63 T.C.M. (CCH) 2482
SEALY POWER, LTD., DONALD E. RUTT, TAX MATTERS PARTNER, Petitioner,
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
March 23, 1992
S owned and operated a facility that converted solid waste into electricity by burning the waste and generating electricity from the heat. The incinerator at S's facility never worked properly, thereby preventing the facility from generating consistent quantities of electricity.
HELD, the notice of final partnership administrative adjustment was not arbitrary.
HELD, FURTHER, whether an individual partner is at risk pursuant to sec. 465, I.R.C., is an " affected item" which is not an item over which the Court has jurisdiction in a partnership level proceeding. Dial USA, Inc. v. Commissioner, 95 T.C. 1 (1990).
HELD, FURTHER, the facility was not placed in service within the meaning of sec. 1.46-3(d), Income Tax Regs., in 1983 or 1984.
Ruth E. Salek and George W. Connelly Jr., for petitioner.
T. Richard Sealy, III, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
NIMS, CHIEF JUDGE:
Respondent proposed adjustments to partnership items of Sealy Power, Ltd. (the partnership), pursuant to the partnership audit and litigation procedures of sections 6221-6233 with respect to taxable years 1983 and 1984. The proposed adjustments are as follows:
| General partner's fee
| Investment tax credit (basis)
| Business energy tax credit
| Net earnings from self empl.
| Accelerated depreciation (tax
| Net investment income
| Check printing and deposit expense
| Amortization expense
| Net earnings from self empl.
| Accelerated depreciation
| Qualified investment expenses
| (tax preference item)
After concessions, the issues for decision are: (1) Whether the notice of final partnership administrative adjustment was arbitrary so as to shift the burden of going forward with the evidence to respondent; (2) whether the partners of the partnership were at risk within the meaning of section 465 so as to be entitled to the claimed deductions and credits; and (3) whether for purposes of depreciation and investment and energy tax credits the property of the partnership's facility was placed in service in 1983, 1984, or some other year. Unless otherwise indicated, all section references are to the Internal Revenue Code for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. On March 30, 1988, respondent issued the notice of final partnership administrative adjustment (FPAA) in this case. Donald E. Rutt (petitioner), as the tax matters partner, filed a petition for readjustment of partnership items. Rutt resided in Kingwood, Texas, at the time he filed the petition. The partnership is a Texas limited partnership. It filed its Certificate of Limited Partnership on October 21, 1983. The partnership's stated purpose was to build and operate a power production facility (facility) in Sealy, Texas, which was to produce, from solid waste, 38,400 kilowatt hours per day of electricity to be sold to Houston Lighting and Power Co. (HLP). During 1983 and 1984, the partnership had two general partners (Donald E. Rutt and Jim R. Connatser), three new limited partners, and 39 limited partners. The partnership was adequately capitalized, with the partners contributing substantial amounts of cash, promissory notes, and letters of credit. The total initial cash contribution to the partnership by the limited partners was $392,000, and each limited partner pledged a letter of credit that was used to obtain a $790,500 loan from Texas Investment Bank. Each limited partner paid his or her share of the $790,500 partnership loan from Texas Investment Bank. Energy Advancement, Inc. (EAI), built the facility on behalf of the partnership on property located next to the City of Sealy's landfill. The lease agreement between the partnership and the City of Sealy required the partnership to operate the landfill. Tor Lileng, an engineer employed by EAI, designed and supervised construction of the personal property, related buildings, and foundations at the facility. Lileng's design for the facility provided for acquiring various units of machinery from different manufacturers, placing them on concrete slabs and connecting them with wires and pipes. The facility consisted of the following property: a. A building where garbage was deposited by trucks and housed; b. a hopper with a screw/auger feeder, attached to the building. Garbage in the building was loaded into the hopper, and the feeder would move the garbage into the incinerator; c. an incinerator where the garbage was to be burned in two stages; and d. various equipment designed to recover the heat generated by burning the garbage and turn it into electricity, such as a vaporizer, steam superheater, separator, expander, and steam turbines. A large building was constructed at the facility. In this building trash was accepted, sorted, and dried so that it could be burned by the incinerator. A tractor was used in this part of the facility to move and sort the garbage. The building also contained a conveyor which moved the dried garbage to the incinerator. The incinerator was located on its own slab in a pit next to, but separate from, the building. The incinerator had two chambers. In the first chamber the garbage was heated without air so it would be gasified. The second chamber burned the gasses that were generated in the first chamber. The heat produced by the incineration process turned two separate turbine systems, one steam and one dowtherm, to generate electricity. The facility, which cost approximately $3,500,000 to construct, functionally formed a single property. The purpose of the facility was to generate electricity from solid waste. On June 6, 1984, EAI entered into an agreement with HLP on behalf of the partnership which provided for the sale of the electricity produced by the facility to HLP at a price equal to the costs which HLP avoided by not having to produce the power itself. From the winter of 1983 through a portion of 1988, the partnership operated the landfill adjacent to the facility. In so doing, it employed two gatekeepers and paid for required bulldozing. The ground lease between the City of Sealy and the partnership provided that the City of Sealy and its residents could dispose of their garbage at the landfill free of charge. Commercial establishments located within the Sealy city limits could dispose of an incidental amount of garbage at the landfill free of charge, but they had to pay a " tipping fee" equal to the current commercial rate for garbage disposal if they wished to dispose of more than an incidental amount. The partnership was not to be compensated for operating the landfill unless the cost of operation exceeded $60,000. The partnership would be reimbursed for any costs incurred over $60,000. The partnership reported the following tipping fees from persons depositing garbage at the landfill:
The partnership first operated the incinerator at the facility on or before December 31, 1983. The facility functioned sporadically for a short period of time. A number of problems kept the facility from becoming operational: The feed mechanism continually jammed with different types of garbage, such as plastic bags and telephone books. There were problems with the ash conveyor, which was supposed to convey ashes...