Varela v. United States

• Decision Date: 29 May 2012
• Docket Number: CIVIL ACTION NO. H-07-0343
• Parties: ALFONSO VARELA and SANDRA SANTA MARIA VARELA, Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.
• Court: U.S. District Court — Southern District of Texas

ALFONSO VARELA and SANDRA SANTA MARIA VARELA, Plaintiffs,

v.UNITED STATES OF AMERICA, Defendant.

CIVIL ACTION NO. H-07-0343

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Date: May 29, 2012

MEMORANDUM AND OPINION

This tax-refund suit filed by Alfonso and Sandra Santa Maria Varela is one of a number arising out of limited partnerships managed by American Agri-Corp., Inc. (AMCOR). Following the procedures under TEFRA,¹ the Internal Revenue Service issued proposed adjustments to the AMCOR partnerships' tax returns disallowing certain expense deductions the limited partners had claimed, which increased their income-tax liability for the corresponding tax year. The IRS also assessed enhanced or penalty interest under 26 U.S.C. § 6621(c). The Varelas, like other limited partners, paid and filed suit seeking a tax refund.

In June 2011, this court granted the government's motion for summary judgment on the Varelas' refund claims for 1984 and 1985, finding no jurisdiction in a partner-level refund suit to adjudicate the claim that the tax was assessed after the three-year statute of limitations under 26 U.S.C. § 6501(a) had expired. (Docket Entry No. 45). The remaining claim, addressed in thismemorandum and opinion, is for refund of penalty interest under § 6621(c). The Varelas abandoned their 1984 penalty-interest refund claim, leaving the 1985 claim. (See Docket Entry No. 54, at 1 n.4). The government and the Varelas have cross-moved for summary judgment. (Docket Entry Nos. 53-54; see also Docket Entry Nos. 58-61).

The government argues that this court lacks subject-matter jurisdiction over the penalty-interest refund claim for two reasons: first, resolving the claim under § 6621(c) would require the court to look at partnership items over which it lacks subject-matter jurisdiction under § 7422(h); and second, the Varelas failed to file a timely refund claim. (Docket Entry No. 53). The Varelas argue that they have presented evidence that the stipulated decision entered by the Tax Court did not include a finding that the transactions were tax-motivated or "sham." As a result, the Varelas argue, the government cannot prove that their underpayment was previously determined to be tax-motivated in a partnership-level suit to which the Varelas are bound by claim preclusion. The Varelas also argue that their claim was timely. (Docket Entry No. 54). The Varelas supplemented their arguments with two recent cases. (Docket Entry Nos. 62, 64). The government responded that neither case is relevant or helpful. (Docket Entry Nos. 63, 66).

The Varelas also have moved for reconsideration of this court's grant of summary judgment on their limitations-based refund claims. (Docket Entry No. 65). The Varelas argue that a February 2012 decision of the Fifth Circuit, A.I.M. Controls, L.L.C. v. Commissioner, 672 F.3d 390 (5th Cir. 2012), requires summary judgment in their favor. The government has responded, and the Varelas have replied. (Docket Entry Nos. 67-68). The government also has provided notice of a recent opinion of the Court of Federal Claims, McCann v. United States, — Fed. Cl. —, 2012 WL 1886746 (2012). (Docket Entry No. 69).

Based on the motions and related filings, the record, and the applicable law, this court denies the Varelas' motion for reconsideration, (Docket Entry No. 65); grants the government's motion for summary judgment on the 1985 penalty-interest refund claim, (Docket Entry No. 53); and denies the Varelas' cross-motion on that claim, (Docket Entry No. 54). The reasons for these rulings are set out below.

I. Background

A number of opinions detail the statutory background of the AMCOR cases. See, e.g., Duffie v. United States, 600 F.3d 362, 365-67 (5th Cir. 2010); Irvine v. United States, No. 4:08-cv-2568, 2012 WL 1552936, at *1-2 (S.D. Tex. Apr. 30, 2012); Varela v. United States, Civ. A. No. H-07-0343, 2011 WL 2173679, at *1-3 (S.D. Tex. June 1, 2011). It need not be repeated here.

"In a partnership-level proceeding, the Tax Court has jurisdiction to determine all partnership items for the tax year to which the FPAA relates." Duffie, 600 F.3d at 367. For tax years before 1997, the Tax Court lacks jurisdiction over nonpartnership items and affected items. Id. (citing 26 U.S.C. § 6226(f)). In a partner-level refund action, district courts lack jurisdiction over partnership items. Id. (citing 26 U.S.C. § 7422(h)). Items converted from partnership items to nonpartnership items through settlement with the IRS fall within a district court's jurisdiction. Id. (citing 26 U.S.C. § 6231(b)(1)(C)). District courts generally have jurisdiction over a taxpayer's refund action. 28 U.S.C. §§ 1340, 1346(a)(1); see also Matthews v. United States, Civ. A. No. 00-4131, 2010 WL 2305750, at *3 (S.D. Tex. June 8, 2010), aff'd sub nom. Scott v. United States, 437 F. App'x 281 (5th Cir. 2011) (per curiam). TEFRA, however, strips courts of subject-matter jurisdiction over refund actions attributable to partnership items. 26 U.S.C. § 7422.

Alfonso Varela was a limited partner in two AMCOR partnerships, Agri-Venture II and Coachella-85 Partners. In 1991, based on its investigation, the IRS issued Notices of FPAAs for those partnerships' 1984 and 1985 returns—which, in turn, would adjust the Varelas' 1984 and 1985 returns. After the partnerships' TMPs—Frederick Behrens and Robert Wright—declined to contest the FPAAs, individual partners filed partnership-level suits in the Tax Court under 26 U.S.C. § 6226(b). The partners argued that § 6501's three-year assessment period had lapsed. In 1997, while these suits proceeded before the Tax Court, several individual partners settled their income-tax liability with the IRS by executing Forms 870-P(AD). For those partners who did not settle with the IRS, including the Varelas, the TMPs, who had by now intervened on behalf of the partnerships, and the IRS agreed to be bound by the results of a test case. In that test case, the Tax Court accepted the IRS's argument and ruled in its favor on the limitations ground. See Agri-Cal Venture Assocs. v. Comm'r, 80 T.C.M. (CCH) 295 (2000).

After that ruling, the TMPs and the IRS filed a Joint Status Report with the Tax Court in December 2000 announcing "a basis for settlement of the partnership items at issue" in the AMCOR-partnership cases. (Docket Entry No. 25, Ex. 12, at 1 (0076)). The report provided "[a] summary of the contingent basis for settlement." (Id.). For each AMCOR-partnership case, the TMPs and the IRS stated as follows in their joint report:

The Decision to be entered in each partnership proceeding will contain the following factual findings by the Court:

That the foregoing adjustments to partnership income and expense are attributable to transactions which lacked economic substance, as described in former I.R.C. § 6621(c)(3)(A)(v), so as to result in a substantial distortion of income and expense, as described in I.R.C. § 6621(c)(3)(A)(iv), whencomputed under the partnership's cash receipts and disbursements method of accounting.

That the assessment of deficiencies in income tax that are attributable to the adjustments to partnership items for the years [1984, 1985 and 1986] are set forth herein are not barred by the provisions of I.R.C. § 6229.

(Id., at 6 (0081)). The report stated that this settlement:

will conclusively determine all controversies arising from the events except for claims or defenses . . . which are unrelated to the determination of partnership items, affected items or the computation of interest due under I.R.C. § 6621(c). The parties expressly waive by stipulation in the Decision any right to take an appeal from the decision or any opinions entered by the Tax Court in these proceedings.

(Id., at 6-7 (0081-82)). Counsel for the TMPs and for the IRS signed the report. (Id., at 7 (0082)).

In April 2001, the IRS moved to have decisions entered in each of the AMCOR-partnership cases. This motion confirmed that the TMPs had reached "contingent agreements" to settle the disputed partnership items in each AMCOR case. (Docket Entry No. 25, Ex. 13, ¶ 8 (0086)). The agreement would bind "[a]ll partners in each partnership whose partnership items are to be determined in the FPAA Cases and who meet the interest requirements of I.R.C. § 6222(d)"—such as Alfonso Varela—once the Tax Court entered stipulated decisions in all cases consistent with the agreement and those decisions became final. (Id., ¶ 9 (0086)). The decisions would become final after all partners declined to object within 90 days after the motion was filed. (See id., ¶ 19 (0088-89); see also Docket Entry No. 54, at 6). This provision appears to have been necessary because the TMPs "agree[d] to the proposed Decisions in these cases, but d[id] not certify that no party objects to the granting of [the IRS]'s Motion for Entry of Decision." (Docket Entry No. 25,Ex. 13, ¶ 18 (0088)). These provisions also appeared in Attachment C to the motion, the agreement itself. (See id. at 10-16 (0093-99)).

No partners objected within the 90-day period. The Tax Court granted the motion in July 2001. (See id. at 1 (0084)). The Tax Court simultaneously entered stipulated decisions in each of the AMCOR-partnership cases. In the Coachella-85 Partners decision, the Tax Court stated as follows:

That the foregoing adjustments to partnership income and expense are attributable to transactions which lacked economic substance, as described in former I.R.C. § 6621(c)(3)(A)(v), so as to result in a substantial distortion of income and expense, as described in I.R.C. § 6621(c)(3)(A)(iv), when computed under the partnership's cash receipts and disbursements method of accounting; . . .

That the assessment of deficiencies in income tax that are attributable to the adjustments to partnership items for the year 1985 is not barred by the provisions of I.R.C. § 6229.

(Docket Entry No. 25, Ex. 19, at 2 (0159)).

The IRS assessed the Varelas $13,895 in taxes and $74,914 in penalty...