Schwartz v. Commissioner

T.C. Memo. 1996-88

UNITED STATES TAX COURT

JOHN W. AND VINCENTIA SCHWARTZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 19269-92, 7275-93. Filed February 29, 1996.

Gene M. Zafft and John W. Schwartz, Jr., for petitioners.

Robert J. Burbank and Thomas C. Pliske, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: These consolidated cases

were assigned for hearing pursuant to section 7443A(b)(4) and

Rules 180, 181, and 183.1

These cases are before the Court on petitioners' motions to

dismiss for lack of jurisdiction. In their motions, petitioners

1
Unless otherwise indicated, all section references are to the
Internal Revenue Code as amended. All Rule references are to the
Tax Court Rules of Practice and Procedure.
claim that we lack jurisdiction over the portions of the

deficiency determinations with respect to Westco Transportation

Co. (Westco) and Makalu Apartments, Ltd. (Makalu), partnerships

of which petitioner John W. Schwartz (petitioner) is a partner,

because respondent failed to comply with the Tax Equity and

Fiscal Responsibility Act (TEFRA) provisions of section 6223(a).

Respondent objects to the motions on the grounds that Westco and

Makalu fall within the small partnership exception to the

partnership audit and litigation provisions, and, therefore,

TEFRA procedures do not apply. A hearing was held with respect

to these motions in St. Louis, Missouri.

At the time the petitions were filed herein, petitioners

resided in Creve Coeur, Missouri. On June 5, 1992, respondent

mailed a notice of deficiency to petitioners for taxable years

1987, 1988, and 1989. On January 19, 1993, respondent issued a

second notice of deficiency to petitioners for taxable years 1985

and 1986. The deficiencies in and additions to petitioners' 1985

through 1989 taxes, as determined by respondent, are attributable

in part to petitioner's interests in several partnerships and S

corporations. The entities identified in the notices of

deficiency are D & J Transportation, Inc. (D&J), J & J Marine,

Inc. (J&J), MMM Management Corporation (MMM), Westco, and Makalu.
 3

Following concessions,2 the sole issue for decision is

whether respondent was required by the partnership audit and

litigation procedures, enacted in 1982 as a part of TEFRA, to

issue notices of final partnership administrative adjustments

(FPAA) with respect to Westco and Makalu within the statutory

period.3 Secs. 6221, 6223(a)(2), 6231(a)(1)(B). If respondent

was required to issue FPAA's with respect to Westco and Makalu

and failed to do so, we lack jurisdiction over these cases and

petitioners' motions must be granted. Harrell v. Commissioner,

91 T.C. 242, 243 (1988); Frazell v. Commissioner, 88 T.C. 1405

(1987)).

Petitioners contend that the resolution of disputed

partnership items with respect to Westco and Makalu should occur

at the partnership level, not the individual partner level.

Respondent alleges that the partnerships fall within the small

2
The parties stipulated that the Court does not have
jurisdiction over respondent's adjustments to: (1) D&J for the
taxable years ending Sept. 30, 1985, and Sept. 30, 1986; (2) J&J
for the taxable years ending Sept. 30, 1985, and Sept. 30, 1986;
and (3) MMM for 1985. The parties further stipulated that the
Court has jurisdiction over respondent's adjustments to: (1) D&J
for the taxable years ending Sept. 30, 1987, Sept. 30, 1988, and
Sept. 30, 1989; (2) J&J for the taxable years ending Sept. 30,
1987, Sept. 30, 1988, and Sept. 30, 1989; and (3) MMM for years
1986 through 1989.
3
In their motions to dismiss, petitioners also moved for
litigation costs and attorney's fees under sec. 7430. That
motion is premature and not properly filed. See Rule 231. Were
we to consider it, in light of our decision in this case,
petitioners' request would be denied as moot.
 4

partnership exception of section 6231(a) and, thus, all issues

should be determined at the partner level. See sec. 6221.

Congress enacted the partnership audit and litigation

procedures to provide 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.

Harrell v. Commissioner, supra at 243 (citing Maxwell v.

Commissioner, 87 T.C. 783, 787 (1986)).

Section 6231(a)(1)(B) excludes certain small partnerships

from the partnership audit and litigation provisions unless the

partnership elects to have such provisions apply. The relevant

portion of this section provides as follows:

(B) Exception for small partnerships.--

(i) In general. -- The term "partnership" shall not
include any partnership if--

(I) such partnership has 10 or fewer partners each of
whom is a natural person (other than a nonresident
alien) or an estate, and

(II) each partner's share of each partnership item is
the same as his share of every other item.

For purposes of the preceding sentence, a husband and wife
(and their estates) shall be treated as 1 partner.

Petitioners concede that Westco and Makalu had 10 or fewer

partners during the relevant periods. The dispute of the parties

centers upon the applicability of section 6231(a)(1)(B)(i)(II) to
 5

the facts as they existed in the taxable year 1985, with respect

to Westco, and taxable years 1985 through 1988, with respect to

Makalu; i.e., whether "each partner's share of each partnership

item is the same as his share of every other item."

The same share requirement of section 6231(a)(1)(B)(i)(II)

is satisfied if during all periods within a taxable year, each

partner's share of each partnership item specified in section

301.6231(a)(3)-1(a)(1), Proced. & Admin. Regs., is the same as

that partner's share of each of the other partnership items

specified in that section during that period. Moreover,

if each partner's share of each partnership item would be
the same as his or her share of every other item but for
allocations made under section 704(c) or allocations made
under similar principles in accordance with applicable
regulations the requirement of section 6231(a)(1)(B)(i)(II)
shall be considered satisfied. Similarly, special basis
adjustments pursuant to sections 754, 743, and 734 shall not
be taken into account in determining whether the "same
share" requirement is met.

Sec. 301.6231(a)(1)-1T(a)(3), Temporary Proced. & Admin. Regs.,

52 Fed. Reg. 6789 (Mar. 5, 1987).

The partnership items referred to in these regulations and

taken into consideration for purposes of the "same share"

requirement are:

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

(ii) Expenditures by the partnership not deductible in
computing its taxable income (for example, charitable
contributions);

(iii) Items of the partnership which may be tax preference
items under section 57(a) for any partner;
 6

(iv) Income of the partnership exempt from tax * * *

Sec. 301.6231(a)(3)-1(a)(1)(i) through (iv), Proced. & Admin.

Regs.

Section 6031(a) provides that every partnership is required

to "make a return for each taxable year, stating specifically the

items of its gross income and the deductions allowable by

subtitle A * * * and shall include in the return the names and

addresses of the individuals who would be entitled to share in

the taxable income if distributed and the amount of the

distributive share of each individual." The regulations further

clarify that the return shall include the "amount of the

distributive share of income, gain, loss, deduction, or credit

(including any items which enter into the determination of the

tax imposed by section 56) allocated to each partner." Sec.

1.6031-1(a)(1), Income Tax Regs. Therefore, the partnership

returns and Schedules K-1 are required to reflect what each

partner's distributive share of each partnership item was for the

partnership year. Harrell v. Commissioner, supra.

In Harrell v. Commissioner, supra, we first addressed the

issue of the application of the same share requirement. The

taxpayers argued that we lacked jurisdiction over the deficiency

determination because the Commissioner, in seeking to make

adjustments with respect to a partnership, failed to issue an

FPAA. In particular, the taxpayers argued that the same share

test should be applied to the terms of the partnership agreement,
 7

and that if disproportionate allocations of items with respect to

any partner are possible under the terms of the agreement, then

the test has not been satisfied. We held:

[F]or purposes of determining whether a partnership is a
small partnership and whether the same share rule is
satisfied, the test should be applied by determining whether
the partnership reported more than one partnership item for
the year and, if so, how those items were shared by each
partner. This determination should be made by respondent as
of the date of commencement of the audit of the partnership
(but not necessarily on that date) by examining the
partnership return and the corresponding Schedules K-1s, and
any amendments thereto received prior to this date.

* * * * * * *

Because this section serves the limited purpose of
determining to whom to issue a statutory notice or whether
to issue an FPAA, and for the sake of judicial economy, we
will not for these purposes permit a partner or
representative of a partnership or respondent to claim a
result other than that identified in the return and
Schedules K-1s as filed and amended prior to the date of
commencement of the partnership audit.

Harrell v. Commissioner, 91 T.C. at 246-247; see also Z-Tron

Computer Program v. Commissioner, 91 T.C. 258 (1988).4

In McKnight v. Commissioner, T.C. Memo. 1991-514,

suppplemented by 99 T.C. 180 (1992), affd. 7 F.3d 447 (5th Cir.

4
We note that although Harrell v. Commissioner, supra, and Z-
tron Computer Program v. Commissioner, supra, hold that one may
not look behind the returns and Schedules K-1 for purposes of the
same share requirement, each opinion provides a detailed
examination of the partnership agreement and its provisions
regarding the partners' distributive share. Moreover, we
question whether this Court would be able to decide whether a
specific allocation falls within the realm of sec. 704(c) or
"similar principles" without looking to the partnership agreement
or other supporting documents. See sec. 301.6231(a)(1)-1T(a)(3),
Temporary Proced. & Admin. Regs.
 8

1993), the taxpayers moved to dismiss for lack of jurisdiction on

the ground that the Commissioner failed to comply with the TEFRA

provisions of section 6223(a). The Commissioner argued that the

partnership at issue was a small partnership within the meaning

of section 6231(a)(1)(B), and, therefore, the TEFRA provisions do

not apply. As in the instant case, the dispute centered on the

same share requirement. The partnership reported only two items

on its return for the year at issue; ordinary loss and net loss

from self-employment. Because the losses were allocated

according to the loss sharing distribution set forth on the

Schedules K-1, we held that the same share requirement was

satisfied.

The taxpayers in McKnight v. Commissioner, supra, later

filed motions to vacate and for reconsideration of our opinion,

arguing the validity of the same share regulation in that it

conflicts with the intent of Congress in enacting section

6231(a)(1). The taxpayers contended that Congress' intent with

regard to the same share rule under section 6231(a)(1)(B)(i)(II)

was to include in the determination all partnership items defined

in section 301.6231(a)(3)-1(a)(1), Proced. & Admin. Regs, and not

to narrow its scope by application of the same share regulation

of section 301.6231(a)(1)-1T(a)(3), Temporary Proced. & Admin.

Regs., supra.

After reviewing the relevant statues and regulations, and

the legislative history of the same, we observed that:
 9

the regulation at issue is explicit in defining precisely
what partnership items are to be considered in making such a
determination. * * * (i) Items of income, gain, loss,
deduction, or credit of the partnership; (ii) Expenditures
by the partnership not deductible in computing its taxable
income (for example, charitable contributions); (iii) Items
of the partnership which may be tax preference items under
section 57(a) for any partner; [and] (iv) Income of the
partnership exempt from tax; Thus, in defining same share
the regulation disregarded as a partnership item under
section 301.6231(a)(3)-1(a), Proced. & Admin. Regs.,
partnership liabilities; other amounts determinable at the
partnership level with respect to partnership assets,
investments, transactions and operations; guaranteed
payments; optional adjustments to basis of partnership
property pursuant to an election under section 754; and
items relating to contributions to the partnership,
distributions from the partnership, and transactions to
which section 707(a) applies to the extent that it is
determined that the partnership is under an obligation.
Sec. 301.6231(a)(3)-1(a)(1)(v) through (4), Proced. & Admin.
Regs. [Emphasis added.]

McKnight v. Commissioner, 99 T.C. at 184-185.

We stated that the small partnership exception to the TEFRA

provisions "sought to establish that the partnerships which would

realize such exception were those whose members 'treat themselves

as co-ownerships rather than partnerships, as each co-owner

resolves his own tax responsibilities separately as an individual

with the IRS.'" Id. at 185 (quoting Tax Compliance Act of 1982

and Related Legislation: Hearings on H.R. 6300 Before the House

Committee on Ways and Means, 97th Cong., 2d Sess. 259-261

(1982)). Thus, the intent of Congress in establishing the same

share rule of section 6231(a)(1)(B)(i)(II) was to ensure that

only "simple" partnerships would be excepted from the TEFRA

provisions.
 10

With these guidelines in mind, we turn to the facts of the

instant cases. We first consider whether Makalu falls within the

small partnership exception, and, as such, was not subject to the

unified audit and litigation procedures for 1985. During the

taxable years 1985 through 1988, Makalu consisted of two

partners, petitioner and Murray Tucker (Tucker). Each owned .5-

percent share of Makalu as a limited partner, and 49.5-percent

share as a general partner.

Makalu's Form 1065 (partnership return) for 1985 reflects

only one item; an ordinary loss of $50,176. The Schedules K-1 of

petitioner and Tucker, attached to the Form 1065, indicate that

the net loss was allocated to the partners according to the

aforementioned percentages:

Partner Status Percent Ownership Loss Assigned Percent Loss

Petitioner GP .5 $251 .5
Tucker GP .5 251 .5
Petitioner LP 49.5 24,837 49.5
Tucker LP 49.5 24,837 49.5

The Schedules K-1, attached to Forms 1065 for taxable years 1986

through 1988, also reflect a single item of ordinary loss or loss

from rental real estate activities and corresponding allocations.

As we stated in Z-tron Computer Program v. Commissioner,

supra at 263, "An allocation to a partner of a share of

partnership net or 'bottom line' taxable income or loss is an

allocation to such partner of the same share of each item of

income, gain, loss, and deduction that is taken into account in
 11

computing the taxable income or loss. See sec.

1.704-1(b)(1)(vii), Income Tax Regs." Because the return and

Schedules K-1 for Makalu during the relevant periods reflect only

net loss and the partners' distributive share of that loss, the

same share rule, that each partner's share of each partnership

item was the same as his share of every other item available for

distribution during the relevant period, was satisfied.

Petitioners initially contend that Makalu fails to satisfy

the same share requirement in that there is disproportionate

treatment of items due to and including guaranteed payments and

basis adjustments. However, as we clearly stated in McKnight v.

Commissioner, 99 T.C. at 184, such items are not considered

"partnership items" for purposes of the same share requirement.

Petitioners appear to concede this position in their posttrial

briefs, and, in the alternative, argue that the disproportionate

allocations of the partners' capital accounts is sufficient to

place Makalu outside the scope of section 6231(a)(1)(B).

In McKnight v. Commissioner, 99 T.C. at 186, we agreed with

the Commissioner that "the rationale for limiting the partnership

items applicable to the same share rule was to ensure that only

items [having] a direct taxable impact on the partners, i.e.,

items flowing through to the partners from the partnership under

subtitle A, be analyzed." We further agreed that "items that are

consistently exclusive to a partner would not eliminate the

availability of the small partnership exception." Id.
 12

Therefore, contributions to and distributions from the

partnership, and, as such, reconciliation of a partner's capital

account, are not weighed for purposes of the same share

requirement.

We next consider whether Westco falls within the small

partnership exception, thereby excusing respondent from issuing

an FPAA with respect to that partnership for the 1985 taxable

year. Westco was formed in February 1979 and originally

consisted of four partners: Bill Bruce, Donald Ham (Ham), Michael

O'Daniels, and petitioner. As of 1985, only petitioner and Ham

remained partners, petitioner having purchased the other

partners' interests. Because, like Makalu, Westco clearly had 10

or fewer partners during the relevant period, the dispute again

centers upon whether the same share requirement is satisfied.

The record is unclear as to the percentage of Westco that

was owned by petitioner during 1985. Despite petitioner's having

prepared Westco's partnership returns and Schedules K-1 for each

of the years it was in existence, he was unable to testify as to

his ownership interest in Westco or his distributive share of the

partnership's profits and losses. Westco's Form 1065 for 1985

reflects a net ordinary loss of $3,252. The loss was allocated

to the partners and reflected on the Schedules K-1 as follows:

Partner Status Income(Loss) Assigned Percent of Loss

Petitioner GP ($3,563) 1.09
Ham GP 311 (.09)
 13

Citing Z-tron Computer Program v. Commissioner, supra,

respondent maintains that the same share requirement is satisfied

in that only one partnership item, the net loss or income, is

reported on each of the Schedules K-1. Petitioners respond that

two partnership items exist on each Schedule K-1; the net loss or

income and the amounts in Line F (Reconciliation of partner's

capital account), item (e) (losses not included in column (c),

plus unallowable deductions). In Line F, item (e) of the

Schedules K-1, petitioner was allocated a loss of $6,125 and Ham

was allocated a loss of $3063. Petitioners argue that these

allocations are disproportionate with respect to the allocations

of the net loss or income.

As we explained, changes to a partner's capital account are

in and of themselves immaterial to the determination of the same

share requirement except to the extent an item is itself an item

enumerated in section 301.6231(a)(1)-1T(a)(1), Temporary Proced.

& Admin. Regs., supra. Because Westco's partnership return and

the Schedules K-1 attached thereto do not reflect any of the

items listed in the regulations other than net income and loss,

which are allocated to the partners elsewhere on the Schedules K-

1, we are unable to conclude that the amounts in Line F, item

(e), are determinative items for purposes of the same share

requirement.

In light of this conclusion, we need not address whether the

amounts in item (e) reflect an allocation under section 704(c) or
 14

rules similar to. We note, however, that based on the record, if

item (e) were found to represent a partnership item for purposes

of the same share requirement, the allocations thereof on

Westco's 1985 partnership return and attached Schedules K-1 would

fall within the scope of section 704(c) or rules similar to and

would not have affected the availability of the small partnership

exception.5

Based on the foregoing, we conclude that Westco and Makalu

are excepted from the partnership audit and litigation provisions

of TEFRA for the taxable years at issue pursuant to the small

partnership exception of section 6231(a)(1)(B), and, as a result,

respondent was not required to issue FPAA's with respect to the

partnerships within the statutory periods. Accordingly, we deny

petitioners' motions to dismiss for lack of jurisdiction.

During the hearing on this matter, petitioners orally

requested that, in the event that respondent prevails and

5
The Schedules K-1 attached to Westco's 1985 return reflect
the following reconciliation of the partners' capital accounts:
Petitioner Ham

(a) Capital account at beginning of year $191,955 $93,161
(b) Capital contributions during year 59,591 -0-
(c) Ordinary income/loss (3,563) 311
(d) Income not included in column (c) -0- -0-
plus nontaxable income
(e) Loss not included in column (c) (6,125) (3,063)
plus unallowable deductions
(f) Withdrawals and distributions 241,858 90,409
(g) Capital account at end of year -0- -0-
 15

petitioners' motions are denied, the issues be certified for an

interlocutory appeal pursuant to section 7482(a)(2) and Rule

193.6 Petitioners did not file a written pleading detailing the

grounds for this motion, nor did they address the matter in their

posttrial briefs. Because petitioners failed to satisfy the

criteria outlined in section 7482(a)(2), and under the reasoning

of Eastern States Casualty Agency v. Commissioner, T.C. Memo.

1991-559, we deny petitioners' oral request.

An appropriate order

will be issued.

6
This Court may certify an interlocutory order for an
immediate appeal if we conclude that (1) a controlling question
of law is involved, (2) with respect to which there is a
substantial ground for difference of opinion, and (3) an
immediate appeal from the order may materially advance the
ultimate termination of the litigation. Sec. 7482(a)(2)(A); Rule
193. If any one of the three requirements is not satisfied, the
taxpayer's request for certification must be denied. Kovens v.
Commissioner, 91 T.C. 74, 77 (1988), affd. without published
opinion 933 F.2d 1071 (11th Cir. 1991).