BASR P'ship v. United States

• Decision Date: 08 February 2019
• Docket Number: 2017-1925
• Parties: BASR PARTNERSHIP, William F. Pettinati, Sr., Tax Matters Partner, Plaintiffs-Appellees v. UNITED STATES, Defendant-Appellant
• Court: U.S. Court of Appeals — Federal Circuit

915 F.3d 771

BASR PARTNERSHIP, William F. Pettinati, Sr., Tax Matters Partner, Plaintiffs-Appellees

v.UNITED STATES, Defendant-Appellant

2017-1925

United States Court of Appeals, Federal Circuit.

Decided: February 8, 2019

Thomas A. Cullinan, Eversheds Sutherland (US) LLP, Atlanta, GA, argued for plaintiffs-appellees. Represented by Rebecca M. Stork.

Michael J. Haungs, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellant. Also represented by Jacob Earl Christensen, David A. Hubbert, Gilbert Steven Rothenberg.

Carlton M. Smith, New York, NY, for amici curiae Harvard Federal Tax Clinic, Philip C. Cook Low-Income Tax Clinic of Georgia State University.

Before Prost, Chief Judge, Wallach and Chen, Circuit Judges.

Dissenting opinion filed by Circuit Judge Wallach.

Prost, Chief Judge.

This appeal concerns an order from the U.S. Court of Federal Claims awarding $ 314,710.69 to BASR Partnership ("BASR") under 26 U.S.C. § 7430 (" I.R.C. § 7430") for its reasonable litigation costs incurred in connection with a tax determination from a Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") proceeding. The United States ("Government") appeals the order. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3). We affirm.

I

The Pettinati family owned a commercial printing company, Page Printing, from 1982 until they sold it in 1999. Before completing the sale, the Pettinatis hired the now-defunct law firm of Jenkens & Gilchrist to advise them on an investment strategy that potentially had tax benefits arising from the sale of their business. See BASR P’ship v. United States , 795 F.3d 1338, 1340 (Fed. Cir. 2015) ; J.A. 133, 987. As part of the "tax planning strategy by attorney Erwin Mayer of Jenkens & Gilcrest [sic], P.C.," J.A. 1071, the Pettinatis formed BASR, a general partnership, J.A. 1071, 2392–402. BASR assumed certain U.S. Treasury Note obligations, which increased its cost basis. J.A. 54. Further, each of the BASR partners—William Pettinati, Sr., his wife, Virginia Pettinati, and the gift trusts belonging to their two sons, William Pettinati, Jr. and Andrew Pettinati—contributed all their shares in Page Printing to BASR in June 1999. J.A. 55, 82. Two months later, BASR sold 100% of its stock in Page Printing to Nationwide Graphics, Inc. for $ 6,898,245. J.A. 55. When offset against its overstated cost basis, however, BASR realized a gain of only $ 263,934. Id . On their 1999 individual returns, the Pettinati partners reported their shares of this understated gain passed through to them from BASR. J.A. 1231, 1266, 1280. In other words, "by creating the BASR Partnership, the Pettinatis greatly reduced the tax liability arising from the sale of their printing business." BASR P’ship , 795 F.3d at 1340.

The Internal Revenue Service ("IRS") did not confront the Pettinatis regarding the overstated basis until a decade later. In January 2010, the IRS issued to BASR’s tax matters partner, William Pettinati, Sr., a final partnership administrative adjustment ("FPAA"), which disallowed the tax benefits generated from BASR’s 1999 tax filing. J.A. 61–72. In April 2010, Mr. Pettinati filed a petition and summary judgment motion in the U.S. Court of Federal Claims ("trial court") challenging the FPAA as untimely under I.R.C. § 6501(a), which provides a three-year statute of limitations. J.A. 45–60. At that time, BASR had "zero assets," J.A. 1956, and had filed its last partnership return in 1999, J.A. 317.

While BASR’s filings were pending before the trial court, the BASR partners offered the Government $ 1.00 to settle all of the adjustments that the Government made in the FPAA. J.A. 1953–54.¹ The Government declined the offer. Government’s Br. 56–57.

In September 2013, the trial court granted summary judgment for BASR, holding that the FPAA was untimely issued. BASR P’ship v. United States , 113 Fed.Cl. 181, 194 (2013). This court affirmed. BASR P’ship , 795 F.3d at 1350.

In March 2016, BASR, by and through Mr. Pettinati, Sr., moved the trial court for litigation costs under I.R.C. § 7430(c)(4)(E). J.A. 1934–41. The trial court granted BASR’s motion in part and awarded BASR $ 314,710.69 in litigation costs. BASR P’ship v. United States , 130 Fed.Cl. 286, 313–14 (2017).²

II

This appeal concerns the interplay between two statutory schemes— I.R.C. § 7430, which is a fee-shifting statute, and TEFRA, 26 U.S.C. § 6221 et seq.

I.R.C. § 7430(a) provides that a "prevailing party" may be awarded reasonable litigation costs incurred in connection with a court proceeding brought against the United States in connection with "the determination, collection, or refund of any tax, interest, or penalty under this title." Generally, a party must "substantially prevail" with respect to the amount in controversy or the issues presented, as provided by I.R.C. § 7430(c)(4)(A).³ But special rules apply when a taxpayer makes the Government a monetary offer to settle the tax dispute and the Government rejects the offer. In such cases, if the taxpayer’s liability under the court’s judgment turns out to be less than or equal to the offer that the taxpayer made to the Government to settle the tax dispute, the taxpayer will be treated as a "prevailing party" if it is also "[a] party to [the] court proceeding."⁴ There are two exceptions, however, to this so-called qualified offer rule. The qualified offer rule does not apply (1) when the court’s judgment issues pursuant to a settlement or (2) when the amount of tax liability is not "in issue" during the court proceeding. See I.R.C. § 7430(c)(4)(E)(ii).

TEFRA, enacted in 1982, enables the IRS to correct errors on a partnership’s tax return in a single, unified proceeding.⁵ United States v. Woods , 571 U.S. 31, 38–39, 134 S.Ct. 557, 187 L.Ed.2d 472 (2013). Under TEFRA, the IRS first initiates proceedings at the partnership level to adjust partnership items. Id. at 39, 134 S.Ct. 557. Once the tax treatment of the partnership items at the partnership level becomes final, administratively or judicially, the IRS next initiates a partner-level proceeding to make any resulting computational adjustments in the tax liability of the individual partners. See id . The IRS directly assesses most computational adjustments against the partners, "bypassing deficiency proceedings and permitting the partners to challenge the assessments only in post-payment refund actions." Id.⁶

III

With this legal framework in mind, we turn to the Government’s arguments. The Government advances five independent challenges to the trial court’s order. The first is that (1) BASR does not qualify for litigation costs under I.R.C. § 7430(a) because it is not a "party" and therefore cannot be a "prevailing party." Government’s Br. 17–18. Next, it argues that, even if BASR were considered to be a "party," it still could not receive litigation costs under I.R.C. § 7430(a) because (2) it did not pay or incur any such costs, and (3) the amount of tax liability was not "in issue" during the TEFRA partnership-level court proceeding. Government’s Br. 24, 45. Lastly, the Government argues that even if BASR were statutorily eligible to receive an award for litigation costs under I.R.C. § 7430(a), the trial court erred by (4) failing to apply the real-party-in-interest doctrine and by (5) abusing its discretion in granting the award. Government’s Br. 51, 56.

A. Prevailing Party

To qualify as a "prevailing party" under I.R.C. § 7430(a), the taxpayer must necessarily be a "party" to a § 7430(a) court proceeding—here, the TEFRA partnership-level judicial proceeding. See I.R.C. § 7430(c)(4)(E) ; 26 U.S.C. § 6226 (2009) (" I.R.C. § 6226"). The Government argues that BASR could not have been a party to the proceeding because it is the partnership entity, and as a legal matter, only the individual partners can be parties to a TEFRA proceeding. Government’s Br. 40. The trial court disagreed and determined that BASR was indeed a party to the TEFRA proceeding. Although the trial court relied largely on an inapplicable treasury regulation to reach its conclusion,⁷ the trial court’s error was harmless because, in our view, other reasons support a finding that BASR was a party.

Whether I.R.C. § 6226 prohibits a partnership from being a party to a TEFRA partnership-level court proceeding is a legal question requiring statutory interpretation. We review the trial court’s statutory interpretation de novo. Salman Ranch Ltd. v. United States , 573 F.3d 1362, 1370 (Fed. Cir. 2009). We focus our inquiry on the statutory language. Electrolux Holdings, Inc. v. United States , 491 F.3d 1327, 1330 (Fed. Cir. 2007) (explaining that "[s]tatutory interpretation begins with the language of the statute" and "the plain meaning of the statute [is derived] from its text and structure").

I.R.C § 6226 concerns judicial review of FPAAs under the TEFRA scheme. It provides, in relevant part, that "(1) each person who was a partner in [the] partnership at any time during [the partnership taxable] year shall be treated as a party to [the] action," and "(2) the court having jurisdiction of [the] action shall allow each such person to participate in the action." I.R.C. § 6226(c). Despite the Government’s argument to the contrary, I.R.C. § 6226(c) does not provide that "partners, rather than the partnership itself, are the parties in a TEFRA partnership proceeding." Government’s Br. 44–45. While it is true that I.R.C. § 6226(c) provides that a partner "shall be treated as a party" to the TEFRA judicial proceeding, that provision alone does not disqualify the partnership entity from also being a party to the proceeding.

The Government, however, avers that allowing a partnership to be a party would conflict with U.S. Tax Court precedent and the Rules of the Court of Federal Claims ("RCFC").⁸ Government’s Br. 40, 44. As the trial court acknowledged, the Tax Court has, at least on one occasion, interpreted I.R.C. § 6226(c) as standing for the proposition that "the...