GAF Corporation and Subsidiaries v. Commissioner , 114 T.C. No. 33 ( 2000 )

114 T.C. No. 33UNITED 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.
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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.
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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.
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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.
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(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.
4Unless 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.
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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.
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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.
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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...)
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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.
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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
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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.]
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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
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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.”
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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.
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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
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“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.
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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.
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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
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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.
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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
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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).
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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),
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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.
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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).
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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.