                         T.C. Memo. 2007-375



                       UNITED STATES TAX COURT



    JOHN C. BEDROSIAN AND JUDITH D. BEDROSIAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12341-05.              Filed December 26, 2007.



     Richard E. Hodge, William E. Johnson, Steven R. Mather, and

Elliott H. Kajan, for petitioners.

     Michael L. Boman, for respondent.



                         MEMORANDUM OPINION


     VASQUEZ, Judge:    This case is before the Court on

respondent’s motion to dismiss for lack of jurisdiction on the

ground that the notice of deficiency is invalid and prohibited by
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section 6225.1   See generally Kligfeld Holdings v. Commissioner,

128 T.C. 192 (2007), and Notice 2000-44, 2000-2 C.B. 255, for a

general description of the transaction in this case.     Petitioners

petitioned the Court to redetermine respondent’s determination of

a $3,498,882 deficiency in their 1999 Federal income tax, a

$134,781.15 addition to tax pursuant to section 6651(a)(1) for

1999, a $1,392,552.80 accuracy-related penalty pursuant to

section 6662(a) for 1999, a $12,137 deficiency in their 2000

Federal income tax, and a $4,854.80 accuracy-related penalty

pursuant to section 6662(a) for 2000.2

     The issue for decision is whether the Court lacks

jurisdiction to consider partnership and affected items in

response to a notice of deficiency issued prior to the completion

of partnership proceedings.

                              Background

     Petitioners are husband and wife, and they resided in Los

Angeles, California, when their petition was filed.

     JCB Stone Canyon Investments, LLC (JCB), a single member

limited liability company, and Stone Canyon Investors, Inc.


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
     2
        This case involves the same or related parties as in
docket Nos. 24581-06 and 9664-07. Docket No. 24581-06 is based
on an affected items notice sent to John and Judith Bedrosian.
Docket No. 9664-07 is a partnership-level proceeding concerning
the validity of a notice of final partnership administrative
adjustment.
                                - 3 -

(Investors), an S corporation wholly owned by John and Judith

Bedrosian as community property, purported to form a partnership,

Stone Canyon Partners (Stone Canyon).   The validity of the

partnership is a matter of dispute between the parties.     The use

of terms in this opinion, for purposes of the pending motion,

does not express any view on the validity of any of the entities

mentioned.   Soward v. Commissioner, T.C. Memo. 2006-262.

     In November 1999, JCB purported to purchase and sell options

on foreign currency.   JCB then purported to contribute the

purchased options, the sold options, and Texas Instruments stock

to Stone Canyon, on behalf of itself and on behalf of Investors.

In calculating the basis in the interests of JCB and Investors,

the Bedrosians did not treat the options purportedly sold by JCB

as a liability subject to the provisions of section 752.

     In December 1999, JCB purported to transfer its interest in

Stone Canyon to Investors.   Investors acquired the Texas

Instruments stock previously purportedly contributed by JCB to

Stone Canyon.   Investors claimed a basis in the Texas Instruments

stock based on the basis of the stock “in the hands” of Stone

Canyon.

     On their 1999 Federal income tax return, petitioners

reported an ordinary loss of $175,000 for 1999 related to their

interest in Stone Canyon.    Additionally, petitioners reported a
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distributive share of long-term capital loss from Investors of

$17,250,088 for 1999.

      On April 8, 2005, respondent issued a notice of final

partnership administrative adjustment (FPAA) to the partners of

Stone Canyon for 1999.   Eleven days after the FPAA was issued,

respondent issued petitioners a statutory notice of deficiency

for 1999 and 2000.   Petitioners timely petitioned the Court to

review the notice of deficiency.

                             Discussion

I.   Respondent’s Motion To Dismiss

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

exercise our jurisdiction only to the extent provided by

Congress.   See sec. 7442; see also GAF Corp. & Subs. v.

Commissioner, 114 T.C. 519, 521 (2000).   We have jurisdiction to

redetermine a deficiency if a valid notice of deficiency is

issued by the Commissioner and if a timely petition is filed by

the taxpayer.   GAF Corp. & Subs. v. Commissioner, supra at 521.

      The partnership-level proceeding described in sections 6221

through 6234 requires that all challenges to adjustments of

partnership items contained in the FPAA are to be made in a

single unified proceeding.   Under these procedures, the tax

treatment of any partnership item shall be determined at the

partnership level.   Sec. 6221.
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     Pursuant to section 6226, the TMP of a partnership

may file a petition for a readjustment of the partnership items

for a taxable year with the Tax Court, the District Court of

the United States for the district in which the partnership’s

principal place of business is located, or the Court of Federal

Claims, within 90 days after the day on which a notice of an FPAA

is mailed to the TMP.   Sec. 6226(a).    If the tax matters partner

does not file a readjustment petition under subsection (a) of

section 6226 with respect to any FPAA, any notice partner may,

within 60 days after the close of the 90-day period set forth in

subsection (a), file a petition for a readjustment of the

partnership items for the taxable years involved with any of the

courts described in subsection (a).     Sec. 6226(b).

     The Commissioner generally must wait until a partnership-

level proceeding is over to determine a liability attributable to

a partnership item.   See sec. 6225(a); Maxwell v. Commissioner,

87 T.C. 783, 788 (1986).   Section 6225(a) provides:

          SEC. 6225(a). RESTRICTION ON ASSESSMENT AND
     COLLECTION.--Except as otherwise provided in this
     subchapter, no assessment of a deficiency attributable to
     any partnership item may be made (and no levy or proceeding
     in any court for the collection of any such deficiency may
     be made, begun, or prosecuted) before--

               (1) the close of the 150th day after the day on
           which a notice of a final partnership administrative
           adjustment was mailed to the tax matters partner, and

               (2) if a proceeding is begun in the Tax Court
           under section 6226 during such 150-day period, the
                               - 6 -


            decision of the court in such proceeding has become
            final.

Additionally, the Commissioner generally must follow the

deficiency procedures before assessing a liability related to an

affected item that requires a partner-level determination.   See

sec. 6230(a)(2).   Under section 6231(a)(3), (4), and (5),

“partnership item”, “nonpartnership item”, and “affected item”

are defined as follows:

                (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.

                (4) Nonpartnership item.--The term
           “nonpartnership item” means an item which is
           (or is treated as) not a partnership item.

                (5) Affected item.--The term “affected
           item” means any item to the extent such item
           is affected by a partnership item.

Because the tax treatment of affected items depends on

partnership-level determinations, affected items cannot be tried

as part of a partner’s personal tax case until the resolution of

the partnership proceeding.   GAF Corp. & Subs. v. Commissioner,

supra at 526 (citing Dubin v. Commissioner, 99 T.C. 325, 328

(1992)).   Thus, the Court does not have jurisdiction to consider

partnership items or affected items while a partnership
                                 - 7 -

proceeding is pending.     Id. at 528; Maxwell v. Commissioner,

supra at 788.

     The notice of deficiency was issued 11 days after the FPAA;

therefore the partnership proceeding was still pending.      See sec.

6226(b).   We must therefore decide whether any of the items

giving rise to any part of the deficiencies in this case are

partnership items or affected items.

     The parties are in agreement that all of the items for 1999

are either partnership items or affected items.    We agree.   As a

result, we do not have jurisdiction over those items because the

partnership proceeding was pending when the notice of deficiency

was issued.     See Maxwell v. Commissioner, supra at 788.

     For 2000, the parties are not in agreement as to the

characterization of all of the items.    Respondent argues that the

claim on petitioners’ return for that year to an itemized

deduction of $525,000 for legal, accounting, consulting, and

advisory fees related to Stone Canyon is an affected item because

the partnership was a sham.    Although the partnership did not pay

the fee, respondent argues that the deduction is nevertheless an

affected item because the disallowance is dependent on the

partnership’s being a sham.    In Goldberg v. Commissioner, T.C.

Memo. 2007-81, we held that such fees were neither a partnership

item nor an affected item, and therefore we retained jurisdiction

over them.    The deduction was not claimed on the partnership
                                 - 8 -

return nor claimed by petitioners as their distributive share of

any deduction on the partnership return.       The disallowance of the

deduction at the individual level did not flow from a deduction

disallowed at the partnership level, nor is the legality of the

deduction at the individual level necessarily affected by a

determination at the partnership level.       Id.

     Respondent’s motion to dismiss for lack of jurisdiction will

be granted in part and denied in part.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,


                                              An appropriate order will

                                         be issued.
