Samford v. Commissioner

T.C. Memo. 2000-266

UNITED STATES TAX COURT

LESTER L. AND SUSAN P. SAMFORD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13597-91. Filed August 24, 2000.

Thomas E. Redding, for petitioners.

Robert E. Marum, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

POWELL, Special Trial Judge: This case is before the Court

on petitioners’ motion to dismiss for lack of jurisdiction.

Petitioners are part of a group of investors in a partnership,

Summer Lovers Associates (SLA). Six other partners, who have

petitions pending in this Court, have also filed motions to

dismiss. In those six cases the petitioners have agreed that

this case will serve as the test case as to the motions to

dismiss. This case was submitted fully stipulated under Rule
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122. Neither party has requested a further evidentiary hearing.

Petitioners claimed a pass-through loss and an investment

credit from SLA on their 1982 Federal income tax return.

Respondent disallowed the loss and credit and determined a

deficiency in petitioners' 1982 Federal income tax and additions

to tax under sections 6653(a)(1) and 66591 in the respective

amounts of $27,552, $1,377.60, and $8,265.60. Respondent also

determined that petitioners are liable for an addition to tax

under section 6653(a)(2) in the amount of 50 percent of the

interest due on the deficiency and that the increased interest

provisions of section 6621(c) applied. Assuming that the

adjustments pertaining to SLA are properly before this Court in

this proceeding, petitioners and respondent have reached an

agreement as to the deficiency and additions to tax. The issue

remaining is whether respondent’s adjustments to the loss and

credit from SLA and the additions to tax resulting therefrom are

properly before the Court in this proceeding. If SLA was formed

prior to September 4, 1982, it is not subject to the partnership

procedural provisions enacted as sections 6221 through 6231 by

section 402(a) of the Tax Equity & Fiscal Responsibility Act of

1982 (TEFRA), Pub. L. 97-248, 96 Stat. 648, and respondent’s

adjustments are properly before the Court in this proceeding. On

1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year in issue.
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the other hand, if SLA was formed on or after September 4, 1982,

respondent’s adjustments are not properly before the Court in

this proceeding.

FINDINGS OF FACT

The facts may be summarized as follows.

A. The Basic Partnership Documents

A Certificate of Limited Partnership was filed with the

State of New York on July 28, 1981, under the name Greenberg

Brothers Partnership #8.2 The partnership was formed “to engage

in the general business of owning and dealing in all respects

with motion picture films to be acquired by the Partnership.”

Richard M. Greenberg and A. Frederick Greenberg were listed as

the general partners. A. Frederick Greenberg was also listed as

a limited partner. The general partners had “the right to admit

additional Limited Partners.”

SLA issued a Private Placement Memorandum (the Memorandum)

on May 18, 1982, for units of SLA. The Memorandum states that

the partnership was “formed” on July 28, 1981, and that the

original partnership agreement would be amended. The Memorandum

further states that SLA intended to purchase the worldwide rights

to the motion picture “Summer Lovers” from Filmways, Inc.

(Filmways). The purchase price of the film was $6,600,000,

2
Greenberg Brothers Partnership #8 later became known as
SLA.
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consisting of a $6,540,000 promissory note and $60,000 in cash.

The closing of the offering was conditioned on SLA purchasing the

film and entering into a distribution agreement.

Under the “amended partnership agreement” (hereinafter the

partnership agreement), the “term of the Partnership shall

commence upon the recording of the Certificate of Limited

Partnership.” The partnership agreement stated that SLA would

not purchase the film unless subscriptions of $2,500,000 had been

accepted. If the capital contributions of the limited partners

were less than the total subscription amount, the general partner

could accept contributions from other persons, “and such persons

shall be admitted as Limited Partners”.

The Subscription Agreement provided that the offering would

terminate on the earliest of (1) the date the general partners in

their sole discretion determined, or (2) the outside date, July

1, 1982. The general partners had the authority to extend the

outside date to August 5, 1982. Under that agreement the limited

partners, however, could waive any of the conditions in that

agreement or in the Memorandum.

On July 30, 1982, SLA filed a Certificate of Amendment of

Certificate of Limited Partnership with the State of New York.

The certificate listed the limited partners of SLA and the amount

of their contributions. The certificate indicated that all 50

units had been purchased and listed contributions totaling
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$2,500,000. On September 2, 1982, SLA filed another Certificate

of Amendment of Certificate of Limited Partnership with the State

of New York. The second amended certificate listed the limited

partners and contributions totaling $2,500,000.

B. The Film “Summer Lovers”

SLA and Filmways executed a Purchase Agreement and a

Distribution Agreement for the film, Summer Lovers, on April 15,

1982. In addition, an Assignment of Copyright and a Mortgage of

Copyright between SLA and Filmways were executed on April 15,

1982.

An Advertising Services Agreement between SLA and Filmways

was also executed on April 15, 1982, and provided for payment by

SLA of $1,313,000 to a separate account for payment of third-

party invoices for advertising expenses. Filmways sent Richard

M. Greenberg a letter dated July 23, 1982, containing the

signature card and letter of authorization, both dated July 19,

1982, for the Summer Lovers Associates Advertising bank account.

On January 10, 1983, employees of Orion Pictures Corporation,

successor in interest to Filmways, sent an interoffice memo

listing invoices and checks totaling $1,313,000 in connection

with the Summer Lovers Associates Advertising account. The

invoices totaled $1,313,000 and included invoices for advertising

services performed during July and August 1982. SLA deducted

advertising expenses in the amount of $1,313,000 for 1982.
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The Bill Of Sale for the movie “Summer Lovers” was executed

by Filmways on July 14, 1982. SLA executed a $6,540,000 non-

negotiable recourse promissory note to Filmways, and Filmways

issued a receipt for $6,540,000 on the same date.

C. Partnership Tax Return

On its 1982 Form 1065, U.S. Partnership Return of Income,

SLA reported that its business commenced on January 1, 1982. On

Form 4562, Depreciation and Amortization, SLA reported 5-year

property (the film) being placed in service on January 1, 1982.

The property was reported to have a basis of $6.6 million and SLA

took a full year’s depreciation deduction in the amount of

$990,000.

An opinion letter was issued by the law firm of Goldschmidt,

Fredericks & Oshatz as to tax consequences of the formation and

operation of SLA. The opinion letter stated, in part, “The

General Partners have advised that the Partnership will claim a

full year’s depreciation for 1982. * * * [t]he Partnership will

have been in existence for all of 1982, so that it will have a 12

month taxable year”. A report on the projected tax basis and

cash-flow was prepared by the accounting firm of Touche Ross &

Co. on May 23, 1982. In reviewing the depreciation of the film

the report stated, in part, that “The general partners believe

that the Partnership has actively been engaged in business from

January 1, 1982 through the present.”
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SLA filed a petition for the 1983 taxable year with this

Court in docket No. 27185-91, on November 22, 1991. In the

petition SLA stated that “The Film was placed in service by the

Partnership during July 1982 at which time it was released in

more than 125 motion picture theaters.” There is no evidence in

this record that contradicts that statement.

D. Petitioners’ Interest in SLA

Petitioner, Lester L. Samford, issued a check to SLA for

$13,836 on November 29, 1982. Petitioners held a 1.96000 percent

interest in SLA. The following documents relating to SLA were

signed by petitioners: Purchaser Questionnaire, Subscription

Agreement with an attached Annex I dealing with Powers of

Attorneys-in-Fact, a Negotiable Promissory Note, a Security

Agreement, an Assumption Agreement, and an Alternate Negotiable

Promissory Note. The power of attorney provided that the general

partners had the power and authority to act for petitioners in

the filing of documents required to be filed. All of the above

documents were dated and notarized July 22, 1982. Even though

these documents were notarized, petitioners claim, and respondent

does not dispute, that these documents were actually executed

after September 3, 1982.

E. Transactions After September 3, 1982

In the State of Washington, William Bratton and Stephen

Roberts (Bratton and Roberts), certified public accountants,
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began selling partnership units of SLA in October 1982. All of

the investors Bratton and Roberts sold units to made their

investments during or after October 1982. The original

subscription documents were sent to SLA for the units they sold.

After those documents were sent to SLA, the general partners

returned them and required that the documents be reexecuted with

a July 22, 1982, date. Washington limited partners Bonnie B.

Nelson, Herman M. Nirschl, and Dennis W. Neifert each wrote

checks to SLA for $13,836 for their partnership interests in

December 1982.

SLA did not apply to register the sale of partnership units

in the State of Texas until September 21, 1982.

SLA received a promissory note, dated September 23, 1982,

payable by a Bob L. Jordan in the amount of $32,000, showing

interest accruing from July 15, 1982.

OPINION

Partnership audit and litigation matters are governed by

sections 6221 through 6231 enacted by section 402(a) of the Tax

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

248, 96 Stat. 324, 648, commonly referred to as the TEFRA

partnership provisions. Under the TEFRA provisions, a

“partnership item” (as defined by section 6231(a)(3)) must be

litigated at the partnership level in a partnership proceeding.

Secs. 6221, 6226(a); Maxwell v. Commissioner, 87 T.C. 783, 787-
 - 9 -

788 (1986). We do not have jurisdiction over a partnership

proceeding until a valid notice of final partnership

administrative adjustment (FPAA) has been issued and the tax

matters or notice partner has timely petitioned this Court for a

readjustment of the partnership items. See Rule 240(c); see also

Consolidated Cable, Ltd. v. Commissioner, T.C. Memo. 1990-657,

affd. without published opinion 995 F.2d 222 (5th Cir. 1993). An

“affected item” (as defined by section 6231(a)(5), which includes

additions to tax based on partnership items) cannot be determined

before the final resolution of the partnership item. GAF Corp.

v. Commissioner, 114 T.C. , ___ (2000) (slip op. at 13);

Maxwell v. Commissioner, supra at 790-791.

Prior to TEFRA, items corresponding to those which TEFRA

defines as partnership and affected items were all litigated in a

deficiency proceeding under section 6212. See Maxwell v.

Commissioner, supra at 787. In this case, respondent did not

issue a FPAA for the year at issue in this case; rather

respondent issued a notice of deficiency under section 6212. The

parties agree that the items set forth in the notice of

deficiency would be either partnership or affected items, if the

TEFRA partnership provisions apply.

Under section 407(a)(1) of TEFRA, 96 Stat. 670, section 402

“shall apply to partnership taxable years beginning after the

date of the enactment of this Act.” TEFRA was enacted on
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September 3, 1982, and the partnership provisions of TEFRA apply

to any partnership taxable year beginning after September 3,

1982. See Wolf v. Commissioner, 4 F.3d 709, 714 (9th Cir. 1993),

affg. T.C. Memo. 1991-212. Therefore, we must determine whether

SLA was a partnership for Federal income tax purposes prior to

September 4, 1982.

Federal law determines when a partnership is formed for tax

purposes. See Frazell v. Commissioner, 88 T.C. 1405, 1412

(1987). A partnership’s taxable year begins upon the date it is

formed. See Sparks v. Commissioner, 87 T.C. 1279, 1282 (1986).

A partnership is formed “when the parties to a venture join

together capital or services with the intent of conducting

presently an enterprise or business.” Id. Whether SLA was

formed prior to September 4, 1982, is a factual question. See

Wolf v. Commissioner, supra.

For our purposes here, we need not decide the exact date

that SLA was formed. The question is whether SLA was formed

prior to September 4, 1982, and we have no doubt that it was

formed prior to that date. The antecedent of SLA was formed in

1981. That partnership metamorphized into SLA with the amended

partnership agreement. That agreement provided that the

partnership would commence with the filing of the certificate of

limited partnership which first was filed on July 30, 1982. On

July 14, 1982, SLA purchased the film Summer Lovers and caused
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the film to be advertised during July and August 1982.

Petitioners’ contention that the partnership was not formed

until after September 4, 1982, is based on the fact that some of

the limited partners (including petitioners) did not become

partners prior to September 4, 1982. Petitioners, however,

confuse two different concepts, the formation of the partnership

and the time that a limited partner acquired an interest in the

partnership. We are concerned here with the question when the

partnership was formed.

A partnership is deemed to have been formed on the date

which the first parties acquire their capital interest in the

partnership. See Sparks v. Commissioner, supra at 1283. That

event unquestionably occurred here prior to September 4, 1982.

Petitioners rejoin that, under the subscription agreement, if the

limited partnership units were not subscribed to by August 5,

1982, all subscriptions would be canceled. But, that provision

could be waived by the limited partners. Moreover, the

partnership agreement provided that the term of the partnership

commenced with the filing of the amended certificate of limited

partnership, and that was filed on July 30, 1982. While

petitioners characterize some of the limited partners who are

listed in the amended certificates of limited partnership filed

prior to September 4, 1982, as “conditionally subscribed”

partners, there is no evidence that the general partners
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falsified the amended certificate and the subsequent certificate

filed on September 2, 1982. Furthermore, the partnership

agreement provided that the general partners could admit other

limited partners. At the time the amended certificate was filed

on July 30, 1982, SLA had title to the film, the film had been

released, and SLA was actively advertising the film. At least by

that time, SLA had been formed.

Petitioners belittle the advertising activities because the

checks drawn on the advertising account were not drawn until

after September 4, 1982. But, under the advertising agreement,

SLA transferred $1,313,000 to the advertising account at the

closing of the purchase of the film. Furthermore, most of the

invoices paid were for services performed in July and August

1982. We find petitioners’ argument at best unconvincing.

Finally, it should be noted that petitioners are attempting

to disavow the partnership documents and sworn statements of the

general partners on the certificates of limited partnership and

the tax return of SLA. Petitioners seem to argue that they

should not be bound by these representations of SLA. We

disagree. Under general partnership principles one partner is

bound by the acts of another. See Friend v. H.A. Friend and Co.,

416 F.2d 526, 533 (9th Cir. 1969); Truman v Commissioner, 3

B.T.A. 386, 388 (1926). This is particularly true here where the

partnership agreement provided that “management and control * * *
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shall rest exclusively with the General Partners.” Furthermore,

petitioners executed a power of attorney that provided that the

attorney-in-fact shall have the “authority to act in * * *

[their] name[s] and on * * * [their] behalf in the * * * filing

of * * * [a]ny other instrument which may be required to be filed

by the Partnership * * * or by any governmental agency * * *.”

Morever, with respect to the date of the formation of the

partnership, petitioners’ hands are not exactly clean: They

admit that they backdated documents indicating that their

interest in the partnership commenced in July 1982, and they

claimed tax deductions and credits predicated on that

representation at least in part. In these circumstances, in

order to disregard the records of the partnership, we would

require a much stronger showing than the innuendo based on

innuendo that petitioners argue here. See Estate of Durkin v.

Commissioner, 99 T.C. 561 (1992).

An appropriate order denying

petitioners’ Motion to Dismiss for

Lack of Jurisdiction will be issued.