563 F.3d 1280 (Fed. Cir. 2009), 2008-5107, Bassing v. United States

Docket Nº:2008-5107.
Citation:563 F.3d 1280
Party Name:Charles W. BASSING, III, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
Case Date:April 16, 2009
Court:United States Courts of Appeals, Court of Appeals for the Federal Circuit

Page 1280

563 F.3d 1280 (Fed. Cir. 2009)

Charles W. BASSING, III, Plaintiff-Appellant,


UNITED STATES, Defendant-Appellee.

No. 2008-5107.

United States Court of Appeals, Federal Circuit.

April 16, 2009

Page 1281

Patrick G. Dooher, Buchanan, Ingersoll & Rooney, PC, of Washington, DC, argued for plaintiff-appellant.

Carol Barthel, Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were Nathan J. Hochman, Assistant Attorney General, and Michael J. Haungs, Attorney.

Before BRYSON, LINN, and MOORE, Circuit Judges.

BRYSON, Circuit Judge.

The question presented in this income tax refund case is whether the release of one partner's obligation to restore a capital account deficit is a " partnership item," as that term is used in the Tax Equity and Fiscal Responsibility Act of 1982 (" TEFRA" ), Pub.L. 97-248, 96 Stat. 324. The Court of Federal Claims held that the release at issue in this case is most appropriately treated as a partnership item. We agree, and we therefore affirm.


The 1110 Bonifant Limited Partnership was organized in 1985 under Maryland law for the purpose of developing an office building in Silver Spring, Maryland, to be held as an investment property. The partnership agreement named Richard S. Cohen and appellant Charles W. Bassing, III, as the two general partners. The two of them were also limited partners along with several other individuals and entities, including three family limited partnerships. The partnership maintained a capital account balance for each partner, which reflected each partner's contributions to the partnership, his allocation of the partnership's income, and his share of the partnership's expenditures and losses. The partnership agreement, as amended in 1988, provided that in the event of the partnership's liquidation, any partner with a negative capital account was obligated to restore the amount of the deficiency to the partnership.

In the late 1980's, the partnership became unable to satisfy its obligations. It subsequently entered into a settlement agreement with its principal creditor on February 1, 1991, and was treated as having liquidated as of that date. At that time, Mr. Bassing had a total negative capital account balance of $882,871 that he was obligated to restore to the partnership. Mr. Bassing was insolvent, however. As a consequence, when the partners entered into the settlement agreement with the partnership's creditor, they also entered into a separate agreement releasing Mr. Bassing from his obligations to the partnership. In that agreement, Mr. Bassing waived certain rights he had under the partnership agreement, as amended.

On April 15, 1992, Mr. Bassing filed his income tax return for the 1991 tax year. In that return, he treated the release from his deficit restoration obligation as a deemed sale of his interests in the partnership, and he reported a long-term capital gain of $882,871 from that transaction. He reported tax due of $68,695 with respect to that return, but he did not pay any portion of that sum at that time.

Through the accumulation of interest and penalties, Mr. Bassing's tax obligation for 1991 rose to $152,539 by 2002. He paid that amount on April 8, 2002. Later that year, Mr. Bassing filed an amended return for 1991. In his amended return, he claimed that the release of his deficit

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restoration obligation should have been characterized as income from the cancellation of a debt rather than as income from a deemed sale, and that in light of his insolvency, most of the gain from that transaction should have been excluded from his gross income for 1991. The Internal Revenue Service denied his claim.

Mr. Bassing then filed this action in the Court of Federal Claims seeking a refund of his 2002 payment. The government responded that his action was barred by the operation of 26 U.S.C. § 7422(h), which prohibits refund actions attributable to " partnership items," as that term is defined by 26 U.S.C. § 6231(a)(3), except in limited circumstances not present in this case. Mr. Bassing replied that the release was not a " partnership item" under 26 U.S.C. § 6231(a)(3), but was an item that should be treated at the partner level, and that the bar of...

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