Court Opinion

ID: 2649145
Source: CourtListenerOpinion
Date Created: 2014-01-14 18:27:30.439222+00
Date Added: 2024-06-11T09:09:20.397086
License: Public Domain

FOR PUBLICATION

    UNITED STATES COURT OF APPEALS
         FOR THE NINTH CIRCUIT

 CANDYCE MARTIN 1999                             No. 11-17879
 IRREVOCABLE TRUST, a Partner
 other than the Tax Matters                       D.C. Nos.
 Partner; CONSTANCE GOODYEAR                  4:08-cv-05150-PJH
 1997 IRREVOCABLE TRUST, a                    4:08-cv-05151-PJH
 Partner other than the Tax Matters
 Partner,
             Petitioners-Appellants,               OPINION

                    v.

 UNITED STATES OF AMERICA,
           Respondent-Appellee.

        Appeal from the United States District Court
           for the Northern District of California
        Phyllis J. Hamilton, District Judge, Presiding

                  Argued and Submitted
        October 16, 2013—San Francisco, California

                     Filed January 13, 2014

  Before: Sidney R. Thomas and M. Margaret McKeown,
   Circuit Judges, and Mark W. Bennett, District Judge.*

                   Opinion by Judge Thomas

 *
   The Honorable Mark W. Bennett, District Judge for the U.S. District
Court for the Northern District of Iowa, sitting by designation.
2   MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES

                           SUMMARY**

                                 Tax

    The panel affirmed in part and reversed in part the district
court’s denial of a petition for readjustment of partnership
items, brought by a group of heirs of the founders of
Chronicle Publishing Company in connection with its sale
and resulting tax consequences.

    The heirs owned a portion of the company, either outright
or through family trusts. They formed a tiered partnership
structure and commenced a series of transactions designed to
minimize their tax liability from the company’s sale. In
connection with an IRS audit of tax returns for two
partnerships involved in the transactions, the IRS executed
agreements extending the limitations period for assessing
taxes. The IRS then issued a Notice of Final Partnership
Administrative Adjustment (FPAA) that effectively increased
the heirs’ tax liability. The heirs, via two trusts that were
partners in the partnerships, challenged the FPAA as time-
barred.

    After reviewing partnership taxation law and the language
of the extension agreements, the panel concluded that some
of the adjustments made in the FPAA were directly due to,
caused by, or generated by partnership items that flow
through to the partners (appellants), and that the extension
agreements therefore encompassed some of the adjustments

  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES          3

made by the FPAA and permitted the IRS to assess new tax
on appellants today.

                         COUNSEL

Michael J. Desmond (argued), Law Offices of Michael J.
Desmond, APC, Santa Barbara, California; Ronald L. Buch,
Jr. and Saul Mezei, Bingham McCutchen LLP, Washington,
D.C., for Petitioners-Appellants.

Arthur T. Catterall (argued), Attorney, Kathryn Keneally,
Assistant Attorney General, Tamara W. Ashford, Deputy
Assistant Attorney General, Gilbert S. Rothenberg, and
Jonathan S. Cohen, Attorneys, United States Department of
Justice, Tax Division, Washington, D.C.; Melinda L. Haag,
United States Attorney, and Tom Moore, Assistant United
States Attorney, United States Attorneys’ Office for the
Northern District of California, San Francisco, California, for
Respondent-Appellee.

                         OPINION

THOMAS, Circuit Judge:

    In this appeal, we examine some of the tax consequences
arising from the sale of the Chronicle Publishing Company
and, specifically, whether the Internal Revenue Service’s
proposed adjustment of certain partnership tax items was time
barred.      Although the ultimate issue is relatively
straightforward, both the back story and the legal framework
are somewhat complex, requiring us to delve deep in the heart
of taxes.
4        MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES

                                       I

    The storied Chronicle Publishing Company was founded
in the mid-1800s in San Francisco by teenage brothers
Charles and M. H. de Young with a borrowed $20 gold piece.
Their first venture, the Daily Dramatic Chronicle, began with
a small circulation, but its readership quickly tripled when it
provided the only breaking news accounts of the assassination
of Abraham Lincoln. It was rechristened as the Morning
Chronicle and ultimately the San Francisco Chronicle.
Within a few decades, it became the largest circulation
newspaper on the West Coast.1

    After the death of Charles de Young in 1880, M. H. de
Young assumed control of the paper, incorporated it as the
Chronicle Publishing Company (“Chronicle Publishing”) in
1906, and ran the enterprise until his death in 1925. He left
the newspaper assets in an irrevocable trust that would
terminate on the death of all five of his children. From M. H.
de Young’s death until the early 1990s, a family member
remained at the helm of the media empire. Over the course
of time, Chronicle Publishing expanded its operations,
acquiring a television station along with other properties and
forming a book publishing company.

    The Chronicle was not the only media game in town.
Mining entrepreneur George Hearst acquired the rival San
Francisco Examiner in 1880 and turned its management over
to his son William Randolph Hearst seven years later, when
the elder Hearst became a United States Senator. Over the
next century, the Examiner and Chronicle engaged in a fierce

    1
        See generally John P. Young, Journalism in California 68–71 (1915).
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES                5

competition for readers.2 With both papers experiencing
financial challenges in the early 1960s, the Examiner and the
Chronicle entered into a joint operating and profit sharing
agreement in 1965. The joint operating agreement also
granted Hearst the right of first refusal if Chronicle
Publishing were put up for sale. Reilly v. Hearst Corp.,
107 F. Supp. 2d 1192–99 (N.D.Cal. 2000).

    When M. H. de Young’s last child died in 1988 and the
irrevocable trust dissolved, Chronicle Publishing elected to be
treated as a Delaware Subchapter S corporation. Companies
generally take such actions to avoid the double taxation
attendant to “C” corporations, where taxes are assessed on
both corporations and shareholders. The Subchapter S
corporate structure is often employed by small, family-held
businesses. However, to discourage misuse of the Subchapter
S vehicle, Congress provided that Subchapter S corporations
would be subject to the normal double taxation if the
corporation were sold within ten years of its creation. Estate
of Litchfield v. Comm’r, 97 T.C.M. 1079, at *2 (T.C.
2009) (citing 26 U.S.C. § 1374).

    In the late 1990s, amidst deteriorating family
relationships and financial challenges, and after the ten-year
Subchapter S waiting period expired, the de Young heirs
decided to sell most of the assets of Chronicle Publishing to
the rival Hearst Corporation and distribute the assets among
the heirs according to their ownership percentages. The
Chronicle was to continue as a morning paper, and the
Examiner was sold to a third party.

 2
   See generally David Nasaw, The Chief: The Life of William Randolph
Hearst 59–80 (2006).
6       MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES

    In its discussions of the sale, Chronicle Publishing’s
Board of Directors realized the possibility of future liability
arising from a variety of potential issues, such as
environmental problems, contractual disputes, and the risk
that Chronicle Publishing might lose its Subchapter S status.
Thus, the Directors prepared a recontribution agreement,
which provided that the shareholders would contribute on a
pro rata basis if there were future Chronicle Publishing
liabilities. Each shareholder was required to execute the
recontribution agreement as a condition of receiving a
distribution of proceeds from the Chronicle Publishing sale.

    Our case involves one group of de Young heirs,
specifically Conseulo Martin (M. H. de Young’s
granddaughter) and her five children (“the Martin heirs”).
The Martin heirs owned 16.67% of the shares of Chronicle
Publishing, either outright or through fourteen family trusts
(“the Martin Family Trusts” or “trusts”). Some of the trusts
had existed since the 1980s; others were created just before
the Chronicle Publishing sale.

    The Martin heirs sought advice on how to minimize the
tax consequences of the proposed Chronicle Publishing sale
and to protect themselves against future liabilities posed by
the recontribution agreement. After consulting with several
tax specialists, the Martin heirs decided to implement what
the IRS now claims was a “Son of BOSS” tax shelter.3
Although there are a number of variants, a “Son of BOSS”
tax scheme generally involves a “series of contrived steps in
a partnership interest to generate artificial tax losses designed

    3
    “BOSS” is an acronym for “Bond and Option Sales Strategy.”
Kornman & Assocs., Inc. v. United States, 527 F.3d 443, 446 n. 2 (5th Cir.
2008). “Son of BOSS” is a variation of the “BOSS” tax shelter. Id.
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES             7

to offset income from other transactions.” Nevada Partners
Fund, L.L.C. ex rel. Sapphire II, Inc. v. U.S. ex rel. I.R.S.,
720 F.3d 594, 604 (5th Cir. 2013). Assets encumbered by
artificial liabilities are transferred into a partnership with the
goal of increasing basis in the partnership. The net result is
that the artificial loss offsets the taxable gain.

    Thus, acting on tax advice, the Martin Family Trusts
formed a tiered partnership structure, meaning that the trusts
served as partners of an upper tier of partnerships that owned
interests in a lower tier partnership, and then engaged in a
short term hedging strategy using option contracts. There
were three parts to the structure: (a) the fourteen Martin
Family Trusts; (b) an upper partnership tier, which included
multiple partnerships; and (c) a single, lower tier partnership.
At the top of the structure were the fourteen Martin Family
Trusts, which were the ultimate partners of the two tiers of
partnerships below.

    The upper partnership tier consisted of three partnerships,
the most relevant of which is First Ship, LLC (“First Ship”).
The fourteen Martin Family Trusts were the First Ship
partners and 100% owners. After the Chronicle Publishing
sale, the trusts contributed certain of the sale assets to First
Ship. The other two upper-tier partnerships (the “minority
partnerships”), were Fourth Ship, LLC (“Fourth Ship”) and
LMGA Holdings, Inc. (“LMGA”).

    The lower tier consisted solely of First Ship 2000-A, LLC
(“2000-A”). First Ship, Fourth Ship, and LMGA were the
three partners of 2000-A. First Ship owned 77.03% of 2000-
A, with Fourth Ship and LMGA owning minority partnership
shares.
8   MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES

    With the structure in place, the Martin heirs commenced
a series of transactions designed to create losses that would
offset the taxable gain realized from the Chronicle Publishing
sale. The trusts purchased certain assets, in addition to the
stock they already owned, and transferred some assets to the
partnerships. Most relevant to this case, the trusts purchased
$315.7 million in European-style option contracts (“the long
options”), while simultaneously selling $314.8 million in
similar-style option contracts (“the short options”). The trusts
paid JP Morgan the difference between the two sets of
options, roughly $900,000. The trusts then contributed their
assets to the upper-tier partnerships, mostly to First Ship.
First Ship received over $485 million in assets from the
trusts, including the value of the purchased long options. In
contrast, Fourth Ship only received $29.4 million in assets.
First Ship then contributed $415 million in assets to 2000-A,
including the value of the purchased long options. Fourth
Ship and LMGA also transferred some of their more limited
assets to 2000-A.

    Throughout the transactions, the various entities did not
treat the short options as a liability or subtract the amount
owed on the short options from the amount purchased in long
options. As a result, the Martin Family Trusts and First Ship
each saw a dramatic increase in their tax bases in the
partnerships below them (i.e., the Martin Family Trusts in
relation to First Ship and First Ship in relation to 2000-A).
Following the contribution, 2000-A sold off its assets,
terminated the options, distributed its remaining holdings
back to its partners, primarily First Ship, and dissolved.

   2000-A filed its Form 1065 partnership tax return on
March 22, 2001. First Ship in turn reported its share of gains
and losses from the closing out of 2000-A, including a $321
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES          9

million short-term capital loss, in a March 22, 2001 Form
1065 return. Fourth Ship and LMGA also filed returns and
posted small losses due to the liquidation of 2000-A. First
Ship’s partners, the Martin Family Trusts, timely filed their
own returns before April 15, 2001. Due to the inflated basis
the Martin Family Trusts had in First Ship, the trusts reported
losses of over $320 million following the termination of the
options and the dissolution of 2000-A.

    The net result of these transactions was that the Martin
heirs did not owe any taxes on the proceeds from the
Chronicle Publishing sale. Perhaps not unexpectedly, this
fortuity drew the attention of the IRS. In 2004, the IRS began
an audit of the year 2000 tax returns for First Ship and 2000-
A and First Ship’s 2001 tax return.

   Both 2000-A and First Ship are subject to the uniform
audit rules of the Tax Equity and Fiscal Responsibility Act
(“TEFRA”). See 26 U.S.C. (“I.R.C.”) §§ 6221–6233.
Because the three-year statute of limitations found in I.R.C.
§ 6229 and § 6501 was near, the IRS executed Form 872-I
Extension Agreements (“extension agreements”) with the
Martin Family Trusts. The following restrictive language
was added to each of the agreements:

       The amount of any deficiency assessment is to
       be limited to that resulting from any
       adjustment directly or indirectly (through one
       or more intermediate entities) attributable to
       partnership flow-through items of First Ship
       LLC, and/or to any adjustment attributable to
       costs incurred with respect to any transaction
       engaged in by First Ship LLC, any penalties
       and additions to tax attributable to any such
10 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

       adjustments, any affected items, and any
       consequential changes to other items based on
       any such adjustments.

Because the first set of agreements only extended the
limitations period until April 15, 2005, the IRS further
extended the period through successive agreements,
eventually extending the period until June 30, 2008.

     On June 19, 2008, the IRS issued a Notice of Final
Partnership Administrative Adjustment (“FPAA”) to 2000-A
for the 2000 tax year. It did not issue an FPAA for First Ship
for the 2000 tax year. On the same date, the IRS issued an
FPAA for First Ship for the 2001 tax year. There is no
challenge to the 2001 FPAA to First Ship, so the only FPAA
at issue in this case is the FPAA to 2000-A for the 2000 tax
year (“2000-A FPAA”). The FPAA disregarded all of 2000-
A’s transactions, labeling the partnership a sham and finding
it “lacked economic substance.” Most relevant here, the
FPAA declared that the short options constituted liabilities
and expressly reduced First Ship’s basis in 2000-A by
$314,885,516. This had the effect of eliminating most of the
$321 million short-term capital loss reported by First Ship on
its 2000 tax return.

    Two of the trusts, the Candyce Martin 1999 Irrevocable
Trust and the Constance Goodyear 1997 Irrevocable Trust
(“taxpayers”), challenged the FPAAs by filing petitions
against the United States. Taxpayers filed for partial
summary judgment, challenging the FPAA to 2000-A.
Taxpayers argued the 2000-A FPAA was time-barred by the
restrictive language in the extension agreements. The district
court denied taxpayers’ partial summary judgment motion.
The court held that “the extension agreements encompass the
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES 11

adjustments made by the IRS in the FPAA issued to 2000-A.”
Relying on the “direct connection” between 2000-A and First
Ship, the court found “the FPAA issued to 2000-A involve[d]
an adjustment directly attributable to flow-through items of
First Ship.” The court analogized to Brody v. Comm’r,
55 T.C.M. 808 (1988), in which the tax court held that
an extension agreement covering a lower-tiered partnership
encompassed a notice of deficiency to the partners and the
upper-tiered partnership.

    After a bench trial, the district court issued an order
denying taxpayers’ petition for relief. Following the district
court’s entry of final judgment, taxpayers filed a timely
notice of appeal.

    We have jurisdiction under 28 U.S.C. § 1291. We
“review de novo a district court’s grant or denial of a motion
for partial summary judgment.” Balvage v. Ryderwood
Improvement and Serv. Ass’n, Inc., 642 F.3d 765, 775 (9th
Cir. 2011). “Interpretation of [IRS] waiver agreements is
subject to the rules governing interpretation of contracts; and
when, as in this case, the lower court based its decision on the
language of the agreement and principles of contract
interpretation, the decision is one of law which we review de
novo.” Roszkos v. Comm’r, 850 F.2d 514, 516 (9th Cir.
1988) (internal citations omitted).

                               II

    Before we analyze the legal effect of the FPAA and
extension agreements in this case, some additional
background on the structure of partnership taxation law is
required. Unlike corporations, partnerships are not subject to
federal income tax. I.R.C. § 701. However, partnerships do
12 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

file informational tax returns, id. § 6031, which inform the
partners of their distributive share of partnership gains,
losses, deductions, or credits. See id. §§ 701, 702. To avoid
the redundancy of assessing the effect of a partnership on a
partner’s tax returns at the individual partner level, Congress
enacted TEFRA, “which created a single unified procedure
for determining the tax treatment of all partnership items at
the partnership level.” Randell v. United States, 64 F.3d 101,
103 (2d Cir. 1995); see also United States v. Woods,
134 S. Ct. 557, 562–63 (2013). Partnership items, such as a
partnership’s income, gain, loss, deductions, or credits,
26 C.F.R. § 301.6231(a)(3)–1(a)(1)(i), are items that must be
taken into account on a partner’s federal income tax return
and that are determined by the Treasury Secretary to be
“more appropriately determined at the partnership level than
at the partner level.” I.R.C. § 6231(a)(3).

    Under TEFRA, when the IRS initiates adjustment
“proceedings at the partnership level,” it must notify certain
partners. Woods, 134 S. Ct. at 563. The IRS sends notice of
an adjustment in the form of an FPAA. Id. A partnership can
challenge an FPAA under I.R.C. § 6226. Id. After an FPAA
becomes final, “the IRS may assess partners with their
distributive share of the adjusted partnership items.” Randell,
64 F.3d at 104.

    Generally, the IRS must assess federal income tax within
three years of a taxpayer filing his return. I.R.C. § 6501(a).
For assessments related to partnerships, TEFRA has
established a separate provision for extending the Section
6501 statute of limitations for assessments attributable to
partnership items. Id. § 6229; see also Bakersfield Energy
Partners, LP v. Comm’r, 568 F.3d 767, 770 n.5 (9th Cir.
2009) (noting that Section 6229 “provides a minimum time
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES 13

period in which the IRS can assess a tax deficiency”). With
regard to partnerships, Section 6229 states that:

       [T]he period for assessing any tax imposed by
       [the federal income tax subtitle of the Internal
       Revenue Code] with respect to any person
       which is attributable to any partnership item
       (or affected item) for a partnership taxable
       year shall not expire before the date which is
       3 years after the later of–

           (1) the date on which the partnership
           return for such taxable year was filed, or

           (2) the last day for filing such return for
           such year (determined without regard to
           extensions).

I.R.C. § 6229(a). The provision allows for an extension of
this three-year period, however, in two instances relevant to
this case:

       (1) if an FPAA is filed before the expiration
       of either the limitations period itself or an
       extension of the limitations period. Id.
       § 6229(d).

       (2) if the IRS negotiates an agreement to
       extend the period with any or multiple
       ultimate partners or, with respect to all
       partners, with the tax matters partner. Id.
       § 6229(b)(1).
14 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

An extension agreement may include restrictive language or
a “restricted consent” to limit its scope. See I.R.M.
25.6.22.8.1 (Jan. 1, 2000).

    Extension agreements, including those with restricted
consent language, have long been viewed as “unilateral
waiver[s]” of the assessments limitations period and not as
contracts or tolling agreements. Stange v. United States,
282 U.S. 270, 276 (1931).         Nevertheless, extension
agreements are interpreted using contract principles.
Roszkos, 850 F.2d at 516.

    The limitations period and extension options in Section
6229 apply to assessments of tax against the tax-paying
partner(s). An FPAA, on the other hand, need not be issued
within a certain limitations period. Meruelo v. Comm’r,
691 F.3d 1108, 1117–18 (9th Cir. 2012). However, while the
FPAA may be issued at any time, it is “subject only to the
practical limitation that the FPAA may affect only those
partners whose individual returns remain open under” an
extension pursuant to I.R.C. Sections 6501 or 6229. Id.
(internal quotation marks omitted).

                             III

    With this factual and legal background in hand, we can
now set aside the MacGuffins and examine the primary issue
before us: the scope and effect of the extension agreements.
We conclude that the extension agreements between the
Martin Family Trusts and the IRS encompass some of the
adjustments made to 2000-A by the IRS’s 2000-A FPAA.

    The restrictive language in the extension agreements
reads, in pertinent part, that “[t]he amount of any deficiency
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES 15

assessment is to be limited to that resulting from any
adjustment directly . . . attributable to partnership flow-
through items of First Ship.” Although the government
argues the term “adjustment” in these agreements refers to
adjustments to the taxes of the Martin Family Trusts, we
conclude that under the TEFRA regime, the term
“adjustment” in agreements such as these refers to
partnership-level adjustments conducted through an FPAA.
Cf. Randell, 64 F.3d at 104. The term “deficiency
assessment” refers to changes to a partner’s tax liability. See,
e.g., I.R.C. § 6225. The term “partnership flow-through
items,” then, logically means partnership items that flow
through to the partnership’s ultimate partners. The most
obvious partnership flow-through items are items of income
or loss because those items ultimately flow through
successive partnership tiers and are reported on the tax
returns of the partnership’s partners. See, e.g., Tigers Eye
Trading, LLC v. Comm’r, 138 T.C. 67, 88 (2012) (“A
partnership[’s] . . . items of income and loss flow through to
its partners.”). In contrast, for example, a partnership’s
distributions or contributions are partnership items, 26 C.F.R.
§ 301.6231(a)(3)–1(a)(4), that do not flow through to the
partners.

    The term “attributable to” is used throughout the Internal
Revenue Code but is not defined in statute and “has no
special technical meaning under the tax laws.” Electrolux
Holdings, Inc. v. United States, 491 F.3d 1327, 1330 (Fed.
Cir. 2007). Both the court in Electrolux and the United States
Court of Federal Claims have defined “attributable to,” as it
appears in statute, to mean “‘due to, caused by, or generated
by.’” Russian Recovery Fund Ltd. v. United States, 101 Fed.
Cl. 498, 507–09 (2011) (quoting Electrolux Holdings, Inc.,
491 F.3d at 1331) (interpreting “attributable to” as it is used
16 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

in I.R.C. § 6229 and rejecting the argument that this
straightforward definition of “attributable to” “runs afoul of
the Federal Circuit’s admonition against a ‘but for’ test”).
Here, because the extension agreements are governed by
Section 6229, we interpret the term “attributable to” as used
in these extension agreements to mean “due to, caused by, or
generated by.” See id.

    Therefore, the question in this appeal is whether at least
some of the adjustments made in the 2000-A FPAA are
directly due to, caused by, or generated by partnership items
of First Ship that flow through (e.g., that are items of income
or loss) to First Ship’s partners, the Martin Family Trusts. If
so, the extension agreements encompass at least part of the
2000-A FPAA and, when combined with the subsequent
extension of time triggered by the issuance of the FPAA
itself, allow for the IRS to assess new tax on the Martin
Family Trusts today.

    Reduced to this simple question, the language of the
agreements leads us to affirm the district court in part. Some
of the partnership items of First Ship that flow through to the
Martin Family Trusts triggered some of the adjustments in the
2000-A FPAA. Specifically, in its 2000 tax return, First Ship
claimed $318,018,377 in losses due to the liquidation of
2000-A. This loss is not merely First Ship’s share of the
losses claimed by 2000-A. Those losses, rather minor, only
add up to $4,067,455. Instead, this $318 million loss
originated with First Ship, due to its artificially high basis in
2000-A. This loss was a partnership flow-through item of
First Ship that led to the adjustment to 2000-A. Indeed,
without this large loss, which was the main target of the IRS
audit and investigation, there would have been no 2000-A
FPAA.
     MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES 17

     Following its investigation, the IRS could have issued an
FPAA to First Ship, disallowing the loss, or it could have
issued an FPAA to 2000-A, barring any recognition of that
entity and declaring that the short options constituted
liabilities. Here, the IRS chose the latter and that action was
not outside the strictures of the extension agreements.
Contrary to taxpayers’ arguments, the agreements are not so
restrictive as to hold that an adjustment that is directly
attributable to a partnership flow-through item of First Ship
will not be allowed if it is technically an adjustment to a
partnership item of a lower-tier, but related, partnership. This
is especially true given that the limitations period established
in Sections 6229 and 6501 applies to assessments of tax, not
adjustments. Meruelo, 691 F.3d at 1117–18. Here, the
operative restraint on assessments, and therefore, practically,
on the adjustments, is the extension agreements. And
because some of the adjustments in the FPAA (i.e., those
portions of the FPAA that had the effect of voiding the $318
million loss) were directly attributable to the $318 million
loss claimed by First Ship, a First Ship partnership flow-
through item, the extension agreements encompass those
adjustments.4

    Taxpayers dispute this conclusion, relying heavily on
Russian Recovery Fund. In that case, the Court of Federal
Claims held that an agreement that specifically cites an
upper-tier partnership does not encompass adjustments made
to the lower-tiered partnership. Russian Recovery Fund Ltd.,
101 Fed. Cl. at 509–10. But Russian Recovery Fund is
distinguishable from our case. Unlike Russian Recovery

 4
   By operation of I.R.C. § 6229(d), the issuance of the FPAA suspended
any open period for tax assessment, but only as to tax attributable to any
partnership item of 2000-A as to its 2000 tax year.
18 MARTIN 1999 IRREVOCABLE TRUST V. UNITED STATES

Fund, where the upper-tier partnership simply reported and
passed along its share of the lower-tiered partnerships’s
losses, id. at 510, here the upper-tiered partnership, First Ship,
was largely reporting its own loss. This loss generated both
the massive loss claimed by the Martin Family Trusts and the
adjustments made by the IRS to 2000-A, bringing it within
the confines of the extension agreements. Indeed, this loss
did not and could not have originated with 2000-A, since it
was only the dissolution of 2000-A that gave rise to the loss.
Id. Thus, unlike in the partnership structure in Russian
Recovery Fund, the IRS’s adjustments eliminating the $318
million First Ship loss, regardless of whether they were made
through an adjustment to First Ship or 2000-A, were caused
by the $318 million loss that originated with First Ship.5

                                     IV

     We conclude that the extension agreements encompass
the adjustments made in the 2000-A FPAA that are directly
attributable to partnership flow-through items of First Ship.
Thus, as both parties agree, they do not encompass
adjustments to items of 2000-A which only flow up through
the minority partners and as a result have no connection to
First Ship. Nor do they apply to any adjustments made in the
2000-A FPAA to partnership items of 2000-A of which First

    5
       Taxpayers also argue that the district court misinterpreted and
misapplied Brody. However, the court’s reliance on Brody is not essential
to its decision, or our decision, in this case. While taxpayers are correct
that Brody was decided before TEFRA and is different than this case, the
district court acknowledged these distinctions and simply used Brody to
underscore the significance of the relationship between partnerships in a
multi-tiered partnership structure (e.g., the fact that liabilities claimed by
2000-A ultimately reach the Martin Family Trusts by first passing through
First Ship).
    MARTIN 1999 IRREVOCABLE TRUST V. U NITED STATES 19

Ship merely claimed a share (e.g., the $4,067,455 share First
Ship claimed of 2000-A’s reported losses). Those losses
originated with 2000-A and, therefore, adjustments to 2000-A
that affect those losses are not directly attributable to
partnership flow-through items of First Ship. To the extent
that the district court concluded otherwise, it erred.

                               V

     In sum, we affirm in part and reverse in part. We agree
with the district court that the extension agreements between
the IRS and First Ship encompass adjustments made in the
2000-A FPAA that are directly attributable to partnership
flow-through items of First Ship. These are adjustments to
2000-A that stem from partnership flow-through items of
First Ship that originate with First Ship (i.e., adjustments that
eliminate the $318 million loss claimed by First Ship due to
its inflated basis in 2000-A). We also hold that the FPAA to
2000-A extended the limitations period for assessing tax
beyond the extension agreements and through the present
litigation. However, the agreements do not extend to
adjustments in the 2000-A FPAA that are not directly
attributable to First Ship. Because the district court held
more broadly that “the extension agreements encompass the
adjustments made by the IRS in the FPAA issued to 2000-A,”
we remand to the district court to make a determination of
which adjustments in the 2000-A FPAA are directly
attributable to partnership flow-through items of First Ship,
consistent with this opinion.

    Each party shall bear its own costs on appeal.

    AFFIRMED IN PART, REVERSED IN PART