Sarma v. Comm'r
| Decision Date | 12 December 2018 |
| Docket Number | T.C. Memo. 2018-201,Docket No. 26318-16. |
| Parties | RAGHUNATHAN SARMA AND GAILE SARMA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Charles E. Hodges II, Antoinette G. Ellison, and Aditya Shrivastava, for petitioners.
Leslie J. Spiegel and Craig Connell, for respondent.
GOEKE, Judge: This case is before us on the parties' cross-motions to dismiss for lack of jurisdiction following respondent's issuance of an affected item notice of deficiency. The parties submitted a declaration of witnesses with attached exhibits.1
When the petition was filed, petitioner Raghunathan Sarma resided in Florida. Petitioner Gaile Sarma had a mailing address in New Jersey; the record does not provide her State of residence. During the years at issue petitioners were married and filed joint tax returns. They divorced in 2005.
The adjustments in the notice of deficiency arise from Raghunathan Sarma's participation in a tax shelter known as a "Family Office Customized partnership" or "FOCus", a transaction substantially similar to the transaction described in Notice 2002-50, 2002-2 C.B. 98. Mr. Sarma implemented the FOCus tax shelter through a series of transactions executed by a three-tiered set of limited liability companies treated as partnerships for Federal tax purposes:2 the upper tier partnership, Nebraska Partners Fund, LLC (Nebraska Partners or Nebraska), the middle-tier partnership, Lincoln Partners Fund, LLC (Lincoln Partners orLincoln), and the lower tier partnership, Kearney Partners Fund, LLC (Kearney Partners or Kearney). The tax shelter resulted in a series of deemed terminations of the partnerships and deemed formations of new partnerships because of changes in the ownership of the partnerships, including Mr. Sarma's purchases of Lincoln Partners and Nebraska Partners. Because of the deemed terminations, the partnerships filed tax returns for multiple short tax periods during 2001. Lincoln and Kearney were subject to the unified partnership audit and litigation procedures (TEFRA) under sections 6221 through 6234 for short tax periods (TEFRA tax periods) when Mr. Sarma did not formally own direct interests in the partnerships.3 He was an indirect partner in both partnerships during certain TEFRA tax periods. Of significance, Lincoln Partners was not subject to TEFRA for the short tax period that Mr. Sarma held a direct interest in it because it fell within the small partnership exception to TEFRA under section 6231(a)(1)(B) () and did not elect to be subject to TEFRA.
The issues for consideration are: (1) whether respondent is bound by an initial decision (later abandoned) to audit Lincoln Partners' return for the small partnership tax period under the TEFRA procedures; we hold he is not; (2) whether the special statute of limitations rules for TEFRA partnerships under section 6229 apply for petitioners' 2001 tax year; we hold they do; (3) whether a partner-level determination is required to adjust petitioners' tax liabilities following the decision in the TEFRA case; we hold it is; and (4) whether respondent issued invalid multiple notices of deficiency; we hold he did not.
Nebraska Partners and Lincoln Partners were formed on October 17, 2001. The date of Kearney Partners' organization is not stated in the record. As of December 4, 2001, as part of the structure of the FOCus tax shelter, Nebraska Partners owned 99% of Lincoln Partners, and Lincoln Partners owned 99% of Kearney Partners. Bricolage Capital Management Co., a C corporation, was a 1% partner in Nebraska and Lincoln and the tax matters partner of each. Delta Currency Management Co. was a 1% partner and the tax matters partner of Kearney Partners. Each of the three partnerships filed a partnership tax return for the short tax period of October 17 to November 20, 2001 (November 20, 2001, tax period), before Mr. Sarma acquired an ownership interest in the partnerships.
The tax shelter involved three transactions relating to ownership changes of the partnerships within the tiered structure. On December 4, 2001, Mr. Sarma purchased a 99% interest in Nebraska Partners. All three partnerships terminated their tax periods on December 4, 2001, pursuant to section 708(b)(1)(B), for short tax periods of November 21 to December 4, 2001 (December 4, 2001, tax period). See sec. 1.708-1(b)(2), Income Tax Regs. (). New partnerships were deemed to be formed for the three partnerships, and the partnerships treated their new tax periods as beginning on December 5, 2001.4 See id. para. (b)(4) (). Each of the threepartnerships filed a partnership tax return for the December 4, 2001, tax period on the basis of its deemed termination.
On December 14, 2001, Mr. Sarma purchased a 99% interest in Lincoln Partners from Nebraska Partners; Mr. Sarma already indirectly owned Lincoln Partners through Nebraska Partners. Mr. Sarma directly held the partnership interest in Lincoln Partners for the remainder of 2001. On December 14, 2001, Lincoln and Kearney terminated their tax periods pursuant to section 708(b)(1)(B) on the basis of Mr. Sarma's purchase of Lincoln Partners, and two new partnerships were deemed to be organized. See sec. 1.708-1(b)(4), Income Tax Regs. Both Lincoln and Kearney reported short tax periods of December 5 to 14, 2001 (December 14, 2001, tax period). On December 19, 2001, Lincoln Partners, with Mr. Sarma as a 99% partner, sold its 99% interest in Kearney Partners for $737,118 to Fermium II Partners Fund, LLC, an entity related to the tax shelter promoter. As a result of the sale, Kearney Partners terminated its tax period, reporting a short tax period of December 15 to 19, 2001 (December 19, 2001, tax period). Lincoln Partners filed a partnership return for the short tax period of December 15 to 31, 2001 (December 31, 2001, tax period), and continued to file returns for 2002 through 2004 with Mr. Sarma as its partner.
Beginning before December 4, 2001, the date Mr. Sarma purchased his Nebraska partnership interest, through December 19, 2001, the date Lincoln sold its Kearney Partners interest, Kearney Partners executed offsetting foreign currency options (FX straddles) generating significant artificial gains and losses. At the time of Lincoln's sale of its Kearney partnership interest, Kearney Partners held $737,118 in cash and certificates of deposit totaling $81,794,837.5 It had unrealized losses from the FX straddles that had not been closed out, but it also had realized gain from the FX straddles. Lincoln Partners claimed that it had an outside basis in its Kearney partnership interest at the time of the sale of $79,110,062 on the basis of the gain from the FX straddles. It did not account for the unrealized losses, however. Lincoln Partners reported a short-term capital loss of $78,392,194 on the sale of its Kearney partnership interest (Lincoln loss) for its December 31, 2001, tax period. It allocated $77,608,272 of the Lincoln loss to Mr. Sarma as its 99% partner (Sarma loss). Petitioners claimed a deduction for the Sarma loss on their 2001 joint tax return and carried forward portions of the loss to 2002 through 2004.
On the basis of the above transactions, Lincoln Partners filed partnership tax returns for the following three short tax periods during which Mr. Sarma owned an indirect or direct interest: (1) the December 4, 2001, tax period, (2) the December 14, 2001, tax period, and (3) the December 31, 2001, tax period. Lincoln Partners was subject to TEFRA for the first two tax periods, December 4 and 14, 2001. For a portion of Lincoln's December 31, 2001, tax period, from December 15 to 19, 2001, Lincoln was a 99% partner of Kearney, and Kearney was subject to TEFRA during that time. Lincoln was a small partnership exempt from TEFRA for its December 31, 2001, tax period, the only tax period that Mr. Sarma was a direct partner. Lincoln Partners' return for its December 31, 2001, tax period (December 31, 2001, return) shows that it had two partners and neither partner was the type that would cause TEFRA to automatically apply. Lincoln did not attach a statement to its December 31, 2001, tax return electing to opt out of the small partnership exception and to apply TEFRA. See sec. 301.6231(a)(1)-1(b)(2), Proced. & Admin. Regs. (). On its December 31, 2001 tax return, Lincoln Partners answered "yes" on line 4 of Schedule B to the question of whether it was subject to TEFRA and named a tax matters partner.
During Lincoln's December 31, 2001 tax period, Mr. Sarma contributed $36.5 million in cash to Lincoln Partners. The record does not establish whether the contribution occurred before or after Lincoln sold its interest in Kearney Partners. However, Mr. Sarma's outside basis in Lincoln is not at issue here. Mr. Sarma also guaranteed a $38.8 million loan used to execute the FX straddles. The lender did not require the guaranty from Mr. Sarma as the FX straddles did not result in any risk to the lender. Kearney Partners Fund, LLC ex rel. Lincoln Partners Fund v. United States (Kearney), No. 2:10-cv-153-FtM-37CM, 2014 WL 905459, at *9 (M.D. Fla. Mar. 7, 2014), aff'd per curiam, 803 F.3d 1280 (11th Cir. 2015).
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