LAUBER, Judge.
These consolidated cases involve the assertion by the Internal Revenue Service (IRS or respondent) of transferee liability against petitioners, former shareholders of a corporation that was the subject of a "Midco" transaction. Currently before the Court are cross-motions for summary judgment on the question whether the IRS mailed notices of transferee liability to petitioners within the period of limitations specified in section 6901(c).
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits attached thereto. They are stated solely for purposes of deciding the motions and not as findings of fact in these cases.
Petitioners are former shareholders of Arebec Corp. (Arebec), a C corporation whose assets consisted chiefly of appreciated marketable securities. At the time petitioners were shareholders, Arebec was subject to Federal income tax as a "personal holding company" under section 542. This tax classification was disadvantageous: Section 541 imposes, in addition to applicable income taxes, "a personal holding company tax equal to 20 percent" of undistributed personal holding company income.
Petitioners desired to liquidate Arebec's assets and have the proceeds distributed to them. But this approach would have had the consequence of requiring that Federal and State income tax be paid both at the corporate and at the share-holder level. Petitioner Andrew Namm, a member of Arebec's board of directors, informed his fellow shareholders that Arebec had explored ways to avoid this "double taxation" problem but had found no "credible solutions."
During the late 1990s and early 2000s tax shelter promoters offered purported solutions to this perceived problem. In one common strategy shareholders would sell their stock to a transient intermediary company, which would plan to offset the built-in gain with a prepackaged tax shelter, often a Son-of-BOSS scheme.
In July 2000 a partner at Grant Thornton approached Arebec's management and suggested that Arebec might be a good candidate for sale. He indicated that he had found a suitable buyer, Diversified Group, Inc. (Diversified). Diversified and its president, James Haber, were leading promoters of Midco transactions, and several of their transactions have previously been scrutinized by this Court.
On August 24, 2000, Mr. Namm and petitioner James Doran, also a member of Arebec's board, met with Diversified's representatives to discuss the proposal. From August through October the finer points of the deal were negotiated. On September 22, 2000, AC Acquisition, LLC (AC Acquisition), was formed as a subsidiary of Diversified to act as the buyer. On October 16, 2000, Arebec's board approved the transaction and AC Acquisition paid $25,170,000 for 100% of Arebec's stock. The proceeds were placed in a trust for petitioners, and 95.7% of the proceeds was distributed to them the following day.
The following facts are affirmatively alleged by respondent in his answer. In their reply to answer petitioners deny most of these allegations "for lack of sufficient knowledge or information." AC Acquisition, which had negligible assets, financed its purchase of the Arebec stock with a purported loan of $29 million from a subsidiary of Rabobank, a Dutch bank that has played a similar fleeting role in other Midco transactions.
On October 17, 2000, the day after the purported stock acquisition and asset sale closed, the proceeds from the asset sale, totaling about $26 million, were withdrawn from Arebec's Paine Webber account and deposited into Arebec's Rabobank account. Later that day $25,500,000 was withdrawn from Arebec's Rabobank account and deposited into AC Acquisition's Rabobank account. AC Acquisition immediately used those funds to repay the Rabobank loan in full. This set of transactions left Arebec, now wholly owned by AC Acquisition, with negligible assets and a very large tax liability.
On October 23, 2000, Arebec formed and became the sole member of AC Trading, LLC (AC Trading), making a modest capital contribution. Four days later AC Trading purchased offsetting long- and short-option positions on the Japanese yen. Given the offsetting nature of these options and the lack of other assets, AC Trading had negligible economic value. But Arebec claimed a basis in excess of $20 million in AC Trading, valuing the long option at its cost and failing to offset against that value the contingent liability represented by the short option.
Two weeks later Arebec contributed its 100% interest in AC Trading in exchange for an 85% membership interest in AD Equity Investment Fund, LLC (AD Equity), a partnership of which Diversified was the tax matters partner (TMP). Arebec's purported basis in AD Equity was inflated because of the artificially high basis it claimed in AC Trading. On December 11, 2000, AD Equity redeemed Arebec's interest for cash and securities of little value. Arebec's inflated outside basis in AD Equity was transferred to the securities. Arebec claimed it suffered a short-term loss of $20,986,503 when it sold those securities on December 26, 2000.
On December 14, 2001, AD Equity filed Form 1065, U.S. Return of Partnership Income, for the calendar tax year 2000, the year in which it redeemed Arebec's 85% interest.
On December 14, 2004, the IRS issued a notice of final partnership administrative adjustment (FPAA) to Diversified, AD Equity's TMP. The FPAA determined that AD Equity had never existed (or had existed solely for tax avoidance purposes) and that its transactions lacked economic substance. On March 4, 2005, Diversified filed suit on behalf of AD Equity in the U.S. District Court for the Southern District of New York to contest the FPAA adjustments. On June 25, 2014, the District Court dismissed the case with prejudice, which had the effect of sustaining the FPAA.
Following conclusion of the lengthy partnership proceeding, the IRS issued, on May 12, 2015, a statutory notice of deficiency to Arebec. The IRS disallowed $19,972,484 of Arebec's reported capital losses, determining a tax deficiency of $6,957,864 and penalties under section 6662 of $2,783,139. When Arebec did not petition this Court within 90 days,
Upon investigation of Arebec the IRS discovered that it had no assets. The IRS accordingly determined to seek recovery from petitioners as transferees of Arebec. The IRS issued notices of liability to petitioners on January 18, 2017, and they timely petitioned this Court for review.
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials.
The sole question presented for decision at this stage of the proceedings is whether the IRS mailed notices of liability to petitioners within the applicable period of limitations for assessment. The parties have filed cross-motions for partial summary judgment on this question, and we find that it may appropriately be adjudicated summarily.
Various petitioners reside in New York (docket Nos. 8485-17, 8487-17, and 8501-17), Connecticut (docket Nos. 8488-17, 8498-17, and 8500-17), New Jersey (docket No. 8499-17), Nevada (docket No. 8490-17), and California (docket No. 8496-17). Absent stipulation to the contrary, venue for appeal of these cases would apparently be the U.S. Court of Appeals for the Second, Third, and Ninth Circuits, respectively.
"The expiration of the period of limitation on assessment is an affirmative defense, and the party raising it must specifically plead it and carry the burden of proving its applicability."
A party advancing this affirmative defense must make a prima facie case establishing the date on which the relevant tax return was filed, the expiration of the relevant limitations period, and the mailing of the relevant IRS notice after that period had expired.
When Arebec filed its corporate tax return for its FYE January 31, 2001, it reported a capital loss of $21,109,722. This reported loss stemmed chiefly from the sale of securities it had received from AD Equity, a partnership, in purported redemption of its 85% interest in that partnership. That redemption and the validity of AD Equity as a partnership were the subject of a partnership-level proceeding. Because these cases involve items on a corporate tax return that are "affected items" from a partnership return, two distinct limitations provisions are implicated.
Section 6501(a) sets forth the general rule that Federal income tax must be assessed "within 3 years after the return was filed." Section 6229(a) addresses "the period for assessing any [income] tax * * * with respect to any person which is attributable to any partnership item (or affected item) for a partnership taxable year." It provides that this assessment period "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 date for filing such return * * * (determined without regard to extensions)."
In situations where sections 6501(a) and 6229(a) both apply, this Court has held that the longer of the two periods controls.
If an FPAA is timely mailed to the TMP for a partnership, section 6229(d) suspends the running of the period of limitations "(1) for the period during which an action may be brought under section 6226 (and, if a petition is filed under section 6226 * * *, until the decision of the court becomes final), and (2) for 1 year thereafter." We held in
Petitioners disagree with this second holding of
We decline to reconsider either holding in
The Form 1120 on which Arebec reported the challenged losses was filed on January 17, 2002. Under the general rule of section 6501(a), therefore, the IRS initially had until January 17, 2005, to assess tax against Arebec. The Form 1065 on which AD Equity reported the relevant partnership items was filed on December 14, 2001. Under section 6229(a), the period of limitations for assessing Arebec for the affected items arising from its ownership of AD Equity "[did] not expire before" December 14, 2004. Under our first holding in
As we further held in
Under section 6229(d), the running of the remaining 34 days of the limitations period was suspended during the District Court litigation and for one year after the judgment of the District Court became final. Sec. 6229(d)(1) and (2). The District Court dismissed the AD Equity case with prejudice on June 25, 2014, and neither party appealed. That court's judgment thus became final on August 25, 2014, the last day on which a notice of appeal could have been filed.
When section 6229(d) suspends a limitations period, any unexpired time left in the original assessment period is tacked on following the suspension. We so held in
Here, immediately before the section 6229(d) suspension began, the IRS had 34 days remaining to assess tax against Arebec. The section 6229(d) suspension ended on August 25, 2015. The period for assessing tax against Arebec, as extended by section 6229(d), thus closed 34 days later, on September 28, 2015. The IRS issued the notice of deficiency to Arebec on May 12, 2015, which was well within the period of limitations on assessment defined above. On May 12, 2015, the limitations period still had 139 days left to run.
Upon the mailing of a timely notice of deficiency, section 6503(a) suspends the running of the period of limitations for (at least) the 90-day period during which the taxpayer can file a Tax Court petition, sec. 6213(a), "and for 60 days thereafter." Because Arebec did not file a Tax Court petition, the period for assessing tax against Arebec was suspended for a total of 150 days, i.e., from May 12, 2015, through October 9, 2015. The 139 days remaining in the original period of limitations is tacked on following that suspension.
Section 6901(c) specifies the period of limitations for assessing the tax of a transferor (here Arebec) against transferees of its assets. For "initial transferees," which petitioners are alleged to be, the transferor's tax may be assessed against transferees "within 1 year after the expiration of the period of limitation for assessment against the transferor." Sec. 6901(c)(1). That one-year period ended on February 25, 2017. Because February 25, 2017, was a Saturday, the period of limitations was extended to February 27, the following Monday.
We reach the same conclusion if we follow petitioners' suggestion and measure the period of limitations from the filing of AD Equity's return. AD Equity filed its 2000 Form 1065 on December 14, 2001. The baseline period of limitations for assessing tax attributable to any partnership item or affected item of AD Equity ran to December 14, 2004, three years from the date AD Equity filed the return.
The FPAA tolls the running of the period of limitations for the period during which a readjustment petition could be brought under section 6226 and (if such a petition is filed) until the court's decision becomes final and for one year thereafter. Sec. 6229(d). On June 25, 2014, the District Court dismissed the partnership case, and that judgment became final on August 25, 2014.
The IRS issued an "affected items" notice of deficiency to Arebec on May 12, 2015, well within the period of limitations. Sec. 6229(a). The notice of deficiency tolled the running of the period of limitations for an additional 150 days,
The period of limitations for assessing tax against petitioners as initial transferees of Arebec extended for one year after the period for assessment against Arebec. Sec. 6901(c)(1). The IRS thus had until January 22, 2017, to issue notices of transferee liability to petitioners. The IRS issued those notices on January 18, 2017. They were therefore timely under the alternative measurement approach that petitioners suggest.
Petitioners advance two contentions against the conclusions set forth above. Neither has merit.
Petitioners' principal contention is that the FPAA issued to AD Equity was untimely. If that were so, petitioners say, the District Court litigation could not have acted to suspend the period of limitations, and section 6226(d) would have no operation here at all. In that event petitioners contend that the notices of liability would be untimely under either of the approaches we have outlined.
We reject this argument for three distinct reasons. First, the issuance of the FPAA on December 14, 2004, was timely for assessment purposes because it was within three years of the filing of Arebec's (the partner's) return on January 17, 2002.
Second, petitioners have not established that the FPAA was untimely even if the three-year limitations period were treated as running from the filing of AD Equity's (the partnership's) return. The IRS received AD Equity's Form 1065 for 2000 on December 14, 2001, as shown by IRS computer records. Those records show a received date ("RCVD DATE") of December 14, 2001 ("20011214"), for a partnership return matching AD Equity's 2000 return. The IRS issued the FPAA to Diversified, the TMP of AD Equity, exactly three years later, on December 14, 2004.
Petitioners assert that AD Equity filed its 2000 return at least two months earlier, on or before October 15, 2001. But the only thing they adduce to support that assertion is a letter from AD Equity's tax return preparer informing the partnership that its Form 1065 should be signed and filed on or before that date. Petitioners have supplied no document (such as a certified mail receipt or a transmittal letter) tending to show that the return was actually mailed to the IRS on or before October 15, 2001. Nor have they supplied a declaration or affidavit executed by a person with actual knowledge of the circumstances surrounding the return's filing.
Under Rule 121(d), a party opposing summary judgment "may not rest upon the mere allegations or denials of such party's pleading," but must set forth, "by affidavits or declarations * * * specific facts showing that there is a genuine dispute for trial."
Third, even if petitioners could run the preceding two traps, they face the formidable hurdle of res judicata. "When a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound."
In the case of a TEFRA partnership, the period of limitations for the assessment of tax attributable to an FPAA is a "`partnership item' that must be raised at the partnership level."
For this reason, Arebec as a partner in AD Equity could not now challenge the timeliness of the FPAA issued to the partnership. And to the extent petitioners are transferees of Arebec, they are in no better position. "It is well settled that a transferee is in privity with the transferor for purposes of the Internal Revenue Code."
Petitioners alternatively contend that the notice of deficiency issued to Arebec was invalid and hence that section 6503(a)(1) did not operate to suspend the limitations period for 150 days when Arebec declined to file a Tax Court petition.
Section 6503(a)(1) suspends the running of the limitations period of section 6229, "but only with respect to a deficiency described in paragraph (2)(A) or (3) of section 6230(a)." Paragraph (3) of section 6230(a), relating to "innocent spouse relief," has no relevance here. Paragraph (2)(A) provides that deficiency procedures apply to any deficiency attributable to affected items "which require partner level determinations," other than certain penalties and additions to tax. On the other hand, section 6230(a)(1) provides that deficiency procedures "shall not apply to the assessment or collection of any computational adjustment," unless it is a computational adjustment covered by paragraph (2)(A) or (3). In short, section 6503(a)(1) does not suspend the section 6229 limitations period where no partner-level determinations entailing deficiency procedures are required.
Petitioners urge that this was such a case. Once AD Equity had been determined in the District Court litigation to be a sham, petitioners contend that no partner-level determinations were needed to implement the FPAA's adjustments at the partner level. Rather, the IRS could supposedly have omitted to send Arebec a notice of deficiency and have assessed Arebec's tax liability as a "computational adjustment" under section 6230(a)(1). We are unpersuaded by this argument.
Regulations issued under section 6231 explain that there are various types of "computational adjustments," some of which require partner-level determinations and some of which do not.
We have previously held that the disallowance of loss deductions following a distribution from a sham partnership required partner-level determinations in a deficiency proceeding.
The taxpayers in
The Ninth Circuit reasoned similarly in
Similar reasoning applies here. Arebec made a capital contribution to AC Trading in exchange for a 100% partnership interest in AC Trading, contributed that interest to AD Equity in exchange for an 85% interest in AD Equity, and received cash and securities from AD Equity in redemption of its partnership interest. Notwithstanding the determination that AD Equity was a sham, partner-level proceedings were required to determine the amount of Arebec's gain or loss on sale of those securities and the character of any loss. These factual determinations included: (1) whether the securities Arebec sold were the same securities that AD Equity had distributed, (2) the portion of the securities actually sold, (3) Arebec's holding period for the securities, (4) the character of Arebec's gain or loss, and (5) Arebec's basis in its partnership interest in AC Trading when it contributed that interest to AD Equity.
Petitioners err in relying on
In sum, petitioners' assertion that the notice of deficiency issued to Arebec was void ab initio derives no support from the opinions of the Supreme Court, the Courts of Appeals, or other binding judicial precedent. The determination that AD Equity was a sham, effectively made in 2014 by the District Court when dismissing the partnership case, did not resolve nonpartnership items and other factual issues unique to each partner. The need to make the fact-based partner-level determinations discussed above required the IRS to follow normal deficiency procedures, thus affording partners a prepayment forum to dispute the IRS' determinations.
To implement the foregoing,