taxpayer’s at-risk and basis amounts increased with respect to debt obligations due 10 years subsequent to the taxable years at issue
How later courts described this case
- taxpayer’s at-risk and basis amounts increased with respect to debt obligations due 10 years subsequent to the taxable years at issue
- “[The regulation] factors are not applicable or appropriate for every case. The facts and circumstances of the case in issue remain the primary test.”
- partnership's basis; at risk under sec. 465
Written by the judges who cited it.
The opinion
SWIFT, J., concurring: I agree with the result reached by the majority opinion but wish to comment on one aspect of the partnership’s obligation under the loan. The majority correctly concludes that the $1,525,000 promissory note is nonrecourse as to the general and limited partners. Under the relevant loan documents, however, as I read them, it appears that the $1,525,000 promissory note is recourse as to the partnership itself (namely, Surhill). If so, the creditor, Rizzoli Co., is entitled to seek full recourse against all of Surhill’s available assets if a default on the note occurs.
The apparent recourse nature of the promissory note as to Surhill, however, does not make the obligations of the general and limited partners secondary to Surhill’s obligation. For Federal tax purposes, the fact that none of the partners has personal liability on the promissory note elevates the obligations of the partners under the guarantee agreements to primary obligations.
With the clarification that the promissory note appears to be recourse as to Surhill, I agree with the majority’s conclusion that Brand v. Commissioner, 81 T.C. 821 (1983), is not applicable to the partners’ obligations because the partners have no other person or partner to whom to look for reimbursement should they be required to make payments under the guarantee agreements.
WILLIAMS, J., concurring: I fully agree with the majority’s opinion and write separate views only because I believe it necessary to express additional support for the distinction the majority draws between this case and Pritchett v. Commissioner, 85 T.C. 580 (1985). While bearing superficial resemblance to each other, the two cases are very different.
First, the lender in this case very clearly had no interest in the activity “other than as a creditor” and was not “related” to any of the debtors. Sec. 465(b)(3). In Pritchett, the ultimate obligee was the promoter of the activity. See concurring opinion of Judge Simpson in Pritchett.
Second, in this case, each partner was fully and personally obligated for his proportionate share of the partnership’s indebtedness to the lender. In Pritchett, quite to the contrary, the limited partners were not liable on the debt to the lender, rather they were hable, if at all, to the general partner. The recourse obligation in Pritchett effectively made the general partner personally hable for repayment of the obhgation. The hmited partners were not hable for any portion of the debt but were hable for an amount equal to any outstanding balance of the debt at a future date only if called upon by the general partner for additional contributions necessary to retire the remaining balance of the debt. Thus, the hmited partners in Pritchett were in effect hable only to indemnify the general partner against personal loss. Because the hmited partners were hable, if at ah, only to indemnify the general partner in Pritchett, they were not hable for “an amount borrowed” until the general partner called upon them to contribute to the partnership. Even if it can be said that this contingency should be treated as an amount borrowed, because it is fundamentally owed to the general partner, it is owed to someone who has an interest in the activity other than as a creditor as well as to one who is “related” within the meaning of section 465(b)(3)(C). The legal obhgations of the hmited partners in this case stand in stark contrast to those of the hmited partners in Pritchett.
Third, the payment out of income does not make the obligation in this case in any way contingent. There is personal liability for the full amount of the debt. In this case, unlike Pritchett, the amount of indebtedness for which each partner is liable is fixed and known at the inception of the obligation and throughout its term. Payment of some or all of the debt during its term out of income of the partnership does not inject any contingency whatsoever into the determination of how much of the debt each partner is liable for.
In sum, the Court reached the correct result in Pritchett and reaches the correct result here. Pritchett is a very different case.
Sterrett, GoFFE, Chabot, Swift, Jacobs, Wright and PARR, JJ., agree with this concurring opinion.