T.C. Memo. 1997-152
UNITED STATES TAX COURT
PAMELA O'ROURKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6575-95. Filed March 24, 1997.
Kevin J. Mirch, for petitioner.
David W. Sorensen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
DEAN, Special Trial Judge: This case was assigned pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
Respondent determined additions to petitioner's 1982 Federal
income tax as follows:
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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Additions to Tax
Year Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661
1982 $321 50 percent of $643
the interest due
on $6,426
The issues for decision are: (1) Whether the notice of
deficiency was issued after the period of limitations for the
assessment and collection of taxes for petitioner's 1982 tax year
expired; and (2) whether petitioner is liable for additions to
tax under section 6653(a)(1) and (2) and section 6661 for the
1982 tax year.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. Petitioner resided in
Reno, Nevada, at the time she filed her petition.
FINDINGS OF FACT
During 1982, petitioner worked for Cal-Sierra Financial
Services, and also for Spectra Financial Network (Spectra), a
financial planning company. Spectra was involved in the
marketing of limited partnership interests in Barbados #6 Ltd.
(Barbados). Petitioner invested in Barbados on the
recommendation of her then-boss, Kent Maerki.2 On her 1982
Federal income tax return, petitioner reported a $21,676 Schedule
2
Mr. Maerki was not an attorney or a C.P.A., and no evidence
was offered regarding his professional credentials or his
knowledge of the Barbados venture.
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E loss attributable to her investment as a limited partner in Barbados.
OPINION
Respondent's determinations, contained in the notice of
deficiency, are presumed correct, and petitioner bears the burden
of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933).
1. Statute of Limitations
The notice of deficiency was issued to petitioner on
February 3, 1995, for additions to tax associated with
petitioner's distributive share of partnership items. Respondent
determined that petitioner is liable for additions to tax
provided in sections 6653(a) and 6661(a). Petitioner contends
that she is not liable because, having filed her 1982 Federal
income tax return on October 19, 1983, the 3-year statutory
period of limitations provided in section 6501 expired before
issuance of the notice of deficiency.
Under the general rule set forth in section 6501, the
Secretary is required to assess the tax within 3 years after the
taxpayer's return is filed. Sec. 6501(a). In the case of the
tax imposed on partnership items, however, section 6229 sets
forth special rules to extend the period of limitations
prescribed by section 6501. See sec. 6501(o).
Section 6229(a) provides that the period for assessing
income tax attributable to a partnership item (or affected item)
for a partnership taxable year shall not expire before 3 years
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after the later of (1) the date the partnership return for such
year was filed or (2) the last day for filing such return for
such year (without regard to extensions).3 However, section
6229(d) provides that the mailing of a final partnership
administrative adjustment suspends the running of the 3-year
limitations period for the period during which an action may be
brought under section 6226 (and, if an action is brought, until
the decision of the court has become final) and for 1 year
thereafter.
The stipulation of facts includes a copy of the decision
entered regarding Barbados, which is dated December 6, 1993.
Under section 6229(d)(2), the running of the 3-year period of
limitations for assessing a deficiency attributable to a 1982
partnership item was suspended for 1 year after the date the
decision entered on December 6, 1993, became final. The decision
became final no earlier than March 6, 1994 (90 days after it was
entered). Secs. 7481(a)(1), 7483. The notice of deficiency was
issued to petitioner on February 3, 1995. Consequently, the
notice of deficiency relating to the affected items (the
additions to tax) was timely issued.
2. Negligence
Section 6653(a)(1) imposes an addition to tax if any portion
of an underpayment is due to negligence or intentional disregard
3
The additions to tax determined by respondent are affected
items. Sec. 301.6231(a)(5)-1T(d), Temporary Proced. & Admin.
Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987).
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of rules or regulations. Section 6653(a)(2) imposes an addition
to tax in an amount equal to 50 percent of the interest due on
the portion of the underpayment attributable to negligence.
Negligence is defined as the failure to exercise the
due care that a reasonable and ordinarily prudent person would
employ under the circumstances. Neely v. Commissioner, 85 T.C.
934, 947 (1985). Thus, to avoid imposition of the addition to
tax, petitioner must prove that her actions in connection with
the loss from the Barbados venture were reasonable in light of
her experience and the nature of the investment. See Henry
Schwartz Corp. v. Commissioner, 60 T.C. 728, 740 (1973); Lucas v.
Commissioner, T.C. Memo. 1995-341.
Petitioner offered very little evidence to refute
respondent's determination of negligence. The only evidence in
the record regarding petitioner's evaluation of the investment
consists of her testimony that she read certain "documents" and
that she relied on the recommendation of Mr. Maerki. No
prospectus or offering memorandum was introduced, no evidence of
the nature of the investment was offered, and no witnesses save
for petitioner testified at trial. Petitioner asserted in her
petition that she was not negligent because she "acted under
advice of counsel in the preparation of the return", yet she
offered no evidence to support this assertion.
Based upon the record in this case, we find that petitioner
has not overcome respondent's determination of negligence. We
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therefore sustain respondent's determination that petitioner is
liable for the additions to tax under section 6653(a)(1) and (2)
for the 1982 tax year.
3. Section 6661 Addition to Tax
In the notice of deficiency, respondent determined the
section 6661 addition to tax at a rate of 10 percent of the
underpayment for that year. As originally enacted, section 6661
provided for an addition to tax of 10 percent of the amount of
any underpayment attributable to a substantial understatement of
income tax liability, applicable to returns due after
December 31, 1982. Tax Equity and Fiscal Responsibility Act of
1982, Pub. L. 97-248, sec. 323, 96 Stat. 324, 615. In 1986,
Congress amended section 6661(a) and provided for an addition to
tax of 25 percent, where the assessment is made after October 21,
1986. Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509,
sec. 8002, 100 Stat. 1874, 1951; see also Pallottini v.
Commissioner, 90 T.C. 498 (1988). Although respondent correctly
refers to the rate of the addition as 25 percent in her synopsis
of legal authorities in her trial memorandum, she made no mention
of the discrepancy between this rate and the 10 percent rate used
in the notice of deficiency, and has not sought to amend the
pleadings to assert an increase.
Section 6214(a) grants this Court jurisdiction to determine
a deficiency or addition to tax larger than that stated in the
notice of deficiency, if respondent claims the increased amount
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"at or before the hearing or a rehearing." We may not, however,
determine a greater deficiency where respondent has not pleaded
an increased deficiency. Moise v. Burnet, 52 F.2d 1071, 1073
(9th Cir. 1931), revg. 13 B.T.A. 525 (1928); Estate of Petschek
v. Commissioner, 81 T.C. 260, 271-272 (1983), affd. 738 F.2d 67
(2d Cir. 1984); Koufman v. Commissioner, 69 T.C. 473, 475-476
(1977).
In the instant case respondent has not specifically
addressed the issue and has not requested an increase in the
addition to tax under section 6661. In these circumstances we
cannot conclude that respondent has asserted a claim for the
increased amount as required by section 6214(a), nor that the
issue has been tried by consent of the parties within the meaning
of Rule 41(b)(1). Thus, we shall apply the addition, if
determined to be applicable, at the rate set forth in the notice
of deficiency.
Section 6661(a) provides that an addition to tax is imposed
on any underpayment attributable to a substantial understatement
of income tax. Petitioner bears the burden of proving that she
is not liable for this addition to tax. Rule 142(a); King's
Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 517
(1992).
An understatement is substantial if it exceeds the greater
of 10 percent of the amount required to be shown on the return
for the taxable year or $5,000. Sec. 6661(b)(1). An
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understatement is the amount by which the amount required to be
shown on the return exceeds the amount actually shown on the
return. Sec. 6661(b)(2). Petitioner's case meets this threshold
requirement.
Petitioner admitted in her petition that Barbados was a tax
shelter. Thus, the adequate disclosure exception of section
6661(b)(2)(B)(ii) does not apply. Sec. 6661(b)(2)(C). Moreover,
even if Barbados was not a tax shelter, petitioner does not
qualify for the adequate disclosure exception because she has not
shown that she provided sufficient information on her return to
enable the Commissioner to identify the potential controversy
involved.
If, however, a taxpayer has substantial authority for the
tax treatment of a tax shelter item on her return and reasonably
believed her tax treatment of the item was more likely than not
the proper tax treatment, the understatement is reduced by the
amount attributable to such item. Sec. 6661(b)(2)(B)(i). The
only evidence in the record concerning petitioner's evaluation of
the economic aspects of the partnership is her testimony that she
"overlooked their documents" and relied on Mr. Maerki's
recommendation. In short, petitioner presented insufficient
evidence to show that she or her adviser made the kind of
independent factual analysis of Barbados that would enable her to
formulate a reasonable belief as to the tax treatment of the item
and to determine whether the claimed loss was more likely than
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not the proper tax treatment. Accordingly, we hold that
petitioner is liable for the section 6661 addition to tax (as
determined by respondent using the 10 percent rate) for the 1982
tax year.
To reflect the foregoing,
Decision will be entered
for respondent.