internal_revenue_service number release date index number ------------------------------- ------------------------------------ ---------------------------------------- ---------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc intl b02 plr-121684-11 date november ty -------- ty -------- legend taxpayer ------------------------------------ ----------------------- corporation x ------------------------------ corporation y --------------- country -------- country --------- product ---------------------------------------- product --------------------------------------------------------------------------- business -------------------------------------------------- region ------------------ b --- c -- d -- e -- f --- dear -------------------------------- this is in response to a letter dated date requesting a ruling on behalf of taxpayer with respect to the related_party sale by corporation x of product and product collectively products purchased from corporation y the ruling contained in this letter is based upon information and representations submitted by the taxpayer plr-121684-11 and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination facts taxpayer is a domestic_corporation and the common parent of an affiliated_group_of_corporations filing a u s consolidated federal_income_tax return taxpayer uses the accrual_method for maintaining its accounting books and filing federal_income_tax returns taxpayer is a publicly traded multinational company and a leading global provider of products taxpayer conducts activities directly and through domestic and foreign subsidiaries taxpayer directly or indirectly wholly owns all of the issued and outstanding shares of certain controlled_foreign_corporations cfcs within the meaning of internal_revenue_code code sec_957 including corporation x which was created under the laws of country corporation y is a publicly traded multinational corporation that is not related to taxpayer or any of taxpayer’s subsidiaries and other affiliated groups within the meaning of code sec_954 corporation y was created under the laws of country corporation y is a leading manufacturer of products pursuant to an agreement between taxpayer affiliates and corporation y affiliates corporation y and its affiliates perform physical manufacturing activities for products as described below and sell finished products to taxpayer affiliates including corporation x for distribution in taxpayer’s supply chains in region corporation x resells products to various taxpayer distribution center affiliates that are related_persons within the meaning of code sec_954 taxpayer distribution center affiliates generally on-sell products to taxpayer sales entities which in turn sell products to third party customers generally within the same jurisdiction as the applicable_taxpayer sales entity the distribution of products makes up a significant portion of taxpayer’s business the manufacture of products by corporation y and its affiliates is a multi-step process and entails several stages of manufacturing in multiple jurisdictions that involve component parts production and final assembly with approximately b component parts embedded in each of the products notwithstanding the total components most of which are purchased as raw materials corporation y manufactures several critical component parts incorporated in products exclusively in country as described below plr-121684-11 in addition corporation y and its affiliates conduct finishing manufacturing activities with respect to products in countries other than country as set forth below certain component parts are critical to the finished products from both a value and cost perspective critical component parts of the approximately b component parts in each of the products c parts with respect to product and d parts with respect to product are critical component parts of the critical component parts e parts with respect to product and f parts with respect to product are manufactured by corporation y exclusively in country collectively country manufactured component parts the country manufactured component parts are manufactured exclusively in country for certain essential competitive reasons including quality control and protection of critical competitively-advantaged intellectual_property inherent in the manufacturing of the component parts manufacturing activities are performed by a significant number of employees of corporation y in factories located in country however products do not bear the moniker made in country and are identified in certain reports provided by corporation y as non-country manufactured products the finishing manufacturing activities with respect to products are performed outside of country at finishing manufacturing plants located outside of country the activities performed at the plants include the manufacture of component parts embedded in products the assembly of products and packaging labeling and shipping of products products finished in these plants are designated as made in _______ with the jurisdiction of the finishing manufacturing plant determining the applicable designation corporation y’s finishing manufacturing activities in jurisdictions outside of country are conducted through wholly-owned subsidiaries of corporation y in those jurisdictions the largest finishing manufacturing subsidiary outside of country is located in country taxpayer represents that the manufacturing activities performed by corporation y in country with respect to the country manufactured component parts are substantial in nature and constitute the manufacture production or construction_of_property with respect to finished products within the meaning of sec_1_954-3 and are substantial with respect to the manufacture of the finished products as a whole in addition taxpayer believes that the manufacturing activities performed by corporation y and its affiliates with respect to products in country may constitute the manufacture production or construction_of_property with respect to finished products within the meaning of sec_1_954-3 this ruling does not address products with respect to which finishing manufacturing activities are conducted in country plr-121684-11 ruling requested income earned by corporation x with respect to the sale of products purchased from corporation y or its affiliates to a related_person within the meaning of code sec_954 is not foreign_base_company_sales_income within the meaning of code sec_954 because the income qualifies for the same country manufacturing exception under code sec_954 law code sec_957 defines a cfc as a foreign_corporation with respect to which more than percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned directly indirectly or constructively by u s shareholders code sec_951 defines a u s shareholder for cfc purposes as a u_s_person who owns directly indirectly or constructively percent or more of the total combined voting power of all classes of stock entitled to vote of the foreign_corporation u s shareholder code sec_951 provides that a u s shareholder of a cfc must include in gross_income its pro_rata share of the cfc’s subpart_f_income for the year code sec_952 defines subpart_f_income to include foreign_base_company_income code sec_954 defines foreign_base_company_income to include the foreign_base_company_sales_income for the taxable_year code sec_954 defines foreign_base_company_sales_income fbcsi to mean income whether in the form of profits commissions fees or otherwise derived in connection with the purchase of personal_property from a related_person and its sale to any person the sale of personal_property to any person on behalf of a related_person the purchase of personal_property from any person and its sale to a related_person or the purchase of personal_property from any person on behalf of a related_person where a the property which is purchased or in the case of property sold on behalf of a related_person the property which is sold is manufactured produced grown or extracted outside the country under the laws of which the cfc is created or organized and b the property is sold for use consumption or disposition outside such foreign_country or in the case of property purchased on behalf of a related_person is purchased for use consumption or disposition outside such foreign_country code sec_954 provides that a person is a related_person with respect to a cfc if such person is an individual corporation partnership trust or estate which plr-121684-11 controls or is controlled by the cfc or such person is a corporation partnership trust or estate which is controlled by the same person or persons which control the cfc control is defined as the direct or indirect ownership of more than percent of the total voting power of all classes of stock entitled to vote or the total value of a corporation or more than percent of the beneficial_interest in a partnership sec_1_954-3 provides that fbcsi does not include income derived in connection with the purchase and sale of personal_property or purchase or sale of personal_property on behalf of a related_person in a transaction described in sec_1_954-3 if the property is manufactured produced constructed grown or extracted in the country under the laws of which the cfc that purchases and sells the property or acts on behalf of a related_person is created or organized the principles set forth in sec_1 a ii and a iii apply under sec_1 a in determining what constitutes the manufacture production or construction of personal_property excluding the requirement set forth in sec_1 a i that the provisions of sec_1 a ii and a iii may only be satisfied through the activities of employees of the corporation manufacturing producing or constructing the personal_property the principles of sec_1 a iv apply under sec_1 a in determining what constitutes the manufacture production or construction of personal_property but only when the personal_property is manufactured produced or constructed by a person related to the cfc within the meaning of sec_1_954-1 sec_1_954-3 provides that purchased personal_property that is substantially transformed prior to sale is treated as having been manufactured by the selling corporation sec_1_954-3 provides that if purchased property is used as a component of property that is sold and the operations conducted by the selling corporation in connection with the property purchased and sold are substantial in nature and generally considered to constitute the manufacture of property then the sale of the property will be treated as the sale of a manufactured product additionally sec_1_954-3 includes a safe_harbor that provides that the operations of the selling corporation in connection with the use of the purchased property as a component part of the personal_property which is sold will be considered to constitute the manufacture of a product if in connection with such property conversion costs of such corporation account for at least percent of the cost_of_goods_sold analysis taxpayer is a u s shareholder of corporation x which is a cfc accordingly taxpayer is required to include amounts in income under code sec_951 including its pro_rata share of corporation x’s subpart_f_income plr-121684-11 one type of subpart_f_income is fbcsi in general income derived by a cfc from the purchase and sale of property is fbcsi if the property is sold to a person that is a related_person with respect to the cfc within the meaning of code sec_954 however pursuant to code sec_954 the income is not fbcsi if the property is manufactured in the country in which the cfc is organized same country manufacturing exception corporation x which was created under the laws of country derives income from the sale of products to related_persons however pursuant to the same country manufacturing exception corporation x’s sale of products will not generate fbcsi if another person physically manufactures the products in country corporation x purchases products from corporation y and its affiliates corporation y and its affiliates manufacture products in a multi-step process which involves component parts production and final assembly in multiple jurisdictions employees of corporation y and its affiliates conduct manufacturing activities with respect to products in country and outside of country specifically the manufacturing activities with respect to the country manufactured component parts are conducted by corporation y exclusively in country and manufacturing activities with respect to some component parts and final assembly are conducted by corporation y and its affiliates outside of country taxpayer has represented that the activities conducted by corporation y in country constitute manufacturing within the meaning of sec_1_954-3 and are substantial with respect to the products as a whole ruling based on the information submitted and the representations made we rule as follows income earned by corporation x with respect to the sale of products purchased from corporation y or its affiliates to a related_person within the meaning of code sec_954 is not fbcsi within the meaning of code sec_954 because the income qualifies for the same country manufacturing exception under code sec_954 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-121684-11 this ruling is directed only to the taxpayer requesting it code sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely jeffrey g mitchell branch chief branch international cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b01-plr-109331-00 date date legend portfolio trust fund company manager state state declaration date dollar_figurea dollar_figureb this letter responds to your submission of date together with subsequent correspondence in which you requested certain rulings under sec_704 sec_721 and sec_7704 of the internal_revenue_code facts portfolio is a sub-trust of trust which was organized as a business_trust under the laws of state pursuant to declaration trust is registered as an investment_company under the investment_company act of act portfolio is a separate business_trust under the laws of state which recognize that separate trusts established under a single instrument with common trustees are independent legal entities portfolio is registered as an investment_company under the act portfolio and fund represent that portfolio is classified as a partnership under sec_301_7701-3 of the procedure and administration regulations portfolio serves as an investment vehicle for fund fund is a separate series of company a state corporation that is an open-end management investment_company under the act fund invests substantially_all of its assets available for investment in portfolio and has the same investment objective as portfolio fund is treated as a corporation for federal_income_tax purposes and has elected or will elect to be taxed plr-109331-00 as a regulated_investment_company ric under part i of subchapter_m of chapter of subtitle a of the code fund intends to be operated in a manner which would permit it to continue to qualify as a ric portfolio was formed on date when manager became a partner in portfolio in exchange for cash of dollar_figurea and fund became a partner in portfolio in exchange for securities and other assets with a fair_market_value of dollar_figureb manager is the investment_advisor for fund beneficial interests in portfolio are issued solely in private_placement transactions that do not involve any public offering within the meaning of sec_4 of the securities act of as amended act portfolio will not register its shares under the act because shares in portfolio may be issued solely in private_placement transactions that do not involve any public offering within the meaning of sec_4 of the act investments in portfolio only may be made by investment companies or certain other entities that are accredited investors within the meaning of regulation d under the act the interest of each partner in portfolio is limited to the net assets of portfolio and does not extend to the assets of any other investment vehicles of trust portfolio has not invested in any of trust’s other investment vehicles nor are any of trust’s other investment vehicles invested in portfolio except as required by sec_704 and sec_1_704-1 each partner will be allocated a pro_rata share of partnership income gain loss deduction and credit in accordance with the regulations under sec_704 each partner’s initial capital_account balance will be the amount of money and the fair_market_value of the property contributed to portfolio by the partner under sec_1_704-1 portfolio will revalue its investment portfolio to fair_market_value as of the close of each day portfolio will adjust each partner’s capital_account to reflect the partner’s share of the net change in the value of its portfolio of securities from the close of the prior day to the close of the current day portfolio intends to qualify as a securities_partnership under sec_1_704-3 the number of partners in portfolio will be limited to or fewer calculated pursuant to sec_1_7704-1 portfolio has made the following additional representations fund has contributed either cash and or a portfolio of assets that meets the diversification requirements of sec_1_351-1 as further defined in sec_368 for purposes of this test government securities are not included within the meaning of securities under sec_368 but are included within the meaning of total assets in sec_368 the assets contributed by fund other than cash will consist of readily marketable_stock and securities as defined in sec_1_351-1 prior to the plr-109331-00 taxpayer_relief_act_of_1997 all cash received by portfolio will be invested in readily marketable_stock and securities as defined in sec_1_351-1 prior to the taxpayer_relief_act_of_1997 the burden of making sec_704 allocations separate from reverse sec_704 allocations is substantial law and analysis ruling portfolio and fund have requested a ruling that portfolio will not be a publicly_traded_partnership within the meaning of sec_7704 sec_7704 provides that a publicly_traded_partnership is treated as a corporation sec_7704 and sec_1_7704-1 provide that for purposes of sec_7704 the term publicly_traded_partnership means any partnership if interests in the partnership are traded on an established_securities_market or readily_tradable on a secondary market or the substantial equivalent thereof sec_1_7704-1 provides that interests in a partnership are readily_tradable on a secondary market or the substantial equivalent thereof if taking into account all of the facts and circumstances the partners are readily able to buy sell or exchange their partnership interests in a manner that is comparable economically to trading on an established_securities_market sec_1_7704-1 provides that interests in a partnership are not readily_tradable on a secondary market or the substantial equivalent thereof for purposes of sec_7704 if i all interests in the partnership were issued in a transaction or transactions that was not required to be registered under the act and ii the partnership does not have more than partners at any time during the taxable_year sec_1_7704-1 provides that for purposes of sec_1_7704-1 a person owning an interest in a partnership grantor_trust or s_corporation flow-through_entity that owns directly or through other flow-through entities an interest in the partnership is treated as a partner in the partnership only if i substantially_all of the value of the beneficial owner’s interest in the flow-through_entity is attributable to the flow-through entity’s interest direct or indirect in the partnership and ii a principal purpose of the use of the tiered arrangement is to permit the partnership to satisfy the 100-partner limitation of sec_1_7704-1 portfolio has represented that the number of partners in portfolio will be limited to or fewer calculated pursuant to sec_1_7704-1 no interest in portfolio has been plr-109331-00 or will be issued in a transaction or transactions required to be registered under the act accordingly portfolio will not be a publicly_traded_partnership within the meaning of sec_7704 ruling portfolio and fund have requested a ruling that portfolio and fund will not recognize gain_or_loss under sec_721 and sec_351 as a result of the contribution of assets by fund to portfolio sec_721 states generally that no gain_or_loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership sec_721 states that sec_721 shall not apply to gain realized on a transfer of property to a partnership that would be treated as an investment_company within the meaning of sec_351 if the partnership were incorporated treas reg c provides that a transfer of property will be considered to be a transfer to an investment_company if i the transfer results directly or indirectly in diversification of the transferor’s interests and ii the transferee is among other possibilities a corporation more than percent of the value of whose assets are held for investment a transfer will not result in diversification and therefore not constitute a transfer to an investment_company if a transferor transfers a diversified portfolio of stocks and securities as determined under sec_368 applying the relevant provisions of sec_368 but treating government securities as part of total assets but not as securities of an issuer sec_1_351-1 after applying the law to the facts submitted and the representations made we conclude that portfolio and fund will not recognize gain_or_loss under sec_721 and sec_351 as a result of the contributions of assets by fund to portfolio we express no opinion about whether subsequent transfers of stock and securities to portfolio by any transferor will affect the tax consequences of the original transfers ruling portfolio and fund have requested permission to aggregate built-in gains and losses from qualified_financial_assets contributed to portfolio with built-in gains and losses from revaluations of qualified_financial_assets held by portfolio for the purpose of making sec_704 and reverse sec_704 allocations sec_704 provides that income gain loss and deduction with respect to property contributed to the partnership by a partner is shared among the partners so as to take account of the variation between the basis of the property to the partnership and its fair_market_value at the time of contribution plr-109331-00 sec_1_704-3 states that the purpose of sec_704 is to prevent the shifting of tax consequences among partners with respect to precontribution gain_or_loss under sec_704 a partnership must allocate income gain loss and deductions with respect to property contributed by a partner to the partnership so as to take into account any variation between the adjusted tax basis of the property and its fair_market_value at the time of the contribution this allocation must be made using a reasonable method that is consistent with the purpose of sec_704 sec_1_704-3 provides that the principles of sec_1_704-3 apply to allocations with respect to property for which differences between book_value and adjusted tax basis are created when a partnership revalues partnership property under sec_1_704-1 reverse sec_704 allocations a partnership that makes allocations with respect to revalued property must use a reasonable method that is consistent with the purposes of sec_704 and c sec_1_704-3 indicates that sec_704 generally applies on a property-by- property basis therefore in determining whether there is a disparity between adjusted tax basis and fair_market_value the built-in gains and built-in losses on items of contributed or revalued property generally cannot be aggregated sec_1_704-3 sets forth a special rule allowing certain securities partnerships to make reverse sec_704 allocations on an aggregate basis specifically sec_1_704-3 provides that for purposes of making reverse sec_704 allocations a securities_partnership may aggregate gains and losses from qualified_financial_assets using any reasonable approach that is consistent with the purposes of sec_704 once a partnership adopts an aggregate approach the partnership must apply the same aggregate approach to all of its qualified_financial_assets for all taxable years in which the partnership qualifies as a securities_partnership sec_1_704-3 defines a securities_partnership as a partnership that is either a management company or an investment_partnership and that makes all of its book allocations in proportion to the partners’ relative book capital accounts except for reasonable special allocations to a partner that provides management services or investment advisory services to the partnership under sec_1_704-3 a partnership is a management company if it is registered as a management company under the act sec_1_704-3 defines qualified_financial_assets as any personal_property including stock that is actively_traded as defined in sec_1_1092_d_-1 defining actively_traded property for purposes of the straddle rules for a management company qualified_financial_assets also include the following even if not actively_traded shares of stock in a corporation notes bonds debentures or other evidences of indebtedness interest rate currency or equity notional_principal_contracts evidences of an interest in or derivative financial instruments in any security currency or plr-109331-00 commodity including any option forward or futures_contract or short position or any similar financial_instrument sec_1_704-3 and e v describe two approaches to making aggregate reverse sec_704 allocations that are generally reasonable -- the partial netting approach and the full netting approach however sec_1_704-3 provides that other approaches may be reasonable in appropriate circumstances sec_1_704-3 provides that an allocation method or combination of methods is not reasonable if the contribution of property or event that results in reverse sec_704 allocations and the corresponding allocation of tax items with respect to the property are made with a view to shifting the tax consequence of built-in_gain or loss among the partners in a manner that substantially reduces the present_value of the partners' aggregate tax_liability furthermore sec_1_704-3 provides that the character and other tax_attributes of gain_or_loss allocated to the partners under an aggregate approach must a preserve the tax_attributes of each item of gain_or_loss realized by the partnership b be determined under an approach that is consistently applied and c not be determined with a view to reducing substantially the present_value of the partners' aggregate tax_liability portfolio has represented that its allocations have complied and will comply with sec_1_704-3 the aggregation rule_of sec_1_704-3 applies only to reverse sec_704 allocations therefore a securities_partnership using an aggregate approach must generally account for any built-in_gain or loss from contributed_property separately the preamble to sec_1_704-3 explains that the final regulations do not authorize aggregation of built-in gains and losses from contributed_property with built-in gains and losses from revaluations because this type of aggregation can lead to substantial distortions in the character and timing of income and loss recognized by contributing partners t d 1995_1_cb_120 however the preamble also recognizes that there may be instances in which the likelihood of character and timing distortions is minimal and the burden of making sec_704 allocations separate from reverse sec_704 allocations is great consequently sec_1 e iii authorizes the commissioner to permit by published guidance or letter_ruling aggregation of qualified_financial_assets for purposes of making sec_704 allocations in the same manner as that described in sec_1_704-3 in this case portfolio will use the partial netting approach described in sec_1_704-3 portfolio’s burden of making sec_704 allocations separate from reverse sec_704 allocations is represented to be substantial in addition the likelihood that this type of aggregation could be abused by portfolio and its partners is minimal it is represented that fund is a publicly_offered_regulated_investment_company as defined in sec_67 and sec_1_67-2t plr-109331-00 after applying the relevant law to the facts presented and the representations made we conclude that portfolio may aggregate built-in gains and losses from qualified_financial_assets contributed to portfolio by fund with built-in gains and losses from revaluations of qualified_financial_assets held by portfolio for purposes of making sec_704 and reverse sec_704 allocations provided that a contribution or revaluation of property and the corresponding allocation of tax items with respect to the property are not made with a view to shifting the tax consequences of built-in_gain or loss among the partners in a manner that substantially reduces the present_value of the partners' aggregate tax_liability except as specifically ruled upon above we express no opinion on the federal tax consequences of the transactions described above under any other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction s that are not specifically covered by the above rulings ruling three is limited to allocations of gain_or_loss from the sale_or_other_disposition of qualified_financial_assets made under sec_704 sec_704 and sec_1_704-3 specifically no opinion is expressed concerning i whether fund qualifies as a ric that is taxable under subchapter_m part i of the code ii allocations of items other than items of gain_or_loss from the sale_or_other_disposition of qualified_financial_assets or iii the aggregation of built-in gains and losses from qualified_financial_assets contributed to portfolio other than those described above in addition portfolio must maintain sufficient records to enable it and its partners to comply with sec_704 and sec_737 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to portfolio and portfolio’s second authorized representative sincerely david r haglund senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


date cor-115778-00 internal_revenue_service number info release date uil the honorable duncan hunter u s house of representatives washington d c dear mr hunter thank you for your letter of date signed by you and a number of your colleagues encouraging the internal_revenue_service to immediately readjust the business standard mileage rate to reflect the recent increase in gasoline prices you note that the increased cost has particularly burdened self-employed taxpayers who use automobiles for business purposes gasoline prices we realize increased gasoline prices are an economic burden however the cost of gasoline is only one part of the business standard mileage rate which includes fixed and operating automobile costs these costs include depreciation or lease payments maintenance and repairs insurance and license and registration fees in addition to gasoline and oil less than one-third of the cents per mile rate comes from the cost of gasoline and oil thus an immediate adjustment in the rate taking into account the recent increase in gasoline prices might not be significant setting the business standard mileage rate the rate is a national average amount determined by an annual study performed by an independent_contractor who is an expert in the cost analysis of business use of automobiles the contractor uses recent data from each state on the component costs of operating the most popular automobiles the contractor then combines this data to achieve a national composite cents-per-mile rate advantages of using the business standard mileage rate reducing a taxpayer’s record-keeping burden is the principal advantage of using the rate gasoline prices rise and fall during the year but taxpayers may continue to use the same rate without having to keep records of actual expenses although rising gasoline prices can be a disadvantage for taxpayers who use the rate falling prices can work to their advantage for example although gasoline prices fell in for all of and through date taxpayers were able to use the rate that reflected the earlier higher prices taxpayer’s options to deduct the ordinary and necessary expenses of using an automobile for business purposes a taxpayer must substantiate the cost date place and business_purpose of each use of the automobile by adequate_records for the cost the taxpayer has two options substantiate actual cost by keeping records or by other_sufficient_evidence use the business standard mileage rate using the rate gives approximate not actual costs taxpayers can deduct the actual business_expenses of using a personally-owned automobile and this may be advantageous when automobile costs are rising publication travel entertainment gift and car expenses contains further information on how taxpayers should substantiate expenses i have enclosed the relevant pages from that publication i am sending a similar letter to your colleagues i hope this information is helpful please call me at or robert a berkovsky at if you have any questions sincerely charles o rossotti enclosure


t c memo united_states tax_court raghunathan sarma and gaile sarma petitioners v commissioner of internal revenue respondent docket no filed date charles e hodges ii antoinette g ellison and aditya shrivastava for petitioners leslie j spiegel and craig connell for respondent memorandum opinion goeke judge this case is before us on the parties’ cross-motions to dismiss for lack of jurisdiction following respondent’s issuance of an affected_item notice_of_deficiency the parties submitted a declaration of witnesses with attached exhibits background when the petition was filed petitioner raghunathan sarma resided in florida petitioner gaile sarma had a mailing address in new jersey the record does not provide her state of residence during the years at issue petitioners were married and filed joint tax returns they divorced in the adjustments in the notice_of_deficiency arise from raghunathan sarma’s participation in a tax_shelter known as a family office customized partnership or focus a transaction substantially_similar to the transaction described in notice_2002_50 2002_2_cb_98 mr sarma implemented the focus tax_shelter through a series of transactions executed by a three-tiered set of limited_liability companies treated as partnerships for federal tax purposes the upper_tier_partnership nebraska partners fund llc nebraska partners or nebraska the middle-tier partnership lincoln partners fund llc lincoln partners or 1respondent disputes that the declaration and exhibits submitted by petitioners allow us to grant petitioners’ motion to dismiss we will deny petitioners’ motion and do not need to address the factual disputes in response to respondent’s motion petitioners state that the material facts are not in dispute 2for simplicity we refer to the entities as partnerships lincoln and the lower_tier_partnership kearney partners fund llc kearney partners or kearney the tax_shelter resulted in a series of deemed terminations of the partnerships and deemed formations of new partnerships because of changes in the ownership of the partnerships including mr sarma’s purchases of lincoln partners and nebraska partners because of the deemed terminations the partnerships filed tax returns for multiple short tax periods during lincoln and kearney were subject_to the unified partnership audit and litigation procedures tefra under sec_6221 through for short tax periods tefra tax periods when mr sarma did not formally own direct interests in the partnerships he was an indirect_partner in both partnerships during certain tefra tax periods of significance lincoln partners was not subject_to tefra for the short tax period that mr sarma held a direct interest in it because it fell within the small_partnership_exception to tefra under sec_6231 small_partnership tax period and did not elect to be subject_to tefra 3unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure all amounts are rounded to the nearest dollar the issues for consideration are whether respondent is bound by an initial decision later abandoned to audit lincoln partners’ return for the small_partnership tax period under the tefra procedures we hold he is not whether the special statute_of_limitations rules for tefra partnerships under section apply for petitioners’ tax_year we hold they do whether a partner-level determination is required to adjust petitioners’ tax_liabilities following the decision in the tefra case we hold it is and whether respondent issued invalid multiple notices of deficiency we hold he did not i tax_shelter transactions nebraska partners and lincoln partners were formed on date the date of kearney partners’ organization is not stated in the record as of date as part of the structure of the focus tax_shelter nebraska partners owned of lincoln partners and lincoln partners owned of kearney partners bricolage capital management co a c_corporation was a partner in nebraska and lincoln and the tax_matters_partner of each delta currency management co was a partner and the tax_matters_partner of kearney partners each of the three partnerships filed a partnership tax_return for the short tax period of october to date date tax period before mr sarma acquired an ownership_interest in the partnerships the tax_shelter involved three transactions relating to ownership changes of the partnerships within the tiered_structure on date mr sarma purchased a interest in nebraska partners all three partnerships terminated their tax periods on date pursuant to sec_708 for short tax periods of november to date date tax period see sec_1_708-1 income_tax regs providing that a partnership and any lower tier_partnerships shall terminate when or more of the total interest in the partnership’s capital and profits is sold or exchanged within a 12-month_period new partnerships were deemed to be formed for the three partnerships and the partnerships treated their new tax periods as beginning on date see id para b providing that when a partnership is deemed to terminate by a sale_or_exchange of an interest the partnership is deemed to contribute its assets and liabilities to a new partnership in exchange for an interest in the new partnership and the terminated partnership is deemed to distribute interests in the new partnership to the purchasing partner and other remaining partners in liquidation of the terminated partnership each of the three 4respondent did not contest the date date used for the beginning of the partnerships’ tax periods partnerships filed a partnership tax_return for the date tax period on the basis of its deemed termination on date mr sarma purchased a interest in lincoln partners from nebraska partners mr sarma already indirectly owned lincoln partners through nebraska partners mr sarma directly held the partnership_interest in lincoln partners for the remainder of on date lincoln and kearney terminated their tax periods pursuant to sec_708 on the basis of mr sarma’s purchase of lincoln partners and two new partnerships were deemed to be organized see sec_1_708-1 income_tax regs both lincoln and kearney reported short tax periods of december to date tax period on date lincoln partners with mr sarma as a partner sold its interest in kearney partners for dollar_figure to fermium ii partners fund llc an entity related to the tax_shelter promoter as a result of the sale kearney partners terminated its tax period reporting a short tax period of december to date tax period lincoln partners filed a partnership return for the short tax period of december to date tax period and continued to file returns for through with mr sarma as its partner beginning before date the date mr sarma purchased his nebraska partnership_interest through date the date lincoln sold its kearney partners interest kearney partners executed offsetting foreign_currency options fx straddles generating significant artificial gains and losses at the time of lincoln’s sale of its kearney partnership_interest kearney partners held dollar_figure in cash and certificates of deposit totaling dollar_figure it had unrealized losses from the fx straddles that had not been closed out but it also had realized gain from the fx straddles lincoln partners claimed that it had an outside_basis in its kearney partnership_interest at the time of the sale of dollar_figure on the basis of the gain from the fx straddles it did not account for the unrealized losses however lincoln partners reported a short-term_capital_loss of dollar_figure on the sale of its kearney partnership_interest lincoln loss for its date tax period it allocated dollar_figure of the lincoln loss to mr sarma as its partner sarma loss petitioners claimed a deduction for the sarma loss on their joint tax_return and carried forward portions of the loss to through 5kearney partners retained the certificates of deposit and cash when lincoln sold its kearney partnership_interest mr sarma did not receive any distributions from kearney partners upon lincoln’s sale of the kearney partnership_interest on the basis of the above transactions lincoln partners filed partnership tax returns for the following three short tax periods during which mr sarma owned an indirect or direct interest the date tax period the date tax period and the date tax period lincoln partners was subject_to tefra for the first two tax periods december and for a portion of lincoln’s date tax period from december to lincoln was a partner of kearney and kearney was subject_to tefra during that time lincoln was a small_partnership exempt from tefra for its date tax period the only tax period that mr sarma was a direct partner lincoln partners’ return for its date tax period date return shows that it had two partners and neither partner was the type that would cause tefra to automatically apply lincoln did not attach a statement to its date tax_return electing to opt_out of the small_partnership_exception and to apply tefra see sec_301_6231_a_1_-1 proced admin regs a small_partnership may elect to apply tefra by filing an attachment to its return on its date tax_return lincoln partners answered yes on line of schedule b to the question of whether it was subject_to tefra and named a tax_matters_partner during lincoln’s date tax period mr sarma contributed dollar_figure million in cash to lincoln partners the record does not establish whether the contribution occurred before or after lincoln sold its interest in kearney partners however mr sarma’s outside_basis in lincoln is not at issue here mr sarma also guaranteed a dollar_figure million loan used to execute the fx straddles the lender did not require the guaranty from mr sarma as the fx straddles did not result in any risk to the lender kearney partners fund llc ex rel lincoln partners fund v united_states 803_f3d_1280 11th cir ii procedural history in date the internal_revenue_service irs began an examination of petitioners’ return revenue_agent barbara rickard issued notices of beginning of administrative_proceeding nbap dated date to the three partnerships for the following tax periods partnership nebraska partners lincoln partners kearney partners tax period date date date date date date date date date date subsequently revenue_agent rickard issued nbaps dated april and date for nebraska partners’ and lincoln partners’ date tax periods respectively respondent did not issue the nbaps to mr sarma mr sarma was not a notice_partner to whom respondent was required to issue an nbap see sec_6223 requiring the commissioner to issue notice partners notices of the beginning and end of a partnership audit in mid-2004 the examination for the partnerships was transferred to revenue_agent linda scheick in late she determined that neither lincoln partners nor nebraska partners was subject_to tefra for its date tax period because both fell within the small_partnership_exception and accordingly the nbaps were issued in error she did not solicit a written extension of the period of limitations for nebraska’s or lincoln’s date tax period on date respondent issued a notice_of_deficiency to petitioners for through notice adjusting partnership and or affected items of the three partnerships relating to the partnerships’ date tax periods and items unrelated to any of the three partnerships respondent determined that the three partnerships were shams and raised economic_substance step transaction substance over form and other issues relating to the focus tax_shelter the notice stated that it was for protective purposes in the event that the adjustments were not subject_to partnership-level proceedings under tefra petitioners filed a petition with this court and a motion to dismiss for lack of jurisdiction as to the partnership and affected items on the basis that the partnerships were subject_to tefra respondent did not object to the motion but filed a response explaining his position that the court lacked jurisdiction over the partnership and affected items he asserted that both lincoln partners and nebraska partners were small partnerships exempt from tefra for their date tax periods respondent’s response to petitioner’s motion to dismiss sarma v commissioner sarma i t c dkt no date respondent identified the sarma loss as an affected_item and asserted that lincoln’s outside_basis in its kearney partnership_interest is an affected_item determined with reference to the three partnerships’ tefra tax periods the court dismissed the partnership and affected items on the basis of lack of jurisdiction in an order dated date the parties settled the remaining adjustments the date decision document included the following stipulation mr sarma does not concede that he has an interest in the outcome under sec_6226 of any partnership proceedings involving kearney lincoln and nebraska or that any adjustment made to partnership items impacts the tax_liabilities of petitioners for tax_year sec_2001 sec_2002 and or on date respondent issued nine notices of final_partnership_administrative_adjustment fpaas to nebraska partners lincoln partners and kearney partners for their tefra tax periods for which the irs had issued nbaps see supra pp except that he did not issue fpaas for nebraska’s and lincoln’s small_partnership tax periods the date tax periods in the fpaas respondent determined that the three partnerships were disregarded for tax purposes and reallocated their income loss and expenses to mr sarma including those for their date and date tax periods when mr sarma was neither a direct nor indirect_partner he disallowed the lincoln loss on the basis that the partnerships were abusive tax_shelters designed to generate artificial tax losses mr sarma did not directly own any interest in the partnerships for the tefra tax periods however he did own indirect interests for certain tefra tax periods respondent included a letter with the fpaas mailed to mr sarma stating that he had the right to elect to have his partnership items treated as nonpartnership_items and thereby opt_out of tefra under sec_6223 because of the irs’ failure to timely issue nbaps to him see sec_6223 requiring the commissioner to issue an nbap at least days before issuing an fpaa and e providing the right to opt_out of tefra for notice partners who did not timely receive an nbap on date mr sarma filed an election with the irs opting out of tefra respondent in a letter dated date stated that he had erred and mr sarma did not have the right to opt_out of tefra because he did not have the right to receive an nbap on date respondent issued a protective converted items notice_of_deficiency to petitioners for through notice because of mr sarma’s attempted election to opt_out of tefra the notice contained the same adjustments to partnership and affected items as the notice but did not contain the adjustments unrelated to the three partnerships respondent filed a motion to dismiss for lack of jurisdiction arguing petitioners did not have the right to opt_out of tefra petitioners argued that mr sarma had the right to opt_out and that the notice was invalid on different grounds the court granted respondent’s motion to dismiss noting the parties agreed that the notice was invalid sarma v commissioner t c dkt no date in response to the fpaas the partnerships filed complaints in the u s district_court for the middle district of florida and their cases were consolidated the partnerships filed a motion to dismiss for lack of personal and subject matter jurisdiction as to mr sarma arguing that he had the right to opt_out of the tefra proceedings because he did not timely receive an nbap kearney no 10-cv- 153-ftm-spc wl m d fla date order the district_court denied the motion holding that mr sarma did not have a right to receive an nbap and therefore did not have the right to opt_out of tefra id at see sec_6223 sec_301_6223_c_-1 proced admin regs providing manner for partners to become notice partners following a bench trial the district_court upheld the disallowance of the lincoln loss deduction but held that the plaintiffs were not subject_to a sec_6662 accuracy-related_penalty on the basis of mr sarma’s participation in the voluntary disclosure program described in notice_2002_2 2002_1_cb_304 kearney no 10-cv-153-ftm-spc wl m d fla date the district_court found that mr sarma schemed to create and operate the partnerships even before mr sarma formally purchased them to serve as an abusive_tax_shelter id at the district_court held the fpaas properly found that the partnerships lacked economic_substance and made adjustments accordingly id at it found that every step of the focus tax_shelter including the creation of the partnerships the fx straddles mr sarma’s purchase of nebraska and lincoln the capital contributions the guaranty and the sale of kearney was solely motivated by tax-avoidance id at it found that the transactions at issue lacked both economic effects and a legitimate business_purpose and thus are not entitled to tax respect id the district_court entered a judgment in favor of defendant and against plaintiffs as to the lack of economic_substance of the partnerships and adjustments in the fpaas holding that the fpaa adjustments that reallocated income and or loss to mr sarma in his individual capacity were moot and not upheld the district_court did not make a finding with respect to lincoln partners’ outside_basis in its kearney partnership_interest the u s court_of_appeals for the eleventh circuit affirmed the decision on date 803_f3d_1280 6the district_court erroneously stated that mr sarma rather than lincoln partners sold the interest in kearney partners we find this error is immaterial to our decision on date respondent issued an affected items notice_of_deficiency notice to petitioners for through the adjustments in the notice arise from mr sarma’s participation in the focus tax_shelter in the notice respondent disallowed the deduction of petitioners’ share of the lincoln loss on the sale of the kearney partnership_interest ie the sarma loss for and the capital_loss carryforwards for through on the basis that kearney partners and lincoln partners were shams and disregarded for tax purposes the disallowance of the sarma loss deduction was the only adjustment except for adjustments to itemized_deductions on the basis of statutory limitations as a result of the loss deduction disallowance on date respondent assessed the tax against petitioners with respect to the adjustments asserted in the notice and issued a notice of computational adjustment for each year he issued the notice for protective purposes iii nebraska partners nebraska partners filed a partnership tax_return for the short tax period december to during which it was a small_partnership exempt from tefra mr sarma directly owned the nebraska partnership_interest from december to nebraska reported a capital_loss of dollar_figure from the sale of its partnership_interest in lincoln partners to mr sarma nebraska loss on date and treated the loss deduction as disallowed under sec_707 see sec_707 providing that no loss deduction shall be allowed from the sale of property between a partnership and a direct or indirect_partner owning more than a capital or profits interest in the partnership on their joint tax_return petitioners reported the nebraska loss deduction as disallowed treatment of the nebraska loss is not at issue respondent did not issue an fpaa to nebraska partners for the december to tax period discussion the parties agree that lincoln partners satisfied the definition of a small_partnership under sec_6231 and was exempt from tefra for its date tax period the period of during which mr sarma was a direct partner mr sarma was an indirect_partner in lincoln during its date tefra tax period see sec_6231 defining an indirect_partner as a person holding an interest in a partnership through or more pass-through 7a small_partnership is defined as a partnership with or fewer partners who are individuals other than nonresident_aliens c corporations or estates of deceased partners sec_6231 a partnership’s status as a small_partnership is determined annually with respect to each partnership taxable_year sec_301_6231_a_1_-1 proced admin regs a partnership cannot qualify as a small_partnership if any partner is a passthrough_partner id subpara a passthrough_partner is a partnership estate_trust s_corporation nominee or other similar person through whom other persons hold an interest in the partnership sec_6231 defining a passthrough_partner partners lincoln partners was a partner of kearney partners for kearney’s date tefra tax period during which time mr sarma was an indirect_partner in lincoln and kearney i parties’ arguments petitioners make three arguments in support of their motion to dismiss they argue that the court should dismiss this case whether we apply the tefra procedures or the normal deficiency procedures of subchapter_b of chapter of the code the first two arguments depend on whether tefra applies despite lincoln’s status as a small_partnership for its date tax period first they argue that tefra applies for lincoln’s date tax period because the irs determined that tefra applied when it issued an nbap and respondent is bound by that determination they argue that respondent failed to issue the required fpaa the notice is invalid and the court lacks jurisdiction over this case as an alternative argument petitioners contend that if we treat lincoln partners as a small_partnership exempt from tefra we must also dismiss they argue that if lincoln is a small_partnership for its date tax period the special statute_of_limitations rules applicable for tefra partnerships under section likewise do not apply for the date tax period they argue that the period of limitations is determined under section and expired no later than date more than three years before the notice was issued respondent counters that the adjustments relate to partnership items from kearney’s and lincoln’s prior tefra tax periods even though lincoln was a small_partnership exempt from tefra for its date tax period third petitioners argue that if we find that the statute_of_limitations does not bar assessment the notice is invalid because respondent previously issued two deficiency notices for through respondent filed a cross-motion to dismiss also arguing that the notice is invalid he argues that the adjustments in the notice do not require a partner-level determination and therefore are not subject_to the deficiency procedures he argues that the partnership-level case determined that kearney partners was a sham and thus lincoln cannot have an outside_basis in its kearney partnership_interest in excess of zero citing united_states v woods 571_us_31 he argues that no partner-level determinations are required to adjust lincoln’s outside_basis to zero because taxpayers cannot have basis in an asset that does not exist for federal tax purposes according to respondent’s argument outside_basis is always zero in a sham_partnership and the adjustments at issue are computational and do not require the issuance of deficiency notices accordingly he argues that the notice is invalid and we do not have jurisdiction in this case this court is a court of limited jurisdiction we may exercise our jurisdiction only to the extent provided by statute see sec_7442 114_tc_519 we have jurisdiction to redetermine a deficiency if the commissioner issues a valid notice_of_deficiency and the taxpayer files a timely petition gaf corp subs v commissioner t c pincite ii application of tefra procedures both parties agree that lincoln partners was a small_partnership exempt from tefra for its date tax period however petitioners argue that the irs determined although erroneously through the issuance of the nbap in date and the notice that tefra applied for lincoln’s date tax period they argue that respondent is bound by that determination pursuant to sec_6231 and was required to issue an fpaa for lincoln’s date tax period to make the adjustments he seeks in this case according to petitioners respondent failed to issue an fpaa and thus the court lacks jurisdiction over lincoln’s date tax period and lacks jurisdiction to disallow the sarma loss deduction we find that neither the nbap nor the notice constitutes a determination by respondent to treat lincoln partners as a tefra partnership for its date tax period for the reasons set forth below we hold that respondent did not determine that tefra applied for lincoln’s date tax period under sec_6231 when the commissioner erroneously determines that tefra applies to a non-tefra partnership the partnership will be subject_to tefra so long as that determination was reasonable on the basis of the partnership’s tax_return when the commissioner makes a reasonable but erroneous determination on the basis of a partnership return that tefra applies to a small_partnership a partnership that should be subject_to the normal deficiency procedures will instead be subject_to the tefra procedures conversely tefra will not apply to a tefra partnership where the commissioner has reasonably but erroneously determined on the basis of a partnership return that tefra does not apply sec_6231 respondent maintains that he did not determine that tefra applied for lincoln’s date tax period and if the court finds that he made such a determination that determination was not reasonable because lincoln partners’ date tax_return clearly shows that it was a small_partnership and lincoln did not file an attachment to the return electing to have tefra apply sec_6231 was intended to protect the commissioner where he makes an erroneous determination on the basis of a partnership return that a small_partnership is subject_to tefra so long as his determination was reasonable 143_tc_83 it is a relief provision for the irs the code grants this relief because of the difficulty that the irs may have when determining whether a partnership is subject_to tefra id pincite congress’ purpose for enacting sec_6231 was to simplify the irs’ task of choosing between the tefra procedures and the normal deficiency procedures by permitting the irs to rely on the partnership’s return id however petitioners attempt to use sec_6231 as a punitive measure against respondent on the basis of certain statements on lincoln’s date return that conflict with its small_partnership status on lincoln’s date return it answered yes to question asking whether tefra applied and it named a tax_matters_partner the return shows that the partnership had two partners and that neither partner was the type of partner that would cause tefra to automatically apply see sec_6231 setting forth the criteria for a small_partnership notably lincoln partners did not follow the rules set forth in the regulations or the instructions for form_1065 u s partnership return which state caution this partnership does not make this election when it answers yes to question the election must be made separately lincoln did not attach a statement to its date return to elect to have tefra apply as required by the regulations or form_1065 instructions see sec_6231 sec_301_6231_a_1_-1 proced admin regs the method for a small_partnership to elect to apply tefra is to attach a statement to its return if sec_6231 applies it would render lincoln partners subject_to tefra for the date tax period even though the parties agree that it fell within the small_partnership_exception for sec_6231 to apply three events must occur the irs determined on the basis of lincoln partners’ return that it was subject_to tefra the determination was erroneous and the determination was reasonable when the commissioner issues multiple notices with conflicting determinations regarding tefra’s applicability the first notice controls bedrosian v commissioner t c pincite the commissioner issued an fpaa followed by a notice_of_deficiency we conclude infra that respondent did not determine that tefra applied for lincoln’s date tax period the second factor is not at issue the parties agree that such a determination would have been erroneous because lincoln was a small_partnership for its date tax period in considering the first factor we must address a threshold question of whether the irs made a determination that tefra applies and a secondary question of what type of notice from the irs constitutes a determination petitioners argue that the notice and the nbap constitute a determination by respondent we disagree the notice is not a determination for purposes of sec_6231 for sec_6231 to apply the commissioner must make a single partnershipwide determination regarding tefra’s applicability bedrosian v commissioner t c pincite in the notice respondent determined that petitioners were not entitled to deduct the portion of the lincoln loss allocated to mr sarma respondent did not make a partnershipwide determination and accordingly did not make a determination regarding tefra’s applicability for purposes of sec_6231 as the notice was not a partnershipwide adjustment the notice does not constitute a determination under sec_6231 even if the notice made partnershipwide adjustments the notice could not constitute a determination because it was invalid as to the adjustments relating 8as we find that respondent did not determine that tefra applied for lincoln’s date tax period we do not consider whether such a determination would have been reasonable the third factor to the partnership and affected items we dismissed the partnership and affected items in sarma i petitioners argue that the dismissal in sarma i is consistent with a determination that tefra applied for lincoln’s date tax period they characterize the decision in sarma i as finding that mr sarma would not have affected items from kearney and kearney cannot affect their tax_liability however our decision to dismiss with respect to the partnership and affected items did not result from a finding that lincoln’s date tax period was subject_to tefra while petitioners argued for dismissal in sarma i as to the partnership and affected items adjustments respondent issued the notice with respect to these adjustments for protective purposes in sarma i respondent stated to the court that lincoln was a small_partnership for its date tax period and the three partnerships were subject_to tefra for certain tax periods during in clear contradiction to petitioners’ characterization of that case respondent did not take the position that tefra applied for lincoln’s date tax period rather the decision in sarma i is consistent with a determination that lincoln is not subject_to tefra for its date tax period nor does the nbap constitute a determination by the commissioner that tefra applies for purposes of sec_6231 the commissioner makes a determination when he issues the notice that concludes the examination bedrosian v commissioner t c pincite we have held that an fpaa is the commissioner’s determination of tefra’s applicability inherent in the issuance of an fpaa is a determination that tefra applies id pincite see clovis i v commissioner 88_tc_980 respondent did not issue an fpaa for lincoln’s date tax period accordingly he did not make a determination that tefra applied for that tax period see bedrosian v commissioner t c pincite events occurring during the examination are not determinative as to whether tefra applies furthermore nothing in the code nor the regulations requires the commissioner to make an adjustment or issue a notice following the conclusion of an audit see sec_6223 relating to issuance of notices at beginning and conclusion of partnership audit we hold that sec_6231 does not apply and lincoln’s date tax period is not subject_to tefra petitioners also argue that the nbap should control because mr sarma did not receive notice at the end of lincoln’s audit that tefra did not apply for lincoln’s date tax period they argue that they reasonably relied on the nbap and reasonably expected respondent to issue an fpaa they argue that respondent had a duty to inform them that he would not issue an fpaa and did not notify them that one would not be issued they argue that the issuance of the nbap should control because the commissioner must determine whether to apply tefra or the normal deficiency procedures at the beginning of a partnership audit they emphasize the importance of the beginning of the audit because they argue if tefra does not apply the commissioner must deal directly with each partner during the audit rather than the tefra tax_matters_partner they rely on a statement in 91_tc_242 that a determination should be made by respondent as of the date of commencement of the audit of the partnership but not necessarily on that date by examining the partnership return prior to this date harrell does not support petitioners’ argument that the commissioner must definitively determine tefra’s applicability at the beginning of the audit or that a revenue agent’s initial decision to issue an nbap controls it was not reasonable for mr sarma to expect respondent to issue an fpaa for lincoln’s date tax period as its status as a small_partnership is clear on the partnership return and it did not file the required attachment to make an election moreover respondent did not have a duty to inform petitioners that he would not issue an fpaa petitioners do not cite any authority in the code or the regulations to support their argument that respondent had such a duty there is no basis to impose a duty on respondent to inform petitioners that he would not issue an fpaa in sarma i respondent stated that lincoln was a small_partnership for the date tax period so petitioners should have known no fpaa would be issued revenue_agent rickard issued an nbap for lincoln’s date tax period and information document requests to lincoln’s tax_matters_partner in mid-2004 the examination of the partnerships’ and petitioners’ returns was transferred to revenue_agent scheick and she determined that tefra did not apply for that tax period she began treating lincoln partners as a non-tefra partnership for its date tax period approximately one year after the nbap for lincoln was issued and approximately five years before the notice and the fpaas for the tefra tax periods were issued under these facts any expectation on mr sarma’s part that respondent would issue an fpaa for lincoln’s date tax period would not have been reasonable in summary respondent was not required to issue an fpaa for lincoln’s date tax period to make the adjustments he seeks in this case we will deny petitioners’ motion to dismiss with respect to this argument iii application of section special statute_of_limitations rules as we have found that respondent was not required to issue an fpaa for lincoln’s date tax period we next consider petitioners’ argument that the statute_of_limitations under sec_6501 bars assessment the statute_of_limitations is an affirmative defense and does not raise a jurisdictional issue see sec_6213 our jurisdiction to redetermine a deficiency depends on the issuance of a notice_of_deficiency and filing of a petition 220_f3d_1255 11th cir aff’g tcmemo_1998_ 98_tc_607 thus the court would not lose jurisdiction even if petitioners are correct that the statute_of_limitations bars assessment as a result we will treat petitioners’ statute_of_limitations argument as a motion for summary_judgment a motion for summary_judgment may be granted where the pleadings and other materials show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b 98_tc_518 aff’d 17_f3d_965 7th cir the burden is on the moving party to show that there is no genuine dispute of material fact and he is entitled to judgment as a matter of law 116_tc_73 in summary_judgment cases the evidence is viewed in the light most favorable to the nonmoving party 100_tc_32 section extends the period of limitations for assessment prescribed by sec_6501 with respect to partnership and affected items see sec_6501 114_tc_533 it applies to assessments of tax with respect to any person which is attributable to any partnership_item or affected_item for a partnership taxable_year sec a under section a the period of limitations for tefra partnerships is triggered by the later of the filing of the partnership tax_return or the last day for filing the return 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 sec 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 for a non-tefra small_partnership however the limitations_period is generally triggered upon the filing of the partner’s return not the partnership return 4_f3d_709 9th cir aff’g tcmemo_1991_212 petitioners do not dispute that the period of limitations would remain open if section applied if section applied the period of limitations for assessments with respect to the sarma loss would expire one year after the district court’s decision became final date rather they argue that section special statute_of_limitations rules for tefra partnerships cannot apply for a small_partnership exempt from tefra they argue that section does not apply for lincoln’s date tax period and the date tax period was the only tax period during which mr sarma owned a direct interest in lincoln they argue that the period of limitations under sec_6501 has expired we hold that the special statute_of_limitations rules for tefra partnerships under section apply for lincoln’s non-tefra date tax period and extend the period of limitations for petitioners’ tax_year by its terms section applies only to partnership or affected items petitioners argue that as a small_partnership lincoln partners cannot have partnership or affected items and thus section does not apply they argue a small_partnership can have only nonpartnership_items citing nehrlich v commissioner tcmemo_2007_88 aff’d 327_fedappx_712 9th cir and am milling l p v commissioner t c memo according to petitioners the lincoln loss was a nonpartnership item of a small_partnership in nehrlich v commissioner slip op pincite we wrote tefra then defines ‘partnership’ to exclude small partnerships and this then excludes them from tefra procedures because a small_partnership would have only nonpartnership_items petitioners argue that in am milling l p we held that tefra partnerships have partnership items and by analogy a small_partnership can have only nonpartnership_items while petitioners may be correct that a small_partnership may not have partnership or affected items flowing from it a small_partnership can have affected items from its participation in other tefra partnerships a partnership_item is any item required to be taken into account for the partnership’s taxable_year under any provision of subtitle a income taxes to the extent the regulations provide that for purposes of this subtitle such item is more appropriately determined at the partnership level than at the partner level sec_6231 a nonpartnership item is an item which is or treated as not a partnership_item id para an affected_item is any item to the extent it is affected by the determination of a partnership_item id para generally outside_basis is an affected_item woods u s pincite 591_f3d_649 d c cir aff’g in part rev’g and remanding in part 131_tc_84 see sec_301_6231_a_5_-1 proced admin regs a computational adjustment is the change in the tax_liability of a partner which properly reflects the treatment of a partnership_item all adjustments required to apply the results of a proceeding with respect to a partnership to an indirect_partner shall be treated as computational adjustments sec_6231 lincoln partners was a tefra partnership and became a small_partnership exempt from tefra for a subsequent tax period ie the date tax period during the non-tefra small_partnership tax period lincoln owned an interest in a tefra partnership kearney partners lincoln’s sale of the kearney partnership_interest generated the lincoln loss that passed through to mr sarma as lincoln’s partner during lincoln’s small_partnership tax period lincoln’s outside_basis in kearney is an affected_item from the tefra partnership proceeding lincoln partners was a direct partner and mr sarma was an indirect_partner of kearney partners during its tefra tax period ending upon the sale of lincoln’s interest in kearney ie the date tefra tax period tefra applies to any entity with respect to any taxable_year that files a partnership return and to any person holding an interest in such entity either directly or indirectly at any time during that taxable_year sec_301_6233-1 admin proced regs for purposes of tefra an indirect_partner is a partner see sec_6231 defining passthrough_partner and defining indirect_partner an adjustment to an affected_item from the tefra proceeding applies to an indirect_partner once a partnership_item is determined the commissioner may adjust items attributable to the partnership items to determine and change a partner’s tax_liability attributable to the partnership items the adjustments may occur in tax periods following the periods at issue in the tefra proceeding see 128_tc_192 the adjustment to the lincoln loss which passed through to mr sarma sarma loss resulted from the kearney tefra proceeding kearney’s date tefra tax period ended within lincoln’s date small_partnership tax period and petitioners’ tax_year thus the tefra decision enters into lincoln’s computation of its gain_or_loss on the sale of its kearney partnership_interest during its date tax period even though lincoln was a small_partnership during that tax period and even though lincoln’s date tax period was not at issue in kearney the fact that lincoln was a small 9a partner is defined as either a partner in the partnership or any other person whose income_tax_liability is determined directly or indirectly by taking partnership items into account sec_6231 partnership during the tax period in which it sustained the subject loss is not relevant mr sarma was a partner in lincoln during kearney’s tefra tax period when the lincoln loss arose the date tax period and over which the district_court had jurisdiction accordingly he was a person to which a partnership_item or an affected_item was attributable thus the kearney decision can result in affected items to mr sarma and may affect hi sec_2001 tax_liability lincoln’s outside_basis in kearney partners is an affected_item it affected the amount of lincoln’s loss on the sale of kearney the loss passed through to mr sarma as a partner in lincoln and he deducted his share of the lincoln loss ie the sarma loss the sarma loss is attributable to the partnership items determined in kearney section extends the period of limitations for assessing tax attributable to partnership items and affected items following the conclusion of a tefra proceeding it applies to determine the period of limitations to assess tax against the partners attributable to the partnership items and affected items those affected items arose in lincoln’s date tax period when it was a small_partnership accordingly section can apply to a non-tefra small_partnership where the small_partnership has affected items from a tefra proceeding it extends the limitations_period to assess tax attributable to the affected items with respect to mr sarma because he was an indirect_partner in kearney partners for the tefra tax periods irrespective of the fact that the loss passed through to mr sarma during lincoln’s non-tefra tax period accordingly the period of limitations has not expired for petitioners’ through tax years with respect to the sarma loss and we will deny petitioners’ motion with respect to their statute_of_limitations argument iv partner-level determination we next address respondent’s motion to dismiss for lack of jurisdiction under sec_6226 a court’s jurisdiction in a tefra partnership-level proceeding extends to all partnership items for the partnership taxable_year to which the fpaa relates the proper allocation of the partnership items among the partners and the applicability of any penalty addition_to_tax or additional_amount that relates to an adjustment to a partnership_item once the partnership-level adjustments become final the commissioner must initiate further action at the partner level to make any resulting adjustments to the tax_liabilities of the individual partners the commissioner must follow the deficiency_notice procedures under sec_6211 through for adjustments attributable to affected items that require partner-level determinations sec a a i sec_301_6231_a_6_-1 proced admin regs in such a case the partner has a prepayment forum to challenge the commissioner’s determination sec a a i the deficiency_notice procedures do not apply to an adjustment to an affected_item that does not require a partner-level determination id para if no partner-level determination is required the adjustment is computational and the commissioner can directly assess the resulting tax_deficiency against each partner without issuing a notice_of_deficiency id sec_301_6231_a_6_-1 proced admin regs the partner would not have access to the deficiency procedures to challenge the commissioner’s computational adjustments instead he must file a claim_for_refund and rely on refund litigation if the refund claim is denied see sec a c respondent moves for dismissal arguing that the adjustments at issue are computational and do not require any partner-level determinations on the basis of the decision in kearney that kearney partners was a sham for its date tax period he argues that lincoln’s outside_basis in the sham kearney partnership must be zero without any further partner-level determinations and thus lincoln could not have sustained a loss on the sale of its kearney partnership_interest to pass through to mr sarma according to respondent the deficiency procedures do not apply the notice is invalid and we should dismiss on the basis of lack of jurisdiction respondent directly assessed tax against petitioners attributable to the disallowance of the sarma loss deduction and issued the notice as a protective measure petitioners argue that outside_basis must be determined at the partner level and not assumed to be zero irrespective of the decision in a partnership-level case that the partnership was a sham they argue that a computational adjustment means only an adjustment that can be made with a mathematical computation they also renew their argument that the lincoln loss and its outside_basis in kearney partners are nonpartnership_items on the basis that lincoln cannot have any affected items from tefra because lincoln was a non-tefra small_partnership for its date tax period we have found that a small_partnership that owns an interest in a tefra partnership can have affected items from the tefra partnership and we will not revisit this argument the issue is whether a partner-level determination is required to adjust a purported partner’s outside_basis in a sham_partnership to zero a partner’s outside_basis in his partnership_interest is an affected_item to the extent it is not a partnership_item sec_301_6231_a_5_-1 proced admin regs following disagreement among the courts of appeals the supreme court decided that a court in a partnership-level tefra proceeding has jurisdiction to provisionally determine an accuracy-related_penalty relating to the portion of any underpayment that is attributable to a valuation misstatement of outside_basis woods 571_us_31 the supreme court recognized that a partner’s outside_basis is a nonpartnership item that the courts do not have jurisdiction to adjust in a tefra partnership-level proceeding id pincite outside_basis must be adjusted at the partner level id however it reasoned that once the partnerships were deemed not to exist for tax purposes no partner could legitimately claim an outside_basis greater than zero id pincite and the court in a partnership-level proceeding where the partners’ liability for a penalty is at issue is not required to shut its eyes to the legal impossibility of any partner’s possessing an outside_basis greater than zero in a partnership that for tax purposes did not exist id pincite thus a court has jurisdiction to determine the penalty even if 10729_f3d_869 8th cir rev’g and remanding 137_tc_220 598_f3d_1372 fed cir 591_f3d_649 d c cir aff’g in part rev’g and remanding in part 131_tc_84 138_tc_67 aff’d in part rev’d in relevant part sub nom 616_fedappx_426 d c cir these cases with the exception of thompson each involved a court’s jurisdiction in a partnership-level proceeding here we determine our jurisdiction in a partner-level case imposing the penalty would also require determining affected or non- partnership items such as outside_basis id pincite however a court would not have jurisdiction to make a formal adjustment to the partner’s outside_basis id pincite see also 616_fedappx_426 d c cir aff’g in part rev’g in relevant part 138_tc_67 petaluma fx partners llc v commissioner f 3d pincite respondent attempts to distinguish an impermissible adjustment of outside_basis from a determination that outside_basis in a sham_partnership is zero the determination of whether a tefra partnership is a sham or bona_fide is a partnership_item properly made at the partnership level petaluma fx partners llc v commissioner f 3d pincite respondent argues that once a partnership-level case determines the partnership was a sham the adjustment of outside_basis to zero does not require a partner-level determination in dicta responding to a point raised in an amicus brief the supreme court in woods observed that where a partnership is a sham and disregarded for tax purposes the determination of the partner’s outside_basis may not require a partner-level determination to adjust outside_basis and thus the adjustment may be computational woods u s pincite n the court stated that the amici’s argument assumes that the underpayment would not be exempt from deficiency proceedings because it would rest on outside_basis id the court further observed even an underpayment attributable to an affected_item is exempt so long as the affected_item does not ‘require partner-level determinations ’ and it is not readily apparent why additional partner level determinations would be required before adjusting outside_basis in a sham_partnership id citations omitted woods did not however answer the question of whether the partner-level adjustment of outside_basis incident to a deficiency determination is computational and the commissioner may directly assess the resulting tax against the purported partners or whether the adjustment requires a partner-level determination and the issuance of a notice_of_deficiency we have stated that woods provided no direct answer to this question thompson v commissioner tcmemo_2014_154 at n aff’d 821_f3d_1008 8th cir we have also suggested in dicta that in cases involving sham disregarded partnerships an adjustment to zero of a purported partner’s outside_basis does not require further partner-level determinations because outside_basis is automatically zero 142_tc_308 greenwald involved a bona_fide partnership where a partner-level determination would be required to determine outside_basis however in greenwald we relied on 138_tc_67 which was subsequently reversed 616_fedappx_426 at the outset we note that partner-level determinations are clearly necessary relating to the tax treatment of the assets distributed in a liquidation from a sham_partnership irrespective of the fact that the partnership is a sham 655_f3d_1060 9th cir aff’g tcmemo_2009_104 129_tc_11 aff’d in part rev’d in part sub nom 581_f3d_297 6th cir partner-level determinations are required regarding the reporting of the subsequent disposition of the distributed assets by the purported partners including the partners’ holding periods of the assets the character of the gain_or_loss on the disposition of the assets and whether the disposed assets were in fact the assets distributed by the sham_partnership domulewicz v commissioner t c pincite in this case there was no liquidating_distribution of assets from a sham_partnership when a court in a partnership-level case holds that a partnership is a sham the logical conclusion is that the purported partners would not have outside bases in the sham_partnership greater than zero that would allow the purported partners to claim loss deductions on the sale of their partnership interests a taxpayer cannot have a basis in an asset that does not exist for federal tax purposes woods u s pincite logan tr v commissioner f app’x pincite where a partnership is a sham and never existed no partner could have any outside_basis in the entity greenwald v commissioner t c pincite this conclusion however does not confer jurisdiction on the court in a partnership- level case to determine outside_basis woods u s pincite we note that the district_court in kearney did not make any findings with respect to lincoln’s outside_basis in kearney partners it was without jurisdiction to make any such findings under sec_6226 a court reviewing a petition_for_readjustment of partnership items generally has jurisdiction to determine partnership items and the proper allocation of such items among the partners however in the limited instance of an accuracy-related_penalty relating to outside_basis sec_6226 specifically grants the court jurisdiction to provisionally impose the penalty that relates to an adjustment to a partnership_item even though the penalty may depend on partner-level determinations thus the court can provisionally determine the penalty on the basis of another determination that it does not have jurisdiction to make the supreme court recognized that every penalty must be imposed in partner-level proceedings after partner-level determinations woods u s pincite likewise the determination of a partner’s outside_basis can be made only at the partner level after partner-level determinations 729_f3d_869 8th cir petaluma fx partners llc v commissioner f 3d pincite acknowledging a sham_partnership results in an outside_basis of zero but holding that the court in a partnership-level case does not have jurisdiction to determine outside_basis a partner-level determination is required even where the partnership is a sham while the supreme court’s dicta in woods gives us pause we conclude that the adjustment of outside_basis in a sham_partnership requires a partner-level determination no court_of_appeals has discussed the question of whether the adjustment of outside_basis could be computational at this late date in the life of the tefra partnership provisions it would be unwise for us to introduce uncertainty in the application of this well-worn lawdollar_figure it is logical as the supreme court suggests to conclude lincoln’s outside_basis in its kearney partnership_interest was zero if so lincoln could not have incurred a loss on the sale of it sec_11congress repealed the tefra procedures in the bipartisan budget act of pub_l_no sec_1101 sec_129 stat pincite kearney partnership_interest to pass through to mr sarma neither the code nor the regulations require that partner-level determinations actually result in a substantive change to a determination made at the partnership level domulewicz v commissioner t c pincite the adjustment to outside_basis is made at the partner level and requires a partner-level determination accordingly the notice is valid and we will deny respondent’s motion to dismiss petitioners advance a number of objections relating to the kearney decision and argue that its findings are irrelevant and erroneous resulting in a need for partner-level determinations it appears that petitioners seek to relitigate the issues decided in kearney they have yet to identify any component of outside_basis left unresolved after kearney partners was held to be a sham or to articulate a position for the court to find that lincoln’s outside_basis in kearney was greater than zero they argue that the district_court did not have jurisdiction over mr sarma because he was not a party in that case mr sarma opted out of kearney and finally kearney supports the deduction of the sarma loss because the district_court reallocated the gain and loss from the fx straddles to mr sarma in his individual capacity after holding the three partnerships were shams they also argue that sarma i supports their position that mr sarma was not a partner during the tefra tax periods and is not bound by kearney as explained the kearney decision may result in adjustments to affected items for tax periods over which the district_court lacked jurisdiction the decision may change a partner’s tax_liability in a tax period different from the period at issue in the tefra proceedings see kligfeld holdings v commissioner t c pincite in sarma i the parties merely stipulated that petitioners did not concede they had an interest in kearney or concede that it could affect their tax_liabilities for through mr sarma did not have the right to opt_out of tefra because he was not a notice_partner with the right to receive the nbap see sec_6223 providing notice partners with statutory rights where an nbap is not timely issued the district_court held that mr sarma did not elect to opt_out of tefra kearney wl at although respondent mistakenly included a letter in the fpaa stating that mr sarma had a right to opt_out of tefra because of an untimely nbap he later informed mr sarma of this mistake as no fpaa is required for lincoln’s date tax period no right to opt_out of tefra can arise petitioners argue in the alternative that kearney supports their entitlement to loss deductions because the district_court sustained the fpaa adjustments and reallocated the income and loss from the fx straddles to mr sarma in his individual capacity accordingly they argue that mr sarma had bases in the fx straddles to claim loss deductions on the transactions we reject petitioners’ characterization of kearney it did not reallocate the fx straddle income and losses to mr sarma the district_court sustained the adjustments in the fpaas which included reallocation of the gain and loss from the fx straddles to mr sarma petitioners argue that in the fpaas respondent recognized the fx straddles for tax purposes however the district_court found that the fx straddles were shams and disregarded for federal tax purposes in its judgment the district_court held the portion of the fpaas that reallocated the income and loss to mr sarma to be moot accordingly the district_court did not reallocate the income and loss from the fx straddles to mr sarma v multiple notices of deficiency generally the commissioner is precluded from issuing more than one notice_of_deficiency for a taxable_year sec_6212 an exception to the one deficiency_notice rule exists for affected items that require partner-level determinations sec a c petitioners argue that the sarma loss is not an affected_item and not a computational adjustment they argue that respondent was precluded from issuing the notice because it is an invalid further notice_of_deficiency for through for the reasons stated above the sarma loss deduction is an affected_item that requires a partner-level determination the exception applies accordingly respondent is not precluded from issuing the notice 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 an appropriate order will be issued