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Partnership Challenges Denial of Bad Debt Deduction in Tax Court

SEP. 10, 2019

Anaheim Arena Management LLC et al. v. Commissioner

DATED SEP. 10, 2019
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Anaheim Arena Management LLC et al. v. Commissioner

[Editor's Note:

The exhibit can be viewed in the PDF version of the document.

]

ANAHEIM ARENA MANAGEMENT, LLC, H&S INVESTMENTS I, LP, 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 June 7, 2019 (the “FPAA”) and as the basis for petitioner's case, alleges as follows:

1. Anaheim Arena Management, LLC (the “partnership”) is a domestic partnership which opted to be treated for tax purposes as a partnership and has a mailing address and principal place of business at 2101 East Coast Highway, Third Floor, Corona del Mar, CA 92625. The partnership's federal income tax return (IRS Form 1065) for the taxable year ending December 31, 2015 (“2015”) was filed with the Internal Revenue Service Center at Ogden, Utah.

2. H&S Investments I, LP is a partner of the partnership and has a mailing address of 2101 East Coast Highway, Third Floor, Corona del Mar, CA 92625. There is confusion over which partner is tax matters partner. H&S Investments I, LP 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 June 7, 2019, and was issued by the Internal Revenue Appeals Office at Laguna Niguel, California.

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

ITEM

AMOUNT

Bad Debts

$51,465,228

Accuracy-Related Penalty

*

*20% of tax attributable to the foregoing adjustments.

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 disallowing a bad debt deduction.

(b) The Commissioner erred in asserting the accuracy-related penalty.

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

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

(1) The FPAA seeks to disallow the partnership's bad debt deduction “[b]ecause there was no valid enforceable obligation to pay a fixed or determinable sum of money.”

(2) The partnership is party to a Facility Management Agreement (“FMA”) to manage an entertainment facility in Anaheim, California (the “Facility”).

(3) The FMA requires the partnership to make or cause an affiliate or a third-party lending institution to make loans, if necessary, to ensure the payment of the facility's operating expenses, debt service, and other amounts payable when cash on hand or in reserves is insufficient.

(4) The FMA parties always intended to create and maintain a debtor-creditor relationship with respect to loans made pursuant to the FMA.

(5) The partnership made the required loans to fund the costs of the Facility.

(6) The loans for the Facility are memorialized in loan documents with stated terms, including loan amount or revolving loan amount, loan date, stated interest, maturity date, and rights and obligations of the parties.

(7) The owner of the Facility has consistently treated the loans as debt on its books and records and on all City of Anaheim public documents.

(8) The partnership has also consistently treated the loans as debt on the partnership's books and records.

(9) The partnership has consistently reported interest income on the loans for book and tax purposes on the accrual basis of accounting.

(10) The loans were at all times enforceable obligations for readily ascertainable amounts as recognized by all parties.

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

(c) Accuracy-Related Penalty. No penalty under I.R.C. §6662 applies to petitioner's transactions based on the following:

(1) No negligence or disregard of rules or regulations within the meaning of I.R.C. §6662(b)(1) exists for 2015 because there is no underpayment, the partnership exercised reasonable business care in reporting all transactions, and reasonable cause exists based on reasonable reliance on professional advisors or other factors.

(2) No substantial understatement of income tax within the meaning of I.R.C. §6662(b)(2) exists for 2015 because there is no understatement, the partnership reasonably believed the tax treatment of the transactions at issue was more likely than not the proper treatment and/or there was substantial authority for that treatment, the relevant facts concerning the tax treatment of the transactions at issue were adequately disclosed, and reasonable cause exists based on reasonable reliance on professional advisors or other factors.

(3) No substantial valuation misstatement within the meaning of I.R.C. §6662(b)(3) exists for 2015 because there is no underpayment, the value or adjusted basis of property was not overstated by 200 percent or more of the correct value, and reasonable cause exists based on reasonable reliance on professional advisors or other factors.

(4) No penalty may be imposed for 2015 because the assessment of the penalty did not receive proper and timely supervisory approval.

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: September 9, 2019

STEVEN R. MATHER, T.C. No. MS 0086
smather@mttaxlawyers.com

LYDIA B. TURANCHIK, T.C. No. TL 0155
lturanchik@mttaxlawyers.com

MATHER TURANCHIK LAW CORPORATION
1801 Century Park East, Suite 1460
Los Angeles, CA 90067
(310) 278-6088

Attorneys for Petitioner

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