Jt USA v. Cir ( 2014 )


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  •                      FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    JT USA, LP; JTR-LLC; TAX                          No. 12-70037
    MATTERS PARTNER,
    Petitioners-Appellees,               Tax Ct. No.
    5282-05
    v.
    COMMISSIONER OF INTERNAL                            OPINION
    REVENUE,
    Respondent-Appellant.
    Appeal from a Decision of the
    United States Tax Court
    Argued and Submitted
    June 2, 2014—Pasadena, California
    Filed November 14, 2014
    Before: Stephen S. Trott and Consuelo M. Callahan, Circuit
    Judges, and Mark W. Bennett, District Judge.*
    Opinion by Judge Trott;
    Dissent by Judge Callahan
    *
    The Honorable Mark W. Bennett, District Judge for the U.S. District
    Court for the Northern District of Iowa, sitting by designation.
    2                          JT USA V. CIR
    SUMMARY**
    Tax
    The panel remanded an appeal by the Commissioner of
    Internal Revenue and held that the tax court erred in
    concluding that taxpayers could opt out of a partnership
    administrative proceeding under the Tax Equity and Fiscal
    Responsibility Act.
    The panel held that the meaning of 26 U.S.C.
    § 6223(e)(3)(B) is clear and unambiguous that unless a
    partner elects to have all of his or her partnership items
    treated as nonpartnership items, the partner cannot elect out
    of proceeding under the Tax Equity and Fiscal Responsibility
    Act.
    Dissenting, Judge Callahan wrote that TEFRA allows one
    partner to make one election and another partner to make a
    different election, and that a partner who has both direct and
    indirect interests should have the same option, at least where
    the IRS fails to timely notify the taxpayer that a bifurcated
    election is not allowed.
    **
    This summary constitutes no part of the opinion of the court. It has
    been prepared by court staff for the convenience of the reader.
    JT USA V. CIR                             3
    COUNSEL
    Joan I. Oppenheimer (argued), Tamara W. Ashford, Deputy
    Assistant Attorney General, Teresa E. McLaughlin, Tax
    Division Department of Justice, Washington, D.C., for
    Respondent-Appellant.
    Richard V. Vermazen (argued), Law Office of Richard V.
    Vermazen, San Diego, California; Ernest S. Ryder and
    Lauren A. Rinsky, Ernest S. Ryder & Associates, Inc., APLC,
    San Diego, California, for Petitioners-Appellees.
    OPINION
    TROTT, Circuit Judge:
    We review de novo the Tax Court’s reading and
    application of a TEFRA statute1 in a convoluted action arising
    from (1) a partnership’s attempted use of a bogus tax shelter
    to offset capital gains, and (2) the Commissioner of Internal
    Revenue’s subsequent denial of a $32.5 million “loss”
    claimed by the partnership to eliminate income tax liability
    on an asset sale resulting in a $28 million capital gain. The
    Tax Court ruled that a taxpayer holding both direct and
    indirect interests in a partnership may elect under 26 U.S.C.
    § 6223(e)(3)(B) not to be bound by the results of a
    1
    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, §§ 401-406, 96 Stat. 324 (codified as
    amended at 26 U.S.C. §§ 6221-6232 (2012)).
    4                               JT USA V. CIR
    partnership proceeding – or partnership audit2 – as to some,
    but not all, of those interests held during the relevant taxable
    year. In other words, that § 6223(e)(3)(B) permits taxpayers
    to opt out of the partnership proceeding with respect to their
    indirect interests but to leave in that proceeding their alleged
    remaining direct partnership interests. The Commissioner
    concedes that “[i]f taxpayers’ elections to opt out, but only as
    indirect partners, are effective, then the assessment of
    deficiencies flowing from about $36.6 million in adjustments
    (or on the order of $10 million in tax) is time-barred.”
    Accordingly, it appears that if the IRS prevails, the taxpayers
    will be liable for additional taxes. Thus, their claim that this
    case is now moot for the lack of a controversy is groundless.
    We have jurisdiction over this timely appeal pursuant to
    26 U.S.C. § 7482(a)(1), and we conclude that the Tax Court’s
    reading of the disputed statute was incorrect.3 We also
    conclude that the IRS’s sloppy administrative errors,
    including mailing the wrong form letter to the taxpayers, were
    2
    26 U.S.C. §§ 6221, 6231(a)(3); 26 C.F.R. § 301.6221-1.
    3
    When this controversy first came to us pursuant to 26 U.S.C.
    § 7482(a)(2)(A) on a failed attempt by the IRS to secure an interlocutory
    decision on this issue, we said,
    If the Tax Court ultimately determines that the
    Gregorys did not retain a direct interest in JT USA at
    the relevant time, and therefore do not have tax
    liability, the IRS will be able to appeal that ruling along
    with the Tax Court’s prior interlocutory order that the
    Gregorys had authority to bifurcate their election in the
    TEFRA proceeding.
    Comm’r v. JT USA, LP, 
    630 F.3d 1167
    , 1173 (9th Cir. 2011) (emphasis
    added).
    JT USA V. CIR                         5
    not sufficient either to require a different outcome or to stop
    the IRS from pursuing this matter and its claims. Thus,
    because we hold that the taxpayers’ disputed elections to opt
    out were invalid, we remand for further proceedings
    consistent with this opinion.
    Background
    The facts and circumstances of this case are available in
    the Tax Court’s decision, JT USA LP v. Comm’r, 
    131 T.C. 59
    (2008), and in our previous opinion in Comm’r v. JT USA,
    LP, 
    630 F.3d 1167
    , 1169–70 (9th Cir. 2011). We attach the
    Tax Court’s opinion as an appendix and repeat the facts only
    as necessary to illuminate our decision. For the best
    “explanation of the statutory scheme for dealing with
    partnership matters,” we refer the reader to and incorporate
    Justice Scalia’s opinion in United States v. Woods, 
    134 S. Ct. 557
    , 562–63 (2013).
    26 U.S.C. § 6223(e)(3)(B)
    26 U.S.C. § 6223(e)(3)(B), entitled “Notice to Partners of
    Proceedings,” reads in pertinent part, “In any case to which
    this subsection applies, if paragraph (2) does not apply, the
    partner shall be a party to the proceedings unless such partner
    elects – . . . (B) to have the partnership items of the partner
    for the partnership taxable year to which the proceeding
    relates treated as nonpartnership items.”
    In Carson Harbor Village, Ltd. v. Unical Corp., 
    270 F.3d 863
    , 878 (9th Cir. 2001) (quoting Caminetti v. United States,
    
    242 U.S. 470
    , 485 (1993)), we said,
    6                        JT USA V. CIR
    It is elementary that the meaning of a statute
    must, in the first instance, be sought in the
    language in which the act is framed, and if
    that is plain, . . . the sole function of the courts
    is to enforce it according to its terms.
    Where the language is plain and admits of no
    more than one meaning, the duty of
    interpretation does not arise, and the rules
    which are to aid doubtful meanings need no
    discussion.
    The statute at the core of this dispute, § 6223(e)(3)(B),
    provides that a “partner” may elect “to have the partnership
    items of the partner for the partnership year to which the
    administrative proceedings relate treated as nonpartnership
    items.” The statute says “the partner,” not an indirect partner
    or any other subset of the term “partner” as defined in
    26 U.S.C. § 6231(a)(2). Moreover, § 6223(e)(3)(B) allows
    the partner to have “the partnership items”(plural) of that
    partner to be treated as nonpartnership items, not some of that
    partner’s items to be treated as such.
    The meaning of this language is clear and unambiguous,
    and it means – as the Commissioner argues – that unless a
    partner elects to have all of his or her partnership items
    treated as nonpartnership items, the partner cannot elect out
    of the TEFRA proceeding. See Exxon Mobil Corp. v.
    Comm’r, 
    484 F.3d 731
    , 734 (5th Cir. 2007) (“Use of the
    definitive article ‘the’ in the statute supports a conclusion that
    there is one overpayment rate for each overpayment
    situation.”). In the vernacular, § 6223(e)(3)(B) is an all-or-
    nothing rule, and that ends our primary inquiry.
    JT USA V. CIR                          7
    The Tax Court’s and the taxpayers’ excursions into other
    sections of TEFRA are irrelevant. All the other TEFRA
    sections to which the taxpayers refer demonstrate that when
    Congress chose to differentiate between types of partners,
    they knew how to do so. As the Supreme Court remarked in
    Loughrin v. United States, ___ U.S. ___ , 
    134 S. Ct. 2384
    ,
    2390 (2014), “We have often noted that when ‘Congress
    includes particular language in one section of a statute but
    omits it in another’ – let alone the very next provision – this
    Court ‘presume[s]’ that Congress intended a different
    meaning.” Indeed, the absence in § 6223(e)(3)(B) of the
    language the taxpayers would like us to read into it “provides
    strong affirmative evidence” that Congress did not intend it
    to be construed or implemented as the taxpayers wish.
    United States v.Naftalin, 
    441 U.S. 768
    , 774–75(1979).
    Accordingly, a partner in a TEFRA proceeding such as this is
    limited under § 6223(e)(3)(B) to a single election: either all
    in, or all out.
    Here, the taxpayers tried to have their cake and eat it too.
    Their multiple simultaneous statements of election were
    entitled respectively “Statement of Election by Direct Partner
    Under Section 6223(e)(3),” and “Statement of Election by
    Indirect Partner Under Section 6223(e)(3).” Each “Indirect”
    partner’s statement of election said that “[t]he undersigned
    who is an Indirect Partner is also a Direct Partner of the
    Partnership” and that “[t]his election does not apply to the
    undersigned as a Direct Partner.” The statute does not permit
    such slight-of-hand, and the taxpayers’ current claim that they
    did not attempt to bifurcate any partnership items in dispute
    going into the partnership proceeding is impeached by the
    record. Equally unavailing were their indisputably untimely
    attempts two years later to have their “elections out” cover
    both their indirect and direct partnership interests.
    8                      JT USA V. CIR
    Legislative History
    Although not necessary to support our conclusion, we
    note that it is consistent with the official legislative history
    behind the statute. See Salinas v. United States, 
    522 U.S. 52
    ,
    57–58 (1997). The House Conference Report on § 6223(e)
    says that “the partner will be a party to the proceeding [under
    TEFRA] unless he elects . . . to have all partnership items
    treated as nonpartnership items.” H.R. Conf. Rep. No. 97-
    760, at 602(1982), reprinted in 1982 U.S.C.C.A.N. 1190,
    1374 (emphasis added).
    TEFRA
    Although it dealt with a different TEFRA issue, our
    reading of § 6223(e)(3)(B) is also consistent with the purpose
    of TEFRA’s partnership provisions recently reiterated by the
    Supreme Court in United States v. Woods, 
    134 S. Ct. 557
    (2013). These provisions were enacted inter alia to prevent
    the waste of time, effort, and resources occasioned by a
    multiply of proceedings such as would occur if the Tax
    Court’s construction of § 6223(e) were to prevail. In a
    normal case the Tax Court’s ruling here would permit
    “duplicative proceedings and the potential for inconsistent
    treatment to partners in the same partnership,” thus hindering
    the purpose and policy justifications that produces TEFRA.
    
    Woods, 134 S. Ct. at 563
    . Citing Kligfeld Holdings, 
    128 T.C. 192
    , 199–200 (2007), the Tax Court correctly recognized also
    that “[t]he goal of TEFRA is to have a single point of
    adjustment for all partnership items at the partnership level,
    thereby making any adjustments to a particular partnership
    item consistent among all the various partners.” And the Tax
    Court acknowledged that it’s reading of the statute would
    seem “to be at odds with TEFRA’s overall goal to consolidate
    JT USA V. CIR                          9
    partnership proceedings and increase consistency.” On these
    points, the Tax Court was correct. Accordingly, we conclude
    under a proper reading of § 6223(e)(3)(B), that the taxpayers’
    attempted elections were ineffective.
    The Pertinent Treasury Regulation
    Even if we were to agree that § 6223(e)(3)(B)’s meaning
    is ambiguous, which we do not, we would still be compelled
    to reach the same conclusion. After the enactment of
    § 6223(e)(3)(B), the Treasury Department issued Temp.
    Treas. Reg. § 301.6223(e)-2T(c)(1), 52 Fed. Reg. 6779 (Mar.
    5, 1987), which was effective for the year of this controversy.
    The regulation tracks the language of the House Conference
    Report, and it provides that “the election shall apply to all
    partnership items for the partnership taxable year to which the
    election relates.” 52 Fed. Reg. at 6785 (emphasis added).
    We agree with the government’s argument that the regulation
    – which uses the words of the House Conference Report –
    represents a reasonable reading of the statute and,
    accordingly, is entitled to Chevron deference. Chevron,
    U.S.A., Inc. v. Natural Res. Def. Council, Inc., 
    467 U.S. 837
    (1984); Mayo Found. for Medical Educ. & Research v.
    United States, 
    131 S. Ct. 704
    , 713 (2011) (“The principles
    underlying our decision in Chevron apply with full force in
    the tax context.”).
    The taxpayers’ attempt to avoid Chevron deference by
    simply offering a different interpretation of the statute and the
    regulation misses the point of Chevron deference. If the
    agency’s reading of a statute is “a permissible construction of
    the statute,” that reading and interpretation stands and is
    entitled to respect. Alarcon v. Keller Industries, Inc., 
    27 F.3d 386
    , 389 (9th Cir. 1994). Such is the case here. Thus, we
    10                          JT USA V. CIR
    remand to the tax court for further proceedings consistent
    with this opinion, and to determine the validity of the
    adjustments in the “final partnership administrative
    adjustment,” known as the FPAA.
    REMANDED for further proceedings.4
    CALLAHAN, Circuit Judge, dissenting:
    I respectfully dissent. We are here because the IRS
    1) waited too long to give notice to the taxpayers of a TEFRA
    partnership proceeding, 2) said nothing when the taxpayers
    attempted to opt out of the TEFRA proceeding with respect
    to their indirect interests but not with respect to their direct
    interests,1 and 3) then failed to bring proceedings against the
    taxpayers outside the TEFRA proceeding within the one-year
    statute of limitations. Having struck out, in effect, the IRS
    now seeks a do-over by disallowing the taxpayers’ election to
    opt out of the TEFRA proceeding in order to pull the
    taxpayers back into the proceeding. Contrary to the
    majority’s contention, the statute does not prohibit such a
    split election. TEFRA allows one partner to make one
    election and another partner to make a different election. I
    4
    We find unpersuasive the taxpayers’ remaining contention that (1) they
    are entitled to the benefits of substantial compliance, Baccei v. United
    States, 
    632 F.3d 1140
    , 1145 (9th Cir. 2011), and (2) that the IRS by its
    delay impliedly ratified their defective elections, Office of Personnel
    Management v. Richmond, 
    496 U.S. 414
    , 419, 422 (1990) (en banc).
    1
    For convenience, I refer to the taxpayers’ election out with respect to
    their indirect interests but not with respect to their direct interests as a
    “split” or “bifurcated” election.
    JT USA V. CIR                              11
    think that a partner who has both direct and indirect interests
    should have the same option, at least where the IRS fails to
    timely notify the taxpayer that a bifurcated election is not
    allowed. On the facts of this case, any ambiguity in the
    statute as to whether a taxpayer can make separate elections
    based on different ownership interests should be construed in
    favor of the taxpayer. I would affirm the Tax Court.
    I
    This case concerns the IRS’s attempts to recover capital
    gains taxes from Jon Ross Gregory and his wife Rita.2 The
    Gregorys held both direct and indirect interests in JT USA,
    LP (“JT USA”), a limited partnership. The IRS issued a
    notice of final partnership administrative adjustment
    (“FPAA”) to JT USA for the 2000 tax year, initiating a
    TEFRA proceeding. However, the IRS did not notify the
    Gregorys of the proceeding, as required by statute under 26
    U.S.C. § 6223(d)(1). Because of this error, the Gregorys had
    the right to opt out of the TEFRA partnership proceeding
    under 26 U.S.C. § 6223(e)(3)(B). The Gregorys then notified
    the IRS that they were opting out of the TEFRA proceeding
    with respect to their indirect interests but that they had
    elected to participate in the proceeding with respect to their
    direct interests.3
    2
    This background is taken from our prior decision regarding this
    dispute, Commissioner v. JT USA, LP, 
    630 F.3d 1167
    (9th Cir. 2011).
    3
    Once the Gregorys began to suspect that their split election would be
    disallowed, they sought to opt out of the TEFRA proceeding with respect
    to both their direct and indirect interests, with no response from the IRS.
    12                     JT USA V. CIR
    After the Gregorys’ election out of the TEFRA
    proceeding with respect to their indirect interests in JT USA,
    the IRS could have brought an action against the Gregorys
    outside of the TEFRA proceeding. However, the IRS failed
    to do so within the one-year statute of limitations, see
    26 U.S.C. § 6229(f)(1), and the limitations period ran out at
    the end of 2005. Thus, “by 2006, the IRS had only two
    options to recover the alleged tax deficiency”: either “show
    that the Gregorys had a direct interest in JT USA at the
    relevant time during 2000,” or “invalidate the Gregorys’
    election out of the TEFRA proceeding with respect to their
    indirect interests.” JT 
    USA, 630 F.3d at 1170
    .
    The Gregorys filed a petition with the Tax Court in 2006,
    arguing that they were only indirect partners of JT USA
    during the period at issue and that they had no tax liability
    because the IRS had not assessed a tax deficiency before the
    one-year statute of limitations had run. In response, the IRS
    argued that taxpayers were not authorized to “bifurcate” their
    election to participate in TEFRA proceedings, and therefore
    the Gregorys’ election to opt out with respect to their indirect
    interest in JT USA was invalid. The Tax Court, however,
    found that the bifurcated election was valid and dismissed the
    Gregorys as indirect partners from the TEFRA proceeding.
    The IRS then filed an interlocutory appeal, which we
    dismissed for lack of appellate jurisdiction. 
    Id. at 1169.
    On
    remand, the Tax Court determined that all of the disputed
    adjustments related to the Gregorys’ interests as indirect
    partners. As the Tax Court had already ruled that the
    Gregorys had validly elected out of the partnership
    proceeding in their capacity as indirect partners, it held that
    none the adjustments in the final partnership administrative
    adjustment would pass through to any individual partner’s
    JT USA V. CIR                         13
    return, and therefore the adjustments were moot. The
    Commissioner then timely appealed the Tax Court’s final
    judgment.
    II
    A
    The statute at issue here, 26 U.S.C. § 6223(e)(3)(B),
    provides that where the IRS fails to provide proper notice of
    a TEFRA proceeding to a partner, the partner may elect “to
    have the partnership items of the partner for the partnership
    taxable year to which the proceeding relates treated as
    nonpartnership items.” The majority and the IRS claim that
    this language unambiguously states that a taxpayer may make
    only one election – either you opt out completely, or not at
    all. The majority and the IRS err in their characterization of
    this statute and the applicable regulations.
    The tax code expressly provides that a single individual
    or entity may have dual capacities as direct and indirect
    partners and separate rights under each capacity. In other
    words, an individual may wear different “hats” and exercise
    its rights differently with respect to each hat. See, e.g.,
    Barbados #6 Ltd. v. Comm’r, 
    85 T.C. 900
    , 904-05 (1985)
    (discussing IRC § 6226(a) and (b)). Thus, the Gregorys were
    not required to make a single election with respect to their
    interests as direct and indirect partners. If different partners
    can make their own separate elections to opt out from a
    TEFRA proceeding (or to stay in the proceeding) under
    § 6223, a single individual holding these exact same interests
    should be treated similarly.
    14                          JT USA V. CIR
    The fact that the statute says “the partner” may elect out
    of the partnership proceeding does not show that parties with
    multiple partnership interests have to make a single election.
    The language just shows that partners may elect out of the
    TEFRA proceeding, regardless of whether they are direct
    partners, indirect partners, or otherwise. Thus if a taxpayer
    wearing his direct partner hat opts out, he opts out with
    respect to all of his direct interests. However, this need not
    affect his interests as an indirect partner. If the taxpayer
    wearing his indirect partner hat opts out, he opts out with
    respect to all of his interests as an indirect partner,
    independent of his interests as a direct partner. Such
    interpretation is not contrary to the statute.4
    Nor does the pertinent Treasury regulation decide this
    issue. The regulation states that “[t]he election shall apply to
    all partnership items for the partnership taxable year to which
    the election relates.” Miscellaneous Provisions Relating to
    the Tax Treatment of Partnership Items, 52 Fed. Reg. 6779,
    6785 (Mar. 5, 1987). However, this regulation, just like the
    statute, is susceptible to an interpretation that the election
    applies to all the partnership items of that particular partner,
    not all of the individual taxpayer’s interests, whether direct or
    indirect.
    Further, as the IRS conceded at oral argument, this issue
    has never come up before. Thus, the IRS’s position in this
    4
    The conference report’s language stated that the statute provided that
    a partner could opt out of the partnership proceeding with respect to all
    partnership items. Tax Equity and Fiscal Responsibility Act of 1982,
    1982-2 C.B. 600, 602 (Aug. 17, 1982). However, the removal of “all”
    from the final language of the statute could also suggest that the drafters
    did not want to prohibit split elections.
    JT USA V. CIR                         15
    appeal is only a litigating position which is not entitled to
    Chevron deference. Accord Price v. Stevedoring Servs. of
    Am., Inc., 
    697 F.3d 820
    , 825–31 (9th Cir. 2012) (en banc)
    (litigating position of agency director in interpreting statute
    was not entitled to Chevron deference). Finally, we should
    interpret the tax code “consistent with the general rule of
    construction that ambiguous tax statutes are to be construed
    against the government and in favor of the taxpayer.” See
    Royal Caribbean Cruises, Ltd. v. United States, 
    108 F.3d 290
    ,
    294 (11th Cir. 1997) (citations omitted). The majority’s
    interpretation of the statute runs contrary to this general rule.
    B
    The majority also errs in holding that TEFRA’s general
    policy mandates reversing the Tax Court. It is true that
    TEFRA was enacted to avoid duplicative proceedings and
    inconsistent treatment of partners in the same partnership.
    See United States v. Woods, 
    134 S. Ct. 557
    , 562–63 (2013).
    However, this general policy does not resolve the question of
    whether split elections are allowed. When Congress provided
    for § 6223(e)(3)’s opt-out provision, Congress determined
    that TEFRA’s general policy against multiple proceedings
    should yield when the IRS does not give proper notice, as
    happened here. In other words, the opt-out provision is a
    statutorily-provided exception to the general policy. If the
    general policy was paramount, Congress never would have
    enacted § 6223(e)(3) in the first place. Allowing a split
    election does not thwart TEFRA’s general policy any more
    than the statute’s express provision allowing a partner to opt
    out due to improper notice.
    16                     JT USA V. CIR
    III
    The IRS struck out in this case: one, it failed to give the
    Gregorys proper notice of the TEFRA proceeding; two, it
    failed to object to the taxpayers’ election out as indirect
    partners; and three, it failed to bring a proceeding against the
    Gregorys outside the TEFRA proceeding.                Congress
    specifically allows taxpayers to opt out of the TEFRA
    proceeding in this context, and the taxpayers did so in their
    capacities as indirect partners. Moreover, especially in light
    of the IRS’s failures, any ambiguity in the statute should be
    resolved in favor of the taxpayer. I would therefore affirm
    the Tax Court.
    JT USA V. CIR   17
    Appendix