Phillips v. Comm'r of Internal Revenue

• Decision Date: 07 March 1995
• Docket Number: No. 4745-94.,4745-94.
• Citation: 106 T.C. 176,106 T.C. No. 7
• Parties: Michael W. And Charlotte S. PHILLIPS, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

106 T.C. 176

106 T.C. No. 7

Michael W. And Charlotte S. PHILLIPS, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 4745-94.

United States Tax Court.

March 7, 1995.

Joseph B. Schimmel and Alan R. Chase, Miami, FL, for petitioners.

Ellen T. Fribourg and James P. Dawson, for respondent.

Ps contend that they avoided recapture of an investment credit claimed with respect to property of a partnership subject to secs. 6221 through 6231, I.R.C., as a result of filing an amended return revoking the credit subsequent to the disposition of the property. Held: The amended return was ineffective because it did not conform to the requirements of an administrative adjustment request under sec. 6227, I.R.C. Held, further, Ps were required to take into account their distributive share of the partnership investment credit, and conversion of their partnership items to nonpartnership items pursuant to the filing of a bankruptcy petition did not affect this obligation, nor preclude R's use of a prospective partnership level settlement as the basis for computing Ps' personal tax liability.

OPINION

LARO, Judge:

Michael W. and Charlotte S. Phillips petitioned the Court for redetermination of deficiencies determined by respondent for their 1984 and 1986 taxable years in the amounts of $25,471 and $69,714, respectively. After petitioners conceded the deficiency for 1984, the sole issue for decision is whether petitioners avoided recapture of an investment credit claimed for property of a partnership subject to sections 6221 through 6231¹ (the partnership provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a), 96 Stat. 324) as a result of filing an amended return revoking the credit subsequent to the disposition of the property. We hold that they did not avoid recapture.

Background

This case was submitted to us fully stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference. A summary of the facts relevant to our decision is as follows.

Petitioners resided in Miami, Florida, at the time they petitioned the Court. During the years 1985 and 1986 they were partners in Ethanol Partners, Ltd. I (Ethanol). The Schedules K-1 they received from Ethanol for taxable year 1985 reported property eligible for regular investment credit in the total amount of $1,145,508. On Form 3468, Computation of Investment Credit, which they submitted with their joint Federal income tax return for 1985, petitioners calculated the amount of their available credit with respect to regular investment credit property as $114,551 and the amount of their available credit with respect to business energy investment credit property as $114,000, for a total of $228,551, based on the Schedules K-1. Of this total amount, they claimed $45,824 as a credit against their tax liability for 1985, leaving a total unused investment credit of $211,492.² In 1986 petitioners filed an amended Federal income tax return for 1984, on which they claimed a refund resulting from the carryback of $25,471 of the unused investment credit for 1985. On their joint Federal income tax return for 1986 petitioners used $118,179 of the balance of the unused investment credit to offset recapture tax incurred pursuant to section 47(a) on certain Ethanol equipment disposed of in that year.

A notice of final partnership administrative adjustment (FPAA) was mailed to the tax matters partner of Ethanol on December 5, 1991, and a timely petition for readjustment was filed with this Court on April 30, 1992. At some time in early 1992, prior to the filing of the petition on behalf of Ethanol, petitioners filed amended Federal income tax returns on Form 1040X for both the 1985 and 1986 taxable years. On their amended return for 1985 they recalculated their tax liability, deleting the investment credit of $45,824 as well as a deduction of $90,174 which they had claimed as their share of a partnership loss. They reported additional tax due in the amount of $57,459. On their amended return for 1986 they recalculated their tax liability, deleting a deduction of $162,008 which they had claimed as their share of a partnership loss, and reported additional tax due of $19,257. They supplied the following explanation for these adjustments on both returns:

We have been advised that the I.R.S. is auditing the tax return of Ethanol Partners Ltd 59-2548638 Registration #8605000826 and wish to reverse the loss and credits taken on this return for Ethanol Partners in order to stop the interest charges.

The amended returns were not accompanied by a Form 8082, Notice of Inconsistent Treatment or Amended Return. Petitioners have never made payment of the additional tax liability shown on the amended returns. The additional taxes were assessed on April 9, 1992.

On December 18, 1992, petitioners filed a petition for bankruptcy under chapter 7 of the Federal Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of Florida. Respondent did not file a proof of claim with the bankruptcy court, and the court did not make a determination of petitioners' tax liability. Petitioners received a bankruptcy discharge pursuant to 11 U.S.C. section 505 on May 17, 1993.

On December 16, 1993, respondent timely mailed to petitioners a notice of deficiency for the 1984 and 1986 taxable years. The deficiencies were determined on the basis of a prospective settlement of the partnership proceedings, pursuant to which the business energy investment credit would be disallowed for 1985, while a regular investment credit would be allowed for 1985 and then subject to recapture in 1986. Consistent with this settlement, respondent determined petitioners' share of the investment credit for 1985 to be $114,000 and their recapture liability for 1986 to be $63,270. The settlement with Ethanol was finalized and decision was entered by this Court on May 19, 1994.

Discussion

This opinion is concerned only with the regular investment credit claimed by petitioners, which respondent for the most part allowed. The business energy investment credit which petitioners also claimed and which respondent disallowed is not at issue and may be disregarded. Petitioners' main argument may be summarized as follows. There can be no liability for recapture of an investment credit that was not used. Use of an allowable investment credit is optional. Although petitioners originally claimed an investment credit on partnership section 38 property for the 1985 taxable year, they subsequently filed an amended return deleting the credit. By assessing the additional tax shown on the amended return, respondent allowed them to revoke their original claim. This left them in the same position as if they had never claimed the credit.³ Accordingly, when in 1986 there was a disposition of the section 38 property, they incurred no recapture liability under section 47(a) and section 1.47-6, Income Tax Regs. We disagree.

Assessment of additional tax liability shown on an amended return does not estop the Commissioner from refusing to recognize the amended return upon subsequent audit. Courts have repeatedly upheld the Commissioner's authority to determine a taxpayer's liability without regard to an amended return that was previously accepted. Burnet v. Porter, 283 U.S. 230 (1931); Bird v. United States, 241 F.2d 516 (1st Cir. 1957); Polt v. Commissioner, 233 F.2d 893 (2d Cir. 1956), affg. Estate of Dula v. Commissioner, 23 T.C. 646 (1955); Melahn v. Commissioner, 9 T.C. 769 (1947) (Court reviewed).⁴ As these cases illustrate, assessment of additional taxes shown on an amended return is routine IRS procedure.⁵ To ascribe to this essentially ministerial act the same binding effect as a considered judgment would make little sense as a practical matter.

Respondent's ultimate rejection of petitioners' amended return for 1985 was entirely proper. The ability of a taxpayer to amend his return creates administrative problems for a tax system in which determination and assessment of taxes are predicated on the annual accounting principle. Pacific Natl. Co. v. Welch, 304 U.S. 191, 194 (1938); Bartlett v. Delaney, 173 F.2d 535 (1st Cir. 1949). Allowing the taxpayer to use the benefit of hindsight to select the most favorable set of intertemporal tax consequences for his transactions would be highly prejudicial to the revenue. Melahn v. Commissioner, supra at 776-777. Accordingly, the case law recognizes limits on the effectiveness of amended returns, generally. Koch v. Alexander, 561 F.2d 1115, 1117 (4th Cir. 1977); Goldstone v. Commissioner, 65 T.C. 113 (1975).

Additional concerns are implicated where the taxpayer is a partner and the item he seeks to change is an item that is more appropriately determined at the partnership level. Consistent treatment of these “partnership items” for all partners is a central principle of the TEFRA unified partnership audit and litigation procedures. See secs. 6221, 6222, 6227, 6231(a)(3); H. Conf. Rept. 97-760, at 600-601 (1982), 1982-2 C.B. 600, 662-663. To help the Secretary monitor consistency and to facilitate coordination, the statute and regulations thereunder establish specific procedures for changing the treatment of partnership items on a partner's return. Sec. 6227; secs. 301.6227(b)-1T, 301.6227(c)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6788 (Mar. 5, 1987). As an express legislative prescription, these procedures apparently supersede the discretionary administrative standards and case law governing the acceptance of amended returns generally: a partner's treatment of partnership items on his return may not be changed except in accordance with these procedures. Sec. 301.6221-1T(a), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6781 (Mar. 5, 1987).

Section 6227 provides that in order to change the treatment of a partnership item on his return the partner must file a request for administrative adjustment ...