Gen. Mills, Inc. v. United States

957 F.3d 1275

GENERAL MILLS, INC. and Subsidiaries, Plaintiff-Appellant

v.UNITED STATES, Defendant-Appellee

2019-1124

United States Court of Appeals, Federal Circuit.

Decided: April 23, 2020

Sheri Dillon, Morgan, Lewis & Bockius LLP, Washington, DC, argued for plaintiff-appellant. Also represented by Jennifer Breen, William Nelson, James Gaston Steele, III.

Julie Ciamporcero Avetta, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Arthur Thomas Catterall, Richard E. Zuckerman.

Before Newman, Moore, and Chen, Circuit Judges.

Dissenting opinion filed by Circuit Judge Newman.

Chen, Circuit Judge.

General Mills, Inc. & Subsidiaries (collectively, GMI) sued the United States seeking refunds of interest it paid on corporate income tax underpayments that the Internal Revenue Service (IRS) assessed at the enhanced rate of interest for "large corporate underpayments" (LCU) set forth in Internal Revenue Code (I.R.C.) § 6621(c). GMI is the parent corporation of a number of partners of General Mills Cereals, LLC, a limited liability company that is treated as a partnership for tax purposes (the Partnership). GMI alleges that after certain partnership-level audits of the Partnership’s returns for the 2002–2006 tax years were settled with the IRS, the IRS erroneously collected $5,958,695 in LCU interest by selecting incorrect "applicable dates" to start interest accrual. GMI paid the LCU interest in April 2011, and, in March 2013, filed administrative refund claims with the IRS. After the IRS denied the claims, GMI initiated the underlying refund suit in the United States Court of Federal Claims. The court dismissed GMI’s suit for lack of subject matter jurisdiction, concluding that GMI was required, but failed, to file its administrative refund claims with the IRS within the six-month limitations period set forth in I.R.C. § 6230(c). General Mills, Inc. v. United States , 123 Fed. Cl. 576 (2015).

GMI contends that the general two-year tax refund claim limitations period under I.R.C. § 6511(a) should apply to its administrative refund claims, instead of the special six-month limitations period described in § 6230(c). Section 6230(c) provides that "[a] partner may file a claim for refund on the grounds that ... the [IRS] erroneously computed any computational adjustment necessary ... to apply to the partner a settlement." § 6230(c)(1)(A)(ii). Section 6230(c) further provides that any such claim "shall be filed within 6 months after the day on which the [IRS] mails the notice of computational adjustment to the partner." § 6230(c)(2)(A). Because we agree with the Court of Federal Claims that the basis of GMI’s refund claims is that the IRS erroneously computed a computational adjustment resulting from a settlement by allegedly miscalculating the amount of LCU interest due, GMI’s refund claims are subject to the six-month limitations period. Since GMI received adequate notice of the computational adjustment, and yet, filed its refund claims well outside the six-month period, we affirm the dismissal.

BACKGROUND

A. TEFRA’S STATUTORY FRAMEWORK

This appeal concerns determining the applicable statute of limitations for GMI’s administrative refund claims—the six-month limitations period under § 6230(c) or the general two-year limitations period under § 6511(a) —and then determining whether that limitations period began to run when the IRS provided GMI with certain notices of the amounts of LCU interest it owed. Before turning to the facts, we undertake a brief review of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), generally codified at I.R.C. §§ 6221 –34, and its effect on the IRS’s auditing of partnerships.

A partnership does not pay federal income taxes; instead, its taxable income and losses pass through to its partners. I.R.C. § 701. A partnership must report its tax items on an information return, I.R.C. § 6031(a), and the partners must report their distributive shares of the partnership’s tax items on their own individual returns, I.R.C. §§ 702, 704. TEFRA comes into play when the IRS reviews a partnership’s information return and disputes some aspect of it. Bush v. United States , 655 F.3d 1323, 1324–25 (Fed. Cir. 2011).

"Partnership items" are items whose treatment affects the entire partnership such as the partnership’s income, gain, loss, or credit, and so analyzing them at the partnership level makes more sense than doing so partner-by-partner. See § 6231(a)(3) (defining "partnership item"); Treas. Reg. §§ 301.6231(a)(3)–1(a), 1(b). Prior to the 1982 enactment of TEFRA, the Internal Revenue Code treated partnership items at the individual partner level. Adjustments to the tax treatment of partnership items had to be determined in separate proceedings involving each individual partner. Olson v. United States , 172 F.3d 1311, 1316 (Fed. Cir. 1999). If a partnership had numerous partners located throughout the country, the piecemeal nature of the individual partner-level determinations sometimes resulted in inconsistent treatment of the same items between different partners and in duplication of administrative and judicial resources. Id. ; Bassing v. United States , 563 F.3d 1280, 1282 (Fed. Cir. 2009) ; see also RJT Investments X v. Comm’r , 491 F.3d 732, 737 (8th Cir. 2007) ("TEFRA was intended ... to prevent inconsistent and inequitable income tax treatment between various partners of the same partnership resulting from conflicting determinations of partnership level items in individual partner proceedings.").

Consequently, TEFRA was enacted in order to streamline the tax audit, assessment, and litigation procedures for partnerships. Bush , 655 F.3d at 1325. Rather than undertake an arduous series of partner-by-partner audits, as had previously been required, TEFRA allows for a single, unified partnership-level procedure for auditing and litigating partnership items, thus addressing concerns about inconsistent treatment of the same partnership items across partners. Id. ; Stobie Creek Investments LLC v. United States , 608 F.3d 1366, 1374 (Fed. Cir. 2010).

Partnership-related matters are addressed in two stages under TEFRA: partnership level and then individual partner level. United States v. Woods , 571 U.S. 31, 39, 134 S.Ct. 557, 187 L.Ed.2d 472 (2013). During the first stage, the IRS initiates a partnership-level proceeding to adjust partnership items reported on the partnership’s information return. Id. ; § 6221. Each partner has the right to participate in the IRS’s audit of the partnership’s information return. Olson , 172 F.3d at 1317 ; see § 6224(a). A partner may waive this right and opt out of the partnership-level proceeding by entering into a binding settlement agreement with the IRS. Olson , 172 F.3d at 1317 ; see §§ 6224(b), (c). Upon completion of the partnership-level proceeding, the IRS is required to mail to certain partners a copy of the resulting final partnership administrative adjustment, which notifies the partners of any adjustments to partnership items. Olson , 172 F.3d at 1317 ; see § 6223.

During the second stage, the results of the partnership-level proceeding are applied to the individual partners. In the partner-level proceeding, the IRS makes "computational adjustments" to each partner’s return to reflect the adjustments to partnership items. See § 6231(a)(6) (defining "computational adjustment" as "the change in the tax liability of a partner which properly reflects the treatment under this subchapter of a partnership item").

The partner-level proceedings subsequently follow one of two procedures: direct assessment or deficiency procedure. Thompson v. Comm’r , 729 F.3d 869, 871 (8th Cir. 2013). Most computational adjustments are directly assessed against the partners. Woods , 571 U.S. at 39, 134 S.Ct. 557. If the IRS’s calculation is purely computational, the IRS directly assesses the computational adjustment and issues to the partner a notice of computational adjustment. Chai v. Comm’r , 851 F.3d 190, 196 (2d Cir. 2017). For direct assessments, the partners are permitted to challenge any error in the computational adjustments only in post-payment refund actions. Woods , 571 U.S. at 39, 134 S.Ct. 557 ; see §§ 6230(a)(1), (c). TEFRA added the provisions providing for direct assessment in order "to increase efficiency when the IRS audits partnership returns that may affect a large number of individual taxpayers." Bush , 655 F.3d at 1328 ; see § 6230(a).

The "standard" deficiency procedures are still required for certain computational adjustments that require a factual determination at the partner level, such as, for example, a determination of negligence by the partner. Olson , 172 F.3d at 1317 ; see § 6230(a)(2)(A)(i). The deficiency procedures, set forth in I.R.C. §§ 6211 –16, require the IRS to issue a pre-assessment notice of deficiency to each taxpayer, § 6212(a), who can file a petition in the Tax Court disputing the alleged deficiency before paying it, § 6213(a). Woods , 571 U.S. at 38, 134 S.Ct. 557.

For those computational adjustments that are directly assessed against them, the partners may challenge any error in the computational adjustments by filing administrative refund claims with the IRS. See §§ 6230(a)(1), (c). For certain types of these administrative refund claims, § 6230(c) requires the taxpayer to "file[ ] within 6 months after the day on which the Secretary mails notice of computational adjustment to the partner." § 6230(c)(2)(A).¹ With this legal framework in mind, we turn to the facts.

B. FACTS

GMI seeks a refund of interest the IRS assessed on large corporate underpayments² of corporate income tax for the 2002–2006 tax years. The interest rate applied to large corporate underpayments is not the interest rate typically applied to an underpayment of tax,³ but instead is two percent higher than the default underpayment rate. See § 6621(c). The enhanced interest rate on large corporate...