                               T.C. Memo. 2015-65



                        UNITED STATES TAX COURT



        CHARLES BRUMBAUGH AND C.E. HOLIFIELD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9161-14.                          Filed April 6, 2015.



      William Marc Weintraub, for petitioners.

      Kris H. An and Jordan Scott Musen, for respondent.



                           MEMORANDUM OPINION


      LAUBER, Judge: On February 19, 2015, the Internal Revenue Service (IRS

or respondent) filed a motion to dismiss and to strike partnership items. Respon-

dent contends that petitioners’ claim of entitlement to additional flowthrough

losses from 4200 Panorama, LLC (Panorama), a partnership for Federal income

tax purposes, must be dismissed because the Court lacks jurisdiction to consider
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[*2] them. This question turns on whether Panorama is subject to the partnership

procedural rules of the Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648. Petitioners argue that

Panorama is not covered by TEFRA but is exempt because it is a “small partner-

ship.” See sec. 6231(a)(1)(B)(i).1 We disagree and accordingly will grant respon-

dent’s motion to dismiss as to the partnership items discussed below.

                                    Background

      There is no dispute concerning the following facts, which are derived from

the parties’ pleadings and motion papers and the attached exhibits. These facts are

stated solely for the purpose of deciding this motion and not as findings of fact in

this case. See Rule 1(b); Fed. R. Civ. P. 52(a); Cook v. Commissioner, 115 T.C.

15, 16 (2000), aff’d, 269 F.3d 854 (7th Cir. 2001).

      On their joint Federal income tax return for 2007 petitioners claimed on

Schedule C, Profit and Loss From Business, an interest deduction of $317,098. In

a timely issued notice of deficiency, the IRS disallowed $163,915 of this interest

deduction for lack of substantiation. The IRS also determined that certain losses

that petitioners deducted on Schedule E, Supplemental Income and Loss, were

      1
       All statutory references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all dollar amounts to the nearest dollar.
                                        -3-

[*3] subject to the passive loss limitation under section 469 and asserted an

accuracy-related penalty under section 6662(a). None of the adjustments set forth

in the notice of deficiency relates to deductions claimed by Panorama.

      Petitioners contend that they are entitled to deduct additional flowthrough

losses from Panorama beyond those originally reported to them on Schedule K-1,

Partner’s Share of Income, Deductions, Credits, etc. In particular, petitioners

contend that they erroneously claimed the disallowed interest deduction of

$163,915 on their Schedule C. Instead, they say that this interest deduction should

have been reported by Panorama and should have been claimed by them on

Schedule E as a part of a larger flowthrough loss from Panorama.

      In 2007 petitioner Charles Brumbaugh owned a 59.99% membership inter-

est in Panorama. The remaining membership interests in Panorama were owned as

follows: 39.99% by Benjamin Lingo and 0.02% by Lynx Realty and Management,

LLC (Lynx), a partnership for Federal income tax purposes. On June 16, 2008,

Panorama filed Form 1065, U.S. Return of Partnership Income, for 2007. Pano-

rama claimed no deduction for interest on this return. Petitioners now contend

that Panorama incurred interest expenses of $172,653 for the taxable year 2007

and that 59.99% of this amount, or $103,575, should have been deductible to

petitioners as their distributive share of Panorama’s loss. As a corollary of this
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[*4] position, petitioners contend that the Schedule K-1 from Panorama did not

accurately represent the losses allocable to them. Petitioners now seek to claim, in

this deficiency case, a deduction for the losses from Panorama to which they

believe they are actually entitled.

                                      Discussion

      Panorama is a partnership within the meaning of section 6231(a)(1). It is

thus subject to the provisions of TEFRA concerning unified partnership

proceedings. See secs. 6221-6234. It appears that the IRS did not commence

partnership audit proceedings for this TEFRA partnership and did not issue a

notice of final partnership administrative adjustment (FPAA) with respect to

Panorama for 2007. Likewise, petitioners did not seek an administrative

adjustment to Panorama’s partnership items under section 6227(a)(1), and the time

for doing so has now expired. As a result, the tax treatment of all partnership

items with respect to the partnership is final in accordance with the tax return filed

by the partnership. Bedrosian v. Commissioner, 144 T.C. __, __ (slip op. at 4)

(Mar. 17, 2015) (“[A]ny partnership items that were not adjusted are final and

cannot be revisited in a collateral proceeding.”).

      Generally, a partnership item, such as an interest deduction, is determined at

the partnership level. Secs. 6221, 6231(a)(3). Petitioners agree that if the TEFRA
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[*5] provisions apply to Panorama, then the parties “would be bound by the

partnership items, including any mortgage interest, reported on Panorama’s 2007

return.” Instead, petitioners oppose respondent’s motion on the theory that

Panorama “in substance” met the requirements of the small partnership exception,

sec. 6231(a)(1)(B)(i), so that the TEFRA procedural rules do not apply to it. If

petitioners are correct, there would be no FPAA and no partnership items, see

Bedrosian v. Commissioner, 143 T.C. __, __ (slip op. at 41) (Aug. 13, 2014), and

the TEFRA rules would not bar petitioners from asserting a claim to an additional

interest deduction.

      The TEFRA provisions begin with the presumption that TEFRA applies to

any entity that is required to file a partnership return. Sec. 6231(a)(1)(A). But

there is an exception for small partnerships. A “small partnership” is any partner-

ship having 10 or fewer partners each of whom is an individual (other than a

nonresident alien), a C corporation, or an estate of a deceased partner. Sec.

6231(a)(1)(B)(i). As is implicit in this exception, a partnership will not be con-

sidered to be a “small partnership” if any partner during the taxable year is a

passthrough partner. See Brennan v. Commissioner, T.C. Memo. 2012-187, aff’d

sub nom. Ashland v. Commissioner, 584 Fed. Appx. 573 (9th Cir. 2014); sec.

301.6231(a)(1)-1(a)(2), Proced. & Admin. Regs. A passthrough partner is a
                                         -6-

[*6] partnership, estate, trust, S corporation, nominee, or other similar person

through whom other persons hold an interest in the partnership and includes

disregarded entities such as single-member LLCs. See sec. 6231(a)(9); 6611, Ltd.

v. Commissioner, T.C. Memo. 2013-49; Tigers Eye Trading, LLC v.

Commissioner, T.C. Memo. 2009-121.

      Panorama cannot satisfy the small partnership exception because it had

during 2007 one passthrough partner, namely, Lynx. On page two of its partner-

ship return, Panorama answered “yes” to the question, “Are any partners in this

partnership also partnerships?” In response to the question, “What type of entity

is this partner?” the Schedule K-1 for Lynx states: “Partnership.”

      Petitioners admit that Lynx is a partnership and that it held a partnership

interest in Panorama during 2007. However, they contend that Lynx held such a

nominal interest, 0.02%, that “in substance” Panorama satisfied the small part-

nership exception. But neither the Internal Revenue Code nor the regulations pro-

vide a “de minimis exception” for passthrough partners, and this Court is not at

liberty to create one. Either a partner is a passthrough entity or it is not; the Court

does not inquire into the entity’s ownership percentage or its upstream partners.

See Bedrosian v. Commissioner, 143 T.C. at __ (slip op. at 48) (“The presence of

any passthrough partner precludes the application of the small partnership ex-
                                        -7-

[*7] ception of section 6231(a)(1)(B) and renders the partnership subject to

TEFRA as a matter of law.”). As the Supreme Court has observed, a taxpayer is

free to organize his affairs as he chooses, but once having done so, he must accept

the tax consequences of his choice, whether contemplated or not. Commissioner

v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974). Because

Panorama had a passthrough partner, the small partnership exception does not

apply and Panorama remains a TEFRA partnership.

      Petitioners and respondent are both bound by Panorama’s return. Petition-

ers therefore cannot claim entitlement to additional passthrough losses from

Panorama on the theory that Panorama should have claimed additional interest

deductions. Although the result may seem harsh, we must dismiss this portion of

the case because we lack jurisdiction to decide partnership-level issues in this

litigation. See Roberts v. Commissioner, 94 T.C. 853, 857, 862 (1990).

      To reflect the foregoing,


                                                    An appropriate order will be

                                              issued.
