Petaluma FX Partners, LLC v. Commissioner of IRS , 792 F.3d 72 ( 2015 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 18, 2014 Decided June 26, 2015
No. 12-1364
PETALUMA FX PARTNERS, LLC, RONALD SCOTT
VANDERBEEK, A PARTNER OTHER THAN THE TAX MATTERS
PARTNER,
APPELLEE
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLANT
On Appeal from the Order and
Decision of the United States Tax Court
Joan I. Oppenheimer, Attorney, U.S. Department of
Justice, argued the cause for appellant. With her on the briefs
were Tamara W. Ashford, Principal Deputy Assistant
Attorney General, and Gilbert S. Rothenberg, Attorney.
Andrew Weiner, Attorney, entered an appearance.
Edward M. Robbins Jr. argued the cause and filed the
brief for appellee.
Before: HENDERSON, GRIFFITH and SRINIVASAN, Circuit
Judges.
Opinion for the Court filed by Circuit Judge SRINIVASAN.
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SRINIVASAN, Circuit Judge: This case comes before this
court for a third time. It arises out of the Tax Court’s
determination that Petaluma FX Partners, LLC, was a sham
entity and so would be disregarded for tax purposes, resulting
in the potential imposition of penalties against individual
partners for underreporting their taxable income. The issue
we now consider concerns whether the Tax Court had
jurisdiction at the current, partnership-level stage to determine
the applicability of the penalties to the individual partners, or
whether that determination instead must await the
commencement of separate, partner-level proceedings against
each partner.
In United States v. Woods, 134 S. Ct. 557 (2013), the
Supreme Court resolved that question in favor of the
existence of jurisdiction at this stage of the proceedings.
Petaluma nonetheless contests the Tax Court’s jurisdiction.
Petaluma challenges a temporary Treasury Department
regulation that, in Petaluma’s view, is necessary to confer the
jurisdiction recognized in Woods. We have no occasion to
resolve Petaluma’s challenge to the temporary regulation,
however. Assuming that a regulation in fact is necessary to
create jurisdiction in the Tax Court, we conclude that a
different (and permanent) regulation is the operative one for
purposes of conferring jurisdiction. The latter regulation is
unchallenged here, and we see no basis for questioning its
applicability in this case. We therefore conclude that the Tax
Court had jurisdiction to decide the applicability of penalties
to Petaluma’s partners.
3
I.
A.
The Tax Court’s initial opinion in this case contains a
detailed description of the facts giving rise to the dispute,
Petaluma FX Partners, LLC v. Comm’r (Petaluma I ), 131
T.C. 84, 86-89 (2008), and our previous opinion summarizes
the factual history, Petaluma FX Partners, LLC v. Comm’r
(Petaluma II ), 591 F.3d 649, 650-52 (D.C. Cir. 2010). By
way of a brief review, this case involves the so-called “Son of
BOSS” tax shelter, in which two or more individuals set up a
partnership solely for tax purposes. The Son of BOSS shelter
generally makes use of a series of offsetting financial
transactions aimed to generate artificial financial losses, with
those losses in turn artificially reducing taxable income. In
2000, the IRS formally identified Son of BOSS tax shelters as
abusive transactions. I.R.S. Notice 2000-44, 2000-2 C.B.
255.
In August 2000, the taxpayers in this case, Ronald
Thomas Vanderbeek and Ronald Scott Vanderbeek, created a
Son of BOSS shelter. They formed Petaluma FX Partners,
LLC as a partnership, ostensibly for the purpose of trading
foreign currency options. In October 2000, the Vanderbeeks
each contributed pairs of offsetting long and short foreign
currency options to Petaluma. When a partner contributes
assets to a partnership, the partner must establish her outside
basis in that partnership, which functions as a proxy for the
value of the assets she contributed. See 26 U.S.C. § 722.
Each of the Vanderbeeks, upon contributing his paired
options to Petaluma, increased his outside basis to account for
the value of his contributed long option. But neither of the
Vanderbeeks reduced his outside basis to account for the
4
offsetting assumption of liability associated with the short
options, resulting in an artificial inflation of his basis.
In December 2000, the Vanderbeeks terminated their
partnership interests in Petaluma. The upshot of their tax
avoidance scheme was to inflate their basis in the
partnership’s assets, enabling them to claim, on their 2000
federal income tax returns, substantial short-term capital
losses of nearly $18 million in the case of Ronald Thomas
Vanderbeek and nearly $8 million in the case of Ronald Scott
Vanderbeek. The Vanderbeeks in turn used those inflated
losses to offset their capital gains for the 2000 tax year, thus
artificially reducing their taxable income.
B.
Partnerships do not pay federal income taxes. 26 U.S.C.
§ 701. A partnership’s taxable income and losses instead pass
through to the partners, who report their shares of partnership
income or losses on their individual federal income tax
returns. Id. When the IRS wishes to reject a transaction like
the Son of BOSS tax shelter at issue in this case, it will
disregard the partnership for tax purposes and thus disallow
the individual partners to report the manufactured losses on
their tax returns. See Woods, 134 S. Ct. at 561-62. Of
particular significance here, the IRS possesses statutory
authority to impose additional penalties on taxpayers who
underreport their taxable income by significant amounts. See
26 U.S.C. § 6662.
Although partnerships do not themselves pay income
taxes, partnerships must submit information returns, which
the IRS reviews and can subject to audit. See 26 U.S.C.
§ 6031. At one time, the IRS lacked any means by which to
correct errors on a partnership’s information return in a single,
5
unified proceeding. Instead, if there were a mistake on a
partnership’s information return, the IRS would need to bring
a separate deficiency proceeding against each individual
partner, giving rise to duplicative proceedings and the
possibility of inconsistent treatment of partners in the same
partnership.
Congress addressed that problem in the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), 26 U.S.C.
§§ 6221, et seq. TEFRA establishes a two-stage process for
review of partnership tax issues, consisting of (i) a
partnership-level proceeding concerning the partnership as a
whole, followed by (ii) a partner-level proceeding for each
individual partner. With regard to the former, if the IRS
disagrees with a partnership’s information return, it can bring
a partnership-level proceeding in which it may adjust
“partnership items,” id. § 6221, defined as items “more
appropriately determined at the partnership level,” id.
§ 6231(a)(3). A partnership-level proceeding culminates in
the IRS’s issuance of a Notice of Final Partnership
Administrative Adjustment (FPAA), which is subject to
judicial review in the Tax Court, the Court of Federal Claims,
or federal district court. Id. § 6226(a). A reviewing court has
jurisdiction to determine “all partnership items”; the
allocation of those items among the partners; and “the
applicability of any penalty, addition to tax, or additional
amount which relates to an adjustment to a partnership item.”
Id. § 6226(f). Once the IRS’s adjustments to the partnership
items become final, the IRS may undertake further
proceedings at the partner level to make associated
adjustments to the tax liability of individual partners. See id.
§§ 6230(a)(1)-(2), (c), 6231(a)(6).
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C.
In July 2005, the IRS issued an FPAA to Petaluma and its
partners for tax year 2000. The FPAA concluded that
Petaluma lacked economic substance and was thus a sham
that would be disregarded for tax purposes. The FPAA
relatedly reduced to zero the Vanderbeeks’ outside basis in
their respective partnership interests. Finally, the FPAA
determined that the accuracy-related penalties set forth in 26
U.S.C. § 6662 applied to the partners’ underpayments of tax.
Petaluma, joined by Ronald Scott Vanderbeek, timely
filed a petition for readjustment of the FPAA in the Tax
Court. During the initial Tax Court proceedings, Petaluma
stipulated to the correctness of most of the adjustments made
by the FPAA but challenged the Tax Court’s jurisdiction.
The Tax Court granted the IRS’s motion for summary
judgment, concluding that it had jurisdiction to determine: (i)
that Petaluma was a sham; (ii) that the Vanderbeeks had no
outside basis in Petaluma because “there can be no adjusted
basis in a disregarded partnership”; and (iii) that accuracy-
related penalties would be applicable to Petaluma’s partners.
Petaluma I, 131 T.C. 97, 99-100, 102.
Petaluma appealed to this court. Petaluma II, 591 F.3d at
649. We upheld the Tax Court’s jurisdiction to deem
Petaluma a sham entity for tax purposes. Id. at 654. But we
held that the Tax Court lacked jurisdiction in a partnership-
level proceeding to determine the outside basis of individual
partners, concluding that the determination of outside basis
must await a subsequent partner-level proceeding. Id. at 654-
55. We therefore vacated the Tax Court’s decision that it had
jurisdiction over the applicability of penalties, and we
remanded for the Tax Court to decide whether it could
7
determine the applicability of penalties without taking into
account the outside basis of individual partners. Id. at 655-56.
On remand, the Tax Court held that it lacked jurisdiction
in this partnership-level proceeding to determine the
applicability to the Vanderbeeks of accuracy-related penalties.
Petaluma FX Partners, LLC v. Comm’r (Petaluma III ), 135
T.C. 581, 586-87 (2010). The IRS again appealed to this
court. During the pendency of that appeal, the Tax Court in
an unrelated case held, in seeming conflict both with our
decision in Petaluma II and with its own decision in Petaluma
III, that it had jurisdiction in partnership-level proceedings to
determine both the outside basis of individual partners and the
applicability of penalties. Tigers Eye Trading, LLC v.
Comm’r (Tigers Eye II ), 138 T.C. 67, 143 (2012). Because of
the apparent conflict between Petaluma III and Tigers Eye II,
we remanded the case without reaching the merits, directing
the Tax Court to address the extent to which its decision in
Tigers Eye II altered its decision in Petaluma III. Petaluma
FX Partners, LLC v. Comm’r (Petaluma IV ), No. 11-1084,
2012 WL 2335993, at *1 (D.C. Cir. Feb. 27, 2012) (per
curiam). On remand, the Tax Court adhered to the result in
Petaluma III despite the apparently contradictory conclusions
reached in Tigers Eye II. Petaluma FX Partners, LLC v.
Comm’r (Petaluma V ), 103 T.C.M. 1769 (2012).
The IRS once again appealed, arguing that the Tax Court
erred in finding it lacked jurisdiction to determine the
applicability of accuracy-related penalties in Petaluma’s
partnership-level proceeding. The taxpayer in Tigers Eye II
concurrently appealed. We held both cases in abeyance
pending the Supreme Court’s decision in Woods. Woods
involved a similar tax shelter in which a partnership’s partners
each likewise claimed large losses based on an artificially
inflated outside basis. The Court in Woods ordered briefing
8
on the jurisdictional question raised by the IRS in this appeal:
whether courts have jurisdiction in partnership-level
proceedings to determine the applicability of accuracy-related
penalties authorized by § 6662. 134 S. Ct. at 562.
As a threshold matter, the Woods Court endorsed our
holdings in Petaluma II that (i) courts have jurisdiction in
partnership-level proceedings to determine that a partnership
is a sham and will be disregarded for tax purposes, and (ii)
courts lack jurisdiction in partnership-level proceedings to
determine an individual partner’s outside basis. Woods, 134
S. Ct. at 563-65. With respect to the latter determination, the
Court held, in agreement with our decision in Petaluma II,
that because outside basis is a nonpartnership item, a court in
a partnership-level proceeding lacks jurisdiction to “make a
formal adjustment of any partner’s outside basis.” Id. at 565
(citing Petaluma II, 591 F.3d at 655). The Court went on to
hold, however, that courts in partnership-level proceedings
have jurisdiction to determine the applicability of accuracy-
related penalties to a partner, “even if imposing the penalty
would also require determining . . . items such as outside
basis.” Id. at 564.
II.
Of the three jurisdictional questions raised by this case,
two—jurisdiction to make a sham determination and
jurisdiction to determine the outside basis of individual
partners—were resolved by the Petaluma II panel, see
Petaluma II, 591 F.3d at 654-55, in a manner subsequently
endorsed by the Woods Court, Woods, 134 S. Ct. at 563-65.
The remaining jurisdictional issue concerns whether
jurisdiction exists in partnership-level proceedings to
determine the applicability of penalties to the partners of a
sham partnership, including penalties that relate to
9
nonpartnership items such as outside basis. See Petaluma II,
591 F.3d at 655-56.
In Woods, the Supreme Court resolved that question in
favor of jurisdiction. 134 S. Ct. at 564. The Court observed
that the applicability-of-penalties determination is “inherently
provisional,” in that “imposing a penalty always requires
some determinations”—such as a partner’s outside basis—
“that can be made only at the partner level.” Id. But courts
retain jurisdiction in partnership-level proceedings to
determine whether any partnership-level adjustments—such
as the determination in this case that Petaluma was a sham—
carry “the potential to trigger a penalty” against the partners.
Id. at 565. Under Woods, accordingly, the Tax Court in this
case had jurisdiction to determine the applicability of
accuracy-related penalties to the Vanderbeeks.
Notwithstanding Woods, Petaluma contends that the Tax
Court lacked jurisdiction in this partnership-level proceeding
to make any determinations concerning Petaluma or its
partners, including the determination that the partners are
subject to accuracy-related penalties. Petaluma’s argument
centers on the validity of a temporary regulation, § 301.6233-
1T (the Temporary Regulation), issued in 1987 by the
Treasury Department. Temp. Treas. Reg. § 301.6233-1T. An
understanding of the Temporary Regulation’s potential
implications for the Tax Court’s jurisdiction in this case
requires a brief march through the statutory and regulatory
provisions governing federal jurisdiction over sham
partnerships.
That march begins with § 6226(f) of the Internal Revenue
Code, enacted as part of TEFRA. Section 6226(f) establishes
that, in a partnership-level proceeding, a court (including the
Tax Court) reviewing an FPAA has jurisdiction to determine
10
not only “all partnership items,” but also “the applicability of
any penalty . . . which relates to an adjustment to a
partnership item.” 26 U.S.C. § 6226(f). In 1984, two years
after TEFRA’s enactment, Congress enacted § 6233(b). That
provision states that, “to the extent provided in regulations,”
the provisions of TEFRA are “extended” to entities that file a
partnership return but as to which “it is [later] determined that
there is no entity” for that taxable year (because, for instance,
the entity is found to be a sham). Id. § 6233(a)-(b).
Treasury, acting pursuant to its authority under § 6233(b)
to “provide[] in regulations” for the extension of TEFRA’s
provisions to sham partnerships, id. § 6233(b), promulgated
the aforementioned Temporary Regulation. The Temporary
Regulation prescribes that “any [FPAA] or judicial
determination resulting from a [TEFRA] proceeding . . . may
include a determination” that “there is no entity for such
taxable year,” as well as “determinations with respect to all
items of the entity which would be partnership items . . . if
such entity had been a partnership in such taxable year.”
Temp. Treas. Reg. § 301.6233-1T(a), (c)(1). Under the
Temporary Regulation, in other words, TEFRA’s provisions
apply not only to bona fide partnerships but also to
partnerships determined to be shams.
TEFRA’s provisions include § 6226(f), which, as noted,
vests courts in partnership-level proceedings with jurisdiction
over partnership items and over the applicability of penalties
related to adjustments to partnership items. In Petaluma’s
view, that provision’s grant of jurisdiction—like all of
TEFRA’s provisions—could extend to sham partnerships only
if a regulation promulgated under § 6233(b) so provides.
Here, Petaluma assumes, that extension ostensibly came about
by virtue of the Temporary Regulation. And if the Temporary
Regulation is invalid, Petaluma argues, the Tax Court
11
necessarily had no valid basis upon which to assert
jurisdiction in this partnership-level proceeding.
Petaluma challenges the validity of the Temporary
Regulation on the ground that its promulgation failed to
comply with both the Administrative Procedure Act’s notice-
and-comment requirements and the APA’s mandate that
agencies publish a substantive rule at least thirty days before
its effective date. See 5 U.S.C. § 553(c), (d). Although
Petaluma failed to raise that (or any) challenge to the
Temporary Regulation at any previous point in these
prolonged proceedings, the IRS raises no argument that
Petaluma forfeited its challenge. Because a forfeiture
argument can itself be forfeited, see Deppenbrook v. Pension
Benefit Guaranty Corp., 778 F.3d 166, 172 (D.C. Cir. 2015),
and because the IRS has done so here, forfeiture principles
pose no bar to reaching the merits of Petaluma’s challenge to
the Temporary Regulation.
While the IRS does not argue forfeiture, it contends that
we should refrain from reaching the merits of Petaluma’s
argument for a different reason. In the IRS’s view, law-of-
the-case principles should bar us from addressing the validity
of the Temporary Regulation because Petaluma II already
resolved that question. The “law-of-the-case doctrine holds
that decisions rendered on the first appeal should not be
revisited on later trips to the appellate court.” LaShawn A. v.
Barry, 87 F.3d 1389, 1393 (D.C. Cir. 1996) (en banc). Here,
however, Petaluma II did not render a “decision” on the
validity of the Temporary Regulation, so we would not
“revisit” any such decision by addressing the merits of that
issue. Although the Petaluma II panel noted the existence of
the Temporary Regulation in discussing the Tax Court’s
jurisdiction over the sham determination, Petaluma II, 591
F.3d at 652, the Temporary Regulation’s validity was neither
12
questioned nor decided in that appeal. Even if Petaluma II in
some sense assumed the validity of the Temporary
Regulation, an issue “assumed” by an appellate court in an
initial appeal does not become the law of the case; rather, the
“law of the case doctrine does not apply where an issue was
not raised before the prior panel and thus was not decided by
it.” Yesudian, ex rel. U.S. v. Howard Univ., 270 F.3d 969,
972 (D.C. Cir. 2001). We therefore proceed to address the
merits of Petaluma’s challenge.
Petaluma’s challenge to the Temporary Regulation
presumes that the Tax Court would have jurisdiction in this
partnership-level proceeding only if a valid regulation grants
jurisdiction over sham partnerships. Cf. Petaluma II, 591
F.3d at 652. The IRS does not contest that premise. We
briefly note, though, that it is unclear whether a regulation in
fact is necessary to give the Tax Court jurisdiction to decide if
a partnership is a sham and if penalties apply against the
partners. The Supreme Court’s opinion in Woods concluded
that jurisdiction exists over those matters in partnership-level
proceedings; and in reaching that conclusion, the Court relied
solely on TEFRA’s base jurisdictional statute, § 6226(f),
without referencing either the statute extending TEFRA’s
provisions to sham partnerships “to the extent provided in
regulations,” § 6233(b), or any resulting regulation. See 134
S. Ct. at 563-65. The Woods Court thus may have assumed
that jurisdiction exists in the circumstances of this case by
virtue of § 6226(f) alone, without regard to regulations
implementing § 6233(b).
We have no need to resolve that issue, however. Even
assuming arguendo that the Tax Court’s jurisdiction in this
case depends on the existence of a valid regulation issued
under § 6233(b) extending TEFRA’s provisions to sham
partnerships, Petaluma’s jurisdictional argument fails.
13
Petaluma aims at the wrong target: Petaluma challenges the
validity of the Temporary Regulation, but the pertinent
regulation is a later-promulgated, final regulation, Treasury
Regulation § 301.6233-1 (2001) (the Final Regulation).
The history of the regulations promulgated pursuant to
§ 6233 demonstrates the salience of the Final Regulation
rather than the Temporary Regulation. In 1986, Treasury
proposed a group of regulations implementing TEFRA,
including one carrying out § 6233’s invitation to extend
TEFRA’s provisions to sham partnerships by regulation.
Prop. Treas. Reg. § 301.6233-1, 51 Fed. Reg. 13,231, 13,249-
50 (Apr. 18, 1986). That proposed regulation stated that
“[a]ny [FPAA] or judicial determination . . . may include a
[sham] determination” as well as determinations of other
“partnership” items of the entity deemed to be a sham. Prop.
Treas. Reg. § 301.6233-1(a), (c)(1). The following year,
Treasury issued the Temporary Regulation, which gave effect
to the proposed regulations on an interim basis. The
Temporary Regulation contained the same language applying
TEFRA’s provisions to sham partnerships. Temp. Treas. Reg.
§ 301.6233-1T. And both the 1986 proposed regulation and
the Temporary Regulation applied by their terms “with
respect to any taxable year beginning after September 3,
1982.” Temp. Treas. Reg. § 301.6233-1T(e); Prop. Treas.
Reg. § 301.6233-1(e).
The Temporary Regulation proved to be less temporary
than perhaps initially envisioned, remaining in effect for more
than a decade. But it was eventually displaced by the Final
Regulation. In 1999, Treasury issued a “notice of proposed
rulemaking by cross-reference to” the Temporary Regulation,
conveying the department’s intent to “finalize” the Temporary
Regulation. Modifications and Additions to the Unified
Partnership Audit Procedures, 64 Fed. Reg. 3886, 3886-87
14
(Jan. 26, 1999). Treasury realized that intention in 2001 by
promulgating the Final Regulation. See Treas. Reg.
§ 301.6233-1. Although the Final and Temporary
Regulations differ in certain limited respects of no
consequence here, compare Temp. Treas. Reg. § 301.6233-
1T(b), (c)(2), with Treas. Reg. § 301.6233-1(b), the Final
Regulation’s language applying TEFRA’s provisions to sham
partnerships parrots the corresponding language of the
Temporary Regulation, see Treas. Reg. § 301.6233-1(a), (b);
Temp. Treas. Reg. § 301.6233-1T(a), (c)(1).
The Final Regulation applies to all tax years, but it adopts
a bifurcated approach depending on the tax year in question.
First, the Final Regulation’s provisions control with regard to
“taxable years beginning on or after October 4, 2001,” the
date of the Final Regulation’s adoption. Treas. Reg.
§ 301.6233-1(d). Second, for taxable “years beginning prior
to October 4, 2001,” the Final Regulation says to “see
§ 301.6233-1T,” i.e., the Temporary Regulation. Id. The
rules set forth in the Temporary Regulation thus control for
taxable years beginning before October 4, 2001, a period that
includes the tax year at issue here (2000).
While the rules set out in the Temporary Regulation
apply to those past tax years per the direction of the Final
Regulation, the Temporary Regulation itself does not continue
to apply. To the contrary, the Temporary Regulation ceased
having effect upon adoption of the Final Regulation. Indeed,
the “Action” undertaken by the Final Regulation included
“removal of temporary regulations,” Unified Partnership
Audit Procedures, 66 Fed. Reg. 50,541, 50,541 (Oct. 4, 2001),
and the Final Regulation correspondingly directed that
“Section 301.6233-1T [the Temporary Regulation] is
removed” from the Code of Federal Regulations. Unified
Partnership Audit Procedures, 66 Fed. Reg. at 50,563 ¶ 53a;
15
compare 26 C.F.R. § 301.6233-1T (2001), with 26 C.F.R.
§ 301.6233-1 (2002). The upshot is that the Final Regulation
controls for all tax years; but as to tax years commencing
before October 4, 2001, the Final Regulation effectively
incorporates the rules set forth in the no-longer-operative
Temporary Regulation.
Because the Final Regulation is the operative regulation,
Petaluma’s procedural challenges to the now-obsolete
Temporary Regulation are misdirected. Any procedural
deficiency afflicting the Temporary Regulation is of no
continuing significance. Rather, the Final Regulation now
prescribes the rules applicable to all tax years, including pre-
October 1, 2001, tax years. And because Petaluma challenges
only the Temporary Regulation—not the Final Regulation—
under the APA’s notice-and-comment and thirty-day-
publication provisions, its jurisdictional argument necessarily
fails. Nor are we aware of any basis on which Petaluma could
assert those same procedural challenges against the Final
Regulation.
With regard to Petaluma’s principal challenge,
concerning the APA’s notice-and-comment rules, see 5
U.S.C. § 553(c), the IRS in 1999 issued a notice of proposed
rulemaking in connection with the Final Regulation.
Modifications and Additions to the Unified Partnership Audit
Procedures, 64 Fed. Reg. at 3886. In that notice, the IRS
made clear that it “intend[ed] to finalize” the Temporary
Regulation, it observed that the “text of [the] temporary
regulations . . . generally serves as the text of these proposed
regulations,” and it invited the submission of comments. Id.
at 3886-87. In communicating its intention to “finalize” the
Temporary Regulation, id., the IRS gave notice that the rules
set forth in the Temporary Regulation would continue to
apply—as that regulation itself prescribed—“with respect to
16
any taxable year beginning after September 3, 1982.” Temp.
Treas. Reg. § 301.6233-1T(e). The agency received no
written comments in response to its proposed finalization of
the Temporary Regulation. See Unified Partnership Audit
Procedures, 66 Fed. Reg. at 50,542.
We note, though, that the IRS evidently had previously
received “[s]everal comments” in 1986 when it initially
proposed a regulation applying TEFRA to sham partnerships.
See Miscellaneous Provisions Relating to the Tax Treatment
of Partnership Items, 52 Fed. Reg. 6779, 6780 (Mar. 5, 1987).
When the IRS later proposed to finalize the Temporary
Regulation in 1999, it explained that it would take into
account those previous comments, stating that “[c]omments
previously received in connection with the [Temporary
Regulation] will be considered as well as new or additional
comments.” Modifications and Additions to the Unified
Partnership Audit Procedures, 64 Fed. Reg. at 3887. It is
unclear from the record whether any of the previous
comments specifically pertained to the proposed regulation
extending TEFRA to sham partnerships or whether those
comments instead concerned some other aspect of the broader
set of regulations proposed at that time.
While the IRS did not specifically discuss the prior
comments when it adopted the Final Regulation, an agency’s
“failure to address a particular comment or category of
comments is not an APA violation per se.” Sherley v.
Sebelius, 689 F.3d 776, 784 (D.C. Cir. 2012). And in any
event, “the court will not set aside a rule” for failure to
comply with § 553’s notice and comment requirements unless
a party has shown that it “suffered prejudice from the
agency’s failure.” Am. Radio Relay League, Inc. v. FCC, 524
F.3d 227, 237 (D.C. Cir. 2008) (internal quotations omitted);
see 5 U.S.C. § 706. Here, Petaluma identifies no comment it
17
believes the IRS erroneously disregarded. We therefore have
no reason to conclude that the agency failed to “base” its
“decision . . . on a consideration of the relevant factors.”
Thompson v. Clark, 741 F.2d 401, 409 (D.C. Cir. 1984).
Nor could Petaluma challenge the Final Regulation on
the ground that it infringes 5 U.S.C. § 553(d), which generally
calls for “publication” of a “substantive rule . . . not less than
30 days before its effective date.” The Final Regulation went
into effect immediately upon adoption, without any 30-day
deferral. Treas. Reg. § 301.6233-1(d). We need not address,
however, whether there was any breach of § 553(d). As with
the APA’s notice and comment rules, the thirty-day notice
requirement of § 553(d) is subject “to the rule of prejudicial
error.” 5 U.S.C. § 706; see United States v. Dean, 604 F.3d
1275, 1288 (11th Cir. 2010). There is no basis for supposing
that Petaluma could have suffered any prejudice as a
consequence of the agency’s decision to make the Final
Regulation effective upon promulgation. Indeed, as the IRS
observed at the time of the Final Regulation’s adoption,
“[t]axpayers and the IRS ha[d] been operating under [the
same] rules since they were promulgated as temporary
regulations” in 1987. Unified Partnership Audit Procedures,
66 Fed. Reg. at 50,542.
We therefore conclude that, assuming there is a need for
a regulation to confer jurisdiction in the Tax Court in this
case, the Final Regulation does so. We acknowledge that the
IRS, in its reply brief, responded to Petaluma’s challenges to
the Temporary Regulation on the merits, without noting or
discussing the possibility that the Final Regulation in fact is
the operative regulation. In the course of examining the
challenge raised by Petaluma, we have concluded, for the
reasons explained, that the Final Regulation governs the Tax
Court’s jurisdiction.
18
Finally, Petaluma raises a challenge to a separate
regulation, Treasury Regulation § 1.6662-5(g) (1991),
addressed to the calculation of accuracy-related penalties
when a taxpayer’s adjusted basis is zero. Under that
regulation, “[t]he value or adjusted basis claimed . . . is
considered to be 400 percent or more of the correct amount.”
Id. Petaluma contends that the regulation conflicts with the
mathematical rule prohibiting division by zero, an argument
noted (but not resolved) by the Supreme Court in Woods. 134
S. Ct. at 566 n.4. We, too, do not reach the merits of the
argument. Unlike with Petaluma’s challenge to the
Temporary Regulation, the IRS argues that Petaluma forfeited
its challenge to § 1.6662-5(g) by failing to raise it until this
late stage of the case. See, e.g., Hartman v. Duffey, 88 F.3d
1232, 1236 (D.C. Cir. 1996). We agree.
* * * * *
For the foregoing reasons, the judgment of the Tax Court
with respect to its jurisdiction to determine the applicability of
penalties in partnership-level proceedings is reversed, and the
case is remanded for further proceedings consistent with this
opinion.
So ordered.