Computer Programs Lambda, Ltd.
v.
Comm'r of Internal Revenue

United States Tax CourtJul 27, 1987
89 T.C. 198 (U.S.T.C. 1987)
89 T.C. 19889 T.C. No. 17

Tax Ct. Dkt. No. 20653-86 32952-86 33223-86.

1987-07-27

COMPUTER PROGRAMS LAMBDA, LTD., WILLIAM A. PYKE, TAX MATTERS PARTNER, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

William A. Pyke, pro se in docket No. 20653-86. William C. Mitchell and William A. Pyke, President, W. P. Builders, Inc. fka American Applications, Inc., pro se in docket No. 32952-86.


R filed motions to dismiss partnership actions brought on behalf of CPL.

1. PII was tax matters partner of CPL. Pyke, president of PII, filed a petition as an individual tax matters partner on June 13, 1986, although Pyke was not a partner of CPL. On June 17, 1986, PII filed for bankruptcy protection. On August 7, 1986, Pyke filed an amended petition purporting to substitute PII as petitioner. HELD, Pyke's petition at docket No. 20653-86 did not commence a partnership action. HELD FURTHER, the so- called amended petition purporting to substitute PII as petitioner was ineffective to commence a partnership action because the automatic stay provision of the Bankruptcy Code, 11 U.S.C. section 362(a)(8) (1982) bars commencement of an action in this Court after a bankruptcy petition has been filed until the bankruptcy proceeding is completed or the stay lifted.

2. W. P. Builders, a notice partner of CPL, is an alter ego of PII and a named debtor in the bankruptcy proceeding commenced by PII. William C. Mitchell and James C. Bearden are notice partners of CPL. W. P. Builders and Mitchell filed a timely notice partner petition on August 11, 1986. Bearden filed a timely notice partner petition on August 12, 1986. HELD, W. P. Builders, as a named debtor in a bankruptcy proceeding, could not commence an action in this Court. 11 U.S.C. section 362(a)(8) (1982). The petition at docket No. 32952-86 remains before the Court, however, as a timely notice partner petition filed by William C. Mitchell. HELD FURTHER, once PII filed its bankruptcy petition, PII's and W. P. Builders' partnership items became nonpartnership items, and PII and W. P. Builders ceased to have an interest in the outcome of the proceeding. Section 6231(c); section 6226(d); section 301.6231(c)-7T(a), Temp. Proced. and Admin. Regs., 52 Fed. Reg. 6793 (March 5, 1987). HELD FURTHER, PII ceased to be tax matters partner when it filed its petition in bankruptcy. Section 301.6231(a)(7)-1T(1)(4), Temp. Proced. and Admin. Regs., 52 Fed. Reg. 6792 (March 5, 1987). HELD FURTHER, because PII and W. P. Builders ceased to have an interest in the outcome of the proceeding and PII ceased to be tax matters partner as of the date the bankruptcy petition was filed, the proceeding will no longer ‘concern the debtor»s†‘ within the meaning of 11 U.S.C. section 362(a)(8) (1982) and the automatic stay provision does not prevent the partnership proceeding from going forward. HELD FURTHER, James C. Bearden's notice partner petition at docket No. 33223-86 dismissed, but Bearden may file an election to participate in the action that goes forward. Section 6226(b)(4); section 6226(b)(2); Rule 244(c), Tax Court Rules of Practice and Procedure. William A. Pyke, pro se in docket No. 20653-86. William C. Mitchell and William A. Pyke, President, W. P. Builders, Inc. fka American Applications, Inc., pro se in docket No. 32952-86. Gilbert Aranza, for the petitioner in docket No. 33223-86.Alvin A. Ohm, R. Alan Lockyear, and Henry S. Schneiderman, for the respondent.

OPINION

WILLIAMS, JUDGE*:

These cases are before us on respondent's motions to dismiss. The Commissioner determined adjustments to Computer Programs Lambda, Ltd.'s (‘CPL‘) partnership return for its 1982 taxable year as set forth in his notice of final partnership administrative adjustment issued on March 11, 1986.

Respondent moved to dismiss the case at docket No. 20653-86 on the ground that it was commenced by an improper party and that an amended petition filed by Pyke International, Inc. (‘PII‘) as a substituted petitioner was void because PII was then a debtor in a bankruptcy proceeding.

Respondent moved to dismiss as to petitioner W. P. Builders, Inc. (‘W. P. Builders‘) in docket No. 32952-86 because W. P. Builders was a debtor in a bankruptcy proceeding at the time it filed a petition. Respondent does not object to the case going forward as to petitioner William C. Mitchell.

Respondent moved to dismiss the case at docket No. 33223-86 pursuant to section 6226(b)(4) or section 6226(b)(1) on the ground that a valid petition (by William C. Mitchell at docket No. 32952-86) had previously been filed.

All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue.

Petitioners have not objected to respondent's proposed findings of fact which are supported by the record.

CPL is a limited partnership organized under the laws of the state of Texas with its principal place of business at Dallas, Texas. PII is a general partner of CPL, and W. P. Builders, William C. Mitchell and James C. Bearden are limited partners of CPL.

PII was the tax matters partner of CPL at the time William A. Pyke filed his petition at docket No. 20653-86. Pyke, president of PII, has never been a partner of CPL. W. P. Builders, a notice partner of CPL, is an alter ego of PII. Mitchell and Bearden are notice partners of CPL. At the time the petitions in thee cases were filed, CPL, PII and W. P. Builders had their principal places of business, and Pyke, Mitchell and Bearden resided, in Texas.

In PII's Statement of Financial Affairs filed in the bankruptcy proceeding in the Northern District of Texas, W.P. Builders is identified as a division of PII. The bankruptcy petition was styled ‘Pyke International, Inc., fka Pyke Professional Building Corp., dba W.P. Builders * * *‘

On March 11, 1986, respondent issued a notice of final partnership administrative adjustment to PII as tax matters partner of CPL for CPL's 1982 taxable year. On April 11, 1986, respondent mailed copies of the notice of final partnership administrative adjustment to the notice partners of CPL. On June 13, 1986, Pyke filed a petition with this Court putting at issue the partnership items of CPL and styling himself tax matters partner. On June 17, 1986, PII filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Texas, case number 386- 32037. W. P. Builders was also named as a debtor in the bankruptcy proceeding as a division of PII.

The 90-day period for filing a petition as tax matters partner expired on June 9, 1986. Respondent concedes, however, that the petition was deemed to be timely filed pursuant to section 7502 on June 9, 1986.

On August 7, 1986, Pyke, as president of PII, filed a document entitled ‘First Amended Petition,‘ purporting to change the caption of the petition to ‘Computer Programs Lambda, Ltd., Pyke International, Inc., Tax Matters Partner.‘

On August 11, 1986, petitioners W. P. Builders and William C. Mitchell timely filed a petition as notice partners of CPL. On August 12, 1986, James C. Bearden timely filed a notice partner petition.

The 60-day period following the 90-day period during which a notice partner may file a petition with this Court expired on August 9, 1986. See section 6226(b). The petitions were deemed to be timely filed on August 7, 1986 and August 8, 1986. Section 7502.

Respondent filed his motions to dismiss on January 15, 1987. A hearing was held on respondent's motions on March 16, 1987 at Washington, D.C. There were no appearances on behalf of petitioners.

The primary issue we must decide is one of first impression concerning the effect of the automatic stay provision of the Bankruptcy Code, 11 U.S.C. section 362(a)(8) (1982) on a case brought or pending pursuant to the partnership audit and litigation procedures, section 6221 et seq. In general, this section of the Bankruptcy Code, by operation of law, stays the commencement or continuation of a proceeding in this Court brought by the debtor upon the filing of a bankruptcy petition. Unless the stay is lifted, a debtor in bankruptcy, therefore, may not commence or continue an action in this Court while the bankruptcy proceeding is pending. Thompson v. Commissioner, 84 T.C. 645 (1985); McClamma v. Commissioner, 76 T.C. 754 (1981).

11 U.S.C. section 362(a)(8) (1982) provides in relevant part:
Section 362. Automatic stay
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title * * * operates as a stay, applicable to all entities, of —
* * *
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor.

Pyke filed a petition with this Court as the tax matters partner of CPL on June 13, 1986. Pyke, however, was not the tax matters partner nor even a partner of CPL. His petition, therefore, did not commence a partnership action.

On August 7, 1986, an amended petition purporting to substitute PII for Pyke as petitioner was filed. PII was the tax matters partner of CPL when Pyke filed his petition. On June 17, 1986, however, PII had filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. Once PII filed a petition in bankruptcy, it was barred from commencing an action in this Court until the bankruptcy proceeding was completed or the stay was lifted. 11 U.S.C. section 362(a)(8) (1982); Thompson v. Commissioner, supra; McClamma v. Commissioner, supra. The amended petition, therefore, was a legal nullity and, like the original petition, did not commence a partnership action.

We note that if a petition is timely brought, an amended petition may constitute a ratification relating back to the time the petition was filed. Rule 60(a). Whether we will permit amendment or ratification of a defective petition, however, is entirely discretionary. See Carstenson v. Commissioner, 57 T.C. 542, 546 (1972). We cannot do so in this case because the so-called amended petition was filed in violation of the stay provision of the Bankruptcy Code. Moreover, even if we were to permit ratification in this case, the filing of the petition in bankruptcy would preclude the continuation of the partnership proceeding as to PII because, as discussed infra, PII would cease to be (1) the tax matters partner of CPL, (2) a notice partner eligible to file a petition and (3) a party to this action. Section 6226(d)(2); section 301.6231(a)(7)-1T(1)(4), Temp. Proced. and Admin. Regs. 52 Fed. Reg. 6792 (March 5, 1987).

W. P. Builders, together with William C. Mitchell, filed a timely notice partner petition with this Court on August 11, 1986. W. P. Builders, however, is a named debtor on the bankruptcy petition that PII filed on June 17, 1986. As of that date, W. P. Builders could not commence an action in this Court until the stay was lifted or the bankruptcy proceeding was completed. A partnership proceeding involving the adjustments to CPL's 1982 taxable year nevertheless remains before the Court because William C. Mitchell filed a timely notice partner petition at docket No. 32952-86. We, therefore, must decide what rights PII and W. P. Builders will have in that proceeding and what effect the automatic stay provision may have on our ability to go forward with that proceeding.

Section 6231(c) provides that in certain special enforcement areas the Secretary may provide by regulations for the conversion of a partner's partnership items into nonpartnership items. The effect of this conversion is to remove the partner from the partnership proceeding and subject the converted items to the deficiency procedures applicable to the partner's individual tax case. Compare Maxwell v. Commissioner, 87 T.C. 783, 787 (1986). The Secretary has promulgated regulations pursuant to section 6231(c) applicable to the circumstances of this case. Section 301.6231(c)-7T(a), Temp. Proced. and Admin. Regs., 52 Fed. Reg. 6793 (March 5, 1987), provides:

Section 6231(c) provides:
(c) REGULATIONS WITH RESPECT TO CERTAIN SPECIAL ENFORCEMENT AREAS. —
(1) APPLICABILITY OF SUBSECTION. — This subsection applies in the case of —
(A) assessments under section 6851 (relating to termination assessments of income tax) or section 6861 (relating to jeopardy assessments of income, estate, gift, and certain excise taxes),
(B) criminal investigations,
(C) indirect methods of proof of income,
(D) foreign partnerships, and
(E) other areas that the Secretary determines by regulation to present special enforcement considerations.
(2) ITEMS MAY BE TREATED AS NONPARTNERSHIP ITEMS. — To the extent that the Secretary determines and provides by regulations that to treat items as partnership items will interfere with the effective and efficient enforcement of this title in any case described in paragraph (1), such items shall be treated as non- partnership items for purposes of this subchapter.
(3) SPECIAL RULES. — The Secretary may prescribe by regulation such special rules as the Secretary determines to be necessary to achieve the purposes of this subchapter in any case described in paragraph (1).

(a) BANKRUPTCY. The treatment of items as partnership items with respect to a partner named as a debtor in a bankruptcy proceeding will interfere with the effective and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy.

The Secretary's determination that bankruptcy presents a special enforcement area is manifestly reasonable because once a debtor files for bankruptcy protection, the automatic stay prevents us from taking any action, including entering an order of dismissal, in any case concerning the debtor. See 11 U.S.C. section 362(a)(8) (1982). Freezing the progress of the partnership litigation would prevent us from determining the remaining partners' income tax liability, even though they would not be affected by the outcome of the bankruptcy proceeding.

Regulations under the special enforcement provisions of section 6231(c) have the effect of severing debtors in bankruptcy, in this case PII and W. P. Builders, from having any interest in the partnership action. As of June 17, 1986, when PII filed its bankruptcy petition, PII's and W. P. Builders' partnership items became nonpartnership items pursuant to section 6231(c) and section 301.6231(c)-7T(a), Temp. Proced. and Admin. Regs., 52 Fed. Reg. 6793 (March 5, 1987). As a result, PII and W. P. Builders ceased to have an interest in the outcome of the proceeding. Section 6226(d)(1)(A). Consequently, W. P. Builders, as a notice partner, can no longer participate in the proceeding. Section 6226(d)(1)(A). W. P. Builders' income tax liability thus will be exclusively the subject matter of the bankruptcy court and will be unaffected by the outcome of the partnership litigation before us.

Although PII no longer has an interest in the outcome of the proceeding in its individual capacity, if it were to remain the tax matters partner of CPL, it would have the right to intervene. The tax matters partner's status is of critical importance to the proper functioning of the partnership audit and litigation procedures, and the statute recognizes this status by permitting intervention in the proceeding even if the tax matters partner is not a party to the proceeding. Although a notice partner will be treated as a party only if he has an interest in the outcome of the proceeding, section 6226(d)(1), there is no comparable restriction on a tax matters partner's right either to file a petition or to intervene in a notice partner's action. A tax matters partner's statutory right to file a petition or to intervene in a notice partner's action arises out of his status as a tax matters partner and not out of his personal tax stake in the outcome of the proceeding. Section 6226(a); section 6226(b)(5). Section 6226(d) does not limit either right.

The tax matters partner is the central figure of partnership proceedings. During both administrative proceedings and litigation, the tax matters partner serves as the focal point for service of all notices, documents and orders on the partnership. The statutorily determined time periods for respondent to notify the other partners of the status of the administrative proceeding at the partnership level (section 6223(d)), for a partner to file a petition for judicial review (section 6226) or for the partnership to request an administrative adjustment (section 6227) are determined with reference to the tax matters partner. The tax matters partner is the only partner who may file a petition for judicial review if an administrative adjustment is not allowed in full, section 6228, and the only partner who may file a petition for judicial review within the first 90 days after respondent issues a notice of final partnership administrative adjustment to him. Section 6226(a); Transpac Drilling Venture 1982-22 v. Commissioner, 87 T.C. 874 (1986). The tax matters partner must also perform important functions within the partnership. He is required to keep all partners informed of the status of administrative and judicial proceedings involving the partnership. Section 6223(g). Moreover, the tax matters partner may, under some circumstances, bind partners who are not notice partners by entering into a settlement agreement with respondent. Section 6224(c)(3).

In the execution of these responsibilities a tax matters partner acts as a fiduciary. His personal interest, if any, is beside the point. The precision of section 6231(a)(7)(B) in setting the procedure for identifying a tax matters partner when the partnership has not done so demonstrates the importance Congress gave to the role of the tax matters partner in partnership proceedings. The detailed statutory procedures for partnership level audits and litigation contemplate the continual presence of one tax matters partner, and the procedures cannot operate unless the tax matters partner is capable of acting on the partnership's behalf regardless of his personal tax posture. As the fiduciary of the partnership's interest in the proceeding, the tax matters partner's initiative (or failure to take initiative) is plainly designed to affect the rights of all partners in the partnership.

If the tax matters partner were prohibited from acting in that capacity because he was a debtor in a bankruptcy proceeding, the partnership proceeding could not go forward as to any of the partners. Partners that would be unaffected by the outcome of the bankruptcy proceeding would nonetheless have to wait until the bankruptcy proceeding was completed or the stay lifted before they could have their rights adjudicated. The Secretary, cognizant of the pivotal role of the tax matters partner and the problems that would result if the automatic stay were in effect, has correctly provided by regulations for the termination of a partner's designation as tax matters partner upon the filing of a bankruptcy petition.

A partner's designation as tax matters partner terminates as of the date its partnership items become nonpartnership items under section 6231(c). Section 301.6231(a)(7)-1T(l)(4), Temp. Proced. and Admin. Regs., 52 Fed. Reg. 6792 (March 5, 1987). PII's partnership items became nonpartnership items as of June 17, 1986, the date it filed for bankruptcy protection. Section 301.6231(c)-7T(a), Temp. Proced. and Admin. Regs. As of that date, PII ceased to be the tax matters partner of CPL. The automatic stay provision thus does not prevent the partnership proceeding from going forward.

The Court expects the partners of CPL to appoint a substitute tax matters partner within 60 days after this opinion is filed. If the partners fail to do so, the Court will take steps to appoint a partner to serve as tax matters partner in this proceeding after appropriate notice and hearing.

On August 12, 1986 petitioner James C. Bearden timely filed a petition with this Court as a notice partner of CPL. Petitioner William C. Mitchell, however, had already timely filed a petition for readjustment of partnership items with respect to the same notice of final partnership administrative adjustment on August 11, 1986. Respondent moved to dismiss the Bearden petition as duplicative of the previously filed notice partner petition pursuant to section 6226(b)(4) or, alternatively, section 6226(b)(1). Petitioner Bearden does not object to the dismissal of his petition provided that he is permitted to participate in the partnership action that goes forward. He requests that we either treat his petition as an election to participate in the partnership action or allow him to file an election to participate out of time pursuant to Rule 244(c), Tax Court Rules of Practice and Procedure. We will not treat Bearden's petition as an election, but we will grant him leave to file an election out of time to participate in the partnership action brought by William C. Mitchell.

Section 6226(b) provides in relevant part:
(b) PETITION BY PARTNER OTHER THAN TAX MATTERS PARTNER. —
(1) IN GENERAL. — If the tax matters partner does not file a readjustment petition under subsection (a) with respect to any final partnership administrative adjustment, any notice partner (and any 5-percent group) may, within 60 days after the close of the 90-day period set forth in subsection (a), file a petition for a readjustment of the partnership items for the taxable year involved with any of the courts described in subsection (a).
(2) PRIORITY OF THE TAX COURT ACTION. — If more than 1 action is brought under paragraph (1) with respect to any partnership for any partnership taxable year, the first such action brought in the Tax Court shall go forward.
* * *
(4) DISMISSAL OF OTHER ACTIONS. — If an action is brought under paragraph (1) in addition to the action which goes forward under paragraph (2) or (3), such action shall be dismissed.
* * *

We, therefore, grant respondent's motions to dismiss in docket No. 20653-86 and docket No. 33223-86. We also grant respondent's motion to dismiss as to petitioner W. P. Builders in docket No. 32952-86. The case remains before the Court, however, because William C. Mitchell properly filed a notice partner petition in docket No. 32952-86. To reflect the foregoing,

Appropriate orders will be entered.