T.C. Memo. 2007-119
UNITED STATES TAX COURT
DANIEL C. GREER AND WINNIE L. GREER, Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21795-03. Filed May 10, 2007.
Ps were investors in a purported tax shelter and
now dispute additions to tax related to R’s
disallowance of losses and credits resulting from the
investment.
Ps argue that they were not negligent because they
relied upon the broker selling the purported shelter
and because R did not inform Ps that the promoter of
the shelter was under investigation. Ps further argue
that the amount of underpayment used to compute the
additions to tax should be reduced to reflect the
remittance paid by Ps before filing an action in the
Federal District Court, which remittance was later
ordered by the District Court to be returned to Ps.
- 2 -
Held: P-husband’s actions regarding the
partnership interest were negligent, and R was not
required to advise Ps regarding R’s investigation of
the promoter. Therefore, the additions to tax under
sec. 6653(a)(1) and (2), I.R.C., are sustained.
Held, further, the remittance which was repaid by
R is excluded from R’s computations of the addition to
tax under sec. 6653(a)(2), I.R.C.
Held further, the addition to tax under sec. 6659,
I.R.C., is sustained.
Joy L. Hall, Martin J. Horwitz, and John A. Freeman, for
petitioner Daniel C. Greer
Kenton Ball, for petitioner Winnie L. Greer.
Aubrey C. Brown and Denise A. Diloreto, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: The issues in this case concern respondent’s
determinations that petitioners are liable for additions to tax
under sections 6653(a)(1) and (2), and 66591 on the deficiencies
in tax resulting from the disallowance of a partnership loss and
related tax credits claimed on petitioners’ 1982 joint Federal
income tax return and carried back to petitioners’ joint Federal
income tax returns for 1979 through 1981. These tax benefits
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
- 3 -
were claimed as a result of the unfortunate decision to
participate in a purported tax shelter in late 1982 to offset
dividend income petitioners received from a family-owned
corporation.
Respondent determined the following additions to tax for
petitioners’ 1979, 1980, 1981, and 1982 tax years:
Year Sec. 6659 Sec. 6653(a)(1) Sec. 6653(a)(2)
1
1979 $2,895.60 $482.60
1
1980 6,239.40 1,039.90
2
1981 2,724.60 454.10
2
1982 14,412.90 2,404.75
1
Respondent conceded the additional 50 percent interest.
2
50 percent additional interest
The partnership in question is subject to the provisions of the
Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA), Pub. L.
97-248, 96 Stat. 324, and the treatment of partnership items was
determined at the partnership level. The underlying deficiencies
in income tax have been previously determined based upon the
TEFRA partnership case Madison Recycling Associates v.
Commissioner, T.C. Memo. 2001-85, affd. 295 F.3d 280 (2d Cir.
2002).
The parties agree that any request for relief from joint and
several liability under section 6015 by petitioner wife should
- 4 -
not be determined in this case but should be determined
separately.
FINDINGS OF FACT
Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and the attached exhibits
are incorporated herein. Petitioners resided in Lexington,
Kentucky, at the time they filed the petition in this case.
Petitioner husband received a bachelor of science degree in
chemical engineering from the University of Kentucky in 1967.
Petitioner wife graduated from Louisiana State University with a
bachelor of arts degree in music in 1969. She also received a
master’s degree in music education from Marshall University in
1973. Petitioners were married in 1967.
Petitioner husband, referred to hereinafter as Mr. Greer,
was employed in 1967 as a chemical engineer for Exxon Chemical
Co. From 1969 until July 1993, Mr. Greer was employed by Ashland
Oil Co., Inc., and its subsidiaries (AOI). From 1975 to 1980,
Mr. Greer was a key assistant to the executive vice president of
AOI. During that period, Mr. Greer participated in AOI’s
executive development program. He also attended a petroleum
economics program at Northwestern University and took an
accounting course for nonfinancial managers at Ohio State
University. In 1982, Mr. Greer was an executive in the part of
AOI’s business characterized as Ashland Development. In that
- 5 -
year, petitioner wife was the sole proprietor of a photography
business.
A. G&L Sale and Madison Purchase
Mr. Greer was the president and chief executive officer of
G&L Communications, Inc. (G&L), a family-owned cable television
business which operated in Kentucky. G&L was incorporated in
December 1979, and the assets of G&L were sold to a third party in
November 1982. G&L was an S corporation. Petitioners were
shareholders of G&L at the time the assets were sold and received
dividends of approximately $250,000 on the sale. Prior to their
dividends from G&L, petitioners had not held cash assets this
large. This profit led Mr. Greer to seek advice from Hamilton
Gregg & Co. (HG), an investment broker and securities dealer with
a seat on the New York Stock Exchange. Mr. Greer had been
introduced to HG through a program at a Holiday Inn in Southport,
Ohio, in 1979. Other AOI executives also attended this program.
Mr. Greer’s primary contact at HG was Ed Gallagher, and Mr.
Greer met with Mr. Gallagher in late November 1982. Mr. Gallagher
explained the tax consequences of the dividends and suggested
purchasing municipal bonds or a limited partnership interest to
reduce petitioners’ tax liability for 1982. Shortly thereafter,
Mr. Gallagher delivered a copy of the Offering Memorandum of
Madison Recycling Associates (the offering memorandum) to Mr.
Greer. This offering memorandum and the attachments were the only
- 6 -
documents Mr. Greer reviewed prior to purchasing an interest in
Madison Recycling Associates (Madison). On December 16, 1982, Mr.
Greer executed a check payable to Madison in the amount of
$50,000. This check purchased a 5.5-percent limited partnership
unit in Madison.
The offering memorandum sets forth warnings to potential
purchasers, including Mr. Greer, of risks involved, informing
these purchasers that “There is a substantial likelihood that the
Service will audit the federal income tax returns filed by the
partnership and each limited partner.” Other warnings provided:
(a) This offering involves a high degree of risk. See
certain business risks and tax risks and consequences;
(b) an investment in the partnership involves a high
degree of risk and should only be considered by those
who could afford to lose their cash investment and
anticipated tax benefits;
(c) the draft legal opinion attached to the private
offering memorandum was prepared for the general
partner’s use only and should not be relied upon by
potential investors;
(d) prospective purchasers should not consider the
contents of the offering memorandum or any other
communications from the partnership or general partner
as legal, tax, accounting, or other expert advice;
- 7 -
(e) no representations, warranties, or assurances are
made or should be inferred concerning the economic
return or tax advantages which may accrue to the limited
partners;
(f) prospective purchasers, before investing, should
consult with their own professional advisors as to
legal, tax, business, accounting, and other matters
relating to an investment in the partnership;
(g) investment in Madison should be considered only by
persons having substantial net worth and substantial
present and anticipated income; and
(h) prospective purchasers will be afforded an
opportunity to obtain all additional information they
may reasonably request relating to the offering, Mr.
Roberts, or any documents attached to the offering
memorandum.
In addition, the offering memorandum warns that Madison is a tax
shelter by stating to potential purchasers, including Mr. Greer,
that “On audit, the purchase price of the Sentinel EPS Recyclers
to be paid by F & G to ECI may be challenged by the Service as
being in excess of the fair market value thereof, a practice
followed by it in transactions it deems to be ‘tax shelters’.”
The offering memorandum advises that Madison “is a newly-formed
- 8 -
entity with no operating history and is subject to all the risks
inherent in starting a new business.”
The offering memorandum further advises that
management of [Madison’s] business will be dependent
upon the services of [Mr. Roberts] who has had limited
experience in marketing recycling or similar equipment
and who is required by the Partnership Agreement to
devote only such time to the affairs of [Madison] as he,
in his absolute discretion, deems necessary
and that Mr. Roberts had other business commitments that would
require a substantial portion of his time and efforts. The
Madison limited partners, including Mr. Greer, had no control over
the conduct of Madison’s business. The offering memorandum
explains that a Sentinel EPS Recycler has “no history of
commercial use, there is no established market for its sale, lease
or license, and there can be no assurance that PI (Packing
Industries Group, Inc.) will meet its obligations under the
aforementioned warranties.” The offering memorandum also points
out risks that the recycled resin pellets may not be marketable
and that the price would fluctuate.
The offering memorandum also states that Mr. Roberts, the
general partner of Madison, may have a potential conflict of
interest with the limited partners of Madison because Mr. Roberts
is not prohibited from engaging in activities that compete with
Madison and that he is a general partner in other partnerships
- 9 -
buying, leasing, and licensing the same Sentinel EPS Recyclers
and/or other recycling equipment. With respect to this potential
conflict of interest, the offering memorandum provides:
The existence of such other limited partnerships may
create conflicts and result in actions taken by, or
omitted to be taken by, (Mr. Roberts) which may be
adverse to the interest of the Limited Partners.
Furthermore, PI, ECI, F&G, RRI, some of the shareholders
of F&G, ECI, and RRI, are, and may again become, engaged
in the business of buying, selling, leasing, licensing
the use of and/or operating recycling equipment,
including other Sentinel EPS Recyclers and other
recycling equipment similar in design and function, or
rendering consulting services with respect thereto.
Before he invested in Madison, Mr. Greer expected that
Madison was going to provide a tax savings of approximately $1.75
for each dollar invested. The offering memorandum sets forth the
1982 tax benefits/savings of an investment in Madison as follows:
Projected Regular Projected Tax Payment
Investment Energy Tax Credits Deductions
$50,000 $77,000 $38,610
Included as part of the offering memorandum package was the
legal opinion, an undated “form of opinion” letter (form of
opinion), which was based on facts supplied by Madison’s general
partner. The form of opinion stated: “This letter is intended
for your [the general partner’s] own individual guidance and for
the purpose of assisting prospective purchasers and their tax
advisors in making their own analysis, and no prospective
- 10 -
purchaser is entitled to rely upon this letter.” In the
discussion of the tax savings and consequences relating to an
investment in Madison, the offering memorandum further provides:
Prospective purchasers are expected to consult with
their own professional tax advisers regarding such tax
risks and the contents of the proposed form of opinion
of counsel included as Appendix E hereto (the “Opinion
of Counsel”). Since the Opinion of Counsel will be
provided to the General Partner for his individual
guidance, prospective purchasers are not permitted to
rely upon the advice contained therein.
PROSPECTIVE PURCHASERS MUST RELY UPON THEIR OWN
PROFESSIONAL ADVISERS WITH RESPECT TO THE TAX BENEFITS
AND TAX RISKS RELATING TO AN INVESTMENT IN THE
PARTNERSHIP. [Capitalized in the original.]
The offering memorandum also provides:
The [partnership] Units are being offered through * * *
[HGSC] as Placement Agent on a best efforts basis. * * *
[HGSC] will be paid a selling commission equal to 10% of
the per Unit offering price for each Unit sold. This
selling commission may also be paid to other qualified
broker-dealers as selling agents for each Unit sold by
them.
The Madison partnership agreement designated Mr. Roberts, the
general partner, as the tax matters partner for the partnership
and granted Mr. Roberts a power of attorney authorizing him to
conduct all activities necessary to carry out the provisions of
the partnership agreement.
In addition to reading the offering memorandum, Mr. Greer
discussed the Madison partnership with some of his coworkers at
AOI who also participated in Madison.
- 11 -
Mr. Greer showed the offering memorandum to his tax return
preparer and tax adviser to confirm the tax computations Madison
represented would result from his investment prior to purchasing a
limited partnership unit. The tax adviser and return preparer Mr.
Greer contacted was John Artis, a certified public accountant with
the accounting firm of Smith, Goolsby, Artis, & Reams in Ashland,
Kentucky (the accounting firm). The accounting firm had prepared
petitioners’ income tax returns for approximately 10 years before
1982. Mr. Artis did not read the entire offering memorandum, but
based upon his conversations with Mr. Greer, he understood that
the tax benefits associated with the Madison interest exceeded the
dollars invested. Because of this understanding, Mr. Artis told
Mr. Greer that Madison was “fairly aggressive” from a tax
standpoint. Mr. Artis was not asked by Mr. Greer to provide a
written tax opinion about the merits of the tax treatment
represented in the Madison offering memorandum; rather, Mr. Greer
asked him to confirm the amount of the tax benefits petitioners
would claim on their tax return for 1982, if Mr. Greer purchased
the limited partnership interest. Mr. Artis told Mr. Greer the
result on the 1982 return he computed would be in accord with the
benefits Mr. Greer expected.
Petitioners’ capital contribution was limited to their
$50,000 investment in Madison because Mr. Greer purchased a 5.5-
percent limited partnership unit in Madison that was not subject
- 12 -
to further assessment, and as a limited partner, Mr. Greer was not
personally liable for the debts, obligations, or losses in Madison
in excess of his $50,000 capital contribution.
B. The Underlying Madison Transaction
The Madison promotion involved the following simultaneous
transactions:
(1) On or about December 31, 1982, PI sold four Sentinel EPS
Recyclers to Ethynol Cogeneration, Inc. (ECI), for $1,520,000 each
or a total of $6,080,000.
(2) The consideration of $6,080,000 provided by ECI
consisted of cash in the amount of $481,000 and a 12-year
nonrecourse note in the amount of $5,599,000, which was secured by
a first lien on the four recyclers.
(3) ECI sold the four recyclers to F&G Equipment Corp. (F&G)
for $7 million or $1.75 million each.
(4) The consideration provided by F&G consisted of cash in
the amount of $553,000 and a 12-year note in the amount of
$6,447,000, of which 80 percent was nonrecourse. The nonrecourse
portion of the note was senior to the recourse portion. The note
was secured by a second lien on the four recyclers.
(5) F&G agreed to lease the four recyclers to Madison. The
lease agreement terminated in 9-1/2 years and required an annual
lease payment of $960,000, or $80,000 per month.
- 13 -
(6) Madison simultaneously entered into a joint venture
agreement with PI and Resin Recyclers, Inc. (RRI), to “exploit”
the recyclers and place them with end-users.
(7) Under the joint venture agreement, Madison received a
fixed monthly “joint venture fee” of $80,000, which is equal to
the monthly lease payment made to F&G. The joint venture fee was
to commence 9 months after the joint venture agreement closed.
(8) After the transactions were completed, the four
recyclers were owned by F&G.
C. Madison Subscription Agreement
Mr. Greer signed a completed, notarized Madison Subscription
Agreement and Purchaser Suitability Representations (Madison
subscription agreement), required for purchasing a limited
partnership interest in Madison during 1982. At the time Mr.
Greer executed the Madison subscription agreement, he did not meet
the net worth suitability (net worth exceeds $1 million) for
purchasing an interest in Madison. Mr. Greer submitted his
subscription agreement to purchase an interest in Madison using
another option, in which he acknowledged that he did not meet
either the net worth or annual net income suitability test to
purchase an interest in Madison but represented and warranted that
he had sufficient business knowledge and financial knowledge, and
- 14 -
was capable of evaluating the risks and merits of investing in
Madison.
D. TEFRA Case
Mr. Greer was notified by the District Director of the
Internal Revenue Service (IRS) in New York City that an
examination of Madison’s partnership income tax return for 1982
had commenced by a letter sent on January 23, 1985. On December
24, 1987, the same District Director issued a Notice of Final
Partnership Administrative Adjustment for 1982 (FPAA) to Richard
Roberts, the Madison tax matters partner. Petitioners were sent a
copy of the FPAA on February 16, 1988. Following the issuance of
the FPAA, as the result of a petition filed on May 17, 1988,
petitioners became parties with other Madison partners in a
docketed case in this Court (docket No. 10601-88) under the TEFRA
provisions challenging the determinations made in the FPAA.
Over the next 13 years the following occurred: The denial of the
partners’ motion for summary judgment pursuant to Madison
Recycling Associates v. Commissioner, T.C. Memo. 1992-605, a
concession by the partners regarding the adjustments in the FPAA,
and an opinion, Madison Recycling Associates v. Commissioner, T.C.
Memo. 2001-85, finding that the FPAA was timely, which was
affirmed by Madison Recycling Associates v. Commissioner, 295 F.3d
280 (2d Cir. 2002). The result is that no dispute as to the
partnership adjustments in the FPAA for 1982 remains.
- 15 -
E. District Court Case
In December 1992, after this Court had denied the partners’
motion for summary judgment, petitioners had mailed in one package
to respondent’s IRS Service Center in Cincinnati, Ohio, Forms
1040X, Amended U.S. Individual Income Tax Return, for 1982 and the
carryback years 1979 through 1981. One set of Forms 1040X
reported additional tax and interest and included a check in the
amount of $189,769. A second set of Forms 1040X bore the legend
“PROTECTIVE CLAIM” and sought refunds of the entire amount paid in
the check. In August 1993, Mr. Greer filed a complaint in the
United States District Court for the Eastern District of Kentucky,
naming the United States as a defendant. Mr. Greer’s complaint
was designated civil case No. 93-CV-194-HRW in the District Court
and was assigned to District Court Judge Henry Wilhoit. Mr.
Greer’s complaint sought the refund of the $189,769, plus
interest, and alleged as one of the jurisdictional grounds section
6226. The United States in seeking to dismiss Mr. Greer’s
complaint asserted that no assessment of the $189,769 was
permitted under section 6225(a)(2).
On September 21, 1994, the District Court entered the
following order (the Order):
This matter is before the Court on defendant’s
motion to dismiss plaintiff’s complaint based on lack of
subject matter jurisdiction. Defendant’s motion to
dismiss, although subsequent in time to plaintiff’s
motion for partial summary judgment, logically precedes
a summary judgment motion on the merits.
- 16 -
Defendant claims in its motion that this Court is
without subject matter jurisdiction over plaintiff’s tax
refund action as dictated by applicable tax statutes.
Although the Court does not concede to the absence of
subject matter jurisdiction under 28 U.S.C. § 1346, it
feels it is appropriate to dismiss the action without
prejudice, subject to the plaintiff’s right to refile
pending the outcome of related tax court litigation, now
awaiting resolution in excess of six years.
IT IS THEREFORE ORDERED AND ADJUDGED:
(1) that defendant’s motion to dismiss is
SUSTAINED,
(2) that the plaintiff’s complaint is
DISMISSED without prejudice,
(3) that the defendant repay the plaintiff
the amount of tax deficiency paid by the plaintiff as a
prerequisite to the filing of this action, plus
interest,
(4) that plaintiff’s motion for summary
judgement is OVERRULED as MOOT.
(Emphasis in the original.)
The District Court subsequently overruled the plaintiff’s motion
to set aside the Order and defendant’s motion to alter or amend
the Order. Petitioners were repaid the $189,769, plus interest,
in early June 1995, after plaintiff’s counsel brought defendant’s
failure to repay to Judge Wilhoit’s attention.
F. The Present Case
After respondent issued notices of deficiency to petitioners
for 1979 through 1982, petitioners timely filed a petition in this
Court in December 2003, contesting the additions to tax and other
items since conceded by petitioners.
- 17 -
OPINION
Our task is to determine the applicability of additions to
tax. Petitioners have the burden of proof. Because a remittance
petitioners made in December 1992 was repaid by Order of the
District Court of the Eastern District of Kentucky, there is a
related issue concerning the amounts of the deficiencies in income
tax to which the addition to tax under section 6653(a)(2) would
apply, if we determine that additions to tax under section
6653(a)(1) and (2) should apply at all.
Section 6653(a)(1) imposes an addition to tax equal to 5
percent of the underpayment if any part of the underpayment of tax
is due to negligence or intentional disregard of rules or
regulations. An additional amount is added under section
6653(a)(2), equal to 50 percent of the interest payable with
respect to the portion of the underpayment attributable to
negligence.
Negligence is defined as the failure to exercise the due care
that a reasonable and ordinarily prudent person would exercise
under the circumstances. Marcello v. Commissioner, 380 F.2d 499,
506 (5th Cir. 1967), affg. in part and remanding in part 43 T.C.
168 (1964) and T.C. Memo. 1964-299. The reasonableness of a
particular taxpayer’s actions is viewed in light of the taxpayer’s
experience, the nature of the investment, and the taxpayer’s
actions regarding the transaction. Henry Schwartz Corp. v.
- 18 -
Commissioner, 60 T.C. 728, 740 (1973). The taxpayer’s reliance
upon a qualified adviser is also a factor, and the specific
expertise of the adviser is considered. Patin v. Commissioner, 88
T.C. 1086, 1130-1131 (1987), affd. sub nom. Hatheway v.
Commissioner, 856 F.2d 186 (4th Cir. 1988), affd. sub nom. Skeen
v. Commissioner, 864 F.2d 93 (9th Cir. 1989), affd. without
published opinion 865 F.2d 1264 (5th Cir. 1989), affd. sub nom.
Gomberg v. Commissioner, 868 F.2d. 865 (6th Cir. 1989).
Mr. Greer had no prior experience in the recycling business.
He relied upon the purported value of the Sentinal EPS Recyclers
set forth in the offering memorandum. He made no attempt to
verify the value of the recyclers. Given the nature of the tax
benefits claimed, this omission supports respondent’s assertion of
negligence. Rybak v. Commissioner, 91 T.C. 524, 565 (1988). Mr.
Greer contacted his longstanding tax accountant, and the
accountant warned Mr. Greer that the transaction was fairly
aggressive. Rather than seek a written opinion from his
accountant on the validity of the tax benefits, Mr. Greer relied
upon HG, the investment brokerage firm that brought him the
transaction. Obviously, the brokerage firm received a commission.
In addition, the individuals at HG who sold the Madison
transaction to Mr. Greer did not have specialized tax expertise.
Mr. Greer asserts that HG came recommended by his employer.
Regardless, Mr. Greer’s business experience prior to 1982 was such
- 19 -
that he should have understood HG’s motivation in suggesting the
transaction to him. In addition, the offering memorandum made
clear the commissions that would be paid to HG, thus indicating
their interest in selling the Madison transaction. Mr. Greer was
also astute enough to know the difference between a sales broker
and a tax expert.
Petitioners also argue that they should be relieved of the
additions to tax because respondent failed to advise them that Mr.
Roberts was under investigation in late 1982 and 1983.
Petitioners admit this is a novel argument. We find no support
for this legal position, and we note that Mr. Greer read a news
article in August 1983 which explained that Mr. Roberts had agreed
to a settlement with the Department of Justice “in federal court”
which imposed upon him reporting requirements that restricted his
actions in selling recycling tax promotions. Mr. Greer took no
remedial actions after learning of the questionable nature of Mr.
Roberts’s tax shelter strategy; rather he purportedly relied upon
vague assurances from HG personnel.
The record establishes that Mr. Greer aggressively sought to
reduce the 1982 tax liability through Madison and consulted with
his tax return preparer about the transaction to verify the tax
benefits, not to obtain an independent opinion on the merits of
the tax scheme. Given that the expected tax refunds were 175
percent of the dollars invested, Mr. Greer’s rush to invest in
- 20 -
Madison was certainly not prudent, and his failure to obtain
expert tax advice regarding the merits of the tax scheme was
negligent. Accordingly, the additions to tax under section 6653
are sustained. See Barlow v. Commissioner, 301 F.3d 714, 724 (6th
Cir. 2002), affg. T.C. Memo. 2000-339.
Anticipating the potential application of section 6653(a)(2),
petitioners assert that respondent has incorrectly computed the
underpayment of tax which is attributable to negligence and
subject to the addition to tax, based upon 50 percent of the
interest payable under section 6601. Petitioners argue to reduce
the deficiencies in 1981 and 1982 computed under section
6211(a)(1), despite respondent’s repayment of the $189,769 with
interest.
Petitioners rely upon the definition of deficiency in section
6211 and argue they made a payment which should be characterized
as an amount collected without assessment as a deficiency under
section 6211(a)(1)(B). They further argue this amount should not
be reduced by the subsequent repayment because that repayment was
not a rebate under section 6211(a)(2).
There is a body of law holding that the deficiency procedures
may not be used to correct amounts collected and then erroneously
refunded because such erroneous payments are not rebates. See,
e.g., O’Bryant v. United States, 49 F.3d 340 (7th Cir. 1995). In
addition, amounts characterized as payments of tax are not
- 21 -
generally treated as deposits. Blatt v. United States, 34 F.3d
252 (4th Cir. 1994).
Petitioners focus on how the payment was treated
administratively by respondent and how it was initially
represented by petitioners, but petitioners fail to overcome a
fundamental point. Section 6225(a) provides that once a
proceeding in the Tax Court under section 6226 has commenced, no
assessment of a deficiency attributable to any partnership item
may be made before the proceeding in the Tax Court has become
final. Section 6226(e)(1) specifically requires that a partner
may file a readjustment petition in the District Court under
section 6226 only if that partner “deposits” the TEFRA
partnership-related tax liability. As previously stated, Mr.
Greer asserted section 6226 as one of the jurisdictional grounds
for his petition in the Federal District Court for the Eastern
District of Kentucky. As a result, we find petitioners’ argument
that the remittance in question is an amount collected to be
inconsistent with petitioners’ efforts to obtain section 6226(e)
jurisdiction in District Court, regardless of how respondent may
have initially characterized the payment.
It is clear from the record in the District Court that Mr.
Greer’s counsel sought the repayment. If this repayment was not
the return of a deposit, then it was nevertheless not an erroneous
refund as that term is described in cases such as O’Bryant v.
- 22 -
United States, supra. The District Court ordered the repayment,
and petitioners had not waived the restrictions on assessment
which arose when the partnership action was filed in the Tax
Court. The District Court specifically noted in the Order that
the amount petitioners had paid was a prerequisite to filing the
action in District Court. The District Court also ordered the
repayment to include interest, thus putting petitioners in the
position they were in before filing the amended returns and
protective claims, which meant the petitioners remained liable for
the entire potential deficiencies and penalties that could result
from the Tax Court partnership case and this current matter.
Respondent’s representative in the District Court action
asserted the remittance made by petitioners could not be assessed
at that time, and we agree. We do not find the remittance was an
unassessed amount collected as a deficiency.
In conclusion, we hold that respondent has correctly computed
the amount of the underpayment of tax related to the section
6653(a)(2) addition to tax.
The remaining issue is the addition to tax under section 6659
for a valuation overstatement of at least 150 percent of the
amount determined to be correct on any return. Section 6659 has
since been repealed but was applicable at the time the partnership
return was filed. The addition to tax has previously been held to
be applicable to carryback years before its enactment. See
- 23 -
Nielsen v. Commissioner, 87 T.C. 779 (1986). Therefore, if the
addition to tax is appropriate, it would apply to all the years
before us. Here, respondent asserts an overstatement exceeding
250 percent of the value of the four Sentinel EPS Recyclers on the
partnership return. Petitioners do not contest the value was
overstated as respondent asserts, but petitioners maintain that
the adjustment in question was not specifically tied to the value
of the recyclers. Nevertheless, the FPAA notes the disallowance
of $7 million in investment tax credit property and $7 million in
business energy investment credit property. Ultimately, these
adjustments were sustained. Petitioners understandably make no
attempt to offer a reasonable basis for the value claimed on the
partnership return under section 6659(e). Given these
circumstances, we reject petitioners’ argument and sustain the
addition to tax under section 6659 as determined by respondent.
To reflect the foregoing and concessions by the parties,
Decision will be entered
under Rule 155.