In a family trust case, the U.S. District Court for the Middle District of Florida found in favor of the son of the New York Yankees' late owner, George Steinbrenner, by ruling that a claim for refund was timely filed and that the date of payment was the correct starting date for the statute of limitation. The court found that tax settlements made at the partnership level do not remain partnership items as they flow to other succeeding entities and mingle with other transactions and tax decisions.
Harold and Christina Steinbrenner were beneficiaries of a family trust that was an indirect partner in YankeeNets LLC through another partner, Yankees Holdings LP. In 2006, YankeeNets, Yankees Holdings, and the IRS settled a tax dispute over the tax treatment of a 2001 YankeeNets asset sale as a long-term capital gain. As part of the settlement, Yankees Holdings had to treat part of the long-term capital gain as ordinary income. The IRS formally accepted the settlement on March 1, 2007. In February 2008 the IRS adjusted YankeeNets’ partnership income for 2001 and 2002 and disallowed two deductions. A large net loss flowed through to the family trust for 2002. The IRS disallowed the distribution of the loss to the beneficiaries for 2002.
On Feb. 26, 2008, the IRS notified the Steinbrenners that they owed more than $500,000 in additional taxes for 2001. The additional taxes were paid in two payments in June and October 2008. The claim of refund in this case involves these two payments.
On June 3, 2009, the family trust amended the 2001 return and elected to carry back the net loss to that year that had been disallowed for distribution in 2002. On Aug. 14, 2009, the Steinbrenners claimed a refund from 2001 of about $585,000. In late December 2009 the IRS paid them a refund of $670,494 in tax and interest but then sued to recover it, stating that the refund claim had not been timely filed.
The primary issue was which statute of limitation applied—the general rules in Sec. 6511(a) or the more specific rules in Sec. 6511(g) for partnership items. If Sec. 6511(a) was correct, the two-year limitation window began on the date the tax was paid. If Sec. 6511(g) applied, then a claim of refund must have been filed two years from the date of the settlement (Sec. 6230(c)(2)(B)(i)). The settlement was entered into on March 1, 2007, so the Aug. 14, 2009, refund claim was late under Sec. 6230(c)(2)(B)(i). However, using the June and October 2008 payment dates as the starting point, the refund claim was well within the two-year time frame.
Sec. 6511(g) applies to any tax that is, or is attributable to, a partnership item. The trustee’s carryback of loss was not a partnership item under Sec. 6231(a)(3) since it was not “required to be taken into account for the partnership’s taxable year,” the court held. The IRS argued, however, that it was attributable to a partnership item, because “but for” the settlement agreement with Yankees Holdings (which determined the amount of partnership loss for YankeeNets in 2002) the overpayment of tax and refund claim would have never occurred.
The court rejected this argument as well, finding that there was no straight line of causation or attribution between the partnership item and the Steinbrenners’ refund. The chain of causation was interrupted, the court held, by the IRS’s independent action in denying distribution of loss by the trustee for 2002 and because the trustee had a choice among alternative courses of action (whether, for example, to contest the IRS’s determination for 2002 or carry back the loss to 2001 or to another year).
Next, the court considered the IRS’s alternative argument that the carryback was an “affected item” that was attributable to a partnership item. The court never explicitly decided whether the trustee’s loss carryback was an affected item, because the Taxpayer Relief Act of 1997, P.L. 105-34, removed the term “affected item” from Sec. 6230(d)(6). However, it determined that exception to the regular refund procedures in Secs. 6230(d)(6) and 6511(g) did not apply to affected items.
Finally, the court noted that a family trust beneficiary, not a partner, was claiming the refund. The beneficiary was not a party to the settlement, and the net loss carryback was not attributable to the Yankees Holdings settlement. The two-year settlement date limitation of Sec. 6230(c)(1)(B) was not applicable on its face or on the facts and circumstances of this action, the court held.
Steinbrenner, No. 8:11-cv-2840-T-23AEP (M.D. Fla. 6/7/13)
By Sharon Burnett, CPA, Ph.D., associate professor of accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.