BLAK Investments, Kyle W. Manroe Trust, Robert and Lori Manroe, Trustees, Tax Matters Partner v. Commissioner

133 T.C. No. 19

UNITED STATES TAX COURT

BLAK INVESTMENTS, KYLE W. MANROE TRUST, ROBERT AND LORI MANROE,
TRUSTEES, TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1283-07. Filed December 23, 2009.

In 2001 two partners of partnership P borrowed
Treasury securities and sold them in the open market;
i.e., a short sale. They contributed the short sale
proceeds and the obligation to cover the short sale to
P in exchange for interests in P. The two partners
claimed their bases in P were increased by the short
sale proceeds but not reduced by the obligation to
cover the short sale. P then redeemed the two
partners’ interests in P. On their Federal income tax
returns the two partners claimed significant losses
with respect to the redemption and subsequent sale of
assets received in the redemption. Neither the
partnership nor the two partners disclosed their
participation in the transaction on tax returns for
2001 and 2002.

Sec. 6501(c)(10), I.R.C., provides that if a
taxpayer fails to disclose on a return or statement for
any taxable year any information required under sec.
 -2-

6011, I.R.C., with respect to a listed transaction as
defined in sec. 6707A(c)(2), I.R.C., the period of
limitations for assessment of any tax imposed with
respect to the transaction does not expire until 1 year
after the Internal Revenue Service is furnished the
information so required. R argues that P and its
partners were required to disclose their participation
in the transaction at issue under sec. 6501(c)(10),
I.R.C.

Petitioner argues that:

(1) Because sec. 6707A, I.R.C., is incorporated
into sec. 6501(c)(10), I.R.C., the effective date of
sec. 6707A, I.R.C., controls and sec. 6501(c)(10),
I.R.C., cannot apply to any transaction for which a
return or statement was due on or before Oct. 22, 2004;

(2) sec. 1.6011-4T, Temporary Income Tax Regs.
(the temporary regulation), 67 Fed. Reg. 41327 (June
18, 2002), which requires disclosure of participation
in listed transactions, is invalid because it violates:

(a) Executive Order 12866, 3 C.F.R. 638 (1994)
(Executive Order 12866);

(b) the Regulatory Flexibility Act (RFA), 5 U.S.C.
secs. 601-612 (1994);

(c) the Administrative Procedure Act, 5 U.S.C.
sec. 553(b) and (c) (1994).

Held: Sec. 6501(c)(10), I.R.C., is effective for
tax years with respect to which the period for
assessing a deficiency did not expire before Oct. 22,
2004. The effective date of sec. 6707A, I.R.C.,
defining “listed transaction” and incorporated into
sec. 6501(c)(10), I.R.C., has no bearing on the
application of sec. 6501(c)(10), I.R.C., in this case.

Held, further: the temporary regulation does not
violate Executive Order 12866 or the RFA.

Held, further: the temporary regulation was
replaced by sec. 1.6011-4, Income Tax Regs. (the final
regulation), T.D. 9046, 2003-1 C.B. 614, effective Feb.
28, 2003, and the rules of the temporary regulation
were incorporated into the final regulation.
 -3-

Held, further: the final regulation is valid and
requires disclosure of the 2001 transaction on the
partnership’s and the partners’ 2002 returns.

Held, further: The period of limitations for
assessment of tax resulting from the adjustment of
partnership items with respect to the transaction at
issue is open for the year 2001 under sec. 6501(c)(10),
I.R.C.

Ernest S. Ryder, Richard V. Vermazen, and Lauren A.

Rinsky, for petitioner.

Donna F. Herbert and Jonathan H. Sloat, for respondent.

OPINION

HAINES, Judge: This case is before the Court on

respondent’s motion and petitioner’s cross-motion for partial

summary judgment filed pursuant to Rule 121.1 The issues are:

(1) Whether the effective date of section 6707A precludes

application of section 6501(c)(10) to the transaction at issue;

(2) whether the transaction at issue is a listed transaction; and

(3) whether the period of limitations for assessment of tax

resulting from the adjustment of partnership items with respect

to the transaction at issue is open for 2001 under section

6501(c)(10).

1
Unless otherwise indicated, section references are to the
Internal Revenue Code (Code), as amended. Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
 -4-

Background

BLAK Investments (the partnership) is a California general

partnership created by Robert and Lori Manroe (the Manroes). The

Manroes are partners of the partnership as are two trusts created

by the Manroes for the benefit of their children. The petition

has been brought by Robert and Lori Manroe, as trustees of the

Kyle W. Manroe Trust, tax matters partner of the partnership.

I. The Transaction at Issue

On December 4, 2001, the Manroes as trustees of the Manroe

Family Trust opened an account with A.G. Edwards & Sons, Inc. On

December 10, 2001, the Manroes deposited $825,000 into the Manroe

Family Trust account. On December 12, 2001, the Manroes, through

the Manroe Family Trust Account, borrowed Treasury notes maturing

on November 15, 2006, with a maturity value of $6,815,000. The

Treasury notes were then sold on the open market for $5,481,713;

i.e., the Treasury notes were sold short.2 Of the proceeds,

$2,491,233 was allocated to Mr. Manroe and $2,990,480 was

allocated to Ms. Manroe.

On December 12, 2001, the Manroes contributed the short sale

proceeds, the $825,000 previously deposited into the Manroe

Family Trust account, and the obligation to cover the short sale

2
A short sale is the sale of borrowed securities, typically
for cash. The short sale is closed when the short seller buys
and returns identical securities to the person from whom he
borrowed them.
 -5-

to the partnership in exchange for a combined 95.2964-percent

partnership interest. The two trusts for the children each

contributed $20,000 in exchange for respective 2.3518-percent

partnership interests.

Mr. Manroe reported a $2,866,688 capital contribution to the

partnership, of which $2,491,233 was proceeds from the short

sale. Ms. Manroe reported a $3,440,025 capital contribution to

the partnership, of which $2,990,480 was proceeds from the short

sale. Neither of their contributions was reduced by the

partnership’s obligation to cover the short sale.

On December 28, 2001, the partnership redeemed Mr. Manroe’s

partnership interest for $380,988.3 Of that amount, Mr. Manroe

received $330,988 and 82,645 Swiss francs having a fair market

value of $50,000. On December 28, 2001, the partnership redeemed

Ms. Manroe’s partnership interest for $457,185. That amount did

not include any foreign currency.

On December 31, 2001, Mr. Manroe converted his 82,645 Swiss

francs into U.S. dollars in the amount of $45,931.

On January 11, 2002, the partnership covered the short sale

by purchasing treasury notes with a face value of $6,815,000

maturing on November 16, 2006, for $5,600,567.

3
The record is inconsistent as to whether the redemption
price of Mr. Manroe’s interest is $380,988 or $330,988. The
inconsistency has no bearing on the issues presented in these
motions. For purposes of these motions, we shall assume the
redemption price was $380,988.
 -6-

II. The Manroes’ Position on the Tax Consequences of the
Transaction

The Manroes claim that upon making their initial

contributions to the partnership their total basis in their

partnership interests was $6,306,713, equal to the total short

sale proceeds of $5,481,713 and the $825,000 cash. See sec. 722.

The Manroes took the position that the obligation to cover the

short sale was not a liability for purposes of section 752(b).

Mr. Manroe claims that when the partnership redeemed his

partnership interest, he recognized no gain or loss because the

money distributed did not exceed his basis in the partnership.

See sec. 731(a). He claims that his basis in the Swiss francs

became $2,585,700; i.e., his total basis in the partnership

interest less the cash distributed. See sec. 732(b). Mr. Manroe

further claims that when he converted his Swiss francs into U.S.

dollars he recognized an ordinary loss of $2,539,769. The

purported loss was claimed on Schedule E, Supplemental Income and

Loss, of the Manroes’ joint 2001 Form 1040, U.S. Individual

Income Tax Return. The loss was reported as being from “Culebra

Trading Partners, Ltd.”, although it was attributable to the

transaction described above.

Ms. Manroe claims that when the partnership redeemed her

partnership interest, she recognized a short-term capital loss of

$2,982,840, equal to her basis less the amount of money received.

See secs. 731(a)(2), 741. The short-term capital loss was
 -7-

claimed on Schedule D, Capital Gains and Losses, of the Manroes’

2001 Form 1040. The claimed loss offset $1,474,391 of short-term

capital gains for 2001. The Manroes claimed a $458,190 carryover

loss on their 2002 return.4

Neither the partnership nor the Manroes attached a

disclosure statement to its or their 2001 return. They did not

file a copy of a disclosure statement with respondent’s Office of

Tax Shelter Analysis. No material adviser provided respondent

with information regarding the partnership’s or the Manroes’

participation in the transaction. See sec. 6112.

III. Procedural History

On October 13, 2006, respondent issued the partnership a

notice of final partnership administrative adjustment (FPAA).

Respondent determined that the partnership was a sham, was formed

and availed of solely for the purpose of overstating the bases of

partnership interests, and lacked economic substance. Respondent

contends that the consequence of these determinations, if they

are sustained, would be the disallowance of the losses the

Manroes claimed on their 2001 and 2002 joint returns and

4
On Oct. 18, 2006, shortly after the issuance of the FPAA,
the Manroes submitted to respondent a Form 1040X, Amended U.S.
Individual Income Tax Return, for 2002. The amended return
eliminated the capital loss carryover and increased the Manroes’
income by $458,190. Respondent did not process the amended
return.
 -8-

imposition of accuracy-related penalties determined at the

partnership level upon the partners. See sec. 6221.

The tax matters partner timely petitioned the Court for

review of the FPAA, asserting among other things that the statute

of limitations bars the determination of a liability with respect

to partnership items or affected items for 2001. Respondent, in

his answer, asserted that section 6501(c)(10) applies to the

transaction because it constituted a listed transaction requiring

disclosure. Petitioner denied the applicability of section

6501(c)(10) in its reply. On November 30, 2007, the Court filed

respondent’s motion for partial summary judgment on the statute

of limitations issue. On March 10, 2008, the Court filed

petitioner’s cross-motion for partial summary judgment on the

same issue. A hearing on the motions was held in San Diego,

California.

Discussion

I. The Period of Limitations for Partnerships and Their
Partners Generally

Under the general rule set forth in section 6501(a), the

Internal Revenue Service (IRS) is required to assess tax (or send

a notice of deficiency) within 3 years after a Federal income tax

return is filed. In the case of a tax imposed on partnership

items, section 6229 sets forth special rules to extend the period

of limitations prescribed by section 6501 with respect to

partnership items or affected items. See sec. 6501(n)(2); Rhone-
 -9-

Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C.

533, 540-543 (2000). Section 6229 provides in pertinent part:

SEC. 6229. PERIOD OF LIMITATIONS FOR MAKING
ASSESSMENTS.

(a) General Rule.–-Except as otherwise provided in
this section, the period for assessing any tax imposed
by subtitle A 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).

Section 6229 supplements section 6501. It is not a separate

statute of limitations for assessments attributable to

partnership items. AD Global Fund, LLC v. United States, 481

F.3d 1351 (Fed. Cir. 2007); Rhone-Poulenc Surfactants &

Specialties, L.P. v. Commissioner, supra at 545. In Rhone-

Poulenc Surfactants & Specialties, L.P. v. Commissioner, supra at

539, the Court analyzed sections 6229 and 6501 as applicable to

an FPAA. The Court stated:

The Internal Revenue Code prescribes no period
during which TEFRA partnership-level proceedings, which
begin with the mailing of the notice of final
partnership administrative adjustment, must be
commenced. However, if partnership-level proceedings
are commenced after the time for assessing tax against
the partners has expired, the proceedings will be of no
avail because the expiration of the period for
assessing tax against the partners, if properly raised,
will bar any assessments attributable to partnership
items.
 -10-

Id. at 534-535; see AD Global Fund, LLC v. United States, supra;

G-5 Inv. Pship. v. Commissioner, 128 T.C. 186 (2007).

Under section 6229(d) the mailing of an FPAA suspends the

running of both 3-year periods--the section 6501(a)

period and the section 6229(a) period. See Rhone-Poulenc

Surfactants & Specialties, L.P. v. Commissioner, supra at 552-

553. The suspension is for the period during which an action for

judicial review of the FPAA may be brought (and, if an action is

brought, until the decision of the court has become final) and

for 1 year thereafter. Sec. 6229(d).

The Manroes filed their 2002 return on October 15, 2003.

The FPAA was issued on October 13, 2006. Petitioner concedes

that pursuant to section 6501(a) the period for assessment of tax

attributable to partnership items for the Manroes’ 2002 tax year

was open when the FPAA was issued.

The Manroes filed their 2001 return on October 15, 2002,

more than 3 years before the issuance of the FPAA. Therefore,

under the general rule of section 6501(a) the Manroes contend

that the 2001 tax year has closed. However, respondent argues

that the period for assessment of tax attributable to partnership

items for 2001 is open under section 6501(c)(10) with respect to

a listed transaction if the taxpayer has not made the requisite

disclosure of his participation in the listed transaction.
 -11-

Neither party disputes our jurisdiction over this issue, but

we shall examine it nonetheless. Section 6226 provides in

pertinent part:

SEC. 6226. JUDICIAL REVIEW OF FINAL PARTNERSHIP
ADMINISTRATIVE ADJUSTMENTS.

(c) Partners Treated as Parties.--If an action is
brought under subsection (a) or (b) with respect to a
partnership for any partnership taxable year--

(1) each person who was a partner in such
partnership at any time during such year shall be
treated as a party to such action, and

(2) the court having jurisdiction of such
action shall allow each such person to participate
in the action.

(d) Partner Must Have Interest in Outcome.--

(1) In order to be party to action.--
Subsection (c) shall not apply to a partner after
the day on which--

(A) the partnership items of such
partner for the partnership taxable year
became nonpartnership items by reason of 1 or
more of the events described in subsection
(b) of section 6231, or

(B) the period within which any tax
attributable to such partnership items may be
assessed against that partner expired.

Notwithstanding subparagraph (B), any person
treated under subsection (c) as a party to an
action shall be permitted to participate in such
action (or file a readjustment petition under
subsection (b) or paragraph (2) of this
subsection) solely for the purpose of asserting
that the period of limitations for assessing any
tax attributable to partnership items has expired
with respect to such person, and the court having
jurisdiction of such action shall have
jurisdiction to consider such assertion.
 -12-

In PCMG Trading Partners XX, L.P. v. Commissioner, 131

T.C. __, __ n.9 (2008) (slip op. at 12-13), the Court noted

that we have the authority to determine whether partner

years are open to assessment for any period in dispute.

Specifically, we stated:

Generally the Court’s jurisdiction in a partnership
proceeding is restricted to determining “partnership
items”. Sec. 6226(f); Petaluma FX Partners, LLC v.
Commissioner, 131 T.C. __, __ (2008) (slip op. at 11-
12). However, our jurisdiction over whether the period
of limitations has expired as to individual partners
presents an exception since the expiration of the
period of limitations can depend on facts that are
peculiar to the individual partners. See Rhone-Poulenc
Surfactants & Specialties, L.P. v. Commissioner, 114
T.C. 533 (2000), appeal dismissed and remanded 249 F.3d
175 (3d Cir. 2001). * * *

In Rhone-Poulenc Surfactants & Specialties, L.P. v.

Commissioner, supra, the Court determined that section 6226

enabled the partners in a partnership action to assert that the

period of limitations for assessing any tax attributable to

partnership items had expired and that the Court had jurisdiction

to decide whether that assertion was correct. As we observed

therein:

Congress recognized that the periods for assessing tax
against individual partners may vary from partner to
partner and specifically provided that an individual
partner will be permitted to participate as a party in
the partnership proceeding “solely for the purpose of
asserting that the period of limitations for assessing
any tax attributable to partnership items has expired
with respect to such person”. * * *

Id. at 546 (citing section 6626(d)(1)(B)).
 -13-

In Curr-Spec Partners, LP v. Commissioner, T.C. Memo. 2007-

289, affd. 579 F.3d 391 (5th Cir. 2009), the Commissioner issued

an FPAA for the taxable year 1999, conceded that the assessment

period for that year had expired, but argued that adjustments

made in the FPAA affected three partners’ net operating loss

carryforwards for 2000 and 2001. The partners, in a partnership-

level action, conceded that the FPAA was issued within 3 years of

the time the partners filed their respective 2000 and 2001 tax

returns but moved for summary judgment on the grounds that the

period of limitations for assessing tax attributable to

partnership items had expired. The partners further argued, on

brief, that issues related to the period of limitations for their

2000 and 2001 tax years were partner-level determinations that

could not be made in a partnership-level proceeding. The Court

rejected the partners’ contentions and held that the period for

assessing tax against the partners had not expired and remained

suspended. Accordingly, under section 6226 and PCMG Trading

Partners we have the authority to address the Manroes’ contention

that the period of limitations for assessing tax attributable to

partnership items for 2001 has expired.

II. The Effective Dates of Sections 6501(c)(10) and 6707A

On October 22, 2004, Congress enacted the American Jobs

Creation Act of 2004 (AJCA), Pub. L. 108-357, sec. 814(a), 118
 -14-

Stat. 1581, which added section 6501(c)(10) to the Code. Section

6501(c)(10) provides:

(10) Listed transactions.-- If a taxpayer fails to
include on any return or statement for any taxable year
any information with respect to a listed transaction
(as defined in section 6707A(c)(2)) which is required
under section 6011 to be included with such return or
statement, the time for assessment of any tax imposed
by this title with respect to such transaction shall
not expire before the date which is 1 year after the
earlier of--

(A) the date on which the Secretary is
furnished the information so required, or

(B) the date that a material advisor meets
the requirements of section 6112 with respect to a
request by the Secretary under section 6112(b)
relating to such transaction with respect to such
taxpayer.

Section 6501(c)(10) incorporates by cross-reference the

definition of “listed transaction” set forth in section

6707A(c)(2), which was added to the Code by AJCA sec. 811, 118

Stat. 1575. Section 6707A(c) provides:

(1) Reportable transaction.--The term “reportable
transaction” means any transaction with respect to
which information is required to be included with a
return or statement because, as determined under
regulations prescribed under section 6011, such
transaction is of a type which the Secretary determines
as having a potential for tax avoidance or evasion.

(2) Listed transaction.--The term “listed
transaction” means a reportable transaction which is
the same as, or substantially similar to, a transaction
specifically identified by the Secretary as a tax
avoidance transaction for purposes of section 6011.

The parties dispute the effect of the incorporation of

section 6707A(c)(2) in section 6501(c)(10). The dispute centers
 -15-

on the effective date provided in the AJCA with respect to each

section.

We begin with a review of the principles of statutory

construction. The “cardinal principle” of statutory construction

requires us “to give effect, if possible, to every clause and

word of a statute”. United States v. Menasche, 348 U.S. 528,

538-539 (1955) (internal quotation marks omitted). In applying

the traditional rules of statutory construction, we assume that

Congress uses language in a consistent manner, unless otherwise

indicated. United States v. Olympic Radio & Television, Inc.,

349 U.S. 232, 235-236 (1955). The various sections of the Code

should be construed so that one section will explain and support

and not defeat or destroy another section. Crane v.

Commissioner, 331 U.S. 1, 13 (1947). Furthermore, “Statutes of

limitation sought to be applied to bar rights of the Government,

must receive a strict construction in favor of the Government.”

E.I. du Pont de Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924).

AJCA sec. 814(b), 118 Stat. 1581, provides that section

6501(c)(10) is effective for tax years “with respect to which the

period for assessing a deficiency did not expire before” October

22, 2004. On October 22, 2004, the period for assessing a

deficiency with respect to the Manroes’ 2001 tax year was open
 -16-

under section 6501(a).5 Therefore, if we regard as determinative

the effective date provided in AJCA sec. 814(b), section

6501(c)(10) is effective for the Manroes’ 2001 tax year.

Section 6707A, which imposes a penalty for failure to

include on a return or statement any required information with

respect to reportable transactions and listed transactions, is

effective for returns and statements the due date for which is

after October 22, 2004, and which were not filed before that

date. AJCA sec. 811(c), 118 Stat. 1577. Petitioner argues that

because section 6707A applies only to returns and statements due

after October 22, 2004, section 6501(c)(10) cannot apply to any

transaction for which a return or statement was due on or before

October 22, 2004.

In support of this proposition, petitioner argues that there

are two types of listed transactions: (1) Section 6707A listed

transactions and (2) listed transactions that predate section

6707A. Petitioner argues that section 6707A listed transactions

are those for which a penalty can be assessed under section 6707A

and which are subject to section 6501(c)(10). The second type of

listed transactions would be those for which no penalty under

section 6707A can be assessed and which are not subject to

section 6501(c)(10).

5
The Manroes’ 2001 return was filed on Oct. 15, 2002,
starting the running of the 3-year period of limitations under
sec. 6501(a), which thus remained open on Oct. 22, 2004.
 -17-

Nothing in the Code, the AJCA, or the legislative history

indicates that Congress intended that there be two types of

listed transactions in the manner petitioner suggests. Section

6707A(c) defines “listed transaction” by reference to the

regulations promulgated under section 6011. Regulations under

section 6011 defining “listed transaction” were first published

by the Department of the Treasury and the IRS in temporary and

proposed form on February 28, 2000. 65 Fed. Reg. 11207 (Mar. 2,

2000). Similarly, the legislative history makes clear that the

section 6707A penalty applies to reportable and listed

transactions as defined in the section 6011 regulations. H.

Conf. Rept. 108-755, at 582-584 (2004); see also Staff of Joint

Comm. on Taxation, General Explanation of Tax Legislation Enacted

in the 108th Congress, at 360 (J. Comm. Print 2005). In other

words, section 6707A does not alter the definition of reportable

transaction or listed transaction. Accordingly, we find that

there are not two types of listed transactions in the manner

petitioner contends.

Section 6707A(c) applies to statements and returns due after

October 22, 2004, while section 6501(c)(10) applies to tax years

for which the period for assessing a deficiency did not expire

before October 22, 2004. Because AJCA sec. 814(a) makes section

6501(c)(10) applicable for tax years for which the period of

limitations remains open as of the date of enactment of the AJCA,
 -18-

section 6501(c)(10) may apply to transactions which are required

to be disclosed on returns due well before that date and which

therefore would not be subject to a section 6707A penalty if left

undisclosed. For that reason, application of the effective date

of section 6707A to section 6501(c)(10) would render the express

effective date of section 6501(c)(10) meaningless, violating the

cardinal principle of statutory construction.

We also find significant that section 6707A and section

6501(c)(10) have different purposes. Section 6707A imposes a

penalty. Congress intended the penalty to apply prospectively,

so that a taxpayer is penalized only if the return was not yet

due when the AJCA was signed into law. AJCA sec. 811(c). On the

other hand, section 6501(c)(10) keeps open a limitations period

which had not yet expired as of the date of enactment of the AJCA

if the taxpayer failed to make the required disclosure of

involvement in a listed transaction on a return due before that

date. The legislative history details the purpose of leaving the

limitations period open.

The Committee has noted that some taxpayers and their
advisors have been employing dilatory tactics and
failing to cooperate with the IRS in an attempt to
avoid liability because of the expiration of the
statute of limitations. The Committee accordingly
believes that it is appropriate to extend the statute
of limitations for unreported listed transactions.

H. Rept. 108-548 (Part 1), at 267 (2004); see also Staff of Joint

Comm. on Taxation, supra at 368 (extension of period of
 -19-

limitations “will encourage taxpayers to provide the required

disclosure and will afford the IRS additional time to discover

the transaction if the taxpayer does not disclose it”). On July

23, 2004, Senator Charles Grassley, Chairman of the Committee on

Finance, and Senator Max Baucus, Ranking Member of the Committee

on Finance, proposed that the period of limitations be extended

to allow the IRS to challenge tax-avoidance transactions,

specifically Son-of-BOSS transactions6 that occurred as early as

2000.7

Son of Boss transactions were aggressively marketed in
the late 1990s and 2000 to companies and high net-worth
individuals. Many of these transactions generated tax
losses of between $10 million and $50 million. On
August 15th, 2004, the statute of limitations for extended
calendar year 2000 income tax returns will close for a
significant number of non-disclosing Son of Boss investors.
These investors will escape their rightful tax liability
after that date.

6
Son-of-BOSS is a variation of a slightly older alleged tax
shelter known as BOSS, an acronym for “bond and option sales
strategy”. There are a number of different types of Son-of-BOSS
transactions, but they all have in common the transfer of assets
encumbered by significant liabilities to a partnership, with the
goal of increasing basis in that partnership. The liabilities
are usually obligations to buy securities and typically are not
completely fixed at the time of transfer. The partnership treats
the liabilities as uncertain and ignores them in computing basis.
The objective is that the partners will have a basis in the
partnership so great as to provide for large--but not out-of-
pocket--losses on their individual tax returns. Kligfeld
Holdings v. Commissioner, 128 T.C. 192, 194 (2007).
7
Senators Grassley and Baucus were proposing the inclusion
of a provision similar to sec. 6501(c)(10) in an amendment to the
Jumpstart Our Business Strength (JOBS) Act, S. 1637, 108th Cong.,
1st sess. (2003), the Senate version of a bill that ultimately
passed as the AJCA.
 -20-

It is the view of the Chairman and Ranking Member of the
Senate Finance Committee that non-disclosing Son of Boss
investors should not be allowed to “run out the clock” on
the statute of limitations before the IRS finds them. The
IRS and Department of Treasury have been on record in
opposing these transactions since 1999. The purchase of
these tax shelters in the year 2000 was an act of sheer
defiance and disregard for the tax laws of the United
States. The Senate and House versions of the bill * * *
contain a measure that would hold open the statute of
limitations on a transaction listed by the Treasury
Department as a tax shelter, such as the Son of Boss
transaction, but this measure only applies to taxable years
that are open to audit after the * * * bill is enacted.
* * * [Press Release, Senator Charles Grassley, Details of
Plans to Ensure Continued “Son of Boss” Enforcement (July
23, 2004).]

Had Congress intended section 6501(c)(10) to apply only to

transactions for which a return or statement was due after

October 22, 2004, it could have done so expressly. Similarly, if

Congress had intended to apply the effective date of section

6707A to section 6501(c)(10), it could have done so by limiting

application of section 6501(c)(10) to cases in which a taxpayer

is subject to a penalty under section 6707A. Congress did not

choose either of those avenues.

Petitioner argues that respondent is applying section

6501(c)(10) retroactively, and if Congress had intended

retroactive application, Congress would have so expressly

stated.8 Petitioner is mistaken. Section 6501(c)(10) does not

8
Petitioner refers to the provision as an “ex post facto
clawback”. The constitutional prohibition against ex post facto
laws applies only to penal legislation that imposes or increases
criminal punishment for conduct predating its enactment.
(continued...)
 -21-

reopen an assessment period that expired before its enactment.

See H. Conf. Rept. 108-755, supra at 593 n.482; Staff of Joint

Comm. on Taxation, supra at 369 n.663. Keeping open the period

of limitations in this fashion is not impermissible retroactive

action. In a manner analogous to the enactment of section

6501(c)(10), section 6502(a)(1) was amended to extend the

limitations period from 6 years to 10 years if the limitations

period had not expired as of the date the amendment was enacted.

Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, sec.

11317(a)(1), (c), 104 Stat. 1388-458. In Rocanova v. United

States, 955 F. Supp. 27 (S.D.N.Y. 1990), affd. 109 F.3d 127 (2d

Cir. 1997), the District Court rejected arguments that the

amendment operated with impermissible retroactive effect in

violation of the Due Process Clause, the Equal Protection Clause,

and the Ex Post Facto Clause of the Constitution.

Furthermore, petitioner’s argument is similar to an argument

rejected by the U.S. Court of Appeals for the Ninth Circuit, the

court to which an appeal in this case would ordinarily lie. See

Leslie v. Commissioner, 146 F.3d 643, 650-652 (9th Cir. 1998),

affg. T.C. Memo. 1996-86. In Leslie, the Commissioner sought

enhanced interest pursuant to section 6621(c) because of the

taxpayers’ use of a straddle transaction. In defining “tax-

8
(...continued)
Harisiades v. Shaughnessy, 342 U.S. 580, 594 (1952).
 -22-

motivated transactions” to which the enhanced-interest provision

applied, section 6621(c)(3)(A)(iii) included “any straddle (as

defined in section 1092(c) without regard to subsection (d) or

(e) of section 1092)”. Section 6621 applied to interest accruing

after December 31, 1984, even though the transaction giving rise

to the underpayment of tax on which interest accrued was entered

into before that date, while section 1092 applied to property

acquired and positions established by the taxpayers after June

23, 1981. The taxpayers contended that because their

transactions occurred before June 23, 1981, section 1092 did not

apply to their transactions, and therefore section

6621(c)(3)(A)(iii), which incorporated the definition in section

1092, did not apply to their transactions either. Leslie v.

Commissioner, supra at 651.

The Court of Appeals rejected the taxpayers’ “interesting

but ultimately unavailing” argument, finding that the

Commissioner was applying section 6621(c), and that the effective

date of section 1092 was not determinative of the issue before

the court as to the taxpayers’ liability for increased interest.

In concluding that the taxpayers’ argument must fail, the court

explained:

Section 6621(c)(3)(A)(iii) references § 1092 for one
simple reason: § 1092 contains what the drafters of
§ 6621 deemed to be a useful definition of “straddle.”
In the interest of expediency, rather than trotting out
the same exact definition again, they simply cross
 -23-

referenced § 1092, which a prior Congress had already
adopted. * * * [Id.]

In this case section 6501(c)(10) cross-references the

definition of “listed transaction” in section 6707A, enacted by

the same act of Congress. Nevertheless, the reason for the

cross-reference is analogous to that in Leslie. See also

Solowiejczyk v. Commissioner, 85 T.C. 552 (1985), affd. without

published opinion 795 F.2d 1005 (2d Cir. 1986). The definition

of “listed transaction” provided in section 6707A was useful, and

Congress chose to cross-reference the definition for expediency’s

sake with the effect that the definition in section 6707A was

incorporated into section 6501(c)(10), but not its effective

date.9

III. Whether the Transaction at Issue Is a Listed Transaction

A transaction is a listed transaction if it is substantially

similar to one of the types of transactions the IRS has

determined to be a tax avoidance transaction and has identified

by notice, regulation, or other form of published guidance as a

listed transaction. Sec. 6707A(c)(2); sec. 1.6011-4(b)(2),

Income Tax Regs. On September 5, 2000, the Commissioner issued

Notice 2000-44, 2000-2 C.B. 255, which described Son-of-BOSS

9
We note that sec. 6501(c)(10) is not the only place in the
Code in which a cross-reference is made to the definitions of
“listed transaction” and “reportable transaction” provided in
sec. 6707A(c). E.g., secs. 4965(e), 6111(b), 6112(a), 6404(g),
6662A(d), 6707(d).
 -24-

transactions and determined that they are listed transactions.

Notice 2000-44, 2000-2 C.B. at 255, includes the following

discussion of that type of transaction:

These arrangements purport to give taxpayers
artificially high basis in partnership interests and
thereby give rise to deductible losses on disposition
of those partnership interests.

* * * * * * *

In * * * [one example], a taxpayer purchases and
writes options and purports to create substantial
positive basis in a partnership interest by
transferring those option positions to a partnership.
For example, a taxpayer might purchase call options for
a cost of $1,000X and simultaneously write offsetting
call options, with a slightly higher strike price but
the same expiration date, for a premium of slightly
less than $1,000X. Those option positions are then
transferred to a partnership which, using additional
amounts contributed to the partnership, may engage in
investment activities.

Under the position advanced by the promoters of
this arrangement, the taxpayer claims that the basis in
the taxpayer’s partnership interest is increased by the
cost of the purchased call options but is not reduced
under § 752 as a result of the partnership’s assumption
of the taxpayer’s obligation with respect to the
written call options. Therefore, disregarding
additional amounts contributed to the partnership,
transaction costs, and any income realized and expenses
incurred at the partnership level, the taxpayer
purports to have a basis in the partnership interest
equal to the cost of the purchased call options
($1,000X in this example), even though the taxpayer’s
net economic outlay to acquire the partnership interest
and the value of the partnership interest are nominal
or zero. On the disposition of the partnership
interest, the taxpayer claims a tax loss ($1,000X in
this example), even though the taxpayer has incurred
no corresponding economic loss.
 -25-

There are many similarities between the transaction at issue

and the one described in Notice 2000-44, supra. However, the

transaction at issue did not involve the purchasing and writing

of options. It involved the short sale of securities.

Nevertheless, we conclude that the transaction at issue is

substantially similar to the one described in Notice 2000-44,

supra.

The regulations define the term “substantially similar” as

“any transaction that is expected to obtain the same or similar

types of tax benefits and that is either factually similar or

based on the same or similar tax strategy.” Sec. 1.6011-

4T(b)(1)(i), Temporary Income Tax Regs., 67 Fed. Reg. 41327 (June

18, 2002). Section 1.6011-4T(b)(1)(ii), Temporary Income Tax

Regs., supra, contains the following highly pertinent example

illustrating the meaning of “substantially similar” and

concluding that the transaction described in Notice 2000-44,

supra, and a similar transaction involving short sales are

substantially similar.

Example 1. Notice 2000-44 * * * sets forth a
listed transaction involving offsetting options
transferred to a partnership where the taxpayer claims
basis in the partnership for the cost of the purchased
options but does not adjust basis under section 752 as
a result of the partnership’s assumption of the
taxpayer’s obligation with respect to the options.
Transactions using short sales, futures, derivatives or
any other type of offsetting obligations to inflate
basis in a partnership interest would be the same as or
substantially similar to the transaction described in
Notice 2000-44. * * * [Emphasis added.]
 -26-

The fundamental components of the transaction described in

Notice 2000-44, supra, are the generation of funds through the

creation of a liability and the contribution of the funds (or the

asset purchased with such funds) and the associated liability to

the partnership without adjusting the partner’s basis for the

liability. That is precisely what the Manroes did. They

generated funds through the short sale of borrowed Treasury notes

and contributed those funds and the obligation to cover the short

sale to the partnership. The Manroes claimed bases in their

partnership interests which included the short sale proceeds but

which were not reduced by the obligation to cover the short sale.

They then disposed of their partnership interests and claimed

more than $5 million of tax losses even though there was no

equivalent economic loss.

Accordingly, we hold that the transaction at issue was

substantially similar to the transaction described in Notice

2000-44, supra, and is therefore a listed transaction.

IV. Section 1.6011-4, Income Tax Regs.

Petitioner argues that section 1.6011-4T, Temporary Income

Tax Regs., 67 Fed. Reg. 41327 (June 18, 2002) (the temporary

regulation), which requires disclosure of participation in listed

transactions, is invalid because it violates Executive Order

12866, 3 C.F.R. 638 (1994) (Executive Order 12866), and the

Regulatory Flexibility Act (RFA), 5 U.S.C. secs. 601-612 (1994).
 -27-

Executive Order 12866 requires that the Office of Management

and Budget review proposed “significant regulatory action”. A

regulatory assessment of the temporary regulation at issue was

not conducted because the Department of the Treasury and the IRS

concluded that it was not a “significant regulatory action.” 67

Fed. Reg. 41327 (June 18, 2002). Petitioner argues that the

regulation is a significant regulatory action requiring review.

Petitioner’s contentions are not persuasive. Section 10 of

Executive Order 12866, 3 C.F.R. at 649, states:

Nothing in this Executive order shall affect any
otherwise available judicial review of agency action.
This Executive order is intended only to improve the
internal management of the Federal Government and does
not create any right or benefit, substantive or
procedural, enforceable at law or equity by a party
against the United States, its agencies or
instrumentalities, its officers or employees, or any other
person.

Accordingly, petitioner has no right to challenge compliance with

Executive Order 12866. See Michigan v. Thomas, 805 F.2d 176, 187

(6th Cir. 1986); Trawler Diane Marie, Inc. v. Brown, 918 F. Supp.

921, 932 (E.D.N.C. 1995), affd. without published opinion 91 F.3d

134 (4th Cir. 1996).

In certain situations, the RFA requires that an agency

prepare a regulatory flexibility analysis. RFA, 5 U.S.C. secs.

603-604. However, a regulation is excepted if the agency

certifies that the rule will not have a significant economic

impact on a substantial number of small entities. The Department
 -28-

of the Treasury and the IRS made that certification in part on

the basis of a finding that the time required to prepare and

submit a disclosure pursuant to the temporary regulation was not

expected to be lengthy. 67 Fed. Reg. 41327 (June 18, 2002).

Petitioner argues that the regulation will have a significant

economic impact on a substantial number of small entities.

Petitioner confuses the disclosure of a tax avoidance transaction

with its disallowance. We are not persuaded to override the

certification that the submission of a disclosure form with a

return in the manner required by the temporary regulation does

not have a significant economic impact on a substantial number of

small entities.

Petitioner also argues that the temporary regulation is

invalid because it does not comply with the notice and comment

requirements of the Administrative Procedure Act (APA), 5 U.S.C.

sec. 553(b) and (c) (1994). Petitioner contends that if the

temporary regulation is invalid, section 6501(c)(10) cannot apply

to the partnership or the Manroes because they had no duty to

disclose their participation in the transaction at issue. We

conclude, however, that the final regulation, section 1.6011-4,

Income Tax Regs., validly promulgated on February 28, 2003, in

T.D. 9046, 2003-1 C.B. 614, which incorporates the rules of the

temporary regulation, controls the outcome of this case.
 -29-

Some background will be useful. On June 14, 2002, the

temporary regulation was amended in two ways that matter to this

case: (1) It extended to individuals, trusts, partnerships, and

S corporations the requirement to disclose listed transactions,

which previously had applied only to corporate taxpayers; and (2)

it provided that if a transaction becomes a reportable

transaction after the taxpayer has filed the return for the first

year in which the transaction affected the taxpayer’s or a

partner’s tax liability, the disclosure statement must be filed

as an attachment to the taxpayer’s next-filed return (hereinafter

the next-return disclosure requirement).10 67 Fed. Reg. 41325,

41326 (June 18, 2002).

Also on June 18, 2002, notice was published and comments

were sought for the final regulation section 1.6011-4, Income Tax

Regs. The text of the proposed regulation was the same as the

10
In this latter regard, the temporary regulation provided:

(d) Time of providing disclosure--(1) * * * If a
transaction becomes a reportable transaction (e.g., the
transaction subsequently becomes one identified in
published guidance as a listed transaction described in
(b)(2) of this section * * *) on or after the date the
taxpayer has filed the return for the first taxable
year for which the transaction affected the taxpayer’s
or a partner’s or a shareholder’s Federal income tax
liability, the disclosure statement must be filed as an
attachment to the taxpayer’s Federal income tax return
next filed after the date the transaction becomes a
reportable transaction (whether or not the transaction
affects the taxpayer’s or any partner’s or
shareholder’s Federal income tax liability for that
year). * * * [67 Fed. Reg. 41328 (June 18, 2002).]
 -30-

text of the temporary regulation as reissued the same day.

Notice of Proposed Rulemaking by Cross-Reference to Temporary

Regulations, 67 Fed. Reg. 41360 (June 18, 2002). The effective

date of the temporary regulation (and of the proposed regulation

by cross-reference) was for “Federal income tax returns filed

after February 28, 2000” except that the two amendments described

above, among others, were made applicable “to any transaction

entered into on or after January 1, 2001.” Sec. 1.6011-4T(g),

Temporary Income Tax Regs., 67 Fed. Reg. 41328 (June 18, 2002).

On October 22, 2002, the temporary regulation was amended

once again, and notice was published and comments were sought for

making the temporary regulation final.11 Notice of Proposed

Rulemaking by Cross-Reference to Temporary Regulations, 67 Fed.

Reg. 64840 (Oct. 22, 2002). The effective date of the temporary

regulation (and of the proposed regulation by cross-reference)

was as follows:

(h) Effective dates. This section applies to
Federal income tax returns filed after February 28,
2000. However, paragraphs (a) through (g) of this
section [reflecting the new amendments] apply to
transactions entered into on or after January 1, 2003.
The rules that apply with respect to transactions
entered into on or before December 31, 2002, are
contained in § 1.6011-4T in effect prior to January 1,
2003 (see 26 CFR part 1 revised as of April 1, 2002,
and 2002-28 I.R.B. 90 (see § 601.601(d)(2) of this

11
This version of the temporary regulation contained new
amendments that are not germane to the present discussion. See
67 Fed. Reg. 64799 (Oct. 22, 2002).
 -31-

chapter)). [67 Fed. Reg. 64805 (Oct. 22, 2002);
emphasis added.]

The final regulation, published February 28, 2003, reflected

various amendments to the temporary regulations in response to

public comments. T.D. 9046, supra. It retained a provision

substantially similar to the next-return disclosure requirement

of the temporary regulation.12 The final regulation carried this

effective date:

(h) Effective dates. This section applies to
federal income tax returns filed after February 28,
2000. However, paragraphs (a) through (g) of this
section apply to transactions entered into on or after
February 28, 2003. All the rules in paragraphs (a)
through (g) of this section may be relied upon for
transactions entered into on or after January 1, 2003,
and before February 28, 2003. Otherwise, the rules
that apply with respect to transactions entered into
before February 28, 2003, are contained in §1.6011-4T
in effect prior to February 28, 2003 (see 26 CFR part 1
revised as of April 1, 2002, 2002-28 I.R.B. 90, and
2002-45 I.R.B. 818 (see §601.601(d)(2) of this
chapter)). [Id., 2003-1 C.B. at 622; emphasis added.]

12
The final regulation provided in par. (e)(2):

(2) Special rules--(i) Listed transactions. If a
transaction becomes a listed transaction after the
filing of the taxpayer’s final tax return reflecting
either tax consequences or a tax strategy described in
the published guidance listing the transaction (or a
tax benefit derived from tax consequences or a tax
strategy described in the published guidance listing
the transaction) and before the end of the statute of
limitations period for that return, then a disclosure
statement must be filed as an attachment to the
taxpayer’s tax return next filed after the date the
transaction is listed. [T.D. 9046, 2003-1 C.B. 614,
621.]
 -32-

Pursuant to this provision the final regulation applies, as it

says, to tax returns filed after February 28, 2000, and the rules

applicable to transactions entered into before January 1, 2003,

are determined under the final regulation by reference to the

rules of the temporary regulation.

The final regulation suspended the temporary regulation as

of February 28, 2003. T.D. 9046, 2003-1 C.B. at 622.13

Consequently, the rules in the temporary regulation have

continuing force and effect only by virtue of their incorporation

into the final regulation. The question is whether the final

regulation ran afoul of the APA by incorporating the rules of the

temporary regulation by cross-referencing them. The answer is

clearly no. The final regulation’s use of a cross-reference to

incorporate the temporary regulation rules creates no more of a

procedural deficiency under the APA than if the final regulation

had reproduced the rules of the temporary regulation word for

word.

Notice 2000-44, 2000-2 C.B. 255, published more than a year

before the Manroes entered into their transaction, identified

13
In addition to stating that the final regulation issued on
Feb. 28, 2003, superseded the temporary regulations, T.D. 9046,
2003-1 C.B. at 622, also summarizes the effective date of the
final regulation by stating that it applies “to transactions
entered into on or after Feb. 28, 2003.” Clearly, this shorthand
description does not alter the actual effective-date provision
contained in par. (h) of the final regulation. Rather, the sense
of this shorthand description is that as of Feb. 28, 2003, the
final regulation replaced the temporary regulation.
 -33-

that type of transaction as a listed transaction. On June 14,

2002, the Secretary published a notice of proposed rulemaking,

containing proposed regulations requiring disclosure of such a

transaction; they embodied the provisions of the temporary

regulation issued the same day. This notice of proposed

rulemaking provided notice of, among other things: (1) The

disclosure requirement as applying to both corporate and

noncorporate taxpayers; and (2) the next-return disclosure

requirement. The Manroes’ transaction first became a reportable

transaction on February 28, 2003, when the final regulation was

issued. As of that date, the Manroes had already filed their

2001 return but had not yet filed their 2002 return.

Consequently, the final regulation, incorporating the rules of

the temporary regulation, required them to attach a statement to

their 2002 return disclosing the listed transaction. When they

filed their 2002 return on October 15, 2003--more than 7 months

after the final regulation was issued–-they failed to include

such a statement.

Section 6501(c)(10) provides that if a taxpayer fails to

include “on any return or statement for any taxable year” any

information with respect to a listed transaction (as defined in

section 6707A(c)(2)) which is required under section 6011, the

time for assessing any tax “with respect to such transaction”

remains open. Section 6501(c)(10) is effective for tax years
 -34-

with respect to which the period for assessing a deficiency did

not expire before October 22, 2004. As of that date, the 3-year

period of limitations remained open with respect to the Manroes’

2001 return, which they filed on October 15, 2002. Consequently,

because the Manroes failed to provide the required statement when

they filed either their 2001 or 2002 return, the period of

limitations remains open with respect to any tax in 2001 and 2002

with respect to the transaction in question.

Under section 6501(c)(10), it is of no consequence that the

transaction in question became a reportable transaction after the

transaction had already occurred.14 The legislative history

expressly contemplated such a result. It states: “For example,

if a taxpayer engaged in a transaction in 2005 that becomes a

listed transaction in 2007 and the taxpayer fails to disclose

such transaction in the manner required by Treasury regulations,

then the transaction is subject to the extended statute of

limitations.”15 H. Conf. Rept. 108-755, supra at 382. In any

14
Actually, as previously discussed, the Manroes’
transaction was a listed transaction under Notice 2000-44, supra,
long before they entered into it. Because sec. 6501(c)(10)
cross-references the definition of “listed transaction” under
sec. 6707A(c)(2), which makes a listed transaction a species of
“reportable transaction”, the transaction became a “listed
transaction” for purposes of sec. 6501(c)(10) when the obligation
to report it arose; i.e., no later than upon the issuance of the
final regulation.
15
In a footnote to this statement, the legislative history
also states:
(continued...)
 -35-

event, as previously discussed, the force and effect of the final

regulation was entirely prospective, requiring the Manroes to

disclose the transaction in a statement with their 2002 return,

which had not yet been filed.

To recapitulate, the Manroes’ obligation to disclose their

transaction arose upon the issuance of the final regulation. The

final regulation, including its provisions incorporating the

rules of the temporary regulation, was subject to notice and

comment and is valid. After the issuance of the final

regulation, the Manroes were required prospectively to report the

listed transaction in a statement attached to their 2002 tax

return. They failed to do so. Consequently, the period of

limitations remains open under section 6501(c)(10) for 2001.

15
(...continued)
If the Treasury Department lists a transaction in a
year subsequent to the year in which a taxpayer entered
into such transaction and the taxpayer’s tax return for
the year the transaction was entered into is closed by
the statute of limitations prior to the date the
transaction became a listed transaction, this provision
does not re-open the statute of limitations with
respect to such transaction for such year. However, if
the purported tax benefits of the transaction are
recognized over multiple tax years, the provision’s
extension of the statute of limitations shall apply to
such tax benefits in any subsequent tax year in which
the statute of limitations had not closed prior to the
date the transaction became a listed transaction. [H.
Conf. Rept. 108-755, at 593 n.482 (2004).]
 -36-

The Court, in reaching its holding, has considered all

arguments made and concludes that any arguments not mentioned

above are moot, irrelevant, or without merit.

To reflect the foregoing,

An order will be issued

granting respondent’s motion for

partial summary judgment and

denying petitioner’s cross-

motion for partial summary

judgment.

Reviewed by the Court.

COLVIN, COHEN, WELLS, VASQUEZ, GALE, THORNTON, MARVEL,
GOEKE, WHERRY, KROUPA, and PARIS, JJ., agree with this majority
opinion.

GUSTAFSON and MORRISON, JJ., did not participate in the
consideration of this opinion.
 -37-

THORNTON, J., concurring: I agree with the majority opinion

and write separately to address possible jurisdictional concerns.

It has been suggested that in a partnership-level proceeding

this Court lacks jurisdiction to consider a partner’s assertion

that the period of limitations has expired for assessing against

that partner tax attributable to partnership items. This is

because, under this view, the issue does not represent a

partnership item or affirmative defense. Subsection (d)(1) of

section 6226, however, expressly confirms this Court’s

jurisdiction to consider a partner’s assertion that “the period

of limitations for assessing any tax attributable to partnership

items has expired with respect to” the partner. In the light of

this statutory provision, it matters little whether the issue

might be characterized as a partnership item or an affirmative

defense or something else.

Some might construe subsection (d)(1) narrowly to grant this

Court jurisdiction to determine which partners have an interest

in the outcome of the proceedings and nothing more. That is not,

however, what the statute provides. In any event, to decide

whether the assessment of tax attributable to partnership items

is time barred for purposes of determining which partners have an

interest in the outcome of the proceeding is, necessarily, to

decide that issue for all purposes.
 -38-

The context and history of subsection (d)(1) of section 6226

are instructive. Under the general rule of subsection (c) of

section 6226, each person who is a partner in a partnership

“shall be treated as a party” to an action brought to review

partnership adjustments and the Court “shall allow each such

person to participate in the action.” Subsection (d)(1) modified

this general rule by providing that subsection (c) shall not

apply to a partner “after the day on which” the period has

expired for assessing against the partner any tax attributable to

the partnership. Before the addition in 1997 of the flush

language of subsection (d)(1), there was potential circularity in

the interaction of subsections (c) and (d)(1): until such time

as the Court might decide that the limitations period had

expired, the partner was allowed to participate in the proceeding

pursuant to the general rule of subsection (c), but if the Court

ultimately decided the limitations issue in the partner’s favor,

then subsection (d)(1) would have seemingly nullified ab initio

the partner’s participation in the proceeding. This situation

gave rise to a question whether a partner had “standing” to

assert that the statutory period of limitations had expired with

respect to that partner. H. Rept. 105-148, at 594 (1997), 1997-4

C.B. (Vol. 1) 319, 916.

To resolve this problem, in 1997 subsection (d)(1) was

amended to provide that a partner “shall be permitted to
 -39-

participate” in the partnership proceeding “solely” for the

purpose of asserting that the limitations period for assessing

tax has expired with respect to that partner. Focusing on the

word “solely”, some have suggested that the statute permits a

partner to participate in the partnership proceeding by asserting

the limitations bar only if that is the sole issue asserted by

the partner. Nothing in the flush language of subsection (d)(1),

however, alters or affects the operation of the general rule of

subsection (c), which entitles a partner to participate fully in

the action until such time as the Court might decide that the

limitations period has expired with respect to the partner--an

issue that might not be finally decided until the final appeal of

such a ruling. Being uncertain of the prospects of ultimately

prevailing on the limitations period issue, a partner would be

well advised also to raise any alternative assertions which the

partner would be entitled to raise as a participant in the

action.

In the light of these considerations, the word “solely” in

the flush language of subsection (d)(1) cannot fairly be

construed to mean that a partner is entitled to assert the

limitations bar only if the partner relinquishes all alternative

assertions. Rather, the statutory language confirms a partner’s

ability to raise on a stand-alone basis an issue that the partner
 -40-

otherwise would be entitled to raise in conjunction with other

issues.

Some seem to suggest that the Court’s jurisdiction to

consider a partner’s assertion of a limitations bar should depend

upon whether the partner asserts the issue for all the partner’s

affected years, in which case the Court would have jurisdiction

to consider the assertion, or for fewer than all the partner’s

affected years, in which case the Court would lack jurisdiction.

Under this view, our jurisdiction would apparently be

unquestioned if the Manroes had asserted the limitations bar for

both tax years 2001 and 2002 but otherwise does not exist.

Suffice it to say that it would be anomalous for this Court’s

jurisdiction to depend upon the litigating tactics of well-

advised (or poorly advised) partners.

In any event, even in a circumstance in which a partner

asserts the limitations bar for all affected years, as everyone

acknowledges a partner would be entitled to do, the Court might

well decide that the limitations period had expired with respect

to fewer than all of the partner’s affected years. In that

eventuality, the partner would remain a party to the action, but

this circumstance would not disturb the Court’s exercise of

jurisdiction in deciding that the limitations period had expired

for some particular year or years.
 -41-

The Court’s jurisdiction to consider the limitations issue

in a partnership proceeding is made more evident in the context

of a readjustment petition filed by a partner. The flush

language of subsection (d)(1) provides that a partner may file a

readjustment petition under section 6226(b) or (d)(2) solely for

the purpose of asserting that the period of limitations

attributable to partnership items has expired with respect to the

partner. If the partner filed such a readjustment petition to

raise this sole assertion, that might well be the only issue

presented in the action.1 In such a case, it is not meaningful

to say that the Court has jurisdiction to consider this issue

only to determine whether the partner is a party to the action,

since but for the partner’s bringing the action, there would be

no action.2 The only conceivable purpose of the action would be

1
Sec. 6226(b) provides that if the tax matters partner (TMP)
does not file a readjustment petition, certain other partners may
file petitions for readjustment of the partnership items. If
more than one such partner brings an action under subsec. (b),
the first such action brought goes forward in the Tax Court.
Sec. 6229(b)(2). If the TMP has not brought an action and an
eligible partner brings the sole action under subsec. (b) solely
for the purpose of asserting that the limitations period had
expired with respect to that partner, as permitted by the flush
language of subsec. (d), there would be no other issue presented
in that action.
2
This analysis is complicated but not altered by the fact
that pursuant to sec. 6226(d)(2), no partner may file a
readjustment petition “unless such partner would (after the
application of paragraph (1) of this subsection) be treated as a
party to the proceeding.” Except for the provision in the flush
language of subsec. (d)(1), which cured the problem for all
(continued...)
 -42-

to assert that the limitations period had expired for that

partner. By expressly permitting the partner to raise this issue

pursuant to section 6226(b), the statute thereby effectively

treats it as a partnership item within the meaning of section

6226(b)(1).

The same sentence of subsection (d)(1) that permits a

partner to raise the limitations bar in a readjustment petition

also permits, without differentiation, a partner to participate

in an action brought by the tax matters partner or another

eligible partner. There is no reason to think that Congress

intended that a partner’s ability to assert the limitations bar

would be any more constrained in the latter circumstance than it

would be in the former. In the final analysis, it would appear

that the legislature perceived that a partner’s assertion of a

limitations bar is so closely intertwined with the issue of

whether the partner has an interest in the outcome of the

partnership proceeding that the partner should be allowed to

raise the assertion during the proceeding without regard to

whether it might otherwise be regarded as a partner-level item.

That result is consistent with the general legislative objective

2
(...continued)
purposes, this provision would give rise to the same sort of
circularity previously noted with regard to the interaction of
subsecs. (c) and (d)(1).
 -43-

of centralizing resolution of disputes over partnership

adjustments.

Moreover, we note that in the case before us the issue of

whether the underlying transaction is a “listed transaction” for

purposes of section 6501(c)(10) must be decided according to the

nature of transactions that occurred at the partnership level

and, thus, could be considered a partnership item. See sec.

6231(a)(3); sec. 301.6231(a)(3)-1, Proced. & Admin. Regs. (If

the transaction was a listed transaction, the partnership was

required to file a disclosure statement.) Whether the

limitations period remains open may also be considered a

partnership item insofar as the partnership’s failure to file a

disclosure statement operates to extend the limitations period

under section 6501(c)(10) for assessing any tax with respect to

the transaction. The duty to file a disclosure statement arises

with respect to every partnership that participated, directly or

indirectly, in a reportable transaction. Sec. 1.6011-4T(a)(1),

Temporary Income Tax Regs., 67 Fed. Reg. 41327 (June 18, 2002).

The partnership in this case participated directly in the

transaction. The record shows that the partnership filed no

disclosure statement with its 2001 or 2002 return. Consequently,

the period of limitations remains open under section 6501(c)(10)

for both the Manroes’ 2001 and 2002 tax years. This conclusion

provides an alternative basis for this Court’s jurisdiction to
 -44-

consider the Manroes’ assertion of the limitations bar in this

partnership-level proceeding.3

It might be argued that the approach of the majority opinion

could give rise to unexpected preclusive effects in future

proceedings involving partners who could have but did not raise

the issue of the limitations bar in the partnership-level

proceeding. Any such argument ignores well-established caselaw

holding that a statute of limitations defense as pertains to a

final notice of partnership adjustments should be prosecuted in

the context of the partnership-level proceeding rather than in a

partner-level proceeding. See Crowell v. Commissioner, 102 T.C.

683, 693 (1994); McConnell v. Commissioner, T.C. Memo. 2008-167

(and cases cited therein).4 In any event, there should be no

unanticipated preclusive effects resulting from the case before

us, since the only partners directly affected by the disputed

partnership adjustments are the Manroes, who have in fact

3
It is true, as Judge Halpern notes, that the parties have
not argued this point. Dissenting op. p. 68. But then again,
neither party has questioned this Court’s jurisdiction.
4
In collection actions brought pursuant to sec. 6330(d) the
caselaw is similarly well established that the assertion of a
limitations bar on assessment constitutes a challenge to the
underlying liability, which is properly at issue in the
collection proceeding only if the taxpayer has had no prior
opportunity to dispute it. See Hoffman v. Commissioner, 119 T.C.
140, 145 (2002); Boyd v. Commissioner, 117 T.C. 127, 130 (2001).
 -45-

asserted the limitations bar in this proceeding.5 The majority

opinion does not purport to decide possible preclusive effects

arising in other circumstances in other actions.

It might be suggested that entertaining partner-level

assertions of a limitations bar raises the specter that

partnership-level proceedings may be made more complex or time

consuming by requiring the Court to decide collateral issues

relating to such assertions. Without question, however, the

statute requires us to decide these issues where a partner

asserts the limitations bar with respect to all the partner’s

affected years. It is not such a great leap that the Court

should also consider such issues where a partner asserts the

limitations bar with respect to fewer than all affected years.

After all, these issues have to be decided somewhere.

Ultimately, it would serve no one’s interests (and undoubtedly

would surprise the parties, who have not questioned our

jurisdiction) for this Court to decline to address the Manroes’

assertion of the limitations bar and instead to require the

5
Apart from the Manroes, the only partners in the
partnership are two trusts that the Manroes created for the
benefit of their children. Because these trusts contributed only
cash to the partnership, they have no basis adjustments to be
adjudicated, now or later.
 -46-

parties and this or some other court to expend additional time

and resources addressing the issue in some future proceeding.

COLVIN, COHEN, WELLS, VASQUEZ, GALE, MARVEL, HAINES, GOEKE,
WHERRY, KROUPA, and PARIS, JJ., agree with this concurring
opinion.
 -47-

HALPERN, J., dissenting: In addition to the question

regarding the effect of certain final and temporary regulations,

this case presents a novel question: Does the Court have

authority in a partnership-level proceeding to decide whether the

statute of limitations bars the assessment of a resulting

computational adjustment? Without the aid of any input from the

parties on that question, in a few cursory paragraphs, the

majority holds that we do have that authority. See majority op.

pp. 11-13. Because the majority has failed to convince me that

in this partnership-level proceeding we have that authority, I

respectfully dissent.

I. Introduction

The Manroes began this partnership-level proceeding after

respondent issued an FPAA for the partnership’s 2001 year. The

parties agree that, if we sustain the partnership adjustments,

there will be computational adjustments to the Manroes’ 2001 and

2002 taxable years. The parties also agree that the Manroes’

2002 year is open.

The motions for partial summary judgment ask us to decide

whether section 6501(a) bars the assessment of any computational

adjustment for the Manroes’ 2001 year. In a partnership-level

proceeding, the Court has authority to decide (1) partnership

items (and related penalties, additions to tax and the like), see

sec. 6221; (2) affirmative defenses, see Rule 39; and (3) whether
 -48-

a partner is not a party because he has no interest in the

outcome of the proceeding, see sec. 6226(c) and (d).

The majority does not suggest that the question before us

concerns either a partnership item (or related penalty, addition

to tax or the like) or an affirmative defense. Rather, the

majority cites section 6226(c) and (d) and three cases involving

those provisions. In response to the majority, I first briefly

explain why the question is not an affirmative defense in this

partnership-level proceeding; second, I discuss the statute; and,

third, I review the caselaw. Fourth, before addressing the

effect of the majority opinion, I address Judge Thornton’s three

arguments that the question before us involves a partnership

item. Finally, I offer my conclusion.

II. Affirmative Defenses

An affirmative defense is an “assertion of facts and

arguments that, if true, will defeat the * * * [cause of action],

even if all the allegations * * * are true.” Black’s Law

Dictionary 482 (9th ed. 2009). Rule 39 provides a few examples

of affirmative defenses: “res judicata, collateral estoppel,

estoppel, waiver, duress, fraud, and the statute of limitations.”

One affirmative defense to an FPAA is that the FPAA cannot affect

any open partner year. See Rhone-Poulenc Surfactants &

Specialties, L.P. v. Commissioner, 114 T.C. 533, 534-535 (2000)

(“However, if partnership-level proceedings are commenced after
 -49-

the time for assessing tax against the partners has expired, the

proceedings will be of no avail because the expiration of the

period for assessing tax against the partners, if properly

raised, will bar any assessments attributable to partnership

items.”); see also infra sec. IV.B.1. of this separate opinion.

The Manroes have assigned error to the FPAA, yet they cannot

avoid addressing its merits simply by showing that section

6501(a) bars the assessment of any computational adjustment for

the Manroes’ 2001 year. The reason is that the Manroes’ 2002

year is open. If they do not address the merits of the FPAA, we

shall be compelled to enter decision clearing the way for

respondent to make a computational adjustment increasing their

tax liability for 2002. That is, even if section 6501(a) bars

the assessment of any computational adjustment for the Manroes’

2001 year, we must reach the merits of the FPAA regardless. The

argument that section 6501(a) bars the assessment of any

resulting tax liability for the Manroes’ 2001 year does not,

therefore, constitute an affirmative defense to the FPAA.1

The Manroes are not without recourse as to that argument,

however, because they may raise it as an affirmative defense in

any subsequent partner-level collection action or refund suit

1
Although the majority does not suggest that the sec.
6501(a) question before us concerns an affirmative defense, I
believe that the majority has impermissibly allowed the parties
to place before the Court a partner-level affirmative defense
that has no place in this partnership-level proceeding.
 -50-

with respect to their 2001 year. At the partner level, that

argument would be an affirmative defense because, at that level,

each year is a separate cause of action with respect to which the

partner can prevail by showing the year is closed.

III. Jurisdiction To Hear a Claim That a Partner Has No
Interest in the Outcome of the Proceeding

Section 6226 provides for the judicial review of an FPAA.

If an action for review is brought, section 6226(c) provides that

each person who was a partner in the partnership at any time

during any partnership year addressed by the FPAA is (1) treated

as a party to the action and (2) allowed to participate in the

action. Subparagraph (B) of section 6226(d)(1) deprives a

partner of that status and that right if he has no interest in

the outcome of the proceeding; i.e., “after the day on which * *

* the period within which any tax attributable to * * * [the

partnership items of the partner] may be assessed against that

partner expired.” Importantly, the sentence following

subparagraph (B) of section 6226(d)(1) (the flush-language

sentence) provides in pertinent part:

Notwithstanding subparagraph (B), any person treated
under subsection (c) as a party to an action shall be
permitted to participate in such action (or file a
readjustment petition * * *) solely for the purpose of
asserting that the period of limitations for assessing
any tax attributable to partnership items has expired
with respect to such person, and the court having
jurisdiction of such action shall have jurisdiction to
consider such assertion.
 -51-

The flush-language sentence affirms our jurisdiction to

treat a partner as a party for the limited purpose of determining

that he is not otherwise a party (i.e., for determining that he

lacks an interest in the outcome of the proceeding).2 It must be

read in context. Congress added it in 1997, effective for

partnership years ending after August 5, 1997, as a means of

“Clarifying the Tax Court’s jurisdiction”. H. Rept. 105-148, at

594 (1997), 1997-4 C.B. (Vol. 1) 319, 916. The House report

describes the jurisdictional question as follows:

For a partner * * * to be eligible to file a
petition for redetermination of partnership items in
any court or to participate in an existing case, the
period for assessing any tax attributable to the
partnership items of that partner must not have
expired. Since such a partner would only be treated as
a party to the action if the statute of limitations
with respect to them [sic] was still open, the law is
unclear whether the partner would have standing to
assert that the statute of limitations had expired with
respect to them [sic].

2
A partner may, of course, plead alternatively that he has
no interest in the outcome of the proceeding and that the
adjustments in the FPAA are in error. See Rule 31(c) (“A party
may state as many separate claims or defenses as the party has
regardless of consistency or the grounds on which based.”).
 -52-

Id.3 The House report states that Congress intended the flush-

language sentence as nothing more than a clarification of

subparagraph (B) of section 6226(d)(1). As a clarification, the

flush-language sentence added nothing of substance to section

6226(d)(1)(B).4 Congress added the flush-language sentence

simply to address the narrow jurisdictional uncertainty

identified in the House report.5

3
The disagreement in number between the relative pronoun
“them” and its antecedent “partner” may indicate the committee’s
understanding that a partner (or group of them) might file a
petition or participate not only to argue individually that no
year was open to a computational adjustment but also to argue the
statute of limitations as an affirmative defense; i.e., that the
case should be decided in favor of the partners because the
statute of limitations had run its course with respect to all
partners. See Columbia Bldg., Ltd. v. Commissioner, 98 T.C. 607,
611 (1992) (holding for the partners on that ground).
4
If the flush-language sentence is, as the House report
states, a mere clarification, then, before its addition in 1997,
the Court must have had the authority to determine whether a
partner was a party to a partnership-level proceeding or to
consider the statute of limitations as an affirmative defense.
And, indeed, the Court did. See Rhone-Poulenc Surfactants &
Specialties, L.P. v. Commissioner, 114 T.C. 533, 535 n.4 (2000)
(citing the flush-language sentence but noting that it did not
apply to the partnership year before us); Columbia Bldg., Ltd. v.
Commissioner, supra (preceding the addition of the flush-language
sentence, and holding that partners may litigate a statute of
limitations defense with respect to all partners).
5
Recognizing that a partner may always make alternative
arguments, see supra note 2, Judge Thornton surmises that the
flush-language sentence simply confirms that, if a partner wishes
“to assert the limitations bar” as his sole argument, he may do
so. Concurring op. p. 39. That, however, is not the point of
the flush-language sentence. Rather, the flush-language sentence
answered a jurisdictional question: How could a partner
participate in (or commence) a partnership-level proceeding for
(continued...)
 -53-

The flush-language sentence makes clear that the Court has

jurisdiction to decide a partner’s claim that he has no interest

in the outcome of a partnership-level proceeding (and perhaps

that no partner has any interest therein6), and it permits

nothing more.7 The history of that sentence demonstrates its

narrow purpose. A partner who concedes that he has an interest

in the outcome of the proceeding is a party to it and has no

recourse to section 6226(d)(1).

The Manroes concede they have an interest in the outcome of

this partnership-level proceeding because they concede that the

partnership adjustments in dispute will affect their 2002 year,

which they concede is open; i.e., they concede that “the period

5
(...continued)
the purpose of arguing that, because the period of limitations
had run, he was not a party thereto? Generally, a statute of
limitations claim is not equivalent to a claim that one is not a
party to the action--it is an affirmative defense. A partner who
makes a successful sec. 6226(d)(1)(B) claim, however, abjures his
status as a party; the Court, for that reason, might appear to
lack jurisdiction to allow him to participate at all (even for
the limited purpose of establishing that he cannot participate).
The flush-language sentence ensures that the Court has
jurisdiction to hear a partner’s claim that (in effect) the Court
has no jurisdiction over him.
6
See supra note 3.
7
A partner may wish to establish that he is not a party to
lessen the risk that, in a subsequent collection action or refund
suit, the Commissioner could successfully defend on the ground
that the partner is estopped from challenging the partnership
adjustments leading to the computational adjustments. See, e.g.,
Katchis v. United States, 84 AFTR 2d 99-5503, 99-2 USTC par.
50,744 (S.D.N.Y. 1999).
 -54-

within which any tax attributable to * * * partnership items may

be assessed” against them is still open. See sec. 6226(d)(1)(B)

(emphasis added). Indeed, the Manroes do not deny that they are

parties to this proceeding. Section 6226(d)(1) is therefore not

relevant to the inquiry before us.8

8
That conclusion does not, as Judge Thornton believes
(concurring op. p. 40), suggest an anomaly. If a partner avers
that, of the years affected by partnership items, some, but not
all, are closed, then he concedes he is a party. If even one
year is open, then the partner has an interest in the outcome of
the proceeding; he has failed to aver facts necessary to prove
that he is not a party under sec. 6226(d)(1)(B). The flush-
language sentence confirms our jurisdiction to determine that a
partner is not a party to a partnership-level proceeding but does
not go further to give us authority to consider a party’s
partner-specific defense. See discussion of New Millennium
Trading, L.L.C. v. Commissioner, 131 T.C. ___ (2008), infra sec.
IV.C.1. of this separate opinion.

Moreover, we need not necessarily decide the status of all a
partner’s years affected by partnership items even if, by
averring that all those years are closed, he properly raises the
question of whether he is a party to the partnership-level
proceeding. Judge Thornton states: “[T]o decide whether the
assessment of tax attributable to partnership items is time
barred for purposes of determining which partners have an
interest in the outcome of the proceeding is, necessarily, to
decide that issue for all purposes.” Concurring op. p. 37. If a
partner argues that he is not a party under sec. 6226(d)(1)(B),
the Court must search for an open year. If the Court finds no
open year, then the partner is not a party; moreover, I assume
collateral estoppel would prevent the Commissioner from arguing
otherwise in a later action. The moment the Court finds one open
year, however, the partner is a party and the inquiry is done;
the Court would not need to find (and judicial restraint would
counsel against finding) the status of any other year.
 -55-

IV. Caselaw

The majority cites three cases in three short paragraphs.

See majority op. pp. 12-13. I discuss all three as well as a few

others.

A. Cases That Reaffirm Our Authority To Determine Which
Partners Are Parties

PCMG Trading Partners XX, L.P. v. Commissioner, 131 T.C. ___

(2008), involved five partners who filed a timely petition as a

5-percent group under section 6226(b)(1) after the tax matters

partner had failed to file a petition. Id. at ___ (slip op. at

4). Because they were uncertain whether the Court would uphold

the petition of the 5-percent group, the five partners also all

filed separate petitions asserting, as the lead petition had,

that under section 6226(d)(1)(B) none was a party to the

proceeding. Id. at ___ (slip op. at 4-5, 10-12). PCMG concerned

the Commissioner’s motion to dismiss those five petitions (and

one other). Id. at ___ (slip op. at 2-3). After establishing

that the Court had jurisdiction over the petition of the 5-

percent group, the Court was bound by section 6226(b)(2) and (4)

to dismiss all subsequent actions. Id. at ___ (slip op. at 9-

10). Thus, the holding of PCMG does not concern section 6226(c)

and (d) in any way relevant here.

Nonetheless, the discussion in PCMG of section 6226(c) and

(d) supports my analysis. The majority quotes PCMG note 9:
 -56-

Generally the Court’s jurisdiction in a partnership
proceeding is restricted to determining “partnership
items”. Sec. 6226(f); Petaluma FX Partners, LLC v.
Commissioner, 131 T.C. ___, ___ (2008) (slip op. at
11-12). However, our jurisdiction over whether the
period of limitations has expired as to individual
partners presents an exception since the expiration of
the period of limitations can depend on facts that are
peculiar to the individual partners. See Rhone-Poulenc
Surfactants & Specialties, L.P. v. Commissioner, 114
T.C. 533 * * *. As we observed therein:

“in 1997, Congress recognized that the periods for
assessing tax against individual partners may vary from
partner to partner and specifically provided that an
individual partner will be permitted to participate as
a party in the partnership proceeding ‘solely for the
purpose of asserting that the period of limitations for
assessing any tax attributable to partnership items has
expired with respect to such person’. See the last
sentence of section 6226(d)(1)(B), added to the Code by
the Taxpayer Relief Act of 1997, Pub. L. 105-34,
section 1239(b), 111 Stat. 1027, effective for years
ending after August 5, 1997. [Id. at 546; fn. ref.
omitted.]”

Id. at ___ n.9 (slip op. at 12-13). To restate: Partnership

items are those items required to be taken into account for the

partnership’s taxable year to the extent that those items are

more appropriately determined at the partnership level than at

the partner level. Sec. 6231(a)(3). By contrast, an inquiry

under section 6226(d)(1) to determine whether a partner is a

party will in most circumstances depend on facts that are

peculiar to the individual partner; for that reason, in most

circumstances, that inquiry would seem inappropriate at the

partnership level. Nonetheless, concludes PCMG note 9, section

6226(d)(1)(B) grants the Court the authority to make such a
 -57-

partner-specific inquiry and to decide whether the period of

limitations for a partner has run in the context of determining

whether that partner is a party.

Again, because the Manroes concede they are parties to this

partnership-level proceeding, section 6226(d)(1) is not relevant.

PCMG does not support the majority.

B. Cases Concerning the Timeliness of the FPAA

1. Cases in Which the FPAA Is Untimely

The majority cites Rhone-Poulenc Surfactants & Specialties,

L.P. v. Commissioner, supra, for the proposition that in a

partnership-level proceeding the partners may assert that the

period of limitations for assessing any tax attributable to

partnership items has expired. See majority op. p. 12. That is,

the majority cites Rhone-Poulenc for its recitation of the flush-

language sentence in section 6226(d)(1), which permits a partner

to argue that he is not a party to a partnership-level

proceeding. Yet Rhone-Poulenc supports my analysis of section

6226(c) and (d). Rhone-Poulenc simply involved the special case

in which every partner argues that, under section 6226(d)(1)(B),

he is not a party to a partnership-level proceeding. We

concluded that, if the statute of limitations barred assessment

of every computational adjustment resulting from every

partnership adjustment, reaching the merits of the FPAA would be

of “no avail”. See Rhone-Poulenc Surfactants & Specialties, L.P.
 -58-

v. Commissioner, 114 T.C. at 534-535; cf. supra sec. II. of this

separate opinion (describing the argument in Rhone-Poulenc as in

effect an affirmative defense to the FPAA). Rhone-Poulenc

involved an argument that no partner was a party to the

partnership-level proceeding and does not support the majority.

2. Cases in Which the FPAA Is Timely

The majority cites Curr-Spec Partners, L.P. v. Commissioner,

T.C. Memo. 2007-289, affd. 579 F.3d 391 (5th Cir. 2009), but does

not explain for what proposition. The reason, I imagine, is that

Curr-Spec does not in fact involve an inquiry into whether any

partner year was open or closed. Kligfeld Holdings v.

Commissioner, 128 T.C. 192 (2007), and G-5 Inv. Pship. v.

Commissioner, 128 T.C. 186 (2007), control Curr-Spec, and all

three involve the same fact pattern. In each case, the

Commissioner conceded that the statute of limitations barred

assessment against any partner of any computational adjustment

for the partner year corresponding to the partnership year for

which the FPAA was issued. The taxpayers argued that, for that

reason, the Commissioner could not assess any computational

adjustment for any subsequent year, even though the taxpayers

conceded that the subsequent years were open. The Court rejected

the taxpayers’ argument.

Those three cases did not involve any partner-specific

inquiry into the statute of limitations, however, because the
 -59-

parties agreed which years were open and which closed. The

question, rather, was whether the FPAA was timely. The Court

held that it was timely because, even assuming the FPAA had been

issued for a partnership year congruent to closed partner years,

if the FPAA could affect an open partner year, then the Court

could reach its merits. See supra sec. II. of this separate

opinion. Those three cases do not support the majority.

C. Other Cases That Support My Analysis

1. New Millennium Trading, L.L.C. v. Commissioner

The specific question we consider today is whether in a

partnership-level proceeding a partner who concedes he is a party

may argue that the statute of limitations bars the assessment of

a resulting computational adjustment. The broader question might

be whether in a partnership-level proceeding a partner may raise

a partner-specific defense. In the penalty context, we recently

answered the latter question with a resounding “no”. See New

Millennium Trading, L.L.C. v. Commissioner, 131 T.C. ___ (2008).

In New Millennium Trading, the taxpayer moved for partial

summary judgment, asking the Court to hold either invalid or

inapplicable the regulation barring a partner from raising

partner-level defenses in a partnership-level proceeding. We

denied the motion in both respects, see id. at (slip op. at
 -60-

2), thereby upholding section 301.6221-1T(c) and (d), Temporary

Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan. 26, 1999).9

9
Although temporary during the year at issue in New
Millennium Trading, L.L.C. v. Commissioner, 131 T.C. ___ (2008),
sec. 301.6221-1T(c) and (d), Temporary Proced. & Admin. Regs., 64
Fed. Reg. 3838 (Jan. 26, 1999), was made final and applicable to
partnership taxable years beginning on or after Oct. 4, 2001.
Sec. 301.6221-1(f), Proced. & Admin. Regs.

Sec. 301.6221-1(c), Proced. & Admin. Regs. (“Penalties
determined at partnership level.”), provides:

Any penalty, addition to tax, or additional amount that
relates to an adjustment to a partnership item shall be
determined at the partnership level. Partner-level
defenses to such items can only be asserted through
refund actions following assessment and payment.
Assessment of any penalty, addition to tax, or
additional amount that relates to an adjustment to a
partnership item shall be made based on
partnership-level determinations. Partnership-level
determinations include all the legal and factual
determinations that underlie the determination of any
penalty, addition to tax, or additional amount, other
than partner-level defenses specified in paragraph (d)
of this section.

Sec. 301.6221-1(d), Proced. & Admin. Regs. (“Partner-level
defenses.”), provides:

Partner-level defenses to any penalty, addition to tax,
or additional amount that relates to an adjustment to a
partnership item may not be asserted in the
partnership-level proceeding, but may be asserted
through separate refund actions following assessment
and payment. See section 6230(c)(4). Partner-level
defenses are limited to those that are personal to the
partner or are dependent upon the partner’s separate
return and cannot be determined at the partnership
level. Examples of these determinations are whether
any applicable threshold underpayment of tax has been
met with respect to the partner or whether the partner
has met the criteria of section 6664(b) (penalties
applicable only where return is filed), or section
(continued...)
 -61-

We began by stating unequivocally that “a partner cannot

raise partner-level defenses in a TEFRA proceeding”. New

Millennium Trading, L.L.C. v. Commissioner, supra at ___ (slip

op. at 15). We explained that “[t]he TEFRA structure enacted by

Congress does not permit a partner to raise partner-level

defenses during a partnership-level proceeding”, id. at ___ (slip

op. at 17), and we held that “sections 6221, 6230(c)(1), and

6230(c)(4), when read in conjunction, make clear that Congress

intended for partners to raise partner-level defenses during a

refund action after the partnership proceeding”, id. at ___ (slip

op. at 22). We concluded that “the legislative history and the

definitions in section 6231(a) [make clear] that Congress did not

wish the Court to decide all issues associated with a partnership

in a single proceeding even if * * * [the Court] has the

information available to do so.” Id. at ___ (slip op. at 25).

New Millennium Trading stands for a simple proposition: The

character of a defense to a penalty determines whether that

defense is appropriate at the partnership level or the partner

level. I argue only that an analogous proposition holds for a

defense based on the statute of limitations.

9
(...continued)
6664(c)(1) (reasonable cause exception) subject to
partnership-level determinations as to the
applicability of section 6664(c)(2).
 -62-

2. Slovacek v. United States

In Slovacek v. United States, 36 Fed. Cl. 250, 253-254

(1996), the taxpayers, in a partner-level proceeding, sought to

disqualify a tax matters partner who had extended the

partnership’s period of limitations. Success on that argument

would have meant that, under section 6226(d)(1)(B), no partner

was a party to the partnership-level proceeding.

The Court of Federal Claims first asked whether section

301.6231(a)(3)-1(b), Proced. & Admin. Regs. (“Factors that affect

the determination of partnership items.”), encompasses the

“partnership’s statute of limitations”. Id. at 255. The Court

of Federal Claims then stated:

Determining whether * * * [the tax matters
partner] extended the statute of limitations might be
said to affect the amount, timing, and characterization
of income, etc., (partnership items) at the partnership
level, if only in a thumbs-up or thumbs-down manner.
Conversely, a statute of limitations issue applicable
only to an individual partner involves questions of
fact pertinent only to that partner, e.g., whether he
extended the statute of limitations for his own return,
see I.R.C. § 6229(b)(1)(A), or timely entered into a
settlement agreement solely with respect to the
partner’s return, see I.R.C. § 6229(f), or participated
in preparing a fraudulent partnership return, see
I.R.C. § 6229(c)(1)(A).

Id. The taxpayers lost because the Court of Federal Claims

concluded that they made the first kind of argument:

[W]hether a statute of limitations applicable to the
partnership as a whole was waived so as to permit
assessment of additional taxes against the partnership
as a whole is an issue to be decided at the partnership
 -63-

level, since it affects all partners alike (to the
extent of their proportionate share). * * *

Id.10

Petitioners, however, have made the second kind of argument.

Their statute of limitations argument, which is not an argument

under section 6226(d)(1)(B) that they are not parties, involves

questions of fact pertinent only to the them; i.e., whether any

computational adjustment for 2001 would be timely with respect to

them individually. Thus, their argument is appropriate at the

partner level.

D. Conclusion

The holding of no case supports the majority; moreover, my

analysis of section 6226(d) is consistent with every case I have

found and the majority cites.11

10
In the end, however, the Court of Federal Claims did not
rely on that analysis and held that, by signing an income tax
settlement agreement, the taxpayers had waived “their legal right
to a refund.” Slovacek v. United States, 36 Fed. Cl. 250, 256
(1996).
11
Judge Thornton cites Crowell v. Commissioner, 102 T.C. 683
(1994), and McConnell v. Commissioner, T.C. Memo. 2008-167, for
the proposition that “a statute of limitations defense as
pertains to a final notice of partnership adjustments should be
prosecuted in the context of the partnership-level proceeding
rather than in a partner-level proceeding.” Concurring op. p.
44. I could not agree more. Yet, as I have argued supra in sec.
II. of this separate opinion, the statute of limitations defense
the Manroes present does not pertain to the FPAA.
 -64-

V. The Concurring Opinion

Judge Thornton proposes three ways in which the Manroes’

statute of limitations claim might present a partnership item

(which would allow us to dispose of the claim at the partnership

level, see sec. 6221). The first way supports the majority’s

analysis of section 6226(d)(1). The second two ways provide an

alternative ground for considering the Manroes’ claim.

A. Section 6226(d)(1) and the Flush-Language Sentence

Judge Thornton apparently believes that a partner’s claim

made pursuant to the flush-language sentence that he has no

interest in the outcome of a partnership-level proceeding

necessarily involves a partnership item. Concurring op. p. 42.

As indicated previously, the term “partnership item” is a term of

art, defined in section 6231(a)(3) and section 301.6231(a)(3)-1,

Proced. & Admin. Regs. A partner’s claim made pursuant to the

flush-language sentence might involve a partnership item,

especially if the claim is that the period of limitations has

expired for all partners for all years so that it raises an

affirmative defense to the FPAA. See sec. 301.6231(a)(3)-1(b),

Proced. & Admin. Regs. (“Factors that affect the determination of

partnership items.”); see also supra note 3; supra sec. IV.C.2.

of this separate opinion (discussing the two kinds of statute of

limitations arguments identified in Slovacek v. United States,

supra). The Manroes do not raise an affirmative defense to the
 -65-

FPAA and do not disclaim an interest in this proceeding. Judge

Thornton has failed to show that their claim nonetheless involves

a partnership item under section 6226(d)(1).

B. Section 6501(c)(10) and Listed Transactions

Relying on section 6501(c)(10), Judge Thornton proposes two

ways the Manroes’ statute of limitations claim might present a

partnership item. Judge Thornton offers his analysis relying on

section 6501(c)(10) as an alternative to the majority’s analysis

under section 6226(d)(1). Section 6501(c)(10) extends the

section 6501(a) period for assessing and collecting tax if a

taxpayer fails to include on his return information required with

respect to listed transactions. Judge Thornton speculates that,

because the partnership was involved in what is arguably a listed

transaction, the question of whether that transaction is a listed

transaction “could be considered a partnership item.” Concurring

op. p. 43. He further speculates that, “insofar as the

partnership’s failure to file a disclosure statement operates to

extend the limitations period under section 6501(c)(10) for

assessing any tax”, the question of “[w]hether the limitations

period remains open may also be considered a partnership item”.

Concurring op. p. 43.

With respect to Judge Thornton’s first conclusion, the

factual inquiry necessary to determine whether a transaction is a

listed transaction may indeed involve partnership items (e.g.,
 -66-

partnership liabilities or the amount of a partner’s

contributions to the partnership, see sec. 301.6231(a)(3)-

1(a)(1)(v), (4)(i), Proced. & Admin. Regs.), and the question

itself may well present a partnership item. Nonetheless, a

finding that the transaction is a listed transaction is

insufficient for a finding that section 6501(c)(10) has extended

the section 6501(a) period of limitations for the Manroes’ 2001

year. To make that finding, we would also need to decide (1) the

effective dates of sections 6501(c)(10) and 6707A and (2) the

validity of section 1.6011-4T(a)(1), Temporary Income Tax Regs.,

67 Fed. Reg. 41327 (June 18, 2002). While those questions are

purely legal, the answers are in this case irrelevant to whether

the FPAA was timely (it was) and to whether the Manroes are

parties (they are); the answers are pertinent only to whether,

because of section 6501(c)(10), the section 6501(a) period of

limitations applicable to the Manroes has been extended for their

2001 year.12 In a partnership-level proceeding, for a partner

who does not deny he is a party thereto, a statute of limitations

claim is not an affirmative defense. See supra secs. II. and

12
Analogous questions would include whether they by
agreement with the Commissioner extended the period of
limitations for the assessment of computational adjustments
pertaining only to their return, see sec. 6229(b)(1)(A), or
entered into a settlement solely with respect their own return,
see sec. 6229(f). Those are questions that would be pertinent
only to the Manroes and so would be properly raised only at the
partner level. See supra sec. IV.C.2. of this separate opinion.
 -67-

III. of this separate opinion. Judge Thornton has failed to

convince me that, nonetheless, that claim involves a partnership

item within the meaning of section 301.6231(a)(3)-1, Proced. &

Admin. Regs.

With respect to Judge Thornton’s second conclusion, I am not

convinced that the Manroes’ statute of limitations claim is a

partnership item because the partnership failed to attach a

disclosure statement to its return. Section 1.6011-4T(a)(1),

Temporary Income Tax Regs., supra, imposes a disclosure

requirement on, among others, every individual and partnership

participating directly or indirectly in a reportable transaction.

If a partnership and some of its partners participate in a

reportable transaction, then both the partnership and those

partners must disclose. (That is, I assume, the situation we

have here.) The temporary regulation, however, does not explain

the effects of disclosure by the partnership on the partners, or

vice versa. I would be hesitant without clarification of the

regulation to state either (1) that, notwithstanding a partner’s

disclosure, a partnership’s failure to disclose could extend the

partner’s period of limitations or (2) that the partnership’s

disclosure could cure a partner’s failure to disclose. I believe

that, in the situation described, the partner’s disclosure should

be both necessary and sufficient to overcome section 6501(c)(10).

Thus, the partnership’s disclosure seems irrelevant. Because the
 -68-

partner’s disclosure should always decide the issue, the issue

does not present a partnership item.

Judge Thornton’s listed transactions speculation raises

interesting points. His alternative to the majority’s analysis

of section 6226(d)(1), however, is pertinent only to a narrow

class of cases (i.e., those involving listed transactions).

Moreover, like the majority, he is satisfied to decide important

issues without any input from the parties. I would not do so.

VI. Effect of the Majority Opinion

I fear that an effect of the majority opinion is to

transform a partnership-level proceeding into the exclusive venue

for raising any statute of limitations defense. That is contrary

to the purposes and logic of the unified audit and litigation

procedures of Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. 97-248, sec. 402, 96 Stat. 648. TEFRA was

intended to make certain that any question that affected partners

in a partnership generally was answered once and for all. See,

e.g., RJT Invs. X v. Commissioner, 491 F.3d 732, 737 (8th Cir.

2007), in which the Court of Appeals stated:

TEFRA was intended, in relevant part, to prevent
inconsistent and inequitable income tax treatment
between various partners of the same partnership
resulting from conflicting determinations of
partnership level items in individual partner
proceedings. Randell v. United States, 64 F.3d 101,
103-04 (3rd Cir. 1995) (describing the goals of TEFRA
and the problems TEFRA was intended to address) * * *
 -69-

TEFRA was also intended to make the administration of the tax

laws more efficient. See H. Conf. Rept. 97-760, at 600 (1982),

1982-2 C.B. 600, 662.

The majority’s interpretation furthers neither of those

goals; indeed, as discussed below, it may have unintended

consequences. I believe that the majority has erred because it

has not considered the differences between an affirmative defense

to an FPAA, a partner’s claim that he is not a party to a

partnership-level proceeding, and a partner’s claim that section

6501(a) bars the collection of a particular computational

adjustment. While hanging its hat on language in section

6226(d)(1) dealing with claims of the second sort, the majority I

believe has conflated claims of the first and third sort,

treating a claim of the third sort as a proper affirmative

defense at the partnership level.13 That misunderstanding of the

statutory framework will almost certainly have adverse and

surprising consequences.

Consider a case in which no partner plans to contest the

merits of an FPAA or his status as a party, but each believes he

has a partner-level defense, some relying on the statute of

limitations, some on another defense. I assume that if a partner

with a statute of limitations defense fails to raise that defense

at the partnership level, he will be deemed to have waived it.

13
See supra note 1.
 -70-

In general, a party who fails to raise a defense when he has the

opportunity to do so thereby waives the defense. See, e.g.,

Chimblo v. Commissioner, 177 F.3d 119, 125 (2d Cir. 1999), affg.

T.C. Memo. 1997-535, in which the Court of Appeals stated:

As a general matter, the statute of limitations is
an affirmative defense that must be pleaded; it is not
jurisdictional. See Columbia Bldg., Ltd. v.
Commissioner, 98 T.C. 607, 611 * * * (1992). It
follows that such a defense may be waived by a party
who fails to raise it at the appropriate time.

The majority opinion seems to stand for the proposition

that, although generally a partner must preserve his partner-

specific defenses for a partner-level proceeding, he may--and so

must--mount his statute of limitations defense at the partnership

level, even if he disputes neither the FPAA nor that he has an

interest in the outcome of the partnership-level proceeding. I

doubt that Congress set such a perilous trap for the unwary.

VII. Conclusion

In a partnership-level proceeding, the Court has authority

to decide (1) partnership items (and related penalties, additions

to tax and the like), see sec. 6221, (2) affirmative defenses,

see Rule 39, and (3) whether a partner is not a party because he

has no interest in the outcome of the proceeding, see sec.

6226(c) and (d). In a partnership-level proceeding, if a partner

is a party thereto, the question of whether the statute of

limitations bars the subsequent assessment of tax for a given

year is neither a partnership item nor an affirmative defense to
 -71-

the FPAA. The majority and Judge Thornton fail to convince me

otherwise and so fail to convince me that the Court has authority

in this proceeding to consider that question.14

Consider the problem another way: Respondent has not yet

sought to collect any tax from any partner with respect to the

adjustments in the FPAA. Indeed, he cannot yet do so. See sec.

6225. Thus, to answer the question these motions present is to

answer a hypothetical question. Generally, when a court answers

a question unnecessarily, its opinion is at best advisory.

I would deny both motions as at this time beyond the

authority of the Court. Therefore, I respectfully dissent.

FOLEY and HOLMES, JJ., agree with this dissenting opinion.

14
Judge Thornton suggests: “It is not such a great leap
that the Court should also consider * * * [a partner’s assertions
of a limitations bar] where a partner asserts the limitations bar
with respect to fewer than all affected years.” Concurring op.
p. 45. It is a great leap, however, if we do not have authority
to do so. As we stated in Blonien v. Commissioner, 118 T.C. 541,
550 (2002) (quoting Saso v. Commissioner, 93 T.C. 730, 734-735
(1989)): “‘When a jurisdictional issue is raised, as well as a
statute of limitations issue, we must first decide whether we
have jurisdiction in the case before considering the statute of
limitations defense.’” As we further stated, citing the Supreme
Court as authority: “We cannot avoid the jurisdictional issue by
assuming hypothetical jurisdiction and disposing of the case on
the merits.” Id. at 551 (citing Steel Co. v. Citizens for a
Better Envt., 523 U.S. 83, 94 (1998)).