OPINION

Sweet, D.J.,

Defendant United States (the "government") has moved for partial dismissal of the complaint in this tax refund action pursuant to Fed.R.Civ.P. 12(b)(6), or, in the alternative, partial summary judgment pursuant to Fed.R.Civ. p. 56. plaintiff Stuart Hirshfield and his wife Susanne Hirshfield (the "Hirshfields") opposed the motion and cross-moved for summary judgment awarding a refund on their claims for taxes, interest, and negligence and valuation overstatement penalties assessed and paid for the taxable year 1982, with interests and administrative costs, in connection with their income and losses from Stuart Hirshfield's role as a partner in Stevens Recycling Associates ("Stevens"). For the reasons set forth below, the motions are granted in part and denied in part.

The Statutory Structure

Partnerships as such are not subject to income tax; partners are liable for the tax in their individual capacities. The Internal Revenue Code establishes an intricate web of procedures for ascertaining and adjusting partnership income for tax purposes, and for adjudicating related claims brought by partnerships and individuals in the Tax Court, district courts, and federal appellate courts.

In order to achieve consistent treatment of all partners in a partnership and to alleviate the administrative burden of determining partnership-related tax issues at the individual partner level, Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub.L. No. 97-248, § 402(a), 96 Stat. 324, codified as sections 6221 through 6233 of the Internal Revenue Code, 26 U.S.C. § 6221 et seq. See Chimblo v. Commissioner, 177 F.3d 119, 120-21 (2d Cir. 1999). Section 6221 specifically provides that "[e]xcept as otherwise provided in this subchapter, the tax treatment of any partnership item shall be determined at the partnership level." 26 U.S.C. § 6221.

TEFRA defines a "partnership item" as "any item required to be taken into account for the partnership's tax 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). More specifically, the Treasury Regulations define partnership items as "items of income, gain, loss, deduction or credit of the partnership." Treas. Reg. § 301.6231 (a)(3)-1(a)(1)(i). "Nonpartnership items" are all other items, and are examined and adjusted at the individual partner level via the standard deficiency procedures rather than through a final partnership administration adjustment ("FPAA") at the partnership level. 26 U.S.C. § 6231 (a)(4); see also Eastern States Cas. Agency, Inc. v. C.I.R., 96 T.C. 773, 785 (1991).

The Commissioner of the Internal Revenue Service ("IRS") is required to notify partners of the beginning of any administrative proceeding adjudicating a partnership item at the partnership level, and any resulting FPAA. 26 U.S.C. § 6223 (a). The FPAA serves to notify individual partners of their share of a partnership's income adjustments for partnership items, just as a Notice of Deficiency notifies individual taxpayers of their tax owed. See Generally PAA Management, Ltd. v. U.S., 962 F.2d 212, 214 (2d Cir. 1992)

In order to aid the notification and compliance process, TEFRA requires partnerships to designate a "tax matters partner" ("TMP"), who is a fiduciary charged with the responsibilities of acting as a liaison between the IRS and individual partners, and representing the partnership in any tax-related proceedings. See Addington v. C.I.R, 205 F.3d 54, 59 (2d Cir. 2000) (describing responsibilities of TMP's); Transpac Drilling Venture 1982-12 v. C.I.R, 147 F.3d 221, 225 (2d Cir. 1998) (TMP's are fiduciaries to partnerships and individual partners) The individual limited partners may designate as TMP any general partner or the general partner with the "largest profits interest in the partnership at the close of the taxable year involved." 26 U.S.C. § 6231 (a)(7)(A), (B). If the partnership fails to so designate any partner, the IRS may select a partner to serve as TMP. 26 U.S.C. § 6231 (a)(7).

The IRS has three years from the date the partnership return was due to be filed in which to issue an FPAA before it may assess any tax attributable to partnership items. 26 U.S.C. § 6229 (a). However, this statute of limitations may be extended by agreement between the IRS and the partnership or its representative, the TMP, whose consent binds all partners. 26 U.S.C. § 6229 (b).

Within 60 days after mailing the FPAA to the TMP, the IRS must also mail a copy of the FPAA. to each "notice partner." 26 U.S.C. § 6223 (c) and (d)(2), 6231(a)(8). Partners are "notice partners" if a partnership has less than 100 partners, or if they have at least a 1% interest in the profits of the partnership. Id. The Secretary need not mail notice to non-notice partners such as those with less than a 1% interest in large partnerships. 26 U.S.C. § 6223 (a), (c). Rather, the TMP is required to forward a copy of the FPAA to each non-notice partner. 26 U.S.C. § 6223 (g); Temp. Treas. Reg. § 301.6223(g)-IT. However, the TMP's failure to notify non-notice partners does not affect the applicability of any partnership proceeding or adjustment as to such partner. 26 U.S.C. § 6230 (f).

For 90 days after the mailing date of the FPAA, the TMP has the exclusive right to file a petition for readjustment of the partnership items for any covered taxable year in the Tax Court, the Court of Federal Claims, or a United States District Court. 26 U.S.C. § 6226 (a). After that 90 days, non-TMP partners have 60 days in which to file a petition for readjustment in any of the above-mentioned courts. 26 U.S.C. § 6226 (b)(1). Once a petition challenging an FPAA is filed by a TMP or notice partner, all interested partners are considered parties to the action and may participate in the partnership-level litigation. 26 U.S.C. § 6226 (c). However, all partners who have been treated as parties will be bound to the resulting decision regardless of whether they elected to participate. Tax Court Rule 251, 26 U.S.C. foll. § 7453.

In a partnership-level action upon a petition for readjustment of partnership items, all the partners' rights with respect to such proceedings (including a right to challenge the FPAA) are to be determined, if at all, in that proceeding. See Crowell v. Commissioner, 102 T.C. 683, 693 (1994); Columbia Building, Ltd. v. Commissioner, 98 T.C. 607, 611 (1992); Saso v. Commissioner, 93 T.C. 730, 734-35 (1989); Maxwell v. Commissioner, 87T.C. 783, 788 (1986); English v. Commissioner, 60 T.C.M. (CCH) 1601, 1603 (1990). Any determination made by a court under Section 6226 has the full force and effect of a decision by the Tax Court or a final judgment of the district court or Court of Federal Claims, as the case may be. 26 U.S.C. § 6226 (g). Once the decision of the court considering the FPAA becomes final, the court's determination of substantive issues with regard to the partnership is "conclusive." 26 U.S.C. § 6230 (c)(4). However, section 6231(e)(2) provides that "[n]o judicial determination in any proceeding under subsection (a) of section 6228 [TMP's petition for administrative adjustment in any court] with respect to any partnership item shall be a bar to any adjustment in any other partnership item.

The IRS may assess any tax liability on individual partners only after the partnership's tax determination has been made. Such an assessment must be made within one year from the date any court's decision on the adjustments to the partnership items becomes final. See 26 U.S.C. § 6229 (d) (one year statute of limitations); 26 U.S.C. § 7481 (A)(1), 7483 (decision become final after expiration of 90 day period to file an appeal). Typically, once it determines the tax deficiency with respect to any individual partner/taxpayer, the IRS sands a notice of deficiency to the taxpayer. 26 U.S.C. § 6212 (a).

An individual taxpayer may contest the notice of deficiency by paying the assessment and then filing a refund action in a United States District Court. Both § 7422 of the Internal Revenue Code and Title 28, United States Code § 1346(a)(1) waive sovereign immunity and provide subject matter jurisdiction for tax refund suits in the federal district courts to recover internal revenue taxes alleged to have been erroneously or illegally assessed. See United States v. Dalm, 494 U.S. 596, 609 n. 6 (1990)

However, subsection (h) of section 7422 provides that "[n]o action may be brought for a refund attributable to partnership items (as defined in section 6231(a)(3)) except as provided in section 6228(b) or section 6230(c)." 26 U.S.C. § 7422 (h).

Items of an individual partner may cease to be partnership items and become nonpartnership items pursuant to § 6231(b)(1) in several ways, including the following:

(A) the Secretary mails to such partner a notice that such items shall be treated as nonpartnership items,

(B) the partner files suit under § 6228(b) after the Secretary fails to allow an administrative adjustment request with respect to any of such items,

(C) the Secretary enters into a settlement agreement with the partner with respect to such items, or

(D) such change occurs under subsection (e) of section 6223 (relating to effect of Secretary's failure to provide notice) or under subsection (c) of this section.

Facts and procedural History

Except as otherwise noted, these facts are undisputed. In 1982, Stuart Hirshfield purchased a one-third limited partnership interest in Stevens for $16,667. (Compl. ¶¶ 6, 7.) As a result of the investment, Stuart and Susanne Hirshfield claimed on their jointly filed 1982 tax return a deduction for advance rentals in the amount of $13,472; an investment tax credit of $14,079; and a business energy credit of $12,810, thereby reducing their tax liability in the amount of $32,152. (Compl. ¶ 11.)

At all times relevant to this action, Sam Winer ("Winer") was the promoter and TMP of various recycling partnerships, including Stevens. (Compl. ¶ 12.) Stevens was subject to the audit procedures set forth in TEFRA. On August 17, 1984, the United States filed a complaint against Winer and Winer Development Corporation in the United States District Court for the Middle District of Florida. (Compl. ¶ 13.) The complaint alleged that Winer had organized and promoted various abusive tax shelters, including Stevens, and had made gross valuation overstatements in connection with Stevens, and sought to enjoin Winer from representing Stevens and its partners. (Compl. ¶ 14.)

On February 18, 1986, the Florida district court entered a final judgment permanently enjoining Winer from (1) taking any action to organize, promote or sell tax shelters; or (2) representing that any limited partner was entitled to federal income tax deductions or credits regarding Stevens' property. At the government's request, the court also ordered Winer to resign as TMP of Stevens, to send notice of his resignation to the limited partners, and to waive his right to intervene in any court proceeding as TMP of Stevens. (Compl. ¶ 15.)

As a result, Stevens resigned as TMP and sent a notice letter to each partner. The letters set forth the terms of the injunction, notified the partners of his resignation and that Stuart Hirshfield would serve as the new TMP for Stevens. (Compl. ¶ 16.) By letter of April 30, 1986, Hirshfield notified Winer that he did not wish to serve as TMP. (Lane Decl. Ex. A.).

On August 11, 1986, Winer and the government filed a "Joint Motion for Specific Relief From Final Judgment of Permanent Injunction," petitioning the Florida district court to permit Winer to "act as tax matters partner for some of the recycling partnerships, for the purpose of providing administrative services. . . ." (Compl. ¶ 22.) The court granted the motion on September 17, 1986, and allowed Winer to "act as tax matters partner for the purpose of providing administrative services." (Compl. ¶ 23.) The Hirshfields claim that neither they nor any other partner was notified of the joint motion or the court's September 17, 1986 order. (Compl. ¶¶ 22, 23.)

Thereafter, Winer signed Forms 872-P as TMP of Stevens, consenting to extend the statute of limitations to grant the IRS additional time to issue a FPAA of Stevens's income, including the tax year 1982. On July 3, 1989, the IRS issued an FPAA adjusting Stevens's income for tax years including 1982. (Lane Decl. Ex. B.) But for Winer's consent to extending the one-year statute of limitations, the FPAA would have been untimely.

On July 24, 1989, Winer signed and filed a petition in the United States Tax Court as TMP of Stevens seeking a redetermination of the adjustments against Stevens contained in the FPAA for tax years 1982 through 1985. (Compl. ¶ 31.) The IRS District Counsel filed an answer to the petition, although the Hirshfields allege that neither party ever notified the Tax Court that Winer had previously been enjoined from acting as TMP for Stevens, and had been reinstated only for limited administrative purposes. (Compl. ¶ 33.)

In addition to Stevens, Winer was a general partner in six other Plastics Recycling programs involving partnerships which leased Sentinel EPS Recyclers. Davenport Recycling Associates, Sam Winer Tax Matters Parner v. Commissioner, T.C. Memo 19980347, 1998 WL 670465 (1998), aff'd 220 F.3d 1255 (11th Cir. 2000). On March 25, 1992, the Tax Court held that these lease transactions were a sham. Provizer v. Commissioner, T.C. Memo 1992-177, 1992 WL 56983 (1992) (finding that recycling program lacked economic substance and concluding that penalties were appropriate under Sections 6653(a), 6659 and 6621(c)), aff'd, 996 F.2d 1216 (6th Cir. 1993), cert. denied, 510 U.S. 1163 (1994)

After the Tax Court held that the first Winer-related recycling partnership owed penalties for tax improprieties, Winer conceded the pending Stevens action. On November 9, 1993, the IRS filed in the Tax Court a motion for entry of decision pursuant to the Tax Court Rules of Practice and Procedure Rule 248(b) representing that Winer, as TMP to Stevens, "entered into a settlement agreement, the terms of which are reflected in the decision document lodged concurrently herewith." (Compl. ¶ 35.) The Hirshfields allege that the motion for entry of judgment in accordance with the settlement agreement failed to inform the Tax Court of the prior action before the Florida district court and Winer's limitations as TMP. (Id.)

On February 17, 1994, Tax Court Special Trial Judge Norman H. Wolfe granted the IRS motion by endorsing it as "granted" with a rubber stamp. (Smith Decl. Ex. B.) The decision was served on the parties on February 23, 1994.

Also on February 23, 1994, Tax Court Chief Judge Hamblen signed a decision resolving all of the issues relating to Stevens's income for the tax years 1982 through 1985. (Compl. ¶ 39.) However, no date was written, stamped, or otherwise marked after the word "entered." (Id.);Carroll v: United States, No. CV 98-5740, 1999 WL 1090814, *1 (E.D.N.Y. Oct. 19, 1999) ("Carroll I"), motion for reconsider. granted, 2000 WL 1819419 (E.D.N.Y. Oct. 23, 2000) ("Carroll II"). The only date on the decision is the stamp, "SERVED FEB. 23, 1994." (Compl. ¶ 39; Smith Decl. Exs. B, C.)

One hundred and three days later, on June 6, 1994, Judge Hamblen issued an Order and Decision stating:

On February 23, 1994, through inadvertent clerical error, the Court served on the parties a Decision which did not bear the requisite "Entered" date. Accordingly, it is ORDERED that the Decision served on February 23, 1994 . . . is vacated and set aside. . . .

(Compl. ¶ 40; Lane Decl. Ex. C.) The Order went on to duplicate the February 23, 1994 decision in all other respects. (Smith Decl. Ex. D); Carroll I, 1999 WL 17582, *1.

The IRS then sent tax and interest assessments to each Stevens partner, including Stuart Hirshfield, although he had already paid the amount and filed a claim for a refund which the IRS has not acted upon. (Compl. ¶ 39, 51.)

By notice of deficiency dated July 3, 1995, the IRS determined that the Hirshfields were liable for penalties for negligence and valuation overstatement for the year 1982 pursuant to the Internal Revenue Code as follows: (1) $1,608, or five percent of the $32,152 tax deficiency under § 6653(a)(1); (2) an amount equal to 50% of the interest due on $32,152 under § 6653(a)(2); and (3) $9,646, or 30% of the credits claimed under § 6650. (Compl. ¶ 52; Lane Decl. Ex. D.)

The Hirshfields filed this refund action for a total of $133,764.86 plus interest on 1982 taxes, interest, and penalties on March 11, 1999. The complaint (1) seeks a refund of tax assessments plus statutory interest on the grounds that the Tax Court was without jurisdiction and/or its decision time-barred because Winer was without authority to act on Stevens' behalf (Compl. ¶¶ 39-40, 42-43, 50); (2) challenges the imposition of penalty rate of interest on the assessments because (a) the Tax Court did not find that the Stevens partnership was a tax-motivated transaction (Compl. ¶¶ 41, 55-56); (b) similarly-situated taxpayers were not assessed negligence penalty rates of interest (Compl. ¶¶ 44-46, 57); (c) plaintiffs reasonably relied on competent and disinterested professional advisers in deciding to invest in Stevens and filing tax returns claiming deductions related thereto (Compl. ¶ 58); and (3) contests the imposition of the assessment for valuation overstatement because plaintiffs had a reasonable basis for making the valuation of Stevens and did so in good faith (Compl. ¶ 59).

The United States filed the instant motion in lieu of answering on January 30, 2001. Specifically, the government seeks to dispose of all the claims in the complaint for lack of subject matter jurisdiction except the issues of (1) whether the Hirshfields reasonably relied on professional advisors in making their investment in Stevens for purposes of assessing a negligence penalty pursuant to 26 U.S.C. § 6653 (a), and (2) whether there was a reasonable basis for plaintiffs' valuation overstatement under § 6659. The Hirshfields opposed and cross-moved for summary judgment on March 2, 2001. The motions were deemed fully submitted after oral argument on April 18, 2001.

I. Jurisdiction Over this Action

As a preliminary matter, the Court must determine whether it may properly exercise jurisdiction over this dispute. The government asserts that the funds at issue involve "partnership items" within the meaning of § 6231(a)(3), and that this Court therefore has no jurisdiction over these claims pursuant to § 7422(h). In the alternative, the government contends that this action is essentially a collateral attack on a Tax Court decision that is barred by § 6512(a) and the principles of res judicata.

In contrast, the Hirshfields aver that the claims at issue in this action are not "partnership items" and therefore may be adjudicated here. In the alternative, they assert that Winer was not authorized to settle the Tax Court action or consent to enlarge the statute of limitations. Hence, they argue, the Tax Court decision was invalid as against them, so this action is not an improper collateral attack but is rather a timely refund action properly filed in this Court pursuant to 28 U.S.C. § 1340 and 1346(a)(1).

The critical jurisdictional question is therefore whether this action involves "partnership items" or "nonpartnership items." The answer to this question depends on which "items" are at issue — the taxes, interest, or valuation overstatement penalty assessed. The nature of these three claims will be addressed in turn.

A. This Court has No Jurisdiction Over the Claim for a Refund of Taxes Because It Involves Partnership Items

The Hirshfields alternately contend that their tax refund claim is cognizable because Winer lacked authority to act on the partnership's behalf, or because the one-year statute of limitations invalidated the notice of deficiency on which their Stevens-related tax assessment depended. As set forth below, both of these arguments pertain to partnership items.

1. The TKP's Authority to Act is a Partnership Item

The Hirshfields' first argument seems to involve the following syllogism:

(a) the entry of the permanent injunction "terminated any agency relationship between [Winer] and the Stevens partners;"

(b) Winer therefore lacked authority to act on the partnership's behalf either before the Tax Court or to consent to extend the statute of limitations; and

(c) thus, the Tax Court's decision could not have pertained to a "partnership item" and bar the instant action.

(See Pltf. Br. at 16.) The premises of this argument do not lead to its conclusion as a matter of law, because whether the items to be litigated involve "partnership" or "nonpartnership" items turns on the statutory definitions and the judicial economy goals TEFRA was enacted to promote, independent of the TMP's actual authority to bring the action. The fact that the IRS Commissioner has statutory authority to appoint a TMP for a partnership where the partnership has already done so belies the notion that a TMP's authority to act on behalf of a partnership derives solely from an "agency relationship." See 26 U.S.C. § 6231 (a)(7) (providing that if the partnership fails to designate a TMP pursuant to subsections (A) or (B), and it is impracticable to apply the largest-profits interest rule of subsection (B), "the partner selected by the Secretary shall be treated as the tax matters partner."); 26 C.F.R. § 301.6231 (a)(7)-1(n), (p) (under conditions set forth in § 6231(a)(7), "the Commissioner will select . . . as the tax matters partner any person who was a general partner at any time during the taxable year under examination.").

Plaintiffs cite Transpac Drilling Venture 1982-12 v. C.I.R., 147 F.3d 221 (2d Cir. 1998), in support of the proposition that Winer lacked authority to act on behalf of Stevens. In Transpac, plaintiffs who were partners in TEFRA-covered partnerships argued that the fact that their partnerships' TMP's were under criminal investigation when they agreed to extend the statute of limitations created a conflict of interest that deprived them of authority to act on the partnerships' behalf. The Tax Court had held that the actions of the TMP's bound the individual partners regardless of the ongoing investigations. On direct review, the Second Circuit recognized that the criminal investigation of the TMP's created "a powerful incentive to ingratiate themselves to the government" in "severe conflict" with the interests of the individual partners. 147 F.3d at 227. The Second Circuit reversed, and held that "where serious conflicts exist, a TMP may be barred from acting on behalf of the partnership. . . ." Id.

Although Transpac may be relevant to the merits of the Hirshfield's claim, it does not address the crucial jurisdictional question of whether a district court has the authority to address a challenge to a TMP's authority in a refund action. The Second Circuit decided Transpac on direct appeal from the Tax Court pursuant to 26 U.S.C. § 7482 (a)(1), unlike this case, which is a new action filed in the district court pursuant to 28 U.S.C. § 1346. As such, the jurisdictional bar in § 7422(h) on "actions . . . brought for a refund attributable to partnership items" did not apply in Transpac, and the Second Circuit had no cause to address whether a TMP's authority to act was a "partnership" or "nonpartnership item."

Federal courts that have considered challenges to a TMP's authority to act on behalf of a partnership in the context of § 7422(h) have found this issue to be a quintessential "partnership item" that should be decided at the partnership level in the Tax Court. For example, in Kaplan v. United States, 133 F.3d 469 (7th Cir. 1998), the plaintiffs filed a refund action in the district court alleging that because their partnership's TMP was not a general partner in the partnership, he was without authority to act on their behalf when he agreed to extend the period for making adjustments to the partnership's taxes. The Seventh Circuit rejected this argument, reasoning that:

the underlying substantive claim concerns the propriety of the adjustments to the partnership's 1983 tax return. If the Kaplans were to succeed in their claim, it would affect the tax liability of all of [the partnership's] partners. This is precisely the type of challenge prohibited by TEFRA in light of Congress's decision that such suits are better addressed in one fell swoop at the `partnership level' than in countless suits by individual partners.

Numerous other courts, including those faced with challenges to Winer's authority to act as TMP for other partnerships, have reached the same conclusion. See. e.g., Clark v. United States, 68 F. Supp.2d 1333 (N.D. Ga. 1999) ("the court finds that whether Winer was a proper representative of [the partnership] before the Tax Court in the procedure for judicial review set forth in TEFRA is correctly deemed to be a `partnership item.'"); Klein v. United States, 86 F. Supp.2d 690, 696 (E.D. Mich. 1999) ("This Court would lack subject matter jurisdiction to review Plaintiff s' claim for refund with respect to partnership items even if Plaintiffs proved that Winer lacked authority to act as TMP for [the partnership].").

Because the Hirshfields' challenge to Winer's authority to act on behalf of Stevens will affect each of the Stevens partners, their claim pertains to a "partnership item" that should be raised in a partnership level proceeding in the Tax Court rather than in this individual refund action. This Court has no jurisdiction to entertain the Hirshfields' claim for a tax refund on this basis.

2. Whether the Statute of Limitations Bars a Notice of Deficiency is a Partnership Item

The Hirshfields present a strong case that the statute of limitations should have barred the notice of deficiency and the taxes, interest, and penalties assessed against them as a result.

The Tax Court issued a decision relating to Stevens's income for tax years including 1982 on February 23, 1994. The decision was served on the parties and docketed on February 23, 1994, but no date was marked after the word "entered" in the decision. (Smith Aff. Ex. B.) On June 6, 1994, the same Tax Court judge issued an order and decision vacating the February 23, 1994 decision because, "through inadvertent clerical error, the Court served on the parties a Decision which did not bear the requisite `Entered' date." The decision was otherwise identical to the prior order. (Smith Aff. Ex. C.) The IRS issued a notice of deficiency to the Hirshfields on July 3, 1995. (Smith Aff. Ex. E.)

The IRS has one year from the date a Tax Court decision becomes final in which to issue a notice of deficiency. 26 U.S.C. § 6229 (d). A decision becomes final "[u]pon the expiration of the time for filing a notice of appeal." 26 U.S.C. § 7481 (a)(1). Section 7483 requires that a notice of appeal be filed "within 90 days after the decision of the Tax Court is entered." As the Tax Court's first decision was entered in court records on February 23, 1994, the Hirshfields reasonably contend that it became final on May 24, 1994, and that the notice of deficiency was untimely because it was issued on July 3, 1995, after the statute of limitations had run out on May 24, 1995.

The government argues that the statute of limitations depends not the date the decision is "entered" pursuant to § 7483, but rather when the decision is "rendered," pursuant to § 7459(c). Section 7459(c) provides in relevant part:

A decision of the Tax Court . . . shall be held to be rendered upon the date that an order specifying the amount of the deficiency is entered in the records of the Tax Court . . . or in the case of an action brought under section 6226, 6228(a), 6234(c), 6247, or 6252, the date of the court's order entering the decision.

In Carroll v. United States, No. CV 98-5740, 1999 WL 1090814 (E.D.N.Y. Oct. 19, 1999) ("Carroll I"), another refund action filed by Stevens partners, the Honorable Denis R. Hurley addressed just this question, upon identical facts. Although Judge Hurley initially denied the plaintiffs' claim, he later granted reconsideration in a well-reasoned opinion.Carroll v. United States, No. CV 98-5740, 2000 WL 1819419 (E.D.N.Y. Oct. 23, 2000) ("Carroll II"). Finding that § 7459(c) "has no direct bearing upon the finality of a Tax Court order or the period for filing an appeal," the Carroll II court held that "it is irrelevant whether the February 1994 Decision was `rendered'; the dispositive issue is whether the February 1994 Decision had been `entered' within the meaning of § 7483." 2000 WL 1819419, at *5.

Here also the operative provisions for ascertaining when a decision of the Tax Court becomes final are §§ 7481(a)(1) and 7483 rather than 7483, and therefore the clock begins to run when the decision is entered into court records, rather than when it is "rendered" under the more general "date of decision" provision in § 7459(c), if in fact those dates differ. See Black's Law Dictionary 531 (6th ed. 1990) ("The entering of judgment is a ministerial act performed by the clerk of court by means of which permanent evidence of judicial act in rendering judgment is made a record of the court.")

As such, the first Tax Court decision in this case, which was entered on February 23, 1994, became final 90 days later, on May 24, 1994 — before the Tax Court purported to vacate it in the June 6, 1994 decision. See Davenport Recycling Associates v. C.I.R., 220 F.3d 1255, 1259 (11th Cir. 2000) (finding in another Winer-related case that undated Tax Court decision docketed on February 23, 1994 became final on May 24, 1994).

The Tax Court has no authority to vacate a decision after it has become final absent extraordinary circumstances such as lack of jurisdiction or fraud on the court. See id. ("Courts that have applied these provisions [for finality of Tax Court decisions] have uniformly held that, as a general rule, the Tax Court lacks jurisdiction to vacate a decision once it becomes final.") (citing cases). Moreover, the Tax Court has no authority to vacate any order due to ministerial errors. Tax Court Rule 160 specifically directs the Tax Court to "disregard any error or defect which does not affect the substantial rights of the parties." Tax Court Rule 160, 26 U.S.C. foll. § 7453. Therefore, the June 6, 1994 decision did not nullify the operation of the February 23, 1994 decision.

Nonetheless, the Tax Court did have authority to issue a second decision to correct the clerical error without substantively affecting the original decision. Tax Court Rule 1(a) directs Tax Court judges to give "particular weight to the Federal Rules of Civil Procedure" in establishing appropriate procedures. 26 U.S.C. foll. § 7453. The Tax Court has looked to the Federal Rules of Civil Procedure on occasion.See, e.g., Estate of Kraus v. C.I.R., 875 F.2d 597, 602 (7th Cir. 1989) (noting that the Tax Court has looked to Rules 59 and 60 of the Federal Rules of Civil Procedure in considering motions for reconsideration and further trial under Tax Court Rule 161). Federal Rule of Civil Procedure 60(a) allows courts to do just what Judge Harnblen did in the June 6, 1994 Tax Court decision, correct "inadvertent errors," Marc Rich Co., A.G. v. United States, 739 F.2d 834 (2d Cir. 1984), or "clerical mistakes in judgments, orders, or other parts of the record an errors therein arising from oversight or omission," Fed.R.Civ.P. 60(a). As in other cases employing Rule 60(a) to make clerical corrections, the June 6 ruling did not make any meaningful change to the prior order and therefore did not start the statute of limitations clock anew. Cf. Berwick Grain Co., Inc. v. Illinois Dept. of Agriculture, 189 F.3d 556, 559 (7th Cir. 1999) (Rule 60(a) motion filed within one year of appellate decision held untimely because appellate decision "did not disturb or revise the legal rights and obligations' of the parties" as set forth in district court decision, and therefore did not toll limitations clock).

Therefore, since the June 6 decision did not affect the running of the one-year plus 90 day period, the statute of limitations ran out on May 24, 1995, one year plus 90 days after February 23, 1994. The Hirshfields have a strong claim that the July 3, 1995 notice of deficiency was untimely.

However, this Court may not rule on the merits of this claim, however compelling, if it does not have subject matter jurisdiction over the issue. The Second Circuit has specifically held that "under TEFRA, a statute of limitations defense concerns a `partnership item' . . . that must be raised at the partnership level." Chimblo v. C.I.R., 177 F.3d 119, 125 (2d Cir. 1999) (citation omitted). As with claims contesting a TMP's authority to act on behalf of a partnership, "[a]llowing individual taxpayers to raise a statute of limitations defense in multiple partner-level proceedings would undermine TEFRA's dual goals of centralizing the treatment of partnership items and ensuring the equal treatment of partners." Id.

All other courts that have addressed the question — including some presented with identical facts — have also held that the statute of limitations for tax matters is a "partnership item" over which the district courts have no jurisdiction. See Williams v. United States, 165 F.3d 30, 1998 WL 537579, *3 (6th Cir. 1998) (table) ("It is well established that statute of limitations challenges are considered challenges to a partnership item."); Kaplan, 133 F.3d at 473; Crowell v. C.I.R., 102 T.C. 683, 693, 1994 WL 151303 (1994); Kelley v. United States, No. 97 C 3104, 1998 U.S. Dist. LEXIS 8903, at *7-10 (N.D. Ill. June 8, 1998); Thomas v. United States, 967 F. Supp. 505, 506 (N.D. Ga. 1997); Slovacek v. United States, 36 Fed. Cl. 250, 254-56 (1996);Anderson v. United States, No. C-91-3523 MHP, 1993 WL 204605 (N.D. Cal. June 3, 1993), aff'd without opinion, 50 F.3d 13 (9th Cir. 1995)

In short, this Court lacks jurisdiction to rule on the Hirshfields' claim for a tax refund on the basis of the statute of limitations.

3. The Effect of the Settlement Agreement on the Status of the Taxes and Interest as "partnership Items" is Unclear

There is an argument to be made that Winer's entry into a settlement agreement with the IRS as TMP bound the nonparticipating Stevens partners and that the items involved therefore became nonpartnership items for the Hirshfields pursuant to § 6231(b)(1)(C). However, because it is unclear how § 6231(b)(1)(C) would be reconciled with § 7422(h) under this analysis, because neither party has raised the argument, and because it is somewhat inconsistent with plaintiffs' argument, the issue is raised here only as a noteworthy unanswered question.

In this case, Winer filed the Tax Court action pursuant to § 6226(a) as TMP for Stevens in order to seek a readjustment of the FPAA. Under section 6226(a), "each person who was a partner in such partnership at any time during such year shall be treated as a party to [the Tax Court] action," 26 U.S.C. § 6226 (c)(1), as long as those partners are "interested" under the definition set forth in subsection (d) of section 6226. At the time the Tax Court action was filed, the Hirshfields were "interested partners" and therefore "parties" to the Tax Court action under this definition because the items in question had not yet become nonpartnership items, and taxes could still be assessed on them.

As set forth above, tax matters partners have the authority to enter into settlement agreements on behalf of partnerships that bind all non-notice partners. 26 U.S.C. § 6224 (c)(3). See also Tax Court Rule 247, 26 U.S.C. fall. § 7453 (providing that the Commissioner, TMP and all other interested partners shall be treated as parties to the action whether or not they participate in the action, and partners who file a notice of election to intervene or participate become "participating partners"). Tax Court Rule 248 provides that the filing of the TMP's consent to entry of decision pursuant to a settlement agreement with the IRS Commissioner "shall bind all parties." Tax Court Rule 248(a), 26 U.S.C. foll. § 7458. Moreover, "[a] decision entered by the [Tax] Court in a partnership action shall be binding on all parties." Tax Court Rule 251, 26 U.S.C. foll. § 7453. Therefore, although the Hirshfields did not participate in the Tax Court proceedings, and may not have received notice of developments there, the Internal Revenue Code considers them to have been parties to that action, and therefore bound by the decision.

However, despite their arguments, being bound by the Tax Court's judgment entering Winer's settlement agreement with the IRS could benefit the Hirshfields. Section 6231(b)(1)(C) of the Internal Revenue Code provides that "the partnership items of a partner for the partnership taxable year shall become nonpartnership items on the date . . . the Secretary enters into a settlement agreement with the partner with respect to such items. . . ." That is to say, "by virtue of a settlement agreement, items previously cast as partnership items have become individualized; hence, the constraints to suit imposed by § 7422(h) no longer apply." Olson v. United States, 37 Fed. Cl. 727, 733 (1997),aff'd, 172 F.3d 1311 (Fed. Cir. 1999). Although section 6231(b)(1)(C) refers to "the partner" who enters into the settlement agreement, the TMP is a partner whose function is to act on behalf of the individual partners. Therefore, Winer acted in the place of each individual partner and thereby may have transformed the partnership items at issue in the settlement into nonpartnership items for them, thereby evading the jurisdictional bar in § 7422(h)

In Alexander v. United States, 44 F.3d 328 (1995), the Fifth Circuit considered the intersection of sections 6231(b)(1)(C) and 7422(h) in an appeal from a district court refund action in which the individual partner plaintiff had entered into a settlement agreement with the IRS in the Tax Court. The government alleged that the district court was without jurisdiction pursuant to § 7422(h), but the taxpayer argued that the partnership items covered in the FPAA had become nonpartnership items once the parties entered into a settlement agreement, pursuant to § 6231(b)(1)(C). The Fifth Circuit held that the district court had jurisdiction over the refund action, reasoning that "[b]ecause the purpose of section 7422(h) is evidently to prevent an individual partner's refund action from interfering with the partnership-level determination of partnership items, that bar becomes unnecessary when the partnership-level proceeding has in some sense concluded." 44 F.3d at 331. For the same reason, the partnership items at issue in the Stevens Tax Court action may have been transformed into nonpartnership items for the Hirshfields on November 5, 1993, when Winer filed the settlement agreement with the Tax Court. (See Smith Decl. Ex. A at 2.)

Alexander appears to be the only court finding that the TMP's settlement transforms individual partners' items into justiciable nonpartnership items, and other courts have declined to follow the Fifth Circuit's bold lead. For example, in Olson v. United States, 37 Fed. Cl. 727, 740 (1997) the Federal Court of Claims declined to address the question, stating only that the statute did not provide any clear answer, and, even assuming that the Alexander court's interpretation of TEFRA is reasonable, "the court is left with a stark choice: if . . . § 7422(h) does not apply to the items subject to plaintiffs' settlement with the IRS, then TEFRA may suffer from — among other ailments — a measure of imprecision in the terms of certain of its provisions; if, on the other hand, § 7422(h) does apply to the settled items, then plaintiffs are effectively shut out of court." Id. See also Slovacek, 40 Fed. Cl. at 832 ("This court however, declined to follow Alexander and concluded that plaintiffs' refund action based on the expiration of the statute of limitations was barred by I.R.C. § 7422(h) and by the settlement agreement.").

As the parties have elected not to raise this issue, it would be inappropriate to rule on it here.

Finally, even if the Court found that it had subject matter jurisdiction over the tax refund claim because the affected funds had become nonpartnership items upon the entry of the settlement agreement, it would still lack jurisdiction to address the Hirshfields' arguments in support of that claim because, as set forth above, both a TMP's authority to act and the statute of limitations are partnership items over which district courts have no subject matter jurisdiction.

4. The Hirshfields May Litigate the Tax Claim in Another Forum

In sum, the Hirshfields may not challenge the Tax Court decision that determined adjustments to partnership items here as a means of attacking their Stevens-related tax assessments. Collateral district court actions attacking Tax Court judgments are barred by both Internal Revenue Code section 6512(a) and the principles of res judicata. See Prizer v. United States, 11 Cl. Ct. 184 (1986) ("It is beyond cavil . . . that . . . plaintiffs now seek to litigate issues they could have raised before the United States Tax Court for the same taxable year. They did not, and `having had the opportunity to litigate their controversy. they are conclusively bound by the compromise agreed upon.'") (citations omitted); Morris v. Jones, 329 U.S. 545, 550-551 (1947) (res judicata applies even if defense not asserted might have otherwise barred a cause of action).

The proper course of action to challenge the tax and interest assessments on the grounds raised herein would be to petition the Tax Court for leave to file a motion to vacate its decision. See Tax Court Rule 162, 26 U.S.C. foll. § 7453 ("Any motion to vacate or revise a decision, with or without a new or further trial, shall be filed within 30 days after the decision has been entered, unless the Court shall otherwise permit."). B. Jurisdiction over Claims Pertaining to Interest and Penalty Rates

The Hirshfields next seek to receive an abatement of interest pursuant to §§ 6621(c) and 6404(e), because (a) the Tax Court did not find that the Stevens partnership was a tax-motivated transaction (Compl. ¶¶ 41, 55-56); (b) similarly-situated taxpayers were not assessed negligence penalty rates of interest (Compl. ¶¶ 44-46, 57); (c) plaintiffs reasonably relied on competent and disinterested professional advisers in deciding to invest in Stevens and filing tax returns claiming deductions related thereto (Compl. ¶ 58)

The government asserts that the Court lacks subject matter jurisdiction over claims pertaining to tax-related interest brought pursuant to either § 6621(c) or § 6404(e), but apparently concedes jurisdiction over the reasonable reliance issue. (See Gov't Br. at 3 n. 1 (stating that issue is not briefed because the "facts have not been fully developed.")).

1. This Court Lacks Jurisdiction to Review IRS Interest Abatement Decisions Pursuant to § 6404(e)

First, whether to abate interest with respect to a deficiency attributable to a delay in performing a ministerial act is solely within the discretion of the IRS and is not subject to judicial review. Section 6404(e)(1) of the Internal Revenue Code provides:

(e) Assessments of interest attributable to errors and delays by Internal Revenue Service. — (1) In General. — In the case of any assessment of interest on —

(A) any deficiency attributable in whole or in part to any error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial act, or

(B) any payment of any tax described in Section 6212(a) to the extent that any error or delay in such payment is attributable to such officer or employee being erroneous or dilatory in performing a ministerial act, the secretary may abate the assessment of all or any part of such interest for any period. For purposes of the preceding sentence, an error or delay shall be taken into account only if no significant aspect of such error or delay can be attributed to the taxpayer involved, and after the Internal Revenue Service has contacted the taxpayer in writing with respect to such deficiency or payment.

Only three circuits — the Ninth, Tenth and Eleventh — have considered the availability of judicial review of abatement decisions under this section. Each of them has held that § 701 of the Administrative procedure Act ("APA") bars review. See Argabright v. U.S., 35 F.3d 472, 472 (9th Cir. 1994); Selman v. United States, 941 F.2d 1060, 1063 (10th Cir. 1991); Horton Homes, Inc. v. United States, 936 F.2d 548, 554 (11th Cir. 1991). The Second Circuit has approved these courts' reasoning, noting that there is "substantial authority for the view that interest abatement under Section 6404(e)(1) is a discretionary form of relief within the sole authority of the Commissioner and is thereby beyond the scope of judicial review." Bax v. C.I.R., 13 F.3d 54, 58 (2d Cir. 1993)

Section 701(a) provides: "This chapter applies, according to the provisions thereof, except to the extent that — (1) statutes preclude judicial review; or (2) agency action is committed to agency discretion by law." 5 U.S.C. § 701 (a) (1983). As section 6404(e) employs the word "may" to indicate the secretary's options in deciding whether to abate interest, that action is discretionary within the meaning of § 701 of the APA, and therefore barred from review pursuant to APA § 701(a)(2). Moreover, even if review were available, § 6404 provides no standard by which to assess the secretary's exercise of discretion, which suggests that Congress did not contemplate judicial review when drafting that provision. As the Supreme Court explained in Heckler v. Chaney, 470 U.S. 821, 828, 105 S.Ct. 1649, 1654, 84 L.Ed.2d 714 (1985), "even where Congress has not affirmatively precluded review, review is not to be had if the statute is drawn so that a court would have no meaningful standard against which to judge the agency's exercise of discretion. In such a case, the statute . . . can be taken to have `committed' the decisionmaking to the agency's judgment absolutely."

The plaintiffs having advanced no compelling reason to depart from this analysis, the Court has no jurisdiction to review a discretionary decision by the IRS not to abate interest pursuant to § 6404(e).

2. This Court Has jurisdiction to Determine Whether Stevens Was a Tax-Motivated Transaction

A party may reap the benefits of a transaction only if the transaction was motivated by a legitimate business purpose other than tax avoidance.Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978); Lee v. C.I.R., 155 F.3d 584, 586 (2d Cir. 1998). A "tax-motivated transaction" is defined to include, among other things, "any valuation overstatement (within the meaning of section 6659(c))" and "any sham or fraudulent transaction." 26 U.S.C. § 6621 (c)(3)(A). In this case, the Tax Court entered judgment readjusting all of the partnership items for Stevens for tax years including 1982 as per the settlement agreement. However, it did not specify a legal basis for doing so, and therefore did not issue any conclusive decision on the subject. 26 U.S.C. § 6230 (c)(4) ("For purposes of any claim or suit under this subsection, the treatment of partnership items . . . under the settlement . . . or under the decision of the court . . . shall be conclusive."). As such, this Court has jurisdiction to determine whether the Stevens investment was a tax-motivated transaction pursuant to § 6621(c).

3. This Court Has jurisdiction over the Claim for Consistent Treatment

The Hirshfields next claim that, pursuant to § 6624(c)(2), they should be assessed the same rate of interest as that imposed in two cases, Elliot I. Miller v. C.I.R., No. 10382-86, and Elliot I. Miller and Myra K. Miller v. C.I.R., No. 10383-86 (the "Elliot cases"), which they allege involved "issues that are identical to the instant case." (Pltf. Br. at 12.)

As set forth above, this Court has jurisdiction over this question only if the interest rate does not qualify as a "partnership item." The government concedes, as it must, that "interest and penalties are not partnership items" (Gov't Br. at 23). See Monti v. United States, 223 F.3d 76, 82 (2d Cir. 2000) (holding that "[s]ince the question of whether a particular partner has properly been offered and is entitled to consistent [settlement] terms depends on facts specific to that partner and his or her dealings with the IRS, there is no apparent reason why determination of the item is `more appropriate' at the partnership level.").

This Court has jurisdiction over the consistent treatment issue. Id.

c. Jurisdiction over Claims Pertaining to Negligence Penalties and Valuation Overstatement

Although there is no jurisdiction over the penalty claims on the grounds of Winer's authority or the statute of limitations (Compl. ¶¶ 55-56), the issue may properly be considered here under the rubric of consistent treatment (Compl. ¶ 57), for the reasons set forth above. In addition, the government concedes that this Court may consider whether the Hirshfields reasonably relied on professional advisers in connection with the negligence penalty assessed pursuant to § 6653(a), and had a good faith, reasonable basis for making the valuation as it relates to the valuation overstatement assessed pursuant to § 6659 (Compl. ¶¶ 58, 59). (See Gov't Br. at 3 n. 1.)

II. Summary Judgment is Granted in Part and Denied in Part

In sum, this Court has jurisdiction to consider the merits of the following claims only: (1) whether Stevens was a tax-motivated transaction pursuant to § 6621(c)(3); (2) whether the Hirshfields are entitled to consistent treatment with other settling taxpayers; (3) whether the Hirshfields reasonably relied on competent and disinterested professional advisers in deciding to invest in Stevens and filing tax returns claiming deductions and credits related thereto; and (4) whether the Hirshfields had a reasonable basis for the valuation and claimed it in good faith. The government seeks summary judgment only on the first two claims.

A. Legal Standard

Rule 56(c) of the Federal Rules of Civil Procedure provides that a motion for summary judgment may be granted when "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." The Second Circuit has repeatedly noted that "as a general rule, all ambiguities and inferences to be drawn from the underlying facts should be resolved in favor of the party opposing the motion, and all doubts as to the existence of a genuine issue for trial should be resolved against the moving party." Brady v. Town of Colchester, 863 F.2d 205, 210 (2d Cir. 1988) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 330 n. 2, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (Brennan, J., dissenting)); see Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir. 1995); Burrell v. City Univ., 894 F. Supp. 750, 757 (S.D.N.Y. 1995). If, when viewing the evidence produced in the light most favorable to the non-movant, there is no genuine issue of material fact, then the entry of summary judgment is appropriate. See Burrell, 894 F. Supp. at 758 (citing Binder v. Long Island Lighting Co., 933 F.2d 187, 191 (2d Cir. 1991)).

Materiality is defined by the governing substantive law. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted."Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "[T]he mere existence of factual issues — where those issues are not material to the claims before the court — will not suffice to defeat a motion for summary judgment." Quarles v. General Motors Corp., 758 F.2d 839, 840 (2d Cir. 1985).

While all reasonable ambiguities and inferences should be resolved against the moving party, those inferences must be supported by affirmative facts and must be based on relevant, admissible evidence.See Fed.R.Civ. p. 56. A party seeking to defeat a summary judgment motion cannot "'rely on mere speculation or conjecture as to the true nature of facts to overcome the motion.'" Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995) (citation omitted).

B. Tax Motivated Transaction

As the Tax Court declined to state whether it found that Stevens was a tax-motivated transaction before approving the settlement, there is material question of fact on the subject, and summary judgment on this ground must be denied. See Clark v. United States, No. 1:98-CV-1425-JOF, 2001 WL 306498, *6 (N.D. Ga. Feb. 28, 2001) ("there is no finding by the Tax Court of a basis for the readjustment of the partnership items. Accordingly, this court cannot determine as a matter of law that Plaintiffs are liable under § 6221 as there is a material issue of fact remaining as to whether the Masters recycling partnership was a tax motivated transaction."). C. The Hirshfields Are Not Entitled to Consistent Treatment

Finally, summary judgment is granted for the government on the consistent treatment claim.

In the Elliot cases, which the complaint alleges involved a "transaction that was precisely identical to Plaintiff's investment in Stevens," (Compl. ¶ 57), the IRS conceded the negligence penalty imposed pursuant to § 6653(a) and the increased penalty interest rate pursuant to § 6621(c). The complaint seeks a refund of the negligence penalty consistent with the treatment of the Elliots, pursuant to § 6224(c).

Section 6224(c)(2) gives partners who request it the right to receive an offer of consistent settlement terms as any settling partner has received for the same taxable year, with respect to "partnership items."

However, interest and penalties are not "partnership items." Items reported on a partner's return that may be influenced by partnership items are called "affected items," which are defined under § 6231(a)(5) as "any item to the extent such item is affected by a partnership item." See White v. C.I.R., 95 T.C. 209, 211 (1990); Klein, 86 F. Supp.2d at 698, n. 12 (affected items are those that may require some determination at the individual partner level after the completion of the partnership level proceeding). Interest and penalties are "affected items" that relate to partnership items but must be determined at the individual level. See N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 745-746, 1987 WL 45298 (1987); Crowell, 102 T.C. at 686; Klein, 86 F. Supp.2d at 698 n. 12. Because § 6224(c)(2) requires consistent treatment only with regard to partnership items, the Hirshfields are not entitled to consistent treatment with respect to negligence penalties and interest rates.

Conclusion

For the foregoing reasons, the government's motion for partial summary judgment is granted in part and denied in part, and the Hirshfields' motion for summary judgment or partial summary judgment is denied.

Three issues remain to be litigated: (1) whether Stevens was a tax-motivated transaction within the meaning of § 6621(c)(3); (2) whether the Hirshfields reasonably relied on professional advisors in making their investment in connection with the assessment of a negligence penalty pursuant to § 6653(a); and (3) whether there was a reasonable basis for the Hirshfields' valuation of Stevens as it relates to the valuation overstatement assessed pursuant to § 6659.

It is so ordered.

New York, N.Y. ____________________________________ May 30, 2001 ROBERT W. SWEET U.S.D.J.