Raghunathan Sarma, et al v. Commissioner of Internal Revenue, No. 21-12303 (11th Cir. 2022)
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The appeal involves the tax consequences of Petitioners' participation in a complex tax avoidance scheme. Petitioners expected to realize an $80.9 million capital gain as a result of selling a portion of his company. The scheme, which involved a set of tiered partnerships, allowed Petitioners to claim a $77.6 million artificial loss to offset his legitimate capital gains. A federal district court found the scheme to be an abusive tax shelter and upheld the IRS’s disallowance of the benefits of the shelter in a partnership-level proceeding, and a prior panel of the Eleventh Circuit affirmed. As a result of the partnership-level proceeding, the IRS issued a notice of deficiency to Petitioners disallowing the $77.6 million loss deduction they reported on their joint tax return. Petitioners sought review in the U.S. Tax Court, which rejected their various challenges.
The Eleventh Circuit affirmed. The court explained that the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), the governing scheme in effect during the relevant period, established uniform audit and litigation procedures for the resolution of partnership tax items. The filing of the final partnership administrative adjustment (FPAA), the timeliness of which Petitioners do not contest, suspended the limitations period for assessment of tax attributable to affected items until January 11, 2017. The 2016 notice asserts a deficiency that is attributable to an affected item. Accordingly, the statute of limitations had not expired when the IRS issued the September 9, 2016 notice of deficiency, as the Tax Court correctly found.
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