Berkshire 2006-5, LLC, et al, v. Commissioner, T.C. Memo. 2016-25 (Buch, J.).
The TEFRA partnership entity level audit rules are still with us for at least 5 years and cases will continue to be decided under the TEFRA legislation enacted in 1982. Under the new centralized partnership audit rules, which generally go into effect for partnership taxable years commencing in 2018, the ability of a notice partner to intervene in a partnership audit, appeal or in litigation will be denied. Under TEFRA a notice partner was permitted to intervene.
Facts: Hattler, the petitioner in the case, invested in three oil and gas partnership that were TEFRA partnerships. P.L. No. 97-248, §402(a). In 2009, the SEC filed fraud complaints against the principals of the general partner, Berkshire Resources, LLC, in all three partnerships and the State of Wisconsin administrative dissolved Berkshire Resources on June 10, 2009.
The Commissioner examined the partnership return of each of the three partnerships and issued an FPAA with respect to each of them. The Berkshire 2006–5 and Drilling FPAAs were for the 2006 partnership taxable year, and the Gulf FPAA was for the 2007 partnership taxable year. The Commissioner determined that the partnerships were not entitled to deduct any of the claimed intangible drilling costs (IDCs). Each partnership was issued a FPAA on June 5, 2014 and mailed an FPAA to each tax matters partner at each partnership’s address on such date. On the same day the Service mailed a copy of each partnership’s FPP to “Berkshire Resources” as TMP at three different addresses making a total of nine FPAAs.
Importantly, the Service also mailed copies of the FPAAs for each of the three partnerships to Hattler, as a “notice partner” within 60 days of mailing the FPAAs to the TMPs. §6223(d)(2). On June 30, 2014, Hattler was mailed the Drilling FPAA and on July 14, 2014 the Gulf FPAAs.
As explained in the mailings received by Hattler the taxpayer was informed that if Berkshire or another TMP files a petition with the Tax Court then the notice partner must accept such decision. Where, however, the TMP does not file a petition by the 90th day from the date the FPAA was mailed, any partner, or any 5% group entitled to notice has the right to file the petition after the 90th day but on or before the 150th day from the datet the FPAA was mailed to the TMP.
On November 4, 2014, Hattler mailed petitions for all 3 partnerships via Federal Express overnight priority mail which were received by the Tax Court on the next day. The Court assigned the case docket No. 26512–14. After originally treating all three petitions as one case, the Court ordered the cases severed into three separate cases, found at docket Nos. 26512–14, 28623–14, and 28696–14. The Service, in response, filed motions to dismiss for lack of jurisdiction on the basis that the petitioners were untimely. The petitioner objected and the Court consolidated the cases in issuing its opinion.
Tax Court Rules for Commissioner
The Service was found to have properly issued the FPAA to the TMP in accordance with section 6223(a) even though it was mailed to the “Tax Matters Partner”. Chomp Assocs. v. Commissioner, 91 T.C. 1069, 1073 (1988) ( “[S]ection 6223 does not require that a specific TMP be enumerated on the FPAA.”); Treas. Reg. §301.6223(a)-1(a)(1). Unlike the last known address rule applicable to notices of deficiency, the Service must send the FPAA to the address listed on the partnership return for the year in issue. §6223(c)(1); Triangle Investors Ltd. P’ship v. Comm’r, 95 T.C. 610, 613 (1990); Treas. Reg. §301.6223(c)-1(a). The Service is not required to update the partnership’s address unless it receives a written notification from the partnership. Treas. Regs. §§301.6223(c)-1(b)(2), -1(b)(3). Here on June 5, 2014, the Service mailed a generic FPAA to the “TMP” at each partnership’s address. Hattler argued that because the TMPs were no longer in existence from the prior dissolutions the notice was insufficient. The Court, per Judge Buch, disagreed that the issuance of the FPAAs to the TMP with respect to each partnership was invalid.
Next, Hattler argued that the FPAAs sent to Berkshire Resources as TMP were invalid on the same reasoning, i.e., that Berkshire Resources were administratively dissolved before the FPAAs were issued. Again, Judge Buch rejected this argument and held that the Service met the notice requirement under section 6223(a).
Hattler fired another salvo at the Service. He argued that because Berkshire Resources was dissolved, the Service should have appointed a new TMP. This line of reasoning was similarly dismissed. See §6231(a)(7).
The Court held that Hattler was not prejudiced by the absences of the named TMPs because he received timely notice. He had ample time to file petitions of his own. The Court noted its decision in Seneca, Ltd. v. Comm’r, 2 T.C. 363 (1989), aff’d without published opinion, 899 F.2d 1225 (9th Cir. 1990). In Seneca, Ltd., supra the Service mailed a generic TMP FPAA as well as FPAAs to the notice partners. The notice partners, as in the case here, argued that the FPAA was invalid since the Commissioner had not appointed a new TMP and that the generic FPAA therefore did not start the 90-150 day clock to file the petition. The Tax Court held that “the absence of a tax matters partner for Seneca had no adverse effect on petitioners’ right to notice and hearing”. There was no injury suffered and the cause of their grievance was of their own doing. The same applied in this case.
It is interesting how close Hattler was to filing his petition timely. The generic FPAAs were mailed to the TMPs on June 5, 2015. The 150th day for Hattler to file fell on Sunday November 2, 2014. Section 7503 causes the deadline to run to the next business day, November 3, 2014. Hattler did not mail his petitioners until November 4, 2014 and were not received by the Court until November 5, 2014. The Court noted in a footnote that the “timely mailing treated as timely filing” rule does not help Mr. Hattler either because that rule applies only if the petition is timely mailed in the first instance. And, Hattler mailed the petitions by Federal Express next day delivery. See §7502(a)(2).
Hattler’s counsel then pleaded with the Court that it could, since it had jurisdiction over the proceeding, could exercise its discretion under T.C. Rule 245(c) to permit the case to continue. The Court held that the rule cited by petitioner’s counsel did not apply in this case.
Finally Hattler argued that the Service in issuing its FPAAs should have allowed the partnerships to deduct theft losses to offset the adjustments made in the FPAAs. Judge Buch once again disagreed and noted that the Court did not have jurisdiction over the case.
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