Unpublished Disposition, 908 F.2d 977 (9th Cir. 1990)

MEMORANDUM^* 

Evan W. Lumsden ("Lumsden") appeals the Tax Court's judgment that he had a tax deficiency of $8,604 for 1979. The Tax Court ruled that Lumsden had improperly claimed a deduction for losses suffered by a limited partnership of which he was a limited partner. Lumsden argues that he was entitled to the full deduction because he was at risk economically for the entire amount of the deduction.

We affirm.

BACKGROUND FACTS

Lumsden was a general partner in an Oregon general partnership called Meade Street Investors ("Meade"). Lumsden initially contributed $10,000 to Meade and received a 18.52% interest in the partnership. Meade was formed so that the partners could invest in motion pictures.

In 1979, Meade entered into an agreement with a California limited partnership named ACG Motion Picture Investment Fund II ("ACG II"). Meade purchased a 1.08% interest in ACG II. Meade paid $162,000 for its share in ACG II. Meade contributed $54,000 in cash and issued a $108,000 recourse promissory note. The note represented deferred capital contributions to be paid in five annual installments of $21,600. Lumsden's share of Meade's purchase agreement was $10,000 of the cash payment and $20,000 of the promissory note. Lumsden's effective share of ACG II was a .2% interest.

In 1979, ACG II agreed to purchase a film from American Cinema Productions, Inc. In order to finance its film purchase, ACG II entered into a loan agreement for $7,800,000 with First National Bank of Chicago. ACG II secured the loan with the various promissory notes that it had received from the ACG II limited partners. Included in those notes was the promissory note from Meade.

ACG II reported a net operating loss of $14,428,439 in 1979 and a net operating loss of $317,288 in 1980. Lumsden claimed a deduction of $28,695 in 1979 for his share of ACG II's loss. Lumsden also claimed a deduction of $632 in 1980 for his share of ACG II's 1980 loss. The Commissioner of Internal Revenue disallowed all but $10,000 of Lumsden's 1979 deduction and all of Lumsden's 1980 deduction. The Commissioner based his decision on the finding that Lumsden was not at risk for more than $10,000 and that risk occurred in 1979. The $10,000 represented Lumsden's cash contribution to ACG II when Meade bought its limited partnership interest. Therefore, Lumsden was limited to a $10,000 deduction in 1979. The Commissioner later adjusted his position and permitted Lumsden to also deduct his pro rata share of ACG II's recourse debt in 1979 and 1980. The Tax Court concurred with the Commissioner.

JURISDICTION AND STANDARDS OF REVIEW

The Tax Court had jurisdiction over this action pursuant to 26 U.S.C. § 7442. We have jurisdiction pursuant to 26 U.S.C. § 7482.

We review de novo the Tax Court's decision on an issue of law. Melvin v. Commissioner, 894 F.2d 1072, 1074 (9th Cir. 1990). Similarly, we review de novo its ruling on an issue of state law. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984).

DISCUSSION

The Tax Court correctly held that a state law right of contribution constitutes a loss-limiting arrangement under 26 U.S.C. § 465(b) (4). Under section 465, a person may deduct losses for an activity only if the person was actually at risk for those losses. 26 U.S.C. § 465(a). The taxpayer is not at risk for any amount of his contribution which is protected by some sort of loss-limiting arrangement. 26 U.S.C. § 465(b) (4).

We have previously held that a loss-limiting arrangement includes a state law right of contribution. Melvin, 894 F.2d at 1075-76. In fact, Melvin involved a limited partnership organized by the person who set up ACG II. In Melvin, we carefully considered and rejected the arguments raised by Lumsden in this case. Therefore, the Tax Court properly concluded that a state law right of contribution constituted a loss-limiting arrangement under section 465(b) (4).

The Tax Court also properly concluded that California provides limited partners with a right of contribution. California has adopted both the Uniform Partnership Act and the Uniform Limited Partnership Act. See Cal.Corp.Code Sec. 15001 et seq. ("UPA") and Sec. 15501 et seq. ("ULPA") (West 1977). Section 15040 provides that "partners shall contribute ... the amount necessary to satisfy the liabilities [of the partnership] ... in the relative proportions in which they share the profits...." Cal.Corp.Code Sec. 15040(d) (West 1977). Section 15006 provides that UPA will apply to limited partnerships as long as UPA is consistent with ULPA. Cal.Corp.Code Sec. 15006(2) (West 1977). Similarly, ULPA provides that if a court is faced with an issue not addressed by the Act, the court should apply "the rules of law and equity." Cal.Corp.Code Sec. 15529 (West 1977).¹ 

When California courts have been faced with a gap in ULPA, they have not hesitated to consider whether UPA provides an answer. See Bedolla v. Logan & Frazer, 52 Cal. App. 3d 118, 127-28, 125 Cal. Rptr. 59 (1975). As the Bedolla court stated, when ULPA is silent on an issue "recourse must be had to the general rules of law and equity ..., and especially to the pertinent provisions of the Uniform Partnership Act...." Id. (citations omitted).

The Tax Court correctly looked to UPA to determine whether partners have a right of contribution. Since UPA clearly provides such a right, the Tax Court properly concluded that California would also grant that right to limited partners. Therefore, Lumsden would have a right of contribution from the other partners in ACG II. Because Lumsden had a right of contribution, he was only at risk for his share of Meade's cash downpayment to ACG II plus his share of ACG II's outstanding recourse liabilities.

AFFIRMED.