## Facts

- Several related profit-sharing trusts sponsored by Service Bolt & Nut Co., Inc. and affiliates qualified under I.R.C. § 401(a) and claimed exemption under I.R.C. § 501(a).
- The trusts acquired limited-partnership interests in Ohio partnerships engaged in the wholesale distribution of fasteners.
- The partnerships were operating businesses; their general partners were corporations related to the employers sponsoring the trusts.
- The IRS determined deficiencies, asserting the trusts’ distributive shares of partnership income were unrelated business taxable income (UBTI) taxable under I.R.C. §§ 511–513 through the partnership rule in § 512(c).
- The trusts filed no returns for the years at issue, and the IRS determined additions to tax under § 6651(a)(1) for failure to file.
- Before issuing notices of deficiency, the IRS made assessments based on preliminary administrative determinations, later abated those assessments, and then issued statutory notices of deficiency; the trusts argued the abatement barred the later deficiencies.
- The case was submitted on a fully stipulated record.

## Issues

1. Whether exempt profit-sharing trusts that are limited partners in operating partnerships have UBTI under § 511 via § 512(c), despite their limited-partner status.
2. Whether the trusts were liable for additions to tax under § 6651(a)(1) for failure to file returns, or whether they showed reasonable cause and lack of willful neglect.
3. Whether the IRS was estopped, or otherwise precluded, from issuing deficiency notices after abating earlier assessments for the same tax years.

## Decision

- The Tax Court sustained the Commissioner on all issues.
- The trusts’ distributive shares of partnership income were UBTI taxable under § 511 through § 512(c), without a distinction between limited and general partners.
- Additions to tax under § 6651(a)(1) were upheld because the trusts failed to file and did not prove reasonable cause.
- The prior abatement of assessments did not discharge the underlying liabilities and did not estop the Commissioner from issuing deficiency notices.

## Legal Principles

- Under I.R.C. § 512(c), an exempt organization that is a member of a partnership must include its distributive share of partnership income and deductions in computing UBTI to the extent the partnership’s activities would produce UBTI if conducted directly by the exempt organization.
- Section 512(c) does not create a general/limited partner distinction for UBTI; limited-partner status does not convert operating business income into exempt passive income.
- The UBTI regime is aimed at preventing exempt entities from using tax exemption to gain a competitive advantage in commercial markets by channeling operating businesses through exempt owners.
- For § 6651(a)(1), the taxpayer bears the burden to show the failure to file was due to reasonable cause and not willful neglect; an unsupported belief that no return is required is insufficient.
- An administrative abatement of an assessment is a correction of an erroneous assessment and does not, by itself, compromise or extinguish the underlying tax liability or bar later deficiency procedures; estoppel against the government requires more than an abatement and is disfavored in tax administration.

## Conclusion

The Tax Court held that qualified profit-sharing trusts could not avoid unrelated business income tax by investing as limited partners in operating partnerships, upheld failure-to-file additions for lack of proven reasonable cause, and rejected arguments that prior abatements prevented later statutory deficiency determinations.


Service Bolt & Nut Co. v. Commissioner, 78 T.C. 812 (1982)