Monetary II Ltd. Partnership v. C.I.R., 93-70384
| Decision Date | 02 February 1995 |
| Docket Number | No. 93-70384,93-70384 |
| Citation | 47 F.3d 342 |
| Parties | -777, 95-1 USTC P 50,073 MONETARY II LIMITED PARTNERSHIP, J. Thomas Hannan, Tax Matters Partner, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Curtis W. Berner, Buell & Berner, San Francisco, CA, for petitioner-appellant.
Sarah K. Knutson, U.S. Dept. of Justice, Washington, DC, for respondent-appellee.
Appeal from a Decision of the United States Tax Court.
Before: LAY, * PREGERSON, and O'SCANNLAIN, Circuit Judges.
We must decide whether a former partner can consent to extend the limitations period for the assessment of federal income tax attributable to the partnership's activities.
Monetary II Limited Partnership ("Monetary" or "the partnership") is a California limited partnership that invests in oil and gas properties. At its formation, the partnership had only two general partners, Arthur Lachman and Richard W. Naumann, each of whom had a 1.06 percent interest in the partnership. In March 1985, Lachman and Naumann resigned from the partnership and, from that time forward, neither held any interest. Subsequent to their resignation, Edgar Osgood assumed the position of general partner.
In early 1986, the Internal Revenue Service ("IRS") sent a letter to Monetary informing it that the partnership's 1983 return had been selected for examination. The letter was addressed to the attention of the "tax matters partner" and mailed to Lachman's address. On February 25, 1986, the revenue agent assigned to the case contacted Naumann regarding this matter, Naumann informed the agent that neither he nor Lachman were partners in Monetary, and that Osgood was the new general partner.
Aware that the limitations period for the assessment of Monetary's partners' 1983 taxes was due to expire in April 1987, the revenue agent sent Osgood a Form 872-P--a consent to extend the limitations period for assessment of taxes attributable to partnership items--requesting that Monetary agree to extend the limitations period until December 1987. Osgood refused to consent to the extension.
Later that summer, the revenue agent met with Osgood and served on him a "summary report." The first paragraph of the form cover letter stated: "We have enclosed a copy of our summary report ... for you in your capacity as Tax Matters Partner." Again, Osgood refused to consent to an extension of the period of limitations.
In mid-November 1986, Linda Fogel, a reviewer with the IRS Examination Division, contacted Lachman by phone regarding an extension of the period of limitations. Lachman, concerned that he had no authority to act on behalf of the partnership, advised Fogel to contact Osgood for the extension. According to Lachman, Fogel told him that "as a matter of law, as [he] was general partner of the Partnership in 1983, his signature was required on the form." Fogel then sent Lachman a Form 872-P. Lachman again phoned Fogel, advising her to contact Osgood. Fogel informed Lachman that as tax matters partner for 1983, his signature was required on the form to make the extension effective. As a result of that conversation, Lachman signed the Form 872-P and returned it to Fogel, extending the limitations period until December 31, 1987. On March 3, 1987, the Commissioner mailed a 60-day letter proposing adjustments to the partnership's 1983 return. This letter was addressed to "Arthur Lachman, Tax Matters Partner" and was sent to the address of the partnership. Later that same month, Osgood was formally designated as the tax matters partner for the 1983 tax year by his filing, along with two other partners, a notice of designation with the IRS, pursuant to section 301.6231(a)(7)-IT(e) of the Temporary Treasury Regulations.
On November 10, 1987, the IRS sent a Final Partnership Administrative Adjustment to Monetary. Osgood, challenging the IRS' action, filed a Petition for Readjustment of Partnership Items in the United States Tax Court. Ultimately, Monetary and the Commissioner resolved all substantive issues relating to the tax treatment of the disputed partnership items, and the parties drafted a closing agreement to that effect. A dispute remained, however, with respect to whether a valid consent to extend the statute of limitations was executed on behalf of the partnership. Monetary argued that Lachman's consent was invalid; thus, Monetary reasoned, the IRS' claim, assessed in November 1987--after the expiration of the original limitations period--could not stand. Monetary filed a motion for summary judgment on this claim.
The tax court denied Monetary's motion for summary judgment in a memorandum opinion issued September 23, 1992, concluding that Lachman's consent validly extended the limitations period. As there were no disputed issues remaining, the Commissioner moved for the entry of judgment which the tax court granted on March 8, 1993. Monetary now appeals from the denial of summary judgment. 1
At issue is whether Lachman possessed the authority to consent to the extension of the limitations period. Generally, the limitations period for assessing any income tax attributable to a partnership expires three years after the partnership files its return for the tax year in question. 26 U.S.C. Sec. 6229(a). This limitations period can be extended with respect to all partners by an agreement between the Secretary and the tax matters partner ("TMP") or "any other person authorized by the partnership in writing to enter into such an agreement." 26 U.S.C. Sec. 6229(b)(1)(B).
The Internal Revenue Code defines a TMP as follows:
(A) the general partner designated as the tax matters partner as provided in the regulations, or
(B) if there is no general partner who has been so designated, the general partner having the largest profits interest in the partnership at the close of the taxable year involved (or, where there is more than 1 such partner, the 1 of such partners whose name would appear first in an alphabetical listing).
If there is no general partner designated under subparagraph (A) and the Secretary determines that it is impracticable to apply subparagraph (B), the partner selected by the Secretary shall be treated as the tax matters partner.
In applying this statutory scheme, the tax court noted that it was undisputed that Monetary made no designation of a TMP for the 1983 tax year until March 26, 1987, when it designated Osgood as TMP. Prior to such designation, the tax court reasoned, pursuant to section 6231(a)(7)(B), the TMP for 1983 was the general partner with the largest profits interest during that year, or, such interests being equal, the partner whose name occurred first alphabetically. The sole general partners for Monetary during 1983 were Lachman and Naumann; as both had equal interests in the partnership, Lachman was the TMP for 1983 because his name appeared first alphabetically.
Monetary challenges this conclusion. In particular, Monetary contends that (1) the Commissioner determined that it was impracticable to use the largest profits interest test and instead selected Osgood as the TMP; and (2) Lachman had resigned as TMP and had effectively communicated his resignation to the Commissioner before he signed the Form 872-P. Monetary also argues that Lachman's consent is invalid because of Lachman's failure to sign the Form 872-P on the correct line and because the Commissioner used duress in obtaining Lachman's consent.
We first consider Monetary's contention that because Lachman was no longer a partner in the partnership and had "no authority to act on its behalf," it was impracticable for the Commissioner to apply the largest profits interest test.
Section 6231(a)(7) does not define impracticable. IRS revenue procedures provide us some guidance, however. 2 Under these procedures, the IRS will consider it impracticable to apply the largest profits interest test if on the date that the test is applied, the general partner with the largest profits interest:
(1) is not readily determinable; or
(2) is deemed to have zero profits interest; or
(3) has been suspended from practice before the IRS; incarcerated; or resides outside the United States; or
(4) cannot be located or cannot perform the functions of TMP for any reason.
Rev.Proc. 88-16, 1988-9 I.R.B. 7.
Lachman is not incapable of serving as TMP in the manner anticipated by the first three categories. Rather, Monetary's claim would fall within the fourth category--Monetary argues that Lachman cannot perform the functions of TMP because he is no longer a partner of Monetary. 3
We do not doubt that there may arise a situation in which the cessation of an individual's relationship with the partnership might impair his or her ability to serve as TMP. This is not the situation before us, however, we are ultimately unpersuaded that, based on these facts, Lachman could not adequately protect Monetary's interests. Nor do we believe that the Internal Revenue Code mandates the conclusion that an individual is barred from serving as TMP once he resigns from the partnership. Indeed, temporary treasury regulations suggest that the fact that an individual is no longer a partner does not disqualify that individual from serving as TMP. These temporary regulations provide that
[a] person may be designated as the tax matters partner of a partnership for a taxable year only if that person
(i) was a general partner in the partnership at some time during the taxable year for which the designation is made, or
(ii) is a general partner in the partnership as of the time the designation is made.
Temp.Treas.Reg. Sec. 301.6231(a)(7)-1T(b) (emphasis added). These regulations do not require that the TMP be a partner at the time of designation as such. See also Montana Sapphire Assocs. v. Commissioner, 95 T.C. 477,...
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