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CARROLL v. U.S.
September 13, 2001
DANIEL L. CARROLL AND INGRID N. CARROLL, PLAINTIFFS,
UNITED STATES OF AMERICA, DEFENDANT.
The opinion of the court was delivered by: Hurley, District Judge.
MEMORANDUM OPINION AND ORDER
Pending before the Court in this action for recovery of
federal income tax, interest, penalties and additions to tax
assessed by the Defendant United States [hereinafter "IRS"]
against taxpayer husband and wife Plaintiffs Daniel and Ingrid
Carroll is (1) the IRS's motion, made pursuant to
Rules 12(b)(1), 12(b)(6), and 56(c) of the Federal Rules of Civil
Procedure, for an order dismissing the Complaint for lack of
subject matter jurisdiction and failure to state a claim upon
which relief may be granted, or alternatively, for summary
judgment, (U.S.' Mot. Dismiss Alt. Summ. J.); (2) the
Plaintiffs' cross-motion, made pursuant to Rule 15(d), to file a
supplemental complaint, (Pls.' Notice Cross-Mot.); and (3) the
IRS's motion, made pursuant to Local Civil Rule 6.3, for
reconsideration of this Court's Memorandum and Order, dated
October 23, 2000, see Carroll v. United States, No. CV
98-5740, 2000 WL 1819419 (E.D.N.Y. Oct. 23, 2000) [hereinafter
"Carroll II"], that had (a) granted Plaintiffs' motion, made
pursuant to Federal Rule of Civil Procedure 56(a), for partial
summary judgment with respect to their claim for refund of
certain penalties assessed against them by the IRS, and (b)
granted Plaintiffs' motion, made pursuant to Local Civil
Rule 6.3, for reconsideration of this Court's Memorandum and Order,
dated October 19, 1999, see Carroll v. United States, No. CV
98-5740, 1999 WL 1090814 (E.D.N.Y. Oct. 19, 1999) [hereinafter
"Carroll I"], that had originally denied Plaintiffs'
Rule 56(a) motion. (U.S.' Notice Mot. Recons.)
The legal framework underlying the instant motions is complex,
involving the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"), Pub.L. No. 97-248, 96 Stat. 324 (1982). The factual
history in this case — involving 1995 tax assessments related to
Plaintiffs' 1982 tax liabilities arising from an investment in a
plastics recycling limited partnership, after proceedings in
both the United States District Court for the Middle District of
Florida and the United States Tax Court — is likewise complex.
Therefore the Court sets forth in some detail the legal and
factual background precipitating this litigation.
A. TEFRA'S STATUTORY FRAMEWORK
Prior to the enactment of TEFRA, partnerships generally were
not taxable entities under the Internal Revenue Code. See
Chimblo v. Commissioner, 177 F.3d 119, 121 (2d Cir. 1999).
Typically, the income and expenses of the partnership would
"flow through" to the partners and be taxed at the individual
partner level. See Transpac Drilling Venture v. Commissioner,
147 F.3d 221, 223 (2d Cir. 1998). However, that statutory setup
"proved inefficient and often led to inconsistent results" as
between different partners who could separately challenge the
taxation of their partnership income, sometimes with different
results. See Monti v. United States, 223 F.3d 76, 78 (2d Cir.
2000) [hereinafter Monti II]. Congress enacted TEFRA in 1982
to "ensure equal treatment of partners by uniformly adjusting
partners' tax liabilities and channeling any challenges . . .
into a single, unified proceeding." Kaplan v. United States,
133 F.3d 469, 471 (7th Cir. 1998) [hereinafter Kaplan II];
accord Chimblo, 177 F.3d at 121.
In order to achieve consistent treatment of partners, TEFRA
provides that the tax treatment of "partnership items" is to be
determined at the partnership level. 26 U.S.C. § 6221. TEFRA
defines a "partnership item" as "any item required to be taken
into account for the partnership's taxable year . . . to the
extent regulations prescribed by the [IRS] provide that . . .
such item is more appropriately determined at the partnership
level than at the partner level." Id. § 6231(a)(3). A
"non-partnership item" is defined in the negative as an item
"which is (or is treated as) not a partnership item." Id. §
6231(a)(4). An "affected item" is "any item to the extent such
item is affected by a partnership item." Id. § 6231(a)(5).
Therefore an affected item is a hybrid in the sense that its
proper assessment may require a determination at the individual
partner level after the completion of the partnership level
TEFRA requires partnerships to designate a "tax matters
partner" (TMP) to serve as a liaison between the IRS and the
individual partners in administrative proceedings, and as a
representative of the partners in judicial proceedings. See
id. § 6231(a)(7); Addington v. Commissioner, 205 F.3d 54, 60
(2d Cir. 2000). The TMP is a fiduciary with the authority to
represent and, under certain circumstances, bind the limited
partners in such proceedings. Transpac Drilling, 147 F.3d at
223. The individual limited partners may designate any general
partner to be the partnership's TMP. 26 U.S.C. § 6231(a)(7)(A).
Absent such designation, the "general partner having the largest
profits interest in the partnership at the close of the taxable
year involved" is the TMP by default, id. § 6231(a)(7)(B),
unless that procedure is impracticable, in which case the IRS
may select some other partner to serve as TMP. Id. §
After a partnership files its return for a tax year, the IRS
may decide to commence an administrative proceeding in order to
make adjustments to the return. The IRS has three years from the
date the partnership return is due to issue a final partnership
administrative adjustment ("FPAA") affecting liability for taxes
attributable to "partnership items." See id. § 6229(a).
However, this three year statute of limitations may be extended
by agreement between the IRS and the partnership's TMP, whose
consent binds all partners. Id. § 6229(b)(1)(B).
The IRS must notify partners of any adjustments it makes to
partnership and nonpartnership items. Notice is given through an
FPAA for adjustments to partnership items, see id. §
6223(a)(2), and through a "notice of deficiency" for
nonpartnership items, see id., §§ 6211, 6212. See also PAA
Mgmt., Ltd. v. United States, 962 F.2d 212, 214-15 (2d Cir.
1992). To ease the burden of notifying partners in partnerships
exceeding 100 members, TEFRA only requires that the FPAA be sent
to "notice partners" (i.e., those who own at least one percent
of the partnership) within 60 days after the IRS mails the FPAA
to the TMP. See 26 U.S.C. § 6223(a)(2), (b)(1), (d)(2),
6231(a)(8). Thus, the IRS is not required to individually notify
small-share partners (i.e., "non-notice partners") of
adjustments to partnership items; notice to the TMP is deemed
constructive notice upon them. Kaplan II, 133 F.3d at 472.
Rather, it is the responsibility of the TMP to forward a copy of
the FPAA to non-notice partners. See id. § 6223(g). If the TMP
fails to notify non-notice partners of adjustments to
partnership items, it does not affect the
applicability of any adjustments or partnership proceedings.
See id. § 6230(f).
For 90 days after the mailing date of the FPAA, the TMP has
the exclusive right to file an action for readjustment of the
partnership items in either Tax Court, the Court of Federal
Claims, or a United States District Court. Id. § 6226(a). If
the TMP fails to bring an action to contest the FPAA within that
time period, any notice partner, or any group of non-notice
partners holding at least a 5% interest in the aggregate, may
file suit within the following 60 days in any one of those
courts. Id. § 6226(b)(1). Once a petition challenging an FPAA
is filed, all partners are considered parties to the action and
will be bound by the decision regardless of whether they elected
to participate. Id. § 6226(c); Monti II, 223 F.3d at 79.
This process prevents subsequent, multiple suits by individual
Once a court's decision in an action for readjustment of
partnership items becomes final, it is conclusive with regard to
the treatment of partnership items. 26 U.S.C. § 6230(c)(4). If
the IRS decides to assess taxes upon the individual partners as
a result of the outcome of such a proceeding, it must do so
within a year from the date the decision becomes final, id. §
6229(d), by sending a notice of deficiency to each individual
partner-taxpayer within that time. See id. § 6212(a).
B. JURISDICTION OF FEDERAL DISTRICT COURTS OVER ACTIONS FOR
RECOVERY OF TAXES WRONGFULLY ASSESSED OR COLLECTED
Pursuant to 28 U.S.C. § 1346(a)(1), federal district courts
enjoy original jurisdiction over
[a]ny civil action against the United States for the
recovery of any internal-revenue tax alleged to have
been erroneously or illegally assessed or collected,
or any penalty claimed to have been collected without
authority or any sum alleged to have been excessive
or in any manner wrongfully collected under the
However, that broad grant of jurisdiction is tempered by certain
procedural requirements, and by special rules applicable to
"partnership items" under TEFRA.
Procedurally, 26 U.S.C. § 7422(a) provides that no such suit
shall be maintained "until a claim for refund or credit has been
duly filed" with the IRS. The taxpayer must file his claim for
refund with the IRS within two years (according to the
administrative limitation period applicable under the facts of
this case) from the date he paid the tax that he seeks to
recover. Id. § 6511(a). Once a claim for refund has been
filed, the taxpayer must still wait six months before bringing
suit, unless the IRS sooner renders an adverse decision on the
claim. Id. § 6532(a)(1). An adverse decision on the claim
triggers a two-year limitations period within which the taxpayer
must bring suit. Id. The amount that the taxpayer may recover
in such a suit may not exceed the amount he paid to the IRS
during the two years immediately preceding the filing of his
administrative claim for refund. Id. § 6511(b)(2)(B). These
limits on the accrual period, limitation periods, and amount
recoverable are jurisdictional in nature. See Magnone v. United
States, 902 F.2d 192, 193 (2d Cir. 1990) (per curiam) (the
"prior claim rule" of § 7422(a) is jurisdictional); Weisbart v.
United States Dep't of Treas., 222 F.3d 93, 94 (2d Cir. 2000)
(the limitation period of § 6511(a) is jurisdictional); Roberts
v. United States, 242 F.3d 1065, 1067 (Fed.Cir. 2001) (the
accrual period of § 6532(a)(1) is jurisdictional); Maiman v.
IRS, No. 96-CV-5566, 1998 WL 161003, at *1 (E.D.N.Y. Mar. 27,
1998) (the limitations period of § 6532(a)(1) is
jurisdictional), aff'd mem., 182 F.3d 900 (2d Cir. 1999);
v. United States, 759 F. Supp. 1073, 1074 (Vt. 1991) (same),
aff'd mem., 948 F.2d 1275 (2d Cir. 1991); cf. Porter v.
United States, 919 F. Supp. 927, 932-34 (E.D.Va. 1996) (holding
that § 6511(b)(2)(A), a companion provision to § 6511(b)(2)(B),
is jurisdictional). But cf. Kishnani v. IRS, No. CV-91-3953,
1992 WL 167270, at *4 n. 2 (E.D.N.Y. June 24, 1992)
(questioning, but declining to decide, whether § 6511(b)(2)(A)
is a substantive, as opposed to jurisdictional, provision).
Special rules also limit the district court's jurisdiction to
entertain actions for the recovery of tax "attributable to
partnership items" under TEFRA. Specifically, pursuant to
26 U.S.C. § 7422(h) such actions may not be maintained "except as
provided in section 6228(b)*fn1 or section 6230(c)*fn2" of
the Internal Revenue Code. Id. But if the exceptions contained
in § 7422(h) do not apply, then § 7422(h) effectively preempts
the general grant of jurisdiction in § 1346(a)(1), and a
district court will lack subject matter jurisdiction over any
claim for recovery of tax attributable to partnership items.
See Monti II, 223 F.3d at 78; Kaplan II, 133 F.3d at 473.
A district court will also have jurisdiction over a claim for
recovery of tax attributable to a partnership item if that item
converts to a nonpartnership item in one of the several ways
enumerated in § 6231(b)(1), which provides that a partner's
shall become nonpartnership items as of the date —
(A) the [IRS] mails to such partner a notice
that such items shall be treated as nonpartnership
(B) the partner files suit under section
6228(b) after the [IRS] fails to allow an
administrative adjustment request with respect to
any of such items,
(C) the [IRS] enters into a settlement
agreement with the partner with respect to such
(D) such change occurs under subsection (e) of
section 6223 (relating to effect of [IRS]'s failure
to provide notice) or under subsection (c) of this
26 U.S.C. § 6231(b)(1)(A)-(D). In summary, should a partnership
item fit into one of the exceptions to § 7422(h) or become a
nonpartnership item under one of the subparagraphs of §
6231(B)(1), a district court will have jurisdiction to hear the
claim. See Hirshfield v. United States, No. 99 Civ. 1828, 2001
WL 579783, at *3 (S.D.N.Y. May 31, 2001).
In 1982, Plaintiff Daniel L. Carroll ("Carroll") purchased an
interest in a limited partnership known as Stevens Recycling
Associates ("Stevens") for $16,667. (Compl. ¶ 11; U.S.' Resp.
Req. Admis. ¶ 4.) As one of the partners of the law firm of Shea
& Gould, he purchased the limited partnership interest in
Stevens based upon the recommendation and advice of other of his
law partners. (Compl. ¶¶ 8, 10.)
Samuel Winer ("Winer"), Stevens's general partner, was the
promoter and the TMP of various plastics recycling limited
partnerships, including Stevens. (Id. ¶ 12; U.S.' Resp. Req.
Admis. ¶ 4.) As a result of Carroll's purchase of one-third of a
unit of Stevens, he and his wife claimed on their 1982 joint tax
return a deduction for advance rentals in the amount of $13,064,
an investment tax credit of $12,810, and a business energy
credit of $12,810, thereby reducing their tax liability by
$32,138. (Compl. ¶ 11; U.S.' Resp. Req. Admis. ¶ 5.)
On August 17, 1984, at the request of District Counsel for the
IRS in Jacksonville, Florida, the Government filed a complaint
against Winer in the United States District Court for the Middle
District of Florida. (Compl. ¶ 13; U.S.' Resp. Req. Admis. ¶¶
5-6.) In that complaint, the Government alleged that Winer had
organized and promoted various abusive tax shelters, including
Stevens, and had made gross valuation overstatements in
connection with Stevens. (Compl. ¶ 14; cf. U.S.' Resp. Req.
Admis. ¶ 7.) The district court apparently agreed, entering, at
the IRS's request, a final judgment on February 18, 1985,
permanently enjoining Winer, inter alia, from the "organization,
promotion, advertising, marketing, selling or offering for sale
of the Tax Shelter [Stevens]." United States v. Winer, No.
84-1123-CIV-T-13, slip op. ¶ 3(a) (M.D.Fla. Feb. 18, 1985)
(Compl.Ex. A.). In addition, the court enjoined Winer from
representing any investor in Stevens in order to obtain tax
deductions or credits. See id. ¶ 3(b). Pursuant to the final
judgment, Winer was to send a letter to each partner in Stevens
tendering his resignation as TMP and waiving his right to
intervene as TMP in any court proceeding on behalf of the
partnership. See id. ¶ 4.
Winer resigned as TMP and sent each limited partner of Stevens
a form notice informing him or her of the injunction. (Compl. ¶
18; cf. U.S.' Resp. Req. Admis. ¶ 13.) The attorney
representing the IRS in the district court proceeding selected
Stuart Hirshfield ("Hirshfield"), one of the limited partners of
Stevens, to serve as Stevens' replacement TMP. (Compl. ¶ 19.)
The notice sent by Winer to the Stevens limited partners
reflected Hirshfield's new status. (Id.)
While Winer was enjoined from acting as TMP and Hirshfield was
serving as his replacement, the IRS sought to reinstate Winer as
the TMP for Stevens for specific limited purposes. (Id. ¶ 21;
U.S.' Resp. Req. Admis. ¶ 20.) Winer agreed to be reinstated
under the belief that he could be compelled to do so, and under
threat of independent legal action against him by the IRS.
(Compl. ¶ 21.) Therefore, by "Joint Motion for Specific Relief
from Final Judgment of Permanent Injunction," filed without
notice to the Stevens limited partners, and notwithstanding that
Hirshfield had not been removed as TMP, the IRS and Winer
requested that Winer "be allowed to act as tax matters partner
. . . for the purpose of providing administrative services."
(Id.; cf. U.S.' Resp. Req. Admis. ¶¶ 21-23.) Without
Hirshfield's knowledge, or the knowledge of any of Stevens's
limited partners, the district court granted that motion on
September 17, 1996, and ordered that Winer "may act as tax
matters partner for the purpose of providing administrative
services." (Compl. ¶ 22; cf. U.S.' Resp. Req. Admis. ¶¶ 24-25,
On July 24, 1989, apparently in violation of the final
judgment of the federal district court in Florida, Winer,
representing himself to be Stevens' TMP, brought a § 6226 action
for readjustment of the partnership items for tax years 1982
through 1985 in the United States Tax Court on behalf of
Stevens. (Id. ¶ 31; U.S.' Resp. Req. Admis. ¶ 34; U.S.' Mot.
Dismiss Alt. Summ. J. Ex. 2.) In response to Winer's petition,
IRS's District Counsel in Boston, Massachusetts, filed an Answer
in the Tax Court. (Compl. ¶ 31.) Although the IRS's attorneys
knew, inter alia, that Winer had been enjoined from acting as
Stevens' TMP in any court proceeding, that Hirshfield had been
appointed as Stevens' TMP, and that Winer was not acting as the
Stevens' limited partners' fiduciary, (id. ¶ 33, see id. ¶
35), but under a conflict of interest, cf. Transpac Drilling,
147 F.3d at 227-28, the IRS failed to raise these defenses in
its Answer or otherwise inform the Tax Court of these facts,
(Compl. ¶ 33), instead pursuing a judgment from the Tax Court,
On November 9, 1993, pursuant to the Tax Court Rule of
Practice and Procedure 248(b), the IRS filed a Motion for Entry
of Decision in Tax Court, representing that Winer had "entered
into a settlement agreement" with the IRS and "agreed to the
proposed decision." (Id. ¶ 35; see U.S.' Resp. Req. Admis. ¶
38.) Again, the motion did not disclose to the Tax Court the
restraints on Winer's authority to represent and bind the
limited partners, or Winer's lack of a fiduciary relationship.
(Compl. ¶¶ 35-36.) Nor did the motion disclose that neither the
IRS nor Winer would provide notice of the settlement or the
judgment of the Tax Court to Stevens' limited partners. (Id. ¶¶
35, 38, 40.)
Pursuant to Winer's settlement with the IRS, the Tax Court, on
February 23, 1994, entered an undated decision (the "February
1994 Decision") on its docket relating to Stevens' income for
tax years 1982, 1983, 1984, and 1985. Carroll II, 2000 WL
1819419, at *1. On June 6, 1994, the Tax Court issued an Order
and Decision (the "June 1994 Decision") that purported to vacate
the February 1994 Decision on the grounds that through
inadvertent clerical error, it did not bear the requisite
"entered date." Id. at *1. However, the June 1994 Decision was
otherwise identical to the February 1994 Decision in all
material respects. Id.
D. TAX ASSESSMENTS, PAYMENTS, AND REQUESTS FOR REFUND AND/OR
1. ASSESSMENTS THE SUBJECT OF PLAINTIFFS' MOTION FOR PARTIAL
SUMMARY JUDGMENT IN CARROLL I AND CARROLL II
On July 3, 1995, the IRS issued Plaintiffs a notice of
deficiency, proposing deficiencies for the 1982 tax year for
negligence penalties and valuation overstatement penalties under
26 U.S.C. § 6653(a) and 6659. (Carroll Aff. of 4/15/99 ¶ 8 &
Ex. D.) On November 20, 1995, Plaintiffs were assessed the
penalties under these two statutes in the amounts of $51,357.27
and $7,686.00, respectively, plus interest. (U.S.' Local R. 56.1
Stmt. Facts ¶ m & Ex. 4; Pls.' Resp. U.S.' Local R. 56.1 Stmt.
Facts ¶ M.) Plaintiffs paid to the IRS a total of $81,391.95 in
respect of the penalty additions and interest. (U.S.' Local R.
56.1 Stmt. Facts ¶ o; Pls.' Resp. U.S.' Local R. 56.1 Stmt.
Facts ¶ O.)
In Carroll II, familiarity with which is assumed, this Court
held that Plaintiffs were entitled to recovery of $81,079.16
that they paid with respect to the July 3, 1995, notice of
deficiency. 2000 WL 1819419, at *8. In that regard, the Court
held as a matter of law that pursuant to 26 U.S.C. § 7481(a)(1)
and 7483 (providing that a decision of the Tax Court becomes
final upon the expiration of the time allowed for filing a
notice of appeal, which is 90 days after the Tax Court's
decision is entered), the February 1994 Decision of the Tax
Court became final on May 24, 1994, such that (1) the Tax Court
had no jurisdiction to vacate the final order by later order;
and (2) the July 3, 1995, notice of deficiency issued to
Plaintiffs was time-barred as a matter of law under the one-year
limitation period of § 6229(d). Id. at *5, *8. In short, the
Court granted Plaintiffs' motion for partial summary judgment on
Count IX of the Complaint for the reasons identified in Count
III. See discussion infra Part I.E.
2. Other Challenged Assessments
On July 17, 1995, the IRS assessed additional tax against
Plaintiffs for the year 1982 in the amount of $32,138.00. The
same day, the IRS also assessed against Plaintiffs tax-motivated
transaction interest in the amount of $99,488.54, pursuant to
26 U.S.C. § 6621(c). (U.S.' Local R. 56.1 Stmt. Facts ¶ j & Ex. 4;
Pls.' Resp. U.S.' Local R. 56.1 Stmt. Facts ¶ J; Carroll Aff.
Opp'n Mot. Dismiss Alt. Summ. J. & Supp. Cross-Mot. Supplement
Compl. Ex. 1.) Plaintiffs paid to the IRS a total of $136,913.43
on account of these assessments of tax and interest. (U.S.'
Local R. 56.1 Stmt. Facts T k; Pls.' Resp. U.S.' Local R. 56.1
Stmt. Facts ¶ K.)
3. Plaintiffs' Payments and Requests for Refund and/or
With respect to the assessments against Plaintiffs described
supra Parts I.D.1-2, Plaintiffs paid the following amounts on
the following dates:
(U.S.' Local R. 56.1 Stmt. Facts Ex. 4.)
On May 29, 1996, Plaintiffs executed a Form 843 (i.e., a
"Claim for Refund and Request for Abatement") and a Form 1040X
(i.e., an "Amended U.S. Individual Income Tax Return"). (U.S.'
Opp'n Pls.' Stmt. Facts Local R. 56.1 25 & Ex. 8.) The Forms 843
and 1040X were mailed under cover letter dated May 30, 1996, and
received by IRS on June 4, 1996. (Id. Exs. 7, 8.) The cover
letter requested "that these claims for refunds be expedited."
(Id. Ex. 7.)
The face of Form 843 references §§ 6653(a) and 6659 (i.e., the
provisions of the Internal Revenue Code under which Plaintiffs
were assessed deficiencies the subject of Carroll I and
Carroll II). An "Addendum to Form 843" addresses a list of
reasons argued by Plaintiffs as to why the deficiencies assessed
under these provisions "should be abated and, to the extent
paid, refunded to the taxpayer." The first reason is stated as
Plaintiffs' "Addendum to Form 1040X," in turn, makes the
specific argument — accepted by this Court in Carroll II —
that because the February 1994 Decision of the Tax Court became
final on May 24, 1994, the IRS's July 3, 1995, notice of
deficiency was time-barred as a matter of law under the one-year
limitation period of § 6229(d).
By a fill-in-the-blank form letter dated September 13, 1996,
the IRS wrote Plaintiffs:
This is in reply to your inquiry dated 5-29-96.
The issue you raise in your correspondence is
related to the following partnership: STEVENS
RECYCLING. Your request for abatement is denied for
the reason explained below.
This partnership is subject to the uniform
partnership proceedings of the Internal Revenue
Code (Section 6221 and other sections, also known
as the TEFRA partnership proceedings).
The partnership proceedings for the subject
partnerships were completed due to the reason
* Court decision entered and became final on 6/6/94.
— Final Partnership Notice (FPAA) defaulted on
The issue you have raised was not raised during
the partnership proceeding and can not be raised
after the proceedings have been completed. Since
the partnership proceedings have been completed, we
will not consider a request for abatement.
If you have received a Notice of Deficiency
determining penalties with respect to your
investment in the above partnership, you should
follow the instructions set forth in the Notice of
Deficiency concerning the alternatives available to
you; either agreement to the ...