T.C. Memo. 1996-282

UNITED STATES TAX COURT

HOMER N. CUMMINGS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12449-95. Filed June 19, 1996.

Thomas E. Redding, for petitioner.

 Robert W. West and William A. Heard, for respondent.

MEMORANDUM OPINION

ARMEN, Special Trial Judge: This case is before the Court

on (1) Petitioner's Motion for Partial Summary Judgment Regarding

Penalties Asserted Based On The Net Operating Loss Carryforwards,

filed pursuant to Rule 121(a); and (2) petitioner's Motion for
1 Unless otherwise indicated, all Rule references are to the

Tax Court Rules of Practice and Procedure and all section

references are to the Internal Revenue Code in effect for the

taxable years in issue.

Partial Summary Judgment Regarding The Overvaluation Penalty,

also filed pursuant to Rule 121(a).1 

Respondent concedes petitioner's second motion for partial

summary judgment. Accordingly, we need only address petitioner's

first motion for partial summary judgment. As explained in

greater detail below, we shall deny such motion. 

Background

During the taxable years 1983, 1984, and 1985, Homer N.

Cummings (petitioner) was a partner in December Associates, a

partnership subject to the unified partnership audit and

litigation procedures set forth in sections 6221 through 6231. 

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L.

97-248, sec. 402(a), 96 Stat. 324, 648.

Petitioner reported losses of $66,079, $123,071, and $14,647

on his 1983, 1984, and 1985 Federal income tax returns,

respectively, reflecting his distributive share of the losses

claimed by December Associates for those years. After reporting

an aggregate loss of $167,293 on his 1983 tax return, petitioner

carried his December Associates' loss for 1983 forward to his

1984 tax return. Petitioner likewise carried a portion of his

December Associates loss for 1984 forward to his 1985 tax return.

Respondent subsequently issued separate notices of final

partnership administrative adjustment to December Associates for
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the taxable years 1983, 1984, and 1985. Ira N. Smith, the tax

matters partner for December Associates, invoked this Court's

jurisdiction by filing separate petitions for readjustment. See

December Associates, Ira N. Smith, Tax Matters Partner v.

Commissioner, docket Nos. 25083-89, 25087-89, and 16800-90. 

On March 16, 1994, this Court entered decisions in each of

the foregoing 3 dockets involving December Associates. The

decisions eliminated all income, deductions, and credits claimed

on December Associates' partnership returns for 1983, 1984, and

1985. No appeals were taken, and the decisions became final on

June 14, 1994. Secs. 7481(a), 7483.

Shortly thereafter, respondent made computational

adjustments to petitioner's tax liability for 1983, 1984, and

1985 in order to reflect the disallowance of the losses that

petitioner had claimed from his investment in December

Associates. Sec. 6231(a)(6). Specifically, respondent computed

petitioner's tax liability based upon the elimination of

petitioner's distributive share of the December Associates'

losses that petitioner reported in 1983, 1984, and 1985, as well

as the elimination of the related net operating losses (NOL's)

that petitioner carried forward from 1983 to 1984 and from 1984

to 1985. Consistent with these computations, and within 1 year

of June 14, 1994, respondent assessed petitioner $9,284 in

additional tax for 1984 and $1,399 in additional tax for 1985.
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 On April 4, 1995, respondent issued a so-called affected

items notice of deficiency to petitioner for each of the taxable

years 1984 and 1985. The affected items notices of deficiency

set forth respondent's determination that petitioner is liable

for additions to tax under sections 6651(a)(1) and 6659 for 1984

and 1985. Respondent determined that petitioner is liable for

those additions to tax as a consequence of the adjustments to

petitioner's tax liability arising from the disallowance of

partnership items of December Associates for 1983, 1984, and

1985.

Petitioner invoked this Court's jurisdiction by filing a

timely petition for redetermination. The petition includes an

allegation that petitioner is entitled to a refund under section

6512 in respect of any taxes assessed or paid after the

expiration of the applicable period of limitations. See Barton

v. Commissioner, 97 T.C. 548 (1991). After respondent filed her

answer, petitioner filed his two motions for partial summary

judgment.

 In his Motion for Partial Summary Judgment Regarding The

Overvaluation Penalty, petitioner seeks a ruling that he is not

liable for the additions to tax under section 6659 as determined

by respondent. Although respondent initially filed an objection

to petitioner's motion, respondent subsequently filed a

Memorandum of Law, which states as follows:
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For purposes of this case only, for the

petitioner's taxable years 1984 and 1985, respondent

concedes that petitioner is not liable for the addition

to tax under I.R.C. sec. 6659 based upon the

petitioner's income or loss from the December

Associates partnership of $123,071.00 in 1984 and

$14,647.00 in 1985.

In light of this concession, we shall grant petitioner's Motion

for Partial Summary Judgment Regarding The Overvaluation Penalty

and render judgment that petitioner is not liable for the

additions to tax under section 6659 as determined by respondent

in the affected items notices of deficiency for the taxable years

in issue. 

In his Motion for Partial Summary Judgment Regarding

Penalties Asserted Based On The Net Operating Loss Carryforwards,

petitioner seeks a ruling that respondent erred in treating

petitioner's 1984 and 1985 NOL carryforwards as affected items

subject to computational adjustment. In petitioner's view,

adjustments to NOL's (whether carryforwards or carrybacks) often

require such a detailed review of the taxpayer's tax returns that

such adjustments should invariably be treated as affected items

that require a factual determination in a partner-level

proceeding. In other words, petitioner requests a "bright-line"

rule that would preclude respondent, following a partnership

level proceeding, from adjusting an NOL item at the partner level

until the NOL adjustment is included in an affected items

deficiency notice and the taxpayer/partner is provided with an

opportunity to invoke this Court's deficiency jurisdiction with
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respect to such adjustment. In conjunction with the foregoing,

we understand petitioner to argue that because respondent failed

to issue a notice of deficiency for the computational adjustment,

the assessment was barred and the additions to tax, inasmuch as

they are determined by reference to the NOL carryforward

adjustments, must likewise fall.

Respondent filed an objection to petitioner's Motion for

Partial Summary Judgment Regarding Penalties Asserted Based On

The Net Operating Loss Carryforwards. In her objection,

respondent asserted that she correctly determined that the NOL

adjustments in issue are affected items subject to computational

adjustment. Respondent contends that such adjustments are not

affected items requiring determinations at the partner level

because respondent proceeded with her computations without

otherwise adjusting petitioner's tax liability as reported. From

respondent's perspective, there simply is no need for a

determination at the partner level regarding the NOL adjustments

that were made in this case.

Discussion

 In general, the tax treatment of any partnership item is

determined at the partnership level pursuant to the unified audit

and litigation procedures set forth in sections 6221 through

6231. TEFRA, sec. 402(a), 96 Stat. 648. The TEFRA procedures

apply with respect to all taxable years of a partnership

beginning after September 3, 1982. Sparks v. Commissioner, 87
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T.C. 1279, 1284 (1986); Maxwell v. Commissioner, 87 T.C. 783, 789

(1986). Partnership items include each partner's proportionate

share of the partnership's aggregate items of income, gain, loss,

deduction, or credit. Sec. 6231(a)(3); sec. 301.6231(a)(3)-

1(a)(1)(i), Proced. & Admin. Regs.

 An affected item is defined in section 6231(a)(5) as any

item to the extent that such item is affected by a partnership

item. White v. Commissioner, 95 T.C. 209, 211 (1990). There are

two types of affected items. Id.

The first type of affected item is a computational

adjustment made to record the change in a partner's tax liability

resulting from the proper treatment of partnership items. Sec.

6231(a)(6); White v. Commissioner, supra. Once partnership level

proceedings are completed, respondent is permitted to assess a

computational adjustment against a partner without issuing a

notice of deficiency. Sec. 6230(a)(1); N.C.F. Energy Partners v.

Commissioner, 89 T.C. 741, 744 (1987); Maxwell v. Commissioner,

supra at 792 n.9.

 The second type of affected item is one that is dependent on

factual determinations to be made at the partner level. N.C.F.

Energy Partners v. Commissioner, supra at 744. Section

6230(a)(2)(A)(i) provides that the normal deficiency procedures

apply to affected items that require determinations at the

partner level. For example, additions to tax for negligence are
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affected items that require factual determinations at the partner

level. N.C.F. Energy Partners v. Commissioner, supra at 745.

Petitioner relies on 3 cases to support his position that an

NOL adjustment is an affected item that requires a determination

at the partner level: Harris v. Commissioner, 99 T.C. 121 (1992),

affd. 16 F.3d 75 (5th Cir. 1994); Maxwell v. Commissioner, 87

T.C. 783 (1986); and Durrett v. Commissioner, T.C. Memo. 1994-

179, affd. in part, revd. in part 71 F.3d 515 (5th Cir. 1996). 

In contrast, respondent relies on Bob Hamric Chevrolet, Inc. v.

United States, 849 F. Supp. 500 (W.D. Tex. 1994), to support her

position that an NOL adjustment is properly treated as an

affected item subject to computational adjustment. Based on our

view of the cases cited by the parties, and in light of the

circumstances presented, we agree with respondent that the NOL

adjustments in question are properly treated as computational

adjustments that may be assessed without the issuance of an

affected items notice of deficiency.

In Maxwell v. Commissioner, supra at 790-791, we

characterized an investment tax credit (ITC) carryback as an

affected item on the ground that the existence or amount of the

carryback is dependent on or affected by a partnership item;

i.e., the amount of the partnership's ITC. Given the procedural

posture of that case, however, we were not required to (and did

not) decide whether the ITC carryback was an affected item

subject to a computational adjustment or an affected item
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2 Although we permitted the taxpayer in Harris v.

Commissioner, 99 T.C. 121, 127-128 (1992), to include in his Rule

155 computation the NOL carryback arising from the settlement of

TEFRA partnership proceedings, we declined to extend this ruling

to potential carrybacks relating to separate TEFRA partnership

proceedings that had not at the time been finally settled or

otherwise decided at the partnership level. 

requiring a factual determination at the partner level. 

Accordingly, petitioner's reliance on Maxwell v. Commissioner is

misplaced.

Likewise, Harris v. Commissioner, supra, and Durrett v.

Commissioner, supra, are not dispositive of the issue presented. 

In short, Harris v. Commissioner stands for the proposition that,

in submitting computations for entry of decision pursuant to Rule

155 in a non-TEFRA proceeding, a taxpayer may include in the

taxpayer's computations, NOL carrybacks arising from the

settlement of TEFRA partnership proceedings relating to a later

taxable year when the Commissioner does not otherwise challenge

the amount of the claimed carryback.2 Notably, although Harris

v. Commissioner, supra at 125, includes a citation to Maxwell v.

Commissioner for the proposition that an NOL carryback is an

affected item, and although we referred to the NOL carryback in

question as a computational adjustment, Harris v. Commissioner,

supra at 127, we were not required to (and again did not)

definitively decide the proper characterization of the affected

item.
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Durrett v. Commissioner, supra, concerned the taxpayers'

request for leave to amend their petition on the eve of trial to

claim an ITC carryback from 1983 to 1980, the latter being one of

the taxable years in issue. The ITC carryback purportedly

reflected the taxpayers' distributive share of a credit claimed

by a TEFRA partnership whose return respondent did not challenge

and for which the period of limitations under section 6229 had

expired. The taxpayers reasoned that they should be granted

leave to amend their petition as a matter of course because, in

their view, the ITC carryback amounted to nothing more than a

computational adjustment. To the contrary, we held that, where

the question of the validity of the ITC had not been reviewed in

the context of a TEFRA partnership proceeding, the matter of the

taxpayers' entitlement to the disputed ITC carryback could only

be resolved after consideration of both the bona fides of the

credit itself and the taxpayers' correct tax liability for 1983. 

We then denied the taxpayers' motion for leave to amend on the

ground that to grant the motion on the eve of trial would unduly

prejudice the Commissioner. 

Petitioner's reliance on Durrett v. Commissioner, supra, is

misplaced because we were not required to (and did not) decide in

that case whether the ITC carryback was an affected item subject

to a computational adjustment or an affected item requiring a

factual determination at the partner level. Rather, we merely
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decided, based on the particular facts of that case, not to

exercise our discretion under Rule 41(a) in petitioners' favor. 

As indicated, respondent relies on Bob Hamric Chevrolet,

Inc. v. United States, 849 F. Supp. 500 (W.D. Tex. 1994), for the

proposition that an NOL adjustment is properly treated as an

affected item subject to computational adjustment. 

In Bob Hamric Chevrolet, Inc. v. Commissioner, supra, the

taxpayer reported a partnership loss in 1982 of $199,813.85

reflecting the taxpayer's distributive share of a loss incurred

by a TEFRA partnership for that year. Due to limitations imposed

under the "at-risk" rules, the taxpayer claimed a loss of

$100,000 on its 1982 income tax return, and carried the balance

of the loss forward to 1983 to offset its distributive share of

income from the TEFRA partnership for that year in the amount of

$86,518. As a result, the taxpayer claimed a net partnership

loss for 1983 of $12,596.

Following an examination of the TEFRA partnership by the IRS

for 1982 and 1983, the taxpayer entered into a settlement

agreement reducing its distributive share of partnership loss for

1982. In this regard, the settlement agreement provided that the

taxpayer's distributive share of partnership loss for 1982 would

be reduced from $199,813.35 to $69,934.67. The settlement

agreement also provided that the taxpayer's distributive share of

partnership income for 1983 would remain unchanged.
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 Following the settlement, the Commissioner computed the

taxpayer's income tax liability for 1982, taking into account

partnership items, to be equal to the tax due on an increase in

income of $30,065. This figure represented the difference

between $100,000 (the loss that the taxpayer claimed on its 1982

return) less $69,935 (the taxpayer's distributive share of

partnership loss under the settlement). In addition, after

eliminating the partnership loss that the taxpayer carried

forward from 1982 to 1983, the Commissioner determined that the

taxpayer owed additional income tax for 1983.

The Commissioner later assessed the taxes described above as

computational adjustments. In a subsequent refund action, the

taxpayer claimed that the Commissioner erred in treating the

above-described adjustments as computational adjustments, rather

than as adjustments requiring factual determinations at the

partner level. The United States District Court for the Western

District of Texas, citing Maxwell v. Commissioner, 87 T.C. 783

(1986), and Harris v. Commissioner, supra, agreed with the

Commissioner that the adjustments were properly treated as

affected items subject to computational adjustment. In rejecting

the taxpayer's argument that the adjustments required factual

determinations at the partner level, the District Court pointed

out that the Commissioner did not adjust any other items on the

taxpayer's returns nor did the taxpayer dispute the dollar amount

of the adjustments that the Commissioner made to its 1983 tax
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return. Bob Hamric Chevrolet, Inc. v. United States, supra at

512. 

We are not persuaded that the cases relied on by petitioner

support the conclusion that the NOL carryforward adjustments in

question are properly characterized as affected items that must

be resolved in a partner-level proceeding. Rather, we are

satisfied, based on the record presented, that those adjustments

satisfy the definition of an affected item subject to

computational adjustment. Sec. 6231(a)(6); White v.

Commissioner, 95 T.C. 209, 211 (1990). Indeed, as was the case

in Bob Hamric Chevrolet, Inc. v. United States, supra, counsel

for petitioner concedes that there is no dispute as to the

computations that respondent made in this case. 

In view of the foregoing, and under the facts presented, we

see no merit in petitioner's contention that the NOL carryforward

adjustments in this case must be the subject of an affected items

notice of deficiency. 

In order to reflect the foregoing,

An appropriate order

will be issued.