T.C. Memo. 1996-72
UNITED STATES TAX COURT
MESERVE DRILLING PARTNERS, REGIONAL RESOURCES, INC., F.K.A. R & R
ENERGY, INC., TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
COLUMBIA ENERGY FUND 1982, REGIONAL RESOURCES, INC., F.K.A. R & R
ENERGY, INC., TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 19262-86, 19904-86. Filed February 21, 1996.
Robert B. Martin, Jr., for petitioner.
Jack H. Klinghoffer, for respondent.
MEMORANDUM OPINION
DAWSON, Judge: These cases were assigned to Special Trial
Judge Larry L. Nameroff pursuant to section 7443A(b)(4) of the
Code and Rules 180, 181, and 183.1 The Court agrees with and
1
All section references are to the Internal Revenue Code
in effect for the years in issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
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adopts the opinion of the Special Trial Judge, which is set forth
below.
OPINION OF THE SPECIAL TRIAL JUDGE
NAMEROFF, Special Trial Judge: These cases are before us on
motion by petitioner to dismiss for lack of jurisdiction on the
ground that the Final Partnership Administrative Adjustments
(FPAA) are invalid. Petitioner herein is the Tax Matters Partner
(TMP) of two partnerships, Meserve Drilling Partners and Columbia
Energy Fund 1982. The principal place of business of each
partnership when the petitions for readjustment of partnership
items were filed was in Newport Beach, California.
These two cases were part of a group consisting of 14 cases
that were consolidated for purposes of trial, briefing, and
opinion in Osterhout v. Commissioner, T.C. Memo. 1993-251, affd.
in part, revd. in part without published opinion sub nom. Balboa
Energy Fund 1981 v. Commissioner, F.3d (9th Cir., Jan.
19, 1996). According to that opinion, decisions were to be
entered under Rule 155. In each of the two cases now before us,
respondent filed a computation under Rule 155, and petitioner
thereafter filed a motion to dismiss, together with a statement
that petitioner had no objection to entry of decision pursuant to
respondent's computation if the Court denied the motion to
dismiss.
On March 18, 1986, respondent issued FPAA's in which she
determined adjustments to partnership items as follows:
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MESERVE DRILLING PARTNERS
Year Adjustment to Ordinary Income
1982 $1,228,560
1983 171,721
COLUMBIA ENERGY FUND 1982
Year Adjustment to Ordinary Income
1982 $3,176,180
1983 1,059,673
In the motions to dismiss, petitioner claims that the FPAA's
are invalid because they did not make determinations as to
"partnership items" on the dates they were issued and therefore
cannot confer jurisdiction on this Court. According to
petitioner's argument, the regulations defining "partnership
items" were adopted on April 15, 1986, whereas the FPAA's were
mailed on March 18, 1986. Thus, petitioner argues that because
no regulations existed when the FPAA's were mailed, pursuant to
section 6231(a)(4), all items are "nonpartnership items". In
addition, petitioner argues that the regulation defining
"partnership items" should not be used to retroactively confer
jurisdiction on this Court. Respondent asserts that the FPAA
validly confers jurisdiction on the Court and that jurisdiction
can be conferred by the retroactive application of the regulation
defining "partnership items".
Discussion
The question of jurisdiction is a fundamental question that
can be raised at any time by either party or by the Court.
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Naftel v. Commissioner, 85 T.C. 527, 530 (1985); Estate of Young
v. Commissioner, 81 T.C. 879, 880-881 (1983). Moreover, we have
jurisdiction to determine whether we have jurisdiction. Pyo v.
Commissioner, 83 T.C. 626, 632 (1984); Kluger v. Commissioner, 83
T.C. 309, 314 (1984).
In a partnership action for readjustment of partnership
items, this Court has jurisdiction when the Commissioner has
mailed a valid FPAA and the tax matters partner or other eligible
partner has timely filed a petition with the Court seeking a
readjustment of partnership items. Sec. 6226; Rule 240(c). If
the FPAA is not valid, we lack subject matter jurisdiction.
Clovis I v. Commissioner, 88 T.C. 980 (1987); Maxwell v.
Commissioner, 87 T.C. 783, 788-789 (1986).
At a minimum, the FPAA must give notice to the taxpayer that the
Commissioner has finally determined adjustments to the
partnership return. Chomp Associates v. Commissioner, 91 T.C.
1069, 1073-1074 (1988); Clovis I v. Commissioner, supra at 982.
Petitioner's argument as to jurisdiction turns on section
301.6231(a)(3)-1(a), Proced. & Admin. Regs, which defines
"partnership items". The unified audit and litigation procedures
applicable to partnership items, which are found in sections
6221-6233, were enacted as part of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 401(a),
96 Stat. 648, and are effective for partnership taxable years
commencing after September 3, 1982. The TEFRA partnership
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provisions were enacted partly 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); alteration in
original.]
Section 6221 provides that the tax treatment of partnership
items shall be determined at the partnership level, except as
otherwise provided in subchapter C of chapter 63 of the Code.
Section 6231(a)(3) provides that a "partnership item" means any
item required to be taken into account for the partnership's
taxable year under any provision of subtitle A of the Code to the
extent prescribed by the regulations as an item that "is more
appropriately determined at the partnership level than at the
partner level." Section 6231(a)(4) defines "nonpartnership
items" as those items that are not partnership items.
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The regulations defining "partnership items" were first
proposed in the Federal Register on January 14, 1983. The
proposed regulations gave public notice of the Treasury's intent
to make the regulations effective with respect to partnership
years beginning after September 3, 1982, the date TEFRA was
enacted. Sec. 1.6231(c), Proposed Proced. & Admin. Regs., 48
Fed. Reg. 1760 (Jan. 14, 1983). The proposed regulations
enumerated items of income, loss, deduction, or credit to be
treated as more appropriately determined at the partnership level
than at the partner level, and, therefore, as partnership items.
Id. The regulations became final, without substantial change, on
April 15, 1986. 51 Fed. Reg. 13212 (Apr. 18, 1986). Section
301.6231(a)(3)-1(d), Proced. & Admin. Regs., states: "This
section shall apply with respect to partnership taxable years
beginning after September 3, 1982." These regulations were
issued pursuant to the authority of sections 7805(b), 6230(k),
and 6231(a)(3).
Section 7805(b) provides:
SEC. 7805(b). RETROACTIVITY OF REGULATIONS OR
RULINGS.--The Secretary may prescribe the extent, if
any, to which any ruling or regulation, relating to the
internal revenue laws, shall be applied without
retroactive effect.
The Code thus contemplates that a regulation is to operate
retroactively except to the extent that the Commissioner provides
that it shall be applied without retroactive effect. Butka v.
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Commissioner, 91 T.C. 110, 128 (1988), affd. without published
opinion 886 F.2d 442 (D.C. Cir. 1989).
In the cases before the Court, the Commissioner exercised
her discretion by providing that the regulations defining
"partnership items" would be effective for partnership taxable
years ending after September 3, 1982, coinciding with the
effective date of TEFRA.
In general, the retroactive application of an income tax
regulation has been reviewed for abuse of discretion. Automobile
Club of Michigan v. Commissioner, 353 U.S. 180, 184 (1957);
Wendland v. Commissioner, 739 F.2d 580, 581 (11th Cir. 1984),
affg. 79 T.C. 355 (1982); Redhouse v. Commissioner, 728 F.2d
1249, 1251 (9th Cir. 1984), affg. Wendland v. Commissioner, 79
T.C. 355 (1982). However, we do not find that the Treasury
committed an abuse of discretion with respect to the effective
date of the regulations in question here.
Petitioner's reliance on Eastern States Casualty Agency v.
Commissioner, 96 T.C. 773 (1991), is misplaced. In that case the
Commissioner issued a final S corporation administrative
adjustment (FSAA) to the tax matters person of Eastern States for
the taxable year 1984. Eastern States had only 4 shareholders
and contended that the FSAA procedure did not apply because the
Commissioner had issued section 301.6241-1T(c)(2)(i), Temporary
Proced. & Admin Regs., 52 Fed. Reg. 3003 (January 30, 1987),
which provided that a corporation with five or fewer shareholders
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was not subject to the FSAA procedure. However, we noted that
the temporary regulation by its terms was applicable to a taxable
year of an S corporation only if the due date of the
corporation's return for that year was on or after January 30,
1987. Eastern States Casualty Agency v. Commissioner, supra at
775. By contrast, the regulations in issue here are by their
terms effective for partnership taxable years ending after
September 3, 1982.
We reject petitioner's argument that the regulations should
not be applied here. The legislative history of TEFRA clearly
indicates Congress' intent generally to treat a partnership's
items of income, loss, deduction, and credit as "partnership
items" for purposes of the unified audit and litigation
procedures. See H. Conf. Rept. 97-760, at 600, 604 (1982), 1982-
2 C.B. 600, 662. Further, the issuance of the proposed
regulations in January of 1983, only a few months after the
enactment of TEFRA, provided guidance as to which items fell
within the definition of "partnership items" and put the public
on notice that the regulations would be applied to partnership
years beginning after the date of TEFRA's enactment. The
proposed regulations gave petitioners "warning of things to
come". United States v. Fenix & Scisson, Inc., 360 F.2d 260, 267
(10th Cir. 1966). Accepting petitioner's contentions would lead
to the absurd result that the TEFRA provisions would have little
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or no effect until April 15, 1986, notwithstanding Congress'
clear mandate to the contrary.
Because the regulations apply here, there is no need to
address the remainder of petitioner's argument. Accordingly, the
motions to dismiss for lack of jurisdiction will be denied.
Appropriate orders will be
issued denying petitioner's motions
to dismiss for lack of jurisdiction, and
decisions will be entered in accordance
with respondent's Rule 155 computations.