Opinion
12540-10
11-06-2023
JAY A. JOHNSTON & LAURA M. JOHNSTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Kathleen Kerrigan, Chief Judge.
On June 14, 2011, respondent filed a Motion to Dismiss for Lack of Jurisdiction as to Accuracy-Related Penalties Asserted in the Affected Items Notice of Deficiency. Respondent argued that the Court lacked jurisdiction because petitioners did not contest the underlying deficiency and had not made an overpayment which may have otherwise conferred jurisdiction pursuant to section 6512(b).
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
On August 1, 2011, petitioners filed a Response to respondent's Motion. On February 23, 2018, petitioners (1) filed a Motion for Leave to File Second Amended Petition, (2) filed a Motion for Leave to File First Supplement to Response, and (3) lodged the First Supplement to Response. On February 26, 2018, petitioners lodged the Second Amended Petition. On August 1, 2018, the Court granted petitioners' Motions.
In petitioners' Second Amended Petition, they asserted that they had made an overpayment of income tax for the 2000 tax year, and therefore the Court has jurisdiction over the case pursuant to section 6512(b). On December 14, 2018, the Court ordered respondent to file a Supplement to its Motion to Dismiss advising the Court on respondent's position and reasoning as to petitioners' overpayment argument. On February 28, 2019, respondent filed a Supplement to Motion to Dismiss. On June 10, 2019, petitioners filed a Response to respondent's Supplement. On August 2, 2019, respondent filed a Reply to petitioners' Response.
Background
In 2000 petitioner Mr. Johnston was the sole member of Western Giles Capital Management, LLC (WGCM). WGCM was a member of Gramercy Global Recovery Fund, LLC (GGRF), which was formed to acquire dollar and non-dollar denominated financial products among other activities. During the 2000 tax year, WGCM received a liquidating distribution of foreign currency from GGRF, which WGCM sold a portion of during the same year. Petitioners reported a loss from the sale of the currency on their 2000 income tax return.
On October 15, 2004, respondent issued GGRF a Notice of Final Partnership Administrative Adjustment (NFPAA) for the 2000 tax year. On March 14, 2005, GGRF and partner Richard Garman filed a petition in Docket 4991-05 for readjustment of the partnership items set forth in the NFPAA. During that litigation respondent settled with some of the partners for a 10% section 6662(a) accuracy-related penalty. On April 3, 2009, the Court entered a decision in Docket 4991-05, which became final on July 2, 2009. Respondent sought collection from the partners thereafter.
Respondent followed the partnership unified audit and litigation procedures under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71, codified at sections 6221 through 6234 and repealed for returns filed for partnership tax years beginning after December 31, 2017.
On March 3, 2010, respondent mailed petitioners a notice of deficiency for the 2000 tax year. Respondent determined a $672,879 deficiency as well as a $269,152 gross valuation misstatement penalty pursuant to section 6662(h). On June 1, 2010, petitioners timely filed a Petition contesting respondent's determinations. Petitioners resided in Puerto Rico at that time.
On June 26, 2023, the parties filed a Stipulation of Settled Issues, agreeing that Ms. Johnston is entitled to innocent spouse relief pursuant to section 6015.
On September 3, 2014, petitioners made a $2,049,966 payment on the income tax account for the 2000 tax year. On February 26, 2019, respondent issued petitioners a notice of computational adjustment as to the gross valuation misstatement penalty.
Discussion
In their Second Amended Petition, petitioners argue that they are entitled to consistent penalties settlement treatment with the partners that involved themselves in the Docket 4991-05 matter. They additionally argue that respondent has failed to meet its burden of production with respect to section 6751(b). Petitioners assert that the Court has section 6512(b) overpayment jurisdiction to consider these issues.
Petitioners would have to concede the deficiency as part of the settlement.
The Court "may only exercise jurisdiction to the extent expressly permitted by Congress." Judge v. Commissioner, 88 T.C. 1175, 1180-81 (1987). Section 6230(a)(2)(A)(i) provides that deficiency procedures in an affected items case do not extend to the penalties determined at the partnership level. We have held that we lacked jurisdiction to consider penalties determined at the partnership level even when those penalties were included in the notice of deficiency. See Fears v. Commissioner, 129 T.C. 8, 10 (2007).
Whether we may consider the accuracy-related penalties in this case turns on whether we have overpayment jurisdiction within the meaning of section 6512(b). The first step in that inquiry is to determine whether there is an overpayment. Section 6512(b) provides that, if the Court determines that the taxpayer has made an overpayment of income tax, it will have jurisdiction to determine the amount of such overpayment. An overpayment has been defined as any payment in excess of that which is properly due. Estate of Baumgardner v. Commissioner, 85 T.C. 445, 450 (1985). There can be no overpayment of tax until the entire tax liability (including any interest, addition to tax, or additional amount) has been satisfied. Treas. Reg. § 301.6611-1(b).
Petitioners have satisfied their liability for tax, interest, and penalty on their income tax account for 2000 and have satisfied the pre-requisites for bringing a refund action with respect to the penalty, under sections 7422(h) and 6230(c) by filing a timely claim for refund over such overpayment. Respondent now concedes that the Court has overpayment jurisdiction for the penalty for 2000.
Section 6751(b) is a partnership-level defense and may not be raised at the partner-level. Rogers v. Commissioner, T.C. Memo. 2019-61, at *22 (citing Dynamo Holdings Ltd. P'ship v. Commissioner, 150 T.C. 224, 233 (2018)), aff'd, 9 F.4th 576 (7th Cir. 2021).
To reflect the foregoing, it is hereby
ORDERED that respondent's Motion to Dismiss dated June 14, 2011 is denied.
ORDERED that a joint status report is due on or before November 30, 2023.