                         T.C. Memo. 2010-94



                       UNITED STATES TAX COURT



                 KRR CONSTRUCTION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26634-07.                 Filed May 3, 2010.



     Merle R. Flagg, for petitioner.

     Candace M. Williams, for respondent.



                         MEMORANDUM OPINION


     VASQUEZ, Judge:    Respondent determined a $243,099 deficiency

in petitioner’s 2004 Federal income tax and a $48,620 accuracy-

related penalty under section 6662(a).1    Petitioner filed a



     1
        All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 2 -

timely petition.   The matter is presently before the Court on a

motion by petitioner’s sole shareholder, Joseph Kemp (Mr. Kemp),

to substitute party and change caption pursuant to Rule 63(d).

The issue for decision is whether Mr. Kemp may be substituted for

petitioner.   We hold that he may not.

                             Background

     When the petition was filed, petitioner’s principal place of

business was in Texas.

     In 1993 Mr. Kemp incorporated petitioner under Texas law.

Since petitioner’s incorporation, Garner & Cooper L.L.P., an

accounting firm, has prepared petitioner’s income tax returns.

In 1999 David Molina (Mr. Molina), a business acquaintance of Mr.

Kemp, advised Mr. Kemp that he could reduce his tax burden by

having petitioner elect to be treated as an S corporation.      Mr.

Molina subsequently prepared Form 2553, Election by a Small

Business Corporation, for petitioner, which Mr. Kemp signed and

mailed to respondent.    Petitioner’s accounting firm was not

involved in the preparation of the S corporation election, nor

was it aware of petitioner’s intention to elect S corporation

status.

     On April 10, 1999, respondent received petitioner’s Form

2553.   On May 3, 1999, respondent notified petitioner that its S

corporation election was granted with an effective date of

January 1, 1999.   Though petitioner retained a copy of
                               - 3 -

respondent’s notification, petitioner’s accounting firm did not

receive a copy of this document until 2005.

     According to respondent’s computer records, petitioner’s S

corporation election was reversed or terminated on June 17, 1999.

Further details regarding the reversal or termination are no

longer available as respondent destroys certain records after 7

years in accordance with his document retention policy.

     Petitioner has never filed Form 1120S, U.S. Income Tax

Return for an S Corporation, as S corporations are required to

do, and Mr. Kemp has never reported any of petitioner’s income or

deductions on his personal Federal income tax return.   Rather,

since its incorporation in 1993 petitioner has consistently filed

Form 1120, U.S. Corporation Income Tax Return.

     On petitioner’s Form 1120 for 2004, petitioner deducted 50

percent of certain amounts it contributed to various partnerships

as business bad debts.   Respondent maintains that petitioner

failed to establish that its business bad debt deductions meet

the requirements of section 166(a).2




     2
        According to Mr. Kemp, the benefit of substituting
himself for petitioner is that he may be entitled to certain bad
debt deductions under sec. 166(d) which exceed the amount claimed
as a bad debt deduction on petitioner’s 2004 Federal income tax
return.
                               - 4 -

                            Discussion

I.   Overview

      Mr. Kemp argues that because he is the sole shareholder of

an S corporation, he is the proper party to this proceeding.      He

claims that petitioner’s status as an S corporation was never

terminated and if it was, that it is was done without

petitioner’s consent.   Mr. Kemp further argues that even if

petitioner’s S corporation election was untimely for the 1999 tax

year, the election would have been effective for subsequent

years, including the year at issue.    In either case, Mr. Kemp

asserts that petitioner should be treated as an S corporation.

Consequently, Mr. Kemp argues that he is the correct party to

this proceeding.

      Respondent contends that petitioner was a C corporation for

the year at issue because petitioner’s S corporation election was

reversed or terminated in June 1999.     Respondent claims that the

S corporation election was either reversed because it was

untimely filed or terminated at petitioner’s request.

Respondent’s only support for the latter claim consists of a

computer printout that indicates termination occurred “per TPS

corres”.   According to respondent, this designation means that

the taxpayer requested termination of S corporation status.

Respondent further contends that Mr. Kemp does not meet the

requirements for substitution under Rule 63(d) and that the Court
                                - 5 -

lacks jurisdiction to redetermine Mr. Kemp’s individual income

tax liability.

II.    Substitution

       Rule 63 provides for substitution in four instances:      (1)

Upon a petitioner’s death; (2) when a party becomes incompetent;

(3) where the need for successor representatives or fiduciaries

arises; and (4) for “other cause.”      Rule 63(a), (b), (c), and

(d).

       Mr. Kemp’s motion invokes only Rule 63(d).    Pursuant to Rule

63(d), the Court may order substitution of “proper parties” for

“other cause.”    Although the terms “proper parties” and “other

cause” are not defined, these terms must be interpreted within

the limitations placed upon the Court’s jurisdiction.

       Section 6213(a) limits the Court’s jurisdiction to

proceedings initiated by taxpayers who have filed a timely

petition in response to a valid notice of deficiency.         Guarino v.

Commissioner, 67 T.C. 329, 331 (1976).      This Court has repeatedly

held that a notice of deficiency is a jurisdictional prerequisite

to access this forum as a party-petitioner.      Sampson v.

Commissioner, 81 T.C. 614, 616 (1983) (“no one who has not been

served with a statutory notice of deficiency may become a party-

petitioner in this Court * * * Such a holding is clearly in

accordance with our practice, and with the statute defining and

limiting our jurisdiction.    Sec. 6213(a); Rule 60(a).”), affd.
                               - 6 -

without published opinion 829 F.2d 39 (6th Cir. 1987); Estate of

Siegel v. Commissioner, 67 T.C. 1033, 1041 (1977) (“we could not

within our jurisdictional limits have permitted any person to

whom a notice of deficiency was not sent to become a party”);

Guarino v. Commissioner, supra at 331 (“The jurisdiction of this

Court is strictly limited under section 6213(a) to persons who

file a petition with this Court * * * after the notice of

deficiency authorized in section 6212 has been mailed to that

person.”); Wheeler v. Commissioner, T.C. Memo. 1999-298 (“when a

notice of deficiency is issued to only one spouse, this court

lacks jurisdiction over the spouse not named in the notice”);

Sumerset Props. v. Commissioner, T.C. Memo. 1981-707 (“there is

clearly no basis for substituting as petitioners either the

general partner or the limited partners who were not issued

notices of deficiency”).

     Mr. Kemp wants to be substituted for petitioner pursuant to

Rule 63(d), thereby shifting the focus of the litigation from

petitioner’s corporate tax liability to Mr. Kemp’s individual tax

liability.   Mr. Kemp’s motion for substitution was filed so that

Mr. Kemp can deduct petitioner’s bad debt losses on his personal

Federal income tax return.   In other words, Mr. Kemp wants to

become the party-petitioner in this proceeding.
                                   - 7 -

       Substitution under Rule 63(d) is inappropriate in this case.3

The proper party to this proceeding is petitioner, who was issued

the notice of deficiency and filed a timely petition with this

Court.       See Rule 60(a); Estate of Siegel v. Commissioner, supra

at 1038-1039.      Moreover, Mr. Kemp was not issued a notice of

deficiency, and we do not have jurisdiction to redetermine his

tax liability.      See Sampson v. Commissioner, supra at 616; Estate

of Siegel v. Commissioner, supra at 1041; Guarino v.

Commissioner, supra at 331; Wheeler v. Commissioner, supra;

Sumerset Props. v. Commissioner, supra.      Therefore, we could not

within our jurisdictional limitations substitute Mr. Kemp for

petitioner as the proper party in this proceeding.      Since

petitioner is the proper party, substitution is not appropriate.

See Estate of Siegel v. Commissioner, supra at 1039.

III.       Conclusion

       Based on the foregoing, petitioner is the proper party in

this matter and there is no basis for substituting Mr. Kemp.       In



       3
        Even if we were to find that petitioner was an S
corporation for 2004, which we do not, substitution would not be
proper. In that case Mr. Kemp, as the sole shareholder of an S
corporation, would be the “taxpayer” under sec. 6212(a) to whom
respondent should have issued the notice of deficiency. See
Fehlhaber v. Commissioner, 94 T.C. 863 (1990) (“as a passthrough
entity, an S corporation is generally a taxpayer not subject to
income tax. Secs. 1363(a) and 7701(a)(14)”), affd. 954 F.2d 653
(11th Cir. 1992). However, respondent did not issue a notice of
deficiency to Mr. Kemp. Rather, respondent issued the notice of
deficiency to petitioner. Therefore, the Court would lack
jurisdiction to redetermine Mr. Kemp’s tax liability.
                                 - 8 -

reaching our holding herein, we have considered all arguments

made, and to the extent not mentioned above, we conclude them to

be moot, irrelevant, or without merit.   Accordingly, we shall

deny petitioner’s motion for substitution.

     To reflect the foregoing,


                                          An appropriate order will

                                     be issued.
