Cinema '84 v. C.I.R., Docket No. 00-4263(L).

• Citation: 294 F.3d 432
• Decision Date: 21 May 2002
• Docket Number: Docket No. 00-4267(C).,Docket No. 00-4263(L).,Docket No. 00-4265(C).
• Parties: CINEMA '84, Richard M. Greenberg, Tax Matters Partner, Karin M. Locke, Box Office Partnership and Joseph E. Goodwin, Petitioners-Appellants, Jo Ann Scarfia, Participating Partner, Appellant, First Blood Associates, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

294 F.3d 432

CINEMA '84, Richard M. Greenberg, Tax Matters Partner, Karin M. Locke, Box Office Partnership and Joseph E. Goodwin, Petitioners-Appellants, Jo Ann Scarfia, Participating Partner, Appellant, First Blood Associates, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Docket No. 00-4263(L).

Docket No. 00-4265(C).

Docket No. 00-4267(C).

United States Court of Appeals, Second Circuit.

Argued January 18, 2002.

Decided May 21, 2002.

COPYRIGHT MATERIAL OMITTED

Sallie W. Gladney (Thomas E. Redding, on the brief), Redding & Associates, P.C., Houston, TX, for Petitioners-Appellants and for Appellant Jo Ann Scarfia.

Robert J. Branman (David English Carmack and Claire Fallon, Acting Assistant Attorney General, on the brief), Tax Division, Department of Justice, Washington, DC, for Respondent-Appellee Commissioner of Internal Revenue.

Before: OAKES, VAN GRAAFEILAND, and CABRANES, Circuit Judges.

PER CURIAM:

In this consolidated appeal of three consolidated tax cases, petitioners-appellants and appellant appeal from orders entered by the United States Tax Court in favor of respondent-appellee Commissioner of Internal Revenue (the "Commissioner"). See First Blood Assocs. v. Comm'r, No. 00-4267 (Tax Court Docket Nos. 623-92, 13014-92, 12062-94, 15641-92); Greenberg Bros. P'ship No. 12 v. Comm'r, No. 00-4265 (Tax Court Docket No. 22780-91); Cinema '84 v. Comm'r, No. 00-4263 (Tax Court Docket No. 621-92). We granted the parties' joint motion to consolidate the three consolidated tax cases into one appeal, because the cases concern the tax treatment of a set of partnerships with overlapping issues and similar factual background.

These cases arise from the Commissioner's investigation of certain related partnerships formed to market a number of motion picture films. There are three distinct issues on appeal. With respect to the first issue, decided by the Tax Court in a consolidated case under the name Greenberg Bros. Partnership No. 4 v. Commissioner of Internal Revenue, 111 T.C. 198, 1998 WL 525708 (1998), petitioners-appellants and appellant Jo Ann Scarfia, who are partners in the partnerships, appeal on the ground that the Tax Court erred when it concluded that they were not entitled to a "consistent settlement" pursuant to 26 U.S.C. § 6224(c).¹, ²

The second issue was decided by the Tax Court in First Blood Assocs. v. Commissioner of Internal Revenue, 75 T.C.M. (CCH) 2565, 1998 WL 341844 (1998). In this appeal, petitioners-appellants Joseph E. and Bernice L. Goodwin assert that the Tax Court erred when it concluded that they had not completed a binding settlement agreement with the Commissioner in 1992.³

With respect to the third issue, decided by the Tax Court in First Blood Assocs. v. Commissioner of Internal Revenue, 75 T.C.M. (CCH) 2138, 1998 WL 170137 (1998) and in Greenberg Bros. Partnership No. 12 v. Commissioner of Internal Revenue, 75 T.C.M. (CCH) 2164, 1998 WL 188871 (1998), petitioner-appellant Karin Locke and appellant Jo Ann Scarfia claim that the Tax Court erred when it retained jurisdiction over Scarfia and over Locke because of partnership items listed in the tax returns that they jointly filed with their respective husbands, who had earlier filed petitions in bankruptcy.⁴

We address each of the issues in turn, reviewing the Tax Court's conclusions of law de novo and its findings of fact for clear error. See, e.g., Estate of Gloeckner v. Comm'r, 152 F.3d 208, 212 (2d Cir.1998).

I. Greenberg Bros. Partnership No. 4 v. Commissioner of Internal Revenue, 111 T.C. 198 (1998)

A. Consistent Settlement

Petitioners-appellants and appellant (collectively, "appellants") are partners in a partnership to market certain motion picture films. They seek a "consistent settlement agreement" pursuant to 26 U.S.C. § 6224(c) that mirrors in part a settlement reached between the Commissioner and partners Stanley and Betty Block ("Block settlement agreement"). In the Block settlement agreement, the Blocks and the Commissioner agreed to certain tax treatment of partnership items and of related nonpartnership items.⁵ Appellants contend that the Commissioner should afford them the same terms as the Blocks for treatment of partnership items, pursuant to 26 U.S.C. § 6224(c).

The Block settlement agreement was comprised of twenty numbered paragraphs. Some of the relevant provisions are as follows:

1. No adjustment to the partnership items shall be made for the taxable years 1982 through 1994 for purposes of this settlement.

2. The taxpayers are entitled to claim their distributive share of the partnership losses from 1982 through 1994 only to the extent they are at risk under I.R.C. § 465.

3. The taxpayers['] amount at risk for 1982 through 1990 is their capital contribution to the partnership.

4. The taxpayers['] capital contribution to the partnership is their share of partnership losses as shown on the partnership tax return for 1982. There are no amounts at risk available under this paragraph to carry[ ] forward against losses claimed after 1982.

. . . .

10. No additions to tax under I.R.C. §§ 6653(a), 6661, 6659, or 6662 will be asserted with respect to the taxpayers['] investment in the partnership for 1982 through 1994.

(Pet'r's Mot. for Entry of Order to Compel Resp't to Extend Offers of Consistent Settlement to Movants, Ex. A, at 1-2.) Appellants assert that under 26 U.S.C. § 6224(c) they are entitled to the terms of paragraph 1 (a partnership item) but need not accept the terms of paragraph 3 (a nonpartnership item), among others.

Section 6224(c) of the Internal Revenue Code (the "Code") forms part of the Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248, 96 Stat. 324 (1982). It states in relevant part:

(c) Settlement agreement. — In the absence of a showing of fraud, malfeasance, or misrepresentation of fact

(1) Binds all parties. — A settlement agreement between the Secretary and 1 or more partners in a partnership with respect to the determination of partnership items for any partnership taxable year shall ... be binding on all parties to such agreement....

(2) Other partners have right to enter into consistent agreements. — If the Secretary enters into a settlement agreement with any partner with respect to partnership items for any partnership taxable year, the Secretary shall offer to any other partner who so requests settlement terms for the partnership taxable year which are consistent with those contained in such settlement agreement....

26 U.S.C. § 6224(c).

Temporary regulations were promulgated by the Commissioner to implement Section 6224(c).⁶ The relevant portion of those regulations provides as follows:

(a) In general. If the Service enters into a settlement agreement with any partner with respect to partnership items, the Service shall offer to any other partner who so requests in accordance with paragraph (c) of this section settlement terms which are consistent with those contained in the settlement agreement entered into.

(b) Requirements for consistent settlements. "Consistent" settlement terms are those based on the same determinations with respect to partnership items. Settlement with respect to partnership items shall be self-contained; thus, a concession by one party with respect to a partnership item may not be based upon a concession by the other party with respect to a nonpartnership item. Settlements shall be comprehensive, that is, a settlement may not be limited to selected items.

Temp. Treas. Reg. § 301.6224(c)-3T, 52 Fed.Reg. 6787 (Mar. 5, 1987).

The Commissioner interprets Temporary Treasury Regulation § 301.6224(c)-3T as defining the sorts of settlement agreements that are entitled to "consistent settlement" treatment under 26 U.S.C. § 6224(c). For a partner to be entitled to "consistent settlement" treatment, the original settlement agreement must be entered into "with respect to partnership items." 26 U.S.C. § 6224(c). To qualify as a settlement agreement "with respect to partnership items," the regulation requires that the settlement meet at least two conditions. First, it must be "self-contained." Temp. Treas. Reg. § 301.6224(c)-3T(b). That is, "a concession by one party with respect to a partnership item may not be based upon a concession by the other party with respect to a nonpartnership item." Id. Second, the settlement must be "comprehensive." Id. That is, "the settlement may not be limited to selected items." Id.

In the Commissioner's view, the appellants are not entitled to "consistent settlement" treatment under 26 U.S.C. § 6224(c) because the Block settlement agreement "incorporate[s] both partnership and non-partnership items." Appellee's Br. at 45. In light of the Treasury regulation at issue here, we understand this statement to mean that the Block settlement agreement reflects concessions made by the parties of partnership items for nonpartnership items.⁷ Since it is, therefore not "self-contained," it cannot be the basis for affording other partners "consistent settlement" treatment.

Appellants make three arguments as to why they are entitled to a consistent settlement. First, they contend that the Commissioner's interpretation of Temporary Treasury Regulation § 301.6224(c)-3T is erroneous because, in their view, the regulation requires that the terms offered to one partner addressing partnership items in a settlement agreement must be afforded to all other partners as part of "consistent settlement" treatment. They claim that the fact that partnership and non-partnership items are addressed in the same settlement agreement document is irrelevant to another partner's right to consistent treatment of partnership items. Appellants assert that the Commissioner cannot condition the offer of consistent settlement of partnership terms on concessions by the partner of nonpartnership items. Second, they assert that if the Commissioner's interpretation of Temporary Treasury Regulation §...