Petaluma FX Partners, LLC, Ronald Scott Vanderbeek, A Partner Other Than the Tax Matters Partner v. Commissioner, 135 T.C. 581

This case is on remand from the D.C. Circuit to decide if the Tax Court has jurisdiction over penalties under I.R.C. §6662 arising from a TEFRA partnership adjustment to Petaluma FX Partners, LLC.
The FPAA issued July 28, 2005 made adjustments to Petaluma’s 2000 partnership items and outside bases of all partners, with no computational changes to the partners’ tax liabilities.
Petaluma must be disregarded for tax purposes; partnership outside bases were found not to exist, and the Court previously held there was a valuation misstatement penalty, which the Court of Appeals later limited to partnership-level questions.
The Court of Appeals remanded to determine whether any §6662 penalties relate to partnership items and can be decided at the partnership level, as opposed to partner-level deficiency proceedings.
The majority concludes the court lacks jurisdiction over any §6662 penalties in this partnership-level proceeding because the adjustments are affected items, not partnership items, and penalties must be computed at the partner level.
The matter hinges on TEFRA/TRA 1997 structure: penalties relating to adjustments to partnership items may be determined at the partnership level, but the amount and allocation may require partner-level computations.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Jurisdiction to determine penalties at partnership level under TEFRA/TRA 1997	Petaluma contends penalties do not relate to partnership items and thus cannot be decided at the partnership level.	Respondent contends penalties relate to partnership items and may be decided at the partnership level under §6226(f) and related TEFRA provisions.	Court lacks jurisdiction over penalties at the partnership level.
Relation of penalties to adjustments to partnership items	Petaluma argues no penalty relates to a partnership item since the partnership is disregarded and no computational adjustment flows to partners.	Respondent argues penalties relate to adjustments to partnership items (e.g., sham determination and contributions) and are therefore within partnership-level jurisdiction.	Penalties in question do not relate to a directly computable partnership-item adjustment; jurisdiction is limited.
Effect of the partnership sham on §6662 penalties	Petaluma argues the sham finding creates a basis for penalties at the partnership level due to negligent formation.	Respondent asserts penalties may arise from partnership-item adjustments even if based on the sham finding.	Penalty jurisdiction remains limited; the partnership-level determination does not support a broad §6662 penalty at that level.

Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649 (D.C. Cir. 2010) (remand to decide penalties relating to partnership items under TEFRA/TRA 1997)
Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84 (2008) (Petaluma I; held partnership items and valuation penalty at issue; outside bases as affect items)
Ginsburg v. Commissioner, 127 T.C. 75 (2006) (defines 'affected item' and its relation to partnership items)
Domulewicz v. Commissioner, 129 T.C. 11 (2007) (TEFRA penalties and deficiency procedures interplay)
Maxwell v. Commissioner, 87 T.C. 783 (1991) (affected items discipline in partnership contexts)
N.C.F. Energy Partners v. Commissioner, 89 T.C. 741 (1987) (classification and handling of affected items under TEFRA)