F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

C A N D Y C E M A R

T I N 1999 I R R E V O C A B L E T R

U S T , a Partner other than the Tax Matters Partner; C O N S T A

N C E G O O D Y E A R 1997 I R R E V O C A B L E T R

U S T , a Partner other than the Tax Matters Partner, Petitioners-Appellants
,

v.

U N I T E D S T A T E S O F A M E R I C A , Respondent-Appellee

. No. 11-17879

D.C. Nos. 4:08-cv-05150-PJ H 4:08-cv-05151-PJ H

OPI NI ON

A ppeal from the United States District Court for the Northern District of California Phy llis J . Hamilton, District J u dg e, Presiding

Arg ued and Submitted October 16, 2013—San F rancisco, California

F iled J anuary

13, 2014

B efore: Sidney

R. Thomas and M. Marg aret McKeown, Circuit J udg es, and Mark W . B ennett, District J udg e. *

Opinion by

J udg e Thomas

* T h e Ho n o rab le MarkW . B en n ett, District J u d g e f o r th e U.S. District Co urt f o r th e No rth ern District o f Io w a, sittin g b y

d esig n atio n

.M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES

2

SUMMARY * *

Tax

The panel affirmed in part and reversed in part the district court’s denial of a petition for readjustment o f p artnership items, b ro ug ht by a g roup of heirs of the founders o f Chronicle P u b lishing Company in connection with its sale and resulting tax consequences.

The heirs owned a portion o f the company , either outrig ht

or throug h family trusts. T h ey formed a tiered partnership
structure and commenced a series of transactions desig ned to minimiz e their tax liability from th e co m p any ’s sale. I n connection with an I RS audit of tax r e turns for two partnerships involved in the transactions, the I RS e x ecuted
ag reements ex tending the limitations pe r iod for assessing
tax es. The I RS then issued a Notice o f Fi n a l Partnership Administrative Adjustment (F PAA) that eff e c t i v e l y i n c reased the heirs’ tax liability

. The heirs, via two t r u sts that were partners in the partnerships, challeng e d the F PAA as timebarred.

After reviewing partnership tax ation law and t h e lang uag e of the ex tension ag reements, the panel concluded that some of the adjustments made in the F PAA w ere directl y d ue to,

caus e d by
, or g enerated by partnership items that flow throug h to the partners (appellants), and that the ex tensio n ag reements therefore encompassed some of the adjustments

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co u rt. It h as b een p rep ared b y

co urt staf

f f o r th e co n v en i en ce o f

th e read er.M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES 3

made by the F PAA and p ermitted the I R S t o a s sess new tax on appellants today

.

COUNSEL

Michael J

. Desmond ( arg ued), L aw Offices of Michael J

. Desmond, APC, Santa B arbara, California; Ronald L . B uch, J r. and Saul Mez ei, B ing h am McCutchen L L P, Washing ton, D.C., for Petitioners-Appellants.

Arthur T. Catterall (arg

ued), Att o r

ney , Kathry

n Keneally
, As s i s tant Attorney General, Tamara W

. Ashford, Deputy Assistant Atto rney General, Gilbert S. Rothenberg
, a nd J onathan S. Cohen, A ttorney s, United States Department o f J ustice, T ax Division, Washing ton, D. C

. ; Melinda L

. Haag
, United States Attorney
, and Tom Mo o r e , Assistant United States Attorney
, United States Attorney s’ Office for the Northern District of California, San F rancisco, California, for Respondent-Appellee.

OP INION

THOMAS, Circuit J udg e :

I n this a ppeal, w e ex a mine some of the tax consequences

a r i s ing from the sale of the Chronicle Publishing Compan y

a nd, specifically
, whether the I nternal Revenue Service’s proposed adjustment of certain partnership tax i tems was time barred. Althoug h the ulti m ate issue is relatively straig htforward, both the back story and the leg al framework

are somewhat complex
, requiring us to delve deep in the heart of tax es.M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

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I

The storied Chronicle Publishing Company was founded in the mid-1800s in S a n F r a n cisco by teenag e brothers Charles and M. H. de Young with a borrowed $20 g old piece. Their first venture, the Daily D ramatic Chronicle
, beg an with a small circulation, but its readership q uickly tripled when it
pro vided the only breaking news accounts of the assassination of Abraham L incoln. I t was rechristened a s t he Morning Chronicle and ultima t e ly the San Francisco Chronicle

. W i thin a few decades, it became the larg est circula t i o n newspaper on the W est Coast. 1

After the death of Charles de Young in 1880, M. H. de Young assumed control of the paper, i n c o r p o rated it as the Chronicle Publishing Com p a ny (“Chronicle Publishing ” ) in 1906, a nd ran t h e en terprise until his death in 1925. He left the newspaper a ssets in an irre v o c a ble trust that would terminate on the death of all five of his children. F rom M. H

. de Young ’s death until the early 1990s, a family member remained at the h elm of the med i a em pire. Over the course of time, Chronicle Publishing ex panded its operations, acquiring a television station a long with other properties a nd forming a book publishing company

.

The Chronicle was not the only media g ame in town. M ining entrepreneur Georg e Hearst a cquired the r ival San Francisco Examiner in 1880 and turned its manag ement over to his son W illiam Rand o lph H earst seven y ears later, when the elder Hearst becam e a U n i t ed States Senator. Over the

nex t century , the Examiner and Chronicle eng ag ed in a fierce

1 See gen era lly J o h n P

. Yo un g , Jo u r na lism in Ca lifo rn ia 6 8

– 71 (1 9 1 5 ).M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

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competition f

or readers. 2 W ith both papers ex per i encing financial challeng es in the early 1960s, the Examiner and the Chronicle entered into a joint o perating and profit sharing
ag reement in 1965. The joint operating ag r e ement also
g ranted Hearst the rig ht of first refusal if Chroni c le Publishing w ere put u p for sale. Reilly v. Hearst Corp.
, 107 F .Supp.2d 1192–99 (N.D.Cal. 2000).

W h en M. H. de Young ’s last c hild died in 1988 a nd the irrevocable trust dissolved, Chronicle Pu b l i s h i n g e lected to be treated as a Delaware Subchapter S c orporation. Companies
g enerally take such actions to avoid the double tax ation attendant to “C” corporations, where ta x e s are assessed on bot h c o r porations and shareholders. The Subchapter S corporate structure is o ften employ e d by small, family -held businesses. However, to discourag e misuse of the Subchapter S vehicle, Cong ress provided that Subchapter S corporations would be subject to the n ormal double t a x a t i o n if the corporation w ere sold within ten y ears of its creation. Estate of Litchfield v. Comm’r
, 97 T .C.M. (CCH) 1079, at *2 (T.C. 2009) (citing 26 U.S.C. § 1374).

I n the late 199 0 s , amidst deteriorating family relationships and financial challeng e s, and after the ten-y e ar Subchapter S w a i t ing period ex pired, the de Young heirs decided to sell most of the assets o f Chronicle Publishing to the rival Hearst Corporation and distribute the assets among the h e i r s according to their ownership percentag es. The Chronicle was to continue as a m o r n i ng paper, and the Examiner was sold to a third party

.

2 S ee g en era lly Dav id Nasaw
, Th e Ch i ef: T he Life o f W illia m Ra nd

o l p h Hea r st 5 9

– 80 (2 0 0 6 ).M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

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I n its discussions of t h e sale, Chronicle Publishing ’s B oa r d of Directors realiz ed the possibility of future liability arising from a v a r iety of potential issues, such a s environmental problems, c ontractual disputes, an d t he risk that Chronicle Publishing mig ht lose its Subchapter S status. Thus, the D irectors prepared a recontribution ag re em ent, which provided that the shareholders w ould c o n tribute o n a p r o rata basis if there were future Chronicle Publishing liabilities. Each shareholder was required to ex ecute the recontribution ag reement as a co n d i t ion of receiving a distribution of proceeds from the Chronicle Publishingsale.

Our c ase involv e s o n e g roup of de Y oung h eirs,

s p e c ifically Conseulo Martin (M. H. de Y o u n g’ s g randdaug hter) a

nd her five c hildren (“the Martin heirs”). The Martin heirs owned 1 6

. 6 7% of the shares of Chronicle P u blishing
, either outrig ht or throug h fourteen family trusts (“the Martin F amily Trusts” or “trusts”). Some of the trusts had ex isted since the 1980s; others were c r eated just before the Chronicle Publishing sale.

The Martin heirs soug ht advice on how to minimiz e the
tax consequences of the proposed Chronicle Publishing sale and to protec t themselves ag ainst future liabilities p osed b y the recontr i b u t ion ag reement. After consulting with several
tax specialists
, the Martin heirs decided to implement what the I RS now claims was a “Son of B OSS” tax shelter. 3 Alth o u gh t h e re are a number of variants, a “Son o f B OSS”
tax scheme g enerally involves a “series of contrived steps in

a partnership interest to g enerate artificial tax losses desig n ed

3 “ B OSS” is an acro n y

m f or “ B o n d an d O p t i o n Sales Strateg y .” Ko rn ma n & Asso cs., In c. v. U n ited S ta t es , 5 2 7 F.3 d 4 4 3
, 4 4 6 n

. 2 (5 th Cir. 2 0 0 8 ). “ So n

o f B OSS” is a v ariatio n

o f th e “ B OSS” tax sh elter. Id

.M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

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to offset income from other transactions.” Nevada P a r t n ers Fund, L.L.C. ex rel. Sap

p h i r e I I

, Inc. v

. U.S. ex rel. I.R.S.
, 720 F .3d 594, 604 (5th Cir. 2013). Asset s e n c u m bered b y artificial liabilities are transferred into a partnership with the
g oal of increasing basis in the partnership. The net result is that the artificial loss offsets the tax able g ain.

Thus, acting on tax advice, the Martin Fa m i l y Trusts formed a tiered partnership structure, meaning that the trusts served as partners o f an upper tier of partnerships that owned interests in a lower t i e r partnership, a n d then e ng ag e d in a short term hedg ing strateg y using option contracts. There

were three parts to the structure: (a) the fourteen M artin F amily Trusts; (b) an upper partnership tier, which included multiple partnerships; a

nd ( c) a sing le, lower tier partnership. At the top of the structure were the fourteen M ar t i n F amily Trusts, which were the ultimate partners of the two t i e r s o f partnerships below.

The upper partnership tier c onsisted o f three partnerships, the most relevant of which is F irst Ship, L L C (“F irst Ship”). The fourteen Martin F a m i l y Trusts w ere the F irst Ship partners and 1 00% owners. After the C hronicle Publishing sale, the trusts contributed certain of the sale assets to F irst Ship. The other t w o u

pper-tier partnerships (the “minority partnerships”), were F o urth Ship, L L C ( “ Fo u r th Ship”) a nd L MGA Holding s, I nc. (“L MGA”).

The lower tier consisted solely of F irst Ship 2000-A, L L C (“2000-A”). F irst Ship, F ourth Ship
, and L MGA were the three partners of 2000-A. F irst Ship owned 77.03% of 2 000- A, with F o urth Ship and L MGA owning minority partnership shares.M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

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8

W ith the structure in place, the Martin heirs commenced

a series of transactions desig ned to create losses that would offset the tax able g ain r ealiz ed from the Chronicle Publishing sale. T h e t r u sts purchased certain assets, in addition to the stock they already owned, and transferred some assets to the partnerships. Most relevant to this case, the trusts purchased $315.7 million in E uropean-sty le o ption contracts (“the long options”), w hile simu l t a n eously selling $314.8 million in similar-sty le option contracts (“the short options” ). T he trusts paid J P Morg an the d i f f erence between the two sets o f options, roug hly $900,000. The trusts then contributed their
assets to the up per-tier partnerships, mostly to F irst Ship. F irst Ship rece i v e d over $485 million in assets from the trusts, including the value of the purchased long options. I n

c o n t ra st, F ourth Ship only received $29.4 million in assets. F irst Ship then contributed $415 million in assets to 2000-A, including the value of the p u rchase d l o n g options. F ourth Ship and L MGA also transferred some of their more limited assets to 2000-A.

Throug hout the transactions, the v a ri o us entities did not treat the short options as a l i a b i l ity o r subtract the amount owed on the short options from the amount purchased in long options. As a r esult, the Martin F amily Trusts and F irst Ship each saw a dramatic increase i n their tax bases in the partnerships b elow them (i

. e

. , the Martin F amily Trusts in relation to F irst Ship and F irst Ship in relation to 2 0 0 0 -A). F ollowing the contribution, 2000-A sold off its assets, terminated the options, distributed its remaining holding s back to its partners, primarily F irst Ship, and dissolved.

2000-A filed its F orm 1065 partnership tax r e t u r n on March 22, 2001. F irst Ship in turn reported its share of g ains and losses from the closingout of 2000-A, including a $321M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES 9

million short-term capital loss, in a March 22, 2001 F orm 1065 return. Fo u r t h Ship and L MGA also filed returns a nd
p o s t e d s m all losses due to the liquidation of 2000-A. F irst Ship’s partners, the Martin F am i l y Trusts, timely filed their

own returns before April 15, 2001. Due to the inflated basis the Martin F amily Trusts had in F irst Ship, the trusts r eported losses of over $320 million f ollowing the termination of the options and the dissolution of 2000-A.

The ne t r e s u l t of these transactions was that the Martin heirs did not owe any t ax es on the proceeds f rom the Chronicle Publishing sale. Perhaps not u nex pectedly
, this fortuity drew the attention o f the I RS. I n 2004, the I RS b eg an

an audit of the y ear 2000 tax returns for F irst Ship and 2 000- A and F irst Ship’s 2001 tax return.

B o th 2000-A and F irst Ship are s u b j e c t to the u niform audit rules of the Tax Equity and F iscal Responsibility A ct (“TEF RA”). See 26 U.S.C. (“I .R .C.”) §§ 6221–6233. B ecause the three-y ear statute of limitat i o n s f ound in I

. R.C. § 6229 and § 6501 was near, the I RS ex ecuted Fo r m 872-I Ex tensio n A g reements (“ex tension ag reements”) w ith the Martin F a mily Trusts. T h e f ollowing restrictive lang uag e was added to each of the ag reements:

The amount of a

ny deficiency a ssessment is to be limited to that resulting from any adjustment directly or indirectly (throug h o ne

or more intermediate entities) attribut a b le to partne r s hip flow-throug h items of F irst Ship L L C, and/or to a

n y adjustment attributable to costs incurred with respect to any transaction
eng ag ed in by F irst Ship L L C, a n y p enalties and additions to tax attributable to any suchM A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES

10

adjustments, any affected items
, a nd any consequential chang es to other items b ased on any such adjustments.

B ecause the first set of ag reements only ex tended the limitations p eriod u n til A pril 15, 2005, the I RS f urther

e x t ended the period throug h successive ag reements, eventually ex tending the period until J une 30, 2008.

On J une 19, 2008, the I RS issued a Notice of F inal Partnership Administrative Adjustment (“F PAA”) to 2000-A for the 2000 tax y ear. I t did not issue an F PAA for F irst Ship f o r the 2000 tax y e ar. On the same date, the I RS issu e d a n F PAA f or F i r s t Ship for the 2001 tax y ear. There is no challeng e to the 2001 F PAA to F irst Ship, so the only F PAA

a t i ssue in this case is the F PAA to 2 000-A for the 2000 t a x y ear (“2000-A F PAA”). The F PAA disreg arded all of 2 000- A’s transactions, labeling the p artnership a sham and finding it “lacked economic substance.” M o s t relevant here, the F PAA declared that the short options c o n stituted liabilities and ex pressly r e d u c ed F irst Ship’s basis in 2 0 00-A b y $314,885,516. This h ad the effect of eliminating most of the $321 million short-term capital loss r eported by F irst Ship on its 2000 tax return.

Two of the trusts, the Candy ce Marti n 1 9 99 I r r evocable Trust and the Constan c e Goody ear 1997 I rrevocable Trust (“tax pay ers”), challeng e d the F PAAs by filing p e titions
ag ainst the United States. Tax p a y e rs filed for partial
summary judg ment, challeng ing the F PAA to 2000-A. Tax pay e rs argu ed the 2000-A F PAA w as time-barred by the restrictive lang uag e in the ex tension a g reements. The district
court denied tax pay e rs’ partial summary judg ment motion. The court held that “the ex tension ag reements encompass theM A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES 11

adjustments made b y the I RS in the F PAA issued to 2000-A.” Rely ing on the “direct connection” between 2000-A a nd F irst Ship, the court found “the F PAA issued to 2000-A involve[ d]

an adjustment directly attributable to flow-throug h item s o f F irst Ship.” The court analog iz ed to Brody v. Comm’r
, 55 T.C.M. (CCH) 8 08 ( 1988), in which the tax court held that

an ex tension ag reement covering a lower-tiered partnership encompassed a notice of deficiency to the pa rtners and the upper-tiered partnership.

A ft e r a bench trial, the district court issued an o r d e r deny ing tax pay ers’ petition for relief. F ollowing the district court’s e ntry of f

inal jud g ment, tax pay ers filed a timely notice of appeal.

W e h ave j u r i s diction under 28 U.S.C. § 1291. W e “review d e novo a district c ourt’s g rant or denial o f a motion for partial summary judg ment.” Balvage v. Ryd e r w o o d Improvement a nd Serv. A ss’n, Inc

. , 642 F .3d 765, 775 (9th Cir. 2011). “I nterpretation of [ I R S] waiver ag reements is subject to the rules g overning interpretation of contracts; a nd when, as in this case, the lower court based its decision on the l a ng uag e of the ag reement and principles of contr a ct interpretation, the decision is one o f law which we r eview de novo.” Roszkos v. Comm’r
, 85 0 F .2d 514, 516 (9th Cir. 1988) (internal citations omitted).

I I

B e fore we analy

z e the leg al effect of the F PAA and

ex tension a g r e ements in this case, some additional backg round on the st r u c t u re of partnership tax ation law is required. U nlike corporations, partnerships are not subject to federal income tax

. I .R.C. § 701. However, partnerships doM A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES

12

file inform a t ional tax r eturns, id. § 6031, which inform the partners of their distributive share of partnershi p g a ins, losses, deductions, or credits. See id. §§ 701, 702. To avoid the redundancy of assessing the effect of a partnership o n a partner’s tax returns at the individual partner level, Cong ress enacted TEF RA, “which created a sing le unified procedure for determ i n i n g the tax treatment of all partnership items at the p artnership level.” Randell v. United States
, 64 F .3d 101, 1 0 3 (2d Cir. 1995); see a lso United States v. W oods
, 134 S. Ct. 557, 562–63 (2013). Partnership items, such as a partnership’s income, g a i n , loss, deductions, or credits, 26 C.F .R. § 301.6231(a)(3)–1(a)(1)(i), are items that must be taken into account on a partner’s federal income tax r eturn and that ar e d e t e rmined by the Treasury Secretary to be “more appropriately determined at the partnership level than at the partner level.” I .R.C. § 6231(a)(3).

Under TEF RA, when the I RS initiates ad j u s tment “proceeding s a t the partnership level,” it must notify ce r t ain partners. W

oods
, 134 S. Ct. at 563. The I RS sends notice o f

an adjustment in the f

orm of an F PAA. Id. A p a rtnership can challeng e an F PAA under I .R.C. § 6226. Id. After an F PAA becomes final, “ t h e I RS may a ssess partners with their distributive share of the adjusted partnership items.” R andell
, 64 F .3d at 104.

Generally
, the I RS must assess federal income tax within three y ears of a tax pay er filing h i s re turn. I .R.C. § 6501(a). F or a ssessments related to partnerships, TEF RA has established a separate p rovision f or ex tending the Section 6501 statute o f limitations for assessments attributable to p a r t nership items. Id. § 6229; see also Bakersfield Ene r g y P a r tners, LP v. Comm’r
, 568 F .3d 767, 7 70 n.5 (9th C i r. 2009) (noting that Sec t i o n 6229 “provides a minimum timeM A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES 13

period in which the I RS c a n assess a tax deficiency

”). W ith
reg ard to partnerships, Section 6229 states that:

[ T] he period for a ssessing any tax imposed b y [ the federal income tax subtitle of the I nternal Revenu e Code] w ith respect to any person which is attributable to any p artnership i tem (or affected item) for a par t n ership tax able
y ear shall n ot ex pire before the date w h i c h is 3 y ears after the later of–

(1) the date on which the partners hip return for such tax able y ear was filed, or

(2) the last day for filin g s u c h return for such y ear (determined without reg ard to

ex tensions).

I .R.C. § 6229(a). The provision all o w s for an ex tension o f this three-y ear period, h owever, in two i n s t a n ces relevant to this case:

(1) if an F PAA is filed before the ex piration of either the li m i t a t ions p eriod itself o r an

ex tensi o n o f the limitations period. Id. § 6229(d).

(2) if the I RS n eg otiates an a g reement to

ex tend the period with a ny or multiple ultimate p artners or, with respect to all partners, with the tax matters partner. Id. § 6229(b)(1).M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

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14

An ex tension ag reement may include restrictive lang uag e o r

a “restricted consent” to limi t its scope. See I .R.M. 25.6.22.8.1 (J an. 1, 2000).

Ex tension ag reements, includ i n g those w ith restricted

cons e n t lang uag e, have long b een viewed as “ unilateral waiver[ s] ” of t he assessments limitations period and not a s contracts or tolling ag reements. Stange v. U n i t ed States
, 282 U.S. 270, 276 ( 1 931). Nevertheless, ex tension
ag reements are inter

p reted using contract principles. Roszkos , 850 F .2d at 516.

The limitations period and ex tension options in Section 6229 apply to assessments of tax ag ainst the tax -pay ing partner(s). An F PAA, on the other h and, need not be issued within a certain limitat i o n s period. Meruelo v. Comm’r
, 691 F

. 3d 1 108, 1117–18 (9th Cir. 2 012). However, while the F PAA may b e issued a t any time, it i s “ s ubject only to the practical limitation that the F PA A m a y affect only those partners whose individual returns remain o p e n under” an

ex tension pursuant to I

. R.C. Sections 6 5 0 1 or 6 229. Id. (internal quotation marks omitted).

I I I

W ith this factual and leg al backg rou n d i n hand, w e can

now set aside the MacGuffins and ex amine the primary issue before us: the scope a

nd effect o f the ex tension ag reements. W e conclude that the ex tension a g reements between the Martin F amily Trusts and the I RS encompass some of the adjustments made to 2000-A by the I RS’s 2000-A F PAA.

The restrictive lang u ag e in the ex tension ag reements reads, in pertinent part, that “[ t] he amount of any deficiencyM A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES 15

assessment is to be lim i t e d t o that resulting from any adjustment directly

. . . at t ributable to partnership flowthroug h items of F irst Ship.” Althou gh the g overnment arg ues the term “adjustment” in these ag reements r e fers to adjustments to the tax es o f the Martin F amily T r u s t s , we conclude that under the TEF RA reg ime, t h e term “adjustment” in ag reements such as these refers to p artnership-level adjustments c o nducted throug h an F PAA. Cf. R andell
, 64 F .3d at 104. T h e term “deficiency assessment” refers to chang es to a partner’s tax liability

. See,
e.g. , I .R

. C

. § 6225. The term “partnership flow-throug h items,” then, log ically m e ans partnership items that flow throug h to the partnership ’s ultimate partners. The most obvious partnership flow-throug h items are items of income

or loss because t h o se items ultimately flow throug h successive partnership tiers and are reported on the tax

r e t u r n s of the partnership’s partners. See, e.g. , Tigers Eye Trading, LLC v. Comm’r
, 138 T.C. 67, 88 (2012) (“A partnership[ ’s]

. . . items of income and loss flow throug h to its partners.”). I n contrast, fo r e x a mple, a partnership’s distributions o r contributions are partnership items, 26 C.F .R. § 301.6231(a)(3)–1(a)(4), that do n o t f l o w throug h to the partners.

The term “attributable to” is u sed throug hout the I n ternal Revenue Code but is not defined in s t a t u t e and “ has no special technical meaning under the tax laws.” Electrolux Holdings, Inc. v. U

nited States
, 491 F .3d 1327, 1330 (F ed. Cir. 2007). B oth the court in Electrolux and the United States Court of F ederal Claims have def ined “attributable to,” as it
appears in statute, to mean “‘due to, caused by , or g enerated by .’” Russian Recovery Fund Ltd. v. U nited States
, 1 0 1 F ed. Cl. 498, 507–09 (20 1 1 ) ( quoting Electrolux Holdings, Inc.
, 491 F .3d at 1331) (interpreting “attributable to” as it is usedM A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES

16

in I .R.C. § 6229 and rejecting the arg ument t h a t t h is straig htforward definition of “attributable to” “runs afoul o f
t he F ederal Circuit’s a dmonition ag ainst a ‘but for’ test”). Here, b ecause the e x tension ag reements are go v e r ned b y Section 6229, we interpret the term “attributable to” as used in these ex tension ag r eements to mean “due to, c aused by
, o r g enerated by .” See id.

Therefore, the question in this appeal is w h e ther at least

so m e of the adjustments made in the 2000-A F PAA a re directly due to, caused by , or g enerated by partnership items of F irst Ship that flow throug h (e.g
., that are items of income

or loss) to F irst Ship’s partners, the Martin F amily Trusts. I f
so, the ex tension ag reements encompass at least par t o f the 2000-A F PAA and, when combined with the subsequent

ex tension of time tri gg ered by the issuance of the F PAA itself, allow f

or the I RS to a s s e s s new tax on the Martin F amily Trusts today

.

Reduced to this s imple question, the lang u ag e of the
ag reements leads us to affirm the district court in part. Some of the partnership items of F irst Ship that flow throug h to the Martin F amily Trusts trig g ered some of the adjustments in the 2000-A F PAA. Specifically
, in its 2000 tax return, F irst Ship claimed $318,018,377 in losses due to the liquidati o n o f 2000-A. This loss is not m e r el y F irst Ship’s share of the losses claim ed b y 2000-A. Those losses, rather minor, only

a d d up to $ 4,067,455. I nstead, this $318 million l o s s orig inated with F irst Ship, due to its artificially hig h basis in 2000-A. This loss was a partnership flow-t h r o ug h item o f F irst Ship that led to the adjustment to 2000-A. I ndeed, without this larg e loss, which w as the main targ et o f the I RS audit and investig a t i o n , there would have been no 2000-A F PAA.M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES 17

F ollowing its investig a tion, the I RS could have issued an F PAA to F irst Ship, d isallowing the loss, or it co u l d h a ve issued an F PAA t o 2 0 0 0

- A, b a r ring a ny recog nition of that entity and declaring that the short options constituted liabilities. Here, the I RS chose the latter and that action was not o utside the strictures of the e x tension ag reements. Contrary to tax pay ers’ arg

u ments, the ag reements are not so restrictive as to hold that an adjustment th at is directly attributable to a partnership flow-throug h item o f F irst S h i p will n ot be allowed if it is technically an adjustment to a partnership item of a lower-tier, but related, partnership. This is especially true g iven that the limitations period e stablished in Sections 6229 and 6501 applies to assessments o f tax , not adjust m e nts. Meruelo
, 691 F .3d at 1117–18. Here, the operative restraint on assessments, and therefore, practically
, on the adjustments, i s t he ex tension ag reements. A nd because some of the adjustm en ts in the F PAA (i.e., those portions of the F PAA that had the effect of voiding the $318 million loss) were directly a ttributable to the $318 million loss claimed by F irst Ship, a F i r s t Ship partnership flowt h r oug h item, the ex tension ag reements encompass those adjustments. 4

Tax pay e rs dispute this conclusion, rely i n g h eavily on Russian Recovery Fund

. I n t h at ca s e, the Court of F ederal Claims held that an ag reement that specifically cites a n upper-tier partnership does not encompass adjustments made
to the lower-tiered partnership. R ussian Recovery Fund Ltd.
, 101 F ed. Cl. at 509–10. B u t Russian Recovery Fund is disting uishable from our case. Unli k e R u ssian R ecovery

4 B y o p eratio n o f I.R.C. § 6 2 2 9 (d ), th e issu an ce o f th e FP A A s u sp en ded

an y o p en p erio d f o r tax assessm en t , b u t o n ly as to tax attrib u t ab le to an y p artn ersh ip item

o f 2 0 0 0

- A as to its 2 0 0 0 tax y ear.M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES

18

Fund
, where the upper-tier p artnership simply repor ted a nd passed along it s s h are of the lower-tiered partnerships’s losses, id. at 510, here the upper-tiered partnership, F irst Ship,

was larg ely reporting its own l oss. This loss g enerated both the massive loss claimed by the Martin F amily Trusts and the adjustments made by t h e I RS to 2000-A, bring ing it within the confines of the ex tension ag reements. I n d e e d, this loss did not an d c o u l d not have orig inated with 2000-A, since it

was only the d

issolution of 2000-A that g ave rise to the loss. Id. Thus, unlike in th e partnership structure in Russian Recovery Fund
, the I RS’s adjustments e liminating the $318 million F irst Ship loss, r eg ardless of whether they were made throug h an adjustment to F irst Ship or 2000-A, were c aused by the $318 million loss that orig inated with F irst Ship. 5

I V

W e conclude that the ex tension ag reements encompass the adjustments made in the 2000

- A FP A A that are directly attributable to partnership flow-throug h i t e ms of F irst Ship. Thus, as bo t h p a rties ag ree, they do not encompass adjustments to items of 2000-A which only flow up throug h the minority partners an d a s a result h ave no connection to F irst Ship. Nor do they apply to any adjustments made in the 2000-A F PAA to partnership items o f 2000-A of which F irst

5 T ax p ay ers also arg u e t h at t h e d i s t rict co urt m isin t erp reted an d

m isap p lied Bro d

y

. Ho w ev er, t

h e co u rt’ s relian ce o n Bro d

y is n o t essen tial
to its d ecisio n , o r o ur d ecisio n , in th is case. W h ile tax p ay ers are co rrect th at Bro d y w as d ecid ed bef

ore T EFRA an d is d i f

f eren t th an t

h is case, th e d istrict co u

rt a c kn o w led g ed t

h ese d istin ctio n s an d sim p ly u sed Bro d

y to

un d ersco re th e sig n if

ican ce o f th e relatio n sh ip b etw een p artn ersh ip s in a

m u lti- tiered p artn ersh ip stru ctu re (e.g
., th e f act th at liab ilities claim ed b y 2 0 0 0

- A u ltim ately reach th e Martin Fam i ly T ru sts b y f irst p assin g t

h ro u g h First Sh ip ).M A R T IN 1 9 9 9 I R R EV O C A B LE T R U ST V

. U N IT ED S T A T ES 19

Ship merely claimed a share (e.g
., the $4,067,455 share F irst Ship claimed of 2000-A’s reported losses). Those losses

o r i g i n ated w ith 2000-A and, therefore, adjustments to 2000-A that affect those losses are not directly attributable to partnership flow-throug h items o f F irst Ship. To t h e ex tent that the district court concluded otherwise, it erred.

V

I n sum , we affirm in part and reverse in part. W e ag r ee with the district court that the ex tension ag reements b etween the I RS a nd First Ship encompass adjustments made in the 2000-A F PAA that are direc t l y attributable to partnership flow-throug h items of F irst Ship. These are adjust m e n t s to 2000-A that stem from partnership flow-throug h items o f F irst Ship that originate w ith F irst Ship (i.e., a djustments that eliminate the $318 million loss claimed by F irst Ship due to its inflated basis in 2000-A). W e also hold that the F PAA to 2000-A ex tended the limitations p e r iod for assessing tax bey ond the ex tension ag reements and throu gh t h e present litig ation. H o w ever, the ag reements do not ex tend to adjustments in the 2000-A F PAA that a r e n o t directly attributable to F irst S h i p

. B ecause the district court h eld

more broadly that “the ex tension ag r eements encompass the adjustments made b y the I RS in the F PAA issued to 2000-A,”

we remand to the district c o u rt to make a d etermination o f which adjustments in the 2000-A F PAA ar e directly attributable to partnership flow-throug h items o f F irst Ship, consistent with this opinion.

Each party

shall bear its own costs on appeal.

AF F IRMED IN P ART, REVERSED IN P ART