Gaughf Properties, L.P. v. Commissioner of Internal Revenue Service , 738 F.3d 415 ( 2013 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 14, 2013 Decided December 27, 2013
No. 13-1026
GAUGHF PROPERTIES, L.P., BALAZS VENTURES, LLC,
A PARTNER OTHER THAN THE TAX MATTERS PARTNER,
APPELLANT
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
On Appeal from the Order
of the United States Tax Court
David D. Aughtry argued the cause for the appellant.
William E. Buchanan was on brief.
Thomas A. Cullinan and N. Jerold Cohen were on brief
for amicus curiae West Ventures, L.P. in support of the
appellant.
Ivan C. Dale, Attorney, United States Department of
Justice, argued the cause for the appellee. Tamara W.
Ashford, Principal Deputy Assistant Attorney General, and
Gilbert S. Rothenberg and Michael J. Haungs, Attorneys,
were on brief.
2
Before: GARLAND, Chief Judge, and HENDERSON and
SRINIVASAN, Circuit Judges.
Opinion for the Court filed by Circuit Judge
HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: Gaughf
Properties, L.P. and its partners, Balazs Ventures, LLC and
Gaughf Enterprises, LLC, (collectively, Appellants)1 appeal
the tax court’s decision, holding that the period to assess taxes
for tax year 1999 against Andrew Jackson Gaughf, Jr. (Jack
Gaughf) and his wife, Nan Gaughf, remained open as of
March 30, 2007, when the Internal Revenue Service (IRS)
issued a Notice of Final Partnership Administrative
Adjustment (FPAA) to Gaughf Properties, L.P. Gaughf
Props., L.P. v. Comm’r, 139 T.C. 219 (2012). In so holding,
the tax court determined that (1) the Gaughfs’ tax liability
came within the unidentified partner exception to the general
three-year statute of limitations under I.R.C. section 6229(e)
because the Gaughfs were not identified as indirect partners
of Gaughf Properties, L.P. in its 1999 return2 and (2)
1
Although the cover to the Appellants’ brief refers to a single
“Appellant” designated “Gaughf Properties L.P., Balazs Ventures,
LLC, a Partner Other than the Tax Matters Partner,” their
Certificate as to Parties, Rulings, and Related Cases identifies as
parties all three of the entities enumerated in the text, as does their
petition for interlocutory review. See Brief for the Appellant at i;
Petition for Permission to Appeal, No. 12-8017 (D.C. Cir. Nov. 19,
2012).
2
“The term ‘indirect partner’ means a person holding an
interest in a partnership through 1 or more pass-thru partners.”
I.R.C. § 6231(a)(10). A “pass-thru partner” is “a partnership,
3
information identifying them as indirect partners was not
otherwise timely “furnished to the Secretary [of the
Treasury]” (Secretary) so as to trigger the one-year limitation
period provided in I.R.C. section 6229(e) (flush language).
We agree with both of the tax court’s determinations and,
accordingly, affirm its judgment.
I.
The material facts are undisputed. In 1999, on the advice
of accounting firm KPMG, Jack Gaughf contacted Jenkens &
Gilchrist (J&G), a law firm, “to set up a tax advantage” to
reduce the capital gain taxes the Gaughfs would otherwise
incur when they sold 150,283 shares of stock they held in
Quanta Services, Inc. (Quanta). Trial Tr. 215, Gaughf Props.,
L.P. v. Comm’r, No. 18298-07 (T.C. May 27, 2012) (Trial
Tr.) (5/17/2010 testimony of Jack Gaughf). J&G suggested
using a “Section 754 step up”3 in order to inflate the cost
basis of the Quanta stock and thereby generate a capital loss
estate, trust, S corporation, nominee, or other similar person
through whom other persons hold an interest in the partnership.”
Id. § 6231(a)(9). Here, Bodacious, Inc. was the pass-thru partner
through which Jack Gaughf held a partnership interest in Gaughf
Properties, L.P. at the time of the partnership’s liquidation.
Because Jack and Nan Gaughf were both involved as principals in
the relevant entities and transactions and filed a joint 1999 income
tax return, for convenience we treat them, as did the tax court, as
joint partners.
3
I.R.C. section 754 “permits taxpayers pursuant to [I.R.C.]
§ 743(b) to take a step-up in basis resulting from the transfer of
interest in a partnership by sale or exchange.” Atl. Veneer Corp. v.
Comm’r, 812 F.2d 158, 158 (4th Cir. 1987).
4
instead of a capital gain.4 JA 1197 (J&G Investor Profile of
Jack Gaughf). Accordingly, J&G guided the Gaughfs through
the set-up of a “Son of Boss” tax shelter.5
A. The Corporate Set-Up
Pursuant to J&G’s advice the Gaughfs directed their
lawyer, Maurice Holloway, to form four legal entities—three
corporations and a partnership, all formed under South
Carolina law—which Holloway did in September 1999, as
follows: (1) Gaughf Enterprises, LLC, a limited liability
corporation wholly owned by Jack Gaughf; (2) Balazs
Ventures, LLC, a limited liability corporation wholly owned
by Nan Gaughf; (3) Gaughf Properties, L.P., a limited
partnership consisting of partners Gaughf Enterprises, LLC
and Balazs Ventures, LLC (pursuant to a partnership
agreement signed on behalf of the corporate partners by their
sole owners—Jack Gaughf and Nan Gaughf, respectively);
and (4) Bodacious, Inc., a corporation of which Jack Gaughf
4
According to the tax court, had the Gaughfs sold the stock
without a tax shelter, they would have been taxed on a capital gain
of approximately $4.3 million instead of incurring a capital loss.
139 T.C. 227.
5
The Son of Boss tax shelter “is a ‘variant of the Bond and
Options Sales Strategy (“BOSS”) shelter’ ” and “involves ‘the
transfer of assets along with significant liabilities to a partnership,
with the goal of increasing basis in that partnership.’ ” 106 Ltd. v.
Comm’r, 684 F.3d 84, 86 n.1 (D.C. Cir. 2012) (quoting Napoliello
v. Comm’r, 655 F.3d 1060, 1062 (9th Cir. 2011)) (quotation marks
and brackets omitted). Because the liabilities are not completely
fixed at the time of the transfer, “the partnership ignores them in
computing basis . . . result[ing] in high-basis assets that produce
large tax—but not out-of-pocket—losses.” Id. (quotation marks
omitted).
5
was 100% owner and president. Holloway filed a Form SS-4
(“Application for Employer Identification Number”) on
behalf of each of the four entities with the IRS Service Center
in Atlanta, Georgia. The SS-4 forms identified the “principal
officer, general partner, grantor, owner, or trustor” of Gaughf
Enterprises, LLC, Gaughf Properties, L.P. and Bodacious,
Inc. as “Andrew Jackson Gaughf, Jr.” and of Balazs Ventures,
LLC as “Nan Gaughf”; each filing further identified the
“[r]eason for applying” as “[s]tarted a new business” and
listed the Gaughfs’ personal address in Pickens, South
Carolina as the entity’s “[m]ailing address.” JA 522, 529,
530, 526.
Jack Gaughf set up three separate investment accounts
with Deutsche Bank Alex. Brown LLC (Alex. Brown), an
affiliate of Deutsche Bank AG (Deutsche Bank), one each in
the name of Gaughf Enterprises, LLC, Gaughf Properties,
L.P. and Bodacious, Inc. On November 24, 1999, $90,000
was deposited into Gaughf Enterprises, LLC’s Alex. Brown
account. Five days later, on November 29, 1999, Gaughf
Enterprises, LLC entered into two currency option
transactions with Deutsche Bank: (1) a “long” option under
which Gaughf Enterprises, LLC agreed to pay Deutsche Bank
an up-front premium of $4,500,000 on December 1, 1999 and
Deutsche Bank agreed to pay Gaughf Enterprises, LLC a
$9,000,000 payout on December 22, 1999 if the Japanese yen
were trading at more than 105.76 yen to the U.S. dollar and
(2) a “short” option under which Deutsche Bank agreed to
pay Gaughf Enterprises, LLC a $4,455,000 premium on
December 1, 1999 and Gaughf Enterprises, LLC agreed to
pay Deutsche Bank $8,910,000 on December 22, 1999 if the
Japanese yen were trading at more than 105.78 yen to the
dollar.
6
The next day, November 30, 1999, Gaughf Enterprises,
LLC transferred the currency options to Gaughf Properties,
L.P. as a contribution to capital. The same day, $45,000—the
difference between the long and short option premiums—was
transferred from Gaughf Enterprises, LLC’s Alex. Brown
account to Deutsche Bank. The remaining $45,000 in Gaughf
Enterprises, LLC’s Alex. Brown account was transferred to
Gaughf Properties, L.P.’s Alex. Brown account—also as a
contribution to capital—except for $900 which, under an
agreement between Gaughf Enterprises, LLC and Bodacious,
Inc., was deemed a contribution to capital by Bodacious, Inc.
On December 20, 1999, the two Japanese currency options
Gaughf Properties, L.P. held expired unexercised, with no
pay-out to or by either Gaughf Properties, L.P. or Deutsche
Bank. The long and short of it is that the only money that
changed hands in connection with the options was the
$45,000 premium differential Gaughf Enterprises, LLC had
paid Deutsche Bank on November 30, 1999.
On December 27, 1999, both Gaughf Enterprises, LLC
and Balazs Ventures, LLC signed their general partnership
interests in Gaughf Properties, L.P. over to Bodacious, Inc.
“as a substitute general partner,” while Gaughf Enterprises,
LLC—but not Balazs Ventures, LLC—assigned its limited
partnership interest as well to Bodacious, Inc. Also on
December 27, 1999, the Gaughfs signed a liquidation
agreement on behalf of Bodacious, Inc. and Balazs Ventures,
LLC, terminating Gaughf Properties, L.P. and distributing
“[a]ny and all assets of the Partnership held by the Partnership
as of the date of dissolution” to its partners in accordance
with an attached schedule, which gave Bodacious, Inc. 99.6%
of the partnership assets and Balazs Ventures, LLC the
remaining 0.4%. JA 1080. As a result of the liquidation, the
cash in Gaughf Properties, L.P.’s Alex. Brown account—
consisting of Gaughf Enterprises, LLC’s $45,000 capital
7
contribution plus accrued income thereon—was distributed to
Bodacious, Inc. on December 29, 1999.6
B. The Pay-Offs
On November 19, 1999, Jack Gaughf transferred 142,783
of his 150,283 shares of Quanta stock from his investment
account with Edward D. Jones & Co., L.P. (Edward Jones) to
an Edward Jones account in Bodacious, Inc.’s name, which
sold the shares on December 9, 1999 for net proceeds of
$4,418,243.7 On December 14, 1999, Jack Gaughf transferred
from his account to Bodacious, Inc.’s account an additional
2,575 shares of Quanta stock, which Bodacious, Inc.
transferred to Gaughf Properties, L.P.’s Edward Jones
account on December 20, 1999. Also on December 20, 1999,
Jack Gaughf transferred the last 4,925 Quanta shares in his
Edward Jones account directly to Gaughf Properties, L.P.’s
Edward Jones account. After the December 27, 1999
liquidation of Gaughf Properties, L.P., the 7,500 Quanta
shares then held by Gaughf Properties, L.P.—the 2,575 from
Bodacious, Inc. plus the 4,925 directly from Jack Gaughf—
were transferred to Bodacious, Inc.’s Edward Jones account
on December 30, 1999 and sold the next day for net proceeds
of $207,003.
6
Notwithstanding the terms of the liquidation agreement,
Balazs Ventures, LLC apparently did not receive its pro rata .4%
share of the partnership assets upon the dissolution.
7
Sometime in “late [19]99,” Jack Gaughf transferred all of his
Quanta stock from his Smith Barney account to an Edward Jones
brokerage account and authorized the latter to sell the stock. Trial
Tr. 224 (5/17/2010 testimony of Jack Gaughf).
8
On January 31, 2000, J&G gave Jack Gaughf a written
opinion that the “basis in [his] interest in the Partnership after
the contribution of the Options should include the cost of the
Long Option contributed, without adjustment for the Short
Option,” that “[t]he liquidation of the Partnership should
result in an allocation of the Partnership’s ‘outside’ basis to
the properties distributed by it in liquidation”8—that is, to the
$45,000 distribution and the 7,500 Quanta shares—and
“disposition by [Bodacious, Inc.] of all of the Shares received
in liquidation of the Partnership should result in a long term
capital loss.” JA 878 (emphasis added). Armed with J&G’s
letter, KPMG’s tax department filed separate income tax
returns for tax year 1999 on behalf of the Gaughfs (filing
jointly), Bodacious, Inc. (filing as an S corporation) and
Gaughf Properties, L.P. The Gaughfs reported a long-term
capital loss of $119,919 attributable to “Bodacious, Inc.,” JA
591, which was reported on Bodacious, Inc.’s 1999 return as
the loss attributable to the difference between the Quanta
stock sale price of $4,625,266 and its reported “cost” of
$4,745,185.
C. The Aftermath
In May 2004, responding to a subpoena first issued in
June 2003 during an IRS audit of J&G, J&G delivered to the
IRS a list of clients, which list included Jack Gaughf’s name,
address and taxpayer identification number. Then, in July
2004, J&G turned over to the IRS some 1300 compact discs
of documents that included approximately 480 document
pages covering the various transactions involving the Gaughfs
and their business entities. After the IRS advised the Gaughfs
8
“A partner’s tax basis in a partnership interest [is] called
‘outside basis’ . . . .” United States v. Woods, 134 S. Ct. 557, 561
(2013).
9
and Gaughf Properties, L.P. that their 1999 tax returns were
being investigated, on April 12 and May 10, 2006,
respectively, the Gaughfs and an IRS agent signed a Form
872-1 (“Consent to Extend the Time to Assess Tax As Well
As Tax Attributable to Items of a Partnership”) extending the
limitations period for assessing 1999 tax-year liabilities
against the Gaughfs until April 16, 2007. On May 18, 2006,
the IRS issued a Notice of Beginning of Administrative
Proceeding regarding partnership items related to Gaughf
Properties, L.P.’s 1999 tax return. The IRS issued its FPAA
on March 30, 2007, determining, inter alia, that Gaughf
Properties, L.P. “was a sham [and] lacked economic
substance” and “a principal purpose” of its formation and the
transactions related thereto was “to reduce substantially the
present value of its partners’ aggregate federal tax liability in
a manner that is inconsistent with the intent of [the
[partnership provisions] of the Interna1 Revenue Code.” JA
1297. The FPAA further determined the partnership should
be “disregarded,” all of its transactions be attributed to “its
purported partners” and the long option’s $4,500,000 basis be
offset by the $4,455,000 short option’s premium cost. Id.
In response, on August 15, 2007, Balazs Ventures, LLC
filed in the tax court a Petition for Readjustment of
Partnership Items pursuant to I.R.C. section 6226 on behalf of
Gaughf Properties, L.P., contending the FPAA was untimely
because it issued after the three-year limitations period set out
in I.R.C. section 6229(a) had expired. The IRS subsequently
asserted a number of defenses, including I.R.C. section
6229(e)’s unidentified partner exception to the three-year
statute of limitations. The IRS contended that under the
exception, the Gaughfs’ tax assessment period remained
open, at least until the Form 872-1 was signed extending the
assessment period to April 16, 2007, because Gaughf
Properties, L.P.’s 1999 tax return did not identify the Gaughfs
10
as indirect partners and treated partnership items9—namely,
the contributed Japanese currency options—inconsistently
with their treatment on the Gaughfs’ joint personal return,
without notifying the IRS of the inconsistency.
The tax court set the statute-of-limitations issue for a
preliminary trial, adjudicating two questions: (1) whether,
when the FPAA issued on March 30, 2007, the statutory
period for assessing the Gaughfs’ tax liability attributable to
partnership items remained open pursuant to section
6229(e)’s unidentified partner exception and (2) if so,
whether the IRS was estopped from asserting the exception.
For the purpose of the trial, the parties stipulated to most of
the facts, including that “the basis in the Quanta stock was
‘incorrectly overstated.’ ” 139 T.C. 225.
The tax court conducted a bench trial in Atlanta in May
2010. On September 10, 2012, the court issued its decision,
holding that (1) the assessment period was extended under
section 6229(e)’s exception and (2) the IRS was not estopped
from so asserting.10 139 T.C. 220. Gaughf Properties, L.P.
sought an interlocutory appeal of the tax court’s timeliness
decision pursuant to Tax Court Rule 193 and I.R.C. section
9
“The term ‘partnership item’ means, with respect to a
partnership, any item required to be taken into account for the
partnership’s taxable year under any provision of subtitle A to the
extent regulations prescribed by the Secretary provide that, for
purposes of this subtitle, such item is more appropriately
determined at the partnership level than at the partner level.” I.R.C.
§ 6231(a)(3); see Treas. Reg. § 301.6231(a)(3)-1 (regulatory
definition).
10
The estoppel holding is not appealed.
11
7482(a)(2).11 On November 8, 2012, the tax court granted the
motion. Gaughf Properties, L.P., Balazs Ventures, LLC and
Gaughf Enterprises, LLC, then filed a petition in this court for
interlocutory appeal which we granted on February 1, 2013.
In re Gaughf Props., No. 12-8017 (D.C. Cir. Feb. 1, 2013).
II.
The court has jurisdiction of the interlocutory appeal
under I.R.C. section 7482(a)(2). We review the tax court’s
decision “ ‘in the same manner and to the same extent as
decisions of the district courts in civil actions tried without a
jury.’ ” Petaluma FX Partners, LLC v. Comm’r, 591 F.3d
649, 652 (D.C. Cir. 2010) (quoting I.R.C. § 7482(a)(1)),
abrogated in other respect, United States v. Woods, 134 S. Ct.
557 (2013). Accordingly, “[w]e review the Tax Court’s legal
conclusions de novo and its factual indings
for clear error.” Barnes v. Comm’r, 712 F.3d 581, 582 (D.C.
Cir. 2013). The sole question on appeal is a legal one:
whether the assessment period for the Gaughfs’ 1999 return
remained open as of March 30, 2007 so that the FPAA issued
on that date was timely under section 6229. We conclude that
it did remain open as of March 30, 2007.
11
Tax Court Rule 193 provides in relevant part: “For the
purpose of seeking the review of any order of the Tax Court which
is not otherwise immediately appealable, a party may request the
Court to include, or the Court on its own motion may include, a
statement in such order that a controlling question of law is
involved with respect to which there is a substantial ground for
difference of opinion and that an immediate appeal from that order
may materially advance the ultimate termination of the litigation.”
See also I.R.C. § 7482(a)(2) (authorizing court of appeals “in its
discretion” to take interlocutory appeal upon application filed
within ten days after such order issues).
12
The IRS generally has three years to assess “any tax
imposed . . . with respect to any person which is attributable
to any partnership item” after the later of either the filing
deadline for the applicable tax year or the actual date of filing.
I.R.C. § 6229(a). The period may be extended by agreement
of the parties—provided they do so “before the expiration of
[the three-year] period.” Id. § 6229(b). The three-year
deadline is subject to several statutory exceptions—including
the “[u]nidentified partner” exception in section 6229(e),
which provides in relevant part:
(e) . . . If –
(1) the name, address, and taxpayer
identification number of a partner are not
furnished on the partnership return for a
partnership taxable year, and
(2) (A) . . .
(B) the partner has failed to comply
with subsection (b) of section 6222 (relating
to notification of inconsistent treatment)
with respect to any partnership item for
such taxable year,
the period for assessing any tax . . . which is
attributable to any partnership item (or affected item)
for such taxable year shall not expire with respect to
such partner before the date which is 1 year after the
date on which the name, address, and taxpayer
identification number of such partner are furnished
to the Secretary.
13
I.R.C. § 6229(e).12 The tax court concluded the period for
assessing a tax on the Gaughfs attributable to partnership
items—in particular, the contributions of the Quanta shares
and the foreign currency options—remained open beyond the
general three-year assessment period because both of the
section 6229(e) requirements were satisfied: (1) Gaughf
Properties, L.P.’s 1999 income tax return failed to furnish the
required information identifying the Gaughfs as indirect
partners therein, 139 T.C. 234; and (2) the Gaughfs failed
to comply with section 6222(b)’s requirement that they notify
the IRS that their 1999 tax return treated the partnership items
in a manner inconsistent with the items’ treatment in the
Gaughf Properties, L.P. return, id. at 237. The tax court
further concluded that at no time before the parties signed the
2006 agreement to extend the assessment period was the IRS
otherwise “furnished” information regarding the Gaughfs’
indirect partnership status so as to trigger the one-year
limitation period provided in section 6229(e). The Appellants
challenge each determination.
A. Inconsistent Treatment of Partnership Items
First, the Appellants assert that the Gaughfs’ tax
assessment is not excepted under section 6229(e) from the
general three-year statute of limitations because, they claim,
the Gaughfs did not “fail[] to comply with subsection (b) of
section 6222 (relating to notification of inconsistent
treatment) with respect to any partnership item for such
12
Internal Revenue Code section 6222(b), referenced in section
6229(e)(2)(B), is discussed infra Part II.A.
14
taxable year.” I.R.C. § 6229(e)(2)(B).13 Section 6222
provides in relevant part:
(a) In general.—A partner shall, on the partner’s
return, treat a partnership item in a manner which is
consistent with the treatment of such partnership
item on the partnership return.
(b) Notification of inconsistent treatment.—
(c) In general.—In the case of any partnership item,
if—
(A)(i) the partnership has filed a return but the
partner’s treatment on his return is (or may be)
inconsistent with the treatment of the item on
the partnership return, or
(ii) the partnership has not filed a return,
and
(B) the partner files with the Secretary a
statement identifying the inconsistency,
subsection (a) shall not apply to such item.
13
The Appellants also argue that the IRS tax return forms,
instructions and regulations do not require reporting the names of
indirect partners such as the Gaughfs—only partnership
“members.” Br. for the Appellant 45-46. The applicable regulation
in effect in 1999, however, expressly provided that “[a] partner who
is not properly identified on the partnership return (including an
indirect partner) remains an unidentified partner for purposes of
section 6229(e) until identifying information is furnished as
provided in § 301.6223(c)-1T.” Treas. Reg. § 301.6229(e)-1T
(1999) (emphasis added).
15
I.R.C. § 6222(a)-(b). The Appellants contend that a section
6222(b)(1) statement was not required because there was no
inconsistency between the Gaughfs’ treatment of any
partnership item and Gaughf Properties, L.P.’s return’s
treatment thereof. We agree with the tax court that the two
returns’ treatment of partnership items was inconsistent—in
at least two respects.
The first partnership item the two returns treated
differently is the partner’s basis in the contributed property—
namely, the two foreign currency options. See Treas. Reg.
§ 301.6231(a)(3)-1(a)(4)(i) & (c)(2)(iv) (“[p]artnership items”
include “[i]tems relating to . . . [c]ontributions to the
partnership,” including determining “[t]he basis to the
partnership of contributed property”). Gaughf Properties,
L.P.’s 1999 return reported a partnership loss from the
expired options of $45,000. The loss was reported as a single
item; it therefore assumed that Gaughf Properties, L.P.’s
inside basis in its then-worthless options was likewise
$45,000, the amount that was lost. See United States v.
Woods, 134 S. Ct. at 561 (“Tax basis is the amount used as
the cost of an asset when computing how much its owner
gained or lost for tax purposes when disposing of it. . . .
‘[I]nside basis’ [is] the partnership’s basis in its own assets . .
. .”). The inside basis in turn rested on the assumption that
the partner’s basis in the contributed property was $45,000.
See I.R.C. § 723 (inside basis of “property contributed to a
partnership by a partner shall be the adjusted basis of such
property to the contributing partner at the time of the
contribution”). In contrast, the Gaughfs’ 1999 return reported
an outside basis in Gaughf Properties, L.P.—that is, the
Gaughfs’ tax basis in their partnership interest in Gaughf
16
Properties, L.P., see supra note 8—of over $4.5 million,14 JA
582, which amount was necessarily derived from the
Gaughfs’ basis in the contributed options and assumed a basis
of $4.5 million—the value of the long option without any
reduction for the short option. See I.R.C. § 722 (partner’s
outside basis of “partnership acquired by a contribution of
property, including money, to the partnership shall be the
amount of such money and the adjusted basis of such property
to the contributing partner at the time of the contribution”);
Woods, 134 S. Ct. at 561 (“ ‘[O]utside basis’ . . . is tied to the
value of any assets the partner contributed to acquire the
interest.”). Regardless of which treatment of the partnership
item was correct—indeed even if both had been correct—the
returns’ widely disparate treatment of the partner’s basis in
the contributed property constituted inconsistent treatment of
a partnership item that triggered the section 6222(b) filing
requirement.
The second inconsistency lies in the two returns’
differing treatment of the nature of the contributed property—
14
Whether, or under what circumstances, the inconsistent
treatment of an outside basis—which is determined at the
individual partner rather than the partnership level, Petaluma, 591
F.3d at 654—can itself support an unidentified partner exception to
the statute of limitations is an issue we need not and do not reach.
See Br. for the Appellant 48 (arguing “ ‘outside basis’ that drives
the partners’ returns constitutes a partner-level ‘affected item’
beyond partnership-level jurisdiction”). But see Woods, 134 S. Ct.
at 563-64 (holding court conducting partnership-level proceeding—
“to adjust ‘partnership items,’ [i.e.,] those relevant to the
partnership as a whole”—has “jurisdiction to determine the
applicability of any penalty that could result from an adjustment to
a partnership item, even if imposing the penalty would also require
determining affected or non-partnership items such as outside
basis”).
17
in particular, whether the long and short currency options
constituted a single integrated transaction or two separate
transactions. Like the basis of the contributing partner in the
property, a contribution’s underlying nature is a partnership
item. See Treas. Reg. § 301.6231(a)(3)-1(a)(4)(i) & (a)(3)-
1(b) (“ ‘partnership item’ includes the accounting practices
and the legal and factual determinations that underlie the
determination of the amount, timing, and characterization of
items of income, credit, gain, loss, deduction, etc.”). The
Gaughfs’ and Gaughf Properties, L.P.’s returns treated the
contributed options as constituting two different transactions.
Because it reported a $4.5 million basis in the partnership, the
Gaughfs’ return necessarily assumed the long and short
options were separate contributions of property (or it ignored
the short option contribution altogether). In contrast, Gaughf
Properties, L.P.’s return assumed the currency options
constituted a single, integrated transaction because it reported
a net loss of $45,000—the difference between the two
premiums—rather than separate gains and losses for each
option. See generally I.R.C. § 988 (“Treatment of certain
foreign currency transactions”).
Because “[i]n the case of [these two] partnership
item[s],” the Gaughfs’ “treatment on [their] return is (or may
be) inconsistent with the treatment of the item[s] on the
partnership return,” I.R.C. § 6222(b)(1)(A)(i), and the
Gaughfs did not file a Form 8082 “Notice of Inconsistent
Treatment,” they “failed to comply with subsection (b) of
section 6222,” id. § 6229(e)(2)(B); see 139 T.C.
237. Accordingly we conclude, as did the tax court, that their
assessment period is excepted under section 6229(e) from the
general three-year statute of limitations established in
section 6229(a).
18
B. “Furnished” Additional Partnership Information
The Appellants also contend that, even if the Gaughfs
were unidentified partners under section 6229(e), the FPAA
was untimely because it did not issue (nor was an extension
agreement signed) until after “the date which is 1 year after
. . . the name, address, and taxpayer identification number of
such partner are furnished to the Secretary”—on which date
the assessment period expires under section 6229(e) even
when the unidentified partner exception applies. They assert
that, although the indirect partner status information was “not
furnished on” the 1999 Gaughf Properties, L.P. return under
section 6229(e)(1), the information was nonetheless
adequately “furnished to the Secretary” through other
documents the IRS received—namely, (1) the four individual
entities’ SS-4 forms, filed September 27 to October 1, 1999,
which identified either Jack or Nan Gaughf as the principal of
each of Gaughf Properties, L.P.’s partners and could be cross-
referenced through the 1999 tax returns; and (2) the 1300
compact discs of documents (including what the Appellants
describe as a “480-page gold mine of Gaughf information,”
Br. for the Appellant 43) given to the IRS by J&G in 2004.
None of these documents “furnish[ed]” the required
information so as to satisfy section 6229(e).
Under the temporary IRS regulation in effect in 1999, a
“statement [furnishing ‘additional information regarding
partners’ to the IRS] shall generally be filed with the service
center with which the partnership return is filed” and it must
(i) Identify the partnership, each partner for whom
information is supplied, and the person supplying the
information by name, address, and taxpayer identification
number;
19
(ii) Explain that the statement is furnished to correct or
supplement earlier information with respect to the
partners in the partnership;
(iii) Specify the taxable year to which the
information relates;
(iv) Set out the corrected or additional information[;]
and
(v) Be signed by the person supplying the
information.
Treas. Reg. § 301.6223(c)-1T(b)(2)-(3).15 The Appellants do
not dispute that the documents they point to failed to comply
with the regulation’s literal requirements. Instead, they
challenge the regulation itself—to no avail.
The Appellants argue that the regulation’s requirements
are inconsistent with the language of I.R.C. section 6229(e).
We review a regulation under the familiar two-step
framework set out in Chevron U.S.A. Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984). See
Mayo Found. for Med. Educ. & Research v. United States,
131 S. Ct. 704, 711 (2011). Under Chevron step 1, we ask
“whether Congress has ‘directly addressed the precise
question at issue.’ ” Id. (quoting Chevron, 467 U.S. at 843).
If so, “that is the end of the matter; for the court, as well as
the agency, must give effect to the unambiguously expressed
intent of Congress.” Chevron, 467 U.S. at 842-43. But “if
15
Temporary regulation 301.6223(c)-1T, in effect at the time
the 1999 return was filed, has since been adopted in permanent
form. See Unified Partnership Audit Procedures, 66 Fed. Reg.
50,541, 50,548-49 (2001) (codified at Treas. Reg. § 301.6223(c)-1).
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the statute is silent or ambiguous with respect to the specific
issue, the question for the court is whether the agency’s
answer is based on a permissible construction of the statute.”
Id. at 843. Applying Chevron here, we uphold the regulation.
The Appellants claim the statute’s phrase “are furnished”
is plainly broad and necessarily encompasses “actual
notice”—which they claim the SS-4 forms and the compact
discs provided. In support, they note that the Congress
“chose the passive verb ‘are furnished’ and imposed no
limitation as to who furnishes the taxpayer information to the
Secretary, where the information is furnished to the Secretary,
or when the information is furnished to the Secretary.” Br.
for the Appellant 31. In other words, I.R.C. section 6229(e)
“is silent or ambiguous with respect to the specific issue” of
how, when, where or by whom additional partnership
information must be furnished. See Chevron, 467 U.S. at
843. Under Chevron step 2, therefore, the Secretary may fill
the gap the Congress left and the regulation is entitled to
deference. See Mayo Found., 131 S. Ct. at 713 (“ ‘The power
of an administrative agency to administer a congressionally
created . . . program necessarily requires the formulation of
policy and the making of rules to fill any gap left, implicitly
or explicitly, by Congress.’ ” (quoting Chevron, 467 U.S. at
843) (brackets omitted)). In promulgating section
301.6223(c)-1T(b)(2)-(3), the Secretary filled the gap in a
reasonable fashion. The regulation’s terms ensure that the
additional partnership information reaches the particular IRS
center where the relevant return was filed and that it includes
all of the essentials: the identity of the partners, the nature of
the information, the applicable tax year, the additional
partnership information itself and the identity of the filer. See
Treas. Reg. § 301.6223(c)-1T(b)(2), (b)(3)(i)-(v).
“Regulation, like legislation, often requires drawing lines.”
Mayo Found., 131 S. Ct. at 715. The Secretary’s lines are
21
reasonably drawn. Indeed, the Appellants’ alternative—that
the IRS be charged with actual notice of any information that
has passed into its possession at any place or time, in any
form or by any means—seems at best impractical. While the
regulation provides that the IRS “may use other information
in its possession,” it also makes clear the IRS “is not
obligated to search its records for information not expressly
furnished under [the regulation].” Treas. Reg. § 301.6223(c)-
1T(f) (emphases added); cf. Walthall v. United States, 131
F.3d 1289, 1296 (9th Cir. 1997) (“mere fact that the IRS
possesses in its database the name and address of indirect
partners does not mean that it has been ‘furnished with’ this
information” so as to trigger IRS obligation to notify indirect
partners of administrative proceedings under I.R.C. § 6223).
Nor does the regulation give effect to the “[i]ncorporation by
reference of information contained in another document
previously furnished to the Internal Revenue Service.” Treas.
Reg. § 301.6223(c)-1T(c).
For the foregoing reasons, we affirm the judgment of the
tax court and remand for further proceedings.
So ordered.