Burwell v. C.I.R., 120285 FEDTAX, 6493-82
|Opinion Judge:||STERRETT, CHIEF JUDGE|
|Party Name:||CLIFTON J. BURWELL AND GINETTE A. BURWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||IRENE SCOTT CARROLL, for the respondent. PHILLIP K. FIFE, for the petitioners.|
|Case Date:||December 02, 1985|
|Court:||United States Tax Court|
Petitioner was a partner in a general partnership, which incorporated in 1976. Petitioner intended that the successor- corporation would not assume the partnership's ending liabilities. The corporation did not execute any agreement to assume these liabilities, nor did the partnership's creditors release their claims against the partnership or its partners. Petitioner remained personally liable on the partnership's outstanding obligations. In 1976, the corporation paid certain debts on behalf of petitioner, which had been incurred by the partnership. HELD, respondent is not estopped from determining a deficiency in petitioner's income tax, based on respondent's initial examination of the partnership's tax return. HELD FURTHER, that upon the incorporation of the partnership business, the corporation did not assume the partnership's ending liabilities and petitioner does not have gain to be recognized pursuant to sections 351 and 357(c), I.R.C. 1954. HELD FURTHER, the corporation's payments of petitioner's personal obligations constitute constructive distributions to petitioner as a shareholder, pursuant to section 301.
MEMORANDUM FINDINGS OF FACT AND OPINION
By notice of deficiency dated December 23, 1981, respondent determined a deficiency in petitioners' Federal income tax for the taxable year ended December 31, 1976 in the amount of $20,133. The issues before us are: (1) whether respondent is estopped from determining a deficiency in petitioners' 1976 tax, and, if not, (2) whether petitioners recognized gain due to the assumption of the partnership's liabilities or, alternatively, as constructive distributions by the corporation.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioners, Clifton J. Burwell and Ginette A. Burwell, were husband and wife during 1976 and resided in Northridge, California at the time they filed their petition in this case. They timely filed their joint Federal income tax return for the 1976 taxable year with the Internal Revenue Service Center in Fresno, California. Petitioner Ginette A. Burwell is a party in this case solely because she filed a joint tax return with her husband for the year in issue. All references to petitioner in the singular refer to petitioner Clifton J. Burwell.
Petitioner, Oded E. Sturman (Sturman), and Benjamin Grill (Grill) were the three partners of Rain Brain Manufacturing Company (Rain Brain or the partnership), a general partnership. The partnership was formed as of May 1, 1975 without a written partnership agreement. The partnership elected the cash method of accounting. Petitioner owned a 25-percent interest in the partnership and was allocated 90 percent of the partnership profits or losses; Sturman and Grill each owned a 37.5-percent interest and each was allocated 5 percent of the partnership profits or losses. The purpose of the partnership was to develop, manufacture and market battery-operated lawn sprinkler controls. Various patents were obtained with respect to the partnership's operations. They were held by the partners Sturman and Grill individually and were not transferred to the partnership.
Partnership operating funds were provided in part by loans from the partners. In 1975 and 1976 petitioner made seven loans to the partnership, totaling $80,373. In 1975 Sturman and Grill jointly made three loans to the partnership, totaling $30,800. All such loans were evidenced by written promissory notes of the partnership, also executed jointly by the three individuals in their capacities as partners. The notes were not secured by partnership assets nor by personal assets of the nonlender partner(s).
The partnership ceased operating as of April 8, 1976, with ending liabilities of approximately $182,708, as follows:
|Bank account overdraft||$ 15,006|
|Accounts payable (vendors and suppliers)||41,270|
|Unpaid consulting fees to Sturman and Grill||14,000|
|Loans outstanding (listed above)||111,173|
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