In re Waugh, Bankruptcy No. 396-35759-SF-7. Adversary No. 398-33721. Civ.A. No. 3:99-CV-1260-L.

CourtUnited States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Northern District of Texas
Writing for the CourtLINDSAY
Citation260 BR 806
PartiesIn re Pendleton C. WAUGH, Debtor. Pendleton C. Waugh, Appellant, v. Internal Revenue Service, Appellee.
Docket NumberBankruptcy No. 396-35759-SF-7. Adversary No. 398-33721. Civ.A. No. 3:99-CV-1260-L.
Decision Date28 February 2001

260 B.R. 806 (2001)

In re Pendleton C. WAUGH, Debtor.
Pendleton C. Waugh, Appellant,
Internal Revenue Service, Appellee.

Bankruptcy No. 396-35759-SF-7. Adversary No. 398-33721. Civ.A. No. 3:99-CV-1260-L.

United States District Court, N.D. Texas, Dallas Division.

February 28, 2001.

260 BR 807

Steven A. Felsenthal, Dallas, TX, pro se.

Pendleton C. Waugh Dallas, TX, pro se.

Jon E. Fisher, Attorney at Law, U.S. Department of Justice, Tax Division, Dallas, TX, for Internal Revenue Service.


LINDSAY, District Judge.

This is an appeal from an order granting summary judgment to Appellee, entered February 19, 1999 by the United States Bankruptcy Judge. The order ruled that an income tax assessment against the Debtor/Appellant, for the 1986 tax year, was not discharged by the bankruptcy court's order of discharge on December 23, 1997. After careful consideration of the briefs, supporting evidence, and applicable law, the order of the bankruptcy court is affirmed.

I. Factual and Procedural Background1

This case revolves around the 1986 tax return for Pendleton Waugh ("Waugh") and his wife. Waugh contends that the return was signed and mailed on May 21, 1987 (after having received an extension of the filing deadline), but the IRS contends that the return was never received. On March 20, 1989, Waugh's wife responded to an inquiry from the IRS concerning the missing tax return by sending an unsigned copy of the 1986 return. The copy of the return did include two specific documents that were signed by Waugh: 1) a declaration that Waugh was in compliance with IRS requirements for the substantiation of travel and entertainment expenses, see I.R.C. § 274(d); and 2) a copy of the previously filed Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

The IRS received the copy of the return on March 24, 1989, and subsequently requested that the Waughs execute a verification form under penalty of perjury. Waugh contends that he never received this request for a signature. On August 21, 1989, the IRS sent the Waughs a request for payment for the balance still owed for the 1986 tax year, including interest and penalties. The Waughs sent a check in the full amount requested on September 1, 1989.

260 BR 808

The Waughs' 1986 tax return included a loss of at least $364,0002 from his share of the Agri-Cal Venture Associates partnership ("Agri-Cal"),3 which was also registered as a tax shelter. This loss effectively offset much of the Waughs' other income for the year, including wages of $120,061 and capital gains of $445,004, reducing their taxes accordingly. The IRS' copy of the 1986 tax return was stamped "Accepted Non-TEFRA Issues," apparently on December 7, 1989. By so doing, as will become apparent in the discussion to follow, the IRS apparently excluded from its "acceptance" of the return any items relating to the Waughs' proportional share of the results recorded by any partnerships in which they were a partner, including Agri-Cal.

"TEFRA" is a reference to the Tax Equity and Fiscal Responsibility Act of 1982, Pub.L. 97-248, 96 Stat. 324. The key provisions with respect to the Waughs' return were in Title IV, codified as amended at I.R.C. §§ 6221-33, which changed the way that the IRS reviewed how individual partners reported the results of partnerships. TEFRA was enacted

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."

Alexander v. United States, 44 F.3d 328, 330 (5th Cir.1995) (citation omitted). "Partnership items" and "nonpartnership items" both refer to a partner's proportionate share of partnership income, losses, or deductions that are included on the partner's individual return, but the two categories are treated differently by the Internal Revenue Code, in terms of how they are audited and adjusted and (as discussed below) the period of limitations within which the IRS must make any assessments based on those adjustments.

Partnership items, which are those "more appropriately determined at the partnership level than at the partner level," I.R.C. § 6231(a)(3), are audited and adjusted by the IRS at the partnership level and therefore will be treated consistently for all partners. Nonpartnership items are examined and adjusted at the individual partner level, and may not be treated the same as for other partners. Most items on a partnership information

260 BR 809
return will be "partnership items." Under certain circumstances an item that would normally be treated as a partnership item will be treated instead as a nonpartnership item, if "to treat items as partnership items will interfere with the effective and efficient enforcement" of the tax laws. I.R.C. § 6231(c)(2)

The IRS notation that the return was accepted for non-TEFRA issues thus indicated that the examination of any partnership items had not necessarily been concluded, as such an examination would be conducted at the partnership level rather than at the individual partner level. The IRS initiated an examination of Agri-Cal's operating loss for the 1986 tax year in 1990 and mailed a final partnership administrative adjustment ("FPAA") notice to the "tax matters partner" on March 14, 1990 and to other partners including Waugh on April 23, 1990. The proposed adjustment would affect all partners in Agri-Cal, including Waugh, to the extent of their proportionate share. A petition for readjustment, contesting the FPAA, was filed in the United States Tax Court on June 13, 1990. As of October 8, 1998, this proceeding was still pending before the Tax Court.

Waugh filed a bankruptcy petition under Chapter 11 on August 15, 1996, which was converted to a Chapter 7 proceeding on December 17, 1996. The IRS filed a Proof of Claim on January 31, 1997 that included an unassessed tax liability for the 1986 tax year, and then sent Waugh a statutory notice of deficiency on June 3, 1997. An amended Proof of Claim, including the unassessed tax liability for the 1986 tax year, was filed on November 4, 1997, and on December 23, 1997 the bankruptcy court entered an Order of Discharge. The IRS issued an assessment for the amounts in question on August 17, 1998. The assessment for the 1986 tax year was based on disallowing substantial portions of the losses recorded by Agri-Cal. Waugh's original share of those losses was $364,000, of which $353,015 was disallowed by the IRS.

Waugh filed to reopen the bankruptcy case on October 13, 1998, seeking discharge of the tax assessment. The IRS conceded that assessed penalties and associated interest were dischargeable, but contested the discharge of the income tax liability itself. Waugh filed a Motion for Summary Judgment, and the IRS filed a Cross-Motion for Summary Judgment. The bankruptcy court denied Waugh's motion and granted the IRS motion. Waugh then appealed to this court pursuant to 28 U.S.C. § 158(b) and Fed. R. Bankr.P. 8001.

II. Standard of Review

As this court functions as an appellate court when reviewing a bankruptcy court's decision, the same standards of review generally applied in federal court appeals also apply to this court. In re Webb, 954 F.2d 1102, 1103-04 (5th Cir.1992). While the bankruptcy court's conclusions of law are reviewed de novo, In re Pro-Snax Distribs., Inc., 157 F.3d 414, 420 (5th Cir.1998), its findings of fact are not to be set aside unless clearly erroneous. In re Webb, 954 F.2d at 1104. A grant of summary judgment is reviewed de novo. In re National Gypsum Co., 208 F.3d 498, 504 (5th Cir.), cert. denied, ___ U.S. ___, 121 S.Ct. 172, 148 L.Ed.2d 117 (2000).

Summary judgment shall be rendered when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Ragas v. Tennessee

260 BR 810
Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir.1998). A dispute regarding a material fact is "genuine" if the evidence is such that a reasonable jury could return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When ruling on a motion for summary judgment, the court is required to view all inferences drawn from the factual record in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Ragas, 136 F.3d at 458

Once the moving party has made an initial showing that there is no evidence to support the nonmoving party's case, the party opposing the motion must come forward with competent summary judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586, 106 S.Ct. 1348. Mere conclusory allegations are not competent summary judgment evidence, and thus are insufficient to defeat a motion for summary judgment. Eason v. Thaler, 73 F.3d 1322, 1325 (5th Cir.1996). Unsubstantiated assertions, improbable inferences, and unsupported speculation are not competent summary judgment evidence. See Forsyth v. Barr, 19 F.3d 1527, 1533 (5th Cir.), cert. denied, 513 U.S. 871, 115 S.Ct. 195, 130 L.Ed.2d 127 (1994). The party opposing summary judgment is required to identify...

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