Key Points

  • The Tenth Circuit held that whether an IRS final partnership administrative adjustment was issued within the limitations period is a partnership item under TEFRA that must be raised in the partnership-level proceeding.
  • Scott and Audrey Blum waived their timeliness challenge, including their claim that the IRS failed to sign the first partnership consent extension, by not raising it in the Northern District of California partnership case to which they were parties.
  • The court held the challenge alternatively relates to an adjustment to a partnership item under I.R.C. Section 6221 and reached its result without deferring to the Treasury Department, rejecting an argument based on Loper Bright and Kisor.
  • The affected-items notices of deficiency issued Dec. 8, 2015, were timely because the partnership-level decision became final Jan. 20, 2015, suspending the limitations period until Jan. 20, 2016; the validity of the Blums' individual consents was immaterial.
  • The Blums remain liable for roughly $15.9 million in deficiencies for tax years 1999, 2007 and 2010 arising from the BLIPS shelter.

The U.S. Court of Appeals for the Tenth Circuit held on Nov. 2 that Buy.com founder Scott Blum and his wife, Audrey Blum, gave up their argument that the IRS acted too late to disallow a $78.5 million tax shelter loss, because they never raised it in the partnership lawsuit where federal tax law required it to be decided.

The published decision affirmed a U.S. Tax Court ruling against the couple and leaves them owing roughly $15.9 million in taxes for 1999, 2007 and 2010. Judge Matheson wrote for a three-judge panel that also included Judges McHugh and Federico, and no judge wrote separately. "The Blums remain liable for the roughly $15.9 million at issue in this appeal," Judge Matheson wrote.

The case turned on the Tax Equity and Fiscal Responsibility Act of 1982, known as TEFRA, which splits partnership tax disputes into two stages: one proceeding over the partnership's own tax items, then separate proceedings over each partner's liability. Congress repealed TEFRA effective Jan. 1, 2018, but its rules still govern older tax years like these. The panel held that whether the IRS issued its partnership-level adjustment on time must be litigated at the first stage, joining five other circuits, and said that rule holds after the Supreme Court's decisions in Loper Bright Enterprises v. Raimondo and Kisor v. Wilkie on deference to agency interpretations.

Mr. Blum took part in 1999 in the Bond Linked Issue Premium Structure, or BLIPS, one of the arrangements the court said "enabled participants to report losses on their tax returns that they did not actually suffer." He invested through Bogan Ventures LLC, his single-member company, which owned about 90% of a partnership called Democrat Strategic Investment Fund LLC. According to the opinion, the transactions inflated Bogan's basis, the cost figure used to measure gain or loss, and the sale of assets the partnership distributed generated the $78.5 million loss.

The Blums used the loss to offset about $74.8 million in capital gain from the sale of an unrelated asset and reported no taxable income for 1999. They deducted the leftover loss in 2007 and 2010.

On Dec. 17, 2004, the IRS mailed a final partnership administrative adjustment, or FPAA, the formal notice it uses to change a partnership's return, finding that the BLIPS scheme lacked economic substance. Presidio Growth LLC, the partnership's tax matters partner—the general partner TEFRA charges with keeping the other partners informed of IRS proceedings—challenged the notice in the U.S. District Court for the Northern District of California in March 2005. The Blums knew of that case and were parties to it but did not participate, pursuing an unsuccessful settlement instead, the opinion said.

The district court sustained the IRS adjustments in July 2014, and that ruling became final on Jan. 20, 2015. The IRS issued three notices of deficiency to the Blums on Dec. 8, 2015, assessing about $22 million in taxes and penalties. The Tax Court later dismissed the misstatement penalties for lack of jurisdiction, and the couple did not appeal a penalty for filing their 2007 return late.

The Blums argued that the IRS had missed its deadline. Presidio Growth had signed three consent forms extending the partnership's original three-year limitations period, and the couple contended the first was invalid because the IRS never signed it, which they said made the later extensions, the FPAA and the deficiency notices untimely. They also argued that their own extension agreements with the IRS did not expressly cover partnership items, as the statute requires.

The panel noted in a footnote that the record appears to show the IRS did sign the first consent on April 2, 2003, about two weeks before the original deadline, but said it was not resolving the appeal on that ground. It instead agreed with the Tax Court that the argument had been waived.

Judge Matheson wrote that the FPAA's timeliness is a "partnership item," the category TEFRA reserves for the partnership-level case, because it decided whether the partnership's reported loss would stand. "Because the FPAA's timeliness significantly affects the loss ($0 or $78.5 million), which is a partnership item," the opinion said, it falls within the Treasury regulation defining the term.

The panel rejected the Blums' argument that limitations rules cannot be partnership items because they sit in the code's procedural subtitle rather than the income tax subtitle the definition references. It said TEFRA's design, which channels partnership disputes into a single proceeding, pointed the same way. "TMP Consents affect the timeliness of an FPAA, which affects the outcome of partnership-level proceedings, which affects the interests of all partners," Judge Matheson wrote.

The court added a second statutory ground, holding that the timing question at least "relates to an adjustment to a partnership item" under another TEFRA provision. Neither side had briefed that reading. It came up at oral argument, after which the commissioner addressed it in a letter and the Blums responded that the argument was too late. The panel said it retained "the independent power to identify and apply the proper governing law."

The opinion noted that the Second, Fifth, Seventh, Ninth and Federal circuits had reached the same conclusion. The Blums argued those rulings predated Loper Bright and Kisor, but the panel said its own analysis gave the agency no deference, and it cited the court's "reluctan[ce] to effectively create a circuit split . . . especially where so many circuits would be lined up against us."

"Here, the first TMP Consent was valid as to all partners or none, making the FPAA timely as to all partners or none," Judge Matheson wrote. The California case, the opinion added, "could have resolved the issue equally as to all partners, but the Blums did not raise it there."

With that challenge waived, the panel held that later, unchallenged consents extended the deadline to Dec. 31, 2004, making the Dec. 17 FPAA timely. The final district court judgment then suspended the limitations period for the Blums' related taxes until Jan. 20, 2016, so the December 2015 notices were also timely. That made the validity of the couple's own extension agreements "immaterial," the panel said, echoing the Tax Court, and it declined to decide that question.

William M. Sharp, Sr. of Holland & Knight LLP argued for the Blums. Clint A. Carpenter of the U.S. Department of Justice argued for the commissioner of internal revenue.

The panel denied the Blums' petition for review and affirmed the Tax Court's judgment, leaving the deficiencies for all three tax years in place.