                        T.C. Memo. 1996-72



                      UNITED STATES TAX COURT



MESERVE DRILLING PARTNERS, REGIONAL RESOURCES, INC., F.K.A. R & R
        ENERGY, INC., TAX MATTERS PARTNER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

COLUMBIA ENERGY FUND 1982, REGIONAL RESOURCES, INC., F.K.A. R & R
         ENERGY, INC., TAX MATTERS PARTNER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 19262-86, 19904-86.     Filed February 21, 1996.


     Robert B. Martin, Jr., for petitioner.


     Jack H. Klinghoffer, for respondent.


                        MEMORANDUM OPINION

     DAWSON, Judge:   These cases were assigned to Special Trial

Judge Larry L. Nameroff pursuant to section 7443A(b)(4) of the

Code and Rules 180, 181, and 183.1   The Court agrees with and

     1
          All section references are to the Internal Revenue Code
in effect for the years in issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                               - 2 -

adopts the opinion of the Special Trial Judge, which is set forth

below.

                OPINION OF THE SPECIAL TRIAL JUDGE

     NAMEROFF, Special Trial Judge:    These cases are before us on

motion by petitioner to dismiss for lack of jurisdiction on the

ground that the Final Partnership Administrative Adjustments

(FPAA) are invalid.   Petitioner herein is the Tax Matters Partner

(TMP) of two partnerships, Meserve Drilling Partners and Columbia

Energy Fund 1982.   The principal place of business of each

partnership when the petitions for readjustment of partnership

items were filed was in Newport Beach, California.

     These two cases were part of a group consisting of 14 cases

that were consolidated for purposes of trial, briefing, and

opinion in   Osterhout v. Commissioner, T.C. Memo. 1993-251, affd.

in part, revd. in part without published opinion sub nom. Balboa

Energy Fund 1981 v. Commissioner,        F.3d      (9th Cir., Jan.

19, 1996).   According to that opinion, decisions were to be

entered under Rule 155.   In each of the two cases now before us,

respondent filed a computation under Rule 155, and petitioner

thereafter filed a motion to dismiss, together with a statement

that petitioner had no objection to entry of decision pursuant to

respondent's computation if the Court denied the motion to

dismiss.

     On March 18, 1986, respondent issued FPAA's in which she

determined adjustments to partnership items as follows:
                                - 3 -


                    MESERVE DRILLING PARTNERS
          Year         Adjustment to Ordinary Income
          1982            $1,228,560
          1983               171,721



                    COLUMBIA ENERGY FUND 1982
          Year         Adjustment to Ordinary Income
          1982            $3,176,180
          1983             1,059,673

     In the motions to dismiss, petitioner claims that the FPAA's

are invalid because they did not make determinations as to

"partnership items" on the dates they were issued and therefore

cannot confer jurisdiction on this Court.   According to

petitioner's argument, the regulations defining "partnership

items" were adopted on April 15, 1986, whereas the FPAA's were

mailed on March 18, 1986.   Thus, petitioner argues that because

no regulations existed when the FPAA's were mailed, pursuant to

section 6231(a)(4), all items are "nonpartnership items".    In

addition, petitioner argues that the regulation defining

"partnership items" should not be used to retroactively confer

jurisdiction on this Court.   Respondent asserts that the FPAA

validly confers jurisdiction on the Court and that jurisdiction

can be conferred by the retroactive application of the regulation

defining "partnership items".

Discussion

     The question of jurisdiction is a fundamental question that

can be raised at any time by either party or by the Court.
                                 - 4 -

Naftel v. Commissioner, 85 T.C. 527, 530 (1985); Estate of Young

v. Commissioner, 81 T.C. 879, 880-881 (1983).       Moreover, we have

jurisdiction to determine whether we have jurisdiction.       Pyo v.

Commissioner, 83 T.C. 626, 632 (1984); Kluger v. Commissioner, 83

T.C. 309, 314 (1984).

     In a partnership action for readjustment of partnership

items, this Court has jurisdiction when the Commissioner has

mailed a valid FPAA and the tax matters partner or other eligible

partner has timely filed a petition with the Court seeking a

readjustment of partnership items.       Sec. 6226; Rule 240(c).   If

the FPAA is not valid, we lack subject matter jurisdiction.

Clovis I v. Commissioner, 88 T.C. 980 (1987); Maxwell v.

Commissioner, 87 T.C. 783, 788-789 (1986).

At a minimum, the FPAA must give notice to the taxpayer that the

Commissioner has finally determined adjustments to the

partnership return.     Chomp Associates v. Commissioner, 91 T.C.

1069, 1073-1074 (1988); Clovis I v. Commissioner, supra at 982.

     Petitioner's argument as to jurisdiction turns on section

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

"partnership items".    The unified audit and litigation procedures

applicable to partnership items, which are found in sections

6221-6233, were enacted as part of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 401(a),

96 Stat. 648, and are effective for partnership taxable years

commencing after September 3, 1982.       The TEFRA partnership
                               - 5 -

provisions were enacted partly in response to the administrative

problems experienced by the Internal Revenue Service in auditing

returns of partnerships, particularly tax shelter partnerships

with numerous partners.   Staff of Joint Comm. on Taxation,

General Explanation of the Revenue Provisions of the Tax Equity

and Fiscal Responsibility Act of 1982, at 268 (J. Comm. Print

1982).   As we stated in an earlier case interpreting the TEFRA

partnership provisions:

          By enacting the partnership and audit litigation
     procedures, Congress provided a method for uniformly
     adjusting items of partnership income, loss, deduction,
     or credit that affect each partner. Congress decided
     that no longer would a partner's tax liability be
     determined uniquely but "the tax treatment of any
     partnership item [would] be determined at the
     partnership level." Sec. 6221. [Maxwell v.
     Commissioner, 87 T.C. 783, 787 (1986); alteration in
     original.]

     Section 6221 provides that the tax treatment of partnership

items shall be determined at the partnership level, except as

otherwise provided in subchapter C of chapter 63 of the Code.

Section 6231(a)(3) provides that a "partnership item" means any

item required to be taken into account for the partnership's

taxable year under any provision of subtitle A of the Code to the

extent prescribed by the regulations as an item that "is more

appropriately determined at the partnership level than at the

partner level."   Section 6231(a)(4) defines "nonpartnership

items" as those items that are not partnership items.
                                  - 6 -

      The regulations defining "partnership items" were first

proposed in the Federal Register on January 14, 1983.       The

proposed regulations gave public notice of the Treasury's intent

to make the regulations effective with respect to partnership

years beginning after September 3, 1982, the date TEFRA was

enacted.   Sec. 1.6231(c), Proposed Proced. & Admin. Regs., 48

Fed. Reg. 1760 (Jan. 14, 1983).     The proposed regulations

enumerated items of income, loss, deduction, or credit to be

treated as more appropriately determined at the partnership level

than at the partner level, and, therefore, as partnership items.

Id.   The regulations became final, without substantial change, on

April 15, 1986.   51 Fed. Reg. 13212 (Apr. 18, 1986).      Section

301.6231(a)(3)-1(d), Proced. & Admin. Regs., states:       "This

section shall apply with respect to partnership taxable years

beginning after September 3, 1982."       These regulations were

issued pursuant to the authority of sections 7805(b), 6230(k),

and 6231(a)(3).

      Section 7805(b) provides:

      SEC. 7805(b). RETROACTIVITY OF REGULATIONS OR
      RULINGS.--The Secretary may prescribe the extent, if
      any, to which any ruling or regulation, relating to the
      internal revenue laws, shall be applied without
      retroactive effect.

The Code thus contemplates that a regulation is to operate

retroactively except to the extent that the Commissioner provides

that it shall be applied without retroactive effect.       Butka v.
                               - 7 -

Commissioner, 91 T.C. 110, 128 (1988), affd. without published

opinion 886 F.2d 442 (D.C. Cir. 1989).

     In the cases before the Court, the Commissioner exercised

her discretion by providing that the regulations defining

"partnership items" would be effective for partnership taxable

years ending after September 3, 1982, coinciding with the

effective date of TEFRA.

     In general, the retroactive application of an income tax

regulation has been reviewed for abuse of discretion.   Automobile

Club of Michigan v. Commissioner, 353 U.S. 180, 184 (1957);

Wendland v. Commissioner, 739 F.2d 580, 581 (11th Cir. 1984),

affg. 79 T.C. 355 (1982); Redhouse v. Commissioner, 728 F.2d

1249, 1251 (9th Cir. 1984), affg. Wendland v. Commissioner, 79

T.C. 355 (1982).   However, we do not find that the Treasury

committed an abuse of discretion with respect to the effective

date of the regulations in question here.

     Petitioner's reliance on Eastern States Casualty Agency v.

Commissioner, 96 T.C. 773 (1991), is misplaced.   In that case the

Commissioner issued a final S corporation administrative

adjustment (FSAA) to the tax matters person of Eastern States for

the taxable year 1984.   Eastern States had only 4 shareholders

and contended that the FSAA procedure did not apply because the

Commissioner had issued section 301.6241-1T(c)(2)(i), Temporary

Proced. & Admin Regs., 52 Fed. Reg. 3003 (January 30, 1987),

which provided that a corporation with five or fewer shareholders
                                - 8 -

was not subject to the FSAA procedure.    However, we noted that

the temporary regulation by its terms was applicable to a taxable

year of an S corporation only if the due date of the

corporation's return for that year was on or after January 30,

1987.    Eastern States Casualty Agency v. Commissioner, supra at

775.    By contrast, the regulations in issue here are by their

terms effective for partnership taxable years ending after

September 3, 1982.

       We reject petitioner's argument that the regulations should

not be applied here.    The legislative history of TEFRA clearly

indicates Congress' intent generally to treat a partnership's

items of income, loss, deduction, and credit as "partnership

items" for purposes of the unified audit and litigation

procedures.    See H. Conf. Rept. 97-760, at 600, 604 (1982), 1982-

2 C.B. 600, 662.    Further, the issuance of the proposed

regulations in January of 1983, only a few months after the

enactment of TEFRA, provided guidance as to which items fell

within the definition of "partnership items" and put the public

on notice that the regulations would be applied to partnership

years beginning after the date of TEFRA's enactment.    The

proposed regulations gave petitioners "warning of things to

come".    United States v. Fenix & Scisson, Inc., 360 F.2d 260, 267

(10th Cir. 1966).    Accepting petitioner's contentions would lead

to the absurd result that the TEFRA provisions would have little
                                 - 9 -

or no effect until April 15, 1986, notwithstanding Congress'

clear mandate to the contrary.

     Because the regulations apply here, there is no need to

address the remainder of petitioner's argument.    Accordingly, the

motions to dismiss for lack of jurisdiction will be denied.

                                 Appropriate orders will be

                    issued denying petitioner's motions

                    to dismiss for lack of jurisdiction, and

                    decisions will be entered in accordance

                    with respondent's Rule 155 computations.
