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02/28/92 DISTRICT COLUMBIA v. BRUCE J. TERRIS

February 28, 1992

DISTRICT OF COLUMBIA, APPELLANT
v.
BRUCE J. TERRIS, APPELLEE



Appeal from the Superior Court of the District of Columbia; (Hon. Annice M. Wagner, Trial Judge)

Before Ferren, Schwelb, and Farrell, Associate Judges.

The opinion of the court was delivered by: Farrell

FARRELL, Associate, Judge: The Department of Finance and Revenue (the Department) disallowed a deduction on appellee's 1984 tax return because appellee had moved out of the District of Columbia before the year-end accounting which determined his distributive share of his partnership's loss. The Superior Court ordered that appellee be permitted to deduct his share of the loss in an amount proportionate to the time he resided in the District during 1984. Concluding as we do that appellee's departure from the District of Columbia did not mark the end of an "accounting period" within the meaning of the controlling statute, and hence the Department correctly disallowed the deduction, we must reverse the judgment of the Superior Court.

I.

In August 1984, appellee Bruce J. Terris moved permanently to Israel and ceased residing in the District of Columbia. *fn1 Despite this change of domicile, he continued to practice law in the District, and throughout 1984 remained a partner in a law firm located here. Appellee's firm sustained a loss in 1984, and in accordance with the partnership agreement, his distributive share of the loss, $111,384, was determined at the end of the calendar year.

Appellee originally deducted this entire amount on his 1984 District of Columbia individual income tax return. After the Department of Finance and Revenue disallowed the deduction and assessed a deficiency, however, he apportioned the loss and claimed only $69,615 as a deduction. The latter amount represented 15/24 of appellee's loss and reflected the fact that in 1984 he resided in the District from January 1 through August 15, approximately 15/24 of the year.

The Department maintained that appellee could not deduct any part of his distributive share because the accounting period for which the partnership's loss was calculated did not close until December 31, 1984 -- four and one-half months after appellee quit the District. Since no part of the loss had been ascertained or distributable during the time appellee's income was subject to District taxation, the Department refused to recognize the apportioned amount as a valid deduction.

Appellee paid the assessment plus interest, and timely petitioned the Superior Court for relief. D.C. Code § 47-1815.1 (1990). Since the facts were undisputed, the court decided the matter on motion for summary judgment, ruling that appellee was entitled to deduct from his gross income the apportioned amount of loss even though the loss was not determined until after he ceased to be a District resident.

II.

Excluding personal exemptions and credits for dependents, the District of Columbia taxes "the entire net income of every resident." D.C. Code § 47-1806.1; see also id. § 47-1810.1 (a)(1). The District does not directly tax the income of a partnership such as the law firm appellee belonged to in 1984. § 47-1808.1. Such partnerships must file returns, however, § 47-1805.2 (7), and resident partners are liable for income tax in their individual capacities. § 47-1808.6. Thus, in computing net income, a resident partner must include "his [or her] distributive share, whether distributed or not, of the net income of the partnership for the taxable year." Id. At the same time, "income received or, in the case of a taxpayer reporting on an accrual basis, income accrued when the taxpayer was not a resident of the District," is excluded from gross income, 47-1803.2 (a)(2)(F), and thus not subject to District taxation. §§ 47-1803.1, -1806.1; District of Columbia v. Davis, 125 App. D.C. 311, 313, 371 F.2d 964, 966 (District "income tax law . . . does not tax income received by a taxpayer prior to his becoming a 'resident' of the District"), cert. denied, 386 U.S. 1034 (1967).

A loss incurred by a resident partner in a given taxable year may properly be deducted from the partner's gross income for that year. §§ 47-1803.3, -1804.3, -1808.6. The District contends, however, that appellee may not deduct even a proportional amount of the loss he claimed because he did not sustain any part of the loss during his taxable year (defined to include a fractional part of a year), viz., within the period when he resided here from January 1 through August 15, 1984. *fn2 The District relies upon D.C. Code § 47-1808.6, which governs the taxation of income derived from a partnership. In pertinent part, that section provides:

There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year; or if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the taxable year upon the basis of which the partner's net income is computed.

[Emphasis added.]

According to the District, if during 1984 appellee had neither a statutory nor a contractual right to an accounting on or before August 15, then his right to a distributive share of the loss was unmatured as of that date because no "accounting period" of the partnership expired within his period of residency. Thus, his later ...


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