Court Opinion

ID: 4485188
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:14.195052+00
Date Added: 2024-06-11T14:53:46.933446
License: Public Domain

Dawson, Chief Judge, concurring: I concur in the result reached in this case. However, I think further analysis of section 465 may be helpful. The focus of this case is on that portion of section 465(c)(2) which provides that— 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. [Emphasis added.] It is upon the "express language” of this provision that the majority base their opinion. However, I do not think that such language alone is sufficient. In attempting to apply the above passage of section 465(c)(2), a number of questions arise. The first is, in the context of two-tier partnerships, who is the "partner” to whom this sentence of section 465(c)(2) refers? Is the "partner” the petitioner or is it Dallas Associates? I think it must be petitioner. Under section 465(a), the "at risk” provisions apply— In the case of a taxpayer (other than a corporation which is neither an electing small business corporation * * * nor a personal holding company * * *) engaged in an activity to which this section applies * * * [Emphasis added.] Thus, the "partner” to whom reference is made in section 465(c)(2) must be the "taxpayer” who is subjected to the "at risk” rules under section 465(a), because one arrives at the specific provision of section 465(c)(2) only by beginning at section 465(a). Although a partnership is a person as defined in section 7701(a)(1) and, arguably, for some purposes, it may be a taxpayer as defined in section 7701(a)(14)1 — "any person subject to any internal revenue tax,” — it is not a taxpayer for purposes of the income tax. Section 701 provides that a partnership "shall not be subject to the income tax.” For. purposes of determining the income tax of its partners, as in the present situation, a partnership must be treated as an aggregate of its partners.2  Furthermore, although Congress used the broad term "taxpayer” in section 465(a), Congress did not intend that section 465 apply to a partnership as an entity. For example, if we assume in the instant case that all the partners in Dallas Associates were subchapter C corporations, section 465 would not be applicable (even as to the partnership of Dallas Associates), because such corporations are specifically excluded from the application of section 465. Since, except for subchapter S corporations and personal holding companies, this provision does not limit the deductibility of amounts paid or incurred by corporations, the provision would not apply to a partnership in which all the partners are corporations (other than subchapter S corporations or personal holding companies). Similarly, if a partnership is comprised of both • individual partners and corporate partners (other than subchapter S corporations and personal holding companies), the at risk provision applies to the individual partners but not the corporate partners. [Staff of Joint Comm, on Taxation, 94th Cong., 2d Sess., General Explanation of the Tax Reform Act of 1976, at 36 n. 2,1976-3 C.B. (Vol. 2) 1, 48; emphasis added.] See also H. Kept. 94-1515, at 412 n. 1 (1976). Therefore, in this case, the words "taxpayer” in section 465(a) and "partner” in section 465(c)(2) refer to the petitioner, while the word "partnership” in section 465(c)(2) refers to Dallas Associates. The next question that arises is whether Dallas Associates "is engaged in [the] activit[y]” of leasing any section 1245 property as provided in section 465(c)(2). Dallas Associates is not directly conducting an activity of leasing section 1245 property; it is directly conducting a business of holding partnership interests. For the reasons previously stated, section 465(c)(2), itself, cannot be used to solve the question of whether, for purposes of section 465, Dallas Associates is considered to be engaged in the activities of the second-tier partnerships because section 465(c)(2) does not apply to Dallas Associates as a partner in the second-tier partnerships. Instead, I think it is necessary to look to the provisions of subchapter K. Section 702(a)(7) and the regulations thereunder3 require Dallas Associates to take into account separately its distributive share of each of the second-tier partnerships’ income or losses from leasing activities. Thus, the character of such income or loss would be retained as income or loss from leasing activities under section 702(b).4 In computing the taxable income of the second-tier partnerships, the income or loss from the leasing activities would be separately stated under section 703(a)(1).5  Therefore, through the operation of these partnership provisions, Dallas Associates wouid be treated as having income or loss from five leasing activities of the five second-tier partnerships and, thus, would be treated for section 465(c)(2) purposes as engaged in five leasing activities.6 I think that it is only after one applies the provisions of subchapter K to characterize the leasing activities of the second-tier partnerships as those of the first-tier partnership that the clear language of section 465(c)(2) permits the gains from the leasing activities to be netted against the losses from leasing activities. Absent a compelling reason to disregard the plain language of the statute, we must assume that Congress meant what it said and that the statutory language should be taken at face value. In addition, it seems to me that, respondent was asking the Court to "look through” Dallas Associates and, for purposes of section 465(c)(2) only, to treat petitioner’s interest in Dallas Associates as an interest in each of the second-tier partnerships directly. If petitioner had not interposed Dallas Associates between himself and the second-tier partnerships, it seems that he could not have offset the gains against the losses of the second-tier partnerships.7  The Commissioner has taken a similar position in Rev. Rul. 78-2, 1978-1 C.B. 202. In order to address the complicated issue of whether the optional adjustment to basis provisions of section 743(b) apply to both tiers of a two-tier partnership when there is a sale or exchange of a partnership interest in the first-tier partnership, the Commissioner states as follows: For purposes of sections 743 and 754 of the Code, a sale or exchange of an interest in X [first-tier partnership] or the death of a partner of X is considered to result in an adjustment to the basis of the property of Y [second-tier partnership] as though the transferee partner were a partner of Y. [Rev. Rul. 78-2, supra, 1978-1 C.B. at 202; emphasis supplied.] Thus, in Rev. Rul. 78-2, the Commissioner treats an interest in a first-tier partnership as though it were an interest in the second-tier partnership directly.8 I use Rev. Rul. 78-2 not as authority, but merely to illustrate that respondent’s position here is not unreasonable. I am reluctant to preclude the possibility of our holding in an appropriate case that a first-tier partnership must be "ignored” or "collapsed” for a specific purpose. The Commissioner and this Court are just beginning to address the complex issues which will surely arise with regard to multi-tier partnerships and the Code does not easily accommodate complex partnership structures, as evidenced by the instant case. Although I reach the same conclusion as the majority here, I am unwilling to completely block an avenue that I think should remain open. Fay and Hamblen, JJ., agree with this concurring opinion.   For example, a partnership may be subject to employment tax under sec. 3221(a).    In A. Willis, J. Pennell & P. Postlewaite, Partnership Taxation, sec. 51.03, at 51-5 to 51-6 (3d ed. 1982), the authors state the following: "Partnerships are not specifically included in the designated classes of taxpayers intended to be covered by §465. However, that is not a drafting omission. Partnerships are not taxpayers but are a focal point for the collection of required tax information. The partners are the taxpayers. * * *”    SEC. 702. INCOME AND CREDITS OF PARTNER. (a) General Role. — In determining his income tax, each partner shall take into account separately his distributive share of the partnership’s— [[Image here]] (7) other items of income, gain, loss, deduction, or credit, to the extent provided by.regulations prescribed by the Secretary * * * Sec. 1.702-l(aX8Xii), Income Tax Regs., provides, in part, the following: "Each partner must also take into account separately his distributive share of any partnership item which if separately taken into account by any partner would result in an income tax liability for that partner different from that which would result if that partner did not take the item into' account separately. * * *”    SEC. 702(b). Character of Items Constituting Distributive Share. — The character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share under paragraphs (1) through (7) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.    SEC. 703. PARTNERSHIP COMPUTATIONS. (a) Income and Deductions. — The taxable income of a partnership shall be computed in the same manner as in the case of an individual except that— (1) the items described in section 702(a) shall be separately stated * * *    Respondent should have no objection to this conclusion, since, by analogy, Rev. Rui. 73-360, 1973-2 C.B. 293, reaches a similar result.    The express language of the sentence of sec. 465(c)(2) that is under consideration here permits netting of losses and gains arising within one partnership.    The majority opinion states that in Rev. Rul. 78-2, the Commissioner has "recognized the viability for tax purposes of a first-tier partnership that functioned exclusively as a holding company.” Majority opinion at p. 756 note 7. In my judgment, as stated above, the position of respondent in this case is consistent with that propounded in Rev. Rul. 78-2. For a discussion of Rev. Rul. 78-2, see Hall. "Tier Partnerships — Special Problems,” 59 Taxes 813 (1981).