Seaview Trading, LLC v. Commissioner
2017 U.S. App. LEXIS 10109
| 9th Cir. | 2017Background
- In 2001 Robert Kotick and his father formed Seaview Trading, LLC, treated as a partnership for federal tax purposes; each held interests through single‑member LLCs (AGK and KMC).
- Seaview received an allocated loss from a common trust fund for 2001; Kotick reported that loss on his 2001 Form 1040 (limitations on his return later expired).
- The IRS audited Seaview and in 2010 issued a Final Partnership Administrative Adjustment (FPAA) disallowing the trust loss and assessing penalties; Kotick filed a Tax Court petition challenging the FPAA on behalf of Seaview.
- Kotick (and AGK separately) argued Seaview qualified for TEFRA’s small‑partnership exception because AGK and KMC were disregarded single‑member LLCs and therefore not “pass‑thru partners.”
- The IRS moved to dismiss for lack of jurisdiction, contending (a) the small‑partnership exception did not apply because disregarded single‑member LLCs are pass‑thru partners under 26 U.S.C. § 6231(a)(9), and (b) Kotick lacked standing because he was not Seaview’s tax matters partner and AGK had filed a timely petition.
- The Tax Court granted dismissal; the Ninth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument (Kotick/Seaview) | Defendant's Argument (IRS) | Held |
|---|---|---|---|
| Whether disregarded single‑member LLCs can be "pass‑thru partners" under 26 U.S.C. § 6231(a)(9) | Disregarded status means the LLC is treated as the owner for federal tax purposes and thus cannot be a pass‑thru partner | Single‑member LLCs may be pass‑thru partners because they hold legal title through which another person holds partnership interests; Congress intended § 6231(a)(9) to reach similar intermediaries | Disregarded single‑member LLCs can be pass‑thru partners; Revenue Ruling 2004‑88 is persuasive under Skidmore and supports this view |
| Whether the small‑partnership exception (§ 6231(a)(1)(B)(i)) applies to Seaview | Seaview argued it met the small‑partnership exception because its upstream owners were individuals via disregarded LLCs | Small‑partnership exception inapplicable if any partner is a pass‑thru partner; disregarded single‑member LLCs qualify as pass‑thru partners | Small‑partnership exception does not apply because pass‑thru partners existed |
| Whether Kotick had standing to file the Tax Court petition on behalf of Seaview | Kotick filed and claimed standing as Seaview’s representative, asserting small‑partnership status supported his position | Only the tax matters partner (or a timely filer) can invoke Tax Court jurisdiction under § 6226; AGK (99.15% owner) was tax matters partner and filed first | Kotick lacked standing; because AGK filed a timely petition, Tax Court lacked jurisdiction over Kotick’s petition |
| Whether Revenue Ruling 2004‑88 and related IRS guidance merit deference | Appellants said the IRS guidance lacks sufficient reasoning for deference | IRS argued the ruling and Chief Counsel Advice are consistent and persuasive under Skidmore/Mead | Court afforded Skidmore deference to Revenue Ruling 2004‑88 and found it persuasive |
Key Cases Cited
- Skidmore v. Swift & Co., 323 U.S. 134 (agency rulings entitled to respect based on persuasiveness)
- United States v. Mead Corp., 533 U.S. 218 (limits and framework for deference to agency interpretations)
- Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83 (standing must be established before addressing merits)
- City of Revere v. Massachusetts General Hospital, 463 U.S. 239 (standing and merits may be inextricably intertwined)
- Omohundro v. United States, 300 F.3d 1065 (9th Cir. application of Skidmore to IRS revenue rulings)
- Tualatin Valley Builders Supply, Inc. v. United States, 522 F.3d 937 (factors for Skidmore review)