Conway v. U.S.

• Decision Date: 23 April 2003
• Docket Number: No. 02-5013.,02-5013.
• Citation: 326 F.3d 1268
• Parties: Kevin CONWAY, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

326 F.3d 1268

Kevin CONWAY, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

No. 02-5013.

United States Court of Appeals, Federal Circuit.

April 23, 2003.

Rehearing Denied June 13, 2003.

COPYRIGHT MATERIAL OMITTED

Stuart A. Smith, of New York, NY, argued for plaintiff-appellant.

Kenneth W. Rosenberg, Attorney, Tax Division, Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were Eileen J. O'Connor, Assistant Attorney General; and Richard Farber, Attorney.

Before RADER, LINN, and DYK, Circuit Judges.

DYK, Circuit Judge.

Kevin Conway ("the taxpayer") appeals the Court of Federal Claims' decision dismissing his suit for the refund of penalties and interest, holding that the Internal Revenue Service's ("IRS's") deficiency assessment was timely and rejecting the taxpayer's other contentions. Conway v. United States, 50 Fed. Cl. 273 (2001). We affirm.

BACKGROUND

In 1982, the taxpayer, a professional actor, acquired a quarter-unit interest in a limited partnership known as Stevens Recycling Associates ("the partnership") for $12,500. The taxpayer did so after a conversation with David Alter, a New York lawyer who had represented the taxpayer and provided investment advice. Alter told the taxpayer that he and several other members of his law firm were planning to invest in the partnership and recommended that the taxpayer invest as well. Alter did not provide the taxpayer with the partnership's offering memorandum nor any other document relating to the partnership at the time. Although a tax opinion about the project was prepared by another New York law firm, the taxpayer did not see it and apparently did not know of its existence until after he invested. The taxpayer made no independent investigation of the partnership.

On its 1982 tax return, the partnership claimed a $7,000,000 investment in property eligible for a qualified investment credit, a $7,000,000 investment in property eligible for a business energy credit, and $713,855 in ordinary losses. On his 1982 federal tax return, the taxpayer reported adjusted gross income of $152,270 and, pursuant to his investment in the partnership, claimed a business deduction of $9,851, an investment tax credit of $9,660, and a business energy credit of $9,660. Altogether, the taxpayer used his investment in the partnership to reduce his income tax liability by $24,246, based on his investment of $12,500.

Under the Tax Equity and Fiscal Responsibility Act of 1982, I.R.C. §§ 6221-32,¹ a tax partnership is treated as a pass-through entity. Although administrative and judicial proceedings concerning partnership items are conducted at the partnership level, I.R.C. § 6221, the partnership is merely a tax-reporting entity, and all items of income, deduction, and credit are allocated among the partners in their individual capacities, id. § 701. The tax matters partner designated by the partnership agreement represents the partnership in partnership-level judicial proceedings, id. § 6226(a), but the individual limited partners (e.g., the taxpayer here) are also deemed to be parties to the proceeding, id. § 6226(c). The IRS uses a Notice of Final Partnership Administrative Adjustment ("FPAA") to propose audit adjustments to a tax partnership. The statute provides that issues concerning the tax liability with respect to partnership items are generally to be determined by a judicial proceeding at the partnership level. Id. § 6226.

In 1989 following a partnership-level examination, the IRS issued an FPAA for the partnership for the 1982 tax year. The FPAA determined that the partnership had not invested in any property that qualified for either the investment tax credit or for the business energy credit. Further, the partnership's reported loss was disallowed in its entirety because "it has not been established that [the partnership] incurred a loss in a trade or business or in an activity entered into for profit or with respect to property held for the production of income." Conway, 50 Fed. Cl. at 274. The FPAA explained:

It has been determined that the partnership has improperly taken deductions or credits based on overvaluation of assets and based on positions taken for which substantial authority was lacking. It has also been determined that the transactions were entered into for tax motivated reasons and adjustments to the partnership items were due to negligence or intentional disregard of rules and regulations.

Id. at 275. The FPAA also advised that "[p]enalties based on the above transactions... are applicable at the individual partner level and will be raised in separate proceedings at the partner level following the present partnership proceedings." Id.

On July 24, 1989, the tax matters partner filed a petition for readjustment under § 6226 on behalf of the partnership in the United States Tax Court with respect to the adjustments set forth in the FPAA. The petition was entitled "Petition for Readjustment of Partnership Items Under Code Section 6226." The case was assigned docket number 18447-89.

On February 23, 1994, an opinion and judgment were signed by the presiding Tax Court judge and entered that same day on the Tax Court's docket. Stevens Recycling Assocs. v. Comm'r, No. 18447-89 (T.C. Feb. 23, 1994) ("First Decision"). The Tax Court upheld the FPAA in all respects. However, the Tax Court judge inadvertently failed to affix an "Entered" date to the face of the judgment as was the usual practice. (As will be discussed below, the government argues that this omission rendered the decision ineffective because of the requirements of § 7459(c).) On June 6, 1994, the Tax Court, sua sponte, vacated the First Decision and replaced it with Stevens Recycling Assocs. v. Comm'r, No. 18447-89 (T.C. June 6, 1994) ("Second Decision"). The Second Decision was substantively identical to the first except that the second decision included an "Entered" date. The Second Decision explained:

On February 23, 1994, through inadvertent clerical error, the Court served on the parties a Decision which did not bear the requisite "Entered" date. Accordingly, it is

ORDERED that the Decision served on February 23, 1994, is vacated and set aside. It is further

ORDERED and DECIDED that the following statement shows the adjustments to the partnership items of Stevens Recycling Associates for the taxable years of 1982, 1983, 1984, and 1985.

Id. The Tax Court provided no further explanation for its decision.

Section 6229(d) established the limitations period for assessing the tax and penalties against the individual partners. Section 6229(d) provided:

If notice of a final partnership administrative adjustment with respect to any taxable year is mailed to the tax matters partner, the running of the period specified in subsection (a) (as modified by other provisions of this section) shall be suspended —

(1) for the period during which an action may be brought under section 6226 (and, if an action with respect to such administrative adjustment is brought during such period, until the decision of the court in such action becomes final), and

(2) for 1 year thereafter.

I.R.C. § 6229(d) (emphasis added).² In other words, the limitations period was one year after "the decision of the [Tax Court] bec[a]me[] final." A decision became "final" upon the expiration of the appeal period, id. § 7481(a), which was 90 days after the decision of the Tax Court was "entered," id. § 7483.

On August 7, 1995, the IRS made an individual assessment of tax against the taxpayer for 1982 in the amount of $24,246. On August 28, 1995, more than a year and 90 days after the First Decision but less than a year and 90 days after the Second Decision, the IRS sent the taxpayer a notice of deficiency determining that he was liable for negligence and overstatement penalties under §§ 6653(a) and 6659 of the Internal Revenue Code of 1982. Between August 7, 1995, and November 25, 1996, underpayment interest was assessed against the taxpayer. On January 29, 1996, the Commissioner assessed negligence penalties in the amount of $39,334.92 and valuation overstatement penalties in the amount of $5,796 against the taxpayer. The taxpayer paid all assessments, interest, and penalties.

The taxpayer filed a timely administrative claim for refund, which was denied on April 10, 1996. He filed a complaint in the Court of Federal Claims on December 16, 1996, claiming a refund of both the underpayment assessments and the penalties.³

The government's contention was that by virtue of § 7459 a decision of the Tax Court could not be "entered" until it had been "rendered," and that a decision could not be "rendered" until a decision was issued bearing an "entered" date. Thus, the government concluded, the assessment was timely because a decision had not been "rendered" until the Second Decision issued bearing an "entered" date. The taxpayer made two contentions that are relevant to this appeal.⁴ First, he contended that the First Decision was properly entered on February 23, 1994, and thus became final on May 24, 1995. He thus concluded that the one-year statute of limitations in § 6229(d) ran from the First Decision of the Tax Court and thus had expired on May 24, 1995, so that the notice of deficiency, issued on August 28, 1995, was untimely. Second, he contended that, even if the notice of deficiency were considered timely, the penalties were improperly imposed. He argued that he had relied in good faith on Alter's professional advice, so that the negligence penalty under § 6653(a) was improperly imposed. The taxpayer also argued that he had had good faith basis for the overvaluation, so that the Commissioner should have waived the overstatement penalty pursuant to § 6659(e), which provided that the Commissioner may waive an overstatement assessment "on a showing by the taxpayer that there was a reasonable basis for the overvaluation ... claimed on the return and that such claim...