Court Opinion

ID: 4332810
Source: CourtListenerOpinion
Date Created: 2018-11-14 00:52:54.50067+00
Date Added: 2024-06-11T14:19:45.537925
License: Public Domain

114 T.C. No. 33

                UNITED STATES TAX COURT

    GAF CORPORATION AND SUBSIDIARIES, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23682-97.                      Filed June 29, 2000.

     R determined deficiencies in income tax based on
“affected items” that are dependent upon the resolution
of partnership items. The resolution of the
partnership items must be made at the partnership
level. The partnership level proceeding has not been
completed. P asks us to dismiss for lack of
jurisdiction on the ground that respondent has
determined deficiencies that are based on “affected
items”, which may not be determined before final
resolution of the partnership items to which they
relate. P relies on Maxwell v. Commissioner, 87 T.C.
783 (1986) (striking affected items for lack of
jurisdiction because the partnership proceeding had not
been completed).
     Held: A valid notice of deficiency based on
“affected items” may not be issued prior to completion
of the related partnership-level proceedings. Our
jurisdiction is dependent upon a valid notice of
deficiency. R’s notice of deficiency is invalid. This
case is dismissed for lack of jurisdiction.
                                - 2 -

      Albert H. Turkus, Pamela F. Olson, William F. Nelson, and

Anne E. Collins, for petitioner.

      John A. Guarnieri, Craig Connell, and Ruth M. Spadaro, for

respondent.

                               OPINION

      RUWE, Judge:   The matter is before the Court on petitioner’s

motion for summary judgment.

I.   Introduction

      Petitioner is a Delaware corporation, with its principal

place of business in Wayne, New Jersey.    It is the common parent

of an affiliated group of corporations making a consolidated

return of income (the affiliated group).

      By notice of deficiency dated September 12, 1997, respondent

determined deficiencies in the Federal income tax liabilities of

the affiliated group for its taxable (calendar) years 1987, 1988,

and 1990, in the amounts of $4,038,474, $70,644, and $80,285,840,

respectively, along with an accuracy-related penalty for 1990 of

$16,057,168.1   Petitioner asks for summary disposition in its

favor on the ground that this is not a partnership proceeding,

and respondent has determined deficiencies that are entirely

      1
      Respondent concedes that the adjustment for 1988 was made
in error and that no deficiency exists for that year.
                                 - 3 -

dependent upon proposed adjustments to “partnership items”, which

may not be adjudicated in this proceeding, or to “affected

items”, which may not be determined before final resolution and

adjustment of the partnership items to which they relate.

Petitioner claims that there is no genuine issue as to any

material fact and the law is clear, in its favor.     Respondent

conditionally agrees that there is no genuine issue as to any

material fact.2

II.   Discussion

      A.   Respondent’s Adjustments

      GAF Chemicals Corp. (GAF Chemicals) and Alkaril Chemicals,

Inc. (Alkaril), are two members of the affiliated group.     Rhone-

Poulenc Surfactants and Specialties, L.P., is a Delaware limited

partnership (the partnership).     Respondent’s adjustments, which

give rise to the deficiencies and penalty in question, relate to

certain transfers of property by GAF Chemicals and Alkaril (the

transferors).     The property in question consists of assets

related to businesses carried on by the transferors.     Respondent

determined that the transferors realized gains with respect to

the property at the time of the transfer.     Petitioner avers that

the transfer was a contribution by the transferors to the

      2
      Petitioner has requested a hearing on the motion. The
parties’ submissions fully set forth their respective positions,
and we see no need for any further argument. Therefore, we have
not granted petitioner’s request for a hearing.
                                  - 4 -

partnership in exchange for interests in the partnership and that

the Code provides that no gain is to be recognized to the

transferors.      Respondent denies that the transfer was a

contribution to the partnership by the transferors.      Respondent

believes that the transferors sold the property and, therefore,

gain must be recognized to the transferors on account of such

sale.     Respondent characterizes the transfer as a sale based on

two sometimes independent hypotheses:      (1) There was no

partnership, and (2) the transferors received no partnership

interests in exchange for the property.3

     Petitioner filed its consolidated corporate Federal Income

Tax return (Form 1120) for its 1990 taxable year (the GAF

return), on or about September 16, 1991.

     B.     Jurisdiction

             1.   Petitioner Raises a Question of Subject Matter
                  Jurisdiction

     The Tax Court is a court of limited jurisdiction, and the

Court exercises jurisdiction only to the extent provided by

statute.     See sec. 7442; Pyo v. Commissioner, 83 T.C. 626, 632

     3
      For example, respondent claims, in the alternative: (1)
There was no partnership; (2) if there was a partnership, the
transfer was not to it but to a related party; and (3) if there
was a partnership and the transfer was to it, the transfer was
not in exchange for interests in the partnership but, rather, was
a sale to the partnership.
                               - 5 -

(1984).   Pursuant to section 6213(a),4 this Court’s jurisdiction

to redetermine a deficiency in tax depends upon a valid notice of

deficiency and a timely filed petition.    See Savage v.

Commissioner, 112 T.C. 46, 48 (1999).     Section 6212(a) provides:

“If the Secretary determines that there is a deficiency in

respect of * * * [among other taxes, the income tax], he is

authorized to send notice of such deficiency to the taxpayer”.

Section 6213 authorizes a taxpayer to whom a notice of deficiency

has been sent to petition the Tax Court for a redetermination of

such deficiency.

     In response to the notice, petitioner filed the petition on

December 9, 1997.   Prima facie, we have jurisdiction to

redetermine the deficiencies determined in the notice.     See,

generally, secs. 6211 through 6214.    Petitioner argues, however,

that the determinations in the notice involve either partnership

items that cannot be adjudicated in a partner-level proceeding,

see sec. 6221, or affected items that cannot be determined before

final resolution and adjustment of the partnership items to which

they relate.   Therefore, petitioner argues that the notice is

invalid, citing N.C.F. Energy Partners v. Commissioner, 89 T.C.

     4
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 6 -

741 (1987); Maxwell v. Commissioner, 87 T.C. 783 (1986); and

Gillilan v. Commissioner, T.C. Memo. 1993-366.5

          2.   Partnership Items, Nonpartnership Items, Affected
               Items, and Computational Adjustments

     The terms “partnership item”, “nonpartnership item”,

“affected item”, and “computational adjustment” are terms of art.

They are defined in section 6231(a)(3), (4), (5), and (6),

respectively, as follows:

     The term “partnership item” means, with respect to a
     partnership, any item required to be taken into account
     for the partnership’s taxable year under any provision
     of subtitle A to the extent regulations prescribed by
     the Secretary provide that, for purposes of this
     subtitle, such item is more appropriately determined at
     the partnership level than at the partner level.

     The term “nonpartnership item” means an item which is
     (or is treated as) not a partnership item.

     The term “affected item” means any item to the extent
     such item is affected by a partnership item.

     The term “computational adjustment” means the change in
     the tax liability of a partner which properly reflects
     the treatment under this subchapter of a partnership
     item. * * *

Section 6231 is one of a group of provisions concerning the tax

treatment of partnership items that was added to the Code by the

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

     5
      Petitioner’s alternative ground is that this proceeding is
time barred by sec. 6501(a). The same ground was raised in the
partnership case. See Rhone-Poulenc Surfactants & Specialties,
L.P., v. Commissioner, 114 T.C. __ (2000). Because of our
holding that we lack jurisdiction, we need not address
petitioner’s alternative ground.
                                - 7 -

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

provisions).6

     For income tax purposes, partnerships are not taxable

entities.   See sec. 701 (reflecting the view that a partnership

is no more than an aggregation of its members).   Before TEFRA,

adjustments with respect to partnership items were made to each

partner’s income tax return at the time (and if) that return was

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

600, 662.   An administrative settlement or judicial determination

of a disagreement between a partner (or partners) and the

Commissioner bound only the parties thereto and did not bind

other partners or bind the Commissioner with respect to other

partners.   See id.   The TEFRA partnership provisions provide that

all partnership items are to be determined at the partnership

level rather than at the partner level.   See sec. 6221.

     If a computational adjustment results in a deficiency in a

partner’s tax, the partner is accorded the right to challenge the

adjustment pursuant to the deficiency procedures provided for in

subtitle F, chapter 63, subchapter B of the Internal Revenue Code

only if and to the extent the change in the partner’s tax

liability cannot be made without making one or more partner-level

     6
      The TEFRA partnership provisions have been amended since
their enactment in 1982 and now constitute secs. 6221 through
6234.
                               - 8 -

determinations.   See sec. 6230(a)(1); sec. 301.6231(a)(6)-1T,

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5,

1987).

          3.   Nature of the Items in Issue

     Two mixed questions of law and fact underlie respondent’s

hypotheses about this case:   Was the putative partnership an

actual partnership, and, if so, did the transferors transfer the

property to the partnership in exchange for interests in the

partnership?   Those two questions also underlie the related

partnership case, Rhone-Poulenc Surfactants & Specialties, L.P.,

v. Commissioner, 114 T.C. __ (2000).   In the partnership case,

GAF Chemicals and the Commissioner are in agreement that the

primary questions constitute partnership items.7

     7
      Regulations authorized by sec. 6233 provide:

          Sec. 301.6233-1T. Extension of entities filing
     partnership returns, etc. (Temporary).–-(a) Entities
     filing a partnership return. Except as provided in
     paragraph (d)(1) of this section, the provisions of
     subchapter C of chapter 63 of the Code (“subchapter C”)
     and the regulations thereunder shall apply with respect
     to any taxable year of an entity for which such entity
     files a partnership return as well as to such entity’s
     items for that taxable year and to any person holding
     an interest in such entity at any time during that
     taxable year. Any final partnership administrative
     adjustment or judicial determination resulting from a
     proceeding under subchapter C with respect to such
     taxable year may include a determination that the
     entity is not a partnership for such taxable year as
     well as determinations with respect to all items of the
     entity which would be partnership items, as defined in
                                                   (continued...)
                               - 9 -

          4.   Arguments of the Parties

     Petitioner, consistent with GAF Chemicals’ position in the

partnership case, argues that the primary questions are

partnership items or, at the very least, items that must be

resolved in a partnership-level proceeding.8    Respondent’s

position is substantially the same.    The parties are also in

agreement that the remaining questions present nonpartnership

items that are affected items requiring partner-level

determinations (the affected items).    See sec. 6230(a)(2).

     The parties differ over whether this Court may consider the

affected items before the seminal partnership items have been

resolved at the partnership level.     Because such resolution has

not yet occurred, petitioner alleges that this Court lacks

jurisdiction over this case.

     7
      (...continued)
     section 6231(a)(3) and the regulations thereunder, if
     such entity had been a partnership in such taxable
     year* * * [Sec. 301.6233-1T, Temporary Proced. &
     Admin. Regs., 50 Fed. Reg. 39998 (Oct. 1, 1985).]

     Sec. 301.6231(a)(3)-1(a)(4)(i), Proced. & Admin. Regs.,
provides that the term “partnership item” includes “contributions
to the partnership.”
     8
      GAF Chemicals, petitioner in the partnership case, is a
subsidiary of the petitioner in this case. Since both
corporations are members of the affiliated group, we assume that
they have a common interest. Thus, we attribute the position of
GAF Chemicals in the partnership case to petitioner.
                              - 10 -

          5.   Maxwell Line of Cases

     Since the parties agree that the primary questions are items

that are not before us in this proceeding, we will not concern

ourselves with our jurisdiction to determine those items.      We

consider only our jurisdiction to determine the affected items.

     As noted above, petitioner relies upon N.C.F. Energy

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

Commissioner, 87 T.C. 783 (1986), and Gillilan v. Commissioner,

T.C. Memo. 1993-366, to support its argument that we have no

jurisdiction over the affected items.

     In Maxwell, we were confronted with a notice of deficiency

that was based on adjustments, some of which were unrelated to a

partnership and some of which were “affected items” within the

meaning of section 6231(a)(5).   We granted respondent’s motion to

dismiss the affected items for lack of jurisdiction.     Our

dismissal was based on an analysis of the statutory scheme for

dealing with TEFRA partnerships.   That statutory scheme

contemplated full resolution of partnership items, at the

partnership-level proceeding, before there could be any partner-

level action, such as a notice of deficiency, based on affected

items.   Maxwell did not explicitly state that the notice of

deficiency was invalid as to the affected items, but that appears

to be the only logical conclusion.     For example, if the notice

had been valid as to affected items and the petition had been
                              - 11 -

timely (the petition was timely in Maxwell), we would have had

jurisdiction.   Once we acquire jurisdiction over a deficiency,

subsequent events do not affect our jurisdiction.    See Dorl v.

Commissioner, 57 T.C. 720 (1972); Main-Hammond Land Trust v.

Commissioner, 17 T.C. 942, 956 (1951), affd. 200 F.2d 308 (6th

Cir. 1952).

     Opinions subsequent to Maxwell explicitly state that we lack

jurisdiction over affected items in a notice of deficiency that

was issued prior to the completion of the related TEFRA

partnership proceedings because, to the extent the notice is

based on affected items, such a notice is invalid.     In Frazell v.

Commissioner, 88 T.C. 1405 (1987), the Commissioner issued a

notice of deficiency for 1982 that was dependent upon

partnership-level adjustments.   The taxpayer moved to dismiss for

lack of jurisdiction because the TEFRA partnership procedures had

not been followed.   We framed the issue as follows:

          We must decide whether ACTF was a partnership for
     Federal income tax purposes prior to 1983. If it was,
     and if it had a 1982 taxable year beginning after
     September 3, 1982, then we must grant petitioners’
     cross-motion to dismiss for lack of jurisdiction
     because respondent has not complied with the
     partnership audit and litigation procedures (sec. 6221
     et seq.), and the notice of deficiency would be
     invalid. Maxwell v. Commissioner, 87 T.C. 783 (1986);
     sec. 301.6221-1T(a), Temp. Proced. & Admin. Regs., 52
     Fed. Reg. 6781 (Mar. 5, 1987). * * *[Id. at 1411;
     emphasis added.]
                              - 12 -

We held that the partnership was subject to the TEFRA procedures

stating:

          As a partnership formed after September 3, 1982,
     with its fiscal year ending December 31, 1982, ACTF was
     subject to the partnership audit and litigation
     procedures (sec. 6221 et seq.), for its 1982 taxable
     year. Respondent’s statutory notice of deficiency is,
     therefore, invalid. Petitioners’ cross-motion to
     dismiss for lack of jurisdiction will be granted.
     * * * [Id. at 1414; emphasis added.]

     In Weiss v. Commissioner, 88 T.C. 1036 (1987), we dismissed

for lack of jurisdiction because the notice of deficiency, issued

prior to completion of the TEFRA partnership procedures, was

“ineffectual.”

     In Boyd v. Commissioner, 101 T.C. 365 (1993), we held that a

prior decision of this Court in a deficiency case that was based

on disallowance of a partnership loss was not res judicata in a

subsequent case.   We explained as follows:

          The doctrine of res judicata bars litigating a
     claim if it was or could have been litigated in a prior
     case. Commissioner v. Sunnen, 333 U.S. 591, 597-598
     (1948); Trost v. Commissioner, 95 T.C. 560, 566 (1990).
     As discussed above, petitioners’ $120,000 partnership
     loss deduction was not properly included in the first
     notice of deficiency. Maxwell v. Commissioner, 87 T.C.
     at 788. The first notice of deficiency was invalid,
     id., and the decision entered was a nullity,
     Billingsley v. Commissioner, 868 F.2d 1081, 1084-1085
     (9th Cir. 1989), revg. an order of this Court. Thus,
     litigation of the claimed $120,000 partnership loss is
     not barred by res judicata. [Id. at 371-372; emphasis
     added; fn. ref. omitted.]

     In Dubin v. Commissioner, 99 T.C. 325 (1992), we dismissed

for lack of jurisdiction because the notice of deficiency was
                             - 13 -

dependent on partnership items that had not yet been resolved

under the TEFRA partnership procedures.   In doing so, we

explained:

     In general, respondent has no authority to assess a
     deficiency attributable to a partnership item until
     after the close of a partnership proceeding. Sec.
     6225(a). Moreover, since the tax treatment of affected
     items depends on partnership level determinations,
     affected items cannot be tried as part of a partner’s
     personal tax case until the completion of the
     partnership level proceeding. N.C.F. Energy Partners
     v. Commissioner, 89 T.C. 741, 743-744 (1987); Maxwell
     v. Commissioner, supra at 790-793; see sec. 6230(a).
     This, of course, is a partner level, not a partnership
     level, proceeding. [Id. at 328.]

In Dubin, we lacked jurisdiction because the deficiency notice

was invalid as to P, since it was issued prior to the completion

of partnership-level proceedings.9

     Respondent argues that we have jurisdiction in the instant

case and that it is distinguishable from Maxwell v. Commissioner,

supra, because here the FPAA has already been issued.   In Trost

v. Commissioner, 95 T.C. 560, 564-565 (1990), we rejected a

similar argument when it was made by taxpayers, and opposed by

the Commissioner, stating:

          Based on the statutory pattern and legislative
     history of the TEFRA provisions, we concluded that “The
     ‘partnership items’ must be separated from the
     partner’s personal case and considered solely in the

     9
      In the headnote, we stated: “Held, further, R’s deficiency
notice is invalid as to P, because it was issued prior to the
completion of the partnership-level proceedings. Sec. 6225,
I.R.C.”
                             - 14 -

     partnership proceeding.” Maxwell v. Commissioner,
     supra at 788. (Emphasis added.) We further explained
     that under the rules of the Tax Court “[this] ‘Court
     does not have jurisdiction of a partnership action’ if
     no FPAA has been issued.” Maxwell v. Commissioner,
     supra at 788. Because no FPAA had been issued to the
     partnership, we did not have jurisdiction to
     redetermine any portion of a deficiency attributable to
     partnership items. Maxwell v. Commissioner, supra at
     789.

          We did not, however, conclude in Maxwell that if
     respondent had issued an FPAA to the partnership, we
     would have had jurisdiction to redetermine the portion
     of the deficiency attributable to both partnership and
     nonpartnership items in a single proceeding. Rather,
     we concluded that we would only have jurisdiction to
     redetermine partnership items in a separate partnership
     proceeding if respondent had issued an FPAA [to] the
     partnership. Consequently, we reject petitioners’
     contention that partnership items may be litigated in a
     nonpartnership proceeding if an FPAA has been issued to
     the partnership before a partner’s petition is
     filed.[10]

In Trost, the taxpayers argued that if we did not retain

jurisdiction to determine overpayments attributable to the

     10
      Respondent’s position in the instant case is also
inconsistent with the position he recently took in the case of
Kanter v. Commissioner, docket No. 7553-99, where on Apr. 21,
2000, respondent filed a motion to dismiss for lack of
jurisdiction. In Kanter, the Commissioner had issued a notice of
deficiency for an affected item after we had entered a decision
in the related partnership proceeding, but before our decision
had become final. (The Court of Appeals subsequently affirmed
our decision in the partnership case.) Nevertheless, the
Commissioner moved to dismiss the deficiency case arguing that
the notice of deficiency was invalid because the Commissioner had
no authority to issue the notice of deficiency regarding affected
items until after the decision in the partnership proceeding had
become final. The Commissioner cited Dubin v. Commissioner, 99
T.C. 325 (1992), and Maxwell v. Commissioner, 87 T.C. 783 (1986),
in support of his motion to dismiss.
                              - 15 -

partnership items, they might be precluded by the doctrine of res

judicata from bringing a subsequent suit for the overpayments.

We held that this possible hardship was irrelevant to whether we

had jurisdiction and granted the Commissioner’s motion to dismiss

regarding the taxpayers’ claimed losses from the partnership.

     Finally, in Gillilan v. Commissioner, T.C. Memo. 1993-366,

we once again explained that in a deficiency case, we lack

jurisdiction over partnership and affected items where the notice

of deficiency was issued prior to completion of the related

partnership proceeding.   In Gillilan, the taxpayer was a partner

in a partnership governed by the TEFRA procedures.   The

Commissioner issued an FPAA to the partnership, the tax matters

partner filed a petition, and thereafter, the Commissioner issued

a notice of deficiency to petitioner for tax that was dependent

upon resolution of partnership items.   At the time the notice of

deficiency was issued, the partnership case was pending before

this Court.   We addressed our jurisdiction in the deficiency case

stating:

     The unified audit and litigation procedures applicable
     to partnership items are found in sections 6221-6233.
     Those procedures (the TEFRA procedures) were enacted as
     part of the Tax Equity and Fiscal Responsibility Act of
     1982 (TEFRA), Pub. L. 97-248, sec. 401(a), 96 Stat.
     648. The TEFRA procedures provide a method for
     adjusting “partnership items” in a single, unified
     partnership proceeding, rather than in separate
     proceedings with each partner. Sec. 6621. Until such
     partnership-level proceeding is completed, respondent
     generally may not assess a deficiency attributable to a
                                 - 16 -

     “partnership item” against any partner. Sec. 6225.
     Moreover, because the tax treatment of an “affected
     item” depends upon the partnership-level determination,
     affected items generally cannot be tried as part of a
     partner’s tax case prior to the completion of the
     partnership-level proceeding. E.g., Dubin v.
     Commissioner 99 T.C. 325, 328 (1992). Accordingly, if
     the items at issue in this case are partnership items
     (or affected items), respondent lacks the authority to
     assess a deficiency with regard thereto. If that is
     the case, we must dismiss for lack of jurisdiction on
     the ground that respondent’s deficiency notice is
     invalid. * * * [Id.; fn. ref. omitted; emphasis added.]

In Gillilan, we dismissed the deficiency case for lack of

jurisdiction on the basis that the notice of deficiency was

issued prior to completion of the partnership-level proceedings,

which rendered the notice “invalid”.11

     The theory and holdings in the aforementioned cases apply to

the instant case, and no meaningful distinction can be made.     The

     11
          In Gillilan v. Commissioner, T.C. Memo. 1993-366, we held:

          Petitioner’s share of Startrac’s losses is a
     partnership item. Accordingly, respondent may not
     assess a deficiency attributable to such losses against
     petitioner prior to the completion of Startrac’s
     partnership-level proceedings. Sec. 6225. That has
     not yet occurred, and respondent’s notice of deficiency
     therefore is invalid. We shall dismiss for lack of
     jurisdiction.
                              - 17 -

notice of deficiency on which this case is based was invalid.   We

must therefore dismiss this case for lack of jurisdiction.

                                   An order and order of

                              dismissal for lack of jurisdiction

                              will be entered.

     Reviewed by the Court.

     WELLS, COHEN, PARR, CHIECHI, FOLEY, VASQUEZ, GALE, THORNTON,
and MARVEL, JJ., agree with this majority opinion.
                                - 18 -

     HALPERN, J., dissenting:

I.   Introduction

      This case is a companion to Rhone-Poulenc Surfactants &

Specialties, L.P. v. Commissioner, 114 T.C. __ (2000) (Rhone-

Poulenc).   In Rhone-Poulenc, I agree with the majority that

section 6229(a) provides a minimum period for the assessment of

any tax attributable to any partnership item or affected item and

not the exclusive period for the assessment of such tax, but I

disagree with the majority that the notice of final partnership

administrative adjustment (FPAA) issued in that case was timely

under section 6229(a) to suspend “the period for assessing any

tax imposed by subtitle A”.   I concur in the result reached by

the majority, however, because the taxpayer in Rhone-Poulenc has

failed to show that the notice of deficiency issued to petitioner

in this case (the notice of deficiency) was not timely issued

under section 6503(a)(1) to suspend the running of the period of

limitations provided in section 6501 for the assessment of a

deficiency attributable to affected items requiring partner-level

determinations (arguably 6 years, under the facts of this case

and section 6501(e)(1)).

      My disagreement with the majority in this case is over

whether the notice of deficiency (dealing only with affected

items) is invalid because it was issued prior to the completion

of the related partnership proceeding.   I respectfully dissent
                                - 19 -

from the majority’s holding, rooted in Maxwell v. Commissioner,

87 T.C. 783 (1986), that the notice of deficiency is invalid so

as to require that we grant petitioner’s motion for summary

judgment.

II.   Maxwell v. Commissioner

      The majority relies on Maxwell v. Commissioner, supra, and

cases following it (the Maxwell line of cases) for the

proposition that we lack subject matter jurisdiction to

redetermine a deficiency attributable to affected items until the

related partnership proceeding (if any) is completed.    The

majority concludes that a notice of deficiency is invalid as to

affected items if issued before the conclusion of the related

partnership proceeding.

      In the Maxwell line of cases, we relied upon the overriding

principle that, in enacting the TEFRA partnership provisions,1

"Congress intended administrative and judicial resolution of

disputes involving partnership items to be separate from and

independent of disputes involving non-partnership items.”

Maxwell v. Commissioner, supra at 788.   I believe, however, that

we erred in the Maxwell line of cases when, in effect, we made

separation and independence synonymous with jurisdiction.

      1
       Sec. 402(a) of the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324, 648, added
subchapter C to chapter 63, subtitle F of the Internal Revenue
Code (the TEFRA partnership provisions). The TEFRA partnership
provisions now comprise secs. 6221 through 6234.
                                  - 20 -

III.   Jurisdiction

       A.   Introduction

       Subchapter B, chapter 63, subtitle F of the Internal Revenue

Code (subchapter B), comprises sections 6211 through 6216, and it

contains the deficiency procedures applicable to the income tax.

In pertinent parts, section 6211 defines a deficiency, section

6212 provides for a notice of deficiency, section 6213(a) gives a

taxpayer the right to file a petition with the Tax Court for a

redetermination of the deficiency, and section 6214(a)

establishes our jurisdiction to redetermine the correct amount of

any deficiency.     Section 6230(a)(2)(A)(i) provides:     “Subchapter

B shall apply to any deficiency attributable to-–(i) affected

items which require partner level determinations”.

       By the notice of deficiency, respondent determined a

deficiency attributable to affected items requiring a partner-

level determination.       Petitioner timely filed the petition,

assigning error to respondent’s determination of that deficiency.

In Hannan v. Commissioner, 52 T.C. 787, 791 (1969), we stated:

"it is not the existence of a deficiency but the Commissioner’s

determination of a deficiency that provides a predicate for Tax

Court jurisdiction."       (Emphasis added.)   See also LTV Corp. v.

Commissioner, 64 T.C. 589, 591 (1975).         The majority ignores the

imperative language of section 6230(a)(2)(A)(i) (“Subchapter B

shall apply to * * * affected items”), which, when read in
                              - 21 -

conjunction with subchapter B, establishes our subject matter

jurisdiction over the deficiency determined in the notice of

deficiency.

     B.   Maxwell Line of Cases

     The majority disposes of this case without any critical

analysis of the Maxwell line of cases.   The facts here are

different from those in Maxwell, and a consideration of that

difference exposes the error of our interpretation in Maxwell:

If we dismiss for lack of jurisdiction here, respondent will

suffer a consequence that we did not foresee in any of the

Maxwell line of cases.2   A reasonable interpretation of the

statute does not require that we dismiss this type of case for

lack of jurisdiction, only that, if necessary, we defer

proceeding until consideration of the affected items is

appropriate.   Cf. Harris v. Commissioner, 99 T.C. 121, 128

(1992), affd. 16 F.3d 75 (5th Cir. 1994) (recognizing the

propriety of deferring entry of decision to consider affected

items).   Indeed, petitioner and the participating partner in

Rhone-Poulenc have agreed to a consolidation for trial if both

cases are to go to trial.

     2
      This assumes that I shall be vindicated in my
interpretation of sec. 6229(d). See Rhone-Poulenc Surfactants &
Specialties, L.P. v. Commissioner, 114 T.C. __ , __(2000)
(Halpern, J., concurring in part and dissenting in part).
                               - 22 -

       In Maxwell v. Commissioner, supra, we struck affected items

from the petition for lack of jurisdiction to determine those

items.    We made specific reference to section 6229(a) as

extending the period of limitations for assessing tax

attributable to affected items.    See id. at 791 n.6, 793.     In

addition, after stating that resolution of the affected items

"must await the outcome of the partnership proceeding", we

observed:    "Apparently, in these circumstances respondent may

issue a second notice of deficiency to the partner determining an

additional deficiency attributable to ‘affected items.’"      Id. at

792.    We also noted that the Commissioner and the tax matters

partner had agreed to extend the section 6229(a) period for

assessing any tax attributable to any partnership item or

affected item.    See sec. 6229(b); Maxwell v. Commissioner, supra

at 786.    Thus, in Maxwell, we recognized that the Commissioner

suffered no serious disadvantage on account of our striking the

affected items from the petition.    If the Commissioner had issued

the FPAA before the extended section 6229 period expired, that

period would have been suspended as provided for in section

6229(d).    Moreover, the Commissioner was not prevented from

issuing another notice of deficiency.    See sec. 6230(a)(2)(C).

       If, as I have concluded, the FPAA issued in Rhone-Poulenc

did not suspend the section 6501(e)(1)(A) limitations period

(assuming it is ultimately found to be applicable in this case),
                              - 23 -

this case does not fit within the statutory pattern that applied

in Maxwell v. Commissioner, supra, because the section 6229

3-year minimum period has already expired.   If we strike the

affected items from the petition in this case (leaving no

deficiency in tax for redetermination), invalidate the notice,

and dismiss the case in petitioner’s favor, we are, in effect,

deciding the partnership case in favor of the participating

partner.   Stated another way, the substantive dispute in the

partnership case would already have become moot because

respondent would be precluded from assessing any computational

adjustments.3   That possibility leads me to reject the majority’s

adoption of the Maxwell rationale that Congress intended a full

resolution of partnership items before any affected items notice

of deficiency could validly be issued.

     In the Maxwell line of cases, we held the notice of

deficiency to be "invalid" and dismissed the petition for lack of

jurisdiction on the ground that the notice and the petition, to

the extent they involved affected items, were premature because

     3
       In this case, the 6-year period provided for in sec.
6501(e)(1)(A) had only 3 days to run when respondent issued the
statutory notice and, concurrently, issued to the tax matters
partner the final partnership administrative adjustment (FPAA).
But even in a case where the FPAA was issued months, or even
years, prior to the expiration of the applicable sec. 6501 period
of limitations, unless within the minimum period of sec. 6229(a),
the Commissioner, in order to suspend the sec. 6501 period, may
have to issue a notice of deficiency before the FPAA is resolved.
                                - 24 -

the partnership-level proceeding had not as yet been completed.

In my view, the approach taken by the Court in those cases

represented no more than a rational and convenient method of

separating and ordering the partnership and partner-level

proceedings.   It was not mandated, however, by the absence of a

final decision on the merits in the partnership proceeding.

Nothing in the statute predicates our jurisdiction to redetermine

deficiencies attributable to affected items requiring partner-

level determinations on such finality.   See supra sec. III.A.

Indeed, we have easily found within our jurisdiction the

redetermination of deficiencies attributable to affected items

requiring partner-level determinations that were independent of a

partnership-level proceeding.    See Jenkins v. Commissioner, 102

T.C. 550 (1994); Roberts v. Commissioner, 94 T.C. 853 (1990).

The notice of deficiency is valid, and we have no grounds to

dismiss for lack of jurisdiction.    In a Maxwell type of case, I

would simply postpone consideration of the affected items until

it was appropriate to consider them.4

     4
       The circumstances of this case are analogous to those in
which our jurisdiction over a tax controversy is stayed by the
taxpayer filing a petition in bankruptcy. Until the close of the
bankruptcy case, or earlier lifting of the stay, we suspend (and
do not terminate) our consideration of the case. See 11 U.S.C.
sec. 362 (1994); Freytag v. Commissioner, 110 T.C. 35, 39 (1998).
                                - 25 -

IV.   Conclusion

      Congress enacted the TEFRA partnership provisions to

separate the determination of partnership items from the

determination of nonpartnership items.     Nevertheless, it bears

remembering that the partnership pays no tax, and it is the

partners’ tax liabilities that are at stake.     The partners are

obligated to pay the correct tax and are entitled to contest any

computational adjustment requiring partner-level determinations

in this Court.     Without a clear indication of congressional

purpose, we should not construe the statute so as to allow the

partners to avoid a computational adjustment that ultimately may

prove to be justified on the merits.     I would overrule Maxwell v.

Commissioner, 87 T.C. 783 (1986), and the cases that have

followed it, to the extent that they hold that we lack subject

matter jurisdiction to redetermine a deficiency in tax

attributable to affected items until the related partnership

proceeding (if any) is completed.

      WHALEN and BEGHE, JJ., agree with this dissent.