T.C. Memo. 1996-74
UNITED STATES TAX COURT
DOUGLAS A. VANDER HEIDE AND JANET VANDER HEIDE,
Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13745-95. Filed February 22, 1996.
Douglas A. Vander Heide and Janet Vander Heide, pro se.
Louise C. Pais, for respondent.
MEMORANDUM OPINION
NAMEROFF, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(4)1 and Rules 180, 181, and
183. This case is before the Court on respondent's motion to
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the years at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
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dismiss this case for lack of jurisdiction insofar as it relates
to adjustments arising from petitioners' interest in J & S World
Nurseries Limited Partnership (Nurseries). At the time of the
filing of the petition herein, petitioners resided in Simi
Valley, California. Some of the facts have been stipulated and
are so found. The stipulation of facts and attached exhibits are
incorporated herein by this reference.
During the years 1985 and 1986, petitioners were limited
partners in Nurseries. Their interest was .45 percent and there
were over 100 partners in Nurseries. On March 12, 1993, Form
870-P(AD), Settlement Agreement for Partnership Adjustments, was
executed by Harvey Minars, tax matters partner (TMP) for
Nurseries and by Robert Rosenblatt, Associate Chief, New York
City Appeals on behalf of respondent. The Form 870-P(AD)
represented an offer made by the TMP of Nurseries and provided
that, if accepted by the Commissioner,
the treatment of partnership items under this agreement
will not be reopened in the absence of fraud,
malfeasance, or misrepresentation of fact; and no claim
for refund or credit based on any change in the
treatment of partnership items may be filed or
prosecuted.
This offer is made by the [TMP] and binds all non
notice and other partners to the terms of the agreement
for whom the [TMP] may act under section 6224(c)(3) * *
*
In addition, the Form 870-P(AD) provided for the waiver of
the restrictions on assessment and collection of any deficiency
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attributable to partnership items. See sec. 6225(a).
Petitioners did not file a statement denying the settlement
authority of Nurseries' TMP under section 6224(c)(3)(B) at least
30 days prior to the date on which the settlement agreement was
entered into by the Commissioner and Nurseries' TMP. See section
301.6224(c)-1T(a)(2), Temporary Proced. & Admin. Regs., 52 Fed.
Reg. 6786 (Mar. 5, 1987). Indeed, at that time, petitioners were
unaware of the partnership proceeding.
By letters dated June 14, 1993, and August 9, 1993,
petitioners were advised by respondent of changes made to their
1985 and 1986 joint Federal income tax returns as a result of the
settlement of the partnership items of Nurseries as they flowed
through to petitioners' 1985 and 1986 returns. The computation
form attached to the letter for 1985 reflected that petitioners'
claimed ordinary loss of $74,978 with respect to Nurseries was
disallowed except for a $25,000 settlement allowance, that a
deficiency was computed in the amount of $18,429, that no
additions or penalties were being asserted, but that interest was
to be computed at 120 percent of the normal rates pursuant to
section 6621(c). Similarly for 1986, the petitioners' claimed
loss for Nurseries of $11,309 was disallowed resulting in a
deficiency of $9,995. These deficiencies and appropriate
interest were subsequently assessed, and petitioners began making
arrangements to pay them.
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During 1985 and 1986, petitioners were also partners in a
partnership entitled Hambrose Leasing 1985-4 (Hambrose). The
details of the structure of Hambrose and of petitioners'
percentage investment in Hambrose are not a part of the record,
but it appears that Hambrose was not a TEFRA partnership. On May
26, 1995, respondent issued notices of deficiency with respect to
petitioners' 1985 and 1986 Federal income tax returns determining
deficiencies in income taxes of $11,055 for 1985 and $25,573 for
1986, plus additions to tax under section 6653(a)(1)(A) and (B),
and section 6661(a) in connection with the adjustment of
petitioners' claimed losses attributable to Hambrose. In
addition, in the notices of deficiency respondent determined that
interest was to be computed under section 6621(c) at 120 percent
of normal rates.
A timely petition was filed with respect to the notices of
deficiency. However, petitioners attempted to place into issue
the deficiencies arising out of the adjustments made to their
1985 and 1986 returns in connection with their investment in
Nurseries. Respondent moved to dismiss that aspect of the case
for lack of jurisdiction and to strike all references in the
petition to Nurseries. Petitioners contend that they were never
notified about the examination and settlement of Nurseries and
they therefore deserve an opportunity to litigate the
deficiencies related to Nurseries. The resolution of this issue
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requires a consideration of the unified audit and litigation
procedures enacted as part of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324.
The TEFRA partnership provisions were enacted in response to
the administrative problems experienced by the Internal Revenue
Service in auditing returns of partnerships, particularly tax
shelter partnerships with numerous partners. Staff of Joint
Comm. on Taxation, General Explanation of the Revenue Provisions
of the Tax Equity and Fiscal Responsibility Act of 1982, at 268
(J. Comm. Print 1982). As we stated in an earlier case
interpreting the TEFRA partnership provisions:
By enacting the partnership and audit litigation
procedures, Congress provided a method for uniformly
adjusting items of partnership income, loss, deduction,
or credit that affect each partner. Congress decided
that no longer would a partner's tax liability be
determined uniquely but "the tax treatment of any
partnership item [would] be determined at the
partnership level." Sec. 6221. [Maxwell v.
Commissioner, 87 T.C. 783, 787 (1986).]
A "partnership item" is defined as an item that is more
appropriately determined at the partnership level than at the
partner level. Sec. 6231(a)(3). Partnership items include each
partner's proportionate share of a partnership's aggregate items
of income, gain, loss, deduction, or credit. Sec. 6231(a)(3);
sec. 301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs. The
treatment of partnership items is decided at the partnership
level, rather than in separate proceedings involving individual
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partners. See secs. 6221-6223; see also Harris v. Commissioner,
99 T.C. 121, 125 (1992), affd. 16 F.3d 75 (5th Cir. 1994).
Section 6223(a) generally provides that the Commissioner
shall mail to each partner notice of the beginning of an
administrative proceeding (NBAP) at the partnership level with
respect to a partnership item, as well as the final partnership
administrative adjustment (FPAA) resulting from any such
proceeding. However, the requirement for providing notices under
section 6223(a) does not apply to a partner of a partnership if
the partnership has more than 100 partners and the partner has
less than a 1-percent interest in the profits of the partnership.
See sec. 6223(b)(1). Section 6223(g) requires the TMP to keep
each partner informed of all administrative and judicial
proceedings for the adjustment at the partnership level of
partnership items. Taking petitioners' statements at face value,
we presume that Nurseries' TMP failed to advise petitioners of
Nurseries' partnership administrative proceeding. However,
section 6230(f) provides that the failure of the TMP to forward
copies of the NBAP or FPAA to a partner, or otherwise fail to
fulfill his responsibilities, does not affect the applicability
of partnership proceedings or adjustments to such partner. As we
have said elsewhere in regard to the alleged unfairness
surrounding the FPAA:
Be that as it may, that is the procedure which the
Congress has created, and we have no authority to
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rewrite the statute in order to change procedure and
substitute our own idea of "fairness." If there is any
such inequity, it is up to Congress to revise the law.
* * * [Genesis Oil & Gas, Ltd. v. Commissioner, 93 T.C.
562, 566 (1989).]
In regards to the settlement of a partnership proceeding,
section 6224(c)(3) provides that in the absence of fraud,
malfeasance, or misrepresentation of fact, a TMP may bind a
nonnotice partner by any settlement agreement entered into by the
TMP and in which the TMP expressly states that such agreement
shall bind the other partners.
Once a partnership proceeding is finalized through
settlement, computational adjustments at the partner level are
made to record the change in the partners' tax liability that
results from adjustments in the settlement to partnership items.
The accuracy of the computational adjustments may be contested,
as provided in section 6230(c), but the treatment of the
partnership items under the settlement is conclusive. Sec.
6230(c)(4).2 However, the Code does not provide this Court with
jurisdiction of a section 6230(c) type of judicial proceeding.
Therefore it can be concluded that we have no jurisdiction
to consider anything pertaining to partnership items of
Nurseries. Petitioners, as nonnotice partners of Nurseries, were
2
A proceeding under sec. 6230(c) requires, inter alia, a
timely claim for refund within 6 months of the notice of
computational adjustment. Petitioners did not file such a
document.
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bound by the settlement entered into between Nurseries' TMP and
the Commissioner, and they have failed to bring an appropriate
and timely section 6230 proceeding.
We sympathize with petitioners, but must point out that
petitioners are not victims of respondent or the Internal Revenue
Code. They are victims of unscrupulous purveyors of tax shelters
who, having sold scam investments to petitioners, failed to
follow procedures and disappeared with the funds. Petitioners
are also victims of their own greed and naivete by investing in
these scams, obtaining outrageous deductions and credits without
paying attention to the details of the tax laws, nor putting into
place some sort of check and balance system to monitor their own
investments.
Respondent's motion to dismiss will be granted, and all
references to Nurseries in the petition will be stricken.
An appropriate order
will be issued.