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Copeland v. Commissioner of Internal Revenue

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Petitioners-Appellants Alvin C. Copeland and Patty K. Copeland, also known as Patty K. White (collectively, “Taxpayers”) appeal the Tax Court’s grant of partial summary judgment to the Commissioner of Internal Revenue (“Commissioner”) and the Tax Court’s denial of their motion for summary judgment. We conclude that the Tax Court properly denied the Taxpayers’ deduction under 26 U.S.C. � 165 (“I.R.C. � 165″) for their initial investments in the partnerships, and therefore affirm that ruling. The Tax Court erred, however, in sustaining the Commissioner’s imposition of the increased interest rate under 26 U.S.C.� 6621(c) (“I.R.C. � 6621(c)”). Because no deduction was disallowed under 26 U.S.C. � 183 (“I.R.C. � 183″), and because the Commissioner proffered no alternative basis for imposing the I.R.C. � 6621(c) interest rate, the Commissioner may not impose that rate. Accordingly, we reverse the Tax Court’s ruling on the I.R.C. � 6621(c) interest rate, and remand for imposition of a judgment consistent with these rulings

I. Facts and Proceedings

The disputed tax items and interest charges derive from the following transactions: In 1979, Taxpayers invested $100,000 in Garfield Oil and Gas Associates (“Garfield”), a state-law partnership, and in 1981 they invested $75,000 in Capricorn Company (“Capricorn”), also a state-law partnership. Capricorn invested in another state-law partnership, Cardinal Oil Technology Partners (“Cardinal”), after which Garfield and Cardinal together invested in enhanced oil recovery technology projects. From 1979 to 1982, Garfield and Cardinal reported partnership tax items relating to the investments in the enhanced oil recovery technology projects, and allocated the tax items to the partners, including Taxpayers. Taxpayers filed joint tax returns for the tax years 1979 through 1982, which returns included deductions allocated to the Taxpayers from the Garfield and Capricorn partnerships.

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