Tipps v. Comm'r of Internal Revenue
| Decision Date | 28 May 1980 |
| Docket Number | 8402-77,7349-78.,Docket Nos. 8401-77,7348-78 |
| Citation | 74 T.C. 458 |
| Parties | JUDITH TIPPS, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner-husband's partnerships elected to deduct depreciation of expenditures to rehabilitate low-income rental housing under the accelerated method provided by sec. 167(k), I.R.C. 1954. Statements attached to the Federal income returns of each partnership for the years in issue provided all the information required for the election by sec. 1.167(k)-4(b), Income Tax Regs., except the per-unit information required by subpar. (1)(vii) and (2)(ii), thereof. In lieu of this information, the returns stated, “Per unit information requested by Sec. 167K. is available in our office for field audit.” Held, the requirements of secs. 1.167(k)-4(b)(1)(vii) and 1.167(k)-4(b)(2)(ii), Income Tax Regs., are procedural or directory, and not mandatory; the partnerships substantially complied with the regulations; and therefore, the elections under sec. 167(k) are valid. Charles J. Faruki and Armistead W. Gilliam, Jr., for the petitioners.
Rudolph L. Jansen, for the respondent.
Respondent determined deficiencies in Federal individual income tax and additions to tax under section 6653(b)2 (fraud) as follows:
Petitioners claim overpayments as follows:
+---------------------------------------------------------+
¦Docket No. ¦Petitioner ¦Year ¦Overpayment ¦
+------------+-----------------------+------+-------------¦
¦ ¦ ¦ ¦ ¦
+------------+-----------------------+------+-------------¦
¦8401-77 ¦Judith Tipps ¦1973 ¦$4,092.00 ¦
+------------+-----------------------+------+-------------¦
¦8402-77 ¦Charles Paul Tipps, Jr.¦1973 ¦4,092.00 ¦
+------------+-----------------------+------+-------------¦
¦7348-78 ¦Charles Paul Tipps, Jr.¦1971 ¦15,356.74 ¦
+------------+-----------------------+------+-------------¦
¦ ¦ ¦1972 ¦18,966.70 ¦
+------------+-----------------------+------+-------------¦
¦7349-78 ¦Judith Tipps ¦1971 ¦15,356.74 ¦
+------------+-----------------------+------+-------------¦
¦ ¦ ¦1972 ¦18,966.70 ¦
+---------------------------------------------------------+
The cases have been consolidated for trial, briefs, and opinion.
After concessions and agreements by the parties, the only issue remaining for decision is whether certain partnerships of which the petitioner-husband was a partner validly elected (or continued valid elections for) the benefits of the accelerated depreciation method provided by section 167(k) for 1973 and 1974.3
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions in these cases were filed, petitioners resided in Ohio.
Sometime during the late 1960's, petitioner Charles Paul Tipps, Jr. (hereinafter sometimes referred to as Tipps), became involved in the rehabilitation of multifamily low-income rental housing as an individual, as a general partner, as a limited partner, and as a corporate officer. Most of the housing projects in which he was involved were section 236 projects. A section 236 project is a federally assisted low and moderate income multifamily rental housing project insured under section 236 of the National Housing Act and administered by the Federal Housing Authority. The determination of a taxpayer's eligibility for section 236 assistance is made by the U.S. Department of Housing and Urban Development.
During the period 1970 through 1976, Tipps participated in the profits and losses of 14 limited partnerships as either a limited partner or a general partner. These partnerships are listed in table I.
For 1973 and 1974, the six limited partnerships indicated by asterisks in table I (hereinafter sometimes collectively referred to as the partnerships) deducted depreciation of expenditures to rehabilitate low-income rental housing under the straight-line method using a useful life of 60 months and no salvage value, pursuant to section 167(k).4
Tipps was the general partner of Carpenter's Associates, Urban Properties No. 2, Paul Tipps Enterprises No. 2, and Paul Tipps Enterprises No. 3. The partnership agreements of Carpenter's Associates, Urban Properties No. 2, and Paul Tipps Enterprises No. 3, each contained provisions to the following effect:
(1) With certain restrictions, the general partner was given complete control over the conduct of partnership affairs, including the authority to hire accountants.
(2) The general partner warranted compliance with all valid regulations promulgated by the Secretary of the Treasury pursuant to section 167(k) in order that all the dwelling units in the project would qualify as low-income rental housing and in order that the rehabilitation expenditures with respect to the project would qualify for rapid depreciation authorized by section 167(k).
(3) The partnership was to elect, in accordance with applicable law and regulations, to compute the depreciation deduction attributable to rehabilitation expenditures incurred with respect to the project by the method permitted by section 167(k).
Valid initial or subsequent year elections pursuant to section 167(k) and section 1.167(k)-4, Income Tax Regs., were made (a) in the 1970 Federal partnership income return of Van Gold Enterprises; (b) in the respective 1971 Federal partnership income returns of Paul Tipps Enterprises No. 1, Paul Tipps Enterprises No. 2, and Van Gold Enterprises; and (c) in the respective 1972 Federal partnership income returns of Urban Properties No. 2, Paul Tipps Enterprises No. 1, Paul Tipps Enterprises No. 2, Paul Tipps Enterprises No. 3, and Van Gold Enterprises. These returns were signed by Tipps on behalf of the partnerships (except for the 1970 Van Gold Enterprises return), prepared by the accounting firm of Alexander Grant & Co. (hereinafter sometimes referred to as Alexander Grant), and contained all the per-unit information required by sections 1.167(k)-4(b)(1)(vii) and 1.167(k)-4(b)(2)(ii), Income Tax Regs., to constitute valid initial or subsequent year elections.
Subsidized Management, Inc., was incorporated in Ohio on July 15, 1971, and engaged in the management of rental housing units, including units owned by partnerships in which Tipps or Property Management Consultants, Inc. (a corporation in which Tipps had an ownership interest), was a general partner, and a number of subsidized housing units owned by nonprofit organizations. In 1971, Property Management Consultants, Inc., was acquired by and became a subsidiary of Subsidized Management, Inc. The name of Subsidized Management, Inc., was changed to Federal Property Management Corp. (hereinafter referred to as Management).
Earl Bennett (hereinafter referred to as Bennett) was hired in late September or early October 1973 by Management as manager of taxes and investor relations. He continued in that position until mid-October of 1976. As tax manager, Bennett was responsible for the preparation of all Federal partnership income, Federal corporate income, State income, local property, and payroll tax returns. In 1973 and 1974, Bennett was required to prepare about 35 to 50 Federal income tax returns.
Bennett prepared the 1973 and 1974 Federal partnership income returns for the partnerships. The change from (a) having Alexander Grant prepare the partnership income returns to (b) having Bennett prepare the partnership income returns with Alexander Grant checking and signing them, was part of an effort to reduce Management's audit bill.
In connection with the preparation of these returns, and, in particular, in order to determine how to comply with section 167(k) and the applicable regulations, Bennett referred to the partnerships' prior years, income returns and sought Alexander Grant's advice. Bennett asked Alexander Grant what could be done to satisfy the law and still file the returns on...
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