Court Opinion

ID: 4485190
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:14.20548+00
Date Added: 2024-06-11T14:53:46.935498
License: Public Domain

Whitaker, J., dissenting: I must dissent from the result which the majority reaches in this case since, in my opinion, it has stretched section 465 beyond its permissible limit. Section 465(c) says, so far as relevant to the instant case: (1) Types of activities. — This section applies to any taxpayer engaged in the activity of— ******* (C) leasing any section 1245 property (as defined in section 1245(a)(3)), * * * * * * * (2) Separate activities. — For purposes of this section, a taxpayer’s activity with respect to each— ******* (B) section 1245 property which is leased or held for leasing, ****** * shall be treated as a separate activity. A partner’s interest in a partnership * * * shall be treated as a single activity to the extent that the partnership * * * is engaged in activities described in any subparagraph of this paragraph. The Senate Finance Committee explains this Code section in part in the following language: In general, in the case of an activity engaged in by an individual, each motion picture film or video tape, item of leased equipment, farm, or oil and gas property is treated as a separate activity. However, in the case of a partnership or subchapter S corporation, all of the activities in the same category (i.e., all motion picture films and video tapes) are to be treated as one activity. Thus, the loss from the activity for any partner is that partner’s loss from the partnership * * * ******* This "at risk” limitation applies to all individual taxpayers who invest in an equipment leasing activity, including both individuals who invest for their own account and those who do so through another entity such as a partnership or a subchapter S corporation. * * * [[Image here]] Under the at risk rule as it applies to equipment leasing, the taxpayer is considered to be in a leasing activity if he has an ownership interest, either direct or indirect, in section 1245 property (as defined in sec. 1245(a)(3)) which is leased or held for leasing. * * * [S. Rept. 94-938, at 51, 85 (1976), 1976-3 C.B. (Part 3) 89, 123. Fn. ref. omitted.] It is my opinion that the merging or netting of section 465 activities is only to be permitted within the confines of a single partnership which is actually carrying on the activities, and then only with regard to similar section 465 activities.1 The difficult issue which the majority happily ignores is whether the aggregation rules under section 465(c)(2) should apply to the investment partnership so that this netting can be allowed with respect to the losses realized by an investment partnership from its investments in operating partnerships. This issue is not resolved by merely, insisting upon recognizing the existence of Dallas, the first-tier partnership, as a partnership.2 I agree with the majority that Dallas should be recognized as a partnership; I disagree, however, that its losses from its investments in five separate limited partnerships may be netted. To do this is to ignore the separate existence of the five second-tier partnerships. A slight variation of the facts of the instant case serves better to illustrate the application of section 465(c)(2). Let us assume that Dallas, the investment partnership, has a limited partnership interest in only two limited partnerships, ICL and ICL 001. Let us further assume that ICL has a single equipment leasing activity but that ICL 001 is engaged in leasing two separate properties. There is nothing in the Code which permits consolidation of the activities of separate partnerships. Thus, the gains and losses from ICL and from ICL 001 cannot be combined at that level, although it is clear that the gains and losses from the two equipment leasing activities carried on by ICL 001 can be amalgamated and are to be treated as a single activity in the hands of each of its partners under section 465(c)(2). If we further assume that ICL realizes gains and that the amalgamation of the two activities of ICL 001 results in a net loss, Dallas would have a gain from one partnership and a loss from the other. The majority allows petitioner, as the partner in first-tier Dallas, again to amalgamate its gains and losses from the two second-tier partnerships. In order to do this, one must characterize Dallas as a separate entity rather than an aggregation of its partners. In this respect, the majority and concurring opinion fall into inconsistency. The majority by implication and the concurring opinion expressly reach their result by applying sections 702(a)(7) and 702(b) to maintain in the hands of Dallas the character of the gains and losses realized by the second-tier operating partnerships. Section 702(a)(7) only applies to preserve the character an item would have in the hands of the operating partnership if by reason of such characterization the item could affect the taxpayer’s tax liability.3 Therefore, to reach the result that items are separately stated for section 702(a)(7) purposes, the majority and concurring opinion must look through Dallas, the partnership, to find a taxpayer, i.e., petitioner. In effect, Dallas is treated as an aggregation of its partners rather than a separate distinct entity. With this, I agree. This is consistent with section 465(c)(1), which directs us to look to section 1245 property and then ascertain whether the taxpayer has either a direct or an indirect interest in it.4 But we must consistently apply the aggregate concept,, not only in the characterization of the gains and losses which flow up to petitioner but also in viewing his leasing activities. When we do that, we find that petitioner, one of the aggregate partners that comprise Dallas, must be treated under section 465(c)(2) as engaged in the activities of five separate partnerships. He merely steps into Dallas’ shoes to the extent of his partnership interest. This is consistent with the structure of section 465 because the limitations imposed therein are only applicable to taxpayer-partners in their aggregate capacity. The majority and the concurring opinion, on the other hand, after applying the aggregate concept to the second-tier gains and losses then apply the entity concept so as to place Dallas constructively in the activities of its limited partnerships. In so doing, that part of the legislative history is ignored which directs one to tie the taxpayer indirectly into the section 1245 property, in effect for this purpose to look through Dallas. Therefore, in my judgment, such amalgamation under section 465(c)(2) is to be permitted only with respect to activities that are engaged in by one of the five separate partnerships and not with respect to gains and losses from activities of the investment partnerships that should be analyzed as an aggregation of its partners. It is judicial legislation for us to add to the statute a concept which is not there either by expressed statutory language or expressed legislative intent and which actually is contrary to the stated purpose of the provisions of section 465. I would therefore hold that through Dallas as a limited partner in each of the five second-tier partnerships, petitioner to the extent of his partnership interest was engaged in the separate activities of five different partnerships and is not allowed to net the profits and losses received from these five separate partnerships for purposes of determining his distributive share of the gains or losses. It follows that respondent’s determination should be sustained. Wilbur, Parker, and Kórner, JJ., agree with this dissent.   Where a partnership engaged in dissimilar types of sec. 465 activities, however, it is considered to be engaged in separate activities as to each, "and a separate application of the at risk limitation must be made for each of the two activities.” S. Rept. 94-938 (1976), 1976-3 C.B. (Part 3) 124.    The majority and concurrence assume as a factual matter that Dallas holds, several different entities for a substantial non-tax purpose.    Sec. 703(a)(1) does not raise Dallas to the status of an individual taxpayer for the purpose of computing tax liability but only for computing taxable gross income for distribution purposes. As a result, the only way, under the regulations of sec. 702, to require that items be separately stated is to apply such a test to petitioner’s tax liability potential.    By looking through Dallas again, we see that petitioner indirectly owns the leased property and thus is engaged in the equipment leasing activities of the second-tier partnerships.