TAX COURT OPINION

Case: The Christopher Howard Companies, Christopher Howard Stoten, Tax Matters Partner
Docket Number: 5664-17
Judge: Goeke
Opinion Type: bench
Filed: 10/15/2018
Pages: 14

SD UNITED STATES TAX COURT WASHINGTON, DC 20217 THE CHRISTOPHER HOWARD COMPANIES, ) ) CHRISTOPHER HOWARD STOTEN, TAX ) MATTERS PARTNER, ) ) ) ) Docket No. 5664-17. ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent Petitioner(s), v. ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to the parties a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Los Angeles, California containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered on behalf on the participating partners. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. October 15, 2018 SERVED Oct 16 2018 Bench Opinion by Judge Joseph Robert Goeke September 21, 2018 The Christopher Howard Companies, Christopher Howard Stoten, Tax Matters Partner v. Commissioner of Internal 3 Revenue Docket No. 5664-17 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and 1 2 3 4 5 6 7 8 9 10 opinion. The oral findings.of fact and opinion shall not 11 12 13 14 15 be relied upon as precedent in any other case. This opinion is rendered pursuant to section 7459(B) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. Rule references hereinafter are to the Tax Court Rules of 16 Practice and Procedure, and section references are to the 17 1.8 19 Internal Revenue Code a.s in effect in the taxable year 2010, which is the year before the Court. This case is before us based upon a timely 2'O petition seeking review of a Notice of Final Partnership 21 Administrative Adjustment, which was issued to the 22 Christopher Howard Companies, Christopher Howard Stoten, 23 24 25 Tax Matters Partner on October 28th, 2016. And subsequently, again, on December 5th, 2016. Hereinafter the Notice of Final Partnérship Administrative Adjustment (973;406-2250|operationseescrbertnetlwwwastrbers.net 1 2 3 4 5 6 7 8 9 10 11 is referred to as a FPAA. The threshold issue in this case is whether the FPAA was timely issued. That issue turns on whether the partnership return filed for the year 2010 by a member of the Limited Liability Company, Mr. Shearin was a valid partnership return. If the return was valid, the statute of limitations has expired. Respondent maintains, however, that the return was invalid because Mr. Shearin was not authorized to sign the return and a subsequent copy of the return which he also submitted. The FPAA addresses the 2010 year of the 12 Christopher Howard Companies, which was an LLC and was 13 treated as a partnership for purposes of the Internal 14 Revenue Code. Hereinafter, the Christopher Howard 15 Companies will be referred to as the "LLC". The parties 16 have entered into a stipulation of facts, and the 17 stipulation of facts and the attached exhibits were 18 19 admitted into the record of trial of this case. This case came to trial on September 17th, 2018 in Los Angeles, 20 California. In addition to the stipulation of facts and 21 the attached exhibits, the record contains testimony from 22 Mr. Christopher Howard and fr.om Robert Shearin. 23 24 As will be discussed more in the body of this bench opinion, Mr. Howard's testimony was inconsistent 25 with certain contemporaneous documents, and his testimony MIiEl B)406-2250|operatiomeescriberuwt lwwme cdbertnet was generally not credible about 5 the events leading up to the filing of the 2010 Federal Income Tax Return. The parties have stipulated that Christopher Howard did not file or sign a Federal Income Tax Return for the LLC in 2010. The LLC's tax return for 2010 was due on April 15th, 2011. The parties have stipulated that Mr. Shearin signed and submitted to the Internal Revenue Service a Form 1065 US return for partnership income for 2010, and that that return was filed on October 20th, 2011. 1 2 3 4 5 6 7 8 9 10 Respondent maintains that the return was not properly a 11 12 13 14 15 16 17 18 filed document because respondent consistently maintains that Mr. Shearin was not authorized to sign the return. On March 16th, 2012 Mr. Shearin signed and submitted a second Form 1065 US return for partnership income for 2010. As stated, respondent has not accepted and processed either of these documents as a valid income tax return for the LLC for 2010. During the course of the initial audit for the 19 year 2010 respondent did correspond with Mr. Shearin and 20 treated him as the Tax Matters partner of the company. 21 However, at a certain point in the audit, respondent 22 23 24 determined that Mr. Shearin had not properly signed the return and took a different tact. Subsequently on January 20th, 2016 respondent, through the examining agents, 25 prepared a substitute for return.for the LLC for 2010. 973)406-2250)öperations@escribersmet|wwwscribsmet 1 2 3 4 5 6 7 8 9 The history of this case bed-nge with the relationship between Mr. Shearin and Mr. Howard and the formation of the Christopher Howard Companies, Inc. .4-nee-r-pe-r-a-táca- that was not treated as a partnership for purposes of Federal Income Tax. This corporation was formed sometime before 2004. From. the outset of the operations of this original corporation, and the subsequent formation of the LLC in 2004, Mr. Howard and Mr. Shearin understood that Mr. Shearin was primarily 10 responsible for the financial operations of the 11 organization; and that Mr. Shearin would also provide 12 13 14 15 certain financial backing for the organization. The company originally .operated as a corporation and its primary business was Mr. Howard's motivational speaking, and the conduct of various lifestyle training.seminars for 16 profit. 17 On September 13th, 2004 the Christopher Howard 18 Company, Inc. was converted to the LLC. Articles of 19 Organization - Conversion were filed with the California 20 Secretary of State. On June 30th, 2005 the members of the 21 22 23 24 25 LLC executed an operating agreement. The terms of this operating agreement are the basis of respondent's arguments that Mr. Shearin was unauthorized to sign the Federal Income Tax Returns in question. Specifically respondent relies upon Article 5.1 of the operating Cribers en3 4%-22so l opentionseexrbers.twt t www.escrben.n« 1 2 3 4 5 6 7 8 9 10 11 12 13 agreement. This article reads as follows: "The business of the company shall be managed by one manager, Christopher Howard, a California Limited Partnership. The manager shall serve until either removal by resignation or removal by a majority of the members. The manager has the sole authority to manage the company and is authorized to make any contracts, inc.luding but not limited to, employment contracts for officers of the company; enter into any transactions; and make an obtain any commitments on behalf of the company to conduct or further the company's business. The manager may, in writing, delegate to an employee of the company any of the managers responsibilities and authority. This provision does not 14 alter or waive any duty·that a manager may have to the 15 16 company concerning the man.ager's exercise of management." Provision 5.4 of the operating agreement 17 provides: "Except as authorized by the manager no member 18 19 20 21 22 23 24 25 is an agent of the company or has authority to make any contracts, enter into any transactions, or make the commitments on behalf of the company." Subsequent agreements between Mr. Howard or the LLC and Mr. and Mrs. Shearin are relevant to this case. It is also important to note that the original members of the LLC were Mr. Howard, the Shearin Family Trust, including members Mr. and Mrs. Shearin as the authorized representatives of the trust, Wendy Beacock, and For A Change in Time, LLC. The members of the LLC and their interest in the LLC on June 30th is summarized as follows: 8 Mr. Howard, 61.5 percent interest. The Shearin Family Trust, 28.5 percent interest. For a Change in Time, LLC, 5 percent. Wendy Beacock, 5 percent. On February 20th, 2009 Doug and Sherry Johnson were also admitted as-members, and the interest in the f 0 company were formally amended to reduce Mr. Howard's .interest to 55 percent and provide a 5 percent interest to Doug and Sherry Johnson. In addition, Mr. and Mrs. 1 2 3 4 5 6 7 8 9 10 11 12 13 Shearin took on an interest of 30 percent, pursuant to the 14 15 change in the agreement in 2009. Certain other documents are relevant to the .relationship between the Shearin Trust 16 and the LLC. The first of these is an agreement dated 17 August 22nd, 2006 between the LLC and Mr. and Mrs. Shearin 18 as individuals. Pursuant to this agreement, Mr. and Mrs. 19 Shearin agreed to lend the LLC $250,000. The provision 20 provides that until that loan was paid in full Mr. and 21 Mrs. Shearin would have operational control of the LLC. 22 23 There were subsequent similar agreements amending the loan to provide for additional amounts that 24 have been loaned by Mr. and Mrs. Shearin to the LLC. one 25 was -on September 23rd, 2007. It also provided that (973 4%-2250loperationsøescrbersmt }www.esenbersmet operational control would remain in the hands of Mr. and Mrs. Shearin until the $450,000 loan referenced in that 9 agreement had been r.epaid. .A similar agreement was entered into on January 28th, 2008. This agreement referenced a $550,000 loan and provided that operational control would remain in the hands of Mr. and Mrs. Shearin until the $550,000 loan had been repaid. Finally, an agreement was entered into on September 30th, 2009 referencing a total obligation from the LLC to Mr. and Mrs. Shearin that was computed in an attached repayment schedule, which reflected repa.yments and a total loan balance owed by the LLC to Mr. and Mrs. 1 2 3 4 5 6 7 8 9 10 11 12 13 Shearin. The balance reflected in Exhibit A to the 14 September 30th, 2009 agreement.was $1,182,518. All of the 15 reference ,agreements were signed by Mr. H.oward on behalf 16 of the LLC, and by Mr. and Mrs. Shearin. They were also 17 18 signed by Mr. Howard individually. From the outset of the operations of the 19 corporation and continuing through the operations of the 20 LLC, which was formed in 2004, Mr. Howard and Mr. Shearin 21 understood that Mr. Shearin was responsible for the 22 financial operations of the LLC, and that he was 23 authorized to file Income Tax Returns and other filings 24 with regulatory and state authorities. This authorization 25 continued after the formation of the LLC, and based upon SD)406-2250l opennorneesertstowt jwwwesaibetsmet Mr. Shearin's testimony and Mr. Howard's testimony, 10 it is apparent that they did not perceive that the operating agreement entered into by the members of the LLC on June 30th, 2005 changed Mr. Shearin's authority with respect to the .filing of the Federal Income Tax Returns. Respondent's position is that Mr. Howard failed to delegate the authority given to him in the operating agreement, and therefore Mr. Shearin was not authorized to execute the ·Federal Tax Returns for the LLC for 2010. 1 2 3 4 5 6 7 8 9 10 Pursuant to Federal Income Tax Law, members of the LLC are 11 treated as partners in a partnership. his case is 12 properly treated as a partnership subject to the now no 13 14 15 16 17 18 longer in place partnership regime set forth in section 622f et al. , The parties do not dispute that if the forms 1065 fil·ed by Mr. Shearin on behalf of the LLC for the year 2010 were properly executed, that the statute of limitations has run, and that the FPAA is. invalid. 19 Therefore, we focus our inquiry on whether Mr. Shearin was 20 authorized to file the partnership returns on behalf of 21 22 the LLC for 2010. As stated, respondent relies on Article 5.1 of the Operating Agreement. Respondent is not 23 persuaded by the. fact that Mr. Shearin operated in a 24 manner consistent with his longstanding practice with Mr. 25 Howard, which was understood by Mr. Howard to be his role $73)4%.2250|operations¢erdben.net|www,esoíbers.net in the LLC. In other words, respondent strictly relies 11 upon the fact that Mr. Howard was the managing partner and that he had not authorized Mr. Shearin to file the Federal Income Tax Returns in writing. Our analysis of the agreement would lead us to a different conclusion than respondent's. We believe that Mr. Shearin was authorized to file the returns pursuant to 1 2 3 4 5 6 7 8 Article 5.4 and the understanding that he had with Mr. 9 Howard that he was responsible for the financial matters 10 of the company. In addition, we do not read Article 5.1 11 12 as directly relating to Federal Income Tax Returns. In any event, the agreements entered into by Mr. and Mrs. 13 Shearin with Mr. Howard, previously referenced, beginning 14 with the agreement on August 22nd, 2006 specifically gave 15 operating authority to Mr. and Mrs. Shearin, which 16 17 18 19 20 21 22 23 agreements were in writing, and which would meet the requirements of Article 5.1 if, in fact, it .applied to the filing of Federal Income Tax Returns. The history of the operation of statute of limitations pr.ovlslons for Federal Income Tax is important in understanding the policy reasons behind the statute of limitations in the present case, and whether those policy reasons are offended by the Income Tax Returns filed by 24 Mr. Shearin. 25 "The policy behind the 'nó return' proviso which 973) 406-2250| operatiemperrbersaet J www.escetbetsmet removes the effect of the statute of limitations is that 12 it is unreasonable to expect the government to be diligent in its efforts to collect unpaid taxes if the facts giving rise to the tax liability are not disclosed." Neptune Mut. Ass'n v. United States, 862 F. 2d 1546, 1.555 (Fed. 1 2 3 4 5 6 Cir. 1988). 7 8 9 In the present case the Income Tax Returns in question were 'in fact filed, and did give the respondent the information and notice upon which the audit of this 10 case was originated. In fact, the respondent turned to 11 Mr. Shearin during the initial stages of the audit. 12 Nevertheless, respondent argues that section 6063 13 14 restricts the signing of partnership returns, or in this case a return on behalf of an LLC, to partners with 15 authority. Respondent, in this regard, strictly relies 16 upon section 5.1 of the operating agreement as previously 17 18 stated. We note that even if we were to interpret section 5.1 in conformity with respondent's argument, the loan 19 agreements between the LLC and the Shearins, which 20 transferred operating control to the Shearins would 21 provide wri'tten authority. 22 We also note that Mr. Howard never revoked this 23 transfer of written authority as with regards to the. 2010 24 25 Federal Income Tax Return. Mr. Howard testified at great lengths that he believes the loan agreements after the (973)406-2250loperatlomøesttbersaetjwww.escribersatt original agreements, 13 referenced previously, were specious and were backdated by Mr. Shearin. Mr. Shearin testified that they were dated on the dates they were signed by Mr. Howard. Mr. Howard offered us no evidence to support his allegations, and in this regard, we find Mr. Shearin's testimony to. be credible, and we believe the agreements were on the .dates as reflected. We also note that the operating agreement does not specifically address the authority to sign tax returns, and as we previously 1 2 3 4 5 6 7 8 9 10 stated, Mr. Howard and Mr. Shearin had long taken the 11 position that Mr. Shearin was authorized to file returns 12 13 14 15 and that for the years prior to 2010 Mr. Shearin had fïled returns for the LLC without argument or incident. Respondent maintains that those returns are irrelevant to the present inquiry and that every year 16 stands alone. However, Mr. Shearin's approval of Mr. 17 Howard's filing of those returns is consistent with our 18 ·interpretation of the agreement that the provision in 19 article 5.1 did not apply to Federal Income Tax Returns. 20 There's no question that between Mr. Howard and Mr. 21 Shearin, Mr. Shearin was the member of the LLC who was 22 23 responsible for all financial matters and that Mr. Howard was very comfortable with things operating that way. Mr. 24 Howard testified that he did not understand that he had to 25 provide written authority to Mr. Shearin to file Federal PB)406-2250(operatkmseescriberuet|tamre,4scribers.net 14 1 2 3 4 5 6 7 8 9 Income Tax Returns. It appears that Mr. Howard's dispute with Mr. Shearin only began in January of 2011 after he was released from the Betty Ford center. Nevertheless, there's no evidence that Mr. Howard revoked the operating control he had provided to Mr. and Mrs. Shearin in the loan agreements previously referenced. On the record before us we hold that the operating agreement did not restrict Mr. Shearin's 10 authority to sign the tax returns as a representative of 11 the trust and a member of the LLC, on behalf of the.trust. 12 This holding results in our determination that the statute 13 of limitations provided by section 6229 has expired and 14 15 that the petitioners have a valid affirmative defense in the present case based upon the fact that respondent may 16 no longer assert the adjustments in the FPAA, as the FPAA 17 was sent to the LLC after the period of limitations had. 18 expired. Given our holding the decision will be entered on behalf of the participating partners, and we will not sustain the adjustments in the FPAA. This concludes the Court's oral findings of fact and opinion in this case. 19 20 21 22 23 24 25 (Whereupon, at 11:08 a.m., the above-entitled matter was 15 conclud.ed. ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1 8 19 .20 21 22 2 3 2 4 2 5