Bankrupt Partner Insists Tax Court Lacks Jurisdiction

PRIOR OR RELATED APPEALS

JURISDICTIONAL STATEMENT

ISSUES PRESENTED FOR REVIEW

STATEMENT OF THE CASE

STATEMENT OF FACTS

STANDARD OF REVIEW

ARGUMENT

I. THE TAXPAYER'S SHARE OF PARTNERSHIP LOSSES IS A PARTNERSHIP ITEM AND CAN BE ADJUSTED ONLY IN A PARTNERSHIP-LEVEL PROCEEDING

CONCLUSION

STATEMENT REGARDING ORAL ARGUMENT

CERTIFICATE OF COMPLIANCE WITH WORD LIMIT

ATTACHMENTS TO BRIEF:

Tab

1. Opinion of the United States Tax Court (January 12, 2001)

2. Order of the United States Tax Court Denying the Taxpayer's Motion for Reconsideration (May 11, 2001)

3. Sections of the Internal Revenue Code:

6. Department of the Treasury, Internal Revenue Service Instructions for Form 1065, U.S. Partnership Return of Income (1990)

B&L Oil Co. v. Appel, 782 F.2d 155 (10th Cir. 1986)

Chevron, U.S.A, Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837 (1984)

Crnkovich v. United States, 202 F.3d 1325 (Fed. Cir. 2000)

Doe v. Commissioner, 116 F.3d 1489 (table), 1997 WL 355357 (10th Cir. June 2, 1997)

Edwards v. Valdez, 789 F.2d 1477 (10th Cir. 1986)

In re DeLuca, 142 B.R. 687 (Bankr. D.N.J. 1992)

In re Doemling, 127 B.R. 954 (W.D. Pa. 1991)

In re Johnson, 95-2 USTC ¶ 50,611 (Bankr. D. Mass. 1995)

In re Lazar, 200 B.R. 358 (Bankr. C.D. Cal. 1996)

In re Mirman, 98 B.R. 742 (Bankr. E.D. Va. 1989)

In re Payroll Express Corp., 921 F. Supp. 1121 (S.D.N.Y. 1996)

In re Powell, 187 B.R. 642 (Bankr. D. Minn. 1995)

In re SeaEscape Cruises, Ltd., 201 B.R. 321 (Bankr. S.D. Fla. 1996)

In re Strangis, 67 B.R. 243 (Bankr. D. Minn. 1986)

In re Turboff, 93 B.R. 523 (Bankr. S.D. Tex. 1988)

Kaplan v. United States, 133 F.3d 469 (7th Cir. 1998)

Maxwell v. Commissioner, 87 T.C. 783 (1986)

McKnight v. Commissioner, 7 F.3d 447 (5th Cir. 1993)

Mt. Emmons Mining Co. v. Babbitt, 117 F.3d 1167 (10th Cir. 1997)

Padilla v. School Dist. No. 1, 233 F.3d 1268 (10th Cir. 2000)

Scripps-Howard v FCC, 316 U.S. 4 (1942)

Securities & Exch. Commn. v. Cochran, 214 F.3d 1261 (10th Cir. 2000)

St. Charles Inv. Co. v. Commissioner, 232 F.3d 773 (10th Cir. 2000)

Tavery v. United States, 32 F.3d 1423 (10th Cir. 1994)

United States v. Mangan, 575 F.2d 32 (2d Cir. 1978)

United States v. Morgan, 922 F.2d 1495 (10th Cir. 1991)

11 U.S.C. § 541(a)

11 U.S.C. § 541(a)(1)

26 U.S.C. § 1398

26 U.S.C. § 1398(d)(2)(A)

26 U.S.C. § 6031(a)

26 U.S.C. § 6031(b)

26 U.S.C. § 6213(a)

26 U.S.C. §§ 6221-6233

26 U.S.C. § 6221

26 U.S.C. § 6222

26 U.S.C. § 6223(a)

26 U.S.C. § 6225(a)

26 U.S.C. § 6225(a)(1)

26 U.S.C. § 6226(f)

26 U.S.C. § 6231(a)(3)

26 U.S.C. § 6231(a)(5)

26 U.S.C. §§ 6241-45 (repealed)

26 U.S.C. § 7482(a)(1)

26 U.S.C. § 7482(b)(1)(A)

26 U.S.C. § 7483

F.R.A.P. 36.3(B)

10th Cir. R. 28.1(B)

Treas. Reg. § 1.6031(a)-1

Treas. Reg. § 1.6031(a)-1(a)(2)

Treas. Reg. § 1.6031(b)-1T(a)

Treas. Reg. § 1.6031(b)-1T(a)(1)

Treas. Reg. § 1.6031(b)-1T(a)(3)

Treas. Reg. § 1.6031(b)-1T(a)(3)(i)

Treas. Reg. § 301.6231(a)(3)-1(a)(1) (the "Partnership Items Reg.")

Treas. Reg. § 301.6231(c)-7T(a) (the "Bankruptcy Reg.")

S. Rep. No. 1035, 96th Cong., 2d Sess. (Nov. 25, 1980), reprinted in 1980 U.S.C.A.A.N. 7017

Department of the Treasury, Internal Revenue Service Instructions For Form 1065, U.S. Partnership Return of Income (1990)

[2] Appellant Aron B. Katz ("Mr. Katz" or the "Taxpayer") and his wife, appellant Phyllis A. Katz, submit this opening brief on appeal from the United States Tax Court.

[4] This Court has subject matter jurisdiction pursuant to IRC § 7482(a)(1). The appeals in these cases are properly made to this Circuit because the taxpayers' legal residence is located within this Circuit. See IRC § 7482(b)(1)(A).

[5] The Tax Court entered its decisions on July 6, 2001. The notices of appeal were timely filed in the Tax Court on September 28, 2001, less than 90 days later, as required by IRC § 7483. These appeals are from decisions of the Tax Court that dispose of all claims and thus constitute final decisions.

2. Did the Tax Court err in holding that it would lack jurisdiction to determine this issue in a partnership-level proceeding (and hence had jurisdiction in this partner-level proceeding), where the C ode and regulations expressly provide that in a partnership-level proceeding the court has jurisdiction to determine "all partnership items of the partnership" and any "addition to tax"?

3. Where a person and his bankruptcy estate are universally held to be separate and distinct entities, did the Tax Court err in holding, for the single purpose of determining the court's jurisdiction in partnership tax matters, that the Taxpayer and his bankruptcy estate together "are appropriately treated as a single partner"?

[8] The Commissioner issued notices of deficiency seeking to adjust -- to zero -- the Taxpayer's share of the partnerships' net operating losses reported on his 1991-94 joint returns. (Doc. 35, Exh. 8-J, 9-J, 10- J.) Although the Commissioner did not challenge the validity of the losses, it argued that all of the losses should have been reported by the Taxpayer's bankruptcy estate and that the Taxpayer himself was entitled to none of the losses. (Id.)

[9] The Taxpayer filed petitions with the Tax Court challenging the notices of deficiency. (See, e.g., Doc. 1.) The court granted the Commissioner's motion for summary judgment and issued a decision sustaining deficiencies for tax years 1992 through 1994 totaling $833,281. (Docs. 70, 81; Case No. 780-97 Doc. 72; Case No. 181-98 Doc. 66.) In this appeal, the Taxpayer demonstrates that the Tax Court lacked subject matter jurisdiction to assess those deficiencies.

[11] On July 5, 1990, Mr. Katz filed a petition under Chapter 7 of the Bankruptcy Act. (Doc. 42, ¶ 5.) A taxpayer who files a bankruptcy petition may elect to bifurcate the year into two taxable years -- one ending on the day before the bankruptcy petition and the second beginning on the date of the petition. IRC § 1398(d)(2)(A). Mr. Katz did not elect to divide 1990 into two tax years (Doc. 42, ¶ 5), and he consequently filed a single return on Form 1040 reflecting all tax items attributable to him for all of calendar year 1990. (Doc. 35, Exh. 3-J.) His bankruptcy estate filed a separate return on Form 1041 reflecting post-petition items that were attributable to the estate. (Doc. 35, Exh. 13-J.)

[12] As provided by § 541(a) of the Bankruptcy Act, 11 U.S.C. § 541(a), the Taxpayer's partnership interest in Century was transferred to his bankruptcy estate as of the date of filing the petition. Since that interest was owned by two different entities during the course of the year -- the Taxpayer before filing of the petition and the estate afterward -- Century was required by IRC § 6031(a) and (b) and Treas. Reg. § 1. 6031(b)-1T(a) to allocate income and loss between the Taxpayer and his bankruptcy estate. (See text of statutes and regulations in Attachments 3 and 4.) Century did so, reporting on the Taxpayer's Schedule K-1 all income and loss that had accrued as of the day before the bankruptcy petition (Doc. 35, Exh. 11-J), and reporting on the estate's K-1 all income and loss that accrued from the date of the petition to the end of the year. (Id., Exh. 12-J.) Under the Code and regulations, these Schedule K-1's form part of Century's partnership return for 1990. IRC § 6031(b); Treas. Reg. §§ 1.6031(a)-1, 1.6031(b)-1T(a)(1); Instructions for 1990 Form 1065, see Attachment 6 hereto at p. 15.

[13] Consistent with the Schedule K-1 he had received from Century, the Taxpayer reported on his 1990 return his share of prepetition losses recognized by partnerships in which he was a partner, totaling $19,307,394. (Doc. 35, Exh. 3-J, Scheds. 4 & 5.) Of this amount, $18,838,340, or 97.6%, was derived from Century.² (Id.) The Taxpayer did not use all of these losses on his 1990 return and carried forward the unused portion to his returns for the tax years at issue. (Opinion at 5; see, e.g., Doc. 35, Exh. 5-J, line 22.)

[14] B. TEFRA. Prior to 1982, the only procedure by which the Commissioner could adjust tax items pertaining to partnerships was to commence multiple proceedings concerning the individual partners. (Opinion at 6.) This procedure was cumbersome and duplicative, and it raised the possibility that different proceedings could result in inconsistent treatment of the same items. See Crnkovich v. United States, 202 F.3d 1325, 1328 (Fed. Cir. 2000); Kaplan v. United States, 133 F.3d 469, 471 (7th Cir. 1998). In 1982 Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub. L. 97-248, §402(a), 97th Cong., 2d Sess. (Sept. 3, 1982). Among other things, TEFRA added to the Code §§ 6221-6233, which established procedures requiring the Commissioner to adjust certain tax items in a single, unified proceeding affecting the entire partnership. Such a proceeding is known as a partnership-level proceeding, whereas a proceeding affecting only a single partner is known as a partner-level proceeding. See IRC § 6221; Crnkovich, 202 F.3d at 1328; Opinion at 6-7.

[15] Tax items to be addressed in TEFRA's new partnership-level proceedings are denominated "partnership items," defined in broad terms, as any item that is "more appropriately determined at the partnership level." IRC § 6231(a)(3). The Code leaves it to "regulations prescribed by the Secretary" to state more detailed rules for determining which items are partnership items. Id. Under the authority delegated by this section, the. Secretary of the Treasury promulgated Treas. Reg. § 301.6231(a)(3)-1(a)(1), which provides that the statutory term "partnership items" includes, among other things, "each partner's share of . . . Items of . . . loss . . . of the partnership."

[16] If the Commissioner seeks to adjust a partnership item, it may do so only in a partnership-level proceeding. (IRC § 6221; Opinion at 6; see Maxwell v. Commissioner, 87 T.C. 783, 788-89 (1986).) Thus, a notice of deficiency concerning a partnership item is invalid unless it is issued as a result of a partnership proceeding. (Opinion at 6-7; Maxwell, 87 T.C. at 788-89.) By the same token, the Tax Court lacks jurisdiction in a partner-level proceeding to assess a deficiency attributable to a partnership item. (Kaplan, 133 F.3d at 473.) The same rules apply to an "affected item," which is any item to the extent such item is affected by a partnership item. (IRC § 6231(a)(5)). Like a partnership item, an affected item may be adjusted only in a partnership proceeding. (Opinion at 6.)

[17] C. The notices of deficiency. Despite TEFRA's prohibition against adjusting partnership items in a partner-level proceeding, in this case the Commissioner attempted to do exactly that. Without ever commencing a partnership-level proceeding, the Commissioner issued to the Taxpayer notices of deficiency seeking additional taxes for the years 1991 through 1994. (Opinion at 7; Doc. 35, Exhs. 8-J to 10-J.) The notice of deficiency for 1991, which was incorporated by reference in the following years' notices, explained the Commissioner's theory as follows:

[18] D. Proceedings in the Tax Court. The Taxpayer filed petitions in the Tax Court challenging the notices of deficiency. (Eg., Doc. 1.) The parties stipulated to all relevant facts (Docs. 35, 42, with exhs.), and the only issue for the Tax Court to resolve was the application of the Code to the undisputed facts.

[19] The Taxpayer filed a motion to dismiss for lack of jurisdiction. (Docs. 46, 47.) In his motion, the Taxpayer demonstrated that his share of the partnerships' 1990 net operating losses were "partnership items" and that the carryforwards of these losses to subsequent years were "affected items." (Doc. 47 at 4-5, 10-12.) As a result, these items could be adjusted only in a partnership-level proceeding. (Id. at 10-12.) Since the Commissioner had commenced no such partnership-level proceeding, the notices of deficiency were invalid, and the Tax Court lacked jurisdiction to enforce them.³(Opinion at 6-7; Maxwell, 87 T.C. at 788-89.)

[20] The Commissioner opposed the Taxpayer's motion and cross- moved for summary judgment. (Docs. 51, 54, 55.) The Commissioner agreed that the matters at issue normally would constitute partnership items and affected items and thus could be adjusted only in partnership-level proceedings. (Doc. 51 at 4.) The Commissioner contended, however, that the partnership items at issue had been converted to nonpartnership items by Treas. Reg. § 301.6231(c)- 7T(a), which applies in certain circumstances when a taxpayer files a bankruptcy petition. (Id. at 3, 6.) In response, the Taxpayer showed that this regulation, by its own terms, does not apply here. (Doc. 65 at 2-5.)

[21] The Tax Court issued an opinion denying the Taxpayer's motion to dismiss and granting the Commissioner's motion for summary judgment. (Opinion -- Doc. 69 and Attachment 1 hereto.) On the jurisdictional issue -- whether the Commissioner had authority to issue these notices of deficiency without commencing a partnership- level proceeding -- the court decided the case on grounds that had not been argued by either party. (Opinion at 9.) Although the Commissioner had conceded that the tax items at issue here would be partnership items (unless converted to nonpartnership items by the bankruptcy-related regulation), the Tax Court held that the items at issue were not partnership items at all. (Opinion at 15.)

[22] The court did not address the treasury regulation, on which the Commissioner had relied, converting certain partnership items to nonpartnership items in the event of the taxpayer's bankruptcy. (Opinion at 9.) The court instead focused on IRC § 6226(f) (Opinion at 10-11, 12-13), which lists the grounds on which the Tax Court has jurisdiction to review the Commissioner's administrative decision (known as a "final partnership administrative adjustment" or "FPAA") in a partnership-level proceeding. Section 6226(f) provides that, following such a partnership-level proceeding, a court has jurisdiction to review an FPAA on three grounds. The first is that a court may "determine all partnership items . . . to which the [FPAA] relates." Although the controversy in this case falls squarely within this provision, and the Tax Court would have had jurisdiction to address it in a partnership-level proceeding, the court did not consider this portion of the statute.

[23] Rather, the court focused on the second jurisdictional ground listed in § 6226(f), which states that the court may review "the proper allocation of [partnership] items among the partners." (Opinion at 11.) Considering only this clause, the Tax Court analyzed whether the case presented an issue of allocating partnership losses between the Taxpayer and his bankruptcy estate. (Id. at II-15.) While not disputing the rule of law that a taxpayer and his bankruptcy estate are two separate entities (Id. at 10), the Tax Court created an exception for this one limited purpose and held that it would consider the taxpayer and his bankruptcy estate to be a single, indistinguishable entity. (Id. at 13-14.) Accordingly, the court concluded that there was no issue of allocating partnership losses between the Taxpayer and the estate. (Id. at 14-15.) From this premise, the court reached the conclusion that the case presented no issue affecting a partnership item and that the Commissioner consequently was not required to commence a partnership-level proceeding in order to adjust the Taxpayer's share of partnership losses. (Id. at 15.) The court therefore held that the notices of deficiency were valid and sustained deficiencies against the Taxpayer for tax years 1992 through 1994.⁴(Id. at 28.)

[24] Since the Tax Court had decided the case on grounds not raised or briefed by either party, the Taxpayer filed a motion for reconsideration. (Docs. 71, 72, 78.) The court denied the motion (Doc. 80; see Attachment 2), and this appeal ensued.

[26] The items in question are the Taxpayer's share of partnership losses, which the Commissioner sought to adjust from more than $19 million to zero. The Code and the treasury regulations clearly provide that these losses are partnership items because they satisfy both parts of a two-part test: (1) the partnerships are required to take these losses into account and report them (both the aggregate losses and each partner's share of such losses) on the partnership returns; and (2) these items are explicitly defined to be partnership items in a treasury regulation. Moreover, under a test set forth in this Court's decision in Doe v. Commissioner, 116 F.3d 1489 (table), 1997 WL 355357 (10th Cir. June 2, 1997) (see Attachment 5 hereto), the Taxpayer's share of these partnership losses must be classified as partnership items because the Taxpayer reported these items consistently with the partnership returns, and adjustment of these items would require alteration of the partnership returns.

[27] The Tax Court's sua sponte analysis, which was not proposed or advocated by the Commissioner, is erroneous for two reasons. First, in concluding that it would not have had jurisdiction to review this case following a partnership-level proceeding, the court inappropriately limited its jurisdictional review to only one of the three grounds for jurisdiction set forth in IRC § 6226(f). The other two grounds, which the Tax Court overlooked, each would have provided the court with jurisdiction if the Commissioner had complied with the Code and had reviewed these tax items in the context of a partnership-level proceeding. Second, even as to the one ground for jurisdiction that the Tax Court did analyze, the court's holding depended on creating an unprecedented exception to the well-established rule that a taxpayer and his bankruptcy estate constitute two separate and distinct legal entities. Without citing a single precedent and without offering a reasoned justification, the Tax Court held that it would consider the Taxpayer and his bankruptcy estate to be a single, indistinguishable entity.

[28] In the Tax Court, the Commissioner conceded that the tax items at issue here normally are partnership items. The Commissioner argued only that these items were converted to nonpartnership items by a treasury regulation that applies when a taxpayer files a bankruptcy petition part way through the tax year. The Commissioner is mistaken, however. The plain terms of the treasury regulation show that where, as here, a taxpayer does not elect to divide the tax year in which he files bankruptcy into two "short years" (one ending on the day before the bankruptcy petition, and the second beginning on the date of the petition), the regulation does not affect tax items arising in the same year as the bankruptcy petition. Since the regulation does not convert such items to nonpartnership items, they remain partnership items and can be adjusted only in a partnership- level proceeding. The Commissioner never commenced such a proceeding, and the Tax Court therefore lacked jurisdiction to enforce deficiencies against the Taxpayer.

[31] When the Commissioner completes its administrative review in a partnership-level proceeding, it issues a "final partnership administrative adjustment," or FPAA. See IRC § 6223(a). It is undisputed here that "[n]o FPAA was issued by [the Commissioner] and no partnership-level proceedings have been commenced regarding the prepetition partnership losses in the present case." (Opinion at 7.) As the Tax Court correctly noted, therefore, the outcome of this appeal turns on whether the net operating losses claimed on the Taxpayer's returns constitute "partnership items." (Opinion at 7.)

[33] TEFRA defines "partnership item" in broad terms, essentially leaving it to the treasury regulations to give more detailed guidance:

[34]First, partnership losses and each individual partner's share of such losses must be reported as part of the partnership's return and thus are items that must be taken into account for the partnership's taxable year. Every partnership must file a return stating, among other things, "the names and addresses of the individuals who would be entitled to share in the taxable income if distributed and the amount of the distributive share of each individual." IRC § 6031(a). The partnership must "furnish to each person who is a partner . . . at any time during such taxable year a copy of such information required to be shown on such return as may be required by regulations." Id. § 6031(b) (emphasis added). One of the regulations referred to in this section requires that partnerships "shall furnish to every person who was a partner . . . at any time during the taxable year a written statement" of, among other things, the "partner's distributive share of partnership income [or] loss." Treas. Reg. 1.6031(b)-1T(a)(1), (a)(3)(i). This regulation required Century and other partnerships to specify how much of the partnerships' losses were attributable to the Taxpayer and how much to the bankruptcy estate.

[35] A second regulation directs that the return "must contain the information required by the prescribed form and the accompanying instructions." Treas. Reg. § 1.6031(a)-1(a)(2). The Secretary of the Treasury has prescribed Form 1065 for partnerships to file returns and has prescribed Schedule K-1 for partnerships to furnish to each partner. The Instructions for Form 1065 (hereafter, "Instructions" direct: "One copy of each K-1 must be attached to the Form 1065 filed with the Internal Revenue Service." (Instructions, see Attachment 6 hereto at p. 15.) Thus, the partnership return consists of a completed Form 1065, with attached Schedule K-1's for every partner.

[36] On each Schedule K-1, the partnership is required to state the amount of income or loss from all sources reportable by each partner. Instructions pp. 17-18 (instructions for Schedule K-1 lines 1-7). Where a partner held an interest in the partnership for only part of the tax year, the instructions require, consistently with Treas. Reg. 1.6031(b)-1T(a), that the partnership allocate income and loss attributable to the period during which the partner held the interest:

[37] The Taxpayer's partnership losses also meet the statute's second test because the Taxpayer's share of partnership losses is defined as a "partnership item" in one of the "regulations prescribed by the Secretary." IRC § 6231(a)(3). Pursuant to this section, the Secretary of the Treasury promulgated regulations defining more specifically what is included within the term "partnership items." One of those regulations provides in relevant part as follows:

[38] The Commissioner's notices of deficiency sought to adjust the Taxpayer's share of 1990 partnership losses, as carried over to the Taxpayer's joint returns for 1991-1994, from the amounts reported to zero. This adjustment alters a "partner's share of . . . [i]tems of . . . loss . . . of the partnership" (id.) and thus constitutes a "partnership item" within the plain language of the regulation. See Kaplan, 133 F.3d at 473 (the "definition of partnership items" includes a "partner's share of the partnership's income and deductible losses"). Thus, the tax items that the Commissioner sought to adjust meet both tests in the statute and constitute "partnership items."

[39] In the court below, the Commissioner conceded, contrary to the Tax Court's later ruling, that the losses at issue fell within the regulation's definition of partnership items: "Generally, 1990 items of . . . loss . . . such as those at issue here, and each partner's share thereof, are partnership items." (Doc. 51 at 6.) The Commissioner argued only that a different regulation applying to bankruptcy filings, Temp. Treas. Reg. § 301.6231(c)-7T(a) (hereafter, the "Bankruptcy Reg."), converted these losses to nonpartnership items. (Doc 51 at 6.) Based on the plain language of the Partnership Items Reg. and the Commissioner's own analysis of that regulation, the items at issue here constitute "partnership items" (and the carryovers constitute "affected items") unless these items are converted to nonpartnership items by the Bankruptcy Reg. See Maxwell, 87 T.C. at 790 (a "partnership loss" and other items "are, therefore, 'partnership items' unless some provision of the statute transmutes them into 'nonpartnership items . . . ).

[40] The Tax Court did not rely on the Bankruptcy Reg., however, in reaching its decision, apparently agreeing with the Taxpayer that the regulation could not support the interpretation that the Commissioner urged.⁶ (See Point III below.) Rather, the court based its holding on a different ground that the Commissioner never argued and that the Taxpayer had no prior opportunity to rebut. Despite the clear language of the Partnership Items Reg. and the Commissioner's concession that the losses at issue here fall within that regulation's definition of "partnership item," the Tax Court focused on IRC § 6226(f), which lists the grounds on which the Tax Court may review an FPAA issued at the conclusion of a partnership-level proceeding. (Opinion at 10-11.) Although the Tax Court did not fully explain its reasoning, it appears that the court sought to determine whether it would have had jurisdiction to review the issue in this case if it had arisen in a partnership-level proceeding. If it could not have addressed the issue in a partnership-level proceeding, the court apparently reasoned, then it must have jurisdiction in a partner-level proceeding such as this one. While this analytical framework was sound, the court's application of § 6226(f) to the facts of this case, accomplished without briefing by either party, was faulty.

[41] Section 6226(f) sets forth three separate grounds on which the Tax Court has jurisdiction to review the Commissioner's actions in partnership-level proceedings. In the following quotation of § 6226(f), bold-face numbers have been added to identify the three grounds for the Tax Court's jurisdiction:

[42] As set forth in Point II below, this conclusion is erroneous because it is well established that a person and his bankruptcy estate are two separate and distinct legal entities, and there is no reason here to make an isolated exception to this rule. Even if the court's single-entity holding were correct, however, the "proper allocation" clause is just one of three alternate bases on which the Tax Court may exercise jurisdiction to review an FPAA in a partnership-level proceeding. A conclusion that this case presents no issue of "allocation" under clause [2] does not control because the Tax Court clearly would have had jurisdiction in a partnership-level proceeding under one of the other clauses of § 6226(f).

[43] Clause [1] of § 6226(f) provides that the Tax Court "shall have jurisdiction to determine all partnership items of the partnership for the partnership taxable year to which the notice of final partnership administrative adjustment relates." (Emphasis added.) As demonstrated above, under the Partnership Items Reg., a partner's share of partnership losses is a partnership item, and the Commissioner's attempt to adjust that item consequently falls squarely within clause [1] of § 6226(f).

[44] Clause [3] of § 6226(f) provides that the Tax Court shall have jurisdiction to determine "the applicability of any . . . addition to tax . . . which relates to an adjustment to a partnership item." (Emphasis added.) There is no question that the Commissioner assessed an "addition to tax" based on its adjustment to zero of the Taxpayer's share of partnership losses, which is a partnership item. This case consequently falls squarely within clause [3] as well, and the Tax Court had jurisdiction to review the issues in this case following the conclusion of a partnership-level proceeding.

[45] Thus, the analysis returns to the simple point that the Taxpayer presented to the Tax Court and again raises on appeal: since the 1990 partnership losses constituted "partnership items," the Commissioner can adjust those items and the Taxpayer's share of those items only in a partnership-level proceeding. Any other conclusion would conflict with § 6221, which provides that "the tax treatment of any partnership item . . . shall be determined at the partnership level." See also IRC § 6225(a) ("no assessment of a deficiency attributable to any partnership item may be made" until 150 days after the issuance of an FPAA); Maxwell, 87 T.C. at 789 (until an FPAA is issued, "we have no jurisdiction . . . to redetermine any portion of a deficiency attributable to a 'partnership item"'). Even the Tax Court in this case conceded, in a different part of its opinion, that "[i]n general, the Commissioner is precluded from assessing a deficiency attributable to a partnership item until after the completion of the partnership-level proceeding." (Opinion at 6.) The Tax Court's conclusion that this case presents no issue of the "proper allocation" of partnership losses between partners, even if assumed to be correct, does not dispose of the jurisdictional issue.

[46] It is apparent that the Tax Court's holding on this point was policy-driven, based on what the court believed would represent the most efficient method of tax administration. The court observed that TEFRA reflects "a desire on the part of Congress to have only those items that are more appropriately determined at the partnership level constitute the subject of a partnership-level proceeding." (Opinion at 14.) The Tax Court considered that the issues in this case did not call for a partnership-level proceeding because the case would affect only the allocation of a single partnership share between the Taxpayer and his successor, the bankruptcy estate. Thus, the court noted, the case "will have no effect on the remaining partners" (id. at 14-15) and does not, as a matter of policy, call for the initiation of a partnership-level proceeding.

[47] The problem with this reasoning is that it ignores what the statute plainly says. One may agree or disagree with the Tax Court's assessment of the most efficient method of adjusting partners' returns, but the Tax Court is not empowered to rewrite the law. Congress delegated to the Secretary of the Treasury the power to adopt regulations defining which items were to be partnership items. The Secretary did so in the Partnership Items Reg., specifically defining a partner's share of partnership loss as a partnership item.

[48] As this Court has held many times, a court must apply a statute as written. See United States v. Morgan, 922 F.2d 1495, 1496 (10th Cir.), cert denied, 501 U.S. 1207 (1991). This basic principle, along with other "accepted rules of statutory construction," is applied in tax cases as well as other cases. St. Charles Inv. Co. v. Commissioner of Internal Revenue, 232 F.3d 773, 777 (10th Cir. 2000). Treasury regulations exercising authority delegated by Congress have the same force of law as statutes, Allstate Ins. Co. v. United States, 329 F.2d 346, 349 (7th Cir. 1964), and are analyzed under the same rules of construction.⁷

[49] Under these principles, "[i]t is a well established law of statutory construction that, absent ambiguity or irrational result, the literal language of a statute controls." St. Charles Inv. Co., 232 F.3d at 776, quoting Edwards v. Valdez, 789 F.2d 1477, 1481 (10th Cir. 1986). It is of no consequence that the Commissioner seeks to interpret the statute and regulation differently because, "[i]f a statute is clear and unambiguous, the court must interpret the statute to effect the unambiguous intent of Congress, regardless of the interpretation given to the statute by an administrative agency with responsibility for enforcement." Mt. Emmons Mining Co. v. Babbitt, 117 F.3d 1167, 1170 (10th Cir. 1997).

[50] It is also irrelevant that the agency or the court below may believe that the statute was intended to achieve a result other than what is clearly required by the statute's plain terms. Even if such a different purpose were reflected in the legislative history -- and the Tax Court cited no legislative history to support its interpretation -- the plain language of the statute controls. As this Court has observed:

[51] For the same reason, the plain language of a statute controls over any contrary views based on policy. As this Court has warned: "We must be wary against interpolating our notions of policy in the interstices of legislative provisions." Edwards, 789 F.2d at 1482 n.7. quoting Scripps-Howard v. FCC, 316 U.S. 4911 (1942).

[52] Here, the Tax Court succumbed to the temptation to follow "notions of policy" instead of the plain language of the statute. Adjustment of the Taxpayer's partnership losses in this case affected the allocation between two partners (the Taxpayer and his bankruptcy estate) of a single partnership interest. The Tax Court evidently believed that the involvement of just two partners was not sufficiently complex to warrant treatment in a partnership-level proceeding. But that decision was made by Congress and the Secretary of the Treasury when they wrote the statute and promulgated regulations. They defined the term "partnership item" to include a partner's share of partnership losses, and Congress specified that the tax treatment of a partnership item "shall be determined at the partnership level." IRC § 6221. The Commissioner never commenced a partnership-level proceeding, so its notices of deficiency are invalid, and the Tax Court lacked the power to enforce them or to sustain deficiencies.

[54] Like the Taxpayer in this case, the plaintiffs in Doe contended that the Tax Court lacked jurisdiction in a shareholder-level proceeding to adjust certain tax items that were said to be "subchapter S items." This Court agreed that subchapter S items could be adjusted only in an entity-level proceeding, Doe at **7, 8, but had to determine which of the many items in controversy constituted subchapter S items. Id. at **9.

[55] This Court concluded that, if a tax item falls within the general definition of a subchapter S item (or here, a partnership item), the Tax Court may assert jurisdiction in an individual taxpayer-level proceeding only if "the Commissioner merely accepts the partnership or corporate return as filed and proceeds to determine an individual deficiency by using the information contained in the entity's return." Id. at **9. If, on the other hand, "the Commissioner's explanation of the deficiencies is based on determinations inconsistent with the [entity's] return, then the Tax Court lacks jurisdiction to adjust the item in an individual taxpayer-level proceeding. Id. at * * 14.

[56] There is no doubt that the Commissioner's position in this case depends on assertions that are inconsistent with Century's 1990 partnership return. As set forth above in Point I(A), where a partnership interest changes hands during the year, the partnership is required to allocate items of income and loss and to report these allocations as part of its return. In conformity with this rule, attached to Century's 1990 return were Schedules K-1 for each partner during the year, including one for the Taxpayer and one for his bankruptcy estate. As directed by Treas. Reg. § 1.6031(b)- 1T(a)(1) and (a)(3) and by the instructions for Form 1065, Century divided losses between the Taxpayer and his bankruptcy estate, each of which were partners during some portion of 1990. On the Taxpayer's K-1, Century reported the amount of loss reportable by him. Under the authorities cited above, this allocation of losses on the Taxpayer's K-1 was an integral part of Century's partnership return.

[57] The Commissioner disagrees with this entry and seeks to adjust it to zero. By taking this position, the Commissioner unquestionably seeks tax treatment inconsistent with the partnership's return. Thus, the Doe test requires the conclusion that the tax item in question is a "partnership item" and can be adjusted only in a partnership-level proceeding. Because the Commissioner never commenced such a proceeding, the Tax Court lacked subject-matter jurisdiction to enforce the notices of deficiency at issue here. The court therefore erred in upholding the Commissioner's position and assessing deficiencies in a partner-level proceeding.

[59] This change in ownership presented an issue of how to allocate between two partners all the various partnership tax attributes, including losses. As required by Code § 6031(b), Treas. Reg. § 1.6031(b)-1T(a), and the instructions for Form 1065, Century issued separate forms K-1 for the Taxpayer and the bankruptcy estate, allocating losses between the two. The Commissioner disputed this allocation and contended that all of the losses should have been reported by the estate. As shown in Point I above, the partnership aggregate and each partner's share of partnership losses are partnership items. Thus, the dispute in this case was over the proper allocation between two partners of a partnership item. IRC § 6226(f) provides that the Tax Court has jurisdiction in a partnership-level proceeding to determine, among other things, "the proper allocation of [partnership items] among the partners." The dispute in this case falls squarely within the plain language of § 6226(f), and the Tax Court consequently had jurisdiction to review and decide this case in a partnership-level proceeding.

[60] Notwithstanding the clear terms of this statute, the Tax Court proceeded to invent an entirely new principle of law -- one that is totally at odds with settled principles of bankruptcy and tax law -- to conclude that this case does not fall within the ambit of the "proper allocation" clause of § 6226(f). Recognizing that there can be an allocation issue only if more than one partner is involved, the Tax Court inquired "whether a partner in bankruptcy and his bankruptcy estate should be treated as separate 'partners' for purposes of section 6226(f)." (Opinion at 12-13.) The court concluded that "a partner in bankruptcy and his bankruptcy estate are properly considered as one and the same." (Id. at 14.) This conclusion contradicts settled authority and is error as a matter of law.

• As to bankruptcy law, see, e.g., In re Payroll Express Corp., 921 F. Supp. 1121, 1124 (S.D.N.Y. 1996) ("the trustee in bankruptcy is distinct from the pre-petition debtor"); In re SeaEscape Cruises, Ltd., 201 B.R. 321, 323 (Bankr. S.D. Fla. 1996) ("The bankruptcy estate is a separate legal entity."); In reLazar, 200 B.R. 358, 371 (Bankr. C.D. Cal. 1996) ("The bankruptcy estate is a different entity from the prepetition debtors."); In re DeLuca, supra, 142 B.R. 687 at 691; In re Doemling, 127 B.R. 954, 955 (W.D. Pa. 1991) ("The most glaring problem" in one party's position "is its failure to recognize" that "[t]he debtors and the estate are not interchangeable."); In re Strangis, 67 B.R. 243, 246 (Bankr. D. Minn. 1986) ("A bankruptcy estate is an entity wholly separate from the debtor"). See also B&L Oil Co. v. Appel, 782 F.2d 155, 158 (10th Cir. 1986) ("a petition for bankruptcy operates as a 'cleavage' in time").

• As to tax law, see, e.g., In re Powell, 187 B.R. 642, 647 (Bankr. D. Minn. 1995) ("a separate taxable entity is created when an 'individual' files a petition for relief under either Chapter 7 or Chapter 11 of the Bankruptcy Code"); In re Mirman, 98 B.R. 742, 745 (Bankr. E.D. Va. 1989) (upon the filing of a bankruptcy petition, a separate taxable entity is created" which "is called the bankruptcy estate and is completely distinct from the individuals for income tax purposes"); In re Turboff, 93 B.R. 523, 525 (Bankr. S.D. Tex. 1988) (the bankruptcy estate is a "separate entity" and "is wholly distinct from the individual for income tax purposes"). See also S. Rep. No. 1035, 96th Cong., 2d Sess. (Nov. 25, 1980), at 25, reprinted in 1980 U.S.C.C.A.A.N. 7017, 7039 (the law "treats the bankruptcy estate of an individual as a separate taxable entity for Federal income tax purposes").⁸

[63] These broad generalizations do not justify the Tax Court's holding. No one disputes that the bankruptcy estate is "related" to the debtor, in the sense that it is the successor in interest to the debtor's property on the date of the petition. See 11 U.S.C. § 541. Nothing in that relationship, however, conflicts with the well-established rule that the debtor and his bankruptcy estate are separate and distinct legal entities. Similarly, the court's assertion that the bankruptcy estate "functions as the debtor's economic proxy" amounts to nothing more than a confirmation that the estate is the successor to the debtor's property for the purpose of accomplishing the goals of the bankruptcy statutes. If, by "economic proxy," the court meant that the law of bankruptcy treats the estate and debtor as the same entity, the court was simply wrong. See In re Payroll Express Corp., 921 F. Supp. at 1124, and other cases cited above.

[64] It makes no sense to carve out a one-time exception, applicable only under the narrow facts of this case, to the rule that a debtor and his bankruptcy estate are separate legal entities. The purpose of legal principles is to provide predictability in the law. Respect for precedent and stare decisis demand that, absent a compelling reason to create an exception, principles of law be applied consistently and uniformly.

The regulation provides in relevant part:

[66] The cutoff date specified in the regulation is "the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding." Id. The Taxpayer filed his bankruptcy petition in 1990. The issue thus becomes: what is the latest taxable year of the Taxpayer as to which the United States could have filed a claim in the Taxpayer's bankruptcy? This regulation would apply to partnership items arising in 1990 only if the United States would have been permitted to file a claim in the Taxpayer's 1990 bankruptcy proceeding for the Taxpayer's 1990 taxes -- i.e., taxes due for the same year in which he filed the bankruptcy petition.

[67] The government's ability to file such a claim depends on whether the Taxpayer elected to bifurcate his tax year under IRC § 1398(d)(2)(A). As noted above, this section of the Code allows a Taxpayer who files a bankruptcy petition part way through a tax year to divide the year into two short years: one ending on the day before the bankruptcy petition, and the second beginning on the date of the petition. The law is clear that "if the debtor fails to make the election for any reason, the debtor's tax liability for the entire year is collectible directly from the individual debtor and no portion is collectible from the debtor's bankruptcy estate." In re Mirman, 98 B.R. at 745 (emphasis added). To similar effect, see In re Johnson, 95-2 USTC ¶ 50,611, at 90,032 (Bankr. D. Mass. 1995) (if taxpayers do not elect to bifurcate the year in which they file petitions in bankruptcy, the government has "no claim whatsoever against their bankruptcy estate for any part of the . . . tax liability" for the year in which the petitions are filed) (citing cases); In re Turboff, 93 B.R. at 525 (absent an election under § 1398, "no part of the debtor's tax liability from the year in which the bankruptcy case commences is collectible from the estate"). The exact same language appears in the legislative history of § 1398. See S. Rep. No. 1035, 96th Cong., 2d Sess. at 26, reprinted in 1980 U.S.C.C.A.A.N. 7017, 7041. The Taxpayer did not elect under § 1398(d)(2)(A) to divide 1990 into two tax years, and the United States consequently could not assert a claim against his bankruptcy estate for any part of his 1990 income tax liability.

[68] This result is conclusive in applying the Bankruptcy Reg. Since the United States could not file a claim for the Taxpayer's 1990 taxes in the Taxpayer's bankruptcy, the latest taxable year for which it could file such a claim was 1989. The cutoff date specified by the Bankruptcy Reg. is the last day of that year, December 31, 1989. The partnership items affected by the regulation are those "arising in any partnership taxable year ending on or before" that date, the most recent of which would be calendar year 1989. Partnership items arising afterward -- including the 1990 partnership items at issue in this case -- are unaffected by the regulation.

[69] By its own terms, therefore, the Bankruptcy Reg. does not convert any of the Taxpayer's 1990 partnership items to nonpartnership items. Since they remained partnership items, the Tax Court lacked jurisdiction to enforce deficiencies resulting from such items in a partner-level proceeding. See IRC §§ 6221, 6225(a)(1); Maxwell, 87 T.C. at 789.

² The remaining partnership losses were derived from other partnerships. Unlike Century, some of these partnerships did not allocate losses between the Taxpayer and the bankruptcy estate. As to these partnerships, the Taxpayer filed Notices of Inconsistent Treatment pursuant to IRC § 6222, in which the Taxpayer calculated the allocations. (Doc. 35, Exh. 3-J, Forms 8082.)

³ In the Tax Court, the Taxpayer also disputed the Commissioner's theory that all the losses -- both prepetition and postpetition -- are reportable by the bankruptcy estate. While not conceding this point, the Taxpayer does not raise it on appeal because the jurisdictional issue is clear and is sufficient to require reversal and dismissal.

⁴The court found there was no deficiency for 1991. (Doc. 81.)

⁵The principal statutes cited in this brief are reproduced in Attachment 3, and the principal treasury regulations in Attachment 4.

⁶Based on the principle that a court should rest its decision on the narrowest ground available, the Tax Court presumably would have based its ruling on the Bankruptcy Reg. if it had agreed with the Commissioner that the regulation converted these losses to nonpartnership items. Its decision not to rely on the Bankruptcy Reg., and to assert instead a much broader legal principle of first impression, suggests that the Tax Court agreed with the Taxpayer (see Point III below) that the regulation does not apply to the 1990 losses.

⁷ Regulations such as this one, which are "issued under a specific grant of authority to . . . prescribe a method of executing a statutory provision," are described as "legislative regulations" and are given "more weight than interpretive regulations." McKnight v. Commissioner, 7 F.3d 447, 450 (5th Cir. 1993), quoting in part Chevron, U.S.A, Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837, 843-44 (1984) (ellipsis in original). Legislative regulations "are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the underlying statute." McKnight, 7 F.3d at 451.

⁸This Senate Report accompanied the enactment of IRC § 1398, which generally addresses the tax treatment of individuals and their bankruptcy estates.