Backstrom v. Commissioner
| Citation | 73 T.C.M. 2723 |
| Decision Date | 06 May 1997 |
| Docket Number | Docket No. 5904-88. |
| Parties | Sharon E. Backstrom, Harold J. and Zelma G. Barbret, Virginia Boland, John A. and Theresa A. Cislaghi, Estate of Roger W. Dornbrock, Deceased, Maryn J. Dornbrock, Personal Representative, Maryn J. Dornbrock, Gary E. and Beverly G. Engel, Hermann K. and Helen W. Enzmann, Don and Mary Everett, Kenneth B. and Mary J. Faust, Estate of Harold E. Frazer, Deceased, Elizabeth Frazer, Personal Representative, Charlotte V. Frazer, William M. and Martha J. Goodman, Paul W. and Kathleen M. Hammer, John and Rita C. Harvey, William R. and Ethel Kelley, Edward and Arles Kogelman, Terrence L. LaBadie, Frances Eng Lee, George R. Martell, Craig A. and Cynthia M. Peltier, Myra Joan Rodgers, William H. and Shirley M. Shaw, Karl L. and Sui Ti A. Siebert, John M. and Sandra Soper, Paul J. and Nancy L. Spindler, Gerard W.J. and Madeline Tremblay, Richard R. and Monica J. Riddle, Carol T. Jakubowski, and Arthur Miller v. Commissioner. |
| Court | United States Tax Court |
Andrew W. Mychalowych, for the petitioners Maryn J. Dornbrock and the Estate of Roger W. Dornbrock, Deceased. Karen J. Goheen, for the respondent.
This case was assigned to Special Trial Judge D. Irvin Couvillion pursuant to section 7443A(b)(4) and Rules 180, 181, and 183.1 The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.
COUVILLION, Special Trial Judge:
Petitioner Maryn J. Dornbrock (Mrs. Dornbrock) has before the Court a motion for leave to file a motion to vacate or revise the decision that was entered in this case.2 This case is one of a group of cases that constituted a national litigation project identified by respondent as "IG-Phonomasters" and involved investors in a master recording leasing program. A joint petition was filed in this case on July 11, 1985, on behalf of numerous investors in this program, which included Roger W. Dornbrock and his wife, Maryn J. Dornbrock. The decision is a stipulated decision, signed by counsel for the parties, and was entered by the Court on December 23, 1993. Mrs. Dornbrock's motion for leave to file the motion to vacate or revise the decision was filed on April 15, 1996, over 2 years after the decision was entered. No other motions, such as a motion to vacate, or a notice of appeal, have ever been filed in this case. Concurrent with Mrs. Dornbrock's motion for leave to file is a motion to vacate or revise, which has been lodged with the Court. Mrs. Dornbrock's motion for leave to file was calendared for hearing and was heard at this Court's Detroit, Michigan, trial session at which evidence was adduced.3
This case arises out of Roger W. Dornbrock's (Mr. Dornbrock) participation in a 1981 master recording leasing program known as the Pop Phonomasters Leasing Program (Pop Phonomasters program). Mr. Dornbrock participated in the leasing program in 1981 by signing an "Offer to Participate in the Co-tenancy and Operating Agreement and Phonomasters Lease" (Offer). Mr. and Mrs. Dornbrock claimed a Schedule E partnership loss and an investment tax credit on their joint 1981 Federal income tax return from the Pop Phonomasters program. They also filed amended joint Federal income tax returns for 1978, 1979, and 1980, claiming investment tax credit carrybacks for those years arising out of the Pop Phonomasters program. The investment tax credits resulted in Federal income tax refunds for each of these years. On April 12, 1985, a notice of deficiency was issued to Roger W. Dornbrock and Maryn J. Dornbrock, husband and wife, for all years involving the Pop Phonomasters program. In the notice of deficiency, respondent determined the following deficiencies in Federal income taxes and additions to tax:
Additions to Tax
-------------------
Sec
Year Deficiency 6653(a) Sec. 6659
1978 ............................................. $3,273.50 $163.68 $ 982.05
1979 ............................................. 9,818.00 490.90 2,945.40
1980 ............................................. 3,081.00 154.05 924.30
These deficiencies arose solely from Roger W. Dornbrock's participation in the Pop Phonomasters program.4
On July 11, 1985, a joint petition was filed on behalf of approximately 35 petitioners who received notices of deficiency as a result of their participation in the Pop Phonomasters program, including Mr. and Mrs. Dornbrock.5 The timely petition in this case was filed on behalf of petitioners by Hallison H. Young (Mr. Young), an attorney who is admitted to practice before this Court.6 At the time the petition was filed, Mr. and Mrs. Dornbrock were legal residents of the State of Michigan. On July 19, 1987, Mr. Dornbrock died, and Mrs. Dornbrock was subsequently appointed as personal representative of his estate by the Probate Court of Wayne County, Michigan. At the time the subject motion was filed, Mrs. Dornbrock continued to be a legal resident of the State of Michigan.
Due to the large number of participants in the Pop Phonomasters program who had filed the joint petition, several petitioners representing various versions of the program were selected as "lead cases" that were tried first, and the remainder of petitioners were severed from the lead cases and assigned a separate docket number (i.e., this case). The Court then continued this case pending the outcome of the lead cases. Roger W. Dornbrock and Maryn J. Dornbrock were among petitioners who were severed from the lead cases and assigned to this case. In due course, a notice was issued calendaring this case for trial.
The lead cases in the program that were tried were decided by this Court in Donahue v. Commissioner [Dec. 47,306(M)], T.C. Memo. 1991-181, affd. without published opinion 959 F.2d 234 (6th Cir. 1992), affd. sub nom. Pasternak v. Commissioner [93-1 USTC ¶ 50,226], 990 F.2d 893 (6th Cir. 1993). In Donahue v. Commissioner, supra, this Court found that the Pop Phonomasters program lacked economic substance. The decision in the Donahue case was affirmed in the two cited appeals. Subsequent to the conclusion of the final appeal in the Donahue case and the expiration of time for filing a petition for certiorari with the U.S. Supreme Court, counsel for the parties in this case, which included the Dornbrocks, entered into a stipulated decision with respect to the Pop Phonomasters issues based on the decisions in the Donahue case.
In the stipulated decision entered in this case, the parties agreed to deficiencies in Federal income taxes and additions to tax with regard to Mr. and Mrs. Dornbrock in the amounts set out in the notice of deficiency. The stipulated decision document was lodged with the Court when the case was called for trial on November 1, 1993, and the decision was entered by the Court on December 23, 1993. Concurrent with the filing of the stipulation, the parties filed a Motion to Substitute Parties and to Change Caption with respect to petitioner Roger W. Dornbrock, who passed away in July 1987. Pursuant to Rule 63(a), this Court ordered that "Estate of Roger W. Dornbrock, Deceased, Maryn J. Dornbrock, Personal Representative" be substituted for "Roger W. Dornbrock" as a petitioner in this case.
Throughout the entire process just described, the attorney, Mr. Young, represented the taxpayers in the lead cases that were tried, and he continued as attorney for the taxpayers in this case, which had been severed from the lead cases. Mr. Young was in direct contact with only one of the program participants, Frank C. Pasternak (Mr. Pasternak). Mr. Pasternak was a certified public accountant whose clients included one of the organizers of the Pop Phonomasters program. Mr. Pasternak had accepted the responsibility of acting as "Co-tenancy Operator" (CTO) for the Pop Phonomasters program. By signing the aforementioned Offer, each Pop Phonomasters participant, including Mr. Dornbrock, appointed Mr. Pasternak as his or her attorney in fact and authorized him to execute, on behalf of each participant, the Co-tenancy and Operating Agreement, the Phonomasters Lease Agreement, and the Phonomasters Marketing Agency Agreement. Each participant also authorized Mr. Pasternak to execute any documents required under section 48(d) and section 1.48-4(g), Income Tax Regs., to pass through investment tax credits from the lessor to the lessees. In his capacity as CTO, Mr. Pasternak was given, subject to the other participants' instructions, the exclusive right and duty to conduct the operations of the Pop Phonomasters program. More specifically, Mr. Pasternak was authorized to maintain books and records and to pay all ordinary and necessary expenditures without consulting other participants.
As Pop Phonomasters participants began receiving notices of deficiency regarding their investments, some of them contacted Mr. Pasternak about the matter. In response to their inquiries, and in his capacity as CTO, Mr. Pasternak mailed a form letter to each of the Pop Phonomasters participants regarding the notices of deficiency received by them. The form letter was drafted by Mr. Young's law firm; however, the letters were signed by Mr. Pasternak and were printed on "Phonorecords Phonomaster Leasing" letterhead and stated:
Dear Co-tenant:
As you are aware, the Internal Revenue Service has been conducting an investigation into the tax liabilities of certain co-tenants participation in Pop Phonomaster Leasing Program. We were recently informed that certain co-tenants have received Statutory Notices of Deficiency.
It appears that certain of these investigations by the IRS involve substantial and controlling common questions of law or fact.
Accordingly, if you wish to join...
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