Court Opinion

ID: 4479315
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:13:35.969758+00
Date Added: 2024-06-11T14:53:57.633861
License: Public Domain

Raum, /., dissenting: The effect of the Court’s decision is to permit the petitioners to receive the tax benefit of a much greater share of the partnership’s losses than they were chargeable with under the partnership agreement after the determination of the National Enforcement Commission. Thus, while purportedly upholding the N.E.C. determination, the majority opinion sanctions an outcome that makes the N.E.C. determination largely self-defeating. This result might be acceptable if it were required by that determination, the applicable Defense Production Act of 1950, and the Executive order, general order, and regulations promulgated pursuant to that Act. However, I am convinced that this result is not so required. While I am in agreement with that portion of the majority opinion which holds the N.E.C.’s certificate of disallowance binding upon the respondent, even as to the allocation among the partners involved, that is not the end of the matter. Contrary to the prevailing opinion, I think that the respondent’s determination is consistent with the N.E.C.’s order and that petitioners are entitled to no such windfall as is accorded to them here. As set forth in the findings, the partnership agreement provided that the partnership’s net losses should be borne by the partners in proportion to their capital contributions, except that the limited partners should be liable for losses only to the extent, of their capital contributions and the general partners (the present petitioners) should be chargeable with any excess. Pursuant to this agreed formula and prior to the determination of the N.E.C., the partnership’s net losses for 1952 were divided so that the limited partners were each charged with an amount of loss equal to his or her capital account and the petitioners’ accounts were charged with the sizable excess of $81,046.41 over and above their own capital accounts. However, the subsequent certificate of disallowance of the N.E.C. upset this division of the partnership’s losses by allocating the $22,638 disallowed as a deduction to all of the partners (limited and general) according to their partnership interests. By so doing the share of the partnership’s net loss attributed to each of the limited partners was reduced to less than the capital each had contributed to the partnership. This in turn meant that the share of the partnership’s net loss (as redetermined by the 1ST.E.C.) attributed to petitioners was considerably greater than they were entitled to under the partnership agreement. The respondent’s determination herein is the result of the reapplication of the loss distribution formula of the partnership agreement to the partnership’s reduced net loss (taking into account the determination of the N.E.C.) for 1952. Thus, some of the losses which had previously spilled oyer into petitioners’ accounts as being in excess of the limited partners’ capital accounts must now be restored to the limited partners’ accounts in the light of the NE.C.’s allocation. Unless the losses attributed to petitioners are thus reduced in conformity with the partnership agreement, the N.E.C.’s determination results in a tax windfall to petitioners which I am confident the N.E.C. never intended. Of course, I have no quarrel with the majority opinion to the effect that the N.E.C. determination is binding. Notwithstanding the manner in which the parties may have formulated their contentions, the question whether the N.E.C.’s determination must prevail over that of the Commissioner is a false issue. Certainly, the former is binding. The dispositive issue concerns the effect of that determination in the computation of petitioners’ tax liability; and that tax liability must be computed under the Internal Revenue Code, at the rates fixed therein, and subject to all other provisions of the revenue laws. One of those provisions requires that a partner’s distributive income be determined in accordance with the partnership agreement. And while the N.E.C. determination is conclusive as to the availability of the disallowed deduction to the partnership and the partners, it in no way precludes the distribution of the remaining, allowable net loss among the partners in accordance with the terms of the partnership agreement. Accordingly, after effect is given to the N.E.C. determination, there remains the problem of ascertaining the consequences of that determination. In this case, one of the consequences is that losses of the enterprise (even after the adjustment required by the N.E.C.) are of such magnitude that when they are allocated among the partners proportionately the losses of the limited partners exceed their capital accounts. Therefore, wholly apart from the deduction disallowed by the N.E.C., the limited partners are entitled to deduct losses equal to their capital accounts, leaving only the remaining losses to be deducted by the general partners. Thus, to the extent that the limited partners are entitled to “draw upon” other losses (previously allocated to the general partners) in order to bring them up to the full amount of their capital accounts, the losses available to the general partners must be diminished. The Commissioner’s determination in substance, regardless of its phrasing, merely allocated to the general partners the losses properly allocable to them under the partnership agreement after the N.E.C.’s disallowance. The allowance of deductions to them for greater losses under the supposed compulsion of a N.E.C. determination, purportedly vindicating the N.E.C. as against the Commissioner, would, I think, come as a great surprise to the N.E.C. No such strange result is required by any statute, regulation, determination, or administrative ruling. TuRnee, Bruce, and Pierce, JJ., agree with this dissent.