[00:00:46] Speaker 02: Next target case is number 17-2359, Hibernick's against the United States. [00:00:53] Speaker 02: Mr. Redding. [00:00:58] Speaker 00: If it please the court. [00:01:01] Speaker 00: Actually, I'm going to waste a couple of my precious minutes just to note that this is kind of my swan song. [00:01:07] Speaker 00: This will be my last appearance before this court. [00:01:10] Speaker 00: I'm retiring between Hurricane Harvey flooding my offices. [00:01:16] Speaker 00: developing back and leg problems, and then repealing TEFRA this year, I think it's time to go. [00:01:25] Speaker 00: That's it. [00:01:25] Speaker 03: We'd hate to see you go. [00:01:28] Speaker 03: Congratulations on retiring, though. [00:01:29] Speaker 00: Thank you. [00:01:30] Speaker 00: This case should really be straightforward. [00:01:37] Speaker 00: The government has admitted that the liability [00:01:42] Speaker 00: that the refund claim addresses was erroneously assessed in 1986. [00:01:46] Speaker 00: In their view, it should have been a 1985 liability. [00:01:52] Speaker 00: There are some grievous errors, I think, in both the government's presentation and the lower court's opinion on some things that seem irrelevant, but they're not. [00:02:06] Speaker 00: There is nowhere in this case an agreement by the taxpayers to an amount of liability in any year. [00:02:15] Speaker 00: Both the government asserts that there is. [00:02:17] Speaker 00: The court below seemed to assume that there was. [00:02:22] Speaker 00: That's not the way it works in TEFRA. [00:02:26] Speaker 00: What you have is an agreement to the adjustments or to the treatment of certain partnership items. [00:02:33] Speaker 00: And in this case, the agreement was there would be no change to the way they were treated on the tax return. [00:02:39] Speaker 00: At that point, the government then has the right to compute what they believe to be the correct tax liability resulting from that agreement and, as appropriate, assess and collect that money from the taxpayer. [00:02:55] Speaker 00: But that does not make a final determination as to that taxpayer's ultimate liability. [00:03:03] Speaker 03: best argument here that you think the statute of limitations had expired or that there had to be an assessment before there could be an obligation? [00:03:17] Speaker 00: Actually, neither. [00:03:19] Speaker 00: There's factors that come together that involve both of those. [00:03:23] Speaker 00: My first point that I really want to make clear though is that there is no agreement as to an amount of liability. [00:03:29] Speaker 00: There's no fixed dollar amount that was ever agreed to. [00:03:32] Speaker 00: And even the United States Supreme Court acknowledges that the proper procedure in TEFRA is once that assessment is made, the, quote, computational adjustment assessment, the taxpayer's remedy is to file a claim for refund if he has overpaid his taxes, even for any other reason. [00:03:50] Speaker 00: He can't go back and re-challenge the partnership item adjustments, but he can raise any new claim, for example, omitted deductions on that return. [00:04:00] Speaker 00: In this case, we argue that [00:04:02] Speaker 00: Had it been assessed and paid for 1985, the taxpayers had, in fact, a credible argument for reduction in that liability. [00:04:14] Speaker 03: Did you put in any evidence with respect to the number? [00:04:18] Speaker 00: Yes and no, Your Honor. [00:04:20] Speaker 00: There is evidence in the record that two of the three prior years would have appeared to have led to an income averaging claim. [00:04:27] Speaker 00: We do not have in the record evidence of what their 1982 liability was. [00:04:31] Speaker 00: And without it, you can't make that computation. [00:04:35] Speaker 04: You have an averment that there would have been room for adjustments? [00:04:40] Speaker 00: Yes. [00:04:41] Speaker 00: And for that matter, they would have had the opportunity. [00:04:44] Speaker 04: The actual numbers are not in the record. [00:04:46] Speaker 00: Correct. [00:04:47] Speaker 00: And we also could have raised, had they had the opportunity to do so, to challenge or ask for a 1985 refund, [00:04:55] Speaker 00: that could have raised any other claim. [00:04:57] Speaker 00: Now we've never investigated whether there might have been unclaimed deductions or something because the case didn't go in that direction. [00:05:04] Speaker 00: But by making it a 1986 assessment, the government deprived the taxpayer of the opportunity to follow up his remedies to get to the correct liability for 1985. [00:05:15] Speaker 00: That makes that statement that there was an agreement to an amount of liability important. [00:05:23] Speaker 00: It's not controlling in the case, but it is important. [00:05:28] Speaker 03: The second thing... So I'm trying to follow the thread here, okay? [00:05:33] Speaker 03: So assuming we find that the statute of limitations had not run, okay? [00:05:40] Speaker 03: Then we get to the next question of whether there has to be an assessment before there can ever be a collection. [00:05:48] Speaker 00: No, because there are circumstances where there doesn't have to be. [00:05:52] Speaker 00: For example, if the taxpayer, if the government asserts that there's a liability for 1986, or asserts that there's a refund due for 1986, if the government had come in and said, there are unassessed liabilities for 1986 that are time barred, the government could raise those as an offset to our 1986 refund claim. [00:06:17] Speaker 00: So there are times, yes, when it doesn't matter. [00:06:20] Speaker 00: It almost always matters if you're crossing tax years. [00:06:25] Speaker 00: Our tax code is based on discrete tax periods. [00:06:29] Speaker 00: You don't have to go in to claim a refund for, let's say, 1990. [00:06:34] Speaker 00: I don't have to go in and show that there was never an underpayment in some prior year back to 1933. [00:06:43] Speaker 00: I address the tax year that is involved in the claim. [00:06:51] Speaker 00: And yes, if there are unassessed liabilities for that tax year, the government has the right to automatically offset them because I can't show that there was an overpayment of tax for that year. [00:07:04] Speaker 00: Here the claim is for 1986. [00:07:05] Speaker 00: It wasn't a mere typographical error. [00:07:09] Speaker 00: The government assessed the tax liability as a 1986 liability. [00:07:15] Speaker 00: They sent a demand for payment for a 1986 liability. [00:07:19] Speaker 00: the taxpayer paid the 1986 liability. [00:07:23] Speaker 00: The IRS records show the payment is a 1986 payment of a tax liability. [00:07:28] Speaker 00: 1985 was never assessed, never paid, never collected. [00:07:33] Speaker 00: We can't file a refund claim for 1985 because there's been no 1985 overpayment. [00:07:39] Speaker 00: There has been a 1986 overpayment where the government came in and assessed more than what was due for tax year 1986. [00:07:47] Speaker 03: But the closing agreement [00:07:49] Speaker 03: did contemplate an unassessed liability for 1985, right? [00:07:56] Speaker 00: The potential for one, yes ma'am. [00:07:58] Speaker 00: Not that there necessarily would be one. [00:08:00] Speaker 00: Remember that closing agreement covered 1982 or 83 through 1995. [00:08:06] Speaker 00: Many of those years had no liability. [00:08:09] Speaker 00: So the closing agreement contemplated that there could be adjustments in any of those years. [00:08:16] Speaker 00: There could be a resulting tax liability. [00:08:18] Speaker 00: Had there been losses carried forward to later years, then the loss produced a tax benefit in that later year that was inappropriate for the government to assess in that later year, up through 1995. [00:08:33] Speaker 04: Isn't there a body of law for typo cases? [00:08:37] Speaker 00: Yes, Your Honor, there is. [00:08:38] Speaker 00: But again, it relates to a typographical error on a document. [00:08:43] Speaker 00: The document can be construed to be corrected. [00:08:46] Speaker 00: But that's not just what we have here. [00:08:49] Speaker 00: We have a typographical error somewhere in the government's records that maybe started all of this. [00:08:54] Speaker 00: But then we have an actual acting on that where we have an assessment that is on the government's records, on the IRS's records. [00:09:03] Speaker 00: They have a demand for payment of that assessment for that year, 86. [00:09:09] Speaker 00: The taxpayer actually paid the money for 1986. [00:09:14] Speaker 00: The IRS records show that it is a 1986 tax payment. [00:09:19] Speaker 03: Didn't the testers pay those two different amounts with two different checks? [00:09:26] Speaker 03: They thought it was all for 1986. [00:09:27] Speaker 03: Why did they send two different checks? [00:09:30] Speaker 00: Because there were two separate bills, one for each bill. [00:09:34] Speaker 00: The bills were independently sent, two different bills for 1986, both of which were paid. [00:09:41] Speaker 00: and both of which indicated in 1986. [00:09:43] Speaker 03: Why didn't his taxpayer question why there were two different bills? [00:09:50] Speaker 00: How's he questioning it? [00:09:51] Speaker 00: He doesn't have a right to challenge that at that point. [00:09:54] Speaker 00: He got a bill and a demand for payment that says you're going to be subject to penalties and interest if this is not paid within 20 days. [00:09:59] Speaker 04: Isn't the garbage argument that the fact that you got the form, I'm seeing which one is not the actual assessment, but it's the pre-assessment [00:10:09] Speaker 04: Notice the 45-49A. [00:10:11] Speaker 04: Yes, sir. [00:10:12] Speaker 04: They say, well, you got the 45-49A. [00:10:15] Speaker 04: It clearly shows the numbers for 85 and the numbers for 86. [00:10:20] Speaker 00: And also, as we addressed in the brief, it also addresses with the cover letter and that these are the proposed assessments that if a liability is determined, you will be sent a bill for the correct amount. [00:10:33] Speaker 04: I understand that. [00:10:35] Speaker 00: And that's what he paid. [00:10:35] Speaker 04: My understanding is the assessments you actually got had the [00:10:39] Speaker 04: the 8,627 and the 12,000 numbers on them. [00:10:44] Speaker 04: They do. [00:10:44] Speaker 04: And so the government's argument was, well, that obviously means there was a typo in the assessment. [00:10:49] Speaker 04: That one assessment should have said 85 instead of 86. [00:10:55] Speaker 04: And all their internal documents show that it should have been 85 instead of 86. [00:11:00] Speaker 00: Well, they don't. [00:11:01] Speaker 00: Some of their internal documents do. [00:11:04] Speaker 04: So I think that's the basis of their typo argument. [00:11:07] Speaker 00: I understand that, but it is not strictly a correction of a typo. [00:11:11] Speaker 04: If this was an unpaid bill... No, but the typo mistake was that on the assessment you received, you received two statements for 86. [00:11:21] Speaker 04: If the one that simply said 85, that was the 8,627 number, it would jive exactly with the proposed assessment that you'd received earlier. [00:11:36] Speaker 00: But that correction to the billing notice would not have corrected the fact that the $8,000 was posted as a liability to the government's computers and internal records and that a demand for payment for 1986 was ongoing and collection action for 1986 was ongoing. [00:11:54] Speaker 00: It's not simply the correction of a typo. [00:11:56] Speaker 00: You have a whole series of events that resulted from that typo that have already taken place by the time the court attempted to correct it by just deeming it a typographical error. [00:12:06] Speaker 00: Those are very serious events. [00:12:10] Speaker 00: I can't file a claim for 1985 for a refund because there is no payment on the government's records. [00:12:15] Speaker 00: There has been no payment for 1985. [00:12:16] Speaker 00: I can file a claim for 1986 because it has been overpaid because of the erroneous assessment bill. [00:12:26] Speaker 03: Your income averaging argument that had you known it was for 1985, you could have applied some income averaging. [00:12:34] Speaker 03: There might have been some other deductions. [00:12:36] Speaker 03: And I understand that all you said was, it might be. [00:12:40] Speaker 03: Why wasn't more required at the summary judgment stage for you to at least raise that material dispute of fact with the court below? [00:12:51] Speaker 00: Because, put it this way, had the government pursued equitable recoupment, which they waived, had they pursued that, then we would have had the right and the opportunity to come in and say, wait, no. [00:13:06] Speaker 00: We have a defense to that proposed additional 1985 liability you want to offset it against. [00:13:12] Speaker 00: But that's not what they did. [00:13:14] Speaker 00: What they did is said, we simply want to keep it for 1986. [00:13:18] Speaker 00: And that's what the government allowed. [00:13:20] Speaker 00: The IRS records still reflect the payment as a 1986 payment. [00:13:24] Speaker 00: There is no 1985 payment against which we can file a refund claim. [00:13:29] Speaker 00: Sometimes the taxpayer fails because of the technicalities and the errors in this [00:13:36] Speaker 00: this process. [00:13:36] Speaker 00: And in TEFRA, that's very frequent. [00:13:38] Speaker 00: And in fact, in related cases, that happened in some of the later years, where my clients probably should have gotten refunds. [00:13:45] Speaker 00: But the technicalities on how you carry these suspended losses forward are extremely complex. [00:13:51] Speaker 00: And they lost many of their deductions. [00:13:54] Speaker 00: Here, the government has made a mistake. [00:13:57] Speaker 00: The taxpayer has been harmed, or at least theoretically harmed. [00:14:03] Speaker 00: And it's the law that should be followed. [00:14:06] Speaker 00: It's not an equitable issue here. [00:14:07] Speaker 00: And in fact, the court doesn't have the equitable powers to simply deem it to have happened for some other year. [00:14:16] Speaker 00: And it can't restore both parties to their original position. [00:14:19] Speaker 00: It can't put us back in a position to be able to pursue that refund claim. [00:14:25] Speaker 00: The government simply made a mistake. [00:14:26] Speaker 00: Yes, there's no question about that. [00:14:29] Speaker 00: We don't dispute that. [00:14:31] Speaker 00: But it's a mistake that has caused difficulties. [00:14:34] Speaker 00: It's a mistake that [00:14:36] Speaker 00: If we follow the law, they are simply stuck with. [00:14:41] Speaker 00: The taxpayer has now overpaid his 1986 tax liability. [00:14:45] Speaker 00: He should be able to get a recovery of that tax liability unless there is a law or doctrine that says he cannot. [00:14:51] Speaker 02: Let's hear from the government. [00:14:53] Speaker 02: I think you focused on the point we want to explore. [00:14:56] Speaker 00: Very good. [00:14:56] Speaker 00: Thank you, Your Honor. [00:14:57] Speaker 02: Thank you, Mr. Redding. [00:15:04] Speaker 02: Mr. Ellison, tell us why the government isn't stuck with its mistake. [00:15:09] Speaker 02: I'm sorry? [00:15:10] Speaker 02: Tell us why the government isn't stuck with its mistake. [00:15:13] Speaker 05: Well, the Court of Federal Claims concluded that the mistaken year on the assessment and the related documents was nothing more than a clerical error, that the amount mistakenly assessed for 86 was the increase in their liability for 85, and that the parties understood this at the time they made the payment in 2013. [00:15:32] Speaker 05: And the court also found that they weren't misled by the clerical error. [00:15:38] Speaker 05: And they really can't seriously dispute these conclusions. [00:15:40] Speaker 05: In fact, in their amended complaint, this is at page 30 of the appendix, they said, the $8,627 plus interest assessment made for 1986 was the amount the IRS had determined the habitants should have owed for 1985. [00:15:54] Speaker 03: But I mean, his point isn't absurd that the government [00:15:59] Speaker 03: The IRS is really strict, especially in this whole area to say that if you get it wrong, if you make an error, then you don't get out from under it. [00:16:13] Speaker 03: And you're stuck with it. [00:16:15] Speaker 03: Why isn't the IRS stuck with its own error? [00:16:20] Speaker 05: Well, the error here was in the assessment and related documents. [00:16:24] Speaker 05: And there isn't really any dispute that it was a clerical typographical error. [00:16:29] Speaker 05: As we stated in our brief, there are cases, we haven't been able to find any case that involved an error in the assessment, but there are cases where there's an error in the notice of assessment and demand for payment, which is the notice sent to the taxpayer, and there wasn't one here this time. [00:16:45] Speaker 03: But the IRS internal documents even still reflect this as a 1986 payment, right? [00:16:52] Speaker 05: Well, that's because [00:16:53] Speaker 05: When the error was made, then the documents created after that, including the notice of assessment, all reflected that error. [00:17:01] Speaker 05: And when they paid the tax, it was applied there. [00:17:03] Speaker 05: Because all that happened before the error. [00:17:05] Speaker 03: It wasn't just one document that had a typographical error. [00:17:08] Speaker 03: The IRS continued to look at and continue that error repeatedly, right? [00:17:15] Speaker 05: That's correct, Your Honor. [00:17:17] Speaker 05: But it was all sort of a cascade from the initial error. [00:17:21] Speaker 03: So we're supposed to forgive the IRS its errors, even though the IRS doesn't forgive taxpayers their errors. [00:17:27] Speaker 05: Well, it all depends on the nature of the error. [00:17:30] Speaker 05: If all this is a declarable error, and there are cases that say if there's an error, a technical error in the notice of assessment, that as long as the taxpayer is not misled, that we can ignore the error and the notice of assessment and assessment are still valid. [00:17:50] Speaker 05: the planned investment case in the Sixth Circuit and the Sage case in the Sixth Circuit. [00:17:54] Speaker 03: Right, but at summary judgment, the taxpayer said it was misled and it felt that the taxpayer believed that they were paying both of these amounts for 1986 because that's what you assessed them for. [00:18:11] Speaker 03: And whether you have to have an assessment or not doesn't change the fact that the taxpayer [00:18:16] Speaker 03: gets an assessment for 1986, and pays the assessed amount for 1986. [00:18:21] Speaker 05: But it was the amount which they were well aware because it was exactly the same amount which the IRS had already informed them on the form 4549 before the assessment that they were going to owe for 1985. [00:18:32] Speaker 05: So this is why the court found they weren't assessed. [00:18:35] Speaker 03: Why couldn't they just as reasonably have believed that the first form was an error? [00:18:43] Speaker 03: and that the amounts were all for 1986, and that the calculations the IRS did the first time were not correct, because when the actual assessment came out, they were different. [00:18:54] Speaker 05: Well, the one that they got, all it had was a number. [00:18:58] Speaker 05: The first one actually laid out the computation and made it quite clear. [00:19:03] Speaker 05: And they were aware that they claimed deductions in all three of these years, that under their closing agreement, [00:19:10] Speaker 05: their deductions were going to be limited by their amount at risk. [00:19:14] Speaker 05: And they were aware that the amount at risk all got used up in 1983. [00:19:18] Speaker 05: And that's where they were going to have an income tax liability in 84, 85, and 86. [00:19:23] Speaker 03: What's your response to the fact that the court should not have resolved the question of whether there might have been income averaging or other kinds of deductions for 1985 had they known they were paying something for 1985? [00:19:39] Speaker 05: They may have, even if you thought that at the time they paid an amount, which they were well aware that they owed, that they didn't know which year it was for, once we got to court, because one of the grounds that the government argued and that the court agreed with, and this is apart from the typographical error, this is sort of the court also found, okay, even if we assume that because there was no assessment for 85, [00:20:08] Speaker 05: and you can't deem it, even if there was no assessment for 85, they paid an amount which was the liability for 85. [00:20:15] Speaker 05: So now we can look and see what's their liability for 85. [00:20:19] Speaker 05: If the amount they paid is no more than the correct liability, then they don't get a refund. [00:20:26] Speaker 03: But that's what I'm trying to understand. [00:20:28] Speaker 03: How do we know that that was the correct liability? [00:20:32] Speaker 05: Well, it was the amount determined by the IRS under the party's closing agreement. [00:20:38] Speaker 05: Once there was an issue, is that correct liability? [00:20:42] Speaker 05: It was up to the taxpayer. [00:20:43] Speaker 05: The taxpayer could argue that there was a problem with it. [00:20:46] Speaker 03: I thought that's what they were arguing to the lower court. [00:20:50] Speaker 05: Well, they argued it might be wrong. [00:20:52] Speaker 05: They never pointed to any particular error and said, here's the right amount. [00:20:55] Speaker 05: In fact, the only specific error that they raised was, oh, well, we were entitled to income averaging. [00:21:03] Speaker 05: But as the court said in three of its opinion, [00:21:07] Speaker 05: To do income averaging, you need to know the three prior years. [00:21:12] Speaker 05: There's no evidence in the record about what their income was in 82, so they can't show that they're entitled to income averaging. [00:21:19] Speaker 03: But this was a motion for summary judgment by the IRS, so why would they have had to put that evidence in at that summary judgment stage? [00:21:30] Speaker 05: It's their duty to show that they're entitled to a refund, so their burden would be to show what the correct amount of the tax liability would be and the amount of what the refund was. [00:21:40] Speaker 05: At summary judgment? [00:21:41] Speaker 03: Oh, certainly. [00:21:41] Speaker 03: In response to your summary judgment? [00:21:43] Speaker 05: Yes. [00:21:47] Speaker 03: Why wouldn't they have the opportunity to have that issue tried? [00:21:52] Speaker 05: They would first have to show that there was an issue of fact. [00:21:55] Speaker 03: So you're saying that if the government seeks summary judgment, they essentially have to put all of their trial evidence in to oppose summary judgment? [00:22:02] Speaker 05: No, they'd have to first show that there is a genuine issue of material fact for trial. [00:22:08] Speaker 03: And that's what I'm trying to decide. [00:22:11] Speaker 03: So you're saying to show there's a genuine issue of material fact, they have to put all their proof in on that material fact? [00:22:17] Speaker 05: No. [00:22:17] Speaker 05: Well, for the income averaging, [00:22:21] Speaker 05: What their evidence would be would be they'd have to put in the evidence to show here's what the liabilities were in the prior year with their tax liabilities. [00:22:29] Speaker 04: Was that information available to them? [00:22:31] Speaker 04: Had they chosen to put it in? [00:22:35] Speaker 04: Did they know the 82 numbers? [00:22:37] Speaker 05: Well, they apparently, as I understand it, they no longer had their 1982 tax return, which is where you would start from determining it. [00:22:55] Speaker 03: It's a strange approach to summary judgment. [00:22:58] Speaker 03: I mean, I could see if there were cross motions for summary judgment. [00:23:02] Speaker 03: But this is the government's motion for summary judgment. [00:23:04] Speaker 05: Well, the case was on cross motions. [00:23:05] Speaker 05: But I take your point that the government can't prevail unless we show there's an absence of genuine issue material fact. [00:23:12] Speaker 05: But we put in the evidence. [00:23:13] Speaker 05: We showed here's how the IRS calculated this. [00:23:17] Speaker 05: And they didn't dispute the calculation under them to say we could use income averaging. [00:23:23] Speaker 05: They would have to put in some evidence. [00:23:26] Speaker 05: They would have to put in evidence to show that income averaging would make a difference, which means they'd have to show the amounts of those prior years. [00:23:37] Speaker 02: So you're saying that there should, in fact, here, the Court of Federal Claims say this is obviously a typographical error. [00:23:47] Speaker 02: Pay up, forget it. [00:23:48] Speaker 02: This is not something to litigate. [00:23:51] Speaker 02: Are we to then [00:23:53] Speaker 02: accept or perhaps endorse that the service should be benevolent to typographical errors by taxpayers since their own errors are correctable on summary judgment? [00:24:11] Speaker 05: Well, the critical point here is, as the court found and as the cases I've cited say, is if there's a notice that has a technical error, [00:24:22] Speaker 05: and the taxpayer isn't misled by anything, then it can be deemed corrected. [00:24:28] Speaker 05: So I think if there was a notion of turning this around and applying it to... How do we get around the misled issue? [00:24:36] Speaker 04: That seems to me to be central. [00:24:37] Speaker 04: Was this taxpayer misled? [00:24:40] Speaker 04: And Judge Breggart seems to say, no, they couldn't have been misled. [00:24:45] Speaker 04: Are they arguing at a summary judgment stage that they were misled? [00:24:51] Speaker 05: But the only things, they can't just say they've misled. [00:24:55] Speaker 05: They've got to say what they were misled about. [00:24:56] Speaker 05: And all they've really said is this notion of income averaging or that it might be incorrect. [00:25:01] Speaker 05: Let me just say that it seems to us that there isn't any genuine issue of fact that they weren't misled. [00:25:07] Speaker 05: But if there was a genuine issue of fact that they were misled. [00:25:12] Speaker 04: That's based on the 45-49? [00:25:14] Speaker 05: That's exactly right, which is what the court below relied on. [00:25:19] Speaker 05: But if you thought that was a factual issue, that shouldn't have been decided on summary judgment, we can still go to the court's second ground for decision, which is you can't get a refund of a tax you pay, even if there wasn't an assessment, as long as you paid it before the statute of limitations expired. [00:25:36] Speaker 05: Then the court found that under their closing agreement, and there's where the TEFRA provisions come in. [00:25:42] Speaker 04: That requires the second closing agreement to trump the first for the timing, correct? [00:25:50] Speaker 04: Well, our position is that... Am I right? [00:25:52] Speaker 04: I mean, in order to get to that second argument you're making, you have to have the second agreement trump the first agreement? [00:25:58] Speaker 05: I'd like to phrase it a little differently because our position is that the first one doesn't affect it. [00:26:03] Speaker 05: Our position is that the first one is the one you look at. [00:26:06] Speaker 05: I mean, the second one, I'm sorry, the individual closing agreement for several different reasons. [00:26:11] Speaker 05: First is that the first closing agreement didn't purport to convert [00:26:17] Speaker 05: the Habonyx partnership items into non-partnership items. [00:26:21] Speaker 05: All it addressed was the first level partnership, Wilderness Village, that was a partner in the Lone Wolf-Wickway-Greenberg partnership. [00:26:30] Speaker 04: Does that shift of the partnership assets automatically affect the Habonyx? [00:26:34] Speaker 05: No, all that does is it makes it on Wilderness Village's return. [00:26:39] Speaker 05: Now, the items that flowed through to Wilderness Village, those are no longer [00:26:46] Speaker 05: the partnership items from LVM. [00:26:47] Speaker 05: Now they're non-partnership items for wilderness drilling. [00:26:50] Speaker 03: But there's plenty of case law that says that the individual returns flow from those partnership items. [00:26:57] Speaker 03: And so I think that Judge Clevenger is correct. [00:27:00] Speaker 03: We would have to conclude that the second agreement overrides the first to find that the statute of limitations had not run, right? [00:27:09] Speaker 05: Well, no, because [00:27:11] Speaker 05: because you have to look at what the terms of the first one was, because we're not just talking about what's flowing through, we're talking about the specific notion in the statute that says where a partner makes a settlement agreement with the commissioner, that's when the partnership items of the partner are converted on partnership items. [00:27:33] Speaker 05: So what you need is a settlement agreement between the partner [00:27:38] Speaker 05: meaning Marla having it. [00:27:41] Speaker 03: Why don't you just argue that even if we have to show that the second one trumps the first, it does? [00:27:48] Speaker 03: I mean, isn't that the better argument? [00:27:54] Speaker 05: Well, it's another argument, so I'll switch to that one then. [00:27:59] Speaker 05: Actually, that is what the court found because it does say right in it that this agreement supersedes any prior agreement. [00:28:06] Speaker 04: But it wasn't any prior agreement by anyone? [00:28:10] Speaker 04: Well, it certainly has to supersede any prior agreement between the parties to this agreement. [00:28:14] Speaker 04: Isn't that what that means? [00:28:18] Speaker 05: Yes, I'm sorry. [00:28:19] Speaker 05: That is what it says. [00:28:20] Speaker 05: I'll read it just so we're clear. [00:28:22] Speaker 05: It says, this agreement supersedes any prior agreement entered into between the taxpayers and the Internal Revenue Service. [00:28:28] Speaker 04: And they didn't have a prior agreement? [00:28:31] Speaker 05: Well, our position is that the taxpayers [00:28:34] Speaker 05: which is the Habernicks, they didn't have a prior agreement. [00:28:38] Speaker 05: Wilderness Village Partnership had a prior agreement. [00:28:43] Speaker 04: That's what the prior agreement does. [00:28:44] Speaker 04: Why does the prior agreement necessarily state exactly what the tax liabilities are for the Habernicks? [00:28:52] Speaker 05: Well, the prior agreement doesn't. [00:28:54] Speaker 05: All it does is it says, [00:28:59] Speaker 05: The taxpayer, meaning Wilderness Village, is entitled to claim its distribution partner. [00:29:04] Speaker 05: It also lists the taxpayer's Wilderness Village amount at risk. [00:29:08] Speaker 04: Well, my point is, why is the first agreement relevant at all to the Habernicks for purposes of statute of limitations? [00:29:15] Speaker 05: Well, that's our argument is that it's not. [00:29:18] Speaker 05: And then our secondary argument. [00:29:20] Speaker 04: Yeah, but if the second agreement comes into play, then hasn't the statute run? [00:29:26] Speaker 05: Well, no. [00:29:26] Speaker 05: The key on the statute is, [00:29:29] Speaker 05: If you think the first agreement, the wilderness village agreement, is the controlling one that converted the partnership items, then the payment, the key here was the payment before the assessment. [00:29:42] Speaker 05: We agree that if it's the controlling agreement and the second one doesn't matter, the payment was made more than one year after that. [00:29:50] Speaker 05: If it's the second one, the individual agreement entered into by the taxpayers in this case, [00:29:55] Speaker 05: then the payment was made within one year after that. [00:29:58] Speaker 04: And what's the consequences of being made within one year? [00:30:02] Speaker 05: As opposed to not. [00:30:06] Speaker 05: That when a taxpayer makes a payment of a tax, even where there's been no assessment, if the payment is made before the time for making the assessment, then he's not entitled to a refund. [00:30:19] Speaker 05: I mean, then he can argue the merits of the payment. [00:30:21] Speaker 05: If the payment was made [00:30:25] Speaker 05: after the time for assessment, then it's an amount that was collected by the IRS after the time for assessment, so it's illegally assessed or collected and is recoverable. [00:30:36] Speaker 05: It's under Section 6401 of the interior order. [00:30:38] Speaker 04: Say, for example, if we decide in this case that the second agreement is the agreement that we should look at, not the first agreement, because the first agreement was not between the taxpayer and the IRS. [00:30:51] Speaker 04: The second agreement says, [00:30:53] Speaker 04: This only amends agreements between me and the taxpayer, and there wasn't a previous one of those. [00:30:58] Speaker 04: So what are the consequences to this case for decisional purposes if the second agreement is the one that applies? [00:31:05] Speaker 05: Well, that would mean that their payment in 2000, I can't remember what month, but that their payment was made within the time for making the assessment. [00:31:16] Speaker 03: Right, so even if the assessment wasn't made. [00:31:18] Speaker 05: Even if the assessment wasn't made, which is [00:31:23] Speaker 05: Which is what would be the result if, for example, if the court held, you can't use this type of graphical error to get around it. [00:31:32] Speaker 05: Or if you held there was some factual issue there, well, this is still a legal question. [00:31:36] Speaker 05: Okay, even if for summary judgment you say the assessment isn't made, then we go to the question of, was the correct tax liability paid before the time for making the assessment? [00:31:46] Speaker 03: Right. [00:31:46] Speaker 03: But again, then we'd also have to conclude that you don't need an assessment to keep it. [00:31:52] Speaker 05: Well, because there's plenty of case law that says that, as long as the payment is before the time for assessment. [00:32:01] Speaker 04: And you say if the second agreement prevails, then the payment was made before the time for assessment? [00:32:06] Speaker 05: Yes. [00:32:07] Speaker 04: That cuts in your favor? [00:32:10] Speaker 05: Let me get the dates on here, just so instead of talking in the abstract. [00:32:15] Speaker 04: Maybe I'm just wrong, but my understanding was the taxpayer was arguing that the second agreement should prevail, not the first. [00:32:21] Speaker 05: No, they're arguing the first agreement, because the first one that was earlier in time, because then that will result in an earlier key date. [00:32:43] Speaker 03: I don't think there's any dispute that if the second agreement controls the payment was made within [00:32:48] Speaker 03: That's correct, Your Honor. [00:32:51] Speaker 03: But the taxpayer does dispute whether an assessment has to occur, right? [00:32:55] Speaker 03: Even though you say there's case law, we've never said that yet. [00:33:01] Speaker 05: Right? [00:33:02] Speaker 05: Oh, I think in the... Now I can't remember exactly how it came up. [00:33:06] Speaker 05: I think that probably in some of these cases, at least the court recognized that it didn't need to occur. [00:33:22] Speaker 03: No, we haven't expressly said that. [00:33:25] Speaker 03: Well, I think you haven't expressly said it. [00:33:27] Speaker 03: You didn't cite us any cases. [00:33:28] Speaker 03: I didn't find any cases. [00:33:30] Speaker 03: We haven't expressly said that. [00:33:31] Speaker 03: So it's not a frivolous argument for him to make, because there are some cases going the other way. [00:33:38] Speaker 03: I concede the bulk of the cases say you don't need an assessment to collect a tax. [00:33:47] Speaker 03: But there are cases that say the opposite, that assessment has to occur. [00:33:51] Speaker 05: I think a lot of the cases that say you need one are ones where it's because you couldn't make an assessment or collect it unless there was a notice of deficiency. [00:34:03] Speaker 05: In fact, that was the issue in this Court's Bush case, which we mentioned in our statement of the proceedings, that this case was held up pending that because their initial argument was [00:34:15] Speaker 05: None of these assessments were good because we needed a notice of deficiency of the court. [00:34:18] Speaker 05: No, because these were computational adjustments, we don't need a notice of deficiency. [00:34:24] Speaker 02: Okay. [00:34:26] Speaker 02: Okay. [00:34:26] Speaker 02: Okay to move on. [00:34:27] Speaker 02: Thank you, Mr. Allison. [00:34:32] Speaker 02: Mr. Redding. [00:34:38] Speaker 00: Your Honor, I need to clear something up. [00:34:39] Speaker 00: The question on the closing agreement, the effect of the closing agreement [00:34:46] Speaker 00: The statute under TEFRA says that when a partner in the government enter into a closing agreement, that agreement converts partnership items to non-partnership items as of that time. [00:34:58] Speaker 00: The first agreement did that for all partners in Wilderness Village. [00:35:06] Speaker 00: It was an agreement that converted partnership items to non-partnership items. [00:35:11] Speaker 00: The statute then says, [00:35:13] Speaker 00: that once that conversion takes place, the government has one year in which to make its assessment. [00:35:19] Speaker 00: It doesn't matter what the contents of the agreement were, even an agreement that there's no change to the partnership items like there was here. [00:35:28] Speaker 00: That conversion to non-partnership items starts the one year. [00:35:32] Speaker 03: The second agreement, incidentally... But the second agreement says that it overrides all other agreements, right? [00:35:39] Speaker 00: It does, but it can't reconvert partnership items to non-partnership items. [00:35:43] Speaker 00: There's nothing in the law that allows that. [00:35:45] Speaker 00: Once they're converted, they're converted. [00:35:48] Speaker 00: You're in a completely different procedural world at that point. [00:35:54] Speaker 00: And additionally, I'll go on and say that the question about who these are between, Marla Habernick signed both of those closing agreements. [00:36:02] Speaker 00: She was the partner who signed the closing agreement on behalf of Wilderness Village. [00:36:08] Speaker 03: But once there's conversion and it becomes a non-partnership item, there still has to be a calculation of amount, right? [00:36:15] Speaker 00: Yes, ma'am. [00:36:15] Speaker 00: No question about that. [00:36:17] Speaker 00: No doubt. [00:36:18] Speaker 00: But what it does is it gives the government one year to make that calculation and make its computational adjustment. [00:36:24] Speaker 00: Unless there's an agreement that... Extends the statute. [00:36:28] Speaker 00: The second agreement could have included an agreement that we're extending the statute of limitations to all prior converted partnership items. [00:36:36] Speaker 00: Or had there been partnership items that under the first agreement weren't adjusted and were adjusted in the second agreement, that agreement would be the one that converts the partnership items if there had been partnership items that weren't addressed by the first agreement. [00:36:53] Speaker 00: Here you can't go backwards on whether it's a partnership item or not. [00:36:58] Speaker 03: So what is the purpose of the second agreement then? [00:37:03] Speaker 00: The second agreement [00:37:07] Speaker 00: was a boots and suspenders process at that time, frankly. [00:37:13] Speaker 00: Whose boots and whose suspenders? [00:37:17] Speaker 00: Boots and suspenders for both the Hebronics. [00:37:20] Speaker 00: We requested that second closing agreement to ensure that we got the effect we wanted of the first agreement. [00:37:29] Speaker 04: The... Hasn't that cut against you? [00:37:33] Speaker 00: Pardon? [00:37:33] Speaker 04: Hasn't that cut against you? [00:37:35] Speaker 00: I don't think so, Your Honor. [00:37:36] Speaker 00: I think the law is what the law is. [00:37:39] Speaker 04: And... You asked for one that then said it supersedes another agreement that I also signed. [00:37:47] Speaker 00: As to any of the terms, any of the merits of the agreement, any of the specifics, that would be true. [00:37:54] Speaker 00: But it still doesn't convert things that were already converted. [00:37:58] Speaker 00: We could agree in the second agreement to change how those converted partnership items would be treated. [00:38:05] Speaker 00: But it would not be a partnership item conversion at that time. [00:38:09] Speaker 00: We might agree to change the way it's treated. [00:38:12] Speaker 00: But it was converted when the first agreement took place. [00:38:15] Speaker 00: There is not any case anywhere in our case law that says you can go backwards and make a nonpartnership item back into a partnership item so we can convert it again back to a nonpartnership item. [00:38:26] Speaker 00: There's just nothing in the law that does that. [00:38:34] Speaker 00: The question though, even beyond that, is why is this relevant? [00:38:37] Speaker 00: We talk about whether or not the payment was made before the statute of limitations expired. [00:38:44] Speaker 00: But now we are again throwing out the concept of discrete taxable years. [00:38:50] Speaker 00: No payment for 1985 was made. [00:38:53] Speaker 00: There's no payment on the records for 1985. [00:38:57] Speaker 00: So whether or not the 1985 statute was open is not even relevant to that. [00:39:03] Speaker 00: The payment that was made was for 1986. [00:39:06] Speaker 00: We're asking for a 1986 refund. [00:39:09] Speaker 00: The payment that was made for 1986, whether or not a 1985 unassessed liability could still be assessed would be irrelevant. [00:39:20] Speaker 03: Yeah, but if you have, I mean, the bulk of the case law seems to support the government's position that you don't need an assessment. [00:39:30] Speaker 00: Your Honor, that is true if you are talking about [00:39:32] Speaker 00: offsets within the same taxable period, which is not what we have here. [00:39:38] Speaker 00: There are no cases that do that where we are talking about a tax liability in one year and a refund claim in another. [00:39:45] Speaker 00: If that were the case, it would open up every prior taxable year of the taxpayer to be re-examined, re-audited, and new deficiencies asserted by the government that were never assessed in order to offset a year 2000 refund claim that could go back to 1970. [00:40:02] Speaker 00: That is not our law. [00:40:04] Speaker 00: Our tax law, with very few exceptions, is established on a discrete taxable year basis. [00:40:11] Speaker 00: We've discussed that in the brief. [00:40:12] Speaker 00: We go to where the authority is in the code for that. [00:40:15] Speaker 00: We've shown that not a single case that the government cites, do they cross taxable years on those principles. [00:40:22] Speaker 00: It just doesn't happen. [00:40:24] Speaker 00: The issue arises from the concept that for there to be an overpayment [00:40:30] Speaker 00: You must have paid more than your tax liability, whether or not it had been assessed for that year. [00:40:38] Speaker 00: This is a refund claim for 1986, not a refund claim for 1985. [00:40:42] Speaker 00: Had he made the payment as a payment for 1985, had it been posted to the 1985 account, it could not be recovered. [00:40:54] Speaker 00: I agree. [00:40:56] Speaker 00: That's not what happened. [00:40:57] Speaker 00: This is a 1986 payment. [00:40:59] Speaker 00: It's a 1986 assessment. [00:41:01] Speaker 00: And it is an overpayment for 1986. [00:41:04] Speaker 00: Are there principles under which the government could try to offset a 1985 liability? [00:41:11] Speaker 00: I think they might have had a colorable argument had they not waived equitable recoupment. [00:41:16] Speaker 00: That is a special provision grafted into the code and into the federal common law. [00:41:23] Speaker 00: But they waived it. [00:41:25] Speaker 00: For reasons I'm not going to try to argue here, because it was waived, I think we'd have a defense to it. [00:41:30] Speaker 00: a very good defense to it. [00:41:32] Speaker 00: But it is the only principle that I know in all my years of practicing tax law that would allow them to do that, to come in and offset an unassessed liability from one year against another year, or even an assessed liability from one year against another year. [00:41:51] Speaker 00: The general concept of offset is all within that same discrete taxable year. [00:41:59] Speaker 00: There are cases where they have penalties that could have been applied to a taxpayer for the same year that were huge that the government failed to assess, failed to assert. [00:42:08] Speaker 00: He comes in later with a million dollar plus, as I recall, refund claim for that year. [00:42:14] Speaker 00: The government comes and says, look, we have these payments, we have these huge penalties that should have been asserted back five years ago on this same taxable year. [00:42:25] Speaker 00: And even though the statute of limitations to assess those penalties has now run, we can offset them against your refund claim. [00:42:32] Speaker 00: And yes, I agree, they can. [00:42:35] Speaker 00: But that's not what's happening here. [00:42:37] Speaker 00: What's happening here is the government is trying to jump taxable years. [00:42:42] Speaker 00: And none of the principles they're relying on apply. [00:42:45] Speaker 02: Any more questions for Mr. Redd? [00:42:48] Speaker 02: Any more questions for Mr. Redd? [00:42:49] Speaker 02: Okay, I think we have the arguments. [00:42:51] Speaker 00: Thank you, Your Honor. [00:42:52] Speaker 00: May I make a comment unrelated to the case? [00:42:55] Speaker 02: Thank you. [00:42:55] Speaker 00: Thank you both. [00:42:57] Speaker 03: This is taken under submission. [00:42:58] Speaker 03: You just asked if you could make a comment unrelated to the case, since it's its last argument. [00:43:03] Speaker 00: I attended a seminar, I will, I attended a seminar just a couple of months ago on the new law that has replaced TEFRA. [00:43:11] Speaker 00: And you'll be trying TEFRA cases probably for ten years, but it's been replaced as of 1990, I mean as of 2017. [00:43:20] Speaker 00: Let me just say that you went from the frying pan to the fire [00:43:25] Speaker 00: Oh, geez. [00:43:26] Speaker 00: This new procedure of law is insane. [00:43:28] Speaker 00: It is probably not even constitutional. [00:43:31] Speaker 00: And I'm getting out. [00:43:32] Speaker 00: I'm retiring. [00:43:33] Speaker 00: I'm hunting. [00:43:33] Speaker 00: Can you leave on those circumstances? [00:43:37] Speaker 00: Because I'm smart enough to do so. [00:43:38] Speaker 04: What do you need to do when you ask for your skills as a litigant? [00:43:43] Speaker 00: Your Honor, I don't know how you can impose a tax liability. [00:43:47] Speaker 00: Question I asked at the end of the session, some of the people on the panel were drafters, were among the drafters of the law. [00:43:53] Speaker 00: You have a partnership that gets audited. [00:43:57] Speaker 00: When the audit is complete, they compute a phantom tax liability based on what the highest tax rates might have been and charge it to the partnership and indirectly to the partners of the partnership in the year when the audit is concluded. [00:44:12] Speaker 00: Not the people that were partners in the year that they took the deductions. [00:44:16] Speaker 00: And if that is challenged to appeals, it defers it on out and the final result is in it's going to be applied to the partners in that tax year. [00:44:25] Speaker 00: And if that goes to court, it's going to be 10 years later. [00:44:30] Speaker 00: How can you impose a tax liability on somebody who had nothing to do with... Okay, now you're getting into stuff that might come before us. [00:44:37] Speaker 00: It is going to come before you. [00:44:40] Speaker 03: But not by me, your honor.