Robert B. And Alma B. Weiss v. Commissioner of Internal Revenue
1992 U.S. App. LEXIS 4725, 956 F.2d 242, 69 A.F.T.R.2d (RIA) 1031 (1992)
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Rule of Law:
A partner who personally guarantees a partnership debt is not relieved of that liability for tax purposes upon expulsion from the partnership, unless there is an express or inferred agreement with the creditor releasing the guarantee. Under Florida law, the dissolution of a partnership does not, by itself, discharge an existing partner's liability.
Facts:
- In 1978, Robert Weiss and the Hillman Group formed the Hawaiian Village Partnership to purchase and operate a motel, with Weiss receiving a 50% interest and a management contract.
- The partnership agreement stipulated that Weiss would forfeit his partnership interest if his management contract was terminated or if he failed to advance capital when requested.
- In early 1979, the Partnership secured a $1,000,000 loan, of which $300,000 was a participation from Flagship Bank.
- As a condition for its participation, Flagship Bank required Weiss to personally guarantee its $300,000 portion of the loan.
- By summer 1979, the motel was in financial disarray, leading the Hillman Group to terminate Weiss's management contract on October 4, 1979.
- On October 5, 1979, the Hillman Group made a capital call to all partners, requesting a $400,000 infusion, of which Weiss's share was $200,000.
- Weiss failed to remit his $200,000 portion of the capital call.
- On November 19, 1979, the Hillman Group notified Weiss that, pursuant to the partnership agreement, his partnership interest had been forfeited as of November 15, 1979.
Procedural Posture:
- The Internal Revenue Service (IRS) issued a Notice of Deficiency to Robert and Alma Weiss for their 1979 income taxes, asserting they realized a capital gain upon being relieved of partnership liabilities.
- Weiss filed a petition in the U.S. Tax Court for a redetermination of the deficiency.
- The Tax Court sustained the deficiency, ruling in favor of the IRS.
- Weiss, as the appellant, appealed the Tax Court's decision to the U.S. Court of Appeals for the Eleventh Circuit, with the Commissioner of Internal Revenue as the appellee.
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Issue:
Does a partner's expulsion from a partnership, by itself, relieve that partner of his personal guarantee on a partnership loan for the purpose of determining taxable gain in that year?
Opinions:
Majority - Edmondson, J.
No. A partner's expulsion from a partnership does not, by itself, relieve that partner of a personal guarantee on partnership debt. Weiss remained liable on his $300,000 personal guarantee to Flagship Bank because there was no evidence that the guarantee was discharged during the 1979 tax year. Citing Florida Statute § 620.735(1), the court noted that the dissolution of a partnership does not automatically discharge a partner's existing liability. A discharge under § 620.735(2) requires an agreement between the departing partner, the creditor, and the continuing partners. Here, there was no express agreement releasing Weiss, and no course of dealing from which such an agreement could be inferred. Flagship's extension of new credit to the remaining partners was not inconsistent with holding Weiss to his pre-existing guarantee. Therefore, because Weiss was not relieved of this liability, he did not realize a taxable gain from its discharge in 1979.
Analysis:
This decision clarifies the intersection of partnership and tax law regarding the concept of 'relief from liability' under 26 U.S.C. § 752(b). It establishes that for tax purposes, relief from liability requires an actual legal discharge, not merely a partner's expulsion from the business. The ruling emphasizes that a personal guarantee creates a distinct and continuing liability that survives partnership dissolution unless the creditor affirmatively agrees to its release. This precedent sets a high bar for taxpayers claiming relief from guaranteed debts, requiring them to prove a clear and affirmative release by the creditor rather than relying on changes in partnership status.
