Gaf Corp. & Subsidiaries v. Comm'r of Internal Revenue

• Decision Date: 29 June 2000
• Docket Number: No. 23682–97.,23682–97.
• Citation: 114 T.C. 519,114 T.C. No. 33
• Parties: GAF CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

114 T.C. 519

114 T.C. No. 33

GAF CORPORATION AND SUBSIDIARIES, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 23682–97.

United States Tax Court.

June 29, 2000.

Corporate taxpayer petitioned for redetermination of deficiencies arising from partnership items. Taxpayer moved to dismiss for lack of jurisdiction on ground that its affected items could not be determined before final resolution of partnership proceeding. The Tax Court, Ruwe, J., held that a valid notice of deficiency based on affected partnership items could not be issued prior to completion of related partnership-level proceedings.

Motion granted.

Halpern, J., dissented in written opinion, in which Whalen and Beghe, JJ., joined.

See also, 2000 WL 863142, and 249 F.3d 175. R determined deficiencies in income tax based on “affected items” that are dependent upon the resolution of partnership items. The resolution of the partnership items must be made at the partnership level. The partnership level proceeding has not been completed. P asks us to dismiss for lack of jurisdiction on the ground that respondent has determined deficiencies that are based on “affected items”, which may not be determined before final resolution of the partnership items to which they relate. P relies on Maxwell v. Commissioner, 87 T.C. 783, 1986 WL 22033 (1986) (striking affected items for lack of jurisdiction because the partnership proceeding had not been completed).Held: A valid notice of deficiency based on “affected items” may not be issued prior to completion of the related partnership-level proceedings. Our jurisdiction is dependent upon a valid notice of deficiency. R's notice of deficiency is invalid. This case is dismissed for lack of jurisdiction.Albert H. Turkus, Pamela F. Olson, William F. Nelson, and Anne E. Collins, for petitioner.

John A. Guarnieri, Craig Connell, and Ruth M. Spadaro, for respondent.

OPINION

RUWE, J.

The matter is before the Court on petitioner's motion for summary judgment.

I. Introduction

Petitioner is a Delaware corporation, with its principal place of business in Wayne, New Jersey. It is the common parent of an affiliated group of corporations making a consolidated return of income (the affiliated group).

By notice of deficiency dated September 12, 1997, respondent determined deficiencies in the Federal income tax liabilities of the affiliated group for its taxable (calendar) years 1987, 1988, and 1990, in the amounts of $4,038,474, $70,644, and $80,285,840, respectively, along with an accuracy-related penalty for 1990 of $16,057,168.¹ Petitioner asks for summary disposition in its favor on the ground that this is not a partnership proceeding, and respondent has determined deficiencies that are entirely dependent upon proposed adjustments to “partnership items”, which may not be adjudicated in this proceeding, or to “affected items”, which may not be determined before final resolution and adjustment of the partnership items to which they relate. Petitioner claims that there is no genuine issue as to any material fact and the law is clear, in its favor. Respondent conditionally agrees that there is no genuine issue as to any material fact.²

II. DiscussionA. Respondent's Adjustments

GAF Chemicals Corp. (GAF Chemicals) and Alkaril Chemicals, Inc. (Alkaril), are two members of the affiliated group. Rhone–Poulenc Surfactants and Specialties, L.P., is a Delaware limited partnership (the partnership). Respondent's adjustments, which give rise to the deficiencies and penalty in question, relate to certain transfers of property by GAF Chemicals and Alkaril (the transferors). The property in question consists of assets related to businesses carried on by the transferors. Respondent determined that the transferors realized gains with respect to the property at the time of the transfer. Petitioner avers that the transfer was a contribution by the transferors to the partnership in exchange for interests in the partnership and that the Code provides that no gain is to be recognized to the transferors. Respondent denies that the transfer was a contribution to the partnership by the transferors. Respondent believes that the transferors sold the property and, therefore, gain must be recognized to the transferors on account of such sale. Respondent characterizes the transfer as a sale based on two sometimes independent hypotheses: (1) There was no partnership, and (2) the transferors received no partnership interests in exchange for the property.³

Petitioner filed its consolidated corporate Federal Income Tax return (Form 1120) for its 1990 taxable year (the GAF return), on or about September 16, 1991.

B. Jurisdiction1. Petitioner Raises a Question of Subject Matter Jurisdiction

The Tax Court is a court of limited jurisdiction, and the Court exercises jurisdiction only to the extent provided by statute. See sec. 7442; Pyo v. Commissioner, 83 T.C. 626, 632, 1984 WL 15623 (1984). Pursuant to section 6213(a),⁴ this Court's jurisdiction to redetermine a deficiency in tax depends upon a valid notice of deficiency and a timely filed petition. See Savage v. Commissioner, 112 T.C. 46, 48, 1999 WL 71571 (1999). Section 6212(a) provides: “If the Secretary determines that there is a deficiency in respect of * * * [among other taxes, the income tax], he is authorized to send notice of such deficiency to the taxpayer”. Section 6213 authorizes a taxpayer to whom a notice of deficiency has been sent to petition the Tax Court for a redetermination of such deficiency.

In response to the notice, petitioner filed the petition on December 9, 1997. Prima facie, we have jurisdiction to redetermine the deficiencies determined in the notice. See, generally, secs. 6211 through 6214. Petitioner argues, however, that the determinations in the notice involve either partnership items that cannot be adjudicated in a partner-level proceeding, see sec. 6221, or affected items that cannot be determined before final resolution and adjustment of the partnership items to which they relate. Therefore, petitioner argues that the notice is invalid, citing N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 1987 WL 45298 (1987); Maxwell v. Commissioner, 87 T.C. 783, 1986 WL 22033 (1986); and Gillilan v. Commissioner, T.C. Memo.1993–366.⁵

2. Partnership Items, Nonpartnership Items, Affected Items, and Computational Adjustments

The terms “partnership item”, “nonpartnership item”, “affected item”, and “computational adjustment” are terms of art. They are defined in section 6231(a)(3), (4), (5), and (6), respectively, as follows:

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.

The term “nonpartnership item” means an item which is (or is treated as) not a partnership item.

The term “affected item” means any item to the extent such item is affected by a partnership item.

The term “computational adjustment” means the change in the tax liability of a partner which properly reflects the treatment under this subchapter of a partnership item. * * *

Section 6231 is one of a group of provisions concerning the tax treatment of partnership items that was added to the Code by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. 97–248, sec. 402(a), 96 Stat. 324, 648 (TEFRA partnership provisions).⁶

For income tax purposes, partnerships are not taxable entities. See sec. 701 (reflecting the view that a partnership is no more than an aggregation of its members). Before TEFRA, adjustments with respect to partnership items were made to each partner's income tax return at the time (and if) that return was examined. See H. Conf. Rept. 97–760, at 599 (1982), 1982–2 C.B. 600, 662. An administrative settlement or judicial determination of a disagreement between a partner (or partners) and the Commissioner bound only the parties thereto and did not bind other partners or bind the Commissioner with respect to other partners. See id. The TEFRA partnership provisions provide that all partnership items are to be determined at the partnership level rather than at the partner level. See sec. 6221.

If a computational adjustment results in a deficiency in a partner's tax, the partner is accorded the right to challenge the adjustment pursuant to the deficiency procedures provided for in subtitle F, chapter 63, subchapter B of the Internal Revenue Code only if and to the extent the change in the partner's tax liability cannot be made without making one or more partner-level determinations. See sec. 6230(a)(1); sec. 301.6231(a)(6)–1T, Temporary Proced. & Admin. Regs., 52 Fed.Reg. 6790 (Mar. 5, 1987).

3. Nature of the Items in Issue

Two mixed questions of law and fact underlie respondent's hypotheses about this case: Was the putative partnership an actual partnership, and, if so, did the transferors transfer the property to the partnership in exchange for interests in the partnership? Those two questions also underlie the related partnership case, Rhone–Poulenc Surfactants & Specialties, L.P., v. Commissioner, 114 T.C. ––––, (2000). In the partnership case, GAF Chemicals and the Commissioner are in agreement that the primary questions constitute partnership items.⁷ 4. Arguments of the Parties

Petitioner, consistent with GAF Chemicals' position in the partnership case, argues that the primary questions are partnership items or, at the very least, items that must be resolved in a partnership-level proceeding.⁸ Respondent's position is substantially the same. The parties are also in agreement that the remaining questions present nonpartnership items that are affected items requiring partner-level determinations (the affected items). See sec. 6230(a)(2).

The parties...