Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner , 249 F.3d 175 ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
5-1-2001
Rhone-Poulenc, Inc. v. Internal Revenue Service
Precedential or Non-Precedential:
Docket 00-3636
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"Rhone-Poulenc, Inc. v. Internal Revenue Service" (2001). 2001 Decisions. Paper 96.
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Filed May 1, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-3636
RHONE-POULENC SURFACTANTS AND
SPECIALTIES, L.P., GAF CHEMICALS
CORPORATION, A PARTNER OTHER
THAN THE TAX MATTERS PARTNER,
Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Appellee
On Appeal From the United States Tax Court
(Tax Court Docket No. 2125-98)
(114 T.C. No. 34)
Argued January 19, 2001
Before: ROTH and BARRY, Cir cuit Judges
SHADUR,1 District Judge
(Opinion filed: May 1, 2001)
_________________________________________________________________
1. Honorable Milton I. Shadur, United States District Court Judge for the
Northern District of Illinois, sitting by designation.
William F. Nelson, Esq. (argued)
Gerald A. Kafka, Esq.
J. Bradford Anwyll, Esq.
McKee Nelson Ernst & Young, LLP
1919 M Street, N.W., Suite 800
Washington, DC 20036
Attorneys for Appellant
Charles F. Marshall, Esq. (argued)
Paula M. Junghans, Esq.
Richard Farber, Esq.
Tax Division
Department of Justice
P.O. Box 502
Washington, DC 20044
Attorneys for Appellee
OPINION OF THE COURT
SHADUR, District Judge:
Taxpayer GAF Chemicals Corporation ("GAF "), a
subsidiary of GAF Corporation and a purported partner in
the putative partnership Rhone-Poulenc Surfactants and
Specialties, L.P. ("Rhone-Poulenc"),filed a petition for
readjustment of partnership items in the United States Tax
Court under 26 U.S.C. S6226(b).2 GAF filed its petition in
response to a notice of final partnership administrative
adjustment ("FPAA") issued by the Commissioner of
Internal Revenue ("Commissioner") to Rhone-Poulenc
pursuant to Section 6223(a)--an FPAA that tr eated a
transfer of assets from GAF to Rhone-Poulenc as a taxable
sale rather than as a nontaxable contribution in exchange
for an interest in the partnership.
This appeal stems from the Tax Court's denial of GAF 's
motion for summary judgment on the ground that the
_________________________________________________________________
2. All further citations to provisions of the Internal Revenue Code
("Code") will simply take the form "Section--," omitting the prefatory "26
U.S.C."
2
Commissioner's assessment is time-barred. Although that
order was not final, the Tax Court certified it for
interlocutory appeal under Section 7482(a)(2)(A), and this
Court granted GAF 's petition for permission to appeal.
For the reasons stated in this opinion, wefind that
GAF 's petition for permission to appeal was improvidently
granted. Upon our further consideration of the issues
presented for decision, we hold that Tax Court rulings on
certain unresolved issues that Court has r eserved for the
future constitute a precondition to the ripeness of the
issues certified by that Court, so that we have essentially
been presented with a request for an advisory opinion
forbidden by Article III of the Constitution.
Background
In 1990 GAF and Alkaril Chemicals, Inc. ("Alkaril"),
another subsidiary of GAF Corporation, transferr ed certain
business assets to Rhone-Poulenc. About September 17,
1991 Rhone-Poulenc filed a federal partnership information
return that characterized GAF 's transfer to it as a
contribution of property to the partnership in exchange for
an interest in the partnership. Almost simultaneously (the
record-indicated date is September 16, 1991) GAF
Corporation filed a consolidated corporate federal income
tax return for itself and all of its affiliated subsidiary
corporations (including GAF).
On September 12, 1997 the Commissioner issued Rhone-
Poulenc an FPAA notice that treated the transfer as a
taxable sale rather than as an exchange for a partnership
interest entitled to non-recognition tr eatment under Section
721(a). It followed from the FPAA's tr eatment of the transfer
as a taxable sale that GAF Corporation's consolidated
return had understated its gross income by 25%. In
response to the FPAA, GAF filed a petition in the Tax Court
for a readjustment of partnership items.
GAF brought that petition pursuant to the unified
partnership audit and litigation procedur es of the Tax
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). As
Boyd v. Comm'r, 101 T.C. 365, 368-69 (1993) (internal
citations and quotation marks omitted) explains:
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The TEFRA partnership provisions were enacted in
1982 in response to the mushrooming administrative
problems experienced by the Internal Revenue Service
in auditing returns of partnerships, particularly tax
shelter partnerships with numerous partners. Under
these procedures, the tax treatment of partnership
items is determined at the partnership level in a
unified partnership proceeding rather than in separate
proceedings for each partner. As we stated in an earlier
case interpreting the TEFRA partnership pr ovisions:
By enacting the partnership audit and litigation
procedures, Congress provided a method for
uniformly adjusting items of partnership income,
loss, deduction, or credit that affect each partner.
Congress decided that no longer would a partner's
tax liability be determined uniquely but the tax
treatment of any partnership item would be
determined at the partnership level.
Although it is the tax matters partner that most often files
a petition for readjustment under TEFRA, if it does not do
so within 90 days any notice partner may file a petition
within 60 days thereafter (Section 6226(b)(1)).
Before the Tax Court the Commissioner ar gued on
several alternative grounds that the transfer did not qualify
for non-recognition treatment:
1. There was no partnership.
2. If instead there were a partnership, the transfer
was not to it but to a related party.
3. If there were indeed a partnership and the transfer
were in fact made to it, the transfer was not in
exchange for an interest in the partnership but was
rather a sale to the partnership.
In those terms GAF would have had to sur mount all three
hurdles to prevail.
On September 9, 1998 GAF moved for summary
judgment on the separate ground that the assessment is
time-barred. Its motion asserted:
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1. Section 6501(a)'s general limitations period is
inapplicable to partnership items because Section
6629(a) sets forth a separate and exclusive thr ee-year
statute of limitations on assessments attributable to
partnership items. Because more than thr ee years had
elapsed since GAF Corporation had filed its
consolidated return, the assessment was untimely.
2. Even if Section 6501(a) were held to pr ovide the
applicable limitations period, the issuance of the FPAA
did not suspend the running of that period, and it too
has expired. Again that would render the assessment
untimely.
3. Section 6501(e), which provides a six-year statute
of limitations where items in excess of 25% of a
taxpayer's gross income are omitted fr om the face of a
return, is inapplicable because the items at issue were
disclosed on the consolidated return.
In response the Commissioner urged that the general
limitation on assessments set out in Section 6501(a)
governs all taxes assessed under the Code. As for Section
6229(a), the Commissioner contended that it does not
provide a separate limitations period for partnership items
but rather describes an "add on" period that in some
circumstances extends the period prescribed by Section
6501. As the Commissioner would have it, the nor mal
three-year period set forth in Section 6501(a) had been
extended to six years under Section 6501(e) because,
contrary to GAF 's assertion, the disputed income was not
disclosed on the return. And the Commissioner further
argued that under Section 6229(d) the issuance of the
FPAA had suspended the limitations period pr escribed in
Section 6501--in this case the six-year period in Section
6501(e) to which Section 6501(a) points.
In a sharply divided opinion, a majority of the judges on
the Tax Court (sitting en banc) found the Commissioner's
reading of the Code provisions mor e persuasive and denied
GAF 's motion for summary judgment. In particular , the
majority concluded that the limitations period set forth in
Section 6501(a) applies to partnership items. As for the
Section 6229(a) reference to a thr ee-year period, the Court
5
read that provision as setting a minimum limitations period
that "may expire before or after the section 6501 maximum
period."
Next the Tax Court addressed GAF 's ar gument that even
if the six-year limitation specified in Section 6501(e)
applied, that period had expired as well. In that respect
GAF argued that by its terms Section 6229(d) suspends
only the running of the three year period in Section
6229(a), not the limitations period contained in Section
6501(a). On that premise, even if the T ax Court were to find
that Section 6501(a) dictated the application of the six-year
limitations period in Section 6501(e), that six-year period
had already expired about September 15, 1997 (six years
after the date GAF Corporation had filed its r eturn).
Again agreeing with the Commissioner's dif ferent reading
of the Code, the Tax Court determined that Section 6229(d)
does suspend the running of the limitations period
prescribed by Section 6501 once an FPAA is issued. If
Section 6501(e) were applicable, then, that would render
timely the Commissioner's issuance of the FP AA within six
years of the date of the partnership retur n.
With the Tax Court having made those determinations,
the only issue remaining for decision ther e was whether
Section 6501(e) in fact applies to this case. In that regard
the Tax Court found genuine issues of fact as to whether or
not the return had adequately disclosed the existence of the
omitted income, precluding summary judgment.
On September 20, 2000 the Tax Court granted GAF 's
Motion for Certification of Question for Interlocutory Appeal
pursuant to Section 7482(a). As stated earlier , a panel of
this Court granted GAF 's petition for per mission to appeal
on October 12.
Standing
Before we turn directly to the substantive discussion that
controls the disposition of this appeal, we must travel a
byway that might have diverted us from r eaching that
substantive issue. That potential diversion stems fr om a
post-appeal development that has raised a possible issue of
standing on the part of the taxpayer.
6
By letter dated January 11, 2001 counsel for GAF
informed us that G-I Holdings, Inc., the successor to GAF
Corporation through internal merger , has filed a voluntary
petition in the Bankruptcy Court for the District of New
Jersey seeking relief under chapter 11 of the Bankruptcy
Code. That led to the filing of two motions befor e oral
argument.
First both sides asked that the case be taken of f of the
Court's calendar because under 11 U.S.C. S362
("Bankruptcy S362") G-I Holding's filing had assertedly
operated to stay this appeal. Then the parties thought
better of that somewhat Pavlovian (and entir ely erroneous)
notion: the Commissioner's later-filed Motion To Dismiss
GAF Chemicals Corp. as a Party and GAF 's Opposition to
that motion (as to which more below) reversed course on
that issue.
We determined before oral ar gument that Bankruptcy
S362 does not in fact stay the appeal, for that provision
stays only actions or proceedings "against the debtor"
(emphasis added). Here the proceeding before the Tax Court
was brought by the debtor (or, more accurately, by its
corporate predecessor). As is true of all other types of
litigation brought by debtors that are under the protection
of the bankruptcy courts (see most recently Aiello v.
Providan Fin. Corp., ___ F.3d ___, 2001 WL 101533, at *2
(7th Cir. Feb. 6), citing other cases, including our own
Maritime Elec. Co. v. United Jersey Bank, 959 F .2d 1194,
1204-05 (3d Cir. 1991), two of the thr ee cases that have
addressed the same question in the context of appeals by
a debtor from Tax Court proceedings initiated by that
debtor (Roberts v. Comm'r, 175 F.3d 889, 893-96 (11th Cir.
1999) and Freeman v. Comm'r, 799 F .2d 1091 (5th Cir.
1986)(per curiam)) have held that Bankruptcy S362 does
not stay such appeals; contra, Delpit v. Comm'r , 18 F.3d
768, 771-73 (9th Cir. 1994). We like the Eleventh Circuit
find the Ninth Circuit's position to be unpersuasive and out
of sync with this Circuit's general jurisprudence addressing
Bankruptcy S362, and we too adopt the no-stay view.
With that threshold issue out of the way, the
Commissioner then also moved to dismiss GAF as a party
to the proceedings and to dismiss the appeal unless
7
another party with standing to litigate the same issue were
to intervene within a reasonable time. Under Section
6226(d)(1)(A) a partner is no longer treated as a party to a
TEFRA proceeding when its partnership items ar e converted
to non-partnership items by reason of certain events
described in Section 6231 (see Section 6231(c)(2) and
6231(c)(1)(E)). On that score Treas. Reg. S301.6231(c)-7T
(found in 26 C.F.R.) provides that the effective and efficient
enforcement of the tax laws requir es that when a partner is
named as a debtor in a bankruptcy proceeding, its
partnership items must be treated as non-partnership
items (see Computer Programs Lambda, Ltd. v. Comm'r, 89
T.C. 198, 203 (1987), upholding and applying that
regulation).
Accordingly the Commissioner's motion ur ged that even if
it were ultimately to be determined that the transfer of
assets had been in exchange for a partnership inter est,
GAF 's partnership items were converted to non-partnership
items for tax purposes when G-I Holdings filed its
bankruptcy petition. That being so, the Commissioner's
position was that GAF no longer has an inter est in the
outcome and can no longer be a party to the action under
Section 6226(d)(1)(A).
But GAF has responded in part that in any event ACI,
Inc. ("ACI," formerly known as Alkaril) should be viewed as
a proper party to the case, so that it could take the place
of GAF if the latter were knocked out of this appeal. It will
be recalled that Alkaril, like GAF, had participated in the
transaction challenged by the Commissioner's FP AA--the
transfer of assets to Rhone-Poulenc, purportedly in
exchange for an interest in the partnership. G-I Holdings'
officer Peter Ganz has provided an affidavit stating that
although ACI is a direct subsidiary of G-I Holdings, it did
not petition for bankruptcy and is not a party to G-I
Holdings' bankruptcy proceeding. So, GAF says, ACI has
tax consequences flowing from the adjustments to
partnership items contained in the FPAA and still has
standing to litigate the case. After investigating the
statements made in the Ganz affidavit, and afterfinding no
information to contradict them or any other evidence calling
into question ACI's status as a proper party to the case,
8
Commissioner has agreed that the appeal should go
forward.
Apart from that, GAF also argues that it too remains a
proper party because of the potential applicability of
Section 6229(f)(1):
If before the expiration of the period otherwise provided
in this section for assessing any tax imposed by
subtitle A with respect to the partnership items of a
partner for the partnership taxable year, such items
become nonpartnership items by reason of 1 or more of
the events described in subsection (b) of section 6231,
the period for assessing any tax imposed by subtitle A
which is attributable to such items (or any item
affected by such items) shall not expir e before the date
which is 1 year after the date on which the items
become nonpartnership items.
As GAF points out, that provision--extending the
limitations period beyond the time when a partnership item
becomes a nonpartnership item (as by a partner's
bankruptcy filing)--kicks in only if the conversion takes
place before the Section 6229 limitations clock runs out.
That then poses the same limitations questions that we
have been asked to resolve in this interlocutory appeal to
begin with.
But as the next section of this opinion demonstrates, any
current resolution of those questions would run afoul of the
constitutional requirement of justiciability. Hence GAF 's
continued presence or nonpresence in this litigation poses
a problem of circularity: To answer that question, we would
first have to decide a preliminary question that Article III
forecloses from resolution at this time.
Fortunately there is no need to cut that Gor dian knot.
Treating the parties' most recentfilings as a stipulation
that ACI may be treated as a petitioner and appellant
(substituting for GAF in those capacities if need be), we
hold that ACI has standing to proceed with the appeal. And
all of the events already described in the Background
section also apply to ACI, obviating any need to r esolve the
issue of GAF 's continued involvement. Nonetheless this
opinion will continue to refer to the appellant as GAF
9
simply for ease of reference, because that was the
nomenclature used in the Tax Court below and throughout
the parties' briefs.
Jurisdiction Over This Appeal
We turn then to a look at the merits. Two issues have
been posed to us on this interlocutory appeal:
1. whether the general limitations period set forth in
Section 6501 applies, or whether instead Section
6229(a) specifies a separate and exclusive limitations
period for assessments attributable to partnership
items; and
2. whether Section 6229(d) suspended the running of
the limitations period set out in Section 6501(a) when
the Commissioner issued the FPAA to Rhone-Poulenc.
But it became apparent to us on reading the parties' briefs,
and it has been reconfirmed on oral ar gument, that any
current resolution of those issues would be premature--
indeed, neither question may ever have to be answer ed in
this litigation. That renders those issues nonjusticiable at
this time.
In that regard, such cases as T ravelers Ins. Co. v.
Obusek, 72 F.3d 1148, 1153 (3d Cir . 1995), quoting
Armstrong World Indus., Inc. v. Adams, 961 F.2d 405, 410
(3d Cir. 1992), set forth the well-settled principle:
Of course, Article III, Section II of the Constitution of
the United States "limits federal jurisdiction to actual
``cases' and ``controversies.' " This constitutional
provision "stands as a direct pr ohibition on the
issuance of advisory opinions."
Travelers, id. at 1154 (again quoting Armstrong, 961 F.2d at
411) goes on to state the relevant test for determining
whether an action satisfies Article III's case or controversy
requirement in these terms:
We have previously noted that:
[t]o satisfy Article III's case or contr oversy requirement,
an action must present (1) a legal contr oversy that is
10
real and not hypothetical, (2) a legal contr oversy that
affects an individual in a concrete manner so as to
provide the factual predicate for r easoned adjudication,
and (3) a legal controversy so as to sharpen the issues
for judicial resolution.
That this case involves not a final decision but an
interlocutory appeal does not itself pose a jurisdictional
problem: There are sometimes issues whose resolution will
materially advance the ultimate disposition of litigation and
that, for appropriate jurisprudential r easons, need not
await the entry of a final judgment (see, e.g., Abdullah v.
American Airlines, Inc., 181 F.3d 363, 366 (3rd Cir. 1999)).
But in this instance the issues presented on appeal are
purely contingent: They will be reached only if the Tax
Court finds (1) that GAF has an interest in the partnership
and (2) that the return did not disclose the omitted income.
Neither of those determinations has yet been made, as the
Tax Court itself has explicitly acknowledged.
Because the necessity for any decision of the issues
sought to be tendered to us rests on those yet unresolved
contingencies, the issues posed fail to present a justiciable
"case or controversy." More than a half century ago the
Supreme Court reconfirmed that teaching in Alabama State
Federation of Labor v. McAdory, 325 U.S. 450, 461 (1945)
(internal citations omitted):
This Court is without power to give advisory opinions.
It has long been its considered practice not to decide
abstract, hypothetical or contingent questions.
And that already firmly established concept has not been
eroded by time.
At this juncture the Tax Court has not chosen to decide
whether the transaction at issue was one under which GAF
acquired an interest in the putative partnership and thus
whether the Code's partnership provisions even apply to
GAF. Its opinion was forthright on that scor e, stating in its
n.5:
For convenience, we use the terms "partnership" and
"partner" without deciding whether a partnership
existed or petitioner was a partner in that partnership,
conclusions that respondent disputes.
11
If the Tax Court were ultimately to hold that the
transaction was indeed a sale as the Commissioner
contends, GAF never became a partner--hence the
assessment of tax on the proceeds of the sale would not be
one related to a partnership item, rendering Section 6229
(and the Code's other partnership provisions) inapplicable.
In that instance the knotty questions submitted to us on
the current appeal would not have to be decided at all.
In response to our December 18, 2000 inquiry into the
existence of jurisdiction over this interlocutory appeal, both
parties suggest that because Rhone-Poulenc filed a
partnership return for 1990, Section 6233(a) causes the
unified partnership provisions of the Code to apply
regardless of the Tax Court's ultimate ruling as to whether
the transaction was indeed a sale or was a contribution in
exchange for an interest in the partnership. Here is Section
6233(a):
If a partnership return is filed by an entity for a
taxable year but it is determined that the entity is not
a partnership for such year, then, to the extent
provided in regulations, the provisions of this
subchapter are hereby extended in r espect of such year
to such entity and its items and to persons holding an
interest in such entity.
To be sure, with Rhone-Poulenc's havingfiled a
partnership return for 1990, Section 6233(a) operates to
render the Code's unified partnership pr ovisions applicable
to it even if the partnership were to be determined a sham.
But the appellant here is GAF (or now ACI), and the parties'
contention glosses over (more accurately, ignor es entirely)
the relevant fact that the partnership pr ovisions apply to
the taxpayer appellant only if it is a "person[ ] holding an
interest in such entity." If the transaction was a sale to
Rhone-Poulenc--the highly disputed issue left open by the
Tax Court--neither GAF nor ACI has an inter est in Rhone-
Poulenc (whether or not it is truly a partnership), and the
extension of the Code's partnership provisions provided for
in Section 6233 simply does not reach the taxpayer.
There is another contingency that confir ms the
prematurity of the present appeal: the absence of any Tax
12
Court determination as to whether the disputed items of
income were adequately disclosed on the GAF Corporation's
consolidated return. As the Tax Court found in denying
GAF 's motion for summary judgment, there ar e genuine
issues of fact not only as to whether the disputed income
was adequately disclosed on the return but even as to what
documents make up the return. If the disputed income was
not in fact omitted, the six-year statute of limitations in
Section 6501(e) cannot apply in any event. And if Section
6501(e) does not apply, the time for the Commissioner to
make an assessment has run regardless of whose reading
of Sections 6501(a) and 6229(a) may be correct. Again the
resolution of that contested factual dispute may well
obviate any need to reach the difficult statutory
interpretation questions submitted to us. Unless and until
the Tax Court finds that the income was impr operly
omitted, there is no ripe "case or contr oversy" here.
Conclusion
In sum, we conclude that the questions presented are
based on hypothetical scenarios calling for an advisory
opinion at odds with Article III's case or contr oversy
requirement. We therefor e DISMISS for lack of appellate
jurisdiction the appeal of the Tax Court's or der denying
GAF 's motion for summary judgment, and we REMAND the
case for further proceedings on the merits.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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