Battle Flat, LLC v. The United States of America

Filing 24

ORDER granting 13 Motion for Summary Judgment. Signed by Chief Judge Jeffrey L. Viken on 9/21/15. (SB)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
WESTERN DIVISION
BATTLE FLAT, LLC, a South Dakota,
Limited Liability Company,

CIV. 13-5070-JLV

Plaintiff,

ORDER

vs.
THE UNITED STATES OF AMERICA,
Defendant.
INTRODUCTION
Plaintiff Battle Flat, LLC (“Battle Flat”) filed a complaint seeking to recover
late-filing penalties the government allegedly unlawfully assessed against it for
the 2007 and 2008 tax years. (Docket 1). The government denies Battle Flat’s
claim. (Docket 9). Pending before the court is the government’s motion for
summary judgment. (Docket 13). Battle Flat resists the government’s motion.
(Docket 20). For the reasons stated below, the government’s motion for
summary judgment is granted.
FACTS
Because Battle Flat does not dispute the government’s statement of
material facts (Docket 19), the court incorporates the government’s statement of
material facts by reference.

(Docket 15).

Further recitation of salient facts,

including the two additional paragraphs of information propounded by Battle
Flat (Docket 19 at p. 3), is included in the discussion section of this order.

DISCUSSION
1.

Standard Applicable to Summary Judgment Motions
Under Fed. R. Civ. P. 56(a), a movant is entitled to summary judgment if

the movant can “show[] that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.”

Only disputes over

facts that might affect the outcome of the case under the governing substantive
law will properly preclude summary judgment.
477 U.S. 242, 248 (1986).

Anderson v. Liberty Lobby, Inc.,

“[T]he mere existence of some alleged factual dispute

between the parties will not defeat an otherwise properly supported motion for
summary judgment; the requirement is that there be no genuine issue of material
fact.”

Id. at 247-48 (emphasis in original).
In determining whether summary judgment should issue, the facts and

inferences from those facts must be viewed in the light most favorable to the
nonmoving party.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.

574, 587-88 (1986).

In order to withstand a motion for summary judgment, the

nonmoving party “must substantiate [their] allegations with ‘sufficient probative
evidence [that] would permit a finding in [their] favor on more than mere
speculation, conjecture, or fantasy.’ ”

Moody v. St. Charles County, 23 F.3d

1410, 1412 (8th Cir. 1994) (citing Gregory v. Rogers, 974 F.2d 1006, 1010 (8th
Cir. 1992)).
In assessing a motion for summary judgment, the court is to “consider
only admissible evidence and disregard portions of various affidavits and
2

depositions that were made without personal knowledge, consist of hearsay, or
purport to state legal conclusions as fact.”

Howard v. Columbia Public School

District, 363 F.3d 797, 801 (8th Cir. 2004); see Fed. R. Civ. P. 56(e) (a party may
not rely on his own pleadings in resisting a motion for summary judgment; any
disputed facts must be supported by affidavit, deposition, or other sworn or
certified evidence).

The nonmoving party’s own conclusions, without

supporting evidence, are insufficient to create a genuine issue of material fact.
Anderson, 477 U.S. at 256; Thomas v. Corwin, 483 F.3d 516, 527 (8th Cir.
2007); Torgerson v. City of Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011) (en
banc).
2.

The Appropriate Level of Deference Owed to Revenue Procedure
84-35
The parties’ dispute lies in the amount of deference, if any, owed to

Revenue Procedure 84-35.

See Rev. Proc. 84-35, 1984-1 C.B. 509 (1984). The

court’s analysis begins with a summary of 26 U.S.C. § 6698, its legislative
history and the deference, if any, typically given to an Internal Revenue Service
(“IRS”) revenue procedure.
Section 6698 of Title 26 allows the IRS to assess penalties “for each month
(or fraction thereof)” against a partnership for failing to file a partnership tax
return, Form 1065, on or before the prescribed filing deadline.1 26 U.S.C.
1Battle

Flat is a limited liability company. (Docket 15 at ¶ 1). Limited
liability companies (“LLCs”) are treated as partnerships for federal tax purposes
unless the LLC elects to be treated as a corporation. See Superior Trading, LLC
3

§ 6698(a)(2); see also 26 U.S.C. § 6031 (describing the requirements of a
partnership federal income tax return).

The penalty provisions of § 6698 do not

apply if the partnership’s failure to timely file its tax return “is due to reasonable
cause.”

26 U.S.C. 6698(a).

“Reasonable cause” is not defined in the statute,

see id., but the taxpayer bears the burden of proving it meets the reasonable
cause exception.

See Shafmaster v. United States, 707 F.3d 130, 137 (1st Cir.

2013) (“The taxpayer bears the burden of proving both reasonable cause and the
absence of willful neglect.”) (citing United States v. Boyle, 469 U.S. 241, 245
(1985)); see also Gustashaw v. C.I.R., 696 F.3d 1124, 1139 (11th Cir. 2012) (“The
taxpayer bears the burden of establishing that he acted with reasonable cause
and in good faith.”) (citing Calloway v. Comm’r, 691 F.3d 1315 (11th Cir. 2012));
Thompson v. C.I.R., 312 F. App’x 831, 831 (8th Cir. 2009) (affirming the tax
court’s determination that the plaintiff “had not shown reasonable cause
warranting an exception to the accuracy-related penalty assessed.”).
In the legislative history supporting § 6698, the Committee on Ways and
Means concluded “full reporting of the partnership income and deductions by
v. C.I.R., 728 F.3d 676, 678 (7th Cir. 2013) (“An LLC . . . is generally treated as a
partnership for tax purposes . . . and like other partnerships its income and
losses are deemed to flow through to the partners and are taxed to them rather
than to the partnership.”) (citing 26 U.S.C. §§ 701-04, 6031); Historic Boardwalk
Hall, LLC v. C.I.R., 694 F.3d 425, 429, n.1 (3d Cir. 2012) (“[A]n LLC with two or
more members is classified as a partnership for tax purposes unless it elects to
be treated as a corporation.”) (citing Treas. Reg. § 301.7701-3(b)(1)).
Although the co-owners of an LLC are known as “members,” the court
refers to the co-owners of Battle Flat as “partners” because Battle Flat is treated
as a partnership for federal tax purposes.
4

each partner is adequate and that it is reasonable not to file a partnership return
in this instance.” H.R. Rep. 95-1445, 75, 1978 U.S.C.C.A.N. 7046, 7111. In
support of this conclusion, the Committee noted “small partnerships (those with
10 or fewer partners) often do not file partnership returns, but rather each
partner files a detailed statement of his share of partnership income and
deductions with his own return.” Id. Similarly, 26 U.S.C. § 6231 defines the
term “partnership” as “not includ[ing] any partnership with 10 or fewer partners
each of whom is an individual (other than a non-resident alien), a C corporation,
or an estate of a deceased partner.” 26 U.S.C. § 6231(a)(1)(B)(i). Neither § 6698
nor its legislative history explicitly impose a requirement that the individual
partners timely file his or her individual income tax returns in order for the
partnership to qualify for the reasonable cause exception and thereby be exempt
from the penalty provisions of § 6698. Only Revenue Procedure 84-35 imposes
the requirement that the partners timely file his or her individual tax returns.
See Rev. Proc. 84-35, 1984-1 C.B. 509 (1984).
The purpose of Revenue Procedure 84-35 “is to update Revenue Procedure
81-11, 1981-1 C.B. 651 [(1981)] to conform with the small partnership
provisions of section 6231(a)(1)(B).” Rev. Proc. 84-35, § 1 (“Purpose”). “Rev.
Proc. 81-11 [provided] the procedures under which partnerships with 10 or fewer
partners will not be subject to the penalty imposed by section 6698 for failure to
file a partnership return.” Id. Revenue Procedure 84-35 states:

5

A domestic partnership composed of 10 or fewer partners and
coming within the exceptions outlined in section 6231(a)(1)(B) of the
Code will be considered to have met the reasonable cause test and
will not be subject to the penalty imposed by section 6698 for the
failure to file a complete or timely partnership return, provided that
the partnership, or any of the partners, establishes, if so requested
by the Internal Revenue Service, that all partners have fully reported
their shares of the income, deductions, and credits of the
partnership on their timely filed income tax returns.
Rev. Proc. 84-35 (emphasis added).
Battle Flat does not dispute that “not all partners timely filed their income
tax returns” in 2007 and 2008.

(Docket 20 at p. 1).

For the 2007 tax year, six

partners of Battle Flat failed to timely file their personal income tax returns, with
the latest being filed on March 8, 2010.

(Dockets 15 at ¶¶ 3, 12; 19 at ¶¶ 3, 12).

For the 2008 tax year, three Battle Flat partners failed to timely file their
personal income tax returns, with the latest being filed on April 25, 2013.
(Dockets 15 at ¶¶ 3, 13; 19 ¶¶ 3, 13). Two Battle Flat partners did not file their
2008 personal income tax return at the time Battle Flat filed its May 24, 2010,
administrative claim with the IRS seeking to recover the 2007 and 2008
penalties assessed by the IRS.

(Docket 15 at ¶¶ 7, 13).

If the court enforces

Revenue Procedure 84-35, Battle Flat’s claim fails as it is undisputed that not all
of its partners timely filed their 2007 and 2008 personal income tax returns.
Battle Flat requests the court not enforce Revenue Procedure 84-35
because revenue procedures do not have the force of law and are not entitled to
deference under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837 (1984). See Fed. Nat. Mortgage Ass’n v. United States, 379 F.3d 1303, 1307
6

(Fed. Cir. 2004) (holding that Revenue Procedure 99-43 was not entitled to
Chevron deference).
“A revenue procedure is defined as a ‘statement of procedure that affects
the rights or duties of taxpayers or other members of the public under the Code
and related statutes or information that, although not necessarily affecting the
rights and duties of the public, should be a matter of public knowledge.’ ” Fed.
Nat. Mortgage Ass’n, 379 F.3d at 1308 (quoting 26 CFR § 601.601(d)(2)(i)(b)
(2004)); see also In re Peterson, 321 B.R. 259, 261 (Bankr. D. Neb. 2004) (“A
revenue procedure is an internal procedural guide. It represents official IRS
position on a matter of procedure, but it is not mandatory.”) (citing Estate of
Shapiro v. Commissioner, 111 F.3d 1010, 1017-18 (2d Cir.1997), cert. denied,
522 U.S. 1045 (1998)). “[R]evenue procedures are not produced through formal
notice-and-comment rulemaking or formal adjudication.” Tualatin Valley
Builders Supply, Inc. v. United States, 522 F.3d 937, 945 (9th Cir. 2008). In
determining the deference owed to a revenue procedure, “the issue is not
whether the IRS voluntarily subjected [the] Revenue Procedure . . . to a measure
of formalized review, but whether Congress intended for the IRS to do so.” Fed.
Nat. Mortgage Ass’n, 379 F.3d at 1308 (internal quotation marks and citations
omitted) (original brackets removed).
Although the United States Court of Appeals for the Eighth Circuit has not
explicitly addressed the level of deference owed to an IRS revenue procedure, the
Eighth Circuit “has indicated that an agency’s interpretation which is not
7

subjected ‘to the rigors of notice and comment’ is not entitled to substantial
deference.” In re Old Fashioned Enterprises, Inc., 236 F.3d 422, 425-26 (8th
Cir. 2001) (internal quotation marks omitted) (quoting King v. Morrison, 231
F.3d 1094, 1096 (8th Cir. 2000)) (further citations omitted).2 The court
presumes, without deciding, that IRS revenue procedures are not entitled to
Chevron deference under Eighth Circuit precedent.

However, the court’s

analysis does not end with Chevron.
In United States v. Mead Corp., the Supreme Court noted that “whether or
not [an agency] enjoy[s] any express delegation of authority on a particular
question, agencies charged with applying a statute necessarily make all sorts of
interpretive choices, and while not all of those choices bind judges to follow them,
they certainly may influence courts facing questions the agencies have already
answered.” 533 U.S. 218, 227 (2001). “[T]he well-reasoned views of the
agencies implementing a statute ‘constitute a body of experience and informed
judgment to which courts and litigants may properly resort for guidance.’ ”
Bragdon v. Abbott, 524 U.S. 624, 642 (1998) (quoting Skidmore v. Swift & Co.,
323 U.S. 134, 139-140 (1944)); see also Chevron, 467 U.S. at 844 (Courts “have
2Under

Chevron, “[w]hen Congress has ‘explicitly left a gap for an agency to
fill, there is an express delegation of authority to the agency to elucidate a
specific provision of the statute by regulation,’ . . . and any ensuing regulation is
binding in the courts unless procedurally defective, arbitrary or capricious in
substance, or manifestly contrary to the statute.” United States v. Mead Corp.,
533 U.S. 218, 227 (2001) (quoting Chevron, 467 U.S. at 843-844)) (further
citations omitted).

8

long recognized that considerable weight should be accorded to an executive
department’s construction of a statutory scheme it is entrusted to administer.”).
The Mead Corp. Court affirmed its holding in Skidmore and articulated
that the “measure of deference [given] to an agency administering its own statute
has been understood to vary with circumstances, and courts have looked to the
degree of the agency’s care, its consistency, formality, and relative expertness,
and to the persuasiveness of the agency’s position.” Mead Corp., 533 U.S. at
228 (citing and later quoting Skidmore, 323 U.S. at 140).
The balance of the Skidmore factors persuade the court to enforce Revenue
Procedure 84-35. The IRS thoroughly considered Revenue Procedure 84-35.
The “Purpose” of Revenue Procedure 84-35 was to update Revenue Procedure
81-11 to conform with the small partnership provisions of 26 U.S.C.
§ 6231(a)(1)(B). Rev. Proc. 84-35, § 1 (“Purpose”). The IRS explicitly considered
the statutory provisions of §§ 6698 and 6231(a)(1)(B), as well as the import of the
legislative history of § 6698, as identified in the Conference Committee Report.
Id., § 2 (“Background”). The IRS’ description of the application of Revenue
Procedure 84-35 also demonstrates the thoroughness of its consideration. Id.,
§ 3 (“Required Procedures”).
The IRS consistently held the position that the “reasonable cause”
exception to § 6698 requires all partners in a “small” partnership to timely file
their individual personal income tax returns. Revenue Procedure 84-35 was
adopted over thirty years ago on April 23, 1984, replacing its predecessor,
9

Revenue Procedure 81-11, which was adopted on January 1, 1981, and also
imposed the same “timeliness” requirement on the filing of a partner’s personal
income tax returns. Compare Rev. Proc. 84-35, with Rev. Proc. 81-11.
As discussed above, the IRS enacted Revenue Procedure 84-35 without
formal notice and comment. The IRS is an expert in implementing and
enforcing the internal revenue code. See, e.g., Ammex, Inc. v. United States,
367 F.3d 530, 535 (6th Cir. 2004) (“Of course, the IRS possesses ‘relative
expertness’ in the application of the Code to particular facts, given the technical
complexity of federal tax law.”).
The IRS’ position is persuasive. Although § 6698 does not expressly
impose a timeliness requirement by which partners in a “small” partnership
must file their personal income tax return in lieu of filing a partnership tax
return, this is exactly the type of interpretative question left to the discretion of
the IRS in implementing our nation’s tax laws. See Mead Corp., 533 U.S. at
227-28. The IRS’ interpretation that partners in a “small” partnership timely
file their personal income tax returns is reasonable and is a highly practical aid
in its assessment of the tax consequences of a partnership for a given year and
on a year-over-year basis. IRS’ interpretation is consistent with the legislative
history of § 9968 in that it strains credulity to characterize a personal income tax
return filed years after the reporting deadline as an adequate, full reporting of
each partner’s share of the partnership’s income and deductions. See H.R.
REP. 95-1445, 75.
10

Conversely, Battle Flat’s interpretation that § 9968’s “reasonable cause”
exception is satisfied so long as the partners in a “small” partnership file their
personal income tax returns at some unspecified future date is unreasonable.
The interpretation would result in a system where the tax consequences of a
“small” partnership would go unassessed for years at a time.3 Furthermore,
under Battle Flat’s interpretation, the IRS would be required to track the status
of each partner’s personal income tax return until every partner’s tax return was
received before it could accurately calculate the annual tax consequences of the
partnership.4
The court is persuaded by the IRS’ interpretation and will enforce Revenue
Procedure 84-35. Battle Flat’s arguments urging the court to ignore Revenue
Procedure 84-35 are unavailing. See infra.
3.

Battle Flat’s Cited Authority and the Import of 2006 and 2009 Tax
Penalties
Battle Flat relies on the case of In Re Peterson in support of its assertion

the court should give no deference to Revenue Procedure 84-35.

See In re

Peterson, 321 B.R. 259. The IRS in In Re Peterson sought to enforce a
3For

example, Natasha Estes’ 2007 personal income tax return was due on
April 15, 2008, but was filed on March 8, 2010, approximately twenty-three
months later. (Docket 15 at ¶ 12). Natasha Estes’ 2008 personal income tax
return was due on April 15, 2009, but was filed on April 25, 2013, approximately
48 months later. Id. at ¶ 13.
4For

instance, before the IRS could assess Battle Flat’s 2008 tax
consequences, it would have had to track the receipt of each partner’s personal
income tax returns. A time period which ranged from April 15, 2009, to April
25, 2013. (Docket 15 at ¶ 13).
11

non-mandatory revenue procedure prohibiting the IRS from accepting offers in
compromise from taxpayers in bankruptcy despite no internal revenue code
provision or treasury regulation containing the same prohibition. In re
Peterson, 321 B.R. at 261-62. The court held the IRS must either receive and
process the Chapter 13 taxpayer-debtor’s offer in compromise5 or “take seriously
its stated position that it will, in good faith, consider accepting less than the
bankruptcy code requires.” Id. at 262. In reaching this conclusion, the judge
reasoned because revenue procedures are not binding on the IRS, see Estate of
Shapiro, 111 F.3d at 1007-18, it would be disingenuous to enforce the revenue
procedure only in cases where the enforcement benefits the IRS. In re Peterson,
321 B.R. at 261-262.
In addition to the court having already determined Revenue Procedure
84-35 should be enforced in light of the considerations identified in Skidmore,
the equitable considerations facing the court in In Re Peterson are not present in
this case. The IRS has not enforced Revenue Procedure 84-35 in a manner only
to benefit itself. The IRS’ removal of Battle Flat’s 2006 tax penalties
demonstrates this.

See Docket 23-1 at p. 1.

With regard to the 2006 late-filing

penalty, the IRS informed Battle Flat:
[T]his action has been taken based solely on your compliance
history rather than on the information you provided. This type of
5An

offer in compromise is an agreement between a taxpayer and the IRS
that settles the taxpayer’s tax liabilities for less than the full amount owed. See
26 U.S.C. 7122; see also Tax Topic 204, Offers In Compromise, available at
http://www.irs.gov/taxtopics/tc204.html (last visited September 14, 2015).
12

penalty removal is a one-time consideration available only for a
first-time penalty charge. Any future penalties will only be removed
based on your providing information that meets reasonable cause
criteria.
Id. (emphasis added).
The IRS could have enforced § 6698’s late-filing penalty provisions against
Battle Flat for the 2006 tax year but chose not to because of Battle Flat’s prior
history of compliance.

Id.

The IRS demonstrated a willingness to exercise

discretion in its enforcement of § 6698 and Revenue Procedure 84-35.
Battle Flat next asserts the IRS “has not consistently or even-handedly”
applied Revenue Procedure 84-35.

(Docket 20 at p. 3).

enforce Revenue Ruling 84-35 benefitted Battle Flat.

The IRS’ decision not to

Battle Flat’s contention

the IRS has not “even-handedly” enforced Revenue Ruling 84-35 based in part
on the IRS removal of the 2006 penalties is without merit.

The IRS expressly

noted the penalty was removed “based solely on [Battle Flat’s] compliance
history” and explained “this type of penalty removal is a one-time consideration
available only for a first-time penalty charge.”

(Docket 23-1 at p. 1).

The IRS

has not inconsistently applied Revenue Procedure 84-35 or unfairly enforced the
procedure by removing Battle Flat’s 2006 late-filing penalty.
Battle Flat asserts the IRS inconsistently enforced Revenue Procedure
84-35 because the 2009 late-filing penalty was removed and refunded.6
6The

court accepts Docket 17-2 for the limited purpose of demonstrating
the IRS removed portions of Battle Flat’s late-filing penalty and granted Battle
Flat a tax refund for the 2009 tax year. See Sparkman v. C.I.R., 509 F.3d 1149,
13

(Docket 20 at p. 1).

The court is unable to discern if Battle Flat’s partners failed

to timely file their 2009 personal income tax returns.

Compare Docket 20 at

p. 1 (“[N]ot all partners timely filed their income tax returns in those years [2006,
2007, 2008, and 2009].”), with (Docket 19 at p. 3) (referencing only “2006, 2007,
and 2008” when stating that “not all partners timely filed their income tax
returns.”).7
The IRS informed Battle Flat that it removed the late-filing penalty:
[B]ased on [Battle Flat’s] statement that [it] qualif[ied] for penalty
relief under Rev. Proc. 84-35 . . . The penalty will be reassessed if
[the IRS] later find[s] that [Battle Flat] does not qualify for relief
because . . . [a]ny partner filed late or failed to report their
distributive share of partnership items on their income tax return.
(Docket 23-2 at p. 1).
Even if a partner of Battle Flat failed to timely file his or her 2009 personal
income tax return, any error by the IRS in failing to verify that Battle Flat and its
partners actually complied with Revenue Procedure 84-35 does not preclude the
IRS from enforcing the procedure for the 2007 and 2008 tax years. See Tigrett
v. United States, 213 F. App’x 440, 450 (6th Cir. 2007) (“[T]he IRS’[] erroneous
treatment of an issue one year does not preclude its subsequent correction of its
1156-57 (9th Cir. 2007) (“[A] tax return, even though signed under penalty of
perjury, is not per se evidence of the income, deductions, credits, and other items
claimed therein.”) (citations omitted).
7Section

6103 of Title 26 prohibits the government from disclosing the
taxpayer information of Battle Flat’s partners for the tax years not at issue in the
case. See 26 U.S.C. § 6103(h)(4). Because Battle Flat’s complaint dealt only
with the 2007 and 2008 tax years, the government was not able to disclose the
taxpayer information for Battle Flat’s partners relating to the 2009 tax year.
14

error in other tax years.”) (citing Knights of Columbus Council No. 3660 v. United
States, 783 F.2d 69, 73 (7th Cir. 1986)); see also Hawkins v. C.I.R., 713 F.2d
347, 351-52 (8th Cir. 1983) (“[I]t is settled that even if the Commissioner
erroneously may have accepted the tax treatment of certain items in previous
years, he is not precluded from correcting that error in a subsequent year.”)
(citing Harrah’s Club v. United States, 661 F.2d 203, 205 (Ct. Cl. 1981)).
Finally, the court is reminded that “[e]ach tax year stands on its own.”
Kliethermes v. United States, 27 Fed. Cl. 111, 114 (1992). The IRS did not
inconsistently apply Revenue Procedure 84-35 or unfairly enforce the procedure
by removing and refunding portions of Battle Flat’s 2009 late-filing penalty.
Revenue Procedure 84-35 is entitled to Skidmore deference and the court
will enforce it.
84-35.

Battle Flat admits it did not comply with Revenue Procedure

See Dockets 20 at p. 1; 15 at ¶¶ 3, 12, 13; 19 at ¶¶ 3, 12, 13.

There is

no genuine dispute of any material fact in this case.
ORDER
Based on the above analysis, it is
ORDERED defendant’s motion for summary judgment (Docket 13) is
granted.
Dated September 21, 2015.
BY THE COURT:
/s/ Jeffrey L. Viken
JEFFREY L. VIKEN
CHIEF JUDGE
15