In Uncategorized on 07/20/2018 at 17:44

Judge James S (“Big Jim”) Halpern has another TEFRA silt-stirrer, and it’s all about basis. The silt stirred up by TEFRA through its computational-vs.-deficiency dogpaddle results today in Judge Big Jim finding Tax Court has jurisdiction, that notwithstanding the stipulated decision entered years ago the issue of the nonpartner’s basis in the contributed property (euros; this is another Son-of-Boss mix-and-match dodge) was never determined, so there’s a free kick awarded to Larry S. Freedman & Sheri L. Freedman, docket No. 23420-14, filed 7/20/18.

The partnership Larry got into was a phony, but it got an FPAA and Larry got hammered. The only issue now is the 40% overvaluation penalty. Larry claims good faith, and that the net amount of the liquidating distribution of the euros needs to be determined.

Judge Big Jim agrees. Computational adjustments (no SNOD, straight to assessment) are those related to what the FPAA determined, and don’t need partner facts. IRS “…can collect the penalty he determined in the notice of deficiency as a computational adjustment apart from the present case only if he establishes that the penalty ‘relates to’ our redetermination of the capital contributions made to [phony partnership] and is ‘based on’ our determination that the reported contributions were overstated by at least 400%. Respondent has not made the showing required for us to grant his motion to dismiss the portion of the case involving petitioners’ request for a redetermination of the penalty respondent determined.” Order, at p. 5.

Although Tax Court could have determined Larry’s basis in the euros, Tax Court didn’t. And as it was an agreed decision, neither Larry nor IRS asked them to. So if Larry had any basis, that might offset the overvaluation chop IRS wants to slug him with.

Now if you want to see why TEFRA was the mother of abominations, try this.

“It may be that, in asking us to redetermine to be zero the capital contributions made to Pinnacle in the decision entered in [phony partnership]’s partnership case, the Commissioner was referring not to the capital account credits allowed for the contributions (and reported on Schedule M-2 of its Forms 1065), but instead to the partnership’s ‘inside’ basis in the contributed property. Even under that interpretation of our Order & Decision in Pinnacle’s partnership case, however, it would not follow that the penalty respondent determined in the notice of deficiency was based on our Order & Decision. Because a partnership’s inside basis in contributed property and the outside basis of a partnership interest issued in exchange for the property are both determined by reference to the partner’s precontribution basis in the property, secs. 722, 723, a determination that the partnership overstated its inside basis in the property would indicate that the partner’s initial outside basis was also overstated. If Mr. Freedman overstated his initial outside basis in his interest in [phony partnership], it would tend to follow that he also overstated the basis of the euros he received from the partnership in liquidation of that interest. But Mr. Freedman’s correct basis in the euros (in contrast to the redetermined capital contributions and partnership inside basis) was almost certainly higher than zero. Therefore, a determination that [phony partnership]’s basis in the property Mr. Freedman contributed was zero (or, more precisely, did not exist) would not establish that Mr. Freedman’s claimed basis in the distributed euros was overstated by at least 400%.” Order, at p. 7.



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