Alexander v. U.S.

• Decision Date: 15 February 1995
• Docket Number: No. 93-1967,93-1967
• Citation: 44 F.3d 328
• Parties: -1064, 95-1 USTC P 50,105 Thomas E. ALEXANDER, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 328

44 F.3d 328

75 A.F.T.R.2d 95-1064, 95-1 USTC P 50,105

Thomas E. ALEXANDER, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 93-1967.

United States Court of Appeals, Fifth Circuit.

Feb. 15, 1995.

Alan L. Tinsley, Madisonville, TX, Charles B. Koerth, Allie & Thurmond, Houston, TX, for appellant.

William S. Estabrook, Gary R. Allen, Chief, Teresa T. Milton, Appellate Section, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GARWOOD, JOLLY and STEWART, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiff-appellant Thomas Alexander (Alexander) sued defendant-appellee United States (the Service) for a refund of federal income taxes assessed and collected after the expiration of the limitations period on assessment. The Service and Alexander filed cross-motions for summary judgment. The district court granted the Service's motion and entered final judgment against Alexander, 829 F.Supp. 199, who now appeals. We reverse.

Facts and Proceedings Below

Alexander was a limited partner in Columbia Building, Ltd. (Columbia). In his timely 1984 tax return, Alexander included income attributable to his partnership interest. On May 16, 1988, the Service mailed Alexander a notice of final partnership administrative adjustment (FPAA). The FPAA informed him that adjustments had been made at the partnership level to Columbia's return for 1984, resulting in an increase in tax liability on Alexander's individual return for the same year.

Along with the FPAA, the Service enclosed a copy of IRS Form 870-P, then known as a "Settlement Agreement for Partnership Adjustments." ¹ The FPAA informed Alexander that his signature on the 870-P form would constitute an offer to enter into a "binding settlement" to accept the FPAA adjustments. The 870-P form itself notified Alexander that the settlement agreement, if executed, could be avoided only upon a showing of "fraud, malfeasance, or misrepresentation of fact" and, further, barred any "claim for refund or credit based on any change in the treatment of partnership items." On May 18, 1988, Alexander signed the 870-P form and returned it to the Service, which accepted the settlement offer and, one year later, assessed a deficiency. Alexander paid the deficiency, including interest.

Over a year after making this payment, Alexander learned of a suit brought by another Columbia partner to challenge the FPAA adjustments made to the firm's 1984 partnership return. In that proceeding, the Service, after initially defending the adjustments, conceded that the statute of limitations for assessing any deficiency had expired on April 15, 1988. The tax court thereafter entered judgment for the Columbia partners. Columbia Building, Ltd. v. Commissioner, 98 T.C. 607, 1992 WL 101165 (1992). Upon learning of the Service's concession, Alexander realized he had paid the government a deficiency the assessment of which was time-barred.

Alexander timely filed a claim for refund with the Service on November 20, 1990. Ultimately, the Service disallowed the refund claim, and Alexander brought this suit in the district court below. Both parties filed cross-motions for summary judgment. The district court ruled for the Service, concluding that it had jurisdiction over the claim and that the parties' settlement agreement contractually precluded Alexander's refund action. Alexander appeals.

Discussion

We review an order granting summary judgment de novo. Abbott v. Equity Group, Inc., 2 F.3d 613, 618 (5th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 1219, 127 L.Ed.2d 565 (1994). Summary judgment is appropriate where the record discloses that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In reviewing a grant of summary judgment, we apply the same standard as that to be used by the district court in ruling on the motion. E.E.O.C. v. Boeing Services International, 968 F.2d 549, 553 (5th Cir.1992).

I. The Statutory Backdrop

In 1982, Congress enacted the Tax Equity and Fiscal Responsibility Act (TEFRA), Pub.L. No. 97-248, 96 Stat. 324, to improve the auditing and adjustments of income tax items attributable to partnerships. TEFRA provides auditing and litigation procedures which have shifted the Service's focus from the individual partner to the partnership as a whole, thus creating an important distinction between partnership and nonpartnership items. The law creates partnership-level procedures to deal with partnership items, that is, to determine "the tax treatment of items of partnership income, loss, deductions, and credits ... at the partnership level in a unified partnership proceeding rather than in separate proceedings with the partners." H.R.Conf.Rep. No. 97-760, 97th Cong., 2d Sess. at 600 (1982-2 Cum.Bull. at 662).

Under TEFRA, when the Service wishes to adjust the treatment of partnership items on a partnership return, it must mail the partners a notice of a final partnership administrative adjustment (FPAA). Initially, and in order to toll the three-year statute of limitations on assessment, the Service must mail the FPAA to the firm's designated tax matters partner. Within sixty days of this mailing, the Service must also send copies of the FPAA to the remaining, so-called notice partners.

In this case, although the corporate partner to whom the timely FPAA was sent had previously been the tax matters partner, bankruptcy had deprived it of that designation before the FPAA was issued. Temp.Treas.Reg. Sec. 301.6231(a)(7)-1T(1)(4) and Sec. 301.6231(c)-7T(a). The suspension provision in section 6229(d) was therefore ineffective, and the statute of limitations on assessment expired a month before the Service mailed the FPAA to Alexander and the remaining partners.

II. The Jurisdictional Issue

District courts generally have subject matter jurisdiction over refund claims. 28 U.S.C. Secs. 1340, 1346(a)(1). ² In its motion for summary judgment and on appeal, the Service has argued that section 7422 of the Internal Revenue Code deprives the district court of jurisdiction over Alexander's refund claim. Section 7422 provides that "[n]o action may be brought for a refund attributable to partnership items." I.R.C. Sec. 7422(h). The critical inquiry is whether the refund action here is attributable to partnership or nonpartnership items. ³ If the refund is attributable to partnership items, section 7422(h) applies and deprives the court of jurisdiction. If, on the other hand, the refund is attributable to nonpartnership items, then section 7422(h) is irrelevant, and the general grant of jurisdiction is effective.

In this case, the refund claimed was at one time attributable to partnership items, that is, to the adjustments called for in the FPAA to the Columbia partnership return. The question is whether these items remained partnership items after Alexander and the Service entered into a settlement agreement. Because the purpose of section 7422(h) is evidently to prevent an individual partner's refund action from interfering with the partnership-level determination of partnership items, that bar becomes unnecessary when the partnership-level proceeding has in some sense concluded. Accordingly, section 6231 calls for the conversion of partnership items into nonpartnership items on the happening of certain events. Relevant to this case is section 6231(b)(1)(C), which converts partnership items into nonpartnership items when "the Secretary enters into a settlement agreement with the partner with respect to such items." I.R.C. Sec. 6231(b)(1)(C).

Therefore, execution of a valid settlement agreement between Alexander and the Service would convert partnership items into nonpartnership items, thereby lifting the jurisdictional bar of section 7422(h). Because the Service does not dispute the validity of the agreement, the conversion was effective when the settlement was made. Accordingly, the district court had jurisdiction over Alexander's refund action.

Although we believe that the intersection of sections 6231(b)(1)(C) and 7422(h) clearly resolves this jurisdictional question, we note a consistent holding in our recent decision of Treaty Pines Investment Partnership v. Commissioner of Internal Revenue, 967 F.2d 206 (5th Cir.1992), a case which the Service attempts to distinguish. At issue in Treaty Pines was jurisdiction over determining partnership items, as opposed to jurisdiction over refund actions. With regard to determining partnership items, the conversion of partnership items into nonpartnership items denies, rather than grants, subject matter jurisdiction. That the jurisdictional effect of the conversion in Treaty was different from that here, however, does not detract from the case's critical premise that a conversion indeed occurred. Having merely identified a difference in the consequences of conversion, the Service offers no statutory or policy-based rationale to explain why this distinction matters.

We therefore hold that the district court had subject matter jurisdiction over Alexander's claim to a refund.

III. The Contractual Issue

The Service does not dispute that the amounts Alexander paid were assessed and collected after the expiration of the relevant limitations period on assessment. Under the Code, payments made after the limitations period are defined as "overpayments" and, as such, must be refunded. I.R.C. Sec. 6401 (" 'overpayment' includes that part of the amount of the payment of any internal revenue tax which is assessed or collected after the expiration of the period of limitation"); I.R.C. Sec. 6402(a) ("[i]n the case of any overpayment, the [Service] ... shall ... refund any balance"); see Cohen v. United States, 995 F.2d 205, 207 (Fed.Cir.1993) (holding that the payment of a time-barred tax liability constitutes an overpayment subject to...