FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CANDYCE MARTIN 1999

IRREVOCABLE TRUST, a Partner

other than the Tax Matters

Partner; CONSTANCE GOODYEAR

1997 IRREVOCABLE TRUST, a

Partner other than the Tax Matters

Partner,

Petitioners-Appellants,

v.

UNITED STATES OF AMERICA,

Respondent-Appellee.

No. 11-17879

D.C. Nos.

4:08-cv-05150-PJH

4:08-cv-05151-PJH

OPINION

Appeal from the United States District Court

for the Northern District of California

Phyllis J. Hamilton, District Judge, Presiding

Argued and Submitted

October 16, 2013—San Francisco, California

Filed January 13, 2014

Before: Sidney R. Thomas and M. Margaret McKeown,

Circuit Judges, and Mark W. Bennett, District Judge.*

Opinion by Judge Thomas

 

* The Honorable Mark W. Bennett, District Judge for the U.S. District

Court for the Northern District of Iowa, sitting by designation.
2 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

SUMMARY**

Tax

The panel affirmed in part and reversed in part the district

court’s denial of a petition for readjustment of partnership

items, brought by a group of heirs of the founders of

Chronicle Publishing Company in connection with its sale

and resulting tax consequences.

The heirs owned a portion of the company, either outright

or through family trusts. They formed a tiered partnership

structure and commenced a series of transactions designed to

minimize their tax liability from the company’s sale. In

connection with an IRS audit of tax returns for two

partnerships involved in the transactions, the IRS executed

agreements extending the limitations period for assessing

taxes. The IRS then issued a Notice of Final Partnership

Administrative Adjustment (FPAA) that effectivelyincreased

the heirs’ tax liability. The heirs, via two trusts that were

partners in the partnerships, challenged the FPAA as timebarred.

After reviewing partnership taxation law and the language

of the extension agreements, the panel concluded that some

of the adjustments made in the FPAA were directly due to,

caused by, or generated by partnership items that flow

through to the partners (appellants), and that the extension

agreements therefore encompassed some of the adjustments

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 3

made by the FPAA and permitted the IRS to assess new tax

on appellants today.

COUNSEL

Michael J. Desmond (argued), Law Offices of Michael J.

Desmond, APC, Santa Barbara, California; Ronald L. Buch,

Jr. and Saul Mezei, Bingham McCutchen LLP, Washington,

D.C., for Petitioners-Appellants.

Arthur T. Catterall (argued), Attorney, Kathryn Keneally,

Assistant Attorney General, Tamara W. Ashford, Deputy

Assistant Attorney General, Gilbert S. Rothenberg, and

Jonathan S. Cohen, Attorneys, United States Department of

Justice, Tax Division, Washington, D.C.; Melinda L. Haag,

United States Attorney, and Tom Moore, Assistant United

States Attorney, United States Attorneys’ Office for the

Northern District of California, San Francisco, California, for

Respondent-Appellee.

OPINION

THOMAS, Circuit Judge:

In this appeal, we examine some of the tax consequences

arising from the sale of the Chronicle Publishing Company

and, specifically, whether the Internal Revenue Service’s

proposed adjustment of certain partnership tax items was time

barred. Although the ultimate issue is relatively

straightforward, both the back story and the legal framework

are somewhat complex, requiring us to delve deep in the heart

of taxes.
4 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

I

The storied Chronicle Publishing Company was founded

in the mid-1800s in San Francisco by teenage brothers

Charles and M. H. de Young with a borrowed $20 gold piece. 

Their first venture, the Daily Dramatic Chronicle, began with

a small circulation, but its readership quickly tripled when it

provided the onlybreaking news accounts of the assassination

of Abraham Lincoln. It was rechristened as the Morning

Chronicle and ultimately the San Francisco Chronicle. 

Within a few decades, it became the largest circulation

newspaper on the West Coast.1

After the death of Charles de Young in 1880, M. H. de

Young assumed control of the paper, incorporated it as the

Chronicle Publishing Company (“Chronicle Publishing”) in

1906, and ran the enterprise until his death in 1925. He left

the newspaper assets in an irrevocable trust that would

terminate on the death of all five of his children. From M. H.

de Young’s death until the early 1990s, a family member

remained at the helm of the media empire. Over the course

of time, Chronicle Publishing expanded its operations,

acquiring a television station along with other properties and

forming a book publishing company.

The Chronicle was not the only media game in town. 

Mining entrepreneur George Hearst acquired the rival San

Francisco Examiner in 1880 and turned its management over

to his son William Randolph Hearst seven years later, when

the elder Hearst became a United States Senator. Over the

next century, the Examiner and Chronicle engaged in a fierce

1

See generally John P. Young, Journalism in California 68–71 (1915).
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 5

competition for readers.2 With both papers experiencing

financial challenges in the early 1960s, the Examiner and the

Chronicle entered into a joint operating and profit sharing

agreement in 1965. The joint operating agreement also

granted Hearst the right of first refusal if Chronicle

Publishing were put up for sale. Reilly v. Hearst Corp.,

107 F.Supp.2d 1192–99 (N.D.Cal. 2000).

When M. H. de Young’s last child died in 1988 and the

irrevocable trust dissolved, Chronicle Publishing elected to be

treated as a Delaware Subchapter S corporation. Companies

generally take such actions to avoid the double taxation

attendant to “C” corporations, where taxes are assessed on

both corporations and shareholders. The Subchapter S

corporate structure is often employed by small, family-held

businesses. However, to discourage misuse of the Subchapter

S vehicle, Congress provided that Subchapter S corporations

would be subject to the normal double taxation if the

corporation were sold within ten years 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).

In the late 1990s, amidst deteriorating family

relationships and financial challenges, and after the ten-year

Subchapter S waiting period expired, the de Young heirs

decided to sell most of the assets of Chronicle Publishing to

the rival Hearst Corporation and distribute the assets among

the heirs according to their ownership percentages. The

Chronicle was to continue as a morning paper, and the

Examiner was sold to a third party.

2

See generally David Nasaw, The Chief: The Life of William Randolph

Hearst 59–80 (2006).
6 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

In its discussions of the sale, Chronicle Publishing’s

Board of Directors realized the possibility of future liability

arising from a variety of potential issues, such as

environmental problems, contractual disputes, and the risk

that Chronicle Publishing might lose its Subchapter S status. 

Thus, the Directors prepared a recontribution agreement,

which provided that the shareholders would contribute on a

pro rata basis if there were future Chronicle Publishing

liabilities. Each shareholder was required to execute the

recontribution agreement as a condition of receiving a

distribution of proceeds from the Chronicle Publishing sale.

Our case involves one group of de Young heirs,

specifically Conseulo Martin (M. H. de Young’s

granddaughter) and her five children (“the Martin heirs”). 

The Martin heirs owned 16.67% of the shares of Chronicle

Publishing, either outright or through fourteen family trusts

(“the Martin Family Trusts” or “trusts”). Some of the trusts

had existed since the 1980s; others were created just before

the Chronicle Publishing sale.

The Martin heirs sought advice on how to minimize the

tax consequences of the proposed Chronicle Publishing sale

and to protect themselves against future liabilities posed by

the recontribution agreement. After consulting with several

tax specialists, the Martin heirs decided to implement what

the IRS now claims was a “Son of BOSS” tax shelter.3

Although there are a number of variants, a “Son of BOSS”

tax scheme generally involves a “series of contrived steps in

a partnership interest to generate artificial tax losses designed

3

“BOSS” is an acronym for “Bond and Option Sales Strategy.”

Kornman &Assocs., Inc. v. United States, 527 F.3d 443, 446 n. 2 (5th Cir.

2008). “Son of BOSS” is a variation of the “BOSS” tax shelter. Id.
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 7

to offset income from other transactions.” Nevada Partners

Fund, L.L.C. ex rel. Sapphire II, Inc. v. U.S. ex rel. I.R.S.,

720 F.3d 594, 604 (5th Cir. 2013). Assets encumbered by

artificial liabilities are transferred into a partnership with the

goal of increasing basis in the partnership. The net result is

that the artificial loss offsets the taxable gain.

Thus, acting on tax advice, the Martin Family Trusts

formed a tiered partnership structure, meaning that the trusts

served as partners of an upper tier of partnerships that owned

interests in a lower tier partnership, and then engaged in a

short term hedging strategy using option contracts. There

were three parts to the structure: (a) the fourteen Martin

Family Trusts; (b) an upper partnership tier, which included

multiple partnerships; and (c) a single, lower tier partnership. 

At the top of the structure were the fourteen Martin Family

Trusts, which were the ultimate partners of the two tiers of

partnerships below.

The upper partnership tier consisted of three partnerships,

the most relevant of which is First Ship, LLC (“First Ship”). 

The fourteen Martin Family Trusts were the First Ship

partners and 100% owners. After the Chronicle Publishing

sale, the trusts contributed certain of the sale assets to First

Ship. The other two upper-tier partnerships (the “minority

partnerships”), were Fourth Ship, LLC (“Fourth Ship”) and

LMGA Holdings, Inc. (“LMGA”).

The lower tier consisted solely of First Ship 2000-A, LLC

(“2000-A”). First Ship, Fourth Ship, and LMGA were the

three partners of 2000-A. First Ship owned 77.03% of 2000-

A, with Fourth Ship and LMGA owning minority partnership

shares.
8 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

With the structure in place, the Martin heirs commenced

a series of transactions designed to create losses that would

offset the taxable gain realized from the Chronicle Publishing

sale. The trusts 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 European-style option contracts (“the long

options”), while simultaneously selling $314.8 million in

similar-style option contracts (“the short options”). The trusts

paid JP Morgan the difference between the two sets of

options, roughly $900,000. The trusts then contributed their

assets to the upper-tier partnerships, mostly to First Ship. 

First Ship received over $485 million in assets from the

trusts, including the value of the purchased long options. In

contrast, Fourth Ship only received $29.4 million in assets. 

First Ship then contributed $415 million in assets to 2000-A,

including the value of the purchased long options. Fourth

Ship and LMGA also transferred some of their more limited

assets to 2000-A.

Throughout the transactions, the various entities did not

treat the short options as a liability or subtract the amount

owed on the short options from the amount purchased in long

options. As a result, the Martin Family Trusts and First Ship

each saw a dramatic increase in their tax bases in the

partnerships below them (i.e., the Martin Family Trusts in

relation to First Ship and First Ship in relation to 2000-A). 

Following the contribution, 2000-A sold off its assets,

terminated the options, distributed its remaining holdings

back to its partners, primarily First Ship, and dissolved.

2000-A filed its Form 1065 partnership tax return on

March 22, 2001. First Ship in turn reported its share of gains

and losses from the closing out of 2000-A, including a $321
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 9

million short-term capital loss, in a March 22, 2001 Form

1065 return. Fourth Ship and LMGA also filed returns and

posted small losses due to the liquidation of 2000-A. First

Ship’s partners, the Martin Family Trusts, timely filed their

own returns before April 15, 2001. Due to the inflated basis

the Martin Family Trusts had in First Ship, the trusts reported

losses of over $320 million following the termination of the

options and the dissolution of 2000-A.

The net result of these transactions was that the Martin

heirs did not owe any taxes on the proceeds from the

Chronicle Publishing sale. Perhaps not unexpectedly, this

fortuity drew the attention of the IRS. In 2004, the IRS began

an audit of the year 2000 tax returns for First Ship and 2000-

A and First Ship’s 2001 tax return.

Both 2000-A and First Ship are subject to the uniform

audit rules of the Tax Equity and Fiscal Responsibility Act

(“TEFRA”). See 26 U.S.C. (“I.R.C.”) §§ 6221–6233. 

Because the three-year statute of limitations found in I.R.C.

§ 6229 and § 6501 was near, the IRS executed Form 872-I

Extension Agreements (“extension agreements”) with the

Martin Family Trusts. The following restrictive language

was added to each of the agreements:

The amount of any deficiencyassessment is to

be limited to that resulting from any

adjustment directly or indirectly (through one

or more intermediate entities) attributable to

partnership flow-through items of First Ship

LLC, and/or to any adjustment attributable to

costs incurred with respect to any transaction

engaged in by First Ship LLC, any penalties

and additions to tax attributable to any such
10 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

adjustments, any affected items, and any

consequential changes to other items based on

any such adjustments.

Because the first set of agreements only extended the

limitations period until April 15, 2005, the IRS further

extended the period through successive agreements,

eventually extending the period until June 30, 2008.

On June 19, 2008, the IRS issued a Notice of Final

Partnership Administrative Adjustment (“FPAA”) to 2000-A

for the 2000 tax year. It did not issue an FPAA for First Ship

for the 2000 tax year. On the same date, the IRS issued an

FPAA for First Ship for the 2001 tax year. There is no

challenge to the 2001 FPAA to First Ship, so the only FPAA

at issue in this case is the FPAA to 2000-A for the 2000 tax

year (“2000-A FPAA”). The FPAA disregarded all of 2000-

A’s transactions, labeling the partnership a sham and finding

it “lacked economic substance.” Most relevant here, the

FPAA declared that the short options constituted liabilities

and expressly reduced First Ship’s basis in 2000-A by

$314,885,516. This had the effect of eliminating most of the

$321 million short-term capital loss reported by First Ship on

its 2000 tax return.

Two of the trusts, the Candyce Martin 1999 Irrevocable

Trust and the Constance Goodyear 1997 Irrevocable Trust

(“taxpayers”), challenged the FPAAs by filing petitions

against the United States. Taxpayers filed for partial

summary judgment, challenging the FPAA to 2000-A. 

Taxpayers argued the 2000-A FPAA was time-barred by the

restrictive language in the extension agreements. The district

court denied taxpayers’ partial summary judgment motion. 

The court held that “the extension agreements encompass the
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 11

adjustments made by the IRS in the FPAA issued to 2000-A.” 

Relying on the “direct connection” between 2000-A and First

Ship, the court found “the FPAA issued to 2000-A involve[d]

an adjustment directly attributable to flow-through items of

First Ship.” The court analogized to Brody v. Comm’r,

55 T.C.M. (CCH) 808 (1988), in which the tax court held that

an extension agreement covering a lower-tiered partnership

encompassed a notice of deficiency to the partners and the

upper-tiered partnership.

After a bench trial, the district court issued an order

denying taxpayers’ petition for relief. Following the district

court’s entry of final judgment, taxpayers filed a timely

notice of appeal.

We have jurisdiction under 28 U.S.C. § 1291. We

“review de novo a district court’s grant or denial of a motion

for partial summary judgment.” Balvage v. Ryderwood

Improvement and Serv. Ass’n, Inc., 642 F.3d 765, 775 (9th

Cir. 2011). “Interpretation of [IRS] waiver agreements is

subject to the rules governing interpretation of contracts; and

when, as in this case, the lower court based its decision on the

language of the agreement and principles of contract

interpretation, the decision is one of law which we review de

novo.” Roszkos v. Comm’r, 850 F.2d 514, 516 (9th Cir.

1988) (internal citations omitted).

II

Before we analyze the legal effect of the FPAA and

extension agreements in this case, some additional

background on the structure of partnership taxation law is

required. Unlike corporations, partnerships are not subject to

federal income tax. I.R.C. § 701. However, partnerships do
12 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

file informational tax returns, id. § 6031, which inform the

partners of their distributive share of partnership gains,

losses, deductions, or credits. See id. §§ 701, 702. To avoid

the redundancy of assessing the effect of a partnership on a

partner’s tax returns at the individual partner level, Congress

enacted TEFRA, “which created a single unified procedure

for determining the tax treatment of all partnership items at

the partnership level.” Randell v. United States, 64 F.3d 101,

103 (2d Cir. 1995); see also United States v. Woods,

134 S. Ct. 557, 562–63 (2013). Partnership items, such as a

partnership’s income, gain, 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 return

and that are determined 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 TEFRA, when the IRS initiates adjustment

“proceedings at the partnership level,” it must notify certain

partners. Woods, 134 S. Ct. at 563. The IRS sends notice of

an adjustment in the form of an FPAA. Id. A partnership can

challenge an FPAA under I.R.C. § 6226. Id. After an FPAA

becomes final, “the IRS may assess partners with their

distributive share of the adjusted partnership items.” Randell,

64 F.3d at 104.

Generally, the IRS must assess federal income tax within

three years of a taxpayer filing his return. I.R.C. § 6501(a). 

For assessments related to partnerships, TEFRA has

established a separate provision for extending the Section

6501 statute of limitations for assessments attributable to

partnership items. Id. § 6229; see also Bakersfield Energy

Partners, LP v. Comm’r, 568 F.3d 767, 770 n.5 (9th Cir.

2009) (noting that Section 6229 “provides a minimum time
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 13

period in which the IRS can assess a tax deficiency”). With

regard to partnerships, Section 6229 states that:

[T]he period for assessing any tax imposed by

[the federal income tax subtitle of the Internal

Revenue Code] with respect to any person

which is attributable to any partnership item

(or affected item) for a partnership taxable

year shall not expire before the date which is

3 years after the later of–

(1) the date on which the partnership

return for such taxable year was filed, or

(2) the last day for filing such return for

such year (determined without regard to

extensions).

I.R.C. § 6229(a). The provision allows for an extension of

this three-year period, however, in two instances relevant to

this case:

(1) if an FPAA is filed before the expiration

of either the limitations period itself or an

extension of the limitations period. Id.

§ 6229(d).

(2) if the IRS negotiates an agreement to

extend the period with any or multiple

ultimate partners or, with respect to all

partners, with the tax matters partner. Id.

§ 6229(b)(1).
14 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

An extension agreement may include restrictive language or

a “restricted consent” to limit its scope. See I.R.M.

25.6.22.8.1 (Jan. 1, 2000).

Extension agreements, including those with restricted

consent language, have long been viewed as “unilateral

waiver[s]” of the assessments limitations period and not as

contracts or tolling agreements. Stange v. United States,

282 U.S. 270, 276 (1931). Nevertheless, extension

agreements are interpreted using contract principles. 

Roszkos, 850 F.2d at 516.

The limitations period and extension options in Section

6229 apply to assessments of tax against the tax-paying

partner(s). An FPAA, on the other hand, need not be issued

within a certain limitations period. Meruelo v. Comm’r,

691 F.3d 1108, 1117–18 (9th Cir. 2012). However, while the

FPAA may be issued at any time, it is “subject only to the

practical limitation that the FPAA may affect only those

partners whose individual returns remain open under” an

extension pursuant to I.R.C. Sections 6501 or 6229. Id.

(internal quotation marks omitted).

III

With this factual and legal background in hand, we can

now set aside the MacGuffins and examine the primary issue

before us: the scope and effect of the extension agreements. 

We conclude that the extension agreements between the

Martin Family Trusts and the IRS encompass some of the

adjustments made to 2000-A by the IRS’s 2000-A FPAA.

The restrictive language in the extension agreements

reads, in pertinent part, that “[t]he amount of any deficiency
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 15

assessment is to be limited to that resulting from any

adjustment directly . . . attributable to partnership flowthrough items of First Ship.” Although the government

argues the term “adjustment” in these agreements refers to

adjustments to the taxes of the Martin Family Trusts, we

conclude that under the TEFRA regime, the term

“adjustment” in agreements such as these refers to

partnership-level adjustments conducted through an FPAA.

Cf. Randell, 64 F.3d at 104. The term “deficiency

assessment” refers to changes to a partner’s tax liability. See,

e.g., I.R.C. § 6225. The term “partnership flow-through

items,” then, logically means partnership items that flow

through to the partnership’s ultimate partners. The most

obvious partnership flow-through items are items of income

or loss because those items ultimately flow through

successive partnership tiers and are reported on the tax

returns 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 through to

its partners.”). In contrast, for example, a partnership’s

distributions or contributions are partnership items, 26 C.F.R.

§ 301.6231(a)(3)–1(a)(4), that do not flow through to the

partners.

The term “attributable to” is used throughout the Internal

Revenue Code but is not defined in statute and “has no

special technical meaning under the tax laws.” Electrolux

Holdings, Inc. v. United States, 491 F.3d 1327, 1330 (Fed.

Cir. 2007). Both the court in Electrolux and the United States

Court of Federal Claims have defined “attributable to,” as it

appears in statute, to mean “‘due to, caused by, or generated

by.’” Russian Recovery Fund Ltd. v. United States, 101 Fed.

Cl. 498, 507–09 (2011) (quoting Electrolux Holdings, Inc.,

491 F.3d at 1331) (interpreting “attributable to” as it is used
16 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

in I.R.C. § 6229 and rejecting the argument that this

straightforward definition of “attributable to” “runs afoul of

the Federal Circuit’s admonition against a ‘but for’ test”). 

Here, because the extension agreements are governed by

Section 6229, we interpret the term “attributable to” as used

in these extension agreements to mean “due to, caused by, or

generated by.” See id.

Therefore, the question in this appeal is whether at least

some of the adjustments made in the 2000-A FPAA are

directly due to, caused by, or generated by partnership items

of First Ship that flow through (e.g., that are items of income

or loss) to First Ship’s partners, the Martin Family Trusts. If

so, the extension agreements encompass at least part of the

2000-A FPAA and, when combined with the subsequent

extension of time triggered by the issuance of the FPAA

itself, allow for the IRS to assess new tax on the Martin

Family Trusts today.

Reduced to this simple question, the language of the

agreements leads us to affirm the district court in part. Some

of the partnership items of First Ship that flow through to the

Martin FamilyTrusts triggered some of the adjustments in the

2000-A FPAA. Specifically, in its 2000 tax return, First Ship

claimed $318,018,377 in losses due to the liquidation of

2000-A. This loss is not merely First Ship’s share of the

losses claimed by 2000-A. Those losses, rather minor, only

add up to $4,067,455. Instead, this $318 million loss

originated with First Ship, due to its artificially high basis in

2000-A. This loss was a partnership flow-through item of

First Ship that led to the adjustment to 2000-A. Indeed,

without this large loss, which was the main target of the IRS

audit and investigation, there would have been no 2000-A

FPAA.
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 17

Following its investigation, the IRS could have issued an

FPAA to First Ship, disallowing the loss, or it could have

issued an FPAA to 2000-A, barring any recognition of that

entity and declaring that the short options constituted

liabilities. Here, the IRS chose the latter and that action was

not outside the strictures of the extension agreements. 

Contrary to taxpayers’ arguments, the agreements are not so

restrictive as to hold that an adjustment that is directly

attributable to a partnership flow-through item of First Ship

will not be allowed if it is technically an adjustment to a

partnership item of a lower-tier, but related, partnership. This

is especially true given that the limitations period established

in Sections 6229 and 6501 applies to assessments of tax, not

adjustments. Meruelo, 691 F.3d at 1117–18. Here, the

operative restraint on assessments, and therefore, practically,

on the adjustments, is the extension agreements. And

because some of the adjustments in the FPAA (i.e., those

portions of the FPAA that had the effect of voiding the $318

million loss) were directly attributable to the $318 million

loss claimed by First Ship, a First Ship partnership flowthrough item, the extension agreements encompass those

adjustments.4

Taxpayers dispute this conclusion, relying heavily on

Russian Recovery Fund. In that case, the Court of Federal

Claims held that an agreement that specifically cites an

upper-tier partnership does not encompass adjustments made

to the lower-tiered partnership. Russian Recovery Fund Ltd.,

101 Fed. Cl. at 509–10. But Russian Recovery Fund is

distinguishable from our case. Unlike Russian Recovery

4 By operation of I.R.C. § 6229(d), the issuance of the FPAA suspended

any open period for tax assessment, but only as to tax attributable to any

partnership item of 2000-A as to its 2000 tax year.
18 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

Fund, where the upper-tier partnership simply reported and

passed along its share of the lower-tiered partnerships’s

losses, id. at 510, here the upper-tiered partnership, First Ship,

was largely reporting its own loss. This loss generated both

the massive loss claimed by the Martin Family Trusts and the

adjustments made by the IRS to 2000-A, bringing it within

the confines of the extension agreements. Indeed, this loss

did not and could not have originated with 2000-A, since it

was only the dissolution of 2000-A that gave rise to the loss. 

Id. Thus, unlike in the partnership structure in Russian

Recovery Fund, the IRS’s adjustments eliminating the $318

million First Ship loss, regardless of whether they were made

through an adjustment to First Ship or 2000-A, were caused

by the $318 million loss that originated with First Ship.5

IV

We conclude that the extension agreements encompass

the adjustments made in the 2000-A FPAA that are directly

attributable to partnership flow-through items of First Ship. 

Thus, as both parties agree, they do not encompass

adjustments to items of 2000-A which only flow up through

the minority partners and as a result have no connection to

First Ship. Nor do they apply to any adjustments made in the

2000-A FPAA to partnership items of 2000-A of which First

5 Taxpayers also argue that the district court misinterpreted and

misapplied Brody. However, the court’s reliance on Brody is not essential

to its decision, or our decision, in this case. While taxpayers are correct

that Brody was decided before TEFRA and is different than this case, the

district court acknowledged these distinctions and simply used Brody to

underscore the significance of the relationship between partnerships in a

multi-tiered partnership structure (e.g., the fact that liabilities claimed by

2000-A ultimately reach the Martin Family Trusts by first passing through

First Ship).
MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES 19

Ship merely claimed a share (e.g., the $4,067,455 share First

Ship claimed of 2000-A’s reported losses). Those losses

originated with 2000-A and, therefore, adjustments to 2000-A

that affect those losses are not directly attributable to

partnership flow-through items of First Ship. To the extent

that the district court concluded otherwise, it erred.

V

In sum, we affirm in part and reverse in part. We agree

with the district court that the extension agreements between

the IRS and First Ship encompass adjustments made in the

2000-A FPAA that are directly attributable to partnership

flow-through items of First Ship. These are adjustments to

2000-A that stem from partnership flow-through items of

First Ship that originate with First Ship (i.e., adjustments that

eliminate the $318 million loss claimed by First Ship due to

its inflated basis in 2000-A). We also hold that the FPAA to

2000-A extended the limitations period for assessing tax

beyond the extension agreements and through the present

litigation. However, the agreements do not extend to

adjustments in the 2000-A FPAA that are not directly

attributable to First Ship. Because the district court held

more broadly that “the extension agreements encompass the

adjustments made by the IRS in the FPAA issued to 2000-A,”

we remand to the district court to make a determination of

which adjustments in the 2000-A FPAA are directly

attributable to partnership flow-through items of First Ship,

consistent with this opinion.

Each party shall bear its own costs on appeal.

AFFIRMED IN PART, REVERSED IN PART