Olson v. Commissioner

T.C. Memo. 1996-384

UNITED STATES TAX COURT

ROBERT C. OLSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22213-94. Filed August 20, 1996.

Larry D. Harvey, for petitioner.

David P. Monson, for respondent.

MEMORANDUM OPINION

ARMEN, Special Trial Judge: This matter is before the Court

on respondent's Motion to Dismiss for Lack of Jurisdiction and to

Strike Partnership Items (respondent's Motion to Dismiss). The

issue raised by respondent's Motion to Dismiss involves the scope

of this Court's jurisdiction in a so-called affected items

proceeding involving additions to tax for negligence and

substantial understatement of income tax.
 - 2 -

Background

Some of the facts have been stipulated, and they are so

found.

In 1982, petitioner was a partner with a 1.2374-percent

interest in a partnership known as Computer Graphics Partners,

Ltd. Pacific (Computer Graphics). On his income tax return for

1982, petitioner deducted his distributive share of the loss

claimed by Computer Graphics on its partnership return for that

year.

Computer Graphics was formed after September 3, 1982.

Accordingly, the examination of Computer Graphics' 1982 taxable

year was required to be made, and was in fact made, pursuant to

the unified partnership audit and litigation procedures set forth

in sections 6221 through 6231.1 Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a),

96 Stat. 324, 648.

The Partnership Proceeding

In January 1985, and pursuant to section 6223(a)(1),

respondent mailed petitioner a notice of beginning of

administrative proceeding (NBAP) regarding the examination of

Computer Graphics' partnership return for 1982. Pursuant to

1
Unless otherwise indicated, all section, subchapter, and
chapter references in this Opinion are to the Internal Revenue
Code, as amended.
 - 3 -

section 6223(c)(1), respondent mailed the NBAP to petitioner at

the address set forth on Schedule K-1 of the partnership return.

On March 23, 1988, and pursuant to section 6223(a)(2),

respondent mailed a notice of final partnership administrative

adjustment (FPAA) to Computer Graphics' tax matters partner (TMP)

regarding the partnership's 1982 taxable year. Approximately one

month later, on April 18, 1988, and pursuant to section

6223(a)(2) and (d)(2), respondent mailed a copy of the FPAA to

petitioner.

The FPAA that was sent to petitioner was mailed to him at

1445 E. Irish Lane, Littleton, Colorado 80122 (the Irish Lane

address). Petitioner resided at the Irish Lane address on April

18, 1988, and continued to reside there at least through

September 26, 1995.

In August 1988, a petition for readjustment of partnership

items was filed in response to the FPAA that respondent had

previously issued in respect of Computer Graphics' 1982 taxable

year. The petition, which was assigned docket No. 21062-88, was

filed by a partner other than petitioner, and it served to

commence a partnership level proceeding (the partnership

proceeding).

In September 1992, respondent filed a motion to dismiss for

failure to properly prosecute and a motion for appointment of tax

matters partner in the partnership proceeding. Subsequently, in
 - 4 -

December 1992, the Court issued an Order to Show Cause (the show

cause order) directing petitioner, and all other nonsettling

partners of Computer Graphics, to show cause why the partnership

proceeding should not be dismissed for failure to properly

prosecute. The preamble of the show cause order stated as

follows:

pursuant to our order * * *, respondent provided the
Court with a list of the names and addresses of all
nonparticipating partners in the above partnership who
have not entered into settlement agreements and will
therefore be affected by the outcome of this case.

In order to protect the interests of these
partners with respect to their right to be informed
both about these proceedings in general, the existence
of settlement offers, and the existence of pending
motions to dismiss for lack of jurisdiction, respondent
asked the Court to designate a new tax matters partner
(TMP) pursuant to Tax Court Rule 250(b). However,
respondent was unable to suggest the name of any
partner to serve as TMP inasmuch as respondent has
settled with all participating partners, and the
remaining partners to whom this order is addressed have
not answered their letters from respondent. Mail
addressed to the existing TMP is being returned and his
whereabouts are no longer known.

A copy of the show cause order was served on petitioner at

his Irish Lane address. Petitioner did not respond to the show

cause order.

On June 10, 1993, the Court entered an Order and Order of

Dismissal and Decision (the final order) in the partnership

proceeding. The final order dismissed the partnership proceeding

and sustained respondent's adjustments as determined in the FPAA.

Further, the final order revealed that, as of June 10, 1993, all
 - 5 -

but two of the participating partners (see Rule 247(b)) had

entered into settlement agreements with respondent. The final

order was served on petitioner at his Irish Lane address.

Petitioner did not respond to the final order.

On August 29, 1994, a computational adjustment was assessed

against petitioner. The computational adjustment was made to

record the change in petitioner's tax liability resulting from

the Court's final order dismissing the partnership proceeding and

sustaining the partnership items relating to Computer Graphics

for 1982. See sec. 6226(h).

The Affected Items Proceeding

On August 26, 1994, respondent mailed petitioner a notice of

deficiency in which she determined that, for 1982, petitioner was

liable for (1) additions to tax for negligence under sections

6653(a)(1) and 6653(a)(2), and (2) an addition to tax for a

substantial understatement of income tax under section 6661.

These additions to tax are affected items because they are based

on tax owing by petitioner as a result of adjustments to

partnership items appearing on Computer Graphics' partnership

return for 1982. The affected items notice of deficiency was

mailed to petitioner at his Irish Lane address.

Petitioner timely filed a petition for redetermination with

respect to the affected items notice of deficiency. The petition

appears to place in dispute not only the additions to tax
 - 6 -

determined in the notice of deficiency, but also the

computational adjustment assessed by respondent in respect of

petitioner's share of Computer Graphics' partnership items for

1982.

As previously indicated, respondent has filed a Motion to

Dismiss. In such motion, respondent moves to dismiss for lack of

jurisdiction, and to strike, such portion of the petition that

relates to adjustments "from or to" Computer Graphics for 1982.

In this regard, respondent contends that the Court's jurisdiction

in the present case is limited to redetermining the additions to

tax for 1982 as determined by respondent in the affected items

notice of deficiency.

Petitioner filed an objection to respondent's Motion to

Dismiss. In his objection, petitioner alleged: (1) He did not

receive an FPAA and was therefore not adequately notified of the

underlying partnership proceeding pursuant to section 6223(a);

(2) any FPAA mailed to him should be considered ineffective

because he had health problems rendering him unable to comprehend

such a notice; and (3) the additions to tax determined by

respondent must be assessed consistent with settlement agreements

previously offered by respondent to other partners of Computer

Graphics.

Respondent was directed to file a response to petitioner's

objections setting forth the basis upon which she relied to show
 - 7 -

that she complied with the notice requirements set forth in

section 6223(a). Respondent complied with this directive, and

the parties ultimately stipulated to many of the facts and

documents set forth in respondent's response. Specifically, the

parties stipulated that respondent mailed petitioner an NBAP and

an FPAA in respect of respondent's examination of Computer

Graphics' 1982 taxable year.

Discussion

In general, the tax treatment of any partnership item is

determined at the partnership level pursuant to the unified audit

and litigation procedures set forth in sections 6221 through

6231. TEFRA sec. 402(a), 96 Stat. 648. The TEFRA procedures

apply with respect to all taxable years of a partnership

beginning after September 3, 1982. Sparks v. Commissioner, 87

T.C. 1279, 1284 (1986); Maxwell v. Commissioner, 87 T.C. 783, 789

(1986). Partnership items include each partner's proportionate

share of the 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.

An affected item is defined in section 6231(a)(5) as any

item to the extent that such item is affected by a partnership

item. White v. Commissioner, 95 T.C. 209, 211 (1990). There are

two types of affected items. Id.
 - 8 -

The first type of affected item is a computational

adjustment made to record the change in a partner's tax liability

resulting from the proper treatment of partnership items. Sec.

6231(a)(6); White v. Commissioner, supra. Once partnership level

proceedings are completed, respondent is permitted to assess a

computational adjustment against a partner without issuing a

notice of deficiency. Sec. 6230(a)(1); N.C.F. Energy Partners v.

Commissioner, 89 T.C. 741, 744 (1987); Maxwell v. Commissioner,

supra at 792 n.9. The computational adjustment that respondent

assessed against petitioner on August 29, 1994, was the

underpayment of income tax attributable to the disallowance of

petitioner's proportionate share of the loss claimed by Computer

Graphics on its partnership return.

The second type of affected item is one that depends on

factual determinations to be made at the partner level. N.C.F.

Energy Partners v. Commissioner, supra at 744. Section

6230(a)(2)(A)(i) provides that the normal deficiency procedures

apply to affected items that require determinations at the

partner level. The additions to tax for negligence and

substantial understatement of income tax are examples of such

affected items.

The Court may not adjudicate computational adjustments in an

affected items proceeding. Bradley v. Commissioner, 100 T.C.

367, 371 (1993); Saso v. Commissioner, 93 T.C. 730, 734 (1989);
 - 9 -

Maxwell v. Commissioner, supra at 788; Palmer v. Commissioner,

T.C. Memo. 1992-352, affd. without published opinion 4 F.3d 1000

(11th Cir. 1993). Indeed, we have expressly held that we lack

jurisdiction to consider computational adjustments in a

subsequent deficiency proceeding to redetermine additions to tax.

In his petition and his objection to respondent's Motion to

Dismiss, petitioner contends that the FPAA mailed to him pursuant

to section 6223(a)(2) and (d)(2) should be considered ineffective

notice of the partnership proceeding because his poor health

precluded him from comprehending such notice. In this regard,

petitioner alleged that he was depressed, that he was developing

ulcerative colitis, and that he almost died. However, petitioner

never presented any evidence regarding the state of his health at

the time that the FPAA was mailed to him in April 1988.

Petitioner has therefore failed to establish the factual

predicate necessary to any consideration of his legal argument.2

Further, in his petition, petitioner alleged that respondent

erred in assessing the tax attributable to petitioner's

partnership items. Petitioner subsequently clarified his

position and recognized that this Court does not have

2
In the context of the deficiency procedures prescribed in
subch. B of ch. 63, the analog of an FPAA is a notice of
deficiency. We note that, as a general rule, a notice of
deficiency is legally sufficient if it is mailed to a taxpayer at
the taxpayer's last known address, even if the taxpayer is under
a legal disability or incompetent. Sec. 6212(b)(1); Mulvania v.
Commissioner, 81 T.C. 65, 67-68 (1983).
 - 10 -

jurisdiction over partnership items in an affected items

proceeding. However, petitioner contends that, for purposes of

computing the additions to tax for negligence and substantial

understatement of income tax, the underpayment amount (i.e., the

amount of the computational adjustment assessed on August 29,

1994) should be less than the amount reflected in the affected

items notice of deficiency.3

Specifically, petitioner alleges that he did not receive

notice of settlement agreements between respondent and other

partners of Computer Graphics in which respondent allegedly

reduced the amount of the underpayment with respect to which

additions to tax are calculated. From this, petitioner concludes

that he should be entitled to reduce the amount of the

underpayment as stated in the affected items notice of deficiency

for purposes of calculating the additions to tax determined in

such notice.

Respondent contends that this Court lacks jurisdiction to

reduce the amount of the underpayment; i.e., the computational

adjustment, in an affected items proceeding. We agree with

respondent.

3
The additions to tax for negligence under sec. 6653(a)(1)
and (2), as well as the addition to tax for substantial
understatement of income tax under sec. 6661, are predicated on
an underpayment of tax. In other words, the amount of such
additions is directly related to the amount of an underpayment of
tax.
 - 11 -

As previously mentioned, this Court has no jurisdiction to

consider challenges to computational adjustments in an affected

items proceeding. Bradley v. Commissioner, supra; Saso v.

Commissioner, supra; Maxwell v. Commissioner, supra; Palmer v.

Commissioner, supra. In the instant case, petitioner is directly

challenging the computational adjustment made pursuant to the

dismissal of the partnership proceeding, albeit for purposes of

computing the additions to tax for negligence and substantial

understatement of income tax.4 Nevertheless, the fact remains

that petitioner would have us review a computational adjustment

in an affected items proceeding. This we may not do, even for

the limited purpose advocated by petitioner, because it would

necessarily require us, contrary to the statutory scheme of the

unified partnership audit and litigation provisions, to determine

partnership items in an affected items proceeding.

Petitioner's remaining contentions do not merit any

discussion other than to note that the validity of a properly

mailed FPAA is not contingent on actual receipt by a notice

partner. Crowell v. Commissioner, 102 T.C. 683, 692 (1994).

In order to reflect the foregoing,

4
It should be recalled that the computation of each of the
additions to tax at issue in this case takes into account the
amount of the underpayment of tax, see supra note 3, and that it
is the underpayment of tax that respondent assessed as the
computational adjustment at the conclusion of the partnership
proceeding.
- 12 -

An order granting respondent's

Motion to Dismiss for Lack of

Jurisdiction and to Strike

Partnership Items will be issued.