Olson v. Commissioner

T.C. Memo. 1996-385

UNITED STATES TAX COURT

ELIANE OLSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20124-94. Filed August 20, 1996.

Berkley Rasband, 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

issues to be decided are: (1) Whether the affected items notice

of deficiency issued to petitioner is valid; and, if so, (2)

whether this Court has jurisdiction in an affected items
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proceeding to determine whether petitioner is entitled to

innocent spouse relief with respect to partnership items.

Background

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

found.

In 1982, petitioner Eliane Olson (petitioner) was married to

Robert C. Olson (Mr. Olson). Petitioner and Mr. Olson were

divorced in 1984.

From 1982 until at least November 2, 1994, petitioner

resided at 5242 S. Newton Street, Littleton, Colorado (the Newton

Street address). From April 18, 1988 until at least September

26, 1995, Mr. Olson resided at 1445 E. Irish Lane, Littleton,

Colorado (the Irish Lane address). Although the record does not

indicate Mr. Olson's place of residence in 1982 to 1988, it is

clear that he did not reside with petitioner.

Notwithstanding the existence of some marital discord,

petitioner and Mr. Olson filed a joint Federal income tax return

for 1982.

In 1982, Mr. Olson was a partner with a 1.2374-percent

interest in a partnership known as Computer Graphics Partners,

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

1982, petitioner and Mr. Olson deducted Mr. Olson's distributive

share of the loss claimed by Computer Graphics on its partnership

return for that year.
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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.

Petitioner's name and address do not appear on the Schedule

K-1 that was filed with the partnership's return for 1982.

Further, there is no indication on the schedule that petitioner

had any interest in Computer Graphics. Petitioner never provided

any information to the Commissioner pursuant to section 6223(c)

or section 301.6223(c)-1T(b), Temporary Proced. and Admin. Regs.,

52 Fed. Reg. 6784 (Mar. 5, 1987) that she had any interest in

Computer Graphics.

The Partnership Proceeding

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

respondent mailed Mr. Olson a notice of beginning of

administrative proceeding (NBAP) regarding the examination of

Computer Graphics' partnership return for 1982. The NBAP was

addressed to Mr. Olson and was mailed to the address set forth on

Schedule K-1 of the partnership return.

1
Unless otherwise indicated, all section, subchapter, and
chapter references in this Opinion are to the Internal Revenue
Code, as amended.
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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 and Mr. Olson at Mr. Olson's Irish Lane address.

The copy of the FPAA that was sent to petitioner and Mr.

Olson was addressed to "Robert C. and Eliane Olson" because

petitioner and Mr. Olson had filed a joint Federal income tax

return for 1982. By virtue of section 6231(a)(2)(B), petitioner

is deemed to be a partner for purposes of the unified partnership

audit and litigation procedures.2

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 or Mr. Olson, and it

served to commence a partnership level proceeding (the

partnership proceeding).

2
Pursuant to sec. 6231(a)(2)(B), the term "partner"
includes not only a partner in the partnership, but "any other
person whose income tax liability * * * is determined in whole or
in part by taking into account directly or indirectly partnership
items of the partnership." By virtue of sec. 6013(d)(3), the
liability for income tax in respect of a joint return filed by a
husband and wife is joint and several.
 - 5 -

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.

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 respondent determined that, for 1982,

petitioner was liable for additions to tax for negligence under

section 6653(a)(1) and 6653(a)(2) and 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.

Petitioner timely filed a petition for redetermination with

respect to the affected items notice of deficiency. In the

petition, petitioner claims that she is entitled to relief as an
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innocent spouse with respect to both the computational adjustment

relating to the partnership items and the additions to tax.

As previously indicated, respondent has filed a Motion to

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

jurisdiction and to strike those allegations set forth in the

petition that pertain to petitioner's liability for partnership

items for 1982. Respondent does not dispute that petitioner is

entitled to raise the innocent spouse defense as to the additions

to tax determined in the affected items notice of deficiency.

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
 - 7 -

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

two types of affected items. Id.

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 second type of affected item is one that is dependent 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 at issue in this case 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 (1989);

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

T.C. Memo. 1992-352, affd. without published opinion 4 F.3d 1000
 - 8 -

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

jurisdiction to consider computational adjustments in a

subsequent affected items proceeding to redetermine additions to

tax. However, in Crowell v. Commissioner, 102 T.C. 683 (1994),

we held that a taxpayer could challenge the validity of the

affected items notice of deficiency on the ground that respondent

failed to properly notify the taxpayer partner of the underlying

partnership level proceeding.
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Validity of the Affected Items Notice of Deficiency

Section 6223(a) generally requires that the Commissioner

mail each partner, whose name and address is furnished to the

Commissioner, notice of: (1) The beginning of an administrative

partnership proceeding, and (2) the final partnership

administrative adjustment resulting from that proceeding. To

comply with section 6223(a), the Commissioner is required to use

the names, addresses, and profits interests of the partners shown

on the partnership return for the taxable year in issue, as

modified by any additional information supplied in accordance

with applicable regulations. Sec. 6223(c); Triangle Investors

Ltd. Partnership v. Commissioner, 95 T.C. 610, 613 (1990); sec.

301.6223(c)-1T(f), Temporary Proced. & Admin. Regs., 52 Fed. Reg.

6784 (Mar. 5, 1987).

Supplementing the general provisions in section 6223(a),

section 301.6231(a)(2)-1T(a)(3), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987), provides that "a spouse

who files a joint return with an individual holding a separate

interest in [a] partnership shall be treated as receiving any

notice received by the individual holding the separate interest."

This rule of constructive notice does not apply, however, if the

spouse without a separate partnership interest is identified on

the partnership return or has furnished information to the

Commissioner with respect to his or her indirect interest in the
 - 10 -

partnership. Sec. 301.6231(a)(2)-1T(a)(3)(ii)(A) and (B),

Temporary Proced. & Admin. Regs.; sec. 301.6223(c)-1T(b), Proced.

& Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987).

Petitioner contends that she was deprived of notice that the

partnership action had been commenced because she was living at

the Newton Street address on the date that the FPAA was mailed to

Mr. Olson at the Irish Lane address. Further, petitioner claims

that she and Mr. Olson had a very strained relationship and that

he did not inform her that he had received the FPAA.

We think that it is clear from our findings of fact that

respondent properly notified petitioner of the Computer Graphics'

partnership proceeding for the 1982 taxable year. Petitioner is

treated as though she was a partner in Computer Graphics because

she filed a joint return with Mr. Olson, who held a separate

interest in Computer Graphics for 1982. Therefore, under the

circumstances herein, any notice of the partnership proceeding

that was properly provided to Mr. Olson is deemed to have been

properly provided to petitioner. Sec. 301.6231(a)(2)-

1T(a)(3)(i), Temporary Proced. & Admin. Regs. Respondent

properly notified Mr. Olson of the partnership proceeding by

mailing a copy of the FPAA to Mr. Olson at his current address as

of April 18, 1988; i.e., the Irish Lane address.

If Mr. Olson did not inform petitioner of the partnership

proceeding, it is unfortunate. But, as much as we may sympathize
 - 11 -

with petitioner, the fact remains that respondent complied with

the statutory requirements in notifying Mr. Olson about the

Computer Graphics' partnership proceeding and, thus, is deemed to

have properly notified petitioner of such proceeding.

Because petitioner was properly notified of the partnership

level proceeding regarding Computer Graphics, we hold that the

affected items notice of deficiency is valid as to her.

Jurisdiction Regarding the Innocent Spouse Defense

In her petition, petitioner claims that she is entitled to

innocent spouse relief under section 6013(e) with respect to not

only the additions to tax determined in the affected items notice

of deficiency, but also the computational adjustment that

respondent assessed against her on August 29, 1994.

Respondent acknowledges that petitioner is entitled to raise

the innocent spouse defense with respect to the additions to tax

determined in the affected items notice of deficiency. However,

respondent contends that this Court lacks jurisdiction in an

affected items proceeding to consider the innocent spouse defense

with respect to a computational adjustment. We agree with

respondent.

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.
 - 12 -

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

challenging the computational adjustment made pursuant to the

dismissal of the partnership proceeding by asserting that she is

not liable for the computational adjustment. However, petitioner

has already been held liable for such adjustment by virtue of the

dismissal of the partnership proceeding, which dismissal served

to sustain respondent's disallowance of the partnership items

relating to Computer Graphics for 1982. It follows that we may

not review petitioner's liability for the computational

adjustment in the present proceeding.

Viewing the matter from a slightly different perspective, it

is apparent that the provisions of section 6013(e) relieving a

spouse of liability in certain cases represent a defense to

liability. In the present case, petitioner's liability for tax

in respect of partnership items has already been determined.

Accordingly, we are without jurisdiction in an affected items

proceeding to reconsider petitioner's liability for such tax.

See Greene v. Commissioner, T.C. Memo. 1995-105 (period of

limitations for assessing a computational adjustment is a defense

to liability for such adjustment; such defense may therefore not

be asserted in an affected items proceeding); English v.

Commissioner, T.C. Memo. 1990-662 ("In a proceeding by an

individual partner based upon determinations of his tax liability

at the partner level, we have no power to deal with any question
 - 13 -

relating to the validity of, or defense against any adjustments

set forth in, the FPAA, even though the determination against the

individual partner is an 'affected item', i.e., affected by a

partnership item.").

In view of the foregoing, we hold that to the extent that

petitioner is seeking relief from liability for the computational

adjustment attributable to partnership items, the Court lacks

jurisdiction to consider her claim.3 See Mann-Howard v.

Commissioner, T.C. Memo. 1992-537; see also Carmel v.

Commissioner, 98 T.C. 265 (1992).

Conclusion

In order to reflect the foregoing,

An order granting respondent's

Motion to Dismiss for Lack of

Jurisdiction and to Strike

Partnership Items will be issued.

3
At the hearing and on brief, respondent's counsel
represented that it is generally the Commissioner's practice to
consider administratively a taxpayer's claim that the taxpayer is
entitled to innocent spouse relief with respect to a
computational adjustment at the same time that such claim is
considered with respect to the affected items (such as additions
to tax) that are the subject of a petition for redetermination.
Respondent's counsel also represented that if the innocent spouse
issue is litigated, it is generally the Commissioner's practice
to abate the tax assessed pursuant to the computational
adjustment if the Court decides that the taxpayer is entitled to
innocent spouse relief with respect to affected items.