T.C. Memo. 2009-62



                      UNITED STATES TAX COURT



                  GARY R. FEARS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21508-05.             Filed March 23, 2009.



     Anthony G. Tumminello, for petitioner.

     John J. Boyle, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   Respondent determined a $323,005 deficiency

in petitioner’s 2001 Federal income tax.     Petitioner filed a

timely petition contesting respondent’s determination.

     The issues for decision are whether respondent issued a

timely and valid 2001 notice of deficiency, and if so, whether
                                 - 2 -

respondent erred by denying petitioner’s request to participate

in a settlement initiative offered by respondent.

                              Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.1   We incorporate the stipulations of facts into our

findings by this reference.    Petitioner resided in Illinois when

the petition was filed.2

     This case relates to a so-called Son-of-BOSS transaction

that occurred in 2000.     Petitioner was the sole shareholder of GF

Gateway Investors, Inc. (GFG Investors), an S corporation, and

the sole member of GF Gateway Investments, L.L.C. (GFG

Investments).3   On October 27, 2000, GFG Investors and GFG

Investments formed a partnership, Gateway Investment Partners

(Gateway).   GFG Investors owned 1 percent of Gateway, and GFG

Investments owned 99 percent.    GFG Investors, GFG Investments,

and Gateway were formed solely to engage in the Son-of-BOSS

transaction.




     1
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code, unless otherwise indicated.
     2
      Although the parties stipulated that petitioner resided in
Florida when he filed the petition, the petition shows that he
resided in Illinois.
     3
      Both entities were formed on Oct. 27, 2000.
                                - 3 -

     On November 21, 2000, GFG Investments sold two foreign

currency options (short options) to Deutsche Bank for $4,950,000

and purchased two foreign currency options (long options) from

Deutsche Bank for $5 million.   On November 22, 2000, GFG

Investments contributed the short and long options to Gateway.

On December 7, 2000, Gateway purchased foreign currency for

$20,000.   On December 13, 2000, the short and long options

terminated.   On December 21, 2000, several transactions occurred:

(1) GFG Investments transferred its interest in Gateway to GFG

Investors; (2) Gateway transferred the foreign currency to GFG

Investors; and (3) Gateway was dissolved.   On December 22, 2000,

GFG Investors sold the foreign currency for $20,573.

     On June 26, 2001, GFG Investors filed a 2000 Form 1120S,

U.S. Income Tax Return for an S Corporation, reporting a

$4,999,427 loss resulting from the foreign currency sale.     On

June 28, 2001, Gateway filed a Form 1065, U.S. Return of

Partnership Income, for the period October 27 to December 21,

2000, reporting $5,020,000 of distributions of property other

than money.   On October 22, 2001, petitioner filed his 2000 Form

1040, U.S. Individual Income Tax Return (2000 return), reporting

a net operating loss of $4,146,903 resulting from the foreign

currency loss.   Petitioner reported the $4,999,427 foreign

currency loss from GFG Investors on a Form 4797, Sales of

Business Property, attached to his 2000 return.   On August 12,
                               - 4 -

2002, petitioner filed his 2001 Form 1040 (2001 return) reporting

a $4,146,903 net operating loss carryover from 2000.    On

October 20, 2003, petitioner filed his 2002 Form 1040 reporting a

$3,249,455 net operating loss carryover from 2000.

     On June 22, 2004, respondent received from petitioner a Form

13582, Notice of Election to Participate in Announcement 2004-46

Settlement Initiative (settlement initiative notice).    On

June 28, 2004, pursuant to the unified audit and litigation

provisions of the Tax Equity and Fiscal Responsibility Act of

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

respondent issued a notice of final partnership administrative

adjustment (FPAA) with respect to Gateway’s taxable year ending

December 21, 2000.   Respondent determined, among other things,

that Gateway was a sham, lacked economic substance, or was formed

or availed of in connection with a transaction a principal

purpose of which was to reduce substantially its partners’

Federal tax liability in a manner inconsistent with the intent of

the Internal Revenue Code.

     On October 19, 2004, after several months of negotiations

between respondent and petitioner’s counsel regarding the

settlement initiative notice, respondent denied petitioner’s

request to participate in the settlement initiative.    On

December 1, 2004, pursuant to the FPAA petitioner filed a

petition at docket No. 23002-04 (the partnership-level
                               - 5 -

proceeding).   After respondent moved to dismiss the partnership-

level proceeding for lack of jurisdiction on the ground that the

petition was not filed by a proper party4 and after the Court

gave petitioner an opportunity to object, on May 10, 2005, the

Court issued an order of dismissal for lack of jurisdiction.

Petitioner did not appeal.

     On August 10, 2005, respondent issued petitioner a notice of

deficiency for 2001 (2001 notice) disallowing, among other

deductions, the net operating loss carryover from 2000.5

Respondent also disallowed $3,889 of deductions reported on

petitioner’s 2001 Schedule A, Itemized Deductions,6 relating to

legal, accounting, consulting, and advisory fees and Gateway’s

tax preparation fees; $227 of deductions reported on his 2001

Schedule C, Profit or Loss From Business, relating to GFG

Investments for taxes and licenses and legal and professional




     4
      The petition in the partnership-level proceeding was filed
in the name of “Gary Fears, Partner Gateway Investment Partners
and Gary R. Fears, Sole Shareholder of GF Gateway Investors,
Inc.”
     5
      On Nov. 18, 2005, respondent issued petitioner a notice of
deficiency for 2000 and 2002. Petitioner did not petition the
Court with respect to that notice.
     6
      Respondent made an overall adjustment to petitioner’s
itemized deductions of $70,483 reflecting the $3,889 disallowed
deduction and the sec. 67 and 68 limitations on itemized
deductions. Respondent also adjusted the personal exemption that
petitioner claimed on his 2001 return because of the adjustments
to his taxable income.
                               - 6 -

fees; and a $156,192 flowthrough deduction from GFG Investors for

legal, accounting, consulting, and advisory fees.

     Petitioner timely petitioned this Court.   On January 12,

2007, respondent filed a motion to dismiss for lack of

jurisdiction and to strike with respect to the penalties

determined in the 2001 notice, and on February 12, 2007,

petitioner filed an objection to respondent’s motion.    We issued

an Opinion in Fears v. Commissioner, 

(2007), granting

respondent’s motion.

                            Discussion

I.   2001 Return

     The parties stipulated that petitioner’s 2001 return was

filed on August 12, 2002.   However, petitioner contends in one

part of his brief that the 2001 return was filed on July 31,

2002, and in another part of his brief that it was filed on

July 15, 2002.

     Generally, a Federal income tax return filed before the last

day prescribed by law or by regulations promulgated pursuant to

law for the filing thereof is considered filed on such last day.

Sec. 6501(b)(1).   However, a return received by the Commissioner

before an extended due date is considered filed on the date

received.   First Charter Fin. Corp. v. United States, 

, 1346 (9th Cir. 1982); sec. 301.6501(b)-1(a), Proced. &

Admin. Regs.   A return mailed on or before the due date and
                                 - 7 -

received by the Commissioner after the due date is considered

filed on the date of the postmark made by the U.S. Postal Service

(mailbox rule).     Sec. 7502(a) and (b).   The mailbox rule does not

apply where a return is received by the Commissioner before the

return’s due date.     See secs. 7502(a), 6501(b)(1).

      Petitioner’s return preparer signed and dated petitioner’s

2001 return on July 31, 2002, and the U.S. Postal Service

postmarked the return on August 8, 2002.     Respondent stamped the

2001 return:   “RECEIVED Aug. 12, 2002 ATSC IRS #0027”, and we

find that respondent received petitioner’s 2001 return on that

date.   Because respondent received petitioner’s 2001 return on

August 12, 2002, before the extended due date, the mailbox rule

does not apply.     Consequently, petitioner’s 2001 return is

considered filed on August 12, 2002, the date respondent received

it.

II.   2001 Notice

      Petitioner argues that the period of limitations on

assessments under section 6501 had expired before respondent

issued the 2001 notice and that the period for assessment under

section 6229 does not apply.     Section 6501(a) generally requires

that the Commissioner assess income tax within 3 years after the

taxpayer files a return.     The mailing of a notice of deficiency

to the taxpayer suspends the period of assessment during the

period in which the Secretary is prohibited from making the
                               - 8 -

assessment or from collecting by levy or a proceeding in court

(and, if a proceeding is commenced in the Court, until the

decision of the Court becomes final) and for 60 days thereafter.

Sec. 6503(a)(1).

     Petitioner filed his 2001 return on August 12, 2002.    Under

section 6501(a) respondent had until August 12, 2005, to issue a

notice of deficiency.   Respondent mailed the 2001 notice on

August 10, 2005, before the period of limitations for making an

assessment would have expired under section 6501(a).

Consequently, the 2001 notice was timely.7

     Petitioner further contends that respondent’s grounds for

disallowing the 2001 net operating loss carryover were arbitrary

and false.   Specifically, petitioner argues that because

respondent had not disallowed the 2000 net operating loss and had

not assessed a deficiency in tax for 2000, the year in which the


     7
      Because we hold that the 2001 notice was timely under sec.
6501(a), we need not decide whether sec. 6229 applies or whether
the 2001 notice was timely under sec. 6229. Sec. 6229(a), which
applies to TEFRA proceedings, provides that the Commissioner may
assess income tax with respect to any person which is
attributable to any partnership or affected item for a
partnership taxable year within 3 years after the later of the
date the partnership filed its return or the due date of the
partnership return. If an FPAA is properly issued, sec. 6229(d)
suspends the period of assessment in sec. 6229(a) for the period
during which a petition may be filed with the Court (and if a
petition is filed, until the decision of the Court becomes final)
and for 1 year thereafter. Sec. 6229 operates to extend the
general period of limitations for issuing notices of deficiency
and making assessments under sec. 6501 in TEFRA proceedings. See
Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner,

, 542-543 (2000).
                                - 9 -

net operating loss originated, respondent improperly disallowed

the 2001 net operating loss carryover.      Petitioner’s argument is

misplaced.    Respondent is not required to disallow the net

operating loss in 2000 before he disallows the net operating loss

carryover in 2001.    See sec. 6214(b); Calumet Indus., Inc. v.

Commissioner, 

, 276-277 (1990) (the Commissioner “is

not barred from assessing a deficiency for an open year where his

determination does not concern additional assessments for a

barred year, but only review of a computation from a barred year

for the purpose of correctly determining the tax liability for an

open year”).

     Moreover, under the TEFRA provisions the tax treatment of

partnership items is decided at the partnership level.      Sec.

6231(a)(3); Boyd v. Commissioner, 

, 369 (1993).

Partnership items include, for example, the partnership aggregate

and each partner’s share of the items of income, gain, loss,

deduction, or credit of the partnership.      Sec. 301.6231(a)(3)-

1(a)(1)(i), Proced. & Admin. Regs.      Affected items are items

affected by the treatment of partnership items.      Sec. 6231(a)(5).

The 2000 net operating loss and the 2001 net operating loss

carryover are affected items because their existence or amount is

dependent on determinations made in the partnership-level

proceeding.    See, e.g., Maxwell v. Commissioner, 

,

790-791 (1986).    After the Court’s order of dismissal in the
                                - 10 -

partnership-level proceeding became final, respondent

appropriately issued the 2001 notice disallowing the net

operating loss carryover in accordance with the determinations

made in the partnership-level proceeding.    Therefore, we conclude

that respondent did not disallow the 2001 net operating loss

carryover on arbitrary or false grounds.

III. Other Disallowed Deductions

     Petitioner alleges in his petition that respondent

disallowed certain itemized and business deductions without

requesting and auditing petitioner’s records.    However,

petitioner presented no evidence with respect to the itemized or

business deductions he claimed,8 nor did he dispute these

adjustments in his brief.

     Deductions are strictly a matter of legislative grace, and

petitioner must show that his deductions are allowed by the

Internal Revenue Code.   See Rule 142(a); New Colonial Ice Co. v.

Helvering, 

, 440 (1934).     Petitioner must also keep

sufficient records to substantiate any deductions otherwise

allowed by the Internal Revenue Code.    See sec. 6001; sec.

1.6001-1(a), Income Tax Regs.    Further, the failure to produce

evidence in support of an issue of fact as to which a party has


     8
      Although petitioner introduced into evidence an invoice
from Jenkens & Gilchrist, a professional corporation, dated
Mar. 13, 2001, for professional service fees of $150,000, the
invoice did not substantiate any payment for any professional
services.
                                   - 11 -

the burden of proof and which has not been conceded by such

party’s adversary may be a ground for deciding the issue against

that party.       Rule 149(b).   Petitioner had the burden of proving

his entitlement to the deductions he claimed, see Rule 142(a),

and petitioner failed to substantiate those deductions.9       We

sustain respondent’s determination.

IV.    Settlement Initiative

       Petitioner argues that if we conclude the 2001 notice was

timely and valid, he is entitled to the terms in the Son-of-BOSS

settlement initiative under Announcement 2004-46, 2004-1 C.B.

964.       The announcement was issued to offer taxpayers who have

invested in the Son-of-BOSS tax shelter an opportunity to resolve

their tax liabilities under a settlement initiative and avoid

litigation.

that the “Denial of a

taxpayer’s request to participate in this initiative is not

subject to judicial review.”

C.B. at

965.

       This Court is a court of limited jurisdiction, and it may

exercise its jurisdiction only to the extent authorized by

Congress.       Sec. 7442; Moore v. Commissioner, 

, 175

(2000); Naftel v. Commissioner, 

, 529 (1985).

Petitioner has not cited and we have not found any authority that


       9
      Petitioner does not contend that sec. 7491 applies to this
case, and he has not produced evidence to show he satisfied the
requirements of sec. 7491(a).
                                - 12 -

would permit us to review respondent’s denial of a request to

settle a case under a settlement initiative.       Moreover, we

generally “will not look behind a deficiency notice to examine

the evidence used or the propriety of * * * [the Commissioner’s]

motives or of the administrative policy or procedure involved in

making his determinations.”     Greenberg’s Express, Inc. v.

Commissioner, 

, 327 (1974).    Therefore, we shall not

review respondent’s denial of petitioner’s request to participate

in the settlement initiative.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.