contractor did not complete the project, USF&G was required to perform under the indemnity agreement. Although the partnership was employed to finish the project, USF&G still demanded payment from the partnership and its two partners for their joint and several liability of $3,259,200. Finally, the partnership also borrowed money for working capital. It borrowed $204,758.10 from the City National Bank & Trust Co. of Kansas City in 1963 and $150,000 from the First National Bank of Kansas City in 1959. On December 2, 1959, the decedent also borrowed individually from the First National Bank the principal sum of $230,000.

The decedent died testate on July 5, 1963. According to his last will and testament, his wife, Bertha Long, and his two sons, Robert W. Long and petitioner Marshall Long, were to share equally the residue of his estate. Among the assets so passing to them was the decedent's 25-percent interest in the Long Construction Co. partnership. On its estate tax return, the estate valued the partnership interest at "no value." This valuation was accepted by respondent upon a later audit of the estate.

At the death of the decedent, the above liabilities remained unsatisfied. Thus the following claims were filed against his estate:

Except for $215,788.92 of the First National Bank claim,1 all the claims were for liabilities of the partnership, for which the decedent was liable as a general partner. Subsequently, the estate paid the following amounts in settlement of those claims:

'This amount represents the amount due on the decedent's personal note dated Dec. 2, 1959.

On October 19, 1964, the estate also paid legal fees of $27,957.03 incurred in the settlement of the USF&G claim.

All but $9,778.66 of the above payments were deducted by the estate on its estate tax return under section 2053(a).2 The amount not so deducted represents interest on the banks' claims and was deducted on the estate's income tax return only. Those deductions have all been allowed by respondent and are not disputed here.

Although the estate paid the claims, Robert Long was nevertheless liable as a general partner for 75 percent of all partnership liabilities. Thus the probate court of Jackson County, Mo., in its final order of distribution for the estate found Robert Long to be indebted to the estate for his share of partnership liabilities in the amount of $633,561.62. The court treated this amount as an offset against Robert Long's distributive share of the estate.

Meanwhile, the partnership had continued in existence after the decedent's death until it was liquidated on November 13, 1969. The estate was merely substituted as a general partner in place of the decedent. During that time, the estate reported on its income tax return the following amounts of income and losses, which were attributable to its 25-percent partnership interest:

When the partnership was liquidated, the estate received a liquidating distribution of $46,417.77 in cash. Although it is

2Unless otherwise stated, all section references are to the Internal Revenue Code of 1954, as in effect for the taxable years in issue.

unclear from the record, we assume that represents all the partnership assets.

The estate claimed a long-term capital loss upon liquidation of the partnership. In determining that loss, the estate calculated its basis in its partnership interest as follows:

Value of partnership interest at date of death
Partnership obligations paid by estate

Plus distributive share of partnership income
Less distributive share of partnership losses
Total basis in partnership

0

$639,309.21

7,624.73

122,825.82

524,108.12

It thus calculated a long-term capital loss from the partnership liquidation of $477,690.35 and, after considering a long-term capital loss carryover from 1965 and capital gains for 1969, a net long-term capital loss of $514,615.89. Because the estate was unable to use the claimed loss, petitioner claimed his share of it as a beneficiary of the estate. See sec. 642(h). Respondent has disallowed petitioner's claimed loss carryover on the grounds that the estate did not realize a loss upon liquidation of the partnership and that the loss, if allowed, would result in a double deduction.

Before addressing those issues, we note that petitioners argue in their briefs that the contested deficiencies may be barred by the statute of limitations. We do not reach that issue, however, because petitioners have failed to plead it affirmatively. The statute of limitations is an affirmative defense which must be specifically pleaded. Rule 39, Tax Court Rules of Practice and Procedure. Affirmative defenses should not be raised for the first time in a party's brief simply because it does not give the opposing party a fair opportunity to address the issue properly. Groetzinger v. Commissioner, 69 T.C. 309, 312 (1977). In his reply brief, respondent objected to petitioners' arguments on that point. We sustain respondent's objection. Petitioners' untimely attack puts respondent in an unfair position. Respondent suggests that there may have been agreed extensions of the limitations period. The record is incomplete on this point probably because the defense was not raised properly. In any event, because the statute was not affirmatively pleaded by petitioners to the prejudice of respondent, it will not be considered. See also Shomaker v. Commissioner, 38 T.C. 192, 201 (1962); Citizens Nat. Trust & Sav. Bank of Los Angeles v.

Commissioner, 34 B.T.A. 140, 145 (1936); Oilbelt Motor Co. v. Commissioner, 16 B.T.A. 831, 834 (1929).

We now turn to respondent's first reason for disallowing the loss carryover. He contends that the estate miscalculated the basis of its partnership interest. Respondent argues that no basis adjustments are allowable for payment of the bank claims and the contingent liabilities (i.e., the law suits) because those claims and liabilities were liabilities of the decedent, not the partnership. In any event, he concludes, the liabilities were never "assumed" by the estate within the meaning of section 752(a), and no basis increase for those liabilities is therefore permissible. The basis of a partnership interest acquired from a decedent is determined under section 1014. Sec. 742. Thus the basis of a partnership interest passing at death is its fair market value at death or, if applicable, at the alternate valuation date. Sec. 1014(a). In addition, respondent's regulations provide for an increase in that basis for the "estate's or other successor's share of partnership liabilities." Sec. 1.742-1, Income Tax Regs. After this initial basis determination, the estate adjusts its basis as any general partner would do. The estate's basis is increased by its distributive share of partnership income and decreased (but not below zero) by its share of partnership losses. Sec. 705(a). Likewise, the estate's basis is increased by the amount of money or the adjusted basis of property contributed by it to the partnership. Sec. 722. And in the case of a nonliquidating distribution by the partnership, the basis is reduced (but not below zero) by the amount of money or the adjusted basis of property distributed to the estate. Sec. 733. Finally, any increase in the estate's share of partnership liabilities or in the estate's individual liabilities by reason of its assumption of partnership liabilities is treated as a contribution of money by the estate to the partnership. Sec. 752(a). Conversely, any decrease in such liabilities or share of liabilities is treated as a distribution of money by the partnership to the estate. Sec. 752(b). These are the basic principles upon which the basis adjustments should be made in this case.

The parties agree that the fair market value of the partnership interest at the death of the decedent was zero, and no one disagrees about the basis adjustments resulting from the estate's distributive share of partnership income and losses. The dispute is over Basis adjustments reflecting the estate's pay

ments of the claims of Kansas City Life-TWA, USF&G, First National Bank, and City National Bank.

Clearly, all the bank claims at issue here, except the claim for $215,788.92, were liabilities of the partnership. The decedent had borrowed the funds from the banks on behalf of the partnership as its general partner, and the notes clearly reflect this fact on their faces. Only the note dated December 2, 1959, upon which the claim for $215,788.92 was based, does not reflect the partnership as a borrower. It was signed by the decedent in his individual capacity, not as a general partner of the partnership. We can only conclude that the decedent had borrowed that amount personally, and that the December 2 note was not a partnership liability.3

We think it equally clear that the Kansas City Life-TWA and USF&G claims were liabilities of the partnership. The claims were based upon law suits filed against the partnership and the decedent as one of its general partners. One suit was for the faulty construction of a building and the other for failure to perform on a contract. They arose in the context of the partnership's business, and the decedent's liability arose because he was a general partner.

Having decided that the above claims were in fact liabilities of the partnership, we must now determine the estate's basis in its partnership interest. Our starting point is the fair market value of the interest at the date of the decedent's death. See secs. 742 and 1014(a). That amount is zero. The estate then increases its basis to reflect its 25-percent share of partnership liabilities. See sec. 1.742-1, Income Tax Regs. The treatment of the partnership's notes is clearly directed by the regulations. Sec. 1.742-1, Income Tax Regs. The estate's 25-percent share of those notes, $77,328.92, results in an increase in basis in that amount. The treatment of the other claims is not so clear, however.

Although they may be considered "liabilities" in the generic sense of the term, contingent or contested liabilities such as the Kansas City Life-TWA and USF&G claims are not "liabilities" for partnership basis purposes at least until they have become fixed or liquidated. This Court has held on a number of occasions that contingent and indefinite liabilities assumed by the

We thus compute the amount of partnership notes outstanding at the decedent's death to be $309,315.68.