1975 U.S. Tax Ct. LEXIS 9">*9
Petitioner Edward F. Neubecker and another partner withdrew from a three-man legal partnership and formed their own partnership. They took with them only certain physical assets having minimal value and some of the clients they had been serving. Petitioner had a balance in his partnership capital account of $ 2,425.57 at the time of his withdrawal.
65 T.C. 577">*578 Respondent determined a deficiency in petitioners' income tax for 1969 and an addition to tax under
FINDINGS OF FACT
Some of the facts have been stipulated1975 U.S. Tax Ct. LEXIS 9">*13 and are accordingly so found.
Petitioners were husband and wife during 1969, and at all times material hereto resided in Milwaukee, Wis. Petitioners' joint Federal income tax return for the taxable year 1969 was filed with the Director, Internal Revenue Service Center, Kansas City, Mo., on June 22, 1970.
Edward F. Neubecker (hereinafter referred to as Neubecker or petitioner) 2 is an attorney-at-law who engaged in the practice of law in Milwaukee, Wis. From December 1, 1964, to February or March of 1969, petitioner practiced law as a partner in the firm of Frinzi, Catania, and Neubecker (hereinafter sometimes referred to as the partnership), of which Messrs. Frinzi, Catania, and Neubecker were the sole members. No formal written partnership agreement existed among the three partners although there was an informal understanding as to the partners' respective duties and the division of partnership profits. The partnership maintained a bank account on which each of the partners was authorized to draw.
1975 U.S. Tax Ct. LEXIS 9">*14 At some time in either February or March of 1969, the partnership was dissolved upon oral agreement of all the partners, whereupon petitioner and Catania left the location of the partnership, acquired office facilities elsewhere in Milwaukee, and immediately thereafter formed a new partnership under the 65 T.C. 577">*579 name of Catania and Neubecker. Petitioner and Catania did not execute a written agreement evidencing the new arrangement.
No formal accounting occurred among the three partners incident to the dissolution of Frinzi, Catania, and Neubecker. The partnership bank account, as well as whatever accounts receivable were then outstanding, were left with Frinzi who continued to occupy the offices previously maintained by the partnership. To the extent some fees had at the time of dissolution been received from clients, no attempt was made to allocate these payments among the partners. Although no formal division or assignment of clients and pending cases took place, petitioner and Catania, as partners in Catania and Neubecker, retained certain clients and cases for which they had responsibility when practicing as partners in Frinzi, Catania, and Neubecker.
Upon the dissolution1975 U.S. Tax Ct. LEXIS 9">*15 of Frinzi, Catania, and Neubecker, petitioner actually received the following:
Fair market value | |
Item | on dissolution |
Cash | |
Accounts receivable | |
Inventory | |
1 typewriter | $ 100 |
1 secretary chair | 50 |
2 file cabinets | 100 |
Miscellaneous books and pamphlets | 100 |
1 waiting room chair | 50 |
Office supplies | 15 |
Total value | 415 |
The bulk of the equipment and property used in the conduct of the business of the partnership remained with Frinzi.
As of the date of dissolution of the partnership, petitioner's capital account had a balance of $ 2,425.57.
As calendar year taxpayers, petitioners were required to file their joint Federal individual income tax return for 1969 on April 15, 1970. They obtained an extension until May 15, 1970, on which date they received an additional extension of time until June 15, 1970. Petitioners actually filed their 1969 return on June 22, 1970.
Under Part III of Schedule E attached to their return for 1969, petitioners reported as income from partnerships the amount of $ 13,258.49 from Catania and Neubecker and $ 3,521.01 from 65 T.C. 577">*580 Frinzi, Catania, and Neubecker. The employer identification number listed thereon was the same for both partnerships.
1975 U.S. Tax Ct. LEXIS 9">*16 On Schedule D, "Sales or Exchanges of Property," under Part I, "Short-term capital gains and losses," petitioners reflected a $ 2,425.57 loss on the partnership interest in Frinzi, Catania, and Neubecker. Of this amount, petitioners claimed a deduction of $ 1,000 3 which respondent has disallowed in its entirety.
OPINION
The principal issue remaining for decision is whether, incident to the dissolution of the partnership of Frinzi, Catania, and Neubecker, petitioners sustained a recognizable loss on Edward F. Neubecker's interest in the partnership. We must also determine whether petitioners are liable for the addition to tax asserted by respondent pursuant to
With regard to the partnership loss issue, petitioners' position is predicated on the dissolution of the Frinzi, Catania, and Neubecker partnership. Since Neubecker had, at the time of dissolution, a capital account in the amount of $ 2,425.57, and in view1975 U.S. Tax Ct. LEXIS 9">*17 of the fact that the items taken by Neubecker and Catania for use in their new office were of minimal value, petitioners concluded they sustained a deductible loss on said partnership interest. On brief, 4 petitioners shift the thrust of their argument and characterize the value of Neubecker's share of the assets which remained with Frinzi as an abandonment or forfeiture loss, which theory is premised on petitioner's contention that the Code sections specifically relating to the taxation of partners and partnerships (subchapter K) fail to deal with the treatment to which petitioners are entitled.
1975 U.S. Tax Ct. LEXIS 9">*18 Respondent, on the other hand, argues that petitioners sustained no deductible loss on the partnership interest because the Frinzi, Catania, and Neubecker partnership, albeit dissolved, did not terminate within the meaning of
While it can be argued that the provisions of subchapter K did not envision such an informal splitting up of a partnership as occurred here, we must agree with respondent's analysis that the 1975 U.S. Tax Ct. LEXIS 9">*20 provisions of subchapter K do prevent the recognition of any loss to petitioners under the circumstances here present.
We note as a threshold matter that in the context of
In the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting partnership the members of which had an interest of 50 percent or less in the capital and profits of the prior partnership) shall, for purposes of this section, be considered a continuation of the prior partnership.
See n. 5
We believe that the extant facts warrant no other conclusion than that a sufficient part of the business conducted by Frinzi, Catania, and Neubecker continued to be carried on by the Catania and Neubecker partnership such that the former cannot be considered as terminated.
The fact that the1975 U.S. Tax Ct. LEXIS 9">*23 Catania and Neubecker partnership kept the same employer identification number further supports our determination as to the continuation of Frinzi, Catania, and Neubecker. Contrary to the emphasis placed by petitioners on the fact that Neubecker and Catania vacated the old premises and relocated in other office facilities, we attribute little significance to such fact which, although indicative of some physical interruption of operation, is irrelevant in terms of the criteria set forth in
If, then, Frinzi, Catania, and Neubecker continued by virtue of the fact that its business was in part carried on by its partners, Neubecker and Catania, in a partnership, it follows that the receipt of the few items of office equipment and supplies, to the extent characterized as a distribution to Neubecker, nevertheless did not constitute a distribution in liquidation of his partnership interest, which is the threshold requirement for recognition of loss pursuant to
1975 U.S. Tax Ct. LEXIS 9">*24
The record is devoid of any evidence indicating receipt of any of the prescribed items of property. Petitioner received no cash. Presumably the business of Frinzi, Catania, and Neubecker involved no inventory. Neubecker himself1975 U.S. Tax Ct. LEXIS 9">*25 testified that no allocation of receivables, if any existed, occurred. And further, petitioners have presented no evidence that Neubecker was relieved of any partnership liabilities so as to constitute a distribution of money under
Thus, under either approach,
1975 U.S. Tax Ct. LEXIS 9">*27 Not only does
Further, we do not find support for either characterization in
Unlike the facts in
In addition to being so factually distinguishable, we believe
Moreover, these cases [
Again, in
On the basis of the foregoing, we hold that petitioners did not sustain a deductible loss in 1969 in respect of Neubecker's interest in the Frinzi, Catania, and Neubecker partnership.
Turning to the question of petitioners' 1975 U.S. Tax Ct. LEXIS 9">*30 liability for the late filing penalty asserted pursuant to
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect in the years involved, unless otherwise specified.↩
2. Patricia J. Neubecker is a party to this proceeding solely by virtue of having filed a joint return with her husband, Edward F. Neubecker.↩
3. Apparently sec. 1211(b)(1)(B) applied to limit the amount of deduction allowable.↩
4. Respondent argues that as issues raised for the first time on brief, the abandonment and forfeiture questions are not properly before us and cites in support thereof
5. In pertinent part,
(a) General Rule. -- For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated.
(b) Termination. -- (1) General rule. -- For purposes of subsection (a), a partnership shall be considered as terminated only if -- (A) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership, or (B) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits. (2) Special rules. -- * * * (B) Division of a partnership. -- In the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting partnership the members of which had an interest of 50 percent or less in the capital and profits of the prior partnership) shall, for purposes of this section, be considered a continuation of the prior partnership.↩
6.
(a) Partners. -- In the case of a distribution by a partnership to a partner -- * * * (2) loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner's interest in a partnership where no property other than that described in subparagraph (A) or (B) is distributed to such partner, loss shall be recognized to the extent of the excess of the adjusted basis of such partner's interest in the partnership over the sum of -- (A) any money distributed, and (B) the basis to the distributee, as determined under
7. We recognize that it can be argued that
8.
(2)
9.
(b) Decrease in Partner's Liabilities. -- Any decrease in a partner's share of the liabilities of a partnership, or any decrease in a partner's individual liabilities by reason of the assumption by the partnership of such individual liabilities, shall be considered as a distribution of money to the partner by the partnership.
See
10. That is, the typewriter, chairs, file cabinets, miscellaneous books and pamphlets, and office supplies to which the parties have stipulated.↩
11. Either characterization would give rise to an ordinary loss which is inconsistent with the fact that, on their return for 1969, petitioners claimed the loss as a short-term capital loss.↩