The opinion of the court was delivered by: CONABOY
Plaintiffs Albert N. Danoff and Selma Danoff, his wife, brought this action for tax refund against the United States pursuant to 28 U.S.C. § 1346(a)(1).
The Plaintiffs' claim for refund stems from an alleged $ 68,320.00 loss claimed as their distributive share of Holiday Green Acres partnership income, resulting in a $ 30,634.63 throwback net operating loss for the year 1969.
As a result of this net operating loss, the years affected are 1969, 1970, 1972, 1973, 1974, and 1975. In each of the years in issue, Plaintiffs filed timely returns and paid the taxes reported due. In August of 1976 and January of 1977, the Commissioner of Internal Revenue made assessments of deficiencies against the Plaintiffs, and these amounts were paid. Plaintiffs then filed Amended Individual Tax Returns which were treated in accordance with the provisions of the Internal Revenue Code as claims for refund. Each was denied by the Commissioner on the basis that the loss claimed as a limited partner in Holiday Green Acres was not allowable since the amount claimed exceeded the contribution made by Albert Danoff to the capital of the partnership and his adjusted basis in the partnership. This action was timely filed to contest the denial of the Plaintiffs' claims.
Since the underlying facts which determine Danoff's liability are not in dispute, the parties entered into a stipulation of fact. Plaintiffs then filed a motion for partial summary judgment limited to the determination of whether the male Plaintiff's signing of various Mortgage Assumption Agreements, and delivering them to the general partners, and not to the creditors of the partnership rendered him a general partner and therefor entitled him to claim a greater tax benefit. The Defendant has entered a cross motion for summary judgment limited to the same issue.
The facts stipulated to by the parties can be briefly summarized as follows: Holiday Green Acres (Holiday) is a limited partnership organized under Pennsylvania law, which is in the business of operating rental apartments. Albert N. Danoff is a limited partner in the enterprise. His initial cash investment was $ 18,000, for which he acquired a 10% interest in the limited partnership. In the latter part of 1971 or the early part of 1972, Danoff executed Mortgage Assumption Agreements under which he assumed and agreed to pay mortgages which Holiday had executed to several creditors. The terms of these agreements included a provision that Danoff's assumption of liability would be limited to his pro rata share of Holiday. At this time the partnership's total indebtedness was over $ 2,800,000. These Mortgage Assumption Agreements were delivered to Holiday's general partners, but not to the creditors of the partnership, and were not filed with any state agency.
Danoff is named in the Holiday partnership agreement as a Limited Partner. Section 704(d) of the Internal Revenue Code defines the limits on allowance of losses of a partner:
A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss occurred. Any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership. 26 U.S.C.A. § 704(d).
Section 722 defines the basis of a contributing partner's interest in a partnership acquired by a contribution of property, including money, as "the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution." 26 U.S.C.A. § 722. Section 752(a) allows for an increase in basis with the increase of a partner's liabilities:
Any increase in a partner's share of the liabilities of a partnership, or any increase in a partner's individual liabilities by reason of the assumption by such partner of partnership liabilities, shall be considered as a contribution of money by such partner to the partnership. 26 U.S.C.A. § 752.
Danoff's position then, is that his basis in the partnership was increased by $ 280,000 when he executed the assumption of mortgage agreements, and that he is therefore entitled to the tax benefit of his entire share of the partnership losses suffered in 1972, much in excess of his original $ 18,000 cash basis in the partnership. The Commissioner contends that the Mortgage Assumption agreements were not legally effective to increase his basis.
It has long been held that the Commissioner's deficiency determination is entitled to a presumption of correctness, and that the burden is on the taxpayer to prove the incorrectness of the determination. Helvering v. Taylor, 293 U.S. 507, 515, 55 S. Ct. 287, 291, 79 L. Ed. 623; Welch v. Helvering, 290 U.S. 111, 115, 54 S. Ct. 8, 9, 78 L. Ed. 212; Demkowitz v. Commissioner, 551 F.2d 929, 931 (3d Cir. 1977); Baird v. Commissioner, 438 F.2d 490, 492 (3d Cir., 1971). Therefore, the burden is on the Plaintiffs herein to prove the validity of the Mortgage Assumption Agreements, as an enforceable assumption of liability by the Plaintiffs. We find that they have not sustained this burden.
The facts before this Court are the same as those that were before the Commissioner, and we find the arguments advanced by Danoff
in support of a ...