R issued Ps a notice of deficiency (NOD) for 1999 that contained determinations related to an entity subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
132 T.C. 355">*356 OPINION
VASQUEZ,
Petitioners argue that the Court lacks jurisdiction because the NOD was issued prematurely and is invalid. Such is so, petitioners argue, because the deficiency and the accuracy-related penalties are or are attributable to affected items of Intervest, and respondent as of the time the NOD was issued had neither issued a notice of final partnership administrative adjustment (FPAA) to Intervest for 1999 nor accepted Intervest's return for 1999 as filed. Even if the NOD was not issued prematurely, petitioners argue alternatively, the Court lacks jurisdiction because the affected items set forth in the NOD are not in fact affected items.
We disagree with petitioners on both points. We hold that the NOD was not issued prematurely and that the affected items set forth in the NOD are affected items that require determinations at the partner level. We hold that we have jurisdiction, and we will deny petitioners' motion asserting to the contrary.
Petitioners are husband and wife. 2009 U.S. Tax Ct. LEXIS 16">*21 They filed a joint Form 1040, U.S. Individual Income Tax Return, for 1999 on or about October 16, 2000. They resided in California when they filed their petition with the Court.
MCM was a limited liability company whose only member was Alex Meruelo (Mr. Meruelo). During 1999 MCM owned a 31.68percent interest in Intervest, a Delaware limited liability company. MCM did not file a Federal tax return for 1999. For 1999, MCM was (by default) a disregarded entity for Federal tax purposes because MCM did not file a Form 8832, Entity Classification Election, electing to be treated as a corporation for that year.
Intervest had four members in addition to MCM: Ewing Capital Management, LLC; Markerston Shield, LLC; Manchester Overseas, LLC; and New Day, S.A. Ewing Capital Management, LLC, and Markerston Shield, LLC, were Delaware limited liability companies, and their respective ownership interests in Intervest were 35.64 percent and 24.75 percent. Manchester Overseas, LLC, was a Nevis limited liability company, and it owned a 6.93-percent interest in Intervest. New Day, S.A., was a Bahamian corporation, and it owned a 1-percent interest 2009 U.S. Tax Ct. LEXIS 16">*22 in Intervest.
Intervest filed a Form 1065, U.S. Partnership Return of Income, for 1999. The return was filed on October 14, 2000. The return covered Intervest's initial taxable year beginning on December 13 and ending on December 31, 1999.
Intervest's return for 1999 reported that Intervest incurred a $ 14,327,160 ordinary loss from engaging in foreign currency transactions. Intervest issued MCM a Schedule K-1, Partner's Share of Income, Credits, Deductions, etc., for 1999 that reported an ordinary loss of $ 4,538,844 as a passthrough 132 T.C. 355">*359 item from Intervest to MCM. Intervest's return reported that MCM was a "member" of Intervest. Intervest's return did not indicate that MCM was a single-member limited liability company, that MCM was a disregarded entity, or that Mr. Meruelo (rather than MCM) was actually Intervest's member for 1999 for Federal tax purposes.
On their Form 1040 for 1999, petitioners claimed the $ 4,538,844 loss as a passthrough item from MCM. The return did not identify Intervest, nor did the return state that Intervest was the source of the loss. 3 The return reported that MCM was a partnership. The return did not 2009 U.S. Tax Ct. LEXIS 16">*23 indicate that MCM was a single-member limited liability company, that MCM was a disregarded entity, or that Mr. Meruelo (rather than MCM) was actually Intervest's member for 1999 for Federal tax purposes.
Respondent failed to obtain from petitioners for 1999 a Form 872-I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. On October 10, 2003, shortly before the expiration of the normal period of limitations for assessing tax as to petitioners' 1999 taxable year, which coincided with the expiration of the normal period of limitations for assessing tax attributable to partnership and affected items from Intervest's 1999 taxable year, respondent issued the NOD to petitioners. 4 The NOD reflected petitioners' reporting on their 1999 tax return that MCM was a partnership and that the $ 4,538,844 loss had passed through to them from MCM. The NOD stated that petitioners were not entitled to deduct the loss and that they 132 T.C. 355">*360 were liable for an 2009 U.S. Tax Ct. LEXIS 16">*24 accuracy-related penalty under
The NOD stated that respondent disallowed 2009 U.S. Tax Ct. LEXIS 16">*25 petitioners' claimed deduction for the loss because they failed to establish that they had any basis in MCM, that a loss was sustained during 1999 in the amount claimed, that any loss was attributable to them, or that the claimed loss (or any portion thereof), if sustained, was allowable as a deduction under the Code. The NOD stated that any deduction of the loss also was disallowed because petitioners had failed to establish that any deduction related to the loss was not limited or disallowed by one or more sections of the Code, including for example
The NOD stated as to the accuracy-related penalty that respondent had determined that the 40-percent penalty of
Respondent has not audited Intervest's Form 1065 for 1999. Nor has respondent notified Intervest that respondent is beginning an audit of Intervest for 1999. Respondent has not issued an FPAA to Intervest for 1999.
On November 12, 2004, respondent responded to petitioners' motion to dismiss by moving the Court to "stay the proceedings in this case pending the resolution of a federal criminal investigation whose progress and outcome may affect the disposition of this case." Respondent's motion stated that respondent had just recently learned that petitioners' reported loss was generated in a tax shelter related to an ongoing grand jury investigation into tax shelter activities 2009 U.S. Tax Ct. LEXIS 16">*27 and that the grand jury investigation could affect or be affected by happenings in this case. The motion stated that if respondent learned that petitioner [sic] had, with the intent to evade tax, signed or participated, directly or indirectly, in the preparation of a partnership return which includes a false or fraudulent item, then in the case of partners participating, any tax imposed by Subtitle A which is attributable to any partnership item (or affected item) for the partnership taxable year to which the return relates may be assessed at any time. 10. Furthermore, even if petitioners did not sign or participate directly in the filing of a false or fraudulent partnership return, the period for assessing tax attributable to partnership items related to a false or fraudulent partnership return is six years, rather than three years, from the date on which the partnership return was filed.
On November 18, 2004, the Court granted respondent's motion and stayed all proceedings in this case. The Court later lifted the stay to decide petitioners' motion now before us.
Petitioners move the Court to dismiss 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
We turn to some general tenets involving partnerships. Partnerships are not subject to Federal income tax. See
Before 1982 the Commissioner and the courts had to adjust partnership items at the partner level. See
The term "partnership items" includes any item of income, gain, loss, deduction, 2009 U.S. Tax Ct. LEXIS 16">*31 or credit that the Secretary has determined is more appropriately determined at the partnership level than at the partner level. See
Affected items are of two types. The first type is a computational adjustment made to a partner's tax liability to reflect adjustments to partnership items. See
The second type of affected item requires a partner-level determination; it is an adjustment to a partner's tax liability (other than to reflect a penalty, addition to tax, or additional amount relating to an adjustment to a partnership item) to reflect the proper treatment of a partnership item that is dependent upon factual determinations to be made at the 2009 U.S. Tax Ct. LEXIS 16">*32 partner level. See
When an FPAA is issued to the partnership and a partnership-level proceeding as to the FPAA is properly brought in this Court, the partnership-level proceeding is complete when our decision becomes final. See
The parties agree that respondent has not begun a partnership-level proceeding as to Intervest's 1999 taxable year and that the normal period of limitations with respect to Intervest has expired as to that year. Petitioners argue that the NOD is invalid (and hence the Court lacks jurisdiction) because respondent issued the NOD to them before accepting Intervest's return for 1999 as filed. Petitioners support their argument primarily with a reference to the above-quoted statements in respondent's motion to stay. Petitioners also point the Court to the grand jury investigation and to the Commissioner's general policy that a civil proceeding against a taxpayer should not be commenced while the taxpayer is under criminal investigation. Petitioners conclude that respondent deferred his decision on whether to audit Intervest's return until after the completion of the grand jury investigation and any 2009 U.S. Tax Ct. LEXIS 16">*34 related criminal prosecution.
Respondent acknowledges that the Court lacks jurisdiction to decide any partnership item included in the NOD, e.g., whether the disallowed loss was in fact generated by Intervest. Respondent also concedes that he may no longer adjust Intervest's partnership items absent an exception to 132 T.C. 355">*365 the normal period of limitations. Nevertheless, respondent argues that the affected items included in the NOD properly remain in dispute. Those affected items, respondent asserts, include whether petitioners were at risk under
We agree with respondent that the NOD was not issued prematurely and is valid. Intervest is the partnership to which the partnership items underlying the adjustments in the NOD relate, and respondent 2009 U.S. Tax Ct. LEXIS 16">*35 has neither begun an audit of Intervest nor notified anyone that respondent was beginning an audit of Intervest. 72009 U.S. Tax Ct. LEXIS 16">*36 See
Petitioners assert that this case is indistinguishable from
We note for completeness that we recognize that the NOD at issue referenced MCM (rather than Intervest) as the TEFRA entity to which the adjustments in the NOD related. Petitioners place no weight on this fact in arguing that the Court lacks jurisdiction over this case. Neither do we. Petitioners reported on their 1999 tax return that they were deducting the $ 4,538,844 loss as a passthrough item from a partnership, identified by them as MCM, and petitioners' return gave no indication that MCM was actually Mr. Meruelo's single-member limited liability company that was a disregarded entity for Federal tax purposes, or that the loss actually stemmed from Intervest. Nor did MCM or Intervest file with respondent any document that would have placed petitioners' reporting position in question. Respondent made his determination in the NOD on the basis of all information that petitioners had supplied to him as of the time that the NOD was issued.
We now turn to petitioners' alternative argument. Petitioners argue that the Court lacks jurisdiction because the affected 2009 U.S. Tax Ct. LEXIS 16">*38 items set forth in the NOD are not in fact affected items. We disagree. The three items in the NOD that respondent 132 T.C. 355">*367 has identified as affected items are in fact affected items that require determinations at the partner level.
First, respondent determined as an affected item that petitioners were not at risk in an activity to which
Second, respondent determined as an affected item that
Third, respondent determined as an affected item that petitioners are liable for an accuracy-related penalty under
We conclude we have jurisdiction to decide this case. 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.
To reflect the foregoing,
1. Section references are to the applicable versions of the Internal Revenue Code (Code), unless otherwise stated. Some dollar amounts are rounded to the nearest dollar. We use terms in this Opinion to decide petitioners' motion and do not express any view on the validity of any of the entities or transactions mentioned. See
2. The parties agree that MCMis disregarded for Federal tax purposes because it is a single-member limited liability company that did not elect to be treated as a corporation. See
3. Respondent asserts that he first learned that the loss originated with Intervest when respondent was served with petitioners' petition. The petition references that MCM owned an interest in Intervest.↩
4. The normal period of limitations on an assessment of Federal income tax attributable to a partnership item (or to an affected item) is 3 years after the filing of the taxpayer's return, except that the period shall not expire before the date which is 3 years after the later of the due date of the partnership return (determined without regard to extensions) or the date the partnership return was actually filed. See
5. Neither party asserts, nor does the record establish, that petitioners were or are under criminal tax investigation for violation of an internal revenue law related to income tax. See generally
6. Neither party disputes that the petition would be timely if the NOD were valid. We find similarly and so conclude without further discussion.↩
7. Because respondent did not commence a partnership-level proceeding as to Intervest for 1999, for purposes of this proceeding the parties are bound by the partnership items as reported on Intervest's return. See