Jt USA v. Cir

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JT USA, LP; JTR-LLC; TAX No. 12-70037
MATTERS PARTNER,
Petitioners-Appellees, Tax Ct. No.
5282-05
v.
COMMISSIONER OF INTERNAL OPINION
REVENUE,
Respondent-Appellant.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted
June 2, 2014—Pasadena, California
Filed November 14, 2014
Before: Stephen S. Trott and Consuelo M. Callahan, Circuit
Judges, and Mark W. Bennett, District Judge.*
Opinion by Judge Trott;
Dissent by Judge Callahan
*
The Honorable Mark W. Bennett, District Judge for the U.S. District
Court for the Northern District of Iowa, sitting by designation.
2 JT USA V. CIR
SUMMARY**
Tax
The panel remanded an appeal by the Commissioner of
Internal Revenue and held that the tax court erred in
concluding that taxpayers could opt out of a partnership
administrative proceeding under the Tax Equity and Fiscal
Responsibility Act.
The panel held that the meaning of 26 U.S.C.
§ 6223(e)(3)(B) is clear and unambiguous that unless a
partner elects to have all of his or her partnership items
treated as nonpartnership items, the partner cannot elect out
of proceeding under the Tax Equity and Fiscal Responsibility
Act.
Dissenting, Judge Callahan wrote that TEFRA allows one
partner to make one election and another partner to make a
different election, and that a partner who has both direct and
indirect interests should have the same option, at least where
the IRS fails to timely notify the taxpayer that a bifurcated
election is not allowed.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
JT USA V. CIR 3
COUNSEL
Joan I. Oppenheimer (argued), Tamara W. Ashford, Deputy
Assistant Attorney General, Teresa E. McLaughlin, Tax
Division Department of Justice, Washington, D.C., for
Respondent-Appellant.
Richard V. Vermazen (argued), Law Office of Richard V.
Vermazen, San Diego, California; Ernest S. Ryder and
Lauren A. Rinsky, Ernest S. Ryder & Associates, Inc., APLC,
San Diego, California, for Petitioners-Appellees.
OPINION
TROTT, Circuit Judge:
We review de novo the Tax Court’s reading and
application of a TEFRA statute1 in a convoluted action arising
from (1) a partnership’s attempted use of a bogus tax shelter
to offset capital gains, and (2) the Commissioner of Internal
Revenue’s subsequent denial of a $32.5 million “loss”
claimed by the partnership to eliminate income tax liability
on an asset sale resulting in a $28 million capital gain. The
Tax Court ruled that a taxpayer holding both direct and
indirect interests in a partnership may elect under 26 U.S.C.
§ 6223(e)(3)(B) not to be bound by the results of a
1
Congress enacted the Tax Treatment of Partnership Items Act of 1982
as Title IV of the Tax Equity and Fiscal Responsibility Act of 1982
(“TEFRA”), Pub. L. No. 97-248, §§ 401-406, 96 Stat. 324 (codified as
amended at 26 U.S.C. §§ 6221-6232 (2012)).
4 JT USA V. CIR
partnership proceeding – or partnership audit2 – as to some,
but not all, of those interests held during the relevant taxable
year. In other words, that § 6223(e)(3)(B) permits taxpayers
to opt out of the partnership proceeding with respect to their
indirect interests but to leave in that proceeding their alleged
remaining direct partnership interests. The Commissioner
concedes that “[i]f taxpayers’ elections to opt out, but only as
indirect partners, are effective, then the assessment of
deficiencies flowing from about $36.6 million in adjustments
(or on the order of $10 million in tax) is time-barred.”
Accordingly, it appears that if the IRS prevails, the taxpayers
will be liable for additional taxes. Thus, their claim that this
case is now moot for the lack of a controversy is groundless.
We have jurisdiction over this timely appeal pursuant to
26 U.S.C. § 7482(a)(1), and we conclude that the Tax Court’s
reading of the disputed statute was incorrect.3 We also
conclude that the IRS’s sloppy administrative errors,
including mailing the wrong form letter to the taxpayers, were
2
26 U.S.C. §§ 6221, 6231(a)(3); 26 C.F.R. § 301.6221-1.
3
When this controversy first came to us pursuant to 26 U.S.C.
§ 7482(a)(2)(A) on a failed attempt by the IRS to secure an interlocutory
decision on this issue, we said,
If the Tax Court ultimately determines that the
Gregorys did not retain a direct interest in JT USA at
the relevant time, and therefore do not have tax
liability, the IRS will be able to appeal that ruling along
with the Tax Court’s prior interlocutory order that the
Gregorys had authority to bifurcate their election in the
TEFRA proceeding.
Comm’r v. JT USA, LP, 630 F.3d 1167, 1173 (9th Cir. 2011) (emphasis
added).
JT USA V. CIR 5
not sufficient either to require a different outcome or to stop
the IRS from pursuing this matter and its claims. Thus,
because we hold that the taxpayers’ disputed elections to opt
out were invalid, we remand for further proceedings
consistent with this opinion.
Background
The facts and circumstances of this case are available in
the Tax Court’s decision, JT USA LP v. Comm’r, 131 T.C. 59
(2008), and in our previous opinion in Comm’r v. JT USA,
LP, 630 F.3d 1167, 1169–70 (9th Cir. 2011). We attach the
Tax Court’s opinion as an appendix and repeat the facts only
as necessary to illuminate our decision. For the best
“explanation of the statutory scheme for dealing with
partnership matters,” we refer the reader to and incorporate
Justice Scalia’s opinion in United States v. Woods, 134 S. Ct.
557, 562–63 (2013).
26 U.S.C. § 6223(e)(3)(B)
26 U.S.C. § 6223(e)(3)(B), entitled “Notice to Partners of
Proceedings,” reads in pertinent part, “In any case to which
this subsection applies, if paragraph (2) does not apply, the
partner shall be a party to the proceedings unless such partner
elects – . . . (B) to have the partnership items of the partner
for the partnership taxable year to which the proceeding
relates treated as nonpartnership items.”
In Carson Harbor Village, Ltd. v. Unical Corp., 270 F.3d
863, 878 (9th Cir. 2001) (quoting Caminetti v. United States,
242 U.S. 470, 485 (1993)), we said,
6 JT USA V. CIR
It is elementary that the meaning of a statute
must, in the first instance, be sought in the
language in which the act is framed, and if
that is plain, . . . the sole function of the courts
is to enforce it according to its terms.
Where the language is plain and admits of no
more than one meaning, the duty of
interpretation does not arise, and the rules
which are to aid doubtful meanings need no
discussion.
The statute at the core of this dispute, § 6223(e)(3)(B),
provides that a “partner” may elect “to have the partnership
items of the partner for the partnership year to which the
administrative proceedings relate treated as nonpartnership
items.” The statute says “the partner,” not an indirect partner
or any other subset of the term “partner” as defined in
26 U.S.C. § 6231(a)(2). Moreover, § 6223(e)(3)(B) allows
the partner to have “the partnership items”(plural) of that
partner to be treated as nonpartnership items, not some of that
partner’s items to be treated as such.
The meaning of this language is clear and unambiguous,
and it means – as the Commissioner argues – that unless a
partner elects to have all of his or her partnership items
treated as nonpartnership items, the partner cannot elect out
of the TEFRA proceeding. See Exxon Mobil Corp. v.
Comm’r, 484 F.3d 731, 734 (5th Cir. 2007) (“Use of the
definitive article ‘the’ in the statute supports a conclusion that
there is one overpayment rate for each overpayment
situation.”). In the vernacular, § 6223(e)(3)(B) is an all-or-
nothing rule, and that ends our primary inquiry.
JT USA V. CIR 7
The Tax Court’s and the taxpayers’ excursions into other
sections of TEFRA are irrelevant. All the other TEFRA
sections to which the taxpayers refer demonstrate that when
Congress chose to differentiate between types of partners,
they knew how to do so. As the Supreme Court remarked in
Loughrin v. United States, ___ U.S. ___ , 134 S. Ct. 2384,
2390 (2014), “We have often noted that when ‘Congress
includes particular language in one section of a statute but
omits it in another’ – let alone the very next provision – this
Court ‘presume[s]’ that Congress intended a different
meaning.” Indeed, the absence in § 6223(e)(3)(B) of the
language the taxpayers would like us to read into it “provides
strong affirmative evidence” that Congress did not intend it
to be construed or implemented as the taxpayers wish.
United States v.Naftalin, 441 U.S. 768, 774–75(1979).
Accordingly, a partner in a TEFRA proceeding such as this is
limited under § 6223(e)(3)(B) to a single election: either all
in, or all out.
Here, the taxpayers tried to have their cake and eat it too.
Their multiple simultaneous statements of election were
entitled respectively “Statement of Election by Direct Partner
Under Section 6223(e)(3),” and “Statement of Election by
Indirect Partner Under Section 6223(e)(3).” Each “Indirect”
partner’s statement of election said that “[t]he undersigned
who is an Indirect Partner is also a Direct Partner of the
Partnership” and that “[t]his election does not apply to the
undersigned as a Direct Partner.” The statute does not permit
such slight-of-hand, and the taxpayers’ current claim that they
did not attempt to bifurcate any partnership items in dispute
going into the partnership proceeding is impeached by the
record. Equally unavailing were their indisputably untimely
attempts two years later to have their “elections out” cover
both their indirect and direct partnership interests.
8 JT USA V. CIR
Legislative History
Although not necessary to support our conclusion, we
note that it is consistent with the official legislative history
behind the statute. See Salinas v. United States, 522 U.S. 52,
57–58 (1997). The House Conference Report on § 6223(e)
says that “the partner will be a party to the proceeding [under
TEFRA] unless he elects . . . to have all partnership items
treated as nonpartnership items.” H.R. Conf. Rep. No. 97-
760, at 602(1982), reprinted in 1982 U.S.C.C.A.N. 1190,
1374 (emphasis added).
TEFRA
Although it dealt with a different TEFRA issue, our
reading of § 6223(e)(3)(B) is also consistent with the purpose
of TEFRA’s partnership provisions recently reiterated by the
Supreme Court in United States v. Woods, 134 S. Ct. 557
(2013). These provisions were enacted inter alia to prevent
the waste of time, effort, and resources occasioned by a
multiply of proceedings such as would occur if the Tax
Court’s construction of § 6223(e) were to prevail. In a
normal case the Tax Court’s ruling here would permit
“duplicative proceedings and the potential for inconsistent
treatment to partners in the same partnership,” thus hindering
the purpose and policy justifications that produces TEFRA.
Woods, 134 S. Ct. at 563. Citing Kligfeld Holdings, 128 T.C.
192, 199–200 (2007), the Tax Court correctly recognized also
that “[t]he goal of TEFRA is to have a single point of
adjustment for all partnership items at the partnership level,
thereby making any adjustments to a particular partnership
item consistent among all the various partners.” And the Tax
Court acknowledged that it’s reading of the statute would
seem “to be at odds with TEFRA’s overall goal to consolidate
JT USA V. CIR 9
partnership proceedings and increase consistency.” On these
points, the Tax Court was correct. Accordingly, we conclude
under a proper reading of § 6223(e)(3)(B), that the taxpayers’
attempted elections were ineffective.
The Pertinent Treasury Regulation
Even if we were to agree that § 6223(e)(3)(B)’s meaning
is ambiguous, which we do not, we would still be compelled
to reach the same conclusion. After the enactment of
§ 6223(e)(3)(B), the Treasury Department issued Temp.
Treas. Reg. § 301.6223(e)-2T(c)(1), 52 Fed. Reg. 6779 (Mar.
5, 1987), which was effective for the year of this controversy.
The regulation tracks the language of the House Conference
Report, and it provides that “the election shall apply to all
partnership items for the partnership taxable year to which the
election relates.” 52 Fed. Reg. at 6785 (emphasis added).
We agree with the government’s argument that the regulation
– which uses the words of the House Conference Report –
represents a reasonable reading of the statute and,
accordingly, is entitled to Chevron deference. Chevron,
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837
(1984); Mayo Found. for Medical Educ. & Research v.
United States, 131 S. Ct. 704, 713 (2011) (“The principles
underlying our decision in Chevron apply with full force in
the tax context.”).
The taxpayers’ attempt to avoid Chevron deference by
simply offering a different interpretation of the statute and the
regulation misses the point of Chevron deference. If the
agency’s reading of a statute is “a permissible construction of
the statute,” that reading and interpretation stands and is
entitled to respect. Alarcon v. Keller Industries, Inc., 27 F.3d
386, 389 (9th Cir. 1994). Such is the case here. Thus, we
10 JT USA V. CIR
remand to the tax court for further proceedings consistent
with this opinion, and to determine the validity of the
adjustments in the “final partnership administrative
adjustment,” known as the FPAA.
REMANDED for further proceedings.4
CALLAHAN, Circuit Judge, dissenting:
I respectfully dissent. We are here because the IRS
1) waited too long to give notice to the taxpayers of a TEFRA
partnership proceeding, 2) said nothing when the taxpayers
attempted to opt out of the TEFRA proceeding with respect
to their indirect interests but not with respect to their direct
interests,1 and 3) then failed to bring proceedings against the
taxpayers outside the TEFRA proceeding within the one-year
statute of limitations. Having struck out, in effect, the IRS
now seeks a do-over by disallowing the taxpayers’ election to
opt out of the TEFRA proceeding in order to pull the
taxpayers back into the proceeding. Contrary to the
majority’s contention, the statute does not prohibit such a
split election. TEFRA allows one partner to make one
election and another partner to make a different election. I
4
We find unpersuasive the taxpayers’ remaining contention that (1) they
are entitled to the benefits of substantial compliance, Baccei v. United
States, 632 F.3d 1140, 1145 (9th Cir. 2011), and (2) that the IRS by its
delay impliedly ratified their defective elections, Office of Personnel
Management v. Richmond, 496 U.S. 414, 419, 422 (1990) (en banc).
1
For convenience, I refer to the taxpayers’ election out with respect to
their indirect interests but not with respect to their direct interests as a
“split” or “bifurcated” election.
JT USA V. CIR 11
think that a partner who has both direct and indirect interests
should have the same option, at least where the IRS fails to
timely notify the taxpayer that a bifurcated election is not
allowed. On the facts of this case, any ambiguity in the
statute as to whether a taxpayer can make separate elections
based on different ownership interests should be construed in
favor of the taxpayer. I would affirm the Tax Court.
I
This case concerns the IRS’s attempts to recover capital
gains taxes from Jon Ross Gregory and his wife Rita.2 The
Gregorys held both direct and indirect interests in JT USA,
LP (“JT USA”), a limited partnership. The IRS issued a
notice of final partnership administrative adjustment
(“FPAA”) to JT USA for the 2000 tax year, initiating a
TEFRA proceeding. However, the IRS did not notify the
Gregorys of the proceeding, as required by statute under 26
U.S.C. § 6223(d)(1). Because of this error, the Gregorys had
the right to opt out of the TEFRA partnership proceeding
under 26 U.S.C. § 6223(e)(3)(B). The Gregorys then notified
the IRS that they were opting out of the TEFRA proceeding
with respect to their indirect interests but that they had
elected to participate in the proceeding with respect to their
direct interests.3
2
This background is taken from our prior decision regarding this
dispute, Commissioner v. JT USA, LP, 630 F.3d 1167 (9th Cir. 2011).
3
Once the Gregorys began to suspect that their split election would be
disallowed, they sought to opt out of the TEFRA proceeding with respect
to both their direct and indirect interests, with no response from the IRS.
12 JT USA V. CIR
After the Gregorys’ election out of the TEFRA
proceeding with respect to their indirect interests in JT USA,
the IRS could have brought an action against the Gregorys
outside of the TEFRA proceeding. However, the IRS failed
to do so within the one-year statute of limitations, see
26 U.S.C. § 6229(f)(1), and the limitations period ran out at
the end of 2005. Thus, “by 2006, the IRS had only two
options to recover the alleged tax deficiency”: either “show
that the Gregorys had a direct interest in JT USA at the
relevant time during 2000,” or “invalidate the Gregorys’
election out of the TEFRA proceeding with respect to their
indirect interests.” JT USA, 630 F.3d at 1170.
The Gregorys filed a petition with the Tax Court in 2006,
arguing that they were only indirect partners of JT USA
during the period at issue and that they had no tax liability
because the IRS had not assessed a tax deficiency before the
one-year statute of limitations had run. In response, the IRS
argued that taxpayers were not authorized to “bifurcate” their
election to participate in TEFRA proceedings, and therefore
the Gregorys’ election to opt out with respect to their indirect
interest in JT USA was invalid. The Tax Court, however,
found that the bifurcated election was valid and dismissed the
Gregorys as indirect partners from the TEFRA proceeding.
The IRS then filed an interlocutory appeal, which we
dismissed for lack of appellate jurisdiction. Id. at 1169. On
remand, the Tax Court determined that all of the disputed
adjustments related to the Gregorys’ interests as indirect
partners. As the Tax Court had already ruled that the
Gregorys had validly elected out of the partnership
proceeding in their capacity as indirect partners, it held that
none the adjustments in the final partnership administrative
adjustment would pass through to any individual partner’s
JT USA V. CIR 13
return, and therefore the adjustments were moot. The
Commissioner then timely appealed the Tax Court’s final
judgment.
II
A
The statute at issue here, 26 U.S.C. § 6223(e)(3)(B),
provides that where the IRS fails to provide proper notice of
a TEFRA proceeding to a partner, the partner may elect “to
have the partnership items of the partner for the partnership
taxable year to which the proceeding relates treated as
nonpartnership items.” The majority and the IRS claim that
this language unambiguously states that a taxpayer may make
only one election – either you opt out completely, or not at
all. The majority and the IRS err in their characterization of
this statute and the applicable regulations.
The tax code expressly provides that a single individual
or entity may have dual capacities as direct and indirect
partners and separate rights under each capacity. In other
words, an individual may wear different “hats” and exercise
its rights differently with respect to each hat. See, e.g.,
Barbados #6 Ltd. v. Comm’r, 85 T.C. 900, 904-05 (1985)
(discussing IRC § 6226(a) and (b)). Thus, the Gregorys were
not required to make a single election with respect to their
interests as direct and indirect partners. If different partners
can make their own separate elections to opt out from a
TEFRA proceeding (or to stay in the proceeding) under
§ 6223, a single individual holding these exact same interests
should be treated similarly.
14 JT USA V. CIR
The fact that the statute says “the partner” may elect out
of the partnership proceeding does not show that parties with
multiple partnership interests have to make a single election.
The language just shows that partners may elect out of the
TEFRA proceeding, regardless of whether they are direct
partners, indirect partners, or otherwise. Thus if a taxpayer
wearing his direct partner hat opts out, he opts out with
respect to all of his direct interests. However, this need not
affect his interests as an indirect partner. If the taxpayer
wearing his indirect partner hat opts out, he opts out with
respect to all of his interests as an indirect partner,
independent of his interests as a direct partner. Such
interpretation is not contrary to the statute.4
Nor does the pertinent Treasury regulation decide this
issue. The regulation states that “[t]he election shall apply to
all partnership items for the partnership taxable year to which
the election relates.” Miscellaneous Provisions Relating to
the Tax Treatment of Partnership Items, 52 Fed. Reg. 6779,
6785 (Mar. 5, 1987). However, this regulation, just like the
statute, is susceptible to an interpretation that the election
applies to all the partnership items of that particular partner,
not all of the individual taxpayer’s interests, whether direct or
indirect.
Further, as the IRS conceded at oral argument, this issue
has never come up before. Thus, the IRS’s position in this
4
The conference report’s language stated that the statute provided that
a partner could opt out of the partnership proceeding with respect to all
partnership items. Tax Equity and Fiscal Responsibility Act of 1982,
1982-2 C.B. 600, 602 (Aug. 17, 1982). However, the removal of “all”
from the final language of the statute could also suggest that the drafters
did not want to prohibit split elections.
JT USA V. CIR 15
appeal is only a litigating position which is not entitled to
Chevron deference. Accord Price v. Stevedoring Servs. of
Am., Inc., 697 F.3d 820, 825–31 (9th Cir. 2012) (en banc)
(litigating position of agency director in interpreting statute
was not entitled to Chevron deference). Finally, we should
interpret the tax code “consistent with the general rule of
construction that ambiguous tax statutes are to be construed
against the government and in favor of the taxpayer.” See
Royal Caribbean Cruises, Ltd. v. United States, 108 F.3d 290,
294 (11th Cir. 1997) (citations omitted). The majority’s
interpretation of the statute runs contrary to this general rule.
B
The majority also errs in holding that TEFRA’s general
policy mandates reversing the Tax Court. It is true that
TEFRA was enacted to avoid duplicative proceedings and
inconsistent treatment of partners in the same partnership.
See United States v. Woods, 134 S. Ct. 557, 562–63 (2013).
However, this general policy does not resolve the question of
whether split elections are allowed. When Congress provided
for § 6223(e)(3)’s opt-out provision, Congress determined
that TEFRA’s general policy against multiple proceedings
should yield when the IRS does not give proper notice, as
happened here. In other words, the opt-out provision is a
statutorily-provided exception to the general policy. If the
general policy was paramount, Congress never would have
enacted § 6223(e)(3) in the first place. Allowing a split
election does not thwart TEFRA’s general policy any more
than the statute’s express provision allowing a partner to opt
out due to improper notice.
16 JT USA V. CIR
III
The IRS struck out in this case: one, it failed to give the
Gregorys proper notice of the TEFRA proceeding; two, it
failed to object to the taxpayers’ election out as indirect
partners; and three, it failed to bring a proceeding against the
Gregorys outside the TEFRA proceeding. Congress
specifically allows taxpayers to opt out of the TEFRA
proceeding in this context, and the taxpayers did so in their
capacities as indirect partners. Moreover, especially in light
of the IRS’s failures, any ambiguity in the statute should be
resolved in favor of the taxpayer. I would therefore affirm
the Tax Court.
JT USA V. CIR 17
Appendix