Partner cannot sue for refund of penalty paid by partnership.

• Author: Beavers, James

[ILLUSTRATION OMITTED]

The Eighth Circuit reversed a district court and held that where a partnership paid a penalty under a closing agreement with the IRS, a partner in the partnership did not have standing to sue for a refund of part of the penalty payment.

Background

Barry Jewell was a shareholder in the law firm of Jewell, Moser, Fletcher & Holleman, P.A. (JMFH). JMFH sponsored four prototype retirement plans, Which its clients, mostly small businesses, relied upon to create individual retirement plans. As the plans' sponsor, JMFH had an obligation to ensure that (1) its prototype plans complied with federal law and (2) its clients amended their individual plans to comply with changes in federal law.

In May 2003, the IRS determined that more than 60 of the individual JMFH-sponsored plans had not been timely amended to comply with changes in federal law. After negotiations with the IRS, JMFH agreed in a closing agreement to pay a penalty in return for an IRS determination that the plans in question were timely amended. Jewell and two other JMFH partners made equal contributions to JMFH out of their personal funds so it could pay the penalty required under the closing agreement. JMFH later dissolved in a judicial dissolution instigated by Jewell.

District Court Decision

After the dissolution of JMFH, Jewell filed a suit for a refund of his portion of the partnership's penalty payment, alleging that the IRS had obtained the closing agreement through fraud, malfeasance, or misrepresentation of fact. The IRS moved to dismiss for lack of standing. The district court denied the motion, holding that because JMFH had stopped operating and Jewell had paid part of the penalty out of his personal funds, Jewell had incurred direct harm and had standing to sue. The district court subsequently held for Jewell on the merits and ordered the IRS to refund his penalty payment. The IRS appealed the decision, arguing that the district court had erred in finding that Jewell had standing to sue.

Eighth Circuit's Decision

The Eighth Circuit reversed the district court and held that Jewell did not have standing to sue for a refund of the portion of the penalty he contributed to the partnership. To have standing, the court stated, "a litigant must assert his or her own legal rights and interest, and cannot rest a claim to relief on the legal rights or interests...