                       131 T.C. No. 7



                  UNITED STATES TAX COURT



JT USA LP, JOHN ROSS AND RITA GREGORY, Partners Other than
           The Tax Matters Partner, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 5282-05.               Filed October 6, 2008.



      R issued a notice of final partnership administrative
 adjustment (FPAA) to partnership J and its partners without
 providing a notice under sec. 6223(a), I.R.C. Ps, partners
 of J other than the tax matters partner, attempted to elect
 out of the partnership-level proceeding only in their
 capacity as indirect partners.

       Held: Section 6223 allows partners holding different
  partnership interests in the same partnership to make
  different elections for each interest. Ps’ election,
  otherwise conforming to the requirements of sec.
  301.6223(e)-2T(c), Proced. & Admin. Regs., is therefore
  effective.

       Held, further: The tax matters partner of J may be
  substituted as petitioner, and Ps will be stricken from the
  case in their capacity as indirect partners.
                                 - 2 -

       Ernest S. Ryder, Richard V. Vermazen, and Lauren A. Rinsky,

for petitioners.

       Johnathan H. Sloat and Donna F. Herbert, for respondent.



                                OPINION


       HOLMES, Judge:   In the 1970s, John Ross Gregory and his wife

Rita founded the business which became JT USA, LP.     It was very

successful in selling accessories to enthusiasts of motocross and

paintball.    Over 20 years later the Gregorys decided to sell, and

were faced with the problem of a large tax on a very large

capital gain.    Their solution was to use an alleged tax shelter

to create losses large enough to offset their gain.     The

Commissioner has challenged those losses, but the Gregorys think

they’ve found a way to keep them, or at least greatly increase

the odds of keeping them, because of a procedural flub by the

IRS.

                              Background

       The Gregorys were both pharmacists near San Diego when John,

an off-road motorcycle enthusiast, started selling motorcycle

socks at a local dirt track.    The small side business was a

success and JT USA was born.    The company focused first on

motocross accessories, but when that market started to become

crowded in the early 1990s, the Gregorys expanded their operation

to include accessories for paintball.      Paintballing took off, and
                                - 3 -

JT USA took off with it.1    In less than a decade, it had become

so successful that a superpower of paintball-equipment

manufacturers, Brass Eagle, Inc., was willing to pay $32 million

in cash for the business’s assets.

     When Brass Eagle became interested, JT USA’s ownership

structure was already a bit involved:2




     1
         http://www.jtusa.com/company/about_us/
     2
       The JT USA partnership tax return for the 2000 tax year
shows partnership interests “before change or termination”
totaling 118.84%. We believe this is because of the shifts in
ownership during the year, though there is no explanation in the
record. The exact ownership percentages don’t affect our
decision.
                                - 4 -

JT Racing, LLC (JTR-LLC) was the general partner and JT Racing,

Inc. (JTR-Inc.), an S corporation, was a limited partner.   The

other direct, but limited, partners at the beginning of 2000 were

the Gregorys themselves, their two daughters, and their grandson.

     By the time of the asset sale, JT USA’s ownership had been

scaled back and was wholly owned by the Gregorys indirectly

through JTR-LLC and JTR-Inc.:




The individual limited partners had sold back their partnership

interests3 so that the only partners were JTR-LLC and JTR-Inc. as

the general and limited partner, respectively.   This change in

ownership was part of a larger reorganization of interests that

the Gregorys undertook to minimize or eliminate their income tax


     3
       The record states that JT USA redeemed the partnership
interests of the two daughters and the grandson; it doesn’t
explain what happened to the Gregorys’ partnership interests
except to indicate that they no longer had direct ownership
interests in JT USA by the end of the year.
                               - 5 -

on the asset sale through an alleged Son-of-BOSS transaction.4

They also created a new general partnership called Gregory Legacy

Partners whose partners consisted of the Gregorys (as trustees of

a revocable family trust), the Gregorys’ daughters, their

grandson, and JT USA.

     All of this was done to help make the alleged Son-of-BOSS

transaction work, adding even more complexity to an already

complex business structure.   In November 2000, the Gregorys

executed a short sale of treasury notes5 and then contributed the

proceeds and obligation to replace those notes (along with some

separately purchased stock) to JTR-Inc. as a nontaxable addition

to the capital of a corporation under section 351(a),6 allegedly

receiving a basis in the newly acquired JTR-Inc. stock of a

little more than $37.2 million.7   JTR-Inc. then contributed the

cash, obligation, and additional stock to JT USA as a nontaxable

contribution to the capital of a partnership under section



     4
       See Kligfeld Holdings v. Commissioner, 128 T.C. 192
(2007), for a description of these transactions.
     5
       See Kligfeld Holdings, 128 T.C. at 195 n.6, for an
explanation of the short sale and see id. at 195-98, for an
explanation of how taxpayers use a short sale in Son-of-BOSS
deals.
     6
       Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the years at issue; all Rule
references are to the Tax Court Rules of Practice and Procedure.
     7
       Sec. 351(a) (“General Rule.--No gain or loss shall be
recognized if property is transferred to a corporation by one or
more persons solely in exchange for stock in such corporation and
immediately after the exchange such person or persons are in
control (as defined in section 368(c)) of the corporation.”).
                               - 6 -

721(a), allegedly receiving a basis in the partnership interest

of $37.2 million.8   Finally, JT USA contributed the cash,

obligation, and additional stock to Legacy Partners as a

nontaxable contribution to that partnership’s capital, also

allegedly receiving a basis in its partnership interest of about

$37.2 million.   When everything was finished, the structure

looked like this:




     8
       Sec. 721(a) (“General Rule.--No gain or loss shall be
recognized to a partnership or to any of its partners in the case
of a contribution of property to the partnership in exchange for
an interest in the partnership.”).
                               - 7 -

In December 2000, Legacy Partners redeemed JT USA’s partnership

interest for $4.1 million--the fair market value of the interest

at that time.   With its alleged basis of $36.6 million,9 JT USA

claimed a capital loss of $32.5 million.   That loss more than

offset the capital gain from the sale to Brass Eagle, which in

turn meant that JTR-LLC and JTR-Inc. could supposedly claim a

flow-through capital loss instead of a huge flow-through capital

gain--and the Gregorys, as sole members and shareholders of those

organizations, could supposedly do the same.

     JT USA timely filed its 2000 tax return.   The Commissioner

challenged the transaction by sending a notice to JT USA on

October 15, 2004, just before the statute of limitations would

expire.   But with this notice, he also sent the following letter,

which we quote at length because of its significance:

          We were unable to mail you the notice of
          beginning of administrative proceeding * * *
          before the conclusion of the partnership
          proceeding. Therefore, under Section
          6223(e)(2) of the Internal Revenue Code, you
          have the right to elect to have your
          partnership items treated according to either
          [this notice], a final court decision, or a
          settlement agreement with any partners for
          the taxable year to which the adjustment
          relates. If you do not make this election,
          the partnership items for the partnership



     9
       These figures are from JT USA’s 2000 Schedule D, Capital
Gains and Losses, and as the Commissioner noted there are some
inconsistencies between the partnership Schedule D and the
Schedules K-1 Partner’s Share of Income, Credits, Deductions,
etc., but the differences don’t affect our decision.
                                  - 8 -

            taxable year to which the proceeding relates
            shall be treated as nonpartnership items.

            To elect to have your interest in the
            partnership items treated as partnership
            items, you must file a statement of the
            election with my office within 45 days from
            the date of this letter. It is required that
            the statement:

            (1)    Be clearly identified as an election
                   under Internal Revenue Code Section
                   6223(e)(3);[10]

           (2)     Specify the election being made (i.e.
                   application of final partnership
                   administrative adjustment, court decision,
                   or settlement agreement);

           (3)     Identify yourself as a partner making the
                   election and the partnership by name,
                   address and taxpayer identification number;

           (4)     Specify the partnership taxable year to
                   which the election relates; and

           (5)     Be signed by the partner making the
                   election per Treasury Reg. § 301.6223(e)-2.

     This was almost certainly a form letter, and the

Commissioner concedes it was the wrong form letter.       See infra

p.14, n.12.      But the Gregorys responded to it a total of four

times.    John and Rita each sent a “Statement of Election by

Indirect Partner Under Section 6223(e)(3),” which asked to have

the “partnership items of the Indirect Partner treated as

nonpartnership items.”      These Statements then went on to say:



     10
       Note this reference to (e)(3) rather than (e)(2), as
mentioned in the first paragraph--it’ll turn out to be important.
                               - 9 -

“The undersigned who is an Indirect Partner is also a Direct

Partner of the Partnership.   This election does not apply to the

undersigned as a Direct Partner.”    They also each sent a

“Statement of Election by Direct Partner Under Section

6223(e)(3),” which asked to have the “partnership items of the

Direct Partner treated as partnership items” and stated:

          This election is made in response to IRS
          correspondence dated October 15, 2004, a
          copy of which is attached hereto for your
          reference, which correspondence seems to
          imply that a partner must elect to be a
          party to the proceeding in order to have
          partnership items treated as partnership
          items, and pursuant to Regulation Section
          301.6223(e)-2T which applies to partnership
          taxable years beginning prior to
          October 4, 2001.

The Gregorys sent all four statements of election on November 29,

2004.

     In March 2005, the Gregorys filed a petition with this

Court.   In November 2006, the Gregorys moved to strike themselves

as indirect partners from this case--arguing that they had

properly opted out of the proceedings.    As part of the same

motion, they also requested that we grant JTR-LLC permission to

take over the case in their stead.

     Because of the importance of the issue, the Court held oral

argument on the motion in San Diego--both Gregorys were

California residents when they filed the petition, and the

partnership had its principal place of business in California.
                                - 10 -

We must now decide (1) whether the Gregorys met the requirements

for electing to opt out; (2) whether their elections out as

indirect partners were effective; and (3) who the proper parties

will be in this proceeding.

                              Discussion

     The Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. 97-248, 96 Stat. 324, is a set of special tax

and audit rules that automatically applies to all partnerships

with exceptions that aren’t relevant here.   Sec. 6231(a)(1).

One of these rules requires JT USA to designate one of its

partners as the tax matters partner (TMP) to handle its

administrative issues with the Commissioner and manage any

resulting litigation.   Sec. 6231(a)(7).   JT USA’s TMP is JTR-LLC.

     The goal of TEFRA is to have a single point of adjustment

for all partnership items at the partnership level, thereby

making any adjustments to a particular partnership item

consistent among all the various partners.   See Kligfeld

Holdings, 128 T.C. at 199-200.    TEFRA procedures generally apply

if the adjusted item is a “partnership item,” defined as any item

“more appropriately determined at the partnership level than at

the partner level.”   Secs. 6221, 6231(a)(3).   Partnership items

include the income, gains, losses, deductions and credits of a

partnership.   Sec. 301.6231(a)(3)-1, Proced. & Admin. Regs.

Nonpartnership items are those that aren’t partnership items--and
                              - 11 -

their tax treatment is determined at the individual level.      Sec.

6231(a)(4).   Finally, “affected items” are those that are

affected by the determination of a partnership item.11   Sec.

6231(a)(5); see Ginsburg v. Commissioner, 127 T.C. 75, 83 (2006)

(outlining the different categories of adjustments under TEFRA).

     This adjustment of partnership items is done through a

formal process which--if everything is working as it’s supposed

to--starts with the IRS sending a notice at the beginning of an

audit to each “notice partner,” defined as a “partner whose name

and address is furnished to the [Commissioner].”    Secs. 6223(a),

6231(a)(8).   This notice alerts the partners that an audit is

underway, and gives them a chance to participate.   See generally

secs. 6223 and 6224.   The Gregorys filed the petition in this

case under subsection 6226(b) in their capacity as notice

partners--thus the caption identifying them as “partners other

than the tax matters partner.”   Once the Commissioner completes

the audit, but no sooner than 120 days after he sends the first

notice, he is supposed to send out a Notice of Final Partnership


     11
       Affected items come in two varieties. The first are
purely computational adjustments which reflect changes in a
taxpayer’s tax liability triggered by changes in partnership
items. Sec. 6231(a)(6). The second are adjustments (other than
penalties, additions to tax, and additional amounts that relate
to adjustments to partnership items, see sec. 6226(f)) that
require the Commissioner to follow normal deficiency procedures
because the adjustments depend on factual determinations that
have to be made at the individual partner level. Sec.
6230(a)(2)(A)(i); see also Adkison v. Commissioner, 129 T.C. 97,
102 (2007).
                                 - 12 -

Administrative Adjustment (FPAA) to the TMP outlining any changes

to be made.   Sec. 6223(d)(1).    The Commissioner then sends the

FPAA to other notice partners within 60 days.     Sec. 6223(d)(2).

     The TMP has 90 days from the date the FPAA is sent to file a

petition to contest any adjustments that the FPAA proposes.     Sec.

6226(a).   If he doesn’t, the window for challenging the FPAA

stays open for 60 more days during which any notice partner can

start a case.   Sec. 6226(b).    Once there’s a determination of all

the partnership-level items--either because no one challenges the

FPAA or because a decision in the case challenging the FPAA

becomes final--the Commissioner may begin deficiency proceedings

against any partner with affected items that require a partner-

level proceeding, and may immediately assess the amount due

against any other partners with affected items that don’t.     Sec.

6230(a)(1) and (2).

     The IRS is a large organization, and Congress had the

foresight to enact rules to apply after the inevitable snafus,

including the snafu that happened here--the Commissioner’s

sending out an FPAA just in time to beat the statute of

limitations but without any notice that audit proceedings had

begun.   The Code has two default rules that might apply in this

situation.    If the Commissioner waits so long to notify a partner

that the time to challenge the FPAA in court has passed, the

default rule is that an unnotified partner’s partnership items
                               - 13 -

are treated as nonpartnership items unless the partner “opts in”

to the proceedings; for example, if an unnotified partner learns

of a favorable settlement agreement that he would like to glom

onto.   Sec. 6223(e)(2).   If, however, the Commissioner notices

his mistake before the FPAA becomes unchallengeable, the default

rule is that an unnotified partner’s partnership items remain

partnership items subject to the outcome of the partnership-level

proceeding unless the partner “opts out,” at which point those

items become nonpartnership items.      Sec. 6223(e)(3).   Any items

that become nonpartnership items under section 6223(e) are

subject to the standard deficiency procedures of sections 6211

through 6216.   Sec. 6230(a)(2)(A)(ii).     And the Commissioner

generally has one year from the time a partner’s partnership

items become nonpartnership items to send a notice of deficiency

to that partner.    Secs. 6229(f)(1), 6503(a).

     The problems in this case began when the IRS sent the FPAA

to JT USA just before the statute of limitations was to expire.

None of JT USA’s partners received an advance notice that an

audit was coming, but sending them the FPAA meant they did get

notice before the time to challenge the adjustments proposed by

the FPAA had run.   This meant that the default rule of (e)(3),

not (e)(2), applied and any partner entitled to receive notice
                               - 14 -

had the right to opt out and not the right to opt in.12     The

Gregorys tried to do just that in their capacity as indirect

partners.    The FPAA proposed adjustments only to partnership

items reflecting the alleged Son-of-BOSS transaction.     By the

time JT USA did that transaction, the Gregorys argue, their

entire interest was held only in their capacity as indirect

partners.    So if we determine that their election was valid, they

may well not be subject to any deficiency proceedings since their

attempted election was made more than one year ago.

A.   The Gregorys’ Election

     The regulations have specific requirements for an election

to opt out of TEFRA proceedings.    For the 2000 tax year, those

requirements were listed in section 301.6223(e)-2T(c), Temporary

Proced. & Admin. Regs., 52 Fed. Reg. 6785 (Mar. 5, 1987):

            1.   The election must be made within 45 days
                 after the FPAA was mailed; and



     12
       The Commissioner has conceded that the original notice
sent to the Gregorys with the FPAA was incorrect and should have
been a notice giving the partners the option to opt out of the
TEFRA proceedings under section 6223(e)(3). However, section
6223(e)(3) is only available to partners entitled to receive
notice in the first place. Sec. 6223(e)(1). The Gregorys were
entitled to notice as direct partners since they were named on
the partnership return, but it is unclear if that means they were
also entitled to notice as indirect partners. The regulation
suggests that they were. See sec. 301.6223(e)-1T(b)(1),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6784 (Mar. 5,
1987). In any event, the parties did not raise the issue of
what, if any, effects that possible distinction might have for
this case.
                                - 15 -

            2.   The statement must:

                 a.   Clearly identify that it’s an
                      election under section 6223(e)(3),

                 b.   Specify that the election is to
                      have partnership items treated as
                      nonpartnership items,

                 c.   Identify the electing partner and
                      the partnership by name, address,
                      and taxpayer identification number,

                 d.   Specify the partnership taxable
                      year to which the election relates,
                      and

                 e.   Be signed by the electing partner.

     The election, once made, “shall apply to all partnership

items for the partnership taxable year to which the election

relates.”    Sec. 301.6223(e)-2T(c)(1), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 6785 (Mar. 5, 1987).

     The Gregorys have shown:

            •    They made the elections exactly 45 days
                 after the IRS sent the FPAA to the TMP;

            •    Each election clearly stated that it was
                 “made by the undersigned pursuant to Section
                 6223(e)(3)(B) of the Internal Revenue Code
                 to have the partnership items of the Indirect
                 Partner treated as nonpartnership items”;

            •    Each election also clearly stated the
                 identity of both the indirect partner and
                 the partnership by name, address, and
                 taxpayer identification, as well as the
                 partnership taxable year to which the
                 election related;

            •    None was signed by the Gregorys themselves,
                 but the Commissioner has since conceded that
                              - 16 -

               their power of attorney sufficed to allow him
               to sign on their behalf.

     The most important question left in the case, though, is

whether their election is valid in the light of their choice to

limit it only to all partnership items in their capacity as

indirect partners.

B.   Effect of the Gregorys’ Elections

     The Commissioner focuses on the language of section

6223(e)(3)(B)--“to have the partnership items of the partner

* * * treated as nonpartnership items”--and insists that letting

an individual partner with different partnership interests make

different choices in his different capacities would create a

situation where some of a partner’s partnership items would be

treated as nonpartnership items and some aren’t.    He argues that

the word “partner” in section 6223 refers to the person holding

any such interest, not to that person in his capacity as holder

of a particular partnership interest.    As he sums up his

position, what the Gregorys are trying to do with elections

limited to their capacity as indirect partners is simultaneously

opt in and opt out--and such a self-contradictory election must

necessarily be ineffective.

     The Gregorys have two arguments in reply.    First, they argue

that, at least in this case, there is no possible bifurcation of

any partnership item--no self-contradictory election, in other

words--because the only items involved in this case all arise
                                - 17 -

from the alleged Son-of-BOSS deal, and all those items are

allocable to the Gregorys as indirect partners.    The words of

limitation that they chose to use in their elections are thus

without any practical effect.

     Their second argument is that there’s nothing self-

contradictory or prohibited about having the same person make two

different elections as long as each election relates to a

different partnership interest.    The Gregorys admit that TEFRA

and its regulations do not specifically address the possibility

of the same person acting in each of two different capacities.

But they argue that we must fill in this gap the most reasonable

way we can in light of TEFRA’s overall structure and general

background principles of partnership law.    They claim that the

more reasonable way to fill the gap is by construing the term

“partner” in section 6223 to refer to a person holding a

particular partnership interest, not a person holding any number

of partnership interests.   From this perspective, a single person

with two different interests in a single partnership can make

different elections for each.

     We begin by quickly disposing of the Gregorys’ first

argument.   As the Commissioner carefully notes, this case is only

at the pretrial stage, and the Gregorys have not proven how the

challenged partnership items were allocated to the partners or

that they were in fact no longer direct partners when the deal
                                - 18 -

was done.   And even though the Gregorys may well be able to prove

that they were no longer direct partners by the time they got the

FPAA or even by the end of 2000, section 6226(c)(1) tells us to

treat as a party any partner “who was a partner in such

partnership at any time during such year.”

     This leaves us with the more difficult problem of whether

the same person holding different partnership interests can make

different elections for each.    We begin with the text.     Both

parties agree that section 6231(a)(2) defines the term “partner”

for purposes of TEFRA.   They also both agree that this definition

includes indirect partners as well as direct partners.       The term

“direct partner” isn’t actually defined in the Code, but it is

the common term for someone who holds a partnership interest

directly in the partnership, and not through another entity.

That’s reasonable:   TEFRA defines an “indirect partner” as

someone who holds a partnership interest “through 1 or more pass-

thru partners.”   Sec. 6231(a)(10).      A pass-thru partner is “a

partnership, estate, trust, S corporation, nominee, or other

similar person through whom other persons hold an interest in the

partnership with respect to which proceedings under this

subchapter are conducted.”   Sec. 6231(a)(9).

     The Commissioner also doesn’t dispute that the Gregorys held

both indirect partnership interests (through JTR-LLC and JTR-

Inc.) and direct partnership interests in JT USA at different
                              - 19 -

times during the 2000 tax year.   However, the Commissioner seems

to be arguing that “partner” in the Code is an ontological

category--that once one acquires the status of a partner, by

owning either direct or indirect partnership interests or both,

any reference in the Code or regulations to one’s partnership

interests means all of one’s partnership interests.

     The Gregorys argue that being a partner is not a status one

acquires and then must exercise in only one way; instead, we

should recognize that an individual can have more than one

interest in a partnership that he can treat in different ways.

And if an individual has different bundles of rights arising from

different interests, he should be viewed as a partner in relation

to each bundle, empowered to exercise his different rights in the

different bundles in different ways.

     Rather than answer such metaphysical disputes abstractly, we

look to the Code and regulations governing partners to try to

discover if they take one side or the other in the dispute.

The Gregorys helpfully point out that there are several places in

the regulations that seem to recognize the possibility of

treating different partnership interests held by the same person

differently.   The two examples we find most persuasive are the

following:

     •    A partner (P) is both a direct partner in a
          partnership (PS) and an indirect partner in PS
          through a pass-thru partner (PTP). P reports his
          source partnership items as a direct partner
                             - 20 -

          consistently with PS under section 301.6222(a)-
          1T(a), Temporary Proced. & Admin. Regs., 52 Fed.
          Reg. 6781 (March 5, 1987). However, PTP reports
          its share of partnership items inconsistently with
          PS and informs the IRS of this inconsistency under
          section 301.6222(b)-1T, Temporary Proced. & Admin.
          Regs., 52 Fed. Reg. 6782 (March 5, 1987). P
          reports his share of partnership items flowing
          through to him from PTP consistently with PTP’s
          treatment of the items under section 301.6222(a)-
          2T(c)(3), Temporary Proced. & Admin. Regs., 52
          Fed. Reg. 6781 (March 5, 1987). A single partner
          may--indeed, should--thus take inconsistent
          positions if he has both direct and indirect
          partnership interests.

     •    The TMP for a partnership (PS) enters into a
          settlement agreement with the Commissioner. A
          partner (P) is bound by this settlement agreement
          as a nonnotice direct partner of PS. Sec.
          301.6224(c)-1T(a), Temporary Proced. & Admin.
          Regs., 52 Fed. Reg. 6786 (March 5, 1987). P is
          also an indirect partner of PS through a pass-thru
          partner (PTP) and hasn’t been separately
          identified under section 6223(c)(3). PTP enters
          into a separate settlement agreement with the
          Commissioner. As an unidentified indirect
          partner, P is bound by PTP’s settlement agreement.
          Sec. 301.6224(c)-2T(a), Temporary Proced. & Admin.
          Regs., 52 Fed. Reg. 6787 (March 5, 1987).

We find the second example above especially relevant, since

section 301.6224(c)-2T(a)(1) specifically states that if “an

indirect partner holds a separate interest in that partnership,

either directly or indirectly through a different pass-thru

partner, the indirect partner shall not be bound by that

settlement agreement with respect to [that separate interest].”

It is hard to imagine a clearer indication that different

partnership interests held by the same person may be treated

differently.
                                - 21 -

     And indeed, at oral argument, we hypothesized a situation in

which JT USA’s two direct partners had different TMPs who made

different elections--say, if JTR, Inc. elected out and JTR-LLC

elected in.    The Commissioner conceded (as he must given the

regulation’s language) that the two different direct partners are

allowed to make two different elections.     Yet the Gregorys are

indirect partners through both these direct partners, necessarily

implying that they could indeed be treated as simultaneously in

and out.

     The concept of one person with multiple interests or roles

that he can defend or play in different ways is nothing new in

TEFRA law.    The prime example of this can be found in Barbados

#6, Ltd. v. Commissioner, 85 T.C. 900 (1985).     We held there that

one partner could be both a TMP and a notice partner, and that

such a partner would be entitled to 150 days to file a petition

from an FPAA under section 6226(b)--the initial 90 days in his

capacity as the TMP plus an additional 60 days in his capacity as

a notice partner.

             [W]e are simply saying here that petitioner
             wore two hats--one as the tax matters partner
             and another as a notice partner. Since a
             timely petition was not filed by petitioner
             as the tax matters partner, we see no
             statutory prohibition which precludes
             petitioner from proceeding on its own behalf
             by filing a petition as a notice partner.

Id. at 905.
                              - 22 -

     Our tentative conclusion that one person meeting the

definition of both direct partner and indirect partner can have

multiple rights and choose to exercise them in different ways is

strengthened by the similar rules governing limited partnerships

under state law.   Both the Uniform Limited Partnership Act, and

the Revised Uniform Limited Partnership Act recognize that the

same person can have a dual capacity.   As the former act states:

          A person may be both a general partner and a
          limited partner. A person that is both a
          general and limited partner has the rights,
          powers, duties, and obligations provided by
          this [Act] and the partnership agreement in
          each of those capacities. When the person
          acts as a general partner, the person is
          subject to the obligations, duties and
          restrictions under this [Act] and the
          partnership agreement for general partners.
          When the person acts as a limited partner,
          the person is subject to the obligations,
          duties and restrictions under this [Act] and
          the partnership agreement for limited
          partners.

Cal. Corp. Code sec. 15901.13 (West Supp. 2008); see also Cal.

Corp. Code secs. 15512 and 15644 (West 2006); Unif. Ltd. Pship

Act sec. 113 (2001), 6A U.L.A. 384 (2008); Revised Unif. Ltd.

Pship Act sec. 404 (1976), 6B U.L.A. 263 (2008).

     A careful reading of the regulation also supports this rea-

soning.   That regulation doesn’t say that an election must cover

all a partner’s partnership interests, it says that “the election

shall apply to all partnership items for the partnership taxable

year to which the election relates.”    Sec. 301.6223(e)-2T(c)(1),
                               - 23 -

Temporary Proced. & Admin. Regs., supra.    The phrase “all

partnership items” obviously needs to be read as limited in some

sense, lest the election of one partner in a partnership bind all

his partners.   But if partner A can’t bind partners B and C, then

we can’t see why--especially given the regulations and background

principles of partnership law--partner A shouldn’t be able to

make different elections for each of his partnership interests,

as long as each election applies to all the partnership items

allocable to each partnership interest.

     The Commissioner nevertheless argues that permitting the

same partner to make different elections under section 6223(e)

would increase the administrative burden on the IRS and lead to

inconsistent results, two consequences contrary to TEFRA’s major

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

C.B. 600, 662-63.    We agree that at a very general level allowing

this to happen seems to be at odds with TEFRA’s overall goal to

consolidate partnership proceedings and increase consistency.

The elections under section 6223(e) are only available, however,

when the Commissioner fails to provide proper notice; i.e., when

the TEFRA process has already gone awry and the rules need to be

construed to supply a reasonable fix.

     Inconsistency may also be inevitable when tiered partner-

ships with multiple TMPs are involved--something the Commissioner

seems to forget.    There are simply too many outside factors to
                               - 24 -

have every partner, both direct or indirect, treated identically.

Just because the Gregorys had control over the pass-thru partners

in this particular situation doesn’t change the fact that they

held two separate partnership interests.

     We therefore hold that the Gregorys were allowed to make

separate elections as direct and indirect partners and that their

elections to opt out as indirect partners were valid.   The Grego-

rys’ elections to “opt in” in their capacity as direct partners

have no effect because the default rule dictates the same result

under section 6223(e)(3), a partner is bound by the TEFRA pro-

ceedings unless a proper election is made to opt out.   The elec-

tions in were just a result of the incorrect letter sent out with

the FPAA and have no effect one way or the other.

C.   Proper Parties to This Proceeding

     The Gregorys ask to be stricken from this proceeding since

they no longer have an interest in the outcome as indirect part-

ners.   Sec. 6226(d)(1).   They ask that we let JTR-LLC take over

as the TMP for whatever is left of the proceedings.   Rule 247(a)

makes the TMP a party, and Rule 250 requires the Court to

identify the TMP.   When, as here, the petition is filed by a

partner other than the TMP, section 6226(b)(6) provides that “the

tax matters partner may intervene in any action brought under

this subsection.”   Our Rule 245(a) gives him 90 days from the

date that the petition was served to do so, but Rule 245(c)
                             - 25 -

allows us to enlarge that time for cause.   The Commissioner has

raised no objection and, in the absence of any argument against

allowing the TMP to intervene, we will construe our rule

liberally and let JTR-LLC see this case through to its end.


                                   An appropriate order will be

                              issued.
