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Keywords

probatepartnershiprespondent

partnershiprespondent

Related Cases

Skaggs’ Estate v. Commissioner of Internal Revenue, 75 T.C. 191

Facts

Ernest D. Skaggs and his wife, Carolyn, operated a farming business as equal partners in a partnership known as Santa Rita Ranch Co., holding their interests as community property. Upon Ernest's death on December 31, 1973, the partnership continued its operations under Carolyn's management, and the estate was subject to probate administration. The partnership had significant debts and assets, including crops and accounts receivable, which were managed by Carolyn after Ernest's death. The partnership agreement stipulated that the partnership would terminate upon the death of either partner, but the court found that the partnership continued for tax purposes.

Before his death on December 31, 1973, Ernest and petitioner, husband and wife, conducted a farming business as equal partners in a two-member partnership known as Santa Rita Ranch Co. (the partnership). They owned their capital interests in the partnership as community property.

Issue

Whether the bases of the partnership assets were adjusted under section 1014 upon the death of Ernest D. Skaggs, and if not, whether Carolyn C. Fike made a valid election under section 754 to adjust the bases of those assets.

Whether certain assets held by a partnership, whose members, Ernest D. Skaggs and his wife, Carolyn (now Carolyn C. Fike), held their partnership interests as community property, were acquired from or passed from a decedent upon Ernest D. Skaggs' death so that the bases of the assets of the partnership were then adjusted under section 1014(a) 1 and (b)(6).

Rule

The basis of property acquired from a decedent is generally its fair market value at the time of death, and for community property, the surviving spouse's share is treated as property acquired from the decedent. However, adjustments to the basis of partnership property require a timely election under section 754.

The parties agree that under subsection (a) of section 1014, as in effect during the period in issue, the basis of property which was acquired from or which passed from a decedent is generally its fair market value at decedent's death.

Analysis

The court analyzed the partnership agreement and California law, concluding that the partnership did not terminate upon Ernest's death for federal tax purposes, as the estate continued to share in the profits. The court found that the partnership assets did not pass from Ernest to Carolyn, and thus the bases of those assets were not adjusted under section 1014. Furthermore, the purported election under section 754 was deemed invalid as it was not filed in a timely manner with the partnership return.

We uphold respondent's determination. While, at first blush, it may seem incongruous that this husband-wife partnership continued after Ernest's death until its affairs were wound up, we think it quite clearly did.

Conclusion

The court upheld the respondent's determination that the bases of the partnership assets were not adjusted upon Ernest's death and that the purported election under section 754 was ineffective.

We hold that the purported election was not valid because it was not filed by the partnership in a timely partnership return as required by section 1.754-1(b)(1), Income Tax Regs.

Who won?

The Commissioner of Internal Revenue prevailed in the case, as the court upheld the determination that the bases of the partnership assets were not adjusted due to the lack of a timely election under section 754.

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