Kearney Partners Fund, LLC v. United States of America
Filing
184
ORDER denying 179 Motion for Reconsideration. Signed by Judge Roy B. Dalton, Jr. on 5/20/2013. (VMF)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
KEARNEY PARTNERS FUND, LLC,
by and through
LINCOLN PARTNERS FUND, LLC,
Tax Matters Partner, et al.,
Plaintiffs,
vs.
Case No. 2:10-cv-153-FtM-SPC
THE UNITED STATES OF AMERICA,
etc.
Defendant.
ORDER
This cause is before the Court with regard to Plaintiffs’ Motion for
Reconsideration of the Court’s March 27, 2013 Order (“Motion for Reconsideration” or
“Motion”) (Doc. No. 179) filed on April 8, 2013, and Defendant’s Opposition (Doc. No.
181), filed on April 24, 2013. After a careful review of the parties’ submissions and the
applicable law, the Court denies Plaintiffs’ Motion for Reconsideration.
BACKGROUND
This case is a federal income tax partnership proceeding concerning tax
adjustments and accuracy-related penalty determinations made by the Internal
Revenue Service (“IRS” or “Agency”) to nine partnership returns under the Tax Equity
and Fiscal Responsibility Act of 1982 (“TERFA”). (Doc. No. 107, p. 2.) The facts of this
heavily litigated case have been laid out in a number of prior opinions, including the
Court’s March 27, 2013 Order that Plaintiffs now challenge. The Court will summarily
review the facts relevant to Plaintiffs’ objections.
Nebraska Partners Fund (“Nebraska”), Lincoln Partners Fund (“Lincoln”) and
Kearney Partners Fund, LLC (“Kearney”) (collectively “Partnerships”) make up three
tiers of a partnership structure referred to by the acronym “FOCus”. (Doc. No. 1, p. 3.)
The Partnerships filed tax returns (Forms 1065) for twelve “short-year” periods, which
began and ended at various points between October 17, 2001 and December 31, 2001.
(Doc. No. 128, p. 3.)
On December 4, 2001, Mr. Raghunathan Sarma (“Sarma”)
acquired a direct partnership interest in Nebraska and indirect partnership interests in
Lincoln and Kearney. (Doc. No. 107, p. 5.) On December 17, 2001, Sarma acquired a
direct partnership interest in Lincoln. (Id.)
In early 2002, the IRS became aware of FOCus and initiated an audit of the
Partnerships’ tax returns. (Id., p. 6.) When the IRS audits a partnership item, the
Agency must notify certain partners of (1) the beginning of an administrative proceeding
(“NBAP”) at the partnership level with respect to a partnership item, and (2) the final
partnership administrative adjustment (“FPAA”) resulting from such a proceeding. 26
U.S.C. § 6223(a). The Agency is required to mail the NBAP “no later than 120 days
before” issuing the FPAA. 26 U.S.C. §§ 6223(a) & (d). The IRS’s failure to do so
entitles the partner to “opt-out” of the partnership examination or judicial proceedings.
Id. § 6226(e).
On June 6, 2003, the IRS issued NBAPs to the Partnerships, their tax matters
partners,1 but not Sarma. (Doc. No. 107, p. 9.) On December 9, 10, and 11, 2009, the
IRS sent Plaintiffs and Sarma FPAAs indicating that the IRS had determined that
1
A tax matters partner is the designated direct partner who acts for the
partnership in partnership-level administrative and judicial proceedings. As explained
below, indirect partners (such as Sarma) are entitled to notice if they are identified on
the partnership return or are identified in accordance with the prescribed regulations.
26 U.S.C. § 6223(c).
2
FOCus was formed for tax avoidance purposes and had engaged in a series of
transactions intended to create an artificial economic loss devoid of economic
substance and a legitimate business purpose. (Id., pp. 9-10.) The FPAAs to Sarma
were accompanied by a cover letter declaring that the IRS had failed to mail the NBAPs
within the prescribed period and informing Sarma of his right to opt-out of the
partnership examination. (Id.) On January 23, 2010, Sarma elected to do so. (Id., p.
12.) On February 25, 2010, the IRS reversed course in a letter to Sarma’s counsel
indicating that the Agency had mistakenly informed Sarma of his opt-out rights, that he
was not entitled to directly receive the NBAPs, and that therefore he could not elect to
not be bound by the partnership examinations. (Id.)
On March 27, 2013, the Court denied Plaintiffs’ Motion to Dismiss (Doc. No.
107), which argued that the Court lacked subject matter and personal jurisdiction over
Sarma, who had properly opted out of these partnership proceedings. Plaintiffs ask that
the Court to reconsider its decision.
APPLICABLE STANDARDS
Reconsideration of a previous order is an extraordinary remedy, one that is
reserved for those instances where the facts or law are so strongly convincing as to
induce the court to reverse its prior decision. Ludwig v. Liberty Mut. Fire Ins. Co., No.
03-CV-2378-T-17-MAP, 2005 WL 1053691, at *3 (M.D. Fla. Mar. 30, 2005) (citation
omitted). Courts have recognized three grounds for reconsideration of a prior decision:
(1) an intervening change in controlling law; (2) the availability of new evidence; or (3)
the need to correct clear error or manifest justice. Fla. College of Osteopathic Medicine,
Inc. v. Dean Witter Reynolds, Inc., 12 F. Supp. 2d 1306, 1308 (M.D. Fla. 1998). A
motion for reconsideration does not provide an opportunity to simply argue an issue the
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court has determined.
Quitto v. Bay Colony Golf Club, Inc., No. 2:06-cv-286-FtM-
29DNF, 2007 WL 2808352, at *2 (M.D. Fla. Aug. 13, 2007).
Further, motions for
reconsideration are not to be used “to raise arguments, which could and should have
been made earlier.” Prudential Securities, Inc. v. Emerson, 919 F.Supp. 415, 417
(M.D.Fla.1996).
DISCUSSION
Plaintiffs ask the Court to reconsider its prior denial of their Motion to Dismiss
because of the purported need to correct clear error in the Court’s interpretation of the
law and because of the availability of new evidence. The Court declines to do so.
Plaintiffs’ Motion hinges on whether Sarma was entitled to “opt-out” of these
partnership proceedings, which turns on whether he was required to receive an NBAP
under the applicable statute and regulations.
The relevant facts are undisputed.
Defendant admits that it failed to submit the NBAP to Sarma no later than 120 days
before issuing the FPAAs and that it was aware of Sarma’s interests in the Partnerships
well before it initiated an audit of FOCus. However, Defendant argues and this Court
agrees that because Sarma did not provide the necessary information about his
involvement in the Partnerships in the manner prescribed by the applicable statute and
regulations, he was not entitled to an NBAP.
TERFA and the applicable regulations clearly distinguish between when the
Secretary of the IRS “shall” and “may” rely on information provided to it to notify
partners of the beginning of an administrative proceeding. As this and several other
Courts have held, the Secretary’s obligation to provide a notice arises only if the
relevant information is furnished in one of two manners described in Section 6223(c).
See, e.g., Jaffe v. Comm’r., T.C.N. 2004-122, 87 T.C.M. (CCH) 1349 (T.C. 2004), aff’d.
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175 F. App’x 853 (9th Cir. 2006) (“The Commissioner’s duty to notify under section
6223(a) is triggered only if the names, addresses, and profits interests of partners and
indirect partners are provided to the IRS in one of two forms described in section
6223(c)”). First, the Secretary “shall use the names, addresses, and profits interests
shown on the partnership [tax] return” (emphasis added). Id. § 6223(c)(1). Second, the
Secretary “shall use additional information furnished to him by the tax matters partner or
any other person in accordance with regulations prescribed by the Secretary” (emphasis
added). Id. § 6223(c)(2). “The [p]rocedure for furnishing [the] additional information” is
set forth in 26 C.F.R. § 301.6223(c)-1(b), which requires that a “written statement” is
filed, “with the service center where the partnership return is filed.” Id. § 301.6223(c)1(b); (b)(2). The regulations also require that the statement (1) identify the partnership,
each partner for whom information is supplied, and the persons supplying the
information by name, address, and taxpayer identification number; (2) explain that the
statement is furnished to correct or supplement earlier information with respect to the
partners in the partnership; (3) specify the taxable year to which the information relates;
(4) set out the corrected or additional information; (5) be signed by the person supplying
the information. Id. § 301.6223(c)-1(b)(3).
Plaintiffs do not allege that Sarma provided the necessary information either on
the relevant partnership tax returns2 or in accordance with the aforementioned
regulations. Instead, Plaintiffs misconstrue the regulations to argue that the Secretary
2
In their Reply Brief in support of their Motion to Dismiss (Doc. No. 132, p. 4),
Plaintiffs assert that the December 31, 2001 tax returns for Nebraska and Lincoln
clearly identified Sarma. However, this partnership proceeding only concerns nine
partnership returns covering the October 17, 2001 to November 20, 2001, and
November 21, 2001 to December 4, 2001 tax periods. Accordingly, the contents of the
December 31, 2001 tax returns are not relevant to this partnership proceeding or
Defendant’s obligation to provide an NBAP.
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was required to rely on any other information available to it to mail an NBAP. Plaintiffs’
argument is based on 26 C.F.R. § 301.6223(c)-1(f), which declares that:
In addition to the information on the partnership return and that supplied
on statements filed under this section, the Internal Revenue Service may
use other information in its possession . . . in administering subchapter C
of chapter 63 of the Internal Revenue Code. However, the Internal
Revenue Service is not obligated to search its records for information not
expressly furnished under this section (emphasis added).
Contrary to Plaintiffs’ argument, the provision’s use of the word “may” as well as its
clear mandate that the IRS need not search its records for additional information
distinguishes it from 26 U.S.C. § 6223(a) and (c). There simply is no way to read 26
C.F.R. § 301.6223(c)-1(f) to require the IRS to rely on any other information available to
it to provide an NBAP.
See Jaffe, 87 T.C.M. at *3 (“The IRS also may use other
information that is available to it; however, it is not required to ‘search its records’ to
obtain information not provided in the forms required by section 6223(c).”); Stone
Canyon Partners v. Comm’r., 94 T.C.N. (CCH) 618 (T.C. 2007), aff’d sub nom.
Bedrosian v. Comm’r., 358 F. App’x 868 (9th Cir. 2009) (“[R]espondent [IRS] is not
obligated to search his records for information not expressly furnished [in accordance
with 301.6223(c)-1(f)].”).
Plaintiffs’ Motion is also based on newly discovered evidence, a CD that was
recently turned over by the IRS, which “confirms that more than thirty days prior to the
issuance of the NBAP, the IRS knew that Sarma was the true partner in interest for all
relevant tax returns.”
(Doc. No. 179, p. 3.)
The CD is labeled “Bricolage Focus
Promotion, Investor Sarma, Created May, 2003,” and contains all of the Partnerships’
tax returns and a table of contents that lists Sarma as the investor for every tax period
at issue.
The CD does not affect Plaintiffs’ Motion to Dismiss.
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Defendants have
repeatedly admitted that they received a variety of documents from Sarma and others
indicating Sarma’s direct and indirect interests in the FOCus Partnerships for the
relevant tax periods. At no point, however, was the necessary information provided in
either the partnership tax returns at issue or in a written statement that conforms with 26
C.F.R. § 301.6223(c)-1(b)(3). “[T]he mere fact that the IRS possesses in its database,
the name and addresses of indirect partners does not mean that it has been ‘furnished
with’ this information [in accordance with 26 U.S.C. § 6223(a)”). Walthall v. United
States, 131 F.3d 1289, 1296 (9th Cir. 1997).
In the face of this extensive case law, Plaintiffs cite to In re Raihl, No. A9000786-002, 1994 WL 579919 at *2 (Bankr. D. Alaska July 18, 1994), where the court
held that the IRS had, within its own audit file, all of the information it needed to serve
the § 6223(a) notices” even though the partner had failed to provide the “additional
information” in the manner prescribed by 26 U.S.C. § 6223(c). Plaintiffs fail to mention,
however, that in Raihl, “[i]t was impossible for the indirect partners to timely provide the
‘additional information’ referred to in § 6223(c)” because 26 C.F.R. § 301.6223(c)-1
became effective after the IRS had completed its audit of the partnerships. Id. at *2.
Thus, the court’s holding was “[b]ased on the limited circumstances” of the case and
does not control the instant set of facts.3 Id.
3
Even in its limited scope, Raihl’s holding conflicts with Walthall, where the Ninth
Circuit determined that the IRS was not required to rely on any other information
available to it to provide an NBAP, even though 26 C.F.R. § 301.6223(c)-1 had not yet
been promulgated. 131 F.3d at 1296. The circuit court reasoned that 26 U.S.C. §
6223(c) specifies two “information bases” that the IRS must rely on to provide an NBAP.
Id. Section 6223(c)(2), in particular, requires the Secretary to rely on additional
information furnished in accordance with 26 C.F.R. § 301.6223(c)-1. Walthal, 131 F.3d
at 1296. Because 26 C.F.R. § 301.6223(c)-1 “was not yet operative at the time the
notices were sent, . . . the only way in which the Walthalls would have been entitled to
receive a notice directly from the IRS would have been if they had satisfied [Section
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For the foregoing reasons, the Court declines to reconsider its March 27, 2013
Order denying Plaintiffs’ Motion to Dismiss.
CONCLUSION
It
is hereby
ORDERED
AND
ADJUDGED
that
Plaintiffs’
Motion for
Reconsideration of the Court’s March 27, 2013 Order (Doc. No. 179) is DENIED.
DONE AND ORDERED in Chambers in Fort Myers, Florida, on May 20th, 2013.
Copies:
Parties and Counsel of Record
6223(c)] subparagraph (1),” which requires that the names, addresses, and profits
interests be provided on the partnership tax returns. Id.
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