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Keywords

willpartnership
partnershipsustainedrespondent

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Sennett v. Commissioner of Internal Revenue, 80 T.C. 825, Tax Ct. Rep. (CCH) 40,077

Facts

William Sennett was a partner in Professional Properties Partnership (PPP) and had a negative capital account due to prior losses. In December 1968, he sold his partnership interest back to PPP and agreed to pay for his share of the partnership losses. In 1969, he paid a portion of this amount and claimed it as a loss on his tax return. The IRS disallowed the deduction, leading to the current dispute.

On November 26, 1968, petitioner and PPP executed an agreement for the sale of partnership interest. Under the terms of this agreement, petitioner sold to PPP his interest in PPP, effective December 1, 1968.

Issue

Whether section 704(d) allows a former partner to deduct, in 1969, his payment to the partnership of a portion of his distributive share of partnership losses which was not previously deductible while he was a partner because the basis of his partnership interest was zero.

The issue for decision is whether section 704(d) allows a former partner to deduct, in 1969, his payment to the partnership of a portion of his distributive share of partnership losses which was not previously deductible while he was a partner because the basis of his partnership interest was zero.

Rule

Section 704(d) provides that a partner's distributive share of partnership 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.

Section 704(d) provides as follows: (d) LIMITATION ON ALLOWANCE OF LOSSES.—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.

Analysis

The court analyzed the application of section 704(d) and determined that since Sennett sold his partnership interest in 1968, he was no longer a partner in 1969 when he made the payment. Therefore, he could not deduct the losses as he had no basis in the partnership interest at the end of the partnership year in which the losses occurred. The court emphasized that the deduction is contingent upon being a partner at the time of the payment.

Applying section 706(c)(2)(A)(i) to the facts in the instant case, the taxable year of PPP with respect to petitioner closed in December 1968, when he sold his entire interest in PPP. That being the case, petitioner paid 80 percent of his share of PPP's losses for 1967 and 1968 to PPP after the close of his last partnership year with PPP which fails to come within the provisions of section 704(d) which allows the deduction 'at the end of the partnership year in which such excess is repaid to the partnership.'

Conclusion

The court concluded that Sennett could not deduct his share of the partnership losses in 1969 because he was not a partner at that time, affirming the Commissioner's determination of a tax deficiency.

We agree with respondent that petitioners may not, in 1969, deduct Mr. Sennett's share of the losses sustained by PPP in 1967 and 1968 equal to his payment to PPP of $109,061 in 1969 and that petitioners may, instead, as conceded by respondent, offset $109,061 against the proceeds received by them in 1969 from the disposition of the installment obligation of PPP.

Who won?

The Commissioner prevailed in the case because the court upheld the disallowance of the deduction based on the interpretation of section 704(d) and the fact that Sennett was no longer a partner when he made the payment.

The Commissioner prevailed in the case because the court upheld the disallowance of the deduction based on the interpretation of section 704(d) and the fact that Sennett was no longer a partner when he made the payment.

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