                        T.C. Memo. 2000-382



                      UNITED STATES TAX COURT



                DYNADECK ROTARY SYSTEMS, LTD.,
     MARTIN LETTUNICH, TAX MATTERS PARTNER, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1199-99.                  Filed December 18, 2000.




     Martin N. Lettunich, pro se.

     Paul K. Webb, for respondent.



                        MEMORANDUM OPINION


     LARO, Judge:   This case was submitted to the Court fully

stipulated under Rule 122.   Respondent issued to petitioner a

notice of final partnership administrative adjustment on behalf

of Dynadeck Rotary Systems, Ltd. (Partnership) with respect to

the Partnership’s 1991 and 1992 taxable years.   Following
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concessions, we must decide whether the Partnership had debt that

allowed its partners to increase their bases in the Partnership

under section 752(a).   We hold it did not.   Unless otherwise

indicated, section references are to the Internal Revenue Code in

effect for the relevant years.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                            Background

     The parties have filed with the Court a stipulation of facts

and related exhibits.   We find the stipulated facts accordingly

and set forth the relevant facts in this background section.     The

Partnership’s principal place of business was in Saratoga,

California, at all relevant times.

     In late 1990, Matthew Schadeck (Mr. Schadeck), three of his

colleagues1 (Mr. Schadeck and his three colleagues are

collectively referred to as the individuals), and Dynadeck Rotary

Systems Incorporated (Corporation), a California S corporation,

formed the Partnership to develop an idea that Mr. Schadeck had

for a new rotary engine.   The individuals had incorporated the

Corporation on December 18, 1990, and they were its only

shareholders.   The individuals intended that the Corporation

would secure funding for the rotary engine’s development, and




     1
       The colleagues’ names are Garon Handley, Fred Schadeck,
and an attorney named Martin Lettunich (Mr. Lettunich).
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they used the Corporation’s funds to pay a majority of the

Partnership’s expenses.

     Also in late 1990, the Laurel Assets Group (LAG), an

unrelated investment group, expressed interest in investing in

the Corporation.   Mr. Lettunich met with representatives of LAG

to discuss its interest, and LAG advanced $150,000 to the

Corporation on December 19, 1990.    LAG and the Corporation agreed

that the Corporation would repay LAG the $150,000, with interest,

by December 31, 1991, if they did not reach an investment

agreement by January 31, 1991.    As of December 19, 1990, LAG and

the Corporation believed they would agree to an investment of up

to $350,000 by January 31, 1991, at which time they would

consider the $150,000 part of that investment.

     Mr. Schadeck applied to patent his idea on February 8, 1991.

He transferred his rights in that application to the Partnership

approximately 1 year later, and the Partnership immediately

assigned those rights to Magnitude Technologies Incorporated

(Magnitude), a corporation whose shareholders were the

individuals.

     LAG advanced another $200,000 to the Corporation in the

first half of 1991, making LAG’s total advance $350,000.    The

Corporation asked LAG to take an interest in the Partnership in

consideration for the $350,000.    LAG asked that the $350,000 be

converted into a royalty arrangement.
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     As of January 1992, the Corporation and LAG had not agreed

to the terms under which they would characterize the $350,000 as

an investment in the Corporation.   On January 27, 1992, LAG

informed the Corporation that LAG was considering the $350,000 as

debt owed to it by the Corporation as of December 31, 1991, and

that the Corporation was in default of that debt.   LAG agreed at

that time to lend an additional $50,000 to the Corporation,

making the total debt $400,000.   LAG agreed to cancel the entire

debt if it and the Corporation reached a royalty or other

satisfactory agreement by February 29, 1992.   On January 27,

1992, Mr. Lettunich, in his capacity as secretary/treasurer of

the Corporation, signed a promissory note in which the

Corporation agreed to pay $400,000, with interest, to LAG by

February 29, 1992.   Neither that note, nor the enclosed letter

from LAG to the Corporation, referenced the Partnership.    Nor did

either the note or the letter provide that the debt was secured.

     On February 2, 1994, an agreement concerning the $400,000

was reached between LAG, on the one hand, and Magnitude, the

Partnership, and the Corporation (collectively, the Dynadeck

group), on the other hand.   Pursuant to that agreement, which

provided that it was effective as of January 1, 1991, the

Dynadeck group agreed that in consideration of the $400,000, they

would, among other things, pay to LAG a royalty equal to 5

percent of the gross receipts received by the Dynadeck group.
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     On July 8, 1994, the Partnership filed its 1991 and 1992

Federal partnership information returns with the Commissioner.

Those returns did not report any liabilities of the Partnership

for the related years.

                            Discussion

     Section 752(a) allows partners to increase their bases in a

partnership by an increase in their share of partnership

liabilities.   See also sec. 1.752-1(b), Income Tax Regs.

Respondent determined that the Partnership had no debt during

1991 or 1992 that would allow the partners to increase their

bases under section 752.   Petitioner argues that the $400,000

owed to LAG was a Partnership debt that increased each partner’s

basis in the Partnership during 1991 and 1992.    Petitioner

acknowledges that LAG transferred the $400,000 directly to the

Corporation and that the promissory note listed the Corporation

as the obligor but asserts that the Corporation received the

$400,000 as the Partnership’s agent.

      We disagree with petitioner that the partners may increase

their bases in the Partnership to reflect the $400,000 debt.     The

facts of this case do not establish that the Partnership was ever

liable to repay any of that amount.    The sole evidence that we

find in the record as to a debtor/creditor relationship is the

promissory note which provides clearly that the Corporation owed

the money to LAG.   The note says nothing, nor is there evidence,
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to support petitioner’s claim that the Corporation executed that

note as the Partnership’s agent or that the Partnership was

liable for the note’s repayment.   Nor is there any evidence of a

written agreement identifying the Corporation as the

Partnership’s agent, or evidence that the Corporation was held

out as the partnership’s agent in dealings with LAG or another

third party.   See Commissioner v. Bollinger, 485 U.S. 343, 349-

350 (1988).

     Our conclusion is supported by the fact that the

Corporation’s role in the Partnership was to secure funds for the

Partnership and that the record is barren as to any obligation or

effort on the part of the Partnership to secure its own funds.

Nor do we find that any of the Partnership’s partners, except the

Corporation, had such an obligation.   In fact, each of the

partners appears to have contributed something unique to the

Partnership.   In the case of Messrs. Schadeck and Lettunich, for

example, the former contributed his rights in the underlying

patent, and the latter contributed his legal skills and his

labor.   The Corporation expected to, and did, generate and

contribute funds to the Partnership.

     We hold that the Partnership was not liable for any part of

the $400,000 owed to LAG and, accordingly, that no partner is

entitled to increase his or its basis in the Partnership on

account of that debt.   We have considered all arguments for a
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contrary holding, and we reject all arguments not discussed

herein as without merit or irrelevant.

                                           Decision will be entered

                                      under Rule 155.
