Mk Hillside Partners v. Cir , 826 F.3d 1200 ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MK HILLSIDE PARTNERS; M.A. No. 14-71504
KATZ, a partner other than the Tax
Matters Partner, Tax Ct. No.
Petitioners-Appellants, 13171-08
v.
OPINION
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted May 5, 2016
Pasadena, California
Filed June 23, 2016
Before: RAYMOND C. FISHER, MILAN D. SMITH, JR.,
and JACQUELINE H. NGUYEN, Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.
2 MK HILLSIDE PARTNERS V. CIR
SUMMARY*
Tax
In an action brought by a partner seeking judicial review
of the IRS’s adjustment of a partnership’s tax return, the
panel held that the tax court had jurisdiction to reject the
partner’s assertion of the statute of limitations, and affirmed.
Marcus Katz, a partner in MK Hillside Partners, filed a
petition for review in tax court contesting the IRS’s finding
that MK Hillside was a sham, lacked economic substance,
and was formed and used principally to avoid taxes; and
asserting the statute of limitations. The tax court rejected the
partner’s assertion of the statute of limitations. The panel
held that because the tax court had jurisdiction to consider
Katz’s argument regarding the statute of limitations, it
necessarily had jurisdiction to reject it, at least for the
purposes of the partnership proceeding. The panel affirmed
the tax court’s determination that the limitations period
remained open as to Katz.
COUNSEL
Charles E. Hodges, II (argued) and Antoinette L. Ellison,
Kilpatrick Townsend & Stockton LLP, Atlanta, Georgia;
Adam H. Charnes, Kilpatrick Townsend & Stockton LLP,
Winston-Salem, North Carolina, for Petitioners-Appellants
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
MK HILLSIDE PARTNERS V. CIR 3
Joan I. Oppenheimer (argued) and Damon W. Taaffe,
Attorneys, Tax Division; Tamara W. Ashford, Acting
Assistant Attorney General; United States Department of
Justice, Washington, D.C.; for Respondent-Appellee.
OPINION
M. SMITH, Circuit Judge:
In an action seeking judicial review of the IRS’s
adjustment of a partnership’s tax return, the tax court has
jurisdiction, pursuant to 26 U.S.C. § 6226(d)(1),1 to
“consider” an assertion by any of the partners that the
applicable statute of limitations has expired for that particular
partner. Here, a partner made such an assertion, and the tax
court rejected it, holding that the limitations period remained
open as to the partner. The partner seeks reversal, arguing that
although the tax court had jurisdiction to accept his assertion,
it lacked jurisdiction to reject it. We hold that the tax court
had jurisdiction to reject the partner’s assertion of the statute
of limitations, and we affirm.
FACTS AND PRIOR PROCEEDINGS
In 1998, Appellant Marcus Katz entered into two “collar”
option contracts covering stock shares he owned.2 Katz
1
All further statutory references are likewise to Title 26 of the United
States Code.
2
A “collar” on stock shares consists of simultaneously purchasing a put
option and selling a call option, both covering the same shares. The put
option allows the option holder to sell shares at a set price, guaranteeing
4 MK HILLSIDE PARTNERS V. CIR
terminated the collars in September of 1999, which generated
a credit of $198,000. In October of 1999, Katz contributed
stock to MK Hillside Partners (MK Hillside), a partnership
between Katz and his wholly owned corporation, MK
Hillside Investors, Inc. Katz also contributed real estate to the
partnership. The partnership then sold the stock and real
estate.
Katz’s and MK Hillside’s 1999 tax returns were received
on September 25, 2000. Katz’s return did not list the
$198,000 credit from the collar termination, and MK
Hillside’s return reported no gain on the real estate sale. The
IRS did not issue a notice of deficiency for Katz’s 1999
taxes.3 In July of 2006, Katz agreed to extend the time to
assess his 1999 tax liability, including tax attributable to
partnership items, until January 31, 2008. The IRS issued a
Final Partnership Administrative Adjustment (FPAA) to MK
Hillside on January 2, 2008, finding that MK Hillside was a
sham, lacked economic substance, and was formed and used
principally to avoid taxes.
a floor on the price received. Selling the call option produces income to
cover the cost of the put option, but sets a ceiling on the price received for
the shares. See Levy v. Bessemer Trust Co., 97 Civ. 1785, 1997 U.S. Dist.
LEXIS 11056, at *4 (S.D.N.Y. July 30, 1997).
3
The IRS argues that there would have been no purpose in doing so
because Katz “amended his 2000 tax return to reduce his claimed
carryover losses flowing from his 1999 return, thereby effectively
recognizing the unreported income.”
MK HILLSIDE PARTNERS V. CIR 5
Katz filed a petition in the tax court contesting that
finding and asserting the statute of limitations.4 The IRS
responded that the Section 6501(e)(1) six-year statute of
limitations applied because Katz’s omission of the $198,000
on his 1999 return constituted more than 25% of the gross
income reported on the return. Katz moved for summary
judgment, arguing, inter alia, that he no longer had an interest
in the partnership proceeding under Section 6226(d)(1), and,
in the alternative, that the tax court lacked jurisdiction to
consider at the partnership stage whether, due to a gross
understatement of nonpartnership income, his 1999 tax year
remained open at the time he agreed to extend his assessment
period.
The tax court denied summary judgment, holding that a
trial would be necessary to determine whether Katz in fact
omitted substantial income from his 1999 return, in which
case his personal limitations period would have been six
years and would have remained open at the time Katz agreed
to extend his limitations period. To avoid a trial, the parties
4
Katz filed as “a partner other than the Tax Matters Partner,” which is
why this appeal is so captioned. In fact, Katz is the tax matters partner.
The tax court noted that Katz did not explain why he filed the petition in
his capacity as a partner other than the tax matters partner, and neither did
he do so on appeal. It appears, however, that at the time of filing, Katz was
statutorily barred from filing as the tax matters partner. Under § 6226(a),
a tax matters partner may petition for readjustment of partnership items
within 90 days after a notice of FPAA is mailed. Here, the notice of FPAA
was mailed on January 2, 2008, so the window for a petition by the tax
matters partner closed April 1, 2008. Katz filed on May 30, 2008, one day
before the window for a partner other than the tax matters partner to
petition for readjustment closed under § 6226(b). See Barbados #6 Ltd. v.
Comm’r., 85 T.C. 900, 904 (1985) (holding that a notice partner who was
also the tax matters partner could file petition during the longer § 6226(b)
window for notice partners).
6 MK HILLSIDE PARTNERS V. CIR
agreed to a Stipulation of Facts and a Second Stipulation of
Settled Issues. Based on those stipulations, the tax court held
that the period for assessing tax on the 1999 MK Hillside
partnership items was open as to Katz.
STANDARD OF REVIEW
“Decisions of the tax court are reviewed on the same basis
as decisions from civil bench trials in the district court. Thus,
we review the tax court’s conclusions of law de novo and its
factual findings for clear error.” DHL Corp. & Subsidiaries
v. Comm’r, 285 F.3d 1210, 1216 (9th Cir. 2002) (citations
omitted). Similarly, because we review a district court’s
application of the doctrine of judicial estoppel for abuse of
discretion, Hamilton v. State Farm Fire & Cas. Co., 270 F.3d
778, 782 (9th Cir. 2001), we likewise review the tax court’s
application of judicial estoppel to the facts of this case for
abuse of discretion.
ANALYSIS
I. Legal Standards
A. Partnership Taxation
“A partnership does not pay federal income taxes; instead,
its taxable income and losses pass through to the partners.”
United States v. Woods, 134 S. Ct. 557, 562 (2013) (citing
§ 701). Partnerships are required to file an informational tax
return, and the partners are required to report their shares of
the partnership’s tax items on their individual tax returns. Id.
(citing §§ 702, 704, 6031(a)). Before the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), the IRS disputed
partnership tax matters through deficiency proceedings
MK HILLSIDE PARTNERS V. CIR 7
concerning individual taxpayers. Id. This led to “duplicative
proceedings and the potential for inconsistent treatment of
partners in the same partnership.” Id. at 563. TEFRA
addressed these problems by establishing a two-stage process.
Id. First, the IRS issues an FPAA notifying the partners of
any adjustments to the partnership items, and the partners
may seek judicial review of the FPAA. Id. (citing
§§ 6223(a)(2), 6226(a)–(b)). Second, once the adjustments
are final, the IRS may make the resulting “computational
adjustments” to the individual partners’ tax liability, usually
without a deficiency proceeding, in which case the partners’
only opportunity for further challenge is by way of post-
payment refund action. Id. (citing §§ 6230(a)(1), (c);
6231(a)(6)).5
Generally, an individual’s tax return remains open for
three years after the return is filed. § 6501. For partnership
items, the period for assessing tax expires no earlier than the
later of three years after (1) the date the partnership return
was filed, or (2) the last day for filing the partnership return.
§ 6229(a). The mailing of a notice of FPAA tolls the statute
of limitations until one year after the adjustment becomes
final. § 6229(d).
B. A Partner’s Ability to Assert a Personal Statute of
Limitations in an FPAA Proceeding
Partners are treated as parties to a petition for
readjustment of the FPAA if they have an interest in the
5
Deficiency proceedings are required for certain computational
adjustments attributable to “affected items,” which are those affected by,
but not themselves, partnership items. Woods, 134 S. Ct. at 563 (citing
§§ 6230(a)(2)(A)(i), 6231(a)(5)).
8 MK HILLSIDE PARTNERS V. CIR
outcome. § 6226(c)–(d). Such an interest exists if the items at
issue remain partnership items for that partner and the period
within which any tax attributable to the partnership may be
assessed against that partner has not yet expired. § 6226(d).
However, even if a partner no longer has an interest in the
outcome, it has a limited right specifically to “participate in
such action . . . solely for the purpose of asserting that the
period of limitations for assessing any tax attributable to
partnership items has expired with respect to such person, and
the court having jurisdiction of such action shall have
jurisdiction to consider such assertion.” § 6226(d)(1) (flush
language).
This language is the primary focus of the parties’ dispute.
Katz contends that “to consider” cannot mean “to determine,”
except perhaps if the determination is based on certain
undisputed facts. The IRS contends that “to consider” an
assertion that the statute of limitations has run necessarily
requires either accepting or rejecting the assertion.
C. The Tax Court’s Jurisdiction
“[T]he Tax Court, as an Article I court, is a court of
limited jurisdiction and may only exercise jurisdiction to the
extent authorized by Congress.” Adkison v. Comm’r, 592 F.3d
1050, 1052 (9th Cir. 2010) (citing Estate of Branson v.
Comm’r, 264 F.3d 904, 908 (9th Cir. 2001)). TEFRA
provides that:
A court with which a petition is filed in
accordance with this section shall have
jurisdiction to determine all partnership items
of the partnership for the partnership taxable
year[,] . . . the proper allocation of such items
MK HILLSIDE PARTNERS V. CIR 9
among the partners, and the applicability of
any penalty, addition to tax, or additional
amount which relates to an adjustment to a
partnership item.
26 U.S.C. 6226(f). “Whether the Tax Court has subject matter
jurisdiction is a question of law and thus reviewed de novo.”
Adkison, 592 F.3d at 1052 (citing Crawford v. Comm’r,
266 F.3d 1120, 1123 (9th Cir. 2001)). “We are reluctant to
read limitations on jurisdiction into a statutory scheme that
does not clearly divest a court of jurisdiction.” Id. at 1054–55.
II. Because the Tax Court Had Jurisdiction to
“Consider” Katz’s Argument, it Necessarily Had
Jurisdiction to Reject It, At Least for Purposes of the
Partnership Proceeding
A. Katz’s Statutory Construction Argument Fails
“If the statutory language is unambiguous, its plain
meaning controls unless Congress has ‘clearly expressed’ a
contrary legislative intention.” Price v. Comm’r, 887 F.2d
959, 963–64 (9th Cir. 1989) (quoting United States v.
594,464 Pounds of Salmon, 871 F.2d 824, 826 (9th Cir.
1989)). Conversely, if we find the statutory language
indeterminate, we resolve the dispute “by looking to ‘the
structure of [TEFRA] and its other provisions.’” Woods,
134 S. Ct. at 563 (quoting Maracich v. Spears, 133 S. Ct. 2191,
2200 (2013) (alteration in Woods)).
Katz grounds his argument on the difference in word
choice between statutory subsections. While Section 6226(f)
grants “jurisdiction to determine” all partnership items,
Section 6226(d)(1) grants “jurisdiction to consider” a
10 MK HILLSIDE PARTNERS V. CIR
partner’s assertion of its statute of limitations. Katz, citing
Porter v. Commissioner, 130 T.C. 115, 118–19 (2008), argues
that Congress used “determine” jurisdictionally in Sections
6015(e), 6214(a), 6404(h), 7436, and 7429(b)(3), and that
courts have interpreted “determinations” in those sections to
involve de novo findings. But the standard of review the tax
court applies to “determinations” or “redeterminations” is not
illuminating here, where the dispute does not concern the
standard of review, but rather the scope of the tax court’s
jurisdiction.
Katz next argues that dictionary meanings apply, and cites
the following definitions of “consider”: to “think carefully
about,” to “think or deem to be; regard as,” to “take into
account; bear in mind.” The American Heritage Dictionary of
the English Language 392 (4th ed. 2000). Those definitions,
listed first, second, and fourth, respectively, do not fit the
context of the statute nearly as well as the third definition,
which Katz neglected to mention: to “form an opinion about;
judge.” Id. As the government observes, it is unlikely that
Congress enacted Ҥ 6226(d)(1) to enable a partner to raise an
argument pertaining to timeliness about which the Tax Court
may only ruminate.”
Katz also raises a meritless argument based on a
dictionary’s usage example: “[h]e considered the cost before
buying the new car.” The Random House Dictionary of the
English Language 312 (1967). Katz argues from this example
that “[l]ike the fixed cost of a car, a court can consider
established facts (the filing date of a return, etc.) but must not
‘determine’ if a tax return position is accurate for statute of
limitations or deficiency procedures.” Car salespersons might
dispute the argument’s premise that the cost of a car is
“fixed.” But even if the example given had involved
MK HILLSIDE PARTNERS V. CIR 11
consideration of an immutable item, it would still be just
that—a single nonlimiting example. It would not show that
one can consider only “fixed” items.
The closest analogy Katz draws is to Sections 6214(b)
and (c), both of which discuss considering facts for the
purpose of redetermining a deficiency for one period without
making a determination as to another period. Section 6214(b)
provides:
The Tax Court in redetermining a deficiency
of income tax for any taxable year or of gift
tax for any calendar year or calendar quarter
shall consider such facts with relation to the
taxes for other years or calendar quarters as
may be necessary correctly to redetermine the
amount of such deficiency, but in so doing
shall have no jurisdiction to determine
whether or not the tax for any other year or
calendar quarter has been overpaid or
underpaid.
Section 6214(c) includes the same idea. While these sections
limit the use of the “considered” information, they do not
support Katz’s argument. First, the considered information is
actually used. Second, Section 6214 expressly limits the Tax
Court’s jurisdiction in a manner that Section 6226(d) does
not. Moreover, Katz’s reading does not make much sense in
the context of Section 6226(d), which, to be useful to any
taxpayer, requires the court to be able to act on a petitioner’s
assertion that the statute of limitations has run.
Indeed, Katz ultimately does not propose a “pure
contemplation” interpretation. Instead, Katz argues that the
12 MK HILLSIDE PARTNERS V. CIR
tax court should dismiss partners from the partnership case
based on consideration of:
any undisputed fact, including but not limited
to: (1) whether a partner filed a personal
return for the tax year in issue; (2) the date of
the filing of the return; (3) whether the IRS is
currently examining the partner for the tax
year at issue in the partnership-level
proceeding; (4) whether the IRS issued a
notice of deficiency to the partner; and
(5) whether the partner executed any
extension of the applicable statute of
limitations.
This “undisputed facts” interpretation follows from none of
the bases Katz asserts: the plain language of the statute,
dictionary meanings and examples, or analogy to Section
6214(b) and (c).
Katz’s argument is also in tension with Woods, which
held that “[p]rohibiting courts in partnership-level
proceedings from considering the applicability of penalties
that require partner-level inquiries would be inconsistent with
the nature of the ‘applicability’ determination that TEFRA
requires.” 134 S. Ct. at 563–64. Woods also made clear that a
partnership-level applicability determination is not the same
as determining whether a partner will be required to pay a
penalty, which must occur at the partner-level stage. Id. at
564.
While Woods did not involve Section 6226(d), “[w]e are
‘bound not only by the holdings of [the Supreme Court’s]
decisions but also by their mode of analysis.’” United States
MK HILLSIDE PARTNERS V. CIR 13
v. Van Alstyne, 584 F.3d 803, 813 (9th Cir. 2009) (quoting
Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en
banc) (alteration in Van Alstyne)). By holding that a
partnership proceeding is applicable to Katz because his
limitations period is open, without purporting to determine
whether Katz in fact must pay any penalty or adjustment, the
Tax Court’s decision is consistent with Woods’s mode of
analysis. Consistent with Woods, the procedure followed here
contemplates further partner-level proceedings.
B. Katz’s Judicial Estoppel Argument Fails
Katz argues that the IRS is judicially estopped from
arguing that omission of a nonpartnership item can extend the
time to assess tax on partnership items due to a purportedly
contrary position it took in oral argument in Curr-Spec
Partners, L.P. v. Commissioner, 579 F.3d 391 (5th Cir. 2009).
The tax court, citing New Hampshire v. Maine, 532 U.S. 742,
755–56 (2001), rejected this argument, “declin[ing] to apply
the doctrine in this case based solely on the statement of an
attorney made during oral argument in a different case.”
Although “[a]dditional considerations may inform the
doctrine’s application in specific factual contexts,” “several
factors typically inform the decision whether to apply”
judicial estoppel:
First, a party’s later position must be “clearly
inconsistent” with its earlier position. Second,
. . . whether the party has succeeded in
persuading a court to accept that party’s
earlier position, so that judicial acceptance of
an inconsistent position in a later proceeding
would create “the perception that either the
14 MK HILLSIDE PARTNERS V. CIR
first or the second court was misled.” . . . A
third consideration is whether the party
seeking to assert an inconsistent position
would derive an unfair advantage or impose
an unfair detriment on the opposing party if
not estopped.
New Hampshire, 532 U.S. at 750–51 (citations omitted).
Whether or not counsel’s answer to a question at oral
argument in Curr-Spec was inconsistent with the IRS’s
position here, the statutory construction the tax court adopted
here is consistent with the decision in Curr-Spec, which held
that “the Tax Court does not overreach its jurisdiction in
partnership-level proceedings when, for limitations purposes,
it considers whether a partner’s individual tax return remains
open to assessment.” 579 F.3d at 401. Curr-Spec is thus not
in conflict with the IRS’s position or the Tax Court’s holding
here that “in a partnership-level proceeding we may consider
the partner’s period of limitations for the narrow purpose of
determining whether the partnership-level action may
proceed.”
Katz points to language in Curr-Spec stating that “[a]s
counsel for the Commissioner represented at oral argument
. . . ‘[i]t’s only to the extent that a partner’s individual statute
of limitations is still open that we could do an assessment.’”
579 F.3d at 398–99. This language does not address Katz’s
purported distinction between “considering” and
“determining” a partner’s assertion that the statute of
limitations has expired. Accordingly, there is no perception
that either the first or second court was misled on this issue.
For the same reason, it is unclear what “unfair advantage” the
MK HILLSIDE PARTNERS V. CIR 15
IRS would garner from any purported inconsistency between
its positions in Curr-Spec and here.
Curr-Spec concluded that the practical result of its
holding was that the IRS “may issue an FPAA at any time,
subject only to the practical limitation that the FPAA may
affect only those partners whose individual returns remain
open.” Id. at 399. That holding in no way conflicts with the
IRS’s position here.
We need not, and do not, reach the IRS’s other arguments
for affirmance.6 Nor do we make any prediction regarding
the preclusive effect of the tax court’s holding in the
partnership-level proceeding on any subsequent partner-level
proceedings.7
6
The IRS did not raise Article III’s case or controversy requirement
below, but does so here as an alternative ground for affirmance. The IRS’s
theory is that because an FPAA proceeding would be purely theoretical if
no partnership returns remained open, the case or controversy requirement
would not be satisfied for such a proceeding. The IRS also argues in a
footnote that “[t]he omitted income ($198,000) may be a partnership item”
because the determination of whether a partnership is a sham is a
partnership item, and the facts relating to how the collar transactions were
used to inflate the basis of stock that was contributed to the partnership
“are underlying factual determinations as to the sham nature of the
partnership and thus may be partnership items.”
7
The parties apparently agree that accepting the IRS’s position means
that “the doctrine of res judicata or collateral estoppel would apply in the
[subsequent individual] deficiency proceeding,” but we do not adopt this
position as a holding. “Ordinarily both issue preclusion and claim
preclusion are enforced by awaiting a second action in which they are
pleaded and proved by the party asserting them. The first court does not
get to dictate to other courts the preclusion consequences of its own
judgment . . . .” 18 Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 4405 (2d ed. 2016) (citing Smith v. Bayer
16 MK HILLSIDE PARTNERS V. CIR
CONCLUSION
The decision of the Tax Court is
AFFIRMED.
Corp., 564 U.S. 299, 307 (2011) (“Deciding whether and how prior
litigation has preclusive effect is usually the bailiwick of the second court
. . . .”)).