SCOTUS Reports

Tag: Blevins v. Commissioner

  • Blevins v. Commissioner, 61 T.C. 547 (1974): Recapture of Investment Tax Credits Upon Reduction in Partnership Interest

    Blevins v. Commissioner, 61 T. C. 547, 1974 U. S. Tax Ct. LEXIS 161, 61 T. C. No. 59 (1974)

    A reduction in a taxpayer’s interest in a business following a change in the form of conducting that business can trigger recapture of previously claimed investment tax credits, even if the taxpayer retains a substantial interest post-reduction.

    Summary

    In Blevins v. Commissioner, the Tax Court held that W. Frank Blevins must recapture 53. 33% of investment tax credits claimed in 1965 and 1966 after gifting stock that reduced his corporate interest from 45% to 21%. Initially a partner in Franklin Furniture Co. , Blevins converted the partnership into a corporation under IRC § 351, maintaining his 45% interest. The key issue was whether the subsequent reduction in interest triggered recapture under IRC § 47(a)(1). The court ruled that despite retaining a substantial interest, the reduction in Blevins’ interest post-conversion necessitated partial recapture, applying the partnership interest reduction rules of Treas. Reg. § 1. 47-6(a)(2) as directed by § 1. 47-3(f)(5)(iv).

    Facts

    W. Frank Blevins owned a 45% interest in Franklin Furniture Co. , a partnership, from December 1, 1965, to December 31, 1966. The partnership purchased IRC § 38 property, entitling Blevins to investment tax credits. On December 31, 1966, the partnership converted into Franklin Furniture Corp. under IRC § 351, with Blevins retaining a 45% interest in the corporation. On July 1, 1968, Blevins gifted stock to his sons, reducing his interest to 21%. The § 38 property had been in use for less than 4 years at the time of the gifts.

    Procedural History

    The Commissioner determined a deficiency in Blevins’ 1968 income tax due to the recapture of investment tax credits. Blevins petitioned the U. S. Tax Court, which ruled in favor of the Commissioner, ordering a recapture of 53. 33% of the credits claimed in 1965 and 1966.

    Issue(s)

    1. Whether a reduction in a taxpayer’s interest in a corporation, following the conversion of a partnership to a corporation, triggers recapture of investment tax credits under IRC § 47(a)(1)?

    2. Whether Treas. Reg. § 1. 47-6(a)(2) applies to determine recapture when a taxpayer’s interest in a business is reduced after a change in the form of conducting that business?

    Holding

    1. Yes, because the reduction in interest from 45% to 21% in the corporation, which was a successor to the partnership, triggered recapture under IRC § 47(a)(1) as it was a reduction in interest post-conversion.
    2. Yes, because Treas. Reg. § 1. 47-3(f)(5)(iv) directs the application of § 1. 47-6(a)(2) to determine recapture in such situations, leading to a partial recapture of credits.

    Court’s Reasoning

    The Tax Court applied IRC § 47(a)(1), which mandates recapture if property ceases to be § 38 property with respect to the taxpayer before the end of its useful life. IRC § 47(b) provides an exception for mere changes in the form of conducting a trade or business, but only if the taxpayer retains a substantial interest and the property remains § 38 property. The court noted that the exception in § 47(b) is contingent on the “so long as” conditions being met continuously post-conversion. When Blevins’ interest was reduced, the court applied Treas. Reg. § 1. 47-3(f)(5)(iv), which directs the use of § 1. 47-6(a)(2) for partnership interest reductions, to determine the recapture amount. The court found that a 53. 33% reduction in Blevins’ interest warranted a corresponding 53. 33% recapture of the credits. The court clarified that even though Blevins retained a substantial interest post-reduction, the specific regulations governing partnerships applied to the reduction in interest, necessitating recapture.

    Practical Implications

    This decision impacts how investment tax credit recapture is analyzed post-conversion of business forms. Taxpayers must be aware that reductions in their interest in a business, even if remaining substantial, can trigger recapture if the reduction occurs within the useful life period of the § 38 property. Legal practitioners must carefully consider the implications of any change in ownership interest post-conversion to advise clients on potential recapture liabilities. The ruling also underscores the importance of understanding the interplay between IRC § 47 and the relevant Treasury Regulations. Subsequent cases, such as Charbonnet v. United States, have distinguished this ruling by focusing on different business structures and applying different regulations. This case serves as a reminder to businesses to plan ownership changes carefully to manage tax liabilities effectively.

  • Blevins v. Commissioner, T.C. Memo. 1975-208: Investment Tax Credit Recapture and Changes in Business Form

    Blevins v. Commissioner, T.C. Memo. 1975-208

    A reduction in a taxpayer’s ownership interest in a corporation formed from a partnership, after a tax credit was claimed on partnership assets transferred to the corporation, triggers investment tax credit recapture, even if the assets remain in the same business.

    Summary

    W. Frank Blevins, initially a partner in Franklin Furniture Co., received investment tax credits in 1965 and 1966 based on partnership property. The partnership incorporated in 1966, becoming Franklin Furniture Corp., and Blevins retained the same proportional ownership. In 1968, Blevins gifted a portion of his corporate stock, reducing his ownership from 45% to 21%. The IRS sought to recapture a portion of the previously claimed investment tax credits. The Tax Court held that the stock gifts triggered recapture because Blevins’ reduced corporate ownership, derived from his partnership interest, fell below the threshold for maintaining a ‘substantial interest’ under relevant tax regulations, despite the underlying assets remaining in the same business.

    Facts

    1. From December 1, 1965, to December 31, 1966, W. Frank Blevins owned a 45% interest in Franklin Furniture Co., a partnership.
    2. The partnership acquired new and used Section 38 property during this period.
    3. Blevins received investment tax credits based on his share of this property in 1965 and 1966, which reduced his tax liabilities for 1962, 1963, and 1965.
    4. On December 19, 1966, Franklin Furniture Corp. was formed to succeed the partnership.
    5. The partnership’s assets, including the Section 38 property, were transferred to the corporation as of December 31, 1966, in a Section 351 tax-free exchange.
    6. Blevins received 112.5 shares, or 45%, of the corporation’s stock, mirroring his partnership interest.
    7. On July 1, 1968, Blevins gifted 30 shares of stock to each of his two sons, reducing his corporate ownership to 21%.
    8. As of the gift date, the Section 38 property had been in use for less than four years, which was within its estimated useful life for credit purposes.
    9. The corporation retained the Section 38 property and had not disposed of it by December 31, 1968.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in W. Frank and Henrietta Blevins’ 1968 income tax due to the recapture of prior years’ investment credits. The Blevins petitioned the Tax Court to dispute this deficiency.

    Issue(s)

    1. Whether the gifts of stock in Franklin Furniture Corp. by W. Frank Blevins in 1968, which reduced his ownership from 45% to 21%, triggered a recapture of 53.33% of the investment tax credits he had claimed in 1965 and 1966.

    Holding

    1. Yes, the gifts of stock triggered recapture because Blevins’ reduced ownership interest in the corporation, derived from his original partnership interest, resulted in a failure to maintain a ‘substantial interest’ in the business for investment tax credit purposes under applicable regulations.

    Court’s Reasoning

    The court reasoned that Section 47(a)(1) of the Internal Revenue Code requires recapture of investment credits if property is disposed of or ceases to be Section 38 property before the end of its useful life. While Section 47(b) provides an exception for a ‘mere change in the form of conducting the trade or business’ if the taxpayer retains a ‘substantial interest,’ this exception is not absolute.

    The court referenced Treasury Regulation §1.47-3(f)(5)(iv), which directs taxpayers to partnership recapture rules (§1.47-6(a)(2)) when there is a reduction of interest after a change in business form. The court interpreted this regulation to mean that even if a ‘substantial interest’ is initially maintained after incorporation, a subsequent reduction in that interest can trigger recapture if it falls below certain thresholds outlined in partnership recapture rules. Although neither party contested whether 21% constituted a ‘substantial interest,’ the court proceeded with the recapture analysis based on the existing regulations.

    Applying Regulation §1.47-6(a)(2), the court found that Blevins’ reduction in ownership from 45% to 21% constituted a 53.33% reduction of his original partnership interest. Because this reduction exceeded the permissible limits under the regulations for maintaining investment tax credits, recapture of 53.33% of the previously claimed credits was warranted. The court rejected the petitioner’s argument that recapture only applies if the corporation disposes of the Section 38 property, emphasizing that a reduction in the taxpayer’s interest in the business also triggers recapture under the regulations.

    Practical Implications

    Blevins v. Commissioner clarifies that the ‘mere change in form’ exception to investment tax credit recapture is not a permanent shield. Attorneys and tax advisors must consider not only the initial incorporation or change in business form but also any subsequent changes in ownership interest. Even if Section 38 property remains within the same business, a significant reduction in the taxpayer’s ownership, through gifts, sales, or other means, can trigger recapture. This case highlights the importance of ongoing monitoring of ownership percentages in pass-through entities and successor corporations that have benefited from investment tax credits. It emphasizes that tax planning for investment credits must extend beyond the initial investment and consider future ownership changes to avoid unexpected recapture events. The case also underscores the Tax Court’s reliance on specific Treasury Regulations to interpret and apply broad statutory provisions like Section 47.