United States Tax Court

United States Tax Court

T.C. Memo. 2025-18

SCOTT A. BLUM AND AUDREY R. BLUM,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 5313-16.

Filed February 18, 2025.

__________

Susan E. Seabrook, James N. Mastracchio, Karol Kurzatkowski,

Nicholas S. Netland, and Christopher S. Cruz, for petitioners.

Lori Katrine Shelton, K. Lyn Hillman, Brandon M. Chavez, Najja O.

Bullock, and Lesley A. Hale, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: This affected items case deals primarily with the

responsibility of taxpayers and the Internal Revenue Service (IRS) to

update information about the partners of a partnership under the Tax

Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97248, §§ 401–407, 96 Stat. 324, 648–71. The Treasury regulations1

explicitly and clearly state the requirements for partnerships and their

partners to update names and addresses of the partners as well as the

IRS’s obligations when mailing a notice of Final Partnership

Administrative Adjustment (FPAA).

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure. Dollar

amounts are rounded.

Served 02/18/25

2

[*2] Petitioners did not adhere to the regulations; the IRS did.

Petitioners did not properly identify Scott Blum as an indirect partner

in the TEFRA partnership or update the address for sending the FPAA

with respect to his partnership interest. Instead, they try to place the

blame for their alleged nonreceipt of the FPAA on the revenue agent

(RA) who audited their personal and partnership returns.

Petitioners do this because they want to avoid a district court’s

decision in the TEFRA partnership case that held that Mr. Blum

engaged in a tax shelter and improperly deducted a $78.5 million

artificial loss (tax shelter loss). They knew about the partnership case

while it was ongoing in district court and are obviously unhappy with

the outcome. We find not only that the IRS mailed the required FPAA

with respect to Mr. Blum’s partnership interest to the correct address

but also that petitioners received it.

Throughout this case, petitioners have concocted numerous

unfounded theories about the IRS’s alleged failure to follow proper

procedure. They have also made multiple misrepresentations to the

Court and omitted important information. Testimony by IRS employees

clearly and credibly establishes that the IRS indeed followed proper

procedures and that the IRS mailed the FPAA as required by the Code

and the regulations.

Apart from their argument about their alleged nonreceipt of the

FPAA, petitioners also make multiple baseless arguments to avoid

paying the tax that they owe pursuant to the district court’s decision.

They argue that the district court did not really disallow the tax shelter

loss and that they resolved the disallowance of the $78.5 million tax

shelter loss in a prior Tax Court case for a mere $373,641 in tax. They

also challenge the timeliness of the FPAA and the affected items Notices

of Deficiency that precipitated the filing of the Petition. Each of these

arguments fails. Accordingly, we find, in accordance with the district

court’s decision in the TEFRA case, that petitioners are not entitled to

deduct the $78.5 million tax shelter loss.

Respondent also determined section 6662(h) penalties for gross

valuation misstatements for 1999, 2007, and 2010, and a section

6651(a)(1) addition to tax for failure to file a return timely for 2007. We

dismiss the section 6662(h) penalties for lack of jurisdiction and hold

that petitioners are liable for the section 6651(a)(1) addition to tax for

2007.

3

[*3]

FINDINGS OF FACT

The following facts are derived from the pleadings, Stipulations

of Facts with attached Exhibits, and the testimony and Exhibits

admitted into evidence at trial. Neither petitioner testified. When

petitioners timely filed the Petition, they resided in Wyoming.

We granted numerous continuances so the parties could pursue

discovery.2 Unfortunately, these proceedings have been marked with a

contentious discovery process that included petitioners’ demands for

irrelevant documents from 62 unrelated tax shelter cases and for

documents that witnesses credibly testified do not exist.3 Petitioners

argue that respondent gave evasive and incomplete responses to their

discovery requests, wrongfully withheld or redacted documents, did not

adequately search for requested documents, refused to produce

documents, and made implausible claims that documents do not exist.

We reviewed documents in camera and disagreed with these claims. We

find that respondent cooperated with petitioners’ legitimate discovery

requests but was hampered not only by the fact that most documents

were created approximately 20 years ago but also by California’s COVID

stay-at-home orders. We are satisfied that respondent searched for the

requested documents thoroughly and in good faith and produced all

relevant documents.

I.

Mr. Blum’s Investment in a Tax Shelter

During 1999 Mr. Blum engaged in the Bond Linked Issue

Premium Structure (BLIPS) tax shelter through Democrat Strategic

Investment Fund, LLC (DSIF), a TEFRA partnership for federal tax

purposes. Mr. Blum was not a member of DSIF. Rather, he held his

interest in DSIF through Bogan Ventures, LLC (Bogan), a singlemember limited liability company (LLC) that was a disregarded entity

2 Petitioners informed the Court that they filed a complaint in district court on

October 29, 2024, under the Freedom of Information Act for documents relating to the

TEFRA partnership, Mr. Blum’s partnership interest, and the mailing of the FPAA.

The record in this case closed on the last day of trial. Petitioners had ample time for

discovery before trial.

3 For example, petitioners sought files from an IRS office in Sacramento,

California, but witness testimony credibly establishes that the office did not retain the

files after the partnership-level case was docketed in district court. Petitioners also

alleged that respondent improperly removed and withheld files from a file cabinet used

by an IRS employee, but the employee credibly testified that she did not use the file

cabinet.

4

[*4] for federal tax purposes. Mr. Blum was an indirect partner of DSIF.

See § 6231(a)(10) (defining an indirect partner).

Bogan owned approximately 90% of DSIF although its percentage

interest is not clear from the record. Two entities related to the tax

shelter promoter, Presidio Growth, LLC (Presidio Growth), and Presidio

Resources, LLC (Presidio Resources), owned the remaining interests.

Presidio Growth was DSIF’s tax matters partner (TMP).

The strategy of the BLIPS tax shelter was to inflate Bogan’s

outside basis in DSIF, and then have DSIF liquidate and distribute its

assets (DSIF assets) to Bogan. Petitioners carried over Bogan’s inflated

outside basis in DSIF as the total basis in the distributed DSIF assets.

Mr. Blum had Bogan sell the DSIF assets for prices lower than the

assets’ inflated bases to generate $78.5 million in artificial tax loss.

As a disregarded entity, Bogan did not file a return for 1999.

Petitioners timely filed a personal return for 1999 and reported that

their address was in Monarch Beach, California (Monarch Beach

address). They claimed a $78.5 million tax shelter loss from the sale of

the DSIF assets on Schedule D, Capital Gains and Losses. They

deducted the $78.5 million tax shelter loss to avoid paying tax on

approximately $74.8 million of gain from their sale of an unrelated

asset. They reported that they had no taxable income for 1999. They

carried forward part of the tax shelter loss and deducted it for 2007 and

2010. They also reported Bogan’s income and expenses on their 1999

return.

Around April 17, 2000, DSIF timely filed a partnership return for

a short tax year of August 23 to December 22, 1999 (1999 taxable year).

DSIF’s return included Schedule K–1, Partner’s Share of Income,

Deductions, Credits, etc., for Bogan. Bogan’s Schedule K–1 showed

Bogan’s taxpayer identification number (TIN). It did not indicate that

Bogan was a single-member LLC, that it was a disregarded entity for

federal tax purposes, that Mr. Blum was Bogan’s sole member, or that

Mr. Blum was DSIF’s indirect member. Nor did any other part of DSIF’s

partnership return disclose this information. Mr. Blum’s name was not

on Bogan’s Schedule K–1 or any other part of DSIF’s return. Schedule

K–1 showed that Bogan’s address was on Brookline Avenue in Aliso

Viejo, California (Schedule K–1 address). On the basis of Schedule K–1,

Bogan was a notice partner of DSIF and was entitled to receive a copy

of the FPAA (notice partner FPAA). See § 6231(a)(8) (defining notice

partner).

5

[*5] Bogan’s Schedule K–1 did not specify its percentage ownership in

DSIF. Schedules K–1 for DSIF’s three members showed their profit and

loss percentages and their percentage ownership of capital as “various.”

According to Schedules K–1, Bogan contributed approximately 89.5% of

the capital, was allocated between 94.9% and 99.4% of income, loss, and

deductions, and received 72.3% of the cash distributions. DSIF’s LLC

agreement is not in the record. In February 2001 Mr. Blum dissolved

Bogan.

II.

Audit of Petitioners’ 1999 Return

On September 5, 2000, the IRS issued I.R.S. Notice 2000-44,

2000-2 C.B. 255, advising taxpayers that it determined that Son-of-Boss

tax shelters, including the BLIPS tax shelter, were not bona fide and did

not reflect actual economic consequences.

In October 2001 the IRS began an audit of petitioners’ 1998

return. During 1998 Mr. Blum engaged in the Offshore Portfolio

Investment Strategy (OPIS) tax shelter through a trust. RA Joni

Politzer was assigned to the audit. In February 2002 the IRS expanded

the audit to include petitioners’ 1999 and 2000 returns and in May 2002

DSIF’s 1999 return.

In early 2002 petitioners moved to Wyoming. In March 2002 RA

Politzer sent certified mail to petitioners at the Monarch Beach address

that the U.S. Postal Service (USPS) returned to the IRS as unclaimed.

On July 3, 2002, the IRS mailed a notice of beginning of partnership

administrative proceeding (NBAP) for DSIF’s 1999 taxable year to its

TMP. The NBAP asked the TMP to update the name and address of each

partner for DSIF’s 1999 taxable year if the TMP discovered that

previously provided information was incorrect or incomplete.

Respondent has been unable to find a copy of an NBAP addressed to

Bogan.4

In May 2004 Mr. Blum told RA Politzer that petitioners had

moved to Jackson, Wyoming, in February 2002 and that the address of

their residence in Jackson was on East Hansen Avenue (East Hansen

4 Respondent asserts that he mailed a copy of the NBAP to Bogan at the

Schedule K–1 address on November 5, 2002, which petitioners dispute. We do not need

to decide whether the IRS mailed a copy of the NBAP to Bogan because the failure to

mail a copy of the NBAP to a notice partner does not affect the outcome of this case.

See Goldberg v. Commissioner, T.C. Memo. 2021-119, at *17, aff’d, 73 F.4th 537 (7th

Cir. 2023).

6

[*6] address).5 Shortly thereafter, on May 17, 2004, RA Politzer mailed

correspondence to each petitioner at the East Hansen address. The

USPS stamped the envelopes with a two-line stamp “No Street Delivery”

“Box # Required” and returned them to RA Politzer. By fax dated May

24, 2004, RA Politzer told petitioners’ attorney Jeffrey Helfer that the

USPS had returned mail addressed to the East Hansen address and

requested petitioners’ “correct mailing address.”6 By email on June 17,

2004, Mr. Helfer provided a post office box address for petitioners. No

street address was provided with the post office box address. Mr.

Helfer’s email did not include any other information such as Bogan’s

name, Mr. Blum’s sole ownership of Bogan, DSIF’s name, or Mr. Blum’s

identity as an indirect member of DSIF. Later that month RA Politzer

mailed duplicate copies of correspondence to petitioners at the Monarch

Beach and the post office box addresses.

On June 22, 2004, RA Politzer asked Mr. Helfer to provide “a

street address where overnight/UPS mail can be delivered.” There is no

evidence in the record that Mr. Helfer responded to this request. In a

July 6, 2004, fax to Mr. Helfer, RA Politzer requested petitioners’

“correct street address.” She wrote that “I have made several requests

for a current address for taxpayers (most recently on 6/22/04). However,

you provided me only with a post office box address . . . Please provide

me with a correct street address.” The fax also included an information

document request that showed the post office box address. On the same

date, July 6, 2004, petitioners executed Form 872, Consent to Extend

the Time to Assess Tax, for 2000 and listed two addresses: the East

Hansen address, which was labeled their “current” address, and the

Monarch Beach address, which was labeled their “per return” address.

In an email on July 14, 2004, Mr. Helfer told RA Politzer that

petitioners’ “home address” was the East Hansen address. During July

2004 RA Politzer mailed correspondence to each petitioner and Bogan

in the care of Mr. Blum at the post office box address. RA Politzer and

RA Theresa Alvarez mailed notices of third-party summonses (summons

notices) to each petitioner and Bogan at the post office box address. See

§ 7609 (requiring the IRS to mail a summons notice to a taxpayer’s last

known address). The USPS returned the summons notices addressed to

Bogan and Mrs. Blum to the IRS as unclaimed. On August 4, 2004, RA

5 Some documents in the record spell the street name as “Hanson.”

6 On May 19, 2004, petitioners filed Form 2848, Power of Attorney and

Declaration of Representative, appointing Mr. Helfer as their representative, which

stated petitioners’ address was in Woodland Hills, California.

7

[*7] Politzer faxed an information document request to Mr. Helfer that

showed the post office box address for petitioners.

None of Mr. Helfer’s communications to RA Politzer or any other

communications from petitioners to RA Politzer or the IRS stated that

the USPS did not deliver mail to the East Hansen address or that a post

office box was required for the USPS to deliver mail to petitioners in

Jackson, Wyoming. RA Politzer updated the address box on her case

activity record for petitioners as follows:

Scott A. & Audrey R. Blum

xxx E. Hanson [sic] (7_14_2004 per Helfer)

Jackson, WY 83001

P.O. Box xxx (6_22_2004 per Helfer)

Jackson, WY 83001

A case activity record is part of an RA’s personal workpapers of

the audit and is used to document contemporaneously all actions that

the RA and the taxpayer take during an audit. Internal Revenue Manual

(IRM) 4.10.9.3.1 (May 14, 1999).

The IRS’s FINDSD transcript for petitioners shows that they

continued to use the Monarch Beach address on their returns even after

they moved to Wyoming in 2002, including on a return that they filed in

2005. They first used the East Hansen address on a return that they

filed in 2008 and then switched to using a different street address in

Jackson.7 They did not use the post office box address on any personal

returns that they filed during this period. The instructions for Form

1040, U.S. Individual Income Tax Return, direct taxpayers to enter a

box number instead of the taxpayer’s street address only if the post office

does not deliver mail to the taxpayer’s home.

A.

Freeze on BLIPS Audits

On February 20, 2004, the IRS issued an internal memorandum

directing its personnel to temporarily halt “outside interactions” with

respect to Son-of-Boss tax shelters, including the BLIPS tax shelter,

because of ongoing criminal investigations. According to the

memorandum, RAs were permitted “to continue to develop [their] cases

based on information already in [their] possession.” Thereafter, in late

7 A FINDSD transcript provides a taxpayer’s name and address in the IRS

Integrated Data Retrieval System (IDRS). See IRM 4.71.2.3 (Nov. 12, 2021).

8

[*8] February 2004 IRS officials met with attorneys from the U.S.

Department of Justice’s (DOJ) U.S. Attorney’s Office who participated

in the criminal investigations to discuss protocols for the IRS to resume

audits while minimizing any potential impact on the criminal

investigations. The criminal investigations involved individuals who

designed, promoted, and implemented the BLIPS tax shelter. There is

no evidence in the record that Mr. Blum was under criminal

investigation. The IRS and the DOJ exchanged memoranda of

understanding to establish protocols under which RAs would continue

the audits. The IRS agreed to a 120-day freeze on activities that would

“precipitate a resolution . . . for less than 100% of the tax due and owing.”

On March 8, 2004, after agreeing to the audit protocols, the IRS

issued a second internal memorandum that placed a 120-day freeze (halt

memo) on “discussions of any potential resolutions” regarding any

Notice 2000-44 issue and further directed RAs to make “no attempt to

resolve an audit issue or dispute.” In the halt memo the IRS instructed

RAs not to comment or to indicate any IRS position. However, RAs could

continue certain aspects of their audits including requesting and

obtaining documents, analyzing their cases, and listening to taxpayers’

views of the transactions. The halt memo directed RAs to solicit

extensions of the limitations period and to consult RA Robert Gee, the

team manager for the BLIPS audits, when a partnership or investor

refused to consent to an extension. When a limitations period was set to

expire, RA Gee coordinated with Peter Alvarado, a special agent in the

IRS’s Criminal Investigation Division (CI) for approval to issue an FPAA

or a Notice of Deficiency.

B.

Freeze Code

After issuing the halt memo, the IRS recorded transaction code

(TC) 914 on the accounts of taxpayers who engaged in the BLIPS tax

shelter (BLIPS investors). TCs are used to maintain a history of actions

relating to a taxpayer’s account. IRM 21.2.1.2.4 (Jan. 4, 2012). TC 914

alerts an RA who is assigned to an audit that there is a criminal

investigation. IRM Ex. 4.4.1-1 (May 19, 2009). The IRS recorded TC 914

on petitioners’ account for 1999 on March 18, 2004. The IRS briefly lifted

TC 914 from petitioners’ account on July 19, 2004, and reimposed it on

September 1, 2004.8 The IRS permanently lifted TC 914 from

8 Neither party explained why the IRS briefly lifted TC 914 from petitioners’

account for approximately six weeks in summer 2004. The temporary lift coincides

with the IRS’s settlement initiative. As discussed below, the IRS removed TC 914 from

9

[*9] petitioners’ 1999 account on February 17, 2009, following the

December 2008 convictions of two promoters of the BLIPS tax shelter.

When TC 914 is on a taxpayer’s account, IRS procedure requires

an RA to contact CI before proceeding with an audit, and CI instructs

the RA on how to proceed with the audit. See IRM Ex. 4.4.1-1. CI may

instruct the RA to discontinue work on the audit or allow the audit to

proceed within some constraints. Typically, the RA retains

responsibility for monitoring the period of limitations and requesting

extensions from the taxpayer although CI sometimes assumes that

responsibility. In cases where the RA is responsible for monitoring the

period of limitations, IRS procedure instructs the RA to contact CI for

permission to issue an FPAA or a Notice of Deficiency if the limitations

period is set to expire.

TC 914 on a taxpayer’s account does not prevent the IRS from

issuing an FPAA or a Notice of Deficiency. Accordingly, TC 914 does not

have to be lifted from a taxpayer’s account for the IRS to issue either

notice. However, TC 914 prevents the IRS from assessing tax.

Accordingly, the IRS must lift TC 914 if the taxpayer and the IRS reach

an agreement on the amount of tax owed so that the IRS may assess the

tax. Otherwise, the IRS lifts TC 914 after the relevant criminal matter

is resolved.

Because of the large number of taxpayers who invested in BLIPS

tax shelters, the IRS issued nationwide guidance to RAs through the

halt memo in addition to placing TC 914 on taxpayer accounts. As stated

above, the halt memo centralized communications between IRS

Examinations (Exams) and CI through RA Gee rather than have RAs

assigned to BLIPS audits contact CI directly for instruction on how to

proceed with the BLIPS audits and for approval to issue an FPAA or a

Notice of Deficiency.

According to RA Politzer’s case activity record, she asked RA Gee

about TC 914’s impact on issuing an FPAA for DSIF and a Notice of

Deficiency to petitioners. RA Gee received permission from CI to issue

an FPAA dated December 17, 2004, for DSIF’s 1999 taxable year and a

Notice of Deficiency dated November 10, 2005, to petitioners, discussed

further below, before their issuance. He conveyed CI’s approval to RA

Politzer.

taxpayers who participated in the settlement initiative. However, petitioners chose not

to participate.

10

[*10] C.

Settlement Initiative

In May 2004, before the halt memo’s 120-day freeze ended, the

IRS announced a settlement initiative for investors in Son-of-Boss tax

shelters including BLIPS investors. See I.R.S. Announcement 2004-46,

2004-1 C.B. 964. The settlement initiative required investors to pay

100% of the tax resulting from the disallowance of the tax shelter losses

plus interest but reduced applicable penalties. Investors had until June

21, 2004, to accept the settlement by mailing a completed Notice of

Election (Election) to an IRS address provided in the Announcement.

They were also required to provide a copy of the Election to the

examining RA. Id. § 4(a), 2004-1 C.B. at 965. There is no evidence in the

record that petitioners, Bogan, or DSIF filed an Election.

BLIPS investors who filed Elections entered into closing

agreements with the IRS that contained specific wording drafted for

purposes of the settlement initiative, some of which was set forth in

Announcement 2004-46. The closing agreements were generally

executed in 2004 and 2005. Once a BLIPS investor entered into a closing

agreement, the IRS lifted TC 914 and assessed the tax. However, for

investors who did not accept the settlement initiative, TC 914 remained

in place. Petitioners did not file an Election to accept the settlement

initiative. Accordingly, TC 914 remained on their 1999 account, except

for six weeks during summer 2004, until shortly after the criminal cases

against the promoters were resolved.

III.

Issuance of FPAA

In late 2004 DSIF’s TMP declined to extend DSIF’s limitations

period for 1999 beyond December 31, 2004, and petitioners had not

extended the limitations period with respect to BLIPS tax shelter

adjustments for their personal years under audit. In summer 2004 RA

Politzer began to prepare an FPAA. She was aware that CI approval was

required before an FPAA could be issued and asked RA Gee about the

approval. In late November 2004 RA Gee obtained approval from CI to

issue an FPAA for DSIF’s 1999 taxable year and other unagreed BLIPS

cases with limitations periods set to expire at yearend 2004. By email

dated November 24, 2004, RA Gee informed RA Politzer and other RAs

who were auditing returns of other unagreed BLIPS investors that CI

“had given clearance” to issue the FPAA and that “[a]ny prior directions

to hold on the case have now been released.”

11

[*11] On December 2, 2004, RA Politzer forwarded a proposed FPAA

for DSIF to the Office of Chief Counsel (Chief Counsel) for approval as

required by the IRM. She informed Chief Counsel that CI had not yet

authorized issuance of a Notice of Deficiency to petitioners, writing

under a heading “SNOD” “None – pending CI authorization to issue.”

After Chief Counsel approved the proposed FPAA, the audit team

provided the wording and computations for the FPAA to the IRS’s

Technical Services Unit (TSU), in Sacramento, California (Sacramento

TSU), which prepared, addressed, and mailed the FPAA. TSU is part of

Exams. Sacramento TSU issued the FPAAs for the unagreed BLIPS tax

shelter cases that had limitations periods set to expire at yearend 2004,

including DSIF’s FPAA.

Because of the urgency caused by the yearend period of

limitations, Sacramento TSU prepared the FPAAs to the TMPs and

notice partners for the unagreed BLIPS cases (BLIPS FPAAs) at the

same time.9 Working as a team, the RAs in TSU reviewed the wording

and computations of the BLIPS FPAAs for accuracy and confirmed that

the limitations periods were open. A clerk in TSU searched the

Partnership Control System (PCS) and IDRS for TMPs’ and notice

partners’ addresses. See IRM 4.29.5.1(1) (Jan. 1, 2003). These databases

enable the entire IRS to access the IRS’s activity with respect to

taxpayer accounts.10 When a TMP or notice partner had multiple

addresses in these databases, TSU mailed a copy to each address.

Sacramento TSU generated a certified mailing list (CML) as proof

of mailing the BLIPS FPAAs. A CML is computer-generated and

contains the names and the addresses used to mail FPAAs to TMPs and

9 Normally TSU prepares and issues the FPAA to a TMP and then sends the

partnership file to the Ogden or Brookhaven service center to prepare and mail the

notice partner FPAAs. It is proper to issue FPAAs to the TMP and notice partners on

the same day. See § 6223(d)(2) (providing that the IRS must mail a FPAA to the notice

partners no later than 60 days after mailing the FPAA to the TMP); PCMG Trading

Partners XX, L.P. v. Commissioner, 131 T.C. 206, 207 (2008) (involving FPAAs issued

to the TMP and notice partners FPAA on the same day).

10 PCS contains the names and TINs shown for the partners on Schedules K–1.

See IRM 4.31.2.3.3(1) (May 31, 2005), 4.31.3.3.3(2)(E) (June 4, 2004). The campus

TEFRA function is responsible for maintaining the information on PCS. See IRM

4.31.2.2.9.2(1)(F) (2004). The campus TEFRA function is part of IRS service centers

and is separate from TSU, which is part of Exams. See IRM 4.31.1.2(1)(E) (June 5,

2013). PCS is used to generate FPAAs. See IRM 4.29.5.1(1). IDRS is used to generate

taxpayer transcripts, including the FINDSD transcript which shows the address that

taxpayers use on their personal returns. See May v. Commissioner, T.C. Memo. 2014194, at *12 n.6, aff’d sub nom. Best v. Commissioner, 702 F. App’x 615 (9th Cir. 2017).

12

[*12] notice partners. TSU provided the CML to the USPS employee

who receives the FPAAs for mailing, and the USPS employee completes

the CML by adding a USPS postmark, his signature, the number of

pieces of mail on the CML, and the number of pieces of mail that the

USPS received for mailing. Sacramento TSU RA April Basura reviewed

the addresses on the CML and DSIF’s TMP and notice partner FPAAs

for accuracy and confirmed that postage had been placed on the FPAAs’

mailing envelopes. She then wrote her initials on the lower left-hand

corner of the CML. On December 17, 2004, RA Basura drove the DSIF

FPAAs to the USPS for mailing. She watched while a USPS employee

completed the CML. The USPS employee returned the CML to RA

Basura, and the CML was retained in the files at Sacramento TSU.

Sacramento TSU mailed the FPAAs to DSIF’s TMP (TMP FPAA)

and its three members Presidio Growth, Presidio Resources, and Bogan

on the same date, December 17, 2004. It mailed a copy of the notice

partner FPAA to Bogan at both the Schedule K–1 and the East Hansen

addresses. Neither copy included Mr. Blum’s name in the address.

Sacramento TSU did not request return receipt for either copy and was

not required to do so under the Code. There is no evidence in the record

that the USPS returned either copy of the notice partner FPAA to the

IRS as undeliverable.

In the FPAA, among other adjustments, respondent determined

that DSIF did not exist as a matter of fact. In the alternative he

determined that DSIF was formed solely for tax avoidance purposes and

that DSIF and the BLIPS transactions had no purpose other than tax

avoidance and lacked economic substance. In the second alternative he

determined that DSIF was a sham. He further determined that DSIF

had not established the identities or names of its partners or each

partner’s distributive share of partnership items. He determined that

the allocation of partnership items in the LLC agreement did not have

substantial economic effect and reallocated Presidio Growth, Presidio

Resources, and Bogan each a one-third interest in DSIF.

Respondent produced a completed CML as evidence that the IRS

mailed the notice partner FPAA to Bogan at both the Schedule K–1 and

East Hansen addresses. The CML has a USPS postmark and is signed

by a USPS employee. The USPS employee also completed the spaces on

the CML for the number of pieces of mail listed on the CML for mailing,

seven, and the number of pieces of mail that the USPS received for

mailing, seven. The CML also shows USPS tracking numbers that

correspond to the tracking numbers on the notice partner FPAAs.

13

[*13] On February 28, 2005, the IRS generated Form 886–Z(C),

Partner’s or S Corporation Shareholders’ Shares of Income, for DSIF’s

1999 taxable year, which identified Bogan as a notice partner and

provided its address as follows:

Bogan Ventures, LLC c/o Scott A. Blum

xxx E. Hansen

P.O. Box xxxx

Jackson, WY

Form 886–Z(C) is computer generated using information on PCS.

The Form shows the partners’ names, addresses, TINs, and income and

loss percentages. IRM 4.29.5.2.10(1) (Jan. 1, 2003), 4.29.5.2.1(2) (Mar. 1,

2006). The IRS uses Form 886–Z(C) to verify the profit and loss interests

of each partner and to identify each partner’s distributive share of

partnership items as adjusted in the FPAA. See IRM 4.31.3.6.2.3(6)(C)

(2004). It uses Form 886–Z(C) to show how the adjustments to the

partnership return affect each partner’s distributive shares of

partnership and affected items. See H Graphics/Access, Ltd. P’ship v.

Commissioner, T.C. Memo. 1992-345; IRM 4.31.3.6.2.3(6)(C). It uses

Form 886–Z(C) to verify that all notice partners and their profit and loss

interests have been correctly identified and that all notice partners were

issued an FPAA by comparing the names on the Form with the CML.

See IRM 4.31.3.5.6(8) (2004), 4.31.2.2.15.1 (2004). The IRS generates

Form 886–Z(C) in conjunction with the preparation of an FPAA and

revises the Form when it receives updated information. DSIF’s

February 28, 2005, Form 886–Z(C) shows that its three members,

Bogan, Presidio Growth, and Presidio Resources, each had a percentage

of profits of zero.

IV.

Partnership-Level Case

On March 17, 2005, DSIF’s TMP Presidio Growth timely filed a

consolidated petition for review of the FPAA adjustments in the District

Court for the Northern District of California. The consolidated petition

also pertained to 62 other BLIPS cases. See Sixty-Three Strategic Inv.

Funds v. United States (63 SIFs case), No. 05-CV-01123 (N.D. Cal.

Mar. 17, 2005). Presidio Growth was the TMP for all 63 partnerships in

the 63 SIFs case. The TMP filed a certification of interested entities or

parties with the consolidated petition that listed Bogan and Mr. Blum

as interested entities and persons. Id. The certification provided an

address for Bogan in Houston, Texas, in care of the TMP, and for Mr.

Blum it provided the Schedule K–1 address with “Scott A. Blum

14

[*14] Separate Property Trust” on the second line of the address. On

November 7, 2005, the district court stayed the 63 SIFs case pending

the resolution of the criminal cases of the BLIPS promoters, which was

resolved in early 2009.

Petitioners were aware of the district court case while it was

ongoing. Pursuant to section 6226(c), DSIF’s partners were parties to

the district court case. Petitioners did not have a right to file their own

petition in district court or in this Court although they had the right to

intervene in the 63 SIFs case. See § 6226(b) (providing that a notice

partner may file a petition only if the TMP has not filed a petition).

Petitioners knew about the 63 SIFs case and chose not to intervene on

Bogan’s behalf.

In August 2011, while the 63 SIFs case was ongoing, petitioners

sent a letter to the IRS asking about settling their BLIPS tax shelter

loss and specifically stated that the loss was at issue in the 63 SIFs case.

In response the IRS stated that petitioners would be required to concede

all adjustments pertaining to DSIF to be removed from the 63 SIFs case.

Petitioners did not pursue the settlement.

In July 2014 the district court held that the BLIPS transactions

lacked economic substance and were disregarded for federal tax

purposes. It granted summary judgment to the Government sustaining

all adjustments in the FPAAs except for interest income from the BLIPS

loans. Shasta Strategic Inv. Fund, LLC v. United States,

No. C-04-04264, 2014 WL 3852416 (N.D. Cal. July 31, 2014); see also

Shasta Strategic Inv. Fund LLC v. United States, 76 F. Supp. 3d 895

(N.D. Cal. 2014). It held that the section 6662(h) gross valuation

misstatement penalties provisionally applied. See § 6221 (requiring the

tax treatment of any partnership item including the applicability of any

penalty relating to the adjustment of any partnership item be

determined in a TEFRA partnership case); United States v. Woods, 571

U.S. 31, 41 (2013). The court did not address the FPAAs’ alternative

position that the partnerships were shams. It entered its decision on

January 20, 2015.

V.

Prior Tax Court Case

On November 10, 2005, while the 63 SIFs case was ongoing,

respondent issued a Notice of Deficiency to petitioners for 1998, 1999,

and 2002 (2005 Notice of Deficiency). CI approved the issuance of the

Notice of Deficiency before its issuance. Among other adjustments,

15

[*15] respondent disallowed petitioners’ $45 million OPIS tax shelter

loss for 1998 and $78.5 million BLIPS tax shelter loss for 1999.

Respondent adjusted Mr. Blum’s bases in the DSIF assets to zero and

determined a deficiency of over $15 million attributable to the

adjustments relating to the BLIPS tax shelter. For 1999 he also

disallowed a $1,754,670 capital loss from an equity swap that was part

of the OPIS tax shelter (OPIS swap).

Respondent mailed the 2005 Notice of Deficiency to petitioners at

the post office box address. Petitioners filed a Petition with this Court.

Blum v. Commissioner (Blum I), No. 2679-06 (T.C. filed Feb. 6, 2006).

They asserted that the Notice of Deficiency was invalid with respect to

the BLIPS adjustments because the adjustments were partnership or

affected items. See Amendment to Petition, Blum I, No. 2679-06 (Mar. 9,

2006). They asserted that DSIF’s TMP filed a petition in district court

for readjustment of the BLIPS adjustments and specifically cited the

63 SIFs case. Id. They asserted that the BLIPS adjustments are affected

items that may not be made until the conclusion of the 63 SIFs case. Id.

We dismissed the BLIPS adjustments for lack of jurisdiction on the basis

that the adjustments were partnership or affected items and were at

issue in the ongoing 63 SIFs case. See Order, Blum I, No. 2679-06

(July 3, 2006); see also Blum I, T.C. Memo. 2012-16, slip op. at 2 (stating

that we had “dismissed for lack of jurisdiction those portions of the

deficiencies and penalties pertaining to petitioners’ [BLIPS]

transaction”), aff’d, 737 F.3d 1303 (10th Cir. 2013).

We issued a Memorandum Opinion in Blum I that disallowed the

OPIS tax shelter loss for 1998 and the $1,754,670 capital loss from the

OPIS swap for 1999. Blum I, T.C. Memo. 2012-16, slip op. at 19.

Following the issuance of our Opinion, respondent prepared a

computation of petitioners’ deficiencies for 1998, 1999, and 2002. He

prepared the 1999 deficiency in accordance with Munro v.

Commissioner, 92 T.C. 71 (1989) (Munro computation), to determine the

1999 deficiency solely on the basis of Blum I without accounting for

adjustments pertaining to the BLIPS tax shelter. The parties filed

respondent’s computation as an agreed computation under Rule 155.

The parties agreed to a deficiency of $373,641 for 1999 that is mainly

attributable to a $1,754,670 adjustment for the OPIS swap.

On June 1, 2012, we entered a Decision reflecting the parties’

agreed computation of deficiencies of $9,279,861, $373,641, and $18,737

for 1998, 1999, and 2002, respectively, a section 6662(h) penalty of

$3,697,388 for 1998, and a section 6662(b) penalty of $66,619 for 1999.

16

[*16] Decision, Blum I, No. 2679-06 (T.C. June 1, 2012), No. 98 (Blum I

Decision). The Decision stated that it is “incorporating herein the facts

recited in [the] computation as the findings of the Court.” The Decision

states that “[i]t is further stipulated that this decision does not include

adjustments subject to separate determination under . . . TEFRA.” In

September 2012 the IRS assessed tax and penalties set forth in the

Decision plus interest.

VI.

Closing Agreement

Following Blum I, the IRS issued a Notice of Federal Tax Lien

(NFTL) and a Notice of Intent to Levy to petitioners for 1998 and 1999.

Petitioners requested a collection due process (CDP) hearing with the

IRS Office of Appeals (Appeals) for the NFTL in August 2014.11 During

the CDP hearing, petitioners argued that interest should be abated for

1998 and 1999 because the criminal investigations connected to the

BLIPS tax shelter delayed resolution of Blum I and that petitioners

agreed to continuances to allow the criminal investigations to proceed.

The settlement officer (SO) agreed to a partial interest abatement but

denied petitioners’ request to withdraw the NFTL. The SO prepared

Form 12257, Summary Notice of Determination, to reflect Appeals’

agreement to a partial interest abatement for 1998 and 1999 of

approximately $5.8 million. In the Summary Notice of Determination,

the SO wrote that the IRS would withdraw the NFTL when petitioners

fully paid the tax that had been assessed for 1998 and 1999. The SO also

wrote that “[n]o collection alternatives have been granted . . . because

another liability is expected to be assessed which will increase the

amount you owe for the 1999 tax year.” The SO understood that

approximately $15 million of tax related to the BLIPS tax shelter was

not yet assessed against petitioners for 1999.

By fax dated August 27, 2015, the SO informed petitioners that

their remaining unpaid balance through October 8, 2015, was

$3,763,340. The SO wrote that this amount “does not include any

currently unassessed liabilities which are anticipated from other

litigation or related proceedings.” Petitioners signed the Summary

Notice of Determination and returned it to the SO by fax on August 31,

2015, thereby waiving their right to judicial review of the SO’s

determinations. On September 30, 2015, petitioners paid $3,763,340,

11 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent

Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981,

983 (2019). Although the record is unclear, it seems that petitioners had a separate

CDP hearing for the proposed levy. Respondent collected by levy.

17

[*17] which respondent applied for 1998. By that date, petitioners had

paid their 1999 assessed balance, less the amount of the interest to be

abated, in full.

After petitioners paid their assessed balances for 1998 and 1999,

they entered into a Closing Agreement on Final Determination Covering

Specific Matters with Appeals in December 2015, in which the IRS

agreed to a partial abatement of interest for 1998 and 1999. The SO

drafted the closing agreement. According to the closing agreement,

petitioners alleged during the CDP hearing that RA Politzer told them

that they qualified for interest abatement, which was correct under

section 6404(g). Interest abatement was permitted when petitioners’

audit was ongoing, but Congress subsequently amended the law to

eliminate interest abatement retroactively. The closing agreement

states that Appeals agreed to abate interest because of the hazards of

litigation and “a compelling issue of fairness” under section 6404(a).

The closing agreement states that with the September 30, 2015,

payment, petitioners had “full paid the balance of the liability” for 1998

and 1999. Although Appeals agreed to withdraw the NFTL, the closing

agreement states that a new NFTL might be filed with respect to any

future assessments. The closing agreement did not include the

standardized terms that the IRS used for closing agreements pursuant

to the BLIPS tax shelter settlement initiative or the text contained in

Announcement 2004-46 for closing agreements for the settlement

initiative.

VII.

Consents to Extend Limitations Periods

DSIF’s TMP Presidio Growth signed three Forms 872–P, Consent

to Extend the Time to Assess Tax Attributable to Partnership Items

(TMP consents), to extend the limitations period for 1999 to

December 31, 2004. The copy of the TMP consent in the record that

extends the limitations period to June 30, 2004, is signed by the TMP

but not the IRS. Petitioners and the IRS also executed multiple Forms

872 (individual consents) to extend petitioners’ personal limitations

period for 1999 to December 31, 2005. The individual consents did not

expressly extend the limitations period to assess tax attributable to

partnership or affected items. Respondent has been unable to find paper

copies of the partnership or individual consents and has produced

electronic copies.

18

[*18] VIII. Issuance of Affected Items Notices of Deficiency

On November 30, 2015, respondent issued a Notice of

Computational Adjustment to petitioners for 1999 for affected items

from the BLIPS tax shelter adjustments that did not require partnerlevel determinations, including adjustments to petitioners’ share of

DSIF’s interest income and their itemized deductions plus a section

6662(h) penalty attributable to these adjustments. However, the Notice

of Computational Adjustment did not include a section 6662(h) penalty

attributable to the disallowance of the $78.5 million BLIPS tax shelter

loss.

On December 8, 2015, respondent issued three affected items

Notices of Deficiency to petitioners, one each for 1999, 2007, and 2010,

determining deficiencies of $14,911,356, $214,385, and $736,216,

respectively. In the 1999 affected items Notice of Deficiency respondent

determined that the district court had sustained all adjustments made

in the FPAA, except for respondent’s adjustment to DSIF’s interest

income from the BLIPS loans. For 1999 respondent determined that

petitioners had bases of zero in the DSIF assets and disallowed the $78.5

million tax shelter loss. He disallowed the carryforward of the loss to

2007 and 2010. He also determined section 6662(h) gross valuation

misstatement penalties of $5,964,542, $85,754, and $294,486 for 1999,

2007, and 2010, respectively, and a section 6651(a)(1) addition to tax of

$10,719 for failing to timely file the 2007 return.

OPINION

I.

Mailing of Notice Partner FPAA

Petitioners challenge the validity of the affected items Notices of

Deficiency. They argue that the IRS failed to mail a notice partner FPAA

to Mr. Blum at his correct address. We address petitioners’ argument in

two parts: (1) whether Mr. Blum was a notice partner entitled to receive

the notice partner FPAA in lieu of Bogan and (2) what the correct

address for mailing the notice partner FPAA was. We find that Mr. Blum

was not entitled to receive the notice partner FPAA in lieu of Bogan. We

further find that the Schedule K–1 address was the correct address for

the IRS to mail Bogan’s notice partner FPAA to. By mailing the notice

partner FPAA to Bogan at the Schedule K–1 address, the IRS satisfied

the TEFRA notice requirements of the Code and the regulations.

The IRS was not required to send a copy of the notice partner

FPAA to either the East Hansen or the post office box address because

19

[*19] neither address was Bogan’s address. Petitioners did not argue

that Bogan’s address was the post office box address. Rather, they argue

that Mr. Blum’s address was the post office box address. Nevertheless,

we address petitioners’ argument that Mr. Blum’s correct address was

the post office box address for the sake of completeness. We find that

even if Mr. Blum was entitled to receive the notice partner FPAA as an

indirect partner, the IRS was not required to mail a copy to the post

office box address because petitioners failed to update their address in

accordance with the Code and the regulations for purposes of receipt of

FPAAs. Moreover, we find that petitioners received a copy of the notice

partner FPAA. Thus, the IRS’s decision to send a copy of the notice

partner FPAA to Bogan at both the Schedule K–1 and the East Hansen

addresses ensured delivery of the notice partner FPAA to petitioners.

A.

Remedy for Failure to Issue a Notice Partner FPAA

Taxpayers are entitled to challenge the validity of an affected

items Notice of Deficiency on the grounds that the IRS failed to issue a

notice partner FPAA to them. When the IRS fails to mail an FPAA to a

notice partner, section 6223(e) is the exclusive remedy for the notice

partner. See Wind Energy Tech. Assocs. III v. Commissioner, 94 T.C. 787

(1990); Wayne Caldwell Escrow P’ship v. Commissioner, T.C. Memo.

1996-401. Section 6223(e) allows the affected notice partner to elect to

convert the partnership items into nonpartnership items. See Taurus

FX Partners, LLC v. Commissioner, T.C. Memo. 2013-168, at *17. When

the affected partner elects to have the partnership items treated as

nonpartnership items, the normal deficiency procedures apply to that

partner. See § 6231(b)(1)(D); Crowell v. Commissioner, 102 T.C. 683,

692–94 (1994).

The parties have not adequately addressed the application of

section 6223(e). However, further discussion of section 6223(e) is

unnecessary because we find that the IRS properly and timely mailed a

notice partner FPAA to Bogan in accordance with the Code and the

regulations and that petitioners received it. Thus, the affected items

Notices of Deficiency are valid.

B.

Actual Receipt of Notice Partner FPAA

The parties dispute whether the IRS properly mailed a notice

partner FPAA with respect to Mr. Blum’s indirect interest in DSIF. For

that reason, we address the mailing issue below. However, before we do

so, we make the following critical findings. First, petitioners had actual

20

[*20] notice that the IRS issued a TMP FPAA for DSIF. In Blum I they

admitted to this Court that they knew about the 63 SIFs case. They told

this Court that DSIF’s TMP had filed a petition in district court for

redetermination of the BLIPS adjustments. Second, we find it highly

suspect that petitioners did not appear before this Court to give their

testimony that they did not receive the notice partner FPAA.12 It is well

established that the failure of a party to introduce evidence within his

possession which, if true, would be favorable to him, gives rise to the

presumption that if produced it would be unfavorable. Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d

513 (10th Cir. 1947); see also DiDonato v. Commissioner, T.C. Memo.

2013-11, at *59 (making a negative inference from the taxpayer’s failure

to testify); Gigliobianco v. Commissioner, T.C. Memo. 2012-276, at *18

(making a negative inference from the taxpayer’s accountant’s failure to

testify). Third, there is no evidence in the IRS’s records that either copy

of the notice partner FPAA was returned to the IRS as undeliverable. In

consideration of the entirety of the record, we find that petitioners in

fact received a copy of the notice partner FPAA mailed to Bogan.13

C.

Proof of Mailing

The Commissioner has the burden of proving that the IRS

properly mailed a notice partner FPAA by competent and persuasive

evidence.14 Clough v. Commissioner, 119 T.C. 183, 187 (2002). We

analyze the effect of errors in the address used for mailing an FPAA in

the same way that we analyze errors in the mailing of a Notice of

Deficiency. See Sealy Power, Ltd. v. Commissioner, 46 F.3d 382, 386 (5th

Cir. 1995), aff’g in part, rev’g and remanding in part T.C. Memo. 1992168; Petaluma FX Partners, LLC v. Commissioner, T.C. Memo.

12 Petitioners filed Declarations that they did not receive the notice partner

FPAA in support of summary adjudication. The Declarations are hearsay. Respondent

did not have an opportunity to cross-examine petitioners, and there is no way for the

Court to ascertain their credibility.

13 We question why petitioners waited over five years after they filed the

Petition to allege that respondent failed to mail the notice partner FPAA. Even then

they did not assert that they did not receive the FPAA. Rather, they asserted that

respondent had not provided evidence that he mailed a notice partner FPAA to them.

They waited another two and one-half years to deny receipt of the notice partner FPAA.

Respondent has not argued that petitioners raised a new issue. However, shifting of

the burden of proof is immaterial in this case because we rule for respondent.

14 Respondent argues that we should judicially estop petitioners from disputing

the proper mailing of the notice partner FPAA on the basis of Blum I’s dismissal of the

BLIPS adjustments. In our discretion, we decline to apply judicial estoppel to establish

mailing.

21

[*21] 2007-254. To meet his burden, the Commissioner must introduce

evidence showing that he delivered the FPAAs to the USPS for mailing.

Cataldo v. Commissioner, 60 T.C. 522, 524 (1973), aff’d per curiam, 499

F.2d 550 (2d Cir. 1974). Actual receipt of the FPAA is not required for

an FPAA to be valid. See Cropper v. Commissioner, 826 F.3d 1280, 1285

(10th Cir. 2016), aff’g T.C. Memo. 2014-139; Crowell, 102 T.C. at 692;

Han Kook LLC I-D v. Commissioner, T.C. Memo. 2011-223. “There is a

strong presumption in the law that a properly addressed letter will be

delivered, or offered for delivery, to the addressee.” McClaskey v.

Commissioner, T.C. Memo. 2008-147, slip op. at 8 (quoting Zenco Eng’g.

Corp. v. Commissioner, 75 T.C. 318, 323 (1980), aff’d, 673 F.2d 1332 (7th

Cir. 1981) (unpublished table decision)); see also Greenberg v.

Commissioner, 10 F.4th 1136, 1162 (11th Cir. 2021), aff’g T.C. Memo.

2018-74.

When the existence of an FPAA is not disputed, a properly

completed CML is prima facie evidence of the date and fact of mailing

and raises a rebuttable presumption that the FPAA was delivered. Hoyle

v. Commissioner, 131 T.C. 197, 203 (2008), supplemented by 136 T.C.

463 (2011); Clough, 119 T.C. at 187–88; Coleman v. Commissioner, 94

T.C. 82, 91 (1990). It is well established that a properly completed CML

is the equivalent of USPS Form 3877, Firm Mailing Book For

Accountable Mail, which the IRS uses to establish mailing of notices of

deficiency. See Clough, 119 T.C. at 185 n.3. The presumption does not

apply if the FPAA was mailed to an incorrect address. See BM Constr.

v. Commissioner, T.C. Memo. 2021-13, at *12.

The U.S. Court of Appeals for the Tenth Circuit, to which this case

is appealable absent stipulation to the contrary, has stated that a CML

is complete when it contains (1) the taxpayer’s address used to send the

FPAA to; (2) the certified mail tracking number of each piece of mail;

(3) a USPS date stamp indicating the date that the IRS delivered the

FPAAs to the USPS; (4) the number of pieces received by the USPS; and

(5) the signature of the USPS employee who received the FPAA. See

Walcott v. United States, 782 F. App’x 728, 732 (10th Cir. 2019); Cropper

v. Commissioner, 826 F.3d at 1286. Our Court generally requires (1) the

taxpayer’s name and address; (2) the certified mail tracking number;

(3) a USPS date stamp; (4) the number of pieces of mail submitted to the

USPS and received by the USPS; and (5) the signature or initials of the

USPS employee who received the FPAA. See Chinweze v. Commissioner,

T.C. Memo. 2022-56, at *7.

22

[*22] A properly completed CML shifts the burden to the taxpayer to

show that the notice partner FPAA was not actually or properly mailed.

Coleman, 94 T.C. at 91. The Tenth Circuit requires taxpayers to present

“clear and convincing evidence” of irregularity in mailing to rebut the

presumption. Cropper v. Commissioner, 826 F.3d at 1285–86 (quoting

Welch v. United States, 678 F.3d 1371, 1378 (Fed. Cir. 2012)). Our Court

has allowed taxpayers to rebut the presumption with “clear evidence” of

irregularity in mailing. See Pietanza v. Commissioner, 92 T.C. 729, 739

(1989), aff’d, 935 F.2d 1282 (3d Cir. 1991) (unpublished table decision).

Taxpayers may rebut the presumption by showing that the IRS did not

follow its established mailing procedures. Coleman, 94 T.C. at 91; BM

Constr., T.C. Memo. 2021-13, at *12. When the taxpayer rebuts the

presumption created by the CML, we weigh the evidence to determine,

on the basis of the preponderance of the evidence, whether the IRS

mailed the FPAA. See Chinweze, T.C. Memo. 2022-56, at *7. A

taxpayer’s self-serving testimony that he did not receive the FPAA is

insufficient to rebut the presumption. Id. at *8; Biomage, LLC v.

Commissioner, T.C. Memo. 2013-202, at *9.

After the parties filed their Answering Briefs, petitioners moved

for leave to file a response to respondent’s Answering Brief, arguing that

respondent made new arguments and findings of fact therein and that

they did not have an opportunity to respond. We granted petitioners’

Motion and allowed both parties to file an additional brief. In their Brief

petitioners argue that respondent admitted that the CML contains false

information, and, accordingly, we should not allow respondent to rely on

the CML.15 We find that respondent has not admitted that the CML

contains false information. Furthermore, there is no evidence in the

record that the CML contains false information.

Respondent’s Opening Brief (not the Answer Brief as petitioners

assert) states: “Accordingly, the Service properly mailed [DSIF’s] FPAA

to Bogan only [sic] as the only partner (other than Presidio) entitled to

notice under I.R.C. § 6223(a).” Petitioners argue that this statement

concedes that the CML contains false information. We strongly disagree.

This statement is the concluding sentence of a section of the Opening

Brief that addresses whether Bogan or Mr. Blum was DSIF’s notice

partner. When we read the section of the Brief in its entirety, we

15 In their Motion petitioners also asserted that respondent raised a new

argument in his Answering Brief concerning the constitutionality of his conduct when

he issued the Notice of Deficiency and DSIF’s FPAA. We allowed petitioners to respond

to this argument. We find no unconstitutional conduct.

23

[*23] understand respondent to argue that (1) Bogan was a notice

partner and Mr. Blum was not a notice partner and (2) the Code and the

regulations required the IRS to mail the notice partner FPAA only to

Bogan and not to Mr. Blum. Respondent has not conceded that the IRS

did not mail a notice partner FPAA to Presidio Growth or Presidio

Resource.

Respondent has produced a completed CML to establish that the

IRS mailed the notice partner FPAA to Bogan at the Schedule K–1 and

the East Hansen addresses. The CML shifts the burden to petitioners to

show that the notice partner FPAA was not mailed to those addresses.

Petitioners’ argument is twofold. They argue that the CML does not

create a presumption in this case because the IRS did not mail the notice

partner FPAA to Mr. Blum at the correct address. In the alternative

they attempt to rebut the presumption by arguing that the IRS failed to

follow its established procedures.

D.

Statutory and Regulatory Requirements for Mailing Notice

Partner FPAAs

Under the Code, the IRS is required to mail the notice partner

FPAA to the names and addresses of the partners that are shown on the

partnership return for the taxable year at issue or the names and

addresses that are furnished to the IRS by the TMP or any other person

in accordance with the Treasury regulations. § 6223(a), (c)(1) and (2).

However, the IRS must receive, at least 30 days before it mails the TMP

FPAA, sufficient information about the partner’s names and addresses

to enable it to determine that the partner is entitled to a notice partner

FPAA and to provide the notice partner FPAA to the partner. § 6223(a).

The regulations specify the required content of the written

statement and where the written statement must be filed. Temp. Treas.

Reg. § 301.6223(c)-1T(b), 52 Fed. Reg. 6784 (Mar. 5, 1987); see Treas.

Reg. § 301.6223(c)-1(b) (effective for partnership taxable years

beginning on or after October 4, 2001). The regulations require the

written statement to (1) identify the partnership and identify each

partner whose address is being updated; (2) explain that the information

is being furnished to correct or supplement earlier information for a

partner; (3) specify the taxable year to which the information relates;

(4) state the corrected or additional information; and (5) be signed by the

person supplying the updated address and provide his name, address,

and TIN (written statement requirement). Temp. Treas. Reg.

§ 301.6223(c)-1T(b)(3). The TMP, a partner, or any other person may

24

[*24] provide the written statement. § 6223(c)(2). The written statement

must be filed with the IRS service center where the partnership filed its

return or, if the person filing the written statement knows that an NBAP

has been mailed to the TMP, the IRS office that issued the NBAP. Temp.

Treas. Reg. § 301.6223(c)-1T(b)(2).

If an updated address is furnished to the IRS in accordance with

the regulations, the IRS is required to mail the notice partner FPAA to

the updated address so long as the IRS receives the written statement

at least 30 days before it mails the notice partner FPAA. Temp. Treas.

Reg. § 301.6223(c)-1T(a) and (b)(1); see also § 6223(c)(2).

A similar rule applies to furnishing the name and address of an

indirect partner as the notice partner by virtue of the indirect partner’s

ownership interest in a passthrough notice partner. See § 6223(c)(3). The

IRS is required to mail the notice partner FPAA to the indirect partner

in lieu of the passthrough partner if the indirect partner’s name,

address, and indirect profits interest is shown on the partnership return

for the year at issue or is furnished to the IRS pursuant to the written

statement requirement. Id.; Temp. Treas. Reg. § 301.6223(c)-1T(b); see

Gaughf Props., L.P. v. Commissioner, 139 T.C. 219 (2012), aff’d, 738 F.3d

415 (D.C. Cir. 2013). In such a case the indirect partner is the notice

partner. See § 6231(a)(8).

The regulations recognize that in certain instances, an address

may be updated or the identity of an indirect partner may be furnished

to the IRS in a manner that does not satisfy the written statement

requirement. See Temp. Treas. Reg. § 301.6223(c)-1T(f). In such

instances the IRS “may use” that information to mail notice partner

FPAAs. Id. The regulations provide that the IRS may use “other

information in its possession (for example, a change in address reflected

on a partner’s return).” Id.; see Murphy v. Commissioner, 129 T.C. 82,

87–88 (2007). However, the regulations also make it clear that the IRS

“is not obligated to search its records for information not expressly

furnished” on the partnership return for the year at issue or in a written

statement in accordance with the regulations. Temp. Treas. Reg.

§ 301.6223(c)-1T(f); see Murphy, 129 T.C. at 87; Taurus FX Partners,

T.C. Memo. 2013-168, at *13–14, *16 (holding that a partnership return

that listed indirect partner’s name in the capacity of “in care of” was

insufficient to notify the IRS that the indirect partner was a notice

partner).

25

[*25]

1.

Proper Partner and Address for Mailing DSIF’s

Notice Partner FPAA

Respondent argues that when the IRS mailed the notice partner

FPAA, Bogan was DSIF’s notice partner and Bogan’s address was the

Schedule K–1 address. Petitioners do not appear to challenge that the

Schedule K–1 address was the correct address for Bogan. Rather, they

argue that the IRS was required to mail the notice partner FPAA to Mr.

Blum as DSIF’s indirect partner in lieu of Bogan and that Mr. Blum’s

address was the post office box address. We find that Bogan was the

notice partner and that it was proper for the IRS to mail the notice

partner FPAA to Bogan at the Schedule K–1 address.

Mr. Blum’s identity as an indirect partner was not furnished on

DSIF’s 1999 partnership return or in a written statement in accordance

with the regulations. Schedule K–1 informed the IRS that Bogan was

DSIF’s partner. It did not indicate that Bogan was a single-member LLC

or a disregarded entity. It did not disclose that Mr. Blum was its sole

member or DSIF’s indirect partner. Nor did any other part of DSIF’s

return disclose this information. Mr. Blum’s name was not anywhere on

DSIF’s return. Accordingly, the IRS was not required to mail a copy of

the notice partner FPAA to Mr. Blum.

Petitioners have not identified any document in the record that

satisfies the written statement requirement. Accordingly, we find that

Mr. Blum was not entitled to the notice partner FPAA as DSIF’s indirect

partner in lieu of Bogan. For the sake of completeness, we further find

that neither Bogan’s nor Mr. Blum’s address was updated to the post

office box address pursuant to the written statement requirement.

Petitioners have not identified any document in the record that updates

Bogan’s or Mr. Blum’s address in accordance with the written statement

requirement.

Petitioners argue that a letter to RA Politzer from their former

representative dated April 11, 2002, satisfies the regulation’s written

statement requirement. We disagree. The version of the letter in the

record does not include the information required for the written

statement. It does not identify Mr. Blum as the sole owner of Bogan or

as an indirect partner of DSIF.16 It does not state that updated

information is being provided to supplement information on Bogan’s

16 The letter appears to restate the information document requests and

generally responds with “[p]lease see attached.” The version of the letter in the record

does not include any attachments.

26

[*26] Schedule K–1. In fact, the version of the letter in the record does

not mention DSIF. Moreover, the letter was sent before the IRS mailed

the NBAP. Accordingly, the written statement had to be furnished to the

IRS service center where DSIF’s 1999 return was filed. See Temp. Treas.

Reg. § 301.6223(c)-1T(b)(2). A letter mailed to an RA does not satisfy the

written statement requirement.

The record includes numerous communications, i.e., emails and

faxes, between RA Politzer and petitioners’ representatives during the

course of the audit, none of which satisfies the regulation’s written

statement requirement. None of the communications contains Bogan’s

or DSIF’s name or a statement that an address is being furnished to

correct or supplement Bogan’s or Mr. Blum’s address, or specifies the

1999 taxable year or the signature, address, and TIN of the person

supplying the information. See Temp. Treas. Reg. § 301.6223(c)-1T(b).

In fact petitioners do not argue that any of these communications

(apart from the April 11, 2002, letter) satisfies the written statement

requirement. Rather, they argue that these communications establish

that RA Politzer knew that Mr. Blum was DSIF’s indirect partner and

knew petitioners’ USPS mailing address was the post office box address.

They point out that she used the post office box address to mail notices

and other correspondence to petitioners, including notices that she

addressed to Bogan. It is clear under the Code, the regulations, and our

caselaw that this is not enough. See, e.g., Block Devs., LLC v.

Commissioner, T.C. Memo. 2017-142, at *23–24; Estate of Simon v.

Commissioner, T.C. Memo. 2013-174. The regulations provide detailed

instructions for furnishing the indirect partner’s name and updating

partner addresses, which petitioners did not follow.

We have repeatedly held that an individual IRS employee’s

knowledge of a different address for a partner from the address

furnished on the partnership return and the employee’s use of that

address to send correspondence is insufficient to update the partner’s

address for sending FPAAs. Block Devs., T.C. Memo. 2017-142,

at *23–24; Stone Canyon Partners v. Commissioner, T.C. Memo. 2007377, slip op. at 4, aff’d sub nom. Bedrosian v. Commissioner, 358 F. App’x

868 (9th Cir. 2009). An RA’s mailing of correspondence does not alter

the IRS’s obligations with respect to the address for mailing a notice

partner FPAA. Triangle Invs. Ltd. P’ship v. Commissioner, 95 T.C. 610,

616 (1990). Rather, information furnished to the RA falls into the

category of the type of information that the IRS “may use” to mail a

notice partner FPAA. However, the IRS is not required to use the

27

[*27] information. Block Devs., T.C. Memo. 2017-142, at *23–24. The

IRS is required to mail a notice partner FPAA to the address on the

partnership return for the year at issue or an address that is furnished

to the IRS in accordance with the regulations. Id. It is not required to

use address information or the name of an indirect partner contained in

an RA’s personal working files.

Moreover, none of the communications with RA Politzer clearly

identifies the post office box address as petitioners’ address for USPS

delivery. During the audit RA Politzer made multiple requests for

petitioners’ address. Petitioners provided both the East Hansen and the

post office box addresses to RA Politzer. They called the East Hansen

address their “current address” and “home address” and the post office

box address their “correct mailing address.” They did not tell RA Politzer

that they were updating their address or Bogan’s address. They did not

tell RA Politzer that the USPS did not deliver to the East Hansen

address or that a post office box was required for USPS mail. Rather,

they are forced to rely on a USPS stamp “No Street Delivery” “Box #

Required” on envelopes addressed to them at the East Hansen address

that the USPS returned to RA Politzer. However, the USPS also

returned mail to RA Politzer that she addressed to Mrs. Blum and Bogan

at the post office box address. These communications indicate that RA

Politzer did not know petitioners’ address for USPS mail delivery. RA

Politzer testified at trial, and petitioners failed to elicit testimony about

her knowledge of petitioners’ address for USPS mail delivery.

The presence of both addresses in RA Politzer’s personal files is

due to petitioners’ vague, inconsistent communications about their

address. Petitioners did not update Mr. Blum’s address in accordance

with the Code and the regulations for the purposes of the mailing of a

notice partner FPAA. At best, petitioners provided confusing address

information in informal communications with RA Politzer, none of

which clearly indicated petitioners’ address for USPS mail delivery. A

diligent taxpayer would have ensured that the IRS knew that the USPS

did not deliver mail to their residence and that a post office box was

required for USPS mail delivery. As detailed above, petitioners’ address

updates were unclear and were limited to an RA’s personal working

files. Petitioners did not provide the post office box in accordance with

the Code and the written statement requirement. More importantly, no

one told RA Politzer that the Schedule K–1 address was no longer

Bogan’s address. As stated above, Bogan was the notice partner, and Mr.

Blum was not entitled to a copy of the notice partner FPAA in lieu of

Bogan.

28

[*28]

2.

Last Known Address Rules

Petitioners discuss the last known address rules at length in their

Briefs. Our caselaw is clear: The last known address rules do not apply

to FPAAs. Taurus FX Partners, T.C. Memo. 2013-168, at *8. As

previously discussed, the regulations provide specific, detailed

instructions on the requirements for updating the address of a notice

partner including what information taxpayers are required to provide.

Petitioners acknowledge that the last known address rules “do not

strictly apply” to FPAAs. Nevertheless, they advocate that we adopt the

last known address rules for a subcategory of small TEFRA

partnerships. They argue that we should exempt DSIF from the written

statement requirement because it had only three partners. There is no

such exemption in the Code or the regulations, and we will not create

one.

In Taurus FX Partners, T.C. Memo. 2013-168, at *14–15, we

explained why TEFRA did not adopt the last known address rules:

[U]nlike a corporate or an individual income tax proceeding

where the examination is directly of the taxpayer’s return,

a TEFRA proceeding is conducted at the partnership level

. . . . The partners who are ultimately liable for the tax can

change from year to year. Thus, adjustments resulting

from a partnership proceeding relating to one taxable year

may affect a completely different set of taxpayers from

those who owned an interest in that same partnership in

another year. As a result, simply updating address

information from a subsequent year’s return as is done in

deficiency procedures puts the IRS in peril of notifying the

wrong people.

Petitioners argue that they provided “clear and concise” notice of

the post office box address to RA Politzer as required by Revenue

Procedure 2001-18, 2001-1 C.B. 708 (Feb. 20, 2001). First, Revenue

Procedure 2001-18 is irrelevant because it deals with how a taxpayer

notifies the IRS of a change in his last known address. Second, as we

discussed above, petitioners did not provide “clear and concise” notice of

an address change to RA Politzer. Rather, they gave RA Politzer two

addresses and did not tell her that a post office box was required for

USPS mail delivery.

29

[*29] Finally, we note that petitioners continued to use the Monarch

Beach address on their personal returns through 2008. In 2008 they

filed a personal return that showed the East Hansen address. From 2002

through 2015 petitioners did not file a return using the post office box

address. Petitioners’ personal returns show that petitioners continually

provided inconsistent and incorrect information to the IRS about their

address for USPS mail delivery.

3.

Conclusion

The IRS satisfied the mailing requirements of the Code and

regulations by mailing the notice partner FPAA to Bogan at the

Schedule K–1 address. No one updated DSIF’s partner information to

identify Mr. Blum as DSIF’s indirect partner who was entitled to a

notice partner FPAA in lieu of Bogan. Accordingly, the IRS was not

required to mail the notice partner FPAA to Mr. Blum. Nor did anyone

update Bogan’s address in a written statement that satisfies the

requirements of the Code and the regulations. The IRS took the extra

step of mailing a copy of Bogan’s notice partner FPAA to the East

Hansen address. Petitioners received a copy of the notice partner FPAA.

The Code and the regulations clearly place the responsibility for

furnishing an updated address and the identity of an indirect partner

on the taxpayer. The Code and the regulations limit the IRS’s

obligations to mailing FPAAs to addresses and partners furnished on

the partnership return for the taxable year at issue or in accordance

with the written statement requirement. See Int’l Strategic Partners,

LLC v. Commissioner, 455 F. App’x 91, 92 (2d Cir. 2012) (“It was [the

taxpayer’s] responsibility to update its contact information with the IRS,

if necessary, pursuant to the regulations. It did not do so and cannot

impose a burden on the IRS that Congress declined to impose.”). The

Code also expressly imposes a duty on the TMP to update a partner’s

name and address, and if the TMP discovers that the previously

furnished information is incorrect or incomplete, the TMP is required to

“furnish such revised or additional information as may be necessary.”

§ 6230(e).

The simple fact is that petitioners failed to comply with the clear

and express written statement requirement of the Code and the

regulations. Petitioners have advanced numerous meritless theories

about the alleged nonreceipt of the notice partner FPAA. They argue

that the IRS knowingly and intentionally mailed the notice partner

FPAA to the incorrect address so that petitioners could not dispute the

30

[*30] disallowance of the BLIPS tax shelter loss. However, DSIF’s TMP

did challenge the BLIPS adjustments in district court and lost. When a

TMP files a petition for review of FPAA adjustments, an individual

partner cannot file its own petition for review of the FPAA. See § 6226(b).

Although the IRS was not required to mail a copy of Bogan’s

notice partner FPAA to the East Hansen address, it did so to ensure that

petitioners received a copy of Bogan’s notice partner FPAA. We find on

the basis of the entire record that petitioners received a notice partner

FPAA. If the USPS had been unable to deliver a copy of Bogan’s notice

partner FPAA, it would have been petitioners’ own fault. A taxpayer

subject to TEFRA is required to follow the procedures detailed in the

Code and the regulations.

Mr. Blum chose to own his interest in DSIF through a disregarded

entity and to have DSIF issue Schedule K–1 in Bogan’s name with

Bogan’s TIN and address. As we observed in Taurus FX Partners:

In the context of substantive tax matters, the Supreme

Court “has observed repeatedly that, while a taxpayer is

free to organize his affairs as he chooses, nevertheless, once

having done so, he must accept the tax consequences of his

choice, whether contemplated or not . . . and may not enjoy

the benefit of some other route he might have chosen to

follow but did not.” This proposition should be no less true

in procedural matters.

Taurus FX Partners, T.C. Memo. 2013-168, at *16–17 (footnote omitted)

(quoting Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417

U.S. 134, 149 (1974)).

The IRS was not required to mail a notice partner FPAA to Mr.

Blum. Nor was the IRS required to mail the FPAA to the post office box

address. Bogan’s notice partner FPAA was properly addressed to the

Schedule K–1 address. Accordingly, the IRS satisfied the statutory and

regulatory requirements for mailing a notice partner FPAA with respect

to Mr. Blum’s indirect interest in DSIF. Accordingly, the CML creates a

rebuttable presumption of delivery, and we turn to the question of

whether petitioners have rebutted that presumption.

E.

Petitioners’ Attempt to Rebut CML Presumption

Petitioners have attempted to rebut the presumption by arguing

that the IRS did not follow its established mailing procedures, that

31

[*31] freeze code TC 914 prevented mailing of the notice partner FPAA,

and that Form 886–Z(C) shows that the IRS had the post office box

address for Mr. Blum. The two latter arguments seem to be based on

petitioners’ position that the IRS was required to mail the notice partner

FPAA to Mr. Blum in lieu of Bogan. Although we rejected that position

above, we nevertheless address petitioners’ arguments relating to TC

914 and Form 886–Z(C) for the sake of completeness.

1.

IRS Mailing Procedures

Petitioners argue that the IRS did not follow its established

procedures for mailing notice partner FPAAs. We find that the witness

testimony clearly establishes that the IRS adhered to its established

mailing procedures when it mailed a copy of the notice partner FPAA to

Bogan at the Schedule K–1 address. IRS procedure is to mail a copy of

the notice partner FPAA to every address for the notice partner, i.e.,

Bogan, in PCS and IDRS. RA Basura explained the procedures that

Sacramento TSU used to prepare and mail the TMP and notice partner

FPAAs for the BLIPS tax shelter.

RA Basura stated that she reviewed the CMLs, initialed them,

and then drove them to the USPS for mailing, where the USPS employee

completed the CMLs and returned them to her. The CML in this case

has RA Basura’s initials in her own handwriting. We find that the

procedures are in accordance with respondent’s established mailing

procedure. Moreover, petitioners mischaracterize RA Basura’s

testimony about the addresses used for mailing FPAAs. She testified

that TSU mails a copy of the FPAA to each address in PCS and IDRS

for a notice partner. She did not testify that Sacramento TSU searched

IRS records for any address that is known to an IRS employee.

Petitioners did not rebut the presumption created by the CML.

Rather, RA Basura’s credible testimony establishes that Sacramento

TSU mailed a copy of the notice partner FPAA to Bogan. We base our

decision that the IRS properly mailed the notice partner FPAA largely

on RA Basura’s credible testimony. Petitioners did not testify or present

any evidence that the copies were not delivered. The preponderance of

the evidence establishes that the IRS mailed the notice partner FPAA

to Bogan as required by the Code and the regulations.

2.

TC 914 Freeze Code

Petitioners argue that the presence of TC 914 on their account

prevented issuance of a notice partner FPAA to them. They further

32

[*32] argue that the IRS did not obtain permission to issue the FPAA

from CI as required by the IRM. They argue that for this reason the

CML is incorrect and cannot create a presumption of delivery.

Petitioners’ argument fails for numerous reasons.

First, the record, including credible witness testimony, clearly

establishes that TC 914 does not prevent issuance of a notice partner

FPAA. Moreover, documents in the record establish that the IRS did

obtain CI’s approval to issue the FPAA for DSIF and a notice partner

FPAA to Bogan with respect to Mr. Blum’s indirect interest.

Second, to the extent that petitioners rely on them, the IRM,

internal memoranda, policy statements, or internal procedures do not

have the force of law and confer no rights on taxpayers. See Thompson

v. Commissioner, 140 T.C. 173 (2013); see also United States v. Horne,

714 F.2d 206 (1st Cir. 1983) (holding that a violation of the IRM has no

bearing on the validity of assessments).

Third, the IRM does not support petitioners’ cause. The IRM

clearly shows that the IRS can issue a notice partner FPAA when TC 914

is in effect on a taxpayer’s account. The IRM states that if TC 914 cannot

be reversed, agreement must be reached with CI to issue an FPAA. IRM

4.31.3.4.15(2)(B) (2004). The IRM states that TC 914 must be lifted to

assess tax, however. Both RA Gee and Special Agent Alvarado credibly

testified that TC 914 does not prevent issuance of an FPAA or a Notice

of Deficiency. They testified that TC 914 does prevent assessment.

Special Agent Alvarado also credibly testified that the IRS did not lift

TC 914 until the criminal matters were resolved or a BLIPS investor

agreed to the settlement initiative so that respondent could assess the

agreed-upon tax. Moreover, RA Gee credibly testified that he obtained

approval from Special Agent Alvarado to issue the notice partner FPAA

to Bogan as well as the 2005 Notice of Deficiency. His testimony is

supported by documentary evidence.

Fourth, the filing of the 63 SIFs case establishes that the IRS

mailed the TMP FPAA and the TMP received it, indicating that CI gave

approval for issuance of the FPAA for DSIF.

Finally, the fact that the IRS conducted a settlement initiative

during the halt memo’s 120-day freeze period clearly shows that CI was

granting the IRS permission to resolve the audits.

33

[*33]

3.

Form 886–Z(C)

Petitioners argue that Form 886–Z(C) is evidence that the post

office box address was provided to respondent. Form 886–Z(C) identifies

Bogan as the notice partner and provides a two-line address for Bogan:

“XXX East Hansen, PO Box XXX.”

Form 886–Z(C) is dated February 28, 2005. It was created after

the IRS issued Bogan’s notice partner FPAA. It does not reflect the

address that was in PCS when the IRS mailed Bogan’s notice partner

FPAA. To overcome that fact, petitioners argue that the February 28,

2005, Form 886–Z(C) must be the same one that the IRS generated

before it issued Bogan’s notice partner FPAA. They argue that the IRM

requires the IRS to continue to use the same Form through the

partnership-level proceeding, citing IRM 4.31.2.4.2.5.2(5)(B) (2004).

That part of the IRM describes how the IRS closes a partnership case

after a petition has been filed in district court and requires the IRS to

include Form 886–Z(C) in the partnership file for the district court case.

The IRM states that “[t]his Form 886–Z(C) is the same one that was

included in the FPAA package.” Id.

However, the version of Form 886–Z(C) in the record was

prepared before the DSIF’s TMP filed the petition in district court. We

cannot say why this version of the Form was generated. Moreover, we

are not convinced that petitioners’ interpretation of the “same one”

language is correct because numerous parts of the IRM instruct RAs to

update Form 886–Z(C) when they receive additional information about

partners even after the IRS issued an FPAA. See IRM 4.29.2.2.2(3)

(Jan. 1, 2003). It would be inconsistent for the IRM to require use of the

same version of a Form and to require RAs to update the Form.17 Neither

party elicited testimony about the Form. Significantly, petitioners did

not elicit testimony that contradicts our understanding that (1) Form

886–Z(C) may have been revised after the IRS mailed Bogan’s notice

partner FPAA and (2) it does not necessarily reflect the addresses in

PCS or IDRS when the IRS mailed the notice partner FPAA.

17 Nor do we agree with petitioners’ position that Form 886–Z(C) is provided to

the TMP as part of the TMP FPAA. See IRM 4.31.2.2.9.3(1)(G) (2004) (stating Form

886–Z(C) should be printed for case file only).

34

[*34] F.

Validity of the Regulation

Petitioners tersely assert that Temporary Treasury Regulation

§ 301.6223(c)-1T(f) is invalid.18 The regulation provides that the IRS

“may use other information in its possession” but it “is not obligated to

search its records for information not expressly furnished” on the

partnership return for the taxable year at issue or in accordance with

the written statement requirement. Id.

Petitioners did not seriously challenge the validity of the

regulations. They did not cite Loper Bright Enterprises v. Raimondo, 144

S. Ct. 2244 (2024), and have not articulated a basis to challenge the

efficacy of the regulation. Section 6223(c)(2) expressly delegates

authority to the Secretary of the Treasury to promulgate regulations for

furnishing updated partner and address information to the IRS. We find

that the regulation is consistent with the statute and is valid.

Petitioners also argue that respondent’s interpretation of the

regulation is not permissible. We disagree. Respondent interprets the

regulation in accordance with its plain, unambiguous meaning, that the

IRS is not obligated to search its records for information not provided in

accordance with the Code and the written statement requirement of the

regulations. We find that the IRS satisfied the requirements of the Code

and the regulations by mailing a copy of the notice partner FPAA to

Bogan at the Schedule K–1 address.

II.

Statute of Limitations

Petitioners argue that the period of limitations expired before the

IRS issued both the DSIF FPAA and the affected items Notices of

Deficiency. They argue that the partnership and individual consents are

invalid. They further argue that the decision document in Blum I caused

the limitations period to expire for 1999. We disagree with petitioners

and hold that respondent timely issued the affected items Notices of

Deficiency.

18 Petitioners argue that Treasury Regulation § 301.6223(c)-1(f) is invalid.

However, that regulation was effective for partnership taxable years beginning on or

after October 4, 2001. Accordingly, we treat petitioners as challenging the validity of

Temporary Treasury Regulation § 301.6223(c)-1T(f), which was in effect for DSIF’s

1999 taxable year. Both versions of the regulation contain nearly identical terms.

35

[*35] A.

TMP Consents

Partners cannot challenge the validity of the TMP consents in a

partner-level case. The timeliness of an FPAA is a partnership item that

must be raised during the TEFRA case, or it is waived. Crowell, 102 T.C.

at 693; Goldberg, T.C. Memo. 2021-119, at *11–12; see § 6221 (requiring

partnership items to be determined at the partnership level).

A challenge to the validity of a TMP consent “is precisely the type of

challenge prohibited by TEFRA in light of Congress’s decision that such

suits are better addressed in one fell swoop at the ‘partnership level’

than in countless suits by individual partners.”19 Kaplan v. United

States, 133 F.3d 469, 473 (7th Cir. 1998). Accordingly, we do not address

the merits of petitioners’ argument with respect to the TMP consents.20

B.

Individual Consents

Section 6501(a) sets a three-year limitations period from the filing

of a return to assess tax. In the case of a tax imposed on partnership and

affected items, section 6229 extends the period of limitations prescribed

by section 6501(a). Rhone-Poulenc Surfactants & Specialties, L.P. v.

Commissioner, 114 T.C. 533, 545 (2000). Section 6229 prescribes a

minimum three-year limitations period to assess tax attributable to

partnership or affected items that supplements the section 6501(a)

limitations period. Rhone-Poulenc, 114 T.C. at 540–42. Sections 6229

and 6501 provide alternative statutes of limitations. Rhone-Poulenc, 114

T.C. at 544; see § 6501(n)(2) (cross-referencing section 6229 for the

extension of the limitations period for partnership items).

Under section 6229(a), the limitations period for assessing tax

attributable to partnership or affected items is three years after the

later of the filing of the partnership return or the last day for timely

filing the return. The timely mailing of the TMP FPAA suspends the

19 While the Tenth Circuit has not ruled on the issue of whether the period of

limitations is a partnership item, every other circuit court that has considered the

issue has held that it is a partnership item that must be litigated in the TEFRA

partnership case. See Bedrosian v. Commissioner, 940 F.3d 467, 471–72 (9th Cir. 2019),

aff’g 143 T.C. 83 (2014); Keener v. United States, 551 F.3d 1358, 1362–63 & n.3 (Fed.

Cir. 2009); Weiner v. United States, 389 F.3d 152, 156 (5th Cir. 2004); Davenport

Recycling Assocs. v. Commissioner, 220 F.3d 1255, 1260 (11th Cir. 2000), aff’g T.C.

Memo. 1998-347; Chimblo v. Commissioner, 177 F.3d 119, 125 (2d Cir. 1999), aff’g T.C.

Memo. 1997-535; Williams v. United States, 165 F.3d 30 (6th Cir. 1998) (per curiam)

(unpublished table decision).

20 Section 6226(d)(1)(B) permits individual partners to participate in a

partnership case to raise a limitations period defense.

36

[*36] running of the limitations period, and the limitations period

remains suspended for the period during which a partnership case may

be filed in court and, if an action is brought, until the court’s decision

has become final plus for one year thereafter. § 6229(d)(2). The TMP

may agree to extend the section 6229(a) limitations period for tax

attributable to partnership or affected items in a written agreement

with the IRS, i.e., a TMP consent. §§ 6501(c)(4), 6229(b)(1). When a TMP

agrees to extend the limitations period, he does so on behalf of all

partners. Alternatively, an individual partner may agree to extend the

limitations period for his share of partnership and affected items, i.e.,

an individual consent. An individual consent must expressly state that

it applies to tax attributable to partnership or affected items. See

§ 6229(b)(3).

Petitioners may challenge the timeliness of the affected items

Notices of Deficiency on the basis of the individual consents. Petitioners

argue that the individual consents are invalid. However, we find that

the individual consents are valid on their face, and petitioners did not

present any evidence that the consents are invalid. See Evert v.

Commissioner, T.C. Memo. 2022-48, at *5–6 (placing the burden on

taxpayers to affirmatively show that consents are not valid). Petitioners

also argue that the individual consents failed to expressly extend the

1999 limitations period with respect to partnership or affected items

and, as a result, the individual consents do not extend the 1999

limitations period. Petitioners’ argument is of no avail. Petitioners’ 1999

limitations period was open to assess tax attributable to partnership and

affected items under section 6229, and thus, the individual consents are

immaterial.

The district court’s decision in the 63 SIFs case became final on

January 20, 2015, and respondent had one year from that date to issue

the affected items Notices of Deficiency. Accordingly, the affected items

Notices of Deficiency dated December 8, 2015, were timely under section

6229. The disallowed losses for 2007 and 2010 are carryovers of the 1999

BLIPS tax shelter loss. The limitation periods for 2007 and 2010 remain

open for the carryover loss to the same extent as the 1999 limitations

period. See § 6229.

C.

Blum I Decision

Petitioners argue that the Blum I Decision caused the limitations

period to expire for 1999 because it did not expressly state that the

period remained open for assessing tax attributable to partnership or

37

[*37] affected items. They argue that our Court’s decisions must reserve

respondent’s right to assess tax attributable to partnership or affected

items. However, petitioners cite no statutory, regulatory, or judicial

authority for this argument. Rather, they simply argue that our

decisions routinely include such provisions. There is no requirement in

the Code or the regulations that our decisions reserve a right for the

Commissioner to assess tax for partnership or affected items. In

accordance with our routine practice, the Blum I Decision states that

“[i]t is further stipulated that this decision does not include adjustments

subject to separate determination under . . . TEFRA partnership

provisions.” Furthermore, the Blum I Decision has no relevance to the

limitations period issue because we had no jurisdiction in Blum I over

the BLIPS adjustments.

III.

Purported Settlement of DSIF Affected Items

Petitioners argue that their tax liability attributable to the

disallowance of the BLIPS tax shelter loss was resolved in Blum I and

incorporated in the Rule 155 computation. They further argue that the

December 2015 closing agreement and DSIF’s account transcripts

reflect the settlement and payment of the resulting tax.21 We disagree

with petitioners on all counts.

A.

Improper Second Notice of Deficiency

Petitioners argue that the 1999 affected items Notice of

Deficiency is an improper second Notice of Deficiency for 1999 because

1999 was included in the 2005 Notice of Deficiency. They argue that in

the 2005 Notice of Deficiency respondent determined that DSIF

correctly reported all partnership items on its 1999 partnership return.

Accordingly, they argue that their bases in the DSIF assets did not

require adjustments to partnership items. These arguments are clearly

incorrect. In the 2005 Notice of Deficiency respondent’s deficiency

determination included a deficiency attributable to Mr. Blum’s sale of

the DSIF assets. However, we dismiss that part of the deficiency

determination from Blum I. Thus, Blum I did not resolve Mr. Blum’s tax

from the sale of the DSIF assets or his basis in the DSIF assets. We

again point out that we did not have jurisdiction over the DSIF’s

partnership and affected items in Blum I and did not have jurisdiction

to determine the amount of petitioners’ deficiency attributable to the

21 Respondent argues that we should not consider petitioners’ closing

agreement argument because they failed to affirmatively plead it. We find that

petitioners have sufficiently pleaded this issue.

38

[*38] disallowance of the BLIPS tax shelter loss. Nor did we have

jurisdiction to determine Mr. Blum’s bases in the DSIF assets, which

were affected items because he carried over Bogan’s outside basis in

DSIF as his bases in the distributed DSIF assets.

As we explained in Bedrosian, 143 T.C. at 108–09, it is common

practice for the Commissioner to issue both an FPAA to a partnership

and a Notice of Deficiency to a partner determining the same

adjustments. Thus, issuance of the 2005 Notice of Deficiency was not a

concession by respondent that the reporting on DSIF’s partnership

return was correct. Rather, the prior issuance of the FPAA is

respondent’s determination that TEFRA applies. Id. Accordingly, the

1999 Notice is not a second Notice of Deficiency.

Petitioners argue that the $373,641 deficiency determined in

Blum I is mathematically impossible unless it incorporated a settlement

of the BLIPS tax shelter loss. They argue that Blum I would have

resulted in a deficiency of only $8,701 for 1999 in the absence of the

resolution of the BLIPS adjustments. Thus, the agreed computation

must have included a settlement of the BLIPS tax shelter adjustments.22

A simple review of the filings in Blum I shows that petitioners’

argument is completely without merit. The 2005 Notice of Deficiency

clearly shows that respondent disallowed a $1,754,670 capital loss from

the OPIS equity swap for 1999. In Blum I the Court explained that on

their 1999 return petitioners reported a $1,754,670 capital loss from the

OPIS equity swap, which we disallowed. Blum I, T.C. Memo. 2012-16,

slip op. at 19. The agreed computation in Blum I shows that the 1999

deficiency is in part attributable to a $1,754,670 adjustment for the

OPIS swap. The $373,641 deficiency determined in the Blum I Decision

clearly relates to the OPIS tax shelter and in no way forecloses

respondent from making the BLIPS adjustments determined in the

affected items Notices of Deficiency.

Respondent prepared a Rule 155 computation using a Munro

computation to determine petitioners’ 1999 tax deficiency solely on the

basis of Blum I without accounting for the potential disallowance of the

22 Petitioners did not propose any findings of fact to establish how they

computed the $8,701 amount or cite any evidence or authority to support the

computation. Rather, they cited a Declaration and attached Exhibit that we excluded

from evidence. See Order, May 16, 2024. In that Order we advised petitioners to

present the computations and the authorities that support their analysis in their

Posttrial Briefs, which they failed to do.

39

[*39] BLIPS tax shelter loss. A Munro computation is used to separate

tax attributable to nonpartnership items from tax attributable to

partnership and affected items. Munro computations are performed

when a return is oversheltered (the return reports no taxable income

and a net loss from a partnership) and the nonpartnership adjustments

result in a deficiency. See § 6234(a)(2) and (3); see also § 6234(b) (defining

an oversheltered return). Petitioners filed an oversheltered return for

1999, and the nonpartnership adjustments determined in Blum I

resulted in a deficiency. The Munro computation determined that there

was a deficiency of $373,641, without accounting for the disallowance of

the BLIPS tax shelter loss or other BLIPS adjustments. It was

appropriate for respondent to use a Munro computation because the IRS

could not yet assess the tax attributable to the BLIPS adjustments

because the 63 SIFs case was still ongoing.

Moreover, as we stated above, the Blum I Decision expressly

stated that “this decision does not include adjustments subject to

separate determination under . . . TEFRA.” The clear meaning of this

statement is that the 1999 deficiency determined in Blum I did not

include the BLIPS adjustments. Nevertheless, petitioners seek to

explain away this statement in the Blum I Decision with a nonsensical

argument that it refers to another unrelated TEFRA entity,

ThinkTank.com, LLC (ThinkTank), that Mr. Blum owned through a

trust. Petitioners did not propose any findings of fact relating to

ThinkTank in their Briefs or submit any relevant evidence at trial likely

because there is none. Petitioners do not explain how the issue relating

to ThinkTank remained unresolved when the Blum I Decision was filed

in 2012. The parties signed the agreement in January 2005, before

respondent issued the 2005 Notice of Deficiency. The agreement appears

to relate to ThinkTank’s 2000 taxable year. Petitioners have not

explained how ThinkTank’s activities affected their 1999 tax liability,

and there is no evidence in the record that the agreement affected their

1999 tax liability. We see no adjustment relating to ThinkTank in the

2005 Notice of Deficiency or the opinion in Blum I. Moreover, the record

suggests that petitioners accounted for the agreement’s effect on their

capital loss carryover in 2005. Once again, petitioners’ argument lacks

merit.

B.

Closing Agreement

We also reject petitioners’ argument that the December 2015

closing agreement establishes that Blum I resolved their 1999 tax

liability from the BLIPS tax shelter. The closing agreement clearly

40

[*40] relates solely to interest abatement on the deficiencies determined

in Blum I. Moreover, RA Gee credibly testified that it was not the type

of closing agreement used for the BLIPS investors who accepted the

settlement initiative.

Section 7121(a) authorizes the Commissioner to enter into closing

agreements with taxpayers to resolve their tax liabilities. Once

approved by the IRS, closing agreements are final and conclusive absent

a showing of fraud, malfeasance, or misrepresentation of a material fact.

§ 7121(b). While closing agreements are similar in some respects to

traditional contracts, their validity and enforceability are governed by

the Code. Rink v. Commissioner, 100 T.C. 319, 325 n.4 (1993), aff’d, 47

F.3d 168 (6th Cir. 1995); see Urbano v. Commissioner, 122 T.C. 384, 393

(2004) (stating that section 7121 is the exclusive means by which a

closing agreement may be accorded finality). A closing agreement is

binding on the parties “as to the matters agreed upon.” § 7121(b)(1). We

may not read into it any matters not specifically agreed upon and

mentioned in the closing agreement. See Zaentz v. Commissioner, 90

T.C. 753, 766 (1988). Courts strictly construe closing agreements to

encompass only the issues enumerated in the closing agreement itself.

Analog Devices, Inc. & Subs. v. Commissioner, 147 T.C. 429, 445–46

(2016); Hopkins v. Commissioner, 120 T.C. 451, 457 (2003).

Closing agreements are subject to the rules of federal common law

contract interpretation. Analog Devices, 147 T.C. at 446. We construe a

closing agreement according to the parties’ intent when they entered

into it. Long v. Commissioner, 93 T.C. 5, 10 (1989), aff’d, 916 F.2d 721

(11th Cir. 1990) (unpublished table decision). Intent is inferred from the

four corners of the closing agreement when the contract is unambiguous

although we may use extrinsic evidence to discern the parties’ intent

when the closing agreement is ambiguous. Rink, 100 T.C. at 325.

Contracts must be read as a whole and interpreted in context. See Kolbe

v. BAC Home Loans Servicing, LP, 738 F.3d 432, 439–40 (1st Cir. 2013).

Although recital clauses are not binding, they are explanatory and can

give insight into the parties’ intent. See Estate of Magarian v.

Commissioner, 97 T.C. 1, 5 (1991); Zaentz, 90 T.C. at 762.

The December 2015 closing agreement is unambiguous. It is clear

from reading the closing agreement that the parties entered it to resolve

a dispute over interest on petitioners’ tax liability determined in Blum I.

The recitals provide that the closing agreement’s subject matter was

partial abatement of accrued interest. The dispute over the interest

arose because criminal investigations of the BLIPS tax shelter

41

[*41] promoters delayed resolution of Blum I. The closing agreement

states that petitioners alleged that they agreed to extend the limitations

period because RA Politzer told them that they qualified for suspension

of interest. This statement was correct when RA Politzer allegedly made

it, but Congress later eliminated the suspension provision retroactively.

The closing agreement states that Appeals agreed to abate interest on

the basis of the hazards of litigation and “a compelling issue of fairness.”

There is no discussion in the closing agreement of petitioners’ tax

attributable to the BLIPS tax shelter.

Petitioners rely on a statement in the closing agreement that they

“have full paid the balance of the liability.” That statement must be read

in the context of the closing agreement as a whole. When we do so, it is

clear that the statement refers to the tax assessed as a result of the

Blum I Decision, not tax attributable to the BLIPS adjustments which

had not yet been assessed when the closing agreement was executed.

The “full paid” statement was included in the closing agreement to

establish that petitioners were entitled to withdrawal of the NFTL for

1998 and 1999. During the CDP hearing the SO told petitioners that the

IRS would withdraw the NFTL once they “full paid” their assessed tax

liability.

While we find the closing agreement unambiguous, if we were to

consider extrinsic evidence, we would find that it strongly confirms that

the closing agreement did not settle the BLIPS adjustments. During the

CDP hearing petitioners argued for interest abatement relating only to

their liabilities determined in Blum I. Petitioners signed a summary

notice of determination that stated that “another liability is expected to

be assessed” for 1999, i.e., tax relating to the BLIPS tax shelter. The SO

wrote in his case activity file that petitioners represented that they

“don’t know when Exam is going to make the TEFRA assessment for the

BLIPS shelter.” Less than three months after signing the closing

agreement, petitioners, using the same attorney, filed the Petition

challenging the BLIPS adjustments but did not assert in the Petition

that the BLIPS adjustments had been settled. The attorney testified at

trial and did not confirm that petitioners’ newly crafted interpretation

of the closing agreement is in line with their intent when they entered

into the closing agreement.

C.

IRS Transcripts

Petitioners argue that two account transcripts for DSIF,

BMFOLZ and BMFOLV, show that they have settled their 1999 tax

42

[*42] liability attributable to DSIF.23 A BMFOLZ transcript provides

information relating to a taxpayer’s audit history, and a BMFOLV

transcript provides information from the IRS’s retention register for a

taxpayer’s prior audits. IRM 2.3.59.6(1) (July 1, 2019). These computergenerated transcripts provide information in the IRS’s official computer

records using transaction codes and document locator numbers. Id.

DSIF’s BMFOLZ transcript shows an $898,928 assessment. This

amount corresponds to the $373,641 deficiency and the $66,619 penalty

determined in Blum I plus interest that accrued before petitioners paid

the amount owed in August 2014. Petitioners’ personal transcripts

confirm assessments of these amounts in September 2012, which

corresponds to the Blum I Decision. We understand that DSIF’s

BMFOLZ transcript shows petitioners’ liability for adjustments

unrelated to DSIF and the BLIPS adjustments. Petitioners did not offer

any evidence to interpret the codes on the transcript in a manner that

aids their case.24

DSIF’s BMFOLV transcript shows that the IRS audited DSIF’s

return for the 1999 taxable year and that the IRS removed the records

relating to the audit from its active business master file (BMF) to its

recoverable retention register (RRR) in 2014. The IRS moves taxpayer

records for older, inactive tax periods to the RRR, but the records can be

restored to active status if they are needed. See IRM 4.4.23.8.1 (Aug. 7,

2013). The files in the RRR are less accessible but can be returned to

active status in the BMF if they are needed. The 2014 removal of DSIF’s

files to the RRR coincides with the district court’s 2014 order granting

summary judgment to the Government in the 63 SIFs case. There is no

indication or evidence that removal of DSIF’s files to the RRR means

that petitioners settled their tax liability attributable to the BLIPS tax

shelter. It makes sense to us that the IRS moved DSIF’s records to the

RRR when the 63 SIFs case ended because partnership-level records are

not generally required to make affected item adjustments at the partner

level.

23 BMFOL is an acronym for Business Master File On-Line.

24 At the beginning of trial, we stated that it was important for the parties to

introduce evidence to explain the meaning of the codes and numbers in any transcript

that they intended to rely on. See Barnes v. Commissioner, T.C. Memo. 2010-30, slip op.

at 10–11 (“Many of the documents in the administrative file and most of the documents

labeled as transcripts of [the taxpayer’s] account are full of abbreviations,

alphanumeric codes, dates, and digits that are indecipherable and unintelligible

without additional explanation.”).

43

[*43] Petitioners’ arguments relating to the transcripts are mere

conjecture that is contrary to the facts in the record. Petitioners failed

to solicit evidence to support a different understanding of BMFOLZ and

BMFOLV transcripts. Neither transcript reflects a settlement or an

assessment of tax attributable to the BLIPS tax shelter. Rather, the

BMFOLZ transcript reflects the assessments for the tax, penalty, and

accrued interest from the issues decided in Blum I. Clearly, respondent

did not settle petitioners’ BLIPS adjustments for 2.5% ($373,641) of the

deficiency determination ($15 million) as petitioners allege, especially

given that the settlement initiative required BLIPS investors to concede

100% of the tax.

IV.

Propriety of Basis Adjustment

Petitioners argue that respondent cannot adjust their bases in the

DSIF assets in this affected items case. They argue that such an

adjustment required a determination that DSIF was a sham, but the

district court did not determine that DSIF was a sham. We disagree. It

was unnecessary for the district court to sham DSIF for respondent to

adjust Mr. Blum’s bases in the DSIF assets. As part of the BLIPS tax

shelter, Mr. Blum artificially inflated Bogan’s outside basis in DSIF on

the basis of the BLIPS transactions. The district court determined that

the BLIPS transactions lacked economic substance and were

disregarded for federal tax purposes. That is enough for respondent to

adjust Bogan’s outside basis in DSIF to zero. Moreover, nowhere in the

1999 affected items Notice of Deficiency did respondent state that he

made the determinations on a holding by the district court that DSIF

was a sham. The word “sham” is not in the 1999 affected items Notice of

Deficiency.

Petitioners carried over Bogan’s outside basis in DSIF as their

bases in the DSIF assets. In general a partner’s basis in an asset that

he receives in a liquidating distribution from a TEFRA partnership is

an affected item. Domulewicz v. Commissioner, 129 T.C. 11, 20 (2007),

aff’d in part, remanded in part on other grounds sub nom. Desmet v.

Commissioner, 581 F.3d 297 (6th Cir. 2009); see also § 6231(a)(5)

(defining an affected item). When a partner’s outside basis is greater

than the partnership’s basis in the distributed asset, the partner’s basis

in the distributed asset (other than money) is the partner’s outside basis

in his partnership interest. § 732(b); Treas. Reg. § 1.732-1(b); see § 732(c)

(providing rules for the allocation of outside basis among the distributed

assets); see also § 6231(a)(3) (defining a partnership item). Petitioners

determined Bogan’s outside basis in DSIF through the BLIPS

44

[*44] transactions that the district court held lacked economic

substance and were disregarded for federal tax purposes, meaning that

Bogan cannot increase outside basis by those transactions.

In the 1999 affected items Notice of Deficiency respondent

adjusted petitioners’ bases in the DSIF assets to zero and disallowed

petitioners’ reported loss on the sale of the DSIF assets. Respondent’s

adjustment of the bases of the DSIF assets to zero is correct under the

Code and the district court’s decision. A partner’s outside basis in his

partnership interest is an affected item. Woods, 571 U.S. at 42.

A partner-level proceeding is required even if the partner-level

determinations do not affect the partner’s tax attributable to the

partnership and affected items. Estate of Keeter v. Commissioner, T.C.

Memo. 2018-191, at *14, aff’d, 75 F.4th 1268 (11th Cir. 2023). Partnerlevel determinations are required when the partner disposes of the

distributed assets including the partner’s holding periods of the assets,

the character of the gain or loss, and whether the assets that the partner

sold were in fact the assets that he received from the partnership.

Domulewicz, 129 T.C. at 20.

However, certain components of a partner’s outside basis must be

determined at the partnership level, including partnership liabilities

and partnership distributions. Greenwald v. Commissioner, 142 T.C.

308, 315–16 (2014); Treas. Reg. § 301.6231(a)(3)-1(a)(1)(v), (4). The

factual and legal determinations made at the partnership level with

respect to these components of outside bases are conclusive at the

partner level. See Treas. Reg. § 301.6231(a)(3)-1(a) (categorizing the

amount and character of partnership liabilities as a partnership item).

In the 1999 affected items Notice of Deficiency respondent

determined that Mr. Blum had zero basis in each DSIF asset. In the

63 SIFs case the district court determined that the BLIPS transactions

were shams and lacked economic substance. Thus, the transactions

could not generate Bogan’s outside basis in DSIF. Petitioners did not

provide any evidence that challenged respondent’s determined

deficiency for 1999, 2007, or 2010. Accordingly, we sustain respondent’s

deficiency determination for each year at issue.

V.

Estoppel

In their Opening Brief petitioners argue for the application of

judicial estoppel, and in their Answer Brief they argue for collateral

estoppel.

45

[*45] A.

Judicial Estoppel

Judicial estoppel prevents a party from asserting a position that

is contrary to one that it took in a prior case and affirmatively persuaded

a court to accept. Huddleston v. Commissioner, 100 T.C. 17, 26 (1993).

It seeks to protect the integrity of the judicial process. Id. Generally,

three nonexhaustive factors guide our analysis when we are asked to

invoke this doctrine: whether (1) the party’s later position is clearly

inconsistent with its earlier position, (2) the party persuaded a court to

accept its earlier position, and (3) the party seeking to assert an

inconsistent position would derive an unfair advantage. New Hampshire

v. Maine, 532 U.S. 742, 750–51 (2001).

Petitioners argue that we should judicially estop respondent from

arguing that the district court’s decision is controlling. They argue that

the district court’s decision is not binding on them because they were

not parties to the 63 SIFs case, seemingly forgetting that a petition was

filed in district court on DSIF’s behalf and the certificate of interested

entities named both DSIF and Mr. Blum. Under the Code, Mr. Blum was

a party to the 63 SIFs case. See § 6226(c), (d)(1)(B).

Petitioners seem to argue that they settled their case and were

not part of the 63 SIFs case. They argue that a statement the

Government’s counsel made in the district court case that “virtually all

the investors had settled BLIPS” somehow proves that they settled the

BLIPS adjustments. Petitioners have not proved that they settled their

case.25 There are no grounds to apply judicial estoppel against

respondent.

B.

Collateral Estoppel

Collateral estoppel is a judicially created doctrine that is intended

“to protect litigants from the burden of relitigating an identical issue

and to promote judicial economy by preventing unnecessary or

redundant litigation.” See Hambrick v. Commissioner, 118 T.C. 348, 351

(2002). It bars the relitigation of an issue of law or fact that has been

decided by a court in a previous case. Stan Lee Media, Inc. v. Walt Disney

Co., 774 F.3d 1292, 1297 (10th Cir. 2014); see also Keller Tank Servs. II,

Inc. v. Commissioner, 854 F.3d 1178, 1193 (10th Cir. 2017). It ensures

25 Petitioners also erroneously refer to DOJ’s attorneys representing the

Government in the 63 SIFs case as respondent’s counsel.

46

[*46] the finality of decisions and prevents inefficient use of judicial

resources. See Montana v. United States, 440 U.S. 147, 153–54 (1979).

The elements of collateral estoppel are (1) an issue that is

identical to an issue decided in the first suit; (2) a final judgment

rendered by a court of competent jurisdiction; (3) the same party, or a

privy to a party, in the first suit; (4) actual litigation and resolution of

the issue which was essential to the judgment in the prior decision; and

(5) unchanged controlling facts and applicable legal rules. Hambrick,

118 T.C. at 353–54; see Peck v. Commissioner, 90 T.C. 162, 166–67

(1988), aff’d, 904 F.2d 525 (9th Cir. 1990).

Petitioners argue that the doctrine of collateral estoppel prevents

respondent from adjusting Mr. Blum’s bases in the DSIF assets because

the assets’ bases were actually litigated in Blum I. They argue that we

did not lose jurisdiction over Mr. Blum’s bases in the DSIF assets in

Blum I. They argue that the adjustments to Mr. Blum’s bases in the

DSIF assets did not require partnership-level determinations.

Petitioners show a fundamental misunderstanding of the law. They

appear to argue that Mr. Blum’s bases in the distributed DSIF assets

are not partnership or affected items. Again, they cite no authority for

this position. It is well settled that outside basis is an affected item that

must be determined at the partner level. Woods, 571 U.S. at 42. We have

rejected petitioners’ arguments above and will not address them again.

VI.

Additions to Tax and Penalties

A.

Section 6651(a)(1) Untimely Filing Addition to Tax

Section 6651(a)(1) imposes an addition to tax of 5% of the tax

required to be shown on a return for each month for which there is a

failure to file a tax return, up to 25% in the aggregate, unless the

taxpayer proves that the failure was due to reasonable cause and not

due to willful neglect. Treas. Reg. § 301.6651-1(c). Willful neglect is

defined as a “conscious, intentional failure or reckless indifference.”

United States v. Boyle, 469 U.S. 241, 245 (1985). Reasonable cause exists

where the taxpayer exercised ordinary care and prudence but was

nevertheless unable to file the return by the due date. Id. at 246.

Respondent determined a section 6651(a)(1) addition to tax for

2007. Petitioners’ 2007 return was due under extension on October 15,

2008, and they filed it on November 3, 2008. Petitioners assert that

although they resided in Wyoming when the 2007 return was due under

extension, wildfires in California delayed its filing. There is no evidence

47

[*47] in the record that fires in another state delayed filing of

petitioners’ 2007 return. We find that petitioners have not established

reasonable cause for their untimely filing and are liable for the section

6651(a)(1) addition to tax for 2007.

B.

Section 6662(h) Gross Valuation Misstatement Penalty

Section 6662(h) imposes a 40% penalty for a gross valuation

misstatement. Respondent previously determined that the section

6662(h) penalty applied to DSIF at the partnership level in the FPAA

issued for DSIF. The district court in the 63 SIFs case agreed that the

penalty provisionally applied. Respondent determined a section 6662(h)

penalty on the tax attributable to the disallowance of the BLIPS tax

shelter loss for each year at issue in the affected items Notices of

Deficiency. Respondent has moved to strike and dismiss the penalties

on the ground that they are not affected items subject to the deficiency

procedures as they were determined to apply in the 63 SIFs case.

The deficiency procedures do not apply to the assertion of

penalties that relate to adjustments to partnership items.

§ 6230(a)(2)(A)(i); Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d

1050 (11th Cir. 2019); Domulewicz, 129 T.C. at 22–23. Accordingly, we

do not have jurisdiction over the section 6662(h) penalties and will

dismiss them.

Petitioners argue that the section 6662(h) penalties should not be

treated as computational adjustments that are not subject to deficiency

procedures in this case because respondent did not issue them a Notice

of Computational Adjustment for the penalties. Petitioners argue that

as a result they will not be able to challenge the penalties in a refund

suit.26 Irrespective of petitioners’ concerns, we do not have jurisdiction

to consider the section 6662(h) penalties. See § 6214(b); Sente Inv. Club

P’ship of Utah v. Commissioner, 95 T.C. 243, 248–50 (1990); Maxwell v.

Commissioner, 87 T.C. 783, 788 (1986). The effect of respondent’s failure

to include the section 6662(h) penalties attributable to the BLIPS tax

shelter adjustments in a Notice of Computational Adjustment is not for

us to resolve.

26 The Notice of Computational Adjustment for 1999 did not include a section

6662(h) penalty attributable to the disallowance of the BLIPS tax shelter loss. There

is no Notice of Computational Adjustment for 2007 or 2010 in the record.

48

[*48] In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned above, we conclude they are

moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent except that the section

6662(h) penalties will be dismissed by order.