Bedrosian v. Comm'r
144 T.C. No. 10
Tax Ct.2015Background
- Petitioners (the Bedrosians) participated in a Son-of-BOSS transaction through Stone Canyon Partners, LLC, a partnership found by the IRS at the partnership level to be a sham.
- Partnership-level TEFRA proceedings resulted in a Final Partnership Administrative Adjustment (FPAA) for the 1999 partnership year; the Bedrosians did not timely challenge the FPAA, so partnership items are final.
- The IRS issued notices of deficiency to the Bedrosians for 1999 and 2000; most adjustments in the notice flowed from the partnership-level sham determination and were dismissed from this partner-level case for lack of jurisdiction.
- One remaining item was a $525,000 Schedule A deduction in 2000 labeled "TAX ATTORNEY FEES," which the IRS disallowed on the ground that petitioners failed to substantiate or show deductibility.
- Petitioners moved for leave to file an untimely motion for reconsideration of the Court’s prior interlocutory opinion that it had jurisdiction over the fees issue, arguing intervening jurisprudence refined the partnership/affected-item analysis.
- The Court considered whether the deductibility of the fees is a partnership item, an affected item (computational or factual), or a nonpartnership item, because jurisdiction depends on that characterization.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Court should grant leave to file an untimely motion for reconsideration of the Court’s prior jurisdictional ruling | Bedrosians: intervening case law (refining partnership vs. affected-item analysis) justifies reconsideration | IRS: no objection to leave; earlier position supported dismissal of partnership-level items | Denied leave because reconsideration would not change the result — Court retains jurisdiction over the fees issue |
| Whether the deductibility of the $525,000 in professional fees is a partnership item, a computational affected item, a factual affected item, or a nonpartnership item | Bedrosians: later decisions (e.g., Domulewicz) treat fees disallowed due to partnership sham as affected items, arguing partner-level review is improper if computational | IRS: treats fees as affected by partnership-level sham and therefore outside partner-level deficiency procedures to the extent computational | Held: fees are affected items but specifically factual affected items (not computational), so partner-level factual determination is required and the Tax Court has jurisdiction |
| Whether prior partnership-level determinations (e.g., sham finding) bind the Court on the fee deductibility issue | Bedrosians: argue fees may be characterized as affected items regardless | IRS: argues the sham determination controls and makes fees nondeductible as a matter of partnership-level determination | Held: Court is bound by partnership-level determinations (including sham), but that binding status does not eliminate the required partner-level factual inquiry into whether the fees relate to the sham partnership |
| Whether characterization of the fees as factual or computational affected items dictates assessment procedure (deficiency vs. computational adjustment) | Bedrosians: rely on cases treating fees as affected items; imply computational treatment may apply | IRS: similarly relies on affected-item doctrine; urges limited partner-level jurisdiction | Held: because the fees were reported on Schedule A without indicating they flowed from the TEFRA partnership, their deductibility requires a partner-level factual inquiry; thus they are factual affected items subject to deficiency procedures |
Key Cases Cited
- Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84 (2008) (partnership validity/sham determination falls within the definition of partnership items)
- New Millennium Trading, LLC v. Commissioner, 131 T.C. 275 (2008) (partnership-level determinations bind partners and cannot be collaterally attacked)
- Cinema ’84 v. Commissioner, 122 T.C. 264 (2004) (denial of relief when movant would not prevail on merits; futility doctrine for untimely filings)
- N.C.F. Energy Partners v. Commissioner, 89 T.C. 741 (1987) (distinction between computational and factual affected items)
- White v. Commissioner, 95 T.C. 209 (1990) (computational affected items can be adjusted without deficiency procedures)
- Napoliello v. Commissioner, 655 F.3d 1060 (9th Cir. 2011) (sham/partnership-validity determinations fall within partnership-item definition)
- Sch. Dist. No. 1J v. ACandS, Inc., 5 F.3d 1255 (9th Cir. 1993) (standards for reconsideration: newly discovered evidence, clear error/manifest injustice, or intervening change in controlling law)