                              T.C. Memo. 2014-154



                        UNITED STATES TAX COURT



   RANDALL J. THOMPSON AND KAREN G. THOMPSON, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent*



      Docket No. 30586-08.                         Filed July 31, 2014.



             This TEFRA case is before the Court on remand. Thompson v.
      Commissioner, 729 F.3d 869 (8th Cir. 2013), rev’g and remanding
      137 T.C. 220 (2011). In Thompson, this Court held that it lacked
      subject matter jurisdiction over Ps’ income tax deficiency and a
      related accuracy penalty. As to the deficiency, this Court in
      Thompson reasoned that the computational adjustments underpinning
      it flowed inexorably from this Court’s 2006 decision in the
      partnership-level proceeding, RJT Invs. X, LLC v. Commissioner,
      docket No. 11769-05 (June 6, 2006), aff’d, 491 F.3d 732 (8th Cir.
      2007), and did not require any further partner-level determinations.
      As to the penalty, our final decision in the partnership-level
      proceeding had also resolved its application. That decision had
      acquired preclusive effect, and pursuant to I.R.C. secs. 6225(a)(2) and


      *
       This opinion supplements our previously filed Opinion, Thompson v.
Commissioner, 137 T.C. 220 (2011), rev’d and remanded, 729 F.3d 869 (8th Cir.
2013).
                                         -2-

      [*2] 6230(a)(1), the penalty could be directly assessed. Concluding
      that a partner-level determination was required to calculate the
      amount of Ps’ income tax deficiency, the Court of Appeals for the
      Eighth Circuit reversed this Court’s decision and remanded for
      further proceedings consistent with its opinion.

             Held: Regardless of whether computing Ps’ income tax
      deficiency arising from the adjustments finalized in the partnership-
      level proceeding requires a partner-level determination, the Court
      need not now make any such determination because the parties have
      stipulated the amount of the deficiency.

             Held, further, this Court’s conclusion that it lacks jurisdiction
      to consider the accuracy penalty stands, and pursuant to I.R.C. sec.
      6221 and sec. 301.6221-1(c), Proced. & Admin. Regs., Ps must raise
      any partner-level defenses, if at all, in a refund suit pursuant to I.R.C.
      sec. 6230(c)(1)(C) and sec. 301.6221-1(d), Proced. & Admin. Regs.



      Edward M. Robbins, Jr., for petitioners.

      William Lee Blagg and James A. Kutten, for respondent.



                 SUPPLEMENTAL MEMORANDUM OPINION


      WHERRY, Judge: This case is before the Court on remand from the Court

of Appeals for the Eighth Circuit. See Thompson v. Commissioner, 729 F.3d 869

(8th Cir. 2013), rev’g and remanding 137 T.C. 220 (2011). On February 27, 2014,

respondent filed his motion for entry of decision, and on May 15, 2014, petitioners
                                         -3-

[*3] filed an opposition to motion for entry of decision. For the reasons set forth

below, respondent’s motion will be granted.

      The case constitutes a partner-level proceeding 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 6221-6234).1 In this Supplemental

Memorandum Opinion, we respond to the Court of Appeals’ mandate and to

respondent’s motion for entry of decision. We incorporate our factual findings in

Thompson v. Commissioner, 137 T.C. 220.

      In our previous Opinion, we held that we lacked jurisdiction to consider

petitioners’ income tax deficiency and related accuracy penalty. Id. at 236, 239.

That holding rested on our 2006 decision in the partnership-level proceeding, RJT

Invs. X, LLC v. Commissioner, docket No. 11769-05 (June 6, 2006), aff’d, 491

F.3d 732 (8th Cir. 2007), that: (1) the partnership was a sham and lacked

economic substance; (2) the partnership had been “formed and/or availed to

overstate artificially the basis of the interest of * * * [Mr. Thompson] in * * * [the




      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for the year at issue, 2001.
                                        -4-

[*4] partnership] in the amount of $22,006,759 for purposes of tax avoidance”;

and (3) the 40% gross valuation misstatement penalty under section 6662 would

apply.2

      We thought that these determinations, in a decision that had become final,

led inexorably to the conclusion that any flowthrough income, loss, or deduction

from the partnership, as well as any loss claimed by Mr. Thompson on liquidation

of his partnership interest, must be disallowed. See Thompson v. Commissioner,

137 T.C. at 231-235. No further, partner-level determination within the meaning

of section 6230(a)(2) and section 301.6231(a)(6)-1(a)(2), Proced. & Admin. Regs.,

was necessary. Id. at 231. Hence, section 6230(a)(1) left this Court without

jurisdiction over the petition. See id. at 236, 239. Respondent’s erroneous

issuance of a notice of deficiency to petitioners could not confer jurisdiction

absent the need for a partner-level determination. See id. at 225-226.




      2
        The Court of Appeals for the Eighth Circuit stated: “The issue before us on
appeal is whether the Tax Court properly characterized RJT’s ‘sham, etc.’ status as
a ‘partnership item’ determination.” RJT Invs. X, LLC v. Commissioner, 491 F.3d
732, 735 (8th Cir. 2007). The court answered its question as follows: “[T]he Tax
Court correctly treated as a partnership item its determination that RJT is a ‘sham,
etc.’” Id. at 738. In the accompanying note 8, the court noted: “[I]n the present
case objective facts suffice to demonstrate the sham nature of a partnership
without necessitating an additional individualized inquiry.” Id. at 738 n.8.
                                        -5-

[*5] The Court of Appeals reached a somewhat different conclusion. It noted

petitioners’ concession that our 2006 decision as to the penalties’ applicability was

res judicata. See Thompson v. Commissioner, 729 F.3d at 872 n.3. As to the

underlying deficiency, however, the Court of Appeals agreed with other Courts of

Appeals that have addressed the issue and held that “outside basis is an affected

item that must be determined at the partner level.” Id. at 873 (citing Jade Trading,

LLC v. United States, 598 F.3d 1372, 1380 (Fed. Cir. 2010), and Petaluma FX

Partners, LLC v. Commissioner, 591 F.3d 649, 655 (D.C. Cir. 2010)). It read this

Court’s 2006 decision in the partnership-level proceeding to say that Mr.

Thompson’s outside basis was overstated, but not that it was overstated in its

entirety--in other words, that he had a zero basis.3 See Thompson v.

Commissioner, 729 F.3d at 872-873. The Court of Appeals reasoned that because

Mr. Thompson’s exact outside basis remained to be determined, this Court could

and should have made that partner-level determination. See id. at 873; cf. id. at

874 (Gruender, J., concurring in the judgment) (opining that “the tax court clearly




      3
        We had thought that to claim or find any tax basis in a disregarded “sham”
partnership was an oxymoron. What petitioners actually had, when the dust
cleared, was their cash which they had purported to have invested in the
disregarded “sham” partnership and in which they already had a tax basis equal to
its face value.
                                         -6-

[*6] determined Thompson’s outside basis to be zero”, but that the Court

nevertheless had jurisdiction over the petition).4

      4
        After the Court of Appeals issued its opinion, the Supreme Court decided
another TEFRA case, United States v. Woods, 571 U.S. ___, 134 S. Ct. 557
(2013). In Woods, the District Court in a partnership-level proceeding found that
the subject partnership was a sham, but that the valuation misstatement penalty did
not apply. Woods, 571 U.S. at ___, 134 S. Ct. at 562. The Court of Appeals for
the Fifth Circuit affirmed. Id. To resolve a circuit split, the Supreme Court
granted review as to whether the valuation misstatement penalty applies when a
transaction is disregarded as lacking economic substance. Id. Citing the decisions
in Jade Trading, LLC v. United States, 598 F.3d 1372, 1380 (Fed. Cir. 2010) and
Petaluma FX Partners, LLC v, Commissioner, 591 F.3d 649, 655-656 (D.C. Cir.
2010), aff’g in part, rev’g in part, and remanding 131 T.C. 84 (2008), the Court
also sought briefing on the antecedent question of whether a court in a
partnership-level proceeding has jurisdiction to consider the valuation
misstatement penalty. Id.
        The Supreme Court answered both questions in the affirmative. The Court
held that “TEFRA gives courts in partnership-level proceedings jurisdiction to
determine the applicability of any penalty that could result from an adjustment to a
partnership item, even if imposing the penalty would also require determining
affected or non-partnership items such as outside basis.” Id. at ___, 134 S. Ct. at
564. Where, in a partnership-level proceeding, a court concludes that a
partnership lacks economic substance, that court need not “shut its eyes to the
legal impossibility of any partner’s possessing an outside basis greater than zero”,
such that the gross valuation misstatement penalty will provisionally apply. See
id. at ___, 134 S. Ct. at 565.
        Woods thus confirms that we properly exercised jurisdiction in applying the
valuation misstatement penalty in the partnership-level proceeding here. Before
the penalty can be imposed, Woods cautions, “[e]ach partner’s outside basis still
must be adjusted at the partner level”. Id. But once the court handling the
partnership-level proceeding has concluded that the partnership is a sham, such
that each partner must have a zero outside basis, these partner-level adjustments of
outside basis incident to imposition of the penalty should be merely
computational. See id. at ___, 134 S. Ct. at 565 & n.2.
                                                                        (continued...)
                                         -7-

[*7] The Court of Appeals found that we have jurisdiction to determine Mr.

Thompson’s outside basis in his partnership interest. We need not make such a

determination, however, because the parties have stipulated the deficiency. See

Thompson v. Commissioner, 137 T.C. at 223-224. Our task on remand is,

therefore, limited to entry of a decision formalizing that agreement.5


      4
        (...continued)
       As to whether partner-level adjustments of outside basis incident to a
deficiency determination should also be merely computational, Woods provides no
direct answer. In dicta, however, the Court addresses the amici’s suggestion that
its decision will permit the Internal Revenue Service to directly assess a penalty on
a tax underpayment that cannot itself be assessed without deficiency procedures.
See id. Noting that “an underpayment attributable to an affected item [such as
outside basis] is exempt” from deficiency procedures where partner-level
determinations are unnecessary, the Court observes that “it is not readily apparent
why additional partner-level determinations would be required before adjusting
outside basis in a sham partnership.” Id.
       In the sham partnership at issue here, the Court of Appeals concluded that
such additional determinations were required, and we proceed in accordance with
that mandate.
      5
        Though conditional, this stipulation suggests that the Court of Appeals’
decision and our resulting exercise of jurisdiction will not alter the ultimate
outcome for either party. As our previous Opinion in this case observes, we
presume that respondent deems accurate the deficiency calculation in the
stipulation. Respondent previously assessed, on September 23, 2008, tax of
$4,634,243 and a penalty of $1,853,697.20 plus interest in reliance on our earlier
TEFRA decision in the RJT Invs. X case. Presumably, respondent has abated any
excess deficiency and/or penalty plus excess interest previously assessed to correct
the assessed amounts to the stipulated amounts. In entering into the stipulation,
petitioners conceded their liability in the amount that should have been assessed.
That they did so contingent on a finding that they could properly contest that
                                                                          (continued...)
                                          -8-

[*8] Yet, in their opposition to respondent’s motion for entry of decision,

petitioners raise a new objection. Distilled, their arguments are: (1) TEFRA

permits the IRS to employ deficiency procedures in assessing penalties relating to

partnership items regardless of whether further partner-level determinations are

required; (2) the notice of deficiency issued in this case gave this Court

jurisdiction over the accuracy penalty determined in the notice; and (3) they are

accordingly entitled to adjudication of any partner-level defenses in this

prepayment forum.

      These arguments do not undermine this aspect of our earlier holding, which

the Court of Appeals left undisturbed, see Thompson v. Commissioner, 729 F.3d

at 872 n.3, accepting petitioners’ concession that the penalty issue was resolved in

a final judgment not subject to collateral attack, see Thompson v. Commissioner,

137 T.C. at 238. Our final decision in the partnership-level proceeding applied the

gross valuation misstatement penalty.6 Id. at 237-238. The penalty may be

directly assessed as a computational adjustment, notwithstanding any need for



      5
        (...continued)
liability in this forum suggests that they will suffer little, if any, prejudice from
their inability to contest the deficiency amount in a refund action.
      6
       Woods affirms the propriety of this earlier exercise of jurisdiction and by
extension that of our refusal to exercise jurisdiction here. See supra note 4.
                                        -9-

[*9] partner-level determinations. Id. at 239. Petitioners may raise partner-level

defenses, if any, only in a postpayment refund suit. See sec. 6230(c)(1)(C); sec.

301.6221-1(c), Proced. & Admin. Regs.

      The Court has considered all of petitioners’ and respondent’s contentions,

arguments, requests, and statements. To the extent not discussed herein, we

conclude that they are meritless, moot, or irrelevant.

      To reflect the foregoing,


                                              An appropriate order and decision

                                       will be entered.
