Bedrosian v. Comm'r , 94 T.C.M. 614 ( 2007 )

T.C. Memo. 2007-375
UNITED STATES TAX COURT
JOHN C. BEDROSIAN AND JUDITH D. BEDROSIAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12341-05. Filed December 26, 2007.
Richard E. Hodge, William E. Johnson, Steven R. Mather, and
Elliott H. Kajan, for petitioners.
Michael L. Boman, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: This case is before the Court on
respondent’s motion to dismiss for lack of jurisdiction on the
ground that the notice of deficiency is invalid and prohibited by
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section 6225.1 See generally Kligfeld Holdings v. Commissioner,
128 T.C. 192 (2007), and Notice 2000-44, 2000-2 C.B. 255, for a
general description of the transaction in this case. Petitioners
petitioned the Court to redetermine respondent’s determination of
a $3,498,882 deficiency in their 1999 Federal income tax, a
$134,781.15 addition to tax pursuant to section 6651(a)(1) for
1999, a $1,392,552.80 accuracy-related penalty pursuant to
section 6662(a) for 1999, a $12,137 deficiency in their 2000
Federal income tax, and a $4,854.80 accuracy-related penalty
pursuant to section 6662(a) for 2000.2
The issue for decision is whether the Court lacks
jurisdiction to consider partnership and affected items in
response to a notice of deficiency issued prior to the completion
of partnership proceedings.
Background
Petitioners are husband and wife, and they resided in Los
Angeles, California, when their petition was filed.
JCB Stone Canyon Investments, LLC (JCB), a single member
limited liability company, and Stone Canyon Investors, Inc.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
2
This case involves the same or related parties as in
docket Nos. 24581-06 and 9664-07. Docket No. 24581-06 is based
on an affected items notice sent to John and Judith Bedrosian.
Docket No. 9664-07 is a partnership-level proceeding concerning
the validity of a notice of final partnership administrative
adjustment.
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(Investors), an S corporation wholly owned by John and Judith
Bedrosian as community property, purported to form a partnership,
Stone Canyon Partners (Stone Canyon). The validity of the
partnership is a matter of dispute between the parties. The use
of terms in this opinion, for purposes of the pending motion,
does not express any view on the validity of any of the entities
mentioned. Soward v. Commissioner, T.C. Memo. 2006-262.
In November 1999, JCB purported to purchase and sell options
on foreign currency. JCB then purported to contribute the
purchased options, the sold options, and Texas Instruments stock
to Stone Canyon, on behalf of itself and on behalf of Investors.
In calculating the basis in the interests of JCB and Investors,
the Bedrosians did not treat the options purportedly sold by JCB
as a liability subject to the provisions of section 752.
In December 1999, JCB purported to transfer its interest in
Stone Canyon to Investors. Investors acquired the Texas
Instruments stock previously purportedly contributed by JCB to
Stone Canyon. Investors claimed a basis in the Texas Instruments
stock based on the basis of the stock “in the hands” of Stone
Canyon.
On their 1999 Federal income tax return, petitioners
reported an ordinary loss of $175,000 for 1999 related to their
interest in Stone Canyon. Additionally, petitioners reported a
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distributive share of long-term capital loss from Investors of
$17,250,088 for 1999.
On April 8, 2005, respondent issued a notice of final
partnership administrative adjustment (FPAA) to the partners of
Stone Canyon for 1999. Eleven days after the FPAA was issued,
respondent issued petitioners a statutory notice of deficiency
for 1999 and 2000. Petitioners timely petitioned the Court to
review the notice of deficiency.
Discussion
I. Respondent’s Motion To Dismiss
The Tax Court is a court of limited jurisdiction, and we may
exercise our jurisdiction only to the extent provided by
Congress. See sec. 7442; see also GAF Corp. & Subs. v.
Commissioner, 114 T.C. 519, 521 (2000). We have jurisdiction to
redetermine a deficiency if a valid notice of deficiency is
issued by the Commissioner and if a timely petition is filed by
the taxpayer. GAF Corp. & Subs. v. Commissioner, supra at 521.
The partnership-level proceeding described in sections 6221
through 6234 requires that all challenges to adjustments of
partnership items contained in the FPAA are to be made in a
single unified proceeding. Under these procedures, the tax
treatment of any partnership item shall be determined at the
partnership level. Sec. 6221.
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Pursuant to section 6226, the TMP of a partnership
may file a petition for a readjustment of the partnership items
for a taxable year with the Tax Court, the District Court of
the United States for the district in which the partnership’s
principal place of business is located, or the Court of Federal
Claims, within 90 days after the day on which a notice of an FPAA
is mailed to the TMP. Sec. 6226(a). If the tax matters partner
does not file a readjustment petition under subsection (a) of
section 6226 with respect to any FPAA, any notice partner may,
within 60 days after the close of the 90-day period set forth in
subsection (a), file a petition for a readjustment of the
partnership items for the taxable years involved with any of the
courts described in subsection (a). Sec. 6226(b).
The Commissioner generally must wait until a partnership-
level proceeding is over to determine a liability attributable to
a partnership item. See sec. 6225(a); Maxwell v. Commissioner,
87 T.C. 783, 788 (1986). Section 6225(a) provides:
SEC. 6225(a). RESTRICTION ON ASSESSMENT AND
COLLECTION.--Except as otherwise provided in this
subchapter, no assessment of a deficiency attributable to
any partnership item may be made (and no levy or proceeding
in any court for the collection of any such deficiency may
be made, begun, or prosecuted) before--
(1) the close of the 150th day after the day on
which a notice of a final partnership administrative
adjustment was mailed to the tax matters partner, and
(2) if a proceeding is begun in the Tax Court
under section 6226 during such 150-day period, the
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decision of the court in such proceeding has become
final.
Additionally, the Commissioner generally must follow the
deficiency procedures before assessing a liability related to an
affected item that requires a partner-level determination. See
sec. 6230(a)(2). Under section 6231(a)(3), (4), and (5),
“partnership item”, “nonpartnership item”, and “affected item”
are defined as follows:
(3) Partnership item.--The term
“partnership item” means, with respect to a
partnership, any item required to be taken
into account for the partnership’s taxable
year under any provision of subtitle A to the
extent regulations prescribed by the
Secretary provide that, for purposes of this
subtitle, such item is more appropriately
determined at the partnership level than at
the partner level.
(4) Nonpartnership item.--The term
“nonpartnership item” means an item which is
(or is treated as) not a partnership item.
(5) Affected item.--The term “affected
item” means any item to the extent such item
is affected by a partnership item.
Because the tax treatment of affected items depends on
partnership-level determinations, affected items cannot be tried
as part of a partner’s personal tax case until the resolution of
the partnership proceeding. GAF Corp. & Subs. v. Commissioner,
supra at 526 (citing Dubin v. Commissioner, 99 T.C. 325, 328
(1992)). Thus, the Court does not have jurisdiction to consider
partnership items or affected items while a partnership
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proceeding is pending. Id. at 528; Maxwell v. Commissioner,
supra at 788.
The notice of deficiency was issued 11 days after the FPAA;
therefore the partnership proceeding was still pending. See sec.
6226(b). We must therefore decide whether any of the items
giving rise to any part of the deficiencies in this case are
partnership items or affected items.
The parties are in agreement that all of the items for 1999
are either partnership items or affected items. We agree. As a
result, we do not have jurisdiction over those items because the
partnership proceeding was pending when the notice of deficiency
was issued. See Maxwell v. Commissioner, supra at 788.
For 2000, the parties are not in agreement as to the
characterization of all of the items. Respondent argues that the
claim on petitioners’ return for that year to an itemized
deduction of $525,000 for legal, accounting, consulting, and
advisory fees related to Stone Canyon is an affected item because
the partnership was a sham. Although the partnership did not pay
the fee, respondent argues that the deduction is nevertheless an
affected item because the disallowance is dependent on the
partnership’s being a sham. In Goldberg v. Commissioner, T.C.
Memo. 2007-81, we held that such fees were neither a partnership
item nor an affected item, and therefore we retained jurisdiction
over them. The deduction was not claimed on the partnership
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return nor claimed by petitioners as their distributive share of
any deduction on the partnership return. The disallowance of the
deduction at the individual level did not flow from a deduction
disallowed at the partnership level, nor is the legality of the
deduction at the individual level necessarily affected by a
determination at the partnership level. Id.
Respondent’s motion to dismiss for lack of jurisdiction will
be granted in part and denied in part.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and, to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
An appropriate order will
be issued.