T.C. M em o . 2 0 1 8 -1 3 7

UNITED STATES TAX COURT

ROBERT FORLIZZO AND J UDITH INGRAM , Pet it i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

ROBERT FORLIZZO, Pet it i on er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 1 3 2 7 1 -1 4 , 1 3 27 2 -1 4
. Fi l edAu gu s t 2 7 , 2 0 1 8
.

Ro b ertFo rl i zzo an d Ju d it h In g ram , p ro s es e i n d o ck et No . 1 3 2 7 1 -1 4
. Ro b ertFo rl i zzo , p ro s e i n d ock etNo . 1 3 2 7 2-1 4
. Ch ri st o p h er A. Pav il on i s , fo r res p o n d en t
.- 2
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[* 2 ] M EM ORANDUM OPINION GERBER, J u d g e: Aft er co n ces s i o ns th e i s s u e fo r d eci si on i s wh ether M r. Fo rl i zzo (p et i t i o n er) i s en t i t l edt o l o s s d edu ct i o n s fo r 2 0 0 8 rel at i n g t o h i s i n t eres t s i n cert ai n p art n ers h ip s . 1 Back gro u n d Pet i t i o ner i s an at t o rn ey l i cen s edi n the St at e o f Fl o ri da wh o recei v eda
m as t er o f l aws i n t ax at i o n fro m New Yo rkUn i vers i ty

an dp ri m ari l y

p ract i cedreal
es t at e tran s act i o n s l aw. Pet i t i o n er, Parad is e Dev el op m en tGro up (PDG), an do t her real es t at e p ro fes s i o n al s fo rm edm u lt i p l e p art n ers h i p s wh i ch were o p erat edas
s p eci al p u rp o s e en t i t i es (SPE) t o acq u i re an d d ev el o p real p ro p erty i n Fl o ri d a, Geo rg i a, Io wa, Pen n s y l v an ia, an dSo u th Caro li n a. PDG h i s t o ri cal l y s o l dth e p ro ject s up o n co m

p l et i o n . PDG creat ed an SPE fo r each real es tat e v en tu re i n wh i ch i tp art i ci p at edan d
co n tro l l edth e g en eral p artn er o f each SPE. Pet i t i o n er was a m i n o ri ty p art n er i n
s ev eral o f t h e SPEs m an ag edb y PDG, i n cl u d i ng th e 1 2 l i m i t edp art n ers h i ps at

1 Th es e cas es were reas s i g n edfro m Ch i ef J u d g e Fo l ey t o Sen i o r J u d g e Gerb er b y an o rd er d at edJ u l y

2 6 , 2 0 18 . Th ere was n o tri al o r t es t i m o n y , an dth e p art i es s ub m i t t edth es e cas es fu l l y s ti p u lat ed p urs u an tt o Ru le 1 2 2
. Un l es s o th erwi s e i n di cat ed , al l s ect i on referen ces are t o th e In t ern al Rev en u e Co d e rel at i n g t o th e y ears i n i s s u e, an d al l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re.- 3
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[* 3 ] i s su e: M TW -Ho u s t o n, L.P., Parad i s e Sh o p p es o f Perry , L.P., W i n -8 8 , Lt d ., W i n-W ex fo rd , Lt d
. , Parad i se Sh o p p es o f Hamm o n d Cro s si ng , Lt d ., OFPSu m m erv i l l e, Lt d., W i n-9 8 , Lt d ., W i n -Ad am s Ri d g e, Lt d
. , Sh op p es at Gl en Lak es , Lt d ., GKK-M i ll s Ci v i c, L.P., OFP-Hu t s o n, Lt d., an dW in IV, Lt d . (co l l ect i v el y , Part ners h i p s ). Pet i t i on er al s o m ad e n om i n al fi nan ci al co n tri b u t i o ns t o th e Part ners h i p s , recei v edo n av erag e a 3 % p ro fi t s i n teres ti n each o f t h e Part n ers h i p s , h an dl ed l eg al m at t ers , an dact edas th e reg i s t eredag en tfo r t he Part n ers hi p s . As th e reg i s t eredag en t , p et i t io n er fi l edan nu al rep o rt s fo r s o m e o f t he Part n ers h i p s b efo re, du ri n g , an d aft er 2 0 0 8. Each o f t h e Part n ers h i p s h ada p ri n ci p al p l ace o f b u s i n es s i n Fl ori d a. Th e Part ners h i p s o b t ai n edl o an s (co n s tru ct i o n l o an s ) fro m d i fferen tb an k s t o fi n an ce th e co n s tru ct i o n o f t h e Part n ers h i p s ’ real es t at e p ro ject s . Pet i t i o n er, al o n g wi th th e
o th er p art n ers , p ers o n al ly g u aran t eed th e co ns tru ct i o n l oan s . He was al so atri s k wi th reg ardt o th e Part n ers h i p s ’ co n s tru ct io n l o an s , an dth e co n s tru ct i o n l o an s
were reco u rs e l i ab i l i ti es wi th res p ectt o h i m . Befo re, du ri n g, an daft er 2 0 0 8 th e Part ners h i p s am en d eds o m e o f t h e ag reem en t s rel at i n g t o th es e co ns tru ct i o n l o an s . Beg i n n in g i n o r ab o u tAp ri l 2 0 07 PDG’ s m an ag em en tco n tri b u t edav ai l ab l e
cas h res o u rces t o t he Part ners hi p s s o th atthe Part n ers hi p s co u l d rem ai n v i ab l e g o i n g co n cern s . M an ag em en t al s o b eg an s el l i n g as s et s fro m s ev eral o f t h e- 4
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[* 4 ] Part ners h ip s t o fu n d t h e Part n ers h i p s ’ cas h fl o wreq ui rem en t s. Du ri ng 2 0 0 8 th e co m m erci al an dres i den t i al real es t at e m ark et s d ecl i n ed , an das a res u l tPDG cl o s eds ev eral o ffi ces , l ai do ff em p l o y ees , an dco n si d eredres tru ctu ri n g th e Part ners h i p s ’ d eb ts , i n cl ud i n g th e co n s tru ct i o n l o an s . In Oct o b er 2 0 08 PDG i n i t i at eda m eet i n g wi th i t s cred i t o rs , an dPDG’ s fo u n der an d p res id en tg av e a p res en t at i o n o n th e s t at e o f t h e co m p an y an dth e Part ners h i p s . PDG’ s m an ag em en tb el i ev edth atth e cas h fl o w was i n ad equ at e fo r PDG t o rem ai n a g o i n g co n cern o r s erv ice t h e d eb tan d th e l i qu i d i ty o f t h e p ri n ci p al s , i n cl u d i n g PDG, h adb een d ep l et ed . M an ag em en t , h o wev er, was
co n cern edth atthe v al u e o f t h e p ro ject s o f each o f t h e Part n ers h i p s wo u l d b e d es tro y edi f t h e p ro

ject s were h al t ed . Th e p res en t at i o n p ro v i dedfo u r av ai l ab l e
co u rs es o f act i o n : 1 ) ceas e o p erat i o n s /s h ut d o wn /l i qu id at e ex i s t i n g p ro ject s an draw l an d i n a Ch ap t er 7 [b an krup t cy ] th ro u gh a Tru s t ee, 2 ) [d ] eedi n l ieu o f fo recl o s u re o n raw l an dan d n o n -p ro fi t ab l e p ro j ect s an dco m

p let e o n l y p ro fi t ab l e p ro

ject s , 3 ) [c] o m

p l et [e] ex i s t in g co n s tru ct i o n p ro ject an dco n tro l l i qu id at i o n o f raw l an dan dco m p l et edp ro ject s i n ch ap t er 1 1 [b an krup t cy ] b y

the ex i st i ng m an ag em en tt eam , [an d ] 4 ) [en ter a] co n s en s u al wo rko u twi th b an k s fu n d co m p l et i o n o f co n s tru ct i o n p ro jectan dco n tro l l i qu i d at i o n o f raw l an dan d co m p l et edp ro ject s i n a[n ] o u to f co u rtres tru ctu ri n g . PDG’ s g o al s fo r res tru ctu ri n g were t o co m p l et e t he res tru ctu ri ng o u t s i d e o f b an krup t cy

t o m ax i m i ze v al u e fo r s t ak eh o l d ers an dco m p let e o v er 2 0 ex i s ti n g- 5
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[* 5 ] p ro ject s . As o f Oct o b er 2 0 0 8 , 1 1 o f th e Part n ers h i p s h ada p o s i t i v e n et
s t ab i li zedv al u e 2 an da p o s i t i v e n etcu rren t v al u e, an d7 o f t h e Part n ers h i p s h ada
n eg at i v e “ cu rren tl en d er ex p o s u re”. 3 Pet i t i o n er’ s 2 00 8 Sch edu l es K-1 , Part n er’ s Sh are o f In co m e, Dedu ct i on s , Cred i t s , Et c., al s o s ho w th at du ri n g 2 0 0 8 n i n e o f t h e Part ners h i p s i n cu rredl os s es an dth ree g en erat edi n co m e. Pet i t i o n er d i d n o t p ro v id e ev i d en ce (i
. e., ap p rai s al s o r v al u at i o n s ) es tab l i s h i ng th atan y Part n ers h i p
o r s ub j ectreal es t at e was v al uel es s atth e en do f 2 0 0 8. Aft er t h e cred i t ors ’
m eet i n g an das o f Decem b er 3 1, 2 0 0 8 , th e u n d erl y in g real es t at e o wn ed b y th e Part ners h i p s ret ai n ed v al u e, an dth e l en d ers an dm o rt g ag e h o l d ers h adn ot fo recl o s ed o n an y

o f t h e p ro p ert i es o wn edb y th e Part n ers h ip s . Al tho u g h PDG ret ai n ed th e s erv i ces o f a b an krup t cy fi rm t o as s i s t wi th th e res tru ctu ri n g, n ei th er PDG n o r t h e Part n ers h ip s h ad fi l edfo r b an krup tcy . PDG an d th e p art n ers o f each
o f t h e SPEs co n ti n u edn eg ot iat i n g th e res tru ctu ri n g o f t h e d eb to b l i g at i o n s i n t o 2 0 1 1
. OnOct o b er 1 2 , 2 00 9 , p et i t i on er fi l edh i s 2 0 0 8 i n d i v i dual Fed eral i n co m e t ax return o n wh i ch h e d i dn o trep o rtan y l o s s es rel at i n g t o h i s i n t eres ts i n th e

2 St ab i li zedv al u e i s th e v al u e o f a p ro p ert y aft er i treach es s t ab i l i zed o ccupan cy .

3 W e u nd ers t an d t h e t erm

“ l en d er ex p o su re” t o b e t h e l en d er’ s ri sko f l o s s ex p os u re i n the ev en to f d efau l t
.- 6
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[* 6 ] Part ners h ip s . 4 Pet i t i o n er d et erm i n edth ath i s i nt eres t s i n th e Part n ers h i p s were
wo rt h l es s o n Decem

b er 3 1, 2 0 0 8 , b u t d i d n o t i n fo rm h i s 2 0 08 t ax retu rn p rep arer
o f t h at d et erm in at i o n . On Oct o b er 1 9 , 2 0 1 0 , p et i t io n er fi l ed an am en d ed2 0 0 8 Fed eral i nco m e t ax return o n wh i ch h e cl ai m edl o ss d edu ct i o n s rel at i n g t o h i s i n t eres t s i n th e Part n ers h i p s. OnM arch 7 , 2 01 4 , res p on d en ti s su edp et i t i on er a n o t i ce o f d efi ci en cy rel at i n g t o 2 0 0 8 an d2 0 0 9 an d i s s u edp et i t i o ner an d M s . In g ram (p et i t i o n ers ) a
n o t i ce o f d efi ci en cy

rel at i ng t o 2 0 1 0 an d2 0 1 1 . OnJ u n e 3 , 2 0 1 4 , p et it i on ers , wh i le res i d i n g i n Fl o ri d a, t i m el y fi l edp et i ti o n s rel at i ng t o th e n o t i ces o f d efi ci en cy , an d o n Sep t em b er 2 7 , 2 0 1 6 , th e Co u rtfi l edp et i t i o n er’ s fi rs tam en d ed p et i t i o n , wh i ch al l eg edth atth e n o t i ces o f d efi ci en cy d i d n otrefl ectth e l o s s d educt i o n s rel at i n g t o h is i n t eres t s i n the Part n ers h i p s . OnAp ri l 1 9 , 2 0 1 7, th e Co u rtfi l edp et i t i o n er’ s s eco n dam en d edp et i t i o n co n t en d i n g th ati f p et i t i o ner’ s cl ai m ed2 0 0 8 wo rth l es s p artners h i p i n t eres t l o s s d edu ct i o n s are d en i ed , h e wo u l d

4 Pet i t i on er d i dn o tfi l e a jo i n tFed eral i n co m e t ax retu rnwi th M s . In g ram u n t i l 2 0 1 0 an d2 0 11
.- 7
-

[* 7 ] n o tb e b o u n d
. 5 Th es e cas es were co n s o l i d at edb y an o rd er d at edNo vem

b er 7 , 2 0 1 6
. Pet i t i o ner d i dn o tab an d on h i s i n t eres t s i n th e Part n ers h i p s duri n g 2 0 0 8 , 2 0 0 9 , 2 0 1 0 , an d 2 0 1 1, an dh e s ub ject i v el y co n cl u dedth at h i s i n t eres t s i n th e Part ners h i p s were wo rt h l es s as o f Decem b er 3 1 , 2 0 0 8 . Becau s e p et i t i o ners res i d ed i n Fl o ri d a atth e t i m e t he p et i t i o n was fi l ed , an ap p eal o f t h es e cas es wo u ld
n o rm al l y b e t o the U.S. Co urto f Ap p eal s fo r t h e El ev en th Ci rcu it . Th e o nl y
rem ai n i n g i s s u e fo r d eci s io n i s wh et her a cl o s edan d co m p l et edtran s act i o n
res u l ti n g i n a l o s s o ccu rredas o f Decem ber 3 1 , 2 0 0 8
. Di s cu ss i o n Pu rs uan tt o s ect i o n 1 6 5 (a), a t ax p ay er m ay cl ai m an o rd i n ary l os s d edu ct i o n rel at i n g t o h i s i n v es t m en ti n a p art ners hi p i f t he i nv es tm en tb eco m es wo rth l es s an d
s al e o r ex ch an g e t reat m en td o es n o t ap p l y . 6 See Ech o l s v . Co m m i s s i on er, 9 3 5 F.2 d7 0 3 , 7 0 7 (5 th Ci r. 1 9 9 1 ) (n o t i n g the Co u rtd i dn o tad dres s th e i s s u e o f
wo rt h l es s n es s), rev ’ g 9 3 T.C. 5 5 3 (1 9 8 9 ); s ee al so Tu ck er v . Co m m i s s i o n er, 8 4 1

5 Pet i t i on er rep o rt edrecap tu redi n co m e o n p et i t i o n ers ’ 2 0 1 0 an d 2 0 1 1 jo i n t Fed eral i nco m e t ax return s rel at i n g t o h i s 2 0 08 wo rth l es s p art n ers h i p i n t eres tl o s s d educt i o n s fo r M TW -Ho u s t o n , L.P., OFP-Hu t so n , Lt d
. , an dW i n -8 8 , Lt d
.

6 A l o s s fro m

wo rt h l es s n es s o f a p art n ers h i p i n t eres twi l l b e o rd i n ary i f t h ere i s n ei th er an actu al n o r a d eem edd i s tri bu t i o n t o t h e p art n er p u rs uan tt o s ec. 7 3 1, 7 4 1 , o r 7 5 2 . See Ci tro n v . Co m m i s s i o n er, 9 7 T.C. 2 00 , 2 16 (1 9 91 ).- 8
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[* 8 ] F.3 d1 2 41 , 1 25 1 (1 1 th Ci r. 2 0 1 6 ), aff’ g T.C. M em o . 2 0 1 5 -1 8 5. “ [A] l o s s [rel at i n g t o a wo rt h l es s i n t eres ti n a p art n ers h i p ] m u s tb e ev i d en cedb y

cl o s edan d
co m p l et edtran s act i o n s, fi x edb y i d en t i fi ab l e ev en t s * * * actu al l y s u s t ai n eddu ri n g th e t ax ab l e y ear” i n o rd er t o qu al i fy as a d edu ct i b le l o s s . Sec. 1
. 1 6 5 -1 (b ), In co m e Tax Reg s . Det erm in i n g th e y ear fo r wh i ch a t ax p ay er can cl ai m a l o s s d edu ct i o n
ev i d en cedb y

a cl o s edan dco m

p l et edtran s act i on i s a qu es ti o n o f fact . Bo eh m v . Co m m i s s i o n er, 3 2 6 U.S. 2 8 7 , 2 9 3 (1 9 4 5). A d ecl i n e i n th e as s et s ’ v al u e o r m ere s h ri n k ag e i s n o ts u ffi ci en tt o es t ab l i s h a cl o s edo r co m

p l et edtran s act io n n eces s ary t o ju s t i fy a l o s s d edu ct io n p urs u an tt o
s ect i on 1 6 5 (a). See Pro es el v . Co m m i s s i o ner, 7 7 T.C. 9 9 2, 1 0 0 6 (1 9 81 ); s ec. 1 .1 65 -1 (b ), In co m e Tax Reg s . Fo rm al b an krupt cy , l i qu i d at i o n , i n s o lv en cy , o r
m ark etev en t s an dco n d i t io ns can s u ffi ci en t l y es t ab l i sh a cl os edan dco m p l et ed tran s act io n n eces saryt o ju s t i fy a l o s s d edu ct i o n rel at i n g t o a wo rt h l es s i n t eres t i n a p art n ers hi p . See Tu ck er v . Co m m i s s i o n er, 8 41 F.3 d at1 2 5 3 (h o ld i n g th atat t em p ts t o o b t ai n ad d it i o n al cap it al o r m i n i m i ze l os s es es t ab l i sh edth atp ro p ert y s ub jectt o
reco u rs e d eb t“ ret ai n eden o u gh v al u e t o av o idb ei n g ‘ w o rt h l es s ’ ”); Ech o l s v . Co m m i s s i o n er, 9 3 5 F.2 dat7 0 8-7 0 9
. Pet i t i o ner b ears th e b u rd en o f p ro of o f es t ab l is h i n g th ateach o f h i s i n t eres t s i n the Part n ers h i p s b ecam e wo rth l es s as th e res u lto f a cl os edan dco m p l et ed- 9
-

[* 9 ] tran s act i o n du ri n g 2 0 0 8
. 7 See Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ). Res p o n d en tco n t en d s th atp et i t i o n er’ s reco u rs e l i ab i l i t i es rel at i n g t o th e co n s tru ct i o n l o an s p recl u dedh i m fro m cl ai m i n g a wo rt h l es sn es s l o s s d edu ct i o n rel at i n g t o h is i n t eres t s i n t h e Part ners h i p s u n t i l a fo recl o s u re s al e,
an d th ath i s i n teres t s i n t h e Part n ers h i p s h adv al ue at th e en d o f 2 0 0 8
. Pet i t i o n er arg u es o n b ri ef t h atres p o n d en th as fo cu sedo n th e as s et s o f t h e Part ners h i p s an d h e co nt en d s th at h i s p art n ers h i p i n t eres t s h adb eco m e wo rt h l es s , ev en th o u g h th e Part ners h i p s h el d as s et s th atret ai n edv al ue. He fu rt h er co n t en ds th ath is i n t eres t s i n the Part n ers h i p s were wo rt h l es s i n 2 0 08 reg ard les s o f t h e reco u rs e l i ab i l i t i es t o wh i ch th e Part ners h i p s ’ as s et s are s ub jectb ecau s e t h ey

rel at e t o t h e u n d erl y i n g p ro p ert i es h el db y

th e Part n ers h i p s . Each o f p et i t i o n er’ s i n t eres t s i n th e Part n ers h i p s m u stb e t es t edfo r
wo rt h l es s n es s as o f Decem b er 3 1 , 2 0 0 8 . See Ech o l s v . Co m m i s si on er, 9 3 5 F.2 dat 7 0 7 ; s ee al so Tu ck er v . Co m m i s s i o n er, 8 41 F.3 d at1 2 5 1. Th e Part n ers h i p s were SPEs wi th a s o l e p u rp o s e o f h ol d i n g an dd ev el o p i n g real p ro p ert ies wh i ch were
en cu m b eredb y th e co n s tru ct io n l o an s . As o f Oct o b er 2 0 08 th e Part n ers h ip s

7 Th e s t i p u l at io n s d o n o tes t ab l i s h th atp et i t i o n er m ai n t ai nedth e req u i red reco rd s o r co o p erat edwi th res p o n d en t ’ s req u es t s. Sec. 7 4 9 1 (a)(2 )(B). Acco rd in g ly

th e b u rd en o f p ro of d o es n o t s h i ftt o res po n den tan drem ai n s wi th p et i t i o n er. See s ec. 7 4 9 1 (a).- 1 0 -

[* 1 0 ] g en eral l y

h adp o s i t i v e cu rren tan ds t ab il i zed v al u es , an dth e p ro p ert i es th ey h el dret ai n edv al u e. Al th o u g h th e Part n ers h i ps g en eral l y i n cu rredl o s ses , p et i t i o n er d i dn o ts ub m i tan y ev i d en ce rel at i n g t o t h e v al u es o f t he Part n ers h i p s o r th e u n derl y i n g p ro p ert ies wh i ch wo u l di n di cat e t h at h i s i n t eres ti n each o f t h e Part ners h i p s was wo rt h l es s as o f Decem b er 3 1 , 2 0 0 8
. To th e co n trary , th ere was v al u e rem ai n in g i n th e Part n ers h ip s rel at i n g t o th e u n derl y i n g p ro p ert ies wh i ch PDG an dth e p art n ers , i ncl u d in g p et it i on er,
reco g n izedwo u l db e l o s ti f cert ai n p ro ject s were n o tco m

p l et edan dp ro p ert i es were i m m ed iat el y fo recl o s edup o n . Inad d i t i on , th e Part n ers h i ps ren eg o t iat edthe fi nan ci n g o f t h e co n s tru ct i o n l oan s th ro u g h 2 0 1 1 t o ad dv al u e fo r t he p art n ers b y
m i n i m i zi n g l os s es . Ins h o rt , p et i t io n er fai l edt o m eeth i s b u rd en o f p ro o f an dd i d
n o ts h o w thath i s i n t eres t i n an y o f t h e Part ners h i p s was wo rt h l es s as o f Decem ber 3 1 , 2 0 0 8 . See Ru l e 1 4 2 (a); Tu ck er v . Co m m i ss i o ner, 8 4 1 F.3 dat 1 25 2 ; Ech o l s v . Co m m i s s i o n er, 9 3 5 F.2 dat7 0 8-7 0 9 . W e acco rd i ng l y h ol d t h at , fo r 2 0 0 8 , p et i t i o n er was n oten ti t l edt o d edu ctl o s s es rel at i n g t o h i s i n t eres ti n an y o f t h e Part ners h i p s . To refl ectthe fo reg o i n g , Deci s i o n s wi l l b e en t ered
u n der Ru l e 1 5 5
.