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UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
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No. 00-3636
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Keywords: automatic stay, actions by debtor
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May 1, 2001
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RHONE-POULENC SURFACTANTS AND SPECIALTIES, L.P., GAF
CHEMICALS CORPORATION, A PARTNER OTHER THAN THE TAX MATTERS PARTNER,
APPELLANT,
v.
COMMISSIONER OF INTERNAL REVENUE, APPELLEE
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On Appeal From the United States Tax Court (Tax Court
Docket No. 2125-98) (114 T.C. No. 34)
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William F. Nelson, Esq. (argued) Gerald A. Kafka, Esq.
J. Bradford Anwyll, Esq. McKee Nelson Ernst & Young, Llp 1919 M
Street, N.W., Suite 800 Washington, DC 20036 Attorneys for Appellant
Charles F. Marshall, Esq. (argued) Paula M. Junghans, Esq. Richard
Farber, Esq. Tax Division Department of Justice P.O. Box 502 Washington,
DC 20044 Attorneys for Appellee
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Before: Roth and Barry, Circuit Judges SHADUR,*fn1
District Judge
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The opinion of the court was delivered by: Shadur,
District Judge
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Argued January 19, 2001
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OPINION OF THE COURT
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Taxpayer GAF Chemicals Corporation ("GAF "),
a subsidiary of GAF Corporation and a purported partner in the putative
partnership Rhone-Poulenc Surfactants and Specialties, L.P.
("Rhone-Poulenc"),filed a petition for readjustment of
partnership items in the United States Tax Court under 26 U.S.C.
S6226(b).2 GAF filed its petition in response to a notice of final
partnership administrative adjustment ("FPAA") issued by the
Commissioner of Internal Revenue ("Commissioner") to Rhone-Poulenc
pursuant to Section 6223(a)--an FPAA that treated a transfer of assets
from GAF to Rhone-Poulenc as a taxable sale rather than as a nontaxable
contribution in exchange for an interest in the partnership.
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This appeal stems from the Tax Court's denial of GAF's
motion for summary judgment on the ground that the Commissioner's
assessment is time-barred. Although that order was not final, the Tax
Court certified it for interlocutory appeal under Section 7482(a)(2)(A),
and this Court granted GAF's petition for permission to appeal.
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For the reasons stated in this opinion, we find that
GAF's petition for permission to appeal was improvidently granted. Upon
our further consideration of the issues presented for decision, we hold
that Tax Court rulings on certain unresolved issues that Court has
reserved for the future constitute a precondition to the ripeness of the
issues certified by that Court, so that we have essentially been
presented with a request for an advisory opinion forbidden by Article
III of the Constitution.
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Background
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In 1990 GAF and Alkaril Chemicals, Inc. ("Alkaril"),
another subsidiary of GAF Corporation, transferred certain business
assets to Rhone-Poulenc. About September 17, 1991 Rhone-Poulenc filed a
federal partnership information return that characterized GAF's transfer
to it as a contribution of property to the partnership in exchange for
an interest in the partnership. Almost simultaneously (the
record-indicated date is September 16, 1991) GAF Corporation filed a
consolidated corporate federal income tax return for itself and all of
its affiliated subsidiary corporations (including GAF).
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On September 12, 1997 the Commissioner issued Rhone-
Poulenc an FPAA notice that treated the transfer as a taxable sale
rather than as an exchange for a partnership interest entitled to
non-recognition treatment under Section 721(a). It followed from the
FPAA's treatment of the transfer as a taxable sale that GAF
Corporation's consolidated return had understated its gross income by
25%. In response to the FPAA, GAF filed a petition in the Tax Court for
a readjustment of partnership items.
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GAF brought that petition pursuant to the unified
partnership audit and litigation procedures of the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA"). As Boyd v. Comm'r, 101
T.C. 365, 368-69 (1993) (internal citations and quotation marks omitted)
explains:
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The TEFRA partnership provisions were enacted in 1982
in response to the mushrooming administrative problems experienced by
the Internal Revenue Service in auditing returns of partnerships,
particularly tax shelter partnerships with numerous partners. Under
these procedures, the tax treatment of partnership items is determined
at the partnership level in a unified partnership proceeding rather than
in separate proceedings for each partner. As we stated in an earlier
case interpreting the TEFRA partnership provisions:
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By enacting the partnership audit and litigation
procedures, Congress provided a method for uniformly adjusting items of
partnership income, loss, deduction, or credit that affect each partner.
Congress decided that no longer would a partner's tax liability be
determined uniquely but the tax treatment of any partnership item would
be determined at the partnership level.
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Although it is the tax matters partner that most often
files a petition for readjustment under TEFRA, if it does not do so
within 90 days any notice partner may file a petition within 60 days
thereafter (Section 6226(b)(1)).
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Before the Tax Court the Commissioner argued on several
alternative grounds that the transfer did not qualify for
non-recognition treatment:
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1. There was no partnership.
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2. If instead there were a partnership, the transfer
was not to it but to a related party.
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3. If there were indeed a partnership and the transfer
were in fact made to it, the transfer was not in exchange for an
interest in the partnership but was rather a sale to the partnership.
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In those terms GAF would have had to surmount all three
hurdles to prevail.
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On September 9, 1998 GAF moved for summary judgment on
the separate ground that the assessment is time-barred. Its motion
asserted:
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1. Section 6501(a)'s general limitations period is
inapplicable to partnership items because Section 6629(a) sets forth a
separate and exclusive three-year statute of limitations on assessments
attributable to partnership items. Because more than three years had
elapsed since GAF Corporation had filed its consolidated return, the
assessment was untimely.
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2. Even if Section 6501(a) were held to provide the
applicable limitations period, the issuance of the FPAA did not suspend
the running of that period, and it too has expired. Again that would
render the assessment untimely.
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3. Section 6501(e), which provides a six-year statute
of limitations where items in excess of 25% of a taxpayer's gross income
are omitted from the face of a return, is inapplicable because the items
at issue were disclosed on the consolidated return.
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In response the Commissioner urged that the general
limitation on assessments set out in Section 6501(a) governs all taxes
assessed under the Code. As for Section 6229(a), the Commissioner
contended that it does not provide a separate limitations period for
partnership items but rather describes an "add on" period that
in some circumstances extends the period prescribed by Section 6501. As
the Commissioner would have it, the normal three-year period set forth
in Section 6501(a) had been extended to six years under Section 6501(e)
because, contrary to GAF 's assertion, the disputed income was not
disclosed on the return. And the Commissioner further argued that under
Section 6229(d) the issuance of the FPAA had suspended the limitations
period prescribed in Section 6501--in this case the six-year period in
Section 6501(e) to which Section 6501(a) points.
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In a sharply divided opinion, a majority of the judges
on the Tax Court (sitting en banc) found the Commissioner's reading of
the Code provisions more persuasive and denied GAF 's motion for summary
judgment. In particular , the majority concluded that the limitations
period set forth in Section 6501(a) applies to partnership items. As for
the Section 6229(a) reference to a three-year period, the Court read
that provision as setting a minimum limitations period that "may
expire before or after the section 6501 maximum period."
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Next the Tax Court addressed GAF's argument that even
if the six-year limitation specified in Section 6501(e) applied, that
period had expired as well. In that respect GAF argued that by its terms
Section 6229(d) suspends only the running of the three year period in
Section 6229(a), not the limitations period contained in Section
6501(a). On that premise, even if the Tax Court were to find that
Section 6501(a) dictated the application of the six-year limitations
period in Section 6501(e), that six-year period had already expired
about September 15, 1997 (six years after the date GAF Corporation had
filed its r eturn).
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Again agreeing with the Commissioner's different
reading of the Code, the Tax Court determined that Section 6229(d) does
suspend the running of the limitations period prescribed by Section 6501
once an FPAA is issued. If Section 6501(e) were applicable, then, that
would render timely the Commissioner's issuance of the FP AA within six
years of the date of the partnership retur n.
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With the Tax Court having made those determinations,
the only issue remaining for decision ther e was whether Section 6501(e)
in fact applies to this case. In that regard the Tax Court found genuine
issues of fact as to whether or not the return had adequately disclosed
the existence of the omitted income, precluding summary judgment.
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On September 20, 2000 the Tax Court granted GAF 's
Motion for Certification of Question for Interlocutory Appeal pursuant
to Section 7482(a). As stated earlier , a panel of this Court granted
GAF 's petition for per mission to appeal on October 12.
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Standing
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Before we turn directly to the substantive discussion
that controls the disposition of this appeal, we must travel a byway
that might have diverted us from r eaching that substantive issue. That
potential diversion stems fr om a post-appeal development that has
raised a possible issue of standing on the part of the taxpayer.
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By letter dated January 11, 2001 counsel for GAF
informed us that G-I Holdings, Inc., the successor to GAF Corporation
through internal merger , has filed a voluntary petition in the
Bankruptcy Court for the District of New Jersey seeking relief under
chapter 11 of the Bankruptcy Code. That led to the filing of two motions
befor e oral argument.
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First both sides asked that the case be taken of f of
the Court's calendar because under 11 U.S.C. S362 ("Bankruptcy
S362") G-I Holding's filing had assertedly operated to stay this
appeal. Then the parties thought better of that somewhat Pavlovian (and
entir ely erroneous) notion: the Commissioner's later-filed Motion To
Dismiss GAF Chemicals Corp. as a Party and GAF 's Opposition to that
motion (as to which more below) reversed course on that issue.
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We determined before oral ar gument that Bankruptcy
S362 does not in fact stay the appeal, for that provision stays only
actions or proceedings "against the debtor" (emphasis added).
Here the proceeding before the Tax Court was brought by the debtor (or,
more accurately, by its corporate predecessor). As is true of all other
types of litigation brought by debtors that are under the protection of
the bankruptcy courts (see most recently Aiello v. Providan Fin. Corp.,
___ F.3d ___, 2001 WL 101533, at *2 (7th Cir. Feb. 6), citing other
cases, including our own Maritime Elec. Co. v. United Jersey Bank, 959 F
.2d 1194, 1204-05 (3d Cir. 1991), two of the thr ee cases that have
addressed the same question in the context of appeals by a debtor from
Tax Court proceedings initiated by that debtor (Roberts v. Comm'r, 175
F.3d 889, 893-96 (11th Cir. 1999) and Freeman v. Comm'r, 799 F .2d 1091
(5th Cir. 1986)(per curiam)) have held that Bankruptcy S362 does not
stay such appeals; contra, Delpit v. Comm'r , 18 F.3d 768, 771-73 (9th
Cir. 1994). We like the Eleventh Circuit find the Ninth Circuit's
position to be unpersuasive and out of sync with this Circuit's general
jurisprudence addressing Bankruptcy S362, and we too adopt the no-stay
view.
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With that threshold issue out of the way, the
Commissioner then also moved to dismiss GAF as a party to the
proceedings and to dismiss the appeal unless another party with standing
to litigate the same issue were to intervene within a reasonable time.
Under Section 6226(d)(1)(A) a partner is no longer treated as a party to
a TEFRA proceeding when its partnership items ar e converted to
non-partnership items by reason of certain events described in Section
6231 (see Section 6231(c)(2) and 6231(c)(1)(E)). On that score Treas.
Reg. S301.6231(c)-7T (found in 26 C.F.R.) provides that the effective
and efficient enforcement of the tax laws requir es that when a partner
is named as a debtor in a bankruptcy proceeding, its partnership items
must be treated as non-partnership items (see Computer Programs Lambda,
Ltd. v. Comm'r, 89 T.C. 198, 203 (1987), upholding and applying that
regulation).
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Accordingly the Commissioner's motion ur ged that even
if it were ultimately to be determined that the transfer of assets had
been in exchange for a partnership inter est, GAF 's partnership items
were converted to non-partnership items for tax purposes when G-I
Holdings filed its bankruptcy petition. That being so, the
Commissioner's position was that GAF no longer has an inter est in the
outcome and can no longer be a party to the action under Section
6226(d)(1)(A).
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But GAF has responded in part that in any event ACI,
Inc. ("ACI," formerly known as Alkaril) should be viewed as a
proper party to the case, so that it could take the place of GAF if the
latter were knocked out of this appeal. It will be recalled that Alkaril,
like GAF, had participated in the transaction challenged by the
Commissioner's FP AA--the transfer of assets to Rhone-Poulenc,
purportedly in exchange for an interest in the partnership. G-I
Holdings' officer Peter Ganz has provided an affidavit stating that
although ACI is a direct subsidiary of G-I Holdings, it did not petition
for bankruptcy and is not a party to G-I Holdings' bankruptcy
proceeding. So, GAF says, ACI has tax consequences flowing from the
adjustments to partnership items contained in the FPAA and still has
standing to litigate the case. After investigating the statements made
in the Ganz affidavit, and afterfinding no information to contradict
them or any other evidence calling into question ACI's status as a
proper party to the case,
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Commissioner has agreed that the appeal should go
forward.
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Apart from that, GAF also argues that it too remains a
proper party because of the potential applicability of Section
6229(f)(1):
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If before the expiration of the period otherwise
provided in this section for assessing any tax imposed by subtitle A
with respect to the partnership items of a partner for the partnership
taxable year, such items become nonpartnership items by reason of 1 or
more of the events described in subsection (b) of section 6231, the
period for assessing any tax imposed by subtitle A which is attributable
to such items (or any item affected by such items) shall not expir e
before the date which is 1 year after the date on which the items become
nonpartnership items.
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As GAF points out, that provision--extending the
limitations period beyond the time when a partnership item becomes a
nonpartnership item (as by a partner's bankruptcy filing)--kicks in only
if the conversion takes place before the Section 6229 limitations clock
runs out. That then poses the same limitations questions that we have
been asked to resolve in this interlocutory appeal to begin with.
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But as the next section of this opinion demonstrates,
any current resolution of those questions would run afoul of the
constitutional requirement of justiciability. Hence GAF 's continued
presence or non-presence in this litigation poses a problem of
circularity: To answer that question, we would first have to decide a
preliminary question that Article III forecloses from resolution at this
time.
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Fortunately there is no need to cut that Gor dian knot.
Treating the parties' most recentfilings as a stipulation that ACI may
be treated as a petitioner and appellant (substituting for GAF in those
capacities if need be), we hold that ACI has standing to proceed with
the appeal. And all of the events already described in the Background
section also apply to ACI, obviating any need to r esolve the issue of
GAF 's continued involvement. Nonetheless this opinion will continue to
refer to the appellant as GAF simply for ease of reference, because that
was the nomenclature used in the Tax Court below and throughout the
parties' briefs.
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Jurisdiction Over This Appeal
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We turn then to a look at the merits. Two issues have
been posed to us on this interlocutory appeal:
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1. whether the general limitations period set forth in
Section 6501 applies, or whether instead Section 6229(a) specifies a
separate and exclusive limitations period for assessments attributable
to partnership items; and
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2. whether Section 6229(d) suspended the running of the
limitations period set out in Section 6501(a) when the Commissioner
issued the FPAA to Rhone-Poulenc.
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But it became apparent to us on reading the parties'
briefs, and it has been reconfirmed on oral ar gument, that any current
resolution of those issues would be premature-- indeed, neither question
may ever have to be answer ed in this litigation. That renders those
issues non-justiciable at this time.
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In that regard, such cases as T ravelers Ins. Co. v.
Obusek, 72 F.3d 1148, 1153 (3d Cir . 1995), quoting Armstrong World
Indus., Inc. v. Adams, 961 F.2d 405, 410 (3d Cir. 1992), set forth the
well-settled principle:
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Of course, Article III, Section II of the Constitution
of the United States "limits federal jurisdiction to actual `cases'
and `controversies.' " This constitutional provision "stands
as a direct pr ohibition on the issuance of advisory opinions."
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Travelers, id. at 1154 (again quoting Armstrong, 961
F.2d at 411) goes on to state the relevant test for determining whether
an action satisfies Article III's case or controversy requirement in
these terms:
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We have previously noted that:
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[t]o satisfy Article III's case or controversy
requirement, an action must present (1) a legal controversy that is real
and not hypothetical, (2) a legal controversy that affects an individual
in a concrete manner so as to provide the factual predicate for reasoned
adjudication, and (3) a legal controversy so as to sharpen the issues
for judicial resolution.
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That this case involves not a final decision but an
interlocutory appeal does not itself pose a jurisdictional problem:
There are sometimes issues whose resolution will materially advance the
ultimate disposition of litigation and that, for appropriate
jurisprudential r easons, need not await the entry of a final judgment
(see, e.g., Abdullah v. American Airlines, Inc., 181 F.3d 363, 366 (3rd
Cir. 1999)). But in this instance the issues presented on appeal are
purely contingent: They will be reached only if the Tax Court finds (1)
that GAF has an interest in the partnership and (2) that the return did
not disclose the omitted income. Neither of those determinations has yet
been made, as the Tax Court itself has explicitly acknowledged.
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Because the necessity for any decision of the issues
sought to be tendered to us rests on those yet unresolved contingencies,
the issues posed fail to present a justiciable "case or
controversy." More than a half century ago the Supreme Court
reconfirmed that teaching in Alabama State Federation of Labor v.
McAdory, 325 U.S. 450, 461 (1945) (internal citations omitted):
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This Court is without power to give advisory opinions.
It has long been its considered practice not to decide abstract,
hypothetical or contingent questions.
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And that already firmly established concept has not
been eroded by time.
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At this juncture the Tax Court has not chosen to decide
whether the transaction at issue was one under which GAF acquired an
interest in the putative partnership and thus whether the Code's
partnership provisions even apply to GAF. Its opinion was forthright on
that scor e, stating in its n.5:
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For convenience, we use the terms
"partnership" and "partner" without deciding whether
a partnership existed or petitioner was a partner in that partnership,
conclusions that respondent disputes.
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If the Tax Court were ultimately to hold that the
transaction was indeed a sale as the Commissioner contends, GAF never
became a partner--hence the assessment of tax on the proceeds of the
sale would not be one related to a partnership item, rendering Section
6229 (and the Code's other partnership provisions) inapplicable. In that
instance the knotty questions submitted to us on the current appeal
would not have to be decided at all.
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In response to our December 18, 2000 inquiry into the
existence of jurisdiction over this interlocutory appeal, both parties
suggest that because Rhone-Poulenc filed a partnership return for 1990,
Section 6233(a) causes the unified partnership provisions of the Code to
apply regardless of the Tax Court's ultimate ruling as to whether the
transaction was indeed a sale or was a contribution in exchange for an
interest in the partnership. Here is Section 6233(a):
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If a partnership return is filed by an entity for a
taxable year but it is determined that the entity is not a partnership
for such year, then, to the extent provided in regulations, the
provisions of this subchapter are hereby extended in r espect of such
year to such entity and its items and to persons holding an interest in
such entity.
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To be sure, with Rhone-Poulenc's havingfiled a
partnership return for 1990, Section 6233(a) operates to render the
Code's unified partnership pr ovisions applicable to it even if the
partnership were to be determined a sham. But the appellant here is GAF
(or now ACI), and the parties' contention glosses over (more accurately,
ignor es entirely) the relevant fact that the partnership pr ovisions
apply to the taxpayer appellant only if it is a "person[ ] holding
an interest in such entity." If the transaction was a sale to
Rhone-Poulenc--the highly disputed issue left open by the Tax
Court--neither GAF nor ACI has an inter est in Rhone- Poulenc (whether
or not it is truly a partnership), and the extension of the Code's
partnership provisions provided for in Section 6233 simply does not
reach the taxpayer.
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There is another contingency that confir ms the
prematurity of the present appeal: the absence of any Tax Court
determination as to whether the disputed items of income were adequately
disclosed on the GAF Corporation's consolidated return. As the Tax Court
found in denying GAF 's motion for summary judgment, there ar e genuine
issues of fact not only as to whether the disputed income was adequately
disclosed on the return but even as to what documents make up the
return. If the disputed income was not in fact omitted, the six-year
statute of limitations in Section 6501(e) cannot apply in any event. And
if Section 6501(e) does not apply, the time for the Commissioner to make
an assessment has run regardless of whose reading of Sections 6501(a)
and 6229(a) may be correct. Again the resolution of that contested
factual dispute may well obviate any need to reach the difficult
statutory interpretation questions submitted to us. Unless and until the
Tax Court finds that the income was impr operly omitted, there is no
ripe "case or contr oversy" here.
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Conclusion
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In sum, we conclude that the questions presented are
based on hypothetical scenarios calling for an advisory opinion at odds
with Article III's case or contr oversy requirement. We therefore
DISMISS for lack of appellate jurisdiction the appeal of the Tax Court's
order denying GAF 's motion for summary judgment, and we REMAND the case
for further proceedings on the merits.
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Opinion Footnotes |
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*fn1 Honorable Milton I. Shadur, United States District
Court Judge for the Northern District of Illinois, sitting by
designation.
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*fn2 All further citations to provisions of the
Internal Revenue Code ("Code") will simply take the form
"Section--," omitting the prefatory "26 U.S.C."
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