## Facts

- Edward F. Neubecker and his wife filed a joint federal income tax return for 1969.
- From 1964 to early 1969, Edward practiced law in a three-lawyer partnership, Frinzi, Catania, and Neubecker, with no written partnership agreement.
- The partners dissolved the partnership in February or March 1969 by oral agreement.
- After dissolution, Neubecker and Catania left the firm’s office, moved to new offices, and immediately formed a new partnership, Catania and Neubecker.
- No formal accounting occurred at dissolution; the former partnership’s bank account and outstanding receivables remained with Frinzi, who stayed in the original offices.
- Fees received near the time of dissolution were not allocated among the partners.
- At withdrawal, Neubecker’s partnership capital account reflected a positive balance of $2,425.57; he received only certain physical assets of minimal value and continued serving some of the former firm’s clients through the new partnership.
- Petitioners filed their 1969 return on June 22, 1970 and claimed a loss relating to Neubecker’s interest in the dissolved partnership, deducting $1,000 (subject to the then-applicable limitation).
- The Commissioner disallowed the loss deduction and determined an addition to tax for late filing under I.R.C. § 6651(a).

## Issues

1. Whether Neubecker sustained a recognizable loss under I.R.C. § 731(a)(2) upon withdrawal from and dissolution of the partnership, allowing a loss deduction in 1969.
2. Whether petitioners were liable for an addition to tax under I.R.C. § 6651(a) for late filing of their 1969 return.

## Decision

- The Tax Court held petitioners did not sustain a recognizable loss on Neubecker’s partnership interest under § 731(a)(2) and disallowed the claimed loss deduction.
- The Tax Court held petitioners were liable for the § 6651(a) late-filing addition to tax.
- Decision was to be entered under Rule 155.

## Legal Principles

- A loss under I.R.C. § 731(a)(2) generally requires a completed, closed liquidation-type distribution that fixes the partner’s economic result; informal dissolution without a settling of accounts may not produce a recognizable loss.
- A positive partnership capital account that is not paid out at withdrawal does not, by itself, establish a realized and recognizable loss for tax purposes.
- Continuation of the professional practice through a new partnership with overlapping clientele and associated intangible value may negate a claimed loss by showing continuing economic benefit rather than a finalized loss event.
- Under I.R.C. § 6651(a), a late-filing addition to tax applies unless the taxpayer carries the burden of proving the failure to file timely was due to reasonable cause and not willful neglect.

## Conclusion

The Tax Court denied a claimed partnership loss deduction because the partner’s withdrawal and the partnership’s informal dissolution did not constitute a closed transaction producing a recognizable loss under § 731(a)(2), and it upheld the § 6651(a) addition to tax because the 1969 return was filed late without proof of reasonable cause.


Neubecker v. Commissioner, 65 T.C. 577 (1975)