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December 23, 1982


The opinion of the court was delivered by: William T. Hart, District Judge.


This is a civil tax refund action pursuant to 28 U.S.C. § 1346(a)(1). The matter is currently before the Court on the United States' ("defendant") motion for partial summary judgment. The plaintiff*fn1 Ronald Atlas ("Atlas") is one of 21 limited partners in an Illinois limited partnership, Fostman Venture No. 4 ("Fostman 4"). Sometime in 1975, Fostman 4 became, in exchange for a capital contribution of $650,000.00, a limited partner in an Oklahoma limited partnership Villa Fontana Associates ("Villa Fontana"). Villa Fontana's sole asset is a Tulsa apartment complex, Villa Fontana Apartments. Pursuant to written agreement, 99 percent of Villa Fontana's losses were to be allocated to Fostman 4 in 1975. Villa Fontana claimed 1975 losses in the amount of $1,592,484.00. On his 1975 tax return, Atlas claimed $19,984.00 as his percentage share of that loss. Most of Atlas' claim was disallowed by the Internal Revenue Service.

The defendant argues that the primary reason*fn2 for the disallowance to Atlas is that Fostman 4 did not become a limited partner until December 30, 1975. It asserts that for tax purposes a partnership is created only when capital and services have been contributed with the intent to create a partnership and where the requirements of state law have been met. Neither capital nor services were contributed by Fostman 4 to Villa Fontana before December 30. Also several prerequisites to closing the transaction, including statutorily required filings, were not accomplished until that day.

The defendant further states that the "varying interest" rule provided for in section 706(c)(2) of the Internal Revenue Code of 1954 (26 U.S.C.) ("Code")*fn3 prevents the retroactive allocation of losses to persons not partners when the losses occurred. In the alternative, the defendant claims that the federal policy prohibiting the assignment of unearned income or losses prevents Atlas from claiming more than his percentage share of the losses incurred before December 30, 1975. Accordingly, the defendant requests the Court to determine:

    (1) That the partnership of Fostman Venture No.
  4, for federal income tax purposes, was not
  entitled to a retroactive allocation of 99% of
  the net loss of the partnership of Villa Fontana
  Associates for the period from January 1, 1975
  until the date in 1975 on which Fostman Venture
  No. 4 became a partner in Villa Fontana
    (2) That Fostman Venture No. 4 was not a
  partner in Villa Fontana Associates prior to
  December 30, 1975.
  Atlas raises a number of arguments in opposition. First, he claims that the 1975 tax laws permitted losses incurred from the first day of the relevant tax year to be allocated to new partners admitted up to and including the last day of the partnership's tax year. Atlas alleges that he may claim, pursuant to section 704(a) of the Code, whatever portion of gain or loss is specified in the partnership agreement. Under this view, the exact day in 1975 when Fostman 4 became a limited partner in Villa Fontana is irrelevant. In the alternative, Atlas claims that Fostman 4 became a limited partner at least by December 1, 1975 and that he is entitled to claim his distributive share of 100 percent*fn4 of the losses suffered by Villa Fontana from December 1 until the end of December, 1975.

Second, Atlas argues that the Court cannot grant summary judgment on the issue of when Fostman 4 became a limited partner in Villa Fontana because facts material to the determination are in dispute. See Fed.R.Civ.P. 56(c). He says that for purposes of federal taxation the creation of a partnership is determined from the intent of the parties — not, as the government says, from the contribution of capital and services or from compliance with a state's partnership law. Atlas also claims that when intent is at issue, summary judgment is an improper remedy. See, e.g., Staren v. American National Bank and Trust Co. of Chicago, 529 F.2d 1257 (7th Cir. 1976); Cedillo v. International Association of Bridge and Structural Iron Workers, 603 F.2d 7 (7th Cir. 1979). Atlas submits the affidavit of Jerald F. Richman, a general partner of Fostman and Associates, indicating Richman's intent to become a limited partner in Villa Fontana as of November 29, 1975 and to form Fostman 4 on the same day.

Finally, Atlas argues that partial summary Judgment is not permitted where fewer than all parts of a single claim are presented for disposition. Atlas claims that he is entitled to either a share of 99 percent of all the losses incurred by Villa Fontana in 1975 or 100 percent of the losses incurred from December 1 through December 31, 1975. The defendant allegedly seeks summary judgment only as to part of this claim — whether retroactive allocation of 99 percent of the losses is lawful irrespective of the date on which Fostman 4 became a limited partner of Villa Fontana. Thus the portion of Atlas' claim which proposes that he may deduct his share of 100 percent of the December 1975 losses allegedly has not been presented for disposition.*fn5

The disposition of this motion requires a determination of exactly when Fostman 4 became a limited partner of Villa Fontana. As of November 27, 1982, neither limited partnership, Fostman 4 nor Villa Fontana, was in existence. On November 28, 1975, Fostman and Associates, the general partner of Fostman 4, executed a Memorandum of Agreement with the general partner of Villa Fontana. The Memorandum's purpose was to set the ground rules for acquisition of a limited partnership interest in the Villa Fontana Apartments. Fostman 4 was to be formed by Fostman and Associates and designated as its assignee in a limited partnership to be formed and known as Villa Fontana Associates. The Memorandum also specified that a portion of Fostman 4's capital contribution would be used to fund Villa Fontana's 1975 cash requirements, including some obligations incurred by Villa Fontana prior to December 1, 1975. Closing of the transaction was to occur "no later than December 12, 1975." The closing was contingent on, among other things, the preparation of a limited partnership agreement, the filing of a certificate of limited partnership, financial, profit and loss and cash flow statements and evidence that the general partner of Villa Fontana was a person of general substance.

On December 28, 1975, Atlas executed a Fostman 4 subscription agreement, having tendered an application to be a limited partner six days before. On December 30, 1975, the Agreement of Limited Partnership and Certificate for Fostman 4 were executed and filed in Illinois. Also on December 30, Fostman 4 paid Villa Fontana the sum of $650,000.00. Finally, on December 31, 1975, a Limited Partnership Agreement and Certificate on behalf of Villa Fontana was filed in Oklahoma.


The Court first concludes that, as a matter of law, Fostman 4 did not become for federal tax purposes a limited partner in Villa Fontana until December 30, 1975. For federal tax purposes, the standards governing the existence of a partnership are federal. Evans v. Commissioner, 447 F.2d 547 (7th Cir. 1971); Internal Revenue Code § 7701; Treasury Regulations on Procedure § 301.7701-1. Thus, in one respect Atlas is correct, i.e., whether the would-be partners complied with the specificity of Oklahoma's or Illinois' partnership laws by executing partnership agreements and certificates before doing business is irrelevant to the determination of when Fostman 4 was created for federal taxation.

Turning to the federal regulations, section 704(e)(1) provides that "[a] person shall be recognized as a partner . . . if he owns a capital interest in a partnership in which capital is a material income producing factor." Although section 704(e) applies to family partnerships, its scope encompasses ...

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