Partnership Challenges IRS Loss Limitations in Tax Court

SURK LLC, SYRKADIAN VENTURES LLC, A PARTNER OTHER THAN THE TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER
INTERNAL REVENUE CODE SECTION 6226

Petitioner hereby petitions for a readjustment of the partnership items set forth by the Commissioner of Internal Revenue in the Commissioner's Notice of Final Administrative Adjustment dated September 9, 2021 (the “FPAA”) and as the basis for petitioner's case, alleges as follows:

1. Surk LLC (the “partnership”) is a domestic limited liability company which opted to be treated for tax purposes as a partnership and has a mailing address and principal place of business at 2270 Cosmos Ct., Suite 120, Carlsbad, CA 92011. The partnership's federal income tax return (IRS Form 1065) for the taxable year ending December 31, 2017 (“2017”) was filed with the Internal Revenue Service Center at Ogden, Utah.

2. Syrkadian Ventures LLC is a partner of the partnership and has a mailing address of 2270 Cosmos Ct., Suite 120, Carlsbad, CA 92101. There is confusion over which partner is tax matters partner. Syrkadian Ventures LLC may be the tax matters partner but is filing this petition in its capacity as a partner other than the tax matters partner to ensure a valid petition.

3. The FPAA (a copy of which, including the material statements and schedules accompanying the notice, is attached and marked as Exhibit A) was mailed to the tax matters partner on or about September 9, 2021, and was issued by the Internal Revenue Service Office at San Jose, California.

4. The partnership item adjustments as determined by the Commissioner are in the following amounts:

ITEM	AMOUNT
Loss Limitation (Losses in Excess of Basis)	$3,097,361
Loss Limitation (At-Risk)	$1,090,590

All of the above amounts are in dispute.

5. The adjustments set forth in the FPAA are based on the following errors:

(a) The Commissioner erred in limiting losses due to basis limitations.

(b) The Commissioner erred in limiting losses due to at-risk limitations.

6. The facts upon which petitioner relies as the basis of this case are as follows:

(a) Basis. The Commissioner's determination on this issue is erroneous based on the following:

(1) As of the end of the 2017 calendar year the partnership had tax basis under Internal Revenue Code (“I.R.C”) §705.

(2) The partnership made an election under I.R.C §754 on its 2016 Form 1065, U.S. Return of Partnership Income.

(3) A distribution in the amount of $15,250,000 was made in 2016 to a partner of the partnership.

(5) The 2016 distribution was in excess of the partner's basis, thereby triggering gain at the partner level in the amount of $15,250,000.

(6) In 2016, the partnership increased the inside basis of its assets as prescribed by I.R.C §734(b) equal to the distribution in excess of basis, $15,250,000.

(7) The partnership's tax basis in the Outerknown, LLC investment was increased by the I.R.C §734(b) adjustment made in 2016.

(8) The partnership's basis in Outerknown, LLC is greater than the loss claimed in 2017.

(9) The Commissioner's adjustment for Loss Limitation (Losses in Excess of Basis) is based on adjustments to basis the Commissioner proposes for 2014 and 2015.

(10) The Commissioner's adjustment seeks to reduce otherwise allowable basis increases for 2016 and 2017 due to the proposed adjustments for 2014 and 2015.

(11) The period of limitations for issuing a timely EPAA for 2014 and 2015 has expired.

(12) The Commissioner's proposed adjustments to basis for 2014 and 2015 are barred by expiration of the period of limitations for those years.

(13) The Commissioner's determination on this issue is arbitrary and capricious and not entitled to the presumption of correctness.

(b) At-Risk. The Commissioner's determination on this issue is erroneous based on the following: 

(1) As of the end of the 2017 calendar year the partnership had tax basis under I.R.C. §705.

(2) The partnership made an election under I.R.C. §754 on its 2016 Form 1065, U.S. Return of Partnership Income.

(3) A distribution in the amount of $15,250,000 was made in 2016 to a partner of the partnership.

(5) The 2016 distribution was in excess of the partner's basis, thereby triggering gain at the partner level in the amount of $15,250,000.

(6) In 2016, the partnership increased the inside basis of its assets as prescribed by I.R.C. §734(b) equal to the distribution in excess of basis, $15,250,000.

(7) The partnership's tax basis in the Outerknown, LLC investment was increased by the I.R.C. §734(b) adjustment made in 2016.

(8) The partnership's basis increase also increased the partnership's amount At-Risk.

(9) The partnership was At-Risk for all amounts claimed by the partnership for 2017.

(10) The Commissioner's adjustment for Loss Limitation (At-Risk) does not take into account items that would increase the partnership's amount considered At-Risk.

(11) The partnership's amount At-Risk is greater than the partnership losses claimed in 2017.

(12) The Commissioner's determination on this issue is arbitrary and capricious and not entitled to the presumption of correctness.

WHEREFORE, it is prayed:

1. That the Court determine that the adjustments proposed by the Commissioner in the FPAA are incorrect; and

2. That the Court determine any other relief it deems just and proper.

Dated: January 20, 2022

STEVEN R. MATHER, T.C. No. MS 0086
MATHER | ANDERSON
1801 Century Park East, Suite 1460
Los Angeles, CA 90067
(310) 278-6088
smather@matheranderson.com

Attorney for Petitioner