Source: http://openjurist.org/542/f2d/845/rodman-v-commissioner-of-internal-revenue
Timestamp: 2017-07-20 21:19:32
Document Index: 192073087

Matched Legal Cases: ['§ 1', '§ 1235', '§ 761', '§ 708', '§ 708', '§ 761', '§ 761', '§ 731', '§ 731', '§ 741', '§ 741', '§ 751', '§ 751', '§ 165', '§ 165', '§ 751', '§ 751', '§ 731', '§ 741', '§ 702', '§ 702', '§ 704', '§ 704', '§ 761', '§ 761', '§ 1', '§ 704', '§ 706', '§ 702', '§ 1', '§ 706', '§ 6013', '§ 1', '§ 708', '§ 1', '§ 706', '§ 706', '§ 706', '§ 708', '§ 1']

542 F2d 845 Rodman v. Commissioner of Internal Revenue | OpenJurist
542 F. 2d 845 - Rodman v. Commissioner of Internal Revenue HomeFederal Reporter, Second Series 542 F.2d.
542 F2d 845 Rodman v. Commissioner of Internal Revenue 542 F.2d 845
76-2 USTC P 9710
Norman and Arlene RODMAN et al., Appellants-Cross-Appellees,v.COMMISSIONER OF INTERNAL REVENUE, Appellee-Cross-Appellant.
Nos. 581, 1121, Dockets 75-4211, 75-4239.
Argued April 29, 1976.Decided Sept. 17, 1976.
I. The $900,000 Debt
Upon this evidence, the appellants asserted at trial that an unconditional debt of $900,000 to Brisson had been proved and should be included in the cost of Torbrook stock in accordance with the principle enunciated in Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947). The Commissioner, however, contended that the authenticity of the documents had never been demonstrated and further that there was significant evidence to show that the note had never been delivered to Brisson, and that it was never intended that the joint venture would incur a bona fide unconditional debt to him. It is noteworthy that the original of the November 3, 1956, note and a letter from Brisson to Robert, dated January 7, 1957, were discovered among Sydney Newman's effects at his death.3 The letter acknowledged receipt from Robert of 200,000 Torbrook shares in full satisfaction of the $900,000 debt. The appellants conceded, however, that the 200,000 shares of Torbrook were never delivered to Brisson.4 Taking the record as a whole, the tax court found that "there was at no time a definitive obligation to Brisson upon which to predicate the accrual of a liability on the part of the joint venture." 32 T.C.M. 1318.
Although the appellants now attempt to characterize the tax court's decision as a departure from the Crane doctrine, it is clear that the decision was no more than a factual finding by the court that the appellants had failed to sustain their burden of proving the existence, the bona fides and the unconditional nature of the $900,000 debt. As a factual finding, the tax court's decision must, of course, be upheld on appeal unless that finding is "clearly erroneous." Commissioner v. Duberstein, 363 U.S. 278, 290-91, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). There is nothing in the record to indicate that the finding was erroneous, much less clearly erroneous. Indeed, the mere fact that there was no authentication of the documents upon which the appellants base their contention would in itself suffice to uphold the tax court's finding. In addition, however, there was no proof that the original note had ever been delivered to Brisson. That latter failure, together with the proof of possession by Newman of both the original note and the January 7, 1957, letter from Brisson, which obviously misrepresented the facts with respect to the satisfaction of the debt, certainly casts a shadow over the bona fides of the entire transaction. In short, the record clearly supports the tax court's finding that the joint venture owed no definitive obligation to Brisson with respect to the purchase price of the Torbrook stock in question.
II. The $250,000 Payment
It is rather clear from the tax court's opinion that it was not convinced by appellants' argument that the bulk of the $250,000 payment was made by General Tire for any reason other than to end the acquisition battle and to extinguish the joint venture's proxy expense claim. Given the state of the record here, we cannot fault the tax court's factual determination. Generally, where a transaction involves the sale of both capital assets giving rise to capital gains treatment and other assets giving rise to ordinary income, an allocation between the two categories within the transaction is necessary. Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935); Commissioner v. Ferrer, 304 F.2d 125, 135 (2d Cir. 1962). Neither the Commissioner nor the tax court is required to accept the allocation suggested by the taxpayer but should make such an allocation based upon the relative value of each item transferred as it relates to the whole of the transaction. F. & D. Rentals, Inc. v. Commissioner, 365 F.2d 34, 40 (7th Cir. 1966).
Because a joint venture is not an individual, it cannot itself be a " holder," Treas.Reg. § 1.1235-2(d)(2); Burde v. Commissioner, 352 F.2d 995, 998 (2d Cir. 1965). Although the individual members of a joint venture may be accorded such status, on the record in the tax court only Newman can claim that he paid any consideration to Sunday, the creator of the invention, for the first assignment. Even his unstated claim of entitlement to "holder" status is incomplete, however. There is no evidence that any consideration was paid prior to actual reduction to practice of the invention; in fact, the venture reported a zero basis for the patent in its 1956 return. Also, there was no evidence with respect to whether or not Newman was Sunday's employer. Without such proof, we fail to see how § 1235 is applicable in this case or upon what other basis appellants hoped to establish that the transfer of the patent entitled them to capital gains treatment.
III. Business Expenses
The instant case presents quite a different situation. Here there is no competent evidence that any business expenditures over and above those allowed7 by the Commissioner were ever made. There was no tax court finding that the disputed expenditures were made, nor was there a finding that they were allowable. Consequently, this is not a case where there is a reasonable certainty that there were valid expenditures, with only the amount still in question. In re Sperling's Estate, 341 F.2d 201, 202 (2d Cir. 1965). Judicial attempts to ameliorate the harsh results of a strict requirement that taxpayers account for every penny of deductions have not and cannot be stretched to the extent that taxpayers may merely claim deductions on their returns and, without further proof, expect the tax court to allow a reasonable deduction based upon the nature of the taxpayers' businesses and the amounts of their receipts. Regardless of the Cohan rule with respect to amounts allowable, the courts have consistently held that at least the existence of an expense must be proved before any deduction can be taken. E.g., New Colonial Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348 (1934). The appellants failed to do so here.
IV. The 1958 Losses
It is well settled, and there is no dispute between the parties, that for tax purposes a joint venture is treated as a partnership.8 Sections 761(a) and 7701(a)(2) of the Code, 26 U.S.C. §§ 761(a) and 7701(a)(2). Further, there seems to be no dispute that the partnership terminated in 1958 within the meaning of § 708(b)(1)(A) of the Code, 26 U.S.C. § 708(b)(1)(A), because no part of the partnership's "business, financial operation or venture . . . continue(d) to be carried on by any of its partners in a partnership." To that extent, it seems clear that a distribution to the partners of solely cash, uncollected receivables, and appreciated inventory made by the partnership at its termination would be a distribution in liquidation of the partners' interests, see § 761(d) of the Code, 26 U.S.C. § 761(d), and a loss engendered by such a distribution would be recognized under § 731(a) of the Code, 26 U.S.C. § 731(a),9 as a loss from the sale or exchange of the partnership interests of the distributee partners. Finally, § 741 of the Code, 26 U.S.C. § 741,10 provides that any loss recognized to a partner shall be considered as a loss from the sale or exchange of a capital asset, except to the extent that the property distributed was substantially appreciated inventory and unrealized receivables. See § 751 of the Code, 26 U.S.C. § 751.
Given this general statutory framework, the appellants argue that because the entire venture was abandoned, there was no liquidating distribution, hence no deemed sale or exchange of a partnership interest, and no capital loss treatment. Zeeman v. United States, 275 F.Supp. 235, 253 (S.D.N.Y.1967) (relying upon § 165(c)(1) of the Code, 26 U.S.C. § 165(c)(1) ), aff'd and remanded on other issues, 395 F.2d 861, 865 (2d Cir. 1968). The Commissioner's position is that the appellants have not proved the lack of a distribution upon termination and further that, even if there had been no distribution, because there was no partnership property available to distribute, the resulting loss at termination would nevertheless be a capital loss.11 The Commissioner requests that we overrule the district court's handling of the matter in Zeeman. See Rev.Rul. 76-189, I.R.B. 1976-20, where the Commissioner set forth his position subsequent to the oral argument on this appeal. We need not reach the Commissioner's second argument; we agree that there is no proof that there was a total abandonment of the partnership without some type of distribution.
It should be stressed that there are several other factual possibilities that could be inferred from the record as presented to this Court. There could, for example, have been so-called "hot assets," namely, unrealized receivables or appreciated inventory included in the partnership property distributed, see § 751 of the Code, 26 U.S.C. § 751, in which case ordinary gain or loss principles would have applied to the extent of the distribution of such assets. On the other hand, there may have been other property, such as office equipment, distributed along with cash and other property, in which case it would appear that no loss would be recognized at all on the distribution itself. Section 731(a)(2) of the Code, 26 U.S.C. § 731(a)(2). These possibilities merely serve to point out the inadequate state of the evidence upon which the appellants sought to convince the tax court to reopen the record. It was certainly no abuse of discretion for the tax court to refuse to reopen the record after a protracted trial where the appellants did not even show that they were entitled to ordinary losses if § 741's capital loss provision were inapplicable.
V. The Partners' Allocation of Income
The tax court's opinion rested upon the theory that each partner in a partnership must personally take into account his distributive share of the partnership's taxable income and loss, § 702(a)(9) of the Code, 26 U.S.C. § 702(a)(9), that such share may generally be determined by the provisions of the partnership agreement, § 704(a) of the Code, 26 U.S.C. § 704(a), and that partners may amend the agreement and reallocate their shares at any time up to the original date set by statute for filing the partnership return, § 761(c) of the Code, 26 U.S.C. § 761(c); Smith v. Commissioner, 331 F.2d 298, 301 (7th Cir. 1964); David A. Foxman, 41 T.C. 535, 554 (1964). The tax court concluded that the November 5, 1956 agreement in effect was a modification of the partnership agreement by which the partners retroactively reallocated to Martin a two-ninth's interest in the full year's income and losses. Based upon the statutory framework mentioned above and the factual determination that the agreement had been modified as described, the tax court's final conclusion was that the agreement was controlling and that Martin must be taxed on a full year's basis.16
The most significant problem with the tax court's analysis is that it does not distinguish this case, where a new partner has joined the partnership by a transfer of a partnership interest, from the type of modification considered in the Smith case, namely, where the existing members of an ongoing partnership agreed to rearrange their shares retroactively. In the instant situation we believe that such a retroactive reallocation necessarily violates the well established prohibition against one taxpayer assigning taxable income to another. Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940). In essence, the present case is no more than an assignment by Robert and Norman of a percentage of their interests in the income earned by them as partners prior to Martin's having joined the partnership. See Treas.Reg. § 1.708-1(e) (1)(i). As such, not only does the retroactive reallocation of income to a new partner violate the Helvering v. Horst general assignment of income prohibition, it necessarily follows from that conclusion that such an attempted assignment in the partnership agreement also falls within § 704(b)(2)'s caveat that a term in a partnership agreement cannot be controlling for tax purposes where its principal purpose is the evasion of taxes. Consequently, where a new partner is involved in the sale or exchange of a partnership interest, we must disagree with the tax court's conclusion that the intent of the parties, as evidenced by the partnership agreement, is the controlling factor as to whether or not income or losses which accrued prior to the partner's joining may be reallocated to him retroactively.
The conclusion we reach also has a statutory foundation. Section 706(c)(2) of the Code, 26 U.S.C. § 706(c)(2),17 sets forth certain standards to be applied to "close" the partnership year upon the sale of a part or the whole of a partner's interest. Those provisions require that when a partner transfers his entire interest, the partnership year closes as to him. In the instant case, therefore, when Ornstein sold his entire twenty-five percent interest to Newman, Robert and Norman, the partnership year closed as to him and his distributive shares of the partnership's financial affairs were set as of that moment.18 The transferee partners at that point, Newman, Robert and Norman, each owned one-third interests in what remained of the partnership's income and loss items described in § 702(a). See Treas.Reg. § 1.706-1(c)(2).
When Robert and Norman each subsequently transferred to Martin less than their new entire interests, § 706(c)(2)(B) of the code requires that in computing the partnership income and losses attributable to them they must " tak(e) into account (their) varying interests in the partnership during the partnership taxable year." Consequently, because Robert and Norman are required to take into account their varying interests during the partnership taxable year, it is only logical that Martin must do the same. During the partnership year prior to November 6, 1956, Martin had no interest in the partnership. The only logical conclusion to be drawn from the Code's provisions dealing with the amounts of a partnership's income and losses attributable to the parties involved in the sale or exchange of a partnership interest is that Martin had a two-ninth's interest in only those items that accrued after he entered the partnership. To allow partners by modification of the partnership agreement to rearrange their interests over periods of time when no interests in fact existed would be to disregard the provisions of the Code designed specifically to deal with the allocation of partnership income and losses when partnership interests are transferred. We remand for a proper allocation to Martin of his share of the partnership income based upon the limited time that he in fact had an interest in the partnership.19
VI. Innocent Spouse Status
There was no abuse of the tax court's discretion in its denial of the motion to reopen the record. Subparagraphs (B) and (C) of § 6013(e)(1) clearly require that in order for a spouse to be entitled to "innocent spouse" protection, he or she must show (1) that in signing the joint income tax return he or she did not know or have reason to know of the omission from gross income, and (2) that, "taking into account whether or not (he or she) significantly benefited directly or indirectly from the items omitted and taking into account all other facts and circumstances, it is inequitable to hold" that spouse liable for any deficiency attributable to such omission. Although the issue had been raised prior to trial and appellants' counsel had stated in his opening remarks that the question was in issue, none of the wives testified nor was any reason given at trial for their absence, although counsel did attempt to justify Norman's absence on the ground that he was required to remain in Switzerland for medical reasons. The only evidence at trial even faintly related to subparagraphs (B) and (C) was Martin's testimony that his wife simply signed the joint income tax returns that he placed before her. Given the absence of any further evidence at trial it is clear that appellants have failed to prove their case.
(B) related to such creator (within the meaning of subsection (d) ).
(B) the basis to the distributee, as determined under section 732, of any unrealized receivables (as defined in section 751(c) ) and inventory (as defined in section 751(d)(2) ).
The Commissioner seeks to rely on Treas.Reg. § 1.708-1(b)(1)(iv) for the proposition that if a partnership is considered to be terminated, all of the partnership's property is "deemed" to be distributed to the partners. We think such reliance is unnecessary where a partnership is admittedly terminated and its business wound up within the meaning of § 708(b)(1)(A) of the Code, and further that such reliance is misplaced in such a situation because, by its terms, § 1.708-1(b)(1)(iv) applies only "(i)f a partnership is terminated by a sale or exchange of an interest" (emphasis supplied)
The tax court did reduce the partnership's income and losses by the amount of such items attributable to Ornstein under § 706(c)(2)(A)(i) of the Code, 26 U.S.C. § 706(c)(2)(A)(i), prior to the reallocation to Martin
26 U.S.C. § 706(c)(2) provides as follows:
(B) Disposition of less than entire interest. The taxable year of a partnership shall not close (other than at the end of a partnership's taxable year as determined under subsection (b)(1)) with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced, but such partner's distributive share of items described in section 702(a) shall be determined by taking into account his varying interests in the partnership during the taxable year.
It seems clear under § 708(b)(1)(B) of the Code that if Ornstein's interest had been a fifty percent interest or greater, the transfer of that interest would have "terminated" the partnership and presumably would have closed the partnership year as to all members
Both Martin and the Commissioner contend that on remand the share attributable to Martin should be computed simply by multiplying the pro-rata portion of the year during which he owned his interest (57/366) by his two-ninth's interest. See Treas.Reg. § 1.706-1(C)(2). We note, however, that such a simple pro-rata allocation could in many instances result in a prohibited income assignment to Martin if, for example, the substantial portion of the partnership's income accrued prior to November 6, 1956. The record on appeal does not indicate whether or not such is the case, and we leave to the tax court to determine whether or not a simple pro-rata allocation is appropriate in this case