WILLIAM E. CAMPBELL, ET UX., PETITIONERS V. UNITED STATES OF
   AMERICA

   No. 87-341

   In the Supreme Court of the United States

   October Term, 1987

   On Petition for a Writ of Certiorari to the United States Court of
Appeals for the Fifth Circuit

   Memorandum for the United States in Opposition

   Petitioner contends that he is entitled to include in his net
operating loss carryback his distributive share of a partnership's
losses, even if the partnership itself was not engaged in a trade or
business.  /1/

   1. Petitioner was in the real estate business.  A corporation that
he owned brokered real estate, and he also acted as a broker
individually.  He was the sole owner of several parcels of real
estate.  Pet. App. A1.

   In addition, petitioner owned interests in a number of real estate
partnerships, each of which, in turn, owned a single parcel of real
property.  In 1976 and 1977, the partnerships generated losses that
were passed through to all the partners.  Petitioner reported his
share of those losses on his income tax returns for 1976 and 1977.
Invoking Section 172 of the Internal Revenue Code, /2/ petitioner
carried back the unused portion of the losses and accordingly received
refunds of taxes paid by him for 1973 and 1974.  Pet. App. A1, C3.
/3/

   The Commissioner asserted a deficiency for 1976, and determined a
small overpayment for 1977, and disallowed the inclusion of the losses
in the net operating loss carryback.  The Commissioner's action was
based upon his conclusion that the partnerships were not engaged in a
trade or business and hence the losses were not incurred in a trade or
business as required by Section 172(d)(4) of the Code.  Petitioner
paid the deficiency for 1976 and sued for a refund of that amount and
of the overpayment for 1977.  The government counterclaimed for the
amounts previously refunded as a result of petitioner's claimed loss
carrybacks to 1973 and 1974.

   The district court held that petitioner's distributive shares of
losses from certain partnerships were eligible for carryback because
he had purchased interests in those partnerships for business reasons,
namely, as an inducement to prospective partners.  The court held that
his shares of losses from the remaining partnerships were ineligible
for carryback because he had purchased those partnership interests as
an investment;  investment losses are not treated as losses
attributable to a trade or business (see, e.g., Higgins v.
Commissioner, 312 U.S. 212 (1941);  Moller v. United States, 721 F.2d
810, 813 (Fed. Cir. 1983), cert. denied, 467 U.S. 1251 (1984)).  Pet.
App. A1-A7.

   The court of appeals affirmed in part and reversed in part (Pet.
App. C1-C6).  The court concluded that none of the partnership losses
were attributable to a trade of business and therefore that none were
eligible for carryback treatment by partners.  The court rejected
petitioner's contention that the losses must be regarded as business
losses simply because petitioner was in the real estate business.
Rather, the court held that the nature of a distributive share item is
determined at the partnership level, and that nature is then reflected
on each partner's return.  Thus, if a partnership is not engaged in a
trade or business, a partner's share of the partnership's losses
cannot be treated as business losses.  Id. at C4-C5.  The court then
held that none of the partnerships in question was in a trade or
business, noting that each of the partnerships was formed, according
to its governing articles, "for investment purposes only." Each
partnership held a single parcel of land located in an area of
potential urban development, and the annual expenses on the properties
in 1976 and 1977 were, on average, 20 times the rental income.
Accordingly, the court concluded that the partnerships were
"investment vehicles" and were not engaged in a trade or business.
Id. at C5.

   2. Petitioner contends that the character of his share of the
partnerships' losses is not governed by whether or not the
partnerships were engaged in a "trade or business." This contention
was correctly rejected by the court of appeals, and its decision does
not conflict with any decision of this Court or of another court of
appeals.  Accordingly, there is no reason for review by this Court.

   The character of items constituting a partner's distributive share
is governed by Section 702(b) of the Code, which provides:

         Character of Items Constituting Distributive Share.  -- The
      character of any item of income, gain, loss, deduction, or
      credit included in a partner's distributive share * * * shall be
      determined as if such item were realized directly from the
      source from which realized by the partnership, or incurred in
      the same manner as incurred by the partnership.

   This language plainly suggests that the partner, in characterizing
his distributive share, must look to the partnership entity in order
to ascertain the manner in which the item was "incurred by the
partnership."

   The courts have uniformly recognized this principle.  For example,
the question whether partnership property is or is not a capital asset
as defined in Section 1221 of the Code and, therefore, whether a
distributive share of gain from the disposition of the asset must be
reported by an individual partner as a capital gain or as ordinary
income is resolved at the partnership level (and thus resolved
uniformly for all of the partners), not at the level of the individual
partner.  See Estate of Freeland v. Commissioner, 393 F.2d 573, 584
(9th Cir.), cert. denied, 393 U.S. 845 (1968);  Grove v. Commissioner,
54 T.C. 799, 804 (1970).  And the courts have uniformly held that the
existence of a profit motive under Section 183 of the Code likewise
must be determined at the partnership level.  See Polakof v.
Commissioner, 820 F.2d 321, 323 (9th Cir. 1987), petition for cert.
pending, No. 87-529;  Tallal v. Commissioner, 778 F.2d 275 (5th Cir.
1985);  Brannen v. Commissioner, 722 F.2d 695, 703-704 (11th Cir.
1984).  Similarly, it is well established that, for purposes of
determining whether a partner may take a business expense deduction
(I.R.C. Section 162(a)) for his share of partnership expenses, the
business of the partnership, not of the partner, determines whether
the expense was incurred in carrying on a trade or business.  Madison
Gas & Electric Co. v. Commissioner, 633 F.2d 512, 517 (7th Cir. 1980);
 Barham v. United States, 301 F. Supp. 43, 45 (M.D. Ga. 1969), aff'd,
429 F.2d 40 (5th Cir. 1970);  Goodwin v. Commissioner, 75 T.C. 424,
435-437 (1980), aff'd, 691 F.2d 490 (3d Cir. 1982) (Table).  /4/

   Petitioner apparently acknowledges the correctness of all of these
decisions (see Pet. 7), regarding them as "obvious tenets of
partnership tax law" (Pet. 5).  He claims, however, that Section
172(d) is different, and therefore he maintains that a partner may
carry back his share of partnership losses even if the partnership is
not engaged in a trade or business.  Petitioner offers no authority to
support this proposition, and he does not explain how the statutory
language can yield this result while still requiring all other
characteristics of various tax items to be determined at the
partnership level.

   In short, petitioner's argument here is no more than a plea to
allow him certain tax advantages that Congress has determined are not
available in light of the manner in which he has chosen to structure
these particular real estate transactions.  This Court has repeatedly
noted that, "while a taxpayer is free to organize his affairs as he
chooses, nevertheless, once having done so, he must accept the tax
consequences of his choice" (Commissioner v. National Alfalfa
Dehydrating & Milling Co., 417 U.S. 134, 149 (1974)).  Indeed,
acceptance of petitioner's submission could well lead to a windfall
for him when he avails himself of the benefits of the limited
partnership form of ownership.  For example, if one of the parcels of
property involved here had been sold, petitioner could have reported
his share of the gain on that sale as a capital gain, because the
partnership was holding the parcel for investment purposes, not in
connection with a trade or business, which would have excepted it from
the definition of "capital asset" (I.R.C. Section 1221(2)).  Yet
petitioner insists that he is entitled to carry back his share of the
partnership's losses as business losses, on the theory that Section
172(d) alone -- and incongruously -- requires examination of the
"trade or business" question at the partner level.  The court of
appeals correctly rejected this contention.

   3. Petitioner's contention (Pet. 8-10) that the court of appeals
erred in determining that the partnerships were not engaged in a trade
or business is similarly without merit.  The record showed that each
partnership held a single parcel of land, and each partnership
agreement stated that the entity was formed "for investment purposes
only." Moreover, the rental for the properties averaged only 1/20th of
the annual expenses in 1976 and 1977.  Thus, the record plainly showed
that the partnerships were not engaged in a rental business designed
to make a profit;  rather, the properties were simply being held as
investments and therefore the partnerships could not generate any
business losses.  Petitioner points to nothing in the record that
casts any doubt on this conclusion.  In these circumstances, the court
of appeals correctly determined that it need not remand the case to
the district court, since "the record permits only one resolution of
the factual issue." Pullman-Standard v. Swint, 456 U.S. 273, 292
(1982).

   It is therefore respectfully submitted that the petition for a writ
of certiorari should be denied.

   CHARLES FRIED

      Solicitor General

   NOVEMBER 1987

   /1/ While Gwendolyn E. Campbell is a party hereto by virtue of
having joined her husband in the filing of a joint return, William E.
Campbell was the principal actor in the transactions at issue.
Accordingly, for convenience, we will use the term, "petitioner,"
referring to William E. Campbell.

   /2/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code (26 U.S.C.), as amended (the Code or I.R.C.).

   /3/ Section 172 of the Code allows unused net operating loss
deductions to be carried back for three years and, if still unused,
carried forward for five years.  However, in the case of a taxpayer
other than a corporation, only business losses may be used to offset
business income in computing a net operating loss for a given year and
any corollary carryback or carryover to other taxable years.  I.R.C.
Section 172(d)(4).

   /4/ The general concept that income is ascertained and reported at
the partnership level, and retains in the hands of the partners the
character so determined, was also recognized by this Court in United
States v. Basye, 410 U.S. 441 (1973).  The Court there held that a
partnership must report as current income payments made into a
retirement trust, since the partnership's right to the payments was
noncontingent, even though the right of the individual partners to
receive payments from the trust was not vested.  The partners were
therefore required to include in income their distributive share of
those payments, even though, as individuals, they had no right
currently to receive any part of them.  The Court explained that, for
this purpose, "the partnership is regarded as an independently
recognizable entity apart from the aggregate of its partners" (id. at
448).