                        T.C. Memo. 2006-164



                      UNITED STATES TAX COURT



         LEATHERSTOCKING 1983 PARTNERSHIP, SAM I. BROWN,
   A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2753-98.               Filed August 14, 2006.



     Richard J. Sapinski and Edward A. Vrooman,1 for petitioner.

     Shawna A. Early, Gerard Mackey, and Tamara L. Kotzker, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   This case is a partnership-level proceeding

subject to the unified audit and litigation procedures of the Tax


     1
       Edward A. Vrooman signed the petition as petitioner’s
counsel and was allowed to withdraw after Richard J. Sapinski
entered his appearance on Nov. 30, 1998.
                                  -2-

Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L.

97-248, sec. 401, 96 Stat. 648.    Sam I. Brown, a partner other

than the tax matters partner of Leatherstocking 1983 Partnership

(Leatherstocking), petitioned the Court to readjust partnership

items respondent adjusted for 1983 and 1984.      Respondent

determined that Leatherstocking could not deduct $950,907 and

$569,940 of expenses for the respective years because it failed

to establish that its activities were entered into for profit or

for the production of income, or that the “alleged transaction”

had economic substance or reality.      Petitioner alleged in the

petition that respondent erred in his determination because

Leatherstocking’s activities were entered into for profit and for

the production of income, and the “alleged transaction” did have

economic substance and reality.

     On November 2, 1998, petitioner moved the Court for leave to

amend the petition to allege that respondent had issued the

underlying notices of final partnership administrative adjustment

(FPAAs) after the periods of limitation had expired.      The motion

noted that the Court of Appeals for the Second Circuit had

recently decided Transpac Drilling Venture 1982-12 v.

Commissioner, 147 F.3d 221 (2d Cir. 1998), revg. and remanding

T.C. Memo. 1994-26, and stated that the court in that case had

“found on substantially similar facts as the instant case that,

as a result of being placed under investigation by the Internal
                                 -3-

Revenue Service, the tax matters partners of various partnerships

labored under a conflict of interest and, thereby, were

disqualified from binding the partnerships by extending the

assessment period.”    The motion stated further that

Leatherstocking’s tax matters partner (TMP), Robert L. Steele

(Steele), had been under investigation by the Commissioner’s

Criminal Investigation Division (CID).    This Court allowed

petitioner to amend the petition on November 4, 1998, to

challenge the timeliness of the FPAAs.    When the case was called

for trial, petitioner conceded all allegations of error initially

set forth in the petition and stated that he was henceforth

relying solely on the allegation that the FPAAs were issued

untimely.

      We decide whether the periods of limitation for assessment

as to Leatherstocking’s limited partners remain open for the

subject years.   We hold they do.   Unless otherwise indicated,

section references are to the applicable versions of the Internal

Revenue Code.

                          FINDINGS OF FACT

1.   Preface

      Some facts were stipulated.   We incorporate herein by this

reference the parties’ stipulations of facts and the exhibits

submitted therewith.    We find the stipulated facts accordingly.
                                   -4-

2.   Leatherstocking

      Leatherstocking is a New York limited partnership that was

inactive when its petition was filed with the Court.     When it was

active, Leatherstocking’s business offices were located in New

York, New York.   Leatherstocking’s organizer and only general

partner is Steele.     Leatherstocking had 34 limited partners

during each subject year.

      Leatherstocking’s operation involved a cattle breeding and

embryo transfer venture conducted at the Leatherstocking Farm in

Easton, New York.      Through the venture, Leatherstocking produced

embryos fertilized from Black Angus cows and the sperm of a Black

Angus bull named “High Voltage”.     The venture was conducted

primarily as a tax shelter.

      Leatherstocking was one of many entities formed by Steele in

1983 through 1986 to syndicate interests in High Voltage or to

own or market cattle or their embryos.     Those entities included

eight limited partnerships, the sole general partner of whom was

either Steele or his wholly owned corporation.     One of the other

partnerships was Leatherstocking High Voltage Limited Partnership

(High Voltage Limited Partnership), through which interests in

High Voltage were syndicated in 1985.     Another entity was Roblis

Enterprises, Ltd. (Roblis), an S corporation wholly owned in form

by Steele’s wife.      Roblis owned and operated the Leatherstocking

Farm.
                                  -5-

3.   The Start of Respondent’s Audit of Leatherstocking’s 1983
     and 1984 Partnership Returns of Income

     Leatherstocking filed a 1983 and a 1984 Form 1065, U.S.

Partnership Return of Income, on May 29, 1984, and April 22,

1985, respectively.    In 1985, respondent selected the 1983 return

for audit and assigned the case to Jane Hursty (Hursty).            Hursty

later notified Leatherstocking that its 1984 return also was

selected for audit.    In late 1986 or early 1987, respondent

notified Leatherstocking’s limited partners that Leatherstocking

was being audited.

     During respondent’s audit of Leatherstocking, respondent

received various consents (consents) to extend the periods of

limitation for the subject years.2      The consents were signed by

Steele in his capacity as Leatherstocking’s TMP or, in the case

of a consent signed on February 4, 1988, by Daniel Kornblatt

(Kornblatt) in his capacity as Leatherstocking’s attorney and

authorized representative.    The relevant details of the consents

for 1983 were as follows:

         Date signed          Date signed       Extended date
          by Steele          by respondent      for assessment

     Nov. 18, 1986          Nov. 24, 1986       Dec.   31,   1987
     Aug. 12, 1987          Aug. 14, 1987       Dec.   31,   1988
     July 7, 1988           Aug. 31, 1988       Dec.   31,   1989
     Aug. 14, 1989          Sept. 8, 1989       Dec.   31,   1990
     May 30, 1990           June 8, 1990        Dec.   31,   1991


     2
       Each consent was given by way of Form 872-P, Consent to
Extend the Time to Assess Tax Attributable to Items of a
Partnership.
                                   -6-

       June 16, 1991        June   21,   1991   Dec.   31,   1993
       Dec. 15, 1993        Dec.   28,   1993   Dec.   31,   1995
       May 8, 1995          June   12,   1995   Dec.   31,   1996
       Sept. 23, 1996       Oct.   2,    1996   Dec.   31,   1997

The relevant details of the consents for 1984 were as follows:

        Date signed by       Date signed        Extended date
     Steele or Kornblatt    by respondent       for assessment

       Feb. 4, 1988         Mar. 1, 1988        Dec.   31,   1988
       Sept. 6, 1988        Sept. 13, 1988      Dec.   31,   1989
       Aug. 24, 1989        Sept. 8, 1989       Dec.   31,   1990
       May 31, 1990         June 8, 1990        Dec.   31,   1991
       June 16, 1991        June 21, 1991       Dec.   31,   1993
       Dec. 15, 1993        Dec. 28, 1993       Dec.   31,   1995
       May 8, 1995          June 12, 1995       Dec.   31,   1996
       Sept. 23, 1996       Oct. 2, 1996        Dec.   31,   1997

4.    Steele’s Criminal Activities

       In or about August 1986, Steele and three of his

coconspirators (we refer collectively to Steele and one or more

of the conspirators as coconspirators) traveled to Hawaii to meet

with Ferdinand Marcos (Marcos), who was then in exile there.             The

coconspirators offered to help Marcos return to power in the

Philippines.    The coconspirators first offered to return Marcos

to power peacefully in return for at least $180,000.          In

September 1986, Marcos transferred $180,000 to the coconspirators

by wiring that amount from a foreign account to an account of one

of Steele’s corporate entities, Commonwealth Group, Ltd.            In

October 1986, Marcos wired another $1 million to the Commonwealth

account.

       When the peaceful efforts failed, the coconspirators offered

to return Marcos to power forcefully by way of a coup.          The
                                 -7-

coconspirators told Marcos that they wanted $100 million if the

coup succeeded and that $15 million of that amount would have to

be paid immediately.    In or about December 1986, the

coconspirators directed Steele’s cousin, Michael Seifert

(Seifert), a solicitor in London, to open bank accounts on the

Isle of Man in the names of nominee corporations in order to

receive and conceal funds relating to the planned coup.    In

January 1987, Steele caused an account (First Hi-Tech account) to

be opened at First City National Bank & Trust in New York, New

York, in the name of First Hi-Tech Co.    On February 1, 1987,

Marcos wired at least $8 million to the escrow account of

Seifert’s firm in London, and 2 days later, Seifert transferred

$1.8 million to the First Hi-Tech account.    Between February 3

and 19, 1987, Steele caused approximately $1,140,000 of the $1.8

million to be withdrawn from the First Hi-Tech account in amounts

less than $10,000.

5.   Government Learns About the Planned Coup

      a.   New Jersey Investigation

      The planned coup collapsed in March 1987 when two of the

coconspirators (other than Steele) were arrested in New Jersey

trying to buy weapons from one or more undercover agents.    This

arrest caused the U.S. Attorney for the District of New Jersey to

open an investigation that led to the filing on March 5, 1992, in

the District of New Jersey of Information Crim. No. 92-122 (AJL).
                                   -8-

This information charged Steele with one count of conspiracy to

violate the Arms Export Control Act by scheming in 1986 and 1987

to buy weapons to use in the planned coup and to make false

statements to obtain weapons export licenses from the Department

of State.   Steele pleaded guilty to that information on the day

it was filed.

     b.   Colorado Investigation

     In or about 1989, the U.S. Attorney for Colorado also began

investigating Steele for securities fraud relating to the High

Voltage Limited Partnership.   Steele was later indicted in

Colorado on mail, wire, and securities fraud violations allegedly

committed in 1984 and 1985 arising out of misrepresentations and

material omissions made in the marketing of the bull named High

Voltage and the sale of its semen and resulting embryos.   This

indictment was filed in the District of Colorado as Indictment

Crim. No. 92-150 (AJL).   On March 5, 1992, Steele pleaded guilty

to one count of this indictment, specifically, the count that

charged him with securities fraud.

     c.   New York Investigation

     The withdrawals from the First Hi-Tech account also caused

the U.S. Attorney for the Southern District of New York to open

an investigation as to the withdrawals.   This investigation led

to the filing on September 9, 1992, in the Southern District of

New York of Information Crim. No. 92-751.   This information
                                -9-

charged Steele with one count of structuring the transactions in

the First Hi-Tech account to evade the currency transaction

reporting requirements of 31 U.S.C. sec. 5313(a), in violation of

31 U.S.C. secs. 5322(b) and 5324(a)(3) and 18 U.S.C. sec. 2.

     In September 1992, Steele and the U.S. Attorney for the

Southern District of New York agreed that Steele would plead

guilty to this information and that the information would be

transferred to the District of New Jersey (the resulting case

filed as Crim. No. 92-513 (AJL)), so that Steele could be

sentenced in one proceeding on his separate pleas of guilty in

New York, New Jersey, and Colorado.   The September 1992 plea

agreement stated that if Steele complied with the understandings

contained in the agreement, neither the U.S. Attorney for the

Southern District of New York nor the Tax Division of the

Department of Justice, as applicable, would prosecute Steele for

any crime related to:   (1) His participation in the conspiracy to

return Marcos to power in the Philippines, (2) “his failure to

report as income millions of dollars he received from Ferdinand

Marcos in 1986 and 1987", (3) “the validity of the

Leatherstocking Farm as an entity entered into for profit, and

the validity of the [eight] Leatherstocking Partnerships”

(including Leatherstocking), and (4) “his failure to file

personal income tax returns for calendar years 1987 through 1990

and his failure to file for Roblis Enterprises Ltd., U.S. Income
                               -10-

Tax Returns for an S Corporation, for the calendar years 1987

through 1990.”   In relevant part, the September 1992 agreement

required that Steele:   (1) File “accurate” 1986 through 1991

Federal tax returns (or amended tax returns if applicable) for

himself and for Roblis, (2) pay or agree to pay to the Internal

Revenue Service any income tax that is owed by him, by any

related entity, or by any entity that he controls, and any

withholding tax that he failed to pay over to the Internal

Revenue Service from 1983 to present, and (3) “cooperate fully

with the IRS in an expeditious manner in order to resolve his tax

liability and any tax liability and examinations of” entities

that included Leatherstocking, Roblis, and some other entities

related to Leatherstocking.   The September 1992 agreement did not

require Steele to sign any of the consents at issue here and

stated specifically that “this Agreement is in no way intended to

require Robert L. Steele to give up any rights he may have to

contest IRS determinations during any administrative or civil

actions”.

     On October 6, 1992, Steele pleaded guilty to the one-count

criminal information filed in the Southern District of New York.

On June 4 and July 8, 1993, Steele was sentenced on all three of

the charges to which he had pleaded guilty, and he was ordered to

report to prison on August 27, 1993.   Steele’s sentence was 7

years of imprisonment and a $20,000 fine for the charge in
                                 -11-

Colorado, 5 years of imprisonment (to run concurrently with the

previous sentence) and a $20,000 fine for the charge in New York,

and 5 years of probation (to run consecutively to the 7 years of

imprisonment) for the charge in New Jersey.     The Government’s

sentencing memorandum in Steele’s criminal proceedings stated

that Steele’s “failing to report his Marcos income * * * [and the

issues relating to] the partnerships of Steele formed to market

cattle embryos were better left to the IRS civil audit.”

     d.   Hawaii Investigation

     In addition to the above, the Department of Justice

organized a task force in or about 1986 to investigate the

activities in the U.S. of Marcos and his associates.     The

Department of Justice delegated the responsibility for this

investigation to the U.S. Attorney for the District of Hawaii.

This investigation was later reflected in the charges that were

filed in New Jersey.

     e.   Steele’s Proffer

     During his criminal proceedings, Steele was represented by

counsel and proffered himself to the U.S. Attorneys for New

Jersey and Hawaii as a witness against Marcos and the other

individuals involved in the planned coup.     The U.S. Attorneys

declined those proffers.     Steele did not proffer himself as a

witness to respondent in any action relating to the audit or

operation of Leatherstocking.
                               -12-

6.   Culmination of the Audit of the Subject Years

      Respondent had placed the Leatherstocking audit in suspense

on July 15, 1991, because a grand jury had been convened in New

York to investigate Steele as to his structuring of funds related

to the planned coup, his receipt of the unreported income from

Marcos, and his failure to file personal Federal income tax

returns.   Beforehand, in June 1989, respondent had transferred

the Leatherstocking audit to Harold Kerzner (Kerzner).

Respondent had made that transfer to associate the

Leatherstocking audit with other related audits assigned to

Kerzner.   Two of those other related audits involved (1) the 1983

through 1986 personal income tax returns of Steele and his wife

and (2) the 1983 through 1986 taxable years of Roblis.3

      Kertzner never audited Leatherstocking.   His responsibility

and primary action with respect to the Leatherstocking audit was

to obtain the consents that he secured between June 1989 and

January 1994.   Kertzner did not speak to Steele personally to



      3
       As to Steele’s personal income tax returns, Kertzner
expanded his audit in or about October 1989 to include Steele’s
1986 through 1988 taxable years. By February 1990, Kertzner had
learned that Steele had not filed his 1987 and 1988 returns. By
June 1990, Kertzner began analyzing bank records. These analyses
ultimately led to respondent’s discovery that Steele had failed
to report his receipt of income from Marcos. In December 1990,
Kertzner referred the matter of Steele’s personal income taxes to
the CID for fraud. On Feb. 20, 1991, Kertzner was notified by
the CID that his referral had been accepted for investigation.
Between March and June 1991, Kertzner worked with agents from the
CID on various issues relating to that referral.
                                -13-

obtain those consents but obtained them from Steele by contacting

Leatherstocking’s authorized representatives.     Kerzner did not

threaten Steele or offer him any incentive to agree to the

consents.

     Respondent resumed his audit of Leatherstocking in January

1994.   At that time, respondent assigned the audit to Revenue

Agent Robert Clements (Clements).      Respondent also assigned to

Clements the audits of the other entities related to

Leatherstocking.   Kerzner was not assigned those audits because

he had worked on the grand jury case involving Steele.

     During his audit of Leatherstocking, Clements did not

personally speak with or meet with Steele, who was then in

prison, but primarily corresponded with Steele by mail.     In

obtaining the consents that Steele signed after January 1994,

Kerzner did not threaten Steele or offer him any incentive to

agree to the consents.   Nor did Clements ever ask the limited

partners of Leatherstocking to sign consents individually.

Clements never had any contact with the Leatherstocking limited

partners regarding the audit of Leatherstocking.

     On September 16, 1997, respondent issued the FPAAs for the

subject years.   Respondent never issued to Steele written

notification that his partnership items would be treated as

nonpartnership items.    Respondent never issued to Steele written

notification that he was under criminal investigation.
                               -14-

7.   Current Status

     Steele is a fugitive from justice, and his whereabouts are

unknown.   Respondent filed an unopposed motion to remove Steele

as Leatherstocking’s TMP on April 28, 2003.    Pursuant to an order

of the Court dated July 16, 2003, Steele was removed as

Leatherstocking’s TMP on the same day.    On December 5, 2003, the

Court granted the motion of participating partner Philip Wallach

to be appointed substitute TMP for purposes of this litigation.

                              OPINION

     As part of TEFRA, Congress enacted audit and litigation

procedures to provide for the unified treatment of partnership

income, loss, deductions, and credits among the partners.    See

H. Conf. Rept. 97-760, at 600 (1982), 1982-2 C.B. 600, 662.

Under TEFRA, the tax treatment of any partnership item is

generally determined at the partnership level.    See sec. 6221;

see also sec. 6231(a)(3) (partnership item means, with respect to

a partnership, an item that is more appropriately determined at

the partnership level than at the partner level, according to

applicable regulations).   Any dispute regarding the tax treatment

of a partnership item is resolved at the partnership level in a

unified partnership proceeding held in an administrative or

judicial forum, see secs. 6226, 6227, and 6228, and the TMP is

required to keep the other partners informed of the happenings in

those proceedings, see sec. 6223(g).    The TMP is usually the
                                 -15-

general partner designated by the partnership to handle tax

matters or, if no general partner is so designated, the general

partner with the largest profits interest in the partnership at

the close of the taxable year.    See sec. 6231(a)(7); Transpac

Drilling Venture 1982-12 v. Commissioner, 147 F.3d at 223 n.1.

Where the partnership has not designated its tax matters partner

and the Commissioner determines that it is impracticable to

determine which general partner has the largest profits interest,

the tax matters partner is that general or limited partner

selected by the Commissioner.    See sec. 6231(a)(7); sec.

301.6231(a)(7)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.

6791 (Mar. 5, 1987); see also Transpac Drilling Venture 1982-12

v. Commissioner, supra at 223 n.1.

     Petitioner argues that respondent may not assess Federal

income tax as to either subject year because the 3-year periods

of limitation under section 6229(a) have expired as to those

years.   Generally, the Commissioner must assess Federal income

tax as to a partnership item (or affected item) within 3 years

after the later of (1) the date on which the partnership files

its partnership return for the taxable year of assessment or (2)

the last date for filing that return (without extension).    See

Madison Recycling Associates v. Commissioner, 295 F.3d. 280, 286
                               -16-

(2d Cir. 2002) (citing sec. 6229(a)), affg. T.C. Memo. 2001-85.4

If the Commissioner issues a timely FPAA to the taxpayer, the

period of limitation is suspended “for the period during which an

action may be brought under section 6226 (and, if a petition is

filed under section 6226 with respect to such administrative

adjustment, until the decision of the court becomes final), and *

* * for 1 year thereafter.”   Sec. 6229(d)(1) and (2).

     The expiration of the period of limitation on assessment is

an affirmative defense, and petitioner, as the party relying upon

that defense, must plead the defense and prove its applicability.

See Madison Recycling Associates v. Commissioner, supra at 286;

Amesbury Apartments, Ltd. v. Commissioner, 95 T.C. 227, 240

(1990); see also Chimblo v. Commissioner, 177 F.3d 119, 125 (2d

Cir. 1999), affg. T.C. Memo. 1997-535.   Petitioner must make a

prima facie case showing that the periods of limitation have

expired by establishing the filing of the partnership returns,

the expiration of the statutory periods, and the receipt or



     4
       Notwithstanding sec. 6229(a), sec. 6501 establishes a
period of limitations for making assessments attributable to
Federal income tax. While in certain cases the period of
limitations under sec. 6501 may remain open even though the
period of limitations has expired under sec. 6229, see Andantech
L.L.C. v. Commissioner, 331 F.3d 972, 977 (D.C. Cir. 2003), affg.
in part and remanding in part T.C. Memo. 2002-97; Rhone-Poulenc
Surfactants & Specialities, L.P. v. Commissioner, 114 T.C. 533
(2000), appeal dismissed and remanded 249 F.3d 175 (3d Cir.
2001), neither party claims that this is one of those cases.
Instead, as framed by the parties, this case turns on whether the
period of limitations remains open under sec. 6229.
                                -17-

mailing of the FPAAs after the running of those periods.     See

Madison Recycling Associates v. Commissioner, supra at 286;

Amesbury Apartments, Ltd. v. Commissioner, supra at 240-241.       If

petitioner makes such a showing, the burden of production shifts

to respondent to show that the bar of the periods of limitation

does not apply.    See Madison Recycling Associates v.

Commissioner, supra at 286; Transpac Drilling Venture 1982-12 v.

Commissioner, supra at 224 n.5; Amesbury Apartments, Ltd. v.

Commissioner, supra at 241.    If respondent makes such a showing,

the burden of production shifts back to petitioner to establish

that the claimed exception to the expiration of the limitation

periods is ineffective or otherwise inapplicable.    See Madison

Recycling Associates v. Commissioner, supra at 286; Amesbury

Apartments, Ltd. v. Commissioner, supra at 241.     While the burden

of production may shift in this manner, the burden of persuasion

never shifts from petitioner but remains with petitioner.    See

Madison Recycling Associates v. Commissioner, supra at 286;

Amesbury Apartments, Ltd. v. Commissioner, supra at 241.

     Petitioner has pleaded a claim to the affirmative defense

that the periods of limitation have expired as to the subject

years, and petitioner has met the initial burden of production as

to that claim.    As to the latter, the record establishes the

dates on which the subject returns were filed and that the FPAAs

were issued to Leatherstocking more than 3 years after the
                               -18-

corresponding dates.   Accordingly, assessments for the subject

years are barred by the 3-year rule of section 6229(a), given

that Leatherstocking filed the subject returns on May 29, 1984,

and April 22, 1985, respectively, and respondent issued the FPAAs

more than 3 years later, on September 16, 1997.

     Respondent argues that the 3-year rule of section 6229(a)

does not apply because the periods of limitation for assessment

for both years were extended to December 31, 1997, or in other

words, to a date after the FPAAs were issued.   The 3-year period

of limitation set forth in section 6229(a) is extended with

respect to all partners if, before that period expires (including

any periods covered by a prior extension), the Commissioner

receives the consent of:   (1) All partners or (2) the

partnership’s TMP or any other person authorized by the

partnership in writing to enter into such an agreement.   See sec.

6229(b)(1); Transpac Drilling Venture 1982-12 v. Commissioner,

supra at 224.   Petitioner acknowledges that Steele, designated

Leatherstocking’s TMP, executed Forms 872-P with respect to

Leatherstocking.   Respondent also produced the facially valid

forms to rebut petitioner’s periods of limitation defense.    See

Lefebvre v. Commissioner, T.C. Memo. 1984-202 (consent to extend

a period of limitation is valid on its face if it is signed

before the end of the limitation period and includes the name of

the taxpayer, the signature of the taxpayer or a person
                               -19-

authorized to sign on the taxpayer's behalf, and the taxable year

to which the agreement relates), affd. 758 F.2d 1340 (9th Cir.

1985).   Respondent has met his burden of production as to this

issue, and the burden of production now shifts back to petitioner

to show that the consents are invalid.

     Petitioner argues that the consents are invalid as to

Leatherstocking’s limited partners for two reasons.    First,

petitioner argues that the consents which Steele signed after

June 1990 were signed by him when he had a disabling conflict of

interest vis-a-vis the limited partners in that their personal

interests “radically diverged” so as to make Steele incapable of

extending the periods of limitation beyond December 31, 1990.

Petitioner asserts that such a conflict arose because Steele

signed the consents to avoid his criminal referral for not filing

his Federal income tax returns and to avoid alerting the limited

partners to the fact that he was stealing from them.    Petitioner

also asserts that such a conflict arose when Steele was under

criminal tax investigation and that his ability to consent on

behalf of Leatherstocking was compromised when he was in prison.

Petitioner asserts that respondent obviously knew (or should have

known) as of June 1990 that the interests of Steele as to the

Leatherstocking audit were different from the interests of the

limited partners because Kertzner had learned by that time that

Steele was stealing from the limited partners.   Second,
                               -20-

petitioner argues, the consents which Steele signed after July

1991 were invalid because respondent should have removed Steele

as TMP on account of the grand jury investigation.   According to

petitioner, respondent’s failure to remove Steele as TMP by

sending the notices referenced in section 301.6231(c)-5T,

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5,

1987), was an abuse of discretion.

     We reject both of petitioner’s arguments.   As to the first,

i.e., a claimed disabling conflict of interest, we are not

persuaded that Steele’s interests as to the Leatherstocking audit

differed from the interests of the Leatherstocking limited

partners, so as to constitute a breach of any fiduciary duty that

he owed to them.   Nor does the record establish more specifically

that a conflict of interest was present as to Steele’s granting

of the consents, or that respondent ever perceived that a

conflict existed between Steele’s interests and those of his

partners.   Indeed, while petitioner called three limited partners

to testify at trial, none of them testified that he would have

objected to the consents had he known about them when they were

signed.5


     5
       Moreover, as to the reasons proffered by petitioner, we do
not find as a fact that Steele granted the consents to avoid his
criminal referral for failing to file his Federal income tax
returns, or that he granted the consents to conceal any theft
from the Leatherstocking limited partners. To the contrary,
given the number of consents Steele signed during the
                                                   (continued...)
                               -21-

     Petitioner seeks a contrary result, relying upon Transpac

Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221 (2d Cir.

1998).   There, the Court of Appeals for the Second Circuit held

that extensions signed by TMPs who were cooperating witnesses in

a criminal tax and related grand jury investigation of the

promoter of the Transpac partnerships were invalid.   The court

held that the TMPs were under a disabling conflict between their

personal interests as immunized cooperating Government witnesses

and their duties to the limited partners they purported to

represent.   The court noted that the nature of the conflict was

obvious and known by the Commissioner.

     The facts here do not support a finding that Steele was

under a disabling conflict when he signed the consents.   In

Madison Recycling Associates v. Commissioner, 295 F.3d 280 (2d

Cir. 2002), the Court of Appeals for the Second Circuit

distinguished Transpac Drilling Venture 1982-12 v. Commissioner,

supra, and indicated that a disabling conflict of interest is not

necessarily present merely because a TMP is under criminal

investigation.   See Madison Recycling Associates v. Commissioner,

supra at 288 (“Our decision in Transpac was based on * * * an

actual conflict.   We did not hold that the existence of a


     5
      (...continued)
approximately 10-year period from Nov. 18, 1986, through Sept.
23, 1996, it appears that his signing of the consents was merely
a matter of routine rather than, as petitioner would have us
find, a quid pro quo furthering Steele’s self-interests.
                               -22-

criminal investigation by the IRS automatically disqualifies a

TMP or his representative from negotiating or entering into

agreements with the IRS”).   In addition, as this Court has noted:

“‘the mere existence of an investigation * * * [targeting the tax

matters partner does not, in and of itself,] subvert a tax

matters partner’s judgment and bend him to the government’s will

in dereliction of his fiduciary duties to his partners.’”

Phillips v. Commissioner, 114 T.C. 115, 132 (2000) (quoting

Olcsvary v. U.S., 240 Bankr. 264, 266-267 (E.D. Tenn. 1999")),

affd. 272 F.3d 1172 (9th Cir. 2001).

     We find that Transpac Drilling Venture 1982-12 v.

Commissioner, supra, is factually distinguishable from the

setting at hand.   There, the Commissioner asked the TMPs to

extend the periods of limitation after the limited partners had

refused to do so; the Commissioner promised the TMPs leniency in

their own criminal exposure if they cooperated in the criminal

investigation of the partnerships’ promoter; and the Commissioner

told the limited partners to contact the TMPs regarding the

examination of the partnerships but instructed the TMPs to

conceal from them the criminal investigation.   See id. at

223-227.   In sum, the TMPs in Transpac Drilling Venture 1982-12

v. Commissioner, supra at 227, were under “overwhelming pressure”

to ignore their fiduciary duties to the limited partners in that

the TMPs’ discharge of those duties was subverted by their own
                                -23-

criminal problems and the Commissioner’s efforts to bend them to

his will.   Here, by contrast, respondent’s agents never asked any

of Leatherstocking’s limited partners to extend the periods of

limitations for the subject years.     Nor do we find that Steele

tried to ingratiate himself with respondent, that Steele signed

the consents because of the criminal investigations or the fraud

referral, or that the consents were signed for a grant of

immunity or in exchange for other favorable treatment.     We also

do not find that respondent attempted to mislead the

Leatherstocking limited partners about the existence of Steele’s

criminal problems or instructed Steele to do so.6

     Petitioner also argues that respondent was required to

remove Steele as TMP on account of the criminal investigation of

Steele and that respondent’s failure to do so was an abuse of

discretion.   We disagree.   In the case of a criminal

investigation, section 6231(c)(2) provides that partnership items

become nonpartnership items “To the extent that the Secretary

determines and provides by regulations that to treat items as




     6
       Petitioner also asserts that respondent knew by July 1993
that Steele was a “narcissistic sociopath who had no regard for
anyone or anything except himself and his own needs”, and that
respondent had a “powerful incentive” in and after June 1990 to
delay the conclusion of the audit of the subject years in that
such a delay allowed respondent to determine fraud against
Steele. The record does not support a finding of either of these
assertions.
                               -24-

partnership items will interfere with the effective and efficient

enforcement of this title”.   The regulations state:

     The treatment of items as partnership items with
     respect to a partner under criminal investigation for
     violation of the internal revenue laws relating to
     income tax will interfere with the effective and
     efficient enforcement of the internal revenue laws.
     Accordingly, partnership items of such a partner
     arising in any partnership taxable year ending on or
     before the last day of the latest taxable year of the
     partner to which the criminal investigation relates
     shall be treated as nonpartnership items as of the date
     on which the partner is notified that he or she is the
     subject of a criminal investigation and receives
     written notification from the Service that his or her
     partnership items shall be treated as nonpartnership
     items. The partnership items of a partner who is
     notified that he or she is the subject of a criminal
     investigation shall not be treated as nonpartnership
     items under this section unless and until such partner
     receives written notification from the Service of such
     treatment. [Sec. 301.6231(c)-5T, Temporary Proced. &
     Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987).]

Petitioner concedes that respondent never sent Steele a notice

that he was under investigation for violation of internal revenue

laws or that his partnership items would be treated as

nonpartnership items.

     Petitioner argues that the regulations do not set forth the

exclusive cause to remove a TMP following the start of a criminal

investigation.   Notwithstanding the regulations, petitioner

asserts, Steele suffered from a disabling conflict of interest

that required respondent to terminate Steele’s status as

Leatherstocking’s TMP.   While we agree with petitioner that the

regulations do not set forth the exclusive reason for removing a
                               -25-

TMP after the start of a criminal investigation, see Transpac

Drilling Venture 1982-12 v. Commissioner, 147 F.3d at 227, we

disagree with petitioner that Steele suffered from a conflict of

interest that required respondent’s removal of Steele as

Leatherstocking’s TMP.

     A decision that a TMP is disqualified from serving as such

following the start of a criminal investigation turns on the

facts and circumstances of the case, cf. Madison Recycling

Associates v. Commissioner, 295 F.3d at 289, and we are not

persuaded on the basis of the facts and circumstances at hand

that Steele ever lost the ability to carry out properly his

fiduciary duty to his fellow partners in his handling of the

Leatherstocking audit.   Although Steele was under criminal

investigation by the CID and at least one grand jury, those

investigations, as they related to tax, focused primarily on

Steele’s personal income tax situation.   Moreover, while Steele’s

1992 plea agreement required that he “cooperate fully” with

respondent in the audit of Leatherstocking, that agreement did

not compel Steele to grant any of the consents that he did.    As a

matter of fact, that agreement stated specifically that Steele

was not surrendering any rights that he had to contest

respondent’s determinations in a civil matter such as the
                               -26-

Leatherstocking audit.7   Nor do we believe that respondent was

precluded from dealing with Steele as Leatherstocking’s TMP

simply because he was imprisoned.

     In sum, we do not find on the basis of the record at hand

that respondent obtained any of the consents by impermissible

means or that Steele had a serious conflict of interest with the

Leatherstocking partners as to the Leatherstocking audit.    We

hold that the periods of limitation remain open for the subject

years.   We have considered all arguments by petitioner for a

contrary holding and find those arguments not discussed herein to

be without merit.   Given petitioner’s concession of all of the

underlying adjustments in the FPAAs,


                                           Decision will be entered

                                      for respondent.




     7
       We also are mindful that the Government’s sentencing
memorandum in Steele’s criminal proceedings stated that Steele’s
“failing to report his Marcos income * * * [and the issues
relating to] the partnerships of Steele formed to market cattle
embryos were better left to the IRS civil audit.”
