Transcript MILTON TOMACH AND ELAINE TOMACH V. COMMISSIONER OF

MILTON TOMACH AND
ELAINE TOMACH V.
COMMISSIONER OF
INTERNAL REVENUE
VICTORIA GLOVER
TAX 8020
JULY 9, 2007
CITATION
 Tomach v. Commissioner (1991)
 T.C. Memo 1991-538; 1991 Tax Ct.
Memo LEXIS 592, *;
62 T.C.M. (CCH) 1102; T.C.M. (RIA)
91538
 Petitioners: Milton and Elaine Tomach
 Respondents: Commissioner of Internal
Revenue
CASE HISTORY AND JUDGE
 Judge Halpern
 Florida resident in Boca Raton; original
court case in the Supreme Court of the
State of New York, County of Nassau
 Current case: United States Tax Court
FACTS
 Milton Tomach was a senior partner in a law partnership,
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Hayt, Hayt, Tomach & Landau. Landua and Tomach become
estranged and Landua dissolves the firm, without the
consent of Tomach. The continuing partners announced
there would be a new firm without Tomach. There was no
written agreement in partnership.
Legal action followed dissolution
A court appointed referee takes account for the division of
assets. He valued Tomach share of 23.5% to be worth
$2,681,350 plus damages of $150,000. Landau and firm
come to agreement to pay Landau a sum of $1.7 million in
payment for his share of unrealizable receivables plus a
lump-sum of $155,000 for his interest in fixed assets and
goodwill. Landau and new firm are to guarantee payment of
sums, regardless of income received from partnership.
$1.7 million is guaranteed payment under Section 736 (a)
(2)
$155,000 is payment under 736 (b)
FACTS
 In 1983 and 1984, Landau firm provided
petitioner with K-1, showing the
guaranteed payment to Tolmach.
 Tolmach reported payments as result of
a sale of partnership interest in Tolmach
firm. He treated the payments as giving
rise to capital gains and claimed capital
gains deductions.
 IRS disallowed deductions and case
pursued.
ISSUE
 The principal issue concerns the nature of the payments
of $ 135,417 and $ 170,833 received by petitioner
pursuant to the Agreement in 1983 and 1984 (the
payments).
 Sale v. Liquidation of Partnership
 Petitioner claim: Because the payments were received on
account of the sale of an interest in a partnership,
petitioners argue, section 741 governs the taxation of
such payments. Under Section 741, gain recognized on
the sale of an interest in a partnership generally is
considered gain from the sale or exchange of a capital
asset.
 Respondent claim: payments received were in liquidation
of partner’s interest; thus are guaranteed payments,
which give rise to ordinary income and cannot be claimed
for deductions.
HOLDING
 Held, the payments to petitioner were payments made in
liquidation of his interest in the dissolved partnership
rather than on a sale of that interest. The consequences
to petitioners of those payments are determined under
sec. 736, I.R.C. 1954, rather than sec. 741, I.R.C. 1954.
Held further, the [*2] payments at issue were guaranteed
payments and not payments attributable under the
partnership agreement to petitioner's interest in the
goodwill of the partnership. The payments are governed
by sec. 736(a)(2), I.R.C. 1954, rather than sec.
736(b)(2)(B), I.R.C. 1954
REASONING
 Transaction between partnership not
continuing partners
 Petitioner misread 736 (b)
 This case is appeal able to 11th Circuit
Court of Appeals
Reasoning
 Petitioners have not demonstrated to us that, given the
permitted flexibility to bargain over tax consequences and
the underlying nature of petitioners' complaint (that
petitioner did not get enough money), a court in an action
between the parties would reform the Agreement by
reattribution to goodwill payments previously attributed as
guaranteed payments. Thus, we will not disregard the
allocation of payments found in the Agreement. The
payments to petitioner designated in the Agreement as in
payment for his share of unrealized receivables must be
treated under section 736(a)(2) [*32] as guaranteed
payments made in liquidation of the interest of a retiring
partner.