United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 18, 2014 Decided June 26, 2015 

No. 12-1364 

PETALUMA FX PARTNERS, LLC, RONALD SCOTT 

VANDERBEEK, A PARTNER OTHER THAN THE TAX MATTERS 

PARTNER, 

APPELLEE

v. 

COMMISSIONER OF INTERNAL REVENUE SERVICE, 

APPELLANT

On Appeal from the Order and 

Decision of the United States Tax Court 

Joan I. Oppenheimer, Attorney, U.S. Department of 

Justice, argued the cause for appellant. With her on the briefs 

were Tamara W. Ashford, Principal Deputy Assistant 

Attorney General, and Gilbert S. Rothenberg, Attorney. 

Andrew Weiner, Attorney, entered an appearance. 

Edward M. Robbins Jr. argued the cause and filed the 

brief for appellee. 

Before: HENDERSON, GRIFFITH and SRINIVASAN, Circuit 

Judges. 

 Opinion for the Court filed by Circuit Judge SRINIVASAN. 
2 

 SRINIVASAN, Circuit Judge: This case comes before this 

court for a third time. It arises out of the Tax Court’s 

determination that Petaluma FX Partners, LLC, was a sham 

entity and so would be disregarded for tax purposes, resulting 

in the potential imposition of penalties against individual 

partners for underreporting their taxable income. The issue 

we now consider concerns whether the Tax Court had 

jurisdiction at the current, partnership-level stage to determine 

the applicability of the penalties to the individual partners, or 

whether that determination instead must await the 

commencement of separate, partner-level proceedings against 

each partner. 

 In United States v. Woods, 134 S. Ct. 557 (2013), the 

Supreme Court resolved that question in favor of the 

existence of jurisdiction at this stage of the proceedings. 

Petaluma nonetheless contests the Tax Court’s jurisdiction. 

Petaluma challenges a temporary Treasury Department 

regulation that, in Petaluma’s view, is necessary to confer the 

jurisdiction recognized in Woods. We have no occasion to 

resolve Petaluma’s challenge to the temporary regulation, 

however. Assuming that a regulation in fact is necessary to 

create jurisdiction in the Tax Court, we conclude that a 

different (and permanent) regulation is the operative one for 

purposes of conferring jurisdiction. The latter regulation is 

unchallenged here, and we see no basis for questioning its 

applicability in this case. We therefore conclude that the Tax 

Court had jurisdiction to decide the applicability of penalties 

to Petaluma’s partners. 
3 

I. 

A. 

 The Tax Court’s initial opinion in this case contains a 

detailed description of the facts giving rise to the dispute, 

Petaluma FX Partners, LLC v. Comm’r (Petaluma I), 131 

T.C. 84, 86-89 (2008), and our previous opinion summarizes 

the factual history, Petaluma FX Partners, LLC v. Comm’r

(Petaluma II), 591 F.3d 649, 650-52 (D.C. Cir. 2010). By 

way of a brief review, this case involves the so-called “Son of 

BOSS” tax shelter, in which two or more individuals set up a 

partnership solely for tax purposes. The Son of BOSS shelter 

generally makes use of a series of offsetting financial 

transactions aimed to generate artificial financial losses, with 

those losses in turn artificially reducing taxable income. In 

2000, the IRS formally identified Son of BOSS tax shelters as 

abusive transactions. I.R.S. Notice 2000-44, 2000-2 C.B. 

255. 

 In August 2000, the taxpayers in this case, Ronald 

Thomas Vanderbeek and Ronald Scott Vanderbeek, created a 

Son of BOSS shelter. They formed Petaluma FX Partners, 

LLC as a partnership, ostensibly for the purpose of trading 

foreign currency options. In October 2000, the Vanderbeeks 

each contributed pairs of offsetting long and short foreign 

currency options to Petaluma. When a partner contributes 

assets to a partnership, the partner must establish her outside 

basis in that partnership, which functions as a proxy for the 

value of the assets she contributed. See 26 U.S.C. § 722. 

Each of the Vanderbeeks, upon contributing his paired 

options to Petaluma, increased his outside basis to account for 

the value of his contributed long option. But neither of the 

Vanderbeeks reduced his outside basis to account for the 
4 

offsetting assumption of liability associated with the short 

options, resulting in an artificial inflation of his basis. 

In December 2000, the Vanderbeeks terminated their 

partnership interests in Petaluma. The upshot of their tax 

avoidance scheme was to inflate their basis in the 

partnership’s assets, enabling them to claim, on their 2000 

federal income tax returns, substantial short-term capital 

losses of nearly $18 million in the case of Ronald Thomas 

Vanderbeek and nearly $8 million in the case of Ronald Scott 

Vanderbeek. The Vanderbeeks in turn used those inflated 

losses to offset their capital gains for the 2000 tax year, thus 

artificially reducing their taxable income. 

B. 

 Partnerships do not pay federal income taxes. 26 U.S.C. 

§ 701. A partnership’s taxable income and losses instead pass 

through to the partners, who report their shares of partnership 

income or losses on their individual federal income tax 

returns. Id. When the IRS wishes to reject a transaction like 

the Son of BOSS tax shelter at issue in this case, it will 

disregard the partnership for tax purposes and thus disallow 

the individual partners to report the manufactured losses on 

their tax returns. See Woods, 134 S. Ct. at 561-62. Of 

particular significance here, the IRS possesses statutory 

authority to impose additional penalties on taxpayers who 

underreport their taxable income by significant amounts. See

26 U.S.C. § 6662. 

Although partnerships do not themselves pay income 

taxes, partnerships must submit information returns, which 

the IRS reviews and can subject to audit. See 26 U.S.C. 

§ 6031. At one time, the IRS lacked any means by which to 

correct errors on a partnership’s information return in a single, 
5 

unified proceeding. Instead, if there were a mistake on a 

partnership’s information return, the IRS would need to bring 

a separate deficiency proceeding against each individual 

partner, giving rise to duplicative proceedings and the 

possibility of inconsistent treatment of partners in the same 

partnership. 

Congress addressed that problem in the Tax Equity and 

Fiscal Responsibility Act of 1982 (TEFRA), 26 U.S.C. 

§§ 6221, et seq. TEFRA establishes a two-stage process for 

review of partnership tax issues, consisting of (i) a 

partnership-level proceeding concerning the partnership as a 

whole, followed by (ii) a partner-level proceeding for each 

individual partner. With regard to the former, if the IRS 

disagrees with a partnership’s information return, it can bring 

a partnership-level proceeding in which it may adjust 

“partnership items,” id. § 6221, defined as items “more 

appropriately determined at the partnership level,” id. 

§ 6231(a)(3). A partnership-level proceeding culminates in 

the IRS’s issuance of a Notice of Final Partnership 

Administrative Adjustment (FPAA), which is subject to 

judicial review in the Tax Court, the Court of Federal Claims, 

or federal district court. Id. § 6226(a). A reviewing court has 

jurisdiction to determine “all partnership items”; the 

allocation of those items among the partners; and “the 

applicability of any penalty, addition to tax, or additional 

amount which relates to an adjustment to a partnership item.” 

Id. § 6226(f). Once the IRS’s adjustments to the partnership 

items become final, the IRS may undertake further 

proceedings at the partner level to make associated 

adjustments to the tax liability of individual partners. See id. 

§§ 6230(a)(1)-(2), (c), 6231(a)(6). 
6 

C. 

 In July 2005, the IRS issued an FPAA to Petaluma and its 

partners for tax year 2000. The FPAA concluded that 

Petaluma lacked economic substance and was thus a sham 

that would be disregarded for tax purposes. The FPAA 

relatedly reduced to zero the Vanderbeeks’ outside basis in 

their respective partnership interests. Finally, the FPAA 

determined that the accuracy-related penalties set forth in 26 

U.S.C. § 6662 applied to the partners’ underpayments of tax. 

 Petaluma, joined by Ronald Scott Vanderbeek, timely 

filed a petition for readjustment of the FPAA in the Tax 

Court. During the initial Tax Court proceedings, Petaluma 

stipulated to the correctness of most of the adjustments made 

by the FPAA but challenged the Tax Court’s jurisdiction. 

The Tax Court granted the IRS’s motion for summary 

judgment, concluding that it had jurisdiction to determine: (i) 

that Petaluma was a sham; (ii) that the Vanderbeeks had no 

outside basis in Petaluma because “there can be no adjusted 

basis in a disregarded partnership”; and (iii) that accuracyrelated penalties would be applicable to Petaluma’s partners. 

Petaluma I, 131 T.C. at 97, 99-100, 102. 

 Petaluma appealed to this court. Petaluma II, 591 F.3d at 

649. We upheld the Tax Court’s jurisdiction to deem 

Petaluma a sham entity for tax purposes. Id. at 654. But we 

held that the Tax Court lacked jurisdiction in a partnershiplevel proceeding to determine the outside basis of individual 

partners, concluding that the determination of outside basis 

must await a subsequent partner-level proceeding. Id. at 654-

55. We therefore vacated the Tax Court’s decision that it had 

jurisdiction over the applicability of penalties, and we 

remanded for the Tax Court to decide whether it could 
7 

determine the applicability of penalties without taking into 

account the outside basis of individual partners. Id. at 655-56. 

 On remand, the Tax Court held that it lacked jurisdiction 

in this partnership-level proceeding to determine the 

applicability to the Vanderbeeks of accuracy-related penalties. 

Petaluma FX Partners, LLC v. Comm’r (Petaluma III), 135 

T.C. 581, 586-87 (2010). The IRS again appealed to this 

court. During the pendency of that appeal, the Tax Court in 

an unrelated case held, in seeming conflict both with our 

decision in Petaluma II and with its own decision in Petaluma 

III, that it had jurisdiction in partnership-level proceedings to 

determine both the outside basis of individual partners and the 

applicability of penalties. Tigers Eye Trading, LLC v. 

Comm’r (Tigers Eye II), 138 T.C. 67, 143 (2012). Because of 

the apparent conflict between Petaluma III and Tigers Eye II, 

we remanded the case without reaching the merits, directing 

the Tax Court to address the extent to which its decision in 

Tigers Eye II altered its decision in Petaluma III. Petaluma 

FX Partners, LLC v. Comm’r (Petaluma IV), No. 11-1084, 

2012 WL 2335993, at *1 (D.C. Cir. Feb. 27, 2012) (per 

curiam). On remand, the Tax Court adhered to the result in 

Petaluma III despite the apparently contradictory conclusions 

reached in Tigers Eye II. Petaluma FX Partners, LLC v. 

Comm’r (Petaluma V), 103 T.C.M. (CCH) 1769 (2012). 

 The IRS once again appealed, arguing that the Tax Court 

erred in finding it lacked jurisdiction to determine the 

applicability of accuracy-related penalties in Petaluma’s 

partnership-level proceeding. The taxpayer in Tigers Eye II

concurrently appealed. We held both cases in abeyance 

pending the Supreme Court’s decision in Woods. Woods

involved a similar tax shelter in which a partnership’s partners 

each likewise claimed large losses based on an artificially 

inflated outside basis. The Court in Woods ordered briefing 
8 

on the jurisdictional question raised by the IRS in this appeal: 

whether courts have jurisdiction in partnership-level 

proceedings to determine the applicability of accuracy-related 

penalties authorized by § 6662. 134 S. Ct. at 562. 

As a threshold matter, the Woods Court endorsed our 

holdings in Petaluma II that (i) courts have jurisdiction in 

partnership-level proceedings to determine that a partnership 

is a sham and will be disregarded for tax purposes, and (ii) 

courts lack jurisdiction in partnership-level proceedings to 

determine an individual partner’s outside basis. Woods, 134 

S. Ct. at 563-65. With respect to the latter determination, the 

Court held, in agreement with our decision in Petaluma II, 

that because outside basis is a nonpartnership item, a court in 

a partnership-level proceeding lacks jurisdiction to “make a 

formal adjustment of any partner’s outside basis.” Id. at 565 

(citing Petaluma II, 591 F.3d at 655). The Court went on to 

hold, however, that courts in partnership-level proceedings 

have jurisdiction to determine the applicability of accuracyrelated penalties to a partner, “even if imposing the penalty 

would also require determining . . . items such as outside 

basis.” Id. at 564. 

II. 

 Of the three jurisdictional questions raised by this case, 

two—jurisdiction to make a sham determination and 

jurisdiction to determine the outside basis of individual 

partners—were resolved by the Petaluma II panel, see

Petaluma II, 591 F.3d at 654-55, in a manner subsequently 

endorsed by the Woods Court, Woods, 134 S. Ct. at 563-65. 

The remaining jurisdictional issue concerns whether 

jurisdiction exists in partnership-level proceedings to 

determine the applicability of penalties to the partners of a 

sham partnership, including penalties that relate to 
9 

nonpartnership items such as outside basis. See Petaluma II, 

591 F.3d at 655-56. 

In Woods, the Supreme Court resolved that question in 

favor of jurisdiction. 134 S. Ct. at 564. The Court observed 

that the applicability-of-penalties determination is “inherently 

provisional,” in that “imposing a penalty always requires 

some determinations”—such as a partner’s outside basis—

“that can be made only at the partner level.” Id. But courts 

retain jurisdiction in partnership-level proceedings to 

determine whether any partnership-level adjustments—such 

as the determination in this case that Petaluma was a sham—

carry “the potential to trigger a penalty” against the partners. 

Id. at 565. Under Woods, accordingly, the Tax Court in this 

case had jurisdiction to determine the applicability of 

accuracy-related penalties to the Vanderbeeks. 

 Notwithstanding Woods, Petaluma contends that the Tax 

Court lacked jurisdiction in this partnership-level proceeding 

to make any determinations concerning Petaluma or its 

partners, including the determination that the partners are 

subject to accuracy-related penalties. Petaluma’s argument 

centers on the validity of a temporary regulation, § 301.6233-

1T (the Temporary Regulation), issued in 1987 by the 

Treasury Department. Temp. Treas. Reg. § 301.6233-1T. An 

understanding of the Temporary Regulation’s potential 

implications for the Tax Court’s jurisdiction in this case 

requires a brief march through the statutory and regulatory 

provisions governing federal jurisdiction over sham 

partnerships. 

 That march begins with § 6226(f) of the Internal Revenue 

Code, enacted as part of TEFRA. Section 6226(f) establishes 

that, in a partnership-level proceeding, a court (including the 

Tax Court) reviewing an FPAA has jurisdiction to determine 
10 

not only “all partnership items,” but also “the applicability of 

any penalty . . . which relates to an adjustment to a 

partnership item.” 26 U.S.C. § 6226(f). In 1984, two years 

after TEFRA’s enactment, Congress enacted § 6233(b). That 

provision states that, “to the extent provided in regulations,” 

the provisions of TEFRA are “extended” to entities that file a 

partnership return but as to which “it is [later] determined that 

there is no entity” for that taxable year (because, for instance, 

the entity is found to be a sham). Id. § 6233(a)-(b). 

Treasury, acting pursuant to its authority under § 6233(b) 

to “provide[] in regulations” for the extension of TEFRA’s 

provisions to sham partnerships, id. § 6233(b), promulgated 

the aforementioned Temporary Regulation. The Temporary 

Regulation prescribes that “any [FPAA] or judicial 

determination resulting from a [TEFRA] proceeding . . . may 

include a determination” that “there is no entity for such 

taxable year,” as well as “determinations with respect to all 

items of the entity which would be partnership items . . . if 

such entity had been a partnership in such taxable year.” 

Temp. Treas. Reg. § 301.6233-1T(a), (c)(1). Under the 

Temporary Regulation, in other words, TEFRA’s provisions 

apply not only to bona fide partnerships but also to 

partnerships determined to be shams. 

 TEFRA’s provisions include § 6226(f), which, as noted, 

vests courts in partnership-level proceedings with jurisdiction 

over partnership items and over the applicability of penalties 

related to adjustments to partnership items. In Petaluma’s 

view, that provision’s grant of jurisdiction—like all of 

TEFRA’s provisions—could extend to sham partnerships only 

if a regulation promulgated under § 6233(b) so provides. 

Here, Petaluma assumes, that extension ostensibly came about 

by virtue of the Temporary Regulation. And if the Temporary 

Regulation is invalid, Petaluma argues, the Tax Court 
11 

necessarily had no valid basis upon which to assert 

jurisdiction in this partnership-level proceeding. 

Petaluma challenges the validity of the Temporary 

Regulation on the ground that its promulgation failed to 

comply with both the Administrative Procedure Act’s noticeand-comment requirements and the APA’s mandate that 

agencies publish a substantive rule at least thirty days before 

its effective date. See 5 U.S.C. § 553(c), (d). Although 

Petaluma failed to raise that (or any) challenge to the 

Temporary Regulation at any previous point in these 

prolonged proceedings, the IRS raises no argument that 

Petaluma forfeited its challenge. Because a forfeiture 

argument can itself be forfeited, see Deppenbrook v. Pension 

Benefit Guaranty Corp., 778 F.3d 166, 172 (D.C. Cir. 2015), 

and because the IRS has done so here, forfeiture principles 

pose no bar to reaching the merits of Petaluma’s challenge to 

the Temporary Regulation. 

 While the IRS does not argue forfeiture, it contends that 

we should refrain from reaching the merits of Petaluma’s 

argument for a different reason. In the IRS’s view, law-ofthe-case principles should bar us from addressing the validity 

of the Temporary Regulation because Petaluma II already 

resolved that question. The “law-of-the-case doctrine holds 

that decisions rendered on the first appeal should not be 

revisited on later trips to the appellate court.” LaShawn A. v. 

Barry, 87 F.3d 1389, 1393 (D.C. Cir. 1996) (en banc). Here, 

however, Petaluma II did not render a “decision” on the 

validity of the Temporary Regulation, so we would not 

“revisit” any such decision by addressing the merits of that 

issue. Although the Petaluma II panel noted the existence of 

the Temporary Regulation in discussing the Tax Court’s 

jurisdiction over the sham determination, Petaluma II, 591 

F.3d at 652, the Temporary Regulation’s validity was neither 
12 

questioned nor decided in that appeal. Even if Petaluma II in 

some sense assumed the validity of the Temporary 

Regulation, an issue “assumed” by an appellate court in an 

initial appeal does not become the law of the case; rather, the 

“law of the case doctrine does not apply where an issue was 

not raised before the prior panel and thus was not decided by 

it.” Yesudian, ex rel. U.S. v. Howard Univ., 270 F.3d 969, 

972 (D.C. Cir. 2001). We therefore proceed to address the 

merits of Petaluma’s challenge. 

Petaluma’s challenge to the Temporary Regulation 

presumes that the Tax Court would have jurisdiction in this 

partnership-level proceeding only if a valid regulation grants 

jurisdiction over sham partnerships. Cf. Petaluma II, 591 

F.3d at 652. The IRS does not contest that premise. We 

briefly note, though, that it is unclear whether a regulation in 

fact is necessary to give the Tax Court jurisdiction to decide if 

a partnership is a sham and if penalties apply against the 

partners. The Supreme Court’s opinion in Woods concluded 

that jurisdiction exists over those matters in partnership-level 

proceedings; and in reaching that conclusion, the Court relied 

solely on TEFRA’s base jurisdictional statute, § 6226(f), 

without referencing either the statute extending TEFRA’s 

provisions to sham partnerships “to the extent provided in 

regulations,” § 6233(b), or any resulting regulation. See 134 

S. Ct. at 563-65. The Woods Court thus may have assumed 

that jurisdiction exists in the circumstances of this case by 

virtue of § 6226(f) alone, without regard to regulations 

implementing § 6233(b). 

We have no need to resolve that issue, however. Even 

assuming arguendo that the Tax Court’s jurisdiction in this 

case depends on the existence of a valid regulation issued 

under § 6233(b) extending TEFRA’s provisions to sham 

partnerships, Petaluma’s jurisdictional argument fails. 
13 

Petaluma aims at the wrong target: Petaluma challenges the 

validity of the Temporary Regulation, but the pertinent 

regulation is a later-promulgated, final regulation, Treasury 

Regulation § 301.6233-1 (2001) (the Final Regulation). 

 The history of the regulations promulgated pursuant to 

§ 6233 demonstrates the salience of the Final Regulation 

rather than the Temporary Regulation. In 1986, Treasury 

proposed a group of regulations implementing TEFRA, 

including one carrying out § 6233’s invitation to extend 

TEFRA’s provisions to sham partnerships by regulation. 

Prop. Treas. Reg. § 301.6233-1, 51 Fed. Reg. 13,231, 13,249-

50 (Apr. 18, 1986). That proposed regulation stated that 

“[a]ny [FPAA] or judicial determination . . . may include a 

[sham] determination” as well as determinations of other 

“partnership” items of the entity deemed to be a sham. Prop. 

Treas. Reg. § 301.6233-1(a), (c)(1). The following year, 

Treasury issued the Temporary Regulation, which gave effect 

to the proposed regulations on an interim basis. The 

Temporary Regulation contained the same language applying 

TEFRA’s provisions to sham partnerships. Temp. Treas. Reg. 

§ 301.6233-1T. And both the 1986 proposed regulation and 

the Temporary Regulation applied by their terms “with 

respect to any taxable year beginning after September 3, 

1982.” Temp. Treas. Reg. § 301.6233-1T(e); Prop. Treas. 

Reg. § 301.6233-1(e). 

 The Temporary Regulation proved to be less temporary 

than perhaps initially envisioned, remaining in effect for more 

than a decade. But it was eventually displaced by the Final 

Regulation. In 1999, Treasury issued a “notice of proposed 

rulemaking by cross-reference to” the Temporary Regulation, 

conveying the department’s intent to “finalize” the Temporary 

Regulation. Modifications and Additions to the Unified 

Partnership Audit Procedures, 64 Fed. Reg. 3886, 3886-87 
14 

(Jan. 26, 1999). Treasury realized that intention in 2001 by 

promulgating the Final Regulation. See Treas. Reg. 

§ 301.6233-1. Although the Final and Temporary 

Regulations differ in certain limited respects of no 

consequence here, compare Temp. Treas. Reg. § 301.6233-

1T(b), (c)(2), with Treas. Reg. § 301.6233-1(b), the Final 

Regulation’s language applying TEFRA’s provisions to sham 

partnerships parrots the corresponding language of the 

Temporary Regulation, see Treas. Reg. § 301.6233-1(a), (b); 

Temp. Treas. Reg. § 301.6233-1T(a), (c)(1). 

 The Final Regulation applies to all tax years, but it adopts 

a bifurcated approach depending on the tax year in question. 

First, the Final Regulation’s provisions control with regard to 

“taxable years beginning on or after October 4, 2001,” the 

date of the Final Regulation’s adoption. Treas. Reg. 

§ 301.6233-1(d). Second, for taxable “years beginning prior 

to October 4, 2001,” the Final Regulation says to “see 

§ 301.6233-1T,” i.e., the Temporary Regulation. Id. The 

rules set forth in the Temporary Regulation thus control for 

taxable years beginning before October 4, 2001, a period that 

includes the tax year at issue here (2000). 

While the rules set out in the Temporary Regulation 

apply to those past tax years per the direction of the Final 

Regulation, the Temporary Regulation itself does not continue 

to apply. To the contrary, the Temporary Regulation ceased 

having effect upon adoption of the Final Regulation. Indeed, 

the “Action” undertaken by the Final Regulation included 

“removal of temporary regulations,” Unified Partnership 

Audit Procedures, 66 Fed. Reg. 50,541, 50,541 (Oct. 4, 2001), 

and the Final Regulation correspondingly directed that 

“Section 301.6233-1T [the Temporary Regulation] is 

removed” from the Code of Federal Regulations. Unified 

Partnership Audit Procedures, 66 Fed. Reg. at 50,563 ¶ 53a; 
15 

compare 26 C.F.R. § 301.6233-1T (2001), with 26 C.F.R. 

§ 301.6233-1 (2002). The upshot is that the Final Regulation 

controls for all tax years; but as to tax years commencing 

before October 4, 2001, the Final Regulation effectively 

incorporates the rules set forth in the no-longer-operative 

Temporary Regulation. 

Because the Final Regulation is the operative regulation, 

Petaluma’s procedural challenges to the now-obsolete 

Temporary Regulation are misdirected. Any procedural 

deficiency afflicting the Temporary Regulation is of no 

continuing significance. Rather, the Final Regulation now 

prescribes the rules applicable to all tax years, including preOctober 1, 2001, tax years. And because Petaluma challenges 

only the Temporary Regulation—not the Final Regulation—

under the APA’s notice-and-comment and thirty-daypublication provisions, its jurisdictional argument necessarily 

fails. Nor are we aware of any basis on which Petaluma could 

assert those same procedural challenges against the Final 

Regulation. 

With regard to Petaluma’s principal challenge, 

concerning the APA’s notice-and-comment rules, see 5 

U.S.C. § 553(c), the IRS in 1999 issued a notice of proposed 

rulemaking in connection with the Final Regulation. 

Modifications and Additions to the Unified Partnership Audit 

Procedures, 64 Fed. Reg. at 3886. In that notice, the IRS 

made clear that it “intend[ed] to finalize” the Temporary 

Regulation, it observed that the “text of [the] temporary 

regulations . . . generally serves as the text of these proposed 

regulations,” and it invited the submission of comments. Id.

at 3886-87. In communicating its intention to “finalize” the 

Temporary Regulation, id., the IRS gave notice that the rules 

set forth in the Temporary Regulation would continue to 

apply—as that regulation itself prescribed—“with respect to 
16 

any taxable year beginning after September 3, 1982.” Temp. 

Treas. Reg. § 301.6233-1T(e). The agency received no 

written comments in response to its proposed finalization of 

the Temporary Regulation. See Unified Partnership Audit 

Procedures, 66 Fed. Reg. at 50,542. 

We note, though, that the IRS evidently had previously 

received “[s]everal comments” in 1986 when it initially 

proposed a regulation applying TEFRA to sham partnerships. 

See Miscellaneous Provisions Relating to the Tax Treatment 

of Partnership Items, 52 Fed. Reg. 6779, 6780 (Mar. 5, 1987). 

When the IRS later proposed to finalize the Temporary 

Regulation in 1999, it explained that it would take into 

account those previous comments, stating that “[c]omments 

previously received in connection with the [Temporary 

Regulation] will be considered as well as new or additional 

comments.” Modifications and Additions to the Unified 

Partnership Audit Procedures, 64 Fed. Reg. at 3887. It is 

unclear from the record whether any of the previous 

comments specifically pertained to the proposed regulation 

extending TEFRA to sham partnerships or whether those 

comments instead concerned some other aspect of the broader 

set of regulations proposed at that time. 

While the IRS did not specifically discuss the prior 

comments when it adopted the Final Regulation, an agency’s

“failure to address a particular comment or category of 

comments is not an APA violation per se.” Sherley v. 

Sebelius, 689 F.3d 776, 784 (D.C. Cir. 2012). And in any 

event, “the court will not set aside a rule” for failure to 

comply with § 553’s notice and comment requirements unless 

a party has shown that it “suffered prejudice from the 

agency’s failure.” Am. Radio Relay League, Inc. v. FCC, 524 

F.3d 227, 237 (D.C. Cir. 2008) (internal quotations omitted); 

see 5 U.S.C. § 706. Here, Petaluma identifies no comment it 
17 

believes the IRS erroneously disregarded. We therefore have 

no reason to conclude that the agency failed to “base” its 

“decision . . . on a consideration of the relevant factors.” 

Thompson v. Clark, 741 F.2d 401, 409 (D.C. Cir. 1984). 

Nor could Petaluma challenge the Final Regulation on 

the ground that it infringes 5 U.S.C. § 553(d), which generally 

calls for “publication” of a “substantive rule . . . not less than 

30 days before its effective date.” The Final Regulation went 

into effect immediately upon adoption, without any 30-day 

deferral. Treas. Reg. § 301.6233-1(d). We need not address, 

however, whether there was any breach of § 553(d). As with 

the APA’s notice and comment rules, the thirty-day notice 

requirement of § 553(d) is subject “to the rule of prejudicial 

error.” 5 U.S.C. § 706; see United States v. Dean, 604 F.3d 

1275, 1288 (11th Cir. 2010). There is no basis for supposing 

that Petaluma could have suffered any prejudice as a 

consequence of the agency’s decision to make the Final 

Regulation effective upon promulgation. Indeed, as the IRS 

observed at the time of the Final Regulation’s adoption, 

“[t]axpayers and the IRS ha[d] been operating under [the 

same] rules since they were promulgated as temporary 

regulations” in 1987. Unified Partnership Audit Procedures, 

66 Fed. Reg. at 50,542. 

We therefore conclude that, assuming there is a need for 

a regulation to confer jurisdiction in the Tax Court in this 

case, the Final Regulation does so. We acknowledge that the 

IRS, in its reply brief, responded to Petaluma’s challenges to 

the Temporary Regulation on the merits, without noting or 

discussing the possibility that the Final Regulation in fact is 

the operative regulation. In the course of examining the 

challenge raised by Petaluma, we have concluded, for the 

reasons explained, that the Final Regulation governs the Tax 

Court’s jurisdiction. 
18 

Finally, Petaluma raises a challenge to a separate 

regulation, Treasury Regulation § 1.6662-5(g) (1991), 

addressed to the calculation of accuracy-related penalties 

when a taxpayer’s adjusted basis is zero. Under that 

regulation, “[t]he value or adjusted basis claimed . . . is 

considered to be 400 percent or more of the correct amount.” 

Id. Petaluma contends that the regulation conflicts with the 

mathematical rule prohibiting division by zero, an argument 

noted (but not resolved) by the Supreme Court in Woods. 134 

S. Ct. at 566 n.4. We, too, do not reach the merits of the 

argument. Unlike with Petaluma’s challenge to the 

Temporary Regulation, the IRS argues that Petaluma forfeited 

its challenge to § 1.6662-5(g) by failing to raise it until this 

late stage of the case. See, e.g., Hartman v. Duffey, 88 F.3d 

1232, 1236 (D.C. Cir. 1996). We agree. 

* * * * * 

For the foregoing reasons, the judgment of the Tax Court 

with respect to its jurisdiction to determine the applicability of 

penalties in partnership-level proceedings is reversed, and the 

case is remanded for further proceedings consistent with this 

opinion. 

So ordered.