290 F.3d 326 (5th Cir. 2002), 01-60068, Copeland v. C.I.R.

Docket Nº:01-60068, 01-60069.
Citation:290 F.3d 326
Party Name:Alvin C. COPELAND, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Patty K. Copeland, also known as Patty K. White, Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee.
Case Date:May 13, 2002
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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290 F.3d 326 (5th Cir. 2002)

Alvin C. COPELAND, Petitioner-Appellant,



Patty K. Copeland, also known as Patty K. White, Petitioner-Appellant,


Commissioner of Internal Revenue, Respondent-Appellee.

Nos. 01-60068, 01-60069.

United States Court of Appeals, Fifth Circuit

May 13, 2002

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J. Grant Coleman (argued), Len R. Brignac, King, LeBlanc & Bland, New Orleans, LA, for Alvin and Patty Copeland.

Kenneth W. Rosenberg (argued), U.S. Dept. of Justice, Tax Div., Eileen J. O'Connor, Asst. Atty. Gen., U.S. Dept. of Justice, Charles Casazza, Clerk, U.S. Tax Court, Richard W. Skillman, Internal Revenue Service, Washington, DC, for C.I.R.

Thomas E. Redding (argued), Sallie W. Gladney, Teresa Jean Womack, Redding & Associates, Houston, TX, for Cummings, Amicus Curiae.

Appeal from the Decision of the United States Tax Court.

Before JONES, WIENER, and PARKER, Circuit Judges.

WIENER, Circuit Judge:

Petitioners-Appellants Alvin C. Copeland and Patty K. Copeland, also known as Patty K. White (collectively, "Taxpayers") appeal the Tax Court's grant of partial summary judgment to the Commissioner of Internal Revenue ("Commissioner") and the Tax Court's denial of their motion for summary judgment. We conclude that the Tax Court properly denied the Taxpayers' deduction under 26 U.S.C. § 165 ("I.R.C. § 165") for their initial investments in the partnerships, and therefore affirm that ruling. The Tax Court erred, however, in sustaining the Commissioner's imposition of the increased interest rate under 26 U.S.C. § 6621(c) ("I.R.C. § 6621(c)"). Because no deduction was disallowed under 26 U.S.C. § 183 ("I.R.C. § 183"), and because the Commissioner proffered no alternative basis for imposing the I.R.C. § 6621(c) interest rate, the Commissioner may not impose that rate. Accordingly, we reverse the Tax Court's ruling on the I.R.C. § 6621(c) interest rate, and remand for imposition of a judgment consistent with these rulings.

I. Facts and Proceedings

The disputed tax items and interest charges derive from the following transactions: In 1979, Taxpayers invested $100,000 in Garfield Oil and Gas Associates ("Garfield"), a state-law partnership, and in 1981 they invested $75,000 in Capricorn Company ("Capricorn"), also a state-law partnership. Capricorn invested in another state-law partnership, Cardinal Oil Technology Partners ("Cardinal"), after which Garfield and Cardinal together invested in enhanced oil recovery technology projects. From 1979 to 1982, Garfield and Cardinal reported partnership tax items relating to the investments in the enhanced oil recovery technology projects, and allocated the tax items to the partners, including Taxpayers. Taxpayers filed joint tax returns for the tax years 1979 through 1982, which returns included deductions allocated to the Taxpayers from the Garfield and Capricorn partnerships.

In 1990, the Commissioner issued notices of deficiency to Taxpayers, based on the Commissioner's disallowance of the partnership deductions on Taxpayers' returns. The notice of deficiency also imposed interest at 120% of the usual rate on the Taxpayers' underpayment of tax attributable to the disallowed deductions, employing the Secretary's temporary regulations 1 issued pursuant to the then-applicable version of I.R.C. § 6621(c). Taxpayers petitioned the Tax Court for a redetermination of the deficiency that year, but, aside from two flurries of activity in which the parties entered their pleadings, stipulated issues,

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and made appearances in the Tax Court, there was no further action taken in the Tax Court until 1999.

In the interim, the Tax Court decided Krause v. Commissioner of Internal Revenue,2 a case involving various enhanced oil recovery technology partnerships which had engaged in activities and transactions substantially identical to those in which Garfield and Cardinal were involved.3] Following the Tax Court's decision in Krause, Taxpayers paid the principal amount of the tax deficiency, but were allegedly unable to afford to pay the interest that had accumulated by that time. When the Tax Court activities in this case resumed in 1999, the court issued an order requiring the parties to show cause "why a decision in this case should not be entered in accordance with the Court's disposition of the issues in {Krause ]." That issue was not actually addressed at the show-cause hearing, however. Instead, when the Tax Court learned that Taxpayers were willing to settle the case by paying the standard interest (not the I.R.C. § 6621(c) increased interest) on the deficiency in a lump-sum payment, the court adjourned the hearing with instructions to the Taxpayers to make the settlement offer within 12 days, and to the Commissioner to file a status report with the court regarding settlement discussions within 30 days. The Tax Court further instructed that (1) if the parties should fail to reach a settlement, they should file a stipulation of facts; (2) the Commissioner should file a motion for summary judgment within 60 days after the status report was due; and (3) Taxpayers should file a response to the Commissioner's motion within one month thereafter.

The parties did not reach a settlement agreement. In accordance with the Tax Court's instructions, they filed a stipulation of facts, which included an affirmation that the factual findings and legal conclusions made in Krause were incorporated by reference, "except for the conclusion that I.R.C. § 6621(c) applies and [except for] any implication that the [Krause] partnerships are partnerships for federal income tax purposes, notwithstanding that they lack profit objective within the meaning of I.R.C. § 183." In particular, the parties agreed that the Krause decision "control[led] the tax treatment of the Partnership Tax Items, as well as the additions to tax asserted in these cases."

The Commissioner then filed a motion for partial4 summary judgment, arguing that the increased rate of interest under I.R.C. § 6621(c) was properly applied to Taxpayers' underpayment of tax, and that Taxpayers were not entitled to deductions under I.R.C. § 165 for their initial cash investments in the Garfield and Cardinal partnerships. Taxpayers filed their own

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motion for partial summary judgment, directly opposing both of the Commissioner's contentions.

In a Memorandum Opinion,5 the Tax Court granted the Commissioner's motion and denied Taxpayers' counter-motion, sustaining the imposition of the I.R.C. § 6621(c) interest rate on Taxpayers' underpayment of tax, and disallowing the I.R.C. § 165 deduction for their initial cash investments in the partnerships. The court entered a Decision reflecting this ruling in October 2000, from which Taxpayers timely appealed.

II. Discussion

A. Standard of Review

"The Tax Court's determinations of law—for example, interpretations of statutory language—are reviewed de novo, while its factual findings are reviewed for clear error."6

B. Analysis

1. I.R.C. §165 Deduction for Initial Investment

As the Tax Court observed in its Memorandum Opinion, after the Krause case was decided, Taxpayers "concede[d] all of the originally claimed tax benefits relating to their investments in the partnerships, and . . . [sought] a loss deduction only for the amount of cash they invested in the partnerships." In support of this deduction, they framed their argument to the Tax Court as follows:

"Unless there is a finding of fact that [Taxpayers'] investment in the Partnerships lacked sufficient profit motive under IRC § 183, [Taxpayers] are entitled to their out-of-pocket investment under IRC § 165. [Taxpayers] have conceded that if the Partnerships were partnerships for federal income tax purposes, then [Taxpayers] are not entitled to out-of-pocket deductions, however, [Taxpayers] argue that the Partnerships are not partnerships for federal income tax purposes." [Emphasis added.]

Although Taxpayers have not made the above concession so clear in their appellate briefs and oral arguments to us, they have premised their argument in favor of the deduction solely on the assertion that "Garfield and Cardinal are not partnerships for federal income tax purposes." "If an enterprise, such as Garfield and Cardinal, is formed without any profit motive," their reasoning runs, "it cannot be a partnership for federal income tax purposes and the activities of the partnership cannot be imputed to the investors for purposes of determining the applicability of 26 U.S.C. § 183 to the investors. In such cases, a determination of profit motive must be made at the individual investor level." Although this argument is certainly creative, it is without merit.

Section 761(a) defines what a "partnership" is for federal income tax purposes:

(a) Partnership. For purposes of this subtitle, the term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate.7

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In keeping with this definition, the Tax Court observed that the Garfield and Cardinal limited partnerships

entered into transactions, formed joint ventures, operated gas wells, and engaged in various other activities. They carried on a financial operation or venture. They are to be treated as partnerships under section 761(a) even though the underlying activities of the partnerships lacked a profit objective under section 183. The Garfield and Cardinal limited partnerships each had the formal indicia of partnership status and conducted themselves generally as partnerships. They are to be...

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