T.C. Memo. 2004-75
UNITED STATES TAX COURT
DUANE E. HUDSPATH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14741-02. Filed March 18, 2004.
Duane E. Hudspath, pro se.
Taylor Cortright and Ronald D. Pinsky, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: The issue for decision is whether petitioner
is liable for deficiencies relating to 1996 and 1997 and a
section 6662(a)1 accuracy-related penalty relating to 1996.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
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FINDINGS OF FACT
In the mid-1990s, petitioner formed Stephens City
Chiropractic (SCC), a limited liability company; Win Enterprise
(WIN), a limited company; Fair Hollow Trust (FHT), a domestic
trust; and Fair Exit Trust (FET), a foreign trust. Petitioner
transferred 90 percent of his interest in SCC to FHT and retained
10 percent. Petitioner also transferred a percentage of his
interest in WIN to FHT.2 Petitioner subsequently transferred his
interest in FHT to FET.
In 1996 and 1997, petitioner, who is legally blind,
performed services as a chiropractor for SCC. In addition,
petitioner received $8,160 and $8,400 in Social Security benefits
relating to 1996 and 1997, respectively. Petitioner timely filed
his 1996 and 1997 Federal income tax returns and, on those
returns, reported the income he received from SCC and WIN
relating to those years.
On April 14, 2000, respondent sent the SCC and WIN tax
matters partners separate notices of final partnership
administrative adjustment (FPAAs). In the FPAAs, respondent
determined that FHT was a sham trust and attributed its
respective shares of SCC and WIN income and expenses to
petitioner. On that day, respondent also sent petitioner a
2
The record does not disclose the percentage of WIN that
petitioner transferred to FHT or personally retained.
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notice of deficiency that included adjustments relating to
partnership items.
In response to the FPAAs, Jimmy C. Chisum, on July 17, 2000,
initiated a single partnership-level proceeding, Stephens City
Chiropractic, PLC v. Commissioner, docket No. 7982-00. On April
2, 2001, this Court dismissed the partnership-level proceeding
for lack of jurisdiction on the ground that Mr. Chisum failed to
establish his capacity to act on behalf of the entities.3 On
July 1, 2001, the decision in the partnership-level proceeding
became final.
In response to the notice of deficiency, petitioner, on July
14, 2000, initiated a partner-level proceeding, Hudspath v.
Commissioner, docket No. 7901-00. On December 7, 2001, this
Court granted respondent’s motion to dismiss for lack of
jurisdiction and to strike the portion of the partner-level
proceeding relating to partnership items on the ground that
respondent had sent petitioner, pursuant to section 6225, a
notice of deficiency prior to the completion of the partnership-
level proceeding.
3
Mr. Chisum has initiated several proceedings that this
Court has dismissed on similar grounds. E.g., Universal Trust
06-15-90 v. Commissioner, T.C. Memo. 2000-390; Banana Moon Trust
v. Commissioner, T.C. Memo. 2000-73; Jeff Burger Prods., LLC v.
Commissioner, T.C. Memo. 2000-72.
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On April 24, 2002, respondent and petitioner entered into a
stipulation relating to the partner-level proceeding, which
included the following language:
4. The tax treatment of petitioner’s partnership
items relating to WIN Enterprise, LC and Stephens City
Chiropractic, PLC will be resolved in a separate
partnership proceeding conducted in accordance with the
TEFRA partnership procedures.
5. The adjustments necessary to apply the results
of the TEFRA partnership proceeding described in
subparagraph 4 to petitioner, shall be treated as
computational adjustments under I.R.C. § 6231(a)(6) and
assessed, credited or refunded accordingly.
6. To the extent that the computation of
petitioner’s tax liability which properly reflects the
tax treatment of the partnership items relating to WIN
Enterprise, LC and Stephens City Chiropractic, PLC, as
determined in the TEFRA partnership proceeding
described in subparagraph 4, would also result in a
change in petitioner’s tax liability attributable to
nonpartnership items, as previously determined in this
docketed proceeding, such change may be treated as a
computational adjustment under I.R.C. § 6231(a)(6) and
assessed, credited or refunded accordingly.
The stipulation further provided that petitioner was entitled to
overpayments of $716 and $709 relating to 1996 and 1997,
respectively,4 and that petitioner owed no section 6662(a)
accuracy-related penalties relating to those years.
On April 26, 2002, this Court entered a decision that
incorporated the facts stipulated by the parties as the findings
of the Court.
4
The overpayments resulted from interest expense
deductions relating to payments petitioner made on behalf of SCC
in 1996 and 1997.
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On June 3, 2002, respondent sent petitioner a notice of
computational adjustment relating to partnership items. That
notice set forth net income adjustments of $18,347 and $21,123 to
petitioner’s 1996 and 1997 taxable years, respectively.
By notice of deficiency dated June 21, 2002, respondent
determined deficiencies of $2,739 and $4,044 relating to 1996 and
1997, respectively, and a $955 section 6662(a) accuracy-related
penalty relating to 1996. On June 24, 2002, respondent assessed
a computational adjustment against petitioner resulting from
adjustments of the partnership items. On September 16, 2002,
petitioner, while residing in Stephens City, Virginia, filed his
petition with this Court.
OPINION
Petitioner contends that respondent’s determinations
relating to this affected items proceeding should not be
sustained because respondent informed petitioner that, pursuant
to the April 24, 2002, stipulation, petitioner would have an
opportunity to challenge the partnership items. In support of
his contention, petitioner, who is blind, asserts that he
justifiably relied on respondent to explain the terms of the
stipulation.
Petitioner’s credible testimony and the plain language of
the stipulation (i.e., “The tax treatment of petitioner’s
partnership items * * * will be resolved in a separate
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partnership proceeding”. (Emphasis added.)) established that
respondent misled petitioner. These facts, however, do not
override the mandate of section 6221 that “the tax treatment of
any partnership item * * * shall be determined at the partnership
level.” Maxwell v. Commissioner, 87 T.C. 783, 787-788 (1986).
Respondent complied with the partnership audit and
litigation procedures and, upon completion of the partnership-
level proceeding, assessed a computational adjustment against
petitioner. See secs. 6223, 6225(a)(2), 6230(a)(1), 6231(a)(6);
Brookes v. Commissioner, 108 T.C. 1, 5 (1997). Petitioner had
the opportunity, in the partnership-level proceeding, to
challenge the partnership items, but he failed to do so.
Accordingly, petitioner is precluded from challenging those items
in this proceeding. See secs. 6221, 6226; Brookes v.
Commissioner, supra at 5-7.
Petitioner further contends that respondent’s determinations
relating to this proceeding are untimely. We disagree.
Respondent sent petitioner the notice of deficiency relating to
this proceeding prior to the expiration of the period prescribed
by section 6229(d). Sec. 6229(d)(1) and (2) (providing that the
mailing of an FPAA suspends the running of the 3-year limitations
period until 1 year after the Court’s decision relating to a
partnership-level proceeding becomes final); Aufleger v.
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Commissioner, 99 T.C. 109, 112 (1992). Thus, respondent’s
determinations are timely.
With respect to the affected items, petitioner contends that
he is not liable for a section 6662(a) accuracy-related penalty,
taxes on his 1996 and 1997 Social Security benefits, or
additional self-employment taxes. Indeed, pursuant to this
Court’s April 26, 2002, decision, petitioner is not liable for a
section 6662(a) accuracy-related penalty relating to 1996.5 The
computational adjustments resulting from adjustments of the
partnership items, however, subjected a portion of petitioner’s
Social Security benefits to tax and increased his self-employment
tax liability. See secs. 86(a) through (d), 1401, 1402,
6231(a)(6). Thus, respondent’s deficiency determinations are
sustained.
Contentions we have not addressed are irrelevant, moot, or
meritless.
5
Congress amended sec. 6221 to provide that for
partnership taxable years ending after Aug. 5, 1997, the
partnership-level proceeding includes the determination of
penalties, additions to tax, or additional amounts relating to an
adjustment to partnership items. See Taxpayer Relief Act of
1997, Pub. L. 105-34, sec. 1238(a), 111 Stat. 1026. The sec.
6662(a) accuracy-related penalty in this proceeding, however,
relates to 1996 (i.e., prior to the effective date of the
amendment to sec. 6221) and is, thus, an affected item dependent
on factual determinations to be made at the partner level. See
secs. 6230(a)(2)(A)(i), 6231(a)(5); Saso v. Commissioner, 93 T.C.
730, 734 (1989).
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To reflect the foregoing,
Decision will be entered
for respondent as to the
deficiencies relating to 1996
and 1997 and for petitioner
as to the section 6662(a)
accuracy-related penalty
relating to 1996.