Henry and Susan F. Samueli v. Commissioner

132 T.C. No. 16

Opinion

132 T.C. No. 16

UNITED STATES TAX COURT

HENRY AND SUSAN F. SAMUELI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13953-06. Filed May 18, 2009.

Ps allege they overpaid their Federal income tax for 2003 on account of adjustments from a TEFRA partnership. Ps argue that the adjustments are no longer partnership items, in part because Ps filed an amended individual income tax return for 2003 (amended return) that qualifies under sec. 6227, I.R.C., as an administrative adjustment request filed on behalf of a partner (partner AAR). Sec. 301.6227(d)-1(a), Proced. & Admin. Regs., requires that a taxpayer file a partner AAR on a form prescribed by R and in accordance with the form’s instructions. R prescribed the form as Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), and stated in the form’s instructions that a taxpayer must explain in detail on the form the reasons for the administrative adjustment reported on the form. R stated in the instructions and in the referenced regulations that the taxpayer must file the original form with the taxpayer’s amended income tax return and a copy of the form with (as applicable here) the service center where - 2 -

the partnership files its tax return. Ps assert that the amended return qualified as a partner AAR because they substantially complied with the requirements for a partner AAR. Held: The amended return did not qualify as a partner AAR because the return neither met the requirements for a partner AAR nor substantially complied with those requirements. Accordingly, the adjustments remain partnership items.

Nancy L. Iredale, for petitioners.

Miles B. Fuller and Louis B. Jack, for respondent.

OPINION

KROUPA, Judge: Respondent moves the Court to dismiss part

of this case for lack of jurisdiction. That part relates to

petitioners’ allegation of a reduction in their taxable income

for 2003 on account of adjustments from H&S Ventures, LLC (H&S

Ventures), a limited liability company treated as a partnership

for Federal tax purposes. We lack jurisdiction if petitioners’

amended individual income tax return for 2003 (amended return)

did not qualify under section 62271 as an administrative

adjustment request (AAR) filed on behalf of a partner (partner

AAR). We hold that the amended return did not qualify as a

partner AAR, and we shall dismiss the referenced part of this

1 Section references are to the applicable versions of the Internal Revenue Code, unless otherwise stated. - 3 -

case. We need not and do not decide whether we would have

jurisdiction if the amended return qualified as a partner AAR.

Background

I. Petitioners

Petitioners are husband and wife. They filed a joint

Federal income tax return for 2003. They resided in California

when they filed the petition.

II. H&S Ventures

H&S Ventures was a limited liability company treated as a

partnership for Federal tax purposes. Each petitioner owned 10

percent of H&S Ventures, and petitioners’ grantor trust owned the

remaining 80 percent. H&S Ventures filed a Form 1065, U.S.

Return of Partnership Income, for 2003.

III. Respondent’s Notice of Deficiency

Respondent issued a notice of deficiency to petitioners that

reflected respondent’s determination of a $171,026 deficiency for

2001 and a $2,177,532 deficiency for 2003 in petitioners’ Federal

income taxes. Neither the determination nor the deficiencies

reflected any adjustment to H&S Ventures’ Form 1065. Petitioners

challenged respondent’s determination by timely filing a petition

with the Court. The Court redetermined that determination in

Samueli v. Commissioner, 132 T.C. (2009). - 4 -

IV. Amended Schedules K-1

Petitioners received from H&S Ventures amended Schedules

K-1, Partner’s Share of Income, Credits, Deductions, etc., for

2003 after petitioners filed their petition. The amended

Schedules K-1 reflected a $318,671 reduction in petitioners’

gross income and a $86,042 reduction in their itemized

deductions. The reductions were purportedly attributable to a

calculation error discovered during an examination of H&S

Ventures by the State of California.

V. Amended Tax Returns

Petitioners mailed the amended return to respondent’s

service center in Fresno, California (the service center where

petitioners were required to file their individual income tax

return). The amended return was prepared by a certified public

accounting firm and stated that petitioners’ “U.S. INDIVIDUAL

INCOME TAX RETURN FOR THE YEAR ENDED 12/31/2003 IS BEING AMENDED

TO PROPERLY REFLECT AMENDED SCHEDULES K-1 RECEIVED FROM H&S

VENTURES.” The amended return specified that petitioners were

reducing their originally reported gross income to reflect the

net long-term capital gain income reported on the amended

Schedules K-1. The amended return specified that petitioners

were reducing their originally reported itemized deductions to

reflect a change in the non-cash contribution limitation

applicable to their now reduced income. The amended return - 5 -

claimed a refund of $33,461. The amended return included a copy

of petitioners’ Form 1040, U.S. Individual Income Tax Return, for

2003 as amended and a copy of petitioners’ Form 1040 for 2003 as

originally filed. The amended return was three pages in length

(exclusive of the Forms 1040), and each page of the amended

return was stamped “AMENDED.” The amended return did not include

copies of the amended Schedules K-1.

H&S Ventures filed an amended Form 1065 for 2003 shortly

after petitioners mailed the amended return to respondent.

VI. Second Amendment to Petition

Petitioners filed with the Court a second amendment to

petition after they filed the amended return. Petitioners allege

in the second amendment to petition that they overpaid their tax

for 2003 by the $33,461 and are entitled to a refund of that

amount plus statutory interest.

Discussion

I. Jurisdiction

Respondent moves to dismiss part of this case for lack of

jurisdiction. We begin our analysis with some general tenets of

our jurisdiction. This Court like other Federal courts is a

Court of limited jurisdiction. See Ginsberg v. Commissioner,

130 T.C. 88, 91 (2008). Whether we have jurisdiction over the

subject matter of a dispute is an issue that either party may

raise at any time. See Charlotte’s Office Boutique, Inc. v. - 6 -

Commissioner, 121 T.C. 89, 102 (2003), affd. 425 F.3d 1203 (9th

Cir. 2005). Petitioners bear the burden of proving that we have

jurisdiction to decide the propriety of the adjustments from H&S

Ventures (subject adjustments) because petitioners invoke our

jurisdiction over that matter. See David Dung Le, M.D., Inc. v.

Commissioner, 114 T.C. 268, 270 (2000), affd. 22 Fed. Appx. 837

(9th Cir. 2001). Petitioners must therefore establish

affirmatively all facts giving rise to our jurisdiction to

satisfy that burden. See id.

II. TEFRA in General

We turn to some general tenets involving partnerships.

Partnerships are not subject to Federal income tax. See sec.

701. Partnerships are nevertheless required to file annual

information returns reporting their partners’ distributive shares

of income, gain, loss, deductions, or credits. See sec. 6031;

see also Randell v. United States, 64 F.3d 101, 103 (2d Cir.

1995). Partners are required to report their distributive shares

of those items on their individual Federal income tax returns.

See secs. 701, 702, 703, and 704.

The Commissioner and the courts had to adjust partnership

items at the partner level before 1982. See Adams v. Johnson,

355 F.3d 1179, 1186-1187 (9th Cir. 2004); Randell v. United

States, supra at 103. Congress enacted the unified audit and

litigation procedures of the Tax Equity and Fiscal Responsibility - 7 -

Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402, 96 Stat. 648, to

remove the substantial administrative burden occasioned by

duplicative audits and litigation and to provide consistent

treatment of partnership income, gain, loss, deductions, and

credits among all partners in the same partnership. See Adams v.

Johnson, supra at 1186-1187; Randell v. United States, supra at

103; H. Conf. Rept. 97-760, at 599-600 (1982), 1982-2 C.B. 600,

662-663. Those procedures require that a partnership and its

partners treat all partnership items consistently on their

returns (including related Schedules K-1) unless a partner

informs the Commissioner of an inconsistent treatment. See sec.

6222(a) and (b). The proper treatment of partnership items at

the partnership level is determined under the TEFRA procedures in

a single, unified audit and judicial proceeding. See Adams v.

Johnson, supra at 1186-1187; Randell v. United States, supra at

103; H. Conf. Rept. 97-760, supra at 599-600, 1982-2 C.B. at

662-663.

III. Applicability of TEFRA to H&S Ventures

The parties agree that H&S Ventures is subject to TEFRA for

2003 and that the subject adjustments were partnership items at

least until petitioners filed the amended return. We also agree.

See generally secs. 6221 through 6234. We therefore lack

jurisdiction in this deficiency proceeding to decide the

propriety of the subject adjustments unless TEFRA provides - 8 -

otherwise. See Munro v. Commissioner, 92 T.C. 71, 74 (1989);

Maxwell v. Commissioner, 87 T.C. 783, 789 (1986).

IV. AARs

Each partner was generally required to file a separate

amended return to correct a partnership item before TEFRA. TEFRA

allows a “tax matter partner” (as defined in section 6231(a)(7))

to file an AAR on behalf of the entire partnership (partnership

AAR). See sec. 6227. TEFRA also allows each partner to file a

partner AAR solely on behalf of that partner. See id. An AAR

must be filed in accordance with section 6227 for a partner to

change the treatment of a partnership item on the partner’s

return. See Phillips v. Commissioner, 106 T.C. 176, 180-181

(1996).

Petitioners claim they filed a partner AAR in the form of

the amended return. The Commissioner upon receipt of a partner

AAR may take one of four actions. See sec. 6227(d). First, the

Commissioner may process the partner AAR as a claim for credit or

refund with respect to a nonpartnership item. See id. Second,

the Commissioner may assess additional tax resulting from the

requested adjustments. See id. Third, the Commissioner may

notify the partner that all partnership items of the partner for

the partnership’s taxable year to which the partner AAR relates

will be treated as nonpartnership items. See id. Fourth, the

Commissioner may conduct a partnership proceeding. See id. The - 9 -

Commissioner upon receiving a partner AAR generally opts to

follow the fourth action; i.e., to begin a partnership proceeding

and to determine in that proceeding the validity of the request.

See 2 Audit, Internal Revenue Manual (IRM) (CCH), pt.

4.31.4.2.3.1(4), at 10,864 (Sept. 1, 2006).

The partner in turn may begin a civil action for refund of

tax attributable to adjustments claimed in the partner AAR if the

Commissioner does not allow any part of the adjustments and

neither notifies the partner that the adjustments will be treated

as nonpartnership items, nor begins a partnership proceeding.

See sec. 6228(b)(2). The timeliness of such a civil action is

governed by section 6228(b)(2)(B). The partnership items of the

partner for the partnership taxable year to which the partner AAR

relates are recharacterized as nonpartnership items on the

beginning of the civil action. See sec. 6228(b)(2)(A).

V. Regulations Applicable to the Filing of a Partner AAR

The Secretary has prescribed rules for the filing of a

partner AAR in section 301.6227(d)-1(a), Proced. & Admin. Regs.

That section states:

§ 301.6227(d)-1 Administrative adjustment request filed on behalf of a partner.--(a) In general. A request for an administrative adjustment on behalf of a partner shall be filed on the form prescribed by the Internal Revenue Service for that purpose in accordance with that form’s instructions. Except as otherwise provided in that form’s instructions, the request shall-- - 10 -

(1) Be filed in duplicate, the original copy filed with the partner’s amended income tax return * * * and the other copy filed with [as applicable here] the service center where the partnership return is filed * * *;

(2) Identify the partner and the partnership by name, address, and taxpayer identification number;

(3) Specify the partnership taxable year to which the administrative adjustment request applies;

(4) Relate only to partnership items; and

(5) Relate only to one partnership and one partnership taxable year.

VI. Form 8082

The Commissioner has prescribed Form 8082, Notice of

Inconsistent Treatment or Administrative Adjustment Request

(AAR), as the form to be used by a partner requesting an

administrative adjustment. See Instructions for Form 8082

(rev. Jan. 2000) (instructions), at 1. The instructions require

that taxpayers file Form 8082 as an AAR to adjust passthrough

items and that taxpayers explain in detail on the form the

reasons for any adjustment reported on the form. See id. at 1,

3. The instructions require that a partner filing Form 8082 as

an AAR file the form in duplicate, the original filed with the

partner’s amended income tax return and the copy filed with the

service center where the passthrough entity return is filed. See

id. at 2. The face of Form 8082 requires that the partner list - 11 -

on the form the name, address, and identifying number of the

passthrough entity to which the form relates, and that entity’s

taxable year.

VII. Parties’ Arguments and the Court’s Analysis

A. Parties’ Arguments

Respondent argues that the subject adjustments are

partnership items the propriety of which must be decided in a

partnership-level proceeding. Petitioners argue that the subject

adjustments, while once partnership items, are no longer

partnership items, in part because petitioners filed the amended

return that qualified under section 6227 as a partner AAR.2

Petitioners recognize that a partner AAR must be filed on Form

8082 pursuant to section 301.6227(d)-1, Proced. & Admin. Regs.,

and the instructions, and petitioners acknowledge that they did

not file such a form. Petitioners argue nonetheless that the

Court of Appeals for the Ninth Circuit considers amended returns

to be AARs in all instances (i.e., whether accompanied by a Form

8082 or not). Petitioners also argue that their amended return

is a partner AAR because it substantially complied with the

requirements for a partner AAR in that it contained all

information required to be included on Form 8082. Petitioners

2 Petitioners conclude that their filing of the amended return as a partner AAR and their filing of the second amendment to petition made the subject adjustments nonpartnership items pursuant to sec. 6228(b)(2)(B). - 12 -

note that the Court of Appeals for the Ninth Circuit, the court

to which an appeal of this case lies absent a stipulation to the

contrary, treated a taxpayer’s amended income tax return as a

partner AAR. See Wall v. United States, 133 F.3d 1188 (9th Cir.

1998).

B. Analysis

1. Overview

We now focus on whether the amended return here qualifies as

a partner AAR. This Court has held that section 6227 does not

authorize the Commissioner to consider as a partner AAR a request

for an administrative adjustment that fails to conform to the

applicable statutory requirements. See Phillips v. Commissioner,

106 T.C. at 181. The Court of Federal Claims has held similarly.

See Rothstein v. United States, 81 AFTR 2d 2132, 98-1 USTC par.

50,435 (Fed. Cl. 1998). The courts in both cases ruled that an

amended return filed by a partner did not qualify as a partner

AAR where the amended return was not accompanied by a Form 8082.

The courts did not state, however, that an amended return could

never qualify as a partner AAR if it failed to include a Form

8082. Nor does the Commissioner require that an amended return

include a Form 8082 to be characterized as a partner AAR. See

2 Audit, IRM (CCH), pt. 4.31.4.2.3.1(1), at 10,864 (Sept. 1,

2006) (stating that “Any partner may file an AAR on his or her

own behalf. In order to file an AAR, a partner must complete an - 13 -

amended return and Form 8082 or statements that provide the same

information required by Form 8082” (emphasis added)).

Neither party disputes that the amended return fails to meet

all of the requirements for a partner AAR set forth in section

301.6227(d)-1(a), Proced. & Admin. Regs. The parties dispute two

issues. First, the parties dispute whether the Court of Appeals

for the Ninth Circuit considers amended returns to be AARs in all

instances. If the court does not, the parties further dispute

whether petitioners’ amended return substantially complied with

the requirements for a partner AAR so as to be characterized as a

partner AAR. We address those disputes in turn.

2. Whether Amended Returns Are AARs in All Instances

Petitioners first argue that the Court of Appeals for the

Ninth Circuit considers amended returns to be AARs in all

instances, citing Wall v. United States, supra. We do not read

that opinion to support petitioners’ broad claim. In Wall, the

Court of Appeals for the Ninth Circuit treated a taxpayer’s

amended return as a partner AAR even though no Form 8082

accompanied the amended return. The court had previously held,

however, that the amended return substantially complied with the

procedures governing requests for an administrative adjustment.

See id. The court did not state that an amended return in and of

itself is considered to be a partner AAR. Nor are we aware of

any published opinion of the Court of Appeals for the Ninth - 14 -

Circuit (or any other court) that holds that an amended return in

and of itself is considered a partner AAR. The regulations

require that certain information be relayed to the Commissioner

in a certain manner for a request to qualify as a partner AAR.

See sec. 301.6227(d)-1(a), Proced. & Admin. Regs. An amended

return may not contain that information, or it may not be

submitted to the Commissioner in the manner required by the

regulations. We conclude that an amended return is not

necessarily a partner AAR. We now address petitioners’ second

argument.

3. Whether Petitioners’ Amended Return Substantially Complied With Requirements for a Partner AAR

Petitioners also argue that their amended return was a

partner AAR because it substantially complied with the

requirements for a partner AAR. We agree with petitioners that

their amended return, filed without a Form 8082, may be

characterized as a partner AAR if it substantially complied with

the requirements for a partner AAR. We disagree with

petitioners, however, that their amended return substantially

complied with those requirements.

The substantial compliance doctrine is a narrow equitable

doctrine that courts may apply to avoid hardship where a party

establishes that the party intended to comply with a provision,

did everything reasonably possible to comply with the provision,

but did not comply with the provision because of a failure to - 15 -

meet the provision’s specific requirements. See Sawyer v. County

of Sonoma, 719 F.2d 1001, 1007-1008 (9th Cir. 1983); Fischer

Indus., Inc. v. Commissioner, 87 T.C. 116, 122 (1986), affd. 843

F.2d 224 (6th Cir. 1988); see also Credit Life Ins. Co. v. United

States, 948 F.2d 723, 726-727 (Fed. Cir. 1991); Prussner v.

United States, 896 F.2d 218, 224 (7th Cir. 1990); Estate of

Chamberlain v. Commissioner, T.C. Memo. 1999-181, affd. 9 Fed.

Appx. 713 (9th Cir. 2001).

The record does not establish that petitioners intended to

file the amended return as a partner AAR. The amended return was

professionally prepared for petitioners, whom we consider

sophisticated and financially adept individuals, and indicated

that petitioners were amending their individual income tax return

merely to conform the return to amended Schedules K-1 received

from H&S Ventures. The amended return did not include a copy of

any of the amended Schedules K-1, and it did not include a Form

8082 that would indicate that petitioners were filing the amended

return as other than an amended return.3 The amended return

3 A partnership AAR must include revised Schedules K-1, see sec. 6227(c)(3), and the partners may file amended individual income tax returns to conform their individual returns to the revised Schedules K-1, see 2 Audit, Internal Revenue Manual (CCH), pt. 4.31.4.6.1.1, at 10,869 (Sept. 1, 2006) (stating that the Commissioner may take no action in response to a partnership AAR where all of the partners incorporated the reported adjustments into their original or amended returns). We agree with respondent that a primary purpose for TEFRA would be frustrated if respondent had to determine whether each such (continued...) - 16 -

further stressed the word “AMENDED” on each of its pages and

included a copy of petitioners’ Form 1040 for 2003, both as

originally filed and as amended by the amended return. We also

note that petitioners asserted for the first time that the

amended return should be considered a partner AAR only after

receiving respondent’s motion now before us. The requisite

intent needed to be present contemporaneously with the filing of

the partner AAR, not later when petitioners believed it to be

more advantageous to have had that intent initially.

Nor did the amended return substantially comply with the

requirements for a partner AAR in that the amended return was not

filed in the manner required for a Form 8082 and did not include

all information required to be provided on a Form 8082. The

amended return failed the former requirement because a copy of

the amended return was not filed with the service center where

the partnership return was filed. Respondent stated explicitly

in the referenced regulations and in the instructions that a

partner AAR must be filed in duplicate, one copy at each of the

designated places. Petitioners do not assert that the dual

filing requirement is unreasonable as applied to them, nor do we

consider that to be the case. The amended return failed the

latter requirement because, in part, the amended return did not

3 (...continued) amended individual income tax return was in fact a partner AAR, as petitioners effectively ask the Court to hold. - 17 -

list the address of H&S Ventures and did not specify the

partnership taxable year to which the requested adjustments

related. The amended return also did not explain in detail the

reasons for the requested adjustments. Such reasons are

necessary, respondent argues and we agree, so that respondent can

properly carry out the function of section 6227(d) by deciding as

to the AAR whether to allow or disallow the requested

adjustments, or to start a partnership proceeding. The amended

return did not allow respondent to carry out that function

properly in that it did not detail the specific reasons for the

requested adjustments reported on the amended return. The

adjustments could just as easily have been requested to correct a

mathematical error as to reflect a different substantive

treatment of a partnership item.

We conclude that petitioners’ amended return did not

substantially comply with the requirements for a partner AAR.

Petitioners’ amended return is therefore not a partner AAR.

VIII. Conclusion

The amended return does not qualify as a partner AAR, and

the claimed adjustments from H&S Ventures are partnership items

over which we lack jurisdiction. We have considered all

arguments petitioners have made for a contrary conclusion and, to

the extent not discussed, we have rejected those arguments as

without merit. - 18 -

To reflect the foregoing,

An appropriate order

will be issued.