JT USA, LP v. Commissioner

dissenting:

I respectfully dissent. We are here because the IRS 1) waited too long to give notice to the taxpayers of a TEFRA partnership proceeding, 2) said nothing when the taxpayers attempted to opt out of the TEFRA proceeding with respect to their indirect interests but not with respect to their direct interests, 1 and 3) then failed to bring proceedings against the taxpayers outside the TEFRA proceeding within the one-year statute of limitations. Having struck out, in effect, the IRS now seeks a do-over by disallowing the taxpayers’ election to opt out of the TEFRA proceeding in order to pull the taxpayers back into the proceeding. Contrary to the majority’s contention, the statute does not prohibit such a split election. TEFRA allows one partner to make one election and another partner to make a different election. I think that a partner who has both direct and indirect interests should have the same option, at least where the IRS fails to timely notify the taxpayer that a bifurcated election is not allowed. On the facts of this case, any ambiguity in the statute as to whether a taxpayer can make separate elections based on different omiership interests should be construed…

Opinion by Judge TROTT; Dissent by Judge CALLAHAN.

OPINION

We review de novo the Tax Court’s reading and application of a TEFRA statute 1 in a convoluted action arising from (1) a partnership’s attempted use of a bogus tax shelter to offset capital gains, and (2) the Commissioner of Internal Revenue’s subsequent denial of a $32.5 million “loss” claimed by the partnership to eliminate income tax liability on an asset sale resulting in a $28 million capital gain. The Tax Court ruled that a taxpayer holding both direct and indirect interests in a partnership may elect under 26 U.S.C. § 6223 (e)(3)(B) not to be bound by the results of a partnership proceeding — or partnership audit 2 — as to some, but not all, of those interests held during the relevant taxable year. In other words, that § 6223(e)(3)(B) permits taxpayers to opt out of the partnership proceeding with respect to their indirect interests but to leave in that proceeding their alleged remaining direct partnership interests. The Commissioner concedes that “[i]f taxpayers’ elections to opt out, but only as indirect partners, are effective, then the assessment of deficiencies flowing from about $36.6 million in adjustments…