Ninth Circuit: Partnership-level proceedings, limitations period for individual partner’s return

Partnership-level proceedings, limitations period

The U.S. Court of Appeals for the Ninth Circuit today held that the Tax Court has jurisdiction in partnership-level proceedings to consider whether a partner’s individual tax return remains open to assessment.

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The case is: MK Hillside Partners v. Commissioner, No. 14-71504 (9th Cir. June 23, 2016). Read the Ninth Circuit’s decision [PDF 106 KB]


The taxpayer, an individual, in 1998 entered in two collar option contracts covering stock shares he owned. He terminated the collars in September 1999, generating a credit of $198,000. In October 1999, he contributed stock to a partnership that was owned by the taxpayer and his wholly owned corporation. He also contributed real estate to the partnership. The partnership then sold both the stock and the real estate.

The taxpayer’s return for 1999 did not list the $198,000 credit from the collar termination. The partnership’s return for 1999 reported no gain on the real estate sale. These returns were received by the IRS in September 2000.

In July 2006, the taxpayer agreed to extend the time to assess his 1999 tax liability, including tax attributable to partnership items, until January 31, 2008. The IRS on January 2, 2008, issued a Final Partnership Administrative Adjustment (FPAA) to the partnership, concluding that the partnership was a “sham, lacked economic substance, and was formed and used principally to avoid taxes.”

The taxpayer filed a petition with the Tax Court, asserting the statute of limitations as a defense. The IRS responded that the six-year statute of limitations under section 6501(e)(1) applied because of the taxpayer’s omission of the $198,000 on his 1999 return was more than 25% of the gross income reported on the return. The taxpayer countered that the Tax Court lacked jurisdiction to consider at the partnership stage whether his 1999 tax year remained open at the time he agreed to extend his assessment period.

The Tax Court held that the period for assessing tax on the partnership’s items from 1999 was open as to the taxpayer. The taxpayer appealed to the Ninth Circuit.

Ninth Circuit’s findings

The Ninth Circuit concluded that in a partnership-level proceeding, the Tax Court has jurisdiction to consider whether a partner’s individual tax return remains open to assessment and to determine whether the applicable statute of limitations has expired for that partner. In this case, Tax Court rejected the partner’s contention and instead found that the limitations period remained open as to the partner. Accordingly, the Ninth Circuit found that because the Tax Court had jurisdiction to consider the taxpayer’s limitations period argument, the Tax Court also had jurisdiction to reject it—at least for purposes of the partnership proceeding. 

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