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IPO II v. Commissioner of Internal Revenue

122 T.C. 295 (2004)

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IPO II v. Commissioner of Internal Revenue

United States Tax Court

122 T.C. 295 (2004)

Facts

IPO II (plaintiff) was a limited-liability company treated as a partnership for tax purposes. Gerald Forsythe and Indeck Power Overseas Limited (Indeck Overseas) were the only members of IPO II. Indeck Overseas, an S corporation, held 99 partnership units of IPO II, and Forsythe owned 1 partnership unit. IPO II entered into a loan agreement with Nationsbanc Leasing Corporation of North Carolina (Nationsbanc) to purchase an airplane for use in its chartering business. In connection with the loan, Forsythe and two other corporations, both of which were majority-owned by Forsythe, entered into a guaranty agreement to pay for the airplane if IPO II failed to do so. Subsequently, IPO II reported losses on its tax returns and allocated the losses between Forsythe and Indeck Overseas. The Commissioner of Internal Revenue (the commissioner) (defendant) determined that the recourse liability related to the airplane purchase should be allocated solely to Forsythe. This determination meant that Indeck Overseas was not able to take any of the deductions related to the recourse liability of the aircraft. IPO II requested a readjustment, claiming that because Indeck Overseas held 99 percent of the partnership units, the commissioner had erred by failing to allocate any of the liability to Indeck Overseas. The commissioner denied the readjustment, and IPO II appealed to the United States Tax Court.

Rule of Law

Issue

Holding and Reasoning (Haines, J.)

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