[00:00:01] Speaker 00:
Case number 16-1454, Mello Partners, a partnership appellant, versus Commissioner of Internal Revenue Service.

[00:00:09] Speaker 00:
Mr. Shah for the appellant, Mr. Farber for the accolade.

[00:00:13] Speaker 04:
Good morning, Mr. Shah.

[00:00:14] Speaker 04:
We'll hear from you.

[00:00:16] Speaker 04:
Good morning, Your Honors.

[00:00:23] Speaker 03:
May it please the Court, Amish Shah for the appellant.

[00:00:25] Speaker 03:
The first issue in this case is whether Mello Partners is subject to the Tepper Partnership Order Rules.

[00:00:30] Speaker 03:
Because it was a small partnership, it was not subject to TEFRA.

[00:00:34] Speaker 03:
There are four key points in this case.

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First, it's undisputed that Mello Partners had only two partners.

[00:00:39] Speaker 03:
Mr. Berlow and Mr. Melton each held his respective interests to Mello Partners through a single-member LLC.

[00:00:44] Speaker 01:
Excuse me.

[00:00:45] Speaker 01:
Did you say it was undisputed there's only two partners?

[00:00:48] Speaker 03:
That's correct.

[00:00:49] Speaker 01:
I thought the government's position there were actually four partners.

[00:00:53] Speaker 03:
Well, the government's position is that the two partners that are relevant here are the two single-member limited liability companies, and that Mr. Berle and Mr. Mountain are merely indirect partners.

[00:01:02] Speaker 01:
Yeah, well, so that makes them four.

[00:01:04] Speaker 03:
Okay.

[00:01:04] Speaker 03:
I stand corrected, John.

[00:01:07] Speaker 03:
But it is undisputed that the two single-member LLCs were disregarded entities under the Section 7701 regulations.

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And those regulations provide that a disregarded entity is disregarded for all federal tax purposes.

[00:01:21] Speaker 06:
But you're talking about the application of a different statutory provision.

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One doesn't control the other.

[00:01:27] Speaker 03:
Well, in fact, the Section 7701 of the Internal Revenue Code states it applies for purposes of Title 26, the Internal Revenue Code.

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And that provision does not actually define limited liability company.

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Limited liability companies and the treatment of limited liability companies for purposes of the Internal Revenue Code are determined under – and for all purposes of the Internal Revenue Code – are determined under the Section 7701 regulations, also known as the check-the-box regulations.

[00:01:51] Speaker 03:
And those regulations provide that, for purposes of Title 26, that a limited liability company with one member can be treated either as a corporation or as a disregarded entity, and only one of those two.

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For purposes of the Code, there's no exception in 7701 or the regulations there under for the small partnership exception.

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In other words, those regulations apply for all purposes of the Code, including the small partnership exception.

[00:02:14] Speaker 01:
How about the flow-through regulation?

[00:02:18] Speaker 03:
The flow-through regulation, so what they're referring to as a pass-through partner regulation under 6231.

[00:02:23] Speaker 03:
I'm sorry, pass-through rather than... Certainly.

[00:02:27] Speaker 03:
So that regulation states that if a partner is a pass-through partner, then the small partnership section doesn't apply.

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Now, the question here is, who, for purposes of that provision, should be treated as a partner?

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And the IRS has stated in Revenue Rule 2004, starting off with the 7701 regulations, the Section 7701 regulations provide that a disregarded entity is disregarded and is treated, in the case of where it's owned by an individual, is treated as indecipherable from that individual.

[00:02:57] Speaker 03:
It's treated as a sole proprietor.

[00:02:58] Speaker 06:
Where do you have any support for your claim that 7701 determines whether Tefra replies?

[00:03:03] Speaker 06:
I mean, I just, you don't have support.

[00:03:04] Speaker 06:
You're making the argument, and all the authority is against you on it, and you don't meet the requirements of Tefer Herri with respect to the exception.

[00:03:16] Speaker 06:
So, I mean, I hear you, I hear what you're saying, but then we go looking for authority.

[00:03:20] Speaker 06:
You don't have any.

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And everyone who's come down on the point has gone the other way.

[00:03:25] Speaker 03:
Well, the IRS, actually, in revenue ruling 2004-77, which was issued less than a week before 2004-88 and was issued by a different group within the IRS, concluded that where a partnership is... Why does that matter to us?

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Whether it was a different group?

[00:03:43] Speaker 06:
I mean, all of these things are extraneous.

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It doesn't matter.

[00:03:46] Speaker 03:
Well, it goes to the point that deference should not be given to revenue ruling 2004-88.

[00:03:49] Speaker 01:
What about deference to the regulation, the pass-through regulation?

[00:03:55] Speaker 03:
Well, the question with respect to the passive regulation is, first, who is the partner here for federal tax purposes?

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And the partner for federal tax purposes are Mr. Berlow and Mr. Melton.

[00:04:05] Speaker 01:
No, that's not the position of the government.

[00:04:10] Speaker 06:
And you have no support contrary to their position.

[00:04:14] Speaker 06:
I mean, you're arguing it vigorously, but I'm reading them like, so what?

[00:04:17] Speaker 06:
That's not correct.

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It's the LLCs that are the partners.

[00:04:21] Speaker 03:
Well, the IRS actually argued, the government actually argued in 436 Limited and 6611, both tax course cases.

[00:04:27] Speaker 06:
Look, here's the problem.

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When you're preparing the case, everything in the case identifies the LLC's partners, including your materials.

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Everything identifies them as the partners, not the individuals.

[00:04:41] Speaker 06:
Every piece of paper, forget the regulations, just the stuff you were creating, everything says the LLC's are the partners.

[00:04:48] Speaker 03:
And under state law, they may have been the partners for certain purposes, but not for all purposes, even under state law.

[00:04:54] Speaker 03:
Under state law, for tax law purposes, they were not the partners.

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Mr. Berlow and Mr. Melton were the partners.

[00:05:00] Speaker 06:
So under state law, they may have been... Your creation says they're the partners.

[00:05:04] Speaker 03:
Yeah, but the Section 77... Right?

[00:05:06] Speaker 03:
Well, but the Section 77... Right?

[00:05:08] Speaker 03:
I'm sorry?

[00:05:09] Speaker 06:
Your creation of this arrangement says they're the partners.

[00:05:12] Speaker 03:
For state law purposes.

[00:05:13] Speaker 06:
Correct.

[00:05:14] Speaker 06:
It says that for state law purposes?

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Is that limitation in there?

[00:05:17] Speaker 06:
I missed it.

[00:05:18] Speaker 06:
Well, the federal... It doesn't, does it?

[00:05:22] Speaker 06:
It does not.

[00:05:22] Speaker 06:
Okay.

[00:05:23] Speaker 06:
So, I mean, you don't have an argument.

[00:05:26] Speaker 06:
Everything in the authorities points against you.

[00:05:29] Speaker 06:
I understand why you're fighting hard, vigorously, but you have no authority in support of your position.

[00:05:34] Speaker 06:
Nothing.

[00:05:35] Speaker 03:
Well, the question here, Your Honor, is should state law control, a disregarded entity can be formed under state law, it can be formed under the laws of a foreign country.

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And the point here is that the Section 7701 regulations don't look to the laws of a foreign country or state law to determine how an entity, a disregarded entity, should be treated for federal tax purposes.

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That's a matter of federal tax law.

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And so there's nothing in the Section 7701 regulations in the internal revenue code or in any regulation that says that you look to state law to determine how a state law or the laws of a foreign country to determine how a single-member limited liability company should be treated for federal tax purposes.

[00:06:10] Speaker 03:
And in fact, that is why the Section 7101 regulations were promulgated back in 1996.

[00:06:15] Speaker 06:
Didn't you stipulate that the two partners were the LLCs?

[00:06:18] Speaker 03:
No, we did not, Your Honor.

[00:06:19] Speaker 03:
There's no such stipulation.

[00:06:21] Speaker 03:
No.

[00:06:21] Speaker 03:
There's no such stipulation.

[00:06:22] Speaker 06:
Would you be surprised if I cite one to you?

[00:06:24] Speaker 03:
Well, that document I think that you're referring to states that that term is merely used for convenience in that document.

[00:06:33] Speaker 05:
And if the consequences are that great, why would a lawyer say that?

[00:06:40] Speaker 06:
For convenience?

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For the convenience of our determining who the partners were at this arrangement.

[00:06:44] Speaker 06:
Yeah, it was very convenient.

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It helped me a lot.

[00:06:47] Speaker 03:
Well, that provision clearly says similarly for the convenience, and it only refers to the document, only refers to the partners as the partners.

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Under, in a particular section, under which they were the partners under the General Partnership Agreement for Mello Partners.

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So that's correct.

[00:07:02] Speaker 03:
They were the partners under the General Partnership Agreement for Mello Partners.

[00:07:05] Speaker 03:
And you think CBU is wrong as well, right?

[00:07:08] Speaker 03:
I do, Your Honor.

[00:07:10] Speaker 06:
You have to violate the regulations, the law, other circuits, and all of your documents to get to your position.

[00:07:17] Speaker 03:
Well, I believe CVU trading actually is inconsistent with the decisions in other circuits.

[00:07:22] Speaker 03:
I think it's inconsistent with the first, second, and sixth circuits in Medical Practice Solutions, McNamee, and Candy.

[00:07:28] Speaker 03:
In each of those cases, the court concluded that, so the issue in each of those cases was who was an employer for federal employment tax purposes.

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And the IRS argued in each of those cases, and the court agreed that the disregarded entity is disregarded, and the employer, the individual owner, is the employer for federal employment tax purposes.

[00:07:46] Speaker 03:
And so here in CB Trading, where the Ninth Circuit is concluding that you don't disregard the disregarded entity, you regard it and you treat it as a partner, that is actually, in fact, inconsistent with those circuits and the decisions in those cases.

[00:08:00] Speaker 01:
Counsel, let me go back to the past civil regulation.

[00:08:04] Speaker 01:
You object to the IRS's definition or interpretation of that regulation, right?

[00:08:11] Speaker 03:
That's correct, Your Honor.

[00:08:13] Speaker 01:
If their interpretation prevails, you lose.

[00:08:15] Speaker 01:
That would be correct, wouldn't it?

[00:08:18] Speaker 03:
Well, that would require two interpretations to prevail.

[00:08:20] Speaker 03:
One is that they properly determine who is a partner for purposes of that provision, contrary to their decision they're holding in revenue in 2004-77 in their positions.

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in 436 and 6611.

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So, first, they would have to be — they would have to conclude that, in fact, for the purpose of that regulation, that the partners were the two single-member LLCs and not Mr. Verlow and Mr. Melton.

[00:08:41] Speaker 06:
Go ahead.

[00:08:42] Speaker 03:
And then, second, then they'd have to conclude that the — that a disregarded entity is similar to the entities listed under pass-throughs.

[00:08:49] Speaker 01:
I don't believe that they are.

[00:08:50] Speaker 01:
That is correct.

[00:08:51] Speaker 01:
That's the way I saw it.

[00:08:53] Speaker 01:
Now, assuming that regulation is ambiguous,

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Why wouldn't the IRS get our deference with respect to the interpretation of that regulation?

[00:09:04] Speaker 03:
Well, first, because I don't think it's ambiguous as to who is the partner here for federal tax purposes.

[00:09:09] Speaker 03:
Federal tax purposes, again, does not look to state law to determine who is the partner.

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So I think that ends our inquiry.

[00:09:15] Speaker 03:
But even assuming that the partner is where the single-member LLC is, there's nothing in those regulations that applies to a disregarded entity, unlike each of the entities that are listed there.

[00:09:24] Speaker 01:
What about my specific question?

[00:09:27] Speaker 01:
If assuming it's ambiguous, you may argue it's not ambiguous, but assuming it is ambiguous,

[00:09:34] Speaker 01:
Why wouldn't the IRS get our deference with respect to the interpretation of the regulation?

[00:09:40] Speaker 01:
There was an argument as to whether Skidmore deference applies to the revenue ruling.

[00:09:46] Speaker 01:
But why wouldn't our deference, which is a legal requirement that a government's regulation, properly authorized, gets deference with respect to its own interpretation of ambiguity?

[00:10:05] Speaker 03:
Well, that regulation is inconsistent with another government regulation, the Section 7701 regulation.

[00:10:10] Speaker 01:
In other words, you're not answering the question whether our deference would apply.

[00:10:16] Speaker 03:
I see that my time is up.

[00:10:17] Speaker 03:
Could I have 30 seconds to respond, please?

[00:10:19] Speaker 03:
You can respond to the question.

[00:10:21] Speaker 03:
So the provision, their interpretation of the pass your partner regulation lacks any thoroughness of reasoning.

[00:10:29] Speaker 03:
If we look at revenue ruling 2004-88, the cases that cite 2004-88, they all have very little or no analysis of them as to why that interpretation should apply.

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So I think it lacks thoroughness of reasoning or lacks much reasoning altogether.

[00:10:47] Speaker 04:
There was another question that we asked you to be prepared to address in an order.

[00:10:54] Speaker 04:
Can you say something about that?

[00:10:57] Speaker 03:
Regarding CHI, yeah, I can certainly do that.

[00:11:01] Speaker 03:
And so the issue there is under Section 6751B1.

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and whether penalties may be properly assessed.

[00:11:08] Speaker 03:
And the government hasn't contended in its briefs that it met the requirements of Section 6751.

[00:11:12] Speaker 03:
It only contended that the appellant is barred from raising that issue at this point in this proceeding.

[00:11:19] Speaker 03:
And it cites to a case which ultimately cites to the Supreme Court decision in Hormel.

[00:11:24] Speaker 03:
And in that case, in Hormel, the Supreme Court decided that it was appropriate to allow the government to raise an issue for the first time on appeal.

[00:11:32] Speaker 03:
And the Supreme Court recognized the general rule that ordinarily an appellate court does not give consideration to issues not raised below, but it also acknowledged an exception to that rule.

[00:11:42] Speaker 03:
And in the interest of justice, it states that where judicial interpretations of existing law, after decision below and pending appeal, may have materially altered the decision below, that that's an exception to the general rule that an appellate court should not consider.

[00:11:55] Speaker 06:
What are you asking us to do?

[00:11:57] Speaker 03:
I'm asking that the penalties be dismissed or at a minimum the case be remanded to the tax court in light of the decision in the second court decision in Chi.

[00:12:06] Speaker 06:
We certainly couldn't do it on our own motion because we don't know what the evidence is or is not.

[00:12:12] Speaker 06:
So I'm guessing what you're meaning to say is we ought to remand.

[00:12:16] Speaker 06:
That's correct.

[00:12:19] Speaker 04:
our ability to take account of this change in the law.

[00:12:22] Speaker 04:
Yes, that is correct, Your Honor.

[00:12:24] Speaker 04:
Is it your contention that 67B1 is a jurisdictional requirement or it's just a burden of production or burden of proof?

[00:12:35] Speaker 03:
It's our position that under Section 6751, for the IRS to raise penalties and for the court to have jurisdiction, that it had to have those penalties approved in writing before the penalties were brought to protect the taxpayer.

[00:12:52] Speaker 03:
And that was what 6751 was intended to do, protect taxpayers from IRS agents who would threaten penalties to try and get a taxpayer to settle.

[00:13:02] Speaker 04:
I guess here's what I'm struggling with, just to lay it on the table here.

[00:13:07] Speaker 04:
The Second Circuit's opinion in Chai at the beginning speaks of 6751 as if it's jurisdictional.

[00:13:14] Speaker 04:
But then at the end of the opinion, what they say is that what we're doing here is determining whether it was an abuse of discretion

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for the tax court to not address this issue when it was only raised in post trial briefing.

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And they conclude that it wasn't an abuse of discretion.

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And so they, they allowed the issue to be raised on appeal.

[00:13:45] Speaker 04:
From here, as best as I can tell, you didn't raise it at all in the tax court, right?

[00:13:52] Speaker 03:
No, no penalty has ever been denied under Section 6751 before CHI was decided.

[00:13:58] Speaker 04:
But to answer my question, you didn't raise it, right?

[00:14:05] Speaker 04:
We did challenge penalties but did not raise 6751.

[00:14:07] Speaker 04:
That's correct.

[00:14:08] Speaker 04:
So we don't have an abuse of discretion review here because

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They weren't presented with the issue to exercise their discretion.

[00:14:20] Speaker 04:
So in that sense, if we were to follow, I guess, the First Circuit's opinion in Kaufman that Chai discusses, you would be out of luck, right, under Kaufman?

[00:14:34] Speaker 04:
Under Kaufman, yes.

[00:14:36] Speaker 04:
But if it's jurisdictional, then it would seem that we have to consider it whenever it's raised, if it's jurisdiction.

[00:14:44] Speaker 04:
But maybe not.

[00:14:47] Speaker 04:
Maybe that's only if it goes to our jurisdiction.

[00:14:49] Speaker 04:
I'm not sure.

[00:14:51] Speaker 04:
But I'm trying to understand the import of this argument that it's jurisdictional.

[00:14:57] Speaker 04:
Do you see what I'm getting at?

[00:14:58] Speaker 03:
I do, Your Honor.

[00:14:59] Speaker 03:
And I believe that the court, the tax court, has subsequent to Chai followed that decision in numerous dozens of cases.

[00:15:08] Speaker 03:
And that it is a jurisdiction matter.

[00:15:11] Speaker 03:
The question here is whether or not the tax court properly would assess penalties.

[00:15:16] Speaker 06:
Wouldn't your argument that post-Chai the tax court is saying,

[00:15:21] Speaker 06:
that its new view of this provision should be applied prospectively and retroactively.

[00:15:28] Speaker 06:
I mean, I read all those decisions for a kind of a strange array.

[00:15:32] Speaker 06:
They seem to say, whatever, it's always been here.

[00:15:35] Speaker 06:
This is the correct ruling.

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And anyone who's in play, we will take account of it.

[00:15:41] Speaker 06:
So I mean, do you have to have a jurisdictional provision?

[00:15:45] Speaker 06:
You can say Kauffman.

[00:15:46] Speaker 06:
You can say the First Circuit didn't have the question before.

[00:15:48] Speaker 03:
Well, I think whether it's jurisdictional or a matter of what Hormel described.

[00:15:52] Speaker 06:
Well, but I mean, it does matter if it's jurisdictional.

[00:15:54] Speaker 06:
It would be strange if this is jurisdictional.

[00:15:56] Speaker 06:
I don't even know how to wrap my head around that.

[00:15:58] Speaker 06:
But in any event, does that matter to your argument that it's jurisdictional?

[00:16:03] Speaker 03:
Well, it doesn't matter whether or not it's jurisdictional.

[00:16:05] Speaker 03:
I think it's a matter of justice, as the Supreme Court said in Hormel.

[00:16:08] Speaker 06:
Well, but in principle, because the tax court is saying, let them all be in play.

[00:16:13] Speaker 06:
I mean, this is array of opinions that are really quite amazing.

[00:16:16] Speaker 06:
You read them and they're saying, sure, if you're still pending, certainly if you're still pending it around, we'll take a look at it.

[00:16:24] Speaker 06:
Isn't that what they seem to be saying?

[00:16:25] Speaker 03:
Well, they are.

[00:16:26] Speaker 03:
And as Your Honor noted, they are applying it retroactively as well, not simply prospectively.

[00:16:31] Speaker 03:
And so in this case, what we're saying is that just simply because of timing, the appellant here should not suffer the detriment that it wouldn't suffer if it were still in the tax court.

[00:16:42] Speaker 06:
You want to get away from the first sector by saying there's an intervening change of law.

[00:16:46] Speaker 03:
Well, that was intervening judicial interpretation of law.

[00:16:49] Speaker 06:
Well, no, no.

[00:16:49] Speaker 06:
The bigger argument is the tax court itself is saying this is a change in law as far as we're concerned, and we buy it.

[00:16:57] Speaker 06:
It's not like the NLRB, which rejects everything that the courts say.

[00:17:00] Speaker 06:
The tax court is saying we accept it, and it applies in every circle.

[00:17:05] Speaker 03:
That's correct, Your Honor.

[00:17:08] Speaker 04:
OK.

[00:17:08] Speaker 04:
All right.

[00:17:09] Speaker 04:
Thank you.

[00:17:09] Speaker 04:
We'll give you a couple minutes on rebuttal.

[00:17:11] Speaker 04:
We'll hear from your friend on the other side, Mr. Farmer.

[00:17:17] Speaker 01:
Could you start with the question of whether your position now still relies on waiver or whether you're, in light of the tax court's changing position, prepared to change your litigating position?

[00:17:33] Speaker 02:
Your Honor, we're still saying they waived it.

[00:17:36] Speaker 02:
The tax court decisions that my opponent sent to the court have no bearing on this case.

[00:17:42] Speaker 02:
And all the tax court decisions that were sent

[00:17:45] Speaker 02:
The issue was raised by the taxpayer before trial.

[00:17:48] Speaker 02:
A trial was held.

[00:17:49] Speaker 02:
In one of the cases, the commissioner put on evidence.

[00:17:52] Speaker 02:
The tax court found that evidence was sufficient to meet his burden of production to show the written requirement was met.

[00:17:59] Speaker 02:
In the other three cases, the commissioner didn't put on any evidence at trial and the court ruled against him.

[00:18:06] Speaker 02:
In two of those cases, the commissioner wanted to reopen the record

[00:18:10] Speaker 02:
to introduce evidence saying, well, Chai came down in the interim.

[00:18:14] Speaker 02:
We didn't realize we had to put on evidence.

[00:18:16] Speaker 02:
And the tax court rejected it saying, no, the taxpayer put it in issue.

[00:18:21] Speaker 02:
You didn't exercise due diligence.

[00:18:23] Speaker 02:
In this case, we had a petition filed.

[00:18:27] Speaker 02:
The taxpayer challenged the merits of the judgments in the panel.

[00:18:31] Speaker 02:
He didn't say a word about 6751.

[00:18:32] Speaker 02:
Thereafter, it moved to dismiss on jurisdictional grounds.

[00:18:37] Speaker 02:
That was denied.

[00:18:38] Speaker 02:
The taxpayer then conceded his entire case on the merits and then consented to an entry of a decision which included a determination that penalties were applicable.

[00:18:49] Speaker 02:
He consented because the Commissioner filed a motion under Rule 248B of the Tax Court Rules which pertains to settlements and partnership cases, and he said in his motion,

[00:19:00] Speaker 02:
The Commissioner and Mr. Barlow have reached a settlement, the terms of which are reflected in the decision lodged with... Counsel, there's no question he waved down below.

[00:19:09] Speaker 01:
You don't have to argue that point.

[00:19:11] Speaker 01:
The only question was whether you would, given the tax courts of Old Foss, should this case be treated as a change in law?

[00:19:22] Speaker 02:
No, Your Honor, because if you consent to... First of all, the decision in Chai isn't binding on this court.

[00:19:30] Speaker 02:
It's not a Supreme Court.

[00:19:31] Speaker 06:
No, no, that isn't the point.

[00:19:32] Speaker 06:
The tax court itself has embraced it.

[00:19:35] Speaker 06:
They're applying it retroactively and prospectively.

[00:19:38] Speaker 06:
Yes.

[00:19:38] Speaker 06:
They have effectively said it's an intervening change in the law.

[00:19:42] Speaker 06:
We're doing something we hadn't been doing before.

[00:19:44] Speaker 06:
And then they say, but you know, it's here.

[00:19:48] Speaker 06:
And so what we're doing now is really what the law is.

[00:19:50] Speaker 06:
It's very strange.

[00:19:51] Speaker 06:
But in any event, they have chosen to say it applies across the board.

[00:19:54] Speaker 02:
But they haven't said anything about somebody who never raised it before.

[00:19:58] Speaker 06:
Well, isn't that a reason we send it back?

[00:20:01] Speaker 02:
I don't think so, Your Honor.

[00:20:02] Speaker 02:
I don't think there's any change in law.

[00:20:04] Speaker 02:
I think Kaufman is still good law.

[00:20:06] Speaker 01:
Suppose the tax court were to say,

[00:20:09] Speaker 01:
under the circumstances we're changing, we would allow somebody to assert this point even on appeal if it was waived below.

[00:20:19] Speaker 02:
Well, the tax court can't allow someone to raise it on appeal.

[00:20:21] Speaker 02:
Only this court can.

[00:20:22] Speaker 01:
No, no.

[00:20:23] Speaker 01:
Oh, well.

[00:20:25] Speaker 02:
They can't control whether an appellate court will entertain a new argument on appeal.

[00:20:30] Speaker 02:
That's outside their province.

[00:20:32] Speaker 01:
They can... No, suppose they said, we would allow rehearing on this.

[00:20:40] Speaker 02:
Well, they can't have rehearing when it's on appeal only if this court remanded it.

[00:20:44] Speaker 01:
We're trying to figure out what they want.

[00:20:46] Speaker 01:
What would they want in this situation?

[00:20:49] Speaker 02:
I don't know if they would, you know, the taxpayer here could have argued like Mr. Chai that the written requirement wasn't met.

[00:20:56] Speaker 02:
There was no law when he argued the case.

[00:20:58] Speaker 02:
He argued it.

[00:20:59] Speaker 02:
And the provision was on the books for years since 2000, I think, was the statute says, no penalty shall be assessed unless the initial determination of the assessment is approved in writing.

[00:21:11] Speaker 02:
And the question in CHI, the real question was, well, when does this approval have to take place?

[00:21:17] Speaker 06:
So what we're struggling with is, in plain error type analysis, what we do is we look to see what the law is when we hear it.

[00:21:28] Speaker 06:
Okay, it's kind of analogous.

[00:21:30] Speaker 06:
And so the law has now changed.

[00:21:32] Speaker 06:
What it was before when you first started briefing was something different.

[00:21:36] Speaker 06:
Now the law created by the tax court interpreting its statutory provisions and regulations, they said it's different and our case is pending.

[00:21:46] Speaker 06:
And so doesn't justice demand that we send it back and say, well, you seem to want to apply this prospectively and retroactively.

[00:21:54] Speaker 06:
Our case is still alive.

[00:21:56] Speaker 06:
This is not the Kaufman situation.

[00:21:59] Speaker 06:
Kaufman didn't have this intervening change in the law.

[00:22:02] Speaker 02:
Well, I would disagree with change in law, respectfully, Your Honor.

[00:22:06] Speaker 02:
Chai interpreted a statute as to when the requirement of written approval has to be... I think you're right about that.

[00:22:14] Speaker 01:
But I also read the tax court is taking a different position.

[00:22:19] Speaker 02:
Right.

[00:22:19] Speaker 02:
The tax court is saying, we now agree that that's a correct statement of law.

[00:22:25] Speaker 02:
Okay, so now when the commissioner goes to the tax court, he knows that a trial, unless he has a stipulation with the taxpayer agreeing that he's met the written requirement, written approval requirement,

[00:22:38] Speaker 02:
He has to act trial as part of his burden of production.

[00:22:41] Speaker 02:
He has to introduce a writing and testimony, if necessary, to establish it.

[00:22:45] Speaker 02:
Okay, that's fine.

[00:22:47] Speaker 02:
That's what's going to happen in the tax court.

[00:22:49] Speaker 02:
The commissioner knows that.

[00:22:50] Speaker 02:
His attorneys, which handle litigation in the tax court, know that.

[00:22:55] Speaker 02:
That's fine.

[00:22:56] Speaker 02:
But we have a case here where we have a taxpayer who consented to a judgment.

[00:23:03] Speaker 02:
He could have

[00:23:04] Speaker 02:
You know, raised the issue, saying I consent, except as to 6751.

[00:23:09] Speaker 02:
He didn't.

[00:23:10] Speaker 02:
The commissioner lodged a decision that says penalties apply.

[00:23:14] Speaker 02:
He didn't object to it.

[00:23:17] Speaker 06:
And so now he wants another bite of the apple because the taxpayer made a different argument in Chi about... Is the rule in the tax court, as you understand it, that if a party doesn't raise what they see as the law now, it's waived at the tax court?

[00:23:33] Speaker 06:
or is it an affirmative burden on the IRS?

[00:23:40] Speaker 02:
I believe he has to raise it at some, let's assume the taxpayer.

[00:23:43] Speaker 06:
And I want the citation if you have it.

[00:23:45] Speaker 06:
You think their new rule is, yeah, this is the way we're interpreting this provision now, but the burden is on the taxpayer to raise it if they think it hasn't been met as opposed to the burden is on the IRS as part of their case to present it.

[00:24:02] Speaker 02:
Well, you're asking a couple.

[00:24:04] Speaker 02:
The tax court hasn't addressed the situation in these cases that were just sent to you about where the taxpayer never raises it.

[00:24:11] Speaker 02:
Right.

[00:24:12] Speaker 02:
Okay.

[00:24:12] Speaker 02:
Then the commissioner goes to trial.

[00:24:14] Speaker 02:
He doesn't put on evidence.

[00:24:16] Speaker 02:
Right.

[00:24:16] Speaker 02:
And then afterwards, the taxpayer says, oh, the commissioner didn't mean it.

[00:24:22] Speaker 02:
I don't know what the tax court would say there because in all four cases, the taxpayer did raise it before trial, but even assuming

[00:24:29] Speaker 02:
The tax court would say the commissioner should have known now that he has to do it.

[00:24:34] Speaker 02:
That is still not the situation here, where they didn't raise it.

[00:24:39] Speaker 02:
There was no trial where the commission didn't put on evidence.

[00:24:42] Speaker 02:
And that's what happened in Chi.

[00:24:44] Speaker 02:
There was a trial.

[00:24:45] Speaker 02:
The commissioner didn't put on evidence.

[00:24:47] Speaker 06:
The taxpayer, in a post-trial motion, said... What you're saying, it seems to me, is we don't know what the tax court now thinks about.

[00:24:55] Speaker 06:
Who has the responsibility to raise what, when?

[00:24:58] Speaker 06:
Do we?

[00:24:59] Speaker 06:
We don't know.

[00:25:00] Speaker 02:
But the tax court certainly would... Let's assume... Does the tax court regard this as jurisdictional?

[00:25:05] Speaker 01:
No.

[00:25:05] Speaker 01:
Judge Wilkinson?

[00:25:06] Speaker 02:
No.

[00:25:06] Speaker 02:
There's nothing... The statute isn't... Well, no.

[00:25:09] Speaker 01:
I'm trying to figure out what the tax court thinks.

[00:25:12] Speaker 02:
I don't think the tax court put it in jurisdictional terms.

[00:25:16] Speaker 02:
You know, the Supreme Court has cut back on, you know, every statute.

[00:25:19] Speaker 02:
Nothing's jurisdictional anymore, but particularly a statute that says,

[00:25:23] Speaker 02:
No penalty shall be assessed unless the commissioner, you know, has it approved in writing.

[00:25:27] Speaker 02:
There's nothing that constrains jurisdiction there.

[00:25:31] Speaker 02:
The court has to have jurisdiction over a case and then we get to it.

[00:25:35] Speaker 02:
What I'm saying is if we had a case where the taxpayer didn't raise it, the commissioner goes to trial, the parties put on their evidence, on the merits, the taxpayer doesn't raise it even afterwards, the tax court then enters a decision saying upholding penalties, all right?

[00:25:53] Speaker 02:
The taxpayer shouldn't be allowed on appeal to say it was the commissioner's burden of production in the tax court when he never said that at any point in the tax court.

[00:26:02] Speaker 02:
It's got to say at some point.

[00:26:03] Speaker 02:
He could maybe say it now in the tax court after trial because the commissioner should know it's part of his prima facie case.

[00:26:10] Speaker 02:
But the taxpayer has to say it at some point in the tax court to preserve it for trial.

[00:26:15] Speaker 01:
Is your position that nothing the tax court could say

[00:26:19] Speaker 01:
would be relevant to this case?

[00:26:21] Speaker 02:
Absolutely.

[00:26:21] Speaker 02:
That is my position.

[00:26:22] Speaker 01:
In other words, even if it was remanded back, and then the tax court said, yes, this issue can be raised at any time.

[00:26:29] Speaker 01:
Oh, no.

[00:26:29] Speaker 02:
If the court remands it, then the court says, in the interest of justice, the tax court should decide this issue, then the tax court would have to hold a hearing at which the commissioner would have the burden of production to produce the writing.

[00:26:45] Speaker 02:
My position is the court shouldn't do that here.

[00:26:48] Speaker 02:
All the cases that we're talking about are cases where Chai and all the other cases are where the taxpayer at some point in time in the tax court raised the issue.

[00:26:58] Speaker 06:
Did the tax court say that that was important?

[00:27:00] Speaker 06:
I don't recall that.

[00:27:02] Speaker 06:
It's true.

[00:27:03] Speaker 06:
I've read the cases.

[00:27:04] Speaker 06:
I know what you're saying, but I don't remember the tax court saying this is a principal consideration.

[00:27:10] Speaker 06:
As opposed to the burden is on the IRS to put this in, and if we don't see it, they lose.

[00:27:18] Speaker 06:
No, they didn't consider it.

[00:27:21] Speaker 02:
Yes, your honor, but the commissioner doesn't lose if the other side never says the commissioner didn't meet his burden.

[00:27:26] Speaker 02:
You can waive that.

[00:27:28] Speaker 02:
If the commissioner makes out a case and the other side never says you didn't make out a prima facie case, and you lose on the merits, and then you appeal, it's too late to say... I agree with that as a general proposition of law.

[00:27:40] Speaker 04:
What has thrown me about this is that at the beginning of the Second Circuit's opinion in Chai, they say that the tax court

[00:27:48] Speaker 04:
exercises jurisdiction only to the extent provided by statute in its jurisdiction to redetermine a deficiency asserted by the IRS depends upon a valid notice of deficiency and a timely filed petition.

[00:28:07] Speaker 04:
So, but they say that whether there's a valid notice of deficiency is jurisdictional, is what they seem to be saying.

[00:28:16] Speaker 04:
They're citing tax court opinions.

[00:28:19] Speaker 02:
Yes, Your Honor.

[00:28:20] Speaker 02:
Valid means one that complies with the requirements of the code, meaning it was sent to the taxpayer's last known address.

[00:28:29] Speaker 02:
within the time limits for issuing it.

[00:28:32] Speaker 04:
So you don't think that 6751 has nothing to do with the Notice of Deficiency?

[00:28:36] Speaker 04:
It has nothing to do with whether the Notice of Deficiency is valid.

[00:28:40] Speaker 02:
No, not a thing.

[00:28:41] Speaker 02:
That goes to the merits of the penalties and part of the Commissioner's production on the penalties is whether he has the written approval.

[00:28:50] Speaker 02:
There's nothing, the Notice of Deficiency, yes, the Tax Court

[00:28:54] Speaker 02:
The commissioner has to issue a deficiency notice.

[00:28:56] Speaker 02:
To be valid, it has to be timely, has to be sent to the taxpayer's last known address.

[00:29:01] Speaker 02:
Of course, if he receives it, it's okay.

[00:29:03] Speaker 02:
And then the taxpayer has to file a petition within 90 days.

[00:29:07] Speaker 02:
At that point, the tax court has jurisdiction to not only determine the deficiency, determine an overpayment, you know, decide the whole gambit of the merits.

[00:29:17] Speaker 02:
This procedural thing is a defense that the taxpayer has, that the commissioner has the burden of production.

[00:29:25] Speaker 02:
So he could say, well, on the merits I owe the penalty, but it wasn't improved in writing, so I'm not liable for the penalty.

[00:29:32] Speaker 02:
That's just a defense as to whether the penalties are going to apply.

[00:29:36] Speaker 04:
That seems to be the way that the Second Circuit explains it later, because they say it's just a matter of whether

[00:29:43] Speaker 04:
the commissioner has met his or her burden of proof.

[00:29:48] Speaker 02:
Nothing in Kaufman, nothing in these later tax court decisions say anything about jurisdictional terms.

[00:29:54] Speaker 02:
They talk about burden of production, which is not, the court already has jurisdiction or you wouldn't be talking about burden of production.

[00:30:01] Speaker 01:
Well, the word jurisdiction can be confusing here.

[00:30:06] Speaker 01:
There's no question about our jurisdiction.

[00:30:08] Speaker 01:
But the tax court could be taking a position with respect to its jurisdiction, which isn't really Article III.

[00:30:16] Speaker 02:
No, but it hasn't said that it affects their jurisdiction either.

[00:30:20] Speaker 02:
Their jurisdiction is simply, there has to be, in this type of case, there has to be a notice of deficiency, and there has to be a timely petition challenging it.

[00:30:28] Speaker 02:
At that point, they have jurisdiction to decide everything that's in the notice of deficiency.

[00:30:33] Speaker 01:
Counsel, may I go ask a question that puzzled me?

[00:30:37] Speaker 01:
Why did you not assert our deference with respect to the pass-through regulation?

[00:30:46] Speaker 02:
That's probably an oversight about the deference owed to... You went to Skidmore deference on the Revenue Rule.

[00:30:53] Speaker 01:
Right.

[00:30:54] Speaker 01:
But you had a pass-through regulation which would largely win your case.

[00:31:02] Speaker 01:
and your interpretation of it.

[00:31:04] Speaker 01:
Why didn't you just say our deference to that?

[00:31:06] Speaker 01:
That's classic.

[00:31:08] Speaker 02:
Well, it's probably an oversight, Your Honor, but all the authorities have approved the ruling, including the Ninth Circuit.

[00:31:16] Speaker 02:
My opponent is relying on regs which aren't on point to challenge regs which are on point.

[00:31:23] Speaker 01:
No, I understand your argument.

[00:31:25] Speaker 02:
So I think it would be overkill.

[00:31:28] Speaker 02:
There's no authority that has said that the check the box regs have anything to do with whether the small partnership exception applies.

[00:31:36] Speaker 02:
The tax court's rejected it four or five times.

[00:31:38] Speaker 02:
The Ninth Circuit's rejected it.

[00:31:41] Speaker 02:
You have rulings that say

[00:31:43] Speaker 02:
If a partnership has passed through partners, they can't qualify.

[00:31:47] Speaker 02:
Passed through partners include, as the code defines, nominees in grant or trust.

[00:31:52] Speaker 02:
Well, they're disregarded entities, just like LLCs that check the box.

[00:31:56] Speaker 02:
Nominees don't report the income they received from somebody else, either the grant or trust.

[00:32:01] Speaker 02:
The grant or trust files an information return reporting the income it received by the true owner, but it's not reporting not as its own income.

[00:32:12] Speaker 02:
I agree with you, we had that argument, we also had a collateral estoppel argument because when the tax court

[00:32:19] Speaker 02:
uh... dismissed the deficiency proceeding on the ground but that's a separate argument but i'm just saying we can't raise that our difference isn't really a separate argument that's just a legal point you can make but now you're about to make a separate argument well i'm not raising it we didn't raise it below we should have but uh... i'm just saying that you know the ninth circuit gave skidmore deference to the ruling the ruling interprets the official interpretation of the IRS's own regs so that should be the end of

[00:32:48] Speaker 02:
that issue.

[00:32:49] Speaker 02:
All right.

[00:32:50] Speaker 02:
Thank you.

[00:32:51] Speaker 02:
Thank you, Your Honor.

[00:32:53] Speaker 04:
All right, Mr. Shao will give you two minutes on rebuttal.

[00:33:00] Speaker 03:
Thank you, Your Honor.

[00:33:02] Speaker 03:
So I'd like to make just two further points to clarify.

[00:33:04] Speaker 03:
The first is that we're in a very different position here than the taxpayer was in Kauffman, because the legal landscape here has entirely changed.

[00:33:14] Speaker 03:
That was not the case in Kauffman.

[00:33:16] Speaker 03:
Instead, the Supreme Court Hormel has stated that under that authority, we can properly raise this, the panel can properly raise the 6751 issue on appeal for the first time.

[00:33:26] Speaker 03:
The second point is it shouldn't matter whether or not we had a consented decision or decision after trial in the tax court.

[00:33:34] Speaker 03:
In either instance, the government had an affirmative obligation under Section 7491C and had the burden of proof to provide that it had the written determination required under Section 6751.

[00:33:45] Speaker 06:
The problem for you is that you simply did not, before the tax court in any way, preserve the 6751 issue.

[00:33:53] Speaker 06:
You didn't raise it at all.

[00:33:57] Speaker 03:
We never mentioned it.

[00:34:00] Speaker 06:
It seemed to go quite the contrary, and everything you did was to essentially confirm that it was okay as it was.

[00:34:10] Speaker 06:
Certainly we weren't confirming it.

[00:34:11] Speaker 06:
The written approval requirement was there.

[00:34:13] Speaker 06:
That's just kind of a simple thing.

[00:34:15] Speaker 06:
Either you think you have a claim with respect to it or not.

[00:34:18] Speaker 06:
If you think you have a claim with respect to it, one would suppose that you would raise it.

[00:34:22] Speaker 06:
It wasn't raised.

[00:34:26] Speaker 06:
crushed by what Kaufman is saying, which is really important to all law.

[00:34:30] Speaker 03:
Well, I understand it was not raised, and it's being raised on appeal here.

[00:34:34] Speaker 03:
And under Hormel, we believe that we're entitled to raise some law.

[00:34:36] Speaker 06:
Yeah, but you see, the problem is we ought to at least be struggling why wouldn't you have known to have raised it before?

[00:34:43] Speaker 06:
Because the same rule was there.

[00:34:45] Speaker 06:
It's not like it's a gloss on the law.

[00:34:47] Speaker 06:
The statute is still there.

[00:34:49] Speaker 06:
It says what it says, including the written requirement as a requirement.

[00:34:53] Speaker 06:
So any party litigating would know about it, and if they thought there was a problem, they'd raise it.

[00:34:58] Speaker 06:
And all the tax court cases that you want to point to, that you sent to us, essentially are saying, this was raised.

[00:35:07] Speaker 06:
And how it was handled was wrong, and the government loses because you didn't meet your burden here and it was raised.

[00:35:14] Speaker 06:
You don't have a situation where you've raised anything.

[00:35:17] Speaker 06:
So how did those parties know to raise it, and you didn't know to raise it?

[00:35:20] Speaker 03:
May I have?

[00:35:21] Speaker 03:
Yes, you can ask.

[00:35:23] Speaker 03:
So it was not raised.

[00:35:26] Speaker 03:
At the time that this case was in the tax court, as the court said in Chai, this is very unclear provision here.

[00:35:32] Speaker 06:
But it wasn't unclear to the people in the cases in which you're pointing us to.

[00:35:37] Speaker 06:
They raised it.

[00:35:38] Speaker 03:
I understand, Your Honor.

[00:35:39] Speaker 03:
At the time, though, that this case was before the tax court, no court had decided that penalties were inappropriate under Section 6751.

[00:35:47] Speaker 03:
And, you know, in fact, in the first grave decision, what they referred to as grave two, the tax court held that it was premature in that case to

[00:35:57] Speaker 03:
premature in that case to bring 6751 before the tax court because the IRS could get the written determination subsequent to the tax court proceedings.

[00:36:05] Speaker 06:
But it all begs the question because all of these parties in the cases in which you want us to read and have read raised it.

[00:36:14] Speaker 06:
They knew there was a provision there and they raised it.

[00:36:18] Speaker 03:
And we believe that under harm out, we're entitled to raise it here and fall under the same position as those cases that are still in the tax court that have raised this issue.

[00:36:30] Speaker 03:
All right, thank you.

[00:36:31] Speaker 03:
We'll take the matter under submission.

[00:36:32] Speaker 04:
Thank you.