Lipke v. Commissioner

In 1972 Lawrence Reger, Clarence Rautenstrauch, and Herbert M. Luksch (collectively, the general partners) formed a limited partnership called Marc Equity Partners (the partnership). The general partners made a capital contribution to the partnership of $100 total. Limited partnership interests were sold to 14 limited partners (the original limited partners) for a total of $1,175,000. The partnership agreed to allocate its profits and losses to the limited partners. The partnership experienced financial issues, and in 1975, James H. Williams, Francis M. Williams, and Kenneth E. Lipke (the new partners) became limited partners after making a capital contribution of $216,000. Reger also made a new capital contribution. In October 1975, the partnership executed a new partnership agreement that created two classes of limited partners. Generally, Class A contained the original limited partners, and Class B contained the new partners. The agreement explained that Class A would own 49 percent of the partnership, Class B would own 49 percent of the partnership, and the general partners would own 2 percent of the partnership. The agreement also provided that 98 percent of the partnership’s 1975 losses would be allocated to the Class B limited partners in consideration of their capital contributions. In 1975 the partnership reported losses of approximately $934,000. Lipke, James Williams, Francis Williams, Rautenstrauch, and Reger (collectively, the partner plaintiffs) (plaintiffs) reported their share of the losses, and the Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the losses accrued before October 1975. The partner plaintiffs appealed.