Adkison v. C.I.R.

• Decision Date: 21 January 2010
• Docket Number: No. 08-70485.,08-70485.
• Citation: 592 F.3d 1050
• Parties: Peter D. ADKISON, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

592 F.3d 1050

Peter D. ADKISON, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 08-70485.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted September 2, 2009.

Filed January 21, 2010.

Cori Flanders-Palmer (argued), Chicoine & Hallert, P.S., Seattle, Washington; John M. Colvin, Chicoine & Hallert, P.S., Seattle, Washington, for the petitioner-appellant.

Teresa E. McLaughlin (argued), United States Department of Justice, Tax Division, Washington, D.C.; Randolph L. Hutter, United States Department of Justice, Tax Division, Washington, D.C. for the respondent-appellee.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 2532-06.

Before HAWKINS, M. MARGARET McKEOWN, and JAY S. BYBEE, Circuit Judges.

BYBEE, Circuit Judge:

Peter Adkison appeals the Tax Court's dismissal of his claim for relief under 26 U.S.C. § 6015 for lack of jurisdiction. Section 6015(c)¹ allows a former spouse who once filed a joint return and now, no longer married, meets certain requirements to claim relief from joint and several liability for a tax deficiency. The Tax Court held that it lacked jurisdiction because Adkison's deficiency stemmed from a partnership interest that is the subject of an ongoing partnership proceeding under the Tax Equity and Fiscal Responsibility Act (TEFRA) and regulated by a separate set of provisions. We agree with the Tax Court that no remedy is available to Adkison until the TEFRA partnership proceedings have finished, although we arrive at that conclusion through a different path.

I

In 1999, Adkison and his then-wife, Cathleen Adkison, filed a joint tax return claiming deductions and losses through their investment in a partnership called Shavano Strategic Investment Fund, LLC ("Shavano"), which had entered into a transaction with a tax shelter referred to as Bond Linked Issue Premium Structure or "BLIPS." In 2002, the Internal Revenue Service began a disclosure initiative, soliciting taxpayers to disclose their participation in certain tax shelter transactions, including BLIPS. By this time, the Adkisons had divorced, but they disclosed their participation in the BLIPS shelter, and the IRS began an audit of their 1999 joint tax return. Although negotiations failed between Peter Adkison and the IRS in October 2004, Adkison remitted $2.5 million to be posted as a cash bond against his tax liability.

In December 2004, the Internal Revenue Service Commissioner sent Shavano a Notice of Final Partnership Administrative Adjustment ("FPAA") for the year 1999, as required by 26 U.S.C. § 6223. Five months later, in May 2005, Presidio Resources, LLC, a partner in Shavano, filed a timely petition for readjustment of partnership items under TEFRA, see 26 U.S.C. § 6226, in the United States District Court for the Northern District of California, an action that remains pending.

Shortly after the petition for readjustment was filed in the partnership proceeding, Adkison submitted Form 8857, an official request for Innocent Spouse Relief, seeking individual relief from joint and several liability on the 1999 tax deficiency due to his partnership participation in the tax shelter. The Commissioner did not respond to Adkison's request. Instead, on November 10, 2005, the Commissioner sent Adkison and his ex-wife a Notice of Deficiency, stating that they owed $5.8 million for the 1999 tax year. The notice advised the Adkisons that if they wished "to contest this determination in court before making any payment," they had "90 days ... to file a petition with the United States Tax Court."

In February 2006, Adkison filed a petition with the Tax Court, invoking the court's jurisdiction under 26 U.S.C. § 6015(e). He requested two things: (1) a redetermination of his tax deficiency, as contained in the Commissioner's Notice of Deficiency under 26 U.S.C. § 6213, and (2) review of the Commissioner's failure to respond to Adkison's request for separation of liabilities under 26 U.S.C. § 6015(c). Ten months later, the Commissioner moved to dismiss the case for lack of jurisdiction, arguing that the Notice of Deficiency was invalid because of the Shavano partnership proceeding in the Northern District of California. See 26 U.S.C. § 6230(a)(3). The Commissioner advised the Tax Court that it was aware of the potential confusion and conflict between the Shavano partnership proceeding pending in district court and its decision to issue a Notice of Deficiency to Adkison. The Commissioner characterized its approach both as "deliberate" and "pruden[tial]" while it was sorting out how the deals were done.

The Tax Court granted the Commissioner's motion to dismiss for lack of jurisdiction, reasoning that because a separate partnership proceeding involving the transaction from which the deficiency arose was already pending, the Commissioner did not "assert" a deficiency against Adkison within the meaning of 26 U.S.C. § 6015(e)(1)(A). Adkison brought this appeal.

II

We begin with the principle that the Tax Court, as an Article I court, is a court of limited jurisdiction and may only exercise jurisdiction to the extent authorized by Congress. Estate of Branson v. Comm'r, 264 F.3d 904, 908 (9th Cir.2001). Because the deficiency at issue is an affected partnership item, we must examine the interrelationship between the court's jurisdiction to hear a claim for relief from joint and several liability under 26 U.S.C. § 6015 and the court's jurisdiction under 26 U.S.C. §§ 6221-34—the Tax Code provisions applying to affected partnership items. Conclusions of law, including the Tax Court's interpretation of the Internal Revenue Code, are reviewed de novo. Suzy's Zoo v. Comm'r, 273 F.3d 875, 878 (9th Cir.2001). Whether the Tax Court has subject matter jurisdiction is a question of law and thus reviewed de novo. Crawford v. Comm'r, 266 F.3d 1120, 1123 (9th Cir.2001).

When a married couple files a joint tax return, both filers are held jointly and severally liable for any deficiency stemming from their joint return. 26 U.S.C. § 6013(d)(3). In § 6015, Congress provided an avenue of relief from joint and several liability if a petitioning spouse shows he or she was unaware of a mistake made in the return, if the spouses divorced and the petitioning spouse shows no actual knowledge of deficiency, or if equitable relief is appropriate. 26 U.S.C. § 6015(b), (c), (f). In this case, Adkison, as a divorced spouse, claims he is entitled to relief under § 6015(c) because he did not have actual knowledge of an understatement in his joint tax return.

Section 6015(e)(1) grants jurisdiction to the Tax Court to hear such claims:

In the case of an individual against whom a deficiency has been asserted, and who elects to have subsection (b) or (c) apply....

(A) In general. In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed (i) at any time after the earlier of (I) the date the Secretary mails, by certified or registered mail to the tax-payer's last known address, notice of the Secretary's final determination of relief available to the individual, or (II) the date which is 6 months after the date such election is filed or request is made with the Secretary and (ii) not later than the close of the 90th day after the date described in clause (i)(I).

26 U.S.C. § 6015(e)(1) (emphasis added).

Adkison has met the statutory requirements for jurisdiction in the Tax Court, and if only § 6015 were at play here, he could proceed with his petition for relief. The Commissioner sent Adkison a notice asserting a $5.8 million deficiency, Adkison filed his petition and elected subsection (c) to apply, and it had been six months since he officially requested relief. He meets the requirements to establish jurisdiction in the Tax Court under § 6015(e). Having filed a Notice of Deficiency stating that Adkison owed $5.8 million in back taxes, the Commissioner cannot claim that the Notice was not an assertion of a deficiency within the meaning of § 6015(e).

What makes this case complicated is that there is a TEFRA overlay to the spousal relief provision in § 6015. TEFRA has specific rules for the treatment of partnership items that may supersede the general rules for obtaining relief from joint and several liability under § 6015. Pub.L. 97-248 § 402(a), 96 Stat. 324, 648-71 (codified as amended at 26 U.S.C. §§ 6221-34). In TEFRA, Congress provided a unified regulatory scheme for controlling the audit and litigation of partnership interests. TEFRA requires that "the tax treatment of any partnership item ... shall be determined at the partnership level," thereby ensuring the consistent treatment of partnership taxes and avoiding repetitive audits and litigation. 26 U.S.C. § 6221; see also Wall v. United States, 133 F.3d 1188, 1189 (9th Cir.1998). TEFRA applies to all partnership items, which Congress has broadly defined as items that are "more appropriately determined at the partnership level than at the partner level," 26 U.S.C. § 6231(a)(3), and any item that is "affected by a partnership item." Id. § 6231(a)(5).

In general, a partnership proceeding must be completed and a valid notice of deficiency sent before the Tax Court may examine the individual tax treatment of an affected item. "[B]ecause the tax treatment of affected items depends on partnership level determinations, affected items cannot be tried as part of a partner's personal tax case until the completion of the partnership level proceeding." N.C.F. Energy Partners v. Comm'r, 89 T.C. 741, 743-44, 1987 WL 45298 (1987) (superseded on other grounds by Taxpayer Relief Act of 1997, Pub.L. 105-34, § 1238(a), 11 Stat. 126); see also GAF Corp. v. Comm'r, 114 T.C. 519, 526, 2000 WL 863148 (2000); Crowell v. Comm'r, 102 T.C. 683, 694-95, 1994 WL 151303 (1994). This general...