Partnership Challenges Validity, Timeliness of FPAA

Vaporwave, LLC, Hypershop, LLC, Tax Matters Partner,
Petitioner
v.
Commissioner of Internal Revenue
Respondent

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS UNDER CODE SECTION 6226

Vaporwave, LLC, (the “Petitioner”) hereby petitions for a readjustment of the partnership items set forth by the Commissioner of Internal Revenue (the “Respondent”) in its Notice of Final Partnership Administrative Adjustment dated August 25, 2021 (the “FPAA”) related to the tax year ending December 31, 2015 with respect to Vaporwave, LLC, (the “Partnership”) and as a basis for its case alleges as follows:

1. The Petitioner is a limited liability company organized pursuant to the laws of the State of North Carolina and is located at 500 Archdale Avenue, Charlotte, NC 28217-4217.

2. The FPAA and this Petition relate to the Partnership, a limited liability company organized pursuant to the laws of the State of Delaware, located at 500 Archdale Avenue, Charlotte, NC 28217-4217, and treated as a partnership for Federal tax purposes.

3. The Respondent issued the FPAA with respect to the Partnership's taxable year ending December 31, 2015.

4. The Partnership timely filed its Form 1065, U.S. Return of Partnership Income, for the tax year ending December 31, 2015 (the “Tax Return”), on extension, effective September 15, 2017 with the Internal Revenue Service (the “IRS”).

5. The Petitioner is the Tax Matters Partner of the Partnership, as it owned 95% of the membership interests in the Partnership at all times at issue in this Petition and was therefore the general partner which owned the largest profits interest in the Partnership at the end of the Partnership's 2015 tax year.

6. The postmark on the envelope containing the FPAA mailed to the Petitioner indicates that the FPAA, which is dated August 25, 2021, was mailed to the Petitioner on August 25, 2021, and was issued by the Office of the IRS located at 2 Metrotech Center, Brooklyn, New York 11201. A redacted copy of the FPAA is attached as Exhibit A to this Petition.

AFFIRMATIVE DEFENSE

Expiration of the Statute of Limitations. Pursuant to Rule 39 of the Tax Court Rules of Practice and Procedure, the Respondent is not entitled to adjust the partnership items set forth in the FPAA for the reason that the Respondent issued the FPAA after the time allowed for issuing a valid FPAA in violation of the applicable statute of limitations set forth in Internal Revenue Code sections 6501 and/or 6229.

1. The Partnership, timely filed the Tax Return, on extension, effective September 15, 2016.

2. Absent any agreement by the Partnership and the Respondent to extend the statute of limitations on assessment, the statute of limitations on assessment with respect to any Federal income tax attributable to the Partnership's partnership items expired September 15, 2019.

3. On February 8, 2019, the Partnership executed an IRS Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, extending the time for the Respondent to assess any Federal income tax attributable to the Partnership's partnership items from September 15, 2019 until December 31, 2020 (the “First Form 872-P”).

4. The First Form 872-P identified “Raymond S. Coffman,” as the Manager of the Petitioner, the Partnership's Tax Matters Partner.

5. Since Mr. Coffman executed the First Form 872-P as the Manager of the Petitioner, the Partnership's Tax Matters Partner, the First Form 872-P validly extended the time for the Respondent to assess any Federal income tax attributable to the Partnership's partnership items from September 15, 2019 until December 31, 2020.

6. Thereafter, on October 21, 2019, the Partnership purportedly executed another IRS Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, purportedly extending the time for the Respondent to assess any Federal income tax attributable to the Partnership's partnership items until December 31, 2021 (the “Second Form 872-P”).

7. The Second Form 872-P identified “Raymond S. Coffman,” an individual, and not the Petitioner, as the Tax Matters Partner of the Partnership.

8. Mr. Coffman had no ownership interest of any type in the Partnership.

9. The Petitioner owned 95% of the membership interests in the Partnership at all times at issue in this Petition and Electromus, LLC, owned the remaining 5% of the membership interests in the Partnership at all times at issue in this Petition.

10. As Mr. Coffman, an individual, held no ownership interest of any type in the Partnership, the Partnership could not properly designate Mr. Coffman as the Tax Matters Partner of the Partnership.

11. Therefore, Mr. Coffman was not the Tax Matters Partner of the Partnership.

12. The Petitioner, which owned 95% of the membership interests in the Partnership at all times at issue in this Petition, was the general partner which owned the largest profits interest in the Partnership at the end of the Partnership's 2015 tax year.

13. Therefore, the Petitioner was the Tax Matters Partner of the Partnership.

14. The First Form 872-P and the FPAA explicitly identify the Petitioner as the Tax Matters Partner of the Partnership.

15. The Petitioner did not sign the Second Form 872-P.

16. None of the Petitioner, the Partnership, or the Respondent attached to the Second Form 872-P written authorization from the Partnership consenting to Mr. Coffman executing the Second Form 872-P, and no such written authorization exists which, as required by Treasury Regulation 301.6229(b)-1:

a. States that it is an authorization for Mr. Coffman, a person other than the Tax Matters Partner, to extend the assessment period with respect to all the partners;

b. Identifies the Partnership and Mr. Coffman by name, address, and telephone number;

c. Specifies the partnership tax year of 2016 for which the authorization is effective; and

d. Is signed by the Petitioner, Electromus, LLC, and/or any member managers at any time during 2015.

17. As a result, the Second Form 872-P did not validly and/or effectively extend the time for the Respondent to assess any Federal income tax attributable to the Partnership's partnership items from December 31, 2020 until December 31, 2021.

18. Therefore, the statute of limitations on assessment with respect to any Federal income tax attributable to the Partnership's partnership items expired December 31, 2020.

19. Since the Respondent did not issue the FPAA until August 25, 2021, the Respondent issued the FPAA after the time allowed for issuing a valid FPAA.

ADDITIONAL DEFENSE

1. The errors committed by the Respondent in the FPAA are as follows:

a. The Respondent erred in determining that the Partnership was not entitled to an expense deduction in the amount of $220,148.00 with respect to salaries and wages on the grounds that such expenses were not (1) ordinary and necessary business expenses and (2) incurred and paid in the year claimed.

b. The Respondent erred in determining that the Partnership was not entitled to an expense deduction in the amount of $4,773.00 with respect to repairs and maintenance on the grounds that such expenses were not (1) ordinary and necessary business expenses and (2) incurred and paid in the year claimed.

c. The Respondent erred in determining that the Partnership was not entitled to an expense deduction in the amount of $15,119.00 with respect to rent on the grounds that such expense was not (1) ordinary and necessary business expenses and (2) incurred and paid in the year claimed.

d. The Respondent erred in determining that the Partnership was not entitled to an expense deduction in the amount of $17,172.00 with respect to taxes and licenses on the grounds that such expense was not (1) ordinary and necessary business expenses and (2) incurred and paid in the year claimed.

e. The Respondent erred in determining that the Partnership was not entitled to a deduction in the amount of $4,490.00 with respect to depreciation on the grounds that such depreciation was not (1) ordinary and necessary business expenses and (2) incurred and paid in the year claimed.

f. The Respondent erred in determining that the Partnership was not entitled to an expense deduction in the amount of $1,650,702.00 with respect to other unidentified expenses on the grounds that such unidentified expenses were not (1) ordinary and necessary business expenses and (2) incurred and paid in the year claimed.

2. The facts upon which Petitioner relies as the basis of Petitioner's case are as follows:

a. During the taxable year ended December 31, 2015, the Partnership incurred and paid ordinary and necessary business expenses with respect to salaries and wages in the amount of $220,148.00, as shown on the Tax Return.

b. During the taxable year ended December 31, 2015, the Partnership incurred and paid ordinary and necessary business expenses with respect to repairs and maintenance in the amount of $4,773.00, as shown on the Tax Return.

c. During the taxable year ended December 31, 2015, the Partnership incurred and paid ordinary and necessary business expenses with respect to rent in the amount of $15,119.00, as shown on the Tax Return.

d. During the taxable year ended December 31, 2015, the Partnership incurred and paid ordinary and necessary business expenses with respect to taxes and licenses in the amount of $17,172.00, as shown on the Tax Return.

e. During the taxable year ended December 31, 2015, the Partnership incurred and paid ordinary and necessary business expenses with respect to depreciation in the amount of $4,490.00, as shown on the Tax Return.

f. During the taxable year ended December 31, 2015, the Partnership incurred and paid ordinary and necessary business expenses with respect to other expenses in the amount of $1,650,702.00, as shown on the Tax Return.

WHEREFORE, the Petitioner prays that this Court:

1. Determine that the Respondent is not entitled to adjust the partnership items set forth in the FPAA for the reason that the Respondent issued the FPAA after the time allowed for issuing a valid FPAA in violation of the applicable statute of limitations;

2. In the alternative, determine that the Respondent should not have adjusted the Partnership's Tax Return as set forth in the FPAA; and

3. Grant such other and further relief to which the Partnership may be entitled.

Respectfully submitted,

Brian C. Bernhardt
Tax Court Bar No. BB0450
Counsel for Petitioner
Forrest Firm, P.C.
521 E. Morehead Street, Suite 405
Charlotte, NC 28202
(704)833-8181

Dated: This the 10th day of November, 2021.