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New Tax Court Case Shows You Need "Proof" of Ownership Change to Negate DRE Status

11 / 04 / 2018

Sugarloaf Fund, LLC, Jetstream Business Limited, LLC v. IRS, T.C.Memo 2018-181

In this Tax Court case, the taxpayer contended that the partnership taxable income should not be allocated to Mr. Rogers.  However, the Tax Court found that Jetstream was the sole owner of Sugarloaf during the years 2004 and 2005. 

The taxpayers were not able to prove that there were any new owners of Sugarloaf during the years 2006 to 2008. The only owner remaining is Jetstream. Therefore, all of Sugarloaf’s income should be allocated to Jetstream, and accordingly that income flows through to Mr. Rogers.

The taxpayers argued that Jetstream was a subchapter C corporation and became a partner in Sugarloaf on September 23, 2008. However, Sugarloaf’s tax returns for 2006 through 2010 show that Jetstream was a flowthrough entity. In the petitions and the amended petitions, the taxpayers did not raise the issue that a subchapter C corporation known as Jetstream became a partner in 2008 or that income should be allocated to that partner. In addition, the parties stipulated that Jetstream has not filed Forms 1120, U.S. Corporation Income Tax Return, for any of the 2008 through 2010 years, and the taxpayers have not proven that a subchapter C corporation known as Jetstream became a partner in Sugarloaf at any time in 2008.

Critical to the court was that the taxpayers offered no contracts, records, or other documents showing that Jetstream, a subchapter C corporation, was admitted as a partner. In fact, Jetstream was originally organized in May 2002 as a limited company under the laws of the British Virgin Islands. In August 2002 Jetstream elected to be treated as a disregarded entity for tax purposes. 

While the taxpayers asserted that Jetstream became a subchapter C corporation in September 2008, the Schedules K-1 attached to Sugarloaf’s returns and the designation of Jetstream as tax matters partner on Sugarloaf’s tax returns did not change. 

For these reasons, the Tax Court had no problem ruling that Sugarloaf was not a partnership for tax purposes during the years 2006 to 2008, and all of its income should be allocated to Jetstream.