129 T.C. No. 13
UNITED STATES TAX COURT
PETER D. ADKISON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2532-06. Filed October 16, 2007.
R sent to P a notice of deficiency for 1999. P filed a petition seeking to invoke the Court’s jurisdiction to redetermine the deficiency and to decide P’s claim for relief under sec. 6015(c), I.R.C. R moved to dismiss for lack of jurisdiction on the grounds (1) the notice of deficiency is invalid because the underlying adjustments constitute “partnership items” that are the subject of an ongoing partnership- level proceeding in Federal District Court, and (2) P’s claim for relief under sec. 6015(c), I.R.C., constitutes an “affected item” that can be reviewed only after the partnership-level proceeding is completed.
The parties agree that the notice of deficiency is invalid because the underlying adjustments constitute “partnership items” that are the subject of an ongoing partnership-level proceeding in Federal District Court. P opposes dismissal of his claim under sec. 6015(c), I.R.C. - 2 -
Held: The Court lacks jurisdiction to review P’s claim for relief under sec. 6015(c), I.R.C., because, in the context of the TEFRA partnership proceeding, P’s claim for relief from joint and several liability on a joint return may be raised only after R has sent a notice of computational adjustment following the completion of partnership-level proceedings.
John Mark Colvin, for petitioner.
Thomas D. Greenaway, for respondent.
OPINION
COHEN, Judge: This case is before us on respondent’s motion
to dismiss for lack of jurisdiction on the ground the notice of
deficiency is invalid and prohibited by section 6225. Unless
otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue.
Background
The parties stipulated certain facts solely for our action
on respondent’s motion to dismiss for lack of jurisdiction.
Peter D. Adkison (petitioner) resided in Seattle, Washington, at
the time that he filed his petition.
Petitioner filed a joint Federal income tax return for 1999
with his spouse, Cathleen S. Adkison. The Adkisons claimed
deductions and losses on their 1999 tax return in connection with
their participation in a partnership known as Shavano Strategic
Investment Fund, LLC (Shavano). Shavano engaged in a tax shelter - 3 -
transaction referred to as Bond Linked Issue Premium Structure or
BLIPS.
The Adkisons separated in December 1999 and were divorced in
late 2001.
In 2002, in response to an Internal Revenue Service (IRS)
announcement soliciting taxpayers to disclose their participation
in certain tax shelter transactions, the Adkisons informed the
IRS that they participated in the BLIPS transaction through
Shavano during 1999. During 2003, the IRS began an examination
of the Adkisons’ 1999 tax return.
In 2004, petitioner submitted to the IRS an election to
participate in a settlement program pertaining to the Shavano tax
shelter transaction. Although the parties attempted to draft a
final closing agreement with regard to petitioner’s tax liability
for 1999, the negotiations failed when petitioner requested that
the closing agreement include language stating that petitioner
was entitled to relief pursuant to section 6015(c), which
provides that taxpayers filing a joint return may seek an
allocation of the tax liability associated with the return. In
October 2004, petitioner remitted to the IRS $2.5 million to be
posted as a cash bond against his tax liability for 1999.
On December 21, 2004, respondent sent a Notice of Final
Partnership Administrative Adjustment (FPAA) to Shavano for its
taxable year ended December 21, 1999. In May 2005, a partner - 4 -
other than the tax matters partner of Shavano filed a petition
for readjustment with the U.S. District Court for the Northern
District of California (District Court case).
On June 9, 2005, petitioner submitted to the IRS a Form
8857, Request for Innocent Spouse Relief, seeking relief from
joint and several liability on the joint return he filed for the
taxable year 1999. Petitioner requested that the full amount of
the tax due for 1999 be allocated in equal shares to him and to
Cathleen Adkison pursuant to section 6015(c). Petitioner has not
received a notice of determination from the IRS with regard to
his Form 8857.
On November 10, 2005, respondent sent a joint notice of
deficiency for 1999 to petitioner and Cathleen Adkison.
The deficiency of $5,837,482 set forth in the notice is
attributable to the following adjustments related to the
Adkisons’ participation in Shavano: (1) The disallowance of a
capital loss of $27,213,056; (2) the disallowance of a
partnership loss of $184,822; and (3) a reduction of itemized
deductions (investment interest expense) of $812,327. The notice
of deficiency includes an explanation that respondent made a
number of alternative determinations including a determination
that Shavano was a sham and/or Shavano was formed solely for the
purposes of tax avoidance. - 5 -
On February 6, 2006, petitioner filed a petition with the
Court. Petitioner asserted in the petition that he was invoking
the Court’s jurisdiction (1) to redetermine the deficiency under
section 6213(a) and (2) to review respondent’s failure to respond
to petitioner’s request for an allocation of his tax liability
for 1999 under section 6015(c).
On December 15, 2006, respondent filed a motion to dismiss
for lack of jurisdiction asserting that the notice of deficiency
is invalid because the adjustments therein constitute “affected
items” that are dependent upon the completion of partnership-
level proceedings in the District Court case. Secs. 6221, 6225,
6230(a)(2). Respondent further asserts that petitioner submitted
his claim for relief under section 6015(c) prematurely insofar as
the partnership-level proceedings have not been completed, and,
in any event, respondent did not “assert” a deficiency against
petitioner within the meaning of section 6015(e)(1).
Petitioner agrees that the Court lacks jurisdiction in this
case to redetermine a deficiency pursuant to section 6213(a)
because the notice of deficiency is invalid. Petitioner
maintains, however, that he is an “individual against whom a
deficiency has been asserted” within the meaning of section
6015(e)(1), and, therefore, he properly invoked the Court’s
jurisdiction to review his claim for relief under section
6015(c). - 6 -
Discussion
The Tax Court is a court of limited jurisdiction, and we may
exercise our jurisdiction only to the extent provided by
Congress. See sec. 7442; see also GAF Corp. & Subs. v.
Commissioner, 114 T.C. 519, 521 (2000). The jurisdictional
dispute in this case requires an examination of the
interrelationship between the Court’s jurisdiction to review a
claim for relief from joint and several liability on a joint
return under section 6015 and the Court’s jurisdiction under the
unified partnership audit and litigation procedures contained in
sections 6221 through 6234. See Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a),
96 Stat. 648.
Section 6015
Section 6013(d)(3) provides that, if a husband and wife file
a joint Federal income tax return, “the tax shall be computed on
the aggregate income and the liability with respect to the tax
shall be joint and several.” However, section 6015(a) provides
that, notwithstanding section 6013(d)(3), an individual who has
made a joint return may elect to seek relief from joint and
several liability on such return. For a detailed discussion of
the legislative history of section 6015 (and its predecessor
section 6013(e)), see Cheshire v. Commissioner, 115 T.C. 183,
188-189 (2000), affd. 282 F.3d 326 (5th Cir. 2002). - 7 -
Congress vested the Tax Court with jurisdiction to review a
taxpayer’s election to claim relief from joint and several
liability on a joint return under various circumstances. See
King v. Commissioner, 115 T.C. 118, 121-122 (2000); Corson v.
Commissioner, 114 T.C. 354, 363-364 (2000). A taxpayer may seek
relief from joint and several liability on a joint return by
raising the matter as an affirmative defense in a petition for
redetermination filed in response to a notice of deficiency under
section 6213(a). See Butler v. Commissioner, 114 T.C. 276, 287-
288 (2000). In addition, a taxpayer may file with the Court a
so-called stand-alone petition seeking relief from joint and
several liability on a joint return if (1) the Commissioner
issues a final determination letter denying the taxpayer’s claim
for such relief or (2) the Commissioner has failed to rule on the
taxpayer’s claim for relief within 6 months of its filing. See
sec. 6015(e)(1); Mora v. Commissioner, 117 T.C. 279 (2001);
Corson v. Commissioner, supra at 363. A taxpayer also may
request relief from joint and several liability on a joint return
in a petition for review of a lien or levy action. See secs.
6320(c), 6330(c)(2)(A)(i).
TEFRA Partnership Provisions
The proper tax treatment of any partnership item generally
is determined at the partnership level pursuant to the TEFRA
partnership provisions. The TEFRA procedures apply with respect - 8 -
to all taxable years of a partnership beginning after
September 3, 1982. Sparks v. Commissioner, 87 T.C. 1279, 1284
(1986); Maxwell v. Commissioner, 87 T.C. 783, 789 (1986). A
partnership item is 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 subtitle A, such item is more
appropriately determined at the partnership level than at the
partner level. Sec. 6231(a)(3). Partnership items normally
include each partner’s proportionate share of the partnership’s
aggregate items of income, gain, loss, deduction, or credit.
Sec. 301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs.
Partnership items are distinguished from affected items,
which are defined in section 6231(a)(5) as any item to the extent
such item is affected by a partnership item. White v.
Commissioner, 95 T.C. 209, 211 (1990). The first type of
affected item is purely a computational adjustment made to record
the change in a partner’s tax liability resulting from the proper
treatment of partnership items. Sec. 6231(a)(6); White v.
Commissioner, supra at 211. Once the decision in a partnership-
level proceeding is final, the Commissioner is permitted to
assess a computational adjustment against a partner without
issuing a notice of deficiency. Secs. 6225, 6230(a)(1); N.C.F. - 9 -
Energy Partners v. Commissioner, 89 T.C. 741, 744 (1987); Maxwell
v. Commissioner, supra at 792 n.7.
The second type of affected item is an adjustment to a
partner’s tax liability to reflect the proper treatment of a
partnership item that is dependent upon factual determinations to
be made at the individual partner level. N.C.F. Energy Partners
v. Commissioner, supra at 744. Section 6230(a)(2)(A)(i) provides
that the normal deficiency procedures apply to those affected
items that require partner-level determinations. See N.C.F.
Energy Partners v. Commissioner, supra at 743-744; see also
Crowell v. Commissioner, 102 T.C. 683, 689 (1994). A valid
notice of deficiency concerning an affected item generally is
dependent upon a final decision in the underlying partnership-
level proceeding. Sec. 6225(a); GAF Corp. & Subs. v.
Commissioner, supra at 526 (citing Dubin v. Commissioner, 99 T.C.
325, 328 (1992)); see Crowell v. Commissioner, supra at 694-695.
In 1997, Congress passed the Taxpayer Relief Act of 1997,
Pub. L. 105-34, sec. 1237(a) and (b), 111 Stat. 1025, amending
the TEFRA provisions to add specific rules that are applicable
when the spouse of a partner seeks relief from joint and several
liability on a joint tax return. As discussed in detail below,
the new provisions, set forth in section 6230(a)(3) and
6230(c)(5), prescribe the procedures under which a spouse of a
partner seeking relief under section 6015 may raise such a claim - 10 -
either in a deficiency proceeding or in a refund suit. Section
6230(a)(3) and 6230(c)(5) is effective as if included in TEFRA as
originally enacted. See Taxpayer Relief Act of 1997, sec.
1237(d), 111 Stat. 1026.
Section 6230(a)(3)(A) provides in part:
SEC. 6230(a). Coordination With Deficiency Proceedings.--
* * * * * * *
(3) Special rule in case of assertion by partner’s spouse of innocent spouse relief.--
(A) Notwithstanding section 6404(b), if the spouse of a partner asserts that section 6013(e) applies with respect to a liability that is attributable to any adjustment to a partnership item * * * then such spouse may file with the Secretary within 60 days after the notice of computational adjustment is mailed to the spouse a request for abatement of the assessment specified in such notice. Upon receipt of such request, the Secretary shall abate the assessment. Any reassessment of the tax with respect to which an abatement is made under this subparagraph shall be subject to the deficiency procedures prescribed by subchapter B. * * *
To summarize, section 6230(a)(3)(A) provides that, after the
Commissioner has issued to the spouse of a partner a notice of
computational adjustment following the completion of a
partnership-level proceeding, the Commissioner, upon the request
of the spouse, must abate the underlying assessment to permit the
spouse to assert a claim for relief from joint and several
liability pursuant to the deficiency procedures of subchapter B. - 11 -
In addition to the deficiency procedures described above,
section 6230(c)(5) provides in pertinent part:
SEC. 6230(c). Claims Arising Out of Erroneous Computations, Etc.--
(5) Rules for seeking innocent spouse relief.--
(A) In general.--The spouse of a partner may file a claim for refund on the ground that the Secretary failed to relieve the spouse under section 6015 from a liability that is attributable to an adjustment to a partnership item (including any liability for any penalties, additions to tax, or additional amounts relating to such adjustment).
(B) Time for filing claim.--Any claim under subparagraph (A) shall be filed within 6 months after the day on which the Secretary mails to the spouse the notice of computational adjustment referred to in subsection (a)(3)(A).
In sum, section 6230(c)(5)(A) and (B) provides that the spouse of
a partner may file a claim for relief from a tax liability
attributable to an adjustment to a partnership item within
6 months after the Commissioner has mailed to the spouse a notice
of computational adjustment. In connection with these
provisions, section 6230(c)(5)(C) provides that, if the
Commissioner disallows the spouse’s claim for relief under
section 6015, the spouse may bring a refund suit within the
period specified in section 6230(c)(3) (which in turn refers to
section 6532 relating to periods of limitations on refund suits). - 12 -
Section 6015(g)(3) provides that no credit or refund shall be
allowed in respect of a claim for relief under section 6015(c)--
the provision on which petitioner relies.
When section 6230(a)(3) and (c)(5) was originally enacted in
1997, both provisions contained express references to section
6013(e). One year later, however, Congress added new section
6015 to the Internal Revenue Code and made conforming amendments
striking section 6013(e) and replacing the reference to section
6013(e) appearing in section 6230(c)(5)(A) with a reference to
section 6015. See IRS Restructuring and Reform Act of 1998, Pub.
L. 105-206, sec. 3201(a), (e)(1) and (2), 112 Stat. 740. By all
appearances, Congress simply overlooked the reference to section
6013(e) contained in section 6230(a)(3)(A) and failed to make a
conforming amendment to that section. In any event, both
provisions reflect congressional intent that the spouse of a
partner may initiate a claim for relief from joint and several
liability attributable to an adjustment of a partnership item
only after the Commissioner issues to the spouse a notice of
partnership-level proceeding.
With the foregoing as background, we return to the parties’
contentions. - 13 -
The Affected Items Notice of Deficiency
The Court’s jurisdiction to redetermine a deficiency
attributable to an affected item is dependent upon a valid
(affected items) notice of deficiency and a timely filed
petition. Crowell v. Commissioner, 102 T.C. at 694. The record
reflects, and the parties agree, that the adjustments set forth
in the notice of deficiency are attributable to adjustments to
partnership items. Those partnership items are the subject of
the partnership-level proceeding that is pending before the
District Court. Under the circumstances, it follows that the
notice of deficiency is invalid, and it is insufficient to permit
petitioners to invoke the Court’s jurisdiction to redetermine a
deficiency under section 6213(a). GAF Corp. & Subs. v.
Commissioner, 114 T.C. at 528; Maxwell v. Commissioner, 87 T.C.
at 788, 793.
Although petitioner may not invoke the Court’s jurisdiction
under section 6213(a), the petition includes allegations that
petitioner is entitled to relief from joint and several liability
on a joint return under section 6015. Respondent maintains that
the Court lacks jurisdiction to review petitioner’s claim for
relief under section 6015 because (1) the notice of deficiency
upon which the petition is based is invalid and (2) petitioner’s
entitlement to relief under section 6015 is an affected item that - 14 -
may be adjudicated only following a final decision in the related
partnership-level proceeding. Respondent relies primarily on
Life Care Cmtys. of Am. v. Commissioner, T.C. Memo. 1997-95, and
Mann-Howard v. Commissioner, T.C. Memo. 1992-537, for the
proposition that the spouse of a partner must prosecute a claim
for relief under section 6015 in an affected items proceeding.
Petitioner asserts that various developments in this case,
including the parties’ attempt to settle petitioner’s tax
liability for 1999, and eventually the issuance of both the FPAA
and the invalid notice of deficiency, demonstrate that respondent
“asserted” a deficiency against him within the meaning of section
6015(e)(1)(A). As petitioner sees it, his petition is a valid
stand-alone petition for relief under section 6015(e).
Taking into account the ongoing partnership-level
proceeding, we conclude that respondent has not “asserted” a
deficiency against petitioner within the meaning of section
6015(e)(1)(A). As explained below, petitioner’s claim for relief
under section 6015 is premature and will not crystallize into a
justiciable case or controversy until the underlying partnership-
level proceeding is final and respondent has issued to petitioner
a notice of computational adjustment.
The question of when the Court may exercise jurisdiction to
review a claim for relief from joint and several liability on a
joint return in the context of a TEFRA partnership proceeding is - 15 -
not a new one. In cases such as Dynamic Energy, Inc. v.
Commissioner, 98 T.C. 48 (1992), and Marthinuss v. Commissioner,
T.C. Memo. 1995-58, the Court indicated that the spouse of a
partner is not entitled to an adjudication of his or her
entitlement to relief from joint and several liability on a joint
return in a partnership-level proceeding. Further, in cases such
as Life Care Cmtys. of Am. v. Commissioner, supra, and Mann-
Howard v. Commissioner, supra, the Court indicated that the
spouse of a partner normally would be able to prosecute a claim
for relief from joint and several liability on a joint return in
response to an affected items notice of deficiency issued after
the completion of partnership-level proceedings.
As previously discussed, Congress prescribed specific
procedures for purposes of TEFRA partnership actions under which
the spouse of a partner is permitted to obtain an adjudication of
a claim for relief from joint and several liability on a joint
return. Section 6230(a)(3), which refers to section 6013(e) (now
stricken), provides a remedy in the form of a deficiency
proceeding, whereas section 6230(c)(5) provides an alternative
remedy in the form of a refund action. Significantly, in either
case, the spouse of a partner may assert a claim for relief from
joint and several liability only after the Commissioner has
issued to the spouse a notice of computational adjustment.
However, the Commissioner may issue a notice of computational - 16 -
adjustment to a partner (or the spouse of a partner) only
following the completion of proceedings at the partnership level.
Sec. 6225.
Consistent with the foregoing, the Court has exercised its
jurisdiction to review stand-alone petitions filed with the Court
pursuant to section 6015 after the Commissioner issued to the
spouse of a partner a notice of computational adjustment. See
Mora v. Commissioner, 117 T.C. 279 (2001); Abelein v.
Commissioner, T.C. Memo. 2004-274.
Consistent with the preceding discussion, we conclude that
petitioner is not a person against whom a deficiency has been
asserted within the meaning of section 6015(e)(1). The related
partnership-level proceedings have not been completed, and
respondent has not had the occasion to issue to petitioner either
a notice of computational adjustment or a valid affected items
notice of deficiency. Until one of those events occurs, or
respondent institutes a collection action under sections 6320
and/or 6330, petitioner’s claim for relief under section 6015 is
premature, and the Court lacks jurisdiction to consider it.
Because the Court lacks jurisdiction over the petition in
this case, respondent’s motion to dismiss for lack of
jurisdiction will be granted. - 17 -
To reflect the foregoing,
An order of dismissal for lack
of jurisdiction will be entered
granting respondent’s motion to
dismiss for lack of jurisdiction.