Tigers Eye Trading, LLC v. Comm'r of Internal Revenue, Docket No. 14510-05

• Court: United States Tax Court
• Writing for the Court: BEGHE
• Citation: 138 T.C. No. 6
• Parties: TIGERS EYE TRADING, LLC, SENTINEL ADVISORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Docket Number: Docket No. 14510-05
• Decision Date: 13 February 2012

138 T.C. No. 6

TIGERS EYE TRADING, LLC, SENTINEL ADVISORS, LLC,
TAX MATTERS PARTNER, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14510-05

UNITED STATES TAX COURT

Filed February 13, 2012

The stipulated decision in this Son of BOSS TEFRA partnership-level case, entered by the Court Dec. 1, 2009, was agreed to by R and the tax matters partner (TMP) of Tigers Eye Trading, LLC (Tigers Eye), with concurrence of participating partner (P), a partner other than TMP. The first decision paragraph specifies that the partnership items of ordinary loss, other deductions, distributions of property, and capital contributions were reduced to zero as determined in the notice of final partnership administrative adjustment (FPAA) issued to Tigers Eye. The second decision paragraph, determining that the FPAA is correct, includes the determinations that Tigers Eye is disregarded for Federal income tax purposes, outside basis is reduced to zero, and a 40% penalty applies to any gross valuation/basis

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misstatement. The third and fourth decision paragraphs respectively determine that the 40% gross valuation misstatement penalty under I.R.C. sec. 6662(b)(3), (e), and (h) applies to any underpayment of tax attributable to overstating the capital contributions claimed to have been made to the purported partnership and a 20% penalty for negligence or substantial underpayment under I.R.C. sec. 6662 applies to any additional underpayment of tax attributable to the partnership item adjustments other than the claimed capital contributions.

On Jan. 12, 2010, the Court of Appeals for the D.C. Circuit, to which this case would be appealable, issued Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (Petaluma II), aff'g in part, rev'g in part and remanding 131 T.C. 84 (2009) (Petaluma I). In Petaluma II the Court of Appeals for the D.C. Circuit held that outside basis is not a partnership item that the Tax Court had jurisdiction to determine in the partnership-level proceeding and remanded the case on the applicability of penalties.

On Jan. 19, 2010, P filed a motion for leave to file a motion to revise the stipulated decision and lodged the motion to revise. On Dec. 30, 2010, the Court granted the motion for leave nunc pro tunc as of Jan. 19, 2010, and as of that date filed the motion to revise. In the motion to revise P asks the Court to revise the stipulated decision to conform to the jurisdictional limits on the authority of the Tax Court established in Petaluma II.

On Dec. 15, 2010, this Court issued Petaluma FX Partners, LLC v. Commissioner, 135 T.C. 581 (2010) (Petaluma III), on appeal (D.C. Cir. Mar. 8, 2011), holding that for this Court to have jurisdiction over a penalty at the partnership level, Petaluma II requires that the penalty be computable without partner-level proceedings to determine affected items, leading at least potentially to only a computational adjustment to the partners' returns. Id. at 586-587.

After Petaluma II and Petaluma III were issued, the Supreme Court issued Mayo Found. for Med. Educ. & Research v. United

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States, 562 U.S. ___, 131 S. Ct. 704 (2011). In Mayo Found., the Supreme Court made clear that courts must defer to regulations that interpret the Internal Revenue Code unless they fail to meet the two-step standard of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-843 (1984). In the recently issued opinion in Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 650 F.3d 691 (D.C. Cir. 2011), rev'g and remanding 134 T.C. 211 (2010), supplementing T.C. Memo. 2009-195, the Court of Appeals for the D.C. Circuit held that, prior caselaw to the contrary notwithstanding, the Tax Court must defer to a regulation unless it holds the regulation invalid under Chevron.

Held: The motion to revise the stipulated decision will be denied; the jurisdictional limitations established in Petaluma II were based on a concession by the Government that does not apply in the case at hand; the applicability of the accuracy-related penalties determined by the stipulated decision in the case at hand is sustained by the decision's adoption of adjustments to partnership items that are related to said penalties.

Held, further, because Tigers Eye filed a partnership return for 1999, the TEFRA procedures apply with respect to 1999 to Tigers Eye and its items and to TMP, P, and other persons holding an interest in Tigers Eye, and the Tax Court has jurisdiction to determine that Tigers Eye does not exist and is not a partnership for Federal income tax purposes. See I.R.C. sec. 6233; sec. 301.6233-1T(a), (c), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987).

Held, further, because Tigers Eye does not exist and is not a partnership for Federal income tax purposes, the Court has jurisdiction to make determinations with respect to all items of Tigers Eye that would be partnership items, as defined in I.R.C. sec. 6231(a)(3) and sec. 301.6231(a)(3)-1, Proced. & Admin. Regs., if Tigers Eye had been a partnership, including the nature and character of those items. See I.R.C. sec. 6233; sec. 301.6233-1T(a), (c), Temporary Proced. & Admin. Regs., supra.

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Held, further, because Tigers Eye is disregarded for Federal income tax purposes, it acted as a nominee and agent for P and others who participated in the transactions at issue and Tigers Eye's items are of that nature and character.

Held, further, the determination that Tigers Eye is disregarded as a partnership for Federal income tax purposes serves as a basis for a computational adjustment reflecting the disallowance of any loss or credit claimed by P or any other purported partner with respect to Tigers Eye, and the Court has jurisdiction to determine that all items of Tigers Eye that purported to be partnership items are adjusted to zero. See I.R.C. sec. 6233; sec. 301.6233-1T(a), Temporary Proced. & Admin. Regs., supra.

Held, further, items of Tigers Eye that are necessary for maintaining its books and records as nominee-agent acting on behalf of the purported partners and providing information to them are entity/partnership items that the Court has jurisdiction to decide in this partnership/entity-level proceeding. See sec. 301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs.

Held, further, because Tigers Eye conducted the transactions as nominee-agent for P, P's basis in the distributed property is Tigers Eye's cost basis in the property, which P concedes is the amount of the distributions shown on the Schedule K-1, Partner's Share of Income, Credits, Deductions, etc., Tigers Eye issued to P; Tigers Eye's cost basis in the distributed property is an entity/partnership item that this Court has jurisdiction to decide in this proceeding. See sec. 301.6231(a)(3)-1(a)(4), (c)(3)(iii), Proced. & Admin. Regs.

Held, further, in accordance with Mayo Found. and Intermountain, we must apply the TEFRA regulations that satisfy the Chevron standard and are not bound to follow a contrary holding of Petaluma II to the extent those regulations were not specifically considered and applied by the Court of Appeals in deciding the issue.

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Held, further, Petaluma II notwithstanding, outside basis is an entity/partnership item related to contributions and distributions that Tigers Eye needed to determine for purposes of maintaining its books and records and providing information to its purported partners that the Court has jurisdiction to decide in the partnership/entity-level proceeding. See sec. 301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs.

Held, further, sec. 301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs., is valid under the two-step Chevron standard.

Held, further, the ordinary loss and other deductions reduced to zero by the first decision paragraph flowed directly through to the purported partners' returns, and R may compute and assess the deficiencies related to the adjustments of those partnership items to zero without issuing a statutory notice of deficiency; under Petaluma II, this Court has jurisdiction in this partnership-level proceeding to determine applicability of penalties to the underpayments of tax resulting from the adjustments to zero of the ordinary loss and other deductions that flowed directly through to the purported partners' individual returns.

Held, further, the adjustment of the ordinary loss to zero is attributable to overstating the capital contributions claimed to have been made to the purported partnership; pursuant to the stipulated decision the 40% gross valuation misstatement penalty and the 20% negligence penalty apply respectively to the underpayments of tax resulting from the adjustments of the loss and other deductions to zero.

Held, further, the overstatement of the purported partners' bases in the distributed property is attributable to claiming that capital contributions were made to the purported partnership; the underpayment of tax resulting from the overstatement of basis in the distributed property (distributed property loss deficiency) is attributable to the reduction to zero of capital contributions claimed to have been made to the purported partnership that is disregarded for Federal income tax purposes; this Court has jurisdiction in this partnership-

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level proceeding to determine in the stipulated decision that the 40% gross basis misstatement penalty applies to the distributed property loss deficiency.

Held, further, there will be a gross misstatement of basis in the distributed property if the misstatement exceeds four times the amount of the distributions shown on the Schedule K-1 issued to the purported partner; the 40% penalty will apply to any underpayment of tax attributable to claiming basis in the property that is more than four times the amount of the distributions shown on the Schedule K-1 issued to the purported partner.

Felix B. Laughlin and Mark D. Allison, for petitioner.

David D. Aughtry, Hale E. Sheppard, and William E....