The opinion
JOHN C. BEDROSIAN AND JUDITH D. BEDROSIAN, PETITIONERS
v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 12341–05. Filed March 17, 2015.
Ps invested in a Son-of-BOSS transaction through a part-
nership that was subject to the partnership provisions of the
Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No.
97–248, sec. 402(a), 96 Stat. at 648. R issued an FPAA with
respect to the partnership determining that the partnership
was a sham. Ps did not file a timely petition. Ps claimed
deductions for professional fees. R issued a notice of deficiency
duplicating the partnership adjustments and also disallowing
the deduction for professional fees. R filed a motion to dismiss
asserting that we lack jurisdiction over the entire case. In
Bedrosian v. Commissioner, T.C. Memo. 2007–375, we granted
the motion in part but held that we have jurisdiction over the
deductibility of the professional fees. Ps seek leave to file a
motion for reconsideration out of time that would ask the
Court to revisit whether we have jurisdiction over the deduct-
ibility of the professional fees. Ps assert that intervening
caselaw would have us reach a different result. Held: In deter-
mining whether to grant leave to file a motion out of time, we
may consider the merits of the underlying motion. Held, fur-
ther, the deductibility of professional fees paid and claimed as
a deduction at the partner level is a factual affected item that
is subject to deficiency procedures.
Richard E. Hodge and Stephen Mather, for petitioners.
Melanie R. Urban and Janet Reiners Balboni, for
respondent.
OPINION
BUCH, Judge: This case has a long history, only the rel-
evant portion of which we recount. For more background, see
our prior opinions in this case, Bedrosian v. Commissioner,
143 T.C. 83 (2014), and T.C. Memo. 2007–375. See also Stone
Canyon Partners v. Commissioner, T.C. Memo. 2007–377,
152
(152) BEDROSIAN v. COMMISSIONER 153
aff ’d sub nom. Bedrosian v. Commissioner, 358 Fed. Appx.
868 (9th Cir. 2009); Bedrosian v. Commissioner, T.C. Memo.
2007–376, aff ’d, 358 Fed. Appx. 868 (9th Cir. 2009).
Background
The Bedrosians participated in what has come to be known
as a Son-of-BOSS transaction, and that transaction involved
an investment in a partnership, Stone Canyon Partners,
LLC. The partnership was subject to the audit and litigation
procedures found at sections 6221 through 6234, commonly
referred to as TEFRA (short for the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. No. 97–248, sec. 402(a),
96 Stat. at 648). 1 The Internal Revenue Service (IRS) con-
ducted an examination and eventually issued a notice of final
partnership administrative adjustment (FPAA) with respect
to the 1999 partnership taxable year. The principal adjust-
ment at the partnership level was a determination by the
IRS that the partnership was a sham.
The Bedrosians did not file a timely petition in response to
the FPAA. As a result, all partnership items are final. The
adjustments set forth in the FPAA are final and may not be
collaterally attacked. See New Millennium Trading, LLC v.
Commissioner, 131 T.C. 275, 279 (2008) (‘‘The determinations
of partnership items in partnership-level proceedings are
binding on the partners and may not be challenged in subse-
quent partner-level proceedings.’’); Blonien v. Commissioner,
118 T.C. 541, 564 (2002) (‘‘We are bound by the determina-
tion made at the partnership level’’.); see also Maxwell v.
Commissioner, 87 T.C. 783, 788 (1986). Likewise, any part-
nership items that were not adjusted are final and cannot be
revisited in a collateral proceeding. See Roberts v. Commis-
sioner, 94 T.C. 853, 857 (1990) (‘‘Respondent did not com-
mence any partnership proceedings for these TEFRA part-
nerships and, therefore, did not issue Notices of Final Part-
nership Administrative Adjustment * * * . Consequently,
the tax treatment of all partnership items with respect to
these partnerships is final in accordance with the tax returns
1 Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule ref-
erences are to the Tax Court Rules of Practice and Procedure. All mone-
tary amounts are rounded to the nearest dollar.
154 144 UNITED STATES TAX COURT REPORTS (152)
filed by these partnerships.’’); see also Jenkins v. Commis-
sioner, 102 T.C. 550 (1994); Gustin v. Commissioner, T.C.
Memo. 2002–64.
The IRS also issued notices of deficiency to the Bedrosians
for 1999 and 2000, one of which underlies this case. The
Bedrosians filed a timely petition in this case, placing at
issue all of the items in the notice of deficiency. Nearly all
of the adjustments set forth in the notice of deficiency are
either partnership items or items that the IRS adjusted as
a result of the partnership-level proceeding. The principal
adjustment was the disallowance of a loss that was a direct
result of the determination that the partnership was a sham.
Many of the other adjustments were computational—mathe-
matical results of the disallowance of that loss. We dismissed
the items that were a direct result of the determinations
made in the partnership-level proceeding because we lack
jurisdiction over those items in this proceeding. Bedrosian v.
Commissioner, T.C. Memo. 2007–375. But one item
remained.
The notice of deficiency also disallowed a deduction for
professional fees. On line 22 of the Schedule A, Itemized
Deductions, attached to the Bedrosians’ 2000 Form 1040,
U.S. Individual Income Tax Return, the Bedrosians reported
$618,985 of other expenses. That line referred to Statement
10, which contained several items. One of those items was
listed on the statement as follows:
DESCRIPTION AMOUNT
TAX ATTORNEY FEES 525,000
Statement 10 also included other fees that were described as
legal or tax related, but it was this entry that the IRS
adjusted in its notice of deficiency, stating:
No deduction is allowed for any legal, accounting, consulting and
advisory fees claimed since you failed to establish such expenditures
were incurred and if incurred, are deductible under any provision of the
Internal Revenue Code, including but not limited to I.R.C. Section[s] 183
and 212. Therefore, a Schedule A Miscellaneous Deduction of $525,000
in taxable year 2000 is herein disallowed.
When we dismissed from this case both the partnership
items and the items that resulted computationally from the
adjustments to partnership items, we retained jurisdiction
(152) BEDROSIAN v. COMMISSIONER 155
over the issue of the deductibility of the $525,000 of profes-
sional fees. Unlike the items we dismissed, the professional
fees that the IRS disallowed did not represent a disallowance
of a deduction at the partnership level, ‘‘nor is the legality
of the deduction at the individual level necessarily affected
by a determination at the partnership level.’’ Bedrosian v.
Commissioner, T.C. Memo. 2007–375, slip op. at 8 (citing
Goldberg v. Commissioner, T.C. Memo. 2007–81).
On January 29, 2015, the Bedrosians filed a motion for
leave to file a motion for reconsideration of findings or
opinion. In that motion the Bedrosians represent that
respondent has no objection to the granting of the motion.
With their motion for leave, the Bedrosians lodged their
prospective motion for reconsideration wherein they ask that
we reconsider T.C. Memo. 2007–375. And as with the motion
for leave, the Bedrosians represent that respondent has no
objection to the granting of the motion to reconsider. This is
unsurprising, in that the position taken by the Bedrosians in
their motion for reconsideration is the position taken by
respondent in his earlier motion to dismiss.
Discussion
A motion for reconsideration generally must be filed within
30 days after a written opinion has been served; however, the
Court may grant leave to file an untimely motion. Rule 161.
Thus, we must consider whether to allow the untimely
motion.
When considering whether to allow the filing of an
untimely motion, we can consider the merits of the under-
lying motion. In Cinema ’84 v. Commissioner, 122 T.C. 264
(2004), a partner who had not participated in a TEFRA pro-
ceeding sought leave to file an election to participate out of
time. The partner intended to subsequently move to vacate
the final decision in the case. We denied his motion because
there were ‘‘no viable grounds for vacating the final decision
in this case. Accordingly, granting movant’s motion for leave
[to file notice of election out of time] would be nothing more
than an act of futility’’. Id. at 272; see also Russo v. Commis-
sioner, 98 T.C. 28, 31 (1992) (denying taxpayer’s motion for
leave to file amendment to petition where taxpayer would
not prevail on her claim even if motion were granted);
156 144 UNITED STATES TAX COURT REPORTS (152)
Stillman v. Commissioner, T.C. Memo. 1995–591 (denying
taxpayer’s motion for leave to vacate decision out of time
because she would not prevail on her claim of fraud on the
Court even if her motion were granted). Thus, we turn to
petitioners’ prospective motion for reconsideration of our
opinion that we have jurisdiction over the determination of
the deductibility of the professional fees.
I. Reconsideration
Rule 161 allows motions for reconsideration of findings or
opinion, and the Court has the discretion to grant a motion
for reconsideration. Vaughn v. Commissioner, 87 T.C. 164,
166 (1986). Although this Rule is in title XVI, addressing
posttrial proceedings, such motions may be filed with regard
to interlocutory orders. A motion for reconsideration is not an
appropriate mechanism by which to reassert previously
unsuccessful arguments or to present new legal theories.
Stoody v. Commissioner, 67 T.C. 643, 644 (1977). And we
typically grant motions for reconsideration only if there is a
substantial error or unusual circumstances. CWT Farms, Inc.
v. Commissioner, 79 T.C. 1054, 1057 (1982), supplementing
79 T.C. 86, aff ’d, 755 F.2d 790 (11th Cir. 1985).
In considering whether to grant reconsideration, we can
look to the Federal Rules of Civil Procedure. The Tax Court
Rules of Practice and Procedure are, to some extent, based
on the Federal Rules, and we may defer to the Federal Rules
when they are ‘‘suitably adaptable to govern the matter at
hand.’’ Rule 1(b). The closest corollary to our Rule 161 is rule
60(b) of the Federal Rules of Civil Procedure. That rule
allows for relief from a judgment or order for the following
reasons: (1) mistake, inadvertence, surprise, or excusable
neglect; (2) newly discovered evidence; (3) fraud; (4) the judg-
ment is void; (5) the judgment has been satisfied, released,
or discharged; or (6) any other reason that justifies relief. In
the Court of Appeals for the Ninth Circuit, to which this case
would be appealable, reconsideration is appropriate if ‘‘(1) [a
court] is presented with newly discovered evidence, (2) [a
court] committed clear error or the initial decision was mani-
festly unjust, or (3) * * * there is an intervening change in
controlling law.’’ Sch. Dist. No. 1J v. ACandS, Inc., 5 F.3d
1255, 1263 (1993).
(152) BEDROSIAN v. COMMISSIONER 157
The Bedrosians’ prospective motion for reconsideration is
predicated on this last reason, their claim that there has
been an intervening change in the controlling law. In both
their motion for leave and their prospective motion for
reconsideration, the Bedrosians cite ‘‘intervening jurispru-
dence’’ as the reason we should reconsider our prior opinion.
That intervening jurisprudence relates to the scope of the
terms ‘‘partnership items’’ and ‘‘affected items’’.
II. Partnership Items
The definition of partnership items has been the subject of
extensive litigation. The definition is largely regulatory. The
term ‘‘partnership item’’ is defined by statute as ‘‘any item
required to be taken into account for the partnership’s tax-
able year under any provision of subtitle A to the extent
regulations prescribed by the Secretary provide that, for pur-
poses of this subtitle, such item is more appropriately deter-
mined at the partnership level than at the partner level.’’
Sec. 6231(a)(3). The Secretary has promulgated detailed
regulations defining what is a partnership item.
The regulations define partnership items expansively. The
general rule is that partnership items include items of
income, gain, loss, deduction, or credit. Sec. 301.6231(a)(3)–
1(a)(1), Proced. & Admin. Regs. These generally are items of
immediate and direct tax consequences to the partners. The
same is true with guaranteed payments, which are also part-
nership items. Id. para. (a)(2). But partnership items also
include items that might not have immediate or direct tax
consequences, items such as contributions and distributions.
Id. para. (a)(4). And similarly with optional adjustments to
the basis of partnership property. Id. para. (a)(3). Beyond
these items, the regulations contain a residual catchall that
expands partnership items to include ‘‘the accounting prac-
tices and the legal and factual determinations that underlie
the determination of the amount, timing, and characteriza-
tion of items of income, credit, gain, loss, deduction, etc.’’ Id.
para. (b).
Although not expressly stated in the statute or the regula-
tions, the issue of whether a partnership is a sham is also
a partnership item. Petaluma FX Partners, LLC v. Commis-
sioner, 131 T.C. 84 (2008), aff ’d in part, rev’d in part and
158 144 UNITED STATES TAX COURT REPORTS (152)
remanded, 591 F.3d 649 (D.C. Cir. 2010). This necessarily
must be the case because in order to determine items such
as the income, gain, loss, deduction, or credit of the partner-
ship, one must first determine that there is a partnership.
Thus, the sham determination is brought into the definition
of partnership items through the residual catchall. The Court
of Appeals for the Ninth Circuit, to which this case is appeal-
able, has reached the same conclusion, stating: ‘‘We join the
D.C. and Eighth Circuits in holding that a determination as
to a partnership’s validity, such as the determination that
* * * [a partnership] was a sham, falls within the definition
of a partnership item.’’ Napoliello v. Commissioner, 655 F.3d
1060, 1065 (9th Cir. 2011), aff ’g T.C. Memo. 2009–104.
III. Nonpartnership and Affected Items
Two other terms are relevant to the issue of whether we
have jurisdiction over the deductibility of the professional
fees reported by the Bedrosians.
Nonpartnership items are defined in the negative to be ‘‘an
item which is (or is treated as) not a partnership item.’’ Sec.
6231(a)(4). Thus anything that is not a partnership item is,
by definition, a nonpartnership item.
Some nonpartnership items, even though they might have
nothing to do with a partnership, are affected items. The
Code defines affected items to be ‘‘any item to the extent
such item is affected by a partnership item.’’ Sec. 6231(a)(5).
An example might be an individual’s Schedule A deduction
for medical expenses. Medical expense deductions are subject
to a floor. Sec. 213(a). If the income flowing to a partner
changes, then the floor for medical expense deductions
changes. As a result, a nonpartnership item that is wholly
unrelated to the partnership (a partner’s medical expense
deductions) is affected by a partnership item (the partner’s
share of partnership income) and becomes an affected item.
Affected items are further divided into two important sub-
categories: computational affected items and factual affected
items. See N.C.F. Energy Partners v. Commissioner, 89 T.C.
741, 744 (1987). A computational affected item is one that
can be determined mathematically, such as the medical
expense deduction just described. Sec. 6231(a)(6); White v.
Commissioner, 95 T.C. 209, 211 (1990). A factual affected
(152) BEDROSIAN v. COMMISSIONER 159
item is an affected item that requires further factual deter-
minations at the partner level. The extent to which a partner
is at risk for his investment is an example of a factual
affected item. Hambrose Leasing 1984–5 Ltd. P’ship v.
Commissioner, 99 T.C. 298, 310 (1992) (‘‘It is only after the
losses, deductions, and credits of a partnership have flowed
through to [the] individual partners that the at-risk status of
the partners can be determined.’’); Roberts v. Commissioner,
94 T.C. 853.
Whether an affected item is factual or computational
affects what procedures apply to the assessment of tax
relating to that item. Computational affected items are not
subject to deficiency procedures. See generally sec. 6230(a)(1).
Following a TEFRA proceeding, the IRS may assess tax
attributable to those items, along with the tax attributable to
partnership items, by way of computational adjustment. Sec.
6231(a)(6). In contrast, affected items that require partner-
level determinations are subject to deficiency procedures.
Sec. 6230(a)(2)(A)(i).
IV. Professional Fees
The issue that would be before us in a motion for
reconsideration is whether tax resulting from the IRS’ dis-
allowance of a deduction for the professional fees reported by
the Bedrosians is a partnership item or a computational
affected item, either of which can be assessed without fol-
lowing deficiency procedures. If it is either of those, we would
lack jurisdiction over the IRS’ disallowance of a deduction for
the professional fees in this proceeding. If, however, the IRS’
disallowance of a deduction for the professional fees is a fac-
tual affected item or a nonpartnership item that is wholly
unrelated to the partnership, any tax resulting from the
adjustment must be assessed through deficiency procedures,
and we would have jurisdiction to determine the item in this
proceeding.
The Bedrosians argue:
In the intervening time between the Opinion and now, the Court (and
other courts) have had occasion to refine the analysis concerning the
proper characterization of legal fees that are disallowed based on a part-
nership sham determination. In particular, in Domulewicz v. Commis-
sioner, T.C. Memo. 2010–177, the Court determined that legal fees dis-
160 144 UNITED STATES TAX COURT REPORTS (152)
allowed based on their connection to a putative partnership sham trans-
action were in fact affected items.
The Bedrosians are correct, insofar as their statement goes.
But the question remains whether the deductibility of the
professional fees is a computational affected item or a factual
affected item that is subject to deficiency procedures.
Here, the very case cited by the Bedrosians is instructive.
In that case, we stated:
To the extent that the fees were related to the partnership and to the
transaction, the fees (and the S corporation’s claimed deduction of the
fees) were affected by the partnership-item determination in that the
fees were nondeductible given the lack of an income, profit, or business-
related motive encompassed in, and then flowing from, the partnership-
level determination. * * * [Domulewicz v. Commissioner, T.C. Memo.
2010–177, slip op. at 9; emphasis added.]
We went on to state that, if the fees were related to a part-
nership that was determined in the TEFRA proceeding to be
a sham, then the payment of the fees would have lacked the
‘‘business-related, profit, or income motive that served as a
precondition to deducting the fees under section 162, 183, or
212, respectively, the only statutory provisions that would
have permitted such a deduction.’’ Id., slip op. at 10. In sum,
if the fees relate to a partnership that is determined to be
a sham, then the disallowance of a deduction for the fees is
an affected item. With that, we turn to the professional fees
deducted by the Bedrosians.
Both the Bedrosians and the IRS argue that the deduct-
ibility of the professional fees is an affected item, but our
jurisdiction does not turn on that question. We lack jurisdic-
tion only if the deductibility of the professional fees is a com-
putational affected item.
The deductibility of the professional fees is a factual
affected item. The professional fees deducted by the
Bedrosians were reported on their Schedule A as simply
‘‘TAX ATTORNEY FEES’’; they were not reported as flowing
from a TEFRA entity. A partner-level factual determination
must be made as to whether those fees relate to the
Bedrosians’ participation in the partnership that has been
determined to be a sham. The answer to this question may
be known to the parties; it may be a fact to which the parties
are willing to stipulate. But a factual determination at the
(152) BEDROSIAN v. COMMISSIONER 161
partner level over which there is no dispute nonetheless
remains a factual determination at the partner level. Accord-
ingly, the deductibility of the professional fees is a factual
affected item subject to deficiency procedures and over which
we have jurisdiction.
Conclusion
The Bedrosians ask us to grant leave for them to file an
untimely motion for reconsideration. That motion for
reconsideration would have us reconsider our opinion in
which we held that we have jurisdiction over the deduct-
ibility of professional fees that the Bedrosians reported as
deductions on their personal income tax return. Because the
deductibility of those fees is a factual affected item, we have
jurisdiction to determine the deductibility of those fees in
this proceeding. In doing so, we are bound by prior partner-
ship-level determinations, such as the determination that the
partnership is a sham. Because the motion for reconsider-
ation would not yield a different result, we will deny the
motion for leave.
An appropriate order will be issued.
f