United States: Eleventh Circuit rejects procedural arguments raised by taxpayer in son-of-BOSS case

In brief

The Eleventh Circuit recently issued an opinion in Greenberg v. Commissioner, No. 20-13001 (11th Cir. 20 August 2021), one of the few remaining son-of-BOSS cases working its way through the courts. In Greenberg, the taxpayer and former accounting firm partner engaged in a number of son-of-BOSS-style transactions between the years 1999 to 2001 through a tiered partnership structure. The IRS disallowed the losses generated by these transactions and used by the taxpayer to offset his income. The taxpayer challenged the IRS’s determinations in the Tax Court, raising both substantive and procedural arguments.

Although it is not surprising that the Tax Court upheld the IRS’s disallowances—which the Eleventh Circuit affirmed—Greenberg presents a number of interesting procedural issues which have potential implications for other taxpayers.

Period of limitations for assessments under TEFRA

First, the taxpayer argued that the IRS Notice of Deficiency (NOD) for his 1999 taxable year was issued after the three-year period of limitations in section 6501(a) was closed, thus rendering the NOD untimely. Section 6501(a) generally requires that the IRS assess a taxpayer’s taxes within three years of the date the return was filed. The taxpayer filed his individual tax return for 1999 on 18 October 2000. However, on 14 October 2003—four days shy of three years—the IRS sent AD Global Fund, a lower-tier partnership, a Final Partnership Administrative Adjustment (FPAA). The Commissioner argued that the FPAA held open both the section 6229(a) partnership statute of limitations period and the section 6501(a) statute of limitations. According to the Commissioner, because the NOD for the taxpayer’s 1999 taxable year was issued while the AD Global partnership proceedings were still ongoing, the section 6501(a) period was still open and the NOD timely.

The taxpayer’s and the Commissioner’s arguments raised questions about the interaction between section 6229(a)—which generally provides that the period for assessing tax attributable to partnership items “shall not expire” before three years after the later of the date the partnership return was filed or the last day for filing such return—and section 6501(a), as well as the effect of an FPAA on those two provisions. Implicit in the taxpayer’s argument is the view that section 6501(a) controlled the IRS’s assessments in the NOD and that the AD Global FPAA did not toll that period. Both issues have been addressed by the Tax Court, but only a few Courts of Appeal have ruled on these issues. The effect of an FPAA on the section 6501(a) period of limitations was an issue of first impression in the Eleventh Circuit.

The court looked to both Tax Court case law and decisions issued by other Courts of Appeals. The court ultimately sided with the Tax Court and its sister circuits. With regard to the first issue, in Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000), and its progeny, the Tax Court held that section 6229(a) provides a minimum period for assessment of partnership items, not a standalone period of limitations, and that, in instances where sections 6501(a) and 6229(a) both apply, the longer of the two periods controls. Id. At 540–43. Additionally, the Tax Court has held that where “an FPAA is timely mailed . . . section 6229(d) suspends the running of the period of limitations” under both sections 6501(a) and 6229(a). Id. at 552. In agreeing with the Tax Court on both counts and holding that the NOD for the taxpayer’s 1999 year was timely, the Eleventh Circuit joined the Third Circuit, Fifth Circuit, Federal Circuit, and the D.C. Circuit on the first issue and the Federal Circuit on the second. However, the interactions between the provisions of section 6229 and section 6501 remain an open issue in most circuits.

Although section 6229 was repealed by the Bipartisan Budget Act of 2015 (BBA) effective for tax years beginning after 31 December 2017, the interaction of former section 6229 and section 6501 remains a live issue for pre-2018 taxable years in circuits other than those listed above. Going forward, partnership items generally are subject to the BBA statute of limitations under section 6235(a), which generally provides that no adjustments may be made for any partnership taxable year after the later of three years after the date the partnership return was filed, the return due date, or the date on which the partnership filed an administrative adjustment request. If an eligible partnership elects out of BBA, however, its partners are subject to the general three-year period under section 6501(a).

Commissioner’s burden of production for accuracy-related penalty approval

The next notable issue raised in Greenberg pertained to the Commissioner’s burden of production to prove compliance with section 6751(b)(1). That provision requires that penalties be “personally approved (in writing) by the immediate supervisor” of the IRS employee who made the initial determination to assert penalties against the taxpayer. In Greenberg, the IRS asserted 40% accuracy-related penalties against the taxpayer under section 6662(a) and (h). In Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), and Graev v. Commissioner, 149 T.C. 485 (2017), the Second Circuit and the Tax Court, respectively, held that section 7491(c) places the burden on the IRS to show compliance with section 6751(b)(1). Because the IRS failed in Greenberg to produce any evidence that this was done, the Tax Court held the taxpayer was not liable for penalties. The IRS did not appeal this decision, so it was not addressed by the Eleventh Circuit. However, the string of IRS losses on this issue may end in the not-too-distant future.

Section 6751(b)(1) case law has been a thorn in the IRSs side as hundreds of penalties have been rejected by courts since the decisions in Chai and Graev. Also, no Court of Appeals other than the Second Circuit has directly addressed whether section 6751(b)(1) creates an affirmative burden of production on the Commissioner to show that penalty approval was obtained prior to assessment. However, this very issue is currently pending before the Ninth Circuit in Laidlaw’s Harley Davidson Sales Inc. v. Commissioner, No. 20-73420 (9th Cir.). In that case, the taxpayer challenged a penalty on the basis that the written supervisory approval requirement of section 6751(b)(1) was not satisfied because approval was not received before the IRS issued a 30-day letter proposing the penalty to the taxpayer. Conversely, the government has renewed its argument that supervisory approval of penalties is timely under the plain language of section 6751(b)(1) so long as it is obtained before the penalty is “assessed” and while the supervisor still has the discretion to approve the initial penalty determination—directly challenging the Second Circuit’s holding in Chai and the multitude of Tax Court cases since. The Tax Court in Laidlaw’s Harley Davidson sided with the taxpayer and held that the IRS failed to comply with section 6751(b)(1) because, per the court, that section requires that written supervisory approval be obtained before the first formal communication to the taxpayer of the determination to assess a penalty. The Commissioner filed its Reply Brief on 4 October and oral argument is set for 6 December. As a result, we could have a ruling on the issue as soon as the first half of next year.

However, this issue may become moot going forward due to a provision in the revised Build Back Better Act, H.R. 5376, that would retroactively repeal the supervisory approval requirement to penalty determinations and replace it with a quarterly certification of procedural compliance. The multitude of cases since Chai and Graev in which the Commissioner was unable to produce any proof that the IRS complied with the supervisory approval requirement—including Greenberg— demonstrates that the IRS did not have robust procedures in place to comply with that provision. If that continues, the new requirement could drastically undermine the purpose of section 6751(b)(1)—to ensure that penalties would be imposed only when appropriate and not used as bargaining chips to pressure taxpayers into a settlement. It is unclear whether taxpayers would be able to challenge compliance with the quarterly certification requirement and ensure procedural requirements were met in particular cases.

Jurisdictional challenges raised during Tax Court Rule 155 proceedings

Lastly, of note was the Eleventh Circuit’s off-the-cuff remark that it may have been too late for the taxpayer to challenge the Tax Court’s jurisdiction after the Commissioner had already submitted proposed Tax Court Rule 155 computations. The taxpayer filed a motion to dismiss, making the case that the Tax Court lacked subject matter jurisdiction over certain losses because they were partnership items for which no FPAA was issued. The Tax Court reviewed the motion to dismiss and disposed of the challenge on the merits. However, on appeal, the Eleventh Circuit noted that Rule 155 proceedings are intended to be “confined strictly to consideration of the correct computation of the amount to be included in the decision resulting from the findings and conclusions made by the [Tax Court]” and that the motion to dismiss appeared to be a new issue that was “inappropriate” for the taxpayer to raise at such a late point in the case.

Though the Eleventh Circuit did not delve deeper into the rationale for its comment, it seems to contradict traditional case law regarding when parties may challenge a court’s subject matter jurisdiction. Generally, the US Supreme Court has held that an attack on subject matter jurisdiction can be brought at any time. See, e.g., Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 570-571 (2004) (providing that challenges to subject matter jurisdiction can be raised at any time, “whether the challenge be brought shortly after filing, after the trial, or even for the first time on appeal”). These cases suggest that taxpayers can raise challenges to the Tax Court’s jurisdiction at any point in the litigation, including at Rule 155 proceedings. However, no court has yet addressed this point directly.

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