Fike v. Comm'r of Internal Revenue (In re Estate of Skaggs)
| Citation | 75 T.C. 191 |
| Decision Date | 30 October 1980 |
| Docket Number | Docket No. 6546-78. |
| Court | United States Tax Court |
| Parties | ESTATE of ERNEST D. SKAGGS, DECEASED, CAROLYN C. FIKE, EXECUTRIX, and CAROLYN C. FIKE, FORMERLY CAROLYN C. SKAGGS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
OPINION TEXT STARTS HERE
Held, unless a timely election was made under sec. 754, I.R.C. 1954, the bases of the assets of a California husband-wife partnership were not adjusted on the death of the husband under sec. 1014(a) and (b)(6), I.R.C. 1954, even though the bases of the interests of the respective partners were adjusted and both the deceased husband's interest and the surviving wife's interest were administered pursuant to State law under the supervision of the local superior court. Held, further, a purported election under sec. 754, I.R.C. 1954, to have the bases of the assets of the partnership adjusted for the calendar year 1973, made in the petition filed in the instant case, is not effective. Philip H. Wile, for the petitioners.
Henry E. O'Neill, for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax for 1974 as follows:
+---------------------------------------+
¦Petitioner ¦Deficiency ¦
+--------------------------+------------¦
¦ ¦ ¦
+--------------------------+------------¦
¦Estate of Ernest D. Skaggs¦$151,858 ¦
+--------------------------+------------¦
¦Carolyn C. Fike ¦110,113 ¦
+---------------------------------------+
Due to concessions by petitioners, the following issues remain for decision:
(1) 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).
(2) If the bases of the assets were not adjusted at Ernest D. Skaggs' death, whether Carolyn C. Fike in the petition filed in the instant case made a valid election under section 754 to permit an adjustment in the bases of those assets pursuant to sections 743(b) and 755.
When the petition was filed, Carolyn C. Fike (petitioner), who has filed this action in her individual capacity and as executrix of the Will of Ernest D. Skaggs (Ernest), was a legal resident of Raymond, Calif. She filed 1974 Federal income tax returns for herself and for the estate with the Director, Fresno Service Center, Fresno, Calif.
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. The partnership maintained its records on the basis of a calendar year.
A written memorandum of partnership agreement was executed on April 22, 1967, and effective as of January 1, 1967. The partnership agreement (in article 8) provided that the partnership of Ernest and petitioner was to “terminate” on the death of either partner. It further provided (in article 10):
In the event of the death of either partner at a time when the partnership shall not have already made the election provided in Section 754 of the Internal Revenue Code, as amended, to adjust the basis of the partnership property, the estate of such deceased partner shall be entitled to determine whether the partnership shall make such election and the remaining partner shall abide by such determination.
Prior to December 31, 1973, the partnership was engaged in farming 1,736 acres of land in Merced County, Calif., producing cotton, corn, sugar beets, alfalfa, and other annual crops. The land was leased by the partnership under an oral lease from Lillian Christiana. In July 1973, the partnership assumed control over the operation of certain property known as the “Raymond Ranch.” This property was used primarily as grazing land under contractual arrangements with various cattle owners who were permitted to graze their cattle on the property for prescribed fees.
As of December 31, 1973, when Ernest died, the partnership owned certain depreciable assets and certain crops. At that time, the partnership held 435 bales of harvested but unsold cotton, a sugar beet crop, then estimated at 11,550 tons, which was in the ground subject to harvest in the spring of 1974, and accounts receivable for corn and milo harvested and delivered but not yet paid for by purchasers. The partnership was heavily indebted to the Bank of America for crop loans in the amount of $158,000 to cover the cost of producing 1973 crops which had not yet been sold or for which sales proceeds had not yet been collected. Additional debts in the amount of $47,687.14 were outstanding. To realize proceeds from the crop assets and to repay the bank loan, it was essential that business operations conducted by the partnership prior to December 31, 1973, be continued for the purposes of collecting the receivables, selling unsold crops, and harvesting and selling the beet crop.
No notice of dissolution of the partnership was published in any newspaper. Nor was any affidavit showing the publication of such a notice filed with the county clerk.
All of the community property owned by Ernest and petitioner at the date of his death, including both the partnership interest of Ernest and that of petitioner, became subject to probate administration in the Merced County Superior Court (hereinafter the Superior Court). Under Ernest's will, which was admitted to probate on February 4, 1974, petitioner was authorized to carry on the farming business owned by the partnership. On February 28, 1974, as executrix, she filed a petition with the Superior Court seeking authority to continue the farming operation, and her petition was granted on March 15, 1974. From December 31, 1973, as executrix, petitioner exercised full management control over the farming business and operations. She completed the sale of crops produced in 1973, collected the proceeds from the sale of those crops, handled the production and sale of crops maturing in 1974, and began preparations for the production of the 1975 crops. The debts outstanding as of December 31, 1973, were paid from crop income and from collection of accounts receivable or were otherwise discharged during the period beginning January 10, 1974, and ended September 1974.
On November 7, 1974, Santa Rita Farms, Inc., was incorporated, and the corporation leased the farm property which had been leased and operated by the partnership. The lease to the corporation preserved for “the prior tenant” the right to harvest crops still growing on the land on November 7, 1974. The corporation paid Ernest's estate $70,000 to reimburse it for expenses paid with respect to future crops not ready for harvest on November 8, 1974. The farming business conducted under petitioner's supervision was continued to complete the harvest and sale of the crops not conveyed to the corporation and to pay expenses incurred in the business.
On December 6, 1974, petitioner acquired 500 shares of the capital stock of Santa Rita Farms, Inc., all of the shares issued prior to February 27, 1975. Before February 10, 1975, all obligations of the farming business had been discharged. On February 27, 1975, she acquired an additional 15,000 shares in exchange for certain equipment and additions to rented farm labor houses, all of which was used in the farming business of the partnership before Ernest's death. These items were distributed to petitioner in her individual capacity from the estate pursuant to court order on February 26, 1975.
Federal and State income tax returns for the partnership were filed for 1973. Pursuant to advice of counsel, no further partnership returns were filed for the partnership and no election under section 754 was filed on any return. No application for an extension of time for filing either the 1973 partnership return or a section 754 election was ever made.
The estate and petitioner filed 1974 Federal income tax returns, each of which reported one-half of the 1974 collections and crop income. In reporting income derived from the sale of crops during 1974, new bases were claimed by the estate and by petitioner in an amount equal to the fair market value of the crops on hand as of December 31, 1973. The claimed bases represented a total increase of $415,936 over the bases of the same assets in the hands of the partnership prior to December 31, 1973. No basis was claimed with respect to the accounts receivable.2 Depreciation deductions claimed by Ernest's estate and petitioner for the period of the continued operation of the farming business were computed on an amount equal to the fair market value of the depreciable assets as of December 31, 1973.
In the notices of deficiency issued to petitioner and to Ernest's estate, respectively, respondent made the following determination:
The deduction of $207,968.00 claimed as basis in growing crops is not allowed because it has not been established that you acquired such assets from the decedent within the provisions of section 1014 of the Internal Revenue Code of 1954. Accordingly, your taxable income is increased by $207,968.00.
Due to this denial of the claimed adjustment in basis, respondent also disallowed a portion of the depreciation claimed on assets used in the farming business. In her petition filed June 16, 1978, petitioner sought to elect under section 754 to adjust the bases of partnership assets pursuant to section 743(b).
The parties agree that under subsection (a) of section 1014,3 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. In the case of...
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