G-5 Investment Partnership, H. Miles Investments, LLC, Tax Matters Partner, and Henry M. Greene and Julie M. Greene, Partners Other Than The Tax Matters Partner v. Commissioner , 128 T.C. 186 ( 2007 )

128 T.C. No. 15
UNITED STATES TAX COURT
G-5 INVESTMENT PARTNERSHIP, H. MILES INVESTMENTS, LLC, TAX
MATTERS PARTNER, AND HENRY M. GREENE AND JULIE M. GREENE,
PARTNERS OTHER THAN THE TAX MATTERS PARTNER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17767-06. Filed May 30, 2007.
G-5 filed its partnership return for 2000 on Oct.
4, 2001. R issued a notice of final partnership
administrative adjustment (FPAA) to G-5 for 2000 on
Apr. 12, 2006, more than 3 years after the date of
filing of the partnership tax return and the filing of
the partners’ individual 2000 and 2001 Federal income
tax returns, but before the expiration of 3 years from
the dates the partners filed their individual 2002-04
Federal income tax returns.
R’s FPAA denied partnership losses in 2000. G-5’s
partners reported their distributive shares of partnership
losses for 2000 as capital loss carryovers on their
individual Federal income tax returns for 2002-04.
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Ps moved for judgment on the pleadings on the
ground that the period of limitations for assessing any
tax resulting from this partnership proceeding has
expired pursuant to secs. 6229(a) and 6501(a), I.R.C.
R contends the period of limitations for assessment has
not expired under sec. 6501(a), I.R.C., for 2002-04 and
he may assess taxes attributable to the adjustment of
partnership items for 2000 against the partners for
2002-04.
Held: Secs. 6229(a) and 6501(a), I.R.C., do not
preclude R from issuing the FPAA and adjusting
partnership items for 2000.
Held: Secs. 6229(a) and 6501(a), I.R.C., do not
preclude R from assessing against the partners an
income tax liability for the 2002-04 tax years
attributable to the carryforward by the partners of
their distributive shares of partnership losses for
2000 where the partnership item adjustments relate to
transactions completed and reported on G-5’s
partnership return in 2000.
Denis J. Conlon and Steven S. Brown, for petitioners.
William F. Castor, for respondent.
OPINION
HAINES, Judge: This case is a partnership-level action
based on a petition filed pursuant to section 6226.1 The sole
issue raised by petitioners’ motion for judgment on the pleadings
is whether the period of limitations for making assessments of
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, and Rule references
are to the Tax Court Rules of Practice and Procedure.
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income tax against individual partners, relative to partnership
items, has expired pursuant to sections 6501 and 6229.
The following facts are based upon the parties’ pleadings.
See Rule 120. They are stated solely for the purpose of deciding
the motion for judgment on the pleadings and not as findings of
fact in this case. See Fed. R. Civ. P. 52(a).
Background
G-5 Investment Partnership (G-5) filed a Form 1065, U.S.
Return of Partnership Income, for 2000 on October 4, 2001. Henry
M. Greene and his wife, Julie M. Greene (partners),2 were indirect
partners3 in G-5, and H. Miles Investments, L.L.C., was the tax
matters partner (TMP).4
On April 12, 2006, respondent issued a notice of final
partnership administrative adjustment (FPAA) for 2000. The FPAA
was issued more than 3 years after the filing of the partnership
return and the filing of the partners’ individual 2000 and 2001
2
For convenience, the Court uses the terms “partnership”
and “partner” without deciding whether a partnership existed, a
matter which respondent disputes.
3
The term “indirect partner” means a person holding an
interest in a partnership through one or more pass-thru partners.
Sec. 6231(a)(10). The term “pass-thru partner” means a
partnership, estate, trust, S corporation, nominee, or other
similar person through whom other persons hold an interest in the
partnership with respect to which proceedings under subch. C are
conducted. Sec. 6231(a)(9).
4
H. Miles Investments, L.L.C., is a single-member limited
liability company and a pass-thru partner with petitioner Henry
M. Greene as its member.
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Federal income tax returns, but before the expiration of 3 years
from the dates the partners filed their individual 2002-04
Federal income tax returns.
In the motion for judgment on the pleadings, petitioners
contend respondent is barred by the statute of limitations under
sections 6501(a) and 6229(a) from assessing an income tax
liability attributable to G-5’s partnership items for 2000
because the FPAA was issued more than 3 years after the
partnership and the partners filed their 2000 tax returns.
Respondent argues that because the FPAA was issued within 3 years
after the partners filed their 2002-04 Federal income tax
returns, the period of limitations has not expired for 2002-04
and he may assess income taxes attributable to the adjustment of
partnership items against the partners for those years.5
Petitioners do not dispute that they carried forward capital
losses attributable to G-5 partnership items incurred in 2000 to
their 2002-04 Federal income tax returns.
Discussion
A. Judgment on the Pleadings
Rule 120 provides that, after the pleadings in a case are
closed but within such time as not to delay the trial, a party
may move for judgment on the pleadings. The granting of a motion
5
In respondent’s objection to the motion for judgment on
the pleadings, he concedes the limitation periods are closed with
respect to the partners’ 2000 and 2001 tax years.
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for judgment on the pleadings is proper only where the pleadings
do not raise a genuine issue of material fact and the moving
party is entitled to judgment as a matter of law. Abrams v.
Commissioner, 82 T.C. 403, 408 (1984); Anthony v. Commissioner,
66 T.C. 367 (1976). The record shows, and the parties agree,
that there is no genuine issue of material fact.
B. Background
Section 6226 is one of a group of provisions concerning the
tax treatment of partnership items6 that was added to the Code by
the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. 97-248, sec. 402(a), 96 Stat. 648 (TEFRA partnership
provisions). The TEFRA partnership provisions have been amended
since their enactment in 1982 and are now contained in sections
6221 through 6234.
A taxpayer may seek judicial review of an FPAA by filing a
petition for readjustment of the partnership items with this
Court. Sec. 6226. The procedures under TEFRA parallel
deficiency procedures in that notice (the FPAA), and the right to
petition this Court must generally be given before assessments
6
Partnership items are items required to be taken into
account for the partnership’s taxable year, to the extent
regulations provide that such items are more appropriately
determined at the partnership level than at the partner level.
Sec. 6231(a)(3); sec. 301.6231(a)(3)-1, Proced. & Admin. Regs.
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can be made attributable to partnership items or affected items7.
See secs. 6223, 6225, 6226.
The Commissioner must give notice of both the beginning and
the ending of administrative proceedings. Sec. 6223(a). The
ending notice is the issuance of the FPAA, which must be mailed
no earlier than the 120th day after the notice of the beginning
of the administrative proceedings was mailed. Sec. 6223(d)(1).
TEFRA partnership provisions do not contain a period of
limitations within which an FPAA must be issued, unlike the
period of limitations applicable to the issuance of an FPAA to a
large partnership.8 Rhone-Poulenc Surfactants & Specialties, L.P.
v. Commissioner, 114 T.C. 533, 534 (2000).
7
An “affected item” is any item whose existence or amount
depends on any partnership item. Sec. 6231(a)(5). Examples of
affected items include: Capital loss carryforwards, net
operating loss carrybacks, investment tax credit carrybacks, a
partner’s basis in his partnership interest, passive losses, and
sec. 465 at-risk limitations. Harris v. Commissioner, 99 T.C.
121, 125 (1992); Dial USA, Inc. v. Commissioner, 95 T.C. 1, 5-6
(1990); Maxwell v. Commissioner, 87 T.C. 783, 790-791 (1986);
sec. 301.6231(a)(5)-1T, Temporary Proced. & Admin. Regs., 52 Fed.
Reg. 6790 (Mar. 5, 1987).
8
SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS.
(a) General Rule.-- * * * no adjustment under this
subpart to any partnership item for any partnership taxable
year may be made after the date which is 3 years after the
later of--
(1) the date on which the partnership return
for such taxable year was filed, or
(2) the last day for filing such return for such
year (determined without regard to extensions).
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C. Statute of Limitations in TEFRA Proceedings
Section 6501(a) provides that the amount of any tax shall be
assessed within 3 years from the date a taxpayer’s return is
filed.9 The term “return” for purposes of section 6501(a) does
not include a return of any person from whom the taxpayer has
received an item of income, gain, loss, deduction, or credit,
e.g., a partnership return. Sec. 6501(a). Section 6501 provides
the general period of limitations for assessing any tax imposed
by the Code.
Section 6229 establishes the minimum period for the
assessment of any tax attributable to partnership items (or
affected items) notwithstanding the period provided for in
section 6501. Section 6229 is not a stand-alone statute of
limitations but can extend the section 6501 period of limitations
with respect to the tax attributable to partnership items or
affected items. Rhone-Poulenc Surfactants & Specialties, L.P. v.
Commissioner, supra at 542-544; Estate of Quick v. Commissioner,
110 T.C. 172, 181-182 (1998), supplemented 110 T.C. 440 (1998).
Stated another way, sections 6229 and 6501 provide
alternative periods within which to assess tax with respect to
partnership items, with the later expiring period governing in a
particular case. AD Global Fund, LLC v. United States, 481 F.3d
9
There are exceptions to the 3-year period which are not
applicable in this case. See, e.g., sec. 6501(c), (d), (e), (f),
(h).
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1351 (Fed. Cir. 2007); Ginsburg v. Commissioner, 127 T.C. 75, 84-
85 (2006); Rhone-Poulenc Surfactants & Specialties, L.P. v.
Commissioner, supra at 534; Andantech L.L.C. v. Commissioner,
T.C. Memo. 2002-97, affd. in relevant part and remanded in part
331 F.3d 972 (D.C. Cir. 2003); CC&F W. Operations Ltd. Pship. v.
Commissioner, T.C. Memo. 2000-286, affd. 273 F.3d 402 (1st Cir.
2001).
The issuance of an FPAA suspends the running of any
applicable period of limitations under sections 6229 and 6501
until the FPAA adjustments become final or conclusively
established,10 after which the Commissioner has 1 year to assess
partners with the tax which properly accounts for their
distributive shares of the adjusted partnership items. Sec.
6229(d). The adjustment is a computational adjustment,11 without
notice, provided no partner-level determination is necessary. A
statutory notice of deficiency is not required for a
computational adjustment because, under TEFRA, the partnership
item has been resolved at the partnership level and cannot be
10
Adjustments may become final or conclusively established
as a result of an unchallenged FPAA, a judicial determination
pursuant to a sec. 6226 proceeding, a settlement agreement
pursuant to sec. 6224(c), or a request for administrative
adjustment pursuant to sec. 6227.
11
A computational adjustment is any change in a partner’s
tax liability to reflect the proper treatment of a partnership
item. Sec. 6231(a)(6).
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contested at the individual partner level.12 Secs. 6225, 6230(a),
6229(d); sec. 301.6231(a)(6)-1T(a)(1), Temporary Proced. & Admin.
Regs., 64 Fed. Reg. 3840 (Jan. 26, 1999).
Once the partnership proceeding is completed, if an affected
item requires determinations to be made at the partner level, the
Commissioner may issue a notice of deficiency to a partner for
additional deficiencies attributable to an affected item
requiring partner-level determinations. Sec. 6230(a); White v.
Commissioner, 95 T.C. 209, 211-212 (1990); sec. 301.6231(a)(6)-
1T(a)(2), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3840
(Jan. 26, 1999).
Petitioners do not dispute that the FPAA was issued within 3
years of the time they filed their 2002-04 individual income tax
returns. Petitioners do dispute whether respondent may assess a
tax liability for the 2002-04 taxable years where the underlying
partnership item adjustments relate to transactions that were
completed and reported on G-5’s partnership return in 2000, a
year closed to assessment by section 6501.
In deficiency proceedings, section 6501 does not preclude an
examination into events occurring in prior years which are closed
to assessment for the purpose of correctly determining income tax
12
Challenges to readjustments of affected items requiring
partner-level determinations are not precluded by the finality of
a partnership proceeding, although relitigation of distributable
partnership income is barred. Woody v. Commissioner, 95 T.C.
193, 208 (1990).
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liability for years which are still open. Sec. 6214(b); Hill v.
Commissioner, 95 T.C. 437, 445-446 (1990); Calumet Indus., Inc.
v. Commissioner, 95 T.C. 257, 276-277 (1990) (the Commissioner
may recompute the amount of a taxpayer’s loss for a source year
closed under the period of limitations to determine whether a net
operating loss was incurred, and, if so, the amount available in
a year open under the period of limitations); Mennuto v.
Commissioner, 56 T.C. 910, 922-923 (1971) (the statute of
limitations does not prevent the recomputation of the investment
tax credit carryover from a barred year in order to determine the
tax due for an open year). The critical element is that the
deficiency being determined be for a year on which the period of
limitations has not run.
Although the rule, which allows the review of a year closed
by the period of limitations to adjust or recompute items that
would cause a tax liability in an open year, pertains to
deficiency proceedings, there is no TEFRA partnership provision
that precludes extending this rule to partnership proceedings.
Petitioners offer no reason the same rule should not apply to the
assessment of a tax liability arising from a TEFRA partnership
proceeding. The Court has jurisdiction to determine all
partnership items for the taxable year to which the FPAA relates
and the proper allocation of such items among the partners. Sec.
6226(f). Therefore, after the Court’s decision in this TEFRA
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partnership proceeding becomes final, respondent may assess a tax
liability for a year open under the period of limitations, even
though the underlying partnership item adjustments are
attributable to transactions that were completed in a year for
which assessments of the partners’ tax is barred because of the
expiration of the period of limitations.
In this case, although the periods prescribed by sections
6229(a) and 6501(a) have run for 2000 and 2001, the FPAA
determined adjustments to partnership items (capital losses) that
may have income tax consequences to the partners at the partner
level in 2002-04, years open under the period of limitations. If
the adjustments to partnership items in the FPAA are sustained,
respondent may assess a computational adjustment or determine a
deficiency against the partners for those open years. However,
respondent concedes that, because the tax years 2000 and 2001 are
closed, respondent is barred from assessing any deficiencies,
penalties or additions to tax with respect to the partners’ 2000
and 2001 tax years.
This Court finds that respondent’s issuance of the FPAA on
April 12, 2006, for G-5’s 2000 tax year was not barred by any
period of limitations13 and that the period of limitations for
assessing taxes attributable to partnership items for
13
See Kligfeld Holdings v. Commissioner, 128 T.C. ___
(2007).
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petitioners’ 2002-04 taxable years is open. Accordingly, this
Court will deny petitioners’ motion for judgment on the
pleadings. To reflect the foregoing,
An appropriate order denying
petitioners’ motion for judgment
on the pleadings will be issued.