Lipke v. Comm'r of Internal Revenue
| Decision Date | 05 October 1983 |
| Docket Number | 13982–82,13984–82.,13983–82,13981–82,Docket Nos. 12898–80 |
| Citation | 81 T.C. 689,81 T.C. No. 41 |
| Parties | KENNETH E. LIPKE and PATRICIA LIPKE, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Marc Equity Partners I, a limited partnership, was organized in 1972 for the purpose of acquiring and operating apartment buildings. Shortly after formation, limited partnership interests were sold to 14 investors for a total amount of $1,175,000. All profits and losses were allocated to these limited partners.
In 1974 and 1975, the partnership experienced severe financial problems which necessitated additional capital contributions. On October 1, 1975, six of the original limited partners, one of the general partners, and three other persons (herein collectively referred to as the Class B limited partners) contributed a total of $300,000 to the partnership in exchange for limited partnership interests. An October 1, 1975, amendment to the partnership agreement reallocated 98 percent of all of the partnership's 1975 profits and losses to the Class B limited partners in consideration for these additional capital contributions. The remaining two percent of the partnership's 1975 profits and losses was reallocated to the general partners.
Held: The reallocation of losses accrued by the partnership before October, 1975, to the Class B limited partners is not permitted by section 706(c)(2)(B) because it was made as a result of the additional capital contributions. It makes no difference that the additional capital was contributed by, and the resulting retroactive reallocation was made to, both new and existing partners. Richardson v. Commissioner, 76 T.C. 512 (1981), affd. 693 F.2d 1189 (5th Cir. 1982), extended.
Held further: The partnership's retroactive reallocation of losses to the general partners is permissible since it did not result from additional capital contributions.
Held further: The partnership is not now entitled to use the “year-end totals” method of accounting in order to allocate its 1975 losses ratably over the year. Donald J. Holzman, for the petitioners.
Louis John Zeller, Jr., for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax as follows:
+---------------------------------------------------------+
¦ ¦Docket No. ¦Year ¦Deficiency ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------------------+------------+------+------------¦
¦Kenneth E. Lipke ¦12898-80 ¦1976 ¦$16,032 ¦
+------------------------+------------+------+------------¦
¦and Patricia Lipke ¦ ¦ ¦ ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------------------+------------+------+------------¦
¦James H. Williams ¦13981-82 ¦1972 ¦7,820 ¦
+------------------------+------------+------+------------¦
¦and Diane Williams ¦ ¦1973 ¦630 ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦1975 ¦69,175 ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦1976 ¦21,286 ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------------------+------------+------+------------¦
¦Lawrence Reger ¦13982-82 ¦1975 ¦89,303 ¦
+------------------------+------------+------+------------¦
¦and Bernice Reger ¦ ¦1976 ¦25,113 ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------------------+------------+------+------------¦
¦Francis M. Williams ¦13983-82 ¦1972 ¦2,581 ¦
+------------------------+------------+------+------------¦
¦and Marie K. Williams ¦ ¦1973 ¦9,493 ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦1975 ¦53,708 ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦1976 ¦25,924 ¦
+------------------------+------------+------+------------¦
¦ ¦ ¦ ¦ ¦
+------------------------+------------+------+------------¦
¦Clarence Rautenstrauch ¦13984-82 ¦1975 ¦1,873 ¦
+------------------------+------------+------+------------¦
¦and Jennie Rautenstrauch¦ ¦1976 ¦11 ¦
+---------------------------------------------------------+
These cases have been consolidated for purposes of trial, briefing, and opinion. After concessions, the issues are (1) whether a certain partnership's retroactive reallocation of losses in 1975 to both new and existing partners was allowable under the “varying interest” rules of section 706(c)(2)(B),2 and if not, (2) whether petitioner is now entitled to use the “yearend totals” method of accounting in order to allocate its 1975 losses ratably over the year.3
The facts have been fully stipulated and are so found.
Petitioners Clarence Rautenstrauch and Jennie Rautenstrauch resided in Florida when they filed their petition herein. All other petitioners resided in New York when they filed their petitions herein.4
In 1972 petitioner Lawrence Reger (Reger), petitioner Clarence Rautenstrauch (Rautenstrauch), and Herbert M. Luksch (Luksch), formed Marc Equity Partners I, a limited partnership. The partnership was organized for the purpose of acquiring and operating apartment buildings in the suburbs of Buffalo, New York. Reger, Rautenstrauch, and Luksch were the general partners, and Luksch was also the initial limited partner. The general partners made a capital contribution in the total amount of $100. Shortly after formation of the partnership, limited partnership interests were sold to 14 investors for a total amount of $1,175,000, and Luksch's interest as a limited partner was liquidated. With one exception, the partnership agreement allocated all profits and losses to the limited partners.5 At all relevant times, the partnership computed its taxable income on a calendar year basis using the accrual method of accounting.
In 1972 and 1973 the partnership acquired several apartment buildings. At all relevant times, these apartment buildings were subject to mortgages. In 1974 and 1975, the partnership experienced severe financial problems and defaulted on the mortgages. After the mortgagee foreclosed on one of the apartment buildings, the partnership obtained additional capital of $300,000 in order to avoid losing its remaining apartment buildings. Of the $300,000, $84,000 was contributed by six of the fourteen original limited partners who together held interests in the partnership totaling 28 percent. The remaining $216,000 was contributed by petitioners James H. Williams (James), Francis M. Williams (Francis), Kenneth E. Lipke (Lipke), (herein sometimes collectively referred to as the new partners), and Reger (one of the general partners), in return for new limited partnership interests. All of these capital contributions were made on October 1, 1975. Also effective October 1, 1975, one of the original limited partners (herein the withdrawing partner) sold his entire limited partnership interest to several of the other original limited partners.
In connection with these additional capital contributions, effective October 1, 1975, the general and limited partners executed an amendment to the partnership agreement (herein the Amendment). The Amendment created two classes of limited partners. All of the original limited partners, except for the withdrawing partner, were designated as Class A limited partners. Together with Reger and the new partners, the six original partners who made new capital contributions also became Class B partners. Reger, Rautenstrauch, and Luksch continued as the general partners.
The Amendment also provided that the partnership was to be owned 49 percent by the Class A limited partners, 49 percent by the Class B limited partners, and 2 percent by the general partners. Accordingly, before and after the new capital contributions were made, the partnership records reflected ownership percentages as follows:
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