Katz v. Commissioner

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
JUL 7 2003
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

ARON B. KATZ and PHYLLIS A.
KATZ,

Petitioners-Appellants,
v. Nos. 01-9009, 01-9010, 01-9011
COMMISSIONER OF INTERNAL
REVENUE,

Respondent-Appellee.

APPEAL FROM THE UNITED STATES TAX COURT
(T.C. Nos. 181-98, 460-96, 780-97)

Andrew M. Low (Laurence E. Nemirow, with him on the briefs), of Davis
Graham & Stubbs LLP, Denver, Colorado, for Petitioners-Appellants.

Robert J. Branman, Attorney, Tax Division, Department of Justice (Eileen J.
O’Connor, Assistant Attorney General, and Bruce R. Ellisen, Attorney, Tax
Division, Department of Justice, with him on the brief), Washington, D.C., for
Respondent-Appellee.

Before LUCERO and HARTZ , Circuit Judges, and ROBINSON , District Judge. *

HARTZ , Circuit Judge.

*
The Honorable Julie A. Robinson, United States District Judge for the
District of Kansas, sitting by designation.
 This case involves the intersection of the laws governing income taxes and

bankruptcy. Mr. Aron Katz (Taxpayer) was a partner in a number of partnerships

that suffered substantial losses during a year in which he filed for bankruptcy. On

his income tax return for that year, Taxpayer allocated between himself and his

bankruptcy estate the losses attributable to his interests in the various

partnerships. The question before us is whether the Commissioner of Internal

Revenue can challenge that allocation in a proceeding involving only the

Taxpayer, or whether the Commissioner must first bring a partnership-level

proceeding. We hold that a partnership-level proceeding is necessary.

I. Background

Taxpayer’s partnerships did not do well in 1990. The losses attributable to

his interests exceeded $19 million. The losses generated by one of the

partnerships, a real estate investment company called Century Centre Associates,

Ltd. (Century), accounted for 96.7% of this total. On July 5, 1990, Taxpayer filed

a petition for Chapter 7 bankruptcy relief. Although he could have elected to

bifurcate his 1990 tax year into two short years, 26 U.S.C. (I.R.C.)

§ 1398(d)(2)(A), Taxpayer opted instead to file a single return for the entire year,

resulting in his 1990 income taxes being treated as a post-petition debt not subject

to the bankruptcy proceedings.

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 The Internal Revenue Code and related regulations require partnerships to

prepare Schedule K-1 forms that report each partner’s share of partnership income

and losses. I.R.C. § 6031; Treas. Reg. §§ 1.6031(b)-1T(a)(1), (3). For the year

1990, Century and several other partnerships filed returns that included two

separate K-1 forms relating to Taxpayer. The first K-1 issued by each of these

partnerships concerned Taxpayer in his individual capacity and showed the

income and losses that had accrued prior to Taxpayer’s filing for bankruptcy. The

second K-1 concerned Taxpayer’s bankruptcy estate and reported post-petition tax

items. The remaining partnerships of which Taxpayer was a member did not

distinguish between pre-petition and post-petition items in the K-1 forms they

prepared, instead allocating all items to Taxpayer. As to these partnerships,

Taxpayer filed Notices of Inconsistent Treatment in which he allocated the tax

items between himself as an individual and his bankruptcy estate.

On his individual tax return for 1990, Taxpayer reported that he had

suffered over $19 million in losses before he declared bankruptcy. These losses

exceeded the amount that he could apply to reduce his tax liability for 1990, so

Taxpayer carried the losses over to tax years 1991, 1992, 1993, and 1994.

Disputing the validity of those carryovers, the Commissioner issued notices of

deficiency to Taxpayer and his wife, Phyllis Katz, for all four years. (Although

the couple had filed separate tax returns for 1990, they filed jointly the next four

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years.) The Commissioner contended that Taxpayer could not allocate the 1990

partnership losses between himself and his bankruptcy estate and that Taxpayer’s

interest in any partnership losses incurred during 1990 passed to the bankruptcy

estate when he filed for bankruptcy. Thus, the Commissioner argued, Taxpayer in

his individual capacity could not claim deductions based on those losses.

Taxpayer and his wife contested the notices of deficiency in the Tax Court.

The parties settled all matters of dispute except the treatment of partnership

losses. With respect to this issue, Taxpayer argued that the Tax Court lacked

jurisdiction to enforce the notices insofar as they concerned adjustments to

partnership items. To understand this argument requires a brief discussion of the

governing statute and regulations.

Under the Internal Revenue Code, “[p]artnerships, as such, are not subject

to the federal income tax.” Kaplan v. United States, 133 F.3d 469, 471 (7th Cir.

1998). Instead, “partnership income and expenses ‘pass through’ to the individual

partners.” Chimblo v. Comm’r, 177 F.3d 119, 121 (2d Cir. 1999) (citing I.R.C.

§§ 701, 6031). Until 1982 the process of reviewing tax returns of individual

partners, rather than the return of the partnership itself, created a significant

administrative problem. To address tax issues arising from a single partnership,

the IRS needed to initiate multiple proceedings. Id. “[T]he IRS was forced to

conduct distinct investigations for and, where appropriate, enter separate

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settlement agreements with each individual partner.” Crnkovich v. United States,

202 F.3d 1325, 1328 (Fed. Cir. 2000). In response to this problem, the Tax

Equity and Fiscal Responsibility Act of 1982 (TEFRA), I.R.C. §§ 6221-6233,

included “unified partnership audit examination and litigation provisions,” which

“centralized the treatment of partnership taxation issues, and ensure[d] equal

treatment of partners by uniformly adjusting partners’ tax liabilities.” Chimblo,

177 F.3d at 121 (internal quotation marks and citations omitted). See generally

Callaway v. Comm’r, 231 F.3d 106, 107-12 (2d Cir. 2000) (discussing TEFRA

treatment of partnerships).

Section 6221 of TEFRA states that “[e]xcept as otherwise provided in this

subchapter, the tax treatment of any partnership item . . . shall be determined at

the partnership level.” A partnership-level proceeding is the exclusive means for

adjusting a partnership item. See Maxwell v. Comm’r, 87 T.C. 783, 788-89

(1986). The Tax Court lacks authority to make partnership-item adjustments in a

partner-level proceeding except in circumstances not pertinent to this case. See

Kaplan, 133 F.3d at 473.

A similar rule applies to an item whose tax treatment is dependent on the

treatment of a partnership item. Such an item is called an “affected item.” See

I.R.C. § 6231(a)(5) (“The term ‘affected item’ means any item to the extent such

item is affected by a partnership item.”). The Tax Court has explained that

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“‘because the tax treatment of an “affected item” depends upon the partnership-

level determination, affected items generally cannot be tried as part of a partner’s

tax case prior to the completion of the partnership-level proceeding.’” GAF Corp.

& Subsidiaries v. Comm’r, 114 T.C. 519 (2000) (quoting Gillilan v. Comm’r, 66

T.C.M. (CCH) 398, 1993 WL 311552 (1993)).

The dispositive issue here is whether the Commissioner’s proposed

adjustments to Taxpayer’s income tax liability required an adjustment to either a

partnership item or an affected item. The Internal Revenue Code provides a

common-sense definition of “partnership item,” but permits the Secretary of the

Treasury to provide for appropriate exceptions by regulation. It states:

The term “partnership item” means, with respect to a partnership, any
item required to be taken into account for the partnership’s taxable
year under any provision of subtitle A to the extent regulations
prescribed by the Secretary provide that, for purposes of this subtitle,
such item is more appropriately determined at the partnership level
than at the partner level.

I.R.C. § 6231(a)(3).

Taxpayer argued that “his share of the partnerships’ 1990 net operating

losses were ‘partnership items’ and that the carryforwards of these losses to

subsequent years were ‘affected items.’” Aplt. Br. at 9. To support this claim, he

cited to the general rule set forth in Treas. Reg. § 301.6231(a)(3)-1(a)(1)(i):

(a) In general. For purposes of subtitle F of the Internal Revenue
Code of 1954, the following items which are required to be taken
into account for the taxable year of a partnership under subtitle A of

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 the Code are more appropriately determined at the partnership level
than at the partner level and, therefore, are partnership items:

(1) The partnership aggregate and each partner’s share of each of the
following:

(i) Items of income, gain, loss, deduction, or credit of the partnership
....

(emphasis added). Consequently, in Taxpayer’s view, the Commissioner could

adjust these losses only in a partnership-level proceeding.

In response to Taxpayer’s argument, the Commissioner relied on Treasury

Regulation § 301.6231(c)-7T(a) (the Bankruptcy Regulation), which specifically

addresses the impact of bankruptcy on the characterization of items as partnership

items. According to the Commissioner, the regulation (which will be discussed

below) converted Taxpayer’s 1990 partnership losses into nonpartnership items.

The Tax Court rejected Taxpayer’s jurisdictional argument. It did not,

however, rely on the Bankruptcy Regulation. Rather, the court reasoned that the

allocation of partnership tax items between the Taxpayer and his bankruptcy

estate is not a “partnership item,” an analysis that had not been suggested by the

Commissioner.

The Tax Court’s decision turned on its view that “a partner in bankruptcy

and his bankruptcy estate are appropriately treated as a single partner for purposes

of TEFRA procedures.” Katz v. Comm’r, 116 T.C. 5, 12 (2001). In particular,

the court said that “once the partnership has determined the distributive share of a

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partner who happens to be in bankruptcy, there exists no statutory obligation upon

the partnership to subdivide the distributive share between such partner and his

bankruptcy estate.” Id. at 13-14. Thus, “[t]he subdivision of partnership tax items

between the two related but independently taxed entities is . . . not a

determination ‘required to be taken into account for the partnership’s taxable

year,’” id. at 14, which is a condition for being a “partnership item” under

§ 6231(a)(3).

In deciding that partnership-level review under § 6226(f) does not extend to

disputes concerning the allocation of losses between a partner and that partner’s

bankruptcy estate, the Tax Court observed that its interpretation was consistent

with the legislative intent underlying TEFRA. “The determination of the manner

in which items . . . are allocated among the various partners in a partnership is

one best made at the partnership level, because the allocation to one partner

necessarily affects the allocation to another.” Id. at 13. In contrast, the court

noted, “once the partnership has determined the distributive share of a partner

who happens to be in bankruptcy,” id. , the subdivision of that partner’s share of a

partnership tax item between the partner as an individual and the partner’s

bankruptcy estate “will have no effect on the remaining partners,” id. at 14.

After denying Taxpayer’s motion to dismiss, the Tax Court went on to

consider the merits of the dispute between Taxpayer and the Commissioner. The

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court held that Taxpayer’s allocation of the partnership losses between himself

and his bankruptcy estate was improper, because all the 1990 losses should have

been allocated to the bankruptcy estate. Hence, the loss carryovers for 1991,

1992, 1993, and 1994—which had been based on claims of portions of the 1990

losses on the tax returns for Taxpayer and his wife—were not valid, and there was

a tax deficiency for three of these years.

Taxpayer and his wife appealed the Tax Court’s decision to this court.

Their brief explains that while they do not concede the merits of that decision,

their sole ground for appeal is that the Tax Court erred in denying the motion to

dismiss for lack of jurisdiction.

We reverse, holding that the Tax Court lacked authority to reallocate the

losses because of the Commissioner’s failure to conduct a partnership-level

proceeding (except that we dismiss the appeal in Case No. 01-9010 on the ground

that we lack jurisdiction because in that case the Tax Court ruled that there was

no deficiency, see W. W. Windle Co. v. Comm’r , 550 F.2d 43, 45 (1st Cir. 1977)).

We first discuss the Bankruptcy Regulation, which is the source of the

Commissioner’s principal argument on appeal. We then turn to the

Commissioner’s arguments in support of the Tax Court’s reasoning.

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II. Discussion

“We review tax court decisions ‘in the same manner and to the same extent

as decisions of the district courts in civil actions tried without a jury.’” Kurzet v.

Comm’r , 222 F.3d 830, 833 (10th Cir. 2000) (quoting I.R.C. § 7482(a)(1)). The

Tax Court’s legal conclusions are subject to de novo review, and its factual

findings can be set aside only if clearly erroneous. Id.

A. The Bankruptcy Regulation

As mentioned above, the Commissioner argues that the Bankruptcy

Regulation converts Taxpayer’s share of 1990 partnership losses into

nonpartnership items. The regulation states:

Bankruptcy. The treatment of items as partnership items with respect
to a partner named as a debtor in a bankruptcy proceeding will
interfere with the effective and efficient enforcement of the internal
revenue laws. Accordingly, partnership items of such a partner
arising in any partnership taxable year ending on or before the last
day of the latest taxable year of the partner with respect to which the
United States could file a claim for income tax due in the bankruptcy
proceeding shall be treated as nonpartnership items as of the date the
petition naming the partner as debtor is filed in bankruptcy.

Treas. Reg. § 301.6231(c)-7T(a).

Under this regulation, items that would otherwise be partnership items are

converted to nonpartnership items because the taxable year in which they arose is

too intertwined with the bankruptcy proceeding. The taxable years so designated

are those “ending on or before the last day of the latest taxable year of the partner

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with respect to which the United States could file a claim for income tax due in

the bankruptcy proceeding.” Id. It is not surprising that an argument could

emerge regarding the meaning of such intricate language.

There is no question that the disputed items arose during the partnership

year ending on December 31, 1990. What the parties do not agree upon is what

was “the latest taxable year of the partner with respect to which the United States

could file a claim for income tax due in the bankruptcy proceeding.” If the last

day of that taxable year was on or after December 31, 1990, then the regulation

provides that the disputed items are to be treated as nonpartnership items.

The problem for the Commissioner is that 1989 (which, of course, ended on

December 31, 1989—well before December 31, 1990) is the latest taxable year of

Taxpayer for which the United States could file a claim in the bankruptcy

proceeding. Because Taxpayer elected not to bifurcate his 1990 tax year into a

pre-petition partial year and a post-petition partial year, his 1990 taxes were

treated as a post-petition debt—a personal obligation not encompassed by the

bankruptcy. See In re Johnson , 190 B.R. 724, 726 (Bankr. D. Mass. 1995); In re

Mirman , 98 B.R. 742, 745 (Bankr. E.D. Va. 1989). The United States thus could

not “file a claim . . . in the bankruptcy proceeding” for Taxpayer’s taxes for 1990

and thereafter.

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 The Commissioner concedes that “the latest year for which the

United States could file a claim for [Taxpayer’s] liability is 1989.” Aple. Br. at

27. He contends, however, that for purposes of the Bankruptcy Regulation, the

bankruptcy estate must be identified with the partner who declared bankruptcy.

The bankruptcy estate can continue to incur tax liability for the duration of the

bankruptcy proceedings. Therefore, as the Commissioner points out, the IRS

could file a claim in the bankruptcy proceedings for income tax liabilities

incurred by the bankruptcy estate during the tax year 1990 (and thereafter, as long

as the bankruptcy continued). Because that tax year ended on or after

December 31, 1990, he concludes that the disputed partnership items converted

into nonpartnership items under the regulation.

In support of his interpretation of the Bankruptcy Regulation, the

Commissioner emphasizes a policy justification. He contends that severing a

bankrupt partner from partnership-level proceedings promotes the efficient

resolution of disputes between the IRS and the other partners. The filing of a

bankruptcy petition effects a stay on “the commencement or continuation of a

proceeding before the United States Tax Court concerning the debtor.” 11 U.S.C.

§ 362(a)(8). According to the Commissioner,“[i]f the tax liability of the debtor or

the bankruptcy estate were still affected by a partnership proceeding, the stay

imposed by the bankruptcy petition would halt the commencement or continuation

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of the partnership proceeding, and would prevent the IRS and the remaining

partners from litigating whether any adjustments were appropriate to the

partnership return.” Aple. Br. at 26. Moreover, he argues, even if the bankruptcy

court lifted the stay, ongoing tax court proceedings might delay and complicate

resolution of the bankruptcy proceeding.

The Commissioner may be right that public policy favors his reading of the

Bankruptcy Regulation. Our task, however, is to interpret the regulation’s

language, not to decide public policy. And we are unable to read the words of the

regulation as the Commissioner proposes.

In our view, it would require a gross distortion of the regulation’s language

to read the word “partner” to include the bankruptcy estate. That word appears

four times in the regulation:

The treatment of items as partnership items with respect to a partner
named as a debtor in a bankruptcy proceeding will interfere with the
effective and efficient enforcement of the internal revenue laws.
Accordingly, partnership items of such a partner arising in any
partnership taxable year ending on or before the last day of the latest
taxable year of the partner with respect to which the United States
could file a claim for income tax due in the bankruptcy proceeding
shall be treated as nonpartnership items as of the date the petition
naming the partner as debtor is filed in bankruptcy.

Treas. Reg. § 301.6231(c)-7T(a) (emphasis added). The first and fourth times

that the word “partner” is used, the regulation expressly refers to the partner’s

status as a debtor. This is significant because, as Taxpayer emphasizes, the

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debtor and the bankruptcy estate are distinct entities in an individual’s bankruptcy

proceeding. See, e.g., In re Smith , 235 F.3d 472, 477-78 (9th Cir. 2000) (“The

Bankruptcy Code distinguishes between property of the estate in bankruptcy and

property of the debtor. The commencement of a case under the Bankruptcy Code

creates an estate and though the estate may acquire property after the

commencement of the case, estate property remains distinct from the debtor’s

property.”) (internal citations omitted); Martin v. United States , 159 F.3d 932,

934 (5th Cir. 1998) (“IRC § 1398 treats the bankruptcy estate as a separate entity

[from the debtors] for tax purposes . . . .”). The first and fourth references to a

“partner” thus cannot be construed as referring to the bankruptcy estate. Given

that the second use of the word “partner” refers back to the preceding use

(“partnership items of such a partner”), the second use also cannot be read to

include the bankruptcy estate.

The remaining use of the word “partner” is the operative one for our

purposes. The defining date for determining whether an item should be treated as

a nonpartnership item is based on “the latest taxable year of the partner with

respect to which the United States could file a claim for income tax due in the

bankruptcy proceeding.” Here, too, the “partner” must be the debtor in

bankruptcy. A common-sense rule of statutory construction states that “identical

words used in different parts of the same act are intended to have the same

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meaning.” Comm’r v. Keystone Consol. Indus., Inc. , 508 U.S. 152, 159 (1993)

(internal quotation marks omitted). We think it is not asking too much of the

drafters of our nation’s laws to say that if they use a term three times in the same

sentence, they should be sure that they intend to give it the same meaning each

time. Accordingly, we agree with Taxpayer that the word “partner” does not

encompass the bankruptcy estate and therefore the Bankruptcy Regulation does

not convert his 1990 partnership losses into nonpartnership items.

B. Tax Court Approach

The Commissioner also attempts to defend the Tax Court’s ruling, which he

paraphrases to say: “[T]he manner in which the distributive share of a partner in

bankruptcy is allocated between the partner and the bankruptcy estate of that

partner is not a ‘partnership item’ under IRC § 6231(a)(3), and need not be made

at the partnership level.” Aple. Br. at 30. He acknowledges that “the total

amount of partnership losses for the year is determined at the partnership level,

and the manner in which those losses are divided among the partners of each

partnership is also a partnership item.” Id. But he states that “[t]he regulation

promulgated by the Secretary to define partnership items, Treas. Reg.

§ 301.623(a)(3)-1, does not address the possibility that one partner will file a

bankruptcy petition during the taxable year.” Id. at 31. According to the

Commissioner, not only is there “no indication in the Regulation that the

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allocation of a debtor-partner’s loss between the debtor-partner and the

bankruptcy estate is a partnership item,” id., but neither does “general tax law

require partnerships to take into account on the partnership return the fact that

one partner has become a debtor in bankruptcy, and his partnership interest has

become property of a bankruptcy estate,” id. at 31-32.

Although the premises of the Commissioner’s argument may well be true,

his conclusion does not follow. First, the absence of a reference to bankruptcy in

the regulation defining partnership items does not imply that there must be some

sort of exception in that context. On the contrary, it indicates the general

applicability of the regulation to bankrupt partners. Moreover, the Secretary’s

promulgation of a regulation (the Bankruptcy Regulation) specifically to provide

for an exception to the general rule when a bankruptcy is involved strongly

suggests that the existence of a bankruptcy would otherwise not be a reason to

treat as a nonpartnership item what would be a partnership item under the general

regulation.

Second, the rule regarding allocation of losses between the debtor-partner

and the bankruptcy estate is a red herring. What is important is that the debtor

was a partner during part of the partnership year, so the partnership returns must

set forth the debtor’s share of income, loss, etc. It may be that the partnership can

report all such items as the debtor’s, and need not prepare a K-1 for the

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bankruptcy estate. And perhaps the proper tax treatment of the debtor’s share of

income and losses is to allocate all items to the bankruptcy estate. Nevertheless,

the Commissioner has not challenged the proposition that the partnership return

must contain an assignment of income and loss to a partner who has declared

bankruptcy, whether the figures be $1 million or $0, and that these figures are

partnership items unless excluded by a regulation. If a figure is wrong, it can be

challenged only in a partnership-level proceeding.

To say that the allocation is not a partnership item is to confuse the process

with the result. The statute requires partnership-level proceedings if a partnership

item is being challenged. The partnership item is, of course, the result of the

allocation of the partnership’s income, losses, etc; but the allocation process itself

is not a partnership item. The requirement of a partnership-level proceeding is

triggered regardless of how the partnership item was calculated. There may be

sound policy reasons for not requiring a full-blown partnership-level proceeding

when an alleged error in one partner’s return affects only one other taxpayer

rather than all the partners. But for now the law is otherwise.

We DISMISS the appeal in Case No. 01-9010. In Case No. 01-9009 and

Case No. 01-9011, we REVERSE the decision of the Tax Court and REMAND

for proceedings consistent with this opinion. We express our appreciation to

counsel for the fine appellate briefs.

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01-9009, 01-9010,01-9011, Katz v. Commissioner of Internal Revenue
ROBINSON , District Judge, dissenting.

I join the court’s opinion as to dismissal of Case No. 01-9010. I

respectfully dissent as to the court’s opinion in Case No. 01-9009 and Case

No. 01-9011.

The Tax Court had jurisdiction to enforce the Notices of Deficiency

because there was not a “partnership item” at issue. The issue was whether the

net operating loss carryovers in years 1991-1994 were a tax attribute of

Taxpayer’s bankruptcy estate in whole or part, or whether Taxpayer was entitled

to claim the total amount of these carryovers on his individual tax returns. This

was a dispute between Taxpayer and the bankruptcy estate, and an issue personal

to Taxpayer. Thus, the majority mischaracterizes the Commissioner’s

“adjustments” to Taxpayer’s tax liability as a partnership or affected item.

Although the Commissioner “adjusted” Taxpayer’s liability, it was an adjustment

that was personal to Taxpayer and in no way affected the liability or K-1s of the

other partners in the partnership.

Had the net operating loss carryovers been a “partnership item,” the Tax

Court would not have had jurisdiction, for the issue would have necessarily been

resolved at a partnership-level proceeding. The Internal Revenue Code states that

The term “partnership item” means, with respect to a partnership, any
item required to be taken into account for the partnership’s taxable
year under any provision of subtitle A to the extent regulations
prescribed by the Secretary provide that, for purposes of this subtitle,
 such item is more appropriately determined at the partnership level
than at the partner level.

I.R.C. § 6231(a)(3).

The dispute between Taxpayer and the bankruptcy estate about their rights

to claim the net operating loss carryovers in 1991-1994 is not an item that was

required to be taken into account by the partnership, either in 1990, the year in

which the partnership sustained the loss, or in the subsequent years 1991-1994.

While the partnership was required to take into account the distributive shares of

the partners in the loss sustained in 1990, the partnership was not required to take

into account a single partner’s dispute with a third party over claiming the net

operating loss carryovers generated by the loss.

Nor is this dispute between Taxpayer and his bankruptcy estate an item that

is more appropriately determined at the partnership level than at the partner level.

Partnership-level proceedings are generally required when there is a determination

of an issue that affects the partners or partnership. A partnership-level

proceeding is necessary to work out the competing, disputed or relative rights of

the partners when those issues are dependent on or affect the rights of the other

partners. 1

Nor is the issue in this case an “affected item” within the meaning of
1

I.R.C. § 6231(a)(5), which is defined as “any item to the extent such item is
affected by a partnership item.” Treas. Reg. § 301.6231(a)(5)-1(a) includes as
(continued...)

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 In this case, there was no dispute about the amount of losses by the

partnerships or about the partners’ relative shares of the partnership losses.

Unlike several of the cases cited by the majority, there was no partnership-level

proceeding pending because there was no dispute among or affecting the partners.

Taxpayer and the partners do not dispute that the K-1s reflected the correct

amounts of their respective distributive shares under the partnership. Whether or

not the net operating loss carryover in this case is a tax attribute that benefits

Taxpayer or the bankruptcy estate has absolutely no effect on Taxpayer’s partners.

The regulation promulgated by the Secretary to define partnership items,

Treas. Reg. § 301.6231(a)(3)-1, provides general categories of partnership items

and is entitled to deference under Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) and

United States v. Mead Corp., 533 U.S. 218, 121 S.Ct. 2164, 150 L.Ed.2d 292

(2001) . Examples of partnership items are the partnership and each partner’s

1
(...continued)
affected items those “unrelated to the items reflected on the partnership return.”
To be sure, the Taxpayer’s tax liability is affected by a determination that the net
operating losses are wholly or partially a tax attribute belonging to the bankruptcy
estate. But, “affected items” are items that require adjustment after and as a
consequence of a determination that is necessarily made in a partnership-level
proceeding. Affected items include computational adjustments to a partner’s tax
liability, after a partnership proceeding results in a change in a partnership item.
Examples of affected items include a partner’s basis in the partnership and
penalty, addition to tax or additional amount. Treas. Reg. § 301.6231(a)(5)-1(b)
and (e).

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share of: income, gain, loss, deduction and credit, exempt income, nondeductible

expenses, partnership liabilities, determinations requiring the partnership’s books

and records, contributions, distributions. Treas. Reg. § 301.6231(a)(3)-1(a) and

(c). Partnership items also include the accounting practices and the legal and

factual determinations that underlie the determination of amount, timing, and

characterization of items of income, credit, gain, loss and deduction. Treas. Reg.

§ 301.6231(a)(3)-1(b). In fact, the hallmark of a partnership item is that it affects

the distributive shares reported to other partners. Blonien v. Comm’r , 118 T.C.

541, 551-552 n. 6 (U.S. Tax Ct. 2002). In contrast, non-partnership items include

items personal to the partner. See Hambrose Leasing 1984-5 Ltd. Partnership v.

Comm’r , 99 T.C. 298 (U.S. Tax Ct. 1992)(amounts that the partners have “at risk”

with respect to partnership liabilities assumed under I.R.C. § 465); Crop

Associates-1986 v. Comm’r , 113 T.C. No. 15 (U.S. Tax Ct. 1999)(equitable

recoupment).

Because the dispute between Taxpayer and his bankruptcy estate does not

involve a partnership item, the Bankruptcy Regulation cited by the majority,

Treas. Reg. § 301.6231(c)-7T(a), is inapplicable. The majority’s conclusion that

the Bankruptcy Regulation has “general applicability” to bankrupt partners

ignores the plain language of the regulation, which is limited to treatment of

partnership items. Nothing in the Bankruptcy Regulation states that all

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determinations of whether the debtor or the bankruptcy estate has the benefit of

certain attributes are partnership items. Nor does the Bankruptcy Regulation

subject every issue to a partnership-level proceeding simply because a bankruptcy

was filed. Thus, the applicability of the Bankruptcy Regulation to the particular

facts in this case is irrelevant. Moreover, the Commissioner’s ruling was in

error; there is no statutory or regulatory basis for his ruling that the filing of a

bankruptcy operates to convert all items (whether partnership items or not) into

“non-partnership items.”

Because the Bankruptcy Regulation does not apply in this case, the

majority’s analysis of the last day the IRS could file a claim is of no consequence.

Also of no consequence is the majority’s analysis that the Bankruptcy Regulation

cannot be read to include the bankruptcy estate in the word “partner.” In fact, the

majority is correct that “partner” does not include bankruptcy estate in its

definition. The bankruptcy estate was not a partner. It did not sign a partnership

agreement. It did not have a right to a distributive share. It was not in existence

at the time of the partnership agreement. Whatever rights it has are by operation

of bankruptcy law, and this is not a matter that can or should be resolved in a

partnership-level proceeding.

The amount of the net operating loss carryovers is a given; the only dispute

is how much of that amount is attributed to the benefit of Taxpayer and how much

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is attributed to the benefit of the bankruptcy estate. In fact, the majority makes the

argument when they posit that:

To say that the allocation is not a partnership item is to confuse the
process with the result. The statute requires partnership level
proceedings if a partnership item is being challenged. The
partnership item is, of course, the result of the allocation of the
partnership’s income, losses, etc; but the allocation process itself is
not a partnership item.

Majority opinion at 17 (emphasis in the original).

What is at issue here is the allocation process between Taxpayer and his

bankruptcy estate. The “allocation of the partnership’s income, losses, etc,” is

not at issue. The partnership’s income and losses have been allocated, resulting

in partnership items, that is, the relative allocation between the partners. But

Taxpayer does not dispute the partnership items. Taxpayer does not dispute the

losses attributed to his share of the partnership, nor does the Commissioner

dispute the losses attributed to Taxpayer’s share of the partnership. Taxpayer and

the Commissioner dispute the allocation process of an undisputed amount of loss

and net operating loss carryovers, as between Taxpayer and a third party, the

bankruptcy estate. This is not a matter to be determined at the partnership level–

it is a matter of bankruptcy law, with no effect or consequence on the partnership

or the other partners. 2

2
Although not controlling, I find persuasive the reasoning of Doe v.
(continued...)

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 For these reasons, I would affirm the decision of the Tax Court.

2
(...continued)
Comm’r, 116 F.3d 1489, 1997 WL 355357 (10 th Cir. June 2, 1997) (unpublished).
See 10 th Cir. R. 36.3(B). The court in Doe concluded that the Tax Court had
jurisdiction to assess certain deficiencies at the individual level in a proceeding
involving a subchapter S corporation, which, like a partnership, is taxed through
individual shareholders. The court noted that if the Commissioner’s determination
of a deficiency owed by an individual taxpayer is based upon information set
forth in the original partnership or shareholder return rather than on the
Commissioner’s own investigation, re-calculation and re-determination of a
partnership item or subchapter S item, then the Tax Court retains jurisdiction to
adjudicate the deficiency in an individual proceeding, because there is no
“adjustment” to the entity’s return and thus no need to follow the entity-level
procedures. Doe, 1997 WL at 6-10.

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