Tax Court - Individual investor/purchaser of ownership interests not partner for purposes of TEFRA proceedings 

September 5: The U.S. Tax Court today issued an opinion that holds individual U.S. investors who claimed to have purchased ownership interests in holding companies as well as those who acquired beneficial interests in sub-trusts do not have the right to participate in partnership-level proceedings. Sugarloaf Fund LLC v. Commissioner, 141 T.C. No. 4 (September 5, 2013)

Read the Tax Court’s opinion [PDF 76 KB]


In 2005, a partnership (S) set up Illinois common law business trusts (Main Trust and Sub-Trust). S then transferred distressed Brazilian consumer receivables to Main Trust.

S, Main Trust, and the trustee in turn allocated the receivables to Sub-Trust.

An individual (E) transferred cash to Main Trust in exchange for the entire beneficial interest in Sub-Trust. Then E wrote off most of the value of the receivables as a bad-debt deduction under section 166, claiming a carryover basis in the receivables equal to S’s basis.

The IRS issued a notice of final partnership administrative adjustment regarding S’s 2004 and 2005 tax years, and made adjustments to S’s income on a number of theories—including that S’s basis in the receivables was zero ($0). By extension, E’s basis in the receivables (a carryover basis) would also be zero ($0).

The IRS issued to E a statutory notice of deficiency denying the bad-debt deduction. However, E did not petition the Tax Court for review of his individual income tax liability, but instead alleged that he—as the beneficiary and grantor of Sub-Trust—was a partner of S and ,as such, that he may intervene and participate as a party in the TEFRA proceeding on the grounds that Sub-Trust’s basis in the receivables is a partnership item of S.

The Tax Court concluded that E is not a direct or indirect partner in S and has no standing to participate in the TEFRA proceedings.

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