Estate of Levine v. Commissioner

Majority - Forrester, Judge

1. No, a partnership's taxable year does not terminate for federal income tax purposes when it exchanges its sole income-producing property for another like-kind income-producing property, because the partners continued to carry on the business. The court found that Aaron and Harvey Levine operated as a partnership under Section 761(a) and Regulation Section 1.761-1(a) because they actively managed the properties, provided services to tenants, and shared profits and losses, indicating an intent to operate as a business, not merely passive co-ownership. A partnership terminates under Section 708(b)(1)(A) only if "no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners." The exchange of the 187 Broadway property for 183 Broadway was a like-kind exchange in furtherance of the continuing partnership. The partnership continued to hold income-producing realty, and the partners continued to perform the same services and share profits/losses from the new property. The transfer by a partnership of all its assets does not automatically terminate it for tax purposes (citing Foxman v. Commissioner). Section 708(b)(1)(B) (sale or exchange of 50% or more of interest) was also inapplicable as no partnership interests were transferred. Therefore, the partnership did not terminate on July 1, 1968, and the $60,000 boot gain from the exchange, which occurred in the partnership's taxable year ending December 31, 1968, falls within Aaron's individual taxable year ending July 31, 1969. 2. Yes, a donor realizes taxable gain when transferring real property to a trust where the outstanding nonrecourse mortgages and other liabilities assumed by the trust exceed the donor's adjusted basis in the property. The court applied the principle established in Crane v. Commissioner, 331 U.S. 1 (1947), which holds that the amount realized from the sale or other disposition of property includes the full amount of nonrecourse liabilities assumed by the transferee. The transfer of the property with liabilities exceeding the adjusted basis is viewed as a "combination gift and sale." The donor received a "tangible economic benefit" as the liabilities he was relieved of exceeded his investment (adjusted basis). This economic benefit is taxable under Section 1001(a) and (b). The court rejected the petitioner's argument that it was a mere gift, stating that a bona fide gift with no income tax consequences doesn't apply when the donor receives an economic benefit. The transaction's "sale aspect is measured by the taxable portion" (the excess liabilities over basis), while the "gift appearance is determined by the net gift portion" ($14,518.08 equity). The court also invoked the constructive receipt of income theory under Section 61(a), where the assumption of debt by a donee that benefits the donor is generally regarded as constructive receipt of income (citing Old Colony Trust Co. v. Commissioner). The assumption of nonrecourse debt is equivalent to the constructive receipt of cash. Furthermore, the trustee's assumption of accrued interest liabilities and other expenses also relieved the decedent of personal liability, which is includable in the amount realized.