SCOTUS Reports

Tag: TEFRA

  • Petaluma FX Partners, LLC v. Comm’r, 131 T.C. 84 (2008): Partnership Items and Penalties Under TEFRA

    Petaluma FX Partners, LLC v. Comm’r, 131 T. C. 84 (2008)

    In Petaluma FX Partners, LLC v. Commissioner, the U. S. Tax Court upheld the IRS’s ability to determine whether a partnership should be disregarded for tax purposes as a partnership item under TEFRA. The court also affirmed its jurisdiction over accuracy-related penalties linked to partnership items, including valuation misstatement penalties, despite the taxpayer’s argument that these penalties should be considered at the partner level. The ruling clarifies the scope of judicial review in partnership-level proceedings and impacts how tax shelters and related transactions are treated for tax purposes.

    Parties

    Petaluma FX Partners, LLC, and Ronald Scott Vanderbeek, a partner other than the tax matters partner, were the petitioners. The respondent was the Commissioner of Internal Revenue.

    Facts

    Petaluma FX Partners, LLC (Petaluma) was formed in August 2000 by Bricolage Capital, LLC; Stillwaters, Inc. ; and Caballo, Inc. Its purported business was to engage in foreign currency option trading. Ronald Thomas Vanderbeek (RTV) and Ronald Scott Vanderbeek (RSV) became partners in October 2000, contributing pairs of offsetting long and short foreign currency options. They increased their adjusted bases in Petaluma by the value of the long options but did not decrease their bases by the value of the short options they contributed. In December 2000, RTV and RSV withdrew from Petaluma, receiving cash and Scient stock in liquidation of their interests. They sold their Scient stock in December 2000 and claimed substantial losses on their 2000 tax returns. Petaluma filed a Form 1065 for the 2000 tax year. In July and August 2005, the IRS issued final partnership administrative adjustments (FPAAs) disallowing the claimed losses and adjusting various partnership items to zero, asserting that Petaluma was a sham or lacked economic substance and thus should be disregarded for tax purposes.

    Procedural History

    On December 30, 2005, RSV, as a partner other than the tax matters partner, filed a petition challenging the FPAA adjustments. The parties filed a stipulation of settled issues on May 22, 2007, where RSV conceded most adjustments but disputed the court’s jurisdiction over the remaining issues, including the partners’ outside bases and the applicability of valuation misstatement penalties. Both parties moved for summary judgment, with the IRS seeking affirmation of its adjustments and penalties, while the petitioners argued the court lacked jurisdiction over these issues.

    Issue(s)

    1. Whether the Tax Court has jurisdiction in a partnership-level proceeding to determine whether Petaluma should be disregarded for tax purposes?
    2. Whether the Tax Court has jurisdiction to determine whether the partners’ outside bases in Petaluma were greater than zero?
    3. Whether the Tax Court has jurisdiction to determine whether accuracy-related penalties determined in the FPAA apply?
    4. If the Tax Court has jurisdiction over the penalties, whether the substantial valuation misstatement penalties are applicable to the adjustments of partnership items?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Tax Court’s jurisdiction in partnership-level proceedings includes determining all partnership items, the proper allocation of such items among partners, and the applicability of any penalty that relates to an adjustment to a partnership item. See 26 U. S. C. § 6226(f). A “partnership item” is defined as 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. See 26 U. S. C. § 6231(a)(3).

    Holding

    1. The Tax Court has jurisdiction to determine whether Petaluma should be disregarded for tax purposes as a partnership item.
    2. If Petaluma is disregarded for tax purposes, the Tax Court has jurisdiction to determine that the partners had no outside bases in Petaluma.
    3. The Tax Court has jurisdiction to determine whether accuracy-related penalties apply to adjustments to partnership items.
    4. The substantial valuation misstatement penalties are applicable to the adjustments of partnership items because if the partnership is disregarded, the partners’ claimed bases in Petaluma become overstatements.

    Reasoning

    The court’s reasoning was grounded in the statutory framework of TEFRA and the regulations defining partnership items. The court held that whether Petaluma was a sham or lacked economic substance was a partnership item because it directly affected the tax items reported on the partnership return. The determination that a partnership should be disregarded affects all partnership items, and thus, is appropriately determined at the partnership level to ensure consistent treatment among partners. The court also reasoned that if a partnership is disregarded, the partners’ outside bases must be zero, and this determination can be made at the partnership level without partner-level inquiries. Regarding penalties, the court interpreted “relates to” in § 6226(f) broadly, finding that the accuracy-related penalties, including valuation misstatement penalties, were within its jurisdiction because they were linked to adjustments of partnership items. The court rejected the argument that the valuation misstatement penalty was inapplicable as a matter of law, following the majority view of the Courts of Appeals that such penalties apply when a transaction is disregarded as a sham or for lack of economic substance.

    Disposition

    The court granted the Commissioner’s motion for summary judgment and denied the petitioner’s cross-motion for summary judgment. The court determined that it had jurisdiction over all the issues raised in the FPAA and upheld the adjustments and penalties as stipulated by the petitioner, except for the valuation misstatement penalty, which was upheld as a matter of law.

    Significance/Impact

    The decision in Petaluma FX Partners, LLC v. Commissioner has significant implications for the application of TEFRA in partnership-level proceedings. It clarifies that determinations regarding the validity of a partnership and the applicability of penalties based on partnership items are within the Tax Court’s jurisdiction. This ruling affects how tax shelters and transactions designed to artificially inflate basis may be challenged by the IRS, emphasizing the broad scope of judicial review in partnership-level proceedings. The decision also underscores the importance of consistent treatment of partnership items among partners, reinforcing the purpose of TEFRA to streamline the audit and litigation process for partnerships.

  • JT USA LP v. Commissioner, 131 T.C. 59 (2008): Partner Elections Under TEFRA

    JT USA LP v. Commissioner, 131 T. C. 59 (U. S. Tax Court 2008)

    In JT USA LP v. Commissioner, the U. S. Tax Court ruled that partners can make different elections under the Tax Equity and Fiscal Responsibility Act (TEFRA) for different partnership interests they hold. This decision allows partners to opt out of partnership-level proceedings for specific interests, impacting how the IRS conducts audits and resolves tax disputes involving partnerships. The ruling clarifies the rights of partners in complex partnership structures and emphasizes the need for proper notification from the IRS.

    Parties

    Plaintiffs: JT USA LP, John Ross, and Rita Gregory, identified as partners other than the tax matters partner (TMP) at the trial level. Defendants: Commissioner of Internal Revenue, respondent throughout the litigation.

    Facts

    John and Rita Gregory founded JT USA LP, which sold motocross and paintball accessories. In 2000, they sold the business assets for $32 million, triggering a significant capital gain. To offset this gain, they engaged in a tax shelter known as a Son-of-BOSS transaction. This involved restructuring the partnership’s ownership, including creating indirect partnership interests through JT Racing, LLC (JTR-LLC) and JT Racing, Inc. (JTR-Inc. ). The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) challenging the tax shelter, but failed to send the required initial notice under section 6223(a) of the Internal Revenue Code. The Gregorys attempted to elect out of the TEFRA proceedings only in their capacity as indirect partners.

    Procedural History

    The IRS issued the FPAA to JT USA LP and its partners in October 2004. The Gregorys responded with elections to treat their partnership items as nonpartnership items as indirect partners, while electing to remain in as direct partners. They filed a petition with the U. S. Tax Court in March 2005. In November 2006, the Gregorys moved to strike themselves as indirect partners from the case and requested that JTR-LLC be substituted as the petitioner. The Tax Court held oral arguments and considered the validity of the Gregorys’ elections and the proper parties to the proceeding.

    Issue(s)

    Whether partners holding different interests in the same partnership can make different elections under section 6223 of the Internal Revenue Code for each interest? Whether the Gregorys’ elections to opt out of TEFRA proceedings as indirect partners were effective?

    Rule(s) of Law

    Section 6223 of the Internal Revenue Code and section 301. 6223(e)-2T(c) of the Temporary Procedural and Administrative Regulations govern the election process for partners to opt out of TEFRA partnership-level proceedings. The regulations require that an election be made within 45 days of the FPAA mailing and include specific information and a signature. The election applies to all partnership items for the relevant tax year.

    Holding

    The Tax Court held that partners can make different elections under section 6223 for each partnership interest they hold. The court ruled that the Gregorys’ elections to opt out as indirect partners were effective, as they met the regulatory requirements, and the limitation to their capacity as indirect partners was permissible.

    Reasoning

    The court’s reasoning centered on the interpretation of the term “partner” under TEFRA and the regulations, finding that it refers to a person holding a specific partnership interest, not all interests held by that person. The court noted that the regulations allow for different treatment of partnership items based on different interests held by the same person, as evidenced by examples in the regulations. The court also considered state partnership law, which recognizes dual capacities within partnerships. The court rejected the IRS’s argument that allowing different elections would increase administrative burden or lead to inconsistent results, noting that such inconsistency is inherent in tiered partnerships. The court also addressed the incorrect notice sent by the IRS, which did not affect the validity of the Gregorys’ elections. The court further held that the Gregorys’ elections to “opt in” as direct partners were unnecessary, as the default rule under section 6223(e)(3) already bound them to the proceedings in that capacity.

    Disposition

    The court granted the Gregorys’ motion to strike them from the case as indirect partners and allowed JTR-LLC, the tax matters partner, to intervene and continue the proceedings.

    Significance/Impact

    This decision clarifies the rights of partners in complex partnership structures under TEFRA, allowing them to make different elections for different interests. It emphasizes the importance of proper IRS notification and the potential consequences of procedural errors. The ruling may affect how the IRS conducts audits and resolves disputes involving partnerships, particularly those with tiered structures. It also underscores the need for clear regulatory guidance on partner elections and the treatment of different partnership interests.

  • 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.

  • Domulewicz v. Comm’r, 129 T.C. 11 (2007): Application of Deficiency Procedures to Passthrough Losses and Penalties in TEFRA Proceedings

    Domulewicz v. Commissioner, 129 T. C. 11 (2007)

    In Domulewicz v. Commissioner, the U. S. Tax Court held that deficiency procedures apply to passthrough losses from a partnership involved in a Son-of-BOSS tax shelter, but not to the related accuracy-related penalties. The case involved Michael and Mary Ann Domulewicz, who attempted to offset a capital gain with a loss from a complex transaction involving a partnership and an S corporation. The ruling clarifies the jurisdiction of the Tax Court over computational adjustments and affected items under the TEFRA unified audit procedures, impacting how tax shelters and passthrough entities are audited and litigated.

    Parties

    Michael V. Domulewicz and Mary Ann Domulewicz were the petitioners throughout the litigation, while the Commissioner of Internal Revenue was the respondent.

    Facts

    Michael Domulewicz, a 20% shareholder in CTA Acoustics, sold his shares in 1999, realizing a $5,831,772 capital gain. To offset this gain, Domulewicz engaged in a Son-of-BOSS transaction, involving a partnership, DMD Investment Partners (DIP), and an S corporation, DMD Investments, Inc. (DII). He contributed proceeds from a short sale of U. S. Treasury notes and the related obligation to DIP, which was not treated as a liability under section 752. DIP then dissolved, distributing its assets, including stock in Integral Vision, Inc. (INVI), to DII, which sold the INVI stock and claimed a $29,306,024 loss. Domulewicz reported his share of this loss on his 1999 tax return, offsetting his CTA gain.

    Procedural History

    The IRS issued a Final Partnership Administrative Adjustment (FPAA) to DIP, determining that the basis of the distributed stock was zero and that accuracy-related penalties applied under section 6662. No petition was filed challenging the FPAA, leading to the assessment of taxes and penalties related to DIP’s adjustments. Subsequently, the IRS issued an affected items notice of deficiency to Domulewicz, disallowing the passthrough loss and assessing penalties. Domulewicz petitioned the Tax Court to dismiss the case for lack of jurisdiction over both the loss disallowance and the penalties.

    Issue(s)

    1. Whether section 6230(a)(2)(A)(i) makes the deficiency procedures applicable to the Commissioner’s disallowance of the petitioners’ passthrough loss from DII?
    2. Whether the Commissioner’s determination of accuracy-related penalties is subject to the deficiency procedures?

    Rule(s) of Law

    1. Under section 6230(a)(2)(A)(i), deficiency procedures apply to any deficiency attributable to affected items that require partner-level determinations.
    2. The Taxpayer Relief Act of 1997 amended section 6230(a)(2)(A)(i) to exclude penalties, additions to tax, and additional amounts related to partnership item adjustments from deficiency procedures.

    Holding

    1. The deficiency procedures were applicable to the disallowance of the passthrough loss from DII because it required partner-level factual determinations.
    2. The determination of accuracy-related penalties was not subject to the deficiency procedures due to the amendment by the Taxpayer Relief Act of 1997.

    Reasoning

    The Court reasoned that the passthrough loss from DII required partner-level determinations regarding the stock’s identity, the portion sold, holding period, and character of the gain or loss. These determinations necessitated the application of deficiency procedures under section 6230(a)(2)(A)(i). The Court rejected the petitioners’ argument that the IRS could assess the tax without deficiency procedures, citing the need for partner-level factual findings.

    Regarding the penalties, the Court followed the plain reading of section 6230(a)(2)(A)(i) as amended, which excludes penalties from deficiency procedures. This was supported by legislative history indicating an intent to reduce administrative burden and increase efficiency by determining penalties at the partnership level. The Court acknowledged the potential for assessing penalties before adjudicating related deficiencies but adhered to the statute’s clear language, leaving any legislative correction to Congress.

    The Court also considered the broader implications of TEFRA’s unified audit procedures, designed to streamline audits and ensure consistent treatment among partners. The ruling underscores the distinction between partnership items, which are determined at the partnership level, and affected items, which may require partner-level determinations before assessment.

    Disposition

    The Tax Court granted the petitioners’ motion to dismiss for lack of jurisdiction as to the accuracy-related penalties but denied the motion in all other respects, affirming its jurisdiction over the deficiency related to the passthrough loss.

    Significance/Impact

    The Domulewicz decision is significant for clarifying the application of deficiency procedures in TEFRA partnership proceedings, particularly in the context of complex tax shelters like Son-of-BOSS. It establishes that while deficiency procedures apply to affected items requiring partner-level determinations, penalties related to partnership item adjustments are excluded from these procedures. This ruling impacts how the IRS and taxpayers navigate the audit and litigation process for partnerships and passthrough entities, potentially influencing the design and defense of tax shelter strategies. Subsequent cases and IRS guidance have referenced Domulewicz in interpreting the scope of TEFRA and the assessment of penalties.

  • Kligfeld Holdings v. Comm’r, 128 T.C. 192 (2007): Statute of Limitations and Partnership Adjustments under TEFRA

    Kligfeld Holdings, Kligfeld Corporation, Tax Matters Partner v. Commissioner of Internal Revenue, 128 T. C. 192 (2007)

    In Kligfeld Holdings v. Commissioner, the U. S. Tax Court ruled that the IRS can issue a Final Partnership Administrative Adjustment (FPAA) for a partnership’s tax year beyond the general three-year statute of limitations if it relates to an affected item on a partner’s later tax return. This decision, rooted in the Tax Equity and Fiscal Responsibility Act (TEFRA), clarifies the IRS’s authority to adjust partnership items when linked to subsequent tax assessments, significantly impacting partnership tax planning and IRS enforcement strategies.

    Parties

    Kligfeld Holdings and Kligfeld Corporation, as the Tax Matters Partner (TMP), were the petitioners. The respondent was the Commissioner of Internal Revenue. The case originated in the U. S. Tax Court.

    Facts

    Marnin Kligfeld contributed Inktomi Corporation stock to Kligfeld Holdings 1 in 1999. The stock was transferred among partnerships, theoretically increasing its basis. Most of the stock was sold in 1999, and the remaining was distributed in 2000. Kligfeld reported the sale on his 2000 tax return. The Commissioner challenged the reported basis, issuing a notice of deficiency for Kligfeld’s 2000 tax year and an FPAA for the partnership’s 1999 tax year, despite the three-year statute of limitations having expired for the 1999 tax year. Kligfeld Holdings moved for summary judgment, arguing the FPAA was untimely.

    Procedural History

    The Commissioner issued a notice of deficiency to Kligfeld for his 2000 tax year and an FPAA to Kligfeld Holdings for its 1999 tax year in September 2004. Kligfeld Holdings timely filed a petition to the U. S. Tax Court, contesting the FPAA and seeking summary judgment, asserting that the FPAA was issued beyond the statute of limitations. The Commissioner argued that the FPAA was valid because it related to affected items on Kligfeld’s 2000 return.

    Issue(s)

    Whether the Commissioner can issue an FPAA for a partnership’s tax year more than three years after the partnership filed its return when the adjustment relates to an affected item on a partner’s later tax return?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act (TEFRA), specifically section 6231(a)(3), partnership items are to be determined at the partnership level. Section 6229 sets a minimum three-year period for assessing any tax attributable to partnership items but does not impose a maximum time limit for issuing an FPAA.

    Holding

    The U. S. Tax Court held that the Commissioner could issue an FPAA for Kligfeld Holdings’ 1999 tax year more than three years after the partnership filed its return because the adjustment was necessary to determine a deficiency for Kligfeld’s 2000 tax year, which included affected items.

    Reasoning

    The court’s reasoning focused on the interpretation of section 6229 and TEFRA’s provisions. The court noted that section 6229(a) establishes a minimum three-year period for assessments but does not limit the time for adjustments. The court rejected Kligfeld’s argument that there must be a “matching” of taxable years between the partnership and the partner, finding no such requirement in the statute. The court also considered policy arguments, noting that allowing adjustments beyond the three-year limit when related to later partner returns aligns with TEFRA’s goal of consistent treatment of partnership items. The court addressed potential constitutional issues but found them unnecessary to decide, as Kligfeld Holdings had a TMP with standing to challenge the FPAA. The court’s analysis relied on its prior decision in Rhone-Poulenc Surfactants & Specialties, L. P. v. Commissioner, <span normalizedcite="114 T. C. 533“>114 T. C. 533 (2000), which established that section 6229(a) sets a minimum, not a maximum, period for adjustments.

    Disposition

    The court denied Kligfeld Holdings’ motion for summary judgment, allowing the Commissioner to proceed with the FPAA issued for the partnership’s 1999 tax year.

    Significance/Impact

    The decision in Kligfeld Holdings significantly impacts partnership tax law by clarifying that the IRS can issue FPAAs beyond the three-year statute of limitations when necessary to address affected items on a partner’s later return. This ruling reinforces the IRS’s ability to enforce tax laws against complex tax shelters like the Son-of-BOSS strategy used by Kligfeld. The decision has been cited in subsequent cases, shaping the application of TEFRA and the statute of limitations in partnership taxation. It underscores the importance of understanding the interplay between partnership and individual tax returns and the need for careful tax planning to navigate the extended reach of IRS adjustments.

  • 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.

  • Greene v. Commissioner, T.C. Memo. 2008-116: Statute of Limitations for Partnership Item Adjustments

    T.C. Memo. 2008-116

    The issuance of a Notice of Final Partnership Administrative Adjustment (FPAA) for a partnership tax year remains valid even if the statute of limitations has expired for assessing taxes directly related to that year, provided the FPAA adjustments (partnership items) may have income tax consequences for partners in later years that remain open under the statute of limitations.

    Summary

    This case addresses whether the IRS can adjust partnership items via an FPAA when the tax year of the partnership return is closed by the statute of limitations, but the adjustments affect partners’ tax liabilities in open years. The Tax Court held that the FPAA was valid because adjustments to partnership items (capital losses) had potential tax consequences for the partners in subsequent years that were still open for assessment. The court reasoned that the IRS could assess taxes for those open years, even if the underlying partnership transactions occurred in a closed year.

    Facts

    G-5 Investment Partnership (G-5) filed its 2000 partnership return on October 4, 2001. Henry and Julie Greene were indirect partners in G-5. On April 12, 2006, the IRS issued an FPAA for the 2000 tax year. The FPAA was issued more than three years after the partnership return was filed and after the partners filed their individual 2000 and 2001 returns, but within three years of the partners filing their 2002-2004 returns. The Greenes carried forward capital losses from G-5’s 2000 partnership items to their individual tax returns for 2002-2004.

    Procedural History

    The IRS issued an FPAA for G-5’s 2000 tax year. The Greenes, as partners, petitioned the Tax Court, arguing that the statute of limitations barred assessment of tax liabilities related to the 2000 partnership items. The Greenes moved for judgment on the pleadings. The Tax Court denied the motion, holding that the FPAA was valid because it affected the partners’ tax liabilities in open years (2002-2004).

    Issue(s)

    Whether the IRS is barred by the statute of limitations from assessing income tax liability attributable to partnership items for a closed tax year (2000) when the FPAA was issued more than three years after the partnership and partners filed their 2000 tax returns, but the partnership items affect the partners’ tax liability in open tax years (2002-2004).

    Holding

    No, because the FPAA determined adjustments to partnership items (capital losses) that may have income tax consequences to the partners at the partner level in 2002-04, years open under the period of limitations. The IRS is barred from assessing deficiencies for the closed tax years of 2000 and 2001.

    Court’s Reasoning

    The court reasoned that while sections 6501(a) and 6229(a) generally impose a three-year statute of limitations for assessing tax, section 6229 establishes the minimum period for assessing tax attributable to partnership items, which can extend the section 6501 period. The issuance of an FPAA suspends the running of the statute of limitations. The court relied on the principle that in deficiency proceedings, the IRS can examine events in prior, closed years to correctly determine income tax liability for open years. The court found no reason why this principle should not extend to TEFRA partnership proceedings. The court stated, “[T]here is no TEFRA partnership provision that precludes extending this rule to partnership proceedings.” The court emphasized its jurisdiction to determine all partnership items and their proper allocation among partners. Therefore, the IRS could assess tax liability for open years, even if the underlying partnership item adjustments relate to transactions completed in a closed year.

    Practical Implications

    This case clarifies that the IRS can adjust partnership items even if the partnership’s tax year is closed by the statute of limitations, as long as those adjustments affect the partners’ tax liabilities in open years. This means tax advisors must consider the potential impact of partnership adjustments on partners’ individual tax returns for all open years, not just the partnership year under examination. This ruling reinforces the importance of carefully analyzing partnership items and their carryover effects on individual partners’ tax liabilities, even years after the initial partnership return was filed. It also highlights the interplay between sections 6229 and 6501, emphasizing that section 6229 can extend the assessment period beyond the general three-year rule in section 6501 when partnership items are involved.

  • 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.

  • 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.