Partner allowed to make different elections for different partnership interests.

• Author: Beavers, James

The Tax Court held that taxpayers owning multiple interests in the same partnership were entitled to make different elections under Sec. 6223 for each interest.

Background

John and Rita Gregory were pharmacists living near San Diego. John, an off-road motorcycle enthusiast, started selling motorcycle socks at a local dirt track. The business was a success, which led the Gregorys to form a limited partnership, JT USA LP, to conduct the business. Later the Gregorys expanded the business into the sale of paintball accessories just as that sport took off. The Gregorys were so successful selling paintball accessories that in 2000 a paintball manufacturer offered to buy JT USA for $32 million.

At the time of the sale, the Gregorys owned both direct and indirect (through an LLC and an S corporation) partnership interests in JT USA. The sale was structured as what the IRS alleged was a "Son of Boss" transaction. In October 2004, the Service challenged the sale transaction in an audit under the Tax Equity and Fiscal Responsibility Act of 1982, P.L. 97-248 (TEFRA). In response to the IRS's letter informing them of its challenge, the Gregorys attempted to make an election under Sec. 6223(e)(2) for their indirect interests--but not their direct interests--to have the relevant partnership items of JT USA treated as nonpartnership items (i.e., they attempted to opt out of the TEFRA proceedings with respect to the indirect interests).

In March 2005, the Gregorys filed a petition with the Tax Court, and in November 2006 they moved to strike themselves as indirect partners from the case because they had opted out of the proceedings through the elections they made in 2004. The IRS objected to the Gregorys' request, arguing that their elections to opt out of the proceedings were ineffective because they did not elect to opt out with respect to all the interests they each held in JT USA.

The Parties' Arguments

Sec. 6223(e)(3) states, "The partner shall be a party to the proceeding unless such partner elects ... to have the partnership items of the partner for the partnership taxable year to which the proceeding relates treated as nonpartnership items." According to the Service, the word "partner" in Sec. 6223 refers to the person holding any such interest, not to that person in his or her capacity as holder of a particular partnership interest. The IRS argued that the Gregorys were trying to simultaneously opt in and opt out and that such a self-contradictory...