Opinion
5756-19L 5760-19L 12813-19L
04-08-2022
HEATHER LEIGH GLUCK IRREVOCABLE TRUST, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
In these collection due process (CDP) cases, petitioners seek review of a determination by the Internal Revenue Service (IRS or respondent) to sustain collection actions. Each of the three petitioners is a trust created for a member of the Gluck family. During 2012 petitioners were direct and indirect partners in partnerships. The IRS made large "computational adjustments" to petitioners' 2012 returns and assessed the resulting deficiencies. Those adjustments generated the tax liabilities that are the subject of these collection actions.
Petitioners have moved for summary judgment under Rule 121. They contend that the IRS was not permitted to assess the deficiencies through "computational adjustments" and that the adjustments in any event were erroneous. They urge that the deficiencies should have been offset by a capital loss that one of the partnerships allegedly recognized. Finding that there exist genuine disputes of material fact, we will deny petitioners' motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect during the relevant years, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect during the relevant years, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Background
The following facts are derived from the parties' pleadings and motion papers, including the attached declarations and exhibits. See Rule 121(b). They are stated solely for the purpose of ruling on petitioners' motion and not as findings of fact in these cases. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). Petitioners had mailing addresses in New York when they filed their petitions.
In 2012 petitioners were partners in Stellar GT Promote, LLC (Promote), a partnership for Federal income tax purposes. Promote was a partner in two other partnerships, Stellar GT, LLC (GT), and Stellar Member, LLC (Member). Member was also a partner in GT. By virtue of their ownership interests in Promote, petitioners were indirect partners of GT and Member. See § 6231(a)(10). And because each partner had a passthrough partner as a member, all three partnerships were subject to TEFRA.
Before its repeal, TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, §§ 401-407, 96 Stat. at 648-71) governed the tax treatment and audit procedures for many partnerships.
In 2012 GT recognized capital gain of $88, 461, 244. Promote's distributive share of that gain was $79, 494, 545. This consisted of $48, 580, 162 from the interest that Promote held in GT directly, plus $30, 914, 383 from the interest that Promote held in GT indirectly through Member.
For 2012 Promote filed Form 1065, U.S. Return of Partnership Income. It reported $79, 494, 545, its distributive share of the gain, on Form 4797, Sales of Business Property. But on Schedule K, Partner's Distributive Share Items, Promote reported only the $30, 914, 383 of gain allocated to it indirectly, omitting the $48, 580, 162 of gain allocated to it directly.
Promote issued Schedules K-1, Partners' Share of Income, Deductions, Credits, etc., to its partners, including petitioners. These Schedules K-1 likewise reported only the $30, 914, 383 of gain allocated to Promote indirectly. Neither Promote nor any of its partners filed a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request. See § 6222(b)(1); Treas. Reg. § 301.6222(b)-1.
For 2012 petitioners filed returns on Forms 1041, U.S. Income Tax Return for Estates and Trusts. On these returns they did not report their distributive shares of the gain that had been allocated to Promote directly from GT. Because neither Promote nor petitioners notified the IRS of this inconsistency between GT's return and their returns, the IRS adjusted petitioners' returns by computational adjustment. Under TEFRA the IRS was authorized to make computational adjustments to an indirect partner's return, without issuing a notice that would enable the partner to initiate a pre-assessment challenge. See §§ 6222(c), 6230(a)(1), 6231(a)(6); see also Treas. Reg. § 301.6222(a)-2 (describing the application of the consistent treatment rules to indirect partners).
In June 2017 the IRS sent each petitioner a Letter 4735, Notice of Computational Adjustment. The letters notified petitioners that the IRS had adjusted upward, by $6, 543, 748, each petitioner's distributive share of GT's capital gain for 2012. Each letter explained that "[t]he adjustment is due to your inconsistent treatment of a partnership item related to the section 1231 gain reported by a partnership in which you have an indirect ownership." The letters told petitioners that, if they wished to dispute the computational adjustments, they would need to pay the resulting liabilities and file claims for refund.
When petitioners did not pay the liabilities, the IRS issued lien and/or levy notices. Petitioners timely requested CDP hearings, challenging their underlying liabilities. The IRS Appeals Office initially determined that petitioners were precluded from challenging their underlying liabilities because they had a prior opportunity to do so, i.e., by paying the tax and filing refund claims. In a prior Opinion we rejected that determination. We held that petitioners were entitled to challenge their underlying liabilities and remanded the cases for a supplemental CDP hearing. See Amanda Iris Gluck Irrevocable Tr. v. Commissioner, 154 T.C. 259, 266-70 (2020).
At the supplemental hearing petitioners acknowledged that, for 2012, Promote was allocated a net section 1231 gain of $48, 580, 162 from the interest it held in GT directly. They stated that this allocation increased, from zero to $48, 580, 162, the outside basis of Promote's interest in GT. However, petitioners asserted that GT terminated in 2012 and had no assets at termination, resulting in Promote's recognizing a loss under section 731(a)(2) in the amount of $48, 580, 162. Petitioners argued that Promote omitted the net section 1231 gain, not because of any inconsistent reporting, but because the gain was offset by the purported section 731 loss.
Petitioners supplied the Appeals Office with copies of various tax returns but provided no other documentation to support their position. The Appeals Office thus concluded that petitioners had failed to substantiate the alleged offsetting loss of $48, 580, 162. In March 2021 the Appeals Office issued petitioners a supplemental notice of determination sustaining the proposed collection actions. Petitioners again challenge that determination.
Discussion
A. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant summary judgment regarding an issue as to which there is no genuine dispute of material fact and a decision may be rendered as a matter of law. See Rule 121(b); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party (here respondent). Sundstrand Corp., 98 T.C. at 520. "If, in this generous light, a material issue is found to exist, summary judgment is improper." Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc., 182 F.3d 157, 160 (2d Cir. 1999).
B. Computational Adjustments
Section 6222(a) requires each partner (including indirect partners) in a TEFRA partnership to treat partnership items "in a manner which is consistent with the treatment of such partnership item on the partnership return." If a partner fails to do this, it must provide the IRS with notice "identifying the inconsistency." § 6222(b)(1)(B); see Treas. Reg. § 301.6222(b)-1(a). And if a partner who adopts an inconsistent treatment fails to notify the IRS on Form 8082, the IRS may make "any computational adjustment required to make the treatment of the items by such partner consistent with the treatment of the items on the partnership return." § 6222(c). The IRS may assess these computational adjustments without initiating a partnership-level (or other) proceeding. Ibid.; see §§ 6225, 6230(a)(1).
For 2012 GT reported on its Form 1065 a capital gain of $88, 461, 244. Pro-mote's distributive share of that gain was $79, 494, 545, which consisted of $48, 580, 162 from the interest that Promote held in GT directly, plus $30, 914, 383 from the interest that Promote held in GT indirectly through Member. But on the Schedule K included with its return, and on the Schedules K-1 issued to petitioners, Promote reported only the $30, 914, 383 of gain allocated to it indirectly and thus omitted the $48, 580, 162 of gain allocated to it directly. Neither Promote nor petitioners submitted Form 8082 or otherwise notified the IRS that they were adopting on their returns a position inconsistent with the position reflected on GT's return. Because petitioners failed to report their shares of this gain consistently with GT's return, the IRS made computational adjustments.
Petitioners contend that they filed their returns consistently with Promote, which they say filed consistently with GT. They allege that the person who prepared Promote's return "netted" a loss of $48, 580, 162 against the $48, 580, 162 of gain allocated to Promote directly. This netting, they say, was correct because GT terminated at year-end 2012. Petitioners assert that GT had no assets when it terminated, generating an alleged loss of $48, 580, 162 under section 731. In support of this position they have supplied no documentation other than the partnership returns and the Schedules K-1 issued to them by Promote, which they say were correct.
Respondent argues that summary judgment is improper because petitioners have failed to support any of their allegations with corroborating documentation. Although petitioners have submitted copies of Promote's Schedules K-1 and other tax filings, respondent notes the well-established proposition that "statements made in tax returns do not constitute proof of the transactions underlying the reported figures." LeBouef v. Commissioner, T.C. Memo. 2001-261, 82 T.C.M. (CCH) 685, 690 (ruling that a "Schedule K-1 . . . cannot be regarded as more than an assertion of [a] claim").
Respondent also points to several possible discrepancies in the tax filings petitioners have supplied. GT did not indicate on its Form 1065 for 2012 that the return was the partnership's "final return," nor did it check the box, "Final K-1," on the Schedule K-1 issued to Promote. If GT in fact terminated at year-end 2012, one might have expected its Form 1065 to have been completed differently. There is likewise no mention in any tax filing that Promote recognized a loss upon GT's purported termination. Promote did not report a capital loss on lines 8 or 9 of its Form 1065, and it did not attach any statement identifying a loss or indicating that its accountant "netted" a loss.
Viewing the facts and the inferences drawn from the facts in the light most favorable to respondent, we conclude that summary judgment must be denied. The question whether Promote during 2012 recognized a loss of $48, 580, 162 presents factual questions that are ill-suited to summary adjudication. Among other things, we find genuine disputes of material fact concerning the following:
• Under section 6222(c), the IRS may make "computational adjustments" at the partner level if the partner's return is inconsistent with the partnership's return. Petitioners have not established that Promote's return or their returns for 2012 were consistent with GT's return.
• Under section 731(a)(2), a partner is entitled to a loss "only upon liquidation of his entire interest in the partnership." Treas. Reg. § 1.731-1(a)(2). Petitioners have not established that Promote, at year-end 2012, liquidated its entire interest in GT. Nor have petitioners established that GT terminated. See § 708(b) (providing that a partnership is "considered as terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners").
• Where a partner does liquidate its entire interest in a partnership, "loss shall be recognized to the extent of the excess of the adjusted basis of such partner's interest in the partnership over the sum of (A) any money distributed, and (B) the basis to the distributee . . . of any unrealized receivables . . . and inventory." § 731(a)(2). Considering the record as it currently exists, we are unable to determine (1) the outside basis of Promote's interest in GT, (2) whether GT distributed any money or other property to Promote, or (3) Promote's basis of any unrealized receivables or inventory. Petitioners have produced copies of tax filings, which they say answer these questions. But tax filings, without more, "do not constitute proof," see LeBouef, 82 T.C.M. (CCH) at 690, and they are insufficient to support a grant of summary judgment to petitioners.
Alternatively, petitioners argue that "no additional 2012 gain would be reportable" even if the computational adjustments are sustained. According to petitioners, the capital gains "allocated to [them] from [Promote] would increase the tax basis each [petitioner] had in its membership interest in [Promote] by the amount of the additional gain so allocated" and would generate offsetting capital losses. But petitioners have produced no documentation to substantiate these assertions.
In consideration of the foregoing, it is
ORDERED that petitioners' Motion for Summary Judgment, filed December 2, 2021, is denied. It is further
ORDERED that the parties shall file, on or before May 6, 2022, a joint status report expressing their views as to the conduct of further proceedings in these cases.