129 T.C. No. 3

UNITED STATES TAX COURT

MICHAEL V. DOMULEWICZ AND MARY ANN DOMULEWICZ, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10434-05. Filed August 8, 2007.

As part of a Son-of-BOSS transaction designed to

create a basis of approximately $29.3 million in

publicly traded stock purchased at a relatively minimal

cost, P entered into a short sale of U.S. Treasury

notes and contributed the proceeds of that sale and the

related obligation to a partnership (DIP) in which P

was one of three partners. Neither P nor DIP treated

the obligation assumed by DIP as a liability under sec.

752, I.R.C., and P did not compute his basis in DIP by

taking the obligation into account. After DIP

satisfied the obligation and received contributions of

the publicly traded stock from its partners, the

partners transferred their interests in DIP to DII, an

S corporation of which they were shareholders. The

transfer of partnership interests was followed by DII’s

receipt of DIP’s distributed assets; i.e., the stock

and cash. DII sold the stock and claimed a resulting

capital loss of $29,306,024. On Ps’ 1999 Federal

income tax return, P claimed his $5,858,801 share of

the reported loss as a passthrough capital loss from
- 2 -

DII. P claimed that the loss offset a $5,831,772

capital gain that P realized during the year. In an

FPAA pertaining to DIP, R determined that the basis of

the stock distributed by DIP was zero and that

accuracy-related penalties under sec. 6662, I.R.C.,

applied. When no petition was filed as to the FPAA, R

did not assess any tax or accuracy-related penalty as

to DII’s sale of the stock. Instead, R issued an

affected items notice of deficiency to Ps as a

predicate to assessing those amounts. Ps now move the

Court to dismiss this case for lack of jurisdiction,

asserting that the deficiency procedures of subch. B of

ch. 63, I.R.C. (deficiency procedures), do not apply to

R’s disallowance of the passthrough loss or to R’s

determination of the accuracy-related penalties.

Held: Sec. 6230(a)(2)(A)(i), I.R.C., makes the

deficiency procedures applicable to R’s disallowance of

the passthrough loss from DII.

Held, further, R’s determination of the

accuracy-related penalties is not subject to the

deficiency procedures by virtue of the parenthetical

text added to sec. 6230(a)(2)(A)(i), I.R.C., by the

Taxpayer Relief Act of 1997, Pub. L. 105-34, sec.

1238(b)(2), 111 Stat. 1026.

David D. Aughtry, Eric M. Nemeth, and Paul L.B. McKenney,

for petitioners. 

Meso T. Hammoud, for respondent. 

OPINION

LARO, Judge: This is a Son-of-BOSS case that is currently

before the Court on petitioners’ motion to dismiss for lack of

jurisdiction. See generally Kligfeld Holdings v. Commissioner,

128 T.C. 192 (2007), and Notice 2000-44, 2000-2 C.B. 255, for a

general description of Son-of-BOSS cases. Petitioners petitioned
- 3 -

1 Unless otherwise indicated, section references are to the

applicable versions of the Internal Revenue Code. Rule

references are to the Tax Court Rules of Practice and Procedure.

2 We decide these issues with the aid of extensive briefing

by the parties. The briefing was in the form of petitioners’

memorandum, respondent’s response, petitioners’ reply, and

respondent’s response to reply. After the Court filed

respondent’s response to reply, petitioners moved the Court to

allow them to make their arguments at a hearing. We shall deny

that motion. The parties have adequately advanced their legal

arguments, and further arguments would not significantly aid our

decision process. See Rule 50(b)(3).

the Court to redetermine respondent’s determination of a

$2,398,491 deficiency in their 1999 Federal income tax and a

$946,750.80 accuracy-related penalty under section 6662(a).1

Those determinations were reflected in an affected items notice

of deficiency issued to petitioners after no partner of DMD

Investment Partners (DIP) timely petitioned the Court with

respect to a notice of final partnership administrative

adjustment (FPAA) mailed to Michael Domulewicz (petitioner) as

DIP’s tax matters partner (TMP). Copies of the FPAA also were

mailed to each of DIP’s other partners.

We decide the following issues:2

1. Whether section 6230(a)(2)(A)(i) makes the deficiency

procedures of subchapter B of chapter 63 (deficiency procedures)

applicable to respondent’s disallowance of petitioners’ claim to

a passthrough loss from DMD Investments, Inc. (DII), an S

corporation in which petitioner (through his grantor trust) was a
- 4 -

3 DII’s other shareholders were the two other partners in

DIP. Each of those other shareholders owned a 40-percent

interest in DIP and a 40-percent interest in DII.

4 Petitioners’ motion states in part that the Court lacks

jurisdiction over both issues because the applicable periods of

limitation for assessment of the deficiency and penalties have

expired. Because the expiration of the period of limitation is

an affirmative defense and does not affect this Court’s

jurisdiction, see Davenport Recycling Associates v. Commissioner,

220 F.3d 1255, 1259 (11th Cir. 2000), affg. T.C. Memo. 1998-347;

Columbia Bldg., Ltd. v. Commissioner, 98 T.C. 607, 611 (1992);

cf. Day v. McDonough, 547 U.S. 198, , 126 S. Ct. 1675, 1681

(2006) (“A statute of limitations defense * * * is not

‘jurisdictional’”), we reject without further discussion the

portion of petitioners’ arguments dealing with the period of

limitation.

20-percent shareholder.3 Petitioners argue that the deficiency

procedures do not apply to this item. Respondent argues to the

contrary, asserting that a partner-level determination was

required as to this item. We agree with respondent.

2. Whether respondent’s determination of the

accuracy-related penalties is subject to the deficiency

procedures. The parties agree that it is not. So do we.4

Background

Petitioners are husband and wife, and they resided in

Bloomfield Hills, Michigan, when their petition was filed with

the Court. They filed a joint 1999 Form 1040, U.S. Individual

Income Tax Return, on or before August 18, 2000.

Petitioner was a 20-percent shareholder of CTA Acoustics

(CTA) when CTA was sold on April 30, 1999, at a gain to the

shareholders of approximately $30 million. Petitioner’s portion
- 5 -

5 As we recently explained in Kligfeld Holdings v.

Commissioner, 128 T.C. 192, 195 n.6 (2007):

A short sale is the sale of borrowed securities,

typically for cash. The short sale is closed when the

short seller buys and returns identical securities to

the person from whom he borrowed them. The amount and

characterization of the gain or loss is determined and

reported at the time the short sale is closed. * * *

6 Petitioner held his interest in DIP through his grantor

trust. Because all items from DIP flowed directly to petitioner

through the grantor trust, we refer to petitioner’s interest in

DIP as if he owned it directly.

7 Petitioner entered into the sale through his single-member

(continued...)

of the gain was $5,831,772, and he implemented a plan promoted by

BDO Seidman and Jenkens & Gilchrist to create a $5,858,801 “loss”

to report as an offset to that gain. As discussed in more detail

infra, the “loss” was reportedly generated by using a

partnership, an S corporation, and a short sale of U.S. Treasury

notes to create a basis of approximately $29.3 million in

publicly traded stock purchased at a relatively minimal cost.5

The transaction was similar to the transactions described in

Notice 2000-44, supra.

Under the plan, DIP was formed on April 30, 1999, with

petitioner as a 20-percent partner and two other individuals (at

least one of whom was a 40-percent shareholder of CTA) each with

a 40-percent interest.6 On July 7, 1999, petitioner entered into

a short sale of U.S. Treasury notes with a face value of

$5,800,000.7 The U.S. Treasury notes matured on May 31, 2001,
- 6 -

7(...continued)

limited liability company. Because that company is disregarded

as an entity for Federal income tax purposes, see sec.

301.7701-2(c)(2), Proced. & Admin. Regs.; see also Kligfeld

Holdings v. Commissioner, supra at 195 n.7, we refer to the sale

as if it were entered into directly by petitioner.

and petitioner sold them on July 7, 1999, for $5,791,057.06

(inclusive of $31,614.75 of accrued interest). On July 8, 1999,

petitioner contributed to DIP the proceeds of the short sale, the

obligation to satisfy the short sale, and $116,000 in “margin

cash”. Neither petitioner nor DIP treated the short sale

obligation assumed by DIP as a liability under section 752, and

petitioner did not compute his basis in his interest in DIP by

taking that obligation into account. On July 14, 1999, DIP

satisfied the short sale obligation (as well as similar short

sale obligations assumed from DIP’s other partners) by purchasing

U.S. Treasury notes with a face value of $29,500,000 for

$29,402,053.78 plus accrued interest of $186,188.52 and

delivering the U.S. Treasury notes in satisfaction of the short

sales.

On August 12, 1999, petitioner transferred to DIP 1,500

shares of publicly traded stock in Integral Vision, Inc. (INVI). 

On August 23, 1999, DIP sold 4,500 of the 7,500 shares of INVI

stock contributed by the partners (in addition to 1,500 shares

contributed by petitioner, the other two partners of DIP had

contributed a total of 6,000 shares) and claimed a short-term
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capital loss of $2,278. DIP reported as to the claimed loss that

the 4,500 shares were purchased on August 11, 1999, at a cost of

$10,893 and were sold for $8,615. On August 24, 1999, petitioner

transferred his interest in DIP to DII, which had been

incorporated approximately 8 months earlier. Petitioner and DII

reported that transfer as a nontaxable exchange under section

351, and DII claimed a carryover basis in the transferred

partnership interest equal to petitioner’s basis in DIP. As a

result of this transfer (and similar contemporaneous transfers

made by DIP’s two other partners), DIP dissolved and all of its

assets, including the remaining 3,000 shares of INVI stock, were

distributed and received by DII. On DIP’s 1999 (final) Form

1065, U.S. Partnership Return of Income, DIP reported for that

year that it had realized (1) $1,961 in income, all from taxexempt interest, and (2) a $110,611 short-term capital loss

attributable to the sale of U.S. Treasury notes ($108,333) and

the sale of the 4,500 shares of INVI stock ($2,278). DIP also

reported that it had paid $167,477 of interest expenses on

investment debts and that it had distributed $30,447,106 in cash

and/or marketable securities to its partners. Petitioner, as a

general partner of DIP, filed DIP’s 1999 return no later than

April 17, 2000. 

At the time of DIP’s dissolution, DIP’s only assets were the

INVI stock and minimal cash. Pursuant to section 732(b), DII
- 8 -

8 DII’s 1999 Form 1120S reports that the INVI shares that

were the subject of the sale were “acquired” on Dec. 3, 1997. 

DII’s 1999 Form 1120S does not report the number of INVI shares

that DII sold on Dec. 30, 1999. 

claimed a basis in the INVI stock equal to its basis in DIP. On

December 30, 1999, DII sold some INVI stock for $5,716 and

claimed on its 1999 Form 1120S, U.S. Income Tax Return for an S

Corporation, that it had realized on the sale a long-term capital

loss of $29,306,024.8 DII also claimed an ordinary loss of

$1,053,400, resulting from its payment of fees to Jenkens &

Gilchrist. As to the claimed losses, an ordinary loss of

$210,680 (representing petitioner’s share of the fees) and a

long-term capital loss of $5,858,801 (representing petitioner’s

share of the reported capital loss) passed through to petitioner,

who claimed them on petitioners’ 1999 Federal income tax return. 

Petitioners claimed on that return that the $5,858,801 long-term

capital loss offset a $5,831,772 long-term capital gain that

petitioner had realized on April 30, 1999, from his sale of his

stock in CTA.

On October 15, 2003, respondent mailed the FPAA for 1999 to

petitioner as DIP’s TMP. Respondent determined in the FPAA that

DIP was not entitled to deduct any of the claimed $110,611 shortterm capital loss, that DIP was not entitled to deduct any of the

claimed $167,477 of interest expenses, that the basis of the

property (other than money) distributed by DIP was zero rather
- 9 -

than $30,447,106 as claimed, and that a series of alternative

accuracy-related penalties under section 6662 applied. As to

these items, respondent determined in the FPAA that: (1) The

basis of the property distributed by DIP was zero because DIP

failed to substantiate the basis and, alternatively, the outside

bases of DIP’s partners were not adjusted under section 752 on

account of the short sale liability; (2) DIP’s claimed short-term

capital loss and interest expense were disallowed for lack of

substantiation; (3) DIP was a sham and was disregarded, and all

transactions it engaged in were treated as engaged directly by

the partners; (4) under section 1.701-2, Income Tax Regs., DIP’s

partners were not treated as partners; (5) under section 1.701-2,

Income Tax Regs., contributions to DIP had to be adjusted to

reflect clearly the income of DIP and its partners; and (6) the

40-percent accuracy-related penalty under section 6662(a),

(b)(3), (e), and (h) was imposed because any underpayment of tax

resulting from adjustment of DIP’s basis in the stock was due to

a gross valuation misstatement; the 20-percent accuracy-related

penalty under section 6662(a), (b)(1), and (c) was imposed

because any underpayment of tax arising from the adjustment of

DIP’s basis was due to negligence or disregard of rules and

regulations; or, alternatively, the 20-percent accuracy-related

penalty under section 6662(a), (b)(2), and (d) was imposed
- 10 -

because any underpayment was attributable to a substantial

understatement of tax.

No partner of DIP contested the FPAA timely; i.e., by March

13, 2004, 150 days after its issuance. As a result, respondent

assessed the tax and penalties resulting from the disallowance of

the short-term capital loss and the interest expense. 

Petitioners’ share of the tax, $19,466, was assessed on November

29, 2004, and their share of the accuracy-related penalties,

$3,893.20, was assessed on February 21, 2005. Respondent did not

assess any tax or penalty attributable to DII’s sale of the

distributed stock but issued the affected items notice of

deficiency as a predicate to assessing these amounts.

On March 10, 2005, respondent issued to petitioners the

affected items notice of deficiency for 1999. In that notice,

respondent determined the following three adjustments to income: 

(1) The reported long-term capital loss was disallowed and the

amount realized of $1,143 was a gain given respondent’s

determination in the FPAA that the basis of the property

distributed by DIP was zero; (2) the $210,680 share of expenses

was disallowed; and (3) petitioners’ computational itemized

deductions were adjusted accordingly. Respondent also determined

in the affected items notice of deficiency the same set of

alternative penalties under section 6662 that the FPAA stated

were applicable.
- 11 -

9 In relevant part, sec. 6230(a) provides:

SEC. 6230(a). Coordination with Deficiency

Proceedings.--

(1) In general.--Except as provided in

paragraph (2) or (3), subchapter B of this

chapter shall not apply to the assessment or

collection of any computational adjustment.

(2) Deficiency proceedings to apply in

certain cases.--

(A) Subchapter B shall apply

to any deficiency attributable to--

(i) affected items

which require partner

level determinations

(other than penalties,

additions to tax, and

additional amounts that

relate to adjustments to

partnership items) * * *

Discussion

Petitioners argue that the long-term capital gain and

accuracy-related penalty determinations in the affected items

notice of deficiency are computational adjustments which section

6230(a) places outside the Court’s jurisdiction at the partner

level.9 Respondent argues that the Court has jurisdiction to

decide the issue concerning the long-term capital gain but not

the issue concerning the accuracy-related penalties. We agree

with respondent.

This Court is a court of limited jurisdiction, and we may

exercise our jurisdiction only to the extent provided by
- 12 -

Congress. See sec. 7442; see also GAF Corp. & Subs. v.

Commissioner, 114 T.C. 519, 521 (2000). We have jurisdiction to

redetermine a deficiency if a valid notice of deficiency is

issued by the Commissioner and if a timely petition is filed by

the taxpayer. See GAF Corp. & Subs. v. Commissioner, supra at

521. We may decide issues only to the extent of our

jurisdiction, and the fact that the parties agree that we lack

jurisdiction to decide the issue concerning the accuracy-related

penalties does not necessarily mean that we indeed lack

jurisdiction to decide that issue. See Charlotte’s Office

Boutique, Inc. v. Commissioner, 121 T.C. 89, 102-104 (2003),

affd. 425 F.3d 1203 (9th Cir. 2005).

Partnerships are not subject to Federal income tax. See

sec. 701. They are required, however, to file annual information

returns reporting their partners’ distributive shares of income,

gain, loss, deductions, or credits. See sec. 6031; see also

Randell v. United States, 64 F.3d 101, 103 (2d Cir. 1995). The

partners are required to report their distributive shares of

those items on their personal Federal income tax returns. See

secs. 701, 702, 703, and 704.

Before 1982, the Commissioner and the courts were required

to adjust partnership items at the partner level. See Randell v.

United States, supra at 103. Because this requirement resulted

in a duplication of administrative and judicial resources and
- 13 -

inconsistent results among partners, Congress enacted the unified

audit and litigation procedures of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 401, 96

Stat. 648, intending to remove the substantial administrative

burden occasioned by duplicative audits and litigation and to

provide consistent treatment of partnership income, gain, loss,

deductions, and credits among all partners in the same

partnership. See Randell v. United States, supra at 103;

H. Conf. Rept. 97-760, at 599-600 (1982), 1982-2 C.B. 600,

662-663. The TEFRA procedures determine the proper treatment of

“partnership items” at the partnership level in a single, unified

audit and judicial proceeding. See Randell v. United States,

supra at 103; H. Conf. Rept. 97-760, supra at 599-600, 1982-2

C.B. at 662-663. In this context, the term “partnership items”

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

that the Secretary has determined is “more appropriately

determined at the partnership level than at the partner level.” 

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

Admin. Regs.

Where the Commissioner disagrees with a partnership’s

reporting of a partnership item, the Commissioner must mail an

FPAA before assessing the partners with any amount attributable

to that item. See secs. 6223(a)(2), (d)(2), 6225(a). The TMP

has 90 days from the date of the mailing of the FPAA to contest
- 14 -

10 When a proper petition is filed with a court in

accordance with sec. 6226(a) or (b), the scope of the court’s

jurisdiction to review the Commissioner’s adjustment to a

partnership item is defined by sec. 6226(f) as follows: 

SEC. 6226(f). Scope of Judicial Review.--A court

with which a petition is filed in accordance with this

section shall have jurisdiction to determine all

partnership items of the partnership for the

partnership taxable year to which the notice of final

partnership administrative adjustment relates, the

proper allocation of such 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.

the adjustments in the FPAA by filing a petition in this Court, a

Federal District Court, or the Court of Federal Claims. See sec.

6226(a). If the TMP does not file such a petition, any other

partner entitled to notice of partnership proceedings may file a

petition within 60 days after the close of the 90-day period. 

See sec. 6226(b)(1). If a petition is filed, all partners with

interests in the outcome are treated as parties, see sec.

6226(c), (d)(1)(B), and the court in which the petition is filed

has jurisdiction to readjust all “partnership items” to which the

FPAA relates, see sec. 6226(f).10 The timely mailing of the FPAA

to the applicable address suspends the running of the limitations

period for assessing any income taxes that are attributable to

any partnership item or affected item. See sec. 6229(d); cf. 

Martin v. Commissioner, 436 F.3d 1216, 1226 (10th Cir. 2006)

(concluding that the filing of a petition for a redetermination

of an income tax deficiency suspends the running of the period of
- 15 -

11 The parties agree that the deficiency determined in the

affected items notice of deficiency is a computational

adjustment. 

limitations for assessment of the taxpayer’s income tax, even

when the petition is not authorized or ratified by the taxpayer),

affg. T.C. Memo. 2003-288, supplemented by T.C. Memo. 2004-14. 

This suspension continues for the period during which a

proceeding may be brought in this Court, for the pendency of any

proceeding actually brought, and for 1 year thereafter. See sec.

6229(d).

After a final partnership-level adjustment has been made to

a partnership item in a unified partnership proceeding, a

corresponding “computational adjustment” must be made to the tax

liability of a partner. See sec. 6231(a)(6) (defining

“computational adjustment” as “the change in the tax liability of

a partner which properly reflects the treatment under this

subchapter of a partnership item”, and providing that “All

adjustments required to apply the results of a proceeding with

respect to a partnership under this subchapter to an indirect

partner shall be treated as computational adjustments.”); see

also sec. 6230(c)(1)(A)(ii).11 A computational adjustment may

then affect the amounts of other items on a partner’s return. 

Where an increase in a partner’s tax liability is attributable to

an “affected item” that flows strictly from a computational

adjustment, no notice of deficiency need be sent to the partner,
- 16 -

12 Sec. 301.6231(a)(6)-1T(a)(2), Temporary Proced. & Admin.

Regs., 64 Fed. Reg. 3840 (Jan. 26, 1999), states: 

(2) Changes in a partner’s tax liability with

respect to affected items that require partner level

determinations (such as a partner’s at-risk amount to

the extent it depends upon the source from which the

partner obtained the funds that the partner contributed

to the partnership) are computational adjustments

subject to deficiency procedures. Nevertheless, any

penalty, addition to tax, or additional amount that

relates to an adjustment to a partnership item may be

directly assessed following a partnership proceeding,

based on determinations in that proceeding, regardless

of whether partner level determinations are required.

and any error in the computational adjustment must be challenged

in a refund suit. See sec. 6230(c); see also sec. 6231(a)(5)

(defining “affected item” as “any item to the extent such item is

affected by a partnership item”). If an increased liability

stemming from an affected item requires a factual determination

at the partner level, however, the normal deficiency procedures

outlined in sections 6212 and 6213 apply, and the Commissioner

must issue an affected items notice of deficiency to the partner

in order to assess tax attributable to the affected item. See

sec. 6230(a)(2)(A)(i); see also sec. 301.6231(a)(6)-1T(a)(2),

Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3840 (Jan. 26,

1999).12

As to respondent’s determination in the affected items

notice of deficiency concerning the long-term capital gain, the

parties dispute whether that computational adjustment required a

factual determination at the partner level. Petitioners argue
- 17 -

13 We note, however, that respondent in the FPAA made

several partnership-item determinations that the partners were

(continued...)

that such a factual determination was not required. We disagree. 

As to DII’s sale of the stock distributed by DIP, respondent

determined in the FPAA only the partnership item components of

any resulting assessment; respondent was required to make further

partner-level factual determinations as to any such assessment. 

The claimed long-term capital loss reportedly passed from DII to

petitioner and resulted from DII’s sale of INVI stock. 

Respondent needed to determine, among other things, whether the

stock that was the subject of the sale was the same stock

distributed by DIP, the portion of the stock actually sold, the

holding period for the stock, and the character of any gain or

loss. The fact that these partner-level determinations, once

made, may not have changed respondent’s partnership

determinations as to DIP is of no concern. Neither the Code nor

the regulations thereunder require that partner-level

determinations actually result in a substantive change to a

determination made at the partnership level.

Nor did the FPAA definitively determine the outside basis of

any DIP partner. Thus, when a partner-level determination is

required to determine a partner’s basis, the deficiency

procedures apply although the determination may or may not

actually alter the final result.13 See Dial USA v. Commissioner,
- 18 -

13(...continued)

required to take into account in computing their outside bases in

DIP. The FPAA, for example, determined that the short sale

obligation was a liability under sec. 752. Respondent also

determined in the FPAA that DIP’s partners received constructive

distributions of cash that reduced their outside bases in DIP

under sec. 733(1) when their shares of the short sale liability

was reduced. See also secs. 705(a)(2), 752(b). Both partnership

liabilities and partnership distributions are partnership items

within the meaning of sec. 6231(a)(3). See sec.

301.6231(a)(3)-1(a)(1)(v), (4), Proced. & Admin. Regs. While the

factual and legal determinations made at the partnership level

are conclusive in determining components of outside basis, the

ultimate determination of outside basis is made only in a

subsequent partner-level affected items proceeding such as we

have here. See Gustin v. Commissioner, T.C. Memo. 2002-64; cf.

Univ. Heights v. Commissioner, 97 T.C. 278 (1991).

95 T.C. 1 (1990). What the FPAA did do was determine a tentative

outside basis of each DIP partner and then transfer that

tentative outside basis to the distributed stock under section

732(b). While the tentative basis in the distributed property

was zero, and DIP’s partners were required by section 732(b) to

take bases in the distributed stock equal to their outside bases

in DIP, petitioner’s outside basis in DIP did not necessarily

equal DIP’s inside basis in its assets. (Nor was petitioner’s

outside basis otherwise required under subtitle A to be taken

into account for DIP’s 1999 taxable year.) According to the

FPAA, petitioner’s outside basis in DIP was zero, which made the

basis of the distributed INVI stock zero and, subject to any

partner-level factual determinations, potentially eliminated
- 19 -

14 Petitioners signed their 1999 Federal income tax return

on Apr. 14, 2000, and filed the return on or before Aug. 18,

2000. The return, which was self-prepared, claimed that

petitioners had realized a $210,680 passthrough loss from

petitioner’s grantor trust and did not include any further

explanation as to the loss. Petitioner reported the long-term

capital loss on a 1999 Form 1041, U.S. Income Tax Return for

Estates and Trusts, filed on behalf of his grantor trust. The

Form 1041 reported that a long-term capital loss of $5,858,801

was realized during the year “From Partnership, S Corps. &

Fiduciaries” and that the loss was “Other K-1 Information”. (The

Form 1041 did not include any Schedule K-1, Shareholder’s Share

of Income, Credits, Deductions, etc.) The Form 1041 was prepared

by BDO Seidman on May 16, 2000, signed by petitioner on Oct. 25,

(continued...)

petitioners’ long-term capital loss while potentially adding a

long-term capital gain.

Petitioners argue that respondent could and should have

assessed tax as to the computational adjustment concerning the

long-term capital gain when no one timely filed a petition as to

the FPAA. We disagree. Petitioners rely erroneously on Olson v.

United States, 172 F.3d 1311 (Fed. Cir. 1999), and Bob Hamric

Chevrolet, Inc. v. United States, 849 F. Supp. 500 (W.D. Tex.

1994), to support their argument. Unlike there, respondent could

not have made an assessment as to the long-term capital gain

determination simply by examining petitioners’ 1999 Federal

income tax return and making mere ministerial adjustments. See,

e.g., Olson v. United States, supra at 1318. In fact,

petitioners’ 1999 Federal income tax return does not even

reference the object of the sale underlying the claimed long-term

capital loss.14 Nor do the distributions reported on DIP’s 1999
- 20 -

14(...continued)

2000, and filed on or before Oct. 30, 2000.

partnership return appear on petitioners’ 1999 Federal income tax

return. We also observe that DIP’s 1999 partnership return does

not reference or identify DII and that DII’s 1999 tax return does

not indicate that the INVI stock that was the subject of the

reported sale was received in a distribution from DIP. We

conclude that we have jurisdiction over the deficiency determined

in the affected items notice of deficiency.

We now decide whether we have jurisdiction to decide the

issue concerning the accuracy-related penalties. When no

petition was filed timely as to the FPAA, respondent assessed

only that portion of the accuracy-related penalties attributable

to the disallowance in the FPAA of DIP’s deductions of the shortterm capital loss and interest expense. Respondent now concedes

that the accuracy-related penalties determined in the affected

items notice of deficiency should be dismissed for lack of

jurisdiction. Petitioners concur with this concession. So do

we.

The applicability of any penalty, addition to tax, or

additional amount relating to an adjustment to a partnership item

(collectively, partnership item penalties) is generally

determined at the partnership level and assessed on the basis of

partnership-level determinations. See sec. 6221; see also sec.
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301.6221-1T(c), Temporary Proced. & Admin. Regs., 64 Fed. Reg.

3838 (Jan. 26, 1999) (partnership-level determinations include

all legal and factual determinations underlying the determination

of partnership-level penalties, including partnership-level

defenses but not partner-level defenses). Before the Taxpayer

Relief Act of 1997 (TRA), Pub. L. 105-34, 111 Stat. 788,

partnership-item penalties were determined at the partner level

through the deficiency procedures after the partnership

proceedings to which they related were over. TRA section

1238(b)(2), 111 Stat. 1026, changed that treatment by, inter

alia, inserting into section 6230(a)(2)(A)(i) the parenthetical

text “other than penalties, additions to tax, and additional

amounts that relate to adjustments to partnership items”. Under

a plain reading of this amendment, the effect of the amendment

was to remove partnership-item penalties from the deficiency

procedures effective for partnership taxable years ending after

August 5, 1997.

Although a plain reading of the statute is ordinarily

conclusive, a clear legislative intent that is contrary to the

text may sometimes lead to a different result. See, e.g.,

Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102,

108 (1980); United States v. Am. Trucking Associations, 310 U.S.

534, 543 (1940). No such clear contrary legislative intent is

present here; indeed, the legislative history of the statute
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15 The Senate Finance Committee stated similarly in its

report. See S. Rept. 105-33, at 261 (1997), 1997-4 C.B. (Vol. 2)

1067, 1341; see also H. Conf. Rept. 105-220, at 685 (1997),

1997-4 C.B. (Vol. 2) 1457, 2155 (stating that “The Senate

amendment is the same as the House bill” and that “The conference

agreement follows the House bill and the Senate amendment, with

technical modifications”).

supports its plain reading. In its report underlying the

amendment adding the parenthetical text to section

6230(a)(2)(A)(i), the House Committee on Ways and Means explained

that it had proposed the amendment because

Many penalties are based upon the conduct of the

taxpayer. With respect to partnerships, the relevant

conduct often occurs at the partnership level. In

addition, applying penalties at the partner level

through the deficiency procedures following the

conclusion of the unified proceeding at the partnership

level increases the administrative burden on the IRS

and can significantly increase the Tax Court’s

inventory. [H. Rept. 105-148, at 594 (1997), 1997-4

C.B. (Vol. 1) 319, 916.15]

The House committee report goes on to explain that the proposed

amendment “provides that the partnership-level proceeding is to

include a determination of the applicability of penalties at the

partnership level. However, the provision allows partners to

raise any partner-level defenses in a refund forum.” Id.

Given the enactment of the amendment, we conclude that the

deficiency procedures no longer apply to the assessment of any

partnership-item penalty determined at the partnership level,

regardless of whether further partner-level determinations are

required. The Secretary in interpreting the amendment has
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16 See also sec. 301.6231(a)(6)-1(a)(3), Proced. & Admin.

Regs., effective for partnership taxable years beginning on or

after Oct. 4, 2001 (language similar to that in sec.

301.6231(a)(6)-1T(a)(2), Temporary Proced. & Admin. Regs.,

supra).

concluded similarly. See sec. 301.6231(a)(6)-1T(a)(2), Temporary

Proced. & Admin. Regs., quoted supra note 12 (explaining that any

penalty related to an adjustment of a partnership item is not

subject to the deficiency procedures and may be directly assessed

following a partnership proceeding, on the basis of

determinations in that proceeding, regardless of whether

partner-level determinations may be required).16 Because the

amendment is applicable to this case, i.e., the relevant taxable

year of DIP ended after August 5, 1997, we shall dismiss for lack

of jurisdiction the part of this case that pertains to the

accuracy-related penalties. Accord Fears v. Commissioner,

129 T.C. (2007). 

We note in closing that we are not unmindful that a plain

reading of section 6230(a)(2)(A)(i), as amended by TRA section

1238(b)(2), may sometimes permit (as it apparently does here) the

Commissioner to assess a partnership-item penalty before the

deficiency to which the penalty relates is adjudicated. We doubt

that the drafters of the statute and the regulations, in

excluding partnership item penalties from the deficiency

procedures, contemplated a situation like this where the

deficiency underlying the partnership-item penalty is
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incorporated in an affected items notice and itself made subject

to review under the deficiency procedures before it can be

assessed. All the same, we apply the statute as written in

accordance with its plain reading and leave to the legislators

the job of rewriting the statute, should they decide to do so, to

take into account the situation at hand. See, e.g., Arlington

Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. , ,

126 S. Ct. 2455, 2459 (2006) (stating that “When the statutory

language is plain, the sole function of the courts--at least

where the disposition required by the text is not absurd--is to

enforce it according to its terms” (citations and internal

quotation marks omitted)). We do not believe that our plain

reading of the statute leads to an “absurd or futile result”, or

produces a result that is “an unreasonable one ‘plainly at

variance with the policy of the legislation as a whole’”. United

States v. Am. Trucking Associations, supra at 543 (quoting Ozawa

v. United States, 260 U.S. 178, 194 (1922)). To be sure, both

parties read the statute similarly in requesting the same result

that we reach herein as to the partnership-item penalties, and

neither party suggests that a plain reading of the statute in

this case is unreasonable, absurd, or inconsistent with

legislative intent.

 
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To reflect our conclusions and holdings above, we shall

grant petitioners’ motion to dismiss for lack of jurisdiction as

to the accuracy-related penalties. We shall deny petitioners’

motion in all other regards. We have considered all of the

parties’ arguments, and all arguments not discussed herein have

been rejected as moot, irrelevant, or without merit.

An appropriate order

will be issued.