1998 Tax Ct. Memo LEXIS 139 | Tax Ct. | 1998
1998 Tax Ct. Memo LEXIS 139">*139 An appropriate order will be issued denying the motion to dismiss for lack of Jurisdiction as to JoAnn Scarfia, and granting the motion to dismiss for lack of Jurisdiction as to Michael J. Scarfia.
FIRST BLOOD ASSOCIATES, RICHARD M. GREENBERG, TAX MATTERS PARTNER, ET AL., 1 Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 13014-92, 15641-92, 12062-94
Thomas E. Redding, for participants Michael J. and JoAnn Scarfia.
Joseph F. Long and Gerald A. Thorpe, for respondent.
MEMORANDUM OPINION
POWELL, SPECIAL TRIAL JUDGE: These consolidated cases are before the Court on participants Michael J. and JoAnn Scarfia's (collectively the Scarfias) motion to dismiss for lack of jurisdiction. Respondent concedes that the filing of a petition in bankruptcy by Mr. Scarfia divested this Court of jurisdiction over Mr. Scarfia and his partnership items pursuant to
1998 Tax Ct. Memo LEXIS 139">*140 BACKGROUND
First Blood Associates (the partnership) is one of a number of partnerships formed to purchase and exploit the rights to certain films. The general partners of those partnerships were Richard M. Greenberg and/or A. Frederick Greenberg. 3 Respondent began an examination of the partnership at some point in the mid- 1980's as part of a national project focusing on the various partnerships of the Greenberg brothers.
Respondent issued notices of final partnership administrative adjustments (FPAA's) determining adjustments to partnership items for the following partnership taxable years:
Partnership | |||
Docket No. 4 | FPAA Date | Taxable Year | Petition Date |
623-92 | Oct. 21, 1991 | 1983-1987 | Jan. 8, 1992 |
13014-92 | Mar. 24, 1992 | 1988 | June 12, 1992 |
15641-92 | Apr. 20, 1992 | 1989 | July 10, 1992 |
12062-94 | Mar. 14, 1994 | 1990 | July 11, 1994 |
At the time the petitions in docket Nos. 623-92, 13014-92, and 15641-92 were filed the partnership's principal place of business was located at Greenwich, Connecticut. At the time the petition in docket No. 12026-94 was filed the partnership was in dissolution; the partnership's principal place of business during its wind-down period was located in New York, New York.
The Scarfias were married and filed joint Federal income tax returns for the years at issue. Mr. Scarfia's investment in the partnership was purchased only in his name. The Schedules K-1 issued by the partnership were issued solely in the name of Mr. Scarfia. The Scarfias resided in the State of Florida for all periods relevant to this proceeding.
On April 25, 1986, 1998 Tax Ct. Memo LEXIS 139">*142 Mr. Scarfia filed a petition in bankruptcy with the U.S. Bankruptcy Court for the Middle District of Florida. 5 Mr. Scarfia subsequently was granted a discharge by order of the Bankruptcy Court dated March 20, 1992. Mrs. Scarfia did not file a petition in bankruptcy.
DISCUSSION
THE TEFRA PROVISIONS
Pursuant to the TEFRA provisions the tax treatment of "partnership items" generally is to be determined at the partnership level. See
This Court's jurisdiction of a partnership action is predicated upon the mailing of a valid FPAA by the Commissioner to the tax matters partner (TMP) and the timely filing by the TMP or other eligible partner of a petition seeking a readjustment of partnership1998 Tax Ct. Memo LEXIS 139">*143 items. Rule 240(c);
For purposes of the TEFRA provisions
(A) a partner in the partnership, and
(B) any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.
Section 301.6231(a)(2)-1T(a)(1), Temporary Proced. & Admin. Regs.,
(a) BANKRUPTCY. The treatment of items as partnership items with respect to a partner named as a debtor in a bankruptcy proceeding will interfere with the effective1998 Tax Ct. Memo LEXIS 139">*145 and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy. Sec. 301.6231(c)-7T(a), Temporary Proced. & Admin. Reg.,
The effect of the conversion is to remove the debtor-partner from the partnership proceeding and subject the converted items to the deficiency procedures applicable to the partner's individual tax case.
NATURE OF MRS. SCARFIA'S INTEREST IN THE PARTNERSHIP
In order to assess the impact of the bankruptcy rule upon Mrs. Scarfia, we must first ascertain the nature of her interest, if any, in the partnership. State law determines ownership of property, and Federal income tax liability follows ownership.
Florida is not a community property State. 6
1998 Tax Ct. Memo LEXIS 139">*147 In the instant cases, the parties have stipulated that Mr. Scarfia purchased the partnership interest in his name, and that the partnership issued all Schedules K-1 solely in Mr. Scarfia's name. We conclude that Mrs. Scarfia had neither a joint interest in Mr. Scarfia's partnership investment nor a separate interest in the partnership.
ANALYSIS UNDER TEFRA
The parties agree that as of the date that Mr. Scarfia filed a voluntary petition in bankruptcy, all partnership items attributable to him were converted to nonpartnership items by conjunctive operation of the bankruptcy rule and
The parties further agree that Mrs. Scarfia's status as a partner for TEFRA purposes derives solely from the joint income tax returns she filed with Mr. Scarfia.
Mrs. Scarfia posits that Mr. Scarfia's status as a debtor in a bankruptcy proceeding has a twofold effect upon her. First, she contends that any partnership items that could be adjusted in the TEFRA proceeding that would affect her tax liability are converted to nonpartnership items, thereby removing the basis for this Court's subject matter jurisdiction under
Significantly, Mrs. Scarfia is unable to point to any statute or regulation explicitly divesting this Court of jurisdiction over her as a necessary concomitant to the conversion of Mr. Scarfia's partnership items1998 Tax Ct. Memo LEXIS 139">*149 under the bankruptcy rule. The bankruptcy rule provides that the "partnership items OF SUCH A PARTNER * * * shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy". Sec. 301.6231(c)-7T(a), Temporary Proced. & Admin. Regs.,
Instead, Mrs. Scarfia makes an interpretative argument based upon
We disagree with Mrs. Scarfia's construction of the statute. The language in
Respondent argues that the resolution of this issue is controlled by this Court's decision in
Because the focus in the bankruptcy rule is limited to the PARTNER'S status as a debtor in bankruptcy, we are compelled here to look only to petitioner's status, since she is the only partner before us, and, although she IS a partner, she is NOT in bankruptcy. Accordingly, we find the bankruptcy rule to be inapplicable.
1998 Tax Ct. Memo LEXIS 139">*152 Because the taxpayer was unaffected by the conversion of her husband's partnership items we held the notice of deficiency issued to the taxpayer to be invalid.
We recognize that
1998 Tax Ct. Memo LEXIS 139">*153 In addition, we note that the policy behind the bankruptcy rule is inapplicable to Mrs. Scarfia's situation. The purpose for the bankruptcy rule is to prevent the automatic stay of
In sum, Mrs. Scarfia may not harness the bankruptcy1998 Tax Ct. Memo LEXIS 139">*154 rule as an expedient to ride Mr. Scarfia's coattails out of these TEFRA proceedings. We hold that Mrs. Scarfia's partnership items did not convert to nonpartnership items at the time that Mr. Scarfia's partnership items converted to nonpartnership items pursuant to the bankruptcy rule, and, therefore, she remains a party subject to this Court's jurisdiction.
ALLOCATION OF PARTNERSHIP ITEMS
By amended petitions the Scarfias request that this Court determine the proper allocation of partnership items between them. 9 Mrs. Scarfia maintains that, even if she remains a party to these proceedings, her joint and several liability neither endows her with a separate ownership interest in Mr. Scarfia's partnership investment nor creates partnership items allocable to her. Thus, she requests that we allocate 100 percent of the partnership investment to Mr. Scarfia and zero percent to her.
Nothing in either the bankruptcy rule or the statute allows such1998 Tax Ct. Memo LEXIS 139">*155 an allocation of partnership items between spouses.
We have considered all the other arguments made by the parties and, to the extent not discussed above, find them to be irrelevant or without merit. 10
To reflect the foregoing,
An appropriate order will be issued denying the motion to dismiss for lack of Jurisdiction as to JoAnn Scarfia, and granting the motion to dismiss for lack of Jurisdiction as to Michael J. Scarfia.
Footnotes
1. Cases of the following petitioners are consolidated herewith: First Blood Associates, Richard M. Greenberg, Tax Matters Partner, docket No. 13014-92; First Blood Associates, Richard M. Greenberg, Tax Matters Partner, docket No. 15641-92; and First Blood Associates, Eugene C. Lipsky, A Partner Other Than the Tax Matters Partner, docket No. 12062-94.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. On its partnership returns for the years in issue the partnership claimed loss deductions based upon the alleged purchase of the first-run motion picture "First Blood" starring Sylvester Stallone. We note that whether the partnership obtained the benefits and burdens of ownership in the film is not here at issue, but has formed the basis for considerable securities litigation. See, e.g.,
Block v. First Blood Associates, 988 F.2d 344">988 F.2d 344 , 988 F.2d 344">347↩ (2d Cir. 1993), and cases cited therein.4. The petitions in docket Nos. 623-92, 13014-92, and 15641-92 were filed by the tax matters partner (TMP). The petition in docket No. 12062-94 was filed by notice partner Eugene C. Lipsky.
Sec. 6226(b) provides in part that if the TMP does not file a petition, then any notice partner may, within 60 days after the close of the 90-day period set forth insec. 6226(a)↩ , file a petition for readjustment of partnership items for the taxable year involved.5. Mr. Scarfia's bankruptcy case originally was filed pursuant to ch. 11 on Apr. 25, 1986, and was converted to ch. 7 on Nov. 4, 1986.↩
6. Although not relevant to the instant matter, we note that community property principles have taken root in Florida to a limited degree. See Florida Uniform Disposition of Community Property Rights at Death Act,
Fla. Stat. Ann. secs. 732.216-732.228↩ (West 1995).7. Our decision in
Dubin v. Commissioner, 99 T.C. 325">99 T.C. 325 , 99 T.C. 325">333-334 (1992), reflected our interpretation that, for purposes of the bankruptcy rule, the term "person" as used insec. 6231(a)(12) is synonymous with the term "partner" in sec. 301.6231(a)(12)-1T(a), Temporary Proced. & Admin. Regs.,52 Fed. Reg. 6793↩ (Mar. 5, 1987).8. Indeed, the relevant regulatory provisions utilize similar language in their treatment of a partner with a direct interest (e.g., through community property) and an indirect interest (through filing of a joint return). Compare sec. 301.6231(a)(12)-1T(a), Temporary Proced. & Admin. Regs., supra ("Thus, both spouses are permitted to participate in administrative and judicial proceedings.") with sec. 301.6231(a)(2)-1T(a)(1), Temporary Proced. & Admin. Regs.,
52 Fed. Reg. 6790↩ (Mar. 5, 1987) ("Thus, the spouse who files a joint return with a partner will be permitted to participate in administrative and judicial proceedings.").9.
Sec. 6226(f)↩ vests this Court with subject matter jurisdiction to determine all partnership items of the partnership for the partnership taxable year to which the FPAA relates and the proper allocation of such items among the partners.10. Also without merit is Mrs. Scarfia's argument that a failure to allocate 100 percent of the partnership interest to Mr. Scarfia could potentially result in double taxation. Respondent is entitled to have any tax liability arising from Mr. Scarfia's investment in the partnership satisfied only once. See
Dolan v. Commissioner, 44 T.C. 420">44 T.C. 420 , 44 T.C. 420">430 (1965). Full payment of a joint and several obligation by one obligor extinguishes the liability of all obligors.Kroh v. Commissioner, 98 T.C. 383">98 T.C. 383 , 98 T.C. 383">397 (1992);Dolan v. Commissioner, supra at 430↩ .