Partnerships Seek Review of Penalty, Jurisdictional Issues in Partnership Proceedings

2. Whether a court has jurisdiction in a partnership-level proceeding under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") (i.e., 26 U.S.C. §§ 6221-6233) to determine whether a partner's transfer of his or her partnership interest was a sham, based on the possibility that the trial court might make findings not urged by either party but that would support the court's jurisdiction.

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a. The Internal Revenue Service (the "IRS") issued a notice of final partnership administrative adjustment ("FPAA") to Group making adjustments to how Group reported various items on the tax return that it filed for its taxable year ended December 31, 2001. The main adjustment was to decrease the basis that Group had claimed in stock of Constellation Brands, Inc., that Group had sold during 2001. This resulted in Group recognizing substantial capital gains instead of the capital losses that it had originally reported. The IRS also asserted various accuracy-related penalties in the FPAA, including both the substantial and gross valuation misstatement penalties. Group contested the adjustments in the United States Court of Federal Claims (the "CFC").

b. The IRS also issued FPAAs to Alpha, Beta, Partners, CWC, Mickey, and M, L, R & R. Those FPAAs made adjustments to the tax returns filed by those partnerships for 2001 and, in some cases, 2002, that were a consequence of, or similar to, the adjustments made in the Group FPAA.² Each of these partnerships also contested the adjustments in the CFC, and all of the cases, including the case that Group had filed, were consolidated. These partnerships are referred to herein as the "Partnerships."

c. In a motion filed on April 11, 2008, the Partnerships requested leave to amend their complaints to concede the capital gains adjustments on the ground that they were not sufficiently "at risk" under 26 U.S.C. § 465(b)(1) to claim the losses at issue. The Partnerships explained in their motion that the concession should make the valuation misstatement penalties inapplicable to them. The government accepted the Partnerships' concessions but disputed that the concessions had the effect of making the valuation misstatement penalties inapplicable. The CFC granted the Partnerships' motion to amend on May 14, 2008, in "the interests of judicial economy and efficiency." (App., infra, 47a.)

d. The Partnerships then filed a motion for partial summary judgment asserting that the valuation misstatement penalties could not apply given their concessions.

e. The CFC granted the Partnerships' motion. Alpha I, L.P. v. United States, 84 Fed. Cl. 622 (2008) (App, infra, 97a.) The CFC determined that the "concession obviate [d] the need to conduct a trial on valuation issues and therefore achieve [d] the very efficiencies and economies that the [valuation misstatement] penalties sought to encourage." (App., infra, 124a.) In so holding, the CFC agreed with the Tax Court, the Fifth Circuit, and the Ninth Circuit, all of which had declined to make "valuation determinations for the sole purpose of imposing penalties." (Id.) (discussing, among other cases, Weiner v. United States, 389 F.3d 152 (5th Cir. 2004), Gainer v. Commissioner, 893 F.2d 225 (9th Cir. 1990), Todd v. Commissioner, 862 F.2d 540 (5th Cir. 1988), McCrary v. Commissioner, 92 T.C. 827 (1989)). The CFC therefore declined the government's invitation to hold a trial for purposes of determining whether the adjustments could also be "attributable to" a valuation misstatement. "To go behind the concession and attempt to assign to it a specific ground would be to engage in an activity that the elimination of penalties is intended to prevent." (App., infra, 161a.)

f. The United States filed a motion for reconsideration that the CFC denied on March 16, 2009. Alpha I, L.P., 86 Fed. Cl. 568 (2009) (App., infra, 154a).

g. The United States Court of Appeals for the Federal Circuit reversed the decision of the CFC. Alpha I, L.P. v. United States, 682 F.3d 1009 (Fed. Cir. 2012) (App, infra, 1a). The Federal Circuit rejected the legal analyses applied by the Fifth Circuit in Todd and the Ninth Circuit in Gainer, and erroneously held that the CFC "must determine whether the taxpayers' underpayments are attributable to a valuation misstatement." (App., infra, 41a.) The Federal Circuit held that a taxpayer's concession would not affect a trial court's responsibility to determine whether the taxpayer's underpayment was attributable to a valuation misstatement, stating that "[t]his assessment must be made despite, and independent of, the 'concession' of capital gain and loss adjustments that the partnerships offered." (Id. at 41a-42a.)

2. One of the adjustments that the IRS made in the FPAA that it issued to Group was to disregard the four limited partners' transfers of then-partnership interests in Group to four different charitable remainder unitrusts ("CRUTs"). Group contested this adjustment in the CFC asserting that it was not a "partnership item" that the CFC had jurisdiction to determine in a partnership-level proceeding. See 26 U.S.C. § 6226(f) (defining scope of judicial review). The CFC agreed with Group, but the Federal Circuit reversed, finding that for tax purposes the validity of a transfer of an interest in a partnership is a "partnership item" that is required to be determined at the partnership level. The Federal Circuit relied on the possibility that the CFC "could" make findings of fact not alleged by either party that would support jurisdiction, to determine that the CFC had jurisdiction. The second question presented in this petition is whether a court has jurisdiction in a partnership proceeding to determine items based on the possibility that it could make findings of fact that support its jurisdiction even though neither party alleged those facts.

a. Before September 21, 2001, Group was a limited partnership with four limited partners: Robert Sands, Richard Sands, Marilyn Sands, and CWC Partnership I (collectively, the "Sands"). Each of the Sands owned a 24.975 percent interest in Group, with the remaining 0.1 percent interest owned by the general partner. On September 21, 2001, each of the Sands transferred his, her, or its entire individual partnership interests to a different CRUT. (App., infra, 8a.)

b. In the FPAA, the IRS determined that each of the Sands' transfers of their partnership interests to each of the CRUTs should be disregarded under the economic substance doctrine and, therefore, "that the limited partnership interests purportedly transferred by the original limited partners to their respective charitable trusts are owned by the transferor-partners for federal income tax purposes. . . ." (A346.) The IRS further determined that as a result "[u]nder I.R.C. §§ 703 and 704, tax items of the Partnership allocable to the interests purportedly held by the charitable trusts are allocated to the respective transferor partners." (Id.) The IRS never proposed any adjustment that would have affected the allocation of partnership items among the partners. In the Federal Circuit the government agreed that "the IRS proposed reallocating the shares" in Group such that '"[w]hether the CRUTs or the Sands were limited partners of Group during the period after September 2001 does not change the amount of Group's income and other items or the distributive share of any other partner of record during the period at issue. Those items will still be allocated in 24.975% shares to the four limited partners during that period -- whoever they may be -- and 0.1% to the general partner.'" (Opening Br. for the Appellant ("Gov't Br.") 54 n.10.))

c. Group contested the FPAA in the CFC. In that proceeding, Group filed a motion to dismiss the portion of the FPAA that determined that the transfers to the CRUTs were shams, arguing that the transfers were not a "partnership item" that could be adjusted in an FPAA. (App., infra, 12a.)

d. On October 9, 2008, the CFC issued a decision on the motion. Alpha I, L.P. v. United States, 84 Fed. Cl. 209 (2008) (App., infra, 52a). The CFC agreed with Group that the court lacked jurisdiction to consider the true partners in Group because the identity of Group's partners is not a partnership item. (App., infra, 12a.) Specifically, the CFC found that it was undisputed that the "identity of the partners in RRMC Group would not affect the allocation of the partnership items among the partners." (App., infra, 15a.) The CFC considered that a key fact that made the validity of the transfers a "non-partnership" item more appropriately determined at the partner level. (Id.)

e. The United States filed a motion for reconsideration that the CFC denied on March 3, 2009. Alpha I, L.P. v. United States, 86 Fed. Cl. 126 (2009) (App., infra, 131a). The CFC restated its finding, based on the government's concession, that "the question of whether the partnership interests in Group were validly transferred does not affect the allocation of income, gain, or losses among other partners. (Id. at 144a.)

f. The Federal Circuit reversed the CFC on this issue. The Federal Circuit held that the CFC had applied the correct legal standard in holding that the validity of a transfer in a partnership is a partnership item when it will affect the allocation of partnership items among the partners. The Federal Circuit held that the CFC erred in finding that the validity of the transfers was not a partnership item, however, because the CFC "incorrectly found that the determination of the identity of the partners in RRMC Group would not affect the allocation of the partnership items among the partners. On the facts of this case, partner identity could, in fact, affect allocation of the partnership items. As such, partner identity is properly resolved at the partnership level in this proceeding." (App., infra, 15a.) The Federal Circuit explained "it is possible that the distributive shares reported to the partners of RRMC Group would change if one or more of the CRUTs were disregarded. . . . If the Court of Federal Claims were to determine that some of the [Sands] transfers to the CRUTs were shams, each remaining partner's share of the partnership items could change." (Id. at 22a.)

g. On July 30, 2012, the petitioners filed a petition for panel rehearing and for rehearing en banc. On September 18, 2012, the court of appeals denied the petition for panel rehearing and for rehearing en banc. (App., infra, 44a.)

2. In Todd v. Commissioner, 862 F.2d 540 (5th Cir. 1988), the Fifth Circuit held that the valuation misstatement penalties were inapplicable because the taxpayers' deductions and credits were disallowed on a ground unrelated to valuation or basis. Id. at 542. In considering the meaning of the term "attributable to," the Fifth Circuit found the statute's language to be ambiguous, so it looked to legislative history to divine the statute's meaning. Id. The Fifth Circuit noted that "[t]he House Ways and Means Committee recognized the large number of property valuation disputes clogging the tax collection system, and added the overvaluation penalty to discourage those taxpayers who would inflate the value of property on their tax returns in hopes of 'dividing the difference' with the IRS." Id. (quoting H.R. Rep. No. 201, 97th Cong., 1st Sess. 243 (1981), reprinted in 1981-2 C.B. 352, 398 (stating that the necessity of the valuation misstatement penalty was illustrated by the fact that there were approximately 500,000 tax disputes outstanding involving property valuation questions).

The formal legislative history, however, does not provide a method for calculating whether a tax underpayment is attributable to a valuation misstatement, so the Fifth Circuit turned to the General Explanation of the Economic Recovery Tax Act of 1981, or "Blue Book," prepared by the staff of the Joint Committee on Taxation, which does contain a formula for determining whether an underpayment is attributable to a valuation misstatement. Id. The formula set forth in the Blue Book provides that:

Applying the formula from the Blue Book, the Fifth Circuit held that the taxpayers' underpayment of tax was not attributable to a valuation misstatement, since the taxpayers' deductions and credits were disallowed on a ground unrelated to valuation or basis. Todd, 862 F.2d at 543. The Fifth Circuit explained that "where the deductions and credits for these refrigeration units were inappropriate altogether, the Todds' valuation of the property supposedly generating the tax benefits had no impact whatsoever on the amount of tax actually owed." Id. Thus, because the taxpayers' deductions and credits were disallowed on a ground unrelated to valuation or basis, their underpayment of tax was not attributable to a valuation misstatement.

In an argument that foreshadowed later decisions from the Federal and First Circuits, the government argued in Todd that the Fifth Circuit misapplied the Blue Book's formula, asserting that "the formula was only meant to apply in the simple case where there are separate, unrelated adjustments to an individual's tax, one of which is concededly attributable to a valuation overstatement." Id. at 543-44. The government argued that cases where all of the adjustments to the taxpayer's liability result from the taxpayer's participation in a tax shelter are more complicated and that the Blue Book's formula would not apply in such cases. Id. at 544.

The Fifth Circuit held that the government's "attempted distinction finds no support in the language of the statute, its legislative history, or in the description of the committee staff's formula." Id. The Fifth Circuit continued to explain its decision: "The formula instructs us to determine § 6659 liability 'after' taking account of 'any other proper adjustments to tax liability.' It does not distinguish among other tax adjustments based on their degree of relationship to the valuation overstatement." Id.

The government also argued that the valuation misstatement penalties should apply even where a taxpayer's deductions or credits are disallowed on grounds unrelated to valuation or basis to promote the policies underlying the penalties. Id. The thrust of the government's argument was that Congress wanted to make tax shelters based on overvaluations less attractive. Id. In response, the Fifth Circuit pointed out that it was "probable that Congress was balancing competing policies when it determined how to apply § 6659." Id. On the one hand, "Congress may not have wanted to burden the Tax Court with deciding difficult valuation issues where a case could be easily decided on other grounds." On the other hand, "Congress may have wanted to moderate the application of the § 6659 penalty so that it would not be imposed on taxpayers whose overvaluation was irrelevant to the determination of their actual tax liability." Id.

3. Two years after the Fifth Circuit decided Todd, the Ninth Circuit followed suit in Gainer v. Commissioner, 893 F.2d 225 (1990). There, just as in Todd, the taxpayer's deductions and credits were disallowed on a ground unrelated to valuation or basis. Gainer, 893 F.2d at 226. The government once again argued that the term "attributable to" should be construed broadly to cover the taxpayer's underpayment of tax. Id. The Ninth Circuit noted that "[t]he identical arguments in the same factual context were presented and addressed in Todd." Id. at 227. And the Ninth Circuit rejected the government's arguments, just as the Fifth Circuit had done before it, reasoning that, since the taxpayer's deductions and credits were disallowed on a ground unrelated to valuation, his tax liability, after adjusting for the disallowed deductions and credits, "was no different from his liability after adjusting for any overvaluation." Id. at 228.

4. Just months after the Fifth Circuit decided Todd, the Tax Court considered whether a taxpayer could selectively concede adjustments to avoid imposition of the valuation misstatement penalties and held that those penalties do not apply in such circumstances. See McCrary v. Commissioner, 92 T.C. 827, 851-55 (1989). There, the taxpayers sought to avoid imposition of the Section 6659 valuation misstatement penalty by conceding that their claimed tax credits relating to a purported lease of a master recording of educational tapes were improper because what they had originally claimed to be a lease was actually a license. Id. at 851. Applying the formula used by the Fifth Circuit in Todd, the Tax Court held that the valuation misstatement penalties did not apply to the taxpayers' underpayment of tax. Id. at 854. Despite the taxpayers' concession, the government sought a determination from the Tax Court as to the valuation of the master recording for the sole purpose of determining the applicability of the valuation misstatement penalty. The Tax Court declined the government's invitation to reach the penalty issue, reasoning that would conflict with the purpose for the penalty. Id. at 854-55. The Tax Court has followed the reasoning of McCrary in other cases. See Rogers v. Commissioner, 60 T.C.M. (CCH) 1386 (1990); Schachter v. Commissioner, 67 T.C.M. (CCH) 3092 (1994).

5. The Fifth Circuit addressed the Section 6621 interest penalty in Weiner v. Commissioner, 389 F.3d 152 (2004), and followed Todd, McCrary, Rogers, and Schachter, to hold that, once the taxpayer conceded the underlying adjustments to tax on grounds unrelated to a tax-motivated transaction, it was unnecessary to hold a trial solely to determine whether the underlying adjustment could have also been attributable to a tax motivated transaction.³ The taxpayer in Weiner conceded the underlying adjustments to tax without specifying the grounds upon which he conceded. 389 F.3d at 161. Despite the taxpayer's concession, the government argued that the Section 6621 penalty was applicable. The Fifth Circuit rejected the government's argument, holding that the taxpayer's underpayment was not attributable to a tax-motivated transaction, since it was impossible to tell from the taxpayer's concession the precise grounds upon which he conceded. Id. at 162. The Fifth Circuit reasoned:

6. The First Circuit disagreed with the Fifth Circuit's analysis of the overvaluation misstatement penalties in Fidelity Int'l Currency & Advisor A Fund, LLC v. United States, 661 F.3d 667, 674 (2011). The First Circuit held that the formula in the Blue Book "is designed to avoid attributing to a basis or value misstatement an upward adjustment of taxes that is unrelated to the overstatement but due solely to some other tax reporting error." This is the same approach taken by the Federal Circuit in this case in reversing the Court of Federal Claims' decision. And just as the Federal Circuit in this case erroneously focused on the punitive nature of the valuation misstatement penalties to support its decision, the First Circuit reasoned that its interpretation of the Blue Book's formula was supported by the "heavy penalty for gross misstatements of value or basis" and their "resulting harm and difficulty in detection." Id. at 673.

The First Circuit based its holding on an example found in the footnotes of the Blue Book supported its interpretation of the formula in the Blue Book. The example in the Blue Book described a taxpayer facing two adjustments to tax, one plainly attributable to a valuation misstatement and the other not:

Less than six months after the Federal Circuit issued its decision in this case, the Eleventh Circuit followed the lead of the First Circuit in Fidelity and held that the example found in the footnote in the Blue Book did not support the Fifth or Ninth Circuits' interpretation of the formula in the Blue Book. See Gustashaw v. Comm'r, __ F.3d __, 2012 WL 4465190, at *12 (11th Cir. Sept. 28, 2012). In Gustashaw, the Eleventh Circuit held that because the taxpayer admitted at trial that the tax transaction at issue lacked economic substance the trial court should have proceeded to determine whether the taxpayer's underpayment was attributable to a valuation or basis misstatement for purposes of determining the applicability of the valuation misstatement penalties. Gustashaw, 2012 WL 4465190, at *10. According to the Eleventh Circuit, the rule it adopted "rests upon the fact that the abusive tax shelter is built upon the basis misstatement, and the transaction's lack of economic substance is directly attributable to that misstatement." Id. at *11.

The taxpayer in Gustashaw also argued that his general concession of his underpayment of tax immunized him from imposition of the valuation misstatement penalties. Id. at *9, 17 n.5. The taxpayer did not raise this argument before the Tax Court, however, so the Eleventh Circuit refused to address it for the first time on appeal. Nonetheless, the Eleventh Circuit wrote in dicta that "[e]ven if we were to consider this argument, it is substantially intertwined with and relies on a minority line of cases whose reasoning we now reject." Id.

Thus, in addition to the split between the Federal Circuit and Fifth Circuit on whether the valuation misstatement penalties can apply when a taxpayer concedes the underlying adjustments to tax on a ground unrelated to valuation or basis, a split exists between the First, Eleventh and Federal Circuits, on the one hand, and the Fifth and Ninth Circuits, on the other hand, regarding the proper application of the Blue Book's formula for determining whether an underpayment is "attributable to" a valuation misstatement. Indeed, the Federal Circuit's holding that a trial court "must" address the government's penalty claims notwithstanding the impact on judicial resources was largely predicated on its reading of the Blue Book.

The IRS' own administrative guidance agrees with the Fifth and Ninth Circuit's application of the Blue Book's formula. In a Litigation Guideline Memorandum, the IRS' attorneys stated that "[o]ne result of applying the formula is that where a taxpayer claims a deduction or credit that is disallowed for reasons unrelated to a valuation overstatement, none of the underpayment is attributable to the valuation overstatement, even if there is also a valuation overstatement with respect to that same deduction or credit." Litigation Guideline Memorandum TL-68 (Rev.), 1992 LGM LEXIS 14, at *17-18 (Aug. 12, 1992). Moreover, the Litigation Guideline Memorandum agrees with the Fifth Circuit that the valuation misstatement penalties are inapplicable where a "taxpayer timely concedes the deduction or credit prior to trial on a ground 'independent of and wholly separable from' overvaluation." Id. at *29. Finally, the Litigation Guideline Memorandum agrees with the Fifth Circuit and Tax Court that not imposing the valuation misstatement penalties when a taxpayer concedes the underlying adjustment to tax on a ground unrelated to valuation or basis is consistent with the policy of the valuation misstatement penalties to "provide the court tools for managing the large backlog of valuation and tax shelter cases." Id. at *30. The IRS Chief Counsel recently reiterated the positions set out in the Litigation Guideline Memorandum and advised IRS lawyers that it is their responsibility to oppose purportedly "abusive" concessions. See Notice CC-2012-001, 2011 CCN LEXIS 18 (Oct. 5, 2011).

The Litigation Guideline Memorandum is entitled to deference under Skidmore v. Swift & Co., 323 U.S. 134 (1944). "The fair measure of deference to an agency administering its own statute has been understood to vary with circumstances, and courts have looked to the degree of the agency's care, its consistency, formality, and relative expertness, and to the persuasiveness of the agency's position." United States v. Mead Corp., 533 U.S. 218, 228 (2001) (citing Skidmore, 323 U.S. at 139-40). The Federal Circuit should have deferred to the Litigation Guideline Memorandum, since it is a thorough, well-reasoned explication of the valuation misstatement penalties and because the IRS has maintained its position on the valuation misstatement penalties for almost twenty years.

7. The Federal Circuit erred in applying the statute in manner that is inconsistent with its purpose, as determined by the Fifth Circuit, the Ninth Circuit, the Tax Court, and the IRS.

8. In the absence of a decision from this Court resolving this conflict, the treatment of identically-situated taxpayers will differ based solely on geographic happenstance. As the number of cases raising this same issue reflect, resolution of this recurring issue is needed to avoid continuing uncertainty and uneven application of the revenue laws.

2. The Code requires the IRS to audit and adjust any "partnership item" at the partnership level rather than at the level of the individual partners. See 26 U.S.C. § 6221 et seq. (commonly called the "TEFRA rules" because they were enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982). The tax treatment of any partnership item must be determined at the partnership level, and all partners in the partnership are then bound by that treatment. See 26 U.S.C. §§ 6221-6222. The IRS is to make any adjustments to partnership items in a notice of final partnership administrative adjustment (an "FPAA"). See 26 U.S.C. §§ 6223(a)(2), (d)(2), 6225(a). The jurisdiction of a court reviewing an FPAA is limited by statute to determining:

The definition of a partnership item is found at Section 6231(a)(3) of the Internal Revenue Code. 26 U.S.C. § 6231(a)(3). That section states that a partnership item is "any item required to be taken into account for the partnership's taxable year under any provision of subtitle A to the extent regulations prescribed by the Secretary provide that . . . such item is more appropriately determined at the partnership level than at the partner level." Section 301.6231(a)(3)-1(a) of the Treasury Regulations contains a list of partnership items, which includes "[t]he partnership aggregate and each partner's share of . . . [i]tems of income, gain, loss, deduction, or credit of the partnership." 26 C.F.R. § 301.6231(a)(3)-1(a)(1)(i).

3. In Grigoraci v. Commissioner, 84 T.C.M. (CCH) 186, 190-91 (2002), the United States Tax Court concluded that the identity of a partner is not a partnership item, at least when the determination would not affect the allocation of partnership items to any other partner. Id. at 189.

The CFC followed Grigoraci in holding that the validity of the Sands' transfers of their partnership interests in Group to the CRUTs was not a partnership item because there was "no dispute about the amount of the allocations made to the partners." (App., infra, 24a.) The practical result of this holding would have been that the IRS would have been permitted to challenge the validity of the transfers only at the partner level and not in the proceeding involving Group's partnership tax return.

4. The Federal Circuit also applied the rule in Grigoraci but found "it is possible that the distributive shares reported to the partners of RRMC Group would change if one or more of the CRUTS were disregarded. . . . If the Court of Federal Claims were to determine that some of the heirs' transfers to the CRUTs were shams, each remaining partner's share of the partnership items could change." As a result, the court of appeals found that jurisdiction existed. (App., infra, 22a.)

5. The Federal Circuit's assumption that "it is possible" that the CFC might make findings that "could" change the partnership's allocations violates the core jurisdictional principle that federal courts must presume that they lack jurisdiction over a cause of action. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994) (citing Turner v. Bank of North America, 4 U.S. 8, 11 (1799)). Rather than presuming that the CFC lacked jurisdiction, however, the panel found it could "not conclude with certainty that the [CFC] would accept the IRS's [proposed allocation] if this matter were to proceed to trial." (App., infra, 28a-29a.) Thus, the panel turned the presumption on its head -- finding that the CFC had jurisdiction because the panel could "not conclude with certainty" that it lacked jurisdiction, despite the government's concession that the adjustment made by the IRS in the FPAA would not affect the allocation of partnership items among Group's partners.

6. The Federal Circuit also acted improperly in shifting the government's burden to demonstrate that the CFC had jurisdiction to petitioners to show that the CFC did not have jurisdiction. See McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189 (1936) (holding "the party who seeks the exercise of jurisdiction" has "the burden of showing that he is properly in court."). The Federal Circuit erroneously placed that burden on petitioners, however, stating: "Tellingly, while the taxpayers [i.e., petitioners] argue that the allocation would not change under the IRS's proposal, they remain silent as to whether they agree with the IRS's proposal." (App., infra, 29a.) The panel should have required the government to show that voiding the transfers would result in a reallocation, a fact that would have supported jurisdiction. The government, of course, would not be able to meet that burden given its consistent position in the CFC that voiding the transfers would not result in a reallocation.

7. The Federal Circuit's decision also runs afoul of the general rules of pleading. To survive petitioner's motion to dismiss, the government was required to plead, or at least allege, facts that, accepted as true, would be sufficient to show that the CFC had jurisdiction. See McNutt, 298 U.S. at 189 ("the party who seeks the exercise of jurisdiction in his favor . . . must allege in his pleading the facts essential to show jurisdiction. If he fails to make the necessary allegations he has no standing."). The Federal Circuit rested its holding on the purported fact that "partner identity could, in fact, affect allocation of the partnership items." (App., infra, 15a.) The government, however, never argued or alleged that fact in the CFC, as the government conceded in its brief in the Federal Circuit -- in fact, the IRS asserted exactly the opposite in the FPAA. (Gov't Br. 54 n.10.) Thus, the Federal Circuit allowed the government to survive a motion to dismiss without ever pleading or even alleging the facts necessary to survive that motion to dismiss, based on the theoretical possibility that the CFC could make findings (not urged by either party) that would support jurisdiction.

8. The result of the Federal Circuit decision is to make the identity of a partner a "partnership item" in every case, for there will always be the same abstract "possibility" that a court could make findings that would support jurisdiction.

In enacting Sections 6226(f) and 6231(a)(3) of the Internal Revenue Code, Congress intended to limit jurisdiction only to those items "more appropriately determined at the partnership level than at the partner level." 26 U.S.C. § 6231(a)(3). The legitimacy of an isolated transfer of a partnership interest when the other partners and the partnership may not even be aware of the transfer is a determination that, in effect, only impacts the transferring partners. By requiring the validity of transfers of partnership interests to be determined in a partnership-level rather than in a partner-level proceeding, the court of appeals departed from the purpose of the statute in a manner that could have an adverse impact on the partners of nearly any partnership.

² The IRS adjusted Alpha's tax return to reduce the basis that it had claimed in Yahoo and Corning stock.

³ The Fifth Circuit found the reasoning in Todd and its progeny instructive in the context of the Section 6621 interest penalty because both penalty provisions employed the same "attributable to" language, see Weiner, 389 F.3d at 160, and because both penalty provisions were among those provisions "enacted by Congress 'to deal with the Tax Court backlog."' Id. (quoting Todd, 862 F.2d at 544 n.14).