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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 13, 2003 Decided June 17, 2003
No. 02-1213
& No. 02–1215
ANDANTECH L.L.C., ET AL.,
APPELLANTS
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
Appeals from the United States Tax Court
(TAX Ct. Nos. 15532–98 & 4277–00)
Walter A. Pickhardt argued the cause for appellants. With
him on the briefs were Myron L. Frans, Mark Alan Hager,
and William K. Wilcox.
Robert W. Metzler, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief was
Richard Farber, Attorney.
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
Before: SENTELLE, HENDERSON and GARLAND, Circuit
Judges.
Opinion for the Court filed by Circuit Judge SENTELLE.
SENTELLE, Circuit Judge: This case arises from a final
decision of the Tax Court rejecting challenges brought by the
petitioners to the Commissioner of Internal Revenue’s final
administrative adjustments to the partnership tax returns
filed by Andantech, L.L.C. for short taxable years ending
December 10, 1993 and December 31, 1993, and for the
taxable year ending December 31, 1994. The court first held
that the 1993 years had been timely assessed by the Commis-
sioner, then rejected the petitioners’ claim to $51 million in
losses reported on the returns. For the reasons explained
below, we affirm the Tax Court in part, and remand the
remainder of the issues for further proceedings consistent
with this opinion.
Background
In June 1993, Comdisco Investment Group, Inc. (CIG), a
wholly-owned subsidiary of Comdisco, a lessor, dealer and
remarketer of IBM computer equipment, approached Nor-
west Corporation and its subsidiary, NEFI, with a proposal
for a computer leasing transaction that would produce signifi-
cant tax savings. CIG described the concept for the transac-
tion in its proposal as follows:
Comdisco has developed a cross-border equipment
leasing transaction that produces permanent U.S. tax
savings through the advantageous use of U.S. tax rules
concerning the acceleration of taxable income from rents.
Unlike most Western countries, the United States
treats as taxable income any amounts received as prepaid
rent or as proceeds from a sale, without recourse, of a
stream of rental payments. These amounts are income
even though they are unearned and are attributable to
future years.
As will be shown below, the unusual U.S. treatment of
these income amounts creates an opportunity for an
‘‘arbitrage’’ between the U.S. tax system and that of
3
another country (such as Belgium) which does not treat
the amounts as currently taxable income.
The essential elements of the transaction are as fol-
lows:
1. Two Belgian individuals, with experience in all
aspects of the leasing business, purchase a portfolio of
U.S. computer equipment from Comdisco, Inc. (‘‘Com-
disco’’). The purchase is made through an entity that
is treated as a partnership for U.S. tax purposes (the
‘‘Partnership’’). The equipment is immediately leased
back to Comdisco, which in turn subleases the equip-
ment to its customers, the users of the equipment.
Neither the Partnership nor its partners are subject to
U.S. tax.
2. Subsequently, the Partnership sells to a bank the
right to receive the rents payable by Comdisco under
the lease. The sale of the Comdisco rent stream is
without recourse to either the Partnership or to the
equipment. Accordingly, from a U.S. point of view, all
of the rental income from the Comdisco lease is
deemed to have been accelerated. Stated another
way, the sale of the rent stream removes or ‘‘strips’’
the rental income from the leased equipment.
3. At a later date, but without any prior commitment
(formal or informal) to do so, a U.S. company may
acquire a 98% interest in the Partnership, utilizing
certain provisions of the U.S. tax code under which tax
attributes carry over to the new owner.
4. The U.S. company, as 98% partner, would be enti-
tled to depreciation with respect to 98% of the cost of
the equipment. No rental income would be reportable
by the U.S. company, that income having been acceler-
ated into the tax period prior to the U.S. company’s
becoming a partner.
5. The resulting U.S. tax savings from the deprecia-
tion would be permanent tax saving, not mere defer-
rals. They would be reflected in reported earnings.
4
Andantech, L.L.C. v. Comm’r, 83 T.C.M. (CCH) 1476 at 10–11
(2002).
Following the initial presentation, CIG provided NEFI
with an economic analysis of a hypothetical lease-stripping
transaction, ‘‘sample’’ documents for the sale-leaseback and
rent-sale steps of the transaction, and other documents for
the formation and operation of the partnership described
above. See id. at 12–14. Concurrent with the NEFI negotia-
tions, CIG was negotiating with several European individuals
for their participation. After initial negotiations with two
Swiss individuals fell through, CIG contacted attorney Rich-
ard Temko, located in Belgium, who provided two Belgian
candidates, Baudoiun Parmentier (BP) and his cousin Federic
de La Barre d’Erquelinnes (FBE). Id. at 25–27. Temko
represented both men. On September 15, 1993, CIG faxed
Temko material summarizing the transaction, which showed
that when the U.S. company acquired the 98% interest of one
foreign partner, the foreign partner would receive preferred
stock worth about $612,000, or about .5% of the $122,000,000
sale price.
During negotiations, BP requested, through Temko, that
CIG make certain assurances about the deal and the level of
his personal financial risk. CIG advised BP that while it
could not make such specific assurances, that the U.S. compa-
ny was a ‘‘major public company’’ and that the shares would
include significant financial covenants to ensure payment. A
fax dated September 25, 1993 authored by Comdisco’s attor-
ney contained the following description of the transaction and
its view of the role of the Belgians:
The entire transaction is expected to involve approxi-
mately $120 million. Basically, the individuals forming
the company are involved for two months during which
the income allocation occurs and then the interest is
transferred to the U.S. corporate investor who reaps the
benefit of ongoing depreciation deductions.
See id. at 28.
On September 25, 1993, Andantech’s articles of incorpo-
ration were signed and on September 27, 1993, BP, as the
5
holder of a 98% interest, and FBE, as a 2% interest holder,
contributed $196,000 and $4,000, respectively, to the company.
A Dutch company was chosen as Andantech’s business man-
ager, and contracted to provide its services for a two-and-a-
half month period ending December 15, 1993. See id. at 28–
29. On September 28, 1993, Comdisco and Andantech execut-
ed a sale of computer equipment owned by Comdisco to
Andantech and an immediate leaseback of the equipment to
Comdisco, for a purchase price of $122,415,762. See id. at 30–
39.
Andantech obtained the financing for the purchase through
several loans. See id. at 30–31. The Union Bank of Switzer-
land (UBS) provided a bank loan for $14,995,931, with the
condition that if it was not prepaid by December 29, 1993, the
interest rate would increase and if three percent or more of
the ownership interest in Andantech was transferred, it be-
came immediately payable. See id. at 36–37. Comdisco
provided a term loan of $87,429,319 and a nonrecourse balloon
loan of $19,990,512. The lease for the equipment gave Com-
disco two options to purchase the equipment, one which
allowed Comdisco to purchase at the end of the term at full
market value, and an early termination option which allowed
Comdisco to purchase at specified dates prior to the full term.
Under this option, the price of the equipment included an
early termination supplement. See id. at 30–35. On October
29, 1993 Andantech and NationsBank executed an agreement
under which NationsBank purchased a portion of the rents
due from Comdisco under the lease for $87,805,802, which
accelerated the term loan. NationsBank then paid Comdisco
the amount necessary to satisfy the term loan. Id. at 39.
On November 30, 1993, the two partners BP and FBE
withdrew, in total, $189,882.89 from Andantech’s capital. One
week later, on December 6, 1993, EICI was organized as a
Delaware corporation with FBE as the sole shareholder, and
three days later, he transferred his two percent Andantech
interest to EICI. On December 28, 1993, he transferred all
of his EICI stock to a charitable support trust established by
Comdisco. See id. at 40. On December 10, 1993, BP trans-
6
ferred his 98% Andantech interest to RD Leasing, a Norwest
subsidiary, in exchange for 6,150 shares of preferred stock.
The shares were worth about $615,000, and were encumbered
with a number of conditions beneficial to BP. This transfer
accelerated the due date of the UBS loan, and Andantech
received the cash needed to pay off the loan from capital
contributions from RD Leasing and EICI. NEFI funded the
RD Leasing contribution, and EICI was funded by a UBS
loan made as an accommodation to Comdisco and guaranteed
by Comdisco. Id. at 41–43.
In 1996, Comdisco exercised its early termination option on
the lease, and because the value of the equipment on the date
of the termination was less than what was owed under the
balloon loan, Comdisco owed only $353,366, which was to go
entirely to EICI. Partnership returns for Andantech were
filed, with the following income and losses reported. For the
short year September 25, 1993 to December 10, 1993 BP’s
partner share of income was $85,191,494 and FBE’s was
$1,738,736 and EICI reported a $134 loss. For the short
year December 11, 1993 to December 31, 1993, RD Leasing
reported a $2,101,058 loss and EICI reported a $42,879 loss,
without income. Finally, for the full year ending December
31, 1994 RD Leasing reported a $49,069,009 loss and EICI
reported a $1,001,388 loss, again without income. Id. at 48–
50.
On audit, the Commissioner determined that the first
short-year period should be disregarded, and the income
reported for that period should be properly allocated to the
December 31, 1993 period, and all of the 1993 deductions
should be allowed. The Commissioner also determined that
the losses reported for 1994 should be disallowed, on the
grounds that the sham-transaction doctrine applied to the
transactions and that BP and FBE were not real partners.
The Commissioner issued an final partnership administrative
adjustment (FPAA) for each period reflecting these determi-
nations.
NEFI, Norwest and EICI filed petitions in the Tax Court
challenging those proposed adjustments. In addition, they
argued that the FPAAs for the 1993 periods were time
7
barred under 26 U.S.C. § 6229(a) (2000). The Tax Court
rejected the time-bar argument, observing that it was con-
trary to the plain language of the statute, and to the court’s
own precedent set in Rhone-Poulenc Surfactants & Speciali-
ties, L.P. v. Comm’r, 114 T.C. 533 (2000). The court then
addressed the merits of the petitioners’ claims and held that
Andantech should not be recognized as a valid partnership,
that the sale-leaseback should be disregarded under the
sham-transaction doctrine and that for tax purposes, the sale
was not a sale and the financing did not constitute genuine
debt. See Andantech, L.L.C. at 62–63. The court then held
that: (1) Andantech’s December 10 short period should be
disregarded, (2) Andantech was not required to include the
income from the sale of the rents and was not entitled to
deduct $2,143,937 as expenses from other rental activities for
the December 31 short period, and (3) Andantech was not
entitled to deduct $50,069,397 for the same expenses in 1994.
Id. at 110.
Analysis
On appeal, Norwest and NEFI again challenge the Tax
Court’s interpretation of the statute of limitations, as well as
the merits of the court’s decision. First, we would note that
this is a very complex case, as the length of the recital of the
pertinent facts illustrates. As an initial matter, we affirm the
Tax Court’s application of the statute of limitations in
§ 6229(a), as mandated by the plain language of the statute.
Second, although we agree with the Tax Court that the
Andantech partnership should be disregarded under the
sham-transaction doctrine as we explained it in ASA Invester-
ings P’ship v. Comm’r, 201 F.3d 505 (D.C. Cir. 2000), the
record is not sufficiently clear to establish the court’s jurisdic-
tion over the consequences of that decision with regard to the
allocation of the resulting profits and losses for tax purposes.
Because the government virtually conceded this point at oral
argument, we will affirm merely the Tax Court’s determina-
tion that the Andantech partnership should be disregarded,
and remand the other issues to the Tax Court for further
proceedings consistent with this decision.
8
We review the decisions of the Tax Court ‘‘in the same
manner and to the same extent as decisions of the district
courts in civil actions tried without a jury.’’ 26 U.S.C. § 7482
(2000). Questions of law are reviewed de novo, see United
States v. Popa, 187 F.3d 672, 674 (D.C. Cir. 1999), and factual
findings for clear error. See Comm’r v. Duberstein, 363 U.S.
278, 291 (1960). We have also held that in tax cases, mixed
questions of law and fact are to be treated as questions of
fact. See ASA Investerings, 201 F.3d at 511 (citing Fund for
the Study of Economic Growth and Tax Reform v. IRS, 161
F.3d 755, 759 (D.C. Cir. 1998)). Applying those standards to
the record before us, we first affirm the Tax Court’s interpre-
tation of two sections of the Internal Revenue Code, 26
U.S.C. §§ 6501; 6229(a), to allow for an extension of the
period in which the IRS may properly assess items attribut-
able to a partnership. As the Tax Court explained, it had
recently decided this exact issue in Rhone-Poulenc and relied
on the analysis employed in that case when presented with
the petitioners’ claim here. See Andantech, L.L.C. at 52–53.
In essence, the court reasoned that § 6501 provides a general
period of limitations for assessing and collecting any tax
imposed by the Code, and that § 6229(a) sets forth a mini-
mum period for assessing any income tax with respect to any
person that is attributable to any partnership item or affected
item. Based on the language of the statute, the court held
that § 6229(a) was not a separate limitations period, but
simply set a minimum or allowed an extension of an assess-
ment period, complementing the one set in § 6501. See id.
The plain language of § 6501 compels its application to all
assessments. See 26 U.S.C. § 6501(a) (‘‘[t]he amount of any
tax imposed by this title shall be assessed within 3 years after
the return was filed TTT’’). There are no exceptions for
partnership items mentioned in the provision. Section
6229(a), in contrast, establishes a period for making assess-
ments attributable to partnership items, and references
§ 6501, as follows:
Except as otherwise provided in this section, the peri-
od for assessing any tax imposed by subtitle A with
respect to any person which is attributable to any part-
9
nership item (or affected item) for a partnership taxable
year shall not expire before the date which is 3 years
after the later of—
(1) the date on which the partnership return for such
taxable year was filed, or
(2) the last day for filing such return for such year
(determined without regard to extensions).
26 U.S.C. § 6229(a). The government argues that the ‘‘shall
not expire’’ language of § 6229, together with the broad
application of § 6501 work in conjunction to provide for a
minimum or extension of the § 6501 period, not an indepen-
dent statute of limitations for partnership items. This inter-
pretation of the provision would therefore ensure that the
IRS could assess a partnership tax against a late or non-filing
partner. The government argues that the § 6229 language
contrasts with the mandatory language in § 6501, providing
evidence that Congress did not intend for this section to
operate independently of § 6501.
In Rhone-Poulenc, the Tax Court spoke out unequivocally
and specifically on the exact point in contention here.
Section 6501 unequivocally provides the period of limi-
tations within which ‘‘the amount of any tax imposed by
this title shall be assessed.’’ Generally, the period of
limitations so provided is 3 years from the date the
taxpayer’s return was filed but varies in the case of
certain enumerated exceptions. The pertinent language
of section 6229 is: ‘‘[T]he period for assessing any tax
imposed by subtitle A with respect to any person which
is attributable to any partnership item (or affected item)
for a partnership taxable year shall not expire before the
date which is 3 years after the later of’’ the filing or due
date of the partnership return. (Emphasis added.) Sec-
tion 6229 provides a minimum period of time for the
assessment of any tax attributable to partnership items
(or affected items) notwithstanding the period provided
for in section 6501, which is ordinarily the maximum
period for the assessment of any tax. The section 6229
minimum period may expire before or after the section
10
6501 maximum period. Indeed, section 6501(n)(2) cross-
references section 6229 by providing: ‘‘For extension of
period in the case of partnership items (as defined in
section 6231(a)(3)), see section 6229.’’
Rhone-Poulenc, 114 T.C. at 542 (internal citations omitted).
There is nothing about the court’s reasoning in Rhone-
Poulenc, nor in its reliance on that case here that gives us
pause. The language of § 6501 plainly refers to all the
assessments made pursuant to the chapter, and specifically
notes that § 6229 may be used to extend the period in case of
partnership items. Likewise, the language of § 6229, rather
than simply stating a three-year statute of limitations, indi-
cates by the use of the term ‘‘shall not expire’’ that the
provision is intended to dictate a minimum period, but not an
absolute restriction. Because we find the reasoning and
analysis first applied by the Tax Court in Rhone-Poulenc,
then followed in the present case reasonable, persuasive, and
ultimately convincing, we affirm its decision. Therefore, the
Commissioner properly and timely assessed and filed adjust-
ments for the 1993 Andantech partnership returns.
This brings us to the merits of this case. The Tax Court’s
decision first held that the Andantech partnership, in either
its foreign or U.S. form was not a valid partnership because
neither BP and FBE, nor EICI and RD Leasing intended to
join together to carry on a business for a non-tax business
purpose, thus implicating the sham-transaction doctrine. The
court concluded that the partnership should therefore be
disregarded for tax purposes. See Andantech, L.L.C. at 62–
68. It then held, in the alternative, that the participation of
the above named ‘‘partners’’ should be disregarded under the
step-transaction doctrine. Finally, the court held that the
sale-leaseback transactions between Andantech and Comdisco
should be disregarded with respect to both those entities, as
well as with respect to Norwest and RD Leasing because the
transaction lacked economic substance and a non-tax business
purpose. See id. at 63. The result of the Tax Court’s
findings was to enforce the Commissioner’s proposed adjust-
ments. We affirm the Tax Court’s determination that the
11
Andantech partnership was invalid. However, we need not
reach the other issues presented, because the record before
us is insufficient to determine how the reported income and
losses should be allocated, once that partnership is disregard-
ed, or whether we have the jurisdiction to make that decision.
We therefore affirm the Tax Court in its invalidation of the
Andantech partnership and remand the remainder of the case
to it for further proceedings.
We stated in ASA Investerings that the basic inquiry in
which we engage when determining whether a partnership is
valid for tax purposes is ‘‘whether, all facts considered, the
parties intended to join together as partners to conduct
business activity for a purpose other than tax avoidance.’’
ASA Investerings, 201 F.3d at 513. See also Comm’r v.
Culbertson, 337 U.S. 733, 742–43 (1949). We held in ASA
that merely ‘‘engaging in business activity [is not] sufficient to
validate a partnership’’ and that ‘‘the absence of a nontax
business purpose is fatal’’ to the validity of a partnership.
ASA Investerings, 201 F.3d at 512–13. The Tax Court
applied these principles to the facts of this case when it
examined whether the Andantech partnership in either its
BP–FBE form, or its RD Leasing–EICI form should be valid,
recognizable entities for taxation purposes.
The Tax Court was presented with ample evidence from
which it could reasonably draw its conclusion. The court
approached the issue of the validity of the partnership in two
parts, first considering whether BP and FBE had the inten-
tion of forming the partnership to carry on a business activity
with a non-tax business purpose, then considering whether
the U.S. partners who acquired the Belgians’ interests had
such a purpose.
First, the court stated:
We are convinced that Messrs. Parmentier and de la
Barre d’Erquelinnes did not intend to join together in
order to share in any profit or loss from the business
activity of Andantech–Foreign; namely, the sale and
leaseback of computer equipment. Rather, to the con-
trary, we are convinced that Mr. Parmentier’s true busi-
12
ness objective was to profit from the preferred stock of
RD Leasing that he expected to receive.
Andantech, L.L.C. at 64. This conclusion was well-supported
by the evidence the court recited. Id. Correspondence
between the Belgians’ attorney, Temko, and Comdisco re-
flected BP’s strong interest in getting ‘‘assurances’’ from
Comdisco that he and FBE could promptly recover their
$200,000 investment, withdraw from Andantech without ex-
pense and incur no potential liabilities for Andantech’s debt
or operations. This evidence demonstrated that the intent of
the Belgians was not to run the business as a partnership or
otherwise, but to assist with a transaction for which they, or
at least BP, would be well compensated. Their contribution
of cash was comparatively minimal and borrowed, and they
withdrew almost all of it from the company after only three
months, exactly as outlined in the June proposal. BP and
FBE had only been made aware of the deal and offered their
participation after an earlier pair of potential European part-
ners backed out, and had a maximum of two weeks to
consider the deal before the formation of the partnership.
This, too, illustrates the lack of intent to actually enter into
the partnership for a purpose other than to facilitate the
proposed tax-beneficial transaction. The terms of the deal
offered further evidence of the intent of the participants.
For example, Andantech hired a Dutch business manager to
run Andantech, but with a contract of only two and a half
months, coinciding precisely with the timeline described in
the proposal memo for the income-stripping transaction, and
the time period in which the transaction, in fact, occurred.
The court also noted that negotiations over the sale and
leaseback of the equipment were conducted between Comdis-
co and NEFI without participation by either BP or FBE.
The court stated that based on this evidence, it was apparent
that BP intended to profit only through the preferred stock
he received upon the sale of Andantech to RD Leasing, and
not from the running of the business. The court also noted
that FBE did not apparently intend to profit at all, but simply
lent his two percent and his name to the partnership for the
purpose of facilitating the existence of a partnership, so that
13
the tax avoidance transaction could succeed. See Andantech,
L.L.C. at 66. The record, therefore, amply supports the
court’s conclusion that ‘‘Andantech–Foreign was not created
for the purpose of carrying on a trade or business but rather
to strip the income from the transaction and avoid U.S.
taxation.’’ Id.
The court treated as a separate matter the Andantech
partnership in its U.S. form, after both FBE and BP had
been bought out by RD Leasing and EICI. The court found
that the partnership in that form was also invalid because the
record evidence demonstrated that EICI did not intend to
join RD Leasing in the carrying out of the business of
computer equipment leasing. Here again, the court’s conclu-
sions were supported by ample evidence. As the court noted,
there was no evidence that EICI had assets other than its
interest in Andantech, and its only means of repaying the
UBS loan was through the distribution of that interest in the
case of Comdisco’s exercise of its early termination option.
Further, EICI did not participate in the negotiations of the
transaction, and did not profit from them. EICI did not exist
before the transactions at issue in this case, and the evidence
fully supports the conclusion that it was created solely as a
vehicle to dispose of FBE’s interest and create a second
participant to create the illusion of a partnership, much as
FBE served in the original partnership. Therefore, because
none of the partners involved in the Andantech partnership at
any point during its life had a non-tax business purpose for
forming the partnership, we affirm the Tax Court’s holding
and disregard the Andantech partnership.
As we stated in ASA Investerings, the absence of a non-tax
business purpose for a partnership is fatal to its validity. We
also recognized in that case that the ‘‘business purpose’’
doctrine can be ‘‘hazardous’’ in its application. See ASA
Investerings, 201 F.3d at 513. We stated:
It is uniformly recognized that taxpayers are entitled
to structure their transactions in such a way as to
minimize tax. When the business purpose doctrine is
violated, such structuring is deemed to have gotten out of
14
hand, to have been carried to such extreme lengths that
the business purpose is no more than a facade. But
there is no absolutely clear line between the two. Yet
the doctrine seems essential. A tax system of rather
high rates gives a multitude of clever individuals in the
private sector powerful incentives to game the system.
Even the smartest drafters of legislation and regulation
cannot be expected to anticipate every device. The
business purpose doctrine reduces the incentive to en-
gage in such essentially wasteful activity, and in addition
helps achieve reasonable equity among taxpayers who
are similarly situated—in every respect except for differ-
ing investments in tax avoidance.
Id.
The formation and use of the Andantech partnership in
both its variations demonstrate exactly the type of ‘‘wasteful
activity’’ to which we referred. Although it is possible that
the computer leasing business could have been profitable and
beneficial to any one of the parties involved, there was no
evidence of a non-tax need to form the partnership in order to
take advantage of the potential profits of the business.
FBE’s participation was so minimal, the court could easily
conclude that his presence was required only to make possible
the formation of a partnership, itself formed only to create a
benefit from the method of taxing that entity. In addition,
there was almost no evidence that any of the partners had
any intention of taking advantage of the potential business,
especially FBE and EICI, both of whom contributed almost
nothing to the transaction, except their existence. Finally,
the fact that the entire transaction follows, to the letter, the
proposal laid out months prior to its consummation by CIG
adds a great deal of credibility to the Tax Court’s assessment
of the true nature of this partnership. Because we agree
with the court that the parties never intended to join together
as partners to run a business and that the partnership had no
legitimate non-tax purpose, we affirm the court’s holding
disregarding the Andantech partnership for tax purposes.
Accord ASA Investerings, 201 F.3d 505; Boca Investerings
P’ship v. United States, 314 F.3d 625 (D.C. Cir. 2003).
15
However, this is not a complete result. Without the An-
dantech partnership, the income and losses attributable to
that partnership must still be allocated to a tax payer. We
lack a sufficient record on which to determine whether this
court, or even the Tax Court is the proper body to resolve
this issue. As explained by the government in its brief and at
oral argument, even though we have affirmed that Andantech
was indeed a sham, the issue of whether the Tax Court, and
therefore, this court, have jurisdiction to address whether
Norwest, nonetheless, is entitled to depreciation deductions
not materially different from ones claimed in the form of
losses from Andantech, is apparently still an open one.
As the government explained, the petitions in this case
were filed under 26 U.S.C. § 6226, and pursuant to § 6226(f),
subject matter jurisdiction is limited ‘‘to determin[ing] all
partnership items of the partnership for the partnership
taxable year to which the [FPAA] relates, the proper alloca-
tion of such items among the partners, and [certain penal-
ties].’’ The government reasoned that while 26 U.S.C. § 6233
(2000) and Treas. Reg. 301.6233–1 extend the limited jurisdic-
tion in § 6226 to permit the Tax Court to determine that a
putative partnership that files a partnership return is not a
valid partnership and to determine that there are no partner-
ship losses for the putative partners to deduct, they do not
provide an unlimited extension of subject matter jurisdiction.
The regulation states that ‘‘[a]ny [FPAA] or judicial determi-
nation TTT may include a determination that the entity is not
a partnership for such taxable year as well as determinations
with respect to all items of the entity which would be partner-
ship items, as defined in section 6231(a)(3) TTT if such entity
had been a partnership in such taxable yearTTTT’’ Treas.
Reg. 301.6233–1(a).
The government then argued that Norwest has not demon-
strated that these provisions authorize the Tax Court to
determine whether the ‘‘partners’’ here may deduct the
amounts as non-partners that they could have deducted as
partners. The government concludes that whether Norwest
is entitled to a deduction as a non-partner involves an item
affected by a partnership item, not a partnership item itself,
16
which would be classified as an ‘‘affected item’’ under 26
U.S.C. § 6231(a)(5) and can not be resolved in a proceeding
brought under § 6226. See Crop Associates–1986 v. Comm’r,
113 T.C. 198, 202–03 (1999).
Norwest argues that the Tax Court, and consequently this
Court, have jurisdiction to allow deductions to the partners of
Andantech. Norwest argues that § 6233(a) provides that if a
partnership return is filed by an entity but it is determined
that the entity is not a partnership, the partnership rules are
extended in respect of such year to such entity and its items
and to persons holding an interest in such entity, to the
extent provided in regulations. Section 6233(b) provides that
if a partnership return is filed but it is determined that there
is no entity, then rules similar to the rules of § 6233(a) apply.
Norwest cited the same regulation relied on by the govern-
ment, Treas. Reg. 301.6233–1, and stated that it serves to
create jurisdiction to determine whether the partnership
should be respected as such and also to determine the
allocation of items that would be partnership items if the
partnership was not disregarded. Norwest then posited that
Andantech’s depreciation and interest deductions are these
kinds of partnership items, and not ‘‘affected items.’’ Nor-
west argued that § 6231(a) and Treas. Reg. 301.6231(a)(3)–
1(a)(1), define partnership items to include ‘‘partnership ag-
gregate and each partner’s share of each of TTT (i) Items of
income, gain, loss, deduction, or credit of the partnership’’
and since depreciation and interest are items of deduction,
they are necessarily partnership items under this section.
The record before us is simply not sufficient to enable us to
determine which party’s argument should carry the day. The
Tax Court did not address this issue with any clarity in its
decision below, and counsel for the government assured us at
oral argument that this issue could be properly considered by
the Tax Court upon our remand. The seminal importance of
issues of subject matter jurisdiction generally, also weighs in
favor of a remand to the Tax Court on this issue, for its
determination consistent with our decision that Andantech
may be properly disregarded as an entity for tax purposes.
Finally, we do not herein specifically address the issue of
17
whether the Tax Court properly applied the step-transaction
doctrine either as an alternative to, or in addition to the
sham-transaction doctrine, because that issue is not a neces-
sary part of our finding that the Andantech partnership was a
sham and our remand will allow the Tax Court to reexamine
its use of that test.
Conclusion
For the reasons set forth above, we affirm the decision of
the Tax Court insofar as it determined that the Andantech
Partnership should be disregarded for tax purposes. We
remand the other issues for further proceedings consistent
with this opinion.
So ordered.