Rambacher v. Commissioner

T.C. Memo. 1998-124

UNITED STATES TAX COURT

FRANCES L. AND GARY L. RAMBACHER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11443-96. Filed March 30, 1998.

Paul G. Croushore, for petitioners.

Andrew M. Winkler, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: This case was heard pursuant

to section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent

determined additions to petitioners’ Federal income tax for the

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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year 1981 in the amount of $128 under section 6653(a)(1) and for

50 percent of the interest due on the underpayment of income tax

assessed in the amount of $2,564, pursuant to section 6653(a)(2),

attributable to adjustments in the underlying partnership

proceedings which resulted in automatic adjustments to

petitioners' income pursuant to the provisions of the Tax Equity

& Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96

Stat. 324.

The issue for decision is whether petitioners are liable for

additions to tax for negligence or intentional disregard of rules

or regulations. Petitioners concede that the statute of

limitations does not bar an assessment with respect to 1981.

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioners resided in

Ironton, Ohio, at the time that they filed their petition.

References to petitioner are to Gary L. Rambacher.

In 1982 petitioner received a solicitation to purchase an

interest in a limited partnership, Barrister Equipment Associates

Series Ninety Eight (Series 98). Petitioner received a private

placement memorandum and offering summary for Series 98.

Petitioner received a private placement memorandum and offering

summary for Barrister Equipment Associates Series 124 (Series

124) as well. Petitioner contacted Robert Gold, a general
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partner involved with the promotion of the Barrister

partnerships. In response to his inquiries, petitioner received

another brochure that apparently addressed his remaining

questions about the Barrister partnerships.

The record includes private placement memoranda for Series

98 and Series 124, and the offering summary for Barrister

Equipment Associates Series 115 (Series 115). The parties have

stipulated that the offering summary for Series 115 is

essentially the same as the offering summaries for Series 98 and

Series 124. According to the various materials, the partnerships

were organized to lease literary properties for publication,

distribution, and sale.

The private placement memoranda stated that the offerings

were exempt from registration with the Securities and Exchange

Commission. In addition, both warned that investment in the

securities offered involved a high degree of risk and should not

be purchased by anyone who could not afford the loss of their

entire investment.

The offering summary included a chart identified as a

"Typical Illustration of Anticipated Federal Tax Aspects For a

Full Unit Investor". For a taxpayer in the 50-percent tax

bracket, a full unit investment was projected to yield a tax

savings of 4 times the amount of cash invested in the first year
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and a tax savings of twice the amount of cash invested in the

second year.

Under the lease agreements entered into by the partnerships,

the partnerships were required to pay both a fixed rent and a

variable rent during the first 2 lease years. The offering

memoranda for Series 98 and Series 124 include summaries of lease

payments and cash-flow analyses for the partnerships. The first

part of the cash-flow analyses reflected the projected cash

generated on the initial printings of the book properties based

on net sales, the gross retail sales less the distributors

discount, less rent. These analyses projected cash to

partnership totaling $67,528 and $99,672 for Series 98 and Series

124, respectively. The analyses, however, failed to reduce cash

for the fixed rent payments. In the first 2 years, fixed rents

totaling $1,242,500 and $1,702,500 were payable by Series 98 and

Series 124, respectively. Further, the offering summaries warned

that although a cash-flow analysis was included in the offering

materials, no representations or warranties were intended or

should have been inferred as to any economic return. The

Offering Memorandum disclosed that the capital contributions of

the partners would be used in part to pay the fixed rents in the

first 2 years.

The Private Placement Memorandum for Series 98 stated:

In order for the Partnership to realize sufficient
revenues from sales of the Books (after the payment of
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distribution costs) to satisfy the lease payments for the
Book Properties relating to each Literary Work a very
substantial number of Books will have to be sold. * * *
The number of Books required to be sold to return a profit
to the Partnership in almost all cases greatly exceeds the
industry average. * * *
Accordingly, there is a high degree of probability that
exploitation of the Book Properties relating to any one of
the Literary Works will not yield a profit to the
Partnership and that an investor may not recoup all or any
portion of his cash investment in the Partnership.

Similarly, the Memorandum for Series 124 stated:

Although the appraisals support the value of Properties on
both the Lessor and Partnership levels, there is no
guarantee that all or any of the Books or Disks will achieve
the level of sales necessary to result in Partnership
profits. The Services Contractors have agreed to use their
best efforts but are not bound by any minimum performance
requirement.

In addition, the private placement memoranda for Series 98

and Series 124 included unsigned proposed tax opinion letters.

The letter for Series 98 cautions:

Although the opinions may be deemed an indication of the
fair market value of the Book Properties, they will be
estimates only, and cannot be regarded as definitive with
respect thereto. It is highly likely that unless a Book
achieves substantial sales, the IRS will not agree with the
appraised value therefor. We have made no independent
investigation as to the fair market value of any of the Book
Properties.

Petitioner decided to invest in Series 98 and Series 124

based upon the information contained in the offering materials.

His review of these materials primarily focused on the cash-flow

analyses and the proposed tax opinion letters. Petitioners

invested $6,250 in Series 98 in 1982, and in 1983 they invested

$6,250 in Series 124. Petitioners invested with others in the
 6

partnerships through AB Trust and Equipment Investors which were

listed as the partners on the Schedules K-1 issued by the

partnerships.

Prior to investing in the Barrister partnerships,

petitioners did not have any knowledge about the book publishing

industry. Petitioner is a certified public accountant with 30

years of experience in public accounting. Mrs. Rambacher is an

accountant and helps petitioner in his accounting practice. The

bulk of petitioner's practice is devoted to tax and accounting

work. Petitioners had some prior investment experience before

investing in the Barrister partnerships. Their tax returns for

the years in issue reflect dividend income, interest income, and

capital gains from sales of stock.

Petitioner offered some advice to a few investors concerning

the Barrister partnerships, and received fees from these persons

for his analysis of financial data pertaining to the

partnerships. Petitioner received a monetary rebate from

Barrister for securing other investors, including his mother and

brother, in the partnerships.

The partnership returns for Series 98 and Series 124

reported partnership losses and investment tax credit (ITC) basis

in the following amounts:

Series 98 Loss ITC Basis
1982 $480,725 $13,515,000
1983 899,655 3,290,000
Series 124
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1983 611,814 20,799,000
1984 1,235,173 4,117,230

The Schedules K-1 issued for AB Trust and Equipment investors

reflect the following allocations:

Series 98 Loss ITC Basis
1982 $7,880 $221,551
1983 14,748 53,933

Series 124
1983 11,330 385,177
1984 22,874 76,247

On their 1983 return, petitioners claimed flow-through

losses of $4,896 from their interests in Series 98 and Series

124. On Schedule E of their 1983 return, petitioners claimed net

losses of $3,687 and $1,209, identifying "Barrister Equip." as

the source of the losses and listing a corresponding partnership

identification number for each loss. On Form 3468 of their 1983

return and for purposes of computing the investment tax credit,

petitioners listed total qualified investment in the amount of

$43,970. Petitioners claimed entitlement to a tentative

investment tax credit of $4,397 subject to a tax liability

limitation of $1,833 for 1983. On August 24, 1984, petitioner

filed Form 1045, Application for Tentative Refund, claiming an

investment tax credit carry back of $2,564 from 1983 against

their tax liability for 1981.

Respondent sent separate Notices of Beginning of

Administrative Proceeding at the Partnership Level (NBAPP) and

Notices of Final Partnership Administrative Adjustments (FPAA)
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for tax years 1982 and 1983 for Series 98 to petitioners.

Respondent also sent separate NBAPP's and FPAA's for the tax

years 1983 and 1984 of Series 124 to petitioners.

The Court entered a stipulated decision in the underlying

partnership proceeding, Anderson Equip. Associates v.

Commissioner, at docket No. 27745-89, on February 17, 1995. The

decision provided that the losses claimed by Series 98 for 1982

and 1983 and Series 124 for 1983 and 1984 were not allowed, and

that the amount of qualified investment property held by Series

98 and Series 124 was zero for the aforementioned years as well.

Pursuant to section 7481, that decision became final on May 18,

1995, and, thereafter, respondent assessed taxes against

petitioners for 1981, 1982, 1983, and 1984 as computational

adjustments. On March 5, 1996, respondent issued a notice of

deficiency to petitioner for 1981.

Section 6653(a)(1) provides for an addition to tax equal to

5 percent of any underpayment if any part of the underpayment is

due to negligence or intentional disregard of rules or

regulations. Section 6653(a)(2) provides for an addition to tax

in the amount of 50 percent of the interest payable on the

portion of any underpayment of tax which is attributable to

negligence or intentional disregard of rules or regulations.

Negligence is defined as the lack of due care or the failure to

do what a reasonable and ordinarily prudent person would do under
 9

the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). Petitioners bear the burden of proving that no part of

the underpayment for the year in issue was due to negligence or

intentional disregard of rules or regulations. Rule 142(a);

Bixby v. Commissioner, 58 T.C. 757 (1972).

Petitioners contend that they exercised due care with

respect to their investment in the Barrister partnerships because

they reasonably relied upon the information contained in the

offering materials. Petitioners also contend that they were not

negligent because they reasonably expected that the partnerships

might be profitable. Petitioners do not assert that they relied

on any representations as to the tax treatment of the items

passed through to them by the partnerships; rather their argument

seems to be that if they were not imprudent in investing in the

partnerships, then they were not negligent in claiming the

deductions and investment tax credit basis flowing therefrom.

Assuming arguendo that we agreed with this conclusion,

petitioners have not established that they acted reasonably with

respect to their investments in Series 98 and Series 124.

Petitioner testified that he completed a substantial

evaluation of the potential profitability of the Barrister

partnerships. Petitioner, however, relied solely on the

information contained in the offering materials, particularly the

cash-flow analyses. Reliance on representations by insiders,
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promoters, or offering materials has been held an inadequate

defense to negligence. Rybak v. Commissioner, 91 T.C. 524, 565

(1988); Freytag v. Commissioner, 89 T.C. 849, 889 (1987), affd.

904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991); Coggin

v. Commissioner, T.C. Memo. 1993-209, affd. 71 F.3d 855 (11th

Cir. 1996); Klieger v. Commissioner, T.C. Memo. 1992-734. In

addition, a thorough review of the materials indicates that the

cash-flow analyses were incomplete and could not be relied on as

projections of income or loss or profitability of the

partnerships. Furthermore, the offering materials contained

numerous warnings and risks. Petitioner testified that he

thought the tax opinion letters were conservative, but he gave no

explanation for his conclusion. We think that the cautionary

statements in the materials would have alerted a reasonable

investor that the projected cash-flow, deductions, and credits of

the partnership were questionable. See Estate of Hogard v.

Commissioner, T.C. Memo. 1997-174.

Petitioner testified that he talked with Bob Gold, a general

partner in one of the Barrister entities; however, petitioner

could not recall the content of the conversations. Most, if not

all of the conversations, occurred subsequent to petitioners'

investment in the Barrister partnerships and apparently concerned

the administrative proceedings at the partnership level. Thus,

it does not appear that such action was aimed at monitoring
 11

petitioners' investment. See, e.g., Heasley v. Commissioner, 902

F.2d 380 (5th Cir. 1990), revg. T.C. Memo. 1988-408.

In addition, petitioners argue that they acted in good faith

and disclosed sufficient information on their return, and

therefore no additions should apply under section 6653(a).

Petitioners rely on Belz Investment Co. v. Commissioner, 72 T.C.

1209 (1979), affd. 661 F.2d 76 (6th Cir. 1981); Wesley Heat

Treating Co. v. Commissioner, 30 T.C. 10 (1958), affd. 267 F.2d

853 (7th Cir. 1959); Pullman, Inc. v. Commissioner, 8 T.C. 292

(1947); and Cryder v. Commissioner, T.C. Memo. 1977-103.

Petitioner's reliance is misplaced.

Petitioners did not provide sufficient information to

apprise respondent of their position on their return. In fact,

there is no reference on petitioners' return to the Barrister

partnerships in respect of petitioners' claimed ITC. We do not

believe that the mere listing of tax identification numbers of

the partnerships on Schedule E of their 1983 return constitutes

sufficient information to apprise respondent that there was any

issue with petitioners' treatment of the ITC.

Finally, petitioners argue that respondent has forced

petitioners to petition this Court in an attempt to discern the

basis for the deficiencies asserted against them. Petitioner's

argument seems to be that respondent should be equitably estopped

from assessing the deficiencies.
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Petitioners contend that they have made repeated attempts

to find out the basis for respondent's position on the basis for

the additions, starting as far back as 1986 or 1987. From the

record, it does not appear that respondent has misled

petitioners. Petitioners were informed of the partnership

proceedings. The additions to tax were not determined until

1996, after the partnership proceedings were completed.

Respondent could not give petitioners any explanation for the

additions as far back as 1986 or 1987.

Petitioners argue that Fisher v. Commissioner, 45 F.3d 396

(10th Cir. 1995), revg. in part and remanding T.C. Memo. 1992-

740, supports their position. Petitioners' reliance on Fisher v.

Commissioner, supra, is also misplaced. That case involved a

request for a waiver of additions to tax under section 6661(c).

Based on the record, the Court of Appeals found that the

Commissioner had not issued a denial with respect to the request,

but instead had issued a notice of deficiency. The Court of

Appeals reasoned that this Court could not have determined

whether the Commissioner had abused his discretion in denying the

waiver because no formal denial had ever been made; therefore,

the case was remanded, and the Commissioner was ordered to

reconsider the request for waiver and provide a written

explanation for the decision. The Court did not hold that the

Commissioner's failure resulted in waiver of the addition to tax.
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We have considered all of the arguments and contentions

presented by petitioners, and, to the extent not discussed above,

we have found them to be without merit or not relevant.

Respondent’s determination is sustained.

To reflect the foregoing,

Decision will be entered

for respondent.