Sente Inv. Club P'ship of Utah v. Comm'r of Internal Revenue, Docket No. 21056-87.

• Decision Date: 11 September 1990
• Docket Number: Docket No. 21056-87.
• Court: U.S. Tax Court
• Parties: SENTE INVESTMENT CLUB PARTNERSHIP OF UTAH, WARREN ROY TOLSEN, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

95 T.C. 243

95 T.C. No. 19

SENTE INVESTMENT CLUB PARTNERSHIP OF UTAH, WARREN ROY TOLSEN, TAX MATTERS PARTNER, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21056-87.

United States Tax Court

Filed September 11, 1990.

Sente Partnership (S) was a limited partner of D and E, two separate and distinct partnerships. D and E reported items of income, loss and credit on their respective partnership returns for 1983 and 1984. R issued FPAA's with respect to D's 1983 partnership return and with respect to E's 1983 and 1984 partnership returns.

A petition was filed by S as a partner other than the tax matters partner in response to the FPAA issued to D. The petition was ultimately dismissed for failure to prosecute. No petition was filed in response to the FPAA issued to E.

On its 1983 and 1984 partnership returns, S reported its distributive share of income and losses from D and E. S's 1983 and 1984 partnership returns also reported income and deductions which were unrelated to the flow-through items from D and E.

An FPAA was issued to S with respect to its 1983 and 1984 partnership returns. The FPAA determined adjustments based on flow-through items from both D and E for 1983 and 1984. The FPAA also adjusted items of deductions for 1983 which were not related to the flow-through adjustments from D and E.

A petition was filed on behalf of the partners of S disputing all the adjustments in the FPAA. R filed a motion to dismiss for lack of jurisdiction and to strike with respect to the flow-through adjustments from D and E that P attempted to place in dispute.

An amended petition was served on R on Oct. 5, 1988. R's answer was filed Nov. 30, 1988.

HELD: The partnership items of D and E must be determined in separate partnership proceedings relating to those entities and not in the proceeding relating to S, a pass-through partner of D and E. Sec. 6221. Thus, this Court has no jurisdiction to consider in this proceeding the adjustments made to partnership items of D and E.

HELD FURTHER: R's motion to dismiss for lack of jurisdiction and to strike is granted.

HELD FURTHER: R's answer was timely filed, and P's motion to strike answer is denied. Rule 36. Peter H. Waldo, for the petitioner. ¹

William A. Heard, III, and R. Alan Lockyear, for the respondent.

OPINION

RUWE, JUDGE:

This case was heard by Special Trial Judge Peter J. Panuthos pursuant to the provisions of section 7443A of the Code. ² The Court agrees with and adopts the Special Trial Judge's opinion, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

PANUTHOS, SPECIAL TRIAL JUDGE:

This case is before the Court on respondent's motion to dismiss for lack of jurisdiction and to strike and petitioner's motion to strike answer. The issues for decision are (1) whether this case must be dismissed for lack of jurisdiction to the extent the petition seeks redetermination of adjustments to the partnership return of Sente Investment Club Partnership of Utah (Sente) that are attributable to adjustments to the partnership returns of partnerships in which Sente held an interest, and (2) whether this Court should strike respondent's answer because it was allegedly not timely filed. ³

FACTUAL BACKGROUND

On March 30, 1987, respondent issued notices of final partnership administrative adjustment (FPAA's) determining adjustments to the 1983 and 1984 partnership returns of Sente. Petitioner's amended petition was served on respondent by the Court on October 5, 1988. Respondent filed his answer to the amended petition on NOvember 30, 1988.

On its partnership returns for the years at issue, Sente reported items of loss, income, and credit from two partnerships in which it held limited partnership interests, Union Energy Drilling Fund 1983 (Drilling) and Sente Equipment Limited (Equipment).

Drilling filed a partnership return for its 1983 taxable year on which it reported an ordinary loss in the amount of $3,506,733. A Schedule K-1 identifying Sente as a partner of Drilling reflects Sente's distributive share of that loss as $2,432,166. On its 1984 partnership return, Drilling reported ordinary income of $37,000. A Schedule K-1 issued to Sente by Drilling for 1984 reported $36,640 as Sente's distributive share of that income.

Equipment filed a 1983 partnership return reporting an ordinary loss in the amount of $1,944,684. A Schedule K-1 identifying Sente as a partner of Equipment reflects Sente's distributive share of the loss as $1,925,237. Equipment's 1983 return also reported new recovery property eligible for investment credit as distributive share items of Sente. On its 1984 partnership return, Equipment reported an ordinary loss of $2,522,264. A Schedule K-1 issued to Sente reported $2,497,041 of the loss as the distributive share of Sente.

Sente filed a partnership return for its 1983 taxable year reporting items of loss and credit. On its 1983 return, Sente claimed flow-through losses from the two partnerships in which it was a limited partner, Drilling and Equipment. Sente reported the following amounts on its 1983 and 1984 partnership returns:

+-----------------------------------------------------+
                ¦1983                                    ¦            ¦
                +----------------------------------------+------------¦
                ¦Ordinary loss from Equipment K-1        ¦($1,925,237)¦
                +----------------------------------------+------------¦
                ¦Ordinary loss from Drilling K-1         ¦(2,432,166) ¦
                +----------------------------------------+------------¦
                ¦Other deductions                        ¦(158,717)   ¦
                +----------------------------------------+------------¦
                ¦Ordinary loss reported to Sente partners¦(4,516,120) ¦
                +-----------------------------------------------------+
                

Sente also reported that its partners were entitled to an investment credit for the year 1983.

+----------------------------------------------------+
                ¦1984                                    ¦           ¦
                +----------------------------------------+-----------¦
                ¦Gross receipts                          ¦$12,000    ¦
                +----------------------------------------+-----------¦
                ¦Ordinary loss from Equipment K-1        ¦(2,497,041)¦
                +----------------------------------------+-----------¦
                ¦Ordinary income from Drilling K-1       ¦36,640     ¦
                +----------------------------------------+-----------¦
                ¦Other deductions                        ¦(12,000)   ¦
                +----------------------------------------+-----------¦
                ¦Ordinary loss reported to Sente partners¦(2,460,401)¦
                +----------------------------------------------------+
                

Respondent issued an FPAA dated March 23, 1987, with respect to Drilling's 1983 taxable year disallowing the $3,506,733 ordinary loss reported by Drilling. A petition for readjustment of partnership items was filed in the Tax Court at docket No. 29815-87 by Sente as a partner other than the tax matters partner contesting the proposed adjustments to Drilling's 1983 return. The Court subsequently granted respondent's motion to dismiss for lack of prosecution and entered an Order of Dismissal and Decision in that case on January 4, 1990. No adjustments were proposed to Drilling's 1984 partnership return.

On March 30, 1987, respondent issued an FPAA with respect to the 1983 and 1984 partnership returns of Equipment on which all of the claimed ordinary losses and investment credit were disallowed. No petition for readjustment of partnership items was filed in response to the FPAA.

The FPAA issued to the tax matters partner of Sente disallowed all of the ordinary losses Sente reported on its 1983 and 1984 partnership returns and the investment credit claimed for 1983, even though most of these amounts were partnership items of Equipment and Drilling that had been separately adjusted by respondent in FPAA's issued to those partnerships. The only item on the FPAA issued to Sente that did not flow from either Drilling or Equipment was $158,717 reported as ‘other deductions‘ for Sente's 1983 taxable year.

DISCUSSION

1. RESPONDENT'S MOTION TO DISMISS FOR LACK OF JURISDICTION AND TO STRIKE

Respondent argues in his motion to dismiss for lack of jurisdiction that the only adjustment in the FPAA issued to Sente over which this Court has jurisdiction if the disallowance of the $158,717 of ‘other deductions‘ for the year 1983. This Court lacks jurisdiction over the flow-through items from Drilling and Equipment, respondent contends, because the partnership items of Drilling and Equipment must be determined in separate unified partnership proceedings involving those partnerships. We agree. 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)(j). * * *

N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 743 (1987). T he regulations provide that the partnership aggregate and each partner's share of ‘Items of income, gain, loss, deduction or credit of the partnership‘ are more appropriately determined at the partnership level. Section 301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs. Partnership losses or credits are items taken into account by Drilling and Equipment for their 1983 and 1984 partnership taxable years. Investment credits and partnership losses of Drilling and Equipment are thus partnership items of Drilling and Equipment. Maxwell v. Commissioner, 87 T.C. 783, 790 (1986).

Section 6221 provides that the tax treatment of any partnership item, with certain exceptions, is to be determined at the partnership level. In this regard, this Court has stated:

It is evident both from the statutory pattern and from the Conference report that Congress intended administrative and judicial resolution of disputes involving partnership items to be separate from and independent of disputes involving nonpartnership items. * * * The ...