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D.C. Circuit: Partnership of single-member LLCs, “small partnership” exception

D.C. Circuit: Partnership of single-member LLCs

The U.S. Court of Appeals for the District of Columbia Circuit today affirmed the U.S. Tax Court’s decision that a partnership comprising of single-member LLCs did not qualify for the “small partnership” exception from the then-applicable TEFRA partnership audit proceedings.


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The case is: Mellow Partners v. Commissioner, No. 16-1454 (D.C. Cir. May 22, 2018). Read the D.C. Circuit’s opinion [PDF 398 KB]


The partnership claimed that the single-member LLCs’ individual owners—rather than the LLCs themselves—were the partners for TEFRA purposes and, thus, that the partnership constituted a “small partnership” under section 6231(a)(1)(B). The Tax Court rejected this contention, and the D.C. Circuit today affirmed.

The D.C. Circuit agreed with the Court of Appeals in Seaview Trading LLC v. Commissioner, 858 F.3d 1281(9th Cir. 2017) in concluding that the partnership was subject to the TEFRA partnership proceedings because the partners were the single-member LLCs—and not their individual owners. The D.C. Circuit also deferred to the “…IRS’s reasonable interpretation [Rev. Rul. 2004-88] of its own regulation that a partnership with pass-thru partners is ineligible for the small-partnership exception and that single-member LLCs constitute pass-thru partners.”

The appeals court held that it lacked jurisdiction over the partnership’s challenge to accuracy-related penalties because this claim was not raised in the lower court proceedings.

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