## Facts

- Stroud’s Motor Courts, a Missouri limited partnership, operated a St. Louis motel (Park Plaza Motor Court). Although legal title to the motel stood in the general partner and his wife, a written agreement treated the motel as partnership property.
- Robert B. Dupree and his wife, Katherine P. Dupree, owned a 15% limited partnership interest as community property.
- Katherine died on September 25, 1957. Her one-half of the 15% interest passed to the Duprees’ son, Robert P. Dupree, leaving Robert B. Dupree and the son each owning 7.5%.
- Because the interest was community property, Robert received a new basis in his 7.5% interest under I.R.C. § 1014(b)(6). An IRS estate tax audit valued the full 15% interest at $142,500 as of Katherine’s death, giving Robert a stepped-up basis of $71,250 for his 7.5% interest.
- On August 1, 1960, the partnership sold the motel to Park Plaza Motor Motel, Inc., a corporation controlled by the general partner.
- The partnership’s final return reported the sale as producing capital gain and allocated $52,441.31 of that gain to Robert for 1960.
- The IRS audited Robert’s 1960 return and assessed a deficiency based on his share of gain from the motel sale, without allowing for basis adjustments Robert claimed were relevant to his partnership interest.
- After the audit, the general partner filed an amended 1960 partnership return in 1963, attempting to make a partnership election under I.R.C. § 754 to obtain a special basis adjustment to partnership assets under § 743(b).
- Following the sale, the partnership distributed assets to its partners in liquidation. Robert received $42,150 in cash and a 7.5% interest in two promissory notes secured by the motel (a $100,000 first-lien note and a $600,000 second-lien note).
- After Robert’s death, his estate brought a refund suit, arguing that (1) the liquidation distribution produced an ordinary loss in 1960 because the value of what Robert received was less than his basis, and (2) the later-filed § 754/§ 743(b) election should adjust basis in a way that reduced or eliminated the 1960 tax.
- The district court rejected the estate’s refund claims, and the estate appealed.

## Issues

1. Whether a partner can claim a current ordinary loss in 1960 when, upon liquidation of the partnership after an asset sale, the partner receives cash and notes allegedly worth less than the partner’s adjusted basis in the partnership interest.
2. Whether an election under I.R.C. § 754 (to apply § 743(b) basis adjustments) made on an amended partnership return filed in 1963 was valid and effective to alter the taxpayer’s 1960 income tax liability.
3. Whether the partnership had terminated before the motel sale or distributions, such that the transaction should be treated outside Subchapter K’s partnership-sale and distribution rules.

## Decision

- The Fifth Circuit affirmed judgment for the United States and denied the refund.
- The court held that the 1960 liquidating distribution did not generate a currently deductible ordinary loss under the partnership distribution provisions; the Code generally does not recognize loss to a partner on a distribution of property other than money.
- The court rejected the estate’s attempt to use the 1963 amended return to create retroactive basis adjustments for 1960 through a § 754/§ 743(b) election.
- The court rejected the estate’s termination theory and treated the sale and subsequent distribution as partnership-level events governed by Subchapter K.

## Legal Principles

- Under I.R.C. § 731, a partner generally recognizes no gain or loss on a partnership distribution of property; gain is recognized only to the extent money distributed exceeds the partner’s adjusted basis, and loss recognition is limited to circumstances not met by a distribution of notes and other property.
- A claimed decline in the fair market value of property (including promissory notes) received in liquidation does not by itself create a current ordinary loss if the governing partnership distribution rules provide nonrecognition; any economic loss is addressed through basis rules rather than an immediate deduction.
- A basis adjustment to partnership property under § 743(b) depends on a partnership-level § 754 election and must be made in the manner and time required by statute and regulations; a late election filed years after the return year generally cannot be used to revise closed-year consequences.
- Whether a partnership has terminated for federal income tax purposes turns on statutory rules (then including § 708 concepts); a partner cannot avoid Subchapter K treatment by recharacterizing a continuing partnership’s asset sale and liquidation as something else.

## Conclusion

The Fifth Circuit held that Dupree’s estate was not entitled to an income-tax refund for 1960 because the liquidating distribution of cash and notes did not produce a currently deductible ordinary loss under Subchapter K’s distribution provisions, the partnership’s attempted § 754/§ 743(b) election made on a 1963 amended return could not retroactively change the 1960 tax result, and the partnership-termination theory did not alter the governing treatment of the motel sale and subsequent liquidation.


Estate of Dupree v. United States, 391 F.2d 753 (1968)