Case: 21-20258 Document: 00516455110 Page: 1 Date Filed: 08/31/2022
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
August 31, 2022
No. 21-20258 Lyle W. Cayce
Clerk
Donald E. Baxter; Frances P. Baxter,
Plaintiffs—Appellees,
versus
United States of America,
Defendant—Appellant.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:09-CV-1271
Before Richman, Chief Judge, and Clement and Engelhardt,
Circuit Judges.
Kurt D. Engelhardt, Circuit Judge:
The United States appeals the district court’s summary judgment
rulings rendered in this federal income tax refund action filed by Plaintiffs-Appellees Donald E. Baxter and Frances P. Baxter. Because the district court
erred in its jurisdictional determinations, we REVERSE the judgment of the
district court and REMAND with instructions to dismiss for lack of
jurisdiction. As stated below, we also deny the motion that has been carried
with the case.
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I.
This appeal is the latest in a long line of tax suits involving limited
partnerships that were organized in the mid-1980s by American AgriCorp (“AMCOR”) and marketed to high-income professionals across
the country. Our recent decision in one of these actions, Foster v. United
States, 801 F. App’x 210, 211–12 (5th Cir. 2020)(unpub.), provides a helpful
explanation of federal taxation of partnership income and the legislation governing partnership-related audit and tax adjustment procedures that applies
here:
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
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
1
TEFRA’s partnership procedures were codified as amended at 26 U.S.C. §§ 6221–6234
(2012). The Bipartisan Budget Act of 2015 [“the Act”], 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
2
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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. 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
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)). These include “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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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).
By 1987, the United States Internal Revenue Service (“IRS”) had
begun investigating AMCOR partnerships on suspicion that they were
“impermissible tax shelters.” Duffie, 600 F.3d at 367. In April 1991, after
the investigation concluded, the IRS issued Notices of Final Partnership
Administrative Adjustment (“FPAAs”) to the tax-matters partners of
each of the partnerships. The IRS determined that the partnerships actually engaged in a “a series of sham transactions,” rather than farming activities, and proposed adjustments disallowing several listed farming expenses and other deductions.
After various proceedings and negotiations in tax court, 4 stipulated
tax court decisions were entered, on July 19, 2001, relative to many of the
4
This background information is discussed, at length, in our prior cases. See Foster, 801 F.
App’x at 213; Rodgers, 843 F.3d at 188–90; Irvine, 729 F.3d at 458–59.
4
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AMCOR partnerships, including the three partnerships in which Donald
Baxter (“Baxter”) owned limited partnership interests—Oasis Date Associates (“ODA”), Pump Station III Associates (“PS3”), and Agri-Venture 1985 (“AV85”). The decisions set forth the applicable stipulated
monetary “adjustments to partnership items” for the specified partnership and state:
That the assessment of any deficiencies in income tax
that are attributable to the adjustments to partnership items
for tax year 1984 and 1985 are not barred by the provisions
of I.R.C. § 6229.” 5
Thereafter, on September 2, 2002, the IRS assessed additional taxes
against the Baxters for tax years 1984 and 1985 that were attributable to the
limited partnership interests that Baxter owned in ODA, PS3, and AV85.
5
The decision for each partnership accompanied a “Motion for Entry of Decisions
Pursuant to Rule 248(b),” stating, in paragraphs 8 and 9:
8. The respondent and the tax matters partner for each of the
partnerships whose partnership items are in dispute in the FPAA Cases
have reached contingent agreements with respect to all of the disputed
partnership items at issue in the FPAA Cases. The portion of the
contingent agreement that relates to the partnership items at issue in these
proceedings is reflected in the Decisions submitted herewith.
9. All partners in each partnership whose partnership items are to
be determined in the FPAA Cases and who meet the interest requirements
of I.R.C. § 6226(d) are deemed to be parties to those partnership
proceedings pursuant to the provisions of I.R.C. § 6226(c) and Rule 247(a)
of the Tax Court’s Rules of Practice and Procedure and upon entry of the
Decision and that Decision becoming final, will be bound by the
determination of the partnership items set forth therein, and will be
assessed any additional tax resulting from the adjustments contained in the
Decision documents pursuant to the provisions of I.R.C. §§ 6225, 6230(a)
and 6231(a)(6) within the time period provided by I.R.C. § 6229(d).
5
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After promptly paying the additional taxes, the Baxters filed this federal tax refund action in August 2004. In support of their refund claims, the
Baxters contend the 2002 assessment was improper because no preceding
deficiency notice was issued, in accordance with 26 U.S.C. § 6213, and, applying
26 U.S.C. § 6501, the assessment was untimely. The IRS contests the
merits of the Baxters’ contentions and maintains that subject matter jurisdiction is precluded by
26 U.S.C. § 7422(h).6 Considering cross motions regarding these issues, the district court granted summary judgment in the Baxters’
favor. This appeal followed.
II.
On appeal, the IRS argues that the district court’s summary judgment
rulings cannot be reconciled with our decisions in Foster, 801 F. App’x at
214–16; Rodgers 843 F.3d at 190–97; Irvine, 729 F.3d at 459–60; Kercher v.
United States, 539 F. App’x 517, 521–23 (5th Cir. 2013); Scott v. United States,
437 F. App’x 281 (5th Cir. 2011)(unpub.)(affirming for reasons stated in
district court’s opinion); Curr-Spec Partners, L.P. v. Comm’r of Internal
Revenue,
579 F.3d 391, 395–400 & n. 20 (5th Cir. 2009); and Weiner v. United
6
Although § 7422(h) was repealed in 2015, it applies to this dispute. See note 1. It states:
§ 7422. Civil Actions for Refund
(a)-(g) [omitted]
(h) Special rule for actions with respect to partnership items
No action may be brought for a refund attributable to partnership items (as
defined in section 6231(a)(3) except as provided in section 6228(b) or section
6230(c).
See 28 U.S.C. § 7422(h) (repealed 2015).
6
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States, 389 F.3d 152, 155–59 (5th Cir. 2004). Despite the Baxters’ substantial
efforts to convince us otherwise,7 we agree.
As have other AMCOR partners seeking refunds, the Baxters contend
that the 2002 assessment is time-barred by 26 U.S.C. § 6501, because the
April 1991 FPAAs for the three partnerships were issued more than three
years after the filing dates of their joint individual tax returns (reflecting
partnerships losses) in 1985 (for tax year 1984) and in 1986 (for tax year 1985).
The Baxters also contend the assessment was invalid because it was not
preceded, in accordance with
26 U.S.C. § 6213, by the issuance of a notice of
deficiency.
A. Untimely Assessment
We have previously determined that 26 U.S.C. § 7422(h) deprives
district courts of subject matter jurisdiction over refund actions—whether
filed by “settled” or “unsettled” AMCOR partners—that are premised on
§ 6501’s time limitation. See Foster, 801 F. App’x at 215–16 (unsettled);
Rodgers,
843 F.3d at 183, 188-92 (settled); Irvine,
729 F.3d at 462 (settled);
Kercher,
539 F. App’x at 521-23 (unsettled); Scott, 437 F. App’x at *2-4
(settled). Our analysis in all of these decisions begins with our holding, in
Weiner, that the § 6229 assessment period is a “partnership item” for
purposes of the statutory prohibition, in
26 U.S.C. § 7422(h), against refund
actions attributable to “partnership items.” See Foster, 801 F. App’x at 215;
Rodgers,
843 F.3d at 190 & n.55 (quoting Irvine,
729 F.3d at 461 (citing Weiner,
389 F.3d at 157–58)).8 And “where a basis for a § 6229 extension [of
7
Notably, one or both of the Baxters’ counsel of record have served as appellate counsel
in all of the foregoing matters except Curr-Spec Partners, L.P., which unlike the others, was
not a refund action.
8
In Weiner, we reasoned: “The timeliness of an FPAA affects the IRS’s ability to make
adjustments to partnership items, which in turn affects all partners alike. This
7
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§ 6501(a)’s three-year period] is asserted, any limitations determination with
regard to § 6501(a) must also involve the resolution of § 6229.” Irvine, 729
F.3d at 461. In other words, “[w]here both are at issue, the § 6501 period
cannot be separated from the § 6229 period.” Id. Thus, where
the § 6501 limitations period asserted in support of an individual partner’s
refund claim cannot be determined without reference to the government’s
asserted basis for extension under § 6229, a partnership item, § 7422(h) bars
consideration of the refund action. See Rodgers,
843 F.3d at 191; Irvine, 729
F.3d at 461–62.
The same analysis applies here, despite the Baxters’ assertions that,
by virtue of 26 U.S.C. § 6226(c) and § 6226(d)(2), Baxter was not a “party”
to the partnership proceedings in tax court and, even if he were a party, the
tax court decisions involving ODA, PS3, and AV85 addressed § 6229’s time
period, not § 6501’s. Our decision in Rodgers expressly rejected the same
“nonparty” argument that the Baxters raise here. Rodgers,
843 F.3d at 192
(citing Irvine,
729 F.3d at 462).9 The Baxters’ emphasis of the tax court
decisions’ reference to § 6229, not § 6501, likewise is unavailing.
determination is more appropriately made at the partnership level. . . . The result advocated
by the taxpayers here is at odds with TEFRA’s goal of consolidating decisions that affect
the partnership as a whole.”
389 F.3d at 158.
9
In Prati v. United States, 603 F.3d 1301, 1305–07 & n.4 (Fed. Cir. 2010), the Federal
Circuit rejected such reasoning as “circular” and lacking merit. We agree with this
characterization. The Baxters’ non-party argument turns on the exception in
26 U.S.C. §
6226(d)(1)(B) to the “party” status that
26 U.S.C. § 6226(c) confers upon any person who
was a partner during the partnership taxable year. Deciding the applicability of
§ 6226(d)(1)(B), however, relative to the expiration of the “period within which any tax
attributable to such partnership items may be assessed against that partner” would require
the very consideration of the asserted § 6229 extensions of § 6501’s limitation period that
§ 7422(h) precludes.
8
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As stated above, where determining whether a tax assessment
complies with § 6501’s three-year limitation period necessitates a
determination of whether § 6229 has extended that period, as is true here,
our decisions have repeatedly concluded that a “partnership item” is
presented for determination. And § 7422(h) prohibits refund action courts
from deciding partnership items in the first instance or re-evaluating a tax
court’s determination of those items. Rodgers, 843 F.3d at 192 (“‘a refund
court litigating or re-litigating a partnership item, such as the merits of the
asserted § 6229 basis for an extension of the limitations period, is exactly the
result prohibited by TEFRA’”) (quoting Irvine,
729 F.3d at 462). Thus, in
this instance, the district court lacked subject matter jurisdiction over the
Baxters’ § 6501 refund claims and reversibly erred in concluding the
contrary.
B. Absence of Deficiency Notice
The district court also determined that the IRS’s failure to issue
deficiency notices to the Baxters for the 2002 tax assessment requires a
refund of the additional sums paid. We likewise disagree with this
determination.
Under TEFRA, a deficiency notice generally is not required where a
partner is assessed for a “computational adjustment.” See 26 U.S.C.
§ 6230(a) (repealed 2015); see also § 6231(a)(6) (repealed 2015)
(“‘computational adjustment’ means the change in the tax liability of a
partner which properly reflects the treatment under this subchapter of a
partnership item”).10 A deficiency notice is necessary, however, for “any
10
Section 6223 addresses the notices that must be provided to partners when an
administrative partnership proceeding commences and completed. See 26 U.S.C. § 6223
(repealed 2015) .
9
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deficiency attributable to—(i) affected items [requiring] partner level
determinations. . . .” See 26 U.S.C. § 6230(a)(2)(A)(i) (repealed 2015).
Citing § 6230(a)(2)(A)(i), the Baxters have asserted, and the district court
agreed, that their 2002 assessment constitutes a “deficienc[y] attributable to
[an] affected item[] [requiring] a partner level determination[]”—whether
“a extension to their [§] 6501(a) [assessment] deadline existed.”
As initial matter, we note that the absence of a deficiency notice was
not asserted in the Baxters’ administrative refund claim. Thus, the district
court erred in considering this basis for relief in the Baxters’ refund suit.
See Mallette Bros. Const. Co., Inc. v. United States, 695 F.2d 145, 155 (5th Cir.
1983) (variance doctrine bars taxpayers from raising grounds for recovery in
refund suits that were not previously set forth in the administrative refund
claim); see also
26 U.S.C. § 7422(a) (no suit or proceeding in court for
recovery of income tax until administrative claim for refund has been duly
filed according to pertinent provisions of law and “the regulations of the
Secretary established in pursuance thereof”);
26 C.F.R. § 301.6402–2,
Treas. Reg. § 301.6402–2(b) (“The claim must set forth in detail each
ground upon which a credit or refund is claimed and facts sufficient to apprise
the Commissioner of the exact basis thereof.”). El Paso CGP Company,
L.L.C. v. United States,
748 F.3d 225, 229 (5th Cir. 2014), which was cited by
the Baxters, offers no reprieve from this requirement because, unlike in El
Paso, no events relevant to taxpayers’ notice of deficiency argument occurred
after they filed their administrative refund claim.
Even if the opposite were true, the Baxters’ argument that notice was
required—because their deficiency was attributable to a violation of their
§ 6501 assessment deadline—misunderstands the meaning of “deficiency”
as that term is defined by § 6211(a). Specifically, a “deficiency” is the
monetary “amount by which the tax imposed by subtitle A or B, or chapter
41, 42, 43, or 44” exceeds the amounts shown on the taxpayer’s return and
10
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any amounts previously assessed or collected, after account for rebates. See
26 U.S.C. § 6211(a). Thus, a deficiency for purposes of § 6230(a)(2)(A)(i) is
not defined as the amount of money, if any, that the taxpayer asserts is owed
based on a statute of limitation. See Rodgers,
843 F.3d at 197 (taxpayer
assertion that deficiency was $0 contravenes the statutory definition of
deficiency). Furthermore, the 2002 assessment was, as stated in the tax court
decisions for the three partnerships, “attributable to the adjustments of
partnership items” on the relevant partnership returns, not a statute of
limitations. 11
C. IRA Agent Janis Smith’s Statement
Among their other arguments, the Baxters contend their discovery of
a statement by IRA Agent Janis Smith renders our prior decisions
inapplicable here. The Baxters are wrong. At issue is Agent Smith’s
statement, in a undated declaration taken from the Foster record, that “part
of the preparation of the notice of computational adjustment is to calculate if
the statute of limitations for assessment is open for the taxpayer.” Assuming
the truth of the statement, an IRS agent’s practice of confirming that the
extended assessment period, (provided by § 6229) has not expired, in
preparing a notice of computational adjustment, cannot and does not
override statutory jurisdictional limitations applicable to refund actions as a
matter of law. Again, “where a basis for a § 6229 extension is asserted, any
limitations determination with regard to § 6501(a) must also involve the
resolution of § 6229.” Irvine, 729 F.3d at 461. And § 7422(h) prohibits
11 Nor is there any assertion that the Baxters’ 2002 assessment reflects any
amounts inconsistent with Baxter’s proportionate share of the partnership adjustments
reflected in the relevant tax court decisions.
11
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federal court adjudications of the merits of a § 6229 extension of the § 6501
limitations period. Rodgers, 843 F.3d at 194; Irvine, 729 F.3d at 461–62.
III.
The district court erred by not dismissing Plaintiffs-Appellees
Baxters’ refund claims for lack of subject matter jurisdiction. Accordingly,
we REVERSE the judgment of the district court and REMAND with
instructions to dismiss for lack of jurisdiction.
Additionally, Plaintiffs-Appellees’ “Motion to Strike and Bar
Consideration of Portions of the Opening Brief for the United States and the
Reply Brief for the United States,” which was carried with the case, is
DENIED.
12
