Opinion
2265-19
07-26-2023
CLARK RAYMOND & COMPANY PLLC, D. EDSON CLARK, CPA, PLLC, TAX MATTERS PARTNER Petitioner v. COMMISSIONEROF INTERNAL REVENUE, Respondent
ORDER AND DECISION
David Gustafson, Judge.
On October 13, 2022, the Court issued an Opinion in this case (T.C. Memo. 2022-105), which states at the end thereof that "[d]ecision will be entered under Rule 155." Under the provisions of Rule 155(b) ("Procedure in Absence of Agreement") each party filed a proposed computation for entry of decision (Docs. 49, 52). Each party later filed amended computations for entry of decision (Docs. 54, 62). The Commissioner also filed a reply (Doc. 58) to petitioner's amended computation (Doc. 54). We now address the parties' disputes, which can be discerned by comparing petitioner's proposed "Decision" (attached to Doc. 54) with the Commissioner's proposed "Decision" (attached to Doc. 62). We resolve them in the manner proposed by the Commissioner.
I. Balance of loan owed to Clark PLLC by Town PS
Petitioner's amended proposed computation asserts that "the only difference in the capital analysis of [the] former partners [i.e., John E. Town CPA PS ("Town PS") and Chris Newman CPA PLLC ("Newman PLLC")] is the amount of capital account that Town forfeited pursuant to the PLLC Agreement", derived from a loan made by Clark PLLC to Town PS, as to which petitioner contends that there was an unpaid balance of $101,301 as of the time Town PS withdrew from the partnership. (Doc. 54 at 14.) According to petitioner, Town PS's capital account balance was $101,301 when it withdrew from CRC; and pursuant to paragraph 14.1.c of CRC's PLLC agreement, "that amount was forfeited in a manner best characterized as a distribution, since the original $150,000 of Town's Tangible Net Worth [i.e., Town PS's capital account] was treated as a capital contribution as capital transferred from Clark." (Doc. 54 at 11.) Petitioner therefore asserts that "the amount of Town's capital [account] that he was entitled to withdraw was zero" (Doc. 54 at 11), and petitioner's amended proposed computation accordingly imputes an additional distribution of property other than money in the amount of $101,301 to Town PS.
The Commissioner counters that "[t]he Court did not determine that CRC distributed an additional $101,301 because of a purported capital shift from Town PS to Petitioner", and that accordingly petitioner's attempt to include this adjustment in his proposed computation is prohibited by Rule 155(c) ("Limit on Argument"), which provides:
Any argument under this Rule will be confined strictly to consideration of the correct computation of the amount to be included in the decision resulting from the findings and conclusions made by the Court, and no argument will be heard upon or consideration given to the issues or matters disposed of by the Court's findings and conclusions or to any new issues.
The Commissioner is certainly correct that our opinion did not find an unpaid loan balance of $101,301 (an amount that, as far as we can tell, we saw for the first time in petitioner's original Rule 155 computation, Doc. 52). Our opinion did find, relevant to petitioner's reliance on paragraph 14.1.c of CRC's PLLC agreement, that "[u]pon voluntary withdrawal, a partner is entitled to a distribution in an amount equal to his positive capital account balance, with the exception that Town PS is not entitled to a distribution unless its "Tangible Net Worth exceeds $150,000 [or] until Clark [PLLC] is paid in full". T.C. Memo. 2022-105, at *17. However, in our analysis of the partners' rights to distributions of capital upon liquidation we stated the following:
Without elaboration or quantification, petitioner's opening brief stated: "pursuant to the LLC Agreement, Town forfeited his initial tangible net worth capital account. This forfeiture was treated as transfer of capital back to Clark PLLC and further increased the negative balance of Town's capital account." (Doc. 39 at 15.)
We recognize that whether Town PS is entitled to a distribution of its capital account balance upon voluntary withdrawal under the 2013 LLC Agreement depends on some combination of factors (including its capital account balance and/or payment in full of the loan owed to Clark PLLC). See supra pp. 16-17. However, we are unable to determine from the 2013 LLC Agreement the exact criteria of this limitation or the outstanding balance on the loan to Clark PLLC from the record. Therefore, we do not consider this limitation in our analysis.T.C. Memo. 2022-105, at *51 n.70. Due to insufficient evidence on the variables that would determine the proper application of paragraph 14.1.c of CRC's PLLC agreement, we exempted the provision from our analysis of the partner's capital accounts and distribution rights upon liquidation for the purpose of determining each partners' interest in the partnership.
If that holding, based on lack of evidence, were in error, then petitioner's remedy would have been to move for reconsideration under Rule 161-a motion that would have been due 30 days after the release of our opinion-not to shoehorn the issue into the computation process under Rule 155. Moreover, even now petitioner points to no evidence of the amount of an unpaid balance.
Therefore, petitioner's inclusion of an additional $101,301 in its proposed calculation of distributions of property other than money to Town PS by operation of paragraph 14.1.c of CRC's PLLC agreement goes beyond the findings and conclusions in our Opinion, is not permitted under Rule 155(c), and is not supported by any citation to evidence.
II. The principal dispute
The parties' principal dispute results from an agreement that IRS reached with partners who had withdrawn from the partnership. That agreement gave a benefit to those withdrawn partners; and if the principles of that agreement had been carried through and applied to the remaining partner, then that partner would have borne a corresponding detriment. The IRS attempted to impose that tax burden through a "Notice of Final Partnership Administrative Adjustment" (FPAA) that it issued to petitioner, but our opinion did not sustain the FPAA. Consequently, petitioner prevailed here, the withdrawn partners prevailed through their agreement, and the IRS was left suffering a "whipsaw". If our opinion is correct, then it would seem that the withdrawn partners received from their agreement with the IRS a reduction of their tax burden to which they were not entitled-but that issue is not before us. Petitioner, however, is not content with prevailing here. In its proposed computation, petitioner seems intent on denying the withdrawn partners the benefit of their agreement with the IRS, and petitioner asks us to make determinations that would impose tax detriments on those partners in future years. In effect, petitioner asks to apply the outcome of our opinion to the withdrawn partners and thereby to undo the effect of their agreement with the IRS. We decline to do so.
A. Ordinary income amounts
Petitioner's proposed Decision (both in its original computation, Doc. 52, and in its amended computation, Doc. 54) included allocations of "Ordinary Income" of only $20,000 to Newman PLLC and $5,000 to Town PS, which amounts were consistent with the IRS's Forms 870-PT, "Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax and Additional Amounts", executed by the withdrawn partners and the Commissioner (see T.C. Memo 2022-105, at *27-28), but were radically inconsistent with our holding that under the qualified income offset provisions of the LLC agreement they derived income from the distribution of the client-based intangibles. However, petitioner's amended proposed computation states: "I have stricken the language in my Statement in Support of Petitioner's Differences in Schedule Computation of CRC Ordinary Income Allocation to Newman PLLC and Towne [sic] PS as Qualified Income Offsets that was submitted in support of only allocating $25,000 of income to them." (Doc. 54 at 14). We note that petitioner's handwritten figures in the attachment ("Computation of CRC ordinary income allocation …") to its amended proposed computation (Doc. 54 at 9) do match those in the Commissioner's amended proposed computation (Doc. 62 at 8)-i.e., $354,764 and $208,354. We interpret petitioner's revised submission as acknowledging that, in this respect, the Commissioner's computation corresponds to our opinion.
B. Withdrawn partners' ending account balances
However, it seems that that acknowledgement may be not a surrender but merely a tactical retreat. Petitioner's proposed "Ending 2013 Capital Accounts" (Doc. 54 at 5) are in amounts of $324,424 for Town PS and $383,412 for Newman PLLC, much larger than the Commissioner's $14,769 and $28,648 (Doc. 62 at 14). The differences result from the fact that, in petitioner's computation, the distribution amounts are not applied to the negative capital account balances to reduce those balances. The reason petitioner seeks this treatment is evident: Petitioner's proposed Decision (both its original and the amendment), includes the following phrase: "The negative capital accounts shall [be] allocated income from CRC to bring them up to zero as quickly as possible." Evidently petitioner would have us so hold in order that, in subsequent years, the partnership may allocate to the withdrawn partners large income amounts to offset those large negative balances. This approach contradicts our holding (and, we submit, the relevant law on which it is based) "that CRC's income should be allocated to each partner's deficit capital account", T.C. Memo. 2022-105, slip op. at *55; see also id. at *49 ("the triggered QIO provision allocates income to each of them in an amount necessary to bring their capital account balances up to zero"). Under the reasoning of our opinion, the partners' capital accounts must be calculated by applying the income amounts to increase their account balances (i.e., to reduce their negative balances). Petitioner did not move for reconsideration of that holding, nor does it now cite any authority for the treatment it requests. We decline to lay the predicate for future allocations of CRC's ordinary income in tax years that are not within the Court's jurisdiction in this TEFRA case, to undo the effect of IRS agreements with third parties who are not before us, and to grant petitioner a future tax benefit that would apparently duplicate the tax benefit that results from our opinion. The fact that Newman PLLC's and Town PS's capital accounts remain negative at the end of the 2013 tax year-in amounts much smaller than petitioner proposes-is a product of the evidence presented to the Court in this case, and we will include in our Decision a determination of those balances. However, the consequences (if any) of that outcome on tax liabilities for future years or on any associated disputes between the partners as to their rights and responsibilities to resolve the negative ending capital account balances in 2013 are outside the Court's jurisdiction in this TEFRA case.
The issue of whether Newman PLLC and Town PS are obligated to restore their negative ending capital account balances in 2013 pursuant to a "deficit restoration obligation" is covered by CRC's 2013 PLLC agreement and is addressed in our Opinion. See T.C. Memo. 2022-105, at *40 ("The basic test for economic effect requires (in part) that the partnership agreement contain a deficit restoration obligation. The 2013 LLC Agreement contains no such provision and in fact explicitly states that 'this Agreement shall not be construed as creating a deficit restoration obligation or otherwise personally obligating any Member to make a capital contribution in excess of those required by [a section detailing initial and additional capital contributions].' (Emphasis added.)").
III. Clark PLLC's ending account balance
The partners' capital account balances at the beginning of 2013 were stated in our opinion as CRC reported them. (See T.C. Memo. 2022-105, slip op. at *48.) Both parties' computations of Clark PLLC's account balance appropriately took that as their starting point. The Commissioner's amended computation (which explicitly fixed a $150,000 omission from his original computation of $1,212,535) demonstrates an end-of-2013 balance of $1,362,535 (Doc. 162 at 14). The Commissioner states a dispute (see Doc. 58 at 15) as to Petitioner's supposed "Ending capital account balance per petitioner" in an amount of $1,439,335; but in fact that amount is in the "As Reported" column of petitioner's document; and petitioner's "As Determined" amount is instead $1,212,535-which is the uncorrected amount on the Commissioner's original computation. For petitioner's benefit, we take the Commissioner's corrected figure of $1,362,535.
Therefore, pursuant to our opinion in T.C. Memo. 2022-105, for the reasons stated herein and in the Commissioner's filings (Docs. 49, 58, 62), it is
ORDERED AND DECIDED: That the following statement shows the adjustments to the partnership items of Clark Raymond & Company PLLC for the tax period ending December 31, 2013, and the allocations thereof to the partners:
Partnership Item
As Reported
As Determined
Other income
$563,558
$563,118
Guaranteed payments to partners
219,540
62,000
Distributions-property other than money
866,480
926,306
Distributions-money (cash/securities)
660,889
657,201
Allocation Item(s)
Partner
As Claimed As Determined
Ordinary income
D. Edson Clark CPA PLLC
None
None
John E. Town CPA PS
$255,799
$208,354
Chris Newman CPA PLLC
307,759
354,764
Tony H. Chang CPA PLLC
None
None
Guaranteed
D. Edson Clark CPA PLLC
$7,200
$7,200
payments to
John E. Town CPA PS
119,940
2,400
partners
Chris Newman CPA PLLC
42,400
2,400
Tony H. Chang CPA PLLC
50,000
50,000
Distributions
D. Edson Clark CPA PLLC
None
None
property other
John E. Town CPA PS
$447,437
$424,425
than money
Chris Newman CPA PLLC
419,043
501,881
Tony H. Chang CPA PLLC
None
None
Distributions
D. Edson Clark CPA PLLC
$632,201
$632,201
money
John E. Town CPA PS
5,000
5,000
(cash/securities)
Chris Newman CPA PLLC
23,688
20,000
Tony H. Chang CPA PLLC
None
None
D. Edson Clark John E. Town
Chris Newman
Tony Chang
CPA PLLC CPA PS
CPA PLLC
CPA PLLC
Ending Capital Account Balance
$1,362,535 ($14,769)
($28,648)
$0
That no penalty under I.R.C. § 6662(a) applies to any additional underpayment of tax resulting from the above adjustments of partnership items.