T.C. Memo. 2006-262
UNITED STATES TAX COURT
DAVID SOWARD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15652-05. Filed December 11, 2006.
Martin A. Schainbaum and Esther W. Chang, for petitioner.
Gerald A. Thorpe and Paul R. Zamolo, for respondent.
MEMORANDUM OPINION
COHEN, Judge: This case is before us on respondent’s motion
to dismiss for lack of jurisdiction on the ground that the notice
of deficiency is invalid and prohibited by section 6225. Unless
otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue.
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Background
Petitioner resided in San Francisco, California, at the time
that he filed his petition.
A Notice of Final Partnership Administrative Adjustment
(FPAA) was issued by respondent for the tax year ended
November 22, 1999, with respect to Alverstone Strategic
Investment Fund, L.L.C. (Alverstone SIF), on December 17, 2004.
Because Alverstone SIF is a purported partnership with more than
10 partners and its first taxable year commenced after
September 3, 1982, it is subject to the unified audit and
litigation procedures of sections 6221-6234 (commonly known as
TEFRA). The validity of the partnership is a matter of dispute
between the parties. The use of terms in this opinion, for
purposes of the pending motion, does not express any view on the
validity of any of the entities mentioned. See Oceanic Leasing
v. Commissioner, T.C. Memo. 1996-458; see also sec. 6233; sec.
301.6233-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6795
(Mar. 5, 1987).
Voltaire L.L.C. (Voltaire) is a notice partner of Alverstone
SIF within the meaning of section 6231(a)(8) because Voltaire
held an interest in Alverstone SIF during 1999. Therefore, a
copy of the FPAA was sent to and received by Voltaire.
A petition was filed with respect to the FPAA by Presidio
Growth, L.L.C. (Presidio), tax matters partner of Alverstone SIF,
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in Sixty-Three Strategic Inv. Funds v. United States, at Case No.
3:05-cv-01123-VRW, in the U.S. District Court for the Northern
District of California, San Francisco, on March 17, 2005
(District Court case). Petitioner, on behalf of Voltaire, filed
a petition with respect to the FPAA in the Tax Court on May 13,
2005, titled Alverstone Strategic Inv. Fund, L.L.C., Voltaire
L.L.C., A Partner Other Than the Tax Matters Partner v.
Commissioner (docket No. 8753-05).
The Government filed a motion to dismiss for lack of
jurisdiction in the District Court case. Presidio filed a notice
of election to intervene and a motion to dismiss for lack of
jurisdiction in the Tax Court case at docket No. 8753-05 on
January 17, 2006. The District Court case has been stayed until
at least January 16, 2007, because of the pendency of a criminal
tax case in the District Court for the Southern District of New
York involving certain principals of Presidio. The Tax Court
case at docket No. 8753-05 has been held in abeyance pending
resolution of the related District Court litigation.
A statutory notice of deficiency with respect to his 1999
tax year was sent to petitioner on June 27, 2005. Respondent
determined a deficiency of $1,714,353 for that year. In the
notice of deficiency, respondent made adjustments to petitioner’s
income as follows:
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1.a. PER RETURN PER EXAM ADJUSTMENT
Capital Gain $857,501 $870,420 $12,919
or Loss
A. It is determined that cash distributions you
received as a result of the liquidation of the interest
owned by Voltaire Trust and/or Ampersand Management
Company Inc. (hereinafter “Ampersand”) through Voltaire
LLC in Alverstone Strategic Investment Fund LLC
(hereinafter “SIF LLC (Partnership)”) during the
taxable year from the SIF LLC (Partnership), exceeded
your basis by the amount of $9,462. This results in a
short-term capital gain. * * *
B. We have adjusted your flow through net capital loss
from the SIF LLC (Partnership). * * *
* * * * * * *
C. Alternatively, you have failed to establish that
your losses meet the requirements of the IRC,
including, but not limited to, IRC §§ 165 and 465.
1.b. PER RETURN PER EXAM ADJUSTMENT
Itemized 406,003 130,284 275,719
Deductions
We have adjusted your itemized deductions * * *.
Overall Limitation: An individual whose adjusted gross
income exceeds a threshold amount must reduce the
amount of allowable itemized deductions by three
percent of the excess over the threshold amount. The
1999 threshold is $126,600 for filing status head of
household.
Investment Interest Expense from SIF LLC (Partnership):
Interest expense claimed in the amount of $119,240 for
the taxable year December 31, 1999 did not meet the
requirements for deduction under the Internal Revenue
Code * * *
* * * * * * *
Miscellaneous Itemized Deductions: Certain expenses
deducted as miscellaneous itemized deductions are only
deductible to the extent that they exceed a percentage
of your adjusted gross income. Since we have made
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other changes in this report which affect your adjusted
gross income, we have also adjusted these expenses.
* * *
1.c PER EXAM PER RETURN ADJUSTMENT
Interest Income $12,646 $0 $12,646
Earned by Voltaire
LLC
Interest income from Deutsche Bank earned by Voltaire
LLC is taxable to you per IRC 61(a)(4). * * *
1.d PER EXAM PER RETURN ADJUSTMENT
Ordinary Income $4,648,164 $744,975 $3,903,189
(Loss) from Ampersand
Management Company,
Inc, Schedule K-1,
Line 1
We have adjusted your net gain (or loss) from the sale
or exchange of assets shown on Ampersand Management
Company Inc (Form 1120S), as shown in the accompanying
computation:
Amount Realized Basis Gain/Loss Gain/Loss Adjustment
per Exam per Exam per Exam per Return
A Sale of 3,219 0 3,219 (3,899,970) 3,903,189
Euros
* * *
You have not established your basis in the Euros sold,
and in any asset you received from SIF LLC
(Partnership). * * *
A. It is determined that the ordinary loss for the
taxable year from the sale of Euros that you received
as a result of the liquidation of the interest owned by
The Taxpayer, the Voltaire Trust, Ampersand and/or
Voltaire LLC in SIF LLC (Partnership) is disallowed
because you overstated your basis in the asset[s] sold
in the amount of $3,903,189. * * *
* * * * * * *
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1.e PER EXAM PER RETURN ADJUSTMENT
Other Income (loss) $0 ($26,992) $26,992
from Ampersand
Management Company
Inc, Schedule K-1,
Line 6
SIF LLC (Partnership) losses claimed by you for the
Hong Kong dollar forward contract, Argentine peso
forward contract and Japanese Yen option in the amount
of $26,992 for the taxable year did not meet the
requirements for deduction under the IRC, including but
not limited to section 165 and 465. * * *
1.f PER EXAM PER RETURN ADJUSTMENT
Other Deductions $0 ($107,250) $107,250
from Ampersand
Management Company
Inc, Schedule K-1,
Line 10 - Management Fee
1.g PER EXAM PER RETURN ADJUSTMENT
Other Deductions $0 ($25,732) $25,732
from Ampersand
Management Company
Inc, Schedule K-1,
Line 10 - Loan Breakage Fee
1.h PER EXAM PER RETURN ADJUSTMENT
Other Deductions $0 ($2,644) $2,644
from Ampersand
Management Company
Inc, Schedule K-1,
Line 10 - Guaranteed Payment
1.i PER EXAM PER RETURN ADJUSTMENT
Other Deductions $0 ($9,601) $9,601
from Ampersand
Management Company
Inc, Schedule K-1,
Line 10 - Bank Fee
The * * * items were treated as reductions to your
basis in assets distributed to you by SIF LLC
(Partnership). * * * Since these expenses did not
meet the requirements for a deduction under the IRC
including, but not limited to, the requirements under
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IRC §§ 162, 164, 165, 183, 212, or any other IRC
section, they are not allowed as other deductions.
On August 23, 2005, petitioner filed his petition in
response to the notice of deficiency. On May 30, 2006,
respondent filed a motion to dismiss for lack of jurisdiction on
the ground that the statutory notice of deficiency was invalid
and prohibited by section 6225. Respondent’s position is that
jurisdiction exists in either the District Court case or in
docket No. 8753-05, but not both, and not in this case.
Discussion
The Tax Court is a court of limited jurisdiction, and we may
exercise our jurisdiction only to the extent provided by
Congress. See sec. 7442; see also GAF Corp. & Subs. v.
Commissioner, 114 T.C. 519, 521 (2000). We have jurisdiction to
redetermine a deficiency if a valid notice of deficiency is
issued by the Commissioner and if a timely petition is filed by
the taxpayer. GAF Corp. & Subs. v. Commissioner, supra at 521.
We have jurisdiction in this case only if the notice of
deficiency sent to petitioner was valid.
The partnership-level procedures prescribed in sections 6221
through 6234 require that all challenges to adjustments of
partnership items are to be made in a single unified proceeding.
Under these procedures, the tax treatment of any partnership item
shall be determined at the partnership level. Sec. 6221.
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Under section 6226, the tax matters partner of a partnership
may file a petition for a readjustment of the partnership items
for such taxable year with the Tax Court, the District Court of
the United States for the district in which the partnership’s
principal place of business is located, or the Claims Court (now
Court of Federal Claims), within 90 days after the day on which a
notice of an FPAA is mailed to the tax matters partner. Sec.
6226(a). If the tax matters partner does not file a readjustment
petition under subsection (a) of section 6226 with respect to any
FPAA, any notice partner may, within 60 days after the close of
the 90-day period set forth in subsection (a), file a petition
for a readjustment of the partnership items for the taxable years
involved with any of the courts described in subsection (a).
Sec. 6226(b).
The 90-day period for the tax matters partner to file a
petition in regard to the FPAA issued on December 17, 2004,
expired on March 17, 2005. The 60-day period for the notice
partner to file a petition in regard to the FPAA issued on
December 17, 2004, expired on May 16, 2005. The dates of the
petitions relating to the FPAA fall within the required periods
in which a tax matters partner or a notice partner would need to
file. Sec. 6226(a) and (b). However, the unresolved
jurisdictional issues in those partnership cases are not
determinative of the jurisdictional issue presented in this case.
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Petitioner argues that, in the event the District Court
action is dismissed, this Tax Court action will be the only
viable action under section 6226. He then acknowledges that he
“filed the subject Tax Court petition as a protective measure to
ensure that he is not denied a Due Process forum in which to
contest each of the proposed adjustments to his taxable income”.
Section 6226 pertains to petitions filed in response to an FPAA
issued to a partnership. Therefore, in the event that the
District Court case is dismissed for lack of jurisdiction,
jurisdiction in the Alverstone SIF and Voltaire Tax Court case at
docket No. 8753-05 may survive as a section 6226(b) proceeding
because that petition was filed in response to the FPAA issued on
December 17, 2004. See sec. 6226(b). This case, however, would
not be authorized under section 6226(b) because this case was
filed in response to the notice of deficiency sent to petitioner,
not in response to the FPAA.
The Commissioner generally must wait until a partnership-
level proceeding is over to determine a liability attributable to
a partnership item. See sec. 6225(a); Maxwell v. Commissioner,
87 T.C. 783, 788 (1986). Section 6225(a) states:
SEC. 6225(a). Restriction on Assessment and
Collection.-- Except as otherwise provided in this
subchapter, no assessment of a deficiency attributable
to any partnership item may be made (and no levy or
proceeding in any court for the collection of any such
deficiency may be made, begun, or prosecuted) before--
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(1) the close of the 150th day after the day
on which a notice of a final partnership
administrative adjustment was mailed to the tax
matters partner, and
(2) if a proceeding is begun in the Tax Court
under section 6226 during such 150-day period, the
decision of the court in such proceeding has
become final.
Additionally, the Commissioner generally must follow the
deficiency procedures before assessing a liability related to a
nonpartnership item such as an affected item that requires a
partner-level determination. See sec. 6230(a)(2). Under section
6231(a)(3), (4), and (5), “partnership item”, “nonpartnership
item”, and “affected item” are defined as follows:
(3) * * * 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.
(4) * * * The term “nonpartnership item” means an
item which is (or is treated as) not a partnership
item.
(5) * * * The term “affected item” means any item
to the extent such item is affected by a partnership
item.
Because the tax treatment of affected items depends on
partnership-level determinations, affected items cannot be tried
as part of a partner’s personal tax case until the resolution of
the partnership proceeding. GAF Corp. & Subs. v. Commissioner,
supra at 526 (citing Dubin v. Commissioner, 99 T.C. 325, 328
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(1992)). Thus, the Court does not have jurisdiction to consider
partnership items or affected items while a partnership
proceeding is pending. GAF Corp. & Subs. v. Commissioner, 114
T.C. at 528; Maxwell v. Commissioner, supra at 788.
Petitioner acknowledges that, pursuant to section 6226, “the
Court does not have jurisdiction over disputes regarding
‘partnership items’ and ‘affected items’ as those terms are
defined by * * * [section] 6231(a).” Petitioner then states that
“there has been no determination supporting Respondent’s
allegation that all of the items at issue in the case at bar are
such partnership or partnership affected items”, but he has
provided neither reason nor authority to conclude that any items
in the notice of deficiency are nonpartnership items or are not
affected items requiring partnership-level determinations. The
adjustments made in the notice of deficiency, as quoted above,
are all attributable to adjustments to partnership items or are
affected items, such as miscellaneous itemized deductions that
are deductible only to the extent that they exceed a percentage
of petitioner’s adjusted gross income. See sec. 67(a).
Petitioner claims that dismissal of this case at this time “would
subject Petitioner to the possibility of immediate collection
action without a prior adjudicative hearing.” However,
respondent has conceded, and we hold, that the notice of
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deficiency is invalid. It cannot support assessment or
collection.
The notice of deficiency is invalid under section 6225
because it adjusts partnership items that may not be determined
in a deficiency proceeding. GAF Corp. & Subs. v. Commissioner,
supra at 528; Maxwell v. Commissioner, supra at 789.
Additionally, the notice of deficiency is further prohibited by
section 6225 because it determines affected items, as defined in
section 6231(a)(5), prior to the completion of the related
partnership proceeding. GAF Corp. & Subs. v. Commissioner, supra
at 528. Therefore, there is no jurisdictional basis upon which
the Court may consider the adjustments in this case.
To reflect the foregoing,
An order will be entered
granting respondent’s motion to
dismiss for lack of jurisdiction.