591 F.3d 649 (D.C. Cir. 2010), 08-1356, Petaluma FX Partners, LLC v. C.I.R.

Docket Nº08-1356.
Citation591 F.3d 649
Opinion JudgeSENTELLE, Chief Judge:
Party NamePETALUMA FX PARTNERS, LLC and Ronald Scott Vanderbeek, a Partner Other Than The Tax Matters Partner, Appellants v. COMMISSIONER OF INTERNAL REVENUE Service, Appellee.
AttorneyEdward M. Robbins Jr. argued the cause and filed the briefs for appellants. Sheldon M. Kay, Thomas A. Cullinan, and Julie P. Bowling were on the brief for amicus curiae AJF-1, LLC in support of appellants. Joan I. Oppenheimer, Attorney, U.S. Department of Justice, argued the cause for appellee. W...
Judge PanelBefore: SENTELLE, Chief Judge, and GRIFFITH and KAVANAUGH, Circuit Judges.
Case DateJanuary 12, 2010
CourtUnited States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

Page 649

591 F.3d 649 (D.C. Cir. 2010)

PETALUMA FX PARTNERS, LLC and Ronald Scott Vanderbeek, a Partner Other Than The Tax Matters Partner, Appellants

v.

COMMISSIONER OF INTERNAL REVENUE Service, Appellee.

No. 08-1356.

United States Court of Appeals, District of Columbia Circuit.

January 12, 2010

Argued Sept. 24, 2009.

Appeal from the United States Tax Court.

Edward M. Robbins Jr. argued the cause and filed the briefs for appellants.

Sheldon M. Kay, Thomas A. Cullinan, and Julie P. Bowling were on the brief for amicus curiae AJF-1, LLC in support of appellants.

Joan I. Oppenheimer, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief were Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, and Richard Farber, Supervisory Attorney. Judith A. Hagley, Attorney, entered an appearance.

Before: SENTELLE, Chief Judge, and GRIFFITH and KAVANAUGH, Circuit Judges.

OPINION

SENTELLE, Chief Judge:

Petaluma FX Partners, LLC appeals from the Tax Court's decision that it had jurisdiction over several partnership-level determinations and that valuation misstatement penalties applied. Specifically, the Tax Court held that it had jurisdiction to determine that Petaluma was a sham, lacked economic substance, and should be disregarded for tax purposes; that Petaluma's

Page 650

partners had no outside basis in the disregarded partnership; and that the gross valuation misstatement penalty applied. Petaluma FX Partners, LLC v. Comm'r, 131 T.C. 9, 2008 WL 4682543 (U.S.Tax Ct. Oct.23, 2008). For the reasons explained below, we affirm the Tax Court's holding that it had jurisdiction to determine that Petaluma was a sham and should be disregarded for tax purposes, but reverse its holding that it had jurisdiction to determine that Petaluma's partners had no outside basis in the partnership. In addition, we set aside the Tax Court's holding that it had jurisdiction to determine whether accuracy-related penalties applied and that the valuation misstatement penalties did apply in this case.

I. Background

A. Factual Background

This case involves a " Son of BOSS" tax shelter. Like many of its kin, this tax shelter employs a series of transactions to create artificial financial losses that are used to offset real financial gains, thereby reducing tax liability. In 2000, the Internal Revenue Service (" IRS" ) identified Son of BOSS tax shelters as abusive transactions. I.R.S. Notice 2000-44, 2000-2 C.B. 255; see also Desmet v. Comm'r, 581 F.3d 297, 299 (6th Cir.2009). The facts of this case illustrate how this shelter works. We rely primarily on the Tax Court's description of the facts, which is undisputed. Petaluma, 2008 WL 4682543, at * 1-3. Petaluma, a purported partnership, was formed on August 18, 2000. Its ostensible purpose was to engage in foreign currency option trading. On October 10, 2000, Ronald Thomas Vanderbeek and Ronald Scott Vanderbeek (collectively, " the Vanderbeeks" ) each contributed pairs of offsetting long and short foreign currency options to become partners of Petaluma. The Vanderbeeks increased their adjusted bases in Petaluma to reflect the long options they contributed, but did not reduce those bases to reflect Petaluma's assumption of their short options. On December 12, 2000, the Vanderbeeks withdrew from Petaluma, which fully liquidated their interests in the partnership by distributing cash and shares of Scient stock 1 to them. In keeping with 26 U.S.C. § 732(b), they took adjusted bases in the distributed stock equivalent to their adjusted bases in Petaluma immediately prior to the distribution. On December 26, 2000, the Vanderbeeks sold their Scient stock. Given their inflated adjusted bases in the stock, these sales created substantial short-term capital losses that the Vanderbeeks subsequently claimed on their 2000 federal income tax returns. For example, Ronald Thomas Vanderbeek sold his Scient stock for $122,528 and claimed a short-term capital loss of $17,776,360, which conveniently offset $14,472,420 in longterm capital gains. Likewise, Ronald Scott Vanderbeek sold his Scient stock for $39,410 and claimed a resulting short-term capital loss of $7,631,542, thereby offsetting long-term capital gains of $6,191,778.

B. Statutory Background

Although partnerships do not pay federal income taxes, they must file annual informational returns reporting income, loss, deductions, and credits. 26 U.S.C. §§ 701, 6031(a); Treas. Reg. § 301.6231(a)(3)-1(a)(1)(i). The partners are then responsible for reporting their distributive shares of the partnership's income or loss on their individual federal income tax returns. 26 U.S.C. §§ 701-702, 704. Congress established the current framework for adjudicating partnership-related tax matters in the Tax Equity and Fiscal Responsibility

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Act of 1982 (" TEFRA" ), Pub.L. No. 97-248, § 402, 96 Stat. 324, 648-67 (codified as amended at 26 U.S.C. §§ 6221-6232). Prior to TEFRA, all partnership items were determined at the individual taxpayer level, which often required duplicative proceedings for different partners and sometimes resulted in inconsistent treatment of partnership items from partner to partner. Under TEFRA, partnership items are now determined in unified partnership-level audit and judicial proceedings. 26 U.S.C. § 6221. When the IRS disagrees with how a partnership return reports partnership items, it may commence an administrative proceeding by issuing a notice of final partnership administrative adjustment (" FPAA" ) to the partners. § 6223(a), (d). Once an FPAA is mailed, the partnership's tax matters partner has 90 days to file a petition for readjustment of partnership items. § 6226(a). If the tax matters partner does not file within that period, any other partner who received the FPAA has an additional 60 days to file a petition. § 6226(b)(1). Once a petition has been filed, the reviewing court has jurisdiction to determine all partnership items for the partnership taxable year addressed by the FPAA. § 6226(f).

C. The FPAA and the Tax Court's Decision

On April 2, 2001, Petaluma filed a Form 1065 partnership return for its 2000 taxable year. The Commissioner issued an FPAA to the Petaluma partners on July 28, 2005. The FPAA disallowed all partnership items reported on Petaluma's return, reducing them from the amount Petaluma originally claimed to zero. The FPAA also listed " Outside Partnership Basis," which was not originally reported on Petaluma's partnership return, and reduced its value from $24,943,505 to $0. In addition, it included a section titled " EXHIBIT A-Explanation of Items," which determined that Petaluma's existence as a partnership had not been established, that it was formed solely for tax avoidance, that it was a sham and lacked economic substance, and that it should therefore be disregarded for tax purposes. The Explanation also determined that Petaluma's partners " have not established adjusted bases in their respective partnership interests in an amount greater than zero." Finally, the Explanation determined that various accuracy-related penalties set forth in 26 U.S.C. § 6662(a) applied to all underpayments of tax attributable to these adjustments. On December 30, 2005, Ronald Scott Vanderbeek, a Petaluma partner who was not the tax matters partner, filed a petition for readjustment with the Tax Court.

In the Tax Court, Petaluma and the Commissioner entered a settlement of stipulated issues in which Petaluma conceded that the reduction of the line items in its partnership return to zero was appropriate. Petaluma retained just two arguments-first, that the Tax Court lacked jurisdiction to consider certain issues in the FPAA, and second, that the valuation misstatement penalties did not apply. Both parties moved for summary judgment, and the Tax Court granted summary judgment for the Commissioner on October 23, 2008.

In its opinion, the Tax Court first held that it had jurisdiction to determine whether Petaluma should be disregarded for tax purposes. It reasoned that " the determination whether Petaluma is a sham, lacks economic substance, or otherwise should be disregarded for tax purposes is a partnership item over which we have jurisdiction." Petaluma, 2008 WL 4682543, at *9. Second, it held that because Petaluma had been disregarded for tax purposes, the court had jurisdiction to determine that the partners' outside bases in

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the partnership were zero because " there can be no adjusted basis in a disregarded partnership." Id. at *10. Third, the court held that it had jurisdiction over the accuracy-related penalties because § 6226(f) gave it jurisdiction to determine " the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item." Id. at *11-12 (quoting 26 U.S.C. § 6226(f)). Fourth, the court held that " the gross valuation [misstatement] penalty applies when the adjusted basis of property is reduced to zero because a transaction was disregarded as a sham or lacking economic substance and the taxpayer claims an adjusted basis in the property of a greater amount." Id. at * 14. Petaluma timely appealed.

II. Analysis

A. Jurisdiction and Standard of Review

Petaluma filed a petition for readjustment of partnership items with the Tax Court under 26 U.S.C. § 6226. The Tax Court's decisions concerning such petitions are generally reviewed by the U.S. Court of Appeals for the circuit in which the partnership's principal place of business is located. § 7482(b)(1)(E). When a partnership has no principal place of business, as is the case here, the Tax Court's decision " may be reviewed by the Court of Appeals for the District of Columbia." § 7482(b)(1). We review the Tax Court's decisions " in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." § 7482(a)(1). Since the facts of this case...

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    • 14 Febrero 2013
    ...is that there is a conflict among courts about whether outside basis is a partnership item. See Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010), aff'g in part, rev'g in part, vacating and remanding on penalty issues 131 T.C. 84 (2008); Tigers Eye Trading, 138 T.C. a......
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    • 12 Diciembre 2018
    ...para. (5). Generally, outside basis is an affected item. Woods, 571 U.S. at 41; Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 655 (D.C. Cir. 2010), aff'g in part, rev'g and remanding in part 131 T.C. 84 (2008); see sec. 301.6231(a)(5)-1(b), Proced. &......
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    ...or economic substance is a partnership item. Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84, 93, 97 (2008), aff'd on this issue, 591 F.3d 649, 653-654 (D.C. Cir. 2010); see also RJT Invs. X v. Commissioner, 491 F.3d 732, 737-738 (8th Cir. F. Theft Loss Deduction Likewise, petitioner......
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    • 10 Enero 2011
    ...distributed to Palmlund Ltd. OPINION I. Jurisdiction In January 2010, the D.C. Circuit [8] decided Petaluma FX Partners v. Commissioner, 591 F.3d 649, 389 U.S.App. D.C. 64 (D.C. Cir. 2010), affg. in part, revg. in part, vacating in part and remanding on penalty issues 131 T.C. 84 (2008). [9......
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58 cases
  • 6611, Ltd. v. Commissioner of Internal Revenue, 021413 FEDTAX, 13088-05
    • United States
    • Federal Cases United States Tax Court
    • 14 Febrero 2013
    ...is that there is a conflict among courts about whether outside basis is a partnership item. See Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010), aff'g in part, rev'g in part, vacating and remanding on penalty issues 131 T.C. 84 (2008); Tigers Eye Trading, 138 T.C. a......
  • Sarma v. Commissioner of Internal Revenue, 121218 FEDTAX, 26318-16.
    • United States
    • Federal Cases United States Tax Court
    • 12 Diciembre 2018
    ...para. (5). Generally, outside basis is an affected item. Woods, 571 U.S. at 41; Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 655 (D.C. Cir. 2010), aff'g in part, rev'g and remanding in part 131 T.C. 84 (2008); see sec. 301.6231(a)(5)-1(b), Proced. &......
  • Jimastowlo Oil, LLC v. Commissioner of Internal Revenue, 082613 FEDTAX, 11316-08
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    • Federal Cases United States Tax Court
    • 26 Agosto 2013
    ...or economic substance is a partnership item. Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84, 93, 97 (2008), aff'd on this issue, 591 F.3d 649, 653-654 (D.C. Cir. 2010); see also RJT Invs. X v. Commissioner, 491 F.3d 732, 737-738 (8th Cir. F. Theft Loss Deduction Likewise, petitioner......
  • 136 T.C. 67 (T.C. 2011), 14586-05, 106 Ltd. v. Commissioner of Internal Revenue
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    • Federal Cases United States Tax Court
    • 10 Enero 2011
    ...distributed to Palmlund Ltd. OPINION I. Jurisdiction In January 2010, the D.C. Circuit [8] decided Petaluma FX Partners v. Commissioner, 591 F.3d 649, 389 U.S.App. D.C. 64 (D.C. Cir. 2010), affg. in part, revg. in part, vacating in part and remanding on penalty issues 131 T.C. 84 (2008). [9......
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