Partner Cannot Sue for Refund of Penalty Paid by Partnership

The Eighth Circuit reversed a district court and held that where a partnership paid a penalty under a closing agreement with the IRS, a partner in the partnership did not have standing to sue for a refund of part of the penalty payment.

Background

Barry Jewell was a shareholder in the law firm of Jewell, Moser, Fletcher & Holleman, P.A. (JMFH). JMFH sponsored four prototype retirement plans, which its clients, mostly small businesses, relied upon to create individual retirement plans. As the plans’ sponsor, JMFH had an obligation to ensure that (1) its prototype plans complied with federal law and (2) its clients amended their individual plans to comply with changes in federal law.

In May 2003, the IRS determined that more than 60 of the individual JMF-sponsored plans had not been timely amended to comply with changes in federal law. After negotiations with the IRS, JMFH agreed in a closing agreement to pay a penalty in return for an IRS determination that the plans in question were timely amended. Jewell and two otherJMFH partners made equal contributions to JMFH out of their personal funds so it could pay the penalty required under the closing agreement. JMFH later dissolved in a judicial dissolution instigated by Jewell.

District Court Decision

After the dissolution of JMFH, Jewell filed a suit for a refund of his portion of the partnership’s penalty payment, alleging that the IRS had obtained the closing agreement through fraud, malfeasance, or misrepresentation of fact. The IRS moved to dismiss for lack of standing. The district court denied the motion, holding that because JMFH had stopped operating and Jewell had paid part of the penalty out of his personal funds, Jewell had incurred direct harm and had standing to sue. The district court subsequently held for Jewell on the merits and ordered the IRS to refund his penalty payment.The IRS appealed the decision, arguing that the district court had erred in finding that Jewell had standing to sue.

Eighth Circuit’s Decision

The Eighth Circuit reversed the district court and held that Jewell did not have standing to sue for a refund of the portion of the penalty he contributed to the partnership. To have standing, the court stated, “a litigant must assert his or her own legal rights and interest, and cannot rest a claim to relief on the legal rights or interests of third parties.” In the context of a tax refund suit, standing extends only to the taxpayer from whom the IRS collects the tax.

In Jewell’s case, the court stated that it was undisputed that the IRS imposed the penalty on JMFH and not on Jewell and that the closing agreement was between the IRS and JMFH. According to the court, the fact that Jewell contributed funds to the partnership to pay the partnership’s penalty was irrelevant. Because the IRS collected the penalty from JMFH, Jewell could not raise JMFH’s rights against the IRS on his own behalf.

Jewell had also argued that he suffered a separate and distinct injury from JMFH and thus had standing to sue for a refund. The court rejected this argument because in its eyes the injury that Jewell suffered was indistinguishable from the injury suffered by JMFH as an organization. The court also maintained that it could not accept the argument because doing so would alter the rules regarding standing to make personal financial loss the touchstone for shareholder standing.

Reflections

While the Eighth Circuit’s decision makes the issue of Jewell’s standing seem straightforward, the dissent pointed out that the majority elided certain key facts.While the majority opinion focuses on the fact that the IRS collected the penalty from JMFH, the county court that ruled on the dissolution of JMFH determined that the partnership had effectively dissolved as of July 25, 2002—long beforethe date of the closing agreement with the IRS. This was the reason Jewell was forced to pay the penalty from his personal funds.

Because Jewell paid the penalty from his personal funds, he is arguably the person from whom the penalty was collected and he therefore suffered a distinct and separate injury from the defunct JMFH. It seems reasonable that he should at least have standing to file suit for a refund.

Jewell, No. 08-1175 (8th Cir. 2008)

The reports of cases, rulings, etc., herein, except for the Reflections, are edited versions of the relevant court opinion, published ruling, etc.