Opinion
12891-21
04-03-2024
SUKUP BUILDING, LLC, EMILY L. SCHMITT, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch, Judge
Pending before the Court is the Commissioner's Motion to Dismiss for Lack of Jurisdiction filed January 19, 2022.
Sukup Building LLC (sometimes "Building" or "the partnership") has two partners that are passthrough entities. Emily Schmitt owns an interest in, and is the manager of, one of those passthrough partners. Building designated Ms. Schmitt as its tax matters partner (TMP), and she took various actions in that capacity, including filing the Petition in this case. The Commissioner asks that we dismiss this case for lack of jurisdiction arguing that Ms. Schmitt cannot be the TMP and thus is not statutorily authorized to file a petition in that capacity. But as we have previously held, an indirect partner may serve as a TMP. Because Ms. Schmitt could properly be designated as TMP, we will deny the Commissioner's Motion.
BACKGROUND
Sukup Building LLC is a limited liability company organized under Iowa law in 2012. The Operating Agreement identified two equal members, SKS Family LLC (SKS) and Charles and Mary Beth Sukup Family LLC (CMB). The partnership is "manager-managed" as distinguished from "member managed." See generally, Iowa Code § 489.407. In 2014, Emily Schmitt, the petitioner in this case, was appointed as one of the managers of Building.
SKS is also a limited liability company organized under Iowa law in 2012. At the time of its formation, SKS had five owners of varying interests. Ms. Schmitt is one of the owners. Under the terms of the operating agreement, SKS is also manager-managed. The operating agreement identifies Ms. Schmitt as the manager.
Like the other two entities, CMB is a limited liability company organized under Iowa law. At the time of its formation, it had three equal owners. And like the other two entities, CMB is manager -managed.
Building filed Forms 1065, U.S. Return of Partnership Income, for 2015, 2016, and 2017, the years in issue. Those returns showed the same owners and ownership percentages as stated on the Operating Agreement. Under the heading "Designation of Tax Matters Partner," each of those returns designated Ms. Schmitt as TMP.
For each of the years in issue, Ms. Schmitt filed "protective" Forms 1065, Administrative Adjustment Requests, (protective AARs) for Building. For 2015, the protective AAR was signed by Ms. Schmitt, and she listed her title as "Managing Member." For 2016, she filed a protective AAR that she later amended. Both were signed by Ms. Schmitt, one as "Managing Member" and the other as "Member Manager." For 2017, she filed a protective AAR that she signed as "Member Manager." The stated rationale for each of the protective AARs was the same. According to the protective AARs, the Commissioner had issued examination reports to Sukup Manufacturing Company disallowing rental expenses. Building had included these rental payments in its calculation of income and allocated that income to its members. If the deduction is disallowed to Sukup Manufacturing, Building takes the position its members should be entitled to refunds of taxes they paid on the rental income.
A deficiency case involving Sukup Manufacturing Company is pending before the Court at docket no. 4796-22. The Petition in that case alleges that the Commissioner erroneously disallowed rent expense for tax years ended June 30, 2016 through 2018.
The Commissioner took no action with respect to the protective AARs.
It is unsurprising that the Commissioner took no action. Generally, a "protective" claim is one that is submitted to preserve one's right (for example) to file suit at a later date. By labeling a claim as "protective" the taxpayer is implicitly asking the Commissioner not to take action. This may be important in the case of a claim for refund, where the Commissioner's disallowance of a claim will begin the running of a two-year period within which to bring suit. If the Commissioner takes no action (as requested), that two-year period does not begin to run. But there is no equivalent benefit in the TEFRA context. In contrast to the rules governing refunds suits, the administrative adjustment request rules do not accommodate protective claims. The two-year period within which to bring suit commences with the filing of and administrative adjustment request irrespective of whether the Commissioner disallows the claim. I.R.C. § 6227(b)(2).
On April 15, 2021, petitioner, through counsel, mailed a petition to the Court, and the Court received and filed the petition. The petition alleges that Ms. Schmitt is the tax matters partner of the partnership. The petition further alleges that the Commissioner has asserted that Sukup Manufacturing owns the property on which it made rental payments, and that the Commissioner has disallowed the rent deductions. The petition argues that, if the Commissioner's disallowance of Sukup Manufacturing's rent deductions is upheld, then the partnership's income should be reduced in a corresponding amount.
The Commissioner filed a Motion to Dismiss for Lack of Jurisdiction. In his Motion, the Commissioner argues that Ms. Schmitt is not, and cannot be, the TMP of Building. He argues that the partnership could not designate Ms. Schmitt as its TMP when its returns were filed because she was ineligible to serve in that capacity. He argues that the AARs filed by Ms. Schmitt could not have been filed by the TMP because she was ineligible to serve in that capacity. And he argues that we lack jurisdiction over this case because Ms. Schmitt could not file a petition as TMP because she is ineligible to serve in that capacity.
In February 2022, after the Commissioner filed his Motion to Dismiss for Lack of Jurisdiction, the managers of SKS and CMB provided the Commissioner with a statement ratifying the actions of Ms. Schmitt.
DISCUSSION
The question before us is whether Ms. Schmitt was eligible to serve as the TMP of Building. If she was not eligible, the Commissioner argues that we would lack jurisdiction over this case. Consistent with our existing precedent, we conclude that she was eligible to serve as TMP, that she was in fact TMP, that she was the proper person to submit the protective AAR, that she was the proper person to file the petition, and that we have jurisdiction. We will deny the Commissioner's motion.
I. The Role of Tax Matters Partner
We have previously described the TMP as being "the central figure of partnership proceedings" and "of critical importance to the proper functioning of the partnership audit and litigation procedures." Computer Programs Lambda, Ltd. v. Commissioner, 89 T.C. 198, 204-05 (1987). The TMP "serves as the focal point for service of all notices, documents and orders on the partnership." Computer Programs Lambda, 89 T.C. at 205. As is relevant here, the TMP "is the only partner who may file a petition for judicial review if an administrative adjustment is not allowed in full." Id., citing I.R.C. § 6228. In fulfilling these duties, a TMP "acts as a fiduciary" and the role "is plainly designed to affect the rights of all partners in the partnership." Computer Programs Lambda, 89 T.C. at 205-06.
Given the importance of the role of the TMP, and specifically its role as fiduciary, we undertake to give effect to the partners' intent in making a designation so long as it is within the bounds of the applicable law.
II. Designating A Tax Matters Partner
Who may serve as a TMP is governed by various rules including not only the TMP rules, but also the rules defining who is considered to be a partner. We take those rules in turn.
A. Manner of Designation
Generally, the TMP is the general partner who is designated as such in the manner prescribed in the applicable regulations. I.R.C. § 6231(a)(7)(A). If no one is properly designated, then by statute, the TMP is the general partner with the largest profits interest at the close of the taxable year. I.R.C. § 6231(a)(7)(B). If two or more partners are tied with the largest profits interest, then the TMP is the first alphabetically. Id. The regulations clarify that someone can be designated as TMP if that person was either a general partner at any time during the taxable year or at the time the designation was made. Treas. Reg. § 301.6231(a)(7)-1(b).
As for the manner of making a designation, the regulations provide various ways for a TMP to be designated. Perhaps the most common method is for the designation to be made for a particular tax year on the partnership return for that year. Treas. Reg. § 301.6231(a)(7)-1(c). Another method potentially relevant here is that the partnership may provide the Commissioner with a statement designating a TMP if that statement is signed by general partners who own a majority of the general partner interests. Treas. Reg. § 301.6231(a)(7)-1(e).
B. Who May Be Designated
Although the statute is clear that a partnership may designate a general partner as its TMP, defining who is a general partner requires that we dig further into the TEFRA rules.
1. Limited Liability Companies
The TEFRA rules govern the tax treatment of entities that are treated as partnerships for tax purposes. I.R.C. § 6221. This includes limited liability companies that are treated as partnerships for tax purposes. But limited liability companies do not have general partners. To address this, the Commissioner promulgated regulations to specify how to apply the TMP rules to limited liability companies.
When determining who is eligible to be designated as TMP, the regulations create special rules for limited liability companies. If a limited liability company has a member-manager, then the member-manager is treated as a general partner for TMP designation purposes. Treas. Reg. § 301.6231(a)(7)-2(a). But if a limited liability company does not have a member-manager, then all members are treated as general partners. Treas. Reg. § 301.6231(a)(7)-2(b)(3).
2. Indirect Partners
In considering who may be considered a general partner, we must also look to who may be considered a partner. TEFRA's definition of partner is broader than merely who is a partner in a partnership (or a member in an LLC) in the conventional, state law sense. I.R.C. § 6231(a)(2)(A). In addition to state-law partners, the definition includes "any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership." I.R.C. § 6231(a)(2). This would invariably include any indirect partner, i.e., a person who holds an interest in a partnership through another passthrough entity. I.R.C. § 6231(a)(10).
We previously addressed the question of whether an indirect partner could be selected as TMP. In PAE Enter. v. Commissioner, T.C. Memo. 1988-222, we were called upon to address whether the Commissioner could select a particular individual as TMP. That individual was an indirect partner. Although we ultimately concluded on the facts of that case that the Commissioner had not selected the individual, in reaching that conclusion we stated that an indirect partner could have been selected. Although perhaps dicta, the rationale remains sound; because indirect partners are treated as partners for TEFRA purposes, it follows that they may be treated as partners for purposes of designating or selecting a TMP.
III. Application to Sukup Building LLC
Applying the foregoing rules leads to the conclusion that Emily Schmitt is the TMP for each of the years in issue.
Ms. Schmitt was properly designated as TMP of Building. She is eligible to serve as TMP by virtue of being an indirect partner. Ms. Schmitt owns an interest in SKS, which in turn owns an interest in Building. Through her indirect ownership, Ms. Schmitt is deemed to be a partner of Building. And because Building is a limited liability company that does not have a member manager, all members are deemed to be general partners. Thus, Ms. Schmitt is deemed to be a general partner and is eligible to serve as TMP. And Ms. Schmitt was properly designated as the TMP on the Forms 1065 for each of the years in issue.
We note that, even apart from her eligibility as an indirect partner, Ms. Schmitt could have acted for Building in her capacity as TMP of SKS if it had expressly been designated as TMP. SKS could have been designated as TMP of Building. But SKS cannot put pen to an administrative adjustment request; it must act through an individual. And under both state-law and TEFRA, Ms. Schmitt is the individual authorized to act for SKS. Ms. Schmitt has the authority to act for SKS under state law. The operating agreement states that SKS is manager-managed, not member-managed. And the operating agreement identifies Emily Schmitt as a manger. Under state law, the manager of a manager-managed limited liability company has the authority to decide exclusively any matter relating to the activities of the company. Iowa Code § 489.407(3)(a). Thus, Ms. Schmitt can act for SKS. If we look to the TEFRA rules, Ms. Schmitt likewise has the authority to act for SKS. Ms. Schmitt is a member SKS who happens to also be the manger, thus she might be regarded as a member-manager for TEFRA purposes. If she were so regarded, then she would be deemed to be a general partner for purposes of Treas. Reg. § 301.6231(a)(7)-2(a). As such, she could act for the entity. If we regard SKS as not having a member manager, then all members are treated as general partners for TMP purposes, and again Ms. Schmitt could act on behalf of SKS. The Commissioner's own Internal Revenue Manual provides an example of looking through passthrough entities to find the individual authorized to sign a document, such as an extension of the period of limitations. It provides the following example,
[Partnership] B is the TMP for [Partnership] A. Ocean Trust is the TMP for [Partnership] B. Mr. Sandy is the Trustee for Ocean Trust. The Signature should read as follows: Ocean Trust, as Tax Matters Partner of Partnership B, As Tax Matters Partner of Partnership A, By Mr. Sandy, Trustee.IRM 4.31.2-5 (June 20, 2013). If we merely substitute entity names, it is clear that Ms. Schmitt would have similar signature authority:
Emily Schmitt as Tax Matters Partner of SKS Family LLC, as Tax Matters Partner of Sukup Building LLC.We offer this example merely to observe that Ms. Schmitt was eligible to act as TMP whether in her capacity as an indirect partner or through her role as TMP of an entity that was eligible to serve as TMP of Building.
IV. Authority of the TMP
Having concluded that Ms. Schmitt was properly designated as the TMP, it is clear that she had the authority to take all of the actions the Commissioner calls into question. A TMP is authorized to make an administrative adjustment request on behalf of the partnership. I.R.C. § 6227(c). If an administrative adjustment request is not allowed, a TMP may file a petition with the Tax Court. I.R.C. § 6228(a)(1). And the TMP having filed that petition, all partners are treated as parties to that case. I.R.C. § 6228(a)(4)(A).
Conclusion
Sukup Building LLC properly designated Emily Schmitt as its tax matters partner. Accordingly, it is
ORDERED that the Commissioner's Motion to Dismiss for Lack of Jurisdiction filed January 19, 2022, is denied.