Petaluma FX Partners, LLC v. Commissioner of IRS
416 U.S. App. D.C. 411
D.C. Cir.2015Background
- Ronald T. and Ronald S. Vanderbeek formed Petaluma FX Partners, LLC in 2000 as a Son-of-BOSS tax-shelter partnership; each contributed offsetting long and short foreign currency options and claimed large artificial capital losses on their 2000 returns.
- IRS issued an FPAA for tax year 2000 concluding Petaluma was a sham, reducing partners’ outside basis to zero, and asserting accuracy-related penalties under 26 U.S.C. § 6662.
- Under TEFRA, partnership-level proceedings (FPAA review) can determine partnership items and “the applicability of any penalty” relating to partnership-item adjustments; partner-level proceedings resolve nonpartnership items (e.g., outside basis).
- Procedural history: Tax Court initially ruled it could (1) deem Petaluma a sham, (2) set partners’ outside basis to zero, and (3) impose penalties; this court affirmed the sham finding but held the Tax Court could not determine outside basis at partnership level and vacated the penalties ruling; later rounds produced conflicting Tax Court authority on penalties; the Supreme Court in Woods held partnership courts can determine penalty applicability even when doing so requires consideration of nonpartnership items.
- Petaluma contended the Tax Court lacked jurisdiction because the Treasury’s 1987 Temporary Regulation extending TEFRA to sham partnerships was invalid under the APA; the government relied on a 2001 Final Regulation that incorporated the Temporary Regulation’s substance and now governs all years.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tax Court has jurisdiction in partnership-level proceedings to determine applicability of accuracy-related penalties to partners of a sham partnership | Petaluma: No; Tax Court lacks jurisdiction at partnership level to impose penalties on partners absent partner-level proceedings | IRS: Yes; TEFRA § 6226(f) + regulation permit partnership-level determination of penalty applicability | Court: Jurisdiction exists at partnership level to determine penalty applicability (Woods controlling) |
| Whether the 1987 Temporary Regulation (§ 301.6233-1T) is valid and necessary to confer Tax Court jurisdiction over sham partnerships | Petaluma: Temporary Regulation invalid under APA (notice-and-comment and 30-day publication) so no valid regulatory basis extends TEFRA to shams | IRS: Even if Temporary Regulation had defects, the 2001 Final Regulation (§ 301.6233-1) now governs and validly extends TEFRA to shams | Court: Petaluma targeted the wrong regulation; the Final Regulation is operative and was properly promulgated, so Petaluma’s challenge to the Temporary Regulation fails to defeat jurisdiction |
| Whether a regulation is required at all to extend TEFRA jurisdiction to sham partnerships | Petaluma: (assumes) a regulation is required and Temporary Regulation must be valid | IRS: (and Court) Supreme Court in Woods relied on § 6226(f) itself but this case assumes a regulation might be needed; IRS points to Final Regulation | Court: No need to decide whether a regulation is strictly necessary; even assuming one is, the Final Regulation supplies it and is valid for purposes here |
| Challenge to Treasury Reg. § 1.6662-5(g) (penalty calc. when adjusted basis is zero) | Petaluma: The rule improperly treats claimed basis as 400%+ of correct amount and conflicts with division-by-zero logic | IRS: Petaluma forfeited this challenge by raising it too late | Court: Did not reach the merits; challenge forfeited |
Key Cases Cited
- United States v. Woods, 134 S. Ct. 557 (2013) (Supreme Court held partnership-level courts may determine applicability of accuracy-related penalties even if that requires consideration of partner-level items)
- Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (prior D.C. Cir. panel: Tax Court may find a partnership a sham but may not formally adjust individual partners’ outside basis at partnership level)
- Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67 (2012) (Tax Court decision finding it could determine partner outside basis and penalties at partnership level; created conflict addressed on remand)
- LaShawn A. v. Barry, 87 F.3d 1389 (D.C. Cir. 1996) (explaining law-of-the-case doctrine and limits on revisiting prior panel rulings)
- Yesudian ex rel. U.S. v. Howard Univ., 270 F.3d 969 (D.C. Cir. 2001) (issue not raised earlier is not law of the case)