Chef's Choice Produce, Ltd. v. Comm'r of Internal Revenue

• Decision Date: 03 October 1990
• Docket Number: Docket No. 5749-88.
• Parties: CHEF'S CHOICE PRODUCE, LTD., THOMAS W. BURKE, JR., A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

95 T.C. 388

95 T.C. No. 28

CHEF'S CHOICE PRODUCE, LTD., THOMAS W. BURKE, JR., A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5749-88.

United States Tax Court

Filed October 3, 1990.

HELD: Respondent notified the partnership's tax matters partner and notice partners of the beginning of an administrative proceeding for the years 1982 and 1983 on November 29, 1984. Thereafter, the partnership filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Act. The tax matters partner became ineligible to serve as tax matters partner under the provisions of sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs. The bankruptcy court removed the automatic stay to foreclose on the partnership's real property. The mortgage on this property was foreclosed and the partnership's bankruptcy proceeding was converted to Chapter 7. After February 24, 1986, the partnership ceased all activities and maintained no office. By letter dated December 23, 1987, respondent selected a new tax matters partner and on that same date mailed a FPAA notice to the tax matters partner and shortly thereafter mailed a copy of the FPAA to the notice partners. HELD: This Court has jurisdiction over the case based on a timely appeal filed by a notice partner. HELD FURTHER: The FPAA was valid. Charles W. Hall, Steven C. Salch, and Stephen P. Howard, for the petitioner.

Marilyn S. Ames, for the respondent.

OPINION

SCOTT, JUDGE:

This case is before the Court on petitioner's motions to dismiss for lack of jurisdiction and, in the alternative, for summary judgment. Both motions are based on petitioner's position that sale of the major asset of the partnership, Chef's Choice Produce, Ltd. (Chef's Choice), in a bankruptcy proceeding terminated the existence of the partnership for all purposes, including respondent's authority to select a tax matters partner and issue a notice of final administrative adjustment of partnership items and the authority in any person to institute a suit with respect to those adjustments.

Respondent determined adjustments to the 1982 and 1983 partnership returns of Chef's Choice as set forth in his notice of final partnership administrative adjustment. The facts relevant to petitioner's motions have been stipulated and are found accordingly.

Chef's Choice was a limited partnership organized in 1982 under the laws of the State of California for the purpose of conducting a tomato growing operation in solar heated greenhouses. Petitioner, Thomas W. Burke, Jr. (Mr. Burke), was a limited partner in Chef's Choice and was admitted to the partnership on November 15, 1982. Chef's Choice's principal place of business was in Houston, Texas.

On December 30, 1982, Chef's Choice contracted to acquire an improved tract of real property located in San Luis Obispo, California, from Bent Tree Ranch, Inc. (Bent Tree), a general partner of Chef's Choice. At the time Chef's Choice entered into this contract, the property was encumbered by various mortgages including a purchase money mortgage held by the party from whom Bent Tree had previously acquired the property (hereinafter referred to as ‘the mortgage holder‘). Chef's Choice conducted its activities on this tract of real property. The real property and improvements thereon constituted substantially all of Chef's Choice's assets.

Chef's Choice filed Forms 1065, U.S. Partnership Returns of Income, for the taxable years 1982 and 1983 on April 18, 1983, and April 15, 1984, respectively. The address shown on these returns was 4550 Post Oak Place, No. 111, Houston, Texas 77027. Respondent mailed a ‘Notice of Beginning of an Administrative Proceeding‘ for the partnership's 1982 and 1983 taxable years to the partnership's tax matters partner (the prior tax matters partner) and notice partners on November 29, 1984.

In 1985, Bent Tree defaulted on the purchase money mortgage on the San Luis Obispo real property and the mortgage holder posted notices of foreclosure on the property. To protect its rights in the real property, Chef's Choice filed a petition for bankruptcy under the provisions of Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court (the Bankruptcy Court) for the Central District of California on August 19, 1985. In November 1985, the mortgage holder sought relief from the automatic stay of the Bankruptcy Code to foreclose on the real property. Such relief was granted on February 19, 1986, and the real property was sold at a trustee's sale in 1986.

Respondent received notice of the partnership's bankruptcy proceeding and filed proofs of claim therein for various taxes on October 16, 1985, July 24, 1986, and August 6, 1986. On February 24, 1986, the partnership's bankruptcy proceeding was converted to a proceeding under Chapter 7 of the Bankruptcy Code. After February 24, 1986, Chef's Choice ceased all activities and maintained no office.

On December 23, 1987, respondent notified the prior tax matters partner of the partnership that his partnership items were to be treated as nonpartnership items pursuant to sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), (relating to the treatment of partnership items of a partner who is subject to a criminal investigation). By letter of the same date, respondent notified petitioner, Mr. Burke, that respondent had selected him to serve as tax matters partner for the partnership's 1982, 1983, and 1984 tax years pursuant to section 6231(a)(7). ¹ Also, on December 23, 1987, respondent mailed a notice of final partnership administrative adjustment (the FPAA) for the tax years 1982 and 1983 to Mr. Burke in his capacity as tax matters partner. Respondent mailed a copy of the FPAA to Mr. Burke in his capacity as a notice partner on or about January 26, 1988.

On March 23, 1988, Mr. Burke filed a Petition for Readjustment of Partnership Items with this Court as a partner other than the tax matters partner. The case was set for trial at the Houston, Texas, trial session beginning on March 12, 1990. On March 12, 1990, petitioner filed with the Court a ‘Motion to Dismiss For Lack of Jurisdiction‘ and an alternative ‘Motion for Summary Judgment.‘ The parties jointly filed with the Court a ‘Stipulation of Facts (Including Applicable State Law).‘ In addition, the parties filed a ‘Stipulation of Settled Issues Contingent on Outcome Of Jurisdiction Issue,‘ which disposed of all issues other than the issue raised by petitioner's motions.

In support of the motion to dismiss for lack of jurisdiction, petitioner argues that the partnership dissolved and was terminated under California law no later than 1986 after it filed for bankruptcy and was divested of substantially all of its assets (e.g., its real property). Petitioner argues that, under both California law and general principles of Federal law, the partnership had no legal existence after February 24, 1986, and therefore the selection by respondent of a tax matters partner on December 23, 1987, and the issuance of the FPAA are nullities. Petitioner also argues that neither the partnership nor any of its former partners had the capacity to commence judicial proceedings following the dissolution and termination of the partnership. Thus, petitioner contends, the partnership level audit and litigation procedures (the partnership procedures) enacted in the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 648 (TEFRA 1982), could not operate with respect to the partnership. Petitioner argues that since the FPAA which respondent issued with respect to the partnership's 1982 and 1983 tax years was invalid, this Court has no jurisdiction to readjust the partnership items adjusted therein.

In the alternative motion for summary judgment, petitioner raises all of the same arguments made in connection with the motion to dismiss for lack of jurisdiction and points out that the facts herein are not materially in dispute. Petitioner concludes, based on the undisputed facts, that the FPAA issued by respondent was invalid, and, therefore, the adjustments proposed therein are erroneous and unlawful. Thus, according to petitioner, summary judgment is appropriate.

We first address petitioner's argument that the partnership audit and litigation procedures (sec. 6221 et seq.) are inapplicable and inoperative with respect to Chef's Choice because, according to petitioner, the partnership had terminated prior to the issuance of a valid FPAA. Petitioner bases this argument on the contention that, in enacting the partnership procedures, Congress chose to adopt the ‘entity theory of jurisprudence.‘ In other words, petitioner contends that the partnership procedures involve the partnership entity itself rather than a conglomeration of individual partners. Petitioner argues that, once Chef's Choice ceased to exist as an entity, the partnership procedures ceased to have effect with respect to the partnership.

We disagree. Sec. 701 provides that a partnership is not a taxable entity for Federal income tax purposes. Rather, under the Internal Revenue Code, a partnership represents a conglomeration of taxable individuals who have joined together in good faith and with a business purpose to presently conduct an enterprise. Commissioner v. Culbertson, 337 U.S. 733 (1949); Hensel Phelps Construction Co. v. Commissioner, 74 T.C. 939 (1980), affd. 703 F.2d 485 (10th Cir. 1983). Under this so-called ‘aggregate‘ theory, each individual partner must report and pay tax on his distributive share of income. Sec. 701. The partnership is, however, required to file an informational return stating specifically its gross income, deductions, credits, etc., as well as each partner's distributive share of such items. Sec. 6031(a).

Prior to the enactment of the partnership procedures in TEFRA 1982, each partner's tax liability with respect to partnership items...