dissenting: The majority has presented a careful analysis of the complex matters involved in this case. However, I respectfully suggest that, while becoming involved with the intricacies of the regulations, they have lost sight of the ultimate objective of the regulations, which is to decide whether Mai-Kai and Somis more nearly resemble corporations or partnerships. For sake of emphasis, let me reiterate the matter to be decided: This case arose because the Commissioner disallowed the losses claimed by the members of those organizations. Congress has decided that such losses are deductible if, and only if, the organizations constitute partnerships for tax purposes. What we must decide is how the organizations are to be classified. Both parties have asked that we make such decision based on the present regulations so that our task is merely to interpret those regulations, and we are not asked to pass upon their validity.
1. Other Significant Characteristics
The ultimate test to be applied in classifying an organization has long been established by the courts and is set forth in the regulations as:
An organization will be treated as an association if the corporate characteristics are such that the organization more nearly resembles a corporation than a partnership or trust. See Morrissey et al. v. Commissioner (1935) 296 U.S. 344. [Sec. 301.7701-2(a)(l), Proced. & Admin. Regs.]
In the abstract, such test gives rise to many questions, and the regulations attempt to provide definite criteria to assist in applying such test. The regulations enumerate the major characteristics of a corporation — continuity of life, centralized management, limited liability, and freely transferable interests— and set forth many rules to assist in applying those criteria. The regulations also recognize that there may be other characteristics which should be taken into consideration in the classification of an organization by providing:
In addition to the major characteristics set forth in this subparagraph, other factors may be found in some cases which may be significant in classifying an organization as an association, a partnership, or a trust. * * * [Sec. 301.7701-2(a)(l), Proced. & Admin. Regs.]
One of the rules included in the regulations is that:
(3) An unincorporated organization shall not be classified as an association unless such organization has more corporate characteristics than noncorporate characteristics. * * * For example, if a limited partnership has centralized management and free transferability of interests but lacks continuity of life and limited liability, and if the limited partnership has no other characteristics which are significant in determining its classification, such limited partnership is not classified as an association. * * * [Sec. 301.7701-2(a)(3), Proced. & Admin. Regs.]
The majority concludes that since these organizations have two major corporate characteristics — centralized management and freely transferable interests — and lack the other two major corporate characteristics, the organizations should not be classified as associations. Although they recognize that there are other corporate characteristics, they conclude that such characteristics are not helpful in the classification of the organizations.
It is that latter conclusion with which I disagree. Since under both the cases and the regulations, the ultimate test is to decide whether an organization more nearly resembles a corporation or a partnership, we must consider all characteristics which have any relevancy in making that judgment. The even-split rule of the regulations applies only when there are no other significant characteristics. Here, we do have other significant characteristics.
In Outlaw v. United States, 494 F. 2d 1376 (1974), cert. denied 419 U.S. 844 (1974), the Court of Claims held a trust to be taxable as an association and, in reaching that conclusion, found two corporate characteristics to be significant even though they were not among the major corporate characteristics enumerated in the regulations. The court said:
the financing of the Trust was promoted in the beginning by the preparation and distribution of an offering memorandum or prospectus prepared by a firm of securities brokers who were paid a fee for their work, which was similar to the method used by many corporations to obtain initial capital. * * * [494 F. 2d at 1385.]
What is said in Outlaw regarding the method used therein to raise initial capital applies equally with respect to Mai-Kai and Somis. If anything, the method used by such organizations is even closer to that used by corporations than was the method in Outlaw. The interests in the limited partnerships are securities under California and Federal law, just as is corporate stock. See Van Arsdale v. Claxton, 391 F. Supp. 538, 540 (S.D. Cal. 1975); Comment, “SEC Regulation of California Real Estate Syndicates,” 61 Cal. L. Rev. 205 (1973). Further, such interests were sold through licensed brokers just as corporate stock. GHL prepared and distributed offering circulars which advertised the interests as “tax-sheltered real estate investments.” Thus, the method of raising capital and marketing the interests in the organizations was very similar, if not identical, to the methods customarily used by corporations.
The significance of such method cannot be dismissed merely because we have found that the organizations had freely transferable interests. Our conclusion that such interests were freely transferable is based on the fact that there are no significant restrictions on the transfer of such interests; it does not take into consideration the methods used for marketing such interests. Interests may be freely transferable even though they are not marketed in the same manner as corporate stock. Yet, these interests were marketed like corporate stock, and for that reason, the method of marketing constitutes a significant characteristic to be considered in classifying the organizations. See Storrer, “Limited partnership v. association: a need for change,” 5 Tax Adviser 582, 589 (1974).
Moreover, Mai-Kai and Somis possess another significant characteristic which also increases their resemblance to corporations. Section 15507(b) of CULPA1 provides that the limited partners may possess and exercise voting rights with respect to any matter “affecting the basic structure” of the limited partnership. Such rights include the right of the limited partners to remove the general partner at any time and to select a replacement and the right to vote on the sale of all, or substantially all, of the assets of the partnership. The certificates of Mai-Kai and Somis provided that the limited partners in each organization had the rights to remove the general partner and to select a replacement. Such rights could not be conferred upon limited partners under ULPA. See secs. 10 and 11(4) of ULPA.
By conferring such rights on limited partners, California has created greater democracy in limited partnerships. It has thus enabled the limited partners to exercise control over the affairs of the enterprise in much the same manner as shareholders can control the affairs of a corporation. See Storrer, supra at 589; Livsey, “Limited Partnerships: How Far Can IRS Go in Limiting Their Use as Tax Shelters,” 39 J. Tax. 123, 125 (1973). Furthermore, this characteristic is not subsumed in our determination that the organizations possess centralization of management. Centralization of management may exist in an organization formed as a limited partnership even when the limited partners do not possess rights of control over the general partner, and indeed, our conclusion in this case was reached without regard to the rights possessed by the limited partners. The rights of control stand alone and constitute another significant characteristic.
In my judgment, there is no doubt that if we take into consideration all characteristics of these organizations, Mai-Kai and Somis clearly more nearly resemble corporations than traditional partnerships. Even if we assume, as does the majority, that there is an even split among the major characteristics, the method of marketing the interests in the organizations and the control conferred upon the limited partners are surely significant characteristics, and when they are taken into consideration, they establish a clear preponderance in favor of association classification.
2. Limited Liability
I also disagree with the majority’s conclusion that Mai-Kai and Somis do not possess the characteristic of limited liability. The issue as to whether such organizations possess the characteristic of limited liability depends entirely on whether their sole general partner, GHL, possesses such characteristic. Whether GHL has personal or limited liability turns on the proper interpretation of section 301.7701-2(d)(2), Proced. & Admin. Regs., which provides, in part:
(2) In the case of an organization formed as a limited partnership, personal liability does not exist, for purposes of this paragraph, with respect to a general partner when he has no substantial assets (other than his interest in the partnership) which could be reached by a creditor of the organization and when he is merely a “dummy” acting as the agent of the limited partners. * * *
I am in complete agreement with the majority that limited liability exists only when the general partner lacks substantial assets and also is “merely a ‘dummy’ acting as the agent of the limited partners.” Here, there is no doubt that GHL lacked substantial assets; the majority recognizes that such fact may be true but finds it unnecessary to resolve this question. The majority finds that GHL was not a “dummy” since “the limited partners did not use GHL as a screen to conceal their own active involvement in the conduct of the business; far from being a rubber stamp, GHL was the moving force in these enterprises.” I disagree with that construction of the term “dummy” and conclude that GHL was a “dummy” within the meaning of the regulations.
I have two reasons for my disagreement: In the first place, the majority’s construction of the regulations will render the provision meaningless. In Zuckman v. United States, 524 F. 2d 729 (1975), the Court of Claims embraced the same construction of “dummy” now being adopted by the majority of this Court, that is, it applies only to a situation in which the general partner is merely a sham or a straw man acting for the limited partners. The Court of Claims recognized that under such construction of the regulations, a limited partnership would never possess the corporate characteristic of limited liability, because if the general partner was merely a straw man acting for the limited partners, the limited partners would then be personally liable; on the other hand, if the general partner was not a straw man acting for the limited partners, then the general partner would be personally liable. Although the majority has not relied upon Zuckman, its construction of the regulations will reach the same result and make a nullity of those provisions of the regulations. The regulations surely contemplate that under some situations, an organization formed as a limited partnership may have limited liability, but the construction of the regulations adopted by the Court of Claims, and now by a majority of this Court, will result in limited partnerships never possessing such characteristic. See Livsey, “Limited Partnerships with a Sole Corporate General Partner: The Impact of Larson and Zuckman,” 54 Taxes 132, 140-141 (March 1976); U.S. Tax Week, p. 1345, Nov. 7, 1975. When other constructions of a regulation are possible, we should avoid one that renders provisions of the regulations meaningless. Cf. Weinberger v. Hynson, Westcott & Dunning, 412 U.S. 609, 633-634 (1973); United States v. Campos-Serrano, 404 U.S. 293, 301 n. 14 (1971); Mercantile National Bank v. Langdeau, 371 U.S. 555, 560 (1963); Jarecki v. G.D. Searle & Co., 367 U.S. 303, 307-308 (1961); United States v. Menasche, 348 U.S. 528, 538-539 (1955); Ginsberg & Sons v. Popkin, 285 U.S. 204, 208 (1932); 2A Sutherland, Statutory Construction, sec. 46.06 (4th ed. by Sands, 1973).
Unfortunately, the term “dummy” has no precise meaning, but as the majority recognizes, the regulations adopted the language from Glensder Textile Co., 46 B.T.A. 176 (1942). The Board stated that, under certain circumstances, the resemblance of the limited partnerships, as generally known then, to corporations might be so substantial “as to justify classification of the limited partnerships as corporations.” 46 B.T.A. at 183. The Board then suggested such circumstances:
If, for instance, the general partners were not men with substantial assets risked in the business, but were mere dummies without real means acting as the agents of the limited partners, whose investments made possible the business, there would be something approaching the corporate form of stockholders and directors. But, as a practical matter, to suppose such a situation we must also suppose that the limited partners were, in reality, not merely silent partners without control of affairs but were empowered to direct the business actively through the general partners. We suggest this possibility merely to show that designating a partnership as of a particular kind involves no more than applying a particular name, and that the really vital thing, the rights and duties of the partners as between themselves and the public, may vary as much as the legislatures oí the several states may think fit to allow.
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Nor were the limited partners here able to remove the general partners and control them as agents, as stockholders may control directors. The general partners under powers reserved by the certificates might increase the limited partners, to obtain new money, but the latter, unlike new stockholders in a corporation, acquire no share in control.
[46 B.T.A. at 183,185; emphasis supplied.]
These statements from Glensder show rather clearly that when the Board spoke of “mere dummies * * * acting as the agents of the limited partners,” they did not have in mind a private understanding in which the general partners were merely straw men for the limited partners. The Board had in mind the relationship between a board of directors and the shareholders of a corporation and was looking to State law to ascertain what powers were conferred upon the limited partners. Traditionally, corporate shareholders have the right to vote out the directors, the right to select directors who share their policies, and the right to vote on all questions affecting the basic structure of the corporation, including its merger, consolidation, or sale of all or a large part of its assets. The Board wanted to know whether the limited partners in Glensder possessed such rights.
It is true that GHL was not a mere straw man for the limited partners in Mai-Kai and Somis, but it is also true that the limited partners in those organizations possessed rights very similar to those of shareholders in a corporation. As in the case of a board of directors of a corporation and the corporate officers chosen by it, GHL was expected to exercise its discretion in the management of the day-to-day affairs of the enterprises, but the limited partners, through their power to remove GHL, could exercise general control over the policies of the enterprises. In other respects, the limited partners possess the powers with which the Board was concerned in Glensder.
In my judgment, since the phrase “merely a ‘dummy’ acting as the agent of the limited partners” was adopted from the Board’s opinion in Glensder, we should construe it to have the meaning intended by the Board in that case. By adopting such construction, we avoid rendering the provisions of the regulations to be a nullity, and we further their objective of applying the resemblance test by comparing the characteristics of these organizations with those of corporations.
3. Continuity of Life
Although I agree with the majority’s conclusion that Mai-Kai and Somis lacked continuity of life within the meaning of the regulations,21 do not agree with their reasons for that conclusion. Their conclusion is based on the finding that bankruptcy of the general partner would cause a dissolution of each of the organizations. They reason that since CULPA does not expressly deal with the effect of bankruptcy, CUPA is applicable (sec. 15006 (a)), and that since under CUPA, bankruptcy does cause the dissolution of a general partnership, it would have the same effect on a limited partnership.
The majority’s analysis, in my opinion, fails to take into consideration the effect of section 15520 of CULPA, which provided for the years in issue:
The retirement, death, insanity, removal or failure of reelection of a general partner dissolves the partnership, unless the business is continued by the remaining general partners and/or the general partner or general partners elected in place thereof
(a) Under a right so to do stated in the certificate, or
(b) With the consent of all members.
Such provision is similar to section 20 of ULPA, except that California added “removal or failure of reelection” of a general partner. There are no California cases passing on whether the additional language covers bankruptcy, but obviously, the phrase “removal * * * of a general partner” is broad enough to include a removal because of bankruptcy. The majority dismisses such possible interpretation by suggesting that the removal of a partner because of bankruptcy and its replacement would cause a hiatus in the existence of the organization, but a hiatus may arise whenever there is a retirement, death, or insanity of a general partner, followed by the election of a new general partner. In view of the breadth of section 15520 of CULPA, it seems reasonable to conclude that California meant to establish a procedure whereby the limited partnership could prevent its dissolution whenever a general partner was removed from office for any reason.
Yet, for other reasons, the majority’s conclusion is correct under the regulations. Section 301.7701-2(b)(l), Proced. & Admin. Regs., provides, in part:
If the retirement, death, or insanity of a general partner of a limited partnership causes a dissolution of the partnership, unless the remaining general partners agree to continue the partnership or unless all remaining members agree to continue the partnership, continuity of life does not exist. See Glensder Textile Company (1942) 46 B.T.A. 176 (A., C.B. 1942-1, 8). [Emphasis supplied.]
In Glensder, the agreement of all of the remaining general partners to continue the business was necessary to prevent the dissolution of the limited partnership. However, the Board’s explanation indicates that it would reach the same conclusion whenever an agreement of some or all of the remaining partners is necessary to avoid dissolution. The Board said:
A contingent continuity of existence had been provided for by the reservation in the certificate of the power of the surviving general partners to continue the business on the death, retirement, or incapacity of a general partner. We do not think this analogous to the chartered life of a corporation which continues regardless of the death or resignation of its directors or stockholders. A limited partnership is dissolved by death, as an ordinary partnership, unless the right to continue is retained, but continuity is not assured by this power, for it is one vested in the several general partners, apparently, and not in the partnership as an entity. Continuance will be certain only if the remaining general partners agree to it, as would be the case, in substance, in a general partnership. In an ordinary partnership, on the death of a partner a new partnership is formed; here the old partnership continues but receives new life, in effect, from the decision of the members. * * * [46 B.T.A. at 185; emphasis supplied.]
Under Glensder, there is no continuity of life whenever an organization’s continuity is contingent, and if its continuity depends upon the agreement of remaining partners, it is contingent, irrespective of whether all, or merely a majority, of the remaining partners must agree. See Storrer, “Limited partnership v. association: a need for change,” 5 Tax Adviser 582, 585 (1974); Fox, “The Maximum Scope of the Association Concept,” 25 Tax L. Rev. 311, 324-325 (1970). In the case of Mai-Kai, dissolution could be avoided by an agreement of 100 percent of the limited partners, and in the case of Somis, a majority of the limited partners could prevent dissolution. In either event, the continuation of the organization depended upon the agreement of some or all of the limited partners, and consequently, continuity was contingent. For this reason, both organizations lack continuity of life within the meaning of the regulations and Glensder.
Drennen and Sterrett, JJ, agree with this dissent.Sec. 15507(b) of CULPA provides:
(b) A limited partner shall not be deemed to take part in the control of the business by virtue of his possessing or exercising a power, specified in the certificate, to vote upon matters affecting the basic structure of the partnership, including the following matters or others of a similar nature:
(I) Election or removal of general partners.
(IÍ) Termination of the partnership.
(III) Amendment of the partnership agreement.
(IV) Sale of all or substantially all of the assets of the partnership.
However, it may be persuasively argued that, on the record in this case, there was, realistically, continuity of life within the meaning of Morrissey v. Commissioner, 296 U.S. 344 (1935). On this record, the possibility that the bankruptcy of the general partner would affect the continuity of the organizations is minimal and hardly distinguishable from the situation that would exist when a corporation becomes bankrupt.