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MK Hillside Partners, M.A. v. Commissioner of Internal Revenue

United States Court of Appeals, Ninth Circuit

June 23, 2016

MK Hillside Partners; M.A. Katz, a partner other than the Tax Matters Partner, Petitioners-Appellants,
v.
Commissioner of Internal Revenue, Respondent-Appellee.

          Argued and Submitted May 5, 2016 Pasadena, California

         Appeal from a Decision of the United States Tax Court No. 13171-08

          Charles E. Hodges, II (argued) and Antoinette L. Ellison, Kilpatrick Townsend & Stockton LLP, Atlanta, Georgia; Adam H. Charnes, Kilpatrick Townsend & Stockton LLP, Winston-Salem, North Carolina, for Petitioners-Appellants

          Joan I. Oppenheimer (argued) and Damon W. Taaffe, Attorneys, Tax Division; Tamara W. Ashford, Acting Assistant Attorney General; United States Department of Justice, Washington, D.C.; for Respondent-Appellee.

          Before: RAYMOND C. FISHER, MILAN D. SMITH, JR., and JACQUELINE H. NGUYEN, Circuit Judges.

         SUMMARY [*]

         Tax

         In an action brought by a partner seeking judicial review of the IRS's adjustment of a partnership's tax return, the panel held that the tax court had jurisdiction to reject the partner's assertion of the statute of limitations, and affirmed.

         Marcus Katz, a partner in MK Hillside Partners, filed a petition for review in tax court contesting the IRS's finding that MK Hillside was a sham, lacked economic substance, and was formed and used principally to avoid taxes; and asserting the statute of limitations. The tax court rejected the partner's assertion of the statute of limitations. The panel held that because the tax court had jurisdiction to consider Katz's argument regarding the statute of limitations, it necessarily had jurisdiction to reject it, at least for the purposes of the partnership proceeding. The panel affirmed the tax court's determination that the limitations period remained open as to Katz.

          OPINION

          Milan D. Smith, Jr. Judge

         In an action seeking judicial review of the IRS's adjustment of a partnership's tax return, the tax court has jurisdiction, pursuant to 26 U.S.C. § 6226(d)(1), [1] to "consider" an assertion by any of the partners that the applicable statute of limitations has expired for that particular partner. Here, a partner made such an assertion, and the tax court rejected it, holding that the limitations period remained open as to the partner. The partner seeks reversal, arguing that although the tax court had jurisdiction to accept his assertion, it lacked jurisdiction to reject it. We hold that the tax court had jurisdiction to reject the partner's assertion of the statute of limitations, and we affirm.

         FACTS AND PRIOR PROCEEDINGS

         In 1998, Appellant Marcus Katz entered into two "collar" option contracts covering stock shares he owned.[2] Katz terminated the collars in September of 1999, which generated a credit of $198, 000. In October of 1999, Katz contributed stock to MK Hillside Partners (MK Hillside), a partnership between Katz and his wholly owned corporation, MK Hillside Investors, Inc. Katz also contributed real estate to the partnership. The partnership then sold the stock and real estate.

         Katz's and MK Hillside's 1999 tax returns were received on September 25, 2000. Katz's return did not list the $198, 000 credit from the collar termination, and MK Hillside's return reported no gain on the real estate sale. The IRS did not issue a notice of deficiency for Katz's 1999 taxes.[3] In July of 2006, Katz agreed to extend the time to assess his 1999 tax liability, including tax attributable to partnership items, until January 31, 2008. The IRS issued a Final Partnership Administrative Adjustment (FPAA) to MK Hillside on January 2, 2008, finding that MK Hillside was a sham, lacked economic substance, and was formed and used principally to avoid taxes.

         Katz filed a petition in the tax court contesting that finding and asserting the statute of limitations.[4] The IRS responded that the Section 6501(e)(1) six-year statute of limitations applied because Katz's omission of the $198, 000 on his 1999 return constituted more than 25% of the gross income reported on the return. Katz moved for summary judgment, arguing, inter alia, that he no longer had an interest in the partnership proceeding under Section 6226(d)(1), and, in the alternative, that the tax court lacked jurisdiction to consider at the partnership stage whether, due to a gross understatement of nonpartnership income, his 1999 tax year remained open at the time he agreed to extend his assessment period.

         The tax court denied summary judgment, holding that a trial would be necessary to determine whether Katz in fact omitted substantial income from his 1999 return, in which case his personal limitations period would have been six years and would have remained open at the time Katz agreed to extend his limitations period. To avoid a trial, the parties agreed to a Stipulation of Facts and a Second Stipulation of Settled Issues. Based on those stipulations, the tax court held that the period for assessing tax on the 1999 MK Hillside partnership items was open as to Katz.

         STANDARD OF REVIEW

         "Decisions of the tax court are reviewed on the same basis as decisions from civil bench trials in the district court. Thus, we review the tax court's conclusions of law de novo and its factual findings for clear error." DHL Corp. & Subsidiaries v. Comm'r, 285 F.3d 1210, 1216 (9th Cir. 2002) (citations omitted). Similarly, because we review a district court's application of the doctrine of judicial estoppel for abuse of discretion, Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. ...


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