Mellow Partners, A Partnership v. Cmsnr. IRS ( 2018 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 5, 2018 Decided May 22, 2018
No. 16-1454
MELLOW PARTNERS, A PARTNERSHIP,
APPELLANT
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
On Appeal from the Decision
of the United States Tax Court
Amish M. Shah argued the cause for appellant. With him
on the briefs was Thomas A. Cullinan.
Richard Farber, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
Thomas J. Clark and Richard Caldarone, Attorneys. Ellen
Page DelSole, Attorney, entered an appearance.
Before: WILKINS, Circuit Judge, and EDWARDS and
SILBERMAN, Senior Circuit Judges.
Opinion for the Court filed by Senior Circuit Judge
EDWARDS.
2
EDWARDS, Senior Circuit Judge: Mellow Partners
(“Mellow”), a general partnership formed by and between two
single-member LLCs, appeals the Tax Court’s decisions
holding that it had jurisdiction over partnership-related
determinations concerning Mellow’s partnership return for the
1999 tax year and imposing penalties for the underpayment of
taxes. The Internal Revenue Service (“IRS”) determined that
Mellow was “formed and availed of solely for purposes of tax
avoidance” and “constitute[d] an economic sham.” Final
Partnership Administrative Adjustment Letter, Tax Year
Ended: December 31, 1999, reprinted in Joint Appendix
(“J.A.”) 64. On the basis of this determination, IRS
commenced partnership-level proceedings under the Tax
Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), 26
U.S.C. §§ 6221–6234 (2012), to adjust the partnership items in
Mellow’s 1999 partnership return. On March 24, 2005, IRS
issued to Mellow a Notice of Final Partnership Administrative
Adjustment (“FPAA”) setting forth adjustments to the
partnership items, disallowing losses from unlawful
transactions, and assessing penalties.
Mellow filed a petition with the Tax Court challenging the
FPAA. It then moved to dismiss the case for lack of
jurisdiction, arguing that the FPAA was invalid because
Mellow was a “small partnership” exempt from TEFRA’s audit
and litigation proceedings under 26 U.S.C. § 6231(a)(1)(B).
The Tax Court denied the motion. The court held that, as set
forth in Treasury Regulation § 301.6231(a)(1)–1(a)(2) and
other authorities, a partnership does not qualify for the small-
partnership exception if any of its partners is a “pass-thru
partner” within the meaning of 26 U.S.C. § 6231(a)(9), and that
disregarded single-member LLCs are such pass-thru partners.
The Tax Court subsequently entered a decision upholding most
of IRS’s adjustments to Mellow’s partnership return and
imposing penalties.
3
On appeal, Mellow asserts that the Tax Court erred in
rejecting its contention that it qualified for the small-
partnership exception to TEFRA. It contends that, pursuant to
certain tax-classification regulations, the single-member
LLCs’ individual owners rather than the LLCs themselves were
Mellow’s partners for TEFRA purposes and, therefore, Mellow
constituted a “small partnership” within the plain meaning of
§ 6231(a)(1)(B). Mellow also asserts that the Tax Court erred
in imposing penalties because IRS failed to obtain the requisite
written approval for such penalties, as required by 26 U.S.C. §
6751(b)(1) (2012).
We affirm the Tax Court’s holding that Mellow was
subject to the TEFRA partnership proceedings. The record
makes clear that Mellow’s partners were the single-member
LLCs, not their individual owners. Moreover, we defer to IRS’s
reasonable interpretation of its own regulation that a
partnership with pass-thru partners is ineligible for the small-
partnership exception and that single-member LLCs constitute
pass-thru partners. We further hold that we lack jurisdiction
over Mellow’s challenge to the penalties because Mellow
failed to raise its claim below and waived its claim by
consenting to a decision applying penalties.
I. BACKGROUND
A. Statutory and Regulatory Background
The Internal Revenue Code (“Code”) “recognizes a variety
of business entities—including corporations, companies,
associations, partnerships, sole proprietorships, and groups—
and, based on the classifications, treats the entities in various
ways for income tax purposes.” McNamee v. Dep’t of Treasury,
488 F.3d 100, 103 (2d Cir. 2007). Pursuant to its authority to
“prescribe all needful rules and regulations for the enforcement
4
of [Title 26, the Internal Revenue Code],” 26 U.S.C. § 7805(a)
(2012), the Treasury Department has promulgated regulations
governing, inter alia, business entities with only one owner,
see Treas. Reg. §§ 301.7701–1 to –3. These regulations, which
are often referred to as “check-the-box” regulations, permit “an
eligible entity with a single owner [to] elect to be classified as
an association or to be disregarded as an entity separate from
its owner” for federal tax purposes. Id. § 301.7701–3(a); see
also Pierre v. Comm’r, 133 T.C. 24, 24 (2009), supplemented,
99 T.C.M. 1436 (2010). If the entity is “disregarded as
an entity separate from its owner,” its activities “are treated in
the same manner as a sole proprietorship, branch, or division
of the owner.” Treas. Reg. § 301.7701–2(a).
In contrast, “[a] business entity with two or more members
is classified for federal tax purposes as either a corporation or
a partnership.” Id. Partnerships do not pay federal income
taxes. 26 U.S.C. § 701 (2012). “A partnership’s taxable income
and losses instead pass through to the partners, who report their
shares of partnership income or losses on their individual
federal income tax returns.” Petaluma FX Partners, LLC v.
Comm’r, 792 F.3d 72, 75 (D.C. Cir. 2015) (citing § 701).
Partnerships are nevertheless required to submit annual
informational returns to IRS reporting income, gains, losses,
and deductions. See 26 U.S.C. § 6031(a) (2012); Treas. Reg.
§ 301.6231(a)(3)–1(a)(1)(i).
Congress established a framework for reviewing
partnership tax matters in TEFRA. In 2015, Congress amended
the TEFRA provisions. See Bipartisan Budget Act of 2015,
Pub. L. No. 114-74, § 1101, 129 Stat. 584, 625–38 (2015).
However, because the amendments apply to partnership returns
filed for partnership taxable years beginning after
December 31, 2017, id. at 638, we proceed with our analysis
5
using the statutory provisions in force at the time of the events
under consideration in this appeal.
Under the applicable TEFRA framework, “if the IRS
disagrees with a partnership’s information return, it can bring
a partnership-level proceeding in which it may adjust
‘partnership items,’ defined as items ‘more appropriately
determined at the partnership level,’” by issuing a FPAA to the
partnership’s partners. Petaluma FX Partners, 792 F.3d at 75
(quoting §§ 6221 and 6231(a)(3)). The partners can challenge
the FPAA by filing a petition for readjustment with the United
States Tax Court, a federal district court, or the Court of Federal
Claims. 26 U.S.C. § 6226(a) (2012). The reviewing court will
have jurisdiction over the case so long as IRS has provided a
valid FPAA and the taxpayer has “proper[ly] fil[ed] a petition
for readjustment of partnership items for the year or years to
which the FPAA pertains.” Wise Guys Holdings, LLC v.
Comm’r, 140 T.C. 193, 196 (2013). In particular, the court will
have jurisdiction to “determine all partnership items of the
partnership for the partnership taxable year to which the
[FPAA] 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.” 26 U.S.C. § 6226(f) (2012).
As a general rule, the TEFRA procedures apply to all
business entities that are required to file a partnership return.
Bedrosian v. Comm’r, 143 T.C. 83, 104 (2014) (citing 26
U.S.C. § 6231(a)(1)(A)). However, there is a limited exception
for “small partnerships,” which are defined as having “10 or
fewer partners each of whom is an individual . . . , a C
corporation, or an estate of a deceased partner.” 26 U.S.C. §
6231(a)(1)(B) (2012). In 1987, the Treasury Department
promulgated temporary regulations setting forth rules
governing the small-partnership exception. See Miscellaneous
6
Provisions Relating to the Tax Treatment of Partnership Items,
52 Fed. Reg. 6,779, 6,789 (Mar. 5, 1987). As relevant here, one
of the temporary regulations provided that, “[t]he [small-
partnership] exception provided in section 6231(a)(1)(B) 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.”
Id. In 2001, the Treasury Department issued a final regulation,
which stated, inter alia, that the small-partnership exception
“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).” Unified Partnership Audit
Procedures, 66 Fed. Reg. 50,541, 50,556 (Oct. 4, 2001)
(codified at Treas. Reg. § 301.6231(a)(1)–1(a)(2)); see id. at
50,544 (stating that the final regulations apply to partnership
proceedings concerning partnership taxable years beginning on
or after October 4, 2001). The Code, in turn, defines “partner”
as “a partner in the partnership” and “any other person whose
income tax liability . . . is determined in whole or in part by
taking” partnership items “directly or indirectly” into account,
26 U.S.C. § 6231(a)(2) (2012), and “pass-thru partner” as “a
partnership, estate, trust, S corporation, nominee, or other
similar person through whom other persons hold an interest in
the partnership,” id. § 6231(a)(9) (2012).
Although the 2001 Treasury Department regulations at
issue here apply prospectively, the parties do not dispute that
the temporary regulations were in effect when Mellow filed its
1999 partnership return and that the temporary regulations
applied to Mellow’s return. The parties also agree that the
material terms in the temporary and final regulations are the
same. The only difference is that the 2001 regulation added the
language, “as defined in section 6231(a)(9).” However, the
parties agree that under both the temporary and final
regulations, a pass-thru partner is as defined in § 6231(a)(9).
Therefore, like the parties, we base our analysis on the
7
language set forth in the final regulation, Treasury Regulation
§ 301.6231(a)(1)–1(a)(2).
B. Factual and Procedural Background
Mellow Partners was formed on November 12, 1999 and
dissolved in December 1999. Mellow’s partnership agreement
states that the purpose of the partnership was to invest
partnership assets in “securities, businesses, real estate interests
and other investment opportunities,” including “stocks, bonds,
options, foreign currencies, foreign exchange and over the
counter derivatives, and other financial instruments.” J.A. 68.
The partnership agreement also states that the partnership was
formed “by and between” MB 68th Street Investments LLC
(“68th Street”) and WNM Hunters Crest Investments LLC
(“Hunters Crest”) (collectively, “the single-member LLCs” or
“the LLCs”). Id. Mr. Myer Berlow, the sole member of 68th
Street, and Mr. William Melton, the sole member of Hunters
Crest, signed the partnership agreement on behalf of their
respective LLCs. The single-member LLCs did not elect to be
treated as associations under the check-the-box tax-
classification regulations and therefore were treated as
disregarded entities separate from their owners. Accordingly,
the LLCs did not file federal income tax returns for the 1999
tax year.
In April 2000, Mellow filed a Form 1065 partnership
return for the taxable year beginning November 12, 1999 and
ending December 29, 1999. Mellow attached to its Form 1065
Schedules K-1, Partner’s Share of Income, Credits,
Deductions, etc., which identified 68th Street and Hunters
Crest as Mellow’s partners. On its Form 1065, Mellow
answered “No” to the question, “Is this partnership subject to
the consolidated [TEFRA] audit procedures of sections 6221
through 6233?” J.A. 86.
8
Notwithstanding Mellow’s indication on its Form 1065
that it was not subject to TEFRA, the Commissioner of IRS
(“Commissioner”) conducted an audit of Mellow and issued a
FPAA setting forth adjustments to the partnership items
reported in Mellow’s 1999 return. The FPAA concluded that
Mellow “was formed and availed of solely for purposes of tax
avoidance,” “lacked economic substance,” and “constitute[d]
an economic sham for federal income tax purposes.” Final
Partnership Administrative Adjustment Letter, Tax Year
Ended: December 31, 1999, J.A. 64. According to the FPAA,
Mellow’s partners engaged in a series of offsetting transactions
involving digital options that were designed “to generate a
loss” in order “to reduce substantially the present value of its
partners’ aggregate federal tax liability.” Id. Consequently, the
FPAA reduced to zero Mellow’s partners’ outside bases in their
partnership interests and determined that accuracy-related
penalties under 26 U.S.C. § 6662 (2012) applied.
Mellow filed a timely petition for readjustment in the Tax
Court challenging the FPAA. The petition asserted that the
FPAA “improperly asserts adjustments or grounds in support
of adjustments that are not partnership items over which the
court has jurisdiction.” J.A. 18. Mellow then filed a motion to
dismiss the case for lack of jurisdiction, which the Tax Court
denied on June 2, 2015. Following the denial, the
Commissioner moved for summary judgment as to the
correctness of the FPAA’s adjustments. The parties submitted
a stipulation of facts and consented to the entry of a decision
upholding most of IRS’s adjustments to Mellow’s partnership
return and imposing accuracy-related penalties. The Tax Court
entered the decision on November 10, 2016. Mellow’s timely
appeal followed.
9
II. ANALYSIS
We have jurisdiction under 26 U.S.C. § 7482(a)(1) (2012)
to review the Tax Court’s decisions. And because Mellow no
longer exists, venue is proper under § 7482(b)(1). We review
the Tax Court’s legal conclusions, including its jurisdictional
and statutory interpretation determinations, de novo. See Byers
v. Comm’r, 740 F.3d 668, 674 (D.C. Cir. 2014); Barnes v.
Comm’r, 712 F.3d 581, 582 (D.C. Cir. 2013).
A. Whether Mellow Qualified for the “Small-
Partnership” Exception to TEFRA
The central question in this case is whether the Tax Court
properly denied Mellow’s motion to dismiss for lack of
jurisdiction based on its finding that Mellow was subject to the
TEFRA partnership provisions. Mellow argues that when a
business entity with a single owner is classified as
“disregarded” under the check-the-box regulations, the entity
is treated as a “nullity” for all federal tax purposes. Appellant’s
Br. 21. This means that, in Mellow’s view, if a disregarded
single-member LLC is a partner in a partnership, it is actually
the LLC’s owner rather than the LLC itself that is the partner
in the partnership. Id. Therefore, according to Mellow,
Mellow’s partners here were the single-member LLCs’
individual owners (Berlow and Melton), not the two LLCs.
Thus, Mellow contends that it qualified for the small-
partnership exception because it had “10 or fewer partners each
of whom [was] an individual.” Id. at 10 (citing 26 U.S.C. §
6231(a)(1)(B)(i)). We disagree.
The record makes it absolutely clear that Mellow’s
partners were the single-member LLCs, not their individual
owners. In the proceedings below, Mellow stipulated that “[a]t
all times during the existence of Mellow Partners, its only
10
partners were” 68th Street and Hunters Crest. J.A. 52–53.
Mellow’s partnership agreement provides that the agreement
was formed “by and between” 68th Street and Hunters Crest.
J.A. 68. The agreement identifies Hunters Crest as its
Managing Partner. And the agreement is signed by Berlow and
Melton on behalf of their respective LLCs. Mellow also issued
Schedules K-1, reporting each partner’s share of income,
losses, deductions, and credits, to the two LLCs, and there is
no evidence that Schedules K-1 were issued to the LLCs’
individual owners.
Moreover, Mellow has offered no pertinent authority, and
we are aware of none, stating that a single-member LLC’s tax
classification under the check-the-box regulations dictates
whether the LLC or its sole owner is treated as a partner in a
partnership comprised of two single-member LLCs under
TEFRA. The check-the-box regulations merely determine “the
tax consequences for that particular entity.” Seaview Trading,
LLC v. Comm’r, 858 F.3d 1281, 1286 (9th Cir. 2017). For
example, it is undisputed that if the entity is disregarded, the
owner “reports the tax consequences of the entity’s activities
on his own tax return regardless of any independent existence
the entity may have under state law and of any limitation on
liability the entity may afford its owners under state law.”
Appellee’s Br. 33. But the check-the-box regulations do not
determine the tax consequences of a “separate, higher-level
partnership” composed of two or more disregarded entities, nor
do they specify who holds a partnership interest for TEFRA
purposes. Seaview Trading, 858 F.3d at 1287. We therefore
reject Mellow’s claim that the single-member LLCs’
classification as disregarded entities meant that the LLCs’
individual owners, rather than the LLCs, were Mellow’s
partners for TEFRA purposes and, therefore, that it qualified
for the small-partnership exception under § 6231(a)(1)(B)(i).
11
Mellow next contends that the Tax Court erred in finding
that the single-member LLCs were “pass-thru partners” within
the meaning of 26 U.S.C. § 6231(a)(9) (2012) and that a
partnership with pass-thru partners is ineligible for the small-
partnership exception. See Appellant’s Br. 19–20. On this
point, Mellow asserts that the pass-thru partner provision
cannot be read to restrict the small-partnership exception, the
latter of which makes no explicit mention of “pass-thru
partners.” See id. at 20–21, 21 n.9. Mellow recognizes that the
Treasury Department has promulgated a regulation that
provides that the small-partnership exception does not apply to
a partnership with pass-thru partners. Id. at 20. However,
Mellow contends that the list of entities in the pass-thru partner
provision – “partnership, estate, trust, S corporation, nominee,
or other similar person through whom other persons hold an
interest in the partnership,” § 6231(a)(9) – does not include
disregarded entities or single-member LLCs. Id.
As a preliminary matter, Mellow argues in a footnote in its
opening brief that “Treasury arguably exceeded its authority in
issuing Treas. Reg. § 301.6231(a)(1)–1(a)(2).” Id. at 21 n.9.
“Treasury Regulations must be sustained unless unreasonable
and plainly inconsistent with the revenue statutes.” Comm’r v.
Portland Cement Co. of Utah, 450 U.S. 156, 169 (1981).
Mellow makes no serious claim that the regulation is
substantively unlawful or that the Treasury Department
exceeded its statutory authority in promulgating the regulation.
We therefore have no grounds whatsoever in this case to
question the validity of Treasury Regulation § 301.6231(a)(1)–
1(a)(2) and, accordingly, decline to consider Mellow’s vague
and unsubstantiated argument. See Hutchins v. Dist. of
Columbia, 188 F.3d 531, 539 n.3 (D.C. Cir. 1999).
We also reject Mellow’s argument that the pass-thru
partner provision in § 6231(a)(9) should not be applied to
12
narrow the contours of the small-partnership exception.
Mellow’s view of the regulatory framework is misguided.
First, 26 U.S.C. § 6231(a)(1)(B) defines the “exception for
small partnerships” as follows:
The term “partnership” shall not include any
partnership having 10 or fewer partners each of whom
is an individual (other than a nonresident alien), a C
corporation, or an estate of a deceased partner.
Second, Treasury Regulation § 301.6231(a)(1)–1(a)(2)
explains that:
The exception provided in section 6231(a)(1)(B) 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).
Third, 26 U.S.C. § 6231(a)(9), which is referenced in the
aforementioned Treasury Regulation, defines “pass-thru
partner” as follows:
The term “pass-thru partner” means a partnership,
estate, trust, S corporation, nominee, or other similar
person through whom other persons hold an interest
in the partnership with respect to which proceedings
under this subchapter are conducted.
As can be seen from the terms of the statute, § 6231(a)(9)
does not expressly state that disregarded single-member LLCs
are “pass-thru partners.” However, IRS has consistently
interpreted the term “pass-thru partner,” as defined in
§ 6231(a)(9), to include disregarded entities.
13
IRS presented a thorough explanation of its reasoning on
this point in Revenue Ruling 2004–88, 2004–2 C.B. 165 (Aug.
9, 2004). The Revenue Ruling makes it clear that a partnership
cannot qualify as a small partnership under § 6231(a)(1)(B) if
it has pass-thru partners, and it concludes that a single-member
LLC constitutes a pass-thru partner. In reaching this
conclusion, the Revenue Ruling highlights that “‘pass-thru
partner’ is defined in section 6231(a)(9) as ‘a partnership,
estate, trust, S corporation, nominee or other similar person
through whom other persons hold an interest in the
partnership.’” Id. (quoting § 6231(a)(9)). The Revenue Ruling
then explains that “[i]f legal title to a partnership interest is held
in the name of a person other than the ultimate owner, the
holder of legal title is considered a pass-thru partner within the
meaning of section 6231(a)(9).” Id.
The Revenue Ruling goes on to apply these principles to a
hypothetical set of facts:
[A]lthough LLC is a disregarded entity for federal tax
purposes, LLC is a partner of [Partnership (“P”)]
under the law of the state in which P is organized.
Similarly, although [individual “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.
14
Id. (emphasis added).
IRS’s position has been unwavering and consistently
sustained by the Tax Court. For example, in Bedrosian v.
Commissioner, 143 T.C. 83 (2014), the court noted that,
pursuant to Treasury Regulation § 301.6231(a)(1)–1(a)(2) and
other authorities, the small-partnership exception does not
apply to a partnership if it has pass-thru partners. Id. at 104.
The court then held that the term pass-thru partner “includes
disregarded entities such as single-member LLCs.” Id.; see also
436, Ltd. v. Comm’r, 109 T.C.M. 1140, slip op. at 35
n.21 (Feb. 18, 2015); 6611, Ltd. v. Comm’r, 105 T.C.M.
1309, slip op. at 62 n.29 (Feb. 14, 2013); Tigers Eye Trading,
LLC v. Comm’r, 97 T.C.M. 1622, slip op. at 26–27
(May 27, 2009).
IRS’s interpretation in its Revenue Ruling is entitled to
respect. “Although a revenue ruling does not have the force and
effect of Treasury Department Regulations, see 26 C.F.R. §
601.601(d)(2)(v)(d), it does constitute ‘an official interpretation
by the Service,’ id. § 601.601(d)(2)(i)(a). Accordingly, the
Supreme Court and virtually all of the Circuits have indicated
that revenue rulings are entitled to some degree of deference.”
Telecom*USA, Inc. v. United States, 192 F.3d 1068, 1072–73
(D.C. Cir. 1999); see id. at 1073 nn.4, 8–10 (collecting cases).
In this vein, the Supreme Court has said that a Revenue Ruling
reflecting IRS’s longstanding, reasonable, and consistent
interpretation of a Treasury Regulation “attracts substantial
judicial deference.” United States v. Cleveland Indians
Baseball Co., 532 U.S. 200, 220 (2001) (citing Thomas
Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)).
We have no doubt that IRS has reasonably interpreted and
applied § 6231(a)(9) and Treasury Regulation
§ 301.6231(a)(1)–1(a)(2) in conjunction to give meaning to the
15
term “pass-thru partner.” The agency’s view is that, in addition
to the specifically enumerated entities in § 6231(a)(9), the term
“pass-thru partner” includes disregarded single-member LLCs.
This interpretation is grounded in the words “other similar
person through whom other persons hold an interest in the
partnership,” the catchall phrase in the pass-thru partner
definition in § 6231(a)(9).
In this case, IRS argues that “Mellow’s LLC partners
unquestionably [were] . . . pass-thru partners,” Appellee’s Br.
10, because they “were entities through which ‘other persons’
– i.e., Berlow and Melton – held ‘an interest in the
partnership,’” id. at 26 (quoting 26 U.S.C. § 6231(a)(9)). We
agree. And, as noted above, Mellow has raised no meaningful
challenge to the legality of Treasury Regulation
§ 301.6231(a)(1)–1(a)(2). Therefore, the only question here is
whether IRS’s interpretation of the pass-thru partner provision
to include disregarded entities and single-member LLCs is
permissible.
It is not entirely clear whether Revenue Ruling 2004–88
should be viewed as an interpretation of the statute, or of
Treasury Regulation § 301.6231(a)(1)–1(a)(2), or both. IRS’s
position on this point is unclear. In its brief to this court, IRS
contends that the court should defer to the Revenue Ruling
under Skidmore v. Swift & Co., 323 U.S. 134 (1944), because
the IRS’s position that disregarded LLCs are “pass-thru”
entities within the meaning of § 6231(a)(9) reflects a thorough,
reasonable, and consistent construction of the statute. See
Appellee’s Br. 43–47. However, during oral argument, IRS’s
counsel also argued that the court should defer to the Revenue
Ruling pursuant to Auer v. Robbins, 519 U.S. 452 (1997),
because it reflects a reasonable interpretation of the Treasury
Regulation. See Oral Arg. Recording at 30:36–32:15. We need
not choose between these positions because, in our view, the
16
agency’s interpretation easily passes muster, whether reviewed
pursuant to Skidmore or Auer.
As already suggested, one way to view this case is to
consider whether Revenue Ruling 2004–88 reflects a
reasonable construction of the statute’s pass-thru partner
provision. This is the approach that was followed by the Ninth
Circuit when it addressed the same issue that is before us today.
See Seaview Trading, 858 F.3d at 1284–87. In doing so, the
Ninth Circuit accorded Skidmore deference to the Revenue
Ruling. The court first noted:
The IRS directly addressed the question of
whether a disregarded entity may constitute a pass-
thru partner in Revenue Ruling 2004–88, 2004–2 C.B.
165. We have previously applied Skidmore deference
to revenue rulings. 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. 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.”
Id. at 1284–85. Then, after extensively examining the issue, the
Ninth Circuit concluded that IRS’s position was consistent with
the statute and eminently reasonable, and held that
“disregarded single-member LLCs constitute pass-thru
partners under § 6231(a)(9).” Id. at 1287. We find no fault with
the analysis and holding of our sister circuit. Therefore, if
17
Skidmore is the proper standard of review, we agree with
Seaview’s conclusion that disregarded single-member LLCs
are pass-thru partners under § 6231(a)(9). See Del Commercial
Properties, Inc. v. Comm’r, 251 F.3d 210, 214 (D.C. Cir. 2001)
(applying Skidmore deference in reviewing IRS Revenue
Rulings).
Another way to view this case is to consider whether IRS’s
interpretation and application of Treasury Regulation
§ 301.6231(a)(1)–1(a)(2) is due deference under Auer v.
Robbins. See Drake v. FAA, 291 F.3d 59, 68 (D.C. Cir. 2002)
(describing the “Auer deference” standard). This is the
approach that we followed in Polm Family Foundation, Inc. v.
United States, 644 F.3d 406 (D.C. Cir. 2011), where the court
deferred to IRS’s interpretation of a disputed Treasury
Regulation. In affording deference to IRS, the court said:
An agency’s interpretation of its regulation is
controlling unless the interpretation is “plainly
erroneous or inconsistent with the regulation.” Auer v.
Robbins, 519 U.S. 452, 461 (1997). This is so even if
the interpretation appears for the first time in a legal
brief. Because the interpretation the [IRS] presents in
its brief is consistent with the regulatory text, we have
no basis for rejecting it in favor of some other version.
Id. at 409.
In applying Auer deference, we must assume that IRS’s
Revenue Ruling 2004–88 and/or its litigation position in this
case reflect reasonable constructions of Treasury Regulation §
301.6231(a)(1)–1(a)(2). We must also assume that IRS has the
authority to offer definitive interpretations of Treasury
Regulations. See Nat’l Muffler Dealers Ass’n, Inc. v. United
States, 440 U.S. 472, 484 (1979) (IRS’s interpretation of a term
18
in a Treasury Regulation merited “serious deference”). If our
assumptions are correct, then IRS’s interpretation of Treasury
Regulation § 301.6231(a)(1)–1(a)(2) easily fits the Auer mold.
When reviewing an agency’s interpretation of its own
regulation, we accord “substantial deference to [the] agency’s
interpretation,” giving it “controlling weight unless it is plainly
erroneous or inconsistent with the regulation.” Thomas
Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). Courts
typically consider three factors when deciding whether to apply
Auer deference. “First, the language of the regulation in
question must be ambiguous.” Drake, 291 F.3d at 68. “Second,
there must be ‘no reason to suspect that the interpretation does
not reflect the agency’s fair and considered judgment on the
matter in question.’” Id. (quoting Auer, 519 U.S. at 462). And
third, “the agency’s reading of its regulation must be fairly
supported by the text of the regulation itself, so as to ensure
that adequate notice of that interpretation is contained within
the rule itself.” Id.
We have little difficulty concluding that the pass-thru
partner definition, as incorporated in the final Treasury
Regulation, is ambiguous as to whether a disregarded single-
member LLC – through which its sole owner may “hold an
interest in [a] partnership,” 26 U.S.C. § 6231(a)(9) – qualifies
as a pass-thru partner. Further, we have no reason to believe
that the agency’s interpretation “does not reflect [its] fair and
considered judgment on the matter.” Auer, 519 U.S. at 462. On
this point, “we consider whether the agency has ‘ever adopted
a different interpretation of the regulation or contradicted its
position.’” Drake, 291 F.3d at 69. Mellow has offered no
relevant authority suggesting that IRS has ever wavered from
its position that disregarded single-member LLCs qualify as
pass-thru partners within the meaning of the definition set forth
19
in § 6231(a)(9). To the contrary, as detailed above, IRS’s
position has been consistent over a long period of time.
Finally, IRS’s determination that a disregarded single-
member LLC constitutes a pass-thru partner is supported by the
text of the pass-thru partner provision, as incorporated in the
final regulation. The definition’s catchall phrase, “other similar
person through whom other persons hold an interest in the
partnership,” 26 U.S.C. § 6231(a)(9), “expressly contemplates
its application beyond the specific enumerated forms.” Seaview
Trading, 858 F.3d at 1285. The agency’s decision to focus on
whether an entity holds legal title on behalf of another is
consistent with the plain text of § 6231(a)(9), which
specifically refers to the holding of a partnership interest on
behalf of another. See id. at 1287; White v. Comm’r, 62 T.C.M.
(CCH) 1181 (Nov. 5, 1991) (“[E]ach person specifically
defined as a ‘pass-thru partner’ in section 6231(a)(9) [could]
hold legal title to the partnership interest.”), aff’d, 991 F.2d 657
(10th Cir. 1993).
We are unpersuaded by Mellow’s argument, for which it
provides no authority, that a “similar person” under
§ 6231(a)(9) must be one who can have “multiple owners,”
unlike single-member LLCs, which have only one owner.
Appellant’s Br. 22. Mellow bases this argument on the fact that
the catchall phrase refers to “a similar person through whom
other persons hold an interest.” Id. (quoting 26 U.S.C. §
6231(a)(9)). Mellow’s argument, however, ignores the plain
meaning of the plural term “persons,” which necessarily
includes the singular “person.” See 1 U.S.C. § 1 (2012) (stating
that “unless the context indicates otherwise[,] . . . words
importing the plural include the singular”).
In sum, Mellow has “provide[d] no compelling reason to
contravene the consistent stance of the IRS and the tax courts,
20
which have uniformly treated disregarded single-member
LLCs as pass-thru partners.” Seaview Trading, 858 F.3d at
1287. We therefore defer to the agency’s reasonable
construction of the term “pass-thru partner” and reject
Mellow’s claim that the Tax Court lacked jurisdiction.
B. Challenge to the Accuracy-Related Penalties
Mellow next argues, for the first time on appeal, that the
Tax Court’s decision to uphold accuracy-related penalties
against Mellow was improper because IRS failed to comply
with the written-approval requirement in 26 U.S.C.
§ 6751(b)(1) (2012). That provision states: “No penalty under
this title shall be assessed unless the initial determination of
such assessment is personally approved (in writing) by the
immediate supervisor of the individual making such
determination or such higher level official as the Secretary may
designate.” 26 U.S.C. § 6751(b)(1). Mellow asks this court to
reverse the Tax Court’s decision imposing penalties or, in the
alternative, remand the issue to the Tax Court to decide in the
first instance. See Oral Arg. Recording at 11:55–12:05. We
decline to do so because Mellow failed to properly raise and
preserve this issue for consideration by this court.
In the Tax Court, Mellow consented to a decision
resolving the case. In particular, it agreed that “all
determinations, adjustments, assertions and conclusions . . .
contained in the [FPAA] issued for Mellow Partners . . . are
correct” and that penalties were proper under 26 U.S.C.
§ 6662(a). J.A. 140–41. A settlement agreement between IRS
and a partnership regarding the “determination of partnership
items for a[] partnership taxable year” is “binding on all parties
to such agreement.” 26 U.S.C. § 6224(c)(1) (2012); see also
Tax Court Rule 248(b) (procedures for entry of decisions). A
party who consents to the entry of a decision “generally waives
21
the right to appeal,” unless it expressly reserves its right to do
so. Clapp v. Comm’r, 875 F.2d 1396, 1398 (9th Cir. 1989). In
the decision here, Mellow preserved its right to appeal the
small-partnership determination, but did not reserve its right to
appeal any other issue, including whether penalties were
proper. Mellow therefore waived its right to challenge the
penalties.
Mellow acknowledges its failure to preserve its challenge,
see Oral Arg. Recording at 13:44–14:08, but maintains that its
failure to raise the issue below should be excused because a
recent Second Circuit decision, Chai v. Commissioner, 851
F.3d 190 (2d Cir. 2017), provided new grounds for challenging
accuracy-related penalties under § 6751(b)(1), see Appellant’s
Reply Br. 23–24. In Chai, the Second Circuit held that an
individual taxpayer in a deficiency proceeding could raise a
challenge under § 6751(b)(1) for the first time in a post-trial
brief in the Tax Court because doing so “was tantamount to a
post-trial motion for judgment as a matter of law” and raising
the issue at that time did not “den[y] the [IRS] the opportunity
to properly rebut the argument.” 851 F.3d at 222–23. On the
merits, Chai found that the “initial determination of such
assessment” language in § 6751(b)(1) was ambiguous and
interpreted it to mean that “written approval of the initial
penalty determination [must be obtained] no later than the date
the IRS issues the notice of deficiency (or files an answer or
amended answer) asserting such penalty.” Id. at 218, 221. In
reaching its decision, the Second Circuit rejected the Tax
Court’s determination in Graev v. Commissioner (Graev I) that
under § 6751(b)(1) IRS was permitted to obtain written
approval at any time before the penalty was assessed. See 147
T.C. No. 16, slip op. at 32–33 (Nov. 30, 2016). After the
Second Circuit issued its opinion in Chai, the Tax Court
vacated its decision in Graev I and adopted the Second
Circuit’s reading of § 6751(b)(1) as its own. See Graev v.
22
Comm’r (Graev III), 149 T.C. No. 23, slip op. at 5, 14 (Dec.
20, 2017).
Mellow contends that it “would have been premature” to
challenge IRS’s failure to comply with § 6751(b)(1) in the Tax
Court because Chai “created new law” and was issued after the
Tax Court entered its decision in this case. Appellant’s Reply
Br. 23–24. Mellow points to several Tax Court decisions and
orders post-dating Chai that addressed whether IRS had
complied with the written-approval requirement as interpreted
in Chai, and argues that, in light of these decisions, this court
should remand the case to the Tax Court to determine whether
IRS met its obligations under § 6751(b)(1). See Mellow’s Rule
28(j) Letter (Jan. 29, 2018); Mellow’s Rule 28(j) Letter (Feb.
12, 2018). We find no merit in this argument.
Mellow’s reliance on Chai and the various Tax Court
decisions that post-date Chai is misplaced because in each of
those cases the parties or the Tax Court acting sua sponte raised
the § 6751(b)(1) issue while the dispute remained pending in
the Tax Court. Here, however, Mellow did not raise its §
6751(b)(1) challenge at any point during the Tax Court
proceedings. Nothing precluded Mellow from doing so.
Section 6751 has been in existence since 1998. See Internal
Revenue Service Restructuring and Reform Act of 1998, Pub.
L. No. 105–206, § 3306(a), 112 Stat. 685, 744. Mellow was
free to raise the same, straightforward statutory interpretation
argument the taxpayer in Chai made – that is, that the language
of § 6751(b)(1) requires IRS to obtain written approval by a
certain point in the process in order to impose penalties.
In this regard, we find the First Circuit’s decision in
Kaufman v. Commissioner, 784 F.3d 56 (1st Cir. 2015) – which
was issued prior to Chai – more apposite here. There, the First
Circuit held that the taxpayer had not preserved his argument
23
that the Commissioner did not comply with the written-
approval requirement in § 6751(b)(1) by failing to raise it in the
Tax Court proceedings. See id. at 71. As a result, the court
refused to consider the claim in the first instance on appeal. Id.
This reasoning applies with equal force here. Accordingly, we
decline to consider or remand Mellow’s penalties claim.
III. CONCLUSION
For the foregoing reasons, we affirm the judgment of the
Tax Court.
So ordered.