Thomas v. U.S.

• Citation: 166 F.3d 825
• Decision Date: 27 January 1999
• Docket Number: 98-3033,Nos. 97-4478,s. 97-4478
• Parties: -569, 99-1 USTC P 50,222 James B. THOMAS, Plaintiff-Appellee/Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant/Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 825

166 F.3d 825

83 A.F.T.R.2d 99-569, 99-1 USTC P 50,222

James B. THOMAS, Plaintiff-Appellee/Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant/Cross-Appellee.

Nos. 97-4478, 98-3033.

United States Court of Appeals,

Sixth Circuit.

Argued Oct. 29, 1998.

Decided Jan. 27, 1999.

James W. Childs (argued and briefed), Akron, Ohio, for Plaintiff-Appellee/Cross-Appellant.

S. Robert Lyons, U.S. Department of Justice, Tax Division, Washington, DC; Annette G. Butler, Asst. U.S. Attorney, Office of the U.S. Attorney, Cleveland, OH; Regina S. Moriarty (argued and briefed), Bruce R. Ellisen (briefed), U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, for Defendant-Appellant/Cross-Appellee.

Before: BOGGS, SUHRHEINRICH, and SILER, Circuit Judges.

SUHRHEINRICH, J., delivered the opinion of the court, in which SILER, J., joined. BOGGS, J. (pp. 834-35), delivered a separate opinion concurring in the result.

SUHRHEINRICH, Circuit Judge.

This case involves the tax consequences of an investment in sham transactions by a taxpayer. We must decide whether the taxpayer is entitled to a refund of deficiencies and penalties paid. We must also determine whether the interest penalty imposed by I.R.C. § 6621(c) (West 1989) (repealed 1989) requires an inquiry into the taxpayer's investment motive. We answer both questions in the negative. Accordingly, we AFFIRM the district court's grant of summary judgment upholding the deficiencies and penalties, and REVERSE the district court's denial of summary judgment holding that I.R.C. § 6621(c) requires a motive inquiry.

I. BACKGROUND

Taxpayer James B. Thomas began investing in various tax shelters in 1981. Based upon an initial investment of $12,000 and nonrecourse promissory notes, Thomas claimed a $10,000 loss in 1981, a $11,377.94 loss in 1982, and a $17,358 loss in 1983. Thomas also claimed investment tax credits for his investment in the tax shelters. Thomas used the claimed losses and credits to decrease his tax liability for the tax years 1980 through 1983.

The IRS audited Thomas' returns and disallowed the claimed losses and credits, asserting the tax shelters were shams. Accordingly, the IRS issued Thomas a notice of deficiency on June 18, 1990. The notice itemized the following deficiencies and penalties:

                Year  Deficiency    § 6653(a)     § 6653(a)(1)    § 6653(a)(2)     § 6659 4
                1 2 3
                1980    $4,235       $211.75           N/A           N/A            $1,270.50
                1981     1,826         N/A           $ 91.30         *                 547.80
                1982     9,527         N/A            476.35         **              1,479.90
                1983     3,796         N/A            189.80         ***               N/A
                * 50% of the interest due on $1,826
                ** 50% of the interest due on $9,527
                *** 50% of the interest due on $3,796
                

Additionally, the IRS determined that Thomas' underpayment was subject to I.R.C. § 6621(c), ⁵ which provides for an increased rate of interest.

Thomas did not petition for pre-payment review in the Tax Court and the IRS assessed the taxes and penalties on November 13, 1990. Thomas paid the assessed taxes, penalties, and interest on the following dates: November 9, 1995 for the tax year 1980; June 30, 1993 for the tax year 1981; June 6, 1995 for the tax year 1982; and October 30, 1995 for the tax year 1983.

Thomas made several attempts to recover the amounts paid to the IRS. In July of 1993, Thomas filed three Forms 1040X (Amended U.S. Individual Income Tax Return) for the tax years 1981, 1982, and 1983. By this time, Thomas had paid his taxes in full for the 1981 tax year but not for the tax years 1982 and 1983. The IRS sent Thomas three separate letters, all dated September 7, 1993, that stated it was "unable to process" the claims. The IRS informed Thomas it could not process his claim for the 1981 tax year because he had not provided enough supporting information. The IRS informed Thomas it could not process the claims for the 1982 and 1983 tax years because he had not fully paid his taxes for those years.

Thomas claims he mailed on July 1, 1994, by regular mail, four separate Forms 843 (Claim for Refund and Request for Abatement) for the tax years 1980 through 1983 to both the IRS and to an Akron revenue officer. The Government asserts that the IRS only received the Form 843 for the 1983 tax year. In response to the Form 843 received, the IRS sent Thomas a letter dated September 13, 1994 advising him it was "unable to process" his claim for the 1983 tax year because he had not paid the balance due for that year. Thomas has no documentation verifying that the IRS received, or even that he sent, the Forms 843 for the tax years 1980, 1981, or 1982.

Thomas mailed to the IRS another set of four separate Forms 843 for the tax years 1980 through 1983, all dated November 1 1995. Thomas indicated on the Forms 843 that he had mailed a prior claim for each year on July 1, 1994 but that the IRS had not acted on those claims. Thomas attached copies of the Forms 843 that he purportedly mailed on July 1, 1994. The IRS denied Thomas' refund claims in four separate letters dated June 27, 1996. On July 23, 1996, Thomas filed a complaint in district court seeking a refund of taxes, penalties, and interest for the tax years 1980 through 1983.

In the course of the proceedings before the district court, Thomas conceded that the tax shelters were sham transactions. However, Thomas claims that he did not know the tax shelters were shams at the time he entered the transactions. Thomas maintains that he entered the tax shelters with an expectation of profit.

The district court granted partial summary judgment in favor of the Government. First, the district court held that it did not have jurisdiction to consider Thomas' claim for the 1981 tax year because he failed to commence a timely refund suit after the rejection of a valid administrative claim. Second, the district court ruled that the IRS' calculations of tax for the tax years 1980, 1982, and 1983 were correct because Thomas admitted the tax shelters were shams. Third, the district court held that Thomas could not protest the I.R.C. § 6653 negligence penalties because he had not challenged them in his administrative claims with the IRS. ⁶ Fourth, the district court found the IRS' refusal to abate interest was not subject to judicial review. ⁷ Finally, the district court held that Thomas' investment motive was relevant in determining the applicability of the I.R.C. § 6621(c) interest penalty and ordered a jury trial to resolve whether Thomas did in fact have a profit motive in entering the tax shelters.

After the grant of partial summary judgment, Thomas and the Government stipulated for the purposes of this appeal that Thomas invested in the tax shelters with an expectation of profit. The Government appeals the district court's refusal to grant summary judgment on the I.R.C. § 6621(c) penalty. Thomas cross-appeals the district court's grant of summary judgment in favor of the Government regarding the IRS' tax assessments.

II. DISCUSSION

A. Standards of Review

A district court's denial of summary judgment is an interlocutory order that is not ordinarily appealable. See Garner v. Memphis Police Dep't, 8 F.3d 358, 363 (6th Cir.1993). However, when the appeal from a denial of summary judgment is presented together with an appeal from a grant of summary judgment, we have jurisdiction to review the appropriateness of the district court's denial. See id. The denial of summary judgment based on purely legal grounds is reviewed de novo. See id. Similarly, we review the grant of summary judgment de novo. See McKay v. Toyota Motor Mfg., U.S.A., Inc., 110 F.3d 369, 372 (6th Cir.1997). Summary judgment is appropriate when the parties do not dispute any material questions of fact and one party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c).

B. Tax Year 1981

Before addressing Thomas' arguments we believe it necessary to discuss the steps a taxpayer must take before he can maintain a suit in federal court. Unless these steps are taken, a federal court does not have jurisdiction to consider the merits of the taxpayer's claim against the IRS. Initially, the taxpayer must file a sufficient administrative claim with the IRS. See I.R.C. § 7422(a) (West Supp.1998) (stating that there can be no suit prior to the filing of an administrative claim); Martin v. United States, 833 F.2d 655, 658-59 (7th Cir.1987) ("A timely, sufficient claim for refund is a jurisdictional prerequisite to a refund suit."). The administrative claim must be filed before the later of two years from the time the tax was paid or three years from the time the tax return was filed. See I.R.C. § 6511(a) (West Supp.1998). After filing a sufficient and timely administrative claim, the taxpayer may file an action in federal court if he is dissatisfied with the IRS' determination. However, the action must be filed within two years of the IRS' rejection of the claim. See I.R.C. § 6532(a)(1) (West 1989). Now that we have laid out the jurisdictional prerequisites to a refund suit, we turn to Thomas' claims on appeal.

First, Thomas contends that the district court erred in ruling that he did not timely file the Form 843 for the 1981 tax year ("1981 Form 843") dated November 1, 1995. The district court concluded that the "1981 Form 843" dated November 1, 1995 was an untimely administrative filing because the IRS did not receive it before the later of two years from the time the tax was paid or three years from the time the return for the 1981 tax year was filed. Thomas asserts that the IRS failed to follow Revenue Procedure 84-58 in applying his payments, resulting in full payment of his 1981 tax liability much sooner than required. See Rev. Proc. 84-58, 1984-2 C.B. 501. According to Thomas, if the IRS followed the revenue procedure, the "1981 Form 843" dated November 1, 1995 would have been timely. However, Thomas waived...