ment to petitioners' distributive share of any item of credit of Memphis Barge Co. Petitioners argue that the investment credit is not a distributive partnership item and therefore cannot come within the language of the consent. Petitioners also argue that an adjustment does not include an increase in tax pursuant to section 47. For the reasons discussed below, we cannot agree with petitioners' contentions.

The language of the consent and the language of I.R.M. sec. 4541.72(4)(d)3 follow the language of section 702(a) which provides, in pertinent part:

SEC. 702(a). GENERAL RULE.-In determining his income tax, each partner shall take into account separately his distributive share of the partnership's

*

(7) other items of income, gain, loss, deduction, or credit, to the extent provided by regulations prescribed by the Secretary, Section 702(a)(7), formerly section 702(a)(8), was intended to be a "catch-all" provision which would permit the Secretary to prescribe regulations which would require each partner to separately account for items of income, gain, loss, deduction, or credit not otherwise enumerated, the character of which would affect the computation of the partner's personal income tax. S. Rept. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess. 377 (1954); H. Rept. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess. A222 (1954).

The Secretary has prescribed regulations pursuant to his authority granted in section 702(a)(7). Sec. 1.702-1(a)(8), Income Tax Regs. These regulations do not specifically enumerate the investment credit authorized by section 38. Sec. 1.702-1(a)(8)(i), Income Tax Regs. The regulations, however, do provide that, in addition to the enumerated items, the following shall be separately stated under section 702(a)(7):

his distributive share of any partnership item which if separately taken into account by any partner would result in an income tax liability for that partner different from that which would result if that partner did not take the item into account separately. * [Sec. 1.702-1(a)(8)(ii),

Income Tax Regs.]

The language of the regulation and the corresponding legislative history relating to section 702(a)(7) does encompass an investment credit under section 38 when a partnership acquires qualified property. This interpretation is consistent with the legislative history of section 702(a)(7) which defines the purpose of this statutory provision as a "catch-all" for partnership items not otherwise enumerated. The amounts computed under section 38 are distributable partnership items. While the investment credit provisions do not refer to partnerships, in the context of section 48(c)(1), relating to the purchase of used section 38 property, we have recognized that an entity rather than an aggregate approach should be used in determining whether the property was used by the same person who used the property prior to purchase. Moradian v. Commissioner, 53 T.C. 207, 211-212 (1969). Although the operative term used when determining the amount of investment credit is "taxpayer" and not "person" (see, e.g., sec. 46(c)(1)), it is clear that an entity rather than an aggregate approach is contemplated. As in Moradian, the operative term includes a partnership. Sec. 7701(a)(14).5 It is the partnership which places the property in service under section 46(c)(1). Therefore, the focus of the investment credit provisions is initially on the partnership as an entity, and the investment credit is a partnership item for which each partner must report a distributable share.6

3 Although not specifically enumerated in the regulations, it is clear that the Secretary interprets the language of sec. 1.702-1(a)(8)(ii), Income Tax Regs., as including this item. The 1978 Form 1065, U.S. Partnership Return of Income, Schedule K, Partners' Shares of Income, Credits, Deductions, Etc., Line 19, provides for a computation of investment credit. The corresponding Schedule K-1, Partner's Share of Income, Credits, Deductions, Etc., reflects the investment credit property on Line 19. See also 1 A. Willis, J. Pennell & P. Postlewaite, Partnership Taxation, sec. 71.08, at 71-12 (3d ed. 1981); 1 W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, sec. 9.03[2], at 9-15 (1977).

The investment credit provisions enacted by the Revenue Act of 1962, Pub. L. 87-834, 76 Stat. 960, postdate sec. 702 enacted by Pub. L. 591 (1954).

See also Kipperman v. Commissioner, T.C. Memo. 1977-32, affd. 622 F.2d 431 (9th Cir. 1980); Holloman v. Commissioner, T.C. Memo. 1975-309, affd. 551 F.2d 987 (5th Cir. 1977). 5Sec. 7701(a)(14) provides that a "taxpayer" is any person subject to any internal revenue tax. Sec. 701 specifically exempts a partnership from income tax liability but does not exempt a partnership from other taxes imposed by the Internal Revenue Code. Thus, a partnership is a taxpayer for purposes of sec. 7701(a)(14). See 1 A. Willis, J. Pennell & P. Postlewaite, Partnership Taxation, sec. 72.01, at 72-3 (3d ed. 1981).

"Our analysis is consistent with sec. 1.46-3(f), Income Tax Regs., which refers to "partnership section 38 property."

The investment credit authorized by section 38 must be "separately taken into account." The partnership, itself, is not subject to the income tax. Sec. 701. Without a separate statement of this item there would be no income tax effect for the partners. Consequently, failure to reflect this partnerhsip item separately would result in a different income tax liability for the partners.

The language of the consent is identical, in part, to the language of section 702(a)(7). Having determined that the language of section 702(a)(7) is applicable to the investment credit under section 38, we necessarily find that the language of the consent also encompasses the investment credit.

The language of section 702(a)(7) does not encompass a recomputation of the investment credit under section 47. However, the consent adds the word "adjustment" to the language of section 702(a)(7).7 "Adjustment" is not a defined term in the Internal Revenue Code. In common usage, "adjustment" is defined, in part, as an "increase or decrease." Webster's Third New International Dictionary (1971). A "recapture" recomputation of the investment credit pursuant to section 47 is clearly a decrease in or adjustment to the credit. In fact, the committee reports to section 47, as originally enacted, refer to this recomputation as a "special adjustment." S. Rept. 1881, 87th Cong. 2d Sess. (1962), 1962-3 C.B. 703, 724; Conf. Rept. 2518, 87th Cong. 2d Sess. (1962), 1962-3 C.B. 402, 417. The consent contains no limitation as to the year for which the credit being adjusted was claimed. Consequently, any adjustment to petitioners' distributable share of partnership credits reflected on petitioners' 1978 Federal income tax return, irrespective of the year in which the credit was originally claimed, would be encompassed by the language of the

consent.

It is clear from this record that there is no genuine issue of material fact as to the efficacy of the consent. Both parties were aware that an increase in tax pursuant to section 47 relating to Memphis Barge Co. was an issue at

"The Secretary required partnership reporting of recapture amounts on the 1978 Form 1065, U.S. Partnership Return, Schedule K-1, Partner's Share of Income, Credits, Deductions, Etc., Line 20.

the administrative level and executed a consent which validly extended the statute of limitations for this item. Having made this determination, we decline to consider respondent's alternative arguments.

In conclusion, we note that petitioners' contention is inconsistent with the concept of Subchapter K of the Internal Revenue Code that the partnership is not a taxable entity for Federal income tax purposes, and partners bear the benefits and burden of income, allowances, and credits unless otherwise specifically provided. Petitioners' argument convolutes the purpose of the income tax partnership provisions which generally pass to the partners their respective distributive shares of income, gain, loss, deductions, and credits attributable to the partnership. Adjustment by respondent of any such partnership item consequently must require a correlative "adjustment" of a partner's distributive share of that item. Petitioners' contention would cunningly alter that concept and, consequently, must be rejected.

To reflect the foregoing,

An appropriate order will be issued.

JAMES B. LEAHY AND KATHLEEN S. LEAHY, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 9475-84, 9488-84.

Filed July 3, 1986.

P is claiming depreciation and investment tax credit in connection with a movie through his interest as a limited partner. P contends that the partnership purchased the ownership interest in a motion picture photoplay and R argues that the partnership did not have any ownership interest which would enable limited partners to receive tax benefits. In a fully stipulated case where the parties agreed upon the facts and issues to be presented, R raised a new position or issue for the first time in his opening brief. Held, the partnership did not acquire a 100-percent ownership interest in the movie, but did become a joint venturer with the producer, and the partnership held a 25-percent interest in the movie for purposes of depreciation, investment tax credit, etc. Held, further, R's attempt to raise a new position

or issue was untimely under the circumstances and prejudical
to P.

Lawrence A. Chez, Matthias A. Lydon and Roman L. Sukley, for the petitioners.

Lauren W. Gore, for the respondent.

GERBER, Judge: Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1978 and 1980 of $177,974 and $36,564, respectively. Respondent also determined additions to tax under section 6653(a)1 for the taxable years 1978 and 1980 in the amounts of $11,736 and $6,906, respectively. With respect to the taxable year 1980, respondent determined an addition to tax under section 6651(a) in the amount of $5,469. The parties have filed a stipulation of settled issues which purports to resolve all but one adjustment common to both the 1978 and 1980 taxable years in these consolidated cases.2 The issue remaining in controversy is whether a limited partner is entitled to claim a proportionate share of the partnership's claimed depreciation and investment tax credit in connection with a movie entitled "Overboard."

FINDINGS OF FACT

This case was submitted fully stipulated and the stipulation of facts and exhibits are incorporated by this reference. Petitioners James and Kathleen Leahy maintained their legal residence in Palos Heights, Illinois, at the time of filing both petitions in these consolidated cases. Petitioners filed their joint U.S. Individual Income Tax Return (Form 1040) for the taxable years 1978 and 1980 with the Internal Revenue Service Center at Kansas City, Missouri. The Service Center received the 1978 return on June 2, 1980, and the 1980 return on November 4, 1981. Notices of deficiency, dated January 11 and January 24, 1984, were

1All statutory references are to the Internal Revenue Code of 1954 as amended and in effect during the years in question, and all Rule references are to the Rules of Practice and Procedure of this Court.

The parties have agreed that petitioners are not liable for the addition to tax under sec. 6653(a) for the taxable years 1978 and 1980. The parties, however, have not stipulated with respect to the addition to tax for the 1980 taxable year under sec. 6651(a).