T.C. Memo. 2001-85
UNITED STATES TAX COURT
MADISON RECYCLING ASSOCIATES,
DAVID A. BELDON, ROBERT T. BOYD, DOUGLAS C. BRANDON,
STEWART PIERCE BROWN, LLOYD E. BUSCH, DAVID J. D’ANTONI,
JOHN H. DELANEY, JR., DANIEL C. GREER, GERALD O.
HENDERSON, CHARLES D. HOERTZ, ESTATE OF JOSEPH KESSEL,
THOMAS P. KOREHLE, JOSIAH O. LOW, III, ROBERT J.
RIPSTON, HOWARD S. SIEVER, LAVONNE F. SIEVER, JAMES W.
SIMPSON, JR., R. BARRY UBER, LILLIAN D. WILLIAMS, PARTNERS
OTHER THAN THE TAX MATTERS PARTNER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10601-88. Filed April 9, 2001.
Gillard B. Johnson III, for petitioners.
John R. Mikalchus and Maureen T. O’Brien, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: This case was assigned to Special Trial
Judge Lewis R. Carluzzo pursuant to section 7443A(b)(5) and Rules
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180, 181, and 183.1 The Court agrees with and adopts the opinion
of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
CARLUZZO, Special Trial Judge: On December 24, 1987,
respondent issued a Notice of Final Partnership Administrative
Adjustment (FPAA) to Madison Recycling Associates (Madison) for
the year 1982. The issue to be decided is whether the period of
limitations for assessing any income tax attributable to any
partnership item (or affected item) for Madison’s 1982 taxable
year expired prior to the issuance of the FPAA.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Madison’s principal place of business was in New York, New York,
when the petition was filed in this case.
Madison’s 1982 Form 1065, U.S. Partnership Return of Income,
(the information return) was filed with the Internal Revenue
Service at the Brookhaven Service Center, Holtsville, New York,
on March 14, 1983. The return was prepared by H. W. Freedman &
Co. and signed by Richard Roberts (Roberts), who at the time
was Madison’s tax matters partner (TMP) and general partner.
At the time that Madison’s 1982 return was prepared and filed,
Harris W. Freedman (Freedman) and Shaye Jacobson (Jacobson) were
1
Section references are to the Internal Revenue Code of
1986, as amended and in effect during the relevant periods. Rule
references are to the Tax Court Rules of Practice and Procedure.
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certified public accountants licensed to practice in New York,
and partners in H. W. Freedman & Co. In June 1984, Jacobson
purchased Freedman’s interest in H. W. Freedman & Co.
In 1983, the IRS determined that Roberts had violated
section 6700 by promoting and selling limited partnership
interests in plastics recycling partnerships (the partnerships).
Pursuant to section 7408, on August 8, 1983, the United States
filed a civil complaint in the U.S. District Court for the
District of Massachusetts seeking an injunction against Roberts
and other promoters of the partnerships. On the same day, in
accordance with a consent agreement signed by Roberts on August
4, 1983, the court issued a permanent injunction against Roberts
and other promoters to prevent them from further organizing,
promoting, or selling abusive tax shelters. See Announcement of
Injunctions Under Section 7408 of the Code, 1985-1 C.B. 671.
Roberts moved to Paris, France, sometime during 1984; apparently
he has continued to live there ever since. In January 1985,
respondent assessed a section 6700 civil penalty of $205,000
against Roberts for his role in the promotion of the
partnerships.
The examination of Madison’s 1982 tax year began sometime in
1984. On April 2, 1984, Roberts, Freedman, and Jacobson signed a
Form 2848, Power of Attorney and Declaration of Representative,
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in which Roberts appointed Freedman and Jacobson as his
attorneys-in-fact in connection with that examination.
Jacobson, as attorney-in-fact for Roberts, signed two Forms
872-P, Consent to Extend the Time to Assess Tax Attributable to
Items of a Partnership. The first, signed by him on November 5,
1985, extended the period of limitations for assessments related
to Madison’s 1982 tax year to June 30, 1987. The second, signed
by him on August 6, 1986, extended the period to December 31,
1987.
Sometime between August and October of 1985, while the
examination of Madison’s 1982 tax year was in process, respondent
initiated a criminal tax investigation of Roberts. The special
agent assigned to conduct the criminal investigation did not
contact Roberts, who was then in France, during the criminal
investigation. On December 9, 1986, the criminal investigation
of Roberts was discontinued without a recommendation that Roberts
be prosecuted for any tax-related crimes.
OPINION
Madison is a partnership subject to the provisions of the
Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L.
97-248, sec. 402(a), 96 Stat. 648, and therefore the treatment of
partnership items is determined at the partnership level. The
parties now are in agreement with respect to the adjustments made
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in the FPAA,2 but disagree as to whether the FPAA was timely.
In general, the period for assessing any income tax
attributable to any partnership item (or affected item) for a
partnership taxable year will not expire before the date which
is 3 years after the later of: (1) The date on which the
partnership files its information return for the taxable year in
question, or (2) the last day for filing such return for such
year (without extensions). See sec. 6229(a). The period may be
extended if the partnership’s TMP, “or any other person
authorized by the partnership in writing to enter into such an
agreement”, enters into a timely extension agreement with the
Internal Revenue Service. Sec. 6229(b)(1)(B).
In this case, Madison’s 1982 information return was filed on
March 14, 1983. With respect to that return, the 3-year period
for “assessing any * * * [income tax] with respect to any person
which is attributable to any partnership item (or affected item)”
expired on April 15, 1986. Sec. 6229(a); see sec. 1.6031-
1(e)(2), Income Tax Regs. Taken in sequence, the two Forms 872-P
(the consents) signed by Jacobson, as attorney-in-fact for
Roberts, extended until December 31, 1987, the period of
limitations for making assessments attributable to Madison’s 1982
2
The adjustments in this case arise from transactions
similar to those discussed in Provizer v. Commissioner, T.C.
Memo. 1992-177, affd. without published opinion 996 F.2d 1216
(6th Cir. 1993).
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tax year. If the consents are valid, the FPAA is timely and the
period of limitations for making assessments attributable to
Madison’s 1982 tax year remains in suspense pursuant to section
6229(d); if the consents are not valid, the period of limitations
for making assessments attributable to Madison’s 1982 tax year
expired before the FPAA was issued.
Petitioners, relying upon 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, argue that the consents are invalid. Petitioners point
out that Roberts had previously been the subject of section 6700
sanctions and was under criminal investigation at the time that
the consents were signed. According to petitioners, a conflict
of interest legally removed Roberts’ authority to act, personally
or through his attorney-in-fact, on behalf of Madison.3
In Transpac Drilling Venture 1982-12, the IRS began a civil
examination of the Transpac partnerships in the latter part
of 1983. In November 1985, a criminal referral was made.
The promoter and the tax matters partners of the Transpac
partnerships were the targets in the ensuing criminal tax
investigation. Sometime during the course of the criminal
3
Petitioners also argue that the power of attorney did not
give Jacobson the authority to extend the period of limitations
for Madison’s 1982 taxable year. We have previously considered
and rejected that argument in Madison Recycling Associates v.
Commissioner, T.C. Memo. 1992-605.
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investigation, the tax matters partners became cooperating
Government witnesses in the investigation of the promoter, a
convicted tax felon. In exchange for their cooperation, the tax
matters partners were granted immunity from prosecution or
offered suspended sentences. While the criminal investigation
was proceeding, the IRS pursued a civil examination of the
Transpac partnerships. Because the statute of limitations
applicable to the civil examination was about to expire, the IRS
solicited consents from the limited partners but most refused.
The IRS then approached the tax matters partners--who at this
point were targets of the ongoing criminal investigation--and
solicited and received consents from them on behalf of the
Transpac partnerships. See id. at 223.
In Transpac Drilling Venture 1982-12, the Court of Appeals
for the Second Circuit found that the tax matters partners who
signed the consents had “a powerful incentive to ingratiate
themselves to the government” since their grants of immunity or
sentencing agreements depended upon their cooperation with the
Government. Id. at 227. The Court of Appeals further found that
“the criminal investigation created an overwhelming pressure on
the TMPs to ignore their fiduciary duties to the limited
partners” and determined that if “serious conflicts exist, a TMP
may be barred from acting on behalf of the partnership”. Id.
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The facts of Transpac Drilling Venture 1982-12, are
distinguishable from the facts of this case. Unlike the tax
matters partners in Transpac Drilling Venture 1982-12, nothing
here suggests that the consents were agreed to because Roberts,
acting personally or through his attorney-in-fact, had a powerful
incentive to ingratiate himself with the Government. Nothing
suggests that Roberts was a prospective Government witness
against other promoters of plastics recycling partnerships;
nothing suggests that the consents were agreed to in return for
some grant of immunity or sentencing agreements that depended
upon Roberts’ cooperation with the Government. Indeed, there is
no evidence that Roberts (or his attorney-in-fact) was aware of
the criminal tax investigation at the time the consents were
signed. Unless he was aware of the existence of the criminal
investigation against him, we fail to see how Roberts, acting
personally or through his attorney-in-fact, could have been
influenced by personal concerns in a such a way that he could not
properly discharge his fiduciary duties to the limited partners
of Madison. See Agri-Cal Venture Associates v. Commissioner,
T.C. Memo. 2000-271.
We also disagree with petitioners’ suggestion that the
section 6700 proceedings resulted in a conflict of interest;
those proceedings had been completed, and the section 6700
sanctions were imposed prior to the time that the consents were
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executed by Jacobson. See Phillips v. Commissioner, 114 T.C.
115, 132 (2000).
The “‘mere existence of an investigation’” targeting the tax
matters partner does not, in and of itself, “‘subvert a tax
matters partner’s judgment and bend him to the government’s will
in dereliction of his fiduciary duties to his partners.’”
Phillips v. Commissioner, supra at 132 (quoting Olcsvary v.
United States, 240 Bankr. 264, 266-267 (E.D. Tenn. 1999)); see
also Agri-Cal Venture Associates v. Commissioner, supra.
Consequently, without more, we reject petitioners’ contention
that the completed section 6700 proceedings or the criminal tax
investigation targeting Roberts caused him to lose his authority
to act on behalf of Madison due to a conflict of interest. It
follows that the consents are not rendered invalid on that
ground. Because the FPAA was issued within the period
contemplated by the consents, the FPAA was timely, and we so
hold.
To reflect the foregoing and the agreement of the parties
with respect to the adjustments made in the FPAA,
Decision will be entered
under Rule 155.