Lawrence v. and Katharine T. Brookes v. Commissioner

108 T.C. No. 1
UNITED STATES TAX COURT
LAWRENCE V. AND KATHARINE T. BROOKES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11770-96. Filed January 2, 1997.
Ps were partners in a partnership that was the
subject of a partnership proceeding. R mailed a notice
of final partnership administrative adjustment (FPAA)
for taxable years 1983 and 1984 to the tax matters
partner (TMP). The TMP filed a petition, and Ps filed
a motion to participate in the partnership proceeding,
which this Court granted. The TMP settled the
partnership case and certified that no party objected
to the settlement. Ps did not receive notice of the
settlement before the decision was entered by this
Court but received notice of the decision 4 days after
it was entered. Ps object to the settlement and claim
interests adverse to those of the TMP. R assessed
deficiencies in Ps' Federal income taxes for 1983 and
1984 as "computational adjustments" based on the
partnership adjustments. See sec. 6231(a)(6), I.R.C.
Thereafter, R mailed Ps a notice of deficiency for
"affected items", determining additions to tax for 1980
and 1983. Ps filed a petition for redetermination with
respect to the affected items deficiency and the 1983
and 1984 assessments attributable to their share of
partnership items. R filed a motion to dismiss for
lack of jurisdiction and to strike the portion of the
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petition that attempts to put the 1983 and 1984
assessments into issue. Ps argue they were denied due
process in the partnership proceeding because they did
not have an opportunity to be heard and did not have
the right to appeal from a stipulated decision. Ps
filed a cross-motion to dismiss for lack of
jurisdiction because R did not issue a notice of
deficiency for the partnership adjustments before
assessment.
Held: We lack jurisdiction in this affected items
proceeding to redetermine the deficiencies resulting
from the partnership adjustments for 1983 and 1984.
Held, further, Ps were not denied their rights to
procedural due process based on their lack of notice of
the settlement even though their position was adverse
to that of the TMP and they did not have the right to
appeal. Ps could have moved to vacate the decision in
the partnership proceeding upon receiving notice of
that decision. Held, further, R is not required to
issue a notice of deficiency with respect to
partnership items upon the completion of a partnership
proceeding before assessing deficiencies for the
partnership adjustments.
Lawrence V. Brookes, for petitioners.
Allan D. Hill, for respondent.
OPINION
GERBER, Judge: Respondent issued a notice of deficiency for
petitioners’ 1980 and 1983 tax years, determining additions to
tax attributable to petitioners' partnership interest in
Barrister Equipment Associates Series 122, a limited partnership
(Barrister). The notice of deficiency was issued following the
conclusion of a partnership proceeding involving Barrister's 1983
and 1984 taxable years. In the parlance of partnership
proceedings, additions to tax are described as affected items and
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come into play following the completion of the partnership
proceeding. In response to the affected items notice of
deficiency, petitioners filed a petition with this Court. At the
time their petition was filed, petitioners resided in Berkeley,
California. Petitioners attempted to place in issue not only the
additions to tax but also the adjustments to their 1983 and 1984
income tax attributable to their partnership items determined in
the Barrister partnership proceeding. Respondent has not issued
a notice of deficiency to petitioners for 1984.
Respondent moved to dismiss, for lack of jurisdiction, the
portion of the petition relating to the 1983 and 1984 tax and
interest assessed as a computational adjustment in the wake of
the Barrister proceeding. Conversely, petitioners, by a cross-
motion, seek a dismissal for lack of jurisdiction as to the
assessment of the 1983 and 1984 tax and interest on the ground
that respondent failed to issue a notice of deficiency for the
1983 and 1984 tax relating to the Barrister partnership items
prior to the assessment. In addition, petitioners moved to
restrain collection of the 1983 and 1984 assessed tax and
interest.
A threshold question that is key to resolving these motions
is whether we have jurisdiction to entertain controversies
involving petitioners’ assessed 1983 and 1984 partnership income
tax liabilities in the context of this affected items proceeding,
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which is separate from the partnership proceeding involving
Barrister.
Background
Notices of final partnership administrative adjustment
(FPAA) for 1983 and 1984 were mailed on September 5, 1989, to
Barrister and its general partner/tax matters partner (TMP). The
TMP timely filed a petition on November 17, 1989. Petitioners
here moved to participate in the Barrister partnership
proceeding, and this Court granted their motion. The Barrister
proceeding concluded by the entry of an agreed decision on
January 5, 1995, pursuant to an agreement between respondent and
the TMP. The TMP, by means of its execution of a stipulated
decision document, certified that no party objected to the entry
of the decision. Respondent assessed tax and interest against
petitioners for 1983 and 1984 reflecting the treatment of their
share of partnership items in accordance with the decision
entered in the Barrister proceeding.
Petitioners herein claim that they were neither given notice
of, nor were in agreement with, the settlement between respondent
and the TMP. Petitioners further contend that respondent knew,
at the time of the execution of the stipulated decision, that
they had not received notice of the settlement.1 Petitioners,
however, did receive a copy of the decision on January 9, 1995, 4
1
We assume for purposes of these motions that petitioners'
claims can be substantiated.
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days after its entry. In this regard, petitioners claim that
there was a fraud upon the Court as to the entry of the decision
in the partnership proceeding. Respondent counters that,
assuming the Court was fraudulently misled about the notification
of participating partners, we lack jurisdiction to consider such
matters in the context of petitioners’ affected items proceeding.
Petitioners also claim that they were denied due process. Thus,
petitioners argue that the decision in the Barrister partnership
proceeding is not res judicata and binding as to them.
In addition to their contentions as to the validity of the
prior partnership proceeding, petitioners also maintain that
respondent was required to issue a notice of deficiency before
assessing and attempting to collect the 1983 and 1984 income tax
attributable to their Barrister partnership items. In other
words, petitioners interpret the Internal Revenue Code as
requiring respondent to issue a notice of deficiency before
assessing a computational adjustment reflecting the partnership
items, even though a partnership proceeding has been completed
pursuant to sections 6221 through 6233.2
Discussion
2
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the periods under
consideration, and Rule references are to the Tax Court Rules of
Practice and Procedure.
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Initially, we note that we have jurisdiction to consider the
question of our jurisdiction over the parties or subject matter.
Pyo v. Commissioner, 83 T.C. 626, 632 (1984).
1. Res Judicata--Petitioners contend that the doctrine of
res judicata does not bar relitigation of the Barrister
partnership items because they are presenting issues regarding
those items not addressed in the partnership proceeding.
Accordingly, they argue that they are not bound by the Barrister
proceeding. Respondent, without agreeing with their underlying
arguments, argues that petitioners should have moved this Court
to reconsider or vacate the decision in the Barrister partnership
proceeding. Petitioners have framed the issue in a manner that
suggests two separate paths of inquiry to determine whether we
have jurisdiction over the partnership items in this proceeding.
First, we must analyze the statutory partnership provisions to
determine whether we can consider the tax assessments from a
partnership proceeding in petitioners' affected items proceeding.
If we decide that the statutory provisions do not offer the
relief sought, we then consider petitioners’ constitutional claim
that they were deprived of procedural due process.
Sections 6221 through 6231 provide for a unified partnership
proceeding to determine the tax treatment of partnership items
separate from and independent of a partner's deficiency
proceeding involving nonpartnership items. Maxwell v.
Commissioner, 87 T.C. 783, 787-788 (1986); H. Conf. Rept. 97-760,
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at 600 (1982), 1982-2 C.B. 600, 662. Consequently, the portion
of any deficiency attributable to partnership items cannot be
considered in a partner's personal case and must be considered
solely in a partnership proceeding. Secs. 6221, 6226(a); Maxwell
v. Commissioner, supra at 788. Thus, we lack jurisdiction to
redetermine a deficiency attributable to partnership items in a
partner-level proceeding involving nonpartnership items. Powell
v. Commissioner, 96 T.C. 707, 712 (1991); Woody v. Commissioner,
95 T.C. 193, 208 (1990); Saso v. Commissioner, 93 T.C. 730, 734
(1989); Maxwell v. Commissioner, supra at 788.
Section 6231(a)(3) defines a "partnership item" as any item
required to be taken into account for the partnership's taxable
year to the extent that the Secretary provides by regulations
that the item is more appropriately determined at the partnership
level than at the partner level. N.C.F. Energy Partners v.
Commissioner, 89 T.C. 741, 743 (1987). Partnership items include
each partner's proportionate share of the partnership's aggregate
income, gain, loss, deduction, or credit. Sec. 6231(a)(3); sec.
301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs.
“Affected items” are nonpartnership items, defined in
Crowell v. Commissioner, 102 T.C. 683, 689 (1994), as follows:
Affected items are defined under section
6231(a)(5) as any item to the extent such item is
affected by a partnership item. White v. Commissioner,
95 T.C. 209, 211 (1990). The first type of affected
item is a computational adjustment made to record the
change in a partner’s tax liability resulting from
adjustments reflecting the proper treatment of
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partnership items. Sec. 6231(a)(6); White v.
Commissioner, supra. Once partnership level
proceedings are completed, respondent is permitted to
assess a computational adjustment against a partner
without issuing a deficiency notice. Sec. 6230(a)(1).
The second type of affected item requires a
partner level determination. N.C.F. Energy Partners v.
Commissioner, 89 T.C. 741, 744 (1987). Section
6230(a)(2)(A)(i) provides that the normal deficiency
procedures apply to those affected items which require
partner level determinations. The additions to tax for
negligence and valuation overstatement are affected
items requiring factual determinations at the
individual partner level. N.C.F. Energy Partners v.
Commissioner, supra at 745. It is well settled that we
lack jurisdiction to consider partnership items in an
affected items proceeding. Saso v. Commissioner, 93
T.C. 730 (1989).
Although petitioners allege error concerning affected items
(additions to tax), they are not pursuing the merits of that
controversy at this time. Instead, they ask us to redetermine
tax attributable to partnership items because they did not
receive notice of the settlement of those items.
In Crowell v. Commissioner, supra, we considered the effect
of a taxpayer’s lack of notice of the partnership proceeding on
the validity of an affected items notice of deficiency. In
Crowell, the taxpayers argued that they had not received notice
of the partnership-level proceeding from respondent in accordance
with section 6223(a), and no petition was filed to contest the
FPAA. We reasoned that the partnership items set forth in the
Crowell FPAA would become nonpartnership items under section
6223(e) if the taxpayers had not been sent proper notice. See
sec. 6231(b)(1)(D). We concluded that under these circumstances,
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whether sufficient notice of the partnership-level proceeding had
been provided to the taxpayers could be considered in a partner-
level proceeding. As noted above, petitioners do not presently
seek to question the affected items set forth in the notice of
deficiency issued to them. Further, the lack of notice here does
not concern an alleged failure by respondent to comply with
section 6223, but the TMP’s failure to notify petitioners and
obtain their approval of the settlement between the TMP and
respondent. That alleged lack of notice does not permit the
conversion of a partnership item into a nonpartnership item. See
sec. 6231(b) and (c). Furthermore, petitioners became
participating partners in the Barrister proceeding and received
notification of the entry of the stipulated decision at a time
when they could have sought to have that decision reconsidered or
vacated.
Petitioners do not present, nor have we found, any authority
permitting us to redetermine partnership items in this affected
items proceeding. Section 6226(f), which governs judicial review
of adjustments to partnership items, grants jurisdiction over all
partnership items and the proper allocation of the partnership
items among the partners to the Court in which a petition is
filed with respect to the FPAA. Our jurisdiction for the instant
proceeding is based on the issuance of a notice of deficiency
with respect to nonpartnership items.
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Notwithstanding the merits of petitioners' res judicata
argument, we lack jurisdiction over the Barrister partnership
items. Therefore, we will grant respondent's motion to dismiss
and strike. Allowing petitioners to challenge the decision in
the partnership proceeding in their affected items case would
ignore congressional intent that there be a unified, single
resolution of partnership items.
2. Due Process--Petitioners argue that allowing the
assessment of the 1983 and 1984 tax based on the decision in the
Barrister partnership proceeding deprives them of their right to
procedural due process. Petitioners contend that their interests
are adverse to those of the TMP and that the stipulated decision
by the TMP denied their right to a trial and to appeal the
decision.
Our jurisdictional inability to address the tax assessment
attributable to partnership items in the context of this
deficiency proceeding does not violate petitioners' rights to due
process. We have found that the TEFRA partnership provisions
generally do not violate taxpayers' rights to due process. See
1983 Western Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 51,
64 (1990), affd. without published opinion 995 F.2d 235 (9th Cir.
1993). As a general rule, a taxpayer possesses a
constitutionally cognizable property interest invoked by the
assessment and collection of taxes. Accordingly, petitioners
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must receive an opportunity to present their case. Brinkerhoff-
Faris Trust & Savings Co. v. Hill, 281 U.S. 673 (1930).
Although petitioners did not receive notice of settlement,
they did receive notice of the entry of the decision in the
partnership-level proceeding. Upon entry of the decision,
petitioners had 30 days in which to file a motion to vacate that
decision. Rule 162. After 30 days, special leave of Court is
required to file such a motion. Granting a motion for leave lies
within the sound discretion of the Court. Heim v. Commissioner,
872 F.2d 245, 246 (8th Cir. 1989), affg. T.C. Memo. 1987-1.
A decision generally becomes final after 90 days unless
appealed. Sec. 7481(a)(1). Once a decision of this Court
becomes final, we may still vacate the decision, but only in
certain narrowly circumscribed situations. Helvering v. Northern
Coal Co., 293 U.S. 191 (1934). Petitioners argue that a fraud
was committed upon the Court. This Court may vacate a final
decision if obtained through fraud upon the Court, Abatti v.
Commissioner, 859 F.2d 115, 118 (9th Cir. 1988), affg. 86 T.C.
1319 (1986); Senate Realty Corp. v. Commissioner, 511 F.2d 929,
931 (2d Cir. 1975); Stickler v. Commissioner, 464 F.2d 368, 370
(3d Cir. 1972); Casey v. Commissioner, T.C. Memo. 1992-672. If
the Barrister decision is to be vacated, however, it cannot be
accomplished in the context of petitioners’ affected items
proceeding.
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3. Is a Separate Deficiency Notice Required As a
Prerequisite to Assessment of Partnership Items?--Normally, a
taxpayer’s income tax liability for each year is separate and
subject to resolution in a single administrative and/or legal
proceeding. In 1982, Congress provided for a separate, unified
partnership-level proceeding, thereby creating the possibility
that an individual partner may be involved in two or more
separate proceedings for any taxable year. Respondent’s
determinations of partnership and nonpartnership items are
subject to differing notice requirements to the partners.
Partners receive notices of deficiency for their nonpartnership
and/or affected items. At the partnership level, the tax matters
partner and notice partners receive an FPAA. The appropriate
notice must first be issued before respondent can assess either
the partnership or the nonpartnership items.
Petitioners here question the separate nature of partnership
and partner-level proceedings vis-a-vis respondent’s ability to
assess a computational adjustment reflecting partnership items
without first issuing a notice of deficiency to the partner. In
essence, petitioners contend that even though respondent issued
an FPAA and a partnership proceeding (in which petitioners
participated) was begun and concluded, respondent must issue a
separate notice of deficiency to petitioners prior to assessing
the partnership items.
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Courts have repeatedly held that the normal deficiency
procedures, including the notice of deficiency, do not apply to
the allocation of partnership items among partners. Randell v.
United States, 64 F.3d 101, 107 (2d Cir. 1995); Pack v. United
States, 992 F.2d 955, 957-958 (9th Cir. 1993); Harris v.
Commissioner, 99 T.C. 121, 125 (1992), affd. 16 F.3d 75 (5th Cir.
1994); Sente Inv. Club Partnership v. Commissioner, 95 T.C. 243,
249 (1990). Despite this long line of cases, petitioners argue
that a notice of deficiency is required because the partnership
provisions do not vest respondent with authority to assess
partnership items against the partners upon the conclusion of a
partnership proceeding. Thus, respondent must rely on section
6201 for that authority. Petitioners reason that since section
6201(d) refers to the deficiency procedures of subchapter B,
respondent must comply with that subchapter for all assessments,
including assessments attributable to partnership items.
Section 6230(a)(1) provides that, in general, the deficiency
notice procedures do not apply to the assessment of computational
adjustments. A "computational adjustment" is
"the change in the tax liability of a partner which
properly reflects the [tax] treatment * * * of a
partnership item". Sec. 6231(a)(6). In short, a
computational adjustment reflects the amount of change
in the tax liability of a partner that is assessed
after a FPAA proceeding becomes final * * *
Palmer v. Commissioner, T.C. Memo. 1992-352, affd. without
published opinion 4 F.3d 1000 (11th Cir. 1993). However,
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petitioners contend that section 6230(a)(1) should not be read to
exempt from the deficiency procedures of subchapter B a
computational adjustment reflecting the treatment of partnership
items. Petitioners suggest that the term "tax liability" in the
definition of computational adjustment refers to the amount due
after respondent assesses a deficiency in accordance with
subchapter B.
Section 6225(a) restricts assessment of a deficiency
attributable to a partnership item until completion of the
partnership proceedings, while section 6230(a) makes subchapter B
procedures inapplicable to that assessment. Thus, contrary to
petitioners' argument, section 6201 assessment authority is not
limited to assessment under subchapter B procedures. The mere
reference to subchapter B in section 6201(d) does not mean that
respondent lacks assessment authority as to partnership items
unless respondent adheres to subchapter B procedures.
Petitioners argue that respondent must comply with section 6213,
which requires a notice of deficiency prior to assessment.
However, paragraph (3) of section 6213(h) refers to section
6230(a) for the applicability of the notice requirement to
deficiencies attributable to partnership items. In addition,
section 6216(4) provides: "For procedures relating to partnership
items, see subchapter C." Those references belie petitioners'
contention that respondent must comply with the deficiency
procedures of subchapter B before assessing a computational
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adjustment. In addition, requiring a notice of deficiency as a
predicate for such assessment of partnership items after the
conclusion of a partnership proceeding would ignore congressional
intent to provide for a separate partnership proceeding.
We note that petitioners concede that a notice of deficiency
with respect to partnership items would not give taxpayers the
right to relitigate the partnership items. In addition, the
partnership provisions safeguard due process rights by providing
taxpayers with notice of the partnership adjustment and an
opportunity to participate in the partnership proceeding.
Petitioners’ approach would add a procedural step that creates a
mere formality and does not provide any additional due process
protection.
In light of the lengthy list of cases that hold that a
notice of deficiency is not required before assessment of a
computational adjustment, we find petitioners' argument that such
a notice is required unpersuasive. We will deny petitioners'
motion to dismiss for lack of jurisdiction. Because the
assessment of petitioners’ 1983 and 1984 income tax and interest
based on the decision entered in the Barrister proceeding is not
within our subject-matter jurisdiction in this case, it follows
that we have no authority to restrain collection of the assessed
1983 and 1984 income tax and interest.
To reflect the foregoing,
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An order granting respondent’s
motion and denying petitioners’ motions
will be issued.