Frankel v. Comm'r of Internal Revenue
| Decision Date | 10 December 1973 |
| Docket Number | Docket Nos. 8761-72,9292-72. |
| Citation | 61 T.C. 343 |
| Parties | E. J. FRANKEL AND Z. T. FRANKEL, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTSEYMOUR GOLDEN AND DORIS GOLDEN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
H. Louis Katz, Mark H. Berliant, and Edwin T. Robinson, for the petitioners in docket No. 8761-72.
Seymour Golden and Doris Golden, pro se in docket No. 9292-72.
Brian J. Seery, for the respondent.
Petitioners were shareholders in a subch. S corporation that operated a restaurant in an apartment building owned by a partnership which was owned by the shareholders in exact proportion to their shareholdings. Following heavy losses incurred by the corporation, the partnership loaned $234,150 over 2 years to the corporation. Losses in excess of stock basis were incurred in these 2 years. Petitioners deducted the losses to the extent of their basis in loans made by the partnership. Held, the deduction under sec. 1374(c)(2)(B), I.R.C. 1954, is limited to the shareholder's adjusted basis in the stock of the corporation and in the indebtedness of the corporation to the shareholder.
In these consolidated cases, submitted pursuant to Rule 30, Tax Court Rules of Practice, the respondent determined the following deficiencies:
+---------------------------------------------------------+
¦Petitioners ¦Docket No.¦Year¦Amount ¦
+-------------------------------+----------+----+---------¦
¦ ¦ ¦ ¦ ¦
+-------------------------------+----------+----+---------¦
¦E. J. Frankel and Z. T. Frankel¦8761-72 ¦1969¦$4,788.57¦
+-------------------------------+----------+----+---------¦
¦Seymour Golden and Doris Golden¦9292-72 ¦1969¦2,302.00 ¦
+-------------------------------+----------+----+---------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------------------------------+
The only question for decision is whether or not loans made by a partnership to a subchapter S corporation constitute an indebtedness within the meaning of section 1374(c)(2)(B), I.R.C. 1954.1
All of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference and are adopted as our findings. The facts relevant to our decision are set forth below.
E. J. Frankel and Z. T. Frankel are husband and wife who resided in Philadelphia, Pa., at the time their petition herein was filed. They filed a joint Federal income tax return with the Internal Revenue Service Center, Philadelphia, Pa., for the year 1969.
Seymour and Doris Golden are husband and wife who resided in Bala Cynwyd, Pa., at the time their petition herein was filed. They filed a joint Federal income tax return with the Internal Revenue Service Center, Philadelphia, Pa., for the 1969.
E. J. Frankel and Seymour Golden (herein referred to as petitioners) were two of the partners in a partnership known as Regency Apartments which owned ‘The Regency,‘ an apartment building in Cincinnati, Ohio.
Chequers Restaurant, Inc. (herein called Chequers), was an electing small business corporation as defined in section 1371 of the Code. It owned and operated a restaurant in The Regency during 1969.
From its incorporation on November 1, 1967, through December 31, 1969, Frankel owned 20 percent of the issued and outstanding common stock of Chequers. The cost of this stock was $40,000. The total capitalization of Chequers was $200,000.
From its incorporation on November 1, 1967, through December 31, 1969, Golden owned 5 percent of the issued and outstanding common stock of Chequers. The cost of this stock was $10,000.
During 1969 Frankel owned a 20-percent capital interest in the Regency Apartments partnership.
During 1969 Golden owned a 5-percent capital interest in the Regency Apartments partnership.
For the fiscal year ended October 31, 1968, Chequers reported an operating loss of $171,927.
For the fiscal year ended October 31, 1969, Chequers reported an operating loss of $121,049.
On November 1, 1968, the Regency Apartments partnership loaned $199,432 to Chequers.
On October 31, 1969, the Regency Apartments partnership loaned $34,718 to Chequers.
On his Federal income tax return for the year 1968, Frankel deducted $34,385 as his allocable portion of the total losses suffered by Chequers for the fiscal year ended October 31, 1968.
On his Federal income tax return for the year 1968, Golden deducted $8,596 as his allocable portion of the total losses suffered by Chequers for the fiscal year ended October 31, 1968.
On his Federal income tax return for the year 1969, Frankel deducted $24,210 as his allocable portion of the total losses suffered by Chequers for the fiscal year ended October 31, 1969.
On his Federal income tax return for the year 1969, Golden deducted $6,052 as his allocable portion of the total losses suffered by Chequers for the fiscal year ended October 31, 1969.
Both Frankel and Golden claimed losses on their 1969 Federal income tax returns on the ground that the loans made to Chequers by Regency Apartments constituted loans made by the individual partners of that partnership. Respondent disallowed the claimed losses to the extent of $18,595 for Frankel and $4,648 for Golden. The basis for such disallowance was that the loans made by Regency Apartments to Chequers are not an indebtedness of the corporation to the shareholders.
Section 1374 permits a net operating loss of an electing small business corporation to be taken as a deduction from the gross income of the shareholders. A shareholder is permitted to deduct from his gross income only his pro rata share of such loss. Section 1374 (c)(2) established a limitation on such loss.2 The deduction may not exceed the total of a shareholder's adjusted basis in the stock of the corporation and the adjusted basis of any indebtedness of the corporation to the shareholder.
Petitioners argue that the partnership must be treated as an aggregate of its partners as individuals. Thus, they view the loans made by the partnership to the corporation as having been made by the partners in their individual capacities. Under this view the following computations would represent their loss limitation under section 1374(c)(2):
+--------------------------------------------------------------------------+
¦ ¦Frankel ¦Golden ¦
+-------------------------------------------------------+---------+--------¦
¦Initial investment in subch. S corporation ¦$40,000 ¦$10,000 ¦
+-------------------------------------------------------+---------+--------¦
¦Plus: Allocable share of 1968 loan ¦39,886 ¦9,971 ¦
+-------------------------------------------------------+---------+--------¦
¦Summation of basis (1968) ¦79,886 ¦19,971 ¦
+-------------------------------------------------------+---------+--------¦
¦Less: Allocable share of 1968 loss ¦34,385 ¦8,596 ¦
+-------------------------------------------------------+---------+--------¦
¦Adjusted basis 1968 ¦45,501 ¦11,375 ¦
+-------------------------------------------------------+---------+--------¦
¦Plus: Allocable share of 1968 loan ¦6,944 ¦1,736 ¦
+-------------------------------------------------------+---------+--------¦
¦Summation of basis (1969) ¦52,445 ¦13,111 ¦
+-------------------------------------------------------+---------+--------¦
¦Less: Allocable share of 1969 loss ¦24,210 ¦6,052 ¦
+-------------------------------------------------------+---------+--------¦
¦Adjusted basis 1969 (available under sec. 1374 (c) (2))¦28,235 ¦7,059 ¦
+--------------------------------------------------------------------------+
Respondent contends that the shareholder-members of the partnership may not claim, for the purposes of section 1374, any portion of the loans made by the partnership to the corporation as theirs. It is respondent's view that Frankel may deduct from gross income in 1968 his allocable share of the corporation's 1968 net operating loss ($34,385). This would give Frankel an adjusted basis of $5,615 which would be exhausted in 1969 by virtue of the 1969 net operating loss. Respondent would allow Golden to deduct $8,596 from gross income in 1968, which is his allocable share of the 1968 loss. With no further additions to basis Golden would be permitted to deduct only $1,404 as his share of the 1969 net operating loss.
The loans were made to the corporation by the partnership. A partnership may not be a shareholder in a subchapter S corporation. Sec. 1371(a)(2); sec. 1.1371-1(d), Income Tax Regs.3
Petitioners have not cited, and admit they are unable to find, any authority clearly holding that under section 1374(c)(2)(B) indebtedness to a partnership constitutes a debt to an individual. By analogy respondent argues that since stock owned by a partnership is not deemed owned by the partners, then an indebtedness to a partnership is not deemed owed to the individual partners for the purposes of section 1374(c)(2)(B).
The benefits of the operating loss passthrough under section 1374 are provided for shareholders in an electing small business corporation. The language of the statute refers to either a shareholder's stock or any indebtedness of the corporation to the shareholder.
Petitioners isolate the language ‘any indebtedness' and argue that any indebtedness to the shareholder in whatever from or manner incurred should be accounted for when computing the adjusted basis. From this premise they move to the position that the identical ownership interests as between the corporation and the shareholder necessarily require the conclusion that the indebtedness runs directly to the partners as...
To continue reading
Request your trial
-
Bergman v. U.S.
...when funds are advanced to an S corporation by a separate entity, even one closely related to the shareholder. Golden v. Commissioner, 61 T.C. 343, 1973 WL 2529 (1973) (partnership); Prashker v. Commissioner, 59 T.C. 172, 1972 WL 2512 (1972) (estate); Burnstein v. Commissioner, 47 T.C.M. (C......
-
Harrington v. United States
...there was no reloaning of the proceeds from the shareholders to the corporation. The government relies for its position on Frankel v. Commissioner, 61 T.C. 343 (1973), aff'd., 506 F.2d 1051 (3d Cir.1974). Frankel involved a loan from a partnership to a Subchapter S corporation in which the ......
-
Sanborn v. Commissioner
...and to decide whether these bases are affected by petitioners' guarantees of any of Walgro's debts. See, e.g., Frankel v. Commissioner Dec. 32,250, 61 T.C. 343, 347 (1973), affd. without published opinion 506 F. 2d 1051 (CA-3 1974); Prashker v. Commissioner Dec. 31,583, 59 T.C. 172 (1972); ......
-
Resnik v. Comm'r of Internal Revenue
...individual partner, that exercises the various options open to taxpayers in computing net income under the Code. * * * See also E. J. Frankel, 61 T.C. 343 (1973), affd. in an unpublished opinion (3d Cir. 1974). In addition to the reasons stated above for an examination at the partnership le......
-
Tax Court restricts S corporation shareholder's basis for loss deductions.
...in a partnership cannot increase his basis in the S corporation as a result of a loan from the partnership to the S corporation (Frankel, 61 TC 343 In Hitchins, the taxpayer founded Champaign Computer Company (CCC), a C corporation, which developed a database for various chemicals in 1985 a......
-
S corporations vs. C corporations.
...for this purpose, the debt must run directly to the shareholder; the creditor may not be a person related to the shareholder (see Frankel, 61 TC 343 To qualify as "indebtedness," a shareholder generally must have acquired the debt through an actual economic outlay, viz.," there must have oc......