Individually v. United States

Decision Date24 August 2011
Docket Number2009–5009.,Nos. 2009–5008,s. 2009–5008
Citation2011 USTC P 50596,108 A.F.T.R.2d 2011,655 F.3d 1323
PartiesLyman F. BUSH Individually and as Personal Representative of the Estate of Beverly J. Bush, Plaintiffs–Appellants,v.UNITED STATES, Defendant–Appellee.Tommy J. Shelton, Plaintiff–Appellant,v.United States, Defendant–Appellee.
CourtU.S. Court of Appeals — Federal Circuit

OPINION TEXT STARTS HERE

Thomas E. Redding, Redding & Associates, P.C., of Houston, TX, argued for all plaintiffs-appellants. With him on the brief were Sallie W. Gladney and Teresa J. Womack.Andrew M. Weiner, Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were John A. Dicicco, Acting Deputy Assistant Attorney General, and Michael J. Haungs, Attorney.Before RADER, Chief Judge, NEWMAN, LOURIE, BRYSON, GAJARSA, * LINN, DYK, PROST, MOORE, O'MALLEY, and REYNA, Circuit Judges, on rehearing en banc.Opinion for the court filed by Circuit Judge PROST, in which Chief Judge RADER and Circuit Judges LOURIE, BRYSON, GAJARSA, MOORE and O'MALLEY, join. Dissenting opinion filed by Circuit Judge DYK, in which Circuit Judges NEWMAN, LINN, and REYNA join.PROST, Circuit Judge.

This tax case concerns the procedures to be followed when the Internal Revenue Service (“IRS” or “government”) conducts a partnership proceeding under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). I.R.C. §§ 6221–6233. The plaintiffs are individual taxpayers and limited partners in partnerships that were the subject of such proceedings. The plaintiffs opted out of the partnership proceedings via settlement. In doing so, they stipulated to certain matters concerning their participation in the partnerships. Based on those stipulations, the IRS assessed recomputed taxes against the plaintiffs without first issuing notices of deficiency (which would have triggered an opportunity for plaintiffs to challenge the recomputation in the United States Tax Court before assessment). Plaintiffs paid the assessed taxes and subsequently filed suit on grounds that the lack of deficiency notices rendered the assessments invalid. The United States Court of Federal Claims ruled for the government, holding that the IRS had no obligation to issue notices of deficiency in such circumstances. Bush v. United States, 78 Fed.Cl. 76 (2007); Shelton v. United States, Nos. 02–1042, 04–1595, 2007 U.S. Claims LEXIS 311 (Aug. 17, 2007). We agree, and therefore affirm.

I

Before turning to the facts, we undertake a brief review of TEFRA and its effect on the IRS's auditing of partnerships. When an individual taxpayer prepares his yearly tax return, he self-computes his tax for income he has earned, then transmits the appropriate payment. Matters become more complicated where income generated by partnerships is involved. The partnership generates income, but as an entity is not itself taxable. Instead, the individual partners of a partnership shoulder the burden of taxation on income that the partnership generates.

In order for the IRS to properly audit the individual returns of the partners, it must have data about the partnership's income as a whole. For that reason, partnerships are required to file yearly returns, even though they do not pay tax on income. The IRS can then audit the partnership return against the returns of the partners and have a more complete picture of the income generated, which leads to a more accurate assessment of tax liability all around.

TEFRA comes into play when the IRS reviews a partnership return and disputes some aspect of it. One of the Act's purposes was to streamline the tax procedures for partnerships. Rather than undertake an arduous series of partner-by-partner audits, as had previously been required, TEFRA allows for a single, unified audit to determine the treatment of “partnership items” for all the partners. See I.R.C. §§ 6221–6233; H.R. Conf. Rep. No. 97–760, at 599–600 (1982); see also Callaway v. Comm'r, 231 F.3d 106, 107–08 (2d Cir.2000); Keener v. United States, 76 Fed.Cl. 455, 457–58 (2007), aff'd, 551 F.3d 1358 (Fed.Cir.2009). These are items whose treatment affects the entire partnership, and so analyzing them at the partnership level makes more sense than doing so partner-by-partner. See I.R.C. § 6231(a)(3) (defining “partnership item”).

Under TEFRA, the IRS performs its audit of the partnership return and then transmits a notice of any required adjustments to each of the partners, as well as to the partnership's Tax Matters Partner. If the partnership wishes to dispute the outcome of the audit, the Tax Matters Partner may file a petition in court. See id. § 6226(a)(1)(3). All partners are treated as parties and have a right to participate in the judicial proceeding, and if they wish can settle independently with the IRS. See id. § 6224(c).

This case involves such settlements, and questions about the proper procedure for the IRS when it endeavors to collect taxes it believes are owed pursuant to the settlement.

II

We turn, then, to the facts. The two appeals before us present the same issues and nearly identical stories. The first, case number 2009–5008, concerns taxpayer Lyman Bush and his late wife Beverly Bush. In the early 1980s, Mr. Bush was a limited partner in two partnerships, respectively named Lone Wolf McQuade and Cinema '84. As part of their obligations under the Tax Code, the partnerships filed tax returns. As individual taxpayers, the Bushes filed joint tax returns of their own.

The IRS, on reviewing the Lone Wolf McQuade and Cinema '84 returns, found deficiencies. Pursuant to TEFRA, in 1991 the IRS notified the partners of Lone Wolf McQuade that it was issuing Final Partnership Administrative Adjustments (“FPAAs”) that would disallow certain deductions on the partnership's 1983–86 tax returns. See I.R.C. § 6223(a) (requiring notice to the Tax Matters Partner and to each individual partner). The IRS also notified the partners of Cinema '84 of disallowed deductions in that partnership's returns for tax years 1985–89.

Both partnerships challenged the FPAAs with petitions in the Tax Court. 1See I.R.C. § 6226(a) (concerning judicial review of FPAAs). While proceedings were pending, on August 7, 1999, the Bushes settled with the IRS. See I.R.C. § 6224(c) (concerning settlement). The settlement papers—two Form 906 Closing Agreements on Final Determination Covering Specific Matters—expressly stated that they did not make any adjustments to partnership items. The agreements addressed the right to claim partnership losses on individual tax returns. The agreements provided that the settling partners were only entitled to claim partnership losses to the extent of their “at risk” amount. They also contained stipulations as to how to calculate the exact dollar amount for each settling partner that was “at risk” for the relevant tax years. For example, the Bushes' “capital contribution” was set at $50,000 per partnership, and the agreement stated that the at risk amount could increase with any additional capital contribution to the partnership after 1986. See Bush, 78 Fed.Cl. at 78; Bush Panel J.A. 191. Following these Closing Agreements, the Tax Court dismissed the Bushes from the partnership proceedings concerning Cinema '84 and Lone Wolf McQuade.

On July 12, 2000, the IRS issued Notices of Adjustment for the Bushes' 1985, 1986, and 1987 joint tax returns. The Notices disallowed a significant portion of the losses the Bushes had claimed connected to the two partnerships. Two weeks later, the IRS assessed the Bushes for the following amounts:

+-----------------------------------+
                ¦Tax Year¦Assessment                ¦
                +--------+--------------------------¦
                ¦1985    ¦Tax: $16,708.00           ¦
                +--------+--------------------------¦
                ¦        ¦Interest: $42,660.44      ¦
                +--------+--------------------------¦
                ¦1986    ¦Tax: $10,817.00           ¦
                +--------+--------------------------¦
                ¦        ¦Interest: $46,004.97      ¦
                +--------+--------------------------¦
                ¦1987    ¦Tax: $ 9,635.00           ¦
                +--------+--------------------------¦
                ¦        ¦Interest: $26,729.62      ¦
                +-----------------------------------+
                

1986 at 79. The government argues, and the Bushes do not dispute, that these amounts were calculated based on provisions in the Closing Agreements, specifically the stipulated amount of the Bushes' at-risk capital in those years. Crucial to this appeal, the IRS did not issue the Bushes any notices of deficiency as to their joint tax returns prior to making these assessments.

The Bushes paid the assessed tax and interest the next month, August 2000. Two years later, they initiated refund proceedings with the IRS seeking to recover that payment on grounds that the IRS failed to provide them deficiency notices. The IRS denied their claims, and the Bushes filed suit in the Court of Federal Claims on October 25, 2004. Id.

The facts pertaining to case number 2009–5009 are largely identical. Like Mr. Bush, taxpayer Tommy Shelton was a limited partner in Cinema '84 (Lone Wolf McQuade does not figure in Mr. Shelton's appeal). Like the Bushes, Mr. Shelton filed individual income tax returns claiming deductions stemming from that partnership and so was affected by the TEFRA proceeding concerning Cinema '84. Like the Bushes, Mr. Shelton settled with the IRS. His Closing Agreement differed only in the tax years at issue and the amount of Mr. Shelton's capital contribution, which was stipulated to be $150,000. Shelton, 2007 U.S. Claims LEXIS 311, at *3.

Mr. Shelton's post-settlement experience also mirrored that of the Bushes. On July 20, 2000, the IRS issued Notices of Adjustment disallowing deductions on a number of Mr. Shelton's tax returns in the 1980s and 1990s. It subsequently assessed him as follows:

+-----------------------------------+
                ¦Tax Year¦Assessment                ¦
                +--------+--------------------------¦
                ¦1981    ¦Tax: $ 9,782.00           ¦
...

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