Walthall v. US, A94-052 CV (JKS).

• Decision Date: 22 December 1995
• Docket Number: No. A94-052 CV (JKS).,A94-052 CV (JKS).
• Citation: 911 F. Supp. 1275
• Parties: Robert E. WALTHALL and Dorothy C. Walthall, husband and wife, and Jerry T. Dennis, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Alaska

911 F. Supp. 1275

Robert E. WALTHALL and Dorothy C. Walthall, husband and wife, and Jerry T. Dennis, Plaintiffs, v. UNITED STATES of America, Defendant.

No. A94-052 CV (JKS).

United States District Court, D. Alaska.

December 22, 1995.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John L. Hoffer, Jr., Fortier & Mikko, P.C., Anchorage, Alaska, for Plaintiffs Robert E. Walthall, Dorothy C. Walthall, and Jerry T. Dennis.

Robert J. Branman, Trial Attorney, Tax Division, United States Department of Justice, Washington DC, and Robert C. Bundy, United States Attorney, Anchorage, Alaska, for the United States.

ORDER FROM CHAMBERS

SINGLETON, Chief Judge.

I. INTRODUCTION

Plaintiffs, Robert Walthall, Dorothy Walthall, and Jerry Dennis bring this action against the United States, seeking declaratory and injunctive relief in the form of an order preventing the Government from upwardly adjusting their tax liability for certain tax years during the 1980's. The Government adjusted Plaintiffs' tax returns based upon the audits of three partnerships, Union Energy Drilling Fund ("Drilling"), Sente Equipment Ltd. ("Equipment"), and Union Film Ventures 1984-A ("Union Film"). Plaintiffs were indirect partners in these partnerships by virtue of their investment in Certainty Investment Club Partnership of Utah ("Club") and Sierra Investment Club ("Sierra"), which had in turn invested in Drilling, Equipment, and Union Film.¹ Plaintiffs contend that they did not receive due process of law in connection with the audits of the partnerships and that the results of the audits cannot therefore be made binding upon them or used as a basis for increasing their tax liability.² Plaintiffs allege federal question jurisdiction under two separate grounds. First, in their claim for a refund of taxes already paid in full but which are disputed, Plaintiffs allege jurisdiction pursuant to 28 U.S.C. § 1346. Second, in their claim regarding the taxes allegedly owed but have not yet been paid in full, Plaintiffs allege jurisdiction pursuant to 28 U.S.C. § 1331.³

Both parties have moved for summary judgment and their respective motions are ripe for decision. Docket Nos. 20 & 25. After carefully considering the stipulated facts filed by the parties, this Court concludes that 26 U.S.C. § 6223 assures affected taxpayers the notice and opportunity to be heard that is due them under the Fifth Amendment to the United States Constitution before their property rights may be adjusted, and is therefore constitutional. The Court further concludes that Plaintiffs received the notice guaranteed them by the statute. The Government's motion for summary judgment is therefore granted as to all causes of action except the sixth and seventh.⁴

II. FACTS

In 1983, the Walthalls invested $39,000 in Club.⁵ Docket No. 20 at 4; Docket No. 23 at 1 (Stipulated Facts). Dennis also became a partner of Club in 1983, investing $25,000. Docket No. 23 at 2. It appears that Plaintiffs were unaware that Club was in turn a partner in Drilling and Equipment. Docket No. 20 at 5; Docket No. 23 at 3. Drilling and Equipment each filed partnership tax returns for the 1983 and 1984 tax years. Id. Drilling claimed an ordinary loss in excess of $3.5 million for 1983 and Equipment claimed an ordinary loss of nearly $2 million in 1983 and over $2.5 million in 1984. Id. Club owned 99% of Drilling and Equipment and thus claimed approximately $4.5 million in ordinary losses for 1983 and approximately $2.4 million in 1984. Docket No. 20 at 5.

The Drilling and Equipment losses were passed down to Club and then those losses and certain tax credits were distributed to the partners of Club, including the Walthalls and Dennis. 26 U.S.C. §§ 702-04. As a result of these tax credits, the Government issued approximately $61,000 in refunds to the Walthalls. The Government refunded $11,372 of this amount for taxes withheld in 1983, whereas the remaining $50,441 was a refund resulting from a "carry back" of the Club tax credit to the Walthalls' 1980, 1981, and 1982 tax years. Docket No. 20 at 6. Thus, for an investment of $39,000, the Walthalls received back nearly $61,000 from the Government in a single year. Docket No. 20 at 7.⁶

For his $25,000 investment in Club, Dennis recovered approximately $10,000 in 1983 tax withholdings from the Government, and nearly $30,000 for taxes paid in 1980, 1981, and 1982, for an approximate total of $39,000. Docket No. 20 at 7; Docket No. 23 at 25-26.

Drilling, Equipment, and Union Film were audited pursuant to TEFRA⁷ and the Government determined that their losses and credits, which were passed through to Club and Sierra, and thereafter distributed to Plaintiffs and other indirect partners, should be disallowed. Docket No. 23 at 8. This determination in turn caused a readjustment of Plaintiffs' tax liability, requiring Plaintiffs to repay the tax benefits they claimed. Id. at 10, 11, 22. It is from this adjustment of their tax liability that Plaintiffs appeal.

III. DISCUSSION

Plaintiffs argue that the Government incorrectly interpreted and applied TEFRA, claiming that the statute specifically requires the Government to provide notice to indirect partners. Plaintiffs argue, in the alternative, that if TEFRA does not provide that the Government must give notice to indirect partners, TEFRA is unconstitutional. Plaintiffs also complain that the Government's interpretation of the statute is unfair because Plaintiffs stand to lose not only their tax savings, but also their initial investment in Club, because the originators of Club are in jail and are judgment proof. Plaintiffs trace their difficulties to the Secretary's failure to notify them of the administrative proceedings regarding Drilling, Equipment, and Union Film. In their view, because the Secretary failed to provide notice, their tax returns should be immune from readjustment.⁸

Plaintiffs' main complaint is that Congress placed the primary responsibility for keeping indirect partners informed of adjustments at the partnership level of multi-tiered partnerships on the pass-through partnerships and particularly their managing agents or general partners, which the code calls the tax matters partner, rather than on the Secretary. In Plaintiffs' view, this is unfair because many tax matters partners, particularly in syndicated partnerships, are crooks who will not keep their victims informed. Plaintiffs' arguments betray a fundamental misunderstanding of the law of agency and particularly that part of the law of agency governing partnerships. As we shall see, Congress simply relied upon the common law principles enshrined in the Uniform Partnership Act that each general partner is an agent of all partners, and notice to one partner is notice to all.⁹

Legal scholars have debated the nature of "partnerships" for many years. See United States v. Basye, 410 U.S. 441, 447-49, 453-57, 93 S.Ct. 1080, 1084-85, 1087-89, 35 L.Ed.2d 412 (1973); see also Donald J. Weidner, A Perspective To Reconsider Partnership Law, 16 FLA.ST.U.L.REV. 1 (1988). One school of thought views a partnership as an entity; a venture having an existence separate and distinct from its partners akin to a corporation or other form of state chartered business association. Alternatively, a partnership may be viewed as an aggregate, an assemblage of people working together. The Uniform Partnership Act, which has been enacted in most states, is a compromise between the two views. It defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit." Alaska Stat. § 32.05.010.¹⁰ Each partner is an agent of the partnership for partnership purposes (Alaska Stat. § 32.05.040), and by extension, each partner is an agent for every other partner for purposes of partnership property. See, e.g., Friend v. H.A. Friend & Co., 416 F.2d 526, 533 (9th Cir.1969); Stork Restaurant v. Sahati, 166 F.2d 348, 361-62 (9th Cir.1948). Consequently, notice to one partner regarding a matter of importance to the partnership is notice to every partner. Alaska Stat. § 32.05.070; Friend, 416 F.2d at 533.¹¹

The general law governing partnerships carries over to the law of taxation with some limitations. For tax purposes, the aggregate theory applies. While a partnership must file a partnership return (see 26 U.S.C. § 6031), it serves as a conduit through which the profits and losses of the enterprise pass down to the individual partners in the manner provided for in the partnership agreement and are taxed directly to the partner. See 26 U.S.C. § 701; Basye, 410 U.S. at 448 n. 8, 93 S.Ct. at 1085 n. 8; Chef's Choice Produce Ltd. v. C.I.R., 95 T.C. 388, 391-92 (1990). As partnerships became vehicles for massive syndications spreading across district and circuit lines, traditional practices for taxing partnerships became problematic. Where gains and losses of the partnership are distributed to each partner and such partnership items are determined and adjudicated independently, the risk of inconsistent rulings regarding items attributable to a multi-state partnership increases. As a result, Congress took a step towards treating partnerships as an entity by enacting the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). 26 U.S.C. §§ 6221-6233 (1982); see Chef's Choice, 95 T.C. at 393-94; see also Staff of the Joint Committee on Taxation, 97th Cong., 2nd Sess., General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, at 268 (explaining that the fragmented nature of determining the tax liability of partners created administrative problems prior to TEFRA, and that such problems became excessively burdensome as partnership syndications developed and grew over the recent years — making the identification of taxpayers in tiered partnerships difficult).

The purpose of this statute is to provide a single unified audit and judicial proceeding in which all items of partnership income,...