Before Michel, Plager, and Lourie, Circuit Judges.
The opinion of the court was delivered by: Michel, Circuit Judge.
Appealed from: United States Court of Federal Claims
Judge Robert H. Hodges, Jr.
This is a consolidated appeal from four summary judgments of the United States Court of Federal Claims. See Olson v. United States, No. 94-474T (Fed. Cl. Nov. 21, 1997); Cahoon v. United States, No. 95-97T (Fed. Cl. Jan. 20, 1998); Gaus v. United States, No. 95-296T (Fed. Cl. Jan. 20, 1998); Lutter v. United States, No. 95-269T (Fed. Cl. Jan. 20, 1998). The taxpayers in all four suits sought refunds of taxes, interest, and penalties that resulted from their use of carrybacks and carryforwards in their joint tax returns of certain investment tax credits subsequently disallowed at the partnership level. The taxpayers argued that the taxes, interest, and penalties were improperly assessed simply because the Internal Revenue Service (the "IRS") did not first provide the taxpayers with notices of deficiency. The Court of Federal Claims granted partial summary judgment to the government with respect to the refund claim in the Olson case, holding that the taxes and corresponding penalties and interest were validly assessed without a prior notice of deficiency. The court subsequently dismissed the tax refund claims in the other three cases, which had been stayed pending the judgment in Olson. The appeal was submitted for our decision following oral argument on December 7, 1998. Because we agree with the Court of Federal Claims that the taxes, penalties, and interest assessed here resulted from mere computational adjustments, i.e., those requiring no uniquely partner-level determinations, notices of deficiency were not required for their assessment and we therefore affirm.
In 1983, plaintiff-appellant Stephen S. Olson became a limited partner in Solar Energy Savers, Ltd. III ("Solar"). According to the appellants, Solar was set up as a tax shelter for investments and was engaged in the leasing of energy-saving units. Olson acquired his partnership interest by contributing $22,000 in exchange for a 5.66% interest in partnership profits and a 5.71% interest in partnership capital.
On April 18, 1984, Solar filed a Form 1065 ("U.S. Partnership Return of Income") with the IRS for the taxable year 1983. Solar's return reported an ordinary loss of $10,042 as well as a qualified investment of $3,208,240 in property eligible for the regular investment tax credit and the business energy investment tax credit. The return included a Schedule K-1 ("Partner's Share of Income, Credits, Deductions, etc.") for Stephen Olson. The Schedule K-1 reported that Stephen Olson's distributive share of Solar's ordinary loss was $568 and that his distributive share of the partnership's qualified investment in property eligible for the regular and business energy investment tax credits was $181,495.
Stephen Olson and his wife Henrietta jointly filed a Form 1040 ("U.S. Individual Income Tax Return"), also for the taxable year 1983. In accordance with Stephen Olson's distributive share of Solar's ordinary loss, on their Schedule E ("Supplemental Income Schedule") the Olsons reported a net loss of $568. On their Form 3468 ("Computation of Investment Credit"), the Olsons reported a tentative regular investment tax credit of $14,519.60 and a tentative business energy investment tax credit of $27,224.25, which were again attributable to Stephen Olson's distributive share of Solar's qualified investment in property eligible for those tax credits. Based upon these tentative claims, the Olsons' regular investment tax credit was more than sufficient to eliminate their tax liability for 1983. Accordingly, the Olsons reported an allowed regular investment tax credit of $12,904.58 (to eliminate their 1983 tax liability of the same amount reported on their Form 1040) and an allowed business energy investment tax credit of zero.
Following this, the Olsons carried back their unused portion of the regular investment tax credit of $1,615.02 and their entirely unused business energy investment tax credit of $27,224.25 to eliminate their tax liabilities for the taxable years 1980, 1981, and 1982. To obtain refunds for these years, the Olsons filed a Form 1045 ("Application for Tentative Refund") on March 14, 1984. The Olsons' attachment to their Form 1045 showed an available carryforward to 1984 of $10,266.19 of the unused tax credits. On April 16, 1984, the IRS issued refunds to the Olsons for the three carryback years of approximately the amounts requested.
On May 6, 1985, the Olsons filed their Form 1040 joint income tax return for the taxable year 1984. On Schedule E of the return, the Olsons reported a net loss of $3,637, representing Stephen Olson's distributive share of Solar's ordinary loss for 1984. On their Form 3468 for the taxable year 1984, the Olsons reported a carryforward of unused investment tax credits from 1983 of $10,266.19 and a total tentative investment credit of $10,513.63 (comprising the 1983 carryforward plus a current year investment credit of $247.44). Again, the Olsons' tax credits were more than sufficient to eliminate their tax liability for the taxable year 1984. Accordingly, their Form 3468 reported an allowed credit of $7,008, which exactly offset the income tax liability of the same amount reported on the Olsons' Form 1040. The record does not indicate whether the remaining credit of just over $3,500 was ever claimed by the Olsons.
By letter dated November 27, 1985, the IRS advised Stephen Olson that it was commencing a partnership-level examination of Solar. This examination was conducted and, as both parties agreed in the Court of Federal Claims, made timely by Solar and the IRS executing a Form 872-O ("Special Consent to Extend the Time to Assess Tax Attributable to Items of Partnership"). On November 16, 1989, the Olsons executed Parts I and II of Form 870-L(AD) ("Settlement Agreement for Partnership Adjustments and Affected Items") relating to the taxable year 1983 and the same two parts of the same form relating to the taxable year 1984.
Under the terms of Part I ("Offer of Settlement of Partnership Items") of the Form 870-L(AD), the Olsons offered to enter into a settlement agreement "with respect to the determination of partnership items of the partnership for the year shown on the attached schedule of adjustments." The schedule of adjustments attached to the Form 870-L(AD) for the taxable year 1984 contained no adjustments. The schedule for the taxable year 1983, however, reflected (1) a total allowable partnership loss of $137,090 for 1983 (instead of the loss of $10,042 reported on the Form 1065); and (2) disallowance of the partnership regular investment tax credit basis and the partnership business energy investment tax credit basis in the amount of $3,208,240. Part I of the Form 870-L(AD) also contained several other significant provisions. For instance, by executing Part I, the Olsons agreed they would "waive the restrictions on the assessment and collection of any deficiency attributable to partnership items . . . provided in [Internal Revenue Code] section 6225(A)," that the treatment of partnership items under the settlement agreement would "not be reopened in the absence of fraud, malfeasance, or misrepresentation of fact," and that "no claim for refund or credit based on any change in the treatment of partnership items may be filed or prosecuted."
In Part II ("Offer of Settlement of Penalties") of Form 870-L(AD), the Olsons offered to enter into a settlement agreement regarding penalties and interest attributable to the adjustment of partnership items. Under the proposed terms of Part II, the Olsons agreed "to penalties (additions to tax) and interest under section 6621(c) of the Internal Revenue Code, as shown on the attached schedule of adjustments." With respect to penalties and interest, the schedule of adjustments provided that interest would apply to the Olsons' underpayment pursuant to I.R.C. § 6621(c), and that a penalty would be assessed pursuant to I.R.C. § 6659 at a rate of 20%. Like Part I, Part II proposed that the treatment of penalties and interest would not be reopened absent fraud, ...