Even if It’s “Famously” Non-Taxable

Thus the Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, in a quartet of designated hitters. I’ll cite only to Block Developers, LLC, William J. Maxam, APC, Tax Matters Partner, et al., 3198-10, filed 2/26/14.

Block had four partners, each of whom was a Roth IRA, and each of whose trustees got a NBAP (Notice of Beginning of Administrative Proceeding), the TEFRA equivalent of a summons with notice for you civilian practitioners. But the beneficiaries of the several Roths got nothing.

Now if a partner, whether direct or “indirect” but entitled to receive a NBAP, doesn’t get a NBAP, the IRS can be in trouble.

Judge Holmes: “NBAPs are important because, if a person who is entitled to get one doesn’t, he receives in compensation a right to elect out of TEFRA’s partnership-level proceedings and treat all his partnership items as nonpartnership items. IRC§ 6223(e). This can in turn mean an increase in the probability of the Commissioner’s making a mistake in issuing a valid notice of deficiency, and sometimes that means that a partner wins his tax case on a procedural default.” Order, at p. 2.

So who are the “partners” entitled to the NBAPs– the Roth IRA trustees or the individual beneficiaries?

The individuals argue that they are the real partners, and not pass-thru partners who are only entitled to receive a NBAP from their Roth IRA trustees, who IRS claims are the real partners entitled to receive the NBAPs, because a partner is defined as one whose tax liability is determined directly or indirectly by the partnership items in question.

“Roth IRAs are famously exempt from worrying about their tax liability at all — and so petitioner reasons that means that Roth IRAs can’t be partners, and if they can’t be partners, they can’t be ‘pass-thru partners.’” Order, at p. 2.

Another “nice try”, but the beneficiaries are out of luck. Section 6231(a)(9) includes trusts as pass-thru partners, and only the trustee is entitled to the NBAP. If the trustee doesn’t tell the trustor, too bad, so sad, but that’s not IRS’ problem.

“So everything comes down to what exactly ‘trust’ means. Petitioner here has another distinction that he urges on us — a distinction between trusts that have tax liability (e.g. complex trusts, IRC § 641) and trusts (e.g. grantor trusts, IRC § 671 and Roth IRAs, IRC § 408A) that don’t. Only the former, he argues, qualify as ‘partners’ and only ‘partners can be ‘pass-thru partners.’

“We must of course use the definition that the Code itself gives us, and on this point the Commissioner has to be right. And we have definitively held that Code section to mean what its language suggests:

“‘section 6231(a)(9) plainly defines the term “pass-thru partner” to include a “trust” that holds an interest in a partnership. We read nothing in the relevant provisions that expresses a legislative intent to limit that definition to any particular type of trust.’ Murphy v. Commissioner, 129 T.C. 82, 88 (2007).” Order, at p. 3.

Now the bad news: “Murphy is a T.C. opinion. We must follow it.” Order, at p. 3 (Citation omitted).

See my blogpost “This Old House”, 1/30/12. T. C. opinions are reviewed by the whole Court, and have, as I said, “a certain gravitas; if not an Olympian pronouncement, then at least an oracular quality.”

As Gertrude Stein would have put it, simple, complex, taxable or non-taxable, a trust is a trust is a trust.