Opinion ID: 411284
Heading Depth: 1
Heading Rank: 3

Heading: deductibility of pre-admission partnership losses.

Text: On appeal, 6 Schneider and Rice have launched a barrage of arguments, all directed toward establishing that the Tax Court erred in holding that they were not entitled to claim as a deduction partnership losses sustained prior to their admission into the partnerships. All but one of these arguments have been mooted by this court's decision in Williams v. United States, 680 F.2d 382 (5th Cir.1982), which was filed during the interval between the date briefing was completed in this case and the date on which oral argument was heard. In Williams, citing, inter alia, 7 the Tax Court's decision in this case, we held that under section 706(c)(2)(B) as in effect during [1974], the varying interest rule for determining partnership shares prohibited retroactive allocation of partnership losses to incoming partners who acquired their partnership interests through capital investment. 680 F.2d at 386. We also held that even if the case were not controlled by section 706(c)(2)(B), the assignment of income doctrine, which was discussed at length in the opinion, would prohibit retroactive allocation to the newly admitted partners of losses sustained by the partnerships prior to the respective dates of their admission into the partnerships. Id. The only argument advanced by Schneider and Rice before Williams was decided that was not mooted by Williams, and which is, indeed, reurged in a supplemental, post-Williams brief, is that in this case, the existing partners were required to make, and in fact made, additional capital contributions to the partnerships concurrent with the capital contributions of the newly admitted partners. In Williams, none of the existing partners made capital contributions to the partnership when the new partners were admitted. Schneider and Rice argue that whenever existing partners make capital contributions to a partnership, concurrent with the contributions of new partners, the capital interests of the existing partners do not reduce within the meaning of section 706(c)(2)(B). However, we note that section 706(c)(2)(B) does not use the word capital to modify the word interest in the phrase with respect to a partner whose interest is reduced. In view of the fact that section 706(c)(2)(B) mandates that such a partner's distributive share of items described in I.R.C. Sec. 702(a), 8 which include profits and losses, be determined by taking into account his varying interests in the partnership during the taxable year, we think that the clear import of section 706(c)(2)(B) is that it is the existing partner's varying interests in profits and losses which govern, rather than his varying capital interests, at least in a situation such as we have here in which the reduction is occasioned by capital contributions by, and the admission of, new partners. Clearly, in the present case, the existing partners' interests in profits and losses were dramatically reduced by reason of the admission of the new partners. We conclude, therefore, that the Tax Court was correct in denying to Schneider and Rice deductions for the pre-admission losses of the partnerships. We note further that although Schneider and Rice go to some lengths to dissuade us from adopting the position on assignment of income taken by the Court of Appeals for the Eighth Circuit in Snell v. United States, 680 F.2d 545 (8th Cir.1982), they go on to mis-describe Williams as not [holding] that assignment of income principles [govern] the validity of preadmission allocations. Clearly, the holding of this court in Williams that the assignment of income theory prohibits the retroactive allocation to newly admitted partners of losses sustained by the partnerships prior to the admission of such partners would not be affected by the fact that the existing partners made a capital contribution at the time of the admission of the new partners. 9 In summary, if there was a serious question in 1974 about the deductibility of pre-admission losses by newly admitted partners, Williams laid it to rest and mandates affirmance of the Tax Court's holding in this case denying such losses to Schneider and Rice.