JOHN A. IRVINE; LYNDA IRVINE; KENNETH L. KRAEMER; BILLY J. WHITE; INA J. WHITE, Plaintiffs - Appellants
UNITED STATES OF AMERICA, Defendant-Appellee
Appeal from the United States District Court for the Southern District of Texas
Before SMITH, HAYNES, and GRAVES, Circuit Judges.
JAMES E. GRAVES, JR., Circuit Judge:
Billy and Ina White, John and Lynda Irvine, and Kenneth Kraemer(collectively "Taxpayers") assert that the Internal Revenue Service ("IRS") erroneously assessed additional taxes and interest against them in connection with their investments in various partnerships in the 1980s. Taxpayers seek refunds of the federal income taxes and penalty interest paid. Taxpayers assert that the IRS's assessment of additional taxes fell outside the applicable statute of limitations and that the IRS erroneously applied penalty interest. We hold that the district court lacked jurisdiction over the statute of limitations claims but did have jurisdiction over the penalty interest claims and that penalty interest was erroneously assessed.
I. Factual and Procedural Background
This tax refund suit is one among several arising from a series of limited partnerships managed by American Agri-Corp ("AMCOR") in the 1980s. In an earlier AMCOR-related case, we explained the background:
In the early 1980s, AMCOR organized a number of limited partnerships for which it acted as general partner. These partnerships had as stated goals acquiring agricultural land, investing in agricultural ventures, and growing crops. AMCOR solicited investments from high income professionals across the country. Each partner in an AMCOR partnership would receive a projected tax loss from crops planted in the first year of roughly twice that partner's investment. Investors paid the farming expenses up front and deducted the amount invested on their tax returns. The next year, when the crops were harvested, the amount of loss in excess of the amount invested would be subject to taxes. However, the farming expenses typically exceeded any income realized from the farming activities. In 1987, the IRS began an investigation and audit into the AMCOR partnerships to determine whether they were impermissible tax shelters.
Duffie v. United States, 600 F.3d 362, 367 (5th Cir. 2010) (footnote omitted); see also Weiner v. United States, 389 F.3d 152, 153 (5th Cir. 2004) (describing similar AMCOR partnerships).
These Taxpayers were partners in AMCOR limited partnerships in the 1980s. Billy White invested as a limited partner in Texas Farm Venturers in 1984 and in Houston Farm Associates-II in 1985. John Irvine invested as a limited partner in Agri-Venture Fund in 1985. Kenneth Kraemer invested as a limited partner in Rancho California Partners II in 1986. All Taxpayers reported their proportionate share of their respective partnerships' losses in the relevant tax years.
In 1990 and 1991, the IRS issued a Notice of Final Partnership Administrative Adjustment ("FPAA") for the relevant tax years to the tax matters partners ("TMP") of each of the partnerships. The FPAAs disallowed 100% of each partnership's farming expenses and other deductions. The FPAAs listed several reasons for disallowing the partnerships' deductions, including, inter alia, IRS determinations that the partnerships engaged in a series of sham transactions, that the partnerships' activities lacked economic substance, that the partnerships did not actually engage in farming activities, and that the partnerships had not substantiated their expenses. The TMPs for the partnerships did not challenge the FPAAs but other partners filed Tax Court suits contesting each FPAA, including claiming that the FPAAs were untimely. All partners initially became parties to the partnership-level suits. See 26 U.S.C. § 6226(c). These Tax Court suits were eventually consolidated with other similar AMCOR-partnership cases and the Tax Court issued a decision determining that each FPAA issued to the partnerships was timely pursuant to 26 U.S.C. § 6229. See Agri-Cal Venture Associates v. Commissioner, 80 T.C.M. (CCH) 295, 2000 WL 1211147, at *16, *20, *22 (T.C. 2000). In July 2001, a settled stipulated decision was entered in each Tax Court suit.
In 1999 and 2000, during the pendency of the Tax Court suits and before the partnership-level stipulated settlements, the Whites, the Irvines and Kraemer individually settled with the IRS. The settlement agreements disallowed only a portion of the farming deductions, as opposed to 100% disallowance. After accepting Taxpayers' settlements, the IRS assessed additional tax liability against each Taxpayer, including penalty interest under § 6621(c). Section 6621(c) imposed an interest rate of 120% of the statutory rate on "any substantial underpayment attributable to tax motivated transactions." 26 U.S.C. § 6621(c) (1986). The IRS assessed additional tax of $14, 397 and interest of $60, 087.69 for the Whites' 1984 tax year, and additional tax of $16, 812 and interest of $59, 295.34 for the Whites' 1985 tax year. The Whites paid the additional taxes in February 2000 and filed an administrative claim for refund on February 12, 2002. The IRS assessed additional tax of $14, 159 and interest of $52, 459.64 for the Irvines' 1985 tax year. The Irvines paid the additional taxes beginning in May 2000 and filed an administrative claim for refund on May 7, 2002. The IRS assessed additional tax of $9, 817 and interest of $31, 292.40 for Kraemer's 1986 tax year. In February 2001, the IRS applied a previous deposit paid by Kraemer and issued Kraemer a refund; Kraemer filed an administrative claim for refund on February 11, 2003. The IRS did not act on any of Taxpayers' claims for refund. In August 2008, Taxpayers filed this suit for refund of the taxes and interest.
In their refund actions, the Whites and Irvines claimed that the additional taxes had been assessed after the statute of limitations for making such assessments had expired ("the statute of limitations claim"), and all Taxpayers claimed that the interest should not have been computed at the enhanced § 6621(c) penalty rate ("the penalty interest claim"). Taxpayers and the government moved for summary judgment. The district court granted summary judgment to the government on both claims, concluding that it lacked jurisdiction to consider the statute of limitations claim and that Taxpayers' claims for refund of penalty interest were untimely. Taxpayers timely appealed.
II. Statutory Background
This case is governed by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), generally codified at 26 U.S.C. §§ 6221-6233. See generally Weiner, 389 F.3d at 154-55 (describing TEFRA's provisions). TEFRA requires partnerships to file informational returns reflecting the partnership's income, gains, deductions, and credits. Id. at 154. Individual partners then report their proportionate share of the items on their own tax returns. Id. "TEFRA requires the treatment of all partnership items to be determined at the partnership level." Id. (citing 26 U.S.C. § 6221). "After TEFRA, the IRS could adjust partnership items at a singular proceeding, and then subsequently assess all of the partners based upon the adjustment to that particular item." Duffie, 600 F.3d at 365 (quotations omitted). "While TEFRA defines a 'partnership item' in technical terms, the provision generally encompasses items 'more appropriately determined at the partnership level than at the partner level.'" Weiner, 389 F.3d at 154 (quoting § 6231(a)(3)). IRS regulations further clarify that "partnership item" includes "the accounting practices and the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc." 26 C.F.R. § 301.6231(a)(3)-1(b). A "nonpartnership item, " conversely, is an item that is not treated as a partnership item. 26 U.S.C. § 6231(a)(4). "The tax treatment of nonpartnership items requires partner-specific determinations that must be made at the individual partner level." Duffie, 600 F.3d at 366. TEFRA also ...