T.C. Memo. 2004-150
UNITED STATES TAX COURT
ESTATE OF JOSE MARTINEZ, DECEASED,
PATRICK G. MARTINEZ, PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6641-02. Filed June 22, 2004.
Robert B. Scarlett, for petitioner.
Bradley C. Plovan, for respondent.
MEMORANDUM OPINION
THORNTON, Judge: Mr. Jose Martinez (decedent) was a general
partner in a partnership. Decedent personally guaranteed certain
of the partnership’s debts. After the partnership filed for
bankruptcy under chapter 11, the bankruptcy court discharged
decedent’s personal liability with respect to the partnership’s
debts and decedent’s personal guaranty thereof. The issue for
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decision is whether the resulting discharge of indebtedness
income is excludable from 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.
On October 10, 2000, decedent died. His estate was
administered by Patrick Martinez and was closed on June 19, 2001.
When the petition was filed, Patrick Martinez resided in
Timonium, Maryland.
The Partnership’s Debts
At all relevant times, decedent 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, decedent and other general partners of the partnership
executed a personal guaranty agreement, whereby they jointly and
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: Ralph J. and Joan B. Mirarchi, docket
No. 6638-02; Chester L. Price, docket No. 6639-02; and Jose
Gracia and Nancy Gracia, docket No. 6642-02.
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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.
Decedent’s Contribution Agreement
The trustee negotiated with the partnership’s general
partners, including decedent, 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 creditor’s 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 decedent, whereby in
exchange for paying agreed-upon sums to the partnership’s
bankruptcy estate, the contributing partners would be discharged
3
The Apr. 9, 1985, personal guaranty agreement also applied
to this loan.
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from liability as permitted by the confirmed bankruptcy plan. On
September 15, 1995, decedent executed a contribution agreement
and pursuant to its terms contributed $15,000 to the
partnership’s bankruptcy estate in exchange for release of “all
claims or potential claims of creditors against * * * [decedent]
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 decedent
from any and all liability to the trustee and the bank arising
out of or relating to the partnership, decedent’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 decedent from “the claims or potential claims of
all creditors” of the partnership. The bankruptcy court further
ordered that decedent “is subject to the jurisdiction of the
Bankruptcy Court.”
Tax Reporting
For the 1995 tax year, the partnership issued decedent a
Schedule K-1, Partner’s Share of Income, Credits, Deductions,
etc., allocating to him $397,640 of discharge of indebtedness
income. Decedent excluded this entire amount from his gross
income as reported on his 1995 Federal income tax return.
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Notice of Deficiency
By notice of deficiency, respondent determined that $397,640
of discharged debt should be included in decedent’s 1995 income.
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 decedent’s debt (as opposed to the
partnership’s debt) was discharged “in a title 11 case.”
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 decedent from all liability to the
trustee, the bank, and all other creditors that might have claims
arising from or relating to the partnership, decedent’s status as
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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 decedent 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 decedent in the partnership’s
chapter 11 bankruptcy case. See 28 U.S.C. secs. 151, 157, 1334
(2000).
We conclude that decedent’s debts in question were
discharged “in a title 11 case” within the meaning of section
108(d)(2). Accordingly, we hold that decedent’s discharge of
indebtedness income is excludable from gross income pursuant to
section 108(a)(1)(A).
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 petitioner.