WHERRY, Judge:
The petition in this case was filed by Jetstream Business Limited (Jetstream) as tax matters partner for Sugarloaf Fund, LLC (Sugarloaf), on January 8, 2010. On July 12, 2012, Timothy J. Elmes filed an election to participate in this case pursuant to section 6226(c).
This Court has for some time, even predating Mr. Elmes' attempt to intervene in this case, been concerned as to whether "individual U.S. investors who claimed to have purchased ownership interests in the Holding Companies as well as those who acquired beneficial interests in the Sub-Trusts" had "the right to participate in these partnership-level proceedings". This Court's order dated April 17, 2012, discussed these issues in some detail and directed the parties to file briefs addressing these issues. Both petitioner and respondent have, in response to the Court's order, filed briefs
For the sole purpose of deciding this issue, we draw the following background information from the agreed-upon allegations in the pleadings and from the uncontroverted statements in the motions and in the accompanying memoranda, including exhibits thereto.
This case is a partnership-level proceeding under the unified audit and litigation provisions of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648, commonly referred to as TEFRA and currently codified at sections 6221 through 6234. Sugarloaf is an Illinois limited liability company and has filed tax returns as a partnership under the default classification rules. See sec. 301.7701-3(a) and (b)(1)(i), Proced. & Admin. Regs. One or more Brazilian companies allegedly contributed uncollected and overdue consumer receivables to Sugarloaf in exchange for a 98% interest in Sugarloaf. Warwick Trading, LLC (Warwick), and Jetstream owned the remaining 2% interest in Sugarloaf.
Sugarloaf claims to have contributed some of the Brazilian consumer receivables to "Illinois common law business trusts" (main trusts). Then, these main trusts purportedly formed sub-trusts and assigned a portion of the receivables to these sub-trusts, which, according to petitioner, operated to hold, preserve, and delegate collections of the receivables. Investors would contribute cash to a main trust in exchange for an interest in that main trust and the entire beneficial interest in a specified sub-trust. Mr. Elmes was apparently one of these investors. The investors in these sub-trusts reported on their individual tax returns section 166 bad debt deductions relating to the consumer receivables. The Commissioner has denied the claimed deductions and determined income tax deficiencies and penalties against many of the investors.
Respondent disallowed the loss deduction on a number of grounds and determined an income tax deficiency and a penalty against Mr. Elmes for which a statutory notice of deficiency was issued. According to respondent and to this Court's records, Mr. Elmes did not petition this Court for review of that statutory notice of deficiency, and respondent assessed the deficiency.
To support this belated attempt, Mr. Elmes relies on language used in the previously mentioned order dated April 17, 2012, that we issued both in this case and a number of transactionally related cases. In that order we requested briefs on whether the beneficial owners of trusts similar to the Elmes Main Trust and the Elmes Sub-Trust should be considered partners of Sugarloaf. Both respondent and petitioner in this case responded in the negative, as did the petitioners in a number of transactionally related cases. Mr. Elmes, however, filed a protective election to participate in this case, although he has no separate case of his own, and further filed a motion contending that he should be treated
Our April 17, 2012, order hypothesized that if Sugarloaf's basis in the receivables was a partnership item of Sugarloaf and the main trust's and sub-trust's basis in the receivables was a carryover basis, then the sub-trust's basis in the receivables would likely be controlled by our finding as to Sugarloaf's basis in the receivables. As we stated in that order: "Consequently, an individual U.S. investor who claimed a beneficial interest in a Sub-trust would seem to have his Federal income tax liability `determined in whole or [in] part by taking into account directly or indirectly [Sugarloaf's basis in these partnership assets, which are] partnership items of the partnership.' Sec. 6231(a)(2)."
Generally when the tax matters partner or other partner petitions this Court for readjustment of items in a notice of final partnership administrative adjustment (FPAA), each partner who was a partner during the partnership taxable year at issue may participate in the proceeding. Sec. 6226(c). A partner seeking to participate under section 6226(c) must have an interest in the outcome. Sec. 6226(d). Thus, for Mr. Elmes to participate in this proceeding, he must have been a partner in Sugarloaf at some time during the 2005 taxable year of Sugarloaf, which is at issue in this case. See sec. 6226(c)(1).
Section 6231(a)(2) defines a partner for TEFRA purposes not just as a "partner in the partnership" but also as "any other person whose income tax liability * * * is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership." A partnership item is "any item required to be taken into account for the partnership's taxable year under any provision of subtitle A to the extent regulations prescribed by the Secretary provide that, for purposes of this subtitle, such item is more appropriately determined at the partnership level than at the partner level." Sec. 6231(a)(3). The regulations include as partnership items "amounts determinable at the partnership level with respect to partnership assets". Sec. 301.6231(a)(3)-1(a)(1)(vi), Proced. & Admin. Regs.
Section 6231(a)(2)(B) brings within the definition of partner certain persons who are liable or jointly and severally liable for a tax liability attributable to partnership items. For example, a spouse may be a deemed partner if the other spouse is a partner and they file jointly or if the spouse, by operation of State law, has a joint interest in the partnership interest. See Callaway v. Commissioner, 231 F.3d 106, 111 (2d Cir. 2000), rev'g T.C. Memo. 1998-99. In addition, a common parent corporation of a consolidated
Mr. Elmes contends, however, that he is a partner in Sugarloaf by virtue of his status as grantor of Elmes Sub-Trust. Specifically, he contends:
The problem with this argument is that in Dionne, the S corporation had an interest in the partnership, whereas here, Elmes Sub-Trust has no such interest.
We have discussed above some of the circumstances under which a taxpayer is deemed a partner under section 6231(a)(2)(B). Mr. Elmes, however, takes a different tack and claims that he is a partner of Sugarloaf under section 6231(a)(2)(B) because his income tax liability depends in part on the trust's basis in the receivables, which he contends depends on Sugarloaf's basis in those same receivables. Mr. Elmes is correct that the basis of the receivables is a partnership item of Sugarloaf. See Superior Trading, LLC v. Commissioner, 137 T.C. 70, 91 n.20 (2011) (involving a tiered partnership structure that was allegedly set up for servicing Brazilian receivables, holding that "[e]ach partnership's basis in the receivables is part of that partnership's inside basis and is therefore a `partnership item' within the meaning of sec. 6231(a)(3) and sec. 301.6231(a)(3)-1, Income Tax Regs."), supplemented by T.C. Memo. 2012-110, aff'd, 728 F.3d 676 (7th Cir. 2013).
The gist of Mr. Elmes' argument appears to be that any adjustment to Sugarloaf's basis in the receivables determined by respondent or this Court would necessarily affect the amount of the bad debt deduction to which Mr. Elmes is entitled on his individual income tax return. This would occur because under section 1015(b) the basis of the receivables in the hands of the transferee trust must be the same as the basis of those receivables in the hands of transferor Sugarloaf.
This argument depends on the fact that the receivables were transferred from Sugarloaf to Elmes Main Trust and then allocated to Elmes Sub-Trust, but does not depend on any legal relationship among Mr. Elmes, the trusts, and the partnership Sugarloaf for purposes of income taxation. We also note that if the argument were correct, then any trust to which a partnership transferred assets would be a member of that partnership. We do not believe that a trust is necessarily a partner of a partnership merely because the trust
In support of his position that he should be considered a partner of Sugarloaf, Mr. Elmes cites our Supplemental Memorandum Opinion in Superior Trading, LLC v. Commissioner, T.C. Memo. 2012-110. In Superior Trading, the taxpayers contended that a Brazilian retailer contributed distressed consumer receivables to Warwick, which then contributed the receivables to a series of trading companies. Warwick then contributed most of its interest in those trading companies to various holding companies. Warwick then sold a supermajority interest in the holding companies to investors, who claimed substantial bad debt deductions. Respondent issued FPAAs to both Warwick and the trading companies. In those FPAAs respondent took several alternative positions, including that the receivables had no value even before they were transferred to Warwick.
Warwick and most of the trading companies filed petitions with this Court. Warwick's petition was consolidated with some, but not all, of the trading companies' petitions. After trial of those consolidated cases, we found for respondent on each of his alternative theories, including the theory that the receivables had no value.
In our Supplemental Memorandum Opinion on petitioners' motion for reconsideration, before addressing again each of respondent's alternative theories, we discussed the investors who had acquired ownership interests in the holding companies. After quoting section 6231(a)(2)(B), we stated that "to the extent their income tax liability is affected by the basis of the * * * [distressed consumer] receivables, a partnership item in these partnership-level proceedings, these investors are partners for purposes of these proceedings. Consequently, pursuant to section 6226(c)(1), each such investor `shall be treated as a party to such action'." Id., slip op. at 9.
Superior Trading did involve a Sugarloaf-type entity (Warwick), but Warwick's proceeding had been consolidated for trial and opinion with the trading companies' TEFRA proceedings. Our holding in the consolidated cases that the receivables' basis was zero was a factual and legal determination of a partnership item not just for Warwick, but also for the trading companies that were also involved in the case. Unlike Mr. Elmes, the investors, each of whom owned an
Mr. Elmes does not cite caselaw, other than Superior Trading and Dionne, discussed supra, to support his expanded definition of partner for a TEFRA proceeding. But, the Court of Appeals for the Seventh Circuit, to which this case appears to be appealable absent stipulation to the contrary, has provided some guidance in this realm, and it is contrary to Mr. Elmes' position. Cemco Investors, LLC v. United States, 515 F.3d 749 (7th Cir. 2008). Cemco Investors involved three entities: a trust, a partnership, and the taxpayer (Cemco), a limited liability company treated as a partnership for Federal income tax purposes. Id. at 750. The trust entered into two-week-long offsetting short and long option contracts with a bank and then contributed those options to the partnership. Id. The partnership purchased euro and terminated the option contracts the next day. Id. The partnership then liquidated, transferring its assets, both dollars and euro, to the trust. Id. The trust turned around and contributed the euro to Cemco, which then sold them. Id. Cemco claimed a loss on this sale on the grounds that it took a carryover basis from the trust, which allegedly had an increased basis in the euro equal to the full amount of the long option. Id. at 750-751.
One of Cemco's arguments in its challenge to the FPAA was that the Commissioner should have first issued an FPAA
By analogy, Mr. Elmes has never been a partner in Sugarloaf. The TEFRA provisions do not require that the tax treatment of the receivables in Mr. Elmes' hands match their treatment in Sugarloaf's hands. While consistency of treatment in the two parties' hands would be ideal, and many related cases are consolidated with this one in part for that purpose, nothing in the TEFRA provisions requires this. See id. ("[T]he IRS need not ensure consistent tax treatment unless a statute so requires. Sections 6221 to 6234 don't require this because Cemco is not an investor in the Partnership."). Because Mr. Elmes is not a partner, direct or indirect, in Sugarloaf, he has no standing to participate in this TEFRA proceeding.
We have considered all of Mr. Elmes' contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant. To reflect the foregoing,
An appropriate order will be issued.