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Full Opinion
United States Court of Appeals
For the First Circuit
No. 06-1865
TIMOTHY J. BURKE,
Petitioner, Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
APPEAL OF AN ORDER OF THE UNITED STATES TAX COURT
Before
Torruella, Circuit Judge,
John R. Gibson,* Senior Circuit Judge,
and Lipez, Circuit Judge.
Timothy J. Burke, for appellant.
Jonathan S. Cohen, Attorney, Tax Division, U.S. Department of
Justice, with whom Eileen J. O'Connor, Assistant Attorney General,
and Regina S. Moriarty, Attorney, Tax Division, were on brief, for
appellee.
May 4, 2007
*
Of the Eighth Circuit, sitting by designation.
TORRUELLA, Circuit Judge. On May 14, 2004, Timothy J.
Burke received a notice of deficiency from the Internal Revenue
Service ("IRS") stating that Burke owed taxes on his distributive
share of his partnership's income for 1998. Burke petitioned the
tax court for a redetermination of his tax liability, arguing that
he was not liable for tax on his 1998 distributive share because
the partnership's receipts were placed in escrow. The tax court
rejected Burke's argument and granted the IRS's motion for summary
judgment. Burke appeals the tax court's ruling. After careful
consideration, we affirm.
I. Background
On October 13, 1993, Burke formed a partnership with
Jeffrey Cohen named "Cohen & Burke," agreeing to split the proceeds
of the enterprise evenly after allocating a ten percent origination
fee to the partner who generated new business. In 1998, a dispute
arose between the two partners when Cohen allegedly refused to
comply with a superseding partnership agreement that linked the
distribution of the partnership's proceeds more tightly to each
partner's individual efforts1 and stole money received by the
1
Burke alleges that on January 1, 1996, Burke and Cohen entered
into an oral partnership agreement (the "partnership agreement"),
pursuant to which the partnership's income was to be allocated as
follows: (1) A guaranteed payment of 10 percent of the gross
profits from the tax return preparation business would be paid to
the originating partner; (2) 100 percent of the gross profits from
legal services attributable to each originating partner was
allocated to that partner; (3) the remaining net profits were
allocated equally to each partner; and (4) with respect to work
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partnership. As a result of the dispute, Burke filed suit against
Cohen in Massachusetts state court on October 4, 1999, alleging
breach of fiduciary duty, breach of contract, deceit, and
conversion, and requesting an accounting. Cohen and Burke agreed
to keep the partnership receipts in an escrow account pending the
outcome of the litigation.
Meanwhile, Cohen filed the partnership tax return for
1998 reporting $242,000 in ordinary income, with $121,000 as each
partner's distributive share.2 Burke reported zero as his
distributive share of partnership income and filed a notice of
inconsistent determination stating that Cohen's partnership tax
filing was factually and legally inaccurate.
The Commissioner of Internal Revenue issued Burke a
notice of deficiency alleging that Burke had improperly failed to
report his distributive share of partnership income on his
individual return. Burke timely petitioned the tax court for
redetermination of the deficiency, claiming that his distribution
referred from one partner to the other, a referral fee of 33
percent of gross profits from the referred work would be paid to
the referring partner. Burke prepared and filed the partnership
returns for 1996 and 1997 in accordance with the partnership
agreement.
2
Cohen's position in the state court litigation was that the
partnership agreement was not valid and that each partner was
entitled to fifty percent of the partnership's profits. On
October 16, 2002, the jury found for Burke "with regard to the
partnership between January 1, 1996 through December 31, 1998";
i.e., that the income of the partnership should be allocated
according to the partnership agreement.
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of partnership income from 1998 should not have been taxed that
year because the money was being held in escrow and he therefore
did not have access to it. The IRS filed a motion for summary
judgment arguing that, as a matter of law, a partner's distribution
of partnership income was taxable in the year the partnership
received the income, regardless of whether the partner actually
received the distribution. Burke filed an opposition to the IRS's
motion for summary judgment claiming that there were material facts
in dispute precluding summary judgment in favor of the IRS and
moved for partial summary judgment on the issue of whether he was
required to report his distributive share of the 1998 partnership
income. The tax court granted summary judgment in favor of the
IRS, holding that Burke was required to include his distributive
share of partnership income for the 1998 taxable year even though
he had not yet received that distribution.
II. Discussion
We review the award of summary judgment de novo. State
Police Ass'n v. Comm'r, 125 F.3d 1, 5 (1st Cir. 1997).
A. Burke's 1998 Taxable Income
Section 701 of the Internal Revenue code provides that
"[a] partnership as such shall not be subject to the income tax
imposed by this chapter. Persons carrying on business as partners
shall be liable for income tax only in their separate or individual
capacities." 26 U.S.C. § 701. Section 703(a) provides that "[t]he
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taxable income of a partnership shall be computed in the same
manner as in the case of an individual." Id. § 703(a).
Burke argues that his distribution of partnership income
for 1998 should not have been taxed that year because that income
was (and remains) "frozen" in an escrow account, such that neither
he, nor his partner, has access to the income. In support of his
argument, Burke cites several cases (none of which deal with
partnership or partner taxation) that hold that an individual
taxpayer must only include income to which he has a claim of right.
See, e.g., N. Am. Oil Consol. v. Burnet, 286 U.S. 417, 422 (1932)
(holding that profits earned by taxpayer in a given year are not
taxable income until taxpayer "first became entitled to them and
when [taxpayer] actually received them").
Citing § 703's language that "[t]he taxable income of a
partnership shall be computed in the same manner as in the case of
an individual," Burke contends that under these cases, the
partnership did not earn taxable income in 1998 because "the
restriction of funds . . . defers the recognition of income at the
partnership level, as it does for individuals, until the
restriction is removed."
But § 703 does not help Burke. A self-imposed
restriction on the availability of income cannot legally defer
recognition of that income. See Reed v. Comm'r, 723 F.2d 138, 143
(1st Cir. 1983) ("[A] 'self-imposed limitation' created by the
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[taxpayer] is legally ineffective to shift taxability on escrowed
funds from one year to the next."). The partnership received the
money free and clear in 1998. It was the individual partners,
Burke and Cohen, who chose to place the funds in escrow â- not the
partnership's clients or other persons owing the partnership money.
Compare with id. at 142 ("As long as the deferred payment agreement
is binding between the parties and is made prior to the time when
the [taxpayer] has acquired an absolute and unconditional right to
receive payment, then the . . . taxpayer is not required to report
the . . . income until he actually receives [it]."). Thus, Burke's
contentions have only to do with the individual partners' access to
the funds after they were placed in escrow and not the
partnership's access to them.
It is well settled that partners' distributions are taxed
in the year the partnership receives its earnings, regardless of
whether the partners actually receive their share of partnership
earnings: "Few principles of partnership taxation are more firmly
established than that no matter the reason for nondistribution each
partner must pay taxes on his distributive share." United States
v. Bayse, 410 U.S. 441, 454 (1973); see also Heiner v. Mellon, 304
U.S. 271, 281 (1938) ("The tax is . . . imposed upon the partner's
proportionate share of the net income of the partnership, and the
fact that it may not be currently distributable, whether by
agreement of the parties or by operation of law, is not
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material."); 26 C.F.R. § 1.702-1 (providing that a partner must
separately account for his distributive share of partnership income
"whether or not distributed"). Consistent with this long-standing
principle, courts have uniformly held that partners must currently
recognize in their individual incomes their proportionate shares of
partnership income, even if the partnership income was not actually
distributed to them for any reason, including disputes, consensual
arrangements, ignorance, concealment, or force of law. See, e.g.,
Heiner, 304 U.S. at 280-81 (holding partners liable for tax on
their distributive share of liquidating partnership's net profits
in the year earned, even though proceeds from the sale of
partnership assets were not distributed until a year later); Comm'r
v. Goldberger's Estate, 213 F.2d 78, 81-82 (3d Cir. 1954) (holding
taxpayer liable for distributive share of profits earned by joint
venture, even though he was ignorant of the full extent of the
profits and did not receive his distributive share until years
later);3 Earle v. Comm'r, 38 F.2d 965, 967-68 (1st Cir. 1930)
(requiring members of partnership which was dissolved during
taxable period by death of one of the partners to report their
respective proportions of partnership income on their individual
3
Under 26 U.S.C. § 7701(a)(2), the term "partnership" includes a
"joint venture . . ., through or by means of which any business,
financial operation, or venture is carried on, and which is not,
within the meaning of this title, a trust or estate or a
corporation; and the term 'partner' includes a member in such a
. . . joint venture."
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income tax return, whether distributed or not). Thus, Burke was
required to report his distributive share of the partnership's
income in 1998, even if he had not yet received it.
B. Facts in Dispute
Burke also argues that the tax court erred in granting
summary judgment in favor of the IRS because there were facts in
dispute which may affect the outcome of the lawsuit. He claims
that the court incorrectly assumed Burke's taxable income for 1998
was "approximately $151,000," when, in fact, that number was
disputed on the ground that it included money that Cohen had stolen
from the partnership.
The IRS states (and the tax court found) that the IRS
used Burke's own calculation of the partnership's gross receipts
for 1998, subtracting from that number Burke's calculations of the
allegedly stolen funds, in arriving at Burke's taxable income for
1998. This assertion is supported by the record and Burke does not
directly contest it. Instead, he asserts -- without citing to the
IRS's calculations -- that Cohen's tax filings were inaccurate
because he had included the allegedly stolen partnership income in
the calculation of the partnership's gross receipts. Perhaps there
would have been a genuine issue of material fact if, in fact, the
IRS had used Cohen's tax filings to arrive at the $151,000 figure
for 1998 taxable income to Burke, but the IRS did not. The IRS
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used Burke's calculations of partnership income. Accordingly, the
facts to which Burke refers are not actually in dispute.
III. Conclusion
For the reasons stated above, we affirm the tax court's
order and opinion.
Affirmed.
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