T.C. Memo. 2004-148
UNITED STATES TAX COURT
RALPH J. AND JOAN B. MIRARCHI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6638-02. Filed June 22, 2004.
William M. Davidow, Jr., for petitioners.
Bradley C. Plovan, for respondent.
MEMORANDUM OPINION
THORNTON, Judge: Petitioner husband (petitioner) was a
general partner in a partnership. Petitioner personally
guaranteed certain of the partnership’s debts. After the
partnership filed for bankruptcy under chapter 11, the bankruptcy
court discharged petitioner’s personal liability with respect to
the partnership’s debts and petitioner’s personal guaranty
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thereof. The issue for decision is whether the resulting
discharge of indebtedness income is excludable from petitioners’
1995 gross income pursuant to section 108.1 We hold that it is.2
Background
The parties submitted this case fully stipulated pursuant to
Rule 122. The stipulations of the parties, with accompanying
exhibits, are incorporated herein by this reference.
When petitioners filed their petition, they resided in
Fallston, Maryland.
The Partnership’s Debts
At all relevant times, petitioner was a general partner in
Notchcliff Associates (the partnership), a Maryland general
partnership that was engaged in the business of developing a
continuing care facility.
On April 9, 1985, the partnership borrowed $18 million from
The Commercial Bank (the bank) for use in its business. On that
same date, petitioner and other general partners of the
partnership executed a personal guaranty agreement, whereby they
1
Unless otherwise indicated, section references are to the
Internal Revenue Code for the taxable year at issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Essentially identical issues are presented in three other
cases also decided today: Chester L. Price, docket No. 6639-02;
Jose Martinez, Deceased, docket No. 6641-02; and Jose and Nancy
Gracia, docket No. 6642-02.
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jointly and severally guaranteed this loan. On May 29, 1987, the
partnership borrowed an additional $2,956,000 from the bank.3
The Partnership’s Bankruptcy Case
On June 30, 1988, the partnership initiated a bankruptcy
case by filing a voluntary chapter 11 bankruptcy petition in the
U.S. Bankruptcy Court for the District of Maryland (the
bankruptcy court). On November 13, 1989, the bankruptcy court
appointed a chapter 11 trustee (the trustee) to administer the
partnership’s assets and to develop an orderly liquidation and
sale of the assets.
Petitioner’s Contribution Agreement
The trustee negotiated with the partnership’s general
partners, including petitioner, to obtain some contribution from
them to pay the partnership’s debts. The trustee filed a
reorganization plan which, among other things, proposed a means
whereby general partners of the partnership could contribute to a
partnership release fund as a means of resolving the
partnership’s claims and other creditors’ claims against its
general partners. On November 27, 1990, the bankruptcy court
confirmed the plan.
Thereafter, the trustee reached a negotiated settlement with
some of the general partners, including petitioner, whereby in
exchange for paying agreed-upon sums to the partnership’s
3
The Apr. 9, 1985, personal guaranty agreement also applied
to this loan.
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bankruptcy estate, the contributing partners would be discharged
from liability as permitted by the
confirmed bankruptcy plan. Petitioner executed a contribution
agreement and pursuant to its terms contributed $15,530 to the
partnership’s bankruptcy estate in exchange for release of claims
and potential claims of all creditors against petitioner arising
out of or related to the partnership.
On December 19, 1995, the bankruptcy court entered an order
approving the contribution agreement. In its order, the
bankruptcy court specifically discharged and released petitioner
from any and all liability to the trustee and the bank arising
out of or relating to the partnership, petitioner’s status as a
general partner in the partnership, and the April 9, 1985,
personal guaranty agreement. In addition, the bankruptcy court’s
order released petitioner from “the claims or potential claims of
all creditors” of the partnership. The bankruptcy court further
ordered that petitioner “is subject to the jurisdiction of the
Bankruptcy Court.”
Tax Reporting
For the 1995 tax year, the partnership issued petitioner a
Schedule K-1, Partner’s Share of Income, Credits, Deductions,
etc., allocating to him $405,815 of discharge of indebtedness
income. Petitioners excluded $380,699 of this amount from their
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gross income as reported on their joint 1995 Federal income tax
return.4
Notice of Deficiency
By notice of deficiency, respondent determined that $314,257
of the $405,815 discharged debt should be included in
petitioners’ 1995 income.5
Discussion
Generally, discharge of indebtedness gives rise to gross
income to the obligor. Sec. 61(a)(12); see Gitlitz v.
Commissioner, 531 U.S. 206, 213 (2001). Section 108 provides
certain exceptions to this general rule. Pursuant to one of
these exceptions, income from discharge of indebtedness is
excluded from gross income if “the discharge occurs in a title 11
case”. Sec. 108(a)(1)(A). This provision is applied at the
partner level. Sec. 108(d)(6). Consequently, the relevant
question is whether petitioner’s debt (as opposed to the
partnership’s debt) was discharged “in a title 11 case.”
4
Petitioners attached to their 1995 Federal income tax
return Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Basis Adjustment) (Form 982). On
the Form 982, petitioners excluded $380,699 of petitioner
husband’s allocable share of discharged debt pursuant to the
insolvency exception provided in sec. 108(a)(1)(B) and (3).
Petitioners challenge the treatment of this discharged debt only
to the extent of respondent’s deficiency determination set forth
in the notice of deficiency.
5
Respondent determined that petitioners were insolvent to
the extent of $91,558 immediately before Notchcliff Associates’
debt was discharged and that, accordingly, petitioners were
entitled to exclude from gross income $91,558 of the discharged
debt pursuant to sec. 108(a)(1)(B) and (3).
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For purposes of section 108, a “title 11 case” is defined as
“a case under title 11 of the United States Code (relating to
bankruptcy), but only if the taxpayer is under the jurisdiction
of the court in such case and the discharge of indebtedness is
granted by the court or is pursuant to a plan approved by the
court.” Sec. 108(d)(2).
The partnership’s chapter 11 bankruptcy was a case under
title 11 of the United States Code. See 11 U.S.C. ch. 11 (2000).
Pursuant to its December 19, 1995, order, the bankruptcy court
discharged and released petitioner from all liability to the
trustee, the bank, and all other creditors that might have claims
arising from or relating to the partnership, petitioner’s status
as a general partner in the partnership, and the April 9, 1985,
personal guaranty agreement. In the same order, the bankruptcy
court explicitly asserted its jurisdiction over petitioner for
this purpose. Giving due regard to principles of judicial comity,
we discern no reason to second-guess the bankruptcy court’s
assertion of jurisdiction over petitioner in the partnership’s
chapter 11 bankruptcy case. See 28 U.S.C. secs. 151, 157, 1334
(2000).
We conclude that petitioner’s debts in question were
discharged “in a title 11 case” within the meaning of section
108(d)(2). Accordingly, we hold that petitioner’s discharge of
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indebtedness income is excludable from gross income pursuant to
section 108(a)(1)(A).6
We have considered all arguments raised by the parties.
Arguments not addressed herein are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be
entered for petitioners.
6
In their prayer for relief, petitioners requested the
Court to redetermine their deficiency. Petitioners have not
requested the Court to determine the existence of any overpayment
resulting from their inclusion of $25,116 of discharge of
indebtedness in gross income. We deem petitioners to have waived
any claim to any overpayment. See Rule 34(b)(6); Horn v.
Commissioner, 90 T.C. 908, 944 (1988).