In Uncategorized on 12/28/2011 at 15:50

Oliver Wendell Holmes, Jr., was known as “The Great Dissenter” on the US Supreme Court a hundred years ago. His intellectual descendant, Mark V. Holmes, the judge who writes like a person, has written a fine dissent in Randall J. and Karen G. Thompson, 137 T. C. 17, filed 12/27/11.

This is a son-of-BOSS phony partnership that was blown up six years ago, with decided cases sinking Randy. So Randy is precluded from fighting over business purpose, economic substance, or whether he owes IRS telephone numbers in tax, interest, and penalties. Even though Tax Court may have gotten its subject matter jurisdiction wrong back then, Randy never appealed, so he’s stuck with Tax Court’s determinations, even though there are later cases that went his way.

For a quick refresher on issue preclusion and claim preclusion, a/k/a collateral estoppel, see Judge Wherry’s lengthy footnotes numbers 22 and 23, at 137 T.C. 17, pp. 32-33.

The question here is Tax Court’s jurisdiction over affected items, that is individual partners’ tax items that follow from partnership items, but aren’t themselves partnership items. Once the partnership-level adjustment becomes final, TEFRA gives IRS the power to assess these directly to the partner without the need for a SNOD, if they are merely computational, so as not to waste time sending out SNODs for simple arithmetic problems.

IRS issued Randy a SNOD anyway as well as an assessment, since IRS Chief Counsel wanted belt-suspenders-and-crazy-glue, because no one could tell what was or was not a merely computational affected item.

IRS got the numbers wrong in Randy’s SNOD but corrected them. Anyway, says IRS, Randy’s items are merely computational, no partner-level fiddling is needed, so Tax Court has no subject matter jurisdiction. And IRS’ math errors are not “determinations”, so they don’t trigger Tax Court jurisdiction.

The majority, per Judge Wherry, holds that way, and throws out Randy’s petition.  Judge Wherry writes the brief that IRS should have written but didn’t, in 36 pages, and Judges Colvin, Halpern, Vasquez, Thornton, and Paris agree.

Judges Morrison and Gustafson wisely sat this dance out.

Judge Cohen concurs in result only without separate opinion, but Judge Goeke dissents, and Judge Kroupa agrees. The fact that the majority took 36 pages to decide they had no jurisdiction means that each case has to be weighed, says Judge Kroupa. The fact that the SNOD numbers were wrong doesn’t, as the majority claim, invalidate the SNOD. IRS did decide something, there was a determination, so Randy can go to Tax Court, even though he will be thrown out based on his prior unappealed Tax Court losses.

Now for Judge Holmes. He agrees that Randy can’t argue that he had outside basis or that he doesn’t owe the 40% substantial understatement penalty, because he lost on those and never appealed. But Judge Holmes challenges the majority’s analysis of whether an affected item requires partner level determinations. It’s the analysis that troubles Judge Holmes.

A computational adjustment is just the bottom-line change on the partner’s return caused by the change at partnership level. But there are two baskets into which these adjustments can fall. Judge Holmes: “Sometimes the IRS has to send each partner a notice of deficiency, sometimes the IRS can just directly assess each partner and send him a notice of computational adjustment, and sometimes the IRS has to do some combination of both. See sec. 6230(a); sec. 301.6231(a)(6)-1(a), Proced. & Admin. Regs.; see also Napoliello v. Commissioner, 655 F.3d 1060, 1063-1064 (9th Cir. 2011) (citing Olson v. United States, 172 F.3d 1311, 1317 (Fed. Cir. 1999)), affg. T.C. Memo. 2009-104.” 137 T.C. 17, at p. 43.

If the change at partner level arising from the affected item requires a determination at partner level, then the deficiency procedure must be followed. If the only change at partner level is a math item coming from the change at partnership level, then straight to assessment, no SNOD. Incidentally, partner gets no ticket to Tax Court with the concomitant stay of collection.

Once again, Judge Holmes says it in a footnote: IRS could clear this up in the abusive shelter area by creating a single-track deficiency procedure, where both partnership and partners are in it together. 137, T.C. 17, at p. 44, footnote 3. Cf. poor old Beverly Bernice Bang, 2011 T.C. Sum Op. 1, filed 1/4/11, and my blogpost “Bang-A Warning to Tax Matters Partners (and their advisors)”, 1/5/11. If Bev could have bailed on the jojoba deal for $2700 and avoided the $32,000 assessed against her twenty-two years later, I can’t think why she wouldn’t have done so. But back to Randy.

The majority says, it’s all math, so straight to assessment. Judge Holmes says, I’ll concede three of the four items IRS changed on Randy’s return are math, but number four, knocking out his loss on liquidation of the partnership, doesn’t even appear on the 1065.

That’s a paraphrase; now in his own words: “The majority says that we can go ahead and eliminate it anyway because we decided… that the partnership was a sham, and no one can take a loss in disposing of an interest in a sham partnership. I don’t disagree. But it doesn’t quite answer the jurisdictional question that we have– does a taxpayer get to come to our Court to learn this lesson, or does he have to go to a refund court to hear the same bad news?” 137 T.C. 17, at p. 46 (footnote omitted).

More to the point, can Randy use Tax Court’s stay of collection to try to stash his cash before the IRS descends upon him and his?

Judge Holmes goes on. Eliminating Randy’s outside basis doesn’t get the right tax, because the loss Randy claimed took into account the cash he got for supposedly selling his partnership interest on liquidation. IRS disallowed a loss greater than what Randy claimed, because IRS skipped a step; IRS didn’t merely get the math wrong, they got the formula wrong. So it’s not just a math error, or a pure math computation.

The issue, briefly, is whether the partner adjustment is a “work it out with a calculator” adjustment flowing from the partnership adjustment, or whether there’s a legal question involved. Reg. Section 301.6231(a)(6)-1(a)(2) gives examples of mere math adjustments, like changes in threshold for medical deductions based upon AGI where the partnership adjustment gives the partner more gross income, and thus a higher AGI, which involves nothing more than simple arithmetic.

But Judge Holmes finds there’s a legal question here: outside basis, that forms no part of a partnership return. And there was a determination– collateral estoppel operates to keep Randy from fighting the issue again.

Another point. “I also think that it’s important to consider, when thinking about whether a computational adjustment requires partner-level determinations, whether a partner had the opportunity at the partnership level to dispute all issues of law and fact that will affect the computational adjustment. Otherwise we may see cases like the Thompsons’ again in a collection due process proceeding.” 137 T.C. 17, at pp. 56-57. (citations and footnotes omitted).

Again, for Randy it doesn’t matter; he had his chance, and he blew it. But the “thick line” Congress drew between partnership adjustments and partner adjustments not involving partnership matters is blurred here by the majority, says Judge Holmes, and “(T)he silt we stir today will cloud the cases we plunge into tomorrow.” 137 T. C. 17, at p. 61.

Can’t say it better than that.

  1. […] his dissent in Randall J. and Karen G. Thompson, 137 T. C. 17, filed 12/27/11 (see my blogpost “The Great Dissenter”, 12/28/11), Judge Holmes takes on Judge Beghe, who writes the Tigers Eye […]


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