## Facts

- Ben Schaefer died owning an interest in a business partnership with his brother, Arthur Schaefer.
- Marilynn H. Schaefer served as executor of Ben’s estate and filed fiduciary income tax returns (Forms 1041) for multiple post-death tax years.
- In preparing those returns, the estate did not include Ben’s distributive share of partnership income in the estate’s computation of taxable income and distributable net income (DNI).
- The IRS issued notices of deficiency to the estate, determining that the omitted partnership income had to be included in the estate’s income and DNI, which increased the estate’s income tax liability for the years at issue.
- The IRS also determined an addition to tax under I.R.C. § 6651(a)(1) for failure to timely file one or more required returns.
- Marilynn H. Schaefer, as executor (appearing pro se), petitioned the United States Tax Court to contest the deficiencies and the late-filing addition, arguing in part that Wisconsin law supported excluding the partnership income from DNI.

## Issues

1. Whether the estate was required to include the decedent’s distributive share of partnership income in the estate’s taxable income and in computing distributable net income for the years at issue.
2. Whether Wisconsin law could justify excluding that partnership income from the estate’s DNI calculation for federal income tax purposes.
3. Whether the estate was liable for the I.R.C. § 6651(a)(1) addition to tax for late filing.

## Decision

- The Tax Court sustained the Commissioner’s determinations that the estate was required to take into account the partnership income attributable to Ben’s partnership interest in computing the estate’s taxable income and DNI.
- The court rejected the executor’s arguments for omitting the partnership income, including arguments based on state law, concluding they did not change the federal income tax result.
- The Tax Court sustained the § 6651(a)(1) addition to tax because the estate did not prove reasonable cause for the late filing.

## Legal Principles

- A partner’s distributive share of partnership income is included in the partner’s gross income under federal tax law; when an estate succeeds to a decedent’s partnership interest, the estate generally must report the distributive share attributable to that interest.
- Distributable net income (DNI) is a federal tax computation under Subchapter J and is not controlled by an executor’s bookkeeping treatment or by a state-law characterization that conflicts with the Internal Revenue Code’s inclusion rules.
- State law may define property rights and interests, but federal law determines how those interests are taxed for federal income tax purposes.
- The § 6651(a)(1) addition to tax applies for failure to timely file unless the taxpayer carries the burden to show the failure was due to reasonable cause and not due to willful neglect.

## Conclusion

*Schaefer v. Commissioner* held that an estate could not omit the decedent’s partnership income when computing the estate’s taxable income and distributable net income, and it upheld the IRS’s resulting deficiencies as well as a § 6651(a)(1) late-filing addition because the estate failed to establish reasonable cause.


Schaefer v. Commissioner, 46 T.C.M. (CCH) 986 (1983)