                   T.C. Summary Opinion 2003-50



                      UNITED STATES TAX COURT



    JEROME J. KLAWITTER AND ANN T. KLAWITTER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7491-01S.             Filed May 12, 2003.



     John W. Johnson and Brian A. Mills, for petitioners.

     W. Lance Stodghill, for respondent.



     CARLUZZO, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for 1993, 1995, 1996, or 1997, as

appropriate.   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.
                               - 2 -

     Respondent determined deficiencies in petitioners’ 1995,

1996, and 1997 Federal income taxes in the respective amounts of

$3,229, $4,414, and $8,721.   The issue for decision for each year

is whether petitioners are entitled to a deduction for a net

operating loss carryover.   The resolution of the issue depends

upon whether petitioners sustained a deductible loss in 1993 when

Jerome J. Klawitter (petitioner) surrendered his interest in a

certain partnership.

Background

     Some of the facts have been stipulated and are so found.

Petitioners are husband and wife.   They filed a timely joint

Federal income tax return for each year in issue.   At the time

the petition was filed, petitioners resided in Austin, Texas.

     Petitioner holds a Ph.D. in engineering.   Before the years

in issue he was a member of the faculty of several universities.

His doctoral dissertation, submitted in 1970, involved the

development of porous structures in ceramic materials to enable

biological attachment between the human skeletal system and an

orthopedic implant such as an artificial hip or knee.   He taught

bioengineering at Clemson University until 1975, when he began

teaching courses in biomaterials and biomechanics at Tulane

University.
                               - 3 -

     While on the faculty of Tulane, petitioner designed an

artificial heart valve constructed from carbon-based materials.

In 1978, petitioner’s work brought him into contact with Dr. Russ

Chambers (Dr. Chambers).   Shortly after they met, petitioner and

Dr. Chambers organized Hemex, Inc. (Hemex), for the purpose of

producing artificial heart valves.     In 1980, petitioner resigned

from Tulane to become president of Hemex.    Dr. Chambers was

chairman of the board.   Hemex developed an all-carbon heart

valve replacement that was approved by the Food and Drug

Administration.   On December 16, 1986, the assets of Hemex were

acquired by Baxter Healthcare Corp. (Baxter), a company involved

in the production and marketing of artificial heart valves.

     On December 27, 1986, petitioner and Tellurogenic, an

entity created and controlled by Dr. Chambers, formed and

became general partners in Archimedes Partnership (Archimedes).

Initially, Tellurogenic served as managing general partner of

Archimedes.   The original capital structure of Archimedes

consisted of petitioner’s contribution of $3.065 million in

cash and Tellurogenic’s contribution of 75,000 shares of Dews

Laboratories, Inc.1   According to Archimedes’s amended articles




     1
       The value of this stock at the time of its contribution
cannot be determined from the record.
                               - 4 -

of partnership, after the return of capital, liquidation rights

of the partners were equal.   Periodic distributions of income

were to be made, if at all, in a ratio of 75 percent to 25

percent in favor of petitioner.   Losses were allocated in

proportion to each partner’s capital account, except that in

1987, the first $75,000 of losses was allocated to Tellurogenic.

     On January 23, 1987, approximately 1 month after Archimedes

was formed, the Onex Farms Partnership (Onex Farms) was formed,

apparently as proposed by Dr. Chambers.   Onex Farms originally

consisted of three general partners:   (1) Lever, Inc. (Lever), a

corporation organized, controlled, and owned entirely by

petitioner;2 (2) Pencot Farm Management, Inc.3 (Pencot), an

entity organized and controlled by Dr. Chambers; and (3)

Archimedes.   Onex Farms purchased and held title to a large

peanut and cotton farm in Georgia (the Georgia farm), which was

operated pursuant to an arrangement with a local farmer.     Profits

and losses from farming operations were divided equally between

Onex Farms and the farmer.




     2
       Although it was named as a partner in Onex Farms in the
Jan. 23, 1987, agreement, Lever was not actually incorporated
until Feb. 4, 1987.
     3
       “Pencot” is spelled as such on some documents in the
record but spelled “Pentcot” or “Pentecot” in others.
                                - 5 -

     Initial capital contributions to Onex Farms were made as

follows:

            Partner                     Capital Contribution

           Lever                     $500,000

           Pencot                    $1,000,000 ($400,000 in
                                       cash and the balance in
                                       a note, or notes, payable
                                       to the partnership)

           Archimedes                $1,000,000

Profits and losses from Onex Farms, as well as the partners’

ownership interests, were divided in proportion to the partners’

capital contributions; namely, 40 percent each for Pencot and

Archimedes and 20 percent for Lever.

     On December 3, 1990, the Archimedes partnership agreement

was amended.    The amended agreement was retroactive, taking

effect on January 1, 1990.    The name of the partnership was

changed to Archimedes Limited Partnership, and two new partners

were added:    Le Damier Trust (Le Damier) as a limited partner

and Edwin Hunter (Mr. Hunter) as an “ordinary” partner.4

Le Damier made a capital contribution of 982,358 units in




     4
       Edwin Hunter was Dr. Chambers’s attorney. He appears to
have represented many of the entities and individuals involved in
the various transactions and business organizations discussed in
this case. We assume that the reference to “ordinary” partner
means general partner. Le Damier Trust was represented by
Shirley Kidd Hunter, Edwin Hunter’s mother.
                                - 6 -

the Hemex Liquidation Trust.5   Mr. Hunter did not make a capital

contribution to the partnership and was not entitled to a

distribution upon its liquidation.      Pursuant to the amended

agreement Tellurogenic was no longer designated the partnership’s

managing partner, and unanimous consent of the general partners

was required for partnership decisions.

     In May 1992, petitioner formed Ascension Biomedical, a

company through which he intended to develop finger joints made

from carbon.    Nothing in the record suggests that Dr. Chambers

was involved in this company.    A short time later, the Archimedes

partners decided to terminate Archimedes, effective December 30,

1992.    The partners agreed that petitioner would serve as the

liquidating partner.    Petitioner and Dr. Chambers disagreed over

petitioner’s proposal to distribute Archimedes’s 40-percent

interest in Onex Farms to himself.      Apparently Dr. Chambers

believed that he and petitioner (directly or through various

entities that each owned or controlled) were equal partners in

Onex Farms, and if petitioner received Archimedes’s entire

40-percent interest, then petitioner would own 60 percent

(directly and through Lever) of that partnership.      Dr. Chambers

apparently threatened petitioner with a lawsuit if petitioner

distributed the assets of Archimedes as proposed.      Nevertheless,


     5
       Little is known about this entity other than that it was
apparently created in connection with Baxter’s acquisition of
Hemex’s assets.
                               - 7 -

on December 31, 1992, petitioner, acting as Archimedes’s

liquidating partner, distributed Archimedes’s 40-percent interest

in Onex Farms (the distributed partnership interest) to himself.

     With respect to the distributed partnership interest, in a

letter dated April 11, 1993, addressed to Mr. Hunter, petitioner

states:

     I have come to the conclusion it is not in my personal
     or business best interest to pursue claims on
     Archimedes[’s] interest in the Georgia farm property
     called Onex Farms. A dispute with Russ Chambers would
     eventually prove interminable, explosive, and most
     likely what I would recover in the end will not be of
     any value. Accordingly, I am surrendering
     Archimedes[’s] interest in Onex Farms.

Notwithstanding the date of the letter, the partnership return

filed by Onex Farms for 1993, designated the partnership’s final

return, indicates that petitioner’s share of profits, losses, and

capital was 40 percent.   The Schedule K-1, Partner’s Share of

Income, Credits, Deductions, etc., issued to petitioner by Onex

Farms indicates that petitioner received “withdrawals and

distributions” totaling $995,189 during 1993.   Approximately,

$22,000 was withdrawn or distributed in cash.   Onex Farms’ 1993

return further reflects that Pencot’s and Lever’s shares of

profits, losses, and capital were 40 percent and 20 percent,

respectively.

     Onex Farms was terminated on December 3, 1993.   On the same

date, Titan, L.L.C. (Titan), was formed by Lever and Pencot, each

owning 50 percent of the company.   As indicated by its articles
                               - 8 -

of organization, Titan was formed for “the continuation of the

business formerly operated as Onex [Farms].”    Assets distributed

to Lever and Pencot in the liquidation of Onex Farms (including

the Georgia farm) were transferred to Titan.    Petitioner

considered the termination of Onex Farms and creation of Titan to

be little more than a name change.     The record does not establish

how Lever (a 20-percent partner according to the final

partnership return of Onex Farms, or a 33-1/3-percent partner

taking into account petitioner’s surrender of the distributed

partnership interest) acquired a 50-percent partnership interest

in Titan.

     At the time Titan was formed, petitioner intended to

liquidate Lever.   Titan’s operating agreement states as follows:

     Members contemplate that Lever, Inc. may liquidate.
     Should it liquidate, notwithstanding the restrictions
     against transfer of an interest, the Company will
     continue and there shall be a single transfer of Lever,
     Inc.’s interest to its current shareholder of record,
     Jerome J. Klawitter, Ph.D. The transfer must be made
     within one year of the date of this agreement.


     Lever was liquidated on July 5, 1994, and, as planned,

petitioner acquired Lever’s ownership interest in Titan.     As of

the close of 1994, petitioner owned 50 percent of Titan.     The

other 50 percent was owned directly or indirectly by Dr.

Chambers.

     Little is known about petitioners’ 1993 Federal income tax

return since it has not been made part of the record.
                              - 9 -

Nevertheless, on that return petitioners apparently claimed an

ordinary loss deduction of $708,689, attributable to petitioner’s

surrender of the distributed partnership interest.   This ordinary

loss deduction apparently gave rise to a net operating loss that

resulted in the net operating loss carryover deductions here in

dispute.

     In the notice of deficiency, respondent disallowed the net

operating loss carryover deduction claimed for each year in issue

because, according to respondent, petitioners failed to establish

that a loss was incurred in 1993 “on the abandonment of a

partnership interest”.

Discussion

     An individual who abandons a partnership interest is

entitled to a deduction for any loss sustained during the year of

that abandonment if, in addition to other requirements, (1) the

individual intends to abandon the partnership interest, and (2)

the individual’s intent to abandon the interest is manifested by

some affirmative act of abandonment.   Sec. 165(a), (c)(2); Citron

v. Commissioner, 97 T.C. 200, 208-209 (1991); Tsakopoulos v.

Commissioner, T.C. Memo. 2002-8.   Both parties cite Citron in

support of their respective positions.6   According to

petitioners, petitioner intended to abandon the distributed


     6
        In this case, given the manner in which the issue was
framed, we need not address the computation or characterization
of the abandonment loss deducted in 1993.
                              - 10 -

partnership interest in 1993, and his letter dated April 11 of

that year to Mr. Hunter expressly manifested his intent to do so.

According to respondent, petitioner “had neither the intent

to abandon the interest in Onex Farms, nor did * * * [he]

affirmatively act to abandon the property by walking away from

* * * [his] interest and having nothing more to do with the

property”.   Before addressing the dispute between the parties on

these points, we think it is appropriate first to comment on the

dispute between petitioner and Dr. Chambers regarding the

distribution of assets upon the liquidation of Archimedes.

     If we ignore the various entities involved, it is fair to

conclude from petitioner’s presentation at trial that Dr.

Chambers considered himself and petitioner to be equal owners of

Onex Farms, which held title to the Georgia farm.   Nothing in the

record suggests that Dr. Chambers objected to any other aspect of

the Archimedes liquidation, or that Onex Farms owned any other

property of significant interest to Dr. Chambers.   Upon the

liquidation of Archimedes, petitioner’s ownership interest in

Onex Farms, and, more importantly, his right to its assets upon

liquidation, increased.   This increase meant that petitioner’s

total interest in Onex Farms (40 percent directly and 20 percent

indirectly through Lever) exceeded Dr. Chambers’s total interest

in Onex Farms.   From petitioner’s presentation at trial, it is

clear that this situation was not acceptable to Dr. Chambers.
                              - 11 -

As noted, Dr. Chambers believed that through Lever, Pencot, and

Archimedes he and petitioner were, in effect, equal owners of

Onex Farms.   Apparently, Dr. Chambers would not accept the

consequences of any transaction that resulted in the diminution

of his ownership interest in Onex Farms.

     Petitioner explained that he surrendered the distributed

partnership interest because he did not want to be sued by Dr.

Chambers, whom he describes as an aggressive, overbearing

individual.   Petitioner did not explain why he did not simply

divide that interest in a manner satisfactory to Dr. Chambers

and preserve their equal ownership in Onex Farms.   Instead,

petitioner, acting as liquidating partner of Archimedes, caused

the distributed partnership interest to be distributed in its

entirety to himself.   When petitioner ultimately surrendered the

distributed partnership interest, we would expect it to have been

allocated proportionally among the remaining partners, resulting

in Lever’s and Pencot’s owning 33-1/3 percent and 66-2/3

percent,7 respectively, of Onex Farms, but this expected result

is reflected neither in the final partnership return of Onex

Farms nor in the ownership interests in Titan.   When Onex Farms

was terminated and Titan created for “the continuation of the

     7
       Arguments in petitioners’ memorandum are based upon the
premise that after petitioner surrendered the distributed
partnership interest, Lever owned a one-third partnership
interest in Onex Farms and Pencot owned a two-thirds interest.
There is no support for this premise in the record.
                              - 12 -

business formerly operated as Onex [Farms]”, without explanation

and contrary to petitioner’s description of the event as little

more than a name change, Lever owned 50 percent, rather than

33-1/3 percent, of Titan.   We can only assume that this occurred

because, consistent with Dr. Chambers’s consternation over the

distribution of Archimedes’s assets, petitioner and Dr. Chambers

agreed that, however the deal was structured, each should have,

directly or indirectly, an equal share in the Georgia farm owned

first by Onex Farms and subsequently by Titan.

     Petitioner’s conduct, in surrendering the distributed

partnership interest while planning and engaging in a series of

transactions that ultimately led to the Georgia farm’s being

held by an entity owned equally by himself and Dr. Chambers,

provides strong support for the conclusion that petitioner and

Dr. Chambers in fact had an agreement or understanding, express

or implied, that they would be equal owners of the Georgia farm,

regardless of its formal ownership structure at the entity level.

     Set against this background, we think it is unnecessary to

apply the principles used to determine a taxpayer’s entitlement

to a deduction for an abandonment loss as articulated in Citron

v. Commissioner, supra, and similar cases, because we find that,

for Federal income tax purposes, petitioner did not actually

abandon the distributed partnership interest as he claims.   See

Tsakopoulos v. Commissioner, supra (citing Richardson v. McNulty,
                              - 13 -

24 Cal. 339, 345 (1864) (“[One who abandons property] must leave

it free to the occupation of the next comer, whoever he may be,

without any intention to repossess or reclaim it for himself in

any event, and regardless and indifferent as to what may become

of it in the future.”)).   Instead, through a series of

transactions, including the liquidation of Lever, petitioner

effectively retained the partnership interest that he claimed to

have abandoned.   See Commissioner v. Clark, 489 U.S. 726, 738

(1989) (“interrelated yet formally distinct steps in an

integrated transaction may not be considered independently of the

overall transaction”); Commissioner v. Court Holding Co., 324

U.S. 331, 334 (1945).   Consequently, petitioners are not entitled

to a loss deduction in 1993 based upon petitioner’s surrender of

the distributed partnership interest.   It follows that

petitioners are not entitled to the net operating loss carryover

deductions here in dispute, and we so hold.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be

                                    entered for respondent.
