T.C. M em o . 2 0 1 9 -6

UNITED STATES TAX COURT

ROBERT C. GUNTHER AND J AYNE C. GUNTHER, Pet i ti o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 8 3 4-1 6. Fi l edFeb ru ary 5 , 2 0 1 9
. Dav i dD. Au gh try

an dPat ri ckJ . M cCan n , J r., fo r p et i t io n ers . W i l l i am C. Bo g ardu s an dDeb ra Lyn nReal e, fo r res p o n d en t.

M EM ORANDUM OPINION GOEKE, Ju d g e: Th i s cas e i s b efo re th e Co u rto np et i ti o n ers ’ m o t i o n t o
res trai n th e as s es s m en to r co l l ect i o no f t ax an dres p o nd en t ’ s m o t i o n t o d i s m i s s th e p o rt i on o f t h i s cas e rel at i n g t o p en al ti es u n d er s ect i o n6 6 62
. 1

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de as am en d edan di neffect atal l rel ev an t t im es , an d al l Ru l e (co n ti n u ed ...)- 2
-

[* 2 ] OnNo vem

b er 6 , 2 0 1 5 , res p o n d en ti s su edaffect edi t em s n o t i ces o f d efi ci en cy

t o p et i t i o ners fo l l o wi n g p art n ers hi p -l ev el p ro ceed i n g s u n d er th e un i fi ed
au d itan dl i t i g at i o n p art n ers h ip p ro cedu res (TEFRA). Th e d efi ci en cy n ot i ces d et erm i n edi n co m e t ax d efi ci en ci es fo r 1 99 9 , 2 0 0 0, an d 2 00 2 o f $ 1 , 7 4 6 ,0 1 2 , $ 3 4 3 ,0 0 2 , an d$ 2,1 8 4, res p ect iv el y ; an accu racy -rel at edp en al ty u n d er s ect i o n 6 6 6 2 (a) fo r 1 9 9 9 o f $ 7 ,8 8 4 .2 0; an dg ro s s v al u at i o n m i s s t at em en tp en al t i es u n d er
s ect i on 6 6 6 2 (h ) fo r 1 99 9 , 2 0 0 0, an d2 0 0 2 o f $ 6 82 ,6 3 6
. 4 0 , $ 1 3 7 ,2 00 .8 0 , an d $ 8 7 3 .6 0 , res pect i vel y . Bo th p art i es ag ree t h atwe h av e ju ri s d i ct i o nt o red et erm i ne t he i n co m e t ax d efi ci en ci es i n th i s cas e. Res p o n d en tco n ced es thatb ecau s e we h av e ju ri s d i ct i o n
o v er t h e t ax d efi ci en ci es , p et i t io n ers ’ m o t i o nt o res trai nth e co ll ect i o no f t ax i s ap p ro p ri at e. Ho wev er, res p o nd en tb el i ev es th atwe l ackjuri s d i ct io nt o co n s i d er th e p en al t i es ati s su e an dth erefo re we m u s td i s m i s s as t o th e p en al t i es an d h av e n o
au th o ri ty t o res trai n co l l ect i o n o f t h e s am e. Pet i t i o ners arg ue p artn er-l ev el d et erm i n at i o n s m u s tb e m ad e reg ard i n g th e i n co m e t ax d efi ci en ci es an dp en al t i es ati s s u e; th u s , th ey arg u e, we h av e juri s d i ct i o n o v er t h e en t iret y o f t h i s cas e an d res p on d en tcan n otas s es s o r co l l ect

1 (...co n t in u ed ) referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 3
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[* 3 ] an y t ax d efi ci en ci es o r p en al ti es . Res p on d en tag rees th atp art n er-l ev el d et erm i n at i o n s m

u s tb e m ad e reg ard i n g th e i n co m e t ax d efi ci en ci es , b u th e d i s p u t es o u r ju ri sd i ct i o n o v er t h e p en al t ies . He b el i ev es l i ab il i ty as t o th e p en al ti es
was es t ab l i s hedatth e p art n er l ev el duri n g the TEFRA p ro ceed i n gs an d t h erefo re p et i t i o n ers h av e n o reco u rs e wi th th i s Co u rtt o co n tes t th em . Th e i s s u e fo r co ns i d erat io n i s wh et her t h e ad j u s tm en t s i nth e n o t i ces o f d efi ci en cy

at tri b u t ab le t o th e TEFRA d eci s io nreq u ire p art n er-l ev el d et erm i n at i o n s
an d th us g iv e u s juri s d i ct io n o v er t h e cas e. W e h o l dth atth ey d o req u ire p art n erl ev el d et erm i nat i o n s as rel at edt o th e t ax d efi ci en ci es , b u tn o t the p en al t i es , an d th atwe h av e ju ri s d i ct i o n o n l y o v er th e t ax d efi ci en ci es ati s s u e, b utn o t o v er t h e p en al t i es . Acco rd i ng l y , we h av e ju ri s d i ct io nt o en j o i nth e as s es s m en tan d
co l l ect i o n o f t ax an d wi l l g ran t p et i t i o n ers ’ m ot i on as i trel at es t o the t ax d efi ci en ci es . W e wi l l al s o g ran tres p o n d en t ’ s m o t i o nt o d i s m is s as t o th e p en al t i es .- 4
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[* 4 ] Back g ro u nd Pet i t i o ners res i d edi n Fl ori d a wh en th e p et i t i o nwas t i m el y fi l ed
. 2 On Feb ru ary 8 , 2 0 1 6 , res p on d en t i s s u edtwo Fo rm s 3 5 5 2 , No t i ce o f Tax Du e o n Fed eral Tax Retu rn , fo r 1 9 9 9 an d2 0 00 . OnM ay 1 6 , 2 0 16 , res p o n d en ti s s u edtwo No t ices CP5 0 3 , Seco n d Rem i n d er o f Unp ai dTax es , fo r 1 9 9 9 an d2 0 0 0. I. Arb i trag e Trad i n g , LLC Th e d efi ci en ci es i n th is cas e ari s e fro m p et i t i o n ers ’ i n v o l vem en twi th Arb it rag e Trad i n g , LLC (Arb i trag e), an en t i ty s ub jectt o TEFRA. Pet i ti o n ers , as
o wn ers o f t h e Ro b ertan d J ayn e Gu n th er 1 9 9 9 Rev o cab l e Tru s t, acq u i reda p ai r o f
cu rren cy o p t i o n s fro m

AIG In t ern at i o n al , In c., wh i ch they p u rp o rt ed l y

co n tri b u t ed , al o n g wi th $ 4 5 ,0 0 0 i n cas h , t o Arb i trag e i nex ch an g e fo r a p u rp o rt edp artn ers h i p i n t eres tth erei n . Pet it i on ers s ubs equ en t l y wi thd rew t h ei r i nt eres t i nArb i trag e i n
ex ch an g e fo r a l iqu i d at i ng d i st ri b u t io n o f Xero x s to ck
.

2 Th e Co urt recei v edth e p et i t i o no nFeb ru ary 5 , 2 0 1 6 , o n e d ay aft er i twas du e. Ho wev er, we m ay treat the p et i t i o nas b ei n g fi l edo nthe d at e o f m ai l in g . See s ec. 7 5 02 (a); Ru l e 1 3 (c). Al th o u g h th e UPS p ack ag i n g i nwh ich th e p et i t i o nwas m ai l edco n t ai n edn o p o s t m ark , we are p erm i t t edt o p res u m e t h e m ai l i n g d at e b y traci n g b ack t o t h e d at e a p ack ag e o f t h atk in d wo u l dn o rm al l y h av e b een s en t . See s ec. 7 5 0 2 (f)(1 ); s ec. 3 0 1 .7 5 0 2 -1 (c)(3 ), Pro ced . & Adm in . Reg s . ; No t i ce 2 0 1 5
- 3 8 , 2 0 1 5 -2 1 I.R.B. 9 8 4 (d es i gn at i ng UPS Nex tDay Ai r as a qu al i fi edp ri v at e d el i v ery s erv i ce) (s up ers ed edb y

No ti ce 2 0 1 6 -3 0 , 2 01 6 -1 8 I.R.B. 6 7 6 , wh i ch b ecam e effect iv e Ap ri l 1 1 , 2 0 1 6 , aft er t h e p et i t i o nwas fi l edi n th i s cas e). Thu s , b ecau s e th e p ack ag e was m ai l edUPS Nex t Day Ai r, we m ay

p res u m e i twas m ai l edo n Feb ru ary

4 , 2 01 6 , an dtreat i tas fi l edas o f t h atd at e.- 5
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[* 5 ] Part n ers h ip p ro ceed i n g s i n th e Co u rto f Fed eral Cl ai m s fo r Arb i trag e’ s 1 9 9 9 t ax y ear s u s t ai nedres p o n den t ’ s d et erm i n at i o nthatArb i trag e was a s h am an d p ro p erl y d i s reg ard edfo r Fed eral t ax p u rp o s es . Arb i trag e Trad in g , LLC, b y an d th ro u g h Ro b ertC. Gu n th er as a t ru s t ee fo r t h e Ro b ert an dJ ayn e Gu n th er 1 9 9 9 Rev ocab l e Tru s tv . Un i t edSt at es , Do ck etNo . 0 6 -2 02 T (Oct
. 3 , 2 0 1 4 ). As a res u l t , res p o n d en t d i s reg ard edp et i t io ners ’ i n v es tm en t i n Arb i trag e fo r 1 9 9 9
. II. In co m e Tax Defi ci en ci es A. 1 99 9 Tax Defi ci en cy Res p o n d en td et erm i n eda d efi ci en cy fo r p et i t i o n ers ’ 1 9 9 9 t ax y ear as a
res u l t o f: (1 ) th e d i s al l o wan ce o f a rep o rt edl o s s fro m th e s al e o f t he Xero x s t o ck p u rp ort ed l y

d i st ri b u t edb y

Arb i trag e; (2 ) t h e i n cl u s i o n o f a co n s tru ct i v e d i v i d en d fo r t h e p aym en to f l eg al , acco u n t i n g , co n su l t i n g, an dad v i s o ry fees rel at edt o Arb it rag e; an d(3 ) co m

p u t at i on al ad

ju s t m en t s t o i t em i zedd edu ct i on s an dcert ai n
ex em p t i o n s res u l t i ng fro m

(1 ) an d(2 ). B. 2 00 0 an d 2 0 02 Tax Defi ci en ci es Res p o n d en td et erm i n edd efi ci en ci es fo r p et i t i o n ers ’ 2 0 0 0 an d2 0 0 2 t ax y ears as a res u l to f: (1 ) t h e d i s al l o wan ce o f a s h o rt -t erm cap i tal l o ss carry fo rward rep res en t i n g a p ort io n o f th e l o s s cl ai m edo n p et i t io n ers ’ 1 9 99 t ax retu rn fro m th e
s al e o f t he Xero x s t o ckp u rp o rt ed l y d i s tri b u t edb y

Arb i trag e; (2 ) ani n creas e i n- 6
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[* 6 ] t ax ab l e i n co m e fro m th e d i s al lo wan ce o f n eto p erat i n g l o s s carry fo rwardfro m p et i t i o n ers ’ 1 9 99 t ax y ear res u lt i n g fro m tran s act i o n s rel at edt o Arb i trag e; an d(3 )
co m p u t at i o n al ad

ju st m en ts t o i t em izedd educt i o n s res u lt i ng fro m (1 ) an d(2 ). Th e p en al t i es fo r 1 99 9 , 2 0 0 0 , an d2 0 02 rep res en taccu racy -rel at edp en al t i es
u n d er s ect i o n 6 6 6 2 (a) an d(h ), th e ap p l i cab i li ty o f wh i ch was d et erm in edatth e p art n ers hi p l ev el
. Di s cu ss i o n Th e Tax Co u rt i s a co u rto f l i m i t ed juri sd i ct i o n , an dwe m ay ex erci s e t h at juri s d i ct i o n o n l y

t o the ex ten tau th o ri zedb y Co n g res s. Naft el v . Co m m i s s io n er, 8 5 T.C. 5 2 7 , 5 2 9 (1 9 8 5 ). Th e Co u rt ’ s ju ri sd i ct i o n t o red et erm i n e a d efi ci en cy d ep en d s up o n th e i s s uan ce o f a v al i dn o t ice o f d efi ci en cy an da t i m el y fi l ed p et i t i o n . Id . at5 3 0 ; s ee s ecs . 6 2 1 2 an d6 2 1 3(a); Ru l e 1 3 (a), (c). Sect i o n6 2 1 3 (a) g en eral l y res trai n s th e as s es s m en to f d efi ci en ci es an d the co l l ect i on o f t h e s am e
u n l es s a n o t i ce o f d efi ci en cy i s i s s u edb y th e Co m

m i s s io n er. Th e p ro h i b it i o no n
as s es s m en tan dco l l ect i o n ex t en d s du ri n g t h e t i m e a p et it i on m ay b e fi ledi nth i s Co u rt , du ri n g th e p en d en cy o f an y p ro ceed i n g act ual l y

b ro u g h t , an du n t i l the d eci s i o n o f t h e Co u rt b eco m es fi n al . Sec. 6 2 13 (a). Th e Co u rth as juri s di ct i o n t o
en jo i n th e as s es s m en tan dthe co l l ect i o no f a d efi ci en cy th at th e Co u rth as- 7
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[* 7 ] juri s d i ct i o n t o red et erm in e. Id .; s ee M ey er v . Co m m i s s i o n er, 9 7 T.C. 5 5 5 , 5 6 0 -5 6 1 (1 9 9 1 ). W e an al y ze t h e ex t en to f o u r ju ri s d i ct i o nt o en j o i nth e as s es sm en to r t h e
co l l ect i o n o f t ax . W e wi l l ex am i n e o u r ju ri s d i ct i o n o v er t he t ax d efi ci en ci es fi rs t
an d th entu rn t o o u r juri s d i ct i o n o v er t h e p en al t i es . I. J u ri s d i ct i o n Ov er Tax Defi ci en ci es Nei ther p art y

d i s p u t es o u r ju ri s d i ct io n o ver t h e t ax d efi ci en ci es i nth i s cas e. Ho wev er, b ecau s e o u r ju ri s di ct i o n“ fl o ws d i rect l y fro m Co n gres s ” an dcan n o tb e wai v ed , we m

u s td et erm i n e i tfo r o u rs el v es . Dav idDu n g Le, M .D., In c. v . Co m m i s s i o n er, 1 1 4 T.C. 2 6 8 , 2 6 9 (2 0 0 0) (“ T h e fai l u re t o qu es t i on o u r ju ri s d i ct i o n i s n o ta wai v er o f t he ri g h t to d o s o , fo r i f we l ackjuri s di ct io no v er an i s su e, we d o
n o t , an d n ev er d i d, h av e t h e p ower t o d eci d e i t.”), aff’ d , 2 2 F. Ap p ’ x 8 3 7 (9 th Ci r. 2 0 0 1 ). Part n ers h i p s d o n o t p ay t ax ; rat h er, i tem s o f p art ners h i p i n co m e, l os s , d educt i o n , an dcred i t are refl ect edo nth e p art n ers ’ i nd i v i du al t ax retu rn s . See
s ecs . 7 0 1 an d 7 0 2 . Th e TEFRA au di t an dl i t i g at i o n p ro cedu res u n d er s ect i o n s 6 2 2 1 thro u g h 6 2 3 4 ap p l y t o p art n ers h i p i tem s an dal l o w fo r ad ju s tm en t s t o p art n ers hi p i t em s i n a TEFRA p art n ers h i p -l ev el p ro ceed i n g . Su ch ad ju s t m en t s
m ay res u l ti n ad

ju s t m en t s t o th e t ax l i ab i li t i es o f i n d i v i du al p art n ers ; h o wev er,- 8
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[* 8 ] o n ce t he p art n ers h i p i t em s b eco m e fi n al , th e Co m m i s s i o n er m

u s tg en eral l y i n i t i at e fu rt h er act i o n atth e p art n er l ev el t o ad ju s tan i n di v i du al p art n er’ s t ax l i ab i l i ty . Co m p u t at i o n al ad

ju s t m en t s are ch an g es i nth e t ax l i ab i l i ty o f a p art n er t o p ro p erl y refl ectth e t reat m en to f a p art n ers h i p i t em wh et her t ho s e ch an g es can b e d i rect l y as s es s edwi th o u tp art n er-l ev el d et erm i nat i on s o r req ui re p art n er-l ev el d et erm i n at i o n s an dp ro ceed i n gs . See s ec. 6 2 31 (a)(6 ); s ec. 3 0 1.6 2 3 1 (a)(6 )-1 , Pro ced
. & Ad m i n . Reg s . Th e Co m m i s s i o n er m ay

m ak e co m

pu t at i o nal ad

ju s t m en t s t o refl ectaffect ed i t em s --i .e., i t em s affect edb y a p art n ers h i p i t em

d et erm i nedat th e p art n ers h i p l ev el . Sec. 6 23 1 (a)(5 ). Th ere are t wo k in d s o f co m pu t at i o n al ad ju s t m en t s : o n es t o affect edi t em s th atreq u i re p art n er-l ev el d et erm i n at io n s an d
o n es to affect ed i t em s th atd o n o t . If an affect edi t em req u i res p art n er-l ev el d et erm i n at i o n s, i ti s s ub

jectt o th e n o rm al d efi ci en cy p ro cedu res u n der s ect i o n s 6 2 1 1 thro u g h 6 2 1 6 ; an dth e Co m m i ss i o ner m

u s ti ss u e a n o t i ce o f d efi ci en cy t o th e p art n er b efo re as s es s i n g an y t ax . Sec. 6 2 3 0 (a); s ec. 3 0 1
. 6 2 3 1 (a)(6 )-1 (a)(3 ), Pro ced
. & Ad m i n . Reg s . Ho w ev er, i f an affect edi t em req ui res n o p artn er-l ev el d et erm i n at i o n s, th e n o rm al d efi ci en cy p ro cedu res d o n o tap p l y ; an dth e Co m m i s s i o n er m ay

i m m ed i at el y as s es s th e res u l t i n g t ax d efi ci en cy wi th ou ti s s ui n g
a n o t i ce o f d efi ci en cy . Sec. 6 2 3 0 (a)(1 ) an d(2 )(A)(i ); s ec. 3 0 1.6 2 3 1 (a)(6 )-1 (a)(2 ),- 9
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[* 9 ] Pro ced . & Adm i n . Reg s . Wh ere ad d i t i o n al p art n er-l ev el d et erm i n at io n s are req u i redan dth e Co m

m i s s i o n er m

u s ti ss u e a n o t i ce o f d efi ci en cy , th e t ax p ay er h as a p rep aym en tfo ru m

t o ch al l en g e t h e Co m

m is si o n er’ s d et erm i n at i o n s . Sec. 6 2 3 0 (a)(2 )(A). Ho wev er, i f n o p art n er-l ev el d et erm i n at i o n s are req ui redth e t ax p ay er h as n o p rep aym en t fo ru m an d m u s tfi l e a refu n d cl ai m . Sec. 6 2 3 0 (a)(1 ), (c)(4 ). Res p o n d en targ u es th atwe h av e ju ri s d i ct i o no v er t h e t ax d efi ci en ci es i n th i s
cas e b ecau s e fact u al d et erm i n at i o n s m u s tb e m ad e atth e p art ner l ev el ; th u s , th e Co m m i s s i o n er was req u i redt o i s su e a n o ti ce o f d efi ci en cy an d th e n o t i ces i nth i s
cas e are v al i d . Pet i t i o ners d o n o td i s p u t e t hi s p o rt i o no f res p o n d en t ’ s arg u m en t . W e ag ree wi th b o th p art ies
. Res p o n d en t ’ s d et erm i n at i o ns are b as edo np et i t i o n ers ’
s al e o f s t o ckrecei v ed in l i qui d at i o n o f t h ei r p u rp o rt edi n t eres t i nArb i trag e. Gen eral l y , wh en a p art n ers h i p i n t eres t i s l i qu i dat ed , a p art n er’ s b as i s i np ro p ert y (o th er t h an m o ney ) recei v edfro m th e p art n ers h i p i na l i qu i d at in g d is tri b u t i o ni s equ al t o th e p art n er’ s o u t s i d e b as i s i nth e p art n ers h i p . Sec. 7 32 (b ). Ho wev er, wh ere t h e p art ners h i p i s a s h am an d d i sreg ard edfo r Fed eral t ax p urp o s es , th e p art n er i s t reat ed as h o l d i ng th e p artn ers h i p’ s as s et s d i rect l y , an dh i s ad ju s t edb as i s i n the as s et s i s d et erm i n edu n d er s ect io n1 0 1 2 (a). Keet er v . Co m m i s si on er, T.C.- 1 0 -

[* 1 0 ] M em o . 2 0 1 8 -1 9 1, at* 1 3 ; s ee al s o s ec. 1 0 1 2 (a) (b as is o f p ro p ert y i s g en eral l y i t s co s t ). Th e p art n ers o f a s h am

p art n ers h i p d o n oth av e carry o v er b as es u n der
s ect i on 7 3 2 (b ) i n as s et s p u rp o rt ed l y recei v ed i nl iqu i d at io no f th ei r i n t eres t s i n th e p art n ers hi p . No n eth el es s , factual d et erm i nat i o n s reg ard i n g th e p art n ers ’ co s tb as es i n the as s et s u nd er s ect i o n 1 0 1 2 (a) are req u i red . Fo r ex am p l e, p art n er-l ev el d et erm i n at i o n s m

u s tb e m ad e t o d et erm i n e p et i t i o n ers ’ h o ld i n g p eri o d fo r th e
s t ock , th e ch aract er o f an y g ai n o r l os s , an dwh et h er t h e s t o ck they s o l di n1 9 9 9
was th e s t o ckp u rp o rt ed l y d i s tri b u t edb y

Arb i trag e. See Nap o l i el l o v . Co m m i s s i o n er, 6 5 5 F.3 d1 0 6 0 , 1 0 6 4 (9 th Ci r. 2 0 1 1 ), aff’ g T.C. M em o . 2 0 0 9 -1 0 4 ; Do m u lewi cz v . Co m

m is s i o n er, 1 2 9 T.C. 1 1 , 2 0 (2 0 07 ), aff’ di n rel ev an t p art , rem an dedi n p arts ub n o m . Des m etv . Co m m i s si on er, 5 8 1 F.3 d 2 97 (6 th Ci r. 2 0 0 9 ); Keet er v . Co m

m i s si o ner, at * 1 4
. Th e ad ju s t m en t s t o p et it i o n ers ’ t ax l i ab i l i t i es req u i re p art n er-l ev el d et erm i n at i o n s. Co n s equ en t l y , th e n o rm al d efi ci en cy p ro cedu res ap p ly

t o th o s e d et erm i n at i o n s an dwe h av e ju ri s d i ct i o nt o red et erm i ne t h e t ax d efi ci en ci es . W e
n o w m us tex am in e o ur ju ri s d i ct i o no v er t h e p en al ti es .- 1 1 -

[* 1 1 ] II. J u ri s d ict i o n Ov er Pen al t i es Res p o n d en tas sert s th atwe l ackjuri s d ict i o no v er t h e p en al t i es . He arg u es th atth e l i ab i l i ty

fo r t h e p en al t i es was d et erm i nedi nth e p ri or p art ners h i p -l ev el TEFRA p ro ceed i n g ; th erefo re, h e co n t i n u es , b ecau s e l i ab i l i ty fo r p en al t i es i s d i rect l y as s es s ab l e atth e p art n ers h i p l ev el , n o p art n er-l ev el d et erm i n at i o n s are req u i red , we m

u s t d i s m i s s t h e p o rt i o no f t hi s cas e rel at i n g t o p en al ti es fo r l acko f juri s d i ct i o n , an d we h av e n o au th o ri ty t o en jo i nth e as s es s m en to r co l l ect io no f t h e p en al t i es . Pet i t i o ners res p o n d t h at u n d er t h e Sup rem e Co u rt ’ s h o l d in g i nUn i t ed St at es v . W o o d s , 5 7 1 U.S. 3 1 (2 0 1 3 ), p en al t i es m ay b e d et erm in edo n l y p ro v is i o n al l y

atth e p art n ers h i p l ev el an dad di t i o n al d et erm i n at io n s are s t i l l req u i redatth e p art n er l ev el . W e ag ree wi th res p on d en t . As we h av e ex p l ai n ed , affect edi t em s are i t em s th atrel at e t o a p art n ers h i p i t em . Sec. 6 2 3 1 (a)(5 ). Sect i on 6 2 3 0 (a)(1 ) p ro v i d es th atn o rm al d efi ci en cy p ro cedures g en eral l y

d o n o tap p l y

t o th e as s es s m en to r co l l ect i o no f co m pu t at i o n al ad ju s t m en t s . Ho w ev er, t h ere i s an ex cep t i o nwh ere a co m pu t at i o n al ad

ju s t m en ti s at tri b u t ab l e t o an affect edi t em th atreq u i res p artn er-l ev el d et erm i n at i o n s . Sec. 6 2 3 0 (a)(2 )(A)(i ). Th atex cep t io nap p l i es t o th e t ax l i ab i l i t i es i nth i s cas e, wh i ch we h av e s ai dreq u i re p art n er-l ev el d et erm i n at i o n s. Ho w ev er, t h e p l ai nl an g u ag e o f th atex cep t i o n ren d ers i ti nap p l i cab l e t o “p en al t i es , ad d i t i o n s t o t ax , an dad d i t i o n al- 1 2 -

[* 1 2 ] am o un t s th atrel at e t o ad ju s t m en t s t o p art n ers hi p i t em s .” Id .; s ee al s o s ec. 3 0 1 .6 2 3 1 (a)(6 )-1 (a)(3 ), Pro ced . & Adm i n . Reg s . Res p o n d en tu rg es th atb ecau s e th ere i s n o ex cep t io n fo r p en al t i es , th e g en eral ru l e ap p li es an dd efi ci en cy p ro cedures are i n ap p l i cab le. In res p o n s e, p et i t i o ners p o i ntt o the Sup rem e Co u rt ’ s d eci s i o n i n W oo d s as h ol di n g th atp en al ty d et erm i n at i o n s atth e p art n ers h i p l ev el
are o n l y p ro v i s i o n al
. W e d o n o tb el i ev e W o o d s s t an d s fo r t h e p ro p o s i t i o nth at p et i t i o n ers s u g g es t . In W o o d s the Sup rem e Co u rtad dres s eda Di s tri ctCo u rt ’ s ju ri s d i ct i o ni n p art n ers hi p -l ev el p ro ceed i n g s u n der TEFRA an dth e req u i rem en tfo r s ub s equ en t p art n er-l ev el d et erm i n at i o n s . As th e Sup rem e Co u rtex p l ai n ed : On ce t h e ad

ju s t m en t s t o p art n ers h i p i t em s h av e b eco m e fi n al , th e IRS m ay u n d ert ak e fu rt h er p ro ceed i n g s atth e p artn er l ev el t o m ak e an y res u lt i n g “ co m

p ut at i o n al ad

j u s t m en t s ” i n t h e t ax l i ab i l i ty o f t he i n d i vi du al p art n ers . M o s tco m p u tat i o n al ad

ju s t m en t s m ay

b e d i rect l y as s es s edag ai n stth e p art n ers , b y p as s i n g d efi ci en cy p ro ceed i n g s an d p erm i t t i ng th e p art n ers t o ch al l en g e t h e as s es s m en t s o nl y i n p o s t p aym en trefu n d act io n s . Defi ci en cy p ro ceed i n g s are s t i l l req ui red , h o wev er, fo r cert ai n co m p u t at i o nal ad

ju st m en t s * * * W o o d s , 5 7 1 U.S. at3 9 (ci t at i o n s o m i tt ed ). Th e Sup rem e Co u rtwen to n t o ex p l ai nth at co u rt s i np artn ers h i p-l ev el p ro ceed in g s h av e ju ri s di ct i o n t o d et erm i n e th e ap pl i cab i l i ty o f an y p en al ty

th at

“ rel at es t o ” a p art n ers h i p i t em . Id . (qu ot i n g s ect i o n6 2 2 6 (f)). Th u s , th e qu es t i o n- 1 3 -

[* 1 3 ] th e Sup rem e Co u rtwas d eci d i n g i n W o o d s was “ wh eth er t h e v al u at io n m i s s t at em en t p en al ty

‘ rel at es t o ’ th e d et erm i n at i o n th atth e p art n ers h i p s * * * were
s h am s . ” Id . Inan s weri n g th i s qu es t i o ni nth e affi rm at i v e t h e Sup rem e Co u rt
n o t edth at“ [u ] nd er TEFRA’ s two -s t ag e s tru ctu re, p en al t i es fo r t ax u n derp aym en t
m u stb e i m p os edatthe p art n er l ev el ”. Id . at4 0 . As th e Sup rem e Co urtex p l ai n ed , th i s ren d ers the p en al ty

d et erm i n at i o natth e p art n ers h ip -l ev el p ro ceed i n gs

“ i n heren t l y

p ro v i s i o n al ”, b ecau s e i tm u s tb e i m p o s edata l at er p artn er-l ev el p ro ceed in g . Id . at4 1 . Ho wev er, t h e Sup rem e Co u rtd o es n o tm ak e t h e s am e l eap th atp et i t i o n ers d o i n thi s cas e--i .e., th atth e l at er i m p os i t i o n o f t h e p ro vi si o n al p en al t i es m

u s tb e d on e u n d er n o rm al d efi ci en cy p ro ceed i n g s . Th e Sup rem e Co u rt
o n l y n o t es th at“ [e] ach p art n er rem ai n s free t o rai s e, i ns ub s equ en t, p artn er-l ev el p ro ceed in g s , an y

reas o n s wh y

th e p en al ty

m ay n o t b e i m

p o s edo nh i m
s p eci fi cal l y .” Id . at4 2 . Un d er s ect i on 6 2 3 0 t h e ap p ro p ri at e v en u e fo r p art n ers t o rai s e s ub s equ en tch al l en g es t o th e i m p os i t i o n o f p en al ti es i s i n a p o s tp aym en t refu ndact i o n. Sec. 6 2 3 0 (c)(4 ), (c)(1 )(C); s ec. 3 0 1 .6 2 2 1 -1 (c), Pro ced . & Adm i n . Reg s.; see al s o W oo d s , 5 7 1 U.S. at3 9 (“ [M ] o s tco m p u t at i o n al ad

ju s tm en t s m ay

b e d i rect l y as s es s edag ai n s tth e p art n ers , b y pas s i n g d efi ci en cy

p ro ceed i n gs an d p erm i t t in g th e p art n ers t o ch al l en g e t h e as s es s m en t s o nl y i n p o s t -p aym en trefu n d- 1 4 -

[* 1 4 ] act i o n s .”). 3 Th us , we fi ndth atwe h av e n o ju ri s d i ct io ni n th i s p re-p aym en t fo ru m t o co n s i d er t he p en al t i es d et erm i n edatth e p art n ers hi p l ev el . See al s o Do m u lewi cz v . Co m

m is s i o n er, 1 2 9 T.C. at2 2 -2 3. Pet i t io n ers m u s t rai s e an y d efen s es t o th e p en al ti es i n a refu n dact i o n . 4 As we h av e n o juri s d ict i o nt o

3 Th e Sup rem e Co u rtap p ears t o ackn o wl ed g e th ati t s h o l d in g i nUn i ted St at es v . W o o d s , 5 7 1 U.S. 3 1 (2 0 1 3 ), wo u ldal l o w th e d i rect as s es s m en to f p en al t i es wi th ou td efi ci en cy p ro ceed i n g s. In a fo o tn ot e, t he Sup rem e Co u rt d i s m i s s es cri ti ci s m fro m

am i ci th ati t s h ol d i n g wo ul dal l o w a d i rect as s es s m en to f th e 4 0 % p en al ty , b u t req u i re d efi ci en cy p ro ceed i n g s t o as s es s th e t ax u n d erp aym en t . Id . at4 2 n .2 . Ho wev er, t h e Suprem e Co u rtd o es n o ts co ff atth e as s u m pt i o n th ati t s h o l d in g wo u l dfo recl o s e th e d i rect as s es s m en to f p en al t i es ; rat h er, i ts u g g es t s thatth ere i s n o “ read i l y ap p aren t ” reas o nd efi ci en cy p ro ceed i n g s wo u l db e req u i redt o as s es s th e t ax u n d erp aym en ti f i twas d ep en d en to n ly o n ad ju s t i n g o u t s i d e b as i s i n a s ham p art ners hi p . Id
. 4 Pet i t i on ers s u g ges t th at d en y i n g th em a p rep aym en tfo ru m

t o d i s p u t e t h e p en al t i es i n th i s cas e wo u l dv i o l at e th e Fi ft h Am en dm en t ’ s due p ro ces s req u i rem en t . W e d o n o tag ree. Co n g res s h as ch o s en t o p ro v i d e p et i t i o n ers an d o th er s i m i l arl y

s i tu at edt ax p ay ers wi th o n l y a p os tp aym en t refu n dfo ru m . Su ch i s i t s p rero g at i v e an dd oes n o tv i o l at e t h e Co n s t i tu t i o nal req u i rem en t s o f du e p ro ces s . See Ph i l l i p s v . Co m

m i ss i o n er, 2 8 3 U.S. 5 8 9 , 5 95 -5 9 7 (1 9 3 1 ); J o h n s to nv . Co m m i s s i o n er, 4 2 9 F.2 d8 0 4 , 8 0 6 (6 th Ci r. 1 9 7 0 ), aff’ g 5 2 T.C. 7 9 2 (1 9 6 9 ); Fen dl er v . Co m

m i s s i on er, 4 4 1 F.2 d 1 1 0 1 , 1 1 0 3 (9 th Ci r. 1 9 7 1). Ad d it i on al l y , p et i t i o n ers arg u e t hatM rs . Gun th er’ s i nn o cen ts p o u s e cl ai m u n d er s ec. 6 0 1 5 req u i res g ran t i n g a p rep aym en to p p o rtu n i ty t o ch al len g e t h e p en al t i es i n th i s cas e. Ap artfro m a v ag u e as s ert i o ni n t h ei r p et i t i o nth at “ as a p ro t ect i v e m at t er, J ayn e i s en t i t l edt o In n o cen tSp o u s e Rel i ef u n d er Sect i o n 6 0 15 ”, we fi n dn o cl ai m fo r i n n o cen t s p o u se rel i ef b y M rs . Gun th er. Becau s e we fi n d th at th i s co n cl u s o ry st at em en td o es n o t s at i s fy o ur p l ead i n g req ui rem en t s , n o i n n o cen t s p o u se cl ai m

h as b een p l ead edan dwe wi l l n otco n s i d er t h i s arg u m en t . See Ru l e 3 2 1 (b ). Ou r d eci s i o n d o es n o tco n s i d er t h e m eri t s o f an y p o t en t i al i nn o cen t s p o u se cl ai m

M rs . Gun th er m ay

h av e.- 1 5 -

[* 1 5 ] co ns i d er t h e p en al ti es ati s s u e, we h av e n o au th o ri ty t o en jo in th ei r
co l l ect i o n o r as s es s m en t. Acco rd i n g l y , p et it i on ers ’ m o t i o nas i t rel at es t o th e p en al t i es wi ll b e d en i ed an dres p o n d en t ’ s m o t io nt o d i s m i s s as t o th e p en al t i es wi l l b e g ran t ed . W e h av e juri sd i ct io no v er t h e t ax l iab i l i t ies ati s s ue; th erefo re, p et i t i o n ers ’ m o t io n t o res trai n th e co l l ect i o no r as s es s m en to f t h e t ax l i ab i li t i es wi l l b e g ran t ed
. In reach i n g o u r h o ld in g s , we h av e co n s i dered al l arg u m en t s m ad e, an d , t o th e ex t en tn o t m en t io n ed ab o v e, we co n cl u d e t h ey are m o ot , i rrel ev an t , o r wi th o u t
m eri t . To refl ectthe fo reg o i n g , Ano rd er wi l l b e i s s u edg ran t i n g p et i t i o ners ’ m o t i on i n p art an dd en y i n g i ti n p artan dg ran t in g res p o n d en t ’ s m o t i o n .