DocketNumber： Docket No. 3025-76
Judges： Simpson,Sterrett,Hall
Filed Date： 9/19/1978
Status： Precedential
Modified Date： 11/14/2024
1978 U.S. Tax Ct. LEXIS 54">*54
P was a limited partner in X limited partnership. A and B were general partners in Y general partnership. With 3 days remaining in Y's 1972 taxable year, X purchased slightly less than a 50-percent partnership interest in Y ratably from A and B. Simultaneously, the Y partnership agreement was amended to allocate retroactively to X 100 percent of the losses incurred by Y during such taxable year. In its partnership return, X reported a loss which included all of Y's loss, and P deducted his distributive share of such loss on his income tax return.
70 T.C. 1024">*1025 The Commissioner determined a deficiency of $ 2,757.23 in the petitioners' Federal income tax for 1972. Both parties have conceded certain adjustments. The issues remaining for decision are: (1) Whether, for Federal tax purposes, partners can agree to allocate retroactively partnership losses to a partner who was not a member of the partnership at the time such losses accrued; and (2) to what extent was a partnership loss incurred after the admission of a new partner.
FINDINGS OF FACT
Some of the facts have been stipulated, and those facts are so found.
The petitioners, John M. Moore and Barbara G. Moore, husband and wife, resided at Little Rock, Ark., at the time they filed their petition in this case. They filed their joint Federal income tax return1978 U.S. Tax Ct. LEXIS 54">*58 for 1972 with the Southwest Regional Service Center, Austin, Tex. Mr. Moore will sometimes be referred to as the petitioner.
Skyline Mobile Home Park (Skyline) was a general partnership organized under the laws of the State of Texas. Prior to December 29, 1972, Sarah Leake and Sam A. Leake, mother and son, were the only partners in Skyline.
Landmark Park & Associates 71-2 (Landmark) was a limited partnership organized under the laws of the State of Arkansas. During 1972, the petitioner was a limited partner in Landmark and entitled to a 3.3898-percent interest in its profits and losses for 1972. Both Skyline and Landmark were engaged in the mobile home park business. They maintained their books and 70 T.C. 1024">*1026 records by use of the cash method of accounting, and their taxable years during 1972 were calendar years.
On December 23, 1972, Landmark, acting through David Kane, agreed to purchase and the Leakes agreed to sell a portion of their partnership interests in Skyline. In relevant part, the sale and purchase agreement (the agreement) provided:
1.
(a) 45% of Sellers capital in the partnership; plus
(b) 49% of the Sellers interest in partnership profits; plus
(c) 100% of the Sellers interest in partnership losses.
2.
On such date, David Kane also signed two other contracts which provided Landmark with exclusive options to purchase the remainder of the Leakes' partnership interests in Skyline. The first option provided in relevant part that the Leakes granted Landmark "the exclusive option to purchase 45 percent of our interest in the capital account of Skyline Park, Ltd., and 49 percent of our interest in the profits of Skyline Park, Ltd. for the sum of $ 22,239.53 to be payable in cash on the date of the exercise of this Option." Such option could be exercised between January 5 and January 10, 1974. The second option provided in relevant part that the Leakes granted Landmark "the exclusive option to purchase 10 percent1978 U.S. Tax Ct. LEXIS 54">*60 of our interest in the capital account of Skyline Park, Ltd., and 2 percent of our interest in the profits of Skyline Park, Ltd. for the sum of $ 5,000 to be payable in cash on the date of the exercise of this Option." Such option could be exercised between January 12 and January 16, 1975.
On December 29, 1972, the agreement was consummated when Landmark paid the Leakes $ 21,373.53. In addition, several other transactions occurred on such date. Landmark issued a check in the amount of $ 65,000, payable to "Skyline Park Ltd." Such amount was deposited in Skyline's recently opened bank account in Worthen Bank & Trust Co., Little Rock, Ark. Landmark also purchased two nonnegotiable savings certificates. The first savings certificate matured on December 29, 1973, and was in the amount of $ 22,239.53. The second savings certificate 70 T.C. 1024">*1027 matured on December 29, 1974, and was in the amount of $ 5,000. The payees on both certificates were David Kane and Don Reed, the attorney who had represented the Leakes during their negotiations with Landmark. Subsequently, the savings certificates were endorsed by both payees and delivered to Sam Leake.
Prior to December 29, 1972, Skyline1978 U.S. Tax Ct. LEXIS 54">*61 had incurred but not paid the following expenses:
| Item | Amount |
| Mortgage interest | $ 7,195.05 |
| Insurance | 6,090.49 |
| State taxes | 2,050.86 |
| City taxes | 4,114.00 |
| School district taxes | 8,102.29 |
| Total | 27,552.69 |
On its 1972 partnership return, Skyline reported an ordinary loss of $ 189,323.62. On the return, the deductions claimed by Skyline included: interest -- $ 64,135.77, insurance -- $ 6,960.86, and real estate taxes -- $ 15,516.31. On its return, Skyline's entire ordinary loss for 1972 was allocated to Landmark, and Landmark included such amount in computing its ordinary loss of $ 235,470 for 1972. Because of his 3.3898-percent interest in Landmark's profits and losses, $ 7,982.03 of such loss was allocated to the petitioner as his distributive share of such loss. 1978 U.S. Tax Ct. LEXIS 54">*62 share of Landmark's loss to $ 559.55 by disallowing certain deductions taken by Skyline and Landmark and by disallowing the portion of the petitioner's distributive share of Landmark's loss attributable to losses of Skyline which accrued prior to December 29, 1972. Subsequently, the parties agreed that Skyline incurred an ordinary loss of $ 149,323.62, and that if all of such loss was properly allocable to Landmark, then Landmark incurred an ordinary loss of $ 165,429.45 in 1972. They further agreed that at the minimum, Landmark was entitled to $ 818.21 of the loss incurred by Skyline.
70 T.C. 1024">*1028 OPINION
At the outset, we must dispose of a preliminary contention by the Commissioner; he asserts that the Leakes merely intended to allocate to Landmark 100 percent of Skyline's losses accruing on or after December 29, 1972. The agreement between the Leakes and Landmark merely provided that Landmark purchase "100 percent of the Sellers interest in partnership losses." There is no substantial evidence supporting the Commissioner's limited view of such provision.
David Kane, who negotiated the agreement with the Leakes on behalf of Landmark, testified unequivocally that he intended to 1978 U.S. Tax Ct. LEXIS 54">*63 purchase 100 percent of the Leakes' interest in Skyline's losses for 1972. In addition, Sam Leake testified that he intended Landmark to acquire "whatever they wanted." Similarly, Don Reed indicated that it was his understanding that Landmark owned a 45-percent interest in Skyline's capital, a 49-percent interest in Skyline's profits, and a 100-percent interest in Skyline's losses for the calendar year ended December 31, 1972. Finally, all of Skyline's 1972 loss was actually allocated to Landmark on Skyline's 1972 partnership return and deducted by Landmark on its 1972 partnership return.
The Commissioner pointed to certain other testimony of Mr. Leake to support his contention, but it is clear that when he gave such testimony, Mr. Leake did not understand the question asked of him. Accordingly, we hold that the Leakes and Landmark intended their partnership agreement to allocate 100 percent of Skyline's 1972 loss to Landmark. 1978 U.S. Tax Ct. LEXIS 54">*64 Now we come to the principal issue in the case, that is, whether, for Federal tax purposes, a partnership agreement can be modified to allocate to a partner retroactively partnership losses which accrued prior to such partner's entry into the partnership. 1978 U.S. Tax Ct. LEXIS 54">*65 The resolution of this issue requires a reasonable 70 T.C. 1024">*1029 reconciliation of the provisions of subchapter K ( sec. 701 et seq.) of the Internal Revenue Code of 1954,
Section 702(a) contains the general rule that each partner must take into account in computing his income his distributive share of partnership income or loss. Section 704(a) states that1978 U.S. Tax Ct. LEXIS 54">*66 "A partner's distributive share of income, gain, loss, deduction, or credit shall, except as otherwise provided in this section, be determined by the partnership agreement." Under section 704(b)(2), an allocation of any item of income, gain, loss, deduction, or credit is not effective if the principal purpose of the allocation "is the avoidance or evasion of any tax imposed by this subtitle."
any modifications of the partnership agreement made prior to, or at, the time prescribed by law for the filing of the partnership return for the taxable year (not including extensions) which are agreed to by all the partners, or which are adopted in such other manner as may be provided by the partnership agreement.
See generally H. Rept. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess. 65-68, A221-A226, A257 (1954); S. Rept. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess. 89-92, 376-386, 407 (1954);
(2) Partner who retires or sells interest in partnership. -- (A) Disposition of entire interest. -- The taxable year of a partnership shall close -- (i) with respect to a partner who sells or exchanges his entire interest in a partnership, and (ii) with respect to a partner whose interest is liquidated, 1978 U.S. Tax Ct. LEXIS 54">*68 except that the taxable year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership's taxable year. Such partner's distributive share of items described in section 702(a) for such year shall be determined, under regulations prescribed by the Secretary or his delegate, for the period ending with such sale, exchange, or liquidation. (B) Disposition of less than entire interest. -- The taxable year of a partnership shall not close (other than at the end of a partnership's taxable year as determined under subsection (b)(1)) with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced,
The petitioners maintain that sections 702(a), 704(a), and 761(c) reveal a legislative purpose to allow partners flexibility in determining inter se the incidents of their tax liability resulting from participation1978 U.S. Tax Ct. LEXIS 54">*69 in a partnership. See H. Rept. 1337,
Under
Where a partner sells or exchanges less than his entire interest,
Our interpretation of
Here, the partners in Skyline from January 1, 1972, to December 29, 1972, were Sam and Sarah Leake. Any income earned or loss suffered by the partnership attributable to such period could be passed through to the Leakes at the end of Skyline's taxable year in any proportion chosen by the Leakes under sections 702(a), 704(a), and 761(c), provided the allocation 1978 U.S. Tax Ct. LEXIS 54">*75 could withstand any attack under section 704(b). See
The same observation cannot be made with respect to the retroactive allocation sought by the petitioners. Landmark was not a member of the partnership when Skyline incurred the loss attributable to January 1, 1972, through December 28, 1972. Landmark was not liable for such loss, and the burden thereof was not retroactively shifted to Landmark by the December 29, 1972, agreement. The entity incurring the loss was Skyline, and any attempt to transfer such loss to1978 U.S. Tax Ct. LEXIS 54">*76 persons who were not members of the partnership during such period violates the assignment-of-income doctrine. As stated by the Supreme Court in
the taxpayer who sustained the loss is the one to whom the deduction shall be allowed. Had there been a purpose to depart from the general policy in that regard, and to make the right to the deduction transferable or available to 70 T.C. 1024">*1034 others than the taxpayer who sustained the loss, it is but reasonable to believe that purpose would have been clearly expressed. And as the section contains nothing which even approaches such an expression, it must be taken as not intended to make such a departure.
The same observations are pertinent in the case now before us. Subchapter K contains no clear expression of the intention to permit a partner to deduct losses which accrued prior to his entry into the partnership. To the contrary, the opposite intent is expressed in
Our conclusions are also supported by the decision of the Second Circuit in
70 T.C. 1024">*1035 On appeal, the Commissioner and the new partner agreed that the Tax Court erred in permitting a retroactive allocation of pre-November 5, 1956, partnership income to the new partner, and the Court of Appeals for the Second Circuit agreed. The Second Circuit found that the attempted retroactive assignment of income was contrary to the express provisions of
Finally, we must decide how much of Skyline's loss can be passed through to Landmark. Conceptually, there are several different methods of making such determination: One method involves an interim closing of the partnership books as of the date of the transfer of the partial partnership interest and computing the various items of partnership income and loss as of such date. Another method involves computing partnership income or loss at the end of the partnership year and allocating the yearend totals ratably over the year. See
In the first place, it is not altogether clear that the payments at issue were in fact made during the last 3 days of 1972. The petitioner relied upon the parties' stipulation that Skyline 70 T.C. 1024">*1036 incurred an ordinary loss of $ 149,323.62 in 1972, and that in computing such loss, Skyline claimed deductions of $ 15,516.31 for real estate taxes, $ 6,960.86 for insurance, and $ 64,135.77 for interest. He urges us to infer that such deductions included a mortgage interest expense of $ 7,195.05, an insurance expense of $ 6,090.49, and a tax expense of $ 14,267.15, and that such amounts were in fact 1978 U.S. Tax Ct. LEXIS 54">*81 paid in 1972. He also pointed to the Skyline bank statement for January 1973, showing that canceled checks for $ 7,195.05 and $ 6,090.49 cleared such account on January 5, 1973. However, such evidence is not sufficient. From the fact that deductions were claimed for taxes, insurance, and interest, we are not justified in concluding that such amounts were in fact paid in 1972, nor are we justified in concluding that the larger amounts included the particular payments at issue. We were given no evidence as to the time required for checks to clear at that time, and we had no supporting evidence with respect to the payment of taxes.
Moreover, if the petitioner wishes to compute his distributive share of partnership income or loss through an interim closing of the partnership books on the date of the transfer, he must show, not only the expenses which are deductible by the partnership during the short period, but must also show what receipts, if any, the partnership had during such short period. Without information as to the receipts of the partnership during the short period, we are totally unable to determine what loss was sustained during such period. Accordingly, the petitioners1978 U.S. Tax Ct. LEXIS 54">*82 have failed to carry their burden of showing that the Commissioner's determination in this respect was incorrect (see
70 T.C. 1024">*1037 Scott,
However, in my view the transfer of a part of a partnership interest to a new partner prior to the close of the partnership taxable year is not any more an anticipatory assignment of income than is the transfer of such an interest by reallocation of the percentage interests among the existing partners. The latter is permitted by statute. Until the year is closed, there is no income of the partnership on an annual accounting basis as distinguished from specific items of receipts and deductions which go into the computation of income. I would limit my reasons for reaching the conclusion the majority reaches to the construction of the statutory provisions.
1. Although the petitioner deducted $ 7,982.03 as his distributive share of Landmark's loss, a 3.3898-percent interest in such amount equals $ 7,981.96.↩
2. Since the parties assume that the agreement amounted to an amendment of Skyline's partnership agreement, we will make the same assumption.↩
3. The Tax Reform Act of 1976, Pub. L. 94-455, sec. 213(c), (d), and (f), 90 Stat. 1547-1548, expressly prohibits the type of retroactive allocation at issue in this case. In the committee reports accompanying such Act, Congress did not venture an opinion as to whether such allocations were valid prior to 1976, but declared that the issue was uncertain. H. Rept. 94-658, 1976-3 C.B. (Vol. 2) 695, 814-816; S. Rept. 94-938, 1976-3 C.B. (Vol. 3) 49, 133-135. Such uncertainty may have resulted from our unpublished opinion in
4. All statutory references are to the Internal Revenue Code of 1954, as in effect during the year in issue, unless otherwise indicated.↩
5. The Commissioner has decided not to rely on sec. 704(b) in the case now before us.↩
6. Though we sustain the Commissioner's method, he overlooked the fact that 1972 was a leap year, so that the allowable loss should be 3/366ths of the loss for the entire year.↩
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