Kathleen Pilie, Wife Of/and Noel F. Pilie, Plaintiffs-appellants, v. United States of America, Defendant-appellee, 56 F.3d 686 (5th Cir. 1995)

At issue is whether the Sec. 6213(d) waiver of the restrictions on assessment and collection of a deficiency in the settlement agreement between Kathleen and Noel Pilie and the Internal Revenue Service suspended the imposition of interest because the IRS did not make a timely demand of payment. The district court, by summary judgment, held that it did not; we AFFIRM.

The Pilies were partners in Barrister Equipment Associates 88, a TEFRA partnership.¹  As a result of a dispute with the IRS regarding the tax treatment of certain partnership items for tax year 1982, the Pilies and the IRS Commissioner, on May 1, 1990, executed a settlement agreement.²  Part I of the Agreement contained a provision whereby, pursuant to Sec. 6224(b) of the Internal Revenue Code, the Pilies agreed to waive the restrictions on the assessment and collection of any deficiency;³  in Part II, the Pilies waived similar restrictions with respect to penalties and interest, pursuant to Sec. 6213(d).⁴ 

On April 29, 1991, nearly a year after executing the settlement agreement, the IRS assessed a tax deficiency, as well as interest and a penalty. After paying their tax bill in full, the Pilies filed a refund action against the United States, seeking $11,790.68. Based on stipulated facts, both parties moved for summary judgment. Relying on Sec. 6213(d) of the Code, the Pilies contended that they executed a valid waiver; and that, therefore, starting 31 days after they submitted the Agreement to the IRS, the accumulation of interest was suspended. On the other hand, the IRS maintained that Sec. 6213(d) had no application to items that had become nonpartnership items pursuant to the Agreement. The district court entered judgment for the IRS.

Section 6601(c) of the Code suspends the imposition of interest on a deficiency if the taxpayer files a waiver of a deficiency assessment pursuant to Sec. 6213(d), and the IRS fails to make a demand for payment of the deficiency within 30 days after the waiver is filed.⁵  Relying on Sec. 6601(c), the Pilies contend that they are entitled to a refund of interest for the period beginning on the 31st day after they filed the waiver (February 18, 1990) through the day prior to when the IRS gave notice and made a demand for payment (April 28, 1991). Although the IRS acknowledges that the Agreement states that the Pilies waived the restrictions on assessment pursuant to Sec. 6213(d), it maintains that such a waiver is not effective here.

Under the statutory scheme established by Congress in Subchapter C of Chapter 63 of the Code, Secs. 6221-6233 (Tax Treatment of Partnership Items), the normal deficiency procedures in Subchapter B, Secs. 6211-6216 (Deficiency Procedures), are generally inapplicable. Specifically, Sec. 6230(a) (1) provides:

Except as provided in paragraph (2), subchapter B of this chapter shall not apply to the assessment or collection of any computational adjustment.

26 U.S.C. § 6230(a) (1). In turn, paragraph (2) provides:

(A) Subchapter B shall apply to any deficiency attributable to--

....

(ii) items which have become nonpartnership items (other than by reason of section 6231(b) (1) (C)) and are described in section 6231(e) (1) (B).

26 U.S.C. § 6230(a) (2). Section 6231(b) (1) (C) provides, however, that when the IRS and a partner enter into a settlement agreement with respect to a partnership item, that item ceases to be a partnership item and becomes, instead, a "nonpartnership item". 26 U.S.C. § 6231(b) (1) (C).⁶  Because Secs. 6230(a) and 6231(b) (1) (C) makes Subchapter B not applicable to a settlement agreement, and because Sec. 6213 is in Subchapter B, the Sec. 6213(d) waiver in Part II of the Agreement is not effective. Thus, the IRS could assess the interest in issue. Pack v. United States, 992 F.2d 955, 958 (9th Cir. 1993).

The Pilies contend also that, by the terms of the Agreement, the IRS elected to proceed under Subchapter B and to forego utilization of Subchapter C.

Conceding that Part I of the Agreement (which dealt with any deficiency) addresses computational adjustments⁷  under Subchapter C (thus, making Subchapter B not applicable), the Pilies contend that Part II of the Agreement (which dealt with penalties and interest) does not constitute a computational adjustment, and, thus, remains subject to the deficiency procedures of Subchapter B. Notwithstanding the fact that Temporary Treasury Regulation Sec. 301.6231(a) (6)-1T(b) specifies that interest constitutes a computational adjustment,⁸  the Pilies maintain that, pursuant to the terms of Part II of the Agreement, the IRS elected to opt out of Subchapter C and, instead, assessed and collected the penalty and interest pursuant to Subchapter B. In particular, the Pilies identify the second paragraph of Part II, which provides:

This agreement with respect to penalties (additions to tax) and interest under section 6621(c) of the [Code] will not constitute a settlement agreement for purpose of the consistent settlement provision of section 6224(c) (2) of the [Code].

To read this language as an election on the part of the IRS to opt out of Subchapter C (assuming it could do so), fails to appreciate the limited wording of the above quoted passage. Section 6224(c) provides:

In the absence of a showing of fraud, malfeasance, or misrepresentation of fact--

....

(2) Other partners have right to enter into consistent agreements.--If the Secretary enters into a settlement agreement with any partner with respect to partnership items for any partnership taxable year, the Secretary shall offer to any other partner who so requests settlement terms for the partnership taxable year which are consistent with those contained in such settlement agreement.

26 U.S.C. § 6224(c). Thus the limitation relied upon by the Pilies appears simply to be an attempt on the part of the IRS not to obligate itself to agree to the same terms when dealing with other partners of Barrister Equipment Associates.⁹  In any event, there is no indication that the IRS intended to proceed under Subchapter B.III.

For the foregoing reasons, the judgment is

AFFIRMED.