United States District Court, W.D. Texas, Austin Division
DOYLE W. FOSTER, MARTHA G. FOSTER, THOMAS K. NELSON, and CAROLYN C. NELSON, Plaintiffs,
UNITED STATES OF AMERICA, Defendant.
SPARKS "SENIOR UNITED STATES DISTRICT JUDGE.
REMEMBERED on this day the Court reviewed the file in the
above-styled case, and specifically the United States of
America (the Government)'s Motion for Summary Judgment
[#52] and Brief in Support [#51], Plaintiffs Doyle W. Foster,
Martha G. Foster, Thomas K. Nelson, and Carolyn C.
Nelson's Response [#60] in opposition, the
Government's Reply [#61] in support, and Plaintiffs'
Sur-Reply [#63-2] thereto as well as Plaintiffs' Motion
for Summary Judgment [#54], the Government's Response
[#58] in opposition, and Plaintiff s Reply [#62] thereto.
Having reviewed the documents, the governing law, and the
file as a whole, the Court now enters the following opinion
case is one of many tax cases relating to American Agri-Corp
(AMCOR) partnerships of the 1980s. The AMCOR agricultural
partnerships generally allowed partners to report significant
losses on tax returns because "farming expenses
typically exceeded any income realized from farming
activities." Duffie v. United States, 600 F.3d
362, 367 (5th Cir. 2010). The Internal Revenue Service (IRS)
began investigating AMCOR partnerships in the late 1980s
"to determine whether they were impermissible tax
shelters." Id. '
case centers on the Tax Equity and Fiscal Responsibility Act
of 1982 (TEFRA), which amended the Internal Revenue
Code. Although several courts, including the
Fifth Circuit, have previously summarized TEFRA's
provisions, a brief review of TEFRA is necessary to provide
context for this decision.
TEFRA and Partnerships
relevant part, TEFRA regulates the tax treatment of
partnerships. As the United States Supreme Court has
A partnership does not pay federal income taxes; instead, its
taxable income and losses pass through to the partners. 26
U.S.C. § 701. A partnership must report its tax items on
an information return, § 6031(a), and the partners must
report their distributive shares of the partnership's tax
items on their own individual returns, §§ 702, 704.
United States v. Woods, 134 S.Ct. 557, 562 (2013).
Congress enacted TEFRA, in part, to provide the IRS with a
method for correcting errors on a partnership's returns
in a single, unified proceeding. Id. at 562-63.
"TEFRA requires partnerships to file informational
returns reflectingthepartnership's income, gains,
deductions, and credits. Individual partners then report
their proportionate share of the items on their own tax
returns." Rodgers v. United States, 843 F.3d
181, 184 (5th Cir. 2016) (quoting Irvine v. United
States, 729 F.3d 455, 459 (5th Cir. 2013)).
overarching framework, "TEFRA established three
categories for items considered in the tax treatment of a
partnership: partnership items, nonpartnership items, and
affected items." Id. (citing 26 U.S.C. §
6231(a)(3)-(5)) (internal quotation marks omitted). TEFRA
defines a "partnership item" as "any item
required to be taken into account for the partnership's
taxable year under any provision of Subtitle A to the extent
regulations prescribed by the Secretary provide that, for
purposes of [subtitle F], such item is more appropriately
determined at the partnership level than at the partner
level." 26 U.S.C. § 6231(a)(3). TEFRA's
corresponding regulations provided that items "more
appropriately determined at the partnership level"
include the gains, losses, deductions, and credits of a
partnership. 26 C.F.R. § 301.6231(a)(3)-l-The
term "partnership item" also "includes the
accounting practices and the legal and factual determinations
that underlie the determination of the amount, timing, and
characterization of items of income, credit, gain, loss,
deduction, etc." 26 C.F.R. § 301.6231(a)(3)-l(b).
"nonpartnership item" is "an item which is (or
is treated as) not a partnership item." 26 U.S.C. §
6231(a)(4). "The tax treatment of nonpartnership items
requires partner-specific determinations that must be made at
the individual partner level." Duffie, 600 F.3d
at 366. Finally, an "affected item" is "any
item to the extent such item is affected by a partnership
item." 26 U.S.C. § 6231(a)(5).
created a two-stage procedure for the IRS to revise
partnership-related tax matters: first, the IRS assesses
partnership items, making any adjustments it deems necessary,
and then the IRS may initiate proceedings against individual
partners. Rodgers, 843 F.3d at 184. If the IRS
decides to adjust partnership items during the first stage,
it must notify the individual notice partners by issuing a
Notice of Final Partnership Administrative Adjustment (FPAA).
Id. A non-notice partner is a partner with less than
a 1% interest in a partnership that has more than 100
partners. See 26 U.S.C. §§ 6231(a)(8),
can challenge a FPAA in partnership-level proceedings.
Rodgers, 843 F.3d at 184. A partnership's tax
matters partner (TMP) has the exclusive right to file a
petition for readjustment of the partnership items in United
States Tax Court or in a federal district court within ninety
days of the FPAA's issuance. Id. at 184-85
(citing 26 U.S.C. § 6231 (a)(7)). If the TMP does not
challenge the FPAA within the ninety days, other partners who
received notice may file a petition for readjustment within
the following sixty days. Id. (citing 26 U.S.C.
§ 6226(b)(1)). Regardless of who files it, if a
partnership-level challenge is filed, each partner is deemed
a party to the case and is bound by its outcome absent an
agreement to the contrary. Id. at 185 (citing 26
U.S.C. § 6226(c)(1)); see also Cmkovich v. United
States, 202 F.3d 1325, 1328 (Fed. Cir. 2000).
partnership-level proceeding, the Tax Court has jurisdiction
to determine all partnership items for the tax year to which
the FPAA relates. Duffie, 600 F.3d at 367. The Tax
Court also has jurisdiction to determinate the proper
allocation of the partnership items among the partners.
Id. (citing 26 U.S.C. § 6226(f)). For tax years
before 1997, the Tax Court does not have jurisdiction over
nonpartnership items or over affected items. Id.
and the IRS may reach an agreed decision in the Tax Court on
partnership items in multiple ways. See Tax Ct. R.
248. First, the TMP may enter into a settlement agreement
with the IRS and certify that no party objects to the entry
of decision; such a settlement, filed with the Court, binds
all the parties. Tax Ct. R. 248(a). Alternatively, the IRS
may move for entry of a decision if (1) all the participating
partners agree or do not object and (2) the TMP agreed to the
proposed decision without certifying an objection. Tax Ct. R.
248(b)(1). Any party that subsequently objects to the entry
of decision must file such objection with the Tax Court
within sixty days of the IRS's motion. Finally, a
partner may "individually settle his or her
partnership tax liability with the IRS, [and] that partner
will no longer be able to participate in the partnership
level litigation, and will be bound instead by the terms of
the settlement agreement." Rodgers, 843 F.3d at
adjustments to the partnership items become final, the IRS
may begin partner-level proceedings to adjust the affected
tax liability of the individual partners. Woods, 134
S.Ct. at 563. Procedural next steps depend on whether
affected items qualify as computational adjustments or as
substantive affected items. A computational adjustment merely
requires a mechanical change in the tax liability of a
partner to properly reflect adjustment of a partnership item.
Duffie, 600 F.3d at 366. Such an adjustment can only
be made at the conclusion of the partnership level proceeding
and can be applied without any factual determination at the
partner level. Id. By contrast, a substantive
affected item "is dependent upon factual determinations
(other than a computation) relating to an adjustment made at
the partner level" and requires "fact-finding
particular to the individual partner." Id. at
366, 385. (quotation omitted).
the affected item is substantive, the IRS is required to
follow the deficiency procedures articulated in subchapter B
of the Internal Revenue Code, which include mailing the
partner a statutory notice of deficiency. 26 U.S.C. §
6230(a)(2)(A)(i). But where the affected items are only a
computational adjustments, deficiency procedures do not apply
and the IRS is not required to issue a statutory notice of
deficiency to the individual partner. Duffie, 600
F.3d at 385 (citing Woody v. C.I.R., 95 T.C. 193,
202 (1990)). Instead, the IRS is merely required to mail the
partner a notice of computational adjustment. Id.
Statute of Limitations
the IRS has three years from the filing date of a tax return
to assess taxes. See 26 U.S.C. § 6501(a). When
an additional tax assessment is attributable to a partnership
item or an affected item, the three-year statute of
limitations runs from the later of the date the partnership
filed its informational return or the date such return was
due. 26 U.S.C. § 6229(a). The Fifth Circuit has
determined § 6229(a) is not "an independent statute
of limitations for issuing FPAAs." Curr-Spec
Partners, L.P. v. C.I.R., 579 F.3d 391, 393 (5th Cir.
2009). Rather, § 6229(a) allows the IRS to issue an FPAA
at any time, but such FPAA "may affect only those
partners whose individual returns remain open under I.R.C.
§ 6501 (a) or some extension thereto, such as the
minimum period of I.R.C. § 6229(a)....
"Id. at 399.
three-year statute of limitations can also be extended by
agreement or tolled if a FPAA is mailed to the TMP. 26 U.S.C.
§ 6229(a), (d). If the TMP or another partner challenges
the FPAA, then the statute of limitations is further tolled
until one year following the conclusion of the
partnership-level proceedings. Id. But where no
informational return is filed for a partnership, the IRS may
assess any tax ...