Landau v. Commissioner

Harry Landau, et al., Petitioners, 1 v. Commissioner of Internal Revenue, Respondent Landau v. Commissioner Docket Nos. 42885, 42886, 42887, 42888 United States Tax Court 21 T.C. 414; 1953 U.S. Tax Ct. LEXIS 6; December 30, 1953, Promulgated *6 Decisions will be entered for the petitioners. Upon the facts held that section 3801 is not applicable to lift the bar of section 275 (a), Internal Revenue Code. James Brennen, 20 T. C. 495; Max Schulman, 21 T. C. 403, followed. Nathan Schwartz, Esq., for the petitioners. R. B. Sullivan, Esq., for the respondent. Harron, Judge. HARRON *414 The Commissioner has determined deficiencies in income tax for the year 1946 as follows: *415 Docket No. Name Deficiency 42885 Harry Landau $ 2,568.76 42886 Lily Landau 1,095.72 42887 Herbert Landau 1,047.05 42888 Est. of Janie Landau 1,551.14 The determinations of the deficiencies by the Commissioner were made after the expiration of the statute of limitations provided by section 275 (a), Internal Revenue Code. The issue for decision is whether subsections (b) (2), (b) (3), or (b) (5) of section 3801, Internal Revenue Code, apply so as to lift the bar of the statute of limitations. FINDINGS OF FACT. The parties have stipulated all of the facts, as follows: 1. Petitioners Harry Landau, Lily Landau and Herbert D. Landau are nonresident alien individuals who were engaged in trade or business in the United States during the taxable years 1945 and 1946. 2. Janie Landau, now deceased, was a nonresident alien individual who was engaged in trade or business within the United States during the taxable*8 year 1945 and period January 1, 1946, to May 1, 1946. 3. Janie Landau died on May 1, 1946, at which time she was a resident of the Union of South Africa. 4. Petitioner, Leslie Gabriel Landau, was appointed executor of the Estate of Janie Landau, on April 18, 1947, by the Superior Court of the State of California in and for the County of Los Angeles. 5. Petitioners Harry Landau, Herbert D. Landau, Lily Landau, and Janie Landau, now deceased, were members of the partnership, Landau Investment Company, during the partnership taxable period April 1, 1944, to February 28, 1945; March 1, 1945, to February 28, 1946; and March 1, 1946, to May 1, 1946. There were other members of said partnership who are not involved in the instant proceedings. 6. On December 4, 1944, the Landau Investment Company purchased 200 callable and convertible $ 1,000 face value American Telephone and Telegraph bonds for a total consideration of $ 248,750. Inasmuch as these bonds were callable upon 30 days' notice at 104, the Landau Investment Company in its return for the taxable period April 1, 1944, to February 28, 1945, claimed a deduction in the amount of $ 40,750 for amortizable bond premium pursuant to sections*9 23(v) and 125 of the Internal Revenue Code. Interest on said bonds, received during the period they were owned by said partnership, was included in the gross income reported by said partnership on the partnership returns filed by it. 7. Subsequently, the Commissioner of Internal Revenue, in a revenue agent's report dated July 15, 1947, disallowed said deduction *416 of amortizable bond premium for the taxable period April 1, 1944, to February 28, 1945, and thereby increased the partnership's distributive ordinary net income in the amount of $ 40,750. Other items for that taxable period adjusted in said report are not here in issue. 8. On August 30, 1948, the Landau Investment Company filed with the collector of internal revenue for the sixth district of California a Form 843 for the taxable period April 1, 1944, to February 28, 1945, to support the claims for refund filed by the individual partners for the calendar year 1945. The basis of the claim was the erroneous disallowance of bond premium amortization deduction in the amount of $ 40,750 claimed by the partnership, Landau Investment Company, for the taxable period April 1, 1944, to February 28, 1945, which was allowable*10 pursuant to the Tax Court decision in Christian W. Korell, 10 T. C. 1001 (1948), affd. 339 U.S. 619 (1950). 9. Petitioners Harry Landau, Herbert D. Landau, Lily Landau, and Janie Landau, deceased, each filed a nonresident alien individual income tax return for a nonresident alien engaged in trade or business within the United States for the calendar year 1945 on or before June 15, 1946, and paid the tax shown as due thereon. Their respective distributive shares of ordinary income from the partnership, Landau Investment Company, for the taxable period April 1, 1944, to February 28, 1945, were included in these returns, pursuant to section 182 (c) of the Internal Revenue Code. 10. Subsequently, the Commissioner of Internal Revenue by concurrent revenue agent's reports dated July 15, 1947, increased the distributive share of partnership ordinary income to be reported for the taxable year 1945 by each petitioner. Said shares of partnership income were increased due to the disallowance of the deduction for amortization of bond premium (see paragraph 7 above). The amount of increase in share of partnership income and the amount*11 of additional tax due to this increase is shown below. The additional tax was paid on or about April 1, 1948. Additional Tax on additional Name partnership income income Harry Landau $ 11,002.50 $ 8,694.95 Herbert D. Landau 5,419.75 3,544.90 Lily Landau 5,542.00 3,645.42 Janie Landau 7,335.00 5,288.33 Total $ 29,299.25 11. On February 15, 1949, petitioners Harry Landau, Herbert D. Landau, and Lily Landau filed with the collector of internal revenue for the sixth district of California timely claims for refund of income *417 taxes paid for the taxable year 1945 in the amounts of $ 8,694.95, $ 3,544.90, and $ 3,645.42, respectively. On May 4, 1949, petitioner Leslie G. Landau, as executor of the Estate of Janie Landau, filed a timely claim for refund of income tax paid for the taxable year 1945 in the amount of $ 5,288.33. The basis of these claims was the erroneous disallowance of bond premium amortization deduction in the amount of $ 40,750 (of which $ 29,299.25 applies to petitioners herein) claimed by the Landau Investment Company, a partnership, in its return for the fiscal period April 1, 1944, to February 28, 1945. (See paragraph 8 *12 above.) 12. The Landau Investment Company filed a partnership return of income for the fiscal year ending February 28, 1946, on or before May 15, 1946. In said return the partnership reported a long-term capital gain on the sale of the aforesaid 200 bonds in the amount of $ 62,232.65, pursuant to section 117 of the Internal Revenue Code. The gain was computed as follows: Selling price $ 270,232.65 Basis 208,000.00 Total long-term capital gain $ 62,232.65 13. Subsequently, the Commissioner of Internal Revenue in a revenue agent's report, dated September 3, 1948, adjusted Landau Investment Company's return of income for the fiscal year ended February 28, 1946, to reflect a decreased gain on sale of the aforesaid 200 bonds by adding to the partnership's basis for gain the amount of $ 40,750, representing bond premium amortization which was disallowed previously for the taxable period April 1, 1944, to February 28, 1945. (See paragraphs 7 and 10, above.) Other items adjusted in said report are not here in issue. The distributive long-term capital gain was thereby reduced by $ 20,375. 14. Petitioners Harry Landau, Herbert D. Landau, and Lily Landau filed their nonresident*13 alien individual income tax returns for a nonresident alien engaged in trade or business within the United States for the calendar year 1946 on or before June 15, 1947, and duly paid the tax shown as due thereon. Petitioner Leslie Gabriel Landau, as executor of the Estate of Janie Landau, now deceased, filed a final nonresident alien individual income tax return for an alien engaged in trade or business within the United States for Janie Landau for the taxable period January 1, 1946, to May 1, 1946, on or before June 15, 1947, and duly paid the tax shown as due thereon. The distributive shares of partnership capital gain from the Landau Investment Company for the fiscal year ended February 28, 1946, were included in these returns. *418 15. Subsequently, the Commissioner of Internal Revenue, in a revenue agent's report dated September 3, 1948, adjusted petitioners' returns for the calendar year 1946 (January 1, 1946, to May 1, 1946, in the case of Janie Landau, deceased), to reflect an increase in petitioners' share of partnership ordinary income, not here in issue, and to reflect a decrease in petitioners' net long-term capital gain, which adjustments resulted in net overassessments*14 as shown in the schedule below. The decrease in partnership capital gain results from the decreased gain on the sale of the aforesaid 200 bonds (see paragraph 13 above). Decrease in Net Name long-term overassessment capital gain Harry Landau $ 5,501.24 $ 181.25 Herbert D. Landau 2,709.88 307.89 Lily Landau 2,771.00 289.78 Janie Landau, deceased 3,667.49 282.61 The overassessments were refunded or credited to petitioners on or before September 21, 1949. 16. Subsequently, the Commissioner of Internal Revenue in a revenue agent's report dated September 21, 1950, readjusted the ordinary net income of the Landau Investment Company partnership for the taxable period April 1, 1944, to February 28, 1945, by allowing the deduction for amortization of bond premium in the amount of $ 40,750. Revenue agent's reports were also issued to the partners of the Landau Investment Company proposing a decrease in the distributive share of partnership ordinary net income for the year 1945, resulting from this adjustment of partnership net income. The amounts of decreased partnership net income and the decrease in tax resulting therefrom are as follows: Decrease in Name partnership Decrease in ordinary tax net income Harry Landau $ 11,002.50 $ 8,694.95 Herbert D. Landau 5,419.75 3,544.90 Lily Landau 5,542.00 3,645.42 Janie Landau, deceased 7,335.00 5,288.33 *15 17. The Commissioner of Internal Revenue in a revenue agent's report dated September 21, 1950, proposed to increase the long-term capital gain reported by the Landau Investment Company for the fiscal year ended February 28, 1946, in the amount of $ 40,750, of which *419 $ 20,375 is distributive to the partners thereof. The distributive share of petitioners herein is shown in paragraph 15. Said increase results from decreasing the basis for determining gain or loss on the aforesaid 200 bonds which were sold during the partnership's fiscal year. Revenue agent's reports were also issued to the partners of the Landau Investment Company proposing an increase in the distributive share of partnership capital gain with a resulting increase in the partners' tax. Inasmuch as more than 3 years had passed since the filing of the partners' tax returns, said reports stated that only tax equal to the amounts of tax refunded in the 2 preceding years could be recovered pursuant to section 3746 (b) of the Internal Revenue Code. Additional Portion Remainder Name capital gain Increase recovered under of increase from in tax sec. 3746 (b) in tax partnership I. R. C. Harry Landau $ 5,501.24 $ 2,750.61 $ 181.85 $ 2,568.76 Herb't D. Landau 2,709.88 1,354.94 307.89 1,047.05 Lily Landau 2,771.00 1,385.50 289.78 1,095.72 Janie Landau 3,667.49 1,833.75 282.61 1,551.14 *16 The amounts recoverable pursuant to section 3746 (b), Internal Revenue Code, were duly paid on or about October 11, 1950. 18. The remainder of increase in tax for each petitioner, as shown in the tabulation in the preceding paragraph, constitutes the deficiency at issue in this proceeding. Notice of deficiency to each petitioner was issued on April 29, 1952. 19. Subsequent to the filing of the pleadings and before the time of trial in this consolidated proceeding, the Commissioner of Internal Revenue completed the delivery of certificates of overassessment allowing the claims for refund referred to in paragraph 11 above. This action has reference to the scheduling of said certifications on or about June 22, 1951, and is the subject of paragraph VIII of the answers and replies. The parties agree that for all purposes of this proceeding, the notices of deficiency were issued within 1 year after the date of allowance of said claims for refund. 20. The term "petitioner" or "petitioners," wherever the context so requires, shall be construed to include Janie Landau and/or the Estate of Janie Landau and/or Leslie Gabriel Landau, Executor of the Estate of Janie Landau. 21. The assessment*17 of the deficiency determined by the Commissioner on April 29, 1952, with respect to each of the petitioners herein, is barred by the statute of limitations and other provisions of the Internal Revenue Code, unless the assessment constitutes an adjustment under the provisions of section 3801, Internal Revenue Code. *420 OPINION. The deficiency in each proceeding for 1946 results from adjustments made by the respondent on April 29, 1952, the date on which each deficiency notice was mailed. The determinations of deficiencies for 1946 on April 29, 1952, are barred by the statute of limitations unless section 3801, Internal Revenue Code, applies, as the respondent contends. Petitioners contend that section 3801 does not apply. They rely upon James Brennen, 20 T. C. 495. The facts having been stipulated, it is unnecessary to restate the facts. In the Brennen case, the facts were the same. We pointed out there that "the party who invokes the exception to the basic statutory limitation period must * * * assume the burden of proving all of the prerequisites to its application," citing D. A. MacDonald, 17 T. C. 934, 940.*18 The burden is upon the respondent. In this proceeding, on brief, the respondent recognizes that the rule announced in the Brennan case precludes our sustaining his contentions here, but he urges us to overrule our decision in the Brennen case. We need not repeat here what we said in the Brennen case. We adhere to the view there expressed. Accordingly, it is held that subsections (b) (2) and (b) (5) of section 3801, Internal Revenue Code, do not apply under the facts of this proceeding. The respondent relies upon subsection (b) (3) 2 of section 3801, which is set forth in the margin, in addition to subsections (b) (2) and (b) (5), thereby bringing before us consideration of one of the other provisions of section 3801 which was not before us in the Brennen case. Subsection (b) (3) applies to a determination which "requires the exclusion from gross income of an item." Respondent, in invoking subsection (b) (3), argues that a deduction from gross income is equivalent to an exclusion from gross income for the purposes of subsection (b) (3). The respondent cites no authority in support of this novel contention, and, in our opinion, it is without merit. The determination*19 made by the respondent relating to the partnership's fiscal year ending on February 28, 1945, did not require "the exclusion from gross income of an item with respect to which tax was paid and which was *421 erroneously excluded or omitted from the gross income of the taxpayer for another taxable year." Max Schulman, 21 T. C. 403. Respondent makes the further argument, with respect to the applicability of subsection (b) (3) which is derived from the point that in these proceedings the American Telephone and Telegraph bonds were purchased by the partnership, *20 and, later, were sold by the partnership. Respondent calls our attention to the matters pertaining to the computation of the net income of the partnership for the taxable period April 1, 1944, to February 28, 1945, which was affected by the claimed deduction for amortizable bond premium; and to the computation of the gross income of the partnership for the taxable period March 1, 1945, to February 28, 1946, which was affected by the computation of the amount of the long-term capital gain realized upon the sale during that fiscal period of the bonds at a profit. Respondent argues that determination of the question whether or not subsection (b) (3) applies here depends upon whether the gross income of the individual members of the partnership, Landau Investment Company, the petitioners, includes, under section 22 (a), their individual shares of the partnership gross income, or merely their individual shares of the partnership net income. If the latter, respondent argues, then (b) (3) would be applicable. He concedes, however, that if the gross income of an individual partner includes his share of the partnership gross income, (b) (3) would not apply. Respondent's argument involves*21 the so-called "aggregate" and "entity" theories of the interests of partners in a partnership. Section 3801 deals with the "taxpayer." A partnership, as such, is not a taxpayer under the Federal income tax law; it is not a taxable entity. The general rule is that an individual partner is deemed to own a share interest in the gross income of the partnership. Craik v. United States, 31 F. Supp. 132, 134; Neuberger v. Commissioner, 311 U.S. 83; Jennings v. Commissioner, 110 F. 2d 945; Randolph Products Co. v. Manning, 176 F. 2d 190. We recognize that the general rule has been construed for the purpose of applying particular provisions of the Internal Revenue Code. Cf. L. Glenn Switzer, 20 T. C. 759. Here application of the general rule is consistent with the statutory scheme for taxing individual partners with partnership income and with the structure of section 3801. Accordingly, the respondent's argument under this question is rejected. We do not consider these proceedings distinguishable in principle from Max Schulman, supra,*22 simply because here the partnership of which petitioners are members bought and sold the bonds. Since the deficiencies are barred by the statute of limitations, Decisions will be entered for the petitioners. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Harry Landau, Lily Landau, Herbert Landau, and Estate of Janie Landau, deceased, Leslie Gabriel Landau, Executor.↩ 2. SEC. 3801. MITIGATION OF EFFECT OF LIMITATION AND OTHER PROVISIONS IN INCOME TAX CASES. (b) Circumstances of Adjustment. -- When a determination under the income tax laws -- * * * * (3) Requires the exclusion from gross income of an item with respect to which tax was paid and which was erroneously excluded or omitted from the gross income of the taxpayer for another taxable year or from the gross income of a related taxpayer; or↩