The Tax Matters Partner v. USA, Civil Action No. 3:06cv379-HTW-MTP.

• Decision Date: 30 April 2010
• Docket Number: 3:06-cv-385 HTW-MTP,Nos. 3:06-cv-384 HTW-MTP,3:06-cv-38,3:06-cv-386 HTW-MTP,3:06-cv-380 HTW-MTP,3:06-cv-382 HTW-MTP,Civil Action No. 3:06cv379-HTW-MTP.,3:06-cv-387 HTW-MTP,3:06-cv-381 HTW-MTP
• Parties: NEVADA PARTNERS FUND, LLC, by and through SAPPHIRE II, INC., the tax matters partner, Plaintiff v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of Mississippi

714 F.Supp.2d 598

NEVADA PARTNERS FUND, LLC, by and through SAPPHIRE II, INC., the tax matters partner, Plaintiff

v.UNITED STATES of America, Defendant.

Civil Action No. 3:06cv379-HTW-MTP.

Nos. 3:06-cv-384 HTW-MTP, 3:06-cv-385 HTW-MTP, 3:06-cv-386 HTW-MTP, 3:06-cv-387 HTW-MTP, 3:06-cv-380 HTW-MTP, 3:06-cv-381 HTW-MTP, 3:06-cv-382 HTW-MTP, 3:06-cv-388 HTW-MTP, 3:06-cv-389 HTW-MTP, 3:06-cv-390 HTW-MTP.

United States District Court,

S.D. Mississippi,

Jackson Division.

April 30, 2010.

COPYRIGHT MATERIAL OMITTED.

Alveno N. Castilla, W. Whitaker Rayner, Watkins Ludlam Winter & Stennis, P.A., Sheryl M. Bey, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Jackson, MS, Charles E. Hodges, PHV, II, David D. Aughtry, PHV, Chamberlain, Hrdlicka, White, Williams & Martin, Atlanta, GA, for Plaintiff.

Michael N. Wilcove, Pascale Guerrier, Paul A. Allulis, U.S. Dept. of Justice, Tax Division, Washington, DC, for Defendant.

MEMORANDUM OPINION AND ORDER

HENRY T. WINGATE, Chief Judge.

Before this court is a federal income tax partnership proceeding tried to the court sitting without a jury between the dates of August 3, 2009, and September 23, 2009. Now, pursuant to Rule 52, ¹ Federal Rules of Civil Procedure, this court announces its findings of fact and conclusions of law.

This lawsuit was brought by Nevada Partners Fund, LLC, by and through its tax matters partner, Sapphire II, Inc. Nevada Partners Fund, a limited liability corporation, is principally owned (99%) by James Kelley Williams. Sapphire II, Inc., is the tax matters partner, whose presence here is required by tax law. A “tax matters partner” is defined as a general partner who is so designated by the applicable tax regulations and is the entity to whom the Internal Revenue Service is required to mail notice of any final partnership administrative adjustments. Title 26 U.S.C. § 6223(a). See also Title 26 U.S.C. § 6231(a)(7) and Treas. Reg. § 301.6231(a)(7)-1.

Plaintiff Nevada Partners Fund, LLC, submits this action pursuant to Title 26 U.S.C. § 6226(a) ² which allows an aggrieved taxpayer entity to contest a final partnership administrative adjustment (FPAA) finding by the Internal Revenue Service (“IRS”). Under § 6226(a), the United States District Court for the District in which the partnership's principal place of business is located is a proper venue for this lawsuit. The parties do not contest this court's subject matter jurisdiction to hear this dispute.

This dispute between Nevada Partners Fund, LLC, and the United States of America, namely, the IRS, incorporates ten (10) additional member cases brought on behalf of three Limited Liability Companies (LLC's), ³ Nevada Partners Fund, LLC, Carson Partners Fund, LLC, and Reno Partners Fund, LLC, by the owners of these LLC's just prior to their being purchased by James Kelley Williams. All the plaintiffs in the instant case and the member cases challenge certain FPAAs setting forth adjustments to their LLC tax returns for the taxable year ending December 31, 2001, for tax periods between December 4, 2001, and the end of the year.

The ten (10) member cases accompanying the instant lawsuit are listed below. Each one of the cases challenges an IRS adjustment for a specific time period. These time periods also are listed below.

Reno Partners Fund, LLC v. United States of America, 3:06-cv-00384-HTW-MTP; Carson Partners Fund, LLC v. United States of America, 3:06-cv-00385-HTW-MTP; Reno Partners Fund, LLC v. United States of America, 3:06-cv-00386-HTW-MTP; Nevada Partners Fund, LLC v. United States of America, 3:06-cv-00387-HTW-MTP; Carson Partners Fund, LLC v. United States of America, 3:06-cv-00380-HTW-MTP; Reno Partners Fund, LLC v. United States of America, 3:06-cv-00381-HTW-MTP; Carson Partners Fund, LLC v. United States of America, 3:06-cv-00382-HTW-MTP; Nevada Partners Fund, LLC v. United States of America, 3:06-cv-00388-HTW-MTP; Reno Partners Fund, LLC v. United States of America, 3:06-cv-00389-HTW-MTP; Carson Partners Fund, LLC v. United States of America, 3:06-cv-00390-HTW-MTP

All eleven cases challenge the manner in which the IRS has applied Treasury Regulation § 1.701-2, ⁴ the Partnership Anti- Abuse Rule to the plaintiffs' tax returns in this case. Treasury Regulation § 1.701-2, is an anti-abuse regulation which protects partnership Subchapter K provisions from being abused by the principals of partnerships and/or purchasers of partnerships. If a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of a partners' aggregate federal tax liability in a manner that is inconsistent with the intent of subchapter K, the IRS will, pursuant to this regulation, recast the transaction to produce tax. In this case the IRS, based on the manner in which James Kelley Williams availed himself of the Nevada/Carson/Reno partnership for the reduction of his 2001 tax liability, has recast the transaction to produce tax results. ⁵ Consequently, plaintiff herein and the plaintiffs of the ten (10) member lawsuits have sued the IRS, arguing that the IRS has wrongfully adjusted taxes for the LLCs.

The specific time periods for which ten (10) member cases challenge the IRS § 1.701-2 adjustments to their respective returns are as follows. Nevada Partners Fund, LLC, as it existed prior to being purchased by James Kelley Williams, raises its challenge to the readjustment of its partnership income tax returns Forms 1065 for October 22 to November 21, 2001; for November 22 to December 4, 2001; and for December 5 to December 31, 2001, for a total of three cases. Carson Partners Fund, LLC, as it existed prior to its being purchased by James Kelley Williams, brings four cases challenging Internal Revenue Service adjustments to its returns of partnership income for tax periods October 22 to November 21, 2001; for November 22 to December 4, 2001; for December 5 to December 12, 2001; and for December 13 to December 31, 2001. Finally, Reno Partners Fund, LLC, as it existed prior to its being purchased by James Kelley Williams, challenges the Internal Revenue Service's adjustments to its tax returns for October 22 to November 21, 2001; for November 22 to December 4, 2001; for December 5 to December 12, 2001; and for December 13 to December 19, 2001.

Several principals need to be identified at the beginning of this discussion. First, there is James Kelley Williams and his family. James Kelley Williams is the principal owner of the named plaintiff in the instant case Nevada Partners Fund, LLC. On and just after December 4, 2001, James Kelley Williams purchased the Nevada Partners Fund, LLC, the Carson Partners Fund, LLC, and the Reno Partners Fund, LLC, from the principals of a company called Bricolage, LLC. Bricolage, LLC, is a hedge fund located in New York City which is owned by one Andrew Beer, a former Harvard Business School classmate of James Kelley Williams, Jr., a son of James Kelley Williams.

Next is the trinity of Nevada/Carson/Reno, LLCs. Nevada may be viewed under the circumstances of this case as the holding company for Carson and Reno. James Kelley Williams purchased the Nevada/Carson/ Reno, LLCs, from the principals of Bricolage, LLC, pursuant to an investment strategy called the “Family Office Customized” or “FOCus” Program, ⁶ the brainchild of Andrew Beer (and perhaps others in that firm).

Then, there is the IRS, the defendant in this action, which claims that it readjusted the LLCs' tax returns for the taxable year ending December 31, 2001, in a lawful and proper manner pursuant to Treas. Reg. 1.701-2.

Next, James Kelley Williams' Certified Public Accounting firm is KPMG. KPMG is the current name of Klynveld Main Goerdeler, a Swiss/European accounting firm which merged with Peat Marwick (US) and Peat Marwick McKlintock (GB) in 1990 to form KPMG Peat Marwick. The name of the merged entity was shortened to KPMG in 1995. The agent playing the major role for KPMG in this case was one Donna Bruce.

Finally, there are the attorneys for James Kelley Williams who were involved in this matter. They are from the law firm of Baker Donaldson, namely John Beard and William Painter.

When James Kelley Williams purchased Nevada, Carson and Reno from the principals of Bricolage, the names of the LLC's did not change, a matter which might cause confusion. Another matter which could be confusing is that Williams soon sold the Reno Partners Fund in order to take advantage of what had been represented to him by KPMG as a major tax advantage. This alleged tax advantage is at the very core of the dispute in this case. After the sale of Reno, only the Nevada and Carson entities remained in James Kelley Williams' possession. Through these LLC's, James Kelley Williams has enjoyed great investment success which the IRS does not challenge. Only the sale of the Reno Partners Fund and the manner in which it was accomplished has raised the IRS scrutiny which is the subject of this lawsuit. In order to avoid the points of possible confusion mentioned above, this court shall denominate the LLC's in a manner which will distinguish between the Nevada/Carson/Reno trinity before and after the purchase of these entities by Williams.

The purchase of Nevada, Carson and Reno by James Kelley Williams was concluded on or just after December 4, 2001. Consequently, the 2001 tax periods in question are divided between James Kelley Williams and the previous owners of the LLCs. The eleven aforementioned cases have been presented to the court by the parties in two categories, those pertaining to tax periods ending on or before the Williams purchase on December 4, 2001, and those pertaining to tax periods ending after December 4, 2001. The first category of interests are denominated as the “non-Williams” cases, while the second category of interests is referred to as the “Williams cases” or the “Williams companies” cases. So that there will be no doubt as to which...