MEMORANDUM FINDINGS OF FACT AND OPINION
IRWIN,
Docket | |||
Petitioner | No. | Year | Deficiency |
W. D. Holbrook and | |||
Betty K. Holbrook | 579-73 | 1968 | $3,565.06 |
M. D. Childers, Jr., | |||
and M. H. Childers | 5710-73 | 1969 | 2,323.75 |
1970 | 2,302.00 |
FINDINGS OF FACT
Some of the facts have been stipulated and these stipulations are adopted as a part of our findings.
Petitioners W. D. Holbrook (hereinafter referred to as Holbrook) and Betty K. Holbrook, husband and wife, and petitioners M. D. Childers, Jr. (hereinafter referred to as Childers) and M. H. Childers, husband and wife, all resided in Charlotte, N.C., at the time of the filing of their respective petitions with this Court. During the years in issue petitioners timely filed their1975 Tax Ct. Memo LEXIS 82">*84 respective income tax returns with the Internal Revenue Service Center at Chamblee, Ga.
In 1965 Clyde G. Kissinger (hereinafter referred to as Kissinger), the president of the Colorado Drilling Company (hereinafter referred to as CDC), a corporation organized under the laws of the State of Colorado, caused that corporation to form a limited partnership known as Neosho, Ltd. (hereinafter referred to as Neosho). The partnership consisted of one general partner, CDC, and 17 limited partners. Holbrook and Childers, two of the limited partners, purchased interests of ten percent and five percent, respectively. Neosho was engaged in the general oil and gas business including secondary recovery operations known as water floods.
Between the date of purchase of their limited interests in 1964 and October 1, 1968, Holbrook and Childers made various contributions to their capital accounts and took deductions representing operating losses generated by Neosho, so that, as of October 1, 1968, their bases in their interests for income tax purposes were $2,198.11 and $970, respectively. On October 1, 1968, Holbrook and Childers transferred their respective interests to Kissinger. 1 In return1975 Tax Ct. Memo LEXIS 82">*85 Holbrook and Childers received noninterest-bearing installment promissory notes 2 in the amounts of $17,345.37 and $8,450, respectively.
1975 Tax Ct. Memo LEXIS 82">*86 In late 1968 the note received by Holbrook was endorsed by him and transferred to Kissinger who applied the note in equivalent amounts to Holbrook's accounts owed to Kissinger Petroleum Corporation and Kissinger Petroleum, Ltd. In addition to these credits, Kissinger also credited $3,663.74 to Holbrook's business accounts in other business ventures for a total of $21,009.11.
In 1969 and in 1970 Childers received cash payments in the amount of $4,225 each from Kissinger pursuant to the terms of his note.
On October 1, 1968, all of the other partnership interests were also transferred and the partnership was terminated. Neither the limited partnership agreement, CDC or Kissinger guaranteed any of the limited partners against loss.
OPINION
Petitioners submit that they sold their respective interests to Kissinger in 1968 and that under
1975 Tax Ct. Memo LEXIS 82">*87 Respondent argues that the transactions were sales only to the extent of the fair market value of each petitioner's interest. The amounts received in excess of the fair market value, it is submitted, were in substance reimbursements of prior losses deducted by petitioners and thus should be taxed as ordinary income under tax benefit principles. He further argues that the promissory notes were not susceptible to valuation and that, therefore, the transactions did not close upon the receipt of the promissory notes.
With respect to Holbrook it is clear that the transaction became completed in 1968. His transfer of the note back to Kissinger effectively closed that transaction. Thus 1968 is the proper year for taxability.
The issue as to when the transaction became complete or closed with respect to Childers presents a somewhat different picture. Unlike Holbrook, Childers retained his promissory note and received payments thereon in 1969 and 1970. In passing judgment we must first determine whether petitioner established that the receipt of the promissory note constituted an "amount realized" in 1968. Section 1001. If so, we must then determine whether Childers established that the1975 Tax Ct. Memo LEXIS 82">*88 fair market value of the note equalled its face value. The burden of proof is upon petitioner.
In the peculiar context of this case, respondent, in his notice of deficiency, determined that Childers is taxable upon the receipt of the payments on the note, not upon the receipt of the note. Since respondent's notice of deficiency is clothed with a presumption of correctness, petitioner has the burden of overcoming the presumption in order to prevail.
In our judgment petitioner has not overcome the presumption and we hold that the receipt of the promissory note did not constitute an amount realized in 1968.
Since the receipt of the note did not close the transaction, payments on the note in 1969 and 1970 constituted taxable events to petitioner Childers. See 1975 Tax Ct. Memo LEXIS 82">*91
The final question facing us relates to the characterization, for tax purposes, of the cancellation of Holbrook's note and the payments on the Childers' note.
As previously noted, petitioners contend that they should be entitled to capital gain treatment. Respondent, on the other hand, argues that in substance petitioners were reimbursed for their investments. He submits that to the extent a sale occurred it was only to the extent of petitioners' bases in the partnership. The remainder of the amounts received, it is contended, constitute a recovery of partnership losses allocated to Holbrook and Childers and deducted on their tax returns, and should be treated as ordinary income under tax benefit principles.
We are not persuaded by respondent's arguments. Cases such as
We think the situation here contrasts to that in our recently court reviewed case of
Although petitioners have the burden of proof, in our judgment they have overcome the presumption of correctness in respondent's determination and presented a prima facie case in support of a sale. This is not a situation involving a sham. 5 As we interpet the evidence presented, it appears that Kissinger offered to buy back all of the limited partners' interests at their cost, 6 which offers were accepted. Although the fair market value of the two interests herein was not established, 7 in our judgment petitioners have presented a prima facie case of sale. 1975 Tax Ct. Memo LEXIS 82">*94 The fact that the sale price may be greater than the fair market value does not prevent a finding that a sale in fact occurred. Cf.
1975 Tax Ct. Memo LEXIS 82">*95 Accordingly, we find that Holbrook properly reported the difference between the face amount of his note and his adjusted basis as long-term capital gain. With respect to Childers, he erred in failing to treat the payments received in each year as capital gain to the extent the amount received exceeded his partnership basis as allocated to each payment. Compare
1. The transfer agreement between Holbrook and Kissinger is set forth below:
THIS ASSIGNMENT, made as of October 1, 1968, from DR. W. D. HOLBROOK, herein referred to as "Assignor", to CLYDE G. KISSINGER, herein referred to as "Assignee".
WITNESSETH:
In consideration of the sum of Ten ($10.00) Dollars, and other good and valuable consideration, received by Assignor from Assignee, Assignor does hereby grant, bargain, sell, assign, transfer and convey unto Assignee a Ten (10%) Percent interest in and to a limited partnership known as Neosho Ltd., created by a limited partnership agreement between Colorado Drilling Company, as general partner, and Julian Albergotti, Jr., Robert H. Benfield, Charles Brown, Melvin Childers, S. W. Clark, Claud T. David, Doris Flowers as Flowers Investment Group, E. Reed Gaskin, Paul G. Donner, John Harloe, Henry C. Harrelson, Jr., Nash A. Glaze, The Casual Shop, Inc., W. D. Holbrook, William W. Hopson, George Mundorf and Richard Ross.
This Assignment is of the full percentage interest presently owned by Assignor and includes the proportionate share of the profits or other compensation by way of income as of February 1, 1968 which Assignor, as a limited partner, might otherwise have received under the terms of the said partnership agreement, as well as all other rights, interests and privileges of Assignor as a limited partner.
TO HAVE AND TO HOLD unto Assignor, its successors and assigns forever in accordance with the provisions of the said Limited Partnership.
IN WITNESS WHEREOF, Assignor has executed this Assignment as of the date and year first stated above.
The wording of Childers' agreement was substantially the same. ↩
2. Kissinger's promissory note to Holbrook is set forth below: $17,345.37 October 1, 1968
After date, for value received, the undersigned promises to pay to the order of DR. W. D. HOLBROOK, the sum of Seventeen Thousand, Three Hundred Forty-five and 37/100 Dollars, without interest. The said amount is payable in two (2) equal annual installments of one-half (1/2) each of the principal amount on October 31 of calendar years 1969 and 1970.
Any failure to pay any installment when due shall cause the whole note to become due and payable at once, and it shall not be necessary for the holder to declare the same due, but he may proceed to collect the same as if the whole was due and payable by its terms.
If this note is not paid when due or declared due hereunder, the principal thereof shall draw interest at the rate of six percent (6%) per annum.
Presentment for payment, notice of dishonor and protest are hereby waived by the maker.
If this note is not paid when due or declared due hereunder, or suit is brought, the maker agrees to pay reasonable costs of collection, including not more than One Thousand ($1,000.00) Dollars attorney's fees.
The promissory note to Childers had substantially the same wording except for amount and payment dates.↩
3. All statutory references are to the Internal Revenue Code of 1954, as amended.
In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in
No issue with respect to
4.
* * * * *
(b) Jurisdiction Over Other Years and Quarters.--The Tax Court in redetermining a deficiency of income tax for any taxable year or of gift tax for any calendar year or calendar quarter shall consider such facts with relation to the taxes for other years or calendar quarters as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year or calendar quarter has been overpaid or underpaid.↩
5. Cf.
6. The evidence is very sketchy on this point. Respondent introduced letters between Kissinger and a limited partner not a party to this action which we accepted only for the purpose of showing that letters were sent and not for the truth of the contents. Kissinger, although subpoenaed by respondent, did not appear as a witness. Neosho's final return indicated all the interests were sold. Although Childers apparently did not recover his entire investment, Holbrook apparently did. Evidence was not presented to apprise us as to why Kissinger was willing to pay the amounts he did. ↩
7. Respondent has submitted that the book value and basis in the interests indicate the fair market value. We disagree. In our opinion neither of these factors in this instance have been shown to be indicative of fair market value.↩