I really could not let Richard J. O’Neill Trust, Anthony R. Moiso, Trustee, T. C.  Memo. 2022-108, filed 10/27/22, pass without a further shot into dead TEFRA. The late O’Neill put his assets into the trust before he became the late O’Neill. Key asset was his 86.12% membership interest in RMV, an LLC.

In year of death and next succeeding year, RMV realized healthy capital gains, which flowed through RMV to the trust. In year of death, O’Neill’s estate borrowed from RMV at 9% (which IRS challenged, and the parties settled at 6%; they also agreed that the worth of the trust’s investment in RMV was increased by $10 million). Of course, the 9% interest the trust paid RMV flowed right back to the trust, and the note for the borrowing was adjusted to drop the interest rate to 6%.

The trust got a refund four (count ’em, four) years after they paid the taxes on the flowthrough capital gain. IRS gave the trust a SNOD, claiming the trust had no right to the refund.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan finds the trust’s and RMV’s paperwork defective, and that sinks the refund.

“RMV did not file an amended partnership income tax return for 2009, 2010, 2014, or 2015. The trust did not file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with respect to RMV for 2009, 2010, 2014, or 2015.” T. C. Memo. 2022-108, at p. 3.

First, the trust says claim of right.

“Section 1341 addresses instances in which a taxpayer includes an item in gross income for a prior taxable year because it appeared that the taxpayer had an unrestricted right to the item of income. A deduction is allowed after the close of the prior taxable year if it is established that the taxpayer did not have an unrestricted right to that item. § 1341(a). Pursuant to section 1341 a taxpayer may be eligible for a refund.” T. C. Memo. 2022-108, at p. 4.

Problem here is right goods, wrong customer. RMV treated the items (capital gain and interest) as income in the amount of $X. The trust wants to treat them differently. But these are partnership items, and must be determined if disputed at partnership level; RMV never amended its returns for the years at issue. Neither did the trust file the inconsistency paperwork.

The trust’s bœuf with RMV is that RMV understated its basis in the capital assets sold, so the trust’s gain was overstated. But the proceeds RMV distributed to the trust were never questioned or disputed; the trust’s right to the proceeds was never restricted.

And the renegotiation of the interest rate on the note was voluntary. Neither RMV nor the trust was under any challenge as to the payment, only what IRS allowed the estate to deduct.

The trust claims mitigation, but Section 1314 requires a mitigation claim to be filed for the years in which the challenged determination was made. The trust is filing in the wrong year.

How about equitable recoupment?

“As with its claim of right and mitigation provision arguments, the trust’s reliance on the doctrine of equitable recoupment fails in part because the trust is not the appropriate party to seek a refund in this case. The deficiency upon which the trust bases its claim for recoupment arises from deficiencies directly related to the estate’s taxes, not the trust’s.

“Furthermore, the requirements of equitable recoupment are not met. Respondent’s determination is based on the disallowance of the trust’s claimed reduction of tax liability pursuant to section 1341. This determination is not inconsistent with the trust’s time-barred income tax liabilities for tax years 2009 and 2010. The liabilities for 2009 and 2010 have no transactional connection with respondent’s denial under the claim of right.” T. C. Memo. 2022-108, at p. 7.

Now TEFRA is history, and I didn’t mourn its passing. I’m sure the trustee and his trusty attorneys (who get a deserved Taishoff “Good Try”) are even less unhappy at the demise of TEFRA.

But before we rejoice too loudly, are we so sure that the Bipartisan Budget Act solved the problem of partnership-partner inconsistency any better? Are we so sure that the partnership representative under the new régime, who may not even be a fiduciary, much less a partner, is any better than the old TMP?