                        T.C. Memo. 2009-112



                      UNITED STATES TAX COURT



    BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES,
                           Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17108-08.               Filed May 21, 2009.



     Roger J. Jones, Kim Marie K. Boylan, Andrew R. Roberson, and

Sarah S. Sandusky, for petitioner.

     Daniel A. Rosen, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   This partner-level matter is before the

Court on respondent’s motion to dismiss for lack of jurisdiction.

Respondent issued a deficiency notice determining a $5,832,629

deficiency in petitioner’s Federal income tax for 2002, a

$318,554 deficiency for 2003, and a $26,623,226 deficiency for

2004 (the deficiency notice).   Respondent also determined
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accuracy-related penalties under section 66621 of $2,333,052 for

2002, $127,422 for 2003, and $10,649,290 for 2004.   The

deficiencies and penalties flow from determinations in a notice

of final partnership administrative adjustment for tax years

1999-1 and 1999-22 (the FPAA) issued to Wilmington Partners LP

(Wilmington).

     The parties agree that the deficiency notice adjusts only

partnership items or affected items related to Wilmington and

that the partnership-level proceeding contesting the

determinations in the FPAA (Wilmington partnership proceeding)

has not concluded.   Petitioner argues, however, that the

deficiency notice is valid because the FPAA adjusts only 1993

partnership items and no FPAA was issued for 1993.   The sole

issue for decision is whether the deficiency notice is invalid

because it determines deficiencies and penalties that flow from

the FPAA and the ongoing Wilmington partnership proceeding has

not been resolved.   We hold that the deficiency notice is invalid

and we do not have jurisdiction to redetermine the deficiency.

We shall therefore grant respondent’s motion.




     1
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
     2
      Wilmington undertook restructuring transactions in 1999
that caused it to treat itself as terminated under sec.
708(b)(1)(B) on June 4, 1999. Accordingly, Wilmington treated
itself as having two separate tax years and filed two partnership
returns for 1999.
                                -3-

                            Background

     The facts we recite are uncontested facts admitted in the

petition, respondent’s motion, petitioner’s objection to

respondent’s motion and the supporting memorandum, or the

exhibits attached to these documents.

     Petitioner is a corporation, with its principal place of

business in Rochester, New York.   It is the common parent of an

affiliated group that filed a consolidated return of income for

1999.   A member of this group, petitioner’s wholly owned

subsidiary B&L International Holdings Corp. (BLIHC), was the

majority partner of Wilmington until 1999.    The deficiencies

determined in the deficiency notice resulted from respondent’s

disallowance of carryforward losses related to BLIHC’s sale of

its interest in Wilmington and correlative adjustments to credits

and alternative minimum tax.   Petitioner timely filed a petition

to redetermine the adjustments in this deficiency notice.

Respondent filed a motion to dismiss for lack of jurisdiction,

and it is this motion that we address.

     The adjustments in the deficiency notice stem from a 1993

financing transaction that respondent challenges in disallowing

the carryforward losses.   Respondent determined in the FPAA that

BLIHC inflated its basis in Wilmington as a result of the 1993

financing transaction.   We now turn to that transaction.

     Petitioner engaged in a financing arrangement in 1993 that

created an influx of capital priced like debt to maintain

petitioner’s favorable credit rating.    The 1993 financing
                                  -4-

transaction involved BLIHC, four banks, Wilmington, and an

unrelated partnership (Bobcat).

     Bobcat contributed approximately $400 million in loan

proceeds for its interest in the partnership.       BLIHC contributed

a note (the 1993 Reset Note) and $25 to Wilmington in exchange

for a partnership interest.   BLIHC claimed a $550 million basis,

the note’s face value, in the 1993 Reset Note.       Several entities

controlled by petitioner also contributed operating businesses

and cash in exchange for partnership interests in Wilmington.

     Wilmington continued to hold operational businesses in 1999

when BLIHC sold a portion of its Wilmington interest to an

unrelated party for $199,137,637.       Petitioner claimed a

$347,910,187 capital loss related to the sale ($347 million

capital loss) on its 1999 consolidated return.       Petitioner

computed this loss using BLIHC’s basis in its sold Wilmington

interest that was attributable, in part, to BLIHC’s $550 million

claimed basis in the 1993 Reset Note.       Petitioner also claimed

capital loss carryovers as a result of this sale in taxable years

1998, 2001, 2002, 2003, and 2004.

     Respondent issued the FPAA to Wilmington in response to

petitioner’s claimed $347 million capital loss.       Respondent made

several determinations in the FPAA including a determination that

the 1993 Reset Note had a zero basis at the time it was

contributed to Wilmington.    Wilmington’s tax matters partner

(TMP) filed a petition in the Wilmington partnership proceeding

at docket no. 15098-06, which is currently pending.
                                 -5-

     Respondent issued a deficiency notice to petitioner for the

taxable years 1998-2001 separate from the deficiency notice at

issue in this case.    The determinations in both deficiency

notices arise from respondent’s determination in the FPAA that

BLIHC had a zero basis in the 1993 Reset Note rather than the

$550 million basis claimed.    Petitioner filed a petition for

redetermination of the 1998-2001 deficiencies on the ground that

respondent improperly adjusted the basis of the 1993 Reset Note

in 1999, and we granted respondent’s motion to dismiss for lack

of jurisdiction in an unpublished order at docket no. 20958-07

(Bausch & Lomb I) on April 30, 2008.       We concluded that the 1998-

2001 deficiency notice was invalid because the determinations in

that deficiency notice all resulted from the determination in the

FPAA that the 1993 Reset Note had a zero basis and the Wilmington

partnership proceeding had not concluded.      Petitioner appealed

our order dismissing Bausch & Lomb I to the United States Court

of Appeals for the Second Circuit, and the appeal is pending.

     The issue presented in Bausch & Lomb I is identical to the

issue before us now.    We shall therefore grant respondent’s

motion for the same reasons as further discussed.

                              Discussion
     We must decide whether a deficiency notice is valid if it

determines deficiencies and penalties that flow from a previously

issued FPAA and the partnership-level case contesting the FPAA’s

determinations has not been resolved.      We hold that the

deficiency notice is invalid.
                                  -6-

     We begin with our jurisdiction.    This Court is a court of

limited jurisdiction, and we may exercise jurisdiction only to

the extent provided by statute.    Sec. 7442; GAF Corp. & Subs. v.

Commissioner, 114 T.C. 519, 521 (2000).    Our jurisdiction to

redetermine a deficiency in tax depends on a valid deficiency

notice and a timely filed petition.     GAF Corp. & Subs. v.

Commissioner, supra at 521.     A taxpayer may generally file a

petition for redetermination of a deficiency with this Court

after receiving a deficiency notice.    Sec. 6213.   Special rules

apply, however, for certain partnerships and their partners.

     Partnerships do not pay Federal income tax, but they are

required to file annual information returns reporting the

partners’ distributive shares of income, deductions, and other

tax items.   Secs. 701, 6031.   The individual partners then report

their distributive shares of the tax items on their Federal

income tax returns.   See secs. 701-704.   Congress enacted the

unified audit and litigation procedures of the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA) to provide consistent

treatment of partnership items among partners in the same

partnership and to ease the substantial administrative burden

that resulted from duplicative audits and litigation.    See

Petaluma FX Partners, LLC v. Commissioner, 131 T.C. __, __ (2008)

(slip op. at 10).

     The parties acknowledge that the TEFRA rules apply because

the deficiencies arise from BLIHC’s status as a partner in

Wilmington, a TEFRA partnership under section 6231(a).
                                -7-

Accordingly, we must analyze the jurisdictional issue presented

under the specific TEFRA statutes and the related caselaw.

     Under the TEFRA rules, partnership items are determined in

partnership-level proceedings, while nonpartnership items are

determined at the individual partner level.    Sec. 6221;

Affiliated Equip. Leasing II v. Commissioner, 97 T.C. 575, 576

(1991).   A partnership item is any item required to be taken into

account for the partnership’s taxable year to the extent

regulations specify it is an item more appropriately determined

at the partnership level rather than the partner level.     Sec.

6231(a)(3).   Partnership-level determinations also impact certain

items of individual partners.   These are referred to as affected

items, and their resolution depends on partnership-level

determinations.   Sec. 6231(a)(5); Maxwell v. Commissioner, 87

T.C. 783, 792 (1986).   Deficiency procedures apply to affected

items that require partner-level determinations.    Sec.

6230(a)(2)(A)(i).

     This Court does not have jurisdiction, however, to consider

partnership items in a partner-level proceeding resulting from

the issuance of a deficiency notice.   Trost v. Commissioner, 95
T.C. 560, 564 (1990).   Further, no assessment of a deficiency

attributable to any partnership item may be made until the

partnership-level proceeding is completed.    Sec. 6225(a); see GAF

Corp. & Subs. v. Commissioner, supra at 526.    Accordingly, a

deficiency notice adjusting affected items is generally invalid

if it is issued before the conclusion of the partnership
                                -8-

proceeding, and we have no jurisdiction.   See GAF Corp. & Subs.

v. Commissioner, supra at 528; Soward v. Commissioner, T.C. Memo.

2006-262.

     We now determine whether we have jurisdiction over the

deficiency notice.

     Petitioner acknowledges that the Wilmington partnership

proceeding is pending and that the deficiency notice contains

adjustments to partnership items and affected items related to

BLIHC’s basis in the 1993 Reset Note.   Petitioner argues,

however, that BLIHC’s basis in the 1993 Reset Note was a

partnership item only in the year of contribution, 1993, and,

therefore, respondent adjusted the basis in the wrong years; i.e.

1999-1 and 1999-2.   Petitioner further argues that the deficiency

notice is valid and we have jurisdiction because no FPAA was

issued for the year of contribution.    Petitioner attempts to make

a back-door argument that the Court, in determining the validity

of the deficiency notice, is required at the partner level to

answer the substantive question of whether respondent adjusted

BLIHC’s basis in the 1993 Reset Note in the wrong year or years.

We disagree.

     Respondent determined in the FPAA that the 1993 Reset Note

had a zero basis at the time BLIHC contributed it to Wilmington.

Each of the adjustments in the deficiency notice flows from this

determination in the FPAA.

     A partner’s basis in contributed property is a partnership

item when the partnership needs to make a determination with
                               -9-

respect to the partner’s basis for purposes of its books and

records, or for purposes of furnishing information to a partner.

Nussdorf v. Commissioner, 129 T.C. 30, 42 (2007); see sec.

301.6231(a)(3)-1(a)(4), (c), Proced. & Admin. Regs.    The critical

element is that the partnership needs to make a determination

with respect to the partner’s basis for the purposes stated, and

the partnership’s failure to actually make a determination does

not prevent an item from being a partnership item.    See sec.

301.6231(a)(3)-1(c)(1), Proced. & Admin. Regs.

     Petitioner provides no authority for the argument that a

partner’s basis in contributed property is a partnership item

only in the year of contribution, and we find none.    Partnership

items are defined to include a partner’s basis in contributed

property when a partnership must account for the partnership’s

basis in the contributed property for purposes of its books and

records, or for purposes of furnishing information to a partner.3

Sec. 301.6231(a)(3)-1(c)(2), Proced. & Admin. Regs; see also

Nussdorf v. Commissioner, supra at 44.   Accordingly, the

necessary facts are available only at the partnership level to

determine whether the partnership was required to make a

determination with respect to BLIHC’s basis in the 1993 Reset

Note for these purposes.




     3
      A partnership determines its basis in contributed property
by making a preliminary determination of the partner’s basis in
the property at contribution and then adjusting its basis in the
property where subsequent events require.
                               -10-

     Petitioner’s argument that we must address at the partner

level whether respondent adjusted BLIHC’s basis in the 1993 Reset

Note in the wrong years is misplaced.   Petitioner cites several

cases where this Court determined that we had jurisdiction to

redetermine deficiencies attributable to affected items to

support its argument.   See Ginsburg v. Commissioner, 127 T.C. 75

(2006); Estate of Quick v. Commissioner, 110 T.C. 172 (1998);

Jenkins v. Commissioner, 102 T.C. 550 (1994); Roberts v.

Commissioner, 94 T.C. 853 (1990); Gustin v. Commissioner, T.C.

Memo. 2002-64.   These cases are inapposite as no FPAAs were

issued in these cases and no partnership-level proceedings were

pending.   Here, the related Wilmington partnership proceeding is

ongoing, and there Wilmington’s TMP is making the argument that

the Commissioner adjusted BLIHC’s basis in the 1993 Reset Note in

the wrong years.

     Further, the cases petitioner cites involved arguments by

taxpayers that we lacked jurisdiction in deficiency proceedings

because the deficiencies were attributable to partnership items

rather than affected items.   The Court determined in each case

that the deficiencies were attributable to affected items, but in

doing so determined that the deficiencies were not attributable

to partnership items.   These cases do not stand for the

proposition that a partner may make a substantive argument at the

partner level contesting the adjustment of a partnership item in

an FPAA.   We decide at the partnership level substantive

arguments challenging whether items related to contributions or
                                -11-

distributions are actually partnership items.    See Dakotah Hills

Offices Ltd. Pship. v. Commissioner, T.C. Memo. 1996-35.

     Petitioner’s substantive argument that BLIHC’s basis in the

1993 Reset Note was adjusted in an improper year does not provide

jurisdiction, where none exists, to determine a partnership item

in a partner-level case.    This Court may exercise jurisdiction

only to the extent expressly provided by statute, and it may not

enlarge upon that statutory jurisdiction.    See sec. 7442; Breman

v. Commissioner, 66 T.C. 61, 66 (1976); see also Rule 13.

     Further, the remaining determinations in the deficiency

notice depend on the resolution of BLIHC’s basis in the 1993

Reset Note.   These determinations are affected items that cannot

be litigated now but must wait until the Wilmington partnership

proceeding is finalized.    See GAF Corp. & Subs. v. Commissioner,

114 T.C. 519 (2000); N.C.F. Energy Partners v. Commissioner, 89

T.C. 741, 743-744 (1987).

     We conclude that respondent improperly issued the deficiency

notice determining petitioner’s deficiencies and penalties

related to BLIHC’s basis in the 1993 Reset Note before the

decision of this Court has become final in the ongoing Wilmington

partnership proceeding.    See GAF Corp. & Subs. v. Commissioner,
supra at 521, 528; Maxwell v. Commissioner, 87 T.C. at 788.

Accordingly, we hold that the deficiency notice is invalid and

there is no jurisdictional basis upon which the Court may

consider the adjustments in this case.
                            -12-

To reflect the foregoing,



                                        An order of dismissal for

                                   lack of jurisdiction will be

                                   entered.
