Kearney Partners Fund, LLC v. United States

Decision Date22 May 2013
Docket NumberCase No. 2:10-cv-153-FtM-SPC
PartiesKEARNEY PARTNERS FUND, LLC, by and through LINCOLN PARTNERS FUND, LLC, Tax Matters Partner, et al., Plaintiffs, v. UNITED STATES OF AMERICA, etc. Defendant.
CourtUnited States District Courts. 11th Circuit. United States District Court of Middle District of Florida
ORDER

This cause is before the Court on the Motion for Summary Judgment by Plaintiffs Regarding Announcement 2002 and Waiver of Penalties and Memorandum of Law in Support ("Plaintiffs' Motion for Summary Judgment" or "Plaintiffs' Motion") (Doc. No. 103), filed on September 21, 2012, Defendant's Opposition (Doc. No. 131), filed on November 16, 2012, Plaintiffs' Reply in support of their Motion (Doc. No. 143), filed on November 29, 2012, United States of America's Motion for Partial Summary Judgment and Supporting Memorandum of Law ("Defendant's Motion for Summary Judgment" or "Defendant's Motion") (Doc. No. 101), filed on September 21, 2012, Plaintiffs' Opposition (Doc. No. 130), filed on November 16, 2012, and United States of America's Reply (Doc. No. 144), filed on November 29, 2012. After a careful review of the parties' submissions and the applicable law, the Court denies in part and grants in part both parties' Summary Judgment Motions.

BACKGROUND

In this tax case, Plaintiffs filed suit against Defendant United States of America for the readjustment of nine partnership tax returns under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). (Doc. No. 52, p. 1.) The case involves a complex series of financial transactions undertaken by a three-tiered partnership known as "FOCus," which consists of three Delaware incorporated limited liability companies: Nebraska Partners Fund, LLC ("Nebraska"), Lincoln Partners Fund, LLC ("Lincoln"), and Kearney Partners Fund, LLC ("Kearney"). On December 4, 2001, Mr. Raghunathan Sarma ("Sarma") became the controlling member of and acquired a direct partnership interest in Nebraska. Through his interest in Nebraska, Sarma obtained indirect partnership interests in Lincoln and Kearney based on Nebraska's 99% ownership interest in Lincoln and Lincoln's 99% ownership interest in Kearney. (Doc. No. 107, p. 5.)

In January 2002, the IRS issued Announcement 2002-2 ("Announcement" or "Announcement 2002"), a disclosure initiative inviting taxpayers to disclose their tax treatment of certain unauthorized tax shelters. (Doc. No. 103-5.) For any item voluntarily disclosed by taxpayers in accordance with the initiative, the IRS agreed to waive accuracy-related penalties that would otherwise be triggered by the underpayment of taxes. On April 23, 2002, Sarma's attorney Dennis Sabourin filed a voluntary disclosure ("disclosure") with the IRS, which indicated Sarma's involvement in the FOCus partnerships. (Doc. No. 102-1.)

On June 25, 2002, the IRS issued a Notice of Beginning of Administrative Proceeding ("NBAP") notifying Plaintiffs of its intent to challenge FOCus and the taxbenefits allocated to Sarma from the partnerships. (Doc. No. 107, p. 9.) The Agency concluded its investigation by issuing Final Partnership Administrative Adjustments ("FPAA") to the FOCus partnerships and all partners, including Sarma, for the tax periods ending in November 20, 2001, and December 4, 2001.1 (See Doc. No. 100-5.) The FPAAs determined that Nebraska, Lincoln, and Kearney were formed for tax avoidance purposes, and in furtherance of such purposes, engaged in a prearranged series of transactions engineered to create an artificial economic loss that lacked economic substance and a legitimate business purpose. (Id. at 25.) Specifically, it is alleged that the FOCus partnerships took part in "straddle" foreign exchange ("FX") trades that achieved a nominal net profit, but resulted in a substantial loss that was later used by Sarma to obtain substantial tax benefits. The FPAAs made substantive adjustments to the partnerships' tax returns and imposed substantial accuracy-related penalties. The parties' cross-motions for summary judgment primarily concern these penalties.

APPLICABLE STANDARDS

Summary judgment is warranted when there is no genuine issue as to any material fact. Fed. R. Civ. P. 56(a). "An issue of fact is 'genuine' if the record taken as a whole could lead a rational trier of fact to find for the nonmoving party." Baby Buddies, Inc. v. Toys R Us, Inc., 611 F.3d 1308, 1314 (11th Cir. 2010) (citations and internal quotation marks omitted). A fact is "material" if it may affect the outcome of the case under governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The moving party bears the burden of showing the absence of a genuine issue of materialfact by identifying relevant pleadings, depositions, answers to interrogatories, admissions, and/or affidavits. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Hickson Corp. v. N. Crossarm Co., Inc., 357 F.3d 1256, 1259-60 (11th Cir. 2004).

To avoid the entry of summary judgment, the non-moving party must offer enough evidence, beyond a mere scintilla, upon which the fact finder could reasonably find a genuine issue of a material fact. Liberty Lobby, 477 U.S. at 247-48. However, the non-moving party may not simply rely on beliefs, conjecture, speculation, or conclusory allegations. Instead, the party faced with a properly supported summary judgment motion must come forward with extrinsic evidence that meets "the substantive evidentiary standard of proof that would apply at trial on the merits," including affidavits, depositions, answers to interrogatories, and/or admissions. Celotex, 477 U.S. at 322; Hilburn v. Murata Elecs. N. Am., Inc., 181 F.3d 1220, 1225 (11th Cir. 1999).

When evaluating a summary judgment motion, the Court views all evidence and draws all reasonable inferences in favor of the non-moving party. Scott v. Harris, 550 U.S. 372, 378 (2007); Tana v. Dantanna's, 611 F.3d 767, 772 (11th Cir. 2010). "If reasonable minds might differ on the inferences arising from undisputed facts, then the court should deny summary judgment." St. Charles Foods Inc. v. Am.'s Favorite Chicken Co., 198 F.3d 815, 819 (11th Cir. 1999) (citations and internal quotation marks omitted).

When faced with cross-motions for summary judgment, a court must consider each motion on its own merits. Shook v. United States, 713 F.2d 662, 665 (11th Cir. 1983). Where both parties "disagree as to the facts and take inconsistent legal theories[,] the mere filing of cross motions for summary judgment does not warrant theentry of such judgment." Id.

DISCUSSION

The parties' cross-motions for summary judgment concern certain accuracy-related penalties added to Plaintiffs' tax obligations for tax periods ending on November 20, 2001, and December 4, 2001. The IRS imposed the penalties despite the April 23, 2002 disclosure filed by Sarma's attorney. According to the IRS, the disclosure did not comply with the terms of Announcement 2002. Plaintiffs move for summary judgment on their claims that the applicable penalties should be waived on account of Sarma's disclosure and that the IRS should not be permitted to provide the reasons for denying penalty relief. Plaintiffs also argue that Defendant's Rule 30(b)(6) witness was unprepared to answer questions about the Announcement and that this Court should order Defendant to provide another witness.

Before addressing the merits of Plaintiffs' Motion, the Court must first determine whether review is authorized. Specifically, Defendant argues that under the Administrative Procedures Act ("APA"), the Court may not review the IRS's penalty determinations pursuant to Announcement 2002 and that the Court lacks subject matter jurisdiction to assess whether the disclosure is a defense to the penalties.

1. Is Judicial Review Appropriate?

The APA establishes a broad presumption of judicial review of final agency action. 5 U.S.C. § 702. "This is 'just' a presumption, however," and in some cases, agency action is committed to agency discretion by law and unreviewable by the courts. Lincoln v. Vigil, 508 U.S. 182, 190-91 (1993). The APA sets forth two important exceptions to this presumption: (1) when "statutes preclude judicial review," or (2) when"agency action is committed to agency discretion by law." Id. at 191 n.3. Judicial review, however, is the rule, and non-reviewability is a narrow exception which must be clearly demonstrated. Greenwood Utils. Comm'n v. Hodel, 764 F.2d 1459, 1464 (11th Cir. 1985).

Defendant invokes the latter exception and argues that its denial of penalty relief under Announcement 2002 is "committed to agency discretion by law" and therefore unreviewable. Plaintiffs respond that the judiciary may review the IRS's compliance with its own rules and regulations when they impose binding norms on the Agency and when they confer certain rights to taxpayers.

Over the years, a substantial body of law has developed to help discern administrative decisions that are "traditionally left to agency discretion," Lincoln, 508 U.S. at 191, from reviewable agency actions that have the force and effect of law. Chrysler Corp. v. Brown, 441 U.S. 281, 295 (1979). As a general matter, "an administrative agency is not a slave of its rules." Health Sys. Agency of Okla. v. Norman, 589 F.2d 486, 490 n.5 (10th Cir. 1978) (citation and internal quotation marks omitted). Thus, it is well established that rules and policies governing internal agency operations do not have the force and effect of law, do not create substantive rights in the public, and are not binding on the agency issuing them. Tsegay v. Ashcroft, 386 F.3d 1347, 1355 (10th Cir. 2004). In contrast, rules promulgated by a federal agency which regulate the rights and interests of others are controlling upon the agency. Columbia Broad. Sys., Inc. v. United States, 316 U.S. 407, 422 (1942).

In its seminal decision in Accardi v. Shaughnessy, 347 U.S. 260 (1954), the Supreme Court first applied this doctrine in an immigration case, when it vacated aremoval order of the Board of Immigration...

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