Tax Matters Partner.

In Richard K. Phillips, 114 TC No. 7, the Tax Court upheld the validity of Temp. Kegs. Sec. 301.6231(c)-5T. Under that rule, partnership items of a partner under criminal tax investigation become nonpartnership items if and when the IRS notifies the partner in writing that the items will be treated as nonpartnership items. Thus, a person's status as a tax matters partner (TMP) is not revoked merely because he is under criminal investigation. The Tax Court also held that the mere existence of a TMP's criminal tax investigation does not necessarily create a disabling conflict of interest that would cause termination of his designation.

Hoyt was the designated TMP for a multitude of tax shelter partnerships in the 1980s. At the IRS's request, he executed Forms 872, Consent to Extend the Time to Assess Tax, extending the limitations periods for various tax years. Hoyt had been the subject of criminal tax investigations that ended before he executed most of the extensions.

Phillips and his wife were limited partners in several of the partnerships. They contended that Hoyt's extensions of the assessment periods were invalid, because he was not the partnerships' TMP when he executed them.

Temp. Regs. Sec. 301.6231(c)-5T provides that partnership items of a partner under criminal tax investigation shall be treated as nonpartnership items, but only as of the date on which the partner is notified that he is under criminal investigation, and only after he receives written notification from the IRS that his partnership items are treated as nonpartnership items. The rule provides that items are not treated as nonpartnership items unless and until the partner receives written notification to that effect from the IRS. The Service never notified Hoyt that his partnership items were going to be treated as nonpartnership items.

The taxpayers challenged the validity of the part of the regulation requiring the partner to receive written notice from the IRS that partnership items were transformed to nonpartnership items. If that condition were invalid, Hoyt's partnership items would have become nonpartnership items from the time he came under criminal investigation, his designation as a TMP would have terminated under Regs. Sec. 301.6231(a)(7)-1(1)(1) and any extensions he signed would have been invalid.

The Tax Court disagreed, finding that the commencement of a criminal tax investigation of a partner does not necessarily or immediately interfere with the effective and efficient enforcement of the tax laws and require the treatment of partnership items as nonpartnership items in every situation. Thus, it concluded that the regulation was valid.

The taxpayers also argued that Hoyt should have been removed as TMP because of a conflict of interest between Hoyt's fiduciary duty to them as partners and his self-interest as the subject of several criminal tax investigations.

However, the Tax Court found that Hoyt did not have a disabling conflict of interest sufficient to require his removal as TMP or violate his fiduciary duties. Rather, it found that he continued to promote the existing partnerships after the initiation of the criminal tax investigations, defend his legal position throughout the criminal tax investigations and maintain that all partnership items were legitimate--a legal position that was consistent with that of his partners. He also encouraged the limited partners to refuse to cooperate with government investigators.