Opinion ID: 207841
Heading Depth: 4
Heading Rank: 2

Heading: The Helmer, Long and La Rue decisions.

Text: The first significant interpretation of Section 752 came in Helmer v. Commissioner, 34 T.C.M. (CCH) 727 (1975). In Helmer, a partnership received payments in accord with an agreement that gave a third-party corporation the option to buy certain real estate in which the partnership held a two-thirds interest. Id. at 728. During the term of the option agreement, the partnership retained the right to possess and enjoy profits from the property in question, and there was no provision in the option agreement for repayment of the amounts paid under the option agreement should the agreement terminate. Id. at 729. The taxpayers received payments directly from the third party pursuant to the option agreement during the years in issue, and listed these amounts as distributions to the taxpayers on the partnership’s books and tax returns. The taxpayers received partnership distributions during the years in issue, and had the partnership pay personal expenses, in excess of their adjusted bases in the partnership. Id. The Tax Court held in Helmer that the option agreement and receipt of the option payments “created no liability on the part of the partnership to repay the funds paid nor to perform any services in the future . . . [N]o liability arose under [S]ection 752 and the partners’ bases cannot be increased by such amounts.” 34 T.C.M. (CCH) at 731. The court noted that there were no provisions in the option agreement for repayment of, or restrictions on, the option payments. Id. Further, the court emphasized that income attributable to the option payments was subject to deferral at the partnership level due only to the inability of the partnership to determine the character of the gain, not because the partnership was subject to a liability to repay the funds paid or to perform any services in the future. Id. A few years after Helmer, the Tax Court again considered the reach of Section 752 in Long v. Commissioner, 71 T.C. 1 (1978), aff’d in part and rev’d in part on other grounds, 660 14 F.2d 416 (10th Cir. 1981). Long addressed an estate’s recognition of taxable gain on the liquidation of the decedent’s partnership interest. 71 T.C. at 5. The partnership was a construction company that had pending against it claims in litigation, and the question presented was whether those claims could be considered liabilities includable in the estate’s outside basis under Section 752. Id. at 6-7. The Tax Court in Long held that the claims were not sufficiently definite to be treated as liabilities that could be included in the decedent’s outside basis because they had been in contested litigation at the time of decedent’s death. Id. at 7-8 (“Although they may be considered ‘liabilities’ in the generic sense of the term, contingent or contested liabilities . . . are not ‘liabilities’ for partnership basis purposes at least until they have become fixed or liquidated. . . . Those liabilities should be taken into account only when they are fixed or paid.”). This emerging line of precedent was extended ten years later by the Tax Court’s decision in La Rue v. Commissioner, 90 T.C. 465 (1988). That case concerned reserves reflecting “back office” errors of a brokerage partnership. The reserves were established to cover the brokerage’s potential failure to execute trade orders by customers. To correct such errors, the brokerage had to purchase securities and deliver them to customers. Id. at 468. “Gain or loss was incurred on these transactions measured by the difference between the customer’s contract price and what the broker had to pay to obtain the securities.” Id. “The precise amount of gain or loss was not determinable until the securities in question were actually bought or sold.” Id. at 475. The question was whether the partnership’s reserves for the “back office” errors was a liability within the meaning of Section 752 that increased the partners’ outside basis. 90 T.C. at 477-78. The IRS argued that the reserves were not liabilities for purposes of Section 752. The Tax Court concurred. Citing its opinion in Long, the court held that the “all-events” test determines when a liability is includable in basis under Section 752. Id. at 478. As that test would have it, a liability can only be included in basis “for the taxable year in which all the events have occurred which determine the fact of liability and the amount thereof can be determined with reasonable accuracy.” Id. The court concluded that the amount of liabilities was not determinable “until the securities are actually purchased . . . and the transaction closed.” Id. at 479. Notably, the Tax Court in Helmer, Long, and La Rue determined in each case that the obligations at issue were not sufficiently free from contingencies to be deemed liabilities that would give rise to a change in a partner’s outside basis under Section 752. However, the IRS soon indicated that there were circumstances in which some degree of contingency would not prevent recognition of a liability that changed a partner’s basis under Section 752.