Rhone-Poulenc Surfactants & Specialties v. Comm'r of Internal Revenue, RHONE-POULENC

• Decision Date: 01 May 2001
• Docket Number: No. 00-3636,RHONE-POULENC,00-3636
• Citation: 249 F.3d 175
• Parties: (3rd Cir. 2001) SURFACTANTS AND SPECIALTIES, L.P., GAF CHEMICALS CORPORATION, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee
• Court: U.S. Court of Appeals — Third Circuit

Page 175

249 F.3d 175 (3rd Cir. 2001)

RHONE-POULENC SURFACTANTS AND SPECIALTIES, L.P., GAF CHEMICALS CORPORATION, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee

No. 00-3636

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued January 19, 2001

Opinion Filed May 1, 2001

William F. Nelson, Esq. (argued), Gerald A. Kafka, Esq., J. Bradford Anwyll, Esq., McKee Nelson Ernst & Young, LLP, Washington, DC, Attorneys for Appellant.

Charles F. Marshall, Esq. (argued), Paula M. Junghans, Esq., Richard Farber, Esq., Tax Division Department of Justice, Washington, DC, Attorneys for Appellee.

Before: ROTH and BARRY, Circuit Judges, SHADUR,¹ District Judge.

OPINION OF THE COURT

SHADUR, District Judge:

Taxpayer GAF Chemicals Corporation ("GAF"), a subsidiary of GAF Corporation and a purported partner in the putative partnership Rhone-Poulenc Surfactants and Specialties, L.P. ("Rhone-Poulenc"), filed a petition for readjustment of partnership items in the United States Tax Court under 26 U.S.C. 6226(b).² GAF filed its petition in response to a notice of final partnership administrative adjustment ("FPAA") issued by the Commissioner of Internal Revenue ("Commissioner") to Rhone-Poulenc pursuant to Section 6223(a)--an FPAA that treated a transfer of assets from GAF to Rhone-Poulenc as a taxable sale rather than as a nontaxable contribution in exchange for an interest in the partnership.

This appeal stems from the Tax Court's denial of GAF's motion for summary judgment on the ground that the Commissioner's assessment is time-barred. Although that order was not final, the Tax Court certified it for interlocutory appeal under Section 7482(a)(2)(A), and this Court granted GAF's petition for permission to appeal.

For the reasons stated in this opinion, we find that GAF's petition for permission to appeal was improvidently granted. Upon our further consideration of the issues presented for decision, we hold that Tax Court rulings on certain unresolved issues that Court has reserved for the future constitute a precondition to the ripeness of the issues certified by that Court, so that we have essentially been presented with a request for an advisory opinion forbidden by Article III of the Constitution.

Background

In 1990 GAF and Alkaril Chemicals, Inc. ("Alkaril"), another subsidiary of GAF Corporation, transferred certain business assets to Rhone-Poulenc. About September 17, 1991 Rhone-Poulenc filed a federal partnership information return that characterized GAF's transfer to it as a contribution of property to the partnership in exchange for an interest in the partnership. Almost simultaneously (the record-indicated date is September 16, 1991) GAF Corporation filed a consolidated corporate federal income tax return for itself and all of its affiliated subsidiary corporations (including GAF).

On September 12, 1997 the Commissioner issued Rhone-Poulenc an FPAA notice that treated the transfer as a taxable sale rather than as an exchange for a partnership interest entitled to non-recognition treatment under Section 721(a). It followed from the FPAA's treatment of the transfer as a taxable sale that GAF Corporation's consolidated return had understated its gross income by 25%. In response to the FPAA, GAF filed a petition in the Tax Court for a readjustment of partnership items.

GAF brought that petition pursuant to the unified partnership audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). As Boyd v. Comm'r, 101 T.C. 365, 368-69 (1993) (internal citations and quotation marks omitted) explains:

The TEFRA partnership provisions were enacted in 1982 in response to the mushrooming administrative problems experienced by the Internal Revenue Service in auditing returns of partnerships, particularly tax shelter partnerships with numerous partners. Under these procedures, the tax treatment of partnership items is determined at the partnership level in a unified partnership proceeding rather than in separate proceedings for each partner. As we stated in an earlier case interpreting the TEFRA partnership provisions:

By enacting the partnership audit and litigation procedures, Congress provided a method for uniformly adjusting items of partnership income, loss, deduction, or credit that affect each partner. Congress decided that no longer would a partner's tax liability be determined uniquely but the tax treatment of any partnership item would be determined at the partnership level.

Although it is the tax matters partner that most often files a petition for readjustment under TEFRA, if it does not do so within 90 days any notice partner may file a petition within 60 days thereafter (Section 6226(b)(1)).

Before the Tax Court the Commissioner argued on several alternative grounds that the transfer did not qualify for non-recognition treatment:

1. There was no partnership.

2. If instead there were a partnership, the transfer was not to it but to a related party.

3. If there were indeed a partnership and the transfer were in fact made to it, the transfer was not in exchange for an interest in the partnership but was rather a sale to the partnership.

In those terms GAF would have had to surmount all three hurdles to prevail.

On September 9, 1998 GAF moved for summary judgment on the separate ground that the assessment is time-barred. Its motion asserted:

1. Section 6501(a)'s general limitations period is inapplicable to partnership items because Section 6629(a) sets forth a separate and exclusive three-year statute of limitations on assessments attributable to partnership items. Because more than three years had elapsed since GAF Corporation had filed its consolidated return, the assessment was untimely.

2. Even if Section 6501(a) were held to provide the applicable limitations period, the issuance of the FPAA did not suspend the running of that period, and it too has expired. Again that would render the assessment untimely.

3. Section 6501(e), which provides a six-year statute of limitations where items in excess of 25% of a taxpayer's gross income are omitted from the face of a return, is inapplicable because the items at issue were disclosed on the consolidated return.

In response the Commissioner urged that the general limitation on assessments set out in Section 6501(a) governs all taxes assessed under the Code. As for Section 6229(a), the Commissioner contended that it does not provide a separate limitations period for partnership items but rather describes an "add on" period that in some circumstances extends the period prescribed by Section 6501. As the Commissioner would have it, the normal three-year period set forth in Section 6501(a) had been extended to six years under Section 6501(e) because, contrary to GAF's assertion, the disputed income was not disclosed on the return. And the Commissioner further argued that under Section 6229(d) the issuance of the FPAA had suspended the limitations period prescribed in Section 6501--in this case the six-year period in Section 6501(e) to which Section 6501(a) points.

In a sharply divided opinion, a majority of the judges on the Tax Court (sitting en banc) found the Commissioner's reading of the Code provisions more persuasive and denied GAF's motion for summary judgment. In particular, the majority concluded that the limitations period set forth in Section 6501(a) applies to partnership items. As for the Section 6229(a) reference to a three-year period, the Court read that provision as setting a minimum limitations period that "may expire before or after the section 6501 maximum period."

Next the Tax Court addressed GAF's argument that even if the six-year limitation specified in Section 6501(e) applied, that period had expired as well. In that respect GAF argued that by its terms Section 6229(d) suspends only the running of the three year period in Section 6229(a), not the limitations period contained in Section 6501(a). On that premise, even if the Tax Court were to find that Section 6501(a) dictated the application of the six-year limitations period in Section 6501(e), that six-year period had already expired about September 15, 1997 (six years after the date GAF Corporation had filed its return).

Again agreeing with the Commissioner's different reading of the Code, the Tax Court determined that Section 6229(d) does suspend the running of the limitations period prescribed by Section 6501 once an FPAA is issued. If Section 6501(e) were applicable, then, that would render timely the Commissioner's issuance of the FPAA within six years of the date of the partnership return.

With the Tax Court having made those determinations, the only issue remaining for decision there was whether Section 6501(e) in fact applies to this case. In that regard the Tax Court found genuine issues of fact as to whether or not the return had adequately disclosed the existence of the omitted income, precluding summary judgment.

On September 20, 2000 the Tax Court granted GAF's Motion for Certification of Question for Interlocutory Appeal pursuant to Section 7482(a). As stated earlier, a panel of this Court granted GAF's petition for permission to appeal on October 12.

Standing

Before we turn directly to the substantive discussion that controls the disposition of this appeal, we must travel a byway that might have diverted us from reaching that substantive issue. That potential diversion stems from a post-appeal development that has raised a possible issue of standing on the part of the taxpayer.

By letter dated January 11, 2001 counsel for GAF informed us that G-I Holdings, Inc., the successor to GAF Corporation through internal merger, has filed a voluntary petition in the Bankruptcy Court for the District of New Jersey seeking relief under chapter 11 of the Bankruptcy Code. That led to the filing of two motions before oral argument.

First both sides asked that the...