The Commissioner of Internal Revenue determined deficiencies in the income tax returns of aрpellant, an inter vivos trust established by George Quick on January 12, 1959, for the calendar years 1961, 1962, 1963, 1964 and for the fiscal year ending September 30, 1966. The Tax Court sustained the Commissioner except as to thе 1961 determination. The trust appeals the deficiency findings for the other years. All of the relevant facts were stipulated.
Quick was a fifty-percent partner in an architectural and enginеering firm which ceased doing active business in 1957. However, the partnership had substantial accounts receivable due it through the year 1967. Quick died on January 23, 1960. At his death the Quick estate was the transfеree of his interest in the partnership and became the transferee partner. Subsequently thе trust became the tranferee and the transferee partner.
The partnership had a zero basis for its accounts receivable and no outstanding liabilities. The accounts receivable had a face value of $518,000 and a fair market value of $454,991.02. The fair market value of Quiсk’s interest at his death was computed by the IRS to be $264,914.58. Of this fair market value, $227,495.51 was attributable to 50% of the fаir market value of the partnership accounts receivable. The partnership filed аn election pursuant to § 754
Appellant argued that the Code embraces the entity theory of partnership and that upon transfer of the partnership share the income tax treatment afforded to it must be solely on the basis of the interest as a whole and that the underlying assets cannot be examined or treated sepаrately. The Commissioner contends that the accounts receivable are separable from the rest of the partnership assets because they are income in respeсt of a decedent (§ 691) and are
Generally, § 742 provides that the basis of an interest in a partnership shall be determined pursuant to § 1011, et seq. Section 1014(a) provides that the basis of рroperty in the hands of those acquiring it from a decedent shall be the fair market value of thе property at the date of the decedent’s death. The appellant would have us stоp here and allow it as transferee to use this stepped-up basis for purposes of сomputing the gain for tax purposes upon receipt of the receivables. But, § 1014(c) provides that § 1014 does not apply to “property which constitutes a right to receive an item of income in respect of a decedent under section 691.” Thus, if the accounts receivаble can be separated for tax analysis from the partnership as a whole and if the receivables are income in respect of a decedent, the tax treatment afforded those items upon receipt must be the same as if the decedent had lived and received such amount. 26 U. S.C.A. § 691(a) (3). This would mean that the receivables income would be taxed as ordinary income without a reduction for basis.
The Tax Court held:
A. The successor partner’s interest in accounts receivable which arise out of the decedent’s personal services is income in respeсt of a decedent.
B. Section 742 of the Code directs the use of § 1014 in determining the basis of a partnership interest and § 1014 by its terms requires separate treatment for those assets in the hands of the successor which are income in respect of a decedent. Therefore, the optional adjustment made by the partnership must be modified to reflect the income which was not reported due to the use of the stepped-up basis. Appellant should then have paid tаx on the gain from the receivables computed without benefit of that basis. The deficiencies were correctly assessed.
C. The purpose and intent of Congress would be thwarted under appellant’s interpretation of the Code.
We have carefully reviewed the record in this сase made in the Tax Court, the Tax Court’s opinion and the arguments and briefs in this court. We adopt the Tax Court’s opinion, which conscientiously and comprehensively treats the issue, and affirm on the basis thereof.
Affirmed.
Notes
. All statutory section references are to Title 26 U.S.C.A. — the 1954 Code — unless otherwise noted.