Charlton v. Commissioner
| Citation | 60 T.C.M. 324 |
| Decision Date | 31 July 1990 |
| Docket Number | Docket No. 19297-87.,Docket No. 19295-87.,Docket No. 46689-86.,Docket No. 21098-87. |
| Parties | Thomas E. and Judith C. Charlton, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | United States Tax Court |
Larry Kars, 250 W. 57th St., New York, N.Y., for the petitioners. Doreen M. Susi and Robert Cuatto,* for the respondent.
Memorandum Findings of Fact and Opinion
This case was assigned to Special Trial Judge Pate pursuant to the provisions of section 7443A(b) and Rules 180 and 181.2 The Court agrees with and adopts her opinion which is set forth below.
PATE, Special Trial Judge:
This proceeding concerns respondent's determination of deficiencies in tax and additions to tax for petitioners Thomas E. and Judith C. Charlton (hereinafter Charlton or the Charltons) as set forth in the notice of deficiency, and adjustments of partnership items for three partnerships as set forth in the notices of Final Partnership Administrative Adjustment (hereinafter FPAA). These partnership petitioners are: Diabetics CME Group, Ltd., Jules H. Klar, Tax Matters Partner (hereinafter DIABETICS); Allergy CME Group, Ltd., Jules H. Klar, Tax Matters Partner (hereinafter ALLERGY); and Femcare CME Group, Ltd., Virgil Williams, Tax Matters Partner (hereinafter FEMCARE).3
In a notice of deficiency dated October 2, 1986, respondent determined the following deficiencies in tax and additions to tax with regard to the Charltons:
Additions to Tax
Year Deficiency Sec. 6653(a)(1)* Sec. 6659
1979 ...................................... $2,402 $120.10 0
1981 ...................................... 16,858 842.90** $4,981.50
1982 ...................................... 6,086 304.30** 1,825.80
* Sec. 6653(a) for 1979
** Plus 50 percent of the interest due on the portion of the underpayment attributable to
negligence under section 6653(a)(2)
Respondent also determined that the Charltons are liable for increased interest under section 6621(c) (formerly designated section 6621(d)), for each year at issue. In an amended answer, respondent alleged further that in the event that we do not sustain the addition to tax pursuant to section 6659 for 1982, then the addition to tax pursuant to section 6661 is applicable for 1982 in the amount of $1,521.50. However, respondent has since abandoned his claim that the Charltons are liable for the addition to tax under section 6659.
In three FPAA's, respondent made the following adjustments (rounded to the nearest dollar):
DIABETICS
1983 1984
Partnership loss ....... $ 1,177,655 $ 681,317
Short term capital loss 36,039 1,746
Long term capital loss 19,659
Interest capitalized ... 456,431
ALLERGY
1982 1983
Partnership loss ....... $ 320,000 $ 381,910
Qualified investment
credit property ....... (8,000,000) (6,400,000)
FEMCARE
1983 1984
Other Income............ $ (3,484) $ (12,230)
Amortization ........... 1,000 2,000
General partner fee .... 9,000 5,000
Miscellaneous .......... 7 1,630
Leasing expense ........ 212,522 261,550
Qualified investment
credit property ....... (7,021,304) (7,021,304)
In addition, respondent determined that the following additions to tax apply to deficiencies at the partner level for each partner in DIABETICS, ALLERGY and FEMCARE: Section 6653(a)(1) and 6653(a)(2) (negligence); section 6659 (valuation overstatement); and section 6661 (substantial understatement). Respondent also determined that each partner in DIABETICS, ALLERGY and FEMCARE was liable for increased interest under section 6621(c) (formerly designated section 6621(d)) for each year at issue. However, at trial and in his reply brief, respondent admitted that this Court lacks, jurisdiction in these proceedings to consider the additions to tax at the partnership level. N.C.F. Energy Partners v. Commissioner [Dec. 44,257], 89 T.C. 741 (1987); Maxwell v. Commissioner [Dec. 43,431], 87 T.C. 783 (1986). Accordingly, the allegations as to these additions to tax will be dismissed for lack of jurisdiction.
Therefore, with respect to the Charltons, the issues for our decision are: (1) whether petitioners are entitled to deduct losses they claimed in connection with their investment in DIABETICS in 1981 and 1982; (2) whether petitioners are entitled to the investment tax credit carryback they claimed in 1979; and (3) whether petitioners are liable for the addition to tax for negligence under section 6653(a) (for 1979) and under section 6653(a)(1) and (2) (for 1981 and 1982), the addition to tax for substantial understatement of tax under section 6661 (for 1982), and additional interest under section 6621(c) (formerly section 6621(d)).
The issues for our decision with regard to the partnerships are: (1) whether respondent correctly adjusted the income, expenses, and losses each partnership reported on its partnership returns; (2) with regard to ALLERGY and FEMCARE only, whether respondent correctly adjusted the amount of "Qualified Investment Tax Credit Property" ALLERGY claimed for 1982 and 1983, and FEMCARE claimed for 1983 and 1984.
This case involves nearly 3,000 pages of transcripts, nearly 330 exhibits and more than 600 pages of briefs. Some of the facts have been stipulated and they are so found. We incorporate by this reference the stipulation of facts, the supplemental stipulation of facts, the second supplemental stipulation of facts and the third supplemental stipulation of facts, along with the stipulated exhibits.
This case is a test case for some 27 partnerships (hereinafter referred to collectively as CME) and numerous individual limited partners. Each of these partnerships invested directly or indirectly in the production, reproduction, marketing, and distribution of medical educational video tapes (hereinafter tapes). The tapes were produced in a series of approximately 20 programs centered around one medical subject area. We will refer to these programs as the CME Video Tape programs, and to the series at issue as the DIABETIC series, the ALLERGY series, and the FEMCARE series.
The purpose for the CME video tape programs was to provide continuing medical education, principally for the primary care physician. Primary care physicians include internists, general practitioners, and other physicians who are generally not board certified. The three partnership petitioners were formed to exploit the series in diabetes, allergies and gynecology. The fourth petitioner, Charlton, was a limited partner in DIABETICS.
The leading man in this drama undoubtedly was Stephen A. Hofstein, Ph.D. (hereinafter Hofstein). Hofstein was the moving force behind the CME Video Tape programs. He coordinated the production and marketing of the CME video tape programs, and arranged for their exploitation through limited partnerships. He selected the general partners and essentially controlled all aspects of their involvement. Prior to his involvement with CME, Hofstein was an inventor and the founder of Princeton Electronic Products, Inc., which manufactured electronic components (hereinafter Princeton Electronics). Concurrent with his involvement with CME, Hofstein was president of Tiffany Fine Arts, Inc., World Video Corporation, Videotech Associates, Inc., and Trans Oceanic Development Corp., and vice president of World Medical Marketing Corporation.
Peter Pietanza (hereinafter Pietanza) had been Hofstein's business associate since 1974 or 1975 when he was vice president of operations at Princeton Electronics. Pietanza served as vice president of Tiffany Fine Arts, Inc., and World video Corporation, president of CME Productions, Inc., and treasurer of World Video Licensing Corporation.
Tiffany Fine Arts, Inc. (hereinafter Tiffany), was a Florida corporation which acted as a holding company for various subsidiaries. Hofstein's father held a 24-percent ownership interest in Tiffany for the benefit of Hofstein, Pietanza's father-in-law held a 26-percent ownership interest in Tiffany for the benefit of Pietanza, and Peter Rosenthal's (hereinafter Rosenthal) father held a 50-percent ownership in Tiffany for the benefit of Rosenthal. Hofstein was president of Tiffany from 1979 through approximately 1984. Pietanza was vice president. Tiffany's address was 545 Madison Avenue, New York, New York.
World Video Corporation (hereinafter World Video) was a wholly owned subsidiary of Tiffany. It produced the CME Video Tape programs. Hofstein served as World Video's president and sole member of its board of directors during all times relevant to this case. Pietanza served as its vice president and Rosenthal as an incorporating director. From 1981 through 1984, World Video also maintained its offices at 545 Madison Avenue, New York, New York.
World Medical Marketing Corporation (hereinafter World Medical Marketing) was another wholly owned subsidiary of Tiffany. Rosenthal served as president of World Medical Marketing and Hofstein served as its vice president from 1978 through 1979. As early as 1978, World Medical Marketing was licensing distributorships for the "Pedi-Pulsor," a device which offered a method of exercise for the bedridden patient. When Hofstein began to put the CME Video Tape programs together, he worked with many of the same people he contacted while licensing distributorships for the "Pedi-Pulsor."
Videotech Associates, Inc. (hereinafter Videotech) was incorporated in May of 1980 in...
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