Woodhall v. Commissioner

W. Lyle Woodhall and his brother Eldon were equal partners in a lath and plaster contracting business called Woodhall Brothers. The brothers had a buy–sell agreement that said the partnership would automatically terminate on the death of either brother and the surviving brother would buy out the other’s interest. Lyle died in 1964, leaving his wife, Chrissie Woodhall (plaintiff) as his sole heir and executor. Eldon paid Chrissie for Lyle’s share of the partnership according to a formula in the buy–sell agreement that used fair market value as of the date Lyle died. Chrissie filed a joint income tax return as surviving spouse and a fiduciary return for the estate for 1964, and an individual return and a fiduciary return for 1965. Because the partnership reported income on a cash basis, Lyle had not paid taxes on his share of the outstanding accounts receivable when he died. However, Chrissie did not report the amounts allocated to accounts receivable that Eldon paid her as income. Instead, she reported no gain on the sale of Lyle’s interest, claiming its tax basis was the fair market value on the date of his death, the same as the sale price. The tax commissioner (defendant) assessed deficiencies for both years on the ground that Chrissie had not declared the amounts allocated to receivables as income. Chrissie petitioned the tax court for review, and the tax court affirmed the commissioner’s decision. Chrissie appealed.