American Educare, Ltd. v. C. I. R., 032690 FEDTAX, 34128-87

Docket Nº:34128-87, 38384-87, 7081-88, 22864-88.
Opinion Judge:GERBER, JUDGE:
Attorney:Allan P. Harris and Leon A. Van Geldern, for the petitioners. Carolyn Lee Harber and Thomas R. Thomas, for the respondent.
Case Date:March 26, 1990
Court:United States Tax Court

59 T.C.M. (CCH) 212




Nos. 34128-87, 38384-87, 7081-88, 22864-88.

United States Tax Court

March 26, 1990

Respondent issued a Notice of Final Partnership Administrative Adjustment to petitioner-partnership and statutory notices of deficiency to the individual petitioners. These notices were issued after expiration of the initial statutory periods of limitations, but within the time permitted by petitioners' facially valid written consents to extend the periods of limitations. Petitioners urge that the consents are invalid because their execution was premised upon respondent's false representations. They contend that respondent should be estopped from relying upon the consents to establish that his notices were timely, and that we must therefore find the assessments to be time-barred. HELD, petitioners have failed to prove either the false representations or the adverse effects necessary to justify the imposition of estoppel.

Allan P. Harris and Leon A. Van Geldern, for the petitioners.

Carolyn Lee Harber and Thomas R. Thomas, for the respondent.



Respondent, within the time allowed by written consents extending the periods of limitations, issued notices disallowing claimed deductions and credits of petitioner-partnership and of the other petitioners in these consolidated cases. [2] The issues are whether petitioners have proved that their consents to extend the periods of limitations are invalid because the consents were induced by respondent's alleged misrepresentations. If the consents are invalid, then the notices of disallowance are untimely and respondent is barred from assessing the deficiencies, additions to tax, or resulting interest at issue. In that event, only the deficiencies and additions to tax and related interest for petitioners Robert and Paula Snelling for the taxable year 1984 may be assessed. If, however, the notices were timely, the parties have stipulated to the amounts that would be disallowed. In that case, a Rule 155 computation would be necessary to determine the resulting deficiencies, additions to tax, and related interest.


Some of the facts have been stipulated. The stipulations of facts and attached exhibits are incorporated by this reference.

One of the petitioners is a partnership, American Educare, Ltd., which has 36 partners. It is before the Court pursuant to the ‘ TEFRA‘ provisions -- that is, it is representing its partners with respect to matters relating to the ‘ Tax Treatment of Partnership Items,‘ under statutes added to the Internal Revenue Code by section 402(a), Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97- 248, 96 Stat. 648.

The other petitioners are individuals. They are four married couples -- the Salooms, the Snellings, the Newells, and the Mitchells -- who filed joint Federal tax returns for the years involved. They are here pursuant to the deficiency procedures set forth in sections 6211 through 6216. [3]

The individual petitioners are not partners in American Educare. Petitioners all have in common their 1983 investment in a promotion known as Children's Educational Leasing, or ‘ CEL.‘ Of the individual petitioners, the Mitchells invested in CEL through a proprietorship. The Salooms, the Snellings, and the Newells all invested through their own separate partnerships. The proprietorship and these separate partnerships are not themselves parties to this proceeding. The individual petitioners' partnerships were apparently small partnerships that were not covered by the TEFRA procedures applicable to larger partnerships, such as petitioner American Educare.


The CEL promotion was explained by one of the petitioners as an activity that involved a series of audio tapes that would be reproduced for sale in retail stores as children's products. These tapes were designed to be educational presentations in which ‘ a couple of young detectives and a floppy-eared dog ‘ would make presentations ‘ about things like Charles Lindbergh and the Wright brothers and Marconi * * *.‘ The promotion offered tax benefits to its investors through presumed deductions and tax credits.

Respondent questioned the tax benefits that were claimed by the investors for their investments in the CEL promotion. Respondent's Appeals Officer Bill R. Majure was in charge of respondent's appellate consideration of cases involving the CEL promotion. By June 27, 1986, respondent's Appeals Office had established a national settlement position with respect to taxpayer-investors in the CEL activity for the taxable year 1983. In brief, that settlement position was as follows --

1. An investor would be allowed to deduct 50 percent of his cash investment in CEL.

2. An investor would not be allowed to claim the investment tax credits arising from the investment in CEL.

3. The addition to tax for valuation overstatements under section 6659 regarding investment in CEL would be reduced from the proposed 30 percent to 20 percent.

4. The interest on substantial underpayments attributable to tax-motivated transactions under section 6621(c) would be applied to the entire underpayment attributable to investments in CEL; and

5. Respondent would not impose the negligence additions.

While respondent's settlement position resolved the general issues relating to investments in CEL, it did not, in and of itself, resolve all the issues relating to the examination of the CEL promotion; in particular, it left unresolved the issues relating to the specific returns of each of the taxpayer-investors. For example, respondent's agents were required to verify the amount invested in the CEL program by each taxpayer. These procedures required respondent's agents to obtain information from the individual taxpayers, including their canceled checks or other records. Respondent's agents would then examine the records, and evaluate the results in terms of the promotion and the taxpayer's other liabilities. Respondent's agents were required to prepare a final report with respect to each taxpayer. Respondent's procedures then contemplated settlement negotiations with the taxpayers. In that regard, respondent would have modified his settlement position with respect to a taxpayer-investor whose case presented unique facts and circumstances that justified modification of the settlement position. Such modifications from a national program would be ‘ rare,‘ but, in Mr. Majure's words, ‘ it has happened.‘ Respondent's Appeals Office generally intended, however, that the settlement position was to be available to all investors in CEL. With respect to a given taxpayer- investor, the examination would be completed only with the taxpayer's protest of the examining agent's findings to respondent's Appeals Office, or with the issuance of a statutory notice of deficiency, or with a waiver of restrictions on assessment and collection.


American Educare is a partnership whose principal place of business at the time the petition was filed was Dallas, Texas. In 1983, American Educare invested in the CEL promotion. In documents submitted to respondent, it describes its business as ‘ The marketing and distribution of children's educational tapes.‘ American Educare filed its U.S. Partnership Return of Income (Form 1065) for the taxable year 1983 on or before April 15, 1984. All the losses, income, and investment tax credits that were reported on that return related to the CEL program. One Patrick Moretti was the tax matters partner for American Educare for the taxable year 1983. As such, he was the individual responsible under the TEFRA provisions for representing American Educare's partners before respondent on matters concerning the tax incidents of American Educare.

Respondent, during February of 1987, sent an undated letter to Mr. Moretti in care of Mr. Harris, American Educare's attorney. In that letter, respondent solicited a consent to extend the time within which respondent could assess the taxes attributable to the operations of American Educare for the taxable year 1983.

Respondent's employee, Angie Sanderlin, negotiated the proposed consent with American Educare. She told Allan P. Harris, American Educare's attorney, that the consent was necessary to permit respondent time to determine the manner in which to offer the CEL settlement proposal to American Educare.

Prior to April 2, 1987, and after consulting with Mr. Harris, Patrick Moretti signed the requested ‘ Special Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership‘ (Form 872- O). The terms of that document provided that the period of limitations for American Educare's 1983 tax year would be extended indefinitely. Revenue Agent Sanderlin executed the Form 872-O on behalf of respondent for the taxable year 1983 and returned the form to American Educare on April 2, 1987.

On April 15, 1987, respondent sent a Notice of Final Partnership Administrative Adjustment (FPAA) to PAE Enterprises, a three-member partnership which apparently had as one of its constituent partners petitioner-partnership American Educare. PAE Enterprises is not itself a petitioner in this action but is involved in a separate proceeding. See PAE Enterprises v. Commissioner, T.C. Memo. 1988-222.

From the time she solicited the consent from American Educare until her maternity leave began on June 1, 1987, Revenue Agent Sanderlin made attempts, but was unable, to determine the procedures for offering the settlement proposal to American Educare. Her...

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