Estate of Keeter, 111518 FEDTAX, 6771-16
| Docket Number | 6771-16 |
| Date | 15 November 2018 |
| Court | U.S. Tax Court |
| Parties | ESTATE OF JAMES P. KEETER, DECEASED, v. COMMISSIONER OF INTERNAL REVENUE, Respondent GARRY L. HOLTON, JR., AND THOMAS W. SCHAEFER, CO-EXECUTORS, AND JULIE KEETER, Petitioners |
N. Jerold Cohen and Rebecca M. Stork, for petitioners.
Gerald A. Thorpe, for respondent.
MEMORANDUM OPINION
GOEKE, JUDGE
Pending before the Court is petitioners' motion to restrain the assessment or the collection of tax or to order the refund of the amount collected.1 This case is based on affected item notices of deficiency issued to James and Julie Keeter following the completion of a partnership-level proceeding under the unified audit and litigation partnership procedures (TEFRA). Petitioners argue that the notices of deficiency are invalid and the Court lacks jurisdiction.[2]Respondent argues that the notices are valid and acquiesces to petitioners' motion to restrain the assessment and the collection of tax if the Court determines that the notices are valid. We find the notices are valid, and we will grant petitioners' motion to restrain the assessment and collection of tax.
The validity of the notices of deficiency depends on whether a partner-level determination is required following the decision in the TEFRA case. Petitioners argue that no partner-level determination is required because the partnership was a sham, and a partner's outside basis in a sham partnership cannot exceed zero. Respondent agrees that a partner's outside basis in a sham partnership is zero. However, he contends that a partner-level determination is required where the partners have claimed loss deductions on the sale of assets received in a liquidating distribution from the sham partnership as petitioners have in this case. Accordingly, he argues that the deficiency procedures apply, the notices of deficiency are valid, and we have jurisdiction over the deficiencies and the authority to enjoin the assessment and the collection of tax. We hold that the notices are valid and we have jurisdiction over this case.
Background
The background facts are based on the pleadings and attached exhibits, the parties' filings with respect to petitioners' motion, including respondent's objection, the parties' supporting memoranda and attached exhibits, and other material in the Court's record. The parties' written statements of fact to the Court have not been disputed.
Petitioners are a widow and her deceased husband's estate. Julie Keeter resided in Florida at the time of the petition's filing. The estate had a mailing address in Georgia. The record does not indicate either executor's State of residence. In the petition, petitioners state that the estate's legal residence is in Georgia.
James and Julie Keeter filed joint tax returns for 1999 through 2003. During 1999 the Keeters engaged in a tax shelter transaction referred to as the Bond Linked Issue Premium Structure (BLIPS) through Sanford Strategic Investment Fund, LLC (Sanford), a partnership for Federal tax purposes. The objective of the tax shelter was to inflate the tax shelter investor's outside basis in a partnership to generate a tax loss on the partner's subsequent sale of property received in a liquidating distribution from the partnership.
Under the BLIPS tax shelter the investor would organize a single-member limited liability company (LLC) that would obtain a premium loan consisting of a principal amount and a substantial additional premium with an above-market interest rate. Shasta Strategic Inv. Fund, LLC v. United States (Shasta Strategic), No. C-04-04264-RS, 2014 WL 3852416, at *2 (N.D. Cal. July 31, 2014). The premium amount of the loan was set to equal the investor's desired tax loss. Id. The investor also made a capital contribution to the LLC of approximately 7% of the premium. Id. The LLC would contribute all the funds to an investment fund, also organized as an LLC (second LLC), and the second LLC would assume the liability to repay the loan. Id. at *3. For purposes of calculating the investor's outside basis in the second LLC, the investor would treat the obligation to repay the premium portion of the loan as contingent and not as a liability assumed by the LLC under section 752. Id. As a result the investor calculated his outside basis as equal to the premium plus his capital contribution, resulting in an inflated outside basis. Id.; see secs. 722 (providing that a partner's outside basis in a partner interest acquired by a contribution of property equals the contributing partner's adjusted basis in the property plus any gain recognized to the contributing partner under section 721(b)), 733 (providing that a partner's outside basis increases for capital contributions to the partnership and decreases for the partner's liabilities assumed by the partnership). The second LLC would purchase foreign currency assets. After a brief time, typically 60 days, the investor would exit the BLIPS tax shelter. For the investors to obtain the tax shelter benefits, the LLC would terminate; it would sell certain assets, repay the loan, and distribute a small amount of foreign currency and stock to the investor. The investor would claim inflated bases in the distributed assets on the basis of his inflated basis in the LLC, generating tax losses on the investor's sales of the distributed assets.
As part of the tax shelter the Keeters received a liquidating distribution of marketable securities (stock) and foreign currency during 1999 from Sanford. The Keeters treated the distributed assets as having adjusted bases in their hands equal to their outside basis in Sanford pursuant to section 732(b). That same year they sold the stock and a portion of the foreign currency. They sold the remainder of the currency during 2000 through 2002. For 1999 the Keeters claimed a capital loss deduction on the sale of the stock and an ordinary loss deduction on the sale of the foreign currency; for 2000 through 2002 they claimed ordinary loss deductions on the sales of the currency. The losses were generated upon the sales of the distributed assets as a result of the Keeters' inflated outside basis in Sanford.[3]
On July 23, 2004, respondent issued a notice of deficiency for 1999 through 2001 to the Keeters (2004 notice) for tax deficiencies arising from the tax shelter. In response to the 2004 notice the Keeters made payments to the Internal Revenue Service (IRS) for 1999 and 2000 in excess of $16 million. The IRS also applied an overpayment from 2006 of approximately $3.2 million for 2001. Subsequently, respondent determined that he had issued the 2004 notice in error because the TEFRA partnership-level proceeding had not been resolved and notified the Keeters of the error in November 2007. In February 2008 the Keeters filed a refund claim for the payments and credit. The IRS denied the refund claim on the basis that the amounts were advance payments and not overpayments of tax.
On July 19, 2004, respondent issued a notice of final partnership administrative adjustment (FPAA) for Sanford's December 22, 1999, tax period. In the FPAA he determined that Sanford was a sham and disregarded for tax purposes, the BLIPS transaction lacked economic substance, and the Keeters engaged in the transaction for tax-avoidance purposes. The tax matters partner filed a complaint in the District Court for the Northern District of California seeking a readjustment of the partnership items in the FPAA. Sanford Strategic Inv. Fund, LLC v. United States, No. C-04-04398-RS (N.D. Cal. filed Oct. 18, 2004). The case was consolidated for trial with other cases involving BLIPS tax shelters. The District Court granted summary judgment for the Government. Shasta Strategic, 2014 WL 3852416, at *1. The District Court examined the economic substance of the BLIPS transactions and held that they lacked economic substance and should be disregarded for Federal tax purposes. Id. at *5-*9. The District Court did not specifically address whether the LLCs were shams. On January 20, 2015, the District...
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