Court dismisses §1202 refund claim because partnership items must be challenged at the partnership level

Peter Seed v. United States. United States Court of Federal Claims. No. 1:23-cv-01947.

A partner cannot file an individual tax refund lawsuit if the refund depends on partnership-level decisions that TEFRA says must be handled through partnership procedures.

Holding

The Court of Federal Claims dismissed a taxpayer’s refund lawsuit for the §1202 qualified small business stock (QSBS) exclusion. The Court found the refund was tied to partnership items, so former IRC §7422(h) prevented the Court from hearing the case.

Why It Matters

• This is primarily a jurisdictional case, not a substantive QSBS decision.

• The Court never addressed whether the taxpayer actually qualified for the §1202 exclusion.

• The decision reinforces the broad reach of the former TEFRA partnership audit regime for pre-2018 tax years.

• Taxpayers cannot bypass partnership-level procedures by reframing partnership determinations as individual refund claims.

• The ruling highlights a procedural trap: even potentially meritorious tax positions may be unavailable if raised in the wrong forum.

Key Facts

Peter Seed co-founded the online brokerage business TradeKing.

Following several corporate restructurings, Seed became a member of TradeKing Holdings, LLC, which elected partnership tax treatment and owned stock in TradeKing Group, Inc.

In 2016, Ally Financial acquired TradeKing Group. The sale generated capital gain at the partnership level, which flowed through to TradeKing Holdings’ members, including Seed.

Seed paid tax on his share of the gain but later concluded that the gain should have qualified for the §1202 QSBS exclusion. He filed a refund claim with the IRS, which the agency denied. He then sued in the Court of Federal Claims seeking a refund.

Statutory or Regulatory Framework

• Former IRC §7422(h) barred refund suits attributable to partnership items under TEFRA.

• IRC §6231(a)(3) defined a “partnership item” as an item more appropriately determined at the partnership level.

• Treasury regulations treated partnership income, gain, loss, deduction, and related legal and factual determinations as partnership items.

• IRC §1202 allows exclusion of gain from qualified small business stock if statutory requirements are met.

• For the 2016 tax year, TEFRA’s partnership procedures still applied because the repeal of §7422(h) did not become effective until later years.

Arguments

Taxpayer argued:

• TradeKing’s business qualified for the §1202 exclusion.

• The company operated a technology-driven self-directed trading platform rather than a disqualified brokerage business.

• Corporate reorganizations did not restart the required five-year holding period.

• The jurisdictional bar should not apply absent a formal TEFRA proceeding initiated by the IRS.

Government argued:

• The refund claim was attributable to partnership items.

• The legal and factual issues underlying the §1202 claim had to be determined at the partnership level.

• Former IRC §7422(h) therefore deprived the Court of jurisdiction.

Court’s Reasoning

• TradeKing Holdings elected partnership tax treatment and qualified as a partnership under the TEFRA rules.

• The gain from the sale of TradeKing Group stock was an item required to be reported on the partnership’s tax return.

• Treasury regulations classify partnership income and gain, along with the legal and factual determinations affecting their characterization, as partnership items.

• Seed’s refund claim depended on determining whether TradeKing was a qualified business under §1202 and whether the stock satisfied the holding-period requirements.

• Those determinations concerned the characterization of partnership-level gain and therefore constituted partnership items.

• Former IRC §7422(h) expressly prohibited refund suits attributable to partnership items.

• The Court rejected the argument that the IRS had to initiate a TEFRA proceeding before the jurisdictional bar could apply. The statute operated automatically when its requirements were met.

Result

The Court of Federal Claims dismissed the refund case for lack of jurisdiction and did not consider the details of the taxpayer’s §1202 claim.

The Takeaway

The main point in this case is not the taxpayer’s QSBS argument, but the procedural rule that stopped the court from hearing it. For partnership years before 2018 under TEFRA, taxpayers usually could not bring partnership-level issues in individual refund lawsuits, even if those issues affected their own taxes.

List of Citations

• Seed v. United States (Ct. Fed. Cl. 2026) – Refund claim dismissed because it was attributable to partnership items.

• IRC §7422(h) – Barred refund suits attributable to partnership items under TEFRA.

• IRC §6231(a)(3) – Defined partnership items for TEFRA purposes.

• Treas. Reg. §301.6231(a)(3)-1 – Classified partnership income and related factual and legal determinations as partnership items.

• IRC §1202 – Qualified small business stock exclusion at the center of the taxpayer’s refund theory.

• Keener v. United States, 551 F.3d 1358 (Fed. Cir. 2009) – Interpreted the phrase “attributable to” in the TEFRA context.

• Schell v. United States, 589 F.3d 1378 (Fed. Cir. 2009) – Applied the jurisdictional bar for partnership-item refund claims.