Seaview Trading, LLC v. Commissioner ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SEAVIEW TRADING, LLC AND No. 15-71330
ROBERT KOTICK,
Petitioners-Appellants, Tax Ct. No.
1744-11
v.
COMMISSIONER OF INTERNAL OPINION
REVENUE,
Respondent-Appellee.
Appeal from the United States Tax Court
Argued and Submitted April 7, 2017
Pasadena, California
Filed June 7, 2017
Before: MILAN D. SMITH, JR. and N. RANDY SMITH,
Circuit Judges, and GARY FEINERMAN, District Judge. *
Opinion by Judge Milan D. Smith, Jr.
*
The Honorable Gary Feinerman, United States District Judge for
the Northern District of Illinois, sitting by designation.
2 SEAVIEW TRADING V. CIR
SUMMARY **
Tax
The panel affirmed the Tax Court’s dismissal, for lack of
jurisdiction, of a petition challenging a notice of Final
Partnership Administrative Adjustment.
Robert Kotick and his father formed Seaview Trading,
LLC, a limited liability company, which federal tax
regulations treat as a partnership. Seaview acquired an
interest in a common trust fund which reported a loss that
was allocated to its investors, including Seaview. After an
audit of Seaview, the IRS issued a FPAA disallowing the
loss from Seaview’s trust investment and imposed penalties.
Because Kotick contended that Seaview was a small
partnership not subject to the audit procedures under the Tax
Equity and Fiscal Responsibility Act of 1982 (TEFRA), the
panel first held that entities that are disregarded for federal
tax purposes may nevertheless constitute pass-thru partners
under 26 U.S.C. § 6231(a)(9), such that the small-
partnership exception under § 6231 does not apply and the
partnership is therefore subject to the TEFRA audit
procedures. The panel determined that resolution of this
question was inextricably intertwined with the contention
that Kotick had standing to file a petition for readjustment of
partnership items on behalf of his purported small
partnership.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
SEAVIEW TRADING V. CIR 3
As to standing, the panel held that, because a party
(Kotick) other than Seaview’s tax matters partner filed a
petition for readjustment of partnership items after the
partnership had timely done the same, the Tax Court lacked
jurisdiction under 26 U.S.C. § 6226.
COUNSEL
Daniel Benjamin Levin (argued), Jessica Barclay-Strobel,
and Ronald L. Olson, Munger Tolles & Olson LLP, Los
Angeles, California; David W. Foster and Armando Gomez,
Skadden Arps Slate Meagher & Flom LLP, Washington,
D.C.; for Petitioners-Appellants.
Andrew Weiner (argued) and Richard Farber, Attorneys;
Tax Division, United States Department of Justice,
Washington, D.C.; for Respondent-Appellee.
4 SEAVIEW TRADING V. CIR
OPINION
M. SMITH, Circuit Judge:
This appeal presents the question of whether entities that
are disregarded for federal tax purposes may nevertheless
constitute pass-thru partners under 26 U.S.C. § 6231(a)(9)
such that their partnership is not eligible for the small-
partnership exception contained in § 6231. For the reasons
stated in this opinion, we hold that an entity’s disregarded
status does not preclude its classification as a pass-thru
partner.
FACTUAL AND PROCEDURAL BACKGROUND
In 2001, Robert Kotick (Kotick) and his father Charles
Kotick (C. Kotick) formed a Delaware limited liability
company (LLC), Seaview Trading, LLC (Seaview). Federal
tax regulations treat Seaview as a partnership. See Treas.
Reg. § 301.7701-3(b)(1)(i). The Koticks each held their
respective interests in Seaview through Delaware LLCs:
AGK Investments LLC (AGK), owned wholly by Kotick,
and KMC Investments LLC (KMC), owned wholly by C.
Kotick.
Seaview acquired an interest in a common trust fund,
which in 2001 reported a loss that was allocated to its
investors—including Seaview. Kotick reported the loss
arising from Seaview’s interest in the trust fund on his 2001
Form 1040. In 2004, the Internal Revenue Service (IRS)
audited Kotick’s 2001 Form 1040, at which time it became
aware of Kotick’s claimed loss resulting from Seaview’s
investment. At the conclusion of the audit, the IRS
disallowed certain transaction expenses relating to Seaview,
and assessed additional taxes. It did not, however, disallow
the loss that Kotick had reported on his individual tax return
SEAVIEW TRADING V. CIR 5
as a result of Seaview’s trust investment. The statute of
limitations for Kotick’s 2001 Form 1040 expired in July
2005. 26 U.S.C. § 6501(a).
The IRS began an audit of Seaview in October 2005.
Five years later, in October 2010, the IRS issued a final
partnership administrative adjustment (FPAA) notice
disallowing the loss from Seaview’s trust investment and
imposing penalties. Kotick filed a petition in tax court on
behalf of Seaview challenging the IRS’s notice in regard to
Seaview’s 2001 taxes. Kotick argued that the IRS’s notice
was invalid because Seaview was exempt from the
otherwise-applicable partnership audit pursuant to the small-
partnership exception set forth at 26 U.S.C.
§ 6231(a)(1)(B)(i). AGK filed a separate petition seeking
the same relief.
The IRS moved to dismiss Kotick’s petition for lack of
jurisdiction, arguing that (1) Seaview did not fall within the
§ 6231 small-partnership exception, and (2) Kotick lacked
standing to file the petition on behalf of Seaview because he
was not Seaview’s tax matters partner. In March 2015, the
tax court granted the IRS’s motion. Kotick then filed this
appeal.
JURISDICTION AND STANDARD OF REVIEW
On March 11, 2015, the tax court issued an order
dismissing Kotick’s petition for lack of jurisdiction. That
order constituted a final judgment as to all claims and all
parties. Kotick timely noticed his appeal on April 30, 2015.
26 U.S.C. § 7483; Fed. R. App. P. 13(a). We have
jurisdiction pursuant to 26 U.S.C. § 7482(a). We review de
novo the tax court’s dismissal of a petition for lack of
jurisdiction. Gorospe v. Comm’r, 451 F.3d 966, 968 (9th
Cir. 2006).
6 SEAVIEW TRADING V. CIR
ANALYSIS
I. Disregarded Entities and the Tax Equity and Fiscal
Responsibility Act of 1982
Under Treasury Regulation § 301.7701-3, “an eligible
entity with a single owner can elect to be classified as an
association or to be disregarded as an entity separate from its
owner.” Subsection (b)(1)(ii) of the regulation provides that
a domestic eligible entity with a single owner will be
“[d]isregarded as an entity separate from its owner” by
default, unless the entity chooses otherwise. The activities
of a disregarded entity “are treated in the same manner as a
sole proprietorship, branch, or division of the owner,” except
in regard to the application of certain special employment
and excise tax rules. Treas. Reg. § 301.7701-2(a).
The Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA), Pub. L. No. 97-248, § 1(a), 96. Stat. 324, sets
forth unified audit and litigation procedures applicable to
partnerships. See 26 U.S.C. §§ 6221–6234. In a
partnership-level proceeding, a tax court has jurisdiction to
determine
all partnership items of the partnership for the
partnership taxable year to which the notice
of final partnership administrative
adjustment relates, the proper allocation of
such items among the partners, and the
applicability of any penalty, addition to tax,
or additional amount which relates to an
adjustment to a partnership item.
Id. at § 6226(f). Under the exception provided by
§ 6231(a)(1)(B)(i), an entity will not be considered a
“partnership” for the purposes of TEFRA’s audit procedures
SEAVIEW TRADING V. CIR 7
if the entity has “10 or fewer partners each of whom is an
individual . . . , a C corporation, or an estate of a deceased
partner.”
Treasury Regulations provide a caveat to the exception
contained in § 6231: The small-partnership exception in
§ 6231(a)(1)(B)(i) “does not apply to a partnership for a
taxable year if any partner in the partnership during that
taxable year is a pass-thru partner as defined in section
6231(a)(9).” Treas. Reg. § 301.6231(a)(1)-1(a)(2). TEFRA
defines a pass-thru partner as any “partnership, estate, trust,
S corporation, nominee, or other similar person through
whom other persons hold an interest in the partnership.”
26 U.S.C. § 6231(a)(9).
II. Disregarded Single-Member LLCs Constitute Pass-
Thru Partners
Appellants argue that under § 301.7701-3, the so-called
“check-the-box” regulation, AGK and KMC were
disregarded entities treated as sole proprietorships of their
respective individual owners, and that consequently they
could not constitute pass-thru partners within the meaning of
Treasury Regulation § 301.6231(a)(1)-1. Seaview is correct
in regard to its first contention—AGK and KMC were
disregarded entities—but their disregarded status for the
purpose of federal taxes does not preclude their classification
as pass-thru partners under § 301.6231(a)(1)-1. To the
contrary, every source cited by the parties has found that
single-member LLCs qualify as pass-thru partners,
regardless of their elected classification under § 301.7701-3.
Seaview has provided no compelling reason for us to diverge
from this consensus.
The IRS directly addressed the question of whether a
disregarded entity may constitute a pass-thru partner in
8 SEAVIEW TRADING V. CIR
Revenue Ruling 2004-88, 2004-2 C.B. 165. 1 We have
previously applied Skidmore deference to revenue rulings.
See Omohundro v. United States, 300 F.3d 1065, 1068 (9th
Cir. 2002) (per curiam). 2 Under Skidmore v. Swift & Co.,
323 U.S. 134 (1944), and the Supreme Court’s decision in
United States v. Mead Corp., 533 U.S. 218 (2001), an
agency’s ruling “is eligible to claim respect according to its
persuasiveness.” 533 U.S. at 221 (citing generally
Skidmore, 323 U.S. 134). We consider multiple factors
when exercising Skidmore review of agency action,
including “the thoroughness and validity of the agency’s
reasoning, the consistency of the agency’s interpretation, the
formality of the agency’s action, and all those factors that
give it the power to persuade, if lacking the power to
control.” Tualatin Valley Builders Supply, Inc. v. United
States, 522 F.3d 937, 942 (9th Cir. 2008); see also Tablada
v. Thomas, 533 F.3d 800, 806–08 (9th Cir. 2008) (finding
Skidmore deference warranted in light of the “rational
1
A revenue ruling constitutes “an official interpretation by the [IRS]
that has been published in the Internal Revenue Bulletin . . . for the
information and guidance of taxpayers, Internal Revenue Service
officials, and others concerned.” Treas. Reg. § 601.601(d)(2)(i)(a).
Revenue rulings “do not have the force and effect of Treasury
Department Regulations,” but “are published to provide precedents to be
used in the disposition of other cases, and may be cited and relied upon
for that purpose.” Id. § 601.601(d)(2)(v)(d).
2
There is arguably some inconsistency between our application of
Skidmore deference to the revenue ruling at issue in Omohundro, and our
application of more deferential Chevron review to an informal statement
from the Department of Housing and Urban Development in Schuetz v.
Banc One Mortgage Corp., 292 F.3d 1004, 1012 (9th Cir. 2002). See
Tualatin Valley Builders Supply, Inc. v. United States, 522 F.3d 937, 941
(9th Cir. 2008) (noting the tension between Omohundro and Schuetz).
We need not address this tension, however, as Revenue Ruling 2004-88
warrants deference even under the less deferential Skidmore standard.
SEAVIEW TRADING V. CIR 9
validity” and consistent application of an agency’s position,
despite the existence of reasonable alternative
interpretations).
Applying Skidmore’s framework for reviewing agency
rulings, Revenue Ruling 2004-88 carries persuasive, if not
decisive, force, and therefore warrants judicial deference.
Ruling 2004-88 concededly does not contain extensive
discussion of its analysis; but the concise nature of its
reasoning does not undercut its basic logic. Ruling 2004-88
starts by emphasizing that the definition of a “pass-thru”
partner contained in § 6231(a)(9) includes “partnership[s],
estate[s], trust[s], S corporation[s], nominee[s] or [an]other
similar person through whom other persons hold an interest
in the partnership.” Rev. Rul. 2004-88 (quoting
§ 6231(a)(9)). In other words, the definition expressly
contemplates its application beyond the specific enumerated
forms. Single-member LLCs are indisputably entities
“through whom other persons hold an interest in [a]
partnership.” The question, therefore, is whether a single-
member LLC constitutes a “similar person” in respect to the
enumerated entities. Ruling 2004-88 holds that the requisite
similarity exists when “legal title to a partnership interest is
held in the name of a person other than the ultimate owner.”
Id. In support of this holding, Ruling 2004-88 cites White v.
Commissioner, 62 T.C.M. (CCH) 1181 (1991), in which the
custodian for minor children was not a pass-thru partner
because it did not hold legal title to the children’s partnership
interests. Ruling 2004-88 contrasts that result with the
outcome in Primco Management Co. v. Commissioner,
74 T.C.M. (CCH) 177 (1997), in which a grantor trust
holding legal title to an interest in an S corporation
constituted a pass-thru shareholder. Ruling 2004-88 then
goes on to state that,
10 SEAVIEW TRADING V. CIR
although LLC is a disregarded entity for
federal tax purposes, LLC is a partner of P
under the law of the state in which P is
organized. Similarly, although A, LLC’s
owner, is a partner of P for purposes of the
TEFRA partnership provisions under section
6231(a)(2)(B) because A’s income tax
liability is determined by taking into account
indirectly the partnership items of P, A is not
a partner of P under state law. Because A
holds an interest in P through LLC, A is an
indirect partner and LLC, the disregarded
entity, is a pass-thru partner under the
TEFRA partnership provisions.
Consequently, the small partnership
exception does not apply to P because P has
a partner that is a pass-thru partner.
Rev. Rul. 2004-88 (emphasis added).
Seaview argues that Ruling 2004-88’s analysis
impermissibly treats state law as determinative of federal tax
consequences, in contravention of Treasury Regulation
§ 301.7701-1(a)(1), Littriello v. United States, 484 F.3d 372(6th Cir. 2007), and Hecht v. Malley, 265 U.S. 144 (1924).
Each of Seaview’s cited sources stands for the proposition
that state business classifications do not supersede federal
classifications for the purpose of assessing federal taxes. See
Treas. Reg. § 301.7701-1(a)(1) (“Whether an organization is
an entity separate from its owners for federal tax purposes is
a matter of federal tax law and does not depend on whether
the organization is recognized as an entity under local law.”);
Littriello, 484 F.3d at 379 (“The federal government has
historically disregarded state classifications of businesses
for some federal tax purposes.”); Hecht, 265 U.S. at 161–63
SEAVIEW TRADING V. CIR 11
(treating certain state trusts as “associations” within the
meaning of the tax code, despite different treatment under
state law). But the issue here is not whether the IRS may use
state-law entity classifications to determine federal taxes.
Rather, the question is whether an LLC’s federal
classification for federal tax purposes negates the factual
circumstance in which the owner of a partnership holds title
through a separate entity. In other words, state law is
relevant to Ruling 2004-88’s analysis only insofar as state
law determines whether an entity bears the requisite
similarity to the entities expressly enumerated in
§ 6231(a)(9)—that is, whether an entity holds legal title to a
partnership interest such that title is not held by the interest’s
owner.
Ruling 2004-88 is buttressed by the IRS’s 2002 Chief
Counsel Advice (CCA) memorandum, in which Chief
Counsel for the IRS stated that “the test [for whether an
entity is a “similar person” under § 6231(a)(9)] is simply
whether title to the partnership interest is held through
another person regardless of that person’s tax classification.”
I.R.S. C.C.A. 200250012, 2002 WL 31781355 (Aug. 30,
2002). 3 The CCA acknowledges the Treasury Regulations’
sections providing for “classification [of entities] for federal
tax purposes,” and establishing that a given entity may be
“[d]isregarded as an entity separate from its owner,” but
reasons that the non-exclusive definition of pass-thru
partners contained in § 6231(a)(9) “indicates Congressional
intent to make the TEFRA procedures apply whenever
indirect partners exist whose identity will not be reflected on
the face of the partnership return.” 2002 WL 317813553
Under 26 U.S.C. § 6110(k)(3), Chief Counsel Advice is not
precedential. It may, however, be relevant to the panel’s Skidmore
review of the consistency and logic of the agency’s position.
12 SEAVIEW TRADING V. CIR
(alterations in original). The CCA endorses Primco’s
reasoning regarding application of the small-partnership
exception to disregarded entities, noting Primco’s finding
that “the entity classification statute . . . serve[s] a wholly
independent purpose from the pass-thru partner provision of
the small entity exception.” Id. The former establishes the
tax consequences for that particular entity, while the latter
determines the application of TEFRA’s unified audit
procedures to a separate, higher-level partnership. Notably,
the regulation establishing certain entities as “disregarded”
did not exist at the time that Congress enacted either the
small-partnership exception or the pass-thru partner
provision. Id.The CCA concludes by further justifying the rule from
Primco on the ground that “any other rule would be
unworkable.” Id. Treating disregarded single-member
LLCs as pass-thru partners avoids requiring the IRS “to
investigate the chain of ownership down two or more levels
in order to determine whether TEFRA applies,” and is thus
consistent with the TEFRA provision indicating that the IRS
may “rely upon the facts reported on a partnership return in
determining whether TEFRA applies, if such reliance is
reasonable.” Id.; see also 26 U.S.C. § 6231(g).
Seaview argues that disregarded entities are not
“persons” under 26 U.S.C. § 7701(a)(1), and therefore
cannot be “similar persons” under the pass-thru partnership
definition. Section 7701, however, expressly includes
“corporation[s]” within its definition of persons. True, a
single-member LLC’s corporate form may be disregarded
for federal tax purposes. But, as the language of Treasury
Regulation § 301.7701-2(a) itself plainly indicates, that form
is merely disregarded, not altered. In other words, the
corporate form persists, but the tax consequences change. A
SEAVIEW TRADING V. CIR 13
single-member LLC continues to be a single-member LLC,
regardless of whether it is taxed as such. Consequently, a
disregarded single-member LLC could still logically fall
within § 7701(a)’s definition of a “person,” insofar as the
relevant regulation is concerned with the factual
circumstances of partnership-interest ownership. A
“nominee” is similarly a disregarded entity for federal tax
purposes, but is nevertheless expressly included in the
definition of a pass-thru partner. See 26 U.S.C. § 6231(a)(9).
Seaview provides no compelling reason to contravene
the consistent stance of the IRS and the tax courts, which
have uniformly treated disregarded single-member LLCs as
pass-thru partners. Rather, it argues that (1) the IRS and the
tax courts have themselves not provided sufficient reasoning
to warrant deference, and (2) disregarded entities are not
similar to the entities enumerated in 26 U.S.C. § 6231(a)(9).
As discussed, supra, however, the IRS has taken a consistent
position regarding the treatment of disregarded entities as
pass-thru partners, supported by reasoning set forth in both
informal and formal statements. Revenue Ruling 2004-88 is
thus entitled to deference under Skidmore. Moreover,
Seaview’s expansive reading of the consequences of an
entity’s disregarded status under Treasury Regulation
§ 301.7701-2 conflicts with the logical interpretation of a
pass-thru partner as one that holds title to a partnership
interest but is not the interest’s ultimate owner—an
interpretation that accords with the nature of the enumerated
entities in the statute, and the provision’s concern with
entities “through whom other persons hold an interest in the
partnership.” 26 U.S.C. § 6231(a)(9).
For these reasons, we hold that disregarded single-
member LLCs constitute pass-thru partners under
§ 6231(a)(9).
14 SEAVIEW TRADING V. CIR
III. Kotick Lacked Standing to File the Petition on
Seaview’s Behalf
We generally may not address the merits of a case where
we find, as we do here, that the party bringing the action
lacks standing. Steel Co. v. Citizens for a Better Env’t,
523 U.S. 83, 94 (1998). However, because Seaview’s merits
argument regarding AGK’s status as a disregarded entity
underlies, and is inextricably intertwined with, its contention
that Kotick had standing to file the petition on Seaview’s
behalf, resolution of the merits question is necessary to our
holding that Kotick lacked standing. See City of Revere v.
Mass. Gen. Hosp., 463 U.S. 239, 243 n.5 (1983) (noting that
the case was “in the class of those where standing and the
merits are inextricably intertwined”) (internal quotation
marks omitted); United States v. $186,416.00 in U.S.
Currency, 722 F.3d 1173, 1175 (9th Cir. 2013) (same).
The tax court found that AGK was Seaview’s tax matters
partner, and that Kotick, “a party other than Seaview’s tax
matters partner, filed a petition within 90 days of the date the
FPAA was mailed.” As the tax court explained, Seaview
failed to designate a tax matters partner for 2001. Therefore,
under 26 U.S.C. § 6231(a)(7)(B), Seaview’s tax matters
partner was the “general partner having the largest profits
interest.” See also Treas. Reg. § 301.6231(a)(7)–1(m)(2).
AGK held a 99.15% interest in Seaview, and was thus the
tax matters partner. 26 U.S.C. § 6231(a)(7)(B). The tax
court rejected Seaview’s contention that AGK’s status as a
single-member LLC precluded it from being Seaview’s tax
matters partner, citing to a tax court decision in which a
single-member LLC and pass-thru partner was deemed the
tax matters partner for a partnership. See G-5 Inv. P’ship v.
Comm’r, 128 T.C. 186, 187 & n.4 (2007). Finally, the tax
court held that “[p]ursuant to section 6226(a), AGK timely
SEAVIEW TRADING V. CIR 15
filed a petition with [the tax court] relating to the year in
issue, and [the tax court] therefore lack[ed] jurisdiction
relating to Robert Kotick’s petition.” Cf. 26 U.S.C. §§ 6226,
6231(a)(7); Treas. Reg. § 301.6231(a)(7)-1, -2.
Seaview does not dispute the tax court’s factual findings
that AGK held the largest interest in Seaview, that AGK
filed its own petition for relief, or that Kotick filed his
petition within the 90-day period during which only the tax
matters partner may file such a petition. Seaview
additionally presents no argument as to why the tax court
erred in its analysis, beyond Seaview’s general assertion that
as a disregarded entity, AGK could not be tax matters
partner. As we discuss supra, an entity’s disregarded status
does not preclude its treatment as a separate, pass-thru
partner for the purposes of applying TEFRA’s procedures.
Because he was not Seaview’s tax matters partner, Kotick
did not have standing to file the petition. And because
Seaview offers no other argument or analysis regarding
standing, any such argument is waived. See United States ex
rel. Kelly v. Serco, Inc., 846 F.3d 325, 336 (9th Cir. 2017)
(“[A]rguments not raised by a party in its opening brief are
deemed waived.” (citation omitted)).
Accordingly, because a party other than Seaview’s tax
matters partner filed a petition for readjustment of
partnership items after AGK had done the same and within
90 days of the IRS’s mailing of the FPAA, the tax court
lacked jurisdiction under 26 U.S.C. § 6226.
CONCLUSION
For the reasons stated in this opinion, we AFFIRM the
tax court’s dismissal of Kotick’s petition for lack of
jurisdiction.