Failure to Identify Partners in Partnership Extends Statute, Tax Court Holds (Parker's Federal Tax Bulletin: September 13, 2012)

Where partners in a partnership were not appropriately identified to the IRS, the statutory period for assessing tax on the partnership was open and the doctrine of estoppel did not preclude the IRS's assertion to that effect. Gaughf Properties, L.P, v. Comm'r, 139 T.C. No. 7 (9/10/12).

In 1999, Gaughf Properties, a partnership, entered a complicated series of transactions involving currency options and stock trades. Two LLCs and an S corporation also took part in the transactions. All four entities were formed in 1999 and were owned either directly or indirectly by Andrew and/or Nan Gaughf. The transactions, which were facilitated by the accounting firm of KPMG and the law firm of Jenkens & Gilchrist, were intended to yield losses that would offset substantial unrealized gains in stock owned by Andrew by inflating the outside basis in the partnership.

Andrew and Nan were indirect partners of the partnership but did not list certain information identifying themselves as partners on the partnership's 1999 tax return. The IRS was in possession of certain information identifying Andrew and Nan as partners, which it had obtained when certain forms were filed on behalf of the four entities in 1999. The IRS possessed additional identifying information that it had obtained as a result of a summons issued to the law firm that had helped Andrew and Nan complete the transactions. However, the identifying information was not furnished to the IRS in accordance with certain requirements of Reg. Sec. 301.6223(c)-1T.

The IRS issued a final partnership administrative adjustment (FPAA) to Gaughf Properties in March 2007. According to the IRS, the partnership failed to recognize approximately $4.5 million in gross income resulting from the expiration of a currency option. Two issues in that case were separated and presented to the Tax Court. Those issues were (1) whether, on March 30, 2007, the statutory period for assessing tax attributable to partnership items was open under Code Sec. 6229(e), and (2) whether, under the doctrine of estoppel, the IRS was precluded from asserting the statutory period for assessing tax attributable to partnership items was open on March 30, 2007, with respect to Andrew and Nan.

The IRS argued that the identifying information referred to in Code Sec. 6229(e) was not furnished to it because no documents it received satisfied the requirements of Reg. Sec. 301.6223(c)-1T. Under those provisions, if certain information regarding the partners in a partnership is not filed with the IRS, then the statute of limitations remains open. In addition to contesting the IRS's position, the partnership argued that (1) the IRS failed to prove that it did not receive the required information from KPMG; (2) the IRS actually used information in its possession that identified the Gaughfs as indirect partners in Gaughf Properties; and (3) Reg. Sec. 301.6229(e)-1T, which incorporates Reg. Sec. 301.6223(c)-1T regarding the procedure for furnishing identifying information for purposes of Code Sec. 6229(e), was invalid.

The Tax Court held that the statutory period for assessing tax on the partnership was open under Code Sec. 6229(e) and that the doctrine of estoppel did not preclude the IRS's assertion to that effect. The Tax Court found that the information required under Code Sec. 6229(e) and the applicable regulations identifying the Gaughfs as partners in Gaughf Properties was not furnished to the IRS. As a result, the court held that the IRS's statutory-period-for-assessment arguments were satisfied.

With respect to the partnership's and the Gaughfs' allegations that the IRS caused numerous delays in the case while also changing its positions, the Tax Court said that the Gaughfs and other relevant entities were responsible for many of the delays and changed positions taken by the IRS through their implementation of a complex transaction to increase basis in a partnership, their inconsistent and incomplete reporting of facts regarding the transaction, and their failure to list the Gaughfs as indirect partners in Gaughf Properties. These facts helped provide support for the court's decision to reject all of the partnership's and the Gaughfs' estoppel arguments based on delay of the case.

For a discussion of the statute of limitations with respect to partnerships and their partners, see Parker Tax ?260,130.

Parker Tax Publishing

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