Source: https://law.justia.com/cases/federal/appellate-courts/F2/649/1168/460244/
Timestamp: 2019-11-17 00:07:53
Document Index: 226565432

Matched Legal Cases: ['§ 1', '§ 704', '§ 702', '§ 704', '§ 1', '§ 704', '§ 704', '§ 702', '§ 704', '§ 1', '§ 1', '§ 704', '§ 702', '§ 10', '§ 704']

Joe T. Boynton and Helen J. Boynton, Petitioners-appellants, v. Commissioner of Internal Revenue, Respondent-appellee, 649 F.2d 1168 (5th Cir. 1974) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Fifth Circuit › 1974 › Joe T. Boynton and Helen J. Boynton, Petitioners-appellants, v. Commissioner of Internal Revenue, Re...
Joe T. Boynton and Helen J. Boynton, Petitioners-appellants, v. Commissioner of Internal Revenue, Respondent-appellee, 649 F.2d 1168 (5th Cir. 1974)
US Court of Appeals for the Fifth Circuit - 649 F.2d 1168 (5th Cir. 1974)
Before HILL, and FRANK M. JOHNSON, Jr., Circuit Judges, and SCOTT* , District Judge.
It is axiomatic that only the partner who actually incurs a loss will be allowed a deduction for that loss. See New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S. Ct. 788, 790, 78 L. Ed. 1348 (1934). Nor is there any dispute that if Boynton had contributed all of the partnership capital then the allocation of all of the partnership's taxable losses to him as the sole contributing partner would have been proper to reflect the fact that he bore the entire economic burden of any loss. See, e. g., Harrell v. Commissioner, 37 T.C.M. 911, 916 (CCH Dec. 35,201(M)) (1978); Treas.Reg. § 1.704-1(b) (2), Example 5 (1964). Boynton concedes that, if he had contributed money solely in exchange for tax benefits and Plimpton were able to satisfy his obligations regarding contributions, the allocation would lack economic reality and would be a sham. Transactions that have no economic effect other than the creation of income tax losses are shams for tax purposes and will not be recognized. See Knetsch v. United States, 364 U.S. 361, 81 S. Ct. 132, 5 L. Ed. 2d 128 (1960); Gregory v. Helvering, 293 U.S. 465, 55 S. Ct. 266, 79 L. Ed. 596 (1935).
One of the primary issues in this case is what standard should be applied to the loss allocation involved to ascertain whether it was bona fide under IRC § 704. Under IRC § 702(a) (9)10 taxable losses, so-called bottom line losses, are determined by reference to a partner's distributive share of the profits and losses as they were actually divided. Prior to the amendment of Section 704 it was unclear whether bottom line loss allocations were subject to IRC § 704(b) (2)'s tax evasion test which provided that, if the principal purpose of any allocation provision was the avoidance or evasion of any tax, the partners' agreement regarding their loss ratios would be ignored and the actual distributive shares under Section 702(a) (9) would determine the taxable loss.11 Under the regulations, the tax evasion/avoidance test essentially evolved into a substantial economic effect test. See Treas.Reg. § 1.704-1(b) (2).12 See generally Kamin, Partnership Income and Loss Allocations Before and After the Tax Reform Act of 1976, 30 Tax Lawyer 667, 672 (1977); McKee, Partnership Allocations in Real Estate Ventures: Crane, Kresser and Orrisch, 30 Tax Law Rev. 1, 15-18 (1974) (McKee I).
However, the Commissioner does not argue that the statutory tax avoidance test under IRC § 704(b) (2) applied to Boynton's deduction; in fact, the Commissioner conceded in Holladay that Section 704(b) (2) did not apply to bottom line losses.13 Rather the Commissioner argues that, when the allocation of all partnership losses to one partner does not affect the overall distribution of profits and losses, that allocation lacks economic substance under Section 704(a). In other words, the Commissioner looked past the form of the allocation to its substance in concluding that Boynton's loans could not justify his deduction of all of the partnership's losses in 1974. We agree.
Section 704 was amended by the Tax Reform Act of 1976, Pub. L. No.94-455, 90 Stat. 1520 (codified in scattered sections of 26 U.S.C.) but this amendment does not apply to the 1974 taxable year at issue. All references will be to the original IRC § 704 unless otherwise indicated
IRC § 702(a) (9) states:
IRC § 704(b) (2), the only statutory limitation on Section 704(a) states:
(b) Distributive share determined by income or loss ratio. A partner's distributive share of any item of income, gain, loss, deduction, or credit shall be determined in accordance with his distributive share of taxable income or loss of the partnership, as described in section 702(a) (9), for the taxable year, if
Treas.Reg. § 1.704-1(b) (1) (1964) states in part:
(T)he manner in which the net profit or loss (computed after excluding any items subject to a recognized special allocation) is actually credited on the partnership books to the accounts of the partners will generally determine each partner's share of taxable income or loss as described in section 702(a) (9).
Treas.Reg. § 1.704-1(b) (2) provides in part that:
Allocations of special items such as depreciation, capital gains and dividends were clearly covered by IRC § 704(b) (2). See IRC §§ 702(a) (1)-(a) (8). The main reason Congress amended Section 704 was to make it clear that bottom line losses were covered by Section 704(b) (2) and to formally recognize as a statutory provision the substantial economic effect test as stated by the Regulations and the case law. See McKee, Nelson & Whitmire, Federal Taxation of Partnerships and Partners (McKee II) § 10.01(2) (1977). The revised Section 704(b) (2) reads as follows:
Kresser 's holding that the transaction involved therein lacked a substantial economic effect did not rely on IRC § 704(b) (2)