SCOTUS Reports

Tag: Long v. Commissioner

  • Long v. Commissioner, 93 T.C. 352 (1989): Constructive Payment Doctrine Inapplicable to Revenue Procedure 65-17

    Long v. Commissioner, 93 T. C. 352 (1989)

    The doctrine of constructive payment does not apply to satisfy an account receivable established under Revenue Procedure 65-17.

    Summary

    In Long v. Commissioner, the U. S. Tax Court ruled that the doctrine of constructive payment does not apply to an account receivable established between related corporations under Revenue Procedure 65-17. The case involved William R. Long, who sought to apply the doctrine to avoid constructive dividend treatment. The court denied Long’s motion for reconsideration, emphasizing that Rev. Proc. 65-17 requires actual payment in money, not constructive payment, to satisfy the account receivable. The decision clarified that the terms of the closing agreement and the revenue procedure mandate an actual transfer of funds to avoid constructive dividend treatment.

    Facts

    William R. Long, the controlling shareholder, moved for reconsideration of the Tax Court’s opinion in Long v. Commissioner, 93 T. C. 5 (1989). The initial opinion held that an account receivable established between related corporations under Rev. Proc. 65-17, which was not offset by a preexisting account payable or otherwise satisfied within the allowed methods, constituted a constructive dividend to Long and a contribution to the capital of the transferee corporation. Long argued that the doctrine of constructive payment should apply to the transfer of assets required by the revenue procedure.

    Procedural History

    The Tax Court initially ruled in Long v. Commissioner, 93 T. C. 5 (1989), that the unsatisfied portion of the account receivable was a constructive dividend. Long filed a motion for reconsideration under Rule 161 of the Tax Court Rules of Practice and Procedure, which was denied by the court in the supplemental opinion at 93 T. C. 352 (1989).

    Issue(s)

    1. Whether the doctrine of constructive payment applies to the satisfaction of an account receivable established pursuant to Rev. Proc. 65-17.

    Holding

    1. No, because Rev. Proc. 65-17 requires payment “in the form of money,” and the closing agreement required payment in “United States dollars,” which precludes the application of the constructive payment doctrine.

    Court’s Reasoning

    The court’s reasoning focused on the interpretation of Rev. Proc. 65-17 and the closing agreement. The court emphasized that the revenue procedure explicitly required payment in money, and the closing agreement similarly required payment in U. S. dollars. The court rejected Long’s argument that constructive payment could satisfy these requirements, noting that accepting such an interpretation would render the closing agreement futile. The court distinguished this case from prior cases like White v. Commissioner and F. D. Bissette & Son, Inc. v. Commissioner, where the constructive receipt doctrine was applied in different contexts. The court found that the language of Rev. Proc. 65-17 and the closing agreement was unambiguous in requiring actual payment, and thus, the doctrine of constructive payment did not apply.

    Practical Implications

    This decision clarifies that taxpayers cannot use the doctrine of constructive payment to satisfy obligations under Rev. Proc. 65-17. Practitioners should ensure that actual payments are made in accordance with the terms of such agreements to avoid unintended tax consequences like constructive dividends. This ruling impacts how related corporations structure their financial transactions and emphasizes the importance of adhering to the specific payment requirements in revenue procedures. Subsequent cases involving similar revenue procedures will likely cite this decision to support the necessity of actual payment in money.

  • Long v. Commissioner, 93 T.C. 5 (1989): Requirements for Actual Payment Under IRS Revenue Procedure 65-17

    Long v. Commissioner, 93 T. C. 5 (1989)

    Under Rev. Proc. 65-17, actual payment in cash or a written obligation is required to avoid tax consequences of section 482 allocations.

    Summary

    In Long v. Commissioner, the U. S. Tax Court held that the taxpayer, William R. Long, and his controlled corporations did not comply with the terms of a closing agreement under IRS Revenue Procedure 65-17. The agreement required Long Specialty Co. , Inc. to pay Long Mfg. N. C. , Inc. within 90 days following a section 482 allocation. Despite having the financial ability, no actual payment was made within the stipulated time. The court ruled that an actual transfer of funds was necessary to avoid tax consequences, and the failure to pay resulted in a constructive dividend to Long, leading to a tax deficiency.

    Facts

    William R. Long was the chief executive officer and controlling shareholder of Long Mfg. N. C. , Inc. (Manufacturing) and the sole shareholder of Long Specialty Co. , Inc. (Specialty). Both companies used the accrual method of accounting. Following an IRS examination for 1981, income was allocated from Specialty to Manufacturing under section 482. A closing agreement was executed, allowing the companies to elect relief under Rev. Proc. 65-17. This required Specialty to pay Manufacturing $717,084. 93 within 90 days after the agreement’s execution. Manufacturing offset part of this amount against an existing account payable to Specialty, but the remaining balance was not paid in cash or by note within the required period.

    Procedural History

    The IRS determined a tax deficiency against Long for 1981 and issued a statutory notice. Long petitioned the U. S. Tax Court, which upheld the IRS’s position that the terms of the closing agreement were not met, resulting in a constructive dividend to Long.

    Issue(s)

    1. Whether the terms of the closing agreement requiring payment within 90 days were complied with by Specialty.
    2. Whether the failure to pay the remaining balance within the 90-day period resulted in a constructive dividend to Long.

    Holding

    1. No, because Specialty did not make an actual payment in cash or issue a written obligation within 90 days as required by the closing agreement and Rev. Proc. 65-17.
    2. Yes, because the failure to pay resulted in the unpaid balance being treated as a constructive dividend to Long, as stipulated in the closing agreement.

    Court’s Reasoning

    The court emphasized that closing agreements are contracts governed by general contract principles and are final and conclusive as to all matters contained within them. The agreement clearly required payment in “United States dollars” within 90 days, which was not met by Specialty. Rev. Proc. 65-17, which the agreement was subject to, similarly required payment in the form of money or a written obligation. The court rejected the argument that a constructive payment was sufficient, noting that Rev. Proc. 65-17 must be narrowly construed as a relief provision. The court also dismissed the argument of inconsistency in allowing an offset against a pre-existing debt while requiring actual payment for the remaining balance, as the procedure itself allowed such offsets. The court concluded that substance must follow form, and actual payment was required to avoid tax consequences.

    Practical Implications

    This decision underscores the importance of strict compliance with the terms of closing agreements and IRS revenue procedures. Taxpayers relying on Rev. Proc. 65-17 must ensure actual payment within the specified time to avoid tax consequences of section 482 allocations. The ruling affects how taxpayers and their advisors handle such allocations, emphasizing the need for careful planning and timely execution of payments. Businesses with related entities must be aware of the necessity for actual transfers of funds to reflect income adjustments without triggering further tax liabilities. Subsequent cases have cited Long v. Commissioner to support the requirement for actual payment in similar situations involving section 482 and Rev. Proc. 65-17.

  • Long v. Commissioner, 77 T.C. 1045 (1981): Like-Kind Exchanges of Partnership Interests and Recognition of Gain

    Long v. Commissioner, 77 T. C. 1045 (1981)

    A like-kind exchange of partnership interests qualifies under section 1031, but gain must be recognized to the extent of boot received in the form of liability relief.

    Summary

    Arthur and Selma Long, and Dave and Bernette Center exchanged their 50% interest in a Texas partnership, Lincoln Property, for a 50% interest in a Georgia joint venture, Venture Twenty-One. The Tax Court held that the exchange qualified as a like-kind exchange under section 1031(a), as both interests were in general partnerships. However, the court ruled that the entire gain realized on the exchange must be recognized due to the excess of liabilities relieved over liabilities assumed, treated as boot under sections 752(d) and 1031(b). The court also upheld the taxpayers’ right to increase the basis of the partnership interest received by the amount of recognized gain, as per section 1031(d).

    Facts

    Arthur and Selma Long, and Dave and Bernette Center, residents of Georgia, were 50% partners in Lincoln Property Co. No. Five, which owned rental real estate in Atlanta. They exchanged their interest in Lincoln Property for a 50% interest in Venture Twenty-One, which also owned rental real estate in Atlanta. The exchange occurred on May 9, 1975. Prior to the exchange, both partnerships faced financial difficulties, prompting the partners to renegotiate their agreements to reallocate partnership liabilities and eliminate guaranteed payments.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the taxpayers’ federal income tax for 1975 and 1976, asserting that the exchange resulted in a taxable gain. The taxpayers petitioned the Tax Court for a redetermination. The Tax Court upheld the exchange as qualifying under section 1031(a) but found that the entire gain must be recognized due to the boot received from liability relief.

    Issue(s)

    1. Whether the exchange of an interest in a Texas partnership for an interest in a Georgia joint venture qualifies as a like-kind exchange under section 1031(a)? 2. If the exchange qualifies under section 1031(a), whether gain should be recognized to the extent of the boot received under section 1031(b)? 3. If gain is recognized, whether the basis of the partnership interest received should be increased by the full amount of the gain recognized under section 1031(d)?

    Holding

    1. Yes, because both interests exchanged were in general partnerships and the underlying assets were of a like kind. 2. Yes, because the excess of liabilities relieved over liabilities assumed constitutes boot under sections 752(d) and 1031(b), requiring full recognition of the gain realized. 3. Yes, because section 1031(d) mandates an increase in the basis of the partnership interest received by the amount of gain recognized.

    Court’s Reasoning

    The court determined that the exchange qualified as a like-kind exchange under section 1031(a) by applying the entity approach to partnerships, as established in prior cases. The court rejected the Commissioner’s arguments that the exchange was excluded from section 1031(a) due to the nature of the partnership interests or the underlying assets. The court analyzed the boot received under section 1031(b), considering the partnership liabilities under section 752. The court found that the taxpayers’ attempt to reallocate liabilities close to the exchange date to reduce boot was a sham transaction and disregarded it. The court also upheld the taxpayers’ right to increase their basis in the received partnership interest by the amount of recognized gain under section 1031(d), despite the Commissioner’s argument against a “phantom gain” resulting from the taxpayers’ negative capital account.

    Practical Implications

    This decision clarifies that exchanges of partnership interests can qualify as like-kind exchanges under section 1031, but gain must be recognized to the extent of boot received, particularly from liability relief. Taxpayers must carefully consider the allocation of partnership liabilities and the timing of any reallocations to avoid being deemed as entering into sham transactions aimed at reducing tax liability. The decision also reaffirms that recognized gain in such exchanges can increase the basis of the partnership interest received, potentially affecting future depreciation deductions. Practitioners should advise clients on the potential tax implications of partnership interest exchanges, including the recognition of gain and the impact on basis, and ensure that any liability reallocations have economic substance beyond tax avoidance.

  • Long v. Commissioner, 71 T.C. 724 (1979): When a Partner’s Contribution Affects Partnership Basis

    Long v. Commissioner, 71 T. C. 724 (1979)

    A partner’s contribution to partnership liabilities cannot increase another partner’s basis in the partnership.

    Summary

    In Long v. Commissioner, the Tax Court addressed whether an estate could increase its basis in a partnership by paying partnership liabilities with funds partially belonging to another partner, Robert Long. The court held that the estate’s basis could not be increased by Robert’s contribution, emphasizing that only the partner assuming the liability could claim a basis increase. The court rejected the estate’s arguments on factual grounds and the legal effect of Robert’s contribution, affirming the principle that a partner’s basis cannot be increased by another partner’s payment of partnership liabilities.

    Facts

    Marshall Long, as the beneficiary of an estate, claimed capital loss carryovers from the estate’s termination. The estate succeeded the decedent’s interest in a partnership, which was liquidated in 1969. Disputes arose over basis adjustments for partnership liabilities. The estate argued for an increased basis due to payments of partnership liabilities, but some payments were made with funds belonging to Robert Long, another partner and beneficiary of the estate. The probate court noted that Robert’s share of the estate offset his share of partnership liabilities.

    Procedural History

    The Tax Court initially ruled against the estate’s claim for a basis increase in Long v. Commissioner, 71 T. C. 1 (1978). The estate filed a motion for reconsideration under Rule 161 of the Tax Court Rules of Practice and Procedure, which led to the supplemental opinion in 71 T. C. 724 (1979).

    Issue(s)

    1. Whether the estate could increase its basis in the partnership by paying partnership liabilities with funds partially belonging to another partner?

    Holding

    1. No, because the estate’s basis could not be increased by another partner’s contribution to partnership liabilities.

    Court’s Reasoning

    The court applied the rule from Section 752(a) of the Internal Revenue Code, which governs basis adjustments for partnership liabilities. The court found that Robert Long’s share of the estate was used to offset his share of partnership liabilities, and thus, the estate could not claim a basis increase for liabilities paid with Robert’s funds. The court emphasized that the estate had complete control over Robert’s share, and the timing of the probate court’s order did not affect the tax consequences. The court rejected the estate’s factual claims due to insufficient evidence and dismissed arguments about prejudice, noting that the issue of Robert’s contribution was known and discussed by both parties.

    Practical Implications

    This decision clarifies that a partner’s basis in a partnership cannot be increased by another partner’s payment of partnership liabilities, even if those payments are made with funds belonging to the other partner. Practitioners must carefully track the source of funds used to pay partnership liabilities to ensure proper basis adjustments. This ruling impacts estate planning and partnership agreements, requiring clear delineation of liability assumptions. Subsequent cases have reinforced this principle, ensuring that only the partner directly assuming a liability can claim a basis increase.

  • Long v. Commissioner, 71 T.C. 1 (1978): Basis Adjustments for Estate’s Payment of Partnership Liabilities

    Long v. Commissioner, 71 T. C. 1 (1978)

    An estate can increase its basis in a partnership interest for payments made to satisfy partnership liabilities, even if those payments were also deducted for estate tax purposes.

    Summary

    Marshall Long, beneficiary of his father’s estate, sought to utilize capital loss carryovers from the estate upon its termination. The estate, which succeeded to the decedent’s interest in Long Construction Co. , paid off partnership liabilities and deducted these under section 2053 for estate tax purposes. The estate then increased its basis in the partnership interest by these payments, allowing the utilization of partnership losses that were passed to Long. The Tax Court held that the estate could increase its basis upon payment of partnership liabilities, including contingent claims once they were fixed or liquidated, and that section 642(g) did not prohibit this basis increase despite the estate tax deduction.

    Facts

    John C. Long, a partner in Long Construction Co. , died in 1963, leaving his partnership interest to his estate. At his death, the partnership and its partners had substantial liabilities, including bank loans and lawsuits against the partnership. The estate valued the partnership interest at zero for estate tax purposes but later paid off these liabilities. The estate deducted these payments under section 2053 in computing its estate tax and then increased its basis in the partnership interest for these payments, claiming a capital loss upon liquidation of the partnership. This loss was passed through to Marshall Long, the beneficiary of the estate, who sought to use the loss carryover on his personal tax return.

    Procedural History

    The Commissioner of Internal Revenue disallowed Marshall Long’s claimed loss carryover, leading to a deficiency notice. Long petitioned the U. S. Tax Court, arguing that the estate correctly increased its basis in the partnership interest upon paying the partnership liabilities. The Tax Court addressed the Commissioner’s arguments regarding the estate’s basis calculations and the double deduction issue.

    Issue(s)

    1. Whether the estate’s payment of partnership liabilities can increase its basis in the partnership interest.
    2. Whether the estate’s deduction of these payments under section 2053 for estate tax purposes prohibits a basis increase under section 642(g).

    Holding

    1. Yes, because the estate’s payment of partnership liabilities is treated as an individual assumption of those liabilities under section 752(a), resulting in a basis increase under section 722.
    2. No, because section 642(g) only disallows double deductions, not basis adjustments that result in tax benefits.

    Court’s Reasoning

    The court analyzed the estate’s basis in the partnership interest, starting with its value at John C. Long’s death, which was zero. The court allowed an increase in basis for the estate’s share of partnership liabilities under section 1. 742-1 of the regulations. For contingent liabilities, the court held that these could increase basis once they became fixed or liquidated. The court also treated the estate’s payment of partnership liabilities as an individual assumption of those liabilities, allowing a basis increase under sections 752(a) and 722. The court rejected the Commissioner’s argument that the estate did not assume the liabilities, noting that the estate paid the liabilities from its separate funds. Regarding the double deduction issue, the court clarified that section 642(g) only disallows double deductions, not basis adjustments that result in tax benefits. The court emphasized that estate and income taxes are different in theory and incidence, and Congress has prescribed specific rules for double deductions in section 642(g).

    Practical Implications

    This decision impacts how estates should calculate their basis in partnership interests when paying off partnership liabilities. Estates can increase their basis for these payments, even if they also deduct them for estate tax purposes, allowing beneficiaries to utilize partnership losses that would otherwise be wasted. Practitioners should carefully calculate basis adjustments and consider the timing of when contingent liabilities become fixed or liquidated. The decision also clarifies that section 642(g) does not prohibit all double tax benefits, only double deductions, which is a crucial distinction for tax planning. Subsequent cases have applied this ruling in similar contexts, reinforcing its importance in estate and partnership tax planning.

  • Long v. Commissioner, 32 T.C. 511 (1959): Deductibility of Business Expenses and Campaign Expenditures

    32 T.C. 511 (1959)

    To be deductible as a business expense under Section 23(a)(1)(A) of the 1939 Code, an expenditure must be both ordinary and necessary, as well as directly and proximately related to the taxpayer’s trade or business.

    Summary

    In 1953, lawyer Chas. D. Long sought to deduct campaign expenses incurred while running for election to the governing board of a business-social club, as well as a portion of his club membership dues. The IRS disallowed both deductions, finding they were not ordinary and necessary business expenses. The Tax Court upheld the IRS’s determination, concluding that the campaign expenses were not sufficiently connected to the lawyer’s practice to qualify as deductible business expenses, and that the club dues were used for both business and personal purposes.

    Facts

    Chas. D. Long, a lawyer, was a senior partner in a law firm. He was a member of the Missouri Athletic Club and the Algonquin Golf Club. A client of the firm, who was also a member of the Athletic Club, urged Long to run for the board of governors. Long campaigned and was elected. He incurred $1,487.42 in campaign expenses. He also paid club membership dues. Long claimed the campaign expenses and a portion of his club dues as business expense deductions on his tax return. The IRS disallowed the deductions.

    Procedural History

    The IRS disallowed the deductions claimed by Long. Long petitioned the United States Tax Court, challenging the IRS’s decision. The Tax Court heard the case.

    Issue(s)

    1. Whether the campaign expenses incurred by a lawyer running for election to the governing board of a business-social club constitute ordinary and necessary expenses of his law practice.

    2. Whether the IRS erred in disallowing a portion of club membership dues paid by the lawyer as ordinary and necessary business expenses.

    Holding

    1. No, because the campaign expenses were not directly and proximately related to the lawyer’s business.

    2. No, because the club dues were used for both business and personal purposes.

    Court’s Reasoning

    The court relied on Section 23(a)(1)(A) of the 1939 Code, which allows deductions for “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The court stated that an expenditure must be both ordinary and necessary, as well as directly and proximately related to the conduct of the taxpayer’s trade or business to be deductible. The court found the campaign expenses were not sufficiently connected to Long’s law practice. Long’s election to the board of governors was viewed as a personal rather than a business matter. The court reasoned that while Long’s reputation might be enhanced, the connection between the campaign expenses and any business increase was too vague to be considered an ordinary and necessary business expense.

    The court found that Long used the clubs for both business and personal purposes and was not entitled to deduct the full amount of the membership dues. The IRS’s allowance of only two-thirds of the club dues was considered reasonable.

    Practical Implications

    This case reinforces the high standard for deducting business expenses under the tax code. Legal professionals and other business owners must demonstrate a direct and proximate relationship between an expense and their business. The court’s emphasis on the personal nature of the campaign expenses suggests that similar expenses, such as lobbying or other forms of community involvement, are unlikely to be deductible unless a clear business benefit can be shown. The case also demonstrates that mixed-use expenses (like club dues) require careful record-keeping and allocation between business and personal use to justify a deduction. Later cases dealing with business expenses continue to cite this case as precedent for determining what qualifies as an ordinary and necessary business expense.

  • A. J. Long, Jr. v. Commissioner, 5 T.C. 327 (1945): Taxability of Distributions from Capital Surplus

    5 T.C. 327 (1945)

    Earnings accumulated after March 1, 1913, that are capitalized by the issuance of stock dividends retain their character as earnings and are considered ‘dividends’ when distributed, regardless of subsequent accounting treatments.

    Summary

    A.J. Long, a shareholder of A. Nash Co., received a cash distribution partly attributed to ‘capital surplus,’ which originated from previously capitalized earnings via stock dividends. Long only reported the portion sourced from recent earnings as taxable income. The Commissioner argued the entire distribution was a taxable dividend. The Tax Court sided with the Commissioner, holding that earnings capitalized by stock dividends retain their character as earnings and are taxable as dividends when distributed, aligning with Commissioner v. Bedford. This case clarifies that the source of a distribution, not its label, determines its taxability.

    Facts

    A. Nash Co. capitalized earnings from 1920-1924 by issuing stock dividends. In 1932, the company reduced the par value of its stock, transferring a significant portion of previously capitalized earnings to a ‘capital surplus’ account. In 1939, the company distributed cash to shareholders, allocating a small portion to ‘earned surplus’ and the remainder to ‘capital surplus.’ A.J. Long, owning a significant number of shares, treated only the distribution from ‘earned surplus’ as taxable income.

    Procedural History

    The Commissioner of Internal Revenue assessed a deficiency against Long, arguing that the entire distribution was taxable as a dividend. Long petitioned the Tax Court for review.

    Issue(s)

    Whether a cash distribution by a corporation to its shareholders, sourced from ‘capital surplus’ that originated from earnings previously capitalized through stock dividends, constitutes a taxable dividend under Section 115(a) of the Internal Revenue Code.

    Holding

    Yes, because earnings accumulated after March 1, 1913, that are capitalized by the issuance of stock dividends retain their character as earnings and are taxable as dividends when subsequently distributed, regardless of how the corporation accounts for the distribution.

    Court’s Reasoning

    The Tax Court rejected Long’s arguments that the distribution should be treated as a return of capital or partial liquidation. The court emphasized that the key factor is the origin of the funds being distributed. Citing Commissioner v. Bedford, 325 U.S. 283, the court stated that “a distribution out of accumulated earnings and profits previously capitalized by a nontaxable stock dividend is taxable as an ordinary dividend under section 115 (a) of the Internal Revenue Code.” The court found that the reduction in par value of the shares was to allow the company to declare and pay cash dividends, which the distribution then accomplished, further pointing away from any intent of liquidation. The fact that the company labeled the surplus account as ‘capital surplus’ was irrelevant; the funds were still derived from past earnings and profits. The Court also cited Foster v. United States, 303 U.S. 118; Commissioner v. Wheeler, 324 U.S. 542 to further reinforce that how the company accounts for the amount does not alter that a part, at least, was “earned income” for Federal tax purposes.

    Practical Implications

    Long v. Commissioner reinforces the principle that the source of a corporate distribution, not its accounting label, determines its taxability. Attorneys should analyze the origin of funds before advising clients on the tax implications of corporate distributions. This case demonstrates that distributions traced back to previously capitalized earnings are generally taxable as dividends, even if they are characterized as coming from ‘capital surplus.’ It also emphasizes the importance of documenting the intent and purpose behind corporate actions, as the court considered the company’s stated reasons for reducing the par value of its stock.