                        T.C. Memo. 2010-163



                      UNITED STATES TAX COURT



   WAYNE A. DROWN, JR. & CAROLYN EVONNE DROWN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27762-08.                Filed July 27, 2010.



     Wayne A. Drown, Jr. and Carolyn Evonne Drown, pro sese.

     David M. McCallum, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined penalties of $3,558.60,

$816.80, $1,492.60, and $2,133.20 under section 6662(a) for 1990,

1991, 1992, and 1993, respectively, in four separate statutory

notices.   The statutory notices were sent after finality of a

partnership proceeding involving a Hoyt Farms cattle partnership

in which petitioners invested in 1993.    The issues for decision
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are whether petitioners are liable for the penalties and whether

assessment is barred by the statute of limitations or otherwise.

All section references are to the Internal Revenue Code in effect

for the years in issue.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in South Carolina when they filed the

petition.

     In 1993, petitioners invested in a Hoyt Farms cattle

partnership known as Shorthorn Genetic Engineering 1985-2, J.V.

On their 1993 Federal income tax return, they reported wages,

interest, dividends, and pension income totaling $73,825 and

claimed a partnership loss of $274,050.      As a result they

reported zero tax liability and claimed a refund of $8,644 of

Federal income tax withheld.   They claimed net operating loss

(NOL)   carrybacks and applied for and received refunds for 1990,

1991, and 1992.

     On August 8, 1997, the Internal Revenue Service (IRS) sent

petitioners a Form 3552 (Part 3), Notice of Tax Due on Federal

Tax Return, for each of the years 1990 through 1993.      On August

29, 1997, Wayne A. Drown (petitioner) acknowledged receipt of the

Forms 3552 and requested an explanation of the disallowed
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deductions.   On October 20, 1997, the IRS responded to

petitioner’s letter as follows:

          Thank you for your letter dated August 29, 1997
     regarding the Forms 3552 you recently received for the
     years shown above. These assessments were made
     pursuant to IRC section 6213(b)(3), which are summary
     assessments made to reverse IRC section 6411 tentative
     carryback refunds that were previously allowed. These
     summary assessments can be made without any previous
     notice of deficiency.

          It was later determined that these assessments
     were not necessary at this time, because the carryback
     refunds are the result of 1993 TEFRA Partnership losses
     that are currently under examination. The Statute of
     Limitations on these carrybacks are protected by the
     TEFRA examination of the 1993 year, and they will be
     addressed when this examination is completed.
     Therefore, these assessments were reversed at this time
     pending the outcome of the 1993 TEFRA examination.

          We apologize for any inconvenience this may have
     caused. If you have any further questions concerning
     this matter, please call me at the number shown above,
     or you may write to the address shown on this letter.

     Shorthorn Genetic Engg. 1985-2, J.V. v. Commissioner, docket

No. 7280-96, was one of the over 700 cattle investor partnership

cases before the Tax Court bearing the Hoyt Farms designation.

The partnership’s tax matters partner, Mark Lowe, signed a

stipulated decision that had the effect of “zeroing” every

partnership item reported on the partnership’s return for the

year ended September 30, 1993, and eliminating flowthrough items,

such as NOLs, to individual partners.   The stipulated decision

was entered by the Court on May 18, 2007, and is consistent with

the Court’s findings in Durham Farms #1, J.V. v. Commissioner,
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T.C. Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003), in

which the Court concluded that the cattle investor partnership

did not acquire the benefits and burdens of ownership with

respect to the breeding of cattle that it had purportedly

acquired and that it was not entitled to any of the deductions at

issue and did not realize the additional income respondent

asserted.

     On August 14, 2007, notices of deficiency determining

penalties under section 6662(a) for 1994, 1995, and 1996 were

sent to petitioners.    Petitioners did not file a timely petition

in response to those notices.   They attempted to challenge them

in the petition filed in this case on November 14, 2008.

Respondent moved to dismiss and to strike as to those years for

lack of jurisdiction.   That motion was granted on March 19, 2009.

     On August 12, 2008, the IRS assessed the taxes and interest

resulting from the decision in Shorthorn Genetic Engg. 1985-2,

J.V. v. Commissioner, docket No. 7280-96.     The underpayments

assessed were $17,793, $4,084, $7,463, and $10,666 for 1990,

1991, 1992, and 1993, respectively.     Petitioners paid the taxes

and interest in full in 2008.

     The notices of deficiency for the section 6662(a) penalties

for 1990 through 1993 were sent to petitioners on August 13,

2008.
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                                OPINION

     This case presents another unfortunate example of the

consequences of taxpayers’ investments in a Hoyt Farms cattle

partnership.    That partnership promised immediate and substantial

tax benefits but ultimately resulted in large liabilities,

litigation, explicable delays, and procedural confusion.    See

Keller v. Commissioner, 568 F.3d 710, 714 (9th Cir. 2009), affg.

T.C. Memo. 2006-166 (and affg. and vacating on another ground

decisions in related cases).

     The notices of deficiency in this case only determined

penalties under section 6662(a).    Section 6662(a) and (b)(1) and

(2) imposes a 20-percent accuracy-related penalty on any

underpayment of Federal income tax attributable to a taxpayer’s

negligence or disregard of rules or regulations, or substantial

understatement of income tax.    Section 6662(c) defines negligence

as including any failure to make a reasonable attempt to comply

with the provisions of the Internal Revenue Code and defines

disregard as any careless, reckless, or intentional disregard.

Disregard of rules or regulations is careless if the taxpayer

does not exercise reasonable diligence to determine the

correctness of a return position that is contrary to the rule or

regulation.    Sec. 1.6662-3(b)(2), Income Tax Regs.   Disregard of

rules or regulations is reckless if the taxpayer makes little or

no effort to determine whether a rule or regulation exists.       Id.
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Section 6662(d)(1)(A) defines a substantial understatement as one

that exceeds the greater of 10 percent of the tax required to be

shown on a return or $5,000.

     The underpayments assessed for 1990, 1992, and 1993 were

consistent with the decision in the partnership case, were

consistent with the entries on petitioners’ returns shown in a

transcript of their account, and were substantial within the

meaning of section 6662(d).

     Respondent asserts negligence as the ground for the penalty

for 1991.   Respondent relies on similar cases in which the

negligence penalty was sustained against Hoyt Farms investors,

citing Keller v. Commissioner, T.C. Memo. 2006-131, affd. in part

and revd. in part 556 F.3d 1056 (9th Cir. 2009).   See Hansen v.

Commissioner, 471 F.3d 1021 (9th Cir. 2006), affg. T.C. Memo.

2004-269; Mortensen v. Commissioner, 440 F.3d 375, 387-393 (6th

Cir. 2006), affg. T.C. Memo. 2004-279; Van Scoten v.

Commissioner, 439 F.3d 1243, 1256-1260 (10th Cir. 2006), affg.

T.C. Memo. 2004-275.   The parties stipulated that the decision in

Shorthorn Genetic Engg. 1985-2, J.V. v. Commissioner, docket No.

7280-96, is consistent with the Court’s findings in Durham Farms

#1, J.V. v. Commissioner, supra.

     Petitioner asserted at trial that, based on his “research”,

he believed in 1993 that the Hoyt partnership deductions were

legitimate.   He stated that his view was reinforced when the IRS
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sent refunds based on his claimed NOL carrybacks to the 3 earlier

years.    Petitioner did not explain the research that he

conducted.    He admitted during his testimony that he did not

consult with any tax professionals about the correctness of his

view.    He has not shown reasonable cause as an exception to the

substantial understatement penalty under section 6664(c)(1) or

any ground for distinguishing this case from those that have

sustained the penalty for negligence with respect to the Hoyt

Farms partnerships.    See Keller v. Commissioner, 556 F.3d at

1061-1062 n.8.    The section 6662(a) penalty is appropriate for

each year.

     Petitioners argue that assessment and collection of the

amounts here in dispute are barred by the statute of limitations.

They rely on section 6502(a), which as relevant here limits

collection of assessed taxes by levy or by a court proceeding

brought within 10 years after the assessment.    The amounts in

dispute here, however, have not been assessed and will not be

assessed until after our decision in this case becomes final.

See sec. 6213(a).

     Because the related partnership tax years occurred before

August 5, 1997, the accuracy-related penalties are properly

contested before the Court at the partner level as “affected

items”.    See secs. 6221, 6230(a)(2)(A)(i); see also Fears v.

Commissioner, 129 T.C. 8, 10 n.3 (2007) (with respect to
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determining such penalties at the partnership level for

partnership tax years ending after August 5, 1997).   For tax

attributable to partnership items and affected items, section

6229(a) extends the general 3-year period of limitations.     Sec.

6501(n).   Section 6229(a) provides, as follows:

          SEC. 6229(a). General Rule.--Except as otherwise
     provided in this section, the period for assessing any
     tax imposed by subtitle A with respect to any person
     which is attributable to any partnership item (or
     affected item) for a partnership taxable year shall not
     expire before the date which is 3 years after the later
     of--

                (1) the date on which the partnership return
           for such taxable year was filed, or

                (2) the last day for filing such return for
           such year (determined without regard to
           extensions).

Furthermore, if a notice of a final partnership administrative

adjustment (FPAA) is mailed to the tax matters partner, the

running of the period specified in section 6229(a) is suspended

for the period during which a court action may be brought under

section 6226 (and if a petition is filed as a result of the FPAA,

until the decision of the court becomes final) and for 1 year

thereafter.   Sec. 6229(d).

     In this context, the running of the section 6229(a) 3-year

period of limitations is temporarily interrupted during the FPAA

proceeding until a decision entered in that proceeding becomes

final plus 1 year, and then the remaining unexpired part of the

3-year limitations period is tacked on.   See Aufleger v.
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Commissioner, 99 T.C. 109, 113 (1992).     The stipulated decision

in the partnership case was entered on May 18, 2007, and became

final 90 days later, on August 16, 2007.     See sec. 7481(a)(1).

Thus the statutory notices sent August 13, 2008, were timely.

The petition filed in this case further extended the time for

assessment until the decision becomes final and for 60 days

thereafter.   See sec. 6503(a)(1).   Petitioners’ statute of

limitations arguments are therefore erroneous.

     Petitioners also seek to invoke estoppel against the IRS and

assert an agreement that no additional amounts were owing as of

the 1997 correspondence and when, in 2007, they were provided

with the total of amounts previously assessed and accrued

interest for 1994, 1995, and 1996.     The later years are not

before the Court because they were previously dismissed for lack

of jurisdiction.   In any event, none of the correspondence

advising petitioners of the amounts owed at prior times dealt

with the heretofore unassessed penalties at issue in this case.

     Petitioners have not shown that the IRS provided them with

any false or misleading information that would justify estoppel.

The reason for the abatement of the prematurely assessed amounts

was explained to them at the time it occurred in 1997.     There was

no agreement, expressed or implied, that the taxes and interest

would not be assessed or that penalties would not be determined
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at a later date when they were no longer precluded by the pending

partnership proceedings.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.
