SCOTUS Reports

Tag: Bedrosian v. Commissioner

  • Bedrosian v. Commissioner, 143 T.C. 83 (2014): Jurisdiction Over Factual Affected Items in TEFRA Proceedings

    Bedrosian v. Commissioner, 143 T. C. 83 (2014) (U. S. Tax Court, 2014)

    In a pivotal ruling on TEFRA partnership proceedings, the U. S. Tax Court in Bedrosian v. Commissioner clarified its jurisdiction over factual affected items, specifically tax attorney fees claimed by the Bedrosians. The court determined that such fees, not directly tied to partnership items but affected by them, are subject to deficiency procedures, thereby maintaining the court’s jurisdiction. This decision reinforces the distinction between computational and factual affected items in tax law, affecting how tax assessments are handled post-TEFRA proceedings.

    Parties

    Plaintiffs: The Bedrosians, who participated in a Son-of-BOSS transaction through an investment in Stone Canyon Partners, LLC. Defendants: The Commissioner of Internal Revenue.

    Facts

    The Bedrosians were involved in a Son-of-BOSS transaction via their investment in Stone Canyon Partners, LLC, which was subject to the Tax Equity and Fiscal Responsibility Act (TEFRA) audit and litigation procedures. The IRS conducted an examination and issued a notice of final partnership administrative adjustment (FPAA) for the 1999 partnership taxable year, determining that the partnership was a sham. The Bedrosians did not file a timely petition in response to the FPAA, making all partnership items final. In a subsequent notice of deficiency for 1999 and 2000, the IRS disallowed a $525,000 deduction for tax attorney fees reported by the Bedrosians on their personal income tax return. This disallowed deduction was not directly related to the partnership items but was affected by the sham determination.

    Procedural History

    The IRS issued a notice of deficiency to the Bedrosians for the years 1999 and 2000, which included the disallowance of the $525,000 deduction for tax attorney fees. The Bedrosians filed a timely petition challenging the notice of deficiency. The U. S. Tax Court dismissed the partnership items and items resulting computationally from partnership adjustments, retaining jurisdiction over the deductibility of the professional fees. The Bedrosians later filed a motion for leave to file a motion for reconsideration of the court’s findings regarding jurisdiction over the professional fees, which was denied as the court determined the deductibility of the fees to be a factual affected item subject to deficiency procedures.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction over the deductibility of professional fees claimed by the Bedrosians on their personal income tax return, which were not directly related to partnership items but were affected by the determination that the partnership was a sham.

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act (TEFRA), partnership items are determined at the partnership level and are final if not timely challenged. Nonpartnership items include items not classified as partnership items. Affected items are items affected by partnership items, and can be computational or factual. Computational affected items are not subject to deficiency procedures, while factual affected items are subject to such procedures. See sections 6230(a)(1) and 6230(a)(2)(A)(i) of the Internal Revenue Code.

    Holding

    The U. S. Tax Court held that it retains jurisdiction over the deductibility of the professional fees claimed by the Bedrosians, as these fees constitute a factual affected item subject to deficiency procedures.

    Reasoning

    The court’s reasoning focused on the distinction between computational and factual affected items. The court referenced prior case law, including Domulewicz v. Commissioner, to establish that the deductibility of professional fees related to a partnership deemed a sham is an affected item. The court determined that the fees in question were not directly related to the partnership items but were affected by the partnership’s sham status, necessitating a factual determination at the partner level. This factual determination required for the deductibility of the fees falls under the category of factual affected items, which are subject to deficiency procedures. The court emphasized that even if the factual determination might be undisputed by the parties, it remains a factual affected item, thereby retaining the court’s jurisdiction over the issue.

    The court also considered the Bedrosians’ motion for reconsideration, applying the standards for granting such motions under Tax Court Rule 161 and Federal Rules of Civil Procedure rule 60(b). The court found no intervening change in controlling law that would justify reconsideration, as the determination of the professional fees as a factual affected item aligned with existing jurisprudence.

    Disposition

    The court denied the Bedrosians’ motion for leave to file a motion for reconsideration, affirming its jurisdiction over the deductibility of the professional fees as a factual affected item subject to deficiency procedures.

    Significance/Impact

    The Bedrosian decision clarifies the scope of the U. S. Tax Court’s jurisdiction over affected items in TEFRA proceedings, distinguishing between computational and factual affected items. This ruling has practical implications for taxpayers and the IRS in handling tax assessments post-TEFRA proceedings, particularly regarding the deductibility of professional fees related to partnerships deemed shams. The decision reinforces the need for partner-level factual determinations for certain affected items, potentially affecting the strategies of both taxpayers and the IRS in similar cases. The case also underscores the importance of timely filing in response to FPAAs, as failure to do so results in the finality of partnership items, limiting subsequent challenges.

  • Bedrosian v. Commissioner, 143 T.C. 83 (2014): Application of TEFRA Procedures and Jurisdiction Over Partnership Items

    Bedrosian v. Commissioner, 143 T. C. 83 (U. S. Tax Court 2014)

    In Bedrosian v. Commissioner, the U. S. Tax Court ruled that it lacked jurisdiction over partnership items from a notice of deficiency due to the IRS’s mishandling of TEFRA procedures. The court clarified that the IRS’s use of both TEFRA and deficiency procedures was invalid for partnership items because the IRS had initially determined the case was not subject to TEFRA, but later issued a TEFRA notice. This decision underscores the importance of adhering to the correct procedural framework when auditing partnerships, affecting how future cases involving similar procedural issues may be approached.

    Parties

    John C. Bedrosian and Judith D. Bedrosian (Petitioners) v. Commissioner of Internal Revenue (Respondent). The Bedrosians were the taxpayers at the trial level and appellants at the appellate level, while the Commissioner was the respondent at both stages.

    Facts

    John C. Bedrosian and Judith D. Bedrosian invested in a Son-of-BOSS transaction through a partnership named Stone Canyon Partners. The partnership was subject to the Tax Equity and Fiscal Responsibility Act (TEFRA) procedures due to the presence of passthrough partners. The IRS initially audited the Bedrosians’ individual tax returns for 1999 and 2000, soliciting extensions of the statute of limitations and discussing potential settlements without following TEFRA procedures. Later, the IRS issued a notice of beginning of administrative proceeding (NBAP) and a final partnership administrative adjustment (FPAA) for Stone Canyon Partners, but also issued a notice of deficiency to the Bedrosians, which included the same adjustments as the FPAA plus additional adjustments. The Bedrosians filed a timely petition challenging the notice of deficiency but an untimely petition challenging the FPAA.

    Procedural History

    The IRS issued a notice of deficiency to the Bedrosians on April 19, 2005, and an FPAA to Stone Canyon Partners on April 8, 2005. The Bedrosians timely filed a petition in response to the notice of deficiency on July 5, 2005. The Tax Court dismissed the case for lack of jurisdiction over partnership items included in the notice of deficiency, retaining jurisdiction over nonpartnership items. The Bedrosians also filed an untimely petition in response to the FPAA, which the Tax Court dismissed for lack of jurisdiction due to the late filing. The Court of Appeals for the Ninth Circuit affirmed the Tax Court’s dismissals and held that the notice of deficiency was invalid as to partnership items. The case returned to the Tax Court, where the Bedrosians moved for summary judgment, arguing that the court had jurisdiction over all items in the notice of deficiency due to the IRS’s procedural errors.

    Issue(s)

    Whether the partnership items converted to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the IRS mailed the FPAA?
    Whether the partnership items converted to nonpartnership items under section 6223(e)(3) because filing a petition with respect to a notice of deficiency constituted substantial compliance with procedures for opting out of a TEFRA proceeding?
    Whether the Secretary reasonably determined under section 6231(g)(2) that TEFRA did not apply to the partnership?
    Whether the Tax Court was bound by the Court of Appeals for the Ninth Circuit’s prior holding that it lacked jurisdiction over the partnership items in the notice of deficiency?

    Rule(s) of Law

    Section 6223(e)(2) provides that partnership items automatically convert to nonpartnership items if the TEFRA proceeding has concluded at the time the IRS mails notice to the taxpayer. Section 6223(e)(3) allows a partner to elect to have partnership items converted to nonpartnership items if the TEFRA proceeding is ongoing at the time the IRS mails notice to the taxpayer. Section 6231(g)(2) provides that TEFRA procedures do not apply if the Secretary reasonably determines, on the basis of the partnership’s return, that TEFRA does not apply, even if that determination is erroneous.

    Holding

    The Tax Court held that the partnership items did not convert to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the IRS mailed the FPAA. The court also held that the partnership items did not convert to nonpartnership items under section 6223(e)(3) because filing a petition with respect to a notice of deficiency was not substantial compliance with procedures for opting out of a TEFRA proceeding. Additionally, the court held that the Secretary did not reasonably determine under section 6231(g)(2) that TEFRA did not apply to the partnership. Finally, the court held that it was bound by the Court of Appeals for the Ninth Circuit’s prior holding that it lacked jurisdiction over the partnership items in the notice of deficiency.

    Reasoning

    The Tax Court reasoned that section 6223(e)(2) did not apply because the TEFRA proceeding was ongoing when the IRS mailed the FPAA. The court rejected the Bedrosians’ argument that the expiration of the statute of limitations should be considered a conclusion of the TEFRA proceeding. Regarding section 6223(e)(3), the court found that the Bedrosians did not make a timely election to opt out of the TEFRA proceeding and did not substantially comply with the election procedures. The court also found that the IRS did not reasonably determine under section 6231(g)(2) that TEFRA did not apply to the partnership because the partnership’s return clearly indicated the presence of passthrough partners, making the partnership subject to TEFRA. The court concluded that it was bound by the Court of Appeals for the Ninth Circuit’s prior holding, which precluded reconsideration of the jurisdiction issue.

    Disposition

    The Tax Court denied the Bedrosians’ motion for summary judgment and upheld its prior decision that it lacked jurisdiction over the partnership items in the notice of deficiency.

    Significance/Impact

    The decision in Bedrosian v. Commissioner clarifies the application of TEFRA procedures and the consequences of the IRS’s failure to follow those procedures correctly. It underscores the importance of adhering to the proper procedural framework when auditing partnerships and the potential jurisdictional consequences of failing to do so. The case also highlights the limitations of the Tax Court’s jurisdiction over partnership items when TEFRA procedures are involved and the impact of appellate court decisions on subsequent proceedings in the same case. The decision may influence how the IRS approaches audits of partnerships and how taxpayers respond to notices issued under different procedural frameworks.

  • Bedrosian v. Commissioner, 143 T.C. No. 4 (2014): Application of TEFRA Procedures and Reasonableness Under Section 6231(g)(2)

    Bedrosian v. Commissioner, 143 T. C. No. 4 (2014)

    The U. S. Tax Court held that the TEFRA partnership audit procedures applied to the Bedrosians’ tax case despite IRS errors, affirming the IRS’s determination that the partnership was subject to TEFRA. The court rejected the taxpayers’ arguments under sections 6223(e) and 6231(g)(2), ruling that they did not convert partnership items to nonpartnership items and that the IRS’s determination to apply TEFRA was reasonable. This decision underscores the complexities of TEFRA and the strict adherence required to its procedures, significantly impacting how partnerships and their items are audited and litigated.

    Parties

    John C. Bedrosian and Judith D. Bedrosian (Petitioners) v. Commissioner of Internal Revenue (Respondent). The Bedrosians were the petitioners at the trial and appeal levels. The Commissioner of Internal Revenue was the respondent throughout the litigation.

    Facts

    John and Judith Bedrosian engaged in a Son-of-BOSS transaction through Stone Canyon Partners, a partnership subject to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) procedures due to the presence of pass-through entities as partners. The Bedrosians claimed significant losses on their 1999 tax return stemming from this transaction. The IRS initiated an audit focusing on the Bedrosians’ individual income tax returns rather than a TEFRA partnership audit, leading to confusion over the applicable procedures.

    The IRS eventually issued a Notice of Final Partnership Administrative Adjustment (FPAA) for Stone Canyon Partners, which was not timely challenged by the Bedrosians. Subsequently, the IRS issued a Notice of Deficiency (NOD) to the Bedrosians, which included the same adjustments as the FPAA and additional ones. The Bedrosians timely petitioned the Tax Court regarding the NOD but failed to timely challenge the FPAA, resulting in the dismissal of their petition against the FPAA for being untimely.

    Procedural History

    The IRS issued an FPAA to Stone Canyon Partners, followed by an NOD to the Bedrosians. The Bedrosians filed an untimely petition against the FPAA, which was dismissed by the Tax Court and upheld by the Court of Appeals for the Ninth Circuit. They timely petitioned the Tax Court regarding the NOD, which led to the current case. The Tax Court previously dismissed adjustments related to 1999 as partnership items but retained jurisdiction over nonpartnership items for 2000. The Court of Appeals dismissed an appeal from the Tax Court’s partial dismissal due to lack of a final judgment. The Bedrosians then filed a motion for summary judgment in the Tax Court, seeking jurisdiction over all items in the NOD.

    Issue(s)

    Whether the partnership items in the NOD converted to nonpartnership items under section 6223(e)(2) or (e)(3)?

    Whether the IRS reasonably determined under section 6231(g)(2) that TEFRA did not apply to Stone Canyon Partners?

    Rule(s) of Law

    Under section 6223(e)(2), partnership items convert to nonpartnership items if the TEFRA proceeding has concluded when the IRS mails the notice. Under section 6223(e)(3), a partner may elect to have partnership items treated as nonpartnership items if the TEFRA proceeding is ongoing at the time of mailing, but such an election must be made within 45 days and filed with the IRS office that mailed the notice. Section 6231(g)(2) provides that TEFRA does not apply to a partnership if the IRS reasonably but erroneously determines, based on the partnership’s return, that TEFRA does not apply.

    Holding

    The Tax Court held that the partnership items did not convert to nonpartnership items under section 6223(e)(2) because the TEFRA proceeding was ongoing at the time the FPAA was mailed. The court also held that no valid election was made under section 6223(e)(3) as the petition filed by the Bedrosians did not constitute substantial compliance with the election requirements. Finally, the court found that the IRS did not make a reasonable determination under section 6231(g)(2) that TEFRA did not apply to Stone Canyon Partners, as the partnership’s return indicated the presence of pass-through partners, precluding the small partnership exception.

    Reasoning

    The court reasoned that for section 6223(e)(2) to apply, the TEFRA proceeding must have concluded, which was not the case when the FPAA was mailed. Under section 6223(e)(3), the Bedrosians did not make a timely election nor did their petition substantially comply with the election requirements due to lack of intent and procedural deficiencies. Regarding section 6231(g)(2), the court determined that the IRS’s decision to apply TEFRA was based on the partnership’s return, which clearly indicated the presence of pass-through partners, making the application of TEFRA reasonable and necessary. The court rejected the argument that the IRS initially treated the audit as non-TEFRA, emphasizing that the FPAA was the definitive determination of TEFRA applicability. The court also noted that the IRS’s conduct during the audit did not constitute a determination that TEFRA did not apply, and any such determination would have been unreasonable given the partnership’s return.

    Disposition

    The Tax Court denied the Bedrosians’ motion for summary judgment, affirming that it lacked jurisdiction over the partnership items in the NOD due to the ongoing TEFRA proceedings and the lack of a valid election or reasonable determination under the relevant sections of the Code.

    Significance/Impact

    This case highlights the complexity and strict procedural requirements of TEFRA, emphasizing the importance of timely and proper elections and the IRS’s reliance on partnership returns to determine the applicability of TEFRA. It underscores the challenges taxpayers face in navigating these procedures and the potential for significant tax implications based on procedural determinations. The decision reinforces the need for clear and consistent IRS actions in audits and the critical nature of timely responses by taxpayers to IRS notices to preserve their rights to judicial review.