TIGERS EYE TRADING, LLC, SENTINEL ADVISORS, LLC, TAX
MATTERS PARTNER, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 14510–05. Filed February 13, 2012.
The stipulated decision in this Son of BOSS TEFRA part-
nership-level case, entered by the Court Dec. 1, 2009, was
agreed to by R and the tax matters partner (TMP) of Tigers
Eye Trading, LLC (Tigers Eye), with concurrence of partici-
pating partner (P), a partner other than TMP. The first deci-
sion paragraph specifies that the partnership items of ordi-
nary loss, other deductions, distributions of property, and cap-
ital contributions were reduced to zero as determined in the
notice of final partnership administrative adjustment (FPAA)
issued to Tigers Eye. The second decision paragraph, deter-
mining that the FPAA is correct, includes the determinations
that Tigers Eye is disregarded for Federal income tax pur-
poses, outside basis is reduced to zero, and a 40% penalty
applies to any gross valuation/basis misstatement. The third
and fourth decision paragraphs respectively determine that
the 40% gross valuation misstatement penalty under I.R.C.
sec. 6662(b)(3), (e), and (h) applies to any underpayment of
tax attributable to overstating the capital contributions
claimed to have been made to the purported partnership and
a 20% penalty for negligence or substantial underpayment
under I.R.C. sec. 6662 applies to any additional under-
payment of tax attributable to the partnership item adjust-
67
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68 138 UNITED STATES TAX COURT REPORTS (67)
ments other than the claimed capital contributions. On Jan.
12, 2010, the Court of Appeals for the D.C. Circuit, to which
this case would be appealable, issued Petaluma FX Partners,
LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010)
(Petaluma II), aff ’g in part, rev’g in part and remanding 131
T.C. 84 (2009) (Petaluma I). In Petaluma II the Court of
Appeals for the D.C. Circuit held that outside basis is not a
partnership item that the Tax Court had jurisdiction to deter-
mine in the partnership-level proceeding and remanded the
case on the applicability of penalties. On Jan. 19, 2010, P filed
a motion for leave to file a motion to revise the stipulated
decision and lodged the motion to revise. On Dec. 30, 2010,
the Court granted the motion for leave nunc pro tunc as of
Jan. 19, 2010, and as of that date filed the motion to revise.
In the motion to revise P asks the Court to revise the stipu-
lated decision to conform to the jurisdictional limits on the
authority of the Tax Court established in Petaluma II. On
Dec. 15, 2010, this Court issued Petaluma FX Partners, LLC
v. Commissioner, 135 T.C. 581 (2010) (Petaluma III), on
appeal (D.C. Cir. Mar. 8, 2011), holding that for this Court to
have jurisdiction over a penalty at the partnership level,
Petaluma II requires that the penalty be computable without
partner-level proceedings to determine affected items, leading
at least potentially to only a computational adjustment to the
partners’ returns. Id. at 586–587. After Petaluma II and
Petaluma III were issued, the Supreme Court issued Mayo
Found. for Med. Educ. & Research v. United States, 562 U.S.
ll, 131 S. Ct. 704 (2011). In Mayo Found., the Supreme
Court made clear that courts must defer to regulations that
interpret the Internal Revenue Code unless they fail to meet
the two-step standard of Chevron, U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 842–843 (1984). In the
recently issued opinion in Intermountain Ins. Serv. of Vail,
LLC v. Commissioner, 650 F.3d 691 (D.C. Cir. 2011), rev’g and
remanding 134 T.C. 211 (2010), supplementing T.C. Memo.
2009–195, the Court of Appeals for the D.C. Circuit held that,
prior caselaw to the contrary notwithstanding, the Tax Court
must defer to a regulation unless it holds the regulation
invalid under Chevron. Held: The motion to revise the stipu-
lated decision will be denied; the jurisdictional limitations
established in Petaluma II were based on a concession by the
Government that does not apply in the case at hand; the
applicability of the accuracy-related penalties determined by
the stipulated decision in the case at hand is sustained by the
decision’s adoption of adjustments to partnership items that
are related to said penalties. Held, further, because Tigers
Eye filed a partnership return for 1999, the TEFRA proce-
dures apply with respect to 1999 to Tigers Eye and its items
and to TMP, P, and other persons holding an interest in
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 69
Tigers Eye, and the Tax Court has jurisdiction to determine
that Tigers Eye does not exist and is not a partnership for
Federal income tax purposes. See I.R.C. sec. 6233; sec.
301.6233–1T(a), (c), Temporary Proced. & Admin. Regs., 52
Fed. Reg. 6779, 6795 (Mar. 5, 1987). Held, further, because
Tigers Eye does not exist and is not a partnership for Federal
income tax purposes, the Court has jurisdiction to make
determinations with respect to all items of Tigers Eye that
would be partnership items, as defined in I.R.C. sec.
6231(a)(3) and sec. 301.6231(a)(3)–1, Proced. & Admin. Regs.,
if Tigers Eye had been a partnership, including the nature
and character of those items. See I.R.C. sec. 6233; sec.
301.6233–1T(a), (c), Temporary Proced. & Admin. Regs.,
supra. Held, further, because Tigers Eye is disregarded for
Federal income tax purposes, it acted as a nominee and agent
for P and others who participated in the transactions at issue
and Tigers Eye’s items are of that nature and character. Held,
further, the determination that Tigers Eye is disregarded as
a partnership for Federal income tax purposes serves as a
basis for a computational adjustment reflecting the disallow-
ance of any loss or credit claimed by P or any other purported
partner with respect to Tigers Eye, and the Court has juris-
diction to determine that all items of Tigers Eye that pur-
ported to be partnership items are adjusted to zero. See I.R.C.
sec. 6233; sec. 301.6233–1T(a), Temporary Proced. & Admin.
Regs., supra. Held, further, items of Tigers Eye that are nec-
essary for maintaining its books and records as nominee-agent
acting on behalf of the purported partners and providing
information to them are entity/partnership items that the
Court has jurisdiction to decide in this partnership/entity-
level proceeding. See sec. 301.6231(a)(3)–1(a)(4), Proced. &
Admin. Regs. Held, further, because Tigers Eye conducted the
transactions as nominee-agent for P, P’s basis in the distrib-
uted property is Tigers Eye’s cost basis in the property, which
P concedes is the amount of the distributions shown on the
Schedule K–1, Partner’s Share of Income, Credits, Deductions,
etc., Tigers Eye issued to P; Tigers Eye’s cost basis in the
distributed property is an entity/partnership item that this
Court has jurisdiction to decide in this proceeding. See sec.
301.6231(a)(3)–1(a)(4), (c)(3)(iii), Proced. & Admin. Regs. Held,
further, in accordance with Mayo Found. and Intermountain,
we must apply the TEFRA regulations that satisfy the
Chevron standard and are not bound to follow a contrary
holding of Petaluma II to the extent those regulations were
not specifically considered and applied by the Court of
Appeals in deciding the issue. Held, further, Petaluma II not-
withstanding, outside basis is an entity/partnership item
related to contributions and distributions that Tigers Eye
needed to determine for purposes of maintaining its books and
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70 138 UNITED STATES TAX COURT REPORTS (67)
records and providing information to its purported partners
that the Court has jurisdiction to decide in the partnership/
entity-level proceeding. See sec. 301.6231(a)(3)–1(a)(4), Proced.
& Admin. Regs. Held, further, sec. 301.6231(a)(3)–1(a)(4),
Proced. & Admin. Regs., is valid under the two-step Chevron
standard. Held, further, the ordinary loss and other deduc-
tions reduced to zero by the first decision paragraph flowed
directly through to the purported partners’ returns, and R
may compute and assess the deficiencies related to the adjust-
ments of those partnership items to zero without issuing a
statutory notice of deficiency; under Petaluma II, this Court
has jurisdiction in this partnership-level proceeding to deter-
mine applicability of penalties to the underpayments of tax
resulting from the adjustments to zero of the ordinary loss
and other deductions that flowed directly through to the pur-
ported partners’ individual returns. Held, further, the adjust-
ment of the ordinary loss to zero is attributable to overstating
the capital contributions claimed to have been made to the
purported partnership; pursuant to the stipulated decision the
40% gross valuation misstatement penalty and the 20% neg-
ligence penalty apply respectively to the underpayments of
tax resulting from the adjustments of the loss and other
deductions to zero. Held, further, the overstatement of the
purported partners’ bases in the distributed property is attrib-
utable to claiming that capital contributions were made to the
purported partnership; the underpayment of tax resulting
from the overstatement of basis in the distributed property
(distributed property loss deficiency) is attributable to the
reduction to zero of capital contributions claimed to have been
made to the purported partnership that is disregarded for
Federal income tax purposes; this Court has jurisdiction in
this partnership-level proceeding to determine in the stipu-
lated decision that the 40% gross basis misstatement penalty
applies to the distributed property loss deficiency. Held, fur-
ther, there will be a gross misstatement of basis in the distrib-
uted property if the misstatement exceeds four times the
amount of the distributions shown on the Schedule K–1
issued to the purported partner; the 40% penalty will apply
to any underpayment of tax attributable to claiming basis in
the property that is more than four times the amount of the
distributions shown on the Schedule K–1 issued to the pur-
ported partner.
Felix B. Laughlin and Mark D. Allison, for petitioner.
David D. Aughtry, Hale E. Sheppard, and William E.
Buchanan, for participating partner.
James E. Gray, for respondent.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 71
CONTENTS
Page
Background ............................................................................................. 77
Discussion ................................................................................................ 88
I. Introduction: Complexity of Income Tax Treatment of Partners
and Partnerships ......................................................................... 88
A. Overview of Subchapter K .......................................................... 88
B. TEFRA .......................................................................................... 88
1. In General ................................................................................. 88
2. TEFRA Penalty Litigation Structure Before TRA 1997 ........ 89
3. TEFRA Penalty Litigation Structure After TRA 1997 .......... 90
C. Attempted Exploitation by Tax Shelter Promoters of Com-
plex Interactions and Disconnects of Subchapter K Sub-
stantive Rules and TEFRA Procedural Rules ........................ 92
II. Jurisdiction Under TEFRA When Entity Filing Partnership
Return Is Not a Partnership or Does Not Exist ........................ 95
A. TEFRA Procedures Apply When Entity That Filed Partner-
ship Return Is Not a Partnership or Does Not Exist:
Sections 6226(f) and 6233 ........................................................ 95
B. Jurisdiction To Determine Items of Disregarded Entity:
Section 301.6233–1T(a) and (c), Temporary Proced. &
Admin. Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987) ......... 97
C. Jurisdiction To Determine Applicability of Any Penalty That
Relates to Adjustment of Entity Item: Section 6226(f) ......... 100
III. Jurisdiction To Enter Stipulated Decision as Written With
Respect to Partnership Items ................................................... 100
A. Provisions of the Stipulated Decision ......................................... 100
B. Disregard of Tigers Eye ............................................................... 102
C. Items of Tigers Eye ...................................................................... 102
D. First Decision Paragraph ............................................................ 103
1. Partnership Loss and Deductions ............................................ 104
2. Contributions and Distributions .............................................. 104
a. Items Related to Contributions ............................................ 104
b. Items Related to Distributions ............................................. 106
3. Adjustment of Items to Zero .................................................... 107
E. Second Decision Paragraph ......................................................... 107
1. Basis in Property Distributed by Disregarded Entity ........... 108
2. Outside Basis ............................................................................ 109
a. Petaluma Superseded by Mayo Found. and Inter-
mountain: TEFRA Regulations Must Be Applied .......... 110
b. Determination of Outside Basis: General Rule Under
Section 705(a) .................................................................... 112
c. Determination of Outside Basis: Alternative Rule Under
Section 705(b) .................................................................... 114
d. Outside Basis Is a Partnership Item ................................... 115
i. Required To Be Taken Into Account Under Subtitle A ... 115
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72 138 UNITED STATES TAX COURT REPORTS (67)
ii.
More Appropriately Determined at the Partnership
Level: Outside Basis Determined Under the Gen-
eral Rule ......................................................................... 116
iii. More Appropriately Determined at the Partnership
Level: Outside Basis Determined Under Alternative
Rule ................................................................................. 118
iv. More Appropriately Determined at the Partnership
Level: Outside Basis When the Partnership Is
Disregarded .................................................................... 118
e. Misapplication of Dial USA, Inc. v. Commissioner ............. 119
f. Validity of the Regulation Under the Chevron Two-Step
Standard ............................................................................ 124
g. Outside Bases of Tigers Eye’s Purported Partners Are
Partnership Items ............................................................. 126
IV. Jurisdiction To Enter Stipulated Decision as Written With
Respect to Application of Penalties .......................................... 128
A. Items Adjusted in the Stipulated Decision and the Applica-
tion of Accuracy-Related Penalties Thereto Within the
Jurisdictional Limitations of Petaluma II .............................. 130
1. 40% Gross Basis Misstatement Penalty ................................. 131
2. 20% Negligence Penalty ........................................................... 133
3. Conclusion ................................................................................. 134
B. Petaluma II Notwithstanding, Jurisdiction To Determine the
40% Penalty Applies to the Overstatement of the Basis of
the Distributed Property .......................................................... 134
1. Applicability of the 40% Penalty to the Overstatement of
the Basis of the Distributed Property ................................. 134
2. Petaluma III: The Court Was Bound by the Law of the
Case and the Rule of Mandate To Follow Petaluma II
Dicta on Lack of Jurisdiction Over Outside Basis ............. 136
3. TRA 1997: The Tax Court Has Jurisdiction To Determine
Applicability of Penalties That Relate to Adjustment
of Partnership Items ............................................................. 139
V. Conclusion ........................................................................................ 143
OPINION
BEGHE, Judge: Following entry of a stipulated decision on
December 1, 2009, this Son of BOSS 1 case remains before this
Court on a motion to revise the decision. The motion was
1 The Son of BOSS tax shelter was described by the Internal Revenue Service (IRS) as a ‘‘list-
ed transaction’’ in Notice 2000–44, 2000–2 C.B. 255, 256. In Announcement 2004–46, 2004–1
C.B. 964, the IRS announced a settlement initiative for taxpayers to resolve transactions de-
scribed in Notice 2000–44, supra, and similar Son of BOSS transactions, with penalties topping
out at 20% of the deficiencies. Within a year thereafter, the IRS announced that the settlement
initiative had resulted in the collection of more than $3.2 billion of Federal income taxes and
reduced penalties from more than 1,000 taxpayers. See ‘‘Son of BOSS Settlement Initiative
Reaps $3.2 Billion, With More Expected, IRS Says’’, TM Weekly Report (BNA), 24 TMWR 467
(Mar. 28, 2005) (Tax Shelters).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 73
filed by participating partner A. Scott Logan Grantor
Retained Annuity Trust I, A. Scott Logan, Trustee, a partner
other than the tax matters partner. We refer to the trustee
in his individual capacity as Mr. Logan and to the trust as
Logan Trust I or participating partner.
Participating partner argues that the stipulated decision
upholds adjustments in the final partnership administrative
adjustment (FPAA) and applies accuracy-related penalties
that exceed this Court’s jurisdiction under section 6226(f), 2
thereby overstepping the jurisdictional limits under the
TEFRA 3 statute and regulations, 4 as established by the Court
of Appeals for the D.C. Circuit in Petaluma FX Partners,
LLC v. Commissioner, 5 591 F.3d 649 (D.C. Cir. 2010)
(Petaluma II), aff ’g in part, rev’g in part and remanding on
penalty issues 131 T.C. 84 (2008) (Petaluma I). On December
15, 2010, this Court responded to the remand on penalty
issues with its reviewed Opinion (7–5, with two dissenting
opinions), Petaluma FX Partners, LLC v. Commissioner, 135
T.C. 581 (2010) (Petaluma III), and on March 8, 2011, the
Commissioner filed a notice of appeal. 6 Participating partner
argues that under the Golsen 7 rule the Court’s jurisdiction
to decide the issues in dispute in this partnership-level pro-
ceeding is controlled by Petaluma II, so that the Court must
2 Unless otherwise stated, all section references are to the Internal Revenue Code (Code) in
effect for 1999, the year at issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure.
3 Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97–248, sec. 402, 96
Stat. at 648, as amended by the Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. No. 105–34,
sec. 1238, 111 Stat. at 1026.
4 Sec. 301.6231(a)(6)–1T(a), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3840 (Jan. 26,
1999); see also sec. 301.6231(a)(6)–1(a)(1), Proced. & Admin. Regs.
5 In most Son of BOSS cases—as in the case at hand and in Petaluma FX Partners, LLC v.
Commissioner, 135 T.C. 581 (2010) (Petaluma III), on remand from Petaluma FX Partners, LLC
v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (Petaluma II), aff ’g in part, rev’g in part and
remanding on penalty issues 131 T.C. 84 (2008) (Petaluma I)—the taxpayers contributed money
and offsetting long and short foreign currency options to a partnership and reported multi-
million-dollar losses on the sale of property that they claimed was distributed to them in liquida-
tion of their partnership interests.
6 Appeal docketed, No. 024717–05 (D.C. Cir. Mar. 8, 2011). We note that Petaluma II has al-
ready been followed by the Court of Appeals for the Federal Circuit in Jade Trading, LLC, v.
United States, 598 F.3d 1372, 1379–1380 (Fed. Cir. 2010) (Jade Trading II), aff ’g in part, rev’g
in part and remanding on penalty issues 80 Fed. Cl. 11 (2007) (Jade Trading I), remanded to
98 Fed. Cl. 453 (2011) (Jade Trading III), aff ’d, 451 Fed. Appx. 954 (Fed. Cir. 2012), and by
the unpublished summary order of another panel of the Court of Appeals for the D.C. Circuit
in LKF X Invs., LLC, v. Commissioner, 106 A.F.T.R. 2d (RIA) 2010–5003, 2010–1 U.S. Tax Cas.
(CCH) para. 50,488 (D.C. Cir. 2011), aff ’g in part, rev’g in part and remanding on penalty issues
T.C. Memo. 2009–192.
7 Golsen v. Commissioner, 54 T.C. 742 (1970), aff ’d, 445 F.2d 985 (10th Cir. 1971).
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74 138 UNITED STATES TAX COURT REPORTS (67)
vacate and revise the stipulated decision to conform to the
jurisdictional limits imposed by Petaluma II. 8
We observe that the limiting holdings in Petaluma II were
the result of a concession by the Government that the Court
of Appeals accepted without any discussion of the applicable
regulations. In an opinion issued after Petaluma II was filed,
Mayo Found. for Med. Educ. & Research v. United States,
562 U.S. ll, 131 S. Ct. 704 (2011), the Supreme Court
emphatically reminded lower courts that they must defer to
regulations that satisfy the two-step Chevron 9 standard.
More recently, in Intermountain Ins. Serv. of Vail, LLC v.
Commissioner, 650 F.3d 691 (D.C. Cir. 2011), rev’g and
remanding 134 T.C. 211 (2010), supplementing T.C. Memo.
2009–195, the Court of Appeals for the D.C. Circuit held that
the deference given to regulations under Mayo Found.
required the Court to apply the definitions of statutory terms
provided in valid TEFRA regulations rather than follow earlier
caselaw. In accordance with Mayo Found. and Inter-
mountain, this Court must apply the TEFRA regulations,
unless we hold them to be invalid, rather than follow the
holding in Petaluma II in which the Court of Appeals did not
specifically consider and apply the regulations.
Under the assumption that this Court was bound by the
holdings of the Court of Appeals in Petaluma II, in respond-
ent’s response to participating partner’s motion to vacate and
revise the decision, respondent made the same concession as
the Government made in Petaluma II.
Subject-matter jurisdiction relates to a court’s statutory or
constitutional power to hear a given type of case. United
States v. Cotton, 535 U.S. 625, 630 (2002); United States v.
Morton, 467 U.S. 822, 828 (1984); Alikhani v. United States,
200 F.3d 732, 734 (11th Cir. 2000). The Supreme Court has
held that ‘‘subject-matter jurisdiction, because it involves a
court’s power to hear a case, can never be forfeited or
waived.’’ Cotton, 535 U.S. at 630. ‘‘[S]ubject matter jurisdic-
tion is an unwaivable sine qua non for the exercise of federal
8 Tigers Eye Trading, LLC, was dissolved before the petition was filed; pursuant to sec.
7482(b) the proper venue for an appeal would be the Court of Appeals for the D.C. Circuit. When
the tax matters partner filed the petition (in its capacity as a notice partner, see Barbados #6
Ltd. v. Commissioner, 85 T.C. 900, 903–905 (1985)), Mr. Logan was a resident of Florida and
the place of business of the tax matters partner was in New York. The business address of Ti-
gers Eye Trading, LLC, before its dissolution was in New York.
9 Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–843 (1984).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 75
judicial power’’. Curley v. Brignoli, Curley & Roberts, Assocs.,
915 F.2d 81, 83 (2d Cir. 1990). Moreover, courts have an
independent obligation to determine whether subject matter
jurisdiction exists, even in the absence of a challenge from
any party. Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574,
583 (1999).
Whether a court has subject matter jurisdiction to adju-
dicate the merits of a controversy is a question of law. Taylor
v. Voss, 271 U.S. 176, 186 (1926) (‘‘a petition for revision will
lie to bring up for review the question of law whether the
court of bankruptcy has jurisdiction to adjudicate the merits
of such controversy in a summary proceeding’’); Adkison v.
Commissioner, 592 F.3d 1050, 1052 (9th Cir. 2010) (‘‘Whether
the Tax Court has subject matter jurisdiction is a question
of law and thus reviewed de novo’’), aff ’g 129 T.C. 97 (2007);
United States v. Moore, 443 F.3d 790, 793 (11th Cir. 2006).
The meaning of a statutory term is also a question of law.
Crane v. Commissioner, 331 U.S. 1, 15 (1947) (Tax Court’s
determinations of statutory terms ‘‘announced rules of gen-
eral applicability on clear-cut questions of law’’).
Neither the Supreme Court nor an appellate court is bound
to accept the Government’s concession that the court below
erred on a question of law. Orloff v. Willoughby, 345 U.S. 83,
88 (1953). Similarly, the Tax Court need not accept a party’s
concession on a question of law, particularly when to do so
would strip the Court of its jurisdiction. See Charlotte’s Office
Boutique, Inc. v. Commissioner, 121 T.C. 89, 102 (2003),
aff ’d, 425 F.3d 1203 (9th Cir. 2005).
The Golsen rule does not apply where the precedent from
the Court of Appeals constitutes dicta or contains distin-
guishable facts or law. See, e.g., Hefti v. Commissioner, 97
T.C. 180, 187 (1991) (dictum not controlling), aff ’d, 983 F.2d
868 (8th Cir. 1993); Metzger Trust v. Commissioner, 76 T.C.
42, 72–74 (1981) (factual distinctions render Golsen rule not
squarely on point), aff ’d, 693 F.2d 459 (5th Cir. 1982);
Kueneman v. Commissioner, 68 T.C. 609, 612 n.4 (1977) (dis-
tinct legal question not governed by the Golsen rule), aff ’d,
628 F.2d 1196 (9th Cir. 1980). As we stated in Lardas v.
Commissioner, 99 T.C. 490, 493–495 (1992), the Golsen rule
applies only where the ‘‘clearly established’’ position of a
Court of Appeals signals ‘‘inevitable’’ reversal upon appeal.
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76 138 UNITED STATES TAX COURT REPORTS (67)
In Petaluma II the Government conceded that outside
basis was an affected item but argued that the Tax Court
had jurisdiction to decide an affected item where its elements
consisted entirely of partnership items. The Court of Appeals
agreed that outside basis was an affected item but rejected
the Government’s elements argument. The Court of Appeals
did not decide (1) whether under section 301.6231(a)(3)–
1(a)(4) and (c)(3)(iii), Proced. & Admin. Regs., outside basis
is a partnership item because it is an item related to con-
tributions and distributions necessary for maintaining its
books and records and providing information to the pur-
ported partners; (2) whether outside basis was an entity item
under section 301.6233–1T(a) and (c), Temporary Proced. &
Admin. Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987); (3)
whether the basis in the property distributed by an entity
that is disregarded as a partnership for Federal income tax
purposes is an entity item under section 301.6233–1T(a) and
(c), Temporary Proced. & Admin. Regs., supra; or (4) whether
section 301.6231(a)(3)–1(a)(4) and (c)(3)(iii), Proced. &
Admin. Regs., and section 301.6233–1T(a) and (c), Temporary
Proced. & Admin. Regs., supra, are valid.
The Court of Appeals for the D.C. Circuit recognizes its
‘‘obligation to explore any promising avenue to * * * [the
inferior court’s] jurisdiction, whether or not suggested by the
parties’’. Ass’n of Am. Med. Colleges v. Califano, 569 F.2d
101, 111 (D.C. Cir. 1977); see also Da Silva v. Kinsho Int’l
Corp., 229 F.3d 358, 361 (2d Cir. 2000) (‘‘the issue of subject
matter jurisdiction is one we are required to consider, even
if the parties have ignored it or, as here, have switched sides
on the issue’’). Because the Court of Appeals did not consider
the precise issue we decide herein, Golsen does not apply. See
Read v. Commissioner, 114 T.C. 14 (2000), aff ’d without pub-
lished opinion sub nom. Mulberry Motor Parts, Inc. v.
Commissioner, 273 F.3d 1120 (11th Cir. 2001); Estate of
Branson v. Commissioner, 113 T.C. 6, 34 (1999), aff ’d, 264
F.3d 904 (9th Cir. 2001).
Accordingly, we reject respondent’s concession and apply
the applicable regulations, authorized by sections 6231(a)(3)
and 6233, and hold that this Court has jurisdiction to enter
the stipulated decision as written, even to the extent it
adjusts outside basis to zero and applies the 40% gross basis
misstatement penalty under section 6662(h) to the deficiency
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 77
that results from the overstatement of the purported part-
ners’ bases in distributed property. Therefore we shall deny
participating partner’s motion to vacate and revise the deci-
sion.
Background
Entry of the stipulated decision in this 1999 taxable year
Son of BOSS case was preceded by our opinion in Tigers Eye
Trading, LLC v. Commissioner, T.C. Memo. 2009–121 (Tigers
Eye I). 10 Tigers Eye I was preceded by extensive discovery
and motion practice, 11 the lodging of expert reports on the
10 In Tigers Eye I we denied, on the authority of New Millennium Trading, LLC v. Commis-
sioner, 131 T.C. 275 (2008), participating partner’s partial summary judgment motion to invali-
date sec. 301.6221–1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan.
26, 1999). We thereby denied Mr. Logan and Logan Trust I the right in this partnership-level
proceeding to interpose their partner-level good faith/reasonable cause defenses under sec.
6664(c) to the accuracy-related penalties. We also granted respondent’s motion in limine to ex-
clude participating partner’s expert witness report on the reliability of a tax opinion on which
Mr. Logan, Logan Trust I, and Mr. Logan’s two other grantor trusts (collectively, Logan Trusts)
claim to have relied in preparing their 1999 Federal income tax returns.
In Tigers Eye I respondent also contended that Curtis Mallet Prevost Curt & Mosle (Curtis
Mallet)—the law firm that issued the tax opinion on which Mr. Logan and participating partner
claim to have relied in taking their 1999 Federal income tax return positions—was a promoter
of the transaction. In Tigers Eye I we also expressed the view that this promoter contention
raised a partnership-level issue that the Court could address at the trial; we also set forth our
views on the legal standard for determining promoter status. In 106 Ltd. v. Commissioner, 136
T.C. 67, 77–81 (2011), the Court, notwithstanding that in Tigers Eye I we had expressed those
views in dicta, adopted and applied those views in holding that the law firm that had issued
the tax opinion in the Son of BOSS transaction in that case was a promoter of the transaction
whose opinion could not be reasonably relied upon in good faith by the partnership or the tax-
payer.
Tigers Eye I concluded with an Afterword that deplored the inefficiency and waste of judicial
and party resources caused by the apparent splitting of the accuracy-related penalty cause of
action under TEFRA as amended by TRA 1997. That inefficiency and waste are exemplified by
the motions we have had to deal with in Tigers Eye I and by the continuing controversies in
Petaluma, the case at hand, and other Son of BOSS cases over whether the accuracy-related
penalties must or can be determined at the partnership level or the partner (individual tax-
payer) level.
We noted in Tigers Eye I that the IRS has initiated a response to the observed problems, rely-
ing on its authority under sec. 6231(c) to promulgate regulations with respect to special enforce-
ment areas if it determines that treating certain items as partnership items under TEFRA will
interfere with the effective and efficient enforcement of the revenue laws. The IRS has proposed
regulations, Notice of proposed rulemaking, sec. 301.6231(c)–9(c), Proposed Proced. & Admin.
Regs., 74 Fed. Reg. 7205 (Feb. 13, 2009), which, when and if promulgated, would enable the
Commissioner to convert partnership items to nonpartnership items in partnership cases involv-
ing listed transactions; invoking this procedure would have the salutary effect of providing for
‘‘one-stop shopping’’ through application of the traditional deficiency procedures to both defi-
ciencies and accuracy-related penalties in such transactions. See 1 William S. McKee et al., Fed-
eral Taxation of Partners and Partnerships, para. 10.02[4], at 10–16 (4th ed. 2007). We also
noted that the proposed regulations would not provide relief in the case at hand or the myriad
other pending Son of BOSS cases. The proposed regulations have not been finalized.
11 Including participating partner’s motion for partial summary judgment ‘‘regarding confirma-
Continued
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78 138 UNITED STATES TAX COURT REPORTS (67)
actual and expected financial consequences of the trans-
action, and the lodging and later filing of two extensive
stipulations of fact. 12 The undisputed factual material
thereby made available enables us to describe the operative
facts of the transaction. The extensive and detailed facts set
forth in Tigers Eye I are incorporated herein by this ref-
erence. In addressing the pending motion, we take account of
additional indisputable facts and repeat only the most perti-
nent facts set forth in Tigers Eye I.
The subject transaction was one of a number of such trans-
actions promoted by Sentinel Advisors, LLC (Sentinel), 13 the
tax matters partner, using a limited liability company—
Tigers Eye Trading, LLC (Tigers Eye), in the case at hand—
treated as a partnership for income tax purposes, as the
vehicle needed to create the claimed basis step-ups that were
the transaction’s reason for being. 14
tion of Code and caselaw as to contingent obligations’’. Participating partner sought a ruling
that Helmer v. Commissioner, T.C. Memo. 1975–160, requires a holding that ‘‘a contingent obli-
gation such as the Sold Euro Option each of the Logan Trusts sold to AIG falls short of a fixed
‘liability’ for section 752 and other federal income tax purposes’’. By order dated August 5, 2008,
we denied the motion for a variety of reasons.
12 On December 1, 2010, the day the stipulated decision was entered, the Court deemed moot
and discharged its order to show cause in response to respondent’s Rule 91(f) motion to show
cause why proposed facts in evidence (embodied in a proposed third stipulation of facts and Ex-
hibits 145–J through 155–J) should not be accepted as established.
13 Among the cases of Sentinel-promoted Son of BOSS transactions that have been filed in the
Court of Federal Claims are Jade Trading I; Evergreen Trading, LLC v. United States, 80 Fed.
Cl. 122 (2007), to which Nussdorf v. Commissioner, 129 T.C. 30 (2007), is related; and K2 Trad-
ing Ventures, LLC v. United States, 101 Fed. Cl. 365 (2011), to which Asuma Trading Ventures,
LLC v. Commissioner, infra, is related. Other cases of Sentinel-promoted transactions filed in
this Court include Sterling Trading Opportunities, LLC v. Commissioner, No. 12361–05, and
Topaz Trading, LLC v. Commissioner, No. 12629–05 (stip. decs. entered June 24, 2008); New
Millennium Trading, LLC v. Commissioner, No. 3439–06 (filed Feb. 16, 2006); Asuma Trading
Ventures, LLC v. Commissioner, No. 26772–06 (filed Dec. 27, 2006); Sapphire Traders, LLC v.
Commissioner, No. 19067–09 (filed Aug. 10, 2009); Eagle Trading Opportunities, LLC v. Com-
missioner, No. 9733–05 (stip. dec. entered Jan. 23, 2009); Pinnacle Trading Opportunities, LLC
v. Commissioner, No. 19291–05 (filed Oct. 14, 2005); and Oak Leaf Trading, LLC v. Commis-
sioner, No. 1896–06 (stip. dec. entered July 29, 2008). Stipulated decisions in Sterling and Topaz
are virtually identical to each other and to the decision in the case at hand in adjusting to zero
the same four items, in not expressly making an outside basis adjustment (which was expressly
made in the FPAA), in providing that the 40% penalty applies to underpayments of tax attrib-
utable to overstating capital contributions, and in providing that 20% negligence or substantial
understatement penalties apply to any additional underpayments. See also Diebold v. Commis-
sioner, T.C. Memo. 2010–238, in which Sentinel appears to have played a facilitating role in cre-
ating artificial losses claimed on the sale of corporate assets, resulting in a deficiency in Federal
corporation income tax and accuracy-related penalties not contested by the selling corporation.
14 Although the parties have stipulated the correctness of the determinations in the FPAA,
including that the existence of Tigers Eye was not established as a fact and that the trans-
actions in which it claimed to have participated should be disregarded in full, we use the terms
‘‘partnership’’, ‘‘partner’’, and related terms for convenience.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 79
During 1999 Mr. Logan realized a multimillion-dollar long-
term capital gain on his sale to a large Canadian financial
services holding company of his stock interest in a corpora-
tion he had cofounded to act as a distributor of variable
annuities.
Tigers Eye was a Delaware limited liability company
formed in late September 1999, ostensibly to engage in for-
eign currency trading but in reality to generate paper losses
to offset taxpayers’ otherwise taxable capital gains. On
October 1, 1999, the Logan Trusts each acquired a pair of off-
setting long and short foreign currency options through AIG,
which they then contributed along with cash to become part-
ners in Tigers Eye on October 9, 1999. The Logan Trusts
inflated their adjusted bases in Tigers Eye to reflect their
contributions of the long options without reducing those
bases to reflect Tigers Eye’s assumption of their obligations
under the short options. The basis inflation is premised on
(1) treating each purchased option separately from each sold
option, (2) each purchased option’s having a basis equal to
the gross premium in the hands of both the Logan Trusts
and Tigers Eye, (3) treating the assignment to and assump-
tion by Tigers Eye of the contingent obligation to satisfy the
sold option separately from the purchased option for pur-
poses of section 752, and (4) disregarding the contingent
obligation to satisfy the sold option in determining outside
basis in the partnership under the authority of Helmer v.
Commissioner, T.C. Memo. 1975–160.
An unrelated entity, the Batts Group, also acquired
interests in offsetting foreign currency options through AIG
that were transferred to Tigers Eye and also received other
property in liquidation of its interest in Tigers Eye. 15 We
refer to participants in offsetting options transactions with
partnerships such as the offsetting option transactions of the
Logan Trusts and the Batts Group with Tigers Eye as option
partners. In addition to Sentinel, the tax matters partner,
which contributed $3,000 cash, Tigers Eye also had as a
partner a foreign entity, Banque Safra-Luxembourg (Banque
Safra), which contributed $58,000 cash. Neither Sentinel nor
Banque Safra had any financial interest in the option trans-
15 The Batts Group settled its case with the IRS without any court proceeding. In the fol-
lowing description and discussion we will for the most part ignore the role of the Batts Group.
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80 138 UNITED STATES TAX COURT REPORTS (67)
actions, and neither has a stake in the outcome of this pro-
ceeding.
During December 1999 Sentinel caused Tigers Eye to
unwind or terminate the paired options at a net loss. 16 Sen-
tinel through Tigers Eye used the remaining cash contribu-
tions to purchase foreign currency (euro) and shares of listed
stock (Xerox Corp.) that were purportedly distributed to the
Logan Trusts in liquidation of their purported partnership
interests. The Logan Trusts claimed that they had hugely
inflated bases in Tigers Eye that attached to the foreign cur-
rency and stock Tigers Eye transferred to them (sometimes
referred to herein as the distributed property). They sold the
currency and stock before yearend 1999 and claimed huge
losses that flowed through to Mr. Logan’s 1999 Federal
income tax return. Mr. Logan used the claimed losses on the
sales of the foreign currency to offset his ordinary income,
and he used the claimed short-term losses on the sales of the
Xerox Corp. stock to offset most of the multimillion-dollar
long-term capital gain he realized on the sale of his stock
interest in the annuity distribution business. 17
On April 14, 2000, Tigers Eye filed a Form 1065, U.S.
Partnership Return of Income, for its 1999 taxable year. On
March 7, 2005, respondent issued an FPAA to the Tigers Eye
partners.
The FPAA comprises (1) Letter 1830, Notice of Final Part-
nership Administrative Adjustment, (2) Form 870–PT, Agree-
ment for Partnership Items and Partnership Level Deter-
minations as to Penalties, Additions to Tax, and Additional
16 Ignoring the various fees paid by the Logan Trusts and Mr. Logan to participate in the
transaction, the total outlay of the Logan Trusts to purchase their interests in the options and
to make their cash contributions was approximately $400,000. What is important for the
claimed basis inflation in the case at hand is that the premium on each option exceeded $9 mil-
lion and the exercise price of each option exceeded $200 million. However, the net premium the
Logan Trusts paid for each purchased option was only $95,003 more than the premium received
or receivable for the offsetting sold option. The net premium that Tigers Eye received from AIG
on the unwinding of each pair of options was $40,044.68, resulting in a total loss of $164,875
to the Logan Trusts on the unwinding of the options (($95,003 × 3 = $285,009) – ($40,044.68
× 3 = $120,134.04) = $164,874.96).
17 As compared with their total $400,000 outlay to acquire their interests in the paired options
and make their cash capital contributions, see supra note 16, the Logan Trusts received foreign
currency and shares of Xerox Corp. having combined cost and value of approximately $230,000,
of which approximately $14,000 was attributable to the foreign currency. The Logan Trusts
claimed an ordinary loss that they flowed through to Mr. Logan of approximately $1.7 million
on the sale of the foreign currency; Mr. Logan and the Logan Trusts claimed an aggregate basis
of more than $27 million in the Xerox Corp. shares, resulting in claimed losses of more than
$26 million on their sales.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 81
Amounts, including a Schedule of Adjustments, and (3) an
‘‘Exhibit A—Explanation of Items’’, setting forth respondent’s
other adjustments or determinations.
The Schedule of Adjustments adjusted to zero the following
five items:
A. Capital Contributions (Sched. M–2,
line 2) $698,595
B. Distributions of Property other than
Money (Sched. M–2, line 6b) 365,446
C. Outside Partnership Basis 24,500,059
D. Other Deductions (Sched. K, line 11) 11,314
E. Ordinary Income, Other Income
(Loss) (Sched. K, line 7) (242,186)
Items A, B, D, and E are each identified as the adjustment
of a line item on the Tigers Eye 1999 Form 1065. Item C
(Outside Partnership Basis) is not such an item and does not
correspond to any line item on the partnership return.
Unlike the item A, B, D, and E amounts, each of which is
identified as the adjustment of a line item on the Tigers Eye
1999 Form 1065, the item C amount does not appear on the
partnership return or on the Schedules K–1, Partner’s Share
of Income, Credits, Deductions, etc., of the partnership
return and sent to the partners.
Only two of the foregoing adjustments were to items
appearing on the partnership return that directly flowed
through to the returns of the Logan Trusts and thence to Mr.
Logan’s individual return. These two adjustments change to
zero two items that appeared on Schedule K of the partner-
ship return: ‘‘Other Deductions’’ of $11,314 (appearing on line
11, Schedule K, page 3, of the partnership return) and the
negative amount ‘‘($242,186)’’ reported for ‘‘Ordinary Income,
Other Income (Loss)’’ (on line 7, Schedule K, Partners’
Shares of Income, Credits, Deductions, etc., page 3, of the
partnership return). These line items were described in
greater detail in Statements 1 and 2 of the return,
reproduced below. 18 Statement 1, which attributes the nega-
18 Statements 1 and 2 reported as follows:
Continued
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82 138 UNITED STATES TAX COURT REPORTS (67)
tive figure –257,857 to ‘‘ORDINARY LOSS FROM SEC. 988 TRANS-
ACTIONS’’, thereby indicates that this negative figure included
the net loss claimed by Tigers Eye on the termination or
unwinding of the contributed paired options, as well as the
results of other foreign currency transactions. 19
The partnership return Schedules K–1 for the Logan
Trusts show that their respective shares of the entries on
lines 7 and 11 of Schedule K were a loss of $52,583 and other
deductions of $2,136, respectively, for a total loss of $157,749
and total other deductions of $6,408 that flowed from the
partnership return through the returns of the Logan Trusts
to Mr. Logan’s 1999 Federal income tax return. 20 Indeed, the
Form 1041, U.S. Income Tax Return for Estates and Trusts,
for each of the Logan Trusts reports a $55,278 nonpassive
loss from partnerships, which is within $600 of the $54,719
sum of the items allocated to each Logan Trust on lines 7
and 11. Mr. Logan’s 1999 individual Federal income tax
return, in three separate schedules entitled ‘‘1999 income
from passthroughs’’, shows a loss of $55,278 from ‘‘SCHEDULE
lllllllllllllllllllllll
llllllllllllllllllllllllllllllllllllllllllll
SCHEDULE K OTHER INCOME (LOSS) STATEMENT 1
llllllll
DESCRIPTION lllll
AMOUNT
NONPORTFOLIO SHORT–TERM CAPITAL GAIN (LOSS) 5,354
INTEREST INCOME 1,617
WITHDRAWAL FEES 8,700
ORDINARY LOSS FROM SEC. 988 TRANSACTIONS lllll
–257,857
TOTAL TO SCHEDULE K, LINE 7 –242,186
lllllllllllllllllllllll
llllllllllllllllllllllllllllllllllllllllllll
SCHEDULE K OTHER DEDUCTIONS STATEMENT 2
llllllll
DESCRIPTION lllll
AMOUNT
OPERATING EXPENSES lllll
11,314
TOTAL TO SCHEDULE K, LINE 11 lllll
11,314
19 Respondent’s proposed third stipulation of facts and Exhibits 145–J through 155–J, the sub-
jects of respondent’s Rule 91(f) motion, see supra note 12, would have conclusively established
that the option spreads were terminated at a net loss during December 1999 and that the loss
was included in the ‘‘ORDINARY LOSS FROM SEC. 988 TRANSACTIONS’’ that was claimed
on the partnership return. Our conclusion that the contributed paired options were terminated
or unwound during December 1999 is supported by the fact that Tigers Eye’s final return for
the year 2000, which showed Sentinel and Banque Safra to be the only partners, also showed
relatively small amounts of remaining assets (much less than the aggregate capital contribu-
tions of the Logan Trusts and the Batts Group), liabilities, and capital at the beginning of the
year, and relatively small losses and income from dispositions of assets and winding-up oper-
ations.
20 The differences between these figures and the gross amounts shown on Statements 1 and
2, see supra note 18, that were adjusted to zero by the FPAA were attributable to the Batts
Group’s participation in Tigers Eye.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 83
E ACTIVITY INCOME (LOSS)’’ for each of the Logan Trusts
($55,279 loss for Logan Trust II) for total ‘‘SCHEDULE E
INCOME OR (LOSS) FROM ESTATES OR TRUSTS STATEMENT 21
NONPASSIVE LOSS OF’’ $165,835.
Statement 6 on the partnership return, ‘‘PARTNERS’ CAPITAL
ACCOUNT SUMMARY’’, shows ‘‘Capital Contributed’’ and ‘‘With-
drawals’’ (the latter is identical to ‘‘Distributions of Property
Other Than Money’’) totaling $698,595 and $365,446, respec-
tively, that were also adjusted to zero by the FPAA.
The ‘‘Capital Contributions’’ of $698,595 shown by the
partnership return and zeroed out by the FPAA (and the
stipulated decision) was the sum of the cash contributed by
all the partners plus the net value of the paired options that
the Logan Trusts and the Batts Group had ostensibly
contributed to the partnership; this net value was arrived at
by netting the premiums on the long and short options. This
partnership return reporting differed from the inflated bases
claimed by the Logan Trusts through the tax shelter 21 in
that the option partners claimed bases in their partnership
interests that included the premiums on the long options
(amounting to more than $27 million, see supra note 17)
without reduction or offset for the liabilities represented by
the premiums on the short options.
The ‘‘Withdrawals’’ (‘‘Distributions of Property Other Than
Money’’) of $365,446 zeroed out by the FPAA was the book
value (the aggregate purchase price/cost) of the foreign cur-
rency and corporate shares purchased by Sentinel through
Tigers Eye on behalf of the Logan Trusts and the Batts
Group for distribution to them. 22 The Logan Trusts’ share of
21 Capital contributions are to be reported by a partnership at fair market value rather than
the cost or adjusted basis of the contributed property to the contributing partners, which is the
‘‘inside basis’’ of such property to the partnership under sec. 723. Secs. 1.704–1(b)(2)(iv)(b),
1.705–1(a)(1), Income Tax Regs.; see also Interhotel Co. v. Commissioner, T.C. Memo. 2001–151;
Mitchell v. Commissioner, T.C. Memo. 1997–382 n.5. Because of the short time (less than 1
month) between the option partners’ purchases of the option spreads and their contribution to
Tigers Eye, it seems likely that there was little difference between the purchase prices of the
option spreads and their fair market values when contributed to Tigers Eye. In any event, the
determination that Tigers Eye is not a partnership for Federal income tax purposes and the ad-
justment of capital contributions to zero by both the FPAA and the stipulated decision has had
the effects of denying the purported partnership any bases in the paired options and of dis-
allowing any partnership loss claimed by Tigers Eye for 1999 on the termination or unwinding
of the paired options and on any other foreign currency transactions.
22 Under sec. 732(a)(1) the basis of property (other than money) distributed to a partner in
a nonliquidating distribution is its cost to the partnership or its ‘‘inside basis’’, whereas, under
sec. 732(b), the basis of such property distributed to a partner in liquidation is an amount equal
Continued
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84 138 UNITED STATES TAX COURT REPORTS (67)
this cost amounted to approximately $230,000. See supra
note 17. The aggregate inflated ‘‘outside’’ bases claimed by
the Logan Trusts on the sales of foreign currency and Xerox
Corp. stock were more than 118 times greater than (11,800%
of) the withdrawals/distribution amounts reported on the
partnership return.
The ‘‘EXHIBIT A—Explanation of Items’’ made the following
additional adjustments or determinations: (1) Tigers Eye’s
existence as a partnership had not been established as a fact;
(2) Tigers Eye had no business purpose other than tax avoid-
ance, lacked economic substance, and was an economic sham
so that Tigers Eye and the transactions in which it claimed
to have participated should be disregarded in full; and (3)
Tigers Eye had been formed or availed of, within the
meaning of section 1.701–2, Income Tax Regs., for a principal
purpose of improperly reducing the partners’ Federal income
tax liabilities.
The Explanation of Items went on to make alternative
adjustments or determinations premised on regarding Tigers
Eye as a partnership that had received the paired foreign
currency options as contributions and assignments from the
option partners (the Logan Trusts and the Batts Group) and
thereafter distributed foreign currency and listed shares of
stock to them in liquidation of their partnership interests. In
that regard, the Explanation of Items determined that (1) the
partners ‘‘have not established [under section 723] adjusted
bases in their respective partnership interests in amounts
greater than zero’’; (2) ‘‘the purported partners of Tigers Eye
did not enter into the option positions and Tigers Eye did not
purchase the foreign currency or [listed] stock with a profit
motive for purposes of section 165(c)(2)’’; and (3) the obliga-
tions under the sold options should be netted against the
purchased options so that ‘‘any * * * claimed increases in
the outside bases in Tigers Eye resulting from the contribu-
tions of the sold [sic ‘‘purchased’’] options should be dis-
allowed’’. The alternative adjustments described in this para-
graph have been rendered inapplicable by the stipulated
decision’s adoption of the primary adjustments disregarding
to the distributee partner’s interest in the partnership; i.e., its ‘‘outside basis’’. Under sec. 988
and preexisting law, see Nat’l-Standard Co. v. Commissioner, 80 T.C. 551, 558 (1983), aff ’d, 749
F.2d 369 (6th Cir. 1984), foreign currency is generally considered property other than money
for Federal income tax purposes.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 85
the partnership described in the immediately proceeding
paragraph.
Finally, the Explanation of Items determined at the part-
nership level that accuracy-related penalties to be imposed at
the individual taxpayer level apply ‘‘to all underpayments of
tax attributable to adjustments of partnership items of
Tigers Eye Trading, LLC’’. The Explanation of Items went on
to state:
The penalty shall be imposed on the components of underpayment as fol-
lows:
A. a 40 percent penalty shall be imposed on the portion of any under-
payment attributable to the gross valuation misstatement as provided by
Sections 6662 (a), 6662(b)(3), 6662(e), and 6662(h) of the Internal Revenue
Code.
B. a 20 percent penalty shall be imposed on the portion of the under-
payment attributable to negligence or disregard of rules and regulation as
provided by Sections 6662(a), 6662(b)(1), 6662(c) of the Internal Revenue
Code.
C. a 20 percent penalty shall be imposed on the underpayment attrib-
utable to the substantial understatement of income tax as provided by sec-
tions 6662(a), 6662(b)(2), and 6662(d) of the Internal Revenue Code.
D. a 20 percent penalty shall be imposed on the underpayment attrib-
utable to the substantial valuation misstatement as provided by Sections
6662(a), 6662(b)(3), and 6662(e) of the Internal Revenue Code.
Sentinel, the tax matters partner, filed the petition in this
case but claims to have no direct financial interest in its out-
come. Mr. Logan, as trustee of Logan Trust I, 23 sought and
was granted leave to participate in this proceeding as partici-
pating partner. Mr. Logan, through his counsel, has wielded
the laboring oar and called the shots for the taxpayer
interests in this proceeding. 24
23 Participating partner had originally filed a refund suit (to recover a deposit of $18,898.93)
in the Court of Federal Claims, Tigers Eye Trading, LLC v. United States, No. 05–00864–LAS
(filed Aug. 4, 2005), contemporaneously with petitioner’s filing of the petition in the case at
hand. After the United States filed a motion to dismiss for lack of jurisdiction by reason of the
pendency of the case at hand, see sec. 6226(b)(2), participating partner began proceedings to par-
ticipate in the case at hand. This Court granted leave and recognized Logan Trust I’s status
as participating partner, see this Court’s order of Mar. 9, 2007, and the case in the Court of
Federal Claims was dismissed per order (Mar. 20, 2007). We would observe that Mr. Logan’s
deposit in the Court of Federal Claims case was an admission that the FPAA adjusted partner-
ship items on the Tigers Eye 1999 partnership return such that Mr. Logan’s Federal income
tax liability was increased thereby. See sec. 301.6226(e)–1T (a)(1), Temporary Proced. & Admin.
Regs., 52 Fed. Reg. 6788 (Mar. 5, 1987); see also sec. 301.6226(e)–1(a)(1), Proced. & Admin.
Regs.
24 On Oct. 6, 2009, after the filing of Tigers Eye I, participating partner filed a motion and
supporting memorandum for partial summary judgment regarding inapplicability of sec.
Continued
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86 138 UNITED STATES TAX COURT REPORTS (67)
Within a week before the scheduled trial, 25 the Court was
gratified to receive the stipulated decision document signed
by respondent’s counsel, by Sentinel, through Ari Bergmann,
trustee of the Bergmann Revocable Trust, tax matters
partner of Sentinel, tax matters partner of Tigers Eye, and
by Sentinel’s counsel. Participating partner through counsel
indicated no objection to entry of the decision. The decision
provides as follows:
ORDERED AND DECIDED: That the following statement shows the
adjustments to the partnership items of Tigers Eye Trading, LLC, for the
taxable year 1999:
Partnership Item As Reported As Determined
Ordinary Income, Other
Income (Loss) ($242,186) $-0-
Deductions, Other Deductions $11,314 $-0-
6662(h). In the motion and supporting memorandum, participating partner conceded that the
loss on the sale of the distributed stock and foreign currency was not allowed under sec.
465(b)(4) because it exceeded the amount at risk. The motion and memorandum and subsequent
filings made clear that by conceding the at-risk issue participating partner intended to take the
sec. 6662(h) 40% gross basis misstatement penalty out of play at both the partnership and part-
ner/individual levels. In attempting so to do, participating partner cited and relied on the opin-
ion of the Court of Federal Claims in Alpha I, L.P. v. United States, 84 Fed. Cl. 622, 634 (2008).
In orders dated November 6 and 18, 2009, respectively, we denied the motion for partial sum-
mary judgment and explained our view, citing Hambrose Leasing 1984–5 Ltd. P’ship v. Commis-
sioner, 99 T.C. 298 (1992), and Russian Recovery Fund, Ltd. v. United States, 81 Fed. Cl. 793
(2008), that at risk under sec. 465 is a partner-level issue on which the Court lacks jurisdiction
to accept a concession in a partnership-level proceeding such as the case at hand.
The importance of the 40% penalty to both the IRS and taxpayers in Son of BOSS cases is
shown by the repeated attempts by taxpayers to use concessions to take the penalty out of play.
See, e.g., Bergmann v. Commissioner, 137 T.C. 136 (2011), and Chief Counsel Notice CC–2012–
001 (Oct. 5, 2011), opposing the allowance of concessions to avoid imposition of valuation
misstatement penalties. See 199 Daily Tax Rept. (BNA) K–6 (Oct. 14, 2011). In a status report
filed November 13, 2009, in the case at hand respondent provided a list, with docket numbers,
of more than 40 Son of BOSS cases pending in the Tax Court in which respondent was asserting
both sec. 465 at risk (as an alternative position) and the 40% gross basis misstatement penalty.
In a previous filing, respondent had asserted that the aggregate amount of the 40% penalties
being asserted in such cases amounted to approximately $130 million, of which the 40% pen-
alties in five still-pending Sentinel-promoted Son of BOSS cases amounted to approximately $41
million.
25 Participating partner’s counsel informed the Court, in filings of October 26 and November
2, 2009, and in a recorded telephone conference of November 5, 2009, that participating partner
would not participate in the trial that had been set for a special session scheduled to commence
on November 30, 2010, in Washington, D.C. Participating partner’s counsel stated that it would
be futile and prohibitively expensive to have a trial in the partnership-level proceeding. Instead,
participating partner had decided to ‘‘pursue reasonable cause in the refund action consistent
with this Court’s ruling that it lacks jurisdiction over that reasonable cause’’. In the preamble
of our order of November 18, 2009, we urged participating partner to reconsider not partici-
pating in the trial; we ordered participating partner and petitioner to file a status report by
November 29, 2009, ‘‘informing the Court whether they intend to participate in the trial of this
case’’.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 87
Partnership Item As Reported As Determined
Distributions of Property
other than Money $365,446 $-0-
Capital Contributions $698,595 $-0-
It is determined that the notice of final partnership administrative
adjustment dated March 7, 2005, which is the subject matter of this case,
is correct.
It is determined that a 40 percent gross valuation misstatement penalty
under I.R.C. § 6662(a); (b)(3), (e) and (h) applies to any underpayment of
tax attributable to overstating the capital contributions claimed to have
been made to the purported partnership.
It is determined that a 20 percent penalty applies to any additional
underpayment of tax attributable to the foregoing partnership item adjust-
ments other than the capital contributions claimed to have been made to
the purported partnership, as such underpayment is attributable to neg-
ligence or disregard of rules or regulations under I.R.C. § 6662(a), (b)(1)
and (c) or a substantial understatement of income tax under I.R.C. §
6662(a), (b)(2) and (d).
On November 25, 2009, the Court issued an order striking
the case from the November 30, 2009, Washington, D.C., spe-
cial trial session. On December 1, 2009, the Court entered
the stipulated decision.
The Court’s gratification from receipt and entry of the
stipulated decision was short lived. On January 12, 2010, the
Court of Appeals for the D.C. Circuit issued Petaluma II.
One week later, on January 19, 2010, participating partner
filed the motion for leave to file a motion to revise the stipu-
lated decision and lodged the motion to revise decision. On
November 30, 2010, the Court granted leave and the motion
to revise decision was filed. 26 Participating partner asserts
that the Court must vacate and revise the stipulated decision
26 By October 2010 respondent became concerned that if the stipulated decision were not va-
cated, it would have already become final (on March 1, 2010) and the one-year period of limita-
tions under sec. 6229(d) for making computational adjustments and assessing any resulting defi-
ciency and accuracy-related penalties and/or issuing an affected items notice of deficiency would
expire on March 1, 2011. On November 30, 2010, we granted the motion for leave nunc pro tunc
as of the date it had been filed, January 19, 2010, and ordered the lodged motion to revise deci-
sion to be filed as of that date. As a result, the 90-day period for appeal of the stipulated deci-
sion under Fed. R. App. P. 13 does not commence to run until the motion to revise is granted
or denied and the one-year period of limitations under sec. 6229(d) is thereby extended. See
Nordvik v. Commissioner, 67 F.3d 1489, 1492 (9th Cir. 1995), aff ’g T.C. Memo. 1992–731; Simon
v. Commissioner, 176 F.2d 230 (2d Cir. 1949); Stewart v. Commissioner, 127 T.C. 109, 117
(2006).
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88 138 UNITED STATES TAX COURT REPORTS (67)
because it exceeds the jurisdictional limitations imposed by
Petaluma II.
Discussion
I. Introduction: Complexity of Income Tax Treatment of Part-
ners and Partnerships
A. Overview of Subchapter K
A partnership is not taxed as an entity, and its items of
income and loss flow through to its partners. Sec. 701. Part-
nerships are required to file annual information returns
reporting the partners’ distributive shares of income, deduc-
tions, and other partnership items. Sec. 6031. The individual
partners report their distributive shares of the partnership
items on their Federal income tax returns. Secs. 701–704.
The substantive law governing the income taxation of part-
ners is in subchapter K of chapter 1 of the Code (subchapter
K). Subchapter K creates a detailed and complex system of
rules for characterizing transactions between the partnership
and the partners, computing and/or characterizing partner-
ship income, assets, and liabilities, allocating those items
among the partners, and determining and making adjust-
ments to a partner’s basis (cost for tax purposes under sec-
tion 1012 except as otherwise provided in subchapter K) in
the partnership for his share of those items. The purpose of
subchapter K is ‘‘to permit taxpayers to conduct joint busi-
ness (including investment) activities through a flexible eco-
nomic arrangement without incurring an entity-level tax.’’
Sec. 1.701–2(a), Income Tax Regs.
B. TEFRA
1. In General
The unified audit and litigation procedural rules applicable
to partnerships and their partners were enacted by Congress
in the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA), Pub. L. No. 97–248, sec. 402, 96 Stat. at 648, and
amended by Congress in the Taxpayer Relief Act of 1997
(TRA 1997), Pub. L. No. 105–34, sec. 1238, 111 Stat. at
1026. 27 The TEFRA procedures are set forth in subchapter C
27 TEFRA as amended by TRA 1997 is an egregious example of ‘‘hyperlexis’’, see Bayless Man-
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 89
of chapter 63 of the Code. Under the TEFRA procedures all
partnership items, the proper allocation of those partnership
items among the partners, and the applicability of any pen-
alty, addition to tax, or additional amount that relates to an
adjustment to a partnership item are determined in a single
partnership-level proceeding. Sec. 6226. The determinations
of partnership items in partnership-level proceedings are
binding on the partners and may not be challenged in subse-
quent partner-level proceedings. See secs. 6230(c)(4), 7422(h).
2. TEFRA Penalty Litigation Structure Before TRA 1997
Before Congress enacted TRA 1997, any penalty, addition to
tax, or additional amount (collectively, penalty) related to
adjustment of a partnership item or items in a TEFRA pro-
ceeding at the partnership level was generally treated as an
affected item that required a factual determination in a sub-
sequent proceeding at the partner level. See N.C.F. Energy
Partners v. Commissioner, 89 T.C. 741, 744 (1987); sec.
301.6231(a)(5)–1T(d), Temporary Proced. & Admin. Regs., 52
Fed. Reg. 6790 (Mar. 5, 1987). Before Congress enacted TRA
1997, the Tax Court lacked jurisdiction in a partnership-level
proceeding to decide the applicability of partnership-item
penalties. See N.C.F. Energy Partners v. Commissioner, 89
T.C. at 744. Rather, partnership-item penalties were deter-
mined at the partner level as affected items in a deficiency
proceeding after the related partnership-level proceeding had
been completed. Procedurally, this made sense, inasmuch as
the ultimate liability of each individual partner depended,
almost invariably, upon his ability to sustain his individual
reasonable cause/good faith defenses under section 6664(c),
irrespective of whether the application of the penalty origi-
ning, ‘‘Hyperlexis: Our National Disease’’, 71 Nw. U. L. Rev. 767 (1977), and is discussed in the
tax context in Bayless Manning, ‘‘Hyperlexis and the Law of Conservation of Ambiguity’’, 36 Tax
Law. 9 (1982), and Gordon D. Henderson, ‘‘Controlling Hyperlexis—The Most Important ‘Law
and * * *’ ’’, 43 Tax Law. 177 (1989). See also Richard M. Lipton, ‘‘We Have Met the Enemy
and He is Us: More Thoughts on Hyperlexis’’, 47 Tax Law. 1 (1993); Walter D. Schwidetzky,
‘‘Hyperlexis and the Loophole’’, 49 Okla. L. Rev. 403 (1996). We would suggest that TEFRA as
amended by TRA 1997 has gone beyond the conservation of ambiguity described by Henderson,
supra, at 184–186, to its exponential augmentation. See generally Sidney I. Roberts, et al., ‘‘A
Report on Complexity And the Income Tax’’, 27 Tax L. Rev. 325 (1972), on the operation of
‘‘Gresham’s Law of Tax Practice’’, describing the role of tax practitioners who disregard profes-
sional standards of care, exemplified more recently by those who acted as promoters of Son of
BOSS transactions.
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90 138 UNITED STATES TAX COURT REPORTS (67)
nated from misconduct or failure of care at the partnership
or individual level.
3. TEFRA Penalty Litigation Structure After TRA 1997
TRA 1997 sec. 1238 made a comprehensive set of procedural
amendments to the regime for the determination of penalties
under TEFRA:
(1) By amending section 6221, TEFRA’s introductory juris-
dictional provision, to require the applicability of any part-
nership-item penalty to be determined at the partnership
level (‘‘Except as otherwise provided in this subchapter, the
tax treatment of any partnership item (and the applicability
of any penalty * * * which relates to an adjustment to a
partnership item) shall be determined at the partnership
level’’ (emphasis added));
(2) by amending and expanding section 6226(f), on the
scope of judicial review by the Tax Court, the Court of Fed-
eral Claims, or Federal District Courts with which a petition
to review an FPAA is filed, i.e., in a partnership-level pro-
ceeding, to provide that such court ‘‘shall have jurisdiction to
determine’’ not only all partnership items and their alloca-
tions among partners but also ‘‘the applicability of any pen-
alty * * * which relates to an adjustment to a partnership
item’’ (emphasis added);
(3) by amending section 6230(a)(2)(A)(i) to deprive the Tax
Court of jurisdiction to determine partnership-item penalties
in a partner-level deficiency proceeding (‘‘(A) Subchapter B
[sections 6211–6216 titled ‘‘Deficiency Procedures in the Case
of Income, Estate, Gift and Certain Excise Taxes’’] shall
apply to any deficiency attributable to—(i) affected items
which require partner-level determinations (other than pen-
alties * * * that relate to adjustments to partnership
items)’’);
(4) by adding section 6230(c)(1)(C), which allows a partner
to file a claim for refund on the ground that ‘‘the Secretary
erroneously imposed any penalty, addition to tax, or addi-
tional amount which relates to an adjustment to a partner-
ship item’’; and
(5) by amending section 6230(c)(4) to make conclusive the
partnership-level determination regarding the applicability of
any partnership-item penalty, but allowing the partner to
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 91
assert any ‘‘partner-level’’ defenses in the refund claim. This
amendment was added to and continued the provision of sec-
tion 6230(c)(4) that makes conclusive partnership-level
adjustments of partnership items that result in computa-
tional adjustments without the need for an affected items
notice of deficiency, but also allows those adjustments to be
challenged in a refund suit.
In its report underlying the amendments, the House Com-
mittee on Ways and Means provided the following expla-
nation:
Present Law
Partnership items include only items that are required to be taken into
account under the income tax subtitle. Penalties are not partnership items
since they are contained in the procedure and administration subtitle. As
a result, penalties may only be asserted against a partner through the
application of the deficiency procedures following the completion of the
partnership-level proceeding.
Reasons for Change
Many penalties are based upon the conduct of the taxpayer. With respect
to partnerships, the relevant conduct often occurs at the partnership level.
In addition, applying penalties at the partner level through the deficiency
procedures following the conclusion of the unified proceeding at the part-
nership level increases the administrative burden on the IRS and can
significantly increase the Tax Court’s inventory.
Explanation of Provision
The bill provides that the partnership-level proceeding is to include a
determination of the applicability of penalties at the partnership level.
However, the provision allows partners to raise any partner-level defenses
in a refund forum.
[H.R. Rept. No. 105–148, at 594 (1997), 1997–4 C.B. (Vol. 1) 319, 915–
916.]
The foregoing recitation of these TRA 1997 amendments to
TEFRA and their legislative history displays the common
theme that unites them. The recitation makes clear that the
applicability of the accuracy-related penalty or penalties that
relate to the adjustment of partnership items would hence-
forth be determined in the partnership-level proceeding to
determine the validity of the adjustments to partnership
items by the FPAA. No longer would application of accuracy-
related penalties be determined at the partner level by the
resolution of a partner-level affected-items deficiency pro-
ceeding. Nevertheless, for all the reasons discussed in the
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92 138 UNITED STATES TAX COURT REPORTS (67)
Afterword to Tigers Eye I, see supra two concluding para-
graphs of note 10, the TRA 1997 changes have spawned many
controversies concerning proper application of the TEFRA
procedural rules, particularly in Son of BOSS cases, including
the case at hand.
C. Attempted Exploitation by Tax Shelter Promoters of
Complex Interactions and Disconnects of Subchapter
K Substantive Rules and TEFRA Procedural Rules
The substantive and procedural rules applicable to the
income taxation of partners and partnerships are ‘‘distress-
ingly complex and confusing’’. 28 Rhone-Poulenc Surfactants
and Specialties, L.P. v. Commissioner, 114 T.C. 533, 539–540
(2000) (citing Foxman v. Commissioner, 41 T.C. 535, 551 n.9
(1964), aff ’d, 352 F.2d 466 (3d Cir. 1965)). That complexity
has proven to be easily exploited, and consequently, entities
classified as partnerships have become the vehicles of choice
in creating and operating abusive tax shelters. The difficulty
of applying the TEFRA partnership provisions in tax shelter
cases is evidenced—in addition to Petaluma and the case at
hand—by the opinions of the various trial courts and the
Courts of Appeals to which the cases were appealed. See, e.g.,
Jade Trading, LLC v. United States, 598 F.3d 1372, 1379–
1380 (Fed. Cir. 2010) (Jade Trading II), aff ’g in part, rev’g
in part and remanding on penalty issues 80 Fed. Cl. 11
(2007) (Jade Trading I), remanded to 98 Fed. Cl. 453 (2011)
(Jade Trading III), aff ’d, 451 Fed. Appx. 954 (Fed. Cir.
2012); LKF X Invs. LLC v. Commissioner, 106 A.F.T.R. 2d
(RIA) 2010–5003, 2010–1 U.S. Tax Cas. (CCH) para. 50,488
(D.C. Cir. 2010), aff ’g in part, rev’g and remanding on pen-
alty issues T.C. Memo. 2009–192; RJT Invs. X v. Commis-
sioner, 491 F.3d 732 (8th Cir. 2007); Desmet v. Commissioner,
581 F.3d 297 (6th Cir. 2009), aff ’g in part and remanding
Domulewicz v. Commissioner, 129 T.C. 11, 22 (2007),
remanded to T.C. Memo. 2010–177; New Millennium
Trading, LLC v. Commissioner, 131 T.C. 275, 279 (2008);
Hambrose Leasing 1984–5 Ltd. P’ship v. Commissioner, 99
28 A partnership is simultaneously considered to be an aggregation of individual partners (the
‘‘aggregate theory’’) and a separate entity (the ‘‘entity theory’’). The mixing of the aggregate and
entity theories by the substantive and procedural laws applicable to the income taxation of part-
ners and partnerships is a primary source of uncertainty in the application of those laws. Rhone-
Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 T.C. 533, 539–540 (2000).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 93
T.C. 298 (1992); Alpha I, L.P. v. United States, 93 Fed. Cl.
280, 326 (2010); Russian Recovery Fund, Ltd. v. United
States, 81 Fed. Cl. 793 (2008).
Abusive tax shelters are complex financial artifices which exploit two
fundamental weaknesses in the federal tax system: (1) the complexity of
the internal revenue laws and (2) the government’s inability by conven-
tional means to identify quickly and challenge abusive tax schemes. By
exploiting these weaknesses, tax shelter promoters precipitated a prolifera-
tion of abusive tax shelters and huge revenue losses to the federal govern-
ment.
* * * * * * *
* * * Congress could not draft provisions that anticipated every
colorable interpretation for fabricating a tax shelter. New tax shelter tech-
niques continued to develop unhindered by legislative efforts at contain-
ment.
[D. French Slaughter, ‘‘The Empire Strikes Back: Injunctions of Abusive
Tax Shelters After TEFRA’’, 3 Va. Tax Rev. 1, 6 (Summer 1983); fn. refs.,
citations, and quotation marks omitted.]
The above quotation was not only an accurate description of
past and present ills as of the time it was published—1983—
but also a forecast of future developments, as exemplified by
the Son of BOSS transactions that are central to the forma-
tion of the limited liability companies of Tigers Eye in the
case at hand and Petaluma in the Petaluma case; they are
a variation of the ‘‘bond and options sales strategy’’, which
the Commissioner regards as an abusive tax shelter, see
Notice 2000–44, 2000–2 C.B. 255, 256; supra note 1, and this
Court has repeatedly so held, see, e.g., Carpenter Family
Invs., LLC v. Commissioner, 136 T.C. 373, 375 (2011); 3K
Invs. Partners v. Commissioner, 133 T.C. 112, 113 n.2 (2009);
see also Kligfeld Holdings v. Commissioner, 128 T.C. 192, 194
(2007).
Taxpayers attempted to exploit the complexity of partner-
ship substantive tax law by using Son of BOSS transactions
to inflate artificially the basis of property ostensibly distrib-
uted by a partnership to the purported partners in liquida-
tion of their partnership interests. Those attempts exploited
the complexity of the TEFRA partnership procedural rules to
impede the Government’s ability to identify quickly and chal-
lenge abusive Son of BOSS transactions and to avoid the
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94 138 UNITED STATES TAX COURT REPORTS (67)
proper imposition of the accuracy-related penalties. 29 As a
result of those attempts, a disproportionate number of cases
under TEFRA have been devoted to procedural, jurisdictional,
and statute of limitations questions. 30 The diversion of
resources from the determination and collection of liabilities
for taxes, penalties, and interest has been substantial. See
supra note 1.
Application of the TEFRA provisions is the most ‘‘distress-
ingly complex and confusing’’ in tax shelter cases such as the
case at hand and Petaluma where the Commissioner takes
and sustains the primary position in the FPAA (and the par-
ties agree or the taxpayer concedes) that an entity pur-
porting to be a partnership is to be disregarded on grounds
of sham or lack of economic substance. In such cases the
entity is not a partnership for Federal income tax purposes,
the persons holding interests in the entity are not partners,
their interests in the entity are not interests in a partner-
ship, and the transactions between the entity and the
interest holders are not transactions between a partnership
and its partners. Consequently, the substantive provisions of
subchapter K simply do not apply to the entity, the persons
holding interests in the entity, or their transactions with the
entity and among themselves. However, pursuant to section
6233(a) and (b), the TEFRA procedural provisions applicable to
partnerships do apply ‘‘to the extent provided by regulations’’
to an entity that has filed a partnership return and to the
persons holding an interest in the entity even if it is not a
partnership for Federal income tax purposes or even ‘‘if it is
determined that there is no such entity’’. Sec. 301.6233–
1T(c), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6795
(Mar. 5, 1987).
29 TEFRA, particularly as revised by TRA 1997, is fiendishly complicated. Significant proce-
dural problems arise from the complexity introduced by two levels of proceedings under TEFRA
as amended by TRA 1997—the partnership level and the partner level. There are situations in
which the two levels fail to fit perfectly together or the Commissioner’s auditing agents are un-
able to discern which positions are properly raised at the partnership level in the FPAA or dur-
ing the partnership-level court proceeding rather than at the partner level in a ‘‘free-standing’’
notice of deficiency (issued without regard to any FPAA), an affected items notice of deficiency,
or during the attendant court proceedings, and vice versa. These situations have allowed or cre-
ated the potential for taxpayers to escape liabilities for tax deficiencies and penalties that would
have been due if the Commissioner had asserted the correct arguments and positions at the cor-
rect level. See, e.g., Domulewicz v. Commissioner, 129 T.C. 11 (2007), aff ’d sub nom. Desmet v.
Commissioner, 581 F.3d 297 (6th Cir. 2009), remanded to T.C. Memo. 2010–177.
30 See, for example, cases cited infra note 37 on proper application of the six-year statute of
limitations under secs. 6229(c)(2) and 6501(e)(1)(A) to substantial omissions from gross income.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 95
The complexity of the TEFRA provisions in a case where an
entity purporting to be a partnership is disregarded as such
begins with sections 6226(f) and 6233, which govern the Tax
Court’s jurisdiction in partnership-level proceedings. Our
jurisdiction to enter the stipulated decision as written also
begins with those statutory provisions.
II. Jurisdiction Under TEFRA When Entity Filing Partner-
ship Return Is Not a Partnership or Does Not Exist
A. TEFRA Procedures Apply When Entity That Filed Part-
nership Return Is Not a Partnership or Does Not Exist:
Sections 6226(f) and 6233
Generally, in partnership-level proceedings we have juris-
diction under section 6226(f) to determine all partnership
items of the partnership for the partnership taxable year to
which the FPAA relates, and we are not limited to the part-
nership items adjusted in the FPAA. Sec. 301.6226(f)–1T,
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6788 (Mar.
5, 1987). We also have jurisdiction to determine the proper
allocation of those partnership items among the partners and
the applicability of any penalty, addition to tax, or additional
amount that relates to an adjustment to a partnership item.
Sec. 6226(f).
The TEFRA procedures and our jurisdiction in TEFRA pro-
ceedings are not limited to partnership items of valid busi-
ness entities recognized as partnerships for Federal tax pur-
poses. Pursuant to section 6233 and the regulations promul-
gated thereunder, if an entity that has filed a partnership
return is determined not to be a partnership or not to exist,
the TEFRA partnership procedures (statutory and regulatory)
will apply to the entity, its items, and persons holding an
interest in the entity. Sec. 301.6233–1T(a), (c), Temporary
Proced. & Admin. Regs., supra. In such a case, the Court has
jurisdiction to make the determinations that the entity is not
a partnership and/or that it does not exist as well as deter-
minations with respect to all items of the entity that would
be partnership items, as defined in section 6231(a)(3) and
section 301.6231(a)(3)–1, Proced. & Admin. Regs., if the
entity had been a partnership. Sec. 301.6233–1T(a), (c), Tem-
porary Proced. & Admin. Regs., supra.
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96 138 UNITED STATES TAX COURT REPORTS (67)
Generally, a valid business entity having two or more
owners is taxed as either a corporation or a partnership.
However, an entity that merely acts as nominee and agent
for its owners may be disregarded as a separate business
entity. Cf. Commissioner v. Bollinger, 485 U.S. 340, 344–345
(1988). In such a case, the Court may determine that the
entity does not exist and is neither a corporation nor a part-
nership, but the TEFRA procedures will still apply in accord-
ance with section 6233(b) and section 301.6233–1T(c), Tem-
porary Proced. & Admin. Regs., supra.
When Congress enacted the TEFRA procedures and the Sec-
retary first promulgated the temporary regulations, there
were frequent controversies over whether an unincorporated
business entity with two or more owners (often a limited
partnership) was properly classified as a corporation or a
partnership for Federal tax purposes under section
301.7701–2, Proced. & Admin. Regs., in effect at that time.
Section 301.6233–1T(a), Temporary Proced. & Admin. Regs.,
supra, focuses on the resolution of such controversies and, if
the entity is properly taxable as a corporation, gives the
Court jurisdiction in the TEFRA proceeding to determine the
taxable income of the corporation, which will also ‘‘serve as
a basis for a computational adjustment reflecting the dis-
allowance of any loss of credit claimed by a purported
partner with respect to that entity.’’ 31 However, the proce-
dures under section 6233 are not limited to controversies
regarding the proper classification of an entity as a corpora-
tion or as a partnership. Section 6233(b) and section
301.6233–1T(c), Temporary Proced. & Admin. Regs., supra,
give the Court jurisdiction in the partnership-level pro-
ceeding to determine that an entity that filed a partnership
return does not exist. 32 If the Court determines that the
entity does not exist or is deemed not to exist, the non-
31 Controversies involving the proper classification of a multimember business entity were vir-
tually eliminated in 1996 when the Secretary issued new classification regulations, sec.
301.7701–3, Proced. & Admin. Regs., commonly referred to as the ‘‘check-the-box’’ regulations.
Under the ‘‘check-the-box’’ regulations a business entity with two or more members is classified
as a partnership for Federal income tax purposes, absent an election to be treated as a corpora-
tion. Sec. 301.7701–3(a) and (b), Proced. & Admin. Regs.
32 That situation might arise, for example, where an entity purporting to be a legal entity
under State law, such as a limited liability company or a limited partnership, was never formed
under State law. It could also arise where, as in Petaluma and the case at hand, the entity,
although legally formed under State law, is deemed not to exist for Federal income tax purposes
because it is a sham, has no real business purpose, and merely acts as nominee and agent for
its owners. Cf., e.g., Commissioner v. Bollinger, 485 U.S. 340, 344–345 (1988).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 97
existent or disregarded entity will be treated as an entity
that filed a partnership return, and section 301.6233–1T(a),
Temporary Proced. & Admin. Regs., supra, will apply. The
Court must then determine whether the entity is nonetheless
a partnership for Federal income tax purposes. 33 If the
Court determines that it is not, the Court has jurisdiction to
make determinations with respect to all items of the entity
that would be partnership items, as defined in section
6231(a)(3) and section 301.6231(a)(3)–1, Proced. & Admin.
Regs., if the entity had been a partnership.
B. Jurisdiction To Determine Items of Disregarded Entity:
Section 301.6233–1T(a) and (c), Temporary Proced. &
Admin. Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987)
Section 6233 provides that if a partnership return is filed
for a taxable year but it is determined that no partnership
exists, the TEFRA procedures still apply to the entity, its
items, and persons holding an interest in the entity, to the
extent provided in the regulations. In such a case, the TEFRA
temporary regulations applicable to Tigers Eye’s 1999 tax-
able year provide that the Court may make determinations
with respect to all items of the entity (entity items) that
‘‘would be partnership items, as defined in section 6231(a)(3)
and the regulations thereunder [section 301.6231(a)(3)–1,
Proced. & Admin. Regs.], if * * * [it] had been a partner-
ship’’. Sec. 301.6233–1T(a), Temporary Proced. & Admin.
Regs., supra. Further, the TEFRA temporary regulations pro-
vide:
Paragraph (a) of this section shall apply where a partnership return is
filed for a taxable year but it is determined that there is no entity for such
taxable year. For purposes of applying paragraph (a) of this section, the
partnership return shall be treated as if it was filed by an entity. [Sec.
301.6233–1T(c), Temporary Proced. & Admin. Regs., supra.]
See also sec. 301.6233–1(a), (d), Proced. & Admin. Regs.,
supra (applicable for taxable years beginning on or after
October 4, 2001).
33 For example, a limited partnership or limited liability company that does not legally exist
because it was not properly formed under State law might nonetheless be deemed to be a gen-
eral partnership because the partners or members have conducted transactions as general part-
ners of the purported entity.
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98 138 UNITED STATES TAX COURT REPORTS (67)
A partnership item is an item that is (1) required to be
taken into account under any provision of subtitle A, gov-
erning income taxes, and (2) identified by the Secretary in
the regulations as ‘‘more appropriately determined at the
partnership level’’. Sec. 6231(a)(3). 34 In section
301.6231(a)(3)–1, Proced. & Admin. Regs., the Secretary
identified the items that are ‘‘more appropriately determined
at the partnership level than at the partner level and, there-
fore, are partnership items’’.
Section 301.6231(a)(3)–1(a)(1)(i), Proced. & Admin. Regs.,
provides that partnership items include the partnership
aggregate and each partner’s share of items of income, gain,
loss, deduction, or credit of the partnership. Partnership
items also include ‘‘the legal and factual determinations that
underlie the determination of the amount, timing, and
characterization of items of income, credit, gain, loss, deduc-
tion, etc.’’ Sec. 301.6231(a)(3)–1(b), Proced. & Admin. Regs.
The existence of a valid partnership is a partnership item.
First, it must be taken into account in computing a pur-
ported partner’s income taxes. ‘‘ ‘When filling out individual
tax returns, the very process of calculating an outside basis,
reporting a sales price, and claiming a capital loss following
a partnership liquidation presupposes that the partnership
was valid.’ ’’ Petaluma II, 591 F.3d at 653 (quoting RJT Invs.
X v. Commissioner, 491 F.3d at 736). Second, the existence
of a valid partnership ‘‘is a sine qua non for determining the
amount and characterization of all other partnership items.’’
Id. The legal and factual determinations underlying the
Court’s determination that the entity is not a partnership
and/or does not exist will determine the character of the
items of income, credit, gain, loss, and deduction of the
entity. Thus the legal or factual determination that estab-
lishes the existence or nonexistence of a partnership is an
item that the Secretary has identified as being more appro-
priately decided at the partnership level than at the partner
level. Id.
34 Sec. 6231(a)(3) defines the term ‘‘partnership item’’ as follows:
(3) PARTNERSHIP ITEM.—The term ‘‘partnership item’’ means, with respect to a partnership,
any item required to be taken into account for the partnership’s taxable year under any provi-
sion of subtitle A to the extent regulations prescribed by the Secretary provide that, for purposes
of this subtitle, such item is more appropriately determined at the partnership level than at
the partner level.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 99
The determination that an entity is not a partnership
because it is an association taxable as a corporation or
because it was merely the nominee or agent for its owners
is such a legal or factual determination and is a ‘‘partnership
item’’ that the Court has jurisdiction to decide in the partner-
ship-level proceeding. The classification of the entity as a cor-
poration or as a nominee-agent will determine the character
of the items of income, credit, gain, loss, and deduction of the
entity. Thus, if the Court determines that the entity that
filed a partnership return is not a partnership but is an
association taxable as a corporation, entity items would
include amounts taxable to the entity as a corporation. Sec.
301.6233–1T(a), Temporary Proced. & Admin. Regs., supra. If
the Court determines that an entity is a nominee-agent for
the purported partners, the items of the entity will be
directly attributable to them.
‘‘[D]etermining whether there is a valid partnership nec-
essarily controls whether there can be partnership income,
partnership gain, partnership losses, and so forth.’’ Petaluma
II, 591 F.3d at 653. If the Court has determined that an
entity that filed a partnership return is not a partnership
and/or does not exist, there is no partnership income, part-
nership gain, or partnership loss. The items of the entity are
not properly characterized as those of a partnership. The
regulations provide that the Court’s determination that an
entity that filed a partnership return is not a partnership
and is taxable as a corporation ‘‘will serve as a basis for a
computational adjustment reflecting the disallowance of any
loss or credit claimed by a purported partner with respect to
that entity’’. Sec. 301.6233–1T(a), Temporary Proced. &
Admin. Regs., supra. Because that section of the temporary
regulation also applies to entities that do not exist, the deter-
mination that the entity is deemed not to exist and is not a
partnership for Federal tax purposes will also serve as a
basis for a computational adjustment reflecting the disallow-
ance of any loss or credit claimed by a purported partner
with respect to that entity. Notably, the regulation does not
limit the computational adjustment to the disallowance of
the purported partner’s share of ‘‘partnership loss or credit’’
that flowed through to his return from the partnership
return; the regulation extends the permissible computational
adjustment to the disallowance of ‘‘any loss or credit claimed
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100 138 UNITED STATES TAX COURT REPORTS (67)
by a purported partner with respect to that entity’’. (Emphasis
added.) Such a loss or credit, because it would be ‘‘with
respect to that entity’’, would include a loss claimed on the
sale or liquidation of the partner’s purported partnership
interest in the entity or on his sale of property purportedly
distributed to him in liquidation of his partnership interest
in the entity. Thus the Court has jurisdiction in the partner-
ship-level proceeding to determine that items of the entity
that purport to be partnership items do not exist and to
adjust all such items to zero so that a computational adjust-
ment can be made to reflect the disallowance of any loss or
credit claimed by a purported partner with respect to the
entity.
C. Jurisdiction To Determine Applicability of Any Penalty
That Relates to Adjustment of Entity Item: Section
6226(f)
If the Court determines that an entity that filed a partner-
ship return is not a partnership, the TEFRA provisions,
including section 6226(f), apply. Sec. 301.6233–1T(a), Tem-
porary Proced. & Admin. Regs., supra. Pursuant to section
6226(f) the Court has jurisdiction to determine the applica-
bility of any penalty that relates to an adjustment to a part-
nership item.
III. Jurisdiction To Enter Stipulated Decision as Written
With Respect to Partnership Items
A. Provisions of the Stipulated Decision
The first decision paragraph in the stipulated decision
gives specific effect to four of the five scheduled adjustments
made by the FPAA: Loss, Other Deductions, Distributions of
Property Other Than Money, and Capital Contributions,
omitting any reference to ‘‘Outside Partnership Basis’’. The
$242,186 loss and the $11,314 of other deductions flowed
directly through to the purported partners’ returns. The defi-
ciencies resulting from those adjustments do not require any
facts to be determined in a partner-level proceeding. There-
fore respondent may assess those deficiencies and the pen-
alties applicable thereto without sending a statutory notice of
deficiency.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 101
The third and fourth decision paragraphs apply accuracy-
related penalties to any underpayment of tax attributable to
the specified adjustments of partnership items made by the
first decision paragraph. The third decision paragraph
applies the 40% gross valuation (basis) misstatement penalty
to the portion of any underpayment attributable to the gross
valuation misstatement, as provided by section 6662(a),
(b)(3), (e), and (h), attributable to overstating the capital con-
tributions claimed to have been made to the purported part-
nership. The fourth decision paragraph provides that any
additional underpayment of tax that may be attributable to
the adjustments to zero of the loss, other deductions, and dis-
tributions is attributable to negligence or disregard of rules
or regulations under section 6662(a), (b)(1), and (c) or a
substantial understatement of income tax under section
6662(a), (b)(2), and (d) and applies the 20% penalty to that
underpayment.
By the second decision paragraph stating that the FPAA is
correct the parties adopt and incorporate all determinations
made in the FPAA, including the initial FPAA determination
that Tigers Eye is disregarded for Federal income tax pur-
poses. Notwithstanding that the first and third decision para-
graphs omit any reference to ‘‘Outside Partnership Basis’’,
the parties agree that the second decision paragraph, in
determining that the FPAA is correct, implicitly upholds the
FPAA’s adjustment of outside partnership basis to zero and
the application of the 40% penalty to the portion of any
underpayment attributable to the gross valuation
misstatement as provided by section 6662 (a), (b)(3), (e), and
(h). Consequently, the 40% penalty will apply to the portion
of the underpayment attributable to the gross misstatement
of basis in the distributed property (the basis participating
partner claimed was its outside basis in its partnership
interest in Tigers Eye). 35
35 This interpretation of the stipulated decision, agreed to by the parties before the Court of
Appeals for the D.C. Circuit issued Petaluma II, is consistent with the holding of Petaluma I
that the Court has jurisdiction in the partnership-level proceeding to determine outside basis
and the applicability of penalties thereto, and the positions taken by the parties in addressing
participating partner’s motion to revise the stipulated decision.
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102 138 UNITED STATES TAX COURT REPORTS (67)
B. Disregard of Tigers Eye
By the second decision paragraph of the stipulated deci-
sion, the parties have agreed and the Court has decided that
the FPAA that is the subject matter of this case is correct. The
decision upholds the initial FPAA determination that the part-
nership is a sham, lacks economic substance, and is dis-
regarded for Federal income tax purposes. Thus, the stipu-
lated decision reflects the parties’ agreement that for Federal
income tax purposes Tigers Eye does not exist and is not a
partnership. Pursuant to section 6233 and the regulations
thereunder, we have jurisdiction to make those determina-
tions as well as determinations with respect to all items of
Tigers Eye that would be partnership items, as defined in
section 6231(a)(3) and section 301.6231(a)(3)–1, Proced. &
Admin. Regs., if it had been a partnership. Pursuant to sec-
tion 301.6233–1T(a) and (c), Temporary Proced. & Admin.
Regs., supra, the TEFRA procedures apply to Tigers Eye, its
items, and all persons holding interests in Tigers Eye, and
the Court has jurisdiction under section 6226(f) to determine
the applicability of any penalty that relates to an adjustment
to an item of Tigers Eye. That conclusion is consistent with
the holding of the Court of Appeals in the Petaluma case.
Petaluma II, 591 F.3d at 652–654; Petaluma I, 131 T.C. at
92–97.
C. Items of Tigers Eye
The Court has jurisdiction to make determinations with
respect to all of Tigers Eye’s items, including the legal and
factual determinations that underlie the determination of the
amount, timing, and characterization of items of income,
credit, gain, loss, and deduction related to the transactions
conducted by Tigers Eye. See sec. 301.6233–1T(a), (c), Tem-
porary Proced. & Admin. Regs., supra; sec. 301.6231(a)(3)–
1(b), Proced. & Admin. Regs. The determination that Tigers
Eye is a sham and lacks economic substance is a factual
determination that underlies the characterization of items of
income, gain, and loss related to its transactions. Because
Tigers Eye is a sham and had no real business purpose, it
merely acted as nominee and agent for the option partners
and the items related to the transactions involving the option
spreads and purchases and distribution of stock and foreign
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 103
currency are characterized as such. Cf. Commissioner v.
Bollinger, 485 U.S. at 344–345. We have jurisdiction to make
those factual and legal determinations in this partnership
(entity)-level proceeding and to determine the items of Tigers
Eye that resulted from its acting as nominee or agent for the
option partners.
We also have jurisdiction to determine that items that pur-
port to be partnership items do not exist and to adjust all
such items to zero so that a computational adjustment can
be made to reflect the disallowance of any loss or credit
claimed by a purported partner with respect to the non-
existent Tigers Eye partnership. The items reported on the
partnership return that were adjusted to zero in the first
decision paragraph are such items.
D. First Decision Paragraph
By the first decision paragraph, the loss, deductions, cap-
ital contributions, and distributions reported by Tigers Eye
on the partnership return are items adjusted to zero. Tigers
Eye’s purported partners claimed their proportionate shares
of the loss and deductions on their returns. The option part-
ners also claimed huge losses on the sale of the distributed
property, which they characterized as property distributed to
them in liquidation of their interests in a partnership
purportedly acquired by contributing property to the pur-
ported partnership. The parties’ agreement to the Court’s
determination that Tigers Eye is not a partnership for Fed-
eral income tax purposes ‘‘will serve as a basis for a com-
putational adjustment reflecting the disallowance of any loss
claimed by a purported partner with respect to that entity’’
(emphasis added), i.e., Tigers Eye, including the loss claimed
on the sale of property purported to have been distributed to
a purported partner on liquidation of a nonexistent partner-
ship interest in Tigers Eye. See sec. 301.6233–1T(a), Tem-
porary Proced. & Admin. Regs., supra. Pursuant to section
6233 and its implementing regulation, we have jurisdiction to
determine that all items of Tigers Eye purported to be part-
nership items are adjusted to zero. The loss, other deduc-
tions, capital contributions, and distributions are identified
in section 301.6231(a)(3)–1(a)(1)(i), (4), Proced. & Admin.
Regs., as partnership/entity items that the Secretary deter-
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104 138 UNITED STATES TAX COURT REPORTS (67)
mined are more appropriately decided at the partnership
level than at the partner level.
1. Partnership Loss and Deductions
The Secretary determined in section 301.6231(a)(3)–
1(a)(1)(i), Proced. & Admin. Regs., that the partnership
aggregate and each partner’s share of items of income, gain,
loss, deduction, or credit of the partnership are partnership
items more appropriately determined at the entity level. The
$242,186 partnership loss and the $11,314 partnership other
deductions are partnership items. We have jurisdiction to
determine that, because Tigers Eye is not a partnership,
Tigers Eye did not have any partnership loss or partnership
deductions. See sec. 301.6233–1T(a), Temporary Proced. &
Admin. Regs., supra. Thus, we have jurisdiction to adjust to
zero the $242,186 loss and the $11,314 deduction, as pro-
vided in the first decision paragraph of the stipulated deci-
sion.
2. Contributions and Distributions
In section 301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs.,
the Secretary decided that items relating to contributions to
the partnership and distributions from the partnership are
partnership items
to the extent that a determination of such items can be made from deter-
minations that the partnership is required to make with respect to an
amount, the character of an amount, or the percentage interest of a
partner in the partnership, for purposes of the partnership books and
records or for purposes of furnishing information to a partner * * *
Thus, the Secretary decided that items related to contribu-
tions to the partnership and distributions from the partner-
ship that the partnership is required to determine for its
books and records or for providing information to its partners
are partnership items.
a. Items Related to Contributions
In section 301.6231(a)(3)–1(c)(2), Proced. & Admin. Regs.,
the Secretary provided the following illustrations of addi-
tional determinations the partnership is required to make for
purposes of its books and records or for purposes of fur-
nishing information to a partner that relate to contributions:
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 105
(2) Contributions.—For purposes of its books and records, or for purposes
of furnishing information to a partner, the partnership needs to determine:
(i) The character of the amount received from a partner (for example,
whether it is a contribution, a loan, or a repayment of a loan);
(ii) The amount of money contributed by a partner;
(iii) The applicability of the investment company rules of section 721(b)
with respect to a contribution; and
(iv) The basis to the partnership of contributed property (including nec-
essary preliminary determinations, such as the partner’s basis in the
contributed property).
To the extent that a determination of an item relating to a contribution
can be made from these and similar determinations that the partnership
is required to make, therefore, that item is a partnership item. To the
extent that the determination requires other information, however, that
item is not a partnership item. * * *
Under the regulation, for purposes of keeping its books and
records and providing information to the option partners as
a purported partnership, Tigers Eye was required to deter-
mine (1) the amount of money and (2) the character and
basis of the paired options received from the purported part-
ners. Tigers Eye needed to determine its basis in the paired
options in order to compute the losses realized on the
unwinding of the option spreads, which were part of the loss
claimed on the partnership return. In determining the basis
of the paired options, Tigers Eye needed to determine each
partner’s basis in the contributed property, including the
amount of the liabilities to which the property was subject.
Partnership items include the partnership aggregate and
each partner’s share of partnership liabilities, including
determinations as to the amounts of the liabilities, whether
the liabilities are nonrecourse, and increases or decreases
during the taxable year. Sec. 301.6231(a)(3)–1(a)(1)(v),
Proced. & Admin. Regs.
Tigers Eye was also required to determine the contribu-
tions for purposes of determining the partners’ percentage
interests in the purported partnership, the partners’ shares
of the partnership loss and deductions, and the amounts to
which the purported partners were entitled on the purported
liquidation of their interests.
Tigers Eye was required to make the same determinations
for purposes of its books and records and providing informa-
tion to the option partners with respect to the money and
property it received in conducting the transactions as
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106 138 UNITED STATES TAX COURT REPORTS (67)
nominee or agent for the option partners. Tigers Eye needed
to account for expenses it incurred on behalf of the option
partners, the amounts received and expended on the
unwinding of the paired options, and the costs of the foreign
currency and stock purchased on behalf of the option part-
ners. Tigers Eye needed to provide that information to the
option partners so that they could report their gain or loss
on the unwinding of the paired options and determine their
bases in the foreign currency and stock purchased on their
behalves.
b. Items Related to Distributions
In section 301.6231(a)(3)–1(c)(3), Proced. & Admin. Regs.,
the Secretary provided the following illustrations of addi-
tional determinations the partnership is required to make for
purposes of its books and records, or for purposes of fur-
nishing information to a partner that relate to distributions:
(3) Distributions.—For purposes of its books and records, or for purposes
of furnishing information to a partner, the partnership needs to determine:
(i) The character of the amount transferred to a partner (for example,
whether it is a distribution, a loan, or a repayment of a loan);
(ii) The amount of money distributed to a partner;
(iii) The adjusted basis to the partnership of distributed property; and
(iv) The character of partnership property (for example, whether an item
is inventory or a capital asset).
To the extent that a determination of an item relating to a distribution can
be made from these and similar determinations that the partnership is
required to make, therefore, that item is a partnership item. To the extent
that the determination requires other information, however, that item is
not a partnership item. Such other information would include those factors
used in determining the partner’s basis for the partnership interest that
are not themselves partnership items, such as the amount that the partner
paid to acquire the partnership interest from a transferor partner if that
transfer was not covered by an election under section 754.
Under the regulation, for purposes of keeping its books and
records and providing information to the option partners as
a purported partnership, Tigers Eye needed to determine the
character of the amount distributed to an option partner; i.e.,
that it was a distribution in liquidation of the partner’s
interest in the purported partnership. Having made that
determination, Tigers Eye needed to determine the amounts
to be distributed to the purported partners on liquidation of
their interests. Tigers Eye needed to select the property to be
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 107
distributed, determine its basis in the property, and remove
it as an asset on its books. Tigers Eye needed to provide that
information to the option partners so that they could prop-
erly determine their bases in the distributed property.
Tigers Eye was required to make the same determinations
for purposes of its books and records and providing informa-
tion to the option partners with respect to the property it
distributed to them in conducting the transactions as
nominee or agent on their behalves. Tigers Eye was required
to determine the character of property distributed to an
option partner; i.e., that it was a distribution of the property
Tigers Eye purchased as nominee or agent of the option part-
ners. Having made that determination, Tigers Eye needed to
identify the property to be distributed, determine its basis in
the property, and account for it on its books. Tigers Eye
needed to provide that information to the option partners so
that they could properly determine their bases in the distrib-
uted property.
3. Adjustment of Items to Zero
Because Tigers Eye is not a partnership for Federal income
tax purposes, it had no partnership items, there was no part-
nership loss, and there were no partnership deductions, no
contributions to the purported partnership, and no distribu-
tions from a partnership to its purported partners. Adjust-
ment of those items to zero is appropriate. The loss, deduc-
tions, capital contributions, and distributions that are
adjusted to zero pursuant to the first decision paragraph are
partnership items that this Court has jurisdiction to decide
under section 6233 and section 301.6233–1T(a), Temporary
Proced. & Admin. Regs., supra.
E. Second Decision Paragraph
By the second decision paragraph the parties adopt and
incorporate all determinations made in the FPAA, including
the disregard of Tigers Eye, the adjustment of outside basis
to zero, and the application of the 40% penalty to the under-
payment attributable to gross valuation/basis misstatement.
Participating partner asserts that under Petaluma II the
Court does not have jurisdiction to decide outside basis or
the applicability of the 40% penalty to an underpayment of
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108 138 UNITED STATES TAX COURT REPORTS (67)
tax attributable to an overstatement of the basis in the
distributed property, which participating partner attributed
to its outside basis in the partnership. Participating partner
concludes, therefore, that the Court must revise the second
decision paragraph accordingly. However, for the reasons set
forth below, we conclude that the option partners’ bases in
the distributed property as well as their outside bases (or
lack thereof) in their purported partnership interests are
partnership/entity items of Tigers Eye that we have jurisdic-
tion under sections 6233 and 6231(a)(3) and their regulations
to decide in this partnership/entity-level proceeding.
1. Basis in Property Distributed by Disregarded Entity
Pursuant to section 6233 and its regulation, we have juris-
diction to determine the items of Tigers Eye acting as
nominee for the option partners. Tigers Eye was required to
make determinations for purposes of its books and records
and for providing information to the option partners with
respect to the transactions it conducted as nominee or agent
on their behalves.
An option partner is required to take his basis in the
distributed property into account in computing his gain or
loss on the sale of the property and computing his income tax
taking into account that gain or loss. The Secretary has
determined in section 301.6231(a)(3)–1(a)(4), Proced. &
Admin. Regs., that items relating to distributions that the
partnership is required to make for purposes of its books and
records or for providing information to a partner are ‘‘more
appropriately determined at the partnership level’’ and are
partnership items. The regulation specifically provides that,
for purposes of its books and records and providing informa-
tion to a partner, the partnership needs to determine ‘‘[t]he
adjusted basis to the partnership of distributed property’’.
Sec. 301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin. Regs.
Tigers Eye needed to account for the money it received
from the option partners, the expenses it incurred on behalf
of the option partners, the amounts received and spent on
the receipt and unwinding of the paired options, and the cost
of the foreign currency and stock purchased on behalf of the
option partners. Tigers Eye needed to provide that informa-
tion to the option partners so that they could properly report
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 109
their gain or loss on the unwinding of the paired options and
determine their bases in the foreign currency and stock pur-
chased on their behalves. Tigers Eye was required to deter-
mine the character of property distributed to an option
partner; i.e., that it was a distribution of the property Tigers
Eye purchased as nominee or agent on behalf of the option
partners. Tigers Eye needed to identify the property to be
distributed, determine its basis in the property (which, in
view of its nominee-agent status, is participating partner’s
basis in the property) and account for the property on its
books. Because Tigers Eye did not separately account for the
transactions on behalf of the various option partners, the
items are entity items (partnership items) that we have juris-
diction to decide in this entity/partnership-level proceeding.
Although the FPAA Schedule of Adjustments adjusted part-
nership distributions to zero, it did not mention or make any
specific adjustment to the bases of the foreign currency and
stock received by the option partners. However, pursuant to
section 6226(f), regardless of whether the Commissioner
specifically made adjustments in the FPAA, the Court has
jurisdiction to determine ‘‘all partnership items of the part-
nership for the partnership taxable year to which the notice
of FPAA relates, the proper allocation of such items among
the partners, and the applicability of any penalty, addition to
tax, or additional amount which relates to an adjustment to
a partnership item’’. Tigers Eye’s basis in the foreign cur-
rency and stock (which is participating partner’s basis) is a
partnership/entity item we have jurisdiction to decide in this
case. See sec. 301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin.
Regs. Participating partner acknowledges that the distribu-
tions reported on the partnership return filed by Tigers Eye
is Tigers Eye’s cost basis in the distributed property. Thus,
the distributions shown on the Schedule K–1 issued to each
option partner is Tigers Eye’s cost basis in the property
distributed to such partner.
2. Outside Basis
Participating partner and petitioner agree that the second
decision paragraph, in determining that the FPAA is correct,
upholds the FPAA’s adjustment of outside partnership basis to
zero. Participating partner asserts that the stipulated deci-
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110 138 UNITED STATES TAX COURT REPORTS (67)
sion must be revised because under Petaluma II this Court
lacks jurisdiction to make adjustments to outside basis. How-
ever, for the reasons set forth below, we do not believe the
holding of the Court of Appeals on that issue in Petaluma II
serves as binding precedent under the intervening opinion of
the Supreme Court in Mayo Found. for Med. Educ. &
Research v. United States, 562 U.S. ll, 131 S. Ct. 704
(2011), and the recently filed opinion of the Court of Appeals
for the D.C. Circuit, Intermountain Ins. Serv. of Vail, LLC v.
Commissioner, 650 F.3d 691 (D.C. Cir. 2011).
a. Petaluma Superseded by Mayo Found. and Inter-
mountain: TEFRA Regulations Must Be Applied
The adjustments made in the Tigers Eye FPAA are similar
to those made in the Petaluma FPAA. 36 In Petaluma I the
Tax Court held that (1) the partnership was a sham and was
disregarded for Federal tax purposes; (2) the purported part-
ners had no bases in their interests in the disregarded part-
nership; and (3) a valuation misstatement penalty under sec-
tion 6662(b)(3) applied to underpayments related to the gross
misstatement of the partners’ outside bases. In deciding the
second issue, the Court held that although in some cases a
partner’s outside basis may be an affected item, under the
regulations defining partnership items the outside basis of
the Petaluma partners was a partnership item the Court had
jurisdiction in the partnership-level proceeding to decide.
In Petaluma II, the Court of Appeals affirmed the
Petaluma I holding that the determination that the partner-
ship is a sham and is disregarded for Federal tax purposes
is a partnership item the Tax Court has jurisdiction to decide
in the partnership-level proceeding. In so doing, the Court of
Appeals held that the Tax Court’s jurisdiction in the case
was governed by section 6233. The Court of Appeals then
meticulously applied section 6231(a)(3) and the regulations
36 The FPAA in Petaluma, although more detailed in some respects, is substantially similar
to the FPAA in the case at hand, both with respect to the adjustments, including outside basis,
capital contributions, and distributions of property other than money, and the Exhibit A—Expla-
nation of Items. However, the adjustments in Petaluma do not include any other partnership
items that would directly flow through from the partnership return to the returns of the part-
ners to create any deficiency. Unlike the case at hand, the FPAA adjustments in Petaluma do
not include the zeroing out of an overall loss; it is a small amount of net income that is zeroed
out. Nor do the adjustments in Petaluma zero out or even refer to an ‘‘Other Deductions’’ item.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 111
thereunder to decide that the existence or nonexistence of a
partnership is a partnership item.
Next, contrary to the Tax Court’s holding in Petaluma I
that under the regulations outside basis was a partnership
item, the Government conceded that outside basis was not a
partnership item. The Court of Appeals accepted the Govern-
ment’s concession without any discussion of section 6233 or
6231 or the regulations under section 6231 upon which the
Tax Court had relied. The Government argued that the Tax
Court had jurisdiction in the partnership proceeding to deter-
mine the partners’ outside bases as affected items whose ele-
ments are determined mainly from partnership items. The
Court of Appeals rejected that argument and held that the
Tax Court did not have jurisdiction in the partnership pro-
ceeding to determine the partners’ outside bases, an affected
item, despite the disregard of the partnership. Consequently,
the Court of Appeals agreed with Petaluma that ‘‘since the
Tax Court lacked jurisdiction to determine outside basis, it
also lacks jurisdiction to determine that penalties apply with
respect to outside basis because those penalties do not relate
to an adjustment to a partnership item’’. Petaluma II, 591
F.3d at 655.
After Petaluma II was issued, the Supreme Court in Mayo
Found., 562 U.S. ll, 131 S. Ct. 704, made it clear that Fed-
eral courts must defer to regulations interpreting the Code
that satisfy the two-step Chevron standard. See Chevron,
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
842–843 (1984). More recently, in Intermountain Ins. Serv. of
Vail, LLC v. Commissioner, 650 F.3d at 691, the Court of
Appeals for the D.C. Circuit held that the deference given to
regulations under Mayo Found. requires the Court to apply
the definitions of statutory terms provided in valid TEFRA
regulations rather than follow earlier caselaw.
The jurisdictional holdings of Petaluma II on outside basis
and accuracy-related penalties have their genesis in the
Government’s concession that outside basis was not a part-
nership item. The Court of Appeals summarily accepted that
concession without any reference to section 301.6233–1T,
Temporary Proced. & Admin. Regs., supra, or section
301.6231(a)(3)–1, Proced. & Admin. Regs. In contrast, the
Court of Appeals discussed and applied sections 6233 and
6231(a)(3), section 301.6233–1T(a), Temporary Proced. &
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112 138 UNITED STATES TAX COURT REPORTS (67)
Admin. Regs., supra, and section 301.6231(a)(3)–1, Proced. &
Admin. Regs., in affirming our holding in Petaluma I that
disregard of the partnership is a partnership item.
Because the Court of Appeals did not consider the regula-
tion in concluding in Petaluma II that outside basis is an
affected item, we believe that its decision on the outside
basis issue in Petaluma II has been superseded by the inter-
vening opinions of the Supreme Court in Mayo Found. and
the Court of Appeals in Intermountain. Intermountain
requires us to apply the TEFRA regulations rather than follow
any contrary holding in Petaluma II, unless we hold the
regulation to be invalid under the two-step Chevron standard
as mandated by the Supreme Court in Mayo Found.
If, under the applicable regulations, outside basis can be a
partnership item, as we believe it to be generally, and more
particularly when the entity is disregarded for Federal
income tax purposes, acceptance of the Government’s conces-
sion effectively invalidates the regulation. Consequently, we
will follow the Supreme Court’s command in Mayo Found.
and apply the TEFRA regulations rather than hold them
invalid or inapplicable. In determining the validity of a regu-
lation, we are not bound to follow Petaluma II where the
Court of Appeals did not specifically consider the applica-
bility of the regulation in deciding the issue. See Inter-
mountain Ins. Serv. of Vail, LLC v. Commissioner, 650 F.3d
at 702. We begin by identifying the factors that determine
outside basis in a valid partnership, so as to set the stage for
the corresponding analysis that applies when the partnership
is disregarded.
b. Determination of Outside Basis: General Rule Under Sec-
tion 705(a)
Section 705(a) states the general rule for determining the
adjusted basis of a partner’s interest in a partnership. In rel-
evant part, section 705(a) provides that the adjusted basis of
a partner’s interest in a partnership is his original basis as
determined under section 722 (relating to contributions to a
partnership) or section 742 (relating to transfers of partner-
ship interests) increased by (1) the amount of money and his
basis in property subsequently contributed to the partnership
and (2) his distributable share of the income of the partner-
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 113
ship and decreased (but not below zero) by (1) the amount of
money and the partnership’s adjusted basis in property
distributed to the partner in a nonliquidating distribution to
the partner and (2) his distributable shares of partnership
losses and expenditures. Secs. 705(a), 722, 732(a). The
original outside basis of a partner who obtains an interest in
a partnership by contribution to the partnership is equal to
the amount of money contributed plus his adjusted basis in
any property contributed. Sec. 722; sec. 1.722–1, Income Tax
Regs. The original outside basis of a partner who obtains his
interest in the partnership by purchase is his cost basis
equal to the purchase price. Sec. 742; sec. 1.742–1, Income
Tax Regs.
The partnership’s assumption of a partner’s liability and a
reduction of a partner’s share of the liabilities of the partner-
ship are treated as distributions of money. Sec. 752(b). The
partner’s assumption of a liability of the partnership and an
increase in a partner’s share of the liabilities of the partner-
ship are treated as contributions of money. Id. If, as a result
of a single transaction, a partner incurs both an increase and
a decrease in his share of partnership liabilities, only the net
increase is treated as a contribution or the net decrease is
treated as a distribution. Sec. 1.752–1(f), Income Tax Regs.
Thus, if property contributed to the partnership is subject to
indebtedness or if liabilities of the partner are assumed by
the partnership, the increase and decrease in the partner’s
basis from the deemed contributions and distributions of
money are netted and the contributing partner’s outside
basis is reduced by the portion of the indebtedness allocated
to the other partners. Sec. 1.722–1, Income Tax Regs.
The provisions governing the determination of outside
basis are intended to equate the aggregate of the partner-
ship’s inside bases in its assets with the aggregate of its
partners’ outside bases in their partnership interests. Salina
P’ship LP v. Commissioner, T.C. Memo. 2000–352 (citing 1
William S. McKee et al., Federal Taxation of Partnerships
and Partners, par. 6.01, at 6–3 (3d ed. 1997)). The carryover-
basis rule in section 722 generally results in a matching of
inside and outside bases upon the formation of a partnership.
See Coloman v. Commissioner, 540 F.2d 427, 429 (9th Cir.
1976), aff ’g T.C. Memo. 1974–78. The adjustments to basis
to account for income and expenses from partnership oper-
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114 138 UNITED STATES TAX COURT REPORTS (67)
ations under section 705(a) generally preserve the equiva-
lence of inside and outside bases. Id. Finally, the practical
impact of the basis adjustment prescribed in section 752(a)
to reflect increases and decreases in a partner’s share of
partnership liabilities has been described as follows:
If a partnership borrows money, the basis of its assets increases by the
amount of cash received, even though the receipt of the borrowed funds is
not income. By treating the partners as contributing cash in an amount
equal to their shares of the debt, inside/outside basis equality is preserved
and distortions are avoided. If a liability for borrowed money were not
added to the partners’ bases, they could be taxed on a distribution of the
borrowed cash even though there is no gain inherent in the partnership’s
assets. A similar result could occur if a partnership incurs a purchase
money liability to acquire property, since the liability is added to the part-
nership’s basis in the property. [1 McKee, supra, para. 7.01[1], at 7–2.]
See Laney v. Commissioner, 674 F.2d 342, 345–346 (5th Cir.
1982), aff ’g in part, rev’g in part on another ground T.C.
Memo. 1979–491. The preamble to section 1.752–1T, Tem-
porary Income Tax Regs., 53 Fed. Reg. 53143 (Dec. 30, 1988),
states in pertinent part:
The allocation of partnership liabilities among the partners serves to
equalize the partnership’s basis in its assets (‘‘inside basis’’) with the part-
ners’ bases in their partnership interests (‘‘outside basis’’). The provision
of additional basis to a partner for the partner’s partnership interest will
permit the partner to receive distributions of the proceeds of partnership
liabilities without recognizing gain under section 731, and to take deduc-
tions attributable to partnership liabilities without limitation under sec-
tion 704(d) (which limits the losses that a partner may claim to the basis
of the partner’s interest in the partnership). By equalizing inside and out-
side basis, section 752 simulates the tax consequences that the partners
would realize if they owned undivided interests in the partnership’s assets,
thereby treating the partnership as an aggregate of its partners.
The determination of the partners’ shares of partnership
liabilities under section 752 is also complex, requiring a
determination of each partner’s liability for recourse debt and
the proper allocation of nonrecourse debt. See secs. 1.752–1
through 1.752–5, Income Tax Regs.
c. Determination of Outside Basis: Alternative Rule Under
Section 705(b)
Section 705(b) authorizes the Secretary to prescribe regula-
tions under which the adjusted basis of a partner’s interest
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 115
in a partnership may be determined by reference to the part-
ner’s proportionate share of the adjusted basis of partnership
property that would be distributable upon a termination of
the partnership. The regulations promulgated to implement
this section, see sec. 1.705–1(b), Income Tax Regs., provide
that an alternative method (alternative rule) may be used in
circumstances where (a) a partner cannot practicably apply
the general rule set forth in section 705(a) and section 1.705–
1(a), Income Tax Regs., or (b) from a consideration of all the
facts, the Commissioner reasonably concludes that the result
will not vary substantially from the result obtainable under
the general rule.
d. Outside Basis Is a Partnership Item
Under section 6231(a)(3), a partnership item must be (1)
required to be taken into account for the partnership’s tax-
able year under any provision of subtitle A, governing income
taxes, and (2) identified by regulation as ‘‘more appropriately
determined at the partnership level’’.
i. Required To Be Taken Into Account Under Subtitle A
‘‘A partner is required to determine the adjusted basis of
his interest in a partnership only when necessary for the
determination of his tax liability or that of any other person.’’
Sec. 1.705–1(a)(1), Income Tax Regs. The regulation provides
that it is necessary to determine a partner’s outside basis (1)
at end of a taxable year to determine the extent to which the
partner may deduct his share of partnership loss or deduc-
tions and (2) on the date of sale or liquidation of his interest
in the partnership. Id.
As the Court of Appeals stated in deciding that the validity
of a partnership is a partnership item in Petaluma II, 591
F.3d at 653:
We have little difficulty concluding that application of the income tax
provisions of Subtitle A to the tax liability of a taxpayer who receives
income from a purported partnership entails a determination of the
validity of that partnership. As the Eighth Circuit has stated, ‘‘When
filling out individual tax returns, the very process of calculating an outside
basis, reporting a sales price, and claiming a capital loss following a part-
nership liquidation presupposes that the partnership was valid.’’ RJT
Investments X v. Comm’r, 491 F.3d 732, 736 (8th Cir. 2007). Thus the first
requirement of the test is met. [Emphasis added.]
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116 138 UNITED STATES TAX COURT REPORTS (67)
Outside basis is required to be taken into account in com-
puting the income tax liability from the sale of property
purportedly received by the taxpayer from a partnership in
liquidation of his interest in the purported partnership. Thus
the first requirement of section 6231 is satisfied.
ii. More Appropriately Determined at the Partnership Level:
Outside Basis Determined Under the General Rule
Under statutory authority, the Secretary has decided that
items related to contributions to the partnership and dis-
tributions from the partnership that the partnership is
required to determine for its books and records or for pro-
viding information to its partners are partnership items. Sec.
301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs. The Secretary
has also decided that, to the extent that a determination of
an item relating to contributions and distributions can be
made from the determination of contributions, distributions,
and similar determinations that the partnership is required
to make, that item is a partnership item. Sec. 301.6231(a)(3)–
1(c)(2) and (3), Proced. & Admin. Regs. Conversely, to the
extent that the determination of such an item requires other
information, that item is not a partnership item. Id.
The regulation recognizes that a partner’s basis in his
partnership interest is an item relating to distributions and,
in many instances, that the determination of that outside
basis under the general rule of section 705(a) may be made
solely from the determination of contributions, distributions,
and similar determinations that the partnership is required
to make—the partner’s share of items of partnership income,
credit, loss, deduction, and liabilities. If the partner has
contributed property to the partnership that is subject to
indebtedness, the contributing partner’s outside basis is
reduced by the portion of the indebtedness allocated to the
other partners. Sec. 1.722–1, Income Tax Regs. Determina-
tion of the amounts and nature of those liabilities, whether
they are nonrecourse or contingent, and each partner’s share
of each liability is a partnership item. Sec. 301.6231(a)(3)–
1(a)(v), Proced. & Admin. Regs. A partner’s share of partner-
ship liabilities is determined under the complex regulations
promulgated under section 752. Section 1.752–4(d), Income
Tax Regs., requires a partner’s share of liabilities to be cal-
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 117
culated only when necessary to determine the tax liability of
the partner, such as at the end of the partnership taxable
year or when a partner sells or liquidates his partnership
interest. The partnership is required to inform the partners
of their shares of partnership liabilities so the partners can
determine the extent to which they may deduct their shares
of partnership loss or deductions and determine the amounts
of deemed distributions or contributions of money from any
increase or decrease in their shares of the partnership liabil-
ities. In those circumstances, outside basis is a partnership
item.
Under the regulation, a partner’s outside basis is not a
partnership item (i.e., it is an affected item) only when and
to the extent the determination requires other information.
Sec. 301.6231(a)(3)–1(c)(3), Proced. & Admin. Regs. ‘‘Such
other information would include those factors used in deter-
mining the partner’s basis for the partnership interest that
are not themselves partnership items.’’ Id. (emphasis added).
Examples of such factors would include the amount the
partner paid to acquire his partnership interest from a trans-
feror partner and that the transfer was not covered by an
election under section 754. Sec. 301.6231(a)(3)–1(c)(2) and
(3), Proced. & Admin. Regs.
When a partner acquires an interest in the partnership by
purchase, the partnership may make optional adjustments to
the basis of partnership property if an election is made under
section 754. Under section 301.6231(a)(3)–1(a), Proced. &
Admin. Regs., the optional adjustment, including the deter-
mination of the partner’s initial cost basis in the partnership,
is a partnership item, and the determination of the partner’s
adjusted outside basis can be made from the determination
of distributions, contributions, and similar determinations,
including the partner’s initial cost basis, that the partnership
is required to make. In that case, the partner’s adjusted out-
side basis is a partnership item under the regulation. If no
election is made under section 754, the determination of the
partner’s initial basis is not one that the partnership is
required to make. Pursuant to section 301.6231(a)(3)–1(a),
Proced. & Admin. Regs., to the extent the determination of
the partner’s adjusted basis requires information regarding
the amount paid for the interest, it is not a partnership item.
To that extent, it is an affected item. See sec. 301.6231(a)(5)–
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118 138 UNITED STATES TAX COURT REPORTS (67)
1T(b), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790
(Mar. 5, 1987).
iii. More Appropriately Determined at the Partnership
Level: Outside Basis Determined Under Alternative
Rule
When a partner’s outside basis is determined under the
alternative rule of section 705(b), his basis is equal to his
share of the adjusted basis of partnership property that
would be distributable to him upon termination of the part-
nership. If the partnership makes a distribution to a partner
in liquidation of the partner’s interest in the partnership, the
partnership’s basis in the distributed property is a partner-
ship item. Sec. 301.6231(a)(3)–1(c)(3), Proced. & Admin.
Regs. The determination of outside basis under the alter-
native rule of section 705(b) may be made solely from the
determination of distributions that the partnership is
required to make when property is distributed in liquidation
of a partner’s interest in the partnership. In determining the
amount of the distribution, the partnership must determine
the partner’s interest in the partnership and identify the
property to be distributed and its basis in the property for
purposes of its books and records and for providing informa-
tion to the partner. Thus, when outside basis is determined
under the alternative rule, it is a partnership item.
iv. More Appropriately Determined at the Partnership
Level: Outside Basis When the Partnership Is
Disregarded
Section 301.6231(a)(3)–1(c)(1), Proced. & Admin. Regs.,
explicitly states that the illustrations therein are not exhaus-
tive; there may be additional determinations of items
relating to contributions and distributions that the partner-
ship is required to make for purposes of its books and records
or providing information to its partners. The partnership’s
existence for Federal income tax purposes is a determination
the partnership is required to make that also relates to the
proper tax treatment of contributions and distributions. If, as
here, the parties agree and the Court determines on grounds
of sham or lack of economic substance that the entity is not
a partnership, then the purported partners are not partners
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 119
and never acquired any interests in a partnership and the
transactions between the entity and the purported partners
are not treated as transactions between a partnership and its
partners. If the partnership does not exist for Federal tax
purposes, it follows that there were no contributions from a
partner to a partnership, no distributions from a partnership
to a partner, no items of partnership income, partnership
deduction, or partnership loss, no partnership liabilities or
partnership property, nor any adjusted basis in partnership
property. Solely from these determinations, it can be deter-
mined with absolute certainty that there can be no outside
basis in the nonexistent partnership interest. No additional
facts are required to determine the absence of an outside
basis, and no additional facts could possibly alter that conclu-
sion. That being the case, the above regulation makes outside
basis (or the lack thereof) a partnership item if the partner-
ship is disregarded. Indeed, in holding that the determina-
tion of the existence of a valid partnership is a partnership
item, the Court of Appeals for the D.C. Circuit observed in
Petaluma II that ‘‘ ‘the very process of calculating an outside
basis, reporting a sales price, and claiming a capital loss fol-
lowing a partnership liquidation presupposes that the part-
nership was valid.’ ’’ Petaluma II, 591 F.3d at 653 (quoting
RJT Invs. X v. Commissioner, 491 F.3d at 736 (emphasis
added)).
Moreover, pursuant to section 301.6233–1T(a), Temporary
Proced. & Admin. Regs., supra, the determination that the
entity is not a partnership serves as a basis for a computa-
tional adjustment reflecting the disallowance of any loss or
credit claimed by a purported partner with respect to that
entity, including the losses reported by the option partners
on their sales of property purported to have been distributed
to them in liquidation of their purported partnership
interests. We have jurisdiction under section 6233 and its
regulations to make all adjustments of items necessary to
make that computational adjustment, including taking
account of the absence of outside basis by adjusting it to zero.
e. Misapplication of Dial USA, Inc. v. Commissioner
Citing Dial USA, Inc. v. Commissioner, 95 T.C. 1, 4–6
(1990), and section 301.6231(a)(5)–1T(b), Temporary Proced.
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120 138 UNITED STATES TAX COURT REPORTS (67)
& Admin. Regs., supra, this Court has held in some cases
that a partner’s basis in his partnership interest is an
affected item. See, e.g., Meruelo v. Commissioner, 132 T.C.
355, 367 (2009); Gustin v. Commissioner, T.C. Memo. 2002–
64. However, the cited regulation does not define partnership
item; it defines affected items and provides that ‘‘A partner’s
basis in his interest in the partnership is an affected item to
the extent it is not a partnership item.’’ Sec. 301.6231(a)(5)–
1T(b), Temporary Proced. & Admin. Regs. (emphasis added).
None of the immediately above-cited cases examined the
antecedent regulation defining ‘‘partnership item’’ to deter-
mine the extent to which or the circumstance in which a
partner’s basis in his partnership interest is a partnership
item.
Moreover, Dial involved the Court’s jurisdiction to deter-
mine subchapter S items at the corporate level under the uni-
fied subchapter S audit and litigation provisions of the Sub-
chapter S Revision Act of 1982 (SSRA), Pub. L. No. 97–354,
sec. 4(a), 96 Stat. at 1691. The SSRA provisions, enacted
shortly after TEFRA and set forth at former sections 6241
through 6245, have since been repealed by the Small Busi-
ness Job Protection Act of 1996, Pub. L. No. 104–188, sec.
1307(c)(1), 110 Stat. at 1781, applicable to tax years begin-
ning after December 31, 1996. Under SSRA, the TEFRA provi-
sions that relate to partnership items and the judicial deter-
mination of partnership items were made applicable to sub-
chapter S items except to the extent modified or made inappli-
cable by regulations. Sec. 6244. Subchapter S items were
defined in section 6245 as ‘‘any item of an S corporation to
the extent regulations prescribed by the Secretary provide
that, for purposes of this subtitle such item is more appro-
priately determined at the corporate level than the share-
holder level.’’ The Secretary identified subchapter S items in
section 301.6245–1T, Temporary Proced. & Admin. Regs., 52
Fed. Reg. 3003 (Jan. 30, 1987). The subchapter S items in
that regulation are very similar to the partnership items
identified in section 301.6231(a)(3)–1T, Temporary Proced. &
Admin. Regs., supra, and they include items relating to con-
tributions and distributions to the extent they can be made
from those determinations and similar determinations that
the corporation is required to make. The respective regula-
tions, however, are markedly different from each other with
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 121
respect to a shareholder’s basis in the S corporation and a
partner’s basis in his partnership interest. The flush lan-
guage of section 301.6245–1T(c)(3), Temporary Proced. &
Admin. Regs., 52 Fed. Reg. 3004 (Jan. 30, 1987), provides:
To the extent that the determination requires other information, however,
that item is not a subchapter S item. Such other information would
include the determination of a shareholder’s basis in the shareholder’s stock
or in the indebtedness of the S corporation to the shareholder. [Emphasis
added.]
By contrast, the flush language of section 301.6231(a)(3)–
1(c)(3), Proced. & Admin. Regs., provides:
To the extent that that determination requires other information, however,
that item is not a partnership item. Such other information would include
those factors used in determining the partner’s basis for the partnership
interest that are not themselves partnership items, such as the amount that
the partner paid to acquire the partnership interest from a transferor
partner if that transfer was not covered by an election under section 754.
[Emphasis added.]
Thus, the SSRA regulations defining subchapter S items modi-
fied the TEFRA regulations that relate to partnership items,
making the determination of outside basis a partnership item
under certain circumstances inapplicable to subchapter S
items. The shareholder’s basis in the S corporation stock was
solely an affected item. By contrast, a partner’s basis in the
partnership is an affected item only ‘‘to the extent it is not
a partnership item.’’ Sec. 301.6231(a)(5)–1T(b), Temporary
Proced. & Admin. Regs., supra. Section 6244 made the TEFRA
provisions that relate to partnership items and the judicial
determination of partnership items applicable to subchapter
S items. There is no statute or regulation that makes the S
corporation provisions applicable to partnerships. Con-
sequently, the holding in Dial that the shareholder’s basis in
the stock of the corporation is not a subchapter S item is
inapplicable to the issue of the extent to which or cir-
cumstance in which a partner’s outside basis is or may be a
partnership item.
An S corporation, like a partnership, is a passthrough
entity, and pursuant to section 1366(a)(1) a shareholder must
take into account his or her pro rata share of the S corpora-
tion’s items of income, loss, deduction, or credit. However, an
S corporation is not considered an aggregate of its share-
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122 138 UNITED STATES TAX COURT REPORTS (67)
holders—it is merely a small corporation that has elected to
have its income taxed to its shareholders rather than at the
corporate level. For that reason the provisions governing the
determination of a shareholder’s basis are not intended to
equate the aggregate of the corporation’s bases in its assets
with the aggregate of its shareholders’ bases in their stock in
the corporation. Shareholders in S corporations have no
bases in their stock attributable to any liabilities of the S
corporation. However, a shareholder in an S corporation has
a separate tax basis in loans the shareholder makes to the
S corporation equal to the amount of the loans. Secs. 1012,
1366(d)(1)(B). Generally, under section 1367 a shareholder’s
tax basis in the stock in, and in the loans to, an S corpora-
tion are adjusted to reflect the shareholder’s share of income,
losses, deductions, and credits of the S corporation as cal-
culated under section 1366(a)(1). If a shareholder’s tax basis
in his stock in an S corporation is reduced to zero by his
share of the losses of the S corporation, any further share of
the S corporation’s losses decreases, but not below zero, the
shareholder’s tax basis in outstanding loans the shareholder
has made to the S corporation. Sec. 1367(b)(2)(A); sec.
1.1367–2(b)(1), Income Tax Regs.
The computation of a shareholder’s pro rata share of the
S corporation’s items of income is much simpler than the
determination of a partner’s distributable share of partner-
ship items. A shareholder’s pro rata share of the S corpora-
tion items is determined by assigning an equal amount to
each share of outstanding stock. By contrast, a partner’s
distributive share of partnership items of income, loss, etc.,
is determined by the partnership agreement, provided the
allocation has substantial economic effect. Sec. 704(a). Other-
wise the partner’s distributive share is determined in accord-
ance with the partner’s interest in the partnership, taking
into account all the facts and circumstances. Sec. 704(b).
That determination would require an analysis or determina-
tion of, inter alia, the partnership agreement, capital
accounts maintained under general accounting practices, cap-
ital accounts maintained for tax purposes in cases where
there is a difference, historical allocation of income and
deduction items, implications of negative capital account bal-
ances, partners’ liability for partnership debt, whether part-
nership debt is recourse or nonrecourse, partners’ shares of
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 123
profit and loss, and partners’ shares of partnership assets
upon liquidation of the partnership.
Determination of the partners’ outside bases in their
interests in a partnership that is recognized for Federal
income tax purposes requires complex determinations of not
only the amounts of partnership items that are elements of
outside basis but also the partners’ shares of those amounts,
which are also partnership items. Those complex determina-
tions must be made in the partnership proceeding, and most
often there are no other factors to be determined at the
partner level. As the argument in Helmer v. Commissioner,
T.C. Memo. 1975–160, raised in Son of BOSS cases such as
this case demonstrates, the effect of partnership liabilities on
the partners’ outside bases exacerbates the complexity of
computing outside basis. Determination of the partners’
shares of partnership liabilities and any changes in those
shares are usually unrelated to adjustments of any partner-
ship items of income, loss, deduction, or credit. The deter-
mination of one partner’s share of any partnership item
affects every other partner’s share of that item. The com-
plexity of determining a partner’s basis in his partnership
interest justifies the Secretary’s determination that outside
basis is a partnership item to be determined at the partner-
ship level to the extent it requires no additional information
that must be determined at the partner level.
By comparison, the determination of a shareholder’s basis
in his stock in an S corporation is relatively simple once the
S corporation items of income, loss, deduction, and/or credit
are determined at the corporate level (either as reported on
the S corporation return and accepted by the Commissioner
or as a result of a corporate-level proceeding). A share-
holder’s share of those S corporation items can be determined
at the shareholder level on the basis of the number of shares
in the S corporation without affecting any other shareholder’s
pro rata share. His basis in any property contributed to the
S corporation can also be determined by his records. The rel-
ative simplicity of computing a shareholder’s basis in the
stock of an S corporation justified the Secretary’s determina-
tion that stock basis was an affected item to be determined
at the shareholder level.
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124 138 UNITED STATES TAX COURT REPORTS (67)
f. Validity of the Regulation Under the Chevron Two-Step
Standard
We must follow the regulation, unless we hold it to be
invalid under the principles of Chevron, U.S.A., Inc. v. Nat-
ural Res. Def. Council, Inc., 467 U.S. 837 (1984). Under
Chevron, we ask first whether Congress has addressed the
precise question at issue. Id. at 842. Where the statutory text
is ambiguous, we ask whether the agency’s chosen
interpretation is a ‘‘reasonable interpretation’’ of the enacted
text. Id. at 844. We may not disturb the regulation unless it
is ‘‘ ‘arbitrary or capricious in substance, or manifestly con-
trary to the statute.’ ’’ Mayo Found., 562 U.S. at ll, 131 S.
Ct. at 711 (quoting Household Credit Servs., Inc. v. Pfennig,
541 U.S. 232, 242 (2004)).
First, we ask whether the statute is ‘‘silent or ambiguous’’
on the issue in question such that the agency has room to
interpret. Chevron, 467 U.S. at 843. In doing so, we use
‘‘traditional tools of statutory construction, including the
statutory language and legislative history.’’ Anderson v. DOL,
422 F.3d 1155, 1180 (10th Cir. 2005) (citing Chevron, 467
U.S. at 843 n.9). Thus we ask whether Congress’ intent is
clear with respect to whether the term ‘‘partnership item’’ in
section 6231(a)(3) includes the partners’ outside bases in the
partnership. Section 6231(a)(3) defines the term ‘‘partnership
item’’ as any item with respect to a partnership that is
required to be taken into account for the partnership’s tax-
able year under the provisions governing income taxes to the
extent regulations prescribed by the Secretary provide that,
for purposes of subtitle A, such item is more appropriately
determined at the partnership level than at the partner
level. A partner’s basis in his partnership interest is an item
that is required to be taken into account when the partner
is determining the extent to which he may deduct partner-
ship losses and expenses each year or the amount of income
he may realize when he receives a distribution from the part-
nership. Therefore Congress has not excluded the partners’
outside bases from the definition of partnership item.
We proceed to the second step and ask whether the regula-
tion is ‘‘based on a permissible construction of the statute.’’
Chevron, 467 U.S. at 843. If the Secretary’s construction is
reasonable, Chevron requires the Court to accept that
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 125
construction, even if the Secretary’s ‘‘reading differs from
what the court believes is the best statutory interpretation.’’
Nat’l Cable & Telecomms. Ass’n v. Brand X, 545 U.S. 967,
980 (2005).
Nothing in section 6231(a)(3) unambiguously forecloses the
Secretary from interpreting ‘‘partnership items’’ as including
items relating to contributions to the partnership and dis-
tributions from the partnership to the extent that the items
can be ascertained from determinations that the partnership
is required to make with respect to an amount, the character
of an amount, or the percentage interest of a partner in the
partnership, for purposes of the partnership books and
records or for purposes of furnishing information to a
partner. They are items the partners are required to take
into account in determining their income taxes for the part-
nership’s taxable year. It is not arbitrary for the Secretary to
decide that items that can be determined solely by contribu-
tions, distributions, and other similar items that the partner-
ship is required to keep records of for purposes of its books
and records or for providing information to its partners are
more appropriately determined at the partnership level. They
are items that can be determined only from other items that
must be determined at the partnership level, and the deter-
mination with respect to one partner necessarily affects the
other partners, e.g., determination of the basis in property
distributed to one partner reduces the partnership basis in
its remaining assets for purposes of its books and records.
Determining the nature and amounts of liabilities assumed
by the partnership as the result of one partner’s contribution
of property to the partnership affects the other partners’
shares of those liabilities and their deemed contributions of
money related to the increase in the partnership liabilities
allocated to them.
The regulatory scheme under section 6231(a)(3) is technical
and complex. We find that the Secretary considered the
treatment of partnership items in a detailed and reasoned
fashion before making a final decision. The regulations were
promulgated pursuant to notice and comment procedures, ‘‘ ‘a
‘‘significant’’ sign that a rule merits Chevron deference.’ ’’
Mayo Found., 562 U.S. at ll, 131 S. Ct. at 714 (quoting
United States v. Mead Corp., 533 U.S. 218, 230 (2001)). We
note that the regulations in question are longstanding, ante-
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126 138 UNITED STATES TAX COURT REPORTS (67)
dating TRA 1997 by 10 years or so. See United States v. Cleve-
land Indians Baseball Co., 532 U.S. 200, 204 (2001)
(according ‘‘due respect to the [Internal Revenue] Service’s
reasonable, longstanding construction of the governing stat-
utes and its own regulations’’); United States v. Correll, 389
U.S. 299, 307 (1967) (the Supreme Court will defer to long-
standing interpretations of the Code and regulations that
reasonably ‘‘implement the congressional mandate’’). We also
note that the regulations in question are legislative rather
than interpretive, having been promulgated pursuant to
congressional direction. See Square D Co. v. Commissioner,
438 F.3d 739 (7th Cir. 2006), aff ’g 118 T.C. 299, 307 (2002);
Carlos v. Commissioner, 123 T.C. 275, 280 (2004). We hold
that the regulation is valid. 37 Applying the regulation, we
hold further that where a determination of a partner’s basis
in his interest in the partnership can be made solely from
the determination of contributions, distributions, and similar
determinations that the partnership is required to make and
requires no other information, that item is a partnership
item.
g. Outside Bases of Tigers Eye’s Purported Partners Are
Partnership Items
In the case at hand, the option partners obtained their
interests in the purported Tigers Eye partnership by con-
tribution and not by purchase from a transferor partner.
Under the regular rule of section 705(a), their outside bases
would be determined solely by their purported contributions
to the partnership and their shares of the loss and deduc-
tions Tigers Eye reported on the partnership return; i.e.,
determinations that a partnership is required to make.
Participating partner premised his claimed inflated basis on
(1) treating each purchased option separately from each sold
37 We also observe that the regulations in question are not so controversial as the regulations
currently under consideration in the cases concerning the applicability of the six-year period of
limitations under secs. 6229(c)(2) and 6501(2)(1)(A) in Son of BOSS cases. Accord Grapevine Im-
ports Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011), rev’g 77 Fed. Cl. 505 (2008); see,
e.g., Beard v. Commissioner, 633 F.3d 616 (7th Cir. 2011) (three-year period of limitation for
assessing tax was applicable rather than six-year period under secs. 6229(c)(2) and
6501(e)(1)(A)), rev’g T.C. Memo. 2009–184. Contra Home Concrete & Supply, LLC v. United
States, 634 F.3d 249 (4th Cir. 2011), cert. granted, 132 S. Ct. 71 (2011); Burks v. United States,
633 F.3d 347 (5th Cir. 2011); Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 650 F.3d
691 (D.C. Cir. 2011), rev’g and remanding 134 T.C. 211 (2010), supplementing T.C. Memo. 2009–
195; Carpenter Family Invs., LLC v. Commissioner, 136 T.C. 373 (2011).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 127
option, (2) treating each purchased option as having a basis
equal to the gross premium in the hands of both the Logan
Trusts and Tigers Eye, (3) treating the assignment to and
assumption by Tigers Eye of the contingent obligation of the
sold option separately from the purchased option for pur-
poses of section 752, and (4) disregarding the contingent
obligation to satisfy the sold option in determining outside
basis in the partnership under the authority of Helmer v.
Commissioner, T.C. Memo. 1975–160.
Assuming without deciding that Helmer would apply if
Tigers Eye had been recognized as a partnership for Federal
tax purposes, the fact that the obligation to satisfy the sold
option might have been contingent does not mean there
would have been no deemed distribution to the option part-
ners as a result of the partnership’s assumption of the
liability. At best, it means the deemed distribution could not
be determined until the option was exercised or lapsed and
the liability became fixed. Because the option partner could
not practicably apply the general rule set forth in section
705(a) and section 1.705–1(a), Income Tax Regs., his basis
would have to be determined under the alternative rule by
reference to his proportionate share of the adjusted basis of
partnership property that would be distributable upon a
termination of the partnership. See sec. 1.705–1(b), Income
Tax Regs. The property distributed to each option partner
was his share of partnership property distributed in liquida-
tion of his interest in the partnership. Thus, had Tigers Eye
been recognized as a partnership for Federal income tax pur-
poses, the distribution reported on the Schedule K–1 issued
to each option partner would have been the partnership’s
adjusted basis in the distributed property and would have
been the option partner’s outside basis in the partnership
under the alternative rule.
Pursuant to the second decision paragraph, Tigers Eye is
a sham and is not treated as a partnership for Federal
income tax purposes. Consequently the option partners were
not partners and did not acquire interests in a partnership,
they made no contributions to a partnership and received no
distributions from a partnership, and there were no items of
partnership income, partnership deduction, or partnership
loss. Consequently it follows with absolute certainty that
there was no outside basis in the partnership. No additional
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128 138 UNITED STATES TAX COURT REPORTS (67)
facts are required to determine a zero outside basis, and no
additional facts could possibly alter that conclusion.
Therefore, pursuant to section 301.6231(a)(3)–1(c)(3),
Proced. & Admin. Regs., the lack of outside basis is a part-
nership item that we have jurisdiction to decide in the part-
nership/entity-level proceeding, and we need not revise the
stipulated decision.
IV. Jurisdiction To Enter Stipulated Decision as Written With
Respect to Application of Penalties
We have jurisdiction in this proceeding to determine the
applicability of any penalty ‘‘which relates to an adjustment
to a partnership item’’. Sec. 6226(f); sec. 301.6233–1T(a),
Temporary Proced. & Admin. Regs., supra. Therefore, the
stipulated decision will exceed our jurisdiction under section
6226(f) if it decides that a penalty applies to an adjustment
that does not relate to a partnership item.
In Petaluma II, the Court of Appeals succinctly disposed of
the penalties in two paragraphs. First, having accepted the
Government’s concession that outside basis was not a part-
nership item, the Court of Appeals reversed the Tax Court’s
holding that the 40% penalty for gross valuation
misstatement applied to the partners’ outside bases. The
Court of Appeals agreed with Petaluma that ‘‘since the Tax
Court lacked jurisdiction to determine outside basis, it also
lacks jurisdiction to determine that penalties apply with
respect to outside basis because those penalties do not relate
to an adjustment to a partnership item.’’
In the second paragraph, the Court of Appeals vacated the
Tax Court’s Opinion and decision in Petaluma I upholding
other accuracy-related penalties 38 and remanded the case for
further proceedings on that issue. The Court of Appeals could
not determine from the Tax Court’s Opinion, the record, or
the arguments of the parties what determination the Tax
Court had made regarding the application of accuracy-related
penalties. Consequently, the Court of Appeals could neither
affirm nor reverse the Tax Court’s decision that the accuracy-
38 The decision of the Tax Court in Petaluma I upheld the determination in the FPAA that
‘‘the accuracy-related penalty under Section 6662(a) of the Internal Revenue Code applies to all
underpayments of tax attributable to adjustments of partnership items of Petaluma FX Part-
ners, LLC.’’
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 129
related penalties apply. The Court of Appeals concluded as
follows:
As it is not clear from the opinion, the record, or the arguments before this
court that the penalties asserted by the Commissioner and ordered by the
Tax Court could have been computed without partner-level proceedings to
determine the affected items questions concerning outside bases, we are
unable to uphold the court’s determination of the penalty issues. While it
may be that some penalties could have been assessed without partner-level
computations, we cannot affirm a decision that has not yet been made.
Therefore we vacate the opinion of the Tax Court on the penalties imposi-
tion and computation. It may be that upon remand, a determination can
be made for some portion of the penalties, but neither party has briefed
that question before us. [Petaluma II, 591 F.3d at 655–656.]
On remand, in Petaluma III this Court observed:
In this case none of the FPAA adjustments are items that flow directly
to the partner-level deficiency computation as computational adjustments.
Any deficiencies must therefore be determined against the partners as
affected items and must be resolved in separate partner-level deficiency
procedures. The section 6662 penalties are all related to these adjust-
ments, which have not yet been made by respondent. [Petaluma III, 135
T.C. at 586.]
The Court in Petaluma III then fleshed out this observation
by elaborating:
The determination that the partnership is a sham implies negligent con-
duct regarding formation of the partnership, but in this case that deter-
mination does not trigger a computational adjustment to taxable income
of the partners. The Court of Appeals declined to allow the general effect
of the partnership determination of sham to confer jurisdiction of the pen-
alty relating to valuation because the valuation related to outside basis,
an affected item. The Court of Appeals instructs that for us to have juris-
diction over a penalty at the partnership level it must ‘‘ ‘[relate] to an
adjustment to a partnership item.’ ’’ Petaluma FX Partners, LLC v.
Commissioner, 591 F.3d at 655 (quoting section 6226(f)). It must also be
capable of being computed ‘‘without partner-level proceedings,’’ id., leading
at least potentially to only a computational adjustment to the partners’
returns. [Id. at 586–587.]
The Court in Petaluma III concluded its analysis of Petaluma
II as follows:
The effect of the mandate concerning the section 6662 penalty is that if
the penalty does not relate directly to a numerical adjustment to a part-
nership item, it is beyond our jurisdiction. In this case there are no such
adjustments to which a penalty can apply. The adjustment is an affected
item. The sham determination in this case only indirectly affects basis at
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130 138 UNITED STATES TAX COURT REPORTS (67)
the partner level. There is no partnership item flowing through to the
partners’ returns as a computational adjustment. [Id. at 586.]
Under this interpretation, the court of first instance in a
partnership-level TEFRA case has jurisdiction to hold that
accuracy-related penalties apply only if and to the extent
that there are FPAA numerical adjustments to partnership
items reported on the partnership return that flow through
directly to the returns of the partners so that the adjust-
ments can be given effect directly by computational adjust-
ments and assessments.
As the parties agree, by the second decision paragraph the
Court upholds the FPAA’s application of the 40% penalty to
the portion of any underpayment attributable to a gross valu-
ation misstatement as provided by section 6662(a), (b)(3), (e),
and (h), including an underpayment resulting from the over-
statement of the option partners’ bases in the distributed
property. By the third decision paragraph, the stipulated
decision determines that the 40% gross valuation
misstatement penalty applies to any underpayment of tax
attributable to overstating the capital contributions claimed
to have been made to the purported partnership.
Underpayments will result from the adjustments reducing
the $242,186 loss and the $11,314 deduction to zero and the
elimination of the huge losses claimed by the option partners
on the sale of the distributed property attributable to over-
stating the basis in the property. Under Petaluma II as inter-
preted by Petaluma III we have jurisdiction to determine the
applicability of the underpayments related to the adjust-
ments of the loss and other deductions reported on the part-
nership return. Therefore, we first discuss the application of
the penalties to those adjustments.
A. Items Adjusted in the Stipulated Decision and the
Application of Accuracy-Related Penalties Thereto
Within the Jurisdictional Limitations of Petaluma II
Participating partner argues that there will be no under-
payment attributable to the reduction of the $242,186 loss
and the $11,314 of other deductions to zero because the FPAA
treats all transactions engaged in by the purported partner-
ship as engaged in directly by its purported partners, so that
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 131
the loss and other deductions are directly allowable on the
purported partners’ returns. We disagree.
First, because Tigers Eye is disregarded as a partnership
for Federal income tax purposes, the partners did not have
the partnership losses or the partnership deductions that
they claimed on their returns. There will be an under-
payment of tax from the computational adjustment of those
items. The fact that the FPAA treats all transactions engaged
in by the purported partnership as engaged in directly by its
purported partners does not necessarily mean that the pur-
ported partners will be entitled to deduct the losses and
expenses. They would not be so entitled if they did not
engage in the transactions with a profit motive for purposes
of section 165(c)(2), which has been held to disallow losses
claimed on option spreads that were entered into for tax
avoidance purposes. See Fox v. Commissioner, 82 T.C. 1001
(1984); see also Glass v. Commissioner, 87 T.C. 1087, 1174–
1177 (1986), aff ’d sub nom. DeWees v. Commissioner, 870
F.2d 21 (1st Cir. 1989).
The computation of the deficiencies attributable to the
adjustments of the $242,186 loss and the $11,314 deduction
to zero does not require any factual determinations to be
made at the partner level, and respondent may assess the
deficiencies without issuing a statutory notice of deficiency.
Under Petaluma III we have jurisdiction in this partnership-
level proceeding to decide the applicability of the accuracy-
related penalties that relate to those adjustments.
We first address the 40% gross basis misstatement penalty
and then the 20% negligence penalty.
1. 40% Gross Basis Misstatement Penalty
The stipulated decision applies the 40% penalty to the
overstatement of ‘‘the capital contributions claimed to have
been made to the purported partnership’’. Participating
partner asserts that Petaluma II ‘‘establishes that any part-
nership item ‘elements’ of outside basis do not alter the juris-
dictional reality that outside basis and any penalties pre-
mised on that outside basis remain affected items beyond the
scope of a partnership proceeding’’. Participating partner
misconstrues that holding, which addresses the Govern-
ment’s argument that the Tax Court had jurisdiction in the
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132 138 UNITED STATES TAX COURT REPORTS (67)
partnership proceeding to determine the partners’ outside
bases as affected items whose elements are mainly partner-
ship items. The Court of Appeals did not hold that the Tax
Court lacks jurisdiction to determine the applicability of any
penalty that relates to an adjustment of a partnership item
that happens to be an element of outside basis. The holding
reflects acceptance by the Court of Appeals of the Govern-
ment’s concession that outside basis was an affected item.
Contributions to the partnership are partnership items, and
pursuant to section 6226(f) we have jurisdiction in this part-
nership/entity-level proceeding to decide the applicability of
penalties that relate to the adjustment of that item to zero.
The application of the penalty to that adjustment does not
exceed the jurisdictional limitations of Petaluma II.
The alleged capital contributions by the option partners
consisted of cash and the pairs of offsetting long and short
foreign currency options (option spreads). Tigers Eye claimed
the $242,186 loss on the termination or unwinding of the
option spreads using the substituted basis of the option part-
ners. 39
The second decision paragraph upholds the determination
in the FPAA that Tigers Eye does not exist and is not a part-
nership for Federal tax purposes. Pursuant to section
301.6233–1T(c), Temporary Proced. & Admin. Regs., 50 Fed.
Reg. 39998 (Oct. 1, 1985), amended, 52 Fed. Reg. 6795 (Mar.
5, 1987), we have jurisdiction in this partnership-level pro-
ceeding to determine items of Tigers Eye that would be part-
nership items if it had been a partnership. As discussed
supra, we have jurisdiction to determine the items of Tigers
Eye as nominee or agent for the option partners. Therefore,
we have jurisdiction to determine Tigers Eye’s basis in the
option spreads. Because Tigers Eye is disregarded as a part-
nership, there are no contributions to a partnership. Tigers
Eye held the option spreads as nominee or agent and did not
acquire the option spreads with a substituted basis (or any
39 This loss is reflected in Statement 1 to Schedule K of the partnership return, which shows
that the claimed partnership loss of $242,186 is attributable to a claimed ‘‘ORDINARY LOSS
FROM SEC. 988 TRANSACTIONS’’ of $257,857, which includes the loss the partnership
claimed on the termination or unwinding of the option spreads, partially offset by $15,671 of
income items. See supra notes 16, 17, and 18 and accompanying text. The partnership return
Schedules K–1 show that $157,749 of the claimed net partnership loss flowed through to the
returns of the Logan Trusts, from which in turn they flowed through as losses to be claimed
on Mr. Logan’s individual income tax return.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 133
basis, for that matter, because it did not acquire the assets
for Federal income tax purposes). Tigers Eye was required to
account to the option partners for the cost of unwinding the
option spreads so that they could determine the amounts of
their losses, but Tigers Eye did not realize a loss. The adjust-
ment to zero of the contributions to a partnership nullifies
Tigers Eye’s claim that it had positive basis in the option
spreads upon which it based the loss reported on the partner-
ship return.
Thus, the disallowance of the $242,186 partnership loss on
the unwinding of the option spreads claimed on the partner-
ship return is directly attributable to the reduction of the
capital contributions to zero. The overstatement of Tigers
Eye’s basis in the option spreads (the property claimed to
have been contributed to the partnership) is a gross basis
misstatement of a partnership item that is attributable to
overstating the contributions claimed to have been made to
the purported partnership.
The loss claimed by the partnership, which flowed through
to the returns of the Logan Trusts and thence to the indi-
vidual income tax return of Mr. Logan, is attributable to an
overstatement of basis of what were claimed to be partner-
ship assets acquired as capital contributions. The 40% gross
basis misstatement penalty relates to the adjustment of part-
nership items, but also the contributions to capital upon
which Tigers Eye claimed basis in the option spreads and the
loss claimed by Tigers Eye on their unwinding.
The deficiency resulting from the adjustment of the loss
and the 40% penalty can be assessed without issuance of a
notice of deficiency. Consequently, this Court has jurisdiction
under Petaluma II to accept and enter the stipulated decision
giving effect to the partnership-level determination that the
40% gross basis misstatement penalty ‘‘applies to [the]
underpayment of tax attributable to overstating the capital
contributions claimed to have been made to the purported
partnership.’’ Cf. 106 Ltd. v. Commissioner, 136 T.C. at 74–
75.
2. 20% Negligence Penalty
The fourth paragraph of the stipulated decision provides
that the negligence or substantial understatement penalty
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134 138 UNITED STATES TAX COURT REPORTS (67)
applies ‘‘to any additional underpayment of tax attributable
to the foregoing partnership item adjustments other than the
[claimed] capital contributions’’. The FPAA and the stipulated
decision adjust to zero ‘‘Other Deductions’’ of $11,314, see
supra note 18, Statement 2 to the partnership return
Schedule K, and text following note 19, that flow through to
the partners’ returns, $6,408 of which flowed through the
returns of the Logan Trusts to Mr. Logan’s 1999 Federal
income tax return. The deficiency resulting from this adjust-
ment is unrelated to claimed capital contributions and can be
computed and assessed along with the 20% penalty without
issuance of a notice of deficiency. Therefore, the Court has
jurisdiction under Petaluma II to decide that the 20% neg-
ligence penalty applies to the portion of the underpayment of
tax that will result from that adjustment.
3. Conclusion
We conclude that the third and fourth decision paragraphs,
as written, do not overstep the jurisdictional limits of
Petaluma II and Petaluma III with respect to the application
of penalties to deficiencies related to reducing to zero the
$242,186 loss and the $11,314 of other deductions that
flowed directly through to the purported partners’ returns.
B. Petaluma II Notwithstanding, Jurisdiction To Determine
the 40% Penalty Applies to the Overstatement of the
Basis of the Distributed Property
1. Applicability of the 40% Penalty to the Overstatement of
the Basis of the Distributed Property
The amounts of the deficiencies and accuracy-related pen-
alties resulting from the adjustments to partnership items of
loss and other deductions that flowed through to the pur-
ported partners’ returns are de minimis in relation to the
much larger additional deficiency and 40% penalty that will
result from the disallowance of the multimillion-dollar losses
claimed by participating partner and the other option part-
ners on the sale of the distributed property (distributed prop-
erty loss defiency). The huge losses resulted from the option
partners’ claims that the property was distributed to them in
liquidation of their partnership interests and that their bases
in the property were the inflated outside bases they claimed
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 135
in their partnership interests. The disregard of Tigers Eye
for Federal income tax purposes will cause the basis in the
distributed property in their hands to be reduced from the
claimed outside basis to Tigers Eye’s cost basis as nominee
or agent. The reduction will eliminate most of the huge
losses claimed by the option partners on their sales of the
distributed property and will result in an underpayment of
tax by Mr. Logan. Participating partner asserts that the Tax
Court does not have jurisdiction in this proceeding to deter-
mine that the 40% penalty applies to the gross misstatement
of the basis in the distributed property.
A ‘‘substantial valuation misstatement’’ occurs if the value
or the adjusted basis of any property claimed on any return
of tax is 200% or more of the correct amount. Sec.
6662(e)(1)(A). The penalty is increased to 40% if the under-
payment of tax is the result of a gross valuation
misstatement, which is the valuation misstatement deter-
mined under section 6662(e) after substituting ‘‘400 percent’’
for ‘‘200 percent’’. Sec. 6662(h)(2)(A).
As the parties agree, by the second decision paragraph the
Court upholds the FPAA’s application of the 40% penalty to
the portion of any underpayment attributable to a gross valu-
ation misstatement as provided by section 6662(a), (b)(3), (e),
and (h). By the third decision paragraph, the decision deter-
mines that the 40% gross valuation misstatement penalty
applies to any underpayment of tax attributable to over-
stating the capital contributions claimed to have been made
to the purported partnership. The parties agree that the
stipulated decision applies the 40% gross basis misstatement
penalty to the underpayment that will result from the dis-
allowance of the losses the option partners reported on their
sales of the distributed property.
Reducing the basis in distributed property from the
claimed outside basis to Tigers Eye’s cost basis will generate
an underpayment. The underpayment relates to adjustments
to partnership items—the determination that Tigers Eye is
disregarded and is not a partnership for Federal income tax
purposes and the resulting overstatement of the contribu-
tions claimed to have been made to the purported partner-
ship.
Participating partner acknowledges that the amount of the
distributions reported on the partnership return filed by
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136 138 UNITED STATES TAX COURT REPORTS (67)
Tigers Eye is Tigers Eye’s cost basis in the distributed prop-
erty. As we have previously discussed, under section 6233
and its regulations, the basis in the property distributed to
each option partner is an item that we have jurisdiction to
decide in this case. We have jurisdiction to determine the
applicability of any penalty that relates to an adjustment of
that item. The basis of the distributed property reported on
an option partner’s return is a gross misstatement of basis
if it exceeds four times the amount of the distributions shown
on the Schedule K–1 issued to the option partner. The 40%
penalty will apply to any underpayment of tax attributable
to claiming more than four times the amount of the distribu-
tions shown on the Schedule K–1 issued to the option
partner. The underpayment of tax and the 40% penalty can
be computed by reference to the option partner’s return with-
out the need for any additional factual determinations at the
partner level.
The disallowed losses claimed on the sale of the distributed
property were not the option partners’ distributive shares of
any loss reported on the partnership return filed by Tigers
Eye. Thus, under Petaluma II as interpreted by Petaluma
III, we would not have jurisdiction to determine that the
accuracy-related penalty applies to the underpayment that
will result from the disallowance of that loss. However, we
are not bound by that interpretation in this case.
2. Petaluma III: The Court Was Bound by the Law of the
Case and the Rule of Mandate To Follow Petaluma II
Dicta on Lack of Jurisdiction Over Outside Basis
In Petaluma III, this Court was operating under the strict
constraints of the law of the case doctrine and the rule of
mandate. All Federal Courts of Appeals, 40 including the D.C.
Circuit, 41 follow the admonition of the U.S. Supreme Court
in In re Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895),
that the inferior court to which the case is remanded
40 See, e.g., Piambino v. Bailey, 757 F.2d 1112, 1119 (11th Cir. 1985); Commercial Paper Hold-
ers v. Hine (In re Beverly Hills Bancorp), 752 F.2d 1334, 1337 (9th Cir. 1984); Reserve Mining
Co. v. EPA, 514 F.2d 493, 541 (8th Cir. 1975); Cherokee Nation v. Oklahoma, 461 F.2d 674, 678
(10th Cir. 1972).
41 See, e.g., City of Cleveland v. FPC, 561 F.2d 344, 346 (D.C. Cir. 1977); Nixon v. Richey, 513
F.2d 430, 435–436 (D.C. Cir. 1975); Sherwin v. Welch, 319 F.2d 729, 731 (D.C. Cir. 1963).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 137
is bound by the decree as the law of the case, and must carry it into execu-
tion according to the mandate. That court cannot vary it, or examine it for
any other purpose than execution; or give any other or further relief; or
review it, even for apparent error, upon any matter decided on appeal; or
intermeddle with it, further than to settle so much as has been remanded.
On a remand, the inferior court, to the best of its ability and
judgment, must follow and apply the guidance provided by
the holdings and clear instructions in dicta of the appellate
court. See Gersman v. Group Health Ass’n, Inc., 975 F.2d
886, 896–898 (D.C. Cir. 1992). On remand, the inferior court
is also obviously bound under the law of the case by any
party concession upon which the appellate court relies in
deciding the case and framing the mandate, although that
concession would not be binding in another case unless there
were a similar concession that was accepted by the court.
In the case at hand, we are not bound by the law of the
case and the rule of mandate to follow Petaluma II. However,
we have obliged ourselves, under the doctrine of Golsen v.
Commissioner, 54 T.C. 742 (1970), aff ’d, 445 F.2d 985 (10th
Cir. 1971), to follow binding precedent of the Court of
Appeals for the D.C. Circuit—to which this case is appeal-
able—which comes only from its holdings in published opin-
ions, see Gersman, 975 F.2d at 897 (‘‘ ‘[w]e are bound only by
prior published opinions of this Circuit and not by other
means of deciding cases’ ’’ (quoting United States v. North,
910 F.2d 843, 881 (D.C. Cir. 1990))), not from dictum that
does not ‘‘[consider] all the relevant considerations and
adumbrates an unmistakable conclusion’’, see Reich v. Cont’l
Cas. Co., 33 F.3d 754, 757 (7th Cir. 1994); cf. Hefti v.
Commissioner, 983 F.2d 868, 870–872 (8th Cir. 1993), aff ’g
97 T.C. 180 (1991).
In Petaluma II, the Court of Appeals neither affirmed nor
reversed the Tax Court’s decision that accuracy-related pen-
alties applied; it vacated the Tax Court’s Opinion and deci-
sion upholding other accuracy-related penalties and
remanded the case for further proceedings on that issue. The
Court of Appeals could not discern what determination the
Tax Court had made regarding the application of accuracy-
related penalties. Unfortunately, the Court of Appeals’ use of
the words ‘‘computed’’, ‘‘computation’’, ‘‘computations’’, and
‘‘assessed’’, in questions it posed regarding how the Court
determined the applicability of the penalties to partnership
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138 138 UNITED STATES TAX COURT REPORTS (67)
items, created some uncertainty as to the proper disposition
on remand. Those questions should not be read more broadly
than an expression of concern of the Court of Appeals
regarding the necessity of computing an affected item in
order to determine the applicability of the accuracy-related
penalties as was necessary in the Tax Court’s determination
that there was a gross misstatement of outside basis to
which the 40% penalty applied.
The questions posed by the Court of Appeals in Petaluma
II do not rise to the level of clear dictum that ‘‘considers all
the relevant considerations and adumbrates an unmistakable
conclusion’’.
The statements of the Court of Appeals in Petaluma II
flowed from its holding that the Tax Court did not have juris-
diction to determine that the 40% gross basis misstatement
penalty applied to the gross misstatement of outside basis.
The Court did not decide the extent of our jurisdiction to
determine the applicability of penalties that relate to part-
nership items. It did not provide any gloss on the phrase
‘‘which relates to an adjustment to a partnership item.’’ Nor
did it criticize this Court’s statement in Petaluma I that the
legislative history supports a broad reading of the statute.
Consequently, we are not bound to follow our interpretation
in Petaluma III of the dicta in Petaluma II that were based
on the Government’s concession.
The underpayment of tax relates to the adjustment of a
partnership item. The underpayment and the 40% penalty
can be computed without any factual determinations being
made at the partnership level. We conclude that we have
jurisdiction to decide that the 40% basis misstatement pen-
alty applies. That conclusion is consistent with Congress’
intent and purpose in giving the Tax Court jurisdiction in
partnership-level proceedings to determine the applicability
of penalties related to the adjustment of partnership items
and to relegate the taxpayer to a refund suit in a Federal
District Court or the Court of Federal Claims to recover the
penalty by proving his reasonable cause/good faith defenses.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 139
3. TRA 1997: The Tax Court Has Jurisdiction To Deter-
mine Applicability of Penalties That Relate to Adjust-
ment of Partnership Items
We begin with a restatement of the changes Congress
made to the TEFRA audit and litigation procedures when it
enacted TRA 1997, see supra Part I.B.2 and 3, and will now
bring them to bear on the issue at hand. Before the enact-
ment of TRA 1997, penalties and additions to tax (collectively,
penalty or penalties) were classified as affected items, and
issues regarding such items were litigated in a partner-level
affected-items deficiency proceeding following the completion
of the partnership-level proceeding. See, e.g., N.C.F. Energy
Partners v. Commissioner, 89 T.C. at 744–745; Crystal Beach
Dev. of Destin Ltd. v. Commissioner, T.C. Memo. 2000–170.
TRA 1997 did not change the classification of penalties as
affected items, but it amended section 6221 to provide that
the applicability of a penalty ‘‘which relates to an adjustment
to a partnership item shall be determined at the partnership
level’’. (Emphasis added.) Of particular significance, TRA 1997
also amended section 6230(a)(2)(A)(i) to read as follows:
SEC. 6230(a). COORDINATION WITH DEFICIENCY PROCEEDINGS.—
(1) IN GENERAL.—Except as provided in paragraph (2) or (3), sub-
chapter B of this chapter[42] shall not apply to the assessment or collec-
tion of any computational adjustment.
(2) DEFICIENCY PROCEEDINGS TO APPLY IN CERTAIN CASES.—
(A) Subchapter B shall apply to any deficiency attributable to—
(i) affected items which require partner level determinations
(other than penalties, additions to tax, and additional amounts that
relate to adjustments to partnership items) * * *
The change to section 6230(a)(2)(A)(i) deprived a partner of
the opportunity to litigate issues concerning the applicability
of a penalty that related to an adjustment of a partnership
item in an affected-items deficiency proceeding. Therefore, in
TRA 1997 Congress added section 6230(c)(1)(C), which allows
a partner to file a claim for refund on the ground that ‘‘the
Secretary erroneously imposed any penalty, addition to tax,
or additional amount which relates to an adjustment to a
partnership item’’, and amended section 6230(c)(4) by
42 Subch. B (secs. 6211 through 6216) contains the provisions authorizing the Commissioner
to issue notices of deficiency and provides the Tax Court with jurisdiction to redetermine those
deficiencies.
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140 138 UNITED STATES TAX COURT REPORTS (67)
allowing the partner to assert any ‘‘partner-level’’ defenses in
the refund claim.
The TRA 1997 amendments to the TEFRA procedures
require that issues regarding the application of penalties be
litigated at the partnership level and not in partner-level
affected-items deficiency proceedings, as was the case before
the effective date of the penalty litigation amendments of TRA
1997. The only qualification that Congress imposed is that
the penalty ‘‘relate to an adjustment to a partnership item’’.
Secs. 6221, 6226(f), 6230(a)(2)(A)(ii), (c)(1)(C), (4). Congress
did not define the word ‘‘relate’’, nor did Congress tie the
applicability of the penalty to the existence of a computa-
tional adjustment that could be summarily assessed at the
end of the partnership-level proceeding.
When Congress enacted the penalty litigation amend-
ments, it was well aware that a partnership-level proceeding
under TEFRA does not result in the determination of an
underpayment at the partnership level. Underpayments are
determined at the partner level after a partnership-level pro-
ceeding is completed and/or after an affected-items deficiency
proceeding (which occurs if an affected item requires a fac-
tual determination at the partner level) is completed. While
Congress did not address the mechanics of the application of
TEFRA partnership litigation procedures to penalties, it
required that penalties that relate to the adjustment of a
partnership item be litigated in the partnership-level pro-
ceeding and not in an affected-items deficiency proceeding.
In the FPAA issued to Tigers Eye respondent made adjust-
ments to a variety of partnership items and applied the
accuracy-related penalty under section 6662(a). Specifically,
in the FPAA respondent determined that the partnership was
a sham and should be disregarded for Federal income tax
purposes. Respondent also adjusted partnership items to zero
to reflect that determination (capital contributions, distribu-
tions of property other than money, partnership loss, and
other deductions). The critical issue under the penalty litiga-
tion amendments is whether the penalty in question ‘‘relates
to adjustments to partnership items’’. See secs. 6221, 6226(f),
6230(a)(2)(A)(i). Thus we must decide whether the penalties
applied in the stipulated decision relate to adjustments to
partnership items.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 141
Generally, words in revenue legislation should be inter-
preted according to their ordinary, everyday meaning. Fort
Howard Corp. & Subs. v. Commissioner, 103 T.C. 345, 351
(1994) (citing Commissioner v. Soliman, 506 U.S. 168, 174
(1993)). ‘‘Relate’’ means, inter alia, ‘‘to show or establish log-
ical or causal connection’’. Merriam Webster’s Collegiate Dic-
tionary 987 (10th ed. 1997). ‘‘Related’’ means, inter alia,
‘‘being connected; associated.’’ The American Heritage Dic-
tionary of the English Language 1473 (4th ed. 2000).
The words ‘‘related to a partnership item’’ take on a
peculiar meaning in all Son of BOSS cases, which generally
involve the use of a partnership (often transitory) to inflate
basis in a partnership asset or the partner’s basis in the
partnership outside basis. A Son of BOSS transaction gen-
erally relies upon and plays off the provisions of subchapter
K (sections 701 through 777), and its alleged success depends
upon the existence of a partnership. Recognition of the part-
nership for Federal income tax purposes is a critical integral
and necessary element of the transaction. See, e.g., Petaluma
I.
Generally, in Son of BOSS cases, there might not be an
adjustment to a partnership item that flows directly to a
partner’s return, and there might not be an item of loss or
deduction that a partner reports as a flowthrough item from
the partnership to the partnership return to the purported
partner’s return. Nonetheless, the determination that a part-
nership that has no economic substance is disregarded and
is not a partnership for Federal tax purposes will result in
and necessarily require the disallowance of the huge loss
claimed on the partner’s return from the sale of property
purportedly distributed from a partnership. There is a nec-
essary logical and causal relationship between (1) the
Commissioner’s determination to disregard a partnership
that lacks economic substance because it was formed solely
to create the illusion of inflated basis in the distributed prop-
erty and (2) application of the section 6662(h) accuracy-
related penalty to the underpayment that results from the
disallowance of the loss claimed on the sale of that property
that is attributable to the basis overstatement. The penalty
relates to the adjustments that result from the Commis-
sioner’s determination that the partnership is disregarded for
Federal income tax purposes. Under the penalty litigation
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142 138 UNITED STATES TAX COURT REPORTS (67)
amendments, that is all that Congress required in order for
the penalty to be litigated and held applicable in the partner-
ship-level proceeding.
Acceptance of the literal and ordinary meaning of ‘‘relates
to’’ does not lead to absurd results and would not thwart the
obvious purpose of the statute. Thus, we need not adopt a
more restrictive interpretation. See Commissioner v. Brown,
380 U.S. 563, 571 (1965).
Congress, in enacting TRA 1997, intended that penalties
related to the improper use of illusory partnerships to gen-
erate large noneconomic losses be litigated in partnership-
level proceedings. Congress did so because the relevant con-
duct—i.e., the establishment of the partnership, which
includes the recording of partner contributions, the establish-
ment of partner capital accounts, and adjustments to those
accounts resulting from distributions, assumption of liabil-
ities, and liquidation of a partner’s interest—occur largely at
the partnership level. In the case of a disregarded partner-
ship, regardless of whether a disallowance of outside basis is
at play and regardless of whether outside basis is a partner-
ship item or an affected item, any adjustment at the partner
level is preceded by one or more adjustments to partnership
items, and a penalty is related to those partnership-level
adjustments.
Finally, with respect to the mechanics of TEFRA partner-
ship litigation as it involves penalties, a court with jurisdic-
tion over penalties in a partnership-level proceeding can
determine whether the relevant conduct is sufficient to war-
rant a penalty only in the event that there is an under-
payment. The Court does not determine in the partnership/
entity-level proceeding that there is an underpayment or the
amount of the underpayment.
This approach is consistent with the approach we are
required to take in nonpartnership cases that require Rule
155 computations or in TEFRA litigation where the computa-
tional adjustments, and therefore penalty calculations,
cannot be made until the parties make the necessary calcula-
tions following completion of the partnership-level pro-
ceeding.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 143
V. Conclusion
We see no need to burden the reader with further discus-
sion. For all the reasons summarized in the headnote and set
forth at length in the foregoing Discussion, the Court has
jurisdiction to determine and the stipulated decision that has
been entered holds as follows:
1. that participating partner will have a relatively small
deficiency attributable to adjustment of partnership flow-
through items of (a) Loss and (b) Other Deductions, to which
the 40% gross basis misstatement penalty and the 20% neg-
ligence penalty are respectively applicable; and
2. that participating partner will also have a much larger
distributed property loss deficiency attributable to over-
stating the capital contributions claimed to have been made
to the purported partnership; the 40% gross basis
misstatement penalty is also applicable to this deficiency.
On the basis of these rulings, as explained in the foregoing
Discussion,
An appropriate order will be issued,
denying participating partner’s motion to
revise the stipulated decision.
Reviewed by the Court.
COLVIN, COHEN, HALPERN, and GOEKE, JJ., agree with this
opinion of the Court.
GALE and PARIS, JJ., concur in the result only.
FOLEY, J., dissents.
VASQUEZ, GUSTAFSON, and MORRISON, JJ., did not partici-
pate in the consideration of this opinion.
HALPERN, J., concurring: I concur and write separately
only to add some small weight to what, in the main, I con-
sider to be a forceful and persuasive analysis by Judge
Beghe.
I. Golsen Doctrine
We are a court with nationwide jurisdiction in tax matters
alone, and Congress expected that, in so far as we are able
to do so, we set precedents for the uniform application of the
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144 138 UNITED STATES TAX COURT REPORTS (67)
tax law. Lawrence v. Commissioner, 27 T.C. 713, 718 (1957),
rev’d, 258 F.2d 562 (9th Cir. 1958). Review of our cases, how-
ever, is not by a single Court of Appeals but is, variously, by
the Courts of Appeals for the 11 numbered circuits and the
Court of Appeals for the D.C. Circuit. See sec. 7482. Nec-
essarily, we have had to consider what we should do when
an issue comes before us a second time, after a Court of
Appeals has reversed a prior Tax Court decision on the same
point. In Lawrence v. Commissioner, 27 T.C. at 716–717, we
determined that, while certainly we should seriously consider
the reasoning of the reversing Court of Appeals, we ought
not follow its decision if we believe it incorrect. In Golsen v.
Commissioner, 54 T.C. 742, 756–757 (1970), aff ’d, 445 F.2d
985 (10th Cir. 1971), we reconsidered and created a narrow
exception (sometimes described as the Golsen doctrine) to the
rule announced in Lawrence. We reasoned that, where a
reversal would appear inevitable, because of the clearly
established position of the Court of Appeals to which an
appeal would lie, our obligation as a national court does not
require a futile and wasteful insistence on our view. Lardas
v. Commissioner, 99 T.C. 490, 494–495 (1992); Golsen v.
Commissioner, 54 T.C. at 757. ‘‘[T]he logic behind the Golsen
doctrine is not that we lack the authority to render a decision
inconsistent with any Court of Appeals (including the one to
which an appeal would lie), but that it would be futile and
wasteful to do so where we would surely be reversed.’’
Lardas v. Commissioner, 99 T.C. at 495. Judge Beghe’s
insightful consideration of the issues goes well beyond insist-
ence on our view expressed in Petaluma FX Partners, LLC v.
Commissioner, 131 T.C. 84 (2008), aff ’d in part, rev’d in part
and remanded, 591 F.3d 649 (D.C. Cir. 2010). In addition, in
his concurring opinion Judge Wherry maintains that the
Golsen doctrine does not bind our hands because the facts
before us are distinguishable from the facts (indeed, the
absence of facts) before the Court of Appeals for the D.C. Cir-
cuit in Petaluma FX Partners, LLC. I assume that the
Judges joining or concurring in Judge Beghe’s opinion believe
as I do that our effort will be neither futile nor wasteful.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 145
II. Judge Beghe’s Insight
Judge Beghe’s insight is with respect to the consequence of
determining that, for tax purposes, Tigers Eye Trading, LLC
(Tigers Eye), is a sham. That of course does not necessarily
mean that Tigers Eye was not properly organized as a Dela-
ware limited liability company (L.L.C.), nor does it nec-
essarily mean that it is not a business entity recognized for
Federal tax purposes (I assume that Judge Beghe would say:
‘‘If in business, its business was acting as nominee and agent
for its principals, pertinently, the Logan Trusts.’’). It does
mean, however, that the Logan Trusts (trusts), together with
other members of Tigers Eye, did not for Federal income tax
purposes join together as partners to invest in currency
options so as to cause the trusts’ transactions with Tigers
Eye (and Tigers Eye’s actions on their behalf) to be governed
by the substantive provisions of the Internal Revenue Code
(Code) governing partners and partnerships; i.e., subchapter
K (‘‘Partners and Partnerships’’), chapter 1, subtitle A of the
Code (subchapter K). Tigers Eye, however, was properly
organized as a Delaware L.L.C.; it did receive the currency
options from the trusts; it did sell the options, and it did pur-
chase euro and shares of Xerox Corp. (currency and shares,
respectively), which it did transfer to the trusts. The trusts,
later in the same year, sold the currency and the shares,
claiming large losses, which, because of the provisions of the
Code governing trusts and their beneficiaries, flowed through
to Mr. Logan.
How then are we to explain all of those events (or at least
those involving Tigers Eye), and what are the appropriate
Federal income tax consequences? Moreover, because Tigers
Eye filed a partnership return for 1999 (the year in which
most all of the above described events occurred), although we
may (and, indeed, shall) disregard the substantive partner-
ship rules in subchapter K because of our finding Tigers Eye
to be a sham, we may not disregard the TEFRA procedural
provisions applicable to partnership items; i.e., subchapter C
(‘‘Tax Treatment of Partnership Items’’), chapter 63, subtitle
F of the Code (TEFRA procedural provisions). See sec. 6233.
We are thus faced with three questions: (1) How to view the
series of events between the trusts and Tigers Eye (if not as
events between partners and a partnership); (2) what are the
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146 138 UNITED STATES TAX COURT REPORTS (67)
Federal income tax consequences of those events (if not gov-
erned by subchapter K); and (3) which of those consequences
are properly before us in this proceeding subject to the TEFRA
procedural provisions.
Judge Beghe’s answer to the first question is clear and, I
believe, correct:
Because Tigers Eye is a sham and had no real business purpose [except,
perhaps, as an agent], it merely acted as nominee and agent for the option
partners and the items related to the transactions involving the option
spreads and purchases and distribution of stock and foreign currency are
characterized as such [i.e., as items of the option partners (its principal)
rather than items of itself (an agent)]. * * * [See op. Ct. pp. 102–103.]
On that basis, Tigers Eye, as agent for the trusts, (1)
received the offsetting currency options and cash from the
trusts, (2) sold the options (at a loss), and (3) used the bulk
of the remaining cash to purchase for the trusts the currency
and the shares. For Federal income tax purposes (answering
the second question), the trusts (1) realized neither a gain
nor a loss on the transfer of the options to Tigers Eye, (2)
realized (but may not be allowed) a net loss on Tigers Eye’s
disposition of the options, and (3) obtained section 1012 cost
bases in the currency and the shares upon Tigers Eye’s pur-
chase of them for the trusts. 1 Respondent has disallowed the
loss. Respondent believes that, if subchapter K plays no role,
the trusts overstated their bases in the currency and shares,
with the result that they overstated their losses on the sales
of that property. That, respondent believes, caused Mr.
Logan to underpay his taxes, attracting a section 6662 pen-
alty on account of a gross valuation misstatement.
Respondent also determined other penalties and made other
adjustments consistent with the recast principals-agent rela-
tionship. All of which brings us to the third question; i.e.,
which of these consequences are properly before us in this
proceeding subject to the TEFRA procedural provisions.
1 Since the substantive rules of subch. K do not apply to a simple agency relationship, sec.
1012(a), which generally governs the determination of ‘‘basis of property’’, applies to the trusts’
acquisition of the currency and shares, and the exception in that section for subch. K, ‘‘relating
to partners and partnerships’’, has no force or effect. Consequently, under sec. 1012(a), the
trusts’ bases in the currency and shares purchased by Tigers Eye for them are their ‘‘cost of
such property’’.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 147
III. TEFRA Procedural Provisions
Judge Beghe accurately summarizes section 6233: ‘‘Section
6233 provides that if a partnership return is filed for a tax-
able year but it is determined that no partnership exists, the
TEFRA procedures still apply to the entity, its items, and per-
sons holding an interest in the entity, to the extent provided
in the regulations.’’ See op. Ct. p. 97. He also accurately
summarizes the applicable regulations:
In such a case, the TEFRA temporary regulations applicable to Tigers
Eye’s 1999 taxable year provide that the Court may make determinations
with respect to all items of the entity (entity items) that ‘‘would be part-
nership items as defined in section 6231(a)(3) and the regulations there-
under * * * if * * * [it] had been a partnership’’. * * * [Id.]
Thus, for instance, if we determine that an entity filing a
partnership return is not a partnership but is an association
taxable as a corporation, we may determine the amounts tax-
able to the entity. See sec. 301.6233–1T(a), Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 6779 (Mar. 5, 1987);
see also sec. 301.6233–1(a), Proced. & Admin. Regs. More-
over, the regulations tell us that among our determinations
can be the determination that a purported partnership entity
(let’s call it Tigers Eye Investment Partnership) does not
exist. See sec. 301.6233–1T(c), Temporary Proced. & Admin.
Regs., supra; see also sec. 301.6233–1(b), Proced. & Admin.
Regs. If we find (as the parties agree and the stipulated deci-
sion provides) that Tigers Eye Investment Partnership does
not exist for Federal income tax purposes, then nothing
would have been contributed to it, nothing would have been
distributed from it, nor would it, on its own behalf, have
engaged in any transactions. That would explain (and justify)
the first decision paragraph in the stipulated decision, set-
ting to zero the following adjustments made by the FPAA:
Loss, Other Deductions, Distributions of Property Other
Than Money, and Capital Contributions. But Tigers Eye, as
agent, did receive the offsetting options from the trusts, did
sell them, and did purchase for the trusts the currency and
the shares. Certainly, as their agent, it had a fiduciary
obligation to account to the trusts for the expenditure of their
money and to report to them the cost of the property
obtained on their behalf.
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148 138 UNITED STATES TAX COURT REPORTS (67)
An agency (i.e., the fiduciary relationship between agent
and principal), however, is not an entity (i.e., it has no legal
identity apart from the separate identities of its partici-
pants). See Black’s Law Dictionary 70 (‘‘agency’’), 612
(‘‘entity’’) (9th ed. 2009). Nevertheless, because Tigers Eye
filed a partnership return for 1999, that return must be
treated as if it were filed by an entity. See sec. 301.6233–
1T(c), Temporary Proced. & Admin. Regs., supra; see also sec.
301.6233–1(b), Proced. & Admin. Regs. We could treat the
agency as the hypothetical entity filing the return and apply
the TEFRA procedural provisions to determine what would be
the hypothetical entity items of that hypothetical entity as
contemplated in section 301.6233–1T(c), Temporary Proced.
& Admin. Regs., supra (now section 301.6233–1(a), Proced. &
Admin. Regs.). Alternatively, Tigers Eye was properly orga-
nized as a Delaware L.L.C., and, therefore, it existed as an
entity, acting as agent for the trusts. On that basis, we could
ask what were the entity items of Tigers Eye, as agent. It
would seem to make no difference whether we address the
agency as a hypothetical entity, acting through Tigers Eye,
or address Tigers Eye as an entity in its own right, acting
as agent for the trusts. To simplify, we shall proceed as if
Tigers Eye, in its own right, is the relevant entity.
Section 301.6231(a)(3)–1(c)(3), Proced. & Admin. Regs.,
illustrates determinations that, with respect to distributions
from a partnership, the partnership must make for purposes
of its books and records or in order to furnish information to
a partner, and which, on that account, constitute partnership
items. Among the determinations included is: ‘‘The adjusted
basis to the partnership of distributed property’’. Sec.
301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin. Regs.
Tigers Eye, of course, had no basis in the currency and
shares it purchased on behalf of the trusts, nor, in the sense
contemplated by the regulations, did it make any distribution
of that property to them. Nevertheless, because it purchased
the property as agent of the trusts, it—rather than the
trusts—had the information necessary to determine what
property it had purchased for each trust and how much of
each trust’s money it had expended on those purchases.
Those were determinations that Tigers Eye had to make for
purposes of its books and records in order to furnish informa-
tion to the trusts. If we consider Tigers Eye the trusts’ agent
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 149
obligated to make those determinations, Tigers Eye’s deter-
mination of the costs of the property it purchased for the
trusts would be an entity item by analogy to section
301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin. Regs. (adjusted
basis to the partnership of distributed property is a partner-
ship item). Because we have jurisdiction to determine entity
items, see sec. 6226(f), we have jurisdiction to determine the
costs of the currency and the shares, which, as discussed
supra note 1, establishes the trusts’ bases in those prop-
erties.
IV. Penalties
I have little to add to Judge Beghe’s discussion of the pen-
alties issues. Application of the penalties seems pretty
straightforward. Most controversial appears to be application
of the gross valuation misstatement penalty to any under-
payment of tax attributable to the trusts’ overstatements of
their bases in the currency and the shares. The trusts’ bases
in the currency and the shares purchased by Tigers Eye for
them are, pursuant to section 1012, the costs of that prop-
erty, and those costs, in this case, are entity items. The
trusts claimed huge losses on the sale of the currency and
shares, which, it appears, respondent adjusted down (pro-
ducing underpayments in tax) simply by substituting their
cost bases in the property for their claimed outside bases.
There would thus appear to be no partner-level determina-
tion required to apply the penalty. By way of analogy, in
pertinent part, section 301.6231(a)(6)–1(a)(2), Proced. &
Admin. Regs., provides:
substituting redetermined partnership items for the partner’s previously
reported partnership items * * * does not constitute a partner-level deter-
mination where the Internal Revenue Service otherwise accepts, for the
sole purpose of determining the computational adjustment, all nonpartner-
ship items * * * as reported.
In 106 Ltd. v. Commissioner, 136 T.C. 67 (2011), a partner-
ship-level proceeding postdating Petaluma FX Partners, LLC
v. Commissioner, 591 F.3d 649, we agreed with the parties
that a partner-level proceeding was unnecessary to deter-
mine a gross valuation misstatement penalty attendant to a
partner’s sale of foreign currency distributed to him in a non-
liquidating distribution. Apparently, the partner’s basis in
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150 138 UNITED STATES TAX COURT REPORTS (67)
the foreign currency sold was equal to the partnership’s basis
in that currency, and the parties stipulated that the adjust-
ment to inside basis (the partnership’s basis) allowed a
numerical adjustment at the partner level. We held:
Because it is possible to derive through such an adjustment alone the
reduction in the claimed loss on the sale of the Canadian dollars that 106
distributed, and the consequent increase in the reportable gain and
resulting deficiency—all without any need for an affected-item deficiency
notice, * * * we conclude that we do have jurisdiction over the penalty in
this partnership-level case. * * * [106 Ltd. v. Commissioner, 136 T.C. at
75.]
That would appear to be the case here. The similarity
between the two cases is that, as in 106 Ltd., the trusts’
bases in the currency and the shares they received is the
hypothetical entity’s costs of that property (analogous to the
partnership’s basis in the currency distributed in 106 Ltd.),
and respondent may here determine the reduction in the
losses reported by the trusts simply by substituting for the
trusts’ claimed bases in the sold currency and shares their
cost bases properly determined in this procedure.
BEGHE, GOEKE, and WHERRY, JJ., agree with this concur-
ring opinion.
WHERRY, J., concurring: I agree with the results in the
opinion of the Court, and the bulk of its analysis. However,
I find myself unable to abide by the logic that the opinion
deploys to repudiate respondent’s gratuitous acknowledg-
ment, in a Status Report filed May 19, 2010: ‘‘All parties
agree that the basis of each purported partner’s interest in
Tigers Eye Trading, LLC, is an affected item.’’
I. Fighting Shadows
The opinion of the Court characterizes respondent’s conces-
sion as an issue of law that, if accepted, would deprive us of
subject matter jurisdiction. Rejecting it as such, the opinion
demonstrates ‘‘that the basis of each purported partner’s
interest in Tigers Eye Trading, LLC, is [not] an affected
item’’, but a partnership item.
The opinion of the Court, pp. 74–75, has marshaled an
array of arguments and authorities into an impregnable
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 151
rhetorical ‘‘Maginot Line’’ that, like its real-life predecessor,
stands impassive guard against a construct that has not been
attacked—in this case, subject matter jurisdiction. Respond-
ent’s FPAA, which had adjusted the purported partners’ out-
side bases, and the timely petition filed in response, vest us
with subject matter jurisdiction.
Nothing that respondent has said in the Status Report of
May 19, 2010, or elsewhere in the record, seeks to deprive us
of this jurisdiction. But in exercising this jurisdiction, we
cannot avoid confronting the Trojan horse substance latent in
respondent’s concession: ‘‘that the basis of each purported
partner’s interest in Tigers Eye Trading, LLC, is an affected
item.’’ 1
I concur with the opinion of the Court that there exist good
grounds for rejecting this substance. But in my view these
grounds lie farther afield of the ones in which the opinion of
the Court neatly slays the strawman of litigants stipulating
away the Court’s subject matter jurisdiction.
II. A Stipulation That Swallows the Law
Characterizing respondent’s concession as an issue of law
is problematic for three discrete reasons. First, it implies
that respondent is, as it were, recanting in one breath the
very regulations he recites with the next. 2 Second, it sug-
1 The opinion of the Court, pp. 74–75, cites several cases in support of retaining subject matter
jurisdiction here. However, none of these cases seems to advance the majority’s cause of reject-
ing respondent’s concession. Emblematic of these cases that ‘‘only go so far’’ is Charlotte’s Office
Boutique, Inc. v. Commissioner, 121 T.C. 89, 102 (2003), aff ’d, 425 F.3d 1203 (9th Cir. 2005).
In that case, we declined to give up jurisdiction even after the Commissioner conceded that his
initial determination, made in a sec. 7436 notice of determination which had furnished the ‘‘tick-
et to the Court’’, was incorrect. In the notice of determination, the Commissioner had deter-
mined, with respect to the employer who had petitioned the Court, ‘‘that ‘Other Workers’ had
during that year [at issue] received $2,585 of wages from petitioner’’. Id. at 103. However, ‘‘The
Commissioner had conceded before the Tax Court that appellant did not have any ‘other work-
ers.’ ’’ Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d at 1206 n.2. Though we did
not cede jurisdiction, we did accept the substance of the Commissioner’s concession: ‘‘that appel-
lant did not have any other workers for those years and that appellant had treated Mrs. Odell
as an employee in those years.’’ Id. at 1207. Consequently, we went on to ‘‘sustain respondent’s
determination that petitioner paid all of the disputed amounts to Ms. Odell as wages.’’ Char-
lotte’s Office Boutique, Inc. v. Commissioner, 121 T.C. at 106. A straightforward application of
Charlotte’s Office Boutique would result in our exercising jurisdiction here to find ‘‘that the basis
of each purported partner’s interest in Tigers Eye Trading, LLC, is an affected item.’’
2 See infra pt. IV (highlighting that under the Secretary’s legislative regulations issued pursu-
ant to sec. 6231(a)(3), whether outside basis is an affected item or a partnership item is a fac-
tual determination). The opinion of the Court itself points out that respondent swears allegiance
to these regulations, notwithstanding his statement in the May 19, 2010, Status Report that
outside basis is an affected item here. A similar concession made by the Commissioner on appeal
Continued
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152 138 UNITED STATES TAX COURT REPORTS (67)
gests that the Court of Appeals for the D.C. Circuit in
Petaluma FX partners, LLC v. Commissioner, 591 F.3d 649
(D.C. Cir. 2010) (Petaluma II), aff ’g in part, rev’g in part and
remanding 131 T.C. 84 (2008) (Petaluma I), in accepting a
similar concession, was unfaithful to its own precedent that
precludes parties from ‘‘forc[ing] a federal court to render an
advisory opinion * * * [by] stipulat[ing] to the state of
underlying law’’. Indep. Ins. Agents of Am., Inc. v. Clarke,
965 F.2d 1077, 1078 (D.C. Cir. 1992). 3 Finally, and most
troubling, it does gross disservice to the majority’s own
exegesis of the proper classification of outside basis as a part-
nership item. 4
III. ‘‘Do Not Add to What I Command You and Do Not Sub-
tract From It’’
I agree with the exposition in the opinion of the Court
regarding when, under the statute and the regulations, out-
side basis is properly treated as a partnership item, and dis-
agree with the dissent of Judge Holmes, who would effec-
tively limit such treatment to those partnerships that have
made a section 754 election. Judge Holmes’ reasoning reads
into the statute words that are not there, while reading out
of the regulations words that are palpably present.
A. Grammar and Structure of Section 6231(a)(3)
In explicating the definition of the term ‘‘partnership item’’
in section 6231(a)(3), Judge Holmes’ ‘‘ ‘starting point * * *
[is] the language employed by Congress.’ ’’ See Holmes op. p.
in Petaluma II was also accompanied by similar shouts of fealty to the regulations. The Commis-
sioner has in other instances, quite understandably, sought to hedge his litigating risk by seek-
ing to cover all his bases. See, e.g., Chief Counsel Notice CC–2009–11 (Mar. 11, 2009) (recom-
mending the ‘‘protective’’ issuance of a ‘‘notice of deficiency’’ after a partnership-level decision
becomes final, even if there remain ‘‘no affected items which require partner level determina-
tions’’ within the meaning of sec. 6230(a)(2)(A)(i)). Here, however, the opinion of the Court would
have us believe that respondent is, in effect, disowning the very flag under which he has mount-
ed his challenge. Surely that goes way beyond risk-aversion and borders on abject surrender
(and schizophrenia).
3 Though litigants cannot forfeit subject matter jurisdiction, they remain free to stipulate facts
that in practice may preclude a court from exercising jurisdiction that in principle the court en-
joys. The Court of Appeals for the D.C. Circuit is acutely aware of the distinction between delin-
eating the theoretical limits of subject matter jurisdiction and finding facts enabling its exercise.
See, e.g., Owens v. Republic of the Sudan, 531 F.3d 884, 890 (D.C. Cir. 2008) (discussing the
implications of ‘‘the authority * * * to make a finding of fact upon which subject matter jurisdic-
tion depends, as opposed to the authority to define those conditions in the first place’’ (emphasis
supplied)).
4 See infra pt. IV.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 153
179 (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 337
(1979)). However, he proceeds to implicitly add to this lan-
guage. Judge Holmes begins by directing our attention ‘‘at
the first part of section 6231(a)(3)—‘[W]ith respect to a part-
nership, any item required to be taken into account for the
partnership’s taxable year under any provision of subtitle A’.’’
Id. He then accuses the majority of ‘‘reconstruct[ing]’’ this
Code section by ‘‘leav[ing] out an important phrase[,] * * *
the modifier ‘partnership’s’ before ‘taxable year’ ’’. Id. But
Judge Holmes’ own ‘‘deconstruction’’ of section 6231(a)(3)
seems to be adding the restrictive nominative phrase ‘‘by the
partnership’’ after the participial phrase ‘‘to be taken into
account’’. 5
The required account-taking action contemplated by sec-
tion 6231(a)(3) could potentially be incumbent upon, and
therefore be undertaken by, only two kinds of account-taking
actors: the partnership, which is a nontaxable passthrough
entity; and any of its taxable partners. To consider section
6231(a)(3) in its unadorned congressionally enacted glory, we
should refrain from circumscribing the required account-
taking action it contemplates. Consequently, we should desist
from prespecifying either of the two types of potential
account-taking actors as the posited performer of the con-
templated action. Resisting any such urge, we countenance,
as a partnership item, ‘‘any item required to be taken into
account [by anyone] for the partnership’s taxable year under
any provision of subtitle A’’. 6
5 Judge Holmes’ misconception of sec. 6231(a)(3) apparently stems from misconstruing the
prepositional phrase ‘‘for the partnership’s taxable year’’. Judge Holmes seems to believe that
this phrase modifies the contemplated action—account taking. Consequently, he views ‘‘the part-
nership’s taxable year’’, which is the object of the preposition ‘‘for’’, as the recipient (or, as gram-
marians call it, patient) of the contemplated account-taking action. See Holmes op. pp. 184–185
(‘‘Tigers Eye itself was never required to determine its partners’ outside bases, and its partners’
outside bases had no effect on its taxable year.’’ (Emphasis supplied.)). In point of fact, however,
the prepositional phrase ‘‘for the partnership’s taxable year’’ in sec. 6231(a)(3) modifies, not the
contemplated account-taking action, but the ‘‘required’’ character of this action. Thus, the ‘‘for’’
before ‘‘the partnership’s taxable year’’ denotes ‘‘with respect to’’. This is the same meaning that
‘‘for’’ takes in the various substantive provisions of subch. K, where it appears before ‘‘partner-
ship’s taxable year’’ or ‘‘taxable year of the partnership’’. See infra note 7 and accompanying
text. Judge Holmes preemptively denies that ‘‘for’’ implies ‘‘with respect to’’ in sec. 6231(a)(3)
because, he claims, ‘‘section 6231(a)(3) already requires the item be related to or ‘with respect
to a partnership.’ ’’ See Holmes op. p. 180. Judge Holmes forgets, however, that the item in ques-
tion must be related not only to the specific partnership, but also to the given taxable year of
that partnership. The cause of action in a partnership-level proceeding, after all, is a discrete
taxable year of the partnership.
6 The explicit insertion of the indefinite pronoun is supplied to preclude an implicit insertion
Continued
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154 138 UNITED STATES TAX COURT REPORTS (67)
Because the provisions of subtitle A determine a taxpayer’s
tax liability, we cannot exclude from the scope of section
6231(a)(3) the required account-taking actions of a taxpayer-
partner of the given nontaxable passthrough partnership.
Indeed, a comparison of the syntactical structure of section
6231(a)(3) with that of some of the substantive provisions of
subtitle A, chapter 1, subchapter K, part I, titled ‘‘Determina-
tion of Tax Liability’’, suggests that a partner’s required
account-taking actions may very well be the primary focus of
section 6231(a)(3). See, e.g., sec. 702(a) (‘‘In determining his
income tax, each partner shall take into account separately
his distributive share of the partnership’s [income, gain, loss,
deduction, or credit]’’ (emphasis supplied)); see also sec.
706(a) (‘‘In computing the taxable income of a partner for a
taxable year, the inclusions required by section 702 [for the
partner’s distributive shares] and section 707(c) [for the part-
ner’s guaranteed payments] with respect to a partnership
shall be based on the income, gain, loss, deduction, or credit
of the partnership for any taxable year of the partnership
ending within or with the taxable year of the partner.’’
(Emphasis supplied.)). 7
Devoid of any constraints on the type of actor required to
undertake the envisaged account-taking action, section
6231(a)(3) merely represents an ‘‘acquiescing’’ provision, one
that abdicates to the Secretary the nettlesome task of sub-
stantively defining a partnership item. 8 Thus, a partnership
of a demonstrative counterpart.
7 The emphasized prepositional phrase in sec. 706(a), ‘‘for any taxable year of the partnership’’
is modifying the ‘‘required’’ nature of the ‘‘inclusions’’ by the partner. The ‘‘for’’ before ‘‘any tax-
able year of the partnership’’ connotes ‘‘with respect to’’. See supra note 5 (discussing an iden-
tical use of ‘‘for’’ in sec. 6231(a)(3)); see also infra note 10 (discussing the same in sec.
301.6231(a)(3)–1(a), Proced. & Admin. Regs.).
8 Judge Holmes imbues the first half of the definition of the term ‘‘partnership item’’ in sec.
6231(a)(3) with a significance that belies the term’s historical origin. He
believe[s] Congress added the phrase ‘‘to the extent regulations prescribed by the Secretary pro-
vide that * * * such item is more appropriately determined at the partnership level than at
the partner level’’ to section 6231(a)(3), so that the Secretary would not pervert and subvert the
preceding part of section 6231(a)(3)’s definition—as the majority does today—in promulgating
regulations listing what are partnership items. Congress wanted to kick the ladder out from
under the Secretary if he went picking fruit that Congress didn’t want picked at the partnership
level. * * * [See Holmes op. note 7.]
Legislative history, however, clearly reflects that Congress was concerned, not with how high
up a fruit-bearing tree the Secretary might reach, but instead with how often courts were forced
to return to the same tree.
Both the House conference report and the so-called Blue Book accompanying TEFRA use the
term ‘‘partnership item’’ in discussing pre-TEFRA law with no indication that the term’s con-
notation would undergo a qualitative transformation as a consequence of the enactment of
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 155
item is ‘‘any item required to be taken into account * * * to
the extent regulations prescribed by the Secretary provide
that, for purposes of this subtitle, such item is more appro-
priately determined at the partnership level than at the
partner level.’’ 9 In sum, a partnership item is what the Sec-
retary decides it is, so long as he justifies his decision by
invoking the ‘‘more-appropriately-determined’’ principle.
So much for the nonexistent exclusions that Judge Holmes
seems to import into the statute. Now, consider the
applicable regulatory provisions the full import of which I
believe Judge Holmes has overlooked.
B. The Secretary’s Two-Step Tango
The Secretary begins, unsurprisingly, by dutifully noting
that his designation of partnership items will comply with
the statutorily mandated ‘‘more-appropriately-determined’’
principle. Thus, the Secretary declares that he will designate
as partnership items only those items that in his opinion are
more appropriately determined at the partnership level. See
sec. 301.6231(a)(3)–1(a), Proced. & Admin. Regs. (designating
as partnership items those that ‘‘are required to be taken
into account for the taxable year of a partnership under sub-
TEFRA. To the contrary, both reports advance, as a primary motivation for enacting TEFRA,
the consistent tax treatment of any one partnership item across all partners in the same part-
nership.
The House conference report, H.R. Conf. Rept. No. 97–760, at 62 (1982), 1982–2 C.B. 600, 662,
notes that under ‘‘present law’’, i.e., before the enactment of TEFRA, ‘‘partnerships are not tax-
able entities[;] * * * partnerships are required to file an annual information return[;] * * *
[but] adjustments are made to each partner’s income tax return’’. (Emphasis supplied.) The re-
port bemoans the fact that as a result of the foregoing, ‘‘a judicial determination of an issue
relating to a partnership item generally is conclusive only as to those partners who are parties
to the proceeding.’’ Id. (emphasis supplied). In discussing how TEFRA would ‘‘promote increased
compliance and more efficient administration of the tax laws’’, the report comments that pursu-
ant to TEFRA, other than certain limited exceptions, ‘‘the tax treatment of any partnership item
is to be determined at the partnership level’’. Id. (emphasis supplied).
The Blue Book, Staff of the Joint Committee on Taxation, General Explanation of the Revenue
Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, at 267 (J. Comm. Print
1982), repeats the language quoted above. In addition, the Blue Book observes that before enact-
ment of TEFRA, ‘‘Duplication of manpower and administrative and judicial effort was required
in some cases to determine the aggregate tax liability attributable to a single partnership item.
Inconsistent results could be obtained for different partners with respect to the same item.’’ Id.
at 268 (emphasis supplied).
9 As shown supra notes 5 and 7 and the accompanying text, the restrictions ‘‘with respect to’’
the partnership and the partnership’s taxable year in sec. 6231(a)(3) merely ensure that a part-
nership-level proceeding does not exceed the bounds of the cause of action; i.e., only one partner-
ship, and only one of its taxable years, should remain the subject of each adjudication in a given
partnership-level proceeding.
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156 138 UNITED STATES TAX COURT REPORTS (67)
title A of the Code [and] are more appropriately determined
at the partnership level’’). 10
Substantively, that regulation section represents the Sec-
retary’s acknowledgment that the account-taking action
envisaged in section 6231(a)(3) may be required of either the
partnership or any of its partners. Accordingly, he formulates
a two-pronged approach for classifying partnership items.
One prong constitutes a direct application of the ‘‘more-
appropriately-determined’’ principle, while the other prong
comprises a recursive application of this principle.
The first of the Secretary’s two prongs tackles items
required to be taken into account by the partnership. It is
almost definitional that any such item is more appropriately
determined at the partnership level. 11 Consequently, a direct
application of the ‘‘more-appropriately-determined’’ principle
renders the item a partnership item. Let us call such part-
nership items direct partnership items. Included in direct
partnership items is a partner’s distributive share of the
partnership’s income, gain, loss, deduction, or credit. See sec.
301.6231(a)(3)–1(a)(1)(i), Proced. & Admin. Regs.
The second prong of the Secretary’s two-pronged approach
deals with items ‘‘required to be taken into account’’ within
the meaning of section 6231(a)(3)—but not by the partner-
ship. It stands to reason that this account-taking could then
be incumbent only upon one or more of the partnership’s
partners. For such an item, the Secretary prescribes a recur-
sive application of the ‘‘more-appropriately-determined’’ prin-
ciple.
10 Note again the use of the prepositional phrase ‘‘for the taxable year of a partnership’’.
Again, the phrase is modifying, not the envisaged account-taking action, but the ‘‘required’’ char-
acter of this action. And, again, ‘‘for’’ indicates ‘‘with respect to’’. See supra notes 5 and 7.
11 TEFRA envisages that a partnership-level proceeding be concluded before partner-level ac-
tions commence. See sec. 6225. In GAF Corp. & Subs. v. Commissioner, 114 T.C. 519, 525 (2000),
we had followed Maxwell v. Commissioner, 87 T.C. 783 (1986), and its progeny, to hold invalid
an affected items notice of deficiency issued ‘‘prior to completion of the TEFRA partnership pro-
cedures’’.
Assume arguendo that an item required to be taken into account by the partnership is none-
theless not considered more appropriately determined at the partnership level. Because this
item is required to be taken into account by the partnership, it may, indeed quite possibly will,
play a definitive role in the partnership-level proceeding. However, because it is not considered
more appropriately determined at the partnership level, the item will be beyond the purview
of the partnership-level proceeding. Thus, the partnership-level proceeding will remain unre-
solved until the item in question is conclusively determined—presumably at the partner level.
But the latter itself cannot commence until the partnership-level proceeding has been concluded.
Such a perverse perpetual loop could bring TEFRA’s elaborate administrative and judicial ma-
chinery to a grinding halt.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 157
Under this recursive application, the given item may still
be deemed more appropriately determined at the partnership
level. For this, however, the item must be determinable from
other determinations that the partnership is required to
make, even though the partnership itself is not required to
take into account the item per se. Let us call such items,
which are rendered partnership items by recursively
applying the ‘‘more-appropriately-determined’’ principle,
derivative partnership items. 12 They include, among others,
items of contribution and distribution. See sec.
301.6231(a)(3)–1(a)(4)(i) and (ii), Proced. & Admin. Regs.
Judge Holmes’ analysis fails to confront this recursive
application of the ‘‘more-appropriately-determined’’ principle
set out in the regulations and, therefore, ignores derivative
partnership items.
What does all of this mean for classifying as a partnership
item a partner’s basis in his partnership interest; i.e., the
partner’s outside basis? If the partnership is required to
account for its partners’ outside bases, then under the first
12 The recursive application of the ‘‘more-appropriately-determined’’ principle evidently rests
on the eminently reasonable presumption that determination of an item, for purposes of sec.
6231(a)(3), establishes a transitive relationship between the determined item and the deter-
minants that conclusively determine it. In this context, transitivity implies that if, for example,
an item is conclusively determined by two determinants, say (D1 and D2), each of which, in turn,
is conclusively determined by two other determinants, say (D11 and D12) and (D21 and D22), re-
spectively, then the item in question itself is also conclusively determined by the set of (D11,
D12, D21, and D22).
To see how transitivity enables a recursive application of the ‘‘more-appropriately-determined’’
principle, begin by considering an item, ‘‘Item A’’, that is conclusively determined by several
(‘‘n’’) different determinations that the partnership is required to make, call them (A1, A2, A3,
. . ., An). Each of A1 through An constitutes a determinant of Item A. Each of them is also, by
definition, more appropriately determined at the partnership level. The premise of a transitive
relationship between the determined and its determinants renders Item A, in turn, more appro-
priately determined at the partnership level.
Now, consider another item, ‘‘Item B’’, that is conclusively determined by the aggregate set
of: (1) several (‘‘m’’) different determinations that the partnership is required to make, call them
(B1, B2, B3, . . ., Bm); and (2) Item A. Recall that the determinants of Item A itself are n other
determinations that the partnership is required to make; i.e., (A1, A2, A3, . . ., An). Because de-
termination of items is deemed transitive, Item B can be considered as conclusively determined
by the union of the two sets (A1, A2, A3, . . ., An) and (B1, B2, B3, . . ., Bm); i.e., all determina-
tions that the partnership is required to make. Thus, Item B is also more appropriately deter-
mined at the partnership level.
The same would apply for yet another item, ‘‘Item C’’, that is conclusively determined by the
aggregate set of: (1) several (‘‘p’’) different determinations that the partnership is required to
make, call them (C1, C2, C3, . . ., Cp); (2) Item A; and (3) Item B. Again, transitivity implies
that Item C can be considered as conclusively determined by the union of the three sets (A1,
A2, A3, . . ., An), (B1, B2, B3, . . ., Bm), and (C1, C2, C3, . . ., Cp). Thus, Item C is also conclu-
sively determined entirely by determinations that the partnership is required to make, and con-
sequently, more appropriately determined at the partnership level. We can continue this induc-
tive process ad infinitum.
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158 138 UNITED STATES TAX COURT REPORTS (67)
prong of the two-pronged approach detailed above, outside
bases are direct partnership items. Thus, as Judge Holmes
points out, if the partnership has a section 754 election in
effect, then the partnership will account for its partners’ out-
side bases, which will consequently be treated as partnership
items. 13
What if the partnership is not required to account for its
partners’ outside bases? Then, any one partner’s outside
basis may, or may not, be a partnership item. Outside basis
will be a partnership item if it is determined conclusively by
partnership items, whether direct or derivative. If all deter-
minants necessary and sufficient to compute outside basis
are direct or derivative partnership items, then another
recursive application of the ‘‘more-appropriately-determined’’
principle renders the object of their determination, i.e., the
outside basis in question, itself a derivative partnership
item. 14 On the other hand, so long as even one necessary
determinant of the given outside basis is incapable of being
classified as a partnership item, under either of the Sec-
13 Judge Holmes argues that ‘‘The reason outside basis is a partnership item when a partner-
ship makes a section 754 election is that such a partnership itself needs to determine its part-
ners’ outside bases to redetermine the partnership’s own inside basis for the ‘partnership’s tax-
able year.’ ’’ See Holmes op. p. 182 & n.9 (citing Kligfeld Holdings v. Commissioner, 128 T.C.
192, 197 (2007); see also secs. 743(b), 754). Actually, any adjustment under sec. 743(b), which
is made in ‘‘the case of a transfer of an interest in a partnership by sale or exchange or upon
the death of a partner[,] * * * constitute[s] an adjustment to the basis of partnership property
with respect to the transferee partner only.’’ Sec. 743(b) (emphasis supplied). Moreover, such a
basis adjustment is now no longer entirely elective. Effective for transfers after Oct. 22, 2004,
the adjustment is required, not only if the partnership has a sec. 754 election in effect, but also
if ‘‘the partnership has a substantial built-in loss immediately after such transfer.’’ Sec. 743(a).
By comparison with the partner-specific adjustments to the basis of partnership property
under sec. 743(b), sec. 734(b) provides for adjustments to the common basis of partnership prop-
erty. These adjustments are triggered by certain kinds of partnership distributions and are
made to the partnership’s undistributed property.
Specifically, the adjustments apply following any distribution in which the distributee partner
either recognizes gain or loss or receives the distributed property with a basis different from
that of the partnership before the distribution. See sec. 734(b)(1) and (2). Both contingencies,
the distributee partner’s recognizing gain or loss and his receiving the distributed property with
a different basis, would require the partnership to account for the distributee partner’s outside
basis to ascertain the sec. 734(b) adjustment. See generally sec. 731 (governing distributee part-
ner’s recognition of gain or loss); sec. 732 (providing rules for determining distributee partner’s
basis in the distributed property); sec. 733 (specifying adjustments to distributee partner’s out-
side basis). As with sec. 743(b) adjustments, basis adjustments under sec. 734(b) are now no
longer entirely elective. Effective for distributions after October 22, 2004, adjustments to the
partnership’s undistributed property are required, not only if the partnership has a sec. 754
election in effect, but also if ‘‘there is a substantial basis reduction with respect to such distribu-
tion.’’ Sec. 734(a).
14 The Commissioner appeared to be developing an analogous argument in Petaluma II but
seems to have fumbled at the goal line. See Petaluma II, 591 F.3d at 654 (‘‘On appeal the Com-
missioner * * * in this case * * * asserts that outside basis is an affected item whose elements
are mainly or entirely partnership items.’’ (Emphasis supplied.)).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 159
retary’s two prongs, then outside basis cannot be a partner-
ship item. 15 Consistent with this ‘‘all-or-nothing-at-all’’
rationale, the Secretary provides that ‘‘The basis of a part-
ner’s partnership interest is an affected item to the extent it
15 This would be the case if a partner acquires his partnership interest ‘‘as the result of a
transfer of an interest in a partnership by sale or exchange or on the death of a partner’’, sec.
743(b), assuming that the partnership did not have a sec. 754 election in place and further did
not have ‘‘a substantial built-in loss immediately after such transfer’’, id.; see also supra note
13. For a sale or exchange, under sec. 742, and sec. 1.742–1, Income Tax Regs., the purchasing
partner would take an initial outside basis in the amount of his purchase price or other consid-
eration paid. For an acquisition from a decedent partner, the acquiring partner would be enti-
tled under sec. 1014 to a ‘‘stepped-up basis’’. In neither case would the partnership have any
reason to keep track of the basis of the partnership interest in the hands of the transferee part-
ner.
This could also be the case if an individual contributes built-in loss personal use property for
business use by the partnership. Under Au v. Commissioner, 40 T.C. 264 (1963), aff ’d, 330 F.2d
1008 (9th Cir. 1964), the partnership would take a basis in the contributed property in the
amount of: (1) its fair market value at the time of contribution, or (2) its adjusted basis in the
contributing partner’s hands, whichever is lower. See also sec. 1.167(g)–1, Income Tax Regs. (‘‘In
the case of property which has not been used in the trade or business or held for the production
of income and which is thereafter converted to such use, the fair market value on the date of
such conversion, if less than the adjusted basis of the property at that time, is the basis for
computing depreciation.’’). If the contributed property had a built-in loss at the time of contribu-
tion, then the partnership will receive the property with a fair market value basis. The partner-
ship will presumably have no reason to keep track of the contributing partner’s historical cost
basis in the contributed property. However, under sec. 722, the contributing partner’s basis in
his partnership interest should be his adjusted basis in the contributed personal use property.
The same result can obtain even for contributions of business use property if the partnership
does not maintain ‘‘book capital accounts’’ in accordance with the capital account maintenance
rules of sec. 1.704–1(b)(2)(iv), Income Tax Regs. Assume, for simplicity, that the partnership de-
termines each partner’s distributive share of income, gain, loss, deduction, or credit ‘‘in accord-
ance with the partner’s interest in the partnership’’ under sec. 704(b). If a partner contributes
either personal use or business use property with a built-in loss to such a partnership, for the
partnership’s business use, then under sec. 704(c)(1)(C)(ii), the partnership will take a fair mar-
ket value basis in the contributed property. The contributed property’s ‘‘built-in loss shall be
taken into account only in determining the amount of items allocated to the contributing part-
ner’’. Sec. 704(c)(1)(C)(i). Once the partnership no longer holds the property, say as a result of
a distribution to a partner other then the contributing partner, the partnership will presumably
have no reason to keep track of the contributing partner’s historical cost basis in the contributed
property.
Finally, an individual or corporate partner may be required to readjust its basis in its partner-
ship interest under various provisions of the Code for reasons unrelated to changes in the part-
nership’s operations. The partnership would ordinarily have no reason to keep track of such re-
adjustments. Examples of such readjustments include the following.
An insolvent partner may reduce the basis of his partnership interest (along with that of other
unrelated assets he owns) under sec. 108(b), which demands tax attribute reduction as the price
for the insolvency exclusion of cancellation of indebtedness income. Unless the partner’s insol-
vency affects, or arises from, operations of the partnership, the latter will have no reason to
keep track of such a basis reduction under sec. 108(b).
A corporate partner may adjust its basis in its partnership interest for the ‘‘recapture’’ im-
posed by sec. 1363(d) and sec. 1.1363–2, Income Tax Regs., which provide a ‘‘look-through rule’’
for certain partnership inventory upon the tax-free contribution of a partnership interest from
a C corporation to an S corporation. Note that the partnership’s accounting remains unaffected
unless it specifically elects to adjust the basis of the inventory at issue, pursuant to sec. 1.1363–
2(e), Income Tax Regs. This election is different from, and not covered by, a sec. 754 election.
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160 138 UNITED STATES TAX COURT REPORTS (67)
is not a partnership item.’’ Sec. 301.6231(a)(5)–1(b), Proced.
& Admin. Regs.
IV. A Fact-Specific Inquiry—Always and Everywhere
The parsing of the regulations set forth above completely
accords with, and perfectly complements, that of the opinion
of the Court. But having done the heavy lifting, the opinion
of the Court seems to have tripped at the very end. The
opinion fails to account for the obvious implication of its own
painstaking analysis: Under the regulations, whether outside
basis is a partnership item depends upon the facts and cir-
cumstances unique and specific to that partnership and
partner. 16
This implication does not lose validity simply because in a
partnership-level proceeding we make a finding to disregard
the partnership form before us. Disregarding a partnership
means we are not respecting the garb in which the taxpayer
has dressed up his investment transaction. The mere fact
that the form of the investment is not respected, however,
does not by itself reduce to zero the amount of the taxpayer’s
investment that we will recognize for tax purposes. 17
16 In theory, this could be an inquiry without bounds. ‘‘The determinations illustrated in * * *
[the regulations] that the partnership is required to make are not exhaustive; there may be ad-
ditional determinations that the partnership is required to make’’. Sec. 301.6231(a)(3)–1(c)(1),
Proced. & Admin. Regs. Moreover, ‘‘failure by the partnership actually to make a determination
(for example, because it does not maintain proper books and records) does not prevent an item
from being a partnership item.’’ Id. As a practical matter, however, in any given partnership-
level case before us, litigants can be expected to isolate and describe the discrete determinations
that the partnership is, or is not, required to make that control the classification of outside basis
as a partnership item.
17 The opinion of the Court states that ‘‘Solely from these determinations [relating to dis-
regarding the partnership form], it can be determined with absolute certainty that there can
be no outside basis in the nonexistent partnership interest.’’ See op. Ct. p. 119. It is indisputable
that outside basis becomes a conceptual nullity once we disregard the partnership form. How-
ever, that self-evident proposition is not necessarily dispositive for the purpose at hand—sus-
taining a sec. 6662 accuracy-related penalty on grounds of a gross valuation misstatement under
sec. 6662(e) and (h). That requires, for the tax year at issue, readjusting downwards to at least
one-fourth ‘‘the adjusted basis of any property * * * claimed on any return of tax imposed by
chapter 1’’. Sec. 6662(e)(1)(A).
Outside basis would become relevant in this readjustment calculus if a purported partner of
a disregarded partnership claims on his tax return a loss on the sale of property, the basis of
which is derived from his claimed outside basis in the disregarded partnership. Such property
could be the purported partner’s claimed partnership interest, or (as here) property other than
money received in a claimed liquidation distribution. In either case, the conceptual nullity of
outside basis would not by itself allow us to readjust down to zero the basis of such sold prop-
erty. Surely we would not ignore any actual cash, in U.S. dollars (the functional currency for
a U.S. taxpayer), that the purported partner had invested in the partnership, merely because
we are ignoring the partnership form. Thus, if the purported partner had purchased his claimed
partnership interest from a third party, his purchase price would not evaporate and become a
tax nullity, even though his outside basis does so, as a consequence of disregarding the partner-
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 161
Ascertaining the amount of the taxpayer’s investment that
will be recognized for tax purposes may, or may not, entail
looking beyond ‘‘the partnership books and records’’. See, e.g.,
op. Ct. p. 125. This cannot be known in advance, and will be
unique and specific to the disregarded partnership and the
purported partner. 18
V. Respondent’s ‘‘Advocacy’’
As shown above, and as the majority itself points out,
applying the regulations to establish whether outside basis is
an affected item or a partnership item focuses critically on
‘‘the extent that a determination of an item relating to a con-
tribution [or a distribution] can be made from * * * deter-
minations that the partnership is required to make’’. Sec.
301.6231(a)(3)–1(c)(2), Proced. & Admin. Regs. (flush lan-
guage) (emphasis supplied); see also sec. 301.6231(a)(3)–
1(c)(1), Proced. & Admin. Regs. (‘‘The critical element is that
the partnership needs to make a determination with respect
to a matter for the purposes stated’’ (emphasis supplied));
sec. 301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs. (‘‘deter-
minations that the partnership is required to make [include
those] with respect to an amount, the character of an
amount, or the percentage interest of a partner in the part-
nership, for purposes of the partnership books and records or
for purposes of furnishing information to a partner’’).
A. Respondent’s Steadfast Faith in the Regulations
Whether or not the (disregarded) partnership before us,
Tigers Eye Trading, LLC, is ‘‘required’’, or ‘‘needs’’, to make
a determination has to be an issue unique or specific to that
given partnership form. Thus, if the regulations are valid,
and we are applying them properly, then conceding that out-
side basis is an affected item here could only mean that this
particular partnership entity is not required to make the
determinations that will suffice for computing the purported
partners’ outside bases.
ship. In any sale of the claimed partnership interest, or of the property other than money re-
ceived in a claimed liquidating distribution, the purported partner would still be allowed to re-
cover tax free the amount of his actual purchase price; i.e., the underlying transactions would
be treated as engaged in by the purported partner directly.
18 See supra note 16 (discussing how a theoretically unbounded inquiry will, as a practical
matter, be framed and rendered tractable by the litigants).
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162 138 UNITED STATES TAX COURT REPORTS (67)
Respondent has by no means renounced the Secretary’s
regulations. Far from it, he continues to pay homage to them
at every turn. Therefore, respondent’s statement in the May
19, 2010, Status Report that ‘‘All parties agree that the basis
of each purported partner’s interest in Tigers Eye Trading,
LLC, is an affected item’’ is not, and cannot be deemed, an
attempt to stipulate the applicable law. That law, embodied
in the Secretary’s regulations, entails a fact-specific inquiry
for concluding that outside basis is an affected item.
Respondent’s conclusory statement regarding the affected
item status of outside basis, therefore, must evince, at its
core, a concession of fact.
I would portray this ‘‘garrulity of advocacy’’ on respond-
ent’s part for what it essentially is—an attempt at stipu-
lating facts. Identifying it as such, I would disregard it
because the record shows that it is incorrect.
B. Salvaging Respondent From His Zeal
As the trial court, we enjoy an element of discretion in
deciding whether to accept respondent’s proffered stipulation.
Under Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,
195 (1989) (citing Loftin & Woodard, Inc. v. United States,
577 F.2d 1206, 1232 (5th Cir. 1978), and Jasionowski v.
Commissioner, 66 T.C. 312, 317–318 (1976)), ‘‘We may dis-
regard stipulations between parties where justice requires it
if the evidence contrary to the stipulation is substantial or
the stipulation is clearly contrary to facts disclosed by the
record.’’ See also Dillon, Read & Co. v. United States, 875
F.2d 293, 300 (Fed. Cir. 1989) (holding that parties remain
‘‘free to stipulate to whatever facts they wish, except they
may not stipulate to facts known to be fictitious’’).
I have little hesitation in concluding that the attempted
stipulation ‘‘is clearly contrary to facts disclosed by the
record.’’ Examining the record here, it is readily apparent
that the determinants necessary and sufficient for computing
the outside bases of Tigers Eye Trading LLC’s purported part-
ners were themselves required to be determined at the part-
nership level. In particular, each outside basis is conclusively
determined by a set of determinants comprising the following
two kinds of items: (1) the purported partner’s distributive
shares of Tigers Eye Trading LLC’s items of income, gain,
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 163
loss, deduction, or credit; and (2) the purported partner’s
items of contributions and distributions, the bases of each of
which could be derived from determinations required to be
made by Tigers Eye Trading LLC. The first category of deter-
minants consists of direct partnership items under section
301.6231(a)(3)–1(a)(1)(i), Proced. & Admin. Regs., while the
second represents derivative partnership items under section
301.6231(a)(3)–1(a)(4)(i) and (ii), Proced. & Admin. Regs.
Because the outside basis of each purported partner of
Tigers Eye Trading LLC is conclusively determined entirely
by partnership items, recursively applying the ‘‘more-appro-
priately-determined’’ principle under the second prong of the
Secretary’s two-pronged approach, discussed above, yields a
derivative partnership item. I, therefore, have little doubt
that respondent’s attempt at stipulating facts that render
outside basis an affected item is irreconcilable with the facts
disclosed by the record.
I am equally confident that justice requires us to disregard
the attempted stipulation. Treating outside basis as an
affected item of Tigers Eye Trading LLC would preclude us
from readjusting the purported partners’ inflated outside
bases in this partnership-level proceeding. This readjustment
would have to await partner-level actions, even though
Tigers Eye Trading LLC was required to make all the deter-
minations necessary and sufficient to compute the purported
partners’ outside bases. Specifically, no additional informa-
tion would become available for scrutiny at the subsequent
partner-level actions that is not forthcoming now in this
partnership-level proceeding.
TEFRA, howsoever unwieldy its current practice may have
become, 19 was undoubtedly motivated in large part by the
twin goals of conservation of judicial effort and consistent
treatment of all partners in the same partnership. 20 Both
goals would be undermined by necessitating partner-level
actions for readjusting inflated outside bases when all the
19 See op. Ct. note 29 (discussing the ‘‘fiendishly complicated’’ and ill-fitting changes to TEFRA
made by TRA 1997).
20 See generally Staff of the Joint Committee on Taxation, General Explanation of the Revenue
Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, at 268 (J. Comm. Print 1982)
(observing that before enactment of TEFRA, ‘‘Duplication of manpower and administrative and
judicial effort was required in some cases to determine the aggregate tax liability attributable
to a single partnership item. Inconsistent results could be obtained * * * with respect to the
same item.’’).
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164 138 UNITED STATES TAX COURT REPORTS (67)
determinants for conclusively determining such outside bases
are themselves required to be determined at the partnership-
level and are consequently within our purview here.
C. Wings of Ignominy
No discussion of accepting or rejecting respondent’s conces-
sion can be complete without acknowledging and addressing
the fact that the Court of Appeals for the D.C. Circuit had,
in Petaluma II, accepted a similar concession. Does Golsen
tie our hands here and require us to accept respondent’s
concession regardless of our own analysis of the issue? This
is a difficult question, and it bears careful consideration. I
submit that we have sufficient latitude to reject respondent’s
concession without violating the Golsen rule.
At trial in Petaluma I, 131 T.C. 84, the Commissioner
never even hinted, much less announced, that outside basis
was an affected item of Petaluma, the disregarded partner-
ship at issue in that case. However, on appeal, in Petaluma
II, the Commissioner’s advocacy took wings, Icarus-like, and
soared close to the sun. His speech, and even more, his
silence, strongly suggested that the outside bases of
Petaluma’s purported partners were affected items.
He stated on brief that ‘‘A partner’s outside basis is gen-
erally an ‘affected item,’ rather than a ‘partnership item’ ’’,
implying that the purported partners’ outside bases in that
case were also affected items. 21 The Commissioner strength-
ened this implication by his choice of words in responding to
‘‘The argument of Petaluma and the amicus * * * that the
Tax Court created an improper exception to the general rule
that outside basis is an affected item that must be deter-
mined in a partner-level proceeding.’’ The Commissioner
responded that ‘‘The Tax Court created no such exception.’’
The Court of Appeals seems to have taken this denial at
face value. Thus, the court observed that ‘‘On appeal the
Commissioner concedes that outside basis is not a partner-
ship item in this case.’’ Petaluma II, 591 F.3d at 654
(emphasis supplied). Following this observation, the court
seemingly ipso facto ‘‘rejected the Tax Court’s conclusion that
outside basis was a partnership item in this case’’. Id. at 655
21 Though the statement leaves open the possibility of outside basis being a partnership item
of some other partnership, it seems an excessively narrow construction of the Secretary’s regula-
tions discussed supra pt. III.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 165
(emphasis supplied). Though the Commissioner went on to
argue that ‘‘the concept of outside basis in a disregarded
partnership is total nonsense’’, the damage had been done,
the wax melted, and his flight abruptly ended.
By comparison with the Commissioner’s apparently delib-
erate distance from the issue in Petaluma I, and his ‘‘silence
as acceptance’’ of outside bases as affected items in Petaluma
II, respondent has left nothing unspoken here. He unequivo-
cally declares that ‘‘All parties agree that the basis of each
purported partner’s interest in Tigers Eye Trading, LLC, is an
affected item.’’
Because we were not confronted with a similar declaration
in Petaluma I, the Court was denied the opportunity to
develop a record at trial, in sufficient detail, to enable an
objective evaluation of the assertion. 22 Deprived of such a
record developed at the trial stage, the Court of Appeals for
the D.C. Circuit did not have any evidentiary basis for
rejecting what seemed to be a unilateral concession of fact on
the Commissioner’s part. To paraphrase a different Court of
Appeals, trial courts penalize taxpayers, while appellate
courts review records. 23
Clearly, the Commissioner’s subtler, albeit similar, conces-
sion was accepted in Petaluma II against a backdrop devoid
of any contrary facts established at trial. Consequently, I do
not believe Golsen forecloses us from rejecting an unadulter-
ated version of that concession here. Our decision to reject
the concession, however, must be supported by sufficient, and
sufficiently detailed, findings of fact along the lines outlined
above. So long as we do not abuse our discretion and make
clearly erroneous factual findings, our rejection should pass
muster under a reviewing court’s deferential gaze. In sharp
contrast, the majority’s approach of treating the concession
22 Petaluma I was decided ‘‘on the parties’ cross-motions for summary judgment under Rule
121.’’ 131 T.C. 84. Therefore, the Court did not have reason to consider the determinations that
the disregarded partnership may, or may not, have been required to make, and that, in turn,
may, or may not, have conclusively determined the purported partners’ outside bases. Moreover,
the Court had no reason to require the parties to identify the factual issues governing this in-
quiry. See supra note 16 and accompanying text.
23 Cf. United States v. Poynter, 495 F.3d 349, 351–352 (6th Cir. 2007) (‘‘While trial judges sen-
tence individuals face to face for a living, we review transcripts for a living. No one sentences
transcripts. All of this suggests that we should acknowledge the trial court’s comparative advan-
tages—its ring-side perspective on the sentencing hearing and its experience over time in sen-
tencing other individuals—and give considerable deference to their sentencing decisions.’’ (Em-
phasis supplied.)).
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166 138 UNITED STATES TAX COURT REPORTS (67)
as an issue of law seems to unnecessarily heighten the risk
of reversal.
VI. Conclusion
Relying on the Cal-Maine Foods standards for disregarding
factual stipulations, I would tune out respondent’s ‘‘over-
zealous advocacy’’, and instead, turn my ear to the Sec-
retary’s much more ‘‘parsimonious reasoning’’. Applying this
reasoning to the facts clearly disclosed by the record, the
Court should conclude ‘‘that the basis of each purported part-
ner’s interest in Tigers Eye Trading, LLC, is [not] an affected
item’’, but a partnership item. Accordingly, we should sustain
the accuracy-related penalty. 24
HALPERN, J., agrees with this concurring opinion.
MARVEL, J., dissenting: In an effort to create order out of
the uncertainty regarding our jurisdiction over the section
6662(a) accuracy-related penalty in partnership-level pro-
ceedings that was created by Petaluma FX Partners, LLC v.
Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (Petaluma II),
aff ’g in part, rev’g in part, vacating in part and remanding
131 T.C. 84 (2008), and Petaluma FX Partners, LLC v.
Commissioner, 135 T.C. 581 (2010) (Petaluma III), the
opinion of the Court offers an encyclopedic exposition
regarding the interrelationship of the partnership provisions
24 Classifying outside basis as a partnership item brings us most, but not all, of the way to
sustaining a 40% gross valuation misstatement penalty here. To get to the finish line, we need
one more recursive application of the ‘‘more-appropriately-determined’’ principle.
A 40% penalty applies under sec. 6662(a), (e) and (h) ‘‘to any portion of an underpayment of
tax required to be shown on a return, if * * * the adjusted basis of any property * * * claimed
on any return of tax imposed by chapter 1 is * * * [400] percent or more of the amount deter-
mined to be the correct amount of such * * * adjusted basis’’. Such property here is the ‘‘prop-
erty (other than money) distributed by a partnership to a partner in [a claimed] liquidation of
the partner’s interest’’. Sec. 732(b). Because no money was included in the claimed liquidating
distribution, ‘‘The basis of [such] property * * * shall be an amount equal to the adjusted basis
of such partner’s interest in the partnership’’. Id.
Since outside basis is a partnership item here, we can sustain a readjustment down to zero
of each purported partner’s interest in the disregarded partnership. The basis in the hands of
a purported partner of property other than money received in a claimed liquidation distribution
is conclusively determined by determinations that the partnership is required to make and ‘‘the
adjusted basis of such partner’s interest in the partnership’’. Id. The presumption of transitivity
of determinations renders the basis of the claimed liquidating distribution more appropriately
determined at the partnership level, and therefore, a partnership item. See supra note 12.
Hence, we can sustain readjusting the basis of the claimed liquidating distribution down to
equal the readjusted outside basis of zero. The resulting valuation misstatement is ‘‘gross’’
enough to sustain the 40% penalty.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 167
in chapter 1, subchapter K of the Internal Revenue Code and
the partnership litigation provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97–
248, sec. 402, 96 Stat. at 648. It concludes that we have juris-
diction to impose the section 6662(a) accuracy-related pen-
alty, including the 40% gross valuation misstatement compo-
nent of that penalty, at the partnership level. Because I dis-
agree with the attempt in the opinion of the Court to distin-
guish Petaluma II, which I believe we should follow under
Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff ’d, 445
F.2d 985 (10th Cir. 1971), I dissent as reflected in part I of
this opinion. However, I believe that much of the analysis is
correct and that Petaluma III was wrongly decided. I explain
my reasoning in part II of this opinion.
I.
As explained more fully in part II, there is much in the
opinion of the Court with which I agree, but its analysis flies
in the face of Petaluma III and cannot be reconciled with it.
I also disagree that there is an adequate basis for distin-
guishing Petaluma II. Consequently, for some of the same
reasons set forth in Judge Holmes’ dissenting opinion, I
reluctantly dissent from that part of the opinion of the Court
that attempts to distinguish Petaluma II as interpreted and
applied in Petaluma III.
II.
Despite my reservations about the effectiveness of the
attempt to distinguish Petaluma II as interpreted and
applied in Petaluma III, I believe Petaluma III was wrongly
decided, but for reasons somewhat different from those the
opinion of the Court suggests. I explain these reasons below.
While I understand why the opinion of the Court concludes
that outside basis is properly characterized as a partnership
item in a case like Tigers Eye Trading, LLC where the part-
nership is disregarded, I do not believe that our jurisdiction
over the section 6662(a) penalty depends upon that conclu-
sion. I believe that we have jurisdiction to sustain the
accuracy-related penalty at the partnership level in Son-of-
BOSS cases in which we disregard the transitory partnership
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168 138 UNITED STATES TAX COURT REPORTS (67)
regardless of whether outside basis is a partnership item or
an affected item.
Before the enactment of the Taxpayer Relief Act of 1997
(TRA 1997), Pub. L. No. 105–34, sec. 1238, 111 Stat. at 1026,
which amended sections 6221, 6226, and 6230 of the TEFRA
partnership litigation provisions in the Code, penalties and
additions to tax (collectively, penalty or penalties) were
classified as affected items, and issues regarding such items
were litigated in a partner-level affected item deficiency pro-
ceeding following the completion of the partnership-level pro-
ceeding. See, e.g., N.C.F. Energy Partners v. Commissioner,
89 T.C. 741, 744–745 (1987). TRA 1997 did not change the
classification of penalties as affected items, but it amended
section 6221 to provide that the applicability of a penalty
‘‘which relates to an adjustment to a partnership item’’ must
be determined at the partnership level. Of particular signifi-
cance, TRA 1997 also amended section 6230(a)(2)(A)(i) to read
as follows:
SEC. 6230. ADDITIONAL ADMINISTRATIVE PROVISIONS.
(a) COORDINATION WITH DEFICIENCY PROCEEDINGS.—
(1) IN GENERAL.—Except as provided in paragraph (2) or (3), sub-
chapter B of this chapter[1] shall not apply to the assessment or collec-
tion of any computational[2] adjustment.
(2) DEFICIENCY PROCEEDINGS TO APPLY IN CERTAIN CASES.—
(A) Subchapter B shall apply to any deficiency attributable to—
(i) affected items which require partner level determinations
(other than penalties, additions to tax, and additional amounts that
relate to adjustments to partnership items) * * *
Because the change to section 6230(a)(2)(A)(i) deprived a
partner of the opportunity to litigate issues concerning the
applicability of a penalty that relates to an adjustment of a
partnership item in an affected items deficiency proceeding,
TRA 1997 added section 6230(c)(1)(C) to provide that a
partner may file a claim for refund on the ground that ‘‘the
Secretary erroneously imposed any penalty, addition to tax,
or additional amount which relates to an adjustment to a
partnership item.’’ The House committee report described the
1 Subch. B (secs. 6211 through 6216) contains the provisions authorizing the Commissioner
to issue notices of deficiency and provides the Tax Court with jurisdiction to redetermine those
deficiencies.
2 Sec. 6231(a)(6) defines a computational adjustment as ‘‘the change in the tax liability of a
partner which properly reflects the treatment under * * * [TEFRA] of a partnership item.’’
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 169
reason for the change and explained the provisions as fol-
lows:
Reasons for Change
Many penalties are based upon the conduct of the taxpayer. With respect
to partnerships, the relevant conduct often occurs at the partnership level.
In addition, applying penalties at the partner level through the deficiency
procedures following the conclusion of the unified proceeding at the part-
nership level increases the administrative burden on the IRS and can
significantly increase the Tax Court’s inventory.
Explanation of Provision
The bill provides that the partnership-level proceeding is to include a
determination of the applicability of penalties at the partnership level.
However, the provision allows partners to raise any partner-level defenses
in a refund forum.
[H.R. Rept. No. 105–148, at 594 (1997), 1997–4 C.B. (Vol. 1) 319, 916.]
See also S. Rept. No. 105–33, at 261 (1997), 1997–4 C.B. (Vol.
2) 1081, 1341.
The above-described amendments to the TEFRA partnership
litigation procedures (collectively, the penalty litigation
amendments) changed the landscape of penalty litigation by
requiring that issues regarding the application of penalties
be litigated in the first instance in the partnership-level pro-
ceeding and not in partner-level affected items deficiency pro-
ceedings, as was the case before the effective date of the pen-
alty litigation amendments. The only qualifier that Congress
imposed is that the penalty relate to an adjustment to a part-
nership item. Secs. 6221, 6226(f). Congress did not define the
word ‘‘relate’’, 3 nor did Congress tie the penalty determina-
tion to the existence of a computational adjustment that
could be summarily assessed at the end of the partnership-
level proceeding. In fact, Congress did not otherwise address
the mechanics of the TEFRA partnership litigation procedures
as they apply to penalties.
When Congress enacted the penalty litigation amend-
ments, it was well aware that a partnership-level proceeding
under TEFRA does not result in the determination of an
underpayment at the partnership level. Underpayments are
calculated at the partner level after a partnership-level pro-
3 ‘‘Relate’’ means, inter alia, ‘‘to show or establish logical or causal connection’’. Merriam Web-
ster’s Collegiate Dictionary 987 (10th ed. 1997). ‘‘Related’’ means, inter alia, ‘‘being connected;
associated.’’ The American Heritage Dictionary of the English Language 1473 (4th ed. 2000).
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170 138 UNITED STATES TAX COURT REPORTS (67)
ceeding is completed and/or after an affected items deficiency
proceeding (which occurs if an affected item requires a fac-
tual determination at the partner level) is completed. Never-
theless, Congress required that penalties that relate to the
adjustment of a partnership item be litigated in the partner-
ship-level proceeding and not in an affected items deficiency
proceeding. Congress did this to eliminate duplicative litiga-
tion of the same issue in affected items deficiency pro-
ceedings and to take advantage of the partnership-level pro-
ceeding, in which all of the purported partners are bound by
the outcome. See sec. 6221; see also H.R. Rept. No. 105–148,
supra at 594, 1997–4 C.B. (Vol. 1) at 916. Congress did not
limit the required relationship to those partnership items the
adjustment of which flows through to the partners’ Federal
income tax returns and results in a computational adjust-
ment to the partners’ tax liabilities at the end of the partner-
ship-level proceeding as we held in Petaluma III.
In the notice of final partnership administrative adjust-
ment (FPAA) issued to Tigers Eye Trading, LLC (Tigers Eye),
respondent made adjustments to a variety of partnership
items and determined that the accuracy-related penalty
under section 6662(a) applied. See op. Ct. pp. 81–85, 140.
Specifically, in the FPAA respondent determined that the
transitory and illusory partnership involved in the Tigers
Eye Son-of-BOSS transaction must be disregarded for Federal
income tax purposes. See id. p. 84. Respondent also reduced
partnership items to zero to reflect that determination (cap-
ital contributions, distributions of property other than
money, and other items). See id. p. 81. Each one of those
adjustments was directly attributable to and was the result
of the determination that the transitory and illusory partner-
ship in Tigers Eye Trading, LLC must be disregarded for
Federal income tax purposes.
The analysis in the opinion of the Court illustrates in
considerable detail that the relationship requirement
imposed by section 6221 and referenced in section
6230(a)(2)(A)(i) is satisfied in Tigers Eye Trading, LLC. See
id. pp. 103–109, 112–119, 123, 126–127. The section 6662(a)
penalty clearly relates to respondent’s determinations to dis-
regard the Tigers Eye partnership and to zero out specific
partnership items such as contributions and distributions
allegedly made by the purported partnership to the pur-
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 171
ported partners. Although the opinion of the Court incor-
porates this analysis to convince the reader that outside
basis is a partnership item and not an affected item, see id.
pp. 126–127, the analysis is particularly convincing on the
real issue related to our penalty jurisdiction—whether the
penalty in question ‘‘relate[s] to adjustments to partnership
items’’, see sec. 6230(a)(2)(A)(i); see also secs. 6221, 6226(f).
It helps to put the discussion regarding the impact of the
penalty litigation amendments on our penalty jurisdiction in
TEFRA partnership litigation in context, and the opinion of
the Court does that very well. The Tigers Eye Son-of-BOSS
transaction relied upon and played off of the provisions of
subchapter K (sections 701 through 777), and the anticipated
tax benefits that the transaction was supposed to generate
depended upon the existence of a valid partnership. Recogni-
tion of the partnership for Federal income tax purposes was
essential to the success of the Son-of-BOSS transaction as a
tax shelter.
There is a logical and causal relationship between respond-
ent’s determination to disregard a partnership without eco-
nomic substance, his determination to adjust other partner-
ship items, such as contributions and distributions, to zero,
and his determination to impose the section 6662(a)
accuracy-related penalty. All of the adjustments relate to and
flow from respondent’s determination that the partnership is
disregarded for Federal income tax purposes, and the deter-
mination to impose the accuracy-related penalty flows
directly from and relates to the determination to disregard
the transitory and illusory partnership. Under the penalty
litigation amendments, that is all that Congress required for
the penalty to be litigated in the partnership-level pro-
ceeding.
Whether or not outside basis is at play (and, if so, whether
outside basis is an affected item or in narrow circumstances
a partnership item) should not control our resolution of
whether we have jurisdiction to decide in a partnership-level
proceeding whether the section 6662(a) penalty applies. What
does control our resolution of the issue is whether the pen-
alty relates to the adjustment of a partnership item. Absent
any guidance from Congress regarding the meaning of the
word ‘‘relates’’, I, like the opinion of the Court, answer the
question in the affirmative. The imposition of the section
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172 138 UNITED STATES TAX COURT REPORTS (67)
6662(a) penalty is clearly related to the zeroing out of part-
nership items that results from a determination that the
partnership must be disregarded for Federal income tax pur-
poses. That relationship still exists even if the partnership-
level proceeding does not result in computational adjust-
ments to the partners’ income tax liabilities and related
assessment at the end of the partnership-level proceeding
and must await the completion of an affected items defi-
ciency proceeding at the partner level.
If the ‘‘relate to adjustments to partnership items’’ lan-
guage of section 6230(a)(2)(A)(i) is narrowly construed to
mean only a numerical adjustment of an item on a partner-
ship return that flows through to the partners’ returns and
results in computational adjustments to the partners’ tax
liabilities at the end of the partnership proceeding, such an
interpretation, I submit, would effectively repeal the penalty
litigation amendments with respect to many, if not most,
partnerships because the computation of the underpayment
of the partners’ tax liabilities must await the completion of
affected items deficiency proceedings. I do not believe that is
what Congress intended when it enacted the penalty litiga-
tion amendments.
Congress intended that in modern tax shelters involving
partnerships, penalties related to the improper use of an illu-
sory partnership as a mechanism for generating large non-
economic losses should be litigated in the partnership-level
proceeding. Congress did so because the relevant conduct,
i.e., the establishment of the partnership, which includes the
recording of partner contributions, the establishment of
partner capital accounts, and adjustments to those accounts
resulting from distributions, assumption of liabilities, and
liquidations, occurs largely at the partnership level. Cf. H.R.
Rept. No. 105–148, supra at 594, 1997–4 C.B. (Vol. 1) at 916.
In the case of a disregarded partnership, regardless of
whether a disallowance of outside basis is at play and
regardless of whether outside basis is a partnership item or
an affected item, any adjustment at the partner level is pre-
ceded by one or more adjustments to partnership items, and
the section 6662(a) penalty relates to those partnership-level
adjustments.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 173
KROUPA, J., agrees with part I of this dissent.
GALE and PARIS, JJ., agree with part II of this dissent.
HOLMES, J., dissenting: It is customary and appropriate for
us to reconsider an issue after being reversed by a circuit
court, and stick to our position if we think it right. But only
if the case we use to reaffirm ourselves is appealable to a dif-
ferent circuit. When, as unfortunately we do today, we bra-
zenly challenge the D.C. Circuit’s precedent in Petaluma FX
Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir.
2010) (Petaluma II), aff ’g in part, rev’g in part and
remanding in part 131 T.C. 84 (2008) (Petaluma I), in a case
appealable to that court we risk being seen as impudent. We
also risk not even getting that court to reconsider—the D.C.
Circuit treats its published opinions as stare decisis for later
panels, see, e.g., Sierra Club & Valley Watch, Inc. v. Jackson,
648 F.3d 848, 854 (D.C. Cir. 2011), so what we are really
asking is for the parties to appeal and then petition for en
banc reconsideration.
Before today, our Court recognized the importance of cir-
cuit-court precedent. In our landmark decision in Golsen v.
Commissioner, 54 T.C. 742, 757 (1970), aff ’d, 445 F.2d 985
(10th Cir. 1971), we held ‘‘that better judicial administration
requires us to follow a Court of Appeals decision which is
squarely in point where appeal from our decision lies * * *
to that court alone.’’ (Fn. ref. omitted.) Golsen tells us not to
bang our head against contrary appellate precedent, and
we’ve consistently held that we must follow the precedent of
the court that has appellate jurisdiction over a case. See
Bergmann v. Commissioner, 137 T.C. 136, 146 (2011)
(‘‘Because this case is appealable to the * * * Ninth Circuit,
we follow that court’s precedent’’); Wechsler & Co. v. Commis-
sioner, T.C. Memo. 2006–173 (‘‘[U]nder the doctrine of Golsen
* * * we must apply [Second Circuit] precedents * * * to
the extent that they contradict our precedents’’). 1
1 See also Media Space, Inc. v. Commissioner, 135 T.C. 424, 433–434 (2010) (‘‘The Tax Court
will generally defer to the rule adopted by the Court of Appeals for the circuit to which appeal
would normally lie, if that Court of Appeals has ruled with respect to the identical issue’’); Por-
ter v. Commissioner, 132 T.C. 203, 220 (2009) (‘‘This case is appealable * * * to the * * *
Fourth Circuit. Under the rule laid down in Golsen * * * we abide by that court’s precedent’’);
Estate of Kyle v. Commissioner, 94 T.C. 829, 850 (1990) (‘‘Any appeal in this case lies to the
Continued
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174 138 UNITED STATES TAX COURT REPORTS (67)
The tsuris this will cause us—where two circuit courts, 2 a
few trial courts, 3 the Department of Justice, and even the
IRS (at times) all disagree with the position we’re taking—
cannot possibly be worth it. Especially when it’s nothing
more than a dispute about a complicated little bit of partner-
ship-tax law—and not even substantive partnership-tax law,
but partnership-tax-law procedure. And a point of partner-
ship-tax-law procedure in a motion to revise a stipulated
decision we entered in 2009. This was not the case to use to
revisit Petaluma I: ‘‘[I]n most matters it is more important
that the applicable rule of law be settled than that it be set-
tled right.’’ Burnet v. Coronado Oil & Gas Co., 285 U.S. 393,
406 (1932) (Brandeis, J., dissenting).
I’ll begin with an analysis of why the majority’s maneuver
around the precedent it’s bound to follow is bound to fail, and
then move on to an active defense of that precedent. For not
only do I believe Golsen requires us to follow Petaluma II in
this case; I believe the D.C. Circuit got it right both on the
question of whether outside basis is a partnership item, and
on the limits of our jurisdiction over penalties at the partner-
ship level.
I.
Before we hinted in a footnote in Countryside Ltd. P’ship
v. Commissioner, T.C. Memo. 2008–3 n.4, that we might
begin to view things differently, we had consistently held
that outside basis was generally an affected item. 4 But in
* * * Fifth Circuit, and we are bound by any decision of that court squarely in point’’); Hendrix
v. Commissioner, T.C. Memo. 2011–133 (‘‘This case is appealable to the * * * Fifth Circuit, and
we follow precedent of that court that is squarely on point’’); Peter D. Dahlin Att’y at Law, P.S.
v. Commissioner, T.C. Memo. 2007–310 (‘‘Pursuant to Golsen * * * this Court will follow the
precedent established in the court to which an appeal would lie’’); Cutts v. Commissioner, T.C.
Summary Opinion 2004–8 (Beghe, J.) (‘‘Because any appeal in this case, if it were permissible,
would lie to the * * * Eleventh Circuit, we follow the precedent established in that Circuit’’).
2 Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 654–655 (D.C. Cir. 2010)
(Petaluma II), aff ’g in part, rev’g in part, and vacating in part and remanding on penalty issues
131 T.C. 84 (2008) (Petaluma I); Jade Trading, LLC v. United States, 598 F.3d 1372, 1380 (Fed.
Cir. 2010) (Jade Trading II).
3 See, e.g., Jade Trading, LLC v. United States, 98 Fed. Cl. 453, 460 (2011) (Jade Trading III),
aff ’d, 451 Fed. Appx. 954 (Fed. Cir. 2012); Gosnell v. United States, No. CV–09–01399–PHX–
NVW, 2011 U.S. Dist. LEXIS 72224, at *5 n.2 (D. Ariz. June 28, 2011); Fid. Int’l Currency Advi-
sor A Fund, LLC v. United States, 747 F. Supp. 2d 49, 237 (D. Mass. 2010). But see K2 Trading
Ventures, LLC v. United States, 101 Fed. Cl. 365 (2011) (in dicta erroneously saying all FPAA
items, which included outside basis, were partnership items without considering Jade Trading
II).
4 See, e.g., Domulewicz v. Commissioner, 129 T.C. 11, 21 n.13 (2007), aff ’d in part and re-
manded on other grounds sub nom. Desmet v. Commissioner, 581 F.3d 297 (6th Cir. 2009);
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 175
Petaluma I, we officially changed course to hold that outside
basis was a partnership item in ‘‘situation[s] where no
partner-level determinations are necessary.’’ The D.C. Circuit
disagreed, and reversed us in Petaluma II—a case that’s
almost identical to this one.
In Petaluma FX Partners, LLC v. Commissioner, 135 T.C.
581 (2010) (Petaluma III), we tried to comply with the D.C.
Circuit’s mandate in Petaluma II. That decision is so recent
that the appeal from it is still under submission. Yet the
majority in this case offers up essentially two theories as to
why we don’t have to follow Petaluma II and Petaluma III
in this case. It argues that
• the jurisdictional limitations established in Petaluma II
were based on a concession of the Government that outside
basis was an affected item; and
• the D.C. Circuit did not consider the applicable regula-
tion in Petaluma II when it concluded that outside basis is
an affected item, and therefore that opinion is superseded by
the intervening opinions of the Supreme Court in Mayo
Found. and the D.C. Circuit in Intermountain.
I begin by looking at the merits of these arguments. I also
ask whether it’s up to us, as a trial court, even to make
them.
A.
The majority assumes that Petaluma II’s holding was dic-
tated by the Government’s concession on appeal that outside
basis was an affected item. But parties can’t concede that a
court has subject matter jurisdiction over a case; a court has
to decide that for itself. See, e.g., NAACP v. New York, 413
U.S. 345, 353 (1973); Mondy v. Sec’y of the Army, 845 F.2d
1051, 1055 (D.C. Cir. 1988) (defendant’s concession regarding
jurisdiction didn’t matter to court’s jurisdictional analysis);
McGowan v. Commissioner, 67 T.C. 599, 607 (1976). And
because the D.C. Circuit’s jurisdiction over outside basis
depended on ours, the Government’s concession on appeal
didn’t bind the D.C. Circuit and was irrelevant to its jurisdic-
tional analysis.
G–5 Inv. P’ship v. Commissioner, 128 T.C. 186, 189 n.7 (2007); Gustin v. Commissioner, T.C.
Memo. 2002–64.
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176 138 UNITED STATES TAX COURT REPORTS (67)
Despite what the majority insinuates, the D.C. Circuit was
clear that it understood all this:
On appeal the Commissioner concedes that outside basis is not a part-
nership item in this case. Instead, he asserts that outside basis is an
affected item whose elements are mainly or entirely partnership items. He
maintains that the Tax Court had jurisdiction to state the ‘‘obvious conclu-
sion’’ that a partner cannot have any basis in a disregarded partnership.
The correctness of this conclusion is immaterial, however, for the question
is not whether the Tax Court’s determination was correct, but whether the
Tax Court had jurisdiction to make that determination at all in this part-
nership-level proceeding.
* * * * * * *
We have already rejected the Tax Court’s conclusion that outside basis was
a partnership item in this case, and we likewise reject the Commissioner’s
contention that outside basis, although it is an affected item, could none-
theless be determined in the partnership-level proceeding. * * *
[Petaluma II, 591 F.3d at 654–655; emphasis added.]
This jurisdictional question is a question of law. Courts are
never bound by a concession on appeal as to a question of
law, see, e.g., United States v. Ginyard, 444 F.3d 648, 649,
651–652 (D.C. Cir. 2006), so if the D.C. Circuit really did
accept an erroneous concession of jurisdiction, it would have
committed a reversible error. I just don’t believe that to be
the case.
Even assuming arguendo that the D.C. Circuit relied upon
the Government’s concession at all, that court also gave an
additional reason for holding that outside basis was an
affected item under the plain language of section 6231(a)(3).
The fact that a determination seems obvious or easy does not expand the
court’s jurisdiction beyond what the statute provides. In other words, it
does not matter how low the fruit hangs when one is forbidden to pick it.
We hold that the Tax Court had no jurisdiction to determine that
Petaluma’s partners had no outside basis in the disregarded partnership.
Finally, we note that nothing about the concept of outside basis indicates
that it is more appropriately determined at the partnership level. If dis-
regarding a partnership leads ineluctably to the conclusion that its part-
ners have no outside basis, that should be just as obvious in partner-level
proceedings as it is in partnership-level proceedings. Moreover, with the
invalidity of the partnership conclusively established as a partnership-level
determination, there is little danger that outside basis will receive incon-
sistent treatment at the individual partner level. [Petaluma II, 591 F.3d
at 655; emphasis added.]
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 177
The majority incorrectly dismisses Petaluma II’s discussion
of outside basis as dicta. Where a decision rests on two or
more separate grounds, none is dictum. See, e.g., United
States v. Title Ins. & Trust Co., 265 U.S. 472, 486 (1924);
Natural Res. Def. Council, Inc. v. NRC, 216 F.3d 1180, 1189
(D.C. Cir. 2000). We should instead regard the D.C. Circuit’s
holding in Petaluma II about outside basis as binding prece-
dent.
B.
The majority also reasons that ‘‘[b]ecause the Court of
Appeals did not consider the regulation in concluding in
Petaluma II that outside basis is an affected item, * * * its
decision on the outside basis issue in Petaluma II has been
superseded by the intervening opinions of the Supreme Court
in Mayo Found. and the Court of Appeals in Intermountain.’’
See op. Ct. p. 112. Here is the real beginning of our trouble.
It’s not plausible to read Petaluma II as just a mistake
caused by the D.C. Circuit overlooking the regulation the
majority relies on when there’s a simpler reading of that
opinion: The D.C. Circuit construed the Code itself to make
outside basis an affected item—the low-hanging forbidden-
fruit metaphor implies that if an item is not more appro-
priately determined at the partnership level or is not an item
with respect to a partnership’s own tax year, it is not a part-
nership item. Petaluma II, 591 F.3d at 655. Even if deter-
mining it would be really, really easy at the partnership
level.
The majority asserts that Mayo Found. for Med. Educ. &
Research v. United States, 562 U.S. ll, 131 S. Ct. 704
(2011), and Intermountain Ins. Serv. of Vail, LLC v. Commis-
sioner, 650 F.3d 691 (D.C. Cir. 2011), rev’g 134 T.C. 211
(2010), somehow changed the legal landscape that the court
relied on in Petaluma II. I disagree. In Mayo Found., the
Supreme Court held that courts must apply Chevron’s two-
step framework (rather than the multifactor test of National
Muffler) to analyze the validity of regulations. See id. at ll,
131 S. Ct. at 713–714. That wasn’t, however, new law in the
D.C. Circuit—it had been applying Chevron deference to
regulations at least since 2003, well before either Petaluma
II or Mayo Found. See Tax Analysts v. IRS, 350 F.3d 100,
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178 138 UNITED STATES TAX COURT REPORTS (67)
102–103 (D.C. Cir. 2003). And nobody—in this case or in any
of the Petaluma cases—has said the regulation is invalid.
It’s not even true that the D.C. Circuit overlooked the
regulation: A glance at Petaluma II shows that the court
cited section 301.6231(a)(3)–1, Proced. & Admin. Regs. In
fact, it cited the regulation three times. Petaluma II, 591
F.3d at 650, 653. But the majority infers from the D.C. Cir-
cuit’s failure to construe the section of the regulation that
deals with distributions and contributions, section
301.6231(a)(3)–1(a)(4) and (c), Proced. & Admin. Regs., that
it did not consider that regulation in reaching its holding
that outside basis was an affected item. It’s more reasonable
to conclude that it just didn’t read the regulation the way the
majority here does today. Fighting the D.C. Circuit’s holding
in Petaluma II is hard enough, but fighting it with an argu-
ment that the court missed the relevant regulation—when it
actually cited it—will probably prove less than entirely
persuasive.
The majority’s reliance on Intermountain is also misplaced.
In Intermountain, the D.C. Circuit held that old Code section
275(c) was ambiguous and that Congress added language to
section 6501(e)(1)(A) to resolve the ambiguity. See id. at 701–
702. It also held that Colony, Inc. v. Commissioner, 357 U.S.
28 (1958), only dealt with the interpretation of old section
275(c), and didn’t unambiguously foreclose the new regula-
tion applying new section 6501(e)(1)(A). Intermountain, 650
F.3d at 703–704. The court then, as Chevron requires, ana-
lyzed the text of the relevant Code section and the reason-
ableness of the regulation. See id. at 704–710.
Nothing new here either. In neither this case nor Petaluma
is there anything like the problem created by Colony—a
precedent that predates a regulation and might affect its
validity. And Petaluma II interpreted the very same TEFRA
regulations that we are dealing with here. Colony, in con-
trast, did not interpret the regulations at issue in Inter-
mountain; it was relevant only to the question of whether the
Code section in that case was ambiguous. The majority here
cannot reasonably use Intermountain to disregard Petaluma
II’s interpretation of the TEFRA regulations.
What the majority is really arguing is that if only the D.C.
Circuit knew about its more elaborate argument, it would
surely overrule Petaluma II. The rule for Article III courts in
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 179
this situation is clear: The Supreme Court has instructed
appellate courts not to anticipatorily overrule outdated prece-
dent.
We do not acknowledge, and we do not hold, that other courts should
conclude our more recent cases have, by implication, overruled an earlier
precedent. We reaffirm that ‘‘if a precedent of this Court has direct
application in a case, yet appears to rest on reasons rejected in some other
line of decisions, the Court of Appeals should follow the case which directly
controls, leaving to this Court the prerogative of overruling its own
decisions.’’ * * * [Agostini v. Felton, 521 U.S. 203, 237 (1997); citation
omitted.]
I can think of no reason for our relation with the appellate
courts that review our work to be any different.
II.
Even if we weren’t climbing such a towering mountain of
contrary authority, I’d still be skeptical of the majority’s
analysis. Absent a few very limited exceptions, the Code and
regulations make outside basis an affected item.
A.
‘‘[O]ur starting point must be the language employed by
Congress.’’ Reiter v. Sonotone Corp., 442 U.S. 330, 337 (1979).
Section 6231(a)(3) says:
The term ‘‘partnership item’’ means, with respect to a partnership, any
item required to be taken into account for the partnership’s taxable year
under any provision of subtitle A, to the extent regulations prescribed by
the Secretary provide that, for purposes of this subtitle, such item is more
appropriately determined at the partnership level than at the partner
level.
The majority boils it down to this: ‘‘A partnership item is
an item that is (1) required to be taken into account under
any provision of subtitle A, governing income taxes, and (2)
identified by the Secretary in the regulations as ‘more appro-
priately determined at the partnership level.’ ’’ See op. Ct. p.
98. The majority’s reconstructed definition, however, leaves
out an important phrase.
Look at the first part of section 6231(a)(3)—‘‘[W]ith respect
to a partnership, any item required to be taken into account
for the partnership’s taxable year under any provision of sub-
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180 138 UNITED STATES TAX COURT REPORTS (67)
title A.’’ The majority construes this to mean that an item
only needs to be related to a partnership and ‘‘taken into
account in computing the income tax liability’’ of a partner.
See op. Ct. p. 116; see also op. Ct. p. 105. This would make
the modifier ‘‘partnership’s’’ before ‘‘taxable year’’ super-
fluous—section 6231(a)(3) already requires the item be
related to or ‘‘with respect to a partnership.’’
The phrase is no accident—‘‘partnership’s taxable year’’ is
a defined term, see sec. 706, and ‘‘partnership’s taxable year’’
or ‘‘partnership taxable year(s)’’ appears in twenty or so Code
sections. 5 The Code makes sure that a partnership has its
own tax year as if it were a taxpayer apart from its part-
ners. 6 See sec. 706(b)(1). And the tax years for partners and
partnerships may even start and end on different dates. See
sec. 706(b)(2); sec. 1.706–1, Income Tax Regs.
We must read section 6231(a)(3) in pari materia with sec-
tion 706. ‘‘We can only take the Code as we find it and give
it as great an internal symmetry and consistency as its
words permit.’’ United States v. Olympic Radio & Television,
Inc., 349 U.S. 232, 236 (1955). The phrase ‘‘partnership’s tax-
able year,’’ read this way, limits the substantive reach of the
Code’s definition of a ‘‘partnership item.’’ A partnership item
has to have something to do with the partnership’s (and not,
by implication, just with the partners’) tax year. That’s why
section 301.6231(a)(3)–1(a), Proced. & Admin. Regs., says
that a partnership item is an item that is ‘‘required to be
taken into account for the taxable year of a partnership’’
under any income tax provision of the Code.
That leads me to my next point—section 6231(a)(3) also
says that a partnership item isn’t a partnership item unless
a regulation makes it one. But that section adds yet one
5 See secs. 465, 706, 775, 1402, 1446, 6031, 6223, 6224, 6226, 6227, 6228, 6229, 6230, 6231,
6241, 6242, 6247, 6248, 6251, 6252.
6 Section 706 reads:
SEC. 706. TAXABLE YEARS OF PARTNER AND PARTNERSHIP.
(a) YEAR IN WHICH PARTNERSHIP INCOME IS INCLUDIBLE.—In computing the taxable income
of a partner for a taxable year, the inclusions required by section 702 and section 707(c) with
respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the part-
nership for any taxable year of the partnership ending within or with the taxable year of the
partner.
(b) TAXABLE YEAR.—
(1) PARTNERSHIP’S TAXABLE YEAR.—
(A) PARTNERSHIP TREATED AS TAXPAYER.—The taxable year of a partnership shall be de-
termined as though the partnership were a taxpayer.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 181
more restriction. The Secretary can provide in the regula-
tions that something is a partnership item only after he con-
cludes that it’s more appropriately determined at the part-
nership level than at the partner level.
What the majority is missing is that the Commissioner
didn’t expressly conclude it is more appropriate to determine
outside basis at the partnership level than at the partner
level. The Code doesn’t say that a partnership item is defined
by the certainty with which a factfinder can determine it
from what he knows at the partnership level. 7 After all,
Petaluma II taught us that even if something is determinable
at the partnership level, it can still be more appropriately
determined at the partner level.
B.
The majority’s attack on Petaluma II will succeed or fail,
though, on the strength of its interpretation of the regula-
tions defining partnership and affected items. Section
301.6231(a)(5)–1(b), Proced. & Admin. Regs., defines affected
items, and provides that ‘‘[t]he basis of a partner’s partner-
ship interest [(i.e., outside basis)] is an affected item to the
extent it is not a partnership item.’’ One might reasonably
read this as stating a general rule that outside basis is an
affected item, but with a few exceptions. The majority, how-
ever, enthusiastically finds a great many instances where
outside basis is a partnership item. Cataloging them all, one
finds that the majority would hold outside basis to be a part-
nership item when
7 The Code is actually clearer than Judge Wherry’s elaborately detailed and cognitively chal-
lenging grammatical and syntactical analysis lets on. I believe Congress added the phrase ‘‘to
the extent regulations prescribed by the Secretary provide that * * * such item is more appro-
priately determined at the partnership level than at the partner level’’ to section 6231(a)(3), so
that the Secretary would not pervert and subvert the preceding part of section 6231(a)(3)’s defi-
nition—as the majority does today—in promulgating regulations listing what are partnership
items. Congress wanted to kick the ladder out from under the Secretary if he went picking fruit
that Congress didn’t want picked at the partnership level. I would therefore hold that ‘‘any item
required to be taken into account for the partnership’s taxable year’’ under the provisions of the
income tax code would be one the Secretary could reasonably find ‘‘more appropriately deter-
mined at the partnership level than at the partner level.’’ And that means there will never be
the situation like the one dreamed up by Judge Wherry in note 11 of his concurrence—it’s more
of a red herring than a Trojan horse. The ‘‘more appropriately determined’’ language clarifies
the rest of section 6231(a)(3) and seems to foreclose possible deviations from the statute’s plain
language.
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182 138 UNITED STATES TAX COURT REPORTS (67)
• outside-basis computations are made under the general
rule of section 705(a), see op. Ct. pp. 112–114; 8
• outside-basis computations are made under the alter-
native rule of section 705(b), see op. Ct. pp. 114–115; and, of
course
• whenever the partnership is a sham.
Thus, the first problem with the majority’s result: It’s usually
not a good reading when the exception swallows all but a bit
of the tail of the general rule.
Stranger things have happened in tax law—but probably
not here. The regulation itself lists one exception to the gen-
eral rule that outside basis is an affected item: ‘‘Optional
adjustments to the basis of partnership property pursuant to
an election under section 754 (including necessary prelimi-
nary determinations, such as the determination of a trans-
feree partner’s basis in a partnership interest).’’ Sec.
301.6231(a)(3)–1(a)(3), Proced. & Admin. Regs. This makes
sense. The reason outside basis is a partnership item when
a partnership makes a section 754 election is that such a
partnership itself needs to determine its partners’ outside
bases to redetermine the partnership’s own inside basis for
the ‘‘partnership’s taxable year.’’ 9
This specific exception has, of course, nothing to do with
this case because Tigers Eye never made a section 754 elec-
tion. 10 The majority instead looks at the regulation’s general
discussion of contributions and distributions, section
301.6231(a)(3)–1(a)(4) and (c), Proced. & Admin. Regs., and
finds there its proof that outside basis is a partnership item,
at least when it can be determined exclusively from other
partnership items.
But that’s not exactly what the regulation says. Section
301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs., goes like this:
8 The majority acknowledges only one instance where outside basis is an affected item—when
a partner buys his partnership interest from a third party. See op. Ct. pp. 117–118.
9 ‘‘When a new partner acquires a partnership interest, he typically pays fair market value
for that interest, which can result in discrepancies between his outside basis and his share of
the partnership’s inside basis. To help balance out those discrepancies, section 754 allows a
partnership to elect to adjust the inside basis of partnership assets to reflect the new partner’s
different outside basis.’’ Kligfeld Holdings v. Commissioner, 128 T.C. 192, 197 (2007); see secs.
743(b), 754.
10 We noted in Petaluma I that outside basis can also be a partnership item when there is
a tiered partnership—a partnership that owns an interest (i.e., has outside basis) in a second
partnership. See Petaluma I, 131 T.C. at 99.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 183
Items relating to the following transactions, to the extent that a deter-
mination of such items can be made from determinations that the partner-
ship is required to make with respect to an amount, the character of an
amount, or the percentage interest of a partner in the partnership, for pur-
poses of the partnership books and records or for purposes of furnishing
information to a partner:
(i) Contributions to the partnership;
(ii) Distributions from the partnership; and * * *
I acknowledge that section 301.6231(a)(3)–1(a)(4), Proced.
& Admin. Regs., is less than a model of clarity—it doesn’t
just say that contributions to, and distributions from, a part-
nership are partnership items. It says ‘‘items relating to’’
them are—but only ‘‘to the extent that a determination of
such items can be made from determinations that the part-
nership is required to make * * * for purposes of the part-
nership books and records or for purposes of furnishing
information to a partner.’’ (Emphasis added.)
In the very first paragraph of section 301.6231(a)(3)–1(a),
Proced. & Admin. Regs., however, the regulation unequivo-
cally states that all the items it lists as partnership items
are ‘‘required to be taken into account for the taxable year
of a partnership under subtitle A.’’ We can’t just ignore this
language. That’s why in Hambrose Leasing 1984–5 Ltd.
P’ship v. Commissioner, 99 T.C. 298, 311 (1992), we held:
While, at first blush, * * * [section 301.6231(a)(3)–1(a)(4), Proced. &
Admin. Regs.] may seem broad enough to permit virtually any determina-
tion of an item in a partnership level proceeding so long as it is related,
even remotely, to the partnership, an item is not a partnership item under
this subparagraph unless required to be taken into account for the taxable
year of the partnership. Sec. 6231(a)(3); sec. 301.6231(a)(3)–1(a), Proced. &
Admin. Regs.
We also held that for something to be a partnership item
under the regulation, it has to at least have an ‘‘effect on the
partnership, its books and records, or [some] other aspect of
the partnership.’’ Id. Likewise, in Dakotah Hills Offices Ltd.
P’ship v. Commissioner, T.C. Memo. 1996–35, we held:
[T]he determination of whether an item is a partnership item does not
depend upon whether the item is determinable from information actually
available at the partnership level. * * * The critical factor is whether the
partnership was required to make a determination of that item. * * *
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184 138 UNITED STATES TAX COURT REPORTS (67)
(citing by analogy Dial USA, Inc. v. Commissioner, 95 T.C.
1, 4 (1990)); see also Olsen-Smith, Ltd. v. Commissioner, T.C.
Memo. 2005–174. 11
In Petaluma I we did change course and relied on Allen
Family Foods, Inc. v. Commissioner, T.C. Memo. 2000–327.
We claimed in Petaluma I that Allen Family Foods supported
the idea that ‘‘[s]ection 301.6231(a)(3)–1(c)(2) and (3), Proced.
& Admin. Regs., provides that partnership items include
determinations that relate to contributions and distributions
to the extent that those determinations do not require
information that is outside the Court’s jurisdiction.’’
Petaluma I, 131 T.C. at 99. We then reasoned that since
[o]utside basis is related to a partner’s contributions and share of
distributions[,] * * * [when] a partnership is disregarded for tax purposes
* * *, the Court may determine that the partner’s outside basis is zero
without requiring a partner-level [factual] determination because there can
be no adjusted basis in a disregarded partnership. * * * [Id. at 99–100.12]
Allen Family Foods, however, only repeated the language in
the temporary regulation, and held that we lacked jurisdic-
tion in a corporate-level proceeding to decide the amount of
the shareholder’s basis in an S corporation. Allen Family
Foods, T.C. Memo. 2000–327. This is a strong hint that our
reliance on Allen Family Foods in Petaluma I was seriously
misplaced.
The majority, however, makes no mention of these pre-
Petaluma I cases. And although I agree that a partnership
must determine certain items—partnership items such as
contributions and distributions—so that the partner can
figure out his basis in the partnership, Tigers Eye itself was
11 The majority goes to great lengths to try to distinguish Dial USA, Inc. v. Commissioner,
95 T.C. 1 (1990), where we held that a shareholder’s basis in the stock of a corporation is not
a subchapter S item that can be decided at the corporate level. The majority says that our past
reliance on Dial to hold outside basis is an affected item is misplaced because these cases didn’t
examine the regulation defining ‘‘partnership items,’’ and Dial involved our jurisdiction to deter-
mine subchapter S items at the corporate level. See op. Ct. pp. 119–120. The problem with its
analysis, however, is that we did look at and rely on the Code and regulations to reach our con-
clusion that shareholder basis is not an item that can properly be decided in the subchapter
S corporate proceeding. See Dial, 95 T.C. at 3–6. Nowhere in our analysis in Dial did we view
the subchapter S regulations as modifying the TEFRA regulations, and we explicitly recognized
that the TEFRA provisions ‘‘which govern the ‘judicial determination of partnership items’ and
those that ‘relate to partnership items’ ’’ were incorporated into the subchapter S provisions. Id.
at 3. Because Dial actually analyzed the TEFRA regulations, our later cases that relied on Dial
were not simply thoughtless extensions of the S corporation provisions to partnerships.
12 See my dissent in Thompson v. Commissioner, 137 T.C. 220, 242 (2011), which discusses
the types of affected items I believe are subject to deficiency procedures.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 185
never required to determine its partners’ outside bases, and
its partners’ outside bases had no effect on its taxable year.
The majority even acknowledges as much. See op. Ct. pp.
106–107 (‘‘Tigers Eye needed to provide that information to
the option partners so that they could properly determine
their bases in the distributed property.’’ (Emphasis added.))
C.
Odder still is the majority’s invocation of Chevron. See op.
Ct. pp. 124–126. Having misconstrued the regulation, the
majority moves on to defend its validity—something which
no one has challenged before. The most troubling part of the
majority’s analysis on this seemingly superfluous subject is
its assertion that ‘‘the Secretary considered the treatment of
partnership items in a detailed and reasoned fashion before
making a final decision.’’ See op. Ct. p. 125.
In explaining the regulations at the time of their publica-
tion, however, the Secretary gave no hint that he regarded
outside basis as a partnership item under section
301.6231(a)(3)–1(a)(4) and (c), Proced. & Admin. Regs.,
absent a section 754 election. See 51 Fed. Reg. 13212, 13213
(Apr. 18, 1986). There’s certainly nothing like the majority’s
analysis—that if contributions and distributions are partner-
ship items, outside basis must be a partnership item too.
Instead, the explanation straightforwardly reasons that
where a partnership makes a section 754 election, ‘‘[t]he
determination of the transferee partner’s basis in his part-
nership interest is a partnership item because that deter-
mination is necessary in order for the partnership to make
certain partnership-level determinations with respect to the
transferee partner’s basis in partnership property.’’ Id.
(emphasis added).
Even more tellingly, before our decision in Petaluma I, the
Internal Revenue Manual (IRM) said that outside basis was
generally an affected item:
[T]he amount of a partner’s initial contribution to capital would be a fact
developed at the partnership level, that would be the partnership item, but
the utilization of that amount in the computation of basis and any dis-
allowance of a loss at the partner level would be the affected item subject
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186 138 UNITED STATES TAX COURT REPORTS (67)
to deficiency procedures (30-day or 90-day letter). [IRM pt. 4.31.2.2.14(7)
(June 1, 2004). 13]
The clarity of the old IRM on this point suggests that the
majority’s Chevron analysis actually serves to undermine the
validity of the regulation as the majority construes it. For in
section 6231(a)(3), Congress made it clear that the Secretary
can’t just make any item a partnership item—he can only
make an item a ‘‘partnership item’’ if it is
• an item required to be taken into account for the taxable
year of a partnership under any provision of the income tax
code; and
• one that he determines in the regulations to be a part-
nership item and more appropriately determined at the part-
nership level.
The first of these requirements is the most glaring problem
for the majority. Apart from peculiar cases like partnerships
that make section 754 elections or partnerships that hold
partnership interests in other partnerships, a partnership
does not have to take outside basis into account for its own
tax year. If the majority’s reading of the regulation is correct,
there really would be a problem with its validity because it
would conflict with the requirement that an item be taken
into account for the taxable year of a partnership. See
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S.
837, 842–843 (1984) (an agency ‘‘must give effect to the
unambiguously expressed intent of Congress’’).
There would also be a problem because of the Code’s other
requirement. Section 6231(a)(3) tells the Secretary that he
must determine that an item is more appropriately deter-
mined at the partnership level to list it as a partnership item
in the regulations. Other than in the case of a partnership’s
section 754 election, there is no evidence in section
301.6231(a)(3)–1, Proced. & Admin. Regs., that the Secretary
made this finding for outside basis. And I don’t believe that
13 The IRS originally took the same position in the Appeals Office section of the Manual. See
IRM pt. 8.19.1.6.9.4(2)(F) (Apr. 1, 2004). That changed only after—and because of—our holding
in Petaluma I. See IRM pt. 8.19.1.6.9.4(2)(F) (Feb. 10, 2009). I have no desire here to get into
the probable future debate about the weight we give an agency’s own construction of its regula-
tions, or the specific weight we give the IRM. But the IRS’s own initial interpretation of the
regulation would seem to undermine the majority’s view. The IRM’s later adoption in one sec-
tion of a contrary view simply brings to mind the old aphorism of administrative law that an
agency’s interpretation of a regulation that conflicts with its prior interpretation is ‘‘entitled to
considerably less deference than a consistently held agency view.’’ E.g., Thomas Jefferson Univ.
v. Shalala, 512 U.S. 504, 515 (1994).
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 187
he could reasonably conclude that outside basis, as a general
matter, is more appropriately determined at the partnership
level than at the partner level. See Petaluma II, 591 F.3d at
655 (noting that nothing about the concept of outside basis
indicates that it is more appropriately determined at the
partnership level). This means that if the regulation did say
what the majority says it does, it would be quite vulnerable
to a Chevron challenge: Even if a statute is susceptible of
more than one interpretation, an agency’s interpretation is
unreasonable if it doesn’t comport with the statute’s require-
ments. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366,
388–392 (1999).
The majority never grapples with these problems, and cer-
tainly never pins them down.
III.
The majority’s challenge to Petaluma II is not limited to
the question of whether outside basis is a partnership item.
It also goes after Petaluma II’s analysis of our jurisdiction
over penalties in partnership-level cases.
A.
Section 6226(f) says that we have jurisdiction at the part-
nership level to determine ‘‘the applicability of any penalty,
addition to tax, or additional amount which relates to an
adjustment to a partnership item.’’ The fundamental problem
in defining our jurisdiction over penalties at the partnership
level is that imposing a penalty requires an underpayment of
tax from which the penalty can be computed. An under-
payment is generally the difference between the correct
income tax determined by the IRS and the amount stated by
the taxpayer on his return. See sec. 6664(a). It’s axiomatic
that partners, not partnerships, pay tax. This makes it hard
to distinguish penalties that relate to partnership items from
penalties that don’t, since penalties ultimately are calculated
on underpayments, which isn’t something partnership
returns generate by themselves.
In Petaluma II, the D.C. Circuit interpreted section
6226(f)’s grant of jurisdiction much more narrowly than the
majority does today. It declined to allow the finding that a
partnership was a sham to confer on us jurisdiction at the
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188 138 UNITED STATES TAX COURT REPORTS (67)
partnership level to determine penalties relating to outside
basis, which it held to be an affected item. Petaluma II, 591
F.3d at 655–656. It also vacated our holding and told us to
decide on remand whether the penalties ‘‘relate to an adjust-
ment to a partnership item’’ and ‘‘could have been computed
without partner-level proceedings.’’ Id.
In Petaluma III we interpreted the D.C. Circuit’s mandate
to mean that ‘‘if the penalty does not relate directly to a
numerical adjustment to a partnership item, it is beyond our
jurisdiction.’’ Petaluma III, 135 T.C. at 587. 14 We held that
there were no such adjustments to which a penalty could
apply—there were no partnership items flowing through to
the partners’ returns as nondeficiency computational adjust-
ments, and the sham determination in that case only
indirectly affected the outside basis determination at the
partner level. Id. Petaluma III is controlling authority—we
have the same Son-of-BOSS variety and this case is also
appealable to the D.C. Circuit. Our decision today overrules
Petaluma III.
B.
Overruling Petaluma III on jurisdiction over penalties
would be understandable if it were only a side effect of our
reaffirmation of Petaluma I that outside basis is a partner-
ship item. But the majority says that even if it is wrong
about outside basis, we would still have jurisdiction to deter-
mine the applicability of penalties relating to it. The majority
opines that ‘‘[i]n the case of a disregarded partnership,
regardless of whether a disallowance of outside basis is at
play and regardless of whether outside basis is a partnership
item or an affected item, any adjustment at the partner level
is preceded by one or more adjustments to partnership items,
and a penalty is related to those partnership-level adjust-
ments.’’ See op. Ct. p. 142. This conclusion rests on the opin-
ion’s broad interpretation of ‘‘relates to’’ in section 6226(f), a
construction that has been rejected by both the D.C. and Fed-
eral Circuits.
14 In this case the Commissioner did assert penalties relating to adjustments to some of Tigers
Eye’s partnership items—$242,186 of partnership loss and $11,314 of ‘‘Other Deductions’’—that
are ‘‘capable of being ‘computed without partnership-level deficiency proceedings.’ ’’ I agree with
the majority that we have jurisdiction to determine the applicability of those penalties.
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 189
TEFRA doesn’t define the term, so the majority adopts the
broadest dictionary definition—requiring only a mere logical
or causal connection—and cites the general rule that words
are construed according to their ordinary and everyday
meaning. But with a law as complicated as TEFRA, the con-
text in which words are used matters. The words ‘‘relate’’,
‘‘related’’, and ‘‘relates’’ have different shades of meaning
depending on the sense in which they are used. We should
look to see if the individual words are colored by the context
in which they are used, as well as the structure and evident
purpose of the act. See, e.g., People of Puerto Rico v. Shell
Co., 302 U.S. 253, 258 (1937) (statute’s meaning should ‘‘be
arrived at not only by a consideration of the words them-
selves, but by considering, as well, the context, the purposes
of the law, and the circumstances under which the words
were employed’’).
This counsels against a broad construction of ‘‘relates to.’’
In TEFRA world, there’s generally no partnership-level juris-
diction over affected items even though we know by defini-
tion that all affected items ‘‘relate to’’ partnership items—
they couldn’t be affected items if they weren’t affected by
determinations of partnership items. See sec. 6231(a)(5). But
if we hold that all penalties relating to affected items are
also ‘‘penalt[ies] * * * relate[d] to an adjustment to a part-
nership item,’’ we would have to conclude Congress wanted
this Court to determine the applicability of penalties for all
affected item adjustments at the partnership level. Sec.
6226(f). This would be unreasonable because adjustments to
the affected items themselves don’t get determined until
partner-level proceedings, and it’s usually only in Wonder-
land, see Lewis Carroll, Alice’s Adventures in Wonderland
109 (Oxford Univ. Press 2009) (1865), or in the more
unpleasant judicial systems around the world that ‘‘penalty
first—verdict afterwards’’ is the rule. 15 And, of course, even
if Congress wanted the applicability of penalties related to
affected items to be determined at the partnership level,
doing so by making ‘‘the applicability of penalties relating to
15 Or as we say in tax world, under section 7491(c) the Commissioner has the burden of pro-
ducing evidence that there is an underpayment of tax where he thinks it appropriate to impose
the relevant penalty.
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190 138 UNITED STATES TAX COURT REPORTS (67)
partnership items’’—with no mention of affected items—
seems an odd way of expressing it.
Note especially the Code’s use of the word ‘‘adjustments’’
instead of ‘‘determinations’’ in section 6226(f). We have usu-
ally interpreted ‘‘adjustment’’ to mean a numerical increase
or decrease. See Southern v. Commissioner, 87 T.C. 49, 55
(1986) (construing ‘‘adjustment’’ in section 702(a)(7)); see also
S. Rept. No. 105–33, at 254 (1997), 1997–4 C.B. 1081, 1334
(‘‘An adjustment determined to be correct would thus have
the effect of increasing the taxable income that is deemed to
have been reported on the taxpayer’s return’’); Staff of J.
Comm. on Taxation, General Explanation of the Tax Legisla-
tion Enacted in 1997, at 370 (J. Comm. Print 1997). All
adjustments are determinations, but not all determinations
are adjustments. This distinction helps explain the line that
the D.C. Circuit drew in Petaluma II between penalties that
‘‘could have been assessed without partner-level computa-
tions’’ and penalties that could not. Petaluma II, 591 F.3d at
656. The majority implies that determining that a partner-
ship is a sham is an adjustment to a partnership item but
doesn’t explain why. See, e.g., op. Ct. pp. 135, 140. Petaluma
II agreed that the determination that a partnership is a
sham is a determination of a partnership item, but it did not
hold that it was an adjustment.
The majority, however, tries to get around this by rea-
soning that the penalties also relate to the adjustments to
contributions and distributions made in the FPAA. See op. Ct.
pp. 140–142. These determinations certainly were adjust-
ments—contributions and distributions were reduced to zero.
But do the penalties that the Commissioner asserts ‘‘relate
to’’ these adjustments? The Government made a very similar
argument in Jade Trading, LLC v. United States, 98 Fed. Cl.
453, 460 (2011) (Jade Trading III), aff ’d, 451 Fed. Appx. 954
(Fed. Cir. 2012), contending that a finding that a partnership
was a sham permitted the application of penalties without
regard to the partners’ outside bases because it caused Jade
Trading’s inside basis in the spread transaction to be reduced
to zero. Id. But the court disagreed:
Defendant cannot convert what it characterizes as a determination that
Jade was a sham * * * into a wholly separate finding that something
other than the individual partners’ outside bases justifies applying pen-
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(67) TIGERS EYE TRADING, LLC v. COMMISSIONER 191
alties at the partnership level. As Plaintiffs persuasively argue, ‘‘the sham
characterization in Petaluma may represent a legitimate ‘partnership item’
but the impact on the partner-specific ‘outside basis’ stands one step
removed from the partnership proceeding.’’ [Citation omitted.] The
accuracy-related penalties this Court applied were all predicated on
misstatements and erroneous reporting attributable to the * * * [part-
ners’] inflated bases in Jade. * * * [Id. at 461.]
The Government also argued that misstating the basis to
the partnership of property that the partners contributed
(i.e., inside basis)—which undoubtedly is a partnership item,
see sec. 301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs.—also
made the penalties based on misvaluation related to adjust-
ments to partnership items. But the court rejected this argu-
ment too because the Government had not ‘‘demonstrated
that any understatement of tax * * * resulted from the con-
tribution.’’ Id. And the court frowned upon the Government’s
attempt to ‘‘focus on these contributions in isolation * * *
and then use these contributions, standing alone, to trigger
penalties.’’ Id.
I do agree with the majority that the amount of the under-
payment of tax can’t be determined at the partnership
level—it’s determined in a notice of computational adjust-
ment or a notice of deficiency proceeding at the partner level.
Yet unlike the majority, I believe that we have jurisdiction
at the partnership level only over penalties that relate
directly to numerical adjustments to partnership items. See
Petaluma III, 135 T.C. at 587. More specifically, the penalty
must relate to a partnership-item adjustment that seems
capable of being summarily assessed as a computational
adjustment. 16 See Thompson v. Commissioner, 137 T.C. 220,
242 (2011) (Holmes, J., dissenting) (explaining which com-
putational adjustments I believe are subject to deficiency
procedures and which ones aren’t).
In conclusion, I believe that we shouldn’t challenge the
D.C. Circuit on the issue of our partnership-level jurisdiction
over penalties any more than we should challenge it on the
16 Judge Halpern’s concurring opinion incorrectly compares this case to 106 Ltd. v. Commis-
sioner, 136 T.C. 67 (2011). 106 Ltd. involved a nonliquidating distribution from a partnership
and a different variety of Son-of-BOSS—one where the partnership itself, rather than the con-
tributing partner, incorrectly valued the paired options that were contributed—taking the value
of the long position but ignoring the offsetting short position—which, as a consequence, caused
the partnership to grossly overstate the capital contributions and distributions it reported. See
Halpern op. pp. 149–150.
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192 138 UNITED STATES TAX COURT REPORTS (67)
issue of outside basis as a partnership item. 17 Of all the rou-
tines in judicial gymnastics, few have a higher degree of dif-
ficulty than the reverse benchslap, and we’re trying for a
combination double with our Opinion today.
I’ll stand a safe distance off to one side, and respectfully
dissent.
THORNTON and KROUPA, JJ., agree with part I of this dis-
sent.
f
17 I’ll reiterate what I noted in Thompson: The Secretary should not view our Opinion as fore-
closing the possibility that he could clear this area up much more efficiently through regulation
than the Commissioner has been able to do through litigation. Thompson v. Commissioner, 137
T.C. at 244 (Holmes, J., dissenting).
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