Cir v. Ritchie Stevens ( 2023 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JULIE A. KEENE-STEVENS; No. 21-71082
RITCHIE N. STEVENS,
Tax Ct. No.
Petitioners-Appellees, 9539-15
v.
OPINION
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellant.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted April 10, 2023
San Francisco, California
Filed July 3, 2023
Before: Richard A. Paez, Richard R. Clifton, and Holly A.
Thomas, Circuit Judges.
Opinion by Judge Clifton
2 KEENE-STEVENS V. CIR
SUMMARY *
Tax
The panel reversed the Tax Court’s determination that
taxpayers Ritchie Stevens and Julie Keene-Stevens owed
neither deficiencies nor penalties for 2007 and 2009 through
2012, and remanded for recalculation of the deficiencies and
penalties for those years.
Taxpayers did not file returns for 2007 and 2012. The
Tax Court concluded that taxpayers owed no deficiencies or
penalties for those years, because the partnership losses
claimed for those years exceeded the IRS’s adjusted non-
partnership deficiencies. The panel held that the unsigned,
unfiled tax returns, on which the partnership losses were
reported, were legally invalid because they had not been
filed and executed under penalty of perjury, and therefore
could not be used to offset non-partnership income in an
individual deficiency proceeding. Accordingly, the panel
reversed the Tax Court’s deficiency determinations for these
years, and remanded with instructions to determine
taxpayers’ deficiencies without regard to any partnership
losses claimed on the legally invalid tax returns.
For 2009 through 2011, taxpayers reported no tax
liability because of large net operating losses (NOLs) from
partnerships subject to the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA). The Tax Court
determined that taxpayers owed no deficiencies or penalties
for 2009 through 2011 because the adjustments to non-
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
KEENE-STEVENS V. CIR 3
partnership items would not have resulted in a deficiency
even if there were no net loss from partnership items. The
panel concluded that the Tax Court erred when it excluded
from its calculations of “net loss from partnership items” the
portions of the net-operating-loss carryover deductions that
were composed of eligible partnership losses in prior years.
The panel explained that, when carried forward as
deductions, net operating losses composed of partnership
losses can offset a taxpayer’s non-partnership income or
instead are part of the “net loss from partnership items”
under Internal Revenue Code § 6234(a)(3), as it was then in
effect. The panel remanded for the Tax Court to assess the
non-partnership items in the recomputed deficiencies for
those years, accounting for the TEFRA-eligible partnership
components of the net-operating-loss deductions only in the
§ 6234(a)(3) calculations of “net loss from partnership
items.”
COUNSEL
Jacob E. Christensen (argued) and Francesco Ugolini,
Attorneys, Tax Division; David A. Hubbert, Deputy
Assistant Attorney General; United States Department of
Justice; Washington, D.C.; William J. Wilkins, Chief
Counsel; Internal Revenue Service; Washington, D.C.; for
Respondent-Appellant.
A. Lavar Taylor (argued), Taylor Nelson Amitrano LLP,
Santa Ana, California; Fritz Firman, Weber Firman, Costa
Mesa, California; for Petitioners-Appellees.
4 KEENE-STEVENS V. CIR
OPINION
CLIFTON, Circuit Judge:
This dispute arises from the Tax Court’s determination
that Ritchie N. Stevens and Julie A. Keene-Stevens
(Taxpayers) 1 owed neither deficiencies nor penalties for
taxable years 2007 and 2009 through 2012 as a result of
large, alleged partnership losses. We must decide first
whether such partnership losses claimed on unfiled,
unsigned tax returns can be used to offset non-partnership
income in an individual deficiency proceeding. What
complicates matters here is that the normal process by which
partnership losses are separately adjudicated assumes the
existence of valid tax returns. We conclude that unsigned,
unfiled tax returns are legally ineffective and that the alleged
partnership losses they report cannot be used to offset non-
partnership income. For taxable years 2007 and 2012,
therefore, the Tax Court erred by accepting in these
individual deficiency proceedings the partnership losses that
Taxpayers claimed on unsigned, unfiled tax forms. The
partnership losses that the Tax Court accepted offset
Taxpayers’ income, which, according to the Tax Court,
resulted in no deficiency.
Second, we must decide whether, when carried forward
as deductions, net operating losses (NOLs) composed of
partnership losses can offset a taxpayer’s non-partnership
income or instead are part of the “net loss from partnership
1
The Tax Court’s decision spells the second taxpayer’s name as Julie A.
Keen-Stevens, but her brief spells her name as Julie A. Keene-Stevens.
KEENE-STEVENS V. CIR 5
items” under Internal Revenue Code (I.R.C.) § 6234(a)(3), 2
as it was then in effect. As we explain, we conclude that to
the extent they are composed of eligible partnership losses,
NOLs are partnership items that should be part of the
calculation of net loss from partnership items. For taxable
years 2009 through 2011, therefore, the Tax Court erred by
excluding eligible partnership losses within Taxpayers’
NOL carryover deductions from its calculations of “net loss
from partnership items.” Because the Tax Court instead
included those NOLs in its calculations of Taxpayers’ non-
partnership income tax liability, it determined that
Taxpayers did not owe deficiencies.
We thus reverse the Tax Court’s conclusion that
Taxpayers owed neither deficiencies nor penalties in taxable
years 2007 and 2009 through 2012, and we remand for a
recalculation of Taxpayers’ deficiencies and penalties for
those years.
I. Background
A. Factual and Procedural History
Taxpayers did not timely file any federal income tax
returns from 2006 through 2012. For tax years 2007 and
2012, the Tax Court found that they filed no tax returns at
all. 3 The returns they did file for 2008 through 2011 reported
no tax liability because of large net operating losses from
partnerships subject to the Tax Equity and Fiscal
2
Citations in this opinion are to the versions of the statutes in effect
during the years in question.
3
The finding that the IRS never received a tax return for the year 2007
is not clearly erroneous, despite Taxpayers’ assertions below.
6 KEENE-STEVENS V. CIR
Responsibility Act of 1982 (TEFRA). 4 As claimed on
Taxpayers’ Schedule A and Schedule E forms for taxable
years 2007 through 2012, 5 virtually all of the claimed
$11,463,228 in losses was attributable to partnerships
subject to TEFRA. 6 Most of the losses were reported to have
come from one specific partnership—SNJ, Ltd.—which
itself never filed any required annual tax returns from 2006
through 2012. See I.R.C. § 6031 (requiring partnerships to
file information returns); 26 C.F.R. § 1.6031(a)-1 (same).
After an audit, the Internal Revenue Service (IRS) issued
notices of federal income tax deficiencies and associated
penalties under I.R.C. § 6212 for taxable years 2005 through
2012. 7 Taxpayers timely petitioned the Tax Court to review
4
Pub. L. No. 97-248, 96 Stat. 324 (1982) (codified as amended at I.R.C.
§§ 6221–6234 prior to 2015 repeal). TEFRA was repealed in 2015 by
the Bipartisan Budget Act of 2015, Pub. L. No. 114–74, § 1101, 129 Stat.
584, 625 (2015) (codified at I.R.C. §§ 6221–6231, 6233, 6234). Under
that law, the treatment of partnership-related tax matters changed
effective for taxable years after 2017. TEFRA was in effect during all
taxable years at issue in this case.
5
Forms purporting to represent tax returns on behalf of Taxpayers for
2007 and 2012 were provided during this litigation but were not signed
under penalty of perjury nor filed with the IRS.
6
The Schedule A and E forms report net operating losses and losses from
partnerships and S corporations. Here, those forms show that for 2007
through 2012, only $793 in losses was attributable to an S corporation,
Concord Sierra Restaurants. Only $38,439 in losses was attributable to
RSJS Holdings Limited Partnership, a small partnership not subject to
TEFRA. The remainder ($11,423,996) of the claimed $11,463,228 in net
operating losses was from TEFRA-partnerships, mostly the SNJ, Ltd.
partnership.
7
The IRS conceded below that Taxpayers did not owe a deficiency for
taxable year 2005, and the Tax Court granted a motion for summary
KEENE-STEVENS V. CIR 7
and redetermine the deficiencies and penalties pursuant to
I.R.C. § 6213(a). 8 The Tax Court had jurisdiction to
redetermine the deficiencies and penalties under I.R.C.
§§ 6213(a), 6214(a), and where applicable, to enter
declaratory judgments regarding Taxpayers’ non-
partnership items under I.R.C. § 6234 (as it was then in
effect).
Before trying the case, the Tax Court granted the IRS’s
motion to dismiss for lack of jurisdiction so much of the case
as related to partnership items because, as we explain more
below, at 7-10, partnership items could not be adjudicated in
these individual deficiency proceedings. The Tax Court then
ordered the IRS to recompute Taxpayers’ deficiencies and
penalties reflecting that dismissal.
The Tax Court noted that Taxpayers “presented no
evidence challenging the adjustments underlying the
deficiencies [the IRS] determined.” Instead, Taxpayers
argued that the IRS had not timely issued its notices of
deficiency, an argument which the Tax Court rejected in an
interlocutory order. After the litigation began, Taxpayers
also provided unsigned, unfiled individual income tax
returns (Forms 1040) for years 2007 and 2012. For its part,
the IRS argued that the Tax Court should sustain the
recomputed deficiencies, or, where appropriate, issue
judgment that it “lack[ed] jurisdiction to order a refund or credit of any
overpayment with respect to . . . [Taxpayers’] 2005 tax liability.”
Therefore, taxable year 2005 was not at issue in the decision below nor
is it at issue in this appeal.
8
The IRS issued Taxpayers separate notices of deficiency for (1) years
2006, 2008, 2009, and 2010; and (2) 2007, 2011, and 2012. The Tax
Court consolidated the cases into one proceeding.
8 KEENE-STEVENS V. CIR
declaratory judgments sustaining the recomputed
deficiencies for the non-partnership items.
After a trial, the Tax Court issued a memorandum
opinion (1) upholding the IRS’ recomputed deficiencies for
taxable years 2006 and 2008; 9 (2) concluding that Taxpayers
owed no deficiencies or penalties for taxable years 2007 and
2012 because the partnership losses claimed on the
unsigned, unfiled tax forms for those years were larger than
the IRS’ adjusted non-partnership deficiencies; and
(3) concluding that Taxpayers owed no deficiencies or
penalties for taxable years 2009, 2010, and 2011 because the
adjustments to non-partnership items for each of those years
would not have resulted in a deficiency even if there were no
“net loss from partnership items” under I.R.C. § 6234(a)(3).
See Stevens v. Comm’r, 120 T.C.M. (CCH) 103 (2020). We
will elaborate on the second and third conclusions, including
our review of those conclusions, below at 11-20 and 20-28,
respectively.
Taxpayers subsequently appealed to this Court, and the
IRS cross-appealed. We have jurisdiction under 26 U.S.C.
§ 7482(a)(1). Taxpayers’ appeal was dismissed for failure to
prosecute. See Stevens v. Comm’r, No. 21-70650, 2022 WL
4234267, at *1 (9th Cir. June 8, 2022). Thus, all that remains
before us is the IRS’s cross-appeal over the Tax Court’s final
adjudication that Taxpayers owed neither deficiencies nor
penalties for taxable years 2007 and 2009 through 2012.
9
The Tax Court upheld the 2006 recomputed deficiency under I.R.C
§ 6214 and issued a declaratory judgment upholding the 2008
recomputed deficiency as to the non-partnership items under I.R.C.
§ 6234(c).
KEENE-STEVENS V. CIR 9
B. Legal Framework
We begin with an overview of the relevant statutory and
regulatory framework.
If the IRS determines that a taxpayer owes additional tax
(i.e., has a “deficiency,” see I.R.C. § 6211), it issues a
“notice of deficiency” giving the taxpayer an opportunity to
petition the Tax Court before it assesses the additional tax.
Id. §§ 6212, 6213. The Tax Court then has jurisdiction to re-
determine the correct amount of the deficiency and to
determine whether any penalties should be assessed. Id.
§ 6214(a). The IRS generally has only three years after the
taxpayer files a return to assess any additional taxes due. Id.
§ 6501(a).
Partnerships are not taxed directly. Instead, partnership
gains and losses pass through to the partners, who are liable
for their respective shares as reported on their individual tax
returns. Id. §§ 701–02, 6031. Adjudicating partnership gains
and losses in the context of individual deficiency
proceedings presents a potential problem, however.
Determining whether individual partners owe more or less
tax on their share of partnership’s gains or losses in
individual deficiency proceedings could cause “duplicative
proceedings and the potential for inconsistent treatment of
partners in the same partnership.” United States v. Woods,
571 U.S. 31, 38 (2013).
Congress addressed this problem when it enacted
TEFRA (which has since been repealed but was effective
during the relevant years here). 10 Under TEFRA, the
10
As we have noted, TEFRA was repealed in 2015, and the treatment of
partnership-related tax matters changed effective for taxable years after
10 KEENE-STEVENS V. CIR
determination of partnership-related tax matters is addressed
in two stages:
First, the IRS must initiate proceedings at the
partnership level to adjust “partnership
items,” those relevant to the partnership as a
whole. . . . [Second, o]nce the adjustments to
partnership items have become final, the IRS
may undertake further proceedings at the
partner level to make any resulting
“computational adjustments” in the tax
liability of the individual partners.
Woods, 571 U.S. at 39 (emphasis added) (citing I.R.C.
§§ 6221, 6231(a)(3), 6231(a)(6)). Partnership items are
“any item required to be taken into account for the
partnership’s taxable year . . . to the extent . . . such item is
more appropriately determined at the partnership level than
at the partner level.” 11 I.R.C. § 6231(a)(3); see also id.
§ 6221 (“tax treatment of any partnership item . . . shall be
determined at the partnership level”).
In other words, in an individual income tax deficiency
case brought under Sections 6213 and 6214—like this
case—the Tax Court lacks authority to determine the validity
of the taxpayer’s claimed, TEFRA-eligible partnership
2017. See Bipartisan Budget Act of 2015, Pub. L. No. 114–74, 129 Stat.
584 (2015). Again, TEFRA was in effect during all taxable years at issue
in this case.
11
Conversely, non-partnership item “means an item which is (or is
treated as) not a partnership item.” I.R.C. § 6231(a)(4).
KEENE-STEVENS V. CIR 11
losses; 12 the tax treatment of those claimed partnership
losses must first be determined separately at the partnership
level under TEFRA. See id. § 6221; 26 C.F.R.
§ 301.6221- 1(a) (explaining that taxpayers may not place
partnership items at issue in individual deficiency
proceedings).
TEFRA’s two-step procedure creates a potential timing
problem for the IRS. If a taxpayer claims a partnership loss
on an individual return that would offset their non-
partnership income—resulting in no tax liability for that
individual 13—the IRS would be unable to determine whether
a deficiency existed without first conducting partnership-
level proceedings to establish the reported partnership
losses’ validity. The time needed for those partnership-level
proceedings might exceed the three-year period set in the
statute of limitations imposed by Section 6501 to assess any
resulting tax deficiency.
To solve that problem, Congress included a special
declaratory judgment procedure in TEFRA: Section 6234. If
Section 6234 applies, instead of issuing a notice of
deficiency to the taxpayer, the IRS sends a “notice of
adjustment” that reflects its determination of the taxpayer’s
12
TEFRA excludes “any partnership having 10 or fewer partners each of
whom is an individual (other than a nonresident alien), a C corporation,
or an estate of a deceased partner.” See I.R.C. § 6231(a)(1)(B)(i). When
we use the term “eligible” to describe partnership losses throughout this
opinion, we mean to refer to losses from those partnerships subject to
TEFRA.
13
This is an “oversheltered return.” I.R.C. § 6234(b).
12 KEENE-STEVENS V. CIR
non-partnership items. 14 I.R.C. § 6234(a). The taxpayer can
then file a “petition . . . for redetermination of the
adjustments” with the Tax Court under I.R.C. § 6234(c).
In such a Section 6234(c) proceeding, the Tax Court may
issue a declaratory judgment with respect to all non-
partnership items that do not need to be adjudicated in
TEFRA partnership-level proceedings. Id. § 6234(c). That
declaratory judgment is then binding in any subsequent
computational adjustments to the taxpayer’s liability after
the separate, TEFRA-partnership proceedings, even if the
limitations period would have otherwise expired by that
time. Id. § 6234(g)(1); see also id. §§ 6231(a)(6), 6501(a).
Finally, under Section 172(c), an NOL exists when a
taxpayer’s deductions exceed that taxpayer’s gross income
in a given year. When that occurs, the taxpayer may claim
the NOL as a “carryback” deduction against taxable income
for the two preceding years and as a “carryover” or
“carryforward” deduction to each of the next twenty years’
taxable income until the NOL is fully extinguished. See id.
§ 172.
II. Discussion
A. Standard of Review
“Conclusions of law, including the Tax Court’s
interpretation of the Internal Revenue Code, are reviewed de
novo.” SNJ Ltd. v. Comm’r, 28 F.4th 936, 941 (9th Cir.
14
If Section 6234 should apply, but the IRS mistakenly determines that
normal deficiency procedures apply and sends a notice of deficiency, the
Tax Court must treat the notice of deficiency as a “notice of adjustment”
under Section 6234 and any Tax Court action filed from that notice as an
action brought under Section 6234(c). I.R.C. § 6234(h)(2).
KEENE-STEVENS V. CIR 13
2022) (citation omitted). “We review the Tax Court’s factual
determinations . . . for clear error.” Id. (citation omitted).
B. Taxable Years 2007 and 2012
The Tax Court erred by effectively accepting as accurate
partnership losses that were not reported on valid tax returns
and thus could not be adjudicated in the required, separate,
partnership-level proceedings under TEFRA.
The Tax Court correctly held that for taxable years 2007
and 2012, Section 6234 did not apply. The Tax Court found
that Taxpayers filed no signed tax returns in either 2007 or
2012. Section 6234 applies only if “a taxpayer files an
oversheltered return for a taxable year.” I.R.C. § 6234(a)(1).
Because Taxpayers filed no returns—oversheltered or
otherwise—in 2007 and 2012, the Tax Court properly
concluded that the Section 6234(a)(1) prerequisite was not
met for those years. 15
But the Tax Court erred when it reasoned that for 2007
and 2012, it could not “deny [Taxpayers] a prepayment
forum for contesting the adjustment of partnership losses,
contrary to Congress’ intent in enacting section 6234.” The
Tax Court acknowledged that partnership losses “reported
on a signed and filed return may be more credible than
[those] reported on an unsigned return provided to the
Commissioner in the course of litigation in that facts stated
in the former are attested to under penalties of perjury.” And
notably, the Tax Court never found that these claimed
partnership losses were, in fact, grounded in any economic
reality. Nevertheless, without citation to any authority, it
held that the “failure to file a 2007 [and 2012] return should
Again, the SNJ, Ltd. partnership—to which most of the alleged losses
15
were attributed—also did not file tax returns in 2007 or 2012.
14 KEENE-STEVENS V. CIR
not deprive [Taxpayers] of a prepayment forum for
contesting any adjustment of the loss they profess to have
been allocated by [the TEFRA partnerships].” “[T]he
inapplicability of section 6234,” the Tax Court explained,
“does not resuscitate” the approach rejected by Section 6234
and exemplified in Munro v. Commissioner, 92 T.C. 71(1989). This reliance on Munro and the perceived
congressional intent behind Section 6234 was mistaken.
In Munro, the IRS issued a notice of deficiency that
prospectively disallowed the partnership losses reported by
the taxpayers—pending later partnership-level proceedings
to adjudicate their legitimacy—and made other adjustments
to the taxpayers’ reported non-partnership items. Id. at 71–
72. Munro held that the partnership items claimed on the
taxpayers’ return must be “completely ignored” in
determining whether a deficiency existed for the
non-partnership items. Id. at 74. This deprived the taxpayers
of a prepayment forum to determine their tax liability; if the
partnership losses were later verified, they were left to seek
a refund. The IRS and Tax Courts were motivated to take
this approach to avoid the IRS being time-barred from
seeking payment of deficiencies on non-partnership items if
the partnership-level proceedings lasted longer than the
three-year statute of limitations. See I.R.C. § 6501(a). To
solve this problem, Congress enacted Section 6234’s
declaratory judgment procedure for non-partnership items.
Here, because Taxpayers did not file tax returns and
Section 6234’s declaratory judgment procedure did not
apply, the Tax Court conducted an individual deficiency
proceeding pursuant to Section 6214(a). But in that
individual deficiency proceeding, the Tax Court effectively
accepted as accurate the partnership losses reported on
Taxpayers’ unsigned, unfiled tax return forms for 2007 and
KEENE-STEVENS V. CIR 15
2012, 16 which resulted in no tax deficiency for both years.
The Tax Court should have ignored those unreported
partnership losses in assessing Taxpayers’ deficiencies.
1. No Valid Tax Returns with Legal Effect
To begin, Taxpayers’ 2007 and 2012 Forms 1040 were
not valid tax returns with legal effect because they were
neither filed nor executed under penalty of perjury. See In re
Hatton, 220 F.3d 1057, 1060–61 (9th Cir. 2000) (defining
requirements of a valid tax return); see also I.R.C. § 6061(a)
(“any return, statement, or other document required to be
made under any provision of the internal revenue laws or
regulations shall be signed in accordance with forms or
regulations prescribed by the Secretary”); id. § 6065 (any
such form “shall contain or be verified by a written
declaration that it is made under the penalties of perjury”).
For a tax return to have legal effect, the default rule is
that it must be signed and filed under penalty of perjury.
Brown v. United States, 22 F.4th 1008, 1012 (Fed. Cir. 2022)
(“Sections 6061(a) and 6065 thus impose a default rule that
individual taxpayers must personally sign and verify their
[tax return documents]. Otherwise, the documents are
invalid or of no legal effect.”); Selgas v. Comm’r, 475 F.3d
697, 700–01, 701 n.7 (5th Cir. 2007) (“Even if the returns
were filed, the fact that they were unsigned deprives them of
legal effect.”). While the Secretary of Treasury can adjust
that default rule by regulation, she has not done so. See 26
C.F.R. §§ 1.6012-1 (explaining rules for individual tax
returns, consistent with the default rule); 1.6065-1(a)
16
Here, the partnership losses totaled $6,893,357 and $11,463,228 in
2007 and 2012 respectively. The 2012 partnership losses largely result
from a NOL carryforward deduction pursuant to I.R.C. § 172.
16 KEENE-STEVENS V. CIR
(reiterating the statutory rules); see also Brown, 22 F.4th at
1013 (“To be sure, § 6061(a) gives the Secretary the
authority to prescribe how individual taxpayers may satisfy
the statute’s requirement. Similarly, § 6065 gives the
Secretary discretion to suspend the verification requirement
in certain cases. However, these statutes’ implementing
regulations echo the statutory default rule.”).
Because Taxpayers here did not file signed tax returns
under penalty of perjury for 2007 and 2012, their 2007 and
2012 tax forms had no legal effect. That is unlike the
circumstances in Munro. In that case the taxpayers filed
valid, legally effective tax returns claiming partnership
losses, but the Tax Court “completely ignored” those
partnership items reported on signed, valid returns—forcing
them to pay up front and ask for a refund later. Munro, 92
T.C. at 74.
In overruling Munro with Section 6234, Congress
explained that the IRS and Tax Courts must “assum[e] that
all TEFRA items whose treatment has not been finally
determined [in separate partnership proceedings] had been
correctly reported on the taxpayer’s return.” H.R. Rep. 105-
148, at 586 (1997) (emphasis added). The Committee Report
specifically noted that Section 6234 was intended to create a
“special rule to address the factual situation presented in
Munro.” Id.We do not share the Tax Court’s concern that denying
these Taxpayers “a prepayment forum for contesting the
adjustment of partnership losses [would be] contrary to
Congress’ intent in enacting section 6234.” The taxpayers in
Munro had filed a tax return. 92 T.C. at 71. Taxpayers in this
case did not file any returns in 2007 or 2012. As a result, they
are not factually similar to the taxpayers in Munro, who
KEENE-STEVENS V. CIR 17
played by the rules. We see nothing contrary to the intent of
Congress in denying the benefit of Section 6234 to a
taxpayer who never filed a return and thus failed to provide
the Tax Court with any “correctly reported” partnership
losses upon which that court could base its calculations. Cf.
H.R. Rep. 105-148, at 586 (1997).
2. No Mechanism for the Tax Court to Assess
Partnership Losses on Invalid Tax Returns
As we have explained, the proceeding before the Tax
Court was an individual deficiency proceeding under
Section 6214(a). The Tax Court erred by accepting as
accurate Taxpayers’ TEFRA-eligible claimed partnership
losses because it had no jurisdiction in these proceedings to
evaluate those losses at all. What’s more, the TEFRA rules
and statutes provide no process to evaluate partnership losses
claimed on invalid tax returns.
The deficiency statutes applicable here provide that “[i]n
determining the amount of any deficiency for the purposes
of [income tax deficiency procedures], adjustments to
partnership-related items shall be made only as provided in
[the TEFRA partnership provisions].” I.R.C. § 6211(c)
(emphasis added). And under TEFRA, “the tax treatment of
any partnership item . . . shall be determined at the
partnership level.” Id. § 6221 (emphasis added). Indeed, the
TEFRA regulation forbids a taxpayer in a “proceeding
relating to nonpartnership items”—like the Section 6214
proceeding before the Tax Court here—from “offset[ting] a
potential increase in taxable income based on changes to
nonpartnership items by a potential decrease based on
partnership items.” 26 C.F.R. § 301.6221-1(a) (emphasis
added). This is exactly what Taxpayers sought to do, and
what the Tax Court countenanced. The claimed partnership
18 KEENE-STEVENS V. CIR
losses should have been evaluated in separate, TEFRA
proceedings.
But there is a wrinkle in the TEFRA regulations. Those
regulations provide that “treatment of partnership items on
the partner’s return may not be changed except as provided
in [TEFRA] and the regulations thereunder.” Id. (emphasis
added). Thus, absent a valid tax return that reported
partnership items, the TEFRA statutes and regulations do not
provide for the required partnership-level proceedings.
Taxpayers here appear to slip between TEFRA’s cracks, but
if so, it should not work to their advantage. They claimed
TEFRA-eligible partnership losses—which the Tax Court
could not adjudicate in individual proceedings. But they
claimed those losses on unfiled, invalid tax forms—which
could not trigger either the separate, partnership-level
proceedings or Section 6234’s declaratory judgment
procedure for the non-partnership items.
That does not mean that Taxpayers are entirely without
recourse. For example, if Taxpayers were to provide tax
returns that were signed under penalty of perjury, even if
late, they could seek a refund after the TEFRA-partnership
proceedings concluded, just like the taxpayers in Munro. See
92 T.C. at 74. But unlike the Munro taxpayers, the Taxpayers
in our case did not file any valid tax returns for these two
years. No TEFRA-eligible partnership items existed for
Taxpayers in taxable years 2007 or 2012 for the IRS or Tax
Court to consider in a pre-payment context. 17
17
Taxpayers’ assertion that their unreported partnership losses were
simply amendments to their pleadings under I.R.C. Rule 41(b) to which
the IRS effectively consented is unsuccessful. Taxpayers could not assert
KEENE-STEVENS V. CIR 19
3. Negative Incentives of the Tax Court’s Approach
We do not lightly reject the Tax Court’s analysis, but our
interpretation of the applicable statutes is bolstered by the
perverse incentives inherent in the Tax Court’s approach.
That approach undermines Section 6234’s threshold
requirement that taxpayers file tax returns to get its
prepayment protections. See I.R.C. § 6234(a)(1). Instead, the
Tax Court could incentivize a failure to file tax returns in the
hope that, as here, purported partnership losses would be
accepted in a deficiency proceeding and that the IRS might
be precluded from relitigating the taxes owed, even if the
partnership losses were later disallowed. Suppose a
judgment was entered following a proceeding against an
individual taxpayer, and that taxpayer’s alleged partnership
losses were later disallowed in partnership-level
proceedings. The concern of the IRS is that any subsequent
action would be a further claim between the same two
parties—the IRS and the taxpayer—about the same cause of
action— a possible tax deficiency in the given year. That
could trigger an assertion of claim preclusion or res judicata
based on the first proceeding. See, e.g., Comm’r v. Sunnen,
333 U.S. 591, 598 (1948) (“[I]f a claim of liability or non-
liability relating to a particular tax year is litigated, a
judgment on the merits is res judicata as to any subsequent
proceeding involving the same claim and the same tax
year.”). The parties argued this question to us, but we need
not and do not resolve it here. The point is that the approach
taken by the Tax Court here opens the door to arguments that
unreported partnership losses for the first time in this individual
deficiency proceeding because those losses effectively did not occur—
as they were not reported on valid tax returns, there was no mechanism
for them to be adjudicated in accordance with TEFRA.
20 KEENE-STEVENS V. CIR
should not have to be faced, and that, indeed, Congress has
precluded by requiring the submission of partnership losses
on valid returns.
In sum, the Tax Court correctly held that Section 6234
did not apply to taxable years 2007 and 2012, but it erred in
using the partnership losses claimed on the invalid tax
returns to hold that Taxpayers had no income tax
deficiencies for those years. Those purported losses were not
reported on valid tax returns. They could not be adjudicated
in Taxpayers’ individual Tax Court proceedings. Neither
could they be adjudicated—nor were they adjudicated—in
required partnership-level proceedings. We reverse the Tax
Court’s holding that there were no deficiencies in 2007 and
2012 and remand with instructions for the Tax Court to
determine Taxpayers’ 2007 and 2012 deficiencies (and any
applicable penalties and additions-to-tax) 18 disregarding
entirely the alleged partnership losses in those years.
C. Taxable Years 2009, 2010, and 2011
We conclude that the Tax Court erred when it excluded
from its calculations of “net loss from partnership items,” see
I.R.C. § 6234(a)(3), in 2009, 2010, and 2011 the portions of
the NOL carryover deductions that were composed of
eligible partnership losses in prior years.
18
Because it determined that Taxpayers owed no deficiencies in 2007
and 2012, the Tax Court rejected the penalties and additions-to-tax that
the IRS assessed. On remand, the Tax Court must reevaluate whether
Taxpayers owe any failure-to-file or failure-to-pay penalties or
additions-to-tax for taxable years 2007 and 2012 pursuant to I.R.C.
§§ 6651 and 6654.
KEENE-STEVENS V. CIR 21
The Tax Court held that Taxpayers owed no deficiency
to the IRS for taxable years 2009, 2010, and 2011. 19. For
those years, the Tax Court applied Taxpayers’ NOL
carryover deductions to its calculations of Taxpayers’ non-
partnership tax liability. Because those NOL carryover
deductions were so large, they offset any non-partnership
income, resulting in the conclusion that there were no
deficiencies. See I.R.C. § 172.
The Tax Court then determined that the declaratory
judgment provisions of Section 6234(c) were inapplicable
because Taxpayers’ tax returns in those years failed to
satisfy Section 6234(a)(3): that the IRS’ adjustments to the
non-partnership items in the return “do not give rise to a
deficiency . . . but would give rise to a deficiency if there
were no net loss from partnership items.” I.R.C.
§ 6234(a)(3). In other words, the Tax Court held that even
without the net partnership losses that Taxpayers claimed on
their 2009, 2010, and 2011 returns, 20 their adjusted taxable
income was not enough to create a deficiency.
19
Because it determined that Taxpayers owed no deficiencies in 2008
through 2011, the Tax Court also rejected for taxable year 2010 the
addition-to-tax and accuracy related penalties that the IRS assessed
under I.R.C. §§ 6651(a)(1) and 6662(a). The Tax Court rejected for
taxable year 2011 the addition-to-tax that the IRS assessed under I.R.C.
§ 6651(a)(1), but the IRS conceded the 2011 penalties it assessed
pursuant to I.R.C. §§ 6651(a)(2) and 6654. Thus, on remand, the Tax
Court must redetermine whether Taxpayers owe any penalties or
additions-to-tax under I.R.C. §§ 6651(a)(1) and 6662 for taxable years
2010 and 2011.
20
For 2011, the Tax Court did not determine the value of the net loss
from partnership items, though it clearly excluded the NOL deductions
from its analysis. Thus, on remand, the Tax Court must conduct the
Section 6234(a)(3) analysis for taxable year 2011 in the first instance.
22 KEENE-STEVENS V. CIR
In calculating the net losses from partnerships, the Tax
Court did not include any of Taxpayers’ claimed NOL
carryover deductions, even though these deductions were
composed primarily of partnership losses from prior years.
The government contends that the Tax Court should have
accounted for the large, alleged partnership losses
underlying the NOL carryforward deductions when
determining the “net loss from partnership items” under
Section 6234(a)(3).
We agree. A carryforward NOL should be included in
the “net loss from partnership items” under Section
6234(a)(3) to the extent that the NOL is made up of losses
from TEFRA partnerships carried over from prior years. A
TEFRA partnership loss allocated to a partner in a given year
is a “partnership item.” See 26 C.F.R. § 301.6231(a)(3)-
1(a)(1)(i). Such a partnership item does not lose its character
as a partnership item when carried over as an NOL deduction
into a subsequent tax year.
Taxpayers respond that the definition of a “partnership
item” as “any item required to be taken into account for the
partnership’s taxable year,” I.R.C. § 6231(a)(3), limits
partnership items to those losses (or gains) sustained by the
partnership in that taxable year. But Taxpayers insert a time
limit that is not found in the statute. “The preeminent canon
of statutory interpretation requires us to presume that the
legislature says in a statute what it means and means in a
statute what it says there.” BedRoc Ltd., LLC v. United
States, 541 U.S. 176, 183 (2004) (internal quotation and
citation omitted). Contrary to Taxpayers’ claim, nothing in
the text of the statute indicates the year in which the
partnership must take the partnership item into account.
KEENE-STEVENS V. CIR 23
Indeed, Section 6234(a)(3)’s plain language includes
carryover NOLs from prior years. We “determine if a
statute’s meaning is plain or ambiguous by looking to ‘the
language itself, the specific context in which that language
is used, and the broader context of the statute as a whole.’”
Connell v. Lima Corp., 988 F.3d 1089, 1097 (9th Cir. 2021)
(quoting Robinson v. Shell Oil Co., 519 U.S. 337, 341
(1997)). Section 6234(a) provides:
(a) General rule.—If—
(1) a taxpayer files an oversheltered
return for a taxable year,
(2) the Secretary makes a
determination with respect to the
treatment of items (other than
partnership items) of such taxpayer
for such taxable year, and
(3) the adjustments resulting from
such determination do not give rise
to a deficiency (as defined in section
6211) but would give rise to a
deficiency if there were no net loss
from partnership items,
the Secretary is authorized to send a notice of
adjustment reflecting such determination to the
taxpayer by certified or registered mail.
I.R.C. § 6234(a) (emphasis added). Unlike subsections
(a)(1) and (a)(2), subsection (a)(3) does not include any
qualifier that the “net loss from partnership items” occur in
a specific taxable year. This difference between the
subsections plainly suggests that eligible carryforward net
operating losses should be considered part of the “net loss
from partnership items.”
24 KEENE-STEVENS V. CIR
Even if the text of the statute were ambiguous—which it
is not—we must identify the interpretation that is “‘more
consistent with the broader context’ and ‘primary purpose’
of the statute.” Connell, 988 F.3d at 1097 (quoting Robinson,
519 U.S. at 345–46). Congress enacted Section 6234(c)
largely to avoid the IRS being time-barred for non-
partnership deficiency proceedings. See H.R. Rep. 105-148,
at 585; I.R.C. § 6501(a).
With Section 6234’s declaratory judgment procedure,
however, “[i]f the taxpayer’s partnership items were then
adjusted [and disallowed] in a subsequent proceeding, the
IRS has preserved its ability to collect tax on any increased
deficiency attributable to the nonpartnership items,” H.R.
Rep. 105-148, at 587—notwithstanding the
otherwise-applicable statute of limitations. Even the Tax
Court acknowledged that accepting Taxpayers’ arguments
might permit the statute of limitations to bar the IRS from
assessing tax “that would result from the adjustments of
nonpartnership items taken into account in the [2009, 2010,
and 2011 notices of deficiency].” 21 Thus, the interpretation
of Section 6234(a)(3) that includes NOLs in the calculation
(to the extent the NOL contains TEFRA partnership losses)
is most consistent with the broader context and primary
purpose of the law.
Finally, the Tax Court’s inconsistent treatment of the
NOL carryforward deductions as “affected items”
demonstrates that the deductions should have been included
in the Section 6234(a)(3) calculation of “net loss from
21
Again, any additional tax due on the partnership items themselves
would still be available for the IRS to pursue. See I.R.C. § 6230(a)
(repealed 2015).
KEENE-STEVENS V. CIR 25
partnerships.” 22 The Tax Court repeatedly referred to the
NOL deductions as “affected items,” comprised mostly of
TEFRA “partnership item components,” while also ignoring
those NOL partnership item components in its Section
6234(a)(3) calculations. Taxpayers argue that because a net
operating loss carryover is an “affected item” it
definitionally cannot be a “partnership item” to be included
in the calculation of “net loss from partnership items.” But
that is beside the point. The phrase “net loss from partnership
items” includes only that portion of the NOLs consisting of
partnership losses carried over from prior tax years, which
remain “partnership items.” We see no inconsistency in
recognizing that the whole NOL is an affected item because
of its component partnership items.
Applying these principles to the values provided on
Taxpayers’ returns here, if the proportion of the
carryforward NOL deductions attributable to partnership
losses were included in the Tax Court’s arithmetic in taxable
years 2009 and 2010, then Taxpayers would have had a tax
deficiency but for the “net loss from partnership items”—
satisfying Section 6234(a)(3) in those years.
22
An “affected item” is “any item to the extent such item is affected by
a partnership item,” I.R.C. § 6231(a)(5) (repealed 2015), and the tax
code “require[s] partner level determinations” to be completed before the
Tax Court examines the individual tax treatment of an “affected item.”
Id. § 6234(c); see also Adkison v. Comm’r, 592 F.3d 1050, 1053 (9th Cir.
2010) (“In general, a partnership proceeding must be completed and a
valid notice of deficiency sent before the Tax Court may examine the
individual tax treatment of an affected item.”).
26 KEENE-STEVENS V. CIR
For 2009, the Taxpayers reported negative taxable
income of $10,223,895. 23 The IRS’ adjustments to
Taxpayers’ non-partnership income increased their taxable
income by $5,981. The Tax Court determined that
Taxpayers’ net loss from partnership items was only
$990,360. However, Taxpayers claimed a $9,766,818 NOL
carryforward deduction that year, almost all of which,
$9,752,075, was attributable to purported TEFRA-
partnership losses carried forward from 2007 and 2008.24
The true “net loss from partnership items” under Section
6234(a)(3) that Taxpayers claimed, therefore, was
$10,742,435—the $990,360 that the Tax Court originally
included plus the eligible partnership NOLs that it failed to
include. If the net loss from eligible partnership items is
removed from Taxpayers’ adjusted gross income, Taxpayers
would have had a positive taxable income of $524,521 for
2009, 25 satisfying Section 6234(a)(3).
The Tax Court’s arithmetic is similar for 2010. There,
the Taxpayers reported a negative taxable income of
$10,814,841. 26 The IRS’ adjustments to Taxpayers’ non-
partnership income increased their taxable income by
$729,079. The Tax Court determined that Taxpayers’ net
loss from partnership items was only $109,569. However,
23
This figure accounts for the adjusted gross income reduced by itemized
deductions and exemptions claimed on Taxpayers’ 2009 return.
24
The $14,743 remainder was a loss from RSJS Holdings, a small
partnership not subject to TEFRA.
25
This value is obtained from the sum of $5,981 (adjustment to non-
partnership items) + $10,742,435 (net loss from partnership items) –
$10,223,895 (adjusted gross income).
26
This figure accounts for the adjusted gross income reduced by itemized
deductions and exemptions claimed on Taxpayers’ 2009 return.
KEENE-STEVENS V. CIR 27
Taxpayers claimed a $10,188,499 NOL carryforward
deduction that year, of which $10,170,250 was attributable
to purported TEFRA partnership losses carried forward from
2007, 2008, and 2009. 27 The true “net loss from partnership
items” that Taxpayers claimed, therefore, was
$10,279,819—the $109,569 that the Tax Court originally
included plus the eligible partnership NOLs that it failed to
include. Thus, if the net loss from eligible partnership items
is removed from Taxpayers’ adjusted gross income,
Taxpayers would have had a positive taxable income of
$194,057, 28 again satisfying Section 6234(a)(3).
We do not conduct this analysis for taxable year 2011,
though the same result—that Section 6234(a)(3) is
satisfied—seems likely. Unlike for 2009 and 2010, the Tax
Court did not determine the 2011 value of the net loss from
partnership items, though it clearly excluded the alleged
TEFRA-partnership losses underlying the claimed
$10,750,110 NOL deductions when it determined Section
6234(a)(3) did not apply. On remand, the Tax Court must
conduct the Section 6234(a)(3) analysis for taxable year
2011 in the first instance, including by calculating how much
of the claimed $10,750,110 NOL carryforward deduction on
Taxpayers’ 2011 tax returns consists of eligible partnership
losses that should factor into the “net loss from partnership
items” under Section 6234(a)(3).
Because for 2009, 2010, and 2011 the Tax Court should
have included the portion of the NOL carryforward
27
The $18,249 remainder was again the sum of losses reported from
RSJS Holdings, a small partnership not subject to TEFRA.
28
This value is obtained from the sum of $729,079 (adjustment to non-
partnership items) + $10,279,819 (net loss from partnership items) –
$10,814,841 (adjusted gross income).
28 KEENE-STEVENS V. CIR
deductions composed of prior-year partnership losses in its
calculation of “net operating loss from partnership items,”
we (1) reverse the Tax Court’s holding that it lacked
jurisdiction under Section 6234(a)(3) for the 2009, 2010, and
2011 returns; and (2) remand for the Tax Court to issue
declaratory judgments pursuant to Section 6234 regarding
the non-partnership items in the recalculated deficiencies for
those years, this time accounting for the TEFRA-
partnership-loss components of the NOL deductions in its
Section 6234(a)(3) calculations.
III. Conclusion
The Tax Court erred in holding that Taxpayers owed
neither deficiencies nor penalties for taxable years 2007 and
2009 through 2012. Consistent with the foregoing analysis,
we (1) reverse the Tax Court’s deficiency determinations for
taxable years 2007 and 2012 and remand with instructions to
determine Taxpayers’ deficiencies without regard to any
partnership losses claimed on invalid, legally ineffective tax
returns; and (2) reverse the Tax Court’s determination that it
lacked jurisdiction to enter declaratory judgments under
I.R.C. §§ 6234(a)(3), (c) for taxable years 2009 through
2011 and remand for it to assess the non-partnership items
in the Taxpayers’ 2009, 2010, and 2011 recomputed
deficiencies, accounting for the TEFRA-eligible partnership
components of the NOL deductions only in the
Section 6234(a)(3) calculations of “net loss from partnership
items.” We also remand for the Tax Court to recalculate any
penalties or additions-to-tax that Taxpayers owe for taxable
years 2007 and 2009 through 2012 pursuant to I.R.C.
§§ 6651, 6654, and 6662.
REVERSED and REMANDED.