Partnership Challenges Net Earnings Adjustments in Tax Court

SIRIUS SOLUTIONS, L.L.L.P., SIRIUS SOLUTIONS GP, L.L.C., ТАХ MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES ТАХ COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226

Petitioner hereby petitions for readjustment of partnership items set forth by the Commissioner of Internal Revenue (the “Commissioner”) in the Commissioner's TMP Notices of Final Partnership Administrative Adjustment dated June 21, 2021, relating to the tax years ended December 31, 2015 (the “2015 FPAA”) and December 31, 2016 (the “2016 FPAA”, or collectively, the “FPAAs”), and as the basis of this case alleges as follows:

1. Petitioner is Sirius Solutions GP, L.L.C. (“Sirius GP”), a limited liability company formed under the laws of the State of Delaware.

2. Sirius GP is the tax matters partner, as defined in section 6231(a)(7) of the Internal Revenue Code of 1986, as amended (the “Code”), of Sirius Solutions, L.L.L.P. (the “Partnership”).

3. The name and address of Petitioner are:

4. The Partnership is a limited liability limited partnership (“LLLP”) formed under the laws of the State of Delaware.

5. The name and principal place of business of the Partnership at the time of filing the petition are:

6. This Court has jurisdiction over this Petition under Code section 6226(a).

7. The Partnership's Form 1065, U.S. Return of Partnership Income, for the 2015 and 2016 taxable years, the periods in controversy, were timely filed with the Internal Revenue Service Center in Ogden. Utah.

8. The Appeals Office of the Internal Revenue Service located in Laguna Niguel, California issued the 2015 FPAA, a copy of which (with appropriate redactions) is attached hereto and marked as Exhibit A, to Petitioner for the Partnership's 2015 tax уеаr.

9. The 2015 FPAA is in error by increasing the Partnership's net earnings from self-employment by $7,372,756.

10. The Appeals Office of the Internal Revenue Service located in Laguna Niguel, California issued the 2016 FPAA, a copy of which (with appropriate redactions) is attached hereto and marked as Exhibit B, to Petitioner for the Partnership's 2016 tax уеаr.¹

11. The 2016 FPAA is in error by decreasing the Partnership's net earnings from self-employment by $490,291.

12. The Commissioner erred in determining that the Partnership's “individual partners are not 'limited partners' within the meaning of Code section 1402(a)(13). and thus their distributive shares of the partnership's ordinary business income or loss are not excluded from their net earnings or loss from self-employment.”

13. The facts on which Petitioner relies for the assignment of the Commissioner's errors are as follows:

a. The Partnership was organized as a Delaware LLLP in 2002, and its 2015 and 2016 limited partners were “limited partners” under Delaware law.

b. The Partnership is an independent business consulting firm specializing in the areas of financial operations, human capital, technology, litigation and disputes, regulatory and compliance, supply chain, innovation, and transaction services.

c. The Third Amended and Restated Limited Partnership Agreement of the Partnership effective as of August 1, 2015 governs the Partnership for the 2015 and 2016 tax years and sets forth the respective rights and duties of the partners.

d. Throughout 2015 and 2016, the Partnership was owned by five individual limited partners and Sirius GP, which was owned by the Partnership's five individual limited partners.

e. Throughout 2015 and 2016, management and control of the Partnership and its business rested exclusively with Sirius GP, which acted exclusively through a Board of Directors.

f. In 2015, the Partnership made distributions of "Net Cash Flow" to all limited partners pro rata. In 2016, the Partnership made pro rata distributions to limited partners in accordance with their draw amounts as determined by Sirius GP's Board of Directors in accordance with the Partnership's annual plan.

g. Limited partner distributions were subject to business risk and were irregular in 2015 and 2016.

h. The Partnership did not tie limited partner distributions to hours worked, revenues generated, or аnу other formula tied to services in 2015 and 2016. 

i. Limited partners who performed no services or reduced services for the Partnership received the same pro rata distributions as other limited partners.

j. In 2015, the Partnership allocated all items of ordinary business income, gain, loss and deduction among the limited partners pro rata. In 2016, the Partnership allocated all items of ordinary business income, gain. loss and deduction among the limited partners based upon distributions received except for Chickering who was allocated all remaining income or loss. Section 743(b) allocations were separately stated and based on ownership percentages.

k. The Partnership made no guaranteed payments to the limited partners in 2015 and 2016 because none of the Partnership's 2015 and 2016 distributions were determined without regard to the Partnership's income.

l. All of the limited partners made significant capital contributions that were at risk in the Partnership's business in 2015 and 2016.

m. Some of the Partnership's 2015 and 2016 income was attributable to intellectual рrореrtу provided to clients and was not attributable to services.

n. Because the Partnership's limited partners are “limited partners” for purposes of Code section 1402(a)(13) and did not receive guaranteed payments, the Partnership properly excluded its limited partners' 2015 and 2016 distributive shares of business income from net earnings or loss from self-employment.

WHEREFORE, Petitioner respectfully prays that the Court determine that no adjustment should be made to the Partnership's net earnings or loss from self-employment as reported on its 2015 and 2016 tax returns and grant such other and further relief as the Court may deem just and proper.

Respectfully submitted.

Маrу A. McNulty
Practitioner Code MM0774
Telephone: 214.969.1187
Facsimile: 214.880.3182
Mary.McNulty@hklaw.com

Lee Meyercord
Practitioner Code ML0536
Telephone: 214.969.1315
Facsimile: 214.999.1590
Lee.Meyercord@hklaw.com

COUNSEL TO PETITIONER

HOLLAND & KNIGHT LLP
1722 Routh Street, Suite 1500
Dallas, Texas 75201

DATED: September 17, 2021