Chimblo v. C.I.R.

• Decision Date: 17 May 1999
• Docket Number: Docket Nos. 98-4306,98-4307
• Citation: 177 F.3d 119
• Parties: -2610, 99-1 USTC P 50,540 Josephine CHIMBLO, Estate of Anthony J. Chimblo, Deceased, Rosalie Monahan, Executrix, and Catherine Chimblo, Estate of Gus Chimblo, Deceased, Catherine Chimblo, Executrix, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

Page 119

177 F.3d 119

83 A.F.T.R.2d 99-2610, 99-1 USTC P 50,540

Josephine CHIMBLO, Estate of Anthony J. Chimblo, Deceased,

Rosalie Monahan, Executrix, and Catherine Chimblo,

Estate of Gus Chimblo, Deceased,

Catherine Chimblo, Executrix, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Docket Nos. 98-4306, 98-4307.

United States Court of Appeals, Second Circuit.

Argued March 15, 1999.

Decided May 17, 1999.

Tobias Weiss, Stamford, CT, for Petitioners-Appellants.

John A. Nolet, Tax Division, Department of Justice, Washington, DC (Loretta C. Argrett, Assistant Attorney General, William S. Estabrook, Attorney, Tax Division, Charles S. Casazza, Appellate Deputy, United States Tax Court, Stuart L. Brown, Office of Chief Counsel, Internal Revenue Service, of counsel), for Respondent-Appellee.

Before: WALKER and CABRANES, Circuit Judges, and TSOUCALAS, Judge. ^*

JOHN M. WALKER, Jr., Circuit Judge:

Petitioners appeal from the decisions of the United States Tax Court (Dinan, J.), rejecting their contention that they were not properly notified of earlier partnership proceedings which led to the determination of petitioners' tax deficiencies, and finding petitioners liable for additions to tax stemming from petitioners' negligence in substantially underpaying their taxes. We affirm.

I. BACKGROUND

A. Statutory Framework

Before reciting the facts relevant to this dispute, it is useful to outline briefly the statutory context in which the case arises. In 1982, as part of the Tax Equity and Under TEFRA, the Commissioner must notify partners of the beginning and end of partnership-level administrative proceedings. See IRC § 6223. Upon issuance of a notice of final partnership administrative adjustment ("FPAA"), the "tax matters" partner--a person or entity designated as such by the partnership under applicable regulations or, most commonly, the general partner with the largest profit stake in the partnership, see IRC § 6231(a)(7)--may, within 90 days, contest the FPAA by filing a petition for readjustment of "partnership items" in Tax Court, the Court of Federal Claims, or the appropriate federal district court. IRC § 6226(a). A "partnership item" is "any item required to be taken into account for the partnership's taxable year ... [that] is more appropriately determined at the partnership level than at the partner level." IRC § 6231(a)(3). If no such petition is filed by the tax matters partner within the 90-day period, any notice partner or five-percent group may file a petition within the next 60 days. See IRC § 6226(b)(1). Any partner "with an interest in the outcome of the proceeding [is] entitled to participate in an action brought by the tax matters partner or a notice partner, [IRC] §§ 6226(c), 6226(d), thereby meeting TEFRA's objective of ensuring that all partners may ... litigate a dispute with the IRS in a single proceeding." Randell, 64 F.3d at 104.

Fiscal Responsibility Act ("TEFRA"), see Pub.L. No. 97-248, § 402(a), 96 Stat. 324, Congress enacted the unified partnership audit examination and litigation provisions of the Internal Revenue Code ("IRC"), now found, as amended, at 26 U.S.C. §§ 6221-6234. These provisions centralized the treatment of partnership taxation issues, and "ensure[d] equal treatment of partners by uniformly adjusting partners' tax liabilities." Kaplan v. United States, 133 F.3d 469, 471 (7th Cir.1998) (citing Staff of the Joint Committee on Taxation, 97th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Tax Equity and Responsibility Act of 1982, at 268); see also Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221, 223 (2d Cir.1998); Randell v. United States, 64 F.3d 101, 103-04 (2d Cir.1995). Prior to TEFRA's enactment, multiple proceedings were required to address the tax treatment of partnership issues, because partnerships are not separately taxable entities and partnership income and expenses "pass through" to the individual partners. See IRC §§ 701, 6031.

Changes in the tax liabilities of individual partners which result from the correct treatment of partnership items determined at the partnership level proceeding are defined under TEFRA as "computational adjustments." IRC § 6231(a)(6). If no petition for readjustment is filed within 150 days after the mailing of the FPAAs by the Commissioner, tax deficiencies attributable to partnership items, as determined in the FPAAs, may be assessed as computational adjustments against the individual partners without further delay. If, however, a readjustment proceeding is commenced, the assessment of any tax deficiencies as computational adjustments must wait until the decisions of the court are final. See IRC § 6225.

TEFRA contemplates the Commissioner's determination at the individual partner level of "affected items," which are defined as "any item to the extent such item is affected by a partnership item." IRC § 6231(a)(5). Penalties assessed against a partner based on the partner's tax treatment of partnership items on his individual return are examples of affected items. See Olson v. United States, 172 F.3d 1311, at 1316 (Fed.Cir.1999); N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 744-46, 1987 WL 45298 (1987). A partner must be afforded notice of any tax deficiency pursuant to IRC § 6212, and he or she can contest the determination of affected items pursuant to IRC § 6213.

B. The Barrister Partnership Investment

In late 1983 and early 1984, Gus Chimblo and his wife Catherine invested $25,000 According to disclosure statements attached to its 1983 and 1984 tax returns, the Barrister Partnership's sole business was printing and selling "49 different literary works and microcomputer disks aimed at a general public market, using leased films, plates and disks to produce said products." On its 1983 and 1984 returns, the Barrister Partnership claimed ordinary losses in the amounts of $848,599 and $1,059,623, respectively, and qualified investment tax credit property in the amounts of $18,809,500 and $6,110,000, respectively.

in a partnership known as the Barrister Equipment Associates Series 151 ("Barrister" or "Barrister Partnership"). Gus's brother Anthony J. Chimblo and his wife Josephine also invested $25,000, although Josephine handled the transaction alone because of Anthony's failing health. The investments were made on the advice of John Santella, the Chimblos' family accountant and a financial advisor to the Chimblo brothers' construction business. Santella also prepared the Chimblos' individual federal income tax returns. Prior to meeting with Santella about the proposed investment, neither Josephine nor Catherine had heard of Barrister, and neither could recall reviewing any documentation describing the Barrister investment either before or after investing. ¹

The two Chimblo couples claimed their distributive shares of the pass-through losses and investment tax credits reported by the Barrister Partnership on their 1983 and 1984 income tax returns. Thus, both couples claimed ordinary loss deductions of $10,477 in 1983 and $13,083 in 1984, and investment tax credits of $18,578 in 1983 and $6,035 in 1984. More precisely, Gus and Catherine used only $7,817 of their 1983 investment tax credit on their tax return for 1983, but they filed amended tax returns for 1980 and 1982, carrying back the unused portions of the 1983 investment tax credit to offset their previously reported tax liability by $9,571 for 1980 and by $1,190 for 1982. Anthony and Josephine used none of their investment tax credit in 1983, but they filed amended returns for 1980 and 1981, carrying back their unused 1983 credit to offset tax liabilities previously reported for 1980 and 1981 in the respective amounts of $11,893 and $6,685.

C. Assessment of Tax Deficiencies

On September 5, 1989, the Commissioner mailed to the Barrister partners, including taxpayers, notices of FPAAs determining adjustments to Barrister's 1983 and 1984 partnership returns. After Barrister's tax matters partner instituted proceedings in the Tax Court on behalf of the partnership, the Tax Court entered a stipulated decision on February 17, 1995, determining that none of the losses claimed by Barrister for 1983 and 1984 was allowed and that the qualified investment tax credit property for those years was zero.

As a consequence of that decision, the Commissioner assessed against petitioners, as computational adjustments, the tax deficiencies attributable to the losses and investment tax credits claimed by petitioners as related to the Barrister Partnership. See IRC §§ 6225, 6230(a)(1), & 6231(a)(6). Because Catherine and Gus Chimblo had carried back portions of the tax credit claimed for 1983, tax deficiencies were assessed for 1980 and 1982, as well as for 1983 and 1984. The deficiencies assessed in these years were for $9,571 in 1980, $1,190 in 1981, $12,387 in 1983, and $12,577 in 1984. Because of carry-backs claimed by Josephine and Anthony Chimblo, tax deficiencies were assessed against them for 1980 and 1981 in the respective amounts of $11,893 and $6,685. The Commissioner also assessed statutory interest due on the underpayments of tax. The interest amounts were computed under On April 29, 1996, the Commissioner, pursuant to IRC § 6212, mailed separate notices of deficiency for taxable years 1980, 1982, 1983 and 1984 to taxpayers Gus Chimblo (deceased) and Catherine Chimblo. On May 3, 1996, the Commissioner also mailed separate notices of deficiency for taxable years 1980 and 1981 to Anthony J. Chimblo (deceased) and Josephine Chimblo. By the notices, which form the basis for the instant case, the Commissioner determined, with respect to the tax deficiencies arising out of the Barrister partnership-level proceedings, that taxpayers were liable for affected items, see IRC §§ 6230(a)(2)(A)(i), 6231(a)(5), required to be determined at the partner level. Specifically, the Commissioner asserted that pe...