Walthall

In these consolidated appeals, we consider whether the Tax Equity and Fiscal Responsibility Act of 1982 (Act) provides constitutionally adequate notice to indirect partners of multi-tiered partnerships, and if so, whether the Internal Revenue Service (IRS) complied with the requirements of the statute..

I

In 1983, the Walthalls, Camachos, and Raihls invested in a tax shelter partnership known as the Sente Investment Club Partnership (Club). The Club invested in two other partnerships. These other partnerships were thus “top-tier partnerships,” and the Club was a “pass-thru partnership.” Under this structure, the Walthalls, Camachos, and Raihls were all indirect partners of the top-tier partnerships. When the top-tier partnerships reported ordinary losses in 1983 and 1984, the Club claimed its proportion of those losses, which were passed through the Club to its partners, including the Walthalls, Camachos, and Raihls.

The IRS audited the 1983 and 1984 tax returns of the two top-tier partnerships. Pursuant to the Act, the IRS must “give partners notice of beginning and completion of administrative proceedings.” 26 U.S.C. § 6223 (a). In accordance with the Act, the IRS sent notice…

concurring and dissenting:

Cornwallis surrendered to Washington to the tune of The World Turned Upside Down. The surrender ended taxation without representation. The American republic has taken another turn when the government can successfully take the position that although it knows the identities of the taxpayers adversely affected by its action it has no obligation to tell them of the actions because the taxpayers failed to follow government regulations that were not in existence.

That the government knew the names and interests of the taxpayers is not disputed. That in 1985 (and indeed for five years) the regulations were not in existence is not disputed. So the government rests its case by pointing to 26 U.S.C. § 6223 (e)(2) which says, “The Secretary shall use additional information furnished to him by the tax matters partner or any other person in accordance with regulations prescribed by the Secretary.” No regulations, no need to use the additional information. Q.E.D.

Kafka could have designed such a world. I do not believe that Congress did. The whole purpose of § 6223 is to give notice to the partners affected. That is why the section is entitled “Notice to partners…