The opinion of the court was delivered by: SEYBERT
Plaintiffs Joseph and Tita Monti filed the instant action on January 30, 1996 against the United States claiming a refund of certain partnership taxes they paid in 1982, 1983, 1984 and 1985. Specifically, plaintiffs claim that they were essentially "overcharged" for taxes derived from their investment in Syn-Fuel Associates, 1982 ("Syn-Fuel"), of which they were limited partners. In a tax proceeding involving the partnership, certain of the Syn-Fuel partners had settled their tax liabilities with the IRS. Pursuant to the Internal Revenue Code (the "IRC" or the "Code"), the IRS was required to offer, upon any partner's request, a settlement consistent with the other partners' settlement. Because plaintiffs did not know of the first settlement, however, they failed to make a timely offer for a consistent settlement and were required to pay the full amount of the deficiency. They now seek a refund of the amounts they paid over and above the settlement offer amounts.
Pending before the Court is the government's motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure, as well as the parties' cross-motions for summary judgment. For the reasons set forth below, the government's motion to dismiss for lack of subject matter jurisdiction is GRANTED and the parties' cross-motions for summary judgment are DENIED.
A. Introduction to Partnership Tax Code Provisions
The disputes in this action involve certain procedures and obligations created under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub. L. No. 97-248, 96 Stat. 324. Prior to the enactment of TEFRA, adjustments of partnership items were determined at the individual partners' level, resulting in duplication of administrative and judicial resources and inconsistent results between partners. Randell v. United States, 64 F.3d 101, 103 (2d Cir. 1995). Under TEFRA, Congress mandated that in order to provide a uniform method of adjusting partnership items, the tax treatment of any partnership item must be determined on the partnership level. 26 U.S.C. § 6221; Maxwell v. Comm'r, 87 T.C. 783, 787 (1987). Regulations implementing TEFRA define "partnership item" as "the partnership aggregate and each partner's share of . . . items of income, gain, loss, deduction, or credit of the partnership." 26 C.F.R. § 301.6231(a)(3)-1(a)(i).
Under TEFRA, when the IRS audits a partnership through an administrative proceeding, the IRS must send a Final Partnership Administrative Adjustment notice (an "FPAA") to a designated "tax matters partner" or "TMP" indicating the result of the audit. 26 U.S.C. § 6223(a)(2). Within 60 days after the FPAA is sent to the TMP, the IRS must also send copies of the FPAA to every partner in the partnership if the number of partners is 100 or fewer. Id. § 6223(d)(2). Otherwise, the IRS need only send notice to those partners who have more than a 1% interest in a partnership with over 100 partners. These are called "notice partners" under the Code.
After the FPAA is mailed, the TMP has 90 days to file a petition for judicial review of the FPAA in either the Tax Court, the Court of Federal Claims, or the federal district court in which the partnership is located. 26 U.S.C. § 6226(a). After this 90 day period expires, if the TMP has failed to take action, any notice partner may file a petition for readjustment within the next 60 days in either of the same tribunals. Id. § 6226(b). After this 150 day period elapses, if no action has been taken, the tax treatment of the partnership item in issue in the FPAA is conclusively established. Genesis Oil & Gas, Ltd., 93 T.C. 562, 565 (1989). To the extent and in the manner provided by regulations, the TMP must keep each partner informed of all administrative and judicial proceedings for the adjustment at the partnership level of partnership items. 26 U.S.C. § 6223(g). If the TMP fails to provide any notice or perform any act required under the Code or regulations on behalf of a partner, the applicability of any proceeding or adjustment under the partnership rules with respect to such partner is not affected. Id. § 6230(f) (emphasis added).
Among the specific rights of the partners in any administrative proceedings (audits) include: (1) the right to participate in any administrative proceeding relating to the determination of partnership items (§ 6224(a)); (2) the right to waive any rights (§ 6224(b)); and (3) the right to enter into a settlement, upon the partner's request, that is consistent with settlements between the IRS and other partners, as provided under § 6224(c)(2). If the settlement agreement is entered into by the TMP, however, that settlement is binding on all the partners. § 6224(b)(3).
Under Tax Court Rule 248(c), if a settlement is entered into with a partner, the IRS must promptly file with the Tax Court a notice of settlement agreement identifying the participating partners. The IRS must also serve the TMP with a statement setting forth the identity of the settling partners and the terms of the settlement. This notice of settlement to the TMP must be sent within 7 days after the settlement agreement is executed.
B. Facts Underlying This Action
In December 1982, plaintiff Joseph Monti acquired a limited partnership interest in Syn-Fuel. Plf's 3(g) P 1. On their 1982, 1983, 1984 and 1985 joint tax returns, the Montis claimed deductions from the investment in Syn-Fuel in the amounts of $ 242,388 in 1982; $ 235,188 in 1983; $ 237,696 in 1984; and $ 201,407 in 1985. Id. P 2. The Internal Revenue Service (the "IRS") then audited Syn-Fuel for those years and issued a FPAA on March 11, 1988 disallowing the deductions. Id. P 3-4.
On August 2, 1988, Syn-Fuel's TMP filed a petition with the United States Tax Court pursuant to § 6226(a) of the Tax Code for readjustment of the partnership items disallowed by the IRS in the FPAA. Plf's 3(g) P 5. In April 1992, the IRS issued a proposal to settle this action and communicated the offer to Dennis Brager, counsel to certain limited partners including the plaintiffs herein. Id. P 6. Brager then prepared a letter dated April 9, 1992 for the limited partners he represented setting forth the terms of the IRS proposal. Id. P 7. This letter instructed the Syn-Fuel limited partners, including plaintiffs, to fill out and return by May 4, 1992 an attached Form 870-P either accepting or rejecting the IRS' offer to settle. Id. Ex. A. The plaintiffs concede that they received this ...