Ninth Circuit Sustains Notice of Deficiency for Affected Items Despite No Partnership Level Proceeding (8/18/12)

In Meruelo v. Commissioner, ___ F.3d ___, 2012 U.S. App. LEXIS 17208 (9th Cir. 2012), here, the Ninth Circuit held that a notice of deficiency ("NOD") adjusting partnership affected items which is timely by reference to the individual taxpayer's statute of limitations is proper despite there having been no partnership level TEFRA audit.  The setting and resolution of the case permit me to address an issue I made earlier that, under the Allen holding (which I think is wrongly decided), fraud on the return can keep the statute of limitations for a taxpayer who does not commit the fraud.  In Allen, the fraud of the return preparer was involved, but the sweep of the holding is not limited to the return preparer but to anyone materially involved in a chain of events that support a fraudulent position reported on the taxpayer's return.  I noted particularly that fraud with respect to the abusive tax shelters that ran rampant in the late 1990s and early 2000s and led to criminal prosecution of the enablers should be a potential application of the Allen holding.  See Does the Preparer's Fraud Invoke the Unlimited Statute of Limitations? (8/5/12), here.  This type of fraudulent shelter may have been involved in Meruelo.

In Meruelo, the partnership in question (Intervest) did a foreign currency transaction, probably of a Son-of-Boss variety.  The transaction may have been fraudulent, although that issue was not resolved in Meruelo.  Rather than TEFRA audit the partnership, however, the IRS sent the taxpayers (husband and wife) a NOD disallowing the partner's losses claimed indirectly from the partnership.  (Actually the partner in the tax shelter partnership (Intervest) was a disregarded sole member LLC owned by the taxpayer; I ignore the intervening disregarded entity because, well, for tax purposes it is disregarded.)  The NOD was timely under the taxpayers' statute of limitations.

Although it is clear that, had there been a timely TEFRA audit of the partnership, the IRS could have relied upon TEFRA's statute of limitations period to make a timely assessment of partnership items and partnership affected items, there was in fact no TEFRA audit.  Now, I have just used some TEFRA jargon that I am going to have to explain in order to move.  The following is a good summary from CC-2009-011 "Protective Assessments of Affected Items in TEFRA Partnership Cases, (March 11, 2009),  here.