Robert Rock v. United States ( 2020 )

Case: 18-50797 Document: 00515270848 Page: 1 Date Filed: 01/14/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 14, 2020
No. 18-50797
Lyle W. Cayce
Clerk
DOYLE W. FOSTER; MARTHA G. FOSTER; THOMAS K. NELSON;
CAROLYN C. NELSON,
Plaintiffs - Appellants
v.
UNITED STATES OF AMERICA,
Defendant - Appellee
************************************************************************
Consolidated with 18-50817
ROBERT ROCK; VERREE ROCK,
Plaintiffs - Appellants
v.
UNITED STATES OF AMERICA,
Defendant - Appellee
Appeals from the United States District Court
for the Western District of Texas
USDC No. 1:06-CV-818
USDC No. 1:07-CV-65
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Before STEWART, CLEMENT, and HO, Circuit Judges.
PER CURIAM:*
In the 1980s, the Fosters, Nelsons, and Rocks (collectively, “Taxpayers”)
reduced their taxable income by investing in partnerships that were later
determined to be tax-avoidance schemes. The Internal Revenue Service (“IRS”)
disallowed certain deductions reported by the partnerships, and after the
conclusion of partnership-level proceedings challenging those adjustments, the
IRS assessed additional taxes against Taxpayers. Taxpayers paid the amounts
assessed and brought partner-level refund suits claiming that the assessments
were untimely. In both cases, the district court held that it lacked subject-
matter jurisdiction because Taxpayers’ claims involve matters that must be
decided at the partnership level. We affirm the district court’s judgments.
I.
This appeal consolidates two cases raising the same issues related to the
federal treatment of partnerships for tax purposes. A partnership is not a
taxable entity. United States v. Woods, 571 U.S. 31, 38 (2013) (citing 26 U.S.C
§ 701). Rather, it is a conduit through which “its taxable income and losses
pass through to the partners.” Id. Even so, a partnership must file an
informational tax return reflecting its income and losses, and the partners
report their shares of the partnership’s tax items on their own individual
returns. Id.; see also Irvine v. United States, 729 F.3d 455, 459 (5th Cir. 2013).
“Before 1982, examining a partnership for federal tax purposes was a
tedious process.” Duffie v. United States, 600 F.3d 362, 365 (5th Cir. 2010). To
adjust an item on a partnership’s return, the IRS had to audit each partner
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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separately, which led to duplicative proceedings and inconsistent results. See
Woods, 571 U.S. at 38. Recognizing these difficulties, Congress enacted the Tax
Treatment of Partnership Items Act of 1982 as Title IV of the Tax Equity and
Fiscal Responsibility Act of 1982 (“TEFRA”), Pub. L. No. 97-248, §§ 401–07, 96
Stat. 324, 648–71. 1 TEFRA created a single, unified proceeding for determining
the tax treatment of all “partnership items,” i.e., those relevant to the
partnership as a whole, 2 at the partnership level. See Irvine, 729 F.3d at 459.
Under the TEFRA framework, “partnership-related tax matters are
addressed in two stages.” Woods, 571 U.S. at 39. First, the IRS initiates an
administrative proceeding at the partnership level to audit the partnership’s
return and make any necessary adjustments to partnership items. Id. If the
IRS adjusts any partnership item, it must notify the partners by issuing a
Notice of Final Partnership Administrative Adjustment (“FPAA”). Rodgers v.
United States, 843 F.3d 181, 184 (5th Cir. 2016). The partnership, typically
through its “tax-matters partner,” 3 may challenge the FPAA in the United
States Tax Court, the Court of Federal Claims, or an appropriate district court.
1 TEFRA’s partnership procedures were codified as amended at 26 U.S.C. §§ 6221–
6234 (2012). The Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1101, 129 Stat. 584,
625–38, repealed those procedures and struck 26 U.S.C. § 7422(h), the jurisdictional
provision at issue. But those changes do not apply here because the Act is effective only for
tax years after 2017. We therefore proceed using the statutory provisions applicable to the
relevant time period, i.e., tax years 1984 and 1985. All citations to the Internal Revenue Code
and Treasury regulations refer to the versions applicable to tax years 1984 and 1985.
2 The term “partnership item” encompasses all items that are “more appropriately
determined at the partnership level than at the partner level.” Irvine, 729 F.3d at 459
(quoting Weiner v. United States, 389 F.3d 152, 154 (5th Cir. 2004)). This includes “the legal
and factual determinations that underlie the determination of the amount, timing, and
characterization of items of income, credit, gain, loss, deduction, etc.” Id. (quoting Treas. Reg.
§ 301.6231(a)(3)-1(b)). “The tax treatment of nonpartnership items,” on the other hand,
“requires partner-specific determinations that must be made at the individual partner level.”
Id. (quoting Duffie, 600 F.3d at 366).
3 The tax-matters partner is “the partner designated to act as a liaison between the
partnership and the IRS in administrative proceedings and as the representative of the
partnership in judicial proceedings.” Duffie, 600 F.3d at 366 n.1.
3
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Irvine, 729 F.3d at 460 (citing 26 U.S.C. § 6226(a), (b)). If a partnership-level
challenge is filed, each partner is deemed a party to the case and is bound by
its outcome. Rodgers, 843 F.3d at 185 (citing 26 U.S.C. § 6226(c)(1)). “Once the
adjustments to partnership items have become final, the IRS may undertake
further proceedings at the partner level to make any resulting ‘computational
adjustments’ in the tax liability of the individual partners.” Woods, 571 U.S. at
39 (citing 26 U.S.C. § 6231(a)(6)). The IRS can directly assess most
computational adjustments against the partners, and the partners can
challenge those assessments in post-payment refund actions. See id. (citing 26
U.S.C. § 6230(a)(1), (c)).
District courts generally have subject-matter jurisdiction over partner-
level refund actions. Rodgers, 843 F.3d at 186 (citing 28 U.S.C. §§ 1340,
1346(a)(1); Irvine, 729 F.3d at 460). But, with limited exceptions, TEFRA
deprives courts of jurisdiction over claims for refunds “attributable to
partnership items.” Irvine, 729 F.3d at 460 (quoting 26 U.S.C. § 7422(h)). In
other words, “[i]f the refund is attributable to partnership items, section
7422(h) applies and deprives the court of jurisdiction. If . . . the refund is
attributable to nonpartnership items, then section 7422(h) is irrelevant, and
the general grant of jurisdiction is effective.” Rodgers, 843 F.3d at 190
(alteration in original) (quoting Irvine, 729 F.3d at 461).
II.
These cases are the latest in a long line of tax suits involving limited
partnerships organized in the mid-1980s by American Agri-Corp (“AMCOR”)
and marketed to high income professionals across the country. The
partnerships had stated goals of developing farmland and growing crops.
Duffie, 600 F.3d at 367. But according to the IRS, the real purpose was to
shelter the partners’ income from taxation. Acute Care Specialists II v. United
4
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States, 727 F.3d 802, 804 (7th Cir. 2013). They did so by “generat[ing] a large
loss in the first year, allowing each partner to claim a tax deduction averaging
twice the size of his investment, with the excess loss to be recaptured in
subsequent years.” Prati v. United States, 603 F.3d 1301, 1302 (Fed. Cir. 2010).
Taxpayers were partners in three different AMCOR partnerships. 4 In
1984, Doyle Foster invested as a limited partner in Agri-Venture II (“AV2”).
That same year, Thomas Nelson invested as a limited partner in Travertine
Flame Associates (“TFA”). And in 1985, Robert Rock invested as a limited
partner in Agri-Venture Fund (“AVF”). By the end of 1986, all of the
partnerships and Taxpayers had filed their tax returns for the years at issue. 5
Taxpayers reported losses from their investments in the AMCOR partnerships,
reducing their tax liability.
By 1987, the IRS had begun investigating AMCOR partnerships on
suspicion that they were “impermissible tax shelters.” Duffie, 600 F.3d at 367.
In 1991, after the investigation concluded, the IRS issued FPAAs to the tax-
matters partners of each of the partnerships. The IRS determined that the
partnerships did not actually engage in farming activities but rather “a series
of sham transactions,” and therefore proposed adjustments disallowing several
listed farming expenses and other deductions.
Shortly thereafter, partners from each of the partnerships filed
partnership-level suits contesting the FPAAs in Tax Court. Among other
things, they argued that the IRS could not assess more taxes attributable to
partnership items because the statute of limitations for the relevant tax years
4 Martha Foster, Carolyn Nelson, and Verree Rock were not partners in the AMCOR
partnerships, but they are parties to these lawsuits because they filed joint tax returns with
their husbands for the relevant tax years.
5 Notably, however, AV2’s and TFA’s partnership returns were both signed by “Joseph
O. Voyer, Treasurer,” which led to a dispute as to their validity.
5
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had expired. In response, the IRS asserted that the FPAAs were timely issued
for several reasons, including that the partnership returns for TFA and AV2
were invalid because they were not signed by a partner and that AVF’s tax-
matters partner granted the IRS an extension of the limitations period.
While the partnership-level suits were pending in the Tax Court, some
partners chose to settle individually with the IRS, while others did not. See,
e.g., Rodgers, 843 F.3d at 188 (noting that the plaintiffs had individually
settled with the IRS); Irvine, 729 F.3d at 458 (same); Prati, 603 F.3d at 1303–
04 (involving settling partners and non-settling partners). Taxpayers here
chose not to settle with the IRS and instead remained parties to the
partnership proceedings in Tax Court.
The Tax Court eventually consolidated the AVF suit with six other
AMCOR cases as Agri-Cal Venture Associates v. Commissioner, 80 T.C.M.
(CCH) 295 (T.C. 2000), for trial on the partnerships’ statute-of-limitations
defense. Although the AV2 and TFA suits were not consolidated with Agri-Cal,
the IRS and Frederick Behrens, who was the tax-matters partner for AV2,
TFA, and nearly all other AMCOR partnerships, executed stipulations to be
bound by the decision on the limitations issue. In 2000, the court determined
that the statute of limitations had not started running for several of the
partnerships because their returns were not signed by a partner, 6 rendering
the returns invalid. Agri-Cal, 80 T.C.M. (CCH) at 303. The court also concluded
that the tax-matters partner for AVF granted the IRS a valid extension of the
limitations period. Id. at 306. Thus, the court held that the statute of
limitations had not expired. Id. at 311.
6 Like AV2’s and TFA’s returns here, the returns in Agri-Cal were signed by “Joseph
O. Voyer[,] Treasurer.” Agri-Cal, 80 T.C.M. (CCH) at 300. The Tax Court determined that
Voyer was an officer of AMCOR and was never a partner in the partnerships. Id.
6
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After the Agri-Cal decision, the IRS and Behrens engaged in negotiations
to settle all of the partnership-level suits. In 2001, the Tax Court entered
stipulated decisions in the AV2, TFA, and AVF suits, which decreased the
amount of farming expenses the partnerships could claim. The decisions also
expressly stated that “the assessment of any deficiencies in income tax . . .
attributable to the adjustments to partnership items [for the relevant tax
years] is not barred by the provisions of [26 U.S.C.] § 6229.”
As a result of these adjustments, the IRS assessed additional taxes
against the Nelsons and Fosters for 1984 and against the Rocks for 1985.
Taxpayers paid the assessments in 2002 and filed administrative refund
claims with the IRS two years later. The IRS denied their claims.
Taxpayers then filed refund suits in the Western District of Texas. 7 They
claimed that the added taxes were assessed after the statute of limitations for
making those assessments expired. The cases were stayed while similar issues
were litigated in other lawsuits. In 2018, once the stays were lifted, the parties
filed cross-motions for summary judgment in both cases.
The district court granted the motions filed by the United States
(“Government”) and dismissed both cases for lack of subject-matter
jurisdiction. The court held that it lacked jurisdiction pursuant to 26 U.S.C.
§ 7422(h) because Taxpayers’ claims that the assessments were time-barred
were claims for refunds attributable to partnership items. In the alternative,
the court held that it lacked jurisdiction because Taxpayers failed to file their
administrative refund claims within the six-month deadline of 26 U.S.C.
§ 6230(c)(2)(A). Taxpayers appealed.
7The Fosters and Nelsons filed suit together on October 10, 2006, and the Rocks filed
a separate suit on January 25, 2007.
7
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III.
We review a district court’s determination of subject-matter jurisdiction
de novo. Calhoun County v. United States, 132 F.3d 1100, 1103 (5th Cir. 1998).
We also review a district court’s grant of summary judgment de novo. Bridges
v. Empire Scaffold, L.L.C., 875 F.3d 222, 225 (5th Cir. 2017). “Summary
judgment is appropriate if ‘there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.’” Id. (quoting FED.
R. CIV. P. 56(a)).
IV.
Taxpayers seek refunds based on the theory that the IRS had no
authority to assess additional taxes against them because the statute of
limitations for the relevant years had expired. The dispositive issue, then, is
whether Taxpayers’ claims that the assessments were time-barred are claims
for refunds “attributable to partnership items.” 26 U.S.C. § 7422(h). Our
analysis is relatively straightforward because prior decisions in similar cases
have dealt with and resolved the issue presented.
Under § 6501(a), the IRS has three years from the filing of a partner’s
tax return to assess taxes against that partner. 26 U.S.C. § 6501(a). But when
the assessment is attributable to partnership items, the limitations period
“shall not expire” until three years after the partnership’s return was filed. Id.§ 6229(a). Section 6229 also allows for that three-year period to be extended
under a variety of circumstances. See Rodgers, 843 F.3d at 185–86. For
example, the tax-matters partner may grant the IRS an extension, which binds
all partners. Id. at 186 (citing 26 U.S.C. § 6229(b)(1)). And if the partnership
fails to file a valid return, the limitations period never begins to run, meaning
“any tax attributable to a partnership item . . . arising in such year may be
assessed at any time.” Id. (quoting 26 U.S.C. § 6229(c)(3)).
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To be clear, § 6229 is not a separate statute of limitations. Instead, it
establishes “the minimum time period that, when necessary, extends, i.e.,
[supersedes], the general three-year limitations period.” Curr-Spec Partners,
L.P. v. Comm’r, 579 F.3d 391, 396 (5th Cir. 2009). Put simply, for partnership
items, § 6501(a) and § 6229 “operate in tandem to provide a single limitations
period.” Irvine, 729 F.3d at 461 (quoting Prati, 603 F.3d at 1307).
Taxpayers’ claims involve “the significant interplay” between § 6501(a)
and § 6229. Irvine, 729 F.3d at 461. When a § 6229 extension is asserted, any
determination about § 6501(a) must also involve the resolution of § 6229—a
partnership item that cannot be raised in partner-level litigation. Id.; see also
Bedrosian v. Comm’r, 940 F.3d 467, 472 (9th Cir. 2019) (“[A] partner’s statute-
of-limitations challenge to an FPAA constitutes a partnership item that must
be raised at the partnership level.”). In such a case, a refund claim based on a
violation of the statute of limitations is a claim for a refund attributable to a
partnership item. See, e.g., Rodgers, 843 F.3d at 191–92; Irvine, 729 F.3d at
461–62; Weiner, 389 F.3d at 156–59; Bedrosian, 940 F.3d at 471–72; Acute Care
Specialists II, 727 F.3d at 806–09; Prati, 603 F.3d at 1306–08.
Taxpayers’ argument that § 7422(h) does not bar jurisdiction over their
claims is foreclosed by this court’s decisions in Rodgers and Irvine. Like
Taxpayers here, the plaintiffs in Rodgers and Irvine “‘were partners in AMCOR
limited partnerships in the 1980s’ who asserted that they were improperly
‘assessed by the IRS after the 26 U.S.C. § 6501(a) statute of limitations had
passed.’” Rodgers, 843 F.3d at 191 (quoting Irvine, 729 F.3d at 460). And just
as in Rodgers and Irvine, the Government here asserted that § 6229 extended
the statute of limitations because the AV2 and TFA returns were invalid for
not being signed by a partner, and because the tax-matters partner for AVF
agreed to an extension. See Rodgers, 843 F.3d at 192; Irvine, 729 F.3d at 462.
9
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Thus, “the claim for refund is ‘attributable to’ a partnership item and § 7422(h)
bars consideration of the limitations claim.” Rodgers, 843 F.3d at 192 (quoting
Irvine, 729 F.3d at 461–62).
Taxpayers try to distinguish their cases from Rodgers and Irvine because
the individual partners in those cases settled with the IRS. Whereas the
“settled partners” in Rodgers and Irvine were bound only by the terms of their
settlements, which left the limitations issue unresolved, the Taxpayers here,
as “non-settling partners,” remained parties to the partnership-level suits and
are bound by the stipulated decisions entered by the Tax Court. According to
Taxpayers, this distinction is crucial because § 7422(h) does not deprive refund
courts of jurisdiction to enforce prior partnership-level determinations, or lack
thereof, 8 through the application of res judicata.
This argument is not new. In Kercher v. United States, which was
decided on the same day and by the same panel as Irvine, this court found that
the non-settling partners’ limitations claim was “identical to the [settling
partners’] statute of limitations claim in Irvine,” and therefore § 7422(h) barred
jurisdiction. 539 F. App’x 517, 521 (5th Cir. 2013). Likewise, the United States
Court of Appeals for the Federal Circuit addressed this exact distinction in a
similar AMCOR case and held that § 7422(h) barred jurisdiction over the
limitations claims of both the settling and non-settling partners. Prati, 603
F.3d at 1304, 1307. Consistent with Rodgers and Irvine, both of these cases
dismissed the non-settling partners’ claims for lack of jurisdiction under
§ 7422(h) without first conducting res judicata analyses. Kercher, 539 F. App’x
at 521; Prati, 603 F.3d at 1307; see also Acute Care Specialists II, 727 F.3d at
8 Taxpayers argue that the stipulated decisions entered by the Tax Court contain no
determination that § 6229 extended the limitations period. And because those decisions
resolved all partnership items, Taxpayers argue that the limitations issue was necessarily
decided in their favor.
10
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813–14 (rejecting taxpayers’ argument that courts must conduct res judicata
analyses before considering whether § 7422(h) deprives them of jurisdiction).
Stated plainly, Taxpayers’ claims that the IRS assessed additional taxes
outside the statute of limitations are identical to the limitations claims in
Rodgers and Irvine. Factual differences between settling and non-settling
partners do not compel a different result. For the reasons given in Rodgers and
Irvine, Taxpayers’ claims seek refunds attributable to partnership items. See
Rodgers, 843 F.3d at 191–92; Irvine, 729 F.3d at 460–63. Thus, § 7422(h)
deprives the district court of jurisdiction to consider Taxpayers’ claims. 9
V.
For the foregoing reasons, we AFFIRM the district court’s dismissals of
the Taxpayers’ complaints in both cases for lack of subject-matter jurisdiction.
9 Because we conclude that § 7422(h) deprives the district court of jurisdiction to
consider Taxpayers’ claims, we need not address the Government’s alternative argument that
the district court lacked jurisdiction because Taxpayers failed to file their administrative
refund claims with the IRS within the six-month deadline of § 6230(c)(2)(A).
11