Chimblo v. Commissioner of Internal RevenueChimblo v. Commissioner of Internal Revenue
John A. Nolet, Tax Division, Department of Justice, Washington, DC (Loretta C. Argrett, Assistant Attorney General, William S. Estabrook, Attorney, Tax Division, Charles S. Casazza, Appellate Deputy, United States Tax Court, Stuart L. Brown, Office of Chief Counsel, Internal Revenue Service, of counsel), for Respondent-Appellee.
JOHN M. WALKER, Jr., Circuit Judge:
Petitioners appeal from the decisions of the United States Tax Court (Dinan, J.), rejecting their contention that they were not properly notified of earlier partnership proceedings which led to the determination of petitioners’ tax deficiencies, and finding petitioners liable for additions to tax stemming from petitioners’ negligence in substantially underpaying their taxes. We affirm.
I. BACKGROUND
A. Statutory Framework
Before reciting the facts relevant to this dispute, it is useful to outline briefly the statutory context in which the case arises. In 1982, as part of the Tax Equity and Fiscal Responsibility Act (“TEFRA“), see Pub.L. No. 97-248, § 402(a), 96 Stat. 324, Congress enacted the unified partnership audit examination and litigation provisions of the Internal Revenue Code (“IRC“), now found, as amended, at
Under TEFRA, the Commissioner must notify partners of the beginning and end of partnership-level administrative proceedings. See
Changes in the tax liabilities of individual partners which result from the correct treatment of partnership items determined at the partnership level proceeding are defined under TEFRA as “computational adjustments.”
B. The Barrister Partnership Investment
In late 1983 and early 1984, Gus Chimblo and his wife Catherine invested $25,000 in a partnership known as the Barrister Equipment Associates Series 151 (“Barrister” or “Barrister Partnership“). Gus‘s brother Anthony J. Chimblo and his wife Josephine also invested $25,000, although Josephine handled the transaction alone because of Anthony‘s failing health. The investments were made on the advice of John Santella, the Chimblos’ family accountant and a financial advisor to the Chimblo brothers’ construction business. Santella also prepared the Chimblos’ individual federal income tax returns. Prior to meeting with Santella about the proposed investment, neither Josephine nor Catherine had heard of Barrister, and neither could recall reviewing any documentation describing the Barrister investment either before or after investing.1
According to disclosure statements attached to its 1983 and 1984 tax returns, the Barrister Partnership‘s sole business was printing and selling “49 different literary works and microcomputer disks aimed at a general public market, using leased films, plates and disks to produce said products.” On its 1983 and 1984 returns, the Barrister Partnership claimed ordinary losses in the amounts of $848,599 and $1,059,623, respectively, and qualified investment tax credit property in the amounts of $18,809,500 and $6,110,000, respectively.
The two Chimblo couples claimed their distributive shares of the pass-through losses and investment tax credits reported by the Barrister Partnership on their 1983 and 1984 income tax returns. Thus, both couples claimed ordinary loss deductions of $10,477 in 1983 and $13,083 in 1984, and investment tax credits of $18,578 in 1983 and $6,035 in 1984. More precisely, Gus and Catherine used only $7,817 of their 1983 investment tax credit on their tax return for 1983, but they filed amended tax returns for 1980 and 1982, carrying back the unused portions of the 1983 investment tax credit to offset their previously reported tax liability by $9,571 for 1980 and by $1,190 for 1982. Anthony and Josephine used none of their investment tax credit in 1983, but they filed amended returns for 1980 and 1981, carrying back their unused 1983 credit to offset tax liabilities previously reported for 1980 and 1981 in the respective amounts of $11,893 and $6,685.
C. Assessment of Tax Deficiencies
On September 5, 1989, the Commissioner mailed to the Barrister partners, including taxpayers, notices of FPAAs determining adjustments to Barrister‘s 1983 and 1984 partnership returns. After Barrister‘s tax matters partner instituted proceedings in the Tax Court on behalf of the partnership, the Tax Court entered a stipulated decision on February 17, 1995, determining that none of the losses claimed by Barrister for 1983 and 1984 was allowed and that the qualified investment tax credit property for those years was zero.
As a consequence of that decision, the Commissioner assessed against petitioners, as computational adjustments, the tax deficiencies attributable to the losses and investment tax credits claimed by petitioners as related to the Barrister Partnership. See
On April 29, 1996, the Commissioner, pursuant to
On July 26, 1996, Gus (by Catherine, as executrix of his estate) and Catherine timely mailed a petition to the Tax Court in response to the notices of deficiency. On July 31, 1996, Anthony (by Rosalie Monahan, executrix of his estate) and Josephine did the same. Petitioners’ cases were consolidated by the Tax Court for all purposes.
In their petitions, taxpayers claimed that they had reasonably relied on their accountant‘s advice in making the investment in Barrister and that therefore they should not be held liable for negligence penalties. They also sought the return of alleged overpayments of assessed interest, on the grounds that (1) they had paid the interest assessed against them on the underlying tax deficiencies, and (2) the Barrister Partnership transactions were not tax-motivated, making inapplicable the increased rate of interest under
The Tax Court held a trial on May 13, 1997. The Commissioner conceded that the understatements of tax assessed against petitioners as a result of the earlier partnership-level proceedings were not attributable to tax-motivated transactions, thus making inapplicable the increased rate of interest under
After trial, the parties submitted post-trial briefs, in which petitioners asserted, for the first time, that the statute of limitations set forth at
In a memorandum opinion dated December 3, 1997, see Chimblo v. Commissioner, 74 T.C.M. (CCH) 1307 (1997), the Tax Court found: (1) that petitioners had been sent a notice of FPAA, and thus could have appeared and represented their interests in the earlier Barrister partnership-level proceeding; (2) that petitioners’ failure to raise a statute of limitations defense at the earlier partnership-level proceeding foreclosed consideration of that defense at the partner level; (3) that the Commissioner had erroneously asserted a negligence penalty for 1980 under
The Tax Court entered its decisions pursuant to Tax Court Rule 155, which establishes a procedure by which the parties determine the financial ramifications of the court‘s decisions. See Estate of Shapiro v. Commissioner, 111 F.3d 1010, 1013 n. 4 (2d Cir.1997), cert. denied, 118 S.Ct. 686 (1998). Under Rule 155, “[e]ach party submits its own calculations [to the court], and, if there is a discrepancy, the court resolves it.” Id.
After the parties submitted their respective proposed computations under Rule 155, petitioners objected to the Commissioner‘s calculations on the ground that the interest overpayment amounts set forth by the Commissioner failed to account for interest payments petitioners made toward the assessments against them under
| § 6653(a) | § 6653(a)(1) | § 6653(a)(2) | § 6661 | Interest Overpayments | |
|---|---|---|---|---|---|
| Catherine and Gus: | |||||
| 1980 | $479 | $18,326.43 | |||
| 1982 | $ 60 | * | $ 1,442.00 | ||
| 1983 | $619 | ** | $3,097 | $ 2,260.27 | |
| 1984 | $629 | *** | $3,144 | ||
| Josephine and Anthony: | |||||
| 1980 | $595 | $27,695.05 | |||
| 1981 | $334 | **** | $15,567.29 | ||
* 50 percent of the interest due on $1,190
** 50 percent of the interest due on $12,387
*** 50 percent of the interest due on $12,577
**** 50 percent of the interest due on $6,685
II. DISCUSSION
On appeal, petitioners challenge each of the Tax Court‘s decisions, as well as its failure to quantify the amount of the negligence penalty imposed under
A. The Statute of Limitations Defense
Petitioners claim that the Tax Court erred when it held that they had waived any statute of limitations defense by failing to raise it in the earlier Barrister partnership-level proceeding. The basic facts relevant to this contention are not in dispute. The Barrister Partnership‘s returns for 1983 and 1984 were filed on April 15, 1984 and 1985, respectively. Under
Aside from suggesting, without support in the record, that the tax matters partner probably granted an extension of the limitations period pursuant to
As a general matter, the statute of limitations is an affirmative defense that must be pleaded; it is not jurisdictional. See Columbia Bldg., Ltd. v. Commissioner, 98 T.C. 607, 611 (1992). It follows that such a defense may be waived by a party who fails to raise it at the appropriate time.
In the context of this case, one involving the application of TEFRA, petitioners had a right to raise the partnership‘s statute of limitations defense in the earlier partnership-level proceeding but failed to do so. We join the Seventh Circuit, as well as the numerous lower courts that have held that, under TEFRA, a statute of limitations defense concerns a “partnership item,” see
Petitioners contend that the Tax Court erred in making this finding and failed to consider evidence that Gus and Anthony Chimblo were consumed by illness and all four taxpayers lacked the education or experience needed to evaluate the legitimacy of the tax benefits offered by the Barrister Partnership investment. They claim further that these circumstances made reliance on their trusted business advisor and accountant reasonable.
Despite the sympathetic facts presented by appellants, there is sufficient evidence in the record to support the Tax Court‘s finding of negligence. The evidence in the record did not establish that Mr. Santella was qualified to render an expert opinion to the taxpayers as to the business merits of Barrister‘s purported investment in the publishing business. Nor is there any explanation for why petitioners failed to voice a concern to their advisor over the absence of any generated income and the eventual complete loss of their original $25,000 investments, which turned out, not surprisingly, to amount to substantially less than the deducted losses and investment credits taxpayers ultimately claimed. See David v. Commissioner, 43 F.3d 788, 789-90 (2d Cir.1995) (finding taxpayers negligent despite reliance on accountants because accountants lacked knowledge of the business invested in and because partnership‘s “too-good-to-be-true” offering was clear indication that partnership was created only to generate tax deductions); Goldman, 39 F.3d at 408 (same). Accordingly, we affirm the Tax Court‘s finding of liability for negligence penalties under
C. Additions to Tax for Substantial Understatement of Taxes
As in effect during the 1983 and 1984 taxable years,
Here, the Commissioner determined that Gus and Catherine had understated their taxes for 1983 and 1984 by $12,387 and $12,577, respectively. Under the statutory definition set forth above, these understatements were “substantial.” Petitioners, however, relying on the same facts which form the basis of their challenge to the Tax Court‘s finding of negligence under § 6653(a), challenge the imposition of penalties under § 6661 and the Commissioner‘s failure to waive the penalties under
We agree with the Tax Court that the Commissioner could not have abused his discretion in declining to waive the penalty where petitioners failed to request such a waiver in the first instance. See, e.g., McCoy Enters., Inc. v. Commissioner, 58 F.3d 557, 562-63 (10th Cir.1995). Accordingly, we need not reach the merits of petitioners’ contention that their reliance on the advice of their accountant constitutes a basis for waiving a substantial understatement penalty under § 6661(c).
D. The Tax Court‘s Computation of Petitioners’ Penalty Liabilities and Interest Overpayments
Since the “[i]ssues considered in a [Tax Court] Rule 155 proceeding are limited to ‘purely mathematically generated computational items,’ ” Harris v. Commissioner, 99 T.C. 121, 124 (1992) (quoting The Home Group, Inc. v. Commissioner, 91 T.C. 265, 269 (1988)), we will review the Tax Court‘s computations under Rule 155 for abuse of discretion, see Erhard v. Commissioner, 46 F.3d 1470, 1479 (9th Cir.1995).
1. Calculation of Interest Overpayments
With respect to the interest overpayment amounts, petitioners appear to contend that since the Commissioner conceded at trial that petitioners were not liable for an increased rate of interest under
2. Negligence Penalties under IRC § 6653(a)(2)
As noted above, the amount of the penalty imposed under
Often the Tax Court will be unable to specify the § 6653(a)(2) penalty in dollar terms because the underlying interest will not have been paid at the time of the Tax Court‘s decision and it continues to accrue to and including the date of payment. While in this case the Tax Court could have set forth the § 6653(a)(2) penalty in dollar terms because petitioners had already paid the tax deficiencies to the IRS, it was not error to fail to do so. Moreover, petitioners were not harmed by the oversight because the amounts are easily calculated by the parties by applying the 50-percent penalty rate to the amount of regular interest due on the tax deficiencies—amounts that are no longer in dispute.
CONCLUSION
For the foregoing reasons, the decisions of the Tax Court are affirmed.
JOHN M. WALKER, JR.
UNITED STATES CIRCUIT JUDGE