Bausch & Lomb Incorporated and Consolidated Subsidiaries, Petitioner

JMP T.C. Memo. 2012-15 UNITED STATES TAX COURT BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 20664-10.

Filed January 17, 2012.

Roger J. Jones, Kim Marie K. Boylan, and Andrew R. Roberson, for petitioner.

Daniel Allen Rosen, for respondent.

MEMORANDUM OPINION

CHIECHI, Judge: This case is before the Court on respon- dent's motion to dismiss (respondent's motion).

The Court will grant respondent's motion.

SERVED Jan 17 2012 Background The record establishes and/or the parties do not dispute the following.

Petitioner is a corporation with its principal place of business in Rochester, New York.

In December 1993, petitioner engaged in a financing transac- tion (transaction) that involved the formation of Wilmington Partners L.P.

(Wilmington), an entity subject to the provisions of sections 6221-6234.1 As part of the transaction, Bausch & Lomb International Holdings Corp.

(BLIHC), a member of peti- tioner's consolidated Federal.income.tax (tax) return group, contributed a note (the 1993 reset note) to Wilmington in ex- change for a partnership interest.

BLIHC claimed a basis of $550,000,000 in the 1993 reset note, which was equal to the face value of that note.

In 1999, BLIHC sold a portion of its partnership interest in Wilmington to an unrelated party for $199,137,637 in cash.

In its consolidated tax return for 1999 (1999 consolidated return), petitioner reported (1) a long-term capital loss of $347,910,187 from that sale and (2) a net capital loss of $143,849,923.

Petitioner carried that net capital loss (1) back to its taxable year 1998 and (2) forward to its taxable year 2001 and certain 1All section references are to the Internal Revenue Code in effect at all relevant times.

subsequent taxable years, including 2005, the taxable year at issue in this case.

In 2004, respondent began an administrative proceeding with respect to Wilmington for its taxable year ended June 4, 1999 (1999-1) ·and its taxable year ended December 25, 1999 (1999-2).

On May 12, 2006, respondent issued a notice of final partnership administrative adjustment with respect to Wilmington for its taxable years 1999-1 and 1999-2 (1999-1 and 1999-2 FPAA).

In the 1999-1 and 1999-2 FPAA, respondent made, inter alia, the following adjustment:

A. Basis in Reset Note contributed by B&L Inter- It is determined that the national Holdings Corp.: note contributed by Bausch & Lomb International Hold- ings Corporation to Wilmington Partners L.P. on or about December 23, 1993 in the amount of $550,000,000 had a basis of zero at * Accordingly, * Lomb International Holdings Corporation has no basis for the tax years ended June 4, 1999 [1999-1] and December 25, 1999 [1999-2].

its contribution. the note contributed by Bausch & the time of * On August 7, 2006, the tax matters partner of Wilmington filed a petition with the Court, thereby commencing the case at docket No. 15098-06 with respect to the 1999-1 and 1999-2 FPAA (Wilmington Partners case).

On June 21, 2007, the Commissioner of Internal Revenue (Commissioner) issued to Bausch & Lomb Incorporated and Consoli- dated Subsidiaries (Bausch & Lomb) a notice of deficiency (no- tice) with respect to its taxable years 1998 through 2001 (1998- 2001 notice).

On September 14, 2007, Bausch & Lomb filed a petition with the Court, thereby commencing the case at docket No. 20958-07 with respect to the 1998-2001 notice (Bausch & Lomb I).

On Apfil 14, 2008, the Commissioner issued to Bausch & Lomb a notice of deficiency with respect to its taxable years 2002 through 2004 (2002-2004 notice).

In Bausch & Lomb I, the Commissioner filed a motion to dismiss that case for lack of jurisdiction.

On April 30, 2008, the Court granted that motion in an unpublished order (April 30, 2008 Order of dismissal for lack of jurisdiction in Bausch & Lomb I).

In doing so, the Court held that the 1998-2001 notice was "invalid be|cause the * * * [Wilmington Partners case] has not concluded."

On July 11, 2008, Bausch & Lomb filed a petition with the Court, thereby commencing the case at docket No. 17108-08 with respect to the 2002-2004 notice (Bausch & Lomb II).

On July 28, 2008, Bausch & Lomb filed an appeal in the U.S.

Court of Appeals for the Second Circuit from the Court's April 30, 2008 Order of dismissal for lack of jurisdiction in Bausch & Lomb I.

In Bausch & Lomb II, the Commissioner filed a motion to dismiss that case for lack of jurisdiction.

On May 21, 2009, the Court issued a Memorandum Opinion, Bausch & Lomb Inc. v. Commis- sioner, T.C;. Memo. 2009-112, and on May 22, 2009, entered an Order of dismissal for lack of jurisdiction (Order of dismissal for lack of jurisdiction in Bausch & Lomb II) granting the Commissioner's motion to dismiss for lack of jurisdiction and dismissing Bausch & Lomb II.

In that Memorandum Opinion, the Court held that the 2002-2004 notice was invalid because "respon- dent improperly issued the [2002-2004] deficiency notice deter- mining petitioner's deficiencies and penalties related to BLIHC's basis in the 1993 Reset Note before the decision of this Court has become final" in the Wilmington Partners case.

Id.

On June 11, 2009, Bausch &.Lomb filed an appeal in the Court of Appeals for the Second Circuit from the Court's Order of dismissal for lack of jurisdiction in Bausch & Lomb II.

On October 21, 2009, the Court issued an Order in the Wilmington Partners case, in which the Court ordered, inter alia, the Commissioner to show cause why the Court should not enter a decision barring the Commissioner from assessing any tax relating to the adjustments in the 1999-1 and 1999-2 FPAA.

On May 28, 2010, the Court issued an Order and Decision (May 28, 2010 Order and Decision) in the Wilmington Partners case.

In that Order and Decision, the Court concluded, inter alia:

The appropriate basis to use in measuring the claimed loss and any related carryforwards is Wilmington's A decision as 1999-2 basis in the [1993] Reset Note. to Wilmington's 1999-1 basis in the [1993] Reset Note would not affect the disposition of this case.

* * * In the May 28, 2010 Order and Decision, the Court:

ORDERED AND DECIDED that the adjustments set forth in the Notice of Final Partnership Administrative Adjustment mailed May 12, 2006 [1999-1 and 1999-2 FPAA], (1999-2), are barred as a result of the applicable limitations period.

regarding the tax year ending December 25, 1999 the expiration of [and] * * * ORDERED AND DECIDED that respondent's 1999-1 to Wilmington's basis in the [1993] Reset adjustment Note leads to no adjustment deduction, or credit of Wilmington for the tax year ending June 4, 1999 (1999-1).

in the income, gain, loss, On July 1, 2010, respondent issued to petitioner a notice of deficiency with respect to its taxable year 2005 (2005 notice), the year at issue in this case.

In that notice, respondent determined, inter alia, to disallow a long-term capital loss that is attributable to a carryforward of the capital loss that petitioner had claimed in its 1999 consolidated return (discussed above) as the result of BLIHC's sale of its partnership interest in Wilmington.

In the 2005 notice, respondent also determined a deficiency in, and an accuracy-related penalty under section 6662(a) on, petitioner's tax for its taxable year 2005 of $5,659,905 and $2,263,962, respectively.

On September 16, 2010, petitioner filed a petition with the Court, thereby commencing the instant case with respect to the 2005 noticei.

In the petition, petitioner alleged that respondent made, inter alia, the following errors in the 2005 notice:

(a) Adiustments to Income.

(i) The Commissioner erred in continuing to rely on erroneous determinations made in Notices of Defi- ciency issued to Petitioner for its 1998-2001 tax years (the "1998-2001 Notice") and its 2002-2004 tax years (the "2000-2004 Notice").

(ii) The Commissioner erred in determining that loss resulting from the 1999 sale by B&L the capital International Holdings Corp. limited partnership interest in Wilmington Partners L.P.

("Wilmington") was not properly determined.

("BLIHC") of its Class A The Commissioner further erred in determin- (iii) in Petitioner's 1999 tax year, ing, amount of $550,000,000 contributed by BLIHC to Wilmington in 1993 (the "1993 Reset Note") had a basis of zero at that a note in the its contribution.

the time of * * * (vi) As a result of the errors described * the Commissioner erroneously reduced, above, tioner's 1999 tax year, BLIHC's 1993 basis in its partnership interest in Wilmington from $550,000,025 to $25 and correspondingly reduced BLIHC's basis in the Class A limited partnership interest it sold in 1999 to $59,828,384.

* * in Peti- * (vii) As a result of * the Commissioner erroneously determined that above, long-term capital Petitioner on the 1999 sale of BLIHC's Class A limited partnership interest in Wilmington was a long-term capital gain of $139,309,253.

loss of $347,910,187 reported by the errors described * * the (viii) As a result of the errors described * * * the Commissioner erroneously determined that above, Petitioner is not entitled to carryover a capital from its 2000 tax year to its 2005 tax year.

loss In the petition, petitioner also alleged the following:

(d) Affirmative Defenses.

(i) All of the Commissioner's determinations in· the 2005 Notice relate to partnership items of Wilmington or affected items of Petitioner related to such partnership items. The Commissioner's determina- tions relating to BLIHC's basis in the Class A limited partnership interest it sold in 1999 are attributable to a partnership item for Wilmington's 1993 tax year.

(ii) The Commissioner is barred from assessing for 2005 any tax attributable to partnership items of Wilmington in Wilmington's tax years ended December 30, 1993 ("1993"), June 4, 1999 ("1999-1"), and December 25, 1999 ("1999-2") because the applicable periods of limitations for assess1ng any tax attributable to any such partnership items, expired with respect issued the 2005 Notice.

including any additions to tax, to 2005 before the Commissioner (iii) The Commissioner has issued no Notice of to Wilmington with respect Final Partnership Administrative Adjustments [sic] ("FPAA") year adjusting the basis of time of treatment of all partnership items for Wilmington's 1993 tax year is final and binding and no adjustment can be made to BLIHC's basis in the Class A limited partnership interest it sold in 1999.

its contribution in 1993. Accordingly, the 1993 Reset Note at to its 1993 tax the the tax (iv) The Commissioner issued a "No Adjustments Letter" to Wilmington stating that no adjustments would be made to Wilmington's 1993 Form 1065, U.S. Partner- ship Return of of all partnership items for Wilmington's 1993 tax year is final and binding and no adjustment can be made to BLIHC's basis in the Class A limited partnership inter- est it sold in 1999.

Income. Accordingly, the tax treatment (v) The Commissioner is estopped from making the adjustments in the 2005 Notice because he previously examin'ed the taxable year 1993 for Wilmington and Petitioner and made representations that he agreed that the basis of the time of relied on the Commissioner's representations, and the Commissioner has now attempted to change his original position.

its contribution, Wilmington and Petitioner the 1993 Reset Note was $550 million at (vi) The Commissioner is precluded from adjusting BLIHC's basis in the Class A limited partnership inter- est it sold in 1999 based on his litigating position in other cases and his duty of consistency'to similarly situated taxpayers.

On October 5, 2010, the Commissioner filed an appeal in the Court of Appeals for the Second Circuit with respect to the May 28, 2010 Order and Decision entered in the Wilmington Partners case.

That appeal is currently pending.

On November 19, 2010, respondent filed respondent's motion in this case.

In that motion, respondent asks the Court to dismiss this case on one of the following two alternative grounds:

(1) Under the Court's precedent, the Court does not have jurisdiction over this case because the notice of deficiency that respondent issued to petitioner for its taxable year 2005 is invalid, and (2) this case is "not ripe for adjudication".

On December 20, 2010, the Court of Appeals for the Second Circuit dismissed Bausch & Lomb's respective appeals in Bausch & Lomb I and Bausch & Lomb II in an unpublished opinion, in which it held that Bausch & Lomb had not suffered any "concrete and particularized" harm from the respective dismissals of those cases for lack of jurisdiction.

Bausch & Lomb Inc. v. Commis- sioner, 410 Fed. Appx. 367, 369-371 (2d Cir. 2010).

Discussion The Court's jurisdiction to redetermine a deficiency in tax depends upon a valid notice of deficiency and a timely filed petition.

Sec. 6213; GAF Corp. & Subs. v. Commissioner, 114 T.C.

519, 521 (2000).

In order to determine whether the Court has jurisdiction to redetermine the partner-level deficiency and the accuracy-related penalty in this case, the Court will address the parties' disagreement over whether the 2005 notice is valid.

It is respondent's position that, under the Court's prece- dent, see, e.g., GAF Corp. & Subs. v. Commissioner, supra, the Court does not have jurisdiction over the instant case.² In support of that position, respondent argues that the May 28, 2010 Order and Decision in the Wilmington Partners case is currently on appeal in the Court of Appeals for the Second Circuit, the 2005 notice is invalid, and this case should be dismissed for lack of jurisdiction under the Court's precedent.

It is petitioner's position that the 2005 notice is valid because "the Court has now determined [in the May 28, 2010 Order and Decision in the Wilmington Partners case] that Wilmington Partners is not the 'related partnership proceeding.'"3 Peti- 2In contrast. to the Commissioner's position before the Court the Court did not In the appeals by Bausch & Lomb of respondent argues here that, it does not have jurisdiction over in Bausch & Lomb I and Bausch & Lomb II that have jurisdiction over those cases, under the Court's precedent, the instant case. respective Orders of dismissal for lack of & Lomb I and Bausch & Lomb II, the Commissioner argued that the "Tax Court had jurisdiction over I.R.C. §§ 6213, 6214, and 7442, and it erred in concluding otherwise." that "the cases [Bausch & Lomb I and Bausch & Lomb II] were [nonetheless] properly dismissed because the claims for relief therein were not ripe for adjudication."

the Court's jurisdiction in Bausch it was the Commissioner's position [those] actions pursuant In those appeals, to 3Petitioner mischaracterizes what the Court decided in the Wilmington Partners case.

In its May 28, 2010 Order and Decision (continued...)

tioner appears to be restating in this case the argument that it advanced in Bausch & Lomb I and Bausch & Lomb II that respondent adjusted its basis in the 1993 reset note for the wrong year.⁴ The Court rejected that argument in Bausch & Lomb I and Bausch & Lomb II, and the Court.rejects it here.

In the April 30, 2008 Order of dismissal for lack of juris- diction in Bausch & Lomb I, the Court addressed Bausch & Lomb's argument that the Commissioner adjusted its basis in the 1993 reset note for the wrong year.

It stated:

3(...continued) in that case, the Court:

..

ORDERED AND DECIDED that the adjustments set forth in the Notice of Final Partnership Administrative Adjustment mailed May 12, 2006 [1999-1 and.1999-2 FPAA], (1999-2), are barred as a result of the applicable limitations period.

regarding the tax year ending December 25, 1999 the expiration of [and] * * * ORDERED AND DECIDED that respondent's 1999-1 to Wilmington's basis in the [1993] Reset adjustment Note leads to no adjustment deduction, or credit of Wilmington for the tax year ending June 4, 1999 (1999-1).

in the income, gain, loss, 4In Bausch & Lomb I and Bausch & Lomb II, Bausch & Lomb the related argued that the Wilmington Partners case was not partnership proceeding because: Note was a partnership item only in the year of contribution, 1993, and, years; i.e. 1999-1 and 1999-2." Bausch & Lomb Inc. v. Commis- sioner, T.C. Memo. 2009-112. Therefore, according to Bausch & Lomb in Bausch & Lomb I and Bausch & Lomb II, the 1998-2001 notice and the 2002-2004 notice involved in those respective cases were valid and the Court had "jurisdiction because no FPAA was issued for the year of contribution."

respondent adjusted the basis in the wrong "BLIHC's basis in the 1993 Reset therefore, Id.

-'12 - Petitioner's argument is misplaced.

The.[1999-1 the 1993 Reset the time BLIHC contributed it flow from this determination in the [1999-1 and 1999-2] FPAA issued to Wilmington contains adjust- ments relating to the determination that Note had a zero basis at to Wilmington.. The adjustments in the deficiency notice all respondent's determina- and 1999-2] FPAA. Accordingly, tion concerning the note's basis is a partnership item and cannot be litigated in this proceeding. The af- fected items in the deficiency notice that depend on the résolution of this partnership item also cannot be litigated now but must wait until partnership-level proceeding. partnership item was adjusted in an improper year must be made in the partnership-level proceeding, not at partner level. Such an argument does not give us jurisdiction to determine a partnership item in a partner-level case.

[Citations omitted.]

the conclusion of Any argument that a the the In the April 30, 2008 Order of dismissal for lack of juris- diction in Bausch & Lomb I, the Court concluded "that the defi- ciency notice issued to petitioner is invalid because the partnership-level proceeding at docket no. 15098-06 [the Wilmington Partners case] has not concluded."

Implicit in that conclusion is that the Wilmington Partners case was the related partnership proceeding.

In Bausch & Lomb II, Bausch & Lomb Inc. v. Commissioner, T.C. Memo. 2009-112, the Court also addressed Bausch & Lomb's argument that the Commissioner adjusted its basis in the 1993 reset note for the wrong year.

It stated:

.

Petitioner acknowledges that the Wilmington part- nership proceeding is pending and that the deficiency notice contains adjustments to partnership items and affected items related to BLIHC's basis in the 1993 Reset Note. Petitioner argues, however, basis in the 1993 Reset Note was a partnership item only in the year of contribution, 1993, and, that BLIHC's therefore, respondent adjusted the basis in the wrong years; i.e. 1999-1 and 1999-2. Petitioner further argues that the deficiency notice is valid and we have jurisdiction because no FPAA was issued for the year of contribu- tion. Petitioner attempts to make a back-door argument that the Court, deficiency notice, answer the substantive question of whether respondent adjusted BLIHC's basis in the 1993 Reset'Note in the wrong year or years.

is required at the partner level in determining the validity of We disagree.

the to (cid:16)042 * * * * * A partner's basis in contributed property is a partnership item when the partnership needs to make a determination with respect to the partner's basis for purposes of its books and records, or for purposes of furnishing information to a partner. element mination with respect to the partner's basis for. the purposes stated, and the partnership's failure to actually make a determination does not prevent an item from being a partnership item.

the partnership needs to make a deter- The critical is that Petitioner provides no authority for the argument that a partner's basis in contributed property is a partnership item only in the year of contribution, and we find none. Partnership items are defined to include a partner's basis in contributed property when a part- nership must account for the partnership's basis in the contributed property for purposes of records, or for purposes of partner. Accordingly, able only at the partnership was required to make a determination with respect to BLIHC's basis in the 1993 Reset Note for these purposes.

the necessary facts are avail- furnishing information to a the partnership level to determine whether its books and * * Here, the related Wilmington partnership proceed- * ing is ongoing, and there Wilmington's TMP [tax matters partner] adjusted BLIHC's basis in the 1993 Reset Note. in the wrong years.

is making the argument that the Commissioner * * * .

* * * *.

Petitioner's substantive argument that BLIHC's basis in the 1993 Reset Note was adjusted in an im- proper year does not provide jurisdiction, where none exists, to determine a partnership item in a partner- level case. This Court may exercise jurisdiction only to the extent expressly provided by statute, and it may not enlarge upon that statutory jurisdiction.

Further, the remaining determinations in the deficiency notice depend on the resolution of BLIHC's basis in the 1993 Reset Note. affected items that cannot be litigated now but must wait until finalized.

the Wilmington partnership proceeding is [Citations omitted; fn. ref. omitted.]

These determinations are Bausch & Lomb Inc. v. Commissioner, T.C. Memo. 2009-112.

In Bautsch & Lomb Inc. v. Commissioner, supra, the Cóurt concluded that improperly issued the deficiency notice respondent determining.petitioner's deficiencies and penalties related to BLIHC's basis in the 1993 Reset Note before the decision of this Court has become final ongoing Wilmington partnership proceeding.

in the * * * Implicit in that conclusion is that the Wilmington Partners case was. the related partnership proceeding.

In addition to taking the position that the Wilmington Partners case is not the related partnership proceeding, peti- tioner appears to be arguing here that the following statements in the Court's May 28, 2010 Order and Decision in the Wilmington Partners case are in effect a holding that petitioner's basis in its partnership interest in Wilmington is not an affected item:

Respondent's only position regarding 1999-1 is that we should determine Wilmington's 1999-1 basis in the [1993] Reset Note because respondent could then deter- mine the tax consequences of BLIHC's sale of its part- nership interest in Wilmington whenever that even should4occur. We find this argument unconvincing. First, respondent reverses the construct of Subchapter See sec. 6229(a).

'flows from' Wilmington's basis in the [1993] K by asserting that BLIHC's basis in the partnership interest Reset Note. Subchapter K or TEFRA provides that a partner's basis in its partnership interest is to be adjusted based on changes in a partnership's basis in contributed prop- erty. Respondent's logic is circular and patently absurd. Wilmington's basis in the [1993J Reset Note is derived from and dependent on BLIHC's adjusted basis in the [1993] Reset Note at v1ce-versa.

the time of contribution, not No provision in First, the Court notes that the above-quoted statements are dicta.

In addition, the Court's May 28, 2010 Order and Decision in the Wilmington Partners case was not final when respondent issued the 2005 notice; it is currently on appeal in the Court of Appeals for the Second Circuit. Finally, petitioner acknowledged in the petition filed in this case that the determinations in the 2005 notice on which this case is based "relate to partnership items of Wilmington or affected items of Petitioner related to such partnership items", and respondent agrees.

The Court has held that "respondent has no authority to assess a deficiency attributable to a partnership item until after the close of a partnership proceeding." Dubin v. Commis- sioner, 99 T.C. 325, 328 (1992) (citing section 6225(a)). Since the tax treatment of affected items depends on partnership level determinations, affected items may not be tried as part of a partner's personal tax case until the completion of the partner- ship level proceeding. N.C.F. Energy Partners v. Commissioner,

.Accordingly; issue in this [partner-level] case are if the items at partnership items (or affected items), the authority to assess a deficiency with regard thereto. lack o:f deficiency notice is invalid.

jurisdiction on the ground that respondent's * is that case, we must dismiss for respondent If that * * lacks Gillian v. Commissioner, T.C. Memo. 1993-366.

At the' time respondent issued the 2005 notice to petitioner, the decision in the Wilmington Partners case was not final.

See secs. 6225(a), 7481(a) (2).

The Court holds that the 2005 notice is invalid.

See, e.g., GAF Corp. & Subs. v. Commissioner, 114 T.C. 519 (2000); N.C.F. Energy Partners v. Commissioner, supra.

As a result, the Court holds that it does not have jurisdiction over the instant case.⁵ The Court will grant respondent's motion and will dismiss this case for lack of jurisdiction.

The Court has considered all of the parties' respective contentions and arguments that are not discussed herein, and the Court finds them to be without merit, irrelevant, and/or moot.

To reflect the foregoing, An order of dismissal for.

lack of iurisdiction will be entered.

sBecause the Court holds that it does not have jurisdiction the Court need not, and will not, address over the instant case, respondent's alternative argument motion that the Court should dismiss this case because it is not "ripe for adjudication".

in support of respondent's

89. T.C. 741, 743-744 (1987).