Bedrosian v. Comm'r, 143 T.C. No. 4
| Decision Date | 13 August 2014 |
| Docket Number | 143 T.C. No. 4,Docket No. 12341-05 |
| Parties | JOHN C. BEDROSIAN AND JUDITH D. BEDROSIAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Ps invested in a Son-of-BOSS transaction through a partnership that was subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324. R issued an FPAA with respect to the partnership; R included with the FPAA a notice under I.R.C. sec. 6223(e), informing Ps of their right to opt out of the TEFRA proceeding. The FPAA was properly mailed, but Ps claim that they did not receive it within the time in which to file a timely petition. Ps filed an untimely petition, which the Court dismissed; the Court of Appeals for the Ninth Circuit upheld the dismissal. R also issued a notice of deficiency (NOD) that duplicated the adjustments in the FPAA and included additional adjustments. Ps filed a timely petition with respect to the NOD. P moved for summary judgment asking that we determine that we have jurisdiction over all of the items in the NOD, including those that were included in the previously issued FPAA.
Held: The partnership items did not convert to nonpartnership items under I.R.C. sec. 6223(e)(2) because the partnership proceeding was ongoing at the time the IRS mailed the FPAA.
Held, further, the partnership items did not convert to nonpartnership items under I.R.C. sec. 6223(e)(3) because filing a petition with respect to an NOD is not substantial compliance with procedures for opting out of a TEFRA proceeding.
Held, further, the Secretary did not reasonably determine under I.R.C. sec. 6231(g)(2) that TEFRA did not apply to the partnership.
Held, further, we are bound by the Court of Appeals for the Ninth Circuit's prior holding that we lack jurisdiction over the partnership items in the NOD.
Richard E. Hodge and Steve Mather, for petitioners.
Melanie R. Urban and Janet Reiners Balboni, for respondent.
BUCH, Judge: This case combines a system for examining and litigating partnership controversies that differs from typical deficiency procedures with missteps by both the agency charged with administering this system and petitioners' representatives. The confluence of these missteps ultimately deprives us of jurisdiction over the partnership items set forth in the notice of deficiencythat underlies this matter--a result mandated by both the statutory scheme and controlling precedent of the Court of Appeals for the Ninth Circuit, to which this case is appealable. But first, some background.
Background
The underlying transaction in this case is what has come to be known as a Son-of-BOSS transaction, with this variant using foreign currency options. See generally Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007); Notice 2000-44, 2000-2 C.B. 255. The Bedrosians created two entities, JCB Stone Canyon Investments, LLC (LLC), and Stone Canyon Investors, Inc. (S corporation), which in turn formed a third entity, Stone Canyon Partners (Stone Canyon). On October 16, 2000, the Bedrosians timely filed Form 1040, U.S. Individual Income Tax Return, for 1999 in which they claimed large flowthrough losses stemming from the transaction through their interests in the LLC and the S corporation.
Because Stone Canyon had flowthrough entities as its partners, the small partnership exception of section 6231(a)(1)(B)(i)1 did not apply, and StoneCanyon was subject to the unified audit and litigation procedures of sections 62216234, commonly referred to as TEFRA.2 These procedures affect not only the audit and litigation of a passthrough entity, but also the preparation of a passthrough entity's return.
The same day that the Bedrosians filed their return, Stone Canyon timely filed Form 1065, U.S. Partnership Return of Income, for 1999. On line 4 of Schedule B, Other Information, Stone Canyon answered "no" to the question . Notwithstanding the "no" answer on line 4, Stone Canyon designated the LLC as its tax matters partner (TMP). Stone Canyon attached to its Form 1065 a Schedule K-1, Partner's Share of Income, Credits, Deductions, etc., identifying the LLC as being an "INDIVIDUAL" in response to the question "What type of entity is this partner?", even though the name of the partner was the LLC name. Stone Canyon identified the S corporation as an "S CORPORATION" in response to the same question on a second Schedule K-1.
The parties have spilled a great amount of ink on the subject of what transpired during the audit, most of which is irrelevant to the ultimate conclusions in this case. Nonetheless, we summarize what transpired to provide context.
In September 2003 Revenue Agent Harold Jung mailed Mr. Bedrosian a letter informing him that the Internal Revenue Service (IRS) had selected his Form 1040 for 1999 for audit. In the letter Revenue Agent Jung requested that Mr. Bedrosian consent to extend the period of limitations, which was set to expire in less than two months, on an enclosed Form 872, Consent to Extend the Time to Assess Tax. On September 10, 2003, the Bedrosians submitted to the IRS Form 2848, Power of Attorney and Declaration of Representative, designating Richard E. Hodge, an attorney, and Linda Olson, a certified public accountant, as their representatives with respect to the examination of their Form 1040 for 1999.3Revenue Agent Jung did not request a Form 2848 with respect to Stone Canyon, the S corporation, or the LLC.
The Bedrosians submitted to the IRS the completed Form 872, in which they agreed to extend the period of limitations for assessment of their individualincome tax for 1999 to August 31, 2004. Revenue Agent Jung did not request a form extending the period of limitations for assessment of tax attributable to partnership items and affected items of Stone Canyon for 1999. The parties agree that the Form 872 was ineffective to extend the period of limitations for assessment of tax attributable to partnership items and affected items of Stone Canyon for 1999.4
The next month, for reasons unexplained in the record, the administrative files with respect to the audit were transferred from Revenue Agent Jung to Revenue Agent Deborah Smyth. By that time, the period set forth in section 6229(a), which is the minimum period within which to assess tax attributable to partnership items and affected items for Stone Canyon's 1999 tax year, had expired.5 Revenue Agent Smyth was well aware of that fact. And while she believed after reviewing the administrative files that Stone Canyon was subject to the TEFRA procedures, she continued conducting the Stone Canyon audit by examining the Bedrosians' Form 1040 for 1999.
She also examined the Bedrosians' Form 1040 for 2000, which was filed on October 15, 2001. On their Form 1040 for 2000 the Bedrosians claimed a comparatively small net operating loss carryover from 1999 and a deduction for legal, accounting, consulting, and advisory fees (collectively, transaction fees).
At Revenue Agent Smyth's request the Bedrosians submitted to the IRS a second Form 872 for 1999, in which they agreed to further extend the period of limitations for assessment from August 31, 2004, to April 30, 2005. Also at Revenue Agent Smyth's request, the Bedrosians submitted to the IRS Form 872-I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, for 2000 in which they agreed to extend the period of limitations for assessment of their income tax, including tax attributable to partnership items and affected items of Stone Canyon, to April 30, 2005.
In May 2004 Revenue Agent Smyth mailed a letter to Ms. Olson (with copies to the Bedrosians) offering the Bedrosians the opportunity to participate in a settlement. They chose not to participate. In November 2004 Revenue Agent Smyth mailed Ms. Olson a letter (with copies to the Bedrosians) acknowledging the Bedrosians' choice and requesting that they provide additional information with respect to the transaction. Enclosed with the letter was the IRS' fourth information document request. The letter stated:
Revenue Agent Smyth later participated in a conference call with IRS Office of Chief Counsel attorneys and the IRS Son-of-BOSS TEFRA coordinator to discuss "how to proceed with this case in order to disallow the net operating loss carryforward deductions claimed on Petitioners' Form 1040 for the 2000 tax year, in view of * * * [her] determination that the limitations period for issuing a notice of final partnership administrative adjustment (FPAA) for the 1999 tax year had expired." The TEFRA coordinator advised Revenue Agent Smyth that the IRS should issue an FPAA for 1999 in order to disallow the NOL carryforward deduction for 2000. Revenue Agent Smyth's understanding of the TEFRA coordinator's advice was "not that the Service would issue an FPAA for the 1999 tax year instead of the notice of deficiency * * * for the 1999 and 2000 tax years * * * [but] that the Service would issue an FPAA in addition to the notice of deficiency for the 1999 and 2000 tax years."
Revenue Agent Smyth called Ms. Olson and informed her that the IRS would soon issue a notice of beginning of administrative proceeding (NBAP) for1999. Ms. Olson inquired as to why the IRS would issue an NBAP with respect to Stone Canyon for 1999 when Revenue Agent Smyth was in the process of issuing audit reports with respect to the Bedrosians' Form 1040 for that same year. Revenue Agent Smyth responded that "the NBAP was procedural and that the TEFRA examination would be...
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