JT USA, LP; JTR-LLC; TAX MATTERS PARTNER, Petitioners-Appellees,
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant
Argued and Submitted June 2, 2014, Pasadena, California
Appeal from a Decision of the United States Tax Court. Tax Ct. No. 5282-05.
The panel remanded an appeal by the Commissioner of Internal Revenue and held that the tax court erred in concluding that taxpayers could opt out of a partnership administrative proceeding under the Tax Equity and Fiscal Responsibility Act.
The panel held that the meaning of 26 U.S.C. § 6223(e)(3)(B) is clear and unambiguous that unless a partner elects to have all of his or her partnership items treated as nonpartnership items, the partner cannot elect out of proceeding under the Tax Equity and Fiscal Responsibility Act.
Dissenting, Judge Callahan wrote that TEFRA allows one partner to make one election and another partner to make a different election, and that a partner who has both direct and indirect interests should have the same option, at least where the IRS fails to timely notify the taxpayer that a bifurcated election is not allowed.
Joan I. Oppenheimer (argued), Tamara W. Ashford, Deputy Assistant Attorney General, Teresa E. McLaughlin, Tax Division Department of Justice, Washington, D.C., for Respondent-Appellant.
Richard V. Vermazen (argued), Law Office of Richard V. Vermazen, San Diego, California; Ernest S. Ryder and Lauren A. Rinsky, Ernest S. Ryder & Associates, Inc., APLC, San Diego, California, for Petitioners-Appellees.
Before: Stephen S. Trott and Consuelo M. Callahan, Circuit Judges, and Mark W. Bennett, District Judge.[*]
TROTT, Circuit Judge:
We review de novo the Tax Court's reading and application of a TEFRA statute in a convoluted action arising from (1) a partnership's attempted use of a bogus tax shelter to offset capital gains, and (2) the Commissioner of Internal Revenue's subsequent denial of a $32.5 million " loss" claimed by the partnership to eliminate income tax liability on an asset sale resulting in a $28 million capital gain. The Tax Court ruled that a taxpayer holding both direct and indirect interests in a partnership may elect under 26 U.S.C. § 6223(e)(3)(B) not to be bound by the results of a partnership proceeding -- or partnership audit -- as to some, but not all, of those interests held during the relevant taxable year. In other words, that § 6223(e)(3)(B) permits taxpayers to opt out of the partnership proceeding with respect to their indirect interests but to leave in that proceeding their alleged remaining direct partnership interests. The Commissioner concedes that " [i]f taxpayers' elections to opt out, but only as indirect partners, are effective, then the assessment of deficiencies flowing from about $36.6 million in adjustments (or on the order of $10 million in tax) is time-barred." Accordingly, it appears that if the IRS prevails, the taxpayers will be liable for additional taxes. Thus, their claim that this case is now moot for the lack of a controversy is groundless.
We have jurisdiction over this timely appeal pursuant to 26 U.S.C. § 7482(a)(1), and we conclude that the Tax Court's reading of the disputed statute was incorrect. We also conclude that the IRS's sloppy administrative errors, including mailing the wrong form letter to the taxpayers, were not sufficient either to require a different outcome or to stop the IRS from pursuing this matter and its claims. Thus, because we hold that the taxpayers' disputed elections to opt out were invalid, we remand for further proceedings consistent with this opinion.
The facts and circumstances of this case are available in the Tax Court's decision,
JT USA LP v. Comm'r, 131 T.C. 59 (2008), and in our previous opinion in Comm'r v. JT USA, LP, 630 F.3d 1167, 1169-70 (9th Cir. 2011). We attach the Tax Court's opinion as an appendix and repeat the facts only as necessary to illuminate our decision. For the best " explanation of the statutory scheme for dealing with partnership matters," we refer the reader to and incorporate Justice Scalia's opinion in United States v. Woods, 134 S.Ct. 557, 562-63, 187 L.Ed.2d 472 (2013).
26 U.S.C. § 6223(e)(3)(B)
26 U.S.C. § 6223(e)(3)(B), entitled " Notice to Partners of Proceedings," reads in pertinent part, " In any case to which this subsection applies, if paragraph (2) does not apply, the partner shall be a party to the proceedings unless such partner elects -- . . . (B) to have the partnership items of the partner for the partnership taxable year to which the proceeding relates treated as nonpartnership items."
In Carson Harbor Village, Ltd. v. Unocal Corp., 270 F.3d 863, 878 (9th Cir. 2001) (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 61 L.Ed. 442 (1917)), we said,
It is elementary that the meaning of a statute must, in the first instance, be sought in the language in which the act is framed, and if that is plain, . . . the sole function of the courts is to enforce it according to its terms.
Where the language is plain and admits of no more than one meaning, the duty of interpretation does not arise, and the rules which are to aid doubtful meanings need no discussion.
The statute at the core of this dispute, § 6223(e)(3)(B), provides that a " partner" may elect " to have the partnership items of the partner for the partnership year to which the administrative proceedings relate treated as nonpartnership items." The statute says " the partner," not an indirect partner or any other subset of the term " partner" as defined in 26 U.S.C. § 6231(a)(2). Moreover, § 6223(e)(3)(B) allows the partner to have " the partnership items" (plural) of that partner to be treated as nonpartnership items, not some of that partner's items to be treated as such.
The meaning of this language is clear and unambiguous, and it means -- as the Commissioner argues -- that unless a partner elects to have all of his or her partnership items treated as nonpartnership items, the partner cannot elect out of the TEFRA proceeding. See Exxon Mobil Corp. v. Comm'r, 484 F.3d 731, 734 (5th Cir. 2007) (" Use of the definitive article 'the' in the statute supports a conclusion that there is one overpayment rate for each overpayment situation." ). In the vernacular, § 6223(e)(3)(B) is an all-or-nothing rule, and that ends our primary inquiry.
The Tax Court's and the taxpayers' excursions into other sections of TEFRA are irrelevant. All the other TEFRA sections to which the taxpayers refer demonstrate that when Congress chose to differentiate between types of partners, they knew how to do so. As the Supreme Court remarked in Loughrin v. United States,
__ U.S. __, 134 S.Ct. 2384, 2390, 189 L.Ed.2d 411 (2014), " We have often noted that when 'Congress includes particular language in one section of a statute but omits it in another' -- let alone the very next provision -- this Court 'presume[s]' that Congress intended a different meaning." Indeed, the absence in § 6223(e)(3)(B) of the language the taxpayers would like us to read into it " provides strong affirmative evidence" that Congress did not intend it to be construed or implemented as the taxpayers wish. United States v. Naftalin, 441 U.S. 768, 774-75, 99 S.Ct. 2077, 60 L.Ed.2d 624(1979).
Accordingly, a partner in a TEFRA proceeding such as this is limited under § 6223(e)(3)(B) to a single election: either all in, or all out.
Here, the taxpayers tried to have their cake and eat it too. Their multiple simultaneous statements of election were entitled respectively " Statement of Election by Direct Partner Under Section 6223(e)(3)," and " Statement of Election by Indirect Partner Under Section 6223(e)(3)." Each " Indirect" partner's statement of election said that " [t]he undersigned who is an Indirect Partner is also a Direct Partner of the Partnership" and that " [t]his election does not apply to the undersigned as a Direct Partner." The statute does not permit such slight-of-hand, and the taxpayers' current claim that they did not attempt to bifurcate any partnership items in dispute going into the partnership proceeding is impeached by the record. Equally unavailing were their indisputably untimely attempts two years later to have their " elections out" cover both their indirect and direct partnership interests.
Although not necessary to support our conclusion, we note that it is consistent with the official legislative history behind the statute. See Salinas v. United States, 522 U.S. 52, 57-58, 118 S.Ct. 469, 139 L.Ed.2d 352 (1997). The House Conference Report on § 6223(e) says that " the partner will be a party to the proceeding [under TEFRA] unless he elects . . . to have all partnership items treated as nonpartnership items." H.R. Conf. Rep. No. 97-760, at 602(1982), reprinted in 1982 U.S.C.C.A.N. 1190, 1374 (emphasis added).
Although it dealt with a different TEFRA issue, our reading of § 6223(e)(3)(B) is also consistent with the purpose of TEFRA's partnership provisions recently reiterated by the Supreme Court in United States v. Woods, 134 S.Ct. 557, 187 L.Ed.2d 472 (2013). These provisions were enacted inter alia to prevent the waste of time, effort, and resources occasioned by a multiplicity of proceedings such as would occur if the Tax Court's construction of § 6223(e) were to prevail. In a normal case the Tax Court's ruling here would permit " duplicative proceedings and the potential for inconsistent treatment to partners in the same partnership," thus hindering the purpose and policy justifications that produces TEFRA. Woods, 134 S.Ct. at 563. Citing Kligfeld Holdings, 128 T.C. 192, 199-200 (2007), the Tax Court correctly recognized also that " [t]he goal of TEFRA is to have a single point of adjustment for all partnership items at the partnership level, thereby making any adjustments to a particular partnership item consistent among all the various partners." And the Tax Court acknowledged that it's reading of the statute would seem " to be at odds with TEFRA's overall goal to consolidate partnership proceedings and increase consistency." On these points, the Tax Court was correct. Accordingly, we conclude under a proper reading of § 6223(e)(3)(B), that the taxpayers' attempted elections were ineffective.
The Pertinent Treasury Regulation
Even if we were to agree that § 6223(e)(3)(B)'s meaning is ambiguous, which we do not, we would still be compelled to reach the same conclusion. After the enactment of § 6223(e)(3)(B), the Treasury Department issued Temp. Treas. Reg. § 301.6223(e)-2T(c)(1), 52 Fed. Reg. 6779 (Mar. 5, 1987), which was effective for the year of this controversy. The regulation tracks the language of the House Conference Report, and it provides that " the
election shall apply to all partnership items for the partnership taxable year to which the election relates." 52 Fed. Reg. at 6785 (emphasis added). We agree with the government's argument that the regulation -- which uses the words of the House Conference Report -- represents a reasonable reading of the statute and, accordingly, is entitled to Chevron deference. Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984); Mayo Found. for Medical Educ. & Research v. United States, 562 U.S. 44, 131 S.Ct. 704, 713, 178 L.Ed.2d 588 (2011) (" The principles underlying our decision in Chevron apply with full force in the tax context." ).
The taxpayers' attempt to avoid Chevron deference by simply offering a different interpretation of the statute and the regulation misses the point of Chevron deference. If the agency's reading of a statute is " a permissible construction of the statute," that reading and interpretation stands and is entitled to respect. Alarcon v. Keller Industries, Inc., 27 F.3d 386, 389 (9th Cir. 1994). Such is the case here. Thus, we remand to the tax court for further proceedings consistent with this opinion, and to determine the validity of the adjustments in the " final partnership administrative adjustment," known as the FPAA.
REMANDED for further proceedings.
131 T.C. No. 7
UNITED STATES TAX COURT
JT USA LP, JOHN ROSS AND RITA GREGORY, Partners Other than The Tax Matters Partner, Petitioners v. COMMISSIONER ...