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Keywords

liabilitypartnershipcorporationregulation
willpartnershipcorporation

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Larson v. Commissioner of Internal Revenue, 66 T.C. 159

Facts

Petitioners owned limited partnership interests in Mai-Kai Apartments and Somis Orchards, both formed under California law. The general partner, GHL, was a corporation that managed the partnerships but did not invest capital. The partnerships incurred significant losses during the years in question, and the petitioners deducted their shares of these losses on their tax returns. The IRS disallowed these deductions, arguing that the partnerships were associations taxable as corporations under section 7701(a)(3).

During the taxable years 1968, 1969, and 1970, petitioner was a limited partner in Mai-kai Apartments (hereinafter Mai-Kai), a limited partnership formed under the laws of the State of California.

Issue

Whether the limited partnerships, Mai-Kai Apartments and Somis Orchards, constitute associations taxable as corporations under section 7701(a)(3) of the Internal Revenue Code.

The sole issue remaining for decision is whether the limited partnerships involved in this proceeding constitute associations taxable as corporations within the meaning of section 7701(a)(3).

Rule

The court applied the regulations under section 301.7701-2, which define an 'association' as an entity that resembles a corporation based on characteristics such as continuity of life, centralization of management, limited liability, and free transferability of interests.

An organization will be taxed as a corporation if, taking all relevant characteristics into account, it more nearly resembles a corporation than some other entity.

Analysis

The court analyzed the characteristics of the partnerships in light of the regulatory framework. It found that the partnerships lacked key corporate characteristics such as continuity of life and limited liability, while possessing characteristics typical of partnerships, such as the ability of limited partners to withdraw their capital contributions under certain conditions. The court concluded that the partnerships did not resemble corporations more than they resembled partnerships.

The significant differences between a corporation and a partnership as regards continuity of life, then, is that a partner can always opt out of continued participation in and exposure to the risks of the enterprise.

Conclusion

The court held that the partnerships were taxable as partnerships under section 7701(a)(2) and not as corporations under section 7701(a)(3), allowing the petitioners to deduct their distributive shares of the losses.

Upon reconsideration, we have come to the opposite conclusion and hold for petitioners.

Who won?

Petitioners prevailed in the case because the court found that the partnerships did not possess the characteristics necessary to be classified as corporations for tax purposes.

The court's opinion was withdrawn on November 7, 1975.

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