                  T.C. Memo. 2002-64



                UNITED STATES TAX COURT



  BARRY GUSTIN AND CAROLINA GUSTIN, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5192-01.               Filed March 7, 2002.


     R disallowed certain losses claimed by Ps from
various partnerships in tax years 1997, 1998, and 1999.
R determined that P-H’s basis in each of the
partnerships was limited to P-H’s cash contributions,
which did not include P-H’s contributions of
subscription notes. R applied sec. 704(d), I.R.C., and
disallowed losses which exceeded P-H’s adjusted bases
in the partnerships.

     The partnerships involved are subject to the
unified partnership procedures contained in secs. 6221-
6234, I.R.C. R has begun a partnership-level
examination of two partnerships for which Ps claimed
losses in 1998 and 1999. However, R did not initiate a
partnership-level examination of the partnership for
which Ps claimed a loss in 1997. The normal period of
limitations for making partnership-level adjustments
regarding 1997 expired, and R agrees that he is bound
by the partnership’s treatment of partnership items.
                               - 2 -

          Ps filed a motion to dismiss for lack of
     jurisdiction. Ps argue that a notice of deficiency
     which adjusts items affected by partnership items is
     invalid if it is issued before the completion of
     partnership-level proceedings. R concedes that we lack
     jurisdiction over the 1998 and 1999 taxable years. See
     Maxwell v. Commissioner, 87 T.C. 783 (1986).

          Held: The Tax Court has jurisdiction to
     redetermine the deficiency for 1997. Partnership-level
     proceedings were not initiated, a notice of final
     partnership administrative adjustment was not issued by
     R, and the 3-year period of limitations for assessment
     under sec. 6229(a), I.R.C., expired. R acknowledges
     that he cannot pursue a deficiency based on
     partnership-level adjustments for tax year 1997. As a
     result, the parties must accept the partnership-level
     treatment of partnership items. Roberts v.
     Commissioner, 94 T.C. 853 (1990). However, P-H’s basis
     in the partnership, while affected by partnership
     items, is not itself a partnership item. See Dial USA,
     Inc. v. Commissioner, 95 T.C. 1 (1990).


     Donald L. Feurzeig, for petitioners.

     G. Michelle Ferreira, for respondent.



                        MEMORANDUM OPINION


     RUWE, Judge:   The matter before the Court is petitioners’

motion to dismiss for lack of jurisdiction under Rule 53.1

Respondent determined deficiencies with respect to petitioners’

Federal income taxes for 1997, 1998, and 1999.   Those

deficiencies were based on respondent’s determination that


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code applicable to the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

petitioners’ deductions of partnership losses were limited to

petitioners’ bases in the partnerships.   On the basis of our

opinion in Maxwell v. Commissioner, 87 T.C. 783 (1986),

respondent concedes that we lack jurisdiction over petitioners’

1998 and 1999 tax years because ongoing partnership-level

proceedings, see secs. 6221-6234, have not been completed with

respect to partnerships that gave rise to deficiencies for those

years.   The issue remaining for decision is whether we have

jurisdiction to redetermine a deficiency for petitioners’ 1997

tax year.   Petitioners resided in Berkeley, California, at the

time they filed their petition.

     In 1997, Mr. Gustin invested in a partnership called Annona

Venture (Annona).   He made a cash contribution of $50,000 and

also contributed a recourse subscription note of $157,800.     Mr.

Gustin was a general partner in Annona.

     The 1997 partnership return filed by Annona included a

Schedule K-1, Partner’s Share of Income, Credits, Deductions,

etc., which reported items relating to Mr. Gustin.   Line F of the

Schedule K-1 entitled “Partner’s share of liabilities” contains

no entry.   Line J entitled “Analysis of partner’s capital

account” shows “Capital contributed during year” by Mr. Gustin of

$193,800.   The Schedule K-1 shows Mr. Gustin’s share of losses as

$189,138.   Petitioners deducted that amount on their Form 1040,

U.S. Individual Income Tax Return, for 1997.
                                 - 4 -

     On March 1, 2001, respondent issued a notice of deficiency

to petitioners for their 1997 tax year.     Respondent determined

that Mr. Gustin’s adjusted basis in Annona was $36,000 and

disallowed loss deductions from Annona that were claimed on

petitioners’ Form 1040 to the extent those deductions exceeded

$36,000.    See sec. 704(d).   The section 6229(a) period of

limitations for making adjustments to Annona partnership items

expired on April 15, 2001, after the notice of deficiency was

issued.    Petitioners filed their petition on April 19, 2001.

     Annona was subject to the unified partnership procedures of

sections 6221-6234, but respondent did not conduct a partnership-

level examination of Annona’s 1997 partnership return.

Respondent acknowledges that a notice of final partnership

administrative adjustment (FPAA) will not be issued for Annona

and that there will be no adjustments to any partnership items of

Annona for 1997.

     The unified partnership procedures were added to the Code as

part of the Tax Equity and Fiscal Responsibility Act of 1982,

Pub. L. 97-248, sec. 401(a), 96 Stat. 648.2    Under those

procedures, the tax treatment of items of partnership income,

loss, deductions, and credits is determined in partnership-level

proceedings rather than in separate proceedings involving the

     2
      The unified partnership procedures have been amended since
their effective date of Sept. 3, 1982, and those procedures are
now contained in secs. 6221 through 6234.
                               - 5 -

partners.   Sec. 6221; H. Conf. Rept. 97-760, at 599 (1982), 1982-

2 C.B. 600, 662.3   Under section 6223(a), the Secretary shall

mail to each partner notice of the beginning of an administrative

proceeding at the partnership level, as well as an FPAA resulting

from any such proceeding.   A tax matters partner may, within 90

days after the date the FPAA is mailed, file a petition for the

readjustment of partnership items with the Tax Court, a District

Court, or the Claims Court.   Sec. 6226(a).   If a petition is

filed, the court has jurisdiction over all partnership items for

the year to which the FPAA relates, as well as the proper

allocation of those items among the partners.    Sec. 6226(f).

     Petitioners argue that we lack jurisdiction over the

deficiency in this case, because an FPAA has not been issued and

a partnership-level proceeding has not been completed for

Annona’s 1997 tax year.   Petitioners claim that the notice of

deficiency is invalid and that we cannot review, as part of our

normal deficiency procedures, adjustments respondent made to Mr.

Gustin’s basis in Annona nor respondent’s disallowance of losses


     3
      See Roberts v. Commissioner, 94 T.C. 853, 859-860 (1990):

     The purpose behind the enactment of section 6221 et
     seq. was to have one proceeding to determine all of the
     partnerships items with respect to a partnership. All
     of the partners would be eligible participants in such
     a proceeding, and the results of that proceeding would
     then be automatically applied to each of the partner’s
     returns without the necessity of further deficiency
     procedures.
                                 - 6 -

under section 704(d).    Respondent argues that a partnership-level

proceeding was not required to determine Mr. Gustin’s basis and

to apply the loss limitations.    Respondent states that he does

not intend to issue an FPAA, that he can no longer make

adjustments to partnership items for Annona’s 1997 tax year, that

he accepts the partnership’s treatment of partnership items, and

that partnership-level proceedings are completed when he accepts

the partnership’s treatment of partnership items without

adjustment.

     The instant case is similar to Roberts v. Commissioner, 94

T.C. 853 (1990).   In Roberts, the Commissioner did not commence a

partnership-level examination, did not issue an FPAA, and did not

otherwise seek to adjust the partnership items reported on the

partnerships’ returns.    The notice of deficiency was issued on

April 9, 1987, disallowing partnership losses claimed by the

taxpayers because of alleged stop-loss agreements with third

parties.   See sec. 465(b)(4).   On April 15, 1987, the period of

limitations for assessing a tax attributable to any partnership

item under section 6229(a) expired.      On July 6, 1987, the

taxpayers filed their petition and then filed a motion to dismiss

for lack of jurisdiction.

     In Roberts v. Commissioner, supra at 861-862, we held that

side agreements for purposes of the section 465 at-risk
                               - 7 -

provisions were not partnership items4 but were affected items.5

We observed that determination of affected items must await “the

outcome of the partnership proceeding” but held that we had

jurisdiction in that case, stating:

          However, the “outcome of the partnership
     proceeding” may be acceptance of the partnership return
     as filed as a result of the fact that there was no
     partnership proceeding and there can no longer be a
     partnership proceeding under the normal statute of
     limitations. We do not read section 6230(a)(2)(A)(i)
     to mean that a partnership proceeding must be opened
     and closed in order for there to be a determination
     with regard to an affected item. We also find no
     requirement in the statute or regulations that
     prohibits affected items from being considered in a
     proceeding involving a personal tax case, providing
     subject matter jurisdiction exists. [Id. at 860-861.]

     Petitioners direct us to our more recent opinion in Katz v.

Commissioner, 116 T.C. 5, 8-9 (2001), in which we stated:


     4
      See sec. 6231(a)(3), which provides:

          SEC. 6231(a).   Definitions.--For purposes of this
     subchapter--

               *    *     *    *       *   *   *

               (3) Partnership item.--The term “partnership
          item” means, with respect to a partnership, 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.
     5
      See sec. 6231(a)(5), which provides: “The term ‘affected
item’ means any item to the extent such item is affected by a
partnership item.”
                              - 8 -

     a notice of deficiency issued prior to the completion
     of the partnership-level proceeding is invalid to the
     extent it relates to a partnership item or an affected
     item.

          No FPAA was issued by respondent and no
     partnership-level proceedings have been commenced
     regarding the prepetition partnership losses in the
     present case. Accordingly, if the NOL carryovers at
     issue constitute affected items as petitioners contend,
     we must grant the motion to dismiss on the basis that
     the notice of deficiency is invalid as it relates to
     those items. * * * [Citation omitted.]

The language cited by petitioners was unnecessary for the

disposition of that case and should be viewed in its context.    In

Katz v. Commissioner, supra at 10, we stated the issue as

follows:

     whether the manner in which partnership items are
     allocated between a partner in bankruptcy and the
     partner’s bankruptcy estate is a determination which,
     pursuant to the TEFRA procedures, must be made at the
     partnership level. We therefore shall determine our
     jurisdiction based on the resolution of this latter
     issue.

We held:

     The manner in which the distributive share of a partner
     in bankruptcy is allocated between the partner and the
     bankruptcy estate is not a “partnership item” under
     sec. 6231(a)(3), I.R.C. Accordingly, such allocation
     need not be resolved in a partnership-level proceeding
     pursuant to the uniform audit and litigation procedures
     of secs. 6221-6234, I.R.C. * * * [Id. at 5.]

Our holding in Katz did not depend on the status of the NOL

carryover as an “affected item”, and we did not make a

determination that the NOL carryovers were not affected items.

However, since the Commissioner was not challenging the
                               - 9 -

allocation of partnership-level losses among partners, i.e., a

partnership item, but was instead challenging the suballocation

of that item between a partner and his bankruptcy estate, i.e.,

an affected item, it follows that we exercised jurisdiction to

redetermine a deficiency attributable to an affected item, even

though an FPAA had not been issued and partnership-level

proceedings were not initiated.   Therefore, the jurisdictional

holding in Katz supports rather than contradicts the position

taken by this Court in Roberts v. Commissioner, supra.

     In GAF Corp. & Subs. v. Commissioner, 114 T.C. 519, 528

(2000), we granted the taxpayer’s motion to dismiss for lack of

jurisdiction.   We concluded that a notice of deficiency is

invalid where it is based on affected items and is issued before

the completion of the related partnership-level proceedings.      In

that case, an FPAA was issued which proposed partnership

adjustments, and a partnership-level proceeding had been

initiated and was pending in the Tax Court.   A notice of

deficiency was issued on the same date as the FPAA, see Rhone-

Poulenc Surfactants v. Commissioner, 114 T.C. 533, 536 (2000),

and before the partnership-level proceedings were completed.
                              - 10 -

     In the instant case, an FPAA was not issued and partnership-

level proceedings were not initiated.    Respondent has not

proposed any adjustments to partnership items and agrees that he

is bound by the partnership’s determinations of partnership

items.   Under those circumstances, the outcome at the partnership

level is acceptance of the partnership’s treatment of its

partnership items, and a notice of deficiency regarding affected

items can be the basis for our jurisdiction.    See Roberts v.

Commissioner, 94 T.C. 853 (1990).

     The seminal case in this area is Maxwell v. Commissioner, 87

T.C. 783 (1986).   In Maxwell, the potential for a duplication of

procedures prompted this Court to limit our jurisdiction over the

deficiencies relating to affected items:    “Affected items depend

on partnership level determinations, cannot be tried as part of

the personal tax case, and must await the outcome of the

partnership proceeding.”   Id. at 792.   We have previously

considered this language and have appropriately declined to

afford it an interpretation that is broader than what was

required for the disposition of the jurisdictional issue in that

case:

          Petitioners rely on our statement in Maxwell that
     “Affected items depend on partnership level
     determinations, [and] cannot be tried as part of the
     personal tax case, and must await the outcome of a
     partnership proceeding.” Maxwell v. Commissioner,
     supra at 792. Petitioners have taken that statement
     out of context. In Maxwell, respondent had determined
     deficiencies and additions to tax by disallowing
                              - 11 -

     certain claimed partnership losses. At the time of the
     issuance of the notice of deficiency, however, a
     partnership proceeding had been commenced, but no FPAA
     had as yet been issued. Under those circumstances, the
     additions to tax were affected items and had to await
     the outcome of the partnership proceeding. They could
     not be determined as part of the personal income tax
     case. [Roberts v. Commissioner, supra at 860.]

Thus, Maxwell is distinguishable from this case because here

there are no partnership-level proceedings underway, and

respondent has accepted the partnership’s treatment of

partnership items.

     In Jenkins v. Commissioner, 102 T.C. 550, 553 (1994), we

stated:

    Generally, respondent is prohibited from assessing a
    deficiency regarding a partnership item without first
    attempting to adjust the item in a partnership level
    proceeding and issuing a notice of final partnership
    administrative adjustment (FPAA). Sec. 6225(a). Once
    the partnership level proceeding is complete, or if no
    partnership level proceeding is necessary, then a
    partner’s individual income tax for the related tax
    period can be affected by the partnership item which
    was reported and/or adjusted at the partnership level.
    * * * [Emphasis added.]

We decided that partnership-level proceedings were not required

because the Commissioner was “not questioning the treatment of

the partnership item at the partnership level”, and because the

deficiency related to an affected item reported on the taxpayers’

return which is within the subject matter jurisdiction of this

Court in a partner’s deficiency proceeding.   Id. at 556.    We also

observed:   “Respondent * * * may accept the partnership’s

characterization of the item and only question the position of a
                               - 12 -

partner, without the superfluous step of conducting a partnership

proceeding”.   Id. at 557.

     A partner’s basis in his partnership interest is an affected

item.   Sec. 301.6231(a)(5)-1T(b), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987).    Our normal deficiency

procedures apply to “any deficiency attributable to * * *

affected items which require partner level determinations”.     Sec.

6230(a)(2)(A)(i).    Since a partner’s basis in a partnership

interest may require determinations at the partner level,

deficiencies attributable to adjustments to basis must be made at

the partner level.    See Dial USA, Inc. v. Commissioner, 95 T.C.

1, 5-6 (1990).

     In the notice of deficiency, respondent determined:      “Since

your distributive share of the partnership loss is limited to the

extent of your adjusted basis, we have disallowed the amount in

excess of your basis [$36,000], as shown.”    Respondent’s

determination is based on an adjustment to Mr. Gustin’s basis in

his partnership interest, an affected item.    Mr. Gustin’s

partnership loss is affected by partnership items; however, basis

is not itself a partnership item and can be the appropriate

subject of deficiency proceedings.

     In this case, respondent acknowledges that he cannot make an

adjustment to a partnership item, and he accepts the partnership

return as filed.    The treatment of partnership items on Annona’s
                              - 13 -

1997 partnership return is final and binding on both respondent

and petitioners.   However, that does not present itself as a

jurisdictional issue where, as here, the only adjustments stated

are to affected items.6

     We hold that the notice of deficiency based on affected

items is valid where an administrative partnership-level

proceeding has not been initiated and respondent is bound by the

partnership’s treatment of partnership items.    We hold that we

have jurisdiction to redetermine the deficiency for petitioners’

1997 tax year.


                                                An appropriate order

                                         will be issued.




     6
      Petitioners contend that the determination of basis will
require an examination of Annona’s books and records and that
this involves a determination of partnership items, which
requires partnership-level proceedings. We rejected the same
argument in Roberts v. Commissioner, 94 T.C. at 862, stating:

     Nothing in the TEFRA partnership provisions indicates
     that we cannot analyze documents and records at the
     partnership level in a deficiency proceeding. We lack
     jurisdiction only to redetermine partnership items that
     the partnership was required to take into account at
     the partnership level. Sec. 6231(a)(3). In the
     absence of a partnership proceeding, those matters are
     considered final at the partnership level. * * *
     [Emphasis added; fn. ref. omitted.]
