                         T.C. Memo. 2003-308



                       UNITED STATES TAX COURT



     RODNEY J. BLONIEN AND NOREEN E. BLONIEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 2660-00.               Filed November 7, 2003.


     R. Todd Luoma, for petitioners.

     Kathryn K. Vetter and Neal O. Abreu, for respondent.


                   SUPPLEMENTAL MEMORANDUM OPINION


     BEGHE, Judge:   This case has remained before us because

petitioners have objected to respondent’s computations for



________________
     *
      This Supplemental Opinion supplements Blonien v.
Commissioner, 118 T.C. 541 (2002).
                                 - 2 -

entry of decision under Rule 1551 pursuant to our opinion in

Blonien v. Commissioner, 118 T.C. 541 (2002).    In that opinion,

we sustained respondent’s determination that petitioners had a

deficiency in 1992 Federal income tax as a result of the

allocation to Mr. Blonien (petitioner), in a partnership-level

proceeding under TEFRA,2 of a distributive share of cancellation

of debt (COD) income of the bankrupt law firm of Finley, Kumble,

Wagner, Heine, Underberg, Manley, Myerson & Casey (Finley

Kumble).

     The remaining issues are:    (1) Whether respondent used the

proper method to allocate COD income of Finley Kumble to

petitioner, and (2) whether proper adjustments to reduce

petitioner’s taxable income were omitted from respondent’s Rule

155 computations.   We shall enter decision in accordance with

respondent’s computations.

Background

     In Blonien v. Commissioner, supra, petitioners argued that

petitioner never became a partner of Finley Kumble, that the

period of limitations under section 6229 to assess a deficiency


     1
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
year at issue.
     2
      See the partnership unified audit and litigation procedures
enacted by the Tax Equity & Fiscal Responsibility Act of 1982
(TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 648, codified at
secs. 6221 through 6233.
                               - 3 -

relating to partnership items did not apply to him, and that the

statutory period of limitations on assessing nonpartnership items

had expired.

     We held the Court lacks jurisdiction to determine whether

petitioner was not a partner because the Commissioner’s

determination of partnership items can be challenged under TEFRA

only in a   partnership-level proceeding.3   We held petitioner

lacks standing to challenge on due process grounds the

partnership-level determination that he was a partner in Finley

Kumble.   This was particularly true for at least two reasons:

First, on prior years’ returns, petitioner had claimed he was a

partner and the tax benefits derived therefrom; and, second, for

1992, the tax year in issue, he had received a Schedule K-1 (Form

1065), Partner’s Share of Income, Credits, Deductions, Etc., that

he failed to take issue with by notifying respondent that he was

not a partner by filing Form 8082, Notice of Inconsistent

Treatment or Administrative Adjustment Request.    See Blonien v.

Commissioner, supra at 552-557.   Therefore, the period of

limitations under section 6229 for the IRS to assess the


     3
      One might wonder how this case ever came to the Court,
inasmuch as all the issues have been resolved on the ground of
lack of jurisdiction. In our opinion in Blonien v. Commissioner,
supra at 550 n.4, we speculated that respondent might have used
the “affected items” procedure to enable petitioner (and other
Finley Kumble partners) to claim that he need not recognize his
share of Finley Kumble’s COD income to the extent of his own
insolvency. See sec. 108(a)(1)(B). We observed that petitioner
did not claim in his petition that he was insolvent.
                                - 4 -

deficiency did not expire before the affected item deficiency

notice was issued.    Id. at 557.   We concluded that a Rule 155

computation was needed to consider whether a $2,000 credit

petitioners are entitled to for their inclusion of $2,000 of COD

income reported on their 1992 income tax return (the $2,000

credit) and other items reported on petitioner’s 1992 Schedule K-

1 received from Finley Kumble had properly been given effect in

computing the deficiency.    Id. at 558-559, 564.

     As part of respondent’s Rule 155 computation, Form 5278,

Statement-Income Tax Change, states petitioner’s “Adjustment to

Income” for partnership items of Finley Kumble as “Finley Other

Income” of $34,332.   Respondent’s Form 4549-CG, Income Tax

Examination Changes, attached to the statutory notice of

deficiency, recited “Finley Other Income $36,332.”    Respondent’s

computation has given proper effect to the $2,000 of COD income

reported on petitioners’ 1992 return.

     The first page of Finley Kumble’s 1992 Form 1065, U.S.

Partnership Return of Income, at line 7, Other income (loss),

referenced “SEE STATEMENT 1”, which was a Form 8275, Disclosure

Statement, containing an Item 2 “CANCELLATION OF INDEBTEDNESS

$55,777,452”.   Petitioner’s 1992 Schedule K-1 indicated he had a

0.0170-percent interest in Finley Kumble’s profits and losses,

and a 0.0345-percent interest in capital.    The Schedule K-1 also

indicated that petitioner had a yearend negative capital account.
                               - 5 -

Petitioners’ Federal income tax return for 1987, the only year

petitioner did legal work for Finley Kumble clients, reported a

distributive share of partnership income that was substantially

exceeded by the partnership draws he actually received from

Finley Kumble during that year.   Finley Kumble announced its

dissolution late in 1987 and was declared bankrupt early the next

year without petitioner’s having made any capital contribution to

the firm.

     Respondent has explained that under the closing agreement

between the IRS and the Finley Kumble bankruptcy trustee that

concluded the Finley Kumble partnership-level TEFRA proceeding,

COD income was allocated to petitioner and all other partners

using a two-step process.   After taking into account the capital

contribution of $15,000 that petitioner was required to make in

the Finley Kumble bankruptcy proceeding, over 10 years, with

interest at 10 percent, including the present value of the future

interest payments on the deferred installments thereof,

petitioner still had a negative capital account of $26,099.     In

the first step of the COD income allocation, petitioner was

allocated $26,099 of COD income to reduce his negative capital

account to zero.   Finley Kumble’s remaining COD income, after

accounting for step-one COD income allocations to petitioner and

other partners with negative capital accounts, was $26,580,484.

In the second step, Finley Kumble allocated the remaining COD
                               - 6 -

income among the partners in proportion to their contributions to

the partnership under the bankruptcy plan.   The total

contribution by all partners was $38,962,594.   Petitioner’s

second COD income allocation of $10,233 was calculated by

dividing his $15,000 contribution by the total of all partner

contributions, $38,962,594, and then multiplying the result by

the remaining COD income, $26,580,484 (15,000/38,962,594 = .03849

percent x $26,580,484).4

     In order to explain fully the two-step process, respondent

attached to his response to petitioners’ objection to his

computation a spreadsheet titled “IRS Closing Agreement” that

reflects the computation of the COD income allocation to

petitioner using the two-step process described above.   Neither

party introduced the closing agreement or the spreadsheet into

evidence during the trial of the case.

     The following adjustments (the adjustment items) to

petitioners’ income listed on respondent’s Form 4549A-CG, Income

Tax Examination Changes, reduce petitioners’ taxable income by

$1,199:   (1) Capital loss of $18, (2) Finley Kumble interest




     4
      The computation shows the second allocation amount is
$10,231, which is $2 less than the $10,233 allocation claimed by
respondent. The discrepancy could be caused by mistakes in
amounts recited in respondent’s response. This computational
discrepancy is minimal and harmless and does not change our
decision.
                                  - 7 -

income of $127, (3) Finley Kumble ordinary loss of $1,251, and

(4) itemized deductions of $57.

Discussion

     Petitioners and respondent provide the following alternative

computations of petitioners’ additional taxable income:

              Petitioners’ Computation    Respondent’s Computation
              Additional Taxable Income   Additional Taxable Income

COD income          $9,482.17                   $36,332
$2,000 credit       (2,000.00)                   (2,000)
Finley Kumble
  interest income      127.00              Already accounted for
Capital loss           (18.00)             Already accounted for
Finley Kumble
  ordinary loss     (1,251.00)             Already accounted for
Itemized deductions    (57.00)             Already accounted for

     Total:            6,283.17                 34,332

     Petitioners argue the two-step process described above was

not the proper method to compute and allocate COD income to

petitioner.   They complain that the two-step process resulted in

an allocation of COD income to petitioner that substantially

exceeds his percentage interest in profits and losses as shown by

his Schedule K-1 for 1992, the taxable year in issue.

Petitioners also argue respondent’s Rule 155 computation did not

take the adjustment items into account.

Issue 1.   Whether the Proper Method Was Used To Compute
           and Allocate Finley Kumble COD Income to Petitioner

     Petitioners argue that, in accordance with Finley Kumble’s

1992 Form 1065 and Schedule K-1, petitioner’s increased

distributive share of Finley Kumble’s COD income should be
                                 - 8 -

$7,482.17 (Finley Kumble’s total COD income of $55,777,452,

multiplied by petitioner’s 0.0170-percent interest in Finley

Kumble’s profits and losses, minus the $2,000 credit for the COD

income actually reported by petitioners on their return).

      Respondent argues the Court lacks jurisdiction to review

the allocation of COD income to petitioner because such

allocation is a partnership item that could only have been raised

in the prior TEFRA proceeding.    Respondent also argues

petitioners are raising new issues in the Rule 155 computation.

     We hold, pursuant to our opinion in Blonien v. Commissioner,

118 T.C. 541 (2002), that the Court does not have jurisdiction to

consider the proper methodology to allocate Finley Kumble COD

income to petitioner because such allocation is a partnership-

level item that was determined in the partnership-level TEFRA

proceeding.   Moreover, petitioners’ objection to respondent’s

computation is an attempt to raise a new issue we would not

address at this stage of the proceedings even if we did have

jurisdiction.

     a. Jurisdiction To Review Method Used To Compute
     and Allocate COD Income

     We agree with respondent that we have no jurisdiction to

consider the allocation of COD income to petitioner because such

allocation is a partnership item.    We have no jurisdiction to

consider partnership items in a partnership-level deficiency
                                 - 9 -

proceeding.    Id. at 550-552; GAF Corp. v. Commissioner, 114 T.C.

519 (2000); Maxwell v. Commissioner, 87 T.C. 783 (1986).

     Items determined at the partnership level include the amount

of, and each partner’s distributive share of, partnership items

of income.     Dakotah Hills Offices Ltd. Pship. v. Commissioner,

T.C. Memo. 1996-35; sec. 301.6231(a)(3)-1(a)(1), (4), Proced. &

Admin. Regs.

     The amount of Finley Kumble’s COD income and each partner’s

share of such COD income are partnership items.    See sec.

301.6231(a)(3)-1(a)(1), Proced. & Admin. Regs.    The first and

second steps of respondent’s allocations to petitioner of his

distributive share of COD income are items determined at the

partnership level.

     The decision on the method of allocating partnership income

is a partnership-level determination.    The allocation and

computation of COD income to petitioner under the two-step

process must be and was determined at the partnership level

because it affects the allocation of the remaining COD income to

all the other partners.

     We do not have jurisdiction to review the method used to

compute and allocate Finley Kumble COD income to petitioner.

     b.   New Issue in a Rule 155 Proceeding

     Generally, new issues may not be raised in a Rule 155

proceeding.    Rule 155(c); Harris v. Commissioner, 99 T.C. 121,
                              - 10 -

123 (1992); Gladstone v. Commissioner, T.C. Memo. 1992-10.        That

is because, as relevant here, the record would have to be

reopened in order to permit petitioners to introduce the

spreadsheet into evidence to establish a discrepancy between

petitioners’ and respondent’s computations of petitioner’s Finley

Kumble COD income.   See Harris v. Commissioner, supra at 124;

Cloes v. Commissioner, 79 T.C. 933, 937 (1982).     Issues

considered in a Rule 155 proceeding are limited to “purely

mathematically generated computational items”.     The Home Group,

Inc. v. Commissioner, 91 T.C. 265, 269 (1988), affd. on another

issue 875 F.2d 377 (2d Cir. 1989).     Petitioners do not claim

there is a mathematical error or that the formula resulting from

application of the two-step process was improperly applied;

rather they argue the two-step process was not the proper method

to allocate COD income.

     The notice of deficiency, notice of final partnership

administrative adjustment, and petitioner’s Schedule K-1 gave

petitioners notice of the amount of COD income allocated to

petitioner.   Petitioners did not provide any reasons why they

failed to raise this issue prior to the Rule 155 computation.       We

did not find or hold in our prior opinion that petitioner’s

.0170-percent profits or capital interest should or did determine

the amount of COD income that should be allocated to petitioner.
                              - 11 -

     Because the resolution of the issue of the proper method

used to allocate COD income is a matter that would require the

Court to consider new evidence, i.e., the terms of the closing

agreement and spreadsheet, not presented at the original

proceeding, we would not consider the issue at the Rule 155

proceeding.   See Bankers Pocahontas Coal Co. v. Burnet, 287 U.S.

308, 313 (1932) (prohibiting taxpayer from raising new issue in

postdecision tax deficiency proceeding:   “It is not shown that

the evidence tendered was not available to the petitioner in

ample time to present it before the Board had made and filed its

findings of fact and opinion.”); Paccar, Inc. v. Commissioner,

849 F.2d 393, 400 (9th Cir. 1988) (“a further trial is exactly

what is not permitted under Rule 155”), affg. 85 T.C. 754 (1985);

Cloes v. Commissioner, supra at 937.

Issue 2.   Whether Downward Adjustments to Petitioners’ Income
           Listed in Respondent’s Form 4549A-CG Were Omitted From
           Respondent’s Rule 155 Computation

     Petitioners argue the adjustment items were not reflected in

respondent’s Rule 155 computation.

     Respondent took the adjustment items into consideration in

his Rule 155 computation.   In issuing the notice of deficiency,

respondent reduced petitioners’ taxable income by $1,199 from

$254,590 reported on petitioners’ 1992 return to $253,391 to take

the adjustments items into account.
                              - 12 -

     Having sustained respondent’s determinations and

computations without having reached the merits of petitioners’

arguments and objections, we make some final observations.    We

make these observations to allay any impression--which

petitioners have tried to create, in arguing their case and in

contesting respondent’s Rule 155 computations--that petitioner

has been treated unfairly in the TEFRA proceeding and in this

proceeding.

     In making these observations, we do not intend to belittle

the economic insecurity and resulting aggravation and anxiety

that petitioner experienced in having been induced to join a law

firm that was about to go under.   But these are matters for which

the tax law provides no redress; we still would have sustained

respondent’s determination and adopted respondent’s computations,

even if we had been able to rule on the merits of petitioner’s

arguments and objections.

     In 1987, the year Finley Kumble announced its dissolution,

petitioner received cash distributions, in the form of

partnership draws, that substantially exceeded his share of

partnership profits.   As a result, petitioner had a negative

capital account at the end of 1987 that could only go more

negative in the intervening years until 1992, the taxable year in

issue.   In that year, petitioner agreed with the Finley Kumble

bankruptcy trustee to make a $15,000 capital contribution with
                              - 13 -

interest over 10 years, which still left him with a negative

capital account.

     As a general rule, absent an agreement to the contrary, a

partner will be liable to a partnership to the extent of such

partner’s negative capital account balance upon dissolution of

the partnership.   See sec. 1.704-1(b)(2)(ii)(b)(3), (c), Income

Tax Regs.

     For tax and accounting purposes, Finley Kumble first

allocated COD income to petitioner and other partners to reduce

their negative capital accounts and then allocated the remaining

COD income to petitioner and all other partners in proportion to

their contributions to the partnership under the bankruptcy plan.

The restoration of the balance of petitioner’s negative capital

account was accomplished by the first-step allocation of the

partnership’s COD income resulting from the discharge of its

debts in the bankruptcy proceeding; the second-step allocation

allocated the remaining COD income to petitioner and the other

partners in proportion to their capital contributions.

     All in all, the partnership-level TEFRA proceeding seems to

have led to a sensible tax result insofar as petitioner is

concerned.   In 1987, petitioner realized tax benefits from Finley

Kumble in the form of losses that reduced his distributive share

of partnership income to less than his actual distributions

received, which was a contributing factor in causing his capital
                              - 14 -

account to go negative.   The determinations in the partnership-

level TEFRA proceeding--to which we are bound to give effect--

have resulted in the recapture of those tax benefits and also

take into account the current economic benefit petitioner

realized as a partner in 1992 from the discharge of his share of

the remaining liability to the firm’s creditors.   What goes

around comes around.

     To reflect the foregoing,

                                        Decision will be entered

                                   in accordance with respondent’s

                                   computations.
