Brown v. Commissioner, Docket No. 7462-94.
| Decision Date | 17 July 1996 |
| Docket Number | Docket No. 7462-94. |
| Citation | 72 T.C.M. 139 |
| Parties | R. Edwin Brown and Winsome S. Brown v. Commissioner. |
| Court | U.S. Tax Court |
Rex L. Sturn, Rockville, Md., for the petitioners. Lindsey D. Stellwagen, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1990 in the amount of $179,597 and an accuracy-related penalty under section 6662(a)1 in the amount of $35,919.
The issues for decision are: (1) Whether the amount of debt outstanding on certain computer equipment contributed to the Barnesville School is includable in the amount realized by petitioners from the transaction. We hold the debt is includable in the amount realized. (2) Whether petitioners are entitled to a charitable contribution deduction for computer equipment and lease rights contributed to the Barnesville School. We hold they are not. (3) Whether petitioners are liable for an accuracy-related penalty under section 6662(a) due to substantial understatement of income tax. We hold they are liable.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time the petition was filed, petitioners resided in Dickerson, Maryland. Petitioners are married and filed a joint Federal income tax return for the year in issue. Since petitioner husband entered into the transaction at issue, the term "petitioner" refers to R. Edwin Brown.
On July 2, 1985, Federal Data Corp. (hereinafter FDC) entered into a Non-Recourse Loan and Security Agreement with and executed a promissory note to the Old Stone Bank (hereinafter OSB) for the purpose of purchasing computer equipment. FDC leased the equipment to American Telephone and Telegraph Co. (hereinafter AT&T). FDC assigned its rights, title, and interest in the lease to OSB.
On December 31, 1985, FDC and petitioner entered into a sale/leaseback transaction with respect to the computer equipment (hereinafter sometimes referred to as the equipment leasing transaction). Pursuant to the equipment leasing transaction, the parties executed a Master Purchase Agreement, a Bill of Sale, and a promissory note entitled "Recourse Note and Security Agreement"2 (FDC note) in the amount of $2,358,994. On January 2, 1990, petitioner and the Barnesville School (hereinafter the School) executed an Assignment—Master Purchase Agreement and Master Lease Agreement (hereinafter the agreement) and Bill of Sale. The Bill of Sale provides for the sale of the computer equipment and all rights in the lease with FDC to the School for $1 consideration. The agreement provides, in relevant part, as follows:
all right, title, and interest in the equipment and rights described in the Master Purchase Agreement and the Master Lease Agreement dated the 31st day of December, 1985, entered into by and between Federal Data Corporation * * * and R. Edwin Brown is by these presents hereby transferred, assigned, and set over to The Barnesville School. * * * The Barnesville School shall be substituted for the Buyer and that all applicable terms and conditions of the aforesaid Master Purchase Agreement and Master Lease Agreement shall remain in full force and effect.
The Barnesville School agrees to use the proceeds from the aforesaid Master Lease Agreement to first satisfy the obligations under the Recourse Note and Security Agreement dated December 31, 1985, between R. Edwin Brown, Payor, and Federal Data Corporation, Payee, as provided in the Agency Agreement between said parties.
On January 2, 1990, petitioner's outstanding obligation under the FDC note was $1,540,280.
On their Federal income tax returns for years 1985-89, petitioners claimed deductions for depreciation and interest relating to the equipment-leasing transaction. Three separate statutory notices of deficiency were issued, in which respondent disallowed petitioners' claimed deductions pursuant to section 465. Petitioners petitioned the Tax Court in each instance. Losses in the amount of $549,122 were disallowed for those years and were treated as a carryforward of suspended losses. On July 21, 1993, respondent sent petitioners a statutory notice of deficiency for the 1990 tax year, determining a gain on the disposition of the computer equipment to the School and allowing the gain to be reduced by suspended losses for years 1985-89. However, on February 10, 1994, in response to petitioners' continued litigation in the Tax Court with respect to the 1988 and 1989 losses, respondent sent petitioners a second statutory notice of deficiency for the 1990 tax year allowing the gain to be reduced by suspended losses for years 1985-87 only. Subsequently, on April 19, 1994, this Court entered a decision reflecting the settlement of petitioners' 1988 and 1989 tax years. As a consequence, respondent concedes that to the extent petitioner realized a gain on the disposal of the computer leasing equipment, the gain is reduced by suspended losses from 1985-89. Petitioners did not claim a charitable contribution deduction on their 1990 Federal income tax return relating to the property transferred to the School.
At the end of the trial, respondent orally moved for leave to conform the pleadings to the evidence. Petitioners objected. We took the motion under advisement. We subsequently issued an order indicating that to the extent we allow respondent to amend the pleadings to conform to the proof we would grant petitioners the same privilege. To this end, we directed the parties to brief the consequences of the sale of the computer equipment and rights to the lease for purposes of claiming a charitable contribution deduction.
OPINIONAs a preliminary matter, we must resolve two issues: Whether the second statutory notice of deficiency is valid and whether respondent's motion to conform the pleadings to the evidence should be granted.
In their petition, petitioners allege that respondent improperly issued a second statutory notice of deficiency. Respondent argues she was not precluded from issuing a second notice of deficiency because petitioners had not filed a Tax Court petition with respect to the first notice of deficiency.
If the Commissioner mails a notice of deficiency in income tax and the taxpayer files a timely petition with the Tax Court, the Commissioner is in general precluded from mailing to the taxpayer a second notice of deficiency determining an additional deficiency in income tax for the same year. Sec. 6212(c); McCue v. Commissioner [Dec. 13,122], 1 T.C. 986, 987-988 (1943). See generally Breman v. Commissioner [Dec. 33,760], 66 T.C. 61, 65-70 (1976). Accordingly, the Commissioner is restricted from issuing a second notice of deficiency with respect to the same taxable year only if the taxpayer has filed a Tax Court petition with respect to the first notice of deficiency. Goff v. Commissioner [Dec. 5641], 18 B.T.A. 283, 288-289 (1929); Gmelin v. Commissioner [Dec. 44,939(M)], T.C. Memo. 1988-338, affd. without published opinion 891 F.2d 280 (3d Cir. 1989).
On July 21, 1993, respondent sent a statutory notice of deficiency to petitioners determining a deficiency for taxable year 1990. Petitioners did not file a petition with respect to the July 21, 1993, notice of deficiency. Respondent issued a second statutory notice of deficiency on February 10, 1994, in an attempt to preserve respondent's position with respect to prior year deductions being contested by petitioners in another proceeding before the Court.
Since petitioners had not filed a petition with the Court, section 6212(c) did not preclude respondent from issuing a second statutory notice of deficiency for tax year 1990. Accordingly, we hold that the second statutory notice of deficiency is valid.
Respondent's motion is for leave to file an amended answer for an increased deficiency and penalty. The increase from $1,017,248 to $1,540,280 arises due to correction of the amount realized from the transfer of the computer lease obligation. Petitioners allege harm and prejudice should we allow respondent to amend her answer.
At the close of trial, respondent moved pursuant to Rule 41(b) to increase the deficiency. This Court has held on numerous occasions that it will not consider issues which have not been properly pleaded or otherwise preserved. Markwardt v. Commissioner [Dec. 33,403], 64 T.C. 989, 997-998 (1975). Nevertheless, Rule 41(b) provides a procedure whereby in appropriate circumstances the pleadings may be amended to conform to the evidence presented at trial.3
Section 6214(a) requires a claim for increased deficiency to be asserted at or before the hearing or a rehearing. It is well established that the word "hearing" as used in section 6214(a) encompasses the entire "proceeding" up until the decision of the Tax Court has been entered. Henningsen v. Commissioner [57-1 USTC ¶ 9637], 243 F.2d 954 (4th Cir. 1957), affg. [Dec, 21,785] 26 T.C. 528 (1956); Law v. Commissioner [Dec. 42,106], 84 T.C. 985, 989 (1985).
As part of the parties' joint stipulations, Exhibit 8-H was admitted into evidence. That exhibit is the recourse note entered into between petitioner and FDC. In addition, page 8 of Exhibit 8-H is the debt service schedule. The schedule begins with the principal balance of $2,358,994 and chronicles the payments made on the note. As of January 2, 1990, the date of the transfer to the School, the debt service schedule shows a balance of $1,540,280.
The basic issue in the instant case—whether the nonrecourse debt should be included in the amount realized upon transfer of the computer to the School—was not altered by the increase in the deficiency asserted by respondent. Petitioners had full opportunity to meet the claim for an increased...
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