t c memo united_states tax_court ihc group inc petitioner v commissioner of internal revenue respondent docket no 14599-99xx filed date douglas m mancino james l malone iii and robert c louthian iii for petitioner mark a weiner kirk m paxson don r spellman and kenneth m griffin for respondent memorandum opinion wells chief_judge ina final adverse determination_letter respondent determined that ihc group inc petitioner did not gualify as an organization described in sec_501 and c and was not entitled to exemption from - - federal_income_tax pursuant to sec_501 unless otherwise indicated section references are to sections of the internal_revenue_code as amended and rule references are to the tax_court rules_of_practice and procedure petitioner filed a timely petition for declaratory_judgment pursuant to sec_7428 a challenging respondent’s determination_letter at the time the petition was filed petitioner’s principal_place_of_business was in salt lake city utah the administrative record was submitted to the court pursuant to rule b the facts contained in the administrative record are assumed to be true for purposes of this proceeding see rule b the case was submitted to the court by joint motion of the parties pursuant to rule the parties agree that petitioner has satisfied all jurisdictional requirements see sec_7428 rule c background by way of a brief introduction petitioner along with its sister corporation ihc care inc care and their common parent ihc health_plans inc health_plans operated health maintenance organizations and were part of a number of companies comprising the so-called intermountain health system petitioner offered health_plans to the employees of employers with more than employees at the same time that respondent denied petitioner’s application_for tax-exempt status respondent denied care’s application_for tax-exempt status and revoked health plans’ tax-exempt status ’ for completeness we have provided a detailed description of the various entities constituting the intermountain health system i the intermountain health system a intermountain health care inc between and the church of jesus christ of latter- day saints lds church constructed or purchased hospitals in the states of utah idaho and wyoming during lds church organized intermountain health care inc ihc as a nonprofit corporation under the laws of the state of utah lds church organized ihc for the purpose of assuming ownership and control of lds church hospitals during lds church relinquished control of ihc respondent recognized ihc as an organization described in sec_501 that is exempt from taxation pursuant to sec_501 over a period of several years ihc organized a group of affiliate corporations for the purpose of forming a comprehensive health care network with operations in utah and surrounding states respondent’s determinations to deny ihc care inc ’s application_for tax-exempt status and to revoke ihc health_plans inc ’s tax-exempt status are the subjects of the court’s opinions in ihc care inc v commissioner tcmemo_2001_248 and ihc health_plans inc v commissioner tcmemo_2001_246 b ihc health services inc during ihc organized a nonprofit affiliate ihc health services inc health services ihc transferred substantially_all of its assets including its hospital properties and substantially_all of its liabilities to health services respondent recognized health services as an organization described in sec_501 that is exempt from taxation pursuant to sec_501 health services conducted its activities through two divisions the hospital division and the physician division which are described in detail below the hospital division health services’ hospital division comprised hospitals including big_number licensed beds located in utah and idaho all health services hospitals with the exception of primary children’s medical center primary children’s and mckay-dee institute for behavioral medicine mckay--dee institute were general acute care hospitals that provided inpatient and outpatient services and varying levels of emergency ancillary and specialized services the scope of services varied with the size of the hospital and the needs of the particular community all health services hospitals participated in the medicare and medicaid programs for inpatient and outpatient hospital services and for a number of free-standing ambulatory care services such - - as ambulatory surgery home health care and kidney dialysis primary children’s specialized in pediatric care in the intermountain west defined generally as the area covering eastern nevada western colorado and the states of utah idaho wyoming and montana the mckay--dee institute operated a free- standing psychiatric and behavioral health facility located in ogden utah during health services provided dollar_figure million worth of charity services to indigent patients the physician division as of date health services’ physician division employed primary care physicians and specialist physicians the physicians generally practiced in health services’ clinics and other community-based settings c ihc health_plans inc during ihc organized health_plans as a nonprofit affiliate for the purpose of establishing a state-licensed health_maintenance_organization hmo ihc was health plans’ sole utah code ann sec_31a-8-101 repl defines the term health_maintenance_organization hmo as follows health_maintenance_organization means any person other than an insurer licensed under chapter or an individual who contracts to render professional or personal services that he performs himself which a furnishes at a minimum either directly or through arrangement with others basic health care continued corporate member health_plans was licensed to operate an hmo in the state of utah and was permitted to offer a variety of health_plans to individuals and employers in the communities that it served health_plans did not own any medical facilities or employ any physicians health_plans offered its plans to individuals and their families the employees of both large and small employers and individuals covered by medicaid health_plans operated the largest hmo within the ihc system and the state of utah in date respondent recognized health_plans as an organization described in sec_501 that is exempt from taxation pursuant to sec_501 continued services to an enrollee in return for prepaid periodic_payments agreed to in amount prior to the time during which the health care may be furnished and b is obligated to the enrollee to arrange for or to directly provide available and accessible health care d federally qualified hmos hmos are defined for purposes of federal_law under u s c sec 300e a which provides a health_maintenance_organization defined for purposes of this subchapter the term health_maintenance_organization means a public or private entity which is organized under the laws of any state and which provides basic and supplemental health services to its members in the manner prescribed by subsection b of this section and is organized and operated in the manner prescribed by subsection c of this section u s c sec 300e b provides in pertinent part that an hmo generally will provide basic health services to its members without limitations as to time or cost for a fixed payment from each member that is determined under a community rating system and is paid on a periodic basis without regard to the dates health services are provided u s c sec 300e b provides that hmos may also provide members with supplemental health services defined in u s c sec 300e-1 for a separate fee that is fixed under a community rating system u s c sec 300e b a provides that at least percent of physician services provided as basic health services to an hmo enrollee shall be provided through the members of the hmo’s physician staff staff model hmo a medical group medical group model hmo an individual practice association ipa model hmo physicians who have contracted with the hmo for the provision of such services direct contract model hmo or any combination of these models see 966_f2d_738 n 2d cir c f_r sec_417 definitions boisture assessing the impact of health care reform on the formation of tax-exempt health care providers and hmo’s tax notes date u s c sec 300e c provides that hmos shall have a fiscally sound operation adequate provision against the risk of insolvency and assume full financial risk ona prospective basis for the provision of basic health services however u s c sec 300e c provides that hmos may continued ihc care inc in date health_plans organized care as a nonprofit affiliate for the purpose of establishing a federally gqualified direct contract model hmo health_plans was care’s sole corporate member care was licensed to operate an hmo in the state of utah and was subject_to regulation by the utah insurance commissioner care used the same network of health care providers used by health_plans continued obtain insurance for the cost of providing a member with more than dollar_figure in basic health services for any one year for the cost of basic health services provided to a member by a source outside the hmo due to an emergency and for not more than percent of the amount by which its costs for any fiscal_year exceed sec_115 percent of its income additionally the section states that hmos may enter into arrangements under which physicians and or health care institutions assume all or part of the risk on a prospective basis for the provision to enrollees of basic health services ‘ the health_maintenance_organization act of the hmo act publaw_93_222 87_stat_914 codified a number of provisions governing the organization and operation of federally gualified hmos under the hmo act an hmo was required to satisfy both state licensing requirements and additional federally mandated conditions pertaining to benefits availability and accessibility of services fiscal soundness and guality assurance the hmo act provided federally qualified hmos with certain marketing advantages in particular under u s c sec 300e-9 a provision referred to as the so- called dual-choice mandate certain employers generally those with more than employees were obligated to offer their employees the option of enrolling in a federally qualified hmo thc group inc in date health_plans organized petitioner as a nonprofit affiliate for the purpose of establishing a federally qualified medical group model hmo health_plans was petitioner’s sole corporate member petitioner’s articles of incorporation stated that petitioner is organized and shall be operated exclusively for charitable educational or scientific purposes as described in sec_501 in furtherance of such purposes the corporation may develop and operate alternative health care delivery plans and financing systems such as a health_maintenance_organization to provide cost-effective and high quality care to members of the community served by the plans including elderly and disadvantaged persons and conduct research and educational demonstration projects with various health care delivery systems petitioner was licensed to operate an hmo in the state of utah and was subject_to regulation by the utah insurance commissioner thc had effective_control of health_plans petitioner and care by virtue of its authority direct and indirect to elect their boards of trustees health_plans petitioner and care shared the same officers and trustees il petitioner’s operations health_plans structured its health_plans in conjunction with petitioner’s and care’s health_plans in order to offer potential enrollees a range of health services and pricing options health_plans provided general and administrative services to petitioner -- - and care including marketing sales enrollment customer service claims processing underwriting and actuarial services provider relations and contracting management information systems and general accounting services a petitioner’s selectmed health plan petitioner operated a closed panel medical group model hmo offering a health plan known as selectmed to employers with more than employees in short as petitioner did not itself provide health care services it arranged for its enrollees to receive such services by contracting directly with physician medical groups to provide health services to its enrollees petitioner collected premiums from its enrollees and arranged for them to receive comprehensive health care services including preventive care outpatient services inpatient hospital services emergency services out-of-area services and miscellaneous services such as ambulance and pharmacy services to participate in petitioner’s selectmed health plan an employer was required to enter into a master group contract thereafter during annual open enrollment periods the employer’s individual employees were permitted to enroll in the health plan health_plans also offered plans known as selectmed and selectmed plus the principal differences between petitioner’s selectmed plan and the selectmed plans offered by health_plans related to the methodology applied in determining premiums and enrollees’ degree of access to primary care physicians see ihc health_plans inc v commissioner tcmemo_2001_246 and select the benefit package of his or her choice although petitioner did not deny membership to enrollees with preexisting medical conditions some selectmed benefit plans denied enrollees full coverage for certain preexisting conditions during the first months of membership petitioner could terminate coverage for any employer group subject_to offering conversion coverage for individual members based upon any of the following events failure of the employer to pay all premiums in full when due written notice of termination given by either party fraud or material misrepresentation by the employer or failure by the employer to continue to meet the plan’s minimum enrollment or underwriting obligation petitioner could terminate coverage for any individual enrollee for the following reasons enrollee fraud or misrepresentation in the enrollment process or in the use of plan services or the services of participating providers or facilities failure to meet eligibility requirements and failure to make required payroll deductions applicable copayments coinsurance or deductible payments or other authorized charges petitioner did not own or operate any medical facilities nor did it directly employ any physicians or other health care professionals petitioner fulfilled its obligation to arrange for its selectmed enrollees to receive physician services by -- contracting with a panel of approximately big_number primary care physicians and specialist physicians to provide such services approximately percent of these physicians were members of independent multispecialty physician medical groups while the c f_r sec_417 defines the term medical group as a partnership_association corporation or other group which is composed of health professionals licensed to practice medicine or osteopathy and of such other licensed health professionals including dentists optometrists and podiatrists as are necessary for the provision of health services for which the group is responsible a majority of the members of which are licensed to practice medicine or osteopathy and the members of which after the end of the month period beginning after the month in which the hmo for which the group provides health services becomes a qualified hmo as their principal professional activity over percent individually engage in the coordinated practice of their profession and as a group responsibility have substantial responsibility over percent in the aggregate of their professional activity for the delivery of health services to members of an hmo pool their income from practice as members of the group and distribute it among themselves according to a prearranged salary or drawing account or other similar plan unrelated to the provision of specific health services share health including medical records and substantial portions of major equipment and of professional technical and continued remaining percent of the physician panel comprised physicians employed by health services as a closed panel hmo petitioner required its enrollees to agree to coordinate all of their medical_care through a primary care physician pcp or so-called gatekeeper in cases in which the pcp determined that an enrollee should be seen by a medical specialist the pcp generally was expected to refer the enrollee to a specialist within the pcp’s medical group petitioner relied upon an adjusted community rating methodology to determine the amount of selectmed premiums ’ petitioner’s rating methodology included adjustments for actual enrollee utilization rates during the preceding year and a projection of the cost of services expected to be provided during the coverage period petitioner compensated all physicians by paying them the greater of a capitation fee or approximately percent of the physician’s usual and customary billed charges in some cases continued administrative staff iv establish an arrangement whereby a member’s enrollment status is not known to the health professional who provides health services to the member see c f_r sec_417 b which sets forth the requirements for acceptable hmo community rating systems a capitation fee represents a fixed payment for each enrollee patient under a physician’s care in the event that petitioner achieved a budget surplus the physicians may have qualified to receive additional payments however in the event petitioner experienced a budget deficit the physicians did not incur any additional financial obligation approximately percent of petitioner’s expenditures_for physician services was attributable to services provided by physicians employed by health services the remaining percent of such expenditures was attributable to services provided by members of independent physician medical groups petitioner fulfilled its obligation to arrange for its enrollees to receive hospital services by contracting with a panel of hospitals including health services hospitals anda limited number of independent hospitals petitioner generally compensated its contractor hospitals pursuant to a modified diagnosis related group drg payment system under which an enrollee admitted to a hospital on either an inpatient or outpatient basis would be assigned a drg and the hospital would be paid a fixed fee consistent with the drg schedule approximately percent of petitioner’s expenditures_for inpatient hospital services and approximately percent of petitioner’s expenditures_for outpatient hospital services were attributable to services provided by health services’ hospitals a substantial portion of petitioner’s enrollees’ admissions to independent hospitals were for admissions to either university -- - of utah medical center umc or davis hospital and medical center in particular health services entered into special contracts with umc to obtain services from umc’s intermountain burn center the only certified burn center in the region neuropsychiatric institute to provide psychiatric beds when lds hospital temporarily exceeded its inpatient capacity and pain management center some umc admissions were related to a unique relationship between primary children’s hospital a health services hospital dedicated to acute care pediatric services and umc’s specialized genetic research and other pediatric-related teaching and research programs in addition health_plans petitioner and care entered into provider agreements with davis hospital and medical center located in davis county utah because there were no health services hospitals in the immediate area during the 2-year period including and umc accounted for approximately percent of all inpatient hospital services provided to petitioner’s enrollees by independent utah hospitals during the 2-year period including and umc accounted for approximately percent of all outpatient hospital services provided to petitioner’s enrollees by independent utah hospitals petitioner maintained a core wellness program under which selectmed enrollees were provided health care information and a -- - variety of health care services at no additional_charge petitioner’s core wellness program included annual worksite health screenings group health risk profiles a 24-hour nurse hotline ergonomics assessment and consulting worksite health seminars and a health newsletter petitioner did not offer its core wellness program to the general_public b petitioner’s ihc senior care health plan between and petitioner offered a medicare cost health plan known as ihc senior care senior care plan between and care offered a medicare risk health plan of the same name under petitioner’s senior care plan medicare eligible enrollees who paid the required premium were entitled to obtain physician services and a number of additional services not covered by medicare from petitioner’s panel of primary care physicians and specialists and were relieved of the obligation to pay any deductible or co-insurance payments under medicare part b physician services enrollees in petitioner’s senior care plan retained their eligibility for medicare part a hospital services and continued to pay medicare part a premiums to the government under care’s senior care plan medicare eligible enrollees agreed to obtain their medicare part a hospital services and medicare part b physician services from care’s network of providers and care was compensated by the government for each enrollee on a prepaid capitation basis petitioner and care ceased offering their respective senior care plans effective date care terminated its senior care plan in part due to the financial losses that it incurred under the program c enrollment as of date petitioner had big_number enrollees including big_number enrollees in its selectmed plan and enrollees in its senior care plan d lack of free low cost services petitioner did not maintain a program designed to encourage or assist low income persons medically high-risk persons persons located in medically under-served areas or elderly persons to enroll in its health_plans petitioner did not subsidize premiums for persons who were unable to afford its premiums and petitioner did not retain existing enrollees who failed to pay their premiums petitioner did not conduct any medical health care or scientific research tiil petitioner’s application_for exemption in petitioner filed an application_for recognition as an organization described in sec_501 that is exempt from taxation pursuant to sec_501 petitioner’s application stated that it intended to operate for the charitable purpose of promoting health for the benefit of the community -- - on date respondent issued a final adverse determination_letter to petitioner denying its application_for tax-exempt status pursuant to sec_501 the record does not reflect the date that petitioner filed its application_for exemption under sec_501 or whether petitioner filed a petition for declaratory_judgment with the court challenging that determination on date respondent issued a final adverse determination_letter to petitioner denying its application_for tax-exempt status pursuant to sec_501 on date respondent also denied care’s application_for tax-exempt status on date respondent issued a revocation letter to health_plans revoking its status as an organization described in sec_501 discussion sec_501 to qualify as an organization described in sec_501 c that 1s exempt from federal income_taxation pursuant to sec_501 an organization generally must demonstrate it is organized and operated exclusively for certain specified exempt purposes no part of its net_earnings inures to the benefit of a private_shareholder_or_individual no part of its activities constitutes intervention or participation in any political campaign on behalf of any candidate for public_office and no substantial part of its activities consists of political or lobbying_activities see fla hosp trust fund v commissioner t cc affd 71_f3d_808 11th cir am campaign acad v commissioner 92_tc_1053 qualification as an organization described in sec_501 not only provides an exemption from federal income taxes but also generally permits the organization to solicit and accept donations which normally are deductible by the donor against his or her federal taxes see sec_170 461_us_574 with a few minor differences the organizations and requirements listed in sec_170 are virtually identical to those described in sec_501 with limited exceptions not here relevant organizations described in the other paragraphs of sec_501 c are not eligible to receive tax-deductible contributions in the event the commissioner determines that an organization does not qualify for tax-exempt status the organization may after exhausting its administrative remedies seek judicial review of the matter sec_7428 confers jurisdiction on the tax_court among other courts to make a declaration with respect to the initial or continuing gualification of an organization as an organization described in sec_501 see 69_tc_570 it is well established that the scope of our inquiry is limited to the propriety of the reasons given by the commissioner for denying an organization's application_for exemption see 71_tc_202 thus in making our declaration we do not engage in a de novo review of the administrative record see am campaign acad v commissioner supra pincite 71_tc_102 houston lawyer referral serv inc v commissioner supra pincite the burden_of_proof is on the organization to overcome the grounds for denial of the exemption set forth in the commissioner’s determination see rule c a fla hosp trust fund v commissioner supra pincite christian manner intl inc v commissioner 1t c 69_tc_488 the parties do not dispute that petitioner was organized for an tax-exempt purpose within the meaning of sec_501 the dispute in this case centers on whether petitioner was operated exclusively for an tax-exempt purpose sec_1 c -1 c income_tax regs provides c operational test-- primary activities an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an --- - insubstantial part of its activities is not in furtherance of an exempt_purpose the operational_test focuses on the actual purposes the organization advances by means of its activities rather than on the organization's statement of purpose or the nature of its activities see am campaign acad v commissioner supra pincite aid to artisans inc v commissioner supra pincite although an organization might be engaged in only a single activity that single activity might be directed toward multiple purposes both exempt and nonexempt see 113_tc_47 affd per curiam 242_f3d_904 9th cir t he presence of a single x non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes 326_us_279 see 93_tc_596 am campaign acad v commissioner supra pincite whether an organization operates for a substantial nonexempt purpose is a guestion of fact to be resolved on the basis of all the evidence presented in the administrative record see 765_f2d_1387 9th cir affg tcmemo_1984_349 for purposes of the instant proceeding we assume that the facts as represented in the administrative record are true although in the course of our - review we may draw our own ultimate conclusions and inferences from the facts see am campaign acad v commissioner supra pincite4 houston lawyer referral serv inc v commissioner supra pincite sec_501 specifies various qualifying exempt purposes including charitable purposes the term charitable is not defined in sec_501 but is used in its generally accepted legal sense see 102_tc_558 affd per curiam 37_f3d_216 5th cir sec_1 c -1 d income_tax regs charitable purpose the supreme court has stated that charitable exemptions are justified on the basis that the exempt entity confers a public benefit---a benefit which the society or the community may not itself choose or be able to provide or which supplements and advances the work of public institutions already supported by tax revenues bob jones univ v united_states supra pincite although neither the furnishing of medical_care nor the operation of an hmo is listed as a qualifying exempt activity under sec_501 it now well settled that the promotion of health for the benefit of the community is a charitable purpose see redlands surgical servs v commissioner supra pincite 71_tc_158 as discussed in detail below a health-care provider seeking tax- - - exempt status such as an hmo must demonstrate that it provides a community benefit community benefit test in sound health association v commissioner supra we first considered whether an hmo may qualify as an organization described in sec_501 the commissioner determined that sound health association did not qualify for tax-exempt status pursuant to sec_501 on the ground that the organization served the private interests of its members as opposed to the interests of the community in sound health association v commissioner supra pincite- we utilized the same factors deemed significant by the commissioner in granting tax-exempt status to one of two hospitals under review in revrul_69_545 1969_2_cb_117 and referred to the factors cited favorably in that ruling as the community benefit test in sound health association we concluded that the subject organization shared several characteristics with the hospital deemed exempt in revrul_69_ supra in particular like the hospital in the revenue_ruling sound health association operated a medical clinic and employed physicians and nurses to provide medical services and opened its emergency room to all persons requiring emergency care whether they were members or not and regardless of whether they were financially able to pay sound health association also - established a research program to study health care delivery systems conducted a health education program open to the general_public and was governed by a board_of directors the majority of whom were elected by sound health association members from the community at large sound health association v commissioner supra pincite we found that sound health association provided community benefits beyond those offered by the hospital deemed exempt in revrul_69_545 supra specifically sound health association adopted a plan to accept contributions for the purpose of subsidizing membership for those who could not otherwise afford to pay the full amount of monthly dues further sound health association’s practice of offering membership to the public at large demonstrated that the class of persons eligible to benefit from the organization’s activities was practically unlimited sound health association v commissioner supra pincite we rejected the commissioner’s argument that sound health association provided an unwarranted private benefit to its members we reasoned that like the hospital deemed exempt in revrul_69_545 supra which except in emergency cases limited its treatment to paying patients sound health association was permitted to restrict its services to paying members sound health association v commissioner supra pincite- - - the tax-exempt status of an hmo arose again in geisinger health plan v commissioner tcmemo_1991_649 985_f2d_1210 3d cir 100_tc_394 30_f3d_494 3d cir geisinger iv geisinger hmo like petitioner in the instant case was part of a group of related_organizations forming a large health care network the geisinger system geisinger hmo arranged for its enrollees to receive hospital services by contracting for such services with other geisinger entities geisinger hospitals and outpatient clinics that were recognized as exempt_organizations and independent hospitals geisinger hmo arranged for its enrollees to receive physician services by contracting for such services with clinic- -a tax-exempt geisinger affiliate clinic provided physician services through a combination of staff physicians and by contracting with independent physicians for their services geisinger hmo was organized as a separate_entity to avoid regulatory difficulties and to simplify operations from an organizational and managerial standpoint geisinger hmo offered enrollment to groups with a minimum of eligible enrollees and individuals and certain dependents residing in of the counties in which the geisinger system operated individual enrollees were required to - - be at least years of age individual enrollees were required to complete a medical questionnaire whereas group enrollees were not subject_to this requirement all enrollees generally paid the same premium based on a community rating system during the period in question geisinger hmo had approximately big_number individual and group enrollees geisinger hmo also enrolled slightly more than big_number medicare recipients under a wraparound plan that covered medical_expenses not reimbursed by medicare geisinger hmo also enrolled a small number of medicaid recipients geisinger hmo planned to initiate a subsidized dues program to assist enrollees who might be unable to continue to pay their membership fees as the result of some financial misfortune at the conclusion of the administrative proceedings the commissioner determined that geisinger hmo did not qualify for exemption as an organization described in sec_501 on the grounds that geisinger hmo did not satisfy the criteria for exemption outlined in sound health association v commissioner supra and geisinger hmo was not an integral part of its tax-exempt parent in geisinger i we held that the commissioner erred in determining that geisinger hmo did not qualify for exemption pursuant to sec_501 we based our holding largely ona comparison of the geisinger hmo with the organization in 71_tc_158 in particular we found that like sound health association geisinger hmo was operated for the charitable purpose of promoting health insofar as its class of possible enrollees was practically unlimited it had adopted a subsidized dues program for its enrollees it offered health care services to medicare recipients at a reduced_rate and it was not operated for the private benefit of its enrollees geisinger health plan v commissioner tcmemo_1991_649 in geisinger ii the united_states court_of_appeals for the third circuit reversed and remanded our decision in geisinger i geisinger health plan v commissioner supra pincite9 although the court_of_appeals agreed with the court that an hmo seeking tax-exempt status must provide a community benefit see id the court_of_appeals concluded that geisinger hmo did not provide a primary benefit to the community but rather provided benefits solely to its members the court_of_appeals looking at the totality of the circumstances stated ghp standing alone does not merit tax-exempt status under sec_501 ghp cannot say that it provides any health care services itself nor does it ensure that people who are not ghp subscribers have access to health care or information about health care according to the record it neither conducts research nor offers educational programs much less educational programs open to the public it benefits no one but its subscribers id further the court_of_appeals attached little significance to - - geisinger hmo’s subsidized dues program stating in pertinent part the mere fact that a person need not pay to belong does not necessarily mean that ghp which provides services only to those who do belong serves a public purpose which primarily benefits the community the community benefited is in fact limited to those who belong to ghp since the requirement of subscribership remains a condition_precedent to any service absent any additional indicia of a charitable purpose this self-imposed precondition suggests that ghp is primarily benefiting itself and perhaps secondarily benefiting the community by promoting subscribership throughout the areas it serves id pincite although concluding that geisinger hmo did not qualify for tax- exempt status on its own the court_of_appeals remanded the case to the court for a determination whether the geisinger hmo gualified for exemption as an integral part of its tax-exempt parent id pincite ' integral part test in geisinger iii we held that the administrative record did not support geisinger hmo’s claim that it was entitled to tax- exempt status as an integral part of the geisinger system geisinger health plan v commissioner supra pincite asa preliminary matter we concluded that an hmo may qualify for tax- exempt status as an integral part of a related tax-exempt_entity the integral_part_doctrine is not codified but its genesis may be found in sec_1_502-1 income_tax regs which states that a subsidiary may qualify for tax-exempt status on the ground that its activities are an integral part of the exempt_activities of the parent organization - - if its activities are carried_out_under the supervision or control of a related tax-exempt_entity and the hmo’s activities would not constitute an unrelated_trade_or_business if conducted by the related tax-exempt_entity id pincite we looked to sec_513 which defined an unrelated_trade_or_business in pertinent part as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the purpose or function constituting the basis for its exemption id pincite because geisinger hmo enrollees received medical services from hospitals outside of the geisinger system and because the administrative record lacked evidence as to whether such services were substantial we were unable to conclude that geisinger hmo’s activities were substantially related to the activities of its tax-exempt affiliates id pincite in geisinger iv the court_of_appeals affirmed our holding in geisinger iii albeit on slightly different grounds geisinger health plan v commissioner f 3d pincite the court_of_appeals held that an organization may qualify for tax-exempt status as an integral part of its tax-exempt parent if the organization is not carrying_on_a_trade_or_business which would be an unrelated_trade_or_business if regularly carried on by its tax-exempt parent and the organization’s relationship with -- - its tax-exempt parent somehow enhances or boosts its own tax- exempt character to the point that the organization would qualify for tax-exempt status id pincite focusing solely on the latter issue the court_of_appeals concluded that geisinger hmo was not entitled to tax-exempt status because it did not receive the necessary boost from its relationship with exempt geisinger entities in particular the court_of_appeals held as our examination of the manner in which geisinger hmo interacts with other entities in the system makes clear itss association with those entities does nothing to increase the portion of the community for which geisinger hmo promotes health--it serves no more people as a part of the system than it would serve otherwise id pincite under the circumstances the court_of_appeals concluded that it was unnecessary to consider whether geisinger hmo’s activities would constitute an unrelated_trade_or_business if regularly carried on by a related tax-exempt_entity id analysis consistent with the preceding discussion petitioner’s gualification for exemption pursuant to sec_501 as an organization described in sec_501 initially depends upon whether petitioner satisfies the community benefit test in the event that petitioner cannot satisfy the community benefit test we must consider whether petitioner nevertheless qualifies for exemption as an integral part of a related tax-exempt_entity --- - whether petitioner satisfies the community benefit test the community benefit test requires consideration of a variety of factors that indicate whether an organization is involved in the promotion of health on a communitywide basis see sound health association v commissioner t c pincite comparing sound health association’s operations with hospital a in revrul_69_545 c b considering all the facts and circumstances surrounding petitioner’s operations even though petitioner is instrumental in arranging for the provision of health care to a large number of individuals in the geographic area that it serves we are not persuaded that petitioner provides a meaningful community benefit accordingly petitioner does not qualify for tax-exempt status as an organization described in sec_501 based upon the provision of a community benefit significantly unlike the hmos in geisinger health_plans v commissioner supra and sound health association v commissioner supra petitioner did not offer its health_plans to the general_public petitioner offered its selectmed plan to only employees of large employers ie employers with more than employees moreover petitioner no longer offers its senior care plan to medicare patients in sum petitioner operates ina manner that substantially limits its universe of potential enrollees against this backdrop we further note that unlike the hmo in sound health association v commissioner supra petitioner did not own or operate its own medical facilities nor did petitioner employ its own physicians consequently petitioner could not provide free medical_care to those otherwise unable to pay for medical services additionally petitioner did not establish a subsidized premiums program conduct research or offer free education programs to the public petitioner’s core wellness program was offered exclusively to its enrollees we recognize that petitioner’s operations and particularly petitioner’s practice of setting premiums based upon an adjusted community rating system likely allowed its enrollees to obtain medical_care at a lower cost than might otherwise have been available however the benefit associated with these cost savings is more appropriately characterized as a benefit to petitioner’s enrollees as opposed to the community at large in sum the record does not establish that petitioner provides a community benefit that would qualify petitioner for tax-exempt status pursuant to sec_501 we next consider whether petitioner qualifies for tax-exempt status as an integral part of a related tax-exempt_entity - - whether petitioner satisfies the integral part test in geisinger iii we concluded that an organization may qualify for exemption as an integral part of a tax-exempt affiliate if the organization’s activities are carried_out_under the supervision or control of a tax-exempt affiliate and such activities would not constitute an unrelated_trade_or_business if conducted by a related tax-exempt_entity geisinger health_plans v commissioner t c pincite there is no dispute that petitioner’s activities were carried_out_under the supervision and control of ihc--a tax-exempt affiliate thus we turn to the question whether petitioner’s activities would constitute an unrelated_trade_or_business if conducted by a related tax-exempt_entity in geisinger iii we held that because geisinger hmo enrollees received some hospital services from independent hospitals geisinger hmo had to show that its overall operations were substantially related to the functions of its tax-exempt affiliates id pincite we stated if petitioner’s activities are conducted on a scale larger than is ‘reasonably necessary’ to accomplish the purposes of the exempt entities there is no substantial relationship within the meaning of the regulations hi-plains hospital v united_states f 2d pincite sec_1_513-1 income_tax regs id pincite although geisinger hmo enrollees received all of their physician services through clinic an exempt affiliate geisinger - -- hmo enrollees received approximately percent of their hospital services from independent hospitals because the record did not disclose why geisinger hmo enrollees received hospital services from hospitals outside of the geisinger system we were unable to conclude that geisinger hmo’s operations were substantially related to the functions of its tax-exempt affiliates id pincite like geisinger hmo petitioner neither owned nor operated any medical facilities and did not employ any physicians or health care professionals petitioner fulfilled its obligation to provide medical services to its enrollees by contracting with physicians both physicians employed by health services and physicians that were members of independent medical groups and hospitals both health services hospitals and independent hospitals to provide such services in contrast to geisinger hmo however the administrative record in this case indicates that the medical services that petitioner’s enrollees received from independent hospitals were largely attributable to admissions to either umc or davis hospital and medical center further these admissions were undertaken to take advantage of specialized services such as burn treatment and pain management provided at umc address occasional shortages of psychiatric beds in health services hospitals and accommodate petitioner’s enrollees living in davis county utah -- - where health services lacked a hospital because the circumstances under which petitioner’s enrollees received hospital services from independent hospitals were limited to situations where health services was unable to provide specialized hospital services or were due to geographical expediency or both we conclude that petitioner’s method for arranging for its enrollees to receive hospital services was substantially related to health services’ exempt_function however we do not end our analysis here in particular the administrative record reveals that petitioner’s enrollees received a substantial portion of their physician services from independent physician medical groups in geisinger iii we did not discuss the provision of physician services to geisinger enrollees inasmuch as geisinger hmo arranged for its enrollees to receive all their physician services from clinic--a tax-exempt affiliate of geisinger hmo clinic in turn arranged to provide physician services to geisinger enrollees through its approximately physician employees approximately percent of services and through contracts with independent physicians approximately percent of services in contrast in the instant case petitioner’s enrollees received only percent of their physician services from physicians employed by or contracting with health services while petitioner contracted for the - - remaining percent of such physician services directly with independent physician medical groups in other words petitioner’s enrollees received nearly percent of their physician services from physicians with no direct link to one of petitioner’s tax-exempt affiliates petitioner contends that its contracts with independent medical groups are not relevant to the question of whether petitioner qualifies for tax-exempt status as an integral part of its tax-exempt ihc affiliates because all such independent physicians were required to maintain privileges at health services hospitals we disagree with the basic premise underlying petitioner’s argument health services was composed of the hospital division which operated a large number of hospitals and clinics and the physician division which employed primary care physicians and specialist physicians who generally practiced in health services’ clinics and other community-based settings health services’ status as an organization described in sec_501 is undoubtedly attributable to its participation in medicare medicaid and other governmental programs and its willingness to provide charity services considering that petitioner does not provide free or low cost health services and given the termination of its senior care plan for medicare patients we fail to see how petitioner’s operations including -- - its heavy reliance on independent physicians would be essential to or substantially related to health services’ exempt functions to the contrary petitioner’s method of arranging for its enrollees to receive physician services suggests that petitioner conducted its operations on a scale larger than is reasonably necessary to accomplish the purposes of the exempt entities geisinger health_plans v commissioner t c at dollar_figure in sum petitioner’s practice of offering its selectmed health plan solely to the employees of large employers does not provide the community benefit required for petitioner to qualify as an organization described in sec_501 further petitioner’s operations are not essential to or substantially related to health services’ exempt functions consequently petitioner is not entitled to the declaratory_judgment it seeks to reflect the foregoing decision will be entered for respondent under the circumstances we need not consider whether we would apply the boost test set forth in 30_f3d_494 3d cir


cca-118131-13 ----------------- id office uilc number release date from ------------------ sent friday date pm to -------------------- cc ------------------------------------------------------------ subject ------------------------ bad_debt debt v equity --------- - we have reviewed the documents submitted in this matter and coordinated with cc ----- -------------- and cc ----- based on the facts submitted for our review ----- does not object to the position taken in the draft memorandum but defers to --------- regarding whether a bona_fide debt exists ------------ analysis of whether there is a bona_fide debt is that based on the facts submitted for our review we support the field's argument that a bona_fide debt does not exist the taxpayer has not provided any information to show that the parties treated the amount as debt specifically the taxpayer did not provide a fixed maturity_date for the purported loan there is no evidence of any principal repayment or interest charged paid the purported creditor made no attempt to collect the alleged debt furthermore beginning in ------- the parties treated the purported debt as equity for foreign jurisdiction purposes as noted in the draft memorandum if there is not a bona_fide debt then there can not be a bad_debt_loss under sec_166 sec_1_166-1 therefore based on the facts submitted for our review and given that ----------supports the argument that a bona_fide debt does not exist we support the field’s argument that the taxpayer is not entitled to a bad_debt_loss deduction under sec_166 sincerely ----------------------- -------------


department of the treasury internal_revenue_service washington d c date number release date cc dom fs proc uilc internal_revenue_service national_office field_service_advice memorandum for associate district_counsel from assistant chief_counsel field service cc dom fs subject nol carryforward claims of partnership items this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent representatives legend x y ps sc yr1 yr2 yr3 yr4 yr5 yr6 yr7 issue sec_1 whether the statute_of_limitations is open for the tax_court to consider a partner’s request for adjustments to the characterization of losses reported by a partnership for other tax years in determining the partner’s tax_liability for the year to which the losses might be carried forward whether the statute_of_limitations is open for the tax_court to consider a shareholder’s request for adjustments to the characterization of losses by an s_corporation for other tax years in determining a shareholder’s tax_liability for the year to which the losses might be carried forward conclusion sec_1 because ps a partnership is subject_to the tefra unified_audit provisions for the years in which it reported the losses that a partner wants to recharacterize and carry over to the tax_year pending before the tax_court the tax_court does not have jurisdiction in the partner’s pending case to consider the characterization of the partnership’s losses the characterization of the losses is a partnership_item that can only be determined in a unified partnership proceeding the partner did not initiate a timely action for the recharacterization of the partnership’s losses under the tefra unified_audit provisions because sc an s_corporation is not subject_to the unified_audit proceedings for s_corporations sec_6214 gives the tax_court jurisdiction to consider the characterization of the s corporation’s losses in a shareholder’s tax_court case if the limitations_period is open for the year before the court even if the statute_of_limitations has expired for the year or years in which the losses were incurred facts x and y husband and wife are the petitioners in a pending tax_court case based upon a notice_of_deficiency proposing an additional joint income_tax_liability for yr7 although x and y are prepared to settle the issue raised in the notice_of_deficiency x and y have claimed an overpayment of taxes for yr7 based upon the carryforward of net operating losses from yr1 through yr6 yr1 through yr6 are calendar years beginning after date but before date ps and sc are respectively a partnership and a subchapter_s_corporation that have operated over a period of tax years ending december and including yr1 through yr6 x is a general_partner and the tax_matters_partner of ps the only other partner in ps is a_trust controlled by x x is the sole shareholder in sc the operating losses were allegedly incurred by x by ps and by sc in trading options forwards futures and swap contracts during yr1 through yr6 x ps and sc all reported the losses as capital losses either short-term or long-term under code sec_1201 through on the returns that x ps and sc filed for yr1 through yr6 x and y now claim that x ps and sc incurred ordinary losses in yr1 through yr6 because either --- x ps and sc were active traders or dealers in this trading activity rather than investors or the trades were sec_988 transactions the service had not examined the trading activities before the issues were raised by x and y in the tax_court case for the yr7 for yr1 through yr6 ps filed forms u s partnership returns of income on which it reported net short term capital_gains or losses and net long term capital_gains or losses from the trading activity on a schedule_k-1 for each year ps reported the portion of the net gains or losses that was allocable to x for each year in which ps reported net short-term gains or losses and net long term capital_gains or losses x and y reported the information from the schedule_k-1 on their annual income_tax return for yr1 through yr6 sc filed forms 1120s u s income_tax returns for an s_corporation on which it reported net short term capital_gains or losses and net_long-term_capital_gains or losses from the trading activity alternatively sc reported sec_1256 income or losses that are statutorily allocated between short term and long term gains and losses sc’s returns were due after date on a schedule_k-1 for each year sc reported of the net gains or partnership years beginning after date are subject_to the unified_audit procedures for partnerships under code sec_6221 through the tax years of s_corporations beginning between date and date are subject_to the unified_audit procedures for s_corporations under sec_6241 through see law and analysis section of this memorandum sec_301_6241-1t c ii which applies to tax years of s_corporations for which returns are due after date generally excepts s_corporations with five or fewer shareholders all of whom are natural persons or estates from the unified_audit procedures unless the s_corporation elected to be included losses as being allocable to x for each year in which sc reported net short-term and long-term_capital_losses x and y reported the information from the schedule_k-1 on their annual income_tax return the service has not audited the income_tax returns filed by x and y the partnership returns filed by ps or the s_corporation returns filed by sc for yr1 through yr6 neither x nor his partner in ps have filed a request_for_administrative_adjustment for ps and x has not filed a request_for_administrative_adjustment for sc we are aware of no claims for refund filed by x and y for y1 through yr6 the general three year period in which the service can assess tax against x and y as well as the three year period or two year period in which x and y can file a claim_for_refund for yr1 through yr6 have expired the period for filing a request_for_administrative_adjustment for the yr1 through yr6 tax years of ps and sc has also expired law and analysi sec_1 the tax_court lacks jurisdiction over partnership items in a deficiency case x and y have made overpayment claims in this case for yr7 based upon their effort to recharacterize trading losses separately incurred by x by ps and by sc in yr1 through yr6 as ordinary losses rather than capital losses they claim that x’s ordinary losses in yr1 through yr6 can be carried over to yr7 likewise because the losses_incurred by ps and sc in each year flow through to x as respectively a partner and a shareholder x and y contend that the recharacterization of the ps and sc losses would also give rise to net operating losses that x and y could carry over to yr7 we separately consider the losses_incurred and reported by x by ps and by sc a in determining a tax_deficiency or overpayment the tax_court can consider losses_incurred by the taxpayer in another tax_year x and y are able to raise the characterization of the losses that x incurred in yr1 through yr6 in the tax_court case for the determination_of_a_deficiency or an overpayment for yr7 under code sec_6214 even though the earlier years are not before the court and even though the limitations periods for assessing tax or claiming refunds for those years have expired in determining x and y’s yr7 tax_liability including overpayments the court clearly has jurisdiction to consider transactions in other years that affect the yr7 taxes sec_6214 gives the tax_court jurisdiction - to consider such facts with relation to other years and other quarters as may be necessary correctly to redetermine the amount of the deficiency for the year before the court but in so doing shall have no jurisdiction to determine whether or not the tax for any other year has been overpaid or underpaid the tax_court has previously held that the court may consider whether the taxpayer actually incurred the loss as claimed or would have exhausted the loss by using it in years other than the year before the court when a taxpayer claims the benefits of the carryover of a net_operating_loss to the year before the court leitgen v commissioner u s t c 8th cir aff’g tcmemo_1981_525 substantiation of claimed nol was considered in determining whether loss was available to be carried forward to and 231_f2d_420 2d cir aff’g tcmemo_1955_28 adjustments to income in were considered in determining how much of nol was available for use in 61_tc_436 aff’d without published op 510_f2d_970 3d cir nols available for use in could not be used in and 56_tc_1083 aff’d on other grounds 482_f2d_150 3d cir commissioner could recompute income for closed short taxable_year to determine how much of carried back nol was available in a succeeding year likewise the tax_court may consider the characterization of losses directly incurred by a taxpayer in one year as either ordinary or capital losses for the purposes of determining the taxpayer’s nol_carryback from the transaction in another year see furor v commissioner a f t r 2d 9th cir aff’g tcmemo_1993_165 losses from the stock market crash were found to be capital losses rather than ordinary losses giving rise to nols that could be carried back to and the years before the court see also chamberlin v commissioner tcmemo_2000_50 in which the tax_court considered whether to characterize a loss as resulting from a business_bad_debt ordinary_loss or a nonbusiness_bad_debt short term capital_loss before determining that none of the loss could be carried to the years at issue before the court we have no doubt that the tax_court has jurisdiction to consider the characterization of the losses claimed by x and y on their yr1 through yr6 income_tax returns which respect to x’s trading activities in determining any_tax deficiency or overpayment for yr7 b in determining a tax_deficiency or overpayment for x and y the tax_court does not have jurisdiction to consider the recharacterization of the capital losses reported by ps a tefra partnership the overpayment claims with respect to trades by ps in yr1 through yr6 involve not only the carryover of losses from tax years not before the court but the redetermination of the character of losses_incurred and reported by the partnership because ps reported the losses from its trading activity as capital losses on its partnership returns for yr1 through yr6 x and y reported the flow through of these losses as capital losses on the income_tax returns x and y filed for yr1 through yr6 under sec_6221 through of the code ps’s characterization of its losses on its partnership returns as capital losses is a partnership_item that can only be redetermined in a tefra partnership see sec_6221 through the partnership provisions in title iv of the tax equity and fiscal responsibility act of tefra publaw_97_248 sec 96_stat_324 established a unified_audit and litigation process under code sec_6221 through for determining the tax treatment of partnership items at the partnership level these provisions replaced the then existing process under which amounts reported by a partnership were audited and resolved separately for each partner in individual administrative and judicial proceedings for partnership tax years beginning after date these tefra provisions created a statutory dichotomy between the procedures applicable to the determination of tax deficiencies and overpayments under sec_6211 through of the code and the procedures applicable to the administrative adjustment and judicial readjustment of partnership items under sec_6621 through several cases contain a comprehensive description of the partnership audit process and the reasons for its adoption see addington v commissioner __ f 3d __ 2d cir date aff’g sann v commissioner tcmemo_1997_259 64_f3d_101 2d cir 519_us_815 and 87_tc_783 the tefra unified_audit rules for partnerships apply to taxable years of partnerships such as ps’s yr1 through yr6 that began after date the tefra rules at sec_6231 exclude from the tefra process certain small partnerships that by definition have or fewer partners -- each of whom is an individual a subchapter_c_corporation or the estate of a deceased partner see sec_6231 although there are only two partners in ps ps does not qualify for the small_partnership_exception since one of the two partners in ps is a_trust see ivory v united_states u s t c s d ohio assessment of tax based upon unified partnership audit was proper because partnership including trust did not qualify for small_partnership_exception in the interest of providing consistent treatment for all partners in a partnership the tefra partnership provisions require adjustments to partnership items to be made at the partnership level in a separate tefra partnership proceeding see sec_6226 sec_6231 defines a partnership_item as any item that i sec_3 see fn required to be taken into account for the partnership’s taxable_year under any provision of the code to the extent that service regulations provide that the item is more appropriately determined at the partnership level than at the partner level n c f energy partners v commissio89_tc_741 the service’s regulations define partnership items to include the partnership’s aggregate and each partner’s share of i tems of income gain loss deduction or credit of the partnership sec_301_6231_a_3_-1 they also include factors affecting the determination of partnership items sec_301_6231_a_3_-1 thus the amount and character of gains and losses from a partnership’s trading activities are partnership items that are to be determined in a partnership proceeding see regan v commissioner tcmemo_1993_623 the statutory goal of the unified_audit proceedings is found in sec_6221 which provides that the tax treatment of partnership items shall be determined at the partnership level the partnership level adjustments must be finally resolved before the flow through tefra tax adjustments based upon the adjustments to partnership items can be made to partners’ tax_liabilities see sec_6223 sec_6225 and sec_6226 95_tc_209 the tax_court has jurisdiction over partnership items only in those cases in which a timely petition_for_readjustment of partnership items has been filed with that court see sec_6226 the tax_court has no jurisdiction to redetermine any portion of a deficiency attributable to adjustments to partnership items when no fpaa has been issued by the service 95_tc_560 94_tc_853 92_tc_71 and 87_tc_783 the maxwell opinion clearly illustrates the rationale for the tax court’s lack of jurisdiction in this case mr maxwell one of the taxpayers in that case formed vimas ltd a limited_partnership in date with limited partners and himself as the general_partner while a partnership audit of vimas for the tax_year was pending the service issued a notice_of_deficiency to the maxwells determining deficiencies and additions to the tax for the years and the proposed deficiencies for resulted in part from the disallowance of mr maxwell’s claimed distributive_share of vimas’ losses and investment tax_credits for the and deficiencies were attributable to the maxwells’ claimed carryback of part of the disallowed investment_tax_credit to those years the service had not completed the vimas audit and had not issued an fpaa to the vimas partners when the notice_of_deficiency was issued as the parties were reaching a basis for settling the case the service reconsidered the notice_of_deficiency and concluded that the partnership’s losses and investment tax_credits were partnership items the service filed a motion to strike the partnership items and affected items from the petition for lack of jurisdiction on the grounds that the tax_court had no jurisdiction to consider them unless they were raised in a tefra petition filed after an fpaa had been issued for the partnership the court granted the motion in explaining its lack of jurisdiction the court analyzed the purpose underlying the tefra partnership audit process and raised several key points - - - - - the service has no authority to assess a deficiency attributable to a partnership_item until after the close of the partnership proceeding sec_6225 and may be enjoined from making premature assessments maxwell pincite all nonpartnership matters on a partner’s income_tax return continue to be subject_to existing rules for administrative and judicial resolution of the partner’s tax_liability neither the service nor the taxpayer are permitted to raise nonpartnership_items in the course of a partnership proceeding nor may partnership items be raised in proceedings relating to nonpartnership_items of a partner unless the partnership items are converted to nonpartnership_items h rep 97th cong 2d sess pincite 1982_2_cb_600 pincite maxwell pincite because sec_6226 makes the issuance of an fpaa a condition_precedent to the exercise of its jurisdiction over a partnership action the tax_court has no jurisdiction over partnership items until an fpaa is issued for the partnership maxwell pincite losses and credits claimed by a partnership are partnership items unless some provision of the statute transmits them into nonpartnership_items sec_301_6231_a_3_-1 and vi a maxwell pincite the existence or the amount of carrybacks of the investment tax_credits or nols from the year in which the partnership claimed the credits or losses to other years are affected items as defined in sec_6231 that are dependent upon the determination of a none of the partnership items reported on the partnership returns filed by ps have been converted into nonpartnership_items under sec_6231 the service has not notified x that the items shall be treated as nonpartnership_items x has not filed suit after the service failed to allow an administrative_adjustment_request since none was filed the service has not entered into a settlement agreement with x and because there have been no proceedings the service has not failed to provide timely notice of partnership proceedings to x partnership_item -- such as the amount of the partnership loss or the credit - and cannot be considered until the partnership_item is resolved maxwell pincite the tax court’s analysis in maxwell applies to prohibit the consideration of the partnership items in this case the tax_court cannot consider an adjustment to the character of the losses reported by a tefra partnership a partnership_item until the service issues an fpaa for the partnership further the tax_court may consider the partnership items only in a partnership proceeding not in a deficiency proceeding even if a fpaa has been issued 95_tc_560 partner could not reduce his liability for tax on nonpartnership_items by using items attributable to a partnership if there have been no partnership proceedings in which an fpaa might be timely issued and there can no longer be a partnership proceeding under the normal statute_of_limitations the only possible outcome of the partnership proceeding is the acceptance of the partnership return as filed 94_tc_853 in this case where the service has not issued and is now time barred from issuing an fpaa to question the amount the characterization or the allocation of the losses reported by ps for yr1 through yr6 the tax_court does not have jurisdiction to consider changing the character or the amount of such losses or the allocation of those losses among the ps partners the court’s jurisdiction under sec_6214 is limited to considering x and y’s use of the losses as reported by ps for yr1 through yr6 like the carryback of losses and investment tax_credits in maxwell the carryforward of x’s share of the ps losses to yr7 by x and y is an affected_item see 849_fsupp_500 w d tex when a partnership loss deduction or credit allocated to a partner in one year carries over or back to other years at the partner’s level such carryover or carryback is an affected_item an affected_item is any item to the extent such item is affected by a partnership_item see sec_6231 99_tc_121 unlike partnership items affected items need not necessarily be determined in a partnership proceeding affected items may be either computational adjustments that cannot be made until the partnership proceeding is completed or matters that require factual determinations to be made at the partner level section a 172_f3d_1311 fed cir computational adjustments made upon the completion of the partnership proceedings that do not require separate partner level determinations may be summarily made once the partnership_adjustment is final otherwise once the partnership proceeding is completed the service must issue a notice_of_deficiency to a partner for additional deficiencies before making any assessment that is attributable to an affected_item requiring partner level determinations section a a i olson pincite 108_tc_1 n c f energy partners v commissioner supra pincite because changes to affected items need not be determined in a partnership proceeding the tax_court has jurisdiction under sec_6214 to consider the amount of any passed through partnership losses that can be carried back or carried forward to the year before the court by considering the taxpayer-partner’s use of the loss in the year before the court and in other years see 99_tc_121 however to the extent that the existence and amount of a net_operating_loss_carryback or carryforward that is available in a given year rests upon the existence and amount of a partnership_item ie the loss reported by the partnership the tax_court cannot consider changes in the amount of the partnership loss see 99_tc_121 in which the tax_court held that sec_6214 gave it jurisdiction to consider nol carrybacks based upon a settled tefra case in a rule computation but that it would not take into account pending claims for nols in a second pending partnership case or hold the record open in the deficiency case until the pending partnership case was completed the court agreed with the service’s stated conditions as to when sec_6214 would apply the settled partnership items may not be redetermined in the instant proceeding the nol_carryback claim must be consistent with the partnership settlement and the carryback claim must be made in the applicable limitations_period for claiming refunds harris pincite sec_6214 gives the tax_court jurisdiction to consider affected items based upon the outcome of a partnership action but does not allow the court to consider adjustments to partnership items in a deficiency case inasmuch as the claim filed by x and y would require the redetermination now barred by the statute_of_limitations of the partnership items reported by ps on its returns for yr1 through yr6 sec_6214 does not authorize the tax_court to consider those items in the pending deficiency proceeding finally the tefra provisions do not allow x and y to change the treatment of the partnership items on their returns for yr1 through yr6 in this tax_deficiency proceeding partners are responsible for consistently reporting partnership items under tefra unless a partner notifies the service of an intent to depart from the reporting of items on a partnership return the partner must report his or her share of partnership items consistently with the treatment of the item on the partnership return see sec_6222 if no notification is made the service may make a computational adjustment to conform the partner’s return to the partnership return temp sec_301_6222_b_-2t to change the treatment of a partnership_item on a partner’s return as x has sought to do in this case a partner must file a request_for_administrative_adjustment raa as required by sec_6227 the raa may be filed no later than the early of three years after the later of the filing_date or due_date of the partnership return for the taxable_year to which the request relates or the date on which an fpaa is mailed to the tax_matters_partner with respect to the taxable_year for the partnership years yr1 through yr6 x did not file a timely raa and no fpaa was issued for the purposes of determining the carryover of losses to yr7 the partners in ps are bound by the amount and character of the losses reported on ps’s returns for yr1 through yr6 see 87_tc_783 99_tc_121 and 94_tc_853 the tax_court has jurisdiction to consider the character of a s corporation’s losses that are subject_to small_corporation exception an s_corporation like a partnership does not pay taxes as an entity but files an information_return reporting certain items income gain losses deductions and credits that are passed through to its shareholders for inclusion on their individual returns see 992_f2d_1516 11th cir under the subchapter_s_revision_act_of_1982 ssra publaw_97_354 96_stat_1669 codified in part at sec_6241 through of the code prior to repeal of these sections by the small_business job protection act of publaw_104_188 110_stat_1755 the unified tefra_audit procedures apply to s_corporations with tax years beginning after date and before date dardanos assoc 88_f3d_821 9th cir shareholders in s_corporations must treat s_corporation items on their individual returns consistently with the returns filed by the s_corporation see section as with partnerships if the subchapter_s audit procedures are applicable and unified corporate level proceedings are required the tax_court has no jurisdiction to determine in a separate deficiency case any part of a shareholder’s tax deficiencies that are attributable to subchapter_s items see sec_6214 and 97_tc_278 in sec_301_6241-1t c ii the service exercised its authority to provide an exception from the unified_audit procedures for small s_corporations with returns due after date the service excepted s_corporations with five or fewer shareholders all of whom are natural persons or estates since x was the only shareholder in the yr1 through yr7 all years for which returns were due after date the unified_audit provisions for s_corporations do not apply to sc see 96_tc_773 regulation not effective for tax_year and davis v commissioner tcmemo_1997_80 exception does apply since the unified_audit procedures do not apply to sc the normal deficiency procedures under sec_6211 through do apply under those rules the tax_court can consider any_tax items that would otherwise be within its jurisdiction for yr1 through yr6 in determining the income_tax_liability of x and y for yr7 those items include the losses reported of sc’s corporate return and passed through to x to the same extent as the losses that have been reported directly by x and y see reilly v commissioner tcmemo_1989_312 for a pre-tefra year sec_6214 gave the court authority to redetermine the taxpayer’s distributive_share of a partnership’s loss and investment tax_credits case development hazards and other considerations please call if you have any further questions