Petition for Writ of Certiorari — Bocilla Island Seaport, Inc., fka Highpoint Tower Technology, Inc., Petitioner v. Commissioner of Internal Revenue

Supreme Court briefOct 22, 2019

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APPENDIX

TABLE OF CONTENTS

Appendix A Opinion in the United States Court of

Appeals for the Eleventh Circuit

(July 24, 2019) . . . . . . . . . . . . . . . App. 1

Appendix B Order in the United States Tax Court

(November 2, 2017). . . . . . . . . . . App. 33

Appendix C Order in the United States Tax Court

(July 17, 2017) . . . . . . . . . . . . . . App. 37

Appendix D 26 U.S.C. § 6213(a) . . . . . . . . . . . App. 41

26 U.S.C. § 6214(a) . . . . . . . . . . . App. 43

26 U.S.C. § 6230(a) . . . . . . . . . . . App. 44

26 U.S.C. § 6330(a)-(d) . . . . . . . . App. 47

26 U.S.C. § 6662 (1999) . . . . . . . App. 53

26 U.S.C. § 6664 (1999) . . . . . . . App. 63

App. 1

APPENDIX A

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

No. 18-10394

Agency No. 2828-16

[Filed July 24, 2019]

_________________________________

HIGHPOINT TOWER

)

TECHNOLOGY INC.,

)

Petitioner - Appellant,

)

versus

)

COMMISSIONER OF INTERNAL )

REVENUE,

)

Respondent - Appellee.

)

________________________________ )

Petition for Review of a Decision of the

U.S. Tax Court

(July 24, 2019)

Before ED CARNES, Chief Judge, ANDERSON and

JULIE CARNES, Circuit Judges.

ANDERSON, Circuit Judge:

App. 2

This is an appeal by Highpoint Tower Technology,

Inc. (“Highpoint”) of the Tax Court’s denial of its

Motion to Restrain Collection of the gross valuationmisstatement penalty, I.R.C. § 6662(h)(1), which was

determined to be applicable during relevant

partnership proceedings.1 The issue in this case is

whether, under the Tax Equity and Fiscal

Responsibility Act of 1982 (“TEFRA”),2 a Tax Court

presiding over partner-level deficiency proceedings has

jurisdiction over a gross valuation-misstatement

Although the Tax Court’s order did not resolve all pending claims,

we have appellate jurisdiction over this interlocutory appeal

pursuant to I.R.C. § 7482(a)(3), authorizing an immediate appeal

of “[a]n order of the Tax Court which is entered under authority of

I.R.C. § 6213(a) and which resolves a proceeding to restrain

assessment or collection.” Section 6213(a) authorizes the Tax Court

to enjoin any premature assessment or collection and is treated as

a decision of the Tax Court “subject to the same review by the

United States Court of Appeals as a similar order of a district

court.” § 7482(a)(3).

This case focuses on the 1997 amendments to TEFRA. Taxpayer

Relief Act of 1997, Pub. L. No. 105-34, § 1238(a), 111 Stat. 788,

1026–27. The TEFRA partnership procedures applicable in this

case were prospectively repealed by the Bipartisan Budget Act of

2015, Pub. L. No. 114-74, § 1101(a), 129 Stat. 584, 625, effective for

taxable years beginning on or after January 1, 2018. Unless

otherwise indicated, all United States Code and Treasury

Regulations cited in this opinion refer to those in effect at the time

in question, namely the time of Highpoint filing its return.

We recognize that our decision in this case will have little

impact with respect to taxable years beginning on or after

January 1, 2018. However, the instant dispute suggests that our

decision may well be relevant for several years until disputes with

respect to taxable years beginning before January 1, 2018 have all

been resolved.

App. 3

penalty previously determined to be applicable at the

partnership level where the partnership was

determined to be a “sham” and “lacking economic

substance.” The Internal Revenue Code, as in effect

during the relevant time, applicable regulations, and

Supreme Court precedent make clear that the

valuation-misstatement penalty at issue here relates to

an adjustment to a partnership item and, consequently,

is explicitly excluded from the Tax Court’s deficiency

jurisdiction. We hold that a Tax Court presiding over

partner-level deficiency proceedings does not have

jurisdiction over gross valuation-misstatement

penalties imposed against a partnership previously

determined to be a “sham” and “lacking economic

substance.” We accordingly affirm the Tax Court’s

order denying taxpayer’s Motion to Restrain Collection

to the extent it related to the gross valuationmisstatement penalty.

I. BACKGROUND

A. Factual Background

This case involves a tax shelter known as “Son-ofBOSS.” “Like many of its kin, this tax shelter employs

a series of transactions to create artificial financial

losses that are used to offset real financial gains,

thereby reducing tax liability.” Petaluma FX Partners,

LLC v. Comm’r, 591 F.3d 649, 650 (D.C. Cir. 2010),

abrogated on other grounds by United States v. Woods,

571 U.S. 31, 134 S. Ct. 557 (2013).

There are a number of different types of Son-ofBOSS transactions, but what they all have in

common is the transfer of assets encumbered by

App. 4

significant liabilities to a partnership, with the

goal of increasing basis in that partnership. The

liabilities are usually obligations to buy

securities, and typically are not completely fixed

at the time of transfer. This may let the

partnership treat the liabilities as uncertain,

which may let the partnership ignore them in

computing basis. If so, the result is that the

partners will have a basis in the partnership so

great as to provide for large—but not out-ofpocket—losses on their individual tax returns.

Enormous losses are attractive to a select group

of taxpayers—those with enormous gains.

Kligfeld Holdings v. Comm’r, 128 T.C. 192, 194 (2007);

see also I.R.S. Notice 2000–44, 2000–2 C.B. 255.

In 1999, Highpoint joined Arbitrage Trading, LLC

(“Arbitrage”) as a partner. In exchange for a

membership interest in Arbitrage, Highpoint

contributed $62,500 in cash and a pair of Euro options

that it had purchased from AIG International, Inc. By

disregarding the potential obligations under the Euro

options as a potential liability, Highpoint reported its

outside basis as $13,295,980. A few months after

entering the partnership, Highpoint withdrew in

exchange for a liquidated distribution of the Euros. It

then sold the Euros and reported a related capital loss

of $13,111,783 on its 1999 federal income tax return.

B. Procedural Background

Before outlining the legal proceedings that ensued

after Highpoint filed its 1999 income tax return

reflecting artificial losses generated by its participation

App. 5

in this tax shelter, we first pause to outline the

statutory framework governing taxation of

partnerships at the time in question. After this

overview, we outline the partnership-level proceedings

concerning Arbitrage and the partner-level proceedings

concerning Highpoint that have spanned the twenty

years or so since Highpoint filed its income tax return

reporting the losses at issue, which ultimately resulted

in this appeal.

1. Overview of statutory scheme

“A partnership does not pay federal income taxes;

instead, its taxable income and losses pass through to

the partners.” United States v. Woods, 571 U.S. 31, 38,

134 S. Ct. 557, 562 (2013) (citing I.R.C. § 701).

Partnerships file informational returns, § 6031(a), and

individual partners report their shares of the

partnership’s income or losses on their respective

income tax returns, § 702. Prior to TEFRA

the IRS had no way of correcting errors on a

partnership’s return in a single, unified

proceeding. Instead, tax matters pertaining to

all the members of a partnership were dealt

with just like tax matters pertaining only to a

single taxpayer: through deficiency proceedings

at the individual-taxpayer level. See generally

§§ 6211–6216 (2006 ed. and Supp. V). Deficiency

proceedings require the IRS to issue a separate

notice of deficiency to each taxpayer, § 6212(a)

(2006 ed.), who can file a petition in the Tax

Court disputing the alleged deficiency before

paying it, § 6213(a). Having to use deficiency

proceedings for partnership-related tax matters

App. 6

led to duplicative proceedings and the potential

for inconsistent treatment of partners in the

same partnership. Congress addressed those

difficulties by enacting [TEFRA]. 96 Stat. 648

(codified as amended at 26 U.S.C. §§ 6221–6232

(2006 ed. and Supp. V)).

Woods, 571 U.S. at 38, 134 S. Ct. at 562–63. TEFRA

created a two-step process for addressing partnershiprelated tax matters:

First, the IRS must initiate proceedings at the

partnership level to adjust “partnership items,”

those relevant to the partnership as a whole.

§§ 6221, 6231(a)(3). It must issue [a Final

Partnership Administrative Adjustment]

notifying the partners of any adjustments to

partnership items, § 6223(a)(2), and the partners

may seek judicial review of those adjustments,

§ 6226(a)–(b). Once the adjustments to

partnership items have become final, the IRS

may undertake further proceedings at the

partner level to make any resulting

“computational adjustments” in the tax liability

of the individual partners. § 6231(a)(6). Most

computational adjustments may be directly

assessed against the partners, bypassing

deficiency proceedings and permitting the

partners to challenge the assessments only in

post-payment refund actions. § 6230(a)(1), (c).

Deficiency proceedings are still required,

however, for certain computational adjustments

that are attributable to “affected items,” that is,

items that are affected by (but are not

App. 7

themselves) partnership items. §§ 6230(a)(2)(A)

(i), 6231(a)(5).

Id. at 39, 134 S. Ct. at 563. With this framework in

mind, we next outline the partnership-level

proceedings concerning Arbitrage.

2. Partnership-level proceedings

In October 2005, the IRS issued a Notice of Final

Partnership Administrative Adjustment (“FPAA”) to

Arbitrage, proposing adjustments to partnership items

for the 1999 tax year. The FPAA reported that the IRS

had determined that Arbitrage “was formed and

availed of solely for the purposes of tax avoidance by

artificially overstating basis in the partnership

interests of its purported partners.” The IRS had

determined that Arbitrage “was a sham” and “lacked

economic substance.” Accordingly, the IRS had

determined that (a) Arbitrage would be disregarded

and all transactions engaged in by the purported

partnership would be treated as engaged in directly by

its purported partners; (b) the foreign currency options

would be treated as if never contributed to Arbitrage;

partners of Arbitrage; and (d) contributions to

Arbitrage would be adjusted to reflect the partnership’s

or purported partner’s income. Purported partners

were determined to have “not established adjusted

bases in their respective partnership interests in an

amount greater than zero.” The IRS further

determined, among other things, that “a 40 percent

penalty shall be imposed on the portion of any

underpayment attributable to the gross valuation

misstatement.”

App. 8

I.R.C. § 6662(a) imposes a 20% accuracy-related

penalty to the portion of underpaid tax attributable to,

among other things, negligence, any substantial

understatement of income tax, or any substantial

valuation misstatement. § 6662(a), (b)(1)–(3). The

penalty increases to 40% if there is a gross valuation

misstatement. § 6662(h)(1). “A gross valuation

misstatement exists if ‘the value of any property (or the

adjusted basis of any property) claimed on any return

of tax . . . is [400] percent or more of the amount

determined to be the correct amount of such valuation

or adjusted basis (as the case may be).’” Gustashaw v.

C.I.R., 696 F.3d 1124, 1135 (11th Cir. 2012) (citing

§ 6662(e)(1)(A), (h)(2)(A)(i)). A treasury regulation

relatedly provides:

The value or adjusted basis claimed on a

return of any property with a correct value or

adjusted basis of zero is considered to be 400

percent or more of the correct amount. There is

a gross valuation misstatement with respect to

such property, therefore, and the applicable

penalty rate is 40 percent.

26 C.F.R. § 1.6662-5(g); see also Gustashaw, 696 F.3d

at 1135.

In March 2006, Arbitrage sought judicial review of

the FPAA pursuant to § 6226(a). In October 2014, the

Court of Federal Claims issued an amended judgment

sustaining all adjustments of partnership items

contained in the FPAA and stating that the

explanations offered in the FPAA are “conceded to be

correct.” It sustained all penalties contained in the

FPAA but noted that “partners of Arbitrage, LLC

App. 9

reserve their right to pursue partner-level defenses to

these penalties.” This concluded the partnership-level

proceedings involving Arbitrage. We next outline the

partner-level proceedings initiated by Highpoint as

well as other interactions between the parties during

that timeframe.

3. Partner-level proceedings

In November 2015, the IRS issued a Notice of

Deficiency to Highpoint. This notice reflected a

deficiency of $5,222,675, based upon the following

adjustments: (1) a $13,191,937 increase in capital gains

income representing the disallowed short-term capital

loss for the sale of the Euro option distributed from

Arbitrage when Highpoint left the partnership, (2) a

disallowance of $1,573,727 in claimed professional fee

deductions relating to these transactions, and (3) an

increase of $72,053 in “other income” representing a

disallowed loss from the partnership. The notice also

reflected a 40% gross valuation-misstatement penalty

pursuant to I.R.C. § 6662(h) amounting to $2,089,070.

Highpoint filed a petition in the Tax Court for

redetermination of its deficiency in February 2016.3

A few days later, the IRS issued a Notice of Tax Due

reflecting the same amount contained in the Notice of

Deficiency as well as $12,755,355.16 in interest,

resulting in a total of $20,067,100.16 due. In June

Highpoint’s Notice of Appeal only seeks review of the Tax Court’s

July 17, 2017 order denying Highpoint’s Motion to Restrain to the

extent that it related to the valuation-misstatement penalty.

Because Highpoint’s petition for redetermination of its deficiency

is not at issue in this appeal, we do not discuss it further.

App. 10

2016, the IRS notified Highpoint that it intended to

levy Highpoint’s property and apply the proceeds to the

$20,067,100.16 owed. A few days after that, Highpoint

filed a Motion to Restrain Collection in the United

States Tax Court. In July 2016, the IRS objected to

Highpoint’s Motion to Restrain Collection. The IRS

asserted that, while the Tax Court had jurisdiction over

adjustments relating to capital gains income and the

professional fee deductions, it did not have jurisdiction

over the valuation-misstatement penalty and the

adjustment to “other income.” In September 2016, the

IRS moved to dismiss the portions of the case before

the Tax Court relating to the adjustment to other

income and the valuation-misstatement penalty,

asserting that neither were subject to deficiency

proceedings under I.R.C. § 6230(a).

On July 17, 2017, the Tax Court ordered further

briefing on the adjustment to other income issue and

denied Highpoint’s Motion to Restrain Collection to the

extent that it related to the penalty. As to the

valuation-misstatement penalty, the Tax Court stated:

In United States v. Woods, 134 S. Ct. 557,

565–566 (2013), the Supreme Court stated that

where the partnership is a sham, no partnerlevel determinations are needed to determine

outside basis because “once the partnerships

were deemed not to exist for tax purposes, no

partner could legitimately claim an outside basis

greater than zero.” See also Greenwald v.

Commissioner, 142 T.C. 308, 315 (2014). It is not

possible for petitioner to have an outside basis

greater than zero in Arbitrage, a partnership

App. 11

that does not exist for tax purposes. The final

decision in the partnership-level proceeding

applied the section 6662 penalty. It is well

settled that the penalty may be directly assessed

as a computational adjustment that we lack

jurisdiction over, notwithstanding the need for

partner-level determinations. See sec.

6230(a)(2), (c)(4); Woods, 571 S. Ct. at 565, n.2;

Thompson v. Commissioner, T.C. Memo.

2014–154 at *8; Logan Tr., 616 Fed. Appx. 426

(D.C. Cir. 2015).

In August 2017, Highpoint filed a Motion for

Reconsideration of the Tax Court’s July 17 order. In

support of its motion, Highpoint asserted that:

In the July 17 Order, the Court denied

Petitioner’s Motion to Restrain Assessment with

respect to the gross valuation misstatement

penalty. To assert the gross valuation

misstatement penalty, the Code requires a

comparison of the correct value versus the

reported value of the adjusted basis of the Euros

that Highpoint sold in 1999. A determination of

the correct value, which Respondent admits

must be determined in a deficiency proceeding,

cannot be completed without the Court first

completing partner-level factual determinations.

In November 2017, the Tax Court denied Highpoint’s

Motion for Reconsideration and granted the IRS’s

motion to dismiss in full.4 As to the valuation4

The Tax Court held that it lacked jurisdiction not only over the

valuation-misstatement penalty but also over the “other income.”

App. 12

misstatement penalty, the Tax Court determined that

Highpoint had not established that reconsideration

should be granted and further noted that:

Deficiency proceedings do not apply to the

assessment of penalties determined to be

applicable at the partnership level, regardless of

whether partner level determinations are

required to assess the penalty. I.R.C. sec.

6230(a)(2)(A)(i); sec. 301.6231(a)(6)-1, Proced. &

Admin. Regs. In the Amended Judgment

relating to prior partnership proceeding

(Arbitrage Trading, LLC v. United States,

docket No. 06-202T), partnership items,

including the application of the penalty, were

conclusively determined. See I.R.C. secs. 6221

and 6320(c)(4). As such, this Court lacks

jurisdiction over the penalty, and we stand by

our decision.

Highpoint now appeals the Tax Court’s July 17 order

denying its Motion to Restrain Collection to the extent

that it found it had no jurisdiction over the gross

valuation-misstatement penalty.

II. ISSUE

The sole issue in this appeal is whether the Tax

Court erred in denying Highpoint’s Motion to Restrain

However, on appeal, Highpoint challenges the Tax Court’s ruling

only with respect to the valuation-misstatement penalty.

Accordingly, this opinion considers only the issue of whether the

Tax Court had jurisdiction over the valuation-misstatement

penalty.

App. 13

Collection of the gross valuation-misstatement penalty,

and in holding that it lacked deficiency jurisdiction

over the penalty.

III. STANDARD OF REVIEW

We review the Tax Court’s legal conclusions de

novo, and its factual findings for clear error. See

Campbell v. Comm’r, 658 F.3d 1255, 1258 (11th Cir.

2011). “[W]e review questions of subject matter

jurisdiction and statutory interpretation de novo.”

Lindley v. F.D.I.C., 733 F.3d 1043, 1050 (11th Cir.

2013).

IV. DISCUSSION

Highpoint’s primary argument on appeal is that,

because the valuation-misstatement penalty is an

“affected item[] which require[s] partner level

determinations,” it is necessarily subject to deficiency

jurisdiction. Highpoint contends that, because the

penalty at issue is an “affected item[] which require[s]

partner level determinations,” it cannot also be a

“penalt[y] . . . that relate[s] to adjustments to

partnership items.” See I.R.C. § 6230(a)(2)(A)(i). For

the reasons that follow, we conclude that the relevant

statutory text, applicable regulations, and Supreme

Court precedent make clear that Highpoint’s

arguments are without merit, and that the Tax Court

correctly held that it did not have deficiency

jurisdiction over the penalty. We begin our analysis by

focusing on the statutory provision that specifically

addresses which partnership-related matters are

subject to Tax Court deficiency jurisdiction—and which

are not. See I.R.C. § 6230(a).

App. 14

A. Statutory Deficiency Jurisdiction

1. I.R.C. § 6230(a)(1)

Internal Revenue Code Chapter 63, subchapter B

provides for Tax Court deficiency proceedings. See

I.R.C. §§ 6211–6216 (entitled “Deficiency Procedures in

the Case of Income, Estate, Gift, and Certain Excise

Taxes”). When the IRS issues a notice of deficiency,

notifying a taxpayer that the IRS has determined that

additional taxes are due, a taxpayer ordinarily has an

option to pay the additional taxes and file a claim for

refund, or to challenge the IRS determination without

prepayment by filing a petition to the Tax Court

seeking a redetermination of the deficiency pursuant to

the Tax Court’s deficiency jurisdiction. See 13 Mertens

Law of Federal Income Taxation § 49C:1 (2019) (“Upon

receipt of a notice of deficiency, a taxpayer may either

file a petition with the Tax Court to contest the amount

of the deficiency or pay the amount of the deficiency

and sue for a refund in either the Claims Court or the

appropriate District Court.”). However, that general

provision is modified by I.R.C. § 6230(a), which

specifically addresses the partnership-related issues

before us and specifically provides that some

partnership-related matters are within the Tax Court’s

deficiency jurisdiction, and some are not. We begin

with § 6230(a)(1), which provides:

Except as provided in paragraph (2) or (3),

subchapter B of this chapter shall not apply to

the assessment or collection of any

computational adjustment.

App. 15

From § 6230(a)(1) alone we know that Tax Court

deficiency proceedings (i.e., subchapter B) will not

apply to—or in other words, the Tax Court will not

have deficiency jurisdiction over—assessment or

collection of any computational adjustments other than

those provided for in paragraphs two or three of

§ 6230(a)(1). We must therefore determine whether the

penalty at issue is a computational adjustment, and if

so, whether it is otherwise provided for in § 6230(a)(2)

or (a)(3).

We pause to define statutory terms necessary to

understand § 6230(a)(1). “Computational adjustment”

is defined as “the change in the tax liability of a

partner which properly reflects the treatment under

this subchapter of a partnership item. All adjustments

required to apply the results of a proceeding with

respect to a partnership under this subchapter to an

indirect partner shall be treated as computational

adjustments.” I.R.C. § 6231(a)(6). In turn, a

“partnership item” is defined as “any item required to

be taken into account for the partnership’s taxable year

under any provision of subtitle A to the extent

regulations prescribed by the Secretary provide that,

for purposes of this subtitle, such item is more

appropriately determined at the partnership level than

at the partner level.” § 6231(a)(3).

Considering these definitions in conjunction with

the text of § 6230(a)(1), we know that if a change in tax

liability of a partner reflects treatment of a partnership

item (an item required to be taken into account for the

partnership’s taxable year and more appropriately

determined at the partnership level), then deficiency

App. 16

proceedings will not apply to the assessment of that

adjustment unless otherwise provided for in

§ 6230(a)(2) or (a)(3). Treasury regulations in effect at

the time in question state that “[a]ny penalty, addition

to tax, or additional amount that relates to an

adjustment to a partnership item, shall be determined

at the partnership level.” Treas. Reg. § 301.6221-1T(c).

The FPAA issued by the IRS to Arbitrage stated that

the valuation-misstatement penalty at issue relates to

adjustments to partnership items. It provided in

pertinent part that “at a minimum, the accuracyrelated penalty under Section 6662(a) of the Internal

Revenue Code applies to all underpayments of tax

attributable to adjustments of partnership items of

Arbitrage Trading, LLC.”

We agree with the IRS’s characterization of the

penalty at issue as relating to an adjustment to a

partnership item. Treasury Regulation

§ 301.6231(a)(3)-1(b) includes within its “partnership

item” definition “the legal and factual determinations

that underlie the determination of the amount, timing,

and characterization of items of income, credit, gain,

loss, deduction, etc.” Treas. Reg. § 301.6231(a)(3)-1(b)

(emphasis added). The underlying legal determination

that a partnership is a sham lacking economic

substance—which caused the penalty to be applied in

this case—falls within this “partnership item”

definition. See id. (listing as examples of such legal and

factual determinations deemed “partnership items,”

among other things, “whether partnership activities

have been engaged in with the intent to make a

profit”); accord RJT Invs. X v. Comm’r, 491 F.3d 732,

737–38 (8th Cir. 2007) (holding that the determination

App. 17

that a partnership is a sham is a “legal determination”

that “falls squarely within” the definition of a

partnership item pursuant to Treas. Reg.

§ 301.6231(a)(3)-1(b)). Indeed, as demonstrated in Part

IV.B. below, the Supreme Court made clear in United

States v. Woods that a gross valuation-misstatement

penalty—just like the one at issue in this case—relates

to a determination that the underlying partnerships

are shams and, in turn, relates to an adjustment to a

partnership item. See Woods, 571 U.S. at 39–44, 134

S. Ct. at 563–66. For a more detailed discussion of

Woods, see infra Part IV.B.5 Accordingly, the penalty in

question relates to an adjustment to a partnership item

and is therefore a computational adjustment not

Many other courts have treated sham determinations, which can

justify imposing a valuation-misstatement penalty, as relating to

adjustments to partnership items. See, e.g., Petaluma FX

Partners, LLC v. Comm’r, 792 F.3d 72, 77 (D.C. Cir. 2015)

(“[C]ourts retain jurisdiction in partnership-level proceedings to

determine whether any partnership-level adjustments—such as

the determination in this case that Petaluma was a sham—carry

‘the potential to trigger a penalty’ against the partners.” (quoting

Woods, 571 U.S. at 41, 134 S. Ct. at 565)); NPR Invs., L.L.C. ex rel.

Roach v. United States, 740 F.3d 998, 1010 (5th Cir. 2014) (holding

that the partnership-level court had jurisdiction to adjudicate the

applicability of the valuation-misstatement penalties where the

partnership was a sham, and stating that “we conclude that the

District Court had jurisdiction to determine the applicability of the

valuation-misstatement penalty—to determine, that is, whether

the partnerships’ lack of economic substance (which all agree was

properly decided at the partnership level) could justify imposing a

valuation-misstatement penalty on the partners.” (quoting Woods,

571 U.S. at 42, 137 S. Ct. at 564)); RJT Invs., 491 F.3d at 737–38

(holding that a determination that a partnership is a sham is a

partnership item).

App. 18

subject to deficiency jurisdiction under § 6230(a)(1)

unless otherwise provided for.

The plain text of § 6230(a)(1), when read in

conjunction with definitional statutory provisions and

applicable regulations, makes clear that unless

otherwise provided in § 6230(a)(2) or (a)(3), the Tax

Court does not have deficiency jurisdiction over the

penalty at issue. Highpoint argues that

§ 6230(a)(2)(A)(i) nonetheless provides the Tax Court

deficiency jurisdiction over the penalty because the

penalty is an “affected item[] which require[s] partner

level determinations.” We address that argument next.6

2. I.R.C. § 6230(a)(2)(A)(i)

Section 6230(a)(2)(A) provides that:

Subchapter B shall apply to any deficiency

attributable to affected items which require

partner level determinations (other than

penalties, additions to tax, and additional

amounts that relate to adjustments to

partnership items) . . . .

I.R.C. § 6230(a)(2)(A)(i). From the face of

§ 6230(a)(2)(A)(i), we know that, even with respect to

affected items requiring partner-level determinations,

Tax Court deficiency proceedings will not apply to—or

in other words, will not have jurisdiction over—

“penalties . . . that relate to adjustments to partnership

items.” Highpoint’s argument focuses on the penalty

Highpoint does not argue that other provisions of § 6230(a)(2) or

(a)(3) provide the Tax Court with deficiency jurisdiction over the

penalty.

App. 19

being an “affected item[] which require[s] partner level

determinations,” but this argument ignores the

exclusion within the same sentence. The parenthetical

exclusion makes clear that, even if the deficiency at

issue is attributable to an affected item which requires

partner-level determinations, deficiency proceedings

will not apply to “penalties . . . relat[ing] to

adjustments to partnership items.” § 6230(a)(2)(A)(i).

The issue, again, is whether the penalty at issue

“relates to [an] adjustment[] to [a] partnership item.”

“Affected item” is defined as “any item to the extent

such item is affected by a partnership item,”

§ 6231(a)(5), while “partnership item” is defined as

“any item required to be taken into account for the

partnership’s taxable year under any provision of

subtitle A to the extent regulations prescribed by the

Secretary provide that, for purposes of this subtitle,

such item is more appropriately determined at the

partnership level than at the partner level,”

§ 6231(a)(3). As outlined above, Treas. Reg.

§ 301.6231(a)(3)-1(b) and the Supreme Court’s decision

in Woods make clear that the penalty in question

relates to an adjustment to a partnership item.

Accordingly, the penalty is not subject to Tax Court

deficiency jurisdiction under § 6230(a)(2)(A)(i).7

The Tax Court has frequently held that penalties deemed to

apply in partnership-level proceedings are not subject to Tax Court

deficiency jurisdiction under § 6230(a)(2)(A)(i). See, e.g.,

Domulewicz v. Comm’r, 129 T.C. 11, 21–23 (2007) (“Under a plain

reading of [§ 6230(a)(2)(A)(i)], the effect of the amendment was to

remove partnership-item penalties from the deficiency procedures

effective for partnership taxable years ending after August 5,

1997.”), aff’d in part remanded in part on other grounds Desmet v.

App. 20

In addition to contradicting the plain language of

§ 6230(a)(2)(A)(i), Highpoint’s argument that the penalty

is subject to Tax Court deficiency jurisdiction because it

is an “affected item[] which require[s] partner level

determinations” is undermined by Treasury Regulations

in effect during the time in question.

Changes in a partner’s tax liability with respect to

affected items that require partner level

determinations . . . are computational adjustments

subject to deficiency procedures. Nevertheless, any

penalty, addition to tax, or additional amount that

relates to an adjustment to a partnership item may

be directly assessed following a partnership

proceeding, based on determinations in that

proceeding, regardless of whether partner level

determinations are required.

Treas. Reg. § 301.6231(a)(6)-1T(a)(2). This only

confirms what is unambiguous from the plain meaning

of § 6230(a)(1) and (a)(2)(A)(i)—namely, that penalties

relating to adjustments to partnership items are

treated differently (i.e., not subject to Tax Court

deficiency jurisdiction) even if they are affected items

requiring partner level determinations. See also Woods,

571 U.S. at 41, 134 S. Ct. at 564 (holding that “a

penalty can relate to a partnership-item adjustment

even if the penalty cannot be imposed without

additional, partner-level determinations”).

Comm’r, 581 F.3d 297 (6th Cir. 2009); Fears v. Comm’r, 129 T.C.

8, 10 (2007); Estate of Simon v. Comm’r, T.C. Memo. 2013-174,

2013 WL 3879804, at *4 (2013); Bedrosian v. Comm’r, T.C. Memo.

2007-376, 2007 WL 4526479, at *3 (2007).

App. 21

Highpoint argues that preventing it from

addressing the penalty in Tax Court deficiency

proceedings—and forcing it to raise challenges to the

penalty in refund or Collection Due Process (“CDP”)

proceedings instead8—is duplicative and contrary to

the congressional intent behind the 1997 amendments

to TEFRA that sought to streamline partnership tax

Even though Highpoint may not challenge the penalty in the

instant partner-level Tax Court deficiency proceedings, it still has

the opportunity to raise partner-level defenses regarding the

penalty (including the good faith and reasonable cause defenses it

alludes to throughout its brief) in refund proceedings. See

§ 6230(c)(4) (“[T]he partner shall be allowed to assert any partner

level defenses that may apply or to challenge the amount of the

computational adjustment.”). Highpoint argues that it would be

unfair not to provide Tax Court deficiency jurisdiction over the

penalty because that would require Highpoint, and similarly

situated taxpayers, to pay large sums of tax liability before

challenging the penalty in refund proceedings. “[E]ven if we agree

that the statute allows for harsh or unfair consequences, that does

not give us license to ignore the plain meaning of the text. We will

look beyond the unambiguous plain meaning of the text only if the

plain meaning produces absurd results.” Patel v. U.S. Attorney

Gen., 917 F.3d 1319, 1330 (11th Cir. 2019). We will not ignore the

plain meaning of I.R.C. § 6230 in this case.

Moreover, there is an opportunity for Highpoint to challenge

the penalty other than through refund proceedings and prior to

payment—i.e., in a prepayment proceeding other than refund

proceedings. Highpoint can challenge the penalty in a prepayment

Collection Due Process (“CDP”) hearing as provided for by

§ 6330(a)(1), which states “[n]o levy may be made on any property

or right to property of any person unless the Secretary has notified

such person in writing of their right to a hearing under this section

before such levy is made.” At this hearing, Highpoint may raise

“challenges to the underlying tax liability for any tax period if the

person . . . did not otherwise have an opportunity to dispute such

tax liability.” § 6330(c)(2)(B).

App. 22

litigation. “We have . . . said . . . frequently that ‘[w]hen

the import of words Congress has used is clear . . . we

need not resort to legislative history, and we certainly

should not do so to undermine the plain meaning of the

statutory language.’” CBS Inc. v. PrimeTime 24 Joint

Venture, 245 F.3d 1217, 1222 (11th Cir. 2001) (quoting

Harris v. Garner, 216 F.3d 970, 976 (11th Cir. 2000)

(en banc)). Because we find that § 6230(a)(1) and

(a)(2)(A)(i) clearly exclude the penalty at issue from

Tax Court deficiency jurisdiction, we need not entertain

Highpoint’s legislative intent arguments.9

Highpoint also argues that “imposing the 40 percent basis

penalty before determining the basis or the resulting deficiency

works an algebraic absurdity” because it is impossible to calculate

the penalty without first determining the basis and deficiency in

partner-level deficiency proceedings. We are not convinced that

holding that there is no Tax Court deficiency jurisdiction over the

penalty produces such absurd results as to justify ignoring the

unambiguous plain meaning of § 6230. See Patel, 917 F.3d at 1330.

The Supreme Court in Woods noted that the district court

presiding over partnership-level proceedings “was not required to

shut its eyes to the legal impossibility of any partner’s possessing

an outside basis greater than zero in a partnership that, for tax

purposes, did not exist.” Woods, 571 U.S. at 42, 134 S. Ct. at 565.

The Woods Court also noted in dicta that “it is not readily

apparent why additional partner-level determinations would be

required before adjusting outside basis in a sham partnership.” Id.

at 42 n.2, 134 S. Ct. at 565 n.2 (citing Petaluma, 591 F.3d at 655

(“If disregarding a partnership leads ineluctably to the conclusion

that its partners have no outside basis, that should be just as

obvious in partner-level proceedings as it is in partnership-level

proceedings”)).

We acknowledge the problem to which Highpoint points. The

applicability of the 40% penalty has been determined during

partnership-level proceedings. However, that 40% penalty is to be

applied to the appropriate portion of the deficiency which

App. 23

We conclude that the Internal Revenue Code

unambiguously excludes from the Tax Court’s

deficiency jurisdiction Highpoint’s challenge to the

penalty at issue. Nevertheless, Highpoint relies on

United States v. Woods to argue that the Tax Court has

jurisdiction over the penalty. Quite contrary to

Highpoint’s argument, however, Woods only provides

further and significant support for what the Internal

Revenue Code makes unambiguous—that the Tax

Court does not have deficiency jurisdiction over the

penalty.

B. United States v. Woods

The Supreme Court, in United States v. Woods,

addressed a related but distinct question of whether

“the penalty for tax underpayments attributable to

valuation misstatements, 26 U.S.C. § 6662(b)(3), is

applicable to an underpayment resulting from a basisinflating transaction subsequently disregarded for lack

of economic substance.” Woods, 571 U.S. at 33, 134 S.

Ct. at 560. Woods arose from partnership-level

proceedings considering an appeal of an FPAA. Id. at

Highpoint is ultimately determined to owe. That deficiency amount

would ordinarily be determined in Tax Court deficiency

proceedings. It might well have been preferable, in an ideal world,

had Congress permitted the precise amount of the penalty to be

determined also in the same deficiency proceedings. However,

Congress clearly did not permit that. But, there are at least two

other partner-level proceedings available in which the appropriate

deficiency and precise amount of the penalty can be

determined—CDP proceedings or refund proceedings. In any

event, the problem about which Highpoint complains falls far short

of the kind of absurdity that might warrant assuming that

Congress intended the opposite of which it plainly stated.

App. 24

37, 134 S. Ct. at 562. The respondent taxpayer in

Woods participated in a Current Options Bring Reward

Alternatives (“COBRA”) tax shelter. Id. at 34, 134

S. Ct. at 560. This tax shelter used offsetting options to

give respondent taxpayer an artificially high basis in

partnership interests so that he could claim significant

losses on paper, thereby reducing taxable income. Id. at

33–35, 134 S. Ct. at 560–61. The IRS did not treat

these COBRA-generated losses as valid and issued an

FPAA stating that the partnerships lacked economic

substance, the partnerships would be disregarded for

tax purposes, and the losses would be disallowed. Id. at

36–37, 134 S. Ct. at 561–62. Having determined that

there was no partnership for tax purposes, the IRS also

concluded that the partners had “not established

adjusted bases in their respective partnership interests

in an amount greater than zero” and that any

underpayment of tax would be subject to the 40% gross

valuation-misstatement penalty—the exact same

penalty at issue in this case. Id. at 37, 134 S. Ct. at

562.

Pursuant to § 6226(a)(2), respondent (the tax

matters partner for the partnerships) appealed the

FPAA’s determination that the 40% penalty was

applicable when the underlying transaction is

disregarded for lack of economic substance. Id. Both the

district court and the court of appeals held that,

although the partnerships were shams, the valuationmisstatement penalty did not apply. Id. The Supreme

Court, in addition to considering this question, also

ordered briefing on whether the district court presiding

over the partnership-level proceedings had “jurisdiction

to consider the valuation-misstatement penalty.” Id. at

App. 25

37–38, 134 S. Ct. at 562. The jurisdictional question

before the Court in Woods is distinct from the one

currently before us because it considered whether the

district court had partnership-level jurisdiction over a

valuation-misstatement penalty, whereas we are asked

to determine whether the Tax Court had partner-level

deficiency jurisdiction over a valuation-misstatement

penalty. Despite the different procedural postures,

Woods’s discussion of the same penalty at issue in this

case is instructive.

Under TEFRA, a court presiding over a partnershiplevel proceeding has jurisdiction to determine both

partnership items and “the applicability of any penalty

. . . which relates to an adjustment to a partnership

item.” § 6226(f). We take note that the phrase “penalty

. . . which relates to an adjustment to a partnership

item” that appears in § 6226(f) is nearly identical to the

phrase “penalties . . . that relate to adjustments to

partnership items” in § 6230(a)(2)(A)(i), which is at

issue in this case. The Woods Court framed the

jurisdictional issue before it as follows:

As both sides agree, a determination that a

partnership lacks economic substance is an

adjustment to a partnership item. Thus, the

jurisdictional question here boils down to

whether the valuation-misstatement penalty

“relates to” the determination that the

partnerships Woods and McCombs created were

shams.

Woods, 571 U.S. at 39, 134 S. Ct. at 563. The

Government argued that the valuation-misstatement

penalty “logically and inevitably” flowed from the

App. 26

economic-substance (or sham) determination. See id. at

39–40, 134 S. Ct. at 563. Because there can be no

outside basis in a sham partnership, the Government

contended, any partner who reports an outside basis

greater than zero commits a valuation misstatement.

See id. The respondent taxpayer argued that, because

outside basis is an affected item and not a partnership

item, a penalty resting on a misstatement of an outside

basis could not be considered at the partnership level.

See id. at 40, 134 S. Ct. at 563. The Court summarized

his argument as follows: “He maintains, in short, that

a penalty does not relate to a partnership-item

adjustment if it ‘requires a partner-level

determination,’ regardless of ‘whether or not the

penalty has a connection to a partnership item.’” Id.

This argument made by the taxpayer in Woods is

nearly identical to the one Highpoint advances before

this Court—i.e., that because the penalty at issue is an

affected item requiring partner-level determinations, it

cannot also relate to adjustments to partnership items.

The Court rejected the taxpayer’s arguments, and

held that

TEFRA gives courts in partnership-level

proceedings jurisdiction to determine the

applicability of any penalty that could result

from an adjustment to a partnership item, even

if imposing the penalty would also require

determining affected or non-partnership items

such as outside basis.

Id. at 41, 134 S. Ct. at 564. The Court explained that

even though every penalty must be imposed after

partner-level determinations are made at the partner

App. 27

level, “TEFRA provides that the applicability of some

penalties must be determined at the partnership level.

The applicability determination is therefore inherently

provisional; it is always contingent upon

determinations that the court in a partnership-level

proceeding does not have jurisdiction to make.”10 Id. at

41, 134 S. Ct. at 564. The Court in Woods explained

that several provisions of TEFRA make clear that

courts presiding over partnership-level proceedings

have jurisdiction to consider the applicability of some

penalties that cannot be imposed without partner-level

inquiries. Id.

Highpoint focuses on this passage from Woods in arguing that

imposing the penalty is merely provisional at the partnership

stage and that the penalty can actually be imposed only after

determining the outside basis and deficiency in partner-level

proceedings. By stating that the partnership-level determination

that a penalty is “provisional,” however, the Woods Court was

indicating that the district court did not have jurisdiction to

consider partner-level defenses in a partnership-level proceeding.

The Court did not state that the “provisional” nature of this

penalty at the partnership level indicated that partner-level Tax

Court deficiency proceedings would have jurisdiction. In other

words, the Court’s suggestion that the penalty would have to be

actually imposed in partner-level proceedings did not indicate that

the appropriate partner-level forum would be Tax Court deficiency

proceedings. There are at least two other partner-level

proceedings—refund proceedings and CDP proceedings. Indeed,

previously in the opinion, the Woods Court indicated that “[m]ost

computational adjustments may be directly assessed against the

partners, bypassing deficiency proceedings and permitting the

partners to challenge the assessments only in post-payment refund

actions.” Woods, 571 U.S. at 39, 134 S. Ct. at 563 (citing

§ 6230(a)(1), (c)).

App. 28

One requires the IRS to use deficiency

proceedings for computational adjustments that

rest on “affected items which require partner

level determinations (other than penalties . . .

that relate to adjustments to partnership

items).” § 6230(a)(2)(A)(i). Another states that

while a partnership-level determination

“concerning the applicability of any penalty . . .

which relates to an adjustment to a partnership

item” is “conclusive” in a subsequent refund

action, that does not prevent the partner from

“assert[ing] any partner level defenses that may

apply.” § 6230(c)(4). Both these provisions

assume that a penalty can relate to a

partnership-item adjustment even if the penalty

cannot be imposed without additional, partnerlevel determinations.

Id. In other words, the Court made clear that penalties

relating to partnership-item adjustments and penalties

that cannot be actually imposed without additional,

partner-level determinations are not mutually

exclusive. See id.

In sum, the Court in Woods rejected the argument

of the taxpayer Woods—i.e., “that a penalty does not

relate to a partnership-item adjustment if it requires a

partner-level determination.” Id. at 40, 134 S. Ct. at

563 (internal quotation marks omitted). The Court held

that the gross valuation-misstatement penalty at issue

there related to the determination that the

partnerships were a sham, which determination was an

adjustment to a partnership item. Id. at 39–42, 134 S.

Ct. at 563–64. Thus, the Court held that, under

App. 29

§ 6226(f), the partnership-level court at issue there had

jurisdiction over the gross valuation-misstatement

penalty because the penalty related to an adjustment

to a partnership item. Id. The Court’s reasoning

proceeded as follows. The Court first set out the issue

before it:

Under the TEFRA framework, a court in a

partnership-level proceeding like this one has

jurisdiction to determine not just partnership

items, but also “the applicability of any penalty

. . . which relates to an adjustment to a

partnership item.” § 6226(f). As both sides agree,

a determination that a partnership lacks

economic substance is an adjustment to a

partnership item. Thus, the jurisdictional

question here boils down to whether the

valuation-misstatement penalty “relates to” the

determination that the partnerships . . . created

were shams.

Id. at 39, 134 S. Ct. at 563. The Court then set out the

Government’s position:

In the Government’s view, there can be no

outside basis in a sham partnership . . . , so any

partner who underpaid his individual taxes by

declaring an outside basis greater than zero

committed a valuation misstatement. In other

words, the penalty flows logically and inevitably

from the economic-substance determination.

Id. at 39–40, 134 S. Ct. at 563. The Court next set out

the argument of taxpayer Woods:

App. 30

He maintains, in short, that a penalty does not

relate to a partnership-item adjustment if it

requires a partner-level determination,

regardless of whether or not the penalty has a

connection to a partnership item.

Id. at 40, 134 S. Ct. at 563 (internal quotation marks

omitted). The Court then noted that several provisions

in the Internal Revenue Code, including

§ 6230(a)(2)(A)(i) and § 6230(c)(4), indicate that:

A penalty can relate to a partnership-item

adjustment even if the penalty cannot be

imposed without additional partner-level

determinations.

Id. at 41, 134 S. Ct. at 564. The Court then rejected the

argument of taxpayer Woods, and held:

that TEFRA gives courts in partnership-level

proceedings jurisdiction to determine the

applicability of any penalty that could result

from an adjustment to a partnership item, even

if imposing the penalty would also require

determining affected or non-partnership items

such as outside basis. . . .

Applying the foregoing principles to this case,

we conclude that the District Court had

jurisdiction to determine the applicability of the

valuation-misstatement penalty—to determine,

that is, whether the partnerships’ lack of

economic substance (which all agree was

App. 31

properly decided at the partnership level) could

justify imposing a valuation-misstatement

penalty on the partners.

Id. at 41–42, 134 S. Ct. at 564.

Woods strongly supports what we already

determined to be unambiguous from the relevant

Internal Revenue Code provisions. The valuationmisstatement penalty at issue can be an affected item

requiring partner-level determinations while also

relating to adjustments to partnership items. Woods

directly rejects Highpoint’s argument that these

categories are mutually exclusive. Woods leaves no

doubt that the valuation-misstatement penalty at issue

is related to an adjustment to a partnership item so as

to clearly fall within § 6230(a)(2)(A)(i)’s exclusion of

such items from deficiency jurisdiction.

V. CONCLUSION

For the foregoing reasons, we conclude that the

relevant statutory provisions, applicable regulations,

and precedent—including in particular the Supreme

Court decision in Woods—indicate clearly that the

valuation-misstatement penalty at issue, which was

triggered by the partnership-level determination that

Arbitrage lacked economic substance, relates to an

adjustment to a partnership item, and thus is excluded

from the Tax Court’s deficiency jurisdiction under

§ 6230(a)(2)(A)(i). We hold that the Tax Court presiding

over partner-level deficiency proceedings did not have

jurisdiction over the valuation-misstatement penalty at

App. 32

issue.11 The Tax Court’s order denying Highpoint’s

Motion to Restrain Collection to the extent it related to

the valuation-misstatement penalty is therefore

AFFIRMED.

Other arguments raised by Highpoint on appeal need not be

addressed in light of our jurisdictional holding.

App. 33

APPENDIX B

UNITED STATES TAX COURT

WASHINGTON, DC 20217

Docket No. 2828-16.

[Filed November 2, 2017]

________________________

HIGHPOINT TOWER

)

TECHNOLOGY, INC., )

Petitioner(s),

)

COMMISSIONER OF

)

INTERNAL REVENUE, )

Respondent

)

_______________________ )

ORDER

On June 9, 2016, petitioner filed a Motion to

Restrain Assessment or Collection or to Order Refund

of Amount Collected (petitioner’s motion). On

September 15, 2016, respondent filed a Motion to

Dismiss and Strike a Portion of the Proposed

Deficiency and the Entire Penalty (respondent’s

motion).

On July 17, 2017, the Court granted petitioner’s

motion as relates to the portion of the deficiency

related to the increase in capital gain income and the

disallowance of deducted fees, and denied the motion as

App. 34

relates to the penalty (July 17 order). The Court

ordered petitioner to file a response addressing the

issue whether this Court has jurisdiction over the

portion of the deficiency related to the adjustment to

other income. The Court granted respondent’s motion

in part as to the penalty.

On August 17, 2017, petitioner filed a Motion for

Reconsideration of Order and a Memorandum in

Support of Motion by Petitioner for Reconsideration of

Order Dated July 17, 2017 (petitioner’s motion for

reconsideration). In petitioner’s motion for

reconsideration, petitioner contends that this Court

retains jurisdiction over the adjustment to other

income, and reasserts its position that this Court has

jurisdiction over the penalty.

Petitioner contends that this Court retains

jurisdiction over the adjustment to other income

because “[t]he application of the at-risk rules to the

$72,053 loss (even ignoring Arbitrage) remains a

factual affected item requiring partner-level

determinations.” We disagree. The deficiency at issue

results in part from the disallowance of a $72,053 loss

that flowed directly from Arbitrage Trading, LLC

(Arbitrage). It was previously determined that

Arbitrage was a sham and any loss resulting from

transactions engaged in by Arbitrage is not allowed as

a deduction. As such, the $72,053 flow-through loss is

a computational adjustment pursuant to I.R.C. section

6231(a)(6) and not subject to deficiency proceedings

under I.R.C. section 6230(a). Accordingly, we lack

jurisdiction over the adjustment to other income.

App. 35

Petitioner encourages the Court to reconsider its

July 17 order dismissing the penalty in order “to

prevent manifest injustice.” Tax Court Rule 161 allows

the Court to reconsider its findings, opinions, and

interlocutory orders. Bedrosian v. Commissioner, 144

T.C. 152, 156 (2015). The Court will grant

reconsideration if the case of: (1) mistake,

inadvertence, surprise, or excusable neglect; (2) newly

discovered evidence; (3) fraud; (4) the judgement is

void; (5) the judgement has been satisfied, released, or

discharged; (6) manifest injustice; or (7) any other

reason that justifies relief. Id. at 156. Petitioner,

however, fails to articulate with any specificity any

injustice that may occur.

Deficiency proceedings do not apply to the

assessment of penalties determined to be applicable at

the partnership level, regardless of whether partnerlevel determinations are required to assess the penalty.

I.R.C. sec. 6230(a)(2)(A)(i); sec. 301.6231(a)(6)-1,

Proced. & Admin. Regs. In the Amended Judgment

relating to prior partnership proceeding (Arbitrage

Trading, LLC v. United States, docket No. 06-202T),

partnership items, including the application of the

penalty, were conclusively determined. See I.R.C. secs.

6221 and 6320(c)(4). As such, this Court lacks

jurisdiction over the penalty, and we stand by our

decision.

Accordingly, it is

ORDERED that petitioner’s

reconsideration is denied. It is further

motion

for

App. 36

ORDERED that respondent’s motion is granted in

full.

(Signed) Joseph Robert Goeke

Judge

Dated:

Washington, D.C.

November 2, 2017

App. 37

APPENDIX C

UNITED STATES TAX COURT

WASHINGTON, DC 20217

Docket No. 2828-16.

[Filed July 17, 2017]

________________________

HIGHPOINT TOWER

)

TECHNOLOGY, INC., )

Petitioner(s),

)

COMMISSIONER OF

)

INTERNAL REVENUE, )

Respondent

)

_______________________ )

ORDER

Pending before the Court are petitioner’s Motion to

Restrain Assessment or Collection or to Order Refund

of Amount Collected, filed June 9, 2016 (petitioner’s

motion), and respondent’s Motion to Dismiss and to

Strike a Portion of the Proposed Deficiency and the

Entire Penalty, filed September 15, 2016 (respondent’s

motion).

This case is based upon an Affected Item Notice of

Deficiency (notice) issued to petitioner. The notice was

issued following completion of Arbitrage Trading,

LLC’s (Arbitrage) TEFRA partnership proceeding for

App. 38

tax year ended December 31, 1999. In the Amended

Judgment relating to that proceeding, the Court of

Federal Claims determined, inter alia, Arbitrage was

a sham that is properly disregarded for tax purposes,

and that the 40% gross valuation misstatement penalty

applies to any underpayment of tax attributable to the

adjustments to contribution amounts in excess of the

corrected bases. That decision became final

December 2, 2014. All adjustments and the section

66621 penalty in the notice flow from the partnership

decision.

Petitioner alleges it was premature for respondent

to assess any of the items in the notice. Respondent

agrees that we have jurisdiction over the portion of the

deficiency related to the increase in capital gain income

and the disallowance of deducted fees, and that that

portion of the assessment may be abated. Respondent

argues, however, that we lack jurisdiction over the

adjustment to other income because it is a

computational adjustment not subject to deficiency

procedures. Petitioner counters that the adjustment to

other income flowing from Arbitrage is an affected item

that relates to petitioner’s basis in Arbitrage and

requires partner-level factual determinations.

Respondent further contends that this Court has no

jurisdiction over the penalty.

Respondent contends that because Arbitrage was

formed solely for tax avoidance purposes, any loss

Unless otherwise indicated, all section references are to the

Internal Revenue Code of 1986, as amended, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

App. 39

resulting from the transactions engaged in by

Arbitrage is disallowed as a deduction at the partner

level. As such, the adjustment to other income flowing

from Arbitrage is a computation adjustment pursuant

to section 6231(a)(6) and is not subject to deficiency

procedures under section 6230(a) because no additional

facts need to be determined at the partner-level.

Accordingly, the Court will direct petitioner to file a

response to this Order addressing which, if any,

specific factual determinations need to be made in this

partner-level proceeding to determine the adjustment

to other income.

In United States v. Woods, 134 S.Ct. 557, 565-566

(2013), the Supreme Court stated that where the

partnership is a sham, no partner-level determinations

are needed to determine outside basis because “once

the partnerships were deemed not to exist for tax

purposes, no partner could legitimately claim an

outside basis greater than zero.” See also Greenwald v.

Commissioner, 142 T.C. 308, 315 (2014). It is not

possible for petitioner to have an outside basis greater

than zero in Arbitrage, a partnership that does not

exist for tax purposes. The final decision in the

partnership-level proceeding applied the section 6662

penalty. It is well settled that the penalty may be

directly assessed as a computational adjustment that

we lack jurisdiction over, notwithstanding the need for

partner-level determinations. See sec. 6230(a)(2), (c)(4);

Woods, 571 S. Ct. at 565, n.2; Thompson v.

Commissioner, T.C. Memo. 2014-154 at *8; Logan Tr.,

616 Fed. Appx. 426 (D.C. Cir. 2015).

App. 40

Accordingly, it is

ORDERED that so much of petitioner’s motion as

relates to the portion of the deficiency related to the

increase in capital gain income and the disallowance of

deducted fees is granted and that so much of

petitioner’s motion as relates to the penalty is denied.

It is further

ORDERED that, on or before August 25, 2017,

petitioner shall file with the Court a response to this

Order addressing the issue whether this Court has

jurisdiction over the portion of the deficiency related to

the adjustment to other income. It is further

ORDERED that respondent’s motion is granted in

part as to the penalty.

(Signed) Joseph Robert Goeke

Judge

Dated:

Washington, D.C.

July 17, 2017

App. 41

APPENDIX D

26 U.S.C. § 6213(a). Restrictions applicable to

deficiencies; petition to Tax Court

(a) Time for filing petition and restriction on

assessment

Within 90 days, or 150 days if the notice is addressed

to a person outside the United States, after the notice

of deficiency authorized in section 6212 is mailed (not

counting Saturday, Sunday, or a legal holiday in the

District of Columbia as the last day), the taxpayer may

file a petition with the Tax Court for a redetermination

of the deficiency. Except as otherwise provided in

section 6851, 6852, or 6861 no assessment of a

deficiency in respect of any tax imposed by subtitle A,

or B, chapter 41, 42, 43, or 44 and no levy or proceeding

in court for its collection shall be made, begun, or

prosecuted until such notice has been mailed to the

taxpayer, nor until the expiration of such 90-day or

150-day period, as the case may be, nor, if a petition

has been filed with the Tax Court, until the decision of

the Tax Court has become final. Notwithstanding the

provisions of section 7421(a), the making of such

assessment or the beginning of such proceeding or levy

during the time such prohibition is in force may be

enjoined by a proceeding in the proper court, including

the Tax Court, and a refund may be ordered by such

court of any amount collected within the period during

which the Secretary is prohibited from collecting by

levy or through a proceeding in court under the

App. 42

provisions of this subsection. The Tax Court shall have

no jurisdiction to enjoin any action or proceeding or

order any refund under this subsection unless a timely

petition for a redetermination of the deficiency has

been filed and then only in respect of the deficiency

that is the subject of such petition. Any petition filed

with the Tax Court on or before the last date specified

for filing such petition by the Secretary in the notice of

deficiency shall be treated as timely filed.

App. 43

26 U.S.C. § 6214(a). Determinations by Tax

Court

(a) Jurisdiction as to increase of deficiency,

additional amounts, or additions to the tax

Except as provided by section 7463, the Tax Court shall

have jurisdiction to redetermine the correct amount of

the deficiency even if the amount so redetermined is

greater than the amount of the deficiency, notice of

which has been mailed to the taxpayer, and to

determine whether any additional amount, or any

addition to the tax should be assessed, if claim therefor

is asserted by the Secretary at or before the hearing or

a rehearing.

App. 44

26 U.S.C. § 6230(a). Additional administrative

provisions

(a) Coordination with deficiency proceedings.-(1) In general.–Except as provided in paragraph

(2) or (3), subchapter B of this chapter shall not

apply to the assessment or collection of any

computational adjustment.

(2) Deficiency proceedings to apply in certain

cases.–

(A) Subchapter B shall apply to any deficiency

attributable to–

(i) affected items which require partner level

determinations (other than penalties,

additions to tax, and additional amounts that

relate to adjustments to partnership items),

(ii) items which have become nonpartnership

items (other than by reason of section

6231(b)(1)(C)) and are described in section

6231(e)(1)(B).

(B) Subchapter B shall be applied separately

with respect to each deficiency described in

subparagraph (A) attributable to each

partnership.

law, any notice or proceeding under subchapter

B with respect to a deficiency described in this

paragraph shall not preclude or be precluded by

any other notice, proceeding, or determination

App. 45

with respect to a partner’s tax liability for a

taxable year.

(3) Special rule in case of assertion by

partner’s spouse of innocent spouse relief.–

(A) Notwithstanding section 6404(b), if the

spouse of a partner asserts that section 6015

applies with respect to a liability that is

attributable to any adjustment to a partnership

item (including any liability for any penalties,

additions to tax, or additional amounts relating

to such adjustment), then such spouse may file

with the Secretary within 60 days after the

notice of computational adjustment is mailed to

the spouse a request for abatement of the

assessment specified in such notice. Upon

receipt of such request, the Secretary shall abate

the assessment. Any reassessment of the tax

with respect to which an abatement is made

under this subparagraph shall be subject to the

deficiency procedures prescribed by subchapter

B. The period for making any such reassessment

shall not expire before the expiration of 60 days

after the date of such abatement.

(B) If the spouse files a petition with the Tax Court

pursuant to section 6213 with respect to the request

for abatement described in subparagraph (A), the

Tax Court shall only have jurisdiction pursuant to

this section to determine whether the requirements

of section 6015 have been satisfied. For purposes of

such determination, the treatment of partnership

items (and the applicability of any penalties,

additions to tax, or additional amounts) under the

App. 46

settlement, the final partnership administrative

adjustment, or the decision of the court (whichever

is appropriate) that gave rise to the liability in

question shall be conclusive.

subparagraphs (B) and (C) of paragraph (2) shall

apply for purposes of this paragraph.

App. 47

26 U.S.C. § 6330(a)-(d). Notice and opportunity

for hearing before levy

(a) Requirement of notice before levy

(1) In general

No levy may be made on any property or right to

property of any person unless the Secretary has

notified such person in writing of their right to a

hearing under this section before such levy is made.

Such notice shall be required only once for the

taxable period to which the unpaid tax specified in

paragraph (3)(A) relates.

(2) Time and method for notice

The notice required under paragraph (1) shall be—

(A) given in person;

(B) left at the dwelling or usual place of

business of such person; or

receipt requested, to such person’s last known

address;

not less than 30 days before the day of the first

levy with respect to the amount of the unpaid

tax for the taxable period.

(3) Information included with notice The notice

required under paragraph (1) shall include in

simple and nontechnical terms—

(A) the amount of unpaid tax;

App. 48

(B) the right of the person to request a hearing

during the 30-day period under paragraph (2);

and

rights of the person with respect to such action,

including a brief statement which sets forth—

(i) the provisions of this title relating to levy

and sale of property;

(ii) the procedures applicable to the levy and

sale of property under this title;

(iii) the administrative appeals available to

the taxpayer with respect to such levy and

sale and the procedures relating to such

appeals;

(iv) the alternatives available to taxpayers

which could prevent levy on property

(including installment agreements under

section 6159); and

(v) the provisions of this title and procedures

relating to redemption of property and

release of liens on property.

(b) Right to fair hearing

(1) In general

If the person requests a hearing in writing under

subsection (a)(3)(B) and states the grounds for the

requested hearing, such hearing shall be held by the

Internal Revenue Service Independent Office of

Appeals.

App. 49

(2) One hearing per period

A person shall be entitled to only one hearing under

this section with respect to the taxable period to

which the unpaid tax specified in subsection

(a)(3)(A) relates.

(3) Impartial officer

The hearing under this subsection shall be

conducted by an officer or employee who has had no

prior involvement with respect to the unpaid tax

specified in subsection (a)(3)(A) before the first

hearing under this section or section 6320. A

taxpayer may waive the requirement of this

paragraph.

hearing conducted under this section—

(1) Requirement of investigation

The appeals officer shall at the hearing obtain

verification from the Secretary that the

requirements of any applicable law or

administrative procedure have been met.

(2) Issues at hearing

(A) In general The person may raise at the

hearing any relevant issue relating to the

unpaid tax or the proposed levy, including—

(i) appropriate spousal defenses;

(ii) challenges to the appropriateness of

collection actions; and

App. 50

(iii) offers of collection alternatives, which

may include the posting of a bond, the

substitution of other assets, an installment

agreement, or an offer-in-compromise.

(B) Underlying liability

The person may also raise at the hearing

challenges to the existence or amount of the

underlying tax liability for any tax period if the

person did not receive any statutory notice of

deficiency for such tax liability or did not

otherwise have an opportunity to dispute such

tax liability.

(3) Basis for the determination The

determination by an appeals officer under this

subsection shall take into consideration—

(A) the verification presented under paragraph

(1);

(B) the issues raised under paragraph (2); and

balances the need for the efficient collection of

taxes with the legitimate concern of the person

that any collection action be no more intrusive

than necessary.

(4) Certain issues precluded An issue may not be

raised at the hearing if—

App. 51

(A)

(i) the issue was raised and considered at a

previous hearing under section 6320 or in

any other previous administrative or judicial

proceeding; and

(ii) the person seeking to raise the issue

participated meaningfully in such hearing or

proceeding;

(B) the issue meets the requirement of clause (i)

or (ii) of section 6702(b)(2)(A); or

respect to such issue in a proceeding brought

under subchapter C of chapter 63.

This paragraph shall not apply to any issue with

respect to which subsection (d)(3)(B) applies.

(d) Proceeding after hearing

(1) Petition for review by Tax Court

The person may, within 30 days of a determination

under this section, petition the Tax Court for review

of such determination (and the Tax Court shall

have jurisdiction with respect to such matter).

(2) Suspension of running of period for filing

petition in title 11 cases

In the case of a person who is prohibited by reason

of a case under title 11, United States Code, from

filing a petition under paragraph (1) with respect to

a determination under this section, the running of

the period prescribed by such subsection for filing

App. 52

such a petition with respect to such determination

shall be suspended for the period during which the

person is so prohibited from filing such a petition,

and for 30 days thereafter.

(3) Jurisdiction retained at IRS Independent

Office of Appeals The Internal Revenue Service

Independent Office of Appeals shall retain

jurisdiction with respect to any determination made

under this section, including subsequent hearings

requested by the person who requested the original

hearing on issues regarding—

(A) collection actions taken or proposed with

respect to such determination; and

(B) after the person has exhausted all

administrative remedies, a change in

circumstances with respect to such person which

affects such determination.

App. 53

26 U.S.C. § 6662 (1999)

§ 6662. Imposition of accuracy-related penalty

(a) Imposition of penalty.--If this section applies to

any portion of an underpayment of tax required to be

shown on a return, there shall be added to the tax an

amount equal to 20 percent of the portion of the

underpayment to which this section applies.

(b) Portion of underpayment to which section

applies.--This section shall apply to the portion of any

underpayment which is attributable to 1 or more of the

following:

(1) Negligence or disregard of rules or regulations.

(2) Any substantial understatement of income tax.

(3) Any substantial valuation misstatement under

chapter 1.

(4) Any substantial overstatement of pension

liabilities.

(5) Any substantial estate or gift tax valuation

understatement.

This section shall not apply to any portion of an

underpayment on which a penalty is imposed under

section 6663.

“negligence” includes any failure to make a reasonable

attempt to comply with the provisions of this title, and

the term “disregard” includes any careless, reckless, or

intentional disregard.

App. 54

(d) Substantial understatement of income tax.-(1) Substantial understatement.-(A) In general.--For purposes of this section,

there is a substantial understatement of income

tax for any taxable year if the amount of the

understatement for the taxable year exceeds the

greater of-(i) 10 percent of the tax required to be shown

on the return for the taxable year, or

(ii) $5,000.

(B) Special rule for corporations.--In the

case of a corporation other than an S corporation

or a personal holding company (as defined in

section 542), paragraph (1) shall be applied by

substituting “$10,000” for “$5,000”.

(2) Understatement.-(A) In general.--For purposes of paragraph (1),

the term “understatement” means the excess of-(i) the amount of the tax required to be

shown on the return for the taxable year,

over

(ii) the amount of the tax imposed which is

shown on the return, reduced by any rebate

(within the meaning of section 6211(b)(2)).

App. 55

(B) Reduction for understatement due to

position of taxpayer or disclosed item.--The

amount of the understatement under

subparagraph (A) shall be reduced by that

portion of the understatement which is

attributable to-(i) the tax treatment of any item by the

taxpayer if there is or was substantial

authority for such treatment, or

(ii) any item if-(I) the relevant facts affecting the item’s

tax treatment are adequately disclosed in

the return or in a statement attached to

the return, and

(II) there is a reasonable basis for the tax

treatment of such item by the taxpayer.

For purposes of clause (ii)(II), in no event shall

a corporation be treated as having a reasonable

basis for its tax treatment of an item

attributable to a multiple-party financing

transaction if such treatment does not clearly

reflect the income of the corporation.

shelters.-(i) In general.--In the case of any item of a

taxpayer other than a corporation which is

attributable to a tax shelter-(I) subparagraph (B)(ii) shall not apply,

and

App. 56

(II) subparagraph (B)(i) shall not apply

unless (in addition to meeting the

requirements of such subparagraph) the

taxpayer reasonably believed that the tax

treatment of such item by the taxpayer

was more likely than not the proper

treatment.

(ii) Subparagraph (B) not to apply to

corporations.--Subparagraph (B) shall not

apply to any item of a corporation which is

attributable to a tax shelter.

(iii) Tax shelter.--For purposes of this

subparagraph, the term “tax shelter” means-(I) a partnership or other entity,

(II) any investment plan or arrangement,

(III) any other plan or arrangement,

if a significant purpose of such

partnership, entity, plan, or arrangement

is the avoidance or evasion of Federal

income tax.

(D) Secretarial list.--The Secretary shall

prescribe (and revise not less frequently than

annually) a list of positions-(i) for which the Secretary believes there is

not substantial authority, and

(ii) which affect a significant number of

taxpayers.

App. 57

Such list (and any revision thereof) shall be

published in the Federal Register.

(e) Substantial valuation misstatement under

chapter 1.-(1) In general.--For purposes of this section, there

is a substantial valuation misstatement under

chapter 1 if-(A) the value of any property (or the adjusted

basis of any property) claimed on any return of

tax imposed by chapter 1 is 200 percent or more

of the amount determined to be the correct

amount of such valuation or adjusted basis (as

the case may be), or

(B)(i) the price for any property or services (or

for the use of property) claimed on any such

return in connection with any transaction

between persons described in section 482 is 200

percent or more (or 50 percent or less) of the

amount determined under section 482 to be the

correct amount of such price, or

(ii) the net section 482 transfer price adjustment

for the taxable year exceeds the lesser of

$5,000,000 or 10 percent of the taxpayer’s gross

receipts.

(2) Limitation.--No penalty shall be imposed by

reason of subsection (b)(3) unless the portion of the

underpayment for the taxable year attributable to

substantial valuation misstatements under chapter

1 exceeds $5,000 ($10,000 in the case of a

corporation other than an S corporation or a

App. 58

personal holding company (as defined in section

542)).

(3) Net section 482 transfer price adjustment.-For purposes of this subsection-(A) In general.--The term “net section 482

transfer price adjustment” means, with respect

to any taxable year, the net increase in taxable

income for the taxable year (determined without

regard to any amount carried to such taxable

year from another taxable year) resulting from

adjustments under section 482 in the price for

any property or services (or for the use of

property).

(B) Certain adjustments excluded in

determining threshold.--For purposes of

det ermining whether t he t hreshol d

requirements of paragraph (1)(B)(ii) are met, the

following shall be excluded:

(i) Any portion of the net increase in taxable

income referred to in subparagraph (A) which

is attributable to any redetermination of a

price if-(I) it is established that the taxpayer

determined such price in accordance with

a specific pricing method set forth in the

regulations prescribed under section 482

and that the taxpayer’s use of such

method was reasonable,

App. 59

(II) the taxpayer has documentation

(which was in existence as of the time of

filing the return) which sets forth the

determination of such price in accordance

with such a method and which establishes

that the use of such method was

reasonable, and

(III) the taxpayer provides such

documentation to the Secretary within 30

days of a request for such documentation.

(ii) Any portion of the net increase in taxable

income referred to in subparagraph (A) which

is attributable to a redetermination of price

where such price was not determined in

accordance with such a specific pricing

method if-(I) the taxpayer establishes that none of

such pricing methods was likely to result

in a price that would clearly reflect

income, the taxpayer used another pricing

method to determine such price, and such

other pricing method was likely to result

in a price that would clearly reflect

income,

(II) the taxpayer has documentation

(which was in existence as of the time of

filing the return) which sets forth the

determination of such price in accordance

with such other method and which

establishes that the requirements of

subclause (I) were satisfied, and

App. 60

(III) the taxpayer provides such

documentation to the Secretary within

30 days of request for such

documentation.

(iii) Any portion of such net increase which

is attributable to any transaction solely

between foreign corporations unless, in the

case of any such corporations, the treatment

of such transaction affects the determination

of income from sources within the United

States or taxable income effectively

connected with the conduct of a trade or

business within the United States.

in section 55(c)) imposed by chapter 1 on the

taxpayer is determined by reference to an

amount other than taxable income, such amount

shall be treated as the taxable income of such

taxpayer for purposes of this paragraph.

(D) Coordination with reasonable cause

exception.--For purposes of section 6664(c) the

taxpayer shall not be treated as having

reasonable cause for any portion of an

underpayment attributable to a net section 482

transfer price adjustment unless such taxpayer

meets the requirements of clause (i), (ii), or (iii)

of subparagraph (B) with respect to such

portion.

App. 61

(f) Substantial

liabilities.--

overstatement

pension

(1) In general.--For purposes of this section, there

is a substantial overstatement of pension liabilities

if the actuarial determination of the liabilities taken

into account for purposes of computing the

deduction under paragraph (1) or (2) of section

404(a) is 200 percent or more of the amount

determined to be the correct amount of such

liabilities.

(2) Limitation.--No penalty shall be imposed by

reason of subsection (b)(4) unless the portion of the

underpayment for the taxable year attributable to

substantial overstatements of pension liabilities

exceeds $1,000.

(g) Substantial estate or gift tax valuation

understatement.-(1) In general.--For purposes of this section, there

is a substantial estate or gift tax valuation

understatement if the value of any property claimed

on any return of tax imposed by subtitle B is

50 percent or less of the amount determined to be

the correct amount of such valuation.

(2) Limitation.--No penalty shall be imposed by

reason of subsection (b)(5) unless the portion of the

underpayment attributable to substantial estate or

gift tax valuation understatements for the taxable

period (or, in the case of the tax imposed by chapter

11, with respect to the estate of the decedent)

exceeds $5,000.

App. 62

(h) Increase in penalty in case of gross valuation

misstatements.—

(1) In general.--To the extent that a portion of the

underpayment to which this section applies is

attributable to one or more gross valuation

misstatements, subsection (a) shall be applied with

respect to such portion by substituting “40 percent”

for “20 percent”.

(2) Gross valuation misstatements.--The term

“gross valuation misstatements” means-(A) any substantial valuation misstatement

under chapter 1 as determined under subsection

(e) by substituting-(i) “400 percent” for “200 percent” each place

it appears,

(ii) “25 percent” for “50 percent”, and

(iii) in paragraph (1)(B)(ii)-(I) “$20,000,000” for “$5,000,000”, and

(II) “20 percent” for “10 percent”.

(B) any substantial overstatement of pension

liabilities as determined under subsection (f) by

substituting “400 percent” for “200 percent”,

and

understatement as determined under subsection

(g) by substituting “25 percent” for “50 percent”.

App. 63

26 U.S.C. § 6664 (1999)

§ 6664. Definitions and special rules

(a) Underpayment.--For purposes of this part, the

term “underpayment” means the amount by which any

tax imposed by this title exceeds the excess of-(1) the sum of–

(A) the amount shown as the tax by the

taxpayer on his return, plus

(B) amounts not so shown previously assessed

(or collected without assessment), over

(2) the amount of rebates made.

For purposes of paragraph (2), the term “rebate” means

so much of an abatement, credit, refund, or other

repayment, as was made on the ground that the tax

imposed was less than the excess of the amount

specified in paragraph (1) over the rebates previously

made.

(b) Penalties applicable only where return filed.-The penalties provided in this part shall apply only in

cases where a return of tax is filed (other than a return

prepared by the Secretary under the authority of

section 6020(b)).

this part with respect to any portion of an

underpayment if it is shown that there was a

reasonable cause for such portion and that the

App. 64

taxpayer acted in good faith with respect to such

portion.

(2) Special rule for certain valuation

overstatements.--In the case of any underpayment

attributable to a substantial or gross valuation

overstatement under chapter 1 with respect to

charitable deduction property, paragraph (1) shall

not apply unless-(A) the claimed value of the property was based

on a qualified appraisal made by a qualified

appraiser, and

(B) in addition to obtaining such appraisal, the

taxpayer made a good faith investigation of the

value of the contributed property.

(3) Definitions.--For purposes of this subsection-(A) Charitable deduction property.--The

term “charitable deduction property” means any

property contributed by the taxpayer in a

contribution for which a deduction was claimed

under section 170. For purposes of paragraph

(2), such term shall not include any securities for

which (as of the date of the contribution) market

quotations are readily available on an

established securities market.

(B) Qualified appraiser.--The term “qualified

appraiser” means any appraiser meeting the

requirements of the regulations prescribed

under section 170(a)(1).

App. 65

appraisal” means any appraisal meeting the

requirements of the regulations prescribed

under section 170(a)(1).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.