Frazell v. Comm'r of Internal Revenue
| Decision Date | 27 May 1987 |
| Docket Number | Docket No. 41891-86. |
| Citation | 88 T.C. No. 78,88 T.C. 1405 |
| Parties | GENE M. FRAZELL AND ALICE M. FRAZELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps filed their petition with this Court out of time. R moved to dismiss for lack of jurisdiction on the ground that the petition was not timely filed. Ps filed a cross-motion to dismiss for lack of jurisdiction on the ground that the notice of deficiency was invalid because R did not comply with the partnership audit and litigation procedures, section 6221 et seq. Ps are a limited partner in ACTF. R determined a deficiency in Ps' 1982 income tax based entirely on adjustments arising from Ps' investment in ACTF. ACTF is a partnership in the business of selling and leasing audio cassette teaching tapes made from 4 master tapes. By the end of 1982, ACTF was fully subscribed, had acquired its business assets and had prepaid the rent for the term of each lease. A partnership information return, Form 1065, and Forms K-1 were filed on behalf of ACTF for its taxable year ended December 31, 1982. The partnership return stated that ACTF commenced business on November 30, 1982. Partnership documents were filed with the State of California pursuant to Cal. Corp. Code section 15502 (West 1977) on April 7, 1983 to meet the
HELD, ACTF was a partnership for Federal tax purposes in December 1982 and is, therefore, subject to the partnership audit and litigation procedures, section 6221 et seq. for its 1982 taxable year. HELD FURTHER, even if ACTF's business activities had not begun in 1982, pursuant to section 6233 ACTF is nonetheless subject to the partnership audit and litigation procedures for its 1982 taxable year because it filed a partnership return for that year. Section 301.6233-1T(a), Temp. Proced. and Admin. Regs., 52 Fed. Reg. 6795 (March 5, 1987). HELD FURTHER, R's statutory notice of deficiency for Ps' 1982 taxable year is invalid. HELD FURTHER, R's motion to dismiss for lack of jurisdiction denied; Ps' cross-motion to dismiss for lack of jurisdiction granted. Michael A. Shea and Miki Okumura for petitioners.
Carol K. Muranaka and Margaret A. Martin for respondent.
This case is before us on respondent's motion to dismiss for lack of jurisdiction on the ground that the petition was not timely filed pursuant to section 6213(a) and on petitioners' cross-motion to dismiss for lack of jurisdiction on the ground that the notice of deficiency is invalid because respondent failed to comply with the partnership audit and litigation procedures, section 6221 et seq. 1
The deficiency is based entirely on adjustments arising out of petitioners' investment in Audio Cassette Teaching Fund (‘ACTF‘). The issue we must decide is whether ACTF is subject to the partnership audit and litigation provisions in 1982. Respondent argues that ACTF's first taxable year commenced in 1983. If so, then the deficiency notice in this case is valid. Petitioner's position is that ACTF's first taxable year began in December 1982, in which case the notice of deficiency is invalid because adjustments to partnership items must be made pursuant to the procedures of section 6221 et seq. which has not been done.
The Commissioner determined a deficiency in petitioners' joint Federal income tax for their 1982 taxable year and additions to tax as follows:
+-----------------------------------------------+
¦ ¦ ¦Sec. 6653(a) ¦Sec. 6659 ¦
+----+----------+---------------+---------------¦
¦Year¦Deficiency¦addition to tax¦addition to tax¦
+----+----------+---------------+---------------¦
¦1982¦$2,926 ¦$146.30 ¦$877.80 ¦
+-----------------------------------------------+
FINDINGS OF FACT
For purposes of the cross-motions, the facts are not in dispute. Petitioners, Gene M. and Alice M. Frazell, were husband and wife residing at Lakeport, California when they filed their petition in this case. Respondent mailed a notice of deficiency to petitioners' for their 1982 taxable year on April 9, 1986. Petitioners contend that they never received the notice of deficiency. 2 Petitioners received a Statement of Tax Due on Federal Tax Return, Form 3552, dated September 1, 1986, and in response filed their petition with this Court on October 27, 1986 The petition was filed 201 days after the mailing of the notice of deficiency. The petition was, therefore, not timely filed pursuant to section 6213(a) or section 7502.
Richard P. Bryant is, and at all times since ACTF's formation has been, the tax matters partner of ACTF. In October or November 1982, Bryant, as general partner, distributed the original Confidential Private Placement Memorandum, 3 a copy of the Agreement of Limited Partnership, and a Subscription Agreement to prospective limited partners.
The Private Placement Memorandum provides, in relevant part:
THE OFFERING
The Units of Partnership interest offered hereby represent investment in a limited partnership which will be formed to engage in the business of Audio Cassette Teaching Tape(s). The General Partner has set a minimum subscription funding level of $14,000; that is, only when $14,000 in Partnership subscriptions is received will the Partnership be formed and commence business. Each investor must subscribe for (purchase) a minimum of two Units of Partnership interest and must pay for the Unit purchased in cash.
The Partnership will be formed pursuant to the Uniform Limited Partnership Act of California and the relations of the Partners will be governed by said Act, the [Agreement of Limited] Partnership (Exhibit A hereto) and such other laws as may be applicable.
The fiscal year of the Partnership will be the calendar year. The Partnership will terminate approximately seven years following the date of its formation unless terminated sooner pursuant to the provisions of the Agreement of Limited Partnership.
* * *
* * *
* * * The General Partner reserves the right to reject the tender of any application for any reason whatsoever. Pending formation of the Partnership, or addition of new Limited Partners after formation of the Partnership, subscription funds for the Units
No subscription will be held for longer than the date of termination of this Offering. No Units or Partnership interest will be sold if less than fourteen (14) Units are subscribed for. If an insufficient amount of funds is received, each subscriber will receive a prompt refund of the subscription funds paid by him, and all obligations under his subscription will be immediately terminated.
* * *
The minimum investment in ACTF was $2,000, representing two partnership units. Fifty-six units were offered.
The Subscription Agreement required Bryant to accept a subscription within 30 days of its receipt. During November and December 1982, Bryant received and accepted executed Subscription Agreements from 19 partners, including himself, for all 56 offered partnership units. 4 Pursuant to the Subscription Agreement, a subscriber appointed Bryant as attorney-in-fact to execute the Partnership Agreement and other specified documents. The Subscription Agreement further provided that the subscriber intended that his signature on that agreement ‘also constitute his signature to the Partnership Agreement.‘ Thus, by signing the Subscription Agreement, a subscriber whose subscription was accepted also signed the Agreement of Limited Partnership. The pro forma Partnership Agreement provided with the Subscription Agreement was dated ‘as of the ___ day of ___, 1982.‘ With each Subscription Agreement, Bryant received full payment of each partner's capital contribution. He deposited the checks directly into the ACTF's bank account. There were no refunds of any subscription payments because more than 14 units were subscribed by the end of 1982 and because no subscriptions were rejected.
Petitioners executed a Subscription Agreement to purchase two partnership units on December 4, 1982. The Subscription Agreement, together with a check for $2,000, was delivered to Bryant, who accepted petitioners' subscription on December 7, 1982.
ACTF is in the business of selling and leasing audio cassette tapes made from leased master tapes. ACTF's business assets consist of four master audio cassette tapes leased from Entertainment Marketing Company Incorporated (‘EMCI ‘) in December 1982. On behalf of ACTF Bryant entered into the lease agreements with EMCI and issued four checks drawn on ACTF's account for $11,500.00 each in December 1982. These payments represented prepaid rent for the term of each lease.
On March 15, 1983, Bryant filed a Partnership Information Return, Form 1065, on behalf of ACTF for the year ended December 31, 1982. ACTF files its partnership return on a calendar year basis. The return stated that ACTF commenced business as a limited partnership on November 30, 1982. Bryant also prepared a Form K-1 for each partner for the taxable year 1982. 5
The Confidential Private Placement Memorandum for ACTF, together with unsigned copies of the Agreement of Limited Partnership and the Subscription Agreement were recorded in the County of Sonoma, State of California, on April 7, 1983. The Agreement of Limited Partnership provides, in relevant part,
1.16 ‘Partnership‘ means the limited partnership created by this Agreement.
* * *
2.2 PARTNERSHIP NAME AND CERTIFICATE. The name of the Partnership is Audio Cassette Teaching Fund and the Partnership shall conduct business under such name. The General Partner in his sole discretion may change the name at any time and from time to time. The General Partner and the Limited Partners hereto shall promptly execute, and the General Partner shall record with the county recorder in the county in which the Partnership has its principal office, a Certificate of Limited Partnership (the ‘Certificate‘) embodying...
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