Maxwell v. Comm'r of Internal Revenue

Citation87 T.C. No. 48,87 T.C. 783
Decision Date07 October 1986
Docket NumberDocket No. 20641-85.
PartiesLARRY S. MAXWELL AND VICKEY L. MAXWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Ps, Larry and Vickey, are partners in VIMAS, LTD., a limited partnership of more than 10 partners formed after September 3, 1982. Larry is the general partner and the tax matters partner of VIMAS whose taxable year ends December 31. R gave notice of the beginning of an administrative proceeding to audit VIMAS' 1982 partnership information return. On April 25, 1985, R mailed Ps a statutory notice determining deficiencies for 1979, 1980, 1981 and 1982. In his notice for 1982, R disallowed Ps' claimed distributive shares of VIMAS' loss and investment tax credit, determined an addition to tax pursuant to section 6659 in respect of VIMAS' property and determined an addition to tax pursuant to section 6653(a). The deficiencies determined for 1979 and 1980 are attributable to carrybacks of the disallowed 1982 investment tax credit. An addition to tax pursuant to section 6659 was determined for 1979 and 1980 in respect of the carryback of the investment tax credit. An addition to tax pursuant to section 6653(a) was also determined for 1979 and 1980. The record is unclear on what, if any, portion of the deficiency determined for 1981 is attributable to Ps' interest in VIMAS. An addition to tax pursuant to section 6653(a) was determined for 1981. HELD, the partnership audit and litigation provisions of the Code, viz sections 6221-6233, apply to VIMAS' 1982 partnership taxable year; HELD FURTHER, Ps' distributive shares of VIMAS claimed loss and investment tax credit for 1982 are partnership items;‘ HELD FURTHER, Ps' carryback of the ITC to 1979 and 1980 is an ‘affected item;‘ HELD FURTHER, the section 6659 addition to tax for 1979, 1980 and 1982 is an ‘affected item;‘ HELD FURTHER, the section 6653(a) addition to tax to the extent its existence or amount is determinable by reference to a partnership adjustment is an ‘affected item;‘ HELD FURTHER, the portion of a deficiency attributable to an affected item is a ‘deficiency attributable to a partnership item‘ within the meaning of section 6225(a); HELD FURTHER, we have no jurisdiction in a partner's personal tax case over any portion of a deficiency attributable to a partnership item. Rodney L. Norville, for the petitioners.

Cheryl M. D. Rees, for the respondent.

OPINION

WILLIAMS, JUDGE:

Respondent has filed a motion to strike certain items at issue in this case from the petition for lack of jurisdiction. This Court must decide whether we have jurisdiction over the portion of the deficiencies and the additions to tax determined by respondent for petitioners' 1979, 1980, 1981 and 1982 taxable years that arise out of certain adjustments of partnership items of income, deduction or credit for the partnership taxable year ended December 31, 1982.

All of the facts have been stipulated and are so found. Petitioners are husband and wife who resided at Pasadena, Texas at the time their petition was filed.

On April 4, 1985, respondent mailed a statutory notice of deficiency to petitioners determining deficiencies and additions to tax for their 1979, 1980, 1981 and 1982 taxable years. The deficiency for 1982 resulted, in part, from a disallowance of petitioners' distributive share of VIMAS, LTD.'s claimed loss and investment tax credit for the partnership's taxable year ended December 31, 1982. The deficiencies determined in petitioners' 1979 and 1980 taxable years result from the disallowance of investment tax carryback claimed by petitioners in 1982 as partners in VIMAS, LTD. It is unclear from the record what, if any, portion of the deficiency determined for 1981 results from petitioners' interest in VIMAS, LTD. An addition to tax pursuant to section 6659 was determined for 1979, 1980 and 1982 relating to the alleged overvaluation or overstated basis of VIMAS, LTD.'s partnership property. An addition to tax pursuant to section 6653(a)(2) determined for 1982 is identified in the statutory notice of deficiency as being attributable to petitioners' claimed tax benefits resulting from their interest in VIMAS, LTD. An addition to tax pursuant to section 6653(a)(2) was determined for 1981. An addition to tax was determined pursuant to section 6653(a) for 1979 and 1980 and pursuant to section 6653(a)(1) for 1981 and 1982.

VIMAS, LTD. was formed as a limited partnership under the laws of Texas on December 10, 1982. Petitioner Larry Maxwell was the general partner and 13 individuals, including Larry and petitioner Vickey Maxwell, were limited partners.

VIMAS, LTD. was formed to acquire, market and exploit video game masters. The earliest that VIMAS, LTD. acquired video game master recordings and cassettes was December 10, 1982, when it executed leases pertaining to such properties. VIMAS, LTD.'s partnership information return (Form 1065) for 1982 states that it commenced operations on December 27, 1982.

Respondent commenced an administrative proceeding within the meaning of section 6224 1 and mailed to Larry notice of the beginning of the administrative proceeding on February 28, 1985. Larry is, within the meaning of section 6231(a)(7), the tax matters partner of VIMAS, LTD. On May 2, 1985, the required notice of the beginning of an administrative proceeding was mailed to each VIMAS, LTD. partner whose name and address had been furnished to respondent. See section 6223(a)(1). No notice of final partnership administrative adjustment (‘FPAA‘) resulting from the administrative proceeding has, as yet, been mailed. on November 14, 1985, Larry executed a Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership (Form 872-P) on behalf of VIMAS, LTD.

This case presents an issue of first impression arising from the application of the partnership audit and litigation provisions of Subchapter C of Chapter 63 of Subtitle F of the Internal Revenue Code of 1954, as amended. Respondent argues that certain adjustments that resulted in his determination of a portion of the deficiency for 1982 were ‘partnership items‘ within the meaning of section 6231(a)(3). 2 In respondent's view, this Court has jurisdiction over these items only if they are raised in a petition filed subsequent to the issuance of the FPAA pursuant to the procedures of section 6226 and Rules 240 et seq. 3 Section 6230(1). Petitioners counter that dismissal of their claims for redetermination of the portions of the deficiencies attributable to their interest in VIMAS, LTD. and related additions to tax would be prejudicial to them. Petitioners claim that they had reached a basis for settlement of all issues in their case and that the dismissal urged by respondent adversely affects this settlement.

This case presents the dichotomy between, on the one hand, the procedures applicable to the determination and redetermination of DEFICIENCIES and, on the other hand, the procedures applicable to the administrative adjustment and judicial readjustment of PARTNERSHIP ITEMS. Prior to the enactment of the partnership audit and litigation provisions, no dichotomy existed. Any deficiency determination that involved items of income, loss, deduction or credit of a partnership was made for each partner in conjunction with determining the proper tax treatment of all other items on his individual Federal income tax return. Judicial review of respondent's deficiency determination considered only the case of the particular partner before the court. Each partner's tax liability was determined independently of what any other partner's tax liability in respect of identical items might have been. As noted by the Conference Report accompanying the Tax Equity and Fiscal Responsibility Act of 1982, H. Rept. No. 97-760, 97th Cong. 2d Sess. at 599, certain unavoidable consequences follow from separately determining each partner's tax liability:

adjustments are made to each partner's income tax return at the time that return is audited. A settlement agreed to by one partner with the Internal Revenue Service is not binding on any other partner or on the Service in dealing with other partners. Similarly, a judicial determination of an issue relating to a partnership item generally is conclusive only as to those partners who are parties to the proceeding. (1982-2 C.B. 600, 662.)

By enacting the partnership audit and litigation procedures, Congress provided a method for uniformly adjusting items of partnership income, loss, deduction or credit that affect each partner. Congress decided that no longer would a partner's tax liability be determined uniquely but ‘the tax treatment of any partnership item »would† be determined at the partnership level. ‘ Section 6221.

In drawing the line between those matters which may be the subject of a partnership proceeding and those which may not be, the statute divides disputes arising from ‘partnership items‘ from disputes arising from ‘nonpartnership items.‘ Compare paragraphs (3) and (4) of section 6231(a). If the tax treatment of a ‘partnership item‘ is at issue, the statute requires the matter to be resolved at the partnership level. Section 6221. Respondent has no authority to assess a deficiency attributable to a partnership item until after the close of a partnership proceeding, section 6225(a), and may be enjoined from making premature assessments. Section 6225(b). Special rules apply to settlement agreements. Section 6224(c). Special statutes of limitations apply to assessment of deficiencies attributable to partnership items. Section 6229. In separating partnership adjustments from the deficiency procedures applicable in all other income tax matters, Congress intended that all non- partnership matters on a partner's Federal income tax return continue to be subject to the existing rules for administrative and judicial resolution of the partner's tax liability. As reported by the Conference...

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