If a statute allows a court to consider an issue, does that mean the court only has the right to accept the position being posited, but must remain mute if the court decides in the alternative? That was the position being advanced by the taxpayer in the case MK Hillside Partners, et al v. Commissioner, No. 14-71504, CA9, 2016 TNT 122-8.
The case involved a purported partnership tax structure entered into by the taxpayer that the IRS argued was a sham. As the claimed partnership was subject to the TEFRA partnership provisions, the matter arose with regard to that case. Under IRC §6226(f) the Tax Court has the jurisdiction to determine partnership items. However, with regard to the statute of limitations, IRC §6226(d)(1) provides, in part,
...[A]ny person treated under subsection (c) as a party to an action shall be permitted to participate in such action (or file a readjustment petition under subsection (b) or paragraph (2) of this subsection) solely for the purpose of asserting that the period of limitations for assessing any tax attributable to partnership items has expired with respect to such person, and the court having jurisdiction of such action shall have jurisdiction to consider such assertion.
In the case in question the IRS, arriving late to the scene, was asserting that the taxpayer had omitted more than 25% of gross income on his return for 1999, triggering the six year statute of limitations during which the IRS could assess tax under IRC §6501(e)(1). The partner, seeking to end the case based on the IRS coming forward after the end of the normal three year statute, asked the Tax Court to consider the taxpayer’s contention that the statute was closed with regard to the partner.
The Tax Court did not see things that way and, rather than ruling in favor of the taxpayer’s position that the statute was closed to the IRS, instead affirmatively ruled that the statute was open as the taxpayer had omitted more than 25% of gross income for the year.
Now the taxpayer argues that the Court had no right to make the determination at the partnership level that the statute was still open, which would leave the taxpayer open to raise this argument when the IRS sought to move to the assessment against the partner level in the proceeding. That is, in a later proceeding the taxpayer will likely be barred from raising this defense, as the matter had already been decided.
The taxpayer pointed out that while IRC §6226(f) uses the word “determine” to outline the Tax Court’s powers in this case to resolve partnership matters, IRC §6226(d)(1) uses the word “consider” when discussing the Tax Court’s powers in the area of the statute as it applies to a particular partner. The taxpayer argues that the fact that Congress used a different word must imply that the Congress meant for a different result.
The Ninth Circuit panel did not agree with that view. First, the panel noted that the dictionary definitions cited by the taxpayer would apparently allow the Tax Court only the right to think about the matter at hand.
Katz next argues that dictionary meanings apply, and cites the following definitions of “consider”: to“think carefully about,” to “think or deem to be; regard as,” to “take into account; bear in mind.” The American Heritage Dictionary of the English Language 392 (4th ed. 2000). Those definitions, listed first, second, and fourth, respectively, do not fit the context of the statute nearly as well as the third definition, which Katz neglected to mention: to “form an opinion about; judge.” Id. As the government observes, it is unlikely that Congress enacted “§ 6226(d)(1) to enable a partner to raise an argument pertaining to timeliness about which the Tax Court may only ruminate.”
Given the “ruminate only” appearance of the opinions the taxpayer is citing, the Court finds a strong preference for the definition that the taxpayer did not cite, pointing out the absurdity of the result otherwise.
But the taxpayer argues that, in fact, the proper interpretation does allow the court to do something, but it’s only to accept the taxpayer’s argument (and therefore bring the entire situation to a close) or to simply remain mute on the topic.
As the opinion notes:
Indeed, Katz ultimately does not propose a "pure contemplation" interpretation. Instead, Katz argues that the tax court should dismiss partners from the partnership case based on consideration of:
any undisputed fact, including but not limited to: (1) whether a partner filed a personal return for the tax year in issue; (2) the date of the filing of the return; (3) whether the IRS is currently examining the partner for the tax year at issue in the partnership-level proceeding; (4) whether the IRS issued a notice of deficiency to the partner; and (5) whether the partner executed any extension of the applicable statute of limitations.
The panel, however, dismissing this view, noting:
This “undisputed facts” interpretation follows from none of the bases Katz asserts: the plain language of the statute, dictionary meanings and examples, or analogy to Section 6214(b) and (c).
The Court also found this analysis at odds with the Supreme Court’s analysis of another partnership related matter in the case of United States v. Woods, 134 S.Ct. 557 (2013) where the Court looked at the ability of court in a TEFRA partnership proceeding to determine the applicability of a penalty despite the fact that the actual the amount of a penalty due for each partners is determined at the partner’s proceeding.
As the opinion notes:
By holding that a partnership proceeding is applicable to Katz because his limitations period is open, without purporting to determine whether Katz in fact must pay any penalty or adjustment, the Tax Court's decision is consistent with Woods's mode of analysis.