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.