possible liabilities as guarantor of several outstanding loans. Based on its finding that there would be nothing due on the existing guarantees, the Board of Tex appeals valued the assets and found a deficiency based on the asset value undiminished by liabilities. The Court agreed with the Board of Tax Appeals insofar as the values of the assets and the guarantees were concerned, but remanded the case because the Board had not considered the possibility of a serious effect upon the value of the estate assets that might result from the provision that nothing could be withdrawn until the last undertakings were completed. Even though the final result concerning the value of Guggenheim's partnership was more speculative than here, we do not understand that decision to hold that the deceased's share of partnership assets including the right to post-death income, were not to be included in the gross estate for federal estate tax purposes because of the possibility of losses, but merely remanded the case so that the value of the right to future income could be properly ascertained. We do not consider Guggenheim as support of the theory advanced by plaintiff.
In the Darcy case, supra, also relied on by plaintiff, the Court followed the result of the Bull decision and held that post-death income is not includable in the gross estate for estate tax purposes; however, there the decedent was a member of a partnership engaged in the business of cotton and merchandise brokers, essentially a personal service organization. Also there was no evidence of any capital contribution on the part of the decedent to the partnership, all of which distinguish the case at bar.
In the Borden case, supra, the facts of which plaintiff asserts closely parallel the facts at hand, did not involve the Federal Estate tax, but rather the New York Transfer tax. The partnership agreement there likewise provided for the payment of post-death partnership income to the estate of a deceased partner; however, it also provided that the surviving partners could terminate the partnership at any time after the decedent's death, a very important fact which made the right so speculative that it had no practical value. Moreover, there the partnership agreement provided that the exclusive right to the partnership name, a very important part of the partnership good-will, passed to the surviving partners so that again the remaining right of the estate in the partnership business was quite worthless. For these reasons, the Borden case is likewise inapposite to the case at hand and does not control its result.
Plaintiff's argument is primarily based on the fact that decedent's capital contribution remained fully liable for partnership debts, which fact, as plaintiff contends, made the right to share in post-death income so speculative that for all practical purposes, it had no value. Again, we cannot agree with plaintiff's contention.
'It has long been recognized that a value can be placed upon rights even though there is some uncertainty as to the amount, if any, which will be received under the terms of the rights. See Simpson v. United States, 1920, 252 U.S. 547, 40 S. Ct. 367, 64 L. Ed. 709; Ithaca Trust Co. v. United States, 1929, 279 U.S. 151, 154, 49 S. Ct. 291, 73 L. Ed. 647, where the court said that 'the general uncertainty that attends human affairs' is not such an uncertainty that prevents valuation of a right subject to such uncertainty.' Duffield v. United States, supra, 136 F.Supp. at page 947, footnote 9.
Nor can we agree with plaintiff's further contention that the right to post-death income is not includable in the gross estate because the Government has already received income tax on it when the Estate returned it as income to it. The Bull case itself recognizes that the same sum may be used in different aspects for the computation of both estate tax and income tax (295 U.S. at page 256, 55 S. Ct. at page 698, 79 L. Ed. 1421). That this is so is confirmed by the fact that the Internal Revenue Code of 1939
provided that, in computing the income tax payable upon the receipt of income in respect of a decedent, a deduction shall be allowed for the estate tax attributable to the inclusion of the right to the income in the decedent's estate. Cf. United States v. Ellis, D.C.S.D.N.Y.1957, 154 F.Supp. 32, 39.
Finally, with regard to the issue of includability of the right to post-death income in the gross estate, we refer to the example hypothesized by the Court in McClennen v. Commissioner of Internal Revenue, supra, 131 F.2d at pages 168-169, which we consider strikingly similar to the facts of the case at hand:
'Sometimes the partnership agreement merely provides for the postponement of liquidation, say, to the end of the term for which the partnership was created. Thus, a partnership agreement between A, B and C might provide that 'should any partner die during the term of said co-partnership the firm shall not be dissolved thereupon, but the business shall be continued by the survivors until the expiration of said partnership term, the estate of the deceased partner to bear the same share in profits and losses as would have been received and borne by the deceased partner had he lived'. Under such an agreement, if A dies, B and C do not buy out A's interest in the partnership. Unless more appears, A's executor does not become personally liable as a general partner, (cites case). Nor is A's general estate in the executor's hands liable as a partner for new debts created by B and C in continuing the business. (cites case) For the remainder of the term, A's share already embarked in the business remains in, subject to the risks of the business. It would seem not improper to describe the continuing business as now being owned by B and C as general partners, with A's estate (or A's executor as trustee under the will of A) as a limited partner therein, sharing in the profits, but not liable beyond the amount or interest already embarked in the business.
'In the case just supposed, the chose in action, the right to which A's executor succeeds, would have to be included as part of the gross estate for estate tax purposes. It is a right to a fixed share of the profits of the business during the continuance of the term, plus a right to receive in cash the amount due to A's estate upon a final liquidation and accounting after the expiration of the term. This right in its entirety is an asset of A at the date of his death; and the value of this right as of the date of the death or the optional date one year later, with due discount for postponement of payment and other contingencies, would be included in computing the value of the gross estate.' (Emphasis supplied.)
Therefore, we are constrained to hold that the right of the estate here to a share of the post-death income of the partnership is a right properly includable in the gross estate of the decedent for estate tax purposes. Cf. Degener v. Anderson, 2 Cir., 1953, 77 F.2d 859.
The plaintiff's second contention that the Internal Revenue Service's revaluation of the decedent's partnership interest to include a valuation for the right to post-death income was improper and unlawful because the Internal Revenue Service had previously made a deficiency assessment based on the good-will of the partnership business is also without merit.
Plaintiff overlooks the significance of the fact that in making the deficiency assessment based on the value of the right to post-death income, the Internal Revenue Service eliminated the prior good-will item and gave the plaintiff credit for the estate tax already paid thereon.
There was no duplication of valuation which required the payment of a double estate tax on the same asset. There were no representations or other facts in evidence which would raise and support any theory whereby the Internal Revenue Service is estopped from making the revaluation and deficiency assessment.
Moreover, there was no closing agreement or compromise which would preclude the Internal Revenue Service from making a recomputation of the Estate's tax liability within the period of limitation. Cf. Okonite Co. v. Commissioner of Internal Revenue, 3 Cir., 1946, 155 F.2d 248, certiorari denied 329 U.S. 764, 67 S. Ct. 125, 91 L. Ed. 658, rehearing denied 329 U.S. 829, 67 S. Ct. 296, 91 L. Ed. 703, rehearing denied 331 U.S. 870, 67 S. Ct. 1748, 91 L. Ed. 1872; Knapp-Monarch Co. v. Commissioner of Internal Revenue, 8 Cir., 1944, 139 F.2d 863; Auerbach Shoe Co. v. Commissioner of Internal Revenue, 1 Cir., 1954, 216 F.2d 693.
We do find merit in the plaintiff's third contention. We think the Internal Revenue Service should have used the fair market value of the building at the time of the decedent's death in figuring the depreciation allowance of the partnership building to be used in determining the value of the right to post-death income.
The defendant admits that the use of the lower depreciation allowance for the building based on its book value did result in a higher valuation of the Estate's right to post-death income,
but contends that the higher valuation was offset by the Internal Revenue Service's giving the Estate the benefit of a depreciation deduction in arriving at the valuation of the decedent's fractional interest in the building. As stated earlier in this opinion, the Internal Revenue Service allowed the depreciation deduction on the building for the period of the uncompleted term of the partnership because there was no present right to the building on account of the partnership agreement. The defendant would now seem to assert that the depreciation allowance should not have been granted
The depreciation allowance granted actually amounts to a 15 1/3 % discount on the fair market value of the decedent's interest in the building at the time of death. In view of the fact that the decedent's interest in the building was a mere fractional interest, and since the enjoyment of such interest because of the partnership agreement was postponed to the date of dissolution of the partnership agreement, we do not consider such a discount, whether in the form of a depreciation allowance or otherwise, improper. Cf. Estate of Campanari, 1945, 5 T.C. 488, and Wm. R. Stewart, Executors, 1934, 31 B.T.A. 201, where, in valuating fractional interests in realty for estate tax purposes, discounts of 12 1/2 % of and 15%, respectively, were allowed from the fair market proportionate value of the whole.
The Estate's right to post-death income should be revaluated by using a depreciation allowance for the partnership building based on its fair market value less the discount of 15 1/3 %, or 70,273.00, over a 25-year life, and that any overpayment of estate tax revealed by such computation should be refunded to the plaintiff with interest at the rate of 6% per annum from the date of payment, September 8, 1955.