Supreme Court won't review decision that AMCOR investors' refund claims were jurisdictionally barred Keefe, et al, v. U.S., (12/09/2010 CA FC) 106 AFTR 2d 2010-7304 , cert denied 4/18/2011 The Supreme Court has declined to review the Federal Circuit's jurisdictional dismissal of a petition filed by a group of AMCOR investors seeking partnership tax refunds stemming from IRS's disallowance of their agriculture-related partnership deductions. The Federal Circuit, affirming the Court of Federal Claims, determined that the timeliness of IRS's assessment and the imposition of interest for a tax-motivated transaction were partnership items that could only have been raised at the partnership-level proceeding, and denied the taxpayers' motion to continue stay of proceedings. Background on partnership rules. Under the TEFRA partnership audit rules, the tax treatment of any partnership item (and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item) generally is determined at the partnership level. ( Code Sec. 6221) A partner whose tax liability might be affected by the outcome of the litigation of partnership items may participate in the proceeding. ( Code Sec. 6224 ) IRS may assess additional tax liability against individual partners within one year of the final conclusion of the partnership's tax determination. ( Code Sec. 6229(d) ) The partner may contest the tax liability by paying the assessment and filing a refund action in the Court of Federal Claims. However, the partner can't bring an action for a refund attributable to partnership items. ( Code Sec. 7422(h) ) Code Sec. 6501(a) generally provides that a valid assessment of income tax liability may not be made more than 3 years after the later of the date the tax return was filed or the due date of the tax return. However, subject to exceptions and special rules, the period for assessing tax attributable to a partnership item (or affected item) for a partnership tax year won't expire before the date that is three years after the later of: (1) the date the partnership return was filed, or (2) the last day for filing the return for that year (without regard to extensions). ( Code Sec. 6229(a) ) In Keener v. U.S., (CA Fed Cir 2009) 103 AFTR 2d 2009-364 , the Federal Circuit found that taxpayers' statute of limitations claim was attributable to a partnership item and so was barred from being litigated in a refund action by Code Sec. 7422(h) . The Court relied on Reg. § 301.6231(a)(3)-1(b) , which provided that partnership items include the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc. The Court also rejected the taxpayers' argument that interest under former Code Sec. 6621(c) should not have been assessed against them because the transactions for which that interest was imposed were not “tax motivated transactions.” The Court reasoned that whether a particular partnership transaction was tax motivated and whether it was a “sham” transaction turned on the nature of the partnership's transaction—a partnership item. Background on former interest rules. Under former Code Sec. 6621(c) (repealed in '89), a special interest rate of 120% of the usual underpayment rate applied to substantial underpayments attributable to tax motivated transactions, including any sham or fraudulent transaction. Facts. American Agri-Corp (AMCOR) promoted tax shelter partnerships during the '80s. The partnerships were designed to generate a large loss in the first year, allowing each partner to claim a tax deduction averaging twice the size of his investment, with the excess loss to be recaptured in subsequent years. Joseph Keefe and his wife invested in AMCOR partnerships. In '85, the partnerships filed tax returns claiming an ordinary loss deduction, and the Keefes used those losses on their individual tax returns to offset their taxable income for that year. In '87, IRS began investigating the AMCOR partnerships. It issued Notices of Final Partnership Administrative Adjustment (FPAAs) to 43 partnerships in '90 and '91 with respect to their '85 returns, disallowing deductions for several reasons, including that the partnership activities constituted a series of sham transactions. Representatives of the partnerships challenged the FPAA disallowances in partnership level proceedings before the Tax Court under Code Sec. 6226(b) . Among the issues litigated was whether the adjustments were barred by the statute of limitations. In 2000, the Tax Court rejected the statute of limitations defense in test cases that the parties had agreed to, finding that one of the partnerships had failed to file a valid partnership return and that the other four had validly agreed through their tax matters partners (TMPs) to extend the time period under Code Sec. 6229(b) . (Agri-Cal Venture Assocs.,TC Memo 2000-271 ) The Prati case. A total of 129 AMCOR-partnership tax refund cases were filed by various taxpayers in the Court of Federal Claims. The Prati case, (4/16/2008 Ct Fed Cl), 101 AFTR 2d 2008-1778 , was selected to serve as a representative case for 76 other cases, including the Keefes', that were factually and legally similar. In Prati, the taxpayers raised two primary claims for relief: (1) the assessment was untimely because it was made after the statute of limitations had expired; and (2) the assessment of interest under former Code Sec. 6621(c) was improper because the partnership transaction at issue was not a tax-motivated transaction. The court, relying on Keener , dismissed Prati and those of the 76 cases that also presented solely jurisdictional issues under Code Sec. 7422(h) . The taxpayers appealed. The Federal Circuit, on June 22, 2009, stayed proceedings of a number of cases, includingKeefe, pending disposition of Prati and the other representative case. On May 5, 2010, the Federal Circuit affirmed that the statute of limitations issue was a partnership item and that because the taxpayers didn't raise the limitations issue in the partnership-level proceeding, Code Sec. 7422(h) barred them from raising this claim in refund proceedings. (See Prati v. U.S., 105 AFTR 2d 2010-2197 , at Weekly Alert ¶ 17 05/13/2010 ) The Court reasoned that when an assessment of tax involves a partnership item or an affected item, Code Sec. 6229 can extend the time period that the IRS otherwise has available under Code Sec. 6501 to make that assessment. Thus, the limitations period is the period defined by Code Sec. 6501 , as extended when appropriate by Code Sec. 6229 . These two Code sections do not operate independently to allow a taxpayer to assert one in isolation and so render an otherwise timely assessment untimely. The Court also found that because the taxpayers' challenge to the penalty interest assessments under former Code Sec. 6621(c) was inherently a dispute over the proper characterization of the partnerships' transactions, that issue was also barred by Code Sec. 7422(h) from being litigated in a refund action. The Pratis and another couple appealed the Federal Circuit's decision to the Supreme Court The Keefes' appeal. On appeal, the Keefes and other AMCOR investors moved to continue to stay their case pending the Supreme Court's resolution of thePrati case. Alternatively, they requested a stay until two additional representative cases were resolved. In its Dec. 9, 2010 opinion, the Federal Circuit stated that because it had since affirmed the Court of Federal Claims's decision in Prati, and the Keefes' claims were identical to those resolved, summary affirmance was warranted and there was no basis for staying the case pending disposition of petitions for writ of certiorari in Prati and the other representative case. On Jan. 10, 2011, the Supreme Court denied certiorari in Prati. Supreme Court won't review. The Supreme Court declined to review Keefe on Apr. 18, 2011. § 7422 Civil actions for refund. ________________________________________ (a) No suit prior to filing claim for refund. No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof. (b) Protest or duress. Such suit or proceeding may be maintained whether or not such tax, penalty, or sum has been paid under protest or duress. (c) Suits against collection officer a bar. A suit against any officer or employee of the United States (or former officer or employee) or his personal representative for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected shall be treated as if the United States had been a party to such suit in applying the doctrine of res judicata in all suits, in respect of any internal revenue tax, and in all proceedings in the Tax Court and on review of decisions of the Tax Court. (d) Credit treated as payment. The credit of an overpayment of any tax in satisfaction of any tax liability shall, for the purpose of any suit for refund of such tax liability so satisfied, be deemed to be a payment in respect of such tax liability at the time such credit is allowed. (e) Stay of proceedings. If the Secretary prior to the hearing of a suit brought by a taxpayer in a district court or the United States Claims Court [Court of Federal Claims, see§902(b), P.L. 102-572 ] for the recovery of any income tax, estate tax, gift tax, or tax imposed by chapter 41, 42, 43, or 44 (or any penalty relating to such taxes) mails to the taxpayer a notice that a deficiency has been determined in respect of the tax which is the subject matter of taxpayer's suit, the proceedings in taxpayer's suit shall be stayed during the period of time in which the taxpayer may file a petition with the Tax Court for a redetermination of the asserted deficiency, and for 60 days thereafter. If the taxpayer files a petition with the Tax Court, the district court or the United States Claims Court [United States Court of Federal Claims, see §902(b), P.L. 102-572 ], as the case may be, shall lose jurisdiction of taxpayer's suit to whatever extent jurisdiction is acquired by the Tax Court of the subject matter of taxpayer's suit for refund. If the taxpayer does not file a petition with the Tax Court for a redetermination of the asserted deficiency, the United States may counterclaim in the taxpayer's suit, or intervene in the event of a suit as described in subsection (c) (relating to suits against officers or employees of the United States), within the period of the stay of proceedings notwithstanding that the time for such pleading may have otherwise expired. The taxpayer shall have the burden of proof with respect to the issues raised by such counterclaim or intervention of the United States except as to the issue of whether the taxpayer has been guilty of fraud with intent to evade tax. This subsection shall not apply to a suit by a taxpayer which, prior to the date of enactment of this title, is commenced, instituted, or pending in a district court or the United States Claims Court [United States Court of Federal Claims, see §902(b), P.L. 102-572 ] for the recovery of any income tax, estate tax, or gift tax (or any penalty relating to such taxes). (f) Limitation on right of action for refund. (1) General rule. A suit or proceeding referred to in subsection (a) may be maintained only against the United States and not against any officer or employee of the United States (or former officer or employee) or his personal representative. Such suit or proceeding may be maintained against the United States notwithstanding the provisions of section 2502 of title 28 of the United States Code (relating to aliens' privilege to sue) and notwithstanding the provisions of section 1502 of such title 28 (relating to certain treaty cases). (2) Misjoinder and change of venue. If a suit or proceeding brought in a United States district court against an officer or employee of the United States (or former officer or employee) or his personal representative is improperly brought solely by virtue of paragraph (1) , the court shall order, upon such terms as are just, that the pleadings be amended to substitute the United States as a party for such officer or employee as of the time such action commenced, upon proper service of process on the United States. Such suit or proceeding shall upon request by the United States be transferred to the district or division where it should have been brought if such action initially had been brought against the United States. (g) Special rules for certain excise taxes imposed by chapter 42 or 43. (1) Right to bring actions. (A) In general. With respect to any taxable event, payment of the full amount of the first tier tax shall constitute sufficient payment in order to maintain an action under this section with respect to the second tier tax. (B) Definitions. For purposes of subparagraph (A) , the terms “taxable event”, “first tier tax”, and “second tier tax” have the respective meanings given to such terms by section 4963 . (2) Limitation on suit for refund. No suit may be maintained under this section for the credit or refund of any tax imposed under section 4941 , 4942 , 4943 , 4944 , 4945 , 4951, 4952 , 4955 , 4958 , 4971 , or 4975 with respect to any act (or failure to act) giving rise to liability for tax under such sections, unless no other suit has been maintained for credit or refund of, and no petition has been filed in the Tax Court with respect to a deficiency in, any other tax imposed by such sections with respect to such act (or failure to act). (3) Final determination of issues. For purposes of this section , any suit for the credit or refund of any tax imposed under section 4941 , 4942 , 4943 , 4944 , 4945 , 4951 , 4952, 4955 , 4958 , 4971 , or 4975 with respect to any act (or failure to act) giving rise to liability for tax under such sections, shall constitute a suit to determine all questions with respect to any other tax imposed with respect to such act (or failure to act) under such sections, and failure by the parties to such suit to bring any such question before the Court shall constitute a bar to such question. (h) Special rule for actions with respect to partnership items. No action may be brought for a refund attributable to partnership items (as defined in section 6231(a)(3) ) except as provided in section 6228(b) orsection 6230(c) . (i) Special rule for actions with respect to tax shelter promoter and understatement penalties. No action or proceeding may be brought in the United States Claims Court [United States Court of Federal Claims, see §902(b), P.L. 102-572 ] for any refund or credit of a penalty imposed by section 6700 (relating to penalty for promoting abusive tax shelters, etc.) or section 6701 (relating to penalties for aiding and abetting understatement of tax liability). (j) New Law Analysis Special rule for actions with respect to estates for which an election under section 6166 is made. (1) In general. The district courts of the United States and the United States Court of Federal Claims shall not fail to have jurisdiction over any action brought by the representative of an estate to which this subsection applies to determine the correct amount of the estate tax liability of such estate (or for any refund with respect thereto) solely because the full amount of such liability has not been paid by reason of an election undersection 6166 with respect to such estate. (2) Estates to which subsection applies. This subsection shall apply to any estate if, as of the date the action is filed— (A) New Law Analysis no portion of the installments payable under section 6166 have been accelerated; (B) New Law Analysis all such installments the due date for which is on or before the date the action is filed have been paid; (C) New Law Analysis there is no case pending in the Tax Court with respect to the tax imposed by section 2001 on the estate and, if a notice of deficiency under section 6212 with respect to such tax has been issued, the time for filing a petition with the Tax Court with respect to such notice has expired; and (D) New Law Analysis no proceeding for declaratory judgment under section 7479 is pending. (3) New Law Analysis Prohibition on collection of disallowed liability. If the court redetermines under paragraph (1) the estate tax liability of an estate, no part of such liability which is disallowed by a decision of such court which has become final may be collected by the Secretary, and amounts paid in excess of the installments determined by the court as currently due and payable shall be refunded. (k) Cross references. (1) For provisions relating generally to claims for refund or credit, see chapter 65 (relating to abatements, credit, and refund) and chapter 66 (relating to limitations). (2) For duty of United States attorneys to defend suits, see section 507 of Title 28 of the United States Code . (3) For jurisdiction of United States district courts, see section 1346 of Title 28 of the United States Code . (4) For payment by the Treasury of judgments against internal revenue officers or employees, upon certificate of probable cause, seesection 2006 of Title 28 of the United States Code . www.irstaxattorney.com 888-712-7690