Or, There Goes the Neighborhood
The inventive James E. Rogers tries a longshot Rule 161 reargument and a Rule 162 vacatur to avoid the fallout from his cratered distressed asset/debt (DAD) non-partnership deals (see Superior Trading, LLC, Jetstream Business Limited, Tax Matters Partner, et al., 137 T.C. 6, filed 9/1/11 (Superior Trading I), and my blogposts “More Shell Games”, posted 9/2/11, and “Mr Rogers’ Neighborhood – The Adventure Continues”, posted 11/12/11”). The latest chapter in the story is Superior Trading LLC, Jetstream Business LLC Tax Matters Partner, 2012 T.C. Mem. 110, filed 4/17/12.
Judge Wherry disdainfully brushes off Mr. Rogers: “The motions before us to reconsider and vacate are a curious admixture of a regurgitation of unfounded assertions and half-baked theories soundly rejected in Superior Trading I, a disingenuous criticism of our holdings in that Opinion, and fanciful claims of newly discovered evidence that allegedly undermines our findings of fact supporting those holdings. Consequently, these motions merit no more than a summary denial.” 2012 T.C. Mem. 110, at p.8.
But TEFRA rears its ugly head. So Judge Wherry has to deal with the unfounded, the half-baked, the disingenuous criticisms, and the fanciful claims. Though the blown-up “partnership” is initially the promoter’s problem, the fallout affects the individual returns of the investor-partners.
“Yet we recognize that the dispute at the center of the consolidated cases could morph and present itself in other manifestations. Therefore, to provide additional guidance on our interpretation of the applicable law, we have set forth in some detail our reasons for denying the motions. In so doing, we have no illusions of persuading all moving petitioners. Instead, we write now for the benefit of the “silent waters that run deep”–the dozens of deep-pocketed investors who acquired ownership interests in the various holding companies, which in turn sought to exploit the inflated basis of the Arapua receivables. After all the linen is washed, these investors constitute the fonts whither the promised tax savings from chimeral losses would have drained and whence the required tax payments for determined deficiencies and accuracy-related penalties will flow.
“Under section 6231(a)(2)(B), ‘The term “partner” means * * * any * * * person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.’ As we described in Superior Trading I, the investors in the holding companies were never members in the same limited liability company as Arapua. Regardless, to the extent their income tax liability is affected by the basis of the Arapua receivables, a partnership item in these partnership-level proceedings, these investors are partners for purposes of these proceedings.
“Consequently, pursuant to section 6226(c)(1), each such investor ‘shall be treated as a party to such action’. And though it is already too late for these deemed parties to participate in these proceedings, it might not be too early for them to begin preparing for what is surely coming down the pike–computational adjustments by means of either direct assessment or partner-level deficiency proceedings. See generally Thompson v. Commissioner, 137 T.C. 220 (2011).” 2012 T. C. Mem. 110, at pp. 8-9.
Judge Wherry is here referring to the famous Thompson case, which features Judge Holmes’ famous dissent. See my blogpost “The Great Dissenter”, 12/28/11.
So for 39 pages, Judge Wherry slogs through Mr. Rogers’ smokescreen, with footnotes long enough to pass for decisions themselves. And having yet again deconstructed Mr Rogers’ cardboard neighborhood (the details of which I leave to law review writers and the terminally insomniac), Judge Wherry turns to the great defect in TEFRA.
“We are mindful of the fact that the ultimate burden of what we say and do here will be borne by those not before us–the individual investors in the various holding companies. That, however, is a necessary consequence of the essential design of TEFRA. TEFRA, quite perversely, hands the keys to the (sand) castle to those with everything to gain and nothing to lose. Nonetheless, our duty is to apply the law as written by Congress and reasonably interpreted by the Secretary. But even as we fulfill that obligation, we caution all unsuspecting taxpayers who have already been, or may in the future be, tempted to invest in such ‘too-good-to-be-true’ sheltering transactions, or to tie up this Court in TEFRA’s procedural knots. The wheels of TEFRA may grind slowly, but grind they will, and the grist they mill could have been the investors’ half a loaf.” 2012 T.C. Mem. 110, at p. 48-49.
Remember Beverly Bernice Bang, 2011 T.C. Sum. Op. 1, filed 1/4/11, and my blogpost “Bang – A Warning to Tax Matters Partners (and their advisors)”, posted 1/5/11.
The investors might give some serious thought to going after the tax matters partner.