Waterman et al v. The United States of America Office of the Department of the Treasury

Filing 27

OPINION AND ORDER granting 11 Motion to Dismiss. Signed by Judge James L Graham on 3/4/14. (ds)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
Wade Waterman and
Dorothy S. Waterman,
Case No. 2:12-cv-868
Plaintiffs,
Judge Graham
v.
Magistrate Judge Abel
United States of America,
Defendant.
OPINION AND ORDER
This case turns on whether Plaintiff Wade Waterman’s partnership, Midwest
Intermediaries, was a TEFRA partnership or a small partnership under the Internal Revenue
Code for the tax years 1990 through 1992. In 1982, Congress passed the Tax Equity and Fiscal
Responsibility Act, Pub. L. No. 97–248, 96 Stat. 324, to streamline the tax treatment of
partnership income under the Internal Revenue Code. During the relevant time period, a TEFRA
partnership was broadly defined as “any partnership required to file a return under section
6031(a).” 26 U.S.C. § 6231(a)(1)(A) (West 1992). The Code exempted small partnerships from
this definition. See 26 U.S.C. § 6231(a)(1)(B)(i) (West 1992). During the relevant time period,
the Code defined a small partnership as a partnership (1) with 10 or fewer partners and (2) in
which each partner’s share of each partnership item was the same as his share of every other
item. 26 U.S.C. § 6231(a)(1)(B)(i)(I)-(II) (West 1992). Small partnerships were not, and are not,
subject to the provisions of the Code governing TEFRA partnerships.
The Plaintiffs, Mr. Waterman and his wife, Dorothy, seek recovery of an alleged
overpayment of taxes from 1990 through 1992. They filed their administrative claim for refund
of this alleged overpayment on August 21, 2008. If Midwest Intermediaries was a small
1

partnership from 1990 through 1992, as the Defendant argues, the Plaintiffs’ administrative
claim was not timely filed and the Court lacks jurisdiction over the Plaintiffs’ claim. 1 In contrast,
if Midwest Intermediaries was a TEFRA partnership from 1990 through 1992, as the Plaintiffs
assert, it appears that the Plaintiffs have a colorable argument that their administrative claim was
timely filed and the Court may properly exercise jurisdiction over their claim. Because the
Plaintiffs have not alleged sufficient facts to support a plausible inference that Midwest
Intermediaries was a TEFRA partnership, the Court will grant the Defendant’s Motion to
Dismiss (doc. 11).

I.

Background
The following facts are taken from the Plaintiffs’ Complaint (doc. 1):
For an unspecified time, presumably in the 1980s and early 1990s, Plaintiff Wade

Waterman operated a partnership, Midwest Intermediaries, with a business associate, Mr.
Chamberlain. 2 Compl. at ¶ 6, doc. 1. In 1992, Mr. Waterman discovered that Mr. Chamberlain
was embezzling partnership funds. Id. As a result of this embezzlement, the Plaintiffs reported
income earned, but not received, from the partnership from 1990 through 1992. Id. at ¶ 14. This
resulted in an alleged overpayment of $321,292.00 plus interest to the Defendant by the
Plaintiffs. Id.
Over the next 15 years, Mr. Waterman sought to resolve his alleged overpayment of taxes
with the Defendant. Id. at ¶ 7. In April 2008, the Defendant confirmed that Mr. Chamberlain had
1

In its Reply, the Defendant introduces new facts that suggest the Court may exercise jurisdiction over a narrow
portion of the Plaintiffs’ claim even if Midwest Intermediaries was a small partnership. These facts are not part of
the Plaintiffs’ Complaint and the Plaintiff did not address them in their nominal Sur Reply. Therefore, the Court
does not consider these new facts in ruling on the Defendant’s Motion to Dismiss.
2

The Plaintiffs do not provide the first name of Mr. Waterman’s business partner. They refer to him as
“Chamberlain” in their Response in Opposition. See Pls.’ Resp. in Opp at 5–6, doc. 15.
2

not filed an individual tax return for the years 1990 through 1992. Id. In addition, no partnership
return was submitted for those years. Id. at ¶ 13.

Based on this information and their

consultation with tax professionals, the Plaintiffs submitted an amended return for those years on
August 21, 2008. Id. at ¶ 7. On September 23, 2010, the Internal Revenue Service Appeals
Office notified the Plaintiffs that their claims were denied as untimely filed. Id. at ¶ 20.
On September 9, 2012, the Plaintiffs filed a one count Complaint (doc. 1) against the
Defendant. The sole count in the Complaint asserts that the Defendant violated 28 U.S.C. §
7433(a). The Plaintiffs allege that, through its officers or employees, the Defendant recklessly,
intentionally, or negligently disregarded 26 U.S.C. § 6230, which governs partnership credits and
refunds. The Defendant filed its Motion to Dismiss (doc. 11) on April 12, 2013.

II.

Standard of Review
Federal Rule of Civil Procedure 8(a) requires that a pleading contain a “short and plain

statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).
When considering a motion under Rule 12(b)(6) to dismiss a pleading for failure to state a claim,
a court must determine whether the complaint “contain[s] sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A court should
construe the complaint in the light most favorable to the plaintiff and accept all well-pleaded
material allegations in the complaint as true. Iqbal, 556 U.S. at 679; Erickson v. Pardus, 551 U.S.
89, 93–94 (2007); Twombly, 550 U.S. at 555–56.
Despite this liberal pleading standard, the “tenet that a court must accept as true all of the
allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of

3

the elements of a cause of action, supported by mere conclusory statements, do not suffice.”
Iqbal, 556 U.S. at 678; see also Twombly, 550 U.S. at 555, 557 (“labels and conclusions” or a
“formulaic recitation of the elements of a cause of action will not do,” nor will “naked
assertion[s]” devoid of “further factual enhancements”); Papasan v. Allain, 478 U.S. 265, 286
(1986) (a court is “not bound to accept as true a legal conclusion couched as a factual
allegation”). The plaintiff must provide the grounds of his entitlement to relief “rather than a
blanket assertion of entitlement to relief.” Twombly, 550 U.S. at 556 n.3. Thus, “a court
considering a motion to dismiss can choose to begin by identifying pleadings that, because they
are no more than conclusions, are not entitled to the assumption of truth.” Iqbal, 556 U.S. at 679.
When the complaint does contain well-pleaded factual allegations, “a court should
assume their veracity and then determine whether they plausibly give rise to an entitlement to
relief.” Iqbal, 556 U.S. at 679. “A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. at 678. Though “[s]pecific facts are not necessary,” Erickson, 551 U.S.
at 93, and though Rule 8 “does not impose a probability requirement at the pleading stage,”
Twombly, 550 U.S. at 556, the factual allegations must be enough to raise the claimed right to
relief above the speculative level and to create a reasonable expectation that discovery will reveal
evidence to support the claim. Iqbal, 556 U.S. at 678-79; Twombly, 550 U.S. at 555–56. This
inquiry as to plausibility is “a context-specific task that requires the reviewing court to draw on
its judicial experience and common sense. . . . [W]here the well-pleaded facts do not permit the
court to infer more than the mere possibility of misconduct, the complaint has alleged – but it has
not ‘show[n]’– ‘that the pleader is entitled to relief.’” Iqbal, 556 U.S. at 679 (quoting Fed. R.
Civ. P. 8(a)(2)).

4

III.

Discussion
Citing 26 U.S.C. § 6231(a)(1)(B)(i), 3 the Defendant contends that Midwest

Intermediaries was a small partnership, and that, therefore, the timeliness of the Plaintiffs’
administrative claim is governed by 26 U.S.C. § 6511(a). Under § 6511(a), the Defendant
argues, the Plaintiffs were obligated to file their administrative claim “within 3 years from the
time the return was filed or 2 years from the time the tax was paid, whichever of such periods
expires later.” The Defendant argues that the Plaintiffs filed their administrative claim on August
21, 2008, well after the time period permitted in § 6511(a). As a result, the Defendant asserts, the
Plaintiff has not satisfied the jurisdictional requirement for a suit for refund of federal income
taxes.
The Plaintiffs, however, maintain that Midwest Intermediaries qualified as a TEFRA
partnership, placing the Plaintiffs’ claims outside the period of limitations imposed by § 6511.
Instead, the Plaintiffs argue that 26 U.S.C. § 6229 and § 6230 control the timeliness of their
administrative claims. The Plaintiffs explain that Sections 6229 and 6230 generally require that
an administrative claim for refund of an overpayment related to a TEFRA partnership item be
filed within three years of the date the partnership return was filed or the last date on which the
partnership could have been filed for that tax year. However, the Plaintiffs emphasize that §
6229(c)(3), when read in conjunction with § 6230(d)(1), provides no period of limitations for
filing an administrative claim for refund of an overpayment related to a TEFRA partnership.

In

other words, the Plaintiffs argue that there was no period of limitations for filing their

3

It is unclear whether the Defendant is referring to 26 U.S.C. § 6231(a)(1)(B)(i) (West 2013) or 26 U.S.C. §
6231(a)(1)(B)(i) (West 1992). As will be discussed later, there is an important difference between the two statutes.

5

administrative claim for refund and that therefore their August 2008 amended return was timely
filed.

A.

Period of Limitation
“Timely filing of a refund claim [is] a jurisdictional prerequisite to bringing suit in a

federal district court.” Comm’r v. Lundy, 516 U.S. 235, 240 (1996). The Plaintiffs filed their
amended return on August 21, 2008. Section 6511(a) is titled “Period of limitation on filing
claim” and provides, in relevant part, that a “[c]laim for credit or refund of an overpayment of
any tax imposed by this title . . . shall be filed by the taxpayer within 3 years from the time the
return was filed or 2 years from the time the tax was paid, whichever of such periods expires the
later[.]” 26 U.S.C. § 6511(a) (West 2008). 4 Failure to file an administrative claim for refund
within the period of limitation prescribed by § 6511(a) will result in the denial of the taxpayer’s
claim. 26 U.S.C. § 6511(b) (West 2008).
The time limitations for administrative claims related to TEFRA partnerships are
different than those prescribed by § 6511(a). See 26 U.S.C. § 6511(f) (West 2008) (“In the case
of any tax imposed by subtitle A with respect to any person which is attributable to any
partnership item (as defined in section 6231(a)(3)), the provisions of section 6227 and
subsections (c) and (d) of section 6230 shall apply in lieu of the provisions of this subchapter.”)
Under TEFRA, a refund of an overpayment related to a partnership item “shall [not] be allowed
or made to any partner after the expiration of the period of limitation prescribed in section 6229
with respect to such partner for assessment of any tax attributable to such item.” 26 U.S.C. §
6230(d)(1) (West 2008).
4

Section 6511(a) went into effect on June 17, 2008. The current version, 26 U.S.C. § 6511(a) (West 2014), is the
same as the 2008 version.

6

As a general rule, the Government may assess any tax attributable to any partnership item
within three years of “(1) the date on which the partnership return for such taxable year was
filed, or (2) the last day for filing such return for such year (determined without regard to
extensions),” whichever comes later. 26 U.S.C. § 6229(a)(1)-(2) (West 2008). In addition, §
6229 provides a special rule in cases where, as alleged here in the Complaint, no partnership
return was filed. Under this rule, the Government may assess a tax attributable to a TEFRA
partnership item “at any time” if no partnership return was ever filed. See 26 U.S.C. § 6229(c)(3)
(West 2008) (“In the case of a failure by a partnership to file a return for any taxable year, any
tax attributable to a partnership item (or affected item) arising in such year may be assessed at
any time.”). Therefore, an administrative claim for a refund of an overpayment related to a
TEFRA partnership item is generally required to be filed within three years of “(1) the date on
which the partnership return for such taxable year was filed, or (2) the last day for filing such
return for such year,” 26 U.S.C. § 6229(a)(1)-(2) (West 2008), but where no partnership return
was ever filed, it appears that such a claim may be filed “at any time,” 26 U.S.C. § 6229(c)(3)
(West 2008). 5
Here, it is undisputed that no partnership return was filed for Midwest Intermediaries
from 1990 through 1992. If Midwest Intermediaries was a TEFRA partnership from 1990
through 1992, sections 6230(d)(1) and 6229(c)(3) suggest that the Plaintiffs could have filed
their administrative claim for refund of an overpayment related to a TEFRA partnership item “at
any time.” Therefore, if Midwest Intermediaries was a TEFRA partnership, the Plaintiffs’
administrative claim would appear to have been timely filed on August 21, 2008.

5

Although this strikes the Court as a peculiar result, the plain language of § 6230(d)(1) and § 6229(c)(3) appears to
compel it. TEFRA has been aptly described as a “statutory labyrinth,” Prati v. United States, 81 Fed. Cl. 422, 427
(2008) and as “distressingly complex and confusing,” Rhone-Poulenc Surfactants & Specialties LP v. Comm’r, 114
T.C. 533, 540 (2000).
7

However, if Midwest Intermediaries was a small partnership from 1990 through 1992, §
6511(a) provides that an administrative claim for refund of an overpayment must be filed within
three years of the return being filed or within two years from the time the tax was paid,
whichever period expires last. The Plaintiffs do not allege that their administrative claim was
filed within three years of their 1990 through 1992 returns being filed or within two years of
them having paid their taxes for those years. Therefore, if Midwest Intermediaries was a small
partnership, the Plaintiffs’ administrative claim would not have been timely filed on August 21,
2008 based on the factual allegations set forth in their Complaint.

B.

Small v. TEFRA Partnership
To resolve the Defendant’s Motion to Dismiss, the Court must determine whether

Midwest Intermediaries was a small partnership or TEFRA partnership under the Internal
Revenue Code (IRC) from 1990 through 1992, the years in which the Plaintiffs allegedly
overpaid taxes. In its Motion to Dismiss, the Defendant insists that Midwest Intermediaries was a
small partnership because it (1) had 10 or fewer partners and (2) did not file a notice of election
to be treated as a TEFRA partnership pursuant to 26 U.S.C. § 6231(a)(1)(B)(ii). Def.’s Mot. to
Dismiss at 1–5, doc. 11-1. In their Response, the Plaintiffs do not assert that they elected to be
treated as a TEFRA partnership under § 6231(a)(1)(B)(ii). Instead, they cite the Internal Revenue
Manual (the Manual) and argue that Midwest Intermediaries was a TEFRA partnership because
it did not satisfy the same share rule, an essential element of a small partnership under the
Manual. Pls.’ Resp. in Opp. at 4–6, doc. 15.
From 1990 through 1992, as a general rule, a small partnership was a partnership (1) with
10 or fewer partners and (2) in which each partner’s share of each partnership item was the same

8

as his share of every other partnership item. 26 U.S.C. § 6231(a)(1)(B)(i)(I)-(II) (West 1992). 6
However, a small partnership under § 6231(a)(1)(B)(i) could elect to be treated as a TEFRA
partnership. 26 U.S.C. § 6231(a)(1)(B)(ii) (West 1992). 7
In the present case, the Plaintiffs do not allege that Mr. Waterman filed an election
pursuant to § 6231(a)(1)(B)(ii). Instead, the Plaintiffs argue that the partners in Midwest
Intermediaries did not satisfy the same share rule, at the time, a necessary element of a small
partnership, and therefore Midwest Intermediaries was a TEFRA partnership for purposes of this
case. To support this argument, the Plaintiffs cite the Internal Revenue Manual’s provision
concerning the Small Partnership Exception, § 8.19.1.6.3.1 (Dec. 1, 2006), as a basis for finding
that Midwest Intermediaries was a TEFRA partnership in this case. 8
The Defendant correctly points out that the Internal Revenue Manual is not binding on
the Government. The Manual “is an internal IRS document issued to instruct personnel in
performing their duties, and thus, does not create any enforceable rights for taxpayers and does
not have the force or effect of law.” Dudley’s Commercial and Indus. Coating, Inc. v. United
States, 292 F. Supp. 2d 976, 987 (M.D. Tenn. 2003) (citing United States v. McKee, 192 F.3d
535, 540 (6th Cir. 1999); United States v. Barter Sys. of Grand Rapids, 557 F. Supp. 698 (W.D.
6

The 1992 version of 26 U.S.C. § 6231(a) is identical to the 1990 and 1991 versions of the statute.

7
Section 6231(a)(1)(B)(ii) was silent as to how a partnership could elect to be treated as a TEFRA partnership. In
the absence of any statutory guidance, in 1987, the Department of Treasury and the Internal Revenue Service issued
temporary regulations explaining the proper method of election. See 26 C.F.R. § 301.6231(a)(1)-1T(b)(2). The
temporary regulations required that a partnership seeking an election under § 6231(a)(1)(B)(ii) attach a statement to
the partnership return for the first taxable year for which the election is to be effective. Id. The statement must have
been: (1) identified as an election under § 6231(a)(1)(B)(ii); (2) signed by all persons who were partners of that
partnership during the partnership taxable year; and (3) filed at the time and place described for filing the
partnership return. Id.
8

Under the Internal Revenue Manual, the following were necessary elements of a small partnership: (1) “No more
than ten partners at any time during the tax year;” (2) “each partner is a natural person; (3) “each partner’s share of
each partnership item is the same as his share of every other partnership item (same share rule);” and (4) the
“partnership has not made an election to have the TEFRA rules apply.” Internal Revenue Manual, § 8.19.1.6.3.1
(Dec. 1, 2006), doc. 15-1.

9

Mich. 1982)). See also Schweiker v. Hansen, 450 U.S. 785, 789 (1981) (per curiam) (holding
that an agency policy manual “is not a regulation,” “has no legal force,” and “does not bind” the
agency); Reisman v. Bullard, 14 F. App’x 377, 379 (6th Cir. 2001) (citing Valen Mfg. Co. v.
United States, 90 F.3d 1190, 1194 (6th Cir. 1996)) (“Finally, the Reismans’ argument that the
IRS Handbook is binding authority is without merit. The provisions of the manual do not have
the force and effect of law.”) The Plaintiffs therefore cannot rely on the Internal Revenue Manual
to establish that Midwest Intermediaries was a TEFRA partnership.
However, statutory and regulatory authority during the relevant time period 9 also
required a partnership to satisfy the same share rule in order to qualify as a small partnership. See
26 U.S.C. § 6231(a)(1)(B)(i)(II) (West 1992) (defining the same share rule); 26 C.F.R. §
301.6231(a)(1)-1T(a)(3), 1987 WL 128728 (Mar. 5, 1987) (discussing the same share rule at
length). To satisfy the same share rule, “each partner’s share of each partnership item [must have
been] the same as his share of every other item.” 26 U.S.C. § 6231(a)(1)(B)(i)(II) (West 1992).
For purposes of the same share rule, partnership items include: (1) items of income, gain, loss,
deduction, or credit of the partnership; (2) expenditures by the partnership not deductible in
computing its taxable income (for example, charitable contributions); (3) items of the partnership
which may be tax preference items under section 57(a) for any partner; (4) income of the
partnership exempt from tax, 26 C.F.R. § 301.6231(a)(3)–1(a)(1)(i) through (iv). 26 C.F.R. §
301.6231(a)(1)-1T(a)(3), 1987 WL 128728 (Mar. 5, 1987); McKnight v. Comm’r, 99 T.C. 180,
(1992), affd 7 F.3d 447 (5th Cir. 1993).
Here, at the outset, the Plaintiffs acknowledges that Midwest Intermediaries satisfied the
same share rule in the years prior to 1990—each partner had a 50% share in each partnership

9

1990 through 1992.

10

item. Pls.’ Resp. in Opp. at 5. In 1990, the Plaintiffs assert that Mr. Chamberlain began to
embezzle funds from Midwest Intermediaries. As a result, the Plaintiffs maintain that Mr.
Waterman’s share of “gain” was zero, in contrast to Mr. Chamberlain’s gain of 100%, and thus
Midwest Intermediaries did not satisfy the same share rule. See id. (Waterman’s share of the
“gain” was zero; Chamberlain’s exceeded 100% by his non-proportional withdrawal of
$1,837,750 in excess of the true profit income of $241,500 for Midwest in its 1990 fiscal year.”).
Further, the Plaintiffs submit Mr. Waterman’s 1990 Schedule K-1 (doc. 15-2) and argue that Mr.
Waterman’s personal liabilities and equity position were drastically altered by Mr.
Chamberlain’s embezzlement. Id. at 6. Based on these changes in Mr. Waterman’s share of gain,
personal liability, and equity, the Plaintiffs implicitly argue that Midwest Intermediaries did not
satisfy the same share rule.
The Court is not persuaded by these arguments and finds that the Plaintiffs have failed to
allege facts demonstrating that the Midwest Intermediaries was a TEFRA partnership during the
relevant time period. First, the Plaintiffs do not cite any factual allegations from their Complaint,
and the Court has not been able to locate any such allegations, that support their claim that
Midwest Intermediaries did not satisfy the same share rule. Instead, the Plaintiffs rely on
assertions in their Response and exhibits attached thereto. In ruling on a Rule 12(b)(6) motion,
the Court is limited to a consideration of the facts alleged in the Plaintiffs’ Complaint. See Iqbal,
556 U.S. at 678 (quoting Twombly, 550 U.S. at 570) (“To survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’”). The factual allegations made by the Plaintiffs—that Mr. Chamberlain’s
embezzlement negatively affected Mr. Waterman’s share of gain, personal liability, and equity—
are not contained in the Complaint and consequently the Court cannot consider them.

11

Second, even if the Court were to consider these factual allegations, the Court would still
grant the Defendant’s Motion to Dismiss. The Plaintiffs appear to argue that Midwest
Intermediaries did not satisfy the same share rule because Mr. Waterman’s share of gain changed
from 50% prior to 1990 to 0% from 1990 through 1992. See Pls.’ Resp. in Opp. at 5–6 (“Prior to
transactions, Waterman’s and Chamberlain’s (partner) share of ‘gain-loss’ was 50/50%.
Following the transactions, Waterman’s share of the ‘gain’ was zero; Chamberlain’s exceeded
100% by his non-proportional withdrawal of $1,837,750 in excess of the true profit income of
$241,500 for Midwest in its 1990 fiscal year.”) However, the fact that the partners’ individual
shares of gain changed during the course of the partnership does not mean that the same share
rule was not satisfied. Under the same share rule, a partner’s share of partnership items could
change during the year without violating the rule provided that the change in share was the same
for all partnership items. Harrell v. Comm’r, 91 T.C. 242, 245 (1988); see also Arthur B. Willis,
et al, Partnership Taxation ¶ 20.02[2][b], 1999 WL 630409, at *4 (2014) (“A partner’s share of
all of the designated items could change during the year without violating the rule provided that
the variation was the same for all of the designated items”). Moreover, the same share rule did
not require that Mr. Waterman and Mr. Chamberlain have the same share of gain as each other.
Rather, the rule required “each partner’s share of each partnership item [to have been] the same
as his share of every other item.” 26 U.S.C. § 6231(a)(1)(B)(i)(II) (West 1992).
The Plaintiffs also appear to argue that Midwest Intermediaries did not satisfy the same
share rule following Mr. Chamberlain’s embezzlement because of its effect on Mr. Waterman’s
personal liabilities and equity position. However, a partner’s personal liabilities and equity were
not partnership items for purposes of the same share rule. See 26 C.F.R. § 301.6231(a)(3)–
1(a)(1)(i) through (iv) (defining “partnership items” items as: (1) income, gain, loss, deduction,

12

or credit of the partnership; (2) expenditures by the partnership not deductible in computing its
taxable income (for example, charitable contributions); (3) items of the partnership which may
be tax preference items under section 57(a) for any partner; (4) income of the partnership exempt
from tax.). A change in non-partnership items, such as a partner’s personal liabilities and equity
position, does not affect the determination of whether Midwest Intermediaries satisfied the same
share rule.
Third, the Internal Revenue Code, 26 U.S.C. § 704(a) (West 1992), appears to set forth
an objective standard for determining a partner’s distributive share of partnership items. Section
704(a) provides that “[a] partner’s distributive share of income, gain, loss, deduction, or credit
shall, except as otherwise provided in this chapter, be determined by the partnership agreement.”
The parties do not dispute that Mr. Waterman and Mr. Chamberlain had agreed to split
partnership items equally, with each partner receiving a 50% share of partnership items. During
the relevant time period, Mr. Waterman was legally entitled to a 50% share of partnership items
regardless of Mr. Chamberlain’s embezzlement. Under § 704(a), the partnership agreement
described by the Plaintiffs demonstrates that Midwest Intermediaries satisfied the same share
rule and was therefore a small partnership subject to the § 6511(a)’s period of limitations during
the relevant time period.
Fourth, in the alternative to § 704(a), in Harrell v. Comm’r, 91 T.C. 242 (1988) and ZTron Computer Program v. Comm’r, 91 T.C. 258 (1988), the United States Tax Court held that a
partnership agreement is not determinative of whether a partnership satisfies the same share rule
under § 6231(a)(1)(B). Instead, the Tax Court concluded that:
for purposes of determining whether a partnership is a small partnership and
whether the same share rule is satisfied, the test should be applied by determining
whether the partnership reported more than one partnership item for the year and,
if so, how those items were shared by each partner. This determination should be
13

made by respondent [the IRS] as of the date of commencement of the audit of the
partnership (but not necessarily on that date) by examining the partnership return
and the corresponding K-1s, and any amendments thereto received prior to this
date.
Harrell, 91 T.C. at 246. See also Z-Tron Computer Program, 91 T.C. at 262. In other words,
“[w]hether a partnership qualifies as a small partnership depends upon whether the partnership
reported more than one partnership item for the year, and if so, how those items were shared by
each partner,” rather than “how items might have been shared under the terms of the partnership
agreement.” Z-Tron Computer Program, 91 T.C. at 263. 10
Here, the Plaintiffs concede that no partnership return was filed for Midwest
Intermediaries from 1990 through 1992. The Plaintiffs cannot allege that “the partnership
reported more than one partnership item for the year” because no partnership return was ever
filed for Midwest Intermediaries during the relevant time period. Cf. Harrell, 91 T.C. at 246 (“for
purposes of determining whether a partnership is a small partnership and whether the same share
rule is satisfied, the test should be applied by determining whether the partnership reported more
than one partnership item for the year and, if so, how those items were shared by each partner”
(emphasis added)). Further, from 1990 through 1992, the Plaintiffs allege that Mr. Chamberlain’s
embezzlement altered one partnership item, namely gain. In order to establish that the same share
rule was not satisfied, a taxpayer must establish that a partner’s share of two or more partnership
items was unequal. Id.; Z-Tron Computer Program, 91 T.C. at 263. Nothing about Mr.

10

Although the Tax Court’s opinions are not binding on this Court, ABC Beverage Corp & Subsidiaries v. United
States, 577 F. Supp. 2d 935, 946 (W.D. Mich. 2008), “uniform administration [is] promoted by conforming to them
where possible,” Dobson v. Comm’r, 320 U.S. 489, 502 (1943), and multiple courts of appeals have employed the
reasoning set forth in Harrell and Z-Tron when determining whether the same share rule was satisfied under §
6231(a)(1)(B), see McKnight v. Comm’r, 7 F.3d 447, 453 (5th Cir. 1993) (“As the tax court pointed out in Harrell, .
. . what is needed to determine whether unified or separate audit procedures should be followed is a quick check of
the face of the partnership tax return and the Schedules K-1”); Nehrlich v. Comm’r, 327 F. App’x 712, 713 (9th Cir.
2009) (quoting Harrell, 91 T.C. at 247) (“a partner or representative of a partnership is not permitted ‘to claim a
result other than that identified in the return and K–1s as filed and amended prior to the date of commencement of
the partnership audit.’”).
14

Chamberlain’s embezzlement suggests that it altered Mr. Waterman’s share of two or more
partnership items. 11
The Plaintiffs have not alleged sufficient facts demonstrating that Midwest Intermediaries
was a TEFRA partnership. On the allegations before the Court now, Midwest Intermediaries was
a small partnership and therefore subject to the period of limitations set forth in 26 U.S.C. §
6511(a) (West 2008). Because the Plaintiffs do not allege facts demonstrating that they filed their
administrative claim within the period of limitation set forth in § 6511(a), the Court does not
have jurisdiction over the Plaintiffs’ Complaint and the Defendant’s Motion to Dismiss will be
granted.

IV.

Conclusion
For the foregoing reasons, the Court GRANTS the Defendant’s Motion to Dismiss (doc.

11).
IT IS SO ORDERED.
s/ James L. Graham
JAMES L. GRAHAM
United States District Judge
DATE: March 4, 2014

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It appears unlikely that the Plaintiffs can present the evidence necessary to support their claim that Midwest
Intermediaries was a TEFRA partnership from 1990 to 1992. Harrell and Z-Tron hold that the IRS, or in this case,
the Court, should only consider the partnership return and accompanying K-1 documentation in determining whether
a partnership satisfied the same share requirement under § 6231(a)(1)(B), and that a partner is not permitted “to
claim a result other than that identified in the return and K–1s as filed and amended prior to the date of
commencement of the partnership audit,” Harrell, 91 T.C. at 247. The Plaintiffs do not have a partnership return or
partnership K-1 schedule to support their factual allegations. The only evidence that the Plaintiffs have presented to
the Court is Mr. Waterman’s 1990 Schedule K-1 (doc. 15-2), which states that Mr. Waterman’s share of gain
(profit), loss, and capital ownership was 50%. This supports the conclusion that Midwest Intermediaries satisfied the
same share requirement for tax year 1990 and was a small partnership during the relevant time period.

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