PCMG Trading Partners XX, L.P. v. Commissioner ( 2008 )

131 T.C. No. 14UNITED STATES TAX COURT
PCMG TRADING PARTNERS XX, L.P., DAVID BOYER, DONALD DEFOSSET,
JR., RICHARD M. KELLEHER, MICHAEL ROWNY AND JOHN A. MCMULLEN,
PARTNERS OTHER THAN THE TAX MATTERS PARTNER, ET AL.,1 Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5078-08, 5149-08, Filed December 11, 2008.
5150-08, 5151-08,
5152-08, 5153-08,
5154-08.
1
Cases of the following petitioners are consolidated
herewith: PCMG Trading Partners XX, L.P., David Boyer, A Partner
Other Than the Tax Matters Partner, docket No. 5149-08; PCMG
Trading Partners XX, L.P., Donald DeFossett, Jr., A Partner Other
Than the Tax Matters Partner, docket No. 5150-08; PCMG Trading
Partners XX, L.P., Richard M. Kelleher, A Partner Other Than the
Tax Matters Partner, docket No. 5151-08; PCMG Trading Partners
XX, L.P., John A. McMullen, A Partner Other Than the Tax Matters
Partner, docket No. 5152-08; PCMG Trading Partners XX, L.P.,
Michael Rowny, A Partner Other Than the Tax Matters Partner,
docket No. 5153-08; and PCMG Trading Partners XX, L.P., PCMG
Trading Fund XX, LLC., A Partner Other Than the Tax Matters
Partner, docket No. 5154-08.
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On Feb. 28, 2008, five indirect partners filed a
petition pursuant to sec. 6226(b)(1), I.R.C., as
members of a 5-percent group challenging adjustments to
partnership items in the notice of final partnership
administrative adjustment (FPAA) and asserting that the
period of limitations on assessments had expired. On
Feb. 29, 2008, six petitions regarding the same FPAA
were filed, one by the pass-thru partner through which
the five indirect partners held their interests in the
partnership and one by each of the same individual
indirect partners who filed the initial petition on
Feb. 28, 2008. The five petitions filed by the
individual indirect partners purport to be filed
pursuant to sec. 6226(d)(1), I.R.C., solely to assert
that the period of limitations for assessment has
expired as to each of them.
Held: The initial petition filed by the five
indirect partners on Feb. 28, 2008, as members of a 5-
percent group was valid under sec. 6226(b)(1), I.R.C.,
and must go forward pursuant to sec. 6226(b)(2), I.R.C.
Sec. 6226(b)(4), I.R.C., provides that subsequent
actions regarding the same FPAA must be dismissed.
Sec. 6226(d)(1), I.R.C., which allows a partner to file
a petition solely for the purpose of asserting that the
period of limitations on assessments has expired as to
him, does not override the provisions of sec.
6226(b)(2) and (4), I.R.C. The six petitions filed on
Feb. 29, 2008, must be dismissed for lack of
jurisdiction pursuant to sec. 6226(b)(4), I.R.C.
N. Jerold Cohen and Thomas A. Cullinan, for petitioners.
Bonnie L. Cameron, for respondent.
OPINION
RUWE, Judge: These seven cases were consolidated for
purposes of considering respondent’s motions to dismiss the six
cases bearing docket Nos. 5149-08, 5150-08, 5151-08, 5152-08,
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5153-08, and 5154-08, for lack of jurisdiction pursuant to
section 6226(b)(2) and (4).2
Background
On October 3, 2007, pursuant to section 6223(a)(2),
respondent issued a notice of final partnership administrative
adjustment (FPAA) to the Private Capital Management Group,
L.L.C., the tax matters partner (TMP) for PCMG Trading Partners
XX, L.P. (the partnership), for the taxable years 1999 and 2000.3
On the same date respondent also sent a copy of the FPAA to PCMG
Trading Fund XX, LLC (Fund), which was a “notice partner” of the
partnership. See sec. 6231(a)(8). Fund was also a “pass-thru
partner.” See sec. 6231(a)(9). David Boyer, Donald DeFossett,
Jr., Richard M. Kelleher, Michael Rowny, and John A. McMullen
were members of Fund and as such were indirect partners of the
partnership. See sec. 6231(a)(10). None of these individual
indirect partners was a notice partner.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended.
3
Attached to the seven petitions are copies of two
different FPAAs, both issued to the TMP on Oct. 3, 2007. The
FPAA referred to in this Opinion pertains to tax years 1999 and
2000. The other FPAA pertains only to tax year 1999, contains no
adjustments, and appears to be a partial duplication of the FPAA
for 1999 and 2000. Petitioners dispute the proposed adjustments
to both tax years, and in the motions under consideration and the
responses thereto the parties refer to a single FPAA covering
both years; we do likewise.
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Pursuant to section 6226(a), the TMP has 90 days from the
mailing of the FPAA to file a petition for readjustment of
partnership items. The TMP did not file a petition. Pursuant to
section 6226(b)(1), if the TMP does not file a timely petition,
any notice partner and any 5-percent group may file a petition
for readjustment of partnership items within 60 days after the
close of the 90-day period described in section 6226(a). Under
section 6231(a)(11), a 5-percent group is a group of partners who
had aggregate profits interests in the partnership of 5 percent
or more for the partnership’s taxable years at issue.
On February 28, 2008, David Boyer, Donald DeFossett, Jr.,
Richard M. Kelleher, Michael Rowny, and John A. McMullen filed a
single petition for readjustment of partnership items as a 5-
percent group (docket No. 5078-08). The aggregate profits
interests of these individual indirect partners for the 1999 and
2000 taxable years exceeded 5 percent. The petition filed by
members of the 5-percent group was filed within the 60-day period
described in section 6226(b)(1).
On the following day, February 29, 2008, Fund, as a notice
partner, filed a petition for readjustment of partnership items
with respect to the same FPAA (docket No. 5154-08). Also on
February 29, 2008, each of the aforementioned individual indirect
partners filed a separate petition with respect to the same FPAA
(docket Nos. 5149-08, 5150-08, 5151-08, 5152-08, and 5153-08)
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asserting that the period of limitations for assessing any tax
attributable to partnership items had expired as to each of them.
The statute of limitations issue raised in each of the five
petitions filed by the individual indirect partners had also been
raised in the petition filed by the 5-percent group and in the
petition filed by Fund.
Discussion
Respondent argues that the petition filed by the 5-percent
group (docket No. 5078-08) on February 28, 2008, was a valid
petition that gives this Court jurisdiction over the partnership
items and statute of limitations issues and that the six
petitions filed the following day are simply duplications that
must be dismissed for lack of jurisdiction pursuant to section
6226(b)(2) and (4).
Petitioners4 agree that the first petition by the 5-percent
group was valid for jurisdictional purposes but state that the
subsequent six petitions were filed as a “backup” because of
uncertainty about whether jurisdiction over the petition filed by
the 5-percent group will be upheld. Petitioners also argue that
the five individual indirect partners each have a right to file
individual petitions pursuant to section 6226(d)(1) even if the
petition filed by the 5-percent group is held to be valid.
4
Unless otherwise noted, we will refer to all petitioners
collectively since they share counsel and have collectively made
the same arguments.
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Petitioners ask us to deny respondent’s motions to dismiss.
Petitioners also moved for consolidation of the seven cases,
which respondent opposes.
It is incumbent on us to resolve the various jurisdictional
issues raised by the parties. As we recently stated:
This Court can proceed in a case only if it has
jurisdiction, and either party, or the Court sua
sponte, can question jurisdiction at any time. Estate
of Young v. Commissioner, 81 T.C. 879, 880-881 (1983).
We have jurisdiction to determine whether we have
jurisdiction. Brannon’s of Shawnee, Inc. v.
Commissioner, 69 T.C. 999, 1002 (1978). As we stated
in Wheeler’s Peachtree Pharmacy, Inc. v. Commissioner,
35 T.C. 177, 179 (1960): “[Q]uestions of jurisdiction
are fundamental and whenever it appears that this Court
may not have jurisdiction to entertain the proceeding
that question must be decided.” [Stewart v.
Commissioner, 127 T.C. 109, 112 (2006).]
I. Validity of the First Petition by the 5-Percent Group
Section 6226(b)(1) provides:
SEC. 6226(b). Petition by Partner Other Than Tax
Matters Partner.--
(1) In general.--If the tax matters
partner does not file a readjustment petition
under subsection (a) with respect to any
final partnership administrative adjustment,
any notice partner (and any 5-percent group)
may, within 60 days after the close of the
90-day period set forth in subsection (a),
file a petition for a readjustment of the
partnership items for the taxable year
involved with any of the courts described in
subsection (a).[5]
5
This Court is one of the courts described in sec. 6226(a).
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A 5-percent group is defined in section 6231(a)(11) as “a
group of partners who for the partnership taxable year involved
had profits interests which aggregated 5 percent or more.” “The
term ‘partner’ means--(A) a partner in the partnership, and (B)
any other person whose income tax liability under subtitle A is
determined in whole or in part by taking into account directly or
indirectly partnership items of the partnership.” Sec.
6231(a)(2). “The term ‘indirect partner’ means a person holding
an interest in a partnership through 1 or more pass-thru
partners.” Sec. 6231(a)(10).6 We have held that an indirect
partner is deemed a partner under section 6231(a)(2)(B). Dionne
v. Commissioner, T.C. Memo. 1993-117. On the basis of these
definitions, we conclude that a 5-percent group entitled to file
a petition under section 6226(b)(1) can be made up by indirect
partners. See also section 301.6231(d)-1, Proced. & Admin.
Regs., which prescribes timing rules for determining profits
interests of indirect partners for purposes of qualifying as a 5-
percent group.
It is undisputed that each of the individuals who filed the
first petition as a 5-percent group (docket No. 5078-08) was an
indirect partner in the partnership who held an interest in the
6
“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.” Sec. 6231(a)(9).
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partnership through Fund, which was a pass-thru partner. As
such, these five individuals were also “partners” within the
meaning of section 6231(a)(2)(B) who held profits interests which
aggregated 5 percent or more and therefore qualified as a 5-
percent group under section 6231(a)(11).
The only “fly in the ointment” is that only one reported
case cited by either party directly supports the proposition that
indirect partners may form a 5-percent group: Third
Dividend/Dardanos Associates v. Commissioner, 88 F.3d 821 (9th
Cir. 1996), revg. T.C. Memo. 1994-412. In Third Dividend, a
notice partner7 which was also a pass-thru partner filed a
petition after it had filed for bankruptcy and after it had been
notified that it was no longer a party to the partnership
proceedings because its partnership items had been converted to
nonpartnership items. See sec. 6231(c). On the following day,
two indirect partners who held aggregate profits interests in the
partnership of more than 5 percent through the pass-thru partner
also filed a petition with respect to the same FPAA. This Court
dismissed the first petition on the ground that the pass-thru
partner’s bankruptcy disqualified it from filing a petition and
from entitlement to further notice in the partnership proceeding.
7
Sec. 6231(a)(8) provides that “The term ‘notice partner’
means a partner who, at the time in question, would be entitled
to notice under subsection (a) of section 6223 (determined
without regard to subsections (b)(2) and (e)(1)(B) thereof).”
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Because the pass-thru partner was not entitled to notice, the
link of notice to the indirect partners had also been cut. We
held that because the link of notice had been broken, the
partnership items of the indirect partners had converted to
nonpartnership items. As a result, we held that the Court lacked
jurisdiction over the petition filed by the indirect partners.
The Court of Appeals for the Ninth Circuit reversed, holding that
the indirect partners qualified as a 5-percent group that was
entitled to file a petition regardless of the bankruptcy of the
pass-thru partner or whether the link of notice to them had been
cut.
The instant case does not involve any bankruptcy or notice
issues and is therefore distinguishable from Third Dividend.
However, putting those issues aside, we agree with the holding of
the Court of Appeals for the Ninth Circuit that this Court has
jurisdiction over a timely petition filed by members of a 5-
percent group composed of indirect partners. Therefore, we hold
that this Court has jurisdiction over the petition filed by the
members of the 5-percent group in docket No. 5078-08.
II. Dismissal of Subsequent Petitions
As previously stated, section 6226(b)(1) sets forth our
jurisdiction over petitions for readjustment of partnership items
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filed by notice partners and 5-percent groups. Section
6226(b)(2) and (4) then provides:
(2) Priority of the tax court action.--If more
than 1 action is brought under paragraph (1) with
respect to any partnership for any partnership taxable
year, the first such action brought in the Tax Court
shall go forward.
* * * * * * *
(4) Dismissal of other actions.--If an action is
brought under paragraph (1) in addition to the action
which goes forward under paragraph (2) or (3), such
action shall be dismissed.
Since we have already held that we have jurisdiction over
the petition filed by the 5-percent group at docket No. 5078-08,
which was the first action brought, that action must go forward
pursuant to section 6226(b)(2). Section 6226(b)(4) would seem to
require that the six subsequently filed petitions regarding the
same FPAA be dismissed for lack of jurisdiction. See Cablevision
of Conn. v. Commissioner, T.C. Memo. 1993-106; Cambridge Research
& Dev. Group v. Commissioner, T.C. Memo. 1991-434. However, with
respect to the five petitions filed by the individual indirect
partners, petitioners argue that there is a statutory exception
to the dismissal requirement of section 6226(b)(4). They glean
this exception from section 6226(c) and (d), which provides:
SEC. 6226(c). Partners Treated as Parties.--If an
action is brought under subsection (a) or (b) with
respect to a partnership for any partnership taxable
year--
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(1) each person who was a partner in
such partnership at any time during such year
shall be treated as a party to such action,
and
(2) the court having jurisdiction of
such action shall allow each such person to
participate in the action.
(d) Partner Must Have Interest in Outcome.--
(1) In order to be party to action.--
Subsection (c) shall not apply to a partner
after the day on which--
(A) the partnership items of
such partner for the partnership
taxable year became nonpartnership
items by reason of 1 or more of the
events described in subsection (b)
of section 6231, or
(B) the period within which
any tax attributable to such
partnership items may be assessed
against that partner expired.
Notwithstanding subparagraph (B), any person
treated under subsection (c) as a party to an
action shall be permitted to participate in
such action (or file a readjustment petition
under subsection (b) or paragraph (2) of this
subsection) solely for the purpose of
asserting that the period of limitations for
assessing any tax attributable to partnership
items has expired with respect to such
person, and the court having jurisdiction of
such action shall have jurisdiction to
consider such assertion. [Emphasis added.]
The above emphasized provisions of section 6226(d)(1) were
added by the Taxpayer Relief Act of 1997, Pub. L. 105-34, sec.
1239(b), 111 Stat. 1027. The legislative history explains: “The
provision * * * permits a partner to participate in an action or
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file a petition for the sole purpose of asserting that the period
of limitations for assessing any tax attributable to partnership
items has expired for that person.” H. Rept. 105-148, at 594
(1997), 1997-4 C.B. (Vol. 1) 319, 916.8
The individual indirect partners argue that even though
their individual petitions raise the same issue regarding the
statute of limitations that was raised in the lead petition of
the 5-percent group, section 6226(d)(1) permits them each to file
a petition solely for the purpose of asserting that the period of
limitations for assessing any tax attributable to partnership
items has expired with respect to them.9
8
The report explains the law that existed before the 1997
amendment as follows:
For a partner other than the Tax Matters Partner
to be eligible to file a petition for redetermination
of partnership items in any court or to participate in
an existing case, the period for assessing any tax
attributable to the partnership items of that partner
must not have expired. Since such a partner would only
be treated as a party to the action if the statute of
limitations with respect to them was still open, the
law is unclear whether the partner would have standing
to assert that the statute of limitations had expired
with respect to them. [H. Rept. 105-148, at 594
(1997), 1997-4 C.B. (Vol. 1) 319, 916.]
9
Generally the Court’s jurisdiction in a partnership
proceeding is restricted to determining “partnership items”.
Sec. 6226(f); Petaluma FX Partners, LLC v. Commissioner, 131 T.C.
___, ___ (2008) (slip op. at 11-12). However, our jurisdiction
over whether the period of limitations has expired as to
individual partners presents an exception since the expiration of
the period of limitations can depend on facts that are peculiar
to the individual partners. See Rhone-Poulenc Surfactants &
(continued...)
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Assuming that section 6226(d)(1) may, in some situations,
permit a partner who is neither a notice partner nor a member of
a 5-percent group to file a petition for the sole purpose of
raising the statute of limitations,10 we do not think it can be
done under the present facts. The pertinent language of section
6226(d)(1) permits a party to “participate” in an existing
partnership case “or file a readjustment petition” (emphasis
added) for the sole purpose of asserting that the period of
limitations has expired as to that party. This statutory
9
(...continued)
Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000), appeal
dismissed and remanded 249 F.3d 175 (3d Cir. 2001). As we
observed therein:
in 1997, Congress recognized that the periods for
assessing tax against individual partners may vary from
partner to partner and specifically provided that an
individual partner will be permitted to participate as
a party in the partnership proceeding ‘solely for the
purpose of asserting that the period of limitations for
assessing any tax attributable to partnership items has
expired with respect to such person’. See the last
sentence of section 6226(d)(1)(B), added to the Code by
the Taxpayer Relief Act of 1997, Pub. L. 105-34,
section 1239(b), 111 Stat. 1027, effective for years
ending after August 5, 1997. [Id. at 546; fn. ref.
omitted.]
10
Respondent argues that since sec. 6226(d)(1) permits a
petition to be filed under sec. 6226(b), a party filing a
petition under sec. 6226(d)(1) must also be a notice partner or a
member of a 5-percent group as required in sec. 6226(b)(1). We
express no opinion on this issue.
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provision presents parties with a choice.11 The individual
indirect partners made their choice on February 28, 2008, when
they filed their petition as members of a 5-percent group. As
petitioners in the petition filed by the 5-percent group, they
obviously have elected to participate in that case regarding the
statute of limitations issues and should not be able to file
separate petitions involving the same issue. This interpretation
of section 6226(d)(1) is consistent with the purpose of the
unified litigation procedures contained in subchapter C (sections
6221-6234) of chapter 63 of the Internal Revenue Code, which was
to resolve partnership issues in one proceeding. Any other
interpretation of section 6226(d)(1) would be contrary to this
statutory objective.12
11
Webster’s Dictionary defines “or” as a “function word to
indicate * * * an alternative between different or unlike * * *
actions”. Webster’s Third New International Dictionary (1986).
“Normally, use of a disjunctive indicates alternatives and
requires they be treated separately unless such a construction
renders the provision repugnant”. George Hyman Constr. Co. v.
Occupational Safety & Health Review Commn., 582 F.2d 834, 840
n.10 (4th Cir. 1978). “As a general rule, the use of a
disjunctive in a statute indicates alternatives and requires that
they be treated separately.” Azure v. Morton, 514 F.2d 897, 900
(9th Cir. 1975).
12
As we recently observed:
To remove the substantial administrative burden
occasioned by duplicative audits and litigation and to
provide consistent treatment of partnership tax items
among partners in the same partnership, Congress
enacted the unified audit and litigation procedures of
the Tax Equity and Fiscal Responsibility Act of 1982
(continued...)
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Alternatively, even if each of the five individual indirect
partners could have filed a petition under section 6226(d)(1),
that subsection specifically permits a party to file such a
“petition under subsection (b)”. Any petition filed under
section 6226(b) would be subject to the rule in section
6226(b)(2), which gives priority to the first petition filed with
respect to an FPAA, and section 6226(b)(4), which provides for
dismissal of subsequent actions brought with respect to the same
FPAA. These provisions require that the five petitions filed by
the individual indirect partners be dismissed. This still
permits all of the parties to litigate all of the issues that
have been raised and is consistent with the overall statutory
purpose of doing so in one proceeding.
Our jurisdiction to review FPAAs is contained in section
6226. Because the specific provisions of that section give us
jurisdiction over the petition filed on February 28, 2008, in
docket No. 5078-08 and require dismissal of subsequent actions
brought with respect to the same FPAA, we hold that the six
petitions filed on February 29, 2008, in docket Nos. 5149-08,
12
(...continued)
(TEFRA), Pub. L. 97-248, sec. 401, 96 Stat. 648. See
Randell v. United States, 64 F.3d 101, 103 (2d Cir.
1995); H. Conf. Rept. 97-760, at 599-600 (1982), 1982-2
C.B. 600, 662-663. [Petaluma FX Partners, LLC v.
Commissioner, supra at ___ (slip op. at 10).]
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5150-08, 5151-08, 5152-08, 5153-08, and 5154-08 will be dismissed
for lack of jurisdiction.
Orders of dismissal for
lack of jurisdiction will be
entered in docket Nos.
5149-08, 5150-08, 5151-08,
5152-08, 5153-08, and 5154-08.