Benton v. Comm'r of Internal Revenue , 7602–02.

• Decision Date: 12 May 2004
• Docket Number: No. 7602–02.,7602–02.
• Citation: 122 T.C. 353,122 T.C. No. 20
• Parties: Oren L. BENTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

122 T.C. 353
122 T.C. No. 20

Oren L. BENTON, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 7602–02.

United States Tax Court.

May 12, 2004.

[122 T.C. 354]

Oren L. Benton, pro se.

Frederick J. Lockhart, Jr., and John A. Weeda, for respondent.

OPINION GERBER, J.

[122 T.C. 353]

P's ch. 11 bankruptcy commenced in 1995, and he was discharged upon the confirmation of his plan of reorganization during 1997. Effectively, at the time of confirmation, all of the estate's assets were transferred to a liquidating trust for the benefit of creditors. P had net operating losses (NOLs) that arose in years prior to the bankruptcy commencement. P's bankruptcy estate also incurred tax losses. The bankruptcy estate succeeded to P's precommencement NOLs. Under sec. 1398(i), I.R.C., P would succeed to the tax attributes (NOLs) of the bankruptcy estate, upon its termination. P contends that his ch. 11 bankruptcy terminated upon the confirmation of the plan and the discharge of the debtor. R contends that a ch. 11 bankruptcy does not terminate until closed by a final order of a bankruptcy court.

P seeks to apply NOLs to his 1995, 1996, and 1997 income which was not includable in the bankruptcy estate. R contends that P may not carry NOLs to any years prior to the termination of P's bankruptcy estate; i.e., 1996 or 1995.

1. Held: The “termination” of P's ch. 11 bankruptcy, for purposes of sec. 1398, I.R.C., occurred upon the confirmation of the plan and discharge of the debtor.

2. Held, further, P may use NOLs with respect to his separate tax reporting in the year of the commencement of his bankruptcy and later years, to the extent allowed under sec. 172, I.R.C., and the regulations thereunder.

Respondent determined deficiencies in petitioner's Federal income taxes, an addition to tax, and penalties for the short taxable year of February 23 through December 31, 1995, and the taxable years 1996 and 1997, as follows:

+-----------------------------------------------------------------------------+
                ¦Year ¦Deficiency¦Addition to Tax Sec. 6651 ¦Accuracy-Related Penalty Sec. ¦
                ¦ ¦ ¦(a)(1) ¦6662 ¦
                +-------+----------+---------------------------+------------------------------¦
                ¦ ¦ ¦ ¦ ¦
                +-------+----------+---------------------------+------------------------------¦
                ¦1995 ¦$75,771 ¦— ¦$15,154 ¦
                ¦1 ¦ ¦ ¦ ¦
                +-------+----------+---------------------------+------------------------------¦
                ¦1996 ¦240,565 ¦— ¦48,113 ¦
                +-------+----------+---------------------------+------------------------------¦
                ¦1997 ¦249,337 ¦$57,967 ¦46,374 ¦
                +-------+----------+---------------------------+------------------------------¦
                ¦ ¦ ¦ ¦ ¦
                +-----------------------------------------------------------------------------+
                

This matter is before the Court on respondent's motion for partial summary judgment. See Rule 121.¹ The issues presented for our consideration are: (1) Whether petitioner succeeded to the tax attributes of his chapter 11 bankruptcy

[122 T.C. 355]

estate at the time of confirmation of the plan of reorganization or, alternatively, upon entry of a final order closing the bankruptcy proceeding, see sec. 1398(i); (2) whether petitioner may carry net operating losses (NOLs) to his 1995, 1996, and 1997 tax years; and (3) whether certain payments petitioner received were compensation for his services.

Background

Petitioner resided in Oto, Iowa, at the time his petition was filed in this proceeding. On February 23, 1995, petitioner filed a voluntary petition with the U.S. Bankruptcy Court for the District of Colorado under chapter 11 of the Bankruptcy Code. Concurrently, four related petitions were filed for business entities controlled by petitioner. An additional entity controlled by petitioner filed a petition under chapter 11 during 1996. All six bankruptcy cases were administered as a related group. A separate bankruptcy estate was established for each entity, including the Oren L. Benton Bankruptcy Estate (Benton estate) and the Nuexco Trading Corp. Bankruptcy Estate (NTC bankruptcy estate). As of the date of each petition, the entity's assets became assets of its bankruptcy estate. Pursuant to section 1398(d)(2)(D), petitioner elected to terminate his taxable year as of February 23, 1995. A separate Federal income tax return was filed for petitioner's short taxable year February 23 through December 31, 1995.

Among the assets that made up the Benton estate were petitioner's interests in three entities that were involved in the operation and ownership of the Colorado Rockies National League Baseball Franchise. The three interests included a limited partnership interest in the Colorado Baseball Club Limited Partnership (CBCLP), which was the owner of the National League franchise. In addition, Colorado Baseball Management, Inc. (CBM), was a corporation entitled to a percentage of the gross revenues of CBCLP. Lastly, Colorado Baseball, Inc. (CBI), was the managing general partner in CBCLP.

A second amended plan of reorganization (the plan), dated August 18, 1997, for petitioner and his related bankruptcy estates was to be effective on August 31, 1997. Until the August 18, 1997, confirmation of the plan, petitioner served as the debtor in possession. Among other things, the plan

[122 T.C. 356]

provided that on August 31, 1997, most of the various bankruptcy estates' assets would be transferred into a liquidating trust to be administered for the benefit of creditors by a trustee. The trustee was responsible for all tax matters relating to the estates subject to the supervision of an oversight committee. The creditors agreed in the plan that the tax attributes would go to the debtor (petitioner) upon confirmation of the plan.

The plan also provided that the interest in CBCLP was to be placed in the NTC bankruptcy estate, and the CBM and CBI interests were to remain in the Benton estate. The motivation for not transferring these assets to the liquidating trust was to maintain the S corporation status of CBM and CBI. This limited exception to the general transfer of assets to the liquidating trust was approved by the Benton estate's creditors and promoted by Benton's fellow S corporation shareholders. Those shareholders were concerned about whether the placement of an interest in an S corporation into a bankruptcy liquidating trust would result in the termination of S corporation status. Their concern was focused upon whether a liquidating trust and/or liquidating trustee would be a qualified shareholder of an S corporation.²

The Benton estate retained bare legal title to the interests in CBI and CBM with no rights of ownership. The plan included the following terms, which in effect made the Benton estate a mere nominee:

i) the Liquidating Trustee shall be deemed to hold an irrevocable proxy and power of attorney to act on the Benton Estate's behalf with respect to the Baseball Interests or any of them;

ii) * * * [the Baseball Interests] shall be deemed ordered * * * to pay over all payments on account of the Baseball Interests as the Liquidating Trustee shall direct;

iii) the Benton Estate shall not sell, encumber, or otherwise dispose of any interest in the Baseball Interests without the express prior written consent of the Liquidating Trustee. To the extent required to effectuate the purposes of this section, the Liquidating Trustee shall be deemed the representative of the Estates in regard to the administration of the Baseball Interests.

[122 T.C. 357]

On September 1, 1997, the first day following the effective date of the plan, petitioner was discharged under the provisions of Bankruptcy Code section 1141(d) from any debt that arose before confirmation, and he was relieved of his status as “debtor-in-possession”.

On his 1997 Federal income tax return, petitioner claimed approximately $84 million in NOLs that had arisen before the commencement of the bankruptcy and had not been used by his bankruptcy estate. Petitioner contended that he received the NOLs from his bankruptcy estate as of August 31, 1997, the effective date of the confirmed plan. During April 1999 petitioner filed a Form 1040X, Amended U.S. Individual Income Tax Return, for the short taxable year 1995 and the calendar year 1996, attempting to use NOLs initially reported on his 1997 return. During October 2001, petitioner filed amended returns containing $59 million in increased claims for NOLs.

Petitioner received the following amounts from CBM during his taxable years ended December 31, 1995, 1996, and 1997:

+-----------------------+
                ¦Taxable Year ¦Amount ¦
                +-------------+---------¦
                ¦ ¦ ¦
                +-------------+---------¦
                ¦1995 ¦$200,000 ¦
                +-------------+---------¦
                ¦1996 ¦1,000,000¦
                +-------------+---------¦
                ¦1997 ¦925,000 ¦
                +-------------+---------¦
                ¦1997 ¦60,000 ¦
                +-----------------------+
                

Petitioner reported the amounts received in 1995 and 1996 as wages on his Forms 1040, U.S. Individual Income Tax Return. He did not, however, report as income the amounts he received during 1997 on his original 1997 return. Instead, petitioner attached a statement to his 1997 return asserting that the amounts he received from CBM in 1997 belonged to the Benton estate and were loans from the estate to him. On the statement, he also maintained that the Benton estate was challenging the characterization of the payments as compensation, asserting that they were payments with respect to the stock. Petitioner, in amended returns for 1995 and 1996, included statements similar to those included on his 1997 return, asserting that the payments were erroneously included as compensation and should be properly characterized as loans from the Benton estate.

[122 T.C. 358]

Discussion I. Summary Judgment

Respondent moved for partial summary judgment with respect to three issues in this case. Summary judgment is intended to expedite litigation and avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681, 1988 WL 31439 (1988). A motion for partial summary judgment may be granted if there is no genuine issue as...