Henry & Susan F. Samueli, Petitioner

132 T .

No . 1 6

UNITED STATES TAX

COUR T

HENRY AND SUSAN F . SAMUELI,1 Petitioners v . COMMISSIONER OF,INTERNAL REVENUE, Responden t Docket No . 13953-06 .

Filed May 18, 2009 .

Ps allege they overpaid their Federal income tax for 2003 on account of adjustments from a TEFR A i .

.

lAJ 1. t J V SLLl. 1S J __ ~.s 5 ± longer partnership : items, in part because Ps filed an i amended individual income tax . return for 2003 (amended return) that qualifies under sec . 6227, I .R .C ., as a n administrative adjustment request filed on behalf of a partner (partner AAR) . Sec . 301 .6227(d)-lea), Proced . & Admin . Regs ., requires that a taxpayer file a partner, AAR on a 'form"prescr'ibed b `- R and in 'accordance wit h the form's instructions . prescribed the form as Form 8082, Notice of Inconsistent treatment or Administrative Adjustment RJequest (AAR), and stated .i .detail on the form the reasons for the administrative° adjustment reported on the form . R_stated in the { instructions and.in'the referenced regulations that the taxpayer must file the original form with th e taxpayer's amended income, ax return and a copy of . the form with (as applicable here),the service center wher e n the form's instructions that a taxpayer must explain in ,

SEVED MAY 18 2

the partnership files its tax return . . Ps assert that the amended return qualified as a partner AAR because they substantially complied with the requirements for a partner AAR .

Held : The amended return did not qualify as a partner AAR .because the return neither met the requirements for a partner AAR nor substantially complied with those requirements . Accordingly, the adjustments remain partnership items .

Nancy L . Iredale , for petitioners .

Miles B . Fuller and Louis B . Jack , for respondent .

J9

OPINIO N

0KROUPA, Judge : Respondent moves the Court to dismiss par t oftli,th'is case for lack of jurisdiction . That part relates to petitioners' allegation of a reduction in their taxable income for 2003 on account of adjustments from H&S Ventures, LLC (H&S Ventures), a limited liability company treated as a partnership, for Federal tax purposes . We lack jurisdiction if petitioners ' amended individual income tax return for 2003 (amended return) did not qualify under section 62271 as an administrative :

adjustment request (AAR) filed .on behalf of a partner (partner AAR) . We . hold that the amended return did not qualify as a partner,AAR, and we shall dismiss the referenced part of thi s 'Section' .references are to the applicable versions of the Internal Revenue Code, unless otherwise stated .

case . We . need not and do not decide whether we would hav e I jurisdiction if the amended retur, qua~ified as a partner AARJ.

I .

Petitioner s Background Petitioners are husband and wife .

They filed-a .joinnt Federal income tax return for-20d 3 . They resided in Californi a E when they-filed the petition .

II .

H&S Ventures I f ° H&S Ventures was a limited iability company treated a s a partnership for Federal tax purp ses . Each petitioner owne d 10 , .percent of-H&S Ventures ; and petitioners grantor trust owned th e .remaining 80 percent . H&S Ventures filed a Form 1065, U . S Return of, Partnership Income, for 2003 .

III`.

Respondent's Notice : of Deficienc y Respondent' issued a notice of deficiency to petitioners' tha t reflected respondent's determina ion of a-"$171,026 deficient' for 2001 and a $2,1-77,532 deficiency for 2003 in petitioners' Fed era l income taxes . . Neither-the determination nor the deficiencies reflected any adjustment ito H&S Ventures' Form, 1065 . Petitio' e,s challenged respondent-'s determinationlby timely filing a,petitio n t I ~ n with the Court . 'The,Court 'redetermined that determination{i Samueli v . Co mm issioner , !132 T .C .

{

IV, .

Amended Schedules K- 1 - 4 "Petitioners received from H&S Ventures amended Schedule s K-1,"Pa'rtner's Share of Income, Credits, Deductions, etc ., for 2003 after petitioners filed their petition . . The amende d Schedules K-1 reflected a $318,671 reduction in petitioners' gross income and a $86,042 reduction in their itemized deductions . The reductions were purportedly attributable to a calculation error discovered during an examination of H&S Ventures,;. by the State of California .

V .,, Amended Tax Return s ;Petitioners mailed the amended return to respondent's service center in Fresno, California- .(the service center where petitioners were required to file their individual income ta x return) .' The amended return was prepared by a certified publi c accounting firm and stated that petitioners' "U .S . INDIVIDUAL INCOME_TAX RETURN FOR THE YEAR ENDED 12/31/2003 IS BEING AMENDED

TO . PROPERLY REFLECT AMENDED SCHEDULES K-1 RECEIVED FROM H&S

VENTURES ." The amended return specified that petitioners were ~reduci,ng their originally reported gross income to reflect th e net long-term capital gain income reported on the amended .

Schedules' K-1 . The amended return specified that petitioners were reducing their originally reported itemized deductions to reflect a change in the non-cash contribution limitatio n applicable to their now reduced income . The amended return Commissioner , 121 T .C . 89, 102 (2003), affd . 425 F .3d 1203 (9th Cir . 2005) . Petitioners bear the burden of1proving that we hav e jurisdiction to decide the propriety of the adjustments, from H& S Ventures (subject adjustments) because petitioners invoke our jurisdiction over that matter . See David Duna Le, M .D . ., Inc'. v .

Commissioner , 114 T .C . 268, 270 (2000), affd . 22 Fed . Appx . 837 (9th Cir . 2001) . Petitioners must therefore establish affirmatively all facts giving rise to our jurisdictionsto satisfy that burden . See id .

II .

TEFRA in Genera l We turn to some general tenets . involving partnerships .

Partnerships . are not subject .to Federal income tax . See sec .

701 . Partnerships are nevertheless required to file annual information returns reporting their partners' distributive shares of income, gain, loss, deductions, or credits . See sec : 6031 ; see also Randell v . United States , 64 F .3d 101, 103 (2d Cir .

1995) . Partners are required to report their distributive shares of .those items on their individual Federal income tax returns .

See secs . 701, 702, 703, and 704 .

The Commissioner and the courts had to adjust partnership items at the partner level before 19 .82 . See Adams v . Johnson , 355. F .3d :117 .9, 1186-1187 (9th Cir . 2004) ; Randell v . United States , supra at 103 . Congress enacted the unified audit and litigation . procedures of the Tax Equity and Fiscal Responsibility Act of-1982 (TEFRA),"Pub . L . 97-248, sec . 402, 96 Stat . 648,',t d remove the substantial administrative burden-, :occasioned by .,i duplicative audits and litigation and to provide consistent, treatment-of partnership .income, gain, loss, .'deductions,-and credits,among all . .partnersiin the,same partnership= See Ada~s yi.

Johnson , supra at 1186118 ;7 ; Ran ell v . United States , supra a, , 103 ; H'. Conf . Rept . - .97-760, at 59'9-60 0 (1982), 1982-2, C .B . '60!0 , 662-663 . Those procedure.s .,requi~e tha t''a partnership and its partners treat al'l :partnership i ems consistently on, .their_ returns (including . related Sched les K -I 1) unless a-partner ,1 I I -informs the Commissioner . of an inconsistent treatment .

See ;; sec . , 6222 (a) and (b) The . proper tre tment o f partnership items ;, at the partnership level is determined u n der the TEFRA procedu res ~ I a single ; unified audit-,and judicia l proceeding .

See Adams :lv . :

Johnson , supra at 1186-1l⁸⁷ ;' Randell . United States, .supra;,~ at 1 103 ; H . Conf . Rept .

97-760, supra a t 5 99-600, 1982-2 (cid:127)C . B . ate 662-6.6,3 .

.III .

Applicability of TEFRA to H&S Venture s .The parties agree that .H& S Ventures ,is- subject to .TEFRA f or 2003 and that th:e subject ; adjustment s were partnership items{ a t least until petitioners' filed t e ame n ded return . We also a:g r ee .

See generally secs .

6221ithrough 623 4 We therefore` lac k jurisdiction in this deficienc y proceeding, to decide th e propriety of the subject adjus t ents unless TEFRA-provides otherwise . See Munro v . Commissioner , 92 T .C . 71, 74 (1989) ; Maxwell v . Commissioner , 87 T .C . 783, 789 (1986) .

IV .

AAR s Each partner was generally required to file a . separate amended return to correct a partnership item before TEFRA . TEFRA allows, a,"tax matter partner" (as defined in section 6231 ( a)(7)) to file an AAR on behalf of the entire partnership (partnership AAR), .,See sec . 6227 .

TEFRA also allows each partner to file a partner AAR solely on behalf of that partner .

See id . ;An AAR mu"st ' be filed in accordance with section 6227 for a partner to change the treatment of a partnership item on the partner's return .

See Phillips v . Co mm issioner , 106'T . C . 176 , 180-181 (1996) Petitioners claim they filed a partner AAR in the form o f the amended return . The Commissioner upon receipt of aipartner AAR may take one of four actions . See sec . 6227(d) . First, the Commissioner may process the partner AAR as a claim for credit or refund with respect to a nonpartnership item . See id .

Second, the . Commissioner may assess additional tax resulting from the requested : adjustments . See id .

Third, the Commissioner ma y notify the partner that all partnership items of the partner for the partnership's taxable year to which the partner AAR"'relates will be treated as nonpartnership items . See id .

Fourth, the Commissioner may conduct a partnership proceeding . See id .

The Commissioner upon receiving a partner AAR generally opts to `I⁹ follow the fourth action ; 1 .e .-, to begin a partnership proce'edin g and to determine in that proceeding the validity-of the request .

See 2 Audit, Internal Revenue-(cid:127)Ma n al (] RM) (CCH) , 4 .31 .4 .2 .3 .1(4), at 10,864! (Sept .

1., 2006 ) The partner in turn may begin . civil actio n .n a for `refundj ' o f tax attributable to adjustments claime d in- the' partner AAR "i f t he Commissioner does no t allow any part O f the adjustments and ; neither notifies the partner tha t the djustments will be treated fli as nonpartnership items, nor(cid:127)beg i ns?a partnershipproceedin g See sec . 6228(b)(2) . The ?timeliness of such a civil actio n governed . by section 6228 (b) (2)-(B) . The partnership items of~ .lt h partner for the partnership, taxable year to which,- the' partners AA R .relates ar-e recharacteriz e'd as nlnpartnership items on th e beginning of the civil .=action .

See sec . 6228 (b)(2)(A) .

V . (cid:127), Redulations Applicable to the FiliJna . of a Partner AAR The Secretary has prescribed rules for the filing of a 7i partner AAR in section 30i¹ .62`27(Proced : & Admim . Reg s That section' states :

301 .6227(d) -l Administrative adjustment reques t filed on behalf or a partner .--(a) In general . .request for an-administrative adjustment on behalf o f partner shall be filed on the form prescribed by th e Internal Revenue Service for that purpose in=accordance with that form's instructions . Except as otherwis e provided in that form--s in tructions, the request shall-- A s I 'k - 1 0 Ili (1) Be filed in duplicate, the original ., copy filed with the partner's amended income tax return * * * and the other copy file d with [as applicable here] the service center where the partnership return is .filed * * * ; (2) Identify the partner and the partnership by name, address, and taxpayer identification number ; .

(3) Specify the partnership taxable year,.

to which the administrative adjustment request applies ; (4) Relate only to partnership items ; and (5) Relate only to one partnership and u one partnership taxable year . .

VI''.

Form 808 2 ,,it .The ;Commissioner has prescribed Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request .

, (AAR), as the form to be used by a partner requesting an administrative adjustment . See Instructions for .Form 8082 (rev . .Jan . 2000) (instructions), at 1 . The instructions require that taxpayers file Form 8082 as an AAR to adjust passthroug h items and, . that taxpayers explain in detail on the form th e reasons for any adjustment reported on the form . See id . at 1 , 3 . The ;,instructions require that a partner filing Form 8082 as an"!AAR file the form in duplicate, the original filed with . the partner's,amended .income tax return and the copy filed with the service center where the passthrough entity return is filed . See id . at 2 . The face of Form 8082 requires that the partner list on the form the name, passthrough entity-to taxable year .

VII .

Parties' Arc[uments and-th e ourt'ls Analysis - A .

Parties' Arguments Respondent argues that the s ubject adjustments _ar e partnership items the propriety of which must be decided i n partnership-level proceeding . Petitioners argue that the sub ..1 adjustments, while once partner s ip-items, are Ino longer partnership items , part becau e petj tioners(cid:127) filed=`the amen~dd ( return that°qualified under sect i on 6227 as a partner AAR .

I ;i r -Petitioners recognize that .a partner AAR must be filed on Form= 8082 pursuant,to section 301 .62 2 (d) - 1 Proced . & Admin . Regs ., and the instructions, andlpetitibner s acknowledge . that theyz ;did l l not file such a form .

Petitione rs argue nonetheless that the :

Court of Appeals fo r the Ninth Circui t considers amended re t to be AARs i n al l instance's (i .e ., whether accompanied by a 8082 or not) .

Petitioner's-also,-argu e that their amended -re~1ur' n is a partner AAR because it subs 'tenti~lly complied wit h requirements for a-partneir AAR in that it`contained .all' ` information required to b'eincluded of Form-8082 . Petitioner s ZPetitioners conclude that their filing of the amended[lJ return as a partner AAR and theiir filing of the second amen dment to petition made'the subject' adjustments nonpartnershipbitems " pursuant to sec . 6228(b)(2)(8) .

J , is ~ ~ 12 - .note that the .Court of Appeals for the Ninth Circuit, the cour t to which an appeal of this case lies absent a stipulation to the contrary ; treated a taxpayer's amended income tax return-as a partner AAR . See Wall v . United States , 133 F .3d 1188 (9th Cir .

1998) B .

Analysi s 1 .

Overvie w We-now focus on whether the amended return here qualifies as a partner AAR . This Court has held that section 6227 does not authorize the Commissioner to consider as a partner AAR6a request for an administrative adjustment that fails to conform to the applicable statutory requirements . See Phillips V . Commissioner , 106 T .C . at 181 . The Court of Federal-Claims has held similarly .

See Rothstein v . United States , 81 AFTR 2d 2132, 98-1 USTC par .

50,435, (Fed . Cl . 1998) . The courts in both cases ruled'that an amended return filed by a partner did not qualify as a partne r AAR where the amended return was not accompanied by a Form 8082 .

.The courts did not state, however, that an amended return could never qualify as a partner AAR if it failed to include a Form 8082 . Nor does ; the Commissioner require that an amended return inc .lude,a Form 8082 to be characterized as a partner AAR . See

Neither party disputes that the amended return fail s .all of the requirements fo r, a,partner"AAR set forth in section .

301 .6227-0)-1(a), Proced . (&`Admin .Regs . The parties disputertiw o issues . 'First, the parties,- dispute why for therNinth Circuit considers amended returns to . .be AAR s i n instances ., , :.If the court does no the parties further .dispu t whether petitioners'" .amendedreturn substantially complie d the requirements for a partner AAR so as to be` characterize d partner AAR'.I (cid:127) We address those dispute in turn .

2 .

Whether AmeridedReturns-Are AARs in All Instance s Petitioners first argue tha the 'court of Appeals for tY e Ninth Circuit considers amended returns to be AARs in al l instances , citing Wall v . United State! s , supra .

We do not rea d that opinion to support petitioners' broa d claim . In Wall , th e Court of Appeals for the Ninth Circuit treated a taxpayer's amended return as a partne r AAR even hough no Form 808 2 accompanied the amended rJreturn .

The courtr had previously hel d however, that the amended retur n itself is considered t o any published opinion an amended return in"an Circuit .(or any other court) that holds that an amended return in and of itself is considered .a partner AAR . The regulations require that certain information be relayed to the Commissione r in a, certain manner for a request to qualify as a partner AAR .

'See sec . 301 .6227(d)-1(a), Proced . & Admin . Regs . An amende d return ;,may not contain that information, or it may not b submitted to .the Commissioner in the mariner required by, the regulations . We conclude that an amended return is not, necessarily a partner AAR . We now address petitioners'~!second , argument .

3 .

Whether Petitioners' Amended Return Substantially Complied With Requirements for a Partner AAR .

Petitioners also argue that their amended return was a partner AAR because it substantially complied with the requirements for a partner AAR . We agree with petitioners that their amended return, filed without a Form 8082, may be characterized as a partner AAR if it substantially complied with the requirements for a partner AAR . We disagree with petitioners, however, that their amended return substantially complied with .those requirements .

The substantial .compliance doctrine is a narrow equitabl e 'doctrine that courts may apply to avoid hardship where a party establishes that the party intended to comply with a provision, did everything reasonably possible to comply with the provision , but' did not comply with the provision because of a failure to -_1 5 meet the provision's specific regiirements .

See Sawyer v . Count y of Sonoma , 7.19 F .2d 1,001, A 007-1 0 08 (9th~Cir . 1983) ; Fische r I ~.

Indus ., Inc . Commissioner- , 8 7 T(cid:127) .C :-116, 122 (1986 ), affd .'

F . 2d 224 (6th Cir .-1988) . ; 'see' `als o Credit' L ife Ins .

States , 948 ;. F . 2d 723, 726 X727 (Fe d Cit . 1991) ; Prussner v .

{ United States ,896 F .2d 218, 22 4 (-7th .Cir 1990) Estate :o f Chamberlain v .

Commissioner ,'°T . C Memo⁴ 1999`7181, affd . 9 Fed .

Appx . 713 (9th Cir .

2001) .1 I The record doesnnot establi .Ih,thajt petitioners intende d file-the amended .return as a'pa r ner Al R . : Theo amended return wa s professionally prepared for petitioners, whhom'we conside r sophisticated and financially ad pt- .individuals ; and indicated ) that petitioners were amending,their individual income ta x merely to conform the return to amen ded Schedules,K-1 receiv e from H&S Ventures . The amended retur n did not 'i`nclude a .

copy o f any -of the amended Schedules K⁷¹ , and I it did not include a" -Fbrmu u 8082 that would indicate that pe tition ers were filing the .arienided . 11 ( return as other than' an .amende d 'return . 3 The amended return !

, 3A partnership AAR must include revised Schedules K-1, .,4ee l sec . 6227 (c) (3) , and the partne~s' nay'1 file amended individua 1 income tax returns to conformtheir individual returns to th e revised Schedules K-1 see ,2 Audit Internal Revenue Manual ' (CCH), .pt . 4 . 31 . 4 . 6 . 1 . 1,1at 10 869 (Sept : 1, 2006) (stating that the Commissioner may take no ac~ion inaresponse to a partnersh ilp AAR where all of the partners incorporated the reported adjustments into their origina l with respondent that a primar y frustrated if respondentfhad to or am ended returns) . We aai e urpos,'e for, TEFRA would b e determine ` hether each 'such ` r I " )ntinued . .

16 - further stressed the word " AMENDED" on each of its pages and included .a copy of petitioners' Form 1040 for 2003, both as originally filed and as amended by the amended return . We also note .,that petitioners asserted for,the first time that the amended return should be considered a partner AAR only after receiving respondent's motion . now before us . The requisit e intent` :needed,to be present contemporaneously with the filing of the partner AAR, not later when petitioners believed it to be more advantageous to have had that intent initially .

Nor,did the amended return substantially comply with'th e requirements for a partner AAR in that the amended return was not filed in the manner required for a Form 8082 and did not include all information required to be provided on a Form-8082 . Th e amended return failed the former requirement because a copy of the amended return was not filed with the service center where the partnership return was filed . Respondent stated explicitly in the referenced regulations and, in the instructions that a partner' ;AAR must be filed in duplicate, one copy at each of the designated places . Petitioners do not assert that the dua l filing . requirement is unreasonable as .applied to them, nor do we' consider that to be the case . The amended return failed : th e latter requirement because, in part, the amended return did no t 3( .

.

. :continued) amended individual income tax return was in fact a partner AAR, as . petitioners effectively ask the Court to hold .

list the address of H&S Venture s and , d i'dT not specify th e partnership taxable year to whic h the requested adjustment s related .- The amended return also did not explain in detai l reasons for the requested{adjustents .f Such reasons ar e u I necessary , respondent argues and we agree , so that responden t properly carry out the function of section 6227(d)_by decidi~ng a the AAR whether to allow or disallow the requeste d adjustments, or to start a partn~rship~'proceeding . The`ame n return did not allow respondent to carry out that function , properly in that it did not detail the specific reasons for th e requested adjustments reported on the amended return . The:

adjustments could (cid:127) just as{ easil y have been .requested to correc t mathematical error as tolreflect a different substantive treatment of a partnership item .

{ We conclude that petitioners' amended . return did not , substantially-comply with the requirements for a partner A A I Petitioners' amended return is herefpre .not a partner AAR'.

VIII .

Conclusion The amended return does not quallify as a partner AA R the claimed adjustments from H&S Venttures are partnership item s over which we lack juri s diction We}have considered al l arguments petitioners have mad e fore contrary conclusio n the extent not-discussed I, we h a ve rejected those arguments 'without merit .

M .41 To reflect the foregoing, An appropriate orde r will be issued .

2. Audit, IRM (CCH), pt . 4 .31 .4 .2 .3 .1(1), at 10,864 (Sept . 1, 2006) (stating that "Any partner may file an AAR on his or her, own'behalf . In order to'file an AAR, a partner must complete an amended return and Form 8082 or statements that-:Provide-the same .; information required by Fo~m 8082 " :,(emphasis added)) .'