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Manroe v. Commissioner (T.C. Memo. 2020-16)

On January 22, 2020, the Tax Court issued a Memorandum Opinion in the case of Manroe v. Commissioner (T.C. Memo. 2020-16). The issue presented in Manroe was whether the Tax Court had jurisdiction over the partners to redetermine the penalties at issue in a partner-level proceeding.

Background

The case stems from a tax shelter transaction, in which the petitioners ultimately conceded that the partnership at issue was a sham, lacked economic purpose, and was formed solely for tax avoidance purposes. So, that’s the starting point.

The Tax Court sustained the 40% accuracy-related penalty for gross valuation misstatement under IRC § 6662(h). Subsequently the IRS issued statutory notices of deficiency (SNODs) to the petitioners determining deficiencies and accuracy-related penalties. Petitioners timely filed a petition for redetermination, in which the petitioners asserted that the IRS had made premature assessments of the deficiencies.

Jurisdiction

The Tax Court’s jurisdiction to redetermine a deficiency depends upon the issuance of a valid SNOD and a timely filed petition. Naftel v. Commissioner, 85 T.C. 527, 530 (1985); IRC § 6212; IRC § 6213(a); Tax Court Rule 13(a), (c). Assessment and collection of deficiencies may not occur unless and until a notice of deficiency is issued. IRC § 6213(a). The prohibition on assessment and collection extends during the time a petition may be filed, during the pendency of any proceeding actually brought, and until the decision of the Tax Court becomes final. Id. The Tax Court has jurisdiction to enjoin the assessment and the collection of a deficiency that the it has jurisdiction to redetermine. See, e.g., Powell v. Commissioner, 96 T.C. 707, 711 (1991).

Partnership Proceedings under TEFRA

During a TEFRA partnership audit, the IRS employs a two-step process for addressing partnership-related matters. The IRS first addresses adjustments to “partnership items” at the partnership-level. See IRC § 6221; IRC § 6231(a)(3); see also United States v. Woods, 571 U.S. 31, 39 (2013); Gunther v. Commissioner, T.C. Memo. 2019-6, *7-*8. Once the IRS finalizes the partnership-level adjustments to such partnership items, the IRS may then proceed to the partner level to “computationally” adjust individual partner’s liabilities resulting from the partnership-level adjustments. See Woods, 571 U.S. at 39; IRC § 6231(a)(6); Gunther, T.C. Memo. 2019-6 at *7-*8.

Computational adjustments to “affected items,” meaning partner-level items affected by changes to partnership-level adjustments, come in two flavors: ones that require partner-level determinations and ones that do not. Gunther, T.C. Memo. 2019-6 at *7-*8. If an affected item requires partner-level determinations, it is subject to the normal deficiency procedures under IRC § 6211 through IRC § 6216, including the issuance of a notice of deficiency to the partner before the assessment of any tax and the chance to seek prepayment review in this Court. Gunther, T.C. Memo. 2019-6 at *8-*9.

If an affected item does not require partner-level determinations, the normal deficiency procedures do not apply. See IRC § 6230(a)(1); IRC § 6239(a)(2)(A)(i). In that instance the IRS may immediately assess the resulting tax deficiency without first issuing a notice of deficiency. See Woods, 571 U.S. at 39. The partner against whom such an assessment is made may thereafter challenge the deficiency through a post-payment refund action or “to some extent” in a collection due process (CDP) proceeding. Id.; see also Davison v. Commissioner, T.C. Memo. 2019-26, *16.

Tax Court has Jurisdiction for Redetermination of Liabilities

In the present case, adjustments to the petitioners’ liabilities required factual determinations at the partner level, not the partnership level; therefore, deficiency procedures applied. Gunther, T.C. Memo. 2019-6 at *9-*10. Because the partnership in the present matter was a sham, and was, therefore, disregarded for Federal tax purposes, the petitioners were treated as holding the partnership’s assets directly. Therefore, the petitioners’ adjusted basis in the assets were properly determined under IRC § 1012(a). Keeter v. Commissioner, T.C. Memo. 2018-191, *13.

Original opinion: (T.C. Memo. 2020-16) Manroe v. Commissioner

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