T.C. Memo. 2010-163
UNITED STATES TAX COURT
WAYNE A. DROWN, JR. & CAROLYN EVONNE DROWN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27762-08. Filed July 27, 2010.
Wayne A. Drown, Jr. and Carolyn Evonne Drown, pro sese.
David M. McCallum, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined penalties of $3,558.60,
$816.80, $1,492.60, and $2,133.20 under section 6662(a) for 1990,
1991, 1992, and 1993, respectively, in four separate statutory
notices. The statutory notices were sent after finality of a
partnership proceeding involving a Hoyt Farms cattle partnership
in which petitioners invested in 1993. The issues for decision
- 2 -
are whether petitioners are liable for the penalties and whether
assessment is barred by the statute of limitations or otherwise.
All section references are to the Internal Revenue Code in effect
for the years in issue.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioners resided in South Carolina when they filed the
petition.
In 1993, petitioners invested in a Hoyt Farms cattle
partnership known as Shorthorn Genetic Engineering 1985-2, J.V.
On their 1993 Federal income tax return, they reported wages,
interest, dividends, and pension income totaling $73,825 and
claimed a partnership loss of $274,050. As a result they
reported zero tax liability and claimed a refund of $8,644 of
Federal income tax withheld. They claimed net operating loss
(NOL) carrybacks and applied for and received refunds for 1990,
1991, and 1992.
On August 8, 1997, the Internal Revenue Service (IRS) sent
petitioners a Form 3552 (Part 3), Notice of Tax Due on Federal
Tax Return, for each of the years 1990 through 1993. On August
29, 1997, Wayne A. Drown (petitioner) acknowledged receipt of the
Forms 3552 and requested an explanation of the disallowed
- 3 -
deductions. On October 20, 1997, the IRS responded to
petitioner’s letter as follows:
Thank you for your letter dated August 29, 1997
regarding the Forms 3552 you recently received for the
years shown above. These assessments were made
pursuant to IRC section 6213(b)(3), which are summary
assessments made to reverse IRC section 6411 tentative
carryback refunds that were previously allowed. These
summary assessments can be made without any previous
notice of deficiency.
It was later determined that these assessments
were not necessary at this time, because the carryback
refunds are the result of 1993 TEFRA Partnership losses
that are currently under examination. The Statute of
Limitations on these carrybacks are protected by the
TEFRA examination of the 1993 year, and they will be
addressed when this examination is completed.
Therefore, these assessments were reversed at this time
pending the outcome of the 1993 TEFRA examination.
We apologize for any inconvenience this may have
caused. If you have any further questions concerning
this matter, please call me at the number shown above,
or you may write to the address shown on this letter.
Shorthorn Genetic Engg. 1985-2, J.V. v. Commissioner, docket
No. 7280-96, was one of the over 700 cattle investor partnership
cases before the Tax Court bearing the Hoyt Farms designation.
The partnership’s tax matters partner, Mark Lowe, signed a
stipulated decision that had the effect of “zeroing” every
partnership item reported on the partnership’s return for the
year ended September 30, 1993, and eliminating flowthrough items,
such as NOLs, to individual partners. The stipulated decision
was entered by the Court on May 18, 2007, and is consistent with
the Court’s findings in Durham Farms #1, J.V. v. Commissioner,
- 4 -
T.C. Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003), in
which the Court concluded that the cattle investor partnership
did not acquire the benefits and burdens of ownership with
respect to the breeding of cattle that it had purportedly
acquired and that it was not entitled to any of the deductions at
issue and did not realize the additional income respondent
asserted.
On August 14, 2007, notices of deficiency determining
penalties under section 6662(a) for 1994, 1995, and 1996 were
sent to petitioners. Petitioners did not file a timely petition
in response to those notices. They attempted to challenge them
in the petition filed in this case on November 14, 2008.
Respondent moved to dismiss and to strike as to those years for
lack of jurisdiction. That motion was granted on March 19, 2009.
On August 12, 2008, the IRS assessed the taxes and interest
resulting from the decision in Shorthorn Genetic Engg. 1985-2,
J.V. v. Commissioner, docket No. 7280-96. The underpayments
assessed were $17,793, $4,084, $7,463, and $10,666 for 1990,
1991, 1992, and 1993, respectively. Petitioners paid the taxes
and interest in full in 2008.
The notices of deficiency for the section 6662(a) penalties
for 1990 through 1993 were sent to petitioners on August 13,
2008.
- 5 -
OPINION
This case presents another unfortunate example of the
consequences of taxpayers’ investments in a Hoyt Farms cattle
partnership. That partnership promised immediate and substantial
tax benefits but ultimately resulted in large liabilities,
litigation, explicable delays, and procedural confusion. See
Keller v. Commissioner, 568 F.3d 710, 714 (9th Cir. 2009), affg.
T.C. Memo. 2006-166 (and affg. and vacating on another ground
decisions in related cases).
The notices of deficiency in this case only determined
penalties under section 6662(a). Section 6662(a) and (b)(1) and
(2) imposes a 20-percent accuracy-related penalty on any
underpayment of Federal income tax attributable to a taxpayer’s
negligence or disregard of rules or regulations, or substantial
understatement of income tax. Section 6662(c) defines negligence
as including any failure to make a reasonable attempt to comply
with the provisions of the Internal Revenue Code and defines
disregard as any careless, reckless, or intentional disregard.
Disregard of rules or regulations is careless if the taxpayer
does not exercise reasonable diligence to determine the
correctness of a return position that is contrary to the rule or
regulation. Sec. 1.6662-3(b)(2), Income Tax Regs. Disregard of
rules or regulations is reckless if the taxpayer makes little or
no effort to determine whether a rule or regulation exists. Id.
- 6 -
Section 6662(d)(1)(A) defines a substantial understatement as one
that exceeds the greater of 10 percent of the tax required to be
shown on a return or $5,000.
The underpayments assessed for 1990, 1992, and 1993 were
consistent with the decision in the partnership case, were
consistent with the entries on petitioners’ returns shown in a
transcript of their account, and were substantial within the
meaning of section 6662(d).
Respondent asserts negligence as the ground for the penalty
for 1991. Respondent relies on similar cases in which the
negligence penalty was sustained against Hoyt Farms investors,
citing Keller v. Commissioner, T.C. Memo. 2006-131, affd. in part
and revd. in part 556 F.3d 1056 (9th Cir. 2009). See Hansen v.
Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. T.C. Memo.
2004-269; Mortensen v. Commissioner, 440 F.3d 375, 387-393 (6th
Cir. 2006), affg. T.C. Memo. 2004-279; Van Scoten v.
Commissioner, 439 F.3d 1243, 1256-1260 (10th Cir. 2006), affg.
T.C. Memo. 2004-275. The parties stipulated that the decision in
Shorthorn Genetic Engg. 1985-2, J.V. v. Commissioner, docket No.
7280-96, is consistent with the Court’s findings in Durham Farms
#1, J.V. v. Commissioner, supra.
Petitioner asserted at trial that, based on his “research”,
he believed in 1993 that the Hoyt partnership deductions were
legitimate. He stated that his view was reinforced when the IRS
- 7 -
sent refunds based on his claimed NOL carrybacks to the 3 earlier
years. Petitioner did not explain the research that he
conducted. He admitted during his testimony that he did not
consult with any tax professionals about the correctness of his
view. He has not shown reasonable cause as an exception to the
substantial understatement penalty under section 6664(c)(1) or
any ground for distinguishing this case from those that have
sustained the penalty for negligence with respect to the Hoyt
Farms partnerships. See Keller v. Commissioner, 556 F.3d at
1061-1062 n.8. The section 6662(a) penalty is appropriate for
each year.
Petitioners argue that assessment and collection of the
amounts here in dispute are barred by the statute of limitations.
They rely on section 6502(a), which as relevant here limits
collection of assessed taxes by levy or by a court proceeding
brought within 10 years after the assessment. The amounts in
dispute here, however, have not been assessed and will not be
assessed until after our decision in this case becomes final.
See sec. 6213(a).
Because the related partnership tax years occurred before
August 5, 1997, the accuracy-related penalties are properly
contested before the Court at the partner level as “affected
items”. See secs. 6221, 6230(a)(2)(A)(i); see also Fears v.
Commissioner, 129 T.C. 8, 10 n.3 (2007) (with respect to
- 8 -
determining such penalties at the partnership level for
partnership tax years ending after August 5, 1997). For tax
attributable to partnership items and affected items, section
6229(a) extends the general 3-year period of limitations. Sec.
6501(n). Section 6229(a) provides, as follows:
SEC. 6229(a). General Rule.--Except as otherwise
provided in this section, the period for assessing any
tax imposed by subtitle A with respect to any person
which is attributable to any partnership item (or
affected item) for a partnership taxable year shall not
expire before the date which is 3 years after the later
of--
(1) the date on which the partnership return
for such taxable year was filed, or
(2) the last day for filing such return for
such year (determined without regard to
extensions).
Furthermore, if a notice of a final partnership administrative
adjustment (FPAA) is mailed to the tax matters partner, the
running of the period specified in section 6229(a) is suspended
for the period during which a court action may be brought under
section 6226 (and if a petition is filed as a result of the FPAA,
until the decision of the court becomes final) and for 1 year
thereafter. Sec. 6229(d).
In this context, the running of the section 6229(a) 3-year
period of limitations is temporarily interrupted during the FPAA
proceeding until a decision entered in that proceeding becomes
final plus 1 year, and then the remaining unexpired part of the
3-year limitations period is tacked on. See Aufleger v.
- 9 -
Commissioner, 99 T.C. 109, 113 (1992). The stipulated decision
in the partnership case was entered on May 18, 2007, and became
final 90 days later, on August 16, 2007. See sec. 7481(a)(1).
Thus the statutory notices sent August 13, 2008, were timely.
The petition filed in this case further extended the time for
assessment until the decision becomes final and for 60 days
thereafter. See sec. 6503(a)(1). Petitioners’ statute of
limitations arguments are therefore erroneous.
Petitioners also seek to invoke estoppel against the IRS and
assert an agreement that no additional amounts were owing as of
the 1997 correspondence and when, in 2007, they were provided
with the total of amounts previously assessed and accrued
interest for 1994, 1995, and 1996. The later years are not
before the Court because they were previously dismissed for lack
of jurisdiction. In any event, none of the correspondence
advising petitioners of the amounts owed at prior times dealt
with the heretofore unassessed penalties at issue in this case.
Petitioners have not shown that the IRS provided them with
any false or misleading information that would justify estoppel.
The reason for the abatement of the prematurely assessed amounts
was explained to them at the time it occurred in 1997. There was
no agreement, expressed or implied, that the taxes and interest
would not be assessed or that penalties would not be determined
- 10 -
at a later date when they were no longer precluded by the pending
partnership proceedings.
To reflect the foregoing,
Decision will be entered
for respondent.