Harris v. Comm'r of Internal Revenue

• Decision Date: 28 July 1992
• Docket Number: No. 4153–87.,4153–87.
• Citation: 99 T.C. No. 6,99 T.C. 121
• Parties: Joseph R. HARRIS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

99 T.C. 121

99 T.C. No. 6

Joseph R. HARRIS, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 4153–87.

United States Tax Court

July 28, 1992.

H. Karl Zeswitz, Jr., for petitioner.^*

Mary Corrigan Gorman, for respondent.

SUPPLEMENTAL OPINION

WELLS, Judge:

The instant matter arises out of a dispute between the parties over their differing computations under Rule 155.¹ The issue presented by the parties arose after our Memorandum Opinion on the merits of the instant case was issued on February 20, 1990, T.C. Memo.1990–80.² Petitioner has requested that the Court defer entry of the decision in the instant case in order to avoid the possibility that petitioner might be precluded from carrying back, to the years in issue, certain net operating losses (NOL's) arising out of partnerships subject to sections 6221 through 6233 (the partnership provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. 97–248, 96 Stat. 324) in taxable years not before the Court.³ Petitioner argues that the risk that he will be prevented from claiming refunds arising out of any NOL carrybacks attributable to partnerships subject to the TEFRA provisions is sufficient to warrant deferral of entry of decision “in the interests of fairness and justice”. Estate of Bailly v. Commissioner, 81 T.C. 949, 958 (1983). Respondent contends that petitioner will not be precluded from claiming refunds attributable to the carrybacks when they are determined and that the Court should proceed to enter its decision in the instant case. Respondent further objects to the inclusion of any such carrybacks in the instant proceeding on grounds that they are governed by the TEFRA partnership provisions and that we lack jurisdiction to take such carrybacks into account in the instant non-TEFRA proceeding. The disagreement between the parties stems from the interaction of the normal rules governing the time for claiming refunds attributable to NOL carrybacks vis-a-vis the limitations on claiming refunds under the TEFRA partnership provisions, as well as the proper method for claiming carrybacks arising from partnerships subject to the TEFRA provisions in deficiency proceedings for non-TEFRA years.

There are two classes of NOL carrybacks potentially applicable to petitioner's tax liability for the years in issue. The first arises from a settlement made after the Memorandum Opinion in the instant case had been issued. The settlement covered TEFRA years of an unrelated partnership known as Bank Software. Petitioner seeks to apply an NOL carryback in the amount of $38,042 resulting from the settlement of Bank Software TEFRA partnership items for petitioner's 1984 taxable year in the computation of his personal tax liability for his 1981 taxable year under Rule 155 in the instant case. The second class of NOL carrybacks relates to petitioner's assertion of potential settlements of TEFRA partnership items of two partnerships, namely, Research One partnership and Research Two partnership. As no settlement has been reported to the Court for either of such partnerships, the amount of the NOL carrybacks arising out of such partnerships for such years has not been ascertained.

After due consideration, we hold that the NOL carrybacks arising out of the settlement of Bank Software may be taken into account in the instant Rule 155 computation, but that the unascertained NOL carrybacks arising out of the yet to be settled partnerships may not be taken into account in such computation. We note at the outset that, in seeking to offset the NOL carrybacks against the deficiencies for the years in issue, it appears as though petitioner is raising a new issue. Generally, new issues may not be raised in a Rule 155 proceeding. Rule 155(c); Gladstone v. Commissioner, T.C.Memo.1992–10; Yoo Han & Co. v. Commissioner, T.C.Memo.1991–308; Himmelwright v. Commissioner, T.C.Memo.1989–587; Himmelwright v. Commissioner, T.C.Memo.1988–114. That is because, ordinarily, the record would have to be reopened in order to permit the taxpayer to introduce evidence establishing his entitlement to the carryback and its amount, which respondent would be free to contest. Cloes v. Commissioner, 79 T.C. 933, 937 (1982). Issues considered in a Rule 155 proceeding are limited to “purely mathematically generated computational items”. The Home Group, Inc. v. Commissioner, 91 T.C. 265, 269 (1988), affd. on another issue 875 F.2d 377 (2d Cir.1989). Petitioner also must amend his pleadings in order to have the NOL carrybacks considered in the instant case.⁴

At a hearing held on the instant matter, petitioner stated his willingness to amend his pleadings to place the NOL carrybacks in issue, if such action was required. Respondent indicated that there is no objection to the amendment of petitioner's pleadings on any grounds other than that the Court does not have jurisdiction to take TEFRA partnership items into account in the redetermination of a deficiency in a non-TEFRA proceeding. As the computation petitioner submitted pursuant to Rule 155 reflects the carryback arising out of the Bank Software settlement, which we will allow to be taken into account in the Rule 155 computation in the instant proceeding for the reasons discussed below, we will treat petitioner's computation as a motion to amend the petition to include such claim. Accordingly, we will proceed to consider the jurisdictional objection made by respondent.

Petitioner contends that we have jurisdiction to take the carrybacks attributable to partnerships governed by the TEFRA provisions into account in redetermining petitioner's tax liability for the years in issue. Petitioner argues that section 6214(b) empowers this Court to consider such facts in relation to the taxes due for other years as may be necessary to correctly decide the amount of the deficiencies for the years in issue. Petitioner relies upon several cases in which we have held that it is appropriate to consider NOL carrybacks and carryforwards in redetermining the correct amount of tax in years before us. See Hill v. Commissioner, 95 T.C. 437 (1990); Calumet Industries, Inc. v. Commissioner, 95 T.C. 257 (1990); Lone Manor Farms, Inc. v. Commissioner, 61 T.C. 436 (1974), affd. without published opinion 510 F.2d 970 (3d Cir.1975); State Farming Co. v. Commissioner, 40 T.C. 774 (1963); see also Phoenix Coal Co. v. Commissioner, 231 F.2d 420 (2d Cir.1956), affg. T.C.Memo.1955–28. Such cases, however, did not involve the TEFRA partnership provisions and, consequently, do not resolve the issue before us. Petitioner does not assert any other basis for our jurisdiction, such as the overpayment provisions of section 6512.

Respondent contends that the procedure for taking the NOL carrybacks into account is provided by the TEFRA partnership provisions, and not by the provisions ordinarily governing the redetermination of deficiencies, such as section 6214(b). The TEFRA partnership provisions provide that issues related to partnerships subject to such provisions are to be resolved in proceedings governed by subchapter C of chapter 63, and not under the normal deficiency procedures, which are provided in subchapter B of chapter 63. Sec. 6230(a), (d)(6). Consequently, we have held that the parties may neither raise nonpartnership items in the course of a partnership proceeding nor raise partnership items in nonpartnership deficiency proceedings. See Trost v. Commissioner, 95 T.C. 560, 562–565 (1990) (partner could not reduce his liability for tax attributable to nonpartnership items by using items attributable to a partnership that was subject to the TEFRA provisions); Maxwell v. Commissioner, 87 T.C. 783, 792 (1986) (holding that Congress intended to prevent taxpayers and the Commissioner from raising items governed by the TEFRA partnership provisions in a partner's personal tax case).

A “partnership item” is defined as an item which is more appropriately determined at the partnership level than at the partner level. Sec. 6231(a)(3). Examples of partnership items include items of income, gain, loss, credit, or deduction of the partnership. Sec. 301.6231(a)(3)–1, Proced. & Admin.Regs. Separation is also required with respect to affected items, defined to mean any item to the extent such item is affected by a partnership item. Sec. 6231(a)(5); Affiliated Equipment Leasing II v. Commissioner, 97 T.C. 575, 578 (1991); Maxwell v. Commissioner, supra. An NOL carryback is an affected item. See Maxwell v. Commissioner, supra at 790–791.

When the Commissioner and a partner enter into a settlement with respect to partnership items, however, such items become nonpartnership items. Sec. 6231(b)(1)(C). Petitioner argues that items covered by a settlement become nonpartnership items and can be considered in a proceeding to redetermine the partner's personal tax liability. Respondent, however, counters that the items covered by a settlement are not converted into nonpartnership items for all purposes. A settlement is applied to a partner by means of a computational adjustment and not under the ordinary deficiency and refund procedures. Sec. 6230(a)(2)(A)(ii); sec. 6230(c); Powell v. Commissioner, 96 T.C. 707, 712 (1991). Furthermore, we have held that amounts which become due as a result of a settlement between respondent and a partner are not the proper subject for a petition for redetermination in a partner level proceeding. Powell v. Commissioner, supra.

We, however, do not read the provisions of section 6230(a)(2)(A)(ii), which provides that items covered by a settlement are not subject to the provisions of subchapter B of chapter 63, as depriving us of jurisdiction to take account of the settled items pursuant to section 6214(b). The purpose of section 6230(a)(2)(A)(ii) is to enable the Commissioner to collect amounts due as a result of settlements without the necessity of issuing a statutory notice of deficiency, and we find no suggestion that such...