American Milling, LP, UN Limited, Tax Matters Partner ( 2023 )

United States Tax Court
T.C. Memo. 2023-83AMERICAN MILLING, LP,
UN LIMITED, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 8438-13. Filed June 29, 2023.
—————
Anthony J. Rollins and John Phillip Tyler, for petitioner.
John W. Stevens and Richard J. Hassebrock, for respondent.
MEMORANDUM OPINION
PUGH, Judge: Respondent issued a notice of final partnership
administrative adjustment (FPAA) pursuant to section 6223 1 to
UN Limited, the tax matters partner (TMP) of American Milling, LP
(American Milling), for 2000, 2001, 2002, and 2003 (Milling FPAA).
Respondent made adjustments to the income, expense, and deduction
items that American Milling reported on its 2000, 2001, 2002, and 2003
federal income tax returns. Petitioner, its TMP, timely filed a Petition
contesting respondent’s adjustments.
In our previous opinion in this case, American Milling, LP v.
Commissioner (American Milling I), T.C. Memo. 2015-192, we denied
1Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and Rule references are to the Tax Court Rules of Practice and Procedure.
Served 06/29/23
2
[*2] petitioner’s Motion to Dismiss for Lack of Jurisdiction. The only
remaining issue before the Court is whether the period of limitations for
assessing tax attributable to American Milling’s partnership items has
expired with respect to David Jump, an indirect partner of American
Milling.
Background
This case was submitted fully stipulated under Rule 122. When
the Petition was filed, American Milling had its principal place of
business in Illinois.
I. American Boat FPAA
In 1998 Mr. Jump engaged in a series of transactions constituting
a Son-of-BOSS tax shelter. Multiple entities were formed to facilitate
the tax shelter, but only two partnerships are relevant in resolving the
remaining issue before us: American Boat Co., LLC (American Boat),
and American Milling. The tax shelter involved the transfer of assets
encumbered by significant liabilities to American Boat, which then
disregarded the liabilities in computing the contributing partner’s basis
in the partnership. After a series of other transactions, explained in
more detail in American Milling I, American Boat’s partnership status
terminated, triggering a deemed distribution of American Boat’s assets
(18 tugboats) with inflated bases to American Milling.
In October 1999 American Boat filed Form 1065, U.S. Return of
Partnership Income, for 1998. Mr. Jump was not listed as an indirect
partner on the 1998 American Boat Form 1065. In July 2006 respondent
issued an FPAA for 1998 (American Boat FPAA) to American Milling,
the TMP of American Boat at that time. American Milling contested the
adjustments in the U.S. District Court for the Southern District of
Illinois. Am. Boat Co. v. United States, No. 06-CV-00788 (S.D. Ill. Nov.
20, 2008), aff’d, 583 F.3d 471 (7th Cir. 2009). The district court ruled in
favor of the government on most of the issues but rejected the accuracy-
related penalty. 2
Respondent did not assess any tax deficiency resulting from the
adjustments in the American Boat FPAA against Mr. Jump after the
litigation concluded in 2009.
2 The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s
rejection of the accuracy-related penalty. Am. Boat Co., 583 F.3d at 477–87.
3
[*3] II. Milling FPAA
American Milling filed 2000, 2001, 2002, and 2003 Forms 1065 in
May 2003, November 2003, February 2004, and November 2004,
respectively. Mr. Jump was not listed as an indirect partner on any of
these Forms 1065.
On January 18, 2013, respondent mailed the Milling FPAA to
petitioner. Respondent determined that American Milling (1) claimed
inflated depreciation deductions for 2000 through 2003 because of
inflated bases in the tugboats; (2) claimed an inflated capital loss for
2002 resulting from the sale of some of the tugboats; and (3) erroneously
claimed a deduction of $300,000 for 2000 for legal fees incurred in
connection with the tax shelter. Petitioner is not disputing the
correctness of the adjustments to American Milling’s partnership items.
III. American Milling I
After respondent filed his Answer, petitioner filed a Motion to
Dismiss for Lack of Jurisdiction. Petitioner contended that we lacked
jurisdiction to determine American Milling’s partnership items,
adjusted by respondent in the Milling FPAA, because it was a
“reproduction” of the American Boat FPAA and violated the rule
prohibiting respondent from issuing a second FPAA under section
6223(f). Alternatively, petitioner contended that we lacked jurisdiction
over the Milling FPAA because (1) all adjustments in the Milling FPAA
were computational adjustments flowing from the American Boat FPAA
and there were no affected items requiring determinations at the
American Milling level and (2) respondent did not have authority to
issue the Milling FPAA because neither the Code nor the regulations
authorized the issuance of an affected items FPAA.
Respondent argued that the adjustments made in the Milling
FPAA were to American Milling’s partnership items because the Court
had to make factual determinations with respect to American Milling’s
basis in American Boat and its bases in tugboats received from
American Boat without regard to the artificial basis inflation from the
tax shelter. Specifically, respondent argued that “American Milling’s
basis in American Boat and its basis in tugboats received from American
Boat, although affected by partnership items of American Boat, are
partnership items of American Milling.” Therefore, continued
respondent, the tugboat bases were more appropriately determined at
the partnership level, and not at a partner level. Respondent relied on
4
[*4] our decision in Tigers Eye Trading, LLC v. Commissioner, 138 T.C.
67, 116–19 (2012), aff’d in part, rev’d in part, and remanded sub nom.
Logan Tr. v. Commissioner, 616 F. App’x 426 (D.C. Cir. 2015), and
argued that American Milling’s basis in American Boat was not a
partnership item of American Boat.
Respondent further noted that factual determinations also were
necessary “to determine whether the $300,000 of legal fees claimed by
American Milling . . . is allowable as an expense” because these fees were
not claimed as a deduction by American Boat; therefore, the Court had
to make partnership-level determinations regarding the nature of these
legal fees.
In American Milling I, T.C. Memo. 2015-192, at *14–15, the Court
held that the Milling FPAA was not a duplicate of the American Boat
FPAA. We found that the Milling FPAA was issued to a different
partnership, for different tax years, and made materially different
adjustments to items of income and expense. Id. We noted that
American Milling and American Boat were separate entities for the
period examined in the American Boat FPAA, and even though some of
the adjustments in American Milling FPAA were related to the
adjustments in the American Boat FPAA, they were not identical. Id.We concluded that the adjustments in the Milling FPAA, i.e., the
adjustments to depreciation, capital loss, and legal fees deductions, were
adjustments to the partnership items of American Milling and that we
had subject matter jurisdiction in this case. 3 Id. at *21–22.
Discussion
I. Burden of Proof
Ordinarily, the taxpayer bears the burden of proving that the
Commissioner’s determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Taxpayers raising affirmative
defenses such as the expiration of the period of limitations also typically
bear the burden of proving that those defenses apply. Hoffman v.
Commissioner, 119 T.C. 140, 146 (2002). Resolution of the period of
limitations issue before us does not depend on which party has the
3 Because we found that the adjustments in the Milling FPAA were
partnership items of American Milling “and not merely affected items,” we did not
address petitioner’s contention that respondent did not have authority to issue an
affected items FPAA. American Milling I, T.C. Memo. 2015-192, at *12 n.14.
5
[*5] burden of proof. We resolve it on a preponderance of the evidence in
the record. See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008),
supplementing T.C. Memo. 2007-340; Schank v. Commissioner, T.C.
Memo. 2015-235, at *16.
II. Legal Background
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71, the governing
statutory framework in effect during the tax years in issue, established
uniform audit and litigation procedures for the resolution of partnership
tax items. TEFRA provides a two-step process for resolving partnership
tax matters. First, partnership items are adjusted at the partnership
level in a single partnership-level proceeding. See §§ 6221, 6231(a)(3). A
partnership item is “any item required to be taken into account for the
partnership taxable year” if “such item is more appropriately
determined at the partnership level than at the partner level.”
§ 6231(a)(3). A nonpartnership item is “an item which is (or is treated
as) not a partnership item.” § 6231(a)(4). To challenge a partnership
item the Internal Revenue Service (IRS) initiates an administrative
proceeding against the partnership. § 6223(a)(1). The IRS then issues
an FPAA to the partners informing them of the adjustments to
partnership items. § 6223(a)(2). Partners can seek judicial review of the
adjustments to partnership items in a partnership-level proceeding.
§ 6226(a) and (b)(1).
Once partnership-level adjustments are final, the IRS determines
whether partnership-level adjustments require any partner-level
changes, including to affected items. §§ 6225, 6231(a)(5). An affected
item is “any item to the extent such item is affected by a partnership
item.” § 6231(a)(5). If an adjustment is merely computational and does
not require partner-level factual determinations, the IRS may assess the
computational adjustment without issuing a notice of deficiency. See
§§ 6230(a)(1), 6231(a)(6); Treas. Reg. § 301.6231(a)(6)-1(a)(2); see also
Ginsburg v. Commissioner, 127 T.C. 75, 83 (2006) (outlining the
different categories of adjustments under TEFRA). If an adjustment
requires partner-level determinations, the IRS must issue an affected
items notice of deficiency to the partner and regular deficiency
procedures apply. § 6230(a)(2)(A)(i); Treas. Reg. § 301.6231(a)(6)-1(a)(3).
This case is a partnership-level action initiated by a petition filed
pursuant to section 6226. As explained above, the only issue remaining
before the Court is whether the period of limitations for assessing tax
6
[*6] attributable to American Milling’s partnership items has expired
with respect to Mr. Jump, an indirect partner of American Milling, at
the time the Milling FPAA was issued to petitioner.
The Code prescribes no stand-alone deadline for issuing an FPAA.
Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114
T.C. 533, 534 (2000). If an FPAA is issued after the time for assessing
tax against the individual partner has expired, it will be of no avail
because any assessment attributable to partnership items in the FPAA
will be barred with respect to that partner. Id. at 534–35.
Under the general rule set forth in section 6501, the IRS is
required to assess tax or send a notice of deficiency to a taxpayer within
three years after a federal tax return is filed. See § 6501(a). Petitioner
and respondent agree that the general limitations period in section 6501
has expired. In the case of a tax imposed on partnership (and affected)
items, however, section 6229 sets forth special rules to extend the period
of limitations prescribed by section 6501. See Rhone-Poulenc Surfactants
& Specialties, 114 T.C. at 540–41. We have held that “[s]ection 6229
provides a[n] [alternative] minimum period of time for the assessment
of any tax attributable to partnership items (or affected items)” that can
extend, but not reduce, the limitation period otherwise prescribed by
section 6501. Id. at 542; CNT Invs., LLC v. Commissioner, 144 T.C. 161,
186 (2015).
Section 6229(a) prescribes a minimum three-year limitations
period, commencing on the later of the date on which the partnership
return is filed or the last day for filing such a return, without regard to
extensions, for the assessment of tax attributable to any partnership
item or affected item. The timely mailing of an FPAA suspends the
running of the limitations period for assessing any income tax that is
attributable to any partnership item or affected item. See § 6229(d). The
limitations period remains suspended for the period during which an
action may be filed in court, during the pendency of any proceeding
actually brought, and for one year thereafter. Id. Respondent does not
dispute that the Milling FPAA was issued more than one year after the
conclusion of the American Boat litigation, so section 6229(d) does not
apply.
7
[*7] At the center of the parties’ dispute is section 6229(e):
(e) Unidentified partner.—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) the Secretary, before the expiration of
the period otherwise provided under this section
with respect to such partner, mails to the tax
matters partner the notice specified in paragraph (2)
of section 6223(a) with respect to such taxable year,
or
(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 imposed by subtitle A
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.
If a partner is an unidentified partner, then section 6229(e) holds
open that partner’s period of limitations until at least one year after that
partner is properly identified. In Gaughf Properties, L.P. v.
Commissioner, 139 T.C. 219, 234 (2012), aff’d, 738 F.3d 415 (D.C. Cir.
2013), we held that section 6229(e) applies to indirect partners.
III. Analysis
According to respondent, section 6229(e) kept the limitations
period open with respect to Mr. Jump; thus, when the Milling FPAA was
issued, the assessment against Mr. Jump was not barred. Petitioner
disagrees. 4
For purposes of our analysis, we will assume that Mr. Jump was
an unidentified partner, within the meaning of section 6229(e)(1), of
4 In addition, petitioner argues that the period of limitations exception in
section 6501(c)(10) does not apply here because American Milling’s material adviser
made timely and sufficient disclosures. Respondent concedes that this exception is not
applicable, so we do not consider it.
8
[*8] both American Boat and American Milling and remained
unidentified with respect to both partnerships when the Milling FPAA
was issued. 5 Also we understand that petitioner is not arguing that Mr.
Jump filed a notification about the inconsistent treatment as set forth
in section 6222(b). 6
We already decided in American Milling I that the adjustments
in the Milling FPAA were to American Milling’s partnership items.
Petitioner’s Motion to Dismiss for Lack of Jurisdiction argued that the
adjustments in the Milling FPAA were computational adjustments
flowing from the American Boat FPAA, i.e., that those items were
affected items and that respondent was required to assess the resulting
tax liability directly against Mr. Jump within one year after the
American Boat FPAA litigation concluded at the district court (pursuant
to section 6229(d)(2)). Respondent contended that the adjustments in
the Milling FPAA (although affected items of American Boat) were not
computational adjustments but partnership items of American Milling.
We upheld respondent’s position and decided that the adjustments in
the Milling FPAA were American Milling’s partnership items and “not
merely affected items” or computational adjustments. American Milling
I, T.C. Memo. 2015-192, at *12 n.14. Against this backdrop we now apply
section 6229(e)(2).
A. Section 6229(e)(2)(A)
Section 6229(e)(2)(A) keeps the period of limitations open with
respect to an unidentified partner if the IRS mails to the TMP the FPAA
“before the expiration of the period otherwise provided under this
section.” Respondent argues that section 6229(e)(2)(A) applies. In
respondent’s words,
5Petitioner argues that Mr. Jump furnished identifying information to the IRS
as required in Treasury Regulation § 301.6223(c)-1 and therefore he was not an
unidentified partner under section 6229(e)(1) at the time the Milling FPAA was issued.
If Mr. Jump was not an unidentified partner as described in section 6229(e)(1), then
section 6229(e), including paragraph (2), would not apply. We need not decide this issue
because we conclude below that neither of the remaining conditions in section
6229(e)(2) is satisfied.
6 Petitioner does contend that respondent was on notice about any
inconsistencies, but we need not decide whether this was sufficient for purposes of
section 6222(b) because of our conclusion that the American Boat FPAA is the wrong
FPAA as we explain below.
9
[*9] failure to disclose the ultimate taxpayer, David Jump, on
the 1998 American Boat Form 1065 results in the period to
assess tax attributable to the items of American Milling
affected by the partnership items of American Boat being
open at the time the FPAA dated January 18, 2013, was
issued to the Tax Matters Partner of American Milling.
Petitioner counters that respondent did not issue the Milling FPAA
within the period prescribed in section 6229(e)(2)(A) and whether the
American Boat FPAA was issued timely is irrelevant.
We understand respondent’s reasoning to be as follows. Because
(1) section 6229(e) keeps the period of limitations open with respect to
both partnership items and affected items, and (2) the items adjusted in
the Milling FPAA are both partnership items of American Milling and
affected items of American Milling (as items affected by the American
Boat partnership items), then (3) for the purposes of section
6229(e)(2)(A), we must look at when the American Boat FPAA was
issued and not when the Milling FPAA was issued. That is, because the
items are affected items flowing from American Boat through American
Milling to Mr. Jump, the American Boat FPAA is the FPAA that counts
for determining the period of limitations. And, because (1) the American
Boat FPAA was issued within the period prescribed by section
6229(e)(2)(A), and (2) Mr. Jump was an undisclosed partner of American
Boat, (3) the period to assess against Mr. Jump the tax attributable to
the partnership items in the Milling FPAA was open at the time the
Milling FPAA was issued in January 2013.
Respondent’s argument works only if we can ignore the Milling
FPAA and treat the partnership items in it as affected items of American
Milling. The parties do not dispute that the American Boat FPAA was
issued within the prescribed limitations period, and they do not dispute
that the Milling FPAA was not. Their argument focuses specifically on
which FPAA counts for purposes of section 6229(e)(2).
We agree that section 6229(e) keeps the period of limitations open
with respect to both partnership items and affected items (if other
conditions are met). But the same items cannot be both partnership
items and affected items with respect to the same entity. See United
States v. Woods, 571 U.S. 31, 39 (2013) (stating that affected items “are
affected by (but are not themselves) partnership items”); see also Malone
v. Commissioner, 148 T.C. 372, 375–77 (2017) (explaining that if
something is not a partnership item, then it is, by definition, a
10
[*10] nonpartnership item and that affected items are nonpartnership
items). That is so, because partnership items are determined at the
partnership level in a single partnership-level proceeding (like this one).
See §§ 6221, 6231(a)(3). Affected items are determined at the partner
level, once the partnership-level proceeding is over. See § 6225. We have
jurisdiction only with respect to partnership items in a partnership-level
proceeding. See § 6226(f). We do not have jurisdiction to determine
partner-level items in a partnership-level proceeding. See id.
Respondent in American Milling I convinced us that the
adjustments in the Milling FPAA were partnership items of American
Milling, not merely affected items flowing from American Boat through
American Milling ultimately to Mr. Jump. Now, to satisfy section
6229(e)(2)(A), respondent asks us to conclude that the same items are
also affected items of American Milling. But if that were the case, then
they would be determined at the partner level (that is, Mr. Jump’s level)
and this TEFRA partnership-level proceeding would not be necessary or
appropriate. Respondent cannot have it both ways.
In effect respondent asks us to ignore an FPAA of a pass-through
partnership when determining whether an FPAA issued to that pass-
through partnership was issued within the prescribed limitations
period. But the statute provides no basis for looking beyond the Milling
FPAA as respondent argues. And because the Milling FPAA, the FPAA
before us, was not timely under section 6229(e)(2)(A), that section does
not hold open the period of limitations for assessment against Mr. Jump.
B. Section 6229(e)(2)(B)
Section 6229(e)(2)(B) extends the period of limitations with
respect to an unidentified partner when the partner reports items on his
personal tax return inconsistently with how those items are reported on
the partnership return and fails to notify the IRS about the inconsistent
treatment of a partnership item for that taxable year.
Respondent does not argue that Mr. Jump treated American
Milling’s partnership items inconsistently with American Milling’s
reporting, but rather that Mr. Jump and American Milling treated
American Boat’s, the source partnership’s, items inconsistently with
American Boat’s reporting, see Treas. Reg. § 301.6222(a)-2, and that Mr.
Jump failed to notify the IRS about the inconsistent treatment as
required by section 6222(b) and Treasury Regulation § 301.6223(c)-
1(b)(2) and (3). That inconsistent treatment between American Boat and
11
[*11] Mr. Jump’s reporting, coupled with Mr. Jump’s failure to report
the inconsistency, according to respondent, kept the period of limitations
open pursuant to section 6229(e)(2)(B) when the Milling FPAA was
issued. Petitioner argues that we compare only the reporting of
partnership items on Mr. Jump’s and American Milling’s returns; we do
not consider American Boat’s return at all.
A partner must either report partnership items consistently with
the partnership’s return or file Form 8082, Notice of Inconsistent
Treatment or Administrative Adjustment Request (AAR), in which it
either notifies the IRS of the inconsistent treatment or requests an
administrative adjustment of the partnership item. See §§ 6222(a)
and (b), 6227(a). In the absence of either notification or request for
administrative adjustment, a partner who treats items inconsistently
with the partnership’s treatment may be assessed a deficiency, without
notice, as a computational adjustment. See § 6222(c). We do not have
jurisdiction to redetermine a deficiency related to “the assessment or
collection of any computational adjustment.” § 6230(a)(1).
Had respondent determined that Mr. Jump’s reporting position
was inconsistent with American Boat’s, he could have made
computational adjustments to Mr. Jump’s return. And section 6229(e)
would have held open the limitations period for assessment against Mr.
Jump so long as he was an unidentified partner of American Boat. But
respondent instead issued the Milling FPAA initiating a partnership-
level proceeding. As we explained above, in American Milling I, T.C.
Memo. 2015-192, at *12 n.14, we concluded that the adjustments in the
Milling FPAA were not computational adjustments and could not be
assessed directly against Mr. Jump without the intervening
partnership-level determination. In other words, respondent could not
make computational adjustments to Mr. Jump’s return after the
conclusion of the American Boat litigation; determinations at the
American Milling level (that is, the intervening partnership-level) were
necessary.
Respondent cites Gaughf Properties in support of his attempt to
shift our focus from American Milling to American Boat for purposes of
section 6229(e)(2)(B). In Gaughf Properties we decided that the basis and
the nature of the contributed property were treated differently by the
indirect partners and the partnership. The partners’ defense in Gaughf
Properties was that the inconsistency reported by intermediary partners
should not be attributed to indirect partners. The Court rejected that
defense: it held that inconsistent treatment by disregarded entities and
12
[*12] an S corporation also constituted inconsistent treatment by
indirect partners because the income and losses flowed through to the
indirect partners’ personal returns. Gaughf Props., L.P., 139 T.C. at 236.
The problem with respondent’s application of Gaughf Properties is that
he ignores the intervening Milling FPAA. In Gaughf Properties we
considered the timeliness of the source partnership FPAA. As we have
said above, the timeliness of the source partnership FPAA (the
American Boat FPAA) is not before us. Rather the statute directs us to
the partnership from which “any partnership item . . . for such taxable
year” arose. That partnership is American Milling.
Under the plain wording of the statute, we must consider the
partnership items that flow to Mr. Jump. Those were American Milling’s
partnership items determined in the Milling FPAA. Because Mr. Jump
did not file inconsistently from American Milling, section 6229(e)(2)(B)
did not keep the period of limitations open with respect to Mr. Jump
when the Milling FPAA was issued.
IV. Conclusion
We hold that the statutory period for assessing tax attributable
to the partnership items (or affected items) of American Milling was not
open under section 6229(e) with respect to Mr. Jump on the date the
Milling FPAA was issued.
In reaching our holding, we have considered all arguments made
and, to the extent not mentioned above, we conclude that they are moot,
irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for petitioner.