Bassing v. U.S.

Citation563 F.3d 1280
Decision Date16 April 2009
Docket NumberNo. 2008-5107.,2008-5107.
PartiesCharles W. BASSING, III, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals for the Federal Circuit

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.

I

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 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 section 7422(h) therefore did not apply. The Court of Federal Claims agreed with the government that the release was a partnership item and that Mr. Bassing's claim was therefore barred. The court noted that the release "was signed by eight partners" and "was a comprehensive document that defined the partners' obligations to each other." The court concluded that it is "difficult to imagine an item more appropriate for treatment at the partnership level than the release of one of the partner's financial obligations to the partnership," and it therefore granted the government's motion for summary judgment.

II

On the merits of the underlying tax question, Mr. Bassing contends that the obligation to restore his capital account deficit should be treated as a debt, and the release of that obligation should be treated as a cancellation of debt rather than as a deemed sale. If the capital account deficit is treated as a debt, Mr. Bassing contends that most of the income he realized from the cancellation of that debt would be subject to 26 U.S.C. § 108(a)(1)(B), which provides that a discharge of indebtedness is not includible in gross income if the discharge occurs when, and to the extent that, the taxpayer is insolvent. See Halle v. Comm'r, 83 F.3d 649 (4th Cir.1996).

Before we can reach the merits of the underlying tax issue, we must first determine whether the trial court properly characterized the release of Mr. Bassing's capital account restoration obligation as a partnership item and therefore correctly held that his refund action is barred by 26 U.S.C. § 7422(h). Mr. Bassing admits that his negative capital account balance was a partnership item. However, he contends that the treatment of his negative account balance for tax purposes is an item that should be determined at the partner level and that he is therefore free to recharacterize that obligation as a personal debt. The government argues that the characterization of the restoration obligation and the release of that obligation should both be regarded as partnership items, and that Mr. Bassing's argument that the restoration obligation and the release of that obligation should be regarded as partner-level items is contrary to the legislative framework for partnership taxation established by TEFRA.

Before TEFRA, the Internal Revenue Code treated partnership items such as the partnership's income, gain, loss, or credit at the individual partner level. The piecemeal nature of the individual partner level determinations frequently resulted in inconsistent treatment of the same items by different partners. See Monti v. United States, 223 F.3d 76, 78 (2d Cir.2000). In TEFRA, Congress responded to that problem by creating a system in which items "more appropriately determined at the partnership level than at the partner level" would have their tax treatment established by the partnership rather than separately by individual partners. 26 U.S.C. § 6231(a)(3); see H.R. Conf. Rep. No. 97-760, at 599-600 (1982) 1982 U.S.C.C.A.N. 1190, 1277-78; see also Transpac Drilling Venture 1983-63 v. United States, 16 F.3d 383, 387 (Fed.Cir. 1994). TEFRA was enacted "in order that one proceeding would determine how partnership items would be reported on all partners' individual returns. TEFRA thus requires partners, on their individual tax returns, to treat partnership items consistently with the item's treatment on the partnership information return." Olson v. United States, 172 F.3d 1311, 1316 (Fed. Cir.1999); see 26 U.S.C. § 6222(a); Treas. Reg. § 301.6222(a)-1(a).

Mr. Bassing's negative capital account balance of $882,871 was a partnership item because it represented an amount determined by the partnership under its capital account maintenance rules, which constituted an accounting practice adopted by the partnership and...

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