## Facts

- In 1985, Richard Garcia and three others formed a partnership, Banana U.S.A.
- Banana U.S.A. generated an ordinary operating loss for 1985.
- Garcia reported his distributive share of that 1985 partnership loss on his individual federal income tax return.
- In 1986, Garcia filed a civil action against the other partners seeking rescission, damages, and dissolution of the partnership.
- The Commissioner disallowed Garcia’s claimed 1985 partnership loss, asserting that Garcia’s later lawsuit left the partnership’s 1985 taxable activities unresolved.
- Garcia petitioned the U.S. Tax Court in a deficiency proceeding challenging the disallowance.

## Issues

1. Whether a partner may deduct his distributive share of a partnership’s ordinary operating loss for a closed tax year when the partner later initiates civil litigation seeking rescission and dissolution of the partnership.
2. Whether a pending intra-partner dispute, by itself, permits the Commissioner to treat partnership items for a prior year as insufficiently fixed to be reported on the partner’s return.

## Decision

- The Tax Court decided the deficiency proceeding on the merits under Subchapter K principles governing partners’ reporting of distributive shares.
- The court evaluated the partnership’s status and operations for 1985 and considered whether later rescission/dissolution litigation affected the federal tax treatment of 1985 partnership items.
- The court rejected the view that the mere existence of subsequent civil litigation automatically renders the partnership’s prior-year taxable results indeterminate for federal income tax reporting purposes.

## Legal Principles

- Partnerships are generally pass-through entities; partners report their distributive shares of partnership income, gain, loss, deduction, and credit for the relevant tax year.
- Partnership items are determined on an annual, tax-year basis using the objective facts of the partnership’s operations and reporting for that year.
- A subsequent private dispute among partners does not, without a recognized tax-law mechanism, retroactively nullify or postpone the federal income tax consequences of completed partnership operations for a prior year.
- Claims for rescission or dissolution in civil court do not automatically control the timing of recognition of partnership items; any tax effect typically depends on whether tax law treats the later events as changing prior-year consequences or producing separate consequences in later years.

## Conclusion

The Tax Court treated the federal income tax consequences of Banana U.S.A.’s 1985 operations as governed by the partnership’s existence and activities in 1985, and it addressed whether later partner litigation could justify disallowing Garcia’s claimed 1985 distributive-share loss based solely on alleged unresolved partnership status.


Garcia v. Commissioner, 96 T.C. 792 (1991)