Wolverine, Ltd v. Commissioner, Docket No. 26539-90.
| Decision Date | 19 November 1992 |
| Docket Number | Docket No. 26539-90. |
| Parties | Wolverine, Ltd., Sheldon M. Sisson, A Partner Other Than the Tax Matters Partner, and Woodchuck, Ltd., Sheldon M. Sisson, A Partner Other Than the Tax Matters Partner v. Commissioner. |
| Court | U.S. Tax Court |
Sheldon M. Sisson, pro se. Victor A. Ramirez, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent issued Notices of Final Partnership Administrative Adjustment (FPAA) for 1983 for two partnerships: Wolverine, Ltd. (Wolverine), and Woodchuck, Ltd. (Woodchuck). On November 26, 1990, petitioner filed a Petition for Readjustment of Partnership Items Under Code Section 6226. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 1983, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The Wolverine and Woodchuck partnerships merged on December 31, 1983; the surviving partnership was Woodchuck. For 1983, Wolverine and Woodchuck filed separate tax returns, and separate FPAAs were issued for each partnership. In this opinion; Wolverine and Woodchuck will be treated as separate partnerships. Throughout this opinion, there are discussions of the evidence presented by petitioner for the Woodchuck partnership transactions; documentation for the Wolverine transactions was not presented at trial.
The issues for decision are:
(1) Whether an extension of the period of limitations was executed by respondent prior to the expiration of the period of limitations;
(2) whether there exists a 1983 settlement agreement that is binding between respondent and petitioner; and
(3) whether the partnerships' transactions have economic substance to support interest and maintenance expense deductions claimed on the partnership returns for 1983.
Some of the facts have been stipulated, and the stipulated facts are incorporated herein by this reference. Petitioner resided in Tarzana, California, at the time he filed his petition.
The limited partnerships, Woodchuck and Wolverine, were formed under the laws of California on August 30, 1982. Gerald L. Schulman (Schulman) was the general partner and Sheldon M. Sisson (petitioner) was a limited partner of Woodchuck and Wolverine in 1983.
Woodchuck and Wolverine are two of hundreds of similarly structured limited partnerships organized, promoted, and syndicated by Schulman. Schulman was the general partner of each limited partnership. The Schulman partnerships were formed for the express purpose of acquiring buildings under lease to Government entities or utility companies. Schulman promoted the limited partnerships by representing, inter alia, that each partnership would claim an interest deduction in its first year substantially equal to the partners' cash capital contributions. Each first-year interest deduction was actually based upon a circular transfer of funds. The interest was purportedly paid on an unsecured note (short-term note) to a Schulman partnership from a Netherlands or Netherlands Antilles corporation, which amount was purportedly reloaned by that partnership, unsecured and interest free, to a Panamanian corporation. In return for the "interest free deposit", the Panamanian entity would locate a building leased by a Government agency and sell that building to the partnership with favorable long-term financing (long-term note) for the purchase.
Petitioner contributed $121,010 for a limited partnership interest in Woodchuck and $96,790 for a limited partnership interest in Wolverine. The offering memorandum for the Woodchuck partnership stated that the partnership would acquire property including a building leased to the U.S. Government. The memorandum indicated that the Woodchuck partnership would acquire the property for $9,000,000, using a 30-year, 9-percent self-liquidating nonrecourse promissory note.
On December 1, 1982, Schulman, as general partner of Woodchuck, signed a one-page promissory note to borrow $11,175,000 from Alquan Finance Company, B.V. (Alquan), at a 12-percent interest rate. The loan agreement was not signed by a representative of Alquan. Wolverine's 1983 partnership return indicated that $8,940,000 was borrowed for that partnership. The total of these two short-term notes is $20,115,000.
On March 18, 1983, Woodchuck executed with Inversiones Arena Mar, S.A., a Panamanian corporation, an Agreement to Provide Real Property and Financing. The Woodchuck offering memorandum explained the purpose of entering into this financing agreement as follows:
In return for this property and financing commitment, the Partnership was obligated to and did deposit on December 1, 1982, the sum of $20,115,000 with Inversiones for a term of thirteen (13) months. No later than December 31, 1983, Inversiones is obligated to return the deposit to the Partnership without interest. In order to make said deposit, on December 1, 1982, the Partnership borrowed the sum of $20,115,000 from Alquan Finance Co. ("Alquan") at an annual rate of twelve percent (12%). The Partnership will repay the principal of the loan when the deposit is returned by Inversiones.
The entire sum of the capital contributions made by the Limited Partners will be used to pay (i) interest on the loan from Alquan and (ii) currently due maintenance and insurance expenses of the property. * * *
During 1982 and 1983, Woodchuck sold 33 limited partnership interests, raising capital contributions of $2,700,000.
Effective August 22, 1983, Schulman and the Internal Revenue Service (IRS) entered into a Settlement Plan Agreement (Settlement Plan), setting forth concepts upon which formal settlement agreements would be drafted for Schulman's individual tax returns for 1976 through 1983. Although the Settlement Plan was negotiated on the basis of Schulman's tax returns, the plan was to affect settlements offered to other investors in Schulman partnerships. The Settlement Plan included the following:
2.5 This document is intended to be an agreement in principle establishing the concepts upon which a formal settlement agreement will be drafted. * * *
* * * *
Subject to the terms and conditions herein, the parties hereto agree as follows:
3.1 IRS shall allow each investor to deduct seventy percent (70%) of the claimed Investor First Year Deduction. No adjustment shall be made to Additional Investor First Year Deduction. The disallowed portion of the Investor First Year Deduction [thirty percent (30%)] shall be deducted by each investor ratably over the term of the SCHULMAN Partnership Long Term Notes * * *
* * * *
* * * This Settlement Plan Agreement is intended to be used for settlement purposes only and both IRS and SCHULMAN agree that the Agreement, discussions held prior to and in connection with the Agreement, and all schedules and materials previously submitted by SCHULMAN to the Appeals Office (before the date of the execution of this Agreement) in connection with the settlement discussions shall not be used in any manner whatsoever in any administrative or court proceeding. * * *
* * * *
IRS and SCHULMAN agree to exercise the utmost good faith in attempting to settle and resolve the matters described in this Agreement and to execute such documents as are reasonably required to complete Phase II of the settlement plan.
Petitioner was legal counsel for Schulman as well as a limited partner in Wolverine and Woodchuck. On August 23, 1983, petitioner sent a letter to Schulman regarding the Settlement Plan Agreement as follows: "It is my understanding that for 1983 the deductions to be claimed by the partnerships, which are the subject of this letter, will conform to the principles of the agreement for 1977-1982 and it is anticipated that this agreement will be applied by the Internal Revenue Service to 1983."
After the Settlement Plan with Schulman was signed and on September 6, 1983, Miramar Investments negotiated for the purchase of real property located at 160 E. 7th Street, Chester, Pennsylvania (the Chester property), for $4,210,000 from Boyd C. Wagner (Wagner). The property was already leased to the General Services Administration (GSA) under a noncancelable 20-year lease with one 10-year renewal option. During the negotiations with Wagner, Miramar Investments was represented by Schulman and by Philip November (November), vice president of Miramar Investments. November was an agent of Schulman. On December 23, 1983, Woodchuck entered into a nonrecourse installment-purchase agreement with Miramar Investments to acquire the Chester property for $9,000,000. The price was payable over 30 years at an interest rate of 9 percent. The agreement was signed by November and Schulman.
On December 30, 1983, the sale of the Chester property was completed between Wagner and Miramar Investments and, on that same date, the GSA lease was assigned to Miramar Investments.
On December 31, 1983, Woodchuck merged with Wolverine; the surviving partnership was Woodchuck. Woodchuck retained the same assets, capital structure, debts, and limited partners as Wolverine.
On an unspecified date, Schulman signed an agreement for Woodchuck to pay $33,075 to Postal Management Services Company for management services and for obtaining insurance. Schulman was sole proprietor of Postal Management Services Company. Schulman signed both as general partner of Woodchuck and on behalf of Postal Management Services Company; there were no other signatures on the agreement. The building was insured against fire and other damage. Woodchuck's 1983 partnership return listed $33,075 as maintenance and insurance expense; Wolverine's return listed $26,460 for those items.
Woodchuck's Form 1065 "Partnership Return of Income" for 1983, dated April 11, 1984, was received by the IRS Fresno Service Center on April 18, 1984. (A copy of Wolverine's Form 1065, stipulated as a joint exhibit, was neither dated by petitioner nor date stamped by the IRS.)...
To continue reading
Request your trial