Serv. Bolt & Nut Co. Profit Sharing Trust v. Comm'r of Internal Revenue
| Decision Date | 20 May 1982 |
| Docket Number | Docket Nos. 1438-80—-1440-80. |
| Citation | 78 T.C. 812 |
| Parties | SERVICE BOLT & NUT CO. PROFIT SHARING TRUST, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps, profit-sharing trusts qualified under secs. 401(a) and 501(a), I.R.C. 1954, held limited partnership interests in several partnerships engaging in the wholesale fastener distribution business. Held, Ps realized “unrelated business taxable income” within the meaning of sec. 512, I.R.C. 1954, from their distributive shares of income from such partnerships. Held, further, additions to tax under sec. 6651(a)(1), I.R.C. 1954, imposed. Held, further, respondent is not estopped from asserting the deficiencies and additions to tax at issue. John P. Rice, Jr., for the petitioners.
John P. Graham, for the respondent.
In these consolidated cases, respondent determined the following deficiencies in petitioners' Federal income taxes:
+---------------------------------------------------------------------------------+
¦Docket No. ¦ ¦TYE ¦Deficiency ¦Additions to tax sec. 6651(a)(1)2 ¦
+------------+-------------+-----+------------+-----------------------------------¦
¦ ¦ ¦ ¦ ¦ ¦
+------------+-------------+-----+------------+-----------------------------------¦
¦ ¦Service Bolt ¦ ¦ ¦ ¦
¦1438-80 ¦& Nut Co. ¦9/30/¦$38,946.72 ¦$9,736.68 ¦
¦ ¦Profit ¦75 ¦ ¦ ¦
¦ ¦Sharing Trust¦ ¦ ¦ ¦
+------------+-------------+-----+------------+-----------------------------------¦
¦1439-80 ¦Service Bolt ¦12/31¦9,146.07 ¦2,286.52 ¦
¦ ¦& Nut ¦/74 ¦ ¦ ¦
+------------+-------------+-----+------------+-----------------------------------¦
¦ ¦of Akron, ¦12/31¦ ¦ ¦
¦ ¦Inc. Profit ¦/75 ¦3,163.72 ¦790.93 ¦
¦ ¦Sharing Trust¦ ¦ ¦ ¦
+------------+-------------+-----+------------+-----------------------------------¦
¦ ¦Service Bolt ¦ ¦ ¦ ¦
¦ ¦& Nut of ¦12/31¦ ¦ ¦
¦1440-80 ¦Pennsylvania,¦/74 ¦4,125.25 ¦1,031.31 ¦
¦ ¦Inc. Profit ¦ ¦ ¦ ¦
¦ ¦Sharing Trust¦ ¦ ¦ ¦
+---------------------------------------------------------------------------------+
The issues for decision are: (1) Whether petitioners, as profit-sharing trusts qualified under sections 401(a) and 501(a), received “unrelated business taxable income” within the meaning of section 512 in their capacity as limited partners in various wholesale fastener distributing partnerships; (2) whether petitioners, if liable for tax on unrelated business taxable income under section 511, are also liable for additions to tax under section 6651(a)(1) for their failure to file returns in the years before the Court; and (3) whether the respondent is estopped from asserting the deficiencies and additions to tax which he determined in docket Nos. 1439-80 and 1440-80.
This case was submitted fully stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by reference, with the exceptions noted in the margin.3
The address of each petitioner was 3280 West 67th Place, Cleveland, Ohio, at the time the respective petitions were filed in this case.
Petitioner in docket No. 1438-80, Service Bolt & Nut Co. Profit Sharing Trust (hereinafter SBN Co.), did not file a tax return for the taxable year ending September 30, 1975.
Petitioner in docket No. 1439-80, Service Bolt & Nut of Akron, Inc. Profit Sharing Trust (hereinafter Akron), did not file a tax return for the taxable years ending December 31, 1974, and December 31, 1975.
Petitioner in docket No. 1440-80, Service Bolt & Nut of Pennsylvania, Inc. Profit Sharing Trust (hereinafter Pennsylvania), did not file a tax return for the taxable year ending December 31, 1974.
Each petitioner was at all times relevant herein a trust for a profit-sharing plan qualified under section 401(a) and claimed at all times relevant herein a tax-exempt status under section 501(a).
On July 1, 1974, the following five limited partnerships were established under the Ohio Uniform Limited Partnership Act: DWH & Associates, DRM & Associates, TWK & Associates, RWW & Associates, and RHM & Associates. Each of these partnerships consisted of one general partner (owning a 10-percent profit interest) and four limited partners (each owning profit interest of 22 or 23 percent). The general partner of each partnership listed above was, respectively: Service Bolt & Nut of Pennsylvania, Inc., Service Bolt & Nut of Lorain, Inc. (incorporated that same day as a wholly owned subsidiary of Service Bolt & Nut Co., Inc., and immediately thereafter sold to a third party or parties), Service Bolt & Nut Co., Inc., Service Bolt & Nut of Cleveland, Inc. (also incorporated that same day as a wholly owned subsidiary of Service Bolt & Nut Co., Inc., and immediately thereafter sold to a third party or parties), and Service Bolt & Nut of Akron, Inc.
On the same day, each general partner sold its inventory of fasteners to its respective partnership. Each partnership thereafter actively engaged in the wholesale fastener business. If carried on by charitable, etc., organizations described in section 511, discussed infra, such activity would constitute an “unrelated trade or business” defined in section 513(a).4
Profit-sharing trusts of each of the five corporate general partners acquired all of the limited partnership interests of the five new partnerships, doing so in such a fashion that each profit-sharing trust was a 22-percent or 23-percent limited partner in each partnership, except the partnership of which its respective corporation was a general partner.
Petitioners' limited partnership interests in the five partnerships were, thus, as follows:
+-----------------------------------------------+
¦Petitioner ¦Partnership ¦Profit interest ¦
+------------+----------------+-----------------¦
¦ ¦ ¦ ¦
+------------+----------------+-----------------¦
¦SBN Co. ¦DWH & Associates¦22% ¦
+------------+----------------+-----------------¦
¦ ¦DRM & Associates¦22 ¦
+------------+----------------+-----------------¦
¦ ¦RHM & Associates¦23 ¦
+------------+----------------+-----------------¦
¦ ¦RWW & Associates¦23 ¦
+------------+----------------+-----------------¦
¦Akron ¦DRM & Associates¦23 ¦
+------------+----------------+-----------------¦
¦ ¦TWK & Associates¦23 ¦
+------------+----------------+-----------------¦
¦ ¦RWW & Associates¦22 ¦
+------------+----------------+-----------------¦
¦ ¦DWH & Associates¦22 ¦
+------------+----------------+-----------------¦
¦Pennsylvania¦DRM & Associates¦23 ¦
+------------+----------------+-----------------¦
¦ ¦TWK & Associates¦23 ¦
+------------+----------------+-----------------¦
¦ ¦RWW & Associates¦22 ¦
+------------+----------------+-----------------¦
¦ ¦RHM & Associates¦22 ¦
+-----------------------------------------------+
For the taxable year ending September 30, 1975, petitioner SBN Co. received gross income of $88,318 from its partnership interests and net income of $75,692.
For the taxable year ending December 31, 1974, petitioner Akron received gross income of $105,102.52 from its partnership interests and net income of $26,219. For the taxable year ending December 31, 1975, petitioner Akron received gross income of $13,927 from its partnership interests and net income of $12,927.
For the taxable year ending December 31, 1974, petitioner Pennsylvania received gross income of $102,799 from its partnership interests and net income of $15,475.
Notwithstanding their general income tax exemption under section 501(a), section 511 imposes a tax on profit-sharing trusts qualified under section 401(a) to the extent such trusts receive “unrelated business taxable income.” The primary dispute in this case is whether petitioners received any unrelated business taxable income within the meaning of section 511 as a result of holding limited partnership interests in various wholesale fastener distributing partnerships.
Petitioners argue that a limited partnership interest is a passive investment that cannot, unlike a general partnership interest, produce unrelated business taxable income.
Respondent, on the other hand, contends that a limited partnership interest is no different from a general partnership interest for purposes of the section 511 tax: Both can produce unrelated business taxable income.
The concept of and tax imposed upon unrelated business income of exempt organizations derives essentially from Supplement U of the 1939 Code. In its latter codification, this concept appears at sections 511 through 515. Section 511 imposes a tax on the unrelated business taxable income (as defined in section 512) of certain tax-exempt organizations. As regards the treatment of income from partnership interests held by exempt organizations, the relevant provisions of the 1954 Code are sections 512(c) and 513(b). Section 512(c) provides:
(c) SPECIAL RULES APPLICABLE TO PARTNERSHIPS .—-If a trade...
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