Henderson v. Commissioner
4 T.C. 1001; 1945 U.S. Tax Ct. LEXIS 201 (1945)
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Rule of Law:
The death of a partner terminates the partnership's taxable year with respect to that partner, requiring the inclusion of their distributive share of partnership profits or losses on their final personal income tax return. An article of partnership providing for the continuation of the firm after a partner's death is construed as continuing the business under a new legal partnership, not as extending the original partnership for tax purposes for the decedent.
Facts:
- Hunt Henderson was a partner in a sugar refining business operating under the name 'Wm. Henderson'.
- The articles of partnership provided that the firm would 'continue for one (1) year after the death of any partner.'
- Henderson, a cash-basis taxpayer, filed his personal income tax returns on a calendar year basis.
- The partnership, an accrual-basis entity, also filed its tax returns on a calendar year basis.
- From January 1, 1939, to June 21, 1939, the partnership's operations resulted in an apportioned loss for Henderson's interest.
- Hunt Henderson died on June 21, 1939.
- From June 22, 1939, to the end of the year, the partnership interest attributable to the decedent generated income.
Procedural Posture:
- The petitioners, the Estate of Hunt Henderson, challenged a deficiency determination by the Commissioner of Internal Revenue in the U.S. Tax Court.
- The Tax Court entered its original memorandum findings of fact and opinion on December 14, 1943.
- Following the initial decision, petitioners filed a motion for further hearing and reconsideration, arguing that the Revenue Act of 1942 should change the outcome.
- The Tax Court granted the motion, leading to a further hearing and the issuance of this supplemental opinion.
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Issue:
Does the death of a partner terminate the partnership's taxable year with respect to that partner, requiring the inclusion of their distributive share of partnership income or loss on their final personal income tax return, even when the partnership agreement provides for the continuation of the firm after a partner's death?
Opinions:
Majority - Kern, Judge
Yes. The death of a partner terminates the partnership's taxable year with respect to that partner, and their share of income or loss up to the date of death is properly includible on their final income tax return. The court reasoned that under established tax law (equivalent to the revenue acts prior to 1934), a partner's death closes the taxable year for them. The provision in the articles of partnership stating the firm would 'continue' is interpreted to mean that the business would be carried on, but that in law, a new partnership is formed upon the death of a partner. The original partnership is necessarily terminated by the partner's death. Citing precedents like Clarence B. Davison, Executor, the court concluded that the loss attributable to Henderson from the beginning of the year until his death was 'properly includible' in the tax period ending with his death, and therefore should be reported on his final return, not netted against the estate's subsequent income.
Analysis:
This decision reinforces the legal principle that a partnership, as a legal entity for tax purposes, terminates for a specific partner upon their death. It clarifies that contractual language providing for the 'continuation of the firm' does not override this tax rule, but rather allows for the continuation of the business enterprise under a new partnership. This prevents the commingling of a decedent's pre-death income or loss with the post-death income of their estate, ensuring a clear tax cutoff at the date of death. The ruling solidifies the 'termination' concept in partnership tax law, impacting estate planning and the administration of a deceased partner's final tax affairs.
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