Devonian Program, Carl Valeri, A Partner Other Than the Tax Matters Partner, Petitioners

T .C . Memo . 2010-15 3 UNITED STATES . TAX COURT DEVONIAN PROGRAM, CARL VALERI, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioner v . COMMISSIONER OF INTERNAL-REVENUE, Responden t Docket No . 8638-08 . Filed July 19, 2010 .

Bernard S . Mark and Richard S . Kestenbaum , for petitioner .

Halvor N . Adams, III , Theodore R . Leighton , Rose E . Gole , Margaret Burow , and James P .A . Calicture , for respondent .'

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MEMORANDUM OPINION

GOEKE, Judge : Respondent issued a notice of final partnership administrative adjustment (FPAA) to Devonian Program .

This case involves competing petitions--one filed by an entity respondent maintains is the tax matters partner (TMP), whic h r

ED , 19 2010

- 2 timely filed a petition, and . the other filed by a partner .

Respondent filed a motion to . dismiss for lack of jurisdiction because of the prior petition involving the same partnership .

For the reasons stated herein, we will grant respondent's motion .

Background The following information is stated for purposes of thi s Memorandum Opinion only ; this case has yet to be tried on the merits . Unless otherwise indicated, all section references are to the Internal Revenue Code as amended .

Devonian Program (Devonian) was organized in 1999 as a partnership with more than one member .' On April 20, 2000, Devonian filed a Form 1065, U .S . Partnership Return of Income, for its 1999 tax year (partnership return) . The partnership return designated Basin Gas Corp . (Basin) as Devonian's tax .

matters partner .

Basin is a corporation owned by Carl Valeri (Mr . Valeri) . Mr . Valeri is the sole shareholder, director, officer, and president of Basin . Mr . Valeri dealt with the day- to-day operations of Basin along with all administrative duties .

Investors in Devonian acquired their interests therein by executing a subscription agreement . The subscription agreement incorporates a private placement memorandum . The subscription agreement appointed Basin the manager and attorney-in-fact o f 'Devonian has at times referred to itself as America International 1999 Venture .

4 1 Devonian . The private placement memorandum provides in part that .

Basin will receive a flat fee of'$292,500 for services a .nd'will pay $3,000 for a 17-percent interest in Devonian's revenues .

Jerry Karlik°is employed in an administrative capacity by Basin .and helped prepare the private placement memorandum for Devonian .

,Respondent'began an audit of Devonian at-some time-befor e .August 22, 2001 . On August 22, 2001-, Mr . .Valeri, as president of Basin, filed a Form 2848, ._Power of,Attorney and Declaration o f Representative, designating Gail Anger (Mr . Ang'er),' a certified public accountant, to represent Devonian with respect to the audit . On December 3, 2001,,respondent's .revenue agent issued a letter to Mr . Anger requesting information to confirm that Basin was a general partner of Devonian for the years ending December 31, 1999 and 2000, and copies of Schedules,K-l, Partner's Share of Income, Credits,"Deductions, etc .,- showing that Basin- Was a' general partner of Devonian for 1999 and-200 0 On December 5, 2001, 'Mr .' Anger sent a letter to responden t stating the following :

In addition, under the terms of the Subscription Agreement, we contributed $3,000 for a seventeen per cent equity interest at Payout, as defined in the Agreement . Since this is not a Limited Partnership, liability is not limited . Therefore, we are considered "General" partner .

Although Mr . Valeri did not sign the December 5, 2001, letter , authorized his staff to stamp his signature onrthe letter and was aware that the letter had been sent . Included in the letter wer e Schedules K- .1 from Devonian for Basin for 1999 and 2000 . Both Schedules K-1 prepared by Mr . Anger for 1999 and 2000 identified Basin as a general partner of Devonian . The 1999 Schedule K-1 reported that Basin had contributed $3,000 of capital during 199 9 .and had a $3,000 capital account balance at the end of that year .

The 2000 Schedule K-1 reported that Basin had a $3,000 capita l account balance at both the beginning and end of 2000 . Mr .

Valeri did .not inform respondent that what was sent in the December 5, 2001, letter was incorrect at any point before hi s petition was filed .

On June 26, 2006,, Mr . Valeri signed a Form 872-P, Consent t o Extend the Time to Assess Tax Attributable to Partnership Items , for Devonian's 1999 tax year as president of .Basin on the lin e that instructs "Tax Matters . Partner Sign Here . " On November 27, 2007, the FPAA was issued to Basin for the taxable year 1999 and was addressed as follows :

BASIN GAS CORPORATION .TAX MATTERS PARTNE R DEVONIAN . PROGRAM 238 SOUTH EDISON STRE T SALT LAKE CITY, UT 84111-230 7 On February 7, 2008, Basin timely mailed a petition with respect to the FPAA in accordance with section 6226(a), and its petition was assigned docket No . 3881-08 . On April 11, 2008, Mr .

.Valeri filed'a second petitionwith respect to .the same FPAA,",and his petition was assigned docketNo . .8 :638-08 .

On May 27, 2008, respondent filed a motion to dismiss Mr .

Valeri' .s petition'for-lack of jurisdiction because Basin, whic h Devonian designated as its TMP on ..its 1999 Form-1065 ., had filed a petition with respect to the FPAA within the period : provided . by section 6226(a) .

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On June 19, .2008, Mr ._Valeri filed a notice of objection to respondent's ' motion' to dismiss for,lack of- .jurisdiction . By order dated .July 24, 2 .008, the . Court ordered respondent to file a response thereto on or before . August 25,2008 ; respondent's response was filed .on August 11, 20'08 . The motion to .dismiss for lack of jurisdiction was heard on October 27,-2008 .

I . Introductio n Discussio n We must decide . whether Bas-in was a general partner in Devonian for Federal tax purposes . In Mont . Sapphire Associates, Ltd . . ` v . . Commissioner , 95 T .C . 477,481 (1999) .,,, this Court foundi that only a general partner is eligible to be the,TMP .2 Basi n 2Sec . 6231(a) (7) (A) provides that the ,tax matters partner (TMP) of any partnership'is the general partner designated as the TMP in accordance with regulations issued by the Secretary . Sec . 301 .6231(a)(7)-1, Proced . & Admin . Regs ., provides guidelines for selection of the TMP . A person may be designated the TMP of a partnership for a taxable year only if that person was a generalY partner in the partnership at some time during the taxable year for which the designation is made or . is a general partner in th e . .)

(continued .

was designated the TMP of Devonian in a .ccordance .with .section 301 .6231(a) .(7)-1(c), Proced, & Admin . Regs ., and timely mailed its petition to the Court with .respect to theFPAA within the 90- day period prescribed by section 622 .6(a) . Respondent's motion to dismiss for lack of jurisdiction hinges, on whether Basin was a 'general partner of Devonian during 1999 . If Basin was a general partner, then respondent's motion to dismiss for lack of jurisdiction should be granted . This Court would lack jurisdiction because a partner other than the TMP may file a petition . for . readjustment with respect to an FPAA only if the TMP does not file a readjustment petition within the 90-day period set forth in section 6226(a) . See sec . 6226(b)(1 ) II .

Whether Basin Was a Partner .

Federal law determines whether an individual is a partner in a partnership for Federal tax purposes, though status under Stat e law may be relevant . Estate of Kahn v . Commissioner , 499 F .2d 1186, 1189 .(2d .Cir . 1974), affg . Grober v . Commissioner , T . .C .

Memo . 1972-240 ; Luna v . Commissioner , . 42 T .C . 1067, 1077 (1964) ; sec . 301 .7701-1(a), Proced . & Admin . Regs .

This Court and others have relied on Commissioner v .

Culbertson , 337 U .S . 733, 742-743 (1949), where the Commissioner .

challenges a person's status as a partner for Federal ta x 2( continued ) partnership as of the time the designation is made . Sec . 301 .6231(a)(7)-1(b), Proced . & Admin . Regs .

I purposes . In Commissioner v . Culbertson , supra at 742-743, the .Supreme Court listed several objective factors that influence . th e determination of whether apartnership is valid, including : The agreement between the parties ; the conduct of the parties . in executing its provisions ; the .parties' statements ; the testimon y of disinterested persons ; the relationship of the parties ; their respective . abilities and capital contributions ;. the actua l control of income ; and the purposes for which the income is used .

Id . at 742 ; .see also Va . Historic Tax Credit Fund 2001 LP v .

Commissioner , T .C . Memo . 2009-295 . .

In the present case , the validity of the partnership is not.

.disputed but'the analysis in Commissioner v . Culbertson , supra at 742, quoted below is helpful to our determination :

The question is not whether the services or .capital contributed by a partner are of sufficien t importance to meet some objective standard * * * but whether, considering all the facts * * * the parties in good faith .and acting with a business purpose intended to join together in the present conduct of th e enterprise .

Mr . Valeri argues that Basin was not and never .has been a partner because Basin does not have any capital or profit interest in Devonian and that it was strictly a manager/agent of the other partners . Mr . Valeriargues that Basin did not-sig n the subscription agreement as an investor but signed only to .create .an agency relationship . Mr . Valeri contends that th e $3,000 paid to Devonian was strictly :a contingent interest' .

Respondent argues that Basin was a partner and did have a capital interest in Devonian . Respondent points to numerous parts of th e private placement memorandum which provide that Basin is receiving interests in Devonian . Respondent contends that the $3,000 that Basin paid to Devonian .for 17 percent of the net revenues was not a contingency interest because Basin could reassign any or all of its 17-percent interest . and the interest was payable to Basin even if it were . replaced as manager .

We agree with respondent that Basin was a general partner .

Basin, acting with a business purpose, intended to join .together with, the other partners of Devonian in the conduct of a busines s enterprise . According to Mr . Valeri, Basin cannot be an investor because it never received any interest in Devonian and its receipt of a $292,500 fee and of a 17-percent interest in Devonian's net revenues were strictly for services rendered .3 .

Basin executed a subscription agreement which by its terms .incorporated the Devonian private placement memorandum . The private placement memorandum identifies Basin as the TMP of Devonian and gives Basin "exclusive and complete discretion and control over the management, business, and affairs of Devonian" .

The subscription agreement and,private placement memorandu m provided that "Basin shall be entitled to a fee equal to $292,50 0 3Respondent concedes that the $292,500 was for services rendered but disagrees that Basin's 17-percent interest in net revenues was to be received for services rendered .

in addition to 170 of .the net revenues attributable to'-the Program at Payout, for which it will pay $3,000 ."

There are several parts of the private placement memorandum which refer to Basin as holding an "interest" in Devonian . The "Management Fee" section of the private placement memorandum provides, in part : .

The Manager will be entitled to a fee equal to $292,500, if Program is .fully subscribed, for services in arranging for . the acquisition and drilling of th e .Well(s) and for day-today administration of Program operations through the end of .1999 . In addition, the Manager will receive a 17% interest in .the Program's revenues at Payout (and after the driller's 40% back in) for which it will pay aggregate consideration . of $3,000 .

The summary of significant assumptions and accounting policies of the private placement memorandum provides : "After payout, the Manager will receive a 17o interest of the Program's interes t [sic .]' ." Mr . Valeri admitted in his December 5, 2001, letter to respondent that Basin had contributed $3,000 to Devonian for a 17-percent interest in Devonian at payout . The $3,000 was an investment, not compensation for'services . Any return Basin received from its 17-percent interest would be a return on .investment dependent on the profits from Devonian .

Additionally, Mr . Valeri claims that the Schedules K-l sent to respondent during the audit were incorrect . Schedules K-1 for tax years 1999 and 2000 were issued to Basin . The Schedules K-1 reported that (1) Basin was a general partner, (2) Basin had a capital interest in Devonian, and (3) Basin had contributed d $3,000 of capital to Devonian . Mr . Valeri approved the sending .

of the Schedules K-1, never contacted respondent to tell him of any incorrect information on the Schedules K-1, and stated that he realized what was wrong only "over the .past year or two" afte r had discussions with a lawyer and an accountant .

Mr . Valeri was not sure whether he signed the 1999 .

partnership return in his individual capacity or as the president of Basin : He first testified that he signed the 1999 partnership return in his individual capacity as a partner . of Devonian .

Later, he said he was not sure whether he signed it in his individual capacity or as the president of Basin and that he could not remember because he signs a lot of returns . We found Mr . .Valeri's testimony to be vague, questionable, and self- serving .

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Mr ._ Karlik testified . that he helped Mr . Valeri with the private . placement memorandum by preparing the document, forwarding it to attorneys and accountants, and updating Mr .

Valeri on any new tax legislation . Mr . Karlik also stated that both he and Mr . Valeri knew that the Schedules K-1 issued to Basin were incorrect when they were sent to,respondent during the audit but failed to tell respondent or anyone else because they thought it was "meaningless" since the Schedules K-i were not filed with the original return . Mr . Karlik' s answers regarding the Schedules K-1 issued to Basin were unconvincing .

After examining all of the facts in the record, we find that Basin became a general partner of Devonian . Basin, as a general partner designated as the TMP of Devonian on the partnership' s return, was qualified to file the petition in docket No . 3881-08 on Devonian's behalf, and we will therefore dismiss Mr . Valeri's petition .for lack of . jurisdiction .

See sec . 6226(b)(l) .

To reflect the foregoing, An appropriate order of dismissal for lack of jurisdiction will be entered .