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CHARLES BRUMBAUGH AND C.E. HOLIFIELD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrumbaugh v. Comm'rDocket No. 9161-14
United States Tax Court T.C. Memo 2015-65; 2015 Tax Ct. Memo LEXIS 67; 109 T.C.M. 1360;April 6, 2015, FiledAn appropriate order will be issued.
2015 Tax Ct. Memo LEXIS 67">*67 William Marc Weintraub, for petitioners.Kris H. An andJordan Scott Musen , for respondent.LAUBER, Judge.LAUBERMEMORANDUM OPINION LAUBER,
Judge : On February 19, 2015, the Internal Revenue Service (IRS or respondent) filed a motion to dismiss and to strike partnership items. Respondent contends that petitioners' claim of entitlement to additional flowthrough losses from 4200 Panorama, LLC (Panorama), a partnership for Federal income tax purposes, must be dismissed because the Court lacks jurisdiction to consider *66 them. This question turns on whether Panorama is subject to the partnership procedural rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648 . Petitioners argue that Panorama is not covered by TEFRA but is exempt because it is a "small partnership."See sec. 6231(a)(1)(B)(i) .1 We disagree and accordingly will grant respondent's motion to dismiss as to the partnership items discussed below.Background There is no dispute concerning the following facts, which are derived2015 Tax Ct. Memo LEXIS 67">*68 from the parties' pleadings and motion papers and the attached exhibits. These facts are stated solely for the purpose of deciding this motion and not as findings of fact in this case.
See Rule 1(b) ;Fed. R. Civ. P. 52(a) ; , 115 T.C. 15">16 (2000),Cook v. Commissioner , 115 T.C. 15">115 T.C. 15aff'd ,269 F.3d 854">269 F.3d 854 (7th Cir. 2001).On their joint Federal income tax return for 2007 petitioners claimed on Schedule C, Profit and Loss From Business, an interest deduction of $317,098. In a timely issued notice of deficiency, the IRS disallowed $163,915 of this interest deduction for lack of substantiation. The IRS also determined that certain losses that petitioners deducted on Schedule E, Supplemental Income and Loss, were *67 subject to the passive loss limitation under
section 469 and asserted an accuracy-related penalty undersection 6662(a) . None of the adjustments set forth in the notice of deficiency relates to deductions claimed by Panorama.Petitioners contend that they are entitled to deduct additional flowthrough losses from Panorama beyond those originally reported to them on Schedule K-1, Partner's Share of Income, Deductions, Credits, etc. In particular, petitioners contend that they erroneously claimed the disallowed interest deduction of $163,915 on their Schedule C. Instead, they say that this interest deduction should have been2015 Tax Ct. Memo LEXIS 67">*69 reported by Panorama and should have been claimed by them on Schedule E as a part of a larger flowthrough loss from Panorama.
In 2007 petitioner Charles Brumbaugh owned a 59.99% membership interest in Panorama. The remaining membership interests in Panorama were owned as follows: 39.99% by Benjamin Lingo and 0.02% by Lynx Realty and Management, LLC (Lynx), a partnership for Federal income tax purposes. On June 16, 2008, Panorama filed Form 1065, U.S. Return of Partnership Income, for 2007. Panorama claimed no deduction for interest on this return. Petitioners now contend that Panorama incurred interest expenses of $172,653 for the taxable year 2007 and that 59.99% of this amount, or $103,575, should have been deductible to petitioners as their distributive share of Panorama's loss. As a corollary of this *68 position, petitioners contend that the Schedule K-1 from Panorama did not accurately represent the losses allocable to them. Petitioners now seek to claim, in this deficiency case, a deduction for the losses from Panorama to which they believe they are actually entitled.
Discussion Panorama is a partnership within the meaning of
section 6231(a)(1) . It is thus subject to the provisions of TEFRA concerning2015 Tax Ct. Memo LEXIS 67">*70 unified partnership proceedings.See secs. 6221-6234 . It appears that the IRS did not commence partnership audit proceedings for this TEFRA partnership and did not issue a notice of final partnership administrative adjustment (FPAA) with respect to Panorama for 2007. Likewise, petitioners did not seek an administrative adjustment to Panorama's partnership items undersection 6227(a)(1) , and the time for doing so has now expired. As a result, the tax treatment of all partnership items with respect to the partnership is final in accordance with the tax return filed by the partnership. at *2015 U.S. Tax Ct. LEXIS 10">2 (Mar. 17, 2015) ("[A]ny partnership items that were not adjusted are final and cannot be revisited in a collateral proceeding.").Bedrosian v. Commissioner , 144 T.C.Generally, a partnership item, such as an interest deduction, is determined at the partnership level.
Secs. 6221 ,6231(a)(3) . Petitioners agree that if the TEFRA *69 provisions apply to Panorama, then the parties "would be bound by the partnership items, including any mortgage interest, reported on Panorama's 2007 return." Instead, petitioners oppose respondent's motion on the theory that Panorama "in substance" met the requirements of the small partnership exception,sec. 6231(a)(1)(B)(i) , so that the TEFRA procedural rules do not apply to it. If petitioners2015 Tax Ct. Memo LEXIS 67">*71 are correct, there would be no FPAA and no partnership items,see , 143 T.C. 83">103, 2014 U.S. Tax Ct. LEXIS 35">2014 U.S. Tax Ct. LEXIS 35 (Aug. 13, 2014), and the TEFRA rules would not bar petitioners from asserting a claim to an additional interest deduction.Bedrosian v. Commissioner , 143 T.C. 83">143 T.C. 83The TEFRA provisions begin with the presumption that TEFRA applies to any entity that is required to file a partnership return.
Sec. 6231(a)(1)(A) . But there is an exception for small partnerships. A "small partnership" is any partnership having 10 or fewer partners each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.Sec. 6231(a)(1)(B)(i) . As is implicit in this exception, a partnership will not be considered to be a "small partnership" if any partner during the taxable year is a passthrough partner.See ,Brennan v. Comm'r , T.C. Memo 2012-187aff'd sub nom. (9th Cir. 2014);Ashland v. Comm'r , 584 Fed. Appx. 573">584 Fed. Appx. 573sec. 301.6231(a)(1)-1(a)(2) , Proced. & Admin. Regs. A passthrough partner is a *70 partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership and includes disregarded entities such as single-member LLCs.See sec. 6231(a)(9) ; ;6611, Ltd. v. Comm'r , T.C. Memo 2013-49 .Tigers Eye Trading, LLC v. Commissioner , T.C. Memo. 2009-121Panorama cannot satisfy the small partnership exception because it had during 2007 one passthrough partner, namely, Lynx. On page two of its partnership return, Panorama answered2015 Tax Ct. Memo LEXIS 67">*72 "yes" to the question, "Are any partners in this partnership also partnerships?" In response to the question, "What type of entity is this partner?" the Schedule K-1 for Lynx states: "Partnership."
Petitioners admit that Lynx is a partnership and that it held a partnership interest in Panorama during 2007. However, they contend that Lynx held such a nominal interest, 0.02%, that "in substance" Panorama satisfied the small part-nership exception. But neither the Internal Revenue Code nor the regulations provide a "de minimis exception" for passthrough partners, and this Court is not at liberty to create one. Either a partner is a passthrough entity or it is not; the Court does not inquire into the entity's ownership percentage or its upstream partners.
See , 2014 U.S. Tax Ct. LEXIS 35">2014 U.S. Tax Ct. LEXIS 35 at *49 ("The presence of any passthrough partner precludes the application of the small partnership exception *71 ofBedrosian v. Commissioner , 143 T.C. 83">143 T.C. 111section 6231(a)(1)(B) and renders the partnership subject to TEFRA as a matter of law."). As the Supreme Court has observed, a taxpayer is free to organize his affairs as he chooses, but once having done so, he must accept the tax consequences of his choice, whether contemplated or not. , 417 U.S. 134">149, 94 S. Ct. 2129">94 S. Ct. 2129, 40 L. Ed. 2d 717">40 L. Ed. 2d 717 (1974). Because Panorama had a passthrough partner, the small partnership2015 Tax Ct. Memo LEXIS 67">*73 exception does not apply and Panorama remains a TEFRA partnership.Commissioner v. Nat'l Alfalfa Dehydrating & Milling Co. , 417 U.S. 134">417 U.S. 134Petitioners and respondent are both bound by Panorama's return. Petitioners therefore cannot claim entitlement to additional passthrough losses from Panorama on the theory that Panorama should have claimed additional interest deductions. Although the result may seem harsh, we must dismiss this portion of the case because we lack jurisdiction to decide partnership-level issues in this litigation.
See , 94 T.C. 853">857, 94 T.C. 853">862 (1990).Roberts v. Commissioner , 94 T.C. 853">94 T.C. 853To reflect the foregoing,
An appropriate order will be issued .Footnotes
1. All statutory references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all dollar amounts to the nearest dollar.↩
Document Info
Docket Number: Docket No. 9161-14
Citation Numbers: 2015 T.C. Memo. 65, 109 T.C.M. 1360, 2015 Tax Ct. Memo LEXIS 67
Filed Date: 4/6/2015
Precedential Status: Non-Precedential
Modified Date: 4/18/2021