SCOTUS Reports

Tag: TEFRA procedures

  • SN Worthington Holdings LLC v. Commissioner of Internal Revenue, 162 T.C. No. 10 (2024): Validity of Election into Bipartisan Budget Act Procedures

    SN Worthington Holdings LLC v. Commissioner of Internal Revenue, 162 T. C. No. 10 (2024)

    In a landmark decision, the U. S. Tax Court ruled that SN Worthington Holdings LLC’s election into the Bipartisan Budget Act (BBA) audit procedures was valid despite the IRS’s objections. The court held that when a partnership complies with all regulatory requirements for an election, it is valid, and the IRS must follow the elected procedures. This ruling invalidates the IRS’s use of TEFRA procedures and the subsequent Final Partnership Administrative Adjustment (FPAA) issued under those procedures, marking a significant clarification on the application of BBA election rules.

    Parties

    SN Worthington Holdings LLC, formerly known as Jacobs West St. Clair Acquisition LLC, with MM Worthington Inc. as the Tax Matters Partner (TMP), was the petitioner. The Commissioner of Internal Revenue was the respondent.

    Facts

    SN Worthington Holdings LLC, an Ohio limited liability company classified as a partnership for federal income tax purposes, filed a partnership return for the 2016 tax year. In 2018, upon notification from the Commissioner of an examination of its return, SN Worthington elected to be subject to the partnership audit and litigation procedures under the Bipartisan Budget Act of 2015 (BBA). The election required SN Worthington to represent that it had sufficient assets to pay any potential imputed underpayment. The Commissioner rejected this election, asserting that SN Worthington lacked the necessary assets. Despite the rejection, SN Worthington continued communications with the Commissioner, signing documents referencing TEFRA procedures. In 2020, SN Worthington contested the use of TEFRA procedures, arguing that its BBA election was valid.

    Procedural History

    The Commissioner initiated an examination of SN Worthington’s 2016 return and notified SN Worthington of its option to elect into the BBA procedures. SN Worthington made the election within the required timeframe using Form 7036. The Commissioner rejected the election, citing insufficient assets, and proceeded with the examination under TEFRA procedures. On August 24, 2020, the Commissioner issued a Notice of Final Partnership Administrative Adjustment (FPAA) under TEFRA. SN Worthington challenged the FPAA’s validity, arguing that the BBA election was valid and that the FPAA was therefore invalid. The Tax Court heard the case, with the Commissioner arguing that the election was invalid and that SN Worthington should be equitably estopped from asserting the BBA election’s validity.

    Issue(s)

    Whether SN Worthington Holdings LLC made a valid election into the BBA partnership audit and litigation procedures for its 2016 tax year, thereby rendering the Commissioner’s issuance of a Final Partnership Administrative Adjustment (FPAA) under TEFRA invalid?

    Rule(s) of Law

    To elect into the BBA procedures for years before 2018, a partnership must submit an election under Treasury Regulation § 301. 9100-22(b)(2) that satisfies the requirements set forth in that regulation. One of the requirements is a representation that “[t]he partnership has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment with respect to the partnership taxable year. ” (Treas. Reg. § 301. 9100-22(b)(2)(ii)(E)(4)).

    Holding

    The Tax Court held that SN Worthington’s election into the BBA procedures was valid because it complied with all requirements under Treasury Regulation § 301. 9100-22(b)(2). Consequently, the FPAA issued under the repealed TEFRA procedures was invalid, and the court lacked jurisdiction over the TEFRA partnership case.

    Reasoning

    The court reasoned that SN Worthington’s compliance with the plain text of the regulatory election requirements was sufficient to validate the election. The court emphasized that the Commissioner cannot impose additional requirements beyond those stated in the regulation. The court rejected the Commissioner’s argument that SN Worthington needed to prove its asset sufficiency beyond the representation required by the regulation, citing that the BBA procedures themselves account for partnerships with insufficient assets by allowing the Commissioner to assess and collect from partners. The court also addressed the Commissioner’s equitable estoppel argument, concluding that it did not apply because the Commissioner had all relevant facts to determine the election’s validity and incorrectly applied the law to those facts. The court’s decision underscores the importance of adhering to regulatory text in the context of BBA elections and clarifies the procedural framework for partnerships transitioning to the new audit regime.

    Disposition

    The Tax Court dismissed the case for lack of jurisdiction, as the FPAA issued under TEFRA was invalid due to SN Worthington’s valid BBA election.

    Significance/Impact

    This decision significantly impacts the application of the BBA audit procedures, affirming that partnerships can validly elect into these procedures by complying with regulatory requirements without additional burdens imposed by the IRS. It clarifies the boundaries of IRS authority in challenging such elections and underscores the importance of the regulatory text in determining the validity of elections. The ruling may influence future cases involving BBA elections and could lead to a reevaluation of IRS procedures for handling such elections. It also reinforces the transition from TEFRA to BBA procedures, ensuring that partnerships that have elected into the BBA regime are subject to the correct audit and litigation processes.

  • Bedrosian v. Commissioner, 143 T.C. 83 (2014): Application of TEFRA Procedures and Jurisdiction Over Partnership Items

    Bedrosian v. Commissioner, 143 T. C. 83 (U. S. Tax Court 2014)

    In Bedrosian v. Commissioner, the U. S. Tax Court ruled that it lacked jurisdiction over partnership items from a notice of deficiency due to the IRS’s mishandling of TEFRA procedures. The court clarified that the IRS’s use of both TEFRA and deficiency procedures was invalid for partnership items because the IRS had initially determined the case was not subject to TEFRA, but later issued a TEFRA notice. This decision underscores the importance of adhering to the correct procedural framework when auditing partnerships, affecting how future cases involving similar procedural issues may be approached.

    Parties

    John C. Bedrosian and Judith D. Bedrosian (Petitioners) v. Commissioner of Internal Revenue (Respondent). The Bedrosians were the taxpayers at the trial level and appellants at the appellate level, while the Commissioner was the respondent at both stages.

    Facts

    John C. Bedrosian and Judith D. Bedrosian invested in a Son-of-BOSS transaction through a partnership named Stone Canyon Partners. The partnership was subject to the Tax Equity and Fiscal Responsibility Act (TEFRA) procedures due to the presence of passthrough partners. The IRS initially audited the Bedrosians’ individual tax returns for 1999 and 2000, soliciting extensions of the statute of limitations and discussing potential settlements without following TEFRA procedures. Later, the IRS issued a notice of beginning of administrative proceeding (NBAP) and a final partnership administrative adjustment (FPAA) for Stone Canyon Partners, but also issued a notice of deficiency to the Bedrosians, which included the same adjustments as the FPAA plus additional adjustments. The Bedrosians filed a timely petition challenging the notice of deficiency but an untimely petition challenging the FPAA.

    Procedural History

    The IRS issued a notice of deficiency to the Bedrosians on April 19, 2005, and an FPAA to Stone Canyon Partners on April 8, 2005. The Bedrosians timely filed a petition in response to the notice of deficiency on July 5, 2005. The Tax Court dismissed the case for lack of jurisdiction over partnership items included in the notice of deficiency, retaining jurisdiction over nonpartnership items. The Bedrosians also filed an untimely petition in response to the FPAA, which the Tax Court dismissed for lack of jurisdiction due to the late filing. The Court of Appeals for the Ninth Circuit affirmed the Tax Court’s dismissals and held that the notice of deficiency was invalid as to partnership items. The case returned to the Tax Court, where the Bedrosians moved for summary judgment, arguing that the court had jurisdiction over all items in the notice of deficiency due to the IRS’s procedural errors.

    Issue(s)

    Whether the partnership items converted to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the IRS mailed the FPAA?
    Whether the partnership items converted to nonpartnership items under section 6223(e)(3) because filing a petition with respect to a notice of deficiency constituted substantial compliance with procedures for opting out of a TEFRA proceeding?
    Whether the Secretary reasonably determined under section 6231(g)(2) that TEFRA did not apply to the partnership?
    Whether the Tax Court was bound by the Court of Appeals for the Ninth Circuit’s prior holding that it lacked jurisdiction over the partnership items in the notice of deficiency?

    Rule(s) of Law

    Section 6223(e)(2) provides that partnership items automatically convert to nonpartnership items if the TEFRA proceeding has concluded at the time the IRS mails notice to the taxpayer. Section 6223(e)(3) allows a partner to elect to have partnership items converted to nonpartnership items if the TEFRA proceeding is ongoing at the time the IRS mails notice to the taxpayer. Section 6231(g)(2) provides that TEFRA procedures do not apply if the Secretary reasonably determines, on the basis of the partnership’s return, that TEFRA does not apply, even if that determination is erroneous.

    Holding

    The Tax Court held that the partnership items did not convert to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the IRS mailed the FPAA. The court also held that the partnership items did not convert to nonpartnership items under section 6223(e)(3) because filing a petition with respect to a notice of deficiency was not substantial compliance with procedures for opting out of a TEFRA proceeding. Additionally, the court held that the Secretary did not reasonably determine under section 6231(g)(2) that TEFRA did not apply to the partnership. Finally, the court held that it was bound by the Court of Appeals for the Ninth Circuit’s prior holding that it lacked jurisdiction over the partnership items in the notice of deficiency.

    Reasoning

    The Tax Court reasoned that section 6223(e)(2) did not apply because the TEFRA proceeding was ongoing when the IRS mailed the FPAA. The court rejected the Bedrosians’ argument that the expiration of the statute of limitations should be considered a conclusion of the TEFRA proceeding. Regarding section 6223(e)(3), the court found that the Bedrosians did not make a timely election to opt out of the TEFRA proceeding and did not substantially comply with the election procedures. The court also found that the IRS did not reasonably determine under section 6231(g)(2) that TEFRA did not apply to the partnership because the partnership’s return clearly indicated the presence of passthrough partners, making the partnership subject to TEFRA. The court concluded that it was bound by the Court of Appeals for the Ninth Circuit’s prior holding, which precluded reconsideration of the jurisdiction issue.

    Disposition

    The Tax Court denied the Bedrosians’ motion for summary judgment and upheld its prior decision that it lacked jurisdiction over the partnership items in the notice of deficiency.

    Significance/Impact

    The decision in Bedrosian v. Commissioner clarifies the application of TEFRA procedures and the consequences of the IRS’s failure to follow those procedures correctly. It underscores the importance of adhering to the proper procedural framework when auditing partnerships and the potential jurisdictional consequences of failing to do so. The case also highlights the limitations of the Tax Court’s jurisdiction over partnership items when TEFRA procedures are involved and the impact of appellate court decisions on subsequent proceedings in the same case. The decision may influence how the IRS approaches audits of partnerships and how taxpayers respond to notices issued under different procedural frameworks.

  • Nussdorf v. Comm’r, 129 T.C. 30 (2007): Jurisdiction over Partnership Items in Tax Law

    Nussdorf v. Comm’r, 129 T. C. 30 (U. S. Tax Court 2007)

    In Nussdorf v. Comm’r, the U. S. Tax Court ruled it lacked jurisdiction over partnership items and affected items related to the contributions of Euro options to Evergreen Trading, LLC. The court clarified that such items must be addressed in partnership-level proceedings, not individual deficiency proceedings, emphasizing the significance of the Tax Equity and Fiscal Responsibility Act (TEFRA) procedures in tax disputes involving partnerships.

    Parties

    Plaintiffs: Arlene Nussdorf, Glenn Nussdorf, Stephen Nussdorf, Claudine Strum, and Alicia Nussdorf. They were petitioners in the U. S. Tax Court.
    Defendant: Commissioner of Internal Revenue, the respondent in the case.

    Facts

    The petitioners, through certain flowthrough entities, were members of Evergreen Trading, LLC. In November 1999, these entities purportedly entered into two offsetting Euro option trades with AIG International, Inc. , involving the purchase and sale of options for Euros. On November 30, 1999, these entities contributed the Euro options and cash to Evergreen Trading in exchange for partnership interests. Evergreen Trading executed offsetting currency options in December 1999, resulting in reported gains and losses. In 2002 and 2003, the Commissioner issued notices of beginning of administrative proceedings with respect to Evergreen Trading for the taxable years 1999 and 2000. On September 26, 2005, the Commissioner issued a notice of Final Partnership Administrative Adjustment (FPAA) regarding Evergreen Trading and notices of deficiency to the petitioners for the taxable years 1999 and 2000. The petitioners filed a complaint in the U. S. Court of Federal Claims regarding the FPAA adjustments.

    Procedural History

    The Commissioner moved to dismiss the case for lack of jurisdiction, arguing that the notices of deficiency contained determinations that were partnership items or affected items, which should be addressed in a partnership proceeding. The petitioners moved to dismiss the partnership and affected items, contending that one specific determination in the notices of deficiency was a nonpartnership item that should be considered in the individual proceeding. The Tax Court granted the Commissioner’s motion and denied the petitioners’ motion, dismissing the case for lack of jurisdiction.

    Issue(s)

    Whether the Tax Court has jurisdiction over the determination set forth in paragraph 8 of the notices of deficiency issued to the petitioners, which relates to the purported contributions of Euro options to Evergreen Trading, LLC?

    Rule(s) of Law

    Under 26 U. S. C. § 6231(a)(3), “partnership item” means any item required to be taken into account for the partnership’s taxable year under any provision of subtitle A, to the extent regulations provide that such item is more appropriately determined at the partnership level than at the partner level. 26 U. S. C. § 723 provides that the basis of property contributed to a partnership by a partner is the adjusted basis of such property to the contributing partner at the time of contribution. Treasury Regulation § 301. 6231(a)(3)-1(a)(4) lists items required to be taken into account under subtitle A of the Code that are more appropriately determined at the partnership level, including items relating to contributions to the partnership.

    Holding

    The Tax Court held that it lacked jurisdiction over the determination in paragraph 8 of the notices of deficiency, which related to certain partnership items involving the purported contributions of Euro options to Evergreen Trading by its members. The court also held that it lacked jurisdiction over the remaining determinations in the notices of deficiency because they related to partnership items or affected items.

    Reasoning

    The court reasoned that under § 723, Evergreen Trading was required to determine its basis in the contributed Euro options, which included determining the basis of the contributing partners in such property. This determination falls within the definition of partnership items under § 6231(a)(3) and Treasury Regulation § 301. 6231(a)(3)-1(a)(4), as it relates to contributions to the partnership and is more appropriately determined at the partnership level. The court rejected the petitioners’ argument that the determination of the cost basis of the purchased Euro option in their hands was a nonpartnership item, stating that the partnership’s determination of its basis in the contributed property inherently involved determining the contributing partners’ bases. The court emphasized the importance of the TEFRA procedures, which require partnership items to be resolved in partnership-level proceedings. The court’s reasoning was guided by precedent such as Trost v. Commissioner and Maxwell v. Commissioner, which established that the Tax Court lacks jurisdiction over partnership items in individual deficiency proceedings.

    Disposition

    The Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction and denied the petitioners’ motion to dismiss partnership items and affected items, dismissing the case.

    Significance/Impact

    Nussdorf v. Comm’r reinforces the jurisdictional boundaries established by TEFRA, clarifying that partnership items, including those related to contributions and basis determinations, must be resolved in partnership-level proceedings. This decision has significant implications for tax disputes involving partnerships, as it underscores the necessity of following TEFRA procedures to ensure proper adjudication of partnership-related tax issues. Subsequent cases have cited Nussdorf to support the principle that individual deficiency proceedings cannot be used to challenge determinations that fall within the scope of partnership items.

  • Katz v. Commissioner, 116 T.C. 5 (2001): Allocating Partnership Losses to a Bankruptcy Estate

    Katz v. Commissioner, 116 T. C. 5 (2001)

    A partner’s entire distributive share of partnership losses for a taxable year must be reported by the partner’s bankruptcy estate if the estate holds the partnership interest at the end of the partnership’s taxable year.

    Summary

    Aron B. Katz filed for bankruptcy on July 5, 1990, and claimed partnership losses from the pre-bankruptcy period on his individual tax return. The IRS argued that these losses should be reported by Katz’s bankruptcy estate. The Tax Court held that since Katz’s bankruptcy estate held the partnership interests at the end of the 1990 taxable year, the entire distributive share, including pre-bankruptcy losses, must be reported by the estate. This decision was based on the interpretation of Sections 706(a) and 1398(e) of the Internal Revenue Code, which govern the timing and allocation of partnership items to a bankruptcy estate.

    Facts

    Aron B. Katz owned limited partnership interests in several calendar year partnerships. On July 5, 1990, he filed for bankruptcy under Chapter 7. The partnerships allocated his distributive share of income and losses for 1990, with some partnerships subdividing these items into pre-petition and post-petition periods. Katz reported the pre-petition losses on his individual 1990 tax return, totaling $19,122,838, which contributed to a net operating loss (NOL) of $19,262,795. The IRS disallowed NOL carryovers claimed by Katz and his wife for tax years 1991-1994, asserting that these losses belonged to Katz’s bankruptcy estate.

    Procedural History

    Katz and his wife petitioned the Tax Court for a redetermination of the deficiencies. They moved to dismiss the case for lack of jurisdiction, arguing that the IRS should have first adjusted partnership items through a partnership-level proceeding. The Tax Court denied the motion to dismiss, finding that the allocation issue between Katz and his bankruptcy estate was not a partnership item. The court then granted summary judgment to the IRS, ruling that the entire 1990 distributive share should be reported by Katz’s bankruptcy estate.

    Issue(s)

    1. Whether the Tax Court has jurisdiction to determine the allocation of partnership losses between a partner and the partner’s bankruptcy estate without a partnership-level proceeding.
    2. Whether the pre-petition partnership losses should be reported by Katz in his individual capacity or by his bankruptcy estate.

    Holding

    1. No, because the allocation of partnership losses between Katz and his bankruptcy estate is not a partnership item under the TEFRA procedures, and thus, does not require a partnership-level proceeding.
    2. No, because under Sections 706(a) and 1398(e), the entire distributive share of partnership losses for the year must be reported by the bankruptcy estate since it held the partnership interests at the end of the partnership’s taxable year.

    Court’s Reasoning

    The court reasoned that the allocation of partnership items between a partner and the partner’s bankruptcy estate is not a partnership item under the TEFRA procedures, as it does not affect other partners and is not determined at the partnership level. The court applied Section 706(a), which deems a partner’s distributive share to be received on the last day of the partnership’s taxable year, and Section 1398(e), which assigns income from property of the estate to the estate itself. Since Katz’s bankruptcy estate held the partnership interests on December 31, 1990, it was entitled to report the entire distributive share, including the pre-petition losses. The court rejected Katz’s arguments that the varying interests rule under Section 706(d)(1) or the short taxable year election under Section 1398(d)(2) required a different allocation. The court emphasized that a partner in bankruptcy and the bankruptcy estate are treated as a single partner for TEFRA purposes.

    Practical Implications

    This decision clarifies that a partner’s entire distributive share of partnership losses for a taxable year must be reported by the bankruptcy estate if it holds the partnership interest at the end of the year. Practitioners should advise clients in bankruptcy to report all partnership items for the year to the estate, regardless of when the bankruptcy was filed. This ruling may impact the tax planning strategies of individuals considering bankruptcy, as it affects the allocation of tax benefits between the debtor and the estate. Subsequent cases, such as Gulley v. Commissioner, have followed this precedent, reinforcing the principle that the bankruptcy estate is treated as the partner for tax purposes at the end of the partnership’s taxable year.