Court Opinion

ID: 4333727
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:20:16.342733+00
Date Added: 2024-06-11T14:47:18.107997
License: Public Domain

BARRY GUSTIN AND CAROLINA GUSTIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGUSTIN v. COMMISSIONERNo. 5192-01United States Tax CourtT.C. Memo 2002-64; 2002 Tax Ct. Memo LEXIS 67; 83 T.C.M. (CCH) 1341; T.C.M. (RIA) 54674; March 7, 2002, Filed *67  Deficiency based on affected items was valid where an administrative partnership-level proceeding had not been initiated and respondent was bound by the partnership's treatment of partnership items.  Tax Court has jurisdiction to redetermine deficiency.  R disallowed certain losses claimed by Ps from various   partnerships in tax years 1997, 1998, and 1999. R determined   that P-H's basis in each of the partnerships was limited to P-   H's cash contributions, which did not include P-H's   contributions of subscription notes. R applied sec. 704(d),   I.R.C., and disallowed losses which exceeded P-H's adjusted   bases in the partnerships.     The partnerships involved are subject to the unified   partnership procedures contained in secs. 6221- 6234, I.R.C. R   has begun a partnership-level examination of two partnerships   for which Ps claimed losses in 1998 and 1999. However, R did not   initiate a partnership-level examination of the partnership for   which Ps claimed a loss in 1997. The normal period of   limitations for making partnership-level adjustments regarding   1997 expired, and R agrees that he is bound by the partnership's   treatment of partnership items.     Ps filed a motion to dismiss for lack of jurisdiction. Ps   argue that a notice*68  of deficiency which adjusts items affected   by partnership items is invalid if it is issued before the   completion of partnership-level proceedings. R concedes that we   lack jurisdiction over the 1998 and 1999 taxable years. See   Maxwell v. Commissioner, 87 T.C. 783">87 T.C. 783 (1986).     Held: The Tax Court has jurisdiction to redetermine   the deficiency for 1997. Partnership-level proceedings were not   initiated, a notice of final partnership administrative   adjustment was not issued by R, and the 3-year period of   limitations for assessment under sec. 6229(a), I.R.C., expired.   R acknowledges that he cannot pursue a deficiency based on   partnership-level adjustments for tax year 1997. As a result,   the parties must accept the partnership-level treatment of   partnership items.  Roberts v. Commissioner, 94 T.C. 853">94 T.C. 853   (1990). However, P-H's basis in the partnership, while affected   by partnership items, is not itself a partnership item. See   Dial USA, Inc. v. Commissioner, 95 T.C. 1">95 T.C. 1 (1990). Donald L. Feurzeig, *69  for petitioners.G. Michelle Ferreira , for respondent.  Ruwe, Robert P.RUWEMEMORANDUM OPINIONRUWE, Judge: The matter before the Court is petitioners' motion to dismiss for lack of jurisdiction under Rule 53. 1 Respondent determined deficiencies with respect to petitioners' Federal income taxes for 1997, 1998, and 1999. Those deficiencies were based on respondent's determination that petitioners' deductions of partnership losses were limited to petitioners' bases in the partnerships. On the basis of our opinion in Maxwell v. Commissioner, 87 T.C. 783">87 T.C. 783 (1986), respondent concedes that we lack jurisdiction over petitioners' 1998 and 1999 tax years because ongoing partnership-level proceedings, see secs. 6221-6234, have not been completed with respect to partnerships that gave rise to deficiencies for those years. The issue remaining for decision is whether we have jurisdiction to redetermine a deficiency for petitioners' 1997 tax year. Petitioners resided in Berkeley, California, at the time they filed their petition.*70  In 1997, Mr. Gustin invested in a partnership called Annona Venture (Annona). He made a cash contribution of $ 50,000 and also contributed a recourse subscription note of $ 157,800. Mr. Gustin was a general partner in Annona.The 1997 partnership return filed by Annona included a Schedule K-1, Partner's Share of Income, Credits, Deductions, etc., which reported items relating to Mr. Gustin. Line F of the Schedule K-1 entitled "Partner's share of liabilities" contains no entry. Line J entitled "Analysis of partner's capital account" shows "Capital contributed during year" by Mr. Gustin of $ 193,800. The Schedule K-1 shows Mr. Gustin's share of losses as $ 189,138. Petitioners deducted that amount on their Form 1040, U.S. Individual Income Tax Return, for 1997.On March 1, 2001, respondent issued a notice of deficiency to petitioners for their 1997 tax year. Respondent determined that Mr. Gustin's adjusted basis in Annona was $ 36,000 and disallowed loss deductions from Annona that were claimed on petitioners' Form 1040 to the extent those deductions exceeded $ 36,000. See sec. 704(d). The section 6229(a) period of limitations for making adjustments to Annona partnership items expired*71  on April 15, 2001, after the notice of deficiency was issued. Petitioners filed their petition on April 19, 2001.Annona was subject to the unified partnership procedures of sections 6221-6234, but respondent did not conduct a partnership- level examination of Annona's 1997 partnership return. Respondent acknowledges that a notice of final partnership administrative adjustment (FPAA) will not be issued for Annona and that there will be no adjustments to any partnership items of Annona for 1997.The unified partnership procedures were added to the Code as part of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 401(a), 96 Stat. 648. 2 Under those procedures, the tax treatment of items of partnership income, loss, deductions, and credits is determined in partnership-level proceedings rather than in separate proceedings involving the partners. Sec. 6221; H. Conf. Rept. 97-760, at 599 (1982), 2 C.B. 600">1982-2 C.B. 600, 662. 3 Under section 6223(a), the Secretary shall mail to each partner notice of the beginning of an administrative proceeding at the partnership level, as well as an FPAA resulting from any such proceeding. A tax matters partner may, within*72  90 days after the date the FPAA is mailed, file a petition for the readjustment of partnership items with the Tax Court, a District Court, or the Claims Court. Sec. 6226(a). If a petition is filed, the court has jurisdiction over all partnership items for the year to which the FPAA relates, as well as the proper allocation of those items among the partners. Sec. 6226(f).*73  Petitioners argue that we lack jurisdiction over the deficiency in this case, because an FPAA has not been issued and a partnership-level proceeding has not been completed for Annona's 1997 tax year. Petitioners claim that the notice of deficiency is invalid and that we cannot review, as part of our normal deficiency procedures, adjustments respondent made to Mr. Gustin's basis in Annona nor respondent's disallowance of losses under section 704(d). Respondent argues that a partnership-level proceeding was not required to determine Mr. Gustin's basis and to apply the loss limitations. Respondent states that he does not intend to issue an FPAA, that he can no longer make adjustments to partnership items for Annona's 1997 tax year, that he accepts the partnership's treatment of partnership items, and that partnership-level proceedings are completed when he accepts the partnership's treatment of partnership items without adjustment.The instant case is similar to Roberts v. Commissioner, 94 T.C. 853">94 T.C. 853 (1990). In Roberts, the Commissioner did not commence a partnership-level examination, did not issue an FPAA, and did not otherwise seek to adjust the partnership items reported*74  on the partnerships' returns. The notice of deficiency was issued on April 9, 1987, disallowing partnership losses claimed by the taxpayers because of alleged stop-loss agreements with third parties. See sec. 465(b)(4). On April 15, 1987, the period of limitations for assessing a tax attributable to any partnership item under section 6229(a) expired. On July 6, 1987, the taxpayers filed their petition and then filed a motion to dismiss for lack of jurisdiction.In Roberts v. Commissioner, 94 T.C. at 861-862, we held that side agreements for purposes of the section 465 at-risk provisions were not partnership items 4 but were affected items. 5 We observed that determination of affected items must await "the outcome of the partnership proceeding" but held that we had jurisdiction in that case, stating:*75       However, the "outcome of the partnership   proceeding" may be acceptance of the partnership return as   filed as a result of the fact that there was no partnership   proceeding and there can no longer be a partnership proceeding   under the normal statute of limitations. We do not read section 6230(a)(2)(A)(i)   to mean that a partnership proceeding must be   opened and closed in order for there to be a determination with   regard to an affected item. We also find no requirement in the   statute or regulations that prohibits affected items from being   considered in a proceeding involving a personal tax case,   providing subject matter jurisdiction exists. [94 T.C. at 860-861.]Petitioners direct us to our more recent opinion in Katz v. Commissioner, 116 T.C. 5">116 T.C. 5, 8-9 (2001), in which we stated:   a notice of deficiency issued prior to the completion of the   partnership-level proceeding is invalid to the extent it relates   to a partnership item or an affected item.     No FPAA was issued by respondent and no partnership-level   proceedings*76  have been commenced regarding the prepetition   partnership losses in the present case. Accordingly, if the NOL   carryovers at issue constitute affected items as petitioners   contend, we must grant the motion to dismiss on the basis that   the notice of deficiency is invalid as it relates to those   items. * * * [Citation omitted.]The language cited by petitioners was unnecessary for the disposition of that case and should be viewed in its context. In Katz v. Commissioner, 116 T.C. at 10, we stated the issue as follows:   whether the manner in which partnership items are allocated   between a partner in bankruptcy and the partner's bankruptcy   estate is a determination which, pursuant to the TEFRA   procedures, must be made at the partnership level. We therefore   shall determine our jurisdiction based on the resolution of this   latter issue.We held:   The manner in which the distributive share of a partner in   bankruptcy is allocated between the partner and the bankruptcy   estate is not a "partnership item" under sec.   6231(a)(3), I.R.C.*77  Accordingly, such allocation need not be   resolved in a partnership-level proceeding pursuant to the   uniform audit and litigation procedures of secs. 6221-6234,   I.R.C. * * * [Id. at 5.Our holding in Katz did not depend on the status of the NOL carryover as an "affected item", and we did not make a determination that the NOL carryovers were not affected items. However, since the Commissioner was not challenging the allocation of partnership-level losses among partners, i.e., a partnership item, but was instead challenging the suballocation of that item between a partner and his bankruptcy estate, i.e., an affected item, it follows that we exercised jurisdiction to redetermine a deficiency attributable to an affected item, even though an FPAA had not been issued and partnership-level proceedings were not initiated. Therefore, the jurisdictional holding in Katz supports rather than contradicts the position taken by this Court in Roberts v. Commissioner, supra.In GAF Corp. & Subs. v. Commissioner, 114 T.C. 519">114 T.C. 519, 528 (2000), we granted the taxpayer's motion to dismiss for lack of jurisdiction. We concluded that a notice*78  of deficiency is invalid where it is based on affected items and is issued before the completion of the related partnership-level proceedings. In that case, an FPAA was issued which proposed partnership adjustments, and a partnership-level proceeding had been initiated and was pending in the Tax Court. A notice of deficiency was issued on the same date as the FPAA, see Rhone-Poulenc Surfactants v. Commissioner, 114 T.C. 533">114 T.C. 533, 536 (2000), and before the partnership-level proceedings were completed.In the instant case, an FPAA was not issued and partnership-level proceedings were not initiated. Respondent has not proposed any adjustments to partnership items and agrees that he is bound by the partnership's determinations of partnership items. Under those circumstances, the outcome at the partnership level is acceptance of the partnership's treatment of its partnership items, and a notice of deficiency regarding affected items can be the basis for our jurisdiction. See Roberts v. Commissioner, 94 T.C. 853">94 T.C. 853 (1990).The seminal case in this area is Maxwell v. Commissioner, 87 T.C. 783">87 T.C. 783 (1986). In Maxwell, the potential for a duplication of procedures*79  prompted this Court to limit our jurisdiction over the deficiencies relating to affected items: "Affected items depend on partnership level determinations, cannot be tried as part of the personal tax case, and must await the outcome of the partnership proceeding." 87 T.C. at 792. We have previously considered this language and have appropriately declined to afford it an interpretation that is broader than what was required for the disposition of the jurisdictional issue in that case:     Petitioners rely on our statement in Maxwell that   "Affected items depend on partnership level determinations,   [and] cannot be tried as part of the personal tax case, and must   await the outcome of a partnership proceeding." Maxwell v. Commissioner, 87 T.C. at 792.Petitioners have taken   that statement out of context. In Maxwell, respondent had   determined deficiencies and additions to tax by disallowing   certain claimed partnership losses. At the time of the issuance   of the notice of deficiency, however, a partnership proceeding   had been commenced, but no FPAA had as yet been issued. Under *80    those circumstances, the additions to tax were affected items   and had to await the outcome of the partnership proceeding. They   could not be determined as part of the personal income tax case.   [Roberts v. Commissioner, 94 T.C. at 860.Thus, Maxwell is distinguishable from this case because here there are no partnership-level proceedings underway, and respondent has accepted the partnership's treatment of partnership items.In Jenkins v. Commissioner, 102 T.C. 550">102 T.C. 550, 553 (1994), we stated:   Generally, respondent is prohibited from assessing a deficiency   regarding a partnership item without first attempting to adjust   the item in a partnership level proceeding and issuing a notice   of final partnership administrative adjustment (FPAA).    Sec.6225(a). Once the partnership level proceeding is complete,   or if no partnership level proceeding is   necessary, then a partner's individual income tax for the   related tax period can be affected by the partnership item which   was reported and/ or adjusted at the partnership level. * * *   [Emphasis added.]We decided*81  that partnership-level proceedings were not required because the Commissioner was "not questioning the treatment of the partnership item at the partnership level", and because the deficiency related to an affected item reported on the taxpayers' return which is within the subject matter jurisdiction of this Court in a partner's deficiency proceeding.  102 T.C. at 556. We also observed: "Respondent * * * may accept the partnership's characterization of the item and only question the position of a partner, without the superfluous step of conducting a partnership proceeding".  102 T.C. at 557.A partner's basis in his partnership interest is an affected item. Sec. 301.6231(a)(5)-1T(b), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987). Our normal deficiency procedures apply to "any deficiency attributable to * * * affected items which require partner level determinations". Sec. 6230(a)(2)(A)(i). Since a partner's basis in a partnership interest may require determinations at the partner level, deficiencies attributable to adjustments to basis must be made at the partner level. See Dial USA, Inc. v. Commissioner, 95 T.C. 1">95 T.C. 1, 5-6 (1990).*82 In the notice of deficiency, respondent determined: "Since your distributive share of the partnership loss is limited to the extent of your adjusted basis, we have disallowed the amount in excess of your basis [$ 36,000], as shown." Respondent's determination is based on an adjustment to Mr. Gustin's basis in his partnership interest, an affected item. Mr. Gustin's partnership loss is affected by partnership items; however, basis is not itself a partnership item and can be the appropriate subject of deficiency proceedings.In this case, respondent acknowledges that he cannot make an adjustment to a partnership item, and he accepts the partnership return as filed. The treatment of partnership items on Annona's 1997 partnership return is final and binding on both respondent and petitioners. However, that does not present itself as a jurisdictional issue where, as here, the only adjustments stated are to affected items. 6*83  We hold that the notice of deficiency based on affected items is valid where an administrative partnership-level proceeding has not been initiated and respondent is bound by the partnership's treatment of partnership items. We hold that we have jurisdiction to redetermine the deficiency for petitioners' 1997 tax year.An appropriate order will be issued.  Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code applicable to the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. The unified partnership procedures have been amended since their effective date of Sept. 3, 1982, and those procedures are now contained in secs. 6221 through 6234↩.3. See Roberts v. Commissioner, 94 T.C. 853">94 T.C. 853, 859-860 (1990):   The purpose behind the enactment of section 6221 et seq. was to   have one proceeding to determine all of the partnerships items   with respect to a partnership. All of the partners would be   eligible participants in such a proceeding, and the results of   that proceeding would then be automatically applied to each of   the partner's returns without the necessity of further   deficiency procedures.↩4. See sec. 6231(a)(3), which provides:     SEC. 6231(a). Definitions. -- For purposes of this   subchapter --              * * * * * * *        (3) Partnership item. -- 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.↩5. See sec. 6231(a)(5)↩, which provides: "The term 'affected item' means any item to the extent such item is affected by a partnership item."6. Petitioners contend that the determination of basis will require an examination of Annona's books and records and that this involves a determination of partnership items, which requires partnership-level proceedings. We rejected the same argument in Roberts v. Commissioner, 94 T.C. at 862, stating:   Nothing in the TEFRA partnership provisions indicates that we   cannot analyze documents and records at the partnership level in   a deficiency proceeding. We lack jurisdiction only to   redetermine partnership items that the partnership was   required to take into account at the partnership level.    Sec.6231(a)(3). In the absence of a partnership proceeding, those   matters are considered final at the partnership level. * * *   [Emphasis added; fn. ref. omitted.]↩