Court Opinion

ID: 4485409
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:24.402439+00
Date Added: 2024-06-11T14:54:06.456434
License: Public Domain

Simpson, J., concurring: I agree with the result reached by the majority. However, there are a variety of circumstances which have influenced my conclusion, and I wish to mention them. The objective of section 465 is to limit deductions for losses to amounts at risk, and to carry out that objective, we must be assured that an amount is truly at risk. S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 86. To carry out that responsibility, we must examine all the surrounding circumstances to ferret out the true substance of the transaction. An obligation by a partner to make additional contributions does not, standing by itself, create an amount at risk since the obligation is clearly owed to a person, the partnership, having an interest in the activity. An obligation to make additional contributions can result in an amount being at risk only if that obligation is coupled with a recourse obligation by the partnership. See 1 W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, par. 8.03, at 8-11 to 8-12, and par. 10.11[2][b], at 10-78 to 10-79 (1977); Kalish & Rosen, "The Risky Basis for Partnership Allocations,” 38 Tax Lawyer 119, 140-141 (1984). Thus, to determine whether the promise by the petitioners in this case results in an amount at risk, we must inquire into the substance of the notes to Fairfield. At the outset, it should be pointed out that those notes do not bear interest. Although they purport to call for the payment of amounts ranging from $400,000 plus to $700,000 plus in 1992, they do not create a current obligation to pay such amounts. An obligation to pay $100 in 15 years without interest is currently worth only $23 if we assume that the customary interest rate for such an obligation is 10 percent. C. Nickerson, Accounting Handbook for Nonaccountants 575 (1975). Hence, at most, the notes represent a current obligation of less than 25 percent of the stated amounts. In addition, an amount borrowed is not considered to be at risk unless the obligation is owed to a person not having an interest (other than as a creditor) in the activity. Sec. 465(b)(3). Here, Fairfield was not disinterested in the activities of the partnerships. The partnerships acquired the oil and gas leases from Fairfield, and in addition, Fairfield and the partnerships entered into turnkey drilling agreements, completion and operation agreements, and equipment lease agreements. As a part of the transactions, Fairfield acquired a right to 20 percent of the gross sales proceeds of the oil and gas extracted from the leased lands, payable only after the partnerships had achieved certain levels of profits. These arrangements gave Fairfield a substantial interest in the activities of the partnerships. Furthermore, the liability of the limited partners, such as the petitioners, is, by its terms, contingent upon the general partners’ exercise of their right to call upon the limited partners for contributions. It is easy to imagine a situation in which the general partners might be financially irresponsible and have no interest in attempting to collect from the limited partners to satisfy the notes held by Fairfield. In such a situation, a question would arise as to whether Fairfield could enforce contributions by the limited partners. There is some authority for believing that Fairfield could enforce the obligations (Cal. Corp. Code sec. 15517(3) (West 1977); Cal. Civ. Code sec. 1559 (West 1982); Lucas v. Hamm, 56 Cal. 2d 583, 15 Cal. Rptr. 821, 824 (1961); Gilbert Financial Corp. v. Steelform Contracting Co., 82 Cal. App. 3d 65, 145 Cal. Rptr. 448 (1978)), but it is far from a settled matter (2 Restatement, Contracts 2d, sec. 302 comment b (1979)). In summary, the liability of the limited partners is far from clear and certain, and under such circumstances, to carry out the objective of section 465, they should be required to postpone the recognition of their losses until they actually make additional contributions. The effect of our decision is not to deny them a deduction altogether: if income of a partnership is used to pay off its note to Fairfield, each limited partner will be taxable on his distributive share of such income; but at the same time, he is treated as making an additional contribution of such share, and he will be entitled to carry over any loss not previously recognized and deduct that loss against such income. Sec. 465(a)(2); S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 88 n. 8. If he ultimately makes additional contributions as a result of the call arrangement, he will be entitled to deduct, at that time, losses not previously allowed. Sec. 465(a)(2) and (b)(1)(A). Sterrett, Goffe, and Swift, JJ., agree with this concurring opinion.