N.C.F. Energy Partners v. Comm'r of Internal Revenue

• Decision Date: 05 October 1987
• Docket Number: Docket. No. 16553-86
• Citation: 89 T.C. No. 51,89 T.C. 741
• Parties: N.C.F. ENERGY PARTNERS, BINGHAM PETROLEUM, INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

89 T.C. 741

89 T.C. No. 51

N.C.F. ENERGY PARTNERS, BINGHAM PETROLEUM, INC., TAX MATTERS PARTNER, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket. No. 16553-86

United States Tax Court

Filed October 5, 1987.

R issued a notice of Final Partnership Administrative Adjustment to N.C.F. The accompanying Explanation of Items referred to additions to tax that R intended to assert at the partner level at the conclusion of the partnership proceeding. P's petition asserts that R erred in determining the additions to tax. R moved to dismiss and to strike that part of the petition that relates to redetermining the additions to tax in the partnership proceeding. HELD, a partnership proceeding is designed to resolve only disputes over the proper treatment of partnership items; section 6221. HELD FURTHER, the additions to tax at issue are affected items as defined in section 6231(a)(5) that can only be determined after the conclusion of the partnership level proceeding. HELD FURTHER, there are two types of affected items: those that are affected items only because of a computational adjustment that cannot be made until the partnership level proceeding is completed, and those that require factual determinations to be made at the partner level. HELD FURTHER, the affected items at issue in this case are of the type that may require factual determinations to be made at the partner level. HELD FURTHER, matters decided in the partnership level proceeding will be res judicata as to the partnership adjustments in any subsequent litigation at the partner level. HELD FURTHER, R's Motion to Dismiss and to Strike is granted. Robert D. Grossman, Jr. and Donald W. Geerhart, for the petitioner.

Henry S. Schneiderman, for the respondent.

OPINION

WILLIAMS, JUDGE:

This case is before us on respondent's Motion to Dismiss for Lack of Jurisdiction and to Strike that portion of the petition that relates to redetermining in this partnership proceeding the additions to tax pursuant to sections 6653(a)(1), ¹ 6653(a)(2), 6659, 6661, and 6621(c). In his Notice of Final Partnership Administrative Adjustment (FPAA) issued to petitioner Bingham Petroleum, Inc., tax matters partner of N.C.F. Energy Partners (‘N.C.F. ‘) on March 4, 1986, ² the Commissioner determined adjustments to N.C.F.'s partnership returns for its 1982 and 1983 taxable years. The additions to tax are not asserted in the FPAA or the attached schedule of adjustments. They are, however, referred to in the accompanying Explanation of Items to inform the partners of respondent's intention to assert the additions to tax at the partner level at the conclusion of the partnership proceeding. In its petition filed in response to the FPAA on May 29, 1986, petitioner asserts that respondent erred in determining that there would be additions to tax due under sections 6653(a)(1), 6653(a)(2), 6659, 6661, and 6621(c).

On June 15, 1987, respondent filed his Motion to Dismiss for Lack of Jurisdiction and to Strike alleging that the additions to tax amounts referred to in the petition are ‘affected items,‘ as defined in section 6231(a)(5), that can only be determined in statutory notices of deficiency issued to the individual partners after the conclusion of the partnership level proceeding. Petitioner filed its Notice of Objection on August 26, 1987, conceding that the amounts in question concern ‘affected items‘ but alleging that Congress intended for all items relating to partnership adjustments to be resolved in a single partnership level proceeding even though the computation of the amounts due from each partner cannot be made at the partnership level. Petitioner contends that adoption of respondent's position will result in unnecessary and duplicative litigation, which is precisely what Congress intended to foreclose by enacting the partnership audit and litigation procedures, section 6221 et seq.

Section 6221 sets forth the general rule that the tax treatment of any partnership item shall be determined at the partnership level. A ‘partnership item‘ is any item required to be taken into account for the partnership's taxable year to the extent that the Secretary provides by regulations that ‘such item is more appropriately determined at the partnership level than at the partner level.‘ Section 6231(a)(3). An ‘affected item‘ is ‘any item to the extent such item is affected by a partnership item.‘ Section 6231(a)(5); section 301.6231(a)(5)-1T(a), Temp. Proced. and Admin. Regs., 52 Fed. Reg. 6790 (March 5, 1987). The additions to tax at issue are all affected items. Section 301.6231(a)(5)-1T(d), Temp. Proced. and Admin. Regs.

In Maxwell v. Commissioner, 87 T.C. 783, 792 (1986), we held that because the tax treatment of affected items depends on partnership level determinations, affected items cannot be tried as part of a partner's personal tax case until the completion of the partnership level proceeding. Once the partnership level proceeding is completed, respondent in some circumstances may issue a notice of deficiency to the partner determining additional deficiencies attributable to affected items. Section 6230(a). ³ In other cases a computational adjustment is sufficient to reflect the change in the partner's tax liability as a result of partnership level adjustments. Section 6231(a)(6); section 301.6231(a)(6)-1T(a), Temporary Proced. and Admin. Regs., 52 Fed. Reg. 6790, 6791 (March 5, 1987); Maxwell v. Commissioner, supra. These procedural differences in treatment of affected items at the partner level arise because there are two types of affected items.

An item may be an affected item solely because of a computational adjustment that cannot be made until the partnership level proceeding is completed. For example, the amount of a medical expense deduction pursuant to section 213(a) depends on the partner's adjusted gross income. The amount of adjusted gross income depends on the partner's share of partnership income or loss. The amount of the medical expense deduction would be, therefore, an affected item. The partnership level proceeding must be completed to compute the partner's adjusted gross income and the amount of the allowable deduction under section 213(a). Respondent, in such a case, need not issue a notice of deficiency to the partner because the deficiency determination is merely computational. Maxwell v. Commissioner, 87 T.C. 792 at note 7.

In contrast, the other type of affected item requires factual determinations to be made at the partner level. For example, a partner will be liable for the addition to tax for negligence pursuant to section 6653(a) if he has an underpayment of tax some part of which is due to negligence. The existence of an underpayment of tax at the partner level cannot be made until the partner's share of distributable items of income, loss, deduction and credit is determined in the partnership level proceeding. Once the partnership level proceeding ends, however, the factual question of whether any part of an underpayment due from a partner was due to the partner's negligence must be answered at the partner level. In such instances, unless conceded by the partner, respondent will issue a notice of deficiency for the addition to tax under section 6653(a) to the partner after the completion of the partnership level proceedings. The partner may then file a petition in this Court for redetermination of that deficiency. The prior partnership level proceeding will be res judicata as to the partnership adjustments, and in the subsequent litigation we will decide only whether some part of the underpayment, if any, was due to negligence.

Petitioner argues first that the additions to tax at issue may be resolved in a single partnership level proceeding because respondent will have only computational adjustments to make after the completion of that proceeding. Petitioner's argument is misplaced. An...