Randell v. U.S.

• Decision Date: 28 August 1995
• Docket Number: D,No. 1097,1097
• Citation: 64 F.3d 101
• Parties: -6147, 95-2 USTC P 50,468 Jack RANDELL, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. ocket 94-6220.
• Court: U.S. Court of Appeals — Second Circuit

Page 101

64 F.3d 101

76 A.F.T.R.2d 95-6147, 95-2 USTC P 50,468

Jack RANDELL, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 1097, Docket 94-6220.

United States Court of Appeals,

Second Circuit.

Argued March 13, 1995.

Decided Aug. 28, 1995.

Jared J. Scharf, White Plains, NY, for plaintiff-appellant.

Deborah Y. Yeoh, Asst. U.S. Atty., New York City (Mary Jo White, U.S. Atty., Nancy G. Milburn, Asst. U.S. Atty., S.D.N.Y., New York City, of counsel), for defendant-appellee.

Before: MESKILL, CARDAMONE, and ALTIMARI, Circuit Judges.

CARDAMONE, Circuit Judge:

This is an appeal in a tax case. Plaintiff Jack Randell brought suit in the United States District Court for the Southern District of New York (Goettel, J.) seeking to enjoin assessment of deficiencies made by the Internal Revenue Service (IRS) based on his distributive share of income from two partnerships. The district court granted summary judgment to the government and plaintiff appeals. We affirm.

BACKGROUND

A. Statutory and Regulatory Framework

Before laying out the facts of this dispute, it will be helpful to set forth briefly the statutory and regulatory context in which they arise. It is a basic tenet of federal income tax law that partnerships are not taxable entities. I.R.C. Sec. 701 (1988); Treas.Reg. Sec. 1.701-1 (1960). Therefore, rather than file tax returns as individuals and corporations do, partnerships simply file informational returns. I.R.C. Sec. 6031 (1988); Treas.Reg. Sec. 1.6031-1 (as amended in 1978). Although partnerships do not pay federal income tax, each partner is individually liable for income taxes relating to his or her distributive share of partnership income, gain, loss, deduction and credit. I.R.C. Secs. 701, 702 (1988 & Supp. IV 1992); Treas.Reg. Sec. 1.702-1(a) (as amended in 1992). Prior to 1982 adjustments of partnership items were determined at the individual partners' level, resulting in duplication of administrative and judicial resources and inconsistent results between partners.

To solve this problem, 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, 96 Stat. 324, 648 (codified as amended at I.R.C. Secs. 6221-6233 (1988 & Supp. IV 1992)), which created a single unified procedure for determining the tax treatment of all partnership items at the partnership level. A "partnership item" is one "more appropriately determined at the partnership level than at the partner level," I.R.C. Sec. 6231(a)(3), and includes "[t]he partnership aggregate and each partner's share of ... [i]tems of income, gain, loss, deduction, or credit of the partnership." Treas.Reg.

Sec. 301.6231(a)(3)-1(a)(1)(i) (1986). A "nonpartnership item" is one that is "not a partnership item," I.R.C. Sec. 6231(a)(4), and is therefore determined at the individual partner's level. As a consequence, assessments for nonpartnership item adjustments are subject to the statutory notice of deficiency procedure. I.R.C. Secs. 6212(a) (1988); 6230(a)(2).

A partner generally must file an individual income tax return that is consistent with the partnership return. I.R.C. Sec. 6222(a). One example of inconsistent treatment occurs when a partner does not file an individual tax return reporting his distributive share of income as reported by the partnership on a Schedule K-1. A partner disagreeing with the partnership's reporting of his or her distributive share of partnership items has a choice: the partner must either (a) notify the IRS of an election to treat a partnership item inconsistently with the treatment of the item on the partnership return, I.R.C. Sec. 6222(b), or (b) request an administrative adjustment of the partnership item, I.R.C. Sec. 6227(a). In the absence of either notification or request for administrative adjustment, a partner who treats items inconsistently with the partnership's treatment of items may be assessed with a deficiency, without notice, as a computational adjustment. I.R.C. Secs. 6222(c), 6230(a)(1). A "computational adjustment" means a "change in the tax liability of a partner which properly reflects the treatment ... of a partnership item." I.R.C. Sec. 6231(a)(6). In other words, the IRS may assess a partner for tax due in order to conform a partner's treatment of an item with the partnership's treatment of that item.

Just as the tax law generally requires individuals to be given notice of an assessed deficiency, TEFRA requires the IRS to notify certain partners when it undertakes an administrative proceeding to adjust a partnership item. I.R.C. Sec. 6223(a). The IRS mails to the "tax matters partner" (generally the general partner designated by the partnership to handle tax matters, I.R.C. Sec. 6231(a)(7)) a final partnership administrative adjustment (FPAA or administrative adjustment), reflecting its determination to adjust, and thereafter sends copies of the FPAA to each "notice partner." I.R.C. Secs. 6223(a), 6223(b), 6231(a)(8). When a partnership has 100 or more partners, a notice partner is generally one who owns at least a one percent interest in the partnership. I.R.C. Sec. 6223(b)(1).

The tax matters partner may contest the FPAA within 90 days after its mailing by filing a petition for readjustment in Tax Court, the Court of Federal Claims or the appropriate federal district court. I.R.C. Sec. 6226(a). If no such petition is filed, any notice partner may file a petition for readjustment within the next 60 days. I.R.C. Sec. 6226(b)(1). All partners with an interest in the outcome of the proceeding are entitled to participate in an action brought by the tax matters partner or a notice partner, I.R.C. Secs. 6226(c), 6226(d), thereby meeting TEFRA's objective of ensuring that all partners may, if they choose, litigate a dispute with the IRS in a single proceeding.

After the FPAA adjustments become final or conclusively established (i.e., after they go unchallenged or are judicially resolved in a Sec. 6226 proceeding), the IRS may assess partners with their distributive share of the adjusted partnership items, without notice, as a computational adjustment. I.R.C. Secs. 6225, 6230(a). Statutory notice is not required since, under TEFRA, the partnership item has been resolved at the partnership level and cannot be contested at the individual partner level. With this statutory background in hand, we pass to the facts.

B. Government Arbitrage Trading Company

Plaintiff Randell failed to file an individual tax return for the year 1983. That year he had a 1.572 percent limited partnership interest in the Government Arbitrage Trading Company (GATC), a partnership of more than 100 partners. On its partnership return for that year, GATC reported partnership income of $4,224,972, expenses of $56,475,053, a short-term capital loss of $49,412, and a long-term capital loss of $74,117. GATC issued a Schedule K-1 to Randell for that year reporting his distributive share as an ordinary loss of $821,350, a net short-term capital After auditing the partnership for 1983, the IRS determined that adjustments to GATC's tax return were necessary. The government disallowed GATC's claimed expenses of $56,475,053 and its short-term capital loss of $49,412. These adjustments resulted in an increase in the amount of previously reported partnership income that was taxable. On October 24, 1991 the IRS issued an administrative adjustment to GATC's tax matters partner. In November 1991 the IRS sent copies of the FPAA to GATC's notice partners, including plaintiff. On March 16, 1992 GATC's tax matters partner filed an untimely petition with the United States Tax Court which was dismissed for lack of subject matter jurisdiction. See Government Arbitrage Trading Co. v. Commissioner, 67 T.C.M. (CCH) 2551, 1994 WL 102638 (1994) (tax matters partner failed to file petition within 90-day period and was not entitled to file petition as a notice partner within 60 days after the close of the 90-day period because petitioner, owning only a .5 percent interest in partnership profits, did not qualify as a notice partner). No notice partner, including Randell, filed a petition for readjustment.

loss of $777, and a net long-term capital loss of $1,165. Plaintiff admits receiving a copy of the Schedule K-1 indicating his share of the partnership's ordinary and capital losses.

C. Conarbco

Randell was also a limited partner in Conarbco, a partnership of more than 100 partners, with 1.7992 percent, 1.798 percent and 1.798 percent interests during the years 1985, 1986, and 1987, respectively. Randell failed to file individual tax returns for the years 1985 and 1986, and in April 1990 filed an untimely return for 1987, reporting his distributive share of income from Conarbco.

On its 1985 partnership return Conarbco had reported income of $66,212,174 and expenses of $57,369,574. Its 1986 partnership return showed income of $70,184,748, expenses of $61,587,165, and a net long-term capital loss of $278,023. For 1987 the partnership reported income of $7,789,054, expenses of $9,584,515, a net short-term capital loss of $295,464 and a net long-term capital loss of $435,257. Conarbco issued Schedules K-1 to Randell, reporting as follows: for 1985 plaintiff had a distributive share of ordinary income of $160,243, dividends of $3,905, a net short-term capital gain of $32,057 and a net long-term capital gain of $2,585; for 1986 plaintiff's distributive share was ordinary income of $155,712, a net short-term capital gain of $33,715, and a net long-term capital loss of $5,002; and for 1987, although Conarbco appears to have had a net loss, plaintiff's distributive share of ordinary income was $29,526. Randell admits receiving copies of these schedules.

Upon auditing Conarbco for the tax years 1985, 1986, and 1987, the IRS determined that certain partnership item adjustments were necessary. The IRS disallowed Conarbco's 1985...