Richard K. and Marilyn J. Phillips v. Commissioner

114 T.C. No. 7

UNITED STATES TAX COURT

RICHARD K. AND MARILYN J. PHILLIPS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9354-96. Filed February 29, 2000.

Ps were limited partners in several partnerships
with the same designated tax matters partner (TMP). At
the request of the Internal Revenue Service (IRS), the
TMP executed Forms 872, Consent to Extend the Time to
Assess Tax, extending the periods of limitations for
the years in issue.
Before executing the extensions, the TMP had been
the subject of criminal tax investigations by the IRS.
The tax investigations ended before the TMP executed
most of the extensions.
Ps alternatively contend: (1) That the second and
third sentences of sec. 301.6231(c)-5T, Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5,
1987), are invalid and that the initiation of a
criminal tax investigation of the TMP converted his
partnership items into nonpartnership items as a matter
of law; (2) that the criminal tax investigation of the
TMP created a conflict of interest between the TMP's
duties as a fiduciary of the partnerships and his self-
interest as the subject of a criminal tax investigation
and that such a conflict necessitated his removal as
TMP based on the rationale of Transpac Drilling Venture
 - 2 -

1982-12 v. Commissioner, 147 F.3d 221 (2d Cir. 1998),
revg. and remanding Transpac Drilling Venture 1982-16
v. Commissioner, T.C. Memo. 1994-26; or (3) that
respondent abused his discretion by not issuing a
written notice informing the TMP that his partnership
items would be treated as nonpartnership items.
Held: Sec. 301.6231(c)-5T, Temporary Proced. &
Admin. Regs., supra, is a valid regulation. Held,
further: The criminal tax investigation did not create
a disabling conflict of interest and therefore did not
terminate the TMP’s designation. Held, further: Ps
have not established that respondent abused his
discretion by not notifying the TMP that his
partnership items would be treated as nonpartnership
items.

Curtis W. Berner, for petitioners.

Margaret A. Martin, Neal O. Abreu, Steven Mopsick, and

Ronald L. Buch, Jr., for respondent.

OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Stanley J. Goldberg pursuant to Rules 180, 181, and 183.

All Rule references are to the Tax Court Rules of Practice and

Procedure. Unless otherwise indicated, section references are to

the Internal Revenue Code in effect for the years in issue. The

Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

GOLDBERG, Special Trial Judge: Respondent determined

deficiencies in petitioners' Federal income taxes, additions to

taxes, and penalties for the taxable years and in the amounts set

forth below:
 - 3 -

Additions to Tax Additional
Year Deficiency Sec. Sec. Sec. Sec. Sec. Interest
6651(a) 6653(a) 6653(a)(1)(B) 6659 6661 Sec. 6621(c)
1
1980 $3,917 –– –- –- –- --
1981 17 –- -– –- -– -- --
1
1982 1,248 -– -– –- –- -–
1
1983 11,334 $1,043 -– –- –- –-
1
1984 1,196 –- -– –- -– –-
1
1985 4,662 –- -– –- -– –-
1
1986 8,068 139 -– –- -– –-
2 1
1987 54,708 7,402 $2,760 $16,412 $13,677
1
1988 52,048 8,981 2,670 - 15,614 13,012

Penalties
Sec. Sec. Sec. Sec.
6662(h) 6662(e) 6662(d) 6662(c)
1989 $43,986 $4,008 $17,594 $8,797 $8,797 $8,797
1990 25,515 4,697 6,593 3,296 5,103 5,103
1991 41,240 7,435 16,238 8,119 8,248 8,248
1992 222,282 10,792 88,913 44,456 44,456 44,456

1
Respondent determined that interest is to be computed at 120 percent of the interest
payable under sec. 6601 with respect to any substantial underpayment attributable to tax-
motivated transactions.
2
Respondent determined that an additional amount is to be computed equal to 50 percent of
the interest attributable to the entire 1987 underpayment pursuant to sec. 6653(a)(1)(B).

After concessions, the sole issue to be decided is whether

the periods of limitations for the years in issue expired before

the issuance of the final partnership administrative adjustments

(FPAA's). The resolution of this issue depends upon whether

Walter J. Hoyt III, as tax matters partner for the partnerships

involved herein, validly executed various Forms 872, Consent to

Extend the Time to Assess Tax.

This case was submitted fully stipulated pursuant to Rule

122. The stipulations of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioners lived in Shell Beach, California.

In 1983, petitioners became limited partners in the

Shorthorn Genetic Engineering 1983-2 partnership (SGE 83-2) and

claimed losses and investment tax carrybacks to the 1980, 1981,
 - 4 -

and 1982 taxable years. Petitioners subsequently became limited

partners in both the Durham Shorthorn Breed Syndicate 1987-E

partnership (DSBS 87-E) and the Timeshare Breeding Service Joint

Venture partnership (TBS J.V.). These three partnerships,

hereinafter collectively referred to as the Hoyt partnerships,

are TEFRA1 partnerships subject to the provisions of sections

6221 through 6233 for all post-1982 taxable years in issue.

Petitioners claimed losses from the Hoyt partnerships through

1992.

Walter J. Hoyt III (Mr. Hoyt) was designated the tax matters

partner (TMP) on the Hoyt partnership returns for the years in

issue, with the sole exception of SGE 83-2, which did not list a

designated TMP on its partnership return for the 1983 tax year.2

As TMP, Mr. Hoyt executed extensions of the periods of

limitations, extending the periods for assessment and collection

for the Hoyt partnerships as set forth below:

1
Congress enacted the TEFRA partnership procedures as part of
the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. 97-248, sec. 402(a), 96 Stat. 324, 648.
2
Though Mr. Hoyt was not designated TMP on SGE 83-2's 1983
return, he signed the 1983 tax return for SGE 83-2 as general
partner. Mr. Hoyt also executed an extension of the period of
limitations for SGE 83-2's 1983 tax year on Sept. 26, 1986.
 - 5 -

Form Date Date of Extension Date FPAA
Partnership Year1 Signed Signed Expiration Was Issued

SGE 83-2 1983 872-0 9/25/86 Indefinite 9/19/89
SGE 83-2 1984 872-0 8/01/87 Indefinite 9/19/89
SGE 83-2 1985 None – -- 9/19/89
SGE 83-2 1986 None – -- 6/25/90
SGE 83-2 1987 872-P 2/15/91 12/31/92 -–
872 4/06/91 12/31/92 –
872 7/25/92 06/30/93 -–
872-P 7/25/92 06/30/93 –
872-P 3/06/93 12/31/93 11/22/93
SGE 83-2 1988 872-P 2/14/91 12/31/92 –
872 4/06/91 12/31/92 –
872 7/25/92 06/30/93 –
872-P 7/25/92 06/30/93 –
872-P 3/06/93 12/31/93 11/22/93
SGE 83-2 1989 872 7/25/92 06/30/93 –
872-P 7/25/92 06/30/93 –
872-P 3/06/93 12/31/93 11/22/93
SGE 83-2 1990 None – – 9/12/94
SGE 83-2 1991 None – – 3/27/95
SGE 83-2 1992 None – – 6/25/95
DSBS 87-E 1988 872-P 2/14/91 12/31/92 –
872 4/06/91 12/31/92 –
872 7/25/92 06/30/93 –
872-P 7/25/92 06/30/93 –
872-P 3/06/93 12/31/93 10/25/93
DSBS 87-E 1989 872 7/25/92 06/30/93 –
872-P 7/25/92 06/30/93 –
872-P 3/06/93 12/31/93 10/18/93
DSBS 87-E 1990 None – – 7/15/94
DSBS 87-E 1991 None – – 4/24/95
TBS J.V. 1987 872-P 2/22/91 12/31/92 --
872 7/25/92 06/30/93 --
872-P 7/25/92 06/30/93 --
872-P 3/06/93 12/31/93 12/30/93
TBS J.V. 1988 872 4/06/91 12/31/92 --
872 7/25/92 06/30/93 --
872-P 7/25/92 06/30/93 --
872-P 3/06/93 12/31/93 12/30/93
2
TBS J.V. 1989 872 7/25/92 06/30/93 --
872-P 7/25/92 06/30/93 --
872-P 3/06/93 12/31/93 None3
2
TBS J.V. 1990 None -- -- None3
2
TBS J.V. 1991 None – – None3
2
TBS J.V. 1992 None – – None3

1
Before 1989, the correct taxable year for both SGE 83-2 and DSBS 87-E was the
calendar year. Beginning with the short taxable year ending Sept. 30, 1989, the
correct taxable year for both SGE 83-2 and DSBS 87-E was the year ending Sept. 30,
as the result of respondent's acceptance of Forms 1128, Application for Change in
Accounting Period, filed for those partnerships. The correct taxable year of TBS
J.V. was the calendar year for all years in issue.
2
The parties do not agree as to whether a return was filed for this taxable
year at any time through Sept. 23, 1998.
3
No FPAA had been issued as of Apr. 17, 1995, the date petitioners filed a
petition in bankruptcy.
 - 6 -

Pursuant to the stipulations of the parties,3 the periods of

limitations for the following years are still in issue: (1) The

1983, 1987, 1988, and 1989 taxable years for SGE 83-2; (2) the

1988 and 1989 taxable years for DSBS 87-E; and (3) the 1988,

1989, and 1990 taxable years for TBS J.V.

On April 23, 1984, the Examination Division of the Internal

Revenue Service (Examination Division) requested that the

Criminal Investigation Division (CID) of the Internal Revenue

Service (IRS) investigate Mr. Hoyt for allegedly preparing false

and fraudulent individual income tax returns for 12 individuals.4

Mr. Hoyt allegedly advised the 12 individuals that although they

did not join certain Hoyt-managed partnerships until 1984, they

could deduct partnership losses on their 1983 Federal income tax

returns.

3
The parties have stipulated that the periods of limitations
for the assessment and collection of any deficiency in income tax
due from petitioners with respect to: (1) Shorthorn Genetic
Engineering 83-2 partnership for the 1984, 1985, and 1986
calendar years and for its fiscal years ending Sept. 30, 1990 and
1991; and (2) Durham Shorthorn Breed Syndicate 87-E partnership
for the fiscal years ending Sept. 30, 1990 and 1991, have not
expired.
Petitioners concede that the statute of limitations does not
bar assessment and collection of any income tax deficiency from
the Timeshare Breeding Service Joint Venture partnership for its
1991 calendar year or any partnership in this case whose taxable
year ended with, or within, petitioners' 1992 calendar year.
Partnership items of each of those partnerships for those years
became nonpartnership items as of Apr. 17, 1995.
4
None of the 12 individuals are petitioners in the present
case.
 - 7 -

CID assigned a special agent to the investigation on April

24, 1984, and by June 3, 1985, the agent had deposed over 60

partners of various Hoyt-managed partnerships.5

On April 21, 1986, CID recommended that Mr. Hoyt be

prosecuted under section 7206(2) for aiding and assisting in the

preparation of false and fraudulent individual income tax returns

for 12 individuals and referred the matter to the Sacramento IRS

District Counsel. On July 31, 1986, District Counsel referred

the matter to the United States Department of Justice (Justice

Department) for criminal prosecution. The Justice Department

declined prosecution on August 12, 1987.6

In addition to the earlier referral, the Examination

Division referred a criminal fraud case involving Mr. Hoyt to CID

on July 28, 1989. The criminal fraud referral was unrelated to

the earlier criminal tax investigation for which the Justice

Department had already declined criminal prosecution. CID

accepted the criminal fraud referral and began a fraud

investigation of Mr. Hoyt on October 17, 1989.

On October 13, 1989, the U.S. Attorney's Office asked CID to

join an ongoing grand jury investigation of Mr. Hoyt. CID joined

5
In turn, these partners apparently learned of the IRS
criminal tax investigation of Mr. Hoyt because of the depositions
requested by the special agent.
6
From the record, it is clear that the latest that Mr. Hoyt
knew that the Justice Department had declined prosecution was on
or about Nov. 6, 1987.
 - 8 -

the grand jury investigation after receiving permission from the

IRS Regional Commissioner.

CID finished working on both the criminal fraud referral and

the grand jury investigation no later than October 1, 1990. The

U.S. Attorney’s Office ended the grand jury investigation of Mr.

Hoyt on October 2, 1990, without an indictment. The record

before us does not refer to subsequent criminal investigations of

Mr. Hoyt.

On April 17, 1995, petitioners filed a voluntary petition

for bankruptcy in the United States Bankruptcy Court for the

Eastern District of California (bankruptcy court).7 Petitioners'

partnership items in the Hoyt partnerships were converted to

nonpartnership items on that date.8

Respondent mailed notices of deficiency to petitioners on

January 30, 1996. Respondent’s determinations, set forth above,

are based solely on petitioners' involvement in the Hoyt

partnerships.

On April 29, 1996, the bankruptcy court entered an order

granting petitioners' Motion for Relief from the Automatic Stay

7
Petitioners' bankruptcy case, No. 95-23293-A-13, was still
pending at the time the petition was filed.
8
Sec. 301.6231(c)-7T, Temporary Proced. & Admin. Regs., 52
Fed. Reg. 6793 (Mar. 5, 1987), provides that the partnership
items of a partner named as a debtor in a bankruptcy proceeding
become nonpartnership items as of the date the bankruptcy
petition is filed.
 - 9 -

for the sole purpose of permitting them to file a petition with

the Tax Court in this case.

1. General Discussion

The TMP is the central figure of partnership proceedings,

and, consequently, his status is of critical importance to the

proper functioning of the partnership audit and litigation

procedures. He serves as the focal point for service of all

notices, documents, and orders for the partnership in both

administrative and judicial proceedings. See Computer Programs

Lambda, Ltd. v. Commissioner, 89 T.C. 198, 205-206 (1987). As

the result of his statutory responsibilities, the TMP acts as a

fiduciary, and, as a fiduciary, his actions affect the rights of

all partners in the partnership. See id. at 205-206.

The TMP may extend the period of limitations with respect to

all partners in a partnership by an agreement between the IRS and

the TMP, or the period may be extended by an agreement between

the IRS and any other person authorized by the partnership in

writing.9 See sec. 6229(b)(1)(B).

9
The period of limitations for a specific partner may also be
extended by an agreement between the IRS and that partner. See
sec. 6229(b)(1)(A).
 - 10 -

A TMP is generally designated at the time the partnership

return is filed. See sec. 301.6231(a)(7)-1(c), Proced. & Admin.

Regs.10

The designation of a TMP remains effective until the

termination of the designation pursuant to section

301.6231(a)(7)-1(l)(1), Proced. & Admin. Regs.,11 which provides

in pertinent part:

(l) Termination of designation--(1) In general. A
designation of a tax matters partner for a taxable year
under this section shall remain in effect until–

* * * * * * *

(iv) The partnership items of the tax matters
partner become nonpartnership items under section
6231(c)(relating to special enforcement areas); * * *

In turn, section 6231(c), relating to special enforcement areas,

applies to criminal investigations and other areas that the

Secretary determines by regulation to present special enforcement

considerations.

10
The temporary regulation, sec. 301.6231(a)(7)-1T(c),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6791 (Mar. 5,
1987), contained the same provision. Sec. 301.6231(a)(7)-1,
Proced. & Admin. Regs. is the final regulation effective for all
designations, selections, and terminations of a TMP occurring on
or after Dec. 23, 1996.
11
The temporary regulation, sec. 301.6231(a)(7)-1T(l)(4),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6792 (Mar. 5,
1987), was identical.
 - 11 -

Section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52

Fed. Reg. 6793 (Mar. 5, 1987),12 was promulgated by the Secretary

pursuant to section 6231(c)(2) and (3) and provides for the

treatment of partnership items of a partner who is the subject of

a criminal tax investigation as follows:

The treatment of items as partnership items with
respect to a partner under criminal investigation for
violation of the internal revenue laws relating to
income tax will interfere with the effective and
efficient enforcement of the internal revenue laws.
Accordingly, partnership items of such a partner
arising in any partnership taxable year ending on or
before the last day of the latest taxable year of the
partner to which the criminal investigation relates
shall be treated as nonpartnership items as of the date
on which the partner is notified that he or she is the
subject of a criminal investigation and receives
written notification from the Service that his or her
partnership items shall be treated as nonpartnership
items. The partnership items of a partner who is
notified that he or she is the subject of a criminal
investigation shall not be treated as nonpartnership
items under this section unless and until such partner
receives written notification from the Service of such
treatment.

Generally, there is a 3-year period of limitations on the

assessment of a tax attributable to any partnership item. And,

generally, the issuance of an FPAA will suspend the period of

limitations. See, e.g., sec. 6229(d).

12
These temporary regulations apply to partnership taxable
years beginning after Sept. 3, 1982. See 52 Fed. Reg. 6779 (Mar.
5, 1987).
 - 12 -

2. Petitioners' Position

Petitioners contend that Mr. Hoyt’s extensions of the period

of limitations are invalid because at the time he executed the

appropriate Forms 872 he no longer was the TMP of the Hoyt

partnerships because he had been the subject of a criminal tax

investigation. Therefore, they contend that since the extension

agreements were invalidly executed, the periods of limitations

for the years in issue expired before the FPAA's were issued.

Petitioners base their contentions on three alternative

arguments: (1) That the second and third sentences of section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, are

invalid and that the initiation of a criminal tax investigation

of Mr. Hoyt converted his partnership items in the Hoyt

partnerships into nonpartnership items as a matter of law; (2)

that the criminal tax investigation of Mr. Hoyt created a

conflict of interest between Mr. Hoyt's duties as a fiduciary of

the Hoyt partnerships and his self-interest as the subject of a

criminal tax investigation and that such a conflict necessitated

his removal as TMP on the basis of the rationale of Transpac

Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221 (2d Cir.

1998), revg. and remanding Transpac Drilling Venture 1982-16 v.

Commissioner, T.C. Memo. 1994-26; or (3) that the Commissioner

abused his discretion by not issuing a written notice informing
 - 13 -

Mr. Hoyt that his partnership items would be treated as

nonpartnership items.

3. Respondent's Position

Respondent contends that Mr. Hoyt was TMP at all times when

he executed extensions of the periods of limitations for the Hoyt

partnerships. Respondent contends that section 301.6231(c)-5T,

Temporary Proced. & Admin. Regs., supra, is a valid regulation

and that, in accordance with the regulation, a taxpayer's

partnership items are not treated as nonpartnership items until

the Commissioner notifies the taxpayer that: (1) He is the

subject of a criminal tax investigation; and (2) his partnership

items will be treated as nonpartnership items. In addition,

respondent contends that the facts of Transpac Drilling Venture

1982-12 v. Commissioner, supra, are distinguishable from the

facts in this case and that the criminal tax investigation of Mr.

Hoyt did not create a conflict of interest affecting Mr. Hoyt's

duties as a fiduciary of the Hoyt partnerships.

4. Mr. Hoyt's Status as TMP for SGE 83-2's 1983 Taxable Year

As an initial matter, we must decide whether Mr. Hoyt was

validly designated TMP of SGE 83-2 for the 1983 taxable year.

Petitioners contend that Mr. Hoyt could not have served as SGE

83-2's TMP for 1983 because he was not a general partner of SGE

83-2 for that year and was not validly designated TMP on SGE 83-

2's 1983 partnership return.
 - 14 -
Section 6231(a)(7) defines a TMP as either: (1) A general

partner designated TMP as provided in regulations; or (2) if no

general partner has been so designated, the general partner

having the largest profits interest in the partnership at the

close of the tax year.

With the exception of SGE 83-2's 1983 partnership return,

Mr. Hoyt was designated TMP on the returns for the Hoyt

partnerships for all of their post-1982 taxable years pursuant to

section 6231(a)(7)(A). See sec. 301.6231(a)(7)-1(c), Proced. &

Admin. Regs. Though no partner was designated TMP on SGE 83-2's

1983 return, Mr. Hoyt signed SGE 83-2's 1983 tax return as a

general partner.

It is clear from the record that Mr. Hoyt was the sole

general partner of SGE 83-2 in 1983 and therefore was the general

partner having the largest profits interest in the partnership at

the close of the 1983 taxable year pursuant to section

6231(a)(7)(B). On the basis of the record, we find that Mr. Hoyt

was TMP of SGE 83-2 for the 1983 taxable year pursuant to section

6231(a)(7)(B).

We will now examine each of petitioners' arguments in turn.

5. Validity of Section 301.6231(c)-5T, Temporary Proced. &
Admin. Regs.

Petitioners contend that the second and third sentences of

section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra,

are invalid and that the initiation of the criminal tax
 - 15 -
investigation of Mr. Hoyt resulted in the conversion of his

partnership items in the Hoyt partnerships into nonpartnership

items as a matter of law. Therefore, Mr. Hoyt's TMP designation

was terminated and any extensions he signed on behalf of the Hoyt

partnerships were invalid.

Petitioners base their position on the interrelationship of

section 6231(c), section 301.6231(c)-5T, Temporary Proced. &

Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), and section

301.6231(a)(7)-1(l)(1)(iv), Proced. & Admin. Regs.

Our understanding of petitioners' argument is as follows:

(1) The Secretary may determine in situations enumerated in

section 6231(c)(1) that "to treat items as partnership items will

interfere with the effective and efficient enforcement of * * *

[the internal revenue laws]", sec. 6231(c)(2) (emphasis added);

(2) once such a determination is made by the Secretary, such

partner's partnership items "shall be treated as nonpartnership

items", id. (emphasis added); (3) by regulation, the Secretary

has determined that "The treatment of items as partnership items

with respect to a partner under criminal investigation for

violation of the internal revenue laws relating to income tax

will interfere with the effective and efficient enforcement of

the internal revenue laws", sec. 301.6231(c)-5T, Temporary

Proced. & Admin. Regs., supra (emphasis added); and (4)
 - 16 -
therefore, at the initiation of a criminal tax investigation, the

partner's items become nonpartnership items pursuant to section

6231(c)(2), and the partner is removed as TMP pursuant to section

301.6231(a)(7)-1(l)(1)(iv), Proced. & Admin. Regs.

In sum, petitioners conclude that once a partner is removed

as TMP upon the initiation of a criminal tax investigation, the

partner so removed cannot serve as TMP as long as he remains the

subject of a criminal tax investigation and that any previous

designation of that partner as TMP will cease. Petitioners,

however, concede that a partner subject to a criminal tax

investigation could serve as TMP upon completion of that

investigation but would probably have to be redesignated TMP.

On the basis of the above argument, petitioners argue that

Mr. Hoyt could not have served as TMP after the initial criminal

tax investigation which began on April 24, 1984.

In addressing petitioners’ argument, we turn first to the

interpretation of the language of section 6231(c).

When interpreting statutes, the function of courts is to

construe the language of the statute to give effect to the intent

of Congress. See Cramer v. Commissioner, 101 T.C. 225, 247

(1993), affd. 64 F.3d 1406 (9th Cir. 1995). Where possible,

statutes should be interpreted in their ordinary everyday sense.

See Crane v. Commissioner, 331 U.S. 1, 6 (1947). A statute is to
 - 17 -
be construed so that each of its provisions is given full effect

and not to render parts of the statute inoperative or

superfluous. See Duke v. University of Texas, 663 F.2d 522, 526

(5th Cir. 1981).

Accordingly, section 6231(c) should be read in its entirety,

as part of a single statutory scheme, and not so as to render

parts of the statute inoperative. Section 6231(c), in pertinent

part, provides as follows:

SEC. 6231(c). Regulations With Respect to Certain
Special Enforcement Areas.--

(1) Applicability of Subsection.--This subsection
applies in case of

* * * * * * *

(B) criminal investigations,

* * * * * * *

(E) other areas that the Secretary determines
by regulation to present special enforcement
considerations.

(2) Items May Be Treated As Nonpartnership Items.
--To the extent that the Secretary determines and
provides by regulations that to treat items as
partnership items will interfere with the effective and
efficient enforcement of this title in any case
described in paragraph (1), such items shall be treated
as non-partnership items for purposes of this
subchapter. [Emphasis added.]

(3) Special Rules.--The Secretary may prescribe by
regulation such special rules as the Secretary
determines to be necessary to achieve the purposes of
this subchapter in any case described in paragraph (1).
[Emphasis added.]
 - 18 -
From the plain language of the statute, it is clear that the

Secretary has authority to promulgate regulations in order to

"achieve the purposes of this subchapter" in cases involving

section 6231(c), concerning, among other areas, criminal

investigations.

Section 301.6231(c)-5T, Temporary Proced. & Admin. Regs.,

supra, promulgated pursuant to the grant of authority in section

6231(c), is a legislative regulation because Congress explicitly

left a gap for the agency to fill. See Chevron U.S.A., Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837, 843-844

(1984). A legislative regulation is given controlling weight

unless the regulation is arbitrary, capricious, or manifestly

contrary to the statute. See id.

In addition, courts are to interpret a regulation as a

whole, in light of the overall statutory scheme, and not to give

force to one phrase in isolation. See Norfolk Energy, Inc. v.

Hodel, 898 F.2d 1435, 1442 (9th Cir. 1990). Courts have a duty

to give effect to every part of a regulation and construe each

part in connection with every other part so as to produce a

harmonious whole. See Miami Heart Inst. v. Sullivan, 868 F.2d

410, 413 (11th Cir. 1989).

It is clear that section 301.6231(c)-5T, Temporary Proced. &

Admin. Regs., supra, concerning the treatment of partnership

items of partners under criminal tax investigation, differs from
 - 19 -
regulations promulgated to address other special enforcement

areas. For example, the Secretary did not explicitly require

that a taxpayer receive written notification in every special

enforcement situation. Rather, each special enforcement

regulation begins with language similar to the language of

section 6231(c)(2):

The treatment of items as partnership items with
respect to a partner * * * [in a specifically described
circumstance] will interfere with the effective and
efficient enforcement of the internal revenue laws.

Sec. 301.6231(c)-6T, Temporary Proced. & Admin. Regs., 52 Fed.

Reg. 6793 (Mar. 5, 1987) (providing that the partnership items of

a partner whose taxable income is determined by use of an

indirect method of proof shall be treated as nonpartnership items

on the date of the mailing of the deficiency notice); see also

sec. 301.6231(c)-7T, Temporary Proced. & Admin. Regs., 52 Fed.

Reg. 6793 (Mar. 5, 1987) (providing that the partnership items of

a partner named as debtor in a bankruptcy proceeding become

nonpartnership items as of the filing of the bankruptcy

petition).

After this introductory language, each special enforcement

regulation specifically sets forth what circumstances will

interfere with the effective and efficient enforcement of the

internal revenue laws and when partnership items in that

situation will be treated as nonpartnership items.
 - 20 -
For example, in the case of criminal tax investigations,

partnership items would not be treated as nonpartnership items

unless a partner: (1) Was notified that he was the subject of a

criminal tax investigation; and (2) received written notification

that his partnership items would be treated as nonpartnership

items. See sec. 301.6231(c)-5T, Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987). Therefore, the timing

of the treatment of a partner's partnership items as

nonpartnership items is specified in each regulation.

Section 301.6231(c)-5T, Temporary Proced. & Admin. Regs.,

supra, consists of three sentences. Petitioners dispute

respondent’s interpretation of the regulation and contend that

the second and third sentences solely address: (1) Which

partnership items become nonpartnership items; and (2) when

partnership items are converted to nonpartnership items.

Petitioners also contend that the last two sentences of the

regulation conflict with the first sentence and with the language

of section 6231(c). In sum, petitioners urge this Court to read

the first sentence of section 301.6231(c)-5T, Temporary Proced. &

Admin. Regs., supra, in isolation, divorced from the regulation

as a whole.

Petitioners' interpretation of the interaction between

section 6231(c) and section 301.6231(c)-5T, Temporary Proced. &
 - 21 -
Admin. Regs., supra, would negate the two notification

requirements listed in the regulation.

In Transpac Drilling Venture 1982-16 v. Commissioner, T.C.

Memo. 1994-26, revd. Transpac Drilling Venture 1982-12 v.

Commissioner, 147 F.3d 221 (2d Cir. 1998), this Court

specifically noted that section 301.6231(c)-5T, Temporary Proced.

& Admin. Regs., supra, requires that a taxpayer receive two

different notices from the IRS; specifically, (1) Notify the

taxpayer that he is the subject of a criminal tax investigation;

and (2) notify the taxpayer in writing that the IRS will treat

his partnership items as nonpartnership items. We further note

that the Court of Appeals for the Second Circuit in Transpac

Drilling Venture 1982-12 v. Commissioner, supra, in reversing

this Court, did not hold section 301.6231(c)-5T, Temporary

Proced. & Admin. Regs., supra, invalid, nor did the Court of

Appeals attempt to construe the regulation in the manner in which

petitioners urge. Rather, the Court of Appeals held, on the

basis of the facts therein, that where a serious conflict of

interest precludes the faithful exercise of the TMP’s fiduciary

duties to the limited partners and partnerships, the regulation

does not prescribe the sole grounds under which a TMP will be

removed following the commencement of a criminal investigation.

See id. at 225-227.
 - 22 -
Finally, we note that case law in the Ninth Circuit, in

which this case would be appealable, supports our decision as to

the validity of section 301.6231(c)-5T, Temporary Proced. &

Admin. Regs., supra. In In re Leland, 160 Bankr. 834, 836 (E.D.

Cal. 1993), the bankruptcy court stated:

The debtors [sic] argument that Hoyt's partnership
items became nonpartnership items as of the date his
criminal investigation began is simply unsupported and
ignores the entirety of * * * [section 301.6231(c)-5T,
Temporary Proced. & Admin. Regs., supra.]

Though we agree with petitioners that the bankruptcy court's

reliance on language from Chef's Choice Produce, Ltd. v.

Commissioner, 95 T.C. 388 (1990), is misplaced, the bankruptcy

court cited the plain and unequivocal language of the regulation

in sustaining its dual requirements.

Additionally, the bankruptcy court in In re Miller,13 174

Bankr. 791, 796 (E.D. Cal. 1994), affd. 81 F.3d 169 (9th Cir.

1996), stated:

Miller also argues that the regulations are in conflict
with the Internal Revenue Code and by merely showing that
Hoyt was under criminal investigation, Hoyt's status as a
TMP was terminated. We disagree. If this were true, no
party with any certainty would know when a criminal
investigation began in order to terminate a TMP's status.
This uncertainty would undermine one of the main goals in
enacting TEFRA.

* * * * * * *

13
Counsel for petitioners also served as counsel for the
taxpayers in In re Leland, 160 Bankr. 834 (E.D. Cal. 1993), and
in In re Miller, 174 Bankr. 791 (E.D. Cal. 1994), affd. 81 F.3d
169 (9th Cir. 1996).
 - 23 -

The regulations promulgated by the Secretary are not
manifestly contrary to the statute as Miller suggests.
Rather, the Secretary enacted Temporary Treasury Regulation
Section 301.6231(c)-5T to carry out the provisions of 26
U.S.C. section 6231(c)(2) and its purpose.

Hoyt's authority as the designated TMP could not be
terminated based on the criminal investigation until he
received written notification from the IRS of the conversion
of items to nonpartnership. In summary, it is both the
regulations and the Internal Revenue Code which provides
that the TMP designation shall be terminated upon the
criminal investigation and the written notification that
partnership items shall be treated as nonpartnership items.
Therefore, we hold that the TMP had authority to enter into
consents with the IRS to extend the time for assessments and
bind Miller to the extensions. [Fn. ref. omitted.]

We conclude that the Secretary's regulatory treatment of the

partnership items of partners under criminal tax investigation

comports with the language of section 6231(c) and hold section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, is a

valid regulation. In this case the record clearly reflects that

the IRS did not notify Mr. Hoyt that his partnership items would

be treated as nonpartnership items. Pursuant to the provisions

of section 301.6231(c)-5T, Temporary Proced. & Admin. Regs.,

supra, the commencement of a criminal tax investigation of a

partner in a TEFRA partnership does not necessarily or

immediately interfere with the effective and efficient

enforcement of the internal revenue laws and require the

treatment of partnership items as nonpartnership items in every

situation.
 - 24 -
6. Removal of TMP for Violating a Fiduciary Duty

Petitioners contend that Mr. Hoyt should have been removed

as TMP by the IRS because of a conflict of interest between Mr.

Hoyt's fiduciary duty to petitioners, as partners of the Hoyt

partnerships, and his self-interest as the subject of several

criminal tax investigations.

Petitioners rely on Transpac Drilling Venture 1982-12 v.

Commissioner, 147 F.3d 221 (2d Cir. 1998), contending that

Transpac holds that the Commissioner has no discretion and must

remove a TMP who is under criminal tax investigation.

However, the Transpac decision involved distinguishable

facts. In Transpac, the IRS began a civil tax audit of the

Transpac partnerships in the latter part of 1983. By November

1985, however, the civil audit had uncovered issues which were

referred to CID for criminal investigation. See id. at 223.

While the criminal investigation was proceeding, the IRS

approached limited partners of the Transpac partnerships and

asked them to sign extension agreements for the 1982 taxable

year. Most of the limited partners refused, so the IRS then

approached the partnership's TMP's and made the same extension

requests. The TMP's acquiesced and executed the extension

agreements and thereafter continued to execute extension

agreements through March 1988.14 See id. at 224.

14
As the IRS did not issue FPAA's until November 1989, the 3-
year period of limitations would have expired but for the signed
extensions.
 - 25 -
The TMP's approached by the IRS were themselves under

criminal tax investigation, as was the primary promoter of the

Transpac partnerships, who was already a convicted tax felon.

Sometime during the course of the criminal tax investigations,

the TMP's became cooperating Government witnesses whose own

sentencing, or grants of immunity, depended on their cooperation

with the Government. See id. at 223.

In addition, the Court of Appeals for the Second Circuit

found that when the limited partners in the Transpac partnerships

inquired about the status of the civil audits, the IRS misled the

limited partners by telling them to ask for information from the

TMP's, who in turn had been expressly ordered not to disclose any

information about the existence of the criminal investigation.

See id. at 227.

In Transpac, the Court of Appeals reasoned that "where

serious conflicts exist, a TMP may be barred from acting on

behalf of the partnership, quite apart from the issuance of a

government letter under current Regulation 301.6231(c)-5T". Id.

The Court of Appeals proceeded to hold that the TMP's in that

case had a serious conflict of interest which voided their

consents to the extensions of the periods of limitations. The

Court of Appeals found it "especially disquieting" that the IRS

knew the extensions were unwanted by the limited partners on

whose behalf the TMP's purported to act. See id. The Court of

Appeals noted that the IRS, before seeking extensions of the

periods of limitations from the TMP's, had already transformed
 - 26 -
its civil audits of the partnerships into criminal investigations

of the TMP's. The Court of Appeals reasoned that the conversion

of the civil audits into criminal investigations created a

powerful incentive on the part of the TMP's to ingratiate

themselves with the Government and to ignore their fiduciary

duties to the limited partners. See id.

We emphasize that in Transpac the TMP's executed the

extension agreements near the time the TMP's were cooperating

with the Government in anticipation of either grants of immunity

or sentencing agreements. See id. at 223-224. The TMP's in

Transpac became Government witnesses, owing to their cooperation

with Government investigators.15 The Court of Appeals

essentially found therefore that the TMP's had a disabling

conflict of interest that prevented them from faithfully

discharging their fiduciary duties to the limited partners.

Unlike Transpac, there is no evidence in this case that:

(1) The IRS approached limited partners to execute any extension

agreements or that they refused to sign such agreements; (2) the

promoter/TMP of the Hoyt partnerships was, before or during the

relevant period, indicted or convicted of a tax felony or

cooperating with the Government as a witness; or (3) the IRS

misled partners of the Hoyt partnerships about the existence of

15
Two of the TMP's were granted immunity from prosecution,
while the third entered into a plea bargain resulting in a
suspended sentence.
 - 27 -
criminal investigations or ever instructed Mr. Hoyt to say

nothing about such criminal tax investigations.

In addition, the record reflects that the criminal

investigations of Mr. Hoyt ended prior to Mr. Hoyt's execution of

every one of the extension agreements in issue except one. Only

one of the extension agreements for the years in issue,

concerning the 1983 taxable year of SGE 83-2, was executed by Mr.

Hoyt while he was under criminal tax investigation.

In Olcsvary v. United States, 240 Bankr. 264, 266-267 (E.D.

Tenn. 1999), the United States Bankruptcy Court for the Eastern

District of Tennessee stated:

There is no evidence that Hoyt had any contact with the
investigators at all, much less that he executed the
extensions under pressure for leniency. Indeed, since
these tax investigations never resulted in prosecution,
it is possible that Hoyt viewed them with contempt or
haughty disdain rather than fear. * * *

* * * * * * *

The [Court of Appeals] in Transpac did not assume that
the mere existence of an investigation would subvert a
tax matters partner’s judgment and bend him to the
government’s will in dereliction of his fiduciary
duties to his partners. * * *

Mr. Hoyt continued to promote the existing Hoyt partnerships

after the initiation of the criminal tax investigations. Mr.

Hoyt continued to defend his legal position throughout the

criminal tax investigations and continued to maintain that all

partnership items were legitimate, a legal position which was

consistent with that of his partners.
 - 28 -
Mr. Hoyt also encouraged the limited partners to refuse to

cooperate with Government investigators. W.J. Hoyt & Sons sent

letters to some limited partners telling them that they could

refuse to be deposed by the IRS, and, if already deposed, that

they could refuse to sign the interview transcript.

In sum, we are not persuaded that Mr. Hoyt had a disabling

conflict of interest in this case or violated his fiduciary duty

to petitioners. On the basis of the record, we find and hold

that Mr. Hoyt did not have a conflict of interest which required

the removal of his TMP designation or invalidated the extensions

of the periods of limitations.

7. Abuse of Discretion by Respondent

Petitioners contend that respondent's failure to send a

written notice to Mr. Hoyt, informing him that his partnership

items would be treated as nonpartnership items pursuant to

section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed.

Reg. 6793 (Mar. 5, 1987), was an abuse of discretion.

Petitioners assert that, because Mr. Hoyt was the subject of

criminal investigations and because certain IRS officials

countersigning the extension agreements knew of the criminal tax

investigations of Mr. Hoyt, the failure of the IRS to notify Mr.

Hoyt that his partnership items would be treated as

nonpartnership items was arbitrary and unreasonable.

Petitioners once again rely on Transpac Drilling Venture

1982-12 v. Commissioner, 147 F.3d 221 (2d Cir. 1998), in which

the Court of Appeals disagreed with this Court’s conclusion that
 - 29 -
the Commissioner had not abused his discretion by failing to

terminate a TMP’s status.

The taxpayer has the burden of proof when alleging an abuse

of discretion. See Capitol Fed. Sav. & Loan Association v.

Commissioner, 96 T.C. 204, 210 (1991).

The parties have stipulated that the IRS has no formal

criteria to determine when, or whether, a written notice

notifying a partner that his partnership items will be treated as

nonpartnership items is to be sent to a taxpayer who is the

subject of a criminal tax investigation. The IRS makes each

determination upon the particular facts of each case.

As previously indicated, the Transpac decision involved

distinguishable facts, and petitioners have not alleged the facts

that the Court of Appeals for the Second Circuit found so

disquieting. Here, petitioners are unable to show that

respondent's actions in continuing to recognize Mr. Hoyt as TMP

were unlawful or arbitrary. Accordingly, we find that

petitioners have not established that respondent abused his

discretion by not notifying Mr. Hoyt that his partnership items

would be treated as nonpartnership items pursuant to section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra.

8. Expiration of Period of Limitations With Regard to TBS J.V.

As a supplemental matter, we address the parties’

contentions regarding TBS J.V.’s 1989 and 1990 taxable years.

Respondent contends that TBS J.V. failed to file partnership

returns for both the 1989 and 1990 taxable years and that
 - 30 -
therefore the period of limitations for 1989 and 1990 did not

expire before April 17, 1995. Petitioners contend that TBS J.V.

filed both a 1989 and a 1990 partnership return and that the

existence of an extension agreement executed by Mr. Hoyt for TBS

J.V.’s 1989 taxable year is evidence of the timely filing of the

underlying 1989 tax return. Petitioners argue that since Mr.

Hoyt was not the TMP for the years in issue, he was not

authorized to sign the extension for TBS J.V.’s 1989 tax year and

the period of limitations for 1989 has therefore expired.

The period for assessing tax attributable to a partnership

item shall not expire before 3 years after the later of: (1) The

date that the partnership return was filed for the taxable year;

or (2) the last date for filing the return for the year (without

regard to any extensions). See sec. 6229(a). When no

partnership return is filed, adjustments attributable to

partnership items may be assessed at any time. See sec.

6229(c)(3).

Respondent has submitted a certified transcript of TBS

J.V.’s account for the 1989 and 1990 taxable years showing that

the IRS has no record of TBS J.V.'s filing a partnership return

for either taxable year through September 23, 1998. Petitioner,

however, has been unable to adduce any evidence establishing that

TBS J.V. filed a partnership return for either the 1989 or the

1990 taxable year.

The existence of an extension agreement executed by Mr. Hoyt

for TBS J.V.’s 1989 taxable year is not evidence of the timely
 - 31 -
filing of the underlying 1989 tax return. However, since we have

held that Mr. Hoyt was the valid TMP of the Hoyt partnerships for

the years in issue, and since petitioners concede that Mr. Hoyt

signed an extension agreement for TBS J.V.’s 1989 taxable year,

even if a 1989 return had been filed, the period of limitations

for the 1989 taxable year would not have expired before April 17,

1995.

Upon the basis of the record, we find that TBS J.V. failed

to file partnership returns for both the 1989 and 1990 taxable

years and hold that the period of limitations for TBS J.V.’s 1989

and 1990 taxable years did not expire before April 17, 1995.

9. Conclusion

The parties have stipulated that if this Court finds that

the respective periods of limitations had not expired before the

mailing of the FPAA's, then the FPAA's were timely and properly

sent to the TMP of the Hoyt Partnerships for each of the

partnership years in issue.

Upon the basis of the record, we find that Mr. Hoyt was the

TMP when he executed extension agreements with respect to the

years in issue and, therefore, hold that the periods of

limitations with respect to years in issue had not expired

pursuant to section 6229(b)(1)(B) as of April 17, 1995.

Because we find that Mr. Hoyt was TMP of the Hoyt

partnerships when he executed extension agreements for the years

in issue, we need not, and do not, address other issues raised by

the parties.
 - 32 -
The parties stipulated that if we hold that the extension

agreements are valid, which we have, the amounts set forth below

are the correct amounts16 of the deficiencies in petitioners'

Federal income taxes and additions to taxes for the years

involved herein:
Year Deficiency Sec. 6651(a) Sec. 6621(c)
1980 $3,917 -0- Applies
1981 17 -0- Applies
1982 1,248 -0- Applies
1983 11,334 $1,043 Applies
1984 1,196 -0- Applies
1985 4,662 -0- Applies
1986 8,068 139 Applies
1987 3,337 -0- None
1988 11,831 1,562 None
1989 4,776 87 None
1990 8,319 1,258 None
1991 8,243 836 None
1992 6,619 9 None

To reflect the foregoing,

Decision will be entered under

Rule 155.

16
These amounts do not include interest, payments made after
the mailing of the notices of deficiency, frozen refunds, or the
applicability of any penalty for substantial underpayment of tax.