SCOTUS Reports

Tag: Greene v. Commissioner

  • Greene v. Commissioner, T.C. Memo. 2008-116: Statute of Limitations for Partnership Item Adjustments

    T.C. Memo. 2008-116

    The issuance of a Notice of Final Partnership Administrative Adjustment (FPAA) for a partnership tax year remains valid even if the statute of limitations has expired for assessing taxes directly related to that year, provided the FPAA adjustments (partnership items) may have income tax consequences for partners in later years that remain open under the statute of limitations.

    Summary

    This case addresses whether the IRS can adjust partnership items via an FPAA when the tax year of the partnership return is closed by the statute of limitations, but the adjustments affect partners’ tax liabilities in open years. The Tax Court held that the FPAA was valid because adjustments to partnership items (capital losses) had potential tax consequences for the partners in subsequent years that were still open for assessment. The court reasoned that the IRS could assess taxes for those open years, even if the underlying partnership transactions occurred in a closed year.

    Facts

    G-5 Investment Partnership (G-5) filed its 2000 partnership return on October 4, 2001. Henry and Julie Greene were indirect partners in G-5. On April 12, 2006, the IRS issued an FPAA for the 2000 tax year. The FPAA was issued more than three years after the partnership return was filed and after the partners filed their individual 2000 and 2001 returns, but within three years of the partners filing their 2002-2004 returns. The Greenes carried forward capital losses from G-5’s 2000 partnership items to their individual tax returns for 2002-2004.

    Procedural History

    The IRS issued an FPAA for G-5’s 2000 tax year. The Greenes, as partners, petitioned the Tax Court, arguing that the statute of limitations barred assessment of tax liabilities related to the 2000 partnership items. The Greenes moved for judgment on the pleadings. The Tax Court denied the motion, holding that the FPAA was valid because it affected the partners’ tax liabilities in open years (2002-2004).

    Issue(s)

    Whether the IRS is barred by the statute of limitations from assessing income tax liability attributable to partnership items for a closed tax year (2000) when the FPAA was issued more than three years after the partnership and partners filed their 2000 tax returns, but the partnership items affect the partners’ tax liability in open tax years (2002-2004).

    Holding

    No, because the FPAA determined adjustments to partnership items (capital losses) that may have income tax consequences to the partners at the partner level in 2002-04, years open under the period of limitations. The IRS is barred from assessing deficiencies for the closed tax years of 2000 and 2001.

    Court’s Reasoning

    The court reasoned that while sections 6501(a) and 6229(a) generally impose a three-year statute of limitations for assessing tax, section 6229 establishes the minimum period for assessing tax attributable to partnership items, which can extend the section 6501 period. The issuance of an FPAA suspends the running of the statute of limitations. The court relied on the principle that in deficiency proceedings, the IRS can examine events in prior, closed years to correctly determine income tax liability for open years. The court found no reason why this principle should not extend to TEFRA partnership proceedings. The court stated, “[T]here is no TEFRA partnership provision that precludes extending this rule to partnership proceedings.” The court emphasized its jurisdiction to determine all partnership items and their proper allocation among partners. Therefore, the IRS could assess tax liability for open years, even if the underlying partnership item adjustments relate to transactions completed in a closed year.

    Practical Implications

    This case clarifies that the IRS can adjust partnership items even if the partnership’s tax year is closed by the statute of limitations, as long as those adjustments affect the partners’ tax liabilities in open years. This means tax advisors must consider the potential impact of partnership adjustments on partners’ individual tax returns for all open years, not just the partnership year under examination. This ruling reinforces the importance of carefully analyzing partnership items and their carryover effects on individual partners’ tax liabilities, even years after the initial partnership return was filed. It also highlights the interplay between sections 6229 and 6501, emphasizing that section 6229 can extend the assessment period beyond the general three-year rule in section 6501 when partnership items are involved.

  • Greene v. Commissioner, 88 T.C. 376 (1987): When Safe-Harbor Leases Are Subject to Sham Transaction Analysis

    Greene v. Commissioner, 88 T. C. 376 (1987)

    The safe-harbor lease provisions of the tax code do not preclude the IRS from challenging the validity of the lease as part of a broader sham transaction.

    Summary

    In Greene v. Commissioner, the Tax Court rejected the taxpayers’ claim that compliance with the safe-harbor leasing provisions of IRC Section 168(f)(8) automatically entitled them to tax benefits. The court ruled that while the safe-harbor rules might apply to the lease itself, the IRS could still challenge the lease as part of a larger series of transactions that could be considered a sham. This decision underscores that the economic substance and business purpose of the entire transaction, not just the lease, remain relevant in determining tax consequences.

    Facts

    Ira S. Greene and Robin C. Greene, as limited partners in Resource Reclamation Associates (RRA), claimed tax deductions from leasing rights in Sentinel EPE recyclers. The recyclers were sold and resold through a series of transactions involving Packaging Industries Group, Inc. (PI), Ethynol Cogeneration, Inc. (ECI), and F & G Equipment Corp. (F & G), before being leased to RRA and then sublicensed back to PI through First Massachusetts Equipment Corp. (FMEC). The IRS disallowed these deductions, arguing that the transactions lacked economic substance and were a sham.

    Procedural History

    The taxpayers moved for summary judgment in the U. S. Tax Court, asserting that their compliance with the safe-harbor leasing provisions of IRC Section 168(f)(8) should entitle them to the tax benefits as a matter of law. The Tax Court denied this motion, finding that genuine issues of material fact existed regarding the nature of the transactions surrounding the lease.

    Issue(s)

    1. Whether the safe-harbor leasing provisions of IRC Section 168(f)(8) preclude the IRS from challenging the validity of the lease as part of a sham transaction.

    Holding

    1. No, because while the safe-harbor rules might apply to the lease itself, the IRS can still challenge the lease as part of a larger series of transactions that could be considered a sham.

    Court’s Reasoning

    The court emphasized that IRC Section 168(f)(8) was intended to facilitate the transfer of tax benefits to spur capital investment but did not intend to immunize transactions from being scrutinized for lack of economic substance or business purpose. The court distinguished between the isolated lease transaction, which might meet the safe-harbor requirements, and the broader series of transactions, which could be considered a sham. The court noted that the legislative history focused on the lease agreement itself, not the surrounding transactions. The court also pointed out that the IRS’s argument was supported by evidence questioning the valuation and financing terms of the transactions, indicating potential factual disputes that could not be resolved on summary judgment. The court concluded that the IRS should have the opportunity to explore these issues at trial to determine if the entire transaction was a sham.

    Practical Implications

    This decision means that taxpayers cannot rely solely on the safe-harbor leasing provisions to shield their transactions from IRS scrutiny. Legal practitioners must consider the broader context and economic substance of the entire series of transactions when structuring leases to ensure they withstand challenges based on sham transaction doctrines. This ruling may deter aggressive tax planning strategies that rely on the safe-harbor provisions without genuine economic substance. Subsequent cases have reinforced this principle, requiring taxpayers to demonstrate that their transactions have a legitimate business purpose beyond tax benefits.

  • Greene v. Commissioner, 93 T.C. 306 (1989): Tax-Free Exchange of Annuity Contracts Without Binding Obligation

    Greene v. Commissioner, 93 T. C. 306 (1989)

    A taxpayer may exchange one annuity contract for another without tax consequences, even if there is no binding obligation to reinvest the proceeds in the new annuity.

    Summary

    In Greene v. Commissioner, the Tax Court ruled that June Greene’s surrender of an annuity contract from one insurer and immediate reinvestment of the proceeds in a new annuity contract with another insurer qualified as a tax-free exchange under IRC Section 1035(a)(3). The court rejected the IRS’s argument that a binding obligation to reinvest was required, emphasizing that the statute and regulations did not impose such a condition. The decision clarifies that for Section 1035 to apply, the proceeds must be used to purchase a new annuity, but no formal agreement to do so is necessary. This ruling has significant implications for tax planning involving annuity exchanges.

    Facts

    June Greene, a schoolteacher, had an annuity contract with the Variable Annuity Life Insurance Co. (VALIC) funded by her employer under a salary reduction agreement. In October 1980, Greene surrendered her VALIC annuity and received a check for $35,337. 14, which she immediately used to purchase a new annuity contract from Charter Security Life Insurance Co. (Charter). VALIC required the proceeds to be paid directly to Greene, but she endorsed the check to Charter upon receiving it. There was no binding agreement between Greene and Charter obligating her to use the VALIC proceeds for the new annuity.

    Procedural History

    The IRS determined a deficiency in Greene’s 1980 income tax, asserting that the transaction was taxable because Greene had no binding obligation to reinvest the VALIC proceeds in the Charter annuity. Greene petitioned the Tax Court for review. The Tax Court, in a case of first impression, ruled in favor of Greene, holding that the exchange qualified for nonrecognition of gain under Section 1035.

    Issue(s)

    1. Whether the surrender of an annuity contract and immediate reinvestment of the proceeds in another annuity contract constitutes a tax-free exchange under IRC Section 1035(a)(3) when there is no binding obligation to reinvest the proceeds.

    Holding

    1. Yes, because the statute and regulations do not require a binding obligation to reinvest the proceeds in a new annuity contract for the exchange to be tax-free under Section 1035.

    Court’s Reasoning

    The court found that the exchange of Greene’s VALIC annuity for a Charter annuity qualified as a tax-free exchange under Section 1035(a)(3). The court emphasized that neither the statute nor the regulations required a binding obligation to reinvest the proceeds in a new annuity. The court interpreted “exchange” broadly, as intended by Congress, to include situations where a taxpayer gives up an insurance contract with one company to procure a comparable contract from another. The court also noted that Revenue Ruling 73-124 supported the view that an exchange could occur without a binding agreement, as long as the proceeds were immediately used to purchase a new annuity. The court rejected the IRS’s argument that a binding obligation was necessary, finding no support for this in the law or logic, and ruled that the transaction was a valid exchange under Section 1035.

    Practical Implications

    This decision allows taxpayers greater flexibility in managing their annuity contracts without incurring immediate tax liabilities. Attorneys and financial planners can advise clients that they may exchange one annuity for another without a formal agreement to reinvest the proceeds, as long as the exchange is completed promptly. This ruling impacts tax planning strategies, particularly for individuals with multiple annuity contracts. It also sets a precedent for future cases involving similar transactions, clarifying that the absence of a binding obligation does not preclude a tax-free exchange under Section 1035. Subsequent cases and IRS guidance have generally followed this interpretation, reinforcing its practical application in tax law.

  • Greene v. Commissioner, 81 T.C. 132 (1983): Applying the Income Forecast Method for Depreciation of Motion Picture Films

    Greene v. Commissioner, 81 T. C. 132 (1983)

    The income forecast method for depreciation of motion picture films requires the use of net income, not gross receipts, in the calculation.

    Summary

    In Greene v. Commissioner, the U. S. Tax Court addressed whether a partnership, Alpha Film Co. , could claim a depreciation deduction for a motion picture film using the income forecast method based on gross receipts rather than net income. The partnership had no net income in 1975 due to distribution expenses exceeding gross receipts. The court ruled that under the income forecast method, as prescribed by the Commissioner and upheld in prior cases, depreciation must be calculated using net income. Therefore, Alpha was not entitled to a depreciation deduction for 1975 because it had no net income that year.

    Facts

    Lorne and Nancy Greene were limited partners in Alpha Film Co. , which purchased the film “Ten Days’ Wonder” for distribution. Alpha entered into an agreement with Levitt-Pickman Film Corp. for distribution, where gross receipts were to be deposited into a special account and used first to cover distribution expenses and fees before any funds reached Alpha. From 1972 to 1976, the film’s gross receipts totaled $60,778, which was insufficient to cover distribution expenses, resulting in no net income for Alpha in those years. Alpha elected to use the income forecast method for depreciation on its tax returns, calculating depreciation based on gross receipts rather than net income.

    Procedural History

    The Commissioner of Internal Revenue disallowed the depreciation deduction claimed by Alpha for 1975, leading to a deficiency notice for the Greenes. The Greenes petitioned the Tax Court for a redetermination of this deficiency. Both parties filed cross-motions for partial summary judgment on the issue of whether Alpha could claim a depreciation deduction for 1975 under the income forecast method using gross receipts.

    Issue(s)

    1. Whether Alpha Film Co. was entitled to a depreciation deduction for 1975 under the income forecast method using gross receipts rather than net income?

    Holding

    1. No, because under the income forecast method as prescribed by the Commissioner, depreciation must be based on net income, and Alpha had no net income in 1975.

    Court’s Reasoning

    The Tax Court, relying on Revenue Rulings 60-358 and 64-273, held that the income forecast method for film depreciation requires the use of net income in the calculation. The court noted that Alpha’s use of gross receipts was inconsistent with prior cases like Siegel v. Commissioner and Wildman v. Commissioner, where the court rejected attempts to vary the method prescribed by the Commissioner. The court emphasized that Alpha elected to use this method and could not unilaterally change it without the Commissioner’s consent. The court found no need to decide if the gross receipts constituted income for Alpha since the lack of net income in 1975 precluded any depreciation deduction under the correct application of the method.

    Practical Implications

    This decision reinforces that the income forecast method for film depreciation must strictly adhere to the use of net income, impacting how partnerships and film producers calculate depreciation for tax purposes. It underscores the importance of consistent application of chosen depreciation methods and the necessity of seeking the Commissioner’s approval for changes. The ruling affects the tax planning strategies of film industry professionals, requiring careful consideration of distribution agreements and anticipated net income. Subsequent cases, such as Bizub v. Commissioner and Perlman v. Commissioner, have followed this precedent, solidifying the requirement to use net income in the income forecast method for film depreciation.

  • Greene v. Commissioner, 75 T.C. 32 (1980): Calculating Capital Gain Upon Reacquisition of Real Property

    Greene v. Commissioner, 75 T. C. 32 (1980)

    Upon reacquisition of real property in satisfaction of a purchase money mortgage, gain is calculated under IRC § 1038(b)(1) based on money and property received prior to reacquisition minus gain previously reported, without deducting original sales costs.

    Summary

    In Greene v. Commissioner, the taxpayers sold land in 1974 and reported the gain on an installment basis. They reacquired the land in 1976 when the buyers defaulted. The issue was whether they could deduct sales costs from the 1974 sale when calculating gain upon reacquisition. The Tax Court held that under IRC § 1038(b)(1), the taxpayers must recognize gain based on the difference between payments received before reacquisition and gain already reported, without subtracting original sales costs. The decision emphasizes the mandatory application of § 1038(b)(1) and its implications for tax reporting on reacquired property.

    Facts

    In 1974, G. Van Greene, Jr. and Minta J. Greene sold 226. 02 acres of land in Walton County, Georgia, to Bick, Nuzzulo, and Robinson for $350,176, receiving $70,035. 20 in cash and notes that year. They reported a gain of $48,891. 23 on an installment basis. The buyers defaulted on payments, and in 1976, the Greenes reacquired the property in satisfaction of the $280,140. 80 purchase money mortgage. The Greenes claimed a loss on the reacquisition, arguing that sales costs from the 1974 sale should reduce the gain calculation. The IRS determined a long-term capital gain of $10,559. 49 and assessed a minimum tax of $2,427. 17.

    Procedural History

    The IRS issued a statutory notice of deficiency to the Greenes for the 1976 tax year, asserting a long-term capital gain upon reacquisition of the property and a minimum tax liability. The Greenes petitioned the Tax Court for a redetermination of the deficiency. The Tax Court ruled in favor of the Commissioner, affirming the IRS’s calculation of gain under IRC § 1038(b)(1) and the imposition of the minimum tax.

    Issue(s)

    1. Whether the taxpayers are entitled to deduct the sales commissions and other selling costs incurred at the time of the original sale in 1974 when calculating the amount of reportable long-term capital gain upon reacquisition of real property in 1976 under IRC § 1038(b)(1).

    2. Whether the taxpayers are liable for a minimum tax pursuant to IRC §§ 56(a) and 57(a)(9) based on the long-term capital gain recognized upon reacquisition of the property.

    Holding

    1. No, because IRC § 1038(b)(1) mandates that gain upon reacquisition be calculated as the difference between money and property received prior to reacquisition and the gain previously reported, without allowing for deductions of original sales costs.

    2. Yes, because the long-term capital gain recognized under IRC § 1038(b)(1) is subject to the minimum tax imposed by IRC §§ 56(a) and 57(a)(9).

    Court’s Reasoning

    The Tax Court applied IRC § 1038(b)(1), which specifies that gain upon reacquisition of real property is the excess of money and property received before reacquisition over the gain previously reported. The court emphasized that this provision does not allow for the deduction of sales commissions and other costs from the original sale, as argued by the taxpayers. The court noted that the language of § 1038(b)(1) is mandatory and mechanical, requiring strict application without room for taxpayer discretion. The court also referenced the legislative history of § 1038, which aimed to provide a uniform method of reporting gain upon repossession and to prevent the taxpayer from being taxed on unrealized gains. The court rejected the taxpayers’ contention that they should only be taxed on the cash received in 1974, stating that the sales commissions paid by the buyers were effectively received by the taxpayers. The court further explained that any perceived hardship from this rule is mitigated by the increased basis in the reacquired property under IRC § 1038(c). Regarding the minimum tax, the court found that the recognized long-term capital gain was a tax preference item under IRC § 57(a)(9), thus subjecting the taxpayers to the minimum tax under IRC § 56(a).

    Practical Implications

    This decision clarifies that taxpayers cannot deduct original sales costs when calculating gain upon reacquisition of real property under IRC § 1038(b)(1). Attorneys advising clients on similar transactions must ensure that clients understand the tax implications of reacquiring property in satisfaction of a mortgage, particularly the mandatory calculation of gain without deductions for prior sales costs. This ruling may influence how sellers structure sales contracts to minimize tax liabilities upon potential reacquisition. Businesses and individuals dealing in real estate should consider the potential tax consequences of reacquiring property and plan accordingly, potentially seeking tax advice before entering into such transactions. Subsequent cases have generally followed this interpretation of § 1038, reinforcing its application in tax practice.

  • Greene v. Commissioner, 70 T.C. 534 (1978): When Rents from Properties Intended for Demolition Constitute Passive Investment Income

    Greene v. Commissioner, 70 T. C. 534 (1978)

    Rents from properties intended for demolition, but temporarily rented out, constitute passive investment income under IRC § 1372(e)(5) and can terminate a corporation’s subchapter S election.

    Summary

    In Greene v. Commissioner, the U. S. Tax Court held that rental income from properties intended for demolition to make way for a motel project was passive investment income under IRC § 1372(e)(5). The corporation, which had elected subchapter S status, received over $3,000 in rents and interest in 1972, constituting more than 20% of its gross receipts. The court rejected the taxpayers’ argument that these rents should be considered proceeds from demolition, affirming that such income was indeed passive and led to the termination of the corporation’s subchapter S election.

    Facts

    S. Ward White Motor Inn, Inc. was formed to construct and operate a motel in Danville, Illinois. The corporation purchased land with existing residential dwellings, intending to demolish them for the motel project. However, the occupants were allowed to remain until construction necessitated their removal. In 1972, the corporation reported $13,347. 42 in gross rents from these dwellings and $747. 11 in interest income from certificates of deposit. These amounts constituted the corporation’s entire gross receipts for that year.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ federal income taxes, asserting that the corporation’s subchapter S election was terminated due to passive investment income exceeding 20% of gross receipts in 1972. The petitioners contested this, arguing that the rents should be treated as proceeds from demolition. The case was heard by the U. S. Tax Court, which granted partial summary judgment in favor of the Commissioner.

    Issue(s)

    1. Whether the rental income received by the corporation from properties intended for demolition constitutes “proceeds from demolition” under IRC § 165 and thus should not be considered in calculating passive investment income under IRC § 1372(e)(5).

    Holding

    1. No, because the rents did not constitute “proceeds from demolition” but rather were passive investment income under IRC § 1372(e)(5), leading to the termination of the corporation’s subchapter S election.

    Court’s Reasoning

    The court reasoned that the rents received from the temporarily occupied dwellings did not fit the concept of “proceeds from demolition” as outlined in Treas. Reg. § 1. 165-3(a)(1). The regulation addresses the allocation of basis between land and buildings when purchased with the intent to demolish, but does not extend to income derived from using the buildings before demolition. The court emphasized that such income and related expenses are separate from the basis adjustment intended by the regulation. Furthermore, the court rejected the petitioners’ argument that the corporation’s intent to demolish should alter the characterization of the rental income, citing Osborne v. Commissioner for support. The court also noted that even if the rents were considered proceeds from demolition, they would still be included in gross receipts under IRC § 1372(e)(5), and thus passive investment income.

    Practical Implications

    This decision clarifies that rental income from properties intended for future demolition cannot be offset against the cost basis of the land as “proceeds from demolition. ” For corporations with subchapter S status, any rental or interest income must be carefully monitored to ensure it does not exceed the 20% threshold of gross receipts, as it could lead to the termination of the election. This ruling affects real estate development projects where properties are acquired for redevelopment, as temporary rental income must be treated as passive investment income. Subsequent cases have applied this principle to similar situations, emphasizing the need for corporations to plan their income streams to maintain subchapter S status.

  • Greene v. Commissioner, 7 T.C. 142 (1946): Disregarding Partnerships Formed Primarily to Avoid Taxes

    7 T.C. 142 (1946)

    A partnership formed without a legitimate business purpose, primarily to shift income tax liability within a family, can be disregarded by the IRS, with the income attributed to the individual who actually earned it.

    Summary

    Paul Greene, a partner in a construction firm, arranged for his wife and his business partner to form a separate equipment leasing company. The leasing company purchased equipment and immediately leased it back to Greene’s construction firm. Greene’s wife contributed capital borrowed from Greene and did not actively participate in the leasing business. The Tax Court held that Greene was taxable on the income of the leasing company attributable to his wife because the partnership lacked a legitimate business purpose and was created primarily to reduce Greene’s tax liability. The court also addressed the tax implications of rental income from property held as tenants by the entireties.

    Facts

    Paul Greene was a partner in Johnson & Greene, a construction company. He conceived the idea of having his wife, Margaret, and his partner, Johnson, form a new partnership, Alliance Equipment Company, to purchase and lease equipment to Johnson & Greene. Margaret contributed $7,500 to Alliance, which she borrowed from Paul. Alliance then purchased road construction equipment and immediately leased it to Johnson & Greene. Alliance received most of its income from Johnson & Greene. Margaret had limited involvement in Alliance’s business, signing only two checks, and she contributed no capital of her own, as she borrowed the money from her husband. Greene arranged the lease terms. The equipment was essential to Johnson & Greene’s business. Paul and Margaret Greene also received rental income from property they held as tenants by the entireties.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Paul Greene’s income tax liability for 1941. Greene contested the deficiency in the Tax Court, arguing that his wife was taxable on the income from Alliance Equipment Company and that he was not taxable on the entirety of rental income from the property held as tenants by the entireties.

    Issue(s)

    1. Whether Paul Greene was taxable on the income of Alliance Equipment Company distributable to his wife, given that the partnership was formed between his wife and his business partner and leased equipment to his construction firm.
    2. Whether Paul Greene was taxable on all of the rental income derived from property owned with his wife as tenants by the entireties.

    Holding

    1. No, because the Alliance Equipment Company lacked a legitimate business purpose and was created primarily to shift income tax liability from Paul Greene to his wife.
    2. No, because in Michigan, income from property held as tenants by the entireties is taxable equally to each spouse.

    Court’s Reasoning

    The Tax Court reasoned that Alliance Equipment Company served no legitimate business purpose other than to reduce Paul Greene’s income tax liability. Margaret Greene contributed no capital originating with her and did not actively participate in the management or control of Alliance. The court emphasized that tax consequences flow from the substance of a transaction rather than its form, citing Commissioner v. Court Holding Co., 324 U.S. 331, and Helvering v. Clifford, 309 U.S. 331. The court found that Greene exercised control over the income-producing equipment through the creation of a subservient agency, Alliance. Regarding the rental income, the court recognized that under Michigan law, a tenancy by the entirety exists when property is conveyed to a husband and wife, and each spouse is taxable on one-half of the income from such property, citing Harrison v. Schaffner, 312 U.S. 579.

    Practical Implications

    Greene v. Commissioner illustrates the principle that the IRS and courts can disregard business structures, including partnerships, when they are formed primarily to avoid taxes and lack a legitimate business purpose. It reinforces the importance of ensuring that all partners in a partnership contribute capital, services, or control to the business. The case also clarifies that income from property held as tenants by the entireties is generally taxable equally to each spouse, regardless of which spouse manages the property or receives the income. This case is frequently cited in cases involving family partnerships and assignment of income doctrines. Tax advisors must carefully scrutinize the economic substance of transactions to ensure they align with their legal form to withstand IRS scrutiny.