Partnerships, Interest, and Refund Claims: A Recipe for Misfortune, Part II

tax refund, general millsThis will continue coverage of the refund claim by General Mills that went awry. For a detailed review of the facts, look at my earlier post.

The case involved a series of overlapping audits of General Mills and an affiliated LLC, General Mills Cereals, LLC (the “Partnership”). To summarize, the situation was as follows:

  • As a C Corporation, General Mills was subject to what is known as LCU interest, a two percent increase in the underpayment rate that applies to underpayments by C Corporations that exceed $100,000. See I.R.C. § 6621(c).
  • There were gaps between the time when the IRS issued proposed deficiency notices in the corporate audits and the time when it outlined the impact on General Mills of the adjustments made in the audits of the Partnership.
  • The gaps between the completion of the corporate audits and the audits of the Partnership created a dispute over the calculation of LCU interest between General Mills and the IRS that ultimately generated a refund case before the Court of Federal Claims, General Mills, Inc. v. United States, No. 14-89T, 2015 U.S. Claims LEXIS 1311 (Fed. Cl. Oct. 14, 2015).

The government sought dismissal on jurisdictional grounds, arguing that General Mills did not file a timely administrative claim. There was no dispute that General Mills had filed its administrative claim within two years of paying the disputed interest, bringing it within the general limitation period for refund claims under Section 6511(a) of the Code. General Mills, 2015 U.S. Claims LEXIS 1311 at *19-*20. The problem was that a partnership was in the mix, bringing TEFRA into play.

TEFRA created procedures for partnership audits that were intended to simplify the process by creating a single proceeding in which partnership level items are addressed, with the impact on partners addressed with “computational adjustments.” Partners are then free to challenge a computational adjustment:

A partner may file a claim for refund on the grounds that—

(A) the Secretary erroneously computed any computational adjustment necessary—
(i) to make the partnership items on the partner’s return consistent with the treatment of the partnership items on the partnership return, or
(ii) to apply to the partner a settlement, a final partnership administrative adjustment, or the decision of a court in an action brought under section 6226 or section 6228 (a),
(B) the Secretary failed to allow a credit or to make a refund to the partner in the amount of the overpayment attributable to the application to the partner of a settlement, a final partnership administrative adjustment, or the decision of a court in an action brought under section 6226 or section 6228 (a), or
(C) the Secretary erroneously imposed any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item.

I.R.C. § 6230(c)(1).

There is a special limitations period associated with these refund claims. If a partner is seeking a refund under Section 6230(c)(1)(A) because the IRS erred in making a computational adjustment or under Section 6230(c)(1)(C) because a “penalty, addition to tax, or additional amount” was improperly imposed, she must file an administrative claim within six months of payment. I.R.C. § 6230(c)(2)(A).

If General Mills’ refund claim for LCU interest was governed by the TEFRA limitation in Section 6230(c)(2)(A), its administrative claim was untimely. General Mills, 2015 U.S. Claims LEXIS 1311 at *20. And if its refund claim was untimely, then subject matter jurisdiction would not exist.

The Court of Federal Claims concluded that the shorter limit imposed by Section 6230(c)(2)(A) controlled, assessing first whether Section 6230(c)(2)(A) applied and then whether the general limitation period of Section 6511(a) trumped it. Id., at *21.

The court first determined that the LCU interest represented a “computational adjustment” within the meaning of Section 6230(c)(1)(A). TEFRA defines a computational adjustment as the change in a partner’s tax liability that results from changes to partnership items that result from a partnership audit. See I.R.C. § 6231(a)(6). For good measure, the regulations indicate that “[a] computational adjustment includes any interest due with respect to any underpayment or overpayment of tax attributable to adjustments to reflect properly the treatment of partnership items.” Treas. Reg. § 301.6231(a)(6)-1(b) (emphasis supplied).

General Mills argued that LCU was a distinctive type of interest that did not fall within the ambit of the relevant regulation. 2015 U.S. Claims LEXIS 1311 at *23-*24. The government acknowledged that the regulation alone did not bring Section 6230(c) into play. Instead, its position rested upon the following theses:

  • First, that Section 6230(a)(1) takes interest assessment and collection out of the deficiency procedures applicable to taxes with the limited potential exceptions of innocent spouse cases and cases that fell within Section 6230(a)(2);
  • Second, that Section 6230(a)(2) did not apply because it references deficiencies, a term that is defined to embrace a tax, not interest;
  • Since interest was not a component of a deficiency, it had to be a directly assessable computational adjustment.

The court found this explanation dispositive, noting that the Tax Court had reached similar conclusions in cases involving LCU interest. 2015 U.S. Claims LEXIS 1311 at *26-*29. Next, the court concluded that a dispute over the correct starting date for the commencement of LCU interest was a claim that the IRS erroneously computed LCU interest that fell within Section 6230(c)(1)(A)(ii). Id. at *29-*33.

General Mills then asserted that the notices it had received were insufficient to trigger the application of Section 6230(c). In the court’s view, the sequence of notices issued by the IRS provided General Mills with adequate notice; it concluded that “by April 11, 2011, plaintiff had what it needed to ascertain and pay the LCU interest.” Id. at *41.

On the question whether the general refund limitation period of Section 6511(a) should be applied, the court readily concluded that the more specific limitations period of Section 6230(c) should control. Id. at *50-*51. Frankly, that conclusion is difficult to fault.
General Mills offered an alternative argument for the application of Section 6511(a); it noted that Section 6511(g) provided for Section 6230(c) to apply to “partnership items” and asserted that LCU interest was not a “partnership item.” In the court’s view, however, Section 6511(g) merely made clear that partnership items were controlled by Section 6230(c) without precluding its application to the plaintiff’s dispute over LCU interest. Id. at *56.

If there is a lesson here, it is that tax issues that have any relationship to a partnership should be approached with great caution. General Mills is an industrial giant that can afford a sophisticated legal team, but it still lost a refund case due to a tardy administrative filing.