Settlement involved partnership, not individual partner, so assessment was timely
Jean Mathia, (CA 10 01/05/2012) 109 AFTR 2d ¶2012-319
The Court of Appeals for the Tenth Circuit, affirming the Tax Court, has held than an assessment against a partner was timely under Code Sec. 6229(d) because a settlement agreement in the case was between IRS and the partnership, not the individual partner. Had the agreement been with the individual partner, as the taxpayer contended, the assessment would not have been timely under Code Sec. 6229(f)(1).
Background. Under the unified partnership rules, the tax treatment of any partnership item (and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item) generally is determined at the partnership level. (Code Sec. 6221)
If IRS decides to adjust any “partnership items,” it must notify the individual partners through a final partnership administrative adjustment (FPAA). (Code Sec. 6226) 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. (Code Sec. 6226(a)) Once an FPAA is sent, IRS cannot make any assessments attributable to relevant partnership items during the time the partnership seeks review and, if a Code Sec. 6226 proceeding is brought in the Tax Court, until one year after the Court’s decision becomes final. (Code Sec. 6225(a)) Every partner with an interest in the administrative proceeding is treated as a party to that proceeding and is bound by its outcome absent an agreement to the contrary. (Code Sec. 6225(a))
IRS may enter into a settlement agreement with a partnership or an individual partner. Settlement agreements entered into by a partnership generally bind all individual partners. (Code Sec. 6224(c)(3)) In certain circumstances, however, a settlement agreement between IRS and an individual partner may carve out partnership items for resolution outside the context of a partnership-wide proceeding. This enables individual partners to resolve their differences with 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 IRS to resolve his tax liability on an individual basis. In this circumstance, the partner is subject to dismissal from the partnership-level proceeding. (Code Sec. 6226(d)(1)(A), Code Sec. 6231(a)(4), Code Sec. 6231(b)(1)(C)) Under Code Sec. 6231(b)(1)(C), the partnership items of a partner for a partnership tax year become nonpartnership items as of the date IRS enters into a settlement agreement with the partner with respect to such items.
Code Sec. 6501(a) generally provides that a valid assessment of income tax liability may not be made more than three years after the later of the date the tax return was filed or the due date of the tax return. Subject to exceptions and special rules, the period for assessing tax attributable to a partnership item (or affected item), for a partnership tax year won’t expire before the date that is three years after the later of: (1) the date the partnership return was filed, or (2) the last day for filing the return for that year (without regard to extensions). (Code Sec. 6229(a)) If a partnership challenges an FPAA in court, Code Sec. 6229(d) suspends the default limitations period, allowing IRS to make assessments until one year after the date the court decision becomes final. A Tax Court decision becomes final 90 days after it is entered. (Code Sec. 7481(b))
If partnership items become nonpartnership items under Code Sec. 6231(b), there is a special assessment period under Code Sec. 6229(f)(1). That period does not expire until one year after partnership items become nonpartnership items.
Facts. 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 ’82-’84.
Greenwich was one of approximately 50 identically structured coal-related partnerships and joint ventures sponsored by the Swanton Corporation (the Swanton partnerships). It was formed after the enactment of the unified partnership rules.
In the late ’80s, IRS investigated the Swanton partnerships, including Greenwich, and determined they existed solely to generate tax deductions for their partners. In ’87, Greenwich received a timely notice of the beginning of an administrative proceeding for tax years ’82-’84, and in ’90 IRS 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 that were subject to the unified partnership rules.
In September ’91, IRS and Zapruder & Odell reached an agreement in principle regarding several of the Swanton partnerships, including Greenwich. The agreement set forth terms for the resolution of the disallowed losses, and 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, IRS began applying the terms of the settlement to individual partnerships and partners. In ’95, IRS 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 ’82-’84. To be valid, the document had to be signed by Greenwich (via Smith, its tax matters partner) and IRS. In ’96, Smith signed it but IRS did not. Doyle Mathia died in 2000. In 2001, IRS sent an identical, unsigned, Greenwich Stipulation to Greenwich, and this time both parties signed the document.
Receiving no objections to the Stipulation, the Tax Court accepted the settlement and entered its decision. 90 days later, on Apr. 17, 2002, the Court’s decision became final. In September 2002 and January 2003, IRS issued notices of computational adjustment reflecting the Mathias’ deficiencies and interest owed for ’82-’84, based on the Greenwich Stipulation’s agreed-upon figures, as entered by the Tax Court. On Jan. 27, 2003, which was within one year of the Tax Court’s final decision in the partnership-level proceeding, IRS issued the assessments. The Mathias paid deficiencies of $149,360, $4,015, and $2,331 for ’82, ’83, and ’84. Mathia challenged the timeliness of the assessments in Tax Court but lost.
Failed taxpayer argument. On appeal, Mathia contended that IRS’s assessments were untimely because they were levied more than one year after the execution of a “settlement agreement” under Code Sec. 6231(b)(1)(C). She argued that the ’91 agreement in principle and the 2001 executed Stipulation qualified as “settlement agreements” for purposes of Code Sec. 6231(b)(1)(C). Therefore, she argued, the relevant partnership items became nonpartnership items when these agreements were formed, and IRS was required under Code Sec. 6229(f) to assess any taxes due within one year of these agreements.
The Tenth Circuit disagreed. It said that, even assuming the ’91 agreement in principle and the Greenwich Stipulation were binding agreements with IRS, both agreements, by their express terms, dealt only with the treatment of partnership items. Furthermore, both were entered into by and with the partnership alone.
The Court said that the record was clear that Doyle Mathia was not dismissed from the partnership-level proceeding, and he (and later, his estate) was a party at the partnership-level at all times. Because any agreement did not convert the Mathias’ partnership items into nonpartnership items, Code Sec. 6229(f)’s one-year assessment period did not govern. Rather, as a partnership-level agreement, the settlement was governed by the statute of limitations set forth in Code Sec. 6229(d), which permitted IRS to make assessments up to one year after the Tax Court’s decision became final. Therefore, the January 2003 assessments were timely because they were made well within this one-year window, which began to run in April 2002.
RIA Research References: For the unified audit rules for partnerships, see FTC 2d/FIN ¶ T-2100; United States Tax Reporter ¶ 62,214; TaxDesk ¶ 825,000.
Source: Federal Tax Updates on Checkpoint News tab 1/17/2012