Napoliello v. Commissioner
2011 U.S. App. LEXIS 17532
| 9th Cir. | 2011Background
- Napoliello formed MN Trading LLC and issued long/short foreign currency options; later swapped into AD FX Trading 2000 Fund LLC and received AD Trading securities and cash.
- Napoliello claimed large losses on his 2000 tax return by using AD Trading basis tied to the options’ values.
- The IRS concluded AD Trading was a sham and issued a Final Partnership Administrative Adjustment (FPAA) in 2004, adjusting partnership items.
- In 2006 the IRS issued a deficiency notice to Napoliello for 2000, recalculating his basis based on FPAA findings.
- Napoliello challenged in Tax Court; the issues concern TEFRA/deficiency-notice jurisdiction and whether the FPAA’s partnership-item determinations could be redetermined by the Tax Court.
- The Ninth Circuit affirms the Tax Court’s jurisdiction and holds that the partnership-item determination (including AD Trading’s sham status) falls within the Tax Court’s TEFRA jurisdiction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| TEFRA deficiency notice jurisdiction and notice validity | Napoliello contends the deficiency notice is invalid; only direct computational adjustment permissible. | Commissioner contends the notice is valid as an affected-item notice requiring partnership-level determinations. | Notice valid; Tax Court had jurisdiction to redetermine under TEFRA. |
| Whether AD Trading’s sham determination is a partnership item | Napoliello argues a sham determination is not a partnership item. | Commissioner argues the sham determination is a partnership item. | Yes; partnership-item status extends to partnership validity determinations; Tax Court jurisdiction affirmed. |
Key Cases Cited
- Desmet v. Comm'r of Internal Revenue, 581 F.3d 297 (6th Cir.2009) (Son-of-BOSS tax shelters; partnership items and FPAA context supporting partnership-level determinations)
- Petaluma FX Partners, LLC v. Comm'r of Internal Revenue, 591 F.3d 649 (D.C.Cir.2010) (Partnership-item determination includes validity of partnership; affects all partners)
- RJT Invs. X v. Comm'r of Internal Revenue, 491 F.3d 732 (8th Cir.2007) (Definition and scope of partnership item; partnership-level determinations)
- Olson v. United States, 172 F.3d 1311 (Fed. Cir.1999) (Direct vs. partnership-item adjustments; regulatory framework for 6230/6231)
- Estate of Quick v. Comm'r, 110 T.C. 172 (1998) (Affirmation of affected item-notice issues in partnership contexts)
- Scar v. Comm'r of Internal Revenue, 814 F.2d 1363 (9th Cir.1987) (Jurisdictional posture when deficiency notices are challenged; foundational TEFRA principles)