Individually v. United States

• Citation: 599 F.3d 1352
• Decision Date: 31 March 2010
• Docket Number: No. 2009-5008,No. 2009-5009,2009-5008,2009-5009
• Parties: Lyman F. BUSH individually and as Personal Representative of the Estate of Beverly J. Bush, Plaintiffs-Appellants, V. UNITED STATES, Defendant-Appellee. Tommy J. Shelton, Plaintiff-Appellant, v. United States, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

599 F.3d 1352

Lyman F. BUSH individually and as Personal Representative of the Estate of Beverly J. Bush, Plaintiffs-Appellants, V. UNITED STATES, Defendant-Appellee. Tommy J. Shelton, Plaintiff-Appellant, v. United States, Defendant-Appellee.

No. 2009-5008

No. 2009-5009

United States Court of Appeals

Federal Circuit

Decided: March 31, 2010.

Thomas E. Redding, Redding & Associates, P.C., of Houston, Texas, argued for all plaintiffs-appellants. With him on the brief were Sallie W. Gladney and Teresa J Womack.

Andrew M. Weiner, Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC argued for defendant-appellee. With him on the brief were John A. DiCicco, Acting Deputy Assistant Attorney General, and Michael J. Haungs, Attorney.

Before LINN, DYK, and PROST Circuit Judges.

Opinion for the court filed by Circuit Judge DYK.

These two tax refund suits claim that the Internal Revenue Service ("IRS") failed to issue deficiency notices as required by law, thus rendering the tax assessments made against the plaintiff-taxpayers invalid. The Court of Federal Claims dismissed taxpayers' claims, holding that no notice of deficiency was required. While we agree with the taxpayers that deficiency notices were required, we conclude that the taxpayers have failed to establish that the failure to send the required notices was harmful error. We therefore affirm.

BACKGROUND

I

This case presents two questions. These are whether the IRS was required to issue deficiency notices to the taxpayers before making tax assessments, and whether, if such notices were required, the taxpayers in a refund suit can escape liability for taxes admittedly owed on the ground that the IRS failed to issue the required deficiency notices. Some background is essential to an understanding of these issues.

Under the Internal Revenue Code ("IRC"), when the IRS determines that a taxpayer has underpaid income taxes, it makes a deficiency determination. I.R.C § 6212(a). In general, a deficiency is the amount by which the tax imposed under the Code exceeds the amount the taxpayer paid. See id. § 6211(a). After determining a deficiency, the IRS may proceed to collect the tax, first making a deficiency assessment, id. §§ 6201, 6213(c), and then issuing a "notice and demand letter, " specifying the amount due and demanding payment. See id. § 6303. If the taxpayers do not pay after demand, an automatic lien arises in favor of the United States upon all of the taxpayer's property which continues until the time that the lien is either satisfied or extinguished. Id. §§ 63216322. Once the IRS has made a demand for payment, it has several options at its disposal to collect the unpaid tax, including levying on any property belonging to the taxpayer and satisfying the deficiency out of the sale of such property, id. §§ 6331 6335, or instituting a civil action to enforce the lien, id, § 7403. In most circumstances, the IRS is prohibited from proceeding to assess and collect income taxes without first issuing a deficiency notice to the taxpayer that gives the taxpayer the option to either pay the tax (and sue for a refund in either the Court of Federal Claims or a federal district court pursuant to 28 U.S.C. § 1346(a)(1)) or challenge the IRS' deficiency determination in the Tax Court under I.R.C. § 6213(a).

If the taxpayer elects to challenge the deficiency assessment in the Tax Court, assessment and collection are stayed pending the outcome of the Tax Court proceedings. Id. § 6213(a).¹ Thus, the receipt of the deficiency notice allows the taxpayer tolitigate the lawfulness of the tax in a prepayment forum, before the Commissioner of Internal Revenue ("Commissioner") initiates assessment and collection proceedings. See, e.g., Comm'r v. Shapiro, 424 U.S. 614, 616-17, 96 S.Ct. 1062, 47 L.Ed.2d 278 (1976).

The question of whether a notice of deficiency is required becomes more complicated when the taxpayer's liability relates to his participation in a partnership.²Partnerships are pass-through entities that do not themselves pay federal income tax. Olson v. United States, 172 F.3d 1311, 1316 (Fed.Ch-.1999). For most partnerships, when a dispute arises, the Code has established a procedure for determining the tax consequences of partnership activities and other partnership-wide issues in a partnership-level proceeding that is binding on all members of the partnership. See Tax Equity and Fiscal Responsibility Act of 1982, Pub.L. No. 97-248, 96 Stat. 324 (codified at I.R.C. §§ 6221-6233) ("TEFRA"). After the partnership items are determined in the administrative proceeding before the IRS, the IRS issues a Final Partnership Administrative Adjustment ("FPAA") to the Tax Matters Partner ("TMP") and to each individual partner. See I.R.C. §§ 6223(a), (d)(2). Within ninety days after the date on which the notice of FPAA is mailed to the TMP, the TMP may file a petition for a readjustment of the partnership items in the Tax Court, the district court in which the partnership's principal place of business is located, or the Court of Federal Claims. Id. § 6226(a)(l)-(3). Individual partners can opt out of the proceedings by settling with the IRS. Id. § 6224(c). After the conclusion of the judicial proceedings, the IRS can then assess individual partners with respect to the tax attributable to their distributive shares of the adjusted partnership items. See id. §§ 6225(a), 6230(a)(1), 6231(a)(6).

In general, a notice of deficiency is not required if the liability issue leading to the deficiency notice has already been resolved in the partnership-level proceeding. See id. § 6230(a)(1). The statute provides:

(a) Coordination with deficiency proceedings.—

(1) In general.—Except as provided in paragraph (2) or (3), subchapter B [deficiency notice requirement] of this chapter shall not apply to the assessment or collection of any computational adjustment.

(2) Deficiency proceedings to apply in certain cases.—

(A) Subchapter B shall apply to any deficiency attributable to—

(i) affected items which require partner level determinations (otherthan penalties, additions to tax, and additional amounts that relate to adjustments to partnership items)....

Id. 8 6230(a) (emphasis added). A "computational adjustment, " is defined as "the change in the tax liability of a partner which properly reflects the treatment... of a partnership item." See id, § 6231(a)(6). An "affected item" is defined as "any item to the extent that such item is affected by a partnership item." Id. § 6231(a)(5).

Both parties agree that the obligation to provide notice here depends on the resolution of two separate issues. First, the parties agree that a deficiency notice is required if the tax deficiency calculation by the IRS does not involve a "computational adjustment, " which is defined as a "change in the tax liability of a partner which properly reflects the treatment under this subchapter of a partnership item." Id. § 6231(a)(6). Second, they agree that, even if a computational adjustment is involved, notice is required if the deficiency is attributable to "affected items which require partner level determinations." Id. § 6230(a)(2)(A)(i). However, the parties differ as to whether the deficiency assessed here involves a "computational adjustment, " and whether the deficiency involved "affected items which require [a] partner-level determination[ ]."

II

With this background in mind, we turn to the facts of these two individual cases at issue here. These cases are among thirty tax refund suits brought by partners of the various Greenberg Brothers Partnerships. In case number 2009-5008, Bush v. United States, taxpayer Bush was a limited partner in two Greenberg Brothers Partnerships: the Lone Wolf McQuade ("LWM") and Cinema 84 partnerships. Bush v United States, 78 Fed.Cl. 76, 77 (2007). Bush filed a joint return with his wife; the taxpayers were thus both husband and wife. In 1991, the IRS issued Notices of Final Partnership Administrative Adjustment for tax years 1983, 1984, 1985, and 1986 tax years to the TMP of LWM, disallowing certain deductions reported on the LWM partnership's 1983-1986 returns. The IRS then issued FPAAs for Cinema 84's 1985-1989 tax years, disallowing certain deductions reported on the partnership returns for those tax years.

The partnership disagreed, and a partnership-level proceeding resulted. The TMP filed petitions on behalf of LWM and Cinema 84 in the Tax Court on October 7, 1991, and January 8, 1992, respectively, challenging the IRS' proposed adjustments for each partnership. On August 7, 1999, while the partnership proceedings were pending in the Tax Court, the Bushes and the IRS entered into two separate Form 906 Closing Agreements on Final Determination Covering Specific Matters ("Closing Agreements").³ The Closing Agreements resolved both partnership-level and individual partner-level issues. As to partnership-level issues, theparties agreed that no adjustment was required to the items reported in the partnership returns. The agreement also addressed partner-level issues concerning partner at risk capital contribution.⁴ The partners' at risk capital was not finally fixed by the settlement agreements. The agreements provided that the "at risk" capital would consist of $50,000 per partner (representing the original capital contribution) and would be adjusted upward in future years if the partnership earned taxable income or the partners made additional cash contributions to the partnership, including cash contributions in the form of payments on partnership notes. The agreement also did not waive the right to receive deficiency notices. As a result of the settlement, the Tax Court dismissed the Bushes from the partnership proceedings.

In July of 2000, the IRS issued Notices of Adjustment showing adjustments to taxpayers' returns for 1985, 1986, and 1987 tax years. Subsequently, the IRS made the following deficiency assessments in accordance with the...