                                           TIGERS EYE TRADING, LLC, SENTINEL ADVISORS, LLC, TAX
                                              MATTERS PARTNER, PETITIONER v. COMMISSIONER OF
                                                      INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 14510–05.                  Filed February 13, 2012.

                                                   The stipulated decision in this Son of BOSS TEFRA part-
                                                nership-level case, entered by the Court Dec. 1, 2009, was
                                                agreed to by R and the tax matters partner (TMP) of Tigers
                                                Eye Trading, LLC (Tigers Eye), with concurrence of partici-
                                                pating partner (P), a partner other than TMP. The first deci-
                                                sion paragraph specifies that the partnership items of ordi-
                                                nary loss, other deductions, distributions of property, and cap-
                                                ital contributions were reduced to zero as determined in the
                                                notice of final partnership administrative adjustment (FPAA)
                                                issued to Tigers Eye. The second decision paragraph, deter-
                                                mining that the FPAA is correct, includes the determinations
                                                that Tigers Eye is disregarded for Federal income tax pur-
                                                poses, outside basis is reduced to zero, and a 40% penalty
                                                applies to any gross valuation/basis misstatement. The third
                                                and fourth decision paragraphs respectively determine that
                                                the 40% gross valuation misstatement penalty under I.R.C.
                                                sec. 6662(b)(3), (e), and (h) applies to any underpayment of
                                                tax attributable to overstating the capital contributions
                                                claimed to have been made to the purported partnership and
                                                a 20% penalty for negligence or substantial underpayment
                                                under I.R.C. sec. 6662 applies to any additional under-
                                                payment of tax attributable to the partnership item adjust-

                                                                                                                                      67




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                                                ments other than the claimed capital contributions. On Jan.
                                                12, 2010, the Court of Appeals for the D.C. Circuit, to which
                                                this case would be appealable, issued Petaluma FX Partners,
                                                LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010)
                                                (Petaluma II), aff ’g in part, rev’g in part and remanding 131
                                                T.C. 84 (2009) (Petaluma I). In Petaluma II the Court of
                                                Appeals for the D.C. Circuit held that outside basis is not a
                                                partnership item that the Tax Court had jurisdiction to deter-
                                                mine in the partnership-level proceeding and remanded the
                                                case on the applicability of penalties. On Jan. 19, 2010, P filed
                                                a motion for leave to file a motion to revise the stipulated
                                                decision and lodged the motion to revise. On Dec. 30, 2010,
                                                the Court granted the motion for leave nunc pro tunc as of
                                                Jan. 19, 2010, and as of that date filed the motion to revise.
                                                In the motion to revise P asks the Court to revise the stipu-
                                                lated decision to conform to the jurisdictional limits on the
                                                authority of the Tax Court established in Petaluma II. On
                                                Dec. 15, 2010, this Court issued Petaluma FX Partners, LLC
                                                v. Commissioner, 135 T.C. 581 (2010) (Petaluma III), on
                                                appeal (D.C. Cir. Mar. 8, 2011), holding that for this Court to
                                                have jurisdiction over a penalty at the partnership level,
                                                Petaluma II requires that the penalty be computable without
                                                partner-level proceedings to determine affected items, leading
                                                at least potentially to only a computational adjustment to the
                                                partners’ returns. Id. at 586–587. After Petaluma II and
                                                Petaluma III were issued, the Supreme Court issued Mayo
                                                Found. for Med. Educ. & Research v. United States, 562 U.S.
                                                ll, 131 S. Ct. 704 (2011). In Mayo Found., the Supreme
                                                Court made clear that courts must defer to regulations that
                                                interpret the Internal Revenue Code unless they fail to meet
                                                the two-step standard of Chevron, U.S.A., Inc. v. Natural Res.
                                                Def. Council, Inc., 467 U.S. 837, 842–843 (1984). In the
                                                recently issued opinion in Intermountain Ins. Serv. of Vail,
                                                LLC v. Commissioner, 650 F.3d 691 (D.C. Cir. 2011), rev’g and
                                                remanding 134 T.C. 211 (2010), supplementing T.C. Memo.
                                                2009–195, the Court of Appeals for the D.C. Circuit held that,
                                                prior caselaw to the contrary notwithstanding, the Tax Court
                                                must defer to a regulation unless it holds the regulation
                                                invalid under Chevron. Held: The motion to revise the stipu-
                                                lated decision will be denied; the jurisdictional limitations
                                                established in Petaluma II were based on a concession by the
                                                Government that does not apply in the case at hand; the
                                                applicability of the accuracy-related penalties determined by
                                                the stipulated decision in the case at hand is sustained by the
                                                decision’s adoption of adjustments to partnership items that
                                                are related to said penalties. Held, further, because Tigers
                                                Eye filed a partnership return for 1999, the TEFRA proce-
                                                dures apply with respect to 1999 to Tigers Eye and its items
                                                and to TMP, P, and other persons holding an interest in




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                                                Tigers Eye, and the Tax Court has jurisdiction to determine
                                                that Tigers Eye does not exist and is not a partnership for
                                                Federal income tax purposes. See I.R.C. sec. 6233; sec.
                                                301.6233–1T(a), (c), Temporary Proced. & Admin. Regs., 52
                                                Fed. Reg. 6779, 6795 (Mar. 5, 1987). Held, further, because
                                                Tigers Eye does not exist and is not a partnership for Federal
                                                income tax purposes, the Court has jurisdiction to make
                                                determinations with respect to all items of Tigers Eye that
                                                would be partnership items, as defined in I.R.C. sec.
                                                6231(a)(3) and sec. 301.6231(a)(3)–1, Proced. & Admin. Regs.,
                                                if Tigers Eye had been a partnership, including the nature
                                                and character of those items. See I.R.C. sec. 6233; sec.
                                                301.6233–1T(a), (c), Temporary Proced. & Admin. Regs.,
                                                supra. Held, further, because Tigers Eye is disregarded for
                                                Federal income tax purposes, it acted as a nominee and agent
                                                for P and others who participated in the transactions at issue
                                                and Tigers Eye’s items are of that nature and character. Held,
                                                further, the determination that Tigers Eye is disregarded as
                                                a partnership for Federal income tax purposes serves as a
                                                basis for a computational adjustment reflecting the disallow-
                                                ance of any loss or credit claimed by P or any other purported
                                                partner with respect to Tigers Eye, and the Court has juris-
                                                diction to determine that all items of Tigers Eye that pur-
                                                ported to be partnership items are adjusted to zero. See I.R.C.
                                                sec. 6233; sec. 301.6233–1T(a), Temporary Proced. & Admin.
                                                Regs., supra. Held, further, items of Tigers Eye that are nec-
                                                essary for maintaining its books and records as nominee-agent
                                                acting on behalf of the purported partners and providing
                                                information to them are entity/partnership items that the
                                                Court has jurisdiction to decide in this partnership/entity-
                                                level proceeding. See sec. 301.6231(a)(3)–1(a)(4), Proced. &
                                                Admin. Regs. Held, further, because Tigers Eye conducted the
                                                transactions as nominee-agent for P, P’s basis in the distrib-
                                                uted property is Tigers Eye’s cost basis in the property, which
                                                P concedes is the amount of the distributions shown on the
                                                Schedule K–1, Partner’s Share of Income, Credits, Deductions,
                                                etc., Tigers Eye issued to P; Tigers Eye’s cost basis in the
                                                distributed property is an entity/partnership item that this
                                                Court has jurisdiction to decide in this proceeding. See sec.
                                                301.6231(a)(3)–1(a)(4), (c)(3)(iii), Proced. & Admin. Regs. Held,
                                                further, in accordance with Mayo Found. and Intermountain,
                                                we must apply the TEFRA regulations that satisfy the
                                                Chevron standard and are not bound to follow a contrary
                                                holding of Petaluma II to the extent those regulations were
                                                not specifically considered and applied by the Court of
                                                Appeals in deciding the issue. Held, further, Petaluma II not-
                                                withstanding, outside basis is an entity/partnership item
                                                related to contributions and distributions that Tigers Eye
                                                needed to determine for purposes of maintaining its books and




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                                                records and providing information to its purported partners
                                                that the Court has jurisdiction to decide in the partnership/
                                                entity-level proceeding. See sec. 301.6231(a)(3)–1(a)(4), Proced.
                                                & Admin. Regs. Held, further, sec. 301.6231(a)(3)–1(a)(4),
                                                Proced. & Admin. Regs., is valid under the two-step Chevron
                                                standard. Held, further, the ordinary loss and other deduc-
                                                tions reduced to zero by the first decision paragraph flowed
                                                directly through to the purported partners’ returns, and R
                                                may compute and assess the deficiencies related to the adjust-
                                                ments of those partnership items to zero without issuing a
                                                statutory notice of deficiency; under Petaluma II, this Court
                                                has jurisdiction in this partnership-level proceeding to deter-
                                                mine applicability of penalties to the underpayments of tax
                                                resulting from the adjustments to zero of the ordinary loss
                                                and other deductions that flowed directly through to the pur-
                                                ported partners’ individual returns. Held, further, the adjust-
                                                ment of the ordinary loss to zero is attributable to overstating
                                                the capital contributions claimed to have been made to the
                                                purported partnership; pursuant to the stipulated decision the
                                                40% gross valuation misstatement penalty and the 20% neg-
                                                ligence penalty apply respectively to the underpayments of
                                                tax resulting from the adjustments of the loss and other
                                                deductions to zero. Held, further, the overstatement of the
                                                purported partners’ bases in the distributed property is attrib-
                                                utable to claiming that capital contributions were made to the
                                                purported partnership; the underpayment of tax resulting
                                                from the overstatement of basis in the distributed property
                                                (distributed property loss deficiency) is attributable to the
                                                reduction to zero of capital contributions claimed to have been
                                                made to the purported partnership that is disregarded for
                                                Federal income tax purposes; this Court has jurisdiction in
                                                this partnership-level proceeding to determine in the stipu-
                                                lated decision that the 40% gross basis misstatement penalty
                                                applies to the distributed property loss deficiency. Held, fur-
                                                ther, there will be a gross misstatement of basis in the distrib-
                                                uted property if the misstatement exceeds four times the
                                                amount of the distributions shown on the Schedule K–1
                                                issued to the purported partner; the 40% penalty will apply
                                                to any underpayment of tax attributable to claiming basis in
                                                the property that is more than four times the amount of the
                                                distributions shown on the Schedule K–1 issued to the pur-
                                                ported partner.

                                       Felix B. Laughlin and Mark D. Allison, for petitioner.
                                       David D. Aughtry, Hale E. Sheppard, and William E.
                                      Buchanan, for participating partner.
                                       James E. Gray, for respondent.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                                       71


                                                                                       CONTENTS

                                                                                                                                                    Page
                                      Background .............................................................................................      77
                                      Discussion ................................................................................................   88
                                      I. Introduction: Complexity of Income Tax Treatment of Partners
                                             and Partnerships .........................................................................             88
                                         A. Overview of Subchapter K ..........................................................                     88
                                         B. TEFRA ..........................................................................................        88
                                           1. In General .................................................................................          88
                                           2. TEFRA Penalty Litigation Structure Before TRA 1997 ........                                           89
                                           3. TEFRA Penalty Litigation Structure After TRA 1997 ..........                                          90
                                         C. Attempted Exploitation by Tax Shelter Promoters of Com-
                                               plex Interactions and Disconnects of Subchapter K Sub-
                                               stantive Rules and TEFRA Procedural Rules ........................                                   92
                                      II. Jurisdiction Under TEFRA When Entity Filing Partnership
                                             Return Is Not a Partnership or Does Not Exist ........................                                 95
                                         A. TEFRA Procedures Apply When Entity That Filed Partner-
                                               ship Return Is Not a Partnership or Does Not Exist:
                                               Sections 6226(f) and 6233 ........................................................                   95
                                         B. Jurisdiction To Determine Items of Disregarded Entity:
                                               Section 301.6233–1T(a) and (c), Temporary Proced. &
                                               Admin. Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987) .........                                       97
                                         C. Jurisdiction To Determine Applicability of Any Penalty That
                                               Relates to Adjustment of Entity Item: Section 6226(f) .........                                      100
                                      III. Jurisdiction To Enter Stipulated Decision as Written With
                                              Respect to Partnership Items ...................................................                      100
                                         A. Provisions of the Stipulated Decision .........................................                         100
                                         B. Disregard of Tigers Eye ...............................................................                 102
                                         C. Items of Tigers Eye ......................................................................              102
                                         D. First Decision Paragraph ............................................................                   103
                                           1. Partnership Loss and Deductions ............................................                          104
                                           2. Contributions and Distributions ..............................................                        104
                                             a. Items Related to Contributions ............................................                         104
                                             b. Items Related to Distributions .............................................                        106
                                           3. Adjustment of Items to Zero ....................................................                      107
                                         E. Second Decision Paragraph .........................................................                     107
                                           1. Basis in Property Distributed by Disregarded Entity ...........                                       108
                                           2. Outside Basis ............................................................................            109
                                             a. Petaluma Superseded by Mayo Found. and Inter-
                                                   mountain: TEFRA Regulations Must Be Applied ..........                                           110
                                             b. Determination of Outside Basis: General Rule Under
                                                   Section 705(a) ....................................................................              112
                                             c. Determination of Outside Basis: Alternative Rule Under
                                                   Section 705(b) ....................................................................              114
                                             d. Outside Basis Is a Partnership Item ...................................                             115
                                               i. Required To Be Taken Into Account Under Subtitle A ...                                            115




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                                                  ii.
                                                    More Appropriately Determined at the Partnership
                                                       Level: Outside Basis Determined Under the Gen-
                                                       eral Rule .........................................................................      116
                                               iii. More Appropriately Determined at the Partnership
                                                       Level: Outside Basis Determined Under Alternative
                                                       Rule .................................................................................   118
                                               iv. More Appropriately Determined at the Partnership
                                                       Level: Outside Basis When the Partnership Is
                                                       Disregarded ....................................................................         118
                                            e. Misapplication of Dial USA, Inc. v. Commissioner .............                                   119
                                            f. Validity of the Regulation Under the Chevron Two-Step
                                                     Standard ............................................................................      124
                                            g. Outside Bases of Tigers Eye’s Purported Partners Are
                                                     Partnership Items .............................................................            126
                                      IV. Jurisdiction To Enter Stipulated Decision as Written With
                                              Respect to Application of Penalties ..........................................                    128
                                        A. Items Adjusted in the Stipulated Decision and the Applica-
                                               tion of Accuracy-Related Penalties Thereto Within the
                                               Jurisdictional Limitations of Petaluma II ..............................                         130
                                          1. 40% Gross Basis Misstatement Penalty .................................                             131
                                          2. 20% Negligence Penalty ...........................................................                 133
                                          3. Conclusion .................................................................................       134
                                        B. Petaluma II Notwithstanding, Jurisdiction To Determine the
                                               40% Penalty Applies to the Overstatement of the Basis of
                                               the Distributed Property ..........................................................              134
                                          1. Applicability of the 40% Penalty to the Overstatement of
                                                  the Basis of the Distributed Property .................................                       134
                                          2. Petaluma III: The Court Was Bound by the Law of the
                                                  Case and the Rule of Mandate To Follow Petaluma II
                                                  Dicta on Lack of Jurisdiction Over Outside Basis .............                                136
                                          3. TRA 1997: The Tax Court Has Jurisdiction To Determine
                                                  Applicability of Penalties That Relate to Adjustment
                                                  of Partnership Items .............................................................            139
                                      V. Conclusion ........................................................................................    143


                                                                                       OPINION

                                        BEGHE, Judge: Following entry of a stipulated decision on
                                      December 1, 2009, this Son of BOSS 1 case remains before this
                                      Court on a motion to revise the decision. The motion was
                                        1 The Son of BOSS tax shelter was described by the Internal Revenue Service (IRS) as a ‘‘list-

                                      ed transaction’’ in Notice 2000–44, 2000–2 C.B. 255, 256. In Announcement 2004–46, 2004–1
                                      C.B. 964, the IRS announced a settlement initiative for taxpayers to resolve transactions de-
                                      scribed in Notice 2000–44, supra, and similar Son of BOSS transactions, with penalties topping
                                      out at 20% of the deficiencies. Within a year thereafter, the IRS announced that the settlement
                                      initiative had resulted in the collection of more than $3.2 billion of Federal income taxes and
                                      reduced penalties from more than 1,000 taxpayers. See ‘‘Son of BOSS Settlement Initiative
                                      Reaps $3.2 Billion, With More Expected, IRS Says’’, TM Weekly Report (BNA), 24 TMWR 467
                                      (Mar. 28, 2005) (Tax Shelters).




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                                      filed by participating partner A. Scott Logan Grantor
                                      Retained Annuity Trust I, A. Scott Logan, Trustee, a partner
                                      other than the tax matters partner. We refer to the trustee
                                      in his individual capacity as Mr. Logan and to the trust as
                                      Logan Trust I or participating partner.
                                         Participating partner argues that the stipulated decision
                                      upholds adjustments in the final partnership administrative
                                      adjustment (FPAA) and applies accuracy-related penalties
                                      that exceed this Court’s jurisdiction under section 6226(f), 2
                                      thereby overstepping the jurisdictional limits under the
                                      TEFRA 3 statute and regulations, 4 as established by the Court
                                      of Appeals for the D.C. Circuit in Petaluma FX Partners,
                                      LLC v. Commissioner, 5 591 F.3d 649 (D.C. Cir. 2010)
                                      (Petaluma II), aff ’g in part, rev’g in part and remanding on
                                      penalty issues 131 T.C. 84 (2008) (Petaluma I). On December
                                      15, 2010, this Court responded to the remand on penalty
                                      issues with its reviewed Opinion (7–5, with two dissenting
                                      opinions), Petaluma FX Partners, LLC v. Commissioner, 135
                                      T.C. 581 (2010) (Petaluma III), and on March 8, 2011, the
                                      Commissioner filed a notice of appeal. 6 Participating partner
                                      argues that under the Golsen 7 rule the Court’s jurisdiction
                                      to decide the issues in dispute in this partnership-level pro-
                                      ceeding is controlled by Petaluma II, so that the Court must
                                         2 Unless otherwise stated, all section references are to the Internal Revenue Code (Code) in

                                      effect for 1999, the year at issue, and all Rule references are to the Tax Court Rules of Practice
                                      and Procedure.
                                         3 Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97–248, sec. 402, 96

                                      Stat. at 648, as amended by the Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. No. 105–34,
                                      sec. 1238, 111 Stat. at 1026.
                                         4 Sec. 301.6231(a)(6)–1T(a), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3840 (Jan. 26,

                                      1999); see also sec. 301.6231(a)(6)–1(a)(1), Proced. & Admin. Regs.
                                         5 In most Son of BOSS cases—as in the case at hand and in Petaluma FX Partners, LLC v.

                                      Commissioner, 135 T.C. 581 (2010) (Petaluma III), on remand from Petaluma FX Partners, LLC
                                      v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (Petaluma II), aff ’g in part, rev’g in part and
                                      remanding on penalty issues 131 T.C. 84 (2008) (Petaluma I)—the taxpayers contributed money
                                      and offsetting long and short foreign currency options to a partnership and reported multi-
                                      million-dollar losses on the sale of property that they claimed was distributed to them in liquida-
                                      tion of their partnership interests.
                                         6 Appeal docketed, No. 024717–05 (D.C. Cir. Mar. 8, 2011). We note that Petaluma II has al-

                                      ready been followed by the Court of Appeals for the Federal Circuit in Jade Trading, LLC, v.
                                      United States, 598 F.3d 1372, 1379–1380 (Fed. Cir. 2010) (Jade Trading II), aff ’g in part, rev’g
                                      in part and remanding on penalty issues 80 Fed. Cl. 11 (2007) (Jade Trading I), remanded to
                                      98 Fed. Cl. 453 (2011) (Jade Trading III), aff ’d, 451 Fed. Appx. 954 (Fed. Cir. 2012), and by
                                      the unpublished summary order of another panel of the Court of Appeals for the D.C. Circuit
                                      in LKF X Invs., LLC, v. Commissioner, 106 A.F.T.R. 2d (RIA) 2010–5003, 2010–1 U.S. Tax Cas.
                                      (CCH) para. 50,488 (D.C. Cir. 2011), aff ’g in part, rev’g in part and remanding on penalty issues
                                      T.C. Memo. 2009–192.
                                         7 Golsen v. Commissioner, 54 T.C. 742 (1970), aff ’d, 445 F.2d 985 (10th Cir. 1971).




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                                      vacate and revise the stipulated decision to conform to the
                                      jurisdictional limits imposed by Petaluma II. 8
                                         We observe that the limiting holdings in Petaluma II were
                                      the result of a concession by the Government that the Court
                                      of Appeals accepted without any discussion of the applicable
                                      regulations. In an opinion issued after Petaluma II was filed,
                                      Mayo Found. for Med. Educ. & Research v. United States,
                                      562 U.S. ll, 131 S. Ct. 704 (2011), the Supreme Court
                                      emphatically reminded lower courts that they must defer to
                                      regulations that satisfy the two-step Chevron 9 standard.
                                      More recently, in Intermountain Ins. Serv. of Vail, LLC v.
                                      Commissioner, 650 F.3d 691 (D.C. Cir. 2011), rev’g and
                                      remanding 134 T.C. 211 (2010), supplementing T.C. Memo.
                                      2009–195, the Court of Appeals for the D.C. Circuit held that
                                      the deference given to regulations under Mayo Found.
                                      required the Court to apply the definitions of statutory terms
                                      provided in valid TEFRA regulations rather than follow earlier
                                      caselaw. In accordance with Mayo Found. and Inter-
                                      mountain, this Court must apply the TEFRA regulations,
                                      unless we hold them to be invalid, rather than follow the
                                      holding in Petaluma II in which the Court of Appeals did not
                                      specifically consider and apply the regulations.
                                         Under the assumption that this Court was bound by the
                                      holdings of the Court of Appeals in Petaluma II, in respond-
                                      ent’s response to participating partner’s motion to vacate and
                                      revise the decision, respondent made the same concession as
                                      the Government made in Petaluma II.
                                         Subject-matter jurisdiction relates to a court’s statutory or
                                      constitutional power to hear a given type of case. United
                                      States v. Cotton, 535 U.S. 625, 630 (2002); United States v.
                                      Morton, 467 U.S. 822, 828 (1984); Alikhani v. United States,
                                      200 F.3d 732, 734 (11th Cir. 2000). The Supreme Court has
                                      held that ‘‘subject-matter jurisdiction, because it involves a
                                      court’s power to hear a case, can never be forfeited or
                                      waived.’’ Cotton, 535 U.S. at 630. ‘‘[S]ubject matter jurisdic-
                                      tion is an unwaivable sine qua non for the exercise of federal
                                        8 Tigers Eye Trading, LLC, was dissolved before the petition was filed; pursuant to sec.

                                      7482(b) the proper venue for an appeal would be the Court of Appeals for the D.C. Circuit. When
                                      the tax matters partner filed the petition (in its capacity as a notice partner, see Barbados #6
                                      Ltd. v. Commissioner, 85 T.C. 900, 903–905 (1985)), Mr. Logan was a resident of Florida and
                                      the place of business of the tax matters partner was in New York. The business address of Ti-
                                      gers Eye Trading, LLC, before its dissolution was in New York.
                                        9 Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–843 (1984).




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                                      judicial power’’. Curley v. Brignoli, Curley & Roberts, Assocs.,
                                      915 F.2d 81, 83 (2d Cir. 1990). Moreover, courts have an
                                      independent obligation to determine whether subject matter
                                      jurisdiction exists, even in the absence of a challenge from
                                      any party. Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574,
                                      583 (1999).
                                         Whether a court has subject matter jurisdiction to adju-
                                      dicate the merits of a controversy is a question of law. Taylor
                                      v. Voss, 271 U.S. 176, 186 (1926) (‘‘a petition for revision will
                                      lie to bring up for review the question of law whether the
                                      court of bankruptcy has jurisdiction to adjudicate the merits
                                      of such controversy in a summary proceeding’’); Adkison v.
                                      Commissioner, 592 F.3d 1050, 1052 (9th Cir. 2010) (‘‘Whether
                                      the Tax Court has subject matter jurisdiction is a question
                                      of law and thus reviewed de novo’’), aff ’g 129 T.C. 97 (2007);
                                      United States v. Moore, 443 F.3d 790, 793 (11th Cir. 2006).
                                      The meaning of a statutory term is also a question of law.
                                      Crane v. Commissioner, 331 U.S. 1, 15 (1947) (Tax Court’s
                                      determinations of statutory terms ‘‘announced rules of gen-
                                      eral applicability on clear-cut questions of law’’).
                                         Neither the Supreme Court nor an appellate court is bound
                                      to accept the Government’s concession that the court below
                                      erred on a question of law. Orloff v. Willoughby, 345 U.S. 83,
                                      88 (1953). Similarly, the Tax Court need not accept a party’s
                                      concession on a question of law, particularly when to do so
                                      would strip the Court of its jurisdiction. See Charlotte’s Office
                                      Boutique, Inc. v. Commissioner, 121 T.C. 89, 102 (2003),
                                      aff ’d, 425 F.3d 1203 (9th Cir. 2005).
                                         The Golsen rule does not apply where the precedent from
                                      the Court of Appeals constitutes dicta or contains distin-
                                      guishable facts or law. See, e.g., Hefti v. Commissioner, 97
                                      T.C. 180, 187 (1991) (dictum not controlling), aff ’d, 983 F.2d
                                      868 (8th Cir. 1993); Metzger Trust v. Commissioner, 76 T.C.
                                      42, 72–74 (1981) (factual distinctions render Golsen rule not
                                      squarely on point), aff ’d, 693 F.2d 459 (5th Cir. 1982);
                                      Kueneman v. Commissioner, 68 T.C. 609, 612 n.4 (1977) (dis-
                                      tinct legal question not governed by the Golsen rule), aff ’d,
                                      628 F.2d 1196 (9th Cir. 1980). As we stated in Lardas v.
                                      Commissioner, 99 T.C. 490, 493–495 (1992), the Golsen rule
                                      applies only where the ‘‘clearly established’’ position of a
                                      Court of Appeals signals ‘‘inevitable’’ reversal upon appeal.




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                                      76                  138 UNITED STATES TAX COURT REPORTS                                        (67)


                                         In Petaluma II the Government conceded that outside
                                      basis was an affected item but argued that the Tax Court
                                      had jurisdiction to decide an affected item where its elements
                                      consisted entirely of partnership items. The Court of Appeals
                                      agreed that outside basis was an affected item but rejected
                                      the Government’s elements argument. The Court of Appeals
                                      did not decide (1) whether under section 301.6231(a)(3)–
                                      1(a)(4) and (c)(3)(iii), Proced. & Admin. Regs., outside basis
                                      is a partnership item because it is an item related to con-
                                      tributions and distributions necessary for maintaining its
                                      books and records and providing information to the pur-
                                      ported partners; (2) whether outside basis was an entity item
                                      under section 301.6233–1T(a) and (c), Temporary Proced. &
                                      Admin. Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987); (3)
                                      whether the basis in the property distributed by an entity
                                      that is disregarded as a partnership for Federal income tax
                                      purposes is an entity item under section 301.6233–1T(a) and
                                      (c), Temporary Proced. & Admin. Regs., supra; or (4) whether
                                      section 301.6231(a)(3)–1(a)(4) and (c)(3)(iii), Proced. &
                                      Admin. Regs., and section 301.6233–1T(a) and (c), Temporary
                                      Proced. & Admin. Regs., supra, are valid.
                                         The Court of Appeals for the D.C. Circuit recognizes its
                                      ‘‘obligation to explore any promising avenue to * * * [the
                                      inferior court’s] jurisdiction, whether or not suggested by the
                                      parties’’. Ass’n of Am. Med. Colleges v. Califano, 569 F.2d
                                      101, 111 (D.C. Cir. 1977); see also Da Silva v. Kinsho Int’l
                                      Corp., 229 F.3d 358, 361 (2d Cir. 2000) (‘‘the issue of subject
                                      matter jurisdiction is one we are required to consider, even
                                      if the parties have ignored it or, as here, have switched sides
                                      on the issue’’). Because the Court of Appeals did not consider
                                      the precise issue we decide herein, Golsen does not apply. See
                                      Read v. Commissioner, 114 T.C. 14 (2000), aff ’d without pub-
                                      lished opinion sub nom. Mulberry Motor Parts, Inc. v.
                                      Commissioner, 273 F.3d 1120 (11th Cir. 2001); Estate of
                                      Branson v. Commissioner, 113 T.C. 6, 34 (1999), aff ’d, 264
                                      F.3d 904 (9th Cir. 2001).
                                         Accordingly, we reject respondent’s concession and apply
                                      the applicable regulations, authorized by sections 6231(a)(3)
                                      and 6233, and hold that this Court has jurisdiction to enter
                                      the stipulated decision as written, even to the extent it
                                      adjusts outside basis to zero and applies the 40% gross basis
                                      misstatement penalty under section 6662(h) to the deficiency




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      77


                                      that results from the overstatement of the purported part-
                                      ners’ bases in distributed property. Therefore we shall deny
                                      participating partner’s motion to vacate and revise the deci-
                                      sion.

                                                                                Background

                                        Entry of the stipulated decision in this 1999 taxable year
                                      Son of BOSS case was preceded by our opinion in Tigers Eye
                                      Trading, LLC v. Commissioner, T.C. Memo. 2009–121 (Tigers
                                      Eye I). 10 Tigers Eye I was preceded by extensive discovery
                                      and motion practice, 11 the lodging of expert reports on the
                                         10 In Tigers Eye I we denied, on the authority of New Millennium Trading, LLC v. Commis-

                                      sioner, 131 T.C. 275 (2008), participating partner’s partial summary judgment motion to invali-
                                      date sec. 301.6221–1T(c) and (d), Temporary Proced. & Admin. Regs., 64 Fed. Reg. 3838 (Jan.
                                      26, 1999). We thereby denied Mr. Logan and Logan Trust I the right in this partnership-level
                                      proceeding to interpose their partner-level good faith/reasonable cause defenses under sec.
                                      6664(c) to the accuracy-related penalties. We also granted respondent’s motion in limine to ex-
                                      clude participating partner’s expert witness report on the reliability of a tax opinion on which
                                      Mr. Logan, Logan Trust I, and Mr. Logan’s two other grantor trusts (collectively, Logan Trusts)
                                      claim to have relied in preparing their 1999 Federal income tax returns.
                                         In Tigers Eye I respondent also contended that Curtis Mallet Prevost Curt & Mosle (Curtis
                                      Mallet)—the law firm that issued the tax opinion on which Mr. Logan and participating partner
                                      claim to have relied in taking their 1999 Federal income tax return positions—was a promoter
                                      of the transaction. In Tigers Eye I we also expressed the view that this promoter contention
                                      raised a partnership-level issue that the Court could address at the trial; we also set forth our
                                      views on the legal standard for determining promoter status. In 106 Ltd. v. Commissioner, 136
                                      T.C. 67, 77–81 (2011), the Court, notwithstanding that in Tigers Eye I we had expressed those
                                      views in dicta, adopted and applied those views in holding that the law firm that had issued
                                      the tax opinion in the Son of BOSS transaction in that case was a promoter of the transaction
                                      whose opinion could not be reasonably relied upon in good faith by the partnership or the tax-
                                      payer.
                                         Tigers Eye I concluded with an Afterword that deplored the inefficiency and waste of judicial
                                      and party resources caused by the apparent splitting of the accuracy-related penalty cause of
                                      action under TEFRA as amended by TRA 1997. That inefficiency and waste are exemplified by
                                      the motions we have had to deal with in Tigers Eye I and by the continuing controversies in
                                      Petaluma, the case at hand, and other Son of BOSS cases over whether the accuracy-related
                                      penalties must or can be determined at the partnership level or the partner (individual tax-
                                      payer) level.
                                         We noted in Tigers Eye I that the IRS has initiated a response to the observed problems, rely-
                                      ing on its authority under sec. 6231(c) to promulgate regulations with respect to special enforce-
                                      ment areas if it determines that treating certain items as partnership items under TEFRA will
                                      interfere with the effective and efficient enforcement of the revenue laws. The IRS has proposed
                                      regulations, Notice of proposed rulemaking, sec. 301.6231(c)–9(c), Proposed Proced. & Admin.
                                      Regs., 74 Fed. Reg. 7205 (Feb. 13, 2009), which, when and if promulgated, would enable the
                                      Commissioner to convert partnership items to nonpartnership items in partnership cases involv-
                                      ing listed transactions; invoking this procedure would have the salutary effect of providing for
                                      ‘‘one-stop shopping’’ through application of the traditional deficiency procedures to both defi-
                                      ciencies and accuracy-related penalties in such transactions. See 1 William S. McKee et al., Fed-
                                      eral Taxation of Partners and Partnerships, para. 10.02[4], at 10–16 (4th ed. 2007). We also
                                      noted that the proposed regulations would not provide relief in the case at hand or the myriad
                                      other pending Son of BOSS cases. The proposed regulations have not been finalized.
                                         11 Including participating partner’s motion for partial summary judgment ‘‘regarding confirma-

                                                                                                     Continued




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                                      78                  138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      actual and expected financial consequences of the trans-
                                      action, and the lodging and later filing of two extensive
                                      stipulations of fact. 12 The undisputed factual material
                                      thereby made available enables us to describe the operative
                                      facts of the transaction. The extensive and detailed facts set
                                      forth in Tigers Eye I are incorporated herein by this ref-
                                      erence. In addressing the pending motion, we take account of
                                      additional indisputable facts and repeat only the most perti-
                                      nent facts set forth in Tigers Eye I.
                                        The subject transaction was one of a number of such trans-
                                      actions promoted by Sentinel Advisors, LLC (Sentinel), 13 the
                                      tax matters partner, using a limited liability company—
                                      Tigers Eye Trading, LLC (Tigers Eye), in the case at hand—
                                      treated as a partnership for income tax purposes, as the
                                      vehicle needed to create the claimed basis step-ups that were
                                      the transaction’s reason for being. 14
                                      tion of Code and caselaw as to contingent obligations’’. Participating partner sought a ruling
                                      that Helmer v. Commissioner, T.C. Memo. 1975–160, requires a holding that ‘‘a contingent obli-
                                      gation such as the Sold Euro Option each of the Logan Trusts sold to AIG falls short of a fixed
                                      ‘liability’ for section 752 and other federal income tax purposes’’. By order dated August 5, 2008,
                                      we denied the motion for a variety of reasons.
                                         12 On December 1, 2010, the day the stipulated decision was entered, the Court deemed moot

                                      and discharged its order to show cause in response to respondent’s Rule 91(f) motion to show
                                      cause why proposed facts in evidence (embodied in a proposed third stipulation of facts and Ex-
                                      hibits 145–J through 155–J) should not be accepted as established.
                                         13 Among the cases of Sentinel-promoted Son of BOSS transactions that have been filed in the

                                      Court of Federal Claims are Jade Trading I; Evergreen Trading, LLC v. United States, 80 Fed.
                                      Cl. 122 (2007), to which Nussdorf v. Commissioner, 129 T.C. 30 (2007), is related; and K2 Trad-
                                      ing Ventures, LLC v. United States, 101 Fed. Cl. 365 (2011), to which Asuma Trading Ventures,
                                      LLC v. Commissioner, infra, is related. Other cases of Sentinel-promoted transactions filed in
                                      this Court include Sterling Trading Opportunities, LLC v. Commissioner, No. 12361–05, and
                                      Topaz Trading, LLC v. Commissioner, No. 12629–05 (stip. decs. entered June 24, 2008); New
                                      Millennium Trading, LLC v. Commissioner, No. 3439–06 (filed Feb. 16, 2006); Asuma Trading
                                      Ventures, LLC v. Commissioner, No. 26772–06 (filed Dec. 27, 2006); Sapphire Traders, LLC v.
                                      Commissioner, No. 19067–09 (filed Aug. 10, 2009); Eagle Trading Opportunities, LLC v. Com-
                                      missioner, No. 9733–05 (stip. dec. entered Jan. 23, 2009); Pinnacle Trading Opportunities, LLC
                                      v. Commissioner, No. 19291–05 (filed Oct. 14, 2005); and Oak Leaf Trading, LLC v. Commis-
                                      sioner, No. 1896–06 (stip. dec. entered July 29, 2008). Stipulated decisions in Sterling and Topaz
                                      are virtually identical to each other and to the decision in the case at hand in adjusting to zero
                                      the same four items, in not expressly making an outside basis adjustment (which was expressly
                                      made in the FPAA), in providing that the 40% penalty applies to underpayments of tax attrib-
                                      utable to overstating capital contributions, and in providing that 20% negligence or substantial
                                      understatement penalties apply to any additional underpayments. See also Diebold v. Commis-
                                      sioner, T.C. Memo. 2010–238, in which Sentinel appears to have played a facilitating role in cre-
                                      ating artificial losses claimed on the sale of corporate assets, resulting in a deficiency in Federal
                                      corporation income tax and accuracy-related penalties not contested by the selling corporation.
                                         14 Although the parties have stipulated the correctness of the determinations in the FPAA,

                                      including that the existence of Tigers Eye was not established as a fact and that the trans-
                                      actions in which it claimed to have participated should be disregarded in full, we use the terms
                                      ‘‘partnership’’, ‘‘partner’’, and related terms for convenience.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      79


                                         During 1999 Mr. Logan realized a multimillion-dollar long-
                                      term capital gain on his sale to a large Canadian financial
                                      services holding company of his stock interest in a corpora-
                                      tion he had cofounded to act as a distributor of variable
                                      annuities.
                                         Tigers Eye was a Delaware limited liability company
                                      formed in late September 1999, ostensibly to engage in for-
                                      eign currency trading but in reality to generate paper losses
                                      to offset taxpayers’ otherwise taxable capital gains. On
                                      October 1, 1999, the Logan Trusts each acquired a pair of off-
                                      setting long and short foreign currency options through AIG,
                                      which they then contributed along with cash to become part-
                                      ners in Tigers Eye on October 9, 1999. The Logan Trusts
                                      inflated their adjusted bases in Tigers Eye to reflect their
                                      contributions of the long options without reducing those
                                      bases to reflect Tigers Eye’s assumption of their obligations
                                      under the short options. The basis inflation is premised on
                                      (1) treating each purchased option separately from each sold
                                      option, (2) each purchased option’s having a basis equal to
                                      the gross premium in the hands of both the Logan Trusts
                                      and Tigers Eye, (3) treating the assignment to and assump-
                                      tion by Tigers Eye of the contingent obligation to satisfy the
                                      sold option separately from the purchased option for pur-
                                      poses of section 752, and (4) disregarding the contingent
                                      obligation to satisfy the sold option in determining outside
                                      basis in the partnership under the authority of Helmer v.
                                      Commissioner, T.C. Memo. 1975–160.
                                         An unrelated entity, the Batts Group, also acquired
                                      interests in offsetting foreign currency options through AIG
                                      that were transferred to Tigers Eye and also received other
                                      property in liquidation of its interest in Tigers Eye. 15 We
                                      refer to participants in offsetting options transactions with
                                      partnerships such as the offsetting option transactions of the
                                      Logan Trusts and the Batts Group with Tigers Eye as option
                                      partners. In addition to Sentinel, the tax matters partner,
                                      which contributed $3,000 cash, Tigers Eye also had as a
                                      partner a foreign entity, Banque Safra-Luxembourg (Banque
                                      Safra), which contributed $58,000 cash. Neither Sentinel nor
                                      Banque Safra had any financial interest in the option trans-
                                        15 The Batts Group settled its case with the IRS without any court proceeding. In the fol-

                                      lowing description and discussion we will for the most part ignore the role of the Batts Group.




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                                      80                  138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      actions, and neither has a stake in the outcome of this pro-
                                      ceeding.
                                         During December 1999 Sentinel caused Tigers Eye to
                                      unwind or terminate the paired options at a net loss. 16 Sen-
                                      tinel through Tigers Eye used the remaining cash contribu-
                                      tions to purchase foreign currency (euro) and shares of listed
                                      stock (Xerox Corp.) that were purportedly distributed to the
                                      Logan Trusts in liquidation of their purported partnership
                                      interests. The Logan Trusts claimed that they had hugely
                                      inflated bases in Tigers Eye that attached to the foreign cur-
                                      rency and stock Tigers Eye transferred to them (sometimes
                                      referred to herein as the distributed property). They sold the
                                      currency and stock before yearend 1999 and claimed huge
                                      losses that flowed through to Mr. Logan’s 1999 Federal
                                      income tax return. Mr. Logan used the claimed losses on the
                                      sales of the foreign currency to offset his ordinary income,
                                      and he used the claimed short-term losses on the sales of the
                                      Xerox Corp. stock to offset most of the multimillion-dollar
                                      long-term capital gain he realized on the sale of his stock
                                      interest in the annuity distribution business. 17
                                         On April 14, 2000, Tigers Eye filed a Form 1065, U.S.
                                      Partnership Return of Income, for its 1999 taxable year. On
                                      March 7, 2005, respondent issued an FPAA to the Tigers Eye
                                      partners.
                                         The FPAA comprises (1) Letter 1830, Notice of Final Part-
                                      nership Administrative Adjustment, (2) Form 870–PT, Agree-
                                      ment for Partnership Items and Partnership Level Deter-
                                      minations as to Penalties, Additions to Tax, and Additional
                                         16 Ignoring the various fees paid by the Logan Trusts and Mr. Logan to participate in the

                                      transaction, the total outlay of the Logan Trusts to purchase their interests in the options and
                                      to make their cash contributions was approximately $400,000. What is important for the
                                      claimed basis inflation in the case at hand is that the premium on each option exceeded $9 mil-
                                      lion and the exercise price of each option exceeded $200 million. However, the net premium the
                                      Logan Trusts paid for each purchased option was only $95,003 more than the premium received
                                      or receivable for the offsetting sold option. The net premium that Tigers Eye received from AIG
                                      on the unwinding of each pair of options was $40,044.68, resulting in a total loss of $164,875
                                      to the Logan Trusts on the unwinding of the options (($95,003 × 3 = $285,009) – ($40,044.68
                                      × 3 = $120,134.04) = $164,874.96).
                                         17 As compared with their total $400,000 outlay to acquire their interests in the paired options

                                      and make their cash capital contributions, see supra note 16, the Logan Trusts received foreign
                                      currency and shares of Xerox Corp. having combined cost and value of approximately $230,000,
                                      of which approximately $14,000 was attributable to the foreign currency. The Logan Trusts
                                      claimed an ordinary loss that they flowed through to Mr. Logan of approximately $1.7 million
                                      on the sale of the foreign currency; Mr. Logan and the Logan Trusts claimed an aggregate basis
                                      of more than $27 million in the Xerox Corp. shares, resulting in claimed losses of more than
                                      $26 million on their sales.




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                                      (67)               TIGERS EYE TRADING, LLC v. COMMISSIONER                                        81


                                      Amounts, including a Schedule of Adjustments, and (3) an
                                      ‘‘Exhibit A—Explanation of Items’’, setting forth respondent’s
                                      other adjustments or determinations.
                                         The Schedule of Adjustments adjusted to zero the following
                                      five items:

                                           A. Capital Contributions (Sched. M–2,
                                                line 2)                                                                        $698,595
                                           B. Distributions of Property other than
                                                Money (Sched. M–2, line 6b)                                                      365,446
                                           C. Outside Partnership Basis                                                       24,500,059
                                           D. Other Deductions (Sched. K, line 11)                                                11,314
                                           E. Ordinary Income, Other Income
                                                (Loss) (Sched. K, line 7)                                                      (242,186)

                                      Items A, B, D, and E are each identified as the adjustment
                                      of a line item on the Tigers Eye 1999 Form 1065. Item C
                                      (Outside Partnership Basis) is not such an item and does not
                                      correspond to any line item on the partnership return.
                                      Unlike the item A, B, D, and E amounts, each of which is
                                      identified as the adjustment of a line item on the Tigers Eye
                                      1999 Form 1065, the item C amount does not appear on the
                                      partnership return or on the Schedules K–1, Partner’s Share
                                      of Income, Credits, Deductions, etc., of the partnership
                                      return and sent to the partners.
                                        Only two of the foregoing adjustments were to items
                                      appearing on the partnership return that directly flowed
                                      through to the returns of the Logan Trusts and thence to Mr.
                                      Logan’s individual return. These two adjustments change to
                                      zero two items that appeared on Schedule K of the partner-
                                      ship return: ‘‘Other Deductions’’ of $11,314 (appearing on line
                                      11, Schedule K, page 3, of the partnership return) and the
                                      negative amount ‘‘($242,186)’’ reported for ‘‘Ordinary Income,
                                      Other Income (Loss)’’ (on line 7, Schedule K, Partners’
                                      Shares of Income, Credits, Deductions, etc., page 3, of the
                                      partnership return). These line items were described in
                                      greater detail in Statements 1 and 2 of the return,
                                      reproduced below. 18 Statement 1, which attributes the nega-
                                           18 Statements   1 and 2 reported as follows:
                                                                                                         Continued




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                                      82                  138 UNITED STATES TAX COURT REPORTS                                          (67)


                                      tive figure –257,857 to ‘‘ORDINARY LOSS FROM SEC. 988 TRANS-
                                      ACTIONS’’, thereby indicates that this negative figure included
                                      the net loss claimed by Tigers Eye on the termination or
                                      unwinding of the contributed paired options, as well as the
                                      results of other foreign currency transactions. 19
                                         The partnership return Schedules K–1 for the Logan
                                      Trusts show that their respective shares of the entries on
                                      lines 7 and 11 of Schedule K were a loss of $52,583 and other
                                      deductions of $2,136, respectively, for a total loss of $157,749
                                      and total other deductions of $6,408 that flowed from the
                                      partnership return through the returns of the Logan Trusts
                                      to Mr. Logan’s 1999 Federal income tax return. 20 Indeed, the
                                      Form 1041, U.S. Income Tax Return for Estates and Trusts,
                                      for each of the Logan Trusts reports a $55,278 nonpassive
                                      loss from partnerships, which is within $600 of the $54,719
                                      sum of the items allocated to each Logan Trust on lines 7
                                      and 11. Mr. Logan’s 1999 individual Federal income tax
                                      return, in three separate schedules entitled ‘‘1999 income
                                      from passthroughs’’, shows a loss of $55,278 from ‘‘SCHEDULE
                                           lllllllllllllllllllllll

                                           llllllllllllllllllllllllllllllllllllllllllll
                                           SCHEDULE K     OTHER INCOME (LOSS)  STATEMENT 1

                                           llllllll
                                           DESCRIPTION                                                                      lllll
                                                                                                                            AMOUNT

                                           NONPORTFOLIO SHORT–TERM CAPITAL GAIN (LOSS)                                         5,354
                                           INTEREST INCOME                                                                     1,617
                                           WITHDRAWAL FEES                                                                     8,700
                                           ORDINARY LOSS FROM SEC. 988 TRANSACTIONS                                         lllll
                                                                                                                            –257,857
                                           TOTAL TO SCHEDULE K, LINE 7                                                      –242,186
                                           lllllllllllllllllllllll

                                           llllllllllllllllllllllllllllllllllllllllllll
                                           SCHEDULE K      OTHER DEDUCTIONS    STATEMENT 2

                                           llllllll
                                           DESCRIPTION                                                                      lllll
                                                                                                                            AMOUNT

                                           OPERATING EXPENSES                                                               lllll
                                                                                                                             11,314
                                           TOTAL TO SCHEDULE K, LINE 11                                                     lllll
                                                                                                                             11,314
                                         19 Respondent’s proposed third stipulation of facts and Exhibits 145–J through 155–J, the sub-

                                      jects of respondent’s Rule 91(f) motion, see supra note 12, would have conclusively established
                                      that the option spreads were terminated at a net loss during December 1999 and that the loss
                                      was included in the ‘‘ORDINARY LOSS FROM SEC. 988 TRANSACTIONS’’ that was claimed
                                      on the partnership return. Our conclusion that the contributed paired options were terminated
                                      or unwound during December 1999 is supported by the fact that Tigers Eye’s final return for
                                      the year 2000, which showed Sentinel and Banque Safra to be the only partners, also showed
                                      relatively small amounts of remaining assets (much less than the aggregate capital contribu-
                                      tions of the Logan Trusts and the Batts Group), liabilities, and capital at the beginning of the
                                      year, and relatively small losses and income from dispositions of assets and winding-up oper-
                                      ations.
                                         20 The differences between these figures and the gross amounts shown on Statements 1 and

                                      2, see supra note 18, that were adjusted to zero by the FPAA were attributable to the Batts
                                      Group’s participation in Tigers Eye.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                       83


                                      E ACTIVITY INCOME (LOSS)’’ for each of the Logan Trusts
                                      ($55,279 loss for Logan Trust II) for total ‘‘SCHEDULE E
                                      INCOME OR (LOSS) FROM ESTATES OR TRUSTS STATEMENT 21
                                      NONPASSIVE LOSS OF’’ $165,835.
                                         Statement 6 on the partnership return, ‘‘PARTNERS’ CAPITAL
                                      ACCOUNT SUMMARY’’, shows ‘‘Capital Contributed’’ and ‘‘With-
                                      drawals’’ (the latter is identical to ‘‘Distributions of Property
                                      Other Than Money’’) totaling $698,595 and $365,446, respec-
                                      tively, that were also adjusted to zero by the FPAA.
                                         The ‘‘Capital Contributions’’ of $698,595 shown by the
                                      partnership return and zeroed out by the FPAA (and the
                                      stipulated decision) was the sum of the cash contributed by
                                      all the partners plus the net value of the paired options that
                                      the Logan Trusts and the Batts Group had ostensibly
                                      contributed to the partnership; this net value was arrived at
                                      by netting the premiums on the long and short options. This
                                      partnership return reporting differed from the inflated bases
                                      claimed by the Logan Trusts through the tax shelter 21 in
                                      that the option partners claimed bases in their partnership
                                      interests that included the premiums on the long options
                                      (amounting to more than $27 million, see supra note 17)
                                      without reduction or offset for the liabilities represented by
                                      the premiums on the short options.
                                         The ‘‘Withdrawals’’ (‘‘Distributions of Property Other Than
                                      Money’’) of $365,446 zeroed out by the FPAA was the book
                                      value (the aggregate purchase price/cost) of the foreign cur-
                                      rency and corporate shares purchased by Sentinel through
                                      Tigers Eye on behalf of the Logan Trusts and the Batts
                                      Group for distribution to them. 22 The Logan Trusts’ share of
                                         21 Capital contributions are to be reported by a partnership at fair market value rather than

                                      the cost or adjusted basis of the contributed property to the contributing partners, which is the
                                      ‘‘inside basis’’ of such property to the partnership under sec. 723. Secs. 1.704–1(b)(2)(iv)(b),
                                      1.705–1(a)(1), Income Tax Regs.; see also Interhotel Co. v. Commissioner, T.C. Memo. 2001–151;
                                      Mitchell v. Commissioner, T.C. Memo. 1997–382 n.5. Because of the short time (less than 1
                                      month) between the option partners’ purchases of the option spreads and their contribution to
                                      Tigers Eye, it seems likely that there was little difference between the purchase prices of the
                                      option spreads and their fair market values when contributed to Tigers Eye. In any event, the
                                      determination that Tigers Eye is not a partnership for Federal income tax purposes and the ad-
                                      justment of capital contributions to zero by both the FPAA and the stipulated decision has had
                                      the effects of denying the purported partnership any bases in the paired options and of dis-
                                      allowing any partnership loss claimed by Tigers Eye for 1999 on the termination or unwinding
                                      of the paired options and on any other foreign currency transactions.
                                         22 Under sec. 732(a)(1) the basis of property (other than money) distributed to a partner in

                                      a nonliquidating distribution is its cost to the partnership or its ‘‘inside basis’’, whereas, under
                                      sec. 732(b), the basis of such property distributed to a partner in liquidation is an amount equal
                                                                                                     Continued




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                                      84                  138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      this cost amounted to approximately $230,000. See supra
                                      note 17. The aggregate inflated ‘‘outside’’ bases claimed by
                                      the Logan Trusts on the sales of foreign currency and Xerox
                                      Corp. stock were more than 118 times greater than (11,800%
                                      of) the withdrawals/distribution amounts reported on the
                                      partnership return.
                                         The ‘‘EXHIBIT A—Explanation of Items’’ made the following
                                      additional adjustments or determinations: (1) Tigers Eye’s
                                      existence as a partnership had not been established as a fact;
                                      (2) Tigers Eye had no business purpose other than tax avoid-
                                      ance, lacked economic substance, and was an economic sham
                                      so that Tigers Eye and the transactions in which it claimed
                                      to have participated should be disregarded in full; and (3)
                                      Tigers Eye had been formed or availed of, within the
                                      meaning of section 1.701–2, Income Tax Regs., for a principal
                                      purpose of improperly reducing the partners’ Federal income
                                      tax liabilities.
                                         The Explanation of Items went on to make alternative
                                      adjustments or determinations premised on regarding Tigers
                                      Eye as a partnership that had received the paired foreign
                                      currency options as contributions and assignments from the
                                      option partners (the Logan Trusts and the Batts Group) and
                                      thereafter distributed foreign currency and listed shares of
                                      stock to them in liquidation of their partnership interests. In
                                      that regard, the Explanation of Items determined that (1) the
                                      partners ‘‘have not established [under section 723] adjusted
                                      bases in their respective partnership interests in amounts
                                      greater than zero’’; (2) ‘‘the purported partners of Tigers Eye
                                      did not enter into the option positions and Tigers Eye did not
                                      purchase the foreign currency or [listed] stock with a profit
                                      motive for purposes of section 165(c)(2)’’; and (3) the obliga-
                                      tions under the sold options should be netted against the
                                      purchased options so that ‘‘any * * * claimed increases in
                                      the outside bases in Tigers Eye resulting from the contribu-
                                      tions of the sold [sic ‘‘purchased’’] options should be dis-
                                      allowed’’. The alternative adjustments described in this para-
                                      graph have been rendered inapplicable by the stipulated
                                      decision’s adoption of the primary adjustments disregarding
                                      to the distributee partner’s interest in the partnership; i.e., its ‘‘outside basis’’. Under sec. 988
                                      and preexisting law, see Nat’l-Standard Co. v. Commissioner, 80 T.C. 551, 558 (1983), aff ’d, 749
                                      F.2d 369 (6th Cir. 1984), foreign currency is generally considered property other than money
                                      for Federal income tax purposes.




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                                      the partnership described in the immediately proceeding
                                      paragraph.
                                        Finally, the Explanation of Items determined at the part-
                                      nership level that accuracy-related penalties to be imposed at
                                      the individual taxpayer level apply ‘‘to all underpayments of
                                      tax attributable to adjustments of partnership items of
                                      Tigers Eye Trading, LLC’’. The Explanation of Items went on
                                      to state:
                                        The penalty shall be imposed on the components of underpayment as fol-
                                      lows:
                                         A. a 40 percent penalty shall be imposed on the portion of any under-
                                      payment attributable to the gross valuation misstatement as provided by
                                      Sections 6662 (a), 6662(b)(3), 6662(e), and 6662(h) of the Internal Revenue
                                      Code.
                                         B. a 20 percent penalty shall be imposed on the portion of the under-
                                      payment attributable to negligence or disregard of rules and regulation as
                                      provided by Sections 6662(a), 6662(b)(1), 6662(c) of the Internal Revenue
                                      Code.
                                         C. a 20 percent penalty shall be imposed on the underpayment attrib-
                                      utable to the substantial understatement of income tax as provided by sec-
                                      tions 6662(a), 6662(b)(2), and 6662(d) of the Internal Revenue Code.
                                         D. a 20 percent penalty shall be imposed on the underpayment attrib-
                                      utable to the substantial valuation misstatement as provided by Sections
                                      6662(a), 6662(b)(3), and 6662(e) of the Internal Revenue Code.

                                        Sentinel, the tax matters partner, filed the petition in this
                                      case but claims to have no direct financial interest in its out-
                                      come. Mr. Logan, as trustee of Logan Trust I, 23 sought and
                                      was granted leave to participate in this proceeding as partici-
                                      pating partner. Mr. Logan, through his counsel, has wielded
                                      the laboring oar and called the shots for the taxpayer
                                      interests in this proceeding. 24
                                         23 Participating partner had originally filed a refund suit (to recover a deposit of $18,898.93)

                                      in the Court of Federal Claims, Tigers Eye Trading, LLC v. United States, No. 05–00864–LAS
                                      (filed Aug. 4, 2005), contemporaneously with petitioner’s filing of the petition in the case at
                                      hand. After the United States filed a motion to dismiss for lack of jurisdiction by reason of the
                                      pendency of the case at hand, see sec. 6226(b)(2), participating partner began proceedings to par-
                                      ticipate in the case at hand. This Court granted leave and recognized Logan Trust I’s status
                                      as participating partner, see this Court’s order of Mar. 9, 2007, and the case in the Court of
                                      Federal Claims was dismissed per order (Mar. 20, 2007). We would observe that Mr. Logan’s
                                      deposit in the Court of Federal Claims case was an admission that the FPAA adjusted partner-
                                      ship items on the Tigers Eye 1999 partnership return such that Mr. Logan’s Federal income
                                      tax liability was increased thereby. See sec. 301.6226(e)–1T (a)(1), Temporary Proced. & Admin.
                                      Regs., 52 Fed. Reg. 6788 (Mar. 5, 1987); see also sec. 301.6226(e)–1(a)(1), Proced. & Admin.
                                      Regs.
                                         24 On Oct. 6, 2009, after the filing of Tigers Eye I, participating partner filed a motion and

                                      supporting memorandum for partial summary judgment regarding inapplicability of sec.
                                                                                                     Continued




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                                        Within a week before the scheduled trial, 25 the Court was
                                      gratified to receive the stipulated decision document signed
                                      by respondent’s counsel, by Sentinel, through Ari Bergmann,
                                      trustee of the Bergmann Revocable Trust, tax matters
                                      partner of Sentinel, tax matters partner of Tigers Eye, and
                                      by Sentinel’s counsel. Participating partner through counsel
                                      indicated no objection to entry of the decision. The decision
                                      provides as follows:
                                        ORDERED AND DECIDED: That the following statement shows the
                                      adjustments to the partnership items of Tigers Eye Trading, LLC, for the
                                      taxable year 1999:

                                                        Partnership Item                  As Reported           As Determined
                                              Ordinary Income, Other
                                               Income (Loss)                                 ($242,186)                $-0-
                                              Deductions, Other Deductions                     $11,314                 $-0-


                                      6662(h). In the motion and supporting memorandum, participating partner conceded that the
                                      loss on the sale of the distributed stock and foreign currency was not allowed under sec.
                                      465(b)(4) because it exceeded the amount at risk. The motion and memorandum and subsequent
                                      filings made clear that by conceding the at-risk issue participating partner intended to take the
                                      sec. 6662(h) 40% gross basis misstatement penalty out of play at both the partnership and part-
                                      ner/individual levels. In attempting so to do, participating partner cited and relied on the opin-
                                      ion of the Court of Federal Claims in Alpha I, L.P. v. United States, 84 Fed. Cl. 622, 634 (2008).
                                      In orders dated November 6 and 18, 2009, respectively, we denied the motion for partial sum-
                                      mary judgment and explained our view, citing Hambrose Leasing 1984–5 Ltd. P’ship v. Commis-
                                      sioner, 99 T.C. 298 (1992), and Russian Recovery Fund, Ltd. v. United States, 81 Fed. Cl. 793
                                      (2008), that at risk under sec. 465 is a partner-level issue on which the Court lacks jurisdiction
                                      to accept a concession in a partnership-level proceeding such as the case at hand.
                                         The importance of the 40% penalty to both the IRS and taxpayers in Son of BOSS cases is
                                      shown by the repeated attempts by taxpayers to use concessions to take the penalty out of play.
                                      See, e.g., Bergmann v. Commissioner, 137 T.C. 136 (2011), and Chief Counsel Notice CC–2012–
                                      001 (Oct. 5, 2011), opposing the allowance of concessions to avoid imposition of valuation
                                      misstatement penalties. See 199 Daily Tax Rept. (BNA) K–6 (Oct. 14, 2011). In a status report
                                      filed November 13, 2009, in the case at hand respondent provided a list, with docket numbers,
                                      of more than 40 Son of BOSS cases pending in the Tax Court in which respondent was asserting
                                      both sec. 465 at risk (as an alternative position) and the 40% gross basis misstatement penalty.
                                      In a previous filing, respondent had asserted that the aggregate amount of the 40% penalties
                                      being asserted in such cases amounted to approximately $130 million, of which the 40% pen-
                                      alties in five still-pending Sentinel-promoted Son of BOSS cases amounted to approximately $41
                                      million.
                                         25 Participating partner’s counsel informed the Court, in filings of October 26 and November

                                      2, 2009, and in a recorded telephone conference of November 5, 2009, that participating partner
                                      would not participate in the trial that had been set for a special session scheduled to commence
                                      on November 30, 2010, in Washington, D.C. Participating partner’s counsel stated that it would
                                      be futile and prohibitively expensive to have a trial in the partnership-level proceeding. Instead,
                                      participating partner had decided to ‘‘pursue reasonable cause in the refund action consistent
                                      with this Court’s ruling that it lacks jurisdiction over that reasonable cause’’. In the preamble
                                      of our order of November 18, 2009, we urged participating partner to reconsider not partici-
                                      pating in the trial; we ordered participating partner and petitioner to file a status report by
                                      November 29, 2009, ‘‘informing the Court whether they intend to participate in the trial of this
                                      case’’.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      87


                                                        Partnership Item                  As Reported           As Determined

                                              Distributions of Property
                                                other than Money                              $365,446                 $-0-
                                              Capital Contributions                           $698,595                 $-0-

                                         It is determined that the notice of final partnership administrative
                                      adjustment dated March 7, 2005, which is the subject matter of this case,
                                      is correct.
                                         It is determined that a 40 percent gross valuation misstatement penalty
                                      under I.R.C. § 6662(a); (b)(3), (e) and (h) applies to any underpayment of
                                      tax attributable to overstating the capital contributions claimed to have
                                      been made to the purported partnership.
                                         It is determined that a 20 percent penalty applies to any additional
                                      underpayment of tax attributable to the foregoing partnership item adjust-
                                      ments other than the capital contributions claimed to have been made to
                                      the purported partnership, as such underpayment is attributable to neg-
                                      ligence or disregard of rules or regulations under I.R.C. § 6662(a), (b)(1)
                                      and (c) or a substantial understatement of income tax under I.R.C. §
                                      6662(a), (b)(2) and (d).

                                         On November 25, 2009, the Court issued an order striking
                                      the case from the November 30, 2009, Washington, D.C., spe-
                                      cial trial session. On December 1, 2009, the Court entered
                                      the stipulated decision.
                                         The Court’s gratification from receipt and entry of the
                                      stipulated decision was short lived. On January 12, 2010, the
                                      Court of Appeals for the D.C. Circuit issued Petaluma II.
                                      One week later, on January 19, 2010, participating partner
                                      filed the motion for leave to file a motion to revise the stipu-
                                      lated decision and lodged the motion to revise decision. On
                                      November 30, 2010, the Court granted leave and the motion
                                      to revise decision was filed. 26 Participating partner asserts
                                      that the Court must vacate and revise the stipulated decision

                                         26 By October 2010 respondent became concerned that if the stipulated decision were not va-

                                      cated, it would have already become final (on March 1, 2010) and the one-year period of limita-
                                      tions under sec. 6229(d) for making computational adjustments and assessing any resulting defi-
                                      ciency and accuracy-related penalties and/or issuing an affected items notice of deficiency would
                                      expire on March 1, 2011. On November 30, 2010, we granted the motion for leave nunc pro tunc
                                      as of the date it had been filed, January 19, 2010, and ordered the lodged motion to revise deci-
                                      sion to be filed as of that date. As a result, the 90-day period for appeal of the stipulated deci-
                                      sion under Fed. R. App. P. 13 does not commence to run until the motion to revise is granted
                                      or denied and the one-year period of limitations under sec. 6229(d) is thereby extended. See
                                      Nordvik v. Commissioner, 67 F.3d 1489, 1492 (9th Cir. 1995), aff ’g T.C. Memo. 1992–731; Simon
                                      v. Commissioner, 176 F.2d 230 (2d Cir. 1949); Stewart v. Commissioner, 127 T.C. 109, 117
                                      (2006).




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                                      because it exceeds the jurisdictional limitations imposed by
                                      Petaluma II.

                                                                                  Discussion
                                      I. Introduction: Complexity of Income Tax Treatment of Part-
                                         ners and Partnerships
                                            A. Overview of Subchapter K
                                         A partnership is not taxed as an entity, and its items of
                                      income and loss flow through to its partners. Sec. 701. Part-
                                      nerships are required to file annual information returns
                                      reporting the partners’ distributive shares of income, deduc-
                                      tions, and other partnership items. Sec. 6031. The individual
                                      partners report their distributive shares of the partnership
                                      items on their Federal income tax returns. Secs. 701–704.
                                         The substantive law governing the income taxation of part-
                                      ners is in subchapter K of chapter 1 of the Code (subchapter
                                      K). Subchapter K creates a detailed and complex system of
                                      rules for characterizing transactions between the partnership
                                      and the partners, computing and/or characterizing partner-
                                      ship income, assets, and liabilities, allocating those items
                                      among the partners, and determining and making adjust-
                                      ments to a partner’s basis (cost for tax purposes under sec-
                                      tion 1012 except as otherwise provided in subchapter K) in
                                      the partnership for his share of those items. The purpose of
                                      subchapter K is ‘‘to permit taxpayers to conduct joint busi-
                                      ness (including investment) activities through a flexible eco-
                                      nomic arrangement without incurring an entity-level tax.’’
                                      Sec. 1.701–2(a), Income Tax Regs.
                                            B. TEFRA
                                            1. In General
                                        The unified audit and litigation procedural rules applicable
                                      to partnerships and their partners were enacted by Congress
                                      in the Tax Equity and Fiscal Responsibility Act of 1982
                                      (TEFRA), Pub. L. No. 97–248, sec. 402, 96 Stat. at 648, and
                                      amended by Congress in the Taxpayer Relief Act of 1997
                                      (TRA 1997), Pub. L. No. 105–34, sec. 1238, 111 Stat. at
                                      1026. 27 The TEFRA procedures are set forth in subchapter C
                                           27 TEFRA   as amended by TRA 1997 is an egregious example of ‘‘hyperlexis’’, see Bayless Man-




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      89


                                      of chapter 63 of the Code. Under the TEFRA procedures all
                                      partnership items, the proper allocation of those partnership
                                      items among the partners, and the applicability of any pen-
                                      alty, addition to tax, or additional amount that relates to an
                                      adjustment to a partnership item are determined in a single
                                      partnership-level proceeding. Sec. 6226. The determinations
                                      of partnership items in partnership-level proceedings are
                                      binding on the partners and may not be challenged in subse-
                                      quent partner-level proceedings. See secs. 6230(c)(4), 7422(h).
                                           2. TEFRA Penalty Litigation Structure Before TRA 1997
                                         Before Congress enacted TRA 1997, any penalty, addition to
                                      tax, or additional amount (collectively, penalty) related to
                                      adjustment of a partnership item or items in a TEFRA pro-
                                      ceeding at the partnership level was generally treated as an
                                      affected item that required a factual determination in a sub-
                                      sequent proceeding at the partner level. See N.C.F. Energy
                                      Partners v. Commissioner, 89 T.C. 741, 744 (1987); sec.
                                      301.6231(a)(5)–1T(d), Temporary Proced. & Admin. Regs., 52
                                      Fed. Reg. 6790 (Mar. 5, 1987). Before Congress enacted TRA
                                      1997, the Tax Court lacked jurisdiction in a partnership-level
                                      proceeding to decide the applicability of partnership-item
                                      penalties. See N.C.F. Energy Partners v. Commissioner, 89
                                      T.C. at 744. Rather, partnership-item penalties were deter-
                                      mined at the partner level as affected items in a deficiency
                                      proceeding after the related partnership-level proceeding had
                                      been completed. Procedurally, this made sense, inasmuch as
                                      the ultimate liability of each individual partner depended,
                                      almost invariably, upon his ability to sustain his individual
                                      reasonable cause/good faith defenses under section 6664(c),
                                      irrespective of whether the application of the penalty origi-
                                      ning, ‘‘Hyperlexis: Our National Disease’’, 71 Nw. U. L. Rev. 767 (1977), and is discussed in the
                                      tax context in Bayless Manning, ‘‘Hyperlexis and the Law of Conservation of Ambiguity’’, 36 Tax
                                      Law. 9 (1982), and Gordon D. Henderson, ‘‘Controlling Hyperlexis—The Most Important ‘Law
                                      and * * *’ ’’, 43 Tax Law. 177 (1989). See also Richard M. Lipton, ‘‘We Have Met the Enemy
                                      and He is Us: More Thoughts on Hyperlexis’’, 47 Tax Law. 1 (1993); Walter D. Schwidetzky,
                                      ‘‘Hyperlexis and the Loophole’’, 49 Okla. L. Rev. 403 (1996). We would suggest that TEFRA as
                                      amended by TRA 1997 has gone beyond the conservation of ambiguity described by Henderson,
                                      supra, at 184–186, to its exponential augmentation. See generally Sidney I. Roberts, et al., ‘‘A
                                      Report on Complexity And the Income Tax’’, 27 Tax L. Rev. 325 (1972), on the operation of
                                      ‘‘Gresham’s Law of Tax Practice’’, describing the role of tax practitioners who disregard profes-
                                      sional standards of care, exemplified more recently by those who acted as promoters of Son of
                                      BOSS transactions.




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                                      nated from misconduct or failure of care at the partnership
                                      or individual level.
                                           3. TEFRA Penalty Litigation Structure After TRA 1997
                                         TRA 1997 sec. 1238 made a comprehensive set of procedural
                                      amendments to the regime for the determination of penalties
                                      under TEFRA:
                                         (1) By amending section 6221, TEFRA’s introductory juris-
                                      dictional provision, to require the applicability of any part-
                                      nership-item penalty to be determined at the partnership
                                      level (‘‘Except as otherwise provided in this subchapter, the
                                      tax treatment of any partnership item (and the applicability
                                      of any penalty * * * which relates to an adjustment to a
                                      partnership item) shall be determined at the partnership
                                      level’’ (emphasis added));
                                         (2) by amending and expanding section 6226(f), on the
                                      scope of judicial review by the Tax Court, the Court of Fed-
                                      eral Claims, or Federal District Courts with which a petition
                                      to review an FPAA is filed, i.e., in a partnership-level pro-
                                      ceeding, to provide that such court ‘‘shall have jurisdiction to
                                      determine’’ not only all partnership items and their alloca-
                                      tions among partners but also ‘‘the applicability of any pen-
                                      alty * * * which relates to an adjustment to a partnership
                                      item’’ (emphasis added);
                                         (3) by amending section 6230(a)(2)(A)(i) to deprive the Tax
                                      Court of jurisdiction to determine partnership-item penalties
                                      in a partner-level deficiency proceeding (‘‘(A) Subchapter B
                                      [sections 6211–6216 titled ‘‘Deficiency Procedures in the Case
                                      of Income, Estate, Gift and Certain Excise Taxes’’] shall
                                      apply to any deficiency attributable to—(i) affected items
                                      which require partner-level determinations (other than pen-
                                      alties * * * that relate to adjustments to partnership
                                      items)’’);
                                         (4) by adding section 6230(c)(1)(C), which allows a partner
                                      to file a claim for refund on the ground that ‘‘the Secretary
                                      erroneously imposed any penalty, addition to tax, or addi-
                                      tional amount which relates to an adjustment to a partner-
                                      ship item’’; and
                                         (5) by amending section 6230(c)(4) to make conclusive the
                                      partnership-level determination regarding the applicability of
                                      any partnership-item penalty, but allowing the partner to




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                                      assert any ‘‘partner-level’’ defenses in the refund claim. This
                                      amendment was added to and continued the provision of sec-
                                      tion 6230(c)(4) that makes conclusive partnership-level
                                      adjustments of partnership items that result in computa-
                                      tional adjustments without the need for an affected items
                                      notice of deficiency, but also allows those adjustments to be
                                      challenged in a refund suit.
                                         In its report underlying the amendments, the House Com-
                                      mittee on Ways and Means provided the following expla-
                                      nation:
                                                                                  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 deficiency procedures following the completion of the
                                      partnership-level proceeding.
                                                                           Reasons for Change
                                        Many penalties are based upon the conduct of the taxpayer. With respect
                                      to partnerships, the relevant conduct often occurs at the partnership level.
                                      In addition, applying penalties at the partner level through the deficiency
                                      procedures following the conclusion of the unified proceeding at the part-
                                      nership level increases the administrative burden on the IRS and can
                                      significantly increase the Tax Court’s inventory.
                                                                         Explanation of Provision
                                        The 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.
                                        [H.R. Rept. No. 105–148, at 594 (1997), 1997–4 C.B. (Vol. 1) 319, 915–
                                      916.]

                                         The foregoing recitation of these TRA 1997 amendments to
                                      TEFRA   and their legislative history displays the common
                                      theme that unites them. The recitation makes clear that the
                                      applicability of the accuracy-related penalty or penalties that
                                      relate to the adjustment of partnership items would hence-
                                      forth be determined in the partnership-level proceeding to
                                      determine the validity of the adjustments to partnership
                                      items by the FPAA. No longer would application of accuracy-
                                      related penalties be determined at the partner level by the
                                      resolution of a partner-level affected-items deficiency pro-
                                      ceeding. Nevertheless, for all the reasons discussed in the




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                                      Afterword to Tigers Eye I, see supra two concluding para-
                                      graphs of note 10, the TRA 1997 changes have spawned many
                                      controversies concerning proper application of the TEFRA
                                      procedural rules, particularly in Son of BOSS cases, including
                                      the case at hand.
                                           C. Attempted Exploitation by Tax Shelter Promoters of
                                              Complex Interactions and Disconnects of Subchapter
                                              K Substantive Rules and TEFRA Procedural Rules
                                        The substantive and procedural rules applicable to the
                                      income taxation of partners and partnerships are ‘‘distress-
                                      ingly complex and confusing’’. 28 Rhone-Poulenc Surfactants
                                      and Specialties, L.P. v. Commissioner, 114 T.C. 533, 539–540
                                      (2000) (citing Foxman v. Commissioner, 41 T.C. 535, 551 n.9
                                      (1964), aff ’d, 352 F.2d 466 (3d Cir. 1965)). That complexity
                                      has proven to be easily exploited, and consequently, entities
                                      classified as partnerships have become the vehicles of choice
                                      in creating and operating abusive tax shelters. The difficulty
                                      of applying the TEFRA partnership provisions in tax shelter
                                      cases is evidenced—in addition to Petaluma and the case at
                                      hand—by the opinions of the various trial courts and the
                                      Courts of Appeals to which the cases were appealed. See, e.g.,
                                      Jade Trading, LLC v. United States, 598 F.3d 1372, 1379–
                                      1380 (Fed. Cir. 2010) (Jade Trading II), aff ’g in part, rev’g
                                      in part and remanding on penalty issues 80 Fed. Cl. 11
                                      (2007) (Jade Trading I), remanded to 98 Fed. Cl. 453 (2011)
                                      (Jade Trading III), aff ’d, 451 Fed. Appx. 954 (Fed. Cir.
                                      2012); LKF X Invs. LLC v. Commissioner, 106 A.F.T.R. 2d
                                      (RIA) 2010–5003, 2010–1 U.S. Tax Cas. (CCH) para. 50,488
                                      (D.C. Cir. 2010), aff ’g in part, rev’g and remanding on pen-
                                      alty issues T.C. Memo. 2009–192; RJT Invs. X v. Commis-
                                      sioner, 491 F.3d 732 (8th Cir. 2007); Desmet v. Commissioner,
                                      581 F.3d 297 (6th Cir. 2009), aff ’g in part and remanding
                                      Domulewicz v. Commissioner, 129 T.C. 11, 22 (2007),
                                      remanded to T.C. Memo. 2010–177; New Millennium
                                      Trading, LLC v. Commissioner, 131 T.C. 275, 279 (2008);
                                      Hambrose Leasing 1984–5 Ltd. P’ship v. Commissioner, 99
                                         28 A partnership is simultaneously considered to be an aggregation of individual partners (the

                                      ‘‘aggregate theory’’) and a separate entity (the ‘‘entity theory’’). The mixing of the aggregate and
                                      entity theories by the substantive and procedural laws applicable to the income taxation of part-
                                      ners and partnerships is a primary source of uncertainty in the application of those laws. Rhone-
                                      Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 T.C. 533, 539–540 (2000).




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                                      T.C. 298 (1992); Alpha I, L.P. v. United States, 93 Fed. Cl.
                                      280, 326 (2010); Russian Recovery Fund, Ltd. v. United
                                      States, 81 Fed. Cl. 793 (2008).
                                         Abusive tax shelters are complex financial artifices which exploit two
                                      fundamental weaknesses in the federal tax system: (1) the complexity of
                                      the internal revenue laws and (2) the government’s inability by conven-
                                      tional means to identify quickly and challenge abusive tax schemes. By
                                      exploiting these weaknesses, tax shelter promoters precipitated a prolifera-
                                      tion of abusive tax shelters and huge revenue losses to the federal govern-
                                      ment.

                                                               *    *   *    *   *   *    *
                                         * * * Congress could not draft provisions that anticipated every
                                      colorable interpretation for fabricating a tax shelter. New tax shelter tech-
                                      niques continued to develop unhindered by legislative efforts at contain-
                                      ment.
                                         [D. French Slaughter, ‘‘The Empire Strikes Back: Injunctions of Abusive
                                      Tax Shelters After TEFRA’’, 3 Va. Tax Rev. 1, 6 (Summer 1983); fn. refs.,
                                      citations, and quotation marks omitted.]

                                      The above quotation was not only an accurate description of
                                      past and present ills as of the time it was published—1983—
                                      but also a forecast of future developments, as exemplified by
                                      the Son of BOSS transactions that are central to the forma-
                                      tion of the limited liability companies of Tigers Eye in the
                                      case at hand and Petaluma in the Petaluma case; they are
                                      a variation of the ‘‘bond and options sales strategy’’, which
                                      the Commissioner regards as an abusive tax shelter, see
                                      Notice 2000–44, 2000–2 C.B. 255, 256; supra note 1, and this
                                      Court has repeatedly so held, see, e.g., Carpenter Family
                                      Invs., LLC v. Commissioner, 136 T.C. 373, 375 (2011); 3K
                                      Invs. Partners v. Commissioner, 133 T.C. 112, 113 n.2 (2009);
                                      see also Kligfeld Holdings v. Commissioner, 128 T.C. 192, 194
                                      (2007).
                                         Taxpayers attempted to exploit the complexity of partner-
                                      ship substantive tax law by using Son of BOSS transactions
                                      to inflate artificially the basis of property ostensibly distrib-
                                      uted by a partnership to the purported partners in liquida-
                                      tion of their partnership interests. Those attempts exploited
                                      the complexity of the TEFRA partnership procedural rules to
                                      impede the Government’s ability to identify quickly and chal-
                                      lenge abusive Son of BOSS transactions and to avoid the




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                                      94                  138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      proper imposition of the accuracy-related penalties. 29 As a
                                      result of those attempts, a disproportionate number of cases
                                      under TEFRA have been devoted to procedural, jurisdictional,
                                      and statute of limitations questions. 30 The diversion of
                                      resources from the determination and collection of liabilities
                                      for taxes, penalties, and interest has been substantial. See
                                      supra note 1.
                                         Application of the TEFRA provisions is the most ‘‘distress-
                                      ingly complex and confusing’’ in tax shelter cases such as the
                                      case at hand and Petaluma where the Commissioner takes
                                      and sustains the primary position in the FPAA (and the par-
                                      ties agree or the taxpayer concedes) that an entity pur-
                                      porting to be a partnership is to be disregarded on grounds
                                      of sham or lack of economic substance. In such cases the
                                      entity is not a partnership for Federal income tax purposes,
                                      the persons holding interests in the entity are not partners,
                                      their interests in the entity are not interests in a partner-
                                      ship, and the transactions between the entity and the
                                      interest holders are not transactions between a partnership
                                      and its partners. Consequently, the substantive provisions of
                                      subchapter K simply do not apply to the entity, the persons
                                      holding interests in the entity, or their transactions with the
                                      entity and among themselves. However, pursuant to section
                                      6233(a) and (b), the TEFRA procedural provisions applicable to
                                      partnerships do apply ‘‘to the extent provided by regulations’’
                                      to an entity that has filed a partnership return and to the
                                      persons holding an interest in the entity even if it is not a
                                      partnership for Federal income tax purposes or even ‘‘if it is
                                      determined that there is no such entity’’. Sec. 301.6233–
                                      1T(c), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6795
                                      (Mar. 5, 1987).
                                        29 TEFRA, particularly as revised by TRA 1997, is fiendishly complicated. Significant proce-

                                      dural problems arise from the complexity introduced by two levels of proceedings under TEFRA
                                      as amended by TRA 1997—the partnership level and the partner level. There are situations in
                                      which the two levels fail to fit perfectly together or the Commissioner’s auditing agents are un-
                                      able to discern which positions are properly raised at the partnership level in the FPAA or dur-
                                      ing the partnership-level court proceeding rather than at the partner level in a ‘‘free-standing’’
                                      notice of deficiency (issued without regard to any FPAA), an affected items notice of deficiency,
                                      or during the attendant court proceedings, and vice versa. These situations have allowed or cre-
                                      ated the potential for taxpayers to escape liabilities for tax deficiencies and penalties that would
                                      have been due if the Commissioner had asserted the correct arguments and positions at the cor-
                                      rect level. See, e.g., Domulewicz v. Commissioner, 129 T.C. 11 (2007), aff ’d sub nom. Desmet v.
                                      Commissioner, 581 F.3d 297 (6th Cir. 2009), remanded to T.C. Memo. 2010–177.
                                        30 See, for example, cases cited infra note 37 on proper application of the six-year statute of

                                      limitations under secs. 6229(c)(2) and 6501(e)(1)(A) to substantial omissions from gross income.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      95


                                        The complexity of the TEFRA provisions in a case where an
                                      entity purporting to be a partnership is disregarded as such
                                      begins with sections 6226(f) and 6233, which govern the Tax
                                      Court’s jurisdiction in partnership-level proceedings. Our
                                      jurisdiction to enter the stipulated decision as written also
                                      begins with those statutory provisions.
                                      II. Jurisdiction Under TEFRA When Entity Filing Partner-
                                          ship Return Is Not a Partnership or Does Not Exist
                                           A. TEFRA Procedures Apply When Entity That Filed Part-
                                              nership Return Is Not a Partnership or Does Not Exist:
                                              Sections 6226(f) and 6233
                                         Generally, in partnership-level proceedings we have juris-
                                      diction under section 6226(f) to determine all partnership
                                      items of the partnership for the partnership taxable year to
                                      which the FPAA relates, and we are not limited to the part-
                                      nership items adjusted in the FPAA. Sec. 301.6226(f)–1T,
                                      Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6788 (Mar.
                                      5, 1987). We also have jurisdiction to determine the proper
                                      allocation of those partnership items among the partners and
                                      the applicability of any penalty, addition to tax, or additional
                                      amount that relates to an adjustment to a partnership item.
                                      Sec. 6226(f).
                                         The TEFRA procedures and our jurisdiction in TEFRA pro-
                                      ceedings are not limited to partnership items of valid busi-
                                      ness entities recognized as partnerships for Federal tax pur-
                                      poses. Pursuant to section 6233 and the regulations promul-
                                      gated thereunder, if an entity that has filed a partnership
                                      return is determined not to be a partnership or not to exist,
                                      the TEFRA partnership procedures (statutory and regulatory)
                                      will apply to the entity, its items, and persons holding an
                                      interest in the entity. Sec. 301.6233–1T(a), (c), Temporary
                                      Proced. & Admin. Regs., supra. In such a case, the Court has
                                      jurisdiction to make the determinations that the entity is not
                                      a partnership and/or that it does not exist as well as deter-
                                      minations with respect to all items of the entity that would
                                      be partnership items, as defined in section 6231(a)(3) and
                                      section 301.6231(a)(3)–1, Proced. & Admin. Regs., if the
                                      entity had been a partnership. Sec. 301.6233–1T(a), (c), Tem-
                                      porary Proced. & Admin. Regs., supra.




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                                      96                  138 UNITED STATES TAX COURT REPORTS                                        (67)


                                         Generally, a valid business entity having two or more
                                      owners is taxed as either a corporation or a partnership.
                                      However, an entity that merely acts as nominee and agent
                                      for its owners may be disregarded as a separate business
                                      entity. Cf. Commissioner v. Bollinger, 485 U.S. 340, 344–345
                                      (1988). In such a case, the Court may determine that the
                                      entity does not exist and is neither a corporation nor a part-
                                      nership, but the TEFRA procedures will still apply in accord-
                                      ance with section 6233(b) and section 301.6233–1T(c), Tem-
                                      porary Proced. & Admin. Regs., supra.
                                         When Congress enacted the TEFRA procedures and the Sec-
                                      retary first promulgated the temporary regulations, there
                                      were frequent controversies over whether an unincorporated
                                      business entity with two or more owners (often a limited
                                      partnership) was properly classified as a corporation or a
                                      partnership for Federal tax purposes under section
                                      301.7701–2, Proced. & Admin. Regs., in effect at that time.
                                      Section 301.6233–1T(a), Temporary Proced. & Admin. Regs.,
                                      supra, focuses on the resolution of such controversies and, if
                                      the entity is properly taxable as a corporation, gives the
                                      Court jurisdiction in the TEFRA proceeding to determine the
                                      taxable income of the corporation, which will also ‘‘serve as
                                      a basis for a computational adjustment reflecting the dis-
                                      allowance of any loss of credit claimed by a purported
                                      partner with respect to that entity.’’ 31 However, the proce-
                                      dures under section 6233 are not limited to controversies
                                      regarding the proper classification of an entity as a corpora-
                                      tion or as a partnership. Section 6233(b) and section
                                      301.6233–1T(c), Temporary Proced. & Admin. Regs., supra,
                                      give the Court jurisdiction in the partnership-level pro-
                                      ceeding to determine that an entity that filed a partnership
                                      return does not exist. 32 If the Court determines that the
                                      entity does not exist or is deemed not to exist, the non-
                                         31 Controversies involving the proper classification of a multimember business entity were vir-

                                      tually eliminated in 1996 when the Secretary issued new classification regulations, sec.
                                      301.7701–3, Proced. & Admin. Regs., commonly referred to as the ‘‘check-the-box’’ regulations.
                                      Under the ‘‘check-the-box’’ regulations a business entity with two or more members is classified
                                      as a partnership for Federal income tax purposes, absent an election to be treated as a corpora-
                                      tion. Sec. 301.7701–3(a) and (b), Proced. & Admin. Regs.
                                         32 That situation might arise, for example, where an entity purporting to be a legal entity

                                      under State law, such as a limited liability company or a limited partnership, was never formed
                                      under State law. It could also arise where, as in Petaluma and the case at hand, the entity,
                                      although legally formed under State law, is deemed not to exist for Federal income tax purposes
                                      because it is a sham, has no real business purpose, and merely acts as nominee and agent for
                                      its owners. Cf., e.g., Commissioner v. Bollinger, 485 U.S. 340, 344–345 (1988).




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      97


                                      existent or disregarded entity will be treated as an entity
                                      that filed a partnership return, and section 301.6233–1T(a),
                                      Temporary Proced. & Admin. Regs., supra, will apply. The
                                      Court must then determine whether the entity is nonetheless
                                      a partnership for Federal income tax purposes. 33 If the
                                      Court determines that it is not, the Court has jurisdiction to
                                      make determinations with respect to all items of the entity
                                      that would be partnership items, as defined in section
                                      6231(a)(3) and section 301.6231(a)(3)–1, Proced. & Admin.
                                      Regs., if the entity had been a partnership.
                                           B. Jurisdiction To Determine Items of Disregarded Entity:
                                              Section 301.6233–1T(a) and (c), Temporary Proced. &
                                              Admin. Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987)
                                         Section 6233 provides that if a partnership return is filed
                                      for a taxable year but it is determined that no partnership
                                      exists, the TEFRA procedures still apply to the entity, its
                                      items, and persons holding an interest in the entity, to the
                                      extent provided in the regulations. In such a case, the TEFRA
                                      temporary regulations applicable to Tigers Eye’s 1999 tax-
                                      able year provide that the Court may make determinations
                                      with respect to all items of the entity (entity items) that
                                      ‘‘would be partnership items, as defined in section 6231(a)(3)
                                      and the regulations thereunder [section 301.6231(a)(3)–1,
                                      Proced. & Admin. Regs.], if * * * [it] had been a partner-
                                      ship’’. Sec. 301.6233–1T(a), Temporary Proced. & Admin.
                                      Regs., supra. Further, the TEFRA temporary regulations pro-
                                      vide:
                                      Paragraph (a) of this section shall apply where a partnership return is
                                      filed for a taxable year but it is determined that there is no entity for such
                                      taxable year. For purposes of applying paragraph (a) of this section, the
                                      partnership return shall be treated as if it was filed by an entity. [Sec.
                                      301.6233–1T(c), Temporary Proced. & Admin. Regs., supra.]

                                      See also sec. 301.6233–1(a), (d), Proced. & Admin. Regs.,
                                      supra (applicable for taxable years beginning on or after
                                      October 4, 2001).
                                        33 For example, a limited partnership or limited liability company that does not legally exist

                                      because it was not properly formed under State law might nonetheless be deemed to be a gen-
                                      eral partnership because the partners or members have conducted transactions as general part-
                                      ners of the purported entity.




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                                      98                      138 UNITED STATES TAX COURT REPORTS                                        (67)


                                         A partnership item is an item that is (1) required to be
                                      taken into account under any provision of subtitle A, gov-
                                      erning income taxes, and (2) identified by the Secretary in
                                      the regulations as ‘‘more appropriately determined at the
                                      partnership       level’’.  Sec.    6231(a)(3). 34 In    section
                                      301.6231(a)(3)–1, Proced. & Admin. Regs., the Secretary
                                      identified the items that are ‘‘more appropriately determined
                                      at the partnership level than at the partner level and, there-
                                      fore, are partnership items’’.
                                         Section 301.6231(a)(3)–1(a)(1)(i), Proced. & Admin. Regs.,
                                      provides that partnership items include the partnership
                                      aggregate and each partner’s share of items of income, gain,
                                      loss, deduction, or credit of the partnership. Partnership
                                      items also include ‘‘the legal and factual determinations that
                                      underlie the determination of the amount, timing, and
                                      characterization of items of income, credit, gain, loss, deduc-
                                      tion, etc.’’ Sec. 301.6231(a)(3)–1(b), Proced. & Admin. Regs.
                                         The existence of a valid partnership is a partnership item.
                                      First, it must be taken into account in computing a pur-
                                      ported partner’s income taxes. ‘‘ ‘When filling out individual
                                      tax returns, the very process of calculating an outside basis,
                                      reporting a sales price, and claiming a capital loss following
                                      a partnership liquidation presupposes that the partnership
                                      was valid.’ ’’ Petaluma II, 591 F.3d at 653 (quoting RJT Invs.
                                      X v. Commissioner, 491 F.3d at 736). Second, the existence
                                      of a valid partnership ‘‘is a sine qua non for determining the
                                      amount and characterization of all other partnership items.’’
                                      Id. The legal and factual determinations underlying the
                                      Court’s determination that the entity is not a partnership
                                      and/or does not exist will determine the character of the
                                      items of income, credit, gain, loss, and deduction of the
                                      entity. Thus the legal or factual determination that estab-
                                      lishes the existence or nonexistence of a partnership is an
                                      item that the Secretary has identified as being more appro-
                                      priately decided at the partnership level than at the partner
                                      level. Id.
                                           34 Sec.   6231(a)(3) defines the term ‘‘partnership item’’ 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 provi-
                                      sion 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.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      99


                                         The determination that an entity is not a partnership
                                      because it is an association taxable as a corporation or
                                      because it was merely the nominee or agent for its owners
                                      is such a legal or factual determination and is a ‘‘partnership
                                      item’’ that the Court has jurisdiction to decide in the partner-
                                      ship-level proceeding. The classification of the entity as a cor-
                                      poration or as a nominee-agent will determine the character
                                      of the items of income, credit, gain, loss, and deduction of the
                                      entity. Thus, if the Court determines that the entity that
                                      filed a partnership return is not a partnership but is an
                                      association taxable as a corporation, entity items would
                                      include amounts taxable to the entity as a corporation. Sec.
                                      301.6233–1T(a), Temporary Proced. & Admin. Regs., supra. If
                                      the Court determines that an entity is a nominee-agent for
                                      the purported partners, the items of the entity will be
                                      directly attributable to them.
                                         ‘‘[D]etermining whether there is a valid partnership nec-
                                      essarily controls whether there can be partnership income,
                                      partnership gain, partnership losses, and so forth.’’ Petaluma
                                      II, 591 F.3d at 653. If the Court has determined that an
                                      entity that filed a partnership return is not a partnership
                                      and/or does not exist, there is no partnership income, part-
                                      nership gain, or partnership loss. The items of the entity are
                                      not properly characterized as those of a partnership. The
                                      regulations provide that the Court’s determination that an
                                      entity that filed a partnership return is not a partnership
                                      and is taxable as a corporation ‘‘will serve as a basis for a
                                      computational adjustment reflecting the disallowance of any
                                      loss or credit claimed by a purported partner with respect to
                                      that entity’’. Sec. 301.6233–1T(a), Temporary Proced. &
                                      Admin. Regs., supra. Because that section of the temporary
                                      regulation also applies to entities that do not exist, the deter-
                                      mination that the entity is deemed not to exist and is not a
                                      partnership for Federal tax purposes will also serve as a
                                      basis for a computational adjustment reflecting the disallow-
                                      ance of any loss or credit claimed by a purported partner
                                      with respect to that entity. Notably, the regulation does not
                                      limit the computational adjustment to the disallowance of
                                      the purported partner’s share of ‘‘partnership loss or credit’’
                                      that flowed through to his return from the partnership
                                      return; the regulation extends the permissible computational
                                      adjustment to the disallowance of ‘‘any loss or credit claimed




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                                      100                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      by a purported partner with respect to that entity’’. (Emphasis
                                      added.) Such a loss or credit, because it would be ‘‘with
                                      respect to that entity’’, would include a loss claimed on the
                                      sale or liquidation of the partner’s purported partnership
                                      interest in the entity or on his sale of property purportedly
                                      distributed to him in liquidation of his partnership interest
                                      in the entity. Thus the Court has jurisdiction in the partner-
                                      ship-level proceeding to determine that items of the entity
                                      that purport to be partnership items do not exist and to
                                      adjust all such items to zero so that a computational adjust-
                                      ment can be made to reflect the disallowance of any loss or
                                      credit claimed by a purported partner with respect to the
                                      entity.
                                           C. Jurisdiction To Determine Applicability of Any Penalty
                                              That Relates to Adjustment of Entity Item: Section
                                              6226(f)
                                        If the Court determines that an entity that filed a partner-
                                      ship return is not a partnership, the TEFRA provisions,
                                      including section 6226(f), apply. Sec. 301.6233–1T(a), Tem-
                                      porary Proced. & Admin. Regs., supra. Pursuant to section
                                      6226(f) the Court has jurisdiction to determine the applica-
                                      bility of any penalty that relates to an adjustment to a part-
                                      nership item.
                                      III. Jurisdiction To Enter Stipulated Decision as Written
                                           With Respect to Partnership Items
                                           A. Provisions of the Stipulated Decision
                                        The first decision paragraph in the stipulated decision
                                      gives specific effect to four of the five scheduled adjustments
                                      made by the FPAA: Loss, Other Deductions, Distributions of
                                      Property Other Than Money, and Capital Contributions,
                                      omitting any reference to ‘‘Outside Partnership Basis’’. The
                                      $242,186 loss and the $11,314 of other deductions flowed
                                      directly through to the purported partners’ returns. The defi-
                                      ciencies resulting from those adjustments do not require any
                                      facts to be determined in a partner-level proceeding. There-
                                      fore respondent may assess those deficiencies and the pen-
                                      alties applicable thereto without sending a statutory notice of
                                      deficiency.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      101


                                         The third and fourth decision paragraphs apply accuracy-
                                      related penalties to any underpayment of tax attributable to
                                      the specified adjustments of partnership items made by the
                                      first decision paragraph. The third decision paragraph
                                      applies the 40% gross valuation (basis) misstatement penalty
                                      to the portion of any underpayment attributable to the gross
                                      valuation misstatement, as provided by section 6662(a),
                                      (b)(3), (e), and (h), attributable to overstating the capital con-
                                      tributions claimed to have been made to the purported part-
                                      nership. The fourth decision paragraph provides that any
                                      additional underpayment of tax that may be attributable to
                                      the adjustments to zero of the loss, other deductions, and dis-
                                      tributions is attributable to negligence or disregard of rules
                                      or regulations under section 6662(a), (b)(1), and (c) or a
                                      substantial understatement of income tax under section
                                      6662(a), (b)(2), and (d) and applies the 20% penalty to that
                                      underpayment.
                                         By the second decision paragraph stating that the FPAA is
                                      correct the parties adopt and incorporate all determinations
                                      made in the FPAA, including the initial FPAA determination
                                      that Tigers Eye is disregarded for Federal income tax pur-
                                      poses. Notwithstanding that the first and third decision para-
                                      graphs omit any reference to ‘‘Outside Partnership Basis’’,
                                      the parties agree that the second decision paragraph, in
                                      determining that the FPAA is correct, implicitly upholds the
                                      FPAA’s adjustment of outside partnership basis to zero and
                                      the application of the 40% penalty to the portion of any
                                      underpayment attributable to the gross valuation
                                      misstatement as provided by section 6662 (a), (b)(3), (e), and
                                      (h). Consequently, the 40% penalty will apply to the portion
                                      of the underpayment attributable to the gross misstatement
                                      of basis in the distributed property (the basis participating
                                      partner claimed was its outside basis in its partnership
                                      interest in Tigers Eye). 35



                                        35 This interpretation of the stipulated decision, agreed to by the parties before the Court of

                                      Appeals for the D.C. Circuit issued Petaluma II, is consistent with the holding of Petaluma I
                                      that the Court has jurisdiction in the partnership-level proceeding to determine outside basis
                                      and the applicability of penalties thereto, and the positions taken by the parties in addressing
                                      participating partner’s motion to revise the stipulated decision.




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                                      102                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                           B. Disregard of Tigers Eye
                                         By the second decision paragraph of the stipulated deci-
                                      sion, the parties have agreed and the Court has decided that
                                      the FPAA that is the subject matter of this case is correct. The
                                      decision upholds the initial FPAA determination that the part-
                                      nership is a sham, lacks economic substance, and is dis-
                                      regarded for Federal income tax purposes. Thus, the stipu-
                                      lated decision reflects the parties’ agreement that for Federal
                                      income tax purposes Tigers Eye does not exist and is not a
                                      partnership. Pursuant to section 6233 and the regulations
                                      thereunder, we have jurisdiction to make those determina-
                                      tions as well as determinations with respect to all items of
                                      Tigers Eye that would be partnership items, as defined in
                                      section 6231(a)(3) and section 301.6231(a)(3)–1, Proced. &
                                      Admin. Regs., if it had been a partnership. Pursuant to sec-
                                      tion 301.6233–1T(a) and (c), Temporary Proced. & Admin.
                                      Regs., supra, the TEFRA procedures apply to Tigers Eye, its
                                      items, and all persons holding interests in Tigers Eye, and
                                      the Court has jurisdiction under section 6226(f) to determine
                                      the applicability of any penalty that relates to an adjustment
                                      to an item of Tigers Eye. That conclusion is consistent with
                                      the holding of the Court of Appeals in the Petaluma case.
                                      Petaluma II, 591 F.3d at 652–654; Petaluma I, 131 T.C. at
                                      92–97.
                                           C. Items of Tigers Eye
                                        The Court has jurisdiction to make determinations with
                                      respect to all of Tigers Eye’s items, including the legal and
                                      factual determinations that underlie the determination of the
                                      amount, timing, and characterization of items of income,
                                      credit, gain, loss, and deduction related to the transactions
                                      conducted by Tigers Eye. See sec. 301.6233–1T(a), (c), Tem-
                                      porary Proced. & Admin. Regs., supra; sec. 301.6231(a)(3)–
                                      1(b), Proced. & Admin. Regs. The determination that Tigers
                                      Eye is a sham and lacks economic substance is a factual
                                      determination that underlies the characterization of items of
                                      income, gain, and loss related to its transactions. Because
                                      Tigers Eye is a sham and had no real business purpose, it
                                      merely acted as nominee and agent for the option partners
                                      and the items related to the transactions involving the option
                                      spreads and purchases and distribution of stock and foreign




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      103


                                      currency are characterized as such. Cf. Commissioner v.
                                      Bollinger, 485 U.S. at 344–345. We have jurisdiction to make
                                      those factual and legal determinations in this partnership
                                      (entity)-level proceeding and to determine the items of Tigers
                                      Eye that resulted from its acting as nominee or agent for the
                                      option partners.
                                        We also have jurisdiction to determine that items that pur-
                                      port to be partnership items do not exist and to adjust all
                                      such items to zero so that a computational adjustment can
                                      be made to reflect the disallowance of any loss or credit
                                      claimed by a purported partner with respect to the non-
                                      existent Tigers Eye partnership. The items reported on the
                                      partnership return that were adjusted to zero in the first
                                      decision paragraph are such items.
                                           D. First Decision Paragraph
                                         By the first decision paragraph, the loss, deductions, cap-
                                      ital contributions, and distributions reported by Tigers Eye
                                      on the partnership return are items adjusted to zero. Tigers
                                      Eye’s purported partners claimed their proportionate shares
                                      of the loss and deductions on their returns. The option part-
                                      ners also claimed huge losses on the sale of the distributed
                                      property, which they characterized as property distributed to
                                      them in liquidation of their interests in a partnership
                                      purportedly acquired by contributing property to the pur-
                                      ported partnership. The parties’ agreement to the Court’s
                                      determination that Tigers Eye is not a partnership for Fed-
                                      eral income tax purposes ‘‘will serve as a basis for a com-
                                      putational adjustment reflecting the disallowance of any loss
                                      claimed by a purported partner with respect to that entity’’
                                      (emphasis added), i.e., Tigers Eye, including the loss claimed
                                      on the sale of property purported to have been distributed to
                                      a purported partner on liquidation of a nonexistent partner-
                                      ship interest in Tigers Eye. See sec. 301.6233–1T(a), Tem-
                                      porary Proced. & Admin. Regs., supra. Pursuant to section
                                      6233 and its implementing regulation, we have jurisdiction to
                                      determine that all items of Tigers Eye purported to be part-
                                      nership items are adjusted to zero. The loss, other deduc-
                                      tions, capital contributions, and distributions are identified
                                      in section 301.6231(a)(3)–1(a)(1)(i), (4), Proced. & Admin.
                                      Regs., as partnership/entity items that the Secretary deter-




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                                      104                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      mined are more appropriately decided at the partnership
                                      level than at the partner level.
                                           1. Partnership Loss and Deductions
                                         The Secretary determined in section 301.6231(a)(3)–
                                      1(a)(1)(i), Proced. & Admin. Regs., that the partnership
                                      aggregate and each partner’s share of items of income, gain,
                                      loss, deduction, or credit of the partnership are partnership
                                      items more appropriately determined at the entity level. The
                                      $242,186 partnership loss and the $11,314 partnership other
                                      deductions are partnership items. We have jurisdiction to
                                      determine that, because Tigers Eye is not a partnership,
                                      Tigers Eye did not have any partnership loss or partnership
                                      deductions. See sec. 301.6233–1T(a), Temporary Proced. &
                                      Admin. Regs., supra. Thus, we have jurisdiction to adjust to
                                      zero the $242,186 loss and the $11,314 deduction, as pro-
                                      vided in the first decision paragraph of the stipulated deci-
                                      sion.
                                           2. Contributions and Distributions
                                        In section 301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs.,
                                      the Secretary decided that items relating to contributions to
                                      the partnership and distributions from the partnership are
                                      partnership items
                                      to the extent that a determination of such items can be made from deter-
                                      minations that the partnership is required to make with respect to an
                                      amount, the character of an amount, or the percentage interest of a
                                      partner in the partnership, for purposes of the partnership books and
                                      records or for purposes of furnishing information to a partner * * *

                                      Thus, the Secretary decided that items related to contribu-
                                      tions to the partnership and distributions from the partner-
                                      ship that the partnership is required to determine for its
                                      books and records or for providing information to its partners
                                      are partnership items.
                                           a. Items Related to Contributions
                                         In section 301.6231(a)(3)–1(c)(2), Proced. & Admin. Regs.,
                                      the Secretary provided the following illustrations of addi-
                                      tional determinations the partnership is required to make for
                                      purposes of its books and records or for purposes of fur-
                                      nishing information to a partner that relate to contributions:




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                                        (2) Contributions.—For purposes of its books and records, or for purposes
                                      of furnishing information to a partner, the partnership needs to determine:
                                        (i) The character of the amount received from a partner (for example,
                                      whether it is a contribution, a loan, or a repayment of a loan);
                                        (ii) The amount of money contributed by a partner;
                                        (iii) The applicability of the investment company rules of section 721(b)
                                      with respect to a contribution; and
                                        (iv) The basis to the partnership of contributed property (including nec-
                                      essary preliminary determinations, such as the partner’s basis in the
                                      contributed property).
                                      To the extent that a determination of an item relating to a contribution
                                      can be made from these and similar determinations that the partnership
                                      is required to make, therefore, that item is a partnership item. To the
                                      extent that the determination requires other information, however, that
                                      item is not a partnership item. * * *

                                         Under the regulation, for purposes of keeping its books and
                                      records and providing information to the option partners as
                                      a purported partnership, Tigers Eye was required to deter-
                                      mine (1) the amount of money and (2) the character and
                                      basis of the paired options received from the purported part-
                                      ners. Tigers Eye needed to determine its basis in the paired
                                      options in order to compute the losses realized on the
                                      unwinding of the option spreads, which were part of the loss
                                      claimed on the partnership return. In determining the basis
                                      of the paired options, Tigers Eye needed to determine each
                                      partner’s basis in the contributed property, including the
                                      amount of the liabilities to which the property was subject.
                                      Partnership items include the partnership aggregate and
                                      each partner’s share of partnership liabilities, including
                                      determinations as to the amounts of the liabilities, whether
                                      the liabilities are nonrecourse, and increases or decreases
                                      during the taxable year. Sec. 301.6231(a)(3)–1(a)(1)(v),
                                      Proced. & Admin. Regs.
                                         Tigers Eye was also required to determine the contribu-
                                      tions for purposes of determining the partners’ percentage
                                      interests in the purported partnership, the partners’ shares
                                      of the partnership loss and deductions, and the amounts to
                                      which the purported partners were entitled on the purported
                                      liquidation of their interests.
                                         Tigers Eye was required to make the same determinations
                                      for purposes of its books and records and providing informa-
                                      tion to the option partners with respect to the money and
                                      property it received in conducting the transactions as




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                                      nominee or agent for the option partners. Tigers Eye needed
                                      to account for expenses it incurred on behalf of the option
                                      partners, the amounts received and expended on the
                                      unwinding of the paired options, and the costs of the foreign
                                      currency and stock purchased on behalf of the option part-
                                      ners. Tigers Eye needed to provide that information to the
                                      option partners so that they could report their gain or loss
                                      on the unwinding of the paired options and determine their
                                      bases in the foreign currency and stock purchased on their
                                      behalves.
                                           b. Items Related to Distributions
                                         In section 301.6231(a)(3)–1(c)(3), Proced. & Admin. Regs.,
                                      the Secretary provided the following illustrations of addi-
                                      tional determinations the partnership is required to make for
                                      purposes of its books and records, or for purposes of fur-
                                      nishing information to a partner that relate to distributions:
                                         (3) Distributions.—For purposes of its books and records, or for purposes
                                      of furnishing information to a partner, the partnership needs to determine:
                                         (i) The character of the amount transferred to a partner (for example,
                                      whether it is a distribution, a loan, or a repayment of a loan);
                                         (ii) The amount of money distributed to a partner;
                                         (iii) The adjusted basis to the partnership of distributed property; and
                                         (iv) The character of partnership property (for example, whether an item
                                      is inventory or a capital asset).
                                      To the extent that a determination of an item relating to a distribution can
                                      be made from these and similar determinations that the partnership is
                                      required to make, therefore, that item is a partnership item. To the extent
                                      that the determination requires other information, however, that item is
                                      not a partnership item. Such other information would include those factors
                                      used in determining the partner’s basis for the partnership interest that
                                      are not themselves partnership items, such as the amount that the partner
                                      paid to acquire the partnership interest from a transferor partner if that
                                      transfer was not covered by an election under section 754.

                                      Under the regulation, for purposes of keeping its books and
                                      records and providing information to the option partners as
                                      a purported partnership, Tigers Eye needed to determine the
                                      character of the amount distributed to an option partner; i.e.,
                                      that it was a distribution in liquidation of the partner’s
                                      interest in the purported partnership. Having made that
                                      determination, Tigers Eye needed to determine the amounts
                                      to be distributed to the purported partners on liquidation of
                                      their interests. Tigers Eye needed to select the property to be




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      107


                                      distributed, determine its basis in the property, and remove
                                      it as an asset on its books. Tigers Eye needed to provide that
                                      information to the option partners so that they could prop-
                                      erly determine their bases in the distributed property.
                                         Tigers Eye was required to make the same determinations
                                      for purposes of its books and records and providing informa-
                                      tion to the option partners with respect to the property it
                                      distributed to them in conducting the transactions as
                                      nominee or agent on their behalves. Tigers Eye was required
                                      to determine the character of property distributed to an
                                      option partner; i.e., that it was a distribution of the property
                                      Tigers Eye purchased as nominee or agent of the option part-
                                      ners. Having made that determination, Tigers Eye needed to
                                      identify the property to be distributed, determine its basis in
                                      the property, and account for it on its books. Tigers Eye
                                      needed to provide that information to the option partners so
                                      that they could properly determine their bases in the distrib-
                                      uted property.
                                           3. Adjustment of Items to Zero
                                         Because Tigers Eye is not a partnership for Federal income
                                      tax purposes, it had no partnership items, there was no part-
                                      nership loss, and there were no partnership deductions, no
                                      contributions to the purported partnership, and no distribu-
                                      tions from a partnership to its purported partners. Adjust-
                                      ment of those items to zero is appropriate. The loss, deduc-
                                      tions, capital contributions, and distributions that are
                                      adjusted to zero pursuant to the first decision paragraph are
                                      partnership items that this Court has jurisdiction to decide
                                      under section 6233 and section 301.6233–1T(a), Temporary
                                      Proced. & Admin. Regs., supra.
                                           E. Second Decision Paragraph
                                        By the second decision paragraph the parties adopt and
                                      incorporate all determinations made in the FPAA, including
                                      the disregard of Tigers Eye, the adjustment of outside basis
                                      to zero, and the application of the 40% penalty to the under-
                                      payment attributable to gross valuation/basis misstatement.
                                      Participating partner asserts that under Petaluma II the
                                      Court does not have jurisdiction to decide outside basis or
                                      the applicability of the 40% penalty to an underpayment of




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                                      tax attributable to an overstatement of the basis in the
                                      distributed property, which participating partner attributed
                                      to its outside basis in the partnership. Participating partner
                                      concludes, therefore, that the Court must revise the second
                                      decision paragraph accordingly. However, for the reasons set
                                      forth below, we conclude that the option partners’ bases in
                                      the distributed property as well as their outside bases (or
                                      lack thereof) in their purported partnership interests are
                                      partnership/entity items of Tigers Eye that we have jurisdic-
                                      tion under sections 6233 and 6231(a)(3) and their regulations
                                      to decide in this partnership/entity-level proceeding.
                                           1. Basis in Property Distributed by Disregarded Entity
                                         Pursuant to section 6233 and its regulation, we have juris-
                                      diction to determine the items of Tigers Eye acting as
                                      nominee for the option partners. Tigers Eye was required to
                                      make determinations for purposes of its books and records
                                      and for providing information to the option partners with
                                      respect to the transactions it conducted as nominee or agent
                                      on their behalves.
                                         An option partner is required to take his basis in the
                                      distributed property into account in computing his gain or
                                      loss on the sale of the property and computing his income tax
                                      taking into account that gain or loss. The Secretary has
                                      determined in section 301.6231(a)(3)–1(a)(4), Proced. &
                                      Admin. Regs., that items relating to distributions that the
                                      partnership is required to make for purposes of its books and
                                      records or for providing information to a partner are ‘‘more
                                      appropriately determined at the partnership level’’ and are
                                      partnership items. The regulation specifically provides that,
                                      for purposes of its books and records and providing informa-
                                      tion to a partner, the partnership needs to determine ‘‘[t]he
                                      adjusted basis to the partnership of distributed property’’.
                                      Sec. 301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin. Regs.
                                         Tigers Eye needed to account for the money it received
                                      from the option partners, the expenses it incurred on behalf
                                      of the option partners, the amounts received and spent on
                                      the receipt and unwinding of the paired options, and the cost
                                      of the foreign currency and stock purchased on behalf of the
                                      option partners. Tigers Eye needed to provide that informa-
                                      tion to the option partners so that they could properly report




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                                      their gain or loss on the unwinding of the paired options and
                                      determine their bases in the foreign currency and stock pur-
                                      chased on their behalves. Tigers Eye was required to deter-
                                      mine the character of property distributed to an option
                                      partner; i.e., that it was a distribution of the property Tigers
                                      Eye purchased as nominee or agent on behalf of the option
                                      partners. Tigers Eye needed to identify the property to be
                                      distributed, determine its basis in the property (which, in
                                      view of its nominee-agent status, is participating partner’s
                                      basis in the property) and account for the property on its
                                      books. Because Tigers Eye did not separately account for the
                                      transactions on behalf of the various option partners, the
                                      items are entity items (partnership items) that we have juris-
                                      diction to decide in this entity/partnership-level proceeding.
                                         Although the FPAA Schedule of Adjustments adjusted part-
                                      nership distributions to zero, it did not mention or make any
                                      specific adjustment to the bases of the foreign currency and
                                      stock received by the option partners. However, pursuant to
                                      section 6226(f), regardless of whether the Commissioner
                                      specifically made adjustments in the FPAA, the Court has
                                      jurisdiction to determine ‘‘all partnership items of the part-
                                      nership for the partnership taxable year to which the notice
                                      of FPAA relates, the proper allocation of such items among
                                      the partners, and the applicability of any penalty, addition to
                                      tax, or additional amount which relates to an adjustment to
                                      a partnership item’’. Tigers Eye’s basis in the foreign cur-
                                      rency and stock (which is participating partner’s basis) is a
                                      partnership/entity item we have jurisdiction to decide in this
                                      case. See sec. 301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin.
                                      Regs. Participating partner acknowledges that the distribu-
                                      tions reported on the partnership return filed by Tigers Eye
                                      is Tigers Eye’s cost basis in the distributed property. Thus,
                                      the distributions shown on the Schedule K–1 issued to each
                                      option partner is Tigers Eye’s cost basis in the property
                                      distributed to such partner.
                                           2. Outside Basis
                                        Participating partner and petitioner agree that the second
                                      decision paragraph, in determining that the FPAA is correct,
                                      upholds the FPAA’s adjustment of outside partnership basis to
                                      zero. Participating partner asserts that the stipulated deci-




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                                      sion must be revised because under Petaluma II this Court
                                      lacks jurisdiction to make adjustments to outside basis. How-
                                      ever, for the reasons set forth below, we do not believe the
                                      holding of the Court of Appeals on that issue in Petaluma II
                                      serves as binding precedent under the intervening opinion of
                                      the Supreme Court in Mayo Found. for Med. Educ. &
                                      Research v. United States, 562 U.S. ll, 131 S. Ct. 704
                                      (2011), and the recently filed opinion of the Court of Appeals
                                      for the D.C. Circuit, Intermountain Ins. Serv. of Vail, LLC v.
                                      Commissioner, 650 F.3d 691 (D.C. Cir. 2011).
                                           a. Petaluma Superseded by Mayo Found. and Inter-
                                              mountain: TEFRA Regulations Must Be Applied
                                         The adjustments made in the Tigers Eye FPAA are similar
                                      to those made in the Petaluma FPAA. 36 In Petaluma I the
                                      Tax Court held that (1) the partnership was a sham and was
                                      disregarded for Federal tax purposes; (2) the purported part-
                                      ners had no bases in their interests in the disregarded part-
                                      nership; and (3) a valuation misstatement penalty under sec-
                                      tion 6662(b)(3) applied to underpayments related to the gross
                                      misstatement of the partners’ outside bases. In deciding the
                                      second issue, the Court held that although in some cases a
                                      partner’s outside basis may be an affected item, under the
                                      regulations defining partnership items the outside basis of
                                      the Petaluma partners was a partnership item the Court had
                                      jurisdiction in the partnership-level proceeding to decide.
                                         In Petaluma II, the Court of Appeals affirmed the
                                      Petaluma I holding that the determination that the partner-
                                      ship is a sham and is disregarded for Federal tax purposes
                                      is a partnership item the Tax Court has jurisdiction to decide
                                      in the partnership-level proceeding. In so doing, the Court of
                                      Appeals held that the Tax Court’s jurisdiction in the case
                                      was governed by section 6233. The Court of Appeals then
                                      meticulously applied section 6231(a)(3) and the regulations
                                         36 The FPAA in Petaluma, although more detailed in some respects, is substantially similar

                                      to the FPAA in the case at hand, both with respect to the adjustments, including outside basis,
                                      capital contributions, and distributions of property other than money, and the Exhibit A—Expla-
                                      nation of Items. However, the adjustments in Petaluma do not include any other partnership
                                      items that would directly flow through from the partnership return to the returns of the part-
                                      ners to create any deficiency. Unlike the case at hand, the FPAA adjustments in Petaluma do
                                      not include the zeroing out of an overall loss; it is a small amount of net income that is zeroed
                                      out. Nor do the adjustments in Petaluma zero out or even refer to an ‘‘Other Deductions’’ item.




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                                      thereunder to decide that the existence or nonexistence of a
                                      partnership is a partnership item.
                                         Next, contrary to the Tax Court’s holding in Petaluma I
                                      that under the regulations outside basis was a partnership
                                      item, the Government conceded that outside basis was not a
                                      partnership item. The Court of Appeals accepted the Govern-
                                      ment’s concession without any discussion of section 6233 or
                                      6231 or the regulations under section 6231 upon which the
                                      Tax Court had relied. The Government argued that the Tax
                                      Court had jurisdiction in the partnership proceeding to deter-
                                      mine the partners’ outside bases as affected items whose ele-
                                      ments are determined mainly from partnership items. The
                                      Court of Appeals rejected that argument and held that the
                                      Tax Court did not have jurisdiction in the partnership pro-
                                      ceeding to determine the partners’ outside bases, an affected
                                      item, despite the disregard of the partnership. Consequently,
                                      the Court of Appeals agreed with Petaluma that ‘‘since the
                                      Tax Court lacked jurisdiction to determine outside basis, it
                                      also lacks jurisdiction to determine that penalties apply with
                                      respect to outside basis because those penalties do not relate
                                      to an adjustment to a partnership item’’. Petaluma II, 591
                                      F.3d at 655.
                                         After Petaluma II was issued, the Supreme Court in Mayo
                                      Found., 562 U.S. ll, 131 S. Ct. 704, made it clear that Fed-
                                      eral courts must defer to regulations interpreting the Code
                                      that satisfy the two-step Chevron standard. See Chevron,
                                      U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
                                      842–843 (1984). More recently, in Intermountain Ins. Serv. of
                                      Vail, LLC v. Commissioner, 650 F.3d at 691, the Court of
                                      Appeals for the D.C. Circuit held that the deference given to
                                      regulations under Mayo Found. requires the Court to apply
                                      the definitions of statutory terms provided in valid TEFRA
                                      regulations rather than follow earlier caselaw.
                                         The jurisdictional holdings of Petaluma II on outside basis
                                      and accuracy-related penalties have their genesis in the
                                      Government’s concession that outside basis was not a part-
                                      nership item. The Court of Appeals summarily accepted that
                                      concession without any reference to section 301.6233–1T,
                                      Temporary Proced. & Admin. Regs., supra, or section
                                      301.6231(a)(3)–1, Proced. & Admin. Regs. In contrast, the
                                      Court of Appeals discussed and applied sections 6233 and
                                      6231(a)(3), section 301.6233–1T(a), Temporary Proced. &




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                                      Admin. Regs., supra, and section 301.6231(a)(3)–1, Proced. &
                                      Admin. Regs., in affirming our holding in Petaluma I that
                                      disregard of the partnership is a partnership item.
                                         Because the Court of Appeals did not consider the regula-
                                      tion in concluding in Petaluma II that outside basis is an
                                      affected item, we believe that its decision on the outside
                                      basis issue in Petaluma II has been superseded by the inter-
                                      vening opinions of the Supreme Court in Mayo Found. and
                                      the Court of Appeals in Intermountain. Intermountain
                                      requires us to apply the TEFRA regulations rather than follow
                                      any contrary holding in Petaluma II, unless we hold the
                                      regulation to be invalid under the two-step Chevron standard
                                      as mandated by the Supreme Court in Mayo Found.
                                         If, under the applicable regulations, outside basis can be a
                                      partnership item, as we believe it to be generally, and more
                                      particularly when the entity is disregarded for Federal
                                      income tax purposes, acceptance of the Government’s conces-
                                      sion effectively invalidates the regulation. Consequently, we
                                      will follow the Supreme Court’s command in Mayo Found.
                                      and apply the TEFRA regulations rather than hold them
                                      invalid or inapplicable. In determining the validity of a regu-
                                      lation, we are not bound to follow Petaluma II where the
                                      Court of Appeals did not specifically consider the applica-
                                      bility of the regulation in deciding the issue. See Inter-
                                      mountain Ins. Serv. of Vail, LLC v. Commissioner, 650 F.3d
                                      at 702. We begin by identifying the factors that determine
                                      outside basis in a valid partnership, so as to set the stage for
                                      the corresponding analysis that applies when the partnership
                                      is disregarded.
                                           b. Determination of Outside Basis: General Rule Under Sec-
                                              tion 705(a)
                                        Section 705(a) states the general rule for determining the
                                      adjusted basis of a partner’s interest in a partnership. In rel-
                                      evant part, section 705(a) provides that the adjusted basis of
                                      a partner’s interest in a partnership is his original basis as
                                      determined under section 722 (relating to contributions to a
                                      partnership) or section 742 (relating to transfers of partner-
                                      ship interests) increased by (1) the amount of money and his
                                      basis in property subsequently contributed to the partnership
                                      and (2) his distributable share of the income of the partner-




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                                      ship and decreased (but not below zero) by (1) the amount of
                                      money and the partnership’s adjusted basis in property
                                      distributed to the partner in a nonliquidating distribution to
                                      the partner and (2) his distributable shares of partnership
                                      losses and expenditures. Secs. 705(a), 722, 732(a). The
                                      original outside basis of a partner who obtains an interest in
                                      a partnership by contribution to the partnership is equal to
                                      the amount of money contributed plus his adjusted basis in
                                      any property contributed. Sec. 722; sec. 1.722–1, Income Tax
                                      Regs. The original outside basis of a partner who obtains his
                                      interest in the partnership by purchase is his cost basis
                                      equal to the purchase price. Sec. 742; sec. 1.742–1, Income
                                      Tax Regs.
                                        The partnership’s assumption of a partner’s liability and a
                                      reduction of a partner’s share of the liabilities of the partner-
                                      ship are treated as distributions of money. Sec. 752(b). The
                                      partner’s assumption of a liability of the partnership and an
                                      increase in a partner’s share of the liabilities of the partner-
                                      ship are treated as contributions of money. Id. If, as a result
                                      of a single transaction, a partner incurs both an increase and
                                      a decrease in his share of partnership liabilities, only the net
                                      increase is treated as a contribution or the net decrease is
                                      treated as a distribution. Sec. 1.752–1(f), Income Tax Regs.
                                      Thus, if property contributed to the partnership is subject to
                                      indebtedness or if liabilities of the partner are assumed by
                                      the partnership, the increase and decrease in the partner’s
                                      basis from the deemed contributions and distributions of
                                      money are netted and the contributing partner’s outside
                                      basis is reduced by the portion of the indebtedness allocated
                                      to the other partners. Sec. 1.722–1, Income Tax Regs.
                                        The provisions governing the determination of outside
                                      basis are intended to equate the aggregate of the partner-
                                      ship’s inside bases in its assets with the aggregate of its
                                      partners’ outside bases in their partnership interests. Salina
                                      P’ship LP v. Commissioner, T.C. Memo. 2000–352 (citing 1
                                      William S. McKee et al., Federal Taxation of Partnerships
                                      and Partners, par. 6.01, at 6–3 (3d ed. 1997)). The carryover-
                                      basis rule in section 722 generally results in a matching of
                                      inside and outside bases upon the formation of a partnership.
                                      See Coloman v. Commissioner, 540 F.2d 427, 429 (9th Cir.
                                      1976), aff ’g T.C. Memo. 1974–78. The adjustments to basis
                                      to account for income and expenses from partnership oper-




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                                      ations under section 705(a) generally preserve the equiva-
                                      lence of inside and outside bases. Id. Finally, the practical
                                      impact of the basis adjustment prescribed in section 752(a)
                                      to reflect increases and decreases in a partner’s share of
                                      partnership liabilities has been described as follows:
                                      If a partnership borrows money, the basis of its assets increases by the
                                      amount of cash received, even though the receipt of the borrowed funds is
                                      not income. By treating the partners as contributing cash in an amount
                                      equal to their shares of the debt, inside/outside basis equality is preserved
                                      and distortions are avoided. If a liability for borrowed money were not
                                      added to the partners’ bases, they could be taxed on a distribution of the
                                      borrowed cash even though there is no gain inherent in the partnership’s
                                      assets. A similar result could occur if a partnership incurs a purchase
                                      money liability to acquire property, since the liability is added to the part-
                                      nership’s basis in the property. [1 McKee, supra, para. 7.01[1], at 7–2.]

                                      See Laney v. Commissioner, 674 F.2d 342, 345–346 (5th Cir.
                                      1982), aff ’g in part, rev’g in part on another ground T.C.
                                      Memo. 1979–491. The preamble to section 1.752–1T, Tem-
                                      porary Income Tax Regs., 53 Fed. Reg. 53143 (Dec. 30, 1988),
                                      states in pertinent part:
                                         The allocation of partnership liabilities among the partners serves to
                                      equalize the partnership’s basis in its assets (‘‘inside basis’’) with the part-
                                      ners’ bases in their partnership interests (‘‘outside basis’’). The provision
                                      of additional basis to a partner for the partner’s partnership interest will
                                      permit the partner to receive distributions of the proceeds of partnership
                                      liabilities without recognizing gain under section 731, and to take deduc-
                                      tions attributable to partnership liabilities without limitation under sec-
                                      tion 704(d) (which limits the losses that a partner may claim to the basis
                                      of the partner’s interest in the partnership). By equalizing inside and out-
                                      side basis, section 752 simulates the tax consequences that the partners
                                      would realize if they owned undivided interests in the partnership’s assets,
                                      thereby treating the partnership as an aggregate of its partners.

                                      The determination of the partners’ shares of partnership
                                      liabilities under section 752 is also complex, requiring a
                                      determination of each partner’s liability for recourse debt and
                                      the proper allocation of nonrecourse debt. See secs. 1.752–1
                                      through 1.752–5, Income Tax Regs.
                                           c. Determination of Outside Basis: Alternative Rule Under
                                              Section 705(b)
                                         Section 705(b) authorizes the Secretary to prescribe regula-
                                      tions under which the adjusted basis of a partner’s interest




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                                      in a partnership may be determined by reference to the part-
                                      ner’s proportionate share of the adjusted basis of partnership
                                      property that would be distributable upon a termination of
                                      the partnership. The regulations promulgated to implement
                                      this section, see sec. 1.705–1(b), Income Tax Regs., provide
                                      that an alternative method (alternative rule) may be used in
                                      circumstances where (a) a partner cannot practicably apply
                                      the general rule set forth in section 705(a) and section 1.705–
                                      1(a), Income Tax Regs., or (b) from a consideration of all the
                                      facts, the Commissioner reasonably concludes that the result
                                      will not vary substantially from the result obtainable under
                                      the general rule.
                                           d. Outside Basis Is a Partnership Item
                                        Under section 6231(a)(3), a partnership item must be (1)
                                      required to be taken into account for the partnership’s tax-
                                      able year under any provision of subtitle A, governing income
                                      taxes, and (2) identified by regulation as ‘‘more appropriately
                                      determined at the partnership level’’.
                                           i. Required To Be Taken Into Account Under Subtitle A
                                         ‘‘A partner is required to determine the adjusted basis of
                                      his interest in a partnership only when necessary for the
                                      determination of his tax liability or that of any other person.’’
                                      Sec. 1.705–1(a)(1), Income Tax Regs. The regulation provides
                                      that it is necessary to determine a partner’s outside basis (1)
                                      at end of a taxable year to determine the extent to which the
                                      partner may deduct his share of partnership loss or deduc-
                                      tions and (2) on the date of sale or liquidation of his interest
                                      in the partnership. Id.
                                         As the Court of Appeals stated in deciding that the validity
                                      of a partnership is a partnership item in Petaluma II, 591
                                      F.3d at 653:
                                      We have little difficulty concluding that application of the income tax
                                      provisions of Subtitle A to the tax liability of a taxpayer who receives
                                      income from a purported partnership entails a determination of the
                                      validity of that partnership. As the Eighth Circuit has stated, ‘‘When
                                      filling out individual tax returns, the very process of calculating an outside
                                      basis, reporting a sales price, and claiming a capital loss following a part-
                                      nership liquidation presupposes that the partnership was valid.’’ RJT
                                      Investments X v. Comm’r, 491 F.3d 732, 736 (8th Cir. 2007). Thus the first
                                      requirement of the test is met. [Emphasis added.]




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                                      Outside basis is required to be taken into account in com-
                                      puting the income tax liability from the sale of property
                                      purportedly received by the taxpayer from a partnership in
                                      liquidation of his interest in the purported partnership. Thus
                                      the first requirement of section 6231 is satisfied.
                                           ii. More Appropriately Determined at the Partnership Level:
                                               Outside Basis Determined Under the General Rule
                                         Under statutory authority, the Secretary has decided that
                                      items related to contributions to the partnership and dis-
                                      tributions from the partnership that the partnership is
                                      required to determine for its books and records or for pro-
                                      viding information to its partners are partnership items. Sec.
                                      301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs. The Secretary
                                      has also decided that, to the extent that a determination of
                                      an item relating to contributions and distributions can be
                                      made from the determination of contributions, distributions,
                                      and similar determinations that the partnership is required
                                      to make, that item is a partnership item. Sec. 301.6231(a)(3)–
                                      1(c)(2) and (3), Proced. & Admin. Regs. Conversely, to the
                                      extent that the determination of such an item requires other
                                      information, that item is not a partnership item. Id.
                                         The regulation recognizes that a partner’s basis in his
                                      partnership interest is an item relating to distributions and,
                                      in many instances, that the determination of that outside
                                      basis under the general rule of section 705(a) may be made
                                      solely from the determination of contributions, distributions,
                                      and similar determinations that the partnership is required
                                      to make—the partner’s share of items of partnership income,
                                      credit, loss, deduction, and liabilities. If the partner has
                                      contributed property to the partnership that is subject to
                                      indebtedness, the contributing partner’s outside basis is
                                      reduced by the portion of the indebtedness allocated to the
                                      other partners. Sec. 1.722–1, Income Tax Regs. Determina-
                                      tion of the amounts and nature of those liabilities, whether
                                      they are nonrecourse or contingent, and each partner’s share
                                      of each liability is a partnership item. Sec. 301.6231(a)(3)–
                                      1(a)(v), Proced. & Admin. Regs. A partner’s share of partner-
                                      ship liabilities is determined under the complex regulations
                                      promulgated under section 752. Section 1.752–4(d), Income
                                      Tax Regs., requires a partner’s share of liabilities to be cal-




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                                      culated only when necessary to determine the tax liability of
                                      the partner, such as at the end of the partnership taxable
                                      year or when a partner sells or liquidates his partnership
                                      interest. The partnership is required to inform the partners
                                      of their shares of partnership liabilities so the partners can
                                      determine the extent to which they may deduct their shares
                                      of partnership loss or deductions and determine the amounts
                                      of deemed distributions or contributions of money from any
                                      increase or decrease in their shares of the partnership liabil-
                                      ities. In those circumstances, outside basis is a partnership
                                      item.
                                         Under the regulation, a partner’s outside basis is not a
                                      partnership item (i.e., it is an affected item) only when and
                                      to the extent the determination requires other information.
                                      Sec. 301.6231(a)(3)–1(c)(3), Proced. & Admin. Regs. ‘‘Such
                                      other information would include those factors used in deter-
                                      mining the partner’s basis for the partnership interest that
                                      are not themselves partnership items.’’ Id. (emphasis added).
                                      Examples of such factors would include the amount the
                                      partner paid to acquire his partnership interest from a trans-
                                      feror partner and that the transfer was not covered by an
                                      election under section 754. Sec. 301.6231(a)(3)–1(c)(2) and
                                      (3), Proced. & Admin. Regs.
                                         When a partner acquires an interest in the partnership by
                                      purchase, the partnership may make optional adjustments to
                                      the basis of partnership property if an election is made under
                                      section 754. Under section 301.6231(a)(3)–1(a), Proced. &
                                      Admin. Regs., the optional adjustment, including the deter-
                                      mination of the partner’s initial cost basis in the partnership,
                                      is a partnership item, and the determination of the partner’s
                                      adjusted outside basis can be made from the determination
                                      of distributions, contributions, and similar determinations,
                                      including the partner’s initial cost basis, that the partnership
                                      is required to make. In that case, the partner’s adjusted out-
                                      side basis is a partnership item under the regulation. If no
                                      election is made under section 754, the determination of the
                                      partner’s initial basis is not one that the partnership is
                                      required to make. Pursuant to section 301.6231(a)(3)–1(a),
                                      Proced. & Admin. Regs., to the extent the determination of
                                      the partner’s adjusted basis requires information regarding
                                      the amount paid for the interest, it is not a partnership item.
                                      To that extent, it is an affected item. See sec. 301.6231(a)(5)–




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                                      1T(b), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790
                                      (Mar. 5, 1987).
                                           iii. More Appropriately Determined at the Partnership
                                                Level: Outside Basis Determined Under Alternative
                                                Rule
                                         When a partner’s outside basis is determined under the
                                      alternative rule of section 705(b), his basis is equal to his
                                      share of the adjusted basis of partnership property that
                                      would be distributable to him upon termination of the part-
                                      nership. If the partnership makes a distribution to a partner
                                      in liquidation of the partner’s interest in the partnership, the
                                      partnership’s basis in the distributed property is a partner-
                                      ship item. Sec. 301.6231(a)(3)–1(c)(3), Proced. & Admin.
                                      Regs. The determination of outside basis under the alter-
                                      native rule of section 705(b) may be made solely from the
                                      determination of distributions that the partnership is
                                      required to make when property is distributed in liquidation
                                      of a partner’s interest in the partnership. In determining the
                                      amount of the distribution, the partnership must determine
                                      the partner’s interest in the partnership and identify the
                                      property to be distributed and its basis in the property for
                                      purposes of its books and records and for providing informa-
                                      tion to the partner. Thus, when outside basis is determined
                                      under the alternative rule, it is a partnership item.
                                           iv. More Appropriately Determined at the Partnership
                                               Level: Outside Basis When the Partnership Is
                                               Disregarded
                                         Section 301.6231(a)(3)–1(c)(1), Proced. & Admin. Regs.,
                                      explicitly states that the illustrations therein are not exhaus-
                                      tive; there may be additional determinations of items
                                      relating to contributions and distributions that the partner-
                                      ship is required to make for purposes of its books and records
                                      or providing information to its partners. The partnership’s
                                      existence for Federal income tax purposes is a determination
                                      the partnership is required to make that also relates to the
                                      proper tax treatment of contributions and distributions. If, as
                                      here, the parties agree and the Court determines on grounds
                                      of sham or lack of economic substance that the entity is not
                                      a partnership, then the purported partners are not partners




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                                      and never acquired any interests in a partnership and the
                                      transactions between the entity and the purported partners
                                      are not treated as transactions between a partnership and its
                                      partners. If the partnership does not exist for Federal tax
                                      purposes, it follows that there were no contributions from a
                                      partner to a partnership, no distributions from a partnership
                                      to a partner, no items of partnership income, partnership
                                      deduction, or partnership loss, no partnership liabilities or
                                      partnership property, nor any adjusted basis in partnership
                                      property. Solely from these determinations, it can be deter-
                                      mined with absolute certainty that there can be no outside
                                      basis in the nonexistent partnership interest. No additional
                                      facts are required to determine the absence of an outside
                                      basis, and no additional facts could possibly alter that conclu-
                                      sion. That being the case, the above regulation makes outside
                                      basis (or the lack thereof) a partnership item if the partner-
                                      ship is disregarded. Indeed, in holding that the determina-
                                      tion of the existence of a valid partnership is a partnership
                                      item, the Court of Appeals for the D.C. Circuit observed in
                                      Petaluma II that ‘‘ ‘the very process of calculating an outside
                                      basis, reporting a sales price, and claiming a capital loss fol-
                                      lowing a partnership liquidation presupposes that the part-
                                      nership was valid.’ ’’ Petaluma II, 591 F.3d at 653 (quoting
                                      RJT Invs. X v. Commissioner, 491 F.3d at 736 (emphasis
                                      added)).
                                         Moreover, pursuant to section 301.6233–1T(a), Temporary
                                      Proced. & Admin. Regs., supra, the determination that the
                                      entity is not a partnership serves as a basis for a computa-
                                      tional adjustment reflecting the disallowance of any loss or
                                      credit claimed by a purported partner with respect to that
                                      entity, including the losses reported by the option partners
                                      on their sales of property purported to have been distributed
                                      to them in liquidation of their purported partnership
                                      interests. We have jurisdiction under section 6233 and its
                                      regulations to make all adjustments of items necessary to
                                      make that computational adjustment, including taking
                                      account of the absence of outside basis by adjusting it to zero.
                                           e. Misapplication of Dial USA, Inc. v. Commissioner
                                        Citing Dial USA, Inc. v. Commissioner, 95 T.C. 1, 4–6
                                      (1990), and section 301.6231(a)(5)–1T(b), Temporary Proced.




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                                      & Admin. Regs., supra, this Court has held in some cases
                                      that a partner’s basis in his partnership interest is an
                                      affected item. See, e.g., Meruelo v. Commissioner, 132 T.C.
                                      355, 367 (2009); Gustin v. Commissioner, T.C. Memo. 2002–
                                      64. However, the cited regulation does not define partnership
                                      item; it defines affected items and provides that ‘‘A partner’s
                                      basis in his interest in the partnership is an affected item to
                                      the extent it is not a partnership item.’’ Sec. 301.6231(a)(5)–
                                      1T(b), Temporary Proced. & Admin. Regs. (emphasis added).
                                      None of the immediately above-cited cases examined the
                                      antecedent regulation defining ‘‘partnership item’’ to deter-
                                      mine the extent to which or the circumstance in which a
                                      partner’s basis in his partnership interest is a partnership
                                      item.
                                         Moreover, Dial involved the Court’s jurisdiction to deter-
                                      mine subchapter S items at the corporate level under the uni-
                                      fied subchapter S audit and litigation provisions of the Sub-
                                      chapter S Revision Act of 1982 (SSRA), Pub. L. No. 97–354,
                                      sec. 4(a), 96 Stat. at 1691. The SSRA provisions, enacted
                                      shortly after TEFRA and set forth at former sections 6241
                                      through 6245, have since been repealed by the Small Busi-
                                      ness Job Protection Act of 1996, Pub. L. No. 104–188, sec.
                                      1307(c)(1), 110 Stat. at 1781, applicable to tax years begin-
                                      ning after December 31, 1996. Under SSRA, the TEFRA provi-
                                      sions that relate to partnership items and the judicial deter-
                                      mination of partnership items were made applicable to sub-
                                      chapter S items except to the extent modified or made inappli-
                                      cable by regulations. Sec. 6244. Subchapter S items were
                                      defined in section 6245 as ‘‘any item of an S corporation to
                                      the extent regulations prescribed by the Secretary provide
                                      that, for purposes of this subtitle such item is more appro-
                                      priately determined at the corporate level than the share-
                                      holder level.’’ The Secretary identified subchapter S items in
                                      section 301.6245–1T, Temporary Proced. & Admin. Regs., 52
                                      Fed. Reg. 3003 (Jan. 30, 1987). The subchapter S items in
                                      that regulation are very similar to the partnership items
                                      identified in section 301.6231(a)(3)–1T, Temporary Proced. &
                                      Admin. Regs., supra, and they include items relating to con-
                                      tributions and distributions to the extent they can be made
                                      from those determinations and similar determinations that
                                      the corporation is required to make. The respective regula-
                                      tions, however, are markedly different from each other with




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                                      respect to a shareholder’s basis in the S corporation and a
                                      partner’s basis in his partnership interest. The flush lan-
                                      guage of section 301.6245–1T(c)(3), Temporary Proced. &
                                      Admin. Regs., 52 Fed. Reg. 3004 (Jan. 30, 1987), provides:
                                      To the extent that the determination requires other information, however,
                                      that item is not a subchapter S item. Such other information would
                                      include the determination of a shareholder’s basis in the shareholder’s stock
                                      or in the indebtedness of the S corporation to the shareholder. [Emphasis
                                      added.]

                                      By contrast, the flush language of section 301.6231(a)(3)–
                                      1(c)(3), Proced. & Admin. Regs., provides:
                                      To the extent that that determination requires other information, however,
                                      that item is not a partnership item. Such other information would include
                                      those factors used in determining the partner’s basis for the partnership
                                      interest that are not themselves partnership items, such as the amount that
                                      the partner paid to acquire the partnership interest from a transferor
                                      partner if that transfer was not covered by an election under section 754.
                                      [Emphasis added.]

                                      Thus, the SSRA regulations defining subchapter S items modi-
                                      fied the TEFRA regulations that relate to partnership items,
                                      making the determination of outside basis a partnership item
                                      under certain circumstances inapplicable to subchapter S
                                      items. The shareholder’s basis in the S corporation stock was
                                      solely an affected item. By contrast, a partner’s basis in the
                                      partnership is an affected item only ‘‘to the extent it is not
                                      a partnership item.’’ Sec. 301.6231(a)(5)–1T(b), Temporary
                                      Proced. & Admin. Regs., supra. Section 6244 made the TEFRA
                                      provisions that relate to partnership items and the judicial
                                      determination of partnership items applicable to subchapter
                                      S items. There is no statute or regulation that makes the S
                                      corporation provisions applicable to partnerships. Con-
                                      sequently, the holding in Dial that the shareholder’s basis in
                                      the stock of the corporation is not a subchapter S item is
                                      inapplicable to the issue of the extent to which or cir-
                                      cumstance in which a partner’s outside basis is or may be a
                                      partnership item.
                                         An S corporation, like a partnership, is a passthrough
                                      entity, and pursuant to section 1366(a)(1) a shareholder must
                                      take into account his or her pro rata share of the S corpora-
                                      tion’s items of income, loss, deduction, or credit. However, an
                                      S corporation is not considered an aggregate of its share-




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                                      holders—it is merely a small corporation that has elected to
                                      have its income taxed to its shareholders rather than at the
                                      corporate level. For that reason the provisions governing the
                                      determination of a shareholder’s basis are not intended to
                                      equate the aggregate of the corporation’s bases in its assets
                                      with the aggregate of its shareholders’ bases in their stock in
                                      the corporation. Shareholders in S corporations have no
                                      bases in their stock attributable to any liabilities of the S
                                      corporation. However, a shareholder in an S corporation has
                                      a separate tax basis in loans the shareholder makes to the
                                      S corporation equal to the amount of the loans. Secs. 1012,
                                      1366(d)(1)(B). Generally, under section 1367 a shareholder’s
                                      tax basis in the stock in, and in the loans to, an S corpora-
                                      tion are adjusted to reflect the shareholder’s share of income,
                                      losses, deductions, and credits of the S corporation as cal-
                                      culated under section 1366(a)(1). If a shareholder’s tax basis
                                      in his stock in an S corporation is reduced to zero by his
                                      share of the losses of the S corporation, any further share of
                                      the S corporation’s losses decreases, but not below zero, the
                                      shareholder’s tax basis in outstanding loans the shareholder
                                      has made to the S corporation. Sec. 1367(b)(2)(A); sec.
                                      1.1367–2(b)(1), Income Tax Regs.
                                         The computation of a shareholder’s pro rata share of the
                                      S corporation’s items of income is much simpler than the
                                      determination of a partner’s distributable share of partner-
                                      ship items. A shareholder’s pro rata share of the S corpora-
                                      tion items is determined by assigning an equal amount to
                                      each share of outstanding stock. By contrast, a partner’s
                                      distributive share of partnership items of income, loss, etc.,
                                      is determined by the partnership agreement, provided the
                                      allocation has substantial economic effect. Sec. 704(a). Other-
                                      wise the partner’s distributive share is determined in accord-
                                      ance with the partner’s interest in the partnership, taking
                                      into account all the facts and circumstances. Sec. 704(b).
                                      That determination would require an analysis or determina-
                                      tion of, inter alia, the partnership agreement, capital
                                      accounts maintained under general accounting practices, cap-
                                      ital accounts maintained for tax purposes in cases where
                                      there is a difference, historical allocation of income and
                                      deduction items, implications of negative capital account bal-
                                      ances, partners’ liability for partnership debt, whether part-
                                      nership debt is recourse or nonrecourse, partners’ shares of




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                                      profit and loss, and partners’ shares of partnership assets
                                      upon liquidation of the partnership.
                                         Determination of the partners’ outside bases in their
                                      interests in a partnership that is recognized for Federal
                                      income tax purposes requires complex determinations of not
                                      only the amounts of partnership items that are elements of
                                      outside basis but also the partners’ shares of those amounts,
                                      which are also partnership items. Those complex determina-
                                      tions must be made in the partnership proceeding, and most
                                      often there are no other factors to be determined at the
                                      partner level. As the argument in Helmer v. Commissioner,
                                      T.C. Memo. 1975–160, raised in Son of BOSS cases such as
                                      this case demonstrates, the effect of partnership liabilities on
                                      the partners’ outside bases exacerbates the complexity of
                                      computing outside basis. Determination of the partners’
                                      shares of partnership liabilities and any changes in those
                                      shares are usually unrelated to adjustments of any partner-
                                      ship items of income, loss, deduction, or credit. The deter-
                                      mination of one partner’s share of any partnership item
                                      affects every other partner’s share of that item. The com-
                                      plexity of determining a partner’s basis in his partnership
                                      interest justifies the Secretary’s determination that outside
                                      basis is a partnership item to be determined at the partner-
                                      ship level to the extent it requires no additional information
                                      that must be determined at the partner level.
                                         By comparison, the determination of a shareholder’s basis
                                      in his stock in an S corporation is relatively simple once the
                                      S corporation items of income, loss, deduction, and/or credit
                                      are determined at the corporate level (either as reported on
                                      the S corporation return and accepted by the Commissioner
                                      or as a result of a corporate-level proceeding). A share-
                                      holder’s share of those S corporation items can be determined
                                      at the shareholder level on the basis of the number of shares
                                      in the S corporation without affecting any other shareholder’s
                                      pro rata share. His basis in any property contributed to the
                                      S corporation can also be determined by his records. The rel-
                                      ative simplicity of computing a shareholder’s basis in the
                                      stock of an S corporation justified the Secretary’s determina-
                                      tion that stock basis was an affected item to be determined
                                      at the shareholder level.




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                                           f. Validity of the Regulation Under the Chevron Two-Step
                                              Standard
                                         We must follow the regulation, unless we hold it to be
                                      invalid under the principles of Chevron, U.S.A., Inc. v. Nat-
                                      ural Res. Def. Council, Inc., 467 U.S. 837 (1984). Under
                                      Chevron, we ask first whether Congress has addressed the
                                      precise question at issue. Id. at 842. Where the statutory text
                                      is ambiguous, we ask whether the agency’s chosen
                                      interpretation is a ‘‘reasonable interpretation’’ of the enacted
                                      text. Id. at 844. We may not disturb the regulation unless it
                                      is ‘‘ ‘arbitrary or capricious in substance, or manifestly con-
                                      trary to the statute.’ ’’ Mayo Found., 562 U.S. at ll, 131 S.
                                      Ct. at 711 (quoting Household Credit Servs., Inc. v. Pfennig,
                                      541 U.S. 232, 242 (2004)).
                                         First, we ask whether the statute is ‘‘silent or ambiguous’’
                                      on the issue in question such that the agency has room to
                                      interpret. Chevron, 467 U.S. at 843. In doing so, we use
                                      ‘‘traditional tools of statutory construction, including the
                                      statutory language and legislative history.’’ Anderson v. DOL,
                                      422 F.3d 1155, 1180 (10th Cir. 2005) (citing Chevron, 467
                                      U.S. at 843 n.9). Thus we ask whether Congress’ intent is
                                      clear with respect to whether the term ‘‘partnership item’’ in
                                      section 6231(a)(3) includes the partners’ outside bases in the
                                      partnership. Section 6231(a)(3) defines the term ‘‘partnership
                                      item’’ as any item with respect to a partnership that is
                                      required to be taken into account for the partnership’s tax-
                                      able year under the provisions governing income taxes to the
                                      extent regulations prescribed by the Secretary provide that,
                                      for purposes of subtitle A, such item is more appropriately
                                      determined at the partnership level than at the partner
                                      level. A partner’s basis in his partnership interest is an item
                                      that is required to be taken into account when the partner
                                      is determining the extent to which he may deduct partner-
                                      ship losses and expenses each year or the amount of income
                                      he may realize when he receives a distribution from the part-
                                      nership. Therefore Congress has not excluded the partners’
                                      outside bases from the definition of partnership item.
                                         We proceed to the second step and ask whether the regula-
                                      tion is ‘‘based on a permissible construction of the statute.’’
                                      Chevron, 467 U.S. at 843. If the Secretary’s construction is
                                      reasonable, Chevron requires the Court to accept that




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      125


                                      construction, even if the Secretary’s ‘‘reading differs from
                                      what the court believes is the best statutory interpretation.’’
                                      Nat’l Cable & Telecomms. Ass’n v. Brand X, 545 U.S. 967,
                                      980 (2005).
                                         Nothing in section 6231(a)(3) unambiguously forecloses the
                                      Secretary from interpreting ‘‘partnership items’’ as including
                                      items relating to contributions to the partnership and dis-
                                      tributions from the partnership to the extent that the items
                                      can be ascertained from determinations that the partnership
                                      is required to make with respect to an amount, the character
                                      of an amount, or the percentage interest of a partner in the
                                      partnership, for purposes of the partnership books and
                                      records or for purposes of furnishing information to a
                                      partner. They are items the partners are required to take
                                      into account in determining their income taxes for the part-
                                      nership’s taxable year. It is not arbitrary for the Secretary to
                                      decide that items that can be determined solely by contribu-
                                      tions, distributions, and other similar items that the partner-
                                      ship is required to keep records of for purposes of its books
                                      and records or for providing information to its partners are
                                      more appropriately determined at the partnership level. They
                                      are items that can be determined only from other items that
                                      must be determined at the partnership level, and the deter-
                                      mination with respect to one partner necessarily affects the
                                      other partners, e.g., determination of the basis in property
                                      distributed to one partner reduces the partnership basis in
                                      its remaining assets for purposes of its books and records.
                                      Determining the nature and amounts of liabilities assumed
                                      by the partnership as the result of one partner’s contribution
                                      of property to the partnership affects the other partners’
                                      shares of those liabilities and their deemed contributions of
                                      money related to the increase in the partnership liabilities
                                      allocated to them.
                                         The regulatory scheme under section 6231(a)(3) is technical
                                      and complex. We find that the Secretary considered the
                                      treatment of partnership items in a detailed and reasoned
                                      fashion before making a final decision. The regulations were
                                      promulgated pursuant to notice and comment procedures, ‘‘ ‘a
                                      ‘‘significant’’ sign that a rule merits Chevron deference.’ ’’
                                      Mayo Found., 562 U.S. at ll, 131 S. Ct. at 714 (quoting
                                      United States v. Mead Corp., 533 U.S. 218, 230 (2001)). We
                                      note that the regulations in question are longstanding, ante-




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                                      dating TRA 1997 by 10 years or so. See United States v. Cleve-
                                      land Indians Baseball Co., 532 U.S. 200, 204 (2001)
                                      (according ‘‘due respect to the [Internal Revenue] Service’s
                                      reasonable, longstanding construction of the governing stat-
                                      utes and its own regulations’’); United States v. Correll, 389
                                      U.S. 299, 307 (1967) (the Supreme Court will defer to long-
                                      standing interpretations of the Code and regulations that
                                      reasonably ‘‘implement the congressional mandate’’). We also
                                      note that the regulations in question are legislative rather
                                      than interpretive, having been promulgated pursuant to
                                      congressional direction. See Square D Co. v. Commissioner,
                                      438 F.3d 739 (7th Cir. 2006), aff ’g 118 T.C. 299, 307 (2002);
                                      Carlos v. Commissioner, 123 T.C. 275, 280 (2004). We hold
                                      that the regulation is valid. 37 Applying the regulation, we
                                      hold further that where a determination of a partner’s basis
                                      in his interest in the partnership can be made solely from
                                      the determination of contributions, distributions, and similar
                                      determinations that the partnership is required to make and
                                      requires no other information, that item is a partnership
                                      item.
                                           g. Outside Bases of Tigers Eye’s Purported Partners Are
                                              Partnership Items
                                         In the case at hand, the option partners obtained their
                                      interests in the purported Tigers Eye partnership by con-
                                      tribution and not by purchase from a transferor partner.
                                      Under the regular rule of section 705(a), their outside bases
                                      would be determined solely by their purported contributions
                                      to the partnership and their shares of the loss and deduc-
                                      tions Tigers Eye reported on the partnership return; i.e.,
                                      determinations that a partnership is required to make.
                                      Participating partner premised his claimed inflated basis on
                                      (1) treating each purchased option separately from each sold
                                         37 We also observe that the regulations in question are not so controversial as the regulations

                                      currently under consideration in the cases concerning the applicability of the six-year period of
                                      limitations under secs. 6229(c)(2) and 6501(2)(1)(A) in Son of BOSS cases. Accord Grapevine Im-
                                      ports Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011), rev’g 77 Fed. Cl. 505 (2008); see,
                                      e.g., Beard v. Commissioner, 633 F.3d 616 (7th Cir. 2011) (three-year period of limitation for
                                      assessing tax was applicable rather than six-year period under secs. 6229(c)(2) and
                                      6501(e)(1)(A)), rev’g T.C. Memo. 2009–184. Contra Home Concrete & Supply, LLC v. United
                                      States, 634 F.3d 249 (4th Cir. 2011), cert. granted, 132 S. Ct. 71 (2011); Burks v. United States,
                                      633 F.3d 347 (5th Cir. 2011); Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 650 F.3d
                                      691 (D.C. Cir. 2011), rev’g and remanding 134 T.C. 211 (2010), supplementing T.C. Memo. 2009–
                                      195; Carpenter Family Invs., LLC v. Commissioner, 136 T.C. 373 (2011).




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                                      option, (2) treating each purchased option as having a basis
                                      equal to the gross premium in the hands of both the Logan
                                      Trusts and Tigers Eye, (3) treating the assignment to and
                                      assumption by Tigers Eye of the contingent obligation of the
                                      sold option separately from the purchased option for pur-
                                      poses of section 752, and (4) disregarding the contingent
                                      obligation to satisfy the sold option in determining outside
                                      basis in the partnership under the authority of Helmer v.
                                      Commissioner, T.C. Memo. 1975–160.
                                         Assuming without deciding that Helmer would apply if
                                      Tigers Eye had been recognized as a partnership for Federal
                                      tax purposes, the fact that the obligation to satisfy the sold
                                      option might have been contingent does not mean there
                                      would have been no deemed distribution to the option part-
                                      ners as a result of the partnership’s assumption of the
                                      liability. At best, it means the deemed distribution could not
                                      be determined until the option was exercised or lapsed and
                                      the liability became fixed. Because the option partner could
                                      not practicably apply the general rule set forth in section
                                      705(a) and section 1.705–1(a), Income Tax Regs., his basis
                                      would have to be determined under the alternative rule by
                                      reference to his proportionate share of the adjusted basis of
                                      partnership property that would be distributable upon a
                                      termination of the partnership. See sec. 1.705–1(b), Income
                                      Tax Regs. The property distributed to each option partner
                                      was his share of partnership property distributed in liquida-
                                      tion of his interest in the partnership. Thus, had Tigers Eye
                                      been recognized as a partnership for Federal income tax pur-
                                      poses, the distribution reported on the Schedule K–1 issued
                                      to each option partner would have been the partnership’s
                                      adjusted basis in the distributed property and would have
                                      been the option partner’s outside basis in the partnership
                                      under the alternative rule.
                                         Pursuant to the second decision paragraph, Tigers Eye is
                                      a sham and is not treated as a partnership for Federal
                                      income tax purposes. Consequently the option partners were
                                      not partners and did not acquire interests in a partnership,
                                      they made no contributions to a partnership and received no
                                      distributions from a partnership, and there were no items of
                                      partnership income, partnership deduction, or partnership
                                      loss. Consequently it follows with absolute certainty that
                                      there was no outside basis in the partnership. No additional




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                                      facts are required to determine a zero outside basis, and no
                                      additional facts could possibly alter that conclusion.
                                        Therefore, pursuant to section 301.6231(a)(3)–1(c)(3),
                                      Proced. & Admin. Regs., the lack of outside basis is a part-
                                      nership item that we have jurisdiction to decide in the part-
                                      nership/entity-level proceeding, and we need not revise the
                                      stipulated decision.
                                      IV. Jurisdiction To Enter Stipulated Decision as Written With
                                         Respect to Application of Penalties
                                        We have jurisdiction in this proceeding to determine the
                                      applicability of any penalty ‘‘which relates to an adjustment
                                      to a partnership item’’. Sec. 6226(f); sec. 301.6233–1T(a),
                                      Temporary Proced. & Admin. Regs., supra. Therefore, the
                                      stipulated decision will exceed our jurisdiction under section
                                      6226(f) if it decides that a penalty applies to an adjustment
                                      that does not relate to a partnership item.
                                        In Petaluma II, the Court of Appeals succinctly disposed of
                                      the penalties in two paragraphs. First, having accepted the
                                      Government’s concession that outside basis was not a part-
                                      nership item, the Court of Appeals reversed the Tax Court’s
                                      holding that the 40% penalty for gross valuation
                                      misstatement applied to the partners’ outside bases. The
                                      Court of Appeals agreed with Petaluma that ‘‘since the Tax
                                      Court lacked jurisdiction to determine outside basis, it also
                                      lacks jurisdiction to determine that penalties apply with
                                      respect to outside basis because those penalties do not relate
                                      to an adjustment to a partnership item.’’
                                        In the second paragraph, the Court of Appeals vacated the
                                      Tax Court’s Opinion and decision in Petaluma I upholding
                                      other accuracy-related penalties 38 and remanded the case for
                                      further proceedings on that issue. The Court of Appeals could
                                      not determine from the Tax Court’s Opinion, the record, or
                                      the arguments of the parties what determination the Tax
                                      Court had made regarding the application of accuracy-related
                                      penalties. Consequently, the Court of Appeals could neither
                                      affirm nor reverse the Tax Court’s decision that the accuracy-
                                         38 The decision of the Tax Court in Petaluma I upheld the determination in the FPAA that

                                      ‘‘the accuracy-related penalty under Section 6662(a) of the Internal Revenue Code applies to all
                                      underpayments of tax attributable to adjustments of partnership items of Petaluma FX Part-
                                      ners, LLC.’’




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                                      related penalties apply. The Court of Appeals concluded as
                                      follows:
                                      As it is not clear from the opinion, the record, or the arguments before this
                                      court that the penalties asserted by the Commissioner and ordered by the
                                      Tax Court could have been computed without partner-level proceedings to
                                      determine the affected items questions concerning outside bases, we are
                                      unable to uphold the court’s determination of the penalty issues. While it
                                      may be that some penalties could have been assessed without partner-level
                                      computations, we cannot affirm a decision that has not yet been made.
                                      Therefore we vacate the opinion of the Tax Court on the penalties imposi-
                                      tion and computation. It may be that upon remand, a determination can
                                      be made for some portion of the penalties, but neither party has briefed
                                      that question before us. [Petaluma II, 591 F.3d at 655–656.]

                                           On remand, in Petaluma III this Court observed:
                                        In this case none of the FPAA adjustments are items that flow directly
                                      to the partner-level deficiency computation as computational adjustments.
                                      Any deficiencies must therefore be determined against the partners as
                                      affected items and must be resolved in separate partner-level deficiency
                                      procedures. The section 6662 penalties are all related to these adjust-
                                      ments, which have not yet been made by respondent. [Petaluma III, 135
                                      T.C. at 586.]

                                      The Court in Petaluma III then fleshed out this observation
                                      by elaborating:
                                        The determination that the partnership is a sham implies negligent con-
                                      duct regarding formation of the partnership, but in this case that deter-
                                      mination does not trigger a computational adjustment to taxable income
                                      of the partners. The Court of Appeals declined to allow the general effect
                                      of the partnership determination of sham to confer jurisdiction of the pen-
                                      alty relating to valuation because the valuation related to outside basis,
                                      an affected item. The Court of Appeals instructs that for us to have juris-
                                      diction over a penalty at the partnership level it must ‘‘ ‘[relate] to an
                                      adjustment to a partnership item.’ ’’ Petaluma FX Partners, LLC v.
                                      Commissioner, 591 F.3d at 655 (quoting section 6226(f)). It must also be
                                      capable of being computed ‘‘without partner-level proceedings,’’ id., leading
                                      at least potentially to only a computational adjustment to the partners’
                                      returns. [Id. at 586–587.]

                                      The Court in Petaluma III concluded its analysis of Petaluma
                                      II as follows:
                                      The effect of the mandate concerning the section 6662 penalty is that if
                                      the penalty does not relate directly to a numerical adjustment to a part-
                                      nership item, it is beyond our jurisdiction. In this case there are no such
                                      adjustments to which a penalty can apply. The adjustment is an affected
                                      item. The sham determination in this case only indirectly affects basis at




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                                      the partner level. There is no partnership item flowing through to the
                                      partners’ returns as a computational adjustment. [Id. at 586.]

                                         Under this interpretation, the court of first instance in a
                                      partnership-level TEFRA case has jurisdiction to hold that
                                      accuracy-related penalties apply only if and to the extent
                                      that there are FPAA numerical adjustments to partnership
                                      items reported on the partnership return that flow through
                                      directly to the returns of the partners so that the adjust-
                                      ments can be given effect directly by computational adjust-
                                      ments and assessments.
                                         As the parties agree, by the second decision paragraph the
                                      Court upholds the FPAA’s application of the 40% penalty to
                                      the portion of any underpayment attributable to a gross valu-
                                      ation misstatement as provided by section 6662(a), (b)(3), (e),
                                      and (h), including an underpayment resulting from the over-
                                      statement of the option partners’ bases in the distributed
                                      property. By the third decision paragraph, the stipulated
                                      decision determines that the 40% gross valuation
                                      misstatement penalty applies to any underpayment of tax
                                      attributable to overstating the capital contributions claimed
                                      to have been made to the purported partnership.
                                         Underpayments will result from the adjustments reducing
                                      the $242,186 loss and the $11,314 deduction to zero and the
                                      elimination of the huge losses claimed by the option partners
                                      on the sale of the distributed property attributable to over-
                                      stating the basis in the property. Under Petaluma II as inter-
                                      preted by Petaluma III we have jurisdiction to determine the
                                      applicability of the underpayments related to the adjust-
                                      ments of the loss and other deductions reported on the part-
                                      nership return. Therefore, we first discuss the application of
                                      the penalties to those adjustments.
                                           A. Items Adjusted in the Stipulated Decision and the
                                             Application of Accuracy-Related Penalties Thereto
                                             Within the Jurisdictional Limitations of Petaluma II
                                        Participating partner argues that there will be no under-
                                      payment attributable to the reduction of the $242,186 loss
                                      and the $11,314 of other deductions to zero because the FPAA
                                      treats all transactions engaged in by the purported partner-
                                      ship as engaged in directly by its purported partners, so that




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                                      the loss and other deductions are directly allowable on the
                                      purported partners’ returns. We disagree.
                                         First, because Tigers Eye is disregarded as a partnership
                                      for Federal income tax purposes, the partners did not have
                                      the partnership losses or the partnership deductions that
                                      they claimed on their returns. There will be an under-
                                      payment of tax from the computational adjustment of those
                                      items. The fact that the FPAA treats all transactions engaged
                                      in by the purported partnership as engaged in directly by its
                                      purported partners does not necessarily mean that the pur-
                                      ported partners will be entitled to deduct the losses and
                                      expenses. They would not be so entitled if they did not
                                      engage in the transactions with a profit motive for purposes
                                      of section 165(c)(2), which has been held to disallow losses
                                      claimed on option spreads that were entered into for tax
                                      avoidance purposes. See Fox v. Commissioner, 82 T.C. 1001
                                      (1984); see also Glass v. Commissioner, 87 T.C. 1087, 1174–
                                      1177 (1986), aff ’d sub nom. DeWees v. Commissioner, 870
                                      F.2d 21 (1st Cir. 1989).
                                         The computation of the deficiencies attributable to the
                                      adjustments of the $242,186 loss and the $11,314 deduction
                                      to zero does not require any factual determinations to be
                                      made at the partner level, and respondent may assess the
                                      deficiencies without issuing a statutory notice of deficiency.
                                      Under Petaluma III we have jurisdiction in this partnership-
                                      level proceeding to decide the applicability of the accuracy-
                                      related penalties that relate to those adjustments.
                                         We first address the 40% gross basis misstatement penalty
                                      and then the 20% negligence penalty.
                                           1. 40% Gross Basis Misstatement Penalty
                                        The stipulated decision applies the 40% penalty to the
                                      overstatement of ‘‘the capital contributions claimed to have
                                      been made to the purported partnership’’. Participating
                                      partner asserts that Petaluma II ‘‘establishes that any part-
                                      nership item ‘elements’ of outside basis do not alter the juris-
                                      dictional reality that outside basis and any penalties pre-
                                      mised on that outside basis remain affected items beyond the
                                      scope of a partnership proceeding’’. Participating partner
                                      misconstrues that holding, which addresses the Govern-
                                      ment’s argument that the Tax Court had jurisdiction in the




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                                      partnership proceeding to determine the partners’ outside
                                      bases as affected items whose elements are mainly partner-
                                      ship items. The Court of Appeals did not hold that the Tax
                                      Court lacks jurisdiction to determine the applicability of any
                                      penalty that relates to an adjustment of a partnership item
                                      that happens to be an element of outside basis. The holding
                                      reflects acceptance by the Court of Appeals of the Govern-
                                      ment’s concession that outside basis was an affected item.
                                      Contributions to the partnership are partnership items, and
                                      pursuant to section 6226(f) we have jurisdiction in this part-
                                      nership/entity-level proceeding to decide the applicability of
                                      penalties that relate to the adjustment of that item to zero.
                                      The application of the penalty to that adjustment does not
                                      exceed the jurisdictional limitations of Petaluma II.
                                        The alleged capital contributions by the option partners
                                      consisted of cash and the pairs of offsetting long and short
                                      foreign currency options (option spreads). Tigers Eye claimed
                                      the $242,186 loss on the termination or unwinding of the
                                      option spreads using the substituted basis of the option part-
                                      ners. 39
                                        The second decision paragraph upholds the determination
                                      in the FPAA that Tigers Eye does not exist and is not a part-
                                      nership for Federal tax purposes. Pursuant to section
                                      301.6233–1T(c), Temporary Proced. & Admin. Regs., 50 Fed.
                                      Reg. 39998 (Oct. 1, 1985), amended, 52 Fed. Reg. 6795 (Mar.
                                      5, 1987), we have jurisdiction in this partnership-level pro-
                                      ceeding to determine items of Tigers Eye that would be part-
                                      nership items if it had been a partnership. As discussed
                                      supra, we have jurisdiction to determine the items of Tigers
                                      Eye as nominee or agent for the option partners. Therefore,
                                      we have jurisdiction to determine Tigers Eye’s basis in the
                                      option spreads. Because Tigers Eye is disregarded as a part-
                                      nership, there are no contributions to a partnership. Tigers
                                      Eye held the option spreads as nominee or agent and did not
                                      acquire the option spreads with a substituted basis (or any
                                        39 This loss is reflected in Statement 1 to Schedule K of the partnership return, which shows

                                      that the claimed partnership loss of $242,186 is attributable to a claimed ‘‘ORDINARY LOSS
                                      FROM SEC. 988 TRANSACTIONS’’ of $257,857, which includes the loss the partnership
                                      claimed on the termination or unwinding of the option spreads, partially offset by $15,671 of
                                      income items. See supra notes 16, 17, and 18 and accompanying text. The partnership return
                                      Schedules K–1 show that $157,749 of the claimed net partnership loss flowed through to the
                                      returns of the Logan Trusts, from which in turn they flowed through as losses to be claimed
                                      on Mr. Logan’s individual income tax return.




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                                      basis, for that matter, because it did not acquire the assets
                                      for Federal income tax purposes). Tigers Eye was required to
                                      account to the option partners for the cost of unwinding the
                                      option spreads so that they could determine the amounts of
                                      their losses, but Tigers Eye did not realize a loss. The adjust-
                                      ment to zero of the contributions to a partnership nullifies
                                      Tigers Eye’s claim that it had positive basis in the option
                                      spreads upon which it based the loss reported on the partner-
                                      ship return.
                                        Thus, the disallowance of the $242,186 partnership loss on
                                      the unwinding of the option spreads claimed on the partner-
                                      ship return is directly attributable to the reduction of the
                                      capital contributions to zero. The overstatement of Tigers
                                      Eye’s basis in the option spreads (the property claimed to
                                      have been contributed to the partnership) is a gross basis
                                      misstatement of a partnership item that is attributable to
                                      overstating the contributions claimed to have been made to
                                      the purported partnership.
                                        The loss claimed by the partnership, which flowed through
                                      to the returns of the Logan Trusts and thence to the indi-
                                      vidual income tax return of Mr. Logan, is attributable to an
                                      overstatement of basis of what were claimed to be partner-
                                      ship assets acquired as capital contributions. The 40% gross
                                      basis misstatement penalty relates to the adjustment of part-
                                      nership items, but also the contributions to capital upon
                                      which Tigers Eye claimed basis in the option spreads and the
                                      loss claimed by Tigers Eye on their unwinding.
                                        The deficiency resulting from the adjustment of the loss
                                      and the 40% penalty can be assessed without issuance of a
                                      notice of deficiency. Consequently, this Court has jurisdiction
                                      under Petaluma II to accept and enter the stipulated decision
                                      giving effect to the partnership-level determination that the
                                      40% gross basis misstatement penalty ‘‘applies to [the]
                                      underpayment of tax attributable to overstating the capital
                                      contributions claimed to have been made to the purported
                                      partnership.’’ Cf. 106 Ltd. v. Commissioner, 136 T.C. at 74–
                                      75.
                                           2. 20% Negligence Penalty
                                        The fourth paragraph of the stipulated decision provides
                                      that the negligence or substantial understatement penalty




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                                      applies ‘‘to any additional underpayment of tax attributable
                                      to the foregoing partnership item adjustments other than the
                                      [claimed] capital contributions’’. The FPAA and the stipulated
                                      decision adjust to zero ‘‘Other Deductions’’ of $11,314, see
                                      supra note 18, Statement 2 to the partnership return
                                      Schedule K, and text following note 19, that flow through to
                                      the partners’ returns, $6,408 of which flowed through the
                                      returns of the Logan Trusts to Mr. Logan’s 1999 Federal
                                      income tax return. The deficiency resulting from this adjust-
                                      ment is unrelated to claimed capital contributions and can be
                                      computed and assessed along with the 20% penalty without
                                      issuance of a notice of deficiency. Therefore, the Court has
                                      jurisdiction under Petaluma II to decide that the 20% neg-
                                      ligence penalty applies to the portion of the underpayment of
                                      tax that will result from that adjustment.
                                           3. Conclusion
                                         We conclude that the third and fourth decision paragraphs,
                                      as written, do not overstep the jurisdictional limits of
                                      Petaluma II and Petaluma III with respect to the application
                                      of penalties to deficiencies related to reducing to zero the
                                      $242,186 loss and the $11,314 of other deductions that
                                      flowed directly through to the purported partners’ returns.
                                           B. Petaluma II Notwithstanding, Jurisdiction To Determine
                                             the 40% Penalty Applies to the Overstatement of the
                                             Basis of the Distributed Property
                                           1. Applicability of the 40% Penalty to the Overstatement of
                                              the Basis of the Distributed Property
                                         The amounts of the deficiencies and accuracy-related pen-
                                      alties resulting from the adjustments to partnership items of
                                      loss and other deductions that flowed through to the pur-
                                      ported partners’ returns are de minimis in relation to the
                                      much larger additional deficiency and 40% penalty that will
                                      result from the disallowance of the multimillion-dollar losses
                                      claimed by participating partner and the other option part-
                                      ners on the sale of the distributed property (distributed prop-
                                      erty loss defiency). The huge losses resulted from the option
                                      partners’ claims that the property was distributed to them in
                                      liquidation of their partnership interests and that their bases
                                      in the property were the inflated outside bases they claimed




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                                      in their partnership interests. The disregard of Tigers Eye
                                      for Federal income tax purposes will cause the basis in the
                                      distributed property in their hands to be reduced from the
                                      claimed outside basis to Tigers Eye’s cost basis as nominee
                                      or agent. The reduction will eliminate most of the huge
                                      losses claimed by the option partners on their sales of the
                                      distributed property and will result in an underpayment of
                                      tax by Mr. Logan. Participating partner asserts that the Tax
                                      Court does not have jurisdiction in this proceeding to deter-
                                      mine that the 40% penalty applies to the gross misstatement
                                      of the basis in the distributed property.
                                         A ‘‘substantial valuation misstatement’’ occurs if the value
                                      or the adjusted basis of any property claimed on any return
                                      of tax is 200% or more of the correct amount. Sec.
                                      6662(e)(1)(A). The penalty is increased to 40% if the under-
                                      payment of tax is the result of a gross valuation
                                      misstatement, which is the valuation misstatement deter-
                                      mined under section 6662(e) after substituting ‘‘400 percent’’
                                      for ‘‘200 percent’’. Sec. 6662(h)(2)(A).
                                         As the parties agree, by the second decision paragraph the
                                      Court upholds the FPAA’s application of the 40% penalty to
                                      the portion of any underpayment attributable to a gross valu-
                                      ation misstatement as provided by section 6662(a), (b)(3), (e),
                                      and (h). By the third decision paragraph, the decision deter-
                                      mines that the 40% gross valuation misstatement penalty
                                      applies to any underpayment of tax attributable to over-
                                      stating the capital contributions claimed to have been made
                                      to the purported partnership. The parties agree that the
                                      stipulated decision applies the 40% gross basis misstatement
                                      penalty to the underpayment that will result from the dis-
                                      allowance of the losses the option partners reported on their
                                      sales of the distributed property.
                                         Reducing the basis in distributed property from the
                                      claimed outside basis to Tigers Eye’s cost basis will generate
                                      an underpayment. The underpayment relates to adjustments
                                      to partnership items—the determination that Tigers Eye is
                                      disregarded and is not a partnership for Federal income tax
                                      purposes and the resulting overstatement of the contribu-
                                      tions claimed to have been made to the purported partner-
                                      ship.
                                         Participating partner acknowledges that the amount of the
                                      distributions reported on the partnership return filed by




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                                      136                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      Tigers Eye is Tigers Eye’s cost basis in the distributed prop-
                                      erty. As we have previously discussed, under section 6233
                                      and its regulations, the basis in the property distributed to
                                      each option partner is an item that we have jurisdiction to
                                      decide in this case. We have jurisdiction to determine the
                                      applicability of any penalty that relates to an adjustment of
                                      that item. The basis of the distributed property reported on
                                      an option partner’s return is a gross misstatement of basis
                                      if it exceeds four times the amount of the distributions shown
                                      on the Schedule K–1 issued to the option partner. The 40%
                                      penalty will apply to any underpayment of tax attributable
                                      to claiming more than four times the amount of the distribu-
                                      tions shown on the Schedule K–1 issued to the option
                                      partner. The underpayment of tax and the 40% penalty can
                                      be computed by reference to the option partner’s return with-
                                      out the need for any additional factual determinations at the
                                      partner level.
                                         The disallowed losses claimed on the sale of the distributed
                                      property were not the option partners’ distributive shares of
                                      any loss reported on the partnership return filed by Tigers
                                      Eye. Thus, under Petaluma II as interpreted by Petaluma
                                      III, we would not have jurisdiction to determine that the
                                      accuracy-related penalty applies to the underpayment that
                                      will result from the disallowance of that loss. However, we
                                      are not bound by that interpretation in this case.
                                           2. Petaluma III: The Court Was Bound by the Law of the
                                              Case and the Rule of Mandate To Follow Petaluma II
                                              Dicta on Lack of Jurisdiction Over Outside Basis
                                        In Petaluma III, this Court was operating under the strict
                                      constraints of the law of the case doctrine and the rule of
                                      mandate. All Federal Courts of Appeals, 40 including the D.C.
                                      Circuit, 41 follow the admonition of the U.S. Supreme Court
                                      in In re Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895),
                                      that the inferior court to which the case is remanded
                                        40 See, e.g., Piambino v. Bailey, 757 F.2d 1112, 1119 (11th Cir. 1985); Commercial Paper Hold-

                                      ers v. Hine (In re Beverly Hills Bancorp), 752 F.2d 1334, 1337 (9th Cir. 1984); Reserve Mining
                                      Co. v. EPA, 514 F.2d 493, 541 (8th Cir. 1975); Cherokee Nation v. Oklahoma, 461 F.2d 674, 678
                                      (10th Cir. 1972).
                                        41 See, e.g., City of Cleveland v. FPC, 561 F.2d 344, 346 (D.C. Cir. 1977); Nixon v. Richey, 513

                                      F.2d 430, 435–436 (D.C. Cir. 1975); Sherwin v. Welch, 319 F.2d 729, 731 (D.C. Cir. 1963).




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      137


                                      is bound by the decree as the law of the case, and must carry it into execu-
                                      tion according to the mandate. That court cannot vary it, or examine it for
                                      any other purpose than execution; or give any other or further relief; or
                                      review it, even for apparent error, upon any matter decided on appeal; or
                                      intermeddle with it, further than to settle so much as has been remanded.

                                      On a remand, the inferior court, to the best of its ability and
                                      judgment, must follow and apply the guidance provided by
                                      the holdings and clear instructions in dicta of the appellate
                                      court. See Gersman v. Group Health Ass’n, Inc., 975 F.2d
                                      886, 896–898 (D.C. Cir. 1992). On remand, the inferior court
                                      is also obviously bound under the law of the case by any
                                      party concession upon which the appellate court relies in
                                      deciding the case and framing the mandate, although that
                                      concession would not be binding in another case unless there
                                      were a similar concession that was accepted by the court.
                                         In the case at hand, we are not bound by the law of the
                                      case and the rule of mandate to follow Petaluma II. However,
                                      we have obliged ourselves, under the doctrine of Golsen v.
                                      Commissioner, 54 T.C. 742 (1970), aff ’d, 445 F.2d 985 (10th
                                      Cir. 1971), to follow binding precedent of the Court of
                                      Appeals for the D.C. Circuit—to which this case is appeal-
                                      able—which comes only from its holdings in published opin-
                                      ions, see Gersman, 975 F.2d at 897 (‘‘ ‘[w]e are bound only by
                                      prior published opinions of this Circuit and not by other
                                      means of deciding cases’ ’’ (quoting United States v. North,
                                      910 F.2d 843, 881 (D.C. Cir. 1990))), not from dictum that
                                      does not ‘‘[consider] all the relevant considerations and
                                      adumbrates an unmistakable conclusion’’, see Reich v. Cont’l
                                      Cas. Co., 33 F.3d 754, 757 (7th Cir. 1994); cf. Hefti v.
                                      Commissioner, 983 F.2d 868, 870–872 (8th Cir. 1993), aff ’g
                                      97 T.C. 180 (1991).
                                         In Petaluma II, the Court of Appeals neither affirmed nor
                                      reversed the Tax Court’s decision that accuracy-related pen-
                                      alties applied; it vacated the Tax Court’s Opinion and deci-
                                      sion upholding other accuracy-related penalties and
                                      remanded the case for further proceedings on that issue. The
                                      Court of Appeals could not discern what determination the
                                      Tax Court had made regarding the application of accuracy-
                                      related penalties. Unfortunately, the Court of Appeals’ use of
                                      the words ‘‘computed’’, ‘‘computation’’, ‘‘computations’’, and
                                      ‘‘assessed’’, in questions it posed regarding how the Court
                                      determined the applicability of the penalties to partnership




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                                      138                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      items, created some uncertainty as to the proper disposition
                                      on remand. Those questions should not be read more broadly
                                      than an expression of concern of the Court of Appeals
                                      regarding the necessity of computing an affected item in
                                      order to determine the applicability of the accuracy-related
                                      penalties as was necessary in the Tax Court’s determination
                                      that there was a gross misstatement of outside basis to
                                      which the 40% penalty applied.
                                         The questions posed by the Court of Appeals in Petaluma
                                      II do not rise to the level of clear dictum that ‘‘considers all
                                      the relevant considerations and adumbrates an unmistakable
                                      conclusion’’.
                                         The statements of the Court of Appeals in Petaluma II
                                      flowed from its holding that the Tax Court did not have juris-
                                      diction to determine that the 40% gross basis misstatement
                                      penalty applied to the gross misstatement of outside basis.
                                      The Court did not decide the extent of our jurisdiction to
                                      determine the applicability of penalties that relate to part-
                                      nership items. It did not provide any gloss on the phrase
                                      ‘‘which relates to an adjustment to a partnership item.’’ Nor
                                      did it criticize this Court’s statement in Petaluma I that the
                                      legislative history supports a broad reading of the statute.
                                      Consequently, we are not bound to follow our interpretation
                                      in Petaluma III of the dicta in Petaluma II that were based
                                      on the Government’s concession.
                                         The underpayment of tax relates to the adjustment of a
                                      partnership item. The underpayment and the 40% penalty
                                      can be computed without any factual determinations being
                                      made at the partnership level. We conclude that we have
                                      jurisdiction to decide that the 40% basis misstatement pen-
                                      alty applies. That conclusion is consistent with Congress’
                                      intent and purpose in giving the Tax Court jurisdiction in
                                      partnership-level proceedings to determine the applicability
                                      of penalties related to the adjustment of partnership items
                                      and to relegate the taxpayer to a refund suit in a Federal
                                      District Court or the Court of Federal Claims to recover the
                                      penalty by proving his reasonable cause/good faith defenses.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      139


                                           3. TRA 1997: The Tax Court Has Jurisdiction To Deter-
                                              mine Applicability of Penalties That Relate to Adjust-
                                              ment of Partnership Items
                                        We begin with a restatement of the changes Congress
                                      made to the TEFRA audit and litigation procedures when it
                                      enacted TRA 1997, see supra Part I.B.2 and 3, and will now
                                      bring them to bear on the issue at hand. Before the enact-
                                      ment of TRA 1997, penalties and additions to tax (collectively,
                                      penalty or penalties) were classified as affected items, and
                                      issues regarding such items were litigated in a partner-level
                                      affected-items deficiency proceeding following the completion
                                      of the partnership-level proceeding. See, e.g., N.C.F. Energy
                                      Partners v. Commissioner, 89 T.C. at 744–745; Crystal Beach
                                      Dev. of Destin Ltd. v. Commissioner, T.C. Memo. 2000–170.
                                      TRA 1997 did not change the classification of penalties as
                                      affected items, but it amended section 6221 to provide that
                                      the applicability of a penalty ‘‘which relates to an adjustment
                                      to a partnership item shall be determined at the partnership
                                      level’’. (Emphasis added.) Of particular significance, TRA 1997
                                      also amended section 6230(a)(2)(A)(i) to read as follows:
                                           SEC. 6230(a). COORDINATION WITH DEFICIENCY PROCEEDINGS.—
                                              (1) IN GENERAL.—Except as provided in paragraph (2) or (3), sub-
                                           chapter B of this chapter[42] shall not apply to the assessment or collec-
                                           tion of any computational adjustment.
                                              (2) DEFICIENCY PROCEEDINGS TO APPLY IN CERTAIN CASES.—
                                                (A) Subchapter B shall apply to any deficiency attributable to—
                                                   (i) affected items which require partner level determinations
                                                (other than penalties, additions to tax, and additional amounts that
                                                relate to adjustments to partnership items) * * *

                                      The change to section 6230(a)(2)(A)(i) deprived a partner of
                                      the opportunity to litigate issues concerning the applicability
                                      of a penalty that related to an adjustment of a partnership
                                      item in an affected-items deficiency proceeding. Therefore, in
                                      TRA 1997 Congress added section 6230(c)(1)(C), which allows
                                      a partner to file a claim for refund on the ground that ‘‘the
                                      Secretary erroneously imposed any penalty, addition to tax,
                                      or additional amount which relates to an adjustment to a
                                      partnership item’’, and amended section 6230(c)(4) by
                                        42 Subch. B (secs. 6211 through 6216) contains the provisions authorizing the Commissioner

                                      to issue notices of deficiency and provides the Tax Court with jurisdiction to redetermine those
                                      deficiencies.




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                                      140                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      allowing the partner to assert any ‘‘partner-level’’ defenses in
                                      the refund claim.
                                         The TRA 1997 amendments to the TEFRA procedures
                                      require that issues regarding the application of penalties be
                                      litigated at the partnership level and not in partner-level
                                      affected-items deficiency proceedings, as was the case before
                                      the effective date of the penalty litigation amendments of TRA
                                      1997. The only qualification that Congress imposed is that
                                      the penalty ‘‘relate to an adjustment to a partnership item’’.
                                      Secs. 6221, 6226(f), 6230(a)(2)(A)(ii), (c)(1)(C), (4). Congress
                                      did not define the word ‘‘relate’’, nor did Congress tie the
                                      applicability of the penalty to the existence of a computa-
                                      tional adjustment that could be summarily assessed at the
                                      end of the partnership-level proceeding.
                                         When Congress enacted the penalty litigation amend-
                                      ments, it was well aware that a partnership-level proceeding
                                      under TEFRA does not result in the determination of an
                                      underpayment at the partnership level. Underpayments are
                                      determined at the partner level after a partnership-level pro-
                                      ceeding is completed and/or after an affected-items deficiency
                                      proceeding (which occurs if an affected item requires a fac-
                                      tual determination at the partner level) is completed. While
                                      Congress did not address the mechanics of the application of
                                      TEFRA partnership litigation procedures to penalties, it
                                      required that penalties that relate to the adjustment of a
                                      partnership item be litigated in the partnership-level pro-
                                      ceeding and not in an affected-items deficiency proceeding.
                                         In the FPAA issued to Tigers Eye respondent made adjust-
                                      ments to a variety of partnership items and applied the
                                      accuracy-related penalty under section 6662(a). Specifically,
                                      in the FPAA respondent determined that the partnership was
                                      a sham and should be disregarded for Federal income tax
                                      purposes. Respondent also adjusted partnership items to zero
                                      to reflect that determination (capital contributions, distribu-
                                      tions of property other than money, partnership loss, and
                                      other deductions). The critical issue under the penalty litiga-
                                      tion amendments is whether the penalty in question ‘‘relates
                                      to adjustments to partnership items’’. See secs. 6221, 6226(f),
                                      6230(a)(2)(A)(i). Thus we must decide whether the penalties
                                      applied in the stipulated decision relate to adjustments to
                                      partnership items.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      141


                                         Generally, words in revenue legislation should be inter-
                                      preted according to their ordinary, everyday meaning. Fort
                                      Howard Corp. & Subs. v. Commissioner, 103 T.C. 345, 351
                                      (1994) (citing Commissioner v. Soliman, 506 U.S. 168, 174
                                      (1993)). ‘‘Relate’’ means, inter alia, ‘‘to show or establish log-
                                      ical or causal connection’’. Merriam Webster’s Collegiate Dic-
                                      tionary 987 (10th ed. 1997). ‘‘Related’’ means, inter alia,
                                      ‘‘being connected; associated.’’ The American Heritage Dic-
                                      tionary of the English Language 1473 (4th ed. 2000).
                                         The words ‘‘related to a partnership item’’ take on a
                                      peculiar meaning in all Son of BOSS cases, which generally
                                      involve the use of a partnership (often transitory) to inflate
                                      basis in a partnership asset or the partner’s basis in the
                                      partnership outside basis. A Son of BOSS transaction gen-
                                      erally relies upon and plays off the provisions of subchapter
                                      K (sections 701 through 777), and its alleged success depends
                                      upon the existence of a partnership. Recognition of the part-
                                      nership for Federal income tax purposes is a critical integral
                                      and necessary element of the transaction. See, e.g., Petaluma
                                      I.
                                         Generally, in Son of BOSS cases, there might not be an
                                      adjustment to a partnership item that flows directly to a
                                      partner’s return, and there might not be an item of loss or
                                      deduction that a partner reports as a flowthrough item from
                                      the partnership to the partnership return to the purported
                                      partner’s return. Nonetheless, the determination that a part-
                                      nership that has no economic substance is disregarded and
                                      is not a partnership for Federal tax purposes will result in
                                      and necessarily require the disallowance of the huge loss
                                      claimed on the partner’s return from the sale of property
                                      purportedly distributed from a partnership. There is a nec-
                                      essary logical and causal relationship between (1) the
                                      Commissioner’s determination to disregard a partnership
                                      that lacks economic substance because it was formed solely
                                      to create the illusion of inflated basis in the distributed prop-
                                      erty and (2) application of the section 6662(h) accuracy-
                                      related penalty to the underpayment that results from the
                                      disallowance of the loss claimed on the sale of that property
                                      that is attributable to the basis overstatement. The penalty
                                      relates to the adjustments that result from the Commis-
                                      sioner’s determination that the partnership is disregarded for
                                      Federal income tax purposes. Under the penalty litigation




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                                      amendments, that is all that Congress required in order for
                                      the penalty to be litigated and held applicable in the partner-
                                      ship-level proceeding.
                                         Acceptance of the literal and ordinary meaning of ‘‘relates
                                      to’’ does not lead to absurd results and would not thwart the
                                      obvious purpose of the statute. Thus, we need not adopt a
                                      more restrictive interpretation. See Commissioner v. Brown,
                                      380 U.S. 563, 571 (1965).
                                         Congress, in enacting TRA 1997, intended that penalties
                                      related to the improper use of illusory partnerships to gen-
                                      erate large noneconomic losses be litigated in partnership-
                                      level proceedings. Congress did so because the relevant con-
                                      duct—i.e., the establishment of the partnership, which
                                      includes the recording of partner contributions, the establish-
                                      ment of partner capital accounts, and adjustments to those
                                      accounts resulting from distributions, assumption of liabil-
                                      ities, and liquidation of a partner’s interest—occur largely at
                                      the partnership level. In the case of a disregarded partner-
                                      ship, regardless of whether a disallowance of outside basis is
                                      at play and regardless of whether outside basis is a partner-
                                      ship item or an affected item, any adjustment at the partner
                                      level is preceded by one or more adjustments to partnership
                                      items, and a penalty is related to those partnership-level
                                      adjustments.
                                         Finally, with respect to the mechanics of TEFRA partner-
                                      ship litigation as it involves penalties, a court with jurisdic-
                                      tion over penalties in a partnership-level proceeding can
                                      determine whether the relevant conduct is sufficient to war-
                                      rant a penalty only in the event that there is an under-
                                      payment. The Court does not determine in the partnership/
                                      entity-level proceeding that there is an underpayment or the
                                      amount of the underpayment.
                                         This approach is consistent with the approach we are
                                      required to take in nonpartnership cases that require Rule
                                      155 computations or in TEFRA litigation where the computa-
                                      tional adjustments, and therefore penalty calculations,
                                      cannot be made until the parties make the necessary calcula-
                                      tions following completion of the partnership-level pro-
                                      ceeding.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      143


                                      V. Conclusion
                                         We see no need to burden the reader with further discus-
                                      sion. For all the reasons summarized in the headnote and set
                                      forth at length in the foregoing Discussion, the Court has
                                      jurisdiction to determine and the stipulated decision that has
                                      been entered holds as follows:
                                         1. that participating partner will have a relatively small
                                      deficiency attributable to adjustment of partnership flow-
                                      through items of (a) Loss and (b) Other Deductions, to which
                                      the 40% gross basis misstatement penalty and the 20% neg-
                                      ligence penalty are respectively applicable; and
                                         2. that participating partner will also have a much larger
                                      distributed property loss deficiency attributable to over-
                                      stating the capital contributions claimed to have been made
                                      to the purported partnership; the 40% gross basis
                                      misstatement penalty is also applicable to this deficiency.
                                         On the basis of these rulings, as explained in the foregoing
                                      Discussion,
                                                                     An appropriate order will be issued,
                                                                   denying participating partner’s motion to
                                                                   revise the stipulated decision.
                                        Reviewed by the Court.
                                        COLVIN, COHEN, HALPERN, and GOEKE, JJ., agree with this
                                      opinion of the Court.
                                        GALE and PARIS, JJ., concur in the result only.
                                        FOLEY, J., dissents.
                                        VASQUEZ, GUSTAFSON, and MORRISON, JJ., did not partici-
                                      pate in the consideration of this opinion.



                                        HALPERN, J., concurring: I concur and write separately
                                      only to add some small weight to what, in the main, I con-
                                      sider to be a forceful and persuasive analysis by Judge
                                      Beghe.
                                      I. Golsen Doctrine
                                        We are a court with nationwide jurisdiction in tax matters
                                      alone, and Congress expected that, in so far as we are able
                                      to do so, we set precedents for the uniform application of the




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                                      tax law. Lawrence v. Commissioner, 27 T.C. 713, 718 (1957),
                                      rev’d, 258 F.2d 562 (9th Cir. 1958). Review of our cases, how-
                                      ever, is not by a single Court of Appeals but is, variously, by
                                      the Courts of Appeals for the 11 numbered circuits and the
                                      Court of Appeals for the D.C. Circuit. See sec. 7482. Nec-
                                      essarily, we have had to consider what we should do when
                                      an issue comes before us a second time, after a Court of
                                      Appeals has reversed a prior Tax Court decision on the same
                                      point. In Lawrence v. Commissioner, 27 T.C. at 716–717, we
                                      determined that, while certainly we should seriously consider
                                      the reasoning of the reversing Court of Appeals, we ought
                                      not follow its decision if we believe it incorrect. In Golsen v.
                                      Commissioner, 54 T.C. 742, 756–757 (1970), aff ’d, 445 F.2d
                                      985 (10th Cir. 1971), we reconsidered and created a narrow
                                      exception (sometimes described as the Golsen doctrine) to the
                                      rule announced in Lawrence. We reasoned that, where a
                                      reversal would appear inevitable, because of the clearly
                                      established position of the Court of Appeals to which an
                                      appeal would lie, our obligation as a national court does not
                                      require a futile and wasteful insistence on our view. Lardas
                                      v. Commissioner, 99 T.C. 490, 494–495 (1992); Golsen v.
                                      Commissioner, 54 T.C. at 757. ‘‘[T]he logic behind the Golsen
                                      doctrine is not that we lack the authority to render a decision
                                      inconsistent with any Court of Appeals (including the one to
                                      which an appeal would lie), but that it would be futile and
                                      wasteful to do so where we would surely be reversed.’’
                                      Lardas v. Commissioner, 99 T.C. at 495. Judge Beghe’s
                                      insightful consideration of the issues goes well beyond insist-
                                      ence on our view expressed in Petaluma FX Partners, LLC v.
                                      Commissioner, 131 T.C. 84 (2008), aff ’d in part, rev’d in part
                                      and remanded, 591 F.3d 649 (D.C. Cir. 2010). In addition, in
                                      his concurring opinion Judge Wherry maintains that the
                                      Golsen doctrine does not bind our hands because the facts
                                      before us are distinguishable from the facts (indeed, the
                                      absence of facts) before the Court of Appeals for the D.C. Cir-
                                      cuit in Petaluma FX Partners, LLC. I assume that the
                                      Judges joining or concurring in Judge Beghe’s opinion believe
                                      as I do that our effort will be neither futile nor wasteful.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      145


                                      II. Judge Beghe’s Insight
                                          Judge Beghe’s insight is with respect to the consequence of
                                      determining that, for tax purposes, Tigers Eye Trading, LLC
                                      (Tigers Eye), is a sham. That of course does not necessarily
                                      mean that Tigers Eye was not properly organized as a Dela-
                                      ware limited liability company (L.L.C.), nor does it nec-
                                      essarily mean that it is not a business entity recognized for
                                      Federal tax purposes (I assume that Judge Beghe would say:
                                      ‘‘If in business, its business was acting as nominee and agent
                                      for its principals, pertinently, the Logan Trusts.’’). It does
                                      mean, however, that the Logan Trusts (trusts), together with
                                      other members of Tigers Eye, did not for Federal income tax
                                      purposes join together as partners to invest in currency
                                      options so as to cause the trusts’ transactions with Tigers
                                      Eye (and Tigers Eye’s actions on their behalf) to be governed
                                      by the substantive provisions of the Internal Revenue Code
                                      (Code) governing partners and partnerships; i.e., subchapter
                                      K (‘‘Partners and Partnerships’’), chapter 1, subtitle A of the
                                      Code (subchapter K). Tigers Eye, however, was properly
                                      organized as a Delaware L.L.C.; it did receive the currency
                                      options from the trusts; it did sell the options, and it did pur-
                                      chase euro and shares of Xerox Corp. (currency and shares,
                                      respectively), which it did transfer to the trusts. The trusts,
                                      later in the same year, sold the currency and the shares,
                                      claiming large losses, which, because of the provisions of the
                                      Code governing trusts and their beneficiaries, flowed through
                                      to Mr. Logan.
                                          How then are we to explain all of those events (or at least
                                      those involving Tigers Eye), and what are the appropriate
                                      Federal income tax consequences? Moreover, because Tigers
                                      Eye filed a partnership return for 1999 (the year in which
                                      most all of the above described events occurred), although we
                                      may (and, indeed, shall) disregard the substantive partner-
                                      ship rules in subchapter K because of our finding Tigers Eye
                                      to be a sham, we may not disregard the TEFRA procedural
                                      provisions applicable to partnership items; i.e., subchapter C
                                      (‘‘Tax Treatment of Partnership Items’’), chapter 63, subtitle
                                      F of the Code (TEFRA procedural provisions). See sec. 6233.
                                      We are thus faced with three questions: (1) How to view the
                                      series of events between the trusts and Tigers Eye (if not as
                                      events between partners and a partnership); (2) what are the




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                                      Federal income tax consequences of those events (if not gov-
                                      erned by subchapter K); and (3) which of those consequences
                                      are properly before us in this proceeding subject to the TEFRA
                                      procedural provisions.
                                        Judge Beghe’s answer to the first question is clear and, I
                                      believe, correct:
                                      Because Tigers Eye is a sham and had no real business purpose [except,
                                      perhaps, as an agent], it merely acted as nominee and agent for the option
                                      partners and the items related to the transactions involving the option
                                      spreads and purchases and distribution of stock and foreign currency are
                                      characterized as such [i.e., as items of the option partners (its principal)
                                      rather than items of itself (an agent)]. * * * [See op. Ct. pp. 102–103.]

                                         On that basis, Tigers Eye, as agent for the trusts, (1)
                                      received the offsetting currency options and cash from the
                                      trusts, (2) sold the options (at a loss), and (3) used the bulk
                                      of the remaining cash to purchase for the trusts the currency
                                      and the shares. For Federal income tax purposes (answering
                                      the second question), the trusts (1) realized neither a gain
                                      nor a loss on the transfer of the options to Tigers Eye, (2)
                                      realized (but may not be allowed) a net loss on Tigers Eye’s
                                      disposition of the options, and (3) obtained section 1012 cost
                                      bases in the currency and the shares upon Tigers Eye’s pur-
                                      chase of them for the trusts. 1 Respondent has disallowed the
                                      loss. Respondent believes that, if subchapter K plays no role,
                                      the trusts overstated their bases in the currency and shares,
                                      with the result that they overstated their losses on the sales
                                      of that property. That, respondent believes, caused Mr.
                                      Logan to underpay his taxes, attracting a section 6662 pen-
                                      alty on account of a gross valuation misstatement.
                                      Respondent also determined other penalties and made other
                                      adjustments consistent with the recast principals-agent rela-
                                      tionship. All of which brings us to the third question; i.e.,
                                      which of these consequences are properly before us in this
                                      proceeding subject to the TEFRA procedural provisions.


                                        1 Since the substantive rules of subch. K do not apply to a simple agency relationship, sec.

                                      1012(a), which generally governs the determination of ‘‘basis of property’’, applies to the trusts’
                                      acquisition of the currency and shares, and the exception in that section for subch. K, ‘‘relating
                                      to partners and partnerships’’, has no force or effect. Consequently, under sec. 1012(a), the
                                      trusts’ bases in the currency and shares purchased by Tigers Eye for them are their ‘‘cost of
                                      such property’’.




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                                      (67)              TIGERS EYE TRADING, LLC v. COMMISSIONER                                      147


                                      III. TEFRA Procedural Provisions
                                        Judge Beghe accurately summarizes section 6233: ‘‘Section
                                      6233 provides that if a partnership return is filed for a tax-
                                      able year but it is determined that no partnership exists, the
                                      TEFRA procedures still apply to the entity, its items, and per-
                                      sons holding an interest in the entity, to the extent provided
                                      in the regulations.’’ See op. Ct. p. 97. He also accurately
                                      summarizes the applicable regulations:
                                      In such a case, the TEFRA temporary regulations applicable to Tigers
                                      Eye’s 1999 taxable year provide that the Court may make determinations
                                      with respect to all items of the entity (entity items) that ‘‘would be part-
                                      nership items as defined in section 6231(a)(3) and the regulations there-
                                      under * * * if * * * [it] had been a partnership’’. * * * [Id.]

                                         Thus, for instance, if we determine that an entity filing a
                                      partnership return is not a partnership but is an association
                                      taxable as a corporation, we may determine the amounts tax-
                                      able to the entity. See sec. 301.6233–1T(a), Temporary
                                      Proced. & Admin. Regs., 52 Fed. Reg. 6779 (Mar. 5, 1987);
                                      see also sec. 301.6233–1(a), Proced. & Admin. Regs. More-
                                      over, the regulations tell us that among our determinations
                                      can be the determination that a purported partnership entity
                                      (let’s call it Tigers Eye Investment Partnership) does not
                                      exist. See sec. 301.6233–1T(c), Temporary Proced. & Admin.
                                      Regs., supra; see also sec. 301.6233–1(b), Proced. & Admin.
                                      Regs. If we find (as the parties agree and the stipulated deci-
                                      sion provides) that Tigers Eye Investment Partnership does
                                      not exist for Federal income tax purposes, then nothing
                                      would have been contributed to it, nothing would have been
                                      distributed from it, nor would it, on its own behalf, have
                                      engaged in any transactions. That would explain (and justify)
                                      the first decision paragraph in the stipulated decision, set-
                                      ting to zero the following adjustments made by the FPAA:
                                      Loss, Other Deductions, Distributions of Property Other
                                      Than Money, and Capital Contributions. But Tigers Eye, as
                                      agent, did receive the offsetting options from the trusts, did
                                      sell them, and did purchase for the trusts the currency and
                                      the shares. Certainly, as their agent, it had a fiduciary
                                      obligation to account to the trusts for the expenditure of their
                                      money and to report to them the cost of the property
                                      obtained on their behalf.




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                                          An agency (i.e., the fiduciary relationship between agent
                                      and principal), however, is not an entity (i.e., it has no legal
                                      identity apart from the separate identities of its partici-
                                      pants). See Black’s Law Dictionary 70 (‘‘agency’’), 612
                                      (‘‘entity’’) (9th ed. 2009). Nevertheless, because Tigers Eye
                                      filed a partnership return for 1999, that return must be
                                      treated as if it were filed by an entity. See sec. 301.6233–
                                      1T(c), Temporary Proced. & Admin. Regs., supra; see also sec.
                                      301.6233–1(b), Proced. & Admin. Regs. We could treat the
                                      agency as the hypothetical entity filing the return and apply
                                      the TEFRA procedural provisions to determine what would be
                                      the hypothetical entity items of that hypothetical entity as
                                      contemplated in section 301.6233–1T(c), Temporary Proced.
                                      & Admin. Regs., supra (now section 301.6233–1(a), Proced. &
                                      Admin. Regs.). Alternatively, Tigers Eye was properly orga-
                                      nized as a Delaware L.L.C., and, therefore, it existed as an
                                      entity, acting as agent for the trusts. On that basis, we could
                                      ask what were the entity items of Tigers Eye, as agent. It
                                      would seem to make no difference whether we address the
                                      agency as a hypothetical entity, acting through Tigers Eye,
                                      or address Tigers Eye as an entity in its own right, acting
                                      as agent for the trusts. To simplify, we shall proceed as if
                                      Tigers Eye, in its own right, is the relevant entity.
                                          Section 301.6231(a)(3)–1(c)(3), Proced. & Admin. Regs.,
                                      illustrates determinations that, with respect to distributions
                                      from a partnership, the partnership must make for purposes
                                      of its books and records or in order to furnish information to
                                      a partner, and which, on that account, constitute partnership
                                      items. Among the determinations included is: ‘‘The adjusted
                                      basis to the partnership of distributed property’’. Sec.
                                      301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin. Regs.
                                          Tigers Eye, of course, had no basis in the currency and
                                      shares it purchased on behalf of the trusts, nor, in the sense
                                      contemplated by the regulations, did it make any distribution
                                      of that property to them. Nevertheless, because it purchased
                                      the property as agent of the trusts, it—rather than the
                                      trusts—had the information necessary to determine what
                                      property it had purchased for each trust and how much of
                                      each trust’s money it had expended on those purchases.
                                      Those were determinations that Tigers Eye had to make for
                                      purposes of its books and records in order to furnish informa-
                                      tion to the trusts. If we consider Tigers Eye the trusts’ agent




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                                      obligated to make those determinations, Tigers Eye’s deter-
                                      mination of the costs of the property it purchased for the
                                      trusts would be an entity item by analogy to section
                                      301.6231(a)(3)–1(c)(3)(iii), Proced. & Admin. Regs. (adjusted
                                      basis to the partnership of distributed property is a partner-
                                      ship item). Because we have jurisdiction to determine entity
                                      items, see sec. 6226(f), we have jurisdiction to determine the
                                      costs of the currency and the shares, which, as discussed
                                      supra note 1, establishes the trusts’ bases in those prop-
                                      erties.
                                      IV. Penalties
                                         I have little to add to Judge Beghe’s discussion of the pen-
                                      alties issues. Application of the penalties seems pretty
                                      straightforward. Most controversial appears to be application
                                      of the gross valuation misstatement penalty to any under-
                                      payment of tax attributable to the trusts’ overstatements of
                                      their bases in the currency and the shares. The trusts’ bases
                                      in the currency and the shares purchased by Tigers Eye for
                                      them are, pursuant to section 1012, the costs of that prop-
                                      erty, and those costs, in this case, are entity items. The
                                      trusts claimed huge losses on the sale of the currency and
                                      shares, which, it appears, respondent adjusted down (pro-
                                      ducing underpayments in tax) simply by substituting their
                                      cost bases in the property for their claimed outside bases.
                                      There would thus appear to be no partner-level determina-
                                      tion required to apply the penalty. By way of analogy, in
                                      pertinent part, section 301.6231(a)(6)–1(a)(2), Proced. &
                                      Admin. Regs., provides:
                                      substituting redetermined partnership items for the partner’s previously
                                      reported partnership items * * * does not constitute a partner-level deter-
                                      mination where the Internal Revenue Service otherwise accepts, for the
                                      sole purpose of determining the computational adjustment, all nonpartner-
                                      ship items * * * as reported.

                                         In 106 Ltd. v. Commissioner, 136 T.C. 67 (2011), a partner-
                                      ship-level proceeding postdating Petaluma FX Partners, LLC
                                      v. Commissioner, 591 F.3d 649, we agreed with the parties
                                      that a partner-level proceeding was unnecessary to deter-
                                      mine a gross valuation misstatement penalty attendant to a
                                      partner’s sale of foreign currency distributed to him in a non-
                                      liquidating distribution. Apparently, the partner’s basis in




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                                      150                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      the foreign currency sold was equal to the partnership’s basis
                                      in that currency, and the parties stipulated that the adjust-
                                      ment to inside basis (the partnership’s basis) allowed a
                                      numerical adjustment at the partner level. We held:
                                      Because it is possible to derive through such an adjustment alone the
                                      reduction in the claimed loss on the sale of the Canadian dollars that 106
                                      distributed, and the consequent increase in the reportable gain and
                                      resulting deficiency—all without any need for an affected-item deficiency
                                      notice, * * * we conclude that we do have jurisdiction over the penalty in
                                      this partnership-level case. * * * [106 Ltd. v. Commissioner, 136 T.C. at
                                      75.]

                                      That would appear to be the case here. The similarity
                                      between the two cases is that, as in 106 Ltd., the trusts’
                                      bases in the currency and the shares they received is the
                                      hypothetical entity’s costs of that property (analogous to the
                                      partnership’s basis in the currency distributed in 106 Ltd.),
                                      and respondent may here determine the reduction in the
                                      losses reported by the trusts simply by substituting for the
                                      trusts’ claimed bases in the sold currency and shares their
                                      cost bases properly determined in this procedure.
                                        BEGHE, GOEKE, and WHERRY, JJ., agree with this concur-
                                      ring opinion.



                                        WHERRY, J., concurring: I agree with the results in the
                                      opinion of the Court, and the bulk of its analysis. However,
                                      I find myself unable to abide by the logic that the opinion
                                      deploys to repudiate respondent’s gratuitous acknowledg-
                                      ment, in a Status Report filed May 19, 2010: ‘‘All parties
                                      agree that the basis of each purported partner’s interest in
                                      Tigers Eye Trading, LLC, is an affected item.’’
                                      I. Fighting Shadows
                                         The opinion of the Court characterizes respondent’s conces-
                                      sion as an issue of law that, if accepted, would deprive us of
                                      subject matter jurisdiction. Rejecting it as such, the opinion
                                      demonstrates ‘‘that the basis of each purported partner’s
                                      interest in Tigers Eye Trading, LLC, is [not] an affected
                                      item’’, but a partnership item.
                                         The opinion of the Court, pp. 74–75, has marshaled an
                                      array of arguments and authorities into an impregnable




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                                      rhetorical ‘‘Maginot Line’’ that, like its real-life predecessor,
                                      stands impassive guard against a construct that has not been
                                      attacked—in this case, subject matter jurisdiction. Respond-
                                      ent’s FPAA, which had adjusted the purported partners’ out-
                                      side bases, and the timely petition filed in response, vest us
                                      with subject matter jurisdiction.
                                         Nothing that respondent has said in the Status Report of
                                      May 19, 2010, or elsewhere in the record, seeks to deprive us
                                      of this jurisdiction. But in exercising this jurisdiction, we
                                      cannot avoid confronting the Trojan horse substance latent in
                                      respondent’s concession: ‘‘that the basis of each purported
                                      partner’s interest in Tigers Eye Trading, LLC, is an affected
                                      item.’’ 1
                                         I concur with the opinion of the Court that there exist good
                                      grounds for rejecting this substance. But in my view these
                                      grounds lie farther afield of the ones in which the opinion of
                                      the Court neatly slays the strawman of litigants stipulating
                                      away the Court’s subject matter jurisdiction.
                                      II. A Stipulation That Swallows the Law
                                        Characterizing respondent’s concession as an issue of law
                                      is problematic for three discrete reasons. First, it implies
                                      that respondent is, as it were, recanting in one breath the
                                      very regulations he recites with the next. 2 Second, it sug-
                                         1 The opinion of the Court, pp. 74–75, cites several cases in support of retaining subject matter

                                      jurisdiction here. However, none of these cases seems to advance the majority’s cause of reject-
                                      ing respondent’s concession. Emblematic of these cases that ‘‘only go so far’’ is Charlotte’s Office
                                      Boutique, Inc. v. Commissioner, 121 T.C. 89, 102 (2003), aff ’d, 425 F.3d 1203 (9th Cir. 2005).
                                      In that case, we declined to give up jurisdiction even after the Commissioner conceded that his
                                      initial determination, made in a sec. 7436 notice of determination which had furnished the ‘‘tick-
                                      et to the Court’’, was incorrect. In the notice of determination, the Commissioner had deter-
                                      mined, with respect to the employer who had petitioned the Court, ‘‘that ‘Other Workers’ had
                                      during that year [at issue] received $2,585 of wages from petitioner’’. Id. at 103. However, ‘‘The
                                      Commissioner had conceded before the Tax Court that appellant did not have any ‘other work-
                                      ers.’ ’’ Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d at 1206 n.2. Though we did
                                      not cede jurisdiction, we did accept the substance of the Commissioner’s concession: ‘‘that appel-
                                      lant did not have any other workers for those years and that appellant had treated Mrs. Odell
                                      as an employee in those years.’’ Id. at 1207. Consequently, we went on to ‘‘sustain respondent’s
                                      determination that petitioner paid all of the disputed amounts to Ms. Odell as wages.’’ Char-
                                      lotte’s Office Boutique, Inc. v. Commissioner, 121 T.C. at 106. A straightforward application of
                                      Charlotte’s Office Boutique would result in our exercising jurisdiction here to find ‘‘that the basis
                                      of each purported partner’s interest in Tigers Eye Trading, LLC, is an affected item.’’
                                         2 See infra pt. IV (highlighting that under the Secretary’s legislative regulations issued pursu-

                                      ant to sec. 6231(a)(3), whether outside basis is an affected item or a partnership item is a fac-
                                      tual determination). The opinion of the Court itself points out that respondent swears allegiance
                                      to these regulations, notwithstanding his statement in the May 19, 2010, Status Report that
                                      outside basis is an affected item here. A similar concession made by the Commissioner on appeal
                                                                                                      Continued




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                                      152                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                      gests that the Court of Appeals for the D.C. Circuit in
                                      Petaluma FX partners, LLC v. Commissioner, 591 F.3d 649
                                      (D.C. Cir. 2010) (Petaluma II), aff ’g in part, rev’g in part and
                                      remanding 131 T.C. 84 (2008) (Petaluma I), in accepting a
                                      similar concession, was unfaithful to its own precedent that
                                      precludes parties from ‘‘forc[ing] a federal court to render an
                                      advisory opinion * * * [by] stipulat[ing] to the state of
                                      underlying law’’. Indep. Ins. Agents of Am., Inc. v. Clarke,
                                      965 F.2d 1077, 1078 (D.C. Cir. 1992). 3 Finally, and most
                                      troubling, it does gross disservice to the majority’s own
                                      exegesis of the proper classification of outside basis as a part-
                                      nership item. 4
                                      III. ‘‘Do Not Add to What I Command You and Do Not Sub-
                                            tract From It’’
                                         I agree with the exposition in the opinion of the Court
                                      regarding when, under the statute and the regulations, out-
                                      side basis is properly treated as a partnership item, and dis-
                                      agree with the dissent of Judge Holmes, who would effec-
                                      tively limit such treatment to those partnerships that have
                                      made a section 754 election. Judge Holmes’ reasoning reads
                                      into the statute words that are not there, while reading out
                                      of the regulations words that are palpably present.
                                           A. Grammar and Structure of Section 6231(a)(3)
                                         In explicating the definition of the term ‘‘partnership item’’
                                      in section 6231(a)(3), Judge Holmes’ ‘‘ ‘starting point * * *
                                      [is] the language employed by Congress.’ ’’ See Holmes op. p.
                                      in Petaluma II was also accompanied by similar shouts of fealty to the regulations. The Commis-
                                      sioner has in other instances, quite understandably, sought to hedge his litigating risk by seek-
                                      ing to cover all his bases. See, e.g., Chief Counsel Notice CC–2009–11 (Mar. 11, 2009) (recom-
                                      mending the ‘‘protective’’ issuance of a ‘‘notice of deficiency’’ after a partnership-level decision
                                      becomes final, even if there remain ‘‘no affected items which require partner level determina-
                                      tions’’ within the meaning of sec. 6230(a)(2)(A)(i)). Here, however, the opinion of the Court would
                                      have us believe that respondent is, in effect, disowning the very flag under which he has mount-
                                      ed his challenge. Surely that goes way beyond risk-aversion and borders on abject surrender
                                      (and schizophrenia).
                                         3 Though litigants cannot forfeit subject matter jurisdiction, they remain free to stipulate facts

                                      that in practice may preclude a court from exercising jurisdiction that in principle the court en-
                                      joys. The Court of Appeals for the D.C. Circuit is acutely aware of the distinction between delin-
                                      eating the theoretical limits of subject matter jurisdiction and finding facts enabling its exercise.
                                      See, e.g., Owens v. Republic of the Sudan, 531 F.3d 884, 890 (D.C. Cir. 2008) (discussing the
                                      implications of ‘‘the authority * * * to make a finding of fact upon which subject matter jurisdic-
                                      tion depends, as opposed to the authority to define those conditions in the first place’’ (emphasis
                                      supplied)).
                                         4 See infra pt. IV.




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                                      179 (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 337
                                      (1979)). However, he proceeds to implicitly add to this lan-
                                      guage. Judge Holmes begins by directing our attention ‘‘at
                                      the first part of section 6231(a)(3)—‘[W]ith respect to a part-
                                      nership, any item required to be taken into account for the
                                      partnership’s taxable year under any provision of subtitle A’.’’
                                      Id. He then accuses the majority of ‘‘reconstruct[ing]’’ this
                                      Code section by ‘‘leav[ing] out an important phrase[,] * * *
                                      the modifier ‘partnership’s’ before ‘taxable year’ ’’. Id. But
                                      Judge Holmes’ own ‘‘deconstruction’’ of section 6231(a)(3)
                                      seems to be adding the restrictive nominative phrase ‘‘by the
                                      partnership’’ after the participial phrase ‘‘to be taken into
                                      account’’. 5
                                         The required account-taking action contemplated by sec-
                                      tion 6231(a)(3) could potentially be incumbent upon, and
                                      therefore be undertaken by, only two kinds of account-taking
                                      actors: the partnership, which is a nontaxable passthrough
                                      entity; and any of its taxable partners. To consider section
                                      6231(a)(3) in its unadorned congressionally enacted glory, we
                                      should refrain from circumscribing the required account-
                                      taking action it contemplates. Consequently, we should desist
                                      from prespecifying either of the two types of potential
                                      account-taking actors as the posited performer of the con-
                                      templated action. Resisting any such urge, we countenance,
                                      as a partnership item, ‘‘any item required to be taken into
                                      account [by anyone] for the partnership’s taxable year under
                                      any provision of subtitle A’’. 6
                                          5 Judge Holmes’ misconception of sec. 6231(a)(3) apparently stems from misconstruing the

                                      prepositional phrase ‘‘for the partnership’s taxable year’’. Judge Holmes seems to believe that
                                      this phrase modifies the contemplated action—account taking. Consequently, he views ‘‘the part-
                                      nership’s taxable year’’, which is the object of the preposition ‘‘for’’, as the recipient (or, as gram-
                                      marians call it, patient) of the contemplated account-taking action. See Holmes op. pp. 184–185
                                      (‘‘Tigers Eye itself was never required to determine its partners’ outside bases, and its partners’
                                      outside bases had no effect on its taxable year.’’ (Emphasis supplied.)). In point of fact, however,
                                      the prepositional phrase ‘‘for the partnership’s taxable year’’ in sec. 6231(a)(3) modifies, not the
                                      contemplated account-taking action, but the ‘‘required’’ character of this action. Thus, the ‘‘for’’
                                      before ‘‘the partnership’s taxable year’’ denotes ‘‘with respect to’’. This is the same meaning that
                                      ‘‘for’’ takes in the various substantive provisions of subch. K, where it appears before ‘‘partner-
                                      ship’s taxable year’’ or ‘‘taxable year of the partnership’’. See infra note 7 and accompanying
                                      text. Judge Holmes preemptively denies that ‘‘for’’ implies ‘‘with respect to’’ in sec. 6231(a)(3)
                                      because, he claims, ‘‘section 6231(a)(3) already requires the item be related to or ‘with respect
                                      to a partnership.’ ’’ See Holmes op. p. 180. Judge Holmes forgets, however, that the item in ques-
                                      tion must be related not only to the specific partnership, but also to the given taxable year of
                                      that partnership. The cause of action in a partnership-level proceeding, after all, is a discrete
                                      taxable year of the partnership.
                                          6 The explicit insertion of the indefinite pronoun is supplied to preclude an implicit insertion

                                                                                                      Continued




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                                         Because the provisions of subtitle A determine a taxpayer’s
                                      tax liability, we cannot exclude from the scope of section
                                      6231(a)(3) the required account-taking actions of a taxpayer-
                                      partner of the given nontaxable passthrough partnership.
                                      Indeed, a comparison of the syntactical structure of section
                                      6231(a)(3) with that of some of the substantive provisions of
                                      subtitle A, chapter 1, subchapter K, part I, titled ‘‘Determina-
                                      tion of Tax Liability’’, suggests that a partner’s required
                                      account-taking actions may very well be the primary focus of
                                      section 6231(a)(3). See, e.g., sec. 702(a) (‘‘In determining his
                                      income tax, each partner shall take into account separately
                                      his distributive share of the partnership’s [income, gain, loss,
                                      deduction, or credit]’’ (emphasis supplied)); see also sec.
                                      706(a) (‘‘In computing the taxable income of a partner for a
                                      taxable year, the inclusions required by section 702 [for the
                                      partner’s distributive shares] and section 707(c) [for the part-
                                      ner’s guaranteed payments] with respect to a partnership
                                      shall be based on the income, gain, loss, deduction, or credit
                                      of the partnership for any taxable year of the partnership
                                      ending within or with the taxable year of the partner.’’
                                      (Emphasis supplied.)). 7
                                         Devoid of any constraints on the type of actor required to
                                      undertake the envisaged account-taking action, section
                                      6231(a)(3) merely represents an ‘‘acquiescing’’ provision, one
                                      that abdicates to the Secretary the nettlesome task of sub-
                                      stantively defining a partnership item. 8 Thus, a partnership
                                      of a demonstrative counterpart.
                                         7 The emphasized prepositional phrase in sec. 706(a), ‘‘for any taxable year of the partnership’’

                                      is modifying the ‘‘required’’ nature of the ‘‘inclusions’’ by the partner. The ‘‘for’’ before ‘‘any tax-
                                      able year of the partnership’’ connotes ‘‘with respect to’’. See supra note 5 (discussing an iden-
                                      tical use of ‘‘for’’ in sec. 6231(a)(3)); see also infra note 10 (discussing the same in sec.
                                      301.6231(a)(3)–1(a), Proced. & Admin. Regs.).
                                         8 Judge Holmes imbues the first half of the definition of the term ‘‘partnership item’’ in sec.

                                      6231(a)(3) with a significance that belies the term’s historical origin. He
                                      believe[s] Congress added the phrase ‘‘to the extent regulations prescribed by the Secretary pro-
                                      vide that * * * such item is more appropriately determined at the partnership level than at
                                      the partner level’’ to section 6231(a)(3), so that the Secretary would not pervert and subvert the
                                      preceding part of section 6231(a)(3)’s definition—as the majority does today—in promulgating
                                      regulations listing what are partnership items. Congress wanted to kick the ladder out from
                                      under the Secretary if he went picking fruit that Congress didn’t want picked at the partnership
                                      level. * * * [See Holmes op. note 7.]

                                      Legislative history, however, clearly reflects that Congress was concerned, not with how high
                                      up a fruit-bearing tree the Secretary might reach, but instead with how often courts were forced
                                      to return to the same tree.
                                        Both the House conference report and the so-called Blue Book accompanying TEFRA use the
                                      term ‘‘partnership item’’ in discussing pre-TEFRA law with no indication that the term’s con-
                                      notation would undergo a qualitative transformation as a consequence of the enactment of




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                                      item is ‘‘any item required to be taken into account * * * to
                                      the extent regulations prescribed by the Secretary provide
                                      that, for purposes of this subtitle, such item is more appro-
                                      priately determined at the partnership level than at the
                                      partner level.’’ 9 In sum, a partnership item is what the Sec-
                                      retary decides it is, so long as he justifies his decision by
                                      invoking the ‘‘more-appropriately-determined’’ principle.
                                         So much for the nonexistent exclusions that Judge Holmes
                                      seems to import into the statute. Now, consider the
                                      applicable regulatory provisions the full import of which I
                                      believe Judge Holmes has overlooked.
                                           B. The Secretary’s Two-Step Tango
                                        The Secretary begins, unsurprisingly, by dutifully noting
                                      that his designation of partnership items will comply with
                                      the statutorily mandated ‘‘more-appropriately-determined’’
                                      principle. Thus, the Secretary declares that he will designate
                                      as partnership items only those items that in his opinion are
                                      more appropriately determined at the partnership level. See
                                      sec. 301.6231(a)(3)–1(a), Proced. & Admin. Regs. (designating
                                      as partnership items those that ‘‘are required to be taken
                                      into account for the taxable year of a partnership under sub-
                                      TEFRA. To the contrary, both reports advance, as a primary motivation for enacting TEFRA,
                                      the consistent tax treatment of any one partnership item across all partners in the same part-
                                      nership.
                                         The House conference report, H.R. Conf. Rept. No. 97–760, at 62 (1982), 1982–2 C.B. 600, 662,
                                      notes that under ‘‘present law’’, i.e., before the enactment of TEFRA, ‘‘partnerships are not tax-
                                      able entities[;] * * * partnerships are required to file an annual information return[;] * * *
                                      [but] adjustments are made to each partner’s income tax return’’. (Emphasis supplied.) The re-
                                      port bemoans the fact that as a result of the foregoing, ‘‘a judicial determination of an issue
                                      relating to a partnership item generally is conclusive only as to those partners who are parties
                                      to the proceeding.’’ Id. (emphasis supplied). In discussing how TEFRA would ‘‘promote increased
                                      compliance and more efficient administration of the tax laws’’, the report comments that pursu-
                                      ant to TEFRA, other than certain limited exceptions, ‘‘the tax treatment of any partnership item
                                      is to be determined at the partnership level’’. Id. (emphasis supplied).
                                         The Blue Book, Staff of the Joint Committee on Taxation, General Explanation of the Revenue
                                      Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, at 267 (J. Comm. Print
                                      1982), repeats the language quoted above. In addition, the Blue Book observes that before enact-
                                      ment of TEFRA, ‘‘Duplication of manpower and administrative and judicial effort was required
                                      in some cases to determine the aggregate tax liability attributable to a single partnership item.
                                      Inconsistent results could be obtained for different partners with respect to the same item.’’ Id.
                                      at 268 (emphasis supplied).
                                         9 As shown supra notes 5 and 7 and the accompanying text, the restrictions ‘‘with respect to’’

                                      the partnership and the partnership’s taxable year in sec. 6231(a)(3) merely ensure that a part-
                                      nership-level proceeding does not exceed the bounds of the cause of action; i.e., only one partner-
                                      ship, and only one of its taxable years, should remain the subject of each adjudication in a given
                                      partnership-level proceeding.




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                                      title A of the Code [and] are more appropriately determined
                                      at the partnership level’’). 10
                                         Substantively, that regulation section represents the Sec-
                                      retary’s acknowledgment that the account-taking action
                                      envisaged in section 6231(a)(3) may be required of either the
                                      partnership or any of its partners. Accordingly, he formulates
                                      a two-pronged approach for classifying partnership items.
                                      One prong constitutes a direct application of the ‘‘more-
                                      appropriately-determined’’ principle, while the other prong
                                      comprises a recursive application of this principle.
                                         The first of the Secretary’s two prongs tackles items
                                      required to be taken into account by the partnership. It is
                                      almost definitional that any such item is more appropriately
                                      determined at the partnership level. 11 Consequently, a direct
                                      application of the ‘‘more-appropriately-determined’’ principle
                                      renders the item a partnership item. Let us call such part-
                                      nership items direct partnership items. Included in direct
                                      partnership items is a partner’s distributive share of the
                                      partnership’s income, gain, loss, deduction, or credit. See sec.
                                      301.6231(a)(3)–1(a)(1)(i), Proced. & Admin. Regs.
                                         The second prong of the Secretary’s two-pronged approach
                                      deals with items ‘‘required to be taken into account’’ within
                                      the meaning of section 6231(a)(3)—but not by the partner-
                                      ship. It stands to reason that this account-taking could then
                                      be incumbent only upon one or more of the partnership’s
                                      partners. For such an item, the Secretary prescribes a recur-
                                      sive application of the ‘‘more-appropriately-determined’’ prin-
                                      ciple.
                                         10 Note again the use of the prepositional phrase ‘‘for the taxable year of a partnership’’.

                                      Again, the phrase is modifying, not the envisaged account-taking action, but the ‘‘required’’ char-
                                      acter of this action. And, again, ‘‘for’’ indicates ‘‘with respect to’’. See supra notes 5 and 7.
                                         11 TEFRA envisages that a partnership-level proceeding be concluded before partner-level ac-

                                      tions commence. See sec. 6225. In GAF Corp. & Subs. v. Commissioner, 114 T.C. 519, 525 (2000),
                                      we had followed Maxwell v. Commissioner, 87 T.C. 783 (1986), and its progeny, to hold invalid
                                      an affected items notice of deficiency issued ‘‘prior to completion of the TEFRA partnership pro-
                                      cedures’’.
                                         Assume arguendo that an item required to be taken into account by the partnership is none-
                                      theless not considered more appropriately determined at the partnership level. Because this
                                      item is required to be taken into account by the partnership, it may, indeed quite possibly will,
                                      play a definitive role in the partnership-level proceeding. However, because it is not considered
                                      more appropriately determined at the partnership level, the item will be beyond the purview
                                      of the partnership-level proceeding. Thus, the partnership-level proceeding will remain unre-
                                      solved until the item in question is conclusively determined—presumably at the partner level.
                                      But the latter itself cannot commence until the partnership-level proceeding has been concluded.
                                      Such a perverse perpetual loop could bring TEFRA’s elaborate administrative and judicial ma-
                                      chinery to a grinding halt.




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                                         Under this recursive application, the given item may still
                                      be deemed more appropriately determined at the partnership
                                      level. For this, however, the item must be determinable from
                                      other determinations that the partnership is required to
                                      make, even though the partnership itself is not required to
                                      take into account the item per se. Let us call such items,
                                      which are rendered partnership items by recursively
                                      applying the ‘‘more-appropriately-determined’’ principle,
                                      derivative partnership items. 12 They include, among others,
                                      items    of    contribution   and      distribution. See   sec.
                                      301.6231(a)(3)–1(a)(4)(i) and (ii), Proced. & Admin. Regs.
                                         Judge Holmes’ analysis fails to confront this recursive
                                      application of the ‘‘more-appropriately-determined’’ principle
                                      set out in the regulations and, therefore, ignores derivative
                                      partnership items.
                                         What does all of this mean for classifying as a partnership
                                      item a partner’s basis in his partnership interest; i.e., the
                                      partner’s outside basis? If the partnership is required to
                                      account for its partners’ outside bases, then under the first
                                         12 The recursive application of the ‘‘more-appropriately-determined’’ principle evidently rests

                                      on the eminently reasonable presumption that determination of an item, for purposes of sec.
                                      6231(a)(3), establishes a transitive relationship between the determined item and the deter-
                                      minants that conclusively determine it. In this context, transitivity implies that if, for example,
                                      an item is conclusively determined by two determinants, say (D1 and D2), each of which, in turn,
                                      is conclusively determined by two other determinants, say (D11 and D12) and (D21 and D22), re-
                                      spectively, then the item in question itself is also conclusively determined by the set of (D11,
                                      D12, D21, and D22).
                                         To see how transitivity enables a recursive application of the ‘‘more-appropriately-determined’’
                                      principle, begin by considering an item, ‘‘Item A’’, that is conclusively determined by several
                                      (‘‘n’’) different determinations that the partnership is required to make, call them (A1, A2, A3,
                                      . . ., An). Each of A1 through An constitutes a determinant of Item A. Each of them is also, by
                                      definition, more appropriately determined at the partnership level. The premise of a transitive
                                      relationship between the determined and its determinants renders Item A, in turn, more appro-
                                      priately determined at the partnership level.
                                         Now, consider another item, ‘‘Item B’’, that is conclusively determined by the aggregate set
                                      of: (1) several (‘‘m’’) different determinations that the partnership is required to make, call them
                                      (B1, B2, B3, . . ., Bm); and (2) Item A. Recall that the determinants of Item A itself are n other
                                      determinations that the partnership is required to make; i.e., (A1, A2, A3, . . ., An). Because de-
                                      termination of items is deemed transitive, Item B can be considered as conclusively determined
                                      by the union of the two sets (A1, A2, A3, . . ., An) and (B1, B2, B3, . . ., Bm); i.e., all determina-
                                      tions that the partnership is required to make. Thus, Item B is also more appropriately deter-
                                      mined at the partnership level.
                                         The same would apply for yet another item, ‘‘Item C’’, that is conclusively determined by the
                                      aggregate set of: (1) several (‘‘p’’) different determinations that the partnership is required to
                                      make, call them (C1, C2, C3, . . ., Cp); (2) Item A; and (3) Item B. Again, transitivity implies
                                      that Item C can be considered as conclusively determined by the union of the three sets (A1,
                                      A2, A3, . . ., An), (B1, B2, B3, . . ., Bm), and (C1, C2, C3, . . ., Cp). Thus, Item C is also conclu-
                                      sively determined entirely by determinations that the partnership is required to make, and con-
                                      sequently, more appropriately determined at the partnership level. We can continue this induc-
                                      tive process ad infinitum.




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                                      prong of the two-pronged approach detailed above, outside
                                      bases are direct partnership items. Thus, as Judge Holmes
                                      points out, if the partnership has a section 754 election in
                                      effect, then the partnership will account for its partners’ out-
                                      side bases, which will consequently be treated as partnership
                                      items. 13
                                         What if the partnership is not required to account for its
                                      partners’ outside bases? Then, any one partner’s outside
                                      basis may, or may not, be a partnership item. Outside basis
                                      will be a partnership item if it is determined conclusively by
                                      partnership items, whether direct or derivative. If all deter-
                                      minants necessary and sufficient to compute outside basis
                                      are direct or derivative partnership items, then another
                                      recursive application of the ‘‘more-appropriately-determined’’
                                      principle renders the object of their determination, i.e., the
                                      outside basis in question, itself a derivative partnership
                                      item. 14 On the other hand, so long as even one necessary
                                      determinant of the given outside basis is incapable of being
                                      classified as a partnership item, under either of the Sec-
                                         13 Judge Holmes argues that ‘‘The reason outside basis is a partnership item when a partner-

                                      ship makes a section 754 election is that such a partnership itself needs to determine its part-
                                      ners’ outside bases to redetermine the partnership’s own inside basis for the ‘partnership’s tax-
                                      able year.’ ’’ See Holmes op. p. 182 & n.9 (citing Kligfeld Holdings v. Commissioner, 128 T.C.
                                      192, 197 (2007); see also secs. 743(b), 754). Actually, any adjustment under sec. 743(b), which
                                      is made in ‘‘the case of a transfer of an interest in a partnership by sale or exchange or upon
                                      the death of a partner[,] * * * constitute[s] an adjustment to the basis of partnership property
                                      with respect to the transferee partner only.’’ Sec. 743(b) (emphasis supplied). Moreover, such a
                                      basis adjustment is now no longer entirely elective. Effective for transfers after Oct. 22, 2004,
                                      the adjustment is required, not only if the partnership has a sec. 754 election in effect, but also
                                      if ‘‘the partnership has a substantial built-in loss immediately after such transfer.’’ Sec. 743(a).
                                         By comparison with the partner-specific adjustments to the basis of partnership property
                                      under sec. 743(b), sec. 734(b) provides for adjustments to the common basis of partnership prop-
                                      erty. These adjustments are triggered by certain kinds of partnership distributions and are
                                      made to the partnership’s undistributed property.
                                         Specifically, the adjustments apply following any distribution in which the distributee partner
                                      either recognizes gain or loss or receives the distributed property with a basis different from
                                      that of the partnership before the distribution. See sec. 734(b)(1) and (2). Both contingencies,
                                      the distributee partner’s recognizing gain or loss and his receiving the distributed property with
                                      a different basis, would require the partnership to account for the distributee partner’s outside
                                      basis to ascertain the sec. 734(b) adjustment. See generally sec. 731 (governing distributee part-
                                      ner’s recognition of gain or loss); sec. 732 (providing rules for determining distributee partner’s
                                      basis in the distributed property); sec. 733 (specifying adjustments to distributee partner’s out-
                                      side basis). As with sec. 743(b) adjustments, basis adjustments under sec. 734(b) are now no
                                      longer entirely elective. Effective for distributions after October 22, 2004, adjustments to the
                                      partnership’s undistributed property are required, not only if the partnership has a sec. 754
                                      election in effect, but also if ‘‘there is a substantial basis reduction with respect to such distribu-
                                      tion.’’ Sec. 734(a).
                                         14 The Commissioner appeared to be developing an analogous argument in Petaluma II but

                                      seems to have fumbled at the goal line. See Petaluma II, 591 F.3d at 654 (‘‘On appeal the Com-
                                      missioner * * * in this case * * * asserts that outside basis is an affected item whose elements
                                      are mainly or entirely partnership items.’’ (Emphasis supplied.)).




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                                      retary’s two prongs, then outside basis cannot be a partner-
                                      ship item. 15 Consistent with this ‘‘all-or-nothing-at-all’’
                                      rationale, the Secretary provides that ‘‘The basis of a part-
                                      ner’s partnership interest is an affected item to the extent it
                                         15 This would be the case if a partner acquires his partnership interest ‘‘as the result of a

                                      transfer of an interest in a partnership by sale or exchange or on the death of a partner’’, sec.
                                      743(b), assuming that the partnership did not have a sec. 754 election in place and further did
                                      not have ‘‘a substantial built-in loss immediately after such transfer’’, id.; see also supra note
                                      13. For a sale or exchange, under sec. 742, and sec. 1.742–1, Income Tax Regs., the purchasing
                                      partner would take an initial outside basis in the amount of his purchase price or other consid-
                                      eration paid. For an acquisition from a decedent partner, the acquiring partner would be enti-
                                      tled under sec. 1014 to a ‘‘stepped-up basis’’. In neither case would the partnership have any
                                      reason to keep track of the basis of the partnership interest in the hands of the transferee part-
                                      ner.
                                         This could also be the case if an individual contributes built-in loss personal use property for
                                      business use by the partnership. Under Au v. Commissioner, 40 T.C. 264 (1963), aff ’d, 330 F.2d
                                      1008 (9th Cir. 1964), the partnership would take a basis in the contributed property in the
                                      amount of: (1) its fair market value at the time of contribution, or (2) its adjusted basis in the
                                      contributing partner’s hands, whichever is lower. See also sec. 1.167(g)–1, Income Tax Regs. (‘‘In
                                      the case of property which has not been used in the trade or business or held for the production
                                      of income and which is thereafter converted to such use, the fair market value on the date of
                                      such conversion, if less than the adjusted basis of the property at that time, is the basis for
                                      computing depreciation.’’). If the contributed property had a built-in loss at the time of contribu-
                                      tion, then the partnership will receive the property with a fair market value basis. The partner-
                                      ship will presumably have no reason to keep track of the contributing partner’s historical cost
                                      basis in the contributed property. However, under sec. 722, the contributing partner’s basis in
                                      his partnership interest should be his adjusted basis in the contributed personal use property.
                                         The same result can obtain even for contributions of business use property if the partnership
                                      does not maintain ‘‘book capital accounts’’ in accordance with the capital account maintenance
                                      rules of sec. 1.704–1(b)(2)(iv), Income Tax Regs. Assume, for simplicity, that the partnership de-
                                      termines each partner’s distributive share of income, gain, loss, deduction, or credit ‘‘in accord-
                                      ance with the partner’s interest in the partnership’’ under sec. 704(b). If a partner contributes
                                      either personal use or business use property with a built-in loss to such a partnership, for the
                                      partnership’s business use, then under sec. 704(c)(1)(C)(ii), the partnership will take a fair mar-
                                      ket value basis in the contributed property. The contributed property’s ‘‘built-in loss shall be
                                      taken into account only in determining the amount of items allocated to the contributing part-
                                      ner’’. Sec. 704(c)(1)(C)(i). Once the partnership no longer holds the property, say as a result of
                                      a distribution to a partner other then the contributing partner, the partnership will presumably
                                      have no reason to keep track of the contributing partner’s historical cost basis in the contributed
                                      property.
                                         Finally, an individual or corporate partner may be required to readjust its basis in its partner-
                                      ship interest under various provisions of the Code for reasons unrelated to changes in the part-
                                      nership’s operations. The partnership would ordinarily have no reason to keep track of such re-
                                      adjustments. Examples of such readjustments include the following.
                                         An insolvent partner may reduce the basis of his partnership interest (along with that of other
                                      unrelated assets he owns) under sec. 108(b), which demands tax attribute reduction as the price
                                      for the insolvency exclusion of cancellation of indebtedness income. Unless the partner’s insol-
                                      vency affects, or arises from, operations of the partnership, the latter will have no reason to
                                      keep track of such a basis reduction under sec. 108(b).
                                         A corporate partner may adjust its basis in its partnership interest for the ‘‘recapture’’ im-
                                      posed by sec. 1363(d) and sec. 1.1363–2, Income Tax Regs., which provide a ‘‘look-through rule’’
                                      for certain partnership inventory upon the tax-free contribution of a partnership interest from
                                      a C corporation to an S corporation. Note that the partnership’s accounting remains unaffected
                                      unless it specifically elects to adjust the basis of the inventory at issue, pursuant to sec. 1.1363–
                                      2(e), Income Tax Regs. This election is different from, and not covered by, a sec. 754 election.




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                                      is not a partnership item.’’ Sec. 301.6231(a)(5)–1(b), Proced.
                                      & Admin. Regs.
                                      IV. A Fact-Specific Inquiry—Always and Everywhere
                                        The parsing of the regulations set forth above completely
                                      accords with, and perfectly complements, that of the opinion
                                      of the Court. But having done the heavy lifting, the opinion
                                      of the Court seems to have tripped at the very end. The
                                      opinion fails to account for the obvious implication of its own
                                      painstaking analysis: Under the regulations, whether outside
                                      basis is a partnership item depends upon the facts and cir-
                                      cumstances unique and specific to that partnership and
                                      partner. 16
                                        This implication does not lose validity simply because in a
                                      partnership-level proceeding we make a finding to disregard
                                      the partnership form before us. Disregarding a partnership
                                      means we are not respecting the garb in which the taxpayer
                                      has dressed up his investment transaction. The mere fact
                                      that the form of the investment is not respected, however,
                                      does not by itself reduce to zero the amount of the taxpayer’s
                                      investment that we will recognize for tax purposes. 17
                                         16 In theory, this could be an inquiry without bounds. ‘‘The determinations illustrated in * * *

                                      [the regulations] that the partnership is required to make are not exhaustive; there may be ad-
                                      ditional determinations that the partnership is required to make’’. Sec. 301.6231(a)(3)–1(c)(1),
                                      Proced. & Admin. Regs. Moreover, ‘‘failure by the partnership actually to make a determination
                                      (for example, because it does not maintain proper books and records) does not prevent an item
                                      from being a partnership item.’’ Id. As a practical matter, however, in any given partnership-
                                      level case before us, litigants can be expected to isolate and describe the discrete determinations
                                      that the partnership is, or is not, required to make that control the classification of outside basis
                                      as a partnership item.
                                         17 The opinion of the Court states that ‘‘Solely from these determinations [relating to dis-

                                      regarding the partnership form], it can be determined with absolute certainty that there can
                                      be no outside basis in the nonexistent partnership interest.’’ See op. Ct. p. 119. It is indisputable
                                      that outside basis becomes a conceptual nullity once we disregard the partnership form. How-
                                      ever, that self-evident proposition is not necessarily dispositive for the purpose at hand—sus-
                                      taining a sec. 6662 accuracy-related penalty on grounds of a gross valuation misstatement under
                                      sec. 6662(e) and (h). That requires, for the tax year at issue, readjusting downwards to at least
                                      one-fourth ‘‘the adjusted basis of any property * * * claimed on any return of tax imposed by
                                      chapter 1’’. Sec. 6662(e)(1)(A).
                                         Outside basis would become relevant in this readjustment calculus if a purported partner of
                                      a disregarded partnership claims on his tax return a loss on the sale of property, the basis of
                                      which is derived from his claimed outside basis in the disregarded partnership. Such property
                                      could be the purported partner’s claimed partnership interest, or (as here) property other than
                                      money received in a claimed liquidation distribution. In either case, the conceptual nullity of
                                      outside basis would not by itself allow us to readjust down to zero the basis of such sold prop-
                                      erty. Surely we would not ignore any actual cash, in U.S. dollars (the functional currency for
                                      a U.S. taxpayer), that the purported partner had invested in the partnership, merely because
                                      we are ignoring the partnership form. Thus, if the purported partner had purchased his claimed
                                      partnership interest from a third party, his purchase price would not evaporate and become a
                                      tax nullity, even though his outside basis does so, as a consequence of disregarding the partner-




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                                      Ascertaining the amount of the taxpayer’s investment that
                                      will be recognized for tax purposes may, or may not, entail
                                      looking beyond ‘‘the partnership books and records’’. See, e.g.,
                                      op. Ct. p. 125. This cannot be known in advance, and will be
                                      unique and specific to the disregarded partnership and the
                                      purported partner. 18
                                      V. Respondent’s ‘‘Advocacy’’
                                         As shown above, and as the majority itself points out,
                                      applying the regulations to establish whether outside basis is
                                      an affected item or a partnership item focuses critically on
                                      ‘‘the extent that a determination of an item relating to a con-
                                      tribution [or a distribution] can be made from * * * deter-
                                      minations that the partnership is required to make’’. Sec.
                                      301.6231(a)(3)–1(c)(2), Proced. & Admin. Regs. (flush lan-
                                      guage) (emphasis supplied); see also sec. 301.6231(a)(3)–
                                      1(c)(1), Proced. & Admin. Regs. (‘‘The critical element is that
                                      the partnership needs to make a determination with respect
                                      to a matter for the purposes stated’’ (emphasis supplied));
                                      sec. 301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs. (‘‘deter-
                                      minations that the partnership is required to make [include
                                      those] with respect to an amount, the character of an
                                      amount, or the percentage interest of a partner in the part-
                                      nership, for purposes of the partnership books and records or
                                      for purposes of furnishing information to a partner’’).
                                           A. Respondent’s Steadfast Faith in the Regulations
                                        Whether or not the (disregarded) partnership before us,
                                      Tigers Eye Trading, LLC, is ‘‘required’’, or ‘‘needs’’, to make
                                      a determination has to be an issue unique or specific to that
                                      given partnership form. Thus, if the regulations are valid,
                                      and we are applying them properly, then conceding that out-
                                      side basis is an affected item here could only mean that this
                                      particular partnership entity is not required to make the
                                      determinations that will suffice for computing the purported
                                      partners’ outside bases.
                                      ship. In any sale of the claimed partnership interest, or of the property other than money re-
                                      ceived in a claimed liquidating distribution, the purported partner would still be allowed to re-
                                      cover tax free the amount of his actual purchase price; i.e., the underlying transactions would
                                      be treated as engaged in by the purported partner directly.
                                        18 See supra note 16 (discussing how a theoretically unbounded inquiry will, as a practical

                                      matter, be framed and rendered tractable by the litigants).




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                                      162                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                         Respondent has by no means renounced the Secretary’s
                                      regulations. Far from it, he continues to pay homage to them
                                      at every turn. Therefore, respondent’s statement in the May
                                      19, 2010, Status Report that ‘‘All parties agree that the basis
                                      of each purported partner’s interest in Tigers Eye Trading,
                                      LLC, is an affected item’’ is not, and cannot be deemed, an
                                      attempt to stipulate the applicable law. That law, embodied
                                      in the Secretary’s regulations, entails a fact-specific inquiry
                                      for concluding that outside basis is an affected item.
                                      Respondent’s conclusory statement regarding the affected
                                      item status of outside basis, therefore, must evince, at its
                                      core, a concession of fact.
                                         I would portray this ‘‘garrulity of advocacy’’ on respond-
                                      ent’s part for what it essentially is—an attempt at stipu-
                                      lating facts. Identifying it as such, I would disregard it
                                      because the record shows that it is incorrect.
                                           B. Salvaging Respondent From His Zeal
                                          As the trial court, we enjoy an element of discretion in
                                      deciding whether to accept respondent’s proffered stipulation.
                                      Under Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,
                                      195 (1989) (citing Loftin & Woodard, Inc. v. United States,
                                      577 F.2d 1206, 1232 (5th Cir. 1978), and Jasionowski v.
                                      Commissioner, 66 T.C. 312, 317–318 (1976)), ‘‘We may dis-
                                      regard stipulations between parties where justice requires it
                                      if the evidence contrary to the stipulation is substantial or
                                      the stipulation is clearly contrary to facts disclosed by the
                                      record.’’ See also Dillon, Read & Co. v. United States, 875
                                      F.2d 293, 300 (Fed. Cir. 1989) (holding that parties remain
                                      ‘‘free to stipulate to whatever facts they wish, except they
                                      may not stipulate to facts known to be fictitious’’).
                                          I have little hesitation in concluding that the attempted
                                      stipulation ‘‘is clearly contrary to facts disclosed by the
                                      record.’’ Examining the record here, it is readily apparent
                                      that the determinants necessary and sufficient for computing
                                      the outside bases of Tigers Eye Trading LLC’s purported part-
                                      ners were themselves required to be determined at the part-
                                      nership level. In particular, each outside basis is conclusively
                                      determined by a set of determinants comprising the following
                                      two kinds of items: (1) the purported partner’s distributive
                                      shares of Tigers Eye Trading LLC’s items of income, gain,




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                                      loss, deduction, or credit; and (2) the purported partner’s
                                      items of contributions and distributions, the bases of each of
                                      which could be derived from determinations required to be
                                      made by Tigers Eye Trading LLC. The first category of deter-
                                      minants consists of direct partnership items under section
                                      301.6231(a)(3)–1(a)(1)(i), Proced. & Admin. Regs., while the
                                      second represents derivative partnership items under section
                                      301.6231(a)(3)–1(a)(4)(i) and (ii), Proced. & Admin. Regs.
                                         Because the outside basis of each purported partner of
                                      Tigers Eye Trading LLC is conclusively determined entirely
                                      by partnership items, recursively applying the ‘‘more-appro-
                                      priately-determined’’ principle under the second prong of the
                                      Secretary’s two-pronged approach, discussed above, yields a
                                      derivative partnership item. I, therefore, have little doubt
                                      that respondent’s attempt at stipulating facts that render
                                      outside basis an affected item is irreconcilable with the facts
                                      disclosed by the record.
                                         I am equally confident that justice requires us to disregard
                                      the attempted stipulation. Treating outside basis as an
                                      affected item of Tigers Eye Trading LLC would preclude us
                                      from readjusting the purported partners’ inflated outside
                                      bases in this partnership-level proceeding. This readjustment
                                      would have to await partner-level actions, even though
                                      Tigers Eye Trading LLC was required to make all the deter-
                                      minations necessary and sufficient to compute the purported
                                      partners’ outside bases. Specifically, no additional informa-
                                      tion would become available for scrutiny at the subsequent
                                      partner-level actions that is not forthcoming now in this
                                      partnership-level proceeding.
                                         TEFRA, howsoever unwieldy its current practice may have
                                      become, 19 was undoubtedly motivated in large part by the
                                      twin goals of conservation of judicial effort and consistent
                                      treatment of all partners in the same partnership. 20 Both
                                      goals would be undermined by necessitating partner-level
                                      actions for readjusting inflated outside bases when all the
                                        19 See op. Ct. note 29 (discussing the ‘‘fiendishly complicated’’ and ill-fitting changes to TEFRA

                                      made by TRA 1997).
                                        20 See generally Staff of the Joint Committee on Taxation, General Explanation of the Revenue

                                      Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, at 268 (J. Comm. Print 1982)
                                      (observing that before enactment of TEFRA, ‘‘Duplication of manpower and administrative and
                                      judicial effort was required in some cases to determine the aggregate tax liability attributable
                                      to a single partnership item. Inconsistent results could be obtained * * * with respect to the
                                      same item.’’).




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                                      determinants for conclusively determining such outside bases
                                      are themselves required to be determined at the partnership-
                                      level and are consequently within our purview here.
                                           C. Wings of Ignominy
                                         No discussion of accepting or rejecting respondent’s conces-
                                      sion can be complete without acknowledging and addressing
                                      the fact that the Court of Appeals for the D.C. Circuit had,
                                      in Petaluma II, accepted a similar concession. Does Golsen
                                      tie our hands here and require us to accept respondent’s
                                      concession regardless of our own analysis of the issue? This
                                      is a difficult question, and it bears careful consideration. I
                                      submit that we have sufficient latitude to reject respondent’s
                                      concession without violating the Golsen rule.
                                         At trial in Petaluma I, 131 T.C. 84, the Commissioner
                                      never even hinted, much less announced, that outside basis
                                      was an affected item of Petaluma, the disregarded partner-
                                      ship at issue in that case. However, on appeal, in Petaluma
                                      II, the Commissioner’s advocacy took wings, Icarus-like, and
                                      soared close to the sun. His speech, and even more, his
                                      silence, strongly suggested that the outside bases of
                                      Petaluma’s purported partners were affected items.
                                         He stated on brief that ‘‘A partner’s outside basis is gen-
                                      erally an ‘affected item,’ rather than a ‘partnership item’ ’’,
                                      implying that the purported partners’ outside bases in that
                                      case were also affected items. 21 The Commissioner strength-
                                      ened this implication by his choice of words in responding to
                                      ‘‘The argument of Petaluma and the amicus * * * that the
                                      Tax Court created an improper exception to the general rule
                                      that outside basis is an affected item that must be deter-
                                      mined in a partner-level proceeding.’’ The Commissioner
                                      responded that ‘‘The Tax Court created no such exception.’’
                                         The Court of Appeals seems to have taken this denial at
                                      face value. Thus, the court observed that ‘‘On appeal the
                                      Commissioner concedes that outside basis is not a partner-
                                      ship item in this case.’’ Petaluma II, 591 F.3d at 654
                                      (emphasis supplied). Following this observation, the court
                                      seemingly ipso facto ‘‘rejected the Tax Court’s conclusion that
                                      outside basis was a partnership item in this case’’. Id. at 655
                                         21 Though the statement leaves open the possibility of outside basis being a partnership item

                                      of some other partnership, it seems an excessively narrow construction of the Secretary’s regula-
                                      tions discussed supra pt. III.




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                                      (emphasis supplied). Though the Commissioner went on to
                                      argue that ‘‘the concept of outside basis in a disregarded
                                      partnership is total nonsense’’, the damage had been done,
                                      the wax melted, and his flight abruptly ended.
                                         By comparison with the Commissioner’s apparently delib-
                                      erate distance from the issue in Petaluma I, and his ‘‘silence
                                      as acceptance’’ of outside bases as affected items in Petaluma
                                      II, respondent has left nothing unspoken here. He unequivo-
                                      cally declares that ‘‘All parties agree that the basis of each
                                      purported partner’s interest in Tigers Eye Trading, LLC, is an
                                      affected item.’’
                                         Because we were not confronted with a similar declaration
                                      in Petaluma I, the Court was denied the opportunity to
                                      develop a record at trial, in sufficient detail, to enable an
                                      objective evaluation of the assertion. 22 Deprived of such a
                                      record developed at the trial stage, the Court of Appeals for
                                      the D.C. Circuit did not have any evidentiary basis for
                                      rejecting what seemed to be a unilateral concession of fact on
                                      the Commissioner’s part. To paraphrase a different Court of
                                      Appeals, trial courts penalize taxpayers, while appellate
                                      courts review records. 23
                                         Clearly, the Commissioner’s subtler, albeit similar, conces-
                                      sion was accepted in Petaluma II against a backdrop devoid
                                      of any contrary facts established at trial. Consequently, I do
                                      not believe Golsen forecloses us from rejecting an unadulter-
                                      ated version of that concession here. Our decision to reject
                                      the concession, however, must be supported by sufficient, and
                                      sufficiently detailed, findings of fact along the lines outlined
                                      above. So long as we do not abuse our discretion and make
                                      clearly erroneous factual findings, our rejection should pass
                                      muster under a reviewing court’s deferential gaze. In sharp
                                      contrast, the majority’s approach of treating the concession
                                        22 Petaluma I was decided ‘‘on the parties’ cross-motions for summary judgment under Rule

                                      121.’’ 131 T.C. 84. Therefore, the Court did not have reason to consider the determinations that
                                      the disregarded partnership may, or may not, have been required to make, and that, in turn,
                                      may, or may not, have conclusively determined the purported partners’ outside bases. Moreover,
                                      the Court had no reason to require the parties to identify the factual issues governing this in-
                                      quiry. See supra note 16 and accompanying text.
                                        23 Cf. United States v. Poynter, 495 F.3d 349, 351–352 (6th Cir. 2007) (‘‘While trial judges sen-

                                      tence individuals face to face for a living, we review transcripts for a living. No one sentences
                                      transcripts. All of this suggests that we should acknowledge the trial court’s comparative advan-
                                      tages—its ring-side perspective on the sentencing hearing and its experience over time in sen-
                                      tencing other individuals—and give considerable deference to their sentencing decisions.’’ (Em-
                                      phasis supplied.)).




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                                      as an issue of law seems to unnecessarily heighten the risk
                                      of reversal.
                                      VI. Conclusion
                                         Relying on the Cal-Maine Foods standards for disregarding
                                      factual stipulations, I would tune out respondent’s ‘‘over-
                                      zealous advocacy’’, and instead, turn my ear to the Sec-
                                      retary’s much more ‘‘parsimonious reasoning’’. Applying this
                                      reasoning to the facts clearly disclosed by the record, the
                                      Court should conclude ‘‘that the basis of each purported part-
                                      ner’s interest in Tigers Eye Trading, LLC, is [not] an affected
                                      item’’, but a partnership item. Accordingly, we should sustain
                                      the accuracy-related penalty. 24
                                         HALPERN, J., agrees with this concurring opinion.



                                        MARVEL, J., dissenting: In an effort to create order out of
                                      the uncertainty regarding our jurisdiction over the section
                                      6662(a) accuracy-related penalty in partnership-level pro-
                                      ceedings that was created by Petaluma FX Partners, LLC v.
                                      Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (Petaluma II),
                                      aff ’g in part, rev’g in part, vacating in part and remanding
                                      131 T.C. 84 (2008), and Petaluma FX Partners, LLC v.
                                      Commissioner, 135 T.C. 581 (2010) (Petaluma III), the
                                      opinion of the Court offers an encyclopedic exposition
                                      regarding the interrelationship of the partnership provisions
                                         24 Classifying outside basis as a partnership item brings us most, but not all, of the way to

                                      sustaining a 40% gross valuation misstatement penalty here. To get to the finish line, we need
                                      one more recursive application of the ‘‘more-appropriately-determined’’ principle.
                                         A 40% penalty applies under sec. 6662(a), (e) and (h) ‘‘to any portion of an underpayment of
                                      tax required to be shown on a return, if * * * the adjusted basis of any property * * * claimed
                                      on any return of tax imposed by chapter 1 is * * * [400] percent or more of the amount deter-
                                      mined to be the correct amount of such * * * adjusted basis’’. Such property here is the ‘‘prop-
                                      erty (other than money) distributed by a partnership to a partner in [a claimed] liquidation of
                                      the partner’s interest’’. Sec. 732(b). Because no money was included in the claimed liquidating
                                      distribution, ‘‘The basis of [such] property * * * shall be an amount equal to the adjusted basis
                                      of such partner’s interest in the partnership’’. Id.
                                         Since outside basis is a partnership item here, we can sustain a readjustment down to zero
                                      of each purported partner’s interest in the disregarded partnership. The basis in the hands of
                                      a purported partner of property other than money received in a claimed liquidation distribution
                                      is conclusively determined by determinations that the partnership is required to make and ‘‘the
                                      adjusted basis of such partner’s interest in the partnership’’. Id. The presumption of transitivity
                                      of determinations renders the basis of the claimed liquidating distribution more appropriately
                                      determined at the partnership level, and therefore, a partnership item. See supra note 12.
                                      Hence, we can sustain readjusting the basis of the claimed liquidating distribution down to
                                      equal the readjusted outside basis of zero. The resulting valuation misstatement is ‘‘gross’’
                                      enough to sustain the 40% penalty.




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                                      in chapter 1, subchapter K of the Internal Revenue Code and
                                      the partnership litigation provisions of the Tax Equity and
                                      Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97–
                                      248, sec. 402, 96 Stat. at 648. It concludes that we have juris-
                                      diction to impose the section 6662(a) accuracy-related pen-
                                      alty, including the 40% gross valuation misstatement compo-
                                      nent of that penalty, at the partnership level. Because I dis-
                                      agree with the attempt in the opinion of the Court to distin-
                                      guish Petaluma II, which I believe we should follow under
                                      Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff ’d, 445
                                      F.2d 985 (10th Cir. 1971), I dissent as reflected in part I of
                                      this opinion. However, I believe that much of the analysis is
                                      correct and that Petaluma III was wrongly decided. I explain
                                      my reasoning in part II of this opinion.

                                                                                          I.
                                        As explained more fully in part II, there is much in the
                                      opinion of the Court with which I agree, but its analysis flies
                                      in the face of Petaluma III and cannot be reconciled with it.
                                      I also disagree that there is an adequate basis for distin-
                                      guishing Petaluma II. Consequently, for some of the same
                                      reasons set forth in Judge Holmes’ dissenting opinion, I
                                      reluctantly dissent from that part of the opinion of the Court
                                      that attempts to distinguish Petaluma II as interpreted and
                                      applied in Petaluma III.

                                                                                          II.
                                         Despite my reservations about the effectiveness of the
                                      attempt to distinguish Petaluma II as interpreted and
                                      applied in Petaluma III, I believe Petaluma III was wrongly
                                      decided, but for reasons somewhat different from those the
                                      opinion of the Court suggests. I explain these reasons below.
                                         While I understand why the opinion of the Court concludes
                                      that outside basis is properly characterized as a partnership
                                      item in a case like Tigers Eye Trading, LLC where the part-
                                      nership is disregarded, I do not believe that our jurisdiction
                                      over the section 6662(a) penalty depends upon that conclu-
                                      sion. I believe that we have jurisdiction to sustain the
                                      accuracy-related penalty at the partnership level in Son-of-
                                      BOSS cases in which we disregard the transitory partnership




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                                      regardless of whether outside basis is a partnership item or
                                      an affected item.
                                         Before the enactment of the Taxpayer Relief Act of 1997
                                      (TRA 1997), Pub. L. No. 105–34, sec. 1238, 111 Stat. at 1026,
                                      which amended sections 6221, 6226, and 6230 of the TEFRA
                                      partnership litigation provisions in the Code, penalties and
                                      additions to tax (collectively, penalty or penalties) were
                                      classified as affected items, and issues regarding such items
                                      were litigated in a partner-level affected item deficiency pro-
                                      ceeding following the completion of the partnership-level pro-
                                      ceeding. See, e.g., N.C.F. Energy Partners v. Commissioner,
                                      89 T.C. 741, 744–745 (1987). TRA 1997 did not change the
                                      classification of penalties as affected items, but it amended
                                      section 6221 to provide that the applicability of a penalty
                                      ‘‘which relates to an adjustment to a partnership item’’ must
                                      be determined at the partnership level. Of particular signifi-
                                      cance, TRA 1997 also amended section 6230(a)(2)(A)(i) to read
                                      as follows:
                                      SEC. 6230. ADDITIONAL ADMINISTRATIVE PROVISIONS.
                                           (a) COORDINATION WITH DEFICIENCY PROCEEDINGS.—
                                              (1) IN GENERAL.—Except as provided in paragraph (2) or (3), sub-
                                           chapter B of this chapter[1] shall not apply to the assessment or collec-
                                           tion of any computational[2] adjustment.
                                              (2) DEFICIENCY PROCEEDINGS TO APPLY IN CERTAIN CASES.—
                                                (A) Subchapter B shall apply to any deficiency attributable to—
                                                   (i) affected items which require partner level determinations
                                                (other than penalties, additions to tax, and additional amounts that
                                                relate to adjustments to partnership items) * * *

                                      Because the change to section 6230(a)(2)(A)(i) deprived a
                                      partner of the opportunity to litigate issues concerning the
                                      applicability of a penalty that relates to an adjustment of a
                                      partnership item in an affected items deficiency proceeding,
                                      TRA 1997 added section 6230(c)(1)(C) to provide that a
                                      partner may file a claim for refund on the ground that ‘‘the
                                      Secretary erroneously imposed any penalty, addition to tax,
                                      or additional amount which relates to an adjustment to a
                                      partnership item.’’ The House committee report described the
                                        1 Subch. B (secs. 6211 through 6216) contains the provisions authorizing the Commissioner

                                      to issue notices of deficiency and provides the Tax Court with jurisdiction to redetermine those
                                      deficiencies.
                                        2 Sec. 6231(a)(6) defines a computational adjustment as ‘‘the change in the tax liability of a

                                      partner which properly reflects the treatment under * * * [TEFRA] of a partnership item.’’




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                                      reason for the change and explained the provisions as fol-
                                      lows:
                                                                           Reasons for Change
                                        Many penalties are based upon the conduct of the taxpayer. With respect
                                      to partnerships, the relevant conduct often occurs at the partnership level.
                                      In addition, applying penalties at the partner level through the deficiency
                                      procedures following the conclusion of the unified proceeding at the part-
                                      nership level increases the administrative burden on the IRS and can
                                      significantly increase the Tax Court’s inventory.
                                                                         Explanation of Provision
                                        The 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.
                                        [H.R. Rept. No. 105–148, at 594 (1997), 1997–4 C.B. (Vol. 1) 319, 916.]

                                      See also S. Rept. No. 105–33, at 261 (1997), 1997–4 C.B. (Vol.
                                      2) 1081, 1341.
                                         The above-described amendments to the TEFRA partnership
                                      litigation procedures (collectively, the penalty litigation
                                      amendments) changed the landscape of penalty litigation by
                                      requiring that issues regarding the application of penalties
                                      be litigated in the first instance in the partnership-level pro-
                                      ceeding and not in partner-level affected items deficiency pro-
                                      ceedings, as was the case before the effective date of the pen-
                                      alty litigation amendments. The only qualifier that Congress
                                      imposed is that the penalty relate to an adjustment to a part-
                                      nership item. Secs. 6221, 6226(f). Congress did not define the
                                      word ‘‘relate’’, 3 nor did Congress tie the penalty determina-
                                      tion to the existence of a computational adjustment that
                                      could be summarily assessed at the end of the partnership-
                                      level proceeding. In fact, Congress did not otherwise address
                                      the mechanics of the TEFRA partnership litigation procedures
                                      as they apply to penalties.
                                         When Congress enacted the penalty litigation amend-
                                      ments, it was well aware that a partnership-level proceeding
                                      under TEFRA does not result in the determination of an
                                      underpayment at the partnership level. Underpayments are
                                      calculated at the partner level after a partnership-level pro-
                                        3 ‘‘Relate’’ means, inter alia, ‘‘to show or establish logical or causal connection’’. Merriam Web-

                                      ster’s Collegiate Dictionary 987 (10th ed. 1997). ‘‘Related’’ means, inter alia, ‘‘being connected;
                                      associated.’’ The American Heritage Dictionary of the English Language 1473 (4th ed. 2000).




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                                      ceeding is completed and/or after an affected items deficiency
                                      proceeding (which occurs if an affected item requires a fac-
                                      tual determination at the partner level) is completed. Never-
                                      theless, Congress required that penalties that relate to the
                                      adjustment of a partnership item be litigated in the partner-
                                      ship-level proceeding and not in an affected items deficiency
                                      proceeding. Congress did this to eliminate duplicative litiga-
                                      tion of the same issue in affected items deficiency pro-
                                      ceedings and to take advantage of the partnership-level pro-
                                      ceeding, in which all of the purported partners are bound by
                                      the outcome. See sec. 6221; see also H.R. Rept. No. 105–148,
                                      supra at 594, 1997–4 C.B. (Vol. 1) at 916. Congress did not
                                      limit the required relationship to those partnership items the
                                      adjustment of which flows through to the partners’ Federal
                                      income tax returns and results in a computational adjust-
                                      ment to the partners’ tax liabilities at the end of the partner-
                                      ship-level proceeding as we held in Petaluma III.
                                         In the notice of final partnership administrative adjust-
                                      ment (FPAA) issued to Tigers Eye Trading, LLC (Tigers Eye),
                                      respondent made adjustments to a variety of partnership
                                      items and determined that the accuracy-related penalty
                                      under section 6662(a) applied. See op. Ct. pp. 81–85, 140.
                                      Specifically, in the FPAA respondent determined that the
                                      transitory and illusory partnership involved in the Tigers
                                      Eye Son-of-BOSS transaction must be disregarded for Federal
                                      income tax purposes. See id. p. 84. Respondent also reduced
                                      partnership items to zero to reflect that determination (cap-
                                      ital contributions, distributions of property other than
                                      money, and other items). See id. p. 81. Each one of those
                                      adjustments was directly attributable to and was the result
                                      of the determination that the transitory and illusory partner-
                                      ship in Tigers Eye Trading, LLC must be disregarded for
                                      Federal income tax purposes.
                                         The analysis in the opinion of the Court illustrates in
                                      considerable detail that the relationship requirement
                                      imposed by section 6221 and referenced in section
                                      6230(a)(2)(A)(i) is satisfied in Tigers Eye Trading, LLC. See
                                      id. pp. 103–109, 112–119, 123, 126–127. The section 6662(a)
                                      penalty clearly relates to respondent’s determinations to dis-
                                      regard the Tigers Eye partnership and to zero out specific
                                      partnership items such as contributions and distributions
                                      allegedly made by the purported partnership to the pur-




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                                      ported partners. Although the opinion of the Court incor-
                                      porates this analysis to convince the reader that outside
                                      basis is a partnership item and not an affected item, see id.
                                      pp. 126–127, the analysis is particularly convincing on the
                                      real issue related to our penalty jurisdiction—whether the
                                      penalty in question ‘‘relate[s] to adjustments to partnership
                                      items’’, see sec. 6230(a)(2)(A)(i); see also secs. 6221, 6226(f).
                                         It helps to put the discussion regarding the impact of the
                                      penalty litigation amendments on our penalty jurisdiction in
                                      TEFRA partnership litigation in context, and the opinion of
                                      the Court does that very well. The Tigers Eye Son-of-BOSS
                                      transaction relied upon and played off of the provisions of
                                      subchapter K (sections 701 through 777), and the anticipated
                                      tax benefits that the transaction was supposed to generate
                                      depended upon the existence of a valid partnership. Recogni-
                                      tion of the partnership for Federal income tax purposes was
                                      essential to the success of the Son-of-BOSS transaction as a
                                      tax shelter.
                                         There is a logical and causal relationship between respond-
                                      ent’s determination to disregard a partnership without eco-
                                      nomic substance, his determination to adjust other partner-
                                      ship items, such as contributions and distributions, to zero,
                                      and his determination to impose the section 6662(a)
                                      accuracy-related penalty. All of the adjustments relate to and
                                      flow from respondent’s determination that the partnership is
                                      disregarded for Federal income tax purposes, and the deter-
                                      mination to impose the accuracy-related penalty flows
                                      directly from and relates to the determination to disregard
                                      the transitory and illusory partnership. Under the penalty
                                      litigation amendments, that is all that Congress required for
                                      the penalty to be litigated in the partnership-level pro-
                                      ceeding.
                                         Whether or not outside basis is at play (and, if so, whether
                                      outside basis is an affected item or in narrow circumstances
                                      a partnership item) should not control our resolution of
                                      whether we have jurisdiction to decide in a partnership-level
                                      proceeding whether the section 6662(a) penalty applies. What
                                      does control our resolution of the issue is whether the pen-
                                      alty relates to the adjustment of a partnership item. Absent
                                      any guidance from Congress regarding the meaning of the
                                      word ‘‘relates’’, I, like the opinion of the Court, answer the
                                      question in the affirmative. The imposition of the section




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                                      6662(a) penalty is clearly related to the zeroing out of part-
                                      nership items that results from a determination that the
                                      partnership must be disregarded for Federal income tax pur-
                                      poses. That relationship still exists even if the partnership-
                                      level proceeding does not result in computational adjust-
                                      ments to the partners’ income tax liabilities and related
                                      assessment at the end of the partnership-level proceeding
                                      and must await the completion of an affected items defi-
                                      ciency proceeding at the partner level.
                                         If the ‘‘relate to adjustments to partnership items’’ lan-
                                      guage of section 6230(a)(2)(A)(i) is narrowly construed to
                                      mean only a numerical adjustment of an item on a partner-
                                      ship return that flows through to the partners’ returns and
                                      results in computational adjustments to the partners’ tax
                                      liabilities at the end of the partnership proceeding, such an
                                      interpretation, I submit, would effectively repeal the penalty
                                      litigation amendments with respect to many, if not most,
                                      partnerships because the computation of the underpayment
                                      of the partners’ tax liabilities must await the completion of
                                      affected items deficiency proceedings. I do not believe that is
                                      what Congress intended when it enacted the penalty litiga-
                                      tion amendments.
                                         Congress intended that in modern tax shelters involving
                                      partnerships, penalties related to the improper use of an illu-
                                      sory partnership as a mechanism for generating large non-
                                      economic losses should be litigated in the partnership-level
                                      proceeding. Congress did so because the relevant conduct,
                                      i.e., the establishment of the partnership, which includes the
                                      recording of partner contributions, the establishment of
                                      partner capital accounts, and adjustments to those accounts
                                      resulting from distributions, assumption of liabilities, and
                                      liquidations, occurs largely at the partnership level. Cf. H.R.
                                      Rept. No. 105–148, supra at 594, 1997–4 C.B. (Vol. 1) at 916.
                                      In the case of a disregarded partnership, regardless of
                                      whether a disallowance of outside basis is at play and
                                      regardless of whether outside basis is a partnership item or
                                      an affected item, any adjustment at the partner level is pre-
                                      ceded by one or more adjustments to partnership items, and
                                      the section 6662(a) penalty relates to those partnership-level
                                      adjustments.




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                                           KROUPA, J., agrees with part I of this dissent.
                                           GALE and PARIS, JJ., agree with part II of this dissent.



                                         HOLMES, J., dissenting: It is customary and appropriate for
                                      us to reconsider an issue after being reversed by a circuit
                                      court, and stick to our position if we think it right. But only
                                      if the case we use to reaffirm ourselves is appealable to a dif-
                                      ferent circuit. When, as unfortunately we do today, we bra-
                                      zenly challenge the D.C. Circuit’s precedent in Petaluma FX
                                      Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir.
                                      2010) (Petaluma II), aff ’g in part, rev’g in part and
                                      remanding in part 131 T.C. 84 (2008) (Petaluma I), in a case
                                      appealable to that court we risk being seen as impudent. We
                                      also risk not even getting that court to reconsider—the D.C.
                                      Circuit treats its published opinions as stare decisis for later
                                      panels, see, e.g., Sierra Club & Valley Watch, Inc. v. Jackson,
                                      648 F.3d 848, 854 (D.C. Cir. 2011), so what we are really
                                      asking is for the parties to appeal and then petition for en
                                      banc reconsideration.
                                         Before today, our Court recognized the importance of cir-
                                      cuit-court precedent. In our landmark decision in Golsen v.
                                      Commissioner, 54 T.C. 742, 757 (1970), aff ’d, 445 F.2d 985
                                      (10th Cir. 1971), we held ‘‘that better judicial administration
                                      requires us to follow a Court of Appeals decision which is
                                      squarely in point where appeal from our decision lies * * *
                                      to that court alone.’’ (Fn. ref. omitted.) Golsen tells us not to
                                      bang our head against contrary appellate precedent, and
                                      we’ve consistently held that we must follow the precedent of
                                      the court that has appellate jurisdiction over a case. See
                                      Bergmann v. Commissioner, 137 T.C. 136, 146 (2011)
                                      (‘‘Because this case is appealable to the * * * Ninth Circuit,
                                      we follow that court’s precedent’’); Wechsler & Co. v. Commis-
                                      sioner, T.C. Memo. 2006–173 (‘‘[U]nder the doctrine of Golsen
                                      * * * we must apply [Second Circuit] precedents * * * to
                                      the extent that they contradict our precedents’’). 1
                                        1 See also Media Space, Inc. v. Commissioner, 135 T.C. 424, 433–434 (2010) (‘‘The Tax Court

                                      will generally defer to the rule adopted by the Court of Appeals for the circuit to which appeal
                                      would normally lie, if that Court of Appeals has ruled with respect to the identical issue’’); Por-
                                      ter v. Commissioner, 132 T.C. 203, 220 (2009) (‘‘This case is appealable * * * to the * * *
                                      Fourth Circuit. Under the rule laid down in Golsen * * * we abide by that court’s precedent’’);
                                      Estate of Kyle v. Commissioner, 94 T.C. 829, 850 (1990) (‘‘Any appeal in this case lies to the
                                                                                                  Continued




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                                      174                 138 UNITED STATES TAX COURT REPORTS                                         (67)


                                         The tsuris this will cause us—where two circuit courts, 2 a
                                      few trial courts, 3 the Department of Justice, and even the
                                      IRS (at times) all disagree with the position we’re taking—
                                      cannot possibly be worth it. Especially when it’s nothing
                                      more than a dispute about a complicated little bit of partner-
                                      ship-tax law—and not even substantive partnership-tax law,
                                      but partnership-tax-law procedure. And a point of partner-
                                      ship-tax-law procedure in a motion to revise a stipulated
                                      decision we entered in 2009. This was not the case to use to
                                      revisit Petaluma I: ‘‘[I]n most matters it is more important
                                      that the applicable rule of law be settled than that it be set-
                                      tled right.’’ Burnet v. Coronado Oil & Gas Co., 285 U.S. 393,
                                      406 (1932) (Brandeis, J., dissenting).
                                         I’ll begin with an analysis of why the majority’s maneuver
                                      around the precedent it’s bound to follow is bound to fail, and
                                      then move on to an active defense of that precedent. For not
                                      only do I believe Golsen requires us to follow Petaluma II in
                                      this case; I believe the D.C. Circuit got it right both on the
                                      question of whether outside basis is a partnership item, and
                                      on the limits of our jurisdiction over penalties at the partner-
                                      ship level.

                                                                                          I.
                                        Before we hinted in a footnote in Countryside Ltd. P’ship
                                      v. Commissioner, T.C. Memo. 2008–3 n.4, that we might
                                      begin to view things differently, we had consistently held
                                      that outside basis was generally an affected item. 4 But in
                                      * * * Fifth Circuit, and we are bound by any decision of that court squarely in point’’); Hendrix
                                      v. Commissioner, T.C. Memo. 2011–133 (‘‘This case is appealable to the * * * Fifth Circuit, and
                                      we follow precedent of that court that is squarely on point’’); Peter D. Dahlin Att’y at Law, P.S.
                                      v. Commissioner, T.C. Memo. 2007–310 (‘‘Pursuant to Golsen * * * this Court will follow the
                                      precedent established in the court to which an appeal would lie’’); Cutts v. Commissioner, T.C.
                                      Summary Opinion 2004–8 (Beghe, J.) (‘‘Because any appeal in this case, if it were permissible,
                                      would lie to the * * * Eleventh Circuit, we follow the precedent established in that Circuit’’).
                                         2 Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 654–655 (D.C. Cir. 2010)

                                      (Petaluma II), aff ’g in part, rev’g in part, and vacating in part and remanding on penalty issues
                                      131 T.C. 84 (2008) (Petaluma I); Jade Trading, LLC v. United States, 598 F.3d 1372, 1380 (Fed.
                                      Cir. 2010) (Jade Trading II).
                                         3 See, e.g., Jade Trading, LLC v. United States, 98 Fed. Cl. 453, 460 (2011) (Jade Trading III),

                                      aff ’d, 451 Fed. Appx. 954 (Fed. Cir. 2012); Gosnell v. United States, No. CV–09–01399–PHX–
                                      NVW, 2011 U.S. Dist. LEXIS 72224, at *5 n.2 (D. Ariz. June 28, 2011); Fid. Int’l Currency Advi-
                                      sor A Fund, LLC v. United States, 747 F. Supp. 2d 49, 237 (D. Mass. 2010). But see K2 Trading
                                      Ventures, LLC v. United States, 101 Fed. Cl. 365 (2011) (in dicta erroneously saying all FPAA
                                      items, which included outside basis, were partnership items without considering Jade Trading
                                      II).
                                         4 See, e.g., Domulewicz v. Commissioner, 129 T.C. 11, 21 n.13 (2007), aff ’d in part and re-

                                      manded on other grounds sub nom. Desmet v. Commissioner, 581 F.3d 297 (6th Cir. 2009);




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                                      Petaluma I, we officially changed course to hold that outside
                                      basis was a partnership item in ‘‘situation[s] where no
                                      partner-level determinations are necessary.’’ The D.C. Circuit
                                      disagreed, and reversed us in Petaluma II—a case that’s
                                      almost identical to this one.
                                         In Petaluma FX Partners, LLC v. Commissioner, 135 T.C.
                                      581 (2010) (Petaluma III), we tried to comply with the D.C.
                                      Circuit’s mandate in Petaluma II. That decision is so recent
                                      that the appeal from it is still under submission. Yet the
                                      majority in this case offers up essentially two theories as to
                                      why we don’t have to follow Petaluma II and Petaluma III
                                      in this case. It argues that
                                         • the jurisdictional limitations established in Petaluma II
                                      were based on a concession of the Government that outside
                                      basis was an affected item; and
                                         • the D.C. Circuit did not consider the applicable regula-
                                      tion in Petaluma II when it concluded that outside basis is
                                      an affected item, and therefore that opinion is superseded by
                                      the intervening opinions of the Supreme Court in Mayo
                                      Found. and the D.C. Circuit in Intermountain.
                                         I begin by looking at the merits of these arguments. I also
                                      ask whether it’s up to us, as a trial court, even to make
                                      them.

                                                                                          A.
                                         The majority assumes that Petaluma II’s holding was dic-
                                      tated by the Government’s concession on appeal that outside
                                      basis was an affected item. But parties can’t concede that a
                                      court has subject matter jurisdiction over a case; a court has
                                      to decide that for itself. See, e.g., NAACP v. New York, 413
                                      U.S. 345, 353 (1973); Mondy v. Sec’y of the Army, 845 F.2d
                                      1051, 1055 (D.C. Cir. 1988) (defendant’s concession regarding
                                      jurisdiction didn’t matter to court’s jurisdictional analysis);
                                      McGowan v. Commissioner, 67 T.C. 599, 607 (1976). And
                                      because the D.C. Circuit’s jurisdiction over outside basis
                                      depended on ours, the Government’s concession on appeal
                                      didn’t bind the D.C. Circuit and was irrelevant to its jurisdic-
                                      tional analysis.
                                      G–5 Inv. P’ship v. Commissioner, 128 T.C. 186, 189 n.7 (2007); Gustin v. Commissioner, T.C.
                                      Memo. 2002–64.




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                                      176                 138 UNITED STATES TAX COURT REPORTS                                        (67)


                                        Despite what the majority insinuates, the D.C. Circuit was
                                      clear that it understood all this:
                                         On appeal the Commissioner concedes that outside basis is not a part-
                                      nership item in this case. Instead, he asserts that outside basis is an
                                      affected item whose elements are mainly or entirely partnership items. He
                                      maintains that the Tax Court had jurisdiction to state the ‘‘obvious conclu-
                                      sion’’ that a partner cannot have any basis in a disregarded partnership.
                                      The correctness of this conclusion is immaterial, however, for the question
                                      is not whether the Tax Court’s determination was correct, but whether the
                                      Tax Court had jurisdiction to make that determination at all in this part-
                                      nership-level proceeding.

                                                              *   *    *   *   *    *   *
                                      We have already rejected the Tax Court’s conclusion that outside basis was
                                      a partnership item in this case, and we likewise reject the Commissioner’s
                                      contention that outside basis, although it is an affected item, could none-
                                      theless be determined in the partnership-level proceeding. * * *
                                        [Petaluma II, 591 F.3d at 654–655; emphasis added.]

                                        This jurisdictional question is a question of law. Courts are
                                      never bound by a concession on appeal as to a question of
                                      law, see, e.g., United States v. Ginyard, 444 F.3d 648, 649,
                                      651–652 (D.C. Cir. 2006), so if the D.C. Circuit really did
                                      accept an erroneous concession of jurisdiction, it would have
                                      committed a reversible error. I just don’t believe that to be
                                      the case.
                                        Even assuming arguendo that the D.C. Circuit relied upon
                                      the Government’s concession at all, that court also gave an
                                      additional reason for holding that outside basis was an
                                      affected item under the plain language of section 6231(a)(3).
                                      The fact that a determination seems obvious or easy does not expand the
                                      court’s jurisdiction beyond what the statute provides. In other words, it
                                      does not matter how low the fruit hangs when one is forbidden to pick it.
                                      We hold that the Tax Court had no jurisdiction to determine that
                                      Petaluma’s partners had no outside basis in the disregarded partnership.
                                      Finally, we note that nothing about the concept of outside basis indicates
                                      that it is more appropriately determined at the partnership level. If dis-
                                      regarding a partnership leads ineluctably to the conclusion that its part-
                                      ners have no outside basis, that should be just as obvious in partner-level
                                      proceedings as it is in partnership-level proceedings. Moreover, with the
                                      invalidity of the partnership conclusively established as a partnership-level
                                      determination, there is little danger that outside basis will receive incon-
                                      sistent treatment at the individual partner level. [Petaluma II, 591 F.3d
                                      at 655; emphasis added.]




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                                        The majority incorrectly dismisses Petaluma II’s discussion
                                      of outside basis as dicta. Where a decision rests on two or
                                      more separate grounds, none is dictum. See, e.g., United
                                      States v. Title Ins. & Trust Co., 265 U.S. 472, 486 (1924);
                                      Natural Res. Def. Council, Inc. v. NRC, 216 F.3d 1180, 1189
                                      (D.C. Cir. 2000). We should instead regard the D.C. Circuit’s
                                      holding in Petaluma II about outside basis as binding prece-
                                      dent.

                                                                                          B.
                                         The majority also reasons that ‘‘[b]ecause the Court of
                                      Appeals did not consider the regulation in concluding in
                                      Petaluma II that outside basis is an affected item, * * * its
                                      decision on the outside basis issue in Petaluma II has been
                                      superseded by the intervening opinions of the Supreme Court
                                      in Mayo Found. and the Court of Appeals in Intermountain.’’
                                      See op. Ct. p. 112. Here is the real beginning of our trouble.
                                      It’s not plausible to read Petaluma II as just a mistake
                                      caused by the D.C. Circuit overlooking the regulation the
                                      majority relies on when there’s a simpler reading of that
                                      opinion: The D.C. Circuit construed the Code itself to make
                                      outside basis an affected item—the low-hanging forbidden-
                                      fruit metaphor implies that if an item is not more appro-
                                      priately determined at the partnership level or is not an item
                                      with respect to a partnership’s own tax year, it is not a part-
                                      nership item. Petaluma II, 591 F.3d at 655. Even if deter-
                                      mining it would be really, really easy at the partnership
                                      level.
                                         The majority asserts that Mayo Found. for Med. Educ. &
                                      Research v. United States, 562 U.S. ll, 131 S. Ct. 704
                                      (2011), and Intermountain Ins. Serv. of Vail, LLC v. Commis-
                                      sioner, 650 F.3d 691 (D.C. Cir. 2011), rev’g 134 T.C. 211
                                      (2010), somehow changed the legal landscape that the court
                                      relied on in Petaluma II. I disagree. In Mayo Found., the
                                      Supreme Court held that courts must apply Chevron’s two-
                                      step framework (rather than the multifactor test of National
                                      Muffler) to analyze the validity of regulations. See id. at ll,
                                      131 S. Ct. at 713–714. That wasn’t, however, new law in the
                                      D.C. Circuit—it had been applying Chevron deference to
                                      regulations at least since 2003, well before either Petaluma
                                      II or Mayo Found. See Tax Analysts v. IRS, 350 F.3d 100,




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                                      102–103 (D.C. Cir. 2003). And nobody—in this case or in any
                                      of the Petaluma cases—has said the regulation is invalid.
                                         It’s not even true that the D.C. Circuit overlooked the
                                      regulation: A glance at Petaluma II shows that the court
                                      cited section 301.6231(a)(3)–1, Proced. & Admin. Regs. In
                                      fact, it cited the regulation three times. Petaluma II, 591
                                      F.3d at 650, 653. But the majority infers from the D.C. Cir-
                                      cuit’s failure to construe the section of the regulation that
                                      deals with distributions and contributions, section
                                      301.6231(a)(3)–1(a)(4) and (c), Proced. & Admin. Regs., that
                                      it did not consider that regulation in reaching its holding
                                      that outside basis was an affected item. It’s more reasonable
                                      to conclude that it just didn’t read the regulation the way the
                                      majority here does today. Fighting the D.C. Circuit’s holding
                                      in Petaluma II is hard enough, but fighting it with an argu-
                                      ment that the court missed the relevant regulation—when it
                                      actually cited it—will probably prove less than entirely
                                      persuasive.
                                         The majority’s reliance on Intermountain is also misplaced.
                                      In Intermountain, the D.C. Circuit held that old Code section
                                      275(c) was ambiguous and that Congress added language to
                                      section 6501(e)(1)(A) to resolve the ambiguity. See id. at 701–
                                      702. It also held that Colony, Inc. v. Commissioner, 357 U.S.
                                      28 (1958), only dealt with the interpretation of old section
                                      275(c), and didn’t unambiguously foreclose the new regula-
                                      tion applying new section 6501(e)(1)(A). Intermountain, 650
                                      F.3d at 703–704. The court then, as Chevron requires, ana-
                                      lyzed the text of the relevant Code section and the reason-
                                      ableness of the regulation. See id. at 704–710.
                                         Nothing new here either. In neither this case nor Petaluma
                                      is there anything like the problem created by Colony—a
                                      precedent that predates a regulation and might affect its
                                      validity. And Petaluma II interpreted the very same TEFRA
                                      regulations that we are dealing with here. Colony, in con-
                                      trast, did not interpret the regulations at issue in Inter-
                                      mountain; it was relevant only to the question of whether the
                                      Code section in that case was ambiguous. The majority here
                                      cannot reasonably use Intermountain to disregard Petaluma
                                      II’s interpretation of the TEFRA regulations.
                                         What the majority is really arguing is that if only the D.C.
                                      Circuit knew about its more elaborate argument, it would
                                      surely overrule Petaluma II. The rule for Article III courts in




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                                      this situation is clear: The Supreme Court has instructed
                                      appellate courts not to anticipatorily overrule outdated prece-
                                      dent.
                                         We do not acknowledge, and we do not hold, that other courts should
                                      conclude our more recent cases have, by implication, overruled an earlier
                                      precedent. We reaffirm that ‘‘if a precedent of this Court has direct
                                      application in a case, yet appears to rest on reasons rejected in some other
                                      line of decisions, the Court of Appeals should follow the case which directly
                                      controls, leaving to this Court the prerogative of overruling its own
                                      decisions.’’ * * * [Agostini v. Felton, 521 U.S. 203, 237 (1997); citation
                                      omitted.]

                                        I can think of no reason for our relation with the appellate
                                      courts that review our work to be any different.

                                                                                          II.
                                        Even if we weren’t climbing such a towering mountain of
                                      contrary authority, I’d still be skeptical of the majority’s
                                      analysis. Absent a few very limited exceptions, the Code and
                                      regulations make outside basis an affected item.

                                                                                          A.
                                        ‘‘[O]ur starting point must be the language employed by
                                      Congress.’’ Reiter v. Sonotone Corp., 442 U.S. 330, 337 (1979).
                                      Section 6231(a)(3) says:
                                      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.

                                        The majority boils it down to this: ‘‘A partnership item is
                                      an item that is (1) required to be taken into account under
                                      any provision of subtitle A, governing income taxes, and (2)
                                      identified by the Secretary in the regulations as ‘more appro-
                                      priately determined at the partnership level.’ ’’ See op. Ct. p.
                                      98. The majority’s reconstructed definition, however, leaves
                                      out an important phrase.
                                        Look at the first part of section 6231(a)(3)—‘‘[W]ith respect
                                      to a partnership, any item required to be taken into account
                                      for the partnership’s taxable year under any provision of sub-




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                                      title A.’’ The majority construes this to mean that an item
                                      only needs to be related to a partnership and ‘‘taken into
                                      account in computing the income tax liability’’ of a partner.
                                      See op. Ct. p. 116; see also op. Ct. p. 105. This would make
                                      the modifier ‘‘partnership’s’’ before ‘‘taxable year’’ super-
                                      fluous—section 6231(a)(3) already requires the item be
                                      related to or ‘‘with respect to a partnership.’’
                                         The phrase is no accident—‘‘partnership’s taxable year’’ is
                                      a defined term, see sec. 706, and ‘‘partnership’s taxable year’’
                                      or ‘‘partnership taxable year(s)’’ appears in twenty or so Code
                                      sections. 5 The Code makes sure that a partnership has its
                                      own tax year as if it were a taxpayer apart from its part-
                                      ners. 6 See sec. 706(b)(1). And the tax years for partners and
                                      partnerships may even start and end on different dates. See
                                      sec. 706(b)(2); sec. 1.706–1, Income Tax Regs.
                                         We must read section 6231(a)(3) in pari materia with sec-
                                      tion 706. ‘‘We can only take the Code as we find it and give
                                      it as great an internal symmetry and consistency as its
                                      words permit.’’ United States v. Olympic Radio & Television,
                                      Inc., 349 U.S. 232, 236 (1955). The phrase ‘‘partnership’s tax-
                                      able year,’’ read this way, limits the substantive reach of the
                                      Code’s definition of a ‘‘partnership item.’’ A partnership item
                                      has to have something to do with the partnership’s (and not,
                                      by implication, just with the partners’) tax year. That’s why
                                      section 301.6231(a)(3)–1(a), Proced. & Admin. Regs., says
                                      that a partnership item is an item that is ‘‘required to be
                                      taken into account for the taxable year of a partnership’’
                                      under any income tax provision of the Code.
                                         That leads me to my next point—section 6231(a)(3) also
                                      says that a partnership item isn’t a partnership item unless
                                      a regulation makes it one. But that section adds yet one
                                        5 See secs. 465, 706, 775, 1402, 1446, 6031, 6223, 6224, 6226, 6227, 6228, 6229, 6230, 6231,

                                      6241, 6242, 6247, 6248, 6251, 6252.
                                        6 Section 706 reads:


                                      SEC. 706. TAXABLE YEARS OF PARTNER AND PARTNERSHIP.
                                        (a) YEAR IN WHICH PARTNERSHIP INCOME IS INCLUDIBLE.—In computing the taxable income
                                      of a partner for a taxable year, the inclusions required by section 702 and section 707(c) with
                                      respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the part-
                                      nership for any taxable year of the partnership ending within or with the taxable year of the
                                      partner.
                                        (b) TAXABLE YEAR.—
                                          (1) PARTNERSHIP’S TAXABLE YEAR.—
                                             (A) PARTNERSHIP TREATED AS TAXPAYER.—The taxable year of a partnership shall be de-
                                          termined as though the partnership were a taxpayer.




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                                      more restriction. The Secretary can provide in the regula-
                                      tions that something is a partnership item only after he con-
                                      cludes that it’s more appropriately determined at the part-
                                      nership level than at the partner level.
                                         What the majority is missing is that the Commissioner
                                      didn’t expressly conclude it is more appropriate to determine
                                      outside basis at the partnership level than at the partner
                                      level. The Code doesn’t say that a partnership item is defined
                                      by the certainty with which a factfinder can determine it
                                      from what he knows at the partnership level. 7 After all,
                                      Petaluma II taught us that even if something is determinable
                                      at the partnership level, it can still be more appropriately
                                      determined at the partner level.

                                                                                          B.
                                         The majority’s attack on Petaluma II will succeed or fail,
                                      though, on the strength of its interpretation of the regula-
                                      tions defining partnership and affected items. Section
                                      301.6231(a)(5)–1(b), Proced. & Admin. Regs., defines affected
                                      items, and provides that ‘‘[t]he basis of a partner’s partner-
                                      ship interest [(i.e., outside basis)] is an affected item to the
                                      extent it is not a partnership item.’’ One might reasonably
                                      read this as stating a general rule that outside basis is an
                                      affected item, but with a few exceptions. The majority, how-
                                      ever, enthusiastically finds a great many instances where
                                      outside basis is a partnership item. Cataloging them all, one
                                      finds that the majority would hold outside basis to be a part-
                                      nership item when

                                         7 The Code is actually clearer than Judge Wherry’s elaborately detailed and cognitively chal-

                                      lenging grammatical and syntactical analysis lets on. I believe Congress added the phrase ‘‘to
                                      the extent regulations prescribed by the Secretary provide that * * * such item is more appro-
                                      priately determined at the partnership level than at the partner level’’ to section 6231(a)(3), so
                                      that the Secretary would not pervert and subvert the preceding part of section 6231(a)(3)’s defi-
                                      nition—as the majority does today—in promulgating regulations listing what are partnership
                                      items. Congress wanted to kick the ladder out from under the Secretary if he went picking fruit
                                      that Congress didn’t want picked at the partnership level. I would therefore hold that ‘‘any item
                                      required to be taken into account for the partnership’s taxable year’’ under the provisions of the
                                      income tax code would be one the Secretary could reasonably find ‘‘more appropriately deter-
                                      mined at the partnership level than at the partner level.’’ And that means there will never be
                                      the situation like the one dreamed up by Judge Wherry in note 11 of his concurrence—it’s more
                                      of a red herring than a Trojan horse. The ‘‘more appropriately determined’’ language clarifies
                                      the rest of section 6231(a)(3) and seems to foreclose possible deviations from the statute’s plain
                                      language.




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                                        • outside-basis computations are made under the general
                                      rule of section 705(a), see op. Ct. pp. 112–114; 8
                                        • outside-basis computations are made under the alter-
                                      native rule of section 705(b), see op. Ct. pp. 114–115; and, of
                                      course
                                        • whenever the partnership is a sham.
                                      Thus, the first problem with the majority’s result: It’s usually
                                      not a good reading when the exception swallows all but a bit
                                      of the tail of the general rule.
                                         Stranger things have happened in tax law—but probably
                                      not here. The regulation itself lists one exception to the gen-
                                      eral rule that outside basis is an affected item: ‘‘Optional
                                      adjustments to the basis of partnership property pursuant to
                                      an election under section 754 (including necessary prelimi-
                                      nary determinations, such as the determination of a trans-
                                      feree partner’s basis in a partnership interest).’’ Sec.
                                      301.6231(a)(3)–1(a)(3), Proced. & Admin. Regs. This makes
                                      sense. The reason outside basis is a partnership item when
                                      a partnership makes a section 754 election is that such a
                                      partnership itself needs to determine its partners’ outside
                                      bases to redetermine the partnership’s own inside basis for
                                      the ‘‘partnership’s taxable year.’’ 9
                                         This specific exception has, of course, nothing to do with
                                      this case because Tigers Eye never made a section 754 elec-
                                      tion. 10 The majority instead looks at the regulation’s general
                                      discussion of contributions and distributions, section
                                      301.6231(a)(3)–1(a)(4) and (c), Proced. & Admin. Regs., and
                                      finds there its proof that outside basis is a partnership item,
                                      at least when it can be determined exclusively from other
                                      partnership items.
                                         But that’s not exactly what the regulation says. Section
                                      301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs., goes like this:
                                        8 The majority acknowledges only one instance where outside basis is an affected item—when

                                      a partner buys his partnership interest from a third party. See op. Ct. pp. 117–118.
                                        9 ‘‘When a new partner acquires a partnership interest, he typically pays fair market value

                                      for that interest, which can result in discrepancies between his outside basis and his share of
                                      the partnership’s inside basis. To help balance out those discrepancies, section 754 allows a
                                      partnership to elect to adjust the inside basis of partnership assets to reflect the new partner’s
                                      different outside basis.’’ Kligfeld Holdings v. Commissioner, 128 T.C. 192, 197 (2007); see secs.
                                      743(b), 754.
                                        10 We noted in Petaluma I that outside basis can also be a partnership item when there is

                                      a tiered partnership—a partnership that owns an interest (i.e., has outside basis) in a second
                                      partnership. See Petaluma I, 131 T.C. at 99.




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                                      Items relating to the following transactions, to the extent that a deter-
                                      mination of such items can be made from determinations that the partner-
                                      ship is required to make with respect to an amount, the character of an
                                      amount, or the percentage interest of a partner in the partnership, for pur-
                                      poses of the partnership books and records or for purposes of furnishing
                                      information to a partner:
                                           (i) Contributions to the partnership;
                                           (ii) Distributions from the partnership; and * * *

                                        I acknowledge that section 301.6231(a)(3)–1(a)(4), Proced.
                                      & Admin. Regs., is less than a model of clarity—it doesn’t
                                      just say that contributions to, and distributions from, a part-
                                      nership are partnership items. It says ‘‘items relating to’’
                                      them are—but only ‘‘to the extent that a determination of
                                      such items can be made from determinations that the part-
                                      nership is required to make * * * for purposes of the part-
                                      nership books and records or for purposes of furnishing
                                      information to a partner.’’ (Emphasis added.)
                                        In the very first paragraph of section 301.6231(a)(3)–1(a),
                                      Proced. & Admin. Regs., however, the regulation unequivo-
                                      cally states that all the items it lists as partnership items
                                      are ‘‘required to be taken into account for the taxable year
                                      of a partnership under subtitle A.’’ We can’t just ignore this
                                      language. That’s why in Hambrose Leasing 1984–5 Ltd.
                                      P’ship v. Commissioner, 99 T.C. 298, 311 (1992), we held:
                                         While, at first blush, * * * [section 301.6231(a)(3)–1(a)(4), Proced. &
                                      Admin. Regs.] may seem broad enough to permit virtually any determina-
                                      tion of an item in a partnership level proceeding so long as it is related,
                                      even remotely, to the partnership, an item is not a partnership item under
                                      this subparagraph unless required to be taken into account for the taxable
                                      year of the partnership. Sec. 6231(a)(3); sec. 301.6231(a)(3)–1(a), Proced. &
                                      Admin. Regs.

                                      We also held that for something to be a partnership item
                                      under the regulation, it has to at least have an ‘‘effect on the
                                      partnership, its books and records, or [some] other aspect of
                                      the partnership.’’ Id. Likewise, in Dakotah Hills Offices Ltd.
                                      P’ship v. Commissioner, T.C. Memo. 1996–35, we held:
                                      [T]he determination of whether an item is a partnership item does not
                                      depend upon whether the item is determinable from information actually
                                      available at the partnership level. * * * The critical factor is whether the
                                      partnership was required to make a determination of that item. * * *




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                                      (citing by analogy Dial USA, Inc. v. Commissioner, 95 T.C.
                                      1, 4 (1990)); see also Olsen-Smith, Ltd. v. Commissioner, T.C.
                                      Memo. 2005–174. 11
                                         In Petaluma I we did change course and relied on Allen
                                      Family Foods, Inc. v. Commissioner, T.C. Memo. 2000–327.
                                      We claimed in Petaluma I that Allen Family Foods supported
                                      the idea that ‘‘[s]ection 301.6231(a)(3)–1(c)(2) and (3), Proced.
                                      & Admin. Regs., provides that partnership items include
                                      determinations that relate to contributions and distributions
                                      to the extent that those determinations do not require
                                      information that is outside the Court’s jurisdiction.’’
                                      Petaluma I, 131 T.C. at 99. We then reasoned that since
                                      [o]utside basis is related to a partner’s contributions and share of
                                      distributions[,] * * * [when] a partnership is disregarded for tax purposes
                                      * * *, the Court may determine that the partner’s outside basis is zero
                                      without requiring a partner-level [factual] determination because there can
                                      be no adjusted basis in a disregarded partnership. * * * [Id. at 99–100.12]

                                      Allen Family Foods, however, only repeated the language in
                                      the temporary regulation, and held that we lacked jurisdic-
                                      tion in a corporate-level proceeding to decide the amount of
                                      the shareholder’s basis in an S corporation. Allen Family
                                      Foods, T.C. Memo. 2000–327. This is a strong hint that our
                                      reliance on Allen Family Foods in Petaluma I was seriously
                                      misplaced.
                                         The majority, however, makes no mention of these pre-
                                      Petaluma I cases. And although I agree that a partnership
                                      must determine certain items—partnership items such as
                                      contributions and distributions—so that the partner can
                                      figure out his basis in the partnership, Tigers Eye itself was
                                        11 The majority goes to great lengths to try to distinguish Dial USA, Inc. v. Commissioner,

                                      95 T.C. 1 (1990), where we held that a shareholder’s basis in the stock of a corporation is not
                                      a subchapter S item that can be decided at the corporate level. The majority says that our past
                                      reliance on Dial to hold outside basis is an affected item is misplaced because these cases didn’t
                                      examine the regulation defining ‘‘partnership items,’’ and Dial involved our jurisdiction to deter-
                                      mine subchapter S items at the corporate level. See op. Ct. pp. 119–120. The problem with its
                                      analysis, however, is that we did look at and rely on the Code and regulations to reach our con-
                                      clusion that shareholder basis is not an item that can properly be decided in the subchapter
                                      S corporate proceeding. See Dial, 95 T.C. at 3–6. Nowhere in our analysis in Dial did we view
                                      the subchapter S regulations as modifying the TEFRA regulations, and we explicitly recognized
                                      that the TEFRA provisions ‘‘which govern the ‘judicial determination of partnership items’ and
                                      those that ‘relate to partnership items’ ’’ were incorporated into the subchapter S provisions. Id.
                                      at 3. Because Dial actually analyzed the TEFRA regulations, our later cases that relied on Dial
                                      were not simply thoughtless extensions of the S corporation provisions to partnerships.
                                        12 See my dissent in Thompson v. Commissioner, 137 T.C. 220, 242 (2011), which discusses

                                      the types of affected items I believe are subject to deficiency procedures.




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                                      never required to determine its partners’ outside bases, and
                                      its partners’ outside bases had no effect on its taxable year.
                                      The majority even acknowledges as much. See op. Ct. pp.
                                      106–107 (‘‘Tigers Eye needed to provide that information to
                                      the option partners so that they could properly determine
                                      their bases in the distributed property.’’ (Emphasis added.))

                                                                                          C.
                                         Odder still is the majority’s invocation of Chevron. See op.
                                      Ct. pp. 124–126. Having misconstrued the regulation, the
                                      majority moves on to defend its validity—something which
                                      no one has challenged before. The most troubling part of the
                                      majority’s analysis on this seemingly superfluous subject is
                                      its assertion that ‘‘the Secretary considered the treatment of
                                      partnership items in a detailed and reasoned fashion before
                                      making a final decision.’’ See op. Ct. p. 125.
                                         In explaining the regulations at the time of their publica-
                                      tion, however, the Secretary gave no hint that he regarded
                                      outside basis as a partnership item under section
                                      301.6231(a)(3)–1(a)(4) and (c), Proced. & Admin. Regs.,
                                      absent a section 754 election. See 51 Fed. Reg. 13212, 13213
                                      (Apr. 18, 1986). There’s certainly nothing like the majority’s
                                      analysis—that if contributions and distributions are partner-
                                      ship items, outside basis must be a partnership item too.
                                      Instead, the explanation straightforwardly reasons that
                                      where a partnership makes a section 754 election, ‘‘[t]he
                                      determination of the transferee partner’s basis in his part-
                                      nership interest is a partnership item because that deter-
                                      mination is necessary in order for the partnership to make
                                      certain partnership-level determinations with respect to the
                                      transferee partner’s basis in partnership property.’’ Id.
                                      (emphasis added).
                                         Even more tellingly, before our decision in Petaluma I, the
                                      Internal Revenue Manual (IRM) said that outside basis was
                                      generally an affected item:
                                      [T]he amount of a partner’s initial contribution to capital would be a fact
                                      developed at the partnership level, that would be the partnership item, but
                                      the utilization of that amount in the computation of basis and any dis-
                                      allowance of a loss at the partner level would be the affected item subject




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                                      to deficiency procedures (30-day or 90-day letter). [IRM pt. 4.31.2.2.14(7)
                                      (June 1, 2004). 13]

                                        The clarity of the old IRM on this point suggests that the
                                      majority’s Chevron analysis actually serves to undermine the
                                      validity of the regulation as the majority construes it. For in
                                      section 6231(a)(3), Congress made it clear that the Secretary
                                      can’t just make any item a partnership item—he can only
                                      make an item a ‘‘partnership item’’ if it is
                                        • an item required to be taken into account for the taxable
                                      year of a partnership under any provision of the income tax
                                      code; and
                                        • one that he determines in the regulations to be a part-
                                      nership item and more appropriately determined at the part-
                                      nership level.
                                        The first of these requirements is the most glaring problem
                                      for the majority. Apart from peculiar cases like partnerships
                                      that make section 754 elections or partnerships that hold
                                      partnership interests in other partnerships, a partnership
                                      does not have to take outside basis into account for its own
                                      tax year. If the majority’s reading of the regulation is correct,
                                      there really would be a problem with its validity because it
                                      would conflict with the requirement that an item be taken
                                      into account for the taxable year of a partnership. See
                                      Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S.
                                      837, 842–843 (1984) (an agency ‘‘must give effect to the
                                      unambiguously expressed intent of Congress’’).
                                        There would also be a problem because of the Code’s other
                                      requirement. Section 6231(a)(3) tells the Secretary that he
                                      must determine that an item is more appropriately deter-
                                      mined at the partnership level to list it as a partnership item
                                      in the regulations. Other than in the case of a partnership’s
                                      section 754 election, there is no evidence in section
                                      301.6231(a)(3)–1, Proced. & Admin. Regs., that the Secretary
                                      made this finding for outside basis. And I don’t believe that
                                         13 The IRS originally took the same position in the Appeals Office section of the Manual. See

                                      IRM pt. 8.19.1.6.9.4(2)(F) (Apr. 1, 2004). That changed only after—and because of—our holding
                                      in Petaluma I. See IRM pt. 8.19.1.6.9.4(2)(F) (Feb. 10, 2009). I have no desire here to get into
                                      the probable future debate about the weight we give an agency’s own construction of its regula-
                                      tions, or the specific weight we give the IRM. But the IRS’s own initial interpretation of the
                                      regulation would seem to undermine the majority’s view. The IRM’s later adoption in one sec-
                                      tion of a contrary view simply brings to mind the old aphorism of administrative law that an
                                      agency’s interpretation of a regulation that conflicts with its prior interpretation is ‘‘entitled to
                                      considerably less deference than a consistently held agency view.’’ E.g., Thomas Jefferson Univ.
                                      v. Shalala, 512 U.S. 504, 515 (1994).




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                                      he could reasonably conclude that outside basis, as a general
                                      matter, is more appropriately determined at the partnership
                                      level than at the partner level. See Petaluma II, 591 F.3d at
                                      655 (noting that nothing about the concept of outside basis
                                      indicates that it is more appropriately determined at the
                                      partnership level). This means that if the regulation did say
                                      what the majority says it does, it would be quite vulnerable
                                      to a Chevron challenge: Even if a statute is susceptible of
                                      more than one interpretation, an agency’s interpretation is
                                      unreasonable if it doesn’t comport with the statute’s require-
                                      ments. See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366,
                                      388–392 (1999).
                                        The majority never grapples with these problems, and cer-
                                      tainly never pins them down.

                                                                                      III.
                                        The majority’s challenge to Petaluma II is not limited to
                                      the question of whether outside basis is a partnership item.
                                      It also goes after Petaluma II’s analysis of our jurisdiction
                                      over penalties in partnership-level cases.

                                                                                          A.
                                        Section 6226(f) says that we have jurisdiction at the part-
                                      nership level to determine ‘‘the applicability of any penalty,
                                      addition to tax, or additional amount which relates to an
                                      adjustment to a partnership item.’’ The fundamental problem
                                      in defining our jurisdiction over penalties at the partnership
                                      level is that imposing a penalty requires an underpayment of
                                      tax from which the penalty can be computed. An under-
                                      payment is generally the difference between the correct
                                      income tax determined by the IRS and the amount stated by
                                      the taxpayer on his return. See sec. 6664(a). It’s axiomatic
                                      that partners, not partnerships, pay tax. This makes it hard
                                      to distinguish penalties that relate to partnership items from
                                      penalties that don’t, since penalties ultimately are calculated
                                      on underpayments, which isn’t something partnership
                                      returns generate by themselves.
                                        In Petaluma II, the D.C. Circuit interpreted section
                                      6226(f)’s grant of jurisdiction much more narrowly than the
                                      majority does today. It declined to allow the finding that a
                                      partnership was a sham to confer on us jurisdiction at the




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                                      partnership level to determine penalties relating to outside
                                      basis, which it held to be an affected item. Petaluma II, 591
                                      F.3d at 655–656. It also vacated our holding and told us to
                                      decide on remand whether the penalties ‘‘relate to an adjust-
                                      ment to a partnership item’’ and ‘‘could have been computed
                                      without partner-level proceedings.’’ Id.
                                        In Petaluma III we interpreted the D.C. Circuit’s mandate
                                      to mean that ‘‘if the penalty does not relate directly to a
                                      numerical adjustment to a partnership item, it is beyond our
                                      jurisdiction.’’ Petaluma III, 135 T.C. at 587. 14 We held that
                                      there were no such adjustments to which a penalty could
                                      apply—there were no partnership items flowing through to
                                      the partners’ returns as nondeficiency computational adjust-
                                      ments, and the sham determination in that case only
                                      indirectly affected the outside basis determination at the
                                      partner level. Id. Petaluma III is controlling authority—we
                                      have the same Son-of-BOSS variety and this case is also
                                      appealable to the D.C. Circuit. Our decision today overrules
                                      Petaluma III.

                                                                                          B.
                                         Overruling Petaluma III on jurisdiction over penalties
                                      would be understandable if it were only a side effect of our
                                      reaffirmation of Petaluma I that outside basis is a partner-
                                      ship item. But the majority says that even if it is wrong
                                      about outside basis, we would still have jurisdiction to deter-
                                      mine the applicability of penalties relating to it. The majority
                                      opines that ‘‘[i]n the case of a disregarded partnership,
                                      regardless of whether a disallowance of outside basis is at
                                      play and regardless of whether outside basis is a partnership
                                      item or an affected item, any adjustment at the partner level
                                      is preceded by one or more adjustments to partnership items,
                                      and a penalty is related to those partnership-level adjust-
                                      ments.’’ See op. Ct. p. 142. This conclusion rests on the opin-
                                      ion’s broad interpretation of ‘‘relates to’’ in section 6226(f), a
                                      construction that has been rejected by both the D.C. and Fed-
                                      eral Circuits.
                                        14 In this case the Commissioner did assert penalties relating to adjustments to some of Tigers

                                      Eye’s partnership items—$242,186 of partnership loss and $11,314 of ‘‘Other Deductions’’—that
                                      are ‘‘capable of being ‘computed without partnership-level deficiency proceedings.’ ’’ I agree with
                                      the majority that we have jurisdiction to determine the applicability of those penalties.




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                                         TEFRA doesn’t define the term, so the majority adopts the
                                      broadest dictionary definition—requiring only a mere logical
                                      or causal connection—and cites the general rule that words
                                      are construed according to their ordinary and everyday
                                      meaning. But with a law as complicated as TEFRA, the con-
                                      text in which words are used matters. The words ‘‘relate’’,
                                      ‘‘related’’, and ‘‘relates’’ have different shades of meaning
                                      depending on the sense in which they are used. We should
                                      look to see if the individual words are colored by the context
                                      in which they are used, as well as the structure and evident
                                      purpose of the act. See, e.g., People of Puerto Rico v. Shell
                                      Co., 302 U.S. 253, 258 (1937) (statute’s meaning should ‘‘be
                                      arrived at not only by a consideration of the words them-
                                      selves, but by considering, as well, the context, the purposes
                                      of the law, and the circumstances under which the words
                                      were employed’’).
                                         This counsels against a broad construction of ‘‘relates to.’’
                                      In TEFRA world, there’s generally no partnership-level juris-
                                      diction over affected items even though we know by defini-
                                      tion that all affected items ‘‘relate to’’ partnership items—
                                      they couldn’t be affected items if they weren’t affected by
                                      determinations of partnership items. See sec. 6231(a)(5). But
                                      if we hold that all penalties relating to affected items are
                                      also ‘‘penalt[ies] * * * relate[d] to an adjustment to a part-
                                      nership item,’’ we would have to conclude Congress wanted
                                      this Court to determine the applicability of penalties for all
                                      affected item adjustments at the partnership level. Sec.
                                      6226(f). This would be unreasonable because adjustments to
                                      the affected items themselves don’t get determined until
                                      partner-level proceedings, and it’s usually only in Wonder-
                                      land, see Lewis Carroll, Alice’s Adventures in Wonderland
                                      109 (Oxford Univ. Press 2009) (1865), or in the more
                                      unpleasant judicial systems around the world that ‘‘penalty
                                      first—verdict afterwards’’ is the rule. 15 And, of course, even
                                      if Congress wanted the applicability of penalties related to
                                      affected items to be determined at the partnership level,
                                      doing so by making ‘‘the applicability of penalties relating to

                                        15 Or as we say in tax world, under section 7491(c) the Commissioner has the burden of pro-

                                      ducing evidence that there is an underpayment of tax where he thinks it appropriate to impose
                                      the relevant penalty.




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                                      partnership items’’—with no mention of affected items—
                                      seems an odd way of expressing it.
                                         Note especially the Code’s use of the word ‘‘adjustments’’
                                      instead of ‘‘determinations’’ in section 6226(f). We have usu-
                                      ally interpreted ‘‘adjustment’’ to mean a numerical increase
                                      or decrease. See Southern v. Commissioner, 87 T.C. 49, 55
                                      (1986) (construing ‘‘adjustment’’ in section 702(a)(7)); see also
                                      S. Rept. No. 105–33, at 254 (1997), 1997–4 C.B. 1081, 1334
                                      (‘‘An adjustment determined to be correct would thus have
                                      the effect of increasing the taxable income that is deemed to
                                      have been reported on the taxpayer’s return’’); Staff of J.
                                      Comm. on Taxation, General Explanation of the Tax Legisla-
                                      tion Enacted in 1997, at 370 (J. Comm. Print 1997). All
                                      adjustments are determinations, but not all determinations
                                      are adjustments. This distinction helps explain the line that
                                      the D.C. Circuit drew in Petaluma II between penalties that
                                      ‘‘could have been assessed without partner-level computa-
                                      tions’’ and penalties that could not. Petaluma II, 591 F.3d at
                                      656. The majority implies that determining that a partner-
                                      ship is a sham is an adjustment to a partnership item but
                                      doesn’t explain why. See, e.g., op. Ct. pp. 135, 140. Petaluma
                                      II agreed that the determination that a partnership is a
                                      sham is a determination of a partnership item, but it did not
                                      hold that it was an adjustment.
                                         The majority, however, tries to get around this by rea-
                                      soning that the penalties also relate to the adjustments to
                                      contributions and distributions made in the FPAA. See op. Ct.
                                      pp. 140–142. These determinations certainly were adjust-
                                      ments—contributions and distributions were reduced to zero.
                                      But do the penalties that the Commissioner asserts ‘‘relate
                                      to’’ these adjustments? The Government made a very similar
                                      argument in Jade Trading, LLC v. United States, 98 Fed. Cl.
                                      453, 460 (2011) (Jade Trading III), aff ’d, 451 Fed. Appx. 954
                                      (Fed. Cir. 2012), contending that a finding that a partnership
                                      was a sham permitted the application of penalties without
                                      regard to the partners’ outside bases because it caused Jade
                                      Trading’s inside basis in the spread transaction to be reduced
                                      to zero. Id. But the court disagreed:
                                        Defendant cannot convert what it characterizes as a determination that
                                      Jade was a sham * * * into a wholly separate finding that something
                                      other than the individual partners’ outside bases justifies applying pen-




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                                      alties at the partnership level. As Plaintiffs persuasively argue, ‘‘the sham
                                      characterization in Petaluma may represent a legitimate ‘partnership item’
                                      but the impact on the partner-specific ‘outside basis’ stands one step
                                      removed from the partnership proceeding.’’ [Citation omitted.] The
                                      accuracy-related penalties this Court applied were all predicated on
                                      misstatements and erroneous reporting attributable to the * * * [part-
                                      ners’] inflated bases in Jade. * * * [Id. at 461.]

                                         The Government also argued that misstating the basis to
                                      the partnership of property that the partners contributed
                                      (i.e., inside basis)—which undoubtedly is a partnership item,
                                      see sec. 301.6231(a)(3)–1(a)(4), Proced. & Admin. Regs.—also
                                      made the penalties based on misvaluation related to adjust-
                                      ments to partnership items. But the court rejected this argu-
                                      ment too because the Government had not ‘‘demonstrated
                                      that any understatement of tax * * * resulted from the con-
                                      tribution.’’ Id. And the court frowned upon the Government’s
                                      attempt to ‘‘focus on these contributions in isolation * * *
                                      and then use these contributions, standing alone, to trigger
                                      penalties.’’ Id.
                                         I do agree with the majority that the amount of the under-
                                      payment of tax can’t be determined at the partnership
                                      level—it’s determined in a notice of computational adjust-
                                      ment or a notice of deficiency proceeding at the partner level.
                                      Yet unlike the majority, I believe that we have jurisdiction
                                      at the partnership level only over penalties that relate
                                      directly to numerical adjustments to partnership items. See
                                      Petaluma III, 135 T.C. at 587. More specifically, the penalty
                                      must relate to a partnership-item adjustment that seems
                                      capable of being summarily assessed as a computational
                                      adjustment. 16 See Thompson v. Commissioner, 137 T.C. 220,
                                      242 (2011) (Holmes, J., dissenting) (explaining which com-
                                      putational adjustments I believe are subject to deficiency
                                      procedures and which ones aren’t).
                                         In conclusion, I believe that we shouldn’t challenge the
                                      D.C. Circuit on the issue of our partnership-level jurisdiction
                                      over penalties any more than we should challenge it on the
                                         16 Judge Halpern’s concurring opinion incorrectly compares this case to 106 Ltd. v. Commis-

                                      sioner, 136 T.C. 67 (2011). 106 Ltd. involved a nonliquidating distribution from a partnership
                                      and a different variety of Son-of-BOSS—one where the partnership itself, rather than the con-
                                      tributing partner, incorrectly valued the paired options that were contributed—taking the value
                                      of the long position but ignoring the offsetting short position—which, as a consequence, caused
                                      the partnership to grossly overstate the capital contributions and distributions it reported. See
                                      Halpern op. pp. 149–150.




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                                      issue of outside basis as a partnership item. 17 Of all the rou-
                                      tines in judicial gymnastics, few have a higher degree of dif-
                                      ficulty than the reverse benchslap, and we’re trying for a
                                      combination double with our Opinion today.
                                         I’ll stand a safe distance off to one side, and respectfully
                                      dissent.
                                         THORNTON and KROUPA, JJ., agree with part I of this dis-
                                      sent.

                                                                               f




                                        17 I’ll reiterate what I noted in Thompson: The Secretary should not view our Opinion as fore-

                                      closing the possibility that he could clear this area up much more efficiently through regulation
                                      than the Commissioner has been able to do through litigation. Thompson v. Commissioner, 137
                                      T.C. at 244 (Holmes, J., dissenting).




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