SCOTUS Reports

Tag: Computational Adjustments

  • Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 T.C. No. 11 (2020): Collection Due Process and Jurisdiction over Computational Adjustments

    Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 T. C. No. 11 (U. S. Tax Court 2020)

    In Amanda Iris Gluck Irrevocable Trust v. Commissioner, the U. S. Tax Court clarified its jurisdiction in collection due process (CDP) cases involving computational adjustments under the Tax Equity and Fiscal Responsibility Act (TEFRA). The Court held that while it lacked jurisdiction over the 2012 tax year due to the absence of a collection action, it could review the Trust’s underlying tax liabilities for 2014 and 2015 in a CDP context, despite these liabilities stemming from computational adjustments. This ruling underscores the broader scope of judicial review in CDP proceedings compared to deficiency cases, offering taxpayers a chance to contest liabilities they could not previously challenge.

    Parties

    Amanda Iris Gluck Irrevocable Trust (Petitioner) v. Commissioner of Internal Revenue (Respondent). The Trust was the petitioner at the U. S. Tax Court level, challenging the Commissioner’s actions through a collection due process (CDP) hearing and subsequent judicial review.

    Facts

    The Amanda Iris Gluck Irrevocable Trust (the Trust) was a direct and indirect partner in partnerships subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). In 2012, one of these partnerships sold property and realized a large capital gain. The Trust allegedly failed to report its entire distributive share of this gain, prompting the IRS to make computational adjustments to the Trust’s 2012-2015 tax returns. These adjustments eliminated the Trust’s net operating loss (NOL) for 2012 and disallowed NOL carryforward deductions for 2013-2015, resulting in assessed tax liabilities for those years. The IRS issued a levy notice for the 2013-2015 tax years, which the Trust challenged through a CDP hearing and subsequent petition to the U. S. Tax Court.

    Procedural History

    The IRS made computational adjustments to the Trust’s 2012-2015 tax returns and assessed the resulting tax liabilities. The IRS then issued a levy notice for the 2013-2015 tax years, prompting the Trust to request a CDP hearing. The settlement officer (SO) sustained the levy notice, and the Trust timely petitioned the U. S. Tax Court for review. The Commissioner moved to dismiss the case as to the 2012 and 2013 tax years, arguing that the 2012 tax year was not subject to the levy notice and that the 2013 liability had been fully paid. The Commissioner also moved for summary judgment as to the 2014 and 2015 tax years.

    Issue(s)

    1. Whether the U. S. Tax Court has jurisdiction to review the Trust’s underlying tax liability for the 2012 tax year in this CDP proceeding?

    2. Whether the U. S. Tax Court has jurisdiction to review the Trust’s underlying tax liabilities for the 2013-2015 tax years in this CDP proceeding?

    3. Whether the Trust’s challenge to the collection action for the 2013 tax year is moot due to full payment of the liability?

    4. Whether the Trust is entitled to challenge its underlying tax liabilities for the 2014 and 2015 tax years in this CDP proceeding?

    Rule(s) of Law

    1. Under I. R. C. § 6330(d)(1), the U. S. Tax Court has jurisdiction to review a notice of determination issued following a CDP hearing if a timely petition is filed.

    2. I. R. C. § 6330(c)(2)(B) allows a taxpayer to challenge the existence or amount of an underlying tax liability in a CDP proceeding if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute such tax liability.

    3. I. R. C. § 6230(a)(1) generally prohibits the U. S. Tax Court from reviewing computational adjustments in deficiency proceedings, but this limitation does not apply in CDP cases.

    4. The U. S. Tax Court reviews the SO’s determination regarding underlying tax liabilities de novo and other aspects of the determination for abuse of discretion.

    Holding

    1. The U. S. Tax Court lacks jurisdiction over the Trust’s 2012 tax year because no collection action was taken for that year.

    2. The U. S. Tax Court has jurisdiction under I. R. C. § 6330(d)(1) to review the Trust’s underlying tax liabilities for the 2013-2015 tax years in this CDP proceeding.

    3. The Trust’s challenge to the collection action for the 2013 tax year is moot because the liability has been fully paid.

    4. The Trust is entitled to challenge its underlying tax liabilities for the 2014 and 2015 tax years because it did not have a prior opportunity to dispute these liabilities.

    Reasoning

    The U. S. Tax Court’s reasoning in this case focused on the scope of its jurisdiction in CDP proceedings and the distinction between deficiency and CDP cases regarding computational adjustments. The Court emphasized that while it generally lacks jurisdiction to review computational adjustments in deficiency proceedings under I. R. C. § 6230(a)(1), its jurisdiction in CDP cases is not similarly limited. The Court cited McNeill v. Commissioner, 148 T. C. 481 (2017), to support its authority to review underlying liabilities arising from computational adjustments in CDP proceedings.

    The Court also analyzed the Trust’s right to challenge its underlying liabilities under I. R. C. § 6330(c)(2)(B), which allows such challenges if the taxpayer did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the liability. The Court determined that the Trust did not have a prior opportunity to dispute its 2014 and 2015 liabilities in a prepayment posture, thus entitling it to raise these challenges in the CDP hearing.

    The Court rejected the Commissioner’s argument that the Trust was merely disputing its 2012 tax liability to create an overpayment for offsetting purposes. Instead, the Court found that the Trust was challenging the disallowance of NOL carryforward deductions for 2014 and 2015, which directly affected its underlying tax liabilities for those years. The Court noted that it could consider facts related to other tax years, such as the 2012 NOL, to determine the correct amount of deductions for the years in issue.

    The Court also addressed the standard of review in CDP cases, applying de novo review to the Trust’s underlying liability challenges and abuse of discretion review to other aspects of the SO’s determination. The Court found genuine disputes of material fact regarding the Trust’s entitlement to NOL carryforward deductions for 2014 and 2015, precluding summary judgment.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction as to the 2012 tax year and dismissed the 2013 tax year as moot. The Court denied the Commissioner’s motion for summary judgment as to the 2014 and 2015 tax years, finding genuine disputes of material fact regarding the Trust’s underlying tax liabilities for those years.

    Significance/Impact

    This case clarifies the U. S. Tax Court’s jurisdiction in CDP proceedings involving computational adjustments under TEFRA. It underscores the broader scope of judicial review available to taxpayers in CDP cases compared to deficiency proceedings, allowing them to challenge underlying tax liabilities that they could not previously dispute. The decision also highlights the importance of the CDP process as a mechanism for taxpayers to contest tax liabilities assessed through computational adjustments, particularly when they have not had a prior opportunity to challenge those liabilities. This ruling may impact how taxpayers and the IRS approach CDP hearings and the litigation of tax liabilities arising from partnership items.

  • Manroe v. Commissioner, T.C. Memo. 2020-16: Jurisdictional Limits of the U.S. Tax Court in TEFRA Proceedings

    Manroe v. Commissioner, T. C. Memo. 2020-16, U. S. Tax Court (2020)

    In Manroe v. Commissioner, the U. S. Tax Court ruled it lacked jurisdiction over penalties stemming from partnership-level adjustments under TEFRA, despite having authority over the related income tax deficiencies. The decision clarifies the court’s limited scope in TEFRA cases, impacting how penalties related to partnership items are contested, as taxpayers must now rely on post-payment refund actions to challenge such penalties.

    Parties

    Lori J. Manroe and Robert D. Manroe were the petitioners, represented by Ernest Scribner Ryder. The respondent was the Commissioner of Internal Revenue, represented by Thomas Lee Fenner and Mark J. Miller.

    Facts

    The Manroes participated in a Son-of-BOSS tax shelter transaction through BLAK Investments (BLAK), a partnership subject to TEFRA. They reported losses from offsetting short positions in U. S. Treasury notes and Swiss francs. After the IRS determined BLAK was a sham lacking economic substance, the Manroes received deficiency notices for tax years 2001 and 2002, including penalties for gross valuation misstatement. They challenged the premature assessments and sought to restrain collection.

    Procedural History

    The IRS issued a final partnership administrative adjustment (FPAA) to BLAK, which was upheld in a subsequent Tax Court decision. Following this, the Manroes received notices of deficiency for their individual tax liabilities. They filed timely petitions in the Tax Court and moved to restrain collection of the premature assessments. The court had to determine its jurisdiction over the penalties.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to redetermine penalties assessed under section 6662 in a partner-level proceeding following a TEFRA partnership-level adjustment?

    Rule(s) of Law

    The Tax Court’s jurisdiction is limited to what Congress authorizes. Under TEFRA, the court has jurisdiction over partnership items but not over penalties that relate to adjustments to partnership items unless an exception applies. Section 6230(a)(1) states that normal deficiency procedures do not apply to computational adjustments, with exceptions listed in section 6230(a)(2) and (a)(3).

    Holding

    The U. S. Tax Court held that it lacked jurisdiction over the penalties assessed under section 6662 in the partner-level proceeding, as the penalties related to an adjustment to a partnership item and did not fall within the exceptions provided by section 6230(a)(2) or (a)(3).

    Reasoning

    The court reasoned that the penalties were computational adjustments stemming from the partnership-level determination that BLAK was a sham. The court relied on the Supreme Court’s decision in Woods v. Commissioner, which established that penalties relating to adjustments to partnership items could be determined at the partnership level, even if they also involved affected items requiring partner-level determinations. The court rejected the Manroes’ argument that penalties related to affected items (their outside bases) were distinct from penalties related to partnership items, as this was contrary to Woods. The court also noted that the exception in section 6230(a)(2)(A)(i) for affected items requiring partner-level determinations explicitly excluded penalties related to adjustments to partnership items. The court’s decision was consistent with its prior ruling in Gunther v. Commissioner and the Eleventh Circuit’s decision in Highpoint Tower Tech. Inc. v. Commissioner.

    Disposition

    The court granted the Manroes’ motion to restrain collection and refund amounts related to the income tax deficiencies but denied their motion and granted the Commissioner’s motion to dismiss with respect to the penalties.

    Significance/Impact

    Manroe v. Commissioner clarifies the jurisdictional limits of the U. S. Tax Court in TEFRA proceedings, specifically regarding penalties related to partnership items. The decision reinforces that such penalties must be challenged in post-payment refund actions, not in pre-payment deficiency proceedings. This ruling impacts taxpayers involved in TEFRA partnerships by limiting their ability to contest penalties before payment, potentially affecting their tax planning and litigation strategies. The case aligns with recent judicial interpretations of TEFRA’s jurisdictional framework and may influence future cases involving similar issues.

  • Rawls Trading, L.P. v. Comm’r, 138 T.C. 271 (2012): TEFRA Jurisdiction and Computational Adjustments in Tiered Partnerships

    Rawls Trading, L. P. v. Commissioner, 138 T. C. 271 (U. S. Tax Ct. 2012)

    In Rawls Trading, L. P. v. Commissioner, the U. S. Tax Court ruled that it lacked jurisdiction over a prematurely issued Final Partnership Administrative Adjustment (FPAA) to an interim partnership, Rawls Family, L. P. , which only reflected adjustments from lower-tier source partnerships. This decision underscores the importance of completing source partnership proceedings before issuing computational adjustments in tiered partnership structures, impacting how the IRS must proceed in similar cases.

    Parties

    Rawls Trading, L. P. , Rawls Management Corporation, as Tax Matters Partner, and other related entities (Petitioners) v. Commissioner of Internal Revenue (Respondent).

    Facts

    Jerry S. Rawls engaged in the “Son-of-BOSS” tax shelter using a tiered partnership structure involving Rawls Family, L. P. (Family), Rawls Group, L. P. (Group), and Rawls Trading, L. P. (Trading). The structure aimed to generate artificial losses to offset capital gains. Group and Trading, the source partnerships, executed transactions that allegedly overstated their bases. These overstated bases were then purportedly passed up to Family, the interim partnership, and ultimately to Rawls through other pass-through entities. The IRS issued simultaneous FPAAs to Family, Group, and Trading, disallowing the claimed losses. The FPAA issued to Family only reflected the adjustments from Group and Trading.

    Procedural History

    The IRS issued FPAAs to Group, Trading, and Family on March 9, 2007. Petitions for redetermination were filed for all three partnerships. The cases were consolidated, and the IRS moved to stay the Family proceeding, admitting the Family FPAA was issued prematurely but asserting its validity. The Tax Court, on its own motion, considered the jurisdictional issue.

    Issue(s)

    Whether the Tax Court has jurisdiction over the FPAA issued to Family, which only reflected computational adjustments based on the adjustments made to the source partnerships, Group and Trading?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), specifically section 6226(a), the Tax Court’s jurisdiction over partnership items is contingent on the issuance of a valid FPAA. Section 6231(a)(6) defines computational adjustments as changes in a partner’s tax liability reflecting the treatment of a partnership item. Section 6225(a) prohibits the assessment of a deficiency attributable to a partnership item before the partnership proceeding is final. The court’s prior decision in GAF Corp. & Subs. v. Commissioner, 114 T. C. 519 (2000), established that an FPAA or notice of deficiency reflecting only computational adjustments issued before the completion of the partnership-level proceedings is invalid and does not confer jurisdiction.

    Holding

    The Tax Court held that it lacked jurisdiction over the Family case because the FPAA issued to Family, which only reflected computational adjustments based on the adjustments to Group and Trading, was issued prematurely and thus invalid.

    Reasoning

    The court reasoned that the Family FPAA merely represented computational adjustments under section 6231(a)(6), as it only sought to apply the results of the Group and Trading proceedings to Family, an indirect partner. Applying GAF Corp. & Subs, the court determined that such an FPAA, issued before the completion of the source partnership proceedings, was ineffective for conferring jurisdiction. The court emphasized the statutory framework of TEFRA, which segregates partnership and nonpartnership items and requires the completion of partnership-level proceedings before assessing computational adjustments. The court rejected the IRS’s argument that the Family FPAA could be stayed rather than dismissed, noting that without jurisdiction, a stay was not possible. The court also addressed the IRS’s concern about the “no-second-FPAA” rule under section 6223(f), suggesting that the IRS might proceed directly against the indirect partner, Rawls, without issuing another FPAA to Family once the source partnership proceedings were completed.

    Disposition

    The court dismissed the Family proceeding for lack of jurisdiction.

    Significance/Impact

    The Rawls Trading decision clarifies the jurisdictional limits of the Tax Court under TEFRA in tiered partnership structures. It establishes that an FPAA issued to an interim partnership, reflecting only computational adjustments from source partnerships, is invalid if issued before the source partnership proceedings are completed. This ruling impacts IRS procedures in auditing tiered partnerships, requiring the completion of source partnership proceedings before issuing computational adjustments to interim partnerships. It also highlights the Tax Court’s duty to independently assess its jurisdiction, even absent a challenge from the parties, and underscores the need for the IRS to carefully sequence its actions in complex partnership structures to ensure valid jurisdiction.