TAX COURT OPINION

Case: KRR Construction
Docket Number: 26634-07
Judge: Vasquez
Opinion Type: memo
Filed: 05/03/2010
Pages: 8

10c, T .C . Memo . 2010-9 4 UNITED STATES TAX COURT KRR CONSTRUCTION, Petitioner v . COMMISSIONER, OF INTERNAL REVENUE, Responden t Docket No . 26634-07 . Filed May,.3, 201-0 . Merle R . Flagg , for petitioner . Candace M . Williams , for respondent . MEMORANDUM OPINION VASQUEZ, Judge : Respondent determined a $243,099 deficiency in petitioner's 2004 Federal income .tax .and a $48,620 accuracy- related penalty under section 6662(a) .' Petitioner filed a All section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure . SERVED May 03 2010 2 - timely petition . The matter is presently before. the Court on a motion by petitioner's sole shareholder, Joseph Kemp (Mr . Kemp), to substitute party and change caption pursuant to Rule 63(d) . The issue for decision is whether Mr . Kemp may be substituted for petitioner . We hold that he may not . Background When the petition was filed, petitioner's principal place of business was in Texas . In 1993 Mr . Kemp incorporated petitioner under Texas law . Since petitioner's incorporation, .Garner & Cooper L .L .P ., an accounting firm, has prepared petitioner's income tax returns . In 1999 David Molina (Mr . Molina), a business acquaintance of Mr . Kemp, advised Mr . Kemp that he could reduce his tax burden by having petitioner elect to .be treated as an S corporation . Mr . Molina subsequently prepared Form 2553, Election by a Small Business Corporation, for petitioner, which Mr . Kemp signed and mailed to respondent . Petitioner's accounting firm was not involved in the preparation of the S corporation election, nor was it aware of petitioner's intention to elect S corporation status . On April 10, 1999, respondent received petitioner's Form 2553 . On May 3, 1999, respondent notified petitioner that its S corporation election was granted with an effective date of January 1, 1999 . Though petitioner retained a copy of 3 respondent's notification, petitioner's accounting firm did not receive a copy of this document until .2005 . According to respondent's computer records, petitioner's S corporation election was reversed or terminated on June 17, 1999 . Further details regarding the reversal or termination are no longer available as respondent destroys certain records after 7 years in accordance with his document retention policy . Petitioner has never filed Form 1120S, U .S . Income Tax Return for an S Corporation, as S corporations are required to do, and Mr . Kemp has never reported any of petitioner's income or deductions on his personal Federal income tax return . Rather, since its incorporation in 1993 petitioner has consistently filed Form 1120, U .S . Corporation Income Tax Return . On petitioner's Form 1120 for 2004, petitioner deducted 50 percent of certain amounts it contributed to various partnerships as business bad debts . Respondent maintains that petitioner failed to establish that its business bad debt deductions meet the requirements of section 166(a) . 2 2 According to Mr . Kemp, the benefit of substituting himself for petitioner is that he may be entitled to certain bad, debt deductions under sec . 166(d) which exceed the amount claimed as a bad debt deduction on petitioner's 2004 Federal income tax return . I . Overview Discussion Mr . Kemp argues that because he is the sole shareholder o f an S corporation, he is the proper party to this proceeding . claims that petitioner's status as an S corporation was never terminated and if it was, that it is was done without petitioner's consent . Mr . Kemp further argues that even i f petitioner's S corporation election was untimely for the 1999 tax year, the election would have been effective for subsequent years, including the year at issue . In either case, Mr . Kemp asserts that petitioner should be treated as an S corporation . Consequently, Mr . Kemp argues that he is the correct party to this proceeding . Respondent contends that petitioner was a C corporation for the year at issue because petitioner's S corporation election was reversed or terminated in June 1999 . Respondent claims that the S corporation election was either reversed because it wa s untimely filed or terminated at petitioner's request . Respondent's only support for the latter claim consists of a computer printout that indicates termination occurred "per TPS corres" . According to respondent, this designation means that the taxpayer requested termination of S corporation status . Respondent further contends that Mr .: Kemp does not meet the requirements for substitution under Rule 63(d) and that the Court lacks jurisdiction to redetermine Mr . Kemp's individual income tax liability . II . Substitutio n Rule 63 provides for substitution in four instances : (1) Upon a petitioner's death ; (2) when a party becomes incompetent ; (3) where the need for successor representatives or fiduciaries arises ; and (4) for "other cause ." Rule 63(a), (b), (c)', and (d) . Mr . Kemp's motion invokes only Rule 63(d) . 'Pursuant to'Rule 63(d), the Court may order substitution of "proper parties" for- ".other cause ." Although the terms "proper parties" and "other cause" are not defined, these terms must be interpreted within the . limitations placed upon the Court's jurisdiction . Section 6213(a) limits the Court's jurisdiction to proceedings initiated by taxpayers who have filed a timely petition in response to a valid notice of deficiency . Guarino v . Commissioner , 67 T .C . 329, 331 (1976) . This Court has repeatedly held that a notice of deficiency is a jurisdictional prerequisite to access this forum as a party-petitioner . Sampson v . Commissioner , 81 T .C . 614, 616 (1983) ("no one who has not bee n served with a statutory notice of deficiency may become a party- petitioner in this Court * * * Such a holding is clearly in accordance with our practice, and with the statute defining and limiting our jurisdiction . Sec . 6213(a) ; Rule 60(a) ."), affd . without published opinion 829 F .2d 39 (6th Cir . 1987) ; Estate of Siegel v . Commissioner , . 67 T .C . 1033, 1041 (1977) ("we could not within our jurisdictional limits have permitted any person to whom a notice of deficiency was not sent to . become a party") ; Guarino v . Commissioner , supra at 331 ("The jurisdiction of this Court is strictly limited under section 6213(a) to persons who file a petition with this Court * * * after the notice of deficiency authorized in section 6212 has been mailed to that person .") ; Wheeler v . Commissioner , T .C . Memo . 1999-298 ("when a notice .of deficiency is issued to only one spouse, this court lacks jurisdiction over the spouse not named in the notice") ; Sumerset Props . v . . Commissioner , T .C . Memo . 1981-707 ("there is clearly no basis for. substituting . as petitioners either the general partner or the limited partners who were not issued notices of deficiency") . Mr . Kemp wants to be substituted for petitioner pursuant to Rule 63(d), thereby shifting the focus of the litigation from petitioner's corporate tax liability to Mr . Kemp's individual tax liability . Mr . Kemp's motion for substitution was filed so that Mr . Kemp can deduct petitioner's bad debt losses on his personal Federal income tax return . In other words, Mr . Kemp wants to become the party-petitioner in this proceeding . 7 - Substitution under Rule 63(d) is inappropriate in this case . 3 The proper party to this proceeding is petitioner, who was issued the notice of deficiency and filed a timely petition with this Court . See Rule 60(a) ; Estate of Siegel v . Commissioner , supra at 1038-1039 . Moreover, Mr . Kemp was not issued a notice of deficiency, and we do not have jurisdiction to redetermine hi s .tax liability . See Sampson v . Commissioner , supra at 616 ; Estate of Siegel v . Commissioner , supra at 1041 ; Guarino v . Commissioner , supra at 331 ; Wheeler v . Commissioner , supra ; . Sumerset Props . v . Commissioner , su ra . Therefore, we could not within our jurisdictional limitations substitute Mr . Kemp for petitioner as the proper party in this proceeding . Since petitioner is the proper party, substitution is not appropriate . See Estate of Siegel v . Commissioner , supra at 1039 . III . Conclusion Based on the foregoing, petitioner is the proper party i n this matter and there is no basis for substituting Mr . Kemp . 3 Even if we were to find .that petitioner was an S corporation for 2004, which we do not, substitution .would not be proper . In that case Mr . Kemp, as the sole shareholder of an S corporation, would be the "taxpayer" under sec . 6212(a) to whom respondent should have issued the notice of deficiency . See Fehlhaber v . Commissioner , 94 T .C . 863 (1990) ("as a passthrough entity, an S corporation is generally a taxpayer not subject to income tax . Secs . 1363(a) and 7701(a)(14)"), affd . 954 F .2d 653 (11th Cir . 1992) . However, respondent did not issue a notice of deficiency to Mr . Kemp . Rather, respondent issued the notice of deficiency to petitioner . Therefore, the Court would lack jurisdiction to redetermine Mr . Kemp's tax liability . I reaching our holding herein, we have considered all arguments made, and to the extent not mentioned above, we conclude them to be moot, irrelevant, or without merit . Accordingly, we shall deny petitioner's motion for substitution . To reflect the foregoing, An appropriate order wil l be issued .