137 T.C. 220 (T.C. 2011), 30586-08, Thompson v. Commissioner of Internal Revenue

Docket Nº:30586-08
Citation:137 T.C. 220, 137 T.C. No. 17
Opinion Judge:WHERRY, Judge:
Party Name:RANDALL J. AND KAREN G. THOMPSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Edward M. Robbins, Jr., for petitioners. James A. Kutten, for respondent.
Judge Panel:WHERRY, Judge. COLVIN, HALPERN, VASQUEZ, THORNTON, and PARIS, JJ., agree with this majority opinion. COHEN, J., concurs in the result only. GUSTAFSON and MORRISON, JJ., did not participate in the consideration of this opinion. GOEKE, J., dissenting. KROUPA, J., agrees with this dissent. HOLMES, J...
Case Date:December 27, 2011
Court:United States Tax Court

Page 220

137 T.C. 220 (T.C. 2011)

137 T.C. No. 17

RANDALL J. AND KAREN G. THOMPSON, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 30586-08

United States Tax Court

December 27, 2011

An order of dismissal for lack of jurisdiction will be entered.

SYLLABUS

On the basis of a final decision in a partnership-level proceeding for RJT Investments X, LLC, which had made all partnership allocations for its tax year ended Dec. 31, 2001, to P-H, R determined an income tax deficiency and an accuracy-related penalty for Ps' 2001 tax year. Immediately after issuing a notice of deficiency to Ps, R directly assessed the deficiency and penalty amounts determined in that notice. R has since acknowledged errors in these deficiency and penalty amounts and has made corresponding assessment abatements. Nonetheless, R argues that the notice of deficiency is invalid and that the Court lacks jurisdiction over the case because the changes to Ps' 2001 tax liability shown on the notice are computational adjustments that are not subject to deficiency procedures. Ps have conceded the amount of the deficiency but urge us to follow Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 389 U.S.App. D.C. 64 (D.C. Cir. 2010), affg. in part, revg. in part and remanding in part 131 T.C. 84 (2008), and hold that the accuracy-related penalty does not relate to an adjustment to a partnership item and can be assessed only following deficiency procedures.

Held: Computing Ps' income tax deficiency arising from the adjustments finalized in the partnership-level proceeding in RJT Invs. X, LLC v. Commissioner, docket No. 11769-05 (June 6, 2006), affd. 491 F.3d 732 (8th Cir. 2007), does not require any partner-level determinations, and assessing or collecting this deficiency is not subject to deficiency procedures.

Held, further, that the errors in the notice of deficiency do not constitute a " determination" under sec. 6212(a), I.R.C.

Held, further, that the accuracy-related penalty may be directly assessed and is not subject to deficiency procedures, notwithstanding the need for partner-level determinations.

Held, further, that the notice of deficiency is invalid and the Court lacks jurisdiction over this case. R's motion to dismiss for lack of jurisdiction will be granted.

Edward M. Robbins, Jr., for petitioners.

James A. Kutten, for respondent.

WHERRY, Judge. COLVIN, HALPERN, VASQUEZ, THORNTON, and PARIS, JJ., agree with this majority opinion. COHEN, J., concurs in the result only. GUSTAFSON and MORRISON, JJ., did not participate in the consideration of this opinion. GOEKE, J., dissenting. KROUPA, J., agrees with this dissent. HOLMES, J., dissenting.

OPINION

Page 221

WHERRY, Judge:

This case is before the Court on respondent's motion to dismiss for lack of jurisdiction. The case constitutes a partner-level action under the unified partnership audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 324.[1]

Background

I. Partnership-Level Proceeding

Petitioner husband, Randall J. Thompson, engaged in a Son-of-BOSS (BOSS) market linked deposit transaction in 2001, seeking to offset approximately $21,500,000 in capital gains. To facilitate the BOSS transaction, petitioner husband formed RJT Investments X, LLC (RJT), on October 12, 2001. For its tax year ended December 31, 2001, RJT made all partnership allocations to petitioner husband. The Commissioner issued a notice of final partnership administrative adjustment (FPAA) to RJT for 2001 on March 21, 2005, disallowing deductions and losses and determining an accuracy-related penalty under section 6662.

Petitioner husband, as the tax matters partner of RJT, petitioned this Court challenging the FPAA in a partnership-level proceeding, RJT Invs. X, LLC v. Commissioner, docket No. 11769-05. The Court entered a decision in that case on June 6, 2006. That decision was affirmed by the Court of Appeals for the Eighth Circuit in RJT Invs. X, LLC v. Commissioner, 491 F.3d 732 (8th Cir. 2007).

II. Issuance of Notice

Petitioners' 2001 Form 1040, U.S. Individual Income Tax Return, included income, deductions, and losses relating to RJT. In a stipulation of facts filed June 16, 2011, the parties agree that " On September 22, 2008, respondent timely mailed an affected items notice of deficiency for the year ending December 31, 2001, to petitioners determining a deficiency in federal income tax and an addition to tax pursuant

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to I.R.C. § 6662(h)." The " copy of the affected items notice of deficiency issued to petitioners for the year ending December 31, 2001" attached to the stipulation of facts shows the following amounts: (1) $4,634,243.00, labeled " Tax" ; and (2) and $1,853,697.20, labeled " IRC 6662(h)" . The stipulation of facts further states that " On September 23, 2008, respondent assessed the following against petitioners regarding the flow through adjustments from RJT Investments X, LLC (a) $1,853,697.20 penalty pursuant to I.R.C. § 6662, (b) $4,634,243.00 tax, and (c) $3,053,575.48 interest."

Petitioners filed a petition on December 19, 2008, before the December 22, 2008, date shown as the " Last Day to File a Petition With the United States Tax Court" on the September 22, 2008, notice of deficiency. On December 2, 2009, respondent filed a motion to dismiss for lack of jurisdiction (motion), and a memorandum in support of respondent's motion to dismiss for lack of jurisdiction. Pursuant to an order of the Court of December 8, 2009, petitioners timely filed a memorandum in opposition to respondent's motion to dismiss for lack of jurisdiction on December 31, 2009. Respondent's motion asks

that this case be dismissed for lack of jurisdiction upon the ground that no valid statutory notice of deficiency * * * has been sent to petitioners with respect to taxable year 2001, nor has respondent made any other determination with respect to petitioners' taxable year 2001 that would confer jurisdiction on this Court. [Emphasis supplied.]

The motion argues that the September 22, 2008, " notice of deficiency is invalid as the determination relates to computational flow through adjustments that are immediately assessable and not affected items requiring partner-level determinations made through a notice of deficiency" .

III. Errors in Notice

In reviewing the record in the case, the Court noted two apparent errors by respondent in making adjustments to petitioners' 2001 Form 1040 to give effect to the June 6, 2006, decision in the partnership-level proceeding. The Court brought these apparent errors to the parties' attention.[2] The

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parties subsequently filed a stipulation of settlement on July 26, 2011. The stipulation of settlement states in part that

To the extent that this Court has jurisdiction to redetermine respondent's determination in the September 22, 2008, affected item notice of deficiency, the parties agree that respondent's determination regarding the deficiency and penalty pursuant to I.R.C. § 6662(h) for 2001, modified as set forth on the Audit Statement and Statement - Income Tax Changes attached hereto as Exhibit B, is correct. [Emphasis supplied.]

Exhibit B attached to the July 26, 2011, stipulation of settlement, includes a Form 3610, Audit Statement, and a Form 5278, Statement - Income Tax Changes, for petitioners for tax year 2001, each bearing a date of July 18, 2011. The July 18, 2011, Form 3610 shows a " statutory deficiency" of $4,248,420. Line 21 of the July 18, 2011, Form 5278 confirms that the " Deficiency - increase in tax" is $4,248,420. By comparison, on the September 22, 2008, notice of deficiency, the amount shown as " Deficiency" under " Tax" is $4,634,243.[3]

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We recognize that the September 22, 2008, notice of deficiency contains deficiency and penalty amounts that are larger than the respective amounts that respondent has now stipulated as " correct" . Presumably, respondent now believes that the smaller stipulated amounts are the appropriate versions of what he characterized in paragraph 7 of his motion as " computational assessments [that] are authorized by I.R.C. § 6230(a)(1) to be directly assessed without the issuance of an affected items notice of deficiency."

Discussion

We consider, in sequence, our jurisdiction over petitioners' income tax deficiency and the accuracy-related penalty.

I. Jurisdiction Over Deficiency

Whether we have jurisdiction over petitioners' income tax deficiency, in turn, requires us to decide the following three issues: (1) Whether an affected items notice of deficiency issued in the absence of a need for partner-level determinations is void ab initio; (2) whether an erroneous computational adjustment, which both was made and can be corrected without partner-level determinations, constitutes an additional determination rendering valid the notice containing it; and (3) whether any partner-level determinations are required, in petitioners' case, to properly reflect the treatment of partnership items made in the partnership-level proceeding.

A. Notice Void Ab Initio

We first confront the argument that even though an affected items notice of deficiency may not be required in the

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absence of a need for partner-level determinations, once the Commissioner does issue such a notice, he is bound by it. If this is correct, then, pursuant to section 6213(a), " no assessment of a deficiency in respect of any tax * * * shall be made, begun, or prosecuted * * *, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final." This argument presumes that an affected items notice of deficiency is elective if no partner-level determinations are needed. Moreover, once the Commissioner makes the election, then the restrictions on assessments are necessarily activated. This argument, and the electiveness of an...

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