Zuckman v. United States

• Decision Date: 22 October 1975
• Docket Number: No. 798-71.,798-71.
• Parties: George ZUCKMAN and Ethel Zuckman v. The UNITED STATES.
• Court: U.S. Claims Court

524 F.2d 729

George ZUCKMAN and Ethel Zuckman v. The UNITED STATES.

No. 798-71.

United States Court of Claims.

October 22, 1975.

Bart A. Brown, Jr., Cincinnati, Ohio, atty. of record, for plaintiffs. David S. Mann and Dinsmore, Shohl, Coates & Deupree, Cincinnati, Ohio, of counsel.

John E. Evans, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant. Robert H. McKnight, Jr., and Theodore D. Peyser, Jr., Washington, D. C., of counsel.

Before COWEN, Chief Judge, DURFEE, Senior Judge, and SKELTON, Judge.

ON PLAINTIFFS' MOTION AND DEFENDANT'S CROSS MOTION FOR SUMMARY JUDGMENT

COWEN, Chief Judge.

This case concerns the proper classification for tax purposes of a limited partnership with a sole corporate general partner pursuant to Treasury Regulations Section 301.7701-2.¹ Plaintiff, George Zuckman, joined by his wife, Ethel Zuckman,² seeks a refund of $6,299.56 plus interest for Federal income taxes paid for the calendar year 1968.

During 1968, plaintiff held an interest, as limited partner, in a Missouri real estate development group known as Towne House. The principal issue presented by the parties' respective motions for summary judgment is whether Towne House should be classified as an association or a partnership. If classified as an association, which is taxable as a corporation under Section 7701(a)(3) of the Internal Revenue Code of 1954,³ then only the association itself may take deductions for any net operating losses sustained during its 1968 taxable year. Section 11(a). If classified as a partnership within the meaning of Section 7701(a)(2) of the Code, then plaintiff may deduct his pro rata share of such losses under Section 701, which permits the pass-through of partnership income and losses to the individual partners. Since we find that Towne House, under the standards set forth in Treasury Regulations Section 301.7701-2, "more nearly resembled" a partnership than a corporation during the period in question, we conclude that plaintiff was entitled to deduct his distributive share of the Towne House losses. Accordingly, we grant plaintiff's motion for summary judgment, and deny defendant's cross motion.

The parties are generally in agreement as to the material facts. The stated purpose of Towne House, formed as a limited partnership under Missouri law by an agreement dated June 10, 1964, was to acquire a specific parcel of real property in St. Louis, Missouri, known as the Lindell property, and to construct and operate an apartment building on that property. The original partners of Towne House and their respective interests before and after completion of construction were as follows:

                Interest Interest
                Before After
                Construction Construction
                Partner (percent) (percent)
                Forest Park of Missouri, Inc.__________     51                69.577
                J. H. Kanter___________________________     47                29.331
                Robert Blatt___________________________      1                  .546
                Plaintiff George Zuckman_______________      1                  .546
                

The limited partnership agreement designated Forest Park as the sole general partner, and J. H. Kanter, Mr. Blatt, and the plaintiff as limited partners.

Forest Park, incorporated under Missouri law on July 17, 1963, was the wholly-owned subsidiary of Kanter Corporation, which in turn was wholly owned by J. H. Kanter. During the period in question, Kanter Corporation had net assets in excess of $3,500,000. From the time of Towne House's formation on June 10, 1964, through the taxable year ending March 31, 1968, Forest Park remained capitalized at only $500, had no substantial assets other than its interest in Towne House, and engaged in no activities beyond those directly related to Towne House. On August 7, 1963, J. H. Kanter, as president and sole shareholder of Kanter Corporation, received from the directors of that corporation a continuing proxy to vote all of the stock of Forest Park "as though he owned the stock in his individual capacity." By use of this proxy, J. H. Kanter elected all of the Forest Park directors during the period in suit. Three of Forest Park's five officers and directors served concurrently as officers and full-time employees of Kanter Corporation. None of these latter officers received any compensation from Forest Park during the fiscal year 1968.

In October 1963, Forest Park acquired the Lindell property from Millstone Construction, Inc., for $574,500, payable pursuant to a promissory note executed jointly by Forest Park and Kanter Corporation. Shortly thereafter, Kanter Corporation pledged all of its Forest Park stock to Millstone Construction as security for the promissory note. A principal payment of $424,500 was made on the note in July 1967, and a new note for $150,000 was executed by Forest Park and Kanter Corporation.

Construction of the apartment building was financed by a loan of $7,873,300 from the Central Trust Company to Towne House. The loan was evidenced by a Deed of Trust Note dated June 24, 1964, secured by the deed of trust executed that same date by Towne House, and insured by the Federal Housing Administration pursuant to Towne House's execution of an FHA Regulatory Agreement. This latter agreement, in part, prohibited voluntary dissolution of Towne House absent FHA approval, so long as the Towne House property remained subject to the FHA insured mortgage.⁴ The agreement further provided that none of the partners of Towne House would be personally liable for repayment of the FHA loan. Towne House defaulted on its mortgage payments in 1967 and, on September 27, 1967, an agreement restoring the mortgage to current status was executed among Towne House, the FHA, and Kanter Corporation, whereunder Kanter Corporation assumed a potential liability to the FHA of $78,333.

Plaintiff and Mr. Blatt were the largest shareholders and highest officers of Towne Construction, Inc., which was incorporated in Missouri on June 4, 1964, to serve as general contractor for the Towne House construction project. In the contract between Towne Construction and Towne House, dated June 22, 1964, Towne House reserved the right to approve all subcontracts. Beginning in June 1964, Kanter Corporation rendered services to Towne Construction for which it was paid $53,000.

Additional limited partners were added at various times during 1967 and 1968. These new partners were all subcontractors on the Towne House construction project. Thereafter, the partners and their respective interests for the taxable year ending March 31, 1968, were as follows:

                Partner Interest
                (percent)
                    Forest Park--------------------------------------------      61.829
                    J. H. Kanter-------------------------------------------      21.798
                    Robert Blatt-------------------------------------------       1.014
                    Plaintiff----------------------------------------------       1.014
                    Burroughs Glass Co.------------------------------------        .355
                    Metal Trims, Inc.--------------------------------------        .811
                    Ray R. Dolan, Sr.--------------------------------------        .253
                    Daniel F. Shedran--------------------------------------        .253
                    Milton J. Ortbal---------------------------------------        .169
                    Stephen Gorman Bricklaying Co., Inc.-------------------       6.759
                    Thomas J. Dolan----------------------------------------       1.690
                    Daniel E. Siegel---------------------------------------       4.055
                                                                                ________
                                                                                100.000
                

For its fiscal year ending March 31, 1968, Towne House had a net operating loss of $1,050,759. In computing this loss, Towne House took deductions for depreciation in the amount of $533,302 and for interest in the amount of $426,333. As of March 31, 1968, plaintiff had contributed a total of $7,500 to Towne House as a limited partner. Plaintiff's distributive share of Towne House's loss for the fiscal year ending March 31, 1968, was $10,655. This loss was claimed by plaintiff on his Federal income tax return for calendar year 1968. By letter dated January 12, 1970, the District Director of Internal Revenue, Cincinnati, Ohio, issued a proposed assessment, disallowing plaintiff's claimed deductions for the stated reason that Towne House, during the applicable period, was to be considered an association, and not a partnership, for tax purposes. On November 30, 1970, plaintiff paid the full amount of the proposed assessment, plus statutory interest, and on December 14, 1970, filed a timely claim for refund. After more than six months had elapsed without action on the claim, plaintiff instituted this suit.

I The Classification Regulations

The Internal Revenue Code defines a partnership to include "a syndicate, group, pool, joint venture, or other unincorporated organization * * * which is not, within the meaning of this title a trust or estate or a corporation." Section 7701(a)(2). A corporation is defined to include "associations, joint-stock companies, and insurance companies." Section 7701(a)(3). To clarify and effectuate these rather broadly drawn definitions, the Internal Revenue Service promulgated a series of regulations embodying standards for each of the three major classes of business organizations—associations (taxable as corporations), partnerships and trusts. Reg. §§ 301.7701-2 (1960) (associations), -3 (partnerships), and -4 (trusts).

The regulation applicable to partnerships states that an organization qualifying as a limited partnership under state law may be classified for tax purposes as an association if, after the standards in the regulation dealing with associations are considered, the limited partnership more closely resembles a corporation than a partnership. Reg. § 301.7701-3(b). The regulation dealing with associations articulates six corporate characteristics: (1) associates, (2) an objective to carry on business and...