Marcy v. Comm'r
| Decision Date | 03 April 2018 |
| Docket Number | T.C. Memo. 2018-42,Docket No. 12149-04. |
| Parties | GARDNER N. MARCY AND MARIA MARCY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Kyle R. Coleman, for petitioners.
Richard J. Hassebrock, John W. Stevens, and Anne M. Craig, for respondent.
GALE, Judge: Petitioners petitioned the Court to redetermine respondent's determination of a $255,163 deficiency in their Federal income tax for 2000 and a $51,033 accuracy-related penalty under section 6662(a) and (b)(1) and (2).1 The determination stems from respondent's disallowance of petitioners' claimed deductions for a $802,916 short-term capital loss and a $300,675 nonpassive loss that were purportedly passed through to petitioner Gardner N. Marcy as a result of his investment in a so-called Son-of-BOSS transaction involving offsetting foreign currency options.2 Respondent asserts through an amended answer that petitioners also are liable for an increased accuracy-related penalty of $102,065 under section 6662(a) and (h).
Petitioners conceded at trial that respondent correctly determined the deficiency (subject to a small basis adjustment to which the parties agreed), and evidence was thereafter received concerning whether petitioners had reasonable cause under section 6664(c) that would preclude imposition of the penalty. Respondent subsequently conceded the penalty. However, in view of the fact that the deficiency arose from respondent's disallowance of loss deductions passed through to Mr. Marcy from a purported partnership in which he held an interest, ajurisdictional issue arises; namely, whether this Court lacks jurisdiction by virtue of section 6221 to enter a decision concerning the deficiency and penalty that relate to respondent's adjustments to these loss deductions.
The parties submitted stipulated facts and exhibits, which we incorporate. Petitioners were married at the close of their 2000 taxable year, and they filed a joint Federal income tax return for that year. They resided in Illinois when their petition was timely filed.
During 2000, Mr. Marcy was the majority shareholder and president of an engineering/manufacturing firm, Syntronics Instruments, Inc. (Syntronics), that manufactured deflection coils for cathode ray tubes used in televisions and computer screens, and related electronic components. Syntronics had formed an employee stock ownership plan (ESOP) in 1999. On or about January 21, 2000, Mr. Marcy sold some of his Syntronics stock to the ESOP for $1,143,777, realizing a gain of $1,080,531.
In order to reduce or eliminate any tax attributable to that gain, Mr. Marcy decided to invest in a so-called Son-of-BOSS transaction.3 He was assisted in thisregard by his longtime financial adviser and the law firm of Jenkens & Gilchrist. The financial adviser and a Jenkens & Gilchrist partner explained to Mr. Marcy that effecting the Son-of-BOSS transaction would require the formation of various entities, including a limited liability company, an S corporation, and a limited partnership.4
Jenkens & Gilchrist did the necessary work to form these three entities, with Mr. Marcy signing the necessary documents. The first entity formed was GM Evergreen Investments LLC (GMLLC), as a limited liability company, the sole member of which was Mr. Marcy.5 The second entity formed was GM Evergreen Investors, Inc. (GMEI), as a corporation with Mr. Marcy as sole shareholder. Mr. Marcy thereafter elected on GMEI's behalf for it to be treated as an S corporation. The third entity formed was Evergreen Partners (EP), as a limited partnership, in which GMEI owned a 99% limited partnership interest and GMLLC owned a 1% general partnership interest. Mr. Marcy signed EP's partnership agreement, in his capacity as a member of GMLLC and as president of GMEI. EP was formed forthe sole purpose of effecting the Son-of-BOSS transaction. None of the three entities filed a Federal tax return for 2000.
Petitioners' 2000 Federal income tax return reported on Schedule D, Capital Gains and Losses, a long-term capital gain of $1,080,531 from Mr. Marcy's sale of his Syntronics stock to the ESOP. The return also reported on Schedule D a passthrough net short-term loss of $802,916 "from Schedule(s) K-1" and reported on Schedule E, Supplemental Income and Loss, a passthrough "Nonpassive loss from Schedule K-1" of $300,657. The return reported that EP was the passthrough entity that incurred the $300,657 loss, but the return did not identify the passthrough entity that incurred the $802,916 loss.
In full, petitioners' 2000 return reported total income of $236,934 from the following sources:
In the notice of deficiency, respondent disallowed the reported losses of $802,916 and $300,657, stating as follows:
Respondent also determined in the notice of deficiency that petitioners are liable for an accuracy-related penalty under section 6662(a) and (b)(1) and (2) for the underpayment resulting from the disallowance of the loss deductions.
OPINIONWe must decide whether we have jurisdiction over this case so that we may enter a decision reflecting the parties' respective concessions. We directed the parties to file memoranda setting forth their positions on this issue, and they have done so. Both sides agree that we have jurisdiction to decide this case in its entirety. Jurisdiction, however, is fundamental, and the parties cannot confer jurisdiction on the Court by their agreement. See, e.g., Stewart v. Commissioner, 127 T.C. 109, 112 (2006); Evans Publ'g, Inc. v. Commissioner, 119 T.C. 242, 247 n.5 (2002). Congress provides the bounds of our jurisdiction, see sec. 7442; Phillips Petroleum Co. v. Commissioner, 92 T.C. 885, 888 (1989), and we must assure ourselves that we have the requisite jurisdiction to decide a matter whenever our jurisdiction over that matter is subject to reasonable doubt, see Estate of Rosen v. Commissioner, 131 T.C. 75, 81 (2008). The Court, sua sponte, can question jurisdiction at any time. See Raymond v. Commissioner, 119 T.C. 191, 193 (2002). We always have jurisdiction to determine whether we have jurisdiction. See Frazell v. Commissioner, 88 T.C. 1405, 1411 n.7 (1987).
Petitioners timely petitioned the Court to redetermine the deficiency and the section 6662(a) accuracy-related penalty set forth in the notice of deficiency underlying this case. In an amended answer, respondent subsequently asserted an increase in the accuracy-related penalty under section 6662(h). Section 6213(a) empowers the Court to redetermine such a deficiency and any related penalties, see GAF Corp. & Subs. v. Commissioner, 114 T.C. 519, 521 (2000), absent a contrary provision in the Code. Because the deficiency and the accuracy-related penalty at issue are related to a purported partnership, the question arises whether section 6221 is such a contrary provision. Section 6221 generally requires that "any partnership item (and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item) shall be determined at the partnership level"; that is, in a proceeding at the partnership level under the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648 (TEFRA procedures). See Randell v. United States, 64 F.3d 101, 103 (2d Cir. 1995); H.R. Conf. Rept. No. 97-760, at 599-600 (1982), 1982-2 C.B. 600, 662-663. Thus, pursuant to section 6221, "partnership item[s]" and the "applicability of any penalty * * * which relates to an adjustment to a partnership item" must be determined in a TEFRA proceeding involving the partnership; we lack...
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