591 F.3d 649 (D.C. Cir. 2010), 08-1356, Petaluma FX Partners, LLC v. C.I.R.
|Citation:||591 F.3d 649|
|Opinion Judge:||SENTELLE, Chief Judge:|
|Party Name:||PETALUMA FX PARTNERS, LLC and Ronald Scott Vanderbeek, a Partner Other Than The Tax Matters Partner, Appellants v. COMMISSIONER OF INTERNAL REVENUE Service, Appellee.|
|Attorney:||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. W...|
|Judge Panel:||Before: SENTELLE, Chief Judge, and GRIFFITH and KAVANAUGH, Circuit Judges.|
|Case Date:||January 12, 2010|
|Court:||United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit|
Argued Sept. 24, 2009.
Appeal from the United States Tax Court.
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
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.
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
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...
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