DOJ Argues Tax Court had Jurisdiction to Disallow Bankrupt Partner's NOL Carryovers

Internal Revenue Code (26 U.S.C.):

[3] The Tax Court entered decisions in each proceeding on July 6, 2001. The decisions were final, appealable orders. Taxpayer filed notices of appeal in each proceeding on September 28, 2001 (Doc. 82 in Case No. 01-9010; Doc. 73 in Case No. 01-9011; Doc. 67 in Case No. 01-9009), which was within 90 days after entry of the decisions. The notices of appeal were timely. I.R.C. § 7483, Fed. R. App. P. 13(a). This Court has jurisdiction pursuant to I.R.C. § 7482 in two of the cases, Nos. 01-9011 and 01-9009.

[4] In Case No. 01-9010, however, the Tax Court entered a decision that there was no deficiency. Although taxpayer filed a timely notice of appeal, this Court has no jurisdiction over that appeal. W.W. Windle Co. v. Commissioner, 550 F.2d 43, 45 (1st Cir. 1977) (where Tax Court entered decision of no deficiency taxpayer could not appeal to challenge the Tax Court's findings and rulings.)

[6] 2. Whether the Tax Court had jurisdiction to disallow the NOL carryovers from 1990 to 1992, 1993, and 1994, because taxpayer's bankruptcy petition rendered the 1990 losses "nonpartnership" items for purposes of the unified partnership audit provisions.

[8] The principal issue on which the parties differed was whether taxpayer was entitled to net operating loss carryovers from his 1990 tax year. In July of that year, taxpayer filed a bankruptcy petition. At the time, taxpayer was a partner in numerous partnerships that sustained losses in the year ending December 31, 1990. Taxpayer claimed the benefit of the partnership losses on his tax return for the taxable year 1990, and carried over the unused losses to reduce his taxable income for taxable years 1991, 1992, 1993, and 1994.

[9] The Commissioner took the position that the bankruptcy estate acquired the partnership interests and partnership losses, and so taxpayer was not entitled to report the losses on his 1990 return nor claim them as carryovers onto his 1991-1994 returns. Taxpayer asserted, however, that the matter of whether he was entitled to the losses was a "partnership item" that the IRS could only adjust in a partnership-level proceeding pursuant to the uniform partnership audit provisions of I.R.C. §§ 6221-6234, and that the Tax Court therefore lacked jurisdiction.

[10] The Tax Court rejected taxpayer's argument that it lacked jurisdiction, and agreed with the Commissioner that taxpayer was not entitled to the NOL carryovers. (Doc. 69.) Thereafter, the parties set about computing the income tax deficiency for each of the four years in accordance with the Tax Court's opinion so that the Tax Court could enter decisions in each case. The parties concluded, however, that there would still be no deficiency for the 1991 tax year, even under the Tax Court's ruling, because taxpayers had other deductions. (Doc. 74 in Case No. 01-9010.) Thus, the Tax Court entered a decision of "no deficiency" in Case 01-9010. (Doc. 81 in Case No. 01-9010.)

[11] The parties agreed, however, that under the Tax Court's analysis there were deficiencies for 1992, 1993, and 1994. Thus, in Case No. 01-9011, the Tax Court entered a decision that there was a deficiency for 1992 of $64,862 (Doc. 72 in Case No. 01-9011). In Case No. 01-9009, the Tax Court entered a decision that there were deficiencies for 1993 and 1994 of $331,231 and $437,188, respectively. (Doc. 66 in Case No. 01-9009.)³

[13] On July 5, 1990, taxpayer commenced a bankruptcy proceeding in the U.S. Bankruptcy Court for the Southern District of New York by filing a petition for relief under Chapter 7 of the Bankruptcy Code. (Doc. 42 ¶ 5.) Taxpayer did not make an election under I.R.C. § 1398(d)(2) to bifurcate his 1990 taxable year into two short taxable years on account of his bankruptcy filing. (Doc. 42 ¶ 5.) Accordingly, taxpayer's individual income tax return for 1990, on which he claimed the status of a married person filing separately, covered the entire calendar year. (Doc. 35, Exh. 15-J.) Taxpayer received a Chapter 7 discharge on June 2, 1993. (Doc. 42 ¶ 5.)

[14] Although the entire amount of the 1990 partnership losses belonged to the bankruptcy estate, as we explain in our argument below, taxpayer nevertheless claimed a portion of the 1990 partnership losses on his own individual federal income tax return for 1990. (Doc. 35, Exh. 3-J; Doc. 42 ¶ 4.) Unable to use all of the losses in reducing his 1990 income tax liability, taxpayer carried forward the unused losses (as net operating losses (or "NOLs")) to reduce his reported tax liability for taxable years 1991, 1992, 1993 and 1994, the years here at issue. (Doc. 42 ¶ 4; Doc. 35, Exhs. 4-J, 5-J, 6-J, 7-J.)

[15] The Commissioner examined the 1991-1994 returns and, by notices of deficiency, disallowed the NOL carryovers from the 1990 tax year attributable to the partnerships. The Commissioner determined that the 1990 NOLs became property of taxpayer's bankruptcy estate, as opposed to taxpayer individually, and therefore could not be used by taxpayer to reduce his income. (Doc. 35, Exhs. 8-J, 9-J, 10-J.) Taxpayer filed the instant petitions in the Tax Court, which were ultimately consolidated for purposes of briefing and opinion.

[16] After settling other issues (Doc. 36), the parties filed cross-motions for summary judgment as to whether taxpayer's bankruptcy estate acquired all the partnership losses. (Docs. 44 and 54.) Taxpayer also filed a motion to dismiss for lack of jurisdiction with respect to the partnership losses. (Doc. 46.) In support of the motion to dismiss, taxpayer maintained that the partnership losses were "allocated" between taxpayer and his bankruptcy estate, and that each allocation constituted a "partnership item" that the IRS could not adjust except pursuant to the unified partnership audit provisions of I.R.C. §§ 6221-6234. (Doc. 47 at 4-5.) Under those provisions, the IRS must generally make adjustments of partnership items at the partnership level.

[17] The Commissioner opposed the motion to dismiss. The Commissioner did not take a position on the question whether the supposed "allocation" of the partnership losses between taxpayer- debtor and his bankruptcy estate would have been partnership or nonpartnership items. Instead, the IRS contended that such items would, in any event, become nonpartnership items at the time of the bankruptcy petition by virtue of Treas. Reg. § 301.6231(c)-7T. (Doc. 51 at 6.)

[18] The Tax Court concluded that allocation of losses amongst the partners was, in general, a partnership item, because an allocation to one partner necessarily affected the other partners. But the Tax Court further held that a partner who is a debtor in bankruptcy and his bankruptcy estate should be considered a single partner for such purposes, and that the suballocation of that one partner's tax attributes between the individual and the bankruptcy estate was not a partnership item, because that suballocation would not affect the other partners. (Doc. 69 at 15.) The Tax Court accordingly denied the motion to dismiss for lack of jurisdiction. (Ibid.) The Tax Court did not reach the question of what effect Treas. Reg. § 301.6231(c)-7T had on the items. (Doc. 69 at 9 n.5.)

[19] Turning to the merits, the Tax Court agreed with the Commissioner that the partnership losses were properly reportable by the bankruptcy estate, not by taxpayer individually. (Doc. 69 at 28.) Taxpayer filed a motion for reconsideration (Doc. 71) and a supplemental motion for reconsideration (Doc. 72) contending that the Tax Court decided the motion to dismiss for lack of jurisdiction on grounds other than those presented by the parties, and that taxpayer ought to have an opportunity to brief the issue. The Tax Court granted the motion in pertinent part, reviewed the parties' briefs, and declined to modify its opinion. (Doc. 80.)

[21] Upon examination, the Commissioner disallowed the loss carryovers because the partnership losses belonged to the estate, and issued notices of deficiency. Taxpayers petitioned the Tax Court, and argued that the Commissioner could only adjust taxpayer's claim to the 1990 partnership losses by conducting an audit of the partnerships and initiating partnership proceedings. According to taxpayer, his purported allocation of the 1990 partnership losses into pre-petition portions to which he was entitled, and post- petition portions to which the bankruptcy estate was entitled, were "partnership items" that the IRS could only adjust through partnership proceedings.

[22] Taxpayer's argument should be rejected. In the first place, taxpayer's attempt to "allocate" the partnership losses for 1990 into two portions is a nullity. The partnership losses were not realized until the close of the partnerships' taxable years, which occurred on December 31, 1990. There is no basis to allocate the loss into pre- and post-petition portions. Moreover, the bankruptcy estate was entitled to the entire amount of the losses for taxable year 1990, even if there was some basis to separate the losses into two portions.

[23] More importantly, however, Treasury Regulations provide an exception from the TEFRA partnership audit provisions in the event of bankruptcy. When a partner in a partnership becomes a debtor in a bankruptcy proceeding, all partnership items that concern that partnership interest become "nonpartnership" items for purposes of the TEFRA partnership audit provisions. The bankruptcy exception prevents conflict between the imperatives of unified partnership audits and bankruptcy proceedings.

[24] In particular, Treas. Reg. § 301.6231(c)-7T provides that "partnership items [with respect to a partner who is a debtor] arising in any partnership taxable year ending on or before 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 shall be treated as nonpartnership items." Thus, if the United States could file a claim for 1990 income tax due attributable to the partnership interest, then those items convert to nonpartnership items so that they can be addressed in the bankruptcy proceeding. Under the Bankruptcy Code, the trustee of the bankruptcy estate was responsible for filing a 1990 income tax return, and paying 1990 income tax, and the United States was entitled to file a claim in the bankruptcy proceeding to recover that tax. Accordingly, the 1990 items were nonpartnership items, and the Tax Court had jurisdiction to determine taxpayer's deficiencies as a result of their disallowance.

[25] Moreover, as the Tax Court held, a partner who is a debtor in a bankruptcy proceeding and the bankruptcy estate ought not be counted as two separate partners for purposes of determining whether the suballocation of their share of partnership items is a matter which should be determined at the partnership level. The determination of whether the debtor is entitled to any of the losses, vis-a-vis the estate, is a matter of no general concern to the partnership and, therefore, should not be determined at the partnership level.

[28] The purpose of Section 541 of the Bankruptcy Code is, of course, to "secure for creditors everything of value the bankrupt may possess" when he files his petition. Segal v. Rochelle, 382 U.S. 375, 379 (1966) (interpreting statutory predecessor of 11 U.S.C. § 541); accord In re Barowsky, 946 F.2d 1516, 1518 (10th Cir. 1991) (Segal result affirmatively adopted in enactment of Bankruptcy Code Section 541). "To this end the term 'property' has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed." Segal, 382 U.S. at 379. Thus, in Segal, the Court held that a bankruptcy estate acquired a potential net operating loss carryback claim, arising from the debtor's losses experienced during the portion of the year prior to the bankruptcy petition, even though the loss could not be carried back to claim a refund until the close of year. Although the Segal Court did not decide whether the result would be the same for loss carryovers, id. at 381, subsequent legislation has clarified that where the debtor is an individual and a partner in a partnership, any distributive share of income, gain, loss, deduction, or credit of such individual that is considered distributed after the bankruptcy petition belongs to the estate. 11 U.S.C. § 346(b)(1). To address the Segal Court's concern that including carryforwards as property of the estate may jeopardize the fresh start policy,⁶ Congress provided that unutilized tax attributes revert to the debtor at the conclusion of the case. 11 U.S.C. § 346(i)(2); See In re Prudential Lines Inc., 928 F.2d 565, 572 (2d Cir. 1991).

[29] Although we have found no cases on point, several commentators have concluded that the debtor's making a "short-year" election as permitted by I.R.C. § 1398(d) would not alter the facts that (1) the estate acquires the partnership tax interest upon the filing of the petition, and (2) if the bankruptcy proceeding continues until the end of the partnership taxable year in which the petition was filed, the estate will obtain all of the partnership tax attributes for the year. Ann-Elizabeth Purintun, Partnerships and Partners in Bankruptcy, 11 J. Partnership Tax'n 342, 344 (Winter 1995) ("Thus, whether or not the debtor partner makes the short taxable year election, the distributive share of income or loss from the entire partnership taxable year in which the partner's bankruptcy petition is filed should be included in the return of the estate." ); American Bar Association Section of Taxation, Report of the Section 108 Real Estate and Partnership Task Force: Part II, 46 Tax Law. 397, 448-449 (1993) (concluding that "when an individual files bankruptcy prior to the close of the partnership's taxable year, his bankruptcy estate would get the benefit or detriment of the partnership income or loss for the entire year" and noting that "the section 1398(d) short period election to treat the debtor's taxable year of bankruptcy filing as two taxable years would not affect the result").

[30] Thus, upon the filing of the bankruptcy petition, the bankruptcy estate acquired both taxpayer's interests in the partnerships, and the potential claim of NOLs generated in 1990 by the partnership interests.

[32] The crux of taxpayer's argument is his premise that the partnerships were "required by I.R.C. § 6031(a) and (b) and Treas. Reg. § 1.6031(b)-1T(a) to allocate income and loss between the Taxpayer and his bankruptcy estate." (Br. 5.) According to taxpayer, pursuant to this requirement, Century issued to him a Schedule K-1 reporting the partnership's income and losses between January 1, 1990, and July 4, 1990, and issued to the bankruptcy estate a Schedule K-1 reporting to it the partnership's income and losses between July 5, 1990, and December 31, 1990. (Br. 5.) Taxpayer acknowledges that not all of the 30 partnerships showing income or loss on his 1990 return issued to him a Form K-1 purporting to allocate the 1990 tax items into a portion to him and a different portion to his bankruptcy estate. (Br. 6 n.2.) He notes that he filed Notices of Inconsistent Treatment with his 1990 return wherein he purported to perform the allocation himself. There were 14 such notices filed with taxpayer's 1990 return. (Doc. 35, Exh. 3-J.)

[33] But taxpayer's premise has no support. The authorities cited, I.R.C. § 6031 and Treas. Reg. § 1.6031(b)-1T, generally require partnerships to file information returns disclosing the identity of the partners and their distributive shares of partnership items, and also to notify those same partners of what has been reported to the IRS. But those authorities do not specifically deal with a partner who files a bankruptcy petition during the year. To be sure, as taxpayer points out (Br. 18), a partner may join or leave a partnership during the taxable year, and the instructions for partnership tax returns for 1990 advise partnerships to divide the partnership taxable year into segments to account for such changes. But neither I.R.C. § 6031, nor Treas. Reg. § 1.6031(b)-1T, nor even the Form 1065 instructions upon which taxpayer relies (Br. 19, 31-32) direct partnerships to allocate partnership tax attributes between a single partner and the bankruptcy estate in which the partner is a debtor. Taxpayer has not cited any judicial authority for his premise, and our research has not discovered any.

[34] Indeed, there should normally not be any reason to divide a partner's share of the partnership's losses for the year into portions suffered before, and after, a bankruptcy petition, for the bankruptcy estate is entitled to both portions, as set forth above. For example, in Segal v. Rochelle, losses claimed after the close of the taxable year in which the petition was filed (1961), but "suffered by the partnership during 1961 prior to the filing of the bankruptcy petitions", 382 U.S. at 376, were held to belong to the estate. At least two bankruptcy treatises are in accord:

[35] Simply put, the bankruptcy estate was entitled to all the losses arising in the taxable year 1990 from partnership interests that taxpayer owned on the date of his bankruptcy petition. It acquired the losses that the partnerships suffered in that year whether incurred before or after the petition date. There was, accordingly, no reason for the partnerships to purport to allocate that year's tax items into portions to be reported to taxpayer and to his bankruptcy estate. The Tax Court's decision in this regard should be affirmed.

* * *

[37] Taxpayer maintains that the Tax Court lacked jurisdiction to disallow the NOLs attributable to the partnerships, because the NOLs were partnership items determinable only in a partnership level proceeding. As noted above, the Commissioner opposed the motion to dismiss on the basis that the question of how to allocate one partner's share of partnership losses between a debtor-partner and the related bankruptcy estate converted to a nonpartnership item upon the filing of the bankruptcy petition. In other words, the items "converted" at the instant the issue arose: at the time of the bankruptcy petition. The Tax Court did not decide this issue, however, and ruled instead that the allocation of losses between the taxpayer and his bankruptcy estate was not a partnership item. We shall show that the partnership losses were unquestionably nonpartnership items after the bankruptcy petition, because the petition acted to convert all of taxpayer's partnership items to nonpartnership items pursuant to Treas. Reg. § 301.6231(c)-7T. Because there is a regulation specifically addressing the consequences of a partner's bankruptcy, there was no need for the Tax Court to inquire whether the matter in question was, ab initio, a partnership item or nonpartnership item. At all events, as we shall show, the Tax Court correctly concluded that the matter was not a partnership item.

[39] Prior to 1982, there was no mechanism for making adjustments to the tax treatment of partnership items at the partnership level. Adjustments had to be determined in separate proceedings involving each individual partner. Because individual partners in many instances resided throughout the country, the audit of a single partnership often required the participation of dozens of IRS field offices. The piecemeal nature of these individual partner- level determinations resulted in numerous problems in tax administration, including duplication of administrative and judicial effort, inconsistent results for different partners, and difficulty in reaching comprehensive settlements. See Staff of the Joint Comm. on Taxation, 97th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 267-68 (Comm. Print 1982); Chef's Choice Produce, Ltd. v. Commissioner, 95 T.C. 388, 393 (1990).

[40] In response to these concerns, Congress enacted the partnership audit provisions of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324, 648-671 (TEFRA). The legislation consists of comprehensive provisions establishing coordinated procedures for determining the tax treatment of partnership items on audit and for obtaining judicial review of those determinations. H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. 599, reprinted in 1982-2 C.B. 600, 662; see Transpac Drilling Venture 1983-63 v. United States, 16 F.3d 383, 387 (Fed. Cir. 1994); Maxwell v. Commissioner, 87 T.C. 783, 787 (1986). These provisions are set forth in I.R.C. §§ 6221-6234.

[41] Under the TEFRA statutory scheme, the tax treatment of any "partnership item" generally is determined at the partnership level. I.R.C. § 6221. A "partnership item" is any item required to be taken into account under the Code for the partnership's taxable year to the extent regulations prescribed by the Secretary of the Treasury provide that such item is more appropriately determined at the partnership level than at the partner level. I.R.C. § 6231(a)(3). Partnership items include "the partnership aggregate and each partner's share of items of income, gain, loss, deduction or credit of the partnership." Treas. Reg. § 301.6231(a)(3)-1(a); see Kaplan v. United States, 133 F.3d 469, 473 (7th Cir. 1998); Randell v. United States, 64 F.3d 101, 107 (2d Cir. 1995). The partnership files an annual information return, and the partners thereafter are required to report partnership items on their individual income tax returns consistent with the treatment on the partnership return. I.R.C. § 6222(a). Any dispute regarding the treatment of partnership items or the proper allocation of these items among partners is required to be resolved at the partnership level in a unified proceeding. I.R.C. '' 6226-6228; H.R. Conf. Rep. No. 760 at 600, reprinted in 1982-2 C.B. at 662. The determinations made in a partnership proceeding respecting the tax treatment of partnership items are conclusive for the tax years in question and may not be contested in any proceeding instituted by an individual partner. N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 745 (1987); Maxwell, 87 T.C at 788.

[42] The purpose of these provisions is to afford similar treatment to similarly situated partners by ensuring that partnership items are adjusted at the partnership level, that all partners have the opportunity to participate in the audit or any judicial challenge thereof, and that there is only one final audit result or judicial determination to which all partners will be bound. To ensure uniform treatment, Congress provided very few avenues for a partner to obtain a treatment other than as determined by the final audit determination or single judicial proceeding applying to all partners. But Congress conferred upon the Secretary the authority to determine circumstances in which treating items as partnership items would "interfere with the effective and efficient enforcement of this title" because of "special enforcement considerations," and that the Secretary could determine by regulation to treat such items as non-partnership items. I.R.C. § 6231(c). See Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221, 226-227 (2d Cir. 1998). The Secretary has determined that when a partner files bankruptcy, it would interfere with the efficient and effective administration of the tax laws to continue to treat the debtor's tax items as partnership items. Treas. Reg. § 301.6231(c)-7T; Computer Programs Lambda, Ltd. v. Commissioner, 89 T.C. 198, 204 (1987).

[44] When a partner files a bankruptcy petition, the petition operates as a stay of "the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor." 11 U.S.C. § 362(a)(8). If the tax liability of the debtor or the bankruptcy estate were still affected by a partnership proceeding, the stay imposed by the bankruptcy petition would halt the commencement or continuation of the partnership proceeding, and would prevent the IRS and the remaining partners from litigating whether any adjustments were appropriate to the partnership return. And if the Bankruptcy Court granted relief from the stay, the bankruptcy estate would still be tied to the timetable established by the Tax Court and TEFRA provisions for resolving the partnership dispute. That delay, which is sometimes considerable, could interfere with the orderly resolution of the debtor's affairs, to the detriment of the creditors. Accordingly, the Secretary determined that treating the bankrupt debtor's tax items as partnership items would interfere with the effective and efficient enforcement of the internal revenue laws. Thus, when a partner becomes a debtor in bankruptcy, he is effectively severed from the partnership proceeding. The partnership proceeding may progress unimpeded by the bankruptcy stay, and the bankruptcy trustee may resolve the tax issues affecting administration of the estate with the tools provided by the Bankruptcy Code, such as 11 U.S.C. § 505, unhindered by the need to participate in the coordinated TEFRA proceeding.

[45] Taxpayer makes no excuses for the fact that his approach would thwart effective resolution of partnership proceedings and bankruptcy proceedings, explaining simply that his approach follows the plain language of the regulations. (Br. 38-40.) But even that unappealing approach turns on a misreading of the regulation on which it rests.

[46] The regulation at issue converts to nonpartnership items all the "partnership items of such a partner arising in any partnership taxable year ending on or before 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." Treas. Reg. § 301.6231(c)-7T. According to taxpayer, the Regulation creates a cut-off date, and only partnership items arising in years ending on or before that date convert. (Br. 38.) Since taxpayer filed his bankruptcy petition in 1990, the question is, according to taxpayer, what is the latest year in which the United States could file a claim for the debtor's income tax due? Taxpayer asserts that because he did not elect to bifurcate the year, the latest year for which the United States could file a claim for his income tax liability is 1989, because his 1990 tax liability is a post-petition individual liability that may not be claimed against the estate. With that much we agree.

[47] But taxpayer misreads the regulation. The regulation addresses the taxable periods for which the United States "could file a claim for income tax due in the bankruptcy proceeding." The United States could file a claim for the bankruptcy estate's 1990 and later tax liabilities that arose during the administration of the estate.⁷ As explained in our discussion of the merits, above, to the extent the partnership interests generated income, gain, loss, deductions, or credits after July 5, 1990, those interests were reportable by the bankruptcy estate. 11 U.S.C. § 346(b)(1). The estate is responsible for filing tax returns and paying income tax attributable to its interests (11 U.S.C. §§ 346, 728(b), 26 U.S.C. § 1398(c)), including 1990 income tax. Similarly, the United States has a right to payment of the tax due on the estate's 1990 income, and is entitled to file a claim in the bankruptcy proceeding to be paid. A claim for tax incurred by the estate is treated as an administrative expense under 11 U.S.C. § 503(b)(1)(B). Since the United States "could file a claim for [1990] income tax due in the bankruptcy proceeding" attributable to the partnership interest, such 1990 items converted to nonpartnership items so that they can be addressed in the bankruptcy proceeding. Likewise, assuming the bankruptcy continued through December 31, 1992, the partnership items for 1991 and 1992 would convert to nonpartnership items because the United States could then file claims in the proceeding for income tax due from the estate for those years.

[48] Contrary to taxpayer's implication (Br. 38-39), the regulation does not refer specifically to the debtor's income tax. Rather, refers to 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. . ." Treas. Reg. § 301.6231(c)- 7T (emphasis added). Since, as all agree, the bankruptcy estate acquired taxpayer's partnership interest, this passage should be read to include the latest year with respect to which the United States could file a claim in the bankruptcy proceeding for income tax due from the debtor or the bankruptcy estate attributable to the partnership interest the debtor held on the petition date. This reading draws further support from the definition of "partner" in I.R.C. § 6231(a)(2), which defines partner to include "a partner in the partnership" and also "any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership."

[49] In short, the United States could have filed a claim for the 1990 income tax due from the estate, and the 1990 partnership items therefore converted to non-partnership items pursuant to the Regulation.

[51] I.R.C. § 6231(a)(3) defines "partnership item" as "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." Here, there is no question that the total amount of partnership losses for the year is determined at the partnership level, and the manner in which those losses are divided among the partners of each partnership is also a partnership item.

[52] The regulation promulgated by the Secretary to define partnership items, Treas. Reg. § 301.6231(a)(3)-1, does not address the possibility that one partner will file a bankruptcy petition during the taxable year. The Regulation does provide that the general rule is to be that "the following items which are required to be taken into account for the taxable year of a partnership . . . are more appropriately determined at the partnership level than at the partner level and, therefore, are partnership items:" and includes the "partnership aggregate and each partner's share of, inter alia, items of income, gain loss, deductions or credits." Treas. Reg. § 301.6231(a)(3)-1(a)(1). And we agree that, as a general matter, the partnership aggregate of loss, and each partner's share of loss, is something that is "required to be taken into account for the taxable year of a partnership."⁸ But there is no indication in the Regulation that the allocation of a debtor-partner's loss between the debtor- partner and his bankruptcy estate is a partnership item. In fact, there is no mention in the Regulation at all of bankrupt partners. Nor does general tax law require partnerships to take into account on the partnership return the fact that one partner has become a debtor in bankruptcy, and his partnership interest has become property of a bankruptcy estate.

[53] Taxpayers' argument to the contrary turns on the law requiring partnerships to file returns that identify the individuals "who would be entitled to share in the taxable income if distributed and the amount of the distributive share of each individual." I.R.C. § 6031(a). But neither this section, nor Treas. Reg. § 301.6231(a)(3)-1, and not even the instructions published by the IRS for completing partnership returns, which taxpayer cites (Br. 19, 31- 32), contain any reference suggesting that the partnership must "suballocate" a partner's share of the year's tax items into a portion for the debtor and a portion for the bankruptcy estate. To the contrary, several commentators state, as discussed at pp. 15-16, 19, supra, that the bankruptcy estate receives the entire year's tax items, and those items are not determined until the close of the taxable year. Indeed, the transfer of a partnership interest from a debtor to his bankruptcy estate at the commencement of a bankruptcy proceeding is not considered a "disposition" for purposes of any provision of the Internal Revenue Code assigning tax consequences to such a disposition. I.R.C. § 1398(f); see Gulley, 79 T.C.M. (CCH) at 2175.

[54] Taxpayer cites Doe v. Commissioner, 116 F.3d 1489 (table), 1997 WL 355357 (10th Cir. 1997), an unpublished decision of this Court, as requiring the result he advocates. (Br. 29.) That case involved the concept of "Subchapter S items" with reference to an audit of a Subchapter S corporation, a concept similar to that of a partnership item. But the critical question is this case is whether the suballocation of one partner's share of partnership tax items between that partner who becomes a debtor in bankruptcy, and the bankruptcy estate, is a partnership item. There was no bankruptcy petition in the facts of the Doe case, as taxpayer concedes. (Br. 41.) Thus, the unpublished Doe decision will not assist the Court in its disposition of the present case.

[55] Nor is there any merit to taxpayer's argument that the Tax Court could not consider the suballocation in a partner-level proceeding, because it could consider it in a partnership-level proceeding under I.R.C. § 6226(f). Taxpayer contends that that section would allow the Tax Court to consider the suballocation on two bases that the Tax Court did not consider: because it confers upon the Tax Court jurisdiction to determine "all partnership items of the partnership," and also the applicability of any "addition to tax." (Br. 24.) The first rationale fails because it depends again on the definition of a partnership item, which refers to "each partner's share of . . . items of . . . loss . . . of the partnership" (Treas. Reg. § 301.6231(a)(3)-1) but not the suballocation of that partner's share between a debtor and his bankruptcy estate. The second rationale fails because the phrase "addition to tax" refers not to increasing the amount of a taxpayer's tax liability, but to the addition of a tax penalty to the amount of tax a person owes. See, e.g., I.R.C. §§ 6651, 6665. This case does not concern an addition to tax.

[56] There being no authority requiring the partnership to effect the suballocation of a partner's share of partnership loss, the Tax Court correctly concluded that the suballocation is not a matter most appropriately determined at the partnership level, because it does not affect the partnership or any of the other partners.

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²We will follow taxpayer's lead (Br. 2 n.1) in citing to the record in Tax Court Case No. 460-96, Court of Appeals No. 01- 9010, when referring to an event that occurred in all three cases.

³Thus, taxpayer is in error in stating that the three appeals concern one year each. (Br. 2 n.1.) In fact, one appeal concerns two years of liability (1993 and 1994) while one appeal concerns the 1991 year in which the Tax Court determined that there was no deficiency. The decision of "no deficiency" ends the controversy about the amount of tax due, and this Court lacks jurisdiction to review the Tax Court's findings and rulings in that matter. W.W. Windle Co. v. Commissioner, 550 F.2d 43, 45-46 (1st Cir. 1977).

⁴Taxpayer asserts only that he was a partner in "several" partnerships that recognized substantial net operating losses during the first half of 1990, citing his 1990 income tax return. (Br. 3, citing Doc. 35, Exh. 3-J, Sched. 4.) In fact, the schedule to which he cites lists what appear to be 40 separate partnerships. Only 25, however, reported net operating losses, while 5 reported income and 10 reported no income or loss.

⁵Taxpayer does not address the merits of this issue (Br. 9 n.3), instead relying solely on the jurisdictional issue. In our view, this case is one of those cases where an examination of the merits informs the jurisdictional analysis. Thus, we examine the merits first.

⁶It is apparent, in any event, that debtor here did not need the NOLs to secure a "fresh start." Although he filed a Chapter 7 petition in 1990, taxpayers reported on their joint 1993 return over $1.3 million in total income (excluding the NOLs). (Doc. 35, Ex. 6-J.)

⁷Recall that the proceeding continued at least until June 1993, when taxpayer received his Chapter 7 discharge. (Doc. 42 ¶ 5.)

⁸In the Tax Court we maintained (Doc. 51 at 6), as we do here, that determining each partners' share of partnership loss is generally a partnership item. But taxpayer mischaracterizes that statement as a concession that the suballocation of a partner's share between himself and his bankruptcy estate is a partnership item. (Br. 9, 14, 21.) We did not concede that in the Tax Court, as we do not concede it here.