ESTATE OF ROBERT W. QUICK, DECEASED, ESTHER P. QUICK, PERSONAL REPRESENTATIVE, AND ESTHER P. QUICK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8588-97
UNITED STATES TAX COURT
Filed March 16, 1998
110 T.C. No. 17
NIMS, Judge
P was a limited partner in a partnership subject to the unified audit and litigation provisions of the Tax Equity and Fiscal
- Held: Ps’ motion for leave to file amendment to petition and R‘s motion for leave to file amendment to answer are granted. Rule 41(a), Tax Court Rules of Practice and Procedure.
- Held, further, Ps’ motion for summary judgment denied; the statutory period of limitations does not preclude R‘s recharacterization of Ps’ distributive share of partnership losses for 1989 and 1990 as passive losses subject to the limitations set forth in
sec. 469, I.R.C. Secs. 6229(a) and(d) ,6230(a)(2)(A)(i), I.R.C.
Kevin M. Bagley and Mitchell B. Dubick, for petitioners.
Gretchen A. Kindel, for respondent.
OPINION
NIMS, Judge: This matter is before the Court on the following three motions: (1) Petitioners’ Motion for Leave to File Amendment to Petition pursuant to Rule 41(a); (2) respondent‘s Motion for Leave to File Amendment to Answer pursuant to Rule 41(a); and (3) petitioners’ Motion for Summary Judgment filed pursuant to Rule 121.
Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.
| Year | Additions to Tax | Penalties | |||
|---|---|---|---|---|---|
| Sec. 6653(a)(1)(A) | Sec. 6653(a)(1)(B) | Sec. 6659 | Sec. 6661 | Sec. 6662(a) | |
| 1987 | $3,253 | 50 percent of the interest due on $65,053 | $6,284 | $11,031 | |
| 1988 | 727 | 1,824 | 2,114 | ||
| 1989 | $8,423 | ||||
| 1990 | 19,293 | ||||
The issues for decision are:
- Whether to grant the parties’ respective motions to amend their pleadings; and
- Whether the statutory period of limitations bars respondent from recharacterizing petitioners’ distributive share of partnership losses as passive losses subject to the limitations set forth in section 469.
Petitioners resided in West Palm Beach, Florida, at the time they filed their petition.
Background
The background facts related below are derived from the pleadings, the exhibits attached thereto, and other materials in the Court‘s records, including the uncontroverted written representations of the parties. To the extent we draw inferences and conclusions of a factual nature, they are based upon materials forming a part of the record.
During the years at issue, Robert W. Quick (Robert) was a limited partner in Water Oaks, Ltd. (Partnership), a Florida limited partnership. (Robert died on or about May 23, 1997, shortly after the petition was filed. On July 11, 1997, petitioners moved, pursuant to Rule 63, to substitute Esther P. Quick as the personal representative for the Estate of Robert W. Quick. Petitioners’ Motion for Substitution of Party was granted by Order of the Court dated July 15, 1997, and the caption was amended accordingly.) At all relevant times, the Partnership was a so-called TEFRA partnership whose tax treatment is determined under the unified partnership audit and litigation provisions (subchapter C of chapter 63) added
The Partnership owned and operated the Water Oak Estate Mobile Home Park (Park) in Lady Lake, Florida. During the years at issue, a portion of the lots located in the Park was leased to mobile home owners, while the remaining lots were in the process of development.
Petitioners reported their distributive share of losses from the Partnership as passive losses on their joint Forms 1040, U.S. Individual Income Tax Return, for 1987 and 1988. (The record does not reflect the extent of such losses for those years.) Petitioners reported losses from the Partnership of $331,425 (32 percent of $1,035,702 total partnership loss) and $400,125 (32 percent of $1,250,391 total partnership loss) on their joint 1989 and 1990 returns, respectively, as nonpassive losses.
On September 8, 1994, respondent wrote a letter to petitioners’ representative admonishing petitioners to file amended returns for 1989 and 1990 “to reflect the proper treatment of the losses from * * * [the Partnership]” as passive, or face the issuance of a notice of deficiency for those years. The general 3-year period of limitations for making assessments for 1989 and 1990, as extended by Form 872, Consent to Extend the Time to Assess Tax, expired on June 30, 1995. No amended returns were filed by, and respondent did not issue a deficiency notice to, petitioners prior to that date.
On November 14, 1994, respondent issued a Notice of Final Partnership Administrative Adjustment (FPAA) disallowing certain deductions claimed by the Partnership for its taxable years 1987 through 1990. Blaine B. Quick, a partner other than the TMP, petitioned this Court at docket No. 4745-95 on March 27, 1995.
On March 13, 1996, the Court entered a decision (Decision) in docket No. 4745-95. The Decision sets forth adjustments to certain partnership items which are favorable to respondent for the years 1987 and 1988, and favorable to the Partnership for the years 1989 and 1990. Specifically, the Decision adjusts losses reported on line 21, Ordinary income (loss) from trade or business activities, of the Partnership‘s Forms 1065, U.S. Partnership Return of Income, for 1987 through 1990 as follows:
| | Adjustment |
|---|---|
| 1987 | $1,070,445 |
| 1988 | 677,229 |
| 1989 | (311,234) |
| 1990 | (290,088) |
Under the Decision, petitioners’ share of Partnership losses was increased to 48 percent of the adjusted Partnership losses for 1989 and 1990, or $646,529 and $739,430, respectively.
Petitioners subsequently filed Forms 1040X, Amended U.S. Individual Income Tax Return, for taxable years 1989 and 1990. Applying the adjustments contained in the Decision to their original returns, petitioners claimed overpayments in the amounts of $71,602 and $12,889, and net operating losses of $68,270 and $278,658, for 1989 and 1990, respectively. Petitioners also filed amended returns for 1987 and 1988, claiming overpayments in the amounts of $93,467 and $19,689, respectively, as a result of net operating loss carrybacks from 1989 and 1990.
On February 19, 1997, respondent made computational adjustments on Forms 4549-A, Income Tax Examination Changes, to petitioners’ taxable years 1987 through 1990. For 1987 and 1988, the computational adjustments reflect the adjustments to partnership items set forth in the Decision for those years, and determine deficiencies in the amounts of $65,053 and $14,538, respectively. For 1989 and 1990, respondent determined deficiencies in the amounts of $48,366 and $101,879, respectively, which reflect respondent‘s position that all of the Partnership‘s losses for those years (including the losses reported prior to the entry of the Decision) should be recharacterized as passive losses in petitioners’ hands, subject to the limitations of section 469. On March 17, 1997, respondent assessed the deficiencies for 1987 through 1990 arising from the foregoing computational adjustments.
On March 7, 1997, respondent issued to petitioners affected items notices of deficiency for 1987 and 1988 determining additions to tax only, based on the computational adjustments for those years. On March 14, 1997, respondent issued to petitioners penalties-only affected items deficiency notices for 1989 and 1990, based on the computational adjustments for those years.
On July 2, 1997, respondent filed the answer herein, alleging that the penalties determined in the March 14, 1997, notices are affected items, and that such notices are therefore timely pursuant to
Petitioners filed a motion for summary judgment herein on August 18, 1997. On September 3, 1997, petitioners filed a motion for leave to file an amendment to the petition. Respondent filed a notice of objection (notice) to petitioners’ motion for summary judgment on September 8, 1997. On September 15, 1997, respondent filed a motion for leave to file an amendment to answer. The foregoing motions and notice were each accompanied by a supporting memorandum of points and authorities.
Discussion
We must first decide whether to grant petitioners’ and respondent‘s respective motions to amend their pleadings. We must then decide whether to grant petitioners’ motion for summary judgment.
Rule 41(a) provides in pertinent part that
A party may amend a pleading once as a matter of course at any time before a responsive pleading is served. * * * Otherwise a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires.
Whether a motion seeking amendment should be allowed lies within the sound discretion of the Court. Rule 41(a); Law v. Commissioner, 84 T.C. 985, 990 (1985).
In determining the justice of a proposed amendment, we must examine the particular circumstances in the case before us. Law v. Commissioner, supra at 990. We consider, among other factors, whether an excuse for the delay exists and whether the opposing party would suffer unfair surprise, disadvantage, or prejudice if the motion to amend were granted. Id.; Nolte v. Commissioner, T.C. Memo. 1995-57, affd. without published opinion 99 F.3d 1146 (9th Cir. 1996); Estate of Ravetti v. Commissioner, T.C. Memo. 1992-697; Spain v. Commissioner, T.C. Memo. 1978-270.
A. Respondent‘s Motion for Leave To File Amendment to Answer
Respondent first seeks leave to amend the answer to allege that petitioners’ distributive share of partnership losses should be recharacterized as passive losses for purposes of section 469 (the section 469 issue), and that such recharacterization constitutes an “affected item” within the meaning of
Petitioners object to respondent‘s motion, claiming that the “cause of justice” is not served by allowing respondent to amend the answer. Petitioners argue that respondent was cognizant of the section 469 issue at least as early as September 8, 1994, at which time respondent‘s agent warned petitioners’ representative in writing that deficiency notices for 1989 and 1990 challenging petitioners’ nonpassive characterization of their share of Partnership losses would be forthcoming unless petitioners filed amended returns for
There is nothing in the record which would support a finding that petitioners will suffer unfair surprise or prejudice as a result of our granting respondent‘s motion. In fact, petitioners have been aware of the arguments respondent now wishes to affirmatively allege for some time. See Waterman v. Commissioner, 91 T.C. 344, 351 (1988). Such awareness is evidenced by petitioners’ concerted effort to preempt respondent‘s ability to raise the section 469 issue generally and to refute its status as an affected item as a matter of law in their motion for summary judgment filed before respondent moved to amend the answer.
Nor have petitioners convinced us that the delay was due to a failure on the part of respondent to exercise reasonable diligence. Prior to moving for leave to file an amendment to answer, respondent attempted to rescind the March 14, 1997, notices in order to issue corrected notices after discussions with petitioners’ counsel. Respondent was prevented from issuing valid notices when petitioners revoked their consent to withdraw the March 14, 1997, notices. Furthermore, the motion for leave to file amendment was filed 2 and one-half months from the filing of the original answer, which does not strike the Court as dilatory under the circumstances. See Waterman v. Commissioner, supra; Wendorff v. Commissioner, T.C. Memo. 1995-258.
Based on the above discussion, we shall grant respondent‘s motion for leave to file the foregoing amendments to the answer. See, e.g., Waterman v. Commissioner, supra at 351; Spain v. Commissioner, supra.
Respondent further seeks leave to amend the answer to assert increased deficiencies in the amounts of $97,033 and $114,768, and increased penalties pursuant to
Respondent‘s motion was made prior to the entry of a final decision in this case. Moreover, the assertion of additional deficiencies and penalties comes in response to petitioners’ contention that respondent is estopped from reissuing notices of computational adjustment to correct what respondent believes are erroneous abatements for 1989 and 1990. Thus, we conclude that petitioners will suffer no undue surprise or prejudice as a result of this amendment, and respondent‘s motion on this score is therefore granted. Cf. Hanley v. Commissioner, T.C. Memo. 1990-53. The burden of proof as to new matters and increased deficiencies pleaded in the amended answer will be upon respondent. Rule 142(a).
B. Petitioners’ Motion for Leave To File Amendment to Petition
Petitioners seek leave to amend their petition to allege in greater detail the facts necessary to establish the amount of net operating losses that they contend may be carried back to 1987 and 1988, as well as the amount of refunds due them for those years stemming from what they contend are the “proper” computational adjustments for 1989 and 1990. Petitioners further seek to amend their petition to allege that respondent‘s application of the higher interest rate imposed on tax motivated transactions pursuant to
II. Petitioners’ Motion for Summary Judgment
Among other things, in their motion for summary judgment, petitioners ask the Court to: (1) Find that the proper characterization of their distributive share of partnership losses is neither an affected item nor a partnership item for purposes of determining whether the period of limitations for making assessments has run; (2) find that the proper computational adjustments for 1989 and 1990 result in no deficiencies in tax or penalties for those years; (3) order respondent to refund overpayments for taxable years 1989 and 1990, with interest; and (4) find that petitioners incurred net operating losses for 1989 and 1990 which may be carried back to their taxable years 1987 and 1988.
A motion for summary judgment may be granted if the pleadings and other materials demonstrate that no genuine issue of material fact exists and a decision can be rendered as a matter of law. Rule 121(b); Sundstrand Corp. & Consol. Subs. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences are read in a manner most favorable to the party opposing summary judgment. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner, 79 T.C. 340, 344 (1982).
Respondent objects to petitioners’ motion for summary judgment on the grounds that it in part seeks the resolution of matters as to which genuine issues of material fact remain. We agree. However, because we are satisfied that no genuine issue exists as to any of the material facts concerning whether the period of limitations for making assessments for 1989 and 1990 has expired, we conclude that partial summary adjudication is appropriate as to that issue in this case. Rule 121(c).
The parties do not dispute that the
If we determine that the section 469 issue, as petitioners contend, does not involve a partnership item or affected item adjustment, then
SEC. 6231(a)(3) Partnership item.--The term “partnership item” means, with respect to a partnership, 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.
Such items include items of income, gain, loss, deduction or credit of the partnership, and each partner‘s share thereof.
The term “affected item” is defined as “any item to the extent such item is affected by a partnership item.”
The term “nonpartnership item” means an item which is (or is treated as) not a partnership item.
Partnership item adjustments can be made to an individual‘s return solely through computational adjustments.
Respondent‘s principal argument is that the section 469 issue is more appropriately determined at the partnership level and is therefore subject to computational adjustment.
In arguing that the section 469 issue involves a partnership item subject to TEFRA adjustment rules, respondent posits that the Partnership‘s losses stem from rental activity for the years in issue, a per se passive activity under
Petitioners concede that, should the Court determine that the Partnership‘s returns for 1989 and 1990 are to be construed as reporting that the Partnership‘s losses derive from rental activity within the meaning of
We conclude that the Partnership reported its losses as arising from trade or business activity (other than rental activity) on its returns for the years in dispute. (In reaching our conclusion, we note that we are not making an inappropriate review of the partnership‘s returns. See Roberts v. Commissioner, 94 T.C. at 862.) The Partnership reported its income and expense on its returns for 1989 and 1990 immediately below the following statement: “Caution: Include only trade or business income and expenses on lines 1(a) through 21 below.” In addition, lines 2 and 3 on the Schedules K require the Partnership to report its income or loss arising from rental activities. Respondent‘s instructions for these lines refer the reader to Publication 925, Passive Activity and At-Risk Rules, for the purpose of defining rental activities.
It is true, as respondent points out, that line B of the Partnership‘s returns for 1989 and 1990 describes the principal product or service of the Partnership as “rentals“. Contrary to respondent‘s contention, however, such a description is not dispositive of the nature of the Partnership‘s activity for purposes of
Finally, notwithstanding respondent‘s assertions, lines 19(b) and 20(b), Analysis of total distributive income/payment items by type of partner, of the Schedules K for 1989 and 1990, respectively, which reported losses as largely passive to the limited partners, are not substantively equivalent to reporting partnership activities as rental activities within the meaning of
In light of the above, we conclude that the Partnership reported its losses as arising from trade or business activity for 1989 and 1990. Since no adjustment was made during the partnership-level proceeding as to the character of the activity, respondent is bound by the reporting position of the Partnership. See Doe v. Commissioner, 80 AFTR2d 97-5535, 97-1 USTC par. 50460 (10th Cir. 1997), affg. in part and revg. in part T.C. Memo. 1993-543; Roberts v. Commissioner, 94 T.C. at 862.
B. The section 469 issue involves an affected item requiring a partner-level factual determination.
We now turn to consider respondent‘s alternative position set forth in the amended answer that the section 469 issue involves an affected item such that
Although the affected items regulations do not expressly mention section 469, we do not think that the regulations are meant to provide an exhaustive list of such items. See, e.g., Jenkins v. Commissioner, 102 T.C. at 555 (holding that section 104(a) classification by partner of a guaranteed payment is an affected item).
Furthermore, we question petitioners’ assumption in their memorandum that “an item on a partner‘s return can be an
As we said in Hambrose Leasing v. Commissioner, 99 T.C. 298, 308 (1992): “partnership liabilities should be determined and taken into account at the partnership level whenever such determination produces a uniform effect on the partners.” (Emphasis added.) Such is not the case where, as here, the treatment of one partner‘s activities (vis-a-vis the partnership) as passive or nonpassive has no impact on the treatment of another partner‘s activities. In such case, a uniform effect on the partners is not produced.
We therefore conclude that the characterization of losses as either passive or nonpassive in the hands of a partner is an affected item under section 469, and we so hold.
Finally, petitioners argue that
If respondent asserts that the [section] 469 issue is an affected item for 1989 and 1990, respondent must also admit that the computational adjustments for 1987 and 1988 should not have been made, since they involved an item requiring a partner level determination.
Notwithstanding petitioners’ assertions, our conclusion that the characterization of losses in the hands of petitioners for 1989 and 1990 constitutes an affected item is not inimical to respondent‘s authority to issue notices of computational adjustment rather than deficiency notices to petitioners for their taxable years 1987 and 1988 upon the completion of the partnership level proceeding. Respondent never sought to recharacterize petitioners’ distributive share of partnership losses for 1987 and 1988 as passive--petitioners had already reported them as such on their returns for those years. Rather, the computational adjustments for 1987 and 1988 simply reflect the partnership-level adjustments set forth in the Decision for those years. Since the amount of losses in the
We have considered each of the remaining arguments of the parties and, to the extent that they are not discussed herein, find them to be either not germane or unconvincing.
In light of the foregoing, we hold that the section 469 issue involves an affected item, such that the statutory period of limitations does not bar respondent from asserting additional deficiencies and accuracy-related penalties for 1989 and 1990 as set forth in the amended answer.
Accordingly, petitioners’ motion for summary judgment is denied. Factual issues (including the nature and extent of petitioners’ participation in the Partnership‘s activities) which are determinative of respondent‘s right to assess deficiencies and penalties, or petitioners’ right to claim overpayments for the years at issue, among other things, must be resolved in future proceedings.
To reflect the foregoing,
An appropriate order granting petitioners’ motion for leave to file amendment to petition and respondent‘s motion for leave to file amendment to answer, and denying petitioners’ motion for summary judgment, will be issued.