135 T.C. 581 (T.C. 2010), 24717-05, Petaluma FX Partners, LLC v. Commissioner of Internal Revenue

Docket Nº:24717-05
Citation:135 T.C. 581, 135 T.C. No. 29
Opinion Judge:GOEKE, Judge:
Party Name:PETALUMA FX PARTNERS, LLC, RONALD SCOTT VANDERBEEK, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent [*]
Attorney:Edward M. Robbins, Jr., for petitioner. Gerald A. Thorpe and Jason M. Kuratnick, for respondent.
Judge Panel:GOEKE, Judge. COLVIN, WELLS, THORNTON, WHERRY, KROUPA, and HOLMES, JJ., agree with this majority opinion. GUSTAFSON and MORRISON, JJ., did not participate in the consideration of this opinion. HALPERN, J., dissenting. MARVEL, J., dissenting. COHEN, GALE, and PARIS, JJ., agree with this dissent. C...
Case Date:December 15, 2010
Court:United States Tax Court
 
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Page 581

135 T.C. 581 (T.C. 2010)

135 T.C. No. 29

PETALUMA FX PARTNERS, LLC, RONALD SCOTT VANDERBEEK, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent [*]

No. 24717-05

United States Tax Court

December 15, 2010

An appropriate order and decision will be entered.

SYLLABUS

On remand we are instructed by the Court of Appeals for the District of Columbia Circuit to determine whether we have jurisdiction to determine whether a penalty under sec. 6662, I.R.C., is applicable in this partnership-level case. Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 389 U.S.App. D.C. 64 (D.C. Cir. 2010), affg. in part, revg. in part, and vacating in part 131 T.C. 84 (2008).

Held: Applying the instructions set forth in the Court of Appeals' opinion, we do not have jurisdiction over any sec. 6662, I.R.C., penalty determination in this case.

Edward M. Robbins, Jr., for petitioner.

Gerald A. Thorpe and Jason M. Kuratnick, for respondent.

GOEKE, Judge. COLVIN, WELLS, THORNTON, WHERRY, KROUPA, and HOLMES, JJ., agree with this majority opinion. GUSTAFSON and MORRISON, JJ., did not participate in the consideration of this opinion. HALPERN, J., dissenting. MARVEL, J., dissenting. COHEN, GALE, and PARIS, JJ., agree with this dissent.

OPINION

SUPPLEMENTAL OPINION

GOEKE, Judge:

This matter is before the Court on remand from the Court of Appeals for the District of Columbia Circuit for further proceedings consistent with its opinion in Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 389 U.S.App. D.C. 64 (D.C. Cir. 2010), affg. in part, revg. in part, and vacating in part 131 T.C. 84 (2008). The issue for decision on remand is whether this Court has jurisdiction over the determination in respondent's notice of final partnership administrative adjustment (FPAA) issued to petitioner and other partners that all of the underpayments of tax resulting from adjustments of partnership items are attributable to: (1) Gross or substantial valuation misstatements penalized under section 6662(a), (b)(3), (e), and (h); (2) negligence or disregard of rules or regulations penalized under section 6662(a), (b)(1), and (c); or (3) substantial understatements of income tax penalized under section 6662(a), (b)(2), and (d). [1]

Page 582

Background

We summarize relevant background from Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84 (2008) (Petaluma I), and set forth additional details for purposes of deciding the issue on remand.

The dispute in this case relates to an FPAA issued to petitioner and other partners of Petaluma FX Partners, LLC (Petaluma or the partnership), on July 28, 2005. In the FPAA respondent made the following adjustments to items reported on Petaluma's partnership return for its 2000 tax year and to outside bases of all the partners, items not reported on the return:

Item As Reported As Corrected
Capital
contributions $478,800 -0-
Distributions--
property other
than money 171,806 -0-
Outside
partnership
bases 24,943,505 -0-
Distributions--
money 206,076 -0-
Other income 107,242 -0-
Tax-exempt
interest
income 547 -0-
Assets--cash 171,939 -0-
Liabilities and
capital--other
current
liabilities 6,158 -0-
Partners'
capital
accounts 165,781 -0-

None of the above items result in computational adjustments (as defined in section 6231(a)(6)) to the partners' tax liabilities. Petitioner has previously stipulated that substantive issues over which the Court has jurisdiction will not be contested. Petitioner reserved the penalty for valuation misstatement from his concession, but the Court of Appeals has held that we do not have jurisdiction over that penalty. Petaluma FX Partners, LLC v. Commissioner, 591 F.3d at 655. Form 4605-A, Examination Changes--Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations, attached to the FPAA states: " I.R.C. Penalty Section 6662 is applicable at the individual partner level and may be raised in separate proceedings at the partner level following the present partnership proceeding." This Court issued Petaluma I on October 23, 2008, holding that it had jurisdiction to decide: (1) That Petaluma should be disregarded for tax purposes; (2) that the partners had no Page 583 bases in their interests in the partnership since the partnership was disregarded; and (3) that a valuation misstatement penalty under section 6662(b)(3) applied. Petaluma I, 131 T.C. at 100. The Court of Appeals affirmed our determination that we had jurisdiction to decide whether the partnership should be disregarded. However, in this partnership-level case it reversed our determination regarding partners' outside bases, holding that we did not have jurisdiction. The Court of Appeals remanded the case for a determination of whether this Court has jurisdiction over any penalties under section 6662. Petaluma FX Partners, LLC v. Commissioner, 591 F.3d at 656. Discussion Applying the mandate to reconsider whether we have jurisdiction over any section 6662 penalties, we conclude as explained herein that this Court lacks jurisdiction over the penalty issues in this partnership-level proceeding. After the Court of Appeals issued the mandate, we ordered the parties to state their respective positions regarding the issues on remand, and both parties have complied. There being no need for trial or further hearing, we review the parties' respective positions in the light of the opinion of the Court of Appeals. I. TEFRA in General Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), all partnership items are determined in a single partnership-level proceeding. Sec. 6226; see also Randell v. United States, 64 F.3d 101, 103 (2d Cir. 1995). In a partnership-level proceeding, the Court's jurisdiction is limited by section 6226 (f):

SEC. 6226(f). Scope of Judicial Review.--A court with which a petition is filed in accordance with this section shall have jurisdiction to determine all partnership items of the partnership for the partnership taxable year to which the notice of final partnership administrative adjustment relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item.

Section 6231(a) defines the terms " partnership item", " nonpartnership item", and " affected item": Page 584

(3) Partnership item.--The term " partnership item" means, with respect to a partnership, 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.

(4) Nonpartnership item.--The term " nonpartnership item" means an item which is (or is treated as) not a partnership item.

(5) Affected item.--The term " affected item" means any item to the extent such item is affected by a partnership item.

An " affected item" is by definition not a " partnership item" . Ginsburg v. Commissioner, 127 T.C. 75, 79 (2006); see also Dial USA, Inc. v. Commissioner, 95 T.C. 1, 5 (1990). This distinction is important in the present case as affected items generally will involve issuance of notices of deficiency to individual partners, described as partner-level proceedings. II. Petitioner's Position Petitioner first argues that this Court lacks jurisdiction to determine the amounts of any penalties in this partnership-level proceeding because no penalty relates to an adjustment to a partnership item under section 6226(f). Petitioner maintains no underpayment arises as a result of any partnership item because there is no computational deficiency adjustment at the partner level as a result of our holding that Petaluma is to be disregarded for tax purposes. Petitioner contends that, in the light of the Court of Appeals' holding that this Court lacks jurisdiction to determine outside basis, there is no deficiency or underpayment of tax within the jurisdiction of this Court in respect of which a penalty can be held to apply. Petitioner also argues that because the partnership is a nullity, no partnership item could create a deficiency or underpayment to which penalties could apply. Therefore, any penalty does not relate to an adjustment to a partnership item, and any penalty is an item which must be determined with a statutory notice of deficiency. III. Respondent's Position Respondent argues that this Court has jurisdiction to determine the applicability of the gross valuation misstatement penalty because sections 6221, 6226(f), and Page 585 6230 (a) give this Court jurisdiction to determine penalties related to partnership items. Respondent contends the...

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