Court Opinion

ID: 4330932
Source: CourtListenerOpinion
Date Created: 2018-11-13 23:53:50.249192+00
Date Added: 2024-06-11T14:47:04.681534
License: Public Domain

108 T.C. No. 1

                UNITED STATES TAX COURT

 LAWRENCE V. AND KATHARINE T. BROOKES, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11770-96.                    Filed January 2, 1997.

     Ps were partners in a partnership that was the
subject of a partnership proceeding. R mailed a notice
of final partnership administrative adjustment (FPAA)
for taxable years 1983 and 1984 to the tax matters
partner (TMP). The TMP filed a petition, and Ps filed
a motion to participate in the partnership proceeding,
which this Court granted. The TMP settled the
partnership case and certified that no party objected
to the settlement. Ps did not receive notice of the
settlement before the decision was entered by this
Court but received notice of the decision 4 days after
it was entered. Ps object to the settlement and claim
interests adverse to those of the TMP. R assessed
deficiencies in Ps' Federal income taxes for 1983 and
1984 as "computational adjustments" based on the
partnership adjustments. See sec. 6231(a)(6), I.R.C.
Thereafter, R mailed Ps a notice of deficiency for
"affected items", determining additions to tax for 1980
and 1983. Ps filed a petition for redetermination with
respect to the affected items deficiency and the 1983
and 1984 assessments attributable to their share of
partnership items. R filed a motion to dismiss for
lack of jurisdiction and to strike the portion of the
                               - 2 -

     petition that attempts to put the 1983 and 1984
     assessments into issue. Ps argue they were denied due
     process in the partnership proceeding because they did
     not have an opportunity to be heard and did not have
     the right to appeal from a stipulated decision. Ps
     filed a cross-motion to dismiss for lack of
     jurisdiction because R did not issue a notice of
     deficiency for the partnership adjustments before
     assessment.
          Held: We lack jurisdiction in this affected items
     proceeding to redetermine the deficiencies resulting
     from the partnership adjustments for 1983 and 1984.
     Held, further, Ps were not denied their rights to
     procedural due process based on their lack of notice of
     the settlement even though their position was adverse
     to that of the TMP and they did not have the right to
     appeal. Ps could have moved to vacate the decision in
     the partnership proceeding upon receiving notice of
     that decision. Held, further, R is not required to
     issue a notice of deficiency with respect to
     partnership items upon the completion of a partnership
     proceeding before assessing deficiencies for the
     partnership adjustments.

     Lawrence V. Brookes, for petitioners.

     Allan D. Hill, for respondent.

                              OPINION

     GERBER, Judge:   Respondent issued a notice of deficiency for

petitioners’ 1980 and 1983 tax years, determining additions to

tax attributable to petitioners' partnership interest in

Barrister Equipment Associates Series 122, a limited partnership

(Barrister).   The notice of deficiency was issued following the

conclusion of a partnership proceeding involving Barrister's 1983

and 1984 taxable years.   In the parlance of partnership

proceedings, additions to tax are described as affected items and
                                - 3 -

come into play following the completion of the partnership

proceeding.   In response to the affected items notice of

deficiency, petitioners filed a petition with this Court.    At the

time their petition was filed, petitioners resided in Berkeley,

California.   Petitioners attempted to place in issue not only the

additions to tax but also the adjustments to their 1983 and 1984

income tax attributable to their partnership items determined in

the Barrister partnership proceeding.    Respondent has not issued

a notice of deficiency to petitioners for 1984.

     Respondent moved to dismiss, for lack of jurisdiction, the

portion of the petition relating to the 1983 and 1984 tax and

interest assessed as a computational adjustment in the wake of

the Barrister proceeding.    Conversely, petitioners, by a cross-

motion, seek a dismissal for lack of jurisdiction as to the

assessment of the 1983 and 1984 tax and interest on the ground

that respondent failed to issue a notice of deficiency for the

1983 and 1984 tax relating to the Barrister partnership items

prior to the assessment.    In addition, petitioners moved to

restrain collection of the 1983 and 1984 assessed tax and

interest.

     A threshold question that is key to resolving these motions

is whether we have jurisdiction to entertain controversies

involving petitioners’ assessed 1983 and 1984 partnership income

tax liabilities in the context of this affected items proceeding,
                               - 4 -

which is separate from the partnership proceeding involving

Barrister.

Background

     Notices of final partnership administrative adjustment

(FPAA) for 1983 and 1984 were mailed on September 5, 1989, to

Barrister and its general partner/tax matters partner (TMP).       The

TMP timely filed a petition on November 17, 1989.    Petitioners

here moved to participate in the Barrister partnership

proceeding, and this Court granted their motion.    The Barrister

proceeding concluded by the entry of an agreed decision on

January 5, 1995, pursuant to an agreement between respondent and

the TMP.   The TMP, by means of its execution of a stipulated

decision document, certified that no party objected to the entry

of the decision.   Respondent assessed tax and interest against

petitioners for 1983 and 1984 reflecting the treatment of their

share of partnership items in accordance with the decision

entered in the Barrister proceeding.

     Petitioners herein claim that they were neither given notice

of, nor were in agreement with, the settlement between respondent

and the TMP.   Petitioners further contend that respondent knew,

at the time of the execution of the stipulated decision, that

they had not received notice of the settlement.1    Petitioners,

however, did receive a copy of the decision on January 9, 1995, 4

     1
       We assume for purposes of these motions that petitioners'
claims can be substantiated.
                                 - 5 -

days after its entry.   In this regard, petitioners claim that

there was a fraud upon the Court as to the entry of the decision

in the partnership proceeding.    Respondent counters that,

assuming the Court was fraudulently misled about the notification

of participating partners, we lack jurisdiction to consider such

matters in the context of petitioners’ affected items proceeding.

Petitioners also claim that they were denied due process.     Thus,

petitioners argue that the decision in the Barrister partnership

proceeding is not res judicata and binding as to them.

     In addition to their contentions as to the validity of the

prior partnership proceeding, petitioners also maintain that

respondent was required to issue a notice of deficiency before

assessing and attempting to collect the 1983 and 1984 income tax

attributable to their Barrister partnership items.    In other

words, petitioners interpret the Internal Revenue Code as

requiring respondent to issue a notice of deficiency before

assessing a computational adjustment reflecting the partnership

items, even though a partnership proceeding has been completed

pursuant to sections 6221 through 6233.2

Discussion

     2
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the periods under
consideration, and Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 6 -

     Initially, we note that we have jurisdiction to consider the

question of our jurisdiction over the parties or subject matter.

Pyo v. Commissioner, 83 T.C. 626, 632 (1984).

     1.   Res Judicata--Petitioners contend that the doctrine of

res judicata does not bar relitigation of the Barrister

partnership items because they are presenting issues regarding

those items not addressed in the partnership proceeding.

Accordingly, they argue that they are not bound by the Barrister

proceeding.   Respondent, without agreeing with their underlying

arguments, argues that petitioners should have moved this Court

to reconsider or vacate the decision in the Barrister partnership

proceeding.   Petitioners have framed the issue in a manner that

suggests two separate paths of inquiry to determine whether we

have jurisdiction over the partnership items in this proceeding.

First, we must analyze the statutory partnership provisions to

determine whether we can consider the tax assessments from a

partnership proceeding in petitioners' affected items proceeding.

If we decide that the statutory provisions do not offer the

relief sought, we then consider petitioners’ constitutional claim

that they were deprived of procedural due process.

     Sections 6221 through 6231 provide for a unified partnership

proceeding to determine the tax treatment of partnership items

separate from and independent of a partner's deficiency

proceeding involving nonpartnership items.   Maxwell v.

Commissioner, 87 T.C. 783, 787-788 (1986); H. Conf. Rept. 97-760,
                                 - 7 -

at 600 (1982), 1982-2 C.B. 600, 662.     Consequently, the portion

of any deficiency attributable to partnership items cannot be

considered in a partner's personal case and must be considered

solely in a partnership proceeding.      Secs. 6221, 6226(a); Maxwell

v. Commissioner, supra at 788.     Thus, we lack jurisdiction to

redetermine a deficiency attributable to partnership items in a

partner-level proceeding involving nonpartnership items.      Powell

v. Commissioner, 96 T.C. 707, 712 (1991); Woody v. Commissioner,

95 T.C. 193, 208 (1990); Saso v. Commissioner, 93 T.C. 730, 734

(1989); Maxwell v. Commissioner, supra at 788.

     Section 6231(a)(3) defines a "partnership item" as any item

required to be taken into account for the partnership's taxable

year to the extent that the Secretary provides by regulations

that the item is more appropriately determined at the partnership

level than at the partner level.     N.C.F. Energy Partners v.

Commissioner, 89 T.C. 741, 743 (1987).     Partnership items include

each partner's proportionate share of the partnership's aggregate

income, gain, loss, deduction, or credit.     Sec. 6231(a)(3); sec.

301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs.

     “Affected items” are nonpartnership items, defined in

Crowell v. Commissioner, 102 T.C. 683, 689 (1994), as follows:

          Affected items are defined under section
     6231(a)(5) as any item to the extent such item is
     affected by a partnership item. White v. Commissioner,
     95 T.C. 209, 211 (1990). The first type of affected
     item is a computational adjustment made to record the
     change in a partner’s tax liability resulting from
     adjustments reflecting the proper treatment of
                               - 8 -

     partnership items. Sec. 6231(a)(6); White v.
     Commissioner, supra. Once partnership level
     proceedings are completed, respondent is permitted to
     assess a computational adjustment against a partner
     without issuing a deficiency notice. Sec. 6230(a)(1).

          The second type of affected item requires a
     partner level determination. N.C.F. Energy Partners v.
     Commissioner, 89 T.C. 741, 744 (1987). Section
     6230(a)(2)(A)(i) provides that the normal deficiency
     procedures apply to those affected items which require
     partner level determinations. The additions to tax for
     negligence and valuation overstatement are affected
     items requiring factual determinations at the
     individual partner level. N.C.F. Energy Partners v.
     Commissioner, supra at 745. It is well settled that we
     lack jurisdiction to consider partnership items in an
     affected items proceeding. Saso v. Commissioner, 93
T.C. 730 (1989).

Although petitioners allege error concerning affected items

(additions to tax), they are not pursuing the merits of that

controversy at this time.   Instead, they ask us to redetermine

tax attributable to partnership items because they did not

receive notice of the settlement of those items.

     In Crowell v. Commissioner, supra, we considered the effect

of a taxpayer’s lack of notice of the partnership proceeding on

the validity of an affected items notice of deficiency.   In

Crowell, the taxpayers argued that they had not received notice

of the partnership-level proceeding from respondent in accordance

with section 6223(a), and no petition was filed to contest the

FPAA.   We reasoned that the partnership items set forth in the

Crowell FPAA would become nonpartnership items under section

6223(e) if the taxpayers had not been sent proper notice.    See

sec. 6231(b)(1)(D).   We concluded that under these circumstances,
                               - 9 -

whether sufficient notice of the partnership-level proceeding had

been provided to the taxpayers could be considered in a partner-

level proceeding.   As noted above, petitioners do not presently

seek to question the affected items set forth in the notice of

deficiency issued to them.   Further, the lack of notice here does

not concern an alleged failure by respondent to comply with

section 6223, but the TMP’s failure to notify petitioners and

obtain their approval of the settlement between the TMP and

respondent.   That alleged lack of notice does not permit the

conversion of a partnership item into a nonpartnership item.    See

sec. 6231(b) and (c).   Furthermore, petitioners became

participating partners in the Barrister proceeding and received

notification of the entry of the stipulated decision at a time

when they could have sought to have that decision reconsidered or

vacated.

     Petitioners do not present, nor have we found, any authority

permitting us to redetermine partnership items in this affected

items proceeding.   Section 6226(f), which governs judicial review

of adjustments to partnership items, grants jurisdiction over all

partnership items and the proper allocation of the partnership

items among the partners to the Court in which a petition is

filed with respect to the FPAA.   Our jurisdiction for the instant

proceeding is based on the issuance of a notice of deficiency

with respect to nonpartnership items.
                               - 10 -

     Notwithstanding the merits of petitioners' res judicata

argument, we lack jurisdiction over the Barrister partnership

items.    Therefore, we will grant respondent's motion to dismiss

and strike.   Allowing petitioners to challenge the decision in

the partnership proceeding in their affected items case would

ignore congressional intent that there be a unified, single

resolution of partnership items.

     2.    Due Process--Petitioners argue that allowing the

assessment of the 1983 and 1984 tax based on the decision in the

Barrister partnership proceeding deprives them of their right to

procedural due process.    Petitioners contend that their interests

are adverse to those of the TMP and that the stipulated decision

by the TMP denied their right to a trial and to appeal the

decision.

     Our jurisdictional inability to address the tax assessment

attributable to partnership items in the context of this

deficiency proceeding does not violate petitioners' rights to due

process.    We have found that the TEFRA partnership provisions

generally do not violate taxpayers' rights to due process.     See

1983 Western Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 51,

64 (1990), affd. without published opinion 995 F.2d 235 (9th Cir.

1993).    As a general rule, a taxpayer possesses a

constitutionally cognizable property interest invoked by the

assessment and collection of taxes.     Accordingly, petitioners
                                 - 11 -

must receive an opportunity to present their case.      Brinkerhoff-

Faris Trust & Savings Co. v. Hill, 281 U.S. 673 (1930).

     Although petitioners did not receive notice of settlement,

they did receive notice of the entry of the decision in the

partnership-level proceeding.      Upon entry of the decision,

petitioners had 30 days in which to file a motion to vacate that

decision.     Rule 162.   After 30 days, special leave of Court is

required to file such a motion.      Granting a motion for leave lies

within the sound discretion of the Court.      Heim v. Commissioner,

872 F.2d 245, 246 (8th Cir. 1989), affg. T.C. Memo. 1987-1.

     A decision generally becomes final after 90 days unless

appealed.   Sec. 7481(a)(1).    Once a decision of this Court

becomes final, we may still vacate the decision, but only in

certain narrowly circumscribed situations.      Helvering v. Northern

Coal Co., 293 U.S. 191 (1934).     Petitioners argue that a fraud

was committed upon the Court.     This Court may vacate a final

decision if obtained through fraud upon the Court, Abatti v.

Commissioner, 859 F.2d 115, 118 (9th Cir. 1988), affg. 86 T.C.
1319 (1986); Senate Realty Corp. v. Commissioner, 511 F.2d 929,

931 (2d Cir. 1975); Stickler v. Commissioner, 464 F.2d 368, 370

(3d Cir. 1972); Casey v. Commissioner, T.C. Memo. 1992-672.       If

the Barrister decision is to be vacated, however, it cannot be

accomplished in the context of petitioners’ affected items

proceeding.
                              - 12 -

     3.   Is a Separate Deficiency Notice Required As a

Prerequisite to Assessment of Partnership Items?--Normally, a

taxpayer’s income tax liability for each year is separate and

subject to resolution in a single administrative and/or legal

proceeding.   In 1982, Congress provided for a separate, unified

partnership-level proceeding, thereby creating the possibility

that an individual partner may be involved in two or more

separate proceedings for any taxable year.   Respondent’s

determinations of partnership and nonpartnership items are

subject to differing notice requirements to the partners.

Partners receive notices of deficiency for their nonpartnership

and/or affected items.   At the partnership level, the tax matters

partner and notice partners receive an FPAA.   The appropriate

notice must first be issued before respondent can assess either

the partnership or the nonpartnership items.

     Petitioners here question the separate nature of partnership

and partner-level proceedings vis-a-vis respondent’s ability to

assess a computational adjustment reflecting partnership items

without first issuing a notice of deficiency to the partner.     In

essence, petitioners contend that even though respondent issued

an FPAA and a partnership proceeding (in which petitioners

participated) was begun and concluded, respondent must issue a

separate notice of deficiency to petitioners prior to assessing

the partnership items.
                               - 13 -

     Courts have repeatedly held that the normal deficiency

procedures, including the notice of deficiency, do not apply to

the allocation of partnership items among partners.    Randell v.

United States, 64 F.3d 101, 107 (2d Cir. 1995); Pack v. United

States, 992 F.2d 955, 957-958 (9th Cir. 1993); Harris v.

Commissioner, 99 T.C. 121, 125 (1992), affd. 16 F.3d 75 (5th Cir.

1994); Sente Inv. Club Partnership v. Commissioner, 95 T.C. 243,

249 (1990).    Despite this long line of cases, petitioners argue

that a notice of deficiency is required because the partnership

provisions do not vest respondent with authority to assess

partnership items against the partners upon the conclusion of a

partnership proceeding.    Thus, respondent must rely on section

6201 for that authority.    Petitioners reason that since section

6201(d) refers to the deficiency procedures of subchapter B,

respondent must comply with that subchapter for all assessments,

including assessments attributable to partnership items.

     Section 6230(a)(1) provides that, in general, the deficiency

notice procedures do not apply to the assessment of computational

adjustments.   A "computational adjustment" is

     "the change in the tax liability of a partner which
     properly reflects the [tax] treatment * * * of a
     partnership item". Sec. 6231(a)(6). In short, a
     computational adjustment reflects the amount of change
     in the tax liability of a partner that is assessed
     after a FPAA proceeding becomes final * * *

Palmer v. Commissioner, T.C. Memo. 1992-352, affd. without

published opinion 4 F.3d 1000 (11th Cir. 1993).    However,
                              - 14 -

petitioners contend that section 6230(a)(1) should not be read to

exempt from the deficiency procedures of subchapter B a

computational adjustment reflecting the treatment of partnership

items.   Petitioners suggest that the term "tax liability" in the

definition of computational adjustment refers to the amount due

after respondent assesses a deficiency in accordance with

subchapter B.

     Section 6225(a) restricts assessment of a deficiency

attributable to a partnership item until completion of the

partnership proceedings, while section 6230(a) makes subchapter B

procedures inapplicable to that assessment.   Thus, contrary to

petitioners' argument, section 6201 assessment authority is not

limited to assessment under subchapter B procedures.    The mere

reference to subchapter B in section 6201(d) does not mean that

respondent lacks assessment authority as to partnership items

unless respondent adheres to subchapter B procedures.

Petitioners argue that respondent must comply with section 6213,

which requires a notice of deficiency prior to assessment.

However, paragraph (3) of section 6213(h) refers to section

6230(a) for the applicability of the notice requirement to

deficiencies attributable to partnership items.   In addition,

section 6216(4) provides: "For procedures relating to partnership

items, see subchapter C."   Those references belie petitioners'

contention that respondent must comply with the deficiency

procedures of subchapter B before assessing a computational
                              - 15 -

adjustment.   In addition, requiring a notice of deficiency as a

predicate for such assessment of partnership items after the

conclusion of a partnership proceeding would ignore congressional

intent to provide for a separate partnership proceeding.

     We note that petitioners concede that a notice of deficiency

with respect to partnership items would not give taxpayers the

right to relitigate the partnership items.     In addition, the

partnership provisions safeguard due process rights by providing

taxpayers with notice of the partnership adjustment and an

opportunity to participate in the partnership proceeding.

Petitioners’ approach would add a procedural step that creates a

mere formality and does not provide any additional due process

protection.

     In light of the lengthy list of cases that hold that a

notice of deficiency is not required before assessment of a

computational adjustment, we find petitioners' argument that such

a notice is required unpersuasive.     We will deny petitioners'

motion to dismiss for lack of jurisdiction.     Because the

assessment of petitioners’ 1983 and 1984 income tax and interest

based on the decision entered in the Barrister proceeding is not

within our subject-matter jurisdiction in this case, it follows

that we have no authority to restrain collection of the assessed

1983 and 1984 income tax and interest.

     To reflect the foregoing,
    - 16 -

     An order granting respondent’s

motion and denying petitioners’ motions

will be issued.