Estate of Applebaum v. Commissioner

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge:

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.

*376The 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 requirement 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) ¶ 39,034(M) (1982). We will affirm the judgment of the Tax Court substantially for the reasons expressed in that opinion.

I.

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 the 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 the 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 a 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 $67,009.19.1

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.

II.

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’s taxable year.” (emphasis added)2 *377If 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).3 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 only a partner for part of the taxable year.4 In making both arguments, appellants seek to override plain, particular statutory language by citing to overarching policy concerns.

The courts have repeatedly rejected such efforts with respect to closely related provisions of the Code. See, e.g., Rodman v. Commissioner, 542 F.2d 845, 858 (2d Cir.1976); Marriott v. Commissioner, 73 T.C. 1129, 1139 (1980); Moore v. Commissioner, 70 T.C. 1024, 1030-32 (1978). In Hesse v. Commissioner, 74 T.C. 1307 (1980), the Tax Court squarely rejected a taxpayer’s attempt to circumvent the clear command of the provision at issue in this case, section 706(c)(2)(A)(ii). The Tax Court in the present case followed Hesse in rejecting appellants’' claim. In each of these cases the courts have stressed the unambiguous import of the enacted language. While on occasion reproving the sometimes harsh result, they have declined to create an exception where Congress had not.

(ii) The last return of a decedent partner shall include only his share of partnership taxable income for any partnership taxable year or years ending within or with the last taxable year for such decedent partner (i.e., the year ending with the date of his death). The distributive share of partnership taxable income for a partnership taxable year ending after the decedent’s last taxable year is in-cludible in the return of his estate or other successor in interest. If the estate or other successor in interest of a partner continues to share in the profits or losses of the partnership business, the distributives share thereof is includible in the taxable year of the estate or other successor in interest within or with which the taxable year of the partnership ends. See also paragraph (a)(1)(h) of § 1.736-1. Where the estate or other successor in interest receives distributions, any gain or loss on such distributions is includible in its gross income for its taxable year in which the distribution is made.

Appellants urge us to examine the legislative history of section 706(c)(2)(A)(ii), which they contend demonstrates that Congress did not intend to deny the widows of deceased partners the tax benefits of their husband’s partnership losses. The Senate and House reports accompanying this provision do indicate that Congress was mainly concerned with the bunching of income that occurred when mid-year decedent partners realized income from their partnership interests,5 and was not concerned with the *378provision’s effect where, as here, the partnership showed a loss. S.Rep. No. 1622, 83d Cong., 2d Sess. 91 (1954); H.R.Rep. No. 1337, 83d Cong., 2d Sess. A225-26 (1954), U.S.Code Cong. & Admin.News 1954, p. 4017.

However enlightening this legislative history, we simply cannot ignore the unequivocal language of the provision. Section 706(c)(2)(A)(ii) could have excluded partnerships that declared losses rather than income, but it does not. Moreover, we cannot ignore the fact that Congress has not in the ensuing thirty years amended the provision to correct its “error.”6

Congress has been aware for many years of the problem faced by taxpayers in appellants’ situation, but has neither amended nor repealed section 706(c)(2)(A)(ii). The plain language of that section prevents appellants from making the pro rata allocation they seek. We reject appellants’ efforts to circumvent the plain language of section 706(c)(2)(A)(ii).

III.

Appellants present a second argument to support their attempted allocation. I.R.C. § 706(c)(2)(A)(i) states that a partnership’s taxable year shall close “with respect to a partner who sells or exchanges his entire interest in a partnership.”7 Appellants argue first that Applebaum’s partnership interest converted on his death from a general to a limited interest, and second that this conversion constituted a “sale or exchange” sufficient to close Applebaum’s taxable year.

The court below rejected appellants’ argument at the first stage, finding that because of the intrapartnership dispute following Applebaum’s death, his general interest never in fact converted to a limited one. Given the intensity of that dispute, the multiple lawsuits it engendered, and the continued refusal of the surviving general partners to amend the Certificate of Limited Partnership to reflect any change in the status of Applebaum’s interest in the partnership, we cannot say that the Tax Court erred. Consequently, we need not reach appellants’ further and highly controversial 8 argument that such a conversion would constitute a sale or exchange for purposes of section 706(c)(2)(A)(i).

The opinion and decision of the Tax Court will be affirmed.

. The estate declared no income in 1975, so the partnership loss was of no benefit to the estate.

. The full text of section 706(c) is as follows:

(c) CLOSING OF PARTNERSHIP YEAR.—
(1) GENERAL RULE. — Except in the case of termination of a partnership and except as provided in paragraph (2) of this subsection, the taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner’s interest in the partnership, or the sale or exchange of a partner’s interest in the partnership.
(2) PARTNER WHO RETIRES OR SELLS INTEREST IN PARTNERSHIP.—
*377(A) DISPOSITION OF ENTIRE INTEREST. —The taxable year of a partnership shall close—
(i) with respect to a partner who sells or exchanges his entire interest in a partnership, and
(ii) with respect to a partner whose interest is liquidated, except that the taxable year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership’s taxable year.

.The full text of this regulation is as follows:

. It is well-established that one taxpayer may not assign income to another taxpayer. Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940). This principle has been applied to prevent partnerships from retroactively assigning income or losses from a full taxable year to a partner who entered the partnership after the start of the year. Rodman v. Comm’r, 542 F.2d 845, 857-58 (2d Cir.1976); Moore v. Comm’r, 70 T.C. 1024 (1978).

. It was once common for partnerships to have taxable years different from their partners. Before the passage of § 706(c)(2)(A)(ii), conse*378quently, the final tax returns for decedent partners could contain up to 23 months of partnership income. By providing that a partner’s death would not close his taxable year, Congress ensured that a decedent partner’s final return would reflect no more than one year’s partnership income; income from a taxable year closing after the partner’s death would be reflected on the tax return of his estate. See Hesse v. Comm’r, 74 T.C. 1307 (1980).

. The Advisory Group on Subchapter K recommended, shortly after the passage of § 706(c)(2)(A)(ii), that the provision be repealed and replaced with a provision that would have permitted a pro rata allocation like that sought by appellants. Anderson & Coffee, Proposed Revision of Partner and Partnership Taxation: Analysis of the Report of the Advisory Group on Subchapter K, 15 Tax.L.Rev. 285, 309-10 (1960). A bill embodying this recommendation passed the House of Representatives in 1960, and was favorably reported out of the Senate Finance Committee. However, the bill was never passed by the full Senate. 1 A. Willis, Partnership Taxation § 3.05, at 28 (2d ed. 1976).

. For the full text of section 706(c), see note 2 supra.

. See Banoff, New Opportunities Now Exist for General and Limited Partnership Conversions, 52 J.Tax. 130 (1980); 2 McKee, Nelson & Whitmire, Federal Taxation of Partnerships and Partners ¶ 15.04[3][c], at 15-33 to 15-34 (1977); 1 A. Willis, Partnership Taxation § 26.-10, at 343-45 (2d ed. 1976).