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J. Gordon Hansen, John T. Mitchell, Hansen, Jones, Maycock & Leta, Great Falls, Mont., for plaintiff. Glenn L. Archer, Jr., Assistant Attorney General, Ellen C. Specker, Department of Justice, Washington, D. C. 20530, for defendant.

On February 10, 1979, the directors and shareholders of the plaintiff corporation adopted a plan of complete liquidation. Within 12 months of the date of the adoption of the plan, all of the corporation's property, including the limited partnership interest in the Greenbriar, was distributed to its shareholders.

Plaintiff's final income tax return reported that the corporation had recognized gain as a result of the distribution of the partnership interest at a fair market value in excess of its remaining basis, representing the recapture of depreciation in excess of straight-line, previously deducted by the Greenbriar. Thereafter, plaintiff filed a claim for refund on the ground that it had erred in reporting the recapture income, that I. R. C. Section 336 barred recognition of any gain to the plaintiff corporation on their distribution, and that the depreciation recapture statute was inapplicable to the distribution of a partnership interest. After denial of the claim, plaintiff timely filed this suit.

The depreciation recapture provisions are of more recent vintage. I. R. C. Section 1245, relating to gain from disposition of certain depreciable personal property, originated in the Revenue Act of 1962 (Pub. L. No. 87-834, Section 13(a)(1), 76 Stat. 1032). I. R. C. Section 1250, relating to gain from dispositions of certain depreciable realty, was added by the Revenue Act of 1964 (Pub. L. No. 88-272, Title II, Section 231(a), 78 Stat. 100).

The general purpose of the recapture provisions is explained in the House Committee report on Section 1250 as follows (H. R. Rep. No. 749, 88th Cong., 1st Sess. 101-02 (1963) (1964-1 C. B. (Part 2) 123, 225-26):

     (b) General reasons for provisions.--Since the

B. the excess of-

     (i) the amount realized (in the case of a sale, exchange,

The legislative committee reports make it clear that a corporate liquidating distribution of property is a disposition within the meaning of Section 1250. The House Committee report (H. R. Rep. No. 749, 88th Cong., 1st Sess. 104-05 (1963) (1964-1 C. B. (Part 2) 123, 228-29)) states:

     Ordinary income under your committee's bill is recognized

The same committee report further states (H. R. Rep. No. 749, supra, at A148-49 (1964-1 C. B. (Part 2) at 396-97)):

     Paragraph (1) of section 1250(a) further provides (as does

This leaves for consideration plaintiff's remaining argument that recapture is improper because plaintiff's distribution of the 99 percent limited partnership interest was not a disposition of depreciable property. The key assumption underlying this contention is that for purposes of the Internal Revenue Code a partnership is an entity rather than an aggregation of the individual partners who jointly own the property; and, therefore, a corporate partner cannot be deemed to have disposed of its proportionate share of partnership property when it distributed its partnership interest.

The assumption is much too broad. Subchapter K, of Title I of the Internal Revenue Code, which contains the partnership provisions, cuts both ways. In United States v. Basye, 410 U. S. 441, 448 n. 8 (1973), the Supreme Court stated:

     There has been a great deal of discussion in the briefs and

     Both the House provisions and the Senate amendment provide

An illustration of the application of such approach may be found in Casel v. Commissioner, 79 T. C. 424 (1982). There the issue was whether the petitioner's distributable share of a loss by a partnership in which he was a 50 percent partner should be reduced pursuant to I. R. C. Section 267, to the extent of the unpaid management fees owed by the partnership to the petitioner's wholly owned family corporation, which were accrued and deducted by the partnership in computing its losses for 1974 and 1975. In view of the fact that Section 267 barred the deduction of an amount owed by the petitioner, the petitioner claimed that it did not apply to an amount owed by the partnership, contending that a partnership was an entity separate from the individuals who made it up. The court disallowed the deduction. In explanation it quoted the language of the House conference committee report discussed supra, and it then stated (79 T. C. at 433):

     When the 1954 Code was adopted by Congress, the conference

Similar treatment may be found in Tennyson, Jr. v. United States, 37 A. F. T. R. 2d 76-1546, 1552 (D. Ark. 1976), with respect to the interrelationship of Section 453(d) and the partnership provisions. Section 453(d) provides that if an installment obligation is sold, or otherwise disposed of, any gain or loss resulting therefrom shall be considered as resulting from the sale of the property in respect of which the installment obligation was received. The court held that a limited partner's gift to his children and their spouses of two-thirds of his partnership interest in a natural gas field was for purposes of I. R. C. Section 453(d) a taxable disposition by him of his share of installment obligations owned by the partnership.

For the purposes of applying Sections 1245 and 1250, treatment of a partnership as a collection of individuals jointly owning the partnership property is more in keeping with the legislative intent underlying those sections than would be treatment as an entity in which the partners own only shares in the enterprise. And this even more so when the partnership is owned to the extent of 99 percent by a single partner.

The focus of the recapture statute is on taxing at ordinary income rates the person who benefited from the deduction of the excess depreciation at ordinary income rates. In this case that person is the plaintiff, the 99 percent partner. Had plaintiff dissolved the partnership incident to its own liquidation and distributed the assets in kind to its stockholders, plaintiff would unquestionably have been subject to recapture of the excess depreciation on the assets. It is difficult to comprehend why there should be imputed to Congress the intent to adopt an entity theory in the application of Sections 1245 and 1250, which would allow a taxpayer to insulate itself from recapture and frustrate the operation of the statute merely by owning the depreciable assets in partnership and finally disposing them by way of distributing the partnership interest to its stockholders. If it could be permitted to do so, such a taxpayer would obtain a combined benefit not available to taxpayers generally, i.e.: (a) accelerated depreciation allowances equivalent to that which would be available to it by owning the property directly, reducing the partner's income from the property or offsetting its other income; and (b) at the same time avoiding any possibility of recapture of any portion of such depreciation upon disposition, on the theory that it did not own the property. It is illogical to impute to Congress the intent to allow such inconsistent tax conduct, which would allow a taxpayer the best of both worlds.

Another anomaly which would result from the treatment of the corporate distribution of the partnership interest as not involving a disposition of the partner's interest in the assets for purposes of Sections 1245 and 1250 is the likelihood that there would be no recapture of the excess depreciation from the distributee as well as from the distributor. The committee reports indicate the overriding congressional intent to require recapture of the excess depreciation as ordinary income, in order to prevent the abuse of tax benefits by obtaining deductions at ordinary income rates while later converting gain resulting from dispositions of the over depreciated property into capital gain taxable at lesser rates. The importance Congress placed on this recapture is evidenced by the fact that in each recapture statute Congress provided twice that such gain is to be recognized "not withstanding any other provision" of the Code. Sections 1245(a)(1) and (d) and 1250(a)(1) and (i). Nevertheless, if as plaintiff argues, the corporate distributor is not taxable on the recapture income, plaintiff points out no statutory basis for subjecting the distributee to such tax. Indeed, the indications are that it would not be so taxed. Where there has been a sale or exchange of the interest of a partner, the partnership may elect to "increase the adjusted basis of the partnership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership property." Section 743(b)(1). Since amounts distributed in liquidation of the corporation are treated as payments "in exchange for" the stock (Section 331(a)), it would appear that the distributee of plaintiff's partnership interest would qualify for this increase in basis of the partnership assets. And, as previously noted, since recapture is based on the amount by which the lower of the amount realized on a sale or exchange, or the fair market value on any other distribution, exceeds the adjusted basis of the property (Sections 1245(a)(1) and 1250(a)(1)(A)), this could effectively preclude recapture of excess depreciation from anyone.

Other provisions of Sections 1245 and 1250 related statutes also reflect the legislative intent to treat the partner as the owner of his share of the partnership depreciable assets for purposes of recapture:

(a) A partner's transfer to a partnership of property, which has been excessively depreciated, in exchange for an interest in the partnership, is not treated as an actual disposition of the property, but is excepted from the exchanges and dispositions subject to recapture of excess depreciation. I. R. C. Sections 1245(b)(3) and 1250(d)(3).

(b) Likewise, a distribution of property by a partnership to a partner is not treated as an actual disposition but is excepted from recapture of excess depreciation at the time of the distribution and is only taken into account when the partner disposes of the property. I. R. C. Sections 1245(b)(6) and 1250(d)(6)./8/

(c) Similarly, when a partner sells or exchanges his partnership interest, he is treated as if he has disposed of his share of the partnership property. The amount of money or the fair market value of the property received in the sale or exchange which is attributable to the excess depreciation on the underlying property is included in his ordinary income as from the sale of unrealized receivables as if he owned the transferred property directly. (I. R. C. Section 751(c).)/9/

In approximately the last full page of its brief, almost as an afterthought, defendant also asserted that plaintiff's liquidating distribution of the partnership interest was an exchange of corporate assets for its own stock within the scope of Section 751. However, as defendant did not actively pursue this contention in oral argument, as the court has serious questions with respect to the appropriateness of such construction, and as it is unnecessary to this decision for the court to resolve them herein, the court declines to rule on this contention.

² See General Utilities Co. v. Helvering, 296 U. S. 200 (1935).

³ Section 336. General rule

Except as provided in section 453(d) (relating to disposition of installment obligations), no gain or loss shall be recognized to a corporation on the distribution of property in partial or complete liquidation.

⁴ The Senate Committee report, contains substantially identical language. S. Rep. No. 830, 88th Cong., 2d Sess. 131-32 (1964) (1964-1 C. B. (Part 2) 502, 635-36).

⁵ The Senate Committee report is substantially identical. S. Rep. No. 830, supra, at 135 (1964-1 C. B. (Part 2) at 639).

⁶ The specific exceptions in Section 1250 as amended to 1980 are (Section 1250(d)); (1) Gifts; (2) Transfers at death; (3) Certain tax-free transactions; (4) Like kind exchanges, involuntary conversions, etc.; (5) Transactions relating to gain from sales or exchange to effectuate policies of F. C. C. or in obedience to S. E. C. orders; (6) Property distributed by a partnership to a partner; (7) Disposition of principal residence; (8) Disposition of qualified low-income housing; (9) Transfers to tax-exempt organizations where property will be used in unrealated business; (10) Foreclosure dispositions; and (11) Section 1245 recovery property.

⁷ See also S. Rep. No. 830, supra, at 262 (1964-1 C. B. (Part 2) at 765).

⁸ The House committee report on Section 1250 describes the operation of this provision as follows (H. R. Rep. No. 749, supra, at 106-07 (1964-1 C. B. (Part 2) at 230-31)):

A distribution of real property by a partnership to a partner, to the extent that the distribution represents the partner's share of unrealized appreciation attributable to this property, is not to result in ordinary income to the distributee partner at the time of the distribution.

However, the unrealized appreciation representing additional depreciation taken by the partnership will be carried over to the distributee partner.

When he disposes of this real property, the unrealized appreciation represented by these partnerships (or by an earlier transferee where the partnership acquired the property without recognizing gain), additional depreciation deductions will be taken into account in a manner substantially the same as that applying where the taxpayer himself took the depreciation deductions. This rule applies only to the extent a partner is considered as receiving his share of the real property to which is attributable potential ordinary income.

⁹ Congress amended Section 751(c) to include Sections 1245 and 1250 property at the same time it enacted the latter two sections. Revenue Act of 1962, supra, Sections 13(f)(1), 14(b)(2); Revenue Act of 1964, supra, Section 231(b)(6). The excerpt from the committee report referred to in the preceding footnote continues as follows with respect to this provision:

An amendment made elsewhere to the code (sec. 751(c)) provides that in other cases the ordinary income element in real property is to be considered as "unrealized receivable." Thus, to the extent of applicable percentage of the additional depreciation deductions taken (or potential gain, if smaller) ordinary income will be recognized in the case of the sale of a partnership interest, in the case of a distribution to a retiring or a deceased partner, and in the case of distributions to a partner where he receives either more or less than his proportionate share of real property reflecting this ordinary income.