Lori J. Manroe v. Commissioner

• Court: United States Tax Court
• Decided: January 22, 2020
• Status: Published

Opinion

T.C. Memo. 2020-16

UNITED STATES TAX COURT

LORI J. MANROE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

ROBERT D. MANROE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 21590-17, 21591-17. Filed January 22, 2020.

Ernest Scribner Ryder, for petitioners.

Thomas Lee Fenner and Mark J. Miller, for respondent. -2-

[*2] MEMORANDUM OPINION

URDA, Judge: These consolidated cases are before the Court on

petitioners’ motion to restrain collection and respondent’s motion to dismiss the

portions of these cases relating to penalties under section 6662.1

On July 12, 2017, respondent issued two affected items notices of

deficiency both to petitioner Robert Manroe and to petitioner Lori Manroe

(together, Manroes) following partnership-level proceedings under the unified

audit and litigation partnership procedures (TEFRA). The deficiency notices

determined income tax deficiencies of $1,630,592 for 2001 and $96,943 for 2002

and gross valuation misstatement penalties under section 6662(h) of $652,266 for

2001 and $38,777 for 2002. The parties agree that we have jurisdiction to

redetermine the income tax deficiencies, and respondent concedes that petitioners’

motion to restrain collection is appropriate with respect to those deficiencies.

The principal dispute remaining is whether we have jurisdiction to

redetermine the penalties at issue, a necessary prerequisite for us to exercise our

authority to restrain collection of those penalties. Consistent with our recent

1 Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. -3-

[*3] opinion in Gunther v. Commissioner, T.C. Memo. 2019-6, aff’d, ___ F.

App’x ___, 2020 WL 64749 (11th Cir. Jan. 7, 2020), and the decision of the Court

of Appeals for the Eleventh Circuit in Highpoint Tower Tech. Inc. v.

Commissioner, 931 F.3d 1050 (11th Cir. 2019), we conclude that we lack

jurisdiction in this regard. We therefore will grant respondent’s motion in full,

and grant petitioners’ motion in part and deny it in part.

Background

The Manroes lived in California when they timely filed their petitions. The

following facts are not in dispute and are derived from the pleadings, the parties’

motions, and supporting exhibits attached thereto. The facts are stated solely for

purposes of deciding the motions before us.

I. BLAK Investments

These cases stem from the Manroes’ participation in a Son-of-BOSS tax

shelter transaction involving BLAK Investments (BLAK), an entity subject to

TEFRA. BLAK was formed in December 2001, with the Manroes and two trusts

created for the benefit of their children serving as partners. The Manroes each

contributed essentially offsetting positions (proceeds of short sales of U.S.

Treasury notes on one side of the scale and short positions on Treasury notes on

the other) to BLAK. Before December’s end BLAK redeemed the Manroes’ -4-

[*4] respective partnership interests by means of a cash payment to Ms. Manroe

and a payment of both cash and 82,645 Swiss francs (francs) to Mr. Manroe. The

Manroes subsequently exchanged 82,645 francs for U.S. dollars.

BLAK took the position in its 2001 tax reporting that the contributed short

positions were not liabilities within the meaning of section 752. The Manroes

took the related position on their joint 2001 Form 1040, U.S. Individual Income

Tax Return, that their bases in their partnership interests in BLAK were not

decreased by the short positions. They reported that the transaction resulted in an

ordinary loss of $2,539,769 for Mr. Manroe and a short-term capital loss of

$2,982,840 for Ms. Manroe. They further claimed a $458,190 carryover loss

deduction on their joint 2002 Federal income tax return.

On October 13, 2006, the Internal Revenue Service (IRS) issued a notice of

final partnership administrative adjustment (FPAA) to BLAK, in which it

determined that BLAK was a sham lacking in economic substance and made

adjustments consistent with that position. BLAK’s tax matters partner petitioned

this Court for readjustment, raising assorted challenges to the FPAA that we

subsequently rejected.

The parties thereafter stipulated that BLAK was a sham, lacked economic

substance, and was formed to claim deductions of artificial losses solely for tax -5-

[*5] purposes. See BLAK Invs. v. Commissioner, T.C. Dkt. No. 1283-07 (May

25, 2011) (stipulation of settled issues). This Court entered a decision sustaining

the adjustments set forth in the FPAA. See id. (June 2, 2016) (stipulated decision).

The decision specified that “the 40 percent accuracy-related penalty for gross

valuation misstatement under * * * [section 6662(h)] applies to any underpayment

of tax resulting from the adjustments for the taxable year ended December 31,

2001”. Id. at 1. The decision further specified that, if such a penalty did not

apply, the 20% accuracy-related penalty for an underpayment due to either

negligence or a substantial understatement of income tax would apply. Id. at 2.

II. Income Tax Deficiencies

On July 12, 2017, the IRS issued to each of the Manroes notices of

deficiency for their 2001 and 2002 tax years, determining deficiencies and

accuracy-related penalties “in accordance with the examination results for” BLAK.

On October 16, 2017, the Manroes both timely filed petitions for redetermination

in this Court. In addition to challenging the determinations in the notices, the

Manroes asserted in their petitions that the IRS had made premature assessments

(on August 7, 2017) of the deficiencies determined in the notices.

The Manroes then filed in their respective cases a motion to restrain the IRS

from collection of the premature assessments and for the refund of amounts -6-

[*6] previously collected. Although respondent agrees to the relief requested in

the Manroes’ motions as it relates to the collection of the income tax deficiency

amounts, he contends that we may not grant such relief as to penalties because we

lack jurisdiction over them in this partner-level proceeding.

Discussion

I. Legal Standards

A. Postnotice Restraint on Assessment and Collection

This Court is a court of limited jurisdiction, and we may exercise that

jurisdiction only to the extent authorized by Congress. Naftel v. Commissioner,

85 T.C. 527, 529 (1985). Our jurisdiction to redetermine a deficiency depends

upon the issuance of a valid notice of deficiency and a timely filed petition. Id. at

530; see secs. 6212 and 6213(a); Rule 13(a), (c).

Section 6213(a) generally restrains the assessment of deficiencies and the

collection of the same unless a notice of deficiency is issued by the Commissioner.

The prohibition on assessment and collection extends during the time a petition

may be filed in this Court, during the pendency of any proceeding actually

brought, and until the decision of the Court becomes final. Id. We have

jurisdiction to enjoin the assessment and the collection of a deficiency that the -7-

[*7] Court has jurisdiction to redetermine. Id.; see, e.g., Powell v. Commissioner,

96 T.C. 707, 711 (1991).

B. TEFRA Overview

“A partnership does not pay [F]ederal income taxes; instead, its taxable

income and losses pass through to the partners.” United States v. Woods, 571

U.S. 31, 38 (2013); see secs. 701 and 702. Congress enacted the TEFRA

procedures under sections 6221 through 6234 so that partnership-related tax

matters could be adjudicated in a single, unified proceeding, rather than in

multiple deficiency proceedings brought by partners of the same partnership.

Woods, 571 U.S. at 38.

We start with the definitions of a few significant terms in the TEFRA

context: “partnership item”, “nonpartnership item”, “affected item”, and

“computational adjustment”. Generally, the term “partnership item” refers to “any

item required to be taken into account for the partnership’s taxable year under any

provision of subtitle A to the extent regulations prescribed by the Secretary

provide that, for purposes of this subtitle, such item is more appropriately

determined at the partnership level than at the partner level.” Sec. 6231(a)(3). A

“nonpartnership item” is an “item which is (or is treated as) not a partnership

item.” Id. para. (4). An “affected item” is “any item to the extent such item is -8-

[*8] affected by a partnership item.” Id. para. (5). Finally, the term

“computational adjustment” means “the change in the tax liability of a partner

which properly reflects the treatment under this subchapter of a partnership item.”

Id. para. (6).

TEFRA employs a two-step process for addressing partnership-related

matters. The IRS first initiates proceedings at the partnership level to adjust

“partnership items”. See secs. 6221, 6231(a)(3); see also Woods, 571 U.S. at 39;

Gunther v. Commissioner, at *7-*8. “Once the adjustments to partnership items

have become final, the IRS may undertake further proceedings at the partner level

to make any resulting ‘computational adjustments’ in the tax liability of the

individual partners.” Woods, 571 U.S. at 39; see sec. 6231(a)(6); see also Gunther

v. Commissioner, at *7-*8.

Computational adjustments come in two flavors: ones to affected items that

require partner-level determinations and ones to affected items that do not.

Gunther v. Commissioner, at *7-*8. If an affected item requires partner-level

determinations, it is subject to the normal deficiency procedures under sections

6211 through 6216, including the issuance of a notice of deficiency to the partner

before the assessment of any tax and the chance to seek prepayment review in this

Court. See Gunther v. Commissioner, at *8-*9. -9-

[*9] If an affected item does not require partner-level determinations, the normal

deficiency procedures do not apply. See sec. 6230(a)(1) and (2)(A)(i);

sec. 301.6231(a)(6)-1(a)(2), Proced. & Admin. Regs. In that instance the

Commissioner may immediately assess the resulting tax deficiency without issuing

a notice of deficiency. See Woods, 571 U.S. at 39. The partner against whom

such an assessment is made may thereafter challenge it through a postpayment

refund action or “to some extent” in a collection due process (CDP) proceeding.

See id.; see also Davison v. Commissioner, T.C. Memo. 2019-26, at *16, appeal

filed (5th Cir. May 30, 2019).

II. Jurisdiction in These Cases

A. Income Tax Deficiencies

The parties agree that we have jurisdiction over the income tax deficiencies

in these cases, as required to entertain the Manroes’ motion to restrain collection

relating to those deficiencies. While required to assure ourselves of our

jurisdiction independent of the parties’ views, see David Dung Le, M.D., Inc. v.

Commissioner, 114 T.C. 268, 269 (2000), aff’d, 22 F. App’x 837 (9th Cir. 2001),

we agree with their conclusion.

The adjustments to the Manroes’ tax liabilities require factual

determinations at the partner level, and the normal deficiency procedures thus - 10 -

[*10] apply. See Gunther v. Commissioner, at *9-*10. As BLAK was a sham and

disregarded for Federal tax purposes, the Manroes are treated as holding BLAK’s

assets directly, and their adjusted bases in the assets are determined under

section 1012(a). See Keeter v. Commissioner, T.C. Memo. 2018-191, at *13; see

also sec. 1012(a) (basis of property is generally its cost). To do so, we need

additional facts regarding the Manroes’ sale of the francs, including (i) whether

the francs the Manroes sold in 2001 are the same francs that Mr. Manroe received

from BLAK, (ii) the Manroes’ holding period for the francs, (iii) the character of

any gain or loss, and (iv) whether the Manroes had any basis in the francs that was

not attributable to their claimed basis in BLAK. See, e.g., Napoliello v.

Commissioner, 655 F.3d 1060, 1064 (9th Cir. 2011), aff’g T.C. Memo. 2009-104;

Domulewicz v. Commissioner, 129 T.C. 11, 20 (2007), aff’d in relevant part,

remanded in part sub nom. Desmet v. Commissioner, 581 F.3d 297 (6th

Cir. 2009).

In summary, we have jurisdiction over the Manroes’ income tax deficiencies

because partner-level determinations (subject to the normal deficiency procedures)

are needed.2 We accordingly will grant the Manroes’ motion to restrain collection

2 The Manroes argue that partner-level determinations are also required to determine their outside bases in their sham partnership. But “it is not readily (continued...) - 11 -

[*11] and refund amounts previously collected as it relates to their income tax

deficiencies.

B. Penalties

We do not have jurisdiction, however, over the penalties that the Manroes

seek to challenge or their derivative request to restrain collection with respect to

the penalties. See Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d at

1057; Gunther v. Commissioner, at *11-*15; see also sec. 6230(a)(1).

1. Section 6230(a)(1)

Our analysis begins with section 6230(a)(1): “Except as provided in

paragraph (2) or (3), subchapter B of this chapter shall not apply to the assessment

or collection of any computational adjustment.” Section 6230(a)(1) establishes a

default rule that “normal deficiency procedures generally do not apply to the

assessment or collection of computational adjustments.” Gunther v.

Commissioner, at *11; see also Highpoint Tower Tech. Inc. v. Commissioner, 931

F.3d at 1057. Our jurisdiction over the penalties at issue, therefore, relies on

whether the penalties are computational adjustments and whether they fall within

2 (...continued) apparent why additional partner-level determinations would be required before adjusting outside basis in a sham partnership.” United States v. Woods, 571 U.S. 31, 42 n.2 (2013). - 12 -

[*12] the exceptions to the default rule set forth in section 6230(a)(2) or (3). See

sec. 6230(a)(1); see also Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d

at 1057. Like the Court of Appeals for the Eleventh Circuit we conclude that the

penalties at issue constitute computational adjustments and that neither exception

applies. See Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d at 1058-

1061.

Turning to the first point, “if a change in tax liability of a partner reflects

treatment of a partnership item (an item required to be taken into account for the

partnership’s taxable year and more appropriately determined at the partnership

level), then deficiency proceedings will not apply to the assessment of that

adjustment unless otherwise provided for in § 6230(a)(2) or (a)(3).” Highpoint

Tower Tech. Inc. v. Commissioner, 931 F.3d at 1057-1058.

Section 301.6231(a)(3)-1(b), Proced. & Admin. Regs., includes within its

definition of partnership item “the legal and factual determinations that underlie

the determination of the amount, timing, and characterization of items of income,

credit, gain, loss, deduction, etc.” The underlying determination that a partnership

is a sham plainly falls within this definition. Accord Woods, 571 U.S. at 39-44;

see Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d at 1058; see also RJT

Invs. X v. Commissioner, 491 F.3d 732, 737-738 (8th Cir. 2007). The gross - 13 -

[*13] valuation misstatement penalties here thus relate to an adjustment to a

partnership item and are not subject to deficiency jurisdiction absent an exception

to the default rule. See Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d at

1058.

2. Section 6230(a)(2)(A)(i)

The Manroes argue that they satisfy section 6230(a)(2)(A)(i), one such

exception. Both this Court and the Court of Appeals for the Eleventh Circuit have

rejected this argument in similar cases. See Highpoint Tower Tech. Inc. v.

Commissioner, 931 F.3d at 1059; Gunther v. Commissioner, at *11-*12.

Section 6230(a)(2)(A)(i) provides that deficiency procedures “shall apply to

any deficiency attributable to * * * affected items which require partner-level

determinations (other than penalties, additions to tax, and additional amounts that

relate to adjustments to partnership items)”. The plain text of that exception

renders it inapplicable to penalties that relate to adjustments to partnership items,

as here. See Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d at 1061;

Gunther v. Commissioner, at *11-*12; see also sec. 301.6231(a)(6)-1(a)(3),

Proced. & Admin. Regs.

The Manroes, however, assert that the penalties here relate to affected items

(their outside bases) and, consequently, are distinct from penalties that relate to - 14 -

[*14] partnership items. As the Court of Appeals recently explained, the Supreme

Court’s decision in Woods runs counter to this argument. See Highpoint Tower

Tech. Inc. v. Commissioner, 931 F.3d at 1061-1064.

In Woods, the Supreme Court considered the phrase “any penalty * * *

which relates to an adjustment to a partnership item” (in section 6226(f)), which is

nearly identical to the pertinent text of section 6230(a)(2)(A)(i). The taxpayer in

Woods raised an argument analogous to the one that the Manroes make here; i.e.,

that “because outside basis is not a partnership item, but an affected item, a

penalty that would rest on a misstatement of outside basis cannot be considered at

the partnership level.” Woods, 571 U.S. at 40. The Supreme Court expressly

rejected that argument, holding that “TEFRA gives courts in partnership-level

proceedings jurisdiction to determine the applicability of any penalty that could

result from an adjustment to a partnership item, even if imposing the penalty

would also require determining affected or non-partnership items such as outside

basis.” Id. at 41.3

3 In Woods, 571 U.S. at 41, the Supreme Court observed that the penalty determination at the partnership level is “inherently provisional” in that it is “always contingent upon determinations that the court in a partnership-level proceeding does not have jurisdiction to make.” The Manroes argue that this observation supports our jurisdiction over penalties in this partner-level proceeding. As we have previously explained, this argument skips an analytical (continued...) - 15 -

[*15] As the Court of Appeals for the Eleventh Circuit has explained, the

Supreme Court’s decision in Woods refutes the notion that penalties that relate to

adjustments to partnership items and penalties relating to affected items that

require partner-level determinations are mutually exclusive. Highpoint Tower

Tech. Inc. v. Commissioner, 931 F.3d at 1064. To the contrary, “[t]he

valuation-misstatement penalty at issue can be an affected item requiring

partner-level determinations while also relating to adjustments to partnership

items.” Id. As the valuation-misstatement penalty is related to an adjustment to a

partnership item, it “fall[s] within § 6230(a)(2)(A)(i)’s exclusion of such items

from deficiency jurisdiction.” Id.4

3 (...continued) step: The Supreme Court does not suggest “that the later imposition of the provisional penalties must be done under normal deficiency proceedings.” Gunther v. Commissioner, T.C. Memo. 2019-6, at *13, aff’d, ___F. App’x ___, 2020 WL 64749 (11th Cir. Jan. 7, 2020). “Under section 6230 the appropriate venue for partners to raise subsequent challenges to the imposition of penalties is in a postpayment refund action.” Id.; see also Woods, 571 U.S. at 39; Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d 1050, 1063 n.10 (11th Cir. 2019) (identifying refund proceedings and CDP proceedings as partner-level proceedings where penalties could be challenged). 4 We pause to address two additional points. First, the Manroes argue that the stipulation in the partnership-level proceeding that BLAK was a sham resulted in the “agreed creation of a new TEFRA partnership”. The Manroes claim that this new TEFRA partnership entitled them to a substantially similar tax result to the one they hoped to achieve through their Son-of-BOSS transaction. This (continued...) - 16 -

[*16] III. Conclusion

We conclude that, although we have jurisdiction to redetermine the income

tax deficiencies, we have no jurisdiction in this pre-payment forum to consider the

penalties determined here at the partnership level. As we have no jurisdiction to

consider the penalties at issue, we have no authority to enjoin the collection or

order the refund of any amounts previously collected. Accordingly, the Manroes’

motion as it relates to the penalties will be denied and respondent’s motion to

dismiss as to the penalties will be granted.

To reflect the foregoing,

An appropriate order will be issued.

4 (...continued) argument is patently ridiculous. Second, Ms. Manroe asserts that she is entitled to innocent spouse relief. Her vague statement in her petition that “it would appear that * * * [Ms. Manroe] would be eligible for innocent spouse relief, to the extent the Court finds any additional tax liability” does not satisfy our pleading requirements under Rule 321(b). Therefore, we do not consider the merits of any potential innocent spouse claim Ms. Manroe may have. See Gunther v. Commissioner, at *14 n.4.