T.C . M e m o . 2018-42

UNITED STATES TAX C OUR T

GARDNER

N. M AR C Y AND M AR IA M AR C Y, Pe titione rs v. C OM M ISSIONER OF INTER NAL REVENUE, R e sponde nt

Doc ke t No. 12149-04. File d April 3, 2018.
Ky le R . C o le m an , for pe titione rs. R ic ha rd J. Ha sse broc k, John W . Ste ve n s, a n d Anne M . C ra ig, for
re sponde nt.

M EM OR

ANDUM FINDINGS OF FAC T AND OPINION GALE, Judge : Pe titione rs pe titione d the C ourt to re de te rm ine re sponde nt’ s de te rm i nation of a

$255,163 de fic ie nc y

in the ir Fe de ra l inc om e tax for 2000 a nd a- 2 -

[*2] $51,033 a c c ura c y -re late d pe na lty unde r se c t ion 6662(a) and (b)(1) a nd (2). 1 The de te rm ination ste m s from re sponde nt’ s disa llowa

nc e of pe titione rs’ c la im e d de duc tions for a $802,916 short-term c a pita l loss a

nd a $300,675 nonpa ssive loss that we re purporte dly

pa sse d through to pe t itione r Gardne r N. M arc y a s a re sult of his inve stm e nt in a

so-c a lle d Son-of-B OSS transa c tion involving offse tting fore ign
c urre nc y options. 2 R e sponde nt a sse rts through a n am e nde d a

nswe r that pe titione rs
a lso a re lia ble for an inc re a se d a c c ura c y -re late d pe na lty of $102,065 under se c tion 6662(a ) and (h). Pe titione rs c onc e de d at tria l tha t re sponde nt c o rre c tly

de t e rm i ne d

the de fic ie nc y

(subje c t to a

sm a ll ba sis a djustm e nt to whic h the pa rtie s a gre e d), a

nd
e vide nc e wa s the re a fte r re c e ive d c onc e rning whe the r pe titione rs ha d re a s ona ble
c a use unde r se c tion 6664(c ) that would pre c lude im position of the

pe na lty
. R e sponde nt subse que ntly c onc e de d the pe na lty
. Howe ve r, in vie w of the fa c t tha t the d e fic i e n c y

arose from re sponde nt’ s disa llowa nc e of loss de duc tions pa sse d through to Mr. M arc y

from a purporte d pa

rtne rship in whic h he he l d a n inte re st, a

1 Unle ss othe rwise indic at e d, se c tion re fe re nc e s a re to the Inte rna l R e ve nue C ode of 1986, a s in e ffe c t for the y e ar a t issue , R ule re fe re n c e s a

re to the Tax C ourt R ule s of Pra c tic e a

nd Proc e dure , a

nd dolla r am ounts a

re rounde d to the ne are st dolla r. 2 R e sponde nt’ s only

othe r a djustm e nts we re c om puta tiona l, re sulting from the d isa llowa

nc e of the se l oss de duc t ions.- 3 -

[*3] jurisdic tiona l issue arise s; na m e ly , whe the r this C ourt la c ks jurisdic tion by virtue of se c tion 6221 to e nte r a de c ision c o nc e rning the de fic ie nc y and pe n a lty that re l ate to re sponde nt’ s a djustm e nts to the se loss de duc tions. FINDINGS OF FAC T The pa rtie s subm itte d stipula

te d fa c ts a

n d e xhibits, which we inc o rporate
. Pe titione rs we re m arrie d at the c lose of the ir 2000 ta xa ble y e ar, and the y

file d a joint Fe de ra l inc o m e tax re turn for tha t y e ar. The y

re side d in Illinois whe

n the ir pe tition wa s tim e ly file d. During 2000, Mr. M arc y

wa s the m a

jority sha re holde r a nd pre s ide nt of a

n
e ngine e ring/m anufa c turing firm , Syntronic s Instrum e nts, Inc
. (Syntronic s), tha t
m anufa c ture d

de fle c tion c oils for c athode ray tube s use d in te le v i sions a nd
c om pute r sc re e ns, a

nd re late d e le c tronic c om

pone nts. Sy

ntronic s ha d form e d a

n
e m ploy e e stoc k owne rship pla n (ESOP) in 1999. On or a bout Ja nua ry 21, 2000, M r. M arc y

sold som e of his Sy

ntronic s stoc k to the ESOP for $1,143,777, re a liz ing
a ga i n of $1,080,531. In orde r to re duc e or e lim inate any taxattributa ble to tha t ga in, M r. M arc y de c ide d to inve st in a

so-c a lle d Son-of-B OSS tran s a c tion. 3 He wa s a ssiste d in this

3 The m e c ha

nic s of a Son-of-B OSS transa c tion ha ve be e n de s c ribe d e lse whe re . Se e ge ne ra l ly Kligfe ld Holdings v. C om m issione r, 128 T.C . 192 (2007); Notic e 2000-44, 2000-2 C .B . 255.- 4 -

[*4] re ga rd by his longtime fina

nc ia l a dvise r and the la

w firm of Je nke ns & Gilc hrist. Thefina

nc i a l a dvise r and a

Je nke ns & Gilc hrist pa

rtne r e xpla ine d to M r. M arc y tha t e ffe c ting theSon-of-B OSS transa c tion would re q uire the form ation of
va rious e ntitie s, inc luding a lim ite d lia bility c om pa ny , a n S c orporation, a

n d a lim ite d pa rtne rship. 4 Je nke ns & Gilc hrist did the ne c e s sa ry work to form

the se thre e e ntitie s, with M r. M arc y

signing the

ne c e ssa ry doc um e nts. The first e ntity form e d wa s GM Eve rgre e n Inve stm e nts LLC (GM LLC ), a s a lim ite d lia bility c o m pa ny , the sole
m e m b e r of whic h wa s M r. M arc y . 5 The se c ond e ntity form e d wa s GM Eve rgre e n Inve stors, Inc . (GM E I), a s a c orporat ion with Mr. M arc y a s sole sha

re holde r. M r. M arc y the re a fte r e le c te d on GM EI’ s be ha lf for it to betre ate d a s a n S c orporation. The third e ntity

form e d wa s Eve rgre e n Partne rs (EP), a s a lim ite d pa

rtne rship, in whic h GM EI owne d

a 99% lim ite d pa

rtne rship intere st a

nd GM L LC owne d a

1% ge ne ra l pa

rtne rship inte re s t. M r. M arc y signe d EP’ s pa

rtne rship a gre e m e nt, in his
c a pa c ity a s a m e m be r of GM LLC and a s pre side nt of GM EI. EP wa s form e d for

4 Our use of the fore going te rm inology to re fe r to the e n titie s purporte dly c re ate d to e ffe c t the Son-of-B OSS transa c tion is for c o nve n ie nc e only and c arrie s no im plic at ion tha

t any suc h e ntitie s we re va lid for Fe de ra l inc om e tax purpose s. 5 B e c a u se it is a single -m e m

be r lim ite d lia

b ility c om p any , GM LLC would be disre ga rde d a s a n e ntity for Fe de ra l inc o m e tax purpose s. Se e se c . 301.7701- 2(c )(2), Proc e d. & Adm in. R e gs.; se e a lso M urphy v. C o m m issione r, 129 T.C . 82, 85 n.5 (2007). For c la

rity , we c ontinue to re fe r to the e ntity a s GM LLC
.- 5 -

[*5] the sole purpose of e ffe c ting theSon-of-B OSS tran sa c t ion. Noneof the thre e
e ntitie s file d a

Fe de ra l tax re turn for 2000. Pe titione rs’ 2000 Fe de ra l inc om e tax re turn re porte d on Sc he d ule D, C a pita l Ga ins a nd Losse s , a

long-te rm

c a pita l ga in of $1,080,531 from M r. M a rc y ’ s sa le of his Sy ntronic s stoc k to the ESOP. The re turn a lso re porte d on Sc he dule D a pa ssthrough ne t short-te rm loss of $802,916 “ from

Sc he dule (s) K-1” and re porte d on Sc he dule E, Supple m e n ta l Inc om e and Loss, a pa ssthrough “

Nonpa ssive loss from Sc he dule K-1” of $300,657. The re turn re porte d tha

t EP wa s the pa ssthrough
e ntity tha t inc urre d the $300,657 loss, but the re turn did not ide

ntify the pa ssthrough e n tity

tha t inc urre d the $802,916 loss. In full, pe titione rs’ 2000 re turn re porte d tota l inc om e of $236,934 from the following sourc e s:- 6 -

[*6] W a ge s, sa la

rie s, e tc . $212,605 Ta xa ble inte re st 1,849 Ordina

ry divide nds 25,409 Ta xa ble re funds of Sta

te and loc a l inc om e taxe s 300 C a pita l ga in 1 279,573 Supple m e nta l inc om e : R e nta l inc om e 17,730 Nonpa ssive loss from EP (300,657) Pa ssive inc o m e from trust 125 (282,802) Total inc om e 236,934

1 This a m ount e qua ls the $1,080,531 gain on the sa le of the Syntronic s stoc k plus unre late d c a p i ta l ga in distributions tota ling $1,958, le ss the $802,916 reporte d loss. In the notic e of de fic i e nc y , re sponde n t disa llowe d the re porte d losse s of $802,916 a

nd $300,657, sta

ting a s follows: A. C a pita l Ga in or Loss The short te rm

c a pita l loss of $802,916 c la i m e d on y our 2000 inc om e tax re turn is disallowe d sinc e y ou fa ile d to e sta blish tha t y ou inc urre d a loss in the

am ount c la im e d during thetaxa ble y e ar, and if inc urre d, the loss is de d

u c tible unde r any provision of the Inte rna l R e v e nue C ode . In a ddition, y ou ha ve fa ile d to e s ta

blish tha t de duc ting suc h loss is not lim

ite d by any provision of the

Inte rna l R e ve nue C ode inc luding, but not lim

ite d to, I.R .C . Se c tions 165, 183, 212, 465 a nd 704(d). Ac c ordingly

y our taxa ble inc om e is inc re a se d by $802,916.
* * * * * * * D. Sc he dule E--Inc om e /Loss--Pa rtne rship/S-C orps--Non-Pa ssive The ordina

ry loss c la im e d on y our 2000 ta x re t urn in theam ount of $300,675 is disa

llowe d sinc e y ou fa ile d to e s ta blish tha t y ou inc urre d- 7 -

a loss in the

am ount c la im e d during thetaxa ble y e ar and, if inc urre d, the loss is de d

u c tible unde r any provision of the Inte rna l R e v e nue C ode . In a ddition, y ou ha ve fa ile d to e s ta

blish tha t a ny loss de duc tion is not subje c t to limita

tions by any provision of the

Inte rna l R e ve nue C ode inc luding, without lim i tations I.R .C . §§165(a ), 183, 465 a nd 704(d). Ac c ordingly

y our taxa ble inc om e is inc re a se d by $300,675. E. Inve stm e nt in Eve rgre e n Partne rs, GM Eve rgre e n

Inve stm e nts, LLC and GM Eve rgre e n Inve stors, Inc
. It is de t e rm i ne d tha

t the fore going e ntitie s la c k e c onom ic substa

n c e , we re form e d a

nd a va ile d of with theprinc ipa l purpose of re duc ing y our fe de ra l inc o m e tax lia bility in a fa s hion inc onsiste nt with subc ha pte r K and othe rwise c onstitute sha m s for fe d e ra l inc om e tax purpose s. In a d d ition, y o ur inve s tm e nts in the s e e ntitie s we re c onduc te d without a

profit m o tive and la c k e c onom ic substa nc e . Ac c ordingly , no de duc tions a re a llowe d to y ou in c onne c tion with the se e ntitie s. R e sponde nt a lso de te rm ine d in the notic e of de fic ie n c y tha t pe titione rs a

re lia ble for an a c c ura c y -re late d pe n a lty unde r se c tion 6662(a ) an d (b)(1) and (2) for the unde rpay m e nt re sulting from

the disa llowa

nc e of the loss de duc tions. OPINION W e m u st de c ide whe the r we have jurisdic tion ove r this c a se so tha t we m a y
e nte r a de c ision re fle c ting thepa rtie s’ re spe c tive c onc e ssions. W e dire c te d the pa rtie s to file m e m oranda

se tting forth the ir positions on this issue , a nd the y have done so. B oth side s a gre e that we have jurisdic tion to de c ide this c a se in its
e ntire t y . Jurisdic tion, howe ve r, is funda m e nta l, a nd the pa rtie s c annot c onfe r jurisdic tion on the

C ourt by the ir a gre e m e nt. Se e , e . g., Ste wart v. C o m m issione r, [*7]- 8 -

[*8] 127 T.C
. 109, 112 (2006); Eva ns Publ’ g , Inc . v. C om

m i ssione r, 119 T.C . 242, 247 n.5 (2002). C ongre ss provide s the bounds of our jurisdiction, se e se c . 7442; Phillips Pe trole um

C o . v. C om

m issione r, 92 T.C . 885, 888 (1989), a nd we m ust
a ssure ourse lve s tha

t we hav e the re quisitejurisdic t ion to de c ide a m atte r whe ne ve r our jurisdic tion ove r that m atte r is subje c t to re a sona ble doubt, se e Esta

te of R ose n v. C om m issione r, 131 T.C . 75, 81 (2008). The C ourt, sua sponte , c an que stion jurisdic tion a

t a ny tim e . Se e R aym ond v. C om m i ssione r, 119 T.C . 191, 193 (2002). W e a lwa

y s ha v e jurisdic tion to de t e rm i ne whe the r we have jurisdic tion. Se e Fra z e ll v. C o m

m issione r, 88 T.C . 1405, 1411 n.7 (1987). Pe titione rs tim e ly

pe titione d the C ourt to re de te rm ine the de fic ie nc y and the
se c t ion 6662(a) a c c ura c y -re late d pe na lty se t forth in thenotic e of de fic ie nc y unde rly ing this c a s e . In a n am e nde d a

nswe r, re sponde nt subse que n tly a sse rte d a

n inc re a se in the a c c ura c y -re late d pe na lty unde r se c tion 6662(h). Se c tion 6213(a )
e m powe rs the C o urt to re de te rm ine suc h a de fic i e nc y and a

ny re late d pe n a ltie s, se e GAF C o rp. & Subs. v. C om m issione r, 114 T.C . 519, 521 (2000), a bse nt a c ontra

ry provision in the C o de . B e c a use the de fic ie nc y

and the a c c ura c y -re lat e d pe na lty at issue are re lat e d to a

purporte d

pa rtne rship, theque s tion a

rise s whe the r se c tion 6221 is suc h a c o ntra

ry provision. Se c tion 6221 gene ra lly re quire s tha

t “ any pa rtne rship ite m

(and the a

pplic a bility of a ny pe na lty , a ddition to ta

x, or a d ditiona l- 9 -

[*9] am ount whic h re late s to a n a djustm e nt to a

pa rtne rship ite m ) sha ll be de te rm i ne d at the pa

rtne rship le ve l” ; tha

t is, in a proc e e ding a

t the pa rtne rship le ve l unde r the unifie d a

udit a nd litiga tion proc e d

ure s of the Tax Equity

an d Fisc a l R e sponsibility

Ac t of 1982 (TEFR

A), Pub. L. No. 97-248, se c . 402(a ), 96 Sta t. at 648 (TEFR

A proc e d ure s ). Se e R ande ll v. Unite d State s, 64 F.3d 101, 103 (2d C ir. 1995); H.R . C o n f. R e pt. No. 97-760, a t 599-600 (1982), 1982-2 C .B . 600, 662-663. Thus, pursua

nt to se c tion 6221, “

pa rtne rship ite m [s] ” and the “ a pplic a bility of a ny pe na lty * * * whic h re lat e s to a n a djustm e nt to a

pa rtne rship ite m ” m

ust be de te rm i ne d in a

TEFR A proc e e ding involving the pa rtne rship; we la c k jurisdic tion to a d judic ate “ pa

rtne rship ite m [s] ” an d re l ate d pe na ltie s in a de fic ie nc y

proc e e ding
suc h a s this involving a

n individual pa

rtne r. M a xwe ll v. C om

m i ssione r, 87 T.C
. 783 (1986). For purpose s of se c tion 6221, the te rm “ pa rtne rship ite m ” is de fine d by
re fe re n c e to a

“ pa rtne rship” , se e se c . 6231(a )(3), a nd the te rm

“ p a rtne rship” de note s “ any

pa rtne rship [othe r tha

n a “ sm a ll pa

rtne rship” within the

m e aning of
se c t ion 6231(a)(1)(B )] re q uire d to file a re turn unde r se c tion 6031(a )” , se e se c . 6231(a )(1)(A) a n d (B ). 6 Thus, with one re le v ant e xc e ption, the a pplic a bility of the TEFR A proc e dure s to the C om

m issione r’ s a djustm e nts re q uire s a finding tha

t the

6 Se c . 6231(a )(1)(B ) provide s spe c ific a lly tha t suc h a “ sm a ll pa

rtne rship” is not a “ pa rtne rship” for purpose s of the TEFR A proc e dure s.- 10 -

[*10] e n tity

whose ite m s a

re be ing a djuste d is a

“ pa rtne rship” . The re le va

nt
e xc e ption is tha

t TEFR A proc e d ure s a lso a

pply to a n e n tity (or a

purporte d e ntity ) that is not a “ p artne rship” if the e ntity (or the purporte d

e ntity): (1) file d

a pa rtne rship re t

urn for the y e ar a t issue and (2) would not ha ve be e n a “ sm a l l pa rtne rship” ha d it a c tua l l y

be e n a pa rtne rship. Se e se c s. 6231(g), 6233; Pe ta lum a FX Partne rs, LLC v. C om m issione r, 131 T.C . 84, 92-93 (2008), a ff’ d in pa rt, re v’ d in pa rt on a nothe r issue , 591 F.3d 649 (D.C . C ir. 2010); B C P Tra ding & Invs., LLC v. C om m issione r, T.C . M e m o. 2017-151, a t *62; Am . M illing, LP v. C om m issione r, T.C
. M e m o. 2015-192, a t *21 n.19; 436, Ltd. v. C om m issione r, T.C . M e m o. 2015-28, a

t *35-*36; 6611, Ltd. v. C om m issione r, T.C . M e m o. 2013- 49, a t *62; se c . 301.6233-1T(a), (c )(1), (d)(1)(i), Te m pora ry Proc e d. & Adm in. R e gs., 52 Fe d. R e g. 6795 (M ar. 5, 1987); se e a lso Huff v. C om m issione r, 138 T.C
. 258, 271 (2012) (“ [B ] e c a use NASC O did not file

a Fe de ra l pa

rtne rship re turn a

nd be c a use NASC O is c la ssifie d a s a fore ign c orporation for Fe de ra l tax purpose s, the TEFR A proc e dura l rule s do not a pply .” ), re v’ d

on a nothe r issue , 743 F.3d 790 (11th C ir. 2014). Thefiling of a pa rtne rship re turn, e ve n whe n a n e ntity is not in fa c t a pa rtne rship, triggers the a

pplic ation of theTEFR

A proc e dure s unle ss the
e ntity (or purporte d e ntity) is (or would ha ve be e n) a

“ sm a ll pa

rtne rship”
.- 11 -

[*11] Se c tion 6031(a

) re quire s (with e x c e ptions not a pplic a ble he re ) that

an a nnua l
re turn be file d by

e ve ry pa rtne rship within the m e aning of se c tion 761(a). Se c tion 761(a ) ge ne ra l ly

provide s tha

t a ny uninc orporate d e ntity

(othe r tha

n a n e sta te or a trust) is a pa rtne rship if a

busine ss, fina

nc ia l ope ra t ion, or ve nture is c a rrie d on through thee ntity . Se e a lso se c . 7701(a )(2); se c . 1.761-1(a ), Inc om e Ta xR e gs. C a se la w inte rpre ts the te rm

“ p artne rship” to re quire findings tha t “ the pa rtie s in good fa ith a

nd a c ting with a

busine ss purposeinte nde d to join togethe r in the pre s e nt c o nduc t of the e nte rprise ” , C om m issione r v. C u lbe rtson, 337 U.S. 733, 742 (1949), a nd pe rsons to bepa

rtne rs m ust ha ve “ re a lly and truly inte n de d to join toge the r [“ the ir m one y , goods, la bor, or skill” ] for the purpose of c a rry ing on busine ss a

nd sha ring in theprofits or losse s or both” , C om m issione r v. Towe r, 327 U.S. 280, 286-287 (1946). Fe de ra l la w c ontrols thec ha

ra c te riz ation of a

n
e ntity a s a pa rtne rship for Fe d e ra l inc om e tax purpose s, a nd the fa c t tha

t a n e ntity is or is not a

pa rtne rship unde r a

pplic a ble State or c o m

m on la wis of no c onc e rn. Se e C om m i ssione r v. Towe r, 327 U.S. a t 287-288; Esta

te of Ka hn v. C om m issione r, 499 F.2d 1186 (2d C ir. 1974), a ff’ g Grobe r v. C om m issione r, T.C . M e m o. 1972-240; Luna v. C om m issione r, 42 T.C . 1067, 1077 (1964). R e sponde nt de te rm ine d in the notic e of de fic ie n c y tha t EP, GM L LC , a

nd GM EI “ la c k e c onom ic substa nc e * * * a

nd othe rwise c onstitute

sha m s for fe de ra l- 12 -

[*12] inc om e tax p urpose s” and tha t a s a re sult no de duc tions we re a l lowe d to M r. M arc y in c onne c tion with the se e ntitie s. Thus it is re sponde nt’ s position tha t EP is not a va l id pa rtne rship for Fe de ra l inc om e tax purpose s. W e are m indful tha t findings c onc e rning theinva lidity of a pa rtne rship for la c k of e c onom ic substa nc e
are routine ly

m a de i n pa

rtne rship-le ve l TEFR

A proc e e dings tha

t re sulte d from

the
e ntity ’ s ha

ving file d a

pa rtne rship re t

urn. Se e , e .g., Unite d State s v. W oods, 571 U.S. 31, , 134 S. C t. 557, 564 (2013); Southga te M a ste r Fund, LLC v. Unite d Stat e s, 659 F.3d 466 (5th C ir. 2011); Pe ta lum a FX Partne rs, LLC v. C om m issione r, 131 T.C . 84, 92-93 (2008). The que stion he re , by

c ontra st, is whe t

he r the C ourt ha s the re quisite jurisdic tion to m ake tha t finding in a

non-TEFR

A de fic i e nc y proc e e ding whe re the e ntity (or purporte d e ntity) did not filea pa rtne rship re turn for the y e ar a t issue . W e c onc lude tha t we do. As note d , we a lwa

y s ha ve jurisdic t ion to de t e rm i ne whe the r we have jurisdic tion. De te rm ining whe the r we have jurisdic tion in this c a se re quire s tha t
we de c ide whe the r EP is a “ pa rtne rship” subje c t to TEFR A proc e dure s. If so, the disa llowe d loss de duc t ions a re “ pa rtne rship ite m [s] ” , se e se c . 6231; se c . 301.6231(a)(3)-1(a )(1)(i), Proc e d. & Adm in. R e gs., a n d se c tion 6221 would de prive us of jurisdic tion ove r the m in this de fic ie n c y proc e e ding. C onsiste nt with the g e ne ra l sc he m e of TEFR A, whe re a

taxpa y e r in a non-TEFR

A de fic ie nc y- 13 -

[*13] proc e e ding se e k s to de m onstra te e ntitle m e nt to de duc t a

loss from a pa ssthrough e n tity

tha t did not file

a Fe de ra l pa

rtne rship re turn for the y e ar of the loss, the C ourt m

u st de c i de in tha

t proc e e ding whe t

he r the e ntity

is a “ pa rtne rship”
. Se e Huff v. C om

m issione r, 138 T.C . at 268-271 (de c iding in a non-TEFR

A de fic ie nc y

proc e e ding tha

t a lim ite d lia

bility c om pa ny tha t did not file

a Fe de ra l pa rtne rship re t

urn wa s not a

“ pa rtne rship” subje c t to TEFR A proc e dure s); La

ttin v. C om m issione r, T.C
. M e m o. 1995-233 (to sa m e e ffe c t ); se e a lso B u c hsba um v. C om m issione r, T.C
. M e m o. 2002-138 (de c iding in a non-TEFR

A de fic i e nc y proc e e ding tha

t a pa rtne rship wa s not a

sm a ll pa rtne rship a

nd holding tha

t the C ourt thus la c ke d

jurisdic tion to de te rm ine whe the r the taxpa y e r inc urre d losse s from the pa rtne rship); Alhouse

v. C om m issione r, T.C . M e m o. 1991-652 (de c iding in a non-TEFR

A de fic ie nc y

proc e e ding tha

t a pa rtne rship e xiste d, de priving the Ta x C ourt of jurisdic tion ove r a djustm e nts in thenotic e of de fic ie n c y pe rta ining to pa rtne rship or a ffe c te d

ite m s), a ff’ d, 12 F.3d 166 (9th C ir. 1993). EP did not file a pa rtne rship re t

urn at a ny tim e ; thus, if we find tha t EP is not a

“ pa rtne rship” , the n the p urporte d losse s pa sse d through to M r. M arc y a s a re sult of his inte

re st in EP
are n ot “pa

rtne rship ite m [s] ” , nor a

re the pe na ltie s at issue re late d to a n a djustm e n t to a “ pa rtne rship ite m ” . As a

c onse que nc e , se c tion 6221 would not pre c l ude our jurisdic tion to e nte r a

de c ision re fle c ting thepa rtie s’ c onc e ssions in this c a se .- 14 -

[*14] At the c om

m e nc e m e nt of tria l, pe titione rs’ c ounse l--a fte r having indic ate d throughout pre tria l proc e e dings tha t pe titione rs inte nde d to c o nte st the de te rm i nation of thede fic ie nc y --state d tha t “ we will stipula

te to the notic e of de fic ie nc y

tax lia bility * * * [subje c t to a

sm a l l ba sis a djustm e nt tha t is not in dispute ]
. So tha

t toda y a ll we are doing is a

pe na lty pa rt”
. R e sponde nt’ s c ounse l the re upon sought c la

rific at i on tha

t “ [p] e titione rs a

re c onc e d ing the substa

ntive
a djustm e nts se t

forth in the notic e of de fic ie nc y * * * [subje c t to the
a fore m e ntione d ba sis a d

justm e nt] .” Pe titione rs’ c ounse l offe re d no obje c tion to
re sponde nt’ s c o unse l’ s c ha ra c te riz ation. Thesubsta

ntive a djustm e nts in thenotic e of de fic ie nc y

inc lude d the propositions tha t EP, GM LLC , a

nd GM E I “ la c k
e c onom ic substa

nc e * * * a

nd othe rwise c o nstitutesha m s for fe d e ra l inc om e tax purpose s .” Pe titione rs’ c onc e ssion tha t EP is a sha m without e c onom ic substa nc e is fata l to a

finding tha

t it is a va lid pa rtne rship for Fe de ra l inc om e tax purpose s. Eve n a pa rt from the fore going c onc e ssion, thee vide n c e a dduc e d at tria l
e sta blishe s, a nd our findings re fle c t, tha t EP’ s sole purpose wa s to e ffe c t the Sonof-B OSS tran sa c tion. The re is no e vide nc e tha t EP c arrie d on a

ny othe r busine ss
a c tivity
. La c king a

busine ss purpose , EP would not c onstitute a pa rtne rship unde r
e sta blishe d c a se la

w, whic h pre c onditions a

finding of pa

rtne rship sta

tus upon the
e xiste nc e of two or m ore pa rtne rs who, a c ting with a

busine s s purpose , inte nde d to- 15 -

[*15] join toge the r in the pre se nt c onduc t of a n e nte rprise by

c o m bining the ir
m one y , goods, la

bor, or skill for the

purpose of c arry ing on tha t e nte rprise and sha ring in the

profits or losse s or both. Se e C om m issione r v. C ulbe rtson, 337 U.S.
at 742; C om

m issione r v. Towe r, 327 U.S. a t 286-287. W e c onc lude tha

t se c tion 6221 doe s not lim it our jurisdic tion in this c a se be c a use EP is not a

pa rtne rship, nor did it file

a Fe de ra l pa

rtne rship re turn, for the y e ar a t issue . C o nse que ntly , the purporte d loss de duc tions M r. M arc y c la im e d a s pa ssthrough item s from

EP are not, within the

m e aning of se c t ion 6221,

“ pa rtne rship ite m [s] ” and the pe na ltie s a rising from

re sponde nt’ s disa llowa

nc e of those de duc tions do not “ re late [] to a

n a djustm e nt to a

pa rtne rship ite m ” . W e the re fore hold tha

t we have jurisdic tion to e nte r a de c ision in this c a se
re de te rm ining thede fic ie nc y an d pe na lty a s de te rm ine d in the notic e of de fic ie nc y or inc re a se d by

the a sse rtion in the

am e nde d a

n swe r. To re fle c t the pa

rtie s ’ c onc e ssions,
De c ision will be e nte re d unde r R u le 155.