75 F.4th 1268
11th Cir.2023Background
- TEFRA created a two-step process: partnership-level determinations for partnership items and partner-level adjustments for affected items; partner-level adjustments use either direct computational assessment or deficiency procedures if they “require partner level determinations.”
- The Keeters and Kaylan Lewis participated in a BLIPS (Son-of-BOSS) tax shelter: Sanford Strategic Investment Fund, LLC (treated as a partnership) made liquidating distributions of stock and euros that taxpayers later sold, claiming large basis-based losses.
- The IRS audited Sanford, concluded it was a sham (lacked economic substance), and the partnership-level proceedings upheld that conclusion.
- At the partner level the IRS used computational adjustments for some partnership-flow items but issued notices of deficiency (pre-payment forum) for: (1) the taxpayers’ losses on sales of stock and euros received as liquidating distributions and (2) itemized deductions dependent on those losses. Taxpayers challenged the deficiency notices in Tax Court.
- The Tax Court sustained the deficiency notices, finding that adjusting the reported losses and related itemized deductions required individualized partner-level determinations (identity of assets, holding periods, basis, and related AGI effects); the taxpayers appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to appeal stipulated Tax Court judgments | Taxpayers lack standing unless jurisdictional defect; they challenge noticing procedure | Taxpayers may challenge Tax Court subject-matter jurisdiction | Taxpayers have standing to challenge validity of deficiency notices because jurisdictional question is reviewable |
| Meaning of “require partner level determinations” (I.R.C. §6230(a)(2)(A)) | "Determination" means judicial dispute resolution or only when IRS lacks necessary information; narrowly construe exception | Determination = any official act of deciding (factual or legal) that inspects partner-specific information; broader, ordinary meaning | Court adopts IRS reading: partner-level determinations cover individualized decisions about a partner’s circumstances even if IRS already has the facts |
| Whether adjustments to losses on sales of distributed stock/euros required partner-level determinations | Keeter/Lewis: returns provided all information; adjustments were purely computational so IRS should use notices of computational adjustment | IRS: must determine identity of assets sold, holding periods, character of gain/loss, and partner-specific bases — requiring partner-level inquiry | Held for IRS: adjusting those losses required partner-level determinations (identity, holding period, basis), so deficiency procedure was proper |
| Whether itemized deductions tied to the losses required deficiency procedure | Taxpayers: itemized deductions are statutory computations; no partner-level determinations needed | IRS: those deductions depend on adjusted gross income, which depends on partner-level loss determinations | Held for IRS: adjusting itemized deductions depended on partner-level determinations and thus deficiency notices were proper |
Key Cases Cited
- United States v. Woods, 571 U.S. 31 (2013) (explains TEFRA’s purpose to coordinate partnership-item determinations and avoid duplicative, inconsistent partner proceedings)
- Sarma v. Commissioner, 45 F.4th 1312 (11th Cir. 2022) (affected items are addressed at the individual partner level)
- Greenberg v. Commissioner, 10 F.4th 1136 (11th Cir. 2021) (historical contrast to pre-TEFRA partner-by-partner deficiency procedure)
- Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d 1050 (11th Cir. 2019) (describes TEFRA’s coordinated two-step process)
- Desmet v. Commissioner, 581 F.3d 297 (6th Cir. 2009) (Son-of-BOSS loss adjustments required partner-level determinations)
- Napoliello v. Commissioner, 655 F.3d 1060 (9th Cir. 2011) (same: IRS needed to determine portion sold, holding period, and character of gain/loss)
- Bush v. United States, 655 F.3d 1323 (Fed. Cir. 2011) (if nothing remains but mechanical computation after settlement, no partner-level determinations are required)
- Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987) (Tax Court has jurisdiction only with a valid notice of deficiency)