Ginsburg v. Comm'r of Internal Revenue, 13330–05.

• Citation: 127 T.C. No. 5,127 T.C. 75
• Decision Date: 30 August 2006
• Docket Number: No. 13330–05.,13330–05.
• Parties: Alan H. GINSBURG and Estate of Harriet F. Ginsburg, Deceased, Alan H. Ginsburg, Personal Representative, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

127 T.C. 75

127 T.C. No. 5

Alan H. GINSBURG and Estate of Harriet F. Ginsburg, Deceased, Alan H. Ginsburg, Personal Representative, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13330–05.

United States Tax Court.

Aug. 30, 2006.

A TEFRA partnership claimed losses from an investment. See Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. 97–248, secs. 402–407(a), 96 Stat. 648. Ps reported the losses as shareholders of their two wholly owned S corporations, each of which owned a 50–percent interest in the partnership. R examined the Federal tax return of the partnership. Subsequently, R sent a letter to the representative for the partnership stating that R accepted the return as filed. The partnership and R executed six consecutive Forms 872–P, Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership, for the taxable year 1995, the year at issue. The time to assert partnership adjustments has expired pursuant to the Forms 872–P. Ps and R executed nine consecutive Forms 872, Consent to Extend the Time to Assess Tax, related to Ps' 1995 Federal tax return.

R sent a notice of deficiency for 1995 to Ps before the expiration date of the last Form 872. However, the Forms 872 did not specify that they also included tax attributable to partnership or affected items. Ps contend that the deficiency notice adjusts partnership items and therefore is invalid. R contends that the notice adjusts affected items, not partnership items. In addition, R stated in argument that there are also adjustments of affected items which are specific to Ps' ability to take losses that flow through from the partnership.

Held: The notice adjusts both partnership and affected items. We have jurisdiction to review those adjustments to the extent that they are for affected items.

Held, further, under sec. 6229(b)(3), I.R.C., the notice of deficiency is untimely because the Forms 872 did not reference adjustments for partnership or affected items.

N. Jerold Cohen, Sheldon M. Kay, and Joseph M. DePew, for petitioners.

Stephen R. Takeuchi, for respondent.

OPINION

GOEKE, Judge.

This case is before us on petitioners' motions to dismiss for lack of jurisdiction and for summary judgment. The issue raised by petitioners' motion to dismiss is whether respondent's notice of deficiency properly adjusted losses attributable to a partnership at the partner level pursuant to the TEFRA provisions of sections 6221–6234.¹ Specifically, the inquiry centers on whether these losses should be classified as “partnership items” or as “affected items” under the applicable statutes. We hold that the adjustments in the notice of deficiency limiting petitioners' claimed losses concern affected items over which we have jurisdiction.

The issue raised by petitioners' motion for summary judgment is based on the assumption that we hold that the items respondent seeks to adjust are affected items. Under that assumption, petitioners question whether the period of limitations on assessment of tax attributable to affected items as set forth in sections 6501 and 6229 has expired. In particular, we must decide whether section 6229(b)(3) causes the extension of the period of limitations in this case to be ineffective regarding the affected items at issue. We hold that it does, and that therefore the period of limitations on assessment has run.

Background

The parties agree on the basic facts. At the time that the petition was filed, petitioner Alan Ginsburg, who is a fiduciary for the Estate of Harriet Ginsburg, had a mailing address in Winter Park, Florida. In 1995, the taxable year at issue, Mr. and Mrs. Ginsburg, who were married at the time, owned 100 percent of the stock of North American Sports Management, Inc. (NASM), an S corporation. Harriet Ginsburg, who is now deceased, owned 100 percent of the stock of Family Affordable Partners, Inc. (FAP), also an S corporation. NASM and FAP each owned 50 percent of the profits and losses and capital of UK Lotto, L.L.C. (UK Lotto), a TEFRA partnership. NASM and FAP were not subject to the S corporation TEFRA procedures, sections 6241–6245, because they had fewer than five shareholders and had not otherwise elected application of the unified procedures under section 301.6241–1T(c)(2)(v), Temporary Proced. & Admin. Regs., 52 Fed.Reg. 3003 (Jan. 30, 1987).²

Entity and Individual Returns

Form 1065, U.S. Partnership Return of Income, for UK Lotto reflected a total ordinary loss of $7,351,237. Of that amount, $6,936,038 was attributable to a loss reported on its Form 1065 from Pascal & Co., a partnership of which UK Lotto was a partner. NASM and FAP each reported 50 percent of the total loss from UK Lotto along with other items of income, deductions, gain, and loss unrelated to UK Lotto in their respective Forms 1120S, U.S. Income Tax Return for an S Corporation. NASM reported a total ordinary loss from trade or business in 1995 of $4,087,725. FAP reported a total ordinary loss from trade or business in 1995 of $2,941,054. On their 1995 Form 1040, U.S. Individual Income Tax Return, petitioners reported the losses of $4,087,725 and $2,941,054 from NASM and FAP, respectively, on the attached Schedule E, Supplemental Income and Loss, Statement 15, Income or Loss From Partnerships and S Corporations. Petitioners reported total net losses on their Schedule E of $3,045,269.

Extensions of Period To Assess Tax

Respondent examined the 1995 Form 1065 of UK Lotto. UK Lotto and respondent entered into six consecutive Forms 872–P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, for partnership items relating to UK Lotto's 1995 tax year. The last Form 872–P executed on behalf of UK Lotto and respondent for the taxable year 1995 extended the period to assess any Federal income tax attributable to partnership items to any time on or before December 31, 2003. On April 25, 2003, respondent sent a letter to the representative for UK Lotto stating that respondent accepted the 1995 partnership return as filed. Respondent did not conduct any more TEFRA partnership proceedings.

In addition, petitioners and respondent executed nine consecutive Forms 872, Consent to Extend the Time to Assess Tax, for petitioners' 1995 taxable year. The last Form 872 extended the period to assess any Federal income tax to any time on or before June 30, 2005. The Forms 872 did not reference partnership items.

Notice of Deficiency

Respondent issued to petitioners a notice of deficiency for the taxable year 1995 dated April 26, 2005. The total amount of the deficiency was $2,726,742. Respondent also determined a penalty of $545,348 under section 6662(a). In his notice of deficiency, respondent listed the following Schedule E adjustments:

Family Affordable Partners, Inc. $3,468,019

North American Sports Mgmt., Inc. 3,468,019

Respondent provided the same explanation for both adjustments, except that one referred to FAP and the other to NASM:

Since it has not been established that Pascal and Company incurred a deductible $6,936,038.00 loss in 1995, nor has it been established that any loss attributable to Pascal and Company is allowable to UK Lotto, LLC * * * or not limited, nor has it been established that any loss attributable to Pascal and Company is allowable to * * * [Name of S Corporation], or not limited, nor has it been established that any loss attributable to Pascal and Company is allowable to you, or not limited, your $3,468,019.00 distributive loss in 1995 from * * * [Name of S Corporation], that represents 50% of the claimed $6,936,038.00 loss by UK Lotto, LLC, * * * from Pascal and Company, is disallowed, and your taxable income is increased by 3,468,019.00 for 1995.

In their Statement 15 accompanying Schedule E, petitioners did not list any specific item of loss that corresponded with the $3,468,019 that respondent disallowed.

Discussion

I. Petitioners' Motion To Dismiss for Lack of Jurisdiction

Petitioners' motion to dismiss for lack of jurisdiction focuses on whether the disallowed losses are partnership items that must be adjusted at the partnership level. If we find that those losses are partnership items, then we do not have jurisdiction over respondent's adjustments in the notice of deficiency because such items may not be adjusted in an individual deficiency proceeding. See sec. 6230(a)(1).

TEFRA provisions divide disputes arising from “partnership items” from those arising from “nonpartnership items”. Maxwell v. Commissioner, 87 T.C. 783, 787, 1986 WL 22033 (1986) (citing section 6231(a)(3) and (4)). If the tax treatment of a partnership item is at issue, the statute requires the matter to be resolved at the partnership level. Sec. 6221; Maxwell v. Commissioner, supra at 787–788. Section 6231(a)(3) defines a partnership item as “any item required to be taken into account for the partnership's taxable year * * * 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.” Partnership items under section 6231(a)(3) and the applicable regulations include items of loss reflected on the partnership tax return. Maxwell v. Commissioner, supra at 790; sec. 301.6231(a)(3)–1(a)(1)(i), Proced. & Admin. Regs.

Section 6231(a)(4) defines the term “nonpartnership item” as “an item which is (or is treated as) not a partnership item.” Section 6231(a)(5) provides that the term “affected item” means “any item to the extent such item is affected by a partnership item .” An affected item is by definition neither a partnership item nor a subchapter S item. Dial USA, Inc. v. Commissioner, 95 T.C. 1, 5, 1990 WL 89560 (1990). An affected item, rather than being universally applicable to every partner, is peculiar to a particular partner's tax posture. Maxwell v. Commissioner, supra at 790.

Petitioners argue that the notice of deficiency shows that respondent has...