Gosnell, (DC AZ 06/28/2011) 107 AFTR 2d ¶ 2011-1000
A district court has granted IRS summary judgment terminating a real estate developer's refund claims seeking taxes, penalties, and interest for tax years in which he claimed benefits from his participation in a Son of BOSS transaction. In so holding, the court found that IRS wasn't required to issue a deficiency notice before assessing the subject taxes because they reflected mere computational adjustments stemming from agreed-to partnership items.
Background on TEFRA audit 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 to be determined at the partnership level. (Code Sec. 6221) If IRS decides to adjust any partnership items, it must notify the individual partners through a final partnership administrative adjustment (FPAA). (Code Sec. 6226) For 90 days after issuing an FPAA, the tax matters partner (TMP) has the exclusive right to file a petition for readjustment of the partnership items in the Tax Court, the Court of Federal Claims, or a U.S. District Court. (Code Sec. 6226(a)) After that period expires, other partners have 60 days to file a petition for readjustment. (Code Sec. 6226(b)(1))
Background on notices of deficiency. Once a final partnership-level adjustment has been made to a partnership item, if there is no challenge to the FPAA, IRS may proceed to make corresponding computational adjustments to each partner's return. (Code Sec. 6231(a)(6)) For purposes of Code Sec. 6230(c)(2)’s six-month period for a partner to file a refund claim, IRS is deemed to have sent the partner a notice of computational adjustment when it sends Form 4549 or Form 4549A (Income Tax Examination Changes).
Deficiency procedures provided in Code Sec. 6211 through Code Sec. 6216, which include a notice requirement, generally don't apply to the assessment or collection of any computational adjustment. (Code Sec. 6230(a)(1)) However, they do apply to “any deficiency attributable to... affected items which require partner level determinations... other than penalties, additions to tax, and additional amounts that relate to adjustments to partnership items.” (Code Sec. 6230(a)(2)(A))
If the partner's liability relates to affected items requiring partner-level determinations, then IRS must send a notice of deficiency to that partner. For deficiencies other than those resulting from mathematical or clerical errors, IRS may not assess or collect the deficiency until it sends the deficiency notice and waits for the time for the taxpayer to file a Tax Court petition to expire (or if the taxpayer files a petition, until the Tax Court's decision becomes final). (Code Sec. 6213(a)) However, if the partner's liability doesn't relate to affected items requiring partner-level determinations, then IRS may directly assess the tax by making a computational adjustment.
Background on refund claims. A partner may file a refund claim on grounds that: (i) IRS's computational adjustment applying a settlement, FPAA, or court decision to the taxpayer was erroneously made; (ii) IRS erroneously imposed a penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item; or (iii) IRS failed to allow a credit or make a refund to the partner in the amount of the overpayment attributable to the application to the partner of a settlement, FPAA, or court decision. (Code Sec. 6230(c)(1)) Any such claim brought under (i) or (iii) must be filed within six months after the day on which the IRS mails the notice of computational adjustment to the partners (Code Sec. 6230(c)(2)(A)), and a claim under (ii) must be filed within two years after the settlement is entered, the court decision becomes final, or the day on which the period during which an action can be brought regarding the FPAA expires.
Background on limitations periods on assessments. The period for assessing any income tax attributable to any partnership or affected item for a partnership tax year generally does not expire before the date that is three years after the later of: (1) the date on which the partnership return for the tax year was filed, or (2) the last day for filing the return for that year, without regard to extensions. (Code Sec. 6229(a)) Before expiration, the period may be extended by agreement under Code Sec. 6229(b). If notice of an FPAA with respect to any tax year is mailed to the TMP, the period is suspended during the time that an action could be brought under Code Sec. 6226 and for one year thereafter. (Code Sec. 6229(d))
Facts. Robert Gosnell was a luxury resort property developer. In the early’80s, he formed a limited partnership (LP) to develop a luxury resort in Arizona. Gosnell and his business entities owned about 69% of the LP. One of his business entities was the general partner, and Gosnell and his executive team were the principal decision makers.
In 2000, Gosnell arranged to purchase a “Son of BOSS” foreign currency structuring transaction. Overall, between the transaction costs and the losses generated, Gosnell claimed on his 2000–2002 returns over $9 million in tax benefits and had net out-of-pocket costs of $347,564.
In 2004, IRS opened an examination of LP and related partnerships involved in the Son of BOSS transaction. On May 24, 2004, IRS announced a Settlement Initiative involving Son of BOSS transactions under which taxpayers who agreed to the income tax deficiency and statutory interest resulting from disallowance of the claimed tax benefits could reduce their Code Sec. 6662 penalty exposure, from 40% to 10% or 20%, and deduct the out-of-pocket costs of the transaction. Full payment of the tax, penalty, and interest was required within 30 days.
Gosnell elected to participate in the Settlement Initiative and disclosed his claimed total tax benefits. On Dec. 22, 2004, an IRS revenue agent sent him a Form 4549A, Income Tax Examination Changes, and a proposed Form 906 closing agreement that included a deduction for Gosnell's out-of-pocket costs, assessment of a 10% Code Sec. 6662 penalty, and waiver of all defenses against and restrictions on assessment and collection.
Gosnell sent IRS a check for $5,000 with a copy of a revenue officer's letter regarding payment arrangements on Jan. 20, 2005, and later sent IRS a check for $389,018. On Jan. 21, 2005, he signed and returned the Form 906 and a Form 872-I extending the statute of limitations on assessment. The revenue agent recommended that IRS accept the proposed settlement, but IRS didn't execute the Form 906. Instead, it returned Gosnell's $389,018 check and informed him that the revenue officer's letter wasn't an installment agreement. IRS also rejected his later proposed installment agreement.
In communications to IRS, Gosnell's representative stated that he was committed to paying the additional taxes disclosed under the Settlement Initiative, but that he hoped to reduce the 40% penalty.
IRS issued an FPAA on Dec. 30, 2005 to LLC, a third-tier partnership that had been formed as part of the Son of BOSS transaction and was controlled by LP. Duplicate copies were sent to LLC, its partners, and its TMP at various addresses. No response was made by or on behalf of LLC, so the FPAA determinations became final.
On Nov. 6, 2006, IRS prepared a revised Form 4549A pertaining to Gosnell's 2000–2002 income taxes. The tax adjustments were the same as those in the Form 906 Gosnell signed, except for the substitution of a 40% penalty and disallowance of out-of-pocket costs. IRS didn't send Gosnell this revised Form 4549A until August 2007 upon Gosnell's representative's request. IRS also didn't send Gosnell a deficiency notice for 2000, 2001, or 2003 because it determined that assessments could be made through computational adjustments. Accordingly, on May 27, 2007, it assessed the following amounts for tax, penalties, and interest, which Gosnell later paid in full: $95,659.02 for 2000; $3,104.035.49 for 2001; and $326,744.83 for 2003.
On Nov. 3, 2008, Gosnell filed administrative refund claims for 2000, 2001, and 2003 alleging that IRS made the assessments illegally, without first issuing him a deficiency notice under Code Sec. 6212, and that the liabilities couldn't be reassessed because the applicable limitations periods had expired. IRS didn't act on the administrative refund claims within six months, so Gosnell commenced his refund suit seeking to recover the income tax, penalties, and interest for the years at issue.
Jurisdiction. In upholding its jurisdiction, the district court determined that if Gosnell's claims were in fact seeking refund of overpaid taxes, they would be untimely under Code Sec. 6230(c)(2)(B)(ii) since they were filed more than two years and 150 days (i.e., 90 days for the TMP to file a petition plus 60 days thereafter, and two years under Code Sec. 6230(c)) after the date that IRS issued an FPAA to LLC.
However, the court said that Gosnell's claim wasn't for overpayment since he ultimately conceded that the assessments and collections were timely. Rather, the court decided that his argument was essentially that the assessment periods were never properly opened because IRS didn't issue a deficiency notice—but, since the court also found that IRS wasn't required to issue one, his claim more closely resembled one brought under Code Sec. 6230(c)(1)(A)(ii) or Code Sec. 6230(c)(1)(C) (i.e., erroneous computational adjustment or erroneous imposition of penalty or additional amount related to an adjustment to a partnership item). Therefore, Gosnell had six months from the date that IRS mailed the notice of computational adjustment to file his administrative claims. The court further found that, on the record, IRS failed to show when the six-month period began under Code Sec. 6230(c), so Gosnell's administrative claim was held to be timely.
Conclusion. After deciding that Gosnell's claims weren't time-barred and that it had jurisdiction under Code Sec. 7422, the court concluded that IRS's assessments of Gosnell's 2000, 2001, and 2003 taxes were timely made. Notably, although Gosnell asserted that IRS both assessed and collected tax after the statute of limitations expired, the dates referenced in his allegations conceded that, provided no deficiency notice was required to be issued, the assessments were timely made.
The court then determined that no deficiency notice was in fact required because no partner-level determinations were made. Rather, Gosnell himself disclosed the tax benefits from the Son of BOSS transactions, and these figures were set out in both the Form 4549A sent from IRS to Gosnell notifying him of the changes to his tax liabilities and the Form 906 settlement agreement. Further, Gosnell's representative stated in communications to IRS that the “only unresolved question” was the penalty. After IRS issued an FPAA and received no response, it prepared a revised Form 4549A using the same adjustments that Gosnell agreed to in the Form 906, except with an increased penalty and disallowance of out-of-pocket costs, then made assessments against Gosnell based on these revisions.
The court analogized the facts of the case to those in Olson v. U.S., (CA Fed Cir 2/18/99) 83 AFTR 2d 99-759, and determined that the disputed assessments were mere computational adjustments not subject to the Code's standard deficiency procedures. As in Olson, the partnership items were resolved—so no partner-level determination of any affected item was required. Rather, the substitution of the 40% penalty and disallowance of the out-of-pocket costs required only mathematical calculations. And although the Olson taxpayers' settlement agreement was accepted by IRS, unlike Gosnell's, this didn't change the fact that Gosnell's partnership items were nonetheless resolved.
Thus, the court concluded, no deficiency notice was required and the assessments were timely made. It accordingly granted summary judgment in favor of IRS and terminated the case.
References: For computational adjustments not subject to regular deficiency procedures, see FTC 2d/FIN ¶T-2249; United States Tax Reporter ¶62,214.09; TaxDesk ¶825,262; TG ¶70424.