Curran v. Commissioner, Docket No. 488-80.

• Decision Date: 27 February 1984
• Docket Number: Docket No. 488-80.
• Parties: Daniel B. Curran and Ruth Curran v. Commissioner.
• Court: U.S. Tax Court

47 TCM (CCH) 1160

1984 TC Memo 92

T.C. Memo. 1984-92.

Daniel B. Curran and Ruth Curran v. Commissioner.

Docket No. 488-80.

United States Tax Court.

Filed February 27, 1984.

Lawrence W. Campbell, 11717 Bernardo Plaza Court, San Diego, Calif., for the petitioners. H. Steven New, for the respondent.

Memorandum Findings of Fact and Opinion

SCOTT, Judge:

Respondent determined a deficiency in petitioners' income tax for calendar year 1975 in the amount of $247,499 and an addition to tax under section 6653(a)¹ in the amount of $12,375.² On February 10, 1982, respondent filed an Amended Answer in which he raised additional issues and claimed an increased deficiency of $144,283. This increased deficiency resulted in an increased addition to tax under section 6653(a) of $7,214. On July 30, 1982, respondent filed a Second Amended Answer in which he deleted several issues raised in the first Amended Answer and claimed an increased deficiency and an increased addition to tax in an unspecified amount. On brief respondent stated that the increased deficiency amount claimed in the Second Amended Answer was $143,626, which would result in a $7,181 increase in the previously determined section 6653(a) addition to tax.

After concessions by each party, the issues for decision are: (1) Whether petitioners are entitled to a bad debt deduction in the amount of $53,417; (2) whether petitioners are entitled to a $5,650 deduction for payments to creditors of a limited partnership; (3) whether, in 1975, petitioners realized any income upon sale of a partnership interest, for which petitioner received a $750,000 promissory note and relief from partnership liabilities; (4) whether petitioners must recognize $25,156 as ordinary income under section 1250; and (5) whether any part of petitioners' underpayment of income taxes was due to "negligence or intentional disregard of rules or regulations" within the meaning of section 6653(a). Issues (1), (2) and (4) were raised by respondent in his first Amended Answer or Second Amended Answer.

Findings of Fact

Some of the facts have been stipulated and are found accordingly.

Petitioners Daniel B. Curran (hereinafter petitioner) and Ruth Curran, husband and wife, resided in Los Angeles, California, at the time of filing their petition. Petitioners filed a joint Federal income tax return for calendar year 1975 with the Internal Revenue Service Center, Fresno, California. This return shows that it was prepared by a Mr. Otto of the firm of McDonald & Otto. It was mailed to the Fresno Service Center from Santa Ana, California, in an envelope on which had been placed one 13-cent postage stamp, one 10-cent postage stamp and one 1-cent postage stamp. The return address shown on this envelope was "McDonald & Otto, Certified Public Accountants, * * * Los Angeles, California."

Petitioners reported $13,327 as their sole income on their joint 1975 Federal income tax return. This amount was shown as received from the Daniel B. Curran Family Trust (Family Trust). The Internal Revenue Service does not have a record of receiving a fiduciary income tax return for calendar year 1975 for the Family Trust, and respondent issued the statutory notice of deficiency in this case to petitioners on October 12, 1979, without benefit of examining the fiduciary return. Thereafter, petitioners filed an amended joint Federal income tax return for 1975.³ On June 9, 1980, petitioners' representative supplied respondent with an unsigned and undated fiduciary income tax return for the Family Trust in which, for calendar year 1975, various sources of income, expenses, other deductions, and the sale of a partnership interest were reported. The income reported by petitioners on their joint Federal income tax return for 1975 was the amount shown as net income on the copy of the fiduciary return for the Family Trust furnished to respondent.

A $53,417 deduction for a bad debt was among the deductions claimed on the fiduciary income tax return for the Family Trust. This deduction was claimed because of the deficit in Jack W. Greene's capital account in Curran and Company (the Company) which he failed to repay upon his retirement as a general partner.

Mr. Greene, Greg Moore, Michael F. O'Connell and petitioner, as general partners, formed the Company on September 1, 1968, as a management firm. A major purpose of the Company was to supply private placement and underwriting services primarily to real estate limited partnerships. Many of the partnerships involved medical buildings; the Company also was involved in marketing and promoting clinical computers and programs and in hospital acquisitions, development and financing.

According to the Company's Partnership Agreement, petitioner was the managing partner. The Partnership Agreement, having renewable terms of 1 year, provided, in relevant part:

4. Capital. For the purpose of providing funds to finance the business of the Partnership, the profits of the several partners which have not been drawn out by them, and which appear to their credit on the books of the Partnership, shall be treated, for the purposes of this Agreement, as the capital of the Partnership. Each partner shall be credited on the books of the Partnership with the profits thus left in the business from time to time. If the demands of the Partnership business require additional capital, contributions shall be first made by those partners whose percentages of total Partnership capital are respectively less than their profit-sharing percentages.

* * *

6. Income and Investment Accounts.

(a) * * * each partner shall have two Partnership accounts, one of which shall be called the "Income Account", which shall reflect the net profits or net losses of the Partnership, and the other of which shall be called the "Investment Account", which shall reflect the equity ownership of the Partnership in any entity whose principal asset consists of real property and which was received by the Partnership (or a nominee of the Partnership) in consideration for the services of one or more of its partners. * * *

(b) The net losses of the Partnership (except losses caused by the gross negligence or willful misconduct of a partner or partners, which shall be borne entirely by the partner or partners guilty of such negligence or misconduct) shall be borne by the partners in the same proportions; provided, that if a partner's share of the losses of the Partnership exceeds the amount of such partner's interest in the Income Account, such partner shall not personally be liable for said loss but it shall be debited to his interest in the Income Account and shall create a deficit balance for such partner.

* * *

9. Drawings. Each partner shall be allowed to draw from Partnership funds upon proper voucher for all disbursements made by him in the Partnership business. In addition, each partner may draw against his interest in the Income Account such sums as may be reasonable, having due regard to the financial requirements of the Partnership, but in no event shall such withdrawals exceed his interest in the Income Account as shown on the books of the Partnership. Notwithstanding the foregoing, there shall be taken as an expense of the Partnership the ordinary and necessary expenses of Jack W. Greene in moving from Minneapolis, Minnesota, to Los Angeles, California, and such amount shall not be charged to the interest of said partner in the Income Account.

10. Retirement of Partner. * * *

(a) With respect to such retiring partner's interest in the Income Account, the remaining partners shall cause the Partnership to pay to the retiring partner the balance of his interest in four substantially equal semi-annual installments, the first of which shall be due 180 days after the end of such year.

(b) With respect to such retiring partner's interest in the Investment Account, the remaining partners shall cause the Partnership to pay to the retiring partner his proportionate share of any payments actually received by the Partnership within 30 days after the receipt thereof.

During several years, the Company admitted a new partner and several partners retired; each of these changes was documented by written agreement between the Company and the entering or retiring partner. For example, on December 31, 1968, Michael F. O'Connell retired from the Company; on January 1, 1969, A. Jerry Luebbers became a new partner; on July 31, 1970, Mr. Luebbers retired; and on December 31, 1971, Jack W. Greene retired.

In the retirement agreement between the Company and Mr. Greene, the Company agreed to employ Mr. Greene as a consultant and independent contractor for the period of January 1, 1972 to June 30, 1972 for a monthly fee of $3,000. As with the retirement agreements between the Company and prior retiring partners, the retirement agreement between Mr. Greene and the Company included the following language:

Greene hereby acknowledges that he has no claim against the Partnership or its assets, or against the remaining Partners, except as aforesaid and except with regard to any payments by the Partnership and payable to Greene pursuant to Section 10(b) of the Partnership Agreement; and Greene hereby acknowledges and represents that he has incurred no obligation on behalf of the Partnership not now reflected on the Partnership's books and records.

At the time Mr. Greene retired from the Company, a final accounting was not performed to determine the rights and liabilities of either party. However, Mr. Greene was aware that his capital account showed a deficit due to withdrawals in excess of his prior capital contribution. On January 1, 1971, Mr. Greene's investment account showed a deficit of $15,689. During 1971, the Company earned a $175,000 profit. Mr. Greene's share of the Company's profit was approximately $33,000, yet during the year he withdrew approximately $43,000. At yearend 1971, Mr. Greene's capital account reflected a deficit of $53,417. Mr. Greene...