Wilmington Partners L.P. v. Comm'r

T.C. Memo. 2009-193

UNITED STATES TAX COURT

WILMINGTON PARTNERS L.P., WILMINGTON MANAGEMENT CORP.,
TAX MATTERS PARTNER, Petitioner v. COMMISSIONER
OF INTERNAL REVENUE, Respondent

Docket No. 15098-06. Filed August 26, 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 case is a partnership-level proceeding

subject to the Tax Equity and Fiscal Responsibility Act of 1982

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

at issue is Wilmington Partners, L.P. (Wilmington). The years at
 - 2 -

issue are two short taxable years that Wilmington reported for

1999 (respectively, 1999-1 and 1999-2).

Respondent issued Wilmington a notice of final partnership

administrative adjustment (1999 FPAA) for the subject years.1

The 1999 FPAA determined that the basis of a note (1993 Reset

Note) that Wilmington received as a contribution in 1993 was zero

rather than $550 million as Wilmington reported for each subject

year. The 1999 FPAA determined no other adjustment for 1999-1.

The 1999 FPAA determined other adjustments for 1999-2.

The Court previously decided in an unpublished order that

respondent may not assess as to 1999-2 any income tax related to

Wilmington because the applicable limitations period had expired.

The Court stated that Bakersfield Energy Partners, LP v.

Commissioner, 128 T.C. 203 (2007), affd. 568 F.3d 767 (9th Cir.

2009), controlled our decision, and the Court rejected the

Commissioner’s invitation to overrule Bakersfield. Petitioner

now moves to dismiss this case for lack of jurisdiction.

Petitioner argues that the basis adjustment cannot be made

in either year because respondent has not issued Wilmington an

FPAA for 1993; i.e., the year in which the 1993 Reset Note was

contributed to Wilmington. Petitioner concludes that the 1999

FPAA is invalid (and the Court lacks jurisdiction) because all

1
The relevant portions of the 1999 FPAA are contained in an
appendix.
 - 3 -

adjustments in the 1999 FPAA stem from the basis adjustment.

Petitioner argues alternatively that the Court lacks jurisdiction

over 1999-1 because the 1999 FPAA does not adjust any partnership

item that subtitle A required Wilmington to take into account for

1999-1.2

We disagree. We hold that the 1999 FPAA is valid and that

we have jurisdiction over each year. We shall deny petitioner’s

motion to dismiss.

Background

I. Preface

We derive the facts set forth in this background section

from the pleadings and from the parties’ motion papers. We treat

the facts as true solely for purposes of deciding petitioner’s

motion, not as findings of fact for this case. Cf. Samueli v.

Commissioner, 132 T.C. , (Mar. 16, 2009) (slip op. at 4);

P & X Mkts., Inc. v. Commissioner, 106 T.C. 441, 442 n.2 (1996),

affd. without published opinion 139 F.3d 907 (9th Cir. 1998).

II. 1993 Transactions

Wilmington was formed as a limited partnership in 1993 as

part of a financing transaction that created an influx of capital

for Bausch and Lomb, Inc. Wilmington’s partners included B&L

2
Subtitle and section references are to the Internal Revenue
Code, unless otherwise indicated.
 - 4 -

International Holdings Corp. (BLIHC), among various related and

unrelated partners.

BLIHC contributed the 1993 Reset Note to Wilmington in 1993,

and Wilmington treated the 1993 Reset Note as an asset with a

basis and fair market value of $550 million. Wilmington’s basis

in the 1993 Reset Note was not affected by any event that

occurred after its contribution to Wilmington until the start of

1999-2.

III. 1993 Audit

Respondent audited Wilmington’s 1993 taxable year. The

audit closed seven years later with respondent’s issuance of a

“No Adjustments Letter.” The letter stated that respondent was

making no adjustments to Wilmington’s 1993 taxable year and would

not issue Wilmington an FPAA for that year. Respondent has not

issued an FPAA to Wilmington for 1993.

IV. 1999 Transactions

Wilmington treated certain restructuring transactions

occurring on June 4, 1999, as a partnership termination under

section 708(b)(1)(B). Wilmington accordingly reported that it

had two short taxable years during 1999. The first short taxable

year, 1999-1, ended June 4, 1999. The second short taxable year,

1999-2, ended December 25, 1999. Wilmington filed a separate

Federal partnership return (partnership return) for each short

taxable year.
 - 5 -

The June 4 restructuring transactions included one partner

in Wilmington (Bobcat Partners L.P.) selling its partnership

interest and ceasing to be a partner. In addition, Wilmington

transferred the assets of an operating business to BLIHC to

retire a portion of BLIHC’s partnership interest in Wilmington.

Wilmington reported the 1993 Reset Note had a $550 million value

as of the beginning and the end of 1999-1.

BLIHC sold a portion of its remaining partnership interest

in Wilmington in 1999-2. Wilmington exchanged the 1993 Reset

Note for two replacement notes with a collective $550 million

face amount. Wilmington transferred one replacement note and

cash to Charles River Partners L.P. in complete liquidation of

its interest in Wilmington, and Wilmington made a section 754

election as to the transaction. Later in 1999-2, Wilmington sold

one of its active businesses and allocated portions of the sales

price to goodwill and to other intangibles. Wilmington reported

the 1993 Reset Note had a $550 million value as of the beginning

of 1999-2. Wilmington also reported the values of the

replacement notes as of the applicable dates.

V. 1999 FPAA

The 1999 FPAA determined that the value of the 1993 Reset

Note was zero for each year and adjusted the 1993 Reset Note’s

basis accordingly. The FPAA made no other adjustment for 1999-1.

The FPAA made three other adjustments for 1999-2. The 1999-2
 - 6 -

adjustments reflected respondent’s determination that Wilmington

had lower than reported bases in certain property subject to

Wilmington’s section 754 election that Wilmington sold during

1999-2. Respondent in the FPAA also determined accuracy-related

penalties under section 6662.

VI. Wilmington’s Petition to the Court

Wilmington’s petition to the Court challenged each of

respondent’s adjustments in the 1999 FPAA, including the

accuracy-related penalties. Wilmington’s mailing address and

principal place of business were in Rochester, New York, when it

filed the petition.

Discussion

I. Overview

Petitioner moves to dismiss this case for lack of

jurisdiction. Petitioner makes two arguments, the second of

which relates solely to 1999-1 as an alternative to the first

argument. We discuss each argument in turn. We first discuss,

however, the general rules of this Court’s jurisdiction over a

TEFRA proceeding.

II. Jurisdiction of the Court

We begin our analysis with a discussion of the Court’s

jurisdiction over a TEFRA proceeding. The Court is a court of

limited jurisdiction, and we may exercise our jurisdiction only

to the extent provided by Congress. See sec. 7442; GAF Corp. &
 - 7 -

Subs. v. Commissioner, 114 T.C. 519, 521 (2000). The Court’s

jurisdiction includes the right to decide whether the Court has

jurisdiction over the subject matter of a case. See Brookes v.

Commissioner, 108 T.C. 1, 4 (1997); Brannon’s of Shawnee, Inc. v.

Commissioner, 69 T.C. 999, 1002 (1978). The Court’s jurisdiction

is fundamental and may be challenged at any time. See Stewart v.

Commissioner, 127 T.C. 109, 112 (2006).

Section 6226(f) sets the scope of the Court’s jurisdiction

in a TEFRA partnership-level proceeding. The Court has authority

to determine all partnership items for a partnership taxable year

to which the FPAA relates, the proper allocation of partnership

items among the partnership’s partners, and the application of

any penalty, addition to tax, or additional amount that relates

to an adjustment to a partnership item. See id. A partnership

item includes any item of income, gain, loss, deduction, or

credit that subtitle A requires the partnership to take into

account for the taxable year, to the extent that regulations

provide that the item is more appropriately determined at the

partnership level than at the partner level.3 See sec.

6231(a)(3); see also sec. 301.6231(a)(3)-1(a), Proced. & Admin.

Regs. The Court’s jurisdiction over a TEFRA partnership-level

3
A partnership’s basis in contributed property (including
any necessary preliminary determination) is an example of a
partnership item that must be addressed at the partnership level.
See Nussdorf v. Commissioner, 129 T.C. 30 (2007); see also sec.
301.6231(a)(3)-1(a)(4)(i), (c)(2)(iv), Proced. & Admin. Regs.
 - 8 -

proceeding is invoked upon the Commissioner’s issuance of a valid

FPAA and the proper filing of a petition for readjustment of

partnership items for the year or years to which the FPAA

pertains. See Harbor Cove Marina Partners Pship. v.

Commissioner, 123 T.C. 64, 78 (2004). An FPAA need not contain a

partnership item adjustment to be valid. See id.; see also Univ.

Heights at Hamilton Corp. v. Commissioner, 97 T.C. 278, 282

(1991).

III. Petitioner’s Primary Argument

Petitioner argues that the Court lacks jurisdiction as to

both years because respondent had to, but did not, adjust

Wilmington’s initial basis in the 1993 Reset Note in an FPAA for

1993. Petitioner asserts that Wilmington’s initial basis in the

1993 Reset Note is a partnership item only for 1993 and that the

1999 FPAA does not allow the Court to consider events outside the

subject years to adjust items for the subject years. Petitioner

contends that events occurring in a year (here 1993) may be

considered only if an FPAA is issued for that year. Petitioner

also contends that a partnership item is deemed to be reported

correctly for all years if it is not timely adjusted in an FPAA

related to the year in which the item is reported.

We conclude that the Court’s jurisdiction over the subject

years does not rest on whether respondent issued an FPAA for

1993. The 1999 FPAA reflects respondent’s determination that
 - 9 -

Wilmington incorrectly reported its basis in the 1993 Reset Note

on its partnership returns for 1999-1 and 1999-2. The 1999 FPAA

adjusts Wilmington’s reported basis for each year. The 1999 FPAA

does not purport to adjust Wilmington’s partnership return for

1993.

We read nothing in TEFRA that prohibits us from considering

events in a nondocketed (or closed) year (here 1993) to make

proper adjustments for a docketed year (here 1999-1 or 1999-2).

The 1999 FPAA reflects respondent’s determination that the facts

and circumstances underlying the 1993 Reset Note’s contribution

to Wilmington in 1993 establish that the initial basis of the

1993 Reset Note was zero and that the basis remained at zero

throughout each subject year. The Court must decide the

correctness of that determination, given the parties’ dispute of

it. We do not read the TEFRA provisions narrowly to preclude the

Court from considering the events in 1993 to decide the dispute

for the subject years.

Nor do we read the TEFRA provisions to provide that the

initial basis of the 1993 Reset Note was a partnership item only

at the time of the note’s contribution. The initial basis of the

1993 Reset Note, while it may have been a partnership item in

1993, was a partnership item in each subject year. Petitioner

focuses on a statement in the 1999 FPAA that the 1993 Reset Note

“had a basis of zero at the time of its contribution” (emphasis
 - 10 -

added) and concludes this means that respondent adjusted

Wilmington’s basis in the 1993 Reset Note for 1993. We read the

language in the 1999 FPAA differently. The 1999 FPAA did not

adjust the basis of the 1993 Reset Note for 1993. The 1999 FPAA

considered the events in 1993 to make an adjustment for the

subject years. Respondent was not required to adjust

Wilmington’s basis in the 1993 Reset Note in an FPAA that relates

to 1993. The parties have not identified, nor are we aware of,

anything that happened in 1993 that would have caused respondent

to adjust the 1993 Reset Note’s initial basis in an FPAA that

could lead to an assessment of any tax for 1993. A reporting of

basis may typically lead to an adjustment only when something

else happens that implicates that basis. Here, for example, that

something else occurred during the subject years.4

Petitioner asserts that section 6228(a)(5) authorizes the

Court to look to nondocketed (or closed) years to make

adjustments in a docketed year. Petitioner concludes that the

4
The parties discuss respondent’s right to issue an FPAA for
1993 at any time (and his preclusion from assessing tax for 1993
after the limitations period). See Kligfeld Holdings v.
Commissioner, 128 T.C. 192, 203-207 (2007); Rhone-Poulenc
Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533,
534 (2000). We do not understand that right to mean that
respondent must issue an FPAA for 1993 as a prerequisite to our
consideration of relevant events occurring in 1993. Such is
especially so given our conclusion that nothing happened in 1993
that would have caused respondent to adjust the 1993 Reset Note’s
initial basis in an FPAA that could lead to an assessment of any
tax for 1993.
 - 11 -

inclusion of such a provision in section 6228(a)(5), but not in

section 6226(f), means that Congress intentionally declined to

include a similar provision in the latter section. We disagree.

A tax matters partner is allowed to file a request for an

administrative adjustment (AAR) on behalf of a partnership, and

the Commissioner may or may not allow that request. See sec.

6227(a), (c), (d); see also sec. 6231(a)(7) (providing rules on

who is a “tax matters partner”). The tax matters partner is

entitled to petition this Court, the appropriate U.S. District

Court, or the U.S. Court of Federal Claims to adjust the

partnership items related to the AAR if the Commissioner does not

allow the AAR in full. See sec. 6228(a). Section 6228(a)(5)

empowers the court in which the petition is filed to decide the

requested partnership items that were not allowed by the

Commissioner. Section 6228(a)(5) also empowers that court to

decide any additional items that the Commissioner asserts offset

the items requested by the tax matters partner. We read nothing

in section 6228(a)(5) that provides more specifically than

section 6226(f) that the referenced court may or may not consider

adjustments in a nondocketed (or closed) year to make an

adjustment in a docketed year. Nor do we draw such an inference

from our comparison of section 6228(a)(5) to section 6226(f).

We are not unmindful of section 6214(b). That section

provides that the Court in an income or gift tax deficiency case
 - 12 -

shall consider facts occurring in a nondocketed year insofar as

necessary to determine the amount of the deficiency for a

docketed year. TEFRA includes no corresponding provision. The

U.S. Court of Federal Claims in J & J Fernandez Ventures, L.P.

v. United States, 84 Fed. Cl. 369 (2007), considered whether the

absence of such a corresponding provision in TEFRA meant that

Congress intended that a court in a TEFRA partnership-level

proceeding not consider facts from nondocketed (or closed) years.

There, events in 1999 established the tax basis of stock the

taxpayers sold in 2000 through 2003. The Government argued that

the taxpayers artificially inflated the tax basis of the stock

through the 1999 events. The taxpayers argued that the

Commissioner was time-barred from recalculating or considering

partnership items reported on the 1999 partnership returns in

assessing tax for 2000 through 2003. The court disagreed. The

court noted that a basis adjustment alone cannot trigger an

assessment of tax for the year of the adjustment. The court

noted further that the law was well settled that courts in a

nonpartnership proceeding may adjust items (including basis) in a

nondocketed (or closed) year to assess tax in a docketed year.

The court held that the settled law applied just as strongly in a

TEFRA proceeding. We agree. Accord G-5 Inv. Pship. v.

Commissioner, 128 T.C. 186, 191-192 (2007). Nothing in TEFRA or

in its legislative history precludes us in TEFRA proceedings from
 - 13 -

considering events in a nondocketed (or closed) year to make

proper adjustments in a docketed year.

Nor do we read Roberts v. Commissioner, 94 T.C. 853 (1990),

and its progeny to establish that a partnership item as reported

on a partnership return is deemed to be correctly reported for

all years if the item is not adjusted within the limitations

period for that return. Such an unchallenged item may be deemed

binding for the year of reporting because the applicable

limitations period has expired as to the return. We recently

noted as much in Meruelo v. Commissioner, 132 T.C. , n.7

(2009) (slip op. at 17) (citing Roberts v. Commissioner, supra at

862). It does not naturally follow, however, that the item is

deemed correct or binding for all years.

We conclude that respondent’s issuance of an FPAA for

Wilmington’s 1993 taxable year is not a prerequisite for

adjusting Wilmington’s basis in the 1993 Reset Note to assess tax

for each subject year.5 Events in that nondocketed (or closed)

year may be considered to make proper adjustments in the docketed

years. Thus the 1999 FPAA is valid despite petitioner’s primary

argument.6

5
In the absence of a valid FPAA for 1993, however, no
partnership item may be adjusted to assess tax for that year.
See Maxwell v. Commissioner, 87 T.C. 783, 788-789 (1986).
6
Two other matters deserve mention. The first matter
concerns whether respondent’s issuance of the “No Adjustments
(continued...)
 - 14 -

IV. Petitioner’s Alternative Argument

We turn to petitioner’s alternative argument. Petitioner

argues that the Court lacks jurisdiction over 1999-1 because the

1999 FPAA did not adjust a partnership item that Wilmington was

required by subtitle A to take into account for that taxable

year. Petitioner asserts that respondent made no adjustment to

Wilmington’s income, gain, loss, or credit for 1999-1.

Petitioner asserts that Wilmington was not required to take the

1993 Reset Note’s basis into account for 1999-1.

We conclude that the Court’s jurisdiction over 1999-1 does

not rest on whether the 1999 FPAA includes a partnership item

adjustment.7 We previously held as much in Harbor Cove Marina

Partners Pship. v. Commissioner, 123 T.C. 64 (2004). There, a

partner brought a TEFRA partnership-level proceeding to challenge

6
(...continued)
Letter” for 1993 precludes respondent from determining in the
1999 FPAA that Wilmington’s basis in the 1993 Reset Note was
different from that reported for 1993. The second matter
concerns whether respondent is precluded from advancing certain
arguments that are inconsistent with respondent’s litigating
position in other cases. We discuss neither matter in detail
because the matters do not relate to our jurisdiction over the
years. They are instead affirmative defenses to respondent’s
adjustments for those years. See Genesis Oil & Gas, Ltd. v.
Commissioner, 93 T.C. 562, 564-565 (1989); see also Ginsburg v.
Commissioner, 127 T.C. 75, 89 (2006) (holding that the Court had
jurisdiction over the year in question but that the limitations
period precluded the Commissioner from assessing any tax as to
that year).
7
Petitioner apparently agrees with this conclusion.
Petitioner’s moving papers state specifically that judicial
review may be sought of an FPAA that proposes no adjustment.
 - 15 -

an FPAA for 1998 that contained no changes to the partnership’s

return for that year. The Court noted that the FPAA determined

that the partnership return for 1998 was correct as filed. The

Court held that we had jurisdiction because the Commissioner

issued the FPAA and the partner filed a timely petition to

readjust partnership items for 1998. The Court stressed that the

Court had jurisdiction even though the FPAA contained no

adjustment by the Commissioner. Id. at 78. We conclude likewise

that the Court has jurisdiction over 1999-1, and we hold that the

1999 FPAA is valid despite petitioner’s alternative argument.8

8
We would still have jurisdiction over 1999-1 even if the
1999 FPAA had to include a partnership item adjustment. The 1993
Reset Note’s basis in 1999-1 was such an adjustment in that
Wilmington had to account for its basis in the note for purposes
of its books and records, or for purposes of furnishing
information to a partner. As the Court explained in Bausch &
Lomb Inc. v. Commissioner, T.C. Memo. 2009-112, a partner-level
proceeding with the same setting as here:

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. Sec.
301.6231(a)(3)-1(c)(2), Proced. & Admin. Regs; see also
Nussdorf v. Commissioner, * * * [129 T.C.] 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. [Fn. ref. omitted.]
 - 16 -

V. Conclusions

The 1999 FPAA is valid, and the Court has jurisdiction over

each subject year. Any assessment as to 1999-2 is time-barred as

set forth in our unpublished order. We await direction from the

parties regarding how to proceed as to 1999-1.

We have considered all arguments made, and we have rejected

those arguments as without merit to the extent not discussed

above. Accordingly, to reflect the foregoing,

An appropriate order will

be issued.
 - 17 -

APPENDIX

Exhibit A - Explanation of Items
Wilmington Partners L.P. EIN: * * *
Final Partnership Administrative Adjustment Letter
Tax Years Ending: June 4, 1999; December 25, 1999

A. Basis in Reset Note contributed by B&L
International Holdings Corp.: It is
determined that the note contributed by
Bausch & Lomb International Holdings
Corporation to Wilmington Partners L.P. on or
about December 23, 1993 in the amount of
$550,000,000 had a basis of zero at the time
of its contribution. Further, it has not
been established that the distribution of
this note from Bausch & Lomb International,
Inc. to Bausch & Lomb International Holdings
Corporation had economic substance and was
accomplished for reasons other than the
creation of tax benefits. Further, it has
not been established that the note was
evidence of an actual corporate distribution
under IRC section 301. Accordingly, the note
contributed by Bausch & Lomb International
Holdings Corporation has no basis for the tax
years ended June 4, 1999 and December 25,
1999.

B. Section 734 adjustment: For the taxable year
ended December 25, 1999, it is determined
that Wilmington Partners L.P. has failed to
establish the character or adjusted bases of
the assets distributed by them [sic] to
Charles River Partners L.P. Wilmington
Partners L.P. has likewise failed to
establish that there was any increase to the
basis of any partnership property pursuant to
I.R.C. §§ 754 and 734(b). Furthermore, it
has been determined that there was a decrease
to the basis of certain partnership property
pursuant to I.R.C. §§ 754 and 734(b). It is
consequently determined that Wilmington
Partners L.P. has not established a basis in
certain partnership property in an amount
greater than $zero ($0).
 - 18 -

1. It is determined that the basis of
Charles River Division 1245 Assets
was $zero ($0) for purposes of
determining gain or loss from the
sale of such assets. Accordingly,
the ordinary income from the sale
of Charles River Division 1245
Assets reported by Wilmington
Partners L.P. for the taxable year
ended December 25, 1999 is
increased by $9,386,279.

2. It is determined that the basis of
patents/intangibles was $zero ($0)
for purposes of determining gain or
loss from the sale of such assets.
Accordingly, the ordinary income
from the sale of
patents/intangibles reported by
Wilmington Partners L.P. for the
taxable year ended December 25,
1999 is increased by $663,316.

3. It is determined that the basis of
the goodwill in CR Division of WPLP
is $zero ($0) for purposes of
determining gain or loss from the
sale of such asset. Accordingly,
the long-term capital gain from the
sale of the goodwill in CR Division
of WPLP reported by Wilmington
Partners L.P. for the taxable year
ended December 25, 1999 is
increased by $189,882,108.

C. Penalties (apply to all adjustments):

1. It is determined that a 40 percent
penalty shall be imposed on the
portion of any underpayment
attributable to the gross valuation
misstatement as provided by I.R.C.
§§ 6662(a), 6662(b)(3), 6662(e),
and 6662(h). There has not been a
showing by the partnership or any
of its partners that there was
reasonable cause for any of the
resulting underpayments, that the
 - 19 -

partnership or any of its partners
acted in good faith, or that any
other exceptions to the penalty
apply.

2. Alternatively, it is determined
that a penalty applies pursuant to
I.R.C. § 6662 to all of the
partnership adjustments on the
following grounds: (1) negligence
or disregard of the rules and
regulations, (2) substantial
understatement of income tax, and
(3) substantial valuation
misstatement. There has not been a
showing by the partnership or any
of its partners that there was
reasonable cause for any of the
resulting underpayments, that the
partnership or any of its partners
acted in good faith, or that any
other exceptions to the penalty
apply.