Opinion for the Court filed by Chief Judge SENTELLE.
Petaluma FX Partners, LLC appeals from the Tax Court’s decision that it had jurisdiction over several partnership-level determinations and that valuation misstatement penalties applied. Specifically, the Tax Court held that it had jurisdiction to determine that Petaluma was a sham, lacked economic substance, and should be disregarded for tax purposes; that Petalu
*650
ma’s partners had no outside basis in the disregarded partnership; and that the gross valuation misstatement penalty applied.
Petaluma FX Partners, LLC v. Comm’r,
I. Background
A. Factual Background
This case involves a “Son of BOSS” tax shelter. Like many of its kin, this tax shelter employs a series of transactions to create artificial financial losses that are used to offset real financial gains, thereby reducing tax liability. In 2000, the Internal Revenue Service (“IRS”) identified Son of BOSS tax shelters as abusive transactions. I.R.S. Notice 2000-44, 2000-
B. Statutory Background
Although partnerships do not pay federal income taxes, they must file annual informational returns reporting income, loss, deductions, and credits. 26 U.S.C. §§ 701, 6031(a); Treas. Reg. § 301.6231(a)(3)-1(a)(1)®. The partners are then responsible for reporting their distributive shares of the partnership’s income or loss on their individual federal income tax returns. 26 U.S.C. §§ 701-702, 704. Congress established the current framework for adjudicating partnership-related tax matters in the Tax Equity and Fiscal Responsibility *651 Act of 1982 (“TEFRA”), Pub.L. No. 97-248, § 402, 96 Stat. 324, 648-67 (codified as amended at 26 U.S.C. §§ 6221-6232). Pri- or to TEFRA, all partnership items were determined at the individual taxpayer level, which often required duplicative proceedings for different partners and sometimes resulted in inconsistent treatment of partnership items from partner to partner. Under TEFRA, partnership items are now determined in unified partnership-level audit and judicial proceedings. 26 U.S.C. § 6221. When the IRS disagrees with how a partnership return reports partnership items, it may commence an administrative proceeding by issuing a notice of final partnership administrative adjustment (“FPAA”) to the partners. § 6223(a), (d). Once an FPAA is mailed, the partnership’s tax matters partner has 90 days to file a petition for readjustment of partnership items. § 6226(a). If the tax matters partner does not file within that period, any other partner who received the FPAA has an additional 60 days to file a petition. § 6226(b)(1). Once a petition has been filed, the reviewing court has jurisdiction to determine all partnership items for the partnership taxable year addressed by the FPAA. § 6226(f).
C. The FPAA and the Tax Court’s Decision
On April 2, 2001, Petaluma filed a Form 1065 partnership return for its 2000 taxable year. The Commissioner issued an FPAA to the Petaluma partners on July 28, 2005. The FPAA disallowed all partnership items reported on Petaluma’s return, reducing them from the amount Petaluma originally claimed to zero. The FPAA also listed “Outside Partnership Basis,” which was not originally reported on Petaluma’s partnership return, and reduced its value from $24,943,505 to $0. In addition, it included a section titled “EXHIBIT A-Explanation of Items,” which determined that Petaluma’s existence as a partnership had not been established, that it was formed solely for tax avoidance, that it was a sham and lacked economic substance, and that it should therefore be disregarded for tax purposes. The Explanation also determined that Petaluma’s partners “have not established adjusted bases in their respective partnership interests in an amount greater than zero.” Finally, the Explanation determined that various accuracy-related penalties set forth in 26 U.S.C. § 6662(a) applied to all underpayments of tax attributable to these adjustments. On December 30, 2005, Ronald Scott Vanderbeek, a Petaluma partner who was not the tax matters partner, filed a petition for readjustment with the Tax Court.
In the Tax Court, Petaluma and the Commissioner entered a settlement of stipulated issues in which Petaluma conceded that the reduction of the line items in its partnership return to zero was appropriate. Petaluma retained just two arguments — first, that the Tax Court lacked jurisdiction to consider certain issues in the FPAA, and second, that the valuation misstatement penalties did not apply. Both parties moved for summary judgment, and the Tax Court granted summary judgment for the Commissioner on October 23, 2008.
In its opinion, the Tax Court first held that it had jurisdiction to determine whether Petaluma should be disregarded for tax purposes. It reasoned that “the determination whether Petaluma is a sham, lacks economic substance, or otherwise should be disregarded for tax purposes is a partnership item over which we have jurisdiction.”
Petaluma,
II. Analysis
A. Jurisdiction and Standard of Review
Petaluma filed a petition for readjustment of partnership items with the Tax Court under 26 U.S.C. § 6226. The Tax Court’s decisions concerning such petitions are generally reviewed by the U.S. Court of Appeals for the circuit in which the partnership’s principal place of business is located. § 7482(b)(1)(E). When a partnership has no principal place of business, as is the case here, the Tax Court’s decision “may be reviewed by the Court of Appeals for the District of Columbia.” § 7482(b)(1). We review the Tax Court’s decisions “in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” § 7482(a)(1). Since the facts of this case are undisputed, we review the questions of law it presents de novo.
Andantech L.L.C. v. Comm’r,
B. Disregarding the Partnership
Petaluma contends that the Tax Court erred in holding that it had jurisdiction to determine that the partnership was a sham, lacked economic substance, and should be disregarded for tax purposes. Under TEFRA, a court considering a petition for readjustment has “jurisdiction to determine all partnership items of the partnership for the partnership taxable year to which the notice of final partnership administrative adjustment relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item.” 26 U.S.C. § 6226(f). Petaluma argues that the Tax Court had no jurisdiction to determine that it was a sham and lacked economic purpose because that determination was not a “partnership item” within the meaning of § 6226(f). We disagree.
(1) Section 6233
The jurisdiction of the Tax Court over this case is governed by 26 U.S.C. § 6233. That section addresses instances in which a partnership return is filed, but the purported partnership either does not exist or is not actually a partnership. In those situations, § 6233 mandates that TEFRA’s provisions still apply “to the extent provided in regulations.” Id. The relevant regulations state that “[a]ny final partnership administrative adjustment or judicial determination ... may include a determination that the entity is not a partnership for such taxable year.” Temp. Treas. Reg. § 301.6233-lT(a). Under the statutory authority of § 6233, this regulation explicitly authorized the Tax Court to determine that Petaluma was not a partnership for the 2000 taxable year.
(2) Partnership Items
The next question raised by Petaluma’s argument is whether the sham determination was a partnership item. The *653 Internal Revenue Code states that “partnership item” means “any item required to be taken into account for the partnership’s taxable year under any provision of subtitle A to the extent regulations prescribed by the Secretary provide that, for purposes of this subtitle, such item is more appropriately determined at the partnership level than at the partner level.” 26 U.S.C. § 6231(a)(3). Thus a partnership item must be (1) “required to be taken into account ... under any provision of subtitle A” and (2) identified by regulation as “more appropriately determined at the partnership level.” Id. We conclude that the determination that Petaluma was not a valid partnership meets both elements of this test.
(a) Required to Be Taken into Account Under Subtitle A
For the validity of a partnership to be a partnership item, it must be “required to be taken into account ... under any provision of subtitle A,” which is the subtitle concerning income taxes. We have little difficulty concluding that application of the income tax provisions of Subtitle A to the tax liability of a taxpayer who receives income from a purported partnership entails a determination of the validity of that partnership. As the Eighth Circuit has stated, ‘When filling out individual tax returns, the very process of calculating an outside basis, reporting a sales price, and claiming a capital loss following a partnership liquidation presupposes that the partnership was valid.”
RJT Investments X v. Comm’r,
(b) More Appropriately Determined at the Partnership Level
In arguing that the second requirement is not met, Petaluma urges that the term “item” should be interpreted narrowly, arguing that it only includes accounting elements such as income, deductions, credit, gain, loss, and basis. As Petaluma concedes, however, the Code does not define “item.” Moreover, Petaluma’s attempt to cabin the meaning of “partnership item” ignores the statute’s plain language authorizing the Secretary to promulgate regulations that flesh out the definition of that term. § 6231(a)(3). The regulations that fulfill that mandate give examples of partnership items that include “[t]he partnership’s method of accounting, taxable year, and inventory method.” Treas. Reg. § 301.6231(a)(3)-l(b). These examples make clear that the meaning of “partnership item” extends well beyond technical accounting elements.
Furthermore, the regulations state that the definition of partnership item includes “the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc.” Treas. Reg. § 301.6231(a)(3)-l(b). The determination that a valid partnership exists is a
sine qua non
for determining the amount and characterization of all other partnership items. For example, determining whether there is a valid partnership necessarily controls whether there can be partnership income, partnership gain, partnership losses, and so forth. This regulation establishes that the validity of a partnership is “more appropriately determined at the partnership level,” thereby meeting the second requirement of the partnership item test. Thus the determination that a partnership is a sham and lacks economic substance is a partnership item because it is a legal determination that underlies the amount and characterization of other partnership items.
RJT Investments X
Logically, it makes perfect sense to determine whether a partnership is a sham at the partnership level. A partnership cannot be a sham with respect to one partner, but valid with respect to another. In addition, this conclusion is unsurprising given that this court has affirmed the Tax Court’s determinations that a partnership should be disregarded for tax purposes on several prior occasions.
Andantech L.L.C. v. Comm’r,
C. Outside Basis
Petaluma also argues that the Tax Court erred in holding that it had jurisdiction to determine that Petaluma’s partners had no outside basis in the disregarded partnership. An “outside basis” is the value assigned to a partner’s investment in his or her partnership interest.
See American Boat Co. v. United States,
On appeal the Commissioner concedes that outside basis is not a partnership item in this case. Instead, he asserts that outside basis is an affected item whose elements are mainly or entirely partnership items. He maintains that the Tax Court had jurisdiction to state the “obvious conclusion” that a partner cannot have any basis in a disregarded partnership. The correctness of this conclusion is immaterial, however, for the question is not whether the Tax Court’s determination was correct, but whether the Tax Court had jurisdiction to make that determination at all in this partnership-level proceeding.
Here, the partners’ outside bases are affected items, not partnership items. Unlike partnership items, affected items are determined not at the partnership level, but at the individual partner level. Once the partnership items have been finalized, the IRS may make a corresponding “computational adjustment” to each partner’s tax liability. 26 U.S.C. § 6230(e)(l)(A)(ii); § 6231(a)(6). When a computational adjustment directly increases a partner’s tax liability, the IRS can assess the tax and the partner must bring a refund claim to challenge the computation. § 6230(c)(1). When a computational adjustment’s effect indirectly increases a partner’s tax liability and necessitates partner-level determinations concerning affected items, however, the IRS must issue a notice of deficiency, and normal deficiency procedures apply. § 6230(a)(2)(A)(i);
Desmet v. Comm’r,
*655 Under § 6226(f), the Tax Court had jurisdiction to determine partnership items, but it did not have jurisdiction to determine affected items. We have already rejected the Tax Court’s conclusion that outside basis was a partnership item in this case, and we likewise reject the Commissioner’s contention that outside basis, although it is an affected item, could nonetheless be determined in the partnership-level proceeding. The fact that a determination seems obvious or easy does not expand the court’s jurisdiction beyond what the statute provides. In other words, it does not matter how low the fruit hangs when one is forbidden to pick it. We hold that the Tax Court had no jurisdiction to determine that Petaluma’s partners had no outside basis in the disregarded partnership. Finally, we note that nothing about the concept of outside basis indicates that it is more appropriately determined at the partnership level. If disregarding a partnership leads ineluctably to the conclusion that its partners have no outside basis, that should be just as obvious in partner-level proceedings as it is in partnership-level proceedings. Moreover, with the invalidity of the partnership conclusively established as a partnership-level determination, there is little danger that outside basis will receive inconsistent treatment at the individual partner level.
D. Penalties
Petaluma also challenges the Tax Court’s jurisdiction over accuracy-related penalties. The FPAA determined that “the accuracy-related penalty under Section 6662(a) of the Internal Revenue Code applies to all underpayments of tax attributable to adjustments of partnership items of Petaluma FX Partners, LLC.” Petaluma argues that since the Tax Court lacked jurisdiction to determine outside basis, it also lacks jurisdiction to determine that penalties apply with respect to outside basis because those penalties do not relate to an adjustment to a partnership item. We agree. As the Tax Court noted, penalties were formerly determined at the partner level.
Petaluma,
The Tax Court held that its determination that Petaluma should be disregarded for tax purposes sufficed to give it jurisdiction over accuracy-related penalties.
Petaluma,
III. Conclusion
For the reasons set forth above, the decision of the Tax Court is affirmed in part and reversed in part. We affirm the decision of the court that it had jurisdiction to determine the sham nature of the partnership entity. We reverse the decision of the Tax Court insofar as it asserted jurisdiction over the outside-basis issues. We vacate and remand for further proceedings the Tax Court’s decision on the penalties question.
So ordered.
Notes
. The stock is not further identified in the parties’ submissions.