SCOTUS Reports

Tag: Partnership Items

  • Nussdorf v. Commissioner, T.C. Memo. 2007-239: Defining Partnership Items and Tax Court Jurisdiction in TEFRA Cases

    Nussdorf v. Commissioner, T.C. Memo. 2007-239

    Determinations regarding the basis of property contributed to a partnership are partnership items, requiring resolution at the partnership level rather than in individual partner-level proceedings before the Tax Court.

    Summary

    In consolidated cases, the Tax Court addressed jurisdictional motions concerning notices of deficiency issued to partners of Evergreen Trading, LLC, related to a tax shelter scheme. The IRS issued a Final Partnership Administrative Adjustment (FPAA) to Evergreen Trading and notices of deficiency to its partners, disallowing losses from currency option transactions. The partners contested the Tax Court’s jurisdiction, arguing the deficiencies involved partnership items resolvable only at the partnership level. The Tax Court agreed, holding that determinations of basis in contributed property are partnership items under TEFRA, thus it lacked jurisdiction over these items in the individual partner cases.

    Facts

    Petitioners were partners in Evergreen Trading, LLC during 1999 and 2000.
    Petitioners purportedly contributed Euro options and cash to Evergreen Trading in exchange for partnership interests.
    Evergreen Trading engaged in complex currency option transactions, reporting significant ordinary losses in 1999 and gains in 2000.
    A portion of these losses and gains was allocated to the petitioners.
    The IRS issued an FPAA to Evergreen Trading for 1999 and 2000, challenging the transactions as lacking economic substance and designed for tax avoidance.
    Subsequently, the IRS issued notices of deficiency to the petitioners, disallowing losses and making related adjustments.

    Procedural History

    The IRS issued a Notice of Beginning of Administrative Proceeding and later an FPAA to Evergreen Trading for tax years 1999 and 2000.
    The IRS also issued Notices of Deficiency to the individual partners (petitioners) for the same tax years.
    Petitioners filed petitions in Tax Court, arguing the notices of deficiency were invalid as they concerned partnership items.
    Respondent (Commissioner) also moved to dismiss for lack of jurisdiction, agreeing that the notices primarily addressed partnership items.
    Petitioners initially argued that paragraph 8 of the notice of deficiency related to a nonpartnership item, but the court disagreed.

    Issue(s)

    1. Whether the determinations in the notices of deficiency issued to the individual partners constitute “partnership items” or “affected items” as defined under TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), specifically sections 6221-6234 of the Internal Revenue Code?

    2. Whether the determination of the basis of the Euro options contributed by the partners to Evergreen Trading is a “partnership item” that must be resolved at the partnership level?

    Holding

    1. Yes, the Tax Court held that the determinations in the notices of deficiency, including the determination of the basis of contributed options, are “partnership items” or “affected items” because they are intrinsically linked to partnership-level determinations.

    2. Yes, the determination of the basis of the contributed Euro options is a “partnership item” because under Section 723, the partnership’s basis in contributed property is dependent on the contributing partner’s basis, requiring a partnership-level determination.

    Court’s Reasoning

    The court relied on the definition of “partnership item” in Section 6231(a)(3) of the Internal Revenue Code, which includes any item required to be taken into account for the partnership’s taxable year under Subtitle A to the extent regulations prescribe it is more appropriately determined at the partnership level.
    Section 723 mandates that a partnership’s basis in contributed property is the same as the contributing partner’s adjusted basis at the time of contribution. The court stated, “in order for a partnership to determine, as required by section 723, its basis in the property that a partner contributed to it, the partnership is required to determine the basis of such partner in such property.”
    Treasury Regulations Section 301.6231(a)(3)-1(a)(4) and (c)(2) explicitly list contributions to the partnership and the basis of contributed property as partnership items. Specifically, regulation 301.6231(a)(3)-1(c)(2)(iv) identifies as a partnership item “[t]he basis to the partnership of contributed property (including necessary preliminary determinations, such as the partner’s basis in the contributed property).”
    The court reasoned that determining the basis of the contributed Euro options was essential for Evergreen Trading’s books and records and for furnishing information to partners, thus falling squarely within the definition of partnership items. The court rejected petitioners’ argument that the pre-contribution basis was a nonpartnership item, emphasizing that once the options were contributed, their basis became a partnership item to be determined in a partnership proceeding. The court concluded, “We hold that the determination set forth in paragraph 8 of the respective notices of deficiency that respondent issued to petitioners in these cases relates to certain partnership items described above. We further hold that we do not have jurisdiction over those items.”

    Practical Implications

    This case reinforces the principle that under TEFRA, tax disputes involving partnership items must generally be resolved at the partnership level. It clarifies that issues related to the basis of contributed property, even if seemingly originating at the partner level, become partnership items once the property is contributed to the partnership.
    For legal practitioners, this case serves as a reminder of the jurisdictional limitations of the Tax Court in partner-level proceedings when partnership items are at issue. It highlights the importance of understanding the definition of “partnership item” and “affected item” in the context of partnership tax audits and litigation.
    This decision impacts how tax advisors approach partnership tax disputes, emphasizing the need to address partnership items within the framework of partnership-level administrative and judicial proceedings, such as FPAA litigation, rather than through individual partner deficiency cases.
    Later cases have consistently cited Nussdorf for the proposition that basis determinations of contributed property are partnership items, solidifying its precedent in partnership tax law.

  • G-5 Inv. P’ship v. Comm’r, 128 T.C. 186 (2007): Statute of Limitations in TEFRA Partnership Proceedings

    G-5 Inv. P’ship v. Comm’r, 128 T. C. 186 (U. S. Tax Court 2007)

    In G-5 Inv. P’ship v. Comm’r, the U. S. Tax Court ruled that the statute of limitations under TEFRA does not bar the IRS from issuing a Final Partnership Administrative Adjustment (FPAA) for a partnership’s tax year if the FPAA is issued within three years of the partners’ filing of their individual tax returns for subsequent years. The court clarified that even though the partnership’s tax year was closed, the IRS could still assess taxes against partners for open tax years affected by partnership item adjustments. This decision underscores the IRS’s ability to adjust partnership items in closed years when they impact open partner tax years, ensuring comprehensive tax enforcement.

    Parties

    Plaintiffs (Petitioners): G-5 Investment Partnership, H. Miles Investments, LLC (Tax Matters Partner), Henry M. Greene, and Julie M. Greene (Partners other than the Tax Matters Partner). Defendant (Respondent): Commissioner of Internal Revenue.

    Facts

    G-5 Investment Partnership filed its 2000 partnership return on October 4, 2001. Henry M. Greene and Julie M. Greene were indirect partners in G-5, and H. Miles Investments, LLC, served as the tax matters partner (TMP). On April 12, 2006, the Commissioner of Internal Revenue issued a notice of final partnership administrative adjustment (FPAA) for the year 2000, more than three years after the filing of the partnership return and the partners’ individual 2000 and 2001 Federal income tax returns, but within three years of the partners’ filing of their individual 2002-2004 Federal income tax returns. The FPAA denied partnership losses claimed for 2000, which the partners had reported as capital loss carryovers on their individual tax returns for 2002-2004.

    Procedural History

    G-5 Investment Partnership and its partners filed a petition in the U. S. Tax Court pursuant to section 6226 of the Internal Revenue Code, challenging the FPAA. Petitioners moved for judgment on the pleadings, arguing that the period of limitations for assessing any tax resulting from the partnership proceeding had expired under sections 6229(a) and 6501(a) of the Internal Revenue Code. The Commissioner contended that the FPAA was timely issued within the three-year period from the filing of the partners’ 2002-2004 individual returns, and thus, the period of limitations for assessing taxes attributable to partnership items for those years remained open.

    Issue(s)

    Whether the statute of limitations under sections 6229(a) and 6501(a) of the Internal Revenue Code precludes the Commissioner from issuing an FPAA and adjusting partnership items for the year 2000 when the FPAA was issued more than three years after the filing of the partnership return but within three years of the filing of the partners’ individual 2002-2004 tax returns?

    Rule(s) of Law

    Section 6501(a) of the Internal Revenue Code provides that the amount of any tax shall be assessed within three years from the date a taxpayer’s return is filed. Section 6229 establishes the minimum period for the assessment of any tax attributable to partnership items, extending the section 6501 period of limitations with respect to the tax attributable to partnership items or affected items.

    Holding

    The U. S. Tax Court held that sections 6229(a) and 6501(a) of the Internal Revenue Code do not preclude the Commissioner from issuing the FPAA and adjusting partnership items for the year 2000. Furthermore, the court held that these sections do not bar the Commissioner from assessing a tax liability against the partners for the 2002-2004 tax years attributable to the carryforward of their distributive shares of partnership losses for 2000, even though the partnership item adjustments relate to transactions completed and reported in the closed year of 2000.

    Reasoning

    The court reasoned that the issuance of the FPAA was not barred by any period of limitations because it was issued within three years of the partners’ filing of their individual 2002-2004 tax returns. The court emphasized that the TEFRA partnership provisions do not contain a period of limitations within which an FPAA must be issued, unlike the period applicable to large partnerships. The court distinguished between the general period of limitations for assessing any tax under section 6501 and the specific provisions of section 6229, which extend the period of limitations with respect to partnership items. The court noted that the IRS could assess a tax liability for open years (2002-2004) even though the underlying partnership item adjustments were attributable to transactions in a closed year (2000). The court relied on precedents that allow for the review of closed years in deficiency proceedings to adjust items impacting open years, extending this principle to TEFRA partnership proceedings. The court concluded that the Commissioner could assess a computational adjustment or determine a deficiency against the partners for the open years of 2002-2004, while conceding that the tax years 2000 and 2001 were closed to assessment.

    Disposition

    The U. S. Tax Court denied the petitioners’ motion for judgment on the pleadings, allowing the Commissioner to proceed with assessing taxes attributable to partnership items for the partners’ 2002-2004 taxable years.

    Significance/Impact

    The decision in G-5 Inv. P’ship v. Comm’r significantly impacts the application of the statute of limitations in TEFRA partnership proceedings. It clarifies that the IRS can issue an FPAA and adjust partnership items for a closed partnership year if the FPAA is issued within three years of the partners’ filing of their individual tax returns for subsequent years. This ruling expands the IRS’s ability to enforce tax liabilities arising from partnership items across multiple tax years, ensuring that adjustments in closed partnership years can still affect open partner tax years. The case reinforces the principle that the statute of limitations does not prevent the IRS from recomputing partnership items in closed years when those items impact the tax liability of partners in open years, thereby upholding the integrity of the tax system under TEFRA.

  • Ginsburg v. Comm’r, 127 T.C. 75 (2006): Statute of Limitations and Partnership Items in Tax Law

    Ginsburg v. Commissioner, 127 T. C. 75 (U. S. Tax Ct. 2006)

    In Ginsburg v. Commissioner, the U. S. Tax Court held that the IRS’s notice of deficiency to the taxpayers was untimely due to the statute of limitations expiring on affected items related to a partnership. The case underscores the necessity for the IRS to specifically reference partnership items in extension agreements to validly extend the limitations period for assessing affected items. This ruling impacts how the IRS must handle the statute of limitations in cases involving partnership tax assessments.

    Parties

    Alan H. Ginsburg and the Estate of Harriet F. Ginsburg, represented by Alan H. Ginsburg as personal representative (Petitioners), challenged the Commissioner of Internal Revenue (Respondent).

    Facts

    In 1995, Alan and Harriet Ginsburg owned 100% of North American Sports Management, Inc. (NASM) and Family Affordable Partners, Inc. (FAP), respectively, both S corporations. NASM and FAP each held a 50% interest in UK Lotto, LLC, a TEFRA partnership. UK Lotto reported a $7,351,237 ordinary loss on its 1995 Form 1065, with $6,936,038 of this loss stemming from its investment in Pascal & Co. NASM and FAP reported their respective 50% shares of UK Lotto’s loss on their corporate returns, and the Ginsburgs reported these losses on their personal tax return. The IRS audited UK Lotto’s return, accepted it as filed, and executed Forms 872-P to extend the period for assessing partnership items until December 31, 2003. Separately, the Ginsburgs executed Forms 872 with the IRS to extend the period for assessing their individual taxes until June 30, 2005, but these forms did not reference partnership items.

    Procedural History

    The IRS issued a notice of deficiency to the Ginsburgs on April 26, 2005, for the taxable year 1995, disallowing losses from UK Lotto. The Ginsburgs moved to dismiss for lack of jurisdiction, arguing that the adjustments were partnership items that should have been handled at the partnership level. They also moved for summary judgment, asserting that the statute of limitations on affected items had expired. The Tax Court had jurisdiction to review the case to the extent the adjustments pertained to affected items.

    Issue(s)

    Whether the IRS’s notice of deficiency to the Ginsburgs was valid in adjusting losses attributable to a partnership at the partner level under TEFRA provisions?

    Whether the period of limitations on assessment of tax attributable to affected items had expired under sections 6501 and 6229 of the Internal Revenue Code?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), partnership items must be determined at the partnership level. Affected items are items that depend on partnership items but are unique to each partner. Section 6229(a) of the Internal Revenue Code sets a three-year period for assessing taxes attributable to partnership items or affected items, which can be extended by agreement under section 6229(b). Section 6229(b)(3) specifies that any agreement under section 6501(c)(4) applies to partnership items only if it expressly provides so.

    Holding

    The Tax Court held that the IRS’s notice of deficiency adjusted both partnership and affected items. The court had jurisdiction over the affected items. However, the notice of deficiency was untimely because the Forms 872 executed with the Ginsburgs did not reference partnership or affected items as required by section 6229(b)(3).

    Reasoning

    The court analyzed the IRS’s notice of deficiency and determined that it adjusted both partnership items (which were final due to the expiration of the limitations period for UK Lotto) and affected items (which were unique to the Ginsburgs and could be adjusted at the partner level). The court held that it had jurisdiction over the affected items because the IRS had accepted UK Lotto’s return as filed, fulfilling the requirement for an outcome of a partnership proceeding.

    Regarding the statute of limitations, the court interpreted section 6229(b)(3) to require specific mention of partnership items in Forms 872 to extend the period for assessing affected items. The court rejected the IRS’s argument that section 6229(b)(3) applied only to partnership items, not affected items, by noting that the statute refers to the period described in section 6229(a), which includes both partnership and affected items. The court also referenced prior caselaw, secondary authority, and the IRS’s own manual to support its interpretation. The court emphasized that failing to include a reference to partnership items in the extension agreements would lead to untenable consequences and ambiguity, which the statute aims to avoid.

    Disposition

    The Tax Court granted the Ginsburgs’ motion for summary judgment, holding that the period of limitations on assessment of tax attributable to affected items had expired. The court dismissed the case for lack of jurisdiction over the partnership items and entered an appropriate order and decision.

    Significance/Impact

    Ginsburg v. Commissioner clarifies the IRS’s obligations under section 6229(b)(3) to specifically reference partnership items in extension agreements to extend the period for assessing affected items. This decision impacts how the IRS must handle statute of limitations issues in cases involving partnerships and their partners, ensuring that taxpayers receive clear notice of the IRS’s intent to extend the period for assessing taxes related to partnership investments. The ruling also reaffirms the distinction between partnership and affected items under TEFRA, reinforcing the need for the IRS to correctly identify and address these items in tax assessments.

  • Blonien v. Comm’r, 118 T.C. 541 (2002): Tax Court Jurisdiction and Partnership Items under TEFRA

    Blonien v. Commissioner, 118 T. C. 541 (U. S. Tax Court 2002)

    In Blonien v. Commissioner, the U. S. Tax Court ruled that it lacked jurisdiction to consider Rodney Blonien’s argument that he was not a partner in the insolvent law firm Finley Kumble. The court held that the determination of partnership status is a partnership item to be addressed at the partnership level, not in a partner-level deficiency proceeding. This decision upheld the tax deficiency notice issued to Blonien for his share of the firm’s cancellation of debt income, emphasizing the procedural framework of the Tax Equity and Fiscal Responsibility Act (TEFRA) and its impact on the assessment of partnership-related tax liabilities.

    Parties

    Rodney J. Blonien and Noreen E. Blonien, petitioners, filed a case against the Commissioner of Internal Revenue, respondent, in the United States Tax Court. The petitioners sought to challenge the tax deficiency notice issued to them regarding their 1992 Federal income tax.

    Facts

    Rodney Blonien, an attorney, was approached by Finley Kumble, a law partnership, to join as a partner in December 1986. After negotiations, Blonien began working at Finley Kumble’s Sacramento office in April 1987, receiving monthly draws and expecting to be a partner once formalities were completed. However, due to the firm’s financial troubles, Blonien did not sign the partnership agreement and resigned in December 1987 when the firm announced its dissolution. Despite this, Blonien received a Schedule K-1 for 1992 from Finley Kumble indicating his distributive share of partnership items, including cancellation of debt (COD) income. Blonien reported a portion of this income on his 1992 tax return but later argued he was not a partner. The Commissioner issued an affected items notice of deficiency for 1992, attributing to Blonien his distributive share of Finley Kumble’s COD income.

    Procedural History

    The Commissioner issued an affected items notice of deficiency to the petitioners on December 17, 1999, for a tax deficiency of $11,826 for the year 1992, stemming from Blonien’s share of Finley Kumble’s COD income. Petitioners filed a petition with the U. S. Tax Court, challenging the deficiency on the grounds that the period of limitations for assessment had expired and that Blonien was not a partner in Finley Kumble. The Tax Court held that it lacked jurisdiction to consider the argument regarding Blonien’s partnership status, as it was a partnership item to be determined at the partnership level. The court also noted that it had jurisdiction to determine the effect of partnership items on the petitioners’ tax liability at the partner level.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to consider Rodney Blonien’s argument that he was not a partner in Finley Kumble in a partner-level deficiency proceeding?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act (TEFRA), partnership items must be determined at the partnership level. Section 6231(a)(3) defines partnership items as those items that, by regulation, are more appropriately determined at the partnership level than at the partner level. The determination of who is a partner can affect the allocation of partnership items among other partners, making it a partnership item.

    Holding

    The U. S. Tax Court held that it lacked jurisdiction to consider Rodney Blonien’s argument that he was not a partner in Finley Kumble, as this issue is a partnership item that must be challenged at the partnership level under TEFRA. The court affirmed that the period of limitations for assessment of the deficiency had not expired because it was governed by section 6229, not section 6501, due to the partnership-level determination of Blonien’s status.

    Reasoning

    The Tax Court’s reasoning centered on the jurisdiction established by TEFRA, which mandates that partnership items be determined at the partnership level. The court noted that the determination of partnership status could affect the allocation of partnership items among other partners, thus classifying it as a partnership item. The court also addressed the petitioners’ due process concerns, finding that Blonien’s prior returns and failure to notify the Commissioner of inconsistent treatment through Form 8082 estopped him from challenging his partnership status in the deficiency proceeding. The court emphasized that the duty of consistency prevents a taxpayer from taking one position on one tax return and a contrary position on a subsequent return after the limitations period has run for the earlier year. The court further noted that it retained jurisdiction to determine the effect of partnership items on the petitioners’ tax liability at the partner level, which would be addressed through a Rule 155 computation.

    Disposition

    The court decided that a Rule 155 computation would be entered to determine the petitioners’ tax liability based on the partnership items allocated to Blonien at the partnership level.

    Significance/Impact

    Blonien v. Commissioner underscores the procedural framework of TEFRA and its impact on tax assessments related to partnerships. The decision clarifies that the determination of who is a partner is a partnership item, which must be addressed at the partnership level, not in a partner-level deficiency proceeding. This ruling reinforces the importance of the duty of consistency in tax law, preventing taxpayers from taking inconsistent positions across tax years. The case also highlights the jurisdictional limits of the Tax Court in handling partnership items, ensuring that partnership-level determinations are not revisited in individual deficiency proceedings. Subsequent cases have cited Blonien to affirm the principles established regarding partnership items and the Tax Court’s jurisdiction under TEFRA.

  • Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000): Statute of Limitations for Partnership Items and the Impact of Notice of Final Partnership Administrative Adjustment

    Rhone-Poulenc Surfactants & Specialties, L. P. v. Commissioner, 114 T. C. 533 (2000)

    The statute of limitations for assessing tax on partnership items is governed by both IRC sections 6501 and 6229, with section 6229 setting a minimum period and section 6501 potentially extending it.

    Summary

    Rhone-Poulenc Surfactants & Specialties, L. P. challenged the IRS’s adjustments to their 1990 partnership tax return, arguing the statute of limitations had expired. The court clarified that IRC section 6229 sets a minimum three-year period for assessing tax on partnership items, while section 6501 could extend this to six years if a substantial income omission occurred. The IRS issued a Final Partnership Administrative Adjustment (FPAA) notice, which suspended the running of the statute of limitations, allowing for continued assessment. The court denied summary judgment, citing unresolved issues about the adequacy of income disclosure on Rhone-Poulenc’s returns.

    Facts

    In 1990, Rhone-Poulenc and another subsidiary transferred business assets to a partnership, claiming it as a nontaxable exchange. The IRS issued a notice of Final Partnership Administrative Adjustment (FPAA) in 1997, treating the transfer as a taxable sale. Rhone-Poulenc filed a petition, arguing that the statute of limitations for assessing any tax from the partnership had expired. The IRS contended that Rhone-Poulenc omitted over 25% of gross income on its corporate return, justifying a six-year assessment period.

    Procedural History

    The IRS issued the FPAA on September 12, 1997. Rhone-Poulenc filed a petition challenging the adjustments. The Tax Court considered the motion for summary judgment based on the expiration of the statute of limitations, leading to the court’s decision to deny summary judgment due to unresolved factual issues.

    Issue(s)

    1. Whether IRC section 6229(a) provides a minimum three-year statute of limitations for assessing tax attributable to partnership items, independent of section 6501.
    2. Whether the issuance of an FPAA suspends the running of the statute of limitations under section 6501(e)(1)(A) when it might be extended to six years due to a substantial omission of income.
    3. Whether Rhone-Poulenc adequately disclosed any omitted income on its corporate return to prevent the extension of the statute of limitations to six years.

    Holding

    1. No, because section 6229(a) sets a minimum three-year period that does not preclude the applicability of a longer period under section 6501, such as the six-year period for substantial income omissions.
    2. Yes, because the FPAA suspended the running of the six-year period under section 6501(e)(1)(A), as it was issued before the expiration of that period.
    3. Undetermined, as the court found genuine issues of material fact regarding the adequacy of disclosure of the allegedly omitted income on Rhone-Poulenc’s corporate return.

    Court’s Reasoning

    The court interpreted IRC section 6229(a) as establishing a minimum three-year period for assessing tax on partnership items, which does not override the longer periods in section 6501. The court relied on the statutory language and legislative intent to support this view. The issuance of the FPAA was deemed to suspend the running of any open statute of limitations period under section 6501, allowing the IRS to continue the assessment process. The court also noted that statutes of limitations are strictly construed in favor of the government. The issue of adequate disclosure remained unresolved, leading to the denial of summary judgment.

    Practical Implications

    This decision clarifies that both IRC sections 6229 and 6501 are relevant to assessing tax on partnership items, with section 6229 setting a minimum period and section 6501 potentially extending it. Practitioners should be aware that the issuance of an FPAA can suspend the statute of limitations, allowing the IRS to continue assessments even after the initial three-year period has expired. The case also underscores the importance of adequate disclosure on tax returns to avoid extended assessment periods. Subsequent cases, such as Bufferd v. Commissioner, have further clarified the interplay between partnership and individual tax assessments.

  • Crop Associates-1986 v. Commissioner, T.C. Memo. 1999-247: Equitable Recoupment Defense Inappropriate in Partnership-Level Proceedings

    Crop Associates-1986 v. Commissioner, T. C. Memo. 1999-247

    The defense of equitable recoupment cannot be considered in a partnership-level proceeding under subchapter C of the Internal Revenue Code.

    Summary

    In Crop Associates-1986 v. Commissioner, the Tax Court denied a motion to amend a petition to include the affirmative defense of equitable recoupment in a partnership-level proceeding. The partnership sought to challenge the disallowance of a 1986 farming expense deduction and its offsetting 1987 income. The court held that equitable recoupment, which involves partner-level determinations, was not appropriate in a partnership-level proceeding under subchapter C of the Internal Revenue Code. The court also found that allowing the amendment would unfairly prejudice the Commissioner due to the timing and complexity of the new issues raised.

    Facts

    Crop Associates-1986, a limited partnership, filed a petition challenging the disallowance of a farming expense deduction for 1986. The partnership also reported the same amount as income in 1987. Frederick H. Behrens, the tax matters partner, intervened and moved to amend the petition to include the defense of equitable recoupment. This defense was based on the argument that the 1986 deduction and 1987 income arose from a single transaction, which was subject to inconsistent tax treatment. The Commissioner objected to the amendment, arguing that equitable recoupment was not a partnership item and should not be considered in this proceeding.

    Procedural History

    The petition was filed by a partner other than the tax matters partner. Behrens was allowed to intervene and subsequently moved for leave to amend the petition to add the defense of equitable recoupment. The Commissioner opposed the motion, leading to the Tax Court’s review and ultimate denial of the motion to amend.

    Issue(s)

    1. Whether the defense of equitable recoupment can be raised in a partnership-level proceeding under subchapter C of the Internal Revenue Code.
    2. Whether the Commissioner would be substantially disadvantaged by allowing the amendment to the petition.

    Holding

    1. No, because equitable recoupment requires partner-level determinations, which are beyond the jurisdiction of the Tax Court in a partnership-level proceeding under section 6226(f).
    2. Yes, because allowing the amendment would surprise and substantially disadvantage the Commissioner due to the timing and complexity of the issues raised.

    Court’s Reasoning

    The Tax Court reasoned that equitable recoupment is not a partnership item under section 6231(a)(3) and thus cannot be considered in a partnership-level proceeding under section 6226(f). The court noted that equitable recoupment involves partner-level determinations, such as whether a partner made a time-barred overpayment, which are outside the court’s jurisdiction in a partnership-level case. The court also considered the Commissioner’s argument that equitable recoupment is an affected item requiring partner-level determinations, further supporting the inappropriateness of considering it at the partnership level. Additionally, the court found that allowing the amendment would prejudice the Commissioner due to the late timing of the motion and the complexity of gathering evidence for the new issues raised. The court emphasized that justice does not require leave to amend a pleading when it would surprise and substantially disadvantage an adverse party.

    Practical Implications

    This decision clarifies that the defense of equitable recoupment cannot be raised in partnership-level proceedings under subchapter C of the Internal Revenue Code. Attorneys representing partnerships must be aware that such defenses are only appropriate at the partner level, typically after a computational adjustment and issuance of a deficiency notice. The ruling underscores the importance of timely raising all relevant defenses in tax litigation to avoid prejudicing the opposing party. Practitioners should also note that the court’s jurisdiction in partnership-level proceedings is strictly limited to partnership items, and attempts to include partner-level issues may be rejected. This case may influence how partnerships structure their defenses and the timing of raising equitable recoupment in tax disputes.

  • Greenberg Bros. P’ship #4 v. Commissioner, 111 T.C. 198 (1998): When Settlement Agreements Must Be Self-Contained and Comprehensive for Consistent Settlement Purposes

    Greenberg Bros. P’ship #4 v. Commissioner, 111 T. C. 198 (1998)

    For consistent settlement terms under IRC sec. 6224(c)(2), settlement agreements must be self-contained and comprehensive, not based on concessions of nonpartnership items.

    Summary

    In Greenberg Bros. P’ship #4 v. Commissioner, the Tax Court addressed whether a settlement agreement that included both partnership and nonpartnership items was subject to the consistent settlement provisions of IRC sec. 6224(c)(2). The case involved multiple partnerships formed to purchase film rights, where the IRS had settled with some partners but refused to offer the same terms to others who sought only the partnership item benefits. The court upheld the validity of the temporary regulation requiring settlements to be self-contained and comprehensive, ruling that such mixed agreements were not subject to consistent settlement requirements. This decision emphasizes the necessity for clear delineation between partnership and nonpartnership items in settlement agreements to maintain the integrity of the TEFRA consistent settlement process.

    Facts

    The Greenberg Brothers formed several partnerships to acquire film rights, including Breathless Associates, Lone Wolf McQuade Associates, and others. The IRS issued Final Partnership Administrative Adjustments (FPAAs) for these partnerships, and some partners entered into settlement agreements that included concessions on both partnership and nonpartnership items, such as the partners’ at-risk amounts. Other partners, seeking only the partnership item concessions without the nonpartnership item burdens, requested consistent settlement terms under IRC sec. 6224(c)(2). The IRS refused these requests, leading to the dispute.

    Procedural History

    The IRS issued FPAAs to the partnerships between June 1991 and March 1994. Some partners settled with the IRS in February 1995, and others filed petitions in the U. S. Tax Court from August 1991 to July 1994. The Tax Court consolidated these cases and addressed the consistent settlement issue in 1998, ruling on the validity of the temporary regulation and its application to the settlement agreements in question.

    Issue(s)

    1. Whether participants are entitled to consistent settlement terms under IRC sec. 6224(c)(2) when the original settlement agreements include concessions of both partnership and nonpartnership items.
    2. Whether the temporary regulation sec. 301. 6224(c)-3T(b) is valid in requiring settlement agreements to be self-contained and comprehensive.

    Holding

    1. No, because the original settlement agreements were not self-contained and comprehensive as required by the temporary regulation. The agreements included concessions of nonpartnership items, which disqualified them from consistent settlement under IRC sec. 6224(c)(2).
    2. Yes, because the temporary regulation is a permissible interpretation of IRC sec. 6224(c)(2), consistent with the broader legislative purpose of TEFRA to ensure uniform adjustment of partnership items.

    Court’s Reasoning

    The court applied the Chevron analysis to determine the validity of the temporary regulation. It found that IRC sec. 6224(c)(2) is silent on the scope of consistent settlements, leaving room for the IRS to promulgate regulations. The court upheld the regulation’s requirement that settlements must be self-contained (not based on concessions of nonpartnership items) and comprehensive (not limited to selected items) to maintain the integrity of the TEFRA settlement process. The court noted that allowing partial settlements would undermine the goal of uniform treatment of partnership items. It rejected the participants’ argument that the regulation added impermissible restrictions, finding it consistent with the statute’s purpose. The court also dismissed the participants’ estoppel claim, stating there was no reasonable reliance on the IRS’s provision of settlement information.

    Practical Implications

    This decision has significant implications for tax practitioners and partners in TEFRA proceedings. It clarifies that settlement agreements must clearly separate partnership and nonpartnership items to be eligible for consistent settlement under IRC sec. 6224(c)(2). Practitioners must ensure that settlement agreements are self-contained and comprehensive, using forms like the IRS’s Form 870-L(AD) to delineate between partnership and nonpartnership items. The ruling reinforces the IRS’s authority to regulate the settlement process to maintain uniformity and fairness. Subsequent cases, such as Olson v. United States, have utilized the separate parts of Form 870-L(AD) to comply with the regulation. This case also serves as a reminder to partners and their counsel to carefully consider the full scope of settlement agreements and the potential limitations on requesting consistent terms.

  • Phillips v. Commissioner, 106 T.C. 176 (1996): Limitations on Amending Returns to Change Partnership Items

    Phillips v. Commissioner, 106 T. C. 176 (1996)

    A partner cannot unilaterally revoke an investment credit claimed on a partnership item through an amended return without following specific TEFRA procedures.

    Summary

    In Phillips v. Commissioner, the taxpayers attempted to avoid recapture of an investment credit by filing amended returns revoking the credit after disposing of partnership property. The Tax Court ruled that these amended returns were ineffective because they did not comply with the required procedures under TEFRA for changing the treatment of partnership items. The court emphasized that a partner’s distributive share of investment credit is a partnership item that must be addressed through specific administrative adjustment requests, not through individual amended returns. This decision clarifies the procedural limitations partners face when attempting to alter partnership items on their personal tax returns.

    Facts

    Michael W. and Charlotte S. Phillips were partners in Ethanol Partners, Ltd. I and claimed an investment credit on their 1985 tax return based on partnership property. In 1986, after disposing of the property, they filed amended returns for 1985 and 1986 attempting to revoke the credit to avoid recapture liability. These amended returns were not accompanied by Form 8082, Notice of Inconsistent Treatment or Amended Return, and were filed after the IRS had initiated a partnership audit. The Phillips filed for bankruptcy in 1992, but the IRS continued with the partnership proceedings and issued a notice of deficiency based on a prospective settlement with Ethanol Partners.

    Procedural History

    The Phillips petitioned the Tax Court for a redetermination of deficiencies determined by the IRS for their 1984 and 1986 tax years. They conceded the deficiency for 1984, leaving the issue of recapture liability for 1986. The IRS had mailed a notice of final partnership administrative adjustment (FPAA) to the tax matters partner of Ethanol Partners in 1991, leading to a petition for readjustment filed in 1992. The Phillips’ amended returns were assessed in 1992, and after their bankruptcy discharge in 1993, the IRS issued a notice of deficiency in 1993 based on a prospective settlement finalized in 1994.

    Issue(s)

    1. Whether the Phillips’ amended returns for 1985 and 1986 were effective in revoking the investment credit claimed on partnership property to avoid recapture liability.

    Holding

    1. No, because the amended returns did not conform to the requirements of an administrative adjustment request under section 6227 of the Internal Revenue Code, which is necessary for changing the treatment of partnership items.

    Court’s Reasoning

    The court reasoned that the Phillips’ attempt to revoke the investment credit via amended returns was procedurally invalid under TEFRA’s unified audit procedures. The court emphasized that a partner’s distributive share of investment credit is a partnership item, and changes must be requested through Form 8082, which was not filed. The court cited previous cases supporting the IRS’s authority to disregard amended returns upon subsequent audit and highlighted the policy of maintaining consistency in partnership items across all partners. The court also noted that the conversion of partnership items to nonpartnership items due to bankruptcy did not substantively alter the Phillips’ tax liability, as the prospective settlement with Ethanol Partners was still relevant to determining their distributive share and recapture liability.

    Practical Implications

    This decision underscores the importance of adhering to TEFRA procedures when attempting to change the treatment of partnership items on personal tax returns. Practitioners should advise clients that individual amended returns are insufficient to alter partnership items without the proper administrative adjustment requests. The ruling also illustrates that bankruptcy proceedings do not automatically nullify partnership-level determinations, affecting how attorneys should advise clients on the interplay between bankruptcy and partnership tax issues. Subsequent cases have reinforced the need for strict compliance with TEFRA procedures, impacting how partnership audits and individual tax liabilities are managed.

  • Miller v. Commissioner, 104 T.C. 378 (1995): Suspension of Limitations Period for Partnership Items

    Miller v. Commissioner, 104 T. C. 378 (1995)

    The limitations period for assessing tax on partnership items is suspended during the pendency of a judicial action regarding a Final Partnership Administrative Adjustment (FPAA) and for one year thereafter.

    Summary

    In Miller v. Commissioner, the Tax Court addressed the suspension of the limitations period for assessing tax related to partnership items. The Millers invested in Encore Leasing Corp. through Alamo East Enterprises, claiming tax credits for several years. The IRS issued an FPAA to Alamo East, which was challenged in the U. S. District Court and dismissed without prejudice. The Tax Court held that the limitations period was suspended during the judicial action and for one year after its dismissal, allowing the IRS to issue a timely notice of deficiency to the Millers. Additionally, the court upheld the addition to tax for a valuation overstatement, as the adjusted basis of the investment was determined to be zero.

    Facts

    Glenn E. and Sharon A. Miller invested in Encore Leasing Corp. through Alamo East Enterprises in 1983. They claimed tax credits for 1980, 1981, 1983, and 1984. The IRS issued an FPAA to a partner of Alamo East on July 8, 1987, regarding its 1983 return. Alamo East filed a petition in the U. S. District Court for the Northern District of California, which was dismissed without prejudice on July 20, 1988. Following the dismissal, the Millers paid the deficiencies. On July 20, 1989, the IRS mailed a notice of deficiency to the Millers regarding additions to tax for the years in question.

    Procedural History

    The IRS mailed an FPAA to Alamo East on July 8, 1987. Alamo East filed a petition in the U. S. District Court for the Northern District of California on November 27, 1987. The petition was dismissed without prejudice on July 20, 1988. The Millers paid the assessed deficiencies. On July 20, 1989, the IRS mailed a notice of deficiency to the Millers, leading them to file a motion for summary judgment in the Tax Court.

    Issue(s)

    1. Whether the period of limitations on assessment expired with respect to the years in issue.
    2. Whether petitioners are liable for the addition to tax for a valuation overstatement under section 6659 for taxable years 1980, 1981, 1983, and 1984.

    Holding

    1. No, because the period of limitations was suspended during the pendency of the judicial action and for one year after the dismissal of the action became final.
    2. Yes, because the adjusted basis of the investment was overstated, resulting in a valuation overstatement under section 6659.

    Court’s Reasoning

    The Tax Court applied section 6229(d), which suspends the limitations period during the time an action may be brought under section 6226 and for one year thereafter. The court reasoned that even though the District Court dismissed the case without prejudice, section 6226(h) treats the dismissal as a decision that the FPAA is correct. Thus, the limitations period was suspended from July 8, 1987, until the dismissal became final and for an additional year, allowing the IRS to issue a timely notice of deficiency on July 20, 1989. For the second issue, the court relied on prior test cases (Wolf, Feldmann, and Garcia) where it was determined that the adjusted basis of the master recordings leased from Encore was zero, leading to a valuation overstatement. The court upheld the addition to tax under section 6659, as the Millers’ claimed tax credits were based on an overstated value.

    Practical Implications

    This decision clarifies that the limitations period for assessing tax on partnership items is suspended during the pendency of judicial actions and for one year after their dismissal, even if dismissed without prejudice. Tax practitioners must be aware that such suspensions apply to all partners in the partnership, not just those directly involved in the litigation. The ruling also reinforces the application of valuation overstatement penalties under section 6659, particularly in cases where the adjusted basis of an investment is determined to be zero. This case has been cited in subsequent cases involving similar issues, such as O’Neill v. United States, emphasizing its continued relevance in tax law concerning partnership items and valuation overstatements.

  • Boyd v. Commissioner, 101 T.C. 372 (1993): When TEFRA Partnership Provisions Override General Statute of Limitations

    Boyd v. Commissioner, 101 T. C. 372 (1993)

    The TEFRA partnership provisions can extend the statute of limitations for assessing tax deficiencies related to partnership items beyond the general three-year period under section 6501(a).

    Summary

    In Boyd v. Commissioner, the Tax Court addressed whether the IRS could issue a second notice of deficiency for the 1983 tax year due to partnership losses from Regal Laboratories, Ltd. , a TEFRA partnership. The court held that the TEFRA provisions allowed the IRS to assess tax deficiencies related to partnership items beyond the general statute of limitations, validating the second notice of deficiency. The case clarified that TEFRA partnership items must be resolved at the partnership level, and the IRS could issue a second notice of deficiency for the same tax year without being barred by res judicata or section 6212(c) when the first notice was invalid.

    Facts

    Lee C. Boyd and his wife invested $24,000 in Regal Laboratories, Ltd. , a limited partnership formed to exploit agricultural biotechnologies. They claimed a $120,000 partnership loss on their 1983 tax return. The IRS issued a first notice of deficiency in 1987, which was untimely under section 6501(a). In 1988, the IRS conducted a TEFRA partnership audit of Regal, disallowing its research and development deductions. Boyd did not receive timely notice of the TEFRA proceeding. In 1991, the IRS issued a second notice of deficiency, disallowing Boyd’s Regal loss and part of his medical expense deduction.

    Procedural History

    The IRS issued a first notice of deficiency in 1987, which Boyd contested in the Tax Court (docket No. 29725-87). The case was resolved by stipulation that Boyd was not liable for a deficiency. In 1988, the IRS conducted a TEFRA audit of Regal, issuing an FPAA. Boyd did not receive timely notice of this proceeding. In 1991, the IRS issued a second notice of deficiency, which Boyd contested, leading to the Tax Court’s decision in 1993.

    Issue(s)

    1. Whether the statute of limitations under section 6501(a) bars assessment of tax related to Boyd’s Regal partnership deduction.
    2. Whether the second notice of deficiency is barred by res judicata or section 6212(c).
    3. Whether Boyd may deduct a $120,000 partnership loss for Regal.
    4. Whether Boyd is liable for increased interest under section 6621(c).

    Holding

    1. No, because the TEFRA partnership provisions under section 6229 apply to partnership items, extending the statute of limitations beyond the general three-year period.
    2. No, because the first notice of deficiency was invalid, and section 6230(a)(2)(C) allows a second notice for partnership items.
    3. No, because Boyd failed to prove that Regal’s losses were valid.
    4. Yes, because Boyd’s investment in Regal was a tax-motivated transaction under section 6621(c).

    Court’s Reasoning

    The court reasoned that the TEFRA partnership provisions govern the assessment of tax deficiencies related to partnership items, overriding the general statute of limitations under section 6501(a). The court emphasized that partnership items must be resolved at the partnership level, as stated in Maxwell v. Commissioner: “By enacting the partnership audit and litigation procedures, Congress provided a method for uniformly adjusting items of partnership income, loss, deduction, or credit that affect each partner. ” The court found that Boyd’s Regal deduction was a partnership item, and the IRS’s second notice of deficiency was timely under section 6229(f). The court rejected Boyd’s res judicata argument, noting that the first notice was invalid and did not preclude a second notice for partnership items. The court also upheld the disallowance of Boyd’s Regal loss and his liability for increased interest, citing the lack of evidence supporting the loss and the tax-motivated nature of the investment.

    Practical Implications

    This decision clarifies that the TEFRA partnership provisions can extend the statute of limitations for assessing tax deficiencies related to partnership items. Practitioners should be aware that partnership items must be resolved at the partnership level, and the IRS may issue a second notice of deficiency for the same tax year if the first notice was invalid or did not address partnership items. This case also underscores the importance of timely notice in TEFRA proceedings and the potential consequences of failing to elect to be bound by a partnership-level decision. The decision reinforces the IRS’s ability to disallow deductions from tax shelter partnerships and impose increased interest for tax-motivated transactions.