138 T.C. 271">*272 VASQUEZ, Judge: These three consolidated cases are before the Court on respondent's request to stay the proceeding in one case. The cases constitute partnership-level proceedings under the unified partnership audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648 (codified as amended at sections 6221-6233).²

Once each during two discrete periods, the first spanning late March through early April 2000 and the other covering early August through early September 2000, Jerry S. Rawls engaged in the short sale variant of the 2012 U.S. Tax Ct. LEXIS 13">*15 "Son-of-BOSS" tax shelter,³ employing several newly formed entities. These included: Rawls Family, L.P. (Family), Rawls Group, L.P. (Group), and Rawls Trading, L.P. (Trading), each of which sought to be characterized as a partnership for tax purposes.⁴ As more fully discussed below, these purported partnerships 138 T.C. 271">*273 were arranged in a "tiered" structure, with Family holding ownership interests in Group and Trading.

Group and Trading were the entities in which the "sheltering" transactions, which allegedly subsequently generated losses, originated. Because Group and Trading were the source of the putative losses, we refer to them as the "source" partnerships. 2012 U.S. Tax Ct. LEXIS 13">*16 The claimed losses resulted from transactions overstating the bases of partnership interests in the source partnerships. These overstated bases supposedly flowed through to Family, which used them to "fabricate" losses. These contrived losses eventually inured to Mr. Rawls' tax benefit through other passthrough entities. Because it was interposed between the source partnerships, on the one hand, and Mr. Rawls, on the other, we refer to Family as the "interim" partnership.

Using this pyramid-like partnership structure, in which overstated bases purportedly achieved in the source partnerships tiered up through the interim partnership to his benefit, Mr. Rawls claimed tax savings of approximately $11 million.^{52012 U.S. Tax Ct. LEXIS 13">*17} Respondent, by means of notices of final partnership administrative adjustment (FPAAs) issued to Family, Group, and Trading, disallowed the losses at the respective partnership level and asserted accuracy-related penalties under section 6662(a) and (h).⁶ The tax matters partners (TMPs) of Family and Trading and a participating partner of Group brought these consolidated actions on behalf of their respective entities.

After having issued the FPAAs, respondent now contends, in effect, that the FPAA to Family was premature. Respondent has asked the Court to stay the proceeding with respect to Family until the partnership-level proceedings for Group and Trading have been resolved. The issues that we decide here are: (1) whether the Family FPAA is valid and properly confers jurisdiction on us over the Family case; and 138 T.C. 271">*274 (2) if we have jurisdiction, 2012 U.S. Tax Ct. LEXIS 13">*18 whether we should grant respondent's motion and stay proceedings in the Family case until we have entered our decisions in the Group and Trading cases and our decisions have become "final" within the meaning of section 7481(a)(2)(A).

Mr. Rawls earned a bachelor of science degree in mechanical engineering from Texas Tech University and a master of science degree in industrial administration from Purdue University. From 1968 through 1988 he worked for Raychem Corp., where he began as a sales engineer and eventually rose to general manager of two divisions within the company.

Mr. Rawls cofounded the fiber optics company Finisar Corp. (Finisar) in 1989. Upon formation of Finisar, Mr. Rawls received a portion of its outstanding shares of common stock. Since the company's inception, Mr. Rawls has served, variously, as Finisar's president, chief executive officer, or chairman of the board.

By 1999 Finisar had become the nation's leading provider of fiber optic subsystems and network performance tests. On November 11, 1999, Finisar announced an initial public offering (IPO) of its common stock. On November 17, 1999, Finisar made an IPO of 8,150,000 shares. At 2012 U.S. Tax Ct. LEXIS 13">*19 the time of the IPO, Mr. Rawls owned 8,470,627 shares of Finisar stock, which represented 20.2% of Finisar's outstanding common stock.⁷ However, because of his position at the company, Mr. Rawls was subject to a "lock up" that precluded him from selling his Finisar shares in the IPO and for a six-month period thereafter.

Around the time of the IPO, Mr. Rawls had no personal will or estate plan in place, he had no personal lawyers, and his Finisar holdings made up substantially all of his net worth. Between February and March 2000, Mr. Rawls was busy traveling the country in advance of an upcoming secondary offering of Finisar's common stock, scheduled for later that spring. Mr. Rawls intended to sell approximately 600,000 138 T.C. 271">*275 shares of his Finisar common stock in this secondary offering.

On December 8, 1999, Steven J. Lange, a representative from the Heritage Organization, L.L.C. (Heritage)⁸ made an unsolicited call to Mr. Rawls to discuss Heritage's services. According to Mr. Lange's summary of that call, he explained to Mr. Rawls that Heritage2012 U.S. Tax Ct. LEXIS 13">*20 does "work in capital gains for large capital gains, actually eliminating the capital gains taxes and [they] do estate planning, dropping estate taxes down to 15[%]". Mr. Rawls agreed to meet with a Heritage representative in person. Mr. Rawls met with various Heritage representatives several times between December 1999 and early 2000.

Heritage referred Mr. Rawls to Lewis, Rice, Fingerlish (Lewis Rice), a law firm to which Heritage had previously referred five clients in the preceding two years. Mr. Rawls paid Lewis Rice a fee of $150,000 for its services, which included a written tax opinion for the transactions relating to Trading.^{92012 U.S. Tax Ct. LEXIS 13">*21}

During March and early April 2000, Heritage and Mr. Rawls discussed strategies aimed at significantly reducing capital gains taxes that he would owe on any future sale of his Finisar stock. Initially, Heritage and Mr. Rawls contemplated a strategy seeking to "inflate", or overstate, the basis of Mr. Rawls' Finisar stock before its sale.

The strategy envisaged entering into a short sale of Treasury notes and transferring the proceeds of the short sale (along with the obligation to close the short sale) to a partnership. The desired tax result was an inflated "outside basis" in the partnership.^{102012 U.S. Tax Ct. LEXIS 13">*22} The idea was to "impute" this 138 T.C. 271">*276 inflated outside basis to Mr. Rawls' Finisar stock before it was sold. To achieve this, Mr. Rawls would have previously arranged for a contribution of his Finisar stock to the partnership. This stock would then have been received back in a liquidating distribution from the partnership. Presumably, it would have been claimed, under authority of section 732(b), that the Finisar stock was being received back with a basis equal to the inflated outside basis in the partnership.

However, this strategy for inflating the basis of Finisar stock before its sale was subsequently 2012 U.S. Tax Ct. LEXIS 13">*23 discarded in favor of a more complex strategy involving two partnerships. It was envisaged that the two partnerships would eventually be arranged in a tiered structure, with one almost entirely owned by the other. The objective of this strategy was to "manufacture" a short-term capital loss in the upper tier partnership. The loss would then be proclaimed to be available to offset capital gains that the upper tier partnership would realize by selling Finisar stock, previously contributed to it.

Engineering the short-term capital loss contemplated, in the first instance, inflating the outside basis of a partnership--the partnership that would become the lower tier partnership. The notion was to impute this inflated outside basis to the assets of another partnership--the partnership that would become the upper tier partnership. As a consequence of the tiered partnership structure, the erstwhile inflated outside basis in the lower tier partnership would become the overstated "inside basis" of assets held by the upper tier partnership.¹¹ These assets would comprise substantially all of the partnership interests in the lower tier partnership. 138 T.C. 271">*277 The upper tier partnership would subsequently 2012 U.S. Tax Ct. LEXIS 13">*24 sell these partnership interests, at a price reflecting their true economic value rather than their overstated basis. A short-term capital loss would allegedly be realized as a result of this sale.

As would have been the case in the discarded strategy for inflating the basis of Finisar stock, inflating the outside basis in the lower tier partnership would be achieved by entering into a short sale of Treasury notes. The proceeds of the short sale (along with the obligation to close the short sale) would be 2012 U.S. Tax Ct. LEXIS 13">*25 transferred to the lower tier partnership. The tiered partnership structure itself would be effected by a purported capital contribution of substantially all of the partnership interests in the lower tier partnership to the upper tier partnership. Following this capital contribution, the upper tier partnership would hold, as assets, almost all of the partnership interests in the lower tier partnership. The upper tier partnership would claim, under authority of section 723, that its basis in these assets is the same as the inflated outside basis in the lower tier partnership at the time of the capital contribution.

As discussed below, Mr. Rawls ended up executing the tiered partnership strategy twice; once during March and April 2000, and then again during August and September 2000. A different lower tier partnership was involved each time. However, Mr. Rawls used the same upper tier partnership on both occasions.

For purposes of resolving the jurisdictional question at hand, the proper tax characterization of each step of every transaction at issue is not necessarily critical. Instead, what matters is whether the lower tier partnerships were indeed the source of the asserted overstatement 2012 U.S. Tax Ct. LEXIS 13">*26 of their respective outside bases and whether the upper tier partnership was merely a conduit. Consequently, we omit, for now, many of the exact details of these extremely elaborate transactions and provide only a cursory overview, finding only such facts as bear upon the inquiry into whether we have jurisdiction over the interim partnership proceeding.

The tiered partnership strategy was first implemented with a series of transactions that took place between March 28 and April 10, 2000, in roughly the order that they are described below.

Mr. Rawls formed four entities: the Jerry S. Rawls Management Corp. (JSRMC); Rawls Management Corp. (RMC); the Jerry S. Rawls Business Trust (ESBT); and the Jerry S. Rawls Family Trust (Family Trust).^{122012 U.S. Tax Ct. LEXIS 13">*27} Mr. Rawls was the sole shareholder, president, and director of JSRMC and RMC and the grantor, trustee, and beneficiary of ESBT. Mr. Rawls contributed 1,060,000 shares of Finisar stock to ESBT. Mr. Rawls and his brother, Warren Rawls, were the grantor and trustee, respectively, of Family Trust. Family Trust's beneficiaries are the descendants of Mr. Rawls' parents, with the exception of Mr. Rawls.

ESBT and RMC formed Family, which would serve as the upper tier partnership. Mr. Rawls, as trustee of ESBT, was a 99.99% limited partner in Family, and RMC was a 0.01% general partner, and the sole general partner, of Family. Mr. Rawls contributed his interest in RMC to ESBT. ESBT contributed the 1,060,000 shares of Finisar to Family.

ESBT, through a brokerage account at Paine Webber, sold short Treasury notes with a face value of $200 million, receiving $201,326,876 in proceeds. JSRMC and ESBT formed Group, which would serve as the lower tier partnership. ESBT received a 99.99% limited partnership interest in Group in exchange for a contribution of the proceeds of the short sale, and the obligation 2012 U.S. Tax Ct. LEXIS 13">*28 to close the short sale.

On its Form 1065, U.S. Return of Partnership Income (partnership return), for the short tax year beginning April 2 and ending April 6, 2000, filed February 18, 2001, Group accounted for the short sale proceeds as ESBT's capital contribution. Group did not account for the obligation to close the short sale as a partnership liability under section 752(a) and (b). Thus, ESBT presumably received an inflated outside 138 T.C. 271">*279 basis in Group. JSRMC received a 0.01% general partnership interest in Group in exchange for a nominal contribution and became the sole general partner of Group.

ESBT then contributed its partnership interest in Group to Family. Family, presumably under authority of section 723, inherited ESBT's inflated outside basis. The ownership structure at this stage is set forth in the diagram below.

JSRMC and Family then sold their respective partnership interests in Group to Family Trust.¹³ Following this sale, all ownership interests in Group were held by Family Trust. Group, now presumably a "single member disregarded entity",^{142012 U.S. Tax Ct. LEXIS 13">*29} continued to remain liable for the obligation to close the short sale.

On its partnership return for the short tax year beginning March 29 and ending December 31, 2000, filed October 16, 138 T.C. 271">*280 2001, Family claimed a loss of $202,418,954 on the sale of its partnership interest in Group to Family Trust. Almost the entire amount of this loss was the result of the overstatement of Family's basis in its partnership interest in Group. This overstatement, in turn, arose from Group's failure to account for the obligation to close the short sale.

Family sold 635,297 of the 1,060,000 shares of Finisar stock that had been previously contributed to it in a secondary offering, generating net proceeds of $61,052,041.70 after a 3.9% commission. Family Trust then closed the short sale of the Treasury notes.

Lewis Rice prepared all the documents in connection with the Group transactions. However, Lewis Rice refused to issue a "more-likely-than-not" 2012 U.S. Tax Ct. LEXIS 13">*30 opinion letter for the desired tax consequences. Lewis Rice believed that there was a greater than 50% likelihood that the short-term loss claimed by Family on the sale of its partnership interest in Group would be disallowed under section 267. Specifically, the concern appears to have been that Family and Family Trust would be deemed "related" within the meaning of section 267.

After discussions between Mr. Rawls and representatives from Heritage and Lewis Rice, it was decided to undertake a second set of transactions during August and September 2000. These transactions replicated the Group transactions described above in a new lower tier partnership.¹⁵ To avoid section 267 concerns, it was arranged that the partnership interests in this new lower tier partnership would be sold to a "bona fide" third party--an entity organized by Heritage specifically for this purpose.

The transaction with a new lower tier partnership took place in roughly the order that they 2012 U.S. Tax Ct. LEXIS 13">*31 are described below. ESBT began by contributing 5,461,679 shares of Finisar stock, previously transferred from Mr. Rawls, to Family.¹⁶ ESBT, through a brokerage account at Donaldson, Lufkin & Jenrette, sold short Treasury notes with a face value of $200 138 T.C. 271">*281 million, receiving $200,449,728 in proceeds. ESBT and RMC formed Rawls Trading, L.P. (Trading), which would serve as the new lower tier partnership. ESBT received a 99.99% limited partnership interest in Trading in exchange for a contribution of the proceeds of the short sale, and the obligation to close the short sale.

On its partnership return for the short tax year beginning August 17 and ending September 7, 2000, filed July 17, 2001, Trading accounted for the short sale proceeds as ESBT's capital contribution. Trading did not account for the obligation to close the short sale as a partnership liability under section 752(a) and (b). Thus, ESBT presumably received an inflated outside basis in Trading. RMC received a 0.01% general partnership interest in Trading in exchange for a nominal 2012 U.S. Tax Ct. LEXIS 13">*32 contribution, and became the sole general partner of Trading.

ESBT then contributed its partnership interest in Trading to Family. Family, presumably under authority of section 723, inherited ESBT's inflated outside basis. The ownership structure at this stage is set forth in the diagram below.

138 T.C. 271">*282 RMC and Family sold their respective partnership interests in Trading to the West Coast Business Trust (West Coast). West Coast's sole trustee was Gary M. Kornman, a "key" principal at Heritage, and the individual who ostensibly controlled Heritage. West Coast was evidently set up for the sole purposes of accommodating the sale of partnership interests in Trading. Following this sale, all ownership interests in Trading were held by West Coast. Trading, now presumably a "single member disregarded entity",¹⁷ continued to remain liable for the obligation to close the short sale.

On its partnership return, Family claimed a loss of $201,951,603 on the sale of its partnership interest in Trading to West Coast. Almost the entire amount of this loss was the result of the overstatement of Family's basis 2012 U.S. Tax Ct. LEXIS 13">*33 in its partnership interest in Trading. This overstatement, in turn, arose from Trading's failure to account for the obligation to close the short sale. West Coast presumably closed the short sale of the Treasury notes.

It is readily apparent from the foregoing description of the Group and Trading transactions that Group and Trading were, in fact, the source partnerships in which the overstatement of bases was engineered. By comparison, Family was the partnership that merely transmitted the consequences of these overstated bases to Mr. Rawls through other passthrough entities, viz, ESBT, RMC and JSRMC. As mentioned below, respondent admits as much, and in so many words.¹⁸ Consequently, each of Group and Trading is properly characterized as a source partnership, while Family is properly designated an interim partnership.

On October 16, 2000, Lewis Rice issued a written tax opinion to Mr. Rawls supporting the short-term capital loss claimed on Family's partnership return on account of the Trading transactions. Mr. Rawls hired Larry Poster, a certified public accountant, to prepare the tax returns for ESBT, Family 2012 U.S. Tax Ct. LEXIS 13">*34 Trust, Family, Group, and Trading. Mr. Poster was referred to Mr. Rawls by Heritage. Mr. Poster had previously worked on at least one other transaction with a Heritage138 T.C. 271">*283 client, but had never previously received referral fees from or had a fee arrangement with Heritage. Mr. Poster characterized the Rawls transaction as involving the "generation of losses to offset other gains".

Mr. Poster reviewed and agreed with the Lewis Rice opinion. He advised Mr. Rawls that the short sale obligation was not a liability for purposes of section 752. He also advised Mr. Rawls that it was appropriate to report the Group losses on the Family return. Mr. Poster felt it was proper to report the losses from both transactions despite the lack of an opinion letter for the April transaction. Mr. Poster charged Mr. Rawls $3,000 to $5,000 per return prepared.

As 2012 U.S. Tax Ct. LEXIS 13">*35 of the date of trial Mr. Rawls continued to control Family. At that time Family's assets included shares of stock in Finisar and other companies, bonds, and private equity, mutual fund, and hedge fund holdings exceeding $67 million in value. Also, as of the date of trial Mr. Poster continued to prepare tax returns for Mr. Rawls and entities that he owned.

As mentioned above, the Family, Group, and Trading partnership returns were filed on October 16, February 18, and July 17, 2001, respectively.

On March 9, 2007, respondent timely mailed to the respective TMPs of Trading, Group, and Family FPAAs of the partnership items of Trading for the short tax year ending September 7, 2000 (Trading FPAA), Group for the short tax year ending April 6, 2000 (Group FPAA), and Family for the tax year 2000 (Family FPAA). On June 6, 2007, Trading's TMP, RMC, timely filed a petition for redetermination of the partnership items of Trading as set forth in the Trading FPAA. On June 6, 2007, RMC filed a timely petition under section 6226(a) for redetermination of the partnership items of Family as set forth in the Family FPAA. On July 2, 2007, a petition for redetermination of the partnership 2012 U.S. Tax Ct. LEXIS 13">*36 items of Group as set forth in the Group FPAA was filed.

On September 24, 2008, respondent filed a motion to stay the partner-level proceedings initiated in response to the Family FPAA. We denied respondent's motion without prejudice in an order of January 27, 2009. Respondent now raises 138 T.C. 271">*284 the issue for the second time on brief and adopts the same arguments contained in his motion.

Neither party has questioned our jurisdiction over the Family case, or disputed the validity of the Family FPAA. Respondent insists that the Family FPAA is valid and merely asks us to stay the Family case until the resolution of the Group and Trading cases. See motion to stay 1-2 ("Having issued a valid, but partially premature, FPAA to Family's partners for 2000, respondent requests the case be stayed pending the outcome of the related source partnership proceedings." (Emphasis supplied.)). Petitioners object to a stay and wish for a concurrent resolution of all three consolidated cases.

Regardless of the parties' seeming acquiescence on the validity of the Family FPAA, we are under an affirmative duty to investigate the extent of our subject 2012 U.S. Tax Ct. LEXIS 13">*37 matter jurisdiction. See, e.g., Arbaugh v. Y & H Corp., 546 U.S. 500">546 U.S. 500, 546 U.S. 500">514, 126 S. Ct. 1235">126 S. Ct. 1235, 163 L. Ed. 2d 1097">163 L. Ed. 2d 1097 (2006) (underlining that courts "have an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party"); United States v. Cotton, 535 U.S. 625">535 U.S. 625, 535 U.S. 625">630, 122 S. Ct. 1781">122 S. Ct. 1781, 152 L. Ed. 2d 860">152 L. Ed. 2d 860 (2002) (holding that "subject-matter jurisdiction, because it involves a court's power to hear a case, can never be forfeited or waived").

We are a court of limited jurisdiction, and our jurisdiction is both granted and circumscribed by statute. Seesec. 7442("The Tax Court and its divisions shall have such jurisdiction as is conferred on them by this title"); see also Pyo v. Commissioner, 83 T.C. 626">83 T.C. 626, 83 T.C. 626">632 (1984) ("This Court is a court of limited authority and may exercise jurisdiction only to the extent expressly provided by Congress."). Section 6226(a) confers jurisdiction on us over a timely filed "petition for a readjustment of the partnership items" that the Commissioner had previously adjusted pursuant to a valid FPAA. Section 6223 requires the Commissioner to "mail to each partner whose name and address is furnished to * * * [him] notice[s] of * * * the beginning of an administrative proceeding 2012 U.S. Tax Ct. LEXIS 13">*38 at the partnership level with respect to a partnership item, and 138 T.C. 271">*285 * * * the final partnership administrative adjustment resulting from any such proceeding."

As mentioned above, respondent had mailed the Family FPAA on March 9, 2007, and in response RMC had timely petitioned the Court on June 6, 2007. Prima facie, we would appear to have jurisdiction to readjust the items that respondent had adjusted in the Family FPAA. This presumes, however, that none of the adjustments shown on the Family FPAA constitutes a "computational adjustment" within the meaning of section 6231(a)(6). If, however, the Family FPAA merely reflects computational adjustments, then, as we show below, the issuance of this FPAA before the conclusion of the partnership-level proceedings for Group and Trading would render the FPAA ineffective for conferring jurisdiction upon us.

Section 6231(a)(6) defines computational adjustment as "the change in the tax liability of a partner which properly reflects the treatment * * * of a partnership item." It adds that "All adjustments required to apply the results of a proceeding with respect to a partnership * * * 2012 U.S. Tax Ct. LEXIS 13">*39 to an indirect partner shall be treated as computational adjustments."

Section 6231(a)(10) defines an indirect partner as "a person holding an interest in a partnership through 1 or more pass-thru partners." A "pass-thru" partner, in turn, is defined by section 6231(a)(9) as "a partnership * * * or other similar person through whom other persons hold an interest in the partnership with respect to which proceedings under this subchapter are conducted."

Mr. Rawls was an indirect partner in each of Group and Trading because he held interests in both these entities through Family and other "pass-thru partner[s]" within the meaning of section 6231(a)(9). Therefore, to the extent the Family FPAA was merely seeking to apply to Mr. Rawls' individual tax liability the results of the adjustments shown on the Group FPAA and Trading FPAA, pursuant to section 6231(a)(6), the Family FPAA was only making computational adjustments.

138 T.C. 271">*286 Respondent admits that all adjustments shown on the Family FPAA reflect the consequences of corresponding adjustments shown on the Group FPAA and Trading FPAA.¹⁹ Thus, to the extent the Family FPAA made any adjustments, all such adjustments were computational adjustments within 2012 U.S. Tax Ct. LEXIS 13">*40 the meaning of section 6231(a)(6).

Computational adjustments are not subject to the full panoply of restrictions on assessments that apply to an "assessment of a deficiency attributable to any partnership item" under section 6225. By way of example, which is not the case here, under section 6222(c), in the event of "any computational adjustment required to make the treatment of the items by * * * [a] partner consistent with the treatment of the items on the partnership return", the Commissioner may dispense with an FPAA and proceed to make a direct assessment of the computational adjustment. If the Commissioner "erroneously computed any [such] computational adjustment", under section 6230(c)(1)(A)(i) the partner is not eligible for a prepayment remedy but instead must pay the tax and file a claim for refund.

Another example, which also does 2012 U.S. Tax Ct. LEXIS 13">*41 not apply here, is presented by section 6230(c)(1)(A)(ii). As set forth in that section, if the Commissioner "erroneously computed any computational adjustment necessary * * * to apply to the partner a settlement, * * * [an FPAA], or the decision of a court in an action" relating to the readjustment of partnership items, then the partner is restricted to a refund forum and may not litigate in deficiency mode. In other words, the partner has to first pay the tax and then file a claim for refund. Seesec. 6230(c)(2).

TEFRA's design is premised on the conceptual dichotomy of partnership and nonpartnership items. And TEFRA's procedures require "administrative and judicial resolution of disputes 138 T.C. 271">*287 involving partnership items to be separate from and independent of disputes involving non-partnership items." Maxwell v. Commissioner, 87 T.C. 783">87 T.C. 783, 87 T.C. 783">788 (1986) (citing H. Rept. No. 97-760, at 611 (1982) and section 6226(a) and (f)).

The terms "partnership item" and "nonpartnership item" are defined in section 6231(a)(3) and (4), respectively, as follows:

The term "partnership item" means, with respect to a partnership, 2012 U.S. Tax Ct. LEXIS 13">*42 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.

* * * The term "nonpartnership item" means an item which is (or is treated as) not a partnership item.