Raphan v. United States

In 1969 Louis, Peter, and Paul Pomponio purchased a tract of land in Virginia to develop into the James Buchanan House, an apartment building with commercial space. The Pomponios transferred the land to the James Buchanan Corporation (JBC). A group of real estate investors called the Tenzer Group formed a partnership with the Pomponios (the partnership) to develop the James Buchanan House and contributed $2 million to the project. The partnership took out a $9.4 million construction loan (the loan) from the Royal National Bank. According to the partnership agreement, JBC would nominally hold title in the property for loan purposes. The Tenzer Group and the Pomponios would be liable for the loan as partners in the partnership. In 1972 the Tenzer Group discovered that the Pomponios were stealing from the partnership and violating their duties to develop the James Buchanan House. The Tenzer Group forced the Pomponios to terminate their interest in the partnership. JBC transferred title in the property back to the partnership, and the Tenzer Group was able to complete the project. Members of the Tenzer Group (plaintiffs) deducted losses associated with the project on their 1970 and 1971 taxes. The government (defendant) disallowed the loss deduction. The government argued that the Tenzer Group was not entitled to the losses. Instead, the government argued, JBC was entitled to the losses as it held title to the property during the relevant period. Further, the government argued that even if the Tenzer Group was entitled to the losses, it could not deduct the losses because its loss deduction was capped at the amount that the Tenzer Group contributed to the partnership. The members of the Tenzer Group appealed.