The dandiest dodgers’ delight has been around some thirty years, the multi-tiered LLC check-boxed to partnership taxation, with a bunch classes membership interests (hi, Judge Holmes), with each class scattered far and wee, causing FPAAs to shatter on Section 6226(f).

Judge Christian N. (“Speedy”) Weiler will tell you all about it (with pictures, yet) in ES NPA Holding, LLC, Joseph NPA Investment, LLC, Tax Matters Partner, 2021 T. C. Memo. 68, filed 6/3/21. IRS dinged ES NPA in a FPAA with $16 million unreported income, plus chops to the partners thereof at no extra charge.

“In general, section 6226(f) gives this Court jurisdiction to determine all partnership items of the partnership for the partnership’s taxable year to which the FPAA relates. However, this Court’s jurisdiction does not extend to determining the partnership items of lower tier partnerships. That means that we may determine only the partnership items of the partnership to which the FPAA relates. If the partnership items of a lower tier partnership are included in the FPAA of the partnership before us, we are without jurisdiction to determine those lower tier partnership items.” 2021 T. C. Memo. 68, at pp. 11-12. (Citation omitted).

And of course ES NPA claims a lower-tier box-checked LLC (IDS) got the boodle, wherefore summary J tossing FPAA. Check out the picture at p. 8. Enough triangles to stock Bermuda, Bahamas, Antigua and Jamaica.

The bottom line is that ES NPA got a membership interest in the down-tier LLC IDS. There was no passthrough of partnership income and expense. Judge Speedy stresses that all he finds is that ES NPA got a partnership interest, not whether IRS correctly characterized it in the FPAA. See 2021 T. C. Memo. 68,at p. 17, footnote 11.

The membership interests were supposedly payment for services. Property for partnership interest is not taxable, but partnership interest for services might be. Howbeit, there remains the fact question whether what ES NPA got was an income interest or a capital interest. And in any case, whether what ES NPA paid IDS is deductible as compensation is also a fact question.

The roundy-round with tiered LLCs is clearly a growth industry.