Meruelo v. Comm'r

• Court: U.S. Court of Appeals — Ninth Circuit
• Writing for the Court: N.R. SMITH
• Citation: Meruelo v. Comm'r , 691 F.3d 1108, 110 A.F.T.R.2d 2012, 12 Cal. Daily Op. Serv. 9371, 2012 Daily Journal D.A.R. 11435 (9th Cir. 2012)
• Decision Date: 16 August 2012
• Docket Number: No. 11–70015.,11–70015.
• Parties: Alex MERUELO; Liset Meruelo, Petitioners–Appellants, v. COMMISSIONER of INTERNAL REVENUE, Respondent–Appellee.

691 F.3d 1108

110 A.F.T.R.2d 2012-5614

12 Cal. Daily Op. Serv. 9371

2012 Daily Journal D.A.R. 11,435

Alex MERUELO; Liset Meruelo, Petitioners–Appellants,

v.COMMISSIONER of INTERNAL REVENUE, Respondent–Appellee.

No. 11–70015.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 20, 2012.

Filed Aug. 16, 2012.

A. Lavar Taylor (argued) and Robert A. Horwitz, Law Offices of A. Lavar Taylor, Santa Ana, CA, for the petitioners-appellants.

Richard Farber (argued) and Ellen Page DelSole, United States Department of Justice, Tax Division, Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, United States Departments of Justice, Washington, D.C., for the respondent-appellee.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 624–04.

Before: M. MARGARET McKEOWN and N. RANDY SMITH, Circuit Judges, and ROGER T. BENITEZ, District Judge.^*

OPINION

N.R. SMITH, Circuit Judge:

The Internal Revenue Service (IRS) validly issues a Notice of Deficiency (“NOD”) to a partner in a partnership, when (1) no partnership-level proceeding is pending, (2) no notice of final partnership administrative adjustment (“FPAA”) has been issued, and (3) the normal three-year statute of limitations in 26 U.S.C. § 6229(a)¹ has not expired. As such, we affirm the Tax Court's denial of Alex and Liset Meruelo's (husband and wife and hereinafter referredto as the Meruelos or the petitioners) motion to dismiss for lack of jurisdiction.

I. BACKGROUND

A. Facts

Mr. Meruelo was the sole member of Meruelo Capital Management, LLC (“MCM”). In 1999, MCM was a single-member limited liability company (LLC) and a disregarded entity ² by default, because it did not file a Form 8832 (which allows an LLC to elect to be treated as a corporation for that year). As such, MCM did not (and was not required to) file a federal tax return for 1999. Instead, all of MCM's income and losses were to be reported on the Meruelos' joint tax returns. SeeTreas. Reg. § 301.7701–3(a), (b)(ii).

In 1999, MCM owned a 31.68 percent interest in Intervest Financial LLC (“Intervest”). Intervest had five members. The members were treated as partners for income tax purposes. Intervest was an entity subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 26 U.S.C. § 6221–34.

On October 14, 2000, Intervest filed a Form 1065, U.S. Partnership Return of Income, for the 1999 tax year. The return listed MCM as a member, but it did not indicate that MCM was a single-member LLC, a disregarded entity, or that Mr. Meruelo (rather than MCM) was actually Intervest's member for 1999 for Federal tax purposes. The return reported a $14,327,160 ordinary loss from foreign currency transactions. Intervest issued MCM a Schedule K–1, Partner's Share of Income, Credits, Deductions, etc., for 1999 reporting an ordinary loss of $4,538,844 as a passthrough item from Intervest to MCM.

The Meruelos filed a joint tax return for 1999 on October 16, 2000. The return claimed the $4,538,844 loss as a passthrough item from MCM. The return did not identify Intervest or that Intervest was the source of the loss. The return indicated that MCM was a partnership. However, it did not indicate that MCM was a single-member LLC, a disregarded entity, or that Mr. Meruelo was actually Intervest's member in 1999 for federal tax purposes.

Before the expiration of the normal three-year period of limitations ³ on assessing federal income tax attributable to a partnership item (or an affected item),⁴seeI.R.C. §§ 6229(a), 6501(a), the IRS attempted to secure an extension of the statuteof limitations for the 1999 tax year from the Meruelos through the execution of a Form 872–I, entitled Consent to Extend Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. By securing the extension, the IRS would have had additional time to investigate the circumstances behind the Meruelos' claimed loss and may have been able to avoid the problems at issue here. However, the Meruelos refused to grant the extension. Therefore, the IRS issued a NOD ⁵ to the Meruelos on October 10, 2003, a few days before the three-year statute of limitations expired. The NOD indicated that the Meruelos were not entitled to the $4,538,844 loss reported and owed a deficiency of $1,581,293 in federal income tax and $632,517.20 in penalties for the 1999 tax year.

The IRS has never audited Intervest's 1999 return and has never notified Intervest that it will begin an audit. Further, the IRS has never issued a notice of FPAA ⁶ regarding Intervest's 1999 return.

B. Procedural History

On January 7, 2004, the Meruelos timely mailed their Tax Court petition challenging the deficiency contained in the NOD. SeeI.R.C. § 6213(a). On October 1, 2004, the Meruelos moved to dismiss for lack of jurisdiction on the ground that the IRS issued the NOD prematurely, making it invalid. Specifically, the Meruelos argued that the NOD was premature, because it related to affected items and was issued before the issuance of any notice of FPAA and before the IRS had accepted as filed Intervest's 1999 tax return (i.e., no final resolution at the partnership level). Alternatively, the Meruelos argued that the items in the NOD were not affected items.

On November 12, 2004, the IRS moved to stay the proceedings in this case pending the resolution of a federal criminal investigation, the progress and outcome of which may have affected the disposition of this case. The IRS stated that it had just learned that the Meruelos' reported loss was generated by a tax shelter related to a grand jury investigation and that investigation could affect or be affected by the criminal case. Essentially, the IRS indicated that a partnership-level proceeding and adjustment may result (as allowed by the extended period of limitations under § 6229(c)) if fraud or other special circumstances were discovered in the criminal investigation. ⁷

The Tax Court granted the stay on November 18, 2004. The Tax Court ordered status reports every 120 days. The IRS's status reports noted that an indictment had been filed and that the individual indicted “was involved in the transactions at issue in this case, and said transactions are part of the criminal prosecution.”

The Meruelos moved to lift the stay on May 17, 2007, and the IRS did not oppose. The Tax Court lifted the stay on July 3, 2007.

After the Tax Court lifted the stay, the IRS filed an objection to the Meruelos' motion to dismiss. Notably, the IRS conceded that “for purposes of the present deficiency proceeding, ... partnership items must be accepted as reported on the partnership return....” On June 9, 2009, the Tax Court denied the Meruelos' motion to dismiss in a published opinion. Meruelo v. Comm'r, 132 T.C. 355 (2009). The Tax Court held that the NOD was valid and not premature and that the items were affected items.⁸ In deciding that the NOD was valid, the Tax Court reasoned as follows: First, “[t]he normal deficiency procedures apply to affected items,” and a “valid NOD requires that any partnership-level proceeding involving the related partnership be complete.” Meruelo, 132 T.C. at 363–64. Second,

[w]hen the Commissioner [or IRS] opts not to begin a partnership-level proceeding or issue an FPAA within the normal period of limitations, the partnership-level proceeding is considered complete when the Commissioner accepts the partnership's return as filed. Whether the Commissioner has accepted a partnership return as filed is a question of fact that turns in part on a finding of whether the Commissioner opted to allow the normal period of limitations to expire without beginning a partnership-level proceeding.

Id. at 364 (citing Roberts v. Comm'r, 94 T.C. 853, 860–61 (1990)). Finally, the Tax Court disagreed with the Meruelos' argument that the NOD was invalid, based on the IRS deferring any decision whether to audit Intervest's return until after the criminal proceedings. The Tax Court found:

Where, as here, the Commissioner has opted not to commence within the normalperiod of limitations a partnership-level proceeding as to an entity subject to TEFRA, section 6225(a) serves as no restriction on the time within that period when the Commissioner may issue a[ ] NOD related to the partnership. It therefore was proper for respondent to have issued the NOD to petitioners just before the normal period of limitations was going to expire on petitioners' (and Intervest's) 1999 taxable years. Although respondent may have later considered during this proceeding the possibility of beginning a partnership-level proceeding as to Intervest on account of fraud or the like, any such consideration did not invalidate the NOD.

Id. at 365. Thus, because the IRS issued the NOD during the normal limitations period applicable to TEFRA entities and had accepted Intervest's return as filed, the NOD was valid and the Tax Court had jurisdiction. Id. at 366, 368. The Meruelos moved for reconsideration, which was denied on September 15, 2009.

On September 3, 2010, the parties reached an agreement as to all issues, including the amount of tax owed by the Meruelos, except the procedural and jurisdictional issues related to the TEFRA procedures and the validity of the NOD. On October 6, 2010, the Tax Court entered its final decision. It held that the Meruelos were liable for $1,387,006 in additional income tax and $277,401 in penalties. The Meruelos filed a timely appeal on December 21, 2010. Fed. R.App. P. 13(a); I.R.C. § 7483.

II. JURISDICTION AND STANDARD OF REVIEW

Pursuant to 26 U.S.C. § 7482(a)(1), we are authorized to review the decision of the Tax Court. “Whether the Tax Court has subject matter jurisdiction is a question of law and thus reviewed de novo.” Adkison v. Comm'r, 592 F.3d 1050, 1052 (9th Cir.2010) “Conclusions of law, including the Tax Court's interpretation of the Internal Revenue Code, are reviewed de novo.” Id. “Although we presume that the Tax Court...