119 T.C. No. 7
UNITED STATES TAX COURT
PETER M. AND SUSAN L. HOFFMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16028-99L. Filed September 24, 2002.
On Sept. 10, 1991, Ps timely filed a joint 1990 Federal income tax return on which they reported that they: (1) Held a general partner interest in one partnership and limited partner interests in five partnerships and (2) did not under sec. 469, I.R.C., materially participate in any of the partnerships. On Sept. 8, 1997, Ps filed an amended return for 1990 reporting additional income and remitting the tax due on that additional income. On Nov. 6, 1997, R assessed the additional tax liability reported on the amended return and assessed other amounts for a penalty and interest on that additional tax liability.
Subsequently, R issued to Ps a notice of intent to levy, and Ps requested and received a hearing under sec. 6330, I.R.C. At the hearing, Ps contended that the additional tax liability reported in 1997, the penalty, and the interest were all assessed after the expiration of the period of limitations and that they were entitled to a refund of the amount paid with the -2-
amended return. R rejected those arguments in a notice of determination issued to Ps sustaining the proposed levy. R determined that the applicable period of limitations is the 6-year period under sec. 6501(e)(1)(A), I.R.C., and that the assessment was timely because the amended return was filed 2 days before the expiration of the 6-year period. R argues that the 6-year period applies because, R asserts, the reference to “gross income stated in the return” in sec. 6501(e)(1)(A), I.R.C., does not include any of the income of the partnerships given that Ps neither actively nor materially participated in the trade or business of any of those partnerships.
Held: The 6-year period of limitations in sec. 6501(e)(1)(A), I.R.C., is inapplicable, and the assessment made on Nov. 6, 1997, was untimely. Ps’ “gross income stated in the return” is determined by reference to the information returns of the partnerships.
Steven Toscher, Stuart A. Simon, and Bruce I. Hochman, for
petitioners.
Daniel M. Whitley and Irene S. Carroll, for respondent.
OPINION
LARO, Judge: Petitioners petitioned the Court under section
6330(d), and the parties submitted the case to the Court fully
stipulated. See Rule 122. We decide herein whether respondent
assessed certain amounts against petitioners within the period
allowed by section 6501. We hold respondent did not. Unless
otherwise indicated, section references are to applicable
versions of the Internal Revenue Code. Rule references are to -3-
the Tax Court Rules of Practice and Procedure. Petitioners
resided in Los Angeles, California, when the petition was filed.
Peter M. Hoffman and Susan L. Hoffman (Mr. Hoffman and
Ms. Hoffman, respectively) filed a joint Federal income tax
return for 1990. Before filing that return, they requested from
respondent two extensions of time to file, both of which were
granted. Their 1990 Federal income tax return (the original
return) was received by respondent on September 10, 1991.
The original return reported that either Mr. or Ms. Hoffman
was a partner in the following partnerships: (1) Twelve Star
Partners, Ltd., (2) Thirteen Star Partners Limited, (3) Cabrillo
Palms Associates, (4) Desert Investments, (5) Joliet Television
Stations, L.P., and (6) Orbis Television Stations, L.P. The
original return reported that either Mr. or Ms. Hoffman held a
limited partner interest in the partnerships, except for Desert
Investments, in which the original return reported that one of
petitioners was a general partner. The original return reported
that neither petitioner “materially participated” in the
activities of any of these partnerships within the meaning of
section 469. The original return reported that petitioners also
were shareholders in an S corporation, Cinema Products Corp.
(Cinema), and that they did not “materially participate” in the
activity of Cinema. -4-
Respondent no longer has copies of any of the six
partnerships’ Federal tax returns for 1990, and the
Schedules K-1, Partner’s Share of Income, Credits, Deductions,
etc., are not in the record. Respondent has a copy of Cinema’s
1990 Form 1120S, U.S. Income Tax Return for an S Corporation.
The original return reported gross income from wages,
interest, a State tax refund, miscellaneous income, and rental
income totaling $3,019,317. The original return also reported
long-term capital gain of $5,304 from the partnerships and
section 1231 gain of $76,070 from the S corporation. The record
does not indicate the gross income of the six partnerships.
On September 8, 1997, petitioners filed an amended 1990
Federal income tax return (the amended return) that was prepared
by their accountant.1 The amended return shows an additional tax
liability of $218,152, without statutory additions, which was
based upon $779,114 of gross income that was omitted from the
original return.2 The amount omitted from the original return
relates to cancellation of indebtedness income that petitioners
did not report.
1 Respondent asserted in the answer that the amended return was filed pursuant to a plea agreement that settled a criminal case brought against Mr. Hoffman. See United States v. Hoffman, No. CR 96-1144(A)-JGD (C.D. Cal.) (the criminal case). Respondent later conceded that the amended return was not filed as a condition to the plea agreement. 2 Respondent never issued a notice of deficiency to petitioners for 1990. -5-
At or about the time that petitioners filed the amended
return, they remitted payment for the $218,152. Respondent
assessed the additional tax shown on petitioners’ amended return
on November 6, 1997, which is 59 days after the amended return
was filed.
On May 6, 1999, respondent issued to petitioners a Notice of
Intent to Levy and Notice of Your Right to a Hearing (notice of
intent to levy). The notice of intent to levy is not contained
in the record. The Court understands that respondent proposes to
effect the levy to collect interest and penalties related to the
amount of additional tax liability reported in the amended
return. The record does not disclose the type of penalties
respondent assessed.
On May 10, 1999, petitioners timely requested a hearing
under section 6330. In their request, petitioners stated that
we are disputing any balance due and are requesting a refund of $218,152 paid in error.
Mr. and Mrs. Hoffman filed a form 1040X in 1997 for the year 1990. They paid $218,152 of additional tax with this form. The IRS is attempting to collect accumulated interest and penalty on said amended return. [sic]
The 1990 amended return was filed subsequent to the expiration of the statute of limitations and was therefore invalid. Assessment of penalties and interest is incorrect. The taxpayers are now aware of their error and intend to file a Claim for refund of the $218,152 paid utilizing the format enclosed. -6-
The request for a hearing was accompanied by a written
request for a refund, using Form 1040X, Amended U.S. Individual
Income Tax Return, for the additional $218,152 paid with the
amended return. The request for refund stated that
Taxpayer filed form 1040X and paid $218,152 of additional taxes for 1990 in September 1997. This was subsequent to [the] tolling of statute of limitations and as such was not valid. This form is being completed as a claim for refund. It is being filed within the 2 year period of remittance of the erroneous tax payment (IRC 6511(b)(2)(B)).
A Notice of Determination Concerning Collection Action(s)
Under Section 6320 and/or 6330 was sent to petitioners on
September 8, 1999. The Appeals officer determined that
petitioners
raised the issue of the timely filing of your court ordered amended return in your 2nd amended return which sought refund of the tax paid with the court ordered amended return. The statute of limitations had been extended by three years to a six year statute due to an amount of unreported income which was in excess of 25% of your AGI. Your court ordered amended return was filed on September 8, 1997, exactly two days prior to the six year statute of September 10, 1997. You have no basis for the refund of tax paid with your court ordered amended return, and accordingly, no basis for relief from the interest charged on such deficiency.
You requested a Collection Due Process hearing. Your representative appeared at the hearing and indicated that you felt that the proposed levies were intrusive because you had filed your court ordered amended return after the statute of limitations had expired. If the statute of limitations had expired it would mean that the payment you made when the amended return was filed was a voluntary payment and there was no basis for charging interest on the voluntary payments. Additionally, you sought refund of tax paid with such court ordered amended return in the amount of $218,152. -7-
It is determined that you have no basis for refund of $218,152, nor is there basis for relief from the statutory interest being sought by the government. You have offered no other alternative means of disposing of your liability, accordingly standard collection means will be pursued.
In making this determination, the Appeals officer did not review
the 1990 tax returns for the six partnerships in which
petitioners were partners.
In this proceeding, petitioners’ sole allegation is that the
Appeals officer erroneously determined that the assessment of the
penalty and interest was proper. Petitioners allege that the
assessments were made after the expiration of the period of
limitations provided in section 6501. We agree that the
assessment was untimely.
Any amounts assessed, paid, or collected after the
expiration of the period of limitations are overpayments.
Sec. 6401(a); Estate of Michael v. United States, 173 F.3d 503
(4th Cir. 1999); Alexander v. United States, 44 F.3d 328
(5th Cir. 1995); Ewing v. United States, 914 F.2d 499 (4th Cir.
1990); Philadelphia & Reading Corp. v. United States, 944 F.2d
1063 (3d Cir. 1991). Accordingly, if the period of limitations
expired before either formal assessment by respondent or payment
by petitioners, then petitioners are not liable for any tax on
the cancellation of indebtedness income. Ill. Masonic Home v.
Commissioner, 93 T.C. 145 (1989); Diamond Gardner Corp. v.
Commissioner, 38 T.C. 875, 881 (1962) (“any payment by a taxpayer -8-
of a barred tax liability, whether voluntary or involuntary,
automatically becomes an ‘overpayment’ and hence subject to
mandatory refund [under section 6402(a)]”). If petitioners’
liability for the tax attributable to the cancellation of
indebtedness income was eliminated by the expiration of the
period of limitations, petitioners cannot be liable for any
interest or a penalty.
Respondent contends that the additions to tax were timely
assessed pursuant to exceptions to the general 3-year period of
limitations. Sec. 6501(c)(7), (e). Respondent has conceded that
petitioners were not contractually obligated to file the amended
return as part of the plea agreement that settled the criminal
proceeding. Moreover, respondent has conceded that petitioners
are not estopped from asserting the defense of period of
limitations merely because they voluntarily filed an amended
return and paid the additional tax liability.
A. Standard of Review
Where the validity of the underlying tax liability is
properly at issue in an appeal brought under section 6330(d),
the Court will review the taxpayer’s liability under the de novo
standard. Where the underlying liability is not at issue, the
Court will review the Commissioner’s administrative determination
for abuse of discretion. Sego v. Commissioner, 114 T.C. 604, 610
(2000). To determine which standard of review applies, the Court -9-
must decide whether petitioners’ underlying tax liability is at
issue. A taxpayer may challenge “the existence or amount of the
underlying tax liability for any tax period if the * * *
[taxpayer] did not receive any statutory notice of deficiency for
such tax liability or did not otherwise have an opportunity to
dispute such tax liability.” Sec. 6330(c)(2)(B).
At the hearing, petitioners questioned whether the
assessment had been made within the limitations period.
Raising the issue of whether the limitations period has expired
constitutes a challenge to the underlying tax liability. Boyd
v. Commissioner, 117 T.C. 127 (2001); see also MacElvain v.
Commissioner, T.C. Memo. 2000-320.
Under section 6330(c)(2)(B), the underlying liability is
properly at issue if the taxpayer did not receive any statutory
notice of deficiency or did not otherwise have an opportunity to
dispute the tax liability. Goza v. Commissioner, 114 T.C. 176,
181 (2000). An opportunity to dispute a liability includes a
prior opportunity for a conference with Appeals that was offered
either before or after the assessment of the liability. Sego v.
Commissioner, supra at 609-610.
In the instant case, respondent’s assessment was the result
of petitioners’ voluntarily filed amended return. No notice of
deficiency was issued to petitioners, and petitioners have not
otherwise had an opportunity to dispute the tax liability. -10-
Accordingly, whether the assessment was made during the
limitations period is reviewed de novo.
B. Period of Limitations
Section 6501(a) generally provides that a valid assessment
of income tax liability may not be made more than 3 years after
the later of the date the tax return was filed or the due date of
the tax return.3 This 3-year period as to petitioners’ 1990
taxable year expired before respondent assessed the statutory
additions at issue.4 In order for respondent’s assessment of the
statutory additions to be timely, an exception to the general
3-year period of limitations must apply.
1. Burden of Proof
Petitioners contend that respondent assessed the relevant
amounts for 1990 after the expiration of the 3-year period of
limitations in section 6501(a). The bar of the period of
limitations is an affirmative defense, and the party raising this
3 Sec. 6501 provides in pertinent part as follows:
SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.
(a) General Rule.-–Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) * * * and no proceeding in court without assessment for the collection of such tax shall be begun after expiration of such period. * * * 4 The original return for 1990 was filed on Sept. 10, 1991, and the assessments of penalties and interest were made on Nov. 6, 1997. -11-
defense must specifically plead it and prove it. Rules 39,
142(a); Mecom v. Commissioner, 101 T.C. 374, 382 (1993), affd.
without published opinion 40 F.3d 385 (5th Cir. 1994). Because
petitioners have pleaded the defense properly, we proceed to
address their contention.
In questioning the validity of the assessment by asserting
that it was made after the expiration of the 3-year period of
limitations, petitioners initially must prove: (1) The filing
date of their 1990 tax return and (2) that respondent assessed
the relevant amounts after the expiration date of the 3-year
period. Reis v. Commissioner, 142 F.2d 900 (6th Cir. 1944),
affg. 1 T.C. 9, 12 (1942), as modified by a Memorandum Opinion of
this Court dated June 4, 1943; Harlan v. Commissioner, 116 T.C.
31, 39 (2001) (and cases cited therein); see Mecom v.
Commissioner, supra at 382. Respondent concedes that petitioners
have proven both prongs. Thus, petitioners have established a
prima facie case that the period of limitations precludes
respondent from making the relevant assessment for 1990, and the
burden of going forward shifts to respondent. See Mecom v.
Commissioner, supra at 382. Respondent must introduce evidence
that the assessment for 1990 is not barred by the period of
limitations under section 6501(a). Id. If respondent makes such
a showing, the burden of going forward with the evidence shifts
back to petitioners. Id. at 383. Notwithstanding the shifting
of the burden of going forward, the burden of ultimate persuasion -12-
never shifts from the party who pleads the bar of the period of
limitations. Stern Bros. & Co. v. Burnet, 51 F.2d 1042 (8th Cir.
1931), affg. 17 B.T.A. 848 (1929); Mecom v. Commissioner, supra
at 383 n.16.
2. Six-Year Period of Limitations
Respondent relies on the 6-year period of limitations under
section 6501(e) as an exception to the general 3-year period.
Section 6501(e) generally provides that a 6-year period of
limitations is applicable when a taxpayer omits from gross income
an amount includable therein which is greater than 25 percent of
the amount of gross income stated in the return.5 Once
5 SEC. 6501(e) provides, in pertinent part, as follows:
SEC. 6501(e). Substantial Omission of Items.-–Except as otherwise provided in subsection (c)--
(1) Income taxes.-–In the case of any tax imposed by subtitle A--
(A) General rule.-–If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. For purposes of this subparagraph–-
(i) In the case of a (continued...) -13-
petitioners establish the prima facie case that the general
period of limitations has expired, respondent bears the burden of
going forward to establish that the amount petitioners omitted
exceeds 25 percent of the gross income reported in their return.
It is well established in this Court that for purposes of section
6501(e), a taxpayer-partner’s return includes the information
returns of partnerships of which the taxpayer was a member and
that were identified on the taxpayer-partner’s return. Harlan v.
Commissioner, supra; Davenport v. Commissioner, 48 T.C. 921
5 (...continued) trade or business, the term “gross income” means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services; and
(ii) In determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item. -14-
(1967). Accordingly, to satisfy the burden of going forward,
respondent must provide evidence to show the amounts of gross
income reported on the partnership and S corporation returns or
to show that no such returns were filed. Davenport v.
Commissioner, supra at 928; Roschuni v. Commissioner, 44 T.C. 80
(1965).
Respondent has provided none of the income tax returns for
the six partnerships of which petitioners were partners.
Moreover, respondent has not alleged, much less established, that
any of the six partnerships failed to file returns for 1990.
Instead, respondent alleges that his burden of going forward does
not include production of the partnership returns. We disagree.
The 6-year period of limitations provided for in section
6501(e) is implicated if the taxpayer omitted from gross income
an amount greater than 25 percent of the taxpayer’s gross income
as stated on the Federal income tax return. The amount
petitioners omitted, the numerator in the calculation, is not in
dispute in this case. The amount omitted is $779,114. The
parties disagree, however, as to the amount of gross income
stated in their return.
Gross income is not defined in section 6501. We have held,
however, that the general definition of gross income found in the
Code applies to section 6501(e), except for the modification
provided in section 6501(e)(1)(A)(i). N. Ind. Pub. Serv. Co. & -15-
Subs. v. Commissioner, 101 T.C. 294, 299 n.7 (1993). Section
6501(e)(1)(A)(i) provides a special definition of gross income in
the context of a trade or business. That section provides that
as applied to a trade or business, “gross income” includes the
total of the amounts received or accrued from the sale of goods
or services before diminution by the cost of those sales or
services. Sec. 6501(e)(1)(A)(i). With regard to a taxpayer-
partner, we have interpreted this provision as requiring that a
taxpayer’s gross income include her share of the partnership’s
gross receipts from the sale of goods or services. Harlan v.
Commissioner, 116 T.C. 31 (2001); Estate of Klein v.
Commissioner, 63 T.C. 585, 591 n.6 (1975), affd. 537 F.2d 701
(2d Cir. 1976). In essence, the taxpayer-partner’s share of the
partnership’s gross receipts is used in determining total gross
income of the taxpayer, the denominator in our calculation.
Here, respondent argues that petitioners’ interests in the
six partnerships do not implicate section 6501(e)(1)(A)(i).
According to respondent, if the partner did not actively
participate in the partnership, the partner is not engaged in a
trade or business, and the “gross receipts” definition of section
6501(e)(1)(A)(i) is not implicated. Thus, respondent contends,
the general meaning of gross income should apply, and only the
taxpayer-partner’s share of income from the partnership that was
already included in the taxpayer-partner’s return is included in -16-
the calculation of gross income. Such an approach would
eliminate the need to review the partnership’s tax returns, and
respondent would have satisfied his burden. We have not
previously addressed whether section 6501(e)(1)(A) is applicable
only to situations in which the taxpayer-partner did materially
or actively participate in the partnership. We hold that it is
not so limited.
A general partner may be deemed to be conducting the trade
or business activity of the partnership of which she is a member.
Flood v. United States, 133 F.2d 173, 179 (1st Cir. 1943); Cokes
v. Commissioner, 91 T.C. 222, 228 (1988); Drobny v. Commissioner,
86 T.C. 1326 (1986); Brannen v. Commissioner, 78 T.C. 471 (1982),
affd. 722 F.2d 695 (11th Cir. 1984); Hagar v. Commissioner,
76 T.C. 759 (1981); Ward v. Commissioner, 20 T.C. 332 (1953),
affd. 224 F.2d 547 (9th Cir. 1955); Cluet v. Commissioner, 8 T.C.
1178, 1180 (1947); see sec. 1.702-1(b), Income Tax Regs. See
generally Rev. Rul. 92-17, 1992-1 C.B. 142. Moreover, the trade
or business of the partnership may be imputed to a general
partner, irrespective of the fact that the partner did not
actively or materially participate in the partnership. Bauschard
v. Commissioner, 31 T.C. 910 (1959), affd. 279 F.2d 115 (6th Cir.
1960). It is also possible for the trade or business activity of
a limited partnership to be imputed to a limited partner.
Newhall Unitrust v. Commissioner, 104 T.C. 236 (1995), affd. -17-
105 F.3d 482 (9th Cir. 1997); Butler v. Commissioner, 36 T.C.
1097 (1961). Additionally, an individual taxpayer may be engaged
in more than one trade or business. Oliver v. Commissioner,
138 F.2d 910 (4th Cir. 1943), affg. a Memorandum Opinion of this
Court.
Respondent argues that we should not impute the trade or
business of a partnership to a partner, limited or general, who
does not actively or materially participate in a partnership.
Essentially, respondent suggests, section 6501(e)(1)(A)(i) does
not include those activities that qualify as “passive activities”
under section 469(c). Respondent has provided no support for
this argument, other than his view that a partner who does not
materially participate in a partnership is simply an investor.
We see no reason to so limit the application of section
6501(e)(1)(A)(i). That provision of the Code does not indicate
that a partner must materially or actively participate in the
trade or business. In fact, respondent has conceded that the
partnerships are engaged in trade or business activities. We
hold that section 6501(e)(1)(A)(i) does not require that a
partner materially participate, as defined by section 469, in the
trade or business activity.
The gross receipts definition of gross income provided in
section 6501(e)(1)(A)(i) is implicated, and petitioners’ gross
income for purposes of that provision includes their share of the -18-
partnerships’ gross receipts. Respondent has not shown whether
Desert Investments or the other partnerships filed 1990 Federal
income tax returns and, if so, the amount of gross receipts
reported therein. We conclude that respondent has failed to meet
his burden of production with respect to establishing the amount
of gross income stated on petitioners’ 1990 Federal income tax
return. Respondent has failed to show that the 6-year period of
limitations is applicable. Therefore, the general 3-year period
of limitations is applicable. Sec. 6501(a).
Petitioners’ return was filed on September 10, 1991, and the
3-year period of limitations ended on September 10, 1994. Any
amounts assessed, paid, or collected after that date are barred
by expiration of the period of limitations. Sec. 6401(a). Thus,
petitioners’ liability for the tax on the cancellation of
indebtedness income was eliminated when the period of limitations
expired before either formal assessment by respondent or payment
by petitioners. Ill. Masonic Home v. Commissioner, 93 T.C. 145
(1989); Diamond Gardner Corp. v. Commissioner, 38 T.C. 875
(1962). Petitioners have no liability for interest or a penalty
relating to a tax liability that was eliminated by the expiration
of the period of limitations. Accordingly, respondent’s proposal -19-
to levy upon petitioners’ property to collect those amounts is
improper.
Decision will be entered
for petitioners.