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 that were organized, promoted, and operated by Walter J. Hoyt III from the 1970s through the 1990s and that 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 the collection due process hearings, imposed interest under former Sec. 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 partnership’s transactions were tax motivated for purposes of former Sec. 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, not the partnerships, were the parties to the various cases being litigated, 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 in place the Service’s imposition of higher interest under former Sec. 6621(c).
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.
According to the Ninth Circuit, under Sec. 6330(c)(2)(B), the Tax Court has jurisdiction in partner proceedings to entertain partnership-level issues relating to a liability that the taxpayer has not had an opportunity to contest. In this case, the court believed that the record from the partnership proceedings was sufficient to allow the Tax Court to determine whether the partnership transactions were tax motivated. However, rather than remanding the case to the Tax Court, the Ninth Circuit reviewed the partnership proceedings itself and determined that the partnership transactions were tax motivated.
