Upon the incorporation of Airway, petitioner's relatives and friends who were interested in investing in the airline made commitments to supply approximately $ 40,000 in capital. The percentage of these commitments actually honored is unclear from the record. It is clear, however, that Airway contributed a total of $ 17,373.80 for its interest in the partnership. No additional contributions were made to Trans Western by petitioner or the other Airway shareholders. In 1978, petitioner, acting through Airway, advanced a loan to the partnership in the amount of $ 6,117.18. Also, petitioner claimed that he made additional contributions to the partnership, through Airway, as follows: (1) by paying some of the partnership's expenses when the partnership was unable to make payment; (2) by using his personal credit cards to secure overnight accommodations for pilots who got stuck in an unscheduled city, which amounts were billed to him; and (3) by contributing an additional $ 10,000 by personal check.
A partner's share of partnership liabilities shall be determined in accordance with his ratio for sharing losses under the partnership agreement. In the case of a limited partnership, a limited partner's share of partnership liabilities shall not exceed the difference between his actual contribution credited to him by the partnership and the total contribution which he is obligated to make under the limited partnership agreement. However, where none of the partners have any personal liability with respect to a partnership (as in the case of a mortgage on real estate*219 acquired by the partnership without assumption by the partnership or any of the partners of any liability on the mortgage), then all partners, including limited partners, shall be considered as sharing such liability under section 752(c) in the same proportion as they share the profits. * * *
Respondent contends that Airway was not entitled to deduct*223 any losses after the close of its 1978 fiscal year because its basis in Trans Western was exhausted at this point. Respondent further contends that petitioner's basis in Airway was exhausted by the end of his 1979 calendar year, therefore, petitioner was precluded in any event from deducting any portion of the losses claimed by Airway.
Respondent's determination with respect to a taxpayer's basis in a partnership interest or a Sub S corporation is presumptively correct. See J. M. Perry & Co. v. Commissioner,120 F.2d 123">120 F.2d 123 (9th Cir. 1941), affg. a Memorandum Opinion of this Court. Petitioner has the burden of proving that: (1) Airway had adequate basis in its partnership interest to permit Airway to claim its proportionate share of the loses, and (2) he had sufficient basis in his interest in Airway to permit a deduction of his proportionate share of the losses claimed by Airway. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a).
Pursuant to section 704(a) Airway's proportionate share of the $ 253,218.51 loss incurred by the partnership for its taxable year ending March 31, 1978, was $ 84,406.17. However, section 704(d) limits Airway's deductible portion of this loss to its basis in the partnership, or $ 78,952.55. Therefore, pursuant to sections 704(d) and 705(a)(2)(A)*225 Airway's basis was reduced to zero by its allowable share of the partnership loss. The "at risk" provisions of section 465, however, limit the amount of loss Airway could claim, and pass through to its shareholders. Because Airway's contribution and loan of $ 23,490.98 was the only portion of its basis in the partnership interest for which it was "at risk" within the meaning of section 465, only $ 23,490.98 of the $ 84,406.17 loss allocated to Airway, for its taxable year ending March 31, 1978, could be allowed to pass through Airway to its shareholders. The excess of Airway's proportionate share of the loss over the amount claimed by Airway in the amount of $ 55,461.57 ($ 78,952.55 - $ 23,490.98) is subject to the carryover provisions of section 465(a)(2). This section permits such losses to be carried over to the succeeding taxable years. These losses will be deductible when the taxpayer injects more funds into the activity.
*227 At the beginning of its taxable year ending March 31, 1980, Airway's basis in its partnership interest was zero. During this taxable year the liabilities of Trans Western increased by $ 122,789.81 ($ 464,994.41 - $ 342,204.60), of which $ 30,697.45 (one-fourth) was Airway's proportionate share. Pursuant to section 752(a), Airway's basis in TransWestern increased to $ 30,697.45 at the end of the taxable year ending March 31, 1980.
The total loss incurred by the partnership for its 1980 taxable year was $ 439,212.27, of which $ 109,803.07 (one-fourth) was Airway's proportionate share. Under sections 704(d) and 705(a)(2)(A) Airway's allowable loss was $ 30,697.45, which decreased its basis in the partnership interest to zero. Airway was limited, however, in the amount of the 1980 loss it could claim because its basis in the partnership was composed solely of amounts attributable to the nonrecourse liabilities of the partnership. These amounts did not constitute amounts for which Airway was "at risk" within the meaning of section 465 because they were not amounts contributed to the activity by Airway, nor were they amounts borrowed for which Airway was liable. Therefore, the amount*228 of the 1980 loss which could be claimed by Airway, and passed through to its shareholders, was limited to zero. Airway's carryover losses, pursuant to section 465(a)(2), for its taxable year ending March 31, 1980, were $ 30,697.45.
Section 1374(b), as in effect for the years in issue, provided that a shareholder of a Sub S corporation may deduct his pro rata share of the corporation's net operating loss. Section 1374(c)(2) limited this deduction to the sum of (1) the adjusted basis of the shareholders's stock in such corporation, and (2) the adjusted basis of any indebtedness of the corporation to the shareholder. Therefore, the portion of the partnership losses petitioner can deduct for his taxable years depends on Airway's net operating loss, produced by deducting its share of the partnership losses, and petitioner's basis in his Airway interest at the end of each taxable*232 year.
Petitioner admits that he made no direct contributions to Airway other than his initial contribution of $ 17,373.80 and the loan of $ 6,117.18. He contends, however, that he should be allowed deductions both for amounts he purportedly loaned directly to the partnership and the liabilities of the partnership which he guaranteed. Sec. 1374(c).
*235 Also, we are unable to agree that the amounts representing service accounts guaranteed by petitioner should be considered part of petitioner's basis in Airway. As respondent correctly argues, petitioner must make actual disbursements on the corporation's indebtedness before he can increase his basis for purposes of deducting his proportionate share of Airway's net operating loss. Brown v. Commissioner,706 F.2d 755">706 F.2d 755 (6th Cir. 1983), affg. a Memorandum Opinion of this Court. It is well-settled that a shareholder's guaranty of a debt, even where such shareholder is primarily liable, does not give rise to indebtedness from the corporation to the shareholder, within the meaning of section 1374(c)(2)(B). Raynor v. Commissioner,50 T.C. 762">50 T.C. 762, 770-771 (1968). See also Borg v. Commissioner,50 T.C. 257">50 T.C. 257, 264 (1968). Where there is indirect borrowing involved the shareholder can secure such borrowing as an increase in his basis only by paying part or all of the obligation. Upon payment, the amount paid gives rise to an increase in the shareholder's*236 basis for purposes of deducting his proportionate share of the corporation's loss. Estate of Leavitt v. Commissioner,90 T.C. 206">90 T.C. 206, 211 (1988) (Court reviewed). See also Putman v. Commissioner,352 U.S. 82">352 U.S. 82 (1956); Underwood v. Commissioner,535 F.2d 309">535 F.2d 309 (5th Cir. 1976), affg. 63 T.C. 468">63 T.C. 468 (1975); Raynor v. Commissioner,50 T.C. 762">50 T.C. 762 (1968).
For tax purposes a corporate form is usually respected, but may be disregarded in rare instances where it is found that the corporation is a sham or unreal. See Moline Properties v. Commissioner,319 U.S. 436">319 U.S. 436 (1943); Higgins v. Smith,308 U.S. 473">308 U.S. 473, 477-478 (1940); Gregory v. Helvering,293 U.S. 465">293 U.S. 465 (1935). We see no reason to disregard the corporate form*238 in this case. Although Airway was a Sub S corporation and its shareholders treated like partners for tax purposes, Airway is a viable corporate entity. Airway had a business purpose and was created by petitioner for his advantage. It had a special function in the structure and operation of the airline. The corporate entity chosen by petitioner must be recognized even where the tax consequences are unfavorable to petitioner.
We recognize that petitioner acted out of business exigencies in his dealings with the partnership and many of its creditors. Petitioner, however, held his interest in Trans Western through Airway, and therefore, can derive tax benefits from the losses incurred by Trans Western only through Airway. Because petitioner guaranteed many of the partnership's accounts in his individual capacity and not as a shareholder of or officer for Airway, and because Airway cannot be ignored as a valid corpoorate entity, we hold that none of the amounts guaranteed by petitioner for the partnership can be considered part of his basis in Airway. The total deduction of losses generated by Trans Western which can be deducted by petitioner is limited to his basis in Airway of*239 $ 23,490.98 ($ 17,373.80 + 6,117.18).
Petitioner contends that even if we find that his basis in Airway was not increased by amounts owed by Trans Western on the accounts he guaranteed, he must be considered to be "at risk" within the meaning of section 465 for the approximate monthly expenses of the partnership. Should we accept petitioner's argument on this point, petitioner will seek to deduct the losses disallowed by respondent based upon petitioner's indirect relationship with the partnership.
The monthly service expenses of the partnership averaged approximately $ 50,000. Petitioner argues that this was the extent of his financial exposure for any given month of the years in issue. Petitioner contends that the liability for these amounts rested squarely on his shoulders. Petitioner has failed, however, to show how these liabilities were incurred by him in a manner sufficient to meet the standards of section 465.
A taxpayer is generally considered to be "at risk" as to any amounts borrowed for use in an activity with respect to which the taxpayer has personal liability for*240 payment from his personal assets. Sec. 465(b)(2). Respondent does not dispute the fact that petitioner executed guarantees for many of the service related credit lines of the partnership. On the contrary, respondent argues that although petitioner has shown that he guaranteed these accounts, petitioner has failed to show that he personally borrowed such sums or that he was personally liable for the repayment of these amounts. The credit accounts were all established in the name of the partnership. In all instances, the credit was extended to the partnership and the liabilities created through these accounts were paid by the partnership. section 465 for the amounts for which he executed guarantees.
*241 Petitioner contends that he should be considered "at risk" under the "ultimate liability" test set forth in Smith v. Commissioner,84 T.C. 889">84 T.C. 889 (1985). Petitioner's reliance on Smith is misplaced. In Smith the "ultimate liability" test was applied to adjustments of the partner's basis in his partnership interest. Although a similar test was applied to the "at risk" provisions in Abramson v. Commissioner,86 T.C. 360">86 T.C. 360 (1986), a case upon which petitioner also relies, Abramson states that a taxpayer is not "at risk" with respect to a guarantee if he is protected against economic loss. See also S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 87.
Respondent disallowed business expenses claimed by petitioner on his 1982 tax return in the amount of $ 3,533. These expenses included expenditures made for meals and lodging, telephone, copying, postage, automobile mileage and travel. Petitioner testified that the travel expenses were incurred by him through his efforts to leverage the purchase of another airline (Hawaiian Airlines), and his investment in a geothermal pump project. Respondent contends that*249 petitioner has failed to demonstrate that the expenses involved herein were "ordinary and necessary" within the meaning of section 162.
Whether the amounts disallowed by respondent constituted ordinary and necessary expenses incurred in the operation of petitioner's trade or business is a question of fact to be determined from the evidence presented, with the burden being on petitioner to overcome the presumed correctness of respondent's determination. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a).
Section 162(a) provides, in pertinent part, as follows;
(a) IN GENERAL. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including --
* * *
(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business, * * *
*250 To qualify as an allowable deduction the expenses must be both "ordinary" and "necessary" within the meaning section 162. In Deputy v. du Pont,308 U.S. 488">308 U.S. 488, 495 (1940), the Supreme Court held that the word "ordinary" as used in section 162 has "the connotation of normal, usual, or customary." In Commissioner v. Tellier,383 U.S. 687">383 U.S. 687, 689 (1966), the Supreme Court held that the term "necessary," as used in the contest of section 162, has been consistently construed to impose "only the minimal requirement that the expense be 'appropriate and helpful' for the development of the [taxpayer's] business."
At trial petitioner presented summary sheets which listed the disallowed expenses by category and amount. Petitioner testified with specificity with respect to each of the disallowed amounts for postage, copying, telephone and automobile milage expenses. We hold that petitioner's testimony along with the evidence presented carries his burden of proof with respect to these expenses. Consequently, petitioner may deduct expenses for postage, copying, telephone and automobile mileage.
With respect*251 to the expenses incurred for travel, including meals and lodging, section 1.162-2(a), Income Tax Regs., provides as follows:
Traveling expenses include travel fares, meals and lodging, and expenses incident to travel such as expenses for sample rooms, telephone and telegraph, public stenographers, etc. Only such traveling expenses as are reasonable and necessary in the conduct of the taxpayer's business and directly attributable to it may be deducted. If the trip is undertaken for other than business purposes, the travel fares and expenses incident to travel are personal expenses and the meals and lodging are living expenses. If the trip is solely on business, the reasonable and necessary traveling expenses, including travel fares, meals, and lodging, and expenses incident to travel, are business expenses. * * *
Whether a trip is related primarily to the taxpayer's business depends upon the facts and circumstances in each case. Sec. 1.162-2(b)(2), Income Tax Regs. Petitioner has the burden of proving that these travel expenses*252 were related primarily to his business of operating the airline.
Additionally, section 274(d) imposes more stringent substantiation requirements on the deduction of travel expenses. Section 274(d) provides that no deduction is allowed under section 162 for any travel expense (including meals and lodging while away from home) unless the taxpayer substantiates these expenses with adequate records or sufficient evidence corroborating his own testimony.
Petitioner testified that the travel expenses herein involved were incurred as a result of his efforts to leverage the purchase of another airline to help the failing financial condition of the partnership. Although we recognize that petitioner's motives were for business, we find that he failed to adequately substantiate his travel expenses for purposes of section 274(d). Therefore, respondent's disallowance of these expenses will be sustained.
Petitioner's testimony and the evidence presented on this issue is insufficient to meet his burden of showing that the expenses were incurred in the actual conduct of a research or experimental activity. Moreover, petitioner has failed to provide sufficient information on the base period research expenses. These research expenses are a necessary component of the computation of the research tax credit, and could act as a limitation upon an otherwise available credit.
1. In his amended answer, respondent asserts an increased deficiency for the 1982 taxable year in the amount of $ 16,202. Respondent bears the burden of proof with respect to this increase. Rule 142(a), Tax Court Rules of Practice and Procedure.↩
2. Petitioner, Susan W. Allen, is a party to this proceeding solely by filing a joint tax return with her husband. All references to petitioner, singularly, are to Edward H. Allen. ↩
3. During the incorporation process petitioner transferred $ 100 to the corporation to pay the filing fees and incidental expenses. Immediately after incorporation the entity was abandoned as the form through which the airline would operate. The corporation sat idle for about 3-1/2 years. ↩
44. We assume petitioner operated the business as a proprietorship before the formation of the partnership. ↩
5. Air Capital, Inc., was owned by Steward T. Waldrip. ↩
6. Carl Malouf was a long-time friend of petitioner as well as his attorney. Mark Peterson was a long-time business associate. Dorothy Allen was petitioner's mother. ↩
7. A lease was executed between petitioner and the partnership on Dec. 17, 1977. ↩
8. At trial, petitioner pointed out that, initially, the loans were extended to him and the partnership jointly, but later it became clear that the banks were extending the loans to him on the behalf of the partnership. ↩
9. Exhibit 13-M sets forth the liabilities of the partnership for the taxable years 1978, 1979, 1980 and 1081. The parties and the Court have relied upon Exhibit 13-M for taxable years 1978, 1979 and 1980. As to the 1981 taxable year, in addition to Exhibit 13-M which shows liabilities of $ 500,658.64 for 19981, we have access to the partnership's books and records which reflect liabilities in the amount of $ 642,455.26, for the same taxable year. Although this is no reflection on the figures set forth in Exhibit 13-M, we view the total liabilities for 1981, as set forth in the partnership's books and records, more controlling and will use them in our computations with respect to partners' basis in their interest and the liabilities assumed by the corporation on Apr. 1, 1981. (See note 12, infra.↩) The use of the liabilities in the larger amount does not significantly affect the outcome of the case. Therefore, we will not apply the figure as set forth in Exhibit 13-M for the 19981 taxable year as respondent seeks to do.
10. During the partnership's 1978 taxable year, Airway was a one-third partner. For taxable years 1979 through 1981 Airway was a one-fourth partner. ↩
11. The corporate shell was activated to receive the business operations of the partnership. Prior to this the corporation had been inactive. ↩
13. The disallowance of these deductions and the resulting increase in petitioner's gross income resulted in automatic mathematical adjustments to petitioners' medical expense deductions. ↩
14. In the Subchapter S Revision Act of 1982, Congress revised the rules governing Sub S corporations. Subchapter S Revision Act of 1982, Pub. L. 97-354, 96 Stat. 1669. Because the revisions as set forth in the 1982 Act apply to taxable years beginning after Dec. 31, 1982, they are not applicable in this case. ↩
15. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. All rule references are to the Tax Court Rules of Practice and Procedure. ↩
16. Sec. 705(a) provides, in pertinent part, as follows:
(a) GENERAL RULE. -- The adjusted basis of a partner's interest in a partnership shall, except as provided in subsection (b), be the basis of such interest determined under sec. 722 (relating to contributions to a partnership) or sec. 742 (relating to transfers of partnership interests) --
* * *
(2) decreased (but not below zero) by distributions by the partnership as provided in section 733 and by the sum of his distributive share for the taxable year and prior taxable years of --
(A) losses of the partnership, and
(B) expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account, and
(3) decreased (but not below zero) by the amount of the partner's deduction for depletion under section 611 with respect to oil and gas wells. ↩
17. Sec. 705(d) provides as follows:
(d) LIMITATION ON ALLOWANCE OF LOSSES. -- A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss occurred. Any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership. ↩
18. Sec. 465↩ was added to the Code by the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1531, and is applicable to taxable years beginning after Dec. 31, 1975. It was enacted to combat a perceived abuse which allowed a taxpayer to deduct tax losses in excess of the amount of his economic investment. S. Rept. 94-938 (1976), 1976-3 C.B/ (Vol. 3) 49, 86.
19. For the years in issue sec. 465(a)(1) provided, in pertinent part, as follows:
(a) LIMITATION TO AMOUNT AT RISK. --
(1) IN GENERAL. -- In the case of --
(A) an individual,
(B) an electing small business corporation (as defined in section 1371(b)), and
(C) a corporation with respect to which the stock ownership requirement of paragraph (2) of section 542(a) is met,
engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year. ↩
20. For purposes of computing Airway's partnership basis and petitioner's interest in Airway, we treat this liability as being fully assumed solely by petitioner. Therefore, in determining Airway's basis in Trans Western and petitioner's basis in Airway we will use the $ 17,373.80 amount plus the loan. ↩
24. The excess of Airway's proportionate share of the partnership losses over its allowable amount can be carried forward to succeeding taxable years in which the excess loss is repaid. See sec. 704(d)↩.
25. No part of Airway's basis in Trans Western constituted funds or property contributed by Airway or amounts borrowed for which Airway was liable. ↩
26. The "at risk" provisions do not affect the computation of a partner's basis. See sec. 1.465-(1)(e), Proposed Income Tax Regs., 44 Fed. Reg. 32247 (June 5, 1979); H. Rept. 94-658 (1976), 1976-3 C.B. (Vol. 2) 799. See also sec. 705(a)(2)(A)↩.
28. The late completion of the written documentation for the transfer of the business operations to the corporation does not materially affect the outcome of this case. ↩
30. For the years in issue the secs. governing the taxation of Sub S corporations were secs. 1371 through 1379. These secs. have been redesignated by Pub. L. 97-354, 96 Stat. 1669, for taxable years beginning after 1982. ↩
31. Sec. 1374 provided, in pertinent part, as follows:
(a) GENERAL RULE. -- A net operating loss of an electing small business corporation for any taxable year shall be allowed as a deduction from gross income of the shareholders of such corporation in the manner and to the extent set forth in this section.
(b) ALLOWANCE OF DEDUCTION. -- Each person who is a shareholder of an electing small business corporation at any time during a taxable year of the corporation in which it has a net operating loss shall be allowed as a deduction from gross income, for his taxable year in which or with which the taxable year of the corporation ends * * * an amount equal to his portion of the corporation's net operating loss * * *. The deduction allowed by this subsection shall, for the purposes of this chapter, be considered as a deduction attributable to a trade or business carried on by the shareholder.
(c) DETERMINATION OF SHAREHOLDER'S PORTION. --
(1) IN GENERAL. -- For purposes of this section, a shareholder's portion of the net operating loss of an electing small business corporation is his pro rata share of the corporation's net operating loss * * * for his taxable year in which or with which the taxable year of the corporation ends. For purposes of this paragraph, a shareholder's pro rata share of the corporation's net operating loss is the sum of the portions of the corporation's daily net operating loss attributable on a pro rata basis to the shares held by him on each day of the taxable year. For purposes of the preceding sentence, the corporation's daily net operating loss is the corporation's net operating loss dividend by the number of days in the taxable year.
(2) LIMITATION. -- A shareholder's portion of the net operating loss of an electing small business corporation for any taxable year shall not exceed the sum of --
(A) the adjusted basis * * * of the shareholder's stock in the electing small business corporation, determined as of the close of the taxable year of the corporation, * * * and
(B) the adjusted basis * * * of any indebtedness of the corporation to the shareholder, determined as of the close of the taxable year of the corporation * * *. ↩
32. Airway had no other source of income or deductions other than its partnership interest in Trans Western. ↩
33. Because Airway's fiscal year ended on Mar. 31, the losses deducted by Airway would be deducted by petitioner in the calendar year in which Airway's fiscal year ended. ↩
34. At trial, petitioner testified that he considered himself personally liable on the credit guarantees but was unsure whether he was legally liable. Petitioner contended that he considered himself liable for the total expenses of the day-to-day operations. These expenses had a monthly average as follows: payroll -- $ 35,000; hotel accommodations -- $ 600; telephone -- $ 4,000; utilities -- $ 400; airplane fuel -- $ 23,000; maintenance parts -- $ 5,000; lease payments -- $ 3,000; and airline ticket -- $ 200. He testified that he was required to pledge his home as security with the company that supplied Trans Western with fuel for the airplanes. This policy was later abandoned by the fuel company. Petitioner contends that because he was personally liable on the guarantees, the amounts paid under the guarantees should be considered as his additional contribution to the partnership. ↩
35. The other means by which petitioner may deduct such a loan, if established, would be pursuant to sec. 166. Petitioner has the burden of showing that the debt was a real debt and that it became a bad debt in the year petitioner seeks to deduct such amount. However, petitioner has not shown that he was entitled to a bad debt deduction. See sec. 166(a) and (d). ↩
36. Although petitioner's guaranty was required for Trans Western's service accounts such as gas, electricity, telephone, airplane repairs, payroll, shared reservations service and airline tickets, these accounts were obtained in the name of the partnership and all amounts incurred on them were paid by the partnership. Petitioner has not produced any evidence to substantiate his claim that some of the amounts incurred on these accounts were paid by him. ↩
37. Petitioner testified that, on occasion, he paid some of the debts of the partnership that were either billed to him on his personal credit cards or paid by him during one of the partnership's bad financial periods. However, petitioner has not produced any evidence to substantiate his claim. ↩
38. From the events surrounding respondent's efforts to collect a delinquent debt for Federal withholding and excise taxes we find evidence to support our belief that petitioner would actually resist being held liable for the partnership's debts and would seek indemnification for any amounts he was called upon to pay on the behalf of the partnership. Petitioner testified that he represented to every agent of the Internal Revenue Service that the debt was the legitimate obligation of the corporation, for which he was not responsible. Petitioner testified, further, that he left the corporation for a period of time because he had lost confidence in the shareholders who had taken the position that because the Internal Revenue Service was seeking to collect the tax liability from petitioner, which he resisted, there was potential conflict of interest for petitioner to continue in his position with the corporation. During respondent's efforts to collect the payroll taxes petitioner consistently maintained that the taxes were the obligation of the partnership and, subsequently, that of the corporation. Petitioner refused to pay any part of this debt, and appeared to by annoyed at the thought that respondent would seek to hold him liable. ↩
39. At trial, and in both his opening and reply briefs, respondent argued that the transfer of the partnership's business to the corporation did not qualify for nonrecognition of gain pursuant to sec. 351(a). By Notice of Concession, filed Oct. 1, 1986, respondent conceded this issue. Therefore, we will not address any of the arguments respondent made with respect to the issue of the nonapplication of sec. 351↩ in this case.
40. Sec. 357(c) provides, in pertinent part, as follows:
(c) LIABILITIES IN EXCESS OF BASIS. --
(1) IN GENERAL. -- In the case of an exchange --
(A) to which section 351 applies, or
(B) to which section 361 applies by reason of a plan of reorganization within the meaning of section 368(a)(1)(D),
if the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. ↩
41. Generally, Airway's proportionate share of the basis of the assets transferred (inside basis). Airway's proportionate share of the total adjusted basis of the assets transferred to the corporation was $ 33,712.26, and the basis in its partnership interest at the date of the transfer was $ 37,410. Because Airway did not purchase its partnership interest, the inside and outside basis, generally, should correspond. We attribute this discrepancy in bases to petitioner's inadequate record keeping. We do not place great emphasis on the difference in figures here because it does not materially affect the outcome of this case. ↩
42. Respondent argues on brief that Airway's proportionate share of the liabilities assumed by the corporation was $ 124,164.66, and points to Exhibit 15-O as support for this figure. Exhibit 15-O shows each partner's share of the partnership liabilities assumed by the corporation as $ 125,164.66 for a total of $ 500,658.64. This figure has not been used in our computation of Airway's basis in Trans Western, and it will not be used in computing Airway's percentage of the gain triggered by section 357(c). (See note 9, supra↩).
43. Respondent argues that at the time of the transfer, Airway's adjusted basis in its partnership interest was $ 1,960.85. As support of this contention respondent points to Exhibit 14-N which contains this figure. Exhibit 14-N sets forth, as each partner's basis, an amount which includes the very losses respondent disallowed. We are unable to agree with respondent that this is the correct figure to be used for Airway's basis. ↩
44. See Proposed Income Tax Regs. sec. 1.465-12(a), 44 Fed. Reg. 32240 and 1.465-66(a), 44 Fed. Reg. 32249↩ (June 5, 1979). We are cognizant of the fact that proposed regulations merely state respondent's position on a relevant issue and has no effect of law. However, we agree with respondent's position as set forth in the proposed regulation cited herein.
46. Sec. 731(a)(1) provides, in pertinent part, as follows:
EXTENT OF RECOGNITION OF GAIN OR LOSS ON DISTRIBUTION.
(a) PARTNERS. -- In the case of a distribution by a partnership to a partner --
(1) gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner's interest in the partnership immediately before the distribution * * * ↩
47. Sec. 44F↩ was added to the Code in 1981 by Pub. L. 97-34, sec. 221(a), 95 Stat. 241. It was later redesignated sec. 30 by Pub. L. 98-369, sec. 471(c), 98 Stat. 826, and later redesignated sec. 41 by Pub. L. 99-514, sec. 231(d)(2), 100 Stat. 2178.
48. In-House Research Expenses are defined in sec. 44F(b)(2)(A) as:
(i) any wages paid or incurred to an employee for qualified services performed by such employee,
(ii) any amount paid or incurred for supplies used in the conduct of qualified research, and
(iii) any amount paid or incurred to another person for the right to use personal property in the conduct of qualified research. ↩
49. Sec. 44F(b)(2)(B) describes "qualified services" as follows:
The term "qualified services" means services consisting of --
(i) engaging in qualified research, or
(ii) engaging in the direct supervision of direct support of research activities which constitute qualified research.
50. For purposes of sec. 44F, the term "research or experimental" has generally the same meaning as used in sec. 174. See sec. 44F(d). Sec. 174↩ provides that research or experimental expenditures which are paid or incurred by a taxpayer in connection with his trade or business as expenses which are not chargeable to capital account shall be allowed as a deduction in the taxable year in which they are incurred.
51. Petitioner testified that his pro rata share of the costs for the working parts totaled $ 541.06, and his share of the patent attorney's expense for the 1982 taxable year totaled $ 300. ↩
52. We note that petitioner does not rely on sec. 174 for purpose of deducting the research expenses. For purposes of sec. 174, the Supreme Court, in Snow v. Commissioner,416 U.S. 500">416 U.S. 500↩ (1974), relaxed somewhat the "active trade or business" requirement.