2000 Tax Ct. Memo LEXIS 209">*209 An order will be issued granting respondent's motion and dismissing that part of this case pertaining to the accuracy-related penalty under
R issued a notice of final partnership administrative
adjustment (FPAA) to P, the partnership's tax matters partner,
for the taxable years 1995 and 1996. The FPAA was accompanied by
an "Explanation of Affected Items" stating that a penalty under
readjustment contesting adjustments to partnership items and the
accuracy-related penalty under
motion to dismiss for lack of jurisdiction and to strike the
portion of the petition contesting the accuracy-related penalty.
HELD: The Court lacks jurisdiction to review the accuracy-
related penalty in this partnership-level proceeding. See N.C.F.
FURTHER, the amendments made by the Taxpayer Relief Act of 1997,
Pub. L. 105-34, sec. 1238(a), 111 Stat. 1026, which2000 Tax Ct. Memo LEXIS 209">*210 provide that
penalties will be determined in partnership-level proceedings,
are effective for taxable years beginning only after Aug. 7,
1997, and are therefore not applicable to the years before the
Court. HELD FURTHER, R's motion to dismiss for lack of
jurisdiction and to strike will be granted.
MEMORANDUM OPINION
COHEN, CHIEF JUDGE: This case was assigned to Special Trial Judge Robert N. Armen, Jr., pursuant to the provisions of section 7443A(b)(5) and Rules 180, 181, and 183. 1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
ARMEN: SPECIAL TRIAL JUDGE: This2000 Tax Ct. Memo LEXIS 209">*211 matter is before the Court on respondent's Motion To Dismiss For Lack Of Jurisdiction And To Strike With Respect To Penalties/Additions To Tax. Respondent moves to dismiss for lack of jurisdiction and to strike allegations in the petition pertaining to the accuracy-related penalty under
BACKGROUND
On September 17, 1999, respondent issued a notice of final partnership administrative adjustment (FPAA) to Crystal Beach Development of Destin, Ltd. (the partnership) setting forth adjustments to the partnership's returns (Forms 1065) for 1995 and 1996. Attached to the FPAA are: (1) A schedule of examination changes which includes a statement that "Penalties or additions to tax under
Waters Edge Building Company, the partnership's tax matters partner, filed a timely petition for readjustment with the Court. The petition includes2000 Tax Ct. Memo LEXIS 209">*212 allegations contesting the imposition of the accuracy-related penalty.
As indicated, respondent filed a motion to dismiss for lack of jurisdiction and to strike. Respondent contends that the Court lacks jurisdiction over the accuracy-related penalty in this partnership-level proceeding on the ground that such penalty is an "affected item" that can be reviewed only at the individual partner level. Respondent further contends that allegations pertaining to such penalty should be stricken from the petition for readjustment.
Petitioner filed an objection to respondent's motion arguing that the motion should be denied on the grounds that: (1) Respondent's motion was not timely filed; (2) the FPAA includes an adjustment based on the penalty prescribed in
This matter was called for hearing at the Court's motions session in Washington, D.C. Counsel for respondent appeared at the hearing and presented oral argument in support of the pending motion. Counsel for petitioner filed a written statement pursuant to Rule 50(c) in lieu of2000 Tax Ct. Memo LEXIS 209">*213 attendance at the hearing.
DISCUSSION
The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. See
Petitioner further asserts that respondent's motion should be denied because the FPAA included an adjustment "charging" the penalty prescribed in
The Court's jurisdiction to review adjustments to a partnership return is governed by the unified partnership audit and litigation procedures set forth in
Partnership items are distinguished from affected items, which are defined in
The second type of affected item is one that is dependent on factual determinations to be made at the individual partner level. See
In
The Court agreed with the Commissioner that the additions to tax in question were affected items that could not be raised in the partnership-level proceedings. With regard to additions to tax for negligence, the Court stated in pertinent part:
a partner will be liable for the addition to tax for negligence
pursuant to
underpayment of tax at the partner level cannot be made until
the partner's2000 Tax Ct. Memo LEXIS 209">*218 share of distributable items of income, loss,
deduction, and credit is determined in the partnership level
proceeding. Once the partnership level proceeding ends, however,
the factual question of whether any part of the underpayment was
due to the partner's negligence must be answered at the partner
level.
However, in the Taxpayer Relief Act of 1997, Pub. L. 105-34, sec. 1238(a), 111 Stat. 1026, Congress amended
PRESENT LAW
Partnership items include only items that are required to
be taken into account under the income tax subtitle. Penalties
are not partnership items since they are contained in the
procedure and administration subtitle. As a result, penalties
may only be asserted against a partner through the application
2000 Tax Ct. Memo LEXIS 209">*219 of the deficiency procedures following the completion of the
partnership-level proceeding.
HOUSE BILL
The House bill provides that the partnership-level
proceeding is to include a determination of the applicability of
penalties at the partnership level. However, the provision
allows partners to raise any partner-level defenses in a refund
forum.
EFFECTIVE DATE -- The provision is effective for
partnership taxable years ending after the date of enactment.
The Taxpayer Relief Act of 1997 was signed into law on August 5, 1997.
In sum, additions to tax for negligence traditionally have been treated as affected items that may be redetermined only in a partner-level proceeding. However, based on changes to the TEFRA partnership provisions enacted as part of the Taxpayer Relief Act of 1997, accuracy-related penalties for negligence will be determined in partnership-level proceedings effective for partnership taxable years ending after August 5, 1997.
Consistent with the preceding discussion, it follows that the Court lacks jurisdiction to review the2000 Tax Ct. Memo LEXIS 209">*220 applicability of the accuracy-related penalty for the taxable years 1995 and 1996 that petitioner has attempted to place in dispute in this case. In so holding, we reject petitioner's contention that the amendments to the TEFRA provisions enacted by the Taxpayer Relief Act of 1997 were intended to clarify existing law. The legislative history underlying the TEFRA amendments (quoted above) includes a clear description of present law, which states that penalties can only be asserted against a partner through the application of the deficiency procedures following the completion of the partnership-level proceeding. See H. Conf. Rept. 105-220, at 685. Further, Congress unambiguously provided that the TEFRA amendments would apply prospectively only -- the amendments are effective for taxable years ending after August 5, 1997 -- and do not apply to the taxable years in issue. Simply put, petitioner's assertion that Congress enacted the TEFRA amendments described above as a clarification of existing law is incorrect.
In sum, we hold that the Court lacks jurisdiction over the accuracy-related penalty that petitioner has attempted to place in dispute in this partnership-level proceeding. The2000 Tax Ct. Memo LEXIS 209">*221 penalty may be contested at the individual partner level only following the completion of partnership-level proceedings. Accordingly, we shall grant respondent's Motion To Dismiss For Lack Of Jurisdiction And To Strike With Respect To Penalties/Additions To Tax.
To reflect the foregoing,
An order will be issued granting respondent's motion and dismissing that part of this case pertaining to the accuracy-related penalty under
1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. In the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721, 103 Stat. 2395, Congress consolidated the additions to tax for negligence and substantial understatement under new