TYMKOVICH, Circuit Judge.
Jean Mathia is the widow of Doyle Mathia, a limited partner in Greenwich Associates. Greenwich was a partnership that incurred losses that were passed through to the couple's income tax returns for the years 1982-84. After an investigation of numerous related tax shelters, the Commissioner of Internal Revenue disallowed these losses and in 2003, following lengthy administrative and judicial proceedings involving the partnership, assessed more than $150,000 against Mathia. Mathia appealed to the United States Tax Court, challenging the assessments as untimely and asserting the government bore the burden of proof in establishing timeliness. The Tax Court denied the appeal and the case now comes to us.
Mathia contends the tax assessments were untimely because the relevant statute of limitations had run. This contention turns on whether Doyle Mathia entered into a settlement agreement under the tax code that resolved his partnership tax liability on an individual basis, separate from the partnership-level proceeding. We agree with the tax court that he entered into no such agreement which would qualify under the tax code as a settlement of Mathia's liability as an individual partner. Therefore, we conclude the assessments were timely and properly applied by the IRS. We also find the district court correctly assigned the burden of proof to Mathia.
Accordingly, we AFFIRM.
Before considering the facts of this case, a review of several basic partnership tax principles is helpful. As a general matter, partnerships are pass-through entities that do not themselves pay federal income tax. I.R.C. § 701; see also Katz v. Comm'r of Internal Revenue, 335 F.3d 1121, 1123 (10th Cir.2003). All income,
Before 1982, partnership proceedings, both administrative and judicial, were conducted at the level of the individual partner. See Crnkovich v. United States, 202 F.3d 1325 (Fed.Cir.2000). This individualized process created inefficiencies, however, because the IRS was required to conduct distinct, and potentially duplicative, investigations for each partner in a partnership. Likewise, the IRS generally could not enter into settlements at the partnership-level; agreements had to be executed on an individual basis.
Congress responded to these issues by enacting the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. No. 97-248, 96 Stat. 324. TEFRA's partnership provisions, I.R.C. §§ 6221-6233, streamlined partnership taxation by requiring resolution of "partnership items"—items, according to regulations, that are appropriately determined at the partnership level rather than at the partner level—in a single, unified audit and judicial proceeding. See I.R.C. § 6221 ("Except as otherwise provided in this subchapter, the tax treatment of any partnership item shall be determined at the partnership level."); see also id. § 6231(a)(3) (partnership items include "any item required to be taken into account for the partnership's taxable year"). Thus, "TEFRA generally requires determination of the tax treatment of partnership items at the partnership level ..." before assessments are made at the individual partner level. AD Global Fund, LLC ex rel. N. Hills Holding, Inc. v. United States, 481 F.3d 1351, 1355 (Fed.Cir.2007). A partnership must file an information return (Form 1065, U.S. Return of Partnership Income) each year reporting items of income, deduction, and credit, and these items are then allocated among the partners who individually bear the tax consequences for them.
TEFRA is intended to facilitate efficient, partnership-level administrative and judicial proceedings. To commence a partnership-level administrative proceeding under TEFRA, the Commissioner must issue a Notice of the Beginning of an Administrative Proceeding (NBAP) to the tax matters partner
Upon receiving an FPAA, a partnership, via its tax matters partner, may file a petition in the Tax Court, a federal district court, or the Court of Federal Claims contesting the adjustments. Id. § 6226(a). Once an FPAA is sent, the IRS cannot make any assessments attributable to relevant partnership items during the time the partnership seeks review and, if a § 6226 proceeding is brought in the Tax Court,
The facts are undisputed. Appellant Jean Mathia and her now-deceased husband, Doyle Mathia, were married and filed joint tax returns for all years relevant to this case. Doyle Mathia was a limited partner in Greenwich Associates, a New York limited partnership subject to partnership procedures under TEFRA. Mathia owned an 8.5% interest in Greenwich, which was one of approximately 50 identically structured coal-related partnerships and joint ventures sponsored by the Swanton Corporation (the Swanton partnerships). Thirty of the Swanton partnerships were formed before the enactment of TEFRA. The remaining 20, including Greenwich, were formed after the enactment of TEFRA and are subject to TEFRA's unified audit and litigation provisions applicable to partnerships.
In the late 1980s, the Commissioner investigated the Swanton partnerships, including Greenwich, and determined they existed solely to generate tax deductions for their partners. In 1987, Greenwich received a timely notice of the beginning of an administrative proceeding for tax years 1982-84, and in 1990 the Commissioner issued to Greenwich an FPAA stating the losses declared in association with the Greenwich partnership would be disallowed. In response, Greenwich's tax matters partner, Kevin Smith, filed an objection in the Tax Court and sought reconsideration. In the ensuing litigation, Greenwich was represented by Zapruder & Odell, a law firm that served as counsel for most of the Swanton partnerships subject to TEFRA.
In September 1991, the Commissioner and Zapruder & Odell reached an agreement in principle regarding 19 of the 20 Swanton TEFRA partnerships, including Greenwich. The agreement, which was reflected in a series of letters between Zapruder & Odell and the Commissioner's attorneys, set forth terms for the resolution of the disallowed losses, and it required that any final settlement and entry of judgment bind all partnerships and, by extension, each individual partner.
In the wake of the agreement in principle, the Commissioner began applying the terms of the settlement to individual partnerships and partners. To do this, the IRS gathered information enabling it to calculate partnership-level adjustments and each partner's distributive share adjustment. The IRS also began preparing decision documents memorializing the terms of the proposed settlement for each Swanton partnership subject to TEFRA.
Since the 1991 agreement in principle was not yet complete, the parties continued to negotiate aspects of the proposed settlement. For example, in a 1993 letter, the Commissioner informed the partners that, because the Commissioner had not received all tax returns for Greenwich, he could not determine whether any issues prevented computation of the settlement amount. And later in 1993, the Commissioner sent Zapruder & Odell a document setting forth "Terms of Settlement."
In 1995, the Commissioner sent a "Stipulation of Settlement Agreement" to Greenwich (Greenwich Stipulation) memorializing the parties' agreement with respect to Greenwich. The Greenwich Stipulation set forth adjustments to Greenwich's partnership items for tax years 1982-84. To be valid, the document had to be signed by Greenwich (via
In 2001, the Commissioner sent an identical, unsigned, Greenwich Stipulation to Greenwich, and this time both parties signed the document. The Stipulation was filed with the Tax Court on August 31, 2001, pursuant to Tax Court Rule 248(a). See Ex. 29-J (Greenwich Stipulation) ("Pursuant to Rule 248(a) of the Tax Court Rules of Practice and Procedure, it is ORDERED AND DECIDED: That the following statement shows the adjustments to the partnership items of Greenwich Associates ....").
Receiving no objections to the Stipulation, the Tax Court accepted the settlement and entered its decision. Ninety days later, on April 17, 2002, the court's decision became final. In September 2002 and January 2003, the IRS issued notices of computational adjustment reflecting taxpayers' deficiencies and interest owed for 1982-84, based on the Greenwich Stipulation's agreed-upon figures, as entered by the Tax Court. And on January 27, 2003—within one year of the Tax Court's final decision in the partnership-level proceeding—the IRS issued the assessments. The Mathias paid deficiencies of $149,360, $4,015, and $2,331 for the years 1982, 1983, and 1984, respectively, but they paid none of the interest due. The IRS subsequently denied Jean Mathia's request for an abatement of the interest.
The IRS then sought to recover the unpaid interest. In 2004, the Commissioner issued a final notice of intent to levy the interest, a notice of federal tax lien filing, and notices of Mathia's right to a Collection Due Process (CDP) hearing, which she was entitled to under I.R.C. §§ 6320 and 6330. At the CDP hearing, Mathia argued to the IRS's Appeals Office that the assessments were untimely, because they were filed more than one year after both the agreement in principle and the execution of the Greenwich Stipulation.
Mathia petitioned the Tax Court to review the assessments and the determinations at the CDP hearings. The court affirmed the assessments were timely and rejected Mathia's contention that the interest should have been abated. See Mathia v. Comm'r of Internal Revenue, T.C. Memo. 2009-120, 2009 WL 1471716 (U.S.Tax Ct. May 27, 2009). Finally, the Tax Court denied Mathia's motion to shift the burden of proof to the Commissioner under I.R.C. § 7491(a). Mathia now appeals. We have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1).
Mathia contends (1) the Commissioner's assessments were untimely, and (2) the Tax Court erroneously denied her motion to assign the burden of proof to the Commissioner. In considering these issues, we review legal questions de novo and factual questions for clear error. See Jones v. Comm'r of Internal Revenue, 560 F.3d 1196, 1199 (10th Cir.2009). Because this case involves mixed questions of law and fact, and because the factual record is stipulated, our review is de novo.
Mathia contends the IRS's assessments were untimely because they were levied more than one year after the execution of a "settlement agreement" pursuant to I.R.C. § 6231(b)(1)(C). This argument is unavailing because Mathia never entered into an individualized agreement with the IRS, and the IRS timely issued the assessments within one year of the Tax Court's decision becoming final.
Whether the assessments were timely depends on how the 1991 agreement in principle and the executed Greenwich Stipulation are characterized. Under TEFRA, the IRS may enter into a settlement agreement with a partnership or an individual partner. In the ordinary case, TEFRA calls for the IRS to resolve partnership tax issues at the partnership level, and partnerships may enter into partnership-level settlement agreements. See I.R.C. § 6221 (providing for determination of tax liability of partnership items on a partnership-wide basis). The default is that settlement agreements entered into by a partnership bind all individual partners, including non-notice partners.
In certain circumstances, however, a settlement agreement between the IRS and an individual partner may carve out partnership items for resolution outside the context of a partnership-wide proceeding. See Crnkovich, 202 F.3d at 1328-29. This enables individual partners to resolve their differences with the IRS notwithstanding proceedings involving the partnership or other partners. When a partner enters into a settlement agreement individually, he removes himself from the partnership proceeding and allows the Commissioner to resolve his tax liability on an individual basis. In this circumstance, the partner is subject to dismissal from the partnership-level proceeding. I.R.C. §§ 6226(d)(1)(A), 6231(a)(4), 6231(b)(1)(C).
Internal Revenue Code § 6231(b) details the various methods by which partnership items are reclassified as nonpartnership items and resolved on the partner level. Our concern is with the third method:
I.R.C. § 6231(b) (emphasis added).
The relevant provision here, § 6231(b)(1)(C), deems that an individual partner's partnership items become nonpartnership items when there is a settlement agreement "with the partner with respect to such items" (emphasis added). This provision recognizes individual partners
Section 6231(b)(1) is important for Mathia's appeal because which statute of limitations applies depends on whether partnership items were converted to nonpartnership items. Internal Revenue Code § 6501(a) provides the default three-year statute of limitation for assessment and collection of taxes: "Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed ...." See also I.R.C. § 6229(a) (limitations period for such assessments "shall not expire before the date which is 3 years after" the filing of the partnership's return or the return's due date, whichever is later). But if a taxpayer challenges an FPAA, I.R.C. § 6229(d) suspends the default limitations period, allowing the IRS to make assessments until one year after the date the decision in the Tax Court proceeding becomes final. A decision becomes final 90 days after it is entered. Id. § 7481(b).
If, however, relevant partnership items have become nonpartnership items pursuant to § 6231(b), there is a special assessment period under I.R.C. § 6229(f)(1). That period does not expire until one year after partnership items become nonpartnership items:
Id. § 6229(f)(1) (emphasis added). In other words, partnership items become nonpartnership items on the date the IRS enters into a settlement agreement with an individual partner with respect to those items, and the one-year statute of limitations runs from that date. Id. § 6231(b)(1). So for our purposes, the nature and character of the Greenwich agreements is dispositive.
The Tax Court decision implementing the Greenwich Stipulation became final in April 2002. Given this, and so long as Mathia did not enter into a separate closing agreement with the IRS, the Commissioner's January 2003 assessment against Mathia was timely because § 6229(d) suspends the limitation period to allow the IRS to make assessments until one year after the Tax Court's decision becomes final. The outcome would be different, however, if Greenwich's partnership items attributable to Mathia were reclassified at any point as nonpartnership items. If this
Mathia contends the 1991 agreement in principle and the 2001 executed Stipulation qualify as "settlement agreements" for purposes of I.R.C. § 6231(b)(1). Therefore, she argues, the relevant partnership items became nonpartnership items when these agreements were formed, and the IRS was required under § 6229(f) to assess any taxes due within one year of these agreements.
As an initial matter, the parties debate whether there was a binding settlement agreement at all. Specifically, the Commissioner contends the 1991 agreement in principle lacked material terms, and that the Greenwich Stipulation was not binding absent entry of the proposed decision by the Tax Court. We need not decide these questions, however, because even if both agreements were settlements in some sense, they were not the types of settlement agreements required by § 6231(b)(1)(C).
Both parties point to a 2000 Federal Circuit case in support of their arguments. In Crnkovich v. United States, 202 F.3d at 1325, the Federal Circuit analyzed relevant tax code provisions to determine whether several sets of partners had entered into § 6231(b)(1)(C) agreements, so as to trigger the one-year assessment period under § 6229(f)(1). After explaining that the purpose of § 6231(b)(1)(C) is to enable the resolution of an individual partner's tax liability apart from a unified partnership-level proceeding, the court construed the language of the agreements at issue, under principles of contract interpretation, to determine whether the agreements sought to convert partnership items into nonpartnership items. Id. at 1330-33.
In Crnkovich, the Federal Circuit found that the partnership items for one set of plaintiffs had been transformed into nonpartnership items because plaintiffs entered into an individual Form 906 closing agreement with the IRS. Id. at 1331. The Form 906 agreement constituted a "settlement agreement" under § 6231(b)(1)(C) in large part because it reflected the IRS's affirmative "deci[sion] to deal with the Crnkoviches individually and apart from any partnership-level determinations." Id. at 1333. The court explained that, in entering into the Form 906 agreement, the "IRS chose to forego the advantages of making its determinations at the partnership level and opted instead to deal with the Crnkoviches individually with respect to the tax issues addressed in the ... agreement." Id. Similarly, the court found the second set of plaintiffs, who entered a stipulation with the IRS rather than a Form 906 agreement, had entered into a § 6231(b)(1)(C) settlement agreement because the stipulation was the product of "the IRS's decision to resolve certain issues [at the individual partner level] rather than to address those issues at the partnership level." Id. at 1338.
First, neither the 1991 agreement in principle nor the 2001 executed Stipulation (nor any associated correspondence) makes any reference to the individual liability of any of the Greenwich partners, and the Mathias never entered into a separate closing agreement with the IRS so as to convert his partnership items into nonpartnership items. There is no contention the Mathias ever notified Smith, Greenwich's tax matters partner, or the government that they sought to opt out of the partnership-level proceeding, and nothing in the record reflects an intention, on the part of either party, to settle the Mathias' liability separate from the partnership's, via an individual closing agreement or any other means.
Moreover, the Greenwich Stipulation, by its own terms, was a decision binding the partnership and its members. The document was executed pursuant to Tax Court Rule 248(a), which provides: "A stipulation consenting to entry of decision executed by the tax matters partner and filed with the Court shall bind all parties. The signature of the tax matters partner constitutes a certificate by the tax matters partner that no party objects to entry of decision" (emphasis added). The "parties" bound by the Stipulation included all members of Greenwich during the tax years in dispute, including Doyle Mathia. I.R.C. § 6226(c)(1). This alone indicates that the partnership-level agreement bound Mathia, and that he did not opt out—as did the partner in Crnkovich—by executing an individualized agreement with the IRS.
Finally, language from the negotiations between the Swanton partnerships and the IRS confirms our interpretation of the Greenwich settlement agreements. The IRS made it an express prerequisite of any settlement talks that all partners of the Swanton TEFRA partnerships consent to the partnership-level agreement. For example, in an October 1992 letter, the Commissioner stated:
Ex. 19-J at 2 (Oct. 1992 Letter from IRS District Counsel to Zapruder & Odell). April 1993 correspondence drafted by counsel for the Swanton partnerships shows the partnerships fully understood the IRS's conditions:
Ex. 16-J at 1 (April 1993 letter from Swanton Partnerships' Tax Defense Committee). The meaning of these excerpts is plain. As counsel for Greenwich recognized, the IRS would only settle on a partnership basis. The IRS expressly sought to avoid the inefficiencies associated with reclassifying Greenwich partnership items as nonpartnership items and dealing with specific partners on an individual basis.
Mathia also contends the Tax Court erred in placing on the estate the burden of proof to demonstrate the IRS's assessments were untimely.
In general, the burden of proof in a Tax Court proceeding is on the taxpayer, "except as otherwise provided by statute or determined by the Court." Tax Court Rule 142(a). The taxpayer also bears the burden of proof when asserting affirmative defenses. See Tax Court Rule 39; Hoffman v. Comm'r of Internal Revenue, 119 T.C. 140, 146-47 (2002). An exception to this rule exists, however. When a taxpayer introduces credible evidence with respect to a factual issue and meets certain other requirements, I.R.C. § 7491(a) shifts the burden of proof to the Commissioner. Section 7491(a), however, applies only to proceedings "arising in connection with examinations" commencing after its July 22, 1998 enactment.
Relying on § 7491(a), Mathia filed a motion in the Tax Court seeking a declaration the Commissioner bore the burden of proof. The court denied this motion, explaining:
Mathia, 2009 WL 1471716, at *15 n. 17 (citations omitted). The Tax Court declined to shift the burden because it found that "the computational adjustments to [taxpayers'] 1982, 1983, and 1984 tax returns were made in accordance with the Greenwich examination." Id. We agree.
The application of § 7491(a) turns on whether Mathia's appeal before the Tax Court arose "in connection with" the partnership-level examination of Greenwich, which began before March 16, 1987—well before § 7491(a) took effect. In the action before the Tax Court, Mathia challenged her underlying tax liability, as originally determined in the CDP proceeding. This tax liability, and the resulting assessments, was the direct result of the IRS's late-1980s partnership-level examination. Therefore, the case and the examination were related, § 7491(a) is inapplicable, and the Tax Court correctly assigned the burden to Mathia.
The Commissioner's assessments were timely, and the Tax Court correctly assigned the burden of proof. AFFIRMED.
