Martin 1999 Irrevocable Trust v. United States

Economic losses generated by transactions that flow through partnerships permit the IRS to apply Final Partnership Administrative Adjustments (FPAA) relating to one partnership to all partnerships whose transactions are directly related to the initial FPAA.

Consuelo Martin and her five children ("the Martin family") took over ownership of the Chronicle Publishing Company following the death of her grandfather, the previous owner. Ownership was divided among fourteen different trusts. Beginning with the decision to sell the Chronicle, the Martin family formed a number of partnerships to minimize the amount of tax liabilities that they would experience with the sale of the Chronicle Publishing Company. The Martin family organized three levels of partnerships, a principal partnership, First Ship LLC, and other partnerships (Fourth Ship, LMGA, and 2000-A) that acted as partners of the principal partnership. During the year of the sale option contracts were purchased by one partnership, roughly equaling the sale proceeds, and transferred to another partnership as losses. The net effect is that the losses of one partnership offset the gains so much so that the Martin family did not pay any tax in their 2000 tax-year filings after the sale of the Chronicle. In 2008 The IRS issued a Final Partnership Administrative Adjustment (FPAA) to 2000-A disregarding all of the 2000 tax-year transactions, labeling the partnership a sham, and finding it lacked “economic substance.” As a result the capital losses reported by the First Ship Trust on its 2000 tax-year returns were eliminated. Members of the Martin family challenged the FPAA as time-barred by the restrictive language used in the initial FPAA. The district court held that the FPAA was not time barred because the adjustments made to 2000-A directly flowed through the First Ship partnership, and that all of the partnerships were put on notice that the extension period for assessing tax applied beyond the regular three year review period. The Ninth Circuit limited the 2000-A FPAA to adjustments only directly attributable to First Ship. AFFIRMED in part REVERSED in part.