Opinion ID: 603772
Heading Depth: 3
Heading Rank: 5

Heading: Imposition of a Penalty on Both a Partnership and its Partners

Text: 83 The district court excluded earnings Belloff and Gold had received from Barrister Associates from the gross income base of the assessments against them. In re Tax Refund Litigation, 766 F.Supp. at 1255-57. Chief Judge Platt reasoned that Belloff and Gold were the general partners of Barrister Associates, and they were personally liable under New York law for the Section 6700 penalty assessed against the partnership. N.Y. Partnership Law §§ 24, 26 (McKinney 1988). Moreover, Barrister Associates was liable for any penalty assessed against Belloff or Gold as a result of actions taken within the scope of their authority as general partners, including the promotion of the tax shelter program at issue here. Id. Chief Judge Platt concluded that imposing a penalty on Belloff and Gold based on gross income they derived from Barrister Associates, and, at the same time, imposing a penalty on Barrister Associates based on that same income, would constitute a double tax not authorized by Congress. See United States v. Hemme, 476 U.S. 558, 572, 106 S.Ct. 2071, 2079, 90 L.Ed.2d 538 (1986) (double tax permissible only if clearly intended by Congress). 84 In its cross-appeal, the government argues that this was error. It points out that a Section 6700 penalty may be assessed against any person who promotes or organizes an abusive tax shelter. I.R.C. § 6700. A partnership and its individual partners are both persons for purposes of the Internal Revenue Code. See I.R.C. § 7701(a)(1) (definition of person). Had a non-partner of the partnership engaged in conduct within the scope of his or her authority that violated Section 6700, both the agent and the partnership could be penalized on any income earned as a result of that conduct. The government thus argues that, because the jury found that Gold, Belloff, and Barrister Associates had engaged in conduct subject to a penalty under Section 6700, all three should be held accountable to the full extent of any income derived from their tax shelter activity. The question is a close one, but we disagree. 85 The government's agent scenario is different from the situation here. It is true that an agent who promotes abusive tax shelters on behalf of a partnership is subject to a penalty based on the agent's earnings derived from that conduct, as is the partnership. Unlike the instant case, however, income to the partnership is not income to the agent, and an agent of the partnership has no obligation to pay the partnership's penalty. The agent is thus not double-taxed by a penalty. On the other hand, debts of the partnership are debts of the partners, and income to the partnership is income to the partners. Indeed, partnerships and individual proprietorships are generally not taxable entities, see I.R.C. § 701, presumably to avoid double taxation of owners who do not have unlimited liability. Absent a clear direction from the Congress, we follow that logic here and agree with Chief Judge Platt. 5 86