Richardson v. Comm'r of Internal Revenue
| Decision Date | 01 April 1981 |
| Docket Number | 12362-79,12363-79.,Docket Nos. 5808-78 |
| Citation | 76 T.C. 512 |
| Parties | CECIL R. RICHARDSON and DORIS C. RICHARDSON, et al.,1 PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
During 1974, 1975, and 1976, petitioners were partners in three partnerships that owned and operated apartment projects. When the partnerships ran into difficulty in meeting their monthly mortgage payments and other ordinary operating expenses, new investors were sought. On Dec. 30, 1974, several individuals were admitted into each partnership, together owning a 75-percent capital interest in each partnership. Furthermore, the new partners were given a 99-percent interest in the profits and losses of each partnership for 1974 and declining percentages in the following years. Held: Sec. 706(c)(2)(B), I.R.C. 1954, applies to prohibit a retroactive reallocation of losses upon the admission of new partners. The original partners must report their distributive shares of partnership items in accordance with their varying interests in the partnerships during the year. Held, further: Petitioners may use any reasonable method of allocating income or losses to periods before and after the admission of the new partners. The interim closing of the books method is a reasonable method for allocating partnership losses. Held, further, on admission of new partners, the bases of old partners for purposes of sec. 704(d), I.R.C. 1954, must be determined at the end of the partnerships' tax year. Held, further, on the admission of new partners, an old partner's basis shall include his proportionate share of partnership liabilities not assumed by new partners. Held, further, an old partner must include in income payments received in 1974 in the form of cash for management and consulting services and noncompetition fees, but need not include such payments received in the form of promissory notes. Held, further, request for attorney's fees denied. D. Irvin Couvillion, for the petitioners.
William A. Neilson, for the respondent.
By statutory notices dated March 29, 1978 (docket No. 5808-78), and June 18, 1979 (docket Nos. 12362-79 and 12363-79), respondent determined deficiencies in petitioners' income taxes for the taxable years ended December 31, 1974, and December 31, 1976, as follows:
By an amendment to answer, filed after trial, respondent seeks an additional deficiency against Cecil R. and Doris C. Richardson for the year 1974 in the amount of $9,688.75, or a total deficiency of $14,808.91. The cases have been consolidated for the purposes of trial, briefing, and opinion.
The issues for our decision are as follows: (1) Whether the admission of new partners into Bengal I, Bengal II, and Batture on December 31, 1974, with the allocation to the new partners of 99 percent of the losses for all of 1974, contravenes section 706(c)(2)(B), I.R.C. 1954, as it existed prior to 1976; (2) if section 706(c)(2)(B) does apply to prohibit the retroactive reallocation to the new partners of 99 percent of the losses for all of 1974, whether the respondent's reallocation to the new partners of 1,365 of the total losses for 1974 from each partnership is proper; (3) whether the old partners' bases in the partnerships must be determined on the last day of the partnerships' taxable year for purposes of determining the amount of losses as limited by section 704(d); (4) whether petitioner Richardson may increase his basis in an amount equal to his proportionate share of partnership liabilities that were not assumed by new partners, thereby reducing his gain realized under section 731; (5) whether the petitioner Richardson received in 1974, and failed to report on his joint income tax return for that year, various noncompetition fees and management fees from Bengal I, Bengal II, and Batture; and (6) whether petitioner Richardson is entitled to an award of attorney's fees.
Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference.
Petitioners Cecil R. Richardson and Doris C. Richardson, husband and wife, resided in Baton Rouge, La., at the time of the filing of their petition herein. They timely filed a joint Federal income tax return for the calendar year 1974. Petitioner Doris C. Richardson is a party hereto solely by reason of having filed a joint return with her husband. Accordingly, reference will be made only to petitioner Cecil R. Richardson.
Petitioners George Schneider, Jr., and Marianne Schneider, husband and wife, resided in Lafayette, La., at the time of the filing of the petition herein. They timely filed joint Federal income tax returns for the calendar years 1974 and 1976. Petitioner Marianne Schneider is a party hereto solely by reason of having filed a joint return with her husband. Accordingly, reference will be made only to petitioner George Schneider.
Petitioners Irwin J. Rice and Martha J. Rice, husband and wife, resided in Shreveport, La., at the time of the filing of their petition herein. They timely filed a joint Federal income tax return for the calendar year 1974. Petitioner Martha Rice is a party hereto solely by reason of having filed a joint return with her husband. Accordingly, reference will be made only to petitioner Irwin J. Rice. Messrs. Richardson, Schneider, and Rice hereinafter sometimes will be referred to as petitioners.
During the years 1974, 1975, and 1976, petitioners were partners in three partnerships which owned and operated apartment projects in Baton Rouge, La., catering primarily to students of Louisiana State University. The partnerships were known as Batture Apartments (Batture), Bengal Towers I Apartments (Bengal I), and Bengal Towers II Apartments (Bengal II). Petitioner Richardson was a general partner in all three partnerships for the entire years 1974 and 1975 and remained a partner until May 20, 1976, when his interests were sold. Petitioners Schneider and Rice were admitted into each partnership on December 31, 1974, as partners in commendam under Louisiana law (equivalent to status as limited partners for Federal tax purposes) and remained partners throughout 1975 and 1976.
Batture originated as a general partnership on February 1, 1972, and had four general partners, each owning a one-fourth interest in capital, profits, and losses. The partnership agreement was evidenced in writing and was duly recorded in the public records. Bengal I originated as a general partnership in early 1972 and had two general partners, each owning a one-half interest in capital, profits, and losses. The agreement for this partnership was not evidenced in writing. Bengal II originated as a general partnership on February 27, 1973, and had three general partners, each owning a one-third interest in capital, profits, and losses. The partnership agreement was evidenced in writing and was duly recorded in the public records.
The apartment projects that were owned by each of the partnerships were constructed by petitioner Richardson and Daniel R. Fazekas, general partners, who were in the construction business. The principal debts of each partnership, evidenced by mortgages encumbering the property of each, were as follows:
Batture:
First Mortgage, dated Dec. 28, 1972, in favor of Carruth Mortgage Corp. in the amount of $550,000.
Chattel Mortgage dated Apr. 24, 1973, in favor of Capital Bank & Trust Co. of Baton Rouge, La., in the amount of $113,594.40;
Bengal I:
First Mortgage, dated Dec. 20, 1972, in favor of Capital Bank & Trust Co. of Baton Rouge, La., in the amount of $490,000; the note was assigned to Carruth Mortgage Corp.
Second Mortgage, dated Jan. 30, 1974, in favor of Carruth Mortgage Corp. in the amount of $16,209.48;
Bengal II:
First Mortgage, dated Mar. 20, 1973, in favor of Louisiana National Bank of Baton Rouge, La., in the amount of $600,000; the note was assigned to Carruth Mortgage Corp.
Second Mortgage, dated Jan. 30, 1974, in favor of Carruth Mortgage Corp., in the amount of $50,308.44.
The above amounts represent the balances as they stood at the origination of each loan and not the amount of indebtedness as of December 31, 1974.
In addition to the mortgage encumbrances set forth above, the partnerships during the year 1974 were also indebted as follows:
Batture:
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