New Millennium Trading, L.L.C. v. Comm'r of Internal Revenue

• Decision Date: 22 December 2008
• Docket Number: No. 3439–06.,3439–06.
• Citation: 131 T.C. 275,131 T.C. No. 18
• Parties: NEW MILLENNIUM TRADING, L.L.C., AJF–1, L.L.C., Tax Matters Partner, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

131 T.C. 275

131 T.C. No. 18

NEW MILLENNIUM TRADING, L.L.C., AJF–1, L.L.C., Tax Matters Partner, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 3439–06.

United States Tax Court.

Dec. 22, 2008.

P challenges adjustments in a notice of final partnership administrative adjustment (FPAA) issued to NM. The FPAA, in part, determined that penalties under sec. 6662, I.R.C., were applicable. P, wanting to raise partner-level defenses to the determination of sec. 6662, I.R.C., penalties if we should sustain R's substantive determinations in this partnership-level proceeding, has filed a motion for partial summary judgment to declare that sec. 301.6221–1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed.Reg. 3838 (Jan. 26, 1999), is invalid, or, in the event we hold the regulation valid, that it does not apply to the instant proceeding.

Held: Sec. 301.6221–1T(c) and (d), Temporary Proced. & Admin. Regs., supra, is valid.

Held, further: Sec. 301.6221–1T(c) and (d), Temporary Proced. & Admin. Regs., supra, applies to the instant proceeding, so that partner-level defenses cannot be asserted in this partnership proceeding if we should sustain R's substantive determinations.

Thomas A. Cullinan and Julie P. Bowling, for petitioner.

James R. Rich, for respondent.

OPINION

GOEKE, Judge.

This case is before the Court on petitioner's motion for partial summary judgment filed pursuant to Rule 121.¹ Petitioner asks that we hold section 301.6221–1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed.Reg. 3838 (Jan. 26, 1999), invalid, or if valid, inapplicable. For the reasons stated herein, we will deny petitioner's motion in both respects.

Background

The following information is stated for purposes of this Opinion only; this case has yet to be tried on the merits.

On May 20, 1999, Andrew Filipowski established the AJF–1 Trust (trust) by a declaration of trust. Mr. Filipowski was the grantor, cotrustee, and sole beneficiary of the trust and was considered its owner for income tax purposes under sections 671 through 678.

On July 29, 1999, AJF–1, L.L.C. (AJF–1), was formed by the filing of a certificate of formation with the State of Illinois. The trust was the sole member of AJF–1. AJF–1 was disregarded as an entity separate from its owner for Federal income tax purposes pursuant to section 301.7701–3(b)(ii), Proced. & Admin. Regs.

In August 1999 AJF–1 opened a trading account with AIG International (AIG). On August 19, 1999, AJF–1 entered into two transactions with AIG: (1) AJF–1 purchased a European-style call option on the euro for a premium of $120 million; and (2) on that same day, AJF–1 sold to AIG a European-style call option on the euro for a premium of $118.8 million (collectively, the euro options). AJF–1 paid the $1.2 million net premium of the euro options to AIG.

New Millennium Trading, L.L.C. (New Millennium), was formed on August 6, 1999, under the laws of the State of Delaware. New Millennium's original members were Banque Safra–Luxembourg, S.A. (Banque Safra), Fidulux Management, Inc. (Fidulux), and Shakti Advisors, L.L.C. (Shakti). Banque Safra, Fidelux, and Shakti contributed $300,000, $150,000, and $20,000, respectively, to New Millennium for their partnership interests.

AJF–1 joined New Millennium in September 1999. AJF–1 contributed $600,000 and entered into an Assignment and Assumption Agreement dated September 30, 1999, whereby New Millennium assumed the rights and obligations of the euro options. New Millennium valued AJF–1's total contribution at $1,772,417.

After joining New Millennium, AJF–1 had a partnership interest of 79.04–percent, while Shakti, Fidelux, and Banque Safra had interests of .89 percent, 6.69 percent, and 13.38 percent, respectively.

AJF–1 requested withdrawal from New Millennium by letter dated December 2, 1999. AJF–1 was deemed to have withdrawn on December 15, 1999. On December 20, 1999, New Millennium distributed 617,664 euro and 21,454 shares of Xerox Corp. stock valued at $1,068,388.40 to AJF–1. This distribution was made to redeem AJF–1's account. On December 23, 1999 AJF–1 sold all the Xerox Corp. stock and 530,000 of the 617,664 euro, for $464,191 and $537,420, respectively.

On September 21, 2005 Respondent issued a notice of final partnership administrative adjustment (FPAA) to New Millennium. The FPAA made a number of adjustments: (1) It disallowed New Millennium's claimed operating loss of $669,206 and other deductions of $18,712, and (2) it decreased to zero the capital contributions, and distributions of property other than money accounts. The FPAA indicated these changes in chart form. Each adjustment was shown in a chart with an “adjustment,” “as reported,” and “corrected” box accompanying each individual adjustment. The chart included numerical figures for each of the above adjustments but showed asterisks instead of numerical figures as to outside partnership basis.

In addition, respondent made a number of determinations regarding New Millennium and its partners under the title of “EXHIBIT A”. This explanation of items is attached hereto as an appendix. These explanations alleged in pertinent part that: (1) New Millennium was not established as a partnership in fact; (2) if New Millennium existed in fact, it was entered into solely for tax avoidance purposes; (3) New Millennium was a sham, lacked economic substance, and was entered into to decrease its partners' tax liabilities in a manner inconsistent with chapter 1, subchapter K of the Code; (4) neither New Millennium nor its partners entered into the euro options with a profit motive; (5) neither New Millennium nor its partners have established bases in their partnership interests greater than zero; and (6) penalties under section 6662 are applicable.

On February 16, 2006, petitioner petitioned this Court, alleging that respondent's determinations were erroneous. On February 6, 2008, petitioner filed a motion for partial summary judgment (motion). On March 12, 2008, respondent filed his response thereto, and on April 25, 2008, petitioner filed a memorandum in support of its motion. A hearing was held on petitioner's motion on June 27, 2008, during the Court's trial session in Washington, D.C.

Petitioner filed concurrently with the motion a motion to dismiss for lack of jurisdiction as to adjustments to the partners' outside bases and penalties (motion to dismiss). We have recently denied by order petitioner's motion to dismiss because under Petaluma FX Partners, L.L.C. v. Commissioner, 131 T.C. –––– (2008), the extent of our jurisdiction over outside basis and the applicability of penalties determined in the FPAA cannot be established until after a trial on the merits to decide whether New Millennium should be respected as a partnership for tax purposes.

Discussion

I. Motion for Summary Judgment

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment where there is no genuine issue of material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir.1994). The moving party bears the burden of proving that there is no genuine issue of material fact, and the Court will view any factual material and inferences in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). Rule 121(d) provides that where the moving party properly makes and supports a motion for summary judgment, “an adverse party may not rest upon the mere allegations or denials of such party's pleading” but must set forth specific facts, by affidavits or otherwise, “showing that there is a genuine issue for trial.” The matter before us is ripe for summary judgment.

Whether the regulation at issue is valid is strictly a question of law. Although this Court has applied this regulation to prevent partners from raising partner-level defenses in a partnership proceeding, see Fears v. Commissioner, 129 T.C. 8 (2007); Santa Monica Pictures, L.L.C. v. Commissioner, T.C. Memo.2005–104, we have not ruled squarely on the validity of section 301.6221–1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed.Reg. 3838 (Jan. 26, 1999).

II. TEFRA Procedures

Partnerships do not pay Federal income taxes, but they are required to file annual information returns reporting the partners' distributive shares of income, deductions, and other tax items. Secs. 701, 6031. The individual partners then report their distributive shares of the tax items on their Federal income tax returns. Secs. 701–704.

To remove the substantial administrative burden occasioned by duplicative audits and litigation and to provide consistent treatment of partnership items among partners in the same partnership, Congress enacted the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. 97–248, sec. 402, 96 Stat. 648. See Randell v. United States, 64 F.3d 101, 103 (2d Cir.1995); H. Conf. Rept. 97–760, at 599–600 (1982), 1982–2 C.B. 600, 662–663.

Under TEFRA, all partnership items are determined in a single partnership-level proceeding. Sec. 6226; see also Randell v. United States, supra at 103. The determinations of partnership items in partnership-level proceedings are binding on the partners and may not be challenged in subsequent partner-level proceedings. See secs. 6230(c)(4), 7422(h). Thus the courts need not redecide the same issues with each partner of the partnership.

TEFRA also allows for the imposition during the partnership-level proceeding of penalties on adjustments to partnership items. Sec. 6221; see also Santa Monica Pictures, L.L.C. v. Commissioner, supra. Before the 1997 amendments, TEFRA provided for the determination of all penalties at the partner level. N.C.F. Energy Partners v. Commissioner, 89 T.C. 741,...