No. 99-815
In the Supreme Court of the United States
JOSEPHINE CHIMBLO, ET AL., PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE RESPONDENT IN OPPOSITION
SETH P. WAXMAN
Solicitor General
Counsel of Record
LORETTA C. ARGRETT
Assistant Attorney General
WILLIAM S. ESTABROOK
JOHN A. NOLET
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTIONS PRESENTED
1. Whether the notice of deficiency determining "affected items"
against petitioners was barred by the statute of limitations contained in
Section 6229 of the Internal Revenue Code, 26 U.S.C. 6229.
2. Whether the negligence penalty was properly imposed under Section 6653(a)
of the Internal Revenue Code, 26 U.S.C. 6653(a) (1982 & Supp. IV 1986).
In the Supreme Court of the United States
No. 99-815
JOSEPHINE CHIMBLO, ET AL., PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
BRIEF FOR THE RESPONDENT IN OPPOSITION
OPINIONS BELOW
The opinion of the court of appeals (Pet. App. 1a-16a) is reported at 177
F.3d 119. The memorandum opinion of the Tax Court is unofficially reported
at 74 T.C.M. (CCH) 1307 (Pet. App. 17a-28a).
JURISDICTION
The judgment of the court of appeals was entered on May 17, 1999. The petition
for rehearing was denied on August 19, 1999 (Pet. App. 29a). The petition
for a writ of certiorari was filed on November 12, 1999. The jurisdiction
of this Court is invoked under 28 U.S.C. 1254(1).
STATEMENT
1. In 1983 and 1984, petitioners invested in a partnership known as Barrister
Equipment Associates Series 151 (Barrister). The "sole business [of
the partnership] was printing and selling '49 different literary works and
microcomputer disks aimed at a general public market, using leased films,
plates and disks to produce said products'." Pet. App. 5a. On Barrister's
federal partnership tax returns for 1983 and 1984, it reported significant
losses and considerable amounts of qualified investment credit property.
Petitioners claimed a distributive share of the ordinary loss deductions
and investment tax credits on their individual federal income tax returns
for 1983 and 1984, and they carried back an unused portion of the 1983 tax
credit to reduce their 1980 and 1981 tax liabilities. Ibid.
On September 5, 1989, the Commissioner of Internal Revenue mailed to the
Barrister partners, including petitioners, a notice of final partnership
administrative adjustment (FPAA) determining adjustments to Barrister's
1983 and 1984 partnership returns. C.A. App. 28-31. A petition for readjustment
was filed in the Tax Court on behalf of Barrister by its tax matters partner
pursuant to 26 U.S.C. 6226. That case culminated in the entry of a stipulated
decision on February 17, 1995, which provides (i) that none of the losses
claimed by Barrister for 1983 and 1984 are allowable and (ii) that the amounts
of its qualified investment credit property for 1983 and 1984 are zero.
C.A. Supp. App. 93-96. In that partnership-level proceeding, Barrister did
not assert that the statute of limitations barred the adjustment of its
return.
As a result of the decision entered in the partnership-level proceeding,
the Commissioner made "computational adjustments" to the partners'
tax returns and assessed tax deficiencies against petitioners for 1980 and
1981 with respect to their erroneously asserted partnership items. See 26
U.S.C. 6225, 6230(a)(1), 6231(a)(6).
In addition, in a notice of deficiency mailed on April 29, 1996, the Commissioner
determined that petitioners were liable in 1980 and 1981 for negligence
penalties and substantial understatement penalties stemming from their erroneous
treatment of their investments in Barrister. Penalties asserted against
individuals because of their incorrect treatment of partnership items (which
are themselves determined at the partnership level) are known as "affected
items." See generally 26 U.S.C. 6221-6233. Petitioners petitioned to
the Tax Court for a redetermination of these "affected items."
1
2. Petitioners argued in the Tax Court that (i) the Commissioner's determination
of the penalties at issue was barred by the limitations period provided
at 26 U.S.C. 6229 and (ii) they had reasonably relied on the advice of their
accountant with respect to their tax treatment of the Barrister partnership
transactions and were therefore not subject to the negligence penalty. The
Tax Court held that the Commissioner's determination of affected items was
not barred by the statute of limitations and that petitioners had not shown
that their reliance on their accountant respecting the tax treatment of
their partnership items was reasonable. Pet. App. 27a-28a.
3. The court of appeals affirmed. Pet. App. 1a-16a. The court rejected petitioners'
contention that the fact that the FPAA was issued after the limitations
period provided in 26 U.S.C. 6229(a) had expired required a finding that
the "affected items proceeding" involving the individual partners
was barred by the statute. Pet. App. 10a-11a. The court explained that Section
6229(a) creates a limitation on the period for adjusting a partnership return
which creates a defense for the partnership, not for the partners, and that
the failure of the partnership to raise that defense in the partnership-level
proceeding barred its assertion in the "affected items proceeding"
involving the individual partners.
The court of appeals also upheld the Tax Court's finding that petitioners
were liable for negligence penalties. The court concluded that the Tax Court
had not clearly erred in finding that the partners' asserted reliance on
their accountant's advice was unreasonable. The court noted that the partnership's
"too-good-to-be-true" offering was a sufficient indication that
the partnership was created only to generate tax benefits. Pet. App. 12a-13a.
ARGUMENT
The decision of the court of appeals is correct and does not conflict with
any decision of this Court or any other court of appeals. Further review
is therefore not warranted.
1. The court of appeals correctly held that the Commissioner's notice of
deficiency was not barred by limitations. The Commissioner's determination
of federal taxes with respect to partnerships is governed by provisions
codified at 26 U.S.C. 6221-6233.2 The limitations period for assessing any
tax attributable to a partnership item (or an affected item for an individual
partner) is generally three years after the later of (i) the date on which
the partnership return is filed, or (ii) the last day for filing such return
for such year. 26 U.S.C. 6229(a). If an FPAA is mailed to the tax matters
partner with respect to any taxable year, however, the running of the limitations
period is suspended under 26 U.S.C. 6229(d)-
(1) for the period during which an action may be brought under section 6226
(and, if an action with respect to such administrative adjustment is brought
during such period, until the decision of the court in such action becomes
final), and
(2) for 1 year thereafter.
In this case, the Commissioner issued an FPAA to the Barrister partners,
and an action was brought in the Tax Court on their behalf under Section
6226. Under the express terms of 26 U.S.C. 6229(d), the limitations period
was suspended until one year after the Tax Court decision became final.
The stipulated decision of the Tax Court became final on May 18, 1995 (90
days after its entry on February 17, 1995). See 26 U.S.C. 7481(a)(1), 7483.
The notice of deficiency in the "affected items" proceeding was
mailed to petitioners on April 29, 1996, which was within the resulting
limitations period for those items. Pet. App. 6a.
Petitioners contend that, because the FPAA was issued beyond the three-year
period provided in 26 U.S.C. 6229(a), the limitations on the determination
of affected items necessarily expired prior to the Commissioner's mailing
of the notice of deficiency. That contention, however, ignores the fact
that the FPAA was determined in the partnership proceeding to be valid and
that a final decision upholding the FPAA was entered in that case. As the
court of appeals correctly concluded (Pet. App. 12a), any affirmative statute
of limitations defense that may have been available with respect to the
timeliness of the FPAA was waived when it was not raised in the partnership-level
proceeding. Accord, Crowell v. Commissioner, 102 T.C. 683, 693 (1994). See
also Kaplan v. United States, 133 F.3d 469, 473 (7th Cir. 1998); Thomas
v. United States, 967 F. Supp. 505, 506 (N.D. Ga. 1997); Slovacek v. United
States, 36 Fed. Cl. 250, 254-256 (1996); Barnes v. United States, 97-2 Tax
Cas. (CCH) ¶ 50,774 (M.D. Fla. 1997), aff'd, 158 F.3d 587 (11th Cir.
1998)(Table). Because the FPAA was determined to be valid in the partnership
proceeding, and because the affected items were thereafter determined within
the one-year period provided for that purpose in 26 U.S.C. 6229(d), the
court of appeals correctly concluded (Pet. App. 11a-12a) that the notice
of deficiency was timely for the affected items at issue in this case.
Petitioners err in asserting (Pet. 13) that the role given to the tax matters
partner in the partnership proceeding to raise the statute of limitations
defense deprives individual partners of due process of law. That contention
has consistently been rejected in the courts of appeals because the statute
"contemplates that indirect partners will receive notice from [the
tax matters partner or other] specified direct partners." Walthall
v. United States, 131 F.3d 1289, 1294-1295 (9th Cir. 1997). See also Transpac
Drilling Venture 1983-63 v. United States, 16 F.3d 383, 390 (Fed. Cir.),
cert. denied, 513 U.S. 819 (1994); Brookes v. Commissioner, 108 T.C. 1 (1997);
1983 Western Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 51, 64 (1990),
aff'd without published opinion, 995 F.2d 235 (9th Cir. 1993) (Table). There
is no conflict among the circuits or other reason to warrant further review
of that contention in this case.
2. The court of appeals also correctly upheld the factual determination
of the Tax Court that petitioners had not reasonably relied on their accountant
and were liable for the negligence penalty imposed by Section 6653 of the
Code. During the tax years involved in this case, Section 6653 of the Code
imposed a penalty of five percent of an underpayment of tax required to
be shown on a return which was found to be "due to negligence (or intentional
disregard of rules or regulations)." 26 U.S.C. 6653(a) (Supp. IV 1986).3
Negligence for this purpose is defined as the "lack of due care or
[a] failure to do what a reasonable and prudent person would do under the
circumstances." Goldman v. Commissioner, 39 F.3d 402, 407 (2d Cir.
1994); see Zfass v. Commissioner, 118 F.3d 184, 188 (4th Cir. 1997); Chamberlain
v. Commissioner, 66 F.3d 729, 732 (5th Cir. 1995). A taxpayer's reliance
on expert advice is not "reasonable and prudent" for this purpose
when, as the Tax Court found in this case (Pet. App. 24a-25a), the purported
"expert" lacks knowledge of the business in which the taxpayer
invested, and there is no evidence that the "expert" or the taxpayer
independently made a reasonable investigation of the business merits of
the partnership. David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995);
Goldman v. Commissioner, 39 F.3d at 408. Moreover, a taxpayer's purported
reliance on expert advice is not reasonable when, as here, the tax benefits
offered by the advised investment are "too good to be true." David
v. Commissioner, 43 F.3d at 789; Goldman v. Commissioner, 39 F.3d at 407-408.
The Tax Court correctly determined, under these legal standards, that petitioners
did not reasonably rely on expert advice in this case.
Petitioners err in asserting (Pet. 14) that the courts below looked only
at the "single fact" that their reliance on the purported expert
was unreasonable. The court of appeals emphasized that the negligence of
petitioners was also demonstrated by their surprising failure to "voice
a concern to their advisor over the absence of any generated income and
the eventual complete loss of their original $25,000 investments" and
by the fact that their cash investment was substantially less than the claimed
deductible losses and credits. Pet. App. 13a. As the court noted, the negligence
of petitioners was further borne out by the fact that the "partnership's
'too-good-to-be-true' offering was clear indication that [the] partnership
was created only to generate tax deductions." Ibid. Further review
of these findings "concurred in by two lower courts" (Rogers v.
Lodge, 458 U.S. 613, 623 (1982)) is not warranted. See Tiffany Fine Arts,
Inc. v. United States, 469 U.S. 310, 317-318 n.5 (1985).
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
SETH P. WAXMAN
Solicitor General
LORETTA C. ARGRETT
Assistant Attorney General
WILLIAM S. ESTABROOK
JOHN A. NOLET
Attorneys
DECEMBER 1999
1 Their case was consolidated in both the Tax Court and the court of appeals
with a related case involving taxpayers Catherine Chimblo and the Estate
of Gus Chimblo, who also challenged the Commissioner's determination of
affected items against them with respect to their tax treatment of investments
in the Barrister partnership. Catherine Chimblo and the Estate of Gus Chimblo
have not petitioned for a writ of certiorari.
2 These provisions are known as the unified partnership audit examination
and litigation provisions, which were enacted by the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. No. 97- 248, § 402(a),
96 Stat. 648, effective (§ 407(a)(1), 96 Stat. 670) for partnership
taxable years beginning after September 3, 1982.
3 Section 6653 was repealed by the Omnibus Budget Reconciliation Act of
1989, Pub. L. No. 101-239, § 7721(c)(2), 103 Stat. 2399, for tax years
after 1989. Section 6662 of the Code now imposes an "accuracy-related
penalty" in various situations, one of which is "[n]egligence
or disregard of rules or regulations." 26 U.S.C. 6662(a), (b)(1).