George Edward Quick Trust v. Comm'r of Internal Revenue, Docket Nos. 3357-68
| Decision Date | 22 June 1970 |
| Docket Number | 4255-68.,Docket Nos. 3357-68 |
| Citation | 54 T.C. 1336 |
| Parties | GEORGE EDWARD QUICK TRUST, U/A #2333-41 MERCANTILE TRUST COMPANY NATIONAL ASSOCIATION, TRUSTEE, TRANSFEREE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTGEORGE EDWARD QUICK TRUST U/A #2333-41 MERCANTILE TRUST COMPANY NATIONAL ASSOCIATION, TRUSTEE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John S. Pennell and Don S. Harnack, for the petitioners.
Seymour I. Sherman, for the respondent.
Decedent owned a one-half interest in a partnership providing architectural and engineering services. During the period herein relevant, the bulk of the partnership's assets consisted of zero basis accounts receivable for services previously rendered and the partnership had ceased all business activity other than the collection of those accounts. When decedent died, his partnership interest went first to his estate and was later transferred to petitioner. Held: That the right to receive the proceeds of the collection of the accounts receivable was one of the rights included in the partnership interest and, under sec. 691(a)(1) and (3), I.R.C. 1954, constituted income in respect of a decedent. 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. Held, further, that the estate's income tax return for 1961, taken together with the partnership return, adequately disclosed the gross income of the partnership, so that the 6-year limitation of sec. 6501(e)(1) does not apply and the year 1961 is barred.
Respondent determined a deficiency of $20,014.09 in petitioner's income tax for its taxable year ending September 30, 1966. Respondent also determined that petitioner is liable as transferee for deficiencies in the income taxes of the Estate of George Edward Quick for the following taxable years ending December 31:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1961 ¦$13,291.69 ¦
+------+-------------¦
¦1962 ¦23,638.47 ¦
+------+-------------¦
¦1963 ¦21,326.67 ¦
+------+-------------¦
¦1964 ¦9,361.78 ¦
+--------------------+
There are two issues: (1) Whether the basis in the property of a partnership was properly increased, pursuant to sections 743 and 754,1 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.
All of the facts have been stipulated and are so found.
Petitioner is an inter vivos trust created by George Edward Quick (hereinafter sometimes referred to as Quick or as the decedent) on January 12, 1959, under the laws of the State of Missouri. The Mercantile Trust Co. National Association (hereinafter Mercantile) is and has been at all material times the trustee of petitioner and was at all material times coexecutor of the decedent's estate. The principal office of Mercantile at the time of the filing of the petitioner herein was St. Louis, Mo.
Mercantile, acting as coexecutor, caused timely fiduciary income tax returns to be filed on the cash basis for decedent's estate (hereinafter referred to as the estate) for 1951 through 1964. A return was also filed for a final period ending in 1965, but this period is not before us. Acting as trustee of petitioner, Mercantile caused an original and an amended fiduciary income tax return to be timely filed on the cash basis for the taxable year ending September 30, 1965. All of the above- mentioned returns were filed with the district director of internal revenue at St. Louis, Mo.
Decedent, a resident of Missouri, died testate on January 23, 1960. At the time of his death, he was in all respects an equal partner in a general partnership with G. J. Maguolo operating under the name of ‘Maguolo & Quick’ (hereinafter sometimes referred to as the partnership). Decedent reported his income for tax purposes on the cash basis.
The principal business activity of the partnership had been that of providing architectural and engineering services. From 1957 through at least the date of the trial herein, its business activity was limited to the collection of outstanding accounts receivable representing fees for professional services previously rendered.
On January 23, 1960, the only assets owned by the partnership were cash and such accounts receivable in the fact amount of $518,000, with a fair market value of $454,991.02. The partnership had no recorded liabilities and a zero basis for its receivables. The receivables were payable as follows:
+------------------------+
¦Year ¦Amount payable ¦
+------+-----------------¦
¦ ¦ ¦
+------+-----------------¦
¦1960 ¦$15,000 ¦
+------+-----------------¦
¦1961 ¦60,000 ¦
+------+-----------------¦
¦1962 ¦75,000 ¦
+------+-----------------¦
¦1963 ¦96,000 ¦
+------+-----------------¦
¦1964 ¦86,000 ¦
+------+-----------------¦
¦1965 ¦86,000 ¦
+------+-----------------¦
¦1966 ¦50,000 ¦
+------+-----------------¦
¦1967 ¦50,000 ¦
+------+-----------------¦
¦ ¦518,000 ¦
+------------------------+
These receivable were for professional services rendered by the partnership. The fair market value of decedent's partnership interest at the date of his death was $264,914.58.
When decedent died, the estate succeeded to his interest in the partnership and became a partner. In 1965, all of its right, title, and interest in and to the partnership interest was transferred to petitioner and petitioner became the successor partner.
The partnership maintained its books of account on the cash basis of accounting and filed its Federal income tax returns on a calendar year basis. It timely filed Federal income tax returns for each of the calendar years 1959 through 1965, inclusive. As an attachment to its 1960 return, it filed an election pursuant to section 754 to adjust the basis of partnership property as provided in section 743(b). This election, as least up to and including the date of the trial herein, has not been revoked.
In the partnership return for 1960, the first three lines of the first page reads as follows:
+-----------------------------------------------------------------------+
¦1. Gross receipts or gross sales Less: Returns and allowances¦65,174.96¦
+-------------------------------------------------------------+---------¦
¦2. Less: Cost of goods sold (Schedule A) ¦ ¦
+-------------------------------------------------------------+---------¦
¦3. Gross profit (line 1 less line 2) ¦65,174.96¦
+-----------------------------------------------------------------------+
An attachment to the return read as follows:
+----------------------------------------------------------------------------+
¦ ¦ ¦Estate of ¦G.J. ¦
+------------------------------------+----------+-----------------+----------¦
¦Gross revenue: ¦Total ¦G.E. Quick, Sr. ¦Maguolo ¦
+------------------------------------+----------+-----------------+----------¦
¦Collections to 1/21/60 ¦$57,576.70¦$28,788.35 ¦$28,788.35¦
+------------------------------------+----------+-----------------+----------¦
¦Collections 1/22/60 to 12/31/60 ¦15,000.00 ¦7,500.00 ¦7,500.00 ¦
+------------------------------------+----------+-----------------+----------¦
¦Less: Special basis adjustment under¦ ¦ ¦ ¦
+------------------------------------+----------+-----------------+----------¦
¦sec. 743(b) allocated as per section¦ ¦ ¦ ¦
+------------------------------------+----------+-----------------+----------¦
¦755 (schedule attached) ¦(7,401.74)¦(7,401.74) ¦ ¦
+------------------------------------+----------+-----------------+----------¦
¦ ¦65,174.96 ¦28,886.61 ¦36,288.35 ¦
+----------------------------------------------------------------------------+
On the partnership return for 1961, there is no entry for ‘gross receipts or gross sales' and no entry for ‘returns and allowances'; the difference between the two is indicated to be $30,000. There is no entry for ‘cost of goods sold’ and no entry for ‘gross profit.’ Interest income of $2,235.46 and deductible expenses of $173.65 are also reported. The fourth page of the return contains a partnership balance sheet. This balance sheet indicates that the basis of the ‘notes and accounts receivable’ (as adjusted to reflect the section 754 election) decreased by $28,939.54 during the year, from $220,093.77 at the beginning to $191,154.23 at the end.
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