Alfonso Varela v. United States ( 2013 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 5, 2013
No. 12-40483 Lyle W. Cayce
Clerk
KENNETH A. KERCHER; SUZANNE B. KERCHER,
Plaintiffs - Appellants
v.
UNITED STATES OF AMERICA,
Defendant - Appellee
Appeal from the United States District Court
for the Eastern District of Texas
USDC No. 4:07-CV-310
_______________________________________________________________________
Cons w/ 12-20359
ALFONSO VARELA; SANDRA SANTA MARIA VARELA,
Plaintiffs - Appellants
v.
UNITED STATES OF AMERICA,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:07-CV-343
No. 12-40483
Before SMITH, HAYNES, and GRAVES, Circuit Judges.
PER CURIAM:*
This appeal consolidates two cases from two district courts raising the
same issues relating to federal taxation of partnerships. Kenneth and Suzanne
Kercher and Alfonso and Sandra Santa Maria Varela (collectively “Taxpayers”)
seek refunds of taxes and interest paid as a result of Internal Revenue Service
(“IRS”) and Tax Court determinations that their partnerships’ reported losses
were not allowable deductions. These cases raise similar issues as Irvine v.
United States, No. 12-20523, heard by this panel on the same day and argued by
the same counsel. Our resolution of these consolidated cases depends heavily on
the opinion we simultaneously issue in Irvine. See Irvine v. United States, No.
12-20523, slip op. (5th Cir. September 5, 2013). As in Irvine, Taxpayers here
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 courts lacked jurisdiction over both the statute of
limitations claims and the penalty interest claims. The Kerchers separately
assert that their 1985 assessment was invalid as a mere estimate of liability; we
hold that this claim was not timely filed.
I. Factual and Procedural Background
The Kerchers and Varelas are two more of the many individuals with tax
cases relating to American Agri-Corp (“AMCOR”) partnerships in the 1980s.
Alfonso Varela invested as a limited partner in Agri-Venture II in 1984 and
1985, and in Coachella-85 in 1985. Kenneth Kercher invested as a limited
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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No. 12-40483
partner in Coachella-85 in 1985.1 In broad terms, these AMCOR agricultural
partnerships allowed partners to report significant losses on tax returns,
because “farming expenses typically exceeded any income realized from the
farming activities.” Duffie v. United States, 600 F.3d 362, 367 (5th Cir. 2010).
The IRS began an investigation into AMCOR partnerships in the late 1980s “to
determine whether they were impermissible tax shelters.” Id.In 1991, the IRS issued a Notice of Final Partnership Administrative
Adjustments (“FPAA”) to Agri-Venture II for its 1984 and 1985 returns and to
Coachella-85 for its 1985 return, proposing to disallow all of the partnerships’
reported farming expenses. Individual partners from both Agri-Venture II and
Coachella-85 filed partnership-level suits contesting the FPAAs in the Tax
Court. The complaining partners asserted, among other things, that the IRS
could not assess additional taxes because the time period for assessment had
expired. The tax matters partner for each partnership subsequently intervened
in the suits. In 1999, the Agri-Venture II and Coachella-85 parties agreed to be
bound by a test case, which was consolidated with others and decided as Agri-
Cal Venture Associates v. Commissioner, 80 T.C.M. (CCH) 295, 2000 WL
1211147 (T.C. 2000). The Tax Court found that the IRS’s adjustments to the
relevant partnerships were timely because 26 U.S.C. § 6229 allowed for
extensions of the assessment periods. Id. at *15, *16. After this decision, the
Agri-Venture II and Coachella-85 parties filed a Joint Status Report, stating
that they had reached grounds for settlement of the partnership items,
contingent on entry of stipulated decisions. The IRS subsequently moved to
have stipulated decisions entered. On July 19, 2001, the Tax Court entered the
decisions for both the Agri-Venture II and Coachella-85 partnership-level cases.
1
Although Suzanne Kercher and Sandra Santa Maria Varela 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).
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The decisions adjusted downward the amount of farming expenses that the
partnerships could claim. As a result of the Tax Court’s adjustments at the
partnership-level, the IRS assessed additional tax and interest against the
Kerchers and the Varelas. The IRS assessed $13,895 of unpaid tax and $74,914
in interest against the Varelas for 1984 and $26,016 of unpaid tax and
$121,558.88 in interest for 1985. The IRS assessed $41,683 in additional tax
and $195,538.36 in interest against the Kerchers for 1985. The interest included
penalty interest under 26 U.S.C § 6221(c), which provided for interest at 120%
the statutory rate on “substantial underpayments attributable to tax-motivated
transactions.” 26 U.S.C. § 6621(c) (1986).2 The Kerchers and the Varelas paid
the additional assessments in full and filed administrative refund claims with
the IRS. After their claims were denied, the Varelas filed a refund suit in the
Southern District of Texas and the Kerchers filed a refund suit in the Eastern
District of Texas.
As in Irvine, Taxpayers assert two claims in their respective refund
actions: (1) the IRS assessed the additional taxes and interest outside the
applicable 26 U.S.C. § 6501 statute of limitations (“the statute of limitations
claims”); and (2) the IRS erroneously assessed § 6621(c) penalty interest against
them (“the penalty interest claims”). The Kerchers separately assert that their
1985 assessment was invalid. Taxpayers and the government cross-moved for
summary judgment in the respective district courts on all claims. Both district
courts held that they lacked jurisdiction over the statute of limitations claims
under 26 U.S.C. § 7422(h). On the penalty interest claims, the district court in
the Kercher’s case declined to even inquire whether the Tax Court had made any
tax-motivated transaction determination, citing § 7422(h) as a jurisdictional bar.
The district court in the Varela’s case also held that it lacked jurisdiction under
2
Section 6621(c) was repealed in 1989 but applies to the tax years in question. See
Weiner v. United States, 389 F.3d 152, 159 (5th Cir. 2004).
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§ 7422(h) but based on different reasoning. It held that the Tax Court stipulated
decisions included findings that the partnerships’ transactions were tax-
motivated and § 7422(h) barred it from revisiting those determinations. The
district court in the Kercher’s case also granted summary judgment to the
government on the Kercher’s claim that the IRS erred in its calculation of 1985
tax owed because the claim was not timely filed. All Taxpayers timely appealed.
II. 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.
This case, like Irvine, 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). The relevant statutory background of TEFRA is laid out fully in
Part II of our Irvine opinion. See Irvine, slip op. at 5-6.
A. Statute of Limitations Claims
Taxpayers’ claims that the IRS assessed the additional taxes outside the
statute of limitations provided by 26 U.S.C § 6501(a) is identical to the statute
of limitations claim in Irvine. For the reasons given in Part III.A of our Irvine
opinion, we hold that, where both are asserted, the § 6501 limitations period
applicable to an individual partner cannot be determined without reference to
the asserted bases for extensions under 26 U.S.C § 6229, which is a partnership
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No. 12-40483
item. See Irvine, slip op. at 7-11. Thus, the district courts lacked jurisdiction
over the statute of limitations claims under § 7422(h). Id. We affirm the grant
of summary judgment to the government on these claims.
B. Penalty Interest Claims
Taxpayers next assert that penalty interest was erroneously assessed for
1985.3 They raise three issues relating to their penalty interest claims: (1) that
there was no tax-motivated transaction determination as required to assess
penalty interest; (2) that if there was such a determination, they are not bound
by it; or (3) that the Tax Court found multiple bases for disallowing the farming
deductions and so this court cannot conclude that the underpayment was
attributable to a tax-motivated transaction. The government contends that this
court lacks jurisdiction, either because the claims for refund are attributable to
partnership items under § 7422(h) or because Taxpayers failed to file a timely
refund claim under 26 U.S.C. § 6230(c).
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. A claim for refund based on a partnership component of § 6621(c) interest is
jurisdictionally barred under § 7422(h).
As in Irvine, we first make it clear that we do have jurisdiction to
determine whether there was a tax-motivated transaction determination in the
partnership-level proceedings. See Irvine, slip op. at 12-13.
On the merits, however, these cases are factually and legally
indistinguishable from Duffie, in which this court held that there was a tax-
motivated transaction determination entered in the Tax Court stipulated
decisions, that unsettled partners were bound by it, and that it could not be
3
The Varelas have abandoned their penalty interest claim related to 1984.
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No. 12-40483
revisited in the partner-level proceedings. Duffie, 600 F.3d at 368-69, 378-79.
383. In Duffie, the taxpayers similarly argued that the language of the
stipulated decisions was insufficient to constitute a determination that the
partnership transactions were tax-motivated. Id. at 373. The language in the
Duffie stipulated decisions stated:
[t]hat the adjustments to partnership income and expense for the
taxable year 1984 are attributable to transactions which lacked
economic substance, as described in former I.R.C. § 6621(c)(3)(A)(v),
so as to result in a substantial distortion of income and expense, as
described in I.R.C. § 6621(c)(3)(A)(iv), when computed under the
partnership’s cash receipts and disbursements method of
accounting.
Id. at 369. Here, the language of the Tax Court stipulated decisions in the Agri-
Venture and Coachella-85 cases is substantially identical to the language that
the Duffie court found to constitute a tax-motivated transaction determination.
See id. at 369, 373, 378-79, 383. Under the clear holding of Duffie, the Tax Court
decisions include determinations that the partnerships’ transactions were tax-
motivated.
Contrary to Taxpayers’ additional arguments, this determination clearly
binds them pursuant to 26 U.S.C. § 6226(c). Section 6226 makes even non-
participating partners parties to the partnership-level litigation. See id. at 367
(citing § 6226(c)(1)). Further, both the Joint Status Report filed in the Tax
Court summarizing the parties’ settlement terms and the IRS’s subsequent
motion for entry of the stipulated decisions provided that the partners who
qualify under § 6226(d)—i.e. those partners who had not individually settled and
those whose assessment period remained open, see § 6226(d)—were parties to
the proceeding and would be assessed additional taxes as required by the
adjustments to the partnership items. Similarly, even if Taxpayers are correct
that, despite § 6226, a separate res judicata analysis is required in order to bind
partners to a partnership-level determination, the Taxpayers’ claims and the
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No. 12-40483
resulting analysis is indistinguishable from those in Duffie. 600 F.3d 372-82.
Duffie clearly holds that unsettled partners, like the Taxpayers here, are bound
by the partnership-level determinations in the Tax Court, including the
determinations that the partnerships’ transactions were tax-motivated. See id.
at 382, 383-84.
Taxpayers next argue that even if binding, the Tax Court’s decision does
not support a penalty interest assessment because the references to lack of
economic substance and substantial distortion of income are two separate
reasons for disallowing the partnership item. They point to Weiner, where this
court held that several independent reasons listed in an FPAA, some of which
were tax-motivated transaction determinations and some of which were not,
meant that the partners’ underpayment could not be attributable to a tax-
motivated transaction as a matter of law. Weiner, 389 F.3d at 162-63. Here,
however, under the reasoning of Duffie, both lack of economic substance and
substantial distortion of income are independent tax-motivated transaction
determinations. See Duffie, 600 F.3d at 373 (citing Nault v. United States, 517
F.3d 2, 5 (1st Cir. 2008); Kimball v. Comm’r of Internal Revenue, 95 T.C.M.
(CCH) 1306, 2008 WL 862339 (T.C. 2008)); id. at 378.
This is a different outcome than in Irvine, because the taxpayers in Irvine
settled individually with the IRS and were no longer parties to the Tax Court
partnership-level proceedings at the time of the stipulated decisions and were
instead bound by their individual settlements. See Irvine, slip op. at 3-4, 16.
Taxpayers here, however, are bound by the partnership-level stipulated
decisions entered in the Tax Court. We therefore conclude that under Duffie, the
Tax Court decisions included findings that the partnerships’ transactions were
tax-motivated as required to impose § 6621(c) interest, the Taxpayers are bound
by those decisions, and the district courts lacked jurisdiction to revisit those
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No. 12-40483
partnership-level determinations under § 7422(h). We therefore affirm the grant
of summary judgment to the government on the penalty interest claims.
C. The Kerchers’ Amended Return
Lastly, the Kerchers argue that their assessment notice for 1985 was
invalid because it merely estimated their tax liability, or because the IRS failed
to follow the proper assessment procedures by assessing via notice of
computational adjustment rather than by issuing a deficiency notice. This issue
arose because the Kerchers claim they filed an amended 1985 return, of which
neither they nor the IRS have a complete record. Eventually, the Kerchers
located the first page of the amended return, which showed a $185 increase in
tax. The IRS worked backwards from the $185 adjustment to determine what
the income should have been for 1985 in order to compute the additional
assessment after the partnership-level proceedings. Without a complete
amended return, the Kerchers argue that the information used to compute their
additional tax liability was insufficient. The district court found that it lacked
jurisdiction over this claim because the Kerchers’ claim for refund was not timely
filed. We agree.
On appeal, the Kerchers contend: (1) that the adjustment was substantive
and not computational and thus regular refund procedures apply, including a
two-year statute of limitations, rather than the six-month period relied on by the
district court; and (2) that even if the six-month period applies, the notice they
received was insufficient to trigger the running of the limitations period.
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. However, the six-month
limitations period found in 26 U.S.C § 6230 applies where the adjustment is
merely computational. See Irvine, slip op. at 14-15 (discussing computational
versus substantive adjustments); Duffie, 600 F.3d at 385. The Kerchers
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No. 12-40483
primarily dispute how the 1985 assessment was calculated, though they do not
assert what the correct computation should be. On these facts, we conclude that
the adjustment was computational, rather than substantive, and thus the
procedures of 26 U.S.C. § 6230 govern the refund claim.
We further find that the notice of computational adjustment mailed to the
Kerchers was sufficient to trigger the running of the limitations period. Because
the adjustment was not substantive, the IRS was not required to send a notice
of deficiency. See Duffie, 600 F.3d at 385. The notice of computational
adjustment sent to the Kerchers informed them of the additional amount of tax
assessed and that penalty interest would be assessed. Even though the notice
included one form which showed “0.00” for the amount of penalty interest, the
computation of additional taxes, together with the statement that interest would
be computed at the enhanced rate provided for by § 6621(c), constituted
adequate notice to the Kerchers. In any event, as the analysis in Duffie implies,
the Kerchers had adequate notice of the additional taxes, including penalty
interest, at least by the time they paid those taxes and interest in full. See id. at
386. Thus, the six-month period began to run by October 2004 at the latest,
when the Kerchers paid the additional assessment. They did not file their
refund claim until May 18, 2005, which was more than six months later. We
therefore affirm the district court’s grant of summary judgment to the
government on this claim.
III. Conclusion
For the foregoing reasons, we AFFIRM the grant of summary judgment to
the government on all claims.
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