-7-
to the extent that the income was allocated to limited partners,
estates, trusts, corporations, exempt organizations, or IRAs.
See the 1999 Instructions to Form 1065, at 23-24.
Petitioner argues that the reporting of LTD’s ordinary
income as NESE is within our jurisdiction because it is a
characterization of partnership income that is a partnership item
under section 6231(a)(3). According to petitioner, LTD had no
NESE in that neither it nor any of its partners had a partner or
member who was an individual. Petitioner asserts more
specifically that none of the three individuals was a partner and
asks the Court to decide the same. Petitioner asserts that the
identity of LTD’s actual partners also may affect the allocation
of income among those partners, another indicium of a partnership
item under section 6231(a)(3). See infra p. 11. LTD paid
salaries and fringe benefits to the three individuals, and as
petitioner sees it, section 707 would operate to disallow LTD’s
deduction of the payroll taxes paid on the salaries and to treat
the fringe benefits as guaranteed payments, if the three
individuals were in fact partners of LTD.
Respondent argues that the Court’s jurisdiction as to the
issue at hand is narrower than that espoused by petitioner.
According to respondent, the Court in a TEFRA partnership-level
proceeding may decide only the amount of a partnership’s NESE as
ascertained mechanically under the instructions to Form 1065. In
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