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Commissioner of Internal Revenue v. Jt Usa

January 14, 2011

COMMISSIONER OF INTERNAL REVENUE,
APPELLANT,
v.
JT USA, LP, JTR-LLC, TAX MATTERS PARTNER, APPELLEES.



Tax Court No. 5282-05 On Appeal from the Order of the United States Tax Court

The opinion of the court was delivered by: Ikuta, Circuit Judge:

FOR PUBLICATION

OPINION

Argued and Submitted October 6, 2010-Pasadena, California

Before: Harry Pregerson, Dorothy W. Nelson and Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Ikuta

OPINION

This is an appeal from a tax court's interlocutory order in a partnership tax proceeding. We dismiss the appeal because we lack appellate jurisdiction under either the practical finality doctrine or the collateral order doctrine.

I

John Ross Gregory and his wife Rita founded JT USA, LP, a limited partnership, in the 1970s. In 2000, the Gregorys accepted an offer to sell the company that would result in a $32 million capital gain. According to the IRS, the Gregorys decided to engage in a so-called Son-of-BOSS transaction*fn1 to avoid the capital gains that they would otherwise incur. In furtherance of this scheme, the IRS alleges, the Gregorys trans-

Under the applicable statute of limitations, see 26 U.S.C. -§-§ 6501, 6229(f)(1), the IRS had four years to assess a tax deficiency against JT USA for the 2000 tax year. In October 2004, a few months before the statute of limitations ran, the IRS issued a notice of final partnership administrative adjustment (FPAA) to JT USA for the 2000 tax year. An FPAA is a proposed tax adjustment calculated by the IRS, which initiates a TEFRA*fn2 proceeding.

The IRS made a clerical error in its issuance of the FPAA, however, in failing to notify the Gregorys about the TEFRA proceeding, as required by statute; instead, it notified only JT USA. See 26 U.S.C. -§ 6223(d)(1). Because of this error, the IRS was obliged to give the Gregorys the right to elect not to participate in the TEFRA proceeding. See 26 U.S.C. -§ 6223(e)(3)(B). The Gregorys notified the IRS that they elected to participate in the TEFRA proceeding with respect to their direct interests in JT USA*fn3 (i.e., their personal ownership interests in JT USA), but not with respect to their indirect interests*fn4 (i.e., their ownership interests in JT Racing, Inc., and JT Racing, LLC, which gave the Gregorys an indirect ownership interest in JT USA).

After the Gregorys' election, the IRS could not proceed against the Gregorys with respect to their indirect interests in JT USA within the TEFRA proceeding. Although the IRS still had an additional year to bring such an action outside the proceeding, see 26 U.S.C. -§ 6229(f)(1), the IRS failed to do so, and the statute of limitations for bringing such an action ran at the end of 2005. Nor could the IRS proceed against JT Racing, Inc. and JT Racing, LLC within the TEFRA proceeding, because these entities were tax immune; the IRS may impose taxes only on the shareholders of S corporations and limited liability companies, not on the entities themselves. See generally 26 U.S.C. -§ 1363(a) (S corporations generally not subject to income tax); 26 U.S.C. -§ 701 (partnerships not subject to income tax); 26 C.F.R. -§ 301.7701-3 (LLC may be treated as a partnership).

Accordingly, by 2006, the IRS had only two options to recover the alleged tax deficiency. The IRS needed either to show that the Gregorys had a direct interest in JT USA at the relevant time during 2000, or to invalidate the Gregorys' election out of the TEFRA proceeding with ...


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