Meruelo v. CIR

Summarized by:

  • Court: 9th Circuit Court of Appeals Archives
  • Area(s) of Law: Tax Law
  • Date Filed: 08-16-2012
  • Case #: 11-70015
  • Judge(s)/Court Below: Circuit Judge N.R. Smith for the Court; Circuit Judge McKeown and District Judge Benitez
  • Full Text Opinion

The IRS has authority to issue a valid Notice of Deficiency on a partner of an LLC if there are no pending partnership-level proceedings. The mere consideration of future partnership-level proceedings does not invalidate a Notice of Deficiency.

The IRS issued a Notice of Deficiency (“NOD”) to Alex and Liset Meruelo a few days before the expiration of the statute of limitations (“SOL”) for assessing a federal income tax attributable to a partnership item. The Meruelos owned a single member LLC (“MCM”) but were not required to file a return for the company. Alex Meruelo also owned interest in a partnership, Intervest Financial LLC (“Intervest”), and was treated as a partner for tax purposes. The Meruelos filed their 1999 tax return in October of 2000 and included a loss of over $4.5 million as a passthrough item from MCM. The return did not mention Intervest, even though it was a source of the loss. Before the SOL expired, the IRS was forced to issue a NOD to the Meruelos because the Meruelos denied the IRS’s request for an extension of the SOL to investigate the circumstances behind the claimed loss. While the proceedings continued, the IRS moved for a stay due to a pending criminal investigation that could affect the case. The Meruelos contended that the NOD was invalid, because a NOD cannot be issued if there is a pending partnership-level proceeding taking place. The Meruelos claimed the IRS was considering bringing partnership-level proceedings against Intervest, though none ever commenced. The IRS only indicated there was potential for partnership-level proceedings to occur if evidence of fraud was discovered. The Court found that the IRS had not commenced proceedings against or given notice to Intervest and, as such, there were no partnership-level proceedings to interfere with the NOD issued to the Meruelos. Requiring the IRS to prove it has no interest in future partnership-level proceedings when it has statutory authority to commence those proceedings to issue a valid NOD is illogical. AFFIRMED.

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