T.C. Memo. 2009-112
UNITED STATES TAX COURT
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17108-08. Filed May 21, 2009.
Roger J. Jones, Kim Marie K. Boylan, Andrew R. Roberson, and
Sarah S. Sandusky, for petitioner.
Daniel A. Rosen, for respondent.
MEMORANDUM OPINION
KROUPA, Judge: This partner-level matter is before the
Court on respondent’s motion to dismiss for lack of jurisdiction.
Respondent issued a deficiency notice determining a $5,832,629
deficiency in petitioner’s Federal income tax for 2002, a
$318,554 deficiency for 2003, and a $26,623,226 deficiency for
2004 (the deficiency notice). Respondent also determined
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accuracy-related penalties under section 66621 of $2,333,052 for
2002, $127,422 for 2003, and $10,649,290 for 2004. The
deficiencies and penalties flow from determinations in a notice
of final partnership administrative adjustment for tax years
1999-1 and 1999-22 (the FPAA) issued to Wilmington Partners LP
(Wilmington).
The parties agree that the deficiency notice adjusts only
partnership items or affected items related to Wilmington and
that the partnership-level proceeding contesting the
determinations in the FPAA (Wilmington partnership proceeding)
has not concluded. Petitioner argues, however, that the
deficiency notice is valid because the FPAA adjusts only 1993
partnership items and no FPAA was issued for 1993. The sole
issue for decision is whether the deficiency notice is invalid
because it determines deficiencies and penalties that flow from
the FPAA and the ongoing Wilmington partnership proceeding has
not been resolved. We hold that the deficiency notice is invalid
and we do not have jurisdiction to redetermine the deficiency.
We shall therefore grant respondent’s motion.
1
All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
2
Wilmington undertook restructuring transactions in 1999
that caused it to treat itself as terminated under sec.
708(b)(1)(B) on June 4, 1999. Accordingly, Wilmington treated
itself as having two separate tax years and filed two partnership
returns for 1999.
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Background
The facts we recite are uncontested facts admitted in the
petition, respondent’s motion, petitioner’s objection to
respondent’s motion and the supporting memorandum, or the
exhibits attached to these documents.
Petitioner is a corporation, with its principal place of
business in Rochester, New York. It is the common parent of an
affiliated group that filed a consolidated return of income for
1999. A member of this group, petitioner’s wholly owned
subsidiary B&L International Holdings Corp. (BLIHC), was the
majority partner of Wilmington until 1999. The deficiencies
determined in the deficiency notice resulted from respondent’s
disallowance of carryforward losses related to BLIHC’s sale of
its interest in Wilmington and correlative adjustments to credits
and alternative minimum tax. Petitioner timely filed a petition
to redetermine the adjustments in this deficiency notice.
Respondent filed a motion to dismiss for lack of jurisdiction,
and it is this motion that we address.
The adjustments in the deficiency notice stem from a 1993
financing transaction that respondent challenges in disallowing
the carryforward losses. Respondent determined in the FPAA that
BLIHC inflated its basis in Wilmington as a result of the 1993
financing transaction. We now turn to that transaction.
Petitioner engaged in a financing arrangement in 1993 that
created an influx of capital priced like debt to maintain
petitioner’s favorable credit rating. The 1993 financing
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transaction involved BLIHC, four banks, Wilmington, and an
unrelated partnership (Bobcat).
Bobcat contributed approximately $400 million in loan
proceeds for its interest in the partnership. BLIHC contributed
a note (the 1993 Reset Note) and $25 to Wilmington in exchange
for a partnership interest. BLIHC claimed a $550 million basis,
the note’s face value, in the 1993 Reset Note. Several entities
controlled by petitioner also contributed operating businesses
and cash in exchange for partnership interests in Wilmington.
Wilmington continued to hold operational businesses in 1999
when BLIHC sold a portion of its Wilmington interest to an
unrelated party for $199,137,637. Petitioner claimed a
$347,910,187 capital loss related to the sale ($347 million
capital loss) on its 1999 consolidated return. Petitioner
computed this loss using BLIHC’s basis in its sold Wilmington
interest that was attributable, in part, to BLIHC’s $550 million
claimed basis in the 1993 Reset Note. Petitioner also claimed
capital loss carryovers as a result of this sale in taxable years
1998, 2001, 2002, 2003, and 2004.
Respondent issued the FPAA to Wilmington in response to
petitioner’s claimed $347 million capital loss. Respondent made
several determinations in the FPAA including a determination that
the 1993 Reset Note had a zero basis at the time it was
contributed to Wilmington. Wilmington’s tax matters partner
(TMP) filed a petition in the Wilmington partnership proceeding
at docket no. 15098-06, which is currently pending.
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Respondent issued a deficiency notice to petitioner for the
taxable years 1998-2001 separate from the deficiency notice at
issue in this case. The determinations in both deficiency
notices arise from respondent’s determination in the FPAA that
BLIHC had a zero basis in the 1993 Reset Note rather than the
$550 million basis claimed. Petitioner filed a petition for
redetermination of the 1998-2001 deficiencies on the ground that
respondent improperly adjusted the basis of the 1993 Reset Note
in 1999, and we granted respondent’s motion to dismiss for lack
of jurisdiction in an unpublished order at docket no. 20958-07
(Bausch & Lomb I) on April 30, 2008. We concluded that the 1998-
2001 deficiency notice was invalid because the determinations in
that deficiency notice all resulted from the determination in the
FPAA that the 1993 Reset Note had a zero basis and the Wilmington
partnership proceeding had not concluded. Petitioner appealed
our order dismissing Bausch & Lomb I to the United States Court
of Appeals for the Second Circuit, and the appeal is pending.
The issue presented in Bausch & Lomb I is identical to the
issue before us now. We shall therefore grant respondent’s
motion for the same reasons as further discussed.
Discussion
We must decide whether a deficiency notice is valid if it
determines deficiencies and penalties that flow from a previously
issued FPAA and the partnership-level case contesting the FPAA’s
determinations has not been resolved. We hold that the
deficiency notice is invalid.
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We begin with our jurisdiction. This Court is a court of
limited jurisdiction, and we may exercise jurisdiction only to
the extent provided by statute. Sec. 7442; GAF Corp. & Subs. v.
Commissioner, 114 T.C. 519, 521 (2000). Our jurisdiction to
redetermine a deficiency in tax depends on a valid deficiency
notice and a timely filed petition. GAF Corp. & Subs. v.
Commissioner, supra at 521. A taxpayer may generally file a
petition for redetermination of a deficiency with this Court
after receiving a deficiency notice. Sec. 6213. Special rules
apply, however, for certain partnerships and their partners.
Partnerships do not pay Federal income tax, but they are
required to file annual information returns reporting the
partners’ distributive shares of income, deductions, and other
tax items. Secs. 701, 6031. The individual partners then report
their distributive shares of the tax items on their Federal
income tax returns. See secs. 701-704. Congress enacted the
unified audit and litigation procedures of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA) to provide consistent
treatment of partnership items among partners in the same
partnership and to ease the substantial administrative burden
that resulted from duplicative audits and litigation. See
Petaluma FX Partners, LLC v. Commissioner, 131 T.C. __, __ (2008)
(slip op. at 10).
The parties acknowledge that the TEFRA rules apply because
the deficiencies arise from BLIHC’s status as a partner in
Wilmington, a TEFRA partnership under section 6231(a).
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Accordingly, we must analyze the jurisdictional issue presented
under the specific TEFRA statutes and the related caselaw.
Under the TEFRA rules, partnership items are determined in
partnership-level proceedings, while nonpartnership items are
determined at the individual partner level. Sec. 6221;
Affiliated Equip. Leasing II v. Commissioner, 97 T.C. 575, 576
(1991). A partnership item is any item required to be taken into
account for the partnership’s taxable year to the extent
regulations specify it is an item more appropriately determined
at the partnership level rather than the partner level. Sec.
6231(a)(3). Partnership-level determinations also impact certain
items of individual partners. These are referred to as affected
items, and their resolution depends on partnership-level
determinations. Sec. 6231(a)(5); Maxwell v. Commissioner, 87
T.C. 783, 792 (1986). Deficiency procedures apply to affected
items that require partner-level determinations. Sec.
6230(a)(2)(A)(i).
This Court does not have jurisdiction, however, to consider
partnership items in a partner-level proceeding resulting from
the issuance of a deficiency notice. Trost v. Commissioner, 95
T.C. 560, 564 (1990). Further, no assessment of a deficiency
attributable to any partnership item may be made until the
partnership-level proceeding is completed. Sec. 6225(a); see GAF
Corp. & Subs. v. Commissioner, supra at 526. Accordingly, a
deficiency notice adjusting affected items is generally invalid
if it is issued before the conclusion of the partnership
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proceeding, and we have no jurisdiction. See GAF Corp. & Subs.
v. Commissioner, supra at 528; Soward v. Commissioner, T.C. Memo.
2006-262.
We now determine whether we have jurisdiction over the
deficiency notice.
Petitioner acknowledges that the Wilmington partnership
proceeding is pending and that the deficiency notice contains
adjustments to partnership items and affected items related to
BLIHC’s basis in the 1993 Reset Note. Petitioner argues,
however, that BLIHC’s basis in the 1993 Reset Note was a
partnership item only in the year of contribution, 1993, and,
therefore, respondent adjusted the basis in the wrong years; i.e.
1999-1 and 1999-2. Petitioner further argues that the deficiency
notice is valid and we have jurisdiction because no FPAA was
issued for the year of contribution. Petitioner attempts to make
a back-door argument that the Court, in determining the validity
of the deficiency notice, is required at the partner level to
answer the substantive question of whether respondent adjusted
BLIHC’s basis in the 1993 Reset Note in the wrong year or years.
We disagree.
Respondent determined in the FPAA that the 1993 Reset Note
had a zero basis at the time BLIHC contributed it to Wilmington.
Each of the adjustments in the deficiency notice flows from this
determination in the FPAA.
A partner’s basis in contributed property is a partnership
item when the partnership needs to make a determination with
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respect to the partner’s basis for purposes of its books and
records, or for purposes of furnishing information to a partner.
Nussdorf v. Commissioner, 129 T.C. 30, 42 (2007); see sec.
301.6231(a)(3)-1(a)(4), (c), Proced. & Admin. Regs. The critical
element is that the partnership needs to make a determination
with respect to the partner’s basis for the purposes stated, and
the partnership’s failure to actually make a determination does
not prevent an item from being a partnership item. See sec.
301.6231(a)(3)-1(c)(1), Proced. & Admin. Regs.
Petitioner provides no authority for the argument that a
partner’s basis in contributed property is a partnership item
only in the year of contribution, and we find none. Partnership
items are defined to include a partner’s basis in contributed
property when a partnership must account for the partnership’s
basis in the contributed property for purposes of its books and
records, or for purposes of furnishing information to a partner.3
Sec. 301.6231(a)(3)-1(c)(2), Proced. & Admin. Regs; see also
Nussdorf v. Commissioner, supra at 44. Accordingly, the
necessary facts are available only at the partnership level to
determine whether the partnership was required to make a
determination with respect to BLIHC’s basis in the 1993 Reset
Note for these purposes.
3
A partnership determines its basis in contributed property
by making a preliminary determination of the partner’s basis in
the property at contribution and then adjusting its basis in the
property where subsequent events require.
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Petitioner’s argument that we must address at the partner
level whether respondent adjusted BLIHC’s basis in the 1993 Reset
Note in the wrong years is misplaced. Petitioner cites several
cases where this Court determined that we had jurisdiction to
redetermine deficiencies attributable to affected items to
support its argument. See Ginsburg v. Commissioner, 127 T.C. 75
(2006); Estate of Quick v. Commissioner, 110 T.C. 172 (1998);
Jenkins v. Commissioner, 102 T.C. 550 (1994); Roberts v.
Commissioner, 94 T.C. 853 (1990); Gustin v. Commissioner, T.C.
Memo. 2002-64. These cases are inapposite as no FPAAs were
issued in these cases and no partnership-level proceedings were
pending. Here, the related Wilmington partnership proceeding is
ongoing, and there Wilmington’s TMP is making the argument that
the Commissioner adjusted BLIHC’s basis in the 1993 Reset Note in
the wrong years.
Further, the cases petitioner cites involved arguments by
taxpayers that we lacked jurisdiction in deficiency proceedings
because the deficiencies were attributable to partnership items
rather than affected items. The Court determined in each case
that the deficiencies were attributable to affected items, but in
doing so determined that the deficiencies were not attributable
to partnership items. These cases do not stand for the
proposition that a partner may make a substantive argument at the
partner level contesting the adjustment of a partnership item in
an FPAA. We decide at the partnership level substantive
arguments challenging whether items related to contributions or
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distributions are actually partnership items. See Dakotah Hills
Offices Ltd. Pship. v. Commissioner, T.C. Memo. 1996-35.
Petitioner’s substantive argument that BLIHC’s basis in the
1993 Reset Note was adjusted in an improper year does not provide
jurisdiction, where none exists, to determine a partnership item
in a partner-level case. This Court may exercise jurisdiction
only to the extent expressly provided by statute, and it may not
enlarge upon that statutory jurisdiction. See sec. 7442; Breman
v. Commissioner, 66 T.C. 61, 66 (1976); see also Rule 13.
Further, the remaining determinations in the deficiency
notice depend on the resolution of BLIHC’s basis in the 1993
Reset Note. These determinations are affected items that cannot
be litigated now but must wait until the Wilmington partnership
proceeding is finalized. See GAF Corp. & Subs. v. Commissioner,
114 T.C. 519 (2000); N.C.F. Energy Partners v. Commissioner, 89
T.C. 741, 743-744 (1987).
We conclude that respondent improperly issued the deficiency
notice determining petitioner’s deficiencies and penalties
related to BLIHC’s basis in the 1993 Reset Note before the
decision of this Court has become final in the ongoing Wilmington
partnership proceeding. See GAF Corp. & Subs. v. Commissioner,
supra at 521, 528; Maxwell v. Commissioner, 87 T.C. at 788.
Accordingly, we hold that the deficiency notice is invalid and
there is no jurisdictional basis upon which the Court may
consider the adjustments in this case.
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To reflect the foregoing,
An order of dismissal for
lack of jurisdiction will be
entered.