Mfr's Hanover Trust Co. v. Comm'r of Internal Revenue (In re Estate of Carberry)
| Decision Date | 16 July 1990 |
| Docket Number | Docket No. 27350-88. |
| Citation | 95 T.C. No. 5,95 T.C. 65 |
| Parties | ESTATE OF TIMOTHY F. CARBERRY, DECEASED, MANUFACTURER'S HANOVER TRUST CO., AND ELLA J. BRADY, F.K.A. ELLA J. CARBERRY, EXECUTORS, AND ELLA J. BRADY, F.K.A. ELLA J. CARBERRY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Respondent determined a deficiency in which he disallowed a special allocation of partnership intangible drilling costs. Petitioners and respondent executed a Form 872-A extending the period of limitations. Held : (1) The form was properly executed and is binding on both petitioners; (2) respondent is not estopped from asserting the deficiency; (3) the special allocation did not have substantial economic effect and is not recognized pursuant to sec. 704(b)(2), I.R.C.; and (4) the increased interest rate applies since the phrase ”without substantial economic effect” is the equivalent of ”without economic substance” and therefor ”sham” under sec. 6621(c)(3)(A)(v), I.R.C. Patrick W. Hennessey and William L. O'Conor, Jr., for the petitioners.
Scott P. Borsack, for the respondent.
Respondent determined a deficiency of $8,698.00 in Timothy F. Carberry's (decedent) and Ella J. Brady's (his wife) 1 income tax for the taxable year 1967 and increased the interest rate on the underlying deficiency under section 6621(c). 2 The deficiency arises in respect of a net operating loss carryback from 1970. The issues for decision are whether: (1) a Form 872-A was properly executed; (2) respondent is estopped from asserting a deficiency because he failed to act diligently; (3) a special allocation of partnership intangible drilling costs (IDC) is valid under section 704(b); and (4) the increased interest rate is applicable.
All of the facts have been stipulated, and the stipulation of facts and attached exhibits are incorporated herein by reference.
At the time of the filing of the petition, petitioner Ella J. Brady resided in Boca Raton, Florida. Decedent and petitioner Ella J. Brady timely filed joint Federal income tax returns for 1967 and 1970 with the Internal Revenue Service.
Decedent died on May 8, 1972, and on June 6, 1972, petitioner Ella J. Brady and Manufacturers Hanover Trust Co. (Manufacturers) were appointed as co-executors and co-trustees. Manufacturers executed and forwarded to respondent a Form 56, Notice of Fiduciary Relationship (under section 6903 of the Internal Revenue Code) on December 17, 1973 (executors) and on February 23, 1976 (trustees). From January 4, 1974, through March 16, 1979, a series of Forms 872 were executed which extended the statute of limitations for assessment for the 1970 and 1971 taxable years of decedent and petitioner Ella J. Brady, the latest date for assessment being extended to June 30, 1980. The forms were executed by Manufacturers as executor on behalf of the decedent and by Ella J. Carberry or Ella J. Brady as spouse. On March 27, 1980, prior to the expiration of the statute of limitations, respondent accepted and executed a Form 872-A indefinitely extending the statute of limitations. The Form 872-A was signed by Helen Thome, Vice President, on behalf of the decedent. Above her signature appears the following handwritten statement: ‘MANUFACTURERS HANOVER TR. CO. & E. JANE BRADY, EXECUTORS.‘ Additionally, the form is signed by ‘E. Jane Brady (formerly E. Jane Carberry)‘ on the line provided for ‘spouse's signature‘ without any designation as executor.
The decedent's estate was settled by a decree of the Surrogate Court of Nassau County dated April 20, 1978. Respondent never filed with the Surrogate Court a notice of a claim, actual or contingent, for additional income taxes for the year 1967 or 1970 of the decedent.
Decedent was a limited partner in Indonesian Marine Resources (Indomar) in 1970. Indomar was a partner in Southeast Exploration (Souex), an oil exploration general partnership. Indomar was formed to raise the funds necessary to finance the drilling for oil and gas from investors who would be limited partners. Under the Souex partnership agreement, Indomar's initial contribution totalled $8,750,000, which was to repay the partnership costs of the initial exploration program. After this initial contribution, all partners in Souex were required to make contributions in proportion to their partnership interest. The provisions of the Souex partnership agreement allocated income and expenditures, in part, as follows:
(a) All Partnership income shall be allocated to the Partners in the percentages set forth in paragraph (a) of Article I [] * * *.
(b) All deductions and credits shall be allocated to the Partners in the same proportion that they contribute to the expenditures that created such deductions and credits * * *. Without limiting the generality of the foregoing, all deductions and credits attributable to expenditures representing contributions under paragraph (b) of Article V [] shall be allocated to INDOMAR. * * * [Brackets used in original.]
During 1970, Indomar partners made investments in Indomar, and Indomar made investments in Souex, of $8,931,284. Souex's partnership return filed for 1970 reflected no income and $11,777,288 in deductions, of which $9,004,322 was allocated to Indomar. The 1970 Indomar partnership return reflected losses of $9,224,632.42, which included the $9,004,321.59 partnership loss from Souex. Decedent was allocated his ratable share of Indomar's losses from Souex, which he carried back to 1967. On August 11, 1971, respondent received from decedent and petitioner Ella J. Brady a completed Form 1045, Application for Tentative Refund from Carryback of Net Operating Loss, or Unused Credit, on which they claimed a refund for the taxable year 1967 as a result of a carryback of a net operating loss for 1970 in the amount of $44,009.00. The claim was allowed, and a refund of $23,545.00 was issued.
The Souex partnership agreement provided that the partnership would continue until January 1, 1990, unless terminated earlier in accordance with Article XII. Under the partnership agreement, distributions upon dissolution were to be made as follows:
(e) Upon the dissolution of the Partnership where the Partnership is not reconstituted as provided in paragraph (a) above, the Partnership shall be completely liquidated, a proper accounting shall be made of the accounts of the Partnership as of the date of dissolution in the same manner as Partnership accounting is made at the end of any fiscal period, and the Partnership's liabilities, obligations to creditors and expenses of liquidation shall be paid. The Partnership properties shall be distributed to the Partners in the manner contemplated by paragraph (c) of this Article XII.
Article XII, paragraph (c), of the Souex partnership agreement provided:
(c) A Partner who withdraws after the First Withdrawal Date upon giving sixty days advance notice to the Partnership shall be entitled to receive an assignment of an undivided interest in the properties of the Partnership determined on an area-by-area or well-by-well basis in accordance with its share of the income therefrom under Article VI hereof, subject to its assumption of its pro rata share of the liabilities and obligations of the Partnership. Upon such withdrawal the withdrawing Partner shall sign and become a party to the Operating Agreement as such Operating Agreement shall be then in effect.
Souex was dissolved by agreement of the partners after the close of business on August 31, 1971. The capital accounts of the Souex partners on the date of dissolution were as follows:
+------------------------------------------------------------+
¦ ¦Cash invessted by ¦ ¦Total ¦
+------------+-------------------+----------------+----------¦
¦ ¦partners of Souex ¦Pre-Souex ¦capital ¦
+------------+-------------------+----------------+----------¦
¦ ¦to purchase assets ¦concession costs¦accounts ¦
+------------+-------------------+----------------+----------¦
¦ ¦Amount ¦Ratio ¦ ¦ ¦
+------------+----------+--------+----------------+----------¦
¦IIAPCO ¦$5,577,921¦59.0000%¦$1,925,008 ¦$7,502,929¦
+------------+----------+--------+----------------+----------¦
¦Carver-Dodge¦1,854,248 ¦19.6131 ¦639,921 ¦2,494,169 ¦
+------------+----------+--------+----------------+----------¦
¦Indomar ¦1,280,238 ¦13.5417 ¦-0- ¦1,280,238 ¦
+------------+----------+--------+----------------+----------¦
¦Warrior ¦741,696 ¦7.8452 ¦255,968 ¦997,664 ¦
+------------+----------+--------+----------------+----------¦
¦Total ¦9,454,103 ¦100.0000¦2,820,897 ¦12,275,000¦
+------------------------------------------------------------+
On July 18, 1988, respondent issued a notice of deficiency for 1967 which disallowed the carryback of decedent's distributive share of the special allocation of IDC for 1970 (see section 6501 (h)) and which asserted the increased applicable interest rate on the underlying deficiency under section 6621(c).
Before addressing the substantive issue of whether the special allocation of partnership losses should be approved, we dispose of certain procedural matters. Initially, petitioners argue that the Form 872-A executed on March 27, 1980, is invalid because the executors had no power to bind the estate since they were relieved of their duties as of April 20, 1978, and because petitioner Ella J. Brady never signed the Form 872-A in her individual capacity. We disagree.
Section 6903 provides in part:
(a) Rights and Obligations of Fiduciaries. -- Upon notice to the Secretary that any person is acting for another person in a...
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