JT USA v. CIR

The meaning of 26 U.S.C. § 622(e)(3)(B) is clear and unambiguous, and states that a unless a partner elects to have all of their partnership items treated as non-partnership items, the partner may not elect out of a proceeding under the Tax Equity & Fiscal Responsibility Act.

The Commissioner of Internal Revenue (“the Commissioner”) denied a $32.5 million “loss” claimed by a partnership resulting in a $28 million capital gain. The Tax Court held that a taxpayer holding direct and indirect interests in a partnership may elect under 26 U.S.C. § 622(e)(3)(B) not to be bound by the results of a partnership proceeding or partnership audit. The Commissioner subsequently appealed from the Tax Court’s conclusion that taxpayers could opt out of a partnership administrative proceeding under the Tax Equity & Fiscal Responsibility Act. The Ninth Circuit noted that the section of the statute is clear as the Commissioner argues, that unless a partner elects to have all of their partnership items treated as non-partnership items, then the partner may not elect out of the proceeding. The panel went on to call this an “all or nothing rule.” They analyzed that the absence of other language in the statute provides strong affirmative evidence that Congress did not intend it to be construed or implemented as the taxpayers wish. This result is consistent with the legislative history. REMANDED.