Thompson, James E., Jr. v. Commissioner and Board of Trustees of Central Pension Fund of International Union of Operating Engineers and Participating Employers REPORTS OF THE UNITED STATES TAX COURT *MARSHALL LONG AND BETTY C. LONG, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 9088-76. Filed October 3, 1978. Petitioner, as the beneficiary of an estate, claimed certain unused capital loss carryovers of the estate upon its termination. The estate was a successor to the decedent's interest in a partnership. At the decedent's death, the partnership had certain bank loans outstanding and, along with the decedent and his partners, was the defendant in certain law suits involving the partnership's business. The banks and the plaintiffs filed their respective claims against the estate, which were settled and paid by the estate. The estate deducted those claims under sec. 2053, I.R.C. 1954, in computing its estate tax. The estate then increased its basis in its partnership interest for the payment of those claims. Because of the basis increase, the estate was able to use certain partnership capital losses and claimed a capital loss upon liquidation of its partnership interest. Those losses were then passed through the estate to petitioner. Held, certain claims against the estate are determined to be partnership liabilities. Held, further, contingent or contested liabilities are not liabilities for purposes of increasing partnership basis until they are fixed or liquidated. Held, further, the estate individually assumed partnership liabilities to the extent that it paid them out of its separate funds. Held, further, estate's basis in its partnership interest is determined. Held, further, sec. 642(g), I.R.C. 1954, did not prohibit a basis increase for the assumption of partnership liabilities even though those liabilities were also deducted by the estate under sec. 2053, I.R.C. 1954. Daniel C. Weary and Dennis P. Wilbert, for the petitioners. Larry K. Akins, for the respondent. •See Supplemental Opinion at 724. 1 OPINION TIETJENS, Judge: Respondent determined deficiencies in petitioners' Federal income taxes in the amounts of $18,349.85 for 1971 and $2,164.44 for 1972. After certain concessions, the issue remaining is whether petitioner-husband, as beneficiary of the Estate of John C. Long, may use a net long-term capital loss carryover from the estate. The facts have been fully stipulated. The stipulations of facts and attached exhibits are incorporated herein by reference. Petitioners Marshall Long and Betty C. Long resided in Leawood, Kans., when they filed their petition. They filed their joint Federal income tax returns for 1971 and 1972 with the Internal Revenue Service Center in Austin, Tex. Petitioner Marshall Long and Robert W. Long are the sons of decedent John C. Long. Prior to his death in 1963, the decedent had been a partner with his sons in the Long Construction Co. The partnership was formed in 1942 with the decedent and Robert as its only partners. In 1952, petitioner was also admitted as a general partner. His membership in the partnership lasted only 6 years, however. And when he withdrew from the partnership in 1958, petitioner was released from all partnership liabilities, past, present, and future. After petitioner's withdrawal, the decedent and Robert continued the partnership as general partners, respectively sharing in all partnership profits and losses 25 percent and 75 percent. During its existence, the partnership and its partners incurred substantial liabilities. In 1955, the partnership erected a building in Kansas City, Mo., for Kansas City Life Insurance Co. of Kansas City, Mo. (hereafter Kansas City Life). The building was occupied by Trans World Airlines (hereafter TWA) under a longterm lease agreement. When structural defects later appeared in the building, Kansas City Life and TWA sued the decedent, Robert, and petitioner as copartners doing business as Long Construction Co. The suit was filed in 1961 seeking $2,350,000 in damages. Also, in 1959, the partnership became a subcontractor on a construction project in Regina, Saskatchewan, Canada. The partnership and its two partners insured completion of the project with a performance bond issued by United States Fidelity & Guaranty Co. (hereafter USF&G). Because the prime |