T.C. Memo. 1997-535
UNITED STATES TAX COURT
CATHERINE CHIMBLO AND ESTATE OF GUS CHIMBLO, DECEASED,
CATHERINE CHIMBLO, EXECUTRIX, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
JOSEPHINE CHIMBLO AND ESTATE OF ANTHONY J. CHIMBLO, DECEASED,
ROSALIE MONAHAN, EXECUTRIX, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 16546-96, 16804-96. Filed December 3, 1997.
Tobias Weiss, for petitioners.
Andrew M. Winkler, for respondent.
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MEMORANDUM OPINION
DINAN, Special Trial Judge: These consolidated cases were
heard pursuant to the provisions of section 7443A(b)(3) and Rules
180, 181, and 182.1
Respondent determined additions to petitioners' Federal
income taxes for the years as indicated:
Catherine Chimblo and Estate of Gus Chimblo, Deceased, Catherine
Chimblo, Executrix, docket No. 16546-96
Year Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661
1980 $479 * ---
1982 60 * ---
1983 619 * $3,097
1984 629 * 3,144
*50% of the interest due on the deficiency.
Josephine Chimblo and Estate of Anthony J. Chimblo, Deceased,
Rosalie Monahan, Executrix, docket No. 16804-96
Year Sec. 6653(a)(1) Sec. 6653(a)(2)
1980 $595 *
1981 $334 *
*50% of the interest due on the deficiency.
The issues for decision are: (1) Whether respondent
properly notified petitioners of the underlying partnership
proceeding which led to the deficiencies upon which the additions
to tax in these cases are based; (2) whether petitioners are
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
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liable for the section 6653(a) additions to tax as determined by
respondent; and (3) whether petitioners Catherine Chimblo and
Estate of Gus Chimblo are liable for the section 6661 additions
to tax for substantial understatements of income tax for 1983 and
1984.
Some of the facts have been stipulated and are so found.
The stipulations of fact and attached exhibits are incorporated
herein by this reference. Petitioner Catherine Chimblo resided
in Stamford, Connecticut, and petitioner Josephine Chimblo
resided in Cos Cob, Connecticut, on the dates their respective
petitions were filed in these cases.
Petitioner Catherine Chimblo (Catherine) was married to Gus
Chimblo (Gus) until his death on March 22, 1988. Petitioner
Josephine Chimblo (Josephine) was married to Anthony J. Chimblo
(Anthony) until his death on March 21, 1984.
In December of 1983, Gus and his sister-in-law Josephine
each invested $25,000 in Barrister Equipment Associates Series
151 (the Barrister partnership). Their respective Schedules K-1
from the Barrister partnership show their capital contributed
during 1983 as such amounts. The investments were made on the
advice of the Chimblos' family accountant, John Santella. Mr.
Santella died in 1996, prior to the trial in this case. After
his death, Mr. Santella's son, John Santella Jr., acted as the
Chimblos' accountant.
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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 credit
property in the amounts of $18,809,500 and $6,110,000,
respectively. The Barrister partnership attached disclosure
statements to its 1983 and 1984 returns which state that its sole
business was "the printing and sale of 49 different literary
works and microcomputer disks aimed at a general public market,
using leased films, plates and disks to produce said products."
On their 1983 return, Catherine and Gus claimed an ordinary
loss in the amount of $10,477 and an investment tax credit in the
amount of $18,578 with respect to their $25,000 investment.
Since the alternative minimum tax nullified the benefit of part
of the investment tax credit for 1983, Catherine and Gus filed
amended returns for 1980 and 1982 to carry back portions of the
1983 credit to offset their previously reported tax liability for
the 1980 and 1982 taxable years.2 They also claimed an ordinary
loss in the amount of $13,083 and an investment tax credit in the
amount of $6,035 for their 1984 taxable year with respect to
their investment in the Barrister partnership.
2
The parties stipulated that the amounts of the
investment tax credit carrybacks for 1980 and 1982 are $9,571 and
$1,190, respectively, which differ from the amounts claimed on
the 1980 and 1982 amended returns ($4,577 and $6,184). Since we
have found no explanation in the record for these differences,
and the parties have not made any reservations to their
stipulations, we accept the amounts stipulated as correct.
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On their 1983 return, Josephine and Anthony claimed an
ordinary loss in the amount of $10,477 and an investment tax
credit in the amount of $18,578 with respect to their $25,000
investment. Since the alternative minimum tax nullified the
entire benefit of the investment tax credit for 1983, Josephine
and Anthony filed amended returns for 1980 and 1981 to carry back
portions of the 1983 credit to offset their previously reported
tax liability for the 1980 and 1981 taxable years.
Pursuant to the agreement of the parties in the underlying
partnership proceeding, this Court entered a stipulated decision
on February 17, 1995, which decided that the none of the losses
claimed by Barrister partnership for 1983 and 1984 were allowed
and the amounts of its qualified investment credit property for
1983 and 1984 were zero.3 Respondent thereafter made
computational adjustments disallowing the losses and investment
tax credits claimed by petitioners with respect to the Barrister
partnership.
The first issue for decision is whether respondent properly
notified petitioners of the Barrister partnership proceeding for
its 1983 and 1984 taxable years. We have jurisdiction in these
cases to decide whether respondent complied with the notice
requirements of section 6223(a) allowing petitioners the
3
Anderson Equipment Associates, et al, Barrister
Associates, Tax Matters Partner v. Commissioner, docket No.
27745-89.
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opportunity to participate in the partnership level proceeding.
Crowell v. Commissioner, 102 T.C. 683, 691 (1994).
Section 6223(a) generally provides that respondent shall
mail to each partner notice of the beginning of an administrative
proceeding at the partnership level with respect to a partnership
item, as well as notice of the final partnership administrative
adjustment (FPAA) resulting from any such proceeding. It is the
mailing of the FPAA that triggers the time period for a partner
to object to the partnership level adjustments by filing a
petition for readjustment. Sec. 6226(a). Failure by respondent
to provide notice of a partnership level proceeding to a partner
may result in that partner's share of the partnership items being
treated as nonpartnership items. Secs. 6223(e)(2),
6231(b)(1)(D). In light of petitioners' arguments, respondent
must be prepared to demonstrate compliance with the section
6223(a) notice requirements. Crowell v. Commissioner, supra at
691-692.
At trial, Josephine did not recall receiving an FPAA with
respect to the Barrister partnership proceeding. Catherine did
not testify as to whether or not she received one. However, the
validity of a properly mailed FPAA is not contingent upon actual
receipt by the partner of the FPAA. Id. at 692.
Respondent submitted certified records that show that FPAAs
for the Barrister partnership for 1983 and 1984 were mailed to
petitioners on September 5, 1989. We are convinced by evidence
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introduced by respondent that the FPAAs were properly mailed in
these cases, and we so find. We find Josephine's and Catherine's
self-serving testimony on this matter to be vague and
insufficient to overcome respondent's evidence.
Having found that petitioners were properly notified of the
partnership proceeding, we lack jurisdiction to redetermine the
deficiencies on which the additions to tax in these cases are
based. Brookes v. Commissioner, 108 T.C. 1, 5 (1997), on appeal
(9th Cir., March 25, 1997). The deficiencies are attributable to
partnership items, properly considered solely in the partnership
proceeding. Saso v. Commissioner, 93 T.C. 730, 734 (1989);
Maxwell v. Commissioner, 87 T.C. 783, 788 (1986). Likewise,
petitioners' arguments that respondent failed to comply with the
applicable periods of limitation at the partnership level are
affirmative defenses that could have been raised in the
partnership level proceeding and may not be considered by the
Court at the partner level. Crowell v. Commissioner, supra at
693.
The second issue for decision is whether petitioners are
liable for the section 6653(a) additions to tax as determined by
respondent.
Section 6653(a)(1) provides for an addition to tax equal to
5 percent of the entire underpayment of tax if any part of the
underpayment is due to negligence or intentional disregard of
rules and regulations. Section 6653(a)(2) provides for an
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addition to tax equal to 50 percent of the interest payable on
the deficiency with respect to the portion of the underpayment
which is attributable to negligence or intentional disregard of
rules and regulations.
Negligence under section 6653 is the lack of due care or
failure to do what a reasonable and ordinarily prudent person
would do under the same circumstances. Neely v. Commissioner, 85
T.C. 934, 947 (1985). Petitioners bear the burden of proving
that no part of the underpayments for the years in issue is due
to negligence or intentional disregard of rules and regulations.
Rule 142(a); Matthews v. Commissioner, 92 T.C. 351, 362 (1989),
affd. 907 F.2d 1173 (D.C. Cir. 1990); Luman v. Commissioner, 79
T.C. 846, 860-861 (1982).
Before dealing with the question of whether petitioners were
negligent in these cases, we must address the question of whether
respondent properly asserted the section 6653(a)(1) and (2)
additions to tax for petitioners' 1980 taxable years.
The version of section 6653(a)(1) and (2) relied upon by
respondent was enacted by section 722(b) of the Economic Recovery
Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172, 342. ERTA
section 722(b)(2), 95 Stat. 342, provides that section 6653(a)(1)
and (2) "shall apply to taxes the last date prescribed for
payment of which is after December 31, 1981." The last date
prescribed for the payment of taxes for petitioners' 1980 taxable
years was April 15, 1981. Secs. 6072(a), 6151(a); Jacobs v.
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Commissioner, T.C. Memo. 1997-429. Therefore, section 6653(a) as
in effect prior to the ERTA amendments is applicable to
petitioners' 1980 taxable years.
The pre-ERTA section 6653(a) and the "new" section
6653(a)(1) have substantially identical language. Respondent's
erroneous citation does not affect the validity of his
determination that petitioners' underpayments of tax for 1980
were due to negligence or intentional disregard of rules and
regulations. Burrill v. Commissioner, 93 T.C. 643, 670 n.28
(1989). However, the section 6653(a)(2) addition to tax asserted
by respondent for 1980 is without any statutory authority. The
addition to tax equal to 50 percent of the interest attributable
to a negligent underpayment was first introduced into the Code by
ERTA. Accordingly, we hold that petitioners are not liable for
the section 6653(a)(2) additions to tax for 1980 as determined by
respondent. Skyrms v. Commissioner, T.C. Memo. 1997-69.
We now turn to the question of whether petitioners'
underpayments for the taxable years in issue were due to
negligence or intentional disregard of rules and regulations.
Petitioners contend that they did not act negligently because
they relied on the advice of Mr. Santella. Under some
circumstances, a taxpayer may avoid liability for negligence if
reasonable reliance on a competent professional adviser is shown.
United States v. Boyle, 469 U.S. 241 (1985); Freytag v.
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Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th
Cir. 1990), affd. 501 U.S. 868 (1991).
Based on the record, we find that petitioners have not
proved that their reliance on Mr. Santella was reasonable under
the circumstances. There is no evidence in the record that Mr.
Santella was qualified to render a professional opinion to
Josephine and/or Gus as to the business merits and tax
consequences of the Barrister partnership investments.
Petitioners did not establish that Mr. Santella had any
expertise in the publishing industry which he advised petitioners
to invest in for alleged business reasons.4 Although Josephine
and Catherine each testified that the motivation for their
investments was enhanced income flow, neither of them ever voiced
any concern to Mr. Santella over the absence of any income and
eventual complete loss of their $25,000 investments. We find
that petitioners' investment of $25,000 in an industry that
neither they nor their adviser knew anything about without even a
cursory review of the offering materials was negligent.
We are also not convinced that Mr. Santella's advice
regarding the tax consequences of the investment was competent.
In their petitions to this Court, petitioners state that Mr.
Santella mentioned tax benefits which might be obtained from the
investment, for which he had an opinion from legal counsel.
4
Josephine and Catherine also admit to having no
personal knowledge of the publishing industry.
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However, the tax opinion that Mr. Santella purportedly relied
upon is not in the record for our consideration. No testimony
was offered by petitioners from any individual, including Mr.
Santella's son, the successor to the Chimblo accounts, to
establish Mr. Santella's competence to render advice with respect
to the tax consequences of petitioners' investments.
We conclude that petitioners were negligent because their
reliance on Mr. Santella was not reasonable under the
circumstances. They did not prove that he was competent to
render advice concerning the business merits or tax consequences
of the investments, or that he reasonably relied upon competent
professional advice in rendering his own advice. Accordingly, we
hold that petitioners are liable for the section 6653(a)
additions to tax as determined by respondent except for the
6653(a)(2) additions to tax for 1980 discussed supra.
The third issue for decision is whether petitioners are
liable for the section 6661 additions to tax for substantial
understatements of income tax for 1983 and 1984. For purposes of
this issue, all references to petitioners hereinafter are to
Catherine Chimblo and the estate of Gus Chimblo.
Section 6661(a) provides for an addition to tax if there is
a substantial understatement of income tax for the taxable year.
In the case of additions to tax assessed after October 21, 1986,
the amount of the addition to tax is equal to 25 percent of the
amount of any underpayment attributable to such understatement.
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Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec.
8002(c), 100 Stat. 1874, 1951; Licari v. Commissioner, 946 F.2d
690, 692 (9th Cir. 1991), affg. T.C. Memo. 1990-4; Pallottini v.
Commissioner, 90 T.C. 498 (1988).
Section 6661(b)(1)(A) provides that a substantial
understatement of income tax exists if the amount of the
understatement exceeds the greater of: (1) 10 percent of the tax
required to be shown on the return; or (2) $5,000. An
understatement is defined as the excess of the amount of tax
required to be shown on the return for the taxable year over the
amount of tax imposed which is shown in the return, reduced by
any rebate. Sec. 6661(b)(2)(A). In the instant case,
petitioners' understatements of income tax for 1983 and 1984 are
$12,387 and $12,577, respectively, and are therefore substantial.
The entire amounts of the understatements are due to petitioners'
disallowed losses and investment tax credits claimed with respect
to the Barrister partnership.
In general, section 6661(b)(2)(B) provides that the
understatement is deemed to be reduced to the extent it is
attributable to: (1) The tax treatment of an item for which
there was substantial authority; or (2) any item with respect to
which the relevant facts affecting the item's tax treatment are
adequately disclosed in the return or in a statement attached to
the return. In the case of items attributable to a tax shelter,
the understatement may not be reduced by reason of disclosure,
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and may only be reduced by reason of substantial authority if the
taxpayer reasonably believed that the tax treatment of the tax
shelter item was more likely than not the proper treatment. Sec.
6661(b)(2)(C).
Petitioners do not argue that substantial authority exists
for their tax treatment of the items in issue or that they
adequately disclosed the relevant facts with respect to the
Barrister partnership investment. Rather, they contend that
respondent should have waived the additions to tax pursuant to
section 6661(c).
Section 6661(c) authorizes respondent to waive any part of
the addition to tax imposed under section 6661(a) upon a showing
by the taxpayer of reasonable cause for the understatement and
that the taxpayer acted in good faith. The most important factor
in determining whether to grant a waiver is the extent of the
taxpayer's effort to assess the taxpayer's proper tax liability
under the law. Mailman v. Commissioner, 91 T.C. 1079, 1083-1084
(1988); sec. 1.6661-6(b), Income Tax Regs. Reliance upon the
advice of a professional will not constitute reasonable cause and
good faith, unless under all the circumstances, such reliance was
reasonable. Sec. 1.6661-6(b), Income Tax Regs. The appropriate
standard of review for denial of a waiver is whether respondent's
refusal to waive the section 6661 addition to tax constitutes an
abuse of discretion. Mailman v. Commissioner, supra at 1083-
1084.
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There is no evidence in the record that petitioners
requested respondent to waive the section 6661 additions to tax
pursuant to section 6661(c). Petitioners first raised this issue
in their post-trial brief. It was not raised in their petition
or their pre-trial memorandum. Under such circumstances we
decline to find that respondent abused his discretion, since such
discretion was never requested to be exercised. McCoy
Enterprises, Inc. v. Commissioner, 58 F.3d 557, 563 (10th Cir.
1995), affg. T.C. Memo. 1992-693; Reinke v. Commissioner, 46 F.3d
760, 765 (8th Cir. 1995), affg. T.C. Memo. 1993-197; The Escrow
Connection, Inc. v. Commissioner, T.C. Memo. 1997-17; Selig v.
Commissioner, T.C. Memo. 1995-519; Dugow v. Commissioner, T.C.
Memo. 1993-401, affd. without published opinion 64 F.3d 666 (9th
Cir. 1995); Magnus v. Commissioner, T.C. Memo. 1990-596.
Even if we were to assume that such a request was made and
that the evidence in this record was available to respondent, see
Reile v. Commissioner, T.C. Memo. 1992-488; Rogers v.
Commissioner, T.C. Memo. 1990-619, we are not persuaded that
respondent's denial of a request for a waiver would constitute an
abuse of discretion under the facts. As discussed supra,
petitioners have not proved that their reliance on Mr. Santella
was reasonable.5
5
Although the stipulated decision in Anderson Equipment
Associates, et al, Barrister Associates, Tax Matters Partner v.
Commissioner, docket No. 27745-89, see supra note 3 and related
text, does not explain the basis of the decision, we have
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We hold that petitioners are liable for the section 6661
additions to tax for 1983 and 1984 as determined by respondent.
To reflect the foregoing,
Decisions will be entered
under Rule 155.
previously found that the Barrister Equipment Associates Series
162 partnership, the partnership involved in the stipulated
decision, lacked economic substance and was a sham. Connell v.
Commissioner, T.C. Memo. 1996-349.