Alexander v. Comm'r of Internal Revenue

• Decision Date: 25 October 1990
• Docket Number: 20497-86,Docket Nos. 15015-86,21084-86,20498-86,20205-86,21483-86.,20341-86,21101-86,20947-86,20915-86,21473-86,21085-86,21100-86,20403-86,20946-86,20852-86,18367-86,20405-86,20478-86,21097-86,20457-86,21099-86,21018-86,20389-86,20944-86,20945-86,20404-86,20291-86,21382-86,20387-86,18488-86,20476-86,20875-86,21434-86,20450-86,20342-86,20388-86,21102-86
• Citation: 95 T.C. 467,95 T.C. No. 33
• Parties: CHARLES F. ALEXANDER AND YVETTE M. ALEXANDER,ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

95 T.C. 467

95 T.C. No. 33

CHARLES F. ALEXANDER AND YVETTE M. ALEXANDER,ET AL.,1 Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 15015-86

18488-86

20291-86

20342-86,20388-86

20403-86

20405-86

20457-86

20478-86

20498-86

20875-86

20944-86

20946-86

21018-86

21085-86

21099-86

21101-86

21382-86

21473-86

18367-86

20205-86

20341-86

20387-86

20389-86

20404-86

20450-86

20476-86

20497-86

20852-86

20915-86

20945-86

20947-86

21084-86

21097-86

21100-86

21102-86

21434-86

21483-86.

United States Tax Court

Filed October 25, 1990.

The Court filed its opinion in this case at T.C. Memo. 1990-141. Ps were limited partners in certain partnerships involved in computer software development. We held that the payees of certain promissory notes issued by the partnerships held interests in the partnerships, other than interests as creditors, under sec. 465(b)(3)(A). R moved for reconsideration, calling into question whether sec. 465(b)(3)(A) applies to the activities of the partnerships.

HELD: The partnerships were not engaged in the activity of leasing sec. 1245 property, under sec. 465(c)(1)(C). The partnerships were engaged in an activity covered by sec. 465(c)(3)(A). HELD FURTHER: Sec. 465(b)(3)(A) does not apply in this case because regulations have not been prescribed by the Secretary as mandated by sec. 465(c)(3)(D). To the extent it provides otherwise, we will no longer follow Jackson v. Commissioner, 86 T.C. 492 (1986), affd. on other issues 864 F.2d 1521 (10th Cir, 1989). Robert R. Rubin and Kimberly Mitchell-Bott, for the petitioner Kathryn Molakides in docket No. 18367-86.

Harve M. Lewis and Joanne L. Rood, for the respondent.

SUPPLEMENTAL OPINION

PARR, JUDGE:

This matter is before the Court on respondent's motion for reconsideration filed April 18, 1990. Petitioner Kathryn Molakides in docket No. 18367-86 filed notice of no objection to respondent's motion. No other petitioner has filed a response to respondent's motion.

Respondent asks us -- against his own interest -- to find that the at-risk rules of section 465² do not apply to the activity of the partnerships in question, IF we determine it was a ‘new activity‘ under section 465(c)(3)(A). This is because, for twelve years, respondent has failed to promulgate the regulations required to make that section viable. See sec. 465(c)(3)(E).³ See also Transco Exploration Company v. Commissioner, 95 T.C. ___ (1990); Idaho First National Bank and its Subsidiary v. Commissioner, 95 T.C. ____ (1990); Krause v. Commissioner, 92 T.C. 1003, 1025-1026 (1989); Honeywell, Inc. v. Commissioner, 87 T.C. 624 (1986).

Since the majority's opinion contains no indication that the limited partnerships had engaged in any leasing activities during the tax years at issue, I concur with the result reached by the majority.

Tax Court, 1990.

Alexander v. C.I.R.95 T.C. No. 33, 95 T.C. 467, Tax Ct. Rep. (CCH) 46,946, Tax Ct. Rep. Dec. (P-H) 95.33

1 The cases consolidated herewith are set forth in the Appendix.

2 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue.

On March 19, 1990, the Court filed its Memorandum Findings of Fact and Opinion in this case, which was reported at T.C. Memo. 1990-141. The case presented issues related to five limited partnerships involved in computer software development: Blueprint Software (BS), Blueprint Software Professional (BSP), Quoin Software (Quoin), Matrix Business Computers (Matrix), and Computech Research Investors, Ltd. (CRI). The year in issue for BS, BSP, Quoin, and Matrix was 1982, and the year in issue for CRI was 1980. All petitioners were limited partners in one or more of the partnerships.

The third issue we considered was whether the payees of promissory notes made by each of the limited partnerships (except for CRI) held interests in the activities being financed, other than interests as creditors, within the meaning of section 465(b)(3)(A). Citing Jackson v. Commissioner, 86 T.C. 492 (1986), affd. on other issues 864 F.2d 1521 (10th Cir. 1989), and its progeny, we held that they did. Accordingly, those petitioners who were limited partners were not at risk with respect to the portion of the bases of their partnership interests attributable to the notes. To the extent petitioners were not at risk, their distributive shares of partnership losses were not deductible.

It is the policy of this Court to try all the issues raised in a case in one proceeding to avoid piecemeal and protracted litigation. The granting of a motion for reconsideration rests within the discretion of the Court, and will not be granted unless unusual circumstances or substantial error is shown. Vaughn v. Commissioner, 87 T.C. 164, 166-167 (1986).

Respondent's motion questions whether section 465(b)(3)(A) applies to the software development activities of the limited partnerships. Respondent freely admits that neither party focused on this issue until now. Nevertheless, our previous holding that petitioners were not at risk was based upon the premise that section 465(b)(3)(A) applied to the software development activities of the partnerships. Accordingly, it is imperative that we address this issue.

Section 465 was enacted as part of the Tax Reform Act of 1976 (TRA 76). Sec. 204, Pub. L. 94-455, 90 Stat. 1520, 1531. In general, any loss from an activity governed by section 465 is allowed only to the extent of the aggregate amount that a taxpayer is at risk for such activity at the close of the taxable year. Sec. 465(a). Section 465(b)(3)(A) provided that amounts borrowed for use in an activity are not considered to be at risk if such amounts are borrowed from any person who ‘has an interest (other than an interest as a creditor) in such activity.‘ As originally enacted, the at-risk rules applied only to taxpayers engaged in any of four listed activities (‘old activities ‘), including leasing any section 1245 property (as defined in section 1245(a)(3)). Sec. 465(c)(1).⁴

IS THE ACTIVITY IN QUESTION AN ‘OLD ACTIVITY‘?

In his motion for reconsideration respondent, for the first time, suggests that the limited partnerships were engaged in the leasing of section 1245 property, within the meaning of section 465(c)(1)(C). If respondent is correct, then the at-risk limitation of section 465(b)(3)(A) applies, and petitioners would not be allowed to deduct the portion of the bases of their partnership interests attributable to the notes.

Respondent's entire argument on this point is as follows:

If the Court concludes that the petitioners were engaged in the leasing of section 1245 property, which is an old activity under section 465(c)(1)(C), then section 465(b)(3) is applicable to the petitioners' activities.

No reasoning or citations to the record or to law are offered to assist the Court in reaching such a conclusion. We conclude the activity in question is not an old activity.

The at-risk rules of section 465 are to be applied to the relevant facts of a transaction as they exist at the end of each taxable year. Krause v. Commissioner, 92 T.C. 1003, 1025 (1989).

The term ‘section 1245 property‘ is defined in section 1245(a)(3) as including personal property ‘which is or has been property of a character subject to the allowance for depreciation provided in section 167.‘ The term ‘personal property‘ is defined in the regulations as including both tangible and intangible personal property. Sec. 1.1245-3(b), Income Tax Regs.

Computer software is intangible personal property. Ronnen v. Commissioner, 90 T.C. 74, 100 (1988). Since computer software is intangible personal property it is depreciable if at all under section 167 (not ACRS or MACRS). See sec. 168.

Section 167(a) provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, including obsolescence, of property used in a trade or business. ‘The term 'property’ includes intangibles.‘ Computing & Software, Inc. v. Commissioner, 64 T.C. 223, 231-232 (1975). Section 1.167(a)-3, Income Tax Regs., sets forth the ground rules for the allowance of the depreciation deduction for intangibles, as follows:

Sec. 1.167(a)-3 Intangibles.

If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. No deduction for depreciation is allowable with respect to goodwill. * * *

We hold that, in the present case, the computer software was not ‘property of a character subject to the allowance for depreciation provided in section 167 ‘ for two reasons. First, during the years in issue, which were start-up years, the software had not yet been developed. There was only a contract to develop such software. There was, in fact, not yet any ‘property‘ capable of being depreciated. And, secondly, there is no evidence in the record from which we can estimate a useful life with reasonable accuracy, as required by the regulations.

Accordingly, we hold that the software was not section 1245 property.⁵ As a result, the limited partnerships were not engaged in the activity of leasing section 1245 property, under section 465(c)(1)(C).

DO THE AT-RISK LIMITATIONS APPLY TO ‘NEW ACTIVITIES‘?

Respondent alternatively argues that if the limited partnerships were not engaged in the activity of leasing section 1245 property, then section 465(b)(3)(A) does not apply to this case. Respondent makes this argument even though it is adverse to his interest in this case. If respondent is correct, then our previous holding that the at-risk rules...