                       T.C. Memo. 2000-170



                     UNITED STATES TAX COURT



          CRYSTAL BEACH DEVELOPMENT OF DESTIN LTD.,
       WATERS EDGE BUILDING COMPANY, TAX MATTERS PARTNER,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 18413-99.                      Filed May 24, 2000.


          R issued a notice of final partnership
     administrative adjustment (FPAA) to P, the
     partnership’s tax matters partner, for the taxable
     years 1995 and 1996. The FPAA was accompanied by an
     "Explanation of Affected Items" stating that a penalty
     under I.R.C. sec. 6662(a) would be “charged”. P filed
     a petition for readjustment contesting adjustments to
     partnership items and the accuracy-related penalty
     under I.R.C. sec. 6662(a). R filed a motion to dismiss
     for lack of jurisdiction and to strike the portion of
     the petition contesting the accuracy-related penalty.

          Held: The Court lacks jurisdiction to review the
     accuracy-related penalty in this partnership-level
     proceeding. See N.C.F. Energy Partners v.
     Commissioner, 89 T.C. 741 (1987). Held, further, the
     amendments made by the Taxpayer Relief Act of 1997,
     Pub. L. 105-34, sec. 1238(a), 111 Stat. 1026, which
     provide that penalties will be determined in
     partnership-level proceedings, are effective for
                                - 2 -


     taxable years beginning only after Aug. 7, 1997, and
     are therefore not applicable to the years before the
     Court. Held further, R's motion to dismiss for lack of
     jurisdiction and to strike will be granted.


     David D. Aughtry, for petitioner.

     Ronald Buch and William L. Blagg, for respondent.


                         MEMORANDUM OPINION

     COHEN, Chief Judge:    This case was assigned to Special Trial

Judge Robert N. Armen, Jr., pursuant to the provisions of section

7443A(b)(5) and Rules 180, 181, and 183.1     The Court agrees with

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

forth below.

                 OPINION OF THE SPECIAL TRIAL JUDGE

     ARMEN:    Special Trial Judge:   This matter is before the

Court on respondent's Motion To Dismiss For Lack Of Jurisdiction

And To Strike With Respect To Penalties/Additions To Tax.

Respondent moves to dismiss for lack of jurisdiction and to

strike allegations in the petition pertaining to the accuracy-

related penalty under section 6662.     As explained in detail

below, we shall grant respondent's motion.




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


Background

     On September 17, 1999, respondent issued a notice of final

partnership administrative adjustment (FPAA) to Crystal Beach

Development of Destin, Ltd. (the partnership) setting forth

adjustments to the partnership's returns (Forms 1065) for 1995

and 1996.    Attached to the FPAA are:   (1) A schedule of

examination changes which includes a statement that "Penalties or

additions to tax under IRC section 6662, which may be applicable

at the investor level, are being recommended in the examination

of the flow-through entity"; and (2) an "Explanation of Affected

Items" which states that "an addition to the tax is charged as

provided by Section 6662(a)".

     Waters Edge Building Company, the partnership's tax matters

partner, filed a timely petition for readjustment with the Court.

The petition includes allegations contesting the imposition of

the accuracy-related penalty.

     As indicated, respondent filed a motion to dismiss for lack

of jurisdiction and to strike.    Respondent contends that the

Court lacks jurisdiction over the accuracy-related penalty in

this partnership-level proceeding on the ground that such penalty

is an "affected item" that can be reviewed only at the individual

partner level.    Respondent further contends that allegations

pertaining to such penalty should be stricken from the petition

for readjustment.
                                 - 4 -


     Petitioner filed an objection to respondent's motion arguing

that the motion should be denied on the grounds that:    (1)

Respondent's motion was not timely filed; (2) the FPAA includes

an adjustment based on the penalty prescribed in section 6662(a);

and (3) section 6221 was amended in 1997 to clarify that

additions to tax and penalties are to be determined in

partnership-level proceedings.

     This matter was called for hearing at the Court's motions

session in Washington, D.C.    Counsel for respondent appeared at

the hearing and presented oral argument in support of the pending

motion.    Counsel for petitioner filed a written statement

pursuant to Rule 50(c) in lieu of attendance at the hearing.

Discussion

     The Tax Court is a court of limited jurisdiction, and we may

exercise our jurisdiction only to the extent authorized by

Congress.    See Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

The Court's jurisdiction may be challenged by either party, or by

the Court sua sponte, at any stage of the proceedings.    See Smith

v. Commissioner, 96 T.C. 10, 13-14 (1991), and cases cited

therein.    Consistent with this principle, we reject petitioner's

assertion that respondent's motion to dismiss and to strike

should be denied on the ground that it was not timely filed.

     Petitioner further asserts that respondent's motion should

be denied because the FPAA included an adjustment “charging” the
                               - 5 -


penalty prescribed in section 6662(a).    We disagree.   Although

the Court's jurisdiction in a partnership proceeding is

contingent on the issuance of a valid FPAA and a timely-filed

petition for readjustment, see Transpac Drilling Venture 1982-22

v. Commissioner, 87 T.C. 874 (1986), the FPAA does not define the

scope of the Court's jurisdiction.     See, e.g., Powell v.

Commissioner, 96 T.C. 707, 712-713 (1991).    Rather, as previously

stated, the Court's jurisdiction is prescribed by statutory

provisions, to which we now turn.

     The Court's jurisdiction to review adjustments to a

partnership return is governed by the unified partnership audit

and litigation procedures set forth in sections 6221 through

6234.   See Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 648.      Pursuant to

the TEFRA provisions, which apply with respect to all taxable

years of a partnership beginning after September 3, 1982, the tax

treatment of any partnership item generally is determined in a

single proceeding at the partnership level.    See Sparks v.

Commissioner, 87 T.C. 1279, 1284 (1986); Maxwell v. Commissioner,

87 T.C. 783, 789 (1986); see also sec. 6226(f).    Partnership

items include each partner's proportionate share of the

partnership's aggregate items of income, gain, loss, deduction,

or credit.   See sec. 6231(a)(3); sec. 301.6231(a)(3)-1(a)(1)(i),

Proced. & Admin. Regs.
                               - 6 -


     Partnership items are distinguished from affected items,

which are defined in section 6231(a)(5) as any item to the extent

such item is affected by a partnership item. See White v.

Commissioner, 95 T.C. 209, 211 (1990).    The first type of

affected item gives rise to a computational adjustment without

the necessity of a partner-level proceeding.   The computational

adjustment is made to record the change in a partner's tax

liability resulting from the proper treatment of partnership

items.   See sec. 6231(a)(6); White v. Commissioner, supra.    Once

partnership-level proceedings are completed, the Commissioner is

permitted to assess a computational adjustment against a partner

without issuing a notice of deficiency.   See sec. 6230(a)(1);

N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 744 (1987);

Maxwell v. Commissioner, supra at 792 n.9.

     The second type of affected item is one that is dependent on

factual determinations to be made at the individual partner

level.   See N.C.F. Energy Partners v. Commissioner, supra at 744.

Section 6230(a)(2)(A)(i) provides that the normal deficiency

procedures apply to those affected items that require partner-

level determinations.   Traditionally, additions to tax for

negligence were considered affected items requiring factual

determinations at the individual partner level.   See N.C.F.

Energy Partners v. Commissioner, supra at 745; see sec.
                               - 7 -


301.6231(a)(5)-1T(d), Temporary Proced. & Admin. Regs., 52 Fed.

Reg. 6790 (Mar. 5, 1987).2

     In N.C.F. Energy Partners v. Commissioner, supra, a case

similar in many respects to the case now before the Court, the

Commissioner issued an FPAA to N.C.F. Energy Partners (NCF)

determining adjustments to NCF's returns for 1982 and 1983.    The

FPAA was accompanied by an explanation of items which stated that

the Commissioner intended to assert additions to tax (including

additions to tax for negligence) at the individual partner level.

The tax matters partner filed a petition for readjustment on

NCF's behalf contesting both adjustments to partnership items and

the various additions to tax mentioned in the explanation of

items.   The Commissioner moved to dismiss for lack of

jurisdiction and to strike the allegations in the petition

pertaining to additions to tax on the ground that such items

constituted affected items that could be resolved only at the




     2
        In the Omnibus Budget Reconciliation Act of 1989, Pub. L.
101-239, sec. 7721, 103 Stat. 2395, Congress consolidated the
additions to tax for negligence and substantial understatement
under new sec. 6662 entitled "Imposition of Accuracy-Related
Penalty". Although respondent never amended sec. 301.6231(a)(5)-
1T(d), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar.
5, 1987), to include accuracy-related penalties within the
definition of the term "affected items", we are satisfied that
Congress intended for accuracy-related penalties to be treated
similarly to additions to tax; i.e., as affected items. See H.
Conf. Rept. 101-386, at 652 (1989).
                              - 8 -


individual partner level following the completion of partnership-

level proceedings.

     The Court agreed with the Commissioner that the additions to

tax in question were affected items that could not be raised in

the partnership-level proceedings.    With regard to additions to

tax for negligence, the Court stated in pertinent part:

     a partner will be liable for the addition to tax for
     negligence pursuant to section 6653(a) if he has an
     underpayment of tax some part of which is due to
     negligence. The existence of an underpayment of tax at
     the partner level cannot be made until the partner's
     share of distributable items of income, loss,
     deduction, and credit is determined in the partnership
     level proceeding. Once the partnership level
     proceeding ends, however, the factual question of
     whether any part of the underpayment was due to the
     partner's negligence must be answered at the partner
     level.

N.C.F. Energy Partners v. Commissioner, supra at 744-745.

     However, in the Taxpayer Relief Act of 1997, Pub. L. 105-34,

sec. 1238(a), 111 Stat. 1026, Congress amended section 6221 to

provide that the applicability of any penalty, addition to tax,

or additional amount which relates to an adjustment to a

partnership item shall be determined at the partnership level.

H. Conf. Rept. 105-220, at 685 (1997), states in pertinent part:

                           Present Law

          Partnership items include only items that are
     required to be taken into account under the income tax
     subtitle. Penalties are not partnership items since
     they are contained in the procedure and administration
     subtitle. As a result, penalties may only be asserted
     against a partner through the application of the
                               - 9 -


     deficiency procedures following the completion of the
     partnership-level proceeding.


                            House Bill

          The House bill provides that the partnership-level
     proceeding is to include a determination of the
     applicability of penalties at the partnership level.
     However, the provision allows partners to raise any
     partner-level defenses in a refund forum.

          Effective date--The provision is effective for
     partnership taxable years ending after the date of
     enactment.

The Taxpayer Relief Act of 1997 was signed into law on August 5,

1997.

     In sum, additions to tax for negligence traditionally have

been treated as affected items that may be redetermined only in a

partner-level proceeding.   However, based on changes to the TEFRA

partnership provisions enacted as part of the Taxpayer Relief Act

of 1997, accuracy-related penalties for negligence will be

determined in partnership-level proceedings effective for

partnership taxable years ending after August 5, 1997.

     Consistent with the preceding discussion, it follows that

the Court lacks jurisdiction to review the applicability of the

accuracy-related penalty for the taxable years 1995 and 1996 that

petitioner has attempted to place in dispute in this case.   In so

holding, we reject petitioner's contention that the amendments to

the TEFRA provisions enacted by the Taxpayer Relief Act of 1997

were intended to clarify existing law.   The legislative history
                                - 10 -


underlying the TEFRA amendments (quoted above) includes a clear

description of present law, which states that penalties can only

be asserted against a partner through the application of the

deficiency procedures following the completion of the

partnership-level proceeding.    See H. Conf. Rept. 105-220, at

685.    Further, Congress unambiguously provided that the TEFRA

amendments would apply prospectively only--the amendments are

effective for taxable years ending after August 5, 1997--and do

not apply to the taxable years in issue.    Simply put,

petitioner's assertion that Congress enacted the TEFRA amendments

described above as a clarification of existing law is incorrect.

       In sum, we hold that the Court lacks jurisdiction over the

accuracy-related penalty that petitioner has attempted to place

in dispute in this partnership-level proceeding.    The penalty may

be contested at the individual partner level only following the

completion of partnership-level proceedings.    Accordingly, we

shall grant respondent's Motion To Dismiss For Lack Of

Jurisdiction And To Strike With Respect To Penalties/Additions To

Tax.
                        - 11 -


To reflect the foregoing,



                                 An order will be issued

                            granting respondent's motion and

                            dismissing that part of this case

                            pertaining to the accuracy-related

                            penalty under section 6662(a).
