Harlan v. Comm'r of Internal Revenue
| Decision Date | 17 January 2001 |
| Docket Number | 24609–92.,No. 21214–92,21214–92 |
| Citation | 116 T.C. No. 4,116 T.C. 31 |
| Parties | Ridge L. HARLAN and Marjory C. Harlan, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentTheodore S. OCKELS and Rosemarie G. Ockels, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayers, partners in first-tier partnership, petitioned for redetermination of deficiencies in tax year outside three year statute of limitations. In matter of first impression, the Tax Court, Chabot, J., held that determination of gross income to apply six year statute of limitations includes second-tier partnerships' information returns.
Decision for taxpayers.
Acquiesced, 2002 WL 1814914. Ps are partners in partnerships (the 1st-tier partnerships); some of the 1st-tier partnerships are partners in other partnerships (the 2d-tier partnerships). R maintains that the 6–year period of limitations under sec. 6501(e)(1)(A), I.R.C.1986, applies to notices of deficiency sent in 1992 with respect to Ps' 1985 tax year. In determining the applicability of sec. 6501(e)(1)(A), I.R.C.1986, R includes in Ps' “gross income stated in the return” Ps' distributive shares of the gross incomes of the 1st-tier partnerships, but does not take account of the 1st-tier partnerships' distributive shares of the gross incomes of the 2d-tier partnerships. Ps contend to the contrary.Held: In determining the amount of “gross income stated in the return” (the denominator in the 25–percent test of sec. 6501(e)(1)(A), I.R.C.1986) for petitioners, the 2d-tier partnerships' information returns are treated as adjuncts to, and parts of, the 1st-tier partnerships' information returns, which in turn are treated as adjuncts to, and parts of, petitioner's tax returns.
Craig A. Etter, Timothy J. Jessell, and Michael I. Sanders, for petitioners.
Carol E. Schultze, for respondent.
This matter is before us for determination as to whether, in applying the 6–year period of limitations (sec.6501(e)(1)(A)) 1, when a petitioner's tax return reflects income from a partnership (hereinafter sometimes referred to as the 1st-tier partnership) that is itself a partner in another partnership (hereinafter sometimes referred to as the 2d-tier partnership), the statutory phrase “gross income stated in the return” (the denominator in the 25–percent test) requires a tracing of the flow of gross income from not only the 1st-tier partnership's information return but also from the 2d-tier partnership's information return in order to determine petitioners' appropriate distributive share of partnership gross income from the 1st-tier partnership's tax return.2
Respondent determined deficiencies in individual income tax and additions to tax under sections 6653(a) (negligence, etc.) and 6661 (substantial understatement) against (1) petitioners Ridge L. Harlan (hereinafter sometimes referred to as Ridge) and Marjory C. Harlan (hereinafter sometimes referred to as Marjory) (Ridge and Marjory are hereinafter sometimes referred to collectively as the Harlans) and (2) petitioners Theodore S. Ockels (hereinafter sometimes referred to as Theodore) and Rosemarie G. Ockels (Theodore and Rosemarie G. Ockels are hereinafter sometimes referred to collectively as the Ockels) for 1985 as follows:
+----------------------------------------------------------------+
¦ ¦ ¦Additions to Tax ¦
+-----------+----------+-----------------------------------------¦
¦Petitioners¦Deficiency¦Sec. 6653(a)(1)¦Sec. 6653(a)(2)¦Sec. 6661¦
+----------------------------------------------------------------¦
¦ ¦
+----------------------------------------------------------------¦
¦The Harlans¦$548,186 ¦$27,409 ¦1 ¦$137,047 ¦
+-----------+----------+---------------+---------------+---------¦
¦The Ockels ¦62,490 ¦3,125 ¦2 ¦15,623 ¦
+----------------------------------------------------------------+
The instant cases have been severed from docket Nos. 15653–92 and 15654–92 3 for briefing and opinion on the 2d-tier partnership issue.
The 2d-tier partnership issue has been submitted fully stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the respective petitions in the instant cases were filed, the Harlans resided in Hillsborough, California, and the Ockels resided in Lafayette, California.
The Harlans filed their joint 1985 tax return on or about August 12, 1986. On June 26, 1992, respondent issued a notice of deficiency to the Harlans for 1985.
The 3–year period of limitations for assessment of tax under section 6501(a) with respect to the Harlans for 1985 expired before the notice of deficiency was mailed. The Harlans did not execute any extensions of the period of limitations on assessment with respect to 1985.
The Harlans' 1985 tax return has attached to the Form 1040, the following: Schedules A, B, C, D, E, and SE; Forms 3468, 3800, 4136, 4797, 4868, 6251, 1116, 2210, 4562, 4835, 4952; 27 numbered “statements”; and a Treasury Department Form TD F 90–22.1.
The Harlans' 1985 tax return shows an ordinary loss of $56,069 from several partnerships, identified by name, address, and employer identification number. The record includes 1985 partnership information returns, or parts of those returns, from each of the identified partnerships, as well as stipulations as to the Harlans' shares of the partnerships' gross incomes, determined without regard to the 2d-tier partnership gross incomes.
During 1985, Ridge was a partner in three single-tier partnerships, and Marjorie was a partner in one single-tier partnership.
During 1985, Ridge was a partner in two multiple tier partnerships: (1) Pacific Real Estate Investors Partnership (hereinafter sometimes referred to as Pacific) and (2) Carlyle Real Estate Limited Partnership–VI (hereinafter sometimes referred to as Carlyle).
Pacific was a partner in at least one other partnership. Pacific's 1985 information return shows an ordinary loss of $7,705 from another partnership, identified by name and employer identification number. The record does not include information as to the amount of the gross income stated on this 2d-tier partnership's 1985 information return.
Carlyle was a partner in several other partnerships. Carlyle's 1985 information return shows ordinary income of $674,791.81 from four other partnerships, each identified by name and employer identification number. The record does not include information as to the amounts of Carlyle's shares of the gross incomes stated on these 2d-tier partnerships' 1985 information returns.
On one of the schedules attached to their 1985 tax return, the Harlans show their gross income as $1,216,099. This schedule is for purposes of Form 1116, part I, line 2.d. (v), and is an element of the formula used in the computation of their foreign tax credit. Nevertheless, the parties have stipulated that the gross income for purposes of section 6501(e) that is “reflected on the Harlan's 1985 Form 1040 and on the first-tier partnership returns of the partnerships in which Ridge or Marjory Harlan owned a direct interest”, i.e., excluding “the flow of gross income from” the 2d-tier partnerships, is $1,410,077.
The Ockels filed their 1985 joint tax return on October 15, 1986. On August 11, 1992, respondent issued a notice of deficiency to the Ockels for 1985.
The 3–year period of limitations for assessment of tax under section 6501(a) with respect to the Ockels for 1985 expired before the notice of deficiency was mailed. The Ockels did not execute any extensions of the period of limitations on assessment with respect to 1985.
The Ockels' 1985 tax return has, attached to the Form 1040, the following: Schedules A, B, C, D, E, and SE; Forms 2688, 3468, 4797, 6198, 6251, 4684, 8283, 4255, 4562, 4868, 4952, 8082, 6248; and numerous schedules, attachments, and other documents.
The Ockels' 1985 tax return shows net income of $7,900 from several partnerships and one independent oil producer, identified by name and employer identification number. The record includes 1985 partnership information returns, or parts of those returns, from each of the identified partnerships, and a 1985 windfall profit tax information return (Form 6248) from the oil producer, as well as stipulations as to Theodore's shares of the partnerships' gross incomes, and the oil producer's gross sales price, determined without regard to the 2d-tier partnerships' gross incomes.
During 1985, Theodore was a partner in nine single-tier partnerships.
During 1985, Theodore was a partner in one multiple tier partnership, Mission Resources Development Drilling Program—Belridge II (hereinafter sometimes referred to as Mission Resources). Mission Resources was a partner in at least one other partnership. Mission Resources' 1985 information return shows ordinary income of $286,137 from another partnership, identified by name but not otherwise. The record does not include information as to the amount of the gross income stated on this 2d-tier partnership's 1985 information return.
The Ockels do not claim a foreign tax credit on their 1985 tax return, and so do not have any equivalent of the Harlans' above-noted schedule. The parties have stipulated that the gross income for purposes of section 6501(e) that is “reflected on the Ockels' 1985 Form 1040 and on the first-tier partnership return [sic] of the partnerships in which the Ockels owned a direct interest”, i.e., excluding “the flow of gross income from” the 2d-tier partnerships, is $407,819. This total includes Theodore's share of the gross receipts of the independent oil producer.
At the start of 1985, Ridge owned 80,000 shares of junior common stock in VeloBind that he had bought in 1983 for $3 per share. In 1985, Theodore owned 7,500 shares of junior common...
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