Partnership Can't Sue to Compel Issuance of FPAA to Recover Time- Barred, Unclaimed Tax Benefits

MEMORANDUM ORDER

[1] Plaintiffs, the Tax Matter Partners ("TMP") for the Kuparuk River Unit tax partnership ("KRU)", have filed suited seeking an order compelling defendants to issue final partnership administrative adjustments for the partnership tax years 1985-1988. Presently before the Court is plaintiff's motion for a temporary restraining order. Upon consideration of the argument of counsel at a December 30, 1096, hearing, and the entire record in this case, the Court will deny the motion.

[2] For the purposes of this motion, the Court will consider the following as true. The Internal Revenue Service (the "Service") commenced auditing KRU returns for tax years 1985-1988 on August 5, 1992. During the audit, the Service and the TMP agreed to a series of extensions of the statute of limitations for assessment of tax; the most recent extension expires December 31, 1996. At the conclusion of the preliminary audit work in 1993, Service field agents prepared draft proposed adjustment forms for review by their supervisors. Their proposed adjustments included over $800 million in additional deductions and tax credits that KRU failed to claim on its tax returns. On December 2, 1996, the Service informed plaintiffs that it had decided not to challenge KRU's tax returns and thus did not intend to issue final partnership administrative adjustments ("FPAAs") or to seek further extensions of the statute of limitations.

[3] Generally, at the conclusion of an audit of a partnership's tax return, the Service determines any adjustments that must be made to the return and issues an FPAA that summarizes those adjustments. Under 26 U.S.C. section 6226(a), within 90 days after the day the FPAA is mailed to the TMP, the TMP may file a petition for readjustment with the Tax Court, federal district court, or the Federal Court of Claims. The court has jurisdiction to "determine all partnership items of the partnership for the partnership taxable year to which the [FPAA] relates." 26 U.S.C. section 6226(f) (1996).

[4] The statutory period for filing a refund claim for the unclaimed deductions and credits for partnership years 1985-88 expired before the Service commenced auditing KRU's returns in 1992. Plaintiffs claim that the Service's refusal to issue FPAAs has caused them irreparable harm because the FPAAs would allow them to file a petition for readjustment. A court hearing plaintiff's readjustment petition would have jurisdiction to determine de novo KRU's taxable income, deductions, and credits, including the $800 million in unclaimed deductions and credits. See 26 U.S.C. section 6227(f) (1994). Because the Service apparently takes the position that an FPAA issued after expiration of the statute of limitations bars further tax assessments, plaintiffs argue that failure to issue the FPAAs before the December 31, 1996, expiration of the statute of limitations may preclude further judicial relief. Plaintiffs seek the following emergency relief: an injunction directing the Service to either issue an FPAA before December 31, 1996, or to agree to an extension of the statute of limitations.

[5] As an initial matter, the Court finds that it lacks jurisdiction to issue an injunction, ordering the Service to extend the statute of limitations for the assessment of tax. Under the Anti- Injunction Act, 26 U.S.C. section 7421, "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person." 26 U.S.C. section 7421(a) (1994). The Act protects "the Government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference," Bob Jones University v. Simon, 416 U.S. 725, 736-37 (1974), and has been held to apply "to activities leading up to, and culminating in, such assessment and collection." Lowrie v. United States, 824 F.2d 827, 830 (10th Cir. 1987); see also Dickens v. United States, 671 F.2d 969, 971 (6th Cir. 1982); Blech v. United States, 595 F.2d 462, 466 (9th Cir. 1979). An injunction directing the Service to extend the statutory period for assessing additional tax could constitute judicial interference in tax assessment activities and would violate the Anti-Injunction Act.

[6] In determining whether to grant plaintiffs' request for a temporary restraining order directing the Service to issue FPAAs before December 31, 1996, the Court must consider whether plaintiffs have shown (1) that they are likely to prevail on the merits and (2) that without the requested relief, they will be irreparably injured. Washington Metropolitan Area Transit Commission v. Holiday Tours, Inc., 559 F.2d 841, 843 (D.C. Cir. 1977). The Court must also consider (3) whether the issuance of a stay would substantially harm other parties interested in the proceedings and (4) where the public interest lies. Id.

[7] Although it is not necessary to show a mathematical probability of success, without "a substantial indication of probable success, there would be no justification for the court's intrusion into the ordinary processes of administration and judicial review." Id. At the same time, "when confronted with a case in which the other three factors strongly favor interim relief," the Court may exercise its discretion "if the movant has made a substantial case on the merits." Id. Because plaintiffs have not shown even a "substantial indication of probable success," the Court is not required to accord equal weight to the final three factors.

[8] Plaintiffs' argument for an order directing the Service to issue an FPAA before December 31, 1996 is two-pronged. First, plaintiffs argue that, under 26 U.S.C. section 6223(a), the Service must issue an FPAA at the conclusion of every audit. Entitled "Notice to Partners of Proceeding," Section 6223(a) provides that:

     the Secretary shall mail to each partner whose name and address

[10] In any event, plaintiffs fail completely to offer authority for their argument that the statute "implicitly" requires the Service to issue an FPAA before the statute of limitation tolls. Such a provision is not implicit in the statute and indeed is counter-intuitive. The purpose of the Section 6229 statute of limitations is to protect taxpayers by limiting the time period in which the Service may assess additional tax. See 26 U.S.C. section 6229(b) (1994). If the statute tolls, the Service is precluded from seeking additional tax and the taxpayer has no need for judicial review. Further, Congress knows how to preserve the right to judicial review for taxpayers seeking refunds and did so: a partnership that has timely filed an administrative adjustment request under 26 U.S.C. section 6227(a) may seek judicial review notwithstanding the government's failure to issue an FPAA within the statutory period. See 26 U.S.C. sections 6228(b)(2)(D), 6226(a) (1994).

[11] The Court also finds that plaintiffs have failed to show irreparable harm. Although plaintiffs argue that the Service takes the position that a late-filed FPAA is time-barred, they have not shown that the Service's position is * * *. Further plaintiffs fail entirely to * * * demonstrate that judicial review of their claims, were it available, would like produce tax relief. And finally, plaintiffs have not shown that the alleged harm -- loss of certain tax deductions and credits -- has been caused by defendants. The public interest lies in denying such extraordinary relief when it is not clearly warranted and would interfere with the Service's taxpayer audit processes.

[12] Accordingly, it is this 31st day of December 1996,

[13] ORDERED that plaintiffs' motion for a temporary restraining order be, and hereby is, denied.

                                   Norma Holloway Johnson