MEMORANDUM OPINION
RUWE, Judge: The matter before the Court is petitioners' motion to dismiss for lack of jurisdiction under Rule 53. 1 Respondent determined deficiencies with respect to petitioners' Federal income taxes for 1997, 1998, and 1999. Those deficiencies were based on respondent's determination that petitioners' deductions of partnership losses were limited to petitioners' bases in the partnerships. On the basis of our opinion in Maxwell v. Commissioner, 87 T.C. 783 (1986), respondent concedes that we lack jurisdiction over petitioners' 1998 and 1999 tax years because ongoing partnership-level proceedings, see secs. 6221-6234, have not been completed with respect to partnerships that gave rise to deficiencies for those years. The issue remaining for decision is whether we have jurisdiction to redetermine a deficiency for petitioners' 1997 tax year. Petitioners resided in Berkeley, California, at the time they filed their petition.
In 1997, Mr. Gustin invested in a partnership called Annona Venture (Annona). He made a cash contribution of $ 50,000 and also contributed a recourse subscription note of $ 157,800. Mr. Gustin was a general partner in Annona.
The 1997 partnership return filed by Annona included a Schedule K-1, Partner's Share of Income, Credits, Deductions, etc., which reported items relating to Mr. Gustin. Line F of the Schedule K-1 entitled "Partner's share of liabilities" contains no entry. Line J entitled "Analysis of partner's capital account" shows "Capital contributed during year" by Mr. Gustin of $ 193,800. The Schedule K-1 shows Mr. Gustin's share of losses as $ 189,138. Petitioners deducted that amount on their Form 1040, U.S. Individual Income Tax Return, for 1997.
On March 1, 2001, respondent issued a notice of deficiency to petitioners for their 1997 tax year. Respondent determined that Mr. Gustin's adjusted basis in Annona was $ 36,000 and disallowed loss deductions from Annona that were claimed on petitioners' Form 1040 to the extent those deductions exceeded $ 36,000. See sec. 704(d). The section 6229(a) period of limitations for making adjustments to Annona partnership items expired on April 15, 2001, after the notice of deficiency was issued. Petitioners filed their petition on April 19, 2001.
Annona was subject to the unified partnership procedures of sections 6221-6234, but respondent did not conduct a partnership- level examination of Annona's 1997 partnership return. Respondent acknowledges that a notice of final partnership administrative adjustment (FPAA) will not be issued for Annona and that there will be no adjustments to any partnership items of Annona for 1997.
The unified partnership procedures were added to the Code as part of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 401(a), 96 Stat. 648. 2 Under those procedures, the tax treatment of items of partnership income, loss, deductions, and credits is determined in partnership-level proceedings rather than in separate proceedings involving the partners. Sec. 6221; H. Conf. Rept. 97-760, at 599 (1982), 1982-2 C.B. 600, 662. 3 Under section 6223(a), the Secretary shall mail to each partner notice of the beginning of an administrative proceeding at the partnership level, as well as an FPAA resulting from any such proceeding. A tax matters partner may, within 90 days after the date the FPAA is mailed, file a petition for the readjustment of partnership items with the Tax Court, a District Court, or the Claims Court. Sec. 6226(a). If a petition is filed, the court has jurisdiction over all partnership items for the year to which the FPAA relates, as well as the proper allocation of those items among the partners. Sec. 6226(f).
Petitioners argue that we lack jurisdiction over the deficiency in this case, because an FPAA has not been issued and a partnership-level proceeding has not been completed for Annona's 1997 tax year. Petitioners claim that the notice of deficiency is invalid and that we cannot review, as part of our normal deficiency procedures, adjustments respondent made to Mr. Gustin's basis in Annona nor respondent's disallowance of losses under section 704(d). Respondent argues that a partnership-level proceeding was not required to determine Mr. Gustin's basis and to apply the loss limitations. Respondent states that he does not intend to issue an FPAA, that he can no longer make adjustments to partnership items for Annona's 1997 tax year, that he accepts the partnership's treatment of partnership items, and that partnership-level proceedings are completed when he accepts the partnership's treatment of partnership items without adjustment.
The instant case is similar to Roberts v. Commissioner, 94 T.C. 853 (1990). In Roberts, the Commissioner did not commence a partnership-level examination, did not issue an FPAA, and did not otherwise seek to adjust the partnership items reported on the partnerships' returns. The notice of deficiency was issued on April 9, 1987, disallowing partnership losses claimed by the taxpayers because of alleged stop-loss agreements with third parties. See sec. 465(b)(4). On April 15, 1987, the period of limitations for assessing a tax attributable to any partnership item under section 6229(a) expired. On July 6, 1987, the taxpayers filed their petition and then filed a motion to dismiss for lack of jurisdiction.
In Roberts v. Commissioner, 94 T.C. at 861-862, we held that side agreements for purposes of the section 465 at-risk provisions were not partnership items 4 but were affected items. 5 We observed that determination of affected items must await "the outcome of the partnership proceeding" but held that we had jurisdiction in that case, stating:
However, the "outcome of the partnership
proceeding" may be acceptance of the partnership return as
filed as a result of the fact that there was no partnership
proceeding and there can no longer be a partnership proceeding
under the normal statute of limitations. We do not read section 6230(a)(2)(A)(i)
to mean that a partnership proceeding must be
opened and closed in order for there to be a determination with
regard to an affected item. We also find no requirement in the
statute or regulations that prohibits affected items from being
considered in a proceeding involving a personal tax case,
providing subject matter jurisdiction exists. [94 T.C. at 860-861.]
Petitioners direct us to our more recent opinion in Katz v. Commissioner, 116 T.C. 5, 8-9 (2001), in which we stated:
a notice of deficiency issued prior to the completion of the
partnership-level proceeding is invalid to the extent it relates
to a partnership item or an affected item.
No FPAA was issued by respondent and no partnership-level
proceedings have been commenced regarding the prepetition
partnership losses in the present case. Accordingly, if the NOL
carryovers at issue constitute affected items as petitioners
contend, we must grant the motion to dismiss on the basis that
the notice of deficiency is invalid as it relates to those
items. * * * [Citation omitted.]
The language cited by petitioners was unnecessary for the disposition of that case and should be viewed in its context. In Katz v. Commissioner, 116 T.C. at 10, we stated the issue as follows:
whether the manner in which partnership items are allocated
between a partner in bankruptcy and the partner's bankruptcy
estate is a determination which, pursuant to the TEFRA
procedures, must be made at the partnership level. We therefore
shall determine our jurisdiction based on the resolution of this
latter issue.
We held:
The manner in which the distributive share of a partner in
bankruptcy is allocated between the partner and the bankruptcy
estate is not a "partnership item" under sec.
6231(a)(3), I.R.C. Accordingly, such allocation need not be
resolved in a partnership-level proceeding pursuant to the
uniform audit and litigation procedures of secs. 6221-6234,
I.R.C. * * * [Id. at 5.
Our holding in Katz did not depend on the status of the NOL carryover as an "affected item", and we did not make a determination that the NOL carryovers were not affected items. However, since the Commissioner was not challenging the allocation of partnership-level losses among partners, i.e., a partnership item, but was instead challenging the suballocation of that item between a partner and his bankruptcy estate, i.e., an affected item, it follows that we exercised jurisdiction to redetermine a deficiency attributable to an affected item, even though an FPAA had not been issued and partnership-level proceedings were not initiated. Therefore, the jurisdictional holding in Katz supports rather than contradicts the position taken by this Court in Roberts v. Commissioner, supra.
In GAF Corp. & Subs. v. Commissioner, 114 T.C. 519, 528 (2000), we granted the taxpayer's motion to dismiss for lack of jurisdiction. We concluded that a notice of deficiency is invalid where it is based on affected items and is issued before the completion of the related partnership-level proceedings. In that case, an FPAA was issued which proposed partnership adjustments, and a partnership-level proceeding had been initiated and was pending in the Tax Court. A notice of deficiency was issued on the same date as the FPAA, see Rhone-Poulenc Surfactants v. Commissioner, 114 T.C. 533, 536 (2000), and before the partnership-level proceedings were completed.
In the instant case, an FPAA was not issued and partnership-level proceedings were not initiated. Respondent has not proposed any adjustments to partnership items and agrees that he is bound by the partnership's determinations of partnership items. Under those circumstances, the outcome at the partnership level is acceptance of the partnership's treatment of its partnership items, and a notice of deficiency regarding affected items can be the basis for our jurisdiction. See Roberts v. Commissioner, 94 T.C. 853 (1990).
The seminal case in this area is Maxwell v. Commissioner, 87 T.C. 783 (1986). In Maxwell, the potential for a duplication of procedures prompted this Court to limit our jurisdiction over the deficiencies relating to affected items: "Affected items depend on partnership level determinations, cannot be tried as part of the personal tax case, and must await the outcome of the partnership proceeding." 87 T.C. at 792. We have previously considered this language and have appropriately declined to afford it an interpretation that is broader than what was required for the disposition of the jurisdictional issue in that case:
Petitioners rely on our statement in Maxwell that
"Affected items depend on partnership level determinations,
[and] cannot be tried as part of the personal tax case, and must
await the outcome of a partnership proceeding." Maxwell v. Commissioner, 87 T.C. at 792.
Petitioners have taken
that statement out of context. In Maxwell, respondent had
determined deficiencies and additions to tax by disallowing
certain claimed partnership losses. At the time of the issuance
of the notice of deficiency, however, a partnership proceeding
had been commenced, but no FPAA had as yet been issued. Under
those circumstances, the additions to tax were affected items
and had to await the outcome of the partnership proceeding. They
could not be determined as part of the personal income tax case.
[Roberts v. Commissioner, 94 T.C. at 860.
Thus, Maxwell is distinguishable from this case because here there are no partnership-level proceedings underway, and respondent has accepted the partnership's treatment of partnership items.
In Jenkins v. Commissioner, 102 T.C. 550, 553 (1994), we stated:
Generally, respondent is prohibited from assessing a deficiency
regarding a partnership item without first attempting to adjust
the item in a partnership level proceeding and issuing a notice
of final partnership administrative adjustment (FPAA).
Sec.6225(a). Once the partnership level proceeding is complete,
or if no partnership level proceeding is
necessary, then a partner's individual income tax for the
related tax period can be affected by the partnership item which
was reported and/ or adjusted at the partnership level. * * *
[Emphasis added.]
We decided that partnership-level proceedings were not required because the Commissioner was "not questioning the treatment of the partnership item at the partnership level", and because the deficiency related to an affected item reported on the taxpayers' return which is within the subject matter jurisdiction of this Court in a partner's deficiency proceeding. 102 T.C. at 556. We also observed: "Respondent * * * may accept the partnership's characterization of the item and only question the position of a partner, without the superfluous step of conducting a partnership proceeding". 102 T.C. at 557.
A partner's basis in his partnership interest is an affected item. Sec. 301.6231(a)(5)-1T(b), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987). Our normal deficiency procedures apply to "any deficiency attributable to * * * affected items which require partner level determinations". Sec. 6230(a)(2)(A)(i). Since a partner's basis in a partnership interest may require determinations at the partner level, deficiencies attributable to adjustments to basis must be made at the partner level. See Dial USA, Inc. v. Commissioner, 95 T.C. 1, 5-6 (1990).
In the notice of deficiency, respondent determined: "Since your distributive share of the partnership loss is limited to the extent of your adjusted basis, we have disallowed the amount in excess of your basis [$ 36,000], as shown." Respondent's determination is based on an adjustment to Mr. Gustin's basis in his partnership interest, an affected item. Mr. Gustin's partnership loss is affected by partnership items; however, basis is not itself a partnership item and can be the appropriate subject of deficiency proceedings.
In this case, respondent acknowledges that he cannot make an adjustment to a partnership item, and he accepts the partnership return as filed. The treatment of partnership items on Annona's 1997 partnership return is final and binding on both respondent and petitioners. However, that does not present itself as a jurisdictional issue where, as here, the only adjustments stated are to affected items. 6
We hold that the notice of deficiency based on affected items is valid where an administrative partnership-level proceeding has not been initiated and respondent is bound by the partnership's treatment of partnership items. We hold that we have jurisdiction to redetermine the deficiency for petitioners' 1997 tax year.
An appropriate order will be issued.