In Uncategorized on 05/21/2014 at 16:38

No, not the 1969 Coca Cola slogan of advertising fame, but the Regency Plaza Associates of New Jersey, which was a real partnership that did actual business before it lost its only asset to mortgage foreclosure and thus ended its existence.

This is the story of two of its partners, Israel Greenwald and Ruth Greenwald, as told by Judge Buch in 142 T. C. 18, filed 5/21/14.

Once again, it’s the TEFRA-related (and some might say TEFRA-conflated) story of inside basis (partnership’s basis in the assets contributed by each partner) and outside basis (each partner’s basis in his/her partnership interest).

After the dissolution of Regency, there was a partnership-level proceeding years ago, that settled.

Now the partners petition IRS’ partner-level deficiencies arising out of the “affected items” that were settled in the partnership-level proceeding.

But the partners change their minds, and claim Tax Court has no jurisdiction, as the “affected items” involve outside basis, and that had to be determined at partnership-level. IRS claims Tax Court does have jurisdiction, because outside basis that gives rise to “affected items” gets determined at partner-level.

Judge Buch: “Both parties, however, miss the mark. In these partner-level affected items proceedings, we have jurisdiction to redetermine the amounts of any deficiencies attributable to affected items that require partner-level determinations. Because partner-level determinations are required, we have jurisdiction to redetermine the deficiencies at issue.” 142 T. C. 18, at p. 3.

You remember the rule: if the partnership-level redetermination results only in arithmetic to the partner, no deficiency needed, but if it requires partner-level factual determinations, then IRS must follow deficiency procedures.

A partnership item is one the partnership must decide (but if it doesn’t, it’s still a partnership item).

“Partnerships do not keep track of the partners’ outside bases, but they may be required to take a partner’s outside basis into account in some situations. For example, when a partner purchases an interest in a partnership, the partnership may elect under section 754 to make optional adjustments to the basis of partnership property. If such an election is made, the partner’s initial basis in the partnership is a partnership item. However, if the election is not made, the partnership is not required to determine the partner’s initial outside basis. Accordingly, a partner’s outside basis generally would be an affected item.” 142 T. C. 18, at p. 10 (Citations omitted).

The partners cite Tiger Eye and Woods for the proposition that outside basis is a partnership-level item, but those were sham partnership cases. You can’t have any basis greater than zero in a non-existent asset. So once the “partnership” is shown to be a sham, there’s no need to compute outside basis.

Here, there was a real partnership. And there may be necessary fact questions to ascertain in order to compute partners’ gains or losses. And to do that, we need to know each partner’s outside basis.

“To ignore potential partner-level determinations by assessing without following deficiency procedures would have the effect of depriving partners of a prepayment forum where there is a dispute as to the amount or existence of partner-level determinations that could affect the amount of the assessment. Section 6230(a)(2)(A)(i) is specifically intended to give partners that prepayment forum.” 142 T. C. 18, at pp. 14-15.

So, Regency ex-partners, you’ve got your chance to fight about your deficiencies, whether you wanted to or not.

And see my blogpost “The Great Dissenter”, 12/28/11, where Judge Holmes tells the story much better than I do.



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