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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1Unless 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.

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
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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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2The 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.

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 partnershiplevel 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
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3See 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. 

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
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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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4See 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.

5See sec. 6231(a)(5), which provides: “The term ‘affected

item’ means any item to the extent such item is affected by a

partnership item.”

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:
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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 RhonePoulenc 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 partnershiplevel 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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6Petitioners 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.]

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.