Appeal From the United States Tax Court.
Adams, Hunter and Garth, Circuit Judges. Adams, J., concurring.
This appeal arises from a dispute over the short taxable year of Joseph R. Applebaum ("Applebaum"). Applebaum was a general partner in Phoenix Plaza Associates, a limited partnership ("the partnership"). Midway through 1975, Applebaum died. That year the partnership suffered a substantial loss. The question presented here is how Applebaum's share of that loss should be allocated between his final income tax return, filed by his widow, Florence K. Applebaum, and the income tax return filed by his estate.
The applicable statutory provision, I.R.C. § 706 (1976), plainly requires that all of Applebaum's share of the partnership loss be allocated to his estate. Appellants in this case, Florence K. Applebaum and Estate of Joseph R. Applebaum ("appellants"), urge us to disregard the statutory requirements so that they may allocate the partnership loss between them on a pro rata basis. They advance a number of policy reasons in support of their position. Appellants presented similar arguments to the United States Tax Court, sitting below, which rejected their position in a thorough and well-reasoned opinion. Applebaum v. Commissioner, 43 T.C.M. (CCH) P39,034 (M)(1982). We will affirm the judgment of the Tax Court substantially for the reasons expressed in that opinion.
Phoenix Plaza Associates was organized in 1968 to develop and operate a shopping center in Phoenixville, Pennsylvania. Applebaum, one of several general partners, owned 59.52 percent of the partnership at the time of his death on August 22, 1975.
Section X of the partnership agreement provided in part that upon death of a general partner, that partner's general interest "shall be converted into that of a Limited Partner and be subject to the provisions of the agreement relating to a Limited Partner's interest. . . ." Following Applebaum's death, however, a substantial disagreement arose between the remaining general partners and Applebaum's estate regarding the estate's continuing liability for certain partnership obligations incurred prior to Applebaum's death. As a result of this dispute, the remaining general partners refused to amend the Certificate of Limited Partnership to reflect the change in status of Applebaum's interest from general to limited. This dispute dragged on for nearly three years, spawning litigation in the federal and state courts. The estate and the remaining partners eventually settled their dispute, but continued to disagree whether Applebaum's interest had converted from general to limited on his death.
In 1975, the year of Applebaum's death, the partnership suffered loss of $313,684.79. Applebaum's 59.52 percent share amounted to $186,705.19. Because Applebaum's estate succeeded to his interest in the partnership midway through the year, the issue arose how that loss should be allocated between Applebaum's short taxable year and the estate's. Appellants' solution was to divide the loss pro rata between them, based on the portion of the year (234 days) that Applebaum was alive. The tax return filed by Florence K. Applebaum claimed $119,696 of the loss, and the estate's return claimed the remaining $67,009.19.*fn1
Appellee, the Commissioner of Internal Revenue ("Commissioner"), disallowed the portion of the partnership loss claimed on Applebaum's final return by his widow. The Commissioner contends that the entire $186,705.19 loss must be allocated to the estate. Appellants contested the Commissioner's determination in the United States Tax Court and following that court's adverse determination, appealed to this court. They raise the same contentions here as below, and we affirm the Tax Court in rejecting them.
Appellants contend first that we must overlook the plain statutory language of I.R.C. § 706(c)(2)(A)(ii), which states in relevant part that "the taxable year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership taxable year." (emphasis added)*fn2 If the partnership's taxable year is not deemed closed prior to the end of its usual taxable year, all of the income or loss attributable to the deceased partner's share for that year must be allocated to his estate. Treas. Reg. § 1.706-1(c)(3)(ii).*fn3 If the partnership year is deemed to close on a partner's death, then the pro rata allocation urged by appellants would be proper.
Section 706(c)(2)(A)(ii) unequivocally states that the death of a partner will not close the partnership year. Appellants nevertheless advance two policy arguments for disregarding this plain language. The first is that subsection 706(c)(2)(A) runs counter to the broad tax policy of allowing partnerships great freedom in allocating profits and losses among partners. See I.R.C. §§ 704(a), 761(c)(1976). According to appellants, no other section of the Internal Revenue Code denies partnerships this "flexibility." They contend also that section 706(c)(2)(A)(ii) violates assignment-of-income principles by retroactively allocating all of a deceased partner's loss or income to his estate, even though the estate was ...