Tax News

CCH (cch.taxgroup.com) reports:

  The phrase "items of ordinary income" contained in an agreement entered into between a partnership and a venture capital firm did not include short-term capital gains. The interpretation of the phrase was based on the definition of "ordinary income" in the Internal Revenue Code (IRC), which unambiguously does not include capital gains. Therefore, the agreement, which provided a special allocation of ordinary income to the firm, did not provide an allocation of short-term capital gains.

  The agreement used the term "items of ordinary income" without actually defining that term and there was no indication that the parties intended to distinguish the definition of ordinary income from that in the IRC. The partnership's claim that the term "ordinary income" included all income taxed at ordinary income tax rates was unreasonable. In addition, the terms "ordinary income" and "capital gains" are defined in Black's Law Dictionary based on the source of the income rather than the tax rate, which was consistent with Code Sec. 702.

  Further, a settlement agreement entered between the partnership and the venture capital firm in a state court lawsuit did not bar the firm from joining the partnership-level proceeding seeking readjustment of certain partnership items as a participating partner under Code Sec. 6226(c)(2). The mutual release in the settlement agreement specified that the firm released its rights and claims against the partners; the parties did not intend the release to also include claims against the United States.

Imprimis Investors LLC, FedCl, 2008-2 USTC ¶50,489

Other References:

 
Code Sec. 61

  CCH Reference - 2008FED ¶5504.04

 
Code Sec. 702

  CCH Reference - 2008FED ¶25,083.2683

 
Code Sec. 1222

  CCH Reference - 2008FED ¶30,442.40

 
Code Sec. 6226

  CCH Reference - 2008FED ¶37,709.70

  Tax Research Consultant

  CCH Reference - TRC PART: 15,056.05
CCH Reference -
TRC PART: 60,554