SCOTUS Reports

Tag: Partnership Items

  • Soroban Capital Partners LP v. Commissioner, 161 T.C. No. 12 (2023): Application of Limited Partner Exception in Self-Employment Tax

    Soroban Capital Partners LP v. Commissioner, 161 T. C. No. 12 (2023)

    The U. S. Tax Court ruled that determining whether limited partners in a state law limited partnership are ‘limited partners, as such,’ under I. R. C. § 1402(a)(13) requires a functional analysis. This ruling impacts the application of the self-employment tax exclusion for limited partners, affecting how partnerships report net earnings from self-employment and potentially altering tax strategies for limited partnerships.

    Parties

    Soroban Capital Partners LP and Soroban Capital Partners GP LLC, as the tax matters partner (Petitioner), filed against the Commissioner of Internal Revenue (Respondent). The case was adjudicated in the U. S. Tax Court, with docket numbers 16217-22 and 16218-22.

    Facts

    Soroban Capital Partners LP (Soroban) is a Delaware limited partnership subject to the TEFRA audit and litigation procedures for the tax years 2016 and 2017. Soroban reported its net earnings from self-employment by including guaranteed payments to its limited partners and the general partner’s share of ordinary business income. However, it excluded the distributive shares of ordinary business income allocated to its limited partners, Eric Mandelblatt, Gaurav Kapadia, and Scott Friedman, from its computation of net earnings from self-employment. The Commissioner challenged this exclusion, asserting that these limited partners were not limited partners ‘as such’ under I. R. C. § 1402(a)(13) and thus their shares of ordinary business income should be included in Soroban’s net earnings from self-employment.

    Procedural History

    The Commissioner issued Notices of Final Partnership Administrative Adjustment on April 25, 2022, adjusting Soroban’s net earnings from self-employment for the years in issue. Soroban, through its tax matters partner, timely filed a Petition challenging these adjustments. Both parties filed Motions for Summary Judgment. Soroban sought a ruling that the limited partners’ distributive shares of income were excluded from net earnings from self-employment under I. R. C. § 1402(a)(13) or, alternatively, that the issue of limited partners’ roles was not a partnership item subject to TEFRA proceedings. The Commissioner moved for a ruling that the inquiry into the limited partners’ roles was a partnership item that could be determined in these proceedings.

    Issue(s)

    Whether the distributive shares of ordinary business income allocated to limited partners in a state law limited partnership are excluded from the partnership’s net earnings from self-employment under the limited partner exception of I. R. C. § 1402(a)(13)?

    Whether the determination of whether a partner is a ‘limited partner, as such’ under I. R. C. § 1402(a)(13) is a partnership item that can be addressed in a TEFRA partnership-level proceeding?

    Rule(s) of Law

    I. R. C. § 1402(a)(13) provides an exception to net earnings from self-employment for ‘the distributive share of any item of income or loss of a limited partner, as such. ‘ The court must interpret this provision to determine the scope of the limited partner exception.

    I. R. C. § 6221 and related TEFRA provisions mandate that partnership items be determined at the partnership level. Treasury Regulation § 301. 6231(a)(3)-1(b) includes legal and factual determinations underlying partnership items as partnership items themselves.

    Holding

    The court held that the limited partner exception under I. R. C. § 1402(a)(13) does not apply to a partner who is limited in name only. A functional analysis test must be applied to determine if a partner is a ‘limited partner, as such. ‘ Furthermore, the court determined that this inquiry into the functions and roles of limited partners is a partnership item, properly addressed in a TEFRA partnership-level proceeding.

    Reasoning

    The court reasoned that the phrase ‘limited partner, as such’ in I. R. C. § 1402(a)(13) indicates that Congress intended the exception to apply only to partners functioning as passive investors, not those who are limited partners in name only. This interpretation is supported by the legislative history, which aimed to exclude earnings of an investment nature from self-employment tax. The court rejected the argument that the status of limited partner under state law automatically qualifies a partner for the exception, emphasizing the need for a functional analysis to determine whether the partner’s income is derived from passive investment or active participation in the partnership’s business.

    The court further reasoned that the determination of whether a partner is a ‘limited partner, as such’ is a partnership item because it involves factual determinations underlying the calculation of the partnership’s net earnings from self-employment. This aligns with Treasury Regulation § 301. 6231(a)(3)-1(b), which includes such determinations as partnership items. Therefore, the court has jurisdiction to address this issue in a TEFRA partnership-level proceeding.

    The court analyzed the proposed regulations and subsequent moratorium, noting that Congress’s concern was with Treasury’s criteria potentially excluding passive investors from the exception. The court distinguished this from the plain text of the statute, which requires a functional analysis of the partner’s role. The court also considered the TEFRA procedures, affirming that adjustments to partnership items, including the determination of net earnings from self-employment, must be made at the partnership level.

    Disposition

    The court denied Soroban’s Motion for Summary Judgment and granted the Commissioner’s Motion for Partial Summary Judgment, affirming that a functional analysis of the limited partners’ roles is required and is a partnership item subject to TEFRA proceedings.

    Significance/Impact

    This decision clarifies the application of the limited partner exception under I. R. C. § 1402(a)(13), requiring partnerships to conduct a functional analysis to determine if their limited partners qualify for the exclusion from self-employment tax. It impacts how partnerships report net earnings from self-employment and may influence tax planning for limited partnerships. The ruling also reinforces the scope of TEFRA partnership-level proceedings, confirming that inquiries into the roles of limited partners are partnership items that can be resolved at this level. Subsequent courts may rely on this decision when addressing similar issues, and it may prompt further guidance from the IRS on the application of the limited partner exception.

  • Malone v. Comm’r, 148 T.C. 16 (2017): Application of Deficiency Procedures to Partnership-Related Penalties

    Malone v. Commissioner, 148 T. C. 16 (2017)

    In Malone v. Comm’r, the U. S. Tax Court ruled that deficiency procedures apply to a negligence penalty asserted against taxpayers Bernard and Mary Ellen Malone for failing to report partnership items, even though the penalty was related to partnership items. The court clarified that such penalties are subject to deficiency procedures when no adjustments are made to the partnership items themselves. This decision underscores the procedural nuances of the Tax Equity and Fiscal Responsibility Act (TEFRA) and its impact on the assessment of penalties linked to partnership tax reporting.

    Parties

    Bernard P. Malone and Mary Ellen Malone, Petitioners, v. Commissioner of Internal Revenue, Respondent. The Malones were the taxpayers and petitioners at both the trial and appeal levels, while the Commissioner of Internal Revenue was the respondent throughout the litigation.

    Facts

    Bernard Malone was a partner in MBJ Mortgage Services America, Ltd. , a partnership subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act (TEFRA). In 2005, MBJ reported installment sales of partnership assets, with Malone’s distributive share being $3,200,748 of ordinary income and $3,547,326 of net long-term capital gain. However, on their joint 2005 Form 1040, the Malones did not report these partnership items but instead reported $4,526,897 of long-term capital gain from the sale of Malone’s partnership interest in MBJ, which did not occur in 2005. The Malones did not file a notice of inconsistent treatment with the IRS. The Commissioner subsequently adjusted the Malones’ return to include the partnership items as reported by MBJ and asserted a negligence penalty under IRC section 6662(a) for the Malones’ failure to report these items.

    Procedural History

    The Commissioner issued a notice of deficiency to the Malones, leading them to file a petition with the U. S. Tax Court. The Commissioner moved to dismiss for lack of jurisdiction over partnership items, which the court granted on June 5, 2012, but explicitly reserved the jurisdictional issue regarding the applicability of the section 6662(a) penalty. The Commissioner later clarified that the penalty was asserted solely due to the Malones’ failure to report their distributive share of partnership items. The court then ordered supplemental briefing on this jurisdictional question.

    Issue(s)

    Whether the deficiency procedures apply to a negligence penalty under IRC section 6662(a) when the penalty is asserted due to a partner’s failure to report partnership items consistently with the partnership’s return, and no adjustments are made to the partnership items themselves?

    Rule(s) of Law

    IRC section 6221 states that the tax treatment of partnership items and the applicability of penalties related to adjustments to those items are determined at the partnership level. IRC section 6230(a)(2)(A)(i) excludes from deficiency procedures penalties related to adjustments to partnership items. IRC section 6222(a) requires partners to report partnership items consistently with the partnership’s return, and section 6222(d) references penalties for disregard of this requirement, including the negligence penalty under section 6662(a) and (b)(1).

    Holding

    The U. S. Tax Court held that deficiency procedures apply to the negligence penalty asserted against the Malones under IRC section 6662(a) because no adjustments were made to the partnership items reported by MBJ. The court determined that the penalty was not related to any adjustments to partnership items but rather to the Malones’ failure to report those items consistently.

    Reasoning

    The court’s reasoning focused on the procedural implications of TEFRA and the specific circumstances of the case. It noted that penalties are generally factual affected items subject to deficiency procedures unless they relate to adjustments to partnership items, as per the 1997 Taxpayer Relief Act amendments to IRC sections 6221 and 6230. The court emphasized that the adjustments made to the Malones’ tax liability were computational adjustments reflecting the partnership items as originally reported by MBJ, not adjustments to the partnership items themselves. Therefore, the exclusion from deficiency procedures under section 6230(a)(2)(A)(i) did not apply, and the court retained jurisdiction over the penalty determination. The court also addressed the Malones’ argument that their inconsistently reported partnership items were “adjusted,” concluding that no such adjustments occurred since the items were accepted as reported by MBJ.

    Disposition

    The court denied the Malones’ motion to dismiss for lack of jurisdiction over the section 6662(a) penalty, affirming that deficiency procedures apply to the determination of the penalty in question.

    Significance/Impact

    The Malone decision clarifies the application of deficiency procedures to penalties related to partnership items under TEFRA when no adjustments are made to those items. It highlights the importance of distinguishing between adjustments to partnership items and computational adjustments to a partner’s tax liability based on those items. This ruling has practical implications for taxpayers and the IRS in handling penalties for inconsistent reporting of partnership items, ensuring that such penalties are subject to the procedural protections of deficiency procedures when no partnership-level adjustments are at issue. The decision also reaffirms the court’s jurisdiction over penalties that are not directly tied to adjustments to partnership items, providing guidance on the scope of TEFRA’s procedural framework.

  • 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.

  • Gaughf Properties, L.P. v. Comm’r, 139 T.C. 219 (2012): Statutory Period of Limitations Under I.R.C. § 6229(e) for Partnership Items

    Gaughf Properties, L. P. v. Comm’r, 139 T. C. 219 (2012)

    In Gaughf Properties, L. P. v. Comm’r, the U. S. Tax Court held that the statutory period for assessing tax on partnership items remained open under I. R. C. § 6229(e) for indirect partners Andrew and Nan Gaughf due to their omission from the partnership return and inconsistent tax treatment. The decision underscores the importance of correctly identifying all partners on partnership returns to prevent indefinite extension of the assessment period.

    Parties

    Plaintiff: Gaughf Properties, L. P. , represented by Balazs Ventures, LLC, a partner other than the tax matters partner.

    Defendant: Commissioner of Internal Revenue.

    Facts

    In 1999, Gaughf Properties, L. P. , was formed as a limited partnership under South Carolina law. The partnership was involved in a series of transactions intended to offset unrealized gains in stock owned by Andrew Gaughf. The transactions included currency options and stock trades, involving Gaughf Enterprises, LLC, Balazs Ventures, LLC, and Bodacious, Inc. , all owned either directly or indirectly by Andrew and Nan Gaughf. Gaughf Properties’ 1999 tax return did not list Andrew and Nan Gaughf as partners, despite their indirect ownership through the other entities. The partnership return reported no taxable income, tax-exempt interest income of $66, and an ordinary loss of $45,000. The Gaughfs’ personal tax return reported a long-term capital loss from Bodacious, Inc. , which was inconsistent with the partnership’s treatment of the transactions. The IRS received information identifying the Gaughfs through a summons to Jenkens & Gilchrist, but this information was not formally furnished in accordance with IRS regulations.

    Procedural History

    The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) to Gaughf Properties on March 30, 2007, concerning the tax year ended December 27, 1999. Gaughf Properties contested the FPAA, arguing that the statutory period for assessment had closed. The Tax Court separated the issue of the period of limitations for trial and opinion. The IRS conceded other arguments regarding the statutory period for assessment, focusing on I. R. C. § 6229(e).

    Issue(s)

    Whether the statutory period for assessing tax attributable to partnership items was still open under I. R. C. § 6229(e) with respect to Andrew and Nan Gaughf on March 30, 2007, the date the FPAA was issued?

    Rule(s) of Law

    I. R. C. § 6229(e) provides that the period for assessing any tax imposed by subtitle A attributable to partnership items shall not expire with respect to a partner before the date which is 1 year after the date on which the name, address, and taxpayer identification number of such partner are furnished to the Secretary if: (1) the name, address, and taxpayer identification number of a partner are not furnished on the partnership return, and (2) the partner has failed to comply with I. R. C. § 6222(b) regarding notification of inconsistent treatment of partnership items.

    Holding

    The Tax Court held that the statutory period for assessing tax attributable to partnership items remained open under I. R. C. § 6229(e) with respect to Andrew and Nan Gaughf on March 30, 2007, because their names, addresses, and taxpayer identification numbers were not furnished on the partnership return, and they failed to comply with I. R. C. § 6222(b) by not notifying the IRS of their inconsistent treatment of partnership items on their personal tax return.

    Reasoning

    The court reasoned that the Gaughfs were indirect partners in Gaughf Properties, and their identifying information was not included on the partnership return, satisfying the first condition of I. R. C. § 6229(e). The court found that the Gaughfs treated partnership items inconsistently with the partnership return by reporting a capital loss on their personal return that was not accounted for on the partnership return, thus failing to comply with I. R. C. § 6222(b). The court also determined that the information received by the IRS from Jenkens & Gilchrist did not meet the requirements of Treas. Reg. § 301. 6223(c)-1T for furnishing information, as it was not filed with the correct IRS office and did not contain a statement explaining that it was furnished to correct or supplement earlier information. The court rejected the taxpayer’s arguments that the IRS should have been estopped from asserting that the statutory period for assessment was open, finding no basis for estoppel.

    Disposition

    The Tax Court issued an order reflecting that the statutory period for assessing tax attributable to partnership items was open under I. R. C. § 6229(e) with respect to Andrew and Nan Gaughf on the date the FPAA was issued.

    Significance/Impact

    This case underscores the importance of accurately reporting all partners, including indirect partners, on partnership returns to avoid the indefinite extension of the statutory period for assessment under I. R. C. § 6229(e). It also highlights the necessity for partners to comply with I. R. C. § 6222(b) by notifying the IRS of any inconsistent treatment of partnership items on their personal tax returns. The decision reinforces the IRS’s authority to extend the assessment period when partners are not properly identified and emphasizes the strict requirements for furnishing information to the IRS to trigger the running of the one-year period under I. R. C. § 6229(e).

  • Tigers Eye Trading, LLC v. Commissioner, 137 T.C. 67 (2011): Jurisdiction and Penalties in Disregarded Partnerships Under TEFRA

    Tigers Eye Trading, LLC v. Commissioner, 137 T. C. 67 (2011)

    In Tigers Eye Trading, LLC v. Commissioner, the Tax Court held it had jurisdiction under TEFRA to uphold adjustments and penalties against a disregarded partnership, rejecting a challenge to its authority based on the D. C. Circuit’s Petaluma II decision. The case clarified the Court’s power to adjust partnership items and apply penalties at the partnership level when the partnership is deemed a sham, significantly impacting how tax shelters like the ‘Son of BOSS’ transaction are litigated.

    Parties

    Plaintiff (Petitioner): Tigers Eye Trading, LLC (dissolved prior to petition filing) and A. Scott Logan Grantor Retained Annuity Trust I (participating partner), with A. Scott Logan as Trustee. Defendant (Respondent): Commissioner of Internal Revenue.

    Facts

    The case involved a ‘Son of BOSS’ tax shelter transaction. A. Scott Logan, through Logan Trusts, purchased offsetting long and short foreign currency options and contributed them along with cash to Tigers Eye Trading, LLC, a Delaware LLC formed to engage in foreign currency trading but primarily used to generate tax losses. Tigers Eye was treated as a partnership for tax purposes but was later determined to be a sham with no economic substance. Logan claimed substantial losses on his 1999 tax return from the sale of property purportedly distributed by Tigers Eye, which were disallowed by the IRS in a Final Partnership Administrative Adjustment (FPAA). The FPAA adjusted partnership items to zero, including losses, deductions, capital contributions, and distributions, and applied accuracy-related penalties, including a 40% gross valuation misstatement penalty.

    Procedural History

    The case began with the IRS issuing an FPAA on March 7, 2005, to Tigers Eye’s partners. Tigers Eye filed a petition in the U. S. Tax Court, with Sentinel Advisors, LLC, as the tax matters partner. Logan Trust I was granted leave to participate as a participating partner. A stipulated decision was entered on December 1, 2009, upholding the FPAA adjustments and penalties. Logan Trust I moved to revise the decision post-Petaluma II, arguing the Tax Court lacked jurisdiction over outside basis and related penalties. The Tax Court denied the motion to revise, finding it retained jurisdiction to enter the stipulated decision as written.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction under TEFRA to determine the applicability of penalties related to adjustments of partnership items when the partnership is disregarded for Federal income tax purposes?

    Rule(s) of Law

    Under sections 6233 and 6226(f) of the Internal Revenue Code, the Tax Court has jurisdiction over partnership items and the applicability of any penalty related to an adjustment to a partnership item in a partnership-level proceeding. Section 301. 6233-1T(a) and (c), Temporary Proced. & Admin. Regs. , extend this jurisdiction to entities filing as partnerships but determined not to be partnerships or to not exist for Federal tax purposes. Section 301. 6231(a)(3)-1, Proced. & Admin. Regs. , defines partnership items as those more appropriately determined at the partnership level.

    Holding

    The Tax Court held that it has jurisdiction under TEFRA to enter the stipulated decision as written, including upholding adjustments to partnership items and the applicability of penalties, even when the partnership is disregarded for Federal income tax purposes.

    Reasoning

    The Court’s reasoning included several key points:

    – The Court applied the TEFRA regulations, as mandated by Mayo Foundation and Intermountain, rather than following Petaluma II, which did not consider the regulations in its holding on outside basis.

    – The Court determined that when a partnership is disregarded, items such as contributions, distributions, and the basis in distributed property are partnership items that can be adjusted to zero, and related penalties can be applied at the partnership level.

    – The Court emphasized the logical and causal relationship between the determination that a partnership is disregarded and the disallowance of losses claimed on the sale of distributed property, justifying the application of penalties at the partnership level.

    – The Court noted that the legislative history of TRA 1997 supports a broad reading of the Tax Court’s jurisdiction over penalties related to partnership items.

    – The Court rejected Logan Trust I’s argument that Petaluma II limited its jurisdiction, finding that the decision was not binding precedent on the issue of penalties related to partnership items.

    Disposition

    The Tax Court denied Logan Trust I’s motion to revise the stipulated decision, affirming the jurisdiction to uphold the adjustments and penalties as written in the decision entered on December 1, 2009.

    Significance/Impact

    The decision in Tigers Eye Trading, LLC v. Commissioner significantly impacts the litigation of tax shelters, particularly ‘Son of BOSS’ transactions, by clarifying the Tax Court’s jurisdiction to adjust partnership items and apply penalties at the partnership level when the partnership is disregarded. It reinforces the Court’s authority under TEFRA to address penalties related to partnership items, even when those items require adjustments to zero due to the partnership’s lack of economic substance. This case also highlights the complexity and ongoing challenges in applying TEFRA provisions to tax shelter cases, influencing future cases involving similar transactions.

  • Thompson v. Commissioner, 137 T.C. 1 (2011): Jurisdiction and TEFRA Partnership Proceedings

    Thompson v. Commissioner, 137 T. C. 1 (2011)

    In Thompson v. Commissioner, the U. S. Tax Court dismissed a case for lack of jurisdiction under the Tax Equity and Fiscal Responsibility Act (TEFRA). The court ruled that computational adjustments related to partnership items, which do not require partner-level determinations, cannot trigger deficiency procedures. This decision clarifies the jurisdictional boundaries of TEFRA proceedings, emphasizing the direct assessment of such adjustments without the need for a statutory notice of deficiency, thus impacting how tax disputes involving partnerships are litigated.

    Parties

    Randall J. Thompson and his wife, as petitioners, initiated this case against the Commissioner of Internal Revenue, as respondent, in the U. S. Tax Court. The case was reviewed and decided at the partnership level, with the tax matters partner representing RJT Investments X, LLC.

    Facts

    Randall J. Thompson engaged in a Son-of-BOSS (BOSS) market linked deposit transaction in 2001, aiming to offset approximately $21,500,000 in capital gains. He formed RJT Investments X, LLC (RJT) to facilitate this transaction. RJT allocated all partnership items to Thompson for its tax year ending December 31, 2001. The Commissioner issued a Final Partnership Administrative Adjustment (FPAA) to RJT on March 21, 2005, disallowing deductions, losses, and imposing an accuracy-related penalty under I. R. C. § 6662. Thompson, as the tax matters partner, challenged the FPAA in a partnership-level proceeding, which resulted in a decision on June 6, 2006, affirmed by the Eighth Circuit on August 22, 2007. The Commissioner issued a notice of deficiency to Thompson on September 22, 2008, for the 2001 tax year, and subsequently assessed the deficiency and penalty on September 23, 2008. Thompson filed a petition with the Tax Court on December 19, 2008, challenging the notice of deficiency.

    Procedural History

    Following the issuance of the FPAA to RJT, Thompson filed a petition in the Tax Court challenging the adjustments. The partnership-level proceeding concluded with a decision entered on June 6, 2006, affirmed by the Eighth Circuit on August 22, 2007. On September 22, 2008, the Commissioner issued a notice of deficiency to Thompson for the 2001 tax year, determining a deficiency in federal income tax and an addition to tax under I. R. C. § 6662(h). Thompson filed a timely petition with the Tax Court on December 19, 2008. On December 2, 2009, the Commissioner filed a motion to dismiss for lack of jurisdiction, which the Tax Court granted on July 26, 2011, after considering the arguments and stipulations of the parties.

    Issue(s)

    Whether the Tax Court has jurisdiction over an income tax deficiency and accuracy-related penalty determined in an affected items notice of deficiency, when the adjustments do not require partner-level determinations?

    Rule(s) of Law

    Under I. R. C. § 6230(a)(1), computational adjustments related to partnership items can be directly assessed without the issuance of a notice of deficiency. I. R. C. § 6230(a)(2)(A) specifies that deficiency procedures apply only to deficiencies attributable to affected items that require partner-level determinations. The term “computational adjustment” is defined in I. R. C. § 6231(a)(6) as an adjustment that “properly reflects” the treatment of partnership items. The Tax Court’s jurisdiction is limited by these statutory provisions, which mandate direct assessment of computational adjustments without deficiency procedures when no partner-level determinations are needed.

    Holding

    The Tax Court lacked jurisdiction over the income tax deficiency and the accuracy-related penalty because the adjustments were computational and did not require partner-level determinations, as per I. R. C. § 6230(a)(1) and (a)(2)(A).

    Reasoning

    The court reasoned that the notice of deficiency issued to Thompson was invalid because it pertained to computational adjustments that could be directly assessed without partner-level determinations. The court analyzed I. R. C. § 6230(a)(1) and (a)(2)(A) to determine that the deficiency procedures did not apply to the adjustments in question. It emphasized that the term “computational adjustment” under I. R. C. § 6231(a)(6) reflects the treatment of partnership items as determined in the partnership-level proceeding, and thus, the notice of deficiency did not trigger the deficiency procedures. The court also considered the policy implications of TEFRA, which aim to streamline tax disputes involving partnerships by limiting partner-level litigation to only those issues requiring partner-specific determinations. The court noted the potential ambiguity in I. R. C. § 6230(a)(2)(A)(i) regarding penalties but relied on the clarity of the regulations to conclude that penalties related to partnership items could be directly assessed without deficiency procedures. The court rejected the argument that errors in the computational adjustments could convert them into deficiencies subject to deficiency procedures, holding that the notice’s validity should be assessed at the time of issuance without looking behind it for accuracy.

    Disposition

    The Tax Court dismissed the case for lack of jurisdiction and directed the entry of an order of dismissal.

    Significance/Impact

    The decision in Thompson v. Commissioner clarifies the jurisdictional limits of the Tax Court in TEFRA partnership cases, emphasizing the direct assessment of computational adjustments without the need for deficiency procedures. This ruling impacts how taxpayers and the IRS handle partnership-related tax disputes, reinforcing the efficiency of TEFRA’s unified audit and litigation procedures. It also highlights the importance of accurately classifying adjustments as computational or requiring partner-level determinations, affecting the procedural avenues available to taxpayers in challenging tax assessments. Subsequent courts have cited this case in delineating the scope of TEFRA’s jurisdictional provisions, shaping the practice of tax law in partnership cases.

  • Petaluma FX Partners, LLC v. Comm’r, 135 T.C. 581 (2010): Jurisdiction Over Partnership-Level Penalties

    Petaluma FX Partners, LLC v. Commissioner, 135 T. C. 581 (2010)

    In a landmark decision, the U. S. Tax Court clarified its jurisdiction over penalties in partnership-level proceedings under TEFRA. The court held that it lacked authority to determine any penalties under Section 6662 of the Internal Revenue Code related to adjustments made in a partnership-level case. This ruling, stemming from a remand by the D. C. Circuit, underscores the distinction between partnership items and affected items, limiting the court’s jurisdiction to partnership items only and affecting how penalties are assessed in tax shelter cases.

    Parties

    Petitioner: Petaluma FX Partners, LLC, and Ronald Scott Vanderbeek, a partner other than the tax matters partner. Respondent: Commissioner of Internal Revenue.

    Facts

    Petaluma FX Partners, LLC (Petaluma), was formed as part of a Son-of-BOSS tax shelter strategy, involving offsetting options and subsequent transactions aimed at generating artificial losses. The Commissioner issued a Notice of Final Partnership Administrative Adjustment (FPAA) on July 28, 2005, adjusting partnership items to zero, including capital contributions, distributions, and outside bases. The FPAA also asserted penalties under Section 6662 for negligence, substantial understatement of income tax, and gross valuation misstatement, attributing all underpayments to these penalties. The tax matters partner and other partners, including Ronald Scott Vanderbeek, challenged the FPAA.

    Procedural History

    Initially, the Tax Court held in Petaluma FX Partners, LLC v. Commissioner, 131 T. C. 84 (2008), that it had jurisdiction over the partnership’s status as a sham and the related penalties. The D. C. Circuit Court of Appeals affirmed the partnership’s status as a sham but reversed the Tax Court’s jurisdiction over outside basis and penalties related to it. The case was remanded for further consideration of the court’s jurisdiction over other penalties under Section 6662. On remand, the Tax Court reviewed the parties’ positions without further trial or hearing, leading to the supplemental opinion.

    Issue(s)

    Whether the Tax Court has jurisdiction to determine the applicability of penalties under Section 6662 in this partnership-level proceeding?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Tax Court’s jurisdiction in partnership-level proceedings is limited to partnership items as defined in Section 6231(a)(3). Section 6226(f) allows the court to determine the applicability of penalties that relate to adjustments to partnership items. However, penalties related to affected items, which require partner-level determinations, are beyond the court’s jurisdiction in such proceedings.

    Holding

    The Tax Court held that it lacks jurisdiction over any Section 6662 penalty determinations in this partnership-level case, as the penalties do not relate directly to adjustments of partnership items but rather to affected items requiring partner-level determinations.

    Reasoning

    The court reasoned that none of the FPAA adjustments flow directly to the partner-level deficiency computation as computational adjustments. The court emphasized that any deficiencies must be determined as affected items through separate partner-level deficiency procedures. The court interpreted the D. C. Circuit’s mandate to mean that for the Tax Court to have jurisdiction over a penalty at the partnership level, the penalty must relate directly to a numerical adjustment to a partnership item and be capable of being computed without partner-level proceedings. The court found no such adjustments in the FPAA, the pleadings, or the stipulation of settled issues. The court also noted that the determination of the partnership as a sham, while implying negligence at the partnership level, does not trigger a computational adjustment to the partners’ taxable income. Thus, the court concluded that it lacked jurisdiction over the penalties asserted.

    Disposition

    The Tax Court entered an appropriate order and decision, affirming its lack of jurisdiction over Section 6662 penalties in this partnership-level proceeding.

    Significance/Impact

    This decision clarifies the scope of the Tax Court’s jurisdiction in partnership-level proceedings under TEFRA, particularly regarding penalties. It establishes that penalties under Section 6662 that relate to affected items, requiring partner-level determinations, cannot be adjudicated in partnership-level proceedings. This ruling has significant implications for the IRS and taxpayers involved in similar tax shelter cases, as it necessitates separate partner-level proceedings for penalty determinations. The decision also reflects the ongoing judicial and legislative efforts to refine the TEFRA partnership audit and litigation procedures, highlighting the complexities involved in determining the applicability and assessment of penalties in partnership cases.

  • Samueli v. Comm’r, 132 T.C. 336 (2009): Administrative Adjustment Requests Under TEFRA

    Samueli v. Commissioner of Internal Revenue, 132 T. C. 336 (U. S. Tax Court 2009)

    In Samueli v. Comm’r, the U. S. Tax Court ruled that an amended individual income tax return did not qualify as a partner’s administrative adjustment request (AAR) under TEFRA, despite claims of substantial compliance. The case underscores the strict procedural requirements for partners seeking to alter partnership items through AARs, affirming that such requests must adhere to specific IRS forms and instructions. This decision reinforces the necessity for precise compliance with tax procedures to ensure the proper treatment of partnership items, impacting how taxpayers navigate partnership tax adjustments.

    Parties

    Henry and Susan F. Samueli, Petitioners, filed against the Commissioner of Internal Revenue, Respondent, in the United States Tax Court. The case was identified as No. 13953-06.

    Facts

    Henry and Susan F. Samueli, residents of California, filed a joint Federal income tax return for 2003. They were involved with H&S Ventures, LLC, a limited liability company treated as a partnership for Federal tax purposes. Each owned 10 percent of H&S Ventures, with the remaining 80 percent owned by their grantor trust. In 2003, H&S Ventures filed a Form 1065, U. S. Return of Partnership Income. Subsequently, the Samuelis received amended Schedules K-1 from H&S Ventures, reflecting a reduction in their gross income and itemized deductions, which they believed were due to a calculation error discovered during a state examination. The Samuelis then filed an amended individual income tax return (Form 1040X) to reflect these changes and claimed a refund. However, they did not file a Form 8082, which is required for an administrative adjustment request (AAR) under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to the Samuelis for the years 2001 and 2003, which did not include any adjustments from H&S Ventures’ Form 1065. The Samuelis challenged the notice by filing a petition with the U. S. Tax Court, leading to a previous decision (Samueli v. Commissioner, 132 T. C. 37 (2009)). After receiving the amended Schedules K-1, they filed an amended return and a second amendment to their petition, claiming an overpayment for 2003. The Commissioner moved to dismiss part of the case for lack of jurisdiction, arguing that the amended return did not qualify as a partner AAR, thus the adjustments remained partnership items subject to TEFRA procedures.

    Issue(s)

    Whether an amended individual income tax return, filed without a Form 8082 and not following the specific requirements for an administrative adjustment request (AAR), qualifies as a partner AAR under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), thereby converting partnership items into nonpartnership items?

    Rule(s) of Law

    Under TEFRA, specifically 26 U. S. C. § 6227, partners can file an AAR to change the treatment of partnership items. The IRS has prescribed Form 8082 for this purpose, and the filing must comply with the form’s instructions and IRS regulations at 26 C. F. R. § 301. 6227(d)-1(a), which require the AAR to be filed in duplicate, identify the partner and partnership, specify the partnership taxable year, relate only to partnership items, and pertain to one partnership and one taxable year. The substantial compliance doctrine may apply in certain cases, but it is a narrow equitable doctrine.

    Holding

    The U. S. Tax Court held that the Samuelis’ amended return did not qualify as a partner AAR because it neither met the specific requirements for an AAR nor substantially complied with those requirements. Consequently, the adjustments remained partnership items, and the court lacked jurisdiction to decide their propriety in the deficiency proceeding.

    Reasoning

    The court’s reasoning centered on the strict interpretation of TEFRA’s requirements for filing an AAR. It emphasized that an AAR must be filed on Form 8082 and follow the prescribed instructions, including filing in duplicate and providing detailed explanations for the adjustments. The Samuelis’ amended return failed to include a Form 8082, was not filed in duplicate, and did not list the partnership’s address or specify the taxable year. Furthermore, it lacked a detailed explanation for the adjustments, which is necessary for the Commissioner to properly assess the request under § 6227(d). The court rejected the Samuelis’ argument that their amended return should be treated as an AAR under the substantial compliance doctrine, finding no evidence of their intent to file the return as an AAR at the time of filing and noting that the return did not contain all required information or follow the necessary filing procedures. The court also referenced prior cases and IRS guidance, such as the Internal Revenue Manual, to support its conclusion that strict adherence to the prescribed procedures is necessary for an AAR to be valid.

    Disposition

    The U. S. Tax Court dismissed the part of the case related to the Samuelis’ claim of overpayment for 2003 due to adjustments from H&S Ventures, affirming that it lacked jurisdiction over partnership items not converted into nonpartnership items through a valid AAR.

    Significance/Impact

    Samueli v. Comm’r reinforces the stringent requirements for partners seeking to adjust partnership items under TEFRA through an AAR. The decision clarifies that mere filing of an amended individual income tax return does not suffice as an AAR without strict compliance with IRS forms and instructions. This ruling underscores the importance of procedural precision in tax law, particularly in the context of partnership taxation, and serves as a cautionary precedent for taxpayers and practitioners. It may influence future cases by emphasizing the need for clear intent and adherence to specific procedures when filing AARs, potentially impacting how partnerships and their partners navigate tax adjustments and disputes.

  • Petaluma FX Partners, LLC v. Comm’r, 131 T.C. 84 (2008): Partnership Items and Penalties Under TEFRA

    Petaluma FX Partners, LLC v. Comm’r, 131 T. C. 84 (2008)

    In Petaluma FX Partners, LLC v. Commissioner, the U. S. Tax Court upheld the IRS’s ability to determine whether a partnership should be disregarded for tax purposes as a partnership item under TEFRA. The court also affirmed its jurisdiction over accuracy-related penalties linked to partnership items, including valuation misstatement penalties, despite the taxpayer’s argument that these penalties should be considered at the partner level. The ruling clarifies the scope of judicial review in partnership-level proceedings and impacts how tax shelters and related transactions are treated for tax purposes.

    Parties

    Petaluma FX Partners, LLC, and Ronald Scott Vanderbeek, a partner other than the tax matters partner, were the petitioners. The respondent was the Commissioner of Internal Revenue.

    Facts

    Petaluma FX Partners, LLC (Petaluma) was formed in August 2000 by Bricolage Capital, LLC; Stillwaters, Inc. ; and Caballo, Inc. Its purported business was to engage in foreign currency option trading. Ronald Thomas Vanderbeek (RTV) and Ronald Scott Vanderbeek (RSV) became partners in October 2000, contributing pairs of offsetting long and short foreign currency options. They increased their adjusted bases in Petaluma by the value of the long options but did not decrease their bases by the value of the short options they contributed. In December 2000, RTV and RSV withdrew from Petaluma, receiving cash and Scient stock in liquidation of their interests. They sold their Scient stock in December 2000 and claimed substantial losses on their 2000 tax returns. Petaluma filed a Form 1065 for the 2000 tax year. In July and August 2005, the IRS issued final partnership administrative adjustments (FPAAs) disallowing the claimed losses and adjusting various partnership items to zero, asserting that Petaluma was a sham or lacked economic substance and thus should be disregarded for tax purposes.

    Procedural History

    On December 30, 2005, RSV, as a partner other than the tax matters partner, filed a petition challenging the FPAA adjustments. The parties filed a stipulation of settled issues on May 22, 2007, where RSV conceded most adjustments but disputed the court’s jurisdiction over the remaining issues, including the partners’ outside bases and the applicability of valuation misstatement penalties. Both parties moved for summary judgment, with the IRS seeking affirmation of its adjustments and penalties, while the petitioners argued the court lacked jurisdiction over these issues.

    Issue(s)

    1. Whether the Tax Court has jurisdiction in a partnership-level proceeding to determine whether Petaluma should be disregarded for tax purposes?
    2. Whether the Tax Court has jurisdiction to determine whether the partners’ outside bases in Petaluma were greater than zero?
    3. Whether the Tax Court has jurisdiction to determine whether accuracy-related penalties determined in the FPAA apply?
    4. If the Tax Court has jurisdiction over the penalties, whether the substantial valuation misstatement penalties are applicable to the adjustments of partnership items?

    Rule(s) of Law

    Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Tax Court’s jurisdiction in partnership-level proceedings includes determining all partnership items, the proper allocation of such items among partners, and the applicability of any penalty that relates to an adjustment to a partnership item. See 26 U. S. C. § 6226(f). A “partnership item” is defined as any item required to be taken into account for the partnership’s taxable year under any provision of subtitle A to the extent regulations provide that such item is more appropriately determined at the partnership level than at the partner level. See 26 U. S. C. § 6231(a)(3).

    Holding

    1. The Tax Court has jurisdiction to determine whether Petaluma should be disregarded for tax purposes as a partnership item.
    2. If Petaluma is disregarded for tax purposes, the Tax Court has jurisdiction to determine that the partners had no outside bases in Petaluma.
    3. The Tax Court has jurisdiction to determine whether accuracy-related penalties apply to adjustments to partnership items.
    4. The substantial valuation misstatement penalties are applicable to the adjustments of partnership items because if the partnership is disregarded, the partners’ claimed bases in Petaluma become overstatements.

    Reasoning

    The court’s reasoning was grounded in the statutory framework of TEFRA and the regulations defining partnership items. The court held that whether Petaluma was a sham or lacked economic substance was a partnership item because it directly affected the tax items reported on the partnership return. The determination that a partnership should be disregarded affects all partnership items, and thus, is appropriately determined at the partnership level to ensure consistent treatment among partners. The court also reasoned that if a partnership is disregarded, the partners’ outside bases must be zero, and this determination can be made at the partnership level without partner-level inquiries. Regarding penalties, the court interpreted “relates to” in § 6226(f) broadly, finding that the accuracy-related penalties, including valuation misstatement penalties, were within its jurisdiction because they were linked to adjustments of partnership items. The court rejected the argument that the valuation misstatement penalty was inapplicable as a matter of law, following the majority view of the Courts of Appeals that such penalties apply when a transaction is disregarded as a sham or for lack of economic substance.

    Disposition

    The court granted the Commissioner’s motion for summary judgment and denied the petitioner’s cross-motion for summary judgment. The court determined that it had jurisdiction over all the issues raised in the FPAA and upheld the adjustments and penalties as stipulated by the petitioner, except for the valuation misstatement penalty, which was upheld as a matter of law.

    Significance/Impact

    The decision in Petaluma FX Partners, LLC v. Commissioner has significant implications for the application of TEFRA in partnership-level proceedings. It clarifies that determinations regarding the validity of a partnership and the applicability of penalties based on partnership items are within the Tax Court’s jurisdiction. This ruling affects how tax shelters and transactions designed to artificially inflate basis may be challenged by the IRS, emphasizing the broad scope of judicial review in partnership-level proceedings. The decision also underscores the importance of consistent treatment of partnership items among partners, reinforcing the purpose of TEFRA to streamline the audit and litigation process for partnerships.

  • Nussdorf v. Comm’r, 129 T.C. 30 (2007): Jurisdiction over Partnership Items in Tax Law

    Nussdorf v. Comm’r, 129 T. C. 30 (U. S. Tax Court 2007)

    In Nussdorf v. Comm’r, the U. S. Tax Court ruled it lacked jurisdiction over partnership items and affected items related to the contributions of Euro options to Evergreen Trading, LLC. The court clarified that such items must be addressed in partnership-level proceedings, not individual deficiency proceedings, emphasizing the significance of the Tax Equity and Fiscal Responsibility Act (TEFRA) procedures in tax disputes involving partnerships.

    Parties

    Plaintiffs: Arlene Nussdorf, Glenn Nussdorf, Stephen Nussdorf, Claudine Strum, and Alicia Nussdorf. They were petitioners in the U. S. Tax Court.
    Defendant: Commissioner of Internal Revenue, the respondent in the case.

    Facts

    The petitioners, through certain flowthrough entities, were members of Evergreen Trading, LLC. In November 1999, these entities purportedly entered into two offsetting Euro option trades with AIG International, Inc. , involving the purchase and sale of options for Euros. On November 30, 1999, these entities contributed the Euro options and cash to Evergreen Trading in exchange for partnership interests. Evergreen Trading executed offsetting currency options in December 1999, resulting in reported gains and losses. In 2002 and 2003, the Commissioner issued notices of beginning of administrative proceedings with respect to Evergreen Trading for the taxable years 1999 and 2000. On September 26, 2005, the Commissioner issued a notice of Final Partnership Administrative Adjustment (FPAA) regarding Evergreen Trading and notices of deficiency to the petitioners for the taxable years 1999 and 2000. The petitioners filed a complaint in the U. S. Court of Federal Claims regarding the FPAA adjustments.

    Procedural History

    The Commissioner moved to dismiss the case for lack of jurisdiction, arguing that the notices of deficiency contained determinations that were partnership items or affected items, which should be addressed in a partnership proceeding. The petitioners moved to dismiss the partnership and affected items, contending that one specific determination in the notices of deficiency was a nonpartnership item that should be considered in the individual proceeding. The Tax Court granted the Commissioner’s motion and denied the petitioners’ motion, dismissing the case for lack of jurisdiction.

    Issue(s)

    Whether the Tax Court has jurisdiction over the determination set forth in paragraph 8 of the notices of deficiency issued to the petitioners, which relates to the purported contributions of Euro options to Evergreen Trading, LLC?

    Rule(s) of Law

    Under 26 U. S. C. § 6231(a)(3), “partnership item” means any item required to be taken into account for the partnership’s taxable year under any provision of subtitle A, to the extent regulations provide that such item is more appropriately determined at the partnership level than at the partner level. 26 U. S. C. § 723 provides that the basis of property contributed to a partnership by a partner is the adjusted basis of such property to the contributing partner at the time of contribution. Treasury Regulation § 301. 6231(a)(3)-1(a)(4) lists items required to be taken into account under subtitle A of the Code that are more appropriately determined at the partnership level, including items relating to contributions to the partnership.

    Holding

    The Tax Court held that it lacked jurisdiction over the determination in paragraph 8 of the notices of deficiency, which related to certain partnership items involving the purported contributions of Euro options to Evergreen Trading by its members. The court also held that it lacked jurisdiction over the remaining determinations in the notices of deficiency because they related to partnership items or affected items.

    Reasoning

    The court reasoned that under § 723, Evergreen Trading was required to determine its basis in the contributed Euro options, which included determining the basis of the contributing partners in such property. This determination falls within the definition of partnership items under § 6231(a)(3) and Treasury Regulation § 301. 6231(a)(3)-1(a)(4), as it relates to contributions to the partnership and is more appropriately determined at the partnership level. The court rejected the petitioners’ argument that the determination of the cost basis of the purchased Euro option in their hands was a nonpartnership item, stating that the partnership’s determination of its basis in the contributed property inherently involved determining the contributing partners’ bases. The court emphasized the importance of the TEFRA procedures, which require partnership items to be resolved in partnership-level proceedings. The court’s reasoning was guided by precedent such as Trost v. Commissioner and Maxwell v. Commissioner, which established that the Tax Court lacks jurisdiction over partnership items in individual deficiency proceedings.

    Disposition

    The Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction and denied the petitioners’ motion to dismiss partnership items and affected items, dismissing the case.

    Significance/Impact

    Nussdorf v. Comm’r reinforces the jurisdictional boundaries established by TEFRA, clarifying that partnership items, including those related to contributions and basis determinations, must be resolved in partnership-level proceedings. This decision has significant implications for tax disputes involving partnerships, as it underscores the necessity of following TEFRA procedures to ensure proper adjudication of partnership-related tax issues. Subsequent cases have cited Nussdorf to support the principle that individual deficiency proceedings cannot be used to challenge determinations that fall within the scope of partnership items.