                        T.C. Memo. 1997-442



                      UNITED STATES TAX COURT



        FRED L. BAKER AND LISA A. POWERS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25050-95.              Filed September 29, 1997.



     Fred L. Baker, for petitioners.

     Carmino J. Santaniello, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined a deficiency in

petitioners' 1990 Federal income tax in the amount of $43,446.

     After concessions, the only issue for decision is whether a

$65,316 loss claimed by petitioner Fred L. Baker (hereinafter

petitioner) should be treated as an ordinary or capital loss.
                                - 2 -

                         FINDINGS OF FACT


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

The stipulation of facts and supplemental stipulation of facts

are incorporated herein by this reference.    At the time the

petition was filed, petitioners resided in New Milford,

Connecticut.

     Petitioner was a practicing attorney during the relevant

period.   Petitioners timely filed their 1990 Federal income tax

return using the cash receipts and disbursements method of

accounting.

     Prior to June 29, 1987, Raymond Staron held an option to

purchase commercial property located at 1835 Post Road East in

Westport, Connecticut, for which he had paid $100,000.

Hereinafter, 1835 Post Road East will be referred to as the

property.   The property consisted of approximately one-half acre

with four separate buildings.   Raymond Staron sought out others

who would be willing to invest in the property.    On June 29,

1987, petitioner, Bernard Staron, George Allingham, and Raymond

Staron purchased the property for $1.2 million.    They acquired

title to the property as tenants in common.    The purchasers

financed 100 percent of the purchase price with a $1.2 million

loan from Citytrust.   Each of the individual purchasers signed a

note and mortgage on the property for the $1.2 million loan.
                               - 3 -

Neither the note nor the mortgage limited the purchasers'

individual liability to Citytrust.

     At the time of the purchase, petitioner and the three other

purchasers intended to sell the property as soon as possible.

Because of a change in economic conditions, the property could

not be sold.   As a result, the property continued to be rented to

tenants through 1990.   In February 1987, a checking account was

opened in the name of BASS and was thereafter used to deposit

rental income and pay expenses related to the property.   BASS is

an acronym using the first letters of the last names of Messrs.

Baker, Allingham, Raymond Staron, and Bernard Staron.

     Gross income and deductions related to the property for 1987

were reported on a U.S. Partnership Return of Income (Form 1065).

This partnership return was filed using the name "Bass

Associates, George D. Allingham Gen Ptr".1   Bass Associates' 1987

partnership return reported gross income of $47,329, total

expenses of $144,988, and a net loss of $97,659.

     On Schedules K-l, Partner's Share of Income, Credits,

Deductions, etc., attached to the 1987 partnership return, the

partners' percentages of profit, loss, and ownership were

reported as follows:




     1
      Bass Associates had acquired an employer identification
number that it used on its partnership returns for the years 1987
through 1990.
                                  - 4 -
                                    Partner's percentage of:
         Partner         Profit        Loss      Ownership of capital

 Raymond Staron           45%             45%             45%
 George D. Allingham      25%             25%             25%
 Fred L. Baker            20%             20%             20%
 Bernard Staron           10%             10%             10%


The 1987 Schedule K-1 for petitioner reflected his distributive

share of partnership loss from rental real estate activity as

$19,532.

     Partnership returns were also filed for Bass Associates for

the years 1988, 1989, and 1990.     Each of these returns contained

Schedules K-1 reflecting the same percentage share of profit,

loss, and ownership.   These partnership returns reported losses

from rental real estate activity for 1988, 1989, and 1990 in the

respective amounts of $108,278, $114,015, and $102,867.2        The

Schedules K-1 attached to the partnership returns reported

petitioner's share of the partnership's loss from rental real

estate activities for 1988, 1989, and 1990 in the respective

amounts of $21,656, $22,803, and $20,573.

     Petitioners did not report any losses attributable to Bass

Associates on their 1987, 1988, or 1989 individual income tax



     2
      The partnership returns reported gross income and expenses
from rental real estate as follows:


                                1988        1989      1990

  Gross income             $66,292         $71,166   $74,266
  Total expenses           174,570         185,181   177,133
                                 - 5 -

returns; these losses were suspended pursuant to the provisions

of section 469.3

     On December 30, 1990, petitioner conveyed his interest in

Bass Associates to Mr. Allingham.    The written assignment

provided as follows:


          WHEREAS, BASS Associates, a Connecticut general
     partnership, was formed in December of 1986
     ("Partnership") consisting of the following partners
     and their percentage ownership in said Partnership:

           Fred L. Baker                 20%
           George D. Allingham           25%
           Raymond Staron                45%
           Bernard Staron                10%

          WHEREAS, on December 31, 1986, the Partners d/b/a
     BASS Associates purchased the land and buildings known
     as 1835 Post Road East, Westport, Connecticut
     ("Property"), more particularly described on Schedule A
     annexed hereto and made a part hereof; and

          WHEREAS, the Property is subject to a first
     mortgage in favor of Citytrust in the original
     principal amount of $1,200,000 dated June 29, 1987 and
     recorded in Volume 897 at Page 68 of the Westport Land
     Records, as amended; and

          WHEREAS, Assignor desires to sell, assign,
     transfer and set over to Assignee all of his right,
     title and interest in and to said Partnership and
     Assignee agrees to purchase all of Assignor's right,
     title and interest in said Partnership; and

          NOW, THEREFORE, in consideration of the foregoing
     recitals and of the mutual covenants, conditions and
     agreements herein contained, the parties hereto do
     hereby agree as follows:

     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 6 -

          1. Assignor will convey all his interest in the
     Partnership to the Assignee for the consideration
     listed herein.

          2. Assignor shall be relieved of fifty (50%)
     percent of his twenty (20%) percent interest of the
     liability to Citytrust (i.e. 50% of $1,200,000 =
     $600,000 x 20% = $120,000).

          3. Assignor shall remain liable to Assignee and
     the Partnership for fifty (50%) percent of his twenty
     (20%) percent interest, (i.e. 50% of $1,200,000 =
     $600,000 x 20% = $120,000).

          4. Assignee assumes the full liability therefor
     and will indemnify and hold Assignor harmless from any
     and all claims, liens, etc. in connection with the
     Partnership.

          5. This Agreement shall be binding upon and inure
     to the benefit of the parties hereto and their
     respective heirs, successors and assigns.

          IN WITNESS WHEREOF, the parties have hereunto set
     their hands and seals on the day and year first above
     written.


This document was signed by petitioner and Mr. Allingham.    On

December 30, 1990, petitioner executed a quitclaim deed conveying

his interest in the property to Mr. Allingham for the stated

consideration of $1.   A copy of the quitclaim deed was attached

to the assignment of petitioner's partnership interest in Bass

Associates.

     On petitioners' 1990 income tax return, they reported a loss

of $65,316 from the sale of petitioner's interest in Bass

Associates.   In statement 7, attached to their return, the loss

is explained as follows:
                               - 7 -


     STATEMENT 7 - GAINS AND LOSSES FROM SALE OF ASSETS

     BASS ASSOCIATES

     SECTION 1231 GAINS AND LOSSES

          PTRSHP INTEREST - BASS

          DATE ACQUIRED 01/01/87   DATE SOLD 12/30/90

     GROSS SALES PRICE                                 120,000
     COST OR OTHER BASIS               185,316
     ADJUSTMENTS TO BASIS                    0

       ADJUSTED BASIS                                   185,316

     TOTAL GAIN OR LOSS                                -65,316

     ACTIVITY SUMMARY
       TOTAL SECTION 1231 GAIN OR LOSS                 -65,316


     On Schedule E, Supplemental Income and Loss, of petitioners'

1990 income tax return, petitioners reported a partnership loss

of $71,933 from Bass Associates consisting of a 1990 loss from

rental real estate activity of $20,573 and the suspended

partnership losses from 1987 through 1989.       Statement 5 attached

to petitioners' 1990 return indicates that petitioner was a

general partner of Bass Associates, which was engaged in rental

real estate activity.


                              OPINION


     The only issue for decision is whether the $65,316 loss that

petitioner sustained on December 30, 1990, is an ordinary or

capital loss.   Losses from sales or exchanges of capital assets
                                 - 8 -

are allowable only to the extent allowed in sections 1211 and

1212.    Sec. 165(f).   If an individual's capital losses exceed

capital gains, section 1211(b) restricts deductions for capital

losses to the lower of $3,0004 or the excess of such losses over

gains.

     The term "capital asset" is defined in section 1221 as

"property held by the taxpayer (whether or not connected with his

trade or business)," subject to five specified exceptions.     One

such exception, section 1221(2), includes real property used in

the taxpayer's trade or business.

     Gain or loss from the sale of a partnership interest is

generally considered as gain or loss from the sale or exchange of

a capital asset.    Sec. 741; Pollack v. Commissioner, 69 T.C. 142,

145 (1977)(holding section 741 operates independently of section

1221(2)); sec. 1.741-1(a), Income Tax Regs.     The gain or loss of

a partner on the sale of a partnership interest is the difference

between the amount realized and the partner's adjusted basis in

the partnership interest.     Sec. 1.741-1(a), Income Tax Regs.    For

purposes of section 741, the "amount realized" includes the

transferor-partner's share of liabilities assumed by the

transferee.    Sec. 752(d).

     There is no dispute in this case regarding either the amount

or timing of the $65,316 loss.     The only issue is whether this

     4
      The limit is $1,500 in the case of a married individual
filing a separate return.
                               - 9 -

loss is capital or ordinary.   Petitioners recognize that the sale

of a partnership interest gives rise to capital gain or loss.

Resolution of this issue, therefore, turns on a factual question

of whether petitioner's loss resulted from his sale of a

partnership interest in Bass Associates, as respondent contends,

or whether the loss resulted from petitioner's sale of real

property used in a trade or business, as petitioners contend.

     Whether a partnership exists for Federal income tax purposes

is governed by Federal law.    Commissioner v. Tower, 327 U.S. 280,

287-288 (1946); Estate of Kahn v. Commissioner, 499 F.2d 1186,

1189 (2d Cir. 1974), affg. Grober v. Commissioner, T.C. Memo.

1972-240; Frazell v. Commissioner, 88 T.C. 1405, 1412 (1987);

sec. 1.761-1(a), Income Tax Regs.   The term "partnership" is

broadly defined in section 761 as a "syndicate, group, pool,

joint venture or other unincorporated organization through or by

means of which any business, financial operation, or venture is

carried on," but is not a corporation, trust, or estate.   See

also sec. 7701(a)(2).

     Recognition of partnership for Federal tax purposes requires

that the parties conduct some business activity.    Estate of

Winkler v. Commissioner, T.C. Memo. 1997-4.   The regulations in

this regard provide as follows:


     Mere co-ownership of property which is maintained, kept
     in repair, and rented or leased does not constitute a
     partnership. * * * Tenants in common, however, may be
     partners if they actively carry on a trade, business,
                              - 10 -

     financial operation, or venture and divide the profits
     thereof. For example, a partnership exists if co-
     owners of an apartment building lease space and in
     addition provide services to the occupants either
     directly or through an agent. * * * [Sec. 1.761-1(a),
     Income Tax Regs.]


See also sec. 301.7701-3, Proced. & Admin. Regs.   Petitioners

bear the burden of proving that a partnership did not exist.

Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933); Demirjian

v. Commissioner, 54 T.C. 1691, 1696 (1970), affd. 457 F.2d 1 (3d

Cir. 1972).

     In determining whether a particular relationship between

persons constitutes a partnership for tax purposes, the intent of

the persons involved is the controlling factor.    Commissioner v.

Tower, supra at 286-287.   Since intent is a subjective matter not

readily discernable by a trier of fact, a court must rely on

objective acts as evidence of intent.   Burde v. Commissioner, 43

T.C. 252, 266 (1964), affd. 352 F.2d 995 (2d Cir. 1965).   Factors

relied upon by this Court include:


     The agreement of the parties and their conduct in
     executing its terms; the contributions, if any, which
     each party has made to the venture; the parties'
     control over income and capital and the right of each
     to make withdrawals; whether each party was a principal
     and coproprietor, sharing a mutual proprietary interest
     in the net profits and having an obligation to share
     losses, or whether one party was the agent or employee
     of the other, receiving for his services contingent
     compensation in the form of a percentage of income;
     whether business was conducted in the joint names of
     the parties; whether the parties filed Federal
     partnership returns or otherwise represented to
     respondent or to persons with whom they dealt that they
                              - 11 -

     were joint venturers; whether separate books of account
     were maintained for the venture; and whether the
     parties exercised mutual control over and assumed
     mutual responsibilities for the enterprise. [Luna v.
     Commissioner, 42 T.C. 1067, 1077-1078 (1964); Alhouse
     v. Commissioner, T.C. Memo. 1991-652, affd. sub nom.
     Bergford v. Commissioner, 12 F.3d 166 (9th Cir. 1993).]


     Petitioners contend that there never was a partnership.

They argue that petitioner and Messrs. Allingham, Raymond Staron,

and Bernard Staron never entered into a written partnership

agreement, never operated as a trade or business, and never

intended to form a partnership.

     It is true that there was no written partnership agreement.

However, the lack of a written agreement is not dispositive.    We

have previously held that a partnership existed without a written

agreement where other evidence indicated that two or more

individuals intended to and did operate as a partnership.

McManus v. Commissioner, 65 T.C. 197, 210 (1975), affd. 583 F.2d

443 (9th Cir. 1978); Demirjian v. Commissioner, supra at 1697-

1698.

     The objective facts regarding Bass Associates contradict

petitioners' contention that there was no partnership from 1987

through 1990.   The property was rented, rents were collected and

deposited into a checking account in Bass' name, and expenses

were paid out of the Bass accounts.    For each of these 4 years,

the income and expenses related to the operation of the property,

were reported on partnership returns, and the percentages of each
                              - 12 -

partner's ownership, profits, and losses were reflected on

Schedules K-1.5

     On petitioners' 1990 income tax return, the operating losses

and loss on the sale of petitioner's interest in the venture were

clearly and explicitly reported as being from a partnership named

Bass Associates.   Indeed, the sale of petitioner's interest to

Mr. Allingham was pursuant to a written document that explicitly

states that it was a sale of a partnership interest.    Both

petitioner and Mr. Allingham signed this document on December 30,

1990.

     It was not until petitioners' loss deduction was challenged

that petitioner disclaimed the existence of the partnership.     Mr.

Allingham, who purchased petitioner's partnership interest

pursuant to a written agreement and who prepared the partnership

returns and petitioners' 1990 return, testified at trial that he

never intended Bass Associates to be a partnership.    Neither

petitioner nor the other two partners testified.   In light of Mr.

Allingham's prior actions and representations that Bass

Associates was a partnership, we cannot accept the explanation

offered by Mr. Allingham at trial.

     We find that the $65,316 loss that petitioner sustained in

1990 resulted from the sale of his partnership interest in Bass

     5
      These percentages were not reflected in the note signed by
the partners, wherein they each appear to have become jointly and
severally liable to Citytrust. The quitclaim deed to the
property is not in evidence.
                              - 13 -

Associates.   It follows that this loss is a capital loss

allowable only to the extent allowed in sections 1211 and 1212.




                                         Decision will be entered

                                    under Rule 155.
