Harbor Cove Marina Partners Partnership, Robert A. Collins, A Partner Other Than The Tax Matters Partner v. Commissioner

123 T.C. No. 4UNITED STATES TAX COURT
HARBOR COVE MARINA PARTNERS PARTNERSHIP,
ROBERT A. COLLINS, A PARTNER OTHER THAN THE TAX
MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL
REVENUE, Respondent
Docket No. 13267-02. Filed July 15, 2004.
H is a general partnership, its managing partner
is S, and its other two partners are M and P. H’s
business activity is primarily the operation of a
marina in San Diego, California. On account of
dissension that consistently occurred between S and P
as to H’s operation of the marina, S, in its capacity
as H’s managing partner, dissolved H, distributed the
marina to S or to an S affiliate, distributed to P a
check in the amount of the value of P’s interest in H
as ascertained using a $16.5 million appraised value
for the marina, and reported to R that H had
terminated. S’s actions, all of which occurred in
1998, violated H’s partnership agreement which required
that H’s managing partner sell the marina publicly to
the highest bidder in the event of a dissolution and
that the proceeds of the sale be distributed to the
partners in accordance with the interests stated in the
agreement. P disavowed that H had terminated, sued S
- 2 -
to compel S to abide by the partnership agreement, and
deposited with the trial court the check that P had
received from H. In 2000, the trial court declared
that the partnership agreement required that S sell the
marina publicly to the highest bidder, but decided that
P’s sole remedy for S’s violation of that agreement was
to withdraw the funds on deposit. P withdrew those
funds shortly thereafter. In 2002, upon appeal of the
trial court’s judgment, the court of appeal ordered
that the marina be sold and that the proceeds be
distributed in accordance with the partnership
agreement. In 2003, after the marina had been sold for
$25.5 million, but before any distribution of the
resulting proceeds, the trial court decided upon remand
that P’s withdrawing of the funds formerly on deposit
meant that the court of appeal’s order was without any
legal basis and that the final judgment in P’s lawsuit
was the trial court’s judgment stating that P was only
entitled to the withdrawn funds. The trial court’s
latest decision is back on appeal before the court of
appeal.
Held: Pursuant to sec. 708(b)(1)(A), I.R.C., H
did not terminate for Federal tax purposes during 1998;
as of the end of that year, H’s winding up of its
affairs in complete cessation of its business operation
was dependent on the resolution of P’s lawsuit as to
the failure of S to follow the procedures by which the
partners of H had agreed that H’s operation would be
terminated, and P’s lawsuit, when resolved, could have
under the partnership agreement reasonably resulted in
H’s realization of significant income, credit, gain,
loss, or deduction after 1998.
W. Alan Lautanen, for petitioner.
Karen Nicholson Sommers, for respondent.
OPINION
LARO, Judge: This case is a partnership proceeding subject
to the unified audit and litigation procedures of the Tax Equity
- 3 -
& Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248,
96 Stat. 324, 628. It is currently before the Court for decision
without trial. See Rule 122; see also sec. 6226(b).1 When the
tax matters partner of Harbor Cove Marina Partners (HCMP) did not
petition this Court under section 6226(a) within the 90-day
period stated therein, Robert A. Collins (Collins), a notice
partner of HCMP, petitioned the Court under section 6226(b) to
readjust partnership items relating to the Notice of Final
Partnership Administrative Adjustment (FPAA) issued by respondent
for HCMP’s 1998 taxable year. The FPAA reflects respondent’s
determination that the “final” 1998 Form 1065, U.S. Partnership
Return of Income (1998 partnership return), filed by HCMP is
correct and that respondent would make no changes to it.
Collins filed a personal 1998 Form 1040, U.S. Individual
Income Tax Return (1998 individual income tax return). He
included in that return a Form 8082, Notice of Inconsistent
Treatment or Administrative Adjustment Request (AAR), as to four
positions taken by HCMP in its 1998 partnership return. Collins
indicated on the Form 8082 that he was filing inconsistently with
those positions because they reflected HCMP’s erroneous belief
that it had terminated during 1998. According to Collins, HCMP
continues to exist today pending the final outcome of his lawsuit
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the applicable versions of the Internal Revenue Code.
- 4 -
(lawsuit) against HCMP’s managing general partner and others.
The lawsuit, which is currently before the California Court of
Appeal for the Fourth Appellate District (court of appeal), seeks
enforcement of a provision in HCMP’s partnership agreement (and a
directive of the court of appeal) that requires that HCMP sell
its assets in the public market rather than distribute those
assets to its managing general partner (or to an affiliate of
that partner), as was done at the time of HCMP’s reported
termination.
Collins sets forth in his petition to this Court certain
allegations of error which he did not address on brief. We
consider those allegations to be conceded. We are left to decide
whether HCMP terminated during 1998. We hold it did not.2
Background
The facts in this background section are obtained from the
parties’ stipulation of facts, the exhibits submitted therewith,
and the pleadings. HCMP is a general partnership whose principal
place of business was in San Diego, California, when Collins’s
petition to this Court was filed.
2
The parties also dispute whether Collins correctly
reported the other three “inconsistent positions” listed in his
Form 8082. We believe that we need not decide this dispute,
given our holding that HCMP was not terminated during 1998. If
either party disagrees, he should bring this to our attention
during the parties’ discussion of the computations to be
submitted to the Court under Rule 155.
- 5 -
HCMP was formed on April 8, 1985, under the Uniform
Partnership Act of California. It is governed by a written
partnership agreement (partnership agreement) executed on that
date and entitled “Restated Partnership Agreement of Harbor Cove
Marina Partners”. Among its purposes under the partnership
agreement are to acquire, own, commercially develop, and hold for
investment and the production of income a leasehold interest in
certain real property owned by the San Diego Unified Port
District (Port District). Another purpose is to develop a marina
(marina) on that leasehold and to hold that marina for
investment. Its term as stated in the partnership agreement
expires no later than December 31, 2020.
HCMP’s partnership agreement was signed by (or, in the case
of a corporation, on behalf of) its initial partners; namely,
Collins, Charles B. Hope (Hope), Frank L. Hope, Jr. (Hope Jr.),
and a California corporation named Sunroad Marina, Inc. (Sunroad
corporation). The partnership agreement stated that Sunroad
corporation was HCMP’s managing general partner and tax matters
partner, that Sunroad corporation owned a 70-percent interest in
HCMP, and that the other three partners each owned a 10-percent
interest in HCMP. The partnership agreement stated that the
partners shared in each item of income, expense, gain, loss, and
credit in accordance with their ownership interests and that, on
liquidation and distribution, the shares of Collins, Hope,
- 6 -
Hope Jr., and Sunroad corporation were 12, 12, 12, and 64
percent, respectively. The partnership agreement also stated as
to the partners’ business relationship extensive details on,
among other things, the manner in which HCMP shall acquire its
capital, the manner in which HCMP shall allocate its profits and
losses, the manner in which HCMP shall be dissolved, and the
manner in which HCMP shall be liquidated following its
dissolution.
On or about January 30, 1987, HCMP agreed to lease from the
Port District 1,315,440 square feet of tideland area located on
Harbor Island Drive in San Diego, upon which HCMP would construct
the marina. The underlying lease (marina lease) was signed by
each HCMP partner and stated that the tideland area was let for a
40-year period beginning February 1, 1987. On or about March 16,
1988, the Mutual Life Insurance Company of New York (MONY) lent
$13.5 million to HCMP (MONY loan) to acquire and develop the
marina. The MONY loan was nonrecourse, and it was secured by an
interest in the marina lease granted to MONY by HCMP. Each HCMP
partner signed and executed in favor of MONY a single $13.5
million promissory note ($13.5 million promissory note), the
terms of which were governed and construed by California law.
The partnership agreement provided that the managing general
partner had the sole right to manage HCMP’s business. During
HCMP’s existence, Collins vigorously challenged many of the
- 7 -
decisions made by Sunroad corporation as to that business. This
animosity led to Sunroad corporation’s suing Collins in San Diego
Superior Court in an attempt to compel a buyout of his HCMP
interest. This litigation ended unfavorably to Sunroad
corporation.
On or about November 19, 1996, Sunroad corporation assigned
its interest in HCMP to Sunroad Real Estate Holding Corporation
(Sunroad Real Estate) to reflect a change in name from the former
to the latter. Approximately 8 months later, in or about August
1997, Hope and Hope Jr., sold their interests in HCMP to Marina
Holdings Partners, L.P. (Marina Holdings), a California limited
partnership that was formed on May 29, 1997.3 On or about
December 31, 1997, Sunroad Real Estate was liquidated, and its
HCMP interest was assigned to Sunroad Asset Management, Inc.
(Sunroad Asset), the general partner of Marina Holdings.4
Contemporaneous with the liquidation of Sunroad Real Estate,
HCMP’s partnership agreement was amended to reflect the
aforementioned assignment and sales and to reflect the fact that
(1) Marina Holdings as part of the sales assumed all HCMP
3
The parties refer to Marina Holdings as Marina Holding.
We use the former name because that is the name in which Marina
Holdings filed its 1998 partnership return.
4
The address of the principal place of business of Sunroad
Asset was the same San Diego address as that of HCMP, Sunroad
corporation, Marina Holdings, and a California general
partnership named Sunroad Marina Partners (Sunroad general
partnership).
- 8 -
obligations of Hope and Hope Jr., and accepted the partnership
agreement, and (2) Sunroad Asset as part of the assignment
assumed all HCMP obligations of Sunroad Real Estate and accepted
the partnership agreement. As of the end of December 31, 1997,
HCMP’s partners were Sunroad Asset, Marina Holdings, and Collins,
and their ownership interests were 70, 20, and 10 percent,
respectively. Sunroad Asset was at that time HCMP’s managing
general partner.
On May 26, 1998, Sunroad Asset, in its capacity as HCMP’s
managing general partner, notified Collins that it had decided to
dissolve HCMP pursuant to paragraph 11 of the partnership
agreement. Paragraph 11 stated in relevant part that HCMP “shall
be dissolved upon the * * * decision of the MGP [managing general
partner] * * * [or] * * * The sale of all or substantially all of
the Partnership assets and collection of all monies due
therefrom”. The notification also stated that paragraph 12 of
the partnership agreement directed Sunroad Asset, as HCMP’s
managing general partner, to wind up and liquidate HCMP by
selling its property and by applying and distributing those
proceeds in the manner described in the partnership agreement.
Paragraph 12, entitled “LIQUIDATION”, stated in relevant part:
12.1. In the event of a dissolution as
hereinabove provided, the Partnership shall forthwith
be dissolved and terminated, and any certificates or
notices thereof required by law shall be filed or
published by the Liquidator (as defined below). The
MGP * * * shall wind up and liquidate the Partnership
- 9 -
by selling the Partnership property. The proceeds of
liquidation and any other assets of the Partnership
shall be applied and distributed in the following order
of priority:
12.1.1. To the extent of debts and
liabilities of the Partnership * * * and the expense of
liquidation;
12.1.2. To the setting up of any reserves
that the Liquidator may deem reasonably necessary for
any contingent or unforeseen liabilities or obligations
of the Partnership * * *;
12.1.3. To the payment of any loans or
advances (including interest thereon) that may have
been made by any of the Partners;
12.1.4. To the Partners in accordance with
their respective capital accounts; and
12.1.5. Any balance then remaining shall be
distributed to the Partners in proportion to their
respective interest in the Partnership.
Sunroad Asset later informed Collins that it intended to
distribute to him in connection with HCMP’s dissolution the cash
value of his HCMP interest as ascertained using the marina’s
July 31, 1998, appraised value of $16.5 million. That approach
was consistent with the partnership agreement’s “buyout
provisions”, discussed infra, but inconsistent with the
applicable provisions of paragraph 12 of the partnership
agreement. Collins also knew at or about that time that Sunroad
Asset intended to distribute the marina to itself or to its
affiliate. That approach also was inconsistent with the
applicable provisions of paragraph 12 of the partnership
agreement.
- 10 -
On October 7, 1998, Collins commenced the lawsuit in the
Superior Court of California, San Diego County (trial court),
under the caption “Collins v. Feldman, et al., Case No. 724762".5
Collins initially advanced in the lawsuit five causes of action.
The first cause of action alleged that the Sunroad defendants had
to provide Collins with an accounting. The second cause of
action alleged that the Sunroad defendants breached a fiduciary
duty owed to Collins. The third cause of action alleged that
Collins was entitled to a recision of a resolution passed by the
Port District approving an assignment of the marina lease from
HCMP to Sunroad limited partnership. The fourth cause of action
alleged that Collins was entitled to declaratory relief in the
form of a declaration that HCMP’s managing general partner must
under the partnership agreement sell the marina in the public
market to the highest bidder and may not under the partnership
agreement distribute the marina to itself or to an entity under
its control. The fifth cause of action alleged that Collins was
entitled to a cancellation of the assignment of HCMP’s
partnership interest in the marina.
5
“Feldman” is Aaron Feldman (Feldman), the president of
Sunroad corporation, Sunroad Real Estate, and Sunroad Asset. The
other defendants in the lawsuit were Sunroad Asset, formerly
known as Sunroad corporation, Marina Holdings, the Port District,
and a California limited partnership named Sunroad Marina
Partners, L.P. (Sunroad limited partnership). (We refer to all
five defendants collectively as the defendants. We refer
collectively to the defendants other than the Port District as
the Sunroad Defendants.)
- 11 -
Collins alleged in the lawsuit that the “buyout provisions”
of the partnership agreement, which allowed for a liquidation of
a partner’s interest on the basis of the appraised values of
HCMP’s assets, were not applicable but that the applicable
provisions were those in paragraph 12 of the partnership
agreement. Collins also alleged that Sunroad Asset was not
allowed by the partnership agreement to distribute the marina to
itself or to an entity under its control but had to sell the
marina in the public market and divide the net proceeds among the
partners in accordance with their applicable percentages as set
forth in the partnership agreement.
On November 18, 1998, Sunroad Asset, in its capacity as a
general partner of HCMP and Sunroad limited partnership, formally
assigned the rights, title, and interest in the marina lease from
HCMP to Sunroad limited partnership. The document underlying
this assignment was not executed by either Collins or the Port
District. Approximately 3 weeks later, on December 8, 1998,
Sunroad Asset sent to Collins a check for $389,662; i.e., the
amount that Sunroad Asset maintained was the value of Collins’s
interest in HCMP as ascertained using the aforementioned
appraised value of the marina. Collins did not cash this check
upon receipt but deposited it with the trial court pending
resolution of the lawsuit.
- 12 -
On April 15, 1999, HCMP filed its 1998 partnership return
for the period from January 1 to December 7, 1998. In addition
to reporting that it was a “final” return, the return reported
that as of the end of December 7, 1998, (1) HCMP had terminated
and had no assets or liabilities, (2) HCMP had liquidated
Collins’s interest in it through a cash distribution of $389,662,
(3) each HCMP partner’s share of partnership liabilities was
zero, and (4) each HCMP partner’s capital account had a zero
balance. HCMP’s partners as of December 7, 1998, were Collins,
Marina Holdings, and Sunroad general partnership.6 HCMP reported
on its 1998 partnership return that these partners had received
the following distributions during 1998:
Money Other than Money Total
Sunroad general
partnership $63,996 ($4,312,809) ($4,248,813)
Marina Holdings 18,415 466,023 484,438
Collins 389,662 389,662
Marina Holdings and Sunroad general partnership each filed a
“final” 1998 partnership return for the period from January 1, to
December 7, 1998. Marina Holdings reported on its 1998
partnership return that as of December 7, 1998, its general
partner was Sunroad Asset, and its limited partners were Sunroad
6
Sunroad general partnership began business on Oct. 1,
1998. The record does not reflect the details on the transfer of
the HCMP interest from Sunroad Asset to Sunroad general
partnership.
- 13 -
Asset and Walter Turner IRA. The return reported that these
partners had received the following distributions during 1998:
Money Other than Money Total
Sunroad Asset
as a general partner $14,906 $348,451 $363,357
as a limited partner 3,077 71,923 75,000
Walter Turner IRA 1,231 28,769 30,000
Sunroad general partnership reported on its 1998 partnership
return that as of December 7, 1998, its partners were Sunroad
Asset and Walter and Marian Turner Family Trust. The return
reported that these partners had received the following
distributions during 1998:
Money Other than Money Total
Sunroad Asset $62,799 ($4,886,102) ($4,823,303)
Walter Turner IRA 417 (32,417) (32,000)
In or about July 1999, Sunroad limited partnership and MONY
executed an Allonge to the $13.5 million promissory note. The
Allonge provided that Sunroad limited partnership had assumed
HCMP’s obligations under the MONY Loan. The Allonge also
provided that Sunroad Asset and Marina Holdings were not released
from any obligation under the $13.5 million promissory note by
virtue of their status as general partners of HCMP before its
dissolution and that such was so notwithstanding HCMP’s
dissolution and the present assumption. Sunroad limited
partnership reported on its 1998 partnership return that its
general partner was Sunroad Asset and that its limited partners
- 14 -
were Sunroad Asset, Walter and Marian Turner Family Trust, and
Walter Turner IRA. That return reported that it covered the
taxable year of Sunroad limited partnership starting with its
commencement of business on November 17, 1998, and ended on
September 30, 1999, the last day of its fiscal year. That return
reported the income and expense of the marina as the income and
expense of Sunroad limited partnership.
Collins and his wife filed their 1998 individual income tax
return jointly. They included with that return a Form 8082 with
respect to four items reported on HCMP’s 1998 partnership return.
Collins reported on the Form 8082 that he was reporting these
items inconsistently with HCMP’s treatment of them. First, HCMP
reported on its 1998 partnership return and on Collins’s 1998
Schedule K-1, Partner’s Share of Income, Credits, Deductions,
etc., that the partnership return was a “Final return” and that
the Schedule K-1 was a “Final K-1". Collins reported on the Form
8082 that his 1998 Schedule K-1 was not final in that his HCMP
interest was “involuntarily terminated” and he remained a partner
until the final outcome of the lawsuit. Second, HCMP reported on
its 1998 partnership return that it had no debt as of the end of
the reported period, and it reported on Collins’s accompanying
1998 Schedule K-1 that Collins’s share of HCMP’s qualified
nonrecourse financing at that time was zero. Collins reported on
the Form 8082 that his share of HCMP’s qualified nonrecourse
- 15 -
financing was $1,350,000 as of December 31, 1998. Third, HCMP
reported on Collins’s 1998 Schedule K-1 as to an analysis of his
capital account that his share of net income per books, other
increases, and other decreases totaled $1,017,332. Collins
reported on the Form 8082 that these items totaled $3,449 because
“THE AMOUNT REPORTED ON THE K-1 IS DUE TO AN INVOLUNTARY
TERMINATION OF THE PARTNER’S INTEREST. THE TAXPAYERS WILL NOT BE
REPORTING ANY GAIN AMOUNT, IF APPLICABLE, UNTIL THE FINAL OUTCOME
OF THIS CASE.” Fourth, HCMP reported on Collins’s 1998 Schedule
K-1 that his withdrawals and distributions for that year totaled
$389,662, or more specifically, the amount listed on that return
as a cash distribution made to him during that year. Collins
reported on the Form 8082 that he had not received any
distribution or withdrawal during 1998 in that the “CHECK
RECEIVED BY TAXPAYER WAS TRANSFERRED TO THE CLERK OF THE SUPERIOR
COURT OF SAN DIEGO PENDING FINAL SETTLEMENT OF THE CASE”.
Collins’s fourth cause of action in the lawsuit sought
declaratory relief. Collins moved the trial court for summary
judgment as to this issue, as did the Sunroad defendants. The
trial court on August 11, 1999, issued an order granting
Collins’s motion and denying the motion of the Sunroad
defendants. Previously, the trial court had ruled that Sunroad
Asset had dissolved HCMP as of May 26, 1998, and that Sunroad
Asset’s distribution of HCMP’s assets was improper in that the
- 16 -
applicable provisions of the partnership agreement required a
public sale of those assets. The trial court’s August 11, 1999,
order stated that Sunroad Asset must sell the marina “on the open
market at the highest price * * * [it] can procure after a
reasonable marketing effort” and that it is “not legally entitled
to distribute Sunroad Marina [the marina] * * * in kind to itself
and/or an entity or entities it controls while distributing cash
to Collins”.
Following this order, Sunroad Asset declined to put the
marina on the market. On October 7, 1999, Collins amended his
complaint in the lawsuit to add a sixth cause of action for
specific performance. This cause of action prayed that the trial
court compel Sunroad Asset to sell the marina in the open market
and to distribute the sale proceeds pro rata to the partners in
compliance with paragraph 12 of the partnership agreement and the
trial court’s August 11, 1999, order.
The lawsuit was tried on April 4, 5, 6, and 26, 2000, and
the trial court filed its Statement of Decision and entered its
related judgment on October 17, 2000. The judgment stated in
relevant part that:
IT IS ORDERED, ADJUDGED AND DECREED THAT:
1. Pursuant to the Court’s August 11, 1999, Order
on Plaintiff’s Fourth Cause of Action for Declaratory
Relief, plaintiff is entitled to and has a judicial
declaration that Harbor Cove Marina Partners dissolved
as of May 26, 1998, and that the applicable Partnership
- 17 -
Agreement required a public sale of the partnership
assets upon dissolution;
2. Notwithstanding the foregoing, plaintiff shall
have and recover nothing against defendants, or any of
them, except the plaintiff may withdraw the sum of
$389,662 deposited with the Court, plus interest
accrued thereon;
3. Defendants [sic] Sunroad Asset Management,
Inc. shall have and receive from plaintiff the sum of
$388,514.93 * * *; said sum represents the reasonable
attorneys’ fees and costs of Sunroad Marina, Inc. and
its predecessors [sic] Sunroad Asset Management, Inc.
in defending against plaintiff’s First, Second, Fifth
and Sixth Causes of Action, and which sum is net of
plaintiff’s reasonable attorneys’ fees and costs with
respect to the Fourth Cause of Action to August 11,
1999;
The judgment reflected the trial court’s holding against Collins
as to each of his six causes of action but for the fourth.
The trial court’s accompanying “STATEMENT OF DECISION”,
which was amended on November 9, 2000, to correct a minor
typographical error, reflected the trial court’s finding that
HCMP was dissolved on May 26, 1998, and that HCMP was terminated,
was wound up, and had its assets distributed as of December 8,
1998. The trial court also found that the payment of $389,662 to
Collins for his interest in HCMP was not less than the fair
market value of that interest and ordered that Collins could
withdraw from the trial court the $389,662 (with interest
thereon) as full compensation for his interest in HCMP. Collins
shortly thereafter withdrew the $389,662 from the trial court.
- 18 -
Collins appealed to the court of appeal the portion of the
trial court’s judgment that denied him specific performance of
the provision in the partnership agreement that required the
liquidation and sale of HCMP’s assets upon its dissolution. The
Sunroad defendants cross-appealed from the portion of the trial
court’s order granting Collins summary adjudication on the fourth
cause of action that decreed that Sunroad Asset must sell HCMP’s
assets “on the open market” and may not distribute them in kind.
On March 25, 2002, respondent mailed the FPAA to “Tax
Matters Partner, Harbor Cove Marina Partners” and mailed a copy
of the FPAA to Sunroad Asset in its capacity as HCMP’s tax
matters partner. Respondent determined in the FPAA that HCMP’s
partnership return was correct as filed. The FPAA states that
the bases for this determination were twofold. First, the FPAA
states, HCMP filed a “final” partnership return for that year.
Second, the FPAA states, the trial court concluded in its October
17, 2000, decision that HCMP “dissolved” as of May 26, 1998.
On March 29, 2002, 3 days after the FPAA was issued, the
court of appeal affirmed the holding for Collins on the fourth
cause of action and reversed the trial court’s holding against
Collins on the sixth cause of action concerning specific
performance. The court of appeal directed the trial court to
grant to Collins specific performance of that provision of the
partnership agreement and awarded to him his costs of appeal.
- 19 -
The court of appeal noted that the trial court’s denial of
Collins’s request for specific performance allowed Sunroad Asset
to do expressly what the partnership agreement and the trial
court had stated that it could not do; i.e., operate under the
buyout provisions of the partnership agreement rather than the
applicable liquidation provisions.
On April 26, 2002, respondent mailed another copy of the
FPAA to Collins in his capacity as a notice partner of HCMP.
When the tax matters partner of HCMP did not timely petition this
Court to readjust partnership items, see sec. 6226(a), Collins,
as an HCMP notice partner, filed his petition with the Court on
August 15, 2002. Collins’s petition to this Court is timely
under section 6226(b)(1).
On January 15, 2003, upon remand of the lawsuit from the
court of appeal, the trial court entered a minute order that
directed specific performance of the partnership agreement as
requested by Collins. The minute order also noted that HCMP had
not been wound up as initially determined by the trial court and
that Collins, as a partner in HCMP, was entitled to his share of
leasehold profits from November 18, 1998, through the date on
which the marina was sold in the open market. The minute order
directed the Sunroad defendants to “account for and restore to
Plaintiff his share of the profits as defined by the HCMP
partnership agreement generated from and after November 18, 1998,
- 20 -
by operation of the Sunroad Marina leasehold, held by any of the
Sunroad Marina Defendants through and including the present and
continuing through the sale of the subject leasehold.”
On February 14, 2003, the trial court entered a second
amended judgment in the lawsuit. The second amended judgment
stated in relevant part:
IT IS ORDERED, ADJUDGED AND DECREED THAT:
1. Pursuant to the court’s August 11, 1999, Order
on Plaintiff’s Fourth Cause of Action for Declaratory
Relief, plaintiff is entitled to and has a judicial
declaration that HCMP dissolved as of May 26, 1998, and
that the applicable provisions of the HCMP partnership
agreement required a public sale of the partnership
assets upon dissolution;
2. Pursuant to the aforementioned Court of Appeal
decision, plaintiff is granted specific performance as
prayed in his Sixth Cause of Action. SMP [Sunroad
limited partnership], as constructive trustee of HCMP,
shall (i) sell HCMP’s assets including, without
limitation, the lessee’s rights to the property
commonly known as Sunroad Resort Marina, on the open
market at the highest price SMP can procure after a
reasonable marketing effort and (ii) divide the net
sales proceeds among the parties as follows:
Plaintiff Robert A. Collins...............12%
Defendant Marina Holding [sic] Partners...24%
Defendant Sunroad Asset Management, Inc.
fka Sunroad Marina, Inc...................64%
3. Plaintiff is the sole prevailing party. He
shall have and recover from the Sunroad Defendants
reasonable trial attorney’s fees in the sum of
$168,829.50 and trial costs of suit in the sum of
$4,841.70, for a total of $173,671.20.
- 21 -
4. Plaintiff shall have and recover from the
Sunroad Defendants costs and reasonable attorney’s fees
on appeal in the sum of $27,321.31.
5. Except to the extent inconsistent with the
Court of Appeal’s reversal of judgment in favor of the
Sunroad Defendants on plaintiff’s Sixth Cause of Action
* * *, plaintiff shall take nothing by his First,
Second and Fifth Causes of Action. The previous award
of trial attorney’s fees and costs to defendant Sunroad
Asset Management, Inc. is vacated.
6. Plaintiff shall take nothing by his Third
Cause of Action against defendant San Diego Unified
Port District (“the Port”). The Port shall have and
receive from plaintiff its costs as shown on an
approved memorandum of costs, the amount of which shall
hereafter be entered in this blank: $ .
7. Pursuant to this court’s Minute Order dated
August 4, 2000, plaintiff’s Notice of Pendency of
Action dated and recorded January 13, 1999, in the
office of the San Diego County Recorder as Instrument
No. 1999-020302, has been and is expunged.
8. Plaintiff’s rights as a general partner of
HCMP remain intact. Accordingly, SMP shall forthwith
provide to plaintiff an accounting of all its income
and expenses on account of operation and refinancing of
the Sunroad Resort Marina Leasehold from and after
November 18, 1998, to date; and shall restore to
plaintiff (a) 12% of net sums realized by any of the
Sunroad Defendants from any and all loans repayment of
which was secured in whole or in part by a lien upon
the Sunroad Marina Leasehold, (b) 10% of all net
operating income or other cash distributions made to
any of the Sunroad Defendants on account of operations
of the Sunroad Marina Leasehold from and after November
18, 1998, until sale of the Leasehold directed in
Paragraph 2, above, and (c) 10% of all cash, cash
equivalents or assets purchased from cash generated by
operation of the Sunroad Marina Leasehold from and
after November 18, 1998, held by any of the Sunroad
Defendants.
9. The Court retains jurisdiction to monitor
compliance by the Sunroad Defendants with Paragraph 2
of this Second Amended Judgment.
- 22 -
10. This Second Amended Judgment supersedes and
replaces the Amended Judgment entered herein on August
14, 2002.
Approximately 2 months later, on April 18, 2003, the trial court
filed a document confirming a sale of the marina at auction to
Sunroad limited partnership at the highest bid of $25.5 million.
Bidders at the auction numbered three, and Sunroad limited
partnership’s high bid was the 14th bid after Sunroad limited
partnership had made an opening bid of $16.5 million.
Following this sale, Sunroad limited partnership declined to
transfer part of the sale proceeds to Collins as directed by the
court of appeal decree granting specific performance and the
trial court’s order of February 14, 2003. Collins moved the
trial court to compel compliance with the specific performance
decree. On August 29, 2003, by way of a 2-page order, the trial
court denied that motion. The order noted that Collins had
withdrawn the $389,662 from the trial court and that it had
stated in its initial decision, as amended, that this amount
equaled the amount that Collins would have received had it
granted his request for specific performance. The order
concluded that California law (specifically, Preluzsky v. Pac.
Co-operative Cafeteria Co., 232 P. 970 (Cal. 1925), which held
that a voluntary acceptance of the benefit of a judgment or order
is a bar to the prosecution of an appeal therefrom), estopped
Collins from prosecuting his appeal of the portion of the
- 23 -
judgment that was ultimately reversed by the court of appeal in
that, the trial court concluded, the court of appeal could not
overturn that portion of the judgment without affecting Collins’s
right to the $389,662. By virtue of this estoppel, the order
stated, the court of appeal decision and all orders post appeal
were without any legal basis, and the judgment entered by the
trial court on October 17, 2000, was the final judgment in the
lawsuit. Collins filed a notice of appeal as to this order on
September 8, 2003. That appeal is currently before the court of
appeal pending its decision.
Discussion
This case is a TEFRA partnership proceeding that was brought
by a notice partner. Respondent issued an FPAA to the notice
partner, Collins, that determined no changes to HCMP’s 1998
partnership return. Collins timely petitioned this Court to
readjust HCMP’s partnership items relating to the FPAA. Given
the issuance of the FPAA, which we find to be valid, and
Collins’s timely petition for readjustment of HCMP’s partnership
items related thereto, we conclude that we have jurisdiction to
redetermine all partnership items of HCMP for 1998 and to
allocate properly those items among HCMP’s partners. Sec.
6226(f); Seneca, Ltd. v. Commissioner, 92 T.C. 363, 365 (1989),
affd. without published opinion 899 F.2d 1225 (9th Cir. 1990);
Transpac Drilling Venture 1982-22 v. Commissioner, 87 T.C. 874- 24 -
(1986). This is so even though the FPAA contained no changes
made by respondent. See Univ. Heights at Hamilton Corp. v.
Commissioner, 97 T.C. 278, 282 (1991).
Congress promulgated the TEFRA partnership unified audit and
litigation provisions of sections 6221 through 6234 intending to
simplify and streamline the audit, litigation, and assessment
procedures with respect to partnerships and their partners.
These provisions centralized the tax treatment of partnership
items and resulted in equal treatment for partners through the
uniform adjustment of each partner’s tax liability in a single,
unified proceeding. Chimblo v. Commissioner, 177 F.3d 119,
120-121 (2d Cir. 1999), affg. T.C. Memo. 1997-535; Kaplan v.
United States, 133 F.3d 469, 471 (7th Cir. 1998). Because the
income of a partnership is not subject to Federal income tax at
the partnership level, but is passed through and taxed to the
partners, multiple proceedings were required before TEFRA to
address the tax treatment of partnership items. Chimblo v.
Commissioner, supra at 121. Congress in enacting TEFRA intended
that “the tax treatment of items of partnership income, loss,
deductions, and credits will be determined at the partnership
level in a unified partnership proceeding rather than separate
proceedings with the partners.” H. Conf. Rept. 97-760, at 600
(1982), 1982-2 C.B. 600, 662.
- 25 -
TEFRA requires that respondent notify partners of the
beginning and end of partnership-level administrative
proceedings. Sec. 6223(a). If and when an FPAA is issued as to
those proceedings, the “tax matters partner”, generally a person
or entity designated as such by the partnership under applicable
regulations or, more commonly, the general partner in control of
the partnership, sec. 6231(a)(7); Chimblo v. Commissioner, supra
at 121, may contest the FPAA within 90 days of its issuance by
filing a petition for readjustment of “partnership items” in this
Court, the Court of Federal Claims, or the appropriate Federal
District Court. Sec. 6226(a). If the tax matters partner does
not file such a petition by the close of that 90-day period, then
any notice partner or 5-percent group may file a petition within
the next 60 days. Sec. 6226(b)(1). Once an action for
readjustment of partnership items is commenced by either the tax
matters partner or a notice partner, any partner with an interest
in the outcome of that action may participate in it. Sec.
6226(c) and (d).
In the context of TEFRA, a “partnership item” is any item
that must be taken into account for the partnership’s taxable
year to the extent that regulations prescribe it as an item that
is more appropriately determined at the partnership level. Sec.
6231(a)(3); Maxwell v. Commissioner, 87 T.C. 783, 789 (1986).
Section 301.6231(a)(3)-1, Proced. & Admin. Regs., sets forth a
- 26 -
list of items which the Treasury Department has concluded are
partnership items. That list includes the “partnership aggregate
and each partner’s share of * * * (i) Items of income, gain,
loss, deduction, or credit of the partnership; * * * [and]
(v) Partnership liabilities (including determinations with
respect to the amount of the liabilities * * * and changes from
the preceding taxable year)”. Sec. 301.6231(a)(3)-1(a)(1),
Proced. & Admin. Regs. That list also includes items relating to
distributions from the partnership to the extent that a
determination of those items can be made from conclusions that
the partnership is required to make with respect to an amount,
the character of an amount, or the percentage interest of a
partner in the partnership, for purposes of the partnership books
and records or for purposes of furnishing information to a
partner. Sec. 301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs.
The regulations state further that a partnership item not only
includes those items expressly listed in the regulations, but
also includes “the legal and factual determinations [e.g., the
partnership’s taxable year] that underlie the determination of
the amount, timing, and characterization of items of income,
credit, gain, loss, deduction, etc.” Sec. 301.6231(a)(3)-1(b),
Proced. & Admin. Regs.
Collins disputes in the Form 8082 the four items discussed
supra pp. 14-15. Each of these items is an HCMP partnership item
- 27 -
in that it relates to information underlying the determination of
each HCMP partner’s share of liabilities and distributions.
The linchpin of the four items is the parties’ dispute as to
whether HCMP terminated in 1998 for Federal tax purposes.
Section 708(a) provides that a partnership continues to exist
until terminated. Section 708(b) provides that a termination
requires the happening of one of two events. First, under
section 708(b)(1)(A), a partnership terminates when “no part of
any business, financial operation, or venture of the partnership
continues to be carried on by any of its partners in a
partnership”. Second, under section 708(b)(1)(B), a partnership
terminates when “within a 12-month period there is a sale or
exchange of 50 percent or more of the total interest in
partnership capital and profits.”
The parties focus on the first of these events. So do we.7
While the dissolution of a partnership is governed by State law,
the termination of a partnership for Federal tax purposes is
controlled by Federal law. A termination of a partnership for
Federal tax purposes may be different from its termination,
7
As to the second event, the liquidation of a partnership
interest, as reportedly occurred here, is not a “sale or
exchange” for purposes of sec. 708(b)(1)(B). Sec. 1.708-1(b)(2),
Income Tax Regs. (Sec. 1.708-1, Income Tax Regs., was amended on
Jan. 3, 2001. T.D. 8925, 2001-1 C.B. 496, 505. That amendment,
in relevant part, removed old par. (b)(2) and redesignated old
par. (b)(1). Id., 2001-1 C.B. at 500. This part of the
amendment applies to this case in that it is effective Jan. 4,
2001. Id., 2001-1 C.B. at 496.)
- 28 -
dissolution, or winding-up under State law, and a partnership may
continue to exist for Federal tax purposes even though State law
provides that the partnership has terminated, dissolved, or
wound-up. Fuchs v. Commissioner, 80 T.C. 506, 509-510 (1983);
Neubecker v. Commissioner, 65 T.C. 577, 581-582 (1975); see also
Maxcy v. Commissioner, 59 T.C. 716 (1973). When a partnership
terminates under Federal law, its taxable year closes on the same
date. Sec. 1.708-1(b)(3), Income Tax Regs.
For purposes of Federal tax law or, more specifically,
section 708(b)(1)(A), the date of termination is the date on
which the partnership winds up its affairs in cessation of its
business operation. Sec. 1.708-1(b)(3)(i), Income Tax Regs.
Whether a partnership has done so is a factual determination that
generally rests on an analysis of the various subsidiary elements
of proof. The regulations interpreting section 708(b)(1)(A)
establish a liberal approach to a finding of a business nexus
sufficient not to terminate a partnership. In accordance with
those regulations, a partnership continues to exist even when its
operations are substantially changed or reduced in a period of
winding up, and even when its sole asset during that period is
cash. Sec. 1.708-1(b)(1), (3)(i), Income Tax Regs. A
termination under section 708(b)(1)(A) occurs only when “the
operations of the partnership are discontinued and no part of any
business, financial operation, or venture of the partnership
- 29 -
continues to be carried on by any of its partners in a
partnership.” Sec. 1.708-1(b)(1)(3)(i), Income Tax Regs. In
other words, the regulations indicate, a partnership is
terminated under section 708(b)(1)(A) only when the winding up of
its business affairs is completed and “all remaining assets,
consisting only of cash, are distributed to the partners”. Id.The decided cases apply the statute similarly. Those cases
indicate that a nominal amount of continuing business or
financial activity precludes a partnership from terminating for
Federal tax purposes even when the partnership has abandoned or
discontinued its primary business activity. In Foxman v.
Commissioner, 41 T.C. 535 (1964), affd. 352 F.2d 466 (3d Cir.
1965), for example, a partnership sold its assets to a
corporation in which the partners were shareholders and received
in exchange two promissory notes. The Court held that the
partnership continued to exist after its asset sale in that it
held the notes received in the sale, collected interest on those
notes, and made minor purchases. Id. at 556-557. In Baker
Commodities, Inc. v. Commissioner, 415 F.2d 519 (9th Cir. 1969),
affg. 48 T.C. 374 (1967), the Court of Appeals for the Ninth
Circuit reached a similar result. There, the partnership’s
principal asset was a convalescent hospital that was closed and
then sold 9 months later in exchange for a note. The court cited
Foxman and held that the partnership’s sale of its asset did not
- 30 -
result in its termination. Id. at 526. Respondent argued in
Baker Commodities, Inc. that the partnership had terminated upon
its sale of the hospital because it then ceased engaging in its
principal business activity. The court disagreed. The court
held that the cessation of a partnership’s primary purpose is not
necessarily a termination under section 708 but what is required
by the statute is a complete cessation of all partnership
activity, inclusive of a distribution to the partners of all of
the partnership’s assets. Id.; accord Neubecker v. Commissioner,
supra at 582-583 (complete cessation of the partnership business
is required to effect a termination of the partnership under
section 708(b)(1)(A)). The court noted that a partnership whose
sole operation is the winding up of its affairs terminates only
upon the cessation of all activity and the distribution of its
remaining asset, cash. Baker Commodities, Inc. v. Commissioner,
supra at 526-527.
In Baker Commodities, Inc. v. Commissioner, supra at 526,
the court also relied upon Ginsburg v. United States, 184 Ct. Cl.
444, 396 F.2d 983 (1968). There, the partnership discontinued
its primary business activity, the development of land, but
continued to cultivate the land. The Court of Claims declined to
find that the partnership had terminated through a cessation of
its primary business. The Court of Claims rejected the
- 31 -
Government’s argument that a partnership terminates upon the
abandonment of its primary purpose, stating:
Subparagraph (A) of Section 708(b)(1) provides
that a partnership is terminated if ‘no part of any
business, financial operation, or venture of the
partnership continues to be carried on by any of its
partners in a partnership’ (emphasis added). There is
nothing to indicate that this provision requires less
than what it says--a complete cessation of all
partnership business--and therefore we cannot accept
the Government’s contention that a partnership is
terminated if it abandons just its ‘primary purpose.’
See David A. Foxman, 41 T.C. 535, 557 (1964), aff’d,
352 F.2d 466 (C.A. 3, 1965) (no termination even though
‘these items were of comparatively minor character in
contrast to the enterprise previously carried on’);
James v. United States, 63-1 U.S.T.C. 9478, at 88307,
88309 (M.D. Ga. 1963); cf. Treas. Reg. § 1.708-1(b)(1).
[Id. at 988.]
The Court of Claims also stated that “the fact that the
partnership continued to hold the property for a business
purpose--investment–-might well be an adequate showing that it
was not sufficiently inoperative to evoke the termination
provision of Section 708(b)(1)(A).” Id.; accord Yagoda v.
Commissioner, 39 T.C. 170, 182-183 (1962) (partnership that
ceased its business and existence in 1945 was not terminated for
Federal income tax purposes until 1947, when it finished winding
up its affairs), affd. 331 F.2d 485 (2d Cir. 1964); Hoagland v.
Commissioner, T.C. Memo. 1971-310 (partnership did not terminate
as a result of cessation of business where the land development
business for which it was originally formed was frustrated and
- 32 -
the partnership’s only function was holding land pending its
sale).
Turning to the facts at hand, we are unaware of any decided
case that directly answers the question at hand; to wit, whether
a partnership terminates for Federal tax purposes when (1) its
controlling partner purportedly winds up the affairs of the
partnership’s business operation by using procedures apparently
contrary to those stated in the partnership agreement,
(2) another partner has filed a lawsuit to compel the use of the
procedures stated in the agreement, and (3) a resolution of that
lawsuit could reasonably lead to the partnership’s reporting in a
subsequent year of significant income, credit, gain, loss, or
deduction. With our understanding of the statute, regulations,
and judicial jurisprudence in mind, however, it is evident to us
that we must answer this question in the negative and hold that
HCMP was not terminated during 1998. HCMP’s affairs as to its
business operations were not completed as of the end of that year
in that an HCMP partner, Collins, was at that time legitimately
challenging the procedures used by the managing general partner
in winding up the partnership’s business, and a resolution of
Collins’s lawsuit could reasonably lead to HCMP’s reporting in a
subsequent year of significant income, credit, gain, loss, or
- 33 -
deduction (e.g., from a public sale of the marina).8 While
HCMP’s managing general partner may have subjectively intended to
terminate HCMP for Federal tax purposes during 1998, the fact of
the matter is that it failed to wind up HCMP’s business operation
in accordance with the procedures which the HCMP partners as a
whole had agreed would be applied in such a situation. The
agreed-upon procedures of paragraph 12 state clearly and
unequivocally that the managing general partner of HCMP shall in
the case of HCMP’s dissolution wind up and liquidate the
partnership by “selling the Partnership property”.
For Federal tax purposes, Congress has given the partners of
a partnership broad authority to negotiate the terms of their
business relationship, including the terms governing their
business’s formation, operation, and dissolution, so as to
achieve simplicity, flexibility, and equity as between the
partners. See Foxman v. Commissioner, 41 T.C. at 549-552 (and
the legislative history cited therein); see also Moore v.
Commissioner, 70 T.C. 1024, 1033 (1978); Kresser v. Commissioner,
8
We also do not believe that Collins’s HCMP partnership
interest was effectively liquidated as of the end of 1998 in that
(1) he had filed the lawsuit challenging as inconsistent with the
partnership agreement his right to keep the $389,662 check sent
to him as a liquidation distribution and (2) he had delivered
that check to the trial court pending resolution of the lawsuit.
Cf. Bones v. Commissioner, 4 T.C. 415, 420 (1944) (taxpayer’s
refusal to cash a check did not result in constructive receipt of
the income where cashing the check would impair the taxpayer’s
legal position by creating a situation that might be construed as
an accord and satisfaction concerning a disputed claim).
- 34 -
54 T.C. 1621, 1630-1631 (1970). Given this broad grant of
authority, the legislative intent for simplicity, flexibility,
and equity as between the partners, and the fact that each
partner’s distributive share of income, gain, loss, deduction, or
credit generally turns on the partnership agreement, sec. 704(a),
it seems to us that the winding up of HCMP (and hence its
termination) for Federal tax purposes must also be in accordance
with the partnership agreement. In fact, but for a procedural
violation that the trial court stated was committed by Collins as
to the lawsuit, and which the trial court believed made void all
judicial action taken in the lawsuit after October 17, 2000, even
the trial court has concluded that HCMP continues to exist for
State law purposes. The trial court concluded in 2003 that HCMP
was not then wound up, that Collins remained an HCMP partner, and
that Collins, as a partner, was entitled to his share of HCMP
income from November 18, 1998, through the time that the marina
was publicly sold. As the Treasury regulations on the
termination of partnerships are careful to note, a partnership’s
termination under section 708(b)(1)(A) does not occur until the
winding up of its business operations is completed.
Respondent seeks a contrary holding focusing on the fact
that HCMP and its partners other than Collins filed tax returns
reporting that HCMP had been terminated during 1998 and that
Sunroad limited partnership filed a tax return for a period
- 35 -
thereafter reporting that it had acquired HCMP’s business,
assets, and liabilities. According to respondent, Collins may
not unilaterally disavow his other partners’ view that HCMP had
terminated during 1998, nor the fact that HCMP’s business
operation is now being reported by another taxpayer. We find
respondent’s focus misplaced. Simply because a managing partner
acts unilaterally to dissolve a partnership, to zero out the
partnership assets and liabilities, and to report to the
Commissioner that the partnership has been terminated does not
mean that the partnership has terminated for Federal tax
purposes. Nor is it critical to our decision that HCMP is no
longer reporting the marina business as its own. What is
important to us is that the parties to the HCMP partnership
agreement had agreed that the marina would be sold by HCMP in the
case of a dissolution, that basic tax principles establish that
any income or loss on such a sale must be reported by HCMP, and
that such a sale by or on behalf of HCMP may reasonably occur in
a year after 1998.
- 36 -
We hold that HCMP was not terminated during 1998 as reported
by its managing general partner and as determined by respondent.
All arguments for a contrary holding have been considered, and
those arguments not discussed herein have been found to be
without merit. Accordingly,
Decision will be entered
under Rule 155.