Appeal from a Decision of the United States Tax Court Tax Ct. No. 624-04
The opinion of the court was delivered by: N.R. Smith, Circuit Judge:
Argued and Submitted April 20, 2012-San Francisco, California
Before: M. Margaret McKeown and N. Randy Smith, Circuit Judges, and Roger T. Benitez, District Judge.*fn1
Opinion by Judge N.R. Smith
The Internal Revenue Service (IRS) validly issues a Notice of Deficiency ("NOD") to a partner in a partnership, when (1) no partnership-level proceeding is pending, (2) no notice of final partnership administrative adjustment ("FPAA") has been issued, and (3) the normal three-year statute of limitations in 26 U.S.C. § 6229(a)*fn2 has not expired. As such, we affirm the Tax Court's denial of Alex and Liset Meruelo's (husband and wife and hereinafter referred to as the Meruelos or the petitioners) motion to dismiss for lack of jurisdiction.
Mr. Meruelo was the sole member of Meruelo Capital Management, LLC ("MCM"). In 1999, MCM was a single-member limited liability company (LLC) and a disregarded entity*fn3 by default, because it did not file a Form 8832 (which allows an LLC to elect to be treated as a corporation for that year). As such, MCM did not (and was not required to) file a federal tax return for 1999. Instead, all of MCM's income and losses were to be reported on the Meruelos' joint tax returns. See Treas. Reg. § 301.7701-3(a), (b)(ii).
In 1999, MCM owned a 31.68 percent interest in Intervest Financial LLC ("Intervest"). Intervest had five members. The members were treated as partners for income tax purposes. Intervest was an entity subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 26 U.S.C. § 6221-34.
On October 14, 2000, Intervest filed a Form 1065, U.S. Partnership Return of Income, for the 1999 tax year. The return listed MCM as a member, but it did not indicate that MCM was a single-member LLC, a disregarded entity, or that Mr. Meruelo (rather than MCM) was actually Intervest's member for 1999 for Federal tax purposes. The return reported a $14,327,160 ordinary loss from foreign currency transactions. Intervest issued MCM a Schedule K-1, Partner's Share of Income, Credits, Deductions, etc., for 1999 reporting an ordinary loss of $4,538,844 as a passthrough item from Intervest to MCM.
The Meruelos filed a joint tax return for 1999 on October 16, 2000. The return claimed the $4,538,844 loss as a pass-through item from MCM. The return did not identify Intervest or that Intervest was the source of the loss. The return indicated that MCM was a partnership. However, it did not indicate that MCM was a single-member LLC, a disregarded entity, or that Mr. Meruelo was actually Intervest's member in 1999 for federal tax purposes.
Before the expiration of the normal three-year period of limitations*fn4 on assessing federal income tax attributable to a part-nership item (or an affected item),*fn5 see I.R.C. §§ 6229(a), 6501(a), the IRS attempted to secure an extension of the statute of limitations for the 1999 tax year from the Meruelos through the execution of a Form 872-I, entitled Consent to Extend Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. By securing the extension, the IRS would have had additional time to investigate the circumstances behind the Meruelos' claimed loss and may have been able to avoid the problems at issue here. However, the Meruelos refused to grant the extension. Therefore, the IRS issued a NOD*fn6 to the Meruelos on October 10, 2003, a few days before the three-year statute of limitations expired. The NOD indicated that the Meruelos were not entitled to the $4,538,844 loss reported and owed a deficiency of $1,581,293 in federal income tax and $632,517.20 in penalties for the 1999 tax year.
The IRS has never audited Intervest's 1999 return and has never notified Intervest that it will begin an audit. Further, the IRS has never issued a notice of ...