Feldman v. C.I.R.

• Citation: 20 F.3d 1128
• Decision Date: 17 May 1994
• Docket Number: No. 93-4519,93-4519
• Parties: -2133, 94-1 USTC P 50,238 Donald FELDMAN and Patricia Feldman, a/k/a Patsy Jane Feldman, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1128

20 F.3d 1128

73 A.F.T.R.2d 94-2133, 94-1 USTC P 50,238

Donald FELDMAN and Patricia Feldman, a/k/a Patsy Jane Feldman, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 93-4519.

United States Court of Appeals Eleventh Circuit.

May 17, 1994.

Donald Feldman, pro se.

Gary R. Allen, Chief, Paula K. Speck, Jonathan S. Cohen, Appellate Section, Tax Div., Dept. of Justice, Washington, DC, for appellee.

Appeal from a Decision of the United States Tax Court (Florida Case).

Before TJOFLAT, Chief Judge, DUBINA, Circuit Judge, and RONEY, Senior Circuit Judge.

DUBINA, Circuit Judge:

This appeal concerns a notice of deficiency disallowing deductions arising out of appellants' ("the Feldmans") investments in three tax shelter limited partnerships. The Feldmans, husband and wife, do not contest the merits of these deficiencies and penalties, but argue that they are barred by the statute of limitations and that Patricia Feldman should receive innocent spouse relief under 26 U.S.C. Sec. 6013(e). ¹ The Tax Court found the Feldmans' contentions to be without merit. Because we agree with the Tax Court's findings, we affirm the judgment.

I. STATEMENT OF THE FACTS AND PROCEDURAL HISTORY

The Feldmans lived at all relevant times in Florida. Since 1960, Donald Feldman practiced law. Patricia Feldman, during most of the years at issue, occasionally worked as an insurance "advisor" for her husband's law firm and spent the remainder of her time doing volunteer work. She wrote most of the checks on the family's joint bank account and compiled most of the data for the joint tax returns that she and her husband filed for 1974 through 1980, the years at issue, and reviewed the returns before they were filed.

In 1974, Donald Feldman and his law partner, John Abramson, ("Abramson") invested in a limited partnership known as Essex Associates ("Essex"). Essex purported to lease data processing and other equipment. On their 1974, 1975, 1976, and 1977 tax returns, the Feldmans claimed a distributive share of Essex partnership losses of $64,587, $9,725, $11,018, and $803, respectively; on their 1977, 1978, and 1979 tax returns, the Feldmans claimed interest expenses of $10,647, $1,074, and $950, respectively.

Donald Feldman and Abramson invested in another limited partnership, Cambridge Associates ("Cambridge") in 1974. Cambridge purportedly owned the distribution rights to "Dirty Money," a motion picture produced in France in 1972. The Feldmans claimed distributable losses of $27,459, $43,850, $351, $375, $270, $296, and $210 for Cambridge on their tax returns for 1974-1980. The general partner of Cambridge was Lea J. Marks ("Marks"). The Feldmans attended a showing of "Dirty Money" in a Miami movie theater, and were not pleased with the exposure the movie received. Donald suspected Marks of failing to protect the interests of the Cambridge limited partners by not adequately promoting and overseeing the distribution of "Dirty Money," and he wrote to her protesting this failure.

In May 1975, the Feldmans invested in the Berkeley Group, Ltd. ("Berkeley"), another partnership in which Marks served as general partner. Berkeley bought the distribution rights to "Swept Away," a movie produced in Italy in 1974, for $3,385,000, of which $3,234,000 took the form of a non-recourse note. The private placement memorandum soliciting investors for Berkeley acknowledged that the film would need to generate $9.4 million in distributor's theatrical gross receipts in order to pay off the note, and that eighty percent of these revenues would likely be earned in the first 180 months after release. "Swept Away" was relatively successful in the United States, but Donald felt that Marks was not adequately promoting the film. Donald and Abramson spent their own money to buy advertisements for the film while it showed in Miami. The film did not make money for the Berkeley partners; Marks was removed as general partner and the holder of the non-recourse note foreclosed and repossessed the rights to the film. On their 1975-1980 tax returns, the Feldmans claimed distributable losses from Berkeley of $135,331, $50,195, $10,528, $6,417, $3,671, and $2,896.

The Internal Revenue Service ("IRS") solicited from the Feldmans consents to extend the statute of limitations for the tax years at issue (1974-1980). During the period these consents were in effect, the IRS Appeals Division had numerous contacts with the Feldmans or their representatives and offered to settle the case by allowing the Feldmans to claim the cash they invested in Berkeley and by waiving the penalties. The Feldmans did not accept this offer. Nor did the Feldmans ever terminate their consents by filing a Form 872-T for any of the years at issue. On April 2, 1987, the IRS issued a notice of deficiency disallowing many of the Feldmans' deductions, including those attributable to the Essex, Cambridge, and Berkeley partnerships during the 1974-1980 period.

On June 29, 1987, the Feldmans filed a petition in the Tax Court challenging the notice of deficiency. The Commissioner moved for partial summary judgment on the basis that the Tax Court's decision in Abramson ² precluded the Feldmans from asserting the validity of the Berkeley investment. The Tax Court denied this motion and in the same opinion, denied the Feldmans' cross-motions for summary judgment which claimed that the consents to extend the statute of limitations expired because the notices of deficiency had not been issued within a "reasonable" time and that it would be unconstitutional to impose penalty interest under I.R.C. Sec. 6621(c).

The Tax Court conducted a trial on May 15-17, 1991. Donald testified about his attempts to investigate and promote the Cambridge and Berkeley investments, the circumstances leading to the signing of the consents to extend the statute of limitations, and his wife's involvement in these matters. Patricia also testified regarding her involvement in these ventures. IRS Assistant District Counsel Sheldon Kay testified concerning the handling of the Feldmans' case and discovery matters. IRS Appeals Officers James Hinely and James Long testified as to the efforts to settle the case administratively within the Appeals Division.

On January 14, 1993, the Tax Court issued an opinion upholding the deficiencies and upholding penalty interest under I.R.C. Sec. 6621(c) and a late filing penalty for the year 1975 under I.R.C. Sec. 6651(a)(1). The Tax Court found that the Feldmans failed to prove that their investments in Essex, Cambridge, and Berkeley had economic substance or business purpose. See Rice's Toyota World, Inc. v. CIR, 752 F.2d 89 (4th Cir.1985). In regard to Essex, the court noted that the Feldmans' evidence did not even establish the identity of the general partner or general partners, let alone their profit motivation. For Cambridge, the court found that the Feldmans failed to prove that the partnership ever acquired the rights to "Dirty Money," or that the partnership assumed any financial obligations regarding it. In fact, the evidence produced by the Feldmans, especially a letter from the distributor and a letter from Donald to the general partner, tended to show that the film's profit potential was dismal and that the Feldmans were anxious about their investment. For Berkeley, the court outlined the efforts made by Donald and Abramson to promote "Swept Away," but found that only the general partner's motive was relevant and that the Berkeley general partner lacked a profit motive. See Brannen v. Commissioner, 722 F.2d 695 (11th Cir.1984).

The Tax Court also found that the Feldmans' consents to extend the statute of limitations were valid because they showed no misrepresentation or misconduct and because the IRS had in fact made a settlement offer to them, even though they did not accept it. The court upheld the increased interest under I.R.C. Sec. 6621(c), finding that all of the investments were "tax motivated transactions" within the meaning of that provision. The court denied Patricia Feldman's claim of innocent spouse relief because she was a partner of Berkeley and the deduction was therefore "attributable to" both spouses under I.R.C. Sec. 6013(e)(1)(B). As to the Cambridge and Essex deductions, the court held that the evidence was too sparse to sustain Patricia's burden of proving that these investments were "grossly erroneous" when made. The Tax Court denied the Feldmans' motions to vacate its decision. This appeal followed.

II. DISCUSSION

We review the Tax Court's fact findings for clear error. Blohm v. CIR, 994 F.2d 1542, 1548 (11th Cir.1993); Atlanta Athletic Club v. Commissioner, 980 F.2d 1409, 1411 (11th Cir.1993). The Tax Court's rulings on the interpretation and application of the statute are conclusions of law which we review de novo. Blohm, 994 F.2d at 1548. Ordinarily, the Commissioner's determination of tax liability is presumed correct. Id. See also Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933). The taxpayer, therefore, bears the burden of proving the determination erroneous or arbitrary. Welch, 290 U.S. at 115, 54 S.Ct. at 9.

A. Consents to extend the statute of limitations

The Feldmans signed waivers extending the statutory limitations period for each of the tax years at issue, 1974-1980. They contend no mutual assent existed at the inception of the communication regarding the waivers and that the waivers were procured by fraud or misrepresentation. Specifically, they argue that the IRS represented to them that if they signed the waivers, "meaningful" settlement negotiations would occur, but that the IRS never intended such negotiations because it had already arrived at an inflexible settlement position for all of the participants in the tax shelters at issue. The Feldmans also argue that the IRS solicited the extensions in order to litigate the easier cases first, thereby providing favorable...