Pfaff v. Commissioner

Background

The people bringing the case are the executors of a physician who died December 25, 1935. The doctor was a member of a medical partnership entitled to forty percent of its profits. At his death the partnership had about $69,000 in accounts receivable for services rendered during his lifetime, and the doctor’s share of those accounts exceeded $27,000. His death dissolved the partnership under New York law. Both the doctor and the partnership used the cash method of accounting.

Reasoning

The practical question was whether the tax commissioner could include the decedent’s share of the partnership’s accounts receivable in the doctor’s 1935 income under the Revenue Act of 1934 and Treasury Regulations. The commissioner reported that share at about one-fifth of face value. The Board of Tax Appeals agreed with the commissioner and found the valuation supported. The Circuit Court of Appeals affirmed without an opinion. The Supreme Court, noting the case presented the same issue as Helvering v. Estate of Enright, concluded for the reasons given in that opinion that it was proper to include in the decedent’s 1935 income the fair value of his interest in the partnership accounts.

Real world impact

As a result, an estate in this situation must report the fair value of a deceased partner’s share of partnership receivables on the decedent’s income for the year of death. The ruling affects estates of partners and partnerships where partners die leaving unpaid accounts, especially when taxpayers use the cash accounting method. The Court’s decision settles the circuit split by following the reasoning in the companion Enright opinion.