                        T.C. Memo. 2007-81



                      UNITED STATES TAX COURT



    ROBERT J. GOLDBERG AND BRADLEY A. MORGAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7800-05.               Filed April 5, 2007.



     John O. Kent and Dennis N. Brager, for petitioners.

     S. Katy Lin, for respondent.



                        MEMORANDUM OPINION


     GOEKE, Judge:   This matter is before the Court on

respondent’s motion to dismiss for lack of jurisdiction.   At

issue is whether this Court has jurisdiction over items

respondent adjusted in the notice of deficiency relating to

Bradley A. Morgan’s (petitioner) investment in a partnership.   We

do not decide the issue with respect to the majority of the items
                               - 2 -

because of the uncertainty of whether TEFRA procedures in

sections 6221-6234 apply to those items.1   See Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, secs.

402-407(a), 96 Stat. 648.   However, we have jurisdiction over one

of the items adjusted regardless of whether TEFRA applies.

Therefore, respondent’s motion will be denied.

                            Background

     Petitioners are husband and wife.   Their residence at the

time of filing the petition was in Hermosa Beach, California.

Respondent issued a notice of deficiency for the taxable year

2001 to petitioners on January 27, 2005.    The deficiency notice

contained adjustments arising from petitioner’s interest in a

partnership called Alameda Investments, L.L.C. (Alameda).    On its

Form 1065, U.S. Return of Partnership Income, for 2001 Alameda

listed an ordinary loss of $12,279 from trade or business

activities.   On petitioner’s Schedule K-1, Partner’s Share of

Income, Credits, Deductions, etc., petitioner was identified as

the 99-percent owner of Alameda.   A separate Schedule K-1

identified Clarion Forex Advisors XV, LLC (Clarion Forex) as the

1-percent partner.   The Schedule K-1 for petitioner allocated to

her, as her distributive share, 100 percent of the partnership’s




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended.
                               - 3 -

loss of $12,279.2   Petitioners claimed the loss of $12,279 on

their Form 1040, U.S. Individual Income Tax Return, as well as a

loss of $1,657,609 based on a sale of securities distributed to

petitioner by Alameda.   In addition, petitioners claimed a

$125,000 deduction for legal, accounting, consulting, and

advisory fees.   Respondent issued a notice of final partnership

administrative adjustment (FPAA) for Alameda concurrently with

the notice of deficiency.   In the FPAA, respondent determined

that Alameda was a sham and that none of the deductions that the

partnership claimed on its partnership return were allowable.

The notice of deficiency issued to petitioners stated the

following:

     1.   The deduction of $12,279 shown on your 2001 tax
     return as your reported share of the loss purportedly
     sustained by Alameda Investments, LLC is disallowed
     because you have failed to establish (1) that the
     purported loss was sustained in any amount by either
     you or any entity in which you held an interest, (2)
     that the transaction purportedly generating the loss in
     question was entered into for profit within the meaning
     of I.R.C. section 165(c)(2), or (3) that any portion of
     the loss in question is allowable as a deduction under
     any other provision of the Internal Revenue Code. You
     have also failed to establish that, even if loss was
     sustained and would otherwise be deducible, any
     deduction relating to the loss is not specifically
     limited or disallowed by any provision of the Internal
     Revenue Code, including without limitation §§ 165, 212,
     704(d), or 465.



     2
      Although petitioner’s Schedule K-1, Partner’s Share of
Income, Credits, Deductions, etc., identifies her as the 99-
percent partner for part of the year, her share in the profits
and losses is listed as 100 percent.
                         - 4 -

2.   It is further determined that the loss deduction
claimed on your 2001 federal income tax return is
disallowed because Alameda Investments, LLC with
reference to which you determined basis in the
derivative security sold is a sham and should not be
recognized for federal income tax purposes.

3.    It is further determined that the deduction of
$1,657,609 claimed as a loss for the tax year 2001 is
disallowed because you have failed to establish the
basis in the partnership interest in Alameda
Investments, LLC was greater than zero. You have also
failed to establish the basis in the derivative
securities sold or disposed of was greater than zero
($0).

4.   It is further determined that the deduction for
the loss claimed is disallowed to the extent that the
provisions of Chapter 1, Subchapter K of the Internal
Revenue Code were used to calculate basis in the
Property sold. Alameda Investments, LLC was formed or
availed of in connection with a transaction or
transactions in taxable year 2001 a principal purpose
of which was to reduce substantially the present value
of your federal tax liability in a manner that is
inconsistent with the intent of Subchapter K of the
Internal Revenue Code. The manner in which you and
Alameda Investments, LLC accounted for the derivative
securities transaction in question violated the intent
of Subchapter K. Accordingly, the parties’ accounting
for the transaction should be adjusted, pursuant to the
authority contained in Treas. Reg. § 1.701-2, to
achieve results that are consistent with the intent of
Subchapter K by ignoring the existence of the
partnership, or treating transactions purportedly
engaged in by the partnership as engaged in directly by
the purported partners.

5.   It is further determined, in the alternative, that
the loss claimed on your 2001 federal income tax return
should be decreased to reflect the limitation on your
adjusted basis in your partnership interest resulting
from your contribution of your position(s) in the
securities transaction(s) to the partnership, pursuant
to Treas. Reg. § 1.752-6T.

6.   It is further determined, in the alternative, that the
loss claimed on your 2001 federal income tax return should
                               - 5 -

     be decreased in the amount of $1,657,609 to limit any loss
     incurred by you and the partnership in connection with the
     security transaction to the amount actually at risk in the
     transaction, pursuant to Internal Revenue Code §465(b)(4).

     7.   It is further determined that no deduction is
     allowed for any legal, accounting, consulting and
     advisory fees claimed in the amount of $125,000 since
     you failed to establish that such expenditures were
     incurred, and if incurred, are deductible under any
     provision of the Internal Revenue Code, including but
     not limited to Internal Revenue Code §§ 183 and 212.

      Alameda and petitioners filed separate petitions with this

Court.   Alameda’s petition was filed at docket No. 7810-05.   On

January 29, 2007, this Court entered a stipulated decision in the

case at docket No. 7810-05.

     Petitioners’ petition assigned error to all of the

determinations respondent made in his notice of deficiency.

Paragraph 4(g) of petitioners’ petition stated:

          The Commissioner erred in his determination that
     no deduction is allowed for any legal, accounting,
     consulting and advisory fees, claimed in the amount of
     $125,000, on the grounds that Petitioners failed to
     establish that such expenditures were incurred, and if
     incurred, are deductible under any provision of the
     Internal Revenue Code.

     On September 14, 2006, respondent moved to dismiss the case

herein for lack of jurisdiction upon the ground that the notice

of deficiency was invalid under section 6225.   On November 3,

2006, petitioners notified the Court that they did not object to

respondent’s motion.   On November 14, 2006, the Court issued an

order to the parties requesting responses, via a written status

report, to the following:   (1) Why Alameda does not fall under
                               - 6 -

the small partnership exception of section 6231(a)(1)(B)(i); and

(2) the parties’ positions regarding the Court’s jurisdiction

over the losses petitioners claimed on their returns and the

deduction petitioners claimed for legal, accounting, consulting,

and advisory fees.   In their separate status reports, the parties

responded:   (1) One of the partners in Alameda is Clarion Forex,

which is a disregarded entity and therefore disqualifies Alameda

from the small partnership exception; and (2) the Court does not

have jurisdiction over the losses or the deductions petitioners

claimed on their return because those losses flow directly from

partnership items, and since the partnership items had not yet

been determined at the partnership level when respondent issued

the notice of deficiency, this Court does not have jurisdiction

over any of the items in the notice.     In addition, petitioners

conceded that they were not allowed a deduction for legal,

accounting, consulting, and advisory fees.

                            Discussion

Applicability of TEFRA

     TEFRA provisions divide disputes arising from “partnership

items” from those arising from “nonpartnership items”.     Maxwell

v. Commissioner, 87 T.C. 783, 787 (1986).     Section 6231(a)(3)

provides:

          (3) Partnership item.--* * * 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
                                - 7 -

     the Secretary provide that, for purposes of this
     subtitle, such item is more appropriately determined at
     the partnership level than at the partner level.

If the tax treatment of a partnership item is at issue, the

statute generally requires the matter to be resolved at the

partnership level.   Sec. 6221; Maxwell v. Commissioner, supra at

787-788.   Further, deficiencies attributable to “affected items”

may not be assessed until the related partnership proceeding is

completed.    See sec. 6225(a); GAF Corp. & Subs. v. Commissioner,

114 T.C. 519, 525 (2000).   An affected item is “any item to the

extent such item is affected by a partnership item.”   Sec.

6231(a)(5).   An affected item is peculiar to a partner’s own tax

posture.   Maxwell v. Commissioner, supra at 790.

     Respondent asserts that all the adjustments in the notice of

deficiency consist of affected items that depend on partnership-

level determinations.   Respondent asserts that the adjustments in

the notice of deficiency relating to petitioners’ share of the

partnership loss is a partnership item under section

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

further argues that adjustment for the amount of loss petitioners

sustained for their sale of securities depends on a determination

of petitioners’ basis in Alameda, which petitioners used to

compute their basis in the securities under section 732(b).

Under section 301.6231(a)(5)-1(b), Proced. & Admin. Regs., the

basis of a partner’s interest in a partnership is an affected
                                 - 8 -

item to the extent it is not a partnership item.    A partner

generally may not compute his affected items before a related

partnership-level proceeding is completed.     Dial USA, Inc. v.

Commissioner, 95 T.C. 1 (1990).    We lack jurisdiction over

affected items in a notice of deficiency that was issued before

the completion of the related TEFRA partnership proceedings.       GAF

v. Commissioner, supra at 525.    Since respondent issued the

notice of deficiency before the decision in the related TEFRA

proceeding was entered, respondent concludes that we do not have

jurisdiction.

     We do not have sufficient information to determine whether

we have jurisdiction over the above-described items.    The record

does not give us enough information to determine whether TEFRA

applies.   The Schedules K-1 show that petitioner and Clarion

Forex were listed as partners of Alameda.    However, since there

are fewer than five partners of Alameda, the small-partnership

exception to TEFRA under section 6231(a)(1)(B) may apply.

     Section 6231(a)(1)(B) excepts certain small partnerships

from TEFRA procedures.   If TEFRA procedures do not apply, they do

not restrict the Commissioner from determining deficiencies in

the income tax of partners.   Section 6231(a)(1)(B) provides:

     (B) Exception for small partnerships.--

          (i) In general.--The term “partnership” shall not
     include any partnership having 10 or fewer partners
     each of whom is an individual (other than a nonresident
                                 - 9 -

     alien), a C corporation, or an estate of a deceased
     partner. For purposes of the preceding sentence, a
     husband and wife (and their estates) shall be treated
     as 1 partner.

          (ii) Election to have subchapter apply.--A
     partnership (within the meaning of subparagraph (A))
     may for any taxable year elect to have clause (i) not
     apply. Such election shall apply for such taxable year
     and all subsequent taxable years unless revoked with
     the consent of the Secretary.

     Respondent claims that Clarion Forex disqualifies Alameda

from the small partnership exception because it is a disregarded

entity under section 301.7701-3(b)(1)(ii), Proced. & Admin Regs.

Respondent takes the position that a disregarded entity is a

pass-through partner as defined in section 6231(a)(9).3   See Rev.

Rul. 2004-88, 2004-2 C.B. 165.    The small partnership exception

is not applicable where any partner in the partnership is a

“pass-through partner”.   See sec. 301.6231(a)(1)-1(a)(2), Proced.

& Admin. Regs.   However, neither of the parties identified to

whom the interest in Clarion Forex passes through.   Nor do we

have sufficient evidence of Clarion Forex’s status as a

disregarded entity.   Therefore, we specifically do not determine

whether TEFRA applies to the adjustments.

     However, with respect to the adjustments relating to the

deduction for legal, accounting, consulting, and advisory fees,


     3
      Sec. 6231(a)(9) provides that “The term ‘pass-thru partner’
means a partnership, estate, trust, S corporation, nominee, or
other similar person through whom other persons hold an interest
in the partnership with respect to which proceedings under this
subchapter are conducted.”
                                - 10 -

we retain jurisdiction regardless of whether TEFRA applies.

Paragraph 4(g) of the petition assigned error to the adjustment

in paragraph 7 of the explanation of items in the notice of

deficiency denying petitioners a deduction under section 183 or

section 212 for any legal, accounting, consulting, and advisory

fees for the taxable year 2001.     These items are neither

partnership items nor affected items.     They were claimed by

petitioners on their individual return, not by the partnership on

its partnership return.

     Respondent contends that the items referred to in paragraph

4(g) of petitioners’ petition are affected items.     Respondent

reasons that the deduction was disallowed because Alameda and the

partnership transaction at issue were shams, and that the

determination of whether a partnership is a sham is a partnership

item.     Respondent cites River City Ranches #1 Ltd. v.

Commissioner, 401 F.3d 1136, 1144 (9th Cir. 2005), affg. in part

and revg. in part T.C. Memo. 2003-150, and Andantech L.L.C. v.

Commissioner, 331 F.3d 972, 981 (D.C. Cir. 2003), affg. in part

and remanding T.C. Memo. 2002-97, to support his assertion.

        We find that River City Ranches, which dealt with the

penalty-interest provision of section 6621(c), is

distinguishable.     The issue of whether the partnership’s

transactions were shams directly affected the penalty-interest

issue.     In this case, even if the Court were to determine that
                               - 11 -

the partnership or the transaction the partnership engaged in was

a sham, that would not necessarily mean petitioners are not

entitled to an individual deduction for legal, accounting,

consulting, and advisory fees.    Further, Andantech is

inapplicable because neither this Court nor the Court of Appeals

for the D.C. Circuit resolved the issue of whether a partner’s

individual deductions would be classified as a partnership item

or an affected item in the event that the transaction at issue

were declared to be a sham.

     We find that even if the partnership is a sham, we still

retain jurisdiction over the deduction for legal, accounting,

consulting, and advisory fees.    The result would be the same even

if TEFRA applied to the partnership.    The notice of deficiency

disallows the deduction at the individual level.    Petitioners

claimed the deduction on their individual return.    The deduction

was not claimed on the partnership return nor claimed by

petitioners as their distributive share of any deduction on the

partnership return.    The disallowance of the deduction at the

individual level did not flow from a deduction disallowed at the

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

individual level necessarily affected by a determination at the

partnership level.    Petitioners concede that they are not

entitled to the deduction for the items to which paragraph 4(g)

of the petition refers.    It is irrelevant whether petitioners
                             - 12 -

concede that they are not entitled to the disputed deduction.

Such a concession does not deprive us of jurisdiction.    See LTV

Corp. v. Commissioner, 64 T.C. 589, 591 (1975).

     Thus, we conclude that we do have jurisdiction to

redetermine petitioners’ deduction for legal, accounting,

consulting, and advisory fees.    Therefore, respondent’s motion to

dismiss for lack of jurisdiction will be denied.

     To reflect the foregoing,


                                      An appropriate order will be

                                 issued.
