Trust U/W/O BH and MW Namm F/B/O Andrew I. Namm, Andrew I. Namm and James Doran, Trustees, Transferee v. Commissioner

T.C. Memo. 2018-182

UNITED STATES TAX COURT

TRUST U/W/O BH AND MW NAMM F/B/O ANDREW I. NAMM, ANDREW I.
NAMM AND JAMES DORAN, TRUSTEES, TRANSFEREE, ET AL.,1
Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 8485-17, 8487-17, Filed October 29, 2018.
8488-17, 8490-17,
8496-17, 8498-17,
8499-17, 8500-17,
8501-17.

1
The following cases are consolidated herewith: Andrew I. Namm, Trans-
feree, docket No. 8487-17; Beth N. Doran Revocable Trust, James Doran and
Andrew Namm, Trustees, Transferee, docket No. 8488-17; Pamela White, Trans-
feree, docket No. 8490-17; James Perilman, Transferee, docket No. 8496-17;
Wendy H. Doran Revocable Trust, James Doran, Wendy H. Doran and Andrew
Namm, Trustees, Transferee, docket No. 8498-17; Wendy Doran-Paley, Trans-
feree, docket No. 8499-17; Trust U/W/O Peggotty N. Doran, James Doran and
Andrew Namm, Trustees, Transferee, docket No. 8500-17; Barbara P. Lempit,
Transferee, docket No. 8501-17.
 -2-

[*2] Jenny L. Johnson Ware, Guinevere M. Moore, and Shay-Ann Heiser Singh,

for petitioners.

Carina J. Campobasso and Janet F. Appel, for respondent.

MEMORANDUM OPINION

LAUBER, Judge: These consolidated cases involve the assertion by the In-

ternal Revenue Service (IRS or respondent) of transferee liability against petition-

ers, former shareholders of a corporation that was the subject of a “Midco” trans-

action. Currently before the Court are cross-motions for summary judgment on the

question whether the IRS mailed notices of transferee liability to petitioners within

the period of limitations specified in section 6901(c).2 Answering that question in

respondent’s favor, we will grant his motion for partial summary judgment and

deny petitioners’ cross-motions.

Background

The following facts are derived from the pleadings, the parties’ motion pa-

pers, and the exhibits attached thereto. They are stated solely for purposes of de-

2
All statutory references are to the Internal Revenue Code (Code) in effect
for the year in issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. We round all monetary amounts to the nearest dollar.
 -3-

[*3] ciding the motions and not as findings of fact in these cases. Sundstrand

Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir.

1994).

Petitioners are former shareholders of Arebec Corp. (Arebec), a C corpora-

tion whose assets consisted chiefly of appreciated marketable securities. At the

time petitioners were shareholders, Arebec was subject to Federal income tax as a

“personal holding company” under section 542. This tax classification was disad-

vantageous: Section 541 imposes, in addition to applicable income taxes, “a per-

sonal holding company tax equal to 20 percent” of undistributed personal holding

company income.

Petitioners desired to liquidate Arebec’s assets and have the proceeds distri-

buted to them. But this approach would have had the consequence of requiring

that Federal and State income tax be paid both at the corporate and at the share-

holder level. Petitioner Andrew Namm, a member of Arebec’s board of directors,

informed his fellow shareholders that Arebec had explored ways to avoid this

“double taxation” problem but had found no “credible solutions.”

During the late 1990s and early 2000s tax shelter promoters offered purport-

ed solutions to this perceived problem. In one common strategy shareholders

would sell their stock to a transient intermediary company, which would plan to
 -4-

[*4] offset the built-in gain with a prepackaged tax shelter, often a Son-of-BOSS

scheme.3 These transactions took a variety of forms and are commonly called “in-

termediary company” or “Midco” transactions. See Notice 2001-16, 2001-1 C.B.

730, clarified by Notice 2008-111, 2008-51 I.R.B. 1299. These transactions are

well summarized in Diebold Found. Inc. v. Commissioner, 736 F.3d 172, 175-176

(2d Cir. 2013), vacating and remanding T.C. Memo. 2010-238.

A. The Acquisition

In July 2000 a partner at Grant Thornton approached Arebec’s management

and suggested that Arebec might be a good candidate for sale. He indicated that

he had found a suitable buyer, Diversified Group, Inc. (Diversified). Diversified

and its president, James Haber, were leading promoters of Midco transactions, and

several of their transactions have previously been scrutinized by this Court.4

3
Son-of-BOSS tax shelters were variations on a predecessor known as
“BOSS, an acronym for ‘bond and options sales strategy.’” Kligfeld Holdings v.
Commissioner, 128 T.C. 192, 194 (2007). Son-of-BOSS schemes typically
entailed a series of transactions designed to generate an artificially high basis in a
partnership interest. Participants then disposed of their partnership interests,
generating artificial losses used to offset participants’ real income.
4
See, e.g., Greenberg v. Commissioner, T.C. Memo. 2018-74; Jacoby v.
Commissioner, T.C. Memo. 2015-67; Markell Co. v. Commissioner, T.C. Memo.
2014-86; Humboldt Shelby Holding Corp. v. Commissioner, T.C. Memo. 2014-47,
aff’d, 606 F. App’x 20 (2d Cir. 2015).
 -5-

[*5] Diversified stated that it would be willing to purchase 100% of Arebec’s

stock for a price equal to the fair market value of Arebec’s assets, less

approximately 7% of the capital gain embedded in those assets. This 7% “haircut”

was substantially smaller than the effective rate of Federal tax that would apply to

the gain if the securities were sold, which (as Mr. Namm informed his fellow

shareholders) was “currently 35%.” Diversified’s offering price for the stock thus

represented a significant premium over Arebec’s net liquidation value.

On August 24, 2000, Mr. Namm and petitioner James Doran, also a member

of Arebec’s board, met with Diversified’s representatives to discuss the proposal.

From August through October the finer points of the deal were negotiated. On

September 22, 2000, AC Acquisition, LLC (AC Acquisition), was formed as a

subsidiary of Diversified to act as the buyer. On October 16, 2000, Arebec’s

board approved the transaction and AC Acquisition paid $25,170,000 for 100% of

Arebec’s stock. The proceeds were placed in a trust for petitioners, and 95.7% of

the proceeds was distributed to them the following day.

B. Events Surrounding the Acquisition

The following facts are affirmatively alleged by respondent in his answer.

In their reply to answer petitioners deny most of these allegations “for lack of

sufficient knowledge or information.”
 -6-

[*6] AC Acquisition, which had negligible assets, financed its purchase of the

Arebec stock with a purported loan of $29 million from a subsidiary of Rabobank,

a Dutch bank that has played a similar fleeting role in other Midco transactions.5

The loan was dated October 16, 2000, and was explicitly made contingent on an

agreement by Paine Webber, a brokerage firm, to purchase all of Arebec’s assets

immediately after AC Acquisition purchased all of Arebec’s stock. Paine Webber

duly purchased Arebec’s assets.

On October 17, 2000, the day after the purported stock acquisition and asset

sale closed, the proceeds from the asset sale, totaling about $26 million, were

withdrawn from Arebec’s Paine Webber account and deposited into Arebec’s

Rabobank account. Later that day $25,500,000 was withdrawn from Arebec’s

Rabobank account and deposited into AC Acquisition’s Rabobank account. AC

Acquisition immediately used those funds to repay the Rabobank loan in full.

This set of transactions left Arebec, now wholly owned by AC Acquisition, with

negligible assets and a very large tax liability.

5
Rabobank affiliates have provided short-term (usually overnight) financing
for other Midco transactions that this Court has considered. See, e.g., Tricarichi v.
Commissioner, T.C. Memo. 2015-201, 110 T.C.M. (CCH) 370, 375-376; Shockley
v. Commissioner, T.C. Memo. 2015-113, 109 T.C.M. (CCH) 1579, 1582-1583.
 -7-

[*7] On October 23, 2000, Arebec formed and became the sole member of AC

Trading, LLC (AC Trading), making a modest capital contribution. Four days

later AC Trading purchased offsetting long- and short-option positions on the

Japanese yen. Given the offsetting nature of these options and the lack of other

assets, AC Trading had negligible economic value. But Arebec claimed a basis in

excess of $20 million in AC Trading, valuing the long option at its cost and failing

to offset against that value the contingent liability represented by the short option.

Two weeks later Arebec contributed its 100% interest in AC Trading in ex-

change for an 85% membership interest in AD Equity Investment Fund, LLC (AD

Equity), a partnership of which Diversified was the tax matters partner (TMP).

Arebec’s purported basis in AD Equity was inflated because of the artificially high

basis it claimed in AC Trading. On December 11, 2000, AD Equity redeemed

Arebec’s interest for cash and securities of little value. Arebec’s inflated outside

basis in AD Equity was transferred to the securities. Arebec claimed it suffered a

short-term loss of $20,986,503 when it sold those securities on December 26,

2000.

C. Tax Reporting

On December 14, 2001, AD Equity filed Form 1065, U.S. Return of Partner-

ship Income, for the calendar tax year 2000, the year in which it redeemed Are-
 -8-

[*8] bec’s 85% interest.6 On January 17, 2002, Arebec filed Form 1120, U.S.

Corporation Income Tax Return, for its fiscal year ending (FYE) January 31, 2001.

On that return Arebec reported long-term capital gain of $20,187,206, largely from

the sale of its appreciated securities portfolio to Paine Webber, and it reported a

short-term capital loss of $21,109,722, largely from the sale of the low-value

securities received from AD Equity. It reported negative taxable income and

claimed a refund.

On December 14, 2004, the IRS issued a notice of final partnership ad-

ministrative adjustment (FPAA) to Diversified, AD Equity’s TMP. The FPAA

determined that AD Equity had never existed (or had existed solely for tax avoid-

ance purposes) and that its transactions lacked economic substance. On March 4,

2005, Diversified filed suit on behalf of AD Equity in the U.S. District Court for

the Southern District of New York to contest the FPAA adjustments. On June 25,

2014, the District Court dismissed the case with prejudice, which had the effect of

sustaining the FPAA. See sec. 6226(h) (“[T]he decision of the Court dismissing

the action shall be considered as its decision that the notice of final partnership

administrative adjustment is correct.”).

6
AD Equity’s Form 1065 for 2000 was recorded by the IRS computer
system as received on December 14, 2001. Petitioners assert that this return was
filed on or before October 15, 2001. We discuss this issue infra pp. 20-22.
 -9-

[*9] Following conclusion of the lengthy partnership proceeding, the IRS issued,

on May 12, 2015, a statutory notice of deficiency to Arebec. The IRS disallowed

$19,972,484 of Arebec’s reported capital losses, determining a tax deficiency of

$6,957,864 and penalties under section 6662 of $2,783,139. When Arebec did not

petition this Court within 90 days, see sec. 6213, the IRS assessed those liabilities

together with interest of $9,765,061 through August 17, 2015, the assessment date.

Upon investigation of Arebec the IRS discovered that it had no assets. The

IRS accordingly determined to seek recovery from petitioners as transferees of

Arebec. The IRS issued notices of liability to petitioners on January 18, 2017, and

they timely petitioned this Court for review.

Discussion

I. Summary Judgment Standard

The purpose of summary judgment is to expedite litigation and avoid costly,

unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commis-

sioner, 116 T.C. 73, 74 (2001). We may grant partial summary judgment when

there is no genuine dispute of material fact and a decision may be rendered as a

matter of law. Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238

(2002). In deciding whether to grant summary judgment, we construe factual ma-

terials and inferences drawn from them in the light most favorable to the nonmov-
 - 10 -

[*10] ing party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986);

Sundstrand Corp., 98 T.C. at 520. The nonmoving party may not rest upon the

mere allegations or denials in his pleadings but must set forth specific facts

showing that there is a genuine dispute for trial. Rule 121(d); see Sundstrand

Corp., 98 T.C. at 520.

The sole question presented for decision at this stage of the proceedings is

whether the IRS mailed notices of liability to petitioners within the applicable

period of limitations for assessment. The parties have filed cross-motions for

partial summary judgment on this question, and we find that it may appropriately

be adjudicated summarily.

II. Governing Law

Various petitioners reside in New York (docket Nos. 8485-17, 8487-17, and

8501-17), Connecticut (docket Nos. 8488-17, 8498-17, and 8500-17), New Jersey

(docket No. 8499-17), Nevada (docket No. 8490-17), and California (docket No.

8496-17). Absent stipulation to the contrary, venue for appeal of these cases

would apparently be the U.S. Court of Appeals for the Second, Third, and Ninth

Circuits, respectively. See sec. 7482(b)(1)(A); Estate of Israel v. Commissioner,

159 F.3d 593, 595-596 (D.C. Cir. 1998), rev’g and remanding 108 T.C. 208

(1997). Under Golsen v. Commissioner, 54 T.C. 742, 757, aff’d, 445 F.2d 985
 - 11 -

[*11] (10th Cir. 1971), we follow the law of the appellate venue. We discern no

appreciable differences in the law of the Second, Third, and Ninth Circuits on the

issues we are required to address in this opinion.

III. Period of Limitations Defense

“The expiration of the period of limitation on assessment is an affirmative

defense, and the party raising it must specifically plead it and carry the burden of

proving its applicability.” Amesbury Apartments, Ltd. v. Commissioner, 95 T.C.

227, 240 (1990); see Rule 39 (requiring a party to plead specifically “any matter

constituting an avoidance or affirmative defense, including * * * the statute of

limitations”). This general rule applies to a party who advances a limitations de-

fense in a transferee liability case. See Stuart v. Commissioner, 144 T.C. 235, 245

(2015), vacated on other grounds and remanded, 841 F.3d 777 (8th Cir. 2016).

A party advancing this affirmative defense must make a prima facie case es-

tablishing the date on which the relevant tax return was filed, the expiration of the

relevant limitations period, and the mailing of the relevant IRS notice after that

period had expired. Amesbury Apartments, 95 T.C. at 240-241. If the taxpayer

makes that showing, the burden of going forward with the evidence shifts to the

Commissioner to show that the limitations bar is not applicable. Id. at 241. If the

Commissioner makes that showing, the burden shifts back to the taxpayer to prove
 - 12 -

[*12] that the “alleged exception to the expiration of the period is invalid or

otherwise inapplicable.” Ibid. “The burden of proof, i.e., the burden of ultimate

persuasion, * * * never shifts from the party who pleads the bar of the statute of

limitations.” Ibid. (citing Adler v. Commissioner, 85 T.C. 535, 540 (1985)).

When Arebec filed its corporate tax return for its FYE January 31, 2001, it

reported a capital loss of $21,109,722. This reported loss stemmed chiefly from

the sale of securities it had received from AD Equity, a partnership, in purported

redemption of its 85% interest in that partnership. That redemption and the

validity of AD Equity as a partnership were the subject of a partnership-level pro-

ceeding. Because these cases involve items on a corporate tax return that are “af-

fected items” from a partnership return, two distinct limitations provisions are im-

plicated.

Section 6501(a) sets forth the general rule that Federal income tax must be

assessed “within 3 years after the return was filed.” Section 6229(a) addresses

“the period for assessing any [income] tax * * * with respect to any person which

is attributable to any partnership item (or affected item) for a partnership taxable

year.” It provides that this assessment period “shall not expire before the date

which is 3 years after the later of (1) the date on which the partnership return for
 - 13 -

[*13] such taxable year was filed, or (2) the last date for filing such return * * *

(determined without regard to extensions).”

In situations where sections 6501(a) and 6229(a) both apply, this Court has

held that the longer of the two periods controls. Rhone-Poulenc Surfactants and

Specialities, L.P. v. Commissioner (Rhone-Poulenc), 114 T.C. 533, 540-543

(2000); see also Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007); G-5

Inv. P’ship v. Commissioner, 128 T.C. 186, 190 (2007). At least four Courts of

Appeals agree with that conclusion.7

7
See Gail Vento, LLC v. United States, 595 F. App’x 170, 175 n.9 (3d Cir.
2014); Curr-Spec Partners, L.P. v. Commissioner, 579 F.3d 391, 399 (5th Cir.
2009), aff’g T.C. Memo. 2007-289; AD Glob. Fund, LLC v. United States, 481
F.3d 1351, 1354-1355 (Fed. Cir. 2007); Andantech L.L.C. v. Commissioner, 331
F.3d 972, 976-977 (D.C. Cir. 2003), aff’g in part and remanding T.C. Memo.
2002-97. Petitioners contend that the Second Circuit demurred to this approach in
Callaway v. Commissioner, 231 F.3d 106, 110, 122 (2d Cir. 2000), rev’g T.C.
Memo. 1998-99. We have previously rejected that contention, noting that the
Second Circuit in Callaway did not decide “the issue of the relationship between
sections 6229(a) and 6501(a).” LVI Inv’rs LLC v. Commissioner, T.C. Memo.
2009-254, 98 T.C.M. (CCH) 424, 426. As we noted in LVI Inv’rs LLC, the
Second Circuit in a post-Callaway opinion has indicated its view that section
6229(a), which provides that the assessment period “shall not expire before” a
specified date, may simply extend, as opposed to constricting, the time available to
assess tax. See Field v. United States, 381 F.3d 109, 112 n.1, 113 (2d Cir. 2004)
(noting that a taxpayer seeking to ground a limitations defense on section 6229(a)
“would still need to surmount the fact that section 6229(a), by its terms, does not
purport to limit the time available to assess tax, but only to extend limitations
otherwise applicable”).
 - 14 -

[*14] If an FPAA is timely mailed to the TMP for a partnership, section 6229(d)

suspends the running of the period of limitations “(1) for the period during which

an action may be brought under section 6226 (and, if a petition is filed under sec-

tion 6226 * * * , until the decision of the court becomes final), and (2) for 1 year

thereafter.” We held in Rhone-Poulenc that section 6229(d) acts to suspend the

running, not only of the section 6229(a) limitations period, but also of the section

6501(a) limitations period, when it is the longer of the two. See 114 T.C. at 552.

Several courts have expressed agreement with this holding.8

Petitioners disagree with this second holding of Rhone-Poulenc and urge us

to reconsider it. Advancing the views expressed by the concurring and dissenting

opinions in Rhone-Poulenc, petitioners contend that section 6229(d) does not sus-

pend the running of the section 6501(a) limitations period. See Rhone-Poulenc,

114 T.C. at 560-561 (Halpern, J., concurring in part); id. at 569 (Foley, J.,

dissenting).

8
See Grapevine Imports, Ltd. v. United States, 71 Fed. Cl. 324, 340 (2006)
(rejecting argument that section 6229(d) cannot suspend the running of the section
6501(a) period); AD Glob. Fund, LLC ex rel. N. Hills Holding, Inc. v. United
States, 67 Fed. Cl. 657, 694 (2005) (holding that section 6229(d) extended the
section 6501(a) period), aff’d, 481 F.3d 1351 (Fed. Cir. 2007); see also Curr-Spec
Partners, 579 F.3d at 398 n.38 (suggesting that the section 6501(a) period may be
extended by section 6229(d)).
 - 15 -

[*15] We decline to reconsider either holding in Rhone-Poulenc. But even if we

did so, it would not help petitioners. The notices of transferee liability were timely

both under the analysis we adopted in Rhone-Poulenc and also under the alterna-

tive computation method that petitioners prefer.

A. Focusing on Arebec’s Return and Applying Rhone-Poulenc

The Form 1120 on which Arebec reported the challenged losses was filed

on January 17, 2002. Under the general rule of section 6501(a), therefore, the IRS

initially had until January 17, 2005, to assess tax against Arebec. The Form 1065

on which AD Equity reported the relevant partnership items was filed on Decem-

ber 14, 2001. Under section 6229(a), the period of limitations for assessing Are-

bec for the affected items arising from its ownership of AD Equity “[did] not

expire before” December 14, 2004. Under our first holding in Rhone-Poulenc, the

initial period of limitations on assessment thus ran until January 17, 2005, the later

of the two dates. See 114 T.C. at 542.

As we further held in Rhone-Poulenc, section 6229(d) operates to suspend

the running of the section 6501(a) period once the IRS issues a timely FPAA to

the partnership. Rhone-Poulenc, 114 T.C. at 552. The IRS issued the FPAA to

Diversified, the TMP for AD Equity, on December 14, 2004. That date was 34

days before January 17, 2005, the date on which the section 6501(a) period for
 - 16 -

[*16] assessing tax against Arebec expired. Pursuant to section 6226(a),

Diversified filed a District Court action on behalf of AD Equity to contest the

FPAA’s determinations.

Under section 6229(d), the running of the remaining 34 days of the limita-

tions period was suspended during the District Court litigation and for one year

after the judgment of the District Court became final. Sec. 6229(d)(1) and (2).

The District Court dismissed the AD Equity case with prejudice on June 25, 2014,

and neither party appealed. That court’s judgment thus became final on August

25, 2014, the last day on which a notice of appeal could have been filed.9 See

Miller v. Commissioner, 104 T.C. 378, 383 (1995) (citing sections 6230(g),

7481(a)(1)). Thus, section 6229(d)(2) caused the period of limitations to be

suspended for an additional year, until August 25, 2015.

When section 6229(d) suspends a limitations period, any unexpired time left

in the original assessment period is tacked on following the suspension. We so

held in Aufleger v. Commissioner, where we explained: “The plain meaning of

the word ‘suspend’, in the context of a statute of limitations, is to interrupt

9
An appellant generally has 60 days to file a notice of appeal from a District
Court judgment. Fed. R. App. P. 4(a)(1)(B). Because August 24, the 60th day
after the District Court’s judgment was entered, was a Sunday, the period for
appeal was extended to the following Monday. See id. subdiv. (a)(1)(C).
 - 17 -

[*17] temporarily the running of the limitations period with the expectation that

the running of the limitations period will resume at the end of the suspension.” 99

T.C. 109, 117-120 (1992).

Here, immediately before the section 6229(d) suspension began, the IRS

had 34 days remaining to assess tax against Arebec. The section 6229(d) suspen-

sion ended on August 25, 2015. The period for assessing tax against Arebec, as

extended by section 6229(d), thus closed 34 days later, on September 28, 2015.

The IRS issued the notice of deficiency to Arebec on May 12, 2015, which was

well within the period of limitations on assessment defined above. On May 12,

2015, the limitations period still had 139 days left to run.

Upon the mailing of a timely notice of deficiency, section 6503(a) suspends

the running of the period of limitations for (at least) the 90-day period during

which the taxpayer can file a Tax Court petition, sec. 6213(a), “and for 60 days

thereafter.” Because Arebec did not file a Tax Court petition, the period for as-

sessing tax against Arebec was suspended for a total of 150 days, i.e., from May

12, 2015, through October 9, 2015. The 139 days remaining in the original period

of limitations is tacked on following that suspension. See Aufleger, 99 T.C. at

117. The period for assessing tax against Arebec was thus extended to February

25, 2016.
 - 18 -

[*18] Section 6901(c) specifies the period of limitations for assessing the tax of a

transferor (here Arebec) against transferees of its assets. For “initial transferees,”

which petitioners are alleged to be, the transferor’s tax may be assessed against

transferees “within 1 year after the expiration of the period of limitation for assess-

ment against the transferor.” Sec. 6901(c)(1). That one-year period ended on Feb-

ruary 25, 2017. Because February 25, 2017, was a Saturday, the period of limita-

tions was extended to February 27, the following Monday. See Rule 25(a)(2).

The IRS issued notices of transferee liability to petitioners on January 18, 2017.

Those notices were therefore timely.

B. Focusing on AD Equity’s Return

We reach the same conclusion if we follow petitioners’ suggestion and

measure the period of limitations from the filing of AD Equity’s return. AD

Equity filed its 2000 Form 1065 on December 14, 2001. The baseline period of

limitations for assessing tax attributable to any partnership item or affected item of

AD Equity ran to December 14, 2004, three years from the date AD Equity filed

the return. See sec. 6229(a). The IRS issued the FPAA to Diversified as TMP of

AD Equity on December 14, 2004. The FPAA was thus timely under section

6229(a), without taking into account section 6501(a) or our application of that

provision in Rhone-Poulenc.
 - 19 -

[*19] The FPAA tolls the running of the period of limitations for the period dur-

ing which a readjustment petition could be brought under section 6226 and (if

such a petition is filed) until the court’s decision becomes final and for one year

thereafter. Sec. 6229(d). On June 25, 2014, the District Court dismissed the

partnership case, and that judgment became final on August 25, 2014. See supra

p. 16. The running of the period of limitations was thus tolled until August 25,

2015.

The IRS issued an “affected items” notice of deficiency to Arebec on May

12, 2015, well within the period of limitations. Sec. 6229(a). The notice of defici-

ency tolled the running of the period of limitations for an additional 150 days, see

sec. 6503(a), thus extending the period of limitations for assessment against

Arebec from August 25, 2015, to January 22, 2016.

The period of limitations for assessing tax against petitioners as initial trans-

ferees of Arebec extended for one year after the period for assessment against Are-

bec. Sec. 6901(c)(1). The IRS thus had until January 22, 2017, to issue notices of

transferee liability to petitioners. The IRS issued those notices on January 18,

2017. They were therefore timely under the alternative measurement approach

that petitioners suggest.
 - 20 -

[*20] C. Petitioners’ Arguments

Petitioners advance two contentions against the conclusions set forth above.

Neither has merit.

1. Validity of FPAA Issued to AD Equity

Petitioners’ principal contention is that the FPAA issued to AD Equity was

untimely. If that were so, petitioners say, the District Court litigation could not

have acted to suspend the period of limitations, and section 6226(d) would have

no operation here at all. In that event petitioners contend that the notices of

liability would be untimely under either of the approaches we have outlined.

We reject this argument for three distinct reasons. First, the issuance of the

FPAA on December 14, 2004, was timely for assessment purposes because it was

within three years of the filing of Arebec’s (the partner’s) return on January 17,

2002. See, e.g., G-5 Inv. P’ship, 128 T.C. at 191-192 (applying Rhone-Poulenc

and concluding that although the FPAA was issued more than three years after the

partnership return was filed, it was timely for assessment purposes because it was

issued within three years of the partners’ returns on which the affected items

appeared); Curr-Spec Partners, L.P. v. Commissioner, 579 F.3d 391, 396 (5th Cir.

2009), aff’g T.C. Memo. 2007-289.
 - 21 -

[*21] Second, petitioners have not established that the FPAA was untimely even if

the three-year limitations period were treated as running from the filing of AD

Equity’s (the partnership’s) return. The IRS received AD Equity’s Form 1065 for

2000 on December 14, 2001, as shown by IRS computer records. Those records

show a received date (“RCVD DATE”) of December 14, 2001 (“20011214”), for a

partnership return matching AD Equity’s 2000 return. The IRS issued the FPAA

to Diversified, the TMP of AD Equity, exactly three years later, on December 14,

2004.

Petitioners assert that AD Equity filed its 2000 return at least two months

earlier, on or before October 15, 2001. But the only thing they adduce to support

that assertion is a letter from AD Equity’s tax return preparer informing the part-

nership that its Form 1065 should be signed and filed on or before that date. Peti-

tioners have supplied no document (such as a certified mail receipt or a transmittal

letter) tending to show that the return was actually mailed to the IRS on or before

October 15, 2001. Nor have they supplied a declaration or affidavit executed by a

person with actual knowledge of the circumstances surrounding the return’s filing.

Under Rule 121(d), a party opposing summary judgment “may not rest upon

the mere allegations or denials of such party’s pleading,” but must set forth, “by

affidavits or declarations * * * specific facts showing that there is a genuine dis-
 - 22 -

[*22] pute for trial.” See Camerato v. Commissioner, T.C. Memo. 2002-28, 83

T.C.M. (CCH) 1147, 1149 (citing Celotex v. Catrett, 477 U.S. 317, 324 (1986)).

The letter referenced by petitioners shows that AD Equity was informed of the due

date for its 2000 return. But knowledge that a return is due to be filed on a certain

date does not constitute evidence that the return was actually filed on or before

that date. Because petitioners have supplied neither direct evidence of the return’s

mailing nor a declaration or affidavit regarding the circumstances of its filing, we

conclude that they have failed to establish a genuine dispute of fact as to whether

the return was filed on a date earlier than December 14, 2001, the date shown by

the IRS computer records.10

10
There is some evidence to support the proposition that the IRS received
AD Equity’s 2000 return later than December 14, 2001. According to declarations
supplied by the IRS agents who conducted AD Equity’s examination, its 2000 re-
turn was initially posted (erroneously) to its 2001 account with a processing date
of January 28, 2002. This error was evidently connected to the late filing of re-
turns in the wake of the September 11, 2001, terrorist attack in New York. An IRS
agent accordingly made a notation of “rec’d 01/28/2002” on a copy of AD Equi-
ty’s 2000 return. The IRS later discovered the computer entry showing that a re-
turn matching AD Equity’s 2000 return was actually received earlier, on Decem-
ber 14, 2001. Thus, while there is some record evidence pointing to a filing date
later than December 14, 2001, there is no record evidence pointing to a filing date
earlier than December 14, 2001. But even if petitioners could establish an earlier
filing date for the partnership return, our result would not change because Are-
bec’s period of limitations remained open.
 - 23 -

[*23] Third, even if petitioners could run the preceding two traps, they face the

formidable hurdle of res judicata. “When a court of competent jurisdiction has en-

tered a final judgment on the merits of a cause of action, the parties to the suit and

their privies are thereafter bound.” Commissioner v. Sunnen, 333 U.S. 591, 597

(1948). On June 25, 2014, the District Court dismissed AD Equity’s lawsuit with

prejudice. Dismissal with prejudice, even a voluntary dismissal as occurred here,

constitutes an adjudication on the merits. See Chase Manhattan Bank, N.A. v.

Celotex Corp., 56 F.3d 343, 345 (2d Cir. 1995) (“A voluntary dismissal with

prejudice is an adjudication on the merits for purposes of res judicata.”).11 After

the conclusion of the AD Equity partnership proceeding, therefore, neither Arebec

nor any other partner could challenge the partnership-level determinations made

by the District Court. See Koprowski v. Commissioner, 138 T.C. 54, 60 (2012)

11
Other circuits have similarly held that res judicata applies after a voluntary
dismissal with prejudice. See, e.g., Jackson v. Dow Chem. Co., 518 F. App’x 99,
102 (3d Cir. 2013) ( “[Plaintiff’s] voluntary dismissal with prejudice of his re-
maining * * * claims also operated as a final judgment on the merits for purposes
of claim preclusion.”); Warfield v. Allied Signal TBS Holdings, Inc., 267 F.3d
538, 542 (6th Cir. 2001) ( “A voluntary dismissal with prejudice operates as a final
adjudication on the merits and has a res judicata effect.”); Concha v. London, 62
F.3d 1493, 1507 (9th Cir. 1995) (stating that a voluntary dismissal with prejudice
“operates as an adjudication on the merits” and “[b]y obtaining such a dismissal,
the plaintiff submits to a judgment that serves to bar his claims forever”); Harrison
v. Edison Bros. Apparel Stores, 924 F.2d 530, 534 (4th Cir. 1991) (“A voluntary
dismissal with prejudice under Fed. R. Civ. P. 41(a)(2) is a complete adjudication
on the merits of the dismissed claim.”).
 - 24 -

[*24] (quoting Sunnen, 333 U.S. at 597) (noting that parties are bound not only as

to matters offered to defeat a claim but also “to any other admissible matter which

might have been offered for that purpose”).

In the case of a TEFRA partnership, the period of limitations for the assess-

ment of tax attributable to an FPAA is a “‘partnership item’ that must be raised at

the partnership level.” Chimblo v. Commissioner, 177 F.3d 119, 125 (2d Cir.

1999), aff’g Estate of Chimblo v. Commissioner, T.C. Memo. 1997-535; see

Davenport Recycling Assocs. v. Commissioner, 220 F.3d 1255, 1260-1261 (11th

Cir. 2000), aff’g T.C. Memo. 1998-347; Kaplan v. United States, 133 F.3d 469,

473 (7th Cir. 1998); Crowell v. Commissioner, 102 T.C. 683, 693 (1994). A

limitations challenge to an assessment stemming from the issuance of the FPAA

could thus have been brought only in the partnership proceeding. Chimblo, 177

F.3d at 125. “Allowing individual taxpayers to raise a statute of limitations

defense in multiple partner-level proceedings would undermine TEFRA’s dual

goals of centralizing the treatment of partnership items and ensuring the equal

treatment of partners.” Ibid.

For this reason, Arebec as a partner in AD Equity could not now challenge

the timeliness of the FPAA issued to the partnership. And to the extent petitioners

are transferees of Arebec, they are in no better position. “It is well settled that a
 - 25 -

[*25] transferee is in privity with the transferor for purposes of the Internal

Revenue Code.” Pert v. Commissioner, 105 T.C. 370, 376 (1995).12 Indeed, “[i]t

would be a strange rule to confer upon the transferee broader rights than the

transferor by allowing the transferee to relitigate an issue when a transferor is

denied that privilege.” Kreuger v. Commissioner, 48 T.C. 824, 830 (1967).

Because the final judgment in the District Court action binds both “the parties to

the suit and their privies,” Sunnen, 338 U.S. at 597, petitioners as transferees of

Arebec are precluded from challenging the timeliness of the FPAA that the IRS

issued to AD Equity.13

12
Petitioners contend that they cannot be in privity with Arebec because they
have not yet been determined to be transferees of Arebec. Whether petitioners are
“transferees” under Federal and applicable State law involves disputed issues of
law and fact that will be resolved at trial. To the extent petitioners seek to have
this case resolved without trial, by a grant of summary judgment in their favor, we
must view all disputed issues in the light most favorable to respondent. Solely for
purposes of ruling on petitioners’ period of limitations defense, therefore, we
assume that they are transferees of Arebec.
13
Petitioners err in citing Sawyer Trust of May 1992 v. Commissioner, 133
T.C. 60 (2009), to support their contention that res judicata does not apply. In that
case a trust had sold stock of several corporations in a Midco transaction. The IRS
initially issued a notice of deficiency to the trust, seeking to increase its fiduciary
income tax on the theory that it had underreported its basis in the stock. The trust
petitioned this Court, and the case was resolved by a stipulated decision
determining no deficiency. “The decision documents reflected a compromise by
the parties and were not the result of a trial on the merits,” and the parties did not
include any stipulations regarding “respondent’s theories for determining a
(continued...)
 - 26 -

[*26] 2. Validity of the Notice of Deficiency to Arebec

Petitioners alternatively contend that the notice of deficiency issued to

Arebec was invalid and hence that section 6503(a)(1) did not operate to suspend

the limitations period for 150 days when Arebec declined to file a Tax Court peti-

tion. See supra p. 17. This requires us to dig even deeper into some of TEFRA’s

more arcane rules.

Section 6503(a)(1) suspends the running of the limitations period of section

6229, “but only with respect to a deficiency described in paragraph (2)(A) or (3) of

section 6230(a).” Paragraph (3) of section 6230(a), relating to “innocent spouse

relief,” has no relevance here. Paragraph (2)(A) provides that deficiency proce-

dures apply to any deficiency attributable to affected items “which require partner

level determinations,” other than certain penalties and additions to tax. On the

13
(...continued)
deficiency.” Id. at 67. The IRS later sent a notice of transferee liability to the
trust, seeking to collect from it the unpaid corporate income tax of the
corporations, from whom all assets had been stripped. We held that res judicata
did not bar the transferee case for three reasons: (1) the transferee case involved a
different tax liability, viz., transferee liability for unpaid corporate tax as opposed
to direct liability for fiduciary income tax, (2) the deficiency case, which had been
resolved by a stipulated decision reflecting a compromise, did not adjudicate any
factual or legal issues, and (3) the issue of transferee liability could not possibly
have been litigated in the deficiency case. See id. at 70-78. Here, by contrast, the
merits of the partnership-level issues, including the validity of the FPAA issued to
AD Equity, were actually adjudicated in the prior District Court case and could
only have been adjudicated there.
 - 27 -

[*27] other hand, section 6230(a)(1) provides that deficiency procedures “shall not

apply to the assessment or collection of any computational adjustment,” unless it

is a computational adjustment covered by paragraph (2)(A) or (3). In short,

section 6503(a)(1) does not suspend the section 6229 limitations period where no

partner-level determinations entailing deficiency procedures are required.

Petitioners urge that this was such a case. Once AD Equity had been deter-

mined in the District Court litigation to be a sham, petitioners contend that no part-

ner-level determinations were needed to implement the FPAA’s adjustments at the

partner level. Rather, the IRS could supposedly have omitted to send Arebec a no-

tice of deficiency and have assessed Arebec’s tax liability as a “computational ad-

justment” under section 6230(a)(1). We are unpersuaded by this argument.

Regulations issued under section 6231 explain that there are various types

of “computational adjustments,” some of which require partner-level determina-

tions and some of which do not. See sec. 301.6231(a)(6)-1T, Temporary Proced.

& Admin. Regs., 64 Fed. Reg. 3840 (Jan. 26, 1999).14 For example, if “the

threshold amount of medical deductions under section 213” changes as the result

of a partnership-level determination, that computational adjustment “do[es] not

14
Sec. 301.6231(a)(6)-1T, a temporary regulation applicable for tax years
beginning before October 4, 2001, applies to this case. It has since been replaced
by a permanent regulation. See sec. 301.6231(a)(6)-1, Proced. & Admin. Regs.
 - 28 -

[*28] require [a] partner level determination[]” and is “directly assessed.” Id.

para. (a)(1). On the other hand, the determination of a partner’s “at-risk amount,”

to the extent it depends on the source from which he obtained the funds for his

partnership contribution, “require[s] partner level determinations” and thus

involves “computational adjustments subject to deficiency procedures.” Id.

subpara. (2). A ruling that a particular adjustment does not require a partner-level

determination means that partners do not have a prepayment forum, which section

6230(a)(2)(A) otherwise supplies. See Greenwald v. Commissioner, 142 T.C. 308,

317 (2014).

We have previously held that the disallowance of loss deductions following

a distribution from a sham partnership required partner-level determinations in a

deficiency proceeding. See Domulewicz v. Commissioner, 129 T.C. 11 (2007),

aff’d on this issue sub nom. Desmet v. Commissioner, 581 F.3d 297 (6th Cir.

2009). That case resembles this one in relevant respects. The taxpayers in

Domulewicz were partners in a partnership that participated in a Son-of-BOSS tax

shelter; the partnership distributed low-value securities to the partners’ S corpora-

tion; the partners reported large capital losses from the S corporation’s sale of

those securities; the IRS issued an FPAA to the partnership determining that it was

a sham; and no one petitioned this Court in response to the FPAA. The IRS there-
 - 29 -

[*29] after sent petitioners a notice of deficiency denying the claimed capital loss

deductions. See id. at 14-16.

The taxpayers in Domulewicz argued that we lacked jurisdiction of the defi-

ciency case, asserting that the determination of their capital gain or loss was a

mere “computational adjustment” requiring no partner-level factual determina-

tions. We rejected that argument. Notwithstanding the prior determination that

the partnership was a sham, the IRS still “needed to determine, among other

things, whether the stock that was the subject of the sale was the same stock

distributed by * * * [the partnership], the portion of that stock actually sold, the

holding period for the stock, and the character of any gain or loss.” Id. at 20.

“Nor did the FPAA definitively determine the outside basis of any * * * partner”

in his partnership interest. Ibid. For these reasons, we concluded that the IRS

could not have made a final determination of the taxpayers’ capital gain or loss

“simply by examining [their] * * * Federal income tax return and making mere

ministerial adjustments.” Id. at 21. Because factual determinations were required

at the partner level, we held that we had jurisdiction of the deficiency case under

section 6230(a)(2).

The Ninth Circuit reasoned similarly in Napoliello v. Commissioner, 655

F.3d 1060 (9th Cir. 2011), aff’g T.C. Memo. 2009-104. There a sham partnership
 - 30 -

[*30] distributed to the taxpayer securities and cash in liquidation of his

partnership interest. Id. at 1062. The taxpayer sold the securities and claimed a

large loss deduction. Ibid. The court held that partner-level determinations were

necessary because the partnership-level proceedings did not conclusively

determine the identity of the securities used to generate the loss. Id. at 1064.

Similar reasoning applies here. Arebec made a capital contribution to AC

Trading in exchange for a 100% partnership interest in AC Trading, contributed

that interest to AD Equity in exchange for an 85% interest in AD Equity, and

received cash and securities from AD Equity in redemption of its partnership

interest. Notwithstanding the determination that AD Equity was a sham, partner-

level proceedings were required to determine the amount of Arebec’s gain or loss

on sale of those securities and the character of any loss. These factual determina-

tions included: (1) whether the securities Arebec sold were the same securities

that AD Equity had distributed, (2) the portion of the securities actually sold,

(3) Arebec’s holding period for the securities, (4) the character of Arebec’s gain or

loss, and (5) Arebec’s basis in its partnership interest in AC Trading when it con-

tributed that interest to AD Equity. See Domulewicz, 129 T.C. at 20-21. The fact

that some of these partner-level determinations, once made, might resemble those

made tentatively or provisionally in the FPAA does not matter: “Neither the Code
 - 31 -

[*31] nor the regulations * * * require that partner-level determinations actually

result in a substantive change to a determination made at the partnership level.”

Id. at 20.15

Petitioners err in relying on United States v. Woods, 571 U.S. 31 (2013), for

the proposition that no partner-level determinations are required once a partner-

ship has been determined to be a sham. The Supreme Court there ruled that this

Court has jurisdiction in a partnership proceeding to “determine the applicability

of any penalty that could result from an adjustment to a partnership item, even if

imposing the penalty would also require determining affected or non-partnership

items such as outside basis.” Id. at 41. The Supreme Court explained that our

Court in the partnership proceeding would be making only a “provisional”

determination, that is, “whether adjustments properly made at the partnership level

have the potential to trigger the penalty.” Ibid. (emphasis added). The Supreme

Court noted that each partner would “remain[] free to raise, in subsequent, partner-

15
Petitioners urge that Domulewicz is distinguishable because the securities
sold in that case were not identified on the partner’s return, whereas Arebec’s re-
turn showed that some securities were acquired on October 27, 2000, and sold two
months later. Cf. Domulewicz, 129 T.C. at 21. Contrary to petitioners’ view, the
outcome is not determined by parsing the fine points of the partners’ returns and
hypothesizing what inferences the IRS might draw therefrom. The key point in
both this case and Domulewicz is that a partner-level determination was needed,
including (in this case) a determination of Arebec’s basis in its partnership interest
in AC Trading.
 - 32 -

[*32] level proceedings, any reasons why the penalty may not be imposed on him

specifically.” Id. at 42. The Woods case plainly does not stand for the proposition

that no partner-level determinations are required once a partnership has been ruled

a sham.16

In sum, petitioners’ assertion that the notice of deficiency issued to Arebec

was void ab initio derives no support from the opinions of the Supreme Court, the

Courts of Appeals, or other binding judicial precedent. The determination that AD

Equity was a sham, effectively made in 2014 by the District Court when dismis-

sing the partnership case, did not resolve nonpartnership items and other factual

issues unique to each partner. The need to make the fact-based partner-level deter-

minations discussed above required the IRS to follow normal deficiency proce-

dures, thus affording partners a prepayment forum to dispute the IRS’ determina-

tions. See Greenwald, 142 T.C. at 317. Because deficiency procedures were

required under section 6230(a)(2)(A), section 6503(a)(1) operated to suspend the

running of the section 6229(a) assessment period for the 90-day period during

which Arebec could have petitioned this Court and for 60 days thereafter. And

16
Petitioners likewise err in relying on Tigers Eye Trading, LLC v. Commis-
sioner, 138 T.C. 67, 119 (2012). Our decision in that case was reversed in relevant
part by the U.S. Court of Appeals for the D.C. Circuit. See Logan Trust v. Com-
missioner, 616 F. App’x 426, 429 (D.C. Cir. 2015).
 - 33 -

[*33] because that step and all other steps of respondent’s computation of the

relevant limitations period are correct, we reject petitioners’ affirmative defense

based on the period of limitations.

To implement the foregoing,

Appropriate orders will be issued

denying petitioners’ motions for summary

judgment and granting respondent’s cross-

motion for partial summary judgment.