Heckler v. Commissioner

T.C. Memo. 1996-521

UNITED STATES TAX COURT

MICHAEL J. HECKLER, A.K.A. MICHAEL VONHECKLER AND
CHARLOTTE A. MISKA, Petitioners v. COMMISSIONER
OF INTERNAL REVENUE, Respondent

Docket No. 26742-95. Filed November 26, 1996.

Michael J. VonHeckler, pro se.

Joanne E. Johnson and William C. Sabin, Jr., for respondent.

MEMORANDUM OPINION

PANUTHOS, Chief Special Trial Judge: This matter is before

the Court on petitioner Michael VonHeckler's Motion to Restrain

Assessment and Collection and respondent's Motion to Dismiss for

Lack of Jurisdiction and to Strike the Claims Relating to the
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Increased Interest Pursuant to Former I.R.C. Section 6621(c).1

The issues raised by the parties' motions involve the scope of

the Court's jurisdiction in a so-called affected items

proceeding.

Background

During 1986, Michael VonHeckler (petitioner) was a limited

partner in a partnership known as Irving & Co. On their 1986

income tax return, petitioners reported a loss in the amount of

$15,432 representing their distributive share of a $183,184 loss

reported by Irving & Co. on its partnership return for 1986.

In early 1990, respondent issued a notice of deficiency to

petitioners determining a deficiency in, and additions to, their

Federal income tax for 1986. The deficiency was based on

respondent's determination disallowing Schedule C expenses and

itemized deductions (nonpartnership items) that petitioners

reported on their 1986 return. Petitioners filed a petition with

this Court, assigned docket No. 11547-90, seeking a

redetermination of the deficiency and additions to tax. On May

14, 1991, the Court entered a stipulated decision in docket No.

11547-90 that states that petitioners are liable for a deficiency

in tax in the amount of $1,747 for 1986. The decision further

states that petitioners are not liable for additions to tax under

1
Unless otherwise noted, all section references are to the
Internal Revenue Code as amended. All Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 3 -

sections 6653(a)(1)(A) and (B) or 6661 for that year. The

stipulated decision includes the parties' stipulation that the

deficiency in tax was computed on the assumption that petitioners

correctly reported Irving & Co. partnership items on their 1986

tax return and that adjustments to petitioners' tax liability for

1986 relating to their investment in Irving & Co. would be

resolved in separate partnership level proceedings. The final

paragraph of the stipulation states that, upon entry of decision,

petitioners waive the restriction contained in section 6213(a)

prohibiting assessment and collection of the deficiency and

statutory interest until the decision of the Court is final.

On July 11, 1991, petitioners paid $1,747 to respondent in

satisfaction of the deficiency stipulated to in docket No. 11547-

90. Further, on July 18, 1991, petitioners paid $976.38 to

respondent in satisfaction of the interest due on the deficiency.

The latter payment resulted in an overpayment of $17.41, which

respondent credited to petitioners' tax liability for 1988

pursuant to section 6402(a).

On April 16, 1993, petitioner, acting as tax matters partner

for Irving & Co., filed a timely petition for readjustment with

the Court, assigned docket No. 7530-93, seeking readjustment of

items set forth in a notice of final partnership administrative

adjustment (FPAA) issued to Irving & Co. for its taxable year

1986. On September 12, 1994, the Court entered a decision
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sustaining respondent's disallowance of the ordinary loss

reported on the partnership's 1986 return.

As a result of the entry of decision in docket No. 7530-93,

respondent issued a notice to petitioners stating that respondent

was changing petitioners' account for 1986 to reflect the

following: (1) Entry of an assessment for tax in the amount of

$6,054 reflecting the computational adjustment attributable to

the disallowance of petitioner's distributive share of the

ordinary loss reported by Irving & Co., and (2) entry of an

assessment in the amount of $8,692.79 for interest computed at

the increased rate prescribed in section 6621(c) due from

petitioners on the tax deficiency of $6,054. (The notice

indicates that the assessment in the amount of $6,054 was offset

by petitioners' advance payment of that amount on July 20, 1994.)

On October 2, 1995, respondent issued a so-called affected

items notice of deficiency to petitioners for 1986. In

particular, respondent determined that petitioners are liable for

an addition to tax under section 6653(a)(1)(A) in the amount of

$303, an addition to tax under section 6653(a)(1)(B) equal to 50

percent of the interest due on $6,054, and an addition to tax

under section 6661 in the amount of $1,514, attributable to the

tax deficiency arising from the disallowance of petitioner's

distributive share of Irving & Co. partnership items.
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On December 26, 1995, petitioners filed a petition for

redetermination with the Court. The petition includes

allegations that the amount in dispute is $8,692.79, that

petitioners paid the tax on July 18, 1994, and that respondent

computed the interest incorrectly.

On February 20, 1996, petitioners paid $3,240.60 which

respondent applied against the $8,692.79 assessment for section

6621(c) interest that respondent assessed against petitioners on

October 23, 1995.

On June 24, 1996, petitioner filed a Motion to Restrain

Assessment and Collection attaching thereto a notice of intent to

levy which respondent issued to petitioners on June 10, 1996,

demanding payment in the amount of $5,926.35 for the taxable year

1986.

Petitioner's motion was called for hearing in Washington,

D.C., on August 28, 1996. Counsel for respondent appeared at the

hearing and was granted leave to file an objection to

petitioner's motion. Although petitioner did not appear at the

hearing, he did file three written statements with the Court

pursuant to Rule 50(c).2 Reading petitioner's written statements

together, petitioner contends that the $3,240.60 that petitioners

2
After the hearing, petitioner filed a response to
respondent's memorandum of law in support of respondent's
objection to petitioner's motion to restrain assessment and
collection.
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paid on February 20, 1996, represents the full amount of the

interest due on the tax deficiency of $6,054 computed from April

15, 1987 (the due date of petitioners' 1986 tax return) to March

18, 1991 (the date that petitioners executed a waiver of

restrictions as to assessment and collection in docket No. 11547-

90).

During the hearing on this matter, respondent asserted that

the $5,926.35 amount listed as due in the notice of intent to

levy dated June 10, 1996, represents the balance due from

petitioners for interest computed at the increased rate

prescribed in section 6621(c) after taking into the account the

$3,240.60 that petitioners paid on February 20, 1996. Respondent

argued that such interest was properly assessed and that the

Court lacks jurisdiction to consider the matter in this case.

By order dated August 30, 1996, respondent was directed to

file a memorandum addressing the jurisdictional matters discussed

at the hearing, including whether the Court has the authority to

consider petitioners' liability for interest computed at the

increased rate prescribed in section 6621(c) pursuant to the

Court's authority to determine an overpayment under section

6512(b). Barton v. Commissioner, 97 T.C. 548 (1991). In

addition, petitioner was given the opportunity to file a response

to respondent's objection and/or file a memorandum addressing the

scope of the Court's jurisdiction in this proceeding.
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On September 20, 1996, petitioner filed a response to

respondent's objection. Petitioner contends that respondent

erroneously assessed interest computed at the increased rate

prescribed in section 6621(c) on the ground that it violates--

the stipulation of Docket # 11547-90, paragraph (g),
which waived the restriction of assessment for the
TEFRA partnership, paragraph (f), and invokes the
suspension of interest per I.R.C. 6601(c).

On October 15, 1996, respondent filed a Motion to Dismiss

for Lack of Jurisdiction and to Strike the Claims Relating to the

Increased Interest Pursuant to Former I.R.C. Section 6621(c),

along with a supporting memorandum. Specifically, relying on

White v. Commissioner, 95 T.C. 209 (1990), and Odend'hal v.

Commissioner, 95 T.C. 617 (1990), respondent contends that, in a

case based upon an affected items notice of deficiency which

pertains solely to additions to tax, this Court lacks the

authority, in the exercise of its jurisdiction to redetermine a

deficiency, to consider a taxpayer's liability for interest

computed at the increased rate prescribed in section 6621(c).

Respondent further contends that petitioners have not overpaid

the interest in dispute (whether such interest is computed at the

normal rate prescribed in section 6621(a)(2) or the increased

rate prescribed in section 6621(c)), and, therefore, the Court

lacks jurisdiction to determine an overpayment under section

6512(b). See Barton v. Commissioner, supra; Greene v.

Commissioner, T.C. Memo. 1995-105. In support of the latter
 - 8 -

contention, respondent submitted separate schedules setting forth

respondent's computations of the interest due from petitioners

and respondent's application of the payments received from

petitioners as of August 28, 1996. The latter schedule indicates

that, notwithstanding petitioners' payment of $3,240.60 on

February 20, 1996, petitioners still owe interest in the amount

of $3,755.35 for 1986 computed at the normal rate prescribed in

section 6621(a)(2), and $6,106.15 if such interest is computed at

the increased rate prescribed in section 6621(c).3

Discussion

The tax treatment of any partnership item generally is

determined at the partnership level pursuant to the unified audit

and litigation procedures set forth in sections 6221 through

6233. Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),

Pub. L. 97-248, sec. 402(a), 96 Stat. 648. The TEFRA procedures

3
We note that the schedule setting forth respondent's
application of payments received from petitioners varies slightly
from the description of the application of those payments
contained in respondent's objection to petitioner's Motion to
Restrain Assessment and Collection. In particular, respondent's
objection states that the $976.38 that petitioners paid on July
18, 1991, was applied to offset $958.97 in interest due on the
deficiency of $1,747 entered against petitioners in docket No.
11547-90, with a $17.41 credit being applied against petitioners'
tax liability for 1988. In contrast, the schedule suggests that
the $958.97 amount was applied against the $6,054 in tax assessed
against petitioners as a computational adjustment to reflect the
disallowance of Irving & Co. partnership items. Although it
appears that respondent's objection contains a correct statement
of the application of the payment, we observe that the
discrepancy would not compromise respondent's assertion that
petitioners have not overpaid interest in this case.
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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.

Affected items are defined in section 6231(a)(5) as any item

to the extent such item is affected by a partnership item. White

v. Commissioner, supra at 211. 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 deficiency notice. 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

upon factual determinations to be made at the individual 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 those affected items which require partner

level determinations. The additions to tax for negligence are
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affected items requiring factual determinations at the individual

partner level. N.C.F. Energy Partners v. Commissioner, supra at

745.

With the foregoing as background, we turn first to

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

Strike. Respondent asserts that, under the circumstances

presented, the Court lacks jurisdiction, either under its

authority to redetermine a deficiency or under its authority to

determine an overpayment, to consider petitioners' liability for

interest imposed at the increased rate provided under section

6621(c).

Interest computed at the increased rate provided under

section 6621(c) is imposed on a substantial underpayment of tax

that is attributable to a tax-motivated transaction.4 Because

the application of section 6621(c) turns on elements that are

specific to an individual partner, it follows that such interest

is correctly characterized as an affected item that cannot be

4
Sec. 6621(c) provides for interest at 120 percent of the
normal rate provided under sec. 6601. Sec. 6621(c) is applicable
solely with respect to interest accruing after Dec. 31, 1984,
even though the transaction was entered into prior to the date of
enactment of sec. 6621(c). Solowiejczyk v. Commissioner, 85 T.C.
552 (1985), affd. without published opinion 795 F.2d 1005 (2d
Cir. 1986). Sec. 6621(c) was repealed by sec. 7721(b) of the
Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103
Stat. 2106, 2399, effective with respect to returns the due date
for which is after Dec. 31, 1989.
 - 11 -

reviewed in partnership level proceedings. N.C.F. Energy

Partners v. Commissioner, supra at 745.

However, as explained in White v. Commissioner, 95 T.C. at

212-214, an individual partner's liability for section 6621(c)

interest normally cannot be raised in a so-called affected items

proceeding. In White, the Commissioner issued a notice of

deficiency to the taxpayers solely for additions to tax after the

underlying tax deficiency was assessed as a computational

adjustment following the conclusion of partnership level

proceedings. When the taxpayers filed a petition contesting the

additions to tax as well as their liability for additional

interest under section 6621(c), the Commissioner responded by

filing a motion to dismiss for lack of jurisdiction as to the

additional interest.

In granting the Commissioner's motion to dismiss in White,

we first held, based upon a combined reading of sections 6211(a),

6230(a), and 6601(e)(1), that interest computed at the increased

rate prescribed in section 6621(c)(1) is not a deficiency within

the meaning of section 6211(a). Consistent with this holding, we

rejected the taxpayers' argument that section 6230(a)(2)(A)(i)

provides statutory authority for this Court to redetermine such

interest. Next, we analyzed section 6621(c)(4) and concluded

that our jurisdiction under that provision is limited to

determining only the portion of a deficiency in tax imposed under
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subtitle A that is subject to interest computed at the increased

rate prescribed in section 6621(c)(1). Because the only items in

dispute in White concerned additions to tax, the underlying

deficiency in tax having been previously assessed as a

computational adjustment pursuant to section 6230(a)(1), we held

that section 6621(c)(4) did not provide the Court with

jurisdiction to redetermine the taxpayers' liability for

increased interest under section 6621(c). Accord Odend'hal v.

Commissioner, 95 T.C. 617 (1990).

As in White v. Commissioner, supra, respondent issued a

notice of deficiency to petitioners solely for additions to tax

after assessing the underlying tax deficiency as a computational

adjustment following the conclusion of the Irving & Co.

partnership level proceedings. Consistent with White v.

Commissioner, supra, it follows that we lack jurisdiction in this

deficiency proceeding to redetermine petitioners' liability for

interest computed at the increased rate prescribed in section

6621(c).

We likewise agree with respondent that, under the

circumstances presented, we do not have the authority to consider

petitioners' liability for interest computed at the increased

rate prescribed in section 6621(c) by virtue of our jurisdiction

to determine an overpayment under section 6512(b). In short, the

record shows that, despite petitioners' payment of $3,240.60 on
 - 13 -

February 20, 1996, petitioners have not overpaid the interest due

on the $6,054 tax deficiency that respondent assessed as a

computational adjustment on October 23, 1995, regardless of

whether such interest is computed under the normal rate

prescribed in section 6621(a)(2) or under the increased rate

prescribed in section 6621(c). See Greene v. Commissioner, T.C.

Memo. 1995-105.

Petitioner's contention that the $3,240.60 paid on February

20, 1996, represents the full amount of the interest due on the

tax deficiency of $6,054 is incorrect. Petitioner's argument is

based on the erroneous assumption that the interest due on the

deficiency of $6,054, arising from the disallowance of his

distributive share of the loss reported by Irving & Co., is

computed from April 15, 1987 (the due date of petitioners' 1986

tax return) to March 18, 1991 (the date that petitioners executed

a waiver of restrictions as to assessment and collection in

docket No. 11547-90). To the contrary, the stipulated decision

entered in docket No. 11547-90, and the waiver of restrictions on

assessment and collection which petitioners executed in

connection with that decision, concerned adjustments to

petitioners' 1986 tax liability wholly independent of the

partnership adjustments underlying the instant proceeding. In

this light, it is evident that the waiver does not toll the
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interest accruing as the result of adjustments to petitioner's

distributive share of Irving & Co. partnership items.

Consistent with the preceding discussion, we hold that our

jurisdiction in this case is limited to redetermining

petitioners' liability for the additions to tax set forth in the

affected items notice of deficiency, and that we lack

jurisdiction to consider petitioners' liability for interest

computed at the increased rate prescribed in section 6621(c).

Consequently, we shall grant respondent's Motion to Dismiss for

Lack of Jurisdiction and to Strike the Claims Relating to the

Increased Interest Pursuant to Former I.R.C. Section 6621(c).

We shall deny petitioner's Motion to Restrain Assessment and

Collection. Section 6213(a) provides that this Court may enjoin

respondent's collection efforts if respondent is attempting to

collect amounts that have been placed in dispute in a timely

filed petition for redetermination. Powerstein v. Commissioner,

99 T.C. 466, 471-472 (1992); Powell v. Commissioner, 96 T.C. 707,

711 (1991). Having resolved that we lack jurisdiction over the

section 6621(c) interest which respondent assessed following the

conclusion of the Irving & Co. partnership level proceedings, it

is evident that petitioner's Motion to Restrain Assessment and

Collection, which is directed at that assessment, must be denied.

Simply stated, respondent is not attempting to collect amounts
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which are properly before us in this proceeding. See Powell v.

Commissioner, supra.

To reflect the foregoing,

An order will be issued

granting respondent's Motion to

Dismiss for Lack of Jurisdiction

and to Strike the Claims Relating

to the Increased Interest Pursuant

to Former I.R.C. Section 6621(c)

and denying petitioner's Motion to

Restrain Assessment and Collection.