Israel Greenwald & Ruth Greenwald v. Commissioner

ISRAEL GREENWALD AND RUTH GREENWALD, ET AL., 1
PETITIONERS v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket Nos. 29126–11, 29244–11, Filed May 21, 2014.
3203–12, 3212–12,
3213–12, 3215–12,
3216–12, 3217–12,
3218–12.
Ps owned interests in bona fide partnerships that were sub-
ject to the tax audit and litigation procedures of I.R.C. secs.
1 Cases of the following petitioners are consolidated herewith: Brian
308
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(308) GREENWALD v. COMMISSIONER 309
6221–6234. The partnerships liquidated, and the partnership
items for the year of liquidation were determined in partner-
ship-level proceedings. Following those proceedings, R issued
notices of deficiency determining the partners’ gain on liquida-
tion of the partnerships. Ps filed petitions in response to those
notices of deficiency and later moved to dismiss for lack of
jurisdiction, arguing that outside basis is a partnership item
that should have been determined at the partnership level
and that the notices of deficiency are invalid. Held: Gain or
loss on the disposition of a bona fide partnership interest is
an affected item that requires partner-level determinations if
the amount of that gain or loss could be affected by a partner-
level determination.
Peter L. Banis, for petitioners.
Nina P. Ching, for respondent.
OPINION
BUCH, Judge: These cases involve affected items deficiency
proceedings that follow from previous partnership-level pro-
ceedings in this Court. 2 Petitioners filed a motion to dismiss
for lack of subject matter jurisdiction, and their argument is
that outside basis is a partnership item that had to be raised
and determined in the prior partnership-level proceedings.
Respondent argues that this Court has jurisdiction because
outside basis is an affected item that requires partner-level
determinations. Both parties, however, miss the mark. In
these partner-level affected items proceedings, we have juris-
diction to redetermine the amounts of any deficiencies attrib-
utable to affected items that require partner-level determina-
tions. Because partner-level determinations are required, we
have jurisdiction to redetermine the deficiencies at issue.
Auchter and Nancy Auchter, docket No. 29244–11; Paul H. Hildebrandt
and Judith A. Hildebrandt, docket No. 3203–12; Michael Cohen and Susan
Cohen, docket No. 3212–12; Bernard J. Sachs and Joan K. Sachs, docket
No. 3213–12; David Kraus and Susan Kraus, docket No. 3215–12; Jona-
than L. Levine and Sarah S. Levine, docket No. 3216–12; John A.
Hildebrandt and Jean E. Hildebrandt, docket No. 3217–12; and David S.
Marsden and Rosemary Marsden, docket No. 3218–12.
2 Regency Plaza Assocs. of N.J. v. Commissioner, docket Nos. 7150–08
and 7197–08 (decisions entered June 30, 2010).
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310 142 UNITED STATES TAX COURT REPORTS (308)
Background
Petitioners in these consolidated cases resided in the fol-
lowing locations at the time the petitions were filed: the
Greenwalds, docket No. 29126–11, lived in New York; the
Auchters, docket No. 29244–11, lived in New Jersey; Paul
and Judith Hildebrandt, docket No. 3203–12, lived in New
Jersey; the Cohens, docket No. 3212–12, lived in New York;
the Sachses, docket No. 3213–12, lived in Maryland; the
Krauses, docket No. 3215–12, lived in New York; the
Levines, docket No. 3216–12, lived in New Jersey; John and
Jean Hildebrandt, docket No. 3217–12, lived in New Jersey;
and the Marsdens, docket No. 3218–12, lived in New Jersey.
In laying out the facts, we focus on the Greenwalds. 3
Mr. Greenwald was a limited partner in Regency Plaza
Associates of New Jersey (Regency Plaza). Regency Plaza
was subject to the unified partnership audit and litigation
procedures of the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA), Pub. L. No. 97–248, sec. 402(a), 96 Stat. at
648. The partnership was involved in an apartment project
that was managed by Republic Management, Inc., which also
managed 14 other apartment projects insured by the Depart-
ment of Housing and Urban Development. As a result of a
transfer of a partnership interest, Regency Plaza attached a
section 754 4 election to its 1995 Form 1065, U.S. Return of
Partnership Income, which neither side claims was revoked.
In 1996 Regency Plaza petitioned the U.S. Bankruptcy
Court for the District of Massachusetts, Western Division, for
relief under chapter 11. Just over a year after the petition
was filed, the Circuit Court of the Sixth Judicial Circuit in
and for Duval County, Florida, entered a final judgment of
foreclosure. The partnership owned property that was subject
to a mortgage in favor of Beal Bank, S.S.B., which mortgage
was security for a nonrecourse debt against property owned
by Regency Plaza. This judgment allowed Beal Bank to fore-
3 This case has been consolidated with eight other cases. One of the
other cases involves Regency Plaza, and the others involve a separate part-
nership, Prince Manor Apartment Associates. Irrespective of the differing
entities and petitioners, the dispositive facts are similar in all of the cases.
4 Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year at issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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(308) GREENWALD v. COMMISSIONER 311
close its mortgage. Regency Plaza terminated on July 31,
1997.
Because Regency Plaza had failed to file any tax returns
after filing its return for 1995, the Internal Revenue Service
prepared substitute Forms 1065 on Regency Plaza’s behalf
for the 1996 and 1997 taxable years using the 1995 return.
On October 15, 2007, the IRS issued a notice of final partner-
ship administrative adjustment (FPAA) to Regency Plaza for
its taxable years ending December 31, 1996, and July 31,
1997. In response to the FPAA, Brian and Nancy Auchter,
partners other than the tax matters partner, filed petitions
in the Tax Court. 5 Mr. Greenwald filed notices of election to
participate in both cases. He also filed motions to have him-
self appointed the tax matters partner. The Court granted
these motions. The cases were consolidated and later settled.
After the conclusion of the TEFRA proceeding respondent
sent the Greenwalds a notice of computational adjustment
pertaining to Regency Plaza’s 1996 and 1997 taxable years.
Four days later, on September 23, 2011, respondent issued a
notice of deficiency to the Greenwalds for their 1997 taxable
year. The notice of deficiency made an adjustment to the
Greenwalds’ long-term capital gain and made other cor-
responding adjustments. The IRS included a spreadsheet
with the notice of deficiency explaining how it had calculated
the Greenwalds’ long-term capital gain. The spreadsheet
refers to information taken from Regency Plaza’s 1996 and
1997 Forms 1065 and the 1997 Schedule K–1, Partner’s
Share of Income, Credits, Deductions, etc., for Mr.
Greenwald. Again, the Forms 1065 were prepared by
respondent on behalf of Regency Plaza, as was the Schedule
K–1. After the notice of deficiency was issued, respondent
revised the initial computational adjustments to allow for a
rental real estate loss and a passive activity loss using
information provided by the Greenwalds. The modified com-
putational adjustments increased the Greenwalds’ deficiency
by $42; however, respondent seeks only to enforce the defi-
ciency as set forth in the original notice.
These cases were calendared for trial at the Court’s trial
session in Boston, Massachusetts. At the calendar call the
parties moved to submit the cases under Rule 122. However,
5 See supra note 2.
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312 142 UNITED STATES TAX COURT REPORTS (308)
the Greenwalds (through their counsel) also stated that they
wanted to submit additional evidence. The cases were
recalled, and the Greenwalds explained that the evidence
was documents from the attorney who represented another
partnership and general partner in a criminal action by the
United States for equity skimming with respect to Regency
Plaza. Respondent objected to the documents because they
were not relevant and because they had not been provided to
respondent until the morning of the scheduled trial. To avoid
a continuance, the Greenwalds withdrew the documents.
Accordingly, these cases were submitted under Rule 122 and
a briefing schedule was established. After the Greenwalds
submitted their opening brief, they filed their motion to dis-
miss. As a result, the briefing schedule was suspended, and
the Court now turns to the jurisdictional question.
Discussion
I. Partnership and TEFRA Overview
Partnerships are passthrough entities and, as such, are not
responsible for paying Federal income tax. Instead, the part-
ners report their shares of the partnership items on their
own income tax returns. Sec. 701. Although the partnership
does not file an annual income tax return, it must file an
annual information return that identifies each partner’s
share of income, deductions, and other tax items. Sec.
6031(a).
Congress passed TEFRA over 30 years ago. TEFRA’s uni-
fied audit and litigation procedures were enacted to alleviate
the administrative burden caused by duplicative audits and
litigation. Samueli v. Commissioner, 132 T.C. 336, 340
(2009). A goal of TEFRA was to ‘‘promote increased compli-
ance and more efficient administration of the tax laws.’’ H.R.
Conf. Rept. No. 97–760, at 600 (1982), 1982–2 C.B. 600, 662.
Section 6221 provides that the tax treatment of all ‘‘part-
nership items’’ is determined at the partnership level. The
Secretary must mail each notice partner whose name and
address is furnished a notice of the beginning of an adminis-
trative partnership-level proceeding and an FPAA. Sec.
6223(a). The determination of partnership items in a part-
nership-level proceeding (either through a defaulted FPAA or
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(308) GREENWALD v. COMMISSIONER 313
a final court decision) is conclusive. 6 Once adjustments are
made at the partnership level, the IRS will make any nec-
essary partner-level changes, including changes to ‘‘affected
items’’. If the adjustment to an affected item is merely com-
putational and can be made without making additional
partner-level determinations, the IRS can directly assess the
tax due without having to follow the usual deficiency proce-
dures. Sec. 6230(a)(1); sec. 301.6231(a)(6)–1T(a), Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987). 7
However, if an adjustment to an affected item requires a
partner-level factual determination, the IRS must follow defi-
ciency procedures. Sec. 6230(a)(2)(A)(i); sec. 301.6231(a)(6)–
1T(a), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6779(Mar. 5, 1987). 8
II. Partnership Items
A partner’s basis in his partnership interest is an affected
item to the extent it is not a partnership item. Sec.
301.6231(a)(5)–1T(b), Temporary Proced. & Admin. Regs., 52
Fed. Reg. 6790 (Mar. 5, 1987). 9 A partnership item is ‘‘any
item required to be taken into account for the partnership’s
taxable year under any provision of subtitle A [Income
Taxes] to the extent [the] regulations * * * provide that, for
purposes of this subtitle, such item is more appropriately
determined at the partnership level than at the partner
level.’’ Sec. 6231(a)(3). The ‘‘critical element’’ is that the part-
nership is required to make the determination. Sec.
6 Except
in limited circumstances, refund suits for adjustments attrib-
utable to partnership items are not permitted. Sec. 7422(h). And even
then, any prior partnership item determination is conclusive. Sec.
6230(c)(4); see also New Millennium Trading, L.L.C. v. Commissioner, 131
T.C. 275, 280 (2008).
7 This rule is now set forth in permanent regulations at sec.
301.6231(a)(6)–1(a)(2), Proced. & Admin. Regs., which apply to taxable
years beginning on or after October 4, 2001. Sec. 301.6231(a)(6)–1(c),
Proced. & Admin. Regs.
8 This rule is now set forth in permanent regulations at sec.
301.6231(a)(6)–1(a)(3), Proced. & Admin. Regs., which apply to taxable
years beginning on or after October 4, 2001. Sec. 301.6231(a)(6)–1(c),
Proced. & Admin. Regs.
9 Permanent regulations replaced the temporary regulations for taxable
years beginning on or after October 4, 2001. Sec. 301.6231(a)(5)–1(f),
Proced. & Admin. Regs.
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314 142 UNITED STATES TAX COURT REPORTS (308)
301.6231(a)(3)–1(c)(1), Proced. & Admin. Regs. The failure of
the partnership to actually make the determination does not
prevent an item from being a partnership item. Id.Partnerships do not keep track of the partners’ outside
bases, but they may be required to take a partner’s outside
basis into account in some situations. For example, when a
partner purchases an interest in a partnership, the partner-
ship may elect under section 754 to make optional adjust-
ments to the basis of partnership property. If such an elec-
tion is made, the partner’s initial basis in the partnership is
a partnership item. Sec. 301.6231(a)(3)–1(a)(3), Proced. &
Admin. Regs. However, if the election is not made, the part-
nership is not required to determine the partner’s initial out-
side basis. Tigers Eye Trading, LLC v. Commissioner, 138
T.C. 67, 117 (2012). Accordingly, a partner’s outside basis
generally would be an affected item. Sec. 6231(a)(3); see
Tigers Eye Trading, LLC v. Commissioner, 138 T.C. at 117.
III. Jurisdiction
The Tax Court is a court of limited jurisdiction and can
exercise jurisdiction only to the extent provided by statute.
Sec. 7442. Section 6214(a) provides the Court with jurisdic-
tion to redetermine the correct amount of a deficiency as long
as the taxpayer files a timely petition from a valid notice of
deficiency. Sec. 6213(a). While the deficiency procedures gen-
erally do not need to be followed so as to determine affected
items flowing from a TEFRA partnership-level proceeding, an
exception is carved out for affected items that require
partner-level determinations. Sec. 6230(a)(2)(A)(i).
IV. Precedents
In their motion to dismiss, petitioners rely heavily on
Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67. In
Tigers Eye the parties stipulated that the partnership was a
sham. Id. at 102. Accordingly, ‘‘[n]o additional facts [were]
required to determine the absence of an outside basis’’
because the partnership did not exist for Federal tax pur-
poses. Id. at 119. Because no further determinations were
necessary, outside basis was a partnership item. Id. More-
over, that outside basis determination also resulted in a
determination of the applicability of a gross valuation
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misstatement penalty. See sec. 6226(f) (giving the Court
jurisdiction to determine ‘‘the applicability of any penalty,
addition to tax, or additional amount which relates to an
adjustment to a partnership item’’ for taxable years ending
after August 5, 1997). No further partner-level determina-
tions were required in that instance.
The Supreme Court recently addressed this same issue in
United States v. Woods, 571 U.S. ll, 134 S. Ct. 557 (2013),
and came to the same conclusion. Again, the Court stated
that where the partnership is a sham, no partner-level deter-
minations are needed to determine outside basis because
‘‘once the partnerships were deemed not to exist for tax pur-
poses, no partner could legitimately claim an outside basis
greater than zero.’’ Id. at ll, 134 S. Ct. at 565–566. This
flows from the fact that there can be no basis in an asset
that does not exist, such as nonexistent partnership interest.
The Court went on to say that ‘‘‘the basis misstatement and
the transaction’s lack of economic substance are inextricably
intertwined’’’. Id. at ll, 134 S. Ct. at 567 (quoting Bemont
Invs., LLC v. United States, 679 F.3d 339, 354 (5th Cir.
2012)). Thus, as with Tigers Eye, the Court held that outside
basis is a partnership item when the partnership is held to
be a sham, and the applicability of the gross valuation
misstatement penalty arises as a preliminary determination.
Even then, the penalty determination is ‘‘provisional’’. Id. at
ll, 134 S. Ct. at 564. Notwithstanding this type of isolated
situation in which outside basis is determined at the partner-
ship level, the Supreme Court acknowledged that a court
may otherwise need to determine ‘‘affected or non-partner-
ship items such as outside basis.’’ Id.Even then, we do not determine basis in a vacuum. In
these proceedings, we have jurisdiction to redetermine the
amounts of deficiencies. See secs. 6230(a)(2)(A)(i), 6214(a). To
determine the amount of a deficiency, any number of
partner-level determinations may be required, even when
components of the partner’s basis in a partnership interest
are fixed as a result of one or more partnership-level deter-
minations. If, for example, a partner sold a partnership
interest, any deficiency relating to that sale would need to be
determined at the partner level. The amount realized on that
sale would be a partner-level determination even if all of the
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316 142 UNITED STATES TAX COURT REPORTS (308)
components of the partner’s basis in the partnership interest
may already have been determined at the partnership level.
In these specific cases, the partners were charged with
income as a result of the discharge of partnership liabilities;
thus petitioners argue that no partner-level determinations
are necessary. They are mistaken.
Their outside basis is not fixed by partnership-level deter-
minations, even in the case of a section 754 election. The Tax
Court in Tigers Eye and the Supreme Court in Woods held
that outside basis was a partnership item because the part-
nerships were shams and thus no other determinations were
necessary to preliminarily determine that a gross valuation
misstatement penalty applied. That is not the case before us.
The TEFRA proceeding regarding Regency Plaza did not
determine that the partnership was a sham, and thus in
these proceedings we must treat it as a bona fide partner-
ship.
Redetermining the amounts of deficiencies resulting from
partnership-level adjustments will require that we look to
the partners’ specific facts. For example, if a partner
incurred litigation costs in the defense of the ownership of
the partnership interest, those costs would be added to the
partner’s outside basis, but they would not be taken into
account as part of a section 754 election or any other part-
nership-level determination. Cf. Lange v. Commissioner, T.C.
Memo. 1998–161. To make such a determination, the IRS is
required to follow deficiency procedures. Sec. 6230(a)(2)(A)(i).
Determining that a partner did not incur such a cost is
just as much a partner-level determination. As we have pre-
viously stated: ‘‘Neither the Code nor the regulations there-
under require that partner-level determinations actually
result in a substantive change to a determination made at
the partnership level.’’ Domulewicz v. Commissioner, 129
T.C. 11, 20 (2007), aff ’d in part, rev’d in part sub nom.
Desmet v. Commissioner, 581 F.3d 297 (6th Cir. 2009). In
dicta, the Court of Appeals for the Sixth Circuit arguably
took issue with this statement, stating that it ‘‘conflicts with
TEFRA’s mandate to resolve all issues in a single proceeding
against the partnership whenever possible.’’ Desmet v.
Commissioner, 581 F.3d at 304. However, TEFRA’s mandate
is that all partnership items be resolved in a single pro-
ceeding. Sec. 6221. And the controlling statute explicitly
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requires that, if partner-level determinations are necessary
to determine the correct amount of tax, the IRS must follow
deficiency procedures. Sec. 6230(a)(2)(A)(i). To ignore poten-
tial partner-level determinations by assessing without fol-
lowing deficiency procedures would have the effect of
depriving partners of a prepayment forum where there is a
dispute as to the amount or existence of partner-level deter-
minations that could affect the amount of the assessment.
Section 6230(a)(2)(A)(i) is specifically intended to give part-
ners that prepayment forum.
Under these facts, outside basis is an affected item
requiring partner-level determinations, and we have subject-
matter jurisdiction over these cases.
To reflect the foregoing,
An appropriate order will be issued.
f
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