                          128 T.C. No. 16



                   UNITED STATES TAX COURT



KLIGFELD HOLDINGS, KLIGFELD CORPORATION, Tax Matters Partner,
                         Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 21330-04.               Filed May 30, 2007.

        In 2004, R sent a notice of deficiency to one of
   P’s partners for his 2000 taxable year. Because the
   item which R adjusted was an affected item under
   section 6231(a)(5), I.R.C., R also issued a notice of
   final partnership administrative adjustment (FPAA) to P
   for its 1999 taxable year, which was the year in which
   P claimed the item on its taxes.

        Both parties agree that the statute of limitations
   for assessing additional tax on the 1999 taxable year
   had already expired. P argues that if R is barred from
   assessing additional tax for 1999, he is also barred
   from issuing an FPAA for 1999. R claims that an FPAA
   can be issued at any time as long as at least one
   partner can still be assessed additional tax in
   relation to either an affected item or a partnership
   item (as defined by section 6331(a)(3), I.R.C.). P
   moved for summary judgment.

        Held: Sections 6501(a) and 6229(a), I.R.C., do
   not preclude R from issuing an FPAA for P’s 1999
   taxable year.
                                 - 2 -


     Daniel J. Leer, for petitioner.

     John A. Guarnieri, Meso T. Hammoud, and S. Katy Lin, for

respondent.



                                OPINION


     HOLMES, Judge:     Marnin Kligfeld contributed a large block of

Inktomi Corp. stock to a partnership in 1999.    The stock was

shuttled from one partnership to another, theoretically gaining a

greatly increased basis along the way.    Most of this stock was

sold in 1999.   In 2000, the second partnership distributed the

remaining stock with its allegedly increased basis along with the

cash proceeds from the 1999 sale.    Kligfeld sold the leftover

stock and reported the sale on his 2000 joint return.1    The

Commissioner challenges the amount of capital gains Kligfeld and

Estrin reported on their joint return, but does so by attacking

their reported basis.    To do this, he issued a notice of final

partnership administrative adjustment (FPAA) which adjusted items

on a 1999 partnership return.    The problem is that by the time


     1
       Kligfeld and his wife, Margo Estrin, are both parties in a
separate, but related, petition before this court regarding their
2000 tax return. Estrin is included in that petition and is
mentioned in this opinion only because she and Kligfeld filed
jointly. Although she and two other family members together
owned one percent of Kligfeld Holdings in 2000, Kligfeld is the
sole shareholder for Kligfeld Corporation, the tax matters
partner in this case, and he and Kligfeld Corporation were the
only partners in Kligfeld Holdings during the 1999 taxable year.
                              - 3 -

the FPAA was issued, more than three years had passed since that

partnership filed its 1999 tax return.     The Commissioner says

that it doesn’t matter--the three-year restriction is only on

assessments, not on adjustments.   Kligfeld’s partnership has

moved for summary judgment, arguing that three years means three

years and the Commissioner’s FPAA was too late.

                           Background2

     This case is one battle in the Commissioner’s war against an

alleged tax shelter called Son-of-BOSS.3    Son-of-BOSS is a

variation of a slightly older alleged tax shelter known as BOSS,

an acronym for “bond and options sales strategy.”     There are a

number of different types of Son-of-BOSS transactions, but what

they all have in common is the transfer of assets encumbered by

significant liabilities to a partnership, with the goal of

increasing basis in that partnership.    The liabilities are

usually obligations to buy securities, and typically are not

completely fixed at the time of transfer.     This may let the

partnership treat the liabilities as uncertain, which may let the

partnership ignore them in computing basis.     If so, the result is

that the partners will have a basis in the partnership so great


     2
       It should be remembered that the facts described in this
section are meant to illuminate the summary judgment motion--
they have not been found to be true after a trial.
     3
       See also G-5 Inv. Pship. v. Commissioner, 128 T.C. ___
(2007).
                                - 4 -

as to provide for large--but not out-of-pocket--losses on their

individual tax returns.   Enormous losses are attractive to a

select group of taxpayers--those with enormous gains.

     Marnin Kligfeld was one such taxpayer.   In 1999, he owned

more than 80,000 shares of Inktomi Corporation, a software

developer for Internet service providers.   Inktomi’s main

product, a search engine, succeeded in displacing AltaVista.

Eventually, Google displaced Inktomi, and Yahoo! bought what was

left of the business in 2003;4 but in 1999, at the height of the

tech boom, Kligfeld’s Inktomi stock was worth more than $10

million.   Kligfeld had a basis in the stock of just over

$300,000, so if he had simply sold it, he would have incurred a

significant capital gain which would have likely resulted in a

very large capital gains tax.

     But Kligfeld did not simply sell the stock.   Instead, he

began a series of transactions that he asserts eliminated, or at

least reduced, any capital gains built into the Inktomi stock:

     •     On September 20, 1999, Kligfeld--in conjunction
           with his wholly owned “S corporation” Kligfeld
           Corporation (Corporation)--formed Kligfeld
           Holdings (Holdings 1) as a California partnership.
           Kligfeld contributed approximately 83,600 shares
           of Inktomi stock.5


     4
       See Inktomi Corp., Definitive Proxy Statement (Form
DEFM14A) (Feb. 11, 2003).
     5
       It is unclear from the record at this stage of the
proceedings what Corporation contributed to the partnership or
                                                   (continued...)
                              - 5 -


     •    On about November 1, 1999, Kligfeld Investments,
          LLC (Investments), whose sole member was Marnin
          Kligfeld, engaged in a short sale6 of U.S.
          Treasury notes. Before closing the short sale,
          Investments transferred the resulting proceeds--
          along with the attached obligation--to Holdings
          1.7 At the end of this transaction, Kligfeld
          owned 99 percent of Holdings 1 and Corporation
          owned one percent.

     •    On about November 3, 1999, Holdings 1 closed the
          short position by buying U.S. Treasury notes and
          using them to replace those borrowed.

     •    On November 15, 1999, Kligfeld transferred a 98-
          percent interest in Holdings 1 to Corporation
          through a non-taxable section 3518 exchange.




     5
      (...continued)
when exactly Kligfeld transferred the Inktomi stock to Holdings
1. It is also unclear what the percentage ownership was at the
formation of Holdings 1.
     6
       A short sale is the sale of borrowed securities, typically
for cash. The short sale is closed when the short seller buys
and returns identical securities to the person from whom he
borrowed them. The amount and characterization of the gain or
loss is determined and reported at the time the short sale is
closed. See sec. 1.1233-1(a), Income Tax Regs.
     7
       Because Investments is not incorporated and has only one
member, it is disregarded for tax purposes, and Kligfeld is
treated as contributing the short sale proceeds and obligation
himself. See sec. 301.7701-2(c)(2), Proced. & Admin. Regs.
     8
       Unless otherwise indicated, section references are to the
Internal Revenue Code as in effect for the years at issue.
Section 351 allows a person to transfer property to a corporation
with no recognition of gain or loss, as long as he receives only
that corporation’s stock in exchange for the property and,
immediately after the exchange, is “in control” of the
corporation. Kligfeld received only additional Corporation stock
in the exchange, and since he was the sole shareholder in
Corporation both before and after the transfer, he easily met the
“in control” requirement.
                                   - 6 -

     Under section 708(b)(1),9 the transfer of more than 50

percent of Holdings 1 from Kligfeld to Corporation within a

single 12-month period arguably triggered a statutory

termination, and the creation of a new partnership also named

Kligfeld Holdings (Holdings 2).      This new partnership kept the

same taxpayer identification number, but Kligfeld now owned only

one percent of the partnership, and Corporation owned the

remaining 99 percent.

     To understand why this termination of Holdings 1 and

creation of Holdings 2 matters, one must first understand the

partnership-tax concepts of “inside basis” and “outside basis”.

Inside basis is a partnership’s basis in the property which it

owns.    For contributed property, the inside basis is initially

equal to the contributing partner’s adjusted basis in the

property.    Sec. 723.    Outside basis is an individual partner’s

basis in his interest in the partnership itself.      When a partner

contributes both cash and property to a partnership, his outside


     9
         SEC. 708(b).    Termination.--

                 (1) General Rule.--For purposes of
            subsection (a), a partnership shall be
            considered as terminated only if--

                 *       *     *     *     *     *     *

                      (B) within a 12-month period there
                 is a sale or exchange of 50 percent or
                 more of the total interest in partnership
                 capital and profits.
                                 - 7 -

basis is initially equal to the amount of cash plus his adjusted

basis in the contributed property.       Sec. 722; sec. 1.722-1,

Example (1), Income Tax Regs.    Outside basis increases when a

partner contributes additional assets to the partnership or when

the partnership has a gain; it decreases when the partner

contributes liabilities to the partnership, the partnership has a

loss, or the partnership distributes assets to the partner.        Sec.

705(a).

     When Kligfeld initially contributed the Inktomi stock to

Holdings 1, his outside basis in the partnership was equal to his

basis in the contributed stock, or approximately $300,000.

Likewise, the Inktomi stock continued to have the same inside

basis to the partnership as it had before it was contributed--

again, approximately $300,000.    When Kligfeld (through

Investments) later contributed the proceeds from the short sale,

he arguably increased his outside basis in the partnership in an

amount equal to the value of those proceeds.       However, Kligfeld

presumably reasoned that the attached obligation to close out the

short sale, an obligation that he also contributed, was a

contingent liability and therefore shouldn’t reduce his outside

basis as contributing a fixed liability would.10      As a result,


     10
       Section 752 states that outside basis is decreased by the
amount of any personal liability assumed by the partnership. At
the time of this transaction, it didn’t specifically include
contingent liabilities, and so Kligfeld probably reasoned that
                                                   (continued...)
                               - 8 -

Kligfeld conceivably ended up with an outside basis in Holdings 1

of just over $10.5 million, which wasn’t reduced when Holdings 1

closed the short sale.11   Therefore, when Kligfeld transferred

his partnership interest to Corporation, he also might have

transferred his high basis and in return, received shares of

Corporation stock with the same high basis.

     When a new partner acquires a partnership interest, he

typically pays fair market value for that interest, which can

result in discrepancies between his outside basis and his share

of the partnership’s inside basis.     To help balance out those

discrepancies, section 754 allows a partnership to elect to

adjust the inside basis of partnership assets to reflect the new




     10
      (...continued)
the obligation shouldn’t be treated as a liability for purposes
of basis calculation. Section 1.752-6(a), Income Tax Regs.,
which became effective on May 26, 2005, retroactively changed
this line of reasoning (or, perhaps, made clear its original
weakness). The regulation states that, for any contingent
liability assumed by a partnership between October 18, 1999, and
June 24, 2003, the contributing partner must take into
consideration the value of the contingent liability as of the
date of exchange when determining outside basis. The validity of
the regulation’s retroactive application has been a matter of
some controversy. See, e.g., Klamath Strategic Inv. Fund LLC v.
United States, 440 F. Supp. 2d 608 (E.D. Tex. 2006).
     11
       Since the obligation wasn’t treated as a liability when
it was transferred to the partnership, the fulfillment of that
obligation wasn’t treated as a decrease in Kligfeld’s share of
partnership liabilities, which would have reduced his outside
basis. See sec. 752(b).
                              - 9 -

partner’s different outside basis.12   Since both Holdings 1 and

Holdings 2 attached a section 754 election to their 1999 tax

returns, Holdings 2 adjusted the inside basis of its Inktomi

stock to almost $10.4 million to reflect Corporation’s higher

outside basis.13

     Holdings 2 sold most of the Inktomi stock at the end of 1999

and reported the sale on its 1999 partnership return.    The

capital gain from that sale--now comparatively slight due to the

increase in inside basis--flowed through to the partners, again

increasing their outside basis.   However, Holdings 2 didn’t

actually distribute the proceeds from the sale until 2000, when

it distributed both the cash proceeds and the remaining shares of



     12
       Section 754 allows a partnership to adjust the basis of
its property under section 743, which provides in subsection (b):

          SEC. 743(b) Adjustment to Basis of Partnership
     Property.--In the case of a transfer of an interest in
     a partnership by sale or exchange * * *, a partnership
     with respect to which the election provided in section
     754 is in effect * * * shall--

               (1) increase the adjusted basis of the
          partnership property by the excess of the
          basis to the transferee partner of his
          interest in the partnership over his
          proportionate share of the adjusted basis of
          the partnership property * * *
     13
       The assets in Holdings 2 at the time it was created
consisted of cash and the Inktomi stock. Because cash has a
fixed basis, the only partnership property whose basis could be
adjusted was the stock. The newly adjusted inside basis
consisted of the original inside basis plus the value of the
short sale proceeds contributed by Kligfeld.
                                - 10 -

Inktomi stock to its partners.14    The distributed cash was

treated as a return of capital (i.e., not taxable) since it

didn’t reduce the outside basis below zero--any cash distributed

which exceeded outside basis would be considered a capital gain.

Sec. 731(a).     The remaining Inktomi stock that was distributed

retained its inside basis in the hands of the partners to the

extent of the partners’ remaining outside basis after that basis

was reduced by the amount of the cash distribution.     Sec. 732.

     To reflect the above transactions, each entity filed a tax

return:     Holdings 1 filed a partnership return for its brief 1999

taxable year (September 20, 1999-November 15, 1999) on July 17,

2000.     It listed the short sale of the U.S. Treasury notes and

claimed sale proceeds of $9,938,281, a basis of $9,965,625, and a

resulting loss of $27,344.15    Holdings 2 also filed a partnership

return for its short 1999 taxable year (November 15, 1999-

December 31, 1999) on July 17, 2000, reporting $10,000,004 in

proceeds from the sale of Inktomi stock and a gain of $523,337.

The Kligfelds filed a joint return for 1999 on August 15, 2000,


     14
       The record doesn’t show precisely how many shares of
Inktomi stock were distributed, but Corporation sold 12,000 of
the shares it received in November 2000 and distributed all of
the cash plus all remaining corporate property to Kligfeld.
     15
       The basis listed is the price paid for the replacement
securities. In a regular sale, the securities are first paid for
and then sold, with the gain or loss equaling the difference
between the purchase and sale price. In a short sale, the timing
is backwards--the sale price is determined before the purchase
price.
                               - 11 -

and a joint return for 2000 on April 29, 2001.     Any distributed

cash was reported as a nontaxable return of capital rather than a

capital gain because the amount of cash distributed never

exceeded the adjusted basis.

     Meanwhile, the IRS began to notice that very large amounts

of capital gains seemed to be disappearing from the nation’s tax

base via strategies like that of the Kligfelds.     In 2000, the IRS

released Notice 2000-44, 2000-2 C.B. 255, which gave notice that

Son-of-BOSS transactions were officially “listed,” meaning the

IRS would aggressively pursue all taxpayers who had engaged in

them.   The IRS reasoned that the transactions didn’t reflect

economic reality, and the disregarded liabilities must be taken

into account when computing basis.      Without an inflated basis to

shade them, the losses flowing from the partnership would wither

away, and taxpayers using the Son-of-BOSS strategy would be left

with a large tax bill for their now-unsheltered gains.     In June

2003, the government issued a summons to the law firm of Jenkens

& Gilchrist, which had been promoting the arrangement.     The

summons sought the name and address of every U.S. taxpayer who

had pursued the strategy.

     Kligfeld was among those caught in this summons net.     The

Commissioner began examining the entities involved, and in

September 2004, he sent Holdings 2 an FPAA for its 1999 taxable

year.   On the same day, he also issued a notice of deficiency to
                              - 12 -

the Kligfelds for their 2000 taxable year.     Both notices were a

result of the Commissioner’s determination that Kligfeld should

have taken the short sale obligation into consideration when

determining outside basis in Holdings 1.     Accordingly, Kligfeld

(and Corporation after him) should have had a much lower outside

basis, with the following results:     Holdings 2 shouldn’t have

been able to adjust the Inktomi stock’s inside basis under

section 754; the later distribution of cash to Corporation

exceeded Corporation’s much-reduced outside basis and should have

been treated, at least in part, as a capital gain; and, finally,

the stock distributed to Corporation should have had a basis of

zero since Corporation no longer had any outside basis once the

cash was distributed.   As a result, the deficiency notice to the

Kligfelds showed an increase in capital gain of more than $9.8

million.

     Holdings 2 timely filed a petition with this Court to review

the FPAA, and the Kligfelds timely filed a petition challenging

the notice of deficiency.   Kligfeld, as a representative of

Corporation and on behalf of Holdings 2, moved for summary

judgment in the partnership case.    He argues that the

Commissioner acted too slowly:   the FPAA for the 1999 taxable

year was issued more than three years after Holdings 2 filed its

1999 return.   The Commissioner argues in reply that because the
                                - 13 -

Kligfelds’ 2000 personal return reported affected items that

relate back to the partnership’s 1999 taxable year--i.e., the

computation of Kligfeld’s (and Corporation’s) outside basis which

then became the adjusted basis of the Inktomi stock distributed

and sold in 2000--the limitations period for making partnership

adjustments is still open.

                             Discussion

     Holdings 1 and Holdings 2 were both partnerships under

TEFRA--the Tax Equity and Fiscal Responsibility Act of 1982, Pub.

L. 97-248, 96 Stat. 324.   TEFRA partnerships are subject to

special tax and audit rules.    See secs. 6221-6234.   Each TEFRA

partnership, for example, is supposed to designate a tax matters

partner (the TMP), to handle the partnership’s administrative

issues with the IRS and any resulting litigation.      (Corporation

is the TMP for Holdings 2.)16   TEFRA aims at determining all

partnership items--technically defined in section 6231(a)(3)--at

the partnership level; the goal is to have a single point of

adjustment for the IRS rather than having to make separate

partnership item adjustments on each partner’s individual return.

See H. Conf. Rept. 97-760, at 599-601 (1982), 1982-2 C.B. 600,

662-63.   If the IRS decides to adjust any partnership items on a


     16
       Corporation, as TMP, is the petitioner in this case.
References to “Kligfeld’s arguments,” “Kligfeld’s position,” and
so forth are technically references to Corporation in this
capacity.
                                - 14 -

partnership return, it must notify the individual partners of the

adjustment by issuing an FPAA.    Sec. 6223(a).    The TMP has ninety

days after the Commissioner mails an FPAA to petition for its

readjustment.17

     The specific TEFRA provision at issue in this case is

section 6229, which states:

     SEC. 6229.    PERIOD OF LIMITATIONS FOR MAKING ASSESSMENTS.

          (a) General Rule.--Except as otherwise provided in
     this section, the period for assessing any tax imposed
     by subtitle A with respect to any person which is
     attributable to any partnership item (or affected item)
     for a partnership taxable year shall not expire before
     the date which is 3 years after* * *

               (1) the date on which the partnership return
          for such taxable year was filed * * *.

           *        *      *      *      *        *     *

          (d) Suspension When Secretary Makes Administrative
     Adjustment.--If notice of a final partnership
     administrative adjustment with respect to any taxable
     year is mailed to the tax matters partner, the running
     of the period specified in subsection (a) * * * shall
     be suspended--

               (1) for the period during which an
          action may be brought under section 6226
          (and, if a petition is filed under section
          6226 with respect to such administrative
          adjustment, until the decision of the court
          becomes final), and

                  (2) for 1 year thereafter.




     17
       The TMP can seek readjustment in either the Tax Court,
the Court of Federal Claims, or a U.S. District Court. Sec.
6226(a).
                              - 15 -

In Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner,

114 T.C. 533 (2000), we ruled that section 6229(a) does not

restrict the time in which the Commissioner may challenge a

partnership return, but only ensures that he has at least three

years in which to exercise it.18   We also held that the

suspension described in section 6229(d) affects “any open period

of limitations applicable to petitioner on the date the FPAA was

issued * * *.”   Rhone-Poulenc, 114 T.C. at 554.   The “period of

limitations” we referred to is supplied by section 6501, which

(with several exceptions) sets a three-year limitations period,

measured from the filing or due date of a return, for the

Commissioner to assess taxes or issue a notice of deficiency.

     Kligfeld’s first argument is based on that section.




     18
       At least two other courts--the D.C. Circuit and the Court
of Federal Claims--have agreed with our interpretation of section
6229(a) as creating a minimum, not a maximum, time limit for the
Commissioner to adjust partnership items. Each court noted that
construing the section in this way not only honors its plain
language, but furthers the Code’s goal of treating all
partnership items alike. See Andantech L.L.C. v. Commissioner,
331 F.3d 972, 977 (D.C. Cir. 2003) (plain language of section
6229(a) indicates a minimum period of assessment for partnership
items), affg. T.C. Memo. 2002-97; Grapevine Imp. Ltd. v. United
States, 71 Fed. Cl. 324, 332-35 (2006) (legislative history
supports the conclusion that section 6229(a) augments the basic
statute of limitations, ensuring the IRS has sufficient time to
scrutinize certain types of transactions); Rhone-Poulenc, 114
T.C. at 544-45 (section 6229(a) provides standard minimum period
of time to assess partnership items for all partners; if Congress
intended a different meaning, it would have used different
language).
                               - 16 -

A.   Section 6501

     Kligfeld relies on the undisputed fact that he and Estrin

filed their joint return for 1999 on August 15, 2000, which was

after Holdings 2 filed its return.      The Commissioner didn’t mail

the FPAA to Holdings 2 until September 22, 2004.     Even if the

period of limitations was based on the Kligfelds’ later filing

date, September 22, 2004 is more than three years after August

15, 2000.   Therefore, Kligfeld argues, the FPAA is time-barred

and invalid.

     The flaw in this argument is plain.     The Commissioner is not

arguing that the Kligfelds’ 1999 return included partnership

items challenged in the FPAA sent to Holdings 2--he’s arguing

that it was the Kligfelds’ 2000 return that included the

challenged items.    Their 2000 personal return was filed--again,

this is not disputed--in April 2001.

     April 2001 is, of course, still more than three years

removed from September 2004; but the general three-year limit

under section 6501 is subject to a number of exceptions.     The

Commissioner relies on section 7609, which Congress added to the

Code in response to the problem caused by the reluctance of those

selling alleged tax shelters to give up their customers’ names to

the IRS.    Both parties agree that section 7609 applies here

because the IRS issued a “John Doe” summons to Jenkens &

Gilchrist, to get the name of each of its clients who
                               - 17 -

participated in a Son-of-BOSS deal from January 1, 1998 through

June 15, 2003.   The relevant provision is section 7609(e)(2):

           In the absence of the resolution of the
           summoned party’s response to the summons, the
           running of any period of limitations under
           section 6501 * * * with respect to any person
           with respect to whose liability the summons
           is issued * * * shall be suspended for the
           period--

                      (A) beginning on the date which is
                 6 months after the service of such
                 summons, and

                      (B) ending with the final
                 resolution of such response.

     The IRS served Jenkens & Gilchrist with that summons on June

18, 2003, and it was not quickly resolved.   The tolling of

section 6501's three-year limit began on December 18, 2003, six

months after the service of the summons, and continued until May

17, 2004, when information was provided in response to the

summons.   When the tolling began, there were 133 days remaining

on the limitations period; therefore, when the tolling ended,

there were still 133 days remaining and the limitations period

was extended from April 29, 2004--the original date on which the

statute of limitations would have ended--to September 26, 2004.

As the deficiency notice and the FPAA were issued on September

22, 2004, we conclude that there is no statute-of-limitations

problem for the Commissioner based on section 6501 alone.

     Note that the key step in this argument is the implicit

assumption that the Commissioner has the power to adjust 1999
                                - 18 -

partnership items with an eye to determining a deficiency for

2000.     But does the Code allow this--or must there be some

“matching” of taxable years challenged by an FPAA and supplying

the period to calculate limitations under section 6501(a)?

     That is the question to which we now turn.

B.   Section 6229 and the Matching of Taxable Years

     Kligfeld19 begins by making clear that he is not trying to

get us to overrule Rhone-Poulenc.     Instead, he is making a

subtler point--that we need not, and should not, extend Rhone-

Poulenc beyond the situation where the taxable years of a

partnership and its partners overlap.     An obvious problem with

this position is that we mentioned nothing about the overlapping

of taxable years in Rhone-Poulenc itself.     Because Rhone-Poulenc

involved the characterization of a single transaction between the

partner and partnership, see 114 T.C. at 536, one can infer that

the taxable years involved did overlap.     However, we made no

finding--and made no mention--of this fact.

     Kligfeld has therefore, we believe, identified a real

distinction between Rhone-Poulenc and his case, and he makes both

textual and policy arguments--including constitutional questions


     19
        This case is very similar to Bay Way Holdings v.
Commissioner, docket No. 5534-05. Bay Way’s TMP filed a summary
judgment motion very similar to Kligfeld’s, and the Court invited
Bay Way to appear as an amicus curiae on brief and oral argument
of this motion. When we refer to “Kligfeld’s views,” we are
referring as well to the points made by Bay Way’s counsel, Paul
J. Sax.
                              - 19 -

of due process--for why our reading of section 6229 in Rhone-

Poulenc leaves enough room for this distinction to make a

difference.

     Kligfeld’s first argument arises from the Commissioner’s

assertion in this case--an assertion he likewise made in Rhone-

Poulenc--that section 6229 imposes no time limit on his authority

to issue an FPAA for any taxable year of any partnership.20

Kligfeld contends that this ignores the admonition given by the

Supreme Court over sixty years ago that it “would be all but

intolerable * * * to have an income tax system” in which “both

the taxpayer and the Government * * * [must] stand ready forever

and a day” to contest a tax assessment.     Rothensies v. Elec.

Storage Battery Co., 329 U.S. 296, 301 (1946).

     This may be true as a background principle of tax law, but

taxpayers are better off finding some textual hooks within the

Code itself on which to hang their case.    And Kligfeld has

scanned the Code looking for those hooks.    He begins with section



     20
       At the hearing on the motion, the Commissioner’s counsel
took an extreme view of the application of Rhone-Poulenc:

           The Court: The Kligfelds, they take the life-
     enhancing serum, they don’t get rid of their
     distributed partnership property until 2100. They got
     the property in 1999. The IRS says inflated basis,
     partnership item, we’re going to issue an FPAA for
     1999, even though now it’s January of 2100. Kosher?

          IRS Counsel:   Yes, I believe that is the case,
     your Honor.
                              - 20 -

706(a), which states as a general rule that a partner’s inclusion

of income, loss, deductions, etc., “with respect to a partnership

shall be based on the income, gain, loss, deduction, or credit of

the partnership for any taxable year of the partnership ending

within or with the taxable year of the partner.”    (Emphasis

added.)   He then applies this rule to the “principle of fixed,

periodic accountings” and draws the conclusion that a “statute of

limitations for assessment of tax liability” makes sense only

when there is an “interlacing of partners’ and partnerships’

taxable years.”

     The flaw in this argument is that it reads too much into

section 706(a).   That section doesn’t state a grand, overarching

principle that all partnership and affected items of a

partnership’s taxable year must be reflected in a coinciding or

overlapping partner’s taxable year.    It governs only the

inclusion of the partnership’s “income, gain, loss, deduction, or

credit of the partnership.”   Not all partnership items--and not

all affected items of the sort that are at issue in this case--

fall into one of those five categories.

     Kligfeld then turns to section 6226(d)(1)(B), pointing out

that it says that a partner may not be a party to a TEFRA

proceeding after the day on which “the period within which any

tax attributable to such partnership items may be assessed

against that partner expired.”   The phrase “such partnership
                              - 21 -

items” refers to subsection (d)(1)(A), which discusses “the

partnership items of such partner for the partnership taxable

year * * *.”   (Emphasis added.)   Kligfeld claims that this

language supports his reading of the Code’s treatment of partners

and partnerships--especially its echo of section 706(a)--as

requiring that any paired FPAA and notice of deficiency must be

for the same or overlapping taxable year.

     But Kligfeld focuses on the wrong language within this

section of the Code.   We agree with the Commissioner that the key

language in section 6226(d)(1)(B) is that a partner may be a

party to the TEFRA procedure for the period within which “any tax

attributable to such partnership items” (emphasis added) can be

assessed.   A tax that is attributable to a particular partnership

item need not be reportable by both the partner and the

partnership in the same taxable year.    For instance, Holdings 2

made the basis adjustments to its Inktomi stock--which was a

partnership, or at least affected, item--on its 1999 return, but

Corporation reported a taxable capital gain on the later sale of

the distributed portion of that same stock on its 2000 return.

The potential resulting tax was attributable--in the sense of

being at least partially dependent on--that basis computation.

     In addition to focusing on the wrong language, Kligfeld also

appears to confuse the assessment of tax with the adjustment of
                              - 22 -

partnership items.   Section 6229(a)--the key section in this

case--does refer to the partnership’s taxable year, but only in

reference to assessment of tax and not to adjustment of partner-

ship items.   Congress knows how to limit the Commissioner’s time

to adjust partnership items and not just his time to assess tax.

Look at section 6248(a), governing partnerships much larger than

Kligfeld’s.   It says:

          SEC. 6248(a) General Rule.--Except as otherwise
     provided in this section, no adjustment under this
     subpart to any partnership item for any partnership
     taxable year may be made after the date which is 3
     years after the later of * * * [the filing date or due
     date] for such year * * *.

Unlike section 6248(a), section 6229(a) does not set a maximum

time limit to make adjustments.   Since section 6229(a) modifies

section 6501, and section 6501 sets a three-year general

limitation period for assessments, we read the difference in

language between the two TEFRA provisions to indicate that

Congress anticipated that the taxable year in which an assessment

is made would not always be the same as the taxable year in which

the adjustments are made.

     Kligfeld’s final textual argument points us toward three

additional TEFRA provisions that, he claims, imply that TEFRA

itself requires a matching of partnership and partner taxable

years:

     •    Section 6231(a)(7)(B)--general partner with
          the largest interest “at the close of the
                           - 23 -

          taxable year involved” designated as default
          TMP;

     •    Section 6231(d)(1)(B)--partnership percentage
          interests determined on the basis of profits
          interests “as of the close of the partnership
          taxable year;” and

     •    Section 6226(c)(1)--right to file a petition
          challenging the FPAA limited to partners “in
          such partnership at any time during such
          year * * *.”

     Kligfeld correctly points out that these provisions don’t

seem to contemplate the possibility that this case raises--a

situation where the Commissioner issues an FPAA for one taxable

year aimed at the treatment of an affected item on a partner’s

return for a later year.     Imagine a partnership that in 1990 has

50 partners, but due to a great deal of turnover in ownership

interests, has 50 completely different partners by 2000.    Were

the Commissioner to issue an FPAA for the 1990 taxable year aimed

at an affected item on the 2000 tax returns of the current

individual partners, who could challenge it?    Under section

6226(c), only the 1990 partners would be partners “in such

partnership at any time during such year,” but section 6226(d)(1)

might deprive them of standing because they would have no

interest in the outcome.21    And if there were no designated TMP,

then who would serve by default?    Section 6231(a)(7) says that it


     21
       We assume for the purpose of discussing this hypothetical
that all the 1990 partners filed timely, nonfraudulent returns
more than three years before disposing of their partnership
interests.
                               - 24 -

would be the general partner with the largest profits interest at

the close of the 1990 taxable year, but section 6226(d)(1) might

again deprive all the 1990 partners of standing.

     Kligfeld argues, and not without some force, that there may

be times when reading TEFRA provisions as the Commissioner claims

they should be read might lead to strange scenarios like the

example above--where the issuance of FPAAs followed by

computational adjustments would be unchallengeable by any

partner, past or present.    The difficulty with this analysis, as

a matter of statutory interpretation, is that it doesn’t rise to

the level of absurdity:22 In the mill run of cases, the

Commissioner will be challenging partnership returns closer in

time to the partners’ individual returns, and most partnerships

do not have such churning partnership rosters.   Kligfeld may not

be wrong in arguing that such an unchecked exercise of the taxing

power would raise a serious question under the due process clause

of the fifth amendment.   However, a court should “never * * *

anticipate a question of constitutional law in advance of the

necessity of deciding it.”    United States v. Raines, 362 U.S. 17,

21 (1960); see also Ayotte v. Planned Parenthood of N. New Eng.,


     22
       Literal applications of a statute which lead to absurd
consequences should be ignored when a different, reasonable
application can be applied which is consistent with legislative
intent. Lastarmco, Inc. v. Commissioner, 79 T.C. 810, 826
(1982). But the absurdity must be “so gross as to shock the
general moral or common sense.” Crooks v. Harrelson, 282 U.S.
55, 60 (1930).
                              - 25 -

546 U.S. 320, 328 (2006) (“when confronting a constitutional flaw

in a statute, we try to limit the solution to the problem”).    And

in this case, the specter is entirely imaginary:   Kligfeld’s

partnership does not lack a TMP with standing to bring a petition

to challenge the FPAA here.

     We therefore hold that the Commissioner may issue an FPAA

adjusting Holdings 2’s partnership items more than three years

after Holdings 2 timely filed its partnership return.


                                   An order denying petitioner’s

                              summary judgment motion will be

                              issued.
