Keefe, et al, v. U.S., (12/09/2010 CA FC) 106 AFTR 2d 2010-7304, cert denied 4/18/2011
The Supreme Court has declined to review the Federal Circuit's jurisdictional dismissal of a petition filed by a group of AMCOR investors seeking partnership tax refunds stemming from IRS's disallowance of their agriculture-related partnership deductions. The Federal Circuit, affirming the Court of Federal Claims, determined that the timeliness of IRS's assessment and the imposition of interest for a tax-motivated transaction were partnership items that could only have been raised at the partnership-level proceeding, and denied the taxpayers' motion to continue stay of proceedings.
Background on partnership rules. Under the TEFRA partnership audit rules, the tax treatment of any partnership item (and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item) generally is determined at the partnership level. (Code Sec. 6221) A partner whose tax liability might be affected by the outcome of the litigation of partnership items may participate in the proceeding. (Code Sec. 6224) IRS may assess additional tax liability against individual partners within one year of the final conclusion of the partnership's tax determination. (Code Sec. 6229(d)) The partner may contest the tax liability by paying the assessment and filing a refund action in the Court of Federal Claims. However, the partner can't bring an action for a refund attributable to partnership items. (Code Sec. 7422(h))
Code Sec. 6501(a) generally provides that a valid assessment of income tax liability may not be made more than 3 years after the later of the date the tax return was filed or the due date of the tax return. However, subject to exceptions and special rules, the period for assessing tax attributable to a partnership item (or affected item) for a partnership tax year won't expire before the date that is three years after the later of: (1) the date the partnership return was filed, or (2) the last day for filing the return for that year (without regard to extensions). (Code Sec. 6229(a))
In Keener v. U.S., (CA FC 2009) 103 AFTR 2d 2009-364, the Federal Circuit found that taxpayers' statute of limitations claim was attributable to a partnership item and so was barred from being litigated in a refund action by Code Sec. 7422(h). The Court relied on Reg. §301.6231(a)(3)-1(b), which provided that partnership items 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. The Court also rejected the taxpayers' argument that interest under former Code Sec. 6621(c) should not have been assessed against them because the transactions for which that interest was imposed were not “tax motivated transactions.” The Court reasoned that whether a particular partnership transaction was tax motivated and whether it was a “sham” transaction turned on the nature of the partnership's transaction—i.e., a partnership item.
Background on former interest rules. Under former Code Sec. 6621(c) (repealed in’89), a special interest rate of 120% of the usual underpayment rate applied to substantial underpayments attributable to tax motivated transactions, including any sham or fraudulent transaction.
Facts. American Agri-Corp (AMCOR) promoted tax shelter partnerships during the’80s. The partnerships were designed to generate 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. Joseph Keefe and his wife invested in AMCOR partnerships. In’85, the partnerships filed tax returns claiming an ordinary loss deduction, and the Keefes used those losses on their individual tax returns to offset their taxable income for that year.
In ’87, IRS began investigating the AMCOR partnerships. It issued Notices of Final Partnership Administrative Adjustment (FPAAs) to 43 partnerships in’90 and’91 with respect to their’85 returns, disallowing deductions for several reasons, including that the partnership activities constituted a series of sham transactions. Representatives of the partnerships challenged the FPAA disallowances in partnership level proceedings before the Tax Court under Code Sec. 6226(b). Among the issues litigated was whether the adjustments were barred by the statute of limitations. In 2000, the Tax Court rejected the statute of limitations defense in test cases that the parties had agreed to, finding that one of the partnerships had failed to file a valid partnership return and that the other four had validly agreed through their tax matters partners to extend the time period under Code Sec. 6229(b). (Agri-Cal Venture Assocs., TC Memo 2000-271)
The Prati case. A total of 129 AMCOR partnership tax refund cases were filed by various taxpayers in the Court of Federal Claims. The Prati case, (4/16/2008 Ct Fed Cl), 101 AFTR 2d 2008-1778, was selected to serve as a representative case for 76 other cases, including the Keefes', that were factually and legally similar. In Prati, the taxpayers raised two primary claims for relief: (1) the assessment was untimely because it was made after the statute of limitations had expired; and (2) the assessment of interest under former Code Sec. 6621(c) was improper because the partnership transaction at issue was not a tax-motivated transaction. The court, relying on Keener, dismissed Prati and those of the 76 cases that also presented solely jurisdictional issues under Code Sec. 7422(h). The taxpayers appealed. The Federal Circuit, on June 22, 2009, stayed proceedings of a number of cases, including Keefe, pending disposition of Prati and the other representative case.
On May 5, 2010, the Federal Circuit affirmed that the statute of limitations issue was a partnership item and that because the taxpayers didn't raise the limitations issue in the partnership-level proceeding, Code Sec. 7422(h) barred them from raising this claim in refund proceedings. (See Prati v. U.S., 105 AFTR 2d 2010-2197) The Court reasoned that when an assessment of tax involves a partnership item or an affected item, Code Sec. 6229 can extend the time period that the IRS otherwise has available under Code Sec. 6501 to make that assessment. Thus, the limitations period is the period defined by Code Sec. 6501, as extended when appropriate by Code Sec. 6229. These two Code sections do not operate independently to allow a taxpayer to assert one in isolation and so render an otherwise timely assessment untimely. The Court also found that because the taxpayers' challenge to the penalty interest assessments under former Code Sec. 6621(c) was inherently a dispute over the proper characterization of the partnerships' transactions, that issue was also barred by Code Sec. 7422(h) from being litigated in a refund action.
The Pratis and another couple appealed the Federal Circuit's decision to the Supreme Court.
The Keefes' appeal. On appeal, the Keefes and other AMCOR investors moved to continue to stay their case pending the Supreme Court's resolution of the Prati case. Alternatively, they requested a stay until two additional representative cases were resolved.
In its Dec. 9, 2010 opinion, the Federal Circuit stated that because it had since affirmed the Court of Federal Claims's decision in Prati, and the Keefes' claims were identical to those resolved, summary affirmance was warranted and there was no basis for staying the case pending disposition of petitions for writ of certiorari in Prati and the other representative case.
On Jan. 10, 2011, the Supreme Court denied certiorari in Prati.
Supreme Court won't review. The Supreme Court declined to review Keefe on Apr. 18, 2011.
References: For the assessment period for partnership items, see FTC 2d/FIN ¶T-4018; United States Tax Reporter ¶62,294; TaxDesk ¶838,003; TG ¶70431.