## Facts

- Frank A. Logan, an attorney, formed the law partnership Logan & Dawson on March 1, 1959, sharing profits and losses equally with Thomas S. Dawson.
- Logan contributed practice assets with an adjusted basis of \$9,654.36; Dawson contributed no assets. The partnership assumed a \$7,500 personal note owed by Logan.
- Logan also contributed contingent-fee matters and other work in progress treated as having zero tax basis; later fee collections were reported as partnership income.
- Logan retired and, under a written agreement dated July 1, 1960, sold his entire partnership interest to Dawson, who assumed all partnership liabilities.
- At the sale date, the partnership had unbilled work in progress (services performed but not billed/collected) treated as zero basis; there were no express client agreements covering the unbilled fees.
- The sale agreement transferred all partnership assets, expressly including “all unbilled fees” and “the goodwill of the partnership.”
- Logan received \$21,089.75 for the interest; \$4,000 of the consideration was allocated to his share of unbilled fees, and additional consideration reflected, in part, assumption of liabilities.
- For 1961, the Commissioner determined a deficiency of \$2,146.19, treating the \$4,000 as ordinary income under I.R.C. § 751 and computing Logan’s adjusted outside basis as \$11,258.61.

## Issues

1. Whether \$4,000 allocated to unbilled work in progress constituted “unrealized receivables” under I.R.C. § 751(c), requiring ordinary income treatment on sale of the partnership interest.
2. Whether Logan’s adjusted basis in his partnership interest at sale exceeded \$11,258.61 (including whether zero-basis work in progress or liabilities could increase basis).

## Decision

- The Tax Court held the \$4,000 payment for unbilled work in progress was attributable to § 751(c) unrealized receivables and was taxable as ordinary income.
- The court rejected the claim that absence of express client contracts meant there was no “right to payment,” finding a compensable right could exist “contractual or otherwise,” including under quantum meruit.
- The court sustained the Commissioner’s computation of Logan’s adjusted basis at \$11,258.61 and rejected attempts to increase basis using zero-basis contributions or by double counting liabilities.
- The deficiency was sustained to the extent consistent with these holdings.

## Legal Principles

- On sale of a partnership interest, I.R.C. § 751(a) requires ordinary income treatment for the portion of consideration attributable to “unrealized receivables.”
- “Unrealized receivables” under I.R.C. § 751(c) include rights to payment for services rendered or to be rendered “contractual or otherwise,” to the extent payment would be ordinary income if received by the partnership.
- A professional partnership’s unbilled work in progress may constitute an unrealized receivable when it represents compensation for services already performed, even if not yet billed or collected and even absent an express client agreement.
- Partnership outside basis is increased by contributions with tax basis and by the partner’s share of partnership liabilities, and adjusted for partnership income and distributions; zero-basis contributions do not increase outside basis, and liabilities already reflected in basis may not be counted again.

## Conclusion

The Tax Court treated a selling law partner’s payment for unbilled work in progress as ordinary income under § 751(c) because it represented a right to compensation for services and could not be converted into capital gain through sale of the partnership interest; it also upheld the Commissioner’s adjusted basis computation for determining gain.


Logan v. Commissioner, 51 T.C. 482 (1968)