Opinion ID: 2647663
Heading Depth: 2
Heading Rank: 1

Heading: Inconsistent Treatment of Partnership Items

Text: First, the Appellants assert that the Gaughfs’ tax assessment is not excepted under section 6229(e) from the general three-year statute of limitations because, they claim, the Gaughfs did not “fail[] to comply with subsection (b) of section 6222 (relating to notification of inconsistent treatment) with respect to any partnership item for such 12 Internal Revenue Code section 6222(b), referenced in section 6229(e)(2)(B), is discussed infra Part II.A. 14 taxable year.” I.R.C. § 6229(e)(2)(B).13 Section 6222 provides in relevant part: (a) In general.—A partner shall, on the partner’s return, treat a partnership item in a manner which is consistent with the treatment of such partnership item on the partnership return. (b) Notification of inconsistent treatment.— (c) In general.—In the case of any partnership item, if— (A)(i) the partnership has filed a return but the partner’s treatment on his return is (or may be) inconsistent with the treatment of the item on the partnership return, or (ii) the partnership has not filed a return, and (B) the partner files with the Secretary a statement identifying the inconsistency, subsection (a) shall not apply to such item. 13 The Appellants also argue that the IRS tax return forms, instructions and regulations do not require reporting the names of indirect partners such as the Gaughfs—only partnership “members.” Br. for the Appellant 45-46. The applicable regulation in effect in 1999, however, expressly provided that “[a] partner who is not properly identified on the partnership return (including an indirect partner) remains an unidentified partner for purposes of section 6229(e) until identifying information is furnished as provided in § 301.6223(c)-1T.” Treas. Reg. § 301.6229(e)-1T (1999) (emphasis added). 15 I.R.C. § 6222(a)-(b). The Appellants contend that a section 6222(b)(1) statement was not required because there was no inconsistency between the Gaughfs’ treatment of any partnership item and Gaughf Properties, L.P.’s return’s treatment thereof. We agree with the tax court that the two returns’ treatment of partnership items was inconsistent—in at least two respects. The first partnership item the two returns treated differently is the partner’s basis in the contributed property— namely, the two foreign currency options. See Treas. Reg. § 301.6231(a)(3)-1(a)(4)(i) & (c)(2)(iv) (“[p]artnership items” include “[i]tems relating to . . . [c]ontributions to the partnership,” including determining “[t]he basis to the partnership of contributed property”). Gaughf Properties, L.P.’s 1999 return reported a partnership loss from the expired options of $45,000. The loss was reported as a single item; it therefore assumed that Gaughf Properties, L.P.’s inside basis in its then-worthless options was likewise $45,000, the amount that was lost. See United States v. Woods, 134 S. Ct. at 561 (“Tax basis is the amount used as the cost of an asset when computing how much its owner gained or lost for tax purposes when disposing of it. . . . ‘[I]nside basis’ [is] the partnership’s basis in its own assets . . . .”). The inside basis in turn rested on the assumption that the partner’s basis in the contributed property was $45,000. See I.R.C. § 723 (inside basis of “property contributed to a partnership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution”). In contrast, the Gaughfs’ 1999 return reported an outside basis in Gaughf Properties, L.P.—that is, the Gaughfs’ tax basis in their partnership interest in Gaughf 16 Properties, L.P., see supra note 8—of over $4.5 million,14 JA 582, which amount was necessarily derived from the Gaughfs’ basis in the contributed options and assumed a basis of $4.5 million—the value of the long option without any reduction for the short option. See I.R.C. § 722 (partner’s outside basis of “partnership acquired by a contribution of property, including money, to the partnership shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution”); Woods, 134 S. Ct. at 561 (“ ‘[O]utside basis’ . . . is tied to the value of any assets the partner contributed to acquire the interest.”). Regardless of which treatment of the partnership item was correct—indeed even if both had been correct—the returns’ widely disparate treatment of the partner’s basis in the contributed property constituted inconsistent treatment of a partnership item that triggered the section 6222(b) filing requirement. The second inconsistency lies in the two returns’ differing treatment of the nature of the contributed property— 14 Whether, or under what circumstances, the inconsistent treatment of an outside basis—which is determined at the individual partner rather than the partnership level, Petaluma, 591 F.3d at 654—can itself support an unidentified partner exception to the statute of limitations is an issue we need not and do not reach. See Br. for the Appellant 48 (arguing “ ‘outside basis’ that drives the partners’ returns constitutes a partner-level ‘affected item’ beyond partnership-level jurisdiction”). But see Woods, 134 S. Ct. at 563-64 (holding court conducting partnership-level proceeding— “to adjust ‘partnership items,’ [i.e.,] those relevant to the partnership as a whole”—has “jurisdiction to determine the applicability of any penalty that could result from an adjustment to a partnership item, even if imposing the penalty would also require determining affected or non-partnership items such as outside basis”). 17 in particular, whether the long and short currency options constituted a single integrated transaction or two separate transactions. Like the basis of the contributing partner in the property, a contribution’s underlying nature is a partnership item. See Treas. Reg. § 301.6231(a)(3)-1(a)(4)(i) & (a)(3)- 1(b) (“ ‘partnership item’ includes the accounting practices and the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc.”). The Gaughfs’ and Gaughf Properties, L.P.’s returns treated the contributed options as constituting two different transactions. Because it reported a $4.5 million basis in the partnership, the Gaughfs’ return necessarily assumed the long and short options were separate contributions of property (or it ignored the short option contribution altogether). In contrast, Gaughf Properties, L.P.’s return assumed the currency options constituted a single, integrated transaction because it reported a net loss of $45,000—the difference between the two premiums—rather than separate gains and losses for each option. See generally I.R.C. § 988 (“Treatment of certain foreign currency transactions”). Because “[i]n the case of [these two] partnership item[s],” the Gaughfs’ “treatment on [their] return is (or may be) inconsistent with the treatment of the item[s] on the partnership return,” I.R.C. § 6222(b)(1)(A)(i), and the Gaughfs did not file a Form 8082 “Notice of Inconsistent Treatment,” they “failed to comply with subsection (b) of section 6222,” id. § 6229(e)(2)(B); see 139 T.C. at 237. Accordingly we conclude, as did the tax court, that their assessment period is excepted under section 6229(e) from the general three-year statute of limitations established in section 6229(a). 18 B. “Furnished” Additional Partnership Information The Appellants also contend that, even if the Gaughfs were unidentified partners under section 6229(e), the FPAA was untimely because it did not issue (nor was an extension agreement signed) until after “the date which is 1 year after . . . the name, address, and taxpayer identification number of such partner are furnished to the Secretary”—on which date the assessment period expires under section 6229(e) even when the unidentified partner exception applies. They assert that, although the indirect partner status information was “not furnished on” the 1999 Gaughf Properties, L.P. return under section 6229(e)(1), the information was nonetheless adequately “furnished to the Secretary” through other documents the IRS received—namely, (1) the four individual entities’ SS-4 forms, filed September 27 to October 1, 1999, which identified either Jack or Nan Gaughf as the principal of each of Gaughf Properties, L.P.’s partners and could be crossreferenced through the 1999 tax returns; and (2) the 1300 compact discs of documents (including what the Appellants describe as a “480-page gold mine of Gaughf information,” Br. for the Appellant 43) given to the IRS by J&G in 2004. None of these documents “furnish[ed]” the required information so as to satisfy section 6229(e). Under the temporary IRS regulation in effect in 1999, a “statement [furnishing ‘additional information regarding partners’ to the IRS] shall generally be filed with the service center with which the partnership return is filed” and it must (i) Identify the partnership, each partner for whom information is supplied, and the person supplying the information by name, address, and taxpayer identification number; 19 (ii) Explain that the statement is furnished to correct or supplement earlier information with respect to the partners in the partnership; (iii) Specify the taxable year to which the information relates; (iv) Set out the corrected or additional information[;] and (v) Be signed by the person supplying the information. Treas. Reg. § 301.6223(c)-1T(b)(2)-(3).15 The Appellants do not dispute that the documents they point to failed to comply with the regulation’s literal requirements. Instead, they challenge the regulation itself—to no avail. The Appellants argue that the regulation’s requirements are inconsistent with the language of I.R.C. section 6229(e). We review a regulation under the familiar two-step framework set out in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). See Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 711 (2011). Under Chevron step 1, we ask “whether Congress has ‘directly addressed the precise question at issue.’ ” Id. (quoting Chevron, 467 U.S. at 843). If so, “that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842-43. But “if 15 Temporary regulation 301.6223(c)-1T, in effect at the time the 1999 return was filed, has since been adopted in permanent form. See Unified Partnership Audit Procedures, 66 Fed. Reg. 50,541, 50,548-49 (2001) (codified at Treas. Reg. § 301.6223(c)-1). 20 the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.” Id. at 843. Applying Chevron here, we uphold the regulation. The Appellants claim the statute’s phrase “are furnished” is plainly broad and necessarily encompasses “actual notice”—which they claim the SS-4 forms and the compact discs provided. In support, they note that the Congress “chose the passive verb ‘are furnished’ and imposed no limitation as to who furnishes the taxpayer information to the Secretary, where the information is furnished to the Secretary, or when the information is furnished to the Secretary.” Br. for the Appellant 31. In other words, I.R.C. section 6229(e) “is silent or ambiguous with respect to the specific issue” of how, when, where or by whom additional partnership information must be furnished. See Chevron, 467 U.S. at 843. Under Chevron step 2, therefore, the Secretary may fill the gap the Congress left and the regulation is entitled to deference. See Mayo Found., 131 S. Ct. at 713 (“ ‘The power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.’ ” (quoting Chevron, 467 U.S. at 843) (brackets omitted)). In promulgating section 301.6223(c)-1T(b)(2)-(3), the Secretary filled the gap in a reasonable fashion. The regulation’s terms ensure that the additional partnership information reaches the particular IRS center where the relevant return was filed and that it includes all of the essentials: the identity of the partners, the nature of the information, the applicable tax year, the additional partnership information itself and the identity of the filer. See Treas. Reg. § 301.6223(c)-1T(b)(2), (b)(3)(i)-(v). “Regulation, like legislation, often requires drawing lines.” Mayo Found., 131 S. Ct. at 715. The Secretary’s lines are 21 reasonably drawn. Indeed, the Appellants’ alternative—that the IRS be charged with actual notice of any information that has passed into its possession at any place or time, in any form or by any means—seems at best impractical. While the regulation provides that the IRS “may use other information in its possession,” it also makes clear the IRS “is not obligated to search its records for information not expressly furnished under [the regulation].” Treas. Reg. § 301.6223(c)- 1T(f) (emphases added); cf. Walthall v. United States, 131 F.3d 1289, 1296 (9th Cir. 1997) (“mere fact that the IRS possesses in its database the name and address of indirect partners does not mean that it has been ‘furnished with’ this information” so as to trigger IRS obligation to notify indirect partners of administrative proceedings under I.R.C. § 6223). Nor does the regulation give effect to the “[i]ncorporation by reference of information contained in another document previously furnished to the Internal Revenue Service.” Treas. Reg. § 301.6223(c)-1T(c). For the foregoing reasons, we affirm the judgment of the tax court and remand for further proceedings. So ordered.