Walthall v. U.S.

Decision Date19 November 1997
Docket Number96-35271 and 96-35830,Nos. 96-35237,s. 96-35237
Citation131 F.3d 1289
Parties-7959, 97-2 USTC P 50,931, 97 Cal. Daily Op. Serv. 8724, 97 Daily Journal D.A.R. 14,126 Robert WALTHALL; Dorothy Walthall; Jerry T. Dennis, Plaintiffs, and David Raihl; June Raihl, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. John CAMACHO; Barbara Camacho, Plaintiffs-Appellants, and Robert Walthall; Dorothy Walthall; Jerry T. Dennis, Plaintiffs, v. UNITED STATES of America, Defendant-Appellee. Robert WALTHALL; Dorothy Walthall, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Erik LeRoy, Anchorage, AK, for plaintiffs-appellants Raihls.

George R. Lyle, Guess & Rudd, Anchorage, AK, for plaintiffs-appellants Camachos.

Charles F. Schuetze, Davis & Davis, John L. Hoffer, Jr., Anchorage, AK, for plaintiffs-appellants Walthalls.

Pamela C. Berry, Tax Division, United States Department of Justice, Washington, DC, for defendant-appellee.

Appeals from the United States District Court for the District of Alaska; James K. Singleton, Chief District Judge, Presiding. D.C. No. CV-94-00052-JKS.

Before: WALLACE, JOHN T. NOONAN, Jr., and THOMPSON, Circuit Judges.

Opinion by Judge WALLACE; Partial Concurrence and Partial Dissent by Judge NOONAN.

WALLACE, Circuit Judge:

In these consolidated appeals, we consider whether the Tax Equity and Fiscal Responsibility Act of 1982 (Act) provides constitutionally adequate notice to indirect partners of multi-tiered partnerships, and if so, whether the Internal Revenue Service (IRS) complied with the requirements of the statute.

I

In 1983, the Walthalls, Camachos, and Raihls invested in a tax shelter partnership known as the Sente Investment Club Partnership (Club). The Club invested in two other partnerships. These other partnerships were thus "top-tier partnerships," and the Club was a "pass-thru partnership." Under this structure, the Walthalls, Camachos, and Raihls were all indirect partners of the top-tier partnerships. When the top-tier partnerships reported ordinary losses in 1983 and 1984, the Club claimed its proportion of those losses, which were passed through the Club to its partners, including the Walthalls, Camachos, and Raihls.

The IRS audited the 1983 and 1984 tax returns of the two top-tier partnerships. Pursuant to the Act, the IRS must "give partners notice of beginning and completion of administrative proceedings." 26 U.S.C. § 6223(a). In accordance with the Act, the IRS sent notice of the audits of the top-tier partnerships to all partners listed on the partnership returns, including the Club. See 26 U.S.C. § 6223(c)(1). The Walthalls, Camachos, and Raihls were not listed on any returns of the top-tier partnerships, so they were not sent notices.

The audit resulted in adjustments to the returns of the partnerships in which the Club had invested. The Club contested the adjustments for one of the top-tier partnerships, but the petition for readjustment was dismissed for lack of prosecution. The Club did not petition for readjustment of the other adjustment. See Sente Investment Club Partnership v. C.I.R., 95 T.C. 243, 246, 1990 WL 129305 (1990) (Sente ). The IRS subsequently adjusted the tax returns of the Club's partners, including the Walthalls, Camachos, and Raihls.

The Walthalls also invested in another tax shelter partnership, the Sierra Investment Club Partnership (Sierra). Sierra was also a pass-thru partnership that invested in a top-tier partnership. As with the top-tier partnerships in which the Club invested, this top-tier partnership incurred ordinary losses, which were claimed in turn by Sierra and passed through to the Walthalls. The IRS audited the top-tier partnership's returns for 1984-86, and, as before, sent notice to partners listed on the tax return. The Walthalls, who were not listed on the top-tier partnership return, were not sent notice, and did not contest the adjustment. In 1988, the IRS completed its audit and subsequently adjusted the Walthalls' return.

The Walthalls filed an action in the district court, seeking a refund of income taxes paid in 1980-86, asserting the adjustments were invalid, requesting injunctive relief against the government for the unpaid assessments, and asking for a declaration that the notice provisions of the Act were unconstitutional. The district court entered summary judgment in favor of the government, and the Walthalls timely appealed.

To contest their tax adjustment with respect to the Club's ordinary loss, the Camachos filed an adversary complaint against the IRS in bankruptcy court during their Chapter 11 bankruptcy proceedings. Four of the six claims pertained to the tax adjustment. The fifth claim pertained to an investment in a partnership known as Utah Bioresearch. The sixth was a claim that the IRS violated the automatic stay issued by the bankruptcy court in seizing the Camachos' Alaska Permanent Fund Dividend in November 1992, one month after the bankruptcy petition. The bankruptcy court dismissed the fifth claim on the ground that the allegations were insufficient, a ruling affirmed by the district court. With respect to the claims pertaining to the Club, the bankruptcy court found in favor of the Camachos, a ruling subsequently reversed by the district court. The district court also concluded that the Camachos were entitled to the Alaska Permanent Fund Dividend and remanded the case to the bankruptcy court for a determination of whether the Camachos should be awarded damages and attorneys' fees based on the IRS's violation of the bankruptcy stay. The Camachos' appeal from the district court's rulings was timely.

Finally, the Raihls declared Chapter 7 bankruptcy. During the bankruptcy proceedings, they filed an adversary action against the IRS. Six of the twelve claims involved adjustments to their tax returns based on their investment in the Club. The other six claims involved a second tax shelter the Raihls invested in known as the Gran Esperanza Partnership (Gran Esperanza). Gran Esperanza was another pass-thru partnership that invested in a top-tier partnership. The IRS audited the tax returns of this top-tier partnership, and as a result, adjusted Gran Esperanza's return, and eventually that of the Raihls.

The bankruptcy court ruled that the tax adjustments with respect to the Club's investments were invalid because the Raihls were not given notice of the proceedings, but the adjustments with respect to Gran Esperanza were valid, because they occurred after the IRS issued regulations setting forth the steps that indirect partners had to take to ensure that they would receive notice. The district court reversed the bankruptcy court with respect to the Club. The Raihls filed a timely appeal.

II

We must first address our subject-matter jurisdiction over these appeals. The district court, sitting in an appellate capacity, had jurisdiction to review the bankruptcy court's decisions with respect to the Camachos and the Raihls pursuant to 28 U.S.C. § 158(a). We have jurisdiction over appeals from the district court's final judgments pursuant to 28 U.S.C. § 158(d). The district court had original jurisdiction over the Walthalls' case pursuant to 28 U.S.C. §§ 1340, 1345. We have jurisdiction over final orders by the district court pursuant to 28 U.S.C. § 1291.

A district court order that affirms or reverses a bankruptcy court order is final. In re Stanton, 766 F.2d 1283, 1287 (9th Cir.1985) (Stanton ). However, finality determination in the bankruptcy context has its own set of rules. We examine whether we should consider the district court's decision final in a bankruptcy case by considering "(1) the need to avoid piecemeal litigation; (2) judicial efficiency; (3) the systemic interest in preserving the bankruptcy court's role as the finder of fact; and (4) whether delaying review would cause either party irreparable harm." In re Lakeshore Village Resort, Ltd., 81 F.3d 103, 106 (9th Cir.1996) (Lakeshore ), citing In re Vylene Enterprises, Inc., 968 F.2d 887, 895-96 (9th Cir.1992).

A.

The Walthalls' appeal does not involve a bankruptcy court. Rather, they filed an action in a district court, seeking refunds of taxes paid and an injunction against collection of the amounts still unpaid. The district court entered summary judgment against the Walthalls. We have jurisdiction pursuant to 28 U.S.C. § 1291.

B.

The government challenges our jurisdiction to review the Camachos' appeal. Although the district court remanded their case to the bankruptcy court for further factual findings which ordinarily prevents our jurisdiction, Stanton, 766 F.2d at 1287, the Camachos argue that we have jurisdiction over their appeal based on two narrow exceptions described in In re Bonner Mall Partnership, 2 F.3d 899 (9th Cir.1993), cert. granted and case dismissed as moot, 513 U.S. 18, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994). In Bonner, we held that we could assert jurisdiction, even where a case had been remanded "for factual findings on a central issue if that issue is legal in nature and its resolution either 1) could dispose of the case or proceeding and obviate the need for factfinding; or 2) would materially aid the bankruptcy court in reaching its disposition on remand." Id. at 904.

Neither Bonner exception is applicable here. The district court remanded the Camachos' case to the bankruptcy court for a factual determination of whether damages and attorneys' fees should be awarded to them based on the government's refusal to turn over the Alaska Permanent Fund Dividend to which they were entitled. Camacho v. United States, 190 B.R. 895, 902 (D.Alaska 1995). A favorable decision on this appeal would not obviate the need for remand, so the first exception does not apply. Nor would this appeal "materially aid the bankruptcy court," because the issue on remand is whether...

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