Davis v. United States
| Decision Date | 25 January 2016 |
| Docket Number | No. 13–16458.,13–16458. |
| Citation | 811 F.3d 335 |
| Parties | Allen DAVIS; Carol Davis, Plaintiffs–Appellees, v. UNITED STATES of America, Defendant–Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Kathryn Keneally, Assistant Attorney General, Richard Farber, Andrew M. Weiner (argued), Attorneys, Tax Division, Department of Justice, Washington, D.C., for Defendant–Appellant.
Steven L. Mayer (argued), Kenneth G. Hausman, Stuart S. Lipton, Julian Y. Waldo, Arnold & Porter LLP, San Francisco, CA, for Plaintiffs–Appellees.
Before: SIDNEY R. THOMAS, Chief Judge and SANDRA S. IKUTA and ANDREW D. HURWITZ, Circuit Judges.
The late Al Davis is a gridiron icon, deservedly inducted into the Pro Football Hall of Fame in 1992. He served as coach, then general manager, and finally as the "principal owner" of the Oakland (and Los Angeles) Raiders over some fifty years. During the Davis years, the Raiders appeared in five Super Bowls, winning three.
The case before us arises from a complaint filed in 2011 by Davis and his wife, Carol, against the United States, seeking a refund of income taxes.1 Davis2 argues that the Internal Revenue Service (IRS) assessed the taxes outside the statute of limitations and in breach of a Closing Agreement between the IRS and the partnership that formally owned the Raiders. The district court held that the breach of contract invalidated the assessments and entered judgment for Davis. We reverse, finding the assessments valid.
Davis had the largest interest in the Oakland Raiders, a California limited partnership (the "Partnership"), which owned and operated the professional football team. Davis was also the president of A.D. Football, Inc., the sole general partner and tax matters partner ("TMP") of the Partnership. See 26 U.S.C. ("I.R.C.") § 6231(a)(7).
The Partnership and the IRS were involved in long-running Tax Court litigation. See Milenbach v. Comm'r, 318 F.3d 924 (9th Cir.2003). In 2005, the Partnership and the IRS reached a settlement over tax years 1988 through 1994. The Closing Agreement, which concluded the litigation, was signed by Davis, as President of the TMP. Under the Agreement, the IRS was required to make "computational adjustments" to determine the effect of the settlement on each partner's tax liability. I.R.C. § 6231(a)(6). Paragraph Q of the Closing Agreement gave the partners the following procedural rights related to those computations:
[E]ach partner of the [Raiders] will be permitted at least 90 days to review and comment on computational adjustments proposed by the IRS with respect to the implementation of this settlement (and at least 60 days to review any revised computational adjustments) prior to the IRS assessing such amounts.
The Closing Agreement was implemented through three stipulations filed in the Tax Court, one each for tax years 1990, 1991, and 1992. Each stipulation included a Form 4605–A, showing the agreed-upon adjustments to the Partnership's informational tax return; a Form 886–Z, showing each partner's share of the corrected income for that tax year; and a corresponding decision to be entered by the Tax Court. The stipulations recited that they were in agreement with and subject to the Closing Agreement. They were signed by Stuart Lipton, identified as counsel for "Petitioner"—the Partnership and its TMP, A.D. Football. On June 6, 2006, the Tax Court approved and entered the stipulated decisions.
The IRS did not distribute its calculations of each partner's computational adjustments until June 2007. Davis responded a few weeks later, but by the time the IRS sent revised calculations on August 27, 2007, it had no time to wait 60 days for Davis to review these calculations (as provided for by Paragraph Q of the Closing Agreement) because the statute of limitations to make assessments was about to expire. On September 4, 2007, the IRS issued assessments against Davis in the amounts of $501,661 for 1990, $1,820,400 for 1992, and $159,287 for 1995.3 The IRS applied a portion of refunds otherwise due to Davis for earlier years to satisfy those assessments.
In November 2007, Davis filed an administrative refund claim for tax years 1990 and 1992, arguing that the September 2007 assessments were invalid because the IRS had breached Paragraph Q of the Closing Agreement. The IRS never responded to this claim. In February 2009, Davis filed an administrative refund claim for tax year 1995, claiming that the IRS had breached Paragraph Q, made the September 2007 assessments outside the statute of limitations, and miscalculated interest. The IRS disallowed the claim in large part, adjusting only the calculation of interest.
In 2011, Davis brought this action in the United States District Court for the Northern District of California, seeking refunds for tax years 1990, 1992, and 1995, based on the IRS's breach of Paragraph Q. Before the district court, the IRS argued that it did not breach the Closing Agreement, and that even if it did, the breach did not invalidate the assessments. The district court granted Davis's motion for summary judgment, holding that the IRS's breach of the Closing Agreement invalidated the assessments. The government timely appealed.
The IRS now admits that it breached Paragraph Q of the Closing Agreement by making the September 2007 assessments without giving Davis a second opportunity to review its calculations. The issue is whether, as the district court concluded, that breach of contract invalidates the subsequent assessments.
Closing agreements are contracts, States S.S. Co. v. IRS, 683 F.2d 1282, 1284 (9th Cir.1982), governed by federal common law, United States v. Nat'l Steel Corp.,
75 F.3d 1146, 1150 (7th Cir.1996). "[F]or most purposes closing agreements are just like other contracts." Id. And, "damages are always the default remedy for breach of contract." United States v. Winstar Corp., 518 U.S. 839, 885, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996) (plurality opinion) ().
But Davis does not seek damages; instead, he argues that any assessments made in breach of the Closing Agreement are invalid.4 Davis relies primarily on I.R.C. § 7121(b)(2), which provides that closing agreements are "final and conclusive." He notes that the Tax Court incorporated the Closing Agreement into its decision, making it enforceable as a court order. But, the "final and conclusive" nature of closing agreements simply means that they "settle an existing dispute with finality," Nat'l Steel, 75 F.3d at 1150, and may not be modified or disregarded "except upon a showing of fraud or malfeasance, or misrepresentation of a material fact," I.R.C. § 7121(b) ; see also In re Hopkins, 146 F.3d 729, 732 (9th Cir.1998) (). That a contract is "final" does not dictate the remedy for its breach. Cf. Jeff D. v. Andrus, 899 F.2d 753, 759 (9th Cir.1989) (). And, Davis offers no support for the unlikely proposition that, because a settlement with the IRS is "final" and court-approved, the remedy for any breach, however small, is to free the taxpayer from his pre-existing obligation to pay taxes. If this were the case, the IRS justifiably would be reluctant to enter into closing agreements, for fear that a minor error could have major consequences.
Davis argues that Philadelphia & Reading Corp. v. United States, 944 F.2d 1063 (3d Cir.1991), establishes that the remedy for the breach of a closing agreement is invalidation of subsequent assessments. In that case, a settlement waived the statutory requirement that the IRS mail a notice of deficiency prior to making assessments. Id. at 1066–67. The settlement agreement expressly conditioned that waiver on the IRS delaying the assessments until after it had approved a schedule of overpayments, so that the taxpayer, which had overpaid taxes in certain years and underpaid in others, could pay only the net balance owed. Id. at 1067. The IRS, however, assessed taxes before the overpayments had been approved and, more importantly, without sending the statutorily mandated notice of deficiency. Id. at 1068. The Third Circuit held that the assessments were invalid. Id. at 1072.
However, Philadelphia & Reading is of no aid to Davis. Because the IRS had failed to approve the schedule of overpayments, the Third Circuit found that the taxpayer's contractual waiver of its statutory right to receive a notice of deficiency never came into effect. Id. The assessments were therefore not authorized by statute. Id. at 1072–73. Here, by contrast, the IRS violated no law in making the assessments.
At bottom, the problem with Davis's argument is that his obligation to pay taxes validly and accurately assessed comes from the Internal Revenue Code, not the Closing Agreement, which only specified the treatment of certain Partnership income as inputs to the calculation of his taxes. The IRS's failure to perform its contract with the Partnership cannot relieve Davis of his statutory obligation to pay taxes; nothing in the Closing Agreement provided that any taxes assessed on the partners pursuant to statute would be rendered invalid if the government failed to perform.
The IRS breached its contract. That entitled Davis to a remedy, but only one in contract.5 Moreover, although the breach denied Davis an opportunity to comment on the amounts of the assessments before they were made, it did not prevent him from challenging the assessed amounts; Davis could have sought to challenge those amounts in an administrative refund claim or a refund...
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