Doe v. C.I.R.

• Decision Date: 29 November 1993
• Citation: Doe v. C.I.R., 116 F.3d 1489 (10th Cir. 1993)
• Parties: -5535, 97-1 USTC P 50,460 NOTICE: Although citation of unpublished opinions remains unfavored, unpublished opinions may now be cited if the opinion has persuasive value on a material issue, and a copy is attached to the citing document or, if cited in oral argument, copies are furnished to the Court and all parties. See General Order of
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1489

116 F.3d 1489

80 A.F.T.R.2d 97-5535, 97-1 USTC P 50,460

NOTICE: Although citation of unpublished opinions remains unfavored, unpublished opinions may now be cited if the opinion has persuasive value on a material issue, and a copy is attached to the citing document or, if cited in oral argument, copies are furnished to the Court and all parties. See General Order of November 29, 1993, suspending 10th Cir. Rule 36.3 until December 31, 1995, or further order.

Frederick D. DOE, Barbara L. Doe, David S. LaMure, Margaret C. LaMure, James E. Lankford, Virginia LankfordPetitioners-Appellants, v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Nos. 10932-90, 10935-90, 10940-90, 12313-91, 12551-91,

12563-91, 23817-88, 23836-88, 94-9013.

United States Court of Appeals, Tenth Circuit.

June 2, 1997.

Before ANDERSON, HENRY, and BRISCOE, Circuit Judges.

ORDER AND JUDGMENT

Robert H. Henry, Judge.

Appellants Frederick and Barbara Doe, David and Margaret LaMure, and James and Virginia Lankford appeal the United States Tax Court's ruling affirming the Commissioner of the Internal Revenue Service's (the Commissioner's) assessment of deficiencies in their income tax payments for the tax years 1983, 1984, 1986, 1987, and 1988.SeeDoe v. Commissioner, 66 T.C.M. (CCH) 1376(1993).

For the 1983 tax year, the the Tax Court agreed with the Commissioner that the Does, LaMures, and Lankfords realized gain from the transfer of property from a preexisting partnership to Town and Country Sports Enterprises, Inc., a subchapter S corporation.For 1983, the Tax Court also affirmed the Commissioner's findings that the Does', LaMures', and Lankfords' basis in the stock and debt of the Town and Country subchapter S corporation was insufficient to allow them to each deduct their pro rata share of the corporation's losses.For 1984, the Tax Court affirmed the disallowance of the Does' rental loss deduction and the redetermination of their contribution deduction.Finally, for 1986, 1987, and 1988, the Tax Court affirmed the Commissioner's conclusion that, just as for 1983, the Does, the LaMures, and the Lankfords lacked sufficient basis in the Town and Country subchapter S corporation's stock and debt and that, as a result, the taxpayers' deductions of their pro rata share of the corporation's losses should be disallowed.

On appeal to this court, the Does, LaMures and Lankfords maintain that under the Subchapter S Revision Act of 1982 (SSRA), 26 U.S.C. §§ 6241-45, the Commissioner was required to conduct an audit of the Town and Country subchapter S corporation at the entity level and issue a final notice of subchapter S administrative adjustment before assessing the deficiencies against them individually.Because the Commission did not issue such a notice, the Does, LaMures, and Lankfords argue, the Tax Court lacked jurisdiction.In the alternative, they argue that the preexisting partnership did not transfer property to the subchapter S corporation and that, as a result, they did not realize the alleged gain in 1983.They also argue that they did have a sufficient basis in the subchapter S corporation's stock and debt to allow them to deduct their pro rata share of its losses.

We reach different conclusions for the five tax years involved.

As to the deficiencies for 1983, we first conclude that the Tax Court had jurisdiction to assess both categories of deficiencies at issue: (1) the deficiencies attributable to the alleged transfer of property from the preexisting partnership to the Town and Country subchapter S corporation; and (2) the deficiencies attributable to the taxpayers' allegedly insufficient basis in the Town and Country subchapter S corporation's stock and debt.However, on the merits, we reach different conclusions for each category of deficiencies.As to the first category of deficiencies, we conclude that the Tax Court erred in finding that the preexisting partnership transferred property to the Town and Country subchapter S corporation and that the taxpayers realized gain from this alleged transfer.In contrast, as to the second category of deficiencies for 1983, we agree with the Tax Court that the Does, LaMures, and Lankfords lacked sufficient basis in the Town and Country subchapter S corporation's stock and debt to deduct their pro rata share of its losses on their 1983 returns.We therefore affirm in part and reverse in part the Tax Court's decision regarding the Does', LaMures', and Lankfords' tax liability for 1983.

As to 1984, we conclude that the Tax Court had jurisdiction and that it acted properly in determining the deficiencies.

As to the specified deficiencies for the tax years 1986, 1987, and 1988, we conclude that, the Tax Court lacked jurisdiction.As to these latter deficiencies, we reverse the Tax Court's decision and remand to the Tax Court with instructions to dismiss the Commissioner's claims.

I.BACKGROUND

This dispute concerns the proper tax treatment of Town and Country Sports Enterprises, Inc., an entity originally established as a partnership by appellantsDr. Frederick Doe, Dr. David LaMure, and Dr. James Lankford to operate a bar, restaurant, and bowling alley in Roswell, New Mexico.¹In April 1982, Drs. Doe, LaMure, and Lankford entered into a partnership agreement establishing the Town and Country partnership and providing that each of them would contribute $5,000 and share equally in the partnership's profits and losses.The Town and Country partnership purchased a restaurant, bar, bowling alley, and liquor license from Dr. LaMure and his wife, Margaret, for $275,000.In exchange for the property, the partnership executed a $275,000 promissory note secured by a mortgage on the real estate.The partnership opened the facility for business in October 1982.

In November 1982, the partnership borrowed $1.7 million from the First City National Bank in Roswell, securing the loan through a second mortgage on the partnership's real estate.In addition, Drs. Doe, LaMure, and Lankford executed second mortgages on individually-owned property and signed continuing guarantees making them jointly and severally liable for all the partnership's debts.

In the fall of 1982, the Town and Country partners learned of a recent New Mexico court decision expanding the tort liability of businesses selling alcohol.In light of their potential exposure, the partners decided to incorporate the partnership as a subchapter S corporation.In January 1983, they filed articles of incorporation for the Town and Country corporation with the New Mexico Corporation Commission, and the Commission then issued a certificate of incorporation.The Does, LaMures, and Lankfords also filed an Internal Revenue Service Form 2253, an Election to be Taxed as a Small Business Corporation.The form reported that each couple jointly owned 500 shares of stock in the corporation.In May 1983, the Internal Revenue Service accepted the Town and Country corporation's election to be taxed as a small business corporation and assigned it a federal tax identification number.

From 1983 to 1987, the Does, LaMures, and Lankfords repeatedly represented Town and Country to be a subchapter S corporation.They filed corporate tax returns for the Town and Country corporation on an IRS Form 1120 S--the income tax form for a subchapter S corporation.Pleadings in various lawsuits filed on behalf of the Town and Country corporation, with the knowledge and consent of the Does, LaMures, and Lankfords, described the entity as a corporation, as did financial statements prepared for the Town and Country corporation by an accounting firm.For the tax years 1983, 1986, and 1987, the Town and Country corporation filed corporate tax returns claiming losses, and the Does, LaMures, and Lankfords deducted their pro rata share of those losses on their individual returns for those years.

In July 1988, over five years after the initial Form 1120 S returns were filed, the Commissioner issued notices of deficiency to the Does, LaMures, and Lankfords for the 1983 tax year.The Commissioner disallowed a substantial portion of the claimed deductions for the Town and Country corporation's losses because the amounts deducted exceeded the taxpayers' basis in the stock.The Commissioner also determined that, under 26 U.S.C. § 357, the Does, LaMures, and Lankfords were required to recognize the gain that had resulted from the transfer of assets from the Town and Country partnership to the Town and Country corporation.The Commissioner reasoned that the taxpayers had transferred to the corporation property that was subject to a debt and that, because the debt exceeded their adjusted basis in the property, they realized gain from the transfer.

Following the issuance of the July 1988 deficiency notices, the Does, LaMures, and Lankfords sought to recharacterize Town and Country as a partnership.For the tax year 1988, Town and Country filed a partnership return instead of a corporate return.On their individual returns for 1988, the Does, LaMures, and Lankfords each claimed one third of the Town and Country partnership's losses as a deduction.Moreover, in February 1989, the Town and Country partnership filed delinquent partnership returns and amended corporate returns for the tax years 1983-1987.The delinquent partnership returns included the items previously reported on the original corporate returns for those years.The amended corporate returns reported no corporate activity.The Does, LaMures, and Lankfords also filed amended individual returns in which they sought to deduct their pro rata share of the Town and Country partnership's losses.

The Commissioner did not accept the amended and delinquent returns' characterization of Town and Country as a partnership.In March 1990 and March 1991, the Commissioner issued notices of deficiency to the Does, LaMures, and Lankfords, again determining that the taxpayers had failed to establish that they had a...