In Uncategorized on 03/13/2018 at 23:20

Who Is Glad That TEFRA Is Gone

I am prepared to wager a few bobs that some if not all Tax Court Judges will be glad when the last of the TEFRA dinosaurs waddles to oblivion.

But it’s a long, slow waddle for Judge Mark V. Holmes, as he hunts down Ernie Ryder and his sixteen (count ‘em, sixteen, and they aren’t sweet) dodger cases. Same opinion for everyone of these designated hitters, so here’s Ernest S. Ryder & Associates, Inc., APLC, et al., Docket No. 14619-10, filed 3/13/18.

I’ve blogged Ernie’s adventures and misadventures before.

It turns out that the fight is what is a partnership item (needing FPAA and audit) or nonpartnership (no need for TEFRA activity) is irrelevant here.

Judge Holmes: “The primary issues the parties address are whether funds that passed from a C corporation through partnerships are constructive dividends or otherwise income to the Ryders, whether the Ryders have sufficient basis in those partnerships to take flow-through losses, and whether certain losses were from passive activities and could therefore only offset passive income. The Commissioner says these issues either aren’t partnership items or the relevant entities aren’t subject to TEFRA for the years at issue.” Order, at p. 1.

Judge, please don’t call a Statutory Notice of Deficiency a “NOD.” The term “NOD” is reserved for Notice of Determination, as in a CDP, a worker classification (IC or EE), a stand-alone innocent spouse, or a 501(c)(3) revocation.

Ernie was running cash from a C Corp through a bevy of partnerships, and having the cash applied to his personal benefit. Ernie claims IRS is trying to treat the partnerships as shams, and that’s a partnership-level determination, so TEFRA applies.

“But these things are irrelevant to the question of whether funds leaving a C corporation were income to Ryder. See Watkins v. Commissioner, 108 T.C.M. 337, 340 (2014) (where Commissioner agreed partnerships not shams and partnership distributions didn’t go directly to petitioners, ‘[t]he fact that the funds may have at some point come from a distribution from [a partnership] does not make the petitioners’ alleged use of the funds for personal gain necessarily a partnership item’).” Order, at p. 2.

Watkins was the asbestos-remover with the tiered LLCs that came unglued. For the backstory, see my blogpost “Substance Over Form,” 2/11/11. The 2014 T. C. Memo. Judge Holmes quotes was a follow-up.

So TEFRA is irrelevant. But IRS is rather farblungeit (please pardon technical term) as to which of Ernie’s multifarious partnerships is or is not a partnership subject to TEFRA. IRS’ counsel’s record-building isn’t of the best.

But even as to the partnership IRS concedes is a TEFRA partnership, IRS accepted the relevant year’s return as filed, so no audit, no partnership-level proceeding, and all items are strictly partner items, and Judge Holmes has jurisdiction. Remember, no FPAA, no partnership audit, no TEFRA.

Ernie does win on the claim that IRS can’t litigate in this proceeding whether his car outfit was operated for profit in the relevant years. That’s a TEFRA issue. But whether Ernie can take losses from that business for those years is something else. Even if the car thing was for profit, has Ernie sufficient basis and is he subject to the passive loss rules?

After all, this is a motion in limine and to dismiss for lack of jurisdiction, essentially the same thing. But as Judge Holmes finds he has jurisdiction, I eagerly await the opnion.




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