Court Opinion

ID: 3031024
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:45:16.803868+00
Date Added: 2024-06-11T11:48:09.896060
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

RIVER CITY RANCHES #1 LTD.,                No. 03-73853
LEON SHEPARD, TAX MATTERS                     T.C. Nos.
PARTNER, RIVER CITY RANCHES                787-91, 4876-94,
#2 LTD., LEON SHEPARD, TAX                9550-94, 9552-94,
MATTERS PARTNER, RIVER CITY              9554-94, 13595-94,
RANCHES #3 LTD., LEON                   13597-94, 13599-94,
SHEPARD, TAX MATTERS                   382-95, 383-95, 385-95,
PARTNER, RIVER CITY RANCHES               386-95, 14718-95,
                                        14719-95, 14720-95,
#4 LTD., LEON SHEPARD, TAX              14722-95, 14724-95,
MATTERS PARTNER, RIVER CITY              21461-95, 5196-96,
RANCHES #5 LTD., LEON                     5197-96, 5198-96,
SHEPARD, TAX MATTERS                      5238-96, 5239-96,
PARTNER, RIVER CITY RANCHES               5240-96, 5241-96,
#6 LTD., LEON SHEPARD, TAX                9779-96, 9780-96,
MATTERS PARTNER, ET AL.,                 9781-96, 14038-96,
         Petitioners-Appellants,        21774-96, 3304-97,
                                          3305-97, 3306-97,
                v.                        3311-97, 3749-97,
COMMISSIONER OF INTERNAL                15747-98, 15748-98,
REVENUE,                                15749-98, 15750-98,
                                        15751-98, 15752-98,
          Respondent-Appellee.          15753-98, 15754-98,
                                        19106-98, 13250-99,
                                        13251-99, 13256-99,
                                        13257-99, 13258-99,
                                        13259-99, 13260-99,
                                        13261-99, 13262-99,
                                        16557-99, 16563-99,
                                        16568-99, 16570-99,
                                        16572-99, 16574-99,
                                        16578-99, 16581-99,
                                              17125-99
                                             OPINION

                            3669
3670               RIVER CITY RANCHES v. CIR
                  Appeal from an Order of the
                   United States Tax Court

                    Argued and Submitted
         January 11, 2005—San Francisco, California

                      Filed March 25, 2005

    Before: Myron H. Bright,* A. Wallace Tashima, and
           Consuelo M. Callahan, Circuit Judges.

                    Opinion by Judge Bright

  *The Honorable Myron H. Bright, United States Circuit Judge for the
Eighth Circuit, sitting by designation.
3672             RIVER CITY RANCHES v. CIR

                        COUNSEL

Montgomery W. Cobb, Portland, Oregon, for the petitioners-
appellants.

Eileen J. O’Connor, Assistant Attorney General, Richard Far-
ber, and Anthony T. Sheehan, Department of Justice, Appel-
                    RIVER CITY RANCHES v. CIR                     3673
late Section, Tax Division, Washington, D.C., for the
respondent-appellee.

                             OPINION

BRIGHT, Circuit Judge:

                            Introduction

   We review here an extensive opinion and judgment of the
Tax Court1 relating to the tax returns of several affiliated
sheep-breeding partnerships. We affirm in part, reverse in
part, and remand for further proceedings. The federal Internal
Revenue Service (“IRS”) issued Final Partnership Adminis-
trative Adjustments (“Adjustments”) to the tax returns of nine
sheep-breeding partnerships for various past tax-years.2 The
Adjustments resulted in increased tax liabilities for the indi-
vidual partners, such that the partners would owe significant
back-taxes, penalties, and interest if the Adjustments were
valid. The appellant partnerships petitioned the Tax Court for
readjustment of the partnership tax returns, and the court con-
solidated the cases for trial.

   The partnerships claimed, first, that some of the Adjust-
ments were invalid because the IRS filed them untimely, rely-
ing on invalid extensions of the limitations periods that
governed the Adjustments. The partnerships claimed, second,
that insofar as the Adjustments were valid, the partnerships
were entitled to certain theft-loss deductions on the adjusted
  1
     The United States Tax Court, Judge Howard A. Dawson, Jr., adopting
the opinion of Special Trial Judge Stanley J. Goldberg.
   2
     The partnerships are River City Ranches #1 Ltd., River City Ranches
#2 Ltd., River City Ranches #3 Ltd., River City Ranches #4 Ltd., River
City Ranches #5 Ltd., River City Ranches #6 Ltd., River City Ranches #7
Ltd., Ovine Genetic Technology Syndicate 1987-1, and Ovine Genetic
Technology 1990.
3674              RIVER CITY RANCHES v. CIR
tax returns. The Tax Court denied the petitions entirely, hold-
ing that the Adjustments were all valid and that the partner-
ships were entitled to no theft-loss deductions. On the latter
point, the Tax Court held that the asserted losses were not
thefts from the partnerships and, in the alternative, even if
they were, the partnerships could not claim the deductions for
the years at issue.

   On appeal, the partnerships argue that the trial of the case
was flawed on three procedural points: that the Tax Court
improperly denied the partnerships discovery pertinent to the
years for which theft-loss deductions could be claimed; that
the court improperly denied discovery pertinent to the validity
of the extensions of the limitations periods within which the
Adjustments could be filed; and that the court improperly
rejected a stipulation of fact as to the principal place of busi-
ness of the partnerships.

   Further, on a substantive matter, the partnerships argue that
the Tax Court erred in holding that the asserted theft-losses
were not thefts from the partnerships but were only thefts
from the individual partners.

   As to the final issue on appeal, the partnerships and the IRS
agree that the Tax Court erred in holding that it does not have
jurisdiction to make factual findings concerning the validity
of impositions of additional interest on back-taxes owed by
the individual partners, as a penalty under 26 U.S.C.
§ 6621(c) (repealed in 1989, but still applicable to tax years
before then) for engaging in sham business transactions the
sole purpose of which was to gain tax benefits.

   We rule as follows: (1.) We decide that the partnerships are
not entitled to additional discovery pertinent to the years for
which theft-loss deductions can be claimed. (2.) We affirm
the Tax Court’s holding that none of the losses — if they are
thefts from the partnerships — can be claimed for any of the
tax-years at issue. (3.) We determine that the Tax Court did
                  RIVER CITY RANCHES v. CIR               3675
not erroneously reject any stipulation of fact. (4.) We deter-
mine that the partnerships are, however, entitled to limited
additional discovery relevant to the validity of the extensions
of the limitations periods. Finally (5.), we hold that the Tax
Court does have jurisdiction to make findings concerning the
imposition of penalty-interest under 26 U.S.C. § 6621(c).

   Because we affirm the Tax Court’s holding that the partner-
ships cannot claim the asserted theft-losses in the years at
issue in any event, we do not review or make any decision
concerning the Tax Court’s decision that the asserted losses
do not constitute thefts from the partnerships, but only from
the partners.

   Accordingly, we vacate the judgment of the Tax Court in
these cases and remand so that the partnerships will be given
some limited additional discovery relating to the validity of
Adjustments issued under the contested extensions of limita-
tions periods. The Tax Court will reconsider the validity of
those Adjustments after additional discovery is allowed. Also,
we remand for the Tax Court to make findings as to penalty-
interest.

   We sketch the underlying facts below, only as they bear on
the discrete issues we review.

                         Discussion

The Tax Court’s Asserted Rejection of the Principal-Place-of-
Business Stipulation

   The partnerships complain that the Tax Court rejected the
parties’ stipulation that — as the partnerships characterize it
in briefing — “the principal place of business of the partner-
ships was in Oregon.” The partnerships urge reversal on this
basis. Their contention, although not entirely clear, seems to
be that in determining whether the asserted theft-losses were
thefts from the partnerships, the Tax Court looked to the law
3676              RIVER CITY RANCHES v. CIR
of the wrong state, because it erroneously rejected the stipula-
tion. The IRS does not respond to appellants’ argument on
this issue.

   The partnerships’ argument is meritless. In their briefs, the
partnerships do not quote the stipulation at issue, which
merely says that the principal place of business was in Oregon
at the time the partnerships filed their petitions for readjust-
ment. SER 24. The Tax Court did not reject this stipulation.
The court’s statements concerning the principal place of busi-
ness related to the time at which the asserted theft-losses
occurred, not the time at which the petitions were filed. There
was no stipulation as to the former time.

   Additionally, even had the asserted rejection of a stipula-
tion been actual, the partnerships do not show, as they must,
that it would have made any difference. See Cerrato v. San
Francisco Cmty. Coll. Dist., 26 F.3d 968, 974 (9th Cir. 1994)
(“The harmless error standard in civil cases is whether the . . .
verdict is more probably than not untainted by the error.”).
The partnerships do not show that any relevant law varied
materially from Oregon to California or Nevada (the other rel-
evant states). Furthermore, after commenting on the place of
business of the partnerships, the Tax Court did in fact con-
sider whether the losses in dispute constituted theft from the
partnerships under Oregon law. We do not understand pre-
cisely what the partnerships complain of on this issue. In any
event, the Tax Court did not erroneously reject any stipula-
tion.

Discovery Pertinent to Theft-Loss Deductions

   [1] The partnerships argue that the Tax Court denied them
a fair opportunity to litigate their claim that they are entitled
to theft-loss deductions for the years at issue. The Internal
Revenue Code provides that a theft-loss may be deducted
only for the year in which it is discovered — not the year in
which the loss occurs. 26 U.S.C. § 165(a). The partnerships
                  RIVER CITY RANCHES v. CIR                 3677
conceded at trial that they discovered the asserted theft-losses
after the years in question. They argued to the Tax Court,
however, that the IRS is equitably estopped from enforcing
this provision of the law to exact money from them (or their
individual partners, who pay the taxes). The partnerships
argue that the court denied discovery of IRS files that they
were entitled to and without which they could not make good
their equitable estoppel defense.

   We review a denial of discovery for abuse of discretion.
Shad v. Dean Witter Reynolds, Inc., 799 F.2d 525, 527 (9th
Cir. 1986). We will hold an order denying discovery to be an
abuse of discretion only “upon the clearest showing that
denial of discovery results in actual and substantial prejudice
to the complaining litigant.” Hallett v. Morgan, 296 F.3d 732,
751 (9th Cir. 2002).

   [2] The Supreme Court allows the possibility that equitable
estoppel might be successfully asserted against the govern-
ment — whether to get money from the government or as a
defense to the government’s exaction of money. See Office of
Personnel Mgmt. v. Richmond, 496 U.S. 414, 426 (1990);
Heckler v. Cmty. Health Svcs. of Crawford County, Inc., 467
U.S. 51, 59-60 (1984). In general,

    the party claiming the estoppel must have relied on
    its adversary’s conduct “in such a manner as to
    change his position for the worse,” and that reliance
    must have been reasonable in that the party claiming
    the estoppel did not know nor should it have known
    that its adversary’s conduct was misleading.

Id. at 59. The Court has made clear that estoppel will not lie
against the government except upon a stronger showing than
is required in the ordinary case. Id. at 59-60.

  [3] As the Tax Court noted, the Ninth Circuit has held, in
a case involving a taxpayer’s attempt to recoup payments
3678               RIVER CITY RANCHES v. CIR
made to the IRS, that equitable estoppel cannot lie against the
government absent a showing of “affirmative conduct going
beyond mere negligence.” Purcell v. United States, 1 F.3d
932, 939 (9th Cir. 1993).

   The Tax Court found that the IRS had engaged in no con-
duct which the partnerships could reasonably have relied on
to change their position for the worse. Even if the IRS did
nothing to act as a watchdog for the individual partners, to
warn them that Hoyt was swindling them and looting the part-
nerships, and that their claimed tax benefits were invalid, this
would not constitute the “affirmative conduct” on which the
partnerships could “rely” that is necessary to invoke equitable
estoppel against the government. The court found, however,
that the IRS had, on numerous occasions, communicated to
the partnerships and to the individual partners messages that
called into question the validity of tax benefits the partner-
ships claimed — the subsequent rejection of which, in the
Adjustments, are at issue in these cases.

   The partnerships do not dispute the Tax Court’s specific
findings as to actions taken by the IRS. The partnerships’
hope and argument as to discovery on this point must be,
then, that there may be other, countervailing IRS actions, evi-
dence of which may lie in IRS files. Such IRS actions help the
partnerships only if the partnerships reasonably relied on the
actions and thereby discovered the asserted theft-losses later
than the years in question.

   In the ordinary case, if the IRS had taken actions on which
the partnerships relied, the partnerships would of course know
about those actions. They would not need to examine IRS
files to learn of those actions in the first instance, as the part-
nerships here wish to do. This case is unusual, but a brief
sketch of the facts shows that the result is the same.

  Here, Walter J. Hoyt, III (Hoyt), ran the partnerships,
which were among scores of partnerships Hoyt created as part
                    RIVER CITY RANCHES v. CIR                     3679
of a massive swindle extending from 1971 (involving cattle
partnerships) and 1978 (involving sheep partnerships) to 1998
— defrauding his partners, receiving (as general or managing
partner) their capital contributions to the partnerships and then
stealing those contributions, and as Tax Matters Partner
(“TMP”) claiming phony tax benefits for the partnerships, on
which his partners relied for purposes of their individual tax
returns. Hoyt did not keep ordinary business records for each
of his many partnerships, but kept certain overall records.
Hoyt was eventually caught, and is now serving an approxi-
mately twenty-year prison sentence for fraud. The new TMPs
for the partnerships, who are pursuing the present cases, thus
did not inherit the records and continuous institutional knowl-
edge that a partnership would ordinarily possess. The IRS,
which had conducted a roughly twenty-year investigation of
Hoyt’s operations, presumably has far greater knowledge of
the partnerships’ matters than the current TMPs have.

   Because of Hoyt’s commingling of the records of his vari-
ous partnerships, the IRS followed suit and maintained the
bulk of its documents pertaining to all Hoyt entities in a single
file, with only very limited portions of its records in files spe-
cific to individual partnerships. The Tax Court granted the
partnerships discovery only of the files specific to the individ-
ual partnerships at issue here, so that the partnerships did not
see the bulk of the IRS’s records.

   While the partnerships reasonably suppose that the IRS
knows more about the partnerships than the partnerships
themselves know, the discovery issue comes down to a nar-
row question: If the IRS engaged in affirmative conduct that
the partnerships reasonably relied on, and that caused the part-
nerships to discover the asserted theft-losses later than they
otherwise would have, would evidence of such conduct be
unavailable to the partnerships now, without the discovery
they were denied?3
  3
    The issue would be presented differently if the partnerships alleged
specific conduct and sought discovery only to confirm or negate the spe-
cifics they had knowledge of already.
3680                RIVER CITY RANCHES v. CIR
   [4] The managing partner of each of the partnerships, Hoyt,
knew about the thefts at the time they occurred, because he
was the thief. The partnerships could not have detrimentally
relied, through Hoyt, on IRS actions to forestall discovery of
the theft.4 If the other partners, outside of the partnership man-
agement, relied on affirmative IRS actions that forestalled
their discovery of Hoyt’s theft, then evidence of the actions
would lie with the partners. The partnerships would thus not
need the IRS’s central Hoyt files. The Tax Court thus did not
abuse its discretion in denying discovery related to the part-
nerships’ equitable-estoppel argument.

   [5] Because the year-of-discovery issue was properly liti-
gated at trial, and because the partnerships admitted that they
did not discover the asserted theft-losses during the years at
issue, we affirm the Tax Court’s holding that the partnerships
cannot take the deductions in the years at issue. Our holding
here makes it unnecessary to review the Tax Court’s holding
that the thefts at issue were not thefts from the partnerships,
but only from the individual partners.

Discovery Pertinent to the Validity of the Adjustments

   The IRS issued some of the Adjustments after the default
limitations periods had expired. With regard to these Adjust-
ments, however, Hoyt, acting for the partnerships, had
extended the limitations periods. The partnerships argued
before the Tax Court that these extensions are invalid,
because Hoyt executed them while disabled by conflicts
between his own interests and those of his partners. The part-
nerships argue on appeal that they could not present this
defense adequately without the denied discovery.

  [6] This Court has recognized that a TMP may lack capac-
  4
   We do not imply that knowledge of a partner who is defrauding the
partnership is imputed to the partnership. See Cal. Corp. Code § 16102
(2005); Or. Rev. Stat. § 67.010(6).
                  RIVER CITY RANCHES v. CIR                 3681
ity to bind his partners and the partnership, where the TMP
operates under a conflict of interest. See Phillips v. Commis-
sioner, 272 F.3d 1172, 1175 (9th Cir. 2001) (“Trust law, gen-
erally, invalidates the transaction of a trustee who is breaching
his trust in a transaction in which the other party is aware of
the breach.”). The Tax Court found that the partnerships did
not present evidence sufficient to show that Hoyt executed the
extensions under disabling conflicts of interest. The question
here is whether the partnerships were entitled to discovery of
the IRS’s central Hoyt files, to find out the facts concerning
Hoyt’s interests in his dealings with the IRS, and what the
IRS knew about Hoyt’s interests and his treatment of the part-
ners’ interests.

   The partnerships argued to the Tax Court that conflicts
arose not only because of past criminal investigations of Hoyt
by the IRS, but also by Hoyt’s ongoing fraud and theft, com-
mitted against his partners. The partnerships argued that
Hoyt’s interests, specifically regarding tax issues, diverged
from those of the partnerships.

   [7] The Tax Court analogized this case to the Phillips case,
272 F.3d 1172, in which this Court held that the mere exis-
tence of past criminal investigations of a TMP does not prove
a disabling conflict of interest. Here, the Tax Court empha-
sized that, as in Phillips, Hoyt was not under active criminal
investigation by the IRS when he signed any of the exten-
sions. The comparison to Phillips is unilluminating, however,
because in Phillips “[t]he facts were stipulated by the parties
in skeletal form sufficient to provide, without much flesh,
what was necessary to raise the single issue relied on by Phil-
lips.” Id. at 1173. The lesson of Phillips is that the sole fact
of past criminal investigations does not establish a disabling
conflict of interest. But there is more to the partnerships’
assertion of a disabling conflict than past criminal investiga-
tions, and the record before us in this case is not a bare skele-
ton.
3682              RIVER CITY RANCHES v. CIR
   The record before us presents at least one apparent conflict
which, if substantiated, might render the extensions Hoyt
signed legally incompetent and void. To explain this apparent
conflict, we turn again to some of the facts of record.

  Hoyt signed all but one of the extensions between February
1991 and March 1993. The IRS had been investigating Hoyt,
though not always by its criminal investigation division, since
about 1980. The IRS became convinced that Hoyt’s many
partnerships were fraudulent tax shelters. This was difficult to
prove, however, because of the nature of the operations.

   The Hoyt entities were ostensibly livestock-breeding enter-
prises. The nine partnerships at issue in these cases were
sheep-breeding, but the majority of Hoyt’s partnerships were
cattle-breeding. While Hoyt’s long-running swindle was
essentially a matter of taking money in exchange for cows and
sheep that did not exist, the operations did have thousands of
actual cows and sheep on actual ranches with actual breeding
facilities run by well-known and highly respected breeders.
The Hoyt ranches included twelve active ranches and half a
million acres of land rented from the Federal Bureau of Land
Management. It was not a simple matter, then, to prove that
some of the livestock that appeared as figures on business
papers had no corporeal substance on the ground.

   From about 1980 the IRS, convinced that the Hoyt partner-
ships were shams, generally disallowed tax benefits claimed
by the partnerships, leading to much litigation in the Tax
Court. With many cows and sheep spread over many facili-
ties, the IRS had difficulty proving that the partnerships were
shams, and in 1989 the IRS suffered a major setback. The Tax
Court, in Bales v. Commissioner, T.C. Memo. 1989-568, 58
T.C.M. (CCH) 431, found that the cattle partnerships were not
shams. After Bales, the IRS determined to conduct a full
headcount of the Hoyt livestock, to attempt to prove the fraud.

 A headcount could provide proof that Hoyt had been taking
money for non-existent cows and sheep — for which Hoyt
                  RIVER CITY RANCHES v. CIR                 3683
presumably knew he was vulnerable to criminal prosecution.
Hoyt did not cooperate with the headcount. His lack of coop-
eration delayed the count, until finally a federal court order
permitting the count was issued in the Fall of 1992. The IRS
finished the headcount in the Spring of 1993.

   Hoyt signed the extensions between February 1991 and
March 1993 — that is, in the period when the IRS was first
seeking and then performing the headcount that would prove
his crimes.

   [8] The extensions of the limitations periods within which
the IRS could issue Adjustments may have been against the
partners’ interests but in Hoyt’s interest. The sooner the IRS
issued the Adjustments, the more difficult it would be for the
IRS to defend them. Additionally, because the partners had in
fact claimed tax benefits they were not entitled to, it was in
their interest for the Adjustments to be issued sooner rather
than later, even if the IRS could successfully defend the
Adjustments. Delay would mean greater penalties and interest
when eventually the back-taxes were levied. Finally, it was in
the partners’ interest to receive the strong indication, which
the Adjustments provided, that Hoyt was looting the partner-
ships. The Tax Court noted that such measures by the IRS led
some partners to withdraw from other partnerships and to
challenge Hoyt’s management of them — by means that
included a civil fraud suit.

   [9] Hoyt’s interests appear to have run in the opposite
direction — toward delaying as long as possible any threat to
the house of cards he had constructed and kept standing since
1971. The extensions he signed would, and did, forestall the
issuance of Adjustments that would have contributed to ten-
sions with his partners and threatened his management of the
partnerships. Facing the threat of a potential and then an
actual IRS headcount that would prove his crimes, Hoyt might
well have found it in his interest to offer any concession to the
IRS that did not harm him personally, in the hope that it
3684              RIVER CITY RANCHES v. CIR
would put off the day of reckoning — perhaps forever, if his
long run of luck held out.

    [10] Because the evidence in this unusual case lies largely
with the IRS, the partnerships could not fairly and reasonably
litigate their challenge to the extensions and the Adjustments
executed pursuant to them without this discovery. The Tax
Court thus abused its discretion in denying such discovery,
and the partnerships suffered actual and substantial prejudice
because of the denial. Accordingly, the Tax Court should per-
mit further discovery limited to the question whether Hoyt
executed the extensions while disabled by conflicts of inter-
est.

Jurisdiction of the Tax Court to Make Penalty-Interest
Findings

   The parties asked the Tax Court to make factual findings
concerning whether the partnerships’ transactions were
designed merely to secure tax benefits, without any other sub-
stantive economic purpose. The parties wanted the court to
make these findings because they bear on whether the IRS can
require the investor-partners to pay a higher interest rate on
the back taxes for certain years. See 26 U.S.C. § 6621(c). The
Tax Court held that it lacked jurisdiction to make such find-
ings. The parties agree that the court erred in so concluding.

   Both the Tax Court’s interpretation of 26 U.S.C. § 6621(c)
and its holding that it lacked subject-matter jurisdiction to
make findings under that statute are legal conclusions review-
able de novo. Suzy’s Zoo v. Commissioner, 273 F.3d 875, 878
(9th Cir. 2001); Crawford v. Commissioner, 266 F.3d 1120,
1123 (9th Cir. 2001).

   We agree with the parties that the Tax Court erred. Because
the issue is somewhat involved, and the Tax Court considered
the issue at length, we explain our reading of the relevant law.
                   RIVER CITY RANCHES v. CIR                 3685
   The partnerships filed petitions with the Tax Court to read-
just partnership tax items, following the IRS’s issuance of
Adjustments. This petition procedure is governed by 26
U.S.C. § 6226. This section also sets the scope of review for
the Tax Court reviewing the petition:

       (f) Scope of judicial review.—A court with which
    a petition is filed in accordance with this section
    shall have jurisdiction to determine all partnership
    items of the partnership for the partnership taxable
    year to which the notice of final partnership adminis-
    trative adjustment relates, the proper allocation of
    such items among the partners, and the applicability
    of any penalty, addition to tax, or additional amount
    which relates to an adjustment to a partnership item.

The question, then, is what counts as a partnership item. The
term is defined at 26 U.S.C. § 6231(a)(3):

       (3) Partnership item.—The term “partnership
    item” means, with respect to a partnership, any item
    required to be taken into account for the partner-
    ship’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 Tax Court saw that the definition here is limited by the
phrase “required to be taken into account . . . under . . . subti-
tle A.”

   The character of the partnerships’ transactions does relate
back to subtitle A, because it determines the individual part-
ners’ personal income taxes — a subtitle A matter, see 26
U.S.C. § 1. A partnership’s tax items affect not the (non-
existent) income tax of the partnerships, but the income tax of
the partners. 26 U.S.C. § 6222 (subtitle F provision for admin-
3686                 RIVER CITY RANCHES v. CIR
istering subtitle A requirements). A partnership’s tax items,
which determine the partners’ taxes, are litigated in partner-
ship proceedings — not in the individual partners’ cases. 26
U.S.C. § 6221 (subtitle F provision for administering subtitle
A requirements).

  [11] The nature of the partnerships’ transactions is a “part-
nership item” then, because it is “required to be taken into
account . . . under . . . [the income tax provisions of] subtitle
A,” as affecting the income tax of the individual partners. As
a “partnership item,” the character of the partnerships’ trans-
actions is within the Tax Court’s scope of review.

   [12] The Tax Court erred in holding that it had no jurisdic-
tion to make findings concerning the character of the partner-
ships’ transactions, for purposes of the 26 U.S.C. § 6621
penalty-interest provisions. Accordingly, we remand for the
court to make such findings.

                              Conclusion

  For the reasons we have stated, we affirm the Tax Court’s
holding that these partnerships cannot claim a theft-loss
deduction in the years at issue.

   We vacate the judgment of the Tax Court as to all Adjust-
ments issued pursuant to an extension of the limitations
period, and remand for additional discovery on the question
of whether Hoyt executed the extensions while disabled by
conflicts between his own interests and those of his partners,
and any necessary retrial following such discovery. As to
Adjustments executed within the default limitations periods,
our ruling does not disturb the Tax Court’s denial of the peti-
tions for readjustment.5
  5
    The record before us does not clearly identify which Adjustments were
filed within the default limitations periods and which were filed under the
disputed extensions. The Tax Court will distinguish these two classes of
adjustments on remand.
                  RIVER CITY RANCHES v. CIR                3687
   We reverse the judgment of the Tax Court that the court
lacks jurisdiction in this partnership-level proceeding to make
factual findings pertaining to the imposition of penalty-
interest under 26 U.S.C. § 6621, and we remand for the Tax
Court to make such findings. Each party shall bear its own
costs on appeal.

  AFFIRMED in part, REVERSED                  in   part,   and
REMANDED for further proceedings.