Abelein et al. v. United States

After the Internal Revenue Service audited the comings,
goings and machinations involving cattle and sheep breeding tax shelter partnerships organized by Walter J. Hoyt III, it sent
out Notices of Final Partnership Administrative Adjustment
(FPAA) forms to Daniel Abelein and other investors whom it
considered to be partners. Abelein and numerous other investors
(hereafter collectively Abelein) then brought this action
against the United States on the basis that their confidential
tax return information had been improperly disclosed. See 26
U.S.C. § 7431(a)(1). The district court granted summary judgment
to the United States, and Abelein appealed. We affirm.

BACKGROUND
Walter J. Hoyt III formed approximately 130 partnerships
between 1971 and 1996, about 84 of which are the subject of
this lawsuit. Investigations by the IRS and other government
agencies revealed that the Hoyt partnerships bought interests
in livestock that did not exist, thereby fraudulently reporting
tax deductions and other items to which they were not entitled.
In February 2001, Hoyt was convicted of mail fraud,
bankruptcy fraud, and money laundering arising out of his
activities. Abelein was, or had been, a partner in one or more
of those partnerships.

When the IRS began its audits, it discovered that the partnership
records were unreliable to say the least. It was
exceedingly difficult to know who was actually a partner at
any given point. For example, the IRS decided that it could
not rely upon the normal documents - for example, the
Schedule K-1 - in making decisions about who was or who
was not a partner. Various discrepancies, which need not be
detailed here, led the IRS agents to that conclusion. Indeed,
Hoyt himself told agents that he moved loyal partners about
at will and treated some people who were no longer contributing
as if they had never been partners. This was so that his
loyalists would not have tax liabilities arising out of the minor
difficulty that the cattle or sheep supposedly owned by some
of the partnerships were phantoms.

Faced with that dilemma, the IRS decided that it was not
able to accurately ascertain at the partnership level the identities
of those who were the real investors in any given partnership
at any given time, although it could determine that
certain individuals had been members of a partnership at one
time. It, therefore, adopted an approach that has been dubbed
"once a partner, always a partner," unless you prove otherwise.

Having so cracked the dulcarnon with which it was faced,
the IRS sent out the FPAAs for each partnership for the tax
years 1994, 1995, and 1996, and listed the "partners" and
their allocable percentages of the various partnership items on
those FPAAs. In effect, that amounted to the partners' capital
account figures as nearly as the IRS could determine them.

Principally, Abelein asserts that many people listed as partners
really were not and, therefore, they should not have
received the notices and, therefore, the IRS must have violated
the strictures of 26 U.S.C. § 6103 when it sent those
notices out. The district court granted judgment against
Abelein, and this appeal followed.

DISCUSSION
There is no doubt that tax return information was disclosed
by the IRS when it sent out the FPAAs. Nor is there any doubt that if the disclosure was unauthorized, the United States may
have to answer in damages. See 26 U.S.C. § 7431(a), (c); cf.
26 U.S.C. § 7431(b) (exceptions). Thus, the first question is
whether the disclosure was authorized. If it was, we need not
consider whether the disclosure was erroneous but made in
good faith. See id. § 7431(b). In fact, the district court did not
answer the good faith question. With that in mind, we begin
our periplus of that enisled wilderness known as the Internal
Revenue Code.

[1] The general rule is that "except as authorized by this
title . . . no officer or employee of the United States . . . shall
disclose any return or return information obtained by him in
any manner in connection with his service as such an officer
or an employee or otherwise or under the provisions of this
section." Id. § 6103(a). Well, fine; the general rule is clear
enough, but the first phrase requires us to move on to see if
there is an exception which applies here. As we shall show,
there is. The statute provides that:

A return or return information may be disclosed in
a Federal or State judicial or administrative proceeding
pertaining to tax administration, but only -

(A) if the taxpayer is a party to the proceeding, or
the proceeding arose out of, or in connection with,
determining the taxpayer's civil or criminal liability,
or the collection of such civil liability, in respect of
any tax imposed under this title;

(B) if the treatment of an item reflected on such
return is directly related to the resolution of an issue
in the proceeding;

(C) if such return or return information directly
relates to a transactional relationship between a person
who is a party to the proceeding and the taxpayer

which directly affects the resolution of an issue in
the proceeding; or . . . .

26 U.S.C. § 6103(h)(4). This presents us with two major1
questions: (1) is the procedure which led to the FPAAs an
"administrative proceeding," and (2) was Abelein a party to
the proceeding?

A. The Disclosure Was in an Administrative Proceeding

Abelein argues that this was an audit and under § 6103
audits are not "administrative proceedings." The argument has
some plausibility; it has split the circuits. The Tenth Circuit
has opined that audits are administrative proceedings. See
First W. Gov't Sec., Inc. v. United States, 796 F.2d 356, 360-
61 (10th Cir. 1986); see also Norman E. Duquette, Inc. v.
Comm'r, 110 F. Supp. 2d 16, 20 (D.D.C. 2000). The Fourth
Circuit has issued a contrary opinion. See Mallas v. United
States, 993 F.2d 1111, 1122-24 (4th Cir. 1993). We have had
the opportunity to decide cases which have subtended that
issue, but have done so on other grounds. We have looked,
instead, to the 26 U.S.C. § 7431(b)(1) "good faith" exception.
See Ingham, 167 F.3d at 1245-46; McDonald v. United States,
102 F.3d 1009, 1011 (9th Cir. 1996). In another context, we
have referred to audits as administrative proceedings. See
Delpit v. Comm'r, 18 F.3d 768, 770, 772 & n.3 (9th Cir.
1994). Thus, it is a rather interesting debate, but we need not
engage in the full scale battle over whether "audits" are
always administrative proceedings. We need only address
ourselves to the skirmish before us - was the proceeding at
hand an administrative proceeding? We think it pellucid that
it was.

[2] The proceeding we deal with here was the very special
kind that Congress created for, among other things, the puring that all partners, including indirect partners, have the right
to participate in any phase of the administrative proceeding).

All of the above being so, it would be at least middling
strange were we to hold that issuance of the FPAA was not
part of an administrative proceeding within the meaning of 26
U.S.C. § 6103(h)(4). It would overlook "the normal rule of
statutory construction that identical words used in different
parts of the same act are intended to have the same meaning."
Comm'r v. Lundy, 516 U.S. 235, 250, 116 S. Ct. 647, 655,
133 L. Ed. 2d 611 (1996) (internal quotation marks omitted);
see also Montero-Martinez v. Ashcroft, 277 F.3d 1137, 1142
(9th Cir. 2002). Applying that rule here would not lead to an
"absurd or glaringly unjust result." Taylor v. Dir., Office of
Workers Comp. Programs, 201 F.3d 1234, 1240 (9th Cir.
2000). In fact, the contrary is the case. Were we to hold that
26 U.S.C. § 6223(a)(2) directs the sending of an FPAA notice
at the close of the "administrative proceeding," but that the
disclosure is improper because it is not in an "administrative
proceeding" under 26 U.S.C. § 6103(h)(4), that would suggest
that either we, or the tax laws, are even more anserine than
some commentators have suggested.

[4] In fine, the FPAAs were sent out as part of an administrative
proceeding within the meaning of 26 U.S.C.
§ 6103(h)(4).

B. Abelein Was a Party

Well, says Abelein, even if it was an administrative proceeding,
some of the individuals listed as partners really
should not have been. Thus, Abelein argues, they were not
"parties" to the proceeding and 26 U.S.C. § 6103(h)(4)
requires that they be parties. The argument is based on the
thought that if it turns out that a person was not a partner, he
could not have been a party to the proceeding that decided
that question in the first place. We do not agree; indeed, the
argument is a bit of a non sequitur.

[5] Under 26 U.S.C. § 6231, a person need not be a "partner"
as such; he need only be one whose "tax liability under
subtitle A is determined in whole or in part by taking into
account directly or indirectly partnership items of the partnership."
If the IRS has included a person as a participant at the
partnership level, he is surely in danger of having his tax liability
affected, especially if, in the long run, the IRS turns out
to be correct. Surely, he should have a right to participate in
the proceeding; surely he does. Similarly, a person who the
IRS decides is a partner and allocates partnership items to is
certainly a party to that proceeding, whether he ultimately
turns out to be a partner or not. How could the IRS possibly
include a person at the partnership level, and still fail to give
notice to him, or to someone entitled to receive that notice on
his behalf?

[6] Nor are we persuaded by Abelein's argument that we
should look behind the inclusion itself and then ask whether
the IRS properly determined that the person was a partner.
The statutes simply do not make any provision for that
approach. Still, Abelein insists that our decision in Scar v.
Commissioner, 814 F.2d 1363 (9th Cir. 1987) requires us to
take it. However, Scar dealt with a situation where the IRS
had blatantly erred by issuing a notice referring to a partnership
in which the Scars had never had any interest or connection.
Id. at 1364-65. On those facts, we decided that we would
consider whether the IRS ever did make a determination
about the Scars' own tax deficiency. Id. at 1367. That is not
contrary to what we decide here. Indeed, Scar is hardly apposite.
In the first place, Scar did not purport to say that an individual
who was sent an inappropriate notice was not a party
to the proceeding which ensued. In the second place, Scar
strictly limited itself to a case where the notice and its attachments
"make it patently obvious that no determination has in
fact been made." Id. at 1367. Were there any doubt about that
in the opinion itself, we have since made the limitation perfectly
clear. See Clapp v. Comm'r, 875 F.2d 1396, 1400-02
(9th Cir. 1989). Whatever one might say about the IRS's sending of the FPAAs in this case, one cannot say that it is
"patently obvious" that the IRS did not make any underlying
determination about the partnerships and their membership.

CONCLUSION
[7] We are not entirely oblivious to Abelein's ululation
about the IRS's revelation of capital account information to
those who might turn out to have been non-partners. That
could have the effect of unnecessarily revealing some private
tax information. Nevertheless, because the information was
disclosed on the FPAAs arising out of a TEFRA partnership
level administrative proceeding, its revelation was authorized
by 26 U.S.C. § 6103(h)(4), and no action can be maintained
against the United States pursuant to 26 U.S.C. § 7431.

In so holding, we are not gallied by the possibility that the
IRS could, in some conceivable case, misuse the TEFRA proceeding
for some improper purpose. Should it do so, the putative
partners are not entirely without a remedy. Among other
things, upon achieving victory and demonstrating the impropriety
of the government's position, the taxpayers could well
be entitled to recover costs and attorney's fees. See 26 U.S.C.
§ 7430. These days, that itself is not an inconsiderable mulct
of one's adversaries and can be enough to give budding
wrongdoers pause.

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