MILTON TOMACH AND ELAINE TOMACH V. COMMISSIONER OF INTERNAL REVENUE

1. MILTON TOMACH AND ELAINE TOMACH V. COMMISSIONER OF INTERNAL REVENUE VICTORIA GLOVER TAX 8020 JULY 9, 2007

2. 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

3. 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

4. FACTS • Milton Tomach was a senior partner in a law partnership, 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)

5. 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.

6. 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.

7. 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

8. REASONING • Transaction between partnership not continuing partners • Petitioner misread 736 (b) • This case is appeal able to 11th Circuit Court of Appeals

9. 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.