers, 843 F.3d at 190 & n.55 (quoting Irvine, 729 F.3d at 461 (citing Weiner,
   389 F.3d at 157–58)).8 And “where a basis for a § 6229 extension [of

   7
     Notably, one or both of the Baxters’ counsel of record have served as appellate counsel
   in all of the foregoing matters except Curr-Spec Partners, L.P., which unlike the others, was
   not a refund action.
   8
    In Weiner, we reasoned: “The timeliness of an FPAA affects the IRS’s ability to make
   adjustments to partnership items, which in turn affects all partners alike. This

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   § 6501(a)’s three-year period] is asserted, any limitations determination with
   regard to § 6501(a) must also involve the resolution of § 6229.” Irvine, 729
   F.3d at 461. In other words, “[w]here both are at issue, the § 6501 period
   cannot be separated from the § 6229 period.” Id. Thus, where
   the § 6501 limitations period asserted in support of an individual partner’s
   refund claim cannot be determined without reference to the government’s
   asserted basis for extension under § 6229, a partnership item, § 7422(h) bars
   consideration of the refund action. See Rodgers, 843 F.3d at 191; Irvine, 729
   F.3d at 461–62.
            The same analysis applies here, despite the Baxters’ assertions that,
   by virtue of 26 U.S.C. § 6226(c) and § 6226(d)(2), Baxter was not a “party”
   to the partnership proceedings in tax court and, even if he were a party, the
   tax court decisions involving ODA, PS3, and AV85 addressed § 6229’s time
   period, not § 6501’s. Our decision in Rodgers expressly rejected the same
   “nonparty” argument that the Baxters raise here. Rodgers, 843 F.3d at 192
   (citing Irvine, 729 F.3d at 462).9 The Baxters’ emphasis of the tax court
   decisions’ reference to § 6229, not § 6501, likewise is unavailing.

   determination is more appropriately made at the partnership level. . . . The result advocated
   by the taxpayers here is at odds with TEFRA’s goal of consolidating decisions that affect
   the partnership as a whole.” 389 F.3d at 158.
   9
     In Prati v. United States, 603 F.3d 1301, 1305–07 & n.4 (Fed. Cir. 2010), the Federal
   Circuit rejected such reasoning as “circular” and lacking merit. We agree with this
   characterization. The Baxters’ non-party argument turns on the exception in 26 U.S.C. §
   6226(d)(1)(B) to the “party” status that 26 U.S.C. § 6226(c) confers upon any person who
   was a partner during the partnership taxable year. Deciding the applicability of
   § 6226(d)(1)(B), however, relative to the expiration of the “period within which any tax
   attributable to such partnership items may be assessed against that partner” would require
   the very consideration of the asserted § 6229 extensions of § 6501’s limitation period that
   § 7422(h) precludes.

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          As stated above, where determining whether a tax assessment
   complies with § 6501’s three-year limitation period necessitates a
   determination of whether § 6229 has extended that period, as is true here,
   our decisions have repeatedly concluded that a “partnership item” is
   presented for determination. And § 7422(h) prohibits refund action courts
   from deciding partnership items in the first instance or re-evaluating a tax
   court’s determination of those items. Rodgers, 843 F.3d at 192 (“‘a refund
   court litigating or re-litigating a partnership item, such as the merits of the
   asserted § 6229 basis for an extension of the limitations period, is exactly the
   result prohibited by TEFRA’”) (quoting Irvine, 729 F.3d at 462). Thus, in
   this instance, the district court lacked subject matter jurisdiction over the
   Baxters’ § 6501 refund claims and reversibly erred in concluding the
   contrary.
          B. Absence of Deficiency Notice
          The district court also determined that the IRS’s failure to issue
   deficiency notices to the Baxters for the 2002 tax assessment requires a
   refund of the additional sums paid. We likewise disagree with this
   determination.
          Under TEFRA, a deficiency notice generally is not required where a
   partner is assessed for a “computational adjustment.” See 26 U.S.C.
   § 6230(a) (repealed 2015); see also § 6231(a)(6) (repealed 2015)
   (“‘computational adjustment’ means the change in the tax liability of a
   partner which properly reflects the treatment under this subchapter of a
   partnership item”).10 A deficiency notice is necessary, however, for “any

   10
      Section 6223 addresses the notices that must be provided to partners when an
   administrative partnership proceeding commences and completed. See 26 U.S.C. § 6223
   (repealed 2015) .

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   deficiency attributable to—(i) affected items [requiring] partner level
   determinations. . . .” See 26 U.S.C. § 6230(a)(2)(A)(i) (repealed 2015).
   Citing § 6230(a)(2)(A)(i), the Baxters have asserted, and the district court
   agreed, that their 2002 assessment constitutes a “deficienc[y] attributable to
   [an] affected item[] [requiring] a partner level determination[]”—whether
   “a extension to their [§] 6501(a) [assessment] deadline existed.”
          As initial matter, we note that the absence of a deficiency notice was
   not asserted in the Baxters’ administrative refund claim. Thus, the district
   court erred in considering this basis for relief in the Baxters’ refund suit.
   See Mallette Bros. Const. Co., Inc. v. United States, 695 F.2d 145, 155 (5th Cir.
   1983) (variance doctrine bars taxpayers from raising grounds for recovery in
   refund suits that were not previously set forth in the administrative refund
   claim); see also 26 U.S.C. § 7422(a) (no suit or proceeding in court for
   recovery of income tax until administrative claim for refund has been duly
   filed according to pertinent provisions of law and “the regulations of the
   Secretary established in pursuance thereof”); 26 C.F.R. § 301.6402–2,
   Treas. Reg. § 301.6402–2(b) (“The claim must set forth in detail each
   ground upon which a credit or refund is claimed and facts sufficient to apprise
   the Commissioner of the exact basis thereof.”). El Paso CGP Company,
   L.L.C. v. United States, 748 F.3d 225, 229 (5th Cir. 2014), which was cited by
   the Baxters, offers no reprieve from this requirement because, unlike in El
   Paso, no events relevant to taxpayers’ notice of deficiency argument occurred
   after they filed their administrative refund claim.
          Even if the opposite were true, the Baxters’ argument that notice was
   required—because their deficiency was attributable to a violation of their
   § 6501 assessment deadline—misunderstands the meaning of “deficiency”
   as that term is defined by § 6211(a). Specifically, a “deficiency” is the
   monetary “amount by which the tax imposed by subtitle A or B, or chapter
   41, 42, 43, or 44” exceeds the amounts shown on the taxpayer’s return and

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   any amounts previously assessed or collected, after account for rebates. See
   26 U.S.C. § 6211(a). Thus, a deficiency for purposes of § 6230(a)(2)(A)(i) is
   not defined as the amount of money, if any, that the taxpayer asserts is owed
   based on a statute of limitation. See Rodgers, 843 F.3d at 197 (taxpayer
   assertion that deficiency was $0 contravenes the statutory definition of
   deficiency). Furthermore, the 2002 assessment was, as stated in the tax court
   decisions for the three partnerships, “attributable to the adjustments of
   partnership items” on the relevant partnership returns, not a statute of
   limitations. 11
          C. IRA Agent Janis Smith’s Statement
          Among their other arguments, the Baxters contend their discovery of
   a statement by IRA Agent Janis Smith renders our prior decisions
   inapplicable here. The Baxters are wrong. At issue is Agent Smith’s
   statement, in a undated declaration taken from the Foster record, that “part
   of the preparation of the notice of computational adjustment is to calculate if
   the statute of limitations for assessment is open for the taxpayer.” Assuming
   the truth of the statement, an IRS agent’s practice of confirming that the
   extended assessment period, (provided by § 6229) has not expired, in
   preparing a notice of computational adjustment, cannot and does not
   override statutory jurisdictional limitations applicable to refund actions as a
   matter of law. Again, “where a basis for a § 6229 extension is asserted, any
   limitations determination with regard to § 6501(a) must also involve the
   resolution of § 6229.” Irvine, 729 F.3d at 461. And § 7422(h) prohibits

          11   Nor is there any assertion that the Baxters’ 2002 assessment reflects any
   amounts inconsistent with Baxter’s proportionate share of the partnership adjustments
   reflected in the relevant tax court decisions.

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   federal court adjudications of the merits of a § 6229 extension of the § 6501
   limitations period. Rodgers, 843 F.3d at 194; Irvine, 729 F.3d at 461–62.
                                          III.
          The district court erred by not dismissing Plaintiffs-Appellees
   Baxters’ refund claims for lack of subject matter jurisdiction. Accordingly,
   we REVERSE the judgment of the district court and REMAND with
   instructions to dismiss for lack of jurisdiction.
          Additionally, Plaintiffs-Appellees’ “Motion to Strike and Bar
   Consideration of Portions of the Opening Brief for the United States and the
   Reply Brief for the United States,” which was carried with the case, is
   DENIED.

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