USA v. David Stewart, et al
UNPUBLISHED OPINION FILED. [15-20596 Reversed and Rendered] Judge: WED, Judge: JWE, Judge: SAH. Mandate pull date is 12/05/2016 [15-20596]
Date Filed: 10/13/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
October 13, 2016
UNITED STATES OF AMERICA,
Lyle W. Cayce
Plaintiff – Appellant,
DAVID W. STEWART; TARA F. STEWART; RICHARD K. PLATO; TINA M.
Defendants – Appellees.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:10-CV-00294
Before DAVIS, ELROD, and HIGGINSON, Circuit Judges.
This case stems from the United States Internal Revenue Service (IRS)
attempting to claw back tax refunds paid to Defendant taxpayers. The district
court granted summary judgment in full in favor of Defendants. For the
reasons stated below, we REVERSE the district court’s grant of summary
judgment and RENDER judgment in favor of the United States.
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
Date Filed: 10/13/2016
Defendants David Stewart and Richard Plato are two of the five partners
that comprise Odyssey Energy Capital I, LP (Odyssey). The partners at
Odyssey managed a portfolio of oil and gas properties owned by Hydrocarbon
Capital, LLC (Hydrocarbon). In 2004, Hydrocarbon sold its portfolio managed
by Odyssey, and Odyssey received a 20 percent interest worth approximately
In 2005, Odyssey filed its federal partnership tax return for 2004,
reporting “ordinary income” of $20,106,410. Each Odyssey partner received a
Schedule K-1 form to report his share of the partnership. Stewart reported
taxable income of $5,941,529 on his individual tax return, and Plato reported
$2,740,824. 1 In 2007, Odyssey determined that its income from 2004 was not
“ordinary income” but rather “capital gains.” Accordingly, Odyssey amended
its 2004 return to reflect the change and re-issued amended Schedule K-1
forms to its partners. After receiving their new Schedule K-1 forms from
Odyssey, Stewart and Plato each amended their 2004 individual returns and
ultimately received refunds from the government. Two of the other Odyssey
partners also received refunds.
A fifth partner also filed an amended tax return for 2004, but the
government denied his refund request. The government eventually opened an
investigation into the fifth partner’s amended tax return. During this
investigation, the government requested records from Odyssey’s business with
Hydrocarbon and ultimately denied that partner’s refund. 2 As a result of the
Defendants David Stewart and Richard Plato filed their 2004 taxes jointly with their
respective wives, Tara Stewart and Tina Plato. As such, Mrs. Stewart and Mrs. Plato also
are defendants in this matter.
2 The facts concerning this fifth partner’s case, as well as additional background
regarding the Odyssey-Hydrocarbon business arrangement and its tax implications are
Date Filed: 10/13/2016
investigation, the government concluded that Odyssey’s 20 percent interest
was compensation for services and therefore the fifth partner’s earnings should
be taxed as ordinary income, not as capital gains. The investigation also
brought to the government’s attention the refunds it had issued to Defendants.
The government determined it had erred in approving Defendants’ refunds and
brought suit in 2010 for return of the refunds. In 2015, the district court
granted summary judgment in full for the Defendants, holding that because
the income was properly characterized as capital gains, the amended tax
returns were correct, and the tax refunds were not erroneous. This appeal by
the United States followed.
The primary issue in this case is whether either Odyssey’s or Defendants’
amended returns were sufficient to adjust the partnership income from
“ordinary income” to “capital gains.” We hold they were not sufficient.
In order for partnerships or partners to properly amend an income tax
return, they must file an Administrative Adjustment Request (AAR) under
I.R.C. § 6227. See Samueli v. C.I.R., 132 T.C. 336, 341 (2009) (“An AAR must
be filed in accordance with section 6227 for a partner to change the treatment
of a partnership item on the partner’s return.” (emphasis added)). IRS
regulations require that a partnership or partner seeking to make an
adjustment of a partnership item, such as the reclassification of income in this
case, “file[ ] on the form prescribed by the Internal Revenue Service for that
purpose in accordance with that form’s instructions.” 26 C.F.R. §§ 301.6227(c)1, (d)-1. IRS Form 8082 is the form prescribed by the IRS for AARs. See
Samueli, 132 T.C. at 342 (“The Commissioner has prescribed Form 8082,
addressed extensively in this court’s decision in Rigas v. United States, 486 F. App’x 491 (5th
Date Filed: 10/13/2016
Notice of Inconsistent Treatment or Administrative Adjustment Request
(AAR), as the form to be used by a partner requesting an administrative
adjustment.”). The “Instructions for Form 8082” specifically identify taxpayers
who “are requesting an administrative adjustment to correct a previously filed
partnership . . . return” among those who must file a Form 8082.
In this case, Odyssey purportedly changed the characterization of the
$20 million from ordinary income to capital gains simply by filing an amended
tax return. Defendants filed their own amended returns based on the amended
Schedule K-1s provided by Odyssey. However, neither Odyssey nor any of the
Defendants filed a Form 8082; therefore, no proper request for an
administrative adjustment was made by either Odyssey or the Defendant
partners and Odyssey’s income from Hydrocarbon cannot properly have been
adjusted at the partnership level. See Rigas v. United States, 486 F. App’x 491,
500 (5th Cir. 2012) (holding that another of Odyssey’s partner’s amended
return “does not qualify as an AAR filed pursuant to 26 U.S.C. § 6227(d)”); see
also Samueli, 132 T.C. at 343 (“[S]ection 6227 does not authorize the
Commissioner to consider as a partner AAR a request for an administrative
adjustment that fails to conform to the applicable statutory requirements.”).
While Defendants did not comply with section 6227, they could have
potentially satisfied the AAR requirements with “substantial compliance.”
This court addressed this same substantial compliance issue in Rigas. The
taxpayer in Rigas, John Rigas, who is the fifth Odyssey partner mentioned
above, argued he had substantially complied with section 6227’s regulatory
requirements. See 486 F. App’x at 499–500. Both Rigas and Defendants in this
case provided nearly identical short statements on their amended returns
explaining why they were filing an amended return. This court, citing Samueli,
132 T.C. 336, held that the short statement on Rigas’s amended return did not
Date Filed: 10/13/2016
constitute “substantial compliance” because it was not sent to the appropriate
service center and did not contain the level of detail required for an AAR.
Rigas, 486 F. App’x at 499–500. Due to the stark factual similarities between
Rigas and Defendants in the present case, we hold Defendants did not
substantially comply with the regulatory requirements of an AAR. See id. 3
Because neither Odyssey’s nor Defendants’ amended returns qualifies as
an AAR in either form or substance, Odyssey’s income should not have been
adjusted from ordinary income to capital gains and the refunds issued to
Defendants were erroneous. According to federal regulations, the government
can seek to recover “[a]ny portion of a tax imposed by this title, refund of which
is erroneously made, within the meaning of section 6514, may be recovered by
civil action brought in the name of the United States.” I.R.C. § 7405. The
statute of limitations on erroneous refund suits is two years from the date of
the refund. See I.R.C. §6532 (“Recovery of an erroneous refund by suit under
section 7405 shall be allowed only if such suit is begun within 2 years after the
making of such refund . . . .”). The record indicates the government initiated
this suit just within the limitations period. As such, the government is entitled
to a refund.
For the foregoing reasons, we REVERSE the district court’s grant of
summary judgment and RENDER judgment in favor of the United States.
To the extent Defendants argue that the IRS waived the formal requirements for a
partnership AAR by supposedly recognizing and processing the amended Form 1065 as an
AAR, that argument also fails. Defendants’ selective proffering of internal IRS documents
does not establish an administrative wavier. See Angelus Milling Co. v. Comm’r of Internal
Revenue, 325 U.S. 293, 297–98 (1945) (holding that a waiver of the rules may be found only
when there is an “unmistakable” showing “that the Commissioner understood the specific
claim that was made even though there was a departure from form in its submission”).
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