Estate of Dupree v. United States

• Decision Date: 11 March 1968
• Docket Number: No. 22891.,22891.
• Citation: 391 F.2d 753
• Parties: The ESTATE of Robert B. DUPREE, Robert P. Dupree, Independent Executor, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

391 F.2d 753 (1968)

The ESTATE of Robert B. DUPREE, Robert P. Dupree, Independent Executor, Appellant, v. UNITED STATES of America, Appellee.

No. 22891.

United States Court of Appeals Fifth Circuit.

March 11, 1968.

William R. Pakis, Waco, Tex., for appellant.

Ernest Morgan, U. S. Atty., Ted Butler, Asst. U. S. Atty., San Antonio, Tex., Mitchell Rogovin, Asst. Atty. Gen., John B. Jones, Jr., Lee A. Jackson, Meyer Rothwacks, Harold C. Wilkenfeld, Donald W. Williamson, Attys., Dept. of Justice, Washington., D. C., for appellee.

Before COLEMAN and AINSWORTH, Circuit Judges, and YOUNG, District Judge.

YOUNG, District Judge:

The estate of Robert B. Dupree, deceased taxpayer, seeks a refund of income taxes paid by the deceased prior to his death for the year 1960.

In 1947, a limited partnership known as "Stroud's Motor Courts" was organized under the laws of Missouri for the purpose of operating the Park Plaza Motor Court, a motel in St. Louis, Missouri. The partnership had one general partner, Lemuel L. Stroud, and five limited partners. The major partnership asset, the motel, was held in the name of Lemuel L. Stroud and his wife, individually, but by written agreement, was held by them as property of the partnership.

The taxpayer and his wife, Katherine P. Dupree, owned as their community property, a 15% limited interest in the partnership. On September 25, 1957, Katherine P. Dupree died, leaving her one-half of the 15% partnership interest to her son, Robert P. Dupree. Thereafter, the taxpayer, Robert B. Dupree, and his son, Robert P. Dupree, each owned a 7½% interest in the partnership. The taxpayer, upon the death of his wife, obtained a new basis for his 7½% of the partnership interest pursuant to 26 U.S. C.A. Section 1014(b) (6).¹ An audit completed in December, 1960, of Mrs. Dupree's estate tax return resulted in a determination by the Internal Revenue Service that the fair market value of the Dupree 15% interest in the partnership as of the date of her death was $142,500.00, so that the taxpayer's new basis in his 7½% partnership interest as of September 25, 1957, was $71,250.00.

On August 1, 1960, the motel was sold to Park Plaza Motor Motel, Inc., a corporation, in which Lemuel L. Stroud was a principal stockholder and president. The sale was reported in the final partnership return for its fiscal year ending March 31, 1961, as a capital gain and $52,441.31 was attributed to the taxpayer as his share of the gain.

The assets of the partnership were distributed to the various partners, and the taxpayer received $42,150.00 cash, and a 7½% interest in two promissory notes, the face value of one secured by a first lien in the face amount of $100,000.00, and a second secured by a second lien on the motel in the face amount of $600,000.00, so that the taxpayer's 7½% face value interest in the notes amounted to $52,500.00. The Internal Revenue Service stipulated that the fair market value of the second lien note was only 50% of its face value, or $300,000.00, so that the fair market value of the taxpayer's interest in that note was only $22,500.00, instead of $45,000.00.

The parties stipulated that if the motel was sold by the partnership, then after the sale, but before the distribution of the cash and the notes, the taxpayer's basis in his partnership interest was $127,706.95.² The basis in the notes was reduced by the amount of cash money received by him ($42,150.00) to $85,556.95.³

An audit of the final partnership return resulted in a determination by Internal Revenue on March 19, 1962, that the partnership terminated in 1960, and not in 1961 as claimed on the return. A subsequent and related audit of taxpayer's individual return for the year 1960, resulted in a deficiency assessment of $17,388.77 additional tax based on a $52,441.31 capital gain by taxpayer from his share of the sale of the motel properties.⁴ The additional tax was paid and is the basis for this suit.

In charging the taxpayer with the capital gain of $52,441.31, no consideration was given to taxpayer's basis for his 7½% interest in the partnership (as distinguished from his 7½% interest in the assets of the partnership).

Subsequent to the audit of taxpayer's individual 1960 return, an amended partnership return was filed in September 1963, signed by M. L. Stroud, Jr., as "General Partner", with a Schedule A, which sought to exercise an election by the partnership under the provisions of Section 754 of the 1954 Internal Revenue Code to adjust the basis of partnership property under Sections 734(b) and 743 (b)⁵ of the Code for the taxable year ending December 31, 1960.

The taxpayer sought a summary judgment on two grounds: (1) that he had sustained an ordinary loss in 1960, for the difference between his basis in his 7½% interest in the notes received as proceeds from the motel sale and the actual face value of such interest; and (2) that a proper Section 743 election had been made. The district judge denied the motion.

In due course the case proceeded to a jury trial upon three issues raised by the plaintiff taxpayer:

(1) That the taxpayer had an ordinary loss in 1960, as above noted;

(2) That a proper election under Section 743 had been made by the amended return filed in 1963; and (3) That the partnership had in fact terminated prior to the sale of the motel properties.

At the conclusion of plaintiff's case-in-chief the Court granted the government's motion for directed verdict as to all three grounds. Taxpayer asserts here as error the denial of the summary judgment and the directed verdict.

I.

Under his first theory advanced as grounds for recovery, taxpayer contends he was not given credit for an ordinary loss of $33,056.95, allegedly realized by him in 1960, computed as follows:

                  Dupree's basis of his
                   7½% interest in partnership
                   8/1/60.                            $127,706.956
                  Less cash received.                   42,150.00
                                                        _________
                  Dupree's basis of his
                   7½% interest in notes
                   at face value.                       85,556.95
                  7½% of face value of
                   notes.                               52,500.00
                                                       __________
                  Claimed loss.                        $33,056.95
                

Taxpayer claims entitlement to take an ordinary loss deduction of the $33,056.95, under the provisions of Section 165(a)⁷ of the Code. Taxpayer argues that it is obvious that the notes could never produce more than their face value ($52,500.00 for a 7½% interest) and that since his basis for his interest in them was $85,556.95, he sustained an ordinary loss immediately upon his receipt of such interest.

The taxpayer's position seeks to circumvent the mandate of Section 731⁸ of the Code. That section clearly defers for tax purposes recognition (as distinguished from realization)⁹ to a partner of a loss on notes received in a distribution from a partnership. The basis of the partner's interest in such notes, received in liquidation, is computed under Section 732(b) of the Code (footnote 3, supra).

While Section 165(a) is a broad relief measure, as pointed out by taxpayer, the specific language of Section 731 prevails over the general language of Section 165(a) as to a fact situation falling within the ambit of Section 731. In D. Ginsberg & Sons, Inc. v. Popkin, 285 U.S. 204, at page 208, 52 S.Ct. 322, at page 323, 76 L.Ed. 704 (1932), the Supreme Court held:

"General language of a statutory provision, although broad enough to include it, will not be held to apply to a matter specifically dealt with in another part of the same enactment. United States v. Chase, 135 U.S. 255, 260, 10 S.Ct. 756, 34 L.Ed. 117, 119, 8 Am.Crim.Rep. 649. Specific terms prevail over the general in the same or another statute which otherwise might be controlling."

So, Section 731 prevailing, the loss — though unquestioned — would not be recognized in 1960.

In passing, we note that taxpayer's death deprived him of ever receiving income tax recognition of the loss sustained. Even if this were inequitable, there is no equity in tax law, Carlton v. United States of America, 385 F.2d 238 (5th Cir. 1967), but it was not inequitable because the taxpayer was in no different position than any other citizen who held a capital asset which had dropped in value but who died before selling the asset and obtaining a recognizable tax loss on it.

II.

When the taxpayer received a stepped-up basis in the value of his partnership interest as a result of the death of his wife in 1957, the basis of his partnership interest became considerably larger than his proportionate share of the adjusted basis of the partnership property ($71,250.00 vs. $14,973.27). Ordinarily, the fact that a taxpayer received a stepped-up basis in his partnership interest by virtue of a transfer on the death of a partner, does not affect the basis of the partnership property. However, Section 743(b) of the Code (footnote 5, supra) permits an adjustment in the partnership makes an election under Section 754 of the Code. The adjustment to the basis of the partnership's assets is for the benefit of the transferee partner only, and the special basis adjustment is measured by the difference between the transferee's basis for his partnership, interest and his proportionate share of the partnership's basis for its assets at the time of the transfer.

In the case before us the transfer giving rise to a right of an election under Section 754, was that occasioned by the death of Mrs. Dupree in 1957. If a valid election had been effected, the taxpayer would have been entitled to a special basis adjustment by an increase of the basis of his proportionate share of partnership assets, in the amount of $56,276.73 (the difference between $71,250.00 and $14,973.27). Instead of a $52,441.31 capital gain he would have had a $3,834.42 loss on the sale of the motel properties. Although an election was attempted by the partnership, the validity of that...