Meruelo v. Commissioner , 691 F.3d 1108 ( 2012 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
ALEX MERUELO; LISET MERUELO, 
Petitioners-Appellants, No. 11-70015
v.
 Tax Ct. No.
624-04
COMMISSIONER OF INTERNAL
REVENUE, OPINION
Respondent-Appellee.

Appeal from a Decision of the
United States Tax Court
Argued and Submitted
April 20, 2012—San Francisco, California
Filed August 16, 2012
Before: M. Margaret McKeown and N. Randy Smith,
Circuit Judges, and Roger T. Benitez, District Judge.*
Opinion by Judge N.R. Smith
*The Honorable Roger T. Benitez, United States District Judge for the
Southern District of California, sitting by designation.
9401
MERUELO v. CIR 9403
COUNSEL
A. Lavar Taylor (argued) and Robert A. Horwitz, Law Offices
of A. Lavar Taylor, Santa Ana, California, for the petitioners-
appellants.
Richard Farber (argued) and Ellen Page DelSole, United
States Department of Justice, Tax Division, Gilbert S.
Rothenberg, Acting Deputy Assistance Attorney General,
United States Departments of Justice, Washington, D.C., for
the respondent-appellee.
9404 MERUELO v. CIR
OPINION
N.R. SMITH, Circuit Judge:
The Internal Revenue Service (IRS) validly issues a Notice
of Deficiency (“NOD”) to a partner in a partnership, when (1)
no partnership-level proceeding is pending, (2) no notice of
final partnership administrative adjustment (“FPAA”) has
been issued, and (3) the normal three-year statute of limita-
tions in 26 U.S.C. § 6229(a)1 has not expired. As such, we
affirm the Tax Court’s denial of Alex and Liset Meruelo’s
(husband and wife and hereinafter referred to as the Meruelos
or the petitioners) motion to dismiss for lack of jurisdiction.
I. BACKGROUND
A. Facts
Mr. Meruelo was the sole member of Meruelo Capital
Management, LLC (“MCM”). In 1999, MCM was a single-
member limited liability company (LLC) and a disregarded
entity2 by default, because it did not file a Form 8832 (which
allows an LLC to elect to be treated as a corporation for that
year). As such, MCM did not (and was not required to) file
a federal tax return for 1999. Instead, all of MCM’s income
and losses were to be reported on the Meruelos’ joint tax
returns. See Treas. Reg. § 301.7701-3(a), (b)(ii).
1
All statutes cited herein refer to the Internal Revenue Code (the
“Code”), which is codified in Title 26 of the United States Code, unless
otherwise stated. Further, of all the statutes cited herein, only § 6229(c)
has been amended from the version that was applicable at the time the
returns at issue here were filed. Notwithstanding, the amendment to
§ 6229(c) is insignificant as it relates to the discussion in this opinion.
2
The parties agree that MCM was a disregarded entity in 1999. “[A]
‘disregarded entity’ . . . is taxed as a sole proprietor for income tax pur-
poses.” Single Member Limited Liability Companies, IRS (June 12, 2012),
http://www.irs.gov/businesses/small/article/0,,id=158625,00.html.
MERUELO v. CIR 9405
In 1999, MCM owned a 31.68 percent interest in Intervest
Financial LLC (“Intervest”). Intervest had five members. The
members were treated as partners for income tax purposes.
Intervest was an entity subject to the unified audit and litiga-
tion procedures of the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA), 26 U.S.C. § 6221-34.
On October 14, 2000, Intervest filed a Form 1065, U.S.
Partnership Return of Income, for the 1999 tax year. The
return listed MCM as a member, but it did not indicate that
MCM was a single-member LLC, a disregarded entity, or that
Mr. Meruelo (rather than MCM) was actually Intervest’s
member for 1999 for Federal tax purposes. The return
reported a $14,327,160 ordinary loss from foreign currency
transactions. Intervest issued MCM a Schedule K-1, Partner’s
Share of Income, Credits, Deductions, etc., for 1999 reporting
an ordinary loss of $4,538,844 as a passthrough item from
Intervest to MCM.
The Meruelos filed a joint tax return for 1999 on October
16, 2000. The return claimed the $4,538,844 loss as a pass-
through item from MCM. The return did not identify Intervest
or that Intervest was the source of the loss. The return indi-
cated that MCM was a partnership. However, it did not indi-
cate that MCM was a single-member LLC, a disregarded
entity, or that Mr. Meruelo was actually Intervest’s member
in 1999 for federal tax purposes.
Before the expiration of the normal three-year period of limi-
tations3 on assessing federal income tax attributable to a part-
3
This three-year period was triggered on the date the Meruelos filed
their return (October 16, 2000). See I.R.C. §§ 6229(a), 6501(a). In perti-
nent part, § 6229(a) states:
[T]he period for assessing any tax imposed by subtitle A with
respect to any person which is attributable to any partnership item
(or affected item) for a partnership taxable year shall not expire
before the date which is 3 years after the later of—(1) the date
9406 MERUELO v. CIR
nership item (or an affected item),4 see I.R.C. §§ 6229(a),
6501(a), the IRS attempted to secure an extension of the stat-
ute of limitations for the 1999 tax year from the Meruelos
through the execution of a Form 872-I, entitled Consent to
Extend Time to Assess Tax As Well As Tax Attributable to
Items of a Partnership. By securing the extension, the IRS
would have had additional time to investigate the circum-
stances behind the Meruelos’ claimed loss and may have been
able to avoid the problems at issue here. However, the Mer-
uelos refused to grant the extension. Therefore, the IRS issued
a NOD5 to the Meruelos on October 10, 2003, a few days
before the three-year statute of limitations expired. The NOD
indicated that the Meruelos were not entitled to the
$4,538,844 loss reported and owed a deficiency of $1,581,293
in federal income tax and $632,517.20 in penalties for the
1999 tax year.
on which the partnership return for such taxable year was filed,
or (2) the last day for filing such return for such year (determined
without regard to extensions).
In addition, § 6501(a) states in pertinent part: “[T]he amount of any tax
imposed by this title shall be assessed within 3 years after the return was
filed . . . and no proceeding in court without assessment for the collection
of such tax shall be begun after the expiration of such period.”
4
“The term ‘affected item’ means any item to the extent such item is
affected by a partnership item.” I.R.C. § 6231(a)(5). A “ ‘partnership item’
means . . . any item required to be taken into account for the partnership’s
taxable year under any provision of subtitle A to the extent regulations
prescribed by the Secretary provide that . . . such item is more appropri-
ately determined at the partnership level than at the partner level.” Id.
§ 6231(a)(3).
5
“A Notice of Deficiency consists of a letter stating the amount of the
deficiency and the statement showing the computation of the deficiency.”
Internal Revenue Manual 8.17.4.1(3). “The running of the period of limi-
tations is suspended when a notice of deficiency is mailed, and, if a pro-
ceeding with respect to the deficiency is brought before [the Tax] Court,
the period of limitations remains suspended until the decision of [the Tax]
Court becomes final and for 60 days thereafter.” Zarins v. Comm’r, 81
T.C.M. 1375 (2001) (citing I.R.C. §§ 6213(a), 6503(a)(1); Treas.
Reg. § 301.6503(a)-1).
MERUELO v. CIR 9407
The IRS has never audited Intervest’s 1999 return and has
never notified Intervest that it will begin an audit. Further, the
IRS has never issued a notice of FPAA6 regarding Intervest’s
1999 return.
B. Procedural History
On January 7, 2004, the Meruelos timely mailed their Tax
Court petition challenging the deficiency contained in the
NOD. See I.R.C. § 6213(a). On October 1, 2004, the Mer-
uelos moved to dismiss for lack of jurisdiction on the ground
that the IRS issued the NOD prematurely, making it invalid.
Specifically, the Meruelos argued that the NOD was prema-
ture, because it related to affected items and was issued before
the issuance of any notice of FPAA and before the IRS had
accepted as filed Intervest’s 1999 tax return (i.e., no final res-
olution at the partnership level). Alternatively, the Meruelos
argued that the items in the NOD were not affected items.
On November 12, 2004, the IRS moved to stay the pro-
ceedings in this case pending the resolution of a federal crimi-
nal investigation, the progress and outcome of which may
have affected the disposition of this case. The IRS stated that
it had just learned that the Meruelos’ reported loss was gener-
ated by a tax shelter related to a grand jury investigation and
that investigation could affect or be affected by the criminal
case. Essentially, the IRS indicated that a partnership-level
proceeding and adjustment may result (as allowed by the
extended period of limitations under § 6229(c)) if fraud or
other special circumstances were discovered in the criminal
investigation.7
6
The IRS must mail to each partner of a partnership a notice of FPAA
when the IRS begins an “administrative proceeding at the partnership level
with respect to a partnership item . . . .” I.R.C. § 6223(a).
7
Because the Meruelos’ argument depends on the language in the
motion to stay, we include relevant portions of the motion to stay below:
9408 MERUELO v. CIR
The Tax Court granted the stay on November 18, 2004. The
Tax Court ordered status reports every 120 days. The IRS’s
status reports noted that an indictment had been filed and that
the individual indicted “was involved in the transactions at
issue in this case, and said transactions are part of the criminal
prosecution.”
9. Specifically, if the responses to discovery, as well as any avail-
able non-grand jury information, or grand jury information
released for use in this proceeding under Fed. R. Crim. P. 6(e),
reveal that petitioner [sic] had, with the intent to evade tax,
signed or participated, directly or indirectly, in the preparation of
a partnership return which includes a false or fraudulent item,
then in the case of partners so participating, any tax imposed by
Subtitle A which is attributable to any partnership item (or
affected item) for the partnership taxable year to which the return
relates may be assessed at any time. I.R.C. § 6229(c)(1)(A).
10. Furthermore, even if petitioners did not sign or partici-
pate directly in the filing of a false or fraudulent partnership
return, the period for assessing tax attributable to partnership
items related to a false or fraudulent partnership return is six
years, rather than three years, from the date on which the partner-
ship return was filed. I.R.C. § 6229(c)(1)(B). In the instant case,
because Intervest’s return was filed on October 14, 2000, the
period of limitations for assessing tax attributable to partnership
items would remain open for purposes of conducting a partner-
ship level proceeding.
11. In either case, the issuance of a notice of final partnership
administrative adjustment (“FPAA”) with respect to Intervest,
under the circumstances described above, would have an impact
on the Court’s jurisdiction in the case currently before the court
because the notice of deficiency would have to be dismissed in
its entirety as a prematurely issued affected item notice of defi-
ciency. See GAF Corp. v. Commissioner, 114 T.C. 519 (2000).
...
14. It has long been respondent’s policy to defer civil assess-
ment and collection until the completion of criminal proceedings.
Policy Statement P-1-84, IRM 1.2.1.4.25 (1991).
MERUELO v. CIR 9409
The Meruelos moved to lift the stay on May 17, 2007, and
the IRS did not oppose. The Tax Court lifted the stay on July
3, 2007.
After the Tax Court lifted the stay, the IRS filed an objec-
tion to the Meruelos’ motion to dismiss. Notably, the IRS
conceded that “for purposes of the present deficiency pro-
ceeding, . . . partnership items must be accepted as reported
on the partnership return . . . .” On June 9, 2009, the Tax
Court denied the Meruelos’ motion to dismiss in a published
opinion. Meruelo v. Comm’r, 132 T.C. 355 (2009). The Tax
Court held that the NOD was valid and not premature and that
the items were affected items.8 In deciding that the NOD was
valid, the Tax Court reasoned as follows: First, “[t]he normal
deficiency procedures apply to affected items,” and a “valid
NOD requires that any partnership-level proceeding involving
the related partnership be complete.” Meruelo, 132 T.C. at
363-64. Second,
[w]hen the Commissioner [or IRS] opts not to begin
a partnership-level proceeding or issue an FPAA
within the normal period of limitations, the
partnership-level proceeding is considered complete
when the Commissioner accepts the partnership’s
return as filed. Whether the Commissioner has
accepted a partnership return as filed is a question of
fact that turns in part on a finding of whether the
Commissioner opted to allow the normal period of
limitations to expire without beginning a
partnership-level proceeding.
Id. at 364 (citing Roberts v. Comm’r, 94 T.C. 853, 860-61
(1990)). Finally, the Tax Court disagreed with the Meruelos’
argument that the NOD was invalid, based on the IRS defer-
8
The Meruelos do not challenge the Tax Court’s ruling that the pro-
posed adjustments in the NOD were affected items.
9410 MERUELO v. CIR
ring any decision whether to audit Intervest’s return until after
the criminal proceedings. The Tax Court found:
Where, as here, the Commissioner has opted not to
commence within the normal period of limitations a
partnership-level proceeding as to an entity subject
to TEFRA, section 6225(a) serves as no restriction
on the time within that period when the Commis-
sioner may issue a[ ] NOD related to the partnership.
It therefore was proper for respondent to have issued
the NOD to petitioners just before the normal period
of limitations was going to expire on petitioners’
(and Intervest’s) 1999 taxable years. Although
respondent may have later considered during this
proceeding the possibility of beginning a
partnership-level proceeding as to Intervest on
account of fraud or the like, any such consideration
did not invalidate the NOD.
Id. at 365. Thus, because the IRS issued the NOD during the
normal limitations period applicable to TEFRA entities and
had accepted Intervest’s return as filed, the NOD was valid
and the Tax Court had jurisdiction. Id. at 366, 368. The Mer-
uelos moved for reconsideration, which was denied on Sep-
tember 15, 2009.
On September 3, 2010, the parties reached an agreement as
to all issues, including the amount of tax owed by the Mer-
uelos, except the procedural and jurisdictional issues related
to the TEFRA procedures and the validity of the NOD. On
October 6, 2010, the Tax Court entered its final decision. It
held that the Meruelos were liable for $1,387,006 in addi-
tional income tax and $277,401 in penalties. The Meruelos
filed a timely appeal on December 21, 2010. Fed. R. App. P.
13(a); I.R.C. § 7483.
II. JURISDICTION AND STANDARD OF REVIEW
Pursuant to 26 U.S.C. § 7482(a)(1), we are authorized to
review the decision of the Tax Court. “Whether the Tax Court
MERUELO v. CIR 9411
has subject matter jurisdiction is a question of law and thus
reviewed de novo.” Adkison v. Comm’r, 592 F.3d 1050, 1052
(9th Cir. 2010) “Conclusions of law, including the Tax
Court’s interpretation of the Internal Revenue Code, are
reviewed de novo.” Id. “Although we presume that the Tax
Court correctly applied the law, we give no special deference
to the Tax Court’s decisions.” Best Life Assurance Co. of Cal.
v. Comm’r, 281 F.3d 828, 830 (9th Cir. 2002). Although we
do not give the Tax Court special deference in a de novo
review, “[b]ecause the Tax Court has special expertise in the
field, . . . its opinions bearing on the Internal Revenue Code
are entitled to respect.” Merkel v. Comm’r, 192 F.3d 844,
847-48 (9th Cir. 1999) (internal quotation marks omitted).
The Tax Court’s factual findings are reviewed for clear error.
Keller v. Comm’r, 568 F.3d 710, 716 (9th Cir. 2009). Under
clear error review, we may reverse the Tax Court only if we
have a “definite and firm conviction” that the tax court’s fac-
tual finding was wrong. Maciel v. Comm’r, 489 F.3d 1018,
1027 (9th Cir. 2007) (quoting Akland v. Comm’r, 767 F.2d
618, 621 (9th Cir. 1985)). To have a definite and firm convic-
tion that the Tax Court erred, we must find that the Tax
Court’s conclusion was “(1) illogical, (2) implausible, or (3)
without support in inferences that may be drawn from the
facts in the record.” United States v. Hinkson, 585 F.3d 1247,
1262 (9th Cir. 2009) (en banc) (internal quotation marks omit-
ted).
We review the Tax Court’s refusal to allow discovery for
abuse of discretion. River City Ranches #1 Ltd. v. Comm’r,
401 F.3d 1136, 1139 (9th Cir. 2005).
III. DISCUSSION
The Meruelos argue that the Tax Court erred by finding the
NOD valid and not premature. The Meruelos contend that the
NOD was invalid, because the IRS had not accepted the Inter-
vest return as filed as of the NOD issuance date. According
to the Meruelos, the IRS was still considering partnership-
9412 MERUELO v. CIR
level proceedings as evidenced by (1) its statements in the
motion to stay and the status reports; (2) its policy of defer-
ring civil assessment until the completion of criminal pro-
ceedings; and (3) its failure to claim that there had been a
“final outcome” in November 2007 (after the expiration of the
extended six year limitations period in § 6229(c)). Further-
more, while the IRS held exclusive control of the evidence of
its intentions, it never presented any evidence, thereby creat-
ing an adverse inference that such evidence would support the
Meruelos. Based on this information, the Meruelos argue that
the Tax Court erred by relying only on the IRS’s failure to
commence an audit of Intervest’s return, not issuing a notice
of FPAA, and issuing the NOD before the normal three-year
TEFRA audit statute of limitations. Further, the Meruelos
assert that the record only logically supports a factual conclu-
sion that the IRS had not accepted as filed the 1999 Intervest
return as of the NOD date.
We disagree with the Meruelos based on (1) binding Ninth
Circuit case law only invalidating a NOD when partnership-
level proceedings are pending, (2) persuasive Tax Court case
law indicating that a NOD is valid when no partnership-level
proceeding is pending and the normal limitations period has
expired, and (3) the Code, which provides no applicable limi-
tations on the issuance of a NOD in these circumstances.
The Tax Court had jurisdiction, because the lack of any
pending partnership-level proceeding and the expiration of the
normal limitation period makes a NOD valid as a matter of
law. The Tax Court is a court of limited jurisdiction. Adkison,
592 F.3d at 1052. It “may only exercise jurisdiction to the
extent authorized by Congress.” Id.; accord I.R.C. § 7442.
“Pursuant to section 6213(a), [the Tax] Court’s jurisdiction to
redetermine a deficiency in tax depends upon a valid notice
of deficiency and a timely filed petition.” GAF Corp. & Sub-
sidiaries v. Comm’r, 114 T.C. 519, 521 (2000) (footnote omit-
ted); accord Napoliello v. Comm’r, 655 F.3d 1060, 1063 (9th
Cir. 2011) (“The IRS ordinarily may assess, and then collect
MERUELO v. CIR 9413
on, a tax deficiency only after issuing a deficiency notice to
the taxpayer.” (citing I.R.C. § 6213(a))). Section 6212(a)
allows the IRS to send a NOD to a taxpayer if the IRS deter-
mines that there is a deficiency in the taxpayer’s income tax.
GAF Corp., 114 T.C. at 521. Section 6213(a) allows the tax-
payer receiving the NOD, “[w]ithin 90 days . . . after the
notice of deficiency authorized in section 6212 is mailed” to
“file a petition with the Tax Court for a redetermination of the
deficiency.” After petitioning the Tax Court for a redetermi-
nation, “[i]f the taxpayer contests the validity of the notice in
Tax Court, . . . the challenge acts as a challenge to the court’s
jurisdiction.” Napoliello, 655 F.3d at 1063.
[1] However, in the partnership context, a NOD (relating
to an affected item) is invalid if a partnership-level proceed-
ing is pending. See Adkison, 592 F.3d at 1053, 1056. TEFRA
“establishes the process for assessing tax deficiencies against
partners, including the issuance of a valid deficiency notice.”9
Napoliello, 655 F.3d at 1063 (citing I.R.C. §§ 6221-34).
“TEFRA applies to all partnership items . . . and any item that
is ‘affected by a partnership item.”’10 Adkison, 592 F.3d at
1053.
9
“[P]artnerships are not taxable entities; they pay no federal income
taxes and file only informational returns.” Cent. Valley AG Enters. v.
United States, 531 F.3d 750, 755 (9th Cir. 2008) (citing I.R.C. §§ 701,
6031). “Instead, the individual partners are separately or individually lia-
ble for income taxes on their distributive share of partnership items.” Id.
As such, prior to the enactment of TEFRA, “adjustments of partnership
items were determined at the individual partners’ level, resulting in dupli-
cation of administrative and judicial resources and inconsistent results
between partners.” Id. at 755-56 (internal quotation marks omitted).
“TEFRA did not change the taxation of partners and partnerships; rather,
it changed only the procedures for determining the appropriate tax treat-
ment of partnership items.” Id. at 756.
10
Here, TEFRA applies. The IRS issued a NOD to the Meruelos. Mer-
uelo, 132 T.C. at 359. The Meruelos petitioned the Tax Court for a rede-
termination and then filed a motion to dismiss challenging the Tax Court’s
jurisdiction. Id. at 357. The Tax Court determined that the items in the
NOD were affected items that required determination at the partner level.
Id. at 366-67. The Meruelos do not challenge this finding; thus, TEFRA
applies. See Adkison, 592 F.3d at 1053.
9414 MERUELO v. CIR
In general, a partnership proceeding must be com-
pleted and a valid notice of deficiency sent before
the Tax Court may examine the individual tax treat-
ment of an affected item. Because the tax treatment
of affected items depends on partnership level deter-
minations, affected items cannot be tried as part of
a partner’s personal tax case until the completion of
the partnership level proceeding.
Id. (internal quotation marks and alterations omitted) (quoting
N.C.F. Energy Partners v. Comm’r, 89 T.C. 741, 743-44
(1987)); see also id. at 1056 (“TEFRA plainly contemplates
that when a partnership proceeding is pending, the [IRS] will
not assert a deficiency against a taxpayer-partner until the
partnership proceeding determines the liability of the partner-
ship, and consequently, the partners.” (citing I.R.C. §§ 6221,
6225(a)(1))). Thus, if a partnership proceeding is pending,
then a NOD cannot be validly issued.
[2] However, if no partnership proceeding is pending, then
a NOD may be validly issued. In Roberts v. Commissioner,
the Tax Court held that “the ‘outcome of the partnership pro-
ceeding’ may be acceptance of the partnership return as filed
as a result of the fact that there was no partnership proceeding
and there can no longer be a partnership proceeding under the
normal statute of limitations.” 94 T.C. at 860. In Roberts, the
NOD was issued six days before the normal statute of limita-
tions in § 6229(a) expired, no partnership proceedings were
commenced, and no notice of FPAA was issued. Id. at 854,
857. “Consequently, the tax treatment of all partnership items
with respect to these partnerships is final in accordance with
the tax returns filed by these partnerships.” Id. at 857. Roberts
did not read § 6225(a)’s restriction that assessment must wait
until 150 days after a mailed FPAA or the final decision of a
Tax Court proceeding to limit the issuance of a NOD. See id.
at 859-60. Further, Roberts did “not read section
6230(a)(2)(A)(i) to mean that a partnership proceeding must
be opened and closed in order for there to be a determination
MERUELO v. CIR 9415
with regard to an affected item.” Id. at 860. Roberts con-
cluded that “affected items may be adjudicated in a deficiency
proceeding despite the absence of an FPAA after the running
of the normal statute of limitations period for the partnership.”
See id. at 859.
Subsequently, in Gustin v. Commissioner, the Tax Court
reaffirmed Roberts by finding a NOD valid (and jurisdiction
proper) when the IRS had not commenced partnership pro-
ceedings; an FPAA was not issued; the three-year limitations
period in § 6229(a) had expired; and the NOD was issued
forty-five days before the limitation period expired. 83
T.C.M. 1341 (2002). In Gustin, the IRS acknowledged
that it could not make partnership item adjustments, acknowl-
edged that a notice of FPAA would not be issued, and
accepted the return as final. Id. at *5-6. Further, the Tax Court
found the partnership return final and binding on the parties.
Id. at *6.
Applying this law in our case, the Tax Court stated that the
IRS
could not have issued the NOD to petitioners before
the completion of any partnership-level proceeding
involving Intervest in that respondent never started
any such proceeding in the first place. . . . It there-
fore was proper for respondent to have issued the
NOD to petitioners just before the normal period of
limitations was going to expire on petitioners’ (and
Intervest’s) 1999 taxable years. Although respondent
may have later considered during this proceeding the
possibility of beginning a partnership-level proceed-
ing as to Intervest on account of fraud or the like,
any such consideration did not invalidate the NOD.
Meruelo, 132 T.C. at 365. We agree with the Tax Court’s rea-
soning in Roberts and Gustin and the application of that rea-
soning by the Tax Court to this case.
9416 MERUELO v. CIR
[3] The IRS appropriately issued the NOD in this case
based on applicable sections of the Code and case law. Sec-
tion 6230(a)(2) makes the deficiency procedures described in
§§ 6212 and 6213 applicable to affected items. Neither § 6212
nor § 6213 require the issuance of a NOD to await a “final
acceptance” of a partnership return. These sections only
require that a NOD be mailed when the IRS determines that
there is a deficiency and before assessment of the deficiency.
Further, although a valid NOD must await the completion of
partnership proceedings when a partnership item or affected
item is involved, Adkison, 592 F.3d at 1053, 1056, TEFRA
does not limit the issuance of a NOD when no partnership
proceeding is pending and no notice of FPAA has been sent,
see I.R.C. § 6225(a). Section 6225(a) states that “no assess-
ment of a deficiency attributable to any partnership item may
be made . . . before” 150 days after the date a notice of FPAA
is mailed or a proceeding in Tax Court has been finalized.
Assessment of a deficiency is not equivalent to providing
notice of a deficiency. See Bromberg v. Ingling, 300 F.2d 859,
861 (9th Cir. 1962) (holding that a NOD must be issued and
the 90-day time period to file a petition with the Tax Court
must expire before the IRS may assess the deficiency). No
provision of the Code limits the IRS from issuing a NOD and
pursuing a tax deficiency regarding an affected item at the
partner-level when no partnership-level proceeding has been
commenced. Therefore, the NOD issued to the Meruelos was
valid as a matter of law, and the Tax Court had jurisdiction.
While the circumstances here are slightly different from
those in Roberts and Gustin, the outcome does not change. In
Roberts and Gustin there was no evidence indicating that the
IRS might have decided to commence partnership-level pro-
ceedings subsequent to the issuance of the NOD. The Mer-
uelos argue that there is “relevant and conclusive” evidence
of such indecision here. Thus, the NOD was (and any NOD
would be) premature and invalid, because the IRS was consid-
ering potential partnership-level proceedings.
MERUELO v. CIR 9417
[4] However, the evidence here is unique, because the
IRS’s indecision depended on a criminal investigation that
may have found fraud, therefore triggering an exception to the
normal limitations period. See I.R.C. § 6229(a), (c). Section
6229 contemplates assessment of affected items after the nor-
mal three-year limitations period if fraud or a substantial
omission of gross income (among other things) are discov-
ered. I.R.C. § 6229(c). “[T]he Commissioner [or IRS] may
issue an FPAA at any time, subject only to the practical limi-
tation that the FPAA may affect only those partners whose
individual returns remain open under IRC § 6501(a) or some
extension thereto, such as” those found in § 6229. Curr-Spec
Partners, L.P. v. Comm’r, 579 F.3d 391, 399 (5th Cir. 2009);
see also Bakersfield Energy Partners, LP v. Comm’r, 568
F.3d 767, 770 (9th Cir. 2009) (recognizing that a notice of
FPAA may be filed after the normal three-year limitations
period and an assessment may be made if an exception in
§ 6229(c) applies). Congress expected instances where the
IRS would obtain additional information that would warrant
adjustment after the normal limitations period. Thus, because
of the exceptions to the normal limitations period in § 6229(c)
and the absence of any restriction in § 6225(a) to issuing a
NOD before a partnership proceeding is commenced, the
IRS’s contemplation of initiating future partnership-level pro-
ceedings is irrelevant.
Requiring the IRS to represent or prove that it had no inter-
est in seeking future partnership-level adjustments or requir-
ing the Tax Court to find such a fact serves no purpose,
because the IRS has statutory rights to seek future
partnership-level adjustments at anytime and to seek partner
assessments in narrow circumstances. See I.R.C. § 6229(c). In
other words, it makes little sense to require the IRS to prove
that it is not considering partnership-level proceedings in
order to issue a valid NOD, while still recognizing that the
IRS has statutory authority to assess tax related to affected
items when, for example, fraud is discovered. If a NOD were
invalid, because the IRS contemplated future partnership-
9418 MERUELO v. CIR
level proceedings (even relating to the exceptions in
§ 6229(c)) when the NOD was issued, then the IRS may be
barred by the normal three-year limitation period even when
the Code allows adjustments after the normal three-year limi-
tations period in some circumstances. Such a result would be
illogical.
For example, here the NOD would be invalid, if it is
assumed that NODs issued while the IRS is contemplating
future partnership-level adjustments are invalid, because the
IRS issued the NOD while anticipating the possibility of pur-
suing future partnership-level proceedings if fraud was dis-
covered in the related criminal proceeding. Under these
assumed circumstances, the IRS would be barred from assess-
ing the Meruelos the $1,387,006 in additional income tax and
$277,401 in penalties that they stipulated to owing because
the normal limitations period expired. The result ignores the
fact that the normal limitations period expired with no part-
nership audit having been commenced or announced. The IRS
should be able to acknowledge that items in the partnership
return are generally considered final at the end of the three-
year limitations period, while still anticipating future adjust-
ments based on the special, narrow exceptions to the normal
three-year limitations period.
The Meruelos also argue that the Tax Court’s extension of
Roberts is absurd, because a NOD will be deemed valid and
affected item litigation may commence, regardless of the IRS
intending to commence partnership-level proceedings under
the extended statute of limitations in § 6229(c). They argue
that this contradicts the purpose of TEFRA to have a single
partnership proceeding until all partnership level issues are
resolved. We disagree, because Congress already contem-
plated the potential for additional partnership proceedings
after the normal statute of limitations period and assessment
against certain partners if those partners’ returns are open
under the normal or potentially applicable extended limita-
tions period (usually because of discovered fraud or substan-
MERUELO v. CIR 9419
tial omissions from gross income). See Curr-Spec Partners,
579 F.3d at 399. TEFRA’s purpose of having a single partner-
ship proceeding is not disrupted, because there will still be a
single partnership-level proceeding for Intervest. Although
multiple proceedings may result for individual partners, the
Code “explicitly contemplate[s] distinct treatment of different
partners.” Id.
[5] Lastly, even if we were to hold that the NOD must
have been “accepted as filed,” and such a determination is a
factual inquiry, the Meruelos’ argument still fails. The Tax
Court did not clearly err in determining that the IRS accepted
the Intervest return as filed. See Keller, 568 F.3d at 716. The
Tax Court relied on the IRS opting not to begin partnership-
level proceedings and not issuing a notice of FPAA within the
normal statute of limitations period. Although the IRS indi-
cated there was a possibility for future partnership-level pro-
ceedings if fraud was discovered, that fact does not invalidate
the conclusion that the IRS accepted Intervest’s return as filed
on the date the NOD was issued. The IRS stated in the motion
to stay that it had just learned that the loss reported by the
Meruelos was related to the criminal investigation. Meruelo,
132 T.C. at 361. Further, the Meruelos tax return only listed
MCM and did not mention Intervest, and the NOD only refer-
enced reasons related to MCM for disallowing the loss. Id. at
359-60. Thus, the factual determination that the IRS accepted
the return as filed is not “(1) illogical, (2) implausible, or (3)
without support in inferences that may be drawn from the
facts in the record.” See Hinkson, 585 F.3d at 1262 (internal
quotation marks omitted).
IV. CONCLUSION
[6] The IRS issued the NOD when (1) there was no pend-
ing partnership-level proceeding, (2) no notice of FPAA had
been issued, and (3) the normal three-year statute of limita-
tions in § 6229(a) expired a few days later. No case or provi-
sion of the Code limits the issuance of a NOD in these
9420 MERUELO v. CIR
circumstances. In contrast, the Code requires the issuance of
a NOD in order to assess tax to a partner regarding affected
items. I.R.C. §§ 6212, 6213, 6230(a)(2)(A). As such, we hold
that a NOD issued when no partnership-level proceeding or
FPAA have been issued is valid. See Roberts, 94 T.C. at 860.
Therefore, the Tax Court had jurisdiction, and its decision is
AFFIRMED.