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Keywords

trustpartnership
liabilitypartnership

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Quick’s Trust v. Commissioner of Internal Revenue, 54 T.C. 1336

Facts

George Edward Quick was an equal partner in a partnership providing architectural and engineering services. At the time of his death on January 23, 1960, the partnership's assets primarily consisted of accounts receivable with a zero basis. Following his death, Quick's partnership interest was transferred to his estate and later to a trust. The partnership had ceased business activities except for collecting outstanding receivables, which were substantial at the time of Quick's death.

When decedent died, his partnership interest went first to his estate and was later transferred to petitioner. The principal business activity of the partnership had been that of providing architectural and engineering services.

Issue

1) Whether the basis in the property of a partnership was properly increased to reflect the full fair market value of the partnership interest at the date of death; and 2) whether the assessment of the deficiency for the taxable year 1961 was barred under the provisions of section 6501.

There are two issues: (1) Whether the basis in the property of a partnership was properly increased, pursuant to sections 743 and 754, to reflect the full fair market value of the partnership interest of George Edward Quick at the date of death; and (2) whether assessment of the deficiency for the taxable year 1961 was barred under the provisions of section 6501 at the time the statutory notice for that year was issued.

Rule

The court applied sections 691(a)(1) and (3) of the Internal Revenue Code, which state that the right to receive income in respect of a decedent is taxable to the estate or heirs when collected, and section 1014(c), which prohibits including the fair market value of such income in determining the basis of the partnership interest.

Consequently, under sec. 1014(c), I.R.C. 1954, the date of death value of the decedent's partnership interest cannot include the fair market value of the decedent's share of the accounts receivable, and the election by the partnership, under secs. 745 and 743, I.R.C. 1954, cannot cause any increase in its zero basis in those receivables.

Analysis

The court found that the right to collect accounts receivable was part of Quick's partnership interest and constituted income in respect of a decedent. It determined that the estate's income tax return, along with the partnership return, adequately disclosed the gross income, thus barring the assessment of deficiencies for the year 1961. The court emphasized that the partnership's election under section 754 did not affect the zero basis of the receivables.

The share of a general partner's successor in interest upon his death in the collections by a partnership on accounts receivable arising out of the rendition of personal services constituted income in respect of a decedent under the 1939 Code.

Conclusion

The court held that the estate's income tax return for 1961 adequately disclosed the gross income of the partnership, and therefore, the year 1961 is barred from assessment of deficiencies.

Consequently, we hold that section 691(a)(1) and (3) applies and that the right to share in the collections from the accounts receivable must be considered a right to receive income in respect of a decedent.

Who won?

The petitioner (the trust) prevailed because the court found that the estate's income tax return adequately disclosed the partnership's gross income, barring the assessment of deficiencies for 1961.

Petitioner has conceded its liability as transferee, except that the parties have stipulated that petitioner is so liable with respect to the taxable year 1961 if, and only if, the statutory notice of deficiency was timely as to that year.

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