Henry and Susan F. Samueli v. Commissioner

132 T.C. No. 16UNITED STATES TAX COURT
HENRY AND SUSAN F. SAMUELI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13953-06. Filed May 18, 2009.
Ps allege they overpaid their Federal income tax
for 2003 on account of adjustments from a TEFRA
partnership. Ps argue that the adjustments are no
longer partnership items, in part because Ps filed an
amended individual income tax return for 2003 (amended
return) that qualifies under sec. 6227, I.R.C., as an
administrative adjustment request filed on behalf of a
partner (partner AAR). Sec. 301.6227(d)-1(a), Proced.
& Admin. Regs., requires that a taxpayer file a partner
AAR on a form prescribed by R and in accordance with
the form’s instructions. R prescribed the form as Form
8082, Notice of Inconsistent Treatment or
Administrative Adjustment Request (AAR), and stated in
the form’s instructions that a taxpayer must explain in
detail on the form the reasons for the administrative
adjustment reported on the form. R stated in the
instructions and in the referenced regulations that the
taxpayer must file the original form with the
taxpayer’s amended income tax return and a copy of the
form with (as applicable here) the service center where
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the partnership files its tax return. Ps assert that
the amended return qualified as a partner AAR because
they substantially complied with the requirements for a
partner AAR.
Held: The amended return did not qualify as a
partner AAR because the return neither met the
requirements for a partner AAR nor substantially
complied with those requirements. Accordingly, the
adjustments remain partnership items.
Nancy L. Iredale, for petitioners.
Miles B. Fuller and Louis B. Jack, for respondent.
OPINION
KROUPA, Judge: Respondent moves the Court to dismiss part
of this case for lack of jurisdiction. That part relates to
petitioners’ allegation of a reduction in their taxable income
for 2003 on account of adjustments from H&S Ventures, LLC (H&S
Ventures), a limited liability company treated as a partnership
for Federal tax purposes. We lack jurisdiction if petitioners’
amended individual income tax return for 2003 (amended return)
did not qualify under section 62271 as an administrative
adjustment request (AAR) filed on behalf of a partner (partner
AAR). We hold that the amended return did not qualify as a
partner AAR, and we shall dismiss the referenced part of this
1
Section references are to the applicable versions of the
Internal Revenue Code, unless otherwise stated.
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case. We need not and do not decide whether we would have
jurisdiction if the amended return qualified as a partner AAR.
Background
I. Petitioners
Petitioners are husband and wife. They filed a joint
Federal income tax return for 2003. They resided in California
when they filed the petition.
II. H&S Ventures
H&S Ventures was a limited liability company treated as a
partnership for Federal tax purposes. Each petitioner owned 10
percent of H&S Ventures, and petitioners’ grantor trust owned the
remaining 80 percent. H&S Ventures filed a Form 1065, U.S.
Return of Partnership Income, for 2003.
III. Respondent’s Notice of Deficiency
Respondent issued a notice of deficiency to petitioners that
reflected respondent’s determination of a $171,026 deficiency for
2001 and a $2,177,532 deficiency for 2003 in petitioners’ Federal
income taxes. Neither the determination nor the deficiencies
reflected any adjustment to H&S Ventures’ Form 1065. Petitioners
challenged respondent’s determination by timely filing a petition
with the Court. The Court redetermined that determination in
Samueli v. Commissioner, 132 T.C. (2009).
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IV. Amended Schedules K-1
Petitioners received from H&S Ventures amended Schedules
K-1, Partner’s Share of Income, Credits, Deductions, etc., for
2003 after petitioners filed their petition. The amended
Schedules K-1 reflected a $318,671 reduction in petitioners’
gross income and a $86,042 reduction in their itemized
deductions. The reductions were purportedly attributable to a
calculation error discovered during an examination of H&S
Ventures by the State of California.
V. Amended Tax Returns
Petitioners mailed the amended return to respondent’s
service center in Fresno, California (the service center where
petitioners were required to file their individual income tax
return). The amended return was prepared by a certified public
accounting firm and stated that petitioners’ “U.S. INDIVIDUAL
INCOME TAX RETURN FOR THE YEAR ENDED 12/31/2003 IS BEING AMENDED
TO PROPERLY REFLECT AMENDED SCHEDULES K-1 RECEIVED FROM H&S
VENTURES.” The amended return specified that petitioners were
reducing their originally reported gross income to reflect the
net long-term capital gain income reported on the amended
Schedules K-1. The amended return specified that petitioners
were reducing their originally reported itemized deductions to
reflect a change in the non-cash contribution limitation
applicable to their now reduced income. The amended return
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claimed a refund of $33,461. The amended return included a copy
of petitioners’ Form 1040, U.S. Individual Income Tax Return, for
2003 as amended and a copy of petitioners’ Form 1040 for 2003 as
originally filed. The amended return was three pages in length
(exclusive of the Forms 1040), and each page of the amended
return was stamped “AMENDED.” The amended return did not include
copies of the amended Schedules K-1.
H&S Ventures filed an amended Form 1065 for 2003 shortly
after petitioners mailed the amended return to respondent.
VI. Second Amendment to Petition
Petitioners filed with the Court a second amendment to
petition after they filed the amended return. Petitioners allege
in the second amendment to petition that they overpaid their tax
for 2003 by the $33,461 and are entitled to a refund of that
amount plus statutory interest.
Discussion
I. Jurisdiction
Respondent moves to dismiss part of this case for lack of
jurisdiction. We begin our analysis with some general tenets of
our jurisdiction. This Court like other Federal courts is a
Court of limited jurisdiction. See Ginsberg v. Commissioner,
130 T.C. 88, 91 (2008). Whether we have jurisdiction over the
subject matter of a dispute is an issue that either party may
raise at any time. See Charlotte’s Office Boutique, Inc. v.
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Commissioner, 121 T.C. 89, 102 (2003), affd. 425 F.3d 1203 (9th
Cir. 2005). Petitioners bear the burden of proving that we have
jurisdiction to decide the propriety of the adjustments from H&S
Ventures (subject adjustments) because petitioners invoke our
jurisdiction over that matter. See David Dung Le, M.D., Inc. v.
Commissioner, 114 T.C. 268, 270 (2000), affd. 22 Fed. Appx. 837(9th Cir. 2001). Petitioners must therefore establish
affirmatively all facts giving rise to our jurisdiction to
satisfy that burden. See id.II. TEFRA in General
We turn to some general tenets involving partnerships.
Partnerships are not subject to Federal income tax. See sec.
701. Partnerships are nevertheless required to file annual
information returns reporting their partners’ distributive shares
of income, gain, loss, deductions, or credits. See sec. 6031;
see also Randell v. United States, 64 F.3d 101, 103 (2d Cir.
1995). Partners are required to report their distributive shares
of those items on their individual Federal income tax returns.
See secs. 701, 702, 703, and 704.
The Commissioner and the courts had to adjust partnership
items at the partner level before 1982. See Adams v. Johnson,
355 F.3d 1179, 1186-1187 (9th Cir. 2004); Randell v. United
States, supra at 103. Congress enacted the unified audit and
litigation procedures of the Tax Equity and Fiscal Responsibility
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Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402, 96 Stat. 648, to
remove the substantial administrative burden occasioned by
duplicative audits and litigation and to provide consistent
treatment of partnership income, gain, loss, deductions, and
credits among all partners in the same partnership. See Adams v.
Johnson, supra at 1186-1187; Randell v. United States, supra at
103; H. Conf. Rept. 97-760, at 599-600 (1982), 1982-2 C.B. 600,
662-663. Those procedures require that a partnership and its
partners treat all partnership items consistently on their
returns (including related Schedules K-1) unless a partner
informs the Commissioner of an inconsistent treatment. See sec.
6222(a) and (b). The proper treatment of partnership items at
the partnership level is determined under the TEFRA procedures in
a single, unified audit and judicial proceeding. See Adams v.
Johnson, supra at 1186-1187; Randell v. United States, supra at
103; H. Conf. Rept. 97-760, supra at 599-600, 1982-2 C.B. at
662-663.
III. Applicability of TEFRA to H&S Ventures
The parties agree that H&S Ventures is subject to TEFRA for
2003 and that the subject adjustments were partnership items at
least until petitioners filed the amended return. We also agree.
See generally secs. 6221 through 6234. We therefore lack
jurisdiction in this deficiency proceeding to decide the
propriety of the subject adjustments unless TEFRA provides
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otherwise. See Munro v. Commissioner, 92 T.C. 71, 74 (1989);
Maxwell v. Commissioner, 87 T.C. 783, 789 (1986).
IV. AARs
Each partner was generally required to file a separate
amended return to correct a partnership item before TEFRA. TEFRA
allows a “tax matter partner” (as defined in section 6231(a)(7))
to file an AAR on behalf of the entire partnership (partnership
AAR). See sec. 6227. TEFRA also allows each partner to file a
partner AAR solely on behalf of that partner. See id. An AAR
must be filed in accordance with section 6227 for a partner to
change the treatment of a partnership item on the partner’s
return. See Phillips v. Commissioner, 106 T.C. 176, 180-181
(1996).
Petitioners claim they filed a partner AAR in the form of
the amended return. The Commissioner upon receipt of a partner
AAR may take one of four actions. See sec. 6227(d). First, the
Commissioner may process the partner AAR as a claim for credit or
refund with respect to a nonpartnership item. See id. Second,
the Commissioner may assess additional tax resulting from the
requested adjustments. See id. Third, the Commissioner may
notify the partner that all partnership items of the partner for
the partnership’s taxable year to which the partner AAR relates
will be treated as nonpartnership items. See id. Fourth, the
Commissioner may conduct a partnership proceeding. See id. The
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Commissioner upon receiving a partner AAR generally opts to
follow the fourth action; i.e., to begin a partnership proceeding
and to determine in that proceeding the validity of the request.
See 2 Audit, Internal Revenue Manual (IRM) (CCH), pt.
4.31.4.2.3.1(4), at 10,864 (Sept. 1, 2006).
The partner in turn may begin a civil action for refund of
tax attributable to adjustments claimed in the partner AAR if the
Commissioner does not allow any part of the adjustments and
neither notifies the partner that the adjustments will be treated
as nonpartnership items, nor begins a partnership proceeding.
See sec. 6228(b)(2). The timeliness of such a civil action is
governed by section 6228(b)(2)(B). The partnership items of the
partner for the partnership taxable year to which the partner AAR
relates are recharacterized as nonpartnership items on the
beginning of the civil action. See sec. 6228(b)(2)(A).
V. Regulations Applicable to the Filing of a Partner AAR
The Secretary has prescribed rules for the filing of a
partner AAR in section 301.6227(d)-1(a), Proced. & Admin. Regs.
That section states:
§ 301.6227(d)-1 Administrative adjustment request
filed on behalf of a partner.--(a) In general. A
request for an administrative adjustment on behalf of a
partner shall be filed on the form prescribed by the
Internal Revenue Service for that purpose in accordance
with that form’s instructions. Except as otherwise
provided in that form’s instructions, the request
shall--
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(1) Be filed in duplicate, the original
copy filed with the partner’s amended income
tax return * * * and the other copy filed
with [as applicable here] the service center
where the partnership return is filed * * *;
(2) Identify the partner and the
partnership by name, address, and taxpayer
identification number;
(3) Specify the partnership taxable year
to which the administrative adjustment
request applies;
(4) Relate only to partnership items;
and
(5) Relate only to one partnership and
one partnership taxable year.
VI. Form 8082
The Commissioner has prescribed Form 8082, Notice of
Inconsistent Treatment or Administrative Adjustment Request
(AAR), as the form to be used by a partner requesting an
administrative adjustment. See Instructions for Form 8082
(rev. Jan. 2000) (instructions), at 1. The instructions require
that taxpayers file Form 8082 as an AAR to adjust passthrough
items and that taxpayers explain in detail on the form the
reasons for any adjustment reported on the form. See id. at 1,
3. The instructions require that a partner filing Form 8082 as
an AAR file the form in duplicate, the original filed with the
partner’s amended income tax return and the copy filed with the
service center where the passthrough entity return is filed. See
id. at 2. The face of Form 8082 requires that the partner list
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on the form the name, address, and identifying number of the
passthrough entity to which the form relates, and that entity’s
taxable year.
VII. Parties’ Arguments and the Court’s Analysis
A. Parties’ Arguments
Respondent argues that the subject adjustments are
partnership items the propriety of which must be decided in a
partnership-level proceeding. Petitioners argue that the subject
adjustments, while once partnership items, are no longer
partnership items, in part because petitioners filed the amended
return that qualified under section 6227 as a partner AAR.2
Petitioners recognize that a partner AAR must be filed on Form
8082 pursuant to section 301.6227(d)-1, Proced. & Admin. Regs.,
and the instructions, and petitioners acknowledge that they did
not file such a form. Petitioners argue nonetheless that the
Court of Appeals for the Ninth Circuit considers amended returns
to be AARs in all instances (i.e., whether accompanied by a Form
8082 or not). Petitioners also argue that their amended return
is a partner AAR because it substantially complied with the
requirements for a partner AAR in that it contained all
information required to be included on Form 8082. Petitioners
2
Petitioners conclude that their filing of the amended
return as a partner AAR and their filing of the second amendment
to petition made the subject adjustments nonpartnership items
pursuant to sec. 6228(b)(2)(B).
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note that the Court of Appeals for the Ninth Circuit, the court
to which an appeal of this case lies absent a stipulation to the
contrary, treated a taxpayer’s amended income tax return as a
partner AAR. See Wall v. United States, 133 F.3d 1188 (9th Cir.
1998).
B. Analysis
1. Overview
We now focus on whether the amended return here qualifies as
a partner AAR. This Court has held that section 6227 does not
authorize the Commissioner to consider as a partner AAR a request
for an administrative adjustment that fails to conform to the
applicable statutory requirements. See Phillips v. Commissioner,
106 T.C. at 181. The Court of Federal Claims has held similarly.
See Rothstein v. United States, 81 AFTR 2d 2132, 98-1 USTC par.
50,435 (Fed. Cl. 1998). The courts in both cases ruled that an
amended return filed by a partner did not qualify as a partner
AAR where the amended return was not accompanied by a Form 8082.
The courts did not state, however, that an amended return could
never qualify as a partner AAR if it failed to include a Form
8082. Nor does the Commissioner require that an amended return
include a Form 8082 to be characterized as a partner AAR. See
2 Audit, IRM (CCH), pt. 4.31.4.2.3.1(1), at 10,864 (Sept. 1,
2006) (stating that “Any partner may file an AAR on his or her
own behalf. In order to file an AAR, a partner must complete an
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amended return and Form 8082 or statements that provide the same
information required by Form 8082” (emphasis added)).
Neither party disputes that the amended return fails to meet
all of the requirements for a partner AAR set forth in section
301.6227(d)-1(a), Proced. & Admin. Regs. The parties dispute two
issues. First, the parties dispute whether the Court of Appeals
for the Ninth Circuit considers amended returns to be AARs in all
instances. If the court does not, the parties further dispute
whether petitioners’ amended return substantially complied with
the requirements for a partner AAR so as to be characterized as a
partner AAR. We address those disputes in turn.
2. Whether Amended Returns Are AARs in All Instances
Petitioners first argue that the Court of Appeals for the
Ninth Circuit considers amended returns to be AARs in all
instances, citing Wall v. United States, supra. We do not read
that opinion to support petitioners’ broad claim. In Wall, the
Court of Appeals for the Ninth Circuit treated a taxpayer’s
amended return as a partner AAR even though no Form 8082
accompanied the amended return. The court had previously held,
however, that the amended return substantially complied with the
procedures governing requests for an administrative adjustment.
See id. The court did not state that an amended return in and of
itself is considered to be a partner AAR. Nor are we aware of
any published opinion of the Court of Appeals for the Ninth
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Circuit (or any other court) that holds that an amended return in
and of itself is considered a partner AAR. The regulations
require that certain information be relayed to the Commissioner
in a certain manner for a request to qualify as a partner AAR.
See sec. 301.6227(d)-1(a), Proced. & Admin. Regs. An amended
return may not contain that information, or it may not be
submitted to the Commissioner in the manner required by the
regulations. We conclude that an amended return is not
necessarily a partner AAR. We now address petitioners’ second
argument.
3. Whether Petitioners’ Amended Return Substantially
Complied With Requirements for a Partner AAR
Petitioners also argue that their amended return was a
partner AAR because it substantially complied with the
requirements for a partner AAR. We agree with petitioners that
their amended return, filed without a Form 8082, may be
characterized as a partner AAR if it substantially complied with
the requirements for a partner AAR. We disagree with
petitioners, however, that their amended return substantially
complied with those requirements.
The substantial compliance doctrine is a narrow equitable
doctrine that courts may apply to avoid hardship where a party
establishes that the party intended to comply with a provision,
did everything reasonably possible to comply with the provision,
but did not comply with the provision because of a failure to
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meet the provision’s specific requirements. See Sawyer v. County
of Sonoma, 719 F.2d 1001, 1007-1008 (9th Cir. 1983); Fischer
Indus., Inc. v. Commissioner, 87 T.C. 116, 122 (1986), affd. 843
F.2d 224 (6th Cir. 1988); see also Credit Life Ins. Co. v. United
States, 948 F.2d 723, 726-727 (Fed. Cir. 1991); Prussner v.
United States, 896 F.2d 218, 224 (7th Cir. 1990); Estate of
Chamberlain v. Commissioner, T.C. Memo. 1999-181, affd. 9 Fed.
Appx. 713 (9th Cir. 2001).
The record does not establish that petitioners intended to
file the amended return as a partner AAR. The amended return was
professionally prepared for petitioners, whom we consider
sophisticated and financially adept individuals, and indicated
that petitioners were amending their individual income tax return
merely to conform the return to amended Schedules K-1 received
from H&S Ventures. The amended return did not include a copy of
any of the amended Schedules K-1, and it did not include a Form
8082 that would indicate that petitioners were filing the amended
return as other than an amended return.3 The amended return
3
A partnership AAR must include revised Schedules K-1, see
sec. 6227(c)(3), and the partners may file amended individual
income tax returns to conform their individual returns to the
revised Schedules K-1, see 2 Audit, Internal Revenue Manual
(CCH), pt. 4.31.4.6.1.1, at 10,869 (Sept. 1, 2006) (stating that
the Commissioner may take no action in response to a partnership
AAR where all of the partners incorporated the reported
adjustments into their original or amended returns). We agree
with respondent that a primary purpose for TEFRA would be
frustrated if respondent had to determine whether each such
(continued...)
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further stressed the word “AMENDED” on each of its pages and
included a copy of petitioners’ Form 1040 for 2003, both as
originally filed and as amended by the amended return. We also
note that petitioners asserted for the first time that the
amended return should be considered a partner AAR only after
receiving respondent’s motion now before us. The requisite
intent needed to be present contemporaneously with the filing of
the partner AAR, not later when petitioners believed it to be
more advantageous to have had that intent initially.
Nor did the amended return substantially comply with the
requirements for a partner AAR in that the amended return was not
filed in the manner required for a Form 8082 and did not include
all information required to be provided on a Form 8082. The
amended return failed the former requirement because a copy of
the amended return was not filed with the service center where
the partnership return was filed. Respondent stated explicitly
in the referenced regulations and in the instructions that a
partner AAR must be filed in duplicate, one copy at each of the
designated places. Petitioners do not assert that the dual
filing requirement is unreasonable as applied to them, nor do we
consider that to be the case. The amended return failed the
latter requirement because, in part, the amended return did not
3
(...continued)
amended individual income tax return was in fact a partner AAR,
as petitioners effectively ask the Court to hold.
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list the address of H&S Ventures and did not specify the
partnership taxable year to which the requested adjustments
related. The amended return also did not explain in detail the
reasons for the requested adjustments. Such reasons are
necessary, respondent argues and we agree, so that respondent can
properly carry out the function of section 6227(d) by deciding as
to the AAR whether to allow or disallow the requested
adjustments, or to start a partnership proceeding. The amended
return did not allow respondent to carry out that function
properly in that it did not detail the specific reasons for the
requested adjustments reported on the amended return. The
adjustments could just as easily have been requested to correct a
mathematical error as to reflect a different substantive
treatment of a partnership item.
We conclude that petitioners’ amended return did not
substantially comply with the requirements for a partner AAR.
Petitioners’ amended return is therefore not a partner AAR.
VIII. Conclusion
The amended return does not qualify as a partner AAR, and
the claimed adjustments from H&S Ventures are partnership items
over which we lack jurisdiction. We have considered all
arguments petitioners have made for a contrary conclusion and, to
the extent not discussed, we have rejected those arguments as
without merit.
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To reflect the foregoing,
An appropriate order
will be issued.