Opinion ID: 71496
Heading Depth: 1
Heading Rank: 7

Heading: Judgment Rendered by a Court of Competent Jurisdiction

Text: The Duffies argue that the Tax Court was not a court of competent jurisdiction with respect to imposing enhanced interest under Section 6621(c) on partners of the partnership. In a partnership-level proceeding, the Tax Court's jurisdiction is limited to determining partnership items and the proper allocation of those partnership items among the partners. 26 U.S.C. § 6226(f). Section 6621(c), an affected item, imposes interest at 120% of the statutory rate for substantial underpayment of tax. A tax underpayment is substantial when it exceeds $1,000 for the tax year in question. 26 U.S.C. § 6621(c)(2). The IRS may not assess interest under Section 6621(c) unless the substantial underpayment is attributable to one of the tax-motivated transactions defined by statute. Tax-motivated transactions include any sham or fraudulent transaction, 26 U.S.C. § 6621(c)(3)(A)(v), and any use of an accounting method that may result in a substantial distortion of income, 26 U.S.C. § 6621(c)(3)(A)(iv). In the Texas Farm Venturers case, the Tax Court stated: That the adjustments to partnership income and expense for the taxable year 1984 are attributable to transactions which lacked economic substance, as described in former I.R.C. § 6621(c)(3)(A)(v) [sham transaction], so as to result in a substantial distortion of income and expense, as described in I.R.C. § 6621(c)(3)(A)(iv) [accounting method] when computed under the partnership's cash receipts and disbursements method of accounting; ... (Docket Entry No. 30, Ex. 6). The Duffies argue that the Tax Court's determination that the partnership transactions that resulted in the adjustments lacked economic substance, as described in former I.R.C. § 6652(c)(3)(A)(v) is not a finding of tax-motivated transactions. (Docket Entry No. 30, at 30). In other AMCOR partnership cases, courts have examined the language from the Tax Court's agreed decision in the consolidated cases and found that it clearly stated that the partnership's transactions were tax-motivated, allowing the IRS to impose interest under Section 6621(c). See Nault v. United States, 517 F.3d 2, 5 (1st Cir.2008); Kimball v. Comm'r of Internal Revenue, T.C.2008-78, 2008 WL 862339 (U.S. Tax Court 2008) (because the partnership's transactions lacked economic substance, they constituted tax motivated transactions). In Nault, the court stated: The reference to [Section 6621(c)(3)(A)(v)], which helps to define tax-motivated transactions, confirms that the transactions were sham[s] or fraudulent transaction[s] and therefore lacked economic substance. The phrase so as to result in a substantial distortion of income and expense simply tracks the language of the former 26 U.S.C. § 6621(c)(3)(A)(iv), which likewise helps to define tax-motivated transactions. Thus, each phrase independently establishes that the adjustments were attributable to the partnerships' tax-motivated activities. 517 F.3d at 5 (internal citations omitted). The government asserts that the Tax Court has already determined that the transactions that resulted in the adjustments to the partnership items were tax-motivated transactions; this determination is binding on the Duffies; and this determination meets the requirements for imposing enhanced tax under Section 6621(c), leaving open only issues that were not and could not have been addressed in the Tax Court. The open issues do not include any examination into the character of the underlying transactions. The Duffies assert that even if the Tax Court finding at the partnership level that the adjustments resulted from transactions that lacked economic substance means that they were sham tax-motivated transactions, this determination leaves unresolved issues requiring partner-level determinations, including the individual partner's personal profit motive. These issues were not and could not be made at the partnership level because the Tax Court does not have subject-matter jurisdiction to determine them. As a result, according to the Duffies, the Tax Court decision did not resolve their liability for the enhanced interest and they are free to challenge the assessment.