T.C. Memo. 2002-64
UNITED STATES TAX COURT
BARRY GUSTIN AND CAROLINA GUSTIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5192-01. Filed March 7, 2002.
R disallowed certain losses claimed by Ps from
various partnerships in tax years 1997, 1998, and 1999.
R determined that P-H’s basis in each of the
partnerships was limited to P-H’s cash contributions,
which did not include P-H’s contributions of
subscription notes. R applied sec. 704(d), I.R.C., and
disallowed losses which exceeded P-H’s adjusted bases
in the partnerships.
The partnerships involved are subject to the
unified partnership procedures contained in secs. 6221-
6234, I.R.C. R has begun a partnership-level
examination of two partnerships for which Ps claimed
losses in 1998 and 1999. However, R did not initiate a
partnership-level examination of the partnership for
which Ps claimed a loss in 1997. The normal period of
limitations for making partnership-level adjustments
regarding 1997 expired, and R agrees that he is bound
by the partnership’s treatment of partnership items.
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Ps filed a motion to dismiss for lack of
jurisdiction. Ps argue that a notice of deficiency
which adjusts items affected by partnership items is
invalid if it is issued before the completion of
partnership-level proceedings. R concedes that we lack
jurisdiction over the 1998 and 1999 taxable years. See
Maxwell v. Commissioner, 87 T.C. 783 (1986).
Held: The Tax Court has jurisdiction to
redetermine the deficiency for 1997. Partnership-level
proceedings were not initiated, a notice of final
partnership administrative adjustment was not issued by
R, and the 3-year period of limitations for assessment
under sec. 6229(a), I.R.C., expired. R acknowledges
that he cannot pursue a deficiency based on
partnership-level adjustments for tax year 1997. As a
result, the parties must accept the partnership-level
treatment of partnership items. Roberts v.
Commissioner, 94 T.C. 853 (1990). However, P-H’s basis
in the partnership, while affected by partnership
items, is not itself a partnership item. See Dial USA,
Inc. v. Commissioner, 95 T.C. 1 (1990).
Donald L. Feurzeig, for petitioners.
G. Michelle Ferreira, for respondent.
MEMORANDUM OPINION
RUWE, Judge: The matter before the Court is petitioners’
motion to dismiss for lack of jurisdiction under Rule 53.1
Respondent determined deficiencies with respect to petitioners’
Federal income taxes for 1997, 1998, and 1999. Those
deficiencies were based on respondent’s determination that
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code applicable to the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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petitioners’ deductions of partnership losses were limited to
petitioners’ bases in the partnerships. On the basis of our
opinion in Maxwell v. Commissioner, 87 T.C. 783 (1986),
respondent concedes that we lack jurisdiction over petitioners’
1998 and 1999 tax years because ongoing partnership-level
proceedings, see secs. 6221-6234, have not been completed with
respect to partnerships that gave rise to deficiencies for those
years. The issue remaining for decision is whether we have
jurisdiction to redetermine a deficiency for petitioners’ 1997
tax year. Petitioners resided in Berkeley, California, at the
time they filed their petition.
In 1997, Mr. Gustin invested in a partnership called Annona
Venture (Annona). He made a cash contribution of $50,000 and
also contributed a recourse subscription note of $157,800. Mr.
Gustin was a general partner in Annona.
The 1997 partnership return filed by Annona included a
Schedule K-1, Partner’s Share of Income, Credits, Deductions,
etc., which reported items relating to Mr. Gustin. Line F of the
Schedule K-1 entitled “Partner’s share of liabilities” contains
no entry. Line J entitled “Analysis of partner’s capital
account” shows “Capital contributed during year” by Mr. Gustin of
$193,800. The Schedule K-1 shows Mr. Gustin’s share of losses as
$189,138. Petitioners deducted that amount on their Form 1040,
U.S. Individual Income Tax Return, for 1997.
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On March 1, 2001, respondent issued a notice of deficiency
to petitioners for their 1997 tax year. Respondent determined
that Mr. Gustin’s adjusted basis in Annona was $36,000 and
disallowed loss deductions from Annona that were claimed on
petitioners’ Form 1040 to the extent those deductions exceeded
$36,000. See sec. 704(d). The section 6229(a) period of
limitations for making adjustments to Annona partnership items
expired on April 15, 2001, after the notice of deficiency was
issued. Petitioners filed their petition on April 19, 2001.
Annona was subject to the unified partnership procedures of
sections 6221-6234, but respondent did not conduct a partnership-
level examination of Annona’s 1997 partnership return.
Respondent acknowledges that a notice of final partnership
administrative adjustment (FPAA) will not be issued for Annona
and that there will be no adjustments to any partnership items of
Annona for 1997.
The unified partnership procedures were added to the Code as
part of the Tax Equity and Fiscal Responsibility Act of 1982,
Pub. L. 97-248, sec. 401(a), 96 Stat. 648.2 Under those
procedures, the tax treatment of items of partnership income,
loss, deductions, and credits is determined in partnership-level
proceedings rather than in separate proceedings involving the
2
The unified partnership procedures have been amended since
their effective date of Sept. 3, 1982, and those procedures are
now contained in secs. 6221 through 6234.
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partners. Sec. 6221; H. Conf. Rept. 97-760, at 599 (1982), 1982-
2 C.B. 600, 662.3 Under section 6223(a), the Secretary shall
mail to each partner notice of the beginning of an administrative
proceeding at the partnership level, as well as an FPAA resulting
from any such proceeding. A tax matters partner may, within 90
days after the date the FPAA is mailed, file a petition for the
readjustment of partnership items with the Tax Court, a District
Court, or the Claims Court. Sec. 6226(a). If a petition is
filed, the court has jurisdiction over all partnership items for
the year to which the FPAA relates, as well as the proper
allocation of those items among the partners. Sec. 6226(f).
Petitioners argue that we lack jurisdiction over the
deficiency in this case, because an FPAA has not been issued and
a partnership-level proceeding has not been completed for
Annona’s 1997 tax year. Petitioners claim that the notice of
deficiency is invalid and that we cannot review, as part of our
normal deficiency procedures, adjustments respondent made to Mr.
Gustin’s basis in Annona nor respondent’s disallowance of losses
3
See Roberts v. Commissioner, 94 T.C. 853, 859-860 (1990):
The purpose behind the enactment of section 6221 et
seq. was to have one proceeding to determine all of the
partnerships items with respect to a partnership. All
of the partners would be eligible participants in such
a proceeding, and the results of that proceeding would
then be automatically applied to each of the partner’s
returns without the necessity of further deficiency
procedures.
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under section 704(d). Respondent argues that a partnership-level
proceeding was not required to determine Mr. Gustin’s basis and
to apply the loss limitations. Respondent states that he does
not intend to issue an FPAA, that he can no longer make
adjustments to partnership items for Annona’s 1997 tax year, that
he accepts the partnership’s treatment of partnership items, and
that partnership-level proceedings are completed when he accepts
the partnership’s treatment of partnership items without
adjustment.
The instant case is similar to Roberts v. Commissioner, 94
T.C. 853 (1990). In Roberts, the Commissioner did not commence a
partnership-level examination, did not issue an FPAA, and did not
otherwise seek to adjust the partnership items reported on the
partnerships’ returns. The notice of deficiency was issued on
April 9, 1987, disallowing partnership losses claimed by the
taxpayers because of alleged stop-loss agreements with third
parties. See sec. 465(b)(4). On April 15, 1987, the period of
limitations for assessing a tax attributable to any partnership
item under section 6229(a) expired. On July 6, 1987, the
taxpayers filed their petition and then filed a motion to dismiss
for lack of jurisdiction.
In Roberts v. Commissioner, supra at 861-862, we held that
side agreements for purposes of the section 465 at-risk
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provisions were not partnership items4 but were affected items.5
We observed that determination of affected items must await “the
outcome of the partnership proceeding” but held that we had
jurisdiction in that case, stating:
However, the “outcome of the partnership
proceeding” may be acceptance of the partnership return
as filed as a result of the fact that there was no
partnership proceeding and there can no longer be a
partnership proceeding under the normal statute of
limitations. We do not read section 6230(a)(2)(A)(i)
to mean that a partnership proceeding must be opened
and closed in order for there to be a determination
with regard to an affected item. We also find no
requirement in the statute or regulations that
prohibits affected items from being considered in a
proceeding involving a personal tax case, providing
subject matter jurisdiction exists. [Id. at 860-861.]
Petitioners direct us to our more recent opinion in Katz v.
Commissioner, 116 T.C. 5, 8-9 (2001), in which we stated:
4
See sec. 6231(a)(3), which provides:
SEC. 6231(a). Definitions.--For purposes of this
subchapter--
* * * * * * *
(3) Partnership item.--The term “partnership
item” means, with respect to a partnership, any
item required to be taken into account for the
partnership’s taxable year under any provision of
subtitle A to the extent regulations prescribed by
the Secretary provide that, for purposes of this
subtitle, such item is more appropriately
determined at the partnership level than at the
partner level.
5
See sec. 6231(a)(5), which provides: “The term ‘affected
item’ means any item to the extent such item is affected by a
partnership item.”
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a notice of deficiency issued prior to the completion
of the partnership-level proceeding is invalid to the
extent it relates to a partnership item or an affected
item.
No FPAA was issued by respondent and no
partnership-level proceedings have been commenced
regarding the prepetition partnership losses in the
present case. Accordingly, if the NOL carryovers at
issue constitute affected items as petitioners contend,
we must grant the motion to dismiss on the basis that
the notice of deficiency is invalid as it relates to
those items. * * * [Citation omitted.]
The language cited by petitioners was unnecessary for the
disposition of that case and should be viewed in its context. In
Katz v. Commissioner, supra at 10, we stated the issue as
follows:
whether the manner in which partnership items are
allocated between a partner in bankruptcy and the
partner’s bankruptcy estate is a determination which,
pursuant to the TEFRA procedures, must be made at the
partnership level. We therefore shall determine our
jurisdiction based on the resolution of this latter
issue.
We held:
The manner in which the distributive share of a partner
in bankruptcy is allocated between the partner and the
bankruptcy estate is not a “partnership item” under
sec. 6231(a)(3), I.R.C. Accordingly, such allocation
need not be resolved in a partnership-level proceeding
pursuant to the uniform audit and litigation procedures
of secs. 6221-6234, I.R.C. * * * [Id. at 5.]
Our holding in Katz did not depend on the status of the NOL
carryover as an “affected item”, and we did not make a
determination that the NOL carryovers were not affected items.
However, since the Commissioner was not challenging the
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allocation of partnership-level losses among partners, i.e., a
partnership item, but was instead challenging the suballocation
of that item between a partner and his bankruptcy estate, i.e.,
an affected item, it follows that we exercised jurisdiction to
redetermine a deficiency attributable to an affected item, even
though an FPAA had not been issued and partnership-level
proceedings were not initiated. Therefore, the jurisdictional
holding in Katz supports rather than contradicts the position
taken by this Court in Roberts v. Commissioner, supra.
In GAF Corp. & Subs. v. Commissioner, 114 T.C. 519, 528
(2000), we granted the taxpayer’s motion to dismiss for lack of
jurisdiction. We concluded that a notice of deficiency is
invalid where it is based on affected items and is issued before
the completion of the related partnership-level proceedings. In
that case, an FPAA was issued which proposed partnership
adjustments, and a partnership-level proceeding had been
initiated and was pending in the Tax Court. A notice of
deficiency was issued on the same date as the FPAA, see Rhone-
Poulenc Surfactants v. Commissioner, 114 T.C. 533, 536 (2000),
and before the partnership-level proceedings were completed.
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In the instant case, an FPAA was not issued and partnership-
level proceedings were not initiated. Respondent has not
proposed any adjustments to partnership items and agrees that he
is bound by the partnership’s determinations of partnership
items. Under those circumstances, the outcome at the partnership
level is acceptance of the partnership’s treatment of its
partnership items, and a notice of deficiency regarding affected
items can be the basis for our jurisdiction. See Roberts v.
Commissioner, 94 T.C. 853 (1990).
The seminal case in this area is Maxwell v. Commissioner, 87
T.C. 783 (1986). In Maxwell, the potential for a duplication of
procedures prompted this Court to limit our jurisdiction over the
deficiencies relating to affected items: “Affected items depend
on partnership level determinations, cannot be tried as part of
the personal tax case, and must await the outcome of the
partnership proceeding.” Id. at 792. We have previously
considered this language and have appropriately declined to
afford it an interpretation that is broader than what was
required for the disposition of the jurisdictional issue in that
case:
Petitioners rely on our statement in Maxwell that
“Affected items depend on partnership level
determinations, [and] cannot be tried as part of the
personal tax case, and must await the outcome of a
partnership proceeding.” Maxwell v. Commissioner,
supra at 792. Petitioners have taken that statement
out of context. In Maxwell, respondent had determined
deficiencies and additions to tax by disallowing
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certain claimed partnership losses. At the time of the
issuance of the notice of deficiency, however, a
partnership proceeding had been commenced, but no FPAA
had as yet been issued. Under those circumstances, the
additions to tax were affected items and had to await
the outcome of the partnership proceeding. They could
not be determined as part of the personal income tax
case. [Roberts v. Commissioner, supra at 860.]
Thus, Maxwell is distinguishable from this case because here
there are no partnership-level proceedings underway, and
respondent has accepted the partnership’s treatment of
partnership items.
In Jenkins v. Commissioner, 102 T.C. 550, 553 (1994), we
stated:
Generally, respondent is prohibited from assessing a
deficiency regarding a partnership item without first
attempting to adjust the item in a partnership level
proceeding and issuing a notice of final partnership
administrative adjustment (FPAA). Sec. 6225(a). Once
the partnership level proceeding is complete, or if no
partnership level proceeding is necessary, then a
partner’s individual income tax for the related tax
period can be affected by the partnership item which
was reported and/or adjusted at the partnership level.
* * * [Emphasis added.]
We decided that partnership-level proceedings were not required
because the Commissioner was “not questioning the treatment of
the partnership item at the partnership level”, and because the
deficiency related to an affected item reported on the taxpayers’
return which is within the subject matter jurisdiction of this
Court in a partner’s deficiency proceeding. Id. at 556. We also
observed: “Respondent * * * may accept the partnership’s
characterization of the item and only question the position of a
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partner, without the superfluous step of conducting a partnership
proceeding”. Id. at 557.
A partner’s basis in his partnership interest is an affected
item. Sec. 301.6231(a)(5)-1T(b), Temporary Proced. & Admin.
Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987). Our normal deficiency
procedures apply to “any deficiency attributable to * * *
affected items which require partner level determinations”. Sec.
6230(a)(2)(A)(i). Since a partner’s basis in a partnership
interest may require determinations at the partner level,
deficiencies attributable to adjustments to basis must be made at
the partner level. See Dial USA, Inc. v. Commissioner, 95 T.C.
1, 5-6 (1990).
In the notice of deficiency, respondent determined: “Since
your distributive share of the partnership loss is limited to the
extent of your adjusted basis, we have disallowed the amount in
excess of your basis [$36,000], as shown.” Respondent’s
determination is based on an adjustment to Mr. Gustin’s basis in
his partnership interest, an affected item. Mr. Gustin’s
partnership loss is affected by partnership items; however, basis
is not itself a partnership item and can be the appropriate
subject of deficiency proceedings.
In this case, respondent acknowledges that he cannot make an
adjustment to a partnership item, and he accepts the partnership
return as filed. The treatment of partnership items on Annona’s
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1997 partnership return is final and binding on both respondent
and petitioners. However, that does not present itself as a
jurisdictional issue where, as here, the only adjustments stated
are to affected items.6
We hold that the notice of deficiency based on affected
items is valid where an administrative partnership-level
proceeding has not been initiated and respondent is bound by the
partnership’s treatment of partnership items. We hold that we
have jurisdiction to redetermine the deficiency for petitioners’
1997 tax year.
An appropriate order
will be issued.
6
Petitioners contend that the determination of basis will
require an examination of Annona’s books and records and that
this involves a determination of partnership items, which
requires partnership-level proceedings. We rejected the same
argument in Roberts v. Commissioner, 94 T.C. at 862, stating:
Nothing in the TEFRA partnership provisions indicates
that we cannot analyze documents and records at the
partnership level in a deficiency proceeding. We lack
jurisdiction only to redetermine partnership items that
the partnership was required to take into account at
the partnership level. Sec. 6231(a)(3). In the
absence of a partnership proceeding, those matters are
considered final at the partnership level. * * *
[Emphasis added; fn. ref. omitted.]