## Facts

- Real-estate investors (including Benjamin and Myrna Raphan) participated in a partnership, Buchanan Apartment Associates (Associates), formed to develop the James Buchanan House apartment project in Virginia.
- The Pomponio brothers contributed land (subject to an approximately $2 million mortgage) and a construction contract; the Tenzer Group contributed $2 million cash; the venture was structured as a roughly 50–50 arrangement.
- For financing, a Pomponio-controlled corporation, James Buchanan Corporation (JBC), held record title “for loan purposes,” while Associates was intended to bear the project’s economic benefits and burdens.
- A $9.4 million construction loan was obtained from a bank; JBC was the nominal borrower, but the partners understood the project’s economics belonged to Associates.
- In 1972, the Tenzer Group discovered misappropriation and other breaches by the Pomponios, removed them from the venture, and completed the project after title was transferred to the partnership.
- Partners claimed flow-through loss deductions related to the project on their 1970 and 1971 federal income tax returns.
- The IRS disallowed the deductions, asserting (i) losses belonged to JBC because it held title and was borrower, and (ii) in any event, partners’ loss deductions were limited by their bases because the construction loan should not be included (or fully included) in partners’ bases under I.R.C. §§ 704(d) and 752.
- Taxpayers filed refund suits in the United States Claims Court.

## Issues

1. Whether JBC functioned as an agent or nominee for Associates such that the partnership (and its partners) could claim project depreciation and losses for 1970–1971.
2. How the construction loan should be characterized and allocated under then-applicable I.R.C. § 752 regulations, including whether any partner had personal liability and whether partners (including limited partners) could include the loan in basis to support loss deductions.

## Decision

- The Claims Court held JBC acted as an agent for Associates; therefore, Associates was treated as the owner for federal income tax purposes, and the partners were entitled to the tax benefit of project losses for 1970 and 1971.
- The Claims Court held no general partner had personal liability on the construction loan and treated the loan as nonrecourse for § 752 purposes.
- Based on that nonrecourse characterization, the court held each partner, including limited partners such as the Raphans, could include the construction-loan debt in the basis of the partner’s partnership interest.

## Legal Principles

- Tax ownership may follow the parties’ substantive economic arrangement rather than record title when a title-holding corporation functions as an agent/nominee for a partnership.
- Under the then-existing approach applied by the Claims Court to § 752 and its regulations, a partnership liability viewed as nonrecourse could be allocated among partners (including limited partners) and included in their bases in accordance with partnership sharing arrangements, supporting flow-through loss deductions.
- A partner’s deductible distributive share of partnership losses is limited to the partner’s adjusted basis in the partnership interest (I.R.C. § 704(d)), which may be increased by the partner’s share of partnership liabilities as determined under § 752.

## Conclusion

The Claims Court treated the corporation holding record title as the partnership’s agent, allowed the partnership’s 1970–1971 losses to flow through to the partners, and—treating the construction loan as nonrecourse with no partner personally liable—permitted partners (including limited partners) to include their shares of that debt in basis for loss-deduction purposes.


Raphan v. United States, 3 Cl. Ct. 457 (1983)