Estate of Quirk v. C.I.R.
| Citation | 928 F.2d 751 |
| Decision Date | 25 March 1991 |
| Docket Number | 90-1186 and 90-1187,90-1183,90-1185,Nos. 90-1129,s. 90-1129 |
| Parties | -782, 91-1 USTC P 50,148 ESTATE OF Thomas P. QUIRK, Deceased, Gregory J. Quirk, Norman D. Rollins, Co-Administrators, Mary C. Quirk, Petitioners-Appellants (90-1129), v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. John P. LAWLER, Eileen F. Lawler, Michael J. Skelly, Georgette T. Skelly, Karim A. Abood, Donna H. Abood, Felix E. Matusky, Florence P. Matusky, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant, (90-1183/1185/1186/1187). |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
Michel G. Kaplan (argued), J. Lee Woodruff, Steven K. Wood, Boult, Cummings, Conners & Berry, Nashville, Tenn., for Estate of Thomas P. Quirk, Gregory Quirk, and Norman D. Rollins, Co-Administrators.
Joe Vaulx Crockett, III (argued), Nashville, Tenn., for Mary C. Quirk.
Peter K. Scott, I.R.S., Office of Chief Counsel, Washington, D.C., Gary R. Allen, Acting Chief, Robert S. Pomerance (argued), Regina S. Moriarty, Shirley D. Peterson, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for C.I.R.
Eugene Chester (argued), William H. Whitledge, James H. Kenworthy, Everett, Johnson & Breckinridge, New York City, for John P. and Eileen F. Lawler.
Marcia P. Kaplan, Howrey & Simon, Washington, D.C., Eugene Chester (argued), William H. Whitledge, James H. Kenworthy, Everett, Johnson & Breckinridge, New York City, for Michael J. and Georgette T. Skelly.
Eugene Chester (argued), William H. Whitledge, James H. Kenworthy, Everett, Johnson & Breckinridge, New York City, for Karim A. Abood and Donna H. Abood, and Felix E. Matusky and Florence P. Matusky.
Before JONES and NELSON, Circuit Judges, and JOINER, Senior District Judge. *
In this consolidated appeal, petitioners-appellants Estate of Thomas P. Quirk and Mary Quirk appeal the tax court's finding of a tax deficiency for the tax years 1974 and 1975. The Commissioner has filed protective appeals against the tax court's finding of an overpayment to petitioners-appellees John P. Lawler, Felix E. Matusky, Michael J. Skelly and Karim A. Abood.
The dispute in this case centers on the tax consequences of Thomas Quirk's retirement from Quirk, Lawler & Matusky Engineers ("QLM"), an engineering firm organized as a partnership under New York law. Quirk withdrew from QLM on October 31, 1974. At the time of his withdrawal, his proportional share of the partnership income, assets and liabilities was 30.667%. QLM did not have any written partnership agreement and had no formal provisions for division of assets in the event of the withdrawal of a partner. In anticipation of the resolution of the affairs of QLM, and to determine Quirk's share of the partnership's assets and liabilities at the time of Quirk's withdrawal, QLM engaged Peat, Marwick, Mitchell & Co. ("Peat Marwick"), to prepare a financial statement. According to this statement, QLM's total assets as of October 31, 1974, were $1,790,644.05, including unrealized receivables of $1,601,906; cash and other current assets of $87,355; and net capital assets after depreciation of $101,283.17. Quirk's share of these total assets was $549,136 (30.667% of $1,790,644). According to the statement 89.45989% of QLM's assets were attributable to unrealized receivables. The financial statement also reflected total liabilities of $1,043,376.41, Quirk's share of which amounted to $319,972 (30.667% of the total). Thus, Quirk's total interest in the partnership amounted to $232,795, derived from Quirk's share of the assets minus his share of QLM's liabilities.
After Quirk's withdrawal from QLM, a new partnership was formed by Lawler, Matusky and Skelly ("LMS"). 1 In 1974, QLM's remaining partners gave Quirk $15,975 in cash and relieved him of $135,970 in partnership liabilities. In 1975, the remaining partners paid Quirk $23,370 in cash and relieved Quirk of $184,002 in QLM liabilities. The remaining partners ceased their cash payments to Quirk in April 1975 when it became clear that no withdrawal agreement could be reached between Quirk and the remaining partners.
The remaining partners stipulated that the Peat Marwick statement accurately reflected the assets and liabilities of QLM at the time of Quirk's withdrawal and that the value of Quirk's interest in QLM, $232,795, was the amount reflected in the statement. J. App. at 51. Quirk contended that the fair market value of his interest in QLM was higher than was reflected in the Peat Marwick statement. Based upon this contention, Quirk instituted a lawsuit in the Supreme Court of New York, County of Rockland, for an accounting of QLM's assets in 1977. This lawsuit was unresolved at the time of the tax court's decision, but was subsequently settled. Under the settlement agreement, the value of Quirk's share of QLM was determined to be $232,795, the figure in the Peat Marwick statement, and Quirk was released from any liability to the remaining partners or LMS.
On his joint return filed with his wife, Mary Quirk, in 1974, Quirk reported income of $111,809 from QLM. In 1975, on his separate return, Quirk claimed no income from QLM. Following an audit of those returns, the Commissioner asserted tax deficiencies in the Quirks' 1974 joint return and in Quirk's 1975 separate return. A petition naming Thomas and Mary Quirk as petitioners was filed with the tax court contesting the 1974 deficiency. 2 Quirk, on his own, challenged the 1975 deficiency. 3 The petitions were consolidated and considered together. Pursuant to an opinion filed on June 29, 1988, the tax court entered decisions sustaining income tax deficiencies against the Quirks of $64,998.87 for 1974 and $85,747.27 for 1975. 4 The decisions were entered on October 31, 1989 and this timely appeal followed.
As this case arose out of a challenge by Quirk to the tax consequences of his withdrawal from QLM, the Commissioner determined protective income tax deficiencies against the partners who remained in the partnership after Quirk's withdrawal. These partners, Matusky, Lawler, Skelly and Abood, challenged these deficiencies in tax court and the petitions were consolidated with the challenges by the Quirks. The tax court sustained the Commissioner's principal position, that the tax liability was properly placed upon Quirk, and thus found no tax deficiencies with respect to the remaining partners. The Commissioner timely filed a protective appeal against the tax court's finding of no deficiency on behalf of the former partners.
The main issue before the tax court was whether QLM's cash payments to Quirk, and the remaining partners' satisfaction of Quirk's share of QLM liabilities, were properly characterized as ordinary taxable income or return of partnership basis under 26 U.S.C. Sec. 736. 5 The Quirks conceded below that the partnership made "distributions" to Quirk during 1974 and 1975 in two forms--cash and deemed distributions resulting from the partnership's discharge of Quirk's share of QLM's outstanding liabilities at the time of his withdrawal. In Quirk's post-trial brief, he stated that "by virtue of the effect of Section 752(b), Quirk should be deemed to have received a money distribution of $135,970 in 1974 and $184,002 in 1975 as a result of being discharged with respect to his share of partnership liabilities." Trial Brief at 27 (quoted in Quirk's Appellate Brief at 41). These distributions reflected the discharge of QLM liabilities for both a Chemical Bank note and other outstanding liabilities. As to the latter, the Quirks stipulated that "[a]s a result of Quirk's withdrawal from QLM, Quirk's share of the liabilities of QLM, other than the note payable to Chemical Bank, represented distributions to him in 1974 in the amount of $120,636, i.e., 30.667% of $393,376.41 [the total outstanding liabilities of QLM other than the Chemical note]." 6 J. App. at 53. In addition, noting Quirk's post trial brief, the court found that the parties "agree[d]" that Quirk received additional distributions in liquidation of his partnership interest "by virtue of his release from the Chemical Bank note." Id. at 102. The tax court concluded that the total distributions to Quirk from discharge of partnership indebtedness equalled $319,970, a sum essentially equivalent to that he admitted having received as distributions "by virtue of the effect of Section 752(b), ... as a result of being discharged of his share of partnership liabilities." Quirk's Trial Brief at 27. 7
As the tax court found no evidence to refute these stipulations, the dispute focused on whether the distributions generated ordinary income to Quirk, or instead whether the income should be treated as a return of his basis in capital assets of QLM. Section 736 of the Tax Code governs the character (either capital or ordinary) of distributions received by a retiring partner in liquidation of his partnership interest. To the extent that payments equal the fair market value of the retiring partner's capital account, i.e., the fair market value of the partner's interest in tangible partnership assets such as furniture and fixtures, the payments generally are treated as a return of capital by Section 736(b), and any excess over the partner's basis in his capital account will be capital gain. However, under Section 736(a), ordinary income treatment applies to any portion of the liquidating distributions that is attributable to the retiring partner's interest in the partnership's "unrealized receivables," i.e., the accounts evidencing the partnership's right to future payments for its sale of goods or services. This prevents a partner's retirement from serving as an occasion for converting ordinary income into capital gain. Such receivables are deemed "unrealized" because they have yet to be included in the partnership's income at the time of the partner's...
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