John Irvine v. United States , 729 F.3d 455 ( 2013 )

Case: 12-20523 Document: 00512364111 Page: 1 Date Filed: 09/05/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 5, 2013
No. 12-20523 Lyle W. Cayce
Clerk
JOHN A. IRVINE; LYNDA IRVINE; KENNETH L. KRAEMER; BILLY J.
WHITE; INA J. WHITE,
Plaintiffs - Appellants
v.
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 Kraemer1
(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
1
Kraemer’s last name is spelled differently in different documents in this litigation.
It is spelled as “Kraemer” in the case caption and in the original complaint, and as “Kramer”
in Appellants’ briefing. In this opinion, we adopt the spelling in the case caption.
Case: 12-20523 Document: 00512364111 Page: 2 Date Filed: 09/05/2013
No. 12-20523
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 1985.2 Kenneth Kraemer invested as
2
Although Lynda Irvine and Ina White were not partners in the AMCOR partnerships,
each of them filed a joint tax return with their husbands for each of the relevant tax years,
thus becoming jointly and severally liable for the tax reportable on those returns. See 26
U.S.C. § 6013(d)(3).
2
Case: 12-20523 Document: 00512364111 Page: 3 Date Filed: 09/05/2013
No. 12-20523
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”)3 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%
3
“A 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
Case: 12-20523 Document: 00512364111 Page: 4 Date Filed: 09/05/2013
No. 12-20523
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).4 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’
4
Section 6621(c) was repealed in 1989 but applies to the tax years in question. See
Weiner, 389 F.3d at 159.
4
Case: 12-20523 Document: 00512364111 Page: 5 Date Filed: 09/05/2013
No. 12-20523
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 includes a third category of “affected items.” An “affected item” is
“any item to the extent such item is affected by a partnership item.” 26 U.S.C.
§ 6231(a)(5); Duffie, 600 F.3d at 366. “Affected items can have both
5
Case: 12-20523 Document: 00512364111 Page: 6 Date Filed: 09/05/2013
No. 12-20523
partnership-item and nonpartnership-item components.” Duffie, 600 F.3d at
366.
If the IRS adjusts any partnership items on a partnership’s informational
income tax return, it must notify the individual partners by issuing an FPAA.
26 U.S.C. § 6223; see Duffie, 600 F.3d at 366. The partners have the right to
challenge the FPAA in a partnership-level proceeding in the Tax Court, district
court, or the Court of Federal Claims, according to specified procedures. 26
U.S.C § 6226(a), (b); see Duffie, 600 F.3d at 366. In a partnership-level
proceeding, the court has jurisdiction to determine all partnership items for the
tax year to which the FPAA relates, including the allocation of those items
among the partners and the applicability of any penalty. 26 U.S.C. § 6226(f); see
Duffie, 600 F.3d at 367. If a partner individually settles his or her partnership
tax liability with the IRS, “the partner will no longer be able to participate in
the partnership level litigation, and will be bound instead by the terms of the
settlement agreement.” Weiner, 389 F.3d at 155.
District courts generally have subject matter jurisdiction over an
individual partner’s refund claim. 28 U.S.C. §§ 1340, 1346(a)(1); Weiner, 389
F.3d at 155. TEFRA, however, deprives refund courts of jurisdiction over claims
“brought for a refund attributable to partnership items,” with limited
exceptions. 26 U.S.C. § 7422(h). However, “a court does have jurisdiction in a
partner-level refund action over partnership items that were converted to
nonpartnership items through a settlement with the IRS.” Duffie, 600 F.3d at367 (citing 26 U.S.C. § 6231(b)(1)(C)).
Against this statutory backdrop, we turn to the specific claims at issue.
6
Case: 12-20523 Document: 00512364111 Page: 7 Date Filed: 09/05/2013
No. 12-20523
III. Discussion
This court reviews a district court’s grant of summary judgment de novo
and considers the same criteria that the district court relied upon when
deciding the motion. Weiner, 389 F.3d at 155-56 (citing Mongrue v. Monsanto
Co., 249 F.3d 422, 428 (5th Cir. 2001)). Summary judgment is appropriate
when “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). This court also
reviews a district court’s determination of subject matter jurisdiction de novo.
Calhoun County, Tex. v. United States, 132 F.3d 1100, 1103 (5th Cir. 1998).
The parties do not assert that there are any disputed material facts on appeal.
A. The Statute of Limitations Claim
The Whites and the Irvines first assert that the taxes and interest must
be refunded because they were assessed by the IRS after the 26 U.S.C. §6501(a)
statute of limitations had passed. Section 6501(a) is “the three-year statute of
limitations which is generally applicable to the Commissioner’s assessment of
tax.” Curr-Spec Partners, L.P. v. Comm’r of Internal Revenue, 579 F.3d 391, 395
(5th Cir. 2009). Taxpayers argue that the IRS had no authority to assess
additional tax and interest against them in 1999 and 2000 because the §
6501(a) statute of limitations had run for the relevant tax years. They contend
that 26 U.S.C. § 7422(h) does not bar jurisdiction because the § 6501(a) statute
of limitations is a nonpartnership item based on the specific facts of each
partner’s situation. The district court granted summary judgment to the
government because it concluded that the statute of limitations involved the
determination of a partnership item and it thus lacked jurisdiction under §
7422(h).
The dispositive question is whether the Whites’ and the Irvines’ claim
that the additional tax assessments were time-barred is a claim for a refund
7
Case: 12-20523 Document: 00512364111 Page: 8 Date Filed: 09/05/2013
No. 12-20523
attributable to partnership or nonpartnership items. “If the refund is
attributable to partnership items, section 7422(h) applies and deprives the court
of jurisdiction. If, on the other hand, the refund is attributable to
nonpartnership items, then section 7422(h) is irrelevant, and the general grant
of jurisdiction is effective.” Alexander v. United States, 44 F.3d 328, 331 (5th Cir.
1995). This claim also involves the significant interplay between § 6501(a) and
§ 6229(a), a separate provision that can extend the § 6501(a) period for
partnership items. See Curr-Spec Partners, 579 F.3d at 396. “For partnership
items, the otherwise applicable limitations period of IRC § 6501(a) shall not
expire before the date which is 3 years after the later of the date on which the
partnership return was filed or the date on which it was due.” Curr-Spec
Partners, 579 F.3d at 396 (internal quotations and alterations omitted); 26
U.S.C. § 6229(a). Section 6229 can extend the tax assessment period in a variety
of ways, such as when the TMP enters into an agreement with the IRS to extend
the period, § 6229(b)(1)(B), fraudulent returns are filed, § 6229(c)(1) or the
partnership fails to file a return, § 6229(c)(3).
In Weiner, this court held that the § 6229 assessment period is a
partnership item that cannot be raised in partner-level litigation. 389 F.3d at
157-58; accord Keener v. United States, 551 F.3d 1358, 1363-64 (Fed. Cir. 2009).
The Weiner court explained that because the § 6229 limitations issue “affects the
partnership as a whole, it should not be litigated in an individual partner
proceeding, as such a result would contravene the purposes of TEFRA.” Weiner,
389 F.3d at 157. Taxpayers argue that they have not raised a § 6229 argument,
but instead rely only on § 6501. However, all of Taxpayers’ attempts to
distinguish Weiner ignore the fact that where a basis for a § 6229 extension is
asserted, any limitations determination with regard to § 6501(a) must also
8
Case: 12-20523 Document: 00512364111 Page: 9 Date Filed: 09/05/2013
No. 12-20523
involve the resolution of § 6229, a partnership item. Where both are at issue,
the § 6501 period cannot be separated from the § 6229 period.
The Federal Circuit has issued a decision resolving this exact issue
involving another AMCOR partnership with reasoning that we find logical and
persuasive. See Prati v. United States, 603 F.3d 1301, 1307 (Fed. Cir. 2010). As
the Prati court explained, “[s]ections 6501 and 6229 operate in tandem to
provide a single limitations period. When an assessment of tax involves a
partnership item or an affected item, section 6229 can extend the time period
that the IRS otherwise has available under section 6501 to make that
assessment.” Id. (citing Andantech L.L.C. v. Comm’r, 331 F.3d 972, 976-77
(D.C. Cir. 2003); Grapevine Imports, Ltd. v. United States, 71 Fed.Cl. 324, 328-
39 (2006)). The Federal Circuit rejected the argument that a taxpayer could
avoid the jurisdictional bar of § 7422(h) by raising a statute of limitations
argument under § 6501 and failing to mention § 6229. Id. “Sections 6501 and
6229 do not operate independently to allow a taxpayer to assert one in isolation
and thereby render an otherwise timely assessment untimely.” Id. An
unpublished decision of this court has already expressed approval of this
reasoning. See Matthews v. United States, Civ. No. 00-4131, 2010 WL 2305750(S.D. Tex. June 8, 2010), aff’d sub nom. Scott v. United States, 437 Fed. App’x
281 (5th Cir. 2011) (“essentially” approving the district court’s opinion). We
agree with the Federal Circuit that where the government asserts § 6229 as a
basis to extend the § 6501(a) statute of limitations, the claim for refund is
“attributable to” a partnership item and § 7422(h) bars consideration of the
limitations claim. Prati, 603 F.3d at 1307; Matthews, 2010 WL 2305750, at *4.
Partners were required to raise the statute of limitations issue in the
partnership-level proceeding prior to settlement and are barred from raising it
in the refund action. See Prati, 603 F.3d at 1307 & n.4.
9
Case: 12-20523 Document: 00512364111 Page: 10 Date Filed: 09/05/2013
No. 12-20523
Taxpayers argue that the IRS did not actually “assert” any basis for §
6229 extensions of the § 6501 limitations period. This is incorrect. The
government has asserted that § 6229(b)(1)(B) (extensions by agreement of the
TMP), and § 6229(c)(3) (indefinite tolling if no valid partnership return is filed)
provide a basis for extending the assessment periods for each of the relevant
partnerships. Further, in the partnership-level proceedings, the Tax Court
found that § 6229 had extended the assessment periods. See Agri-Cal Venture
Associates, 80 T.C.M. (CCH) 295, 2000 WL 1211147, at *16, *20, *22.
Taxpayers are correct that they are not bound by the Tax Court Agri-Cal
decision because of their individual settlements. Thus, they argue that until
the government actually proves these bases for an extension in the refund
proceeding, jurisdiction is not barred. However, 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. See Weiner, 389 F.3d at 158. Where a § 6229 basis for an extension is
asserted, questions about whether the partnerships’ returns were fraudulent,
contained substantial omissions, were never filed, or were subject to any
extension agreements are matters to be determined at the partnership level
under TEFRA’s statutory scheme.
Taxpayers also argue that jurisdiction is not barred because the
limitations issue was converted to a nonpartnership item in their settlement
agreements. See Alexander, 44 F.3d at 331. Taxpayers’ argument here is
foreclosed by Weiner. In Weiner, this court held that the assessment period was
not converted to a nonpartnership item by the taxpayers’ settlement with the
IRS where it was not specifically mentioned in the settlement. Weiner, 389 F.3d
at 156 n.2. As in Weiner, the settlement agreements here do not mention § 6229
and thus the item was not converted by the settlement agreements. Id.
10
Case: 12-20523 Document: 00512364111 Page: 11 Date Filed: 09/05/2013
No. 12-20523
In sum, because the § 6501 limitations period applicable to an individual
partner cannot be determined without reference to the asserted bases for
extensions under § 6229, which is a partnership item, the district court lacked
jurisdiction over the statute of limitations claim under § 7422(h). We affirm the
grant of summary judgment to the government on this claim.
B. The Penalty Interest Claims
Taxpayers next challenge the penalty interest assessed against them
under 26 U.S.C. § 6621(c). White and Irvine bring this claim in the alternative,
while this is Kraemer’s only claim. 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); see Duffie, 600 F.3d at
372-73. “The IRS may not assess interest under Section 6621(c) unless the
substantial underpayment is attributable to one of the tax-motivated
transactions defined by statute.” Duffie, 600 F.3d at 373. “Tax-motivated
transactions include ‘any sham or fraudulent transaction,’ 26 U.S.C. §
6621(c)(3)(A)(v), and any use of an accounting method that may result in a
substantial distortion of income, 26 U.S.C. § 6621(c)(3)(A)(iv).” Id. Penalty
interest is an affected item, made up of both partnership and non-partnership
components. See Duffie, 600 F.3d at 378. The partnership component is
whether the partnership’s transactions were tax motivated. See id. The two
non-partnership components of § 6621(c) interest are whether the individual
taxpayer’s underpayment was (1) “substantial,” defined as being over $1,000,
and (2) “attributable to” a tax-motivated transaction. See id. Under this rubric,
a claim for refund based on a partnership component of § 6621(c) interest is
jurisdictionally barred under § 7422(h), but a claim contesting one of the non-
partnership items can be adjudicated by a refund court. Id.; see Weiner, 389 F.3d
11Case: 12-20523 Document: 00512364111 Page: 12 Date Filed: 09/05/2013
No. 12-20523
at 159-60 (determining whether the underpayment was “attributable to” a tax-
motivated transaction).
Taxpayers assert that § 6621(c) penalty interest cannot be imposed as a
matter of law because there was no prior binding determination that any of the
partnerships’ transactions were “tax motivated transactions.” The government
again argues that the district court lacked jurisdiction to consider this issue
because whether a partnership engaged in tax-motivated transactions is a
partnership item, and that even if the court had jurisdiction, the claims for
refund are computational adjustments governed by a shortened statute of
limitations and were not timely filed. After initially agreeing with the
Taxpayers that the court had jurisdiction and that circuit precedent required
refund of Taxpayers’ § 6621(c) interest, the district court reconsidered and
granted summary judgment to the government on the grounds that the claims
for refund were untimely.
The government is correct that whether a partnership’s transaction is tax-
motivated is a partnership item which a refund court does not have jurisdiction
to determine. Duffie, 600 F.3d at 378-79. However, the question Taxpayers
raise is different; they argue that no tax-motivated determination was actually
made in an applicable partnership proceeding or in their settlements, and thus
that there has been no tax-motivated transaction determination at all. The
government relies on Duffie to essentially argue that the district court lacked
jurisdiction even to determine whether a tax-motivated determination was
made. Duffie does not support this conclusion. The Duffie court looked to the
partnership-level merits decision in the Tax Court, which found that the
partnership’s transactions were shams and lacked economic substance, and
concluded that the determination was a sufficient finding that the transactions
were tax-motivated and was binding on the unsettled partners seeking refunds.
12
Case: 12-20523 Document: 00512364111 Page: 13 Date Filed: 09/05/2013
No. 12-20523
600 F.3d at 378-80, 383. The court then explained that the Duffies’ claim was
attributable to the Tax Court’s determination that the transactions were shams,
and, “Because the nature of a partnership’s activities—whether they are sham
transactions—is the partnership-item component of an affected item, the
Duffies’ refund claim is based on the determination of a partnership item.” Id.
at 383. The court’s holding that it lacked jurisdiction over the refund claims
clearly hinged on its finding that a sufficient tax-motivated transaction
determination was already made at the partnership level. See id.This situation is not like the one in Duffie. A refund court need not litigate
the merits of any partnership item to decide whether the required tax-motivated
determination has been made. See Duffie, 600 F.3d at 383; Weiner, 389 F.3d at
162-63; see also Bush v. United States, 717 F.3d 920, 928-29 (Fed. Cir. 2013)
(explaining that whether a tax-motivated transaction was made in a previous
partnership-level proceeding is a jurisdictional fact). The district court does not
have jurisdiction to revisit whether a partnership’s transactions were actually
tax-motivated, nor could the district court make that determination in the first
instance. However, the district court does have jurisdiction to determine
whether such a finding has previously been made, either in the partnership-level
proceedings or in a settlement. We thus find that § 7422(h) does not bar
jurisdiction over Taxpayers’ claims that there was no tax-motivated
determination supporting § 6621(c) penalty interest.
Next, the government argues that even if the district court had
jurisdiction, Taxpayers’ refund claims were not timely filed. Failure to timely
file a refund claim deprives the court of subject matter jurisdiction for lack of
a valid waiver of sovereign immunity. Duffie, 600 F.3d at 384. The regular
deadline for filing a refund claim is two years from the date of payment or three
years from the date of filing of a tax return, whichever is later. 26 U.S.C. §
6511(a); see Duffie, 600 F.3d at 385. Section 6230, however, supplants the
13
Case: 12-20523 Document: 00512364111 Page: 14 Date Filed: 09/05/2013
No. 12-20523
normal refund procedures and provides that for “[c]laims arising out of
erroneous computations,” taxpayers have six months from the date of
notification to bring a refund claim, rather than the normal two years. See 26
U.S.C. § 6230(a), (c)(2)(A).
The question of whether the penalty interest refund claims were covered
by the shortened deadlines in § 6230 is dependent on the question of whether the
challenged adjustments including penalty interest are computational or
substantive. See Duffie, 600 F.3d at 385. A computational adjustment to an
individual partner’s tax liability can be made at the conclusion of the
partnership level proceeding “without any factual determination at the partner
level.” Duffie, 600 F.3d at 366; see 26 U.S.C. § 6231(a)(6). A substantive affected
item, however, requires “fact-finding particular to the individual partner” before
any adjustment to tax liability can be made. Duffie, 600 F.3d at 366.
Computational and substantive affected items each require different assessment
procedures. Id. at 385. For computational affected items, the IRS need not issue
a statutory notice of deficiency, and § 6230 procedures and shortened time
requirements apply. Id. By contrast, if the adjustment is a substantive affected
item, the IRS must follow the normal deficiency procedures, including sending
a notice of deficiency, and the normal § 6511(a) statute of limitations applies. Id.5
Where, as here, Taxpayers’ refund claim is dependent on whether there
was a sufficient tax-motivated transaction determination, and thus whether
their underpayment was “attributable to” a tax-motivated transaction, see
Weiner, 389 F.3d at 159-60, we find that § 6621(c) interest is a substantive
affected item. This holding is supported by relevant case law. See Duffie, 600
F.3d at 386 (analyzing whether penalty interest was computational in that case);
5
The IRS assessed additional taxes and penalties against Taxpayers by notice of
computational adjustment rather than by sending a notice of deficiency. However, we reject
any argument that the IRS’s chosen method of assessment is determinative.
14
Case: 12-20523 Document: 00512364111 Page: 15 Date Filed: 09/05/2013
No. 12-20523
see also Weiner, 389 F.3d at 159-62 (analyzing whether an underpayment is
“attributable to” disallowed deductions); McGann v. United States, 76 Fed. Cl.
745, 751, 754-59 (Fed. Cl. 2007). In Duffie, though ultimately determining that
the adjustments at issue in that case were computational, this court first
determined whether the Tax Court’s tax-motivated transaction determination
was sufficient as a matter of law. Duffie, 600 F.3d at 378-80, 383. The Duffie
court found that the tax-motivated transaction determination did not require a
finding that an individual partner lacked a profit motive when engaging in the
relevant transaction, and thus rejected the taxpayers’ argument that the tax-
motivated transaction determination was insufficient. See Duffie, 600 F.3d at
378. After making that determination, the “only issue” was whether the
underpayment attributable to tax-motivated transactions was “substantial,” i.e.
whether it was over $1,000; “clearly a computational rather than a substantive
issue.” 600 F.3d at 386. Here, however, Taxpayers’ claims for refund assert that
their underpayment was not attributable to any transaction found to be tax-
motivated. This is a non-partnership component of § 6621(c) interest. See
Duffie, 600 F.3d at 378. Further, answering this question requires analysis of
substantive issues, including review and application of each individual partner’s
settlement. See Weiner, 389 F.3d at 162-63. These claims require more than
mere computations reflecting the treatment of partnership items. They are thus
substantive and not computational, and Taxpayers claims are not governed by
§ 6230. We hold that Taxpayers’ claims for refund of penalty interest were
timely filed.6
Both parties agree that if the district court had jurisdiction over
Taxpayers’ penalty interest claims and those claims were timely, Weiner dictates
6
Because we find that the claims were timely filed, we need not reach Taxpayers’
additional argument that if § 6230 applies, the notices of computational adjustment sent by
the IRS were not adequate to start the running of the statute of limitations.
15
Case: 12-20523 Document: 00512364111 Page: 16 Date Filed: 09/05/2013
No. 12-20523
that Taxpayers win on the merits of those claims. The FPAAs in Weiner listed
several independent bases for disallowing the deductions, only some of which
were tax-motivated transaction findings, the taxpayers settled and thus
removed the need for a binding merits determination on any of the grounds for
disallowance, and the settlements included no specific findings regarding the
tax-motivated transaction issue. See Weiner, 389 F.3d at 162-63. The Weiner
court found that in such a situation, “[t]here is no way, given the multiple
reasons provided for the disallowance in the FPAAs, to determine whether the
underpayments are ‘attributable to’ a tax motivated transaction.” Id. The
situation is identical here. Weiner thus dictates that the assessment of § 6621(c)
penalty interest against Taxpayers was erroneous as a matter of law. Although
other circuits have taken a different approach, see e.g., Keener, 551 F.3d at 1367,
Weiner is controlling in this circuit. We therefore reverse the grant of summary
judgment to the government and render judgment in favor of Taxpayers on this
issue.
IV. Conclusion
For the foregoing reasons, we AFFIRM the district court’s grant of
summary judgment to the government on Taxpayers’ statute of limitations
claims. We REVERSE the district court’s grant of summary judgment to the
government and RENDER judgment in favor of Taxpayers’ on their penalty
interest claims. We REMAND for any further necessary proceedings, such as
whether there is any remaining issue regarding the amount to be refunded to
Taxpayers.
16