                       T.C. Memo. 1996-458



                     UNITED STATES TAX COURT



       OCEANIC LEASING, DOUGLAS F. SPAULDING, TAX MATTERS
             PARTNER, Petitioner v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket No. 4219-93.                   Filed October 10, 1996.



     George Mac Vogelei and Phillip J. Terry, for petitioner and

for Arthur Willner, a moving party.

     Christian A. Speck, for respondent.



                       MEMORANDUM OPINION

     COHEN, Chief Judge:   Following settlement with the

participating parties to this proceeding, respondent filed a

Motion for Entry of Decision pursuant to Rule 248(b).   Before

acting on respondent's motion, we here decide the motion by
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Arthur Willner (Willner) to dismiss for lack of jurisdiction as

to him, based on Willner's contention that he is not a partner in

the partnership known as Oceanic Leasing that is the subject of

this proceeding, and the motion by Willner requesting leave to

file a notice of election to participate.    Willner concedes that

we have jurisdiction over the partnership items of Oceanic

Leasing, even though that entity was a sham and not a bona fide

partnership.   He contends, however, that the partnership losses

claimed by him on his individual income tax return for 1986,

under the names Oceanic Leasing VI and Oceanic Leasing XXXV and

under the single Federal identification number of Oceanic

Leasing, related to different partnerships.   Use of the term

"partnership" as singular or plural in this opinion is for

convenience and does not have any legal significance with respect

to the separateness or validity of any entity mentioned.    Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

                        Factual Background

Hardin's Oceanic Leasing

     C. Robert Hardin (Hardin) conducted a tax return preparation

business in San Francisco, California, known as "The Tax

Company".   In 1985, Hardin commenced solicitation of clients to

invest in partnerships engaged in equipment leasing transactions.
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Hardin executed or caused to be executed various agreements

identifying partnerships by the name "Oceanic Leasing", followed

by Roman numerals, such as "Oceanic Leasing IV", "Oceanic Leasing

VI", and "Oceanic Leasing XXXV".    The agreements named Hardin and

one or more other individuals as partners.    In most cases, the

capital contribution of Hardin shown in the partnership agreement

was $1.00, while contributions to be made by other partners were

typically in the thousands of dollars.    As Hardin secured

additional investors, he used the funds of those investors to

make payments to earlier investors, thus operating the activity

as a so-called "Ponzi" scheme.    In this regard, he created or

caused to be created various fictitious equipment leases,

fabricating or forging the identities of various businesses.

     In or about October 1987, Hardin prepared and caused to be

filed a Form 1065, U.S. Partnership Return of Income, in the name

of Oceanic Leasing for 1986.    The Form 1065 showed the address of

Oceanic Leasing as 3020 Bridgeway, Sausalito, California 94965

(the Sausalito address), and its employer identification number

(EIN) as XX-XXXXXXX.    The return reported a loss of $454,383,

allegedly arising out of equipment leasing transactions.      The

Form 1065 attached copies of 21 Schedules K-1 for various

investors, reporting alleged distributable shares of ordinary

loss and tax credits.    The persons shown as partners on the

Schedules K-1 attached to the Form 1065 were only a few of the
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scores of persons who had executed partnership agreements with

Hardin for equipment leasing partnerships operating under the

name Oceanic Leasing followed by a Roman numeral.   Willner was

not one of the persons shown on the Schedules K-1 attached to the

Form 1065 filed by Hardin.

     In 1990, a class action suit was filed in the Superior Court

of the State of California for the County of San Francisco by an

investor in the Hardin entities.   The Superior Court appointed a

receiver to take over the operations of Oceanic Leasing and

related Hardin entities.   In findings of fact filed April 15,

1991, in the Superior Court Action, the Superior Court found,

among other things:

          2. The receiver and her accountants (employed
     pursuant to the Court's Order Authorizing Receiver to
     Employ Accountants, entered August 15, 1990), completed
     an extensive review of the available books and records
     of Oceanic and Tax Company, and have identified a total
     of about 500 different entity names used in connection
     with defendants' operations, including about 100
     purported Oceanic Leasing entities and about 400
     purported Aerocapital entities.

          3. Although it appears from the business records
     that Oceanic Leasing and Aerocapital entities would
     typically be set up as purported general partnerships,
     it appears that (1) virtually all of the capital
     contributed to the entities may have been pooled in
     joint bank accounts; (2) no separate books of accounts
     appear to have been kept for the different entities;
     (3) in most cases the entities may not have acquired
     specific identifiable assets; and (4) income and
     expenses may have been consolidated without regard to
     the entity's name or its nominal activity. [Price v.
     Hardin, No. 921799.]
                                - 5 -


The Superior Court authorized the receiver to pool all entities

and transactions for purposes of the receivership.

     On April 28, 1994, Hardin was indicted in the U.S. District

Court for the Northern District of California for various crimes

arising out of his investment transactions, including Oceanic

Leasing transactions.    Criminal proceedings against him were

resolved in 1995.

Willner's Oceanic Leasing

     At the end of 1985, Willner was introduced to Hardin by

Linda Calef (Calef).    Willner, his mother, his brother, and

Hardin entered into an agreement for a partnership to be known as

Oceanic Leasing VI.    He claims, but Calef denies, that Calef was

also a member of a partnership known as Oceanic Leasing VI.

Willner received a Schedule K-1 for 1985 reporting his alleged

share of losses for Oceanic Leasing VI.    Willner did not produce

to respondent or at trial a copy of any written agreement

relating to this partnership.    It appears from other

correspondence that any such agreement was signed after

January 10, 1986.

     Willner executed a document dated December 15, 1986,

purporting to be a partnership agreement between Hardin, Calef,

Arthur and Susan Willner, and Anne Latta (Latta), for a

partnership known as Oceanic Leasing XXXV.    The Sausalito address

was shown as the principal place of business of the partnership.
                                - 6 -


According to the agreement, Hardin, Calef, the Willners, and

Latta each were to contribute $75,000 to the partnership.      In a

"First Amendment to Partnership Agreement" dated December 15,

1987, the capital contributions of the partners were increased to

$150,000.    The contributions called for by the documents were

never made.

     Willner received 1986 Schedules K-1 from Hardin.    One

Schedule K-1 showed Oceanic Leasing VI at the Sausalito address.

The form reported his distributive share of loss as $1,617.

Willner also received a Schedule K-1 that showed Oceanic Leasing

XXXV at the Sausalito address and set forth his distributive

share of loss as $33,889.    Both of the Schedules K-1 received by

Willner used the same EIN for Oceanic Leasing, to wit, 94-

2870681.    When he received the Schedules K-1, Willner called

Hardin and asked about use of the same employer identification

numbers for Oceanic Leasing VI and Oceanic Leasing XXXV; he was

told that such use was not an error.

     Willner prepared a Form 1040, U.S. Individual Income Tax

Return, for himself and his wife for 1986.    On that Form 1040, he

claimed losses from Oceanic Leasing VI and Oceanic Leasing XXXV

in the amounts shown on the Schedules K-1 received by him,

showing the Oceanic Leasing EIN for each.    He also attached to

his Form 1040 a Form 3468, Computation of Investment Credit,
                               - 7 -


claiming $12,313 attributable to Oceanic Leasing XXXV, using the

same EIN.

     Latta, who, along with Willner, executed the agreement

referring to Oceanic Leasing XXXV, claimed Oceanic Leasing losses

using EIN XX-XXXXXXX on her individual return for 1986 without

reference to "XXXV".   The Form 1065 filed by Hardin attached a

Schedule K-1 for Latta.

     Willner gave Hardin payments totaling approximately $79,000

from 1985 through 1989.   Those payments included a check dated

July 26, 1988, in the amount of $10,000 payable to Oceanic

Leasing, without any Roman numeral designation.   Willner received

Oceanic Leasing checks in the amounts set forth below and bearing

the indicated notations in the lower left corner:

         Date               Amount          Notation

     July 22, 1988        $20,701.42        Ocean. 35
     Oct. 31, 1988          8,505.85        OL 35
     Feb.6, 1989           11,462,57        OL 35
     May 11, 1989          11,452.57        #35
     July 24, 1989          1,215.00        #006
     July 27, 1989          5,600.00        #035
     Nov. 7, 1989           5,600.00        035
     Nov. 13, 1989          5,597.47        None
     Feb. 2, 1990          11,452.47        #035
     Apr. 25, 1990          8,195.97        #035

All of the checks bore the name and Sausalito address of Oceanic

Leasing and were written on the same bank account.

     Willner believed that Hardin was completely in control of

running the business of the partnerships and acquiesced in

Hardin's conduct with respect to the partnerships.
                               - 8 -


     In or after 1990, Willner, along with others, began to

suspect problems with respect to Hardin's activities.    Willner

was aware of and believed that he was a beneficiary of the

Superior Court class action commenced against Hardin.    During an

Internal Revenue Service (IRS) audit of his 1990 tax return,

Willner claimed and was allowed a theft loss from his involvement

with Hardin, which loss was applied towards tax due and owing for

earlier years.

Respondent's Oceanic Leasing

     In 1988, the IRS commenced an audit of Janet Grove (Grove),

who had claimed on her 1986 individual income tax return

partnership losses under the name Oceanic Leasing XXXIII, with

the Sausalito address and EIN XX-XXXXXXX.    The agent examining

Grove's return thereafter contacted Hardin and commenced an audit

of the Oceanic Leasing Form 1065 for 1986.    The agent discovered

that Grove and others had claimed partnership losses based on

Schedules K-1 received from Hardin but not attached to the

Form 1065 filed by Hardin for Oceanic Leasing.    Hardin admitted

to the revenue agent that the partnership in which Grove was

involved was a "hoax".   Hardin continued to supply information to

the revenue agent.   Hardin alternatively referred to Oceanic

Leasing as a single entity, sometimes using the term "Big Daddy",

and referred to separate Oceanic Leasing partnerships by number.

He advised the revenue agent that each partnership had a separate
                               - 9 -


agreement, that there was "no overriding partnership agreement

for Oceanic Leasing," and that Oceanic Leasing was a collection

of separate partnerships.

     The revenue agent determined that the Schedules K-l attached

to the Form 1065 did not reconcile with the losses reported on

the return or equal 100-percent interests in the partnership.

The agent began identifying various individuals who had claimed

Oceanic Leasing partnership losses in order to arrive at

interests totaling 100 percent.   The revenue agent solicited

Hardin's appointment as tax matters partner and secured from him

an agreement to extend the period of limitations on adjustments

arising out of the 1986 Form 1065.     She believed that she was

operating under the partnership provisions of the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec.

402(a), 96 Stat. 324, 648, codified at sections 6221-6232.

     The Notice of Final Partnership Administrative Adjustment

(FPAA) that is the subject of this proceeding was mailed

December 31, 1992, to Douglas F. Spaulding, as tax matters

partner.   The partnership was identified as Oceanic Leasing at

the Sausalito address with EIN XX-XXXXXXX.     All of the losses and

credits claimed on the 1986 Form 1065 were disallowed.     At the

time of the notice, the revenue agent had identified at least 29

persons who had claimed losses from Oceanic Leasing with the same

identification number as the partnership Form 1065 that she was
                                - 10 -


auditing.    Among those identified by the revenue agent was

Willner.    A copy of the FPAA was sent to Willner.

     In the petition filed March 1, 1993, the adjustments in the

FPAA were challenged on the following grounds:

          6. The facts on which the Petitioner relies as
     the basis of his case are as follows:

            A.    Not all income and expenses shown on the
                  partnership's tax return are the result of
                  fictitious, sham transactions;

            B.    Some of the business activity actually
                  occurred; and

            C.    Property purchased by the partnership was:
                  (a) depreciable; (b) had a useful life of at
                  least 3 years; (c) was tangible personal
                  property; and (d) was placed in service
                  during the taxable year in a trade or
                  business.

          7. Petitioner further alleges that the statutory
     period for making an assessment for the taxable year
     1986 has expired.

Trial of this case commenced in San Francisco, California, in

September 1994.    Calef appeared by counsel and moved for

dismissal of the case for lack of jurisdiction as to her,

claiming that she was not a partner in the partnership that was a

subject of this proceeding.    The trial was thereafter continued

several times for purposes of settlement discussions among

various interested partners.    In July 1995, Calef's motion to

dismiss was withdrawn as a result of a settlement reached between

herself and respondent.    On August 7, 1995, respondent filed a

Motion for Entry of Decision pursuant to Rule 248(b).      The
                               - 11 -


settlement involves allowing investors to deduct theft losses

incurred as a result of their dealings with Hardin.    Willner

receives no benefit from the settlement.    On October 4, 1995,

Willner filed a Motion for Leave to File Notice of Election to

Participate in order to contend that he was not a partner in the

partnership that is the subject of this proceeding, and on

January 11, 1996, he filed his jurisdictional motion.

                             Discussion

     "[M]ushrooming administrative problems experienced by the

Internal Revenue Service in auditing returns of partnerships,

particularly tax shelter partnerships with numerous partners",

led to the enactment of the TEFRA partnership proceedings in

1982.   Boyd v. Commissioner, 101 T.C. 365, 368 (1993).   The

purpose of the new procedures was to provide a method for

uniformly adjusting items of partnership income, loss, deduction,

or credit, without the necessity of separate proceedings for each

partner.   Id. at 369; Maxwell v. Commissioner, 87 T.C. 783, 787

(1986).    Willner here seeks to avoid the normal consequences of

our determination in this action, which would be an assessment

against him based on disallowance of all partnership losses

claimed by him on his 1986 return under the name and EIN of

Oceanic Leasing.   See secs. 6225, 6229(d) and (e), 6231(a)(6);

Sente Inv. Club Partnership v. Commissioner, 95 T.C. 243, 248-249
                              - 12 -


(1990); cf. N.C.F. Energy Partners v. Commissioner, 89 T.C. 741

(1987).

     That a partnership is a sham does not preclude applicability

of the provisions of TEFRA.   Section 6233(a) provides:

          (a) General Rule.--If a partnership return is
     filed by an entity for a taxable year but it is
     determined that the entity is not a partnership for
     such year, then, to the extent provided in regulations,
     the provisions of this subchapter are hereby extended
     in respect of such year to such entity and its items
     and to persons holding an interest in such entity.

See also sec. 301.6233-1T (a), (c)(1), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 6779, 6795 (Mar. 5, 1987).

     Willner does not deny that Hardin's activities were

fraudulent.   He does not deny that we have jurisdiction with

respect to the partnership that is the subject of these

proceedings, and he has stipulated that the FPAA was timely.

Willner contends that section 6233 does not apply to him because

he was not a partner in the entity that filed a partnership

return for 1986.   He relies on the 21 Schedules K-1 attached to

the Form 1065, which did not include a Schedule K-1 for him.    He

seeks relief on the basis that the Schedules K-1 on which he

relied in claiming losses were not attached to any partnership

return.   He defines the issue as:   "Were Arthur and Susan Willner

partners in the entity that filed a partnership return for 1986?"

Using the words of the statute, we would define the issue as
                              - 13 -


whether Arthur and Susan Willner were "persons holding an

interest in such entity."

     The evidence supports a finding that Willner was a person

holding an interest in the entity that is the subject of this

proceeding.   He claimed tax benefits on the assumption that a

return was filed for the partnerships in which he invested,

bearing the single EIN XX-XXXXXXX; he received cash payments from

a single bank account with respect to the partnerships in which

he invested; he acquiesced in Hardin's total control of all

entity business with knowledge that Hardin was handling as a unit

what were identified as multiple partnerships; he regarded

himself as the beneficiary of a class action that treated the

superficially separate partnerships as a single entity; and he

did not raise his claim in this action until he saw that the

action would neither lead to a determination in favor of the

partnership nor a settlement that would benefit him.    The nexus

between his claims of partnership losses and credit and the

entity that is the subject of this proceeding exists.

     By contrast, there is no evidence that separate partnerships

known as Oceanic Leasing VI or Oceanic Leasing XXXV ever engaged

in any activity other than the fraudulent leasing transactions

engaged in by Hardin in the name of Oceanic Leasing.    Willner did

not comply with the terms of the agreements on which he relies.
                                - 14 -


     Willner acquiesced in Hardin's fraudulent activities so long

as they brought him tax benefits and cash distributions exceeding

his contributions.    See Mishawaka Properties v. Commissioner, 100

T.C. 353, 367 (1993) (where a partner has voluntarily permitted

another partner's petition and apparent authority to exist, the

"situation * * * should not redound to their own benefit and to

respondent's detriment").     The procedural difficulties of TEFRA

do not require us to reward him for investing in sham entities

that did not file separate partnership returns for the years for

which he claimed fictitious partnership losses.

     Willner points out various inconsistent actions taken and

errors made by respondent's revenue agent.     Respondent makes

various arguments based on speculation as to what "must have

been" the arrangement between Hardin and various individual

investors.   Certain of those investors testified, and respondent

presented documentary evidence concerning the tax treatment of

other investors.     We have not discussed in this opinion either

the errors made by the revenue agent or the differences among

other persons who invested in Hardin's Oceanic Leasing scheme.

Nor have we discussed the complex and frequently changing

positions of other investors who have appeared during the

pendency of this proceeding.     The only issue before us is whether

Willner had an interest in the entity that is the subject of this
                              - 15 -


proceeding.   We hold that he did.    His Motion to Dismiss for Lack

of Jurisdiction will be denied.

     Willner's Motion for Leave to File Notice of Election to

Participate was made solely for purposes of raising the

jurisdictional issue and did not set forth any independent

statements to show his preparedness to litigate the case on the

merits or reasons why respondent's Motion for Entry of Decision

should not be granted.   As stated in the Notes to the Amendments

to the Rules of Practice and Procedure, adopted May 20, 1988,

with respect to Rule 248(b), "any objecting partners would have

to make a substantial showing in order for the Court to grant

their motion [for leave to file a notice of election to

participate]".   90 T.C. at 1376.    No such showing having been

made, the Motion for Leave to File Notice of Election to

Participate will be denied, and respondent's Motion for Entry of

Decision will be granted.

                                      Appropriate orders will

                               be issued, and a decision in

                               accordance with respondent's

                               motion will be entered.
