Woodhall v. CIR
| Decision Date | 07 January 1972 |
| Docket Number | No. 26833.,26833. |
| Parties | Chrissie H. WOODHALL, a widow, Estate of W. Lyle Woodhall, Deceased, Chrissie H. Woodhall, Executrix, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
George Constable (argued), Seattle, Wash., for petitioners-appellants.
Janet Spragens (argued), Atty., Tax Div., Dept. of Justice, Washington, D. C., Johnnie M. Walters, Asst. Atty. Gen., K. Martin Worthy, Chief Counsel, Meyer Rothwacks, Grant W. Wiprud, John S. Brown, Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellee.
Before DUNIWAY and CHOY, Circuit Judges, and GOODWIN*, District Judge.
W. Lyle Woodhall died on January 20, 1964, leaving Mrs. Woodhall as his sole heir and executrix. For 1964, Mrs. Woodhall filed a joint income tax return as surviving spouse. She also filed a fiduciary income tax return for the estate for part of 1964. For 1965, she filed an individual tax return and a fiduciary return.
The Commissioner of Internal Revenue determined deficiencies against Mrs. Woodhall for the years 1964 and 1965. The ground was that she had not declared as income certain amounts which came to her from the sale of her husband's interest in a partnership. Mrs. Woodhall petitioned the Tax Court for a declaration that she did not owe the deficiencies. The Tax Court upheld the Commissioner's determination1 and Mrs. Woodhall appeals. We affirm.
From January 1958 until his death, Woodhall was equal partner with his brother, Eldon Woodhall, in a lath and plaster contracting business known as Woodhall Brothers.
In December 1961, the brothers executed a written buy-sell agreement, which provided that "upon the death of either partner the partnership shall terminate and the survivor shall purchase the decedent's interest in the partnership." The price was to be determined according to a formula set out in the agreement. The formula defined accounts payable and included certain valuations for fixed assets, inventory, accounts receivable and other assets. It is the accounts receivable item that generates this controversy over Mrs. Woodhall's income for 1964 and 1965.
Because the partnershp reported income on a cash basis, Woodhall had not paid taxes on his share of the accounts receivable which were outstanding at the time of his death. Mrs. Woodhall, in filing her tax returns as an individual and as executrix of her husband's estate, did not report as income the amounts allocated to the accounts receivable. Instead Mrs. Woodhall's tax returns stated that no gain had been realized by the sale of her husband's partnership interest because the tax basis of the interest was the fair market value at the time of death and this was the same as the sale price.
The issue presented is whether portions of payments received by Mrs. Woodhall, as executrix of the estate and as surviving spouse, constitute income in respect of a decedent under § 691(a) (1) of the Internal Revenue Code2 and are therefore subject to income taxes to the extent that such portions are allocable to unrealized receivables.
Generally, the sale of a partnership interest is an occasion for determining the character of gain or loss "to the transferor partner" as provided by § 741. In the case at bar, however, there was technically no "transferor partner" to accomplish the sale. The Woodhall Brothers partnership terminated automatically upon the death of Woodhall by operation of the buy-sell agreement, as well as under common law. Mrs. Woodhall, as executrix of the estate and as holder of a community property interest, was the transferor.
A tax regulation recognizes that § 741 applies when the sale of the partnership interest results in a termination of the partnership.3 The question arises whether a termination of the partnership by operation of a written agreement of the parties upon the death of one partner has the same effect.
The legislative history of § 741 explicitly deals with this question. The House report reads as follows:
The Senate report is similar, with only technical amendments which do not alter the basic statement of purpose in the House report. Senate Report No. 1622, to accompany H.R. 8300 (Pub.L. 591), 83rd Cong., 2d Sess., p. 396 (1954).
Mrs. Woodhall's approach to the issue was much different. On the sale of her husband's partnership interest, she attempted to elect4 to establish the tax basis as the fair market value on the date of her husband's death. By this means, the sale price would be the same as the fair market value; there would be no gain and so no income to be taxed.
Mrs. Woodhall contends that the payments she received for the accounts receivable do not come within § 691(a), pertaining to income in respect of a decedent. Section 691(f), she points out, makes cross-reference to § 753, for application of § 691 to income in respect of a deceased partner. Section 753, in turn, refers to § 736 which provides5 that payments by a partnership for a deceased partner's interest in unrealized receivables shall be considered income in respect of a decedent under § 691. Mrs. Woodhall argues that a payment by a surviving partner is distinct from a payment by a partnership. Thus, she would have us interpret § 753, in conjunction with § 736, exclusively. In effect, this means that no payment other than one by a partnership which continues after one partner's death could constitute income in respect of a deceased partner. We reject this reading of the statutes.
The approach suggested by Mrs. Woodhall is not an appropriate characterization of the transfer of funds to her. Reading § 691 in the light of § 741, it is clear that Congress intended that the money Mrs. Woodhall received as an allocation from the unrealized accounts receivable be treated as income in respect of a decedent.
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