Production House Limited Partnership C-23 v. Commissioner

Decision Date27 May 1992
Docket NumberDocket No. 28874-89.
Citation63 T.C.M. 3066
PartiesProduction House Limited Partnership C-23, Gary O. Everett, Tax Matters Partner and Sandra B. Everett, A Partner Other Than The Tax Matters Partner v. Commissioner.
CourtU.S. Tax Court

Gary O. Everett, pro se. Clement Shugerman, for the respondent.

Memorandum Findings of Fact and Opinion

WELLS, Judge:

The instant case is a proceeding under section 6226, Internal Revenue Code, for the readjustment of partnership items of Production House Limited Partnership C-23 (the partnership) for the taxable year ended December 31, 1984. The Notice of Final Partnership Administrative Adjustments (FPAA) issued by respondent in the instant case disallowed $43,300 of losses and $3,000 of investment tax credit claimed by the partnership in connection with a video store located at the Chanute, Illinois, Air Force Base. The issues presented for decision are: (1) Whether Gary O. Everett is the tax matters partner (TMP) for the partnership; and (2) whether the partnership is entitled to the deductions and credits claimed with respect to such video store business. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Findings of Fact

Some of the facts and certain documents have been stipulated for trial pursuant to Rule 91. The stipulations of fact are incorporated herein by reference, irrespective of any restatement below. At the time the petition in the instant case was filed, Mr. Everett resided in Vienna, Virginia. At the time the petition in the instant case was filed, the partnership had dissolved due to the bankruptcy of two of the general partners.1

The partnership was formed in 1984 to do business in Utah. The partnership formed part of a plan to acquire the assets of and operate video rental stores on military bases in the United States. The video store with which the partnership was concerned was located at Chanute Air Force Base in Illinois (the Chanute video store). The promoters of the plan were Phillip Rennert and Production House Video Corporation (PHVC).

On September 5, 1984, Adventureland Video, Inc. (Adventureland) was awarded a contract to conduct a video rental business at Chanute by the Army and Air Force Exchange Service (AAFES). Adventureland was engaged in the business of owning, operating, and franchising video rental stores. The contract provided that Adventureland was to furnish the inventory of videotapes, videocassette players, and videotape cameras to be offered for rental, as well as certain equipment, such as cash registers, display cases, and racks. The contract also provided that Adventureland could not subcontract any part of the work to be performed under the contract without the written consent of AAFES, nor could Adventureland assign its rights or delegate its responsibilities under the contract without the prior written consent of AAFES.

Prior to the award, Adventureland and Business Concepts, Inc. (BCI) had formed a joint venture called Adventure World Video to exploit the video rental market on military bases. BCI was to provide day-to-day management for the stores, while Adventureland was to equip the stores and provide the funds to establish them. Adventureworld, Inc., an affiliate of Adventureland (Adventureworld), was to raise the needed capital, and Adventureland transferred its interest in the joint venture to such affiliate.

Adventureworld contracted with Mr. Rennert, whose business was partnership syndications and financing, to raise capital from investors for the stores. An initial contract was made on September 26, 1984, but, because Mr. Rennert defaulted on the contract, it was canceled. A second contract was made November 19, 1984, under which Adventureworld agreed to transfer to PHVC video store assets subject to the joint venture agreement with BCI in exchange for payments equal to the value of such assets. Mr. Rennert guaranteed PHVC's obligations under the contract.

Payment was to be made as follows: $50,000 payable on November 19, 1984, at least $200,000 payable by December 19, 1984, a second such payment by January 9, 1985, and the balance by January 30, 1985. Adventureworld retained a security interest in and title to the assets until payment was made. Upon the making of the first $200,000 payment, assets of such value were to be released to PHVC, and Adventureworld would convey all right, title, and interest in such assets by bill of sale to PHVC. Mr. Rennert was to designate which stores were to be released. By bill of sale dated January 14, 1985, Adventureworld transferred the assets of eight video stores, including the Chanute video store, to PHVC. No transfer of personal property or inventory assets occurred prior to such date.

BCI did not initially consent to the transfer of the joint venture's video store assets to PHVC, but BCI was willing to do so upon receipt of fees due BCI under the joint venture agreement. On January 16, 1985, BCI consented to the transfer of the eight stores covered by the bill of sale, contingent on its receipt of $32,000, covering the set-up fees for such stores. Additionally, PHVC and BCI formed a joint venture on December 31, 1984, to operate the video stores acquired from Adventureworld and to seek more military video store contracts. PHVC and Mr. Rennert subsequently defaulted on the November 19, 1984, agreement, and the contract was terminated March 20, 1985.

Mr. Everett first learned of the video store transaction in October 1984, when he was contacted by Jay Anderson, who was the agent of the promoters. Mr. Everett previously had purchased an oil and gas limited partnership from Mr. Anderson. Mr. Everett neither met with any of the principals involved in promoting the partnerships, nor met with anyone involved with the operation of the video stores. Mr. Everett received an offering memorandum describing the transaction, which stated that, when he invested, a partnership would be formed to hold the assets of a video rental store. The offering memorandum stated that Mr. Rennert and PHVC were to receive approximately 20 percent of the total proceeds in fees, which, for a store such as the one at Chanute, were estimated to be about $4,800. The offering memorandum contains a lengthy discussion of the tax aspects of the transaction. The offering memorandum also indicated that Mr. Everett would make a first year profit of $17,356.

Mr. Everett consulted with an accountant who had no experience in the video rental business about the proposed transaction and visited a video rental store on a military base near his home. Mr. Everett sent the promoters a check dated December 19, 1984, for $5,250, along with a signed promissory note which left blank the principal amount, interest rate, and repayment schedule. Mr. Everett did not intend that such note would be paid by him and no effort to collect on the note has occurred. Mr. Everett contributed all of the partnership's capital. Mr. Everett received a 99 percent interest in the partnership, while the other partners, Mr. Rennert and PHVC, each had a 1/2 percent interest. Mr. Everett never received a partnership agreement signed by all the partners. Mr. Everett did not keep copies of the transaction documents he signed for his files. The offering memorandum stated that the partnership was to be a limited partnership, but a certificate of limited partnership was never filed with the proper Utah government agency. Mr. Everett neither attempted to confirm that the partnership ever acquired the assets of the Chanute video store nor visited such store.

The partnership filed a Form 1065 for its 1984 taxable year which claimed a loss of $43,300 from an excess of expenses over revenues, and claimed an investment tax credit of $3,300. Expenses deducted included a loss from sale of inventory, wages, taxes, depreciation, and miscellaneous fees. The partnership did not designate a TMP in its return.

During 1985, Mr. Everett became aware that the venture was experiencing serious difficulties with BCI, the operator of the video stores, and that a lawsuit would have to be filed in order to obtain income from the stores. Mr. Rennert and PHVC declared bankruptcy on April 1, 1986. Lyle Mortensen, PHVC's accountant, and Jay Anderson, a director of PHVC, also filed for bankruptcy. By mutual agreement, Adventureland and AAFES terminated Adventureland's contract to operate the Chanute video store effective March 31, 1986.

Opinion

The first issue we must consider is whether Gary O. Everett is the TMP of the partnership. Respondent contends that Mr. Everett is the TMP of the partnership as provided by section 6231(a)(7)(B). Mr. Everett contends that he is a limited partner of the partnership and, therefore, he cannot qualify as a TMP under such provision. After due consideration, we conclude that Mr. Everett is the TMP.

Mr. Everett is the only one of the three partners in the partnership eligible to be the TMP. The other two partners, Mr. Rennert and PHVC, went into bankruptcy proceedings and are therefore ineligible to be TMP's. Computer Programs Lambda. Ltd. v. Commissioner [Dec. 44,072], 89 T.C. 198, 203-206 (1987); sec. 301.6231(a)(7)-1T(l)(4), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6792 (Mar. 5, 1987). Section 6231(a)(7)(B) provides that, where a TMP is not designated under the procedures set forth in the regulations, which is the circumstance of the instant case, the TMP is the "general partner having the largest profits interest at the close of the taxable year involved". At the relevant time, Mr. Everett held a 99 percent profits interest in the partnership. Mr. Everett, however, contends that he is a limited partner, not a general partner, and he therefore cannot be the TMP under such provision. Inasmuch as we hold below that the partnership is a general partnership...

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