Long v. Comm'r of Internal Revenue , Docket No. 9088-76.

Citation71 T.C. 1
Decision Date03 October 1978
Docket NumberDocket No. 9088-76.
PartiesMARSHALL LONG and BETTY C. LONG, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Petitioner, as the beneficiary of an estate, claimed certain unused capital loss carryovers of the estate upon its termination. The estate was a successor to the decedent's interest in a partnership. At the decedent's death, the partnership had certain bank loans outstanding and, along with the decedent and his partners, was the defendant in certain law suits involving the partnership's business. The banks and the plaintiffs filed their respective claims against the estate, which were settled and paid by the estate. The estate deducted those claims under sec. 2053, I.R.C. 1954, in computing its estate partnership interest for the payment of those claims. Because of the basis increase, the estate was able to use certain partnership capital losses and claimed a capital loss upon liquidation of its partnership interest. Those losses were then passed through the estate to petitioner. Held, certain claims against the estate are determined to be partnership liabilities. Held, further, contingent or contested liabilities are not liabilities for purposes of increasing partnership basis until they are fixed or liquidated. Held, further, the estate individually assumed partnership liabilities to the extent that it paid them out of its separate funds. Held, further, estate's basis in its partnership interest is determined. Held, further, sec. 642(g), I.R.C. 1954, did not prohibit a basis increase for the assumption of partnership liabilities even though those liabilities were also deducted by the estate under sec. 2053, I.R.C. 1954. Daniel C. Weary and Dennis P. Wilbert, for the

Larry K. Akins, for the respondent.

OPINION

TIETJENS, Judge:

Respondent determined deficiencies in petitioners' Federal income taxes in the amounts of $18,349.85 for 1971 and $2,164.44 for 1972. After certain concessions, the issue remaining is whether petitioner-husband, as beneficiary of the Estate of John C. Long, may use a net long-term capital loss carryover from the estate.

The facts have been fully stipulated. The stipulations of facts and attached exhibits are incorporated herein by reference.

Petitioners Marshall Long and Betty C. Long resided in Leawood, Kans., when they filed their petition. They filed their joint Federal income tax returns for 1971 and 1972 with the Internal Revenue Service Center in Austin, Tex.

Petitioner Marshall Long and Robert W. Long are the sons of decedent John C. Long. Prior to his death in the Long Construction Co. The partnership was formed in 1942 with the decedent and Robert as its only partners. In 1952, petitioner was also admitted as a general partner. His membership in the partnership lasted only 6 years, however. And when he withdrew from the partnership in 1958, petitioner was released from all partnership liabilities, past, present, and future. After petitioner's withdrawal, the decedent and Robert continued the partnership as general partners, respectively sharing in all partnership profits and losses 25 percent and 75 percent.

During its existence, the partnership and its partners incurred substantial liabilities. In 1955, the partnership erected a building in Kansas City, Mo., for Kansas City Life Insurance Co. of Kansas City, Mo. (hereafter Kansas City Life). The building was occupied by Trans World Airlines (hereafter TWA) under a long-term lease agreement. When structural defects later appeared in the building, and petitioner as copartners doing business as Long Construction Co. The suit was filed in 1961 seeking $2,350,000 in damages. Also, in 1959, the partnership became a subcontractor on a construction project in Regina, Saskatchewan, Canada. The partnership and its two partners insured completion of the project with a performance bond issued by United States Fidelity & Guaranty Co. (hereafter USF&G). Because the prime contractor did not complete the project, USF&G was required to perform under the indemnity agreement. Although the partnership was employed to finish the project, USF&G still demanded payment from the partnership and its two partners for their joint and several liability of $3,259,200. Finally, the partnership also borrowed money for working capital. It borrowed $204,758.10 from the City National Bank & Trust Co. of Kansas City in 1963 and $150,000 from the First National Bank of Kansas City in 1959. On December 2, 1959, the decedent also borrowed sum of $230,000.

The decedent died testate on July 5, 1963. According to his last will and testament, his wife, Bertha Long, and his two sons, Robert W. Long and petitioner Marshall Long, were to share equally the residue of his estate. Among the assets so passing to them was the decedent's 25-percent interest in the Long Construction Co. partnership. On its estate tax return, the estate valued the partnership interest at “no value.” This valuation was accepted by respondent upon a later audit of the estate.

At the death of the decedent, the above liabilities remained unsatisfied. Thus the following claims were filed against his estate:

+--------------------------------------------------+
                ¦Claimant            ¦Amount       ¦               ¦
                +--------------------+-------------+---------------¦
                ¦Kansas City Life/TWA¦$2,350,000.00¦               ¦
                +--------------------+-------------+---------------¦
                ¦USF&G               ¦3,259,200.00 ¦               ¦
                +--------------------+-------------+---------------¦
                ¦First National Bank ¦315,101.42   ¦(plus interest)¦
                +--------------------+-------------+---------------¦
                ¦City National Bank  ¦204,758.10   ¦(plus interest)¦
                +--------------------------------------------------+
                

Except for $215,788.92 of the First National Bank claim,1 all the claims were for liabilities of the partnership, Subsequently, the estate paid the following amounts in settlement of those claims:

+----------------------------------------------+
                ¦Date paid  ¦Claimant            ¦Amount paid  ¦
                +-----------+--------------------+-------------¦
                ¦9/6/63     ¦First National Bank ¦$319,276.90  ¦
                +-----------+--------------------+-------------¦
                ¦9/10/63    ¦City National Bank  ¦205,827.90   ¦
                +-----------+--------------------+-------------¦
                ¦10/19/64   ¦Kansas City Life/TWA¦200,000.00   ¦
                +-----------+--------------------+-------------¦
                ¦10/19/64   ¦USF&G               ¦100,000.00   ¦
                +----------------------------------------------+
                

On October 19, 1964, the estate also paid legal fees of $27,957.03 incurred in the settlement of the USF&G claim.

All but $9,778.66 of the above payments were deducted by the estate on its estate tax return under section 2053(a).2 The amount not so deducted represents interest on the banks' claims and was deducted on the estate's income tax return only. Those deductions have all been allowed by respondent and are not disputed here.

Although the estate paid the claims, Robert Long was nevertheless liable as a general partner for 75 court of Jackson County, Mo., in its final order of distribution for the estate found Robert Long to be indebted to the estate for his share of partnership liabilities in the amount of $633,561.62. The court treated this amount as an offset against Robert Long's distributive share of the estate.

Meanwhile, the partnership had continued in existence after the decedent's death until it was liquidated on November 13, 1969. The estate was merely substituted as a general partner in place of the decedent. During that time, the estate reported on its income tax return the following amounts of income and losses, which were attributable to its 25-percent partnership interest:

+----------------------------------+
                ¦TYE—  ¦Amount and character     ¦
                +--------+-------------------------¦
                ¦5/31/64 ¦$1,114.49¦(ordinary loss)¦
                +--------+---------+---------------¦
                ¦5/31/65 ¦28,892.86¦(ordinary loss)¦
                +----------------------------------+
                
         92,630.79 (capital loss)
                5/31/66  187.68    (ordinary loss)
                5/31/67  4,922.21  (ordinary income)
                5/31/68  693.75    (ordinary income)
                5/31/69  305.08    (ordinary income)
                12/29/69 260.00    (ordinary income)
                
             1,443.69   (capital gain)
                Total income 7,624.73
                Total losses 122,825.82
                

When the partnership was liquidated, the estate received a liquidating distribution of $46,417.77 in cash. Although it is unclear from the record, we assume that represents all the partnership assets.

The estate claimed a long-term capital loss upon liquidation of the partnership. In determining that loss, the estate calculated its basis in its partnership interest as follows:

+-----------------------------------------------------------+
                ¦Value of partnership interest at date of death ¦0          ¦
                +-----------------------------------------------+-----------¦
                ¦Partnership obligations paid by estate         ¦$639,309.21¦
                +-----------------------------------------------+-----------¦
                ¦Plus   distributive share of partnership income¦7,624.73   ¦
                +-----------------------------------------------+-----------¦
                ¦Less   distributive share of partnership losses¦122,825.82 ¦
                +-----------------------------------------------+-----------¦
                ¦Total basis in partnership                     ¦524,108.12 ¦
                +-----------------------------------------------------------+
                

It thus calculated a long-term capital loss from the partnership liquidation of $477,690.35 and, after considering a long-term capital loss carryover from 1965 and capital gains for 1969, a net long-term capital loss of $514,615.89. Because the estate was unable to use the claimed loss, petitioner claimed his share Respondent has disallowed petitioner's claimed loss carryover on the grounds that the estate did not realize a loss upon liquidation of the partnership and that the loss, if allowed, would result in a double deduction.

Before addressing those issues, we note that petitioners argue in their briefs that the contested...

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