                        T.C. Memo. 2006-198




                      UNITED STATES TAX COURT



                  OREN L. BENTON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 7602-02.             Filed September 14, 2006.



     Oren L. Benton, pro se.

     Frederick J. Lockhart, Jr., and John A. Weeda, for

respondent.



                 SUPPLEMENTAL MEMORANDUM OPINION


     GERBER, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes, an addition to tax, and




     *
       This opinion supplements a previously released Opinion:
122 T.C. 353 (2004).
                               - 2 -

penalties for the short tax year of February 23 through December

31, 1995, and the tax years 1996 and 1997, as follows:

                                              Accuracy-related
                           Addition to tax        penalty
      Year    Deficiency   Sec. 6651(a)(1)       Sec. 6662

      19951     $75,771           -                $15,154
      1996      240,565           –                 48,113
      1997      249,337        $57,967              46,374
      1
        Pursuant to sec. 1398(d)(2)(D), petitioner elected to
terminate his tax year as of the bankruptcy commencement date,
Feb. 23, 1995. The deficiency is with respect to the short tax
year of Feb. 23 through Dec. 31, 1995.

     All section references are to the Internal Revenue Code in

effect for the tax years in issue, and all Rule references are to

the Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

     In a prior opinion, concerning respondent’s motion for

partial summary judgment, we considered certain legal questions

that affected petitioner’s ability to apply, on his tax returns,

unused net operating losses (NOLs) from his bankruptcy

proceeding.   See Benton v. Commissioner, 122 T.C. 353 (2004)

(Benton I).   Among other things, in Benton I, we held that:

(1) The “termination” of petitioner’s chapter 11 bankruptcy

proceeding, for purposes of section 1398, occurred on August 31,

1997, upon confirmation of the plan and discharge of the debtor;

and (2) generally, NOLs not used or absorbed by his bankruptcy

estate may be applied by petitioner against his income for his

tax years in issue, to the extent allowed under section 172 and
                                 - 3 -

the regulations thereunder.     Benton v. Commissioner, supra at

365, 371 n.11, 377.

     This matter is currently before the Court on petitioner’s

motion for summary judgment.    See Rule 121.   The issues presented

for our consideration are:    (1) Whether petitioner may carry

certain NOLs from his bankruptcy estate to his 1995, 1996, and

1997 tax years; (2) the amount of the NOL carryovers available to

carry over to those years; and (3) whether the amount of the NOL

carryovers available to petitioner for his 1995, 1996, and 1997

tax years is sufficient to eliminate the deficiency, addition to

tax, and/or penalty respondent determined for each of those

years.

                              Background

     Petitioner resided in Oto, Iowa, at the time his petition

was filed in this proceeding.    On February 23, 1995, petitioner

filed a voluntary petition with the U.S. Bankruptcy Court for the

District of Colorado under chapter 11 of the Bankruptcy Code.

Concurrently, four related bankruptcy petitions were filed for

business entities controlled by petitioner.     An additional entity

controlled by petitioner filed a petition under chapter 11 during

1996.    The six bankruptcy cases were administered as a group.    A

separate bankruptcy estate was established for each entity,

including the Oren L. Benton Bankruptcy Estate (Benton estate)

and the Nuexco Trading Corp. Bankruptcy Estate (NTC bankruptcy
                                - 4 -

estate).   As of the date of each petition, the entity’s assets

became assets of its bankruptcy estate.    Pursuant to section

1398(d)(2)(D), petitioner elected to terminate his tax year as of

February 23, 1995.    A separate Federal income tax return was

filed for petitioner’s short tax year February 23 through

December 31, 1995.

     Among the assets that made up the Benton estate were

petitioner’s interests in three entities that were involved in

the operation and ownership of the Colorado Rockies National

League Baseball Franchise.    The three interests included a

limited partnership interest in the Colorado Baseball Club

Limited Partnership (CBCLP), which was the owner of the National

League franchise.    In addition, Colorado Baseball Management,

Inc. (CBM), was a corporation entitled to a percentage of the

gross revenues of CBCLP.    Lastly, Colorado Baseball, Inc. (CBI),

was the managing general partner in CBCLP.

     A settlement agreement was entered into during June 1997 by

petitioner; Beverly A. Benton (petitioner’s wife); Oren L.

Benton, as the debtor in possession of the Benton estate; the NTC

bankruptcy estate; and the Internal Revenue Service.    That

settlement agreement incorporated by reference a March 5, 1997,

letter offer from petitioner, Mrs. Benton, the Benton estate, and

the NTC bankruptcy estate to the U.S. Department of Justice (DOJ)

and DOJ’s April 1, 1997, letter of acceptance of that offer.      As
                              - 5 -

pertinent to this controversy, the settlement agreement

provided that

     6. Amount of Carryforward of Suspended Passive
     Activity Losses Into the Benton Estate. Oren L. Benton
     [petitioner] shall be allowed a passive activity loss
     carryforward under section 469 of the Internal Revenue
     Code * * * in the amount of Eighty Four Million
     Dollars ($84,000,000) from his pre-petition income tax
     periods ending on or before February 22, 1995. This
     suspended passive activity loss carryforward is an
     attribute of Oren L. Benton which passed to the Benton
     Bankruptcy Estate on the [bankruptcy] petition date
     pursuant to I.R.C. section 1398.

     7. Deemed Disposition of Passive Activities. All
     passive activities identified by the IRS in its RARs or
     by Benton in their tax returns will be deemed disposed
     of in a taxable transaction on the effective date of
     the pending liquidation plan of reorganization for the
     Benton estate when the passive activity assets are
     transferred into a liquidation trust. Either the
     Benton Estate or the liquidating trust shall pay any
     Federal income tax which may result from this
     transaction.

     8. Net Operating Losses Under IRC 172. Oren Benton
     shall not be allowed any net operating losses under
     section 172 arising in any taxable period on or before
     the [February 23, 1995, bankruptcy] Petition Date which
     might be carried forward to any tax period of the
     Benton Estate. No net operating losses under section
     172 generated by the Benton Estate or the bankruptcy
     estates of the other debtors in the jointly
     administered bankruptcy cases shall be carried backward
     to any pre-petition income tax period of Oren Benton or
     except for losses identified in paragraph 6 forward to
     any post confirmation income tax period of Oren Benton.

     A second amended plan of reorganization (the plan), dated

August 18, 1997, for petitioner and his related bankruptcy

estates was to be effective on August 31, 1997.   Until the

August 18, 1997, confirmation of the plan, petitioner served as
                               - 6 -

the debtor in possession.   Among other things, the plan provided

that on August 31, 1997, most of the various bankruptcy estates’

assets would be transferred into a liquidating trust to be

administered for the benefit of creditors by a trustee.     The

trustee was responsible for all tax matters relating to the

estates subject to the supervision of an oversight committee.

The creditors agreed in the plan that the tax attributes would go

to the debtor (petitioner) upon confirmation of the plan.

     The plan also provided that the interest in CBCLP was to be

transferred to the NTC bankruptcy estate, and the CBM and CBI

interests were to remain in the Benton estate.     The motivation

for not transferring these assets to the liquidating trust was to

maintain the S corporation status of CBM and CBI.     This limited

exception to the general transfer of assets to the liquidating

trust was approved by the Benton estate's creditors and promoted

by all S corporation shareholders.     The S corporation

shareholders were concerned about whether the transfer of an

interest in an S corporation into a bankruptcy liquidating trust

would result in the termination of S corporation status.     Their

concern was focused on the question of whether a liquidating

trust and/or liquidating trustee would be a qualified shareholder

of an S corporation.   The Benton estate retained bare legal title

to the interests in CBI and CBM with no rights of ownership.      The
                                   - 7 -

plan included certain terms which in effect made the Benton

estate a mere nominee.

     On September 1, 1997, the first day following the effective

date of the plan, petitioner was discharged under the provisions

of Bankruptcy Code section 1141(d) from any debt that arose

before confirmation, and he was relieved of his status as

“debtor-in-possession”.

     On his 1997 Federal income tax return, petitioner claimed

approximately $84 million in NOLs, which he maintained had been

generated by the Benton estate (his bankruptcy estate) in

accordance with paragraphs 6, 7, and 8 of the above settlement

agreement and had not been used by the Benton estate.1

Petitioner contends that the NOLs were derived from the Benton

estate as of August 31, 1997, the effective date of the confirmed

plan.       During April 1999 petitioner filed a Form 1040X, Amended

U.S. Individual Income Tax Return, for the short tax year 1995

        1
       Benton v. Commissioner, 122 T.C. 353, 357 (2004) (Benton
I), contained the statement that the approximately $84 million in
NOLs petitioner claimed had arisen before the commencement of the
bankruptcy proceeding. The parties’ current disagreement reveals
that respondent may have misinterpreted our statement in Benton
I. The $84 million in NOLs are derivative of the $84 million in
suspended passive losses petitioner incurred before commencement
of the bankruptcy proceeding. The suspended passive losses
became NOLs by operation of law upon the disposition of the
entire interest in the activity that gave rise to the suspended
passive losses. That conversion to NOLs occurred during the
bankruptcy proceeding. Therefore, the $84 million in NOLs
petitioner claimed did not arise before the bankruptcy (i.e., did
not arise before Feb. 23, 1995) and were not prebankruptcy NOLs
of petitioner.
                                - 8 -

and the calendar year 1996, attempting to use NOLs initially

reported on his 1997 return.   During October 2001, petitioner

filed amended returns containing increased claims for NOLs of $59

million.

      In his petition in this case, petitioner alleged that he is

entitled to $136 million in NOLs and $440 million in capital

losses from years before and after the commencement of the

bankruptcy proceeding.

                             Discussion

I.   Summary Judgment

      Petitioner moved for summary judgment with respect to the

availability of certain NOLs from the Benton estate to be applied

in computing his 1995, 1996, and 1997 tax liabilities.   Summary

judgment is intended to expedite litigation and avoid unnecessary

trials.    Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681

(1988).    A motion for summary judgment may be granted if there is

no genuine issue as to any material fact and a decision may be

rendered as a matter of law.   See Rule 121(b); Elec. Arts, Inc.

v. Commissioner, 118 T.C. 226, 238 (2002).   The moving party

bears the burden of showing that there is no genuine issue of

material fact, and factual inferences will be read in a manner

most favorable to the party opposing summary judgment.    Bond v.

Commissioner, 100 T.C. 32, 36 (1993); Dahlstrom v. Commissioner,

85 T.C. 812, 821 (1985).   A partial summary adjudication is
                                 - 9 -

appropriate if one or more but not all issues in the case are

susceptible of summary disposition.      See Rule 121(b); Turner

Broad. Sys., Inc. & Subs. v. Commissioner, 111 T.C. 315, 323-324

(1998).     Some aspects of the NOL issues are ripe for disposition

by means of partial summary judgment.     However, genuine issues of

material fact exist with respect to other aspects of the NOL

issues.

II.     The Controversy--Generally

      In Benton v. Commissioner, 122 T.C. at 365, 370-377, we held

that:    (1) The termination of petitioner’s chapter 11 bankruptcy

proceeding, for purposes of section 1398, occurred on August 31,

1997, upon confirmation of the plan and discharge of the debtor;

and (2) generally, petitioner may use NOLs from the Benton estate

with respect to his separate tax years beginning with the year

his bankruptcy proceeding commenced, to the extent allowed under

section 172 and the regulations.     Benton I did not decide certain

factual details pertaining to the amounts or sources of the

losses or to the mechanics of the application of the losses under

section 172.     Accordingly, Benton I did not fully resolve the

parties’ disputes concerning the existence and amounts of any

NOLs from the Benton estate to which petitioner may have

succeeded and which he may have had available for use in his

1995, 1996, and 1997 tax years.      See Schaefer v. Commissioner,

T.C. Memo. 1998-163, affd. without published opinion 188 F.3d 514
                               - 10 -

(9th Cir. 1999); Leavell v. Commissioner, T.C. Memo. 1996-117.

III.    The Net Operating Losses Available to Petitioner

       Petitioner, in his summary judgment motion in Benton I,

contended that he had succeeded to:     (1) Prebankruptcy NOLs in an

amount not less than $50 million and (2) NOLs generated by the

Benton estate in an amount not less than $100 million.

Petitioner now acknowledges that the alleged $50 million in

prebankruptcy NOLs is unallowable for his 1995, 1996, and 1997

tax years under paragraph 8 of the settlement agreement.    The

first sentence of paragraph 8 provides that petitioner would not

be allowed any net operating losses under section 172 that arose

in taxable periods before the bankruptcy petition date which

might be carried forward to any taxable period of the Benton

estate.

       Petitioner continues to contend, however, that any NOLs

attributable to the $84 million in suspended passive activity

losses are not prebankruptcy NOLs that would be covered under the

first sentence of paragraph 8 of the settlement agreement.

According to petitioner, nothing in the settlement agreement

prohibits NOLs generated by the Benton estate, to the extent not

used by the Benton estate and to the extent petitioner succeeds

to them, from being carried to, and used by him for, his 1995,

1996, and 1997 tax years.    He maintains that approximately $80

million in NOLs attributable to the $84 million in suspended
                               - 11 -

passive activity losses is available to be carried to his 1995,

1996, and 1997 tax years so as to offset entirely all taxable

income adjustments for those years made by respondent in the

notice of deficiency.   Petitioner also contends that respondent

failed to determine the Benton estate’s correct taxable income

for its tax years ended January 31, 1996, January 31, 1997, and

August 31, 1998.   In particular, petitioner contends that

respondent failed to analyze and properly compute the Benton

estate’s tax attributes to which petitioner would succeed,

including NOLs attributable to the suspended passive activity

losses, capital losses, and any other losses not used by that

estate.   Conversely, respondent contends that, to the extent any

of the $84 million of NOLs derived from suspended passive

activity losses is substantiated, they are prebankruptcy NOLs of

petitioner, which paragraph 8 of the settlement agreement

specifically limits to petitioner’s postconfirmation (1997 and

later) use (and are not available for petitioner’s 1995 and 1996

tax years).2   In that regard, respondent relies upon a “finding”

in Benton v. Commissioner, 122 T.C. at 357, that NOLs

attributable to the $84 million in suspended passive activity

losses “had arisen before the commencement of the bankruptcy”.




     2
       We note that irrespective of the operation of the tax and
bankruptcy laws, respondent’s position is inconsistent with the
settlement agreement.
                              - 12 -

     Finally, respondent asserts that petitioner bears the burden

of establishing the existence and amounts of NOLs available for

use for his 1995, 1996, and 1997 tax years and that genuine

issues of material fact remain concerning many of those matters.

Respondent does acknowledge, however, that the Appeals officer,

during consideration of the Benton estate’s January 31, 1996,

January 31, 1997, August 31, 1998, and August 31, 1999, tax

years, found that the Benton estate had more than $10 million in

NOLs available to carry over to its post-1999 tax years.    In that

regard, respondent concedes that, for purposes of applying this

Court’s Benton I Opinion, and without prejudice to respondent’s

appeal rights in this case, petitioner succeeded to and has

available for use in the tax years before the Court at least $10

million in NOLs.   Respondent further acknowledges that applying

the conceded NOLs to petitioner’s 1995, 1996, and 1997 tax years

results in:   (1) A reduction to zero of revised taxable income

determined in the notice of deficiency for petitioner’s 1995,

1996, and 1997 tax years; and (2) elimination of the addition to

tax under section 6651(a)(1) and the accuracy-related penalty

under section 6662 determined for petitioner’s 1997 tax year.

Respondent argues that even though the carryback of NOLs

eliminates the 1995 and 1996 income tax deficiencies, the NOLs do

not eliminate petitioner’s liability for the section 6662

accuracy-related penalty for those years.   See on this point
                              - 13 -

Blanton Coal Co. v. Commissioner, T.C. Memo. 1984-397, and cases

cited therein.3

     We agree with petitioner that any NOLs attributable to the

$84 million in suspended passive losses are not prebankruptcy

NOLs of petitioner.   An analysis of the statutes and the parties’

agreement in the bankruptcy proceeding reveals that the net

operating losses did not exist before the bankruptcy.   To the

extent that our statement in Benton I that the NOLs had “arisen

before the commencement of the bankruptcy”, Benton v.

Commissioner, 122 T.C. at 357, could be interrupted otherwise, it

is incorrect.4

     The $84 million in suspended passive losses became allowable

upon the Benton estate’s transfer of its interest in the passive

activities to the liquidating trust.   In addition, under

paragraph 6 of the parties’ bankruptcy settlement agreement, the

$84 million in suspended passive activity losses was a tax


     3
       As we observed in Blanton Coal Co. v. Commissioner, T.C.
Memo. 1984-397, in computing various additions to tax and/or
penalties, longstanding caselaw would permit the reduction of
additions and penalties by NOLs attributable to carryforward
deductions, but not by those attributable to carryback
deductions.
     4
       In Benton I we decided a legal question on the basis of
parties’ representations of the underlying facts in their motions
for summary judgment. The outcome of the legal question in
Benton I did not depend on factual findings made by the Court.
In the setting of a motion for summary judgment, the facts are
not “found”. The parties’ stated facts are interpreted by the
Court in a manner most favorable to the party opposing summary
judgment. See Bond v. Commissioner, 100 T.C. 32, 36 (1993).
                               - 14 -

attribute of petitioner that passed to the Benton estate at the

time of the bankruptcy petition.   See secs. 469(b), 1398(g).   By

statutory definition, a “passive activity deduction” does not

include a loss or deduction that is carried to the taxable year

under section 172(a).    See sec. 469(a) and (b); cf. sec. 1.469-

2T(d)(2)(ix), Temporary Income Tax Regs., 57 Fed. Reg. 20758 (May

15, 1992) (referring to and incorporating rules found in sec.

1.469-2(d)(2)(ix), Income Tax Regs.)

     In general, when a taxpayer disposes of an entire interest

in a passive activity to an unrelated person in a fully taxable

transaction, all passive losses from the activity, both suspended

and current, are deductible from the taxpayer’s income whether

passive or nonpassive.   The loss available upon that type of

disposition is no longer treated as passive to the extent of:

(1) Any loss from the activity for the tax year (including any

losses suspended in prior years), over (2) any net income or gain

for the tax year from all other passive activities (determined

after application of any losses suspended in prior years).    Sec.

469(g)(1)(A).   Hence only upon the Benton estate’s transfer of

its interest in a passive activity to the liquidating trustee–-a

transfer deemed a taxable disposition by reason of the

settlement--would any suspended passive loss from that activity,

pursuant to section 469(g)(1)(A), qualify as a generally

deductible nonpassive loss.    Id.; sec. 1.469-2T(d)(2)(v),
                               - 15 -

Temporary Income Tax Regs., 53 Fed. Reg. 5716 (Feb. 25, 1988).

Therefore, any NOLs generated by the Benton estate’s suspended

passive activity losses arose during the administration of the

estate in bankruptcy, when the passive activity assets were

transferred into the liquidation trust, and would not have been

prebankruptcy NOLs of petitioner.

     Respondent contends that paragraph 8 of the settlement

agreement prohibits petitioner from using NOLs attributable to

the $84 million in suspended passive losses.5     The prohibition of

that section concerns section 172 NOLs arising in any taxable

period on or before the bankruptcy petition date.     As explained

above, the section 172 NOLs attributable to the $84 million in

suspended passive losses did not arise before the bankruptcy

petition.   Therefore, any such NOLs, to the extent not used by

the Benton estate, became available to petitioner upon the

estate’s termination and may be used in petitioner’s 1995, 1996

and 1997 tax years.   We hold that petitioner may apply those

NOLs, to which he succeeded under section 1398(I), to his 1995,




     5
         The first sentence of par. 8 provided:

     Oren Benton shall not be allowed any net operating
     losses under section 172 arising in any taxable period
     on or before the [February 23, 1995, bankruptcy]
     Petition date which may be carried forward to any tax
     period of the Benton Estate.
                                   - 16 -

1996, and 1997 tax years in accord with the provisions of section

172.6       Benton v. Commissioner, 122 T.C. at 377.

        As previously indicated, respondent concedes that petitioner

succeeded to and has available for use in his 1995, 1996, and

1997 tax years at least $10 million in NOLs generated by the

Benton estate.       Respondent acknowledges that petitioner’s

application and use of that $10 million in NOLs would (1) reduce

to zero all income adjustments for petitioner’s 1995, 1996, and

1997 tax years determined by respondent in the notice of

deficiency and (2) eliminate the section 6651(a)(1) addition to

tax and section 6662 penalty determined for petitioner’s 1997

year.       Respondent, however, argues that petitioner may not carry

back the NOLs to eliminate any liability for the accuracy-related

penalties under section 6662 for 1995 and 1996.

        It is well established that in computing additions to tax

and/or penalties, an NOL carryforward deduction may result in the

reduction or elimination of additions and/or penalties.

Conversely, an NOL carryback deduction does not result in the

reduction or elimination of such additions and/or penalties.

See, e.g., Rictor v. Commissioner, 26 T.C. 913, 914-915 (1956)

(denying the use of an NOL carryback deduction to reduce an



        6
       As discussed more fully infra, a number of issues of
material fact remain in dispute between the parties concerning
the amount of NOLs generated by the Benton estate to which
petitioner succeeded.
                               - 17 -

addition to tax for failure to file and addition to tax for

substantial underestimation of estimated tax); Auerbach Shoe Co.

v. Commissioner, 21 T.C. 191, 196 (1953) (denying the use of an

NOL carryback deduction to reduce an addition to tax for fraud),

affd. 216 F.2d 693 (1st Cir. 1954); C.V.L. Corp. v. Commissioner,

17 T.C. 812, 816 (1951) (denying the use of an NOL carryback

deduction to reduce a delinquency penalty); Pusser v.

Commissioner, a Memorandum Opinion of this Court dated December

7, 1951 (denying the use of an NOL carryback deduction to reduce

a negligence penalty).    Accordingly, the $10 million conceded by

respondent as available to be carried back to petitioner’s 1995

and 1996 tax years will not result in the reduction or

elimination of petitioner’s section 6662 penalty.     See generally

discussion in Blanton Coal Co. v. Commissioner, T.C. Memo. 1984-

397.

       Petitioner asserts that the amount of NOLs generated by the

Benton estate to which he succeeded is far greater than the

$10 million respondent conceded.    The parties disagree about the

amount of NOLs available to petitioner from the Benton estate.

See Schaefer v. Commissioner, T.C. Memo. 1998-163; Leavell v.

Commissioner, T.C. Memo. 1996-117.      These matters involve a

“genuine issue of material fact” for which the use of summary

judgment is inappropriate.

       Upon a careful review of the record and analyzing factual

inferences in a manner most favorable to the party opposing
                             - 18 -

summary judgment, we conclude that genuine issues of material

fact exist with respect to the computation of the amount of NOLs

available for petitioner’s 1995, 1996, and 1997 tax years.   See

Dahlstrom v. Commissioner, 85 T.C. at 821.   Accordingly, summary

judgment is inappropriate with respect to the remaining questions

presented in petitioner’s summary judgment motion.


                                   An appropriate order

                              will be issued.
