River City Ranches # 1 Ltd. v. C.I.R.
| Decision Date | 25 March 2005 |
| Docket Number | No. 03-73853.,03-73853. |
| Citation | 401 F.3d 1136 |
| Parties | RIVER CITY RANCHES # 1 LTD., Leon Shepard, Tax Matters Partner, River City Ranches # 2 Ltd., Leon Shepard, Tax Matters Partner, River City Ranches # 3 Ltd., Leon Shepard, Tax Matters Partner, River City Ranches # 4 Ltd., Leon Shepard, Tax Matters Partner, River City Ranches # 5 Ltd., Leon Shepard, Tax Matters Partner, River City Ranches # 6 Ltd., Leon Shepard, Tax Matters Partner, et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Montgomery W. Cobb, Portland, OR, for the petitioners-appellants.
Eileen J. O'Connor, Assistant Attorney General, Richard Farber, and Anthony T. Sheehan, Department of Justice, Appellate Section, Tax Division, Washington, D.C., for the respondent-appellee.
Appeal from an Order of the United States Tax Court.
Before BRIGHT,* TASHIMA, and CALLAHAN, Circuit Judges.
We review here an extensive opinion and judgment of the Tax Court1 relating to the tax returns of several affiliated sheep-breeding partnerships. We affirm in part, reverse in part, and remand for further proceedings. The federal Internal Revenue Service ("IRS") issued Final Partnership Administrative Adjustments ("Adjustments") to the tax returns of nine sheep-breeding partnerships for various past tax-years.2 The Adjustments resulted in increased tax liabilities for the individual partners, such that the partners would owe significant back-taxes, penalties, and interest if the Adjustments were valid. The appellant partnerships petitioned the Tax Court for readjustment of the partnership tax returns, and the court consolidated the cases for trial.
The partnerships claimed, first, that some of the Adjustments were invalid because the IRS filed them untimely, relying on invalid extensions of the limitations periods that governed the Adjustments. The partnerships claimed, second, that insofar as the Adjustments were valid, the partnerships were entitled to certain theft-loss deductions on the adjusted tax returns. The Tax Court denied the petitions entirely, holding that the Adjustments were all valid and that the partnerships were entitled to no theft- loss deductions. On the latter point, the Tax Court held that the asserted losses were not thefts from the partnerships and, in the alternative, even if they were, the partnerships could not claim the deductions for the years at issue.
On appeal, the partnerships argue that the trial of the case was flawed on three procedural points: that the Tax Court improperly denied the partnerships discovery pertinent to the years for which theft-loss deductions could be claimed; that the court improperly denied discovery pertinent to the validity of the extensions of the limitations periods within which the Adjustments could be filed; and that the court improperly rejected a stipulation of fact as to the principal place of business of the partnerships.
Further, on a substantive matter, the partnerships argue that the Tax Court erred in holding that the asserted theft-losses were not thefts from the partnerships but were only thefts from the individual partners.
As to the final issue on appeal, the partnerships and the IRS agree that the Tax Court erred in holding that it does not have jurisdiction to make factual findings concerning the validity of impositions of additional interest on back-taxes owed by the individual partners, as a penalty under 26 U.S.C. § 6621(c) () for engaging in sham business transactions the sole purpose of which was to gain tax benefits.
We rule as follows: (1.) We decide that the partnerships are not entitled to additional discovery pertinent to the years for which theft-loss deductions can be claimed. (2.) We affirm the Tax Court's holding that none of the losses — if they are thefts from the partnerships — can be claimed for any of the tax-years at issue. (3.) We determine that the Tax Court did not erroneously reject any stipulation of fact. (4.) We determine that the partnerships are, however, entitled to limited additional discovery relevant to the validity of the extensions of the limitations periods. Finally (5.), we hold that the Tax Court does have jurisdiction to make findings concerning the imposition of penalty-interest under 26 U.S.C. § 6621(c).
Because we affirm the Tax Court's holding that the partnerships cannot claim the asserted theft-losses in the years at issue in any event, we do not review or make any decision concerning the Tax Court's decision that the asserted losses do not constitute thefts from the partnerships, but only from the partners.
Accordingly, we vacate the judgment of the Tax Court in these cases and remand so that the partnerships will be given some limited additional discovery relating to the validity of Adjustments issued under the contested extensions of limitations periods. The Tax Court will reconsider the validity of those Adjustments after additional discovery is allowed. Also, we remand for the Tax Court to make findings as to penalty-interest.
We sketch the underlying facts below, only as they bear on the discrete issues we review.
The partnerships complain that the Tax Court rejected the parties' stipulation that — as the partnerships characterize it in briefing — "the principal place of business of the partnerships was in Oregon." The partnerships urge reversal on this basis. Their contention, although not entirely clear, seems to be that in determining whether the asserted theft-losses were thefts from the partnerships, the Tax Court looked to the law of the wrong state, because it erroneously rejected the stipulation. The IRS does not respond to appellants' argument on this issue.
The partnerships' argument is meritless. In their briefs, the partnerships do not quote the stipulation at issue, which merely says that the principal place of business was in Oregon at the time the partnerships filed their petitions for readjustment. SER 24. The Tax Court did not reject this stipulation. The court's statements concerning the principal place of business related to the time at which the asserted theft-losses occurred, not the time at which the petitions were filed. There was no stipulation as to the former time.
Additionally, even had the asserted rejection of a stipulation been actual, the partnerships do not show, as they must, that it would have made any difference. See Cerrato v. San Francisco Cmty. Coll. Dist., 26 F.3d 968, 974 (9th Cir.1994) (). The partnerships do not show that any relevant law varied materially from Oregon to California or Nevada (the other relevant states). Furthermore, after commenting on the place of business of the partnerships, the Tax Court did in fact consider whether the losses in dispute constituted theft from the partnerships under Oregon law. We do not understand precisely what the partnerships complain of on this issue. In any event, the Tax Court did not erroneously reject any stipulation.
The partnerships argue that the Tax Court denied them a fair opportunity to litigate their claim that they are entitled to theft-loss deductions for the years at issue. The Internal Revenue Code provides that a theft-loss may be deducted only for the year in which it is discovered — not the year in which the loss occurs. 26 U.S.C. § 165(a). The partnerships conceded at trial that they discovered the asserted theft-losses after the years in question. They argued to the Tax Court, however, that the IRS is equitably estopped from enforcing this provision of the law to exact money from them (or their individual partners, who pay the taxes). The partnerships argue that the court denied discovery of IRS files that they were entitled to and without which they could not make good their equitable estoppel defense.
We review a denial of discovery for abuse of discretion. Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 527 (9th Cir.1986). We will hold an order denying discovery to be an abuse of discretion only "upon the clearest showing that denial of discovery results in actual and substantial prejudice to the complaining litigant." Hallett v. Morgan, 296 F.3d 732, 751 (9th Cir.2002).
The Supreme Court allows the possibility that equitable estoppel might be successfully asserted against the government — whether to get money from the government or as a defense to the government's exaction of money. See Office of Personnel Mgmt. v. Richmond, 496 U.S. 414, 426, 110 S.Ct. 2465, 110 L.Ed.2d 387 (1990); Heckler v. Cmty. Health Svcs. of Crawford County, Inc., 467 U.S. 51, 59-60, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984). In general,
the party claiming the estoppel must have relied on its adversary's conduct "in such a manner as to change his position for the worse," and that reliance must have been reasonable in that the party claiming the estoppel did not know nor should it have known that its adversary's conduct was misleading.
Id. at 59, 104 S.Ct. 2218. The Court has made clear that estoppel will not lie against the government except upon a stronger showing than is required in the ordinary case. Id. at 59-60, 104 S.Ct. 2218.
As the Tax Court noted, the Ninth Circuit has held, in a case involving a taxpayer's attempt to recoup payments made to the IRS, that equitable estoppel cannot lie against the government absent a showing of "affirmative conduct going beyond mere negligence." Purcell v. United States, 1 F.3d 932, 939 (9th Cir.1993).
The Tax Court found that the IRS had engaged in no conduct which the partnerships could reasonably have relied on to change...
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