Tyree v. Commissioner

Estate of Joseph E. Tyree, Deceased, Wilhelmina C. Tyree, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent Tyree v. Commissioner Docket No. 43589 United States Tax Court 20 T.C. 675; 1953 U.S. Tax Ct. LEXIS 106; June 29, 1953, Promulgated *106 Decision will be entered for the petitioner. At the time of his death, August 21, 1946, petitioner's decedent was a member of a Utah partnership. Decedent reported on the basis of the calendar year and the firm on the basis of a fiscal year ending February 28. The partnership agreement provided that upon the death of a partner, the firm could be continued not only for the purpose of winding up the business and liquidating the capital account of the deceased partner, but also for the remainder of the term fixed therein, and upon the terms and conditions set forth therein. Held, the tax year of the partnership did not end with the death of decedent, but continued pursuant to the partnership agreement, and no part of the partnership income for the period March 1, 1946, to August 21, 1946, should be included in decedent's final return for the period January 1, 1946, to August 21, 1946. A. L. Moreton, C. P. A., and Arthur E. Moreton, Esq., for the petitioner. Everett E. Smith, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *675 The respondent determined a deficiency in income tax of petitioner's decedent for the calendar year 1946 in the amount of $ 3,218.95. The issue is whether the decedent's share of the income of the partnership, of which he was a member, for the period March 1, 1946, to August 21, 1946, is includible in decedent's income for the period January 1, 1946, to August 21, 1946, the date of his death. The case was submitted upon a stipulation of facts with exhibits attached, together with certain facts orally stipulated at the hearing. The facts stipulated are so found and made a part hereof by this reference. FINDINGS OF FACT. The petitioner is the Estate of Joseph E. Tyree, Deceased, Wilhelmina C. Tyree, Executrix. The tax return for the period here involved was prepared on a cash receipts and disbursements basis and was filed by the executrix on March 15, 1947, with the collector of internal revenue*108 for the district of Utah at Salt Lake City. Dr. Joseph E. Tyree (hereinafter called decedent) died on August 21, 1946. At the time of his death, and for many years prior thereto, decedent was successively a member of one or more partnerships which practiced medicine in Salt Lake City, Utah, under the firm name of Salt Lake Clinic. The partnership in existence on the date of decedent's death had been organized and was operating pursuant to a written partnership agreement entered into by decedent on March 1, 1939, the material portions of which provided as follows: *676 III -- Purpose and Duration 1. That the parties hereto shall, beginning March 1, 1939, establish and maintain a medical and surgical clinic and engage in the general practice of medicine and surgery, for a term of twenty (20) years from and after March 1, 1939, unless sooner dissolved or terminated as herein provided or by law. IV -- Duties of the Partners 1. Each partner shall at all times: * * * * b. Devote all of his time and attention to the business or profession of the partnership to the best of his endeavors and to the utmost of his skill exert himself for the joint interest, benefit and profit of the partnership, *109 and during the continuance of this partnership not engage or be interested in any other business whatsoever. * * * * VI -- Fiscal Year 1. The fiscal year for income tax, determination of earnings, closing accounts, and all other purposes, shall begin as of the date hereof and end on the last day of February, 1940, and on the last day of February of each year thereafter. VII -- Accounts * * * * 3. * * * Accounts of the firm shall be kept on an accrual basis, even though the making of income tax and other returns are provided to be made on a cash basis. * * * * XII -- Dissolution 1. In the event, during the time fixed for the continuance of the partnership, any partner shall die, retire or become so physically disabled as to be unable to attend to the business or profession of the firm, the said firm need not be dissolved, but may be continued by the continuing or surviving partners, not only for the purpose of winding up the business and liquidating the capital account of such departing member, but also for the remainder of the term fixed for the continuance of this firm, and upon the terms and conditions herein set forth, or as at that time may be agreed upon, and the interest of *110 any partner in the partnership that may have ceased to exist by virtue of any of the provisions contained herein, shall belong to and vest in the continuing or surviving partners, subject, however, to payment to said retiring or deceased partner of his interest bearing capital and the agreed percentage of his non-interest bearing capital as herein provided. In such event, such continuing or surviving partners shall thereafter divide and bear all earnings or losses that may thereafter be earned or sustained upon the basis herein provided. * * * * 7. * * * The retirement, incapacity or death of any of the parties hereto during the continuance of this agreement, shall not of itself operate as an immediate termination of this firm, and the party so retiring or the personal representative of such deceased partner, shall, during the continuance of the partnership, be entitled to receive in full satisfaction and discharge of the deceased party's interest in the firm, three-fourths of his non-interest bearing capital, and his share, if any, of the interest bearing capital as herein provided. * * * * *677 9. The remaining members may carry on the practice until the departing partner's*111 share of the capital, as herein provided, is liquidated in whole or in part. 10. Surviving partners shall make no charge to retiring or deceased members for realization and liquidation of such member's interest, and such retiring partner or the estate of a deceased partner shall not be entitled to interest during the liquidation period on the percentage of his non-interest bearing capital or profits thereafter attributable to the use of his interest in the firm property. * * * * The partnership agreement also provided that a deceased partner should have his capital account liquidated to his estate in 60 monthly payments. The death of the decedent was reflected on the books of the Salt Lake Clinic by entries transferring the interest-bearing capital account of the decedent as of the date of his death to a capital liquidating account. As of August 21, 1946, three-fourths of decedent's non-interest-bearing capital account was transferred to a liquidating account with the balance thereof being transferred to the respective capital accounts of the surviving partners. The profit and loss accounts of the partnership were closed on February 27, 1947, and decedent's share was credited *112 to his capital account in the amount of $ 6,423.08, representing his share of net income. In a partnership return prepared on the cash basis and filed on May 16, 1947, for the fiscal year begun March 1, 1946, and ended February 28, 1947, Salt Lake Clinic, a copartnership, reported the distributive share of decedent as $ 5,778.04, which amount represented decedent's taxable share of the income received by the partnership during the period between March 1, 1946, to August 21, 1946. This sum was not reported in the above-mentioned return which was filed for the decedent by his executrix, but was entered in the income reported by petitioner for the fiscal year begun August 21, 1946, and ended July 31, 1947, in its return which was filed with the collector of internal revenue for the district of Utah on October 17, 1947. This latter return was also prepared on a cash basis. Respondent has determined that decedent's distributive share of the partnership's income in the amount of $ 5,778.04, as reported in the partnership return for the fiscal year begun March 1, 1946, and ended February 28, 1947, is includible within the gross income reported in decedent's final return filed by his executrix*113 for the period January 1, 1946, to August 21, 1946. OPINION. Basically, we have here the question whether a partnership tax year terminates upon the death of a partner, insofar as the deceased partner is concerned, thereby making his distributive share of partnership earnings includible in his gross income for his final return where the partnership agreement provides for a continuance *678 of the same. The pertinent provisions of the Internal Revenue Code are set forth in the margin. 1 *114 The question at issue has been before the courts on numerous occasions and the rulings are not uniform. In , this Court held, in effect, that "* * * partnership losses of decedent for the period of January 1 to June 21, 1939 [the latter being the date of death], were 'properly includible in respect of the taxable period in which falls the date of his death.'" This holding was reversed by the Court of Appeals for the Fifth Circuit at 155 F. 2d 1343. We bowed to the higher court and in (reviewed by the Court), followed the view so expressed by the circuit court. Our decision was affirmed by the Court of Appeals for the Eighth Circuit at 184 F. 2d 89. In , the Court of Appeals for the Third Circuit reversed a decision by the district court and joined the Fifth Circuit and Eighth Circuit in their holding on the question. Relying for support on the above cases, the Tax Court, in *115 (reviewed by the Court), followed the same path. On appeal, the Court of Appeals for the Second Circuit, in a decision by a divided court (Judge Augustus Hand, dissenting), , reversed. In this posture of the ruling cases we adhere to the position taken by us in the Mnookin and Waldman cases and hold that, under the facts here present, the tax year of the partnership, of which decedent *679 was a member, did not end at his death and that no part of the partnership income for the period March 1, 1946, to August 21, 1946 (the date of death), should be included in decedent's final return for the period January 1, 1946, to August 21, 1946. The case of , cited by respondent and chiefly relied on by the Second Circuit in the Waldman reversal, is fully distinguished in the opinion of the Third Circuit in Decision will be entered for the petitioner. Footnotes 1. SEC. 181. PARTNERSHIP NOT TAXABLE. Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. SEC. 182. TAX OF PARTNERS. In computing the net income of each partner, he shall include, whether or not distribution is made to him -- * * * * (c) His distributive share of the ordinary net income or the ordinary net loss of the partnership, computed as provided in section 183 (b). SEC. 188. DIFFERENT TAXABLE YEARS OF PARTNER AND PARTNERSHIP. If the taxable year of a partner is different from that of the partnership, the inclusions with respect to the net income of the partnership, in computing the net income of the partner for his taxable year, shall be based upon the net income of the partnership for any taxable year of the partnership (whether beginning on, before, or after January 1, 1939) ending within or with the taxable year of the partner. SEC. 126. INCOME IN RESPECT OF DECEDENTS. (a) Inclusion in Gross Income. -- (1) General rule. -- The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.↩