Opinion
Docket No. 22262.
1951-10-10
H. W. WAHLERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Fred L. Kuhlmann, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
Petitioner was a 36 per cent member of a partnership, also more than a 50 per cent owner of stock in a corporation. The partnership sold certain property to the corporation. In the determination of deficiency in this matter the Commissioner denied petitioner's claim to deduction of his percentage of the alleged loss stating, in substance, that it was ‘unsubstantiated loss.‘ The petitioner alleged a basis for the property sold of about $64,000, and a loss by the partnership of about $36,000. The answer denied this allegation, and in the opening statement respondent's counsel stated that he was contending that the basis of the property was not substantiated and therefore no deductible loss on the sale was recognizable, also that the loss was not deductible because of the provisions of section 24(b) of the I.R.C., the petitioner owning more than 50 per cent of the stock of the purchasing corporation. Petitioner made no proof of basis in the property sold other than to show that a revenue agent examining the partnership return had recognized a basis of about $64,000, which appeared on the partnership books. The book recitation had its inception in large part to agreement, in the articles of partnership, on the value of property contributed as capital contribution. The identical property was sold by the partnership in the sale here involved. Held, that for failure of proof as to basis, petitioner has not shown error in the denial of deduction of the loss claimed. Fred L. Kuhlmann, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
This case involves income tax for the calendar year 1944. Deficiency was determined in the amount of $10,374.53, all of which is involved. The issue is whether the Commissioner erred in disallowing the deduction as a loss of petitioner's portion of a loss sustained by a partnership of which he was a member.
FINDINGS OF FACT.
Petitioner is an individual who resides in Dubuque, Iowa.
Petitioner keeps his books and files his tax returns on a cash basis. His taxable year is the calendar year, and his 1944 income tax return was filed with the collector of internal revenue for the district of Iowa.
In July 1942 the Iowa Food Products Company, a limited partnership (hereinafter referred to as the ‘partnership‘ or ‘limited partnership‘) was organized pursuant to the provisions of chapter 428 of the Code of Iowa, 1939, with a total capital investment of $100,000. All the partners paid in cash their contribution to the capital investment of the partnership except C. F. Limbeck and M. D. Limbeck who together conveyed real and personal property having a combined value of $38,000, it was agreed in the articles of partnership, as their capital contribution to the partnership.
Petitioner was a limited partner in the partnership and had a 36 per cent interest in the capital of the partnership. At the time the partnership was formed, the other partners in said partnership, and their respective interests in the capital of the partnership, were as follows:
+---------------------------+ ¦ ¦Capital ¦ +--------------+------------¦ ¦ ¦interest ¦ +--------------+------------¦ ¦Partners ¦(per cent) ¦ +--------------+------------¦ ¦C. F. Limbeck ¦20 ¦ +--------------+------------¦ ¦M. D. Limbeck ¦18 ¦ +--------------+------------¦ ¦E. D. Krey ¦9 ¦ +--------------+------------¦ ¦M. V. Kisting ¦2 ¦ +--------------+------------¦ ¦M. E. Wissel ¦3 ¦ +--------------+------------¦ ¦M. C. Haas ¦3 ¦ +--------------+------------¦ ¦M. O. Bischof ¦2 ¦ +--------------+------------¦ ¦L. M. Schmitt ¦2 ¦ +--------------+------------¦ ¦M. M. Kuehn ¦2 ¦ +--------------+------------¦ ¦E. I. Kemerer ¦2 ¦ +--------------+------------¦ ¦V. G. Kisting ¦1 ¦ +---------------------------+
Shortly after the formation of the partnership E. K. Kemerer withdrew from the partnership and his 2 per cent interest was transferred to M. D. Limbeck. With this exception the identity of the partners and their respective partnership interests remained unchanged throughout the existence of the partnership until it was terminated.
Each limited partner, including petitioner, was entitled to share in the net profits of the partnership upon the basis of his or her respective capital contribution.
The partnership was engaged in an egg drying and poultry business, and was located at Guttenberg, Iowa. It kept its books and filed its returns on an accrual basis and on the basis of a fiscal year ending October 31.
The only general partner in the partnership was C. F. Limbeck. (C. F. Limbeck died prior to the trial of this case.) He had carried on the same kind of business for several years prior to the formation of the partnership under the name ‘Iowa Produce Company,‘ and after the partnership was formed, he alone operated the partnership business. All the other partners were limited partners and none of the limited partners participated in the operation of the business. The interest of the limited partners in the partnership was limited to their capital contributions.
In the latter part of September or the early part of October 1944 there were discussions between the limited partners and C. F. Limbeck with respect to the dissolution of the partnership prior to the close of its fiscal year ending October 31, 1944, and the general discussion was that C. F. Limbeck would acquire the property of the partnership and carry on the business. About the same time C. F. Limbeck employed an attorney, Matthew H. Czizek, who prepared for him articles of incorporation of Iowa Food Products Company. A certificate of incorporation was issued to that corporation on October 12, 1944, by the State of Iowa. Its principal place of business was Guttenberg, Iowa. The articles of incorporation provide, in part, that the general nature of the business to be transacted is to buy, grade, pack, process, freeze and cold storage warehouse shell, frozen and dried eggs and the sale of same, and the purchase and sale at wholesale and retail of poultry, and to buy and sell agricultural products of all kinds.
C. F. Limbeck and the limited partners discussed the price at which he was to purchase the assets and agreed that the price was to be $28,000. On October 13, 1944, all of the partners signed an agreement to terminate the partnership and to liquidate its affairs. Paragraph (3) of said agreement provided as follows:
The value of ‘Fixed Assets,‘ consisting of land, building, equipment and trucks is agreed upon to be the sum of $28,000.00, and such Assets shall be offered for sale for such sum and, when sold, the proceeds therefrom shall be distributed among the Partners, General and Limited, in the ratio that their respective contributions bear to the capital investment of said Partnership.
At the first meeting of the board of directors of Iowa Food Products Company, held on October 26, 1944, a motion was passed authorizing the President of the corporation ‘to negotiate with the owners of the real estate, egg drying equipment and machinery, general equipment and office equipment formerly owned by said partnership, for the lease or purchase thereof upon such terms as he deems advisable.‘
At the time C. F. Limbeck agreed to pay $28,000 for the fixed assets, he indicated that he had no objection to the price but that he did not have sufficient funds and that it would be necessary for him to borrow the money. Efforts were made to borrow the money from the American Trust and Savings Bank of Dubuque, Iowa, and from the Interstate Finance Company. Both of these efforts were unsuccessful.
The Board of directors of Dubuque Packing Company held a meeting on November 1, 1944, to consider a proposal submitted by the partnership to sell certain real estate, including buildings and improvements, and all egg drying equipment and machinery, general equipment, and office equipment, for $28,000. A resolution was adopted reading in pertinent part as follows:
Whereas, said partnership has been terminated as of October 31st 1944, and the sale of said property is a part of its liquidating process and it is advisable and for the best interests of said partnership that the Deed of Conveyance be dated on October 31st, 1944, or some day prior thereto rather than on same date subsequent thereto which arrangement is acceptable to this board:
Now, therefore, be it resolved by the Board of Directors of Dubuque Packing Company that the proposal of Iowa Food Products Company, a limited partnership, to sell the property described in the Preamble hereof for the sum of $28,000.00 be, and the same is, hereby accepted.
Be it further resolved that, upon the delivery of a good and sufficient Deed of Conveyance of said property to Dubuque Packing Company, said Company shall pay to said partnership the sum of $28,000.00.
A deed of conveyance from Iowa Food Products Company, a limited partnership, to Dubuque Packing Company, a corporation, covering the property involved and above described, was executed by the partnership and signed by all partners. It recited that it was dated and signed the 28th day of October 1944. Some of the partners acknowledged the execution on October 28, 1944, and others on October 30, 1944. The consideration recited in the deed was $28,000. The $28,000 was paid to the partnership by check of Dubuque Packing Company on November 9, 1944.
The real estate described in the deed from the partnership to Dubuque Packing Company is the same as the real estate described in the articles of limited partnership of July 1942 where a part of the same real estate, later conveyed by the partnership to Dubuque Packing Company, is recited as contributed to the partnership by C. F. Limbeck; and where the remainder of the real estate later conveyed to Dubuque Packing Company by the partnership is recited to be conveyed a one-half interest each by C. F. Limbeck and M. D. Limbeck. In addition, the deed from the partnership to Dubuque Packing Company recites conveyance of improvements and equipment on the described real estate in Guttenberg, Iowa, and the articles of partnership recite contribution by C. F. Limbeck and M. D. Limbeck of a one-half interest each in machinery and equipment located upon a part of said real estate described in the deed from the partnership to Dubuque Packing Company. The real estate and personal property, machinery and equipment so described in the articles of partnership is recited to be (with C. F. Limbeck's interest in 12,863 cases of shell eggs in storage) the property the value of which aggregates the $20,000 recited as the value of his contribution to the partnership; and the real and personal property described, as above recited, in the articles of partnership is recited therein as comprising the $18,000 contribution of M. D. Limbeck to the partnership capital investment.
Petitioner was president of Dubuque Packing Company and presided at the meeting of its board of directors on November 1, 1944, at which the above resolution was passed. He and C. F. Limbeck had been friends for many years. Limbeck through his attorney attempted to obtain funds to purchase the property, conferences being had with a bank at Dubuque and a loaning corporation. Neither effort was successful. After these efforts had failed, the petitioner indicated that Dubuque Packing Company would aid C. F. Limbeck by acquiring the property from the partnership and reselling it to Limbeck later when he was able to purchase. It was left open so that Limbeck would have an opportunity of continuing his efforts to borrow sufficient money to take the property back from Dubuque Packing Company. On October 28, 1944, there was an oral agreement between Dubuque Packing Company and Iowa Food Products Company, the corporation, with regard to the property which was conveyed to Dubuque Packing Company on that date by the partnership, which was in substance the same as an agreement embodied in writing between the two corporations on November 9, 1944.
On November 7, 1944, the directors of Dubuque Packing Company had a meeting, the petitioner presiding as president. He stated that the purpose of the meeting was to consider an offer submitted by Iowa Food Products Company, a corporation, to purchase the property ‘heretofore acquired from Iowa Food Products Company, a limited partnership, for the sum of $28,600.00,‘ explaining that the company represented that it was not able to pay such purchase price in full at this time and that it desired to enter into a contract agreeing to pay $16,600 on or before November 10, 1944, and the balance of $12,000 on or before June 1, 1945. After consideration it was resolved that the proposal be accepted and that a contract be executed by the president on behalf of the corporation.
On November 9, 1944, a written Contract of Purchase was entered into between Dubuque Packing Company and Iowa Food Products Company, the corporation, whereby Dubuque Packing Company agreed to convey to Iowa Food Products Company, the corporation, the same fixed assets which had been conveyed to Dubuque Packing Company by the partnership on October 28, 1944, upon the payment of the sum of $28,600, payable $16,600 on or before November 10, 1944, and the balance of $12,000 on or before June 1, 1945. In the contract it is recited that Dubuque Packing Company is the owner of the property hereinabove described, and which is described in the contract in detail. The contract recites that the Dubuque Packing Company ‘agrees to sell and convey‘ and that the Iowa Food Products Company, a corporation, agrees to purchase, the described property.
The Contract of Purchase provided that Iowa Food Products Company, the corporation, should pay all taxes levied and assessed or to be levied and assessed upon said property, real and personal, for the year 1944, and that Dubuque Packing Company should insure the property against loss by fire or the elements and pay the premiums thereon. The cost of the insurance was estimated to be $600, and this amount was added to the $28,000 which Dubuque Packing Company paid to the partnership in arriving at the $28,600 price agreed upon in the Contract of Purchase. The $28,600 was paid by Iowa Food Products Company, a corporation, as follows: $16,600 on November 10, 1944, and $12,000 on June 2, 1945.
It is the custom of the attorney who handled the transaction for the parties, in a situation where a prospective purchaser does not have sufficient funds to pay in full for property, to handle the matter through a contract of purchase. In that way the title holder sells and agrees to convey to the purchaser upon payment of the purchase price and upon default in the payment when due any initial payment is retained by the owner and the contract stands forfeit. He follows that procedure because it is simpler than a mortgage or deed of trust in case of default in which an action for judgment, a sale, and a 1-year period of redemption is involved.
Pursuant to the terms of the Contract of Purchase, Dubuque Packing Company on May 31, 1945, executed a deed of conveyance to Iowa Food Products Company, the corporation, by the terms of which it sold and conveyed the fixed assets which it had acquired from the partnership to Iowa Food Products Company, the corporation, in consideration of $28,600.
Dubuque Packing Company never operated or intended to operate the egg drying and poultry business which was conducted in the property conveyed to it by the partnership on October 28, 1944, and at no time did it have actual physical possession of the property. After the partnership ceased to operate the business, the newly formed Iowa corporation, Iowa Food Products Company, was in physical possession of the property. There was no lease nor any rent paid between Iowa Food Products Company and Dubuque Packing Company during the time that Dubuque Packing Company held title to the property.
At the date of sale by the partnership to Dubuque Packing Company the following partners in the partnership owned stock in Dubuque Packing Company: M. V. Kisting, L. M. Schmitt, M. M. Kuehn, V. G. Kisting, and petitioner. On said date petitioner and members of his ‘family,‘ as that term is defined in section 24(b)(2)(D) of the Internal Revenue Code, owned more than 50 per cent of the outstanding capital stock of Dubuque Packing Company. Petitioner was president of Dubuque Packing Company. None of the other partners owned stock in Dubuque Packing Company. On said date none of the partners was a member of petitioner's ‘family,‘ as that term is defined in section 24(b)(2)(D) of the Internal Revenue Code.
As an accommodation to C. F. Limbeck, petitioner agreed to serve as one of the three incorporators of Iowa Food Products Company, the corporation, and one of the three directors needed to form the corporation showed 105 shares of $100 par value capital stock issued to C. F. Limbeck, 105 shares issued to M. D. Limbeck, his wife, and one qualifying share to petitioner. Petitioner resigned as director of the corporation on October 26, 1944, and the one share of stock which had been issued in his name was transferred on the books of the corporation to M. H. Czizek, who succeeded petitioner as a director and who paid the corporation the par value of $100 for said share.
The adjusted basis of the fixed assets sold and conveyed to Dubuque Packing Company on October 28, 1944, as shown on the partnership's books, was $64,889.37. The partnership filed a return on Form 1065 for its fiscal year ended October 31, 1944, and reported a net loss of $36,889.37, from said sale, and reported ordinary net income of $101,926.86. On May 7, 1947, an acting internal revenue agent in charge sent to Iowa Food Products Company, the partnership, copy of the report of his examination of its partnership income tax return for the year ending October 31, 1944. The report cites an increase in income of $13,280.17, that is, from $101,926.86, as reported, to $115,207.03, as corrected. In pertinent part it recites that the principal cause for changes in income was the disallowance of a partner's proportion of a loss on the sale of assets to Dubuque Packing Company; that the partners other than H. W. Wahlert, under the provisions of section 24(b)(1) and (2), Internal Revenue Code, are not precluded from taking a deduction for their proportionate share of the loss; that the unallowable deduction and additional income was $13,280.17, described as ‘36% of $36,889.37 (loss on sale of assets to Dubuque Packing Co.) disallowed to H. W. Wahlert, Pasture, Iowa Food Products Company,‘ resulting in a net adjustment of $13,280.17. Schedule 1-A to the report recites:
+-------------+ ¦SCHEDULE 1-A ¦ +-------------¦ ¦ ¦ ¦ +-------------+
Explanation of Items (a) Loss on sale of company assets $13,280.17 This item represents Mr. H. W. Wahlert's proportionate share of the loss from the sale of company assets to the Dubuque Packing Company. Under the provision of Sec. 24 (b) (1) and (2) such losses are not allowable deductions, if one of the partners owns directly or indirectly, more than 50% of the outstanding stock of the corporation. Computation: Proceeds from the sale of depreciable assets to the Dubuque Packing Company, Inc., as of Oct. 31, 1944 $28,000.00 Basis of the assets 64,889.37 Loss claimed on partnership reclaimed 36,889.37 H. W. Wahlert's share 36% 13,280.17
The Iowa Food Products company in computing its net income per its partnership return for the year ended October 31, 1944, deducted a loss of $36,889.27 upon the sale of its said properties as of October 31, 1944, computed as follows:
+------------------------------------------------------------------+ ¦Cost of buildings, equipment and real estate¦ ¦$91,758.25¦ +--------------------------------------------+----------+----------¦ ¦Less depreciation: ¦ ¦ ¦ +--------------------------------------------+----------+----------¦ ¦Prior years ¦$15,024.76¦ ¦ +--------------------------------------------+----------+----------¦ ¦Current year ended 10/31/44 ¦11,844.12 ¦ ¦ +--------------------------------------------+----------+----------¦ ¦ ¦ ¦26,868.88 ¦ +--------------------------------------------+----------+----------¦ ¦Remaining adjusted cost basis as of 10/31/44¦ ¦$64,889.37¦ +--------------------------------------------+----------+----------¦ ¦Proceeds of sale 10/31/44 ¦ ¦28,000.00 ¦ +--------------------------------------------+----------+----------¦ ¦Net deductible loss ¦ ¦$36,889.37¦ +------------------------------------------------------------------+
In the partnership return ordinary net income of $101,926.86 was computed with petitioner's reported distributive share being $31,143.87 (36 per cent of $101,926.86).
Petitioner reported in his individual Federal income tax return for the taxable year 1944 the said sum of $31,143.87 as being his distributive share of partnership income for the partnership year ended October 31, 1944.
The Commissioner, in determining deficiency against petitioner for the calendar year 1944, determined that the above claimed partnership loss of $36,889.37 was an unallowable deduction and the Commissioner increased the petitioner's distributable share of partnership income for petitioner's taxable year 1944 by the sum of $13,280.17 (36 per cent of $36,889.37).
The notice of deficiency against petitioner for the taxable year recited in pertinent part as follows:
+--------------------------------------------------------+ ¦Net income as disclosed by return ¦$50,126.52¦ +---------------------------------------------+----------¦ ¦Unallowable deductions and additional income:¦ ¦ +---------------------------------------------+----------¦ ¦(a) Partnership income increased ¦13,280.17 ¦ +---------------------------------------------+----------¦ ¦Net income as adjusted ¦$63,406.69¦ +--------------------------------------------------------+
Explanation of Adjustments
(a) The distributive share of income reported by you from Iowa Food Products Company, a limited partnership of Guttenberg, Iowa, for the fiscal year October 31, 1944, has been adjusted as follows:
+-----------------------------------------------------------------------+ ¦Ordinary net income reported on Form 1065 for fiscal year ¦ ¦ +-----------------------------------------------------------+-----------¦ ¦October 31, 1944 ¦$101,926.86¦ +-----------------------------------------------------------+-----------¦ ¦Less: Amounts distributed to other partners as salaries ¦15,416.12 ¦ +-----------------------------------------------------------+-----------¦ ¦Balance ¦$86,510.74 ¦ +-----------------------------------------------------------+-----------¦ ¦Add: Loss claimed by above partnership on sales of business¦ ¦ +-----------------------------------------------------------+-----------¦ ¦properties ¦36,889.37 ¦ +-----------------------------------------------------------+-----------¦ ¦ ¦$123,400.11¦ +-----------------------------------------------------------+-----------¦ ¦Your distributive share (36) ¦44,424.04 ¦ +-----------------------------------------------------------+-----------¦ ¦Amount reported by you ¦31,143.87 ¦ +-----------------------------------------------------------+-----------¦ ¦Increase ¦$13,280.17 ¦ +-----------------------------------------------------------------------+
It is held that no part of the unsubstantiated loss claimed in the above partnership return alleged to have arisen from the sale of its business properties to Dubuque Packing Company is deductible in computing your net income for the year 1944.
Petitioner filed an amended petition in which, in substance, in reciting the facts relied upon as basis for this proceeding it is recited, in pertinent part, that Dubuque Packing Company was only the nominal purchaser of the assets from the partnership, that the real purchaser was C. F. Limbeck, and that the sale was bona fide and for a valid business purpose. Under paragraph 5(j) it is recited that the partnership basis in the assets was $64,889.37, that upon the sale the partnership sustained a net loss of $36,889.37 and reported said net loss of $36,889.37 as loss from sale of property other than capital assets, and reported net income of $101,926.86. Paragraph 5(k) in pertinent part recites that respondent in his examination of the return of the partnership used $64,889.37 as the basis of the assets. Respondent filed answer to the amended petition and denied the allegation in paragraph 5(j) that the partnership's basis for the fixed assets was $64,889.37 and that the partnership sustained a net loss of $36,889.37 upon said sale. He also denied the allegation in paragraph 5(k) as to the partnership's basis in the assets being $64,889.37 and its loss $36,889.37. No reply was filed. At trial petitioner's counsel in his opening statement stated that the property sold by the partnership was carried on the partnership's books on the same basis as originally entered, that the basis of the property was never questioned by the respondent for depreciation purposes or in the audit of the partnership return for the year ending October 31, 1944, and that in determining the loss to the other partners that basis was recognized, and that it was his contention that respondent is in no position at this time to question the basis after allowing it as a proper basis to all the other partners; that it puts an impossible burden on petitioner to prove a basis which has to be traced back, if at all, to the origin of the building and the date of acquisition by C. F. Limbeck who is now dead. Later during the trial petitioner's counsel stated that he had no way of proving C. F. Limbeck's original basis for the property, and that he contended that respondent could not establish a basis to this partner (the petitioner) which differs from the basis that was established and accepted by him as to the other partners. Asked by the Court whether he was in effect pleading estoppel or raising estoppel, he stated: ‘It isn't an estoppel argument, I don't believe, Your Honor‘ and later stated as to the plea of estoppel ‘No; we haven't pleaded it and I am not urging that as the argument here * * * .‘ Counsel for the respondent in his opening statement stated in pertinent part that the partnership had computed its loss on a basis of $91,758.26 cost, less depreciation $26,868.88, with remaining cost basis of $64,889.37, proceeds of sale $28,000, and net deductible loss of $36,889.37; that it was the contention of the respondent that the petitioner's claimed share of such purported partnership loss is not allowable for the reasons that (1) the basis of the partnership assets sold was not substantiated and therefore no deductible loss on sale is recognizable; and (2) petitioner owned more than 50 per cent of the capital stock of the purchasing corporation, Dubuque Packing Company, and consequently no part of any such purported partnership loss on sale is deductible by petitioner under section 24(b) of the Internal Revenue Code.
OPINION.
DISNEY, Judge:
We are presented here with a question as to whether the Commissioner erred in denying to the petitioner deduction of his percentage of a loss by his partnership upon sale of assets. The deficiency notice so denying the deduction by way of explanation merely states, in substance, that the petitioner had reported $31,143.87 as his 36 per cent of partnership income of $86,510.74, but that due to the disallowance of loss of $36,889.37, claimed on the sale of the property by the partnership, the petitioner's distributive share was $44,424.04 and his income was therefore increased $13,280.17, with the statement ‘It is held that no part of the unsubstantiated loss claimed in the above partnership return alleged to have arisen from the sale * * * is deductible in computing your net income for the year 1944.‘ The respondent has two contentions, first, that the basis of the partnership assets sold was not substantiated and therefore no deductible loss is recognizable to the petitioner and, second, that the petitioner owned more than 50 per cent of the capital stock of Dubuque Packing Company, the purchaser from the partnership, so that no loss is allowable to the petitioner under the provisions of section 24(b) of the Internal Revenue Code.
Obviously, if the basis of the partnership assets was not substantiated, that is, not proven in this case, petitioner has not established a loss whether deductible or not, and we do not reach the second question. The petitioner's counsel frankly acknowledged at trial that he could not prove the basis of the assets sold, and stated that an impossible burden was put upon petitioner to prove the basis ‘when it has to be traced back, if it is to be traced at all, to the origin of the building and beyond that to the date of acquisition by C. F. Limbeck, who is now dead.‘ He had earlier stated that: ‘The property which was sold by the partnership in this case * * * was contributed to the partnership in 1942 by C. F. Limbeck * * * in exchange for the partnership interest which he acquired at that time.‘ In respondent's opening statement reference is made to the conveyance by C. F. Limbeck and M. D. Limbeck of real estate and plant as contributed capital, and to the fact that the partnership ‘conveyed said assets to Dubuque Packing Company.‘
The real and personal property conveyed by the partnership in 1944 to Dubuque Packing Company is particularly described, in the deed, with the numbers of lots and blocks set forth, and such property is the identical property described in the articles of partnership formed in 1942 where such property is recited as contributed by C. F. Limbeck and M. D. Limbeck as constituting their respective capital contributions of $20,000 and $18,000, respectively, those being the values agreed upon in the articles of partnership. Petitioner's opening statement recites: ‘The property was carried on the books of the partnership at all times on the same basis on which it was originally entered upon its books.‘ It thus appears that although it is stipulated that the adjusted basis for the assets sold and conveyed by the partnership to Dubuque Packing Company was $64,889.37, ‘as shown on the partnership's books,‘ that figure has its inception to a large extent in the real estate and personal property contributed by C. F. Limbeck and M. D. Limbeck and passing to Dubuque Packing Company, as to which no basic value appears, but only the value agreed upon by the partners for purposes of capital contribution. On trial petitioner's counsel stated: ‘We have no way of proving what C. F. Limbeck's original basis for this property was. At this late date, it is completely beyond us.‘ (We note here that only C. F. Limbeck and not M. D. Limbeck was shown to be dead.)
Under such circumstances it is apparent, we think, that any prima facie showing of value created by the stipulation as to the amount appearing on the partnership books, Frank C. Rand, 40 B.T.A. 233 (239), is overcome by the fact that such book value in considerable part rests only upon agreement for purposes of capital contribution. The petitioner does not suggest that the recitation of book value casts any burden upon the respondent but, on the contrary, as above seen, admits inability to prove the value. Petitioner seeks, however, to avoid this failure of proof by the contention that: ‘The basis of assets is a factor in the computation of the tax, and under partnership tax accounting, an adjustment of basis can only be made upon an audit of the partnership return‘; under which he argues, in substance, that the partnership in its return used $64,889.37 as basis for the partnership property sold, that this figure was accepted in the revenue agent's report on the partnership for the taxable year, and that the ‘respondent cannot increase petitioner's distributive share of partnership income on the ground that the partnership return, he determined a new basis for the assets and readjusted each partner's distributive share accordingly.‘ The petitioner cites no case which we find to have any relation to the point. It is obvious that unless the respondent as a matter of law or estoppel is precluded from questioning the partnership basis in the assets sold, petitioner can not prevail. Petitioner's counsel stated at trial when, on this point, he was asked by the Court whether he was in effect raising estoppel, that he did not think it was an estoppel argument and that he had not pleaded estoppel. The pleadings disclose no such plea. It can not be said that the petitioner was taken unawares by the respondent's urging that no basis in the assets sold had been shown. The deficiency notice states that it is held that no part of the ‘unsubstantiated loss‘ claimed in the partnership return is deductible by the petitioner, so that by the determination of deficiency petitioner was duly put upon notice that the loss was considered unsubstantiated. Moreover, the amended petition alleges in paragraphs 5(j) and 5(k), in substance, that the partnership's basis for the assets was $64,889.37, which allegations were in the respondent's answer denied. Again, at trial, the respondent's counsel in his opening statement set forth, as his first contention, that the basis of the partnership assets sold had not been substantiated so that there was no deductible loss. Thus, it is clear that there is no element of surprise, in the urging by the respondent of the lack of basis. The petitioner was clearly apprised that he must prove basis, and just as clearly agreed that he could not do so. We note in this connection that two parties named Limbeck contributed property, instead of cash, to the capital of the partnership (which is the gist of the idea of no substantiation of basis of the assets) and that the death of only C. F. Limbeck is suggested. Estoppel was not pleaded and in any event there appears no basis of estoppel, in the facts before us. The only question, therefore, that remains is whether as a matter of law, as the petitioner urges, the respondent can not question the basis of the assets because it was reported in the partnership return and referred to in the report of the internal revenue agent who examined the partnership return, and the figure as to basis used in the return was used by him in determining the amount of the loss, a percentage of which the petitioner claims is deductible. We note that in Hellman v. United States, 44 F.2d 83, there was contention by the defendant, collector of internal revenue, that the plaintiff, the taxpayer, was bound by the partnership return showing his distributive share. The court held that he was not so bound. In Lillie C. Pomeroy et al., Executors, 24 B.T.A. 488, affd. 68 F.2d 411, an individual case, growing out of a partnership, the petitioner argued that statements made in a revenue agent's report relative to the termination of the partnership were controlling. It was held that such conclusions by the revenue agent were not binding upon the respondent. He had in his reports treated the business as a partnership and stated that it terminated upon the operation of a certain agreement. Though it is not closely applicable here, our statement in Estate of Herbert B. Hatch, 14 T.C. 251, involving a sale by partners and capital gain, that the total of the basis of the partnership assets to the partnership does not necessarily equal the total of the bases to the partners of their interests, does indicate, in our opinion, error in the petitioner's view here that the respondent is necessarily bound by a view as to the basis of the partnership assets. We can conceive of a case where revenue agents in examining a partnership return come to conclusions as to basis of assets, which conclusion it is later decided was erroneous, so that in determining a deficiency against one of the partners growing out of the partnership's sale of such assets the Commissioner in view of the error made by the revenue agents determines that there is no such basis, or, as in this case, that loss therefrom is ‘unsubstantiated‘; and we see no reason why in the absence of estoppel the Commissioner is precluded from so determining and, as in this case, denying, in his answer, allegations as to the amount of partnership basis. In such a situation if, as here, the partnership basis is not proven there seems no reason in law why the petitioner should prevail. The issue here has been squarely made and nothing but some reason, in law, why the respondent can not question the partnership basis can avail the petitioner. No such reason or case supporting it is suggested to us here. The determination of deficiency, the denial of basis in the answer, and the respondent's opening statement all put petitioner on his proof. He agrees that he can not prove his basis, and did not do so. It has been often held that inability to make proof avails nothing. In Burnet v. Houston, 283 U.S. 223, a case, as here, of alleged loss, the Court said:
* * * The impossibility of proving a material fact upon which the right to relief depends simply leaves the claimant upon whom the burden rests with an unenforceable claim, a misfortune to be borne by him, as it must be borne in other cases, as the result of a failure or proof. * * *
We, therefore, conclude that the petitioner has failed to show error on the part of the respondent, not having substantiated his loss by proving the basis of the partnership.
In view of this conclusion it would be superfluous for us to examine the further question presented by the parties involving section 24(b)(1) of the Internal Revenue Code.
Decision will be entered for the respondent.