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Rosefsky v. Commissioner of Internal Revenue

decided: June 12, 1979.


Appeal from a decision of the United States Tax Court, Samuel B. Sterrett, Judge, upholding an IRS assessment of deficiency against petitioner-taxpayers for returns filed in 1971. Affirmed.

Before Smith, Oakes and Van Graafeiland, Circuit Judges.

Author: Smith

Alec Rosefsky and Joseph D'Esti owned certain real estate as partners. The City of Binghamton, New York condemned the property as part of its urban renewal efforts and reimbursed the partners in 1965. In 1970, after litigation on the matter, the partners received further compensation.

On the 1970 federal tax information return filed by the partnership, the partnership elected to replace the property and thus to defer realization of capital gains on the property, pursuant to 26 U.S.C. § 1033.*fn1 The property was not replaced, however.

In December, 1972 the partnership requested that the IRS grant an extension of the time in which the property must be replaced according to § 1033. The IRS denied this request in January, 1973 and all parties agree that the request operated as a notice of intention not to replace the property.

The gain from the reimbursement for the property was not reported on the individual income tax returns filed by D'Esti and Rosefsky in 1971 for the year 1970, in which the final reimbursement was made. (The wives of the two partners are parties to this action because joint returns were filed for that year.) The IRS issued notices of deficiency to each of the partner-taxpayers in November, 1975. The deficiencies total $11,969.60.

The taxpayers claimed that assessment of these deficiencies was barred by the general three-year statute of limitations of 26 U.S.C. § 6501.*fn2 The IRS claimed that the special limitations period of § 1033 applied. The Tax Court, Samuel B. Sterrett, Judge, upheld the IRS, and taxpayers appeal from that decision. We agree with the Tax Court's interpretation of the statutory periods applicable, and affirm the judgment.

In 1965, § 1033 provided for deferment of recognition of gain on condemnation of property for a one-year period or, as in this case, until the taxpayer notified the Commissioner that he did not intend to replace the property condemned. The taxpayers contend that § 1033 did not toll the running of the statute as against them, pointing out that they individually had no place in the scheme of § 1033, election to replace and termination of such an election being functions solely of the partnership. McManus v. Commissioner, 583 F.2d 443, 448 (9th Cir. 1978), Cert. denied, 440 U.S. 959, 99 S. Ct. 1501, 59 L. Ed. 2d 773 (1979).

We find no merit in this argument. While the election, by the tax scheme, 26 U.S.C. § 703(b),*fn3 is the responsibility of the partnership as the property-owning entity, tax incidence is upon the individual members. Thus, it would make no sense to defer recognition only as to the partnership and toll the running of the limitations period solely as to it, since it is not assessable as a taxable entity. United States v. Basye, 410 U.S. 441, 448, 93 S. Ct. 1080, 35 L. Ed. 2d 412 (1973).

Taxpayers rely on Myers v. United States, 7202 U.S. Tax Cas. (CCH) 9669, 30 A.F.T.R.2d 5332 (S.D.Cal. July 20, 1972), Rehearing denied, 7202 U.S. Tax Cas. (CCH) 9670, 30 A.F.T.R.2d 5521 (S.D.Cal. Sept. 15, 1972). The Tax Court distinguished that case on its facts since it considered that the incidence of the gain to the taxpayers in Myers would in any case have been in a taxable year not before the court. In any event, if the Myers case can be read to support the claim that an election by the partnership cannot toll the statute as to the individual partners, we disagree and decline to follow it.

If the Congress had any purpose of deferment and tolling in this situation, it must have intended to include in the scheme the individuals liable for tax on the gain. Tolling solely as to the partnership would be footless. A loophole would be created for the individual taxpayers if recognition of the gain were postponed without extending the period within which the Commissioner must act. No rational justification appears for providing the advantage of deferment of recognition without a corresponding tolling to protect the Commissioner's position. Perhaps the statutory language could be improved upon, but we see no reason to believe that the Congress intended either to deny partnerships and partners the benefit of deferment of gain under § 1033, or to create the anomalous situation of tolling as to the partnership only, the reporting entity, and not as to the partners, to whom the gain was taxable. The assessments were timely and the judgments correct.

Affirme ...

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