Thompson v. COMMISSIONER OF INTERNAL REVENUE

137 T.C. No. 17

RANDALL J. AND KAREN G. THOMPSON, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 30586-08.

12-27-2011

Edward M. Robbins, Jr., for petitioners.

James A. Kutten, for respondent.

OPINION

WHERRY, Judge.

This case is before the Court on respondent's motion to dismiss for lack of jurisdiction. The case constitutes a partner-level action under the unified partnership audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 324.^[1]

Background

I. Partnership-Level Proceeding

Petitioner husband, Randall J. Thompson, engaged in a Son-of-BOSS (BOSS) market linked deposit transaction in 2001, seeking to offset approximately $21,500,000 in capital gains. To facilitate the BOSS transaction, petitioner husband formed RJT Investments X, LLC (RJT), on October 12, 2001. For its tax year ended December 31, 2001, RJT made all partnership allocations to petitioner husband. The Commissioner issued a notice of final partnership administrative adjustment (FPAA) to RJT for 2001 on March 21, 2005, disallowing deductions and losses and determining an accuracy-related penalty under section 6662.

Petitioner husband, as the tax matters partner of RJT, petitioned this Court challenging the FPAA in a partnership-level proceeding, RJT Invs. X, LLC v. Commissioner, docket No. 11769-05. The Court entered a decision in that case on June 6, 2006. That decision was affirmed by the Court of Appeals for the Eighth Circuit in RJT Invs. X, LLC v. Commissioner, 491 F.3d 732 (8th Cir. 2007).

II. Issuance of Notice

Petitioners' 2001 Form 1040, U.S. Individual Income Tax Return, included income, deductions, and losses relating to RJT. In a stipulation of facts filed June 16, 2011, the parties agree that "On September 22, 2008, respondent timely mailed an affected items notice of deficiency for the year ending December 31, 2001, to petitioners determining a deficiency in federal income tax and an addition to tax pursuant to I.R.C. § 6662(h)." The "copy of the affected items notice of deficiency issued to petitioners for the year ending December 31, 2001" attached to the stipulation of facts shows the following amounts: (1) $4,634,243.00, labeled "Tax"; and (2) and $1,853,697.20, labeled "IRC 6662(h)". The stipulation of facts further states that "On September 23, 2008, respondent assessed the following against petitioners regarding the flow through adjustments from RJT Investments X, LLC (a) $1,853,697.20 penalty pursuant to I.R.C. § 6662, (b) $4,634,243.00 tax, and (c) $3,053,575.48 interest."

Petitioners filed a petition on December 19, 2008, before the December 22, 2008, date shown as the "Last Day to File a Petition With the United States Tax Court" on the September 22, 2008, notice of deficiency. On December 2, 2009, respondent filed a motion to dismiss for lack of jurisdiction (motion), and a memorandum in support of respondent's motion to dismiss for lack of jurisdiction. Pursuant to an order of the Court of December 8, 2009, petitioners timely filed a memorandum in opposition to respondent's motion to dismiss for lack of jurisdiction on December 31, 2009.

Respondent's motion asks

that this case be dismissed for lack of jurisdiction upon the ground that no valid statutory notice of deficiency * * * has been sent to petitioners with respect to taxable year 2001, nor has respondent made any other determination with respect to petitioners' taxable year 2001 that would confer jurisdiction on this Court. [Emphasis supplied.]

The motion argues that the September 22, 2008, "notice of deficiency is invalid as the determination relates to computational flow through adjustments that are immediately assessable and not affected items requiring partner-level determinations made through a notice of deficiency".

III. Errors in Notice

In reviewing the record in the case, the Court noted two apparent errors by respondent in making adjustments to petitioners' 2001 Form 1040 to give effect to the June 6, 2006, decision in the partnership-level proceeding. The Court brought these apparent errors to the parties' attention.^[2] The parties subsequently filed a stipulation of settlement on July 26, 2011. The stipulation of settlement states in part that

To the extent that this Court has jurisdiction to redetermine respondent's determination in the September 22, 2008, affected item notice of deficiency, the parties agree that respondent's determination regarding the deficiency and penalty pursuant to I.R.C. § 6662(h)

for 2001, modified as set forth on the Audit Statement and Statement — Income Tax Changes attached hereto as Exhibit B, is correct. [Emphasis supplied.]

Exhibit B attached to the July 26, 2011, stipulation of settlement, includes a Form 3610, Audit Statement, and a Form 5278, Statement — Income Tax Changes, for petitioners for tax year 2001, each bearing a date of July 18, 2011. The July 18, 2011, Form 3610 shows a "statutory deficiency" of $4,248,420. Line 21 of the July 18, 2011, Form 5278 confirms that the "Deficiency — increase in tax" is $4,248,420. By comparison, on the September 22, 2008, notice of deficiency, the amount shown as "Deficiency" under "Tax" is $4,634,243.^[3]

We recognize that the September 22, 2008, notice of deficiency contains deficiency and penalty amounts that are larger than the respective amounts that respondent has now stipulated as "correct". Presumably, respondent now believes that the smaller stipulated amounts are the appropriate versions of what he characterized in paragraph 7 of his motion as "computational assessments [that] are authorized by I.R.C. § 6230(a)(1) to be directly assessed without the issuance of an affected items notice of deficiency."

Discussion

We consider, in sequence, our jurisdiction over petitioners' income tax deficiency and the accuracy-related penalty.

I. Jurisdiction Over Deficiency

Whether we have jurisdiction over petitioners' income tax deficiency, in turn, requires us to decide the following three issues: (1) Whether an affected items notice of deficiency issued in the absence of a need for partner-level determinations is void ab initio; (2) whether an erroneous computational adjustment, which both was made and can be corrected without partner-level determinations, constitutes an additional determination rendering valid the notice containing it; and (3) whether any partner-level determinations are required, in petitioners' case, to properly reflect the treatment of partnership items made in the partnership-level proceeding.

A. Notice Void Ab Initio

We first confront the argument that even though an affected items notice of deficiency may not be required in the absence of a need for partner-level determinations, once the Commissioner does issue such a notice, he is bound by it. If this is correct, then, pursuant to section 6213(a), "no assessment of a deficiency in respect of any tax * * * shall be made, begun, or prosecuted * * *, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final." This argument presumes that an affected items notice of deficiency is elective if no partner-level determinations are needed. Moreover, once the Commissioner makes the election, then the restrictions on assessments are necessarily activated. This argument, and the electiveness of an affected items notice of deficiency, are refuted by the plain language of the statute.

The applicability or inapplicability of deficiency procedures under section 6230 is statutorily mandated and bereft of any administrative discretion. Under section 6230(a)(1), "Except as provided in paragraph (2) [relating to affected items requiring partner-level determinations] or (3) [relating to items ceasing to be partnership items], subchapter B of this chapter [containing deficiency notice procedures and requirements] shall not apply to the assessment or collection of any computational adjustment." (Emphasis supplied.) Conversely, under section 6230(a)(2)(A), "Subchapter B shall apply to any deficiency attributable to * * * affected items which require partner level determinations". (Emphasis supplied.) Thus, for giving partner-level effect to the treatment of any partnership item, the deficiency procedures of subchapter B, sections 6211 through 6216, either apply or do not, depending upon whether partner-level determinations are, or are not, needed. The Commissioner enjoys no element of choice of any sort.

In the absence of a need for partner-level determinations, sections 6211 through 6216 simply do not apply. Consequently, whatever notice the Commissioner may inappropriately (albeit understandably) issue,^[4] it cannot trigger the restraints on assessment of section 6213(a).^[5]

B. Any Other Determination

We now consider the contention that in making an erroneous computational adjustment, respondent has "made any other determination with respect to petitioners' taxable year 2001 that would confer jurisdiction on this Court."

It may be argued that if an affected items notice of deficiency determines an amount higher than the amount that the Commissioner eventually concedes as the definitive deficiency, then the notice does not properly reflect the treatment of the partnership items at issue.^[6] Specifically, the argument posits that the acknowledged errors in computing the impact of the treatment of one or more partnership items cause the notice's determination no longer to be a "computational adjustment" under section 6231(a)(6) but to constitute a "deficiency" within the meaning of section 6211(a). The argument would bring the notice of deficiency within the purview of the deficiency procedures of sections 6211 through 6216. Consequently, whether or not partner-level determinations are needed, the argument would conclude that the notice is valid and validly confers jurisdiction on us to redetermine the deficiency shown in the notice.

Supporting this argument is the tenet...