UNITED STATES TAX COURT

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137 T.C. No.

UNITED STATES TAX COURT

RANDALL J. AND KAREN G. THOMPS,0N, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No.

30586-08.

Filed December 27,

2011.

On the basis of a final decision in a partnership-level

proceeding for RJT Investments X, LC, which had made all

partnership allocations for its tax year ended Dec. 31,

2001, to P-H, R determined an income tax deficiency and an

accuracy-related penalty for Ps' 2001 tax year.

Immediately

after issuing a notice of deficiency to Ps, R directly

assessed the deficiency and penalty amounts determined in

that notice. R has since acknowledged errors in these

deficiency and penalty amounts and has made corresponding

assessment abatements. Nonetheless, R argues that the

notice of deficiency is invalid and that the Court lacks

jurisdiction over the case becausel the changes to Ps' 2001

tax liability shown on the notice are computational

adjustments that are not subject tb deficiency procedures.

Ps have conceded the amount of the deficiency but urge us to

follow Petaluma FX Partners, LLC v. Commissioner, 591 F.3d

649

(D.C. Cir.

2010),

affg.

in part,

revg.

in part and

remanding in part 131 T.C. 84 (2008), and hold that the

accuracy-related penalty does not relate to an adjustment to

SERVED Dec272011

- 2 a partnership item and can be assessed only following

deficiency procedures.

Held: Computing Ps' income tax deficiency arising from

the adjustments finalized in the partnership-level

proceeding in RJT Inys. X, LLC v. Commissioner, docket No.

11769-05

(June 6,

2006), affd. 491 F.3d 732

(8th Cir. 2007),

does not require any partner-level determinations, and

assessing or collecting this deficiency is not subject to

deficiency procedures.

Held, further, that the errors in the notice of

deficiency do not constitute a "determination" under sec.

6212(a),

I.R.C.

Held, further, that the accuracy-related penalty may be

directly assessed and is not subject to deficiency

procedures, notwithstanding the need for partner-level

determinations.

Held, further, that the notice of deficiency is invalid

and the Court lacks jurisdiction over this case.

R's motion

to dismiss for lack of jurisdiction will be granted.

Edward M. Robbins, Jr., for petitioners.

James A. Kutten, for respondent.

OPINION

WHERRY, Judge:

This case is before the Court on

respondent's motion to dismiss for lack of jurisdiction.

The

case constitutes a partner-level action under the unified

partnership audit and litigation procedures of the Tax Equity and

- 3 Fiscal Responsibility Act of 1982

402(a),

96 Stat.

(TEFRA),

Pub. L.

97-248,

sec.

324.1

Background

Partnership-Level Proceeding

Petitioner husband, Randall J. Thompson, engaged in a Sonof-BOSS (BOSS) market linked deposit transaction in 2001, seeking

to offset approximately $21,500,000 in capital gains.

facilitate the BOSS transaction, petitioner husband formed RJT

Investments X, LLC (RJT), on October 12, 2001.

For its tax year

ended December 31, 2001, RJT made all partnership allocations to

petitioner husband.

The Commissioner issued a notice of final

partnership administrative adjustment

(FPAA) to RJT for 2001 on

March 21, 2005, disallowing deductions and losses and determining

an accuracy-related penalty under section 6662.

Petitioner husband, as the tax matters partner of RJT,

petitioned this Court challenging the FPAA in a partnership-level

proceeding, RJT Inys. X, LLC v. Commissioner, docket No.

11769-05.

2006.

The Court entered a decision in that case on June 6,

That decision was affirmed by the Court of Appeals for the

Eighth Circuit in RJT Invs. X, LLC v.

Commissioner, 491 F.3d 732

(8th Cir. 2007).

1Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986 (Code), as amended and in

effect for the year at issue, 2001, and all Rule references are

to the Tax Court Rules of Practice and Procedure.

- 4 II.

Issuance of Notice

Petitioners'

2001 Form 1040, U.S. Individual Income Tax

Return, included income, deductions, and losses relating to RJT.

In a stipulation of facts filed June 16, 2011, the parties agree

that "On September 22, 2008, respondent timely mailed an

affected items notice of deficiency for the year ending December

31, 2001, to petitioners determining a deficiency in federal

income tax and an addition to tax pursuant to I.R.C. § 6662(h)"."

The "copy of the affected items notice of deficiency issued to

petitioners for the year- ending December 31, 2001" attached to

the stipulation of facts shows the following amounts:

(1)

$4,634,243.00, labeled "Tax"; and (2) and $1,853,697.20, labeled

"IRC 6662(h)".

The stipulation of facts further states that "On

September 23, 2008, respondent "assessed the following against

petitioners regarding the flow through adjustments from RJT

Investments X, LLC (a)

6662,

(b)

$1,853,697.20 'penalty pursuant to I.R.C.

$4,634,243.00 tax, and (c)

$3,053,575.48 interest." '

Petitioners filed a petition on December 19, 2008, before

the December 22, 2008, date shown as the "Last Day to File a

Petition With the United States Tax Court" on the September 22,

2008, notice of deficiency.

On December 2, 2009, respondent

filed a motion to dismiss for lack of jurisdiction (motion), and

a memorandum.in support of respondent's motion to dismiss for

lack of jurisdiction.

Pursuant to an order of the Court of

- 5 December 8, 2009, petitioners timely filed a memorandum in

opposition to respondent's motion to dismiss for lack of

jurisdiction on December 31, 2009..

Respondent's motion asks

that this case be dismissed for lack of jurisdiction

upon the ground that no valid statutory noti.ce of

deficiency * * * has been sent to petitioners with

respect to taxable year 2001, nor has respondent made

any other determination with respeát to petitioners'

taxable year 2001 that would confe jurisdiction on

this Court. [Emphasis supplied.]

The motion argues that the September 22; 2008,

"notice of

deficiency is invalid as the determination relates to

computational flow through adjustments Jhat are immediately

assessable and not affected items requ2ring partner-level

determinations made through a notice of deficiency".

III. Errors in Notice

In reviewing the record in the case, the Court noted two

apparent errors by respondent in making adjustments to

petitioners' 2001 Form 1040 to give effect to the June 6, 2006,

decision in the partnership-level proceeding.

The Court brought

these apparent errors to the parties' a tention.2

The parties

2The Court uncovered these apparent errors when comparing

the June 6, 2006, decision in.the. partnership-level proceeding

and petitioners' Form 1040, on the one hand, with the adjustments

shown on Form 886-A, Explanation of Ite s, attached to the Sept.

22, 2008, notice of deficiency, on the other.

One of these

adjustments sought to give effect to thÅ holding in the

partnership-level decision of June 6, 2Ó06, that "RJT Investments

X, LLC is disregarded for Federal incomÄ tax purposes."

(continued...)

subsequently filed a stipulation of settlement on July 26, 2011.

The stipulation of settlement states in part that

To the extent that this Court has iurisdiction to

redetermine respondent's determination in the September

22, 2008, affected item notice of deficiency, the

parties agree that respondent's determination regarding

the deficiency and penalty pursuant to I.R.C. § 6662(h)

2(...continued)

Explaining that "We have adjusted your return in accordance with

the Tax Court decision for RJT Investments X, LLC", Form 886-A

purports to deny petitioners the entire amount of the short-term

capital loss that they had claimed on Schedule D, Capital Gains

and Losses,

on account of "LIQUIDATION OF RJT INVESTMENTS X,

LLC".

Form 886-A shows a,"Per Return" short-term capital loss of

$22,006,759 and a corresponding positive "Adjustment" in the same

amount. However, the Court observed that petitioners' Schedule D

had actually claimed, on line 7, a "Net short-term capital

* * * loss" of $21,032,415. The amount of $22,006,759 was, in

fact, the claimed "Cost or other basis" of the purported

investment in the partnership, shown in column (e) of line 1 of

Schedule D.

Another adjustment on Form 886-A sought to give effect to

the determination in the partnership-level decision of June 6,

2006, that the appropriate amount of the "Partnership Item"

described as "Investment income inciuded in portfolio income" was

zero and not $206. The Court noted that this redetermination of

the relevant partnership item should have "zeroed out" the $206

amount shown on petitioners' Schedule K-1, Partner's Share of

Income, Credits, Deductions, etc., on line 4 (b), Ordinary

dividends.

Nonetheless, if. the $206 amount was actually received

by petitioner husband, it should arguably still have been shown

on petitioners' Schedule B, Interest and Ordinary Dividends,

under Part II, Ordinary Dividends.

Instead of being denoted

"FROM K-1 - RJT INVESTMENTS X,

LLC",

as petitioners had done,

the

dividend should have been attributed directly to the underlying

security. However, it is unclear whether the partnership-level

decision of June 6, 2006, had eliminated the partnership item of

$206 of dividend or merely rendered it a nonpartnership item.

the latter, then there should have been no net amount of

adjustment to petitioners' Schedule B. But Form 886-A, under

"Dividends", zeroed out the $206 amount with a negative

adjustment in the same amount, without an accompanying positive

adjustment to reflect the nonpartnership character of the item.

- 7 for 2001, modified as set forth on the Audit Statement

and Statement - Income Tax Changes attached hereto as

Exhibit B, is correct. [Emphasis sùpplied.]

Exhibit B attached to the July 26, 2011, stipulation of

settlement, includes a Form 3610, Audit Statement, and a Form

5278, Statement - Income Tax Changes, for petitioners for tax

year 2001, each bearing a date of July 18, 2011.

The July 18,

2011, Form 3610 shows a "statutory deficiency" of $4,248,420.

Line 21 of the July 18, 2011, Form 5278 confirms that the

"Deficiency - increase in tax" is $4,248,420.

By comparison, on

the September 22, 2008, notice of deficiency, the amount shown as

Deficiency" under "Tax" is $4,634,243.

3Also, the July 18, 2011, Form 3610 shows an amount under

"§ IRC 6662(h)" of $1,699,368.

Again,

the July 18,

2011,

Form

5278 confirms on line 24 that "Penalties and/or Additions to Tax"

under "IRC 6662" amount to $1,699,368.

Ihr comparison, on the

Sept. 22, 2008, notice of deficiency, the amount shown for "IRC

6662(h)" is $1,853,697.20.

We note that the deficiency and penalty amounts in the

attachments to the July 26, 2011, stipu ation of settlement are

based on petitioners' revised taxable income that reflects,

disallowance of a net short-term capital loss of $21,032,415, the

actual amount petitioners had claimed on their Schedule D, and

not the "Per Return" amount of $22,006,959 shown on Form 886-A.

We further note, however, that this rev sed taxable income still

does not account for the $206 dividend amount.

As we explain infra Discussion, pt. I.C., we decline to look

behind the purported affected items notice of deficiency in

testing its validity. We acknowledge that in discovering what

appeared to be errors in that notice, we considered material

submitted by the parties, including petitioners' Form 1040, and

compared it with attachments to the notice. We ignored all such

material in conducting our jurisdictional inquiry.

Further,

because we conclude infra Discussion,. pts. I.E. and II.C., that.

we lack jurisdiction over the case, we ish to make it clear that

in alerting the parties to these apparent errors we did not make

(continued...)

We recognize that the September 22, 2008, notice of

deficiency contains deficiency and penalty amounts that are

larger than the respective amounts that respondent has now

stipulated as -"correct".

Presumably, respondent now believes

that the smaller stipulated amounts are the appropriate versions

of what he characterized in paragraph 7 of his motion as

"computational assessments

6230(a) (1)

[that] are authorized by I.R.C.

to be directly assessed without the issuance of an

affected items notice of deficiency."

Discussion

We consider,

in sequence, our jurisdiction over petitioners'

income tax deficiency and the accuracy-related penalty.

Jurisdiction Over Deficiency

Whether we have jurisdiction over petitioners' income tax

deficiency, in turn, requires us to decide the following three

issues:

(1) Whether an affected items notice of deficiency

issued in the absence of a need for partner-level determinations

is void ab initio;

(2) whether an erroneous computational

adjustment, which both was made and can be corrected without

partner-level determinations, constitutes an additional

3(...continued)

any-findings on these issues, which speak for themselves in

accordance with the statements on the documents.

Though the

parties have come to an agreement regarding these apparent

errors, we disclaim any responsibility for, or jurisdiction over,

their agreement.

determination rendering valid the notiòe containing it; and (3)

whether any partner-level determinations are required, in

petitioners' case, to properly reflect the treatment of

partnership items made in the partnership-level proceeding.

Notice Void Ab Initio

We first confront the argument that even though an affected

items notice of deficiency may not be required in the absence of

a need for partner-level determinations

once the Commissioner

does issue such a notice, he is bound by it.

then, pursuant to section 6213(a),

If this is correct,

"no assessment.of a deficiency

in respect of any tax * * * shall be made, begun, or

prosecuted * * *, if a petition has been filed with the Tax

Court, ïuntil the decision of the Tax Court has become final."

This argument presumes that an affected items notice of

deficiency is elective if no partner-level determinations are

needed.

Moreover, once the Commissioner makes the election, then

the restrictions on assessments are necessarily activated.

This

argument, and the electiveness of an affected items notice of

deficiency, are refuted by the plain la guage of the statute.

The applicability or inapplicability of deficiency

procedures under section 6230 is statutorily mandated and bereft

of any administrative discretion.

Under section 6230(a) (1),

"Except as provided in paragraph (2)

[relating to affected items

requiring partner-level determinations] or (3)

[relating to items

- 10 -

ceasing to be partnership items], subchapter B of this chapter

[containing deficiency notice procedures and requirements]

shall

not apply to the assessment or collection of any computational

adjustment."

(Emphasis supplied.)

Conversely, under section

6230(a) (2) (A),

"Subchapter B shall apply to any deficiency

attributable to * * * affected items which require partner level

determinations".

(Emphasis supplied.)

Thus, for giving partner-

level effect to the treatment of any partnership item, the

deficiency procedures of subchapter B, sections 6211 through

6216, either apply or do not, depending upon whether partnerlevel determinations are, or are not, needed.

The Commissioner

enjoys no element of choice of any sort.

In the absence of a need for partner-level determinations,

sections 6211 through 6216 simply do not apply.

Consequently,

whatever notice the Commissioner may inappropriately (albeit

- 11 -

understandably)

issue,4 it cannot trigger the restraints on

assessment of section 6213(a).5

Any Other Determination

We now consider the contention that in making.an erroneous

computational adjustment, respondent has "made any other

determination with respect to petitioners' taxable year 2001 that

would confer jurisdiction on this Court "

4See the Commissioner's Chief Counsel Notice CC-2009-11

(Mar. 11, 2009), which.outlines a proteótive.assessment procedure

for "those cases in which a partner has sold at a loss * * * the

TEFRA partnership interest".

Notice CC-2009-11 acknowledges that

If the IRS issues a notice of defióiency, the statute

of limitations is tolled, but only1if section

6230(a) (2) authorizes the notice of deficiency. * * *

To account for this uncertainty in classifying affected

items, the IRS should issue a notice of deficiency with

respect to the affected items and Ény penalties

relating to the affected items * *¡* [regardless of the

need for partner-level determinatlons. Also], the IRS

should assess the entire deficiency, including any

penalties, reflecting both the outcome of the

partnership-level proceeding as well as what was

included in the affected item notice of deficiency.

*Ne note that no Court of Appeals has yet.concluded as much.

The Court of Appeals for the Sixth Circuit in Desmet v.

Commissioner.,

581 F.3d 297,

302

(6th Cir.

2009),

affg.

in part

and remanding on other grounds Domulewicz v. Commissioner, 129

T.C. 11 (2007), appears to have come close when it acknowledged

that "TEFRA prefers that * * * computational adjustments be

assessed directly to the partner's return, without a second set

of proceedings against.each partner." ¡Ihf comparison, the Court

of Appeals for the Ninth Circuit in Napoliello v. Commissioner,

655 F.3d·1060,

1064 n.1

(9th Cir.

2011),! affg. T.C.. Memo. 2009-

104, declined to "reach the question of!whether the notice of

deficiency would be invalid if no partner-level determination

were necessary." We do not enjoy the luxury of leaving the issue

unresolved here.

- 12 -

It may be argued that if an affected items notice of

deficiency determines an amount higher than the amount that the

Commissioner eventually concedes as the definitive deficiency,

then the notice does not properly reflect the treatment of the

partnership items at issue.'

Specifically, the argument posits

that the acknowledged errors in computing the impact of the

treatment of one or more partnership items cause the notice's

determination no longer to be a "computational adjustment" under

section 6231(a) (6) but to constitute a "deficiency" within the

meaning of section 6211(a).

The argument would bring the notice

of deficiency within the purview of the deficiency procedures of

sections 6211 through 6216.

Consequently, whether or not

partner-level determinations are needed, the argument would

conclude that the notice is valid and validly confers

jurisdiction on us to redetermine the deficiency shown in the

notice.

Petitioners have chosen not to make this argument and

declared instead that the computational errors in the affected

items notice of deficiency "have no bearing on the Court's

jurisdiction in this case." Ironically, petitioners' failure to

advance this argument has no bearing on our jurisdictional

inquiry. We have an affirmative duty to investigate the extent

of our jurisdiction regardless of the parties' submissions. See,

e.g., Arbaugh v. Y & H Corp.,

546 U.S. 500,

514

(2006)

(underlining that courts "have an independent obligation to

determine whether subject-matter jurisdiction exists, even in the

absence of a challenge from any party"); United States v. Cotton,

535 U.S.

625,

630. (2002)

(holding that "subject-matter

jurisdiction, because it involves a court's power to hear a case,

can never be forfeited or waived").

- 13 Supporting this argument is the tenet that the words

"properly reflects" in the definition of "computational

adjustment" in section. 6231(a) (6) are construed to require an

objectively ascertainable treatment of ·a partnership item.

Further, the argument assumes that any.such ascertainment should

be made in the light of all relevant information, regardless. of

when or how it.:'us revealed.

Extending this argument to its

logical conclusion yields manifest inconsistencies with the

intent and design of the two-tier TEFRA|regime.

These

inconsistencies would inevitably arise because a "computational

adjustment" is a predicate for not justja direct assessment under

section 6230(a) (1), but also an affected items notice of

deficiency under section 6230 (a.) (2) (B).

See Bush v. United States,

655 F.3d 1323,

1332

(Fed. Cir.

2011) (acknowledging that "Our holding that the assessments in

this case meet the definition of 'computational adjustment' under

I.R.C. § 6231(a) (6) does not end our analysis. Notices of

deficiency would still be due for any deficiencies (including any

that would otherwise be a computational adjustment) attributable

to 'affected items which require partner level determinations'

under § 6230(a) (2) (A) (i)."

(Emphasis supplied.)); Desmet v.

Commissioner, supra at 302 (explaining that "the IRS may proceed

to make computational adiustments to each partner's

return * * * in one of two ways.

First, the IRS may directly

assess the tax against the individual partner by making a

computational adjustment--applying the new tax treatment of all

partnership items to that partner's return. * * * Second, if the

partner's liability relates to 'affected items which require

partner level determinations,' then the IRS must send a notice of

deficiency to that partner, thereby initiating proceedings

against him individually, pursuant to the standard deficiency

procedures set forth in I.R.C. §§ 6211 16." (emphasis supplied)(citations omitted)).

- 14 -

In particular, the exclusions from the "no-second-notice"

rule of section 6212(c), which are contained in section

6230(a) (2) (C) and are restricted to a notice issued under section

6230(a) (2) (B), would be unavailable if an error in a

computational adjustment is deemed to be "another determination".

If this determination represents a section 6211(a) deficiency

(instead of a section 6231(a) (6) computational adjustment), then

the notice containing it would constitute a section 6212(a)

notice of deficiency (instead of a section 6230 (a) (2) (B) affected

items notice of deficiency).

Any time we redetermine downwards a deficiency shown in an

otherwise validly issued affected items notice of deficiency,

after making partner-level determinations, we are necessarily

holding incorrect the computational adjustment shown on the

notice.

If the judicially determined error in the computational

adjustment is conceived of as "another determination" that the

Commissioner has made, then our holding would ipso facto trigger

the prohibition against a second notice contained in section

6212(c).

Therefore, if no notice had been previously issued for

the same tax year, then the affected items notice would foreclose

the possibility of another notice, even with respect to

nonpartnership items.

More troubling, a prior notice for the

same tax year for nonpartnership items would render invalid the

notice underlying our redetermination.

In other words, our

- 15 redetermination would be moot preciselý.because we disagree with

the Commissioner's initial determination.

We reject such perverse results and the stilted logic that

inexorably leads to them.

Instead, we hold that the words

"properly reflects" in the definition of "computational

adjustment" in section 6231(a) (6) are construed as of the time

the notice is issued and without looking behind that notice.

Thus, if the notice, on its face, purports to give proper effect

to the treatment of a partnership item,'then the resulting

determination is a computational adjustment within the meaning of

section 6231(a) (6).

Consequently, unde¼ section 6230(a) (2) (A),

the validity of this notice depends solely on the need for

partner-level determinations.

Do Not Look Behind the Notice

Do Not Go to Tax Court

For a jurisdictional inquiry, the words "properly reflects"

in the definition of "computational adjùstment" in section

6231(a) (6) are construed to require not.a reflection that is

"proper"

(i.e., accurate and correct) in an abstract sense, but

merely a reflection that the Commissioner contends 1s proper.

Looking for a reflection in the Commissioner's all-too human eye

instead of one in a perfectly reflecting mirror, under section

6231(a) (6), is in complete harmony with'our construction of

"deficiency" in section 6211(a).

Under section 6211(a), we do

not seek to establish an objectively verifiable existence of a

- 16 deficiency to test the validity of a notice of deficiency.

focus, instead, on the Commissioner's determination of a

proclaimed deficiency.

As we explained in Hannan v.. Commissioner, 52 T.C. 787, 791

(1969),

"it is not the existence of a deficiency but the

Commissioner's determination of a deficiency that provides a

predicate for Tax Court jurisdiction. * * * Indeed, were this not

true, then the absurd result would be that in every case in which

this Court determined that no deficiency existed, our

jurisdiction would be lost."

This would, among other things,

read out of the Code our incidental refund jurisdiction of

section 6512(b).

Memo. 1991-144

See id.; see also Huffman v. Commissioner, T.C.

(holding that even after the Commissioner

subsequently conceded the entire amount of the deficiency

initially determined in the notice of deficiency, the notice

continued to retain validity for jurisdictional purposes), affd.

in part and revd. in part on other grounds 978 F.2d 1139 (9th

Cir.

1992).

Further, in eschewing to look behind the affected items

notice of deficiency, we are being perfectly consistent with our

precedent in testing the validity of other "ticket[s]

court", Corbett v. Frank, 293 F.2d 501,

502

to the tax

(9th Cir. 1961), viz,

section 6212(a)

notices of. deficiency a d section 6330(d) (1) (A)

notices of determination.8

Our holding is also in accord with Meyer v. Commissioner, 97

T.C. 555

(1991).

In Meyer v. Commissioner, supra at 559, we

observed that the Commissioner "can 1mmediately assess and

collect the addition to tax under section 6651(a) (1) * * * if

such additions are determined (i.e., measured)- by the amount of

tax shown on the taxpayer's return"..

For one of the.tax years at

issue in that case, the Commissioner had summarily assessed an

erroneous amount as an addition to tax under section 6651(a) (1).

8In the context of a sec. 6212(a) notice of, deficiency, we

laid down a general rule of not looking behind the notice to

determine its validity in Greenberg's Express,.Inc. v.

Commissioner,

62 T.C.

324,

327

(1974).

We have adhered to this

rule ever since.

See Pietanza v. Commissioner, 92 T.C. 729, 735

(1989), affd. without published opinion 935 F.2d 1282 (3d Cir.

1991); Riland v. Commissioner,

79 T.C.

2.85,

201

(1982); Estate of

Brimm v. Commissioner, 70 T.C.. 15, 22 (1978). Also, in deciding

whether the Commissioner has made a "determination" within the

meaning of sec. 6212(a), we need only èxamine the face of the

notice.

See Sealy Power, Ltd. v. Commissioner, 46 F.3d 382, 388

n.25 (5th Cir. 1995), affg. in part and revg. in part T.C. Memo.

1992-168; Clapp v. Commissioner, 875 F.2d 1396, 1402 (9th Cir.

1989); Campbell v. Commissioner, 90 T.C 110 (1988); cf. Scar v.

Commissioner, 814 F.2d 1363 (9th Cir. 1987) (holding that because

the face of the notice of deficiency re ealed that the

Commissioner had failed to make a "determination" within the

meaning of sec. 6212(a), the notice was insufficient to confer

jurisdiction on the Court), revg. 81 T.C. 855 (1983).

We extended these principles of lì iting our gaze to a

notice's surface to sec. 6330(d) (1) (A) Ínotices of determination

in Lunsford v. Commissioner, 117 T.C. 159, 164 (2001).

In so

doing, we overruled precedent holding ÇÉat we must first look

behind the determination to see whether a proper hearing was

offered in order to have jurisdiction.] See Meyer v.

Commissioner, 115 T.C. 417 (2000), abrogated by Johnson v.

Commissioner,

117 T.C.

204

(2001).

- 18 -

Subsequently, the Commissioner abated this erroneous assessment

and included a smaller amount as a section 6651(a) (1) addition to

tax in a section 6212(a) statutory notice of deficiency.

We did not attempt to verify the accuracy of the smaller

amount.

Instead, we noted that the "inclusion of the additions

to tax under sections 6651(a) (1) * * * in the deficiency notice

* * * raises a jurisdictional question".

Id. at 562.

Even

though the Commissioner had not challenged our jurisdiction, we

did so sua sponte.

"Having concluded that the additions to tax

in question are not subject to the deficiency procedures,

* * *

[we ruled] on our own motion [to] dismiss this case for

lack of jurisdiction and strike as it relates to" the amount of.

the section 6651(a) (1) addition to tax shown on the notice.

Id.

We refrained from looking behind the notice to consider whether

the amount shown on the notice was the proper section 6651(a) (1)

addition to tax.

We do the same here with respect to the section

6230(a) (1) computational adjustment that does not need any

partner-level determinations.

Finally, we note that if we were to hold otherwise, we would

allow a taxpayer to proceed with a petition by assigning errors

to a notice, even though adjudicating such errors would not

require that we make partner-level determinations.

Allowing

taxpayers such a prepayment forum would circumvent congressional

intent as expressed in sectïon 6230(c) limiting a partner's

- 19 -

relief from erroneous computational adjustments to a claim or

suit for refund.

Whether such a restriction is reasonable or

just is for Congress to decide, and we believe it already has.'

No Partner-Level Determinations Needed

The September 22, 2008, notice of deficiency made four

discrete computational adjustments to petitioners' 2001 income

tax liability, each of which purportedly "properly reflects the

treatment under this subchapter of a partnership item".

6231(a) (6).

These adjustments comprised:

Sec.

(a) Eliminating the

$206 of dividend income reported on petitioners' 2001 Schedule B

as income from RJT's Schedule K-1;

(b) eliminating the $12,415

capital loss reported on petitioners' 2001 Schedule D, line 5, as

a flowthrough loss from RJT's Schedule K-1;

(.c) eliminating the

$81,040 investment expense deduction reported on Schedule A,

Itemized Deductions,

line 22, as a flowthrough deduction from

'Compare sec. 6230(a) (3) (A) (using the phrase "request for

abatement" (emphasis supplied) for seeking innocent spouse relief

from "a liability that is attributable to any adjustment to a

partnership item") with sec. 6230(c) (1) !(using the phrase "claim

for refund" (emphasis supplied) for a claim made "on the grounds

that * * * the Secretary erroneously computed any computational

adjustment necessary * * * to apply to the partner a * * *

decision of a [TEFRA partnership-level proceeding]").

see also Rev. Rul.

78-22,

Rev. Rul. 77-320, 1977-2 C.B.

1978-1 C.B.

(holding that an

individual engaged in the same economic activity both as a sole

proprietor and as a partner is deemed to be engaged in two

distinct activities for section 183 purposes)."

"This excludes, pursuant to sec. 183 (b) (1), "deductions

which would be allowable * * * without egard to whether or not

such activity is engaged in for profit", such as State and local

taxes and casualty losses. No such deductions are at issue here.

We have concurred with this reasoning and concluded that

(continued....)

- 22 -

The two revenue rulings cited above predate TEFRA.

However,

section 301.6231(a) (3)-1(b), Proced. & Admin. Regs., makes it

(...continued)

in a sec. 183 inquiry in a partnership context, "the profit

motive analysis is made at.the partnership level." Antonides v.

Commissioner,

91 T.C., 686,

694

(1988),

affd.

893 F.2d 656

(4th.

Cir. 1990); see also Peat Oil & Gas Associates v. Commissioner,

100 T.C.

271

(1993)

(holding that motives of promoters and

managers of partnership control a sec. 183 analysis), affd. sub

nom. Ferguson v. Commissioner, 29 F.3d 98 (2d Cir. 1994); Krause

Commissioner,

99 T.C.

132,

168

(1992)

("Whether activities of

partnerships were engaged in with actual and honest profit

objectives is analyzed at the partnership level."), affd. 28 F.3d

1024

(10th Cir.

1994); Rosenfeld v..Commissioner,

82 T.C.

105

(1984) (declaring irrelevant the intent of individual co-owners

for analyzing partnership's profit motive); Surloff v.

Commissioner, 81 T.C. 210, 233 n.58 (1983) (stating that for sec.

183 purposes, "the partnership itself is the entity that is or is

not in a trade or business").

We find unanimity among the various Courts of Appeals that

have considered this issue, which have all held that a sec. 183

analysis for a profit motive in a partnership context is properly

conducted at the partnership level.

See Copeland v.

Commissioner, 290 F.3d 326 (5th.Cir. 2002), affg. in part and

revg. in part on other grounds T.C. Memo. 2000-81; Hill v.

Commissioner,

204 F.3d 1214 (9th Cir.

203 F.3d 836 (10th Cir.

2000); Underwood v.

2000).

However, we do detect a difference of opinion between at

least two Courts of Appeals in how sec. 183 operates to disallow

deductions claimed by a partner in a TEFRA partnership.

The

Court of Appeals for the Ninth Circuit has stated that sec. 183

directly "applies to partnerships despite the statute's failure

to mention them." Hill v. Commissioner, supra at 1218.

The

Court of Appeals for the Fifth Circuit, on the other hand, has

held "that the factors from I.R.C. § 183 are only tools for

determining the requisite profit objective under I.R.C. §§ 162

and 174; deductions for partnership expenses are not allowed or

disallowed directly under I.R.C. § 183 itself." Copeland v.

Commissioner, supra at 335.

The preceding suggests that while the Court of Appeals for

the'Ninth Circuit would consider the disallowance of a deduction

under sec. 183 a partnership item for TEFRA purposes, the Court

of Appeals for the Fifth Circuit would treat it as an "affected

item". This difference of opinion does not affect our conclusion

regarding the absence of any need for partner-level

determinations in this case.

See infra notes 17 and 19.

- 23 clear that their logic carries over to TEFRA and "The term

'partnership item' includes * * * whether partnership activities

have been engaged in with the intent to[make a profit for

purposes of section 183".

Sham Partnership and Shamed Partner

We recognize the analytical separability of a partner's

intent in investing in the partnership from the partnership's

intent in engaging in partnership activities.

However:

"We have

never held that the mere presence of.an individual's profit

objective will require us to recognize sfor tax purposes a

transaction which lacks economic substance."

Commissioner,

89 T.C.

986,

993

Cherin v.

(1987).

For a partner to claim a loss on liquidating his partnership

interest, his underlying investment must have been "entered into

for profit" within the meaning of section 165(c) (2).

partnership activities themselves were a sham,

niceties as whether * * *

"then such

[the partner s investment] was

'primarily' for profit, or whether the

subjective one are simply not involved."

Commissioner,

But if the

808 F.2d 1219,

1220

est is an objective or

Mahoney v.

(6th Cir.

1987),

affg.

Forseth

v. Commissioner, 85 T.C. 127 (1985); see also Hoffpauir v.

Commissioner, T.C. Memo. 1996-41 (holding that."A taxpayer may

not deduct * * * losses under section 1 5(c) (2)

from a tax

- 24 -

shelter which lacks economic substance, even if the taxpayer

intended to make a profit.").

In other words, for an allowable loss on liquidating a

partnership interest, each of the following is a necessary

condition.

The partner must have had a profit motive for

investing in the partnership, and the partnership transactions

themselves must not be devoid of economic substance.

v. Commissioner,

982 F.2d 163,

165

(6th Cir.

1992)

See Illes

(formulating a

two-part test for deducting investment losses in which "The

threshold question is whether the transaction has economic

substance.

If the answer is yes, the question becomes whether

the taxpayer was motivated by profit to participate in the

transaction."

(citation omitted)),

affg. T.C. Memo.

1991-449.

Even if the partner had acquired his partnership interest

with the individual motive of making a profit, he may not deduct

as losses any amounts invested in the partnership if the

partnership activities were a sham.

See Illes v. Commissioner,

supra at 165; Rose v. Commissioner,

868 F.2d 851,

1989)

853

(6th Cir.

(declaring that a "court will not inquire into whether a

transaction's primary objective was for the production of income

or to make a profit, until it determines that the transaction is

bona fide and not a sham."), affg. 88 T.C. 386

Commissioner,

857 F.2d 1383,

1385

(9th Cir.

(1987); Collins v.

1988)

(stating that

"the court does not inquire into a transaction's primary

- 25 -

objective until it determines that the ,transaction is bona fide,

that is, not a sham."), affg. T.C. Memo. 1987-217."

Conclusion

In the related partnership-level proceeding. here, RJT Invs.

X, LLC v. Commissioner, docket No. 11769-05, the Commissioner had

filed a motion for summary judgment on April 5, 2006.

That

motion asked the Court to sustain the determinations set forth in

the FPAA including the claims

That the formation of RJT Investments X, LLC, the

acquisition of any interest in RJT Investments X, LLC

by Randall Thompson and any other partner, the purchase

of offsetting positions on market,linked deposits, the

transfer of offsetting positions oÅ market-linked

deposits, the purchase of assets aÁd the distribution

of assets had no business purpose, ¡lacked economic

substance, and constituted an economic sham for income

tax purposes and were not entered.into for a profit

"See also Marinovich v. Commissionèr, T.C. Memo. 1999-179;

Schafer v. Commissioner, T.C. Memo. 1994-569; Farmer v.

Commissioner, T.C. Memo. 1994-342; Wright v. Commissioner, T.C.

Memo.

1994-288; Daoust v. Commissioner, T.C. Memo,

1994-203; cf.

Fid. Intl. Currency Advisor A Fund, LLC, by Tax Matters Partner

v. United States,

747 F. Supp.

2d 49,

236

(D. Mass. 2010)

(concluding as a matter of law that "Even if taxpayers invest in

a partnership with the individual objective of making a profit,

they are not entitled to deduct any amounts invested in the

partnership as losses under Section 165(c) (2) if the partnership

transactions are not entered into for profit", but going on to

contend that applicability of sec. 165(å) (2) is an "affected

item" and beyond the subject matter jurisdiction of a TEFRA

partnership-level proceeding).

Even as uming arguendo that

applying sec. 165(c) (2) to limit a loss claimed on liquidating a

partnership interest is an "affected item", its resolution does

not require any additional factual partner-level determinations

if the partnership-level proceeding hadlpreviously concluded that

the partnership activities were an economic sham. See infra note

19.

- 26 motive and therefore should be disregarded for.income

tax purposes. [Emphasis supplied.]

We granted this motion in its entirety in our order filed April

19,

2006.

Because we had concluded in the April 19, 2006, order that a

profi.t motive was absent at the partnership-level, our subsequent

decision filed June 6, 2006, disallowed all partnership-level

deductions and losses."

That decision also redetermined the

"We acknowledge that neither our order filed Apr. 19, 2006,

nor our decision filed June 6, 2006, in RJT Inys. X, LLC v.

Commissioner, docket No. 11769-05, cited sec. 183. We note,

however, that the redetermination of partnership items set forth

in our June 6, 2006, decision is perfectly consistent with a sec.

183 analysis applied at the partnership level. We also note that

pursuant to sec. 6226(h):

"If an action brought under this

section is dismissed, * * * the decision of the court dismissing

the action shall be considered as its decision that the notice of

final partnership administrative adjustment is correct". The

Commissioner's motion for summary judgment filed Apr. 5, 2006,

had pointed out that "the practical effect of [petitioner's]

calling no witnesses and being held to the issues and arguments

raised in his issues memorandum means that there are no genuine

issues that can be disputed at trial." That motion, granted on

Apr. 19, 2006, had asked as ultimate relief "that the

determinations of the Commissioner [set forth in the FPAA] be

sustained." On the basis of the foregoing, we have presented

above an explication of the findings and holdings of the

partnership-level proceeding.

Though both our Apr. 19, 2006,

order and June 6, 2006, decision were terse, parsing and

explicating their findings and holdings here does not, and cannot

be construed to, constitute a partner-level determination.

- 27 -

partnership income to be zero," while leaving undisturbed the

allocation of all partnership items to petitioner husband."

Our partnership-level holding that#the partnership

activities "were not entered into for aiprofit motive" is

sufficient to deny petitioners any distributive shares of

partnership deductions and losses on their individual tax return

for tax year 2001."

Also, the partnership-level conclusion that

partnership activities "constituted an ,economic sham" forecloses

"See supra note 3, pointing out th t respondent has chosen

not to include the $206 dividend amount in petitioners' taxable

income for tax year 2001 as a nonpartnefship item. We need not,

and therefore do not, decide whether in luding this amount would

have necessitated partner-level determinations.

We note that

ascertaining whether receipt of a dividènd constitutes "qualified

dividend income", as defined by sec. 1(h) (11) (B) (i), could, in

certain circumstances, entail making partner-level

determinations.

""A court with which a petition is filed in accordance with

this section shall have jurisdiction to determine all partnership

items of the partnership for the partne ship taxable year to

which the notice of final partnership administrative adjustment

relates, [and] the proper allocation of such items among the

partners". Sec. 6226(f) (emphasis supplied).

"This case, absent a stipulation of the parties to the

contrary, is appealable to the Court of Appeals for the Eighth

Circuit, which does not appear to have :decided whether deductions

may be disallowed directly under sec. 183 at the partnership

level. If the Court of Appeals were toldo so by, for example,

following Hill v. Commissioner, 204" F.3d at 1218, discussed supra

note 12, it would obviate the need for %ny partner-level

determinations.

Even assuming arguendo that the Court of Appeals

for the Eighth Circuit follows Copeland v. Commissioner, 290 F.3d

at 335, discussed supra note 12, and treats the consequences of

applying sec. 183 to the partnership as an "affected item", no

partner-level determinations would be called for here.

See infra

note 19.

- 28 -

petitioners from claiming any loss on liquidating a partnership

interest in a disregarded partnership."

We arrive at these conclusions without the need for "partner

level determinations" within the meaning of section

6230 (a) (2) (A) (i)."

Consequently, pursuant to section

Our Apr. 19, 2006, order granting respondent's motion for

summary judgment may be construed as determining at the

partnership level, and as a partnership item, the absence of a

profit motive in "the acquisition of any interest in RJT

Investments X, LLC by Randall Thompson".

That order has now

become."final" within the meaning of sec. 7481(a) (2) (A).

This

alone should suffice for concluding that no further partner-level

determinations are needed here.

However, even if we assume that applying sec. 165(c) (2) to

deny a loss on liquidating a partnership interest is an "affected

item" to be determined in a partner-level proceeding, such a

determination requires no further partner-level facts once the

partnership activities have been deemed to lack economic

substance.

See supra note 13 and accompanying text; infra note

19.

Moreover, a partnership-level conclusion that the

partnership "is disregarded for Federal income tax purposes",

while leaving unchanged the allocation of all partnership items

to petitioner husband, effectively reduces the purported

partnership to a "single-member disregarded entity". Cf. sec.

301.7701-3(a) and (b), Proced. & Admin. Regs. (providing in part

that "unless the entity elects otherwise, a domestic eligible

entity is * * * Disregarded as an entity separate from its owner

if it has a single owner"). It is a truism that no loss can be

recognized on liquidating a single-member disregarded entity.

See Callaway v. Commissioner, 231 F.3d 106, 110 & n.4 (2d

Cir. 2000) ("An example of an affected item that requires no

further factual determination at the partner level * * * [is an]

allowable deduction * * * which * * * depends on the partner's

distributive share of the partnership income or loss.

Determining the allowed deduction is a mathematical calculation

and requires no further factual finding." (citation omitted)),

revg. on other grounds T.C. Memo. 1998-99. We are confronted in

the instant case by, in effect, "a mathematical formula" that

requires petitioner husband's distributive shares of partnership

(continued...)

- 29 -

6230 (a) (1), we find ourselves without jurisdiction over

petitioners'

II.

income tax deficiency."

Jurisdiction Over Penalty

Our June 6,

2006,

decision in RJT Inys. X, LLC v.

Commissioner, docket No. 11769-05, determined that an accuracyrelated penalty applied at the partnership level.

The June 6,

2006, decision had specifically and explicitly exercised subject

matter jurisdiction over computing the

artners' outside bases."

We had concluded that "RJT Investments X, LLC was a sham,

economic substance, and was formed and/or availed [of]

lacked

overstate artificially the basis of the interest of Randall

Thompson in RJT Investments X, LLC in the amount of $22,006,759

for purposes of tax avoidance."

On the basis of this finding of

"(...continued)

deductions and losses to be no higher ¿han his distributive share

of zero income.

Further, the partnership-level finding of an

economic sham causes sec. 165(c) (2) to liminate, or set to zero,

any claimed loss on liquidating the partnership interest.

"We are mindful that respondent has not spelled out the

arguments that we have developed and relied upon to demonstrate

the absence of a need for partner-leveljdeterminations.

We are

equally mindful, however, that we are engaged in exploring the

outer limits of our subject matter jurïsdiction.

In conducting

this exercise, we would be derelict in óur duty if we were to

rest solely on the parties' submissions

See supra note 6.

"In RJT Inys. X, LLC.V.

Commissioner,

docket No.

11769-05,

the partnership, through its tax matterà partner, had filed a

motion on Apr. 5, 2006, arguing in part,that it "seeks an order

from the Court that the Court's jurisdiction in this case

* * * Excludes * * * Redetermining Randall Thompson's outside

basis in" the partnership. We had denied that motion in its

entirety in our order filed Apr. 19, 2006.

- 30 -

overstated.outside basis, we had sustained "the 40-percent gross

valuation misstatement penalty under section 6662(a),

(b) (3),

(e), and (h), I.R.C. * * * to any gross valuation misstatement

resulting from adjustments of the above partnership items."

"Out-Of-Sight" Outside Basis

After the petition in this case was filed, the Court of

Appeals for the D.C. Circuit issued its opinion in Petaluma FX

Partners, LLC v.

Commissioner,

591 F.3d 649,

655

(D.C. Cir.

2010), affg. in part, revg. in part, vacating in part and

remanding on penalty issues 131 T.C. 84

(2008), in which it

"rejected the Tax Court's conclusion that outside basis was a

partnership item * * *

[that] could * * * be determined in the

partnership-level proceeding."

On a direct appeal of that

particular partnership-level proceeding, the Court of Appeals

concluded that "the Tax Court lacked jurisdiction to determine

outside basis * * *

[and]

to determine that penalties apply with

respect to outside basis because those penalties do not relate to

an adjustment to a partnership item."

Id.

In a supplemental brief, petitioners urge us to heed the

Court of Appeals for the D.C. Circuit and hold that "that the

penalty determination in a case like this does not relate to an

adjustment to a partnership item, rather the penalty

determination is a non-partnership item which must be determined

with a Subtitle B statutory notice of deficiency."

- 31 -

Estoppel by Any Other Name

We withhold comment on how compelliing the admonition by the

Court of Appeals for the D. C. Circuit and the urging by

petitioners may otherwise be and merely observe that both arrive

too late for this case, where the partnership-level proceeding

has already been concluded.

Our June 6, 2006, decision in RJT

Invs. X, LLC v. Commissioner, docket No. 11769-05, and its

findings were affirmed,

491 F.3d 732

(8t h Cir.

2007), and are now

"final" within the meaning of section /481(a) (2) (A) .

may not, in this partner-level action,

Petitioners

ollaterally attack

subject matter jurisdiction that we had previously exercised in

- 32 -

the partnership-level proceeding."

The findings in that

proceeding are no longer subject to review by this Court."

Under collateral estoppel, once an issue is actually and

necessarily determined by a court of competent jurisdiction, that

determination is conclusive in subsequent suits based on a

different cause of action involving a party to the prior

litigation."

Montana v. United States,

440 U.S.

147,

153

(1979)

(emphasis supplied). While the reference to "a court of

competent jurisdiction" might suggest that collateral estoppel

presupposes valid subject matter jurisdiction, in fact the

doctrine applies to preclude a subsequent challenge to subject

matter.jurisdiction.

See Carr v. District of Columbia, 646 F.2d

599,. 608 (D.C. Cir. 1980) (holding that "When the question of the

[rendering] tribunal's (subject matter) jurisdiction is raised in

the original action, * * * there is no reason why the

determination of the issue should not therefore be conclusive

under the usual rules of issue preclusion." (emphasis supplied)

(citations omitted)).

Privity for invoking collateral estoppel is supplied by sec.

6226(c) (1) (specifying that "each person who was a partner in

such partnership at any time during such year shall be treated as

a party to such action" (emphasis supplied)).

".Collateral estoppel is usually invoked as an affirmative

defense.

Under Rule 39, "A party shall set forth in the party's

pleading any matter constituting an avoidance or affirmative

defense, including * * * collateral estoppel".

Jefferson v.

Commissioner,

50 T.C.

963,

966-967

(1968),

suggests that unless

collateral estoppel is affirmatively pleaded, it is deemed

waived. However, we have long held that we may raise collateral

estoppel sua sponte.

See, e.g., Monahan v. Commissioner, 109

T.C. 235,

(1995).

250

(1997);

Fazi v. Commissioner,

105 T.C.

436,

445

More importantly, insisting that the Commissioner

affirmatively plead collateral estoppel in every TEFRA partnerlevel action is an unworkable rule.

It would necessitate that we

assert jurisdiction even if only to preclude relitigating

partnership items. This would defeat, by procedure, clearly

enunciated legislative intent of attaining speed and symmetry at

the partner level.

TEFRA represents in large part the codification of the

collateral estoppel doctrine in the partnership context.

See

generally Wolff v. Commissioner, T.C. Memo. 1994-196 ("The

implication here is that in pre-TEFRA proceedings a partner would

(continued...)

- 33 -

"A valid jurisdictional judgment has preclusive effect,

* * * even if erroneous."

(D.C. Cir.

Cutler v. Hayes, 818 F.2d 879, 888

1987); see also Lambert v.

(7th Cir. 1976)

Conrad,

536 F.2d 1183,

1185

(holding that "a court ,has jurisdiction to

determine its jurisdiction; and once it has made that

determination, its decision is binding unless reversed on

appeal."

(emphasis supplied)

(citations jomitted)).

(...continued)

not be collaterally estopped by the litigation involving another

partner in the same partnership."), revd. on other grounds 148

F.3d 186 (2d Cir. 1998); H. Conf. Rept. ,97-760, at 62 (1982),

1982-2 C.B. 600, 662 (noting that under ¡pre-TEFRA law, "a

judicial determination of an issue relating to a partnership item

generally is conclusive only as to those partners who are parties

to the proceeding"); Staff of the Joint Committee on Taxation,

General Explanation of the Revenue Provisions of the Tax Eq'uity

and Fiscal Responsibility Act of 1982, gt 268 (J. Comm. Print

1982) (observing that before enactment of TEFRA, "Duplication of

manpower and administrative and judicial effort was required in

some cases to determine the aggregate tax liability attributable

to a single partnership item.

Inconsistent results could be

obtained * * * with respect to the same item"); Requiring the

Commissioner to affirmatively plead collateral estoppel in a

TEFRA partner-level action to give preclusive effect to the prior

findings and conclusions of a partnership-level proceeding would

fatally undermine the basic premises of|TEFRA--conservation of

judicial effort and consistent treatment of all partners in the

same partnership.

Secs.

6221,

6226(f)

and 6230(c) (4)

embody the codification

of collateral estoppel with respect to the partnership-level

adjudication of partnership items and penalties relating to

adjustment of partnership items. Relitigating these items in a

partner-level prepayment forum is, thus,,) statutorily estopped.

Subject to the requirements of sec. 7422(h), a refund forum may

be "allowed to assert any partner levelÍdefenses that may apply

or to challenge the amount of the compu%ational adjustment."

Sec.

6230(c) (4).

- 34 C.

Conclusion

Pursuant to section 6230(a) (1), the penalty may be directly

assessed as a computational adjustment, notwithstanding the need

for partner-level determinations."

The issuance of a

"We note a potential ambiguity in the parenthetical phrase

"other than penalties, additions to tax, and additional amounts

that relate to adjustments to partnership items" at the end of

sec. 6230(a) (2) (A) (i). The parenthetical phrase carves out these

penalties from the set of affected items requiring partner-level.

determinations that are always subject to deficiency procedures.

Read without the parenthetical phrase, sec. 6230 (a) (2) (A) (i) is

explicit that deficiency procedures "shall apply to any

deficiency attributable to * * * affected items which require

partner level determinations".

(Emphasis supplied.)

Thus, one

plausible reading of the impact of the parenthetical carveout is

that deficiency procedures never apply to penalties relating to

adjustments to partnership items.

However, an equally plausible

reading is that deficiency procedures do not always apply to

these penalties; i.e., deficiency procedures may or may not apply

to such a penalty.

The latter construction would render elective

a notice of deficiency that contains these penalties.

Compare

supra Discussion, pt. I.A., arguing against the electiveness of

an affected items notice of deficiency with respect to the income

tax deficiency shown on the notice. Under this "elective"

construction, the validity of an affected items notice of

deficiency pertaining to a sec. 6662 penalty relating to an

adjustment to a partnership item would not be disturbed by a

subsequent direct assessment of this penalty.

Because the statutory language is ambiguous, we turn to the

regulations for guidance.

See Mayo Found. v. United States, 562

U.S.

131 S.

Ct.

704,

713

(2011)

(clarifying that the

Commissioner's regulatory pronouncements are generally entitled

to the standard of deference set forth in Chevron U.S.A. Inc. v.

Natural Res. Def. Council, 467 U.S.

837

(1984)).

The governing regulation for petitioners'

2001,

is sec.

301.6231(a) (6)-1(a) (3),

Proced.

tax year at issue,

& Admin. Regs.

Unlike the statute, the regulation is unambiguous that "any

penalty, addition to tax, or additional amount that relates to an

adjustment to a partnership item is not subiect to the deficiency

procedures".

(Emphasis supplied.)

The regulation does not

eliminate all "elective" phraseology, however; it provides that

the penalty "may be directly assessed * * * following the

(continued...)

- 35 -

purported notice of deficiency cannot trigger deficiency

procedures where none applies.

also sec.

See sec. 6230(a) (2) (A) (i); see

301.6231(a) (6)-1(a) (3),

Proced.

& Admin. Regs.

The Court has considered all of petitioners' and

respondent's contentions, arguments, requests, and statements.

To the extent not discussed herein, we conclude that they are

meritless, moot, or irrelevant.

"(...continued)

partnership proceeding, based on determinations in that

proceeding, regardless of whether any partner level

determinations may be required." Sec. 301.6231(a) (6)-1(a) (3),

Proced. & Admin. Regs. (emphasis supplied).

The word "may" retains the notion of a choice on the

Commissioner's part.

However, in its context in the regulation,

following immediately after a clause that unambiguously rejects

the applicability of deficiency procedures to a penalty, "may"

seems to denote a different choice--notja choice between directly

assessing a penalty and subjecting it to deficiency procedures,

but instead a choice between directly aÃsessing the penalty and

not assessing it at all. The implication appears to be that the

Commissioner may elect not to assess a penalty against a given

taxpayer partner, and allow this partner to go penalty free,

despite successfully defending the asserted penalty at the

partnership level.

If the regulation governs, any affècted items notice of

deficiency showing a penalty relating tÉ an adjustment to a

partnership item is invalid. Despite having issued such a

notice, the Commissioner can proceed with a direct assessment and

collection of the penalty, limiting the taxpayer partner's

recourse to a suit or claim for refund.

See sec. 6230(c) (4)

(stating that in such a refund claim or suit, "a partner shall be

allowed to assert any partner level defenses that may apply" to

the penalty).

- 36 -

To reflect the foregoing,

An order of dismissal

for lack of jurisdiction will be

entered.

Reviewed by the Court.

COLVIN, HALPERN, VASQUEZ, THORNTON,

and PARIS, JJ. ,

agree

with this majority opinion.

COHEN, J., concurs in the result only.

GUSTAFSON and MORRISON,

JJ.,

consideration of this opinion.

did not participate in the

- 37 -

GOEKE, J., dissenting:

The final holding of the majority

opinion is that we do not have jurisdiction because the notice of

deficiency is invalid.

I disagree with this conclusion.

conclude that I am unable to simply concur in the result because

I believe we have jurisdiction.

Because the parties have

resolved the issue which I believe·provides jurisdiction and the

other issues were properly resolved in the prior partnership-

level case, the jurisdiction issue has no practical effect on the

resolution of this matter but rather only on the manner the

resolution is documented.

In future cases, I believe the

question of jurisdiction presented here will not be so easily

resolved and we will be forced to distinguish aspects of the

precedent we create today.

Section 301.6231(a) (6)-1(a),

Proced.

& Admin. Regs.,

provides that "if a change in a partner's tax liability cannot be

made without making one or more partnerilevel determinations",

the deficiency procedures shall apply to the change(s).

The

issue of whether the change in a partner's tax liability which

results from a partnership determinatio

requires "one or more

partner-level determinations" is acknowledged by the Chief

Counsel of the Internal Revenue Servicq as.a decision that

creates "uncertainty".

To account for this uncertainty the Chief

Counsel has issued instructions that partners who have reported a

loss as a result of the sale of a partnership interest or a

- 38 -

distribution by a partnership will be issued affected items

notices of deficiency.

2009).

Chief Counsel Notice CC-2009-11 (Mar. 11,

The present case is such a situation, and it is clear the

notice of deficiency in this case was not inadvertent.

When faced with similar notices of deficiency issued by the

Commissioner to resolve the uncertainty of whether an issue

requires partner-level determinations, I submit we should not

find such notices of deficiency invalid.

We should take

jurisdiction to carefully resolve the uncertainty.

This is not

to say that the majority.has not carefully resolved the present

case, but the time and effort to address what is determined to be

a jurisdictional issue in itself demonstrates the impracticality

of the majority's approach.1

I believe we are legally incorrect in the holdiñg that the

notice of deficiency in the present case is invalid.

The

determination of invalidity rests on the restrictions contained

in section 6230(a) (1), which, as the majority states, provides

the deficiency procedures "shall not apply" to computational

adjustments except where the deficiency is attributable to

"affected items which require partner level determinations",

which case the deficiency procedures do apply.

Respondent issued

1Petitioners filed their petition on Dec. 19, 2008.

Respondent filed his motion to dismiss for lack of jurisdiction 1

year later on Dec. 2, 2009. After extended briefing and

consideration, we are deciding on Dec. 27, 2011, that we lack

jurisdiction.

- 39 -

the notice of deficiency because he detÅrmined that it might be

required pursuant to section 6230 (a) (2) (A) (i) .

The present

notice of deficiency was issued to resolve whether there is in

fact a deficiency.

It determines a deficiency for a specific

year and is identified as a notice of deficiency.

elements of a valid notice.

110, 115

Campbell v

These are the

Commissioner, 90 T..C.

(1988)

("The notice must advisè the taxpayer that

respondent has,

in fact, determined a deficiency, and must

specify the year and amount.") .

If a notice incorrectly

determines a deficiency, we do not lose jurisdiction.

Neely v. Commissioner,

115 T.C.

287

(2000).

See, e.g.,

The majority finds

that respondent's intentional determination of a deficiency is

invalid and therefore this invalidates the notice of deficiency.

This determination is not supported by the precedent the majority

cites.

This case is not based upon a clear error or inadvertent

use of the deficiency procedures.

Respondent clearly and

intentionally determined a deficiency where the existence of a

deficiency was uncertain.

This describes the circumstances in

our deficiency docket in general.

After careful scrutiny of

facts which were not apparent from the face of the notice of

deficiency and after a settlement reached by the parties, we now

know that the amount of tax determined in the notice of

- 40 -

deficiency was incorrect.

However, our conclusion that the

deficiency determined in the notice was incorrect does not

invalidate the notice of deficiency.2

We should expect this issue to arise in the near future in

the context of other complex partnership,issues with complex

partner-level computations.

Have we now made the determination

of the correct application of section 6230 'in each of these cases

a jurisdictional analysis?

I hope not.

KROUPA, J., agrees with this dissent.

2As the majority writes in citing and quoting extensively

from Hannan v. Commissioner, 52 T.C. 787 (1969).

- 41 -

HOLMES, J., dissenting:

I agree with part II of the

majority opinion--that collateral estoppel precludes the

Thompsons from relitigating. the issues

f whether outside basis

is a partnership item and whether we had jurisdiction at the

partnership level to sustain the 40-percent penalty for

misstating it.

I agree with part I of the opinion where it says

that the "applicability or inapplicability of deficiency

procedures under section 6230 is statutorily mandated" and that

deficiency procedures either apply or don't apply, depending upon

whether the deficiency is attributable to any affected items that

require partner-level determinations.

But I disagree with the

majority's holding that the final compu ation of the Thompsons'

income tax liability requires no partner-level determinations,

which means that I also have to disagree with their decision to

dismiss the Thompsons' entire case for ,lack of subject matter

jurisdiction.

I write separately becaùse I fear that the

majority's analysis of whether an "affe ted item'requires

partner-level determinations" is wrong, and will further muddy

this already turbid TEFRA pond.

The Commissioner's argument that we lack jurisdiction

depends largely on the related partnership case, RJT Invs. X, LLC

v. Commissioner, docket No.

F.3d 732

(8th Cir 2007).

11769-05

(June 6,

2006),

affd. 491

In that case we found that the

- 42 -

Thompsons' partnership was "formed.and/or availed to. overstate

artificially the basis of the interest of. Randall Thompson in RJT

Investments X, LLC in the amount of $22,006,759 for purposes of

tax avoidance."

We also upheld the penalties that related to

those determinations--over the objections of RJT that we had no

jurisdiction to,do so--and entered decision in the case.

The

Eighth Circuit affirmed in RJT Invs. X v. Commissioner, 491 F.3d

732

(8th Cir. 2007).1

After the partnership proceedings,

the Commissioner issued a

notice of deficiency which made four adjustments:

042Eliminating the $206 of dividend income reported

on petitioners' 2001 Schedule B, Interest and

Ordinary Dividends, as income from RJT's Schedule

K-1;

042Eliminating the $12,415 capital loss reported on

petitioners' 2001 Schedule D, line 5, as a

flowthrough loss from RJT's Schedule K-1;

042Eliminating the $81,040 investment expense

deduction reported on Schedule A, Itemized

Deduction, line 22, as a flowthrough deduction

from RJT's Schedule K-1; and

042Eliminating the reported loss on liquidation of

RJT reported on petitioners' 2001 Schedule D,

Capital Gains and Losses, line 1.

1 Although the Eighth Circuit affirmed our decision, it

nowhere discussed whether we were right to hold that outside

basis is a partnership item.

See RJT Invs. X v. Commissioner,

491 F.3d 732 (8th Cir. 2007).

The Eighth Circuit stated plainly

that the only issues it was deciding were whether we had properly

found RJT to be a sham and whether that determination should be

made at the partnership level.

Id. at 735.

- 43 -

Partnerships don't pay income tax; partners do.

This means

that there has to be another step after a partnership case is

over before the Commissioner can figure out an individual

partner's tax bill.

The Code calls this a "computational

adjustment," which is just the bottom-line "change in the tax

liability of a partner which properly réflects the treatment

* * * of a partnership item."

Sec. 6231(a) (6).

To make

computational adjustments, however, the,IRS must follow certain

procedures:

Sometimes the IRS has to send each partner a notice

of deficiency, sometimes the IRS can just directly assess each

partner and send him a notice of computational adjustment, and

sometimes the IRS has to do some combination of both.

6230 (a); sec.

301.6231(a) (6)-1(a),

also Napoliello v. Commissioner,

Cir.

2011)

(Fed. Cir.

Proced.

1999),

& Admin. Regs.; see

655 F.3d 1060,

(citing Olson v. United States,

affg. T.C. Memo.

See sec.

1063-1064

(9th

172 F.3d 1311,

1317

2009-104.

Figuring out which adjustments fall into which baskets has

proven to be a major legal problem.

state:

The Code's test is easy to

When a computational adjustment is attributable to an

affected item2 that requires a determination at the partner

level, the Commissioner has to send the partner a notice of

deficiency, which gives him a chance to come to Tax Court before

2 Affected items aren't partnership items but are affected

by partnership items.

See sec. 6231(a) (5).

- 44 -

paying.

See sec. 6230 (a) (2) (A) (i).

words, but says the same thing:

The regulation uses more

"[If]

a change in a partner's

tax liability cannot be made without making one or more

partner-level determinations, that portion of the change in tax

liability attributable to the partner-level determinations shall

be made under the deficiency procedures".

1(a) (1), Proced. & Admin. Regs.

Sec. 301.6231(a) (6)-

The Code and regulations also

have a rule that when a partnership-level determination leads to

a computational adjustment that does not require a partner-level

determination, the Commissioner is to assess the increase in tax

summarily, send the partner a notice of computational adjustment,

and leave him to pay and sue for a refund:

Court for him.

See sec.

6230(a) (1); sec.

No ticket to Tax

301.6231(a) (6)-1(a) (2),

Proced. & Admin. Regs.

This makes a blurry line--between "items which require

partner level determinations" and items which do not--a blurry

line with jurisdictional consequences.3

It's usually not a good

3 The matter is profoundly ambiguous, and the Secretary

should not view our Opinion as foreclosing the possibility that

he could clear this area up much more efficiently through

regulation than the Commissioner has been able to do through

litigation. As we pointed out in Tigers Eye Trading, LLC v.

Commissioner, T.C. Memo. 2009-121, he may be en route to doing

so. See Notice of Proposed Rulemaking, 74 Fed. Reg. 7205 (Feb.

13, 2009) (proposing section 301.6231(c)-9, Proposed Proced. &

Admin. Regs., which would allow the Commissioner, upon notice, to

convert all partnership items of an abusive tax shelter

partnership to nonpartnership items, thereby routing partner- and

partnership-level disputes through a single deficiency

(continued...)

- 45 idea to make jurisdiction this confusing, and courts have had to

make do with what they can to try to make this cranny of the Code

as clean as possible.

And that leads to this case.

The I ajority concludes that

all of the computational adjustments máde in the notice of

deficiency that the Commissioner sent to the Thompsons "follow

directly from the treatment of partnership items determined in

the partnership-level proceeding, and nòne of them requires any .

partner-level determinations within the meaning of section

6230(a) (2)

and section 301.6231(a) (6)-1(a) (2),

Proced.

& Admin.

Regs . "

I disagree.

Remember the list of the four changes the

Commissioner wanted to make to the Thompson's tax bill after RJT

Investments was over:

042

Eliminating the $206 of dividend income from RJT's

Schedule K-1;

042

Eliminating the $12,415 capitål loss from RJT's

Schedule K-1;

042

Eliminating the $81, 040 investment expense deduction

from RJT' s Schedule K-1; and

042

Eliminating the reported loss on liquidation of RJT

from the Thompson's Schedule D.

3(...continued)

proceeding) .

- 46 -

The fourth item stands out--why's the Commissioner

eliminating an item from the individual partner's tax return when

that item doesn't appear on the partnership's own return?

The majority says that we can go ahead and eliminate it

anyway because we decided in RJT Investments that the partnership

was a sham, and no one can take a loss in disposing of an

interest in a sham partnership.4

I don't disagree.

But it

doesn't quite answer the jurisdictional question that we have-does a taxpayer get to come to our Court to learn this lesson, or

does he have to go to a refund court to hear the same bad news?

Finding the correct (or at least a better) answer, l think,

begins with a look at what it was exactly that the Commissioner

did after RJT Investments was over.

In RJT Investments we held

that the Thompsons' outside basis was a partnership item and

determined it to be zero,' so the Commissioner made a conforming

4 Or to put it in more sophisticated language, the

consequence of determining a partnership to be a sham is to say

that the rules of subchapter K don't apply.

This means we

disregard the partnership as an entity separate from its

partners, and treat the assets of the disregarded partnership as

if they were owned directly by the purported partners.

s Since the Eighth Circuit's decision in RJT Inves.tments,

the D.C. and Federal Circuits have held that there's no

jurisdiction at the partnership level to determine a partner's

outside basis in a partnership because it's an affected item, not

a partnership item.

See Jade Trading, LLC v. United States, 598

F.3d 1372 (Fed. Cir. 2010), affg. in part, revg. in part,

vacating in part and remanding in part 80 Fed. Cl. 11 (2007);

(continued....)

- 47 -

change to the Thompsons' return.

He issued them a notice of

deficiency in which he adjusted their outside basis in RJT to

zero.

This certainly made the treatment of outside basis on the

partner level consistent with its treatment on the partnership

level.'

This particular adjustment doe;s'n't involve any partner-

level determinations--section 301.6231(a) (6)-1(a) (2), Proced. &

Admin. Regs., tells us that "substituting redetermined

partnership items for the partner's previously reported

partnership items * * * does not constitute a partner-level

determination."

The problem is that merely zeroing out the Thompsons'

outside basis doesn't get the Thompsons|their correct tax

liability.

That's why the Commissioner's computational

adjustment was off--he skipped a partner-level step.

The notice of deficiency zeroed Òut the Thompsons' outside

basis by substituting zero for the more; than $22 million basis

that they had reported, and then increasing their taxable income

by $22,006,759 of "Short-Term Capital Gain/Loss."

Although the

s(...continued)

Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C.

Cir. 2010), affg. in part, revg. in part, vacating in.part and

remanding in part 131 T.C. 84 (2008).

Although I do not believe--certainly after two circuits

have both ruled the same way--that we had jurisdiction over

outside basis at the partnership level, the Thompsons are

collaterally estopped from attacking our contrary decision in

their case.

- 48 $22,006,759 amount does appear on the Thompsons' return, that was

not the amount of the loss that they reported for the disposition

of their interest in RJT:

Description of

Property

Date Acq.

Date Sold

Sale

Price

Cost or

Other Basis

Gain or

(Loss)

$986,759

$22,006,759

($21,020,000)

Liquidation of

RJT

Investments

X, LLC

10/12/01

12/21/01

Stipulation of Facts, Exhibit 2-J.

As one can see from this

exhibit, their claimed loss was $21,020,000.

This means that the

Commissioner ended up converting the Thompsons'

fictional loss

into a fictional $986,759 gain.

It's not that the Commissioner had the correct mathematical

formula and just made a math error.

Commissioner,

126 T.C.

322,

344-45

As we explained in Huffman

(2006), affd.

518 F.3d 357

(6th cir. 2008), there is a distinction between a "mathematical

error" and omitting a step that requires math.

Mathematical or

clerical errors generally include typographical mistakes, or

errors in addition, subtraction, multiplication, or division.

See sec. 6213(g) (2).

If the computational adjustment was

incorrect only because the Commissioner made a mathematical or

clerical error while applying the correct mathematical formula,

then I would agree that it wouldn't reqùire any partner-level

determinations within the meaning of section 6230 (a) (2) (A) (i) .7

But in this case, the Commissioner!also needed to make

another adjustment--either reducing the Thompsons' reported sales

price for RJT from $986, 759 to zero, or reducing their reported

short-term capital gains to zero, or both.

Neither the sales

price (which, I acknowledge, was nothiñg more than the return of

most of the cash that the Thompsons put into the deal) nor the

short-term loss are anywhere to be foun 1 on RJT' s return.

This becomes a bigger problem af ter the Courts of Appeals '

decisions in Jade Trading and Petaluma, with their holdings that

outside basis isn't even a partnership item.

See Jade Trading,

LLC v. United States,

2010),

598 F.3d 1372

(Fed.

Cir.

affg.

part, revg. in part, vacating in part and remanding in part 80

Fed. Cl.

591 F.3d 649

(2007); Petaluma FX Partners,

(D.C. Cir.

2010),

affg.

LLC v.

in part,

Commissioner,

revg.

vacating in part and remanding in part 131 T.C. 84

7 See Bush v. United States,

655 F.3d 1323

in part,

(2008).

(Fed. Cir. 2011)

(holding that when the IRS simply has to perform mathematical

calculations--i.e., plug numbers into a formula--to determine a

partner's tax liability, it is a computational adjustment that

does not require further determinations at the partner level) ;

Gosnell v. United States,

107 AFTR 2d 2011-2748,

2011-2 USTC par.

50,488 (D. Ariz. 2011) (finding that no partner-level

determination was needed because the substitution of a forty

percent penalty and disallowance of outkof-pocket costs required

only mathematical calculations).

- 50 Without the benefit of collateral estoppel, would we be able to

hold that the disallowance of a loss like this one can be made

without a partner-level determination, when outside basis, the

sales price, and the resulting loss are nowhere on the

partnership's return?

The problem springs from an ambiguity in the phrase

"affected items which require partner level determinations."

The

Code doesn't define "determinations" or "requires", and the

majority doesn't try to do it either.

But a minute's reflection

suggests that there are at least two plausible readings of the

phrase.

The first is one that construes the phrase to read

"affected items which require legal or factual partner-level

determinations."

If this reading is the better one,

then

deficiency procedures apply to a computational adjustment that

requires any question of. fact or law to be decided at the partner

level before the Commissioner can make the computational

adjustment.

A second reading is one that construes the phrase to read

"affected items which on the facts of this particular case

require partner level factual determinations."

The majority

- 51 adopts the second reading, but without.discussing any

alternative.®

One problem with this reading is that determinations aren't

just factual--it's well settled that determinations can be legal,

factual, or some combination of both.'

042Section

301.6231.(a) (3)-1(b), Proced. & Admin. Regs., also contemplates

this when it explains that a "'partnership item'

includes * * *

legal and.factual determinations that underlie the determination

of the amount, timing, and characterizátion of items of income,

credit, gain, loss, deduction, etc."

The term "determination".refers to deciding something's

nature or outcome.- See Terminal Wine Co. v. Commissioner, 1

8 Words in a statute generally must be interpreted according

to their ordinary, everyday meaning.

See, e.g., Commissioner v.

Soliman,

506 U.S.

168,

174

(1993).

We should only adopt a

"restricted rather than a literal or usual meaning of its words

where acceptance of that meaning would'* * * thwart the obvious

purpose of the statute."

Commissioner v. Brown, 380 U.S. 563,

571 (1965). As I illustrate infra partlI.C., the majority's

limited construction of the word "determinations" in fact thwarts

the obvious purpose of TEFRA.

' See, e.g., Smith v. Massachusetts, 543 U.S. 462, 468

(2005) (noting a distinction between "legal rather than factual

determination[s]" with regard to certain criminal procedural

safeguards); Fid. Intl. Currency Advisor A Fund v. United States,

661 F.3d 667 (1st Cir. 2011) (noting that the trial court made

various factual and legal determinations with regard to

disallowed digital.option transactions); Napoliello v.

Commissioner,

655 F.3d 1060,

1065

(9th,Cir.

2011)

(rejecting

petitioner's contention that section 30%.6231(a) (3)-1(b), Proced.

& Admin Regs., encompasses only accounting items and the factual

and legal determinations underpinning the same), affg. T.C. Memo.

2009-104.

- 52 -

B.T.A. 697, 701 (1925)

(stating that a determination is "the

final decision by which the controversy as to the deficiency is

settled and terminated, and by which a final conclusion is

reached relative thereto and the extent and measure of the

deficiency defined")."

"By its very definition and etymology

the word * * * irresistibly connotes consideration,.resolution,

conclusion, and judgment."

1368

(9th Cir.

1987)

Scar v. Commissioner, 814 F.2d 1363,

(citing Terminal Wine Co.,

1 B.T.A. at 701).

I can't say.that the majority's reading is without support

in our caselaw.

It comes from our decision in N.C.F. Energy

Partners and cases that apply its holding.

Partners v. Commissioner,

89 T.C.

741

See N.C.F. Energy

(1987),

superseded by

statute on other grounds;" see also Callaway v. Commissioner,

231 F.3d 106,

Adkison v.

1050

110

(2d Cir.

Commissioner,

(9th Cir.

2000),

129 T.C.

revg. T.C. Memo.

1998-99;

97,

affd.

102

(2007),

2010); Crowell v. Commissioner,

102 T.C.

592 F.3d

683,

689

" See also Rule 155(a) ("Where the Court has filed or

stated its opinion determining the issues in a case, it may

withhold entry of its decision for the purpose of permitting the

parties to submit computations pursuant to the Court's

determination of the issues showing the correct amount to be

included in the decision").

Before the 1997 amendments, TEFRA provided for the

determination of all penalties at the partner level.

See N.C.F.

Energy Partners v. Commissioner,

89 T.C.

741,

744-45

(1987).

This is because penalties imposed on a partner because of an

adjustment to a partnership item are "affected items." But

amendments to TEFRA in 1997 changed this structure and provided

for the determination of some penalties at the partnership level.

- 53 (1994); Carmel v.

Commissioner,

98 T.C.

Commissioner,

95 T.C.

193,

202

Commissioner,

95 T.C.

(1990) .

265,

268

(1990); "Dial, USA,

(1992); Woody v.

Inc. v.

In N.C.F. Energy Partners we noted the distinction between

affected items requiring only a computational adjustment that can

be directly assessed and those subject to subsequent deficiency

proceedings.

89 T.C. at 743-44.

Although we said that affected

items are subject to deficiency procedures if they require

factual determinations at the partner level, we did not use

"factual" in any way that implied that,we were saying that

affected items are not subject to deficiency procedures if they

require "legal" determinations at the partner level.

See ich at

744."

Look again at what the majority is!doing in its opinion--it

is making a legal determination that the Thompsons may not claim

any loss at the partner level from the liquidation of their

partnership interest because we held in RJT Investments that the

partnership was an economic sham."

This is a legal

The example we gave in N. C. F. En'ergy Partners of an

affected item requiring deficiency procedures--the addition to

tax for negligence pursuant to section.6662(b) (1) (former section

6653(a))--is itself one that requires both factual findings and a

legal determination that (i) the facts· are sufficient to

establish negligent disregard for tax rules and regulations and

(ii) that no exception or excuse applies.

89 T. C. at 744-745.

By way of analogy:

Where a taxpayer has previously been

convicted of a crime involving tax fraud, such as criminal tax

(continued . . . )

- 54 determination because it resolves a question of law--namely,

whether anyone in the Thompsons' situation is entitled to claim

such a loss.

559

See McCarthy Trust v. 'Commissioner, 817 F.2d 558,

(9th Cir. 1987)

(stating that when the parties do not dispute

the substance of the transaction,

"Application of the Internal

Revenue Code * * * is a question of law"), affg. 86 T.C. 781

(1986).

But it's a legal determination that the majority's

making at the partner level without even realizing it"--after

all, in RJT Investments,·we didn't and couldn't redetermine the

Thompsons' reported loss from the liquidation of their interest

in RJT at the partnership level because it wasn't a. partnership

item" or a penalty that related to an adjustment to a

"(...continued)

evasion under section 7201, he is collaterally estopped from

denying the existence of fraud with regards to any civil

penalties the Commissioner asserts under section 6663.

See,

e.g., DiLeo v.

Commissioner,

96 T.C.

858,

885

(1991), affd.

959

F.2d 16 (2d Cir. 1992). We don't lose jurisdiction despite the

lack of triable factual issues with regard to imposing the fraud

penalty, but rather find for the Commissioner based upon

collateral estoppel, making a legal determination that the civil

fraud penalty applies.

See, e.g., Williams v. Commissioner, T.C.

Memo. 2009-81; Anderson v. Commissioner, T.C. Memo. 2009-44.

In footnote 18, the majority concludes:

"[E]Ven if we

assume that applying sec. 165(c) (2) to deny a loss on liquidating

a partnership interest is an 'affected item' to be determined in

a partner-level proceeding, such a determination requires no

further partner-level facts once the partnership activities have

been deemed to lack economic substance." Majority op. note 18.

(Emphasis added.)

Section 6231(a) (3) defines "partnership item" as "[(A)]

any item required to be taken into account for the partnership's

(continued...)

- 55 -

partnership item.

See sec. 6226(f)

level jurisdiction).

(laýing out our partnership-

The Thompsons' loss is an affected item

that must be determined (i.e., allowed:or disallowed) at the

partner level.

See Petaluma FX Partners, LLC v. Commissioner,

591 F.3d at 655.

The determination in RJT Investments that RJT is a sham is

certainly the determination of a "partnership.item," but the

effect this has on the Thompsons' claimed capital loss from the

disposition of their interest in RJT is nevertheless one step

removed from the partnership level.

It seems such an easy step

to take, but the conclusion that the Thompsons can't claim a loss

on disposition of RJT is a low-hanging fruit that we shouldn't be

touching at the partnership level:

It's an affected item that

requires a determination at the partner level (no matter how

obvious or easy it seems) before the Commissioner can pluck,

peel, and eat it.

The sham determination only indirectly affects the loss

reported by the Thompsons for the liqui ation of their interest

(...continued)

taxable year under any provision of subtitle A[,. (B)] to the

extent regulations prescribed by the Sécretary provide that, for

purposes of this subtitle, [(C)] such item is more appropriately

determined at the partnership level than at the partner level."

Partnership items include factors that affect the determination

of partnership items such as the "legal and factual

determinations that underlie the determination of the amount,

timing, and characterization of items of income, credit, gain,

loss, deduction,

Admin. Regs.

etc."

Sec.

301.6231(a) (3.)-1(b),

Proced.

- 56 -

in RJT, and doesn't just flow through to the partners' returns as

a numerical adjustment.

This is consistent with our holding in

Petaluma on remand, 135 T.C. 581, 587

(2010).

In that opinion,

we held that a sham determination only indirectly affects outside

basis at the partner level.

Id.

We also held that the sham

determination didn't flow through to the partners'.returns as a

numerical computational adjustment.

Plus, the Thompsons'

Id.

loss from the liquidation of their

interest doesn't look like the kind of affected item the

regulations say can be adjusted without any partner-level

determinations.

Section 301.6231(a) (6)-1(a) (2),

Proced.

& Admin.

Regs., says:

Changes in a partner's tax liability with respect to

affected items that do not require partner-level

determinations (such as the threshold amount of medical

deductions under section 213 that changes as the result

of determinations made at the partnership level) are

computational adjustments that are directly assessed.

This regulation tells us that exemptions, credits, and deductions

that have percentage limitations based on the taxpayer's adjusted

gross income are types of affected items that don't require

partner-level determinations--it's something anyone with a

calculator can do as a math chore without the need for any fact

finding or even simple legal analysis at the partner level.

I also think that it's important to consider, when thinking

about whether a computational adjustment requires partner-level

determinations,

to ask whether a partner had the opportunity at

the partnership level to dispute all issues of law and fact that

will affect the computational adjustment.

See Randell v. United

States,

Otherwise we may see

64 F.3d 101,

108

(2d Cir.

1995)'.

cases like the Thompsons' again in a cóllection due process

proceeding ."

See Manko v. Commissioner, 126 T . C. 195

(2006) .

It' s true, as the majority points out in note 5, that the

Ninth Circuit didn't "reach the questión of whether the notice of

deficiency would be invalid if no partner-level

determination[s]

n.1.

were necessary.-"

[factual]

Napoliello, 655 F.3d at 1064

But the Ninth Circuit also noted that such a "proposition

would deprive taxpayers of procedural såfeguards were we to adopt

it."

Id.

I fear that the majority's òonstruction of

"determinations" won't work well and will lead to results

contrary to TEFRA' s purpose .

This case shows us how that might happen--the majority' s

approach deprives the Thompsons of a pi payment forum to

" Once the Commissioner assesses a tax, he is allowed to

collect any unpaid portion of it by filing liens against, and

levying on, a taxpayer's property. The Code allows taxpayers a

collection due process hearing before the IRS can use a lien or

levy to collect the unpaid taxes .

See, secs . 6320, 6330 . . We have

jurisdiction to review the Commissioner.'s determinations after

such hearings.

Our review of the Commissioner's determinations

in cases like the Thompsons' would be de novo, inasmuch as the

partner never received a notice of deficiency or had the

opportunity to dispute his underlying tax liability. See

Grunsted v. Commissioner,

136 T.C.

Commissioner, 133 T.C. 270, 274

T.C. Memo. 2010-67.

455,, 458 n.4. (2011); Prince v.

(2009);· Lindberg v. Commissioner,

- 58 -

challenge the Commissioner's disallowance of the loss.

Maybe

that doesn't make a lot of difference in this case--it's hard to

see how the Thompsons would care about whether we have

jurisdiction because (if we did have jurisdiction) we'd exercise

it to disallow.their loss and find them collaterally estopped

from disputing the penalty at issue.

But taking a case to conference usually means that we think

it should be analyzed for its effects on tax law more generally.

Our holding today, I suggest, means that in future cases we will

need to conduct a case-by-case analysis as to whether a

particular taxpayer's reported loss on the liquidation of his

partnership interest could be adjusted in a notice of

computational adjustment or only in a notice of deficiency.

This

kind of individualized case processing would, I fear, defeat a

major purpose of TEFRA.

Congress has always made it clear that

"[p]artnership proceedings under rules enacted in TEFRA, must be

kept separate [and distinct]

from deficiency proceedings

involving the partners in their individual capacities."

H. Conf.

Rept.

105-220, at 677