DocketNumber： Docket No. 323-83
Judges： Wright
Filed Date： 10/20/1988
Status： Precedential
Modified Date： 10/19/2024
*133
P, a corporation, held a 50.98-percent majority general partnership interest in GK, a limited partnership. Pursuant to an amendment to the partnership agreement providing for the admission of P's three shareholders, B, F, and M, as additional general partners of GK, P transferred 40.98 percent of its general partnership interest to B, F, and M, who each acquired a 13.66-percent interest in GK. In exchange for their partnership interests, B, F, and M collectively assumed P's obligation to make annual capital contributions and acquired 40.98 percent of GK's nonrecourse obligations. No additional capital was contributed to the partnership, nor were the interests of the two other general partners or the limited partner affected.
*794 Respondent determined the following deficiencies in petitioner's corporate income tax: TYE Jan. 31 -- Deficiency 1978 $ 81,991.29 1979 421,914.35 1980 4,983.45
In the statutory notice of *135 deficiency, respondent determined that petitioner distributed a partnership interest to its shareholders resulting in a gain taxable to petitioner under section 311(c). *136 On January 18, 1985, respondent filed a motion for leave to file amendment to answer wherein he *795 asserted as his primary theory that the transaction in issue was a sale of a partnership interest. Petitioner filed an objection to respondent's motion and requested that respondent's motion be denied or alternatively, that respondent bear the burden of proof with respect to the matters contained in his amended answer. On February 19, 1985, a hearing was held on respondent's motion to amend his answer and petitioner's motion for continuance, at which time we took the matter under advisement. By order dated February 27, 1985, we agreed with petitioner that respondent's amended answer presented new matters under Rule 142(a), and we granted respondent's motion and ordered that the burden of proof be borne by respondent.
*138 *796 FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by this reference.
Colonnade Condominium, Inc. (petitioner or Colonnade), is a corporation organized in June 1974 under the laws of the District of Columbia. Petitioner's principal place of business was Washington, D.C., when its petition was filed. Colonnade filed its Federal corporate income tax returns (Forms 1120) on the accrual basis of accounting with a fiscal year ending January 31.
The three shareholders of Colonnade were, and continue to be, Stewart Bernstein (Bernstein), Myer Feldman (Feldman), and John Mason (Mason). Bernstein and Mason are real estate developers, and Mason is also a banker with NS&T Bank. Feldman is a partner in the District of Columbia law firm of Ginsburg, Feldman & Bress. The three shareholders each own 30 shares of common stock and constitute the board of directors. During the years in issue, Bernstein was the president and treasurer; Feldman was the executive vice president; and Mason was a vice president and secretary. Corporate decisions were made by the three shareholders, *139 who were aware of the policy and direction of the corporation as it related to real estate development and were somewhat aware of the accounting procedures used by its accounting firm.
In 1974, Colonnade embarked on the conversion of an apartment complex in Washington, D.C., known as the Colonnade, into condominiums for sale to the public. Beginning in 1976, Colonnade also developed a second condominium project known as Foxhall East. These two financially successful conversions were Colonnade's major projects. By the end of fiscal year ended January 31, 1979, all of the Colonnade and Foxhall East units had been sold. Due to economic conditions, Colonnade made no new investments for the period 1979 to 1981, although it did look for other real estate ventures.
Colonnade's gross income from sales and rent (gross receipts less costs of goods sold) from January 1976 *797 through January 1981 was approximately $ 5 million. During these years of operation, Colonnade also reported a partnership loss from Georgia King Associates, a limited partnership in which Colonnade held a majority general partnership interest. *140 These partnership losses, combined with other operating expense deductions, resulted in claimed net operating losses. FYE Gross Georgia King Taxable income Minimum Jan. 31 -- income partnership loss (net operating loss) tax paid 1976 $ 287,907 0 ($ 1,181,360) 0 1977 3,093,556 ($ 1,096,819) 0 $ 18,025 1978 1,713,411 (970,949) 0 42,663 1979 63,244 (215,071) (295,435) 11,041 1980 4,718 (102,680) (196,172) 0 1981 292,049 (112,179) 0 11,971 Totals 5,454,885 (2,497,698) 0 83,700
The net operating losses for fiscal years ending January 31, 1976, 1979, and 1980, *141 were carried back and forward to reduce to zero taxable income for fiscal years ending January 31, 1977, 1978, and 1981.
Colonnade declared no dividends and made no distributions to its three shareholders for fiscal years ending January 31, 1975, through January 31, 1980. For fiscal years ending January 31, 1976 through January 31, 1981, Colonnade's books included accounts receivable and notes receivable from its three shareholders, Bernstein, Feldman, and Mason. Initially, only the accounts receivable were posted on the books of Colonnade. In June 1978, approximately 70 percent of the accounts receivable were converted to notes receivable from the respective shareholders in the *798 following amounts: Bernstein in the amount of $ 333,000; Feldman in the amount of $ 475,500; and Mason in the amount of $ 333,000. The cumulative total of the accounts receivable and notes receivable carried on the books of Colonnade is summarized as follows:
| FYE Jan. 31 -- | Mason | Feldman | Bernstein | Total |
| 1976 | $ 58,006 | $ 250,947 | $ 205,294 | $ 514,247 |
| 1977 | 55,506 | 252,795 | 202,794 | 511,095 |
| 1978 | 168,025 | 346,313 | 310,313 | 824,651 |
| 1979 | 469,878 | 612,750 | 469,878 | 1,552,506 |
| 1980 | 508,843 | 627,314 | 508,843 | 1,645,000 |
| 1981 | (293,233) | (299,930) | (293,232) | (886,395) |
*142 These accounts and loans receivable for the period January 1976 to January 1981 resulted from numerous transactions including the issuance of checks; the values assigned to apartments and improvements to apartments received by Feldman and Bernstein and their relatives; cash proceeds from the sale of an apartment; and transfers of amounts receivable and notes receivable from Colonnade Ltd. (a Bernstein, Feldman, and Mason partnership), and the 2801 partnership.
As of December 17, 1980, the outstanding notes receivable and accounts receivable from Mason, Feldman, and Bernstein carried on Colonnade's books totaled $ 1,860,263. By corporate resolution on that same date signed by Bernstein, Feldman, and Mason as shareholders and directors, Colonnade made a $ 1,860,263 distribution to its shareholders of the notes and accounts receivable as follows:
| Recipients | |||
| Items | Feldman | Mason | Bernstein |
| Promissory notes | $ 475,500 | $ 451,288 | $ 451,288 |
| Accounts receivable | 139,587 | 171,300 | 171,300 |
| 615,087 | 622,588 | 622,588 | |
Colonnade reported that, prior to the distribution, its unappropriated retained earnings for fiscal year ending January 31, 1981, was ($ 303,700). On their *143 1980 income tax returns, the shareholders claimed long-term capital gain with respect to the $ 1.8 million distribution.
Georgia King Associates (Georgia King or the partnership) is a limited partnership formed under the laws of New *799 Jersey for the purpose of constructing, developing, owning, maintaining, and operating low-income public housing projects pursuant to the Limited Dividend Non-Profit Housing Corporation Law of New Jersey, and the New Jersey Housing Finance Agency Law of 1976. Georgia King was formed to complete the development of Georgia King Village (the Village or the project), a 422-unit public housing project located in Newark, New Jersey. *144 On August 2, 1976, a certificate of limited partnership (the certificate) was executed by the authorized representatives of To-Sault Renewal & Redevelopment Corp. (To-Sault), C.R.H.C., Inc. (CRHC), Colonnade, the general partners, and by Capital Housing Partners-XX (CHP-XX), the limited partner. Partner Partnership interest Contributions To-Sault (GP) 0.01 $ 50 CRHC (GP) 0.01 50 Colonnade (GP) 97.98 100 CHP-XX (LP) 2.00 100 100.00 300
In addition to the above-stated contributions, Colonnade was to make additional contributions from time to time, and agreed to provide a $ 500,000 letter of credit on behalf of Georgia King in favor of the New Jersey Housing Finance Agency (NJHFA).
*145 Among the stated partnership powers was the following provision:
g. To borrow money and to issue evidence of indebtedness, and to secure the same by mortgage, deed of trust, pledge or other lien, in furtherance of any or all of the objects of its business in connection with *800 said project provided that neither the Partnership nor any of its Partners shall be personally liable for the repayment of any such indebtedness.
To-Sault, a nonprofit corporation was the original owner of the Village and the mortgagor with NJHFA on a 100-percent, 48-year term mortgage in the amount of $ 18,250,000, which was acquired in August 1974. As of August 1974, the estimated development costs and capital requirements totaled $ 18,250,000, the amount of the mortgage. Included in these costs were such items as professional services, selling and renting expenses, and 2-year carrying and finance charges. In May 1976, the estimated development costs and capital requirements were revised for a total project cost of $ 20,278,000. *146 On August 2, 1976, To-Sault agreed to convey its interest in the Village to Georgia King, subject to certain conditions. *147 As a condition for its approval of the transfer of the Village from To-Sault to the partnership, NJHFA required that Georgia King agree to establish a development-cost *801 escrow account (DCE account) totaling $ 965,000, to meet the equity requirement. Date DCE *148 Development costs Total Sept. 1976 $ 19,000 $ 63,000 $ 82,000 Aug. 1, 1977 200,000 196,000 396,000 Aug. 1, 1978 179,000 151,000 330,000 Aug. 1, 1979 144,000 146,000 290,000 Aug. 1, 1980 114,000 126,000 240,000 Aug. 1, 1981 94,000 116,000 210,000 Aug. 1, 1982 94,000 106,000 200,000 Aug. 1, 1983 94,000 96,000 190,000 Aug. 1, 1984 27,000 85,000 112,000 965,000 1,085,000 2,050,000
On August 3, 1976, To-Sault deeded the Village to Georgia King.
On August 17, 1976, To-Sault and Georgia King entered into an assignment and assumption agreement with respect to the original mortgage, mortgage note, and related *802 agreements (the original financing agreements). Under the assignment and assumption agreement, To-Sault assigned the August 7, 1974, original financing agreement to Georgia King. Georgia King assumed all of To-Sault's rights and obligations to pay principal and interest on the $ 18,250,000 indebtedness to NJHFA. The agreement provided that "for the purpose of establishing and continuing the existence of the indebtedness * * * it is a condition * * * that*149 neither the Assignee [Georgia King] nor any general partner or limited partner thereof shall assume any personal liability with respect thereto."
On October 20, 1976, the general partners and limited partner of Georgia King (the Georgia King partners) amended certain terms and provisions of the August 2, 1976, certificate. Partner Percentage interest Contributions To-Sault (GP) 0.01 $ 50 CRHC (GP) 0.01 50 Colonnade (GP) 97.98 2,164,600 CHP-XX (LP) 2.00 62,100 100.00 2,226,800
Under the October 20, 1976, agreement, Colonnade's *150 $ 2,164,600 capital contribution was payable in nine yearly installments through June 1984. In addition to its originally stated $ 100 capital contribution, CHP-XX was to contribute $ 62,000 in June 1984. Except for the first 2 years of scheduled payments, the payment schedule for Colonnade's capital contributions (and including that of CHP-XX in 1984) corresponded to the combined total of the DCE and development *803 costs payable on an annual basis through August 1984. *151 and CHP-XX:
Colonnade and CHP-XX may, at their sole election, hereafter agree upon a reallocation of the amount of capital contribution to be made by each of them, provided however in no event shall the total be less than $ 2,226,600. In the event of such an agreement the Interests of Colonnade and CHP-XX shall be increased or decreased, as appropriate to reflect such reallocation of their obligation to make Capital Contributions.
Under article II, "contribution" was defined as follows:
"Capital Contribution" means the total amount of money or other property contributed or agreed to be contributed, as the context requires, to the Partnership by each Partner pursuant to the terms of this Agreement. Any reference to the Capital Contribution of a Partner shall include the Capital Contribution made by a predecessor holder of the Interest of such Partner.
The October 20, 1976, agreement also provided that subject to any reallocation pursuant to section 5.01(c), certain defined gains (section 10.03(a) gains) recognized by the partnership upon the sale, exchange, or other disposition of the Village were to be allocated according to the percentage interest of the partners for profits*152 and losses. Gains in excess of defined gains and losses on the sale of the Village (section 10.03(c) gains and losses), were to be allocated as follows: *804
| Partner | Percentage |
| Colonnade (GP) | 75.00 |
| To-Sault (GP) | 10.00 |
| CRHC (GP) | 14.99 |
| CHP-XX (LP) | 0.01 |
Likewise, section 10.05(a) provided for the distribution of proceeds from the sale or refinancing of the project, with any remaining proceeds, after payoff of liabilities and return of contributions, going to the partners, pursuant to section 10.05(a)(vi), in the same percentage as excess recognized gains reflected in section 10.03(c).
With respect to the lack of personal liability for mortgage financing, the October 20, 1976, agreement slightly altered the original wording of the certificate, but restated that the partnership and the partners shall have no "personal liability for the payment of a Mortgage or other such indebtedness, but that the sole recourse of any lender shall be to the property securing the Mortgage or other such indebtedness."
The October 20, 1976, agreement stated:
In determining the Federal tax basis of their Interest in the Partnership, the Partners may take into account their allocable *153 share of any nonrecourse mortgage indebtedness incurred by the Partnership (to the extent of the fair market value of the properties secured) in the same proportion as they share in the profits and losses of the Partnership.
Under section 6.01, none of the general partners were entitled to withdraw from the partnership, or to sell or assign their interests without the prior consent of NJHFA and CHP-XX. Section 6.02 of the October 20, 1976, agreement set forth the following terms and conditions for the "admission of a successor or additional general partner:"
(a) the admission of such Person shall have been Consented to by CRHC, Colonnade, To-Sault and NJHFA;
(b) the successor Person shall have accepted and agreed to be bound by all the terms and provisions of this Agreement, by executing a counterpart thereof, * * * and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner; and this Agreement evidencing the admission of such Person as a General Partner shall have been filed for recordation * * *
* * * *
*805 (d) counsel for the Partnership shall have rendered an opinion that the admission of *154 the successor Person is in conformity with the Uniform Limited Partnership Act of the State of New Jersey and that none of the actions taken in connection with the admission of the successor Person will cause the termination of dissolution of the Partnership or will cause it to be classified other than a partnership for Federal income tax purposes.
Section 6.03 which set forth the effect of bankruptcy, death, withdrawal, dissolution, or incompetence of a general partner, provided, in part, that the "dissolution of Colonnade, the effect of which is the transfer of its interest to Myer Feldman, John J. Mason, Stewart A. Bernstein, or any of them, shall not cause the termination" of the partnership.
Under section 7.01 of the October 20, 1976, agreement, To-Sault was designated as the managing general partner.
Section 7.08(a) provided that the corporation was to maintain such net worth "necessary to assure that the Partnership is classified as a partnership for Federal income tax purposes," *155 the requirements of section 7.08(a).
Georgia King, which filed its partnership returns on the accrual method of accounting for the calendar year, claimed a total tax loss for 1976 in the amount of $ 1,119,432. As a 97.98-percent general partner, Colonnade's portion of the loss was $ 1,096,819, which it claimed on its corporate return for fiscal year ending January 31, 1977. Colonnade also claimed its portion of loss attributable to its interest in CHP-XX in the amount of $ 67,229. *156 end of the 1976 partnership year was $ 19,293,340. Colonnade's basis included its share of the nonrecourse partnership mortgage on the Village, plus the $ 2,164,400 total capital contribution required. Colonnade's initial total adjusted basis of $ 20,390,159 was then reduced by $ 1,096,819, the amount of *806 the claimed partnership loss, to arrive at the reported adjusted basis of $ 19,293,340.
Throughout the course of its investment in Georgia King and CHP-XX, Colonnade received draft projections of anticipated taxable income and losses. For example, in a letter dated November 22, 1976, from Martin Schwartzberg (Schwartzberg) *157 are available." There were no references to any reorganization of the partnership affecting any partner's interest other than with respect to Colonnade and CHP-XX.
On July 8, 1977, Schwartzberg wrote to Feldman again and enclosed various exhibits pertaining to the allocation of projected tax losses and investments in Georgia King. Exhibit A to the letter was a 1977 revision of the allocations projected in 1976. The 1976 projections were based on the assumption of a "sale of 49 percent to CHP-XX in 1977 by Georgia King Associates" and a "sale of 25 percent to Georgia King Associates I in 1978 by Georgia King Associates." In 1977, the 1976 projections were "revised to reflect payments by Colonnade assuming no further sale of its interest in Georgia King Associates." *158 On January 19, 1977, the Georgia King partners executed an amendment to agreement and first amended certificate of limited partnership. A revised amendment to agreement and *807 revised first amended certificate of limited partnership (technical corrections) was signed as of January 19, 1977, on March 29, 1977 (the January 19, 1977, revised amendment). Both amendments were filed with the State of New Jersey. As a result of the January 19, 1977, revised amendment, the percentage of profits, losses, and net cash-flow available for distribution as defined in section 10.01(a), and the section 10.03(a) gains were reallocated between Colonnade and CHP-XX as follows:Partner Prior to 1/77 After 1/77 (Decrease)/Increase To-Sault (GP) 0.01% 0.01% CRHC (GP) 0.01 0.01 Colonnade (GP) 97.98 50.98 (47%) CHP-XX (LP) 2.00 49.00 47
Correspondingly, the section 10.03(c) gains and losses and the section 10.05(a)(vi) distributions were reallocated as follows:
| Partner | Prior to 1/77 | After 1/77 | (Decrease)/Increase |
| To-Sault (GP) | 10.00% | 10.00% | |
| CRHC (GP) | 14.99 | 15.00 | 0.01% |
| Colonnade (GP) | 75.00 | 37.50 | (37.50) |
| CHP-XX (LP) | .01 | 37.50 | 37.49 |
*159 The aggregate capital contributions of Colonnade and CHP-XX were reallocated as follows:
| Partner | Prior to 1/77 | After 1/77 | (Decrease)/Increase |
| To-Sault (GP) | $ 50 | $ 50 | |
| CRHC (GP) | 50 | 50 | |
| Colonnade (GP) | 2,164,600 | 1,330,300 | ($ 834,300) |
| CHP-XX (LP) | 62,100 | 834,300 | |
| 2,226,800 | 2,226,800 |
Under the January 19, 1977, revised amendment, Colonnade's capital contribution became payable in seven yearly installments (with one installment previously paid) through 1982, and Colonnade was entitled to receive refunds in the amounts of $ 24,000 and $ 45,000, in 1983 and 1984, respectively. CHP-XX's obligation to contribute was payable in eight installments through 1984.
*808 At the time the partners executed the January 19, 1977, revised amendment (which increased CHP-XX's limited partnership*160 interest to 49 percent), the syndication of the CHP-XX partnership took place simultaneously. Prior to the January 19, 1977, revised amendment, Colonnade had an 80-percent interest in CHP-XX. As a result of the syndication of CHP-XX, Colonnade's interest in CHP-XX was reduced to 0.0247 percent. The limited partners that acquired interests pursuant to the syndication, totaling 95.07 percent, were unrelated to Colonnade.
Georgia King claimed a total tax loss of $ 1,635,090 for the 1977 tax year. Colonnade's portion of that loss was $ 970,949, which it claimed on its corporate return for fiscal year ending January 31, 1978. The $ 970,949 loss was calculated on the basis of Colonnade's retained 50.98-percent interest in Georgia King for the entire year and its allocable interest in CHP-XX as reduced pursuant to the syndication. *161 Colonnade's partnership interest in Georgia King was reported to have dropped from 97.98 percent to 50.98 percent, a decrease of 47-percentage points, while CHP-XX partnership's interest rose from 2 percent to 49 percent, or a gain of 47-percentage points. *162 the 1977 Schedule K-1 as $ 1,067,781. With respect to its obligation to contribute $ 834,300 *809 1984 pursuant to the January 19, 1977, revised amendment was not included in this reduction. After taking into consideration the $ 970,949 loss, Colonnade's yearend capital account was reported as ($ 670,854).
Partner Prior to 4/78 After 4/78 (Decrease)/Increase To-Sault (GP) 0.01% 0.01% CRHC (GP) 0.01 0.01 CHP-XX (LP) 49.00 49.00 Colonnade (GP) 50.98 10.00 (40.98%) Bernstein (GP) 13.66 13.66 Feldman (GP) 13.66 13.66 Mason (GP) 13.66 13.66
The section 10.03(c) gains and losses and the section 10.05(a)(vi) distributions of Georgia King were changed as follows:
| Partner | Prior to 4/78 | After 4/78 | (Decrease)/Increase |
| To-Sault (GP) | 10.00% | 10.00% | |
| CRHC (GP) | 15.00 | 15.00 | |
| CHP-XX (LP) | 37.50 | 37.50 | |
| Colonnade (GP) | 37.50 | 7.50 | (30%) |
| Bernstein (GP) | 10.00 | 10 | |
| Feldman (GP) | 10.00 | 10 | |
| Mason (GP) | 10.00 | 10 |
*164 *810 Similarly, the capital contributions of the Georgia King partners were changed as follows:
| Partner | Prior to 4/78 | After 4/78 | (Decrease)/Increase | |
| To-Sault (GP) | $ 50 | $ 50 | ||
| CRHC (GP) | 50 | 50 | ||
| CHP-XX (LP) | 896,400 | Colonnade (GP) | 1,330,300 | ($ 816,060) |
| Bernstein (GP) | 272,020 | 272,020 | ||
| Feldman (GP) | 272,020 | 272,020 | ||
| Mason (GP) | 272,020 | 272,020 | ||
| Total | 2,226,800 | 2,226,800 |
Pursuant to the revised
*166 When Colonnade transferred a portion of its general partnership interest in Georgia King on April 1, 1978, the fair market value of the Village was less than its basis. *167 Colonnade's portion of the loss was $ 215,071 which it claimed on its corporate return for fiscal year ending January 31, 1979. On the 1978 Schedule K-1, Colonnade's beginning capital account was reported as ($ 670,854). The reduction of the amount of capital to be contributed in the future, which was assumed by the three shareholders, was shown as a "withdrawal*168 or distribution" in the amount of $ 816,060. After taking into consideration the $ 215,071 tax loss, *812 Colonnade's yearend capital account was reported as ($ 1,701,985). Colonnade did not treat the April 1, 1978, transfer of its 40.98-percent partnership interest to Bernstein, Feldman, and Mason as a taxable event in fiscal year ending January 31, 1979, nor did Colonnade treat the April 1, 1978, transfer as a distribution with respect to its stock. For their 1978 taxable year, Bernstein, Feldman, and Mason each claimed a tax loss in the amount of $ 108,837 from Georgia King. The reported share of partnership liabilities (nonrecourse and recourse) for Bernstein, Feldman, and Mason was based on their acquisition of a 13.66-percent interest each in the partnership. Bernstein, Feldman, and Mason each treated the $ 272,020 capital to be contributed in the future as capital contributed during the year, and reduced their capital accounts by the tax losses claimed to $ 163,183. In the statutory notice of deficiency, respondent determined that Colonnade's transfer of its 40.98-percent general partnership interest to Bernstein, Feldman, and Mason resulted in a long-term capital gain*169 in the amount of $ 1,454,874. OPINION Respondent contends that Colonnade's transfer of a portion of its partnership interest in Georgia King Associates to its three shareholders pursuant to the April 1, 1978, amendment to the partnership agreement resulted in the sale of a 40.98-percent general partnership interest by Colonnade in return for the discharge of recourse and nonrecourse partnership liabilities. Accordingly, respondent argues that such disposition should be governed by We agree with respondent. After a careful examination of the facts and circumstances, we conclude that on this record respondent has met his burden of proof in establishing that Colonnade's transfer of a portion of its general partnership *813 interest was, in substance, a taxable sale or exchange pursuant to This flexibility, however, is not unlimited. The form of the transaction must be in keeping with its true substance and the intent of the parties. See The Code and regulations do not offer any guidance for distinguishing between an admission of new partners (pursuant *815 to a contribution of property*174 which is nontaxable under Admission of new partners is not in all respects identical to a sale or exchange of a partnership interest. In the former situation, the transaction is between the new partners and the partnership. The latter situation involves a transaction between a new partner and an existing partner. * * * [ In Unlike *816 Similarly, Colonnade divested*176 itself of its rights under sections 10.03(c) and 10.05(a)(vi) of the partnership agreement (allocations of certain gains and losses) to the extent of 30 percent which were acquired collectively by Bernstein, Feldman, and Mason at 10 percent each. Again, the allocations under these two sections remained unchanged with respect to To-Sault, CRHC, and CHP-XX. Most notably, the aggregate capital contributions of Georgia King, $ 2,226,800, remained the same before and after the April 1, 1978, amendment. No additional contributions were required under the April 1, 1978, amendment to the partnership agreement. Colonnade, however, was discharged of its recourse obligation to contribute $ 816,060 in the future, an obligation which was acquired equally between Bernstein, Feldman, and Mason at $ 272,020 each. The total payment schedule for the contributions (in yearly installments) remained unchanged and continued to mirror the total equity payments required of the partnership. Colonnade was also discharged of 40.98 percent of its partnership nonrecourse liabilities, which were acquired by the three individual shareholders. The fact that the three shareholders of Colonnade expressly assumed*177 Colonnade's liabilities, in return for partnership interests which are capital assets under * * * Where assets are transferred to third parties, assumption of liabilities constitutes consideration. * * * *817 * * * the assumption of liabilities by a third party transferee constitutes an amount realized, and this is consideration to the transferor. In arguing that the form of the arrangement reflects the substance, petitioner points out that the documents show that Bernstein, Feldman, and Mason were admitted to the partnership upon obtaining the required approval of NJHFA, as well as To-Sault, the managing general partner. Petitioner contends that the documents demonstrate an agreement between the partnership and the partners for the admission of new partners and do not reflect a transaction between petitioner and the new general partners. However, as we noted earlier, labels, semantics, technicalities, and formal documents do not necessarily control the tax consequences of a given transaction. See Aside from the transfer of a portion of Colonnade's partnership interest to the three new partners in return for a discharge of liabilities, there were no other changes in the structure or the operation of the Georgia King partnership as a result of the April 1, 1978, amendment. The substance of the transaction did not transpire between the partnership and the new partners, but rather, between Colonnade, an existing partner, and three new partners. Because there was no new or additional capital transferred to the partnership, there were no modifications of the partnership assets and liabilities. The only change was the transfers from the transferor partner's capital account to the transferees' capital accounts. As such, the transaction warrants sale and exchange treatment under Petitioner relies on numerous cases and a revenue ruling in support of its position that the transaction*180 of April 1, 1978, involved nothing more than the admission of new members to an existing partnership under *818 Petitioner asserts that the "first phase" of the transaction in Each partner reported the sale of his partnership interest on his Federal income tax return for the year 1972 as a loss. The Supreme Court held that taxable gain resulted in 1972 from the sale of the partnership interest because the amount realized equaled the balance of the nonrecourse liability even though the balance exceeded the fair market value of the apartment complex. Petitioner here argues that because there was no suggestion in Petitioner also refers to the taxable sale in In arguing that a taxable event did not occur on April 1, 1978, petitioner also cites Venture was reorganized to admit two limited partnerships (the Wilkow Group) into Venture as limited partners. *184 repayment of the $ 500,000 loan. In the notice of deficiency, the Commissioner treated the admission of the Wilkow Group as a purchase and sale of 20 percent of Jupiter's partnership interest in exchange for *820 cash from the Wilkow Group's contribution to capital, and a reduction*185 in Jupiter's liability, from the Wilkow Group's assumption of 20 percent of Venture's mortgage liability. The Claims Court held that the form of the transaction was consistent with the substance. Placing significant weight on the intent of all the parties (Jupiter, Empire, and the Wilkow Group), the court determined that the intent to reorganize Venture and admit the Wilkow Group, rather than to sell a portion of Jupiter's partnership interest, was reflected in the documents and by the credible and uncontradicted testimony of all the parties. In contrast to Prior to the April 1, 1978, amendment wherein it transferred equal portions of its partnership interest to its three shareholders, Colonnade claimed approximately $ 2.2 million in tax losses from the Georgia King partnership. These tax losses sheltered Colonnade's profits from its unrelated, successful condominium conversions in Washington, D.C.*186 Upon formation of Georgia King in 1976, most of Colonnade's partnership basis was attributable to its share of nonrecourse liability in an $ 18,250,000 mortgage held by NJHFA on the Village, a subsidized, low-income housing project in Newark, New Jersey. By 1978, Colonnade's Washington condominium conversions were nearly complete and its profits had declined substantially. Colonnade no longer needed the large losses it had been claiming from Georgia King. In fact, correspondence between Schwartzberg and Feldman relating to projected tax losses manifests that changes in the ownership of Colonnade's partnership interest were contemplated prior to 1977. Numerous factors distinguish Likewise, we find the instant transaction distinguishable from that of Partners who subsequently joined INTELSAT paid for their interests according to a formula which provided that a new member paid the amount of "what would have been the member's pro rata share of the total prior capital contributions made by all members of INTELSAT, plus interest which was reduced by what would have been the member's pro rata share of the total prior profits distributions as if it had been a member from the beginning." The effect of the formula was to determine the new member's contribution without any negotiations involving INTELSAT, the Committee, or any partner once the new member's quota was determined. The amount received from the new partner was distributed to the existing partners reflecting the reduction in their percentage interests. *822 In 1971, six new partners were admitted to INTELSAT. The new partners paid entrance fees totaling $ 429,598.07 in 1971 and $ 101,222.30 in 1972. INTELSAT distributed $ 230,965 in 1971 and*189 $ 54,748 in 1972 to COMSAT. COMSAT did not report any gain from these transactions. The Commissioner claimed that COMSAT should have treated these amounts as capital gain. Relying on The Court of Claims found that the regulation did not automatically or necessarily require recognition of gain in every situation in which property contributed to a partnership is shortly thereafter distributed to one or more of the partners. The Court of Claims noted that in applying the regulation, substance controls over form. Considering all aspects of the true character of the transactions, the court emphasized "that the arrangements by which new partners joined INTELSAT and the interests of the existing partners were reduced were distributions of partnership*190 property to the existing partners rather than sales by the latter of a portion of their partnership interests to the new partners." *823 Viewed together, in light of the special nature and purpose of the partnership, the Court of Claims concluded that these arrangements demonstrated characteristics not commonly associated*191 with sales transactions. Unlike the case now before us, *193 *824 Having concluded that Colonnade's transfer of a portion of its partnership interest to three new partners constituted a sale or exchange, the next issue for our determination is the amount of the taxable gain resulting from this transaction. *194 In determining the amount realized, The amount realized from the sale or other disposition of property includes the amount from which the transferor is discharged as a result of the sale or disposition. When a taxpayer sells or disposes of property encumbered by a nonrecourse obligation, the Commissioner properly requires him to include among the assets realized the outstanding amount of the obligation. The fair market value is irrelevant to this calculation. * * * [ The computation of long-term capital gain resulting from Colonnade's sale of a 40.98-percent general partnership interest is as follows: *197 *196 *826 In the instant case, Colonnade was discharged of 40.98 percent of the partnership liabilities by virtue of the sale of its 40.98-percent interest to Bernstein, Feldman, and Mason. The discharged liabilities, both recourse and nonrecourse, amounted to $ 8,098,298. The amount of gain is $ 1,456,363, calculated by the amount realized ($ 8,098,298) over basis ($ 6,641,935). Although the amount realized through discharged liabilities, primarily nonrecourse, was in excess of fair market value of the interest sold, the gain measured by the amount realized over basis is not limited by the lower*198 fair market value. To reflect the concessions and the foregoing,
If, in return for assets, any consideration is received, even if nominal in amount, the transaction will be classified as a sale or exchange.
1. In his notice of deficiency dated Oct. 8, 1982, respondent also determined an overassessment in the amount of $ 7,737.70 for petitioner's 1981 taxable year. Although petitioner placed taxable year 1981 in issue in its petition, at trial petitioner orally moved to dismiss that portion of this case as it related to taxable year 1981 on the ground that the Court lacked jurisdiction because respondent did not determine a deficiency with respect to that year. Respondent did not object to petitioner's motion. The Court took the motion under advisement. By order dated Aug. 15, 1988, the Court granted petitioner's motion and further ordered that those portions of the petition relating to taxable year 1981 be considered stricken from the petition. Of course, the granting of this motion does not limit the Court from considering facts with relation to taxes for other years as necessary to redetermine the amount of deficiency in 1978, 1979, and 1980, respectively, as provided in sec. 6214(b).↩
2. All section references, unless otherwise indicated, refer to the Internal Revenue Code of 1954 as amended and in effect during the years in issue. All Rule references refer to the Tax Court Rules of Practice and Procedure.↩
3. Generally the burden of proof is on the taxpayer.
4. Petitioner conceded various adjustments made by respondent, including net operating loss carryback/carryforward deductions for its taxable years in issue and related years. Petitioner also conceded respondent's disallowance of its distributable share of losses from Village Green Associates Partnership for fiscal years ended Jan. 31, 1978, and Jan. 31, 1979, as well as respondent's adjustment with respect to capital gain on the disposition of Village Green Associates.↩
5. As a result of its amendment to answer, respondent has relegated his original position to that of an alternative argument. Thus, if we conclude that the Apr. 1, 1978, transfer was not a sale of a partnership interest, the issues for our decision are: (1) Whether Colonnade's transfer of a portion of its partnership interest in Georgia King Associates, which is subject to nonrecourse and recourse liabilities in excess of basis, resulted in a taxable distribution pursuant to sec. 311(c); (2) whether the fair market value limitation of sec. 311(c) operates to relieve petitioner of gain from the discharge of nonrecourse liabilities; and (3) if the recognized gain is limited to fair market value over basis, whether the fair market value of Georgia King Village is $ 16,500,000 or $ 12,200,000.↩
6. During the years in issue, Colonnade also had investments in Village Green Associates, another housing project partnership, Legend Associates, Caesar and Cleopatra Associates, and Capital Housing Partners-XX (CHP-XX). Due to petitioner's concessions, the transactions respecting Village Green Associates which respondent challenged in his notice of deficiency are no longer in issue.↩
7. Respondent does not challenge the validity of petitioner's claimed net operating losses.↩
8. The U.S. Department of Housing and Urban Development (HUD) provided interest subsidy payments for the project pursuant to sec. 236 of title II of the National Housing Act, as amended, and rent supplement payments pursuant to sec. 101 of the Housing and Urban Development Act of 1965. Interest subsidy payments from HUD equal all but 1 percent of the interest rate of the mortgage.↩
9. Colonnade was a general partner and a limited partner of CHP-XX.↩
10. The difference in costs resulted from increased carrying and finance charges, increased working capital cost, new conversion fees, change orders and anticipated change orders, and the establishment of a development cost escrow account.↩
11. The offer and agreement to purchase stated that To-Sault and NJHFA believed that "development, construction, ownership and operation of the Project should be transferred to an experienced limited dividend sponsor working with To-Sault to provide more adequate financing for the Project."↩
12. As a limited dividend entity, Georgia King is entitled to a 2-percent return on its equity investment provided that the development cost escrow account is maintained at a certain level.↩
13. Pursuant to the agreement regarding development cost escrow, executed Nov. 12, 1976, the corpus of DCE account was to be used during the entire term of the mortgage loan for the purpose of paying (1) any expenses of operating the project, exclusive of capital expenditures in excess of income from operations; (2) the cost of capital improvements for design modifications to the project which (a) may be necessary or desirable for marketing the project, (b) would reduce the maintenance cost over the substantial portion of the term of the mortgage loan, (c) would benefit a substantial portion of the residents by providing desirable social services that will improve health, educational opportunities, and the general welfare of the residents, and (d) would make an important contribution to "the livability of the Project." The annual interest earned in the corpus was to be used during the term of the mortgage loan for the purpose of paying the partnership 50 percent of a 4-percent annual return on its equity investment in the project and a trustee's fee to NJHFA.
The acquisition fee, the management fee, and development fees were to be used for the purpose of paying (1) legal fees and other expenses associated with the conversion of ownership from a nonprofit entity to a limited dividend entity; (2) construction interest in an amount not to exceed $ 250,000 on the mortgage loan from NJHFA during the construction period; (3) any expenses of operating the project, including the payment of principal and interest on the mortgage loan from NJHFA from and after the date of commencement of the interest reduction payments and deed subsidy payments from HUD; and (4) for similar purposes stated earlier with respect to DCE, such as reducing maintenance or replacement cost over a substantial portion of the mortgage loan, or providing important contribution to livability of the project.↩
14. These fees were pledged by To-Sault to fund, in part, the DCE account pursuant to the provisions of a trustee agreement between the partnership, To-Sault, and NJHFA. Upon receipt of the funds from the partnership as deposited in the DEC account, NJHFA was required to deposit in the DCE account $ 1,100,000 consisting of an acquisition fee, a nonprofit development fee, and a nonprofit incentive management fee.↩
15. This document was subsequently filed with the State of New Jersey on Nov. 10, 1976.↩
16. For example, under the Oct. 20, 1976, agreement Colonnade was to make aggregate capital contributions on the following payment schedule:
| Date | Amount | |
| Oct. 15, 1976 | $ 63,300 | ($ 195,300 minus |
| $ 132,000 previously | ||
| paid) | ||
| June 15, 1977 | 459,300 | |
| June 15, 1978 | 330,000 | |
| June 15, 1979 | 290,000 | |
| June 15, 1980 | 240,000 | |
| June 15, 1981 | 210,000 | |
| June 15, 1982 | 200,000 | |
| June 15, 1983 | 190,000 | |
| June 15, 1984 | 50,000 |
17. Colonnade's net worth in January 1977 was in excess of $ 3.5 million.↩
18. When considering Colonnade's investment (cash contribution) of $ 195,300 in 1976 versus its tax loss of $ 1,096,819, Colonnade obtained a 5.6 to 1 tax writeoff from its Georgia King general partnership interest for fiscal year ending Jan. 31, 1977.↩
19. Martin Schwartzberg was the president of both CRHC and Capital Realty Investments, Inc. (CRI), the latter being a general partner of CHP-XX. Schwartzberg played a key role in the Georgia King and CHP-XX partnerships.↩
20. The parties have stipulated that if Schwartzberg had been called to testify at trial, he would have stated that he did not intend to characterize the transactions as sales. Rather, he would state that the transactions were changes in the ownership of partnership interests.↩
21. The CHP-XX contribution was stated in the revised amendment to be $ 896,300; however, the contribution total was understated by $ 100, the initial contribution amount. Thus, the total contribution was $ 896,400.↩
22. When considering Colonnade's investment (cash contribution) of $ 189,000 in 1977 versus its tax loss of $ 970,949, Colonnade obtained a 5.1 to 1 tax writeoff from its general partnership interest in Georgia King for fiscal year ending Jan. 31, 1978.↩
23. Colonnade did not treat the Jan. 19, 1977, "reallocation" transaction as a taxable event for fiscal year ending Jan. 31, 1977. Although respondent contends that the reallocation which occurred pursuant to the Jan. 19, 1977, revised amendment was a taxable sale which should have triggered short-term capital gain, it is not an issue in this case because fiscal year ending Jan. 31, 1977, was closed to respondent at the time of examination. We express no opinion as to whether the transaction constituted a taxable sale or exchange of a partnership interest.↩
24. We adopt the figure $ 834,300 because both parties used this figure on brief and at trial. However, we note that the sum of $ 764,700 and $ 69,000 is $ 833,700, a figure $ 600 less than the parties' figure.↩
25. A
26. See note 21,
27. Under the amendment to the partnership agreement, the actual amount of Colonnade's total capital contributions due and payable was $ 583,240. The figure of $ 514,240 reflects the refund payments due Colonnade in 1983 and 1984 in the amounts of $ 24,000 and $ 45,000, respectively.↩
28. The revised
| June 15, 1978 | $ 63,248 |
| June 15, 1979 | 61,908 |
| June 15, 1980 | 58,960 |
| June 15, 1981 | 55,208 |
| June 15, 1982 | 32,696 |
29. Both petitioner and respondent called expert witnesses to testify with respect to the fair market value of the Village, the only partnership property. Respondent's expert witness, Richard M. Chaiken, determined that the fair market value of the Village as of Apr. 1, 1978, was $ 16,500,000 or $ 6,761,700 for the 40.98-percent interest which Colonnade transferred. Petitioner's expert, Richard DiGeronimo, valued the Village as of Apr. 1, 1978, at $ 12,200,000 for a fair market value of $ 4,999,560 for Colonnade's 40.98-percent interest.↩
30. The parties stipulated that if Richard Lager, the national director of tax services for Alexander Grant & Co. (Alexander Grant), the accounting firm for the Georgia King partnership, were called to testify, he would testify that he advised the Alexander Grant accountant who prepared the 1978 partnership return for Georgia King that new members Bernstein, Feldman, and Mason were admitted to the partnership and that the 1978 partnership return of Georgia King would have to be corrected accordingly to reflect the change of ownership in partnership interests.↩
31. The $ 215,071 loss was calculated as follows:
| Interest in Georgia King | Period | Amount |
| 50.98% | 1/1/78 - 04/01/78 | $ 135,395 |
| 10.00 | 4/1/78 - 12/31/78 | 79,676 |
| 215,071 |
When considering Colonnade's investment, cash contributions of $ 46,256 in 1978 versus its tax loss of $ 215,071, Colonnade obtained a 4.6 to 1 tax writeoff from its Georgia King general partnership interest for fiscal year ending Jan. 31, 1979.↩
32. As part of his primary theory set forth in his amended answer, respondent's position is that the transaction is not governed by sec. 311(c) because petitioner did not make a distribution with respect to its stock in fiscal year ending Jan. 31, 1979. Respondent relies on
On the facts of this case, there is no indicia that Colonnade's transfer of a portion of its general partnership interest was intended to be a distribution to its shareholders. Moreover, the parties stipulated that no corporate distributions were made for fiscal years ending Jan. 31, 1975 through Jan. 31, 1980. Accordingly, because we have found that the disposition was a sale, we express no view on the novel issue of whether the fair market value limitation of sec. 311(c) operates to relieve petitioner of gain from the discharge of nonrecourse liabilities. Nor is it necessary for us to determine the fair market value of the property as of Apr. 1, 1978.↩
33. The characterization of the gain as ordinary under the recapture provisions is not before the Court.↩
34.
35. For purposes of
36. To minimize risk, the Wilkow Group desired only a limited partnership interest. The Wilkow Group also sought a secure rate of return on its investment to provide for an income stream to family members.↩
37. In order to obtain Empire's consent to such admission, Jupiter made certain concessions, including reorganizing Venture so that no reduction in Empire's proportioned partnership interest occurred, relieving Empire of any obligation to contribute capital necessary to meet the monthly payments to Wilkow Group, and loaning Empire $ 300,000 which was to be repaid solely out of Empire's proceeds from Venture. As a further inducement, Jupiter granted Empire the right to participate in any future development adjacent to the project.↩
38. Although we find the cases of
One commentator has suggested that "if the transaction is not between a partner and a partnership, obviously
39. We also find that
40. For a complete discussion of computation of gain or loss from the disposition of a partnership interest see
41. This calculation, which corresponds to respondent's calculation of gain on brief, is slightly higher than that set forth in the notice of deficiency. Because of the de minimis difference, respondent has not sought an increased deficiency amount. Accordingly, $ 1,454,874, the gain determined in the statutory notice, is the amount of gain in issue.
In its reply brief, petitioner objected to respondent's determination of gain as being contrary to that set forth in the statutory notice of deficiency. However, respondent's calculation of gain on brief more accurately comports with the record in this case. We note that the statutory notice of deficiency contains computational errors, specifically in that it sets forth petitioner's retained liabilities in Georgia King after Apr. 1, 1978, as being 19.165 percent (10 percent is correct) and sets forth distributable losses allocable to the period ending Apr. 1, 1978, as ($ 133,541), rather than ($ 135,395). In addition, the statutory notice did not include the DCE account in the amount of total partnership liabilities. As of Dec. 31, 1977 (the closest date to the Apr. 1, 1978, partnership amendment when liabilities are reflected in the record), total partnership liabilities, recourse and nonrecourse were $ 19,761,586, and included the DCE account. In determining its basis in the partnership, petitioner included the proportionate amount of all liabilities to its partnership interest. Other than perfunctory arguments, petitioner has not cited any authority for the proposition that such account should properly be excluded from the computation of liabilities nor do we find that any exception in
42. In the calculation set forth herein, a reduction was not made for the partnership distribution reflected by the reduction of liabilities from the
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