The Ninth Circuit has held in a group of consolidated cases that the Tax Court has jurisdiction to decide in partner-level proceedings whether a partnership’s transactions were tax-motivated ( Keller, No. 06-75466 (9th Cir. 6/3/09)).
The case concerns the outstanding tax liabilities of 16 partners who invested in cattle partnerships that were sold to investors as “The 1,000 lb Tax Shelter.” These partnerships were part of a large series of cattle- and sheep-breeding partnerships organized, promoted and operated by Walter J. Hoyt III from the 1970s through the 1990s, and which have been the subject of extensive litigation over the years.
The IRS had offered a variety of settlement offers to the partners in the partnerships at issue. When the Service sent notices of intent to levy, the partners requested collection due process hearings and submitted offers in compromise to settle their outstanding tax liabilities. The IRS rejected the partners’ offers in compromise and, in collection due process hearings, imposed interest under former IRC § 6621(c) (which imposed a higher interest rate for substantial underpayments that resulted from tax-motivated transactions).
In the ensuing litigation, the Tax Court held that the IRS did not abuse its discretion in rejecting the offers in compromise. The court also held that it did not itself have jurisdiction to determine whether the partnerships’ transactions were tax-motivated for purposes of former IRC § 6621(c) (Keller, T.C. Memo 2006-166).
The Tax Court based its jurisdiction decision on the fact that the question of whether the transactions were tax-motivated is a partnership item that must be determined in partnership-level proceedings. Here, the individual partners were the parties to the various cases being litigated, not the partnerships, so the court held that in these proceedings it did not have jurisdiction to decide the partnership-level issue. The effect of this decision was to leave the Service’s imposition of higher interest rates under former section 6621(c) in place.
The Ninth Circuit agreed with the Tax Court that the determination of whether transactions are tax-motivated is a partnership item to be determined at partnership-level proceedings. This rule was formulated by the Ninth Circuit in River City Ranches #1 Ltd., 401 F.3d 1136, 1144 (9th Cir. 2005). However, the partnership proceedings in this case were completed and judgment became final before the River City Ranches decision announced this rule.
The Tax Court has jurisdiction in a collection due process proceeding to decide issues relating to liability that the taxpayer has not had an opportunity to contest (IRC § 6330(c)(2)(B)). Therefore, according to the Ninth Circuit, in a collection due process proceeding of a partner in a partnership, the Tax Court has jurisdiction to review the record of a partnership-level proceeding to make a determination about a partnership level issue affecting the partner’s liability that the partner did not have an opportunity to contest. In this case, the Ninth Circuit believed that the record from the partnership proceedings was sufficient to allow the Tax Court to determine whether the partnership transactions were tax-motivated. The Ninth Circuit then performed the review of the partnership proceedings itself and determined that the partnership transactions were tax-motivated.