                        T.C. Memo. 2007-88



                      UNITED STATES TAX COURT



                THOMAS J. NEHRLICH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20720-04L.               Filed April 12, 2007.



     Patrick J. Quinn, for petitioner.

     Catherine G. Chang, for respondent.



                        MEMORANDUM OPINION


     HOLMES, Judge:   After a partnership named JTA Research was

audited, one of its partners filed a petition in this Court

challenging the disallowance of a large charitable deduction.

But he filed the petition too late and we dismissed it for lack

of jurisdiction.   The Commissioner then assessed each of JTA's
                                -2-

partners for the additional tax owed because of the disallowed

deduction.   One of JTA's other partners, Thomas Nehrlich, didn't

pay after being notified of the assessment, and he now challenges

the underlying liability.

                             Background

     Thomas Nehrlich and Jonathan Yee founded JTA in 1990 to sell

computer consulting and programming services.   Frank Wypychowski

joined JTA in 1994, and the partners adjusted their shares so

that each owned one-third.   One year later, JTA donated dental-

practice-management software to the University of Iowa.   JTA

valued the software at $6 million and deducted the donation as a

charitable contribution on its 1995 partnership return.

     JTA's 1995 return designated Wypychowski as the firm's tax

matters partner (TMP), and the box under "Is this partnership

subject to the consolidated audit procedures of sections 6221

through 6233?" (the IRS's way of saying "TEFRA") was checked

"Yes".1   The return also listed two items, both for $12,850.   The

first was an income adjustment for “guaranteed payments to

     1
       TEFRA is the Tax Equity and Fiscal Responsibility Act of
1982, Pub. L. 97-248, 96 Stat. 324, one part of which governs the
tax treatment and audit procedures for most partnerships. See
TEFRA secs. 401-406, 96 Stat. at 648-671. TEFRA requires the
uniform treatment of all “partnership items”--a term defined by
section 6231(a)(3) and (4), I.R.C.--and its general goal is to
treat all partners alike when the IRS adjusts partnership items.
Each TEFRA partnership is supposed to designate one of its
partners as the TMP to handle TEFRA issues and litigation for the
partnership. Congress frequently amends TEFRA, and though we
note the current law where relevant, all other section references
are to the Internal Revenue Code and regulations as in effect for
1995.
                                 -3-

partners” and the second was on the line labeled “other

deductions.”    JTA identified both these items, in separate

statements attached to its return, as “Health Insurance

Premiums.”    Nehrlich agrees with the Commissioner that the double

reporting of the premiums was simply a mistake.

     The Commissioner audited JTA's 1995 partnership return using

TEFRA audit procedures, not because one of the partners had

designated himself the TMP and the partnership return had a

checked box stating that TEFRA procedures would apply, but

because the examiner noticed that JTA allocated one item--the

$12,850 in health insurance premiums listed under “other

deductions”--other than in equal thirds.2    The focus of the

audit, though, was the value of JTA’s gift to the University of

Iowa.    The Commissioner concluded the software was worthless, and

made a $6 million adjustment.    At the end of the audit, in

October 2000, the Commissioner sent Wypychowski a Notice of Final

Partnership Administrative Adjustment (FPAA) by certified mail.

The Commissioner alleges that he also mailed an FPAA to Nehrlich,

and offers as evidence the first page of an FPAA and a certified

mailing list showing Nehrlich’s name and address.    However, he

stipulated that he cannot prove Nehrlich received the FPAA, and

Nehrlich claims that he did not.



     2
         Nehrlich was allocated $2405; Wypychowski, $3111; and Yee,
$7334.
                                 -4-

       But it was Wypychowski who was the putative TMP, and as TMP

he filed a petition with us in April 2001, 168 days after the

FPAA had been mailed.    The Commissioner noticed the problem--a

TMP generally has at most 150 days to file a petition, secs.

6226(a)(90 days), 6226(b) (plus another 60 days as notice

partner, see Barbados #6 v. Commissioner, 85 T.C. 900, 904 (1985)

--and successfully moved to dismiss the case for lack of

jurisdiction.    After winning dismissal, the Commissioner assessed

Nehrlich for the deficiencies resulting from the disallowance of

the charitable deduction for the years 1995 and 1996.3   Nehrlich

did not pay, and the Commissioner followed up in September 2003

by sending a collection due process (CDP) notice of his intent to

levy and of the filing of a federal tax lien against Nehrlich’s

property.

       Nehrlich asked for and got a CDP hearing, after which the

Commissioner mailed him a notice of determination, concluding

that

       You have indicated that you have the ability to full pay
       [sic]; you just disagree with the TEFRA assessments. You
       are prohibited from raising the liability issue in your
       hearing as you received the FPAA, (TEFRA equivalent of a
       statutory notice of deficiency) and you had prior
       opportunity to challenge the liabilities.

       Nehrlich, a California resident at the time, filed a

petition with this Court, and we put the case on a trial calendar


C Nehrlich had carried over the charitable deduction to later
years. See sec. 170(d)(1).
                                -5-

for San Francisco.   The parties then submitted it for decision on

stipulated facts.

                            Discussion

     As a general rule, partnerships don’t pay taxes, and items

of a partnership’s income, deductions, and credits are supposed

to be reflected on its partners’ individual tax returns.    See

sec. 701.   Before TEFRA, the IRS adjusted these partnership items

after separately auditing each partner.   This easily led to

inconsistent adjustments, and TEFRA’s requirement that the

Commissioner conduct audits at the partnership level was supposed

to ensure the uniform adjustment of partnership items.     Maxwell

v. Commissioner, 87 T.C. 783, 787 (1986); H. Conf. Rept. 97-960,

at 599-600 (1982), 1982-2 C.V. 600, 662-63.   Though the

procedures are complicated, the desired result is easy to

understand--a final determination concerning a partnership item

that binds all the partners and treats them equally.   See sec.

6221; Maxwell, 87 T.C. at 787-88.

     TEFRA audits, with their sometimes arcane distinctions

between “partnership,” “affected,” and “nonpartnership” items,

can be burdensome, so Congress chose to keep the old audit rules

under which each partner resolves his tax liability with the IRS

separately, for “small partnerships.”    Tax Compliance Act of 1982

and Related Legislation: Hearings on H.R. 6300 Before the House

Committee on Ways and Means, 97th Cong., 2d Sess. 259-61 (1982).
                                 -6-

Until 1997, the consequences for the Commissioner of treating a

TEFRA partnership as a small partnership and a small partnership

as a TEFRA partnership could be severe:   If the Commissioner

incorrectly classified a partnership, this Court lacked

jurisdiction and had to dismiss the case.    Frazell v.

Commissioner, 88 T.C. 1405, 1411 (1987); Maxwell, 87 T.C. at 788-

89.   The Commissioner had the authority to correct his mistake

and issue the proper type of notice, but the statute of

limitations wasn't tolled by any procedural flubs and might

expire.   Sec. 6501(a).   This meant that a partner might go tax-

free by defeating a notice of deficiency with the argument that

the Commissioner should have sent him an FPAA, or defeating an

FPAA with the argument that the Commissioner should have sent him

a notice of deficiency.

      This problem has since been fixed,4 but the present case

arose from a tax year that ended before the fix took effect.     And

because this is a CDP appeal, it’s not our jurisdiction over

Nehrlich’s case that is in dispute--the notice of determination

is what gives that to us.   Secs. 6320(c), 6330(d)(1).    But

whether the Commissioner erred in upholding Nehrlich’s underlying

tax liability may well hinge on whether the Commissioner chose



      4
       Congress added section 6234 to the Code in 1997. Taxpayer
Relief Act of 1997, Pub. L. 105-34, sec. 1231(a), 111 Stat. 788,
1020. Section 6234(h) lets the Commissioner (and us) regard the
wrong type of notice as the right one.
                                 -7-

correctly in picking the TEFRA audit procedure for JTA.



       The reason for this is that Nehrlich’s challenge is a

challenge to the Commissioner’s authority to assess the increase

in tax caused by that disallowance.      He asserts that JTA was a

small partnership, so that the Commissioner’s application of

TEFRA audit procedures led to an invalid assessment and any later

collection efforts were therefore improper.      See Freije v.

Commissioner, 125 T.C. 14, 36 (2005) (collection actions related

to an invalid assessment may not proceed).

       This is not a bad technical argument, because the Code draws

the line between small and TEFRA partnerships in a somewhat odd

way:    TEFRA applies its audit procedures only to “partnership

items,” sec. 6221, which are defined to exist only with respect

to partnerships, sec. 6231(a)(3).      TEFRA then defines

“partnership” to exclude small partnerships, sec. 6231(a)(1)(B),

and this then excludes them from TEFRA procedures because a small

partnership would have only nonpartnership items, see sec.

6231(a)(4); Maxwell, 87 T.C. at 788.      The Commissioner can

generally challenge nonpartnership items only through the

deficiency process--as we said in Freije, the Commissioner’s

failure to show that a deduction’s disallowance fell within some

exception “to the proscription of section 6213(a) on assessments

without deficiency procedures is fatal.”      Freije, 125 T.C. at 35.
                                  -8-

     This argument, though, rests entirely on whether JTA met

TEFRA’s definition of a “small partnership.”    See sec.

6231(a)(1)(B).   For the 1995 tax year, this definition set two

tests.   The first was whether JTA had ten or fewer partners, each

of whom was a natural person or the estate of a dead partner.

Sec. 6231(a)(1)(B)(i)(I).     The Commissioner concedes JTA passed

this test.

     The second test for the 1995 tax year was whether JTA

allocated each item to each partner the same way.    This “same-

share” requirement meant, for example, that a one-third partner

had to get one-third of the partnership’s income and deductions;

if he got one-third of the income, but one-half of even one of

the deductions, the partnership would be subjected to TEFRA.5

Sec. 6231(a)(1)(B)(i)(II).    Nehrlich claims that the Commissioner

was wrong to flunk JTA on the same-share test.    He reasons that a

partnership’s “guaranteed payments”6 were not subject to the

same-share requirement, and that JTA’s health insurance premiums

were “guaranteed payments.”    Nehrlich is correct that guaranteed

payments are not one of the items used in a same-share analysis.

See sec. 301.6231(a)(1)-1T(a)(3), Temporary Proced. & Admin.



     5
       The same-share requirement was removed from section
6231(a)(1)(B)(i) by the Taxpayer Relief Act of 1997, Pub. L. 105-
34, sec. 1234(a), 111 Stat. 1024.
     6
       Guaranteed payments are payments made to a partner without
regard to the partnership's income. Sec. 707(c).
                                 -9-

Regs., 52 Fed. Reg. 6789 (Mar. 5, 1987); McKnight v.

Commissioner, 99 T.C. 180, 184-86 (1992), affd. 7 F.3d 447 (5th

Cir. 1993).    And the Commissioner agrees with him that the

$12,850 entry for health insurance premiums that JTA listed under

“guaranteed payments” would not have been enough to make JTA a

TEFRA partnership.

     But the Commissioner defends his determination by pointing

to the $12,850 deduction that JTA took under the heading “other

deductions.”    Under the old regulations, a partnership’s

deductions were generally subject to the same-share rule.      See

sec. 301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs.    Nehrlich

counters by arguing that health insurance premiums are always

“guaranteed payments,” no matter how they are listed on a

partnership return, and that the Commissioner should have

recognized the premiums as “guaranteed payments” before picking

which set of procedures to follow.7    The Commissioner’s failure

to spot JTA’s mistake in reporting the premiums as a deduction,

he concludes, led to the mistaken issuance of an FPAA instead of

a notice of deficiency, and so fatally undermined the assessment

against him.

     7
       Nehrlich mentions that the health insurance premiums are
affected items but he doesn’t argue the point with any
specificity. “Affected items” are those that are affected by
adjustments to partnership items, sec. 6231(a)(5), and we can’t
see how the Commissioner’s one partnership-level adjustment--
disallowing JTA’s charitable deduction--affected JTA’s health
insurance premiums.
                                -10-

     The standards for judging the Commissioner’s decision to

treat JTA as a TEFRA partnership were set by a pair of cases:

Z-Tron Computer Research & Dev. Program v. Commissioner, 91 T.C.

258, 262 (1988); and Harrell v. Commissioner, 91 T.C. 242, 246-48

(1988).   We held in both those cases that the Commissioner should

look only at the partnership return itself to analyze whether a

partnership meets the same-share test.     The test is passed if, on

the face of the return, (1) the partnership reported more than

one partnership item for the year, and (2) those items were

allocated to each partner in equal shares.      Harrell, 91 T.C. at

246; see sec. 6231(a)(1)(B)(i)(II).     We stressed in Harrell that

the Commissioner should not consult sources other than the return

that is in front of his examiner.      Harrell, 91 T.C. at 247.

Neither a partner nor the Commissioner can “claim a result other

than that identified in the return and Schedules K-1 as filed and

amended prior to the date of commencement of the partnership

audit.”   Id.   This bright-line test defeats parties’ later

attempts to secure an undue advantage after the statute of

limitations has run.    Id.

     A regulation told the Commissioner which items to look at in

applying the test.   Sec. 301.6231(a)(1)-1T(a)(3), Temporary

Proced. & Admin. Regs., 52 Fed. Reg. 6779 (Mar. 5, 1987).      One of

those items is a partnership “deduction,” sec. 301.6231(a)(3)-1

(a)(1)(i), Proced. & Admin. Regs., and so the Commissioner
                               -11-

properly looked at JTA’s “other deductions” category.    Comparing

JTA’s partnership return with the individual partners’ K-1s, the

Commissioner’s examiner could easily see that JTA had allocated

these “other deductions” on its 1995 return other than in equal

thirds.   Even though there was a high probability that JTA’s

reporting the premiums paid for the partners as both a deduction

and a guaranteed payment was a mistake, it wasn’t up to the

examiner to figure this out.   Under our rulings in Harrell and

Z-Tron, he should have done what he did--look only on the face of

the returns.

     We therefore hold that the Commissioner did apply the same-

share test correctly and JTA was a TEFRA partnership in 1995.

Nehrlich’s assault on the resulting assessment having failed, he

is liable for the tax and a

                                      Decision will be entered for

                               respondent.
