131 T.C. 84 (T.C. 2008), 24717-05, Petaluma Fx Partners, Llc v. Commissioner of Internal Revenue
|Citation:||131 T.C. 84, 131 T.C. No. 9|
|Opinion Judge:||GOEKE, Judge :|
|Party Name:||PETALUMA FX PARTNERS, LLC, RONALD SCOTT VANDERBEEK, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Edward M. Robbins, Jr., for petitioner. Gerald A Thorpe and Jason M. Kuratnick, for respondent.|
|Judge Panel:||Goeke, Joseph Robert|
|Case Date:||October 23, 2008|
|Court:||United States Tax Court|
P challenges adjustments in a final partnership administrative adjustment (FPAA) issued to a partnership (PFP). P stipulated most of the adjustments in the FPAA and argues that the Court lacks jurisdiction over the remaining determinations. P stipulated that he will not contest any determinations in the FPAA over which the Court finds it has jurisdiction except for the valuation penalties, which P argues do not apply to the partnership items at issue as a matter of law. R argues that all remaining determinations in the FPAA are partnership items or are otherwise within the Court's jurisdiction and therefore seeks summary judgment on all remaining issues.
The issue of whether PFP should be disregarded for tax purposes is a partnership item.
Held, further, because we conclude that we have jurisdiction to determine that PFP should be disregarded for tax purposes, we may determine that the partners had no outside bases in PFP.
Held, further, the Court has jurisdiction to determine whether a valuation misstatement penalty applies.
Held, further, because P stipulated that he will not contest any determinations in the FPAA over which the Court determines it has jurisdiction and the Court finds it has jurisdiction over all determinations necessary to support the adjustments in the FPAA, we shall grant R's motion for summary judgment and deny petitioner's cross-motion for summary judgment.
This case is before the Court on the parties' cross-motions for summary judgment under Rule 121.  The issues for decision are: (1) Whether the Court has jurisdiction in this partnership-level proceeding to determine whether Petaluma FX Partners, L.L.C. (Petaluma) should be disregarded for tax purposes; (2) whether the Court has jurisdiction to determine whether the partners' outside bases in Petaluma were greater than zero; (3) whether the Court has jurisdiction to determine whether the accuracy-related penalties determined in a notice of final partnership administrative adjustment (FPAA) apply; (4) if the Court has jurisdiction to review the application of the accuracy-related penalties determined in the FPAA, whether the substantial valuation misstatement penalties are applicable to the adjustments of partnership items; and (5) whether the Court has jurisdiction to review the remaining determinations made in the FPAA.
For the reasons discussed below, we shall grant respondent's motion for summary judgment and deny petitioner's cross-motion for summary judgment.
Petaluma, a purported partnership,  was formed in August 2000. Bricolage Capital, L.L.C.; Stillwaters, Inc.; and Caballo, Inc., executed the operating agreement for the partnership. Petaluma's alleged business purpose was to engage in foreign currency option trading on behalf of its partners. On or about October 10, 2000, Ronald Thomas Vanderbeek (RTV) and Ronald Scott Vanderbeek (RSV) became partners of Petaluma by contributing pairs of offsetting long and short foreign currency options. In computing their adjusted bases in their interests in Petaluma, RTV and RSV increased their adjusted bases to reflect their contributions of the long options to Petaluma but did not decrease their adjusted bases to reflect Petaluma's assumption of the short options (or written call options) they contributed. 
RTV and RSV withdrew from Petaluma on December 12, 2000. Petaluma distributed cash and shares of Scient stock to RTV and RSV in liquidation of their partnership interests. Pursuant to section 732, RTV and RSV determined the adjusted bases in their Scient stock according to the adjusted bases in their interests in Petaluma immediately before the distribution. RTV and RSV sold their Scient stock on December 26, 2000, and claimed losses on their 2000 Federal income tax returns of about $ 17,776,360 and $ 7,631,542, respectively. At the time of the filing of the petition, Petaluma had no principal place of business and was engaged in no business.
On April 2, 2001, Petaluma timely filed its Form 1065, U.S. Return of Partnership Income, for the taxable year ending December 31, 2000.
On July 28, 2005, respondent issued an FPAA to the tax matters partner and the notice partners of Petaluma. On August 30, 2005, respondent issued a second FPAA to correct an error regarding the taxable year to which the FPAA
related. See Petaluma FX Partners, LLC v. Commissioner, T.C. Memo. 2007-254. With exceptions not relevant here, the adjustments made in the August 30, 2005, FPAA were identical to the adjustments made in the July 28, 2005, FPAA.  According to our holding in T.C. Memo. 2007-254, the FPAA issued on July 28, 2005, suffices to vest this Court with jurisdiction for Petaluma's tax year ending December 31, 2000. Further references herein to the FPAA are to the FPAA issued on July 28, 2005.
In the FPAA, respondent made the following adjustments:
Item As Reported As Corrected Capital contributions $ 478,800 -0- Distributions -- property 171,806 -0- other than money Outside partnership 24,943,505 -0- basis Distributions -- money 206,076 -0- Other income 107,242 -0- Tax-exempt interest 547 -0- income Assets -- cash 171,939 -0- Liabilities and 6,158 -0- capital -- other current liabilities Partners' capital 165,781 -0- accounts
The FPAA also included the following statement:
Outside partnership basis and the penalties are determined at the partnership level. The penalty will be imposed on the partner level. The applicable penalty sections are IRC 6662(a), 6662(b)(1), 6662(b)(2), 6662(b)(3), 6662(c), 6662(d), 6662(e) and 6662(h).
In addition, respondent made a number of determinations regarding Petaluma and its partners under the title of " EXHIBIT A -- Explanation of Items" (the explanation of items). The explanation of items is attached hereto as an appendix. The explanation of items essentially provides the following explanations for the adjustments to Petaluma's partnership items: (1) Petaluma was not a partnership as a matter of fact; (2) even if Petaluma did exist as a partnership, it had no business purpose other than tax avoidance, lacked economic substance, constituted an economic sham, and was abusive under section 1.701-2, Income Tax Regs.; Page 88 therefore, the transactions Petaluma entered into should be treated as having been entered into directly by the partners; and (3) neither Petaluma nor its partners entered into the options positions or purchased the foreign currency or stock with a profit motive for purposes of section 165(c)(2). The explanation of items also provides several alternative reasons for reducing the partners' adjusted bases in Petaluma and determines that penalties under section 6662 are applicable. On December 30, 2005, RSV, as a partner other than the tax matters partner of Petaluma, filed a petition seeking review of the adjustments set forth in the FPAA. On May 22, 2007, the parties filed a stipulation of settled issues (stipulation). Petitioner stipulated that the following partnership items should be adjusted according to the FPAA: Other income, tax-exempt interest income, distributions -- money, distributions -- property other than money, capital contributions, assets -- cash, liabilities and capital -- other current liabilities, and partner's capital accounts. Petitioner further stipulated that his position is that the Court lacks jurisdiction to consider the remaining issues raised in the FPAA, which include the partners' aggregate adjusted basis in the partnership (or outside basis) and the determinations in the explanation of items, including the penalties. However, petitioner also stipulated that he would not contest any issues raised by the FPAA over which the Court has jurisdiction except for the issue of whether the valuation misstatement penalties apply. Respondent filed a motion for summary judgment asserting that the Court has jurisdiction over the remaining issues raised by the FPAA because they all relate to partnership items and that a decision should be entered in favor of respondent on the remaining issues. Petitioner filed a cross-motion for summary judgment arguing that he has stipulated all of the partnership items adjusted in the FPAA and is entitled to summary judgment because all of the remaining issues relate to nonpartnership items over which the Court lacks jurisdiction under section 6226(f).  In the alternative, petitioner argues that the valuation misstatement penalties imposed under section 6662(a), Page 89 (b)(3), (e), and (h) are inapplicable as a matter of law because the penalties do not relate to an error in " valuation" but relate to respondent's determination that Petaluma and/or the transactions it purportedly entered into should be disregarded. Discussion Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted where there is no genuine issue of any material fact and a decision...
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