IPO II v. Comm'r of Internal Revenue, 14500–02.

• Decision Date: 23 April 2004
• Docket Number: No. 14500–02.,14500–02.
• Citation: 122 T.C. No. 17,122 T.C. 295
• Parties: IPO II, a Partnership, Gerald R. Forsythe, Tax Matters Partner, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

122 T.C. 295

122 T.C. No. 17

IPO II, a Partnership, Gerald R. Forsythe, Tax Matters Partner, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 14500–02.

United States Tax Court.

April 23, 2004.

David J. Duez, Thomas C. Borders, and Ann M. Chavie, for petitioner.

Jason W. Anderson, for respondent.

OPINION

HAINES, J.

IPO II, an LLC but treated as a partnership for Federal income tax purposes, is owned by IO, an S corporation, and F, an individual. F owns 100 percent of the outstanding stock in IO, 70 percent of the outstanding stock of IE, an S corporation, and 63 percent of the outstanding stock of IP, a C corporation. F's daughters own the remaining 30 percent of the outstanding stock of IE.

IPO II purchased an aircraft, and the loan was guaranteed by F, IE, and IP, but not IO.

R determined that the liability incurred in the purchase of the aircraft was recourse and fully allocable to F. P argues that part of the liability should be allocated to IO because it is related to IE, a guarantor of the loan.

Held: All of the liability is allocable to F because IO cannot be related to F or to IE for purposes of determining the allocation of the recourse liability pursuant to sec. 1.752–4(b)(2)(iii), Income Tax Regs.

Respondent issued a notice of final partnership administrative adjustment (FPAA) to Gerald R. Forsythe, as tax matters partner (TMP) for IPO II, determining adjustments to IPO II's Federal tax returns for 1998 and 1999 (years in issue). For clarification purposes, we shall refer to Gerald R. Forsythe in his capacity as TMP as petitioner; we shall refer to Gerald R. Forsythe in his capacity as owner of IPO II and the other entities described below as Mr. Forsythe.

After concessions,¹ the issue for decision is whether any of the recourse liability incurred by IPO II with respect to the purchase of an aircraft is allocable to Indeck Power Overseas Ltd. (Indeck Overseas).

Background

The parties submitted this case fully stipulated pursuant to Rule 122. ² The stipulation of facts and the attached exhibits are incorporated herein by this reference.

IPO II is a limited liability company organized in 1996 under the Illinois Limited Liability Company Act. At the time the petition was filed, IPO II's principal place of business was Wheeling, Illinois.

IPO II was treated as a partnership for Federal income tax purposes for the years in issue. The members of IPO II are Mr. Forsythe and Indeck Overseas. Indeck Overseas is an S corporation in which Mr. Forsythe owned 100 percent of the outstanding shares during the years in issue. The members' interests in the profits and losses of IPO II were allocated during the years in issue, and are currently allocated, as follows: Indeck Overseas, 99 units; Mr. Forsythe, 1 unit.

IPO II's operating agreement (operating agreement) provides the following, in relevant part:

2.4 Liability to Third Parties. Except as otherwise provided by the Act, ³ the debts, obligations and liabilities of the Company, whether arising in contract, tort, strict liability or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member or Manager of the Company shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member or acting as a Manager of the Company.

* * *

5.3 Liability of Members to the Company. A Member shall be liable to the Company for capital contributions as and to the extent provided by the Act.

* * *

7.1 Allocations of Profits and Losses. All profits and losses of the Company (which for all purposes of this Agreement shall mean the Company's net income and net loss as determined for federal income tax purposes) for each fiscal year (or part thereof) shall be allocated to the Members for both financial accounting and income tax purposes in proportion to the number of Units held by each respective Member. Each item of income, gain, loss, deduction, credit or tax preference of the Company entering into the computation of such profits or losses, or applicable to the period during which any such profits or losses were realized, shall be considered allocated between the Members in the same proportion as profits and losses are allocated to each Member. Profits and losses of the Company shall be determined for each fiscal year in accordance with the accounting method followed by the Company for federal income tax purposes, applied in a consistent manner.

Mr. Forsythe also owns 70 percent (i.e., 28 of 40 shares) of the outstanding shares of Indeck Energy Services, Inc. (Indeck Energy). Indeck Energy was a C corporation in 1997 but elected to be treated as an S corporation for the years in issue. The remaining outstanding shares in Indeck Energy (i.e., 12 shares) are owned equally by Mr. Forsythe's children: Michelle Fawcett, Monica Breslow, Marsha Fournier, and Melissa Forsythe.

Mr. Forsythe also owned 63 percent of the outstanding shares of Indeck Power Equipment Co. (Indeck Power), a C corporation, during the years in issue.

On December 27, 1996, IPO II purchased a Cessna Citation VII aircraft for $9,205,800 and two Garrett Allied Signal engines for $200,375 (collectively, the aircraft) from the Cessna Aircraft Co. The total purchase price of the aircraft (i.e., $9,406,175) was funded by a loan from Nationsbanc Leasing Corp. of North Carolina (Nationsbanc). The loan was evidenced by a secured promissory note dated December 27, 1996, for the total purchase price, executed by IPO II, as obligor, to the benefit of Nationsbanc.

To secure the loan, IPO II and Nationsbanc entered into an Aircraft Loan and Security Agreement (the loan and security agreement) on December 27, 1996. The loan and security agreement listed the following parties as “Guarantors” of the loan: Indeck Energy, Indeck Power, and Mr. Forsythe. Indeck Overseas was not listed as a guarantor of the loan.

In connection with the loan, Mr. Forsythe, Indeck Energy, and Indeck Power each entered into a guaranty agreement with Nationsbanc (the Forsythe guaranty, the Indeck Energy guaranty, and the Indeck Power guaranty, respectively). Each guaranty provided in relevant part:

SECTION 1. Guarantee. * * * The Guarantor does hereby unconditionally guarantee to the Secured Party and its successors, endorsees, transferees and assigns, without offset or deduction, the following:

(a) the prompt payment when due, whether by acceleration or otherwise, of all amounts payable by the Debtor pursuant to or under the Security Agreement, the Note and all related agreements (collectively, the “Basic Agreements” ); * * *

(b) the punctual and faithful performance by Debtor of each and every duty, agreement, covenant and obligation of Debtor under and in accordance with the terms of the Basic Agreements and all other obligations of Debtor to the Secured Party arising under the Basic Agreements or any of the transactions related thereto. The Guarantor does hereby agree that in the event Debtor does not or is unable to pay or perform in accordance with the terms of the Basic Agreements for any reason (including, without limitation, the liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceedings affecting the status, existence, assets or obligations of Debtor or the limitation of damages for the breach, or the disaffirmance of, any Basic Agreement in such proceeding) it will pay the sums, or amounts equal thereto, which Debtor is (or, but for any such reason, would be) obligated to pay at the times specified in the Basic Agreements, whether by acceleration or otherwise (it being the intention hereof that the Guarantor shall pay to the Secured Party, as a payment obligation directly due from the Guarantor to the Secured Party, amounts equal to all amounts which Debtor shall fail faithfully and properly to pay when due under the Basic Agreements, whether by acceleration or otherwise), or otherwise provide for and bring about promptly when due such payment and the performance of such duties, agreements, covenants and obligations of Debtor under the Basic Agreements. The Guarantor acknowledges that it is fully aware of, and consents to the terms and conditions of the Security Agreement, the Note and each of the other Basic Agreements. The obligations of the Debtor hereby guaranteed are herein called the “Obligations”;

* * *

SECTION 3. No Subrogation. * * * The Guarantor hereby further irrevocably waives all contractual, common law, statutory or other rights of reimbursement, contribution, exoneration or indemnity (or any similar right) from or against the Debtor or any other party which may have arisen in connection with this Guarantee.

Additionally, as required by the loan and security agreement, IPO II and Indeck Energy were issued an aircraft insurance policy with respect to the aircraft. The promissory note, loan and security agreement, and guaranties were recorded and filed in due course.

In 1997, petitioner was appointed TMP of IPO II, and Indeck Overseas was appointed manager of IPO II. Both members continue to serve in their respective capacities.

Petitioner filed a Form 1065, U.S. Partnership Return of Income, on behalf of IPO II for each of the years in issue. On July 12, 2002, respondent issued the FPAA to petitioner, as TMP of IPO II, with respect to the years in issue. In the FPAA, respondent determined, inter alia, that 100 percent of the recourse liability shown on the Schedules K–1, Partner's Share of Income, Credits, Deductions, etc., was allocable to Mr. Forsythe, and, therefore, none of the liability was allocable to Indeck Overseas.⁴

On September 11, 2002, petitioner filed a Petition for Readjustment of Partnership Items Under Code Section 6226 with the Court for a redetermination of the adjustments set forth in the FPAA. Petitioner alleged, inter alia, that respondent erred in the...