## Facts

- Stanley C. Orrisch and Gerta E. Orrisch filed joint federal income tax returns for 1966 and 1967 and were partners with Domonick J. Crisafi and Elaine J. Crisafi in a partnership owning two apartment buildings.
- The partnership, formed in 1963, acquired apartment houses in San Francisco and Burlingame, financed principally by secured loans, with unequal initial cash contributions and later additional contributions.
- The partners’ initial oral agreement provided that profits, losses, and sale proceeds would be shared equally.
- From 1963 to 1965, the partnership reported losses largely attributable to accelerated depreciation, and those losses were allocated 50–50 between the two couples.
- The Orrisches had taxable income from other sources and could use depreciation-driven partnership losses; the Crisafis had losses from other investments and could not effectively use their partnership losses.
- In 1966, the partners amended their arrangement to allocate all depreciation deductions on the buildings to the Orrisches, while continuing to share operating gains and losses equally.
- The amendment included a “charge-back” concept: if the properties were later sold at a gain, gain attributable to the specially allocated depreciation would be allocated to (and taxed to) the Orrisches.
- For 1966 and 1967, the partnership allocated substantial depreciation solely to the Orrisches, who claimed the resulting losses; this pushed the Orrisches’ capital account significantly negative.
- The Commissioner determined deficiencies for 1966 and 1967 after disregarding the special depreciation allocation and recomputing the Orrisches’ partnership items on a 50–50 basis.

## Issues

1. Whether the 1966 amendment allocating all partnership depreciation deductions to the Orrisches, with a future gain “charge-back,” was made for the principal purpose of tax avoidance under I.R.C. § 704(b).
2. If so, whether the Commissioner could disregard the special allocation and compute the Orrisches’ distributive share using only 50% of allowable partnership depreciation.

## Decision

- The Tax Court held that the special allocation of depreciation was made for the principal purpose of avoiding tax within the meaning of I.R.C. § 704(b).
- The court sustained the Commissioner’s disregard of the special allocation and the recomputation of partnership losses using a 50–50 depreciation split for 1966 and 1967.
- Decision was entered for the Commissioner.

## Legal Principles

- Under I.R.C. § 704(b), partners may agree to allocate partnership items, but the Commissioner may disregard an allocation made with the principal purpose of tax avoidance or evasion.
- An allocation that does not reflect a meaningful change in the partners’ economic arrangement, and instead shifts deductions to the partner best positioned to use them, supports an inference of a tax-avoidance principal purpose.
- A contractual “charge-back” of future gain tied to currently allocated depreciation does not, by itself, negate a finding of tax avoidance where the arrangement chiefly accelerates current deductions while leaving future tax effects uncertain and not matched by economic changes.

## Conclusion

The Tax Court upheld the IRS’s reallocation of partnership depreciation because the special depreciation allocation, despite a gain charge-back provision, primarily functioned to transfer current tax benefits to the partners with taxable income without a corresponding change in their economic relationship, triggering § 704(b).


Orrisch v. Commissioner, 55 T.C. 395 (1970)