GAUGHF PROPERTIES, L.P., BALAZS VENTURES, LLC, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 18298-07.
United States Tax Court
Filed September 10, 2012.
139 T.C. 219
GOEKE, Judge
John Aletta, William Franklin Castor, and Edsel Ford Holman, Jr., for respondent.
OPINION
GOEKE, Judge: On March 30, 2007, respondent mailed a notice of final partnership administrative adjustment (FPAA) to the tax matters partner (TMP) for Gaughf Properties, L.P.
- whether, on March 30, 2007, the statutory period for assessing tax attributable to partnership items was open under
section 6229(e) 2 with respect to the Gaughfs. We hold that it was; and - whether, under the doctrine of estoppel, respondent should be precluded from asserting the statutory period for assessing tax attributable to partnership items was open on March 30, 2007, with respect to the Gaughfs. We hold the doctrine of estoppel does not preclude respondent‘s assertion.
Background
Gaughf Properties was a limited partnership formed under South Carolina law on September 29, 1999, and was terminated before the timely filing of the petition on August 15, 2007. At all relevant times the Gaughfs have been married and have resided in South Carolina.
1. Formation of the Entities Involved
During 1999 KPMG persuaded the Gaughfs that they should participate in a series of complicated stock and option transactions (plan) through the Chicago office of a national law firm, Jenkens & Gilchrist (J&G). On the advice of J&G and KPMG, the Gaughfs asked their attorney, Maurice Holloway, to form four entities the Gaughfs were told they needed to complete the plan.
Gaughf Enterprises, LLC (Gaughf Enterprises), was a single-member limited liability company formed under South Carolina law on September 22, 1999, and was wholly owned
Balazs Ventures, LLC (Balazs Ventures), was a single-member limited liability company formed under South Carolina law on September 22, 1999, and was wholly owned by Mrs. Gaughf. As such, during 1999 Balazs Ventures was a disregarded entity for Federal income tax purposes. As with Gaughf Enterprises, on September 27, 1999, Mr. Holloway filed a Form SS-4 on behalf of Balazs Ventures with the Entity Control unit at respondent‘s Service Center in Atlanta, Georgia. This Form SS-4 identified Balazs Ventures as a disregarded entity.
On September 29, 1999, Mr. Gaughf, acting on behalf of Gaughf Enterprises, and Mrs. Gaughf, acting on behalf of Balazs Ventures, executed a limited partnership agreement for Gaughf Properties. The limited partnership agreement listed Gaughf Enterprises and Balazs Ventures as the only partners in Gaughf Properties. Also on September 29, 1999, a Certificate of Limited Partnership for Gaughf Properties was filed with the secretary of state‘s office for the State of South Carolina and a “Certificate of Existence, Limited Partnership” was issued. On October 1, 1999, Mr. Holloway filed a Form SS-4 on behalf of Gaughf Properties with the Entity Control unit at respondent‘s Service Center in Atlanta, Georgia.
On September 30, 1999, Bodacious, Inc. (Bodacious), was organized as a corporation under South Carolina law. Mr. Gaughf owned 100% of Bodacious and was its president. For tax year 1999 Bodacious filed an election to be classified as a subchapter S corporation. On October 1, 1999, Mr. Holloway filed a Form SS-4 on behalf of Bodacious with the Entity Control unit at respondent‘s Service Center in Atlanta, Georgia.
Each Form SS-4 filed by Mr. Holloway stated that it was filed on account of the start of a new business. Each entity listed the Gaughfs’ personal address in South Carolina as the entity‘s mailing address on its Form SS-4. The Forms SS-
The filing of the Forms SS-4 to obtain employer identification numbers was part of Mr. Holloway‘s standard procedure in forming entities for his clients. Other than the Forms SS-4, Mr. Holloway did not file any other documents with the Internal Revenue Service (IRS) on behalf of the Gaughfs or entities related to them.
2. Laying the Groundwork To Offset Gains in Stock Owned by Mr. Gaughf
Per an investor profile prepared by J&G for Mr. Gaughf, J&G contemplated increasing the basis in Gaughf Properties through a “Section 754 step up in the partnership” in order to offset unrealized gains Mr. Gaughf had in stock he owned in Quanta Services, Inc. (Quanta).4 J&G charged the Gaughfs $180,000 for its assistance with the plan.
Investment accounts with Deutsche Bank BT Alex. Brown, LLC (a division of Deutsche Bank Subsidiaries, Inc., and BT Alex. Brown, LLC, which are indirect subsidiaries of Deutsche Bank), were set up for Gaughf Enterprises, Gaughf Properties, and Bodacious to complete the plan. On November 24, 1999, $90,000 was deposited into Gaughf Enterprises’ account. On November 29, 1999, Gaughf Enterprises entered into two currency option transactions with Deutsche Bank regarding the Japanese yen, consisting of a long and a short currency option. The termination date for these options was December 20, 1999. The stated premium for the long cur-
On November 30, 1999, Gaughf Enterprises transferred the currency options to Gaughf Properties as a contribution to capital. On the same date, $45,000 (representing the net premium for entering into the currency options) was transferred from the Gaughf Enterprises account to Deutsche Bank to pay for the options. The $45,000 remaining in Gaughf Enterprises’ account was then transferred on November 30, 1999, to Gaughf Properties’ account as a contribution to capital. On the same date, Mr. Gaughf executed an agreement between Gaughf Enterprises and Bodacious under which $900 of the $45,000 contributed to Gaughf Properties from Gaughf Enterprises would instead be deemed to be a contribution from Bodacious to Gaughf Properties.
On December 20, 1999, the currency options held by Gaughf Properties terminated according to their terms. According to a legal opinion issued to Mr. Gaughf by J&G, Mr. Gaughf‘s5 basis in Gaughf Properties “after the contribution of the [currency] Options should include the cost of the Long Option contributed, without adjustment for the Short Option“.
On December 27, 1999, Gaughf Enterprises assigned its general and limited partnership interests in Gaughf Properties to Bodacious, and Balazs Ventures assigned its general partnership interest in Gaughf Properties to Bodacious, retaining its limited partnership interest. According to the written assignments of the interests, the assignments were made to Bodacious as a substitute general partner of Gaughf Properties, not as an assignee. On the same date, the Gaughfs executed a Liquidation Agreement on behalf of Bodacious and Balazs Ventures terminating Gaughf Properties. The Liquidation Agreement provided that “Any and all assets of the Partnership held by the Partnership as of the date of dissolution shall be distributed to the Partners prorata in accordance with the Schedule attached hereto.” The attached schedule stated that Bodacious was entitled to 99.6% of partnership assets, while Balazs Ventures was entitled to the remaining 0.4% of partnership assets. On
3. The Quanta Stock Transactions
In addition to the investment accounts through Deutsche Bank BT Alex. Brown, LLC, brokerage accounts for both Gaughf Properties and Bodacious were established with Edward D. Jones & Co., L.P. (Edward Jones). Mr. Gaughf also had a brokerage account with Edward Jones. On November 19, 1999, Mr. Gaughf transferred 142,783 shares of Quanta stock from his Edward Jones account to the Bodacious Edward Jones account. On December 9, 1999, Bodacious sold the 142,783 shares of Quanta stock for prices ranging from $31 3/8 to $31.8 After commissions and expenses were deducted, the stock sale generated net proceeds of $4,418,243.
On December 14, 1999, Mr. Gaughf transferred an additional 2,575 shares of Quanta stock from his Edward Jones account to the Bodacious Edward Jones account. On December 20, 1999, Bodacious then transferred these shares to the Gaughf Properties Edward Jones account. Also on December 20, 1999, Mr. Gaughf transferred an additional 4,925 shares of Quanta stock from his Edward Jones account directly to the Gaughf Properties Edward Jones account. On December 30, 1999, Gaughf Properties then transferred, in liquidation, the 7,500 shares of Quanta it then owned to the Bodacious Edward Jones account.9 The next day Bodacious sold the 7,500 shares for net proceeds of $207,003 after commissions and expenses.
4. Tax Returns of the Gaughfs, Gaughf Properties, and Bodacious
The Gaughfs (jointly), Bodacious, and Gaughf Properties timely filed their 1999 tax returns on or before April 17, 2000. Each of these three returns was prepared by Kathy Nall of KPMG and was filed with the IRS Service Center in Atlanta, Georgia. The legal opinion issued by J&G was used to help prepare the returns.
Ms. Nall was a manager in KPMG‘s tax department at the time she prepared the returns for the Gaughfs, Gaughf Properties, and Bodacious. However, she left KPMG in 2001, and all her client files (including those relating to the Gaughfs, Gaughf Properties, and Bodacious) remained with KPMG. At trial she was unable to recall most of the work she had completed on behalf of the Gaughfs, Gaughf Properties, and Bodacious. The parties stipulated that respondent issued summonses to KPMG at some unestablished time, but the point was not well developed, as discussed further infra.
Before filing the tax returns for the Gaughfs, Gaughf Properties, and Bodacious, Ms. Nall sent an email to her boss, seeking clarification on certain items. Ms. Nall noted that of the $45,000 contribution made to Gaughf Properties from Gaughf Enterprises, $900 was a deemed contribution from Bodacious. Ms. Nall stated in the email that this transaction made it look as though Bodacious was a 2% partner in Gaughf Properties, yet it was not listed as a partner on any Gaughf Properties Schedule K–1, Partner‘s Share of Income, Deductions, Credits, etc. Ms. Nall also stated that the agree-
On its 1999 partnership return Gaughf Properties listed Gaughf Enterprises as its TMP. Gaughf Properties reported no taxable income, tax-exempt interest income of $66, and an ordinary loss of $45,000. The Schedule M–2, Analysis of Partners’ Capital Accounts, attached to Gaughf Properties’ partnership return, reported total capital contributions of $300,000 and total distributions of $255,066. The $255,066 distribution was specifically identified as a cash distribution.
Three Schedules K–1 were attached to the Gaughf Properties partnership return. Two of these were for Gaughf Enterprises, as Gaughf Properties identified Gaughf Enterprises as holding two separate partnership interests (of 99% and 0.6%) in Gaughf Properties. The third Schedule K–1 was for Balazs Ventures. On the Schedules K–1 Gaughf Properties reported contributions of $1,800 and $297,000 from Gaughf Enterprises, as well as a $1,200 contribution from Balazs Ventures. Gaughf Properties also reported distributions of $1,530 and $252,516 to Gaughf Enterprises, as well as a $1,020 distribution to Balazs Ventures. Gaughf Properties’ 1999 partnership return did not mention Bodacious.
The Gaughf Properties tax return did not make clear how the partnership calculated the total of $300,000 in capital contributions received in the light of the transactions described supra. The return made no mention of the 7,500 Quanta shares contributed by Bodacious and Mr. Gaughf, the $44,100 contribution from Gaughf Enterprises, the deemed $900 contribution from Bodacious, or the currency options contributed by Gaughf Enterprises. However, considering these transactions it appears that the $300,000 was reached by adding: (1) $44,100 and $900 in cash contributions; (2) the net stated currency option premiums (which equaled $45,000); and (3) an additional $210,000 representing the 7,500 Quanta shares contributed.10
The 1999 Bodacious return was signed by Mr. Gaughf and did not mention Gaughf Properties by name. The Bodacious return included a statement entitled “Bodacious, Inc. Section 351 Disclosure Statement” which indicated that on December
On Statement 9 of their joint tax return, the Gaughfs reported a long-term capital loss flowing from Bodacious of $119,919, equal to Bodacious’ reported cost basis in the Quanta shares minus the sale proceeds. Had the Gaughfs sold the Quanta stock without going through the previous transactions in an attempt to inflate its basis, the result would have instead been a capital gain of approximately $4.3 million. The Gaughfs’ return also included a section 351 statement claiming that Mr. Gaughf had a “tax basis” in Gaughf Properties12 of $4,513,528 which was transferred to Bodacious on December 28, 1999.
5. J&G Summons and Information Provided by J&G
On June 19, 2003, respondent issued a John Doe summons13 to J&G in connection with an audit to determine whether the firm was liable for penalties as a promoter of a tax shelter. The summons requested that J&G produce the names, addresses, and taxpayer identification numbers (TINS) for taxpayers who from January 1, 1998, through June 15, 2003, participated in any transaction which was or later became a listed transaction or other potentially abusive tax shelter, organized or sold by J&G‘s Chicago office. J&G did not comply with the John Doe summons, asserting on
On August 14, 2003, the Department of Justice, as counsel for the IRS, filed a petition in the U.S. District Court for the Northern District of Illinois seeking to enforce the summons. By order dated May 14, 2004, the District Court granted the petition and enforced the summons. On May 17, 2004, J&G provided a list of existing and/or former clients of J&G to the Department of Justice in compliance with the summons. This list included Mr. Gaughf‘s name, address, and TIN, as well as a reference to his being involved in a transaction with J&G for tax year 1999.14 The revenue agent who had been investigating J&G received the list shortly after it was produced by J&G. On June 16, 2004, respondent‘s Office of Professional Responsibility used the information supplied to write Mr. Gaughf a letter advising him of the investigation of J&G.
On or about July 7, 2004, J&G provided the revenue agent investigating it with a set of approximately 1,300 compact disks (CDs) containing documents relating to various existing or former clients of J&G, a list of such J&G clients, and an index of the documents which were stored on the CDs. The CDs included approximately 480 pages of documents pertaining to the transactions involving the Gaughfs, Gaughf Properties, Bodacious, Balazs Ventures, and Gaughf Enterprises. The names, addresses, and TINS of the Gaughfs, Gaughf Properties, Bodacious, Balazs Ventures, and Gaughf Enterprises were also provided on some of the documents on the CDs. The CDs contained copies of the Forms SS-4 filed with respondent for Gaughf Properties, Gaughf Enterprises, and Balazs Ventures. The CDs contained a company profile of Gaughf Enterprises which included Mr. Gaughf‘s name, address, and Social Security number and identified him as owning 100% of Gaughf Enterprises. The company profile also contained the employee identification number for Gaughf Enterprises. A similar company profile for Balazs Ventures with the same information pertaining to that LLC and Mrs. Gaughf was also provided on the CDs. In addition, the CDs contained the articles of organization for both
The revenue agent who received the CDs did not conduct examinations of the J&G clients. He stored the CDs in his office in Illinois15 and also downloaded them onto a computer in his office but did not disseminate the information they contained throughout the IRS or advertise the fact that he had such information.16 However, as word got around, other IRS personnel began to call the revenue agent to request documents for particular J&G clients, which the revenue agent would then supply.
6. Audits of Returns of the Gaughfs, Gaughf Properties, and Bodacious
On January 10, 2006, a revenue agent different from the one investigating J&G was assigned to audit returns of the Gaughfs and their related entities for tax year 1999.17 This revenue agent was initially provided with the Gaughfs’ tax return and on January 19, 2006, was also provided with the J&G documents pertaining to the Gaughfs.18 On January 25, 2006, the revenue agent used information on the Gaughfs’ 1999 tax return to send them a letter notifying them that their 1999 tax return had been selected for examination. On January 31, 2006, the revenue agent sent a letter to the Gaughfs enclosing written requests for information and documents noted on Forms 4564, Information Document Requests. The Gaughfs provided no information or documents in response to the requests.
On February 23, 2006, the same revenue agent auditing the Gaughfs’ return sent a letter to Gaughf Enterprises, as the TMP of Gaughf Properties, notifying it that Gaughf Properties’ tax return for 1999 had been selected for examination. On the same date, the revenue agent sent written requests
On April 12, 2006, the Gaughfs and their certified public accountant, Porter Thompkins, executed Form 872–I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, regarding tax year 1999. On May 10, 2006, an IRS group manager executed the Form 872–I agreement on behalf of respondent. The Form 872–I extended the limitations period for respondent to assess tax liabilities against the Gaughfs for tax year 1999, including liabilities attributable to any partnership items, affected items, computational adjustments, and partnership items converted to nonpartnership items until April 16, 2007. However, the Form 872–I agreement had no effect unless a limitations period applicable for respondent to timely assess any of the tax liabilities covered by the Form 872–I was open on May 10, 2006, the day the agreement was executed on behalf of respondent.
On May 18, 2006, respondent issued a notice of beginning of administrative proceeding (NBAP) to both Gaughf Enterprises and Balazs Ventures. On March 30, 2007, respondent issued the FPAA which is the basis of this case for Gaughf Properties’ TYE December 27, 1999. The FPAA was issued to Gaughf Enterprises, as TMP for Gaughf Properties. On August 15, 2007, Balazs Ventures, a partner other than the TMP, timely filed a Petition for Readjustment of Partnership Items Under Code Section 6226, on behalf of Gaughf Properties contesting the FPAA. Petitioner claimed in the petition that on March 30, 2007, the statutory period for assessment for Gaughf Properties’ TYE December 27, 1999, was no longer open. This issue was separated from other issues in the case for purposes of trial and opinion.
7. Additional Information Relevant to Petitioner‘s Estoppel Argument
At the time the FPAA was issued respondent argued that there was omitted income resulting from the expiration of the short currency option. The Commissioner advanced similar justification for extending the statutory period for
Trial for this case was set for February 4, 2010, but on January 19, 2010, was continued to February 25, 2010, at respondent‘s request. At a February 3, 2010, hearing respondent stated that he was still contemplating whether to assert that there was omitted income resulting from the expiration of the short currency option. In addition, respondent stated that three other grounds supported the extension of the statutory period for assessment: (1) the section 6229(e) issue being considered in this Opinion; (2) the section 6501(e)(1)(A) issue that respondent conceded after trial as a result of the recent Supreme Court decision in United States v. Home Concrete & Supply, LLC, 566 U.S. ___, 132 S. Ct. 1836 (2012); and (3) that it was Gaughf Properties (rather than Bodacious) that sold 7,500 shares of Quanta stock and failed to report a gain on the sale of approximately $207,000. On February 3, 2010, we continued the trial of this case to May 17, 2010.
On February 25, 2010, respondent conceded his original short option income position regarding the statutory period for assessment in this case. On March 3, 2010, we allowed respondent to amend his answer to the petition to assert his three other alternative statutory-period-for-assessment arguments. Less than a month later respondent conceded that his argument that it was Gaughf Properties that sold 7,500 shares of Quanta stock and failed to report a gain on the sale was incorrect. The parties then proceeded to trial on the remaining two issues.
Discussion
I. Burden of Proof
Generally, taxpayers bear the burden of proving, by a preponderance of the evidence, that the determinations of the Commissioner are incorrect.
II. Whether the Statutory Period for Assessing Tax Attributable to Partnership Items Was Open on March 30, 2007, Under Section 6229(e) With Respect to the Gaughfs
SEC. 6229(e) . UNIDENTIFIED PARTNER. If—(1) the name, address, and taxpayer identification number of a partner are not furnished on the partnership return for a partnership taxable year, and
(2)(A) the Secretary, before the expiration of the period otherwise provided under this section with respect to such partner, mails to the tax matters partner the notice specified in paragraph (2) of
section 6223(a) with respect to such taxable year, or(B) the partner has failed to comply with
subsection (b) of section 6222 (relating to notification of inconsistent treatment) with respect to any partnership item for such taxable year,the period for assessing any tax imposed by subtitle A which is attributable to any partnership item (or affected item) for such taxable year shall not expire with respect to such partner before the date which is 1 year after the date on which the name, address, and taxpayer identification number of such partner are furnished to the Secretary.
Respondent argues that the statutory period for assessing tax attributable to partnership items against the Gaughfs was open under
A. Whether the Gaughf Properties 1999 Return Furnished the Gaughfs’ Names, Addresses, and TINS
Respondent claims that the Gaughf Properties 1999 return failed to furnish the Gaughfs’ names, addresses, and TINS as required by
The court in Costello v. United States Gov‘t, 765 F. Supp. 1003 (C.D. Cal. 1991), addressed a similar situation in which information regarding an indirect partner required to satisfy
B. Whether the Gaughfs Failed To Comply With Section 6222(b)
One of the requirements for extending the statutory period for assessment under
Respondent argues that the Gaughfs failed to comply with
Partnership items are defined to include not only “Items of income, gain, loss, deduction, or credit of the partnership“, but also “the accounting practices and the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc.” of the partnership.
to the extent that a determination of such items can be made from determinations that the partnership is required to make with respect to an amount, the character of an amount, or the percentage interest of a partner in the partnership, for purposes of the partnership books and records or for purposes of furnishing information to a partner. [Id. para. (a)(4).]
Given these definitions for the term “partnership item“, we find that the contributions of the currency options and the 7,500 shares of Quanta stock to Gaughf Properties, as well as the distribution of the 7,500 Quanta shares to Bodacious upon Gaughf Properties’ liquidation, were partnership items. The contribution and distribution of the Quanta shares were determinations that Gaughf Properties was required to make for purposes of furnishing information to its partners.24 The currency options contributed likewise affected amounts required to be reported to the partners on their Schedules K–1. The currency options also affected the income reported by Gaughf Properties, which reported an ordinary loss of $45,000 when the options terminated according to their terms.
We find that on their 1999 return the Gaughfs treated these partnership items inconsistently from the way they were treated on the Gaughf Properties 1999 return. Although much of the property contributed to Gaughf Properties came from either Gaughf Enterprises or Bodacious, and the 7,500
Gaughf Properties netted the amounts of the stated premiums for the two currency options in reporting the value of the capital contributions on its return. However, Bodacious (and hence, the Gaughfs) treated only the long option as a capital contribution to Gaughf Properties for purposes of determining the basis in the 7,500 Quanta shares distributed to Bodacious upon the liquidation of Gaughf Properties. This resulted in an incorrect overstatement of Bodacious‘s basis in the Quanta stock which was not accounted for on Gaughf Properties’ 1999 return. When Bodacious subsequently sold the stock, the result was a claimed capital loss of $119,919 instead of a capital gain of approximately $4.3 million which would have resulted had the basis not been overstated.
In addition to the inconsistent treatment by Bodacious, the Gaughfs also directly treated partnership items inconsistently from the way they were reported on the Gaughf Properties 1999 return. A section 351 statement was included with the Gaughfs’ 1999 tax return which claimed that Mr. Gaughf had a tax basis in Gaughf Properties of $4,513,528. This figure included Mr. Gaughf‘s accounting for the contribution of the long option to Gaughf Properties (contributed by Gaughf Enterprises, a disregarded entity) without accounting for the contribution of the short option (also contributed by Gaughf Enterprises). This was inconsistent with the netting of the currency options used by Gaughf Properties in determining and reporting the capital contributions it received from its partners.
For the foregoing reasons, we find that the Gaughfs treated partnership items of Gaughf Properties on their per-
2. Whether the Gaughfs Notified Respondent of Inconsistent Treatment of Partnership Items on Their Personal Tax Return and the Gaughf Properties 1999 Return
As previously mentioned, if a partner‘s treatment of a partnership item on the partner‘s return is inconsistent with the treatment of the item on the partnership return, then the partner must file with the Secretary a statement identifying the inconsistency in order to satisfy
Petitioner has not argued that the Gaughfs filed a Form 8082. At trial the Gaughfs testified that they had no recollection of ever filing a Form 8082. The revenue agent assigned to audit the returns of the Gaughfs and their related entities testified that the administrative file he maintained in connection with the audit contained no Form 8082. Ms. Nall, who prepared the returns for the Gaughfs and their entities, could not recall filing a Form 8082. Considering these facts, we find that the Gaughfs did not notify respondent that they treated partnership items of Gaughf Properties on their personal return in a manner which was inconsistent with their treatment on the Gaughf Properties 1999 return.
Given our findings that the Gaughfs: (1) treated partnership items of Gaughf Properties on their personal return in a manner which was inconsistent with their treatment on the Gaughf Properties 1999 return; and (2) did not notify respondent of this inconsistent treatment, we conclude that the Gaughfs failed to comply with
(a) In general. In addition to the names, addresses, and profits interests as shown on the partnership return, the Service will use additional information as provided in this section for purposes of administering subchapter C of chapter 63 of the Code.
(b) Procedure for furnishing additional information—(1) In general. Any person may furnish additional information at any time by filing a written statement with the Service. * * *
(2) Where statement must be filed. A statement furnished under this section shall generally be filed with the service center with which the partnership return is filed. However, if the person filing the statement knows that the notice described in
section 6223(a)(1) (beginning of an administrative proceeding) has already been mailed to the tax matters partner, the statement shall be filed with the Internal Revenue Service office that mailed such notice.(3) Contents of statement. The statement shall—
Identify the partnership, each partner for whom information is supplied, and the person supplying the information by name, address, and taxpayer identification number; - Explain that the statement is furnished to correct or supplement earlier information with respect to the partners in the partnership;
- Specify the taxable year to which the information relates;
- Set out the corrected or additional information, and
- Be signed by the person supplying the information.
(c) No incorporation by reference to previously furnished documents. Incorporation by reference of information contained in another document previously furnished to the Internal Revenue Service will not be given effect for purposes of sections
(d) Information supplied by a person other than the tax matters partner. The Service may require appropriate verification in the case of information furnished by a person other than the tax matters partner. The 30-day period referred to in paragraph (b)(1) of this section shall not begin until that verification is supplied
* * * * * * *
(f) Service may use other information. In addition to the information on the partnership return and that supplied on statements filed under this section, the Service may use other information in its possession (for example, a change in address reflected on a partner‘s return) in administering subchapter C of chapter 63 of the Code. However, the Service is not obligated to search its records for information not expressly furnished under this section.
Respondent argues that the identifying information referred to in
1. Whether Documents Received by Respondent Satisfy the Requirements of Section 301.6223(c)-1T, Temporary Proced. & Admin. Regs.
Respondent does not dispute that he received extensive amounts of information regarding the Gaughfs from J&G (including their names, joint address, TINS, and status as indirect partners in Gaughf Properties), as well as Forms SS-4 for each of Bodacious, Gaughf Properties, Gaughf Enterprises, and Balazs Ventures (which contained various pieces of identifying information regarding the Gaughfs and their relationships to the various entities). However, respondent argues that certain elements of
The information supplied by J&G also fails to satisfy the requirement of
With regard to the Forms SS-4, it is true that these documents were properly filed with the IRS Service Center in Atlanta, Georgia. However, the Forms SS-4 do not state that they were filed to “correct or supplement earlier information with respect to the partners in the partnership“. See
Petitioner points to, and we have found, no other documents in the record which might comply with the requirements of
2. Whether Respondent Received an Identifying Statement Conforming With Section 301.6223(c)-1T, Temporary Proced. & Admin. Regs. , From KPMG
The parties stipulated that respondent issued summonses to KPMG at some unestablished time. The relevant stipula-
Multiple times during pretrial discovery petitioner requested any information respondent had received from KPMG concerning the Gaughfs or their entities. Respondent‘s answers to the requests were that he had received no taxpayer identifying information relating to the Gaughfs from KPMG and had already supplied petitioner with any information KPMG had provided.28 Neither respondent nor petitioner chose to call a representative of KPMG at trial.29
On brief petitioner claims that respondent bears the burden of proof on this issue, a burden which he allegedly failed to satisfy because he “utterly failed to prove what he received from KPMG or when he received it.” Respondent did not address the issue on brief but has previously argued that he never received an identifying statement conforming with
Petitioner‘s argument regarding possible information received by KPMG relies only on speculation and the fact that respondent issued summonses to KPMG at some point. We first note that even if respondent had received identifying information from KPMG as a result of a summons, we believe
We also find that the testimony and the lack of any substantiating evidence favor the proposition that KPMG never filed a statement identifying the Gaughfs as indirect partners in Gaughf Properties, in response to the summonses or otherwise. Ms. Nall and the Gaughfs testified that they did not know whether KPMG had ever filed an identifying statement with respondent. While it is not exceptionally strong evidence that Ms. Nall was unaware of any statement (given the fact she left KPMG in 2001 and was unable at trial to remember many of her dealings with the Gaughfs), we find it is strong evidence that the Gaughfs were not aware of any statement filed by KPMG. Although nothing in
In addition to Ms. Nall and the Gaughfs, both the IRS revenue agent involved in the J&G investigation and the revenue agent assigned to audit returns of the Gaughfs and their related entities for tax year 1999 were called to testify at trial. The former testified that he was “pretty sure” a summons had been issued to KPMG but did not testify whether KPMG had provided respondent with any documents, in response to a summons or otherwise. The latter testified that he had no knowledge of any contact between respondent and KPMG30 and that there were not any statements identifying the Gaughfs as partners in Gaughf Properties in the documents he received or in the administrative file he maintained.
As previously discussed, information provided in response to a generic, third-party summons would not satisfy
3. Whether the Requirements of Section 301.6223(c)-1T, Temporary Proced. & Admin. Regs. , Were Satisfied Because Respondent Actually Used Information in His Possession Which Identified the Gaughfs as Indirect Partners in Gaughf Properties
Petitioner argues that although respondent is not required to use identifying information not furnished within the meaning of
In its entirety,
Service may use other information. In addition to the information on the partnership return and that supplied on statements filed under this section, the Service may use other information in its possession (for example, a change in address reflected on a partner‘s return) in administering subchapter C of chapter 63 of the Code. However, the Service is not obligated to search its records for information not expressly furnished under this section.
Before applying
Reading
Section 301.6229(e)-1T, Temporary Proced. & Admin. Regs. , Is Invalid
Petitioner‘s final argument regarding
We first address petitioner‘s point regarding the lack of “regulation-enabling language” in
We proceed to petitioner‘s primary argument. We must follow a regulation, unless we hold it to be invalid under the
The first issue is whether
We turn to the statute itself.
Merriam-Webster‘s Collegiate Dictionary 473 (10th ed. 2002) includes the following definitions for “furnish“: “1: to provide with what is needed; esp: to equip with furniture [and] 2: SUPPLY, GIVE“. As this Court has previously noted: “[T]he longstanding definition of the word ‘filed’ as used in Federal statutes is ‘delivered.‘” Hotel Equities Corp. v. Commissioner, 65 T.C. 528, 531 (1975), aff‘d, 546 F.2d 725 (7th Cir. 1976). Considering these definitions, we find that the words “furnish” and “file” are sufficiently similar that (barring any further clarification provided in the language or legislative history of a statute) the intent of Congress does not clearly prohibit an agency from promulgating regulations which require information to be filed where the relevant statute provides that the information must be “furnished“. The legislative history is of no aid on this issue. The House, Senate, and House conference reports pertaining to the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648, which enacted
The second issue is whether the regulation is “based on a permissible construction of the statute.” Chevron, 467 U.S. at 843. “If the Secretary‘s construction is reasonable, Chevron requires the Court to accept that construction, even if the Secretary‘s ‘reading differs from what the court believes is the best statutory interpretation.‘” Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 124-125 (2012) (quoting Nat‘l Cable & Telecomms. Ass‘n v. Brand X, 545 U.S. 967, 980 (2005)). Given the similarity between the definitions of the words “furnish” and “file” previously discussed, we find that
D. Conclusion Regarding the Section 6229(e) Issue
We find that the Gaughfs failed to satisfy the requirements of
III. Whether, Under Principles of Estoppel, Respondent Should Be Prevented From Asserting the Statutory Period for Assessment Was Open on March 30, 2007
Petitioner argues that respondent should be estopped from extending the statutory period for assessment or raising the statutory period for assessment issues considered in this case because respondent: (1) effectively entrapped the Gaughfs by delaying publication of materials stating that disregarding a short option position when determining basis in a partnership is improper;35 (2) delayed in issuing the summons to J&G; (3) withheld and destroyed evidence, including several original Forms SS-4 filed on behalf of the four entities involved in the transaction at issue in this case which were destroyed; (4) delayed trial by asserting that Gaughf Properties omitted income resulting from the expiration of the short currency option or sale of the 7,500 shares of Quanta stock at one point owned by Gaughf Properties; (5) “Lur[ed] the Court into an opinion” on the statutory period for assessment issue but then asserted alternative issues as the centerpiece of his argument; (6) discriminated against the Gaughfs as evidenced by his not conceding this case after the Highwood Partners case was conceded; (7) delayed in conceding his original position in order to keep the case open long enough to develop new issues; (8) raised new issues even though evidence in his possession discredited those positions and those positions were frivolous; (9) performed other actions relating to now-conceded issues such as promul-
Petitioner claims that estoppel should apply against respondent with greater force than against “a private citizen because governmental takings of private property like that pursued here must comport with the Fifth Amendment requirement of due process.” We disagree.
The parties have stipulated that the Court of Appeals for the District of Columbia Circuit has appellate jurisdiction in this case. That court has recognized that “The fundamental principle of equitable estoppel applies to government agencies, as well as private parties.” Invs. Research Corp. v. SEC, 628 F.2d 168, 174 n.34 (D.C. Cir. 1980). However, that court has also recognized that “despite the doctrine‘s flexibility in disputes between private parties, its application to the government must be rigid and sparing.” ATC Petroleum, Inc. v. Sanders, 860 F.2d 1104, 1111 (D.C. Cir. 1988); see also Bull S.A. v. Comer, 55 F.3d 678, 681 (D.C. Cir. 1995). Application of the estoppel doctrine against the Government “generally requires that government agents engage—by commission or omission—in conduct that can be characterized as misrepresentation or concealment, or, at least, behave in ways that have or will cause an egregiously unfair result.” GAO v. GAO Personnel Appeals Bd., 698 F.2d 516, 526 (D.C. Cir. 1983). In addition we have recognized that the doctrine of estoppel “is to be applied against the Commissioner only with utmost caution and restraint.” McCorkle v. Commissioner, 124 T.C. 56, 68 (2005).
We proceed to addressing whether the elements necessary to apply estoppel were satisfied. The essential elements of estoppel are: (1) a false representation was made or a wrongful misleading silence maintained; (2) the error must be in a statement of fact and not in an opinion or a statement of law; (3) the person claiming the benefits of estoppel must be ignorant of the facts; (4) the person claiming the benefits must be adversely affected by the acts or statements of the
Petitioner takes issue with respondent‘s years of “misleading silence” and false representations. Petitioner claims that there is “no doubt that the Gaughfs’ advisors would not have led the Gaughfs down this Helmer path in the Fall of 1999 or filed their returns in April of 2000 had Respondent not delayed issuing Notice 2000-44“. Petitioner also takes issue with the amount of time it took respondent to notify the Gaughfs and issue the FPAA after the Gaughf Properties 1999 return was filed. Finally, petitioner faults respondent for the three-year period between the issuance of the FPAA and the trial of this issue, stating that respondent placed witnesses beyond petitioner‘s reach and destroyed documents during this time,36 in addition to failing to timely concede certain legal issues in order to gain additional time to develop other arguments.
We first address petitioner‘s claim that respondent entrapped the Gaughfs by delaying issuance of Notice 2000-44, supra. Even if we assumed this delay to be a wrongful misleading silence, such silence would still pertain to an issue of law (treatment of short options as they relate to basis in a partnership) as opposed to an issue of fact. Because the doctrine of estoppel is not applicable in a case of misleading statements of law, McCorkle v. Commissioner, 124 T.C. at 68, we reject petitioner‘s argument on this point.
We next address whether respondent‘s actions taken in the period between when the Gaughf Properties 1999 return was filed and the FPAA was issued satisfy the elements of estoppel. Again, even if we assumed that respondent‘s failure to issue the FPAA sooner was a wrongful misleading silence, such silence would still pertain to an issue of law (whether the statutory period for assessment was open) as opposed to an issue of fact. We also note that respondent contacted the Gaughfs several times during this period, including shortly after receipt of the J&G documents, to advise the Gaughfs of
We next address petitioner‘s contention that respondent withheld and destroyed evidence and placed witnesses beyond the reach of petitioner. Respondent stipulated that he destroyed original Forms SS-4 filed on behalf of the four entities involved in the transaction at issue at some point after April 17, 2003. However, there was no showing that destroying those documents years after they were filed was irregular, or that respondent was investigating any of the entities at the time the Forms SS-4 were destroyed. In addition, the loss of the original Forms SS-4 did not prejudice petitioner, as copies existed and were introduced into evidence. No evidence that other relevant documents were withheld or destroyed exists; petitioner merely speculates that other documents may have been.37 The argument that respondent placed witnesses beyond the reach of petitioner is not sufficient to invoke the doctrine of estoppel, as petitioner has alleged no misstatement of fact in connection with the unavailable witnesses. The witnesses petitioner complains of were unavailable on account of criminal investigations, health issues, or petitioner‘s inability to find them. As a result, we reject petitioner‘s argument on this point. We note that if petitioner later discovers evidence proving respondent destroyed or withheld relevant documents, petitioner has other avenues of recourse available.
We next address petitioner‘s contentions that respondent delayed trial by raising or not timely conceding a multitude of issues and “lured” this Court into writing an opinion on the statutory period for assessment issue but then changed his arguments. Many of these arguments we have already rejected when we allowed respondent to amend his answer to raise additional issues. We note that respondent has shown a willingness to concede issues in this case once having received evidence sufficient to show that no possible issue existed. Given the confusing and inconsistent positions taken
We reject petitioner‘s argument regarding promulgation of regulations, on the ground that the issuance of a regulation does not amount to a statement of fact; rather, the regulation is a statement of law. With regard to the underlying reason for issuing regulations,39 we disregard this issue on the ground that petitioner has shown no reliance on any underlying reasons for issuance. We also note that no new regulations were promulgated after the FPAA with respect to
We finally address petitioner‘s argument that respondent discriminated against the Gaughfs by not conceding this case
In sum, petitioner has alleged that respondent has caused a multitude of delays, “lost documents, unavailable witnesses, faded memories, [and] horrible expense[s]” among other things. However, petitioner, Gaughf Properties, the Gaughfs, and other relevant entities are responsible for many of the delays and changed positions taken by respondent through their implementation of a complex transaction to increase basis in a partnership, their inconsistent and incomplete reporting of facts regarding the transaction, and their failure to list the Gaughfs as indirect partners in Gaughf Properties.41 These facts provide additional support for our decision to reject all of petitioner‘s estoppel arguments based on delay of the case.
Considering the facts and law previously discussed, we reject all of petitioner‘s arguments regarding the estoppel
IV. Conclusion
We find the statutory period for assessing tax attributable to partnership items was open under
In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will be issued as to the period of limitations issue.
HEWLETT-PACKARD COMPANY AND CONSOLIDATED SUBSIDIARIES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket Nos. 21976–07, 10075-08. Filed September 24, 2012.
Albert H. Turkus and Paul Oosterhuis, for petitioner.
David P. Fuller and Roger L. Kave, for respondent.
OPINION
GOEKE, Judge: In two statutory notices of deficiency respondent disallowed in part credits for increasing research
Notes
has gain in Quanta stock that has not yet been sold so it is likely that we will be doing the Section 754 step up in the partnership, however, it is possible that stock price will rise quickly and client will need to sell suddenly. We concluded that client would keep the stock out of the partnership for the first 20 days, and if not sold during that period it would be contributed to the partnership for the 754 step up. If the stock must be sold in the first 20 day period it will quickly be put into the S-corp and be sold from there.
We also note that while respondent destroyed certain tax returns of entities related to the Gaughfs but not discussed in this Opinion there was no showing that the destruction of these returns prejudiced petitioner in any way.