T.C. Memo. 2001-238
UNITED STATES TAX COURT
ROBERT K. AND DAWN E. LOWRY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11579-00. Filed September 14, 2001.
Daniel C. Ertel, for petitioners.
Michael A. Menillo, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This matter is before
the Court on the parties' cross-motions for partial summary
judgment under Rule 121. Unless otherwise indicated, section
references are to the Internal Revenue Code, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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Petitioner Robert K. Lowry (petitioner) was a partner in a
partnership that realized taxable income from cancellation of
indebtedness.1 The issue for decision is whether the event
causing the recognition of such income; i.e., the partnership's
surrender of real property, occurred in 1993 or 1994.
Petitioners resided in Santa Ana, California, at the time they
filed their petition.
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. FPL Group, Inc. v.
Commissioner, 116 T.C. 73 (2001); Shiosaki v. Commissioner, 61
T.C. 861, 862 (1974). Summary judgment may be granted with
respect to all or any part of the legal issues in controversy if
the pleadings and other materials show that there is no genuine
issue as to any material fact and that a decision may be rendered
as a matter of law. Rule 121(b); Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th
Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);
Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Both parties
assert that the issue before us is ripe for summary adjudication
and that there is no genuine issue as to any material fact.
1
Although petitioners Robert K. and Dawn E. Lowry filed
joint tax returns for the years in issue, and respondent issued a
joint notice of deficiency, the adjustment that is the subject of
the pending motions relates solely to petitioner Robert K.
Lowry's investment in a partnership.
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The following is a summary of the relevant facts that do not
appear to be in dispute. They are stated solely for purposes of
deciding the pending motions and are not findings of fact for
this case. Fed. R. Civ. P. 52(a); Rule 1(a); Sundstrand Corp. v.
Commissioner, supra.
Background
During the years in issue, petitioner was a 50-percent
partner in a partnership known as Lowry Wells Investments (the
partnership). The partnership owned a building located at 17862
Fitch Street, Irvine, California (Fitch Property), that was
subject to a mortgage reflecting a loan from Aid Association of
Lutherans (AAL).
On December 15, 1993, the partnership as borrower and AAL as
lender entered into a “Covenant Not to Sue”. The covenant stated
in pertinent part:
In consideration of the hereinafter granted
release from [the partnership] * * *, the conveyance of
the real property located at 17862 Fitch Street, and
other good and valuable consideration, * * * [AAL]
hereby covenants not to sue Borrower * * * in
connection with * * * those mortgage loans made by
Lender to Borrower * * *. [Emphasis added.]
The release referred to above was contained within the covenant
and stated that the partnership released all claims it might have
had against AAL in connection with the loans. On May 27, 1994,
escrow closed on the Fitch property, and title to the Fitch
property passed from the partnership to AAL.
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AAL issued to the partnership a Form 1099-A, Acquisition or
Abandonment of Secured Property, indicating that the partnership
had an outstanding debt of $3,218,046 on the Fitch property and
that the Fitch property had been surrendered to AAL on December
15, 1993, at an appraised value of $1,915,000. On October 14,
1994, the partnership filed an amended return for 1993, which
included a statement that the information contained in the Form
1099-A issued by AAL was "wholly inaccurate" and that AAL erred
in reporting the transaction during 1993. The statement
indicated that a deed in lieu of foreclosure was delivered to AAL
on May 27, 1994, and further indicated that the Fitch property
had been transferred to Lowry Wells Limited Liability Company
which "will correctly report this 1994 event on a 1994 return and
realize and recognize any gains (or losses) as is appropriate in
that filing."
Following an examination of the partnership's return for
1994, respondent issued a 30-day letter to the partnership
including an examination report which stated in pertinent part:
"On 12-15-93, it [the partnership] surrendered the property back
to the Lender [AAL]". Respondent subsequently issued a notice of
deficiency to petitioners determining deficiencies in and
accuracy-related penalties with respect to their Federal income
taxes for 1994 and 1995. Contrary to the examination report
attached to the 30-day letter, respondent determined that the
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partnership surrendered the Fitch property to AAL in 1994 and
that petitioners failed to report $774,982 on their 1994 return
representing petitioner's distributive share of the gain
recognized by the partnership under section 1231.
Petitioners filed a petition contesting the notice of
deficiency in which they contend that the surrender of the Fitch
property occurred in 1993 and respondent erred in determining
that the resultant cancellation of indebtedness income was
recognized in 1994. Respondent contends that the partnership
recognized a gain in 1994 because the closing of escrow on, and
transfer of title to, the Fitch property occurred on May 27,
1994.
Discussion
The partnership and AAL executed a covenant which plainly
states that AAL's cancellation of the partnership's debt was
conditioned, among other requirements, on "the conveyance" of the
Fitch property. Black's Law Dictionary 334 (7th ed. 1999)
defines the term "convey" as "To transfer or deliver (something,
such as a right or property) to another, esp. by deed or other
writing." The covenant does not purport to convey the Fitch
property from the partnership to AAL. Rather, the covenant
merely describes the consideration to be exchanged by the
partnership and AAL to support their mutual agreement not to sue.
It is well settled that an agreement to cancel debt in the future
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will not be deemed to discharge the indebtedness immediately if
the cancellation is contingent upon future events. Walker v.
Commissioner, 88 F.2d 170 (5th Cir. 1937), affg. White v.
Commissioner, 34 B.T.A. 424 (1936); Jelle v. Commissioner, 116
T.C. 63, 68 (2001).
We have consistently held that "With respect to real
property, sale or transfer of ownership is complete upon the
earlier of the passage of legal title or the practical assumption
of the benefits and burdens of ownership." Keith v.
Commissioner, 115 T.C. 605, 611 (2000), and cases cited therein.
In the instant case, there is no dispute that the passage of
legal title occurred in 1994. Furthermore, the record is devoid
of any evidence that AAL assumed any benefit or burden of
ownership of the Fitch property before the passage of legal
title. For these reasons, we hold that the partnership's
cancellation of debt provided for by the covenant not to sue was
recognized on May 27, 1994. Accordingly, we shall deny
petitioners' motion for partial summary judgment and grant
respondent's cross-motion.
Petitioners argue that the statement contained in the
examination report attached to respondent's 30-day letter that
the building was surrendered in 1993 constitutes an admission
that respondent found as fact that the surrender occurred in
1993. Petitioners' reliance on the 30-day letter amounts to a
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request that the Court look behind the notice of deficiency. It
has long been a general rule of this Court that we shall not look
behind a deficiency notice to examine the evidence used in making
a deficiency determination. Greenberg's Express, Inc. v.
Commissioner, 62 T.C. 324, 327 (1974). The underlying rationale
for not looking behind a deficiency notice is that a trial before
this Court is a proceeding de novo, and our determination must be
based on the merits of the case without regard to any previous
record developed at the administrative level. Jones v.
Commissioner, 97 T.C. 7, 18 (1991); Greenberg's Express, Inc.,
supra at 328. Accordingly, we do not consider the 30-day letter
or the examination report attached thereto.
To reflect the foregoing,
An order denying petitioners'
motion for partial summary judgment
and granting respondent's oral
cross-motion for partial summary
judgment will be issued.