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Keywords

liabilitypartnershipcorporation

liabilitypartnership

Related Cases

IPO II v. C.I.R., 122 T.C. No. 17, 122 T.C. 295, Tax Ct. Rep. (CCH) 55,622, Tax Ct. Rep. Dec. (RIA) 122.17

Facts

IPO II, an LLC treated as a partnership for tax purposes, was owned by Gerald R. Forsythe and Indeck Overseas, an S corporation. IPO II purchased an aircraft funded by a loan guaranteed by Forsythe and two other entities, but not by Indeck Overseas. The IRS issued a final partnership administrative adjustment (FPAA) determining that the recourse liability was fully allocable to Forsythe, leading to the TMP's petition for review.

IPO II is a limited liability company organized in 1996 under the Illinois Limited Liability Company Act. At the time the petition was filed, IPO II's principal place of business was Wheeling, Illinois. IPO II was treated as a partnership for Federal income tax purposes for the years in issue.

Issue

Whether any of the recourse liability incurred by IPO II with respect to the purchase of an aircraft is allocable to Indeck Power Overseas Ltd. (Indeck Overseas).

The issue for decision is whether any of the recourse liability incurred by IPO II with respect to the purchase of an aircraft is allocable to Indeck Power Overseas Ltd. (Indeck Overseas).

Rule

Under the related partner exception, partners owning interests in the same partnership are not treated as related persons for determining the economic risk of loss for the liabilities of the partnership.

Notwithstanding paragraph (b)(1) of this section (which defines related person), persons owning interests directly or indirectly in the same partnership are not treated as related persons for purposes of determining the economic risk of loss borne by each of them for the liabilities of the partnership.

Analysis

The court analyzed the relationship between the partners and the economic risk of loss associated with the recourse liability. It concluded that Indeck Overseas did not bear any economic risk of loss because it was not a guarantor of the loan and could not be considered a related party to Forsythe under the related partner exception. Therefore, the liability was fully allocable to Forsythe.

We conclude that Indeck Overseas and Indeck Energy are not related parties for purposes of determining whether Indeck Overseas bore any economic risk of loss with regard to IPO II's liability for the aircraft because: (1) Indeck Overseas is not related to Mr. Forsythe pursuant to the related partner exception; and (2) Indeck Overseas is related to Indeck Energy only through Mr. Forsythe, and that relationship is not recognized for purposes of our determination.

Conclusion

The court held that none of the recourse liability incurred by IPO II with respect to the purchase of the aircraft is allocable to Indeck Overseas, and the IRS's determination was upheld.

Therefore, we hold that none of the recourse liability incurred by IPO II with respect to the purchase of the aircraft is allocable to Indeck Overseas.

Who won?

IRS, as the court upheld the IRS's determination that the entire recourse liability was allocable to Gerald R. Forsythe.

Decision for IRS.

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Phillips v. Commissioner of Internal Revenue, 283 U.S. 589, 51 S.Ct. 608, 75 L.Ed. 1289, 2 USTC P 743, 9 A.F.T.R. 1467, 1931-1 C.B. 264

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