Free Response - District Court of Federal Claims - federal

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No. 01-344 T (Judge Block) ______________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS ______________________

ROBERT J. ISLER and SUSAN L. ISLER, PLAINTIFFS VS. UNITED STATES OF AMERICA, DEFENDANT

____________________ PLAINTIFFS' BRIEF IN SUPPORT OF THEIR RESPONSE IN OPPOSITION TO THE MOTION OF THE UNITED STATES FOR PARTIAL DISMISSAL OF PLAINTIFFS' COMPLAINT ____________________

THOMAS E. REDDING TERESA J. WOMACK SALLIE W. GLADNEY REDDING & ASSOCIATES, P.C. 2914 W. T.C. Jester Houston, Texas 77018 Telephone: (713) 965-9244 Telecopier: (713) 621-5227 Attorneys for Plaintiffs Robert J. Isler and Susan L. Isler

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TABLE OF CONTENTS
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii Response to the Government's Factual Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. Legal Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2. The Government's Grounds for Dismissal are Based on a False Predicate . . . . . . . . . . . . . . . 8 3. Analysis Under TEFRA's Statutory Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 a. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 b. Specific Provisions Applicable to This Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 i. "Partnership Item" is a Defined Term, Restricted By Statute . . . . . . . . . . . . . . . . . . 12 ii. Determinations of Partnership Items and Nonpartnership Items are Mutually Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 iii. For the Tax Years at Issue §6224(c) SettlementsAre Comprehensive Not "Partial" . 15 (1) Treas. Reg.§301.6224(c)-3T(b) Mandates that These §6224(c) Partnership Item Settlements Are Comprehensive, Not "Partial" . 15 (2) Treas. Reg. §301.6229(f)-1T(b) and the 1997 Amendment to §6229(f) are Irrelevant Here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (3) The History of the 1997 through 1999 Amendments Supports Plaintiffs' Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (4) In the Case at Bar, the Parties Intended that Plaintiffs' §6224(c) Partnership Item Settlements Be Comprehensive, Not "Partial" . . . . . . . . . . 18 c. Congressional Intent Regarding TEFRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 d. Under TEFRA's Statutory Scheme, This Court Has Jurisdiction to Address the Plaintiffs'§6621(c) Claim in This Partner-Level Refund Case . . . . . . . . . 20 i. The Plaintiffs' Refunds Are Not "Attributable to" Partnership Items . . . . . . . . . . . . . 20 ii. Violation of the Plaintiffs' Due Process Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4. Arguments Specific to Section 6621(c) Penalty Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 a. Plaintiffs Were Not Bound By the Terms as to Economic Substance in the Later Agreed Decisions in the Tax Court . . . . . . . . . . . . . . . . . . . . . . . 24 b. Administrative and Judicial History of the §6621(c) Penalty Interest Claim . . . . . . . . . . 26 c. §6621(c) is an Affected Item - Not a Partnership Item . . . . . . . . . . . . . . . . . . . . . . . . . . 29 d. The Government's Sham Transaction Allegation is an Affected Item . . . . . . . . . . . . . . . 31 ii

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e. Introduction and Survey of Sham Transaction Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . 33 f. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

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TABLE OF AUTHORITIES
Cases AD Global Fund v. United States, 67 Fed.Cl. 657 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Adams v. Carlson, 488 F.2d. 619 (7th Cir. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Affiliated Equip. Leasing II v. C.I.R., 97 T.C. 575 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 30 Am. Pelagic Fishing Co. v. United States, 379 F.3d 1363 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . 22 Ames, et al. v. C.I.R.., 54 T.C.M. 517 (1986), aff'd sub nom as Lukens v. C.I.R., 945 F.2d 92 (5th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . 36 Atkins v. United States, 556 F.2d 1028 (Ct.Cl. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Barlow v. C.I.R., 80 T.C.M. (CCH) 632 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 32 Bayou Fleet, Inc. v. Alexander, 234 F.3d 852 (5th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Beall v. United States, 336 F.3d 419 (5th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Benedict v. Sec. of Dept. of H.H.S., 29 Fed.Cl. 587 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Bill Johnson's Restaurants v. NLRB, 461 U.S. 731, 103 S.Ct. 2161, 76 L.Ed.2d 277 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Boddie v. Conn., 401 U.S. 371 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Bounds v. Smith, 430 U.S. 817, 97 S.Ct. 1491, 52 L.Ed.2d 72 (1977) . . . . . . . . . . . . . . . . . . . . . 22 Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Bray v. United States, 785 F.2d 989 (Fed.Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Brinkerhoff-Faris Trust & Savs. Co. v. Hill, 281 U.S. 673, 50 S.Ct. 451, 74 L.Ed. 1107 (1930) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Broadcast Music, Inc. v. M.T.S. Enterprises, Inc., 811 F.2d 278 (5th Cir.1987) . . . . . . . . . . . . . . 23 Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 83 S.Ct. 239, 9 L.Ed.2d 207 (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Calif. Motor Transp. v. Trucking Unlimited, 404 U.S. 508, 92 S.Ct. 609, 30 L.Ed.2d 642 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Callaway v. C.I.R., 231 F.3d 106 (2nd Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12, 14, 19 Casebeer v. C.I.R., 909 F.2d 1360 (9th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Chamberlain v. C.I.R., 66 F.3d 729 (5th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 33, 36-38 Chambers v. Baltimore & Ohio RR Co., 207 U.S. 142, 28 S.Ct. 34, 52 L.Ed. 143 (1907) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Coltec Industries, Inc. v. United States, ___ F.3d ___, 2006 WL 1897077 (Fed. Cir., July 12, 2006) . . . . . . . . . . . . . . . . . . . . . . 33 Compaq Computer Corp. v. C.I.R., 77 F.3d 778 (5th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . 34 Copeland v. C.I.R., 290 F.3d 326 (5th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 38 Data Gen. Corp. v. Johnson, 78 F.3d 1556 (Fed. Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Davis v. Wakelee, 156 U.S. 680, 15 S.Ct. 555, 39 L.Ed.578 (1895) . . . . . . . . . . . . . . . . . . . . . . 19 DeWitt v.Pail, 366 F.2d 682 (9th Cir. 1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Durrett v. C.I.R., 71 F.3d 515 (5th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 33, 36-38 Eastern RR Pres. Conf. v. Noerr Motor Freight Inc., 365 U.S. 127, 81 S.Ct. 523, 5 L.Ed.2d 464 (1961) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Ex Parte Hull, 312 U.S. 546, 61 S.Ct. 640, 85 L.Ed. 1034 (1941) . . . . . . . . . . . . . . . . . . . . . . . 22 Fehlhaber v. Fehlhaber, 681 F.2d 1015 (5th Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 iv

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Field v. United States, 328 F.3d 58 (2nd Cir. 5003) . . . . . . . . . . . . . . . . . . . . . 6, 7, 9, 13, 17, 29, 30 Forseth v. C.I.R., 50 T.C.M. (CCH) 111 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Fort Stewart Schools v. Federal Labor Relations Auth., 495 U.S. 641 110 S.Ct. 2043, 109 L.Ed.2d 659 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Frank Lyon Co. v. United States, 435 U.S. 561, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Freytag v. C.I.R., 89 T.C. 849 (1987), aff'd 904 F.2d 1011 (5th Cir. 1990), aff'd on other grounds, 501U.S. 868 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 37 Grass Valley Terrace v. United States, 69 Fed. Cl. 341 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 8 Hambrose Leasing v. C.I.R., 99 T.C. 298 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Harper Macleod Solicitors v. Keaty & Keaty, 260 F.3d 389 (5th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Heasley v. C.I.R., 902 F.2d 380 (5th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 32, 37 Hill v. C.I.R., 204 F.3d 1214 (9th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Ins. Corp. of Ireland v. Compagnie des Bauxites, 456 U.S. 694, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Jade Trading v. United States, 60 Fed.Cl. 558 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Johnson v. Avery, 393 U.S. 483, 89 S.Ct. 747, 21 L.Ed.2d 718 (1969) . . . . . . . . . . . . . . . . . . . . . 22 Keeler v. C.I.R., 243 F.3d 1212 (10th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Killingsworth v. C.I.R., 864 F.2d 1214 (5th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Kraemer v. United States, 2002 WL 575791 (S.D.Tex. 2002) . . . . . . . . . . . . . . . . . . . . . . . . 24, 27 Law v. Commissioner, 84 T.C. 985 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-29 Lawinger v. C.I.R., 103 T.C. 428 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Lukens v. C.I.R., 945 F.2d 92 (5th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 33, 36-38 Martin v. Occup. Safety and Health Rev. Comm'n, 499 U.S. 144, 111 S.Ct. 1171, 1178, 113 L.Ed.2d 117 (1991) . . . . . . . . . . . . . . . . . . . . . 18 Maxwell v. C.I.R., 87 T.C. 783 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 12, 19, 32 Monti v. United States, 223 F.3d 76 (2nd Cir. 2000) . . . . . . . . . . . . . . . . . . . 6, 7, 12, 17, 20, 21, 32 N.C.F. Energy Partners v. Commissioner, 89 T.C. 741 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 N.Y. Life Ins. Co. v. Brown, 84 F.3d 137 (5th Cir.1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Patin v. C.I.R., 88 T.C. 1086 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Pennsylvania v. Finley, 481 U.S. 551, 107 S.Ct. 1990, 95 L.Ed.2d 539 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Prochorenko v. United States, 243 F.3d 1359 (Fed.Cir. 2001) . . . . . . . . . . . . . . 6, 9, 13, 17, 20, 21 Randell v. United States, 64 F.3d 101 (2nd Cir. 1995), cert. denied 117 S.Ct. 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Rice's Toyota World, Inc. v. C.I.R., 752 F.2d 89 (4th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . 33-36 River City Ranches # 1 v. C.I.R., T.C. Memo 2003-150, 2003 WL 21205284 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 31 River City Ranches #1 v. C.I.R., 401 F.3d 1136 (9th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . 13, 30 Roberts v. United States, 242 F.3d 1065 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Roberts v. United States, 281 F.3d 1108 (10th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Ryland v. Shapiro, 708 F.2d 967 (5th Cir.1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Saddler v. Department of the Army, 68 F.3d 1357 (Fed.Cir.1995) . . . . . . . . . . . . . . . . . . . . . . . . 15 Silver v. Cormier, 529 F.2d 161 (D.C.Colo. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Stanford v. C.I.R., 152 F.2d 450 (5th Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 v
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Stiltner v. Rhay, 322 F.2d 314 (9th Cir. 1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Thomas v. United States, 166 F.3d 825 (6th Cir.1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Thompson v. United States, 223 F.3d 1206 (10th Cir.2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Todd v. C.I.R., 862 F.2d 540 (5th Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 27 Transcapital Leasing v. United States, ____ F.3d _____, 2006 WL 897723 (W.D. Tex. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . 36 U.P.S. v. C.I.R., 862 F.2d 1486 (11th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 U.S.P.S. of Am., Inc. v. United States, 254 F.3d 1014 (11th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . 34 Wang Lab., Inc. v. Applied Comp. Sci., Inc., 958 F.2d 355 (Fed.Cir.1992) . . . . . . . . . . . . . . . . . . 19 Weiner v. Commissioner, 389 F.3d 152 (5th Cir. 2004) ("Weiner II") . . . . . . . . . . . . . . . . . . . 26, 27 Weiner v. United States, 255 F.Supp.2d 624 (S.D.Tex 2002) ("Weiner I") . . . . . . . . . 24, 27, 32, 33 Weiner v. United States, 255 F.Supp.2d 673 (2002) ("Weiner") . . . . . . . . . . . . . . . . . . . . . . . 33, 35 White v. C.I.R., 95 T.C. 209 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 32 Xechem I'natl, Inc. v. Univ. of Texas, 382 F.3d 1324 (Fed. Cir. 2004) . . . . . . . . . . . . . . . . . . . . . 23 Statutes 26 U.S.C. §162 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 35 26 U.S.C. §165 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 26 U.S.C. §183 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 26 U.S.C. §6031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 26 U.S.C. §6211(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26 U.S.C. §6216(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26 U.S.C. §6221 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 14 26 U.S.C. §6222 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 38 26 U.S.C. §6223 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26 U.S.C. §6224(c) . . . . . . . . . . . . . . 2, 3, 4, 6, 9, 11, 12, 13, 15, 16, 17, 18, 19, 21, 24, 25, 26, 32 26 U.S.C. §6225(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26 U.S.C. §6226 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 14, 30-32 26 U.S.C. §6226(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 14 26 U.S.C. §6226(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26 U.S.C. §6226(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 21 26 U.S.C. §6226(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 24, 25 26 U.S.C. §6226(d)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 11 26 U.S.C. §6226(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26 U.S.C. §6226(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 22 26 U.S.C. §6228(a)(4)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 26 U.S.C. §6229(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 26 U.S.C. §6229(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 26 U.S.C. §6229(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 26 U.S.C. §6229(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 19, 24, 25 26 U.S.C. §6230(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 31 26 U.S.C. §6231(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 26 U.S.C. §6231(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 19, 21, 29 26 U.S.C. §6231(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 26 U.S.C. §6231(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 26 U.S.C. §6231(b)(1)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 vi
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26 U.S.C. §6234(e)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 26 U.S.C. §6621(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 5-10, 13, 20-38 26 U.S.C. §701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 26 U.S.C. §702 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 26 U.S.C. §7121 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 15 26 U.S.C. §7422(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 20 26 U.S.C. §7422(h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7, 9, 14, 20, 21, 29, 30, 32 26 U.S.C. §§6221-6234 (TEFRA) . . . . . . . . . . . . . . . . . . . . . . 7, 10-14, 16, 19, 20, 31, 32, 34, 36 28 U.S.C. §1346(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 7, 14, 20, 29 28 U.S.C. §1491(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 7, 14, 20 Rules and Regulations RCFC 12(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 6 RCFC 12(b)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 8 Tax Court Rule 245(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Tax Court Rule 247(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Tax Court Rule 247(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 18 Tax Court Rule 248(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Treasury Regulation §1.6031-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Treasury Regulation §1.701-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Treasury Regulation §1.702-1(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Treasury Regulation §301.6221-1T(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Treasury Regulation §301.6224(c)-3T(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 11, 12, 15-18 Treasury Regulation §301.6229(f)-1T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Treasury Regulation §301.6229(f)-1T(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 25 Treasury Regulation §301.6231(a)(3)-1(a)(1)(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Treasury Regulation §301.6231(a)(3)-1(a)(1)(v) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Treasury Regulation §301.6621-2T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 35 Miscellaneous 5B C. Wright & A. Miller §1350 at 106 (2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 8 H. R. Conf. Rep. 97-760 (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 H. Rep. No. 101-247, 1388, 1393, 1394 (1989), reprinted in 1989 U.S.C.C.A.N.1906, 2858-59, 2864 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 IRS Field Service Advisory 199950008, (9/13/99) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 13 IRS Field Service Advisory 199924003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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No. 01-344 T (Judge Block) ______________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS ______________________ ROBERT J. ISLER and SUSAN L. ISLER, VS. UNITED STATES OF AMERICA, ____________________ Defendant Plaintiffs

PLAINTIFFS' BRIEF IN SUPPORT OF THEIR RESPONSE IN OPPOSITION TO THE MOTION OF THE UNITED STATES FOR PARTIAL DISMISSAL OF PLAINTIFFS' COMPLAINT ____________________ RESPONSE TO THE GOVERNMENT'S FACTUAL STATEMENT Unless otherwise indicated, Plaintiffs Robert J. Isler and Susan L. Isler ("the Islers" or "Plaintiffs") do not object to the government's factual statements, except the statements that (i) the Plaintiffs' settlements were partial partnership item settlements, (ii) the Tax Court decisions held the adjustments were attributable to sham transactions, and (iii) the Notices of Final Partnership Administrative Adjustment ("FPAAs") disallowed the partnerships transactions because they were shams. Plaintiffs would add the following relevant facts: Oasis Date Associates ("ODA" or "the Partnership") was 1 of 43 structurally similar California and Texas limited partnerships marketed and managed by AMCOR, a California corporation. In 1984, Robert Isler invested in ODA and the Islers filed their 1984 joint income tax returns and reported the Partnership losses pursuant to their Schedule K-1 as required by §6222.1 [B6 and B7]2
1

Unless otherwise indicated all references to section, §, and the Code are to the Internal Revenue Code at 26 U.S.C. References to §1346(a)(1) and §1491(a)(1) are to 28 U.S.C.
2

References to [Bx] are to Bates stamped page "x" of the Appendix B filed with this response and supporting brief. 1
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On April 10, 1991, the IRS issued a Notice of Final Partnership Administrative Adjustment ("FPAA") proposing "adjustments to the partnership return" of ODA for 1984. [B9-B17] The IRS proposed to disallow all of the Schedule F- Farming Expenses and Other Deductions reported by the Partnership for 1984 as well as adjust other ODA partnership items. [B12-B13] The IRS asserted 20 different grounds for disallowing those expenses and deductions. [B14-B17] Partners other than the TMP challenged the FPAAs issued to the AMCOR partnerships by filing over 43 separate partnership-level Tax Court cases, which included the action filed with respect to ODA at Docket No. 15037-91on July 10, 1991. [B18-B25] In November of 1995, the Islers remitted $16,717.00 to the IRS toward any validly assessed deficiencies arising from the partnership item adjustments. [B26] On April 9, 1997, the Islers entered into §6224(c) partnership item settlements with the IRS by executing Forms 870-P(AD) for ODA for 1984, 1985, and 1986 that the IRS accepted. [B27-B32] That settlement was an "original settlement" substantively similar to other "original settlements" entered into by other ODA partners [B33-B38] and the partners of other AMCOR partnerships [BB39-B60] in 1996 and 1997 and with which other partners could and did request "consistent settlements" during 1999 and 2000. [B61-76] This settlement comprehensively settled all of the Islers' ODA partnership items for 1984.3 The Schedule of Adjustments to the 1984 settlement disallowed only a portion of the ODA Schedule F- Farming Expenses and Other Deductions that the FPAA had proposed to completely disallow. [Compare B28 to B12] The settlement allowed the Islers to keep 63% of their 1984 ODA deductions. [$4,696,859 - $1,714,967 = $2,981,892 / $2,981,892 ÷ $4,696,859 = .6349] The IRS also agreed there would be no changes to any ODA partnership items for 1985 and 1986, including no

3

Treas. Reg. §301.6224(c)-3T(b). 2
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changes to substantial income from ODA farming activities. [B30 and B32] The Form 870-P(AD) settlements provide, in part: Under the provisions of section 6224(c) of the Internal Revenue Code, the undersigned offers to enter into a settlement agreement with respect to the determination of partnership items of the partnership for the year shown on the attached schedule of adjustments. ... .... If this offer is accepted for the Commissioner, the treatment of partnership items under this agreement will not be reopened in the absence of fraud, malfeasance, or misrepresentation of fact; and no claim for refund or credit based on any change in the treatment of partnership items may be filed or prosecuted. [E.g., B27 Emphasis added] The settlements did not address any nonpartnership items, e.g. they did not address any factors related to §6621(c) penalty interest. The Form 870-P(AD) and attached Schedule of Adjustments identify only an agreed dollar amount disallowed for each identified partnership item - the farming expenses and other deductions for the tax year identified on the Form 870-P(AD) and Schedule of Adjustments. The Schedule of Adjustments do not identify any grounds or bases for the adjustments. [B27-B32] The IRS solicited the AMCOR partners with "take-it-or-leave-it" settlements that were substantively similar across the partnerships, varying only in adjustment percentages not in issue here. [B12, Compare B27-B32 to B39-B54 and B55-B60] The IRS controlled the settlement terms and required that they be effectuated on the Forms 870-P(AD) that it prepared and sent to the partners. [B128] The IRS stated that the settlement would be binding only if the partner signed and returned the Form 870-P(AD). [B128] Subsequent to the Islers' settlement, in letters sent to individual AMCOR partners, the Office of Chief Counsel for the IRS re-opened the period for partners to request consistent settlements and stated that this "does not involve a new settlement offer, rather, it merely lengthens the time period for

3

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requesting settlement consistent with one previously offered," and, by settling, partners "would avoid further litigation and penalties." [B67] One of these letters was attached as an exhibit to an IRS motion for leave to accept a request for consistent settlement pursuant to that letter that was filed in the ODA Tax Court case at Docket No. 15037-91. [B61-65] The court granted leave to accept and the IRS entered into a consistent settlement with the ODA partner identified in the motion. [B71-B76] The adjustments identified in those consistent settlements are identical to those of the Islers. [Compare the Islers' Forms 870-P(AD) at B27-B32 to those of other settling ODA partners at B-33-38 and the "Consistent Agreement" Forms 870-P(AD) at B71-B76] "Consistent Agreement" is conspicuously stamped across the face of those Forms 870-P(AD). [B71, B73, and B75] Under Tax Court Rule 248(c)(1), if a partner is a Rule 247(b) "participating partner" in a partnership-level Tax Court case then, upon that participating partner's settlement, the IRS "shall" file a notice of settlement in that case. There is no rule requiring the IRS to file a settlement notice for any partner other than a participating partner. The Islers did not file an election to participate and were not participating partners in the ODA Tax Court case. [B18-B25] The IRS was not required to, and did not, file a settlement notice for them in the ODA Tax Court case. But the IRS did file those Rule 247(b) notices for the participating partners who settled their partnership items in the ODA case and other AMCOR partnership cases. [B22, B77, B92-B121] In those settlement notices that the IRS prepared and filed with the Tax Court, the IRS plainly stated and represented to that court that it had "entered into settlement agreements under §6224(c)(1), ..., with respect to such partner's partnership items for the partnership taxable years [1984 and 1985], which are the subject of this proceeding. .... Accordingly, pursuant to section 6231(b)(1)(C), such partnership items became nonpartnership items as of the date of the respective settlement agreements and, pursuant to §6226(d)(1)(A), the partners listed below are no longer parties to the proceeding." [B77]

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The Form 870-P(AD) settlement agreement that prompted the IRS to file that settlement notice with the Tax Court is identical to the Islers' Form 870-P(AD). [Compare B27-B32 to B33-B38] The September 1997 assessments against the Islers included interest that was computed at the §6621(c) penalty rate. [B122 and B26] Tax Matters Partner Frederick Behrens intervened in the ODA and other AMCOR related Tax Court cases in June and July of 1999. [B24] Trial in a test case began on December 13, 1999. On July 19, 2001, over four years aft the Islers had settled with the IRS, the Tax Court entered agreed decisions in the AMCOR partnership-level cases, including the ODA case, that reflected adjustments to the same partnership items included in the Islers' settlement - the farming expenses and other deductions - but in substantially different amounts. [B125-B127] The Tax Court decisions were agreed decisions reflecting only the terms of a purported agreement between the IRS and TMP, not fact findings or determinations by the Tax Court. The Islers timely filed a refund claim to recover all of their overpayment because (i) the IRS assessed after limitations expired; (ii) the IRS improperly imposed §6621(c) penalty interest; and, (iii) excessive interest should be abated under §6404(e). [See Doc# 1, Plaintiffs' Original Complaint] The IRS disallowed their claim and the Plaintiffs timely filed this suit. [See Doc.# 1] ARGUMENT 1. Legal Standard As Chief Judge Damich recently noted, "jurisdiction" is "batted about like a bird caught in a badminton game," but really has two distinct meanings - whether a court has been given the power to adjudicate a matter (RCFC 12(b)(1)4 subject matter jurisdiction) and whether the circumstances under

4

References to "RCFC" are to the Rules of the United States Court of Federal Claims. 5
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which a court may exercise that power have been identified (RCFC 12(b)(6) failure to state a claim).5 The government asserts its motion to dismiss is based on RCFC 12(b)(1) and that it disputes the jurisdictional facts alleged by Plaintiffs. However, a comparison of the government's allegations in this case to the issues addressed by the Federal Circuit6 and the Second Circuit7 to make Rule 12(b)(1) determinations with respect to the same or similar issues illustrates that the government's motion is not an RCFC 12(b)(1) motion, but an untimely RCFC 12(b)(6) motion that should be treated as a crossmotion for summary judgment on the §6621(c) issue. In considering whether a court has Rule 12(b)(1) subject matter jurisdiction, the question is whether the court has statutory or constitutional authority to adjudicate the plaintiffs' claim.8 In considering a Rule 12(b)(1) challenge to an almost identical refund claim to recover §6621(c) penalty interest, the Second Circuit looked past the white noise of the government's "factual" challenges in the district court and made quick work of finding that it had subject matter jurisdiction.9 The Second Circuit employed analysis previously used by the Federal Circuit in Prochorenko and the

5

Grass Valley Terrace v. United States, 69 Fed. Cl. 341, 347 (2005), citing Bray v. United States, 785 F.2d 989, 992 (Fed.Cir. 1986).
6

Prochorenko v. United States, 243 F.3d 1359, 1362-63 (Fed.Cir. 2001) affirming 45 Fed.Cl. 494 (2000)(addressing a claim for refund based on the IRS's denial of plaintiffs' request for §6224(c) consistent settlement). There the government asserted the claim at issue was barred by §7422(h). The Court of Federal Claims held that the plaintiffs had stated a claim for which relief could be granted and disposed of the action on summary judgment. On appeal the Federal Circuit reached the RCFC 12(b)(1) issue and, following the same analysis as the 2nd Circuit in Monti v. United States, 223 F.3d 76 (2nd Cir. 2000), reversing 976 F.Supp. 157 (E.D.N.Y. 1997) held the claim for refund was attributable to §6224(c), which itself is not a partnership item, and the court had jurisdiction over the refund claim.
7

Field v. United States, 328 F.3d 58 (2nd Cir. 5003) (addressing a Rule 12(b)(1) challenge to a claim for refund of §6621(c) penalty interest); Monti, (also addressing a claim for refund based on the IRS's denial of the plaintiffs' request for §6224(c) consistent settlement). Grass Valley at 347; See also, 5B C. Wright & A. Miller §1350 at 106 (2004). Field, supra. 6
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Second Circuit in Monti to address the government's §7422(h) challenge to the plaintiff/partner's refund claims. The Second Circuit began by acknowledging that the district court had statutory authority to adjudicate claims for refund of federal income tax pursuant to 28 U.S.C. §1346(a)(1).10 The government does not challenge this Court's §1346(a)(1) or §1491(a)(1) jurisdiction in this action. The Second Circuit next found that the plain language of §7422(h) bars exercise of this authority only if the refund (not the item that leads to the refund) is attributable to partnership items. The Second Circuit followed the Federal Circuit's and the Second Circuit's previous refusal to succumb to an overbroad, expansive interpretation of the §7422(h) "attributable to" language that would leave every TEFRA related refund claim in some way "attributable to" a partnership item. In Field, the Second Circuit found that the refund was determinative of whether the claim was barred, not the whether the underlying transactions were partnership items. Stated another way, a claim will be barred only if it requests a refund based directly on seeking a change to a partnership item. A claim will not be barred if it seeks recovery of all or part of an assessment that resulted from a change to a partnership item so long as the refund claim is not based on a reconsideration of a partnership item. In making its determination that §6621(c) penalty interest is not a partnership item, the Second Circuit considered three TEFRA factors that are so well settled as to be blackletter law. The Court noted that §6621(c) is located in subtitle F, not subtitle A, and, consequently, did not meet the statutory definition of a partnership item. The Court was next persuaded by the overwhelming and unanimous authority that has consistently held that §6621(c) is an affected item, not a partnership item. The Court was finally persuaded by the government's concession that §6621(c) is an affected item - a concession

28 U.S.C. §1346(a)(1). See also 28 U.S.C. §1491(a)(1), granting this Court authority to adjudicate tax refund suits. 7
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that the government has made in this action as well. The government does not challenge the truth of the jurisdictional facts alleged in Plaintiffs' complaint so much as it attacks the merits of Plaintiffs' claim that the tax assessed against them was not attributable to a tax motivated transaction as set out in §6621(c) and the accompanying regulation. At best, the government's challenge is to the circumstances under which this Court may exercise its authority to adjudicate this case, which Chief Judge Damich categorized as an RCFC 12(b)(6) motion for failure to state a claim.11 Both parties have extensively referenced evidence and documents outside the pleadings that will be necessary for the Court to reference and rely upon in making its determination.12 Consequently, pursuant to RCFC 12(b), the government's motion has been converted into a motion for summary judgment and Plaintiffs are entitled to the RCFC 56(f) procedural safeguards, including the refusal to enter judgment, continuance to permit discovery, or other order as the Court finds just. In this case, the government has raised factual issues regarding the intent of the parties to comprehensively settle the partnership tax controversy. Should the Court not be persuaded by the evidence in the record, then additional discovery regarding the intent of the parties may be necessary. See the Declaration of Teresa J. Womack at Appendix B. 2. The Government's Grounds for Dismissal are Based on a False Predicate As will be addressed in detail in this brief, Defendant's motion is fundamentally flawed to the extent it rests on the following erroneous precepts: (i) The government erroneously asserts that the settlements were partial settlements. They were

11 12

Grass Valley, 69 Fed. Cl. at 347; and Wright & Miller at 106.

The government extensively referenced evidentiary documents filed in other pleadings in this action but did not attach copies of those documents to the motion to dismiss. Plaintiffs have attached and referenced copies of those documents, as well as additional documents, to their response. 8
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in fact comprehensive settlements converting all partnership items to nonpartnership items and removing the Plaintiffs from the Tax Court proceedings. The subsequent Tax Court proceedings are irrelevant. (ii) The government erroneously asserts this Court lacks jurisdiction based on the erroneous representation that Plaintiffs' claim requires a redetermination of partnership items. That is a patent misrepresentation of Plaintiffs' claim. Plaintiffs' claim requires only a consideration of the content of the FPAAs issued by the IRS, the content of the settlements they entered into, and the applicable law. Based on those settlements, the penalty interest provisions of §6621(c) are not applicable. Plaintiffs' claims do not require a re-opening or review of partnership items. Their claims are not attributable to partnership items. They are attributable to the erroneous applications of §6621(c) to the liabilities resulting from the agreed settlement. The Plaintiffs entered into §6224(c) settlements with the IRS for the tax year(s) at issue. It is undisputed that the settlements addressed only partnership items. It is also undisputed that pursuant to §7422(h), this Court is barred from addressing refunds "attributable to partnership items." However, the government erroneously argues that this Court lacks jurisdiction to determine whether §6621(c) was improperly imposed. The government is wrong because Plaintiffs' claims for refund of §6621(c) penalty interest are not "attributable to partnership items" because §6621(c) is not a partnership item. The Second Circuit denied the government's motion to dismiss for lack of jurisdiction on this exact issue in Field. The Federal Circuit has reached a similar conclusion with respect to §6224(c) consistent settlement in Prochorenko. The government is also wrong because: (i) the §6224(c) partnership item settlements at issue in this case and the other AMCOR cases were comprehensive and, by regulation could not be "partial" for the tax years at issue; (ii) the parties intended that the settlement be comprehensive as to partnership

9

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items and the IRS repeatedly represented to the Tax Court that settled partners were no longer parties to the partnership-level cases for any reason; (iii) it is well-settled that §6621(c) is not a partnership item but an "affected item" over which the Tax Court has no jurisdiction in a TEFRA partnership-level case for the years at issue, but over which this Court does have jurisdiction in a partner-level refund case; (iv) for the tax years in issue, a partner cannot be bound to determinations made in a TEFRA partnership-level case after they settle their partnership items; (v) even if a partner could be bound to determinations made in a TEFRA partnership-level case after they settle their partnership items, the bases for the adjustments in the decision cannot be imputed to the Plaintiffs' settlement adjustments because the amount of the adjustments were substantially different for the same partnership items; and (vi) even if the bases for the adjustments in the decisions could be imputed to the Plaintiffs' settlement adjustments, they are not binding because they were not independent findings of the Tax Court, but rather resulted from a purported agreement between the IRS and TMP. 3. Analysis Under TEFRA's Statutory Scheme Partnerships do not pay income tax; they file information returns.13 Each partner's share of partnership income, gains, losses, deductions, etc., is reported and recognized on his individual return.14 Before 1982, to adjust an item on a partnership return the IRS had to examine each partner's individual return and could not ensure consistent adjustments among partners. In response, Congress enacted TEFRA, which consolidated some of the partnership audit and adjustment procedures.15 a. In General TEFRA establishes procedures for a single centralized adjustment of statutorily defined

13 14 15

§§701, 6031; Treas. Reg. §§1.701-1, 1.6031-1. §§701, 702; Treas. Reg. §1.702-1(a). Maxwell v. C.I.R., 87 T.C. 783, 787 (1986). 10
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"partnership items" at the partnership level.16 By statutory definition, everything that is not a partnership item is a nonpartnership item.17 Congress specifically left all nonpartnership items to be determined at the partner level according to the standard pre-TEFRA procedures.18 Under TEFRA, if the IRS wants to adjust any partnership item it must first issue an FPAA.19 An FPAA is issued only to adjust partnership items. Judicial review of the FPAA is limited to the partnership level and the jurisdiction of the courts is expressly restricted to statutorily defined "partnership items."20 Pursuant to §6226(c) and (d), a partner is a party to, may participate in, and is bound by the outcome of, the partnership-level case only as long as he has an ongoing interest in the outcome of that litigation.21 When a partner's partnership items convert to nonpartnership items he is no longer a party, if he ever was, as to his converted partnership items.22 Settlement is the most common method of converting partnership items to nonpartnership items. Sections 6224(c) and 7121 are separate grants of authority by which the IRS may settle partnership items with a partner. Treas. Reg. §301.6224(c)-3T(b), effective for the years at issue, expressly states

16

§§6211(c), 6216(4), 6221, 6223, 6225(a), 6226, 6230(a)(1), §6231(a)(3) ; Temp. Treas. Reg. §301.6221-1T(a); Callaway v. C.I.R., 231 F.3d 106, 110 (2nd Cir. 2000). "Subchapter C" is subchapter 63C at §§6221-6234 (TEFRA).
17 18 19

§6231(a)(4). Callaway at 108. §§6223(a)(2) and (d)(2).

20

§§6226(a), (b). Virtually all partnership-level cases are filed in the Tax Court. Occasionally a partnership-level case is filed in a federal district court or this Court, but only after meeting certain bond requirements that do not apply to Tax Court cases. §6226(e). E.g., see AD Global Fund v. U.S., 67 Fed.Cl. 657 (2005). All AMCOR partnership-level cases at issue here were filed in the Tax Court.
21

§§6226(d)(1)(A) and 6228(a)(4)(B); Tax Court Rules 245(b) and 247(a), IRS Field Service Advisory 199950008, (9/13/99).
22

§6231(b)(1)(C). 11
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and mandates that §6224(c) partnership item "[s]ettlements shall be comprehensive, that is, a settlement may not be limited to selected items."23 This means that a §6224(c) settlement settles all partnership items of the partnership, either on the terms identified and agreed to in the settlement or with no change to partnership items not addressed in the settlement agreement. Once the partnership-level case is concluded as to a partner ­ either by conversion (e.g. settlement as to him alone) or by decision (as to all partners with unconverted partnership items), then that partner's nonpartnership items (including all partner-specific determinations) are addressed in separate partner-level proceedings.24 After the IRS assesses any tax and the partner pays, he may file a refund claim to raise his individual nonpartnership item defenses. If his claim is denied, he may file suit in federal district court or this Court to pursue those defenses. b. Specific Provisions Applicable to This Case To make a determination in this action, the Court must first address which items are "partnership items" and which are "nonpartnership items" under TEFRA's statutory scheme.25 i. "Partnership Item" is a Defined Term, Restricted By Statute In §6231(a)(3) Congress mandates three requirements for a partnership item.26 It must: · · arise "under any provision of subtitle A" (§§1-1563); be "required to be taken into account for the partnership's taxable year;" and

23

Treas. Reg. §301.6224(c)-3T(b) was amended in 1999 to allow partial partnership item settlements but that amendment does not apply here because the Plaintiffs settled in prior to the effective date of the amendments. Maxwell at 788; Callaway at 108; e.g., to assert a penalty related to the partnership item adjustment, such as a negligence penalty, the IRS must wait until after a settlement is effective or a partnership-level decision is final, as applicable, and issue to the partner a statutory notice of deficiency asserting the penalty and giving the opportunity to contest the penalty in the Tax Court.
25 26 24

Callaway at 108. Monti at 82 Anything that is not a "partnership item" is a "nonpartnership item." §6231(a)(4). 12
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·

be designated by the IRS in regulations "as more appropriately determined at the partnership level than at the partner level."

Subtitle A (§§1-1563) is titled "Income Taxes" and may be thought of as addressing "the numbers" reported on the partnership Form 1065 return. By expressly limiting the definition of partnership items, Congress specifically exempted from TEFRA's unified proceedings all other subtitles of the Internal Revenue Code, including subtitle F procedural requirements and penalties and all subtitle A items not designated by regulation. By statutory definition §6621(c), which is in subtitle F of the Code, is not a partnership item. Unanimous judicial precedent establishes the validity of this analysis and the outcome.27 The IRS recognizes that §6621(c) is not a partnership item for the same reason.28 Moreover, the Secretary has not and cannot make §6621(c) a partnership item by regulation because it is not "required to be taken into account for the partnership's taxable year under any provision of subtitle A." However, as the 9th Circuit recognized in River City, any partnership item determination that might be necessary to apply §6621(c) to a partner's tax liability must be determined in the partnershiplevel proceeding or the partnership item settlement.29 But nonpartnership item determinations necessary to apply §6621(c) to a partner's tax liability must be determined in a subsequent partner level proceeding. See discussion below.

27

See Field, supra. See also, Affiliated Equip. Leasing II v. C.I.R., 97 T.C. 575, 577-78 (1991) (§6621(c) not a partnership item because it is in subtitle F). In Prochorenko, the Federal Circuit followed the Second Circuit in Monti and employed the same approach to hold that it had jurisdiction over a refund claim based on a request for §6224(c) consistent settlement because §6224(c) consistent settlement is not a partnership item because it is located in subtitle F, not subtitle A. See IRS Field Service Advisory 199924003 (notifying field agents that §6621(c)is not a partnership item). In Field Service Advisory 199950008 the IRS notified agents that the §6698 penalty is not a partnership item for the same reason.
29

28

River City Ranches #1 v. C.I.R., 401 F.3d 1136 (9th Cir. 2005). 13
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ii.

Determinations of Partnership Items and Nonpartnership Items are Mutually Exclusive In TEFRA, Congress statutorily mandated mutually exclusive procedures for determining

partnership items and nonpartnership items.30 The legislative history confirms this mandatory bifurcation: Neither the Secretary nor the taxpayer will be permitted to raise nonpartnership items in the course of a partnership proceeding nor may partnership items, except to the extent they become nonpartnership items under the rules, be raised in proceedings relating to nonpartnership items of a partner.31 For the tax years at issue, partnership-level proceedings are restricted to adjusting partnership items.32 If those adjustments result in a tax deficiency, it is assessed against the partner. If they result in an overpayment, it is to be refunded to the partner. The partner is restricted to raising nonpartnership item issues in a partner-level proceeding, as here. Likewise, when a partner settles his partnership items he is no longer a party to any pending partnership-level case, if he ever was, and in any later partner-level case his converted partnership items may be examined only "to the extent" of their application as determined under the settlement to compute his liability. In addition to the statutory limitations on what is a partnership item, general contract law applies to tax settlements, and in a partner-level case neither the IRS nor the partner is allowed to go behind the terms of the partnership item settlement to change or re-characterize the partnership items. 28 U.S.C. §§1346(a)(1) and 1491(a)(1) give this Court jurisdiction over an individual partner's claim for refund of tax and interest. But §7422(h) bars jurisdiction over any "refund attributable to
30

§6221; Callaway at 108. See also §6230 (pre-TEFRA procedures apply to nonpartnership/affected item adjustments that are not merely computational changes).
31 32

H. R. Conf. Rep. 97-760, at 611 (1982). §6226(a) and §6226(f). 14
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partnership items." Therefore, after a partner's partnership items are determined, either by settlement or court decision. In later partner-level refund cases this Court may address only nonpartnership items and cannot re-open review of partnership items. iii. For the Tax Years at Issue §6224(c) Settlements Are Comprehensive Not "Partial" The government argues that the Plaintiffs' partnership item settlements were "partial" and settled only some of their partnership items. But the plain language of the Form 870-P(AD) states that it is §6224(c) settlement. The 1999 amendments cited by the government only address the effect of partial settlements. Those amendments are silent and do modify or affect the regulations governing §6224(c) settlements. The §6224(c) settlements are required by regulation to be, and both the partners and the IRS intended that the §6224(c) settlements be, comprehensive and not partial. Both the IRS and the Plaintiffs are bound by those regulations. Neither party can disregard this controlling regulation in ascertaining whether the settlement was partial or comprehensive.33 (1) Treas. Reg.§301.6224(c)-3T(b) Mandates that These §6224(c) Partnership Item Settlements Are Comprehensive, Not "Partial" Sections 6224(c) and 7121 are separate grants of authority for the IRS to settle tax disputes. Partnership item settlements are normally made on one of three forms. A Form 870-P(AD) expressly recites that it is a §6224(c) partnership item settlement. [B129-B130] A Form 870-L(AD) has two parts, a partnership items settlement and an affected item settlement, which expressly includes a §6621(c) concession. [B131-B133]. A Form 906 Closing Agreement allows the IRS and taxpayer to tailor the terms and source of authority for settlement. [B134-B136] The IRS chose Forms 870-P(AD) to settle the AMCOR partnership item tax controversy.

33

See Fort Stewart Schools v. Federal Labor Relations Auth., 495 U.S. 641, 654, 110 S.Ct. 2043, 2051, 109 L.Ed.2d 659 (1990) (an agency must abide by its own regulations.); Saddler v. Department of the Army, 68 F.3d 1357, 1358 (Fed.Cir.1995). 15
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For the tax year(s) at issue, Treas. Reg.§301.6224(c)-3T(b) mandates that pre-1999 §6224(c) partnership item "[s]ettlements shall be comprehensive, that is, a settlement may not be limited to selected items." Consequently, a §6224(c) settlement for the years at issue settles all partnership items and cannot be partial. The partnership items identified in the settlement document are adjusted on the terms agreed to in the settlement and all other partnership items not identified or adjusted in the settlement agreement are left unadjusted, as reported on the original Form 1065 partnership return. Plaintiffs' Form 870-P(AD) states it is a settlement "[u]nder the provisions of §6224(c)" and applies "with respect to the determination of partnership items of the partnership for the year shown on the attached schedule of adjustments." That Schedule of Adjustments expressly addresses only (i) the tax year that the settlement applies to, (ii) partnership items to be adjusted (including the farming expense), and (iii) the dollar amount of the adjustments to those items. Neither the Form 870-P(AD) nor the Schedule of Adjustment conditions or limits the scope of the settlement contrary to Treas. Reg. §301.6224(c)-3T(b). Consequently, all of Plaintiffs' partnership items were settled for the year(s) at issue, either according to the adjustments in the Schedule of Adjustments or with no change to the partnership items not identified in that schedule. TEFRA's legislative history expressly anticipates that refund claims based on nonpartnership item grounds will be filed for moneys paid on assessments attributable to partnership items and unambiguously states that such claims are timely within two years of payment. This evidences Congress' recognition that an assessment may be "attributable to" partnership item adjustments, but the permissible refund of all or part of the assessment is not. A partner is not automatically due a refund every time the IRS makes an assessment arising from adjustments to partnership items. His refund must not be "attributable to" the partnership item adjustments. Congress recognized that a partner may be due a refund of part or all of the assessment paid based on a nonpartnership item ground, i.e. his

16

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"attributable to" ground for refund. The separate statute of limitations applicable to nonpartnership items of a partner may have expired when the computational adjustment of a partner's tax liability attributable to a FPAA or final court decision is made. In such case neither the Secretary (to reduce a refund) nor a partner (to reduce an assessment) may raise nonpartnership items in determining the partner's tax liability resulting from such computational adjustment. However, if the partner has in fact overpaid his income tax liability for the taxable year with respect to which the computational adjustment was made, he may obtain credit or refund of such overpayment by filing a claim within 2 years following such overpayment, as prescribed by §§6511 (a) and (b)(2)(B). If such claim is not allowed, suit may be filed pursuant to §7422(a). Any overpayment which may be refunded pursuant to such a claim or suit for refund would be attributable only to nonpartnership items.34 The Federal Circuit's holding in Prochorenko and the Second Circuit's holdings in Field and Monti are consistent with this legislative intent. The government's approach is inconsistent with legislative intent and was specifically rejected by the Federal Circuit and the Second Circuit. (2) Treas. Reg. §301.6229(f)-1T(b) and the 1997 Amendment to §6229(f) are Irrelevant Here To support its "partial" settlement argument the government offers only an erroneous interpretation of the 1997 amendments to §6229(f) and §301.6229(f)-1T(b), which provide that if a partner settled some but not all of his partnership items then the assessment period related to the settled items is controlled by the unsettled items. However, §301.6229(f)-1T(b) and the 1997 amendments to §6229(f) do not apply to the Plaintiffs' AMCOR settlement. The government concedes they do not apply. (3) The History of the 1997 through 1999 Amendments Supports Plaintiffs' Position Congress amended §6229(f) in 1997 and the IRS added §301.6229(f)-1T(b) in 1998 to address the problem of split limitations periods caused by partial partnership item settlements. But the IRS chose not to amend Treas. Reg.§301.6224(c)-3T(b), which continued to bar partial partnership item settlements under §6224(c) until 1999. Even after those 1999 amendments,

34

H.R.Conf.Rep. 97-760 at 611. 17
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(4) In the Case at Bar, the Parties Intended that Plaintiffs' §6224(c) Partnership Item Settlements Be Comprehensive, Not "Partial" The Plaintiffs and the IRS intended the §6224(c) partnership item settlements to be comprehensive, not partial. The settlements were substantively similar across the 43 AMCOR partnerships, varying only in dollar amounts to the farming expense deductions, a difference that is not at issue here. The IRS chose and mandated Forms 870-P(AD) under §6224(c) for the AMCOR settlements. The Form 870P(AD) plainly states that the partner "offers to enter into a settlement agreement with respect to the determination of partnership items of the partnership for the year shown on the attached schedule of adjustments." The subsequent Form 870-P(AD) settlements are conspicuously identified as "Consistent Agreements." These consistent settlements are required to be identical to the "original settlement" and cannot cherrypick items or terms.35 The IRS told the AMCOR partners that by settling they would "avoid further litigation." In the Rule 247(b) settlement notices and its motions for leave, the IRS repeatedly represented to the Tax Court that the subsequent "consistent settlements"addressed "such partners' partnership items for the partnership taxable year ..., which is the subject of this proceeding" and such partners are, therefore, "no longer parties to the proceeding." The IRS's statements were unqualified and unequivocal: settled partners were no longer parties to the Tax Court cases for any reason. The IRS's representations to the Tax Court and its litigating position in the Tax Court is inconsistent with the government's position in this matter. "[A]gency 'litigating positions' are not entitled to deference when they are merely ... counsel's 'post hoc rationalizations' for agency action."36 The IRS

35 36

§301.6224(c)-3T(b).

Martin v. Occup. Safety and Health Rev. Comm'n, 499 U.S. 144, 111 S.Ct. 1171, 1178, 113 L.Ed.2d 117 (1991), citing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212, 109 S.Ct. 468, 18
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solicited Form 870-P(AD) §6224(c) settlements and represented to both the Plaintiffs and the Tax Court that the original settlements and the consistent settlements settled all partnership items before the Tax Court. "Judicial estoppel" bars the IRS from now arguing that they were partial.37 If this Court gives any credence to the Government's partial settlement argument, further discovery and trial to establish intent should be scheduled. c. Congressional Intent Regarding TEFRA Congress knew the long established subtitle structure of the tax code and expressly restricted partnership items to subtitle A.38 It further restricted them to only those items "required to be taken into account for the partnership's taxable year." It then narrowed them even further to only those items properly designated by the IRS in regulations.39Congress clearly intended TEFRA to ease the IRS's administrative burden by allowing it to choose by regulation those subtitle A issues to be treated uniformly under TEFRA. Congress left all other issues ­ including all subtitle F procedures and penalties, and all subtitle A items the IRS does not designate by regulation ­ to be determined under the general, non-TEFRA procedures.40

473-74, 102 L.Ed.2d 493 (1988). See also Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 245-46, 9 L.Ed.2d 207 (1962).
37

Data Gen. Corp. v. Johnson, 78 F.3d 1556, 1565 (Fed. Cir. 1996) ("The doctrine of judicial estoppel is that where a party successfully urges a particular position in a legal proceeding, it is estopped from taking a contrary position in a subsequent proceeding where its interests have changed. ... Judicial estoppel is designed to prevent the perversion of the judicial process and, as such, is intended to protect t