#### CLEMENT H. BETTS v. THE UNITED STATES1

[No. D-978]

*On the Proofs*

*Income tax; sale of stock.*— The plaintiff acquired an interest in the assets of a copartnership for which he paid an agreed sum, sold that interest to a corporation for shares of its stock, and then sold said shares of stock at an excess over the amount paid by him for the interest in the copartnership. The excess *held*to be a gain and taxable as income.

*Same; acquirement of good will.*— Interest purchased in the capital of a going concern includes the good will, which can not be separated therefrom for the purpose of treating it as a gift, and as such exempt under the income tax laws.

*Same; finality of finding by Commissioner of Internal*Revenue.— Determination by the Commissioner of Internal Revenue of facts found by him in arriving at a taxable gain is not conclusive upon the Court of Claims. *Meyer case,*60 C. Cls. 474, cited.

*The Reporter’s*statement of the case:

*Mr. Lucius E. Beers*for the plaintiff.

*Mr. Fred K.*Dyar, with whom was *Mr. Assistant Attorney General Merman J.*Galloway, for the defendant.

Decided February 1, 1926.

Motion for new trial overruled October 18, 1926.

The court made special findings of fact, as follows:

I. The plaintiff is a citizen of the United States and a resident of New York City and for many years prior to *2September 29, 1916, was an employee of the firm of Funch, Edye & Co., doing a ship brokerage business, with offices located in New York City.

II. During the year 1916 the firm of Funch, Edye & Co. was doing a domestic and foreign business as steamship brokers and agents. It was an old and well-established firm and had been doing business for about seventy-five years. Thomas Ashley Sparks came into the firm as a partner some time in 1901, and he found the plaintiff, Clement H. Betts, in its employ occupying a responsible position. Thereafter the copartnership consisted of Paul Gottheil, William L. Walther, and Thomas Ashley Sparks.

III. Paul Gottheil having died some time prior to the year 1916, thereafter the business of the firm of Funch, Edye & Co. was owned and carried on by Walther and Sparks, as surviving partners, some provision having been made by which the widow of Paul Gottheil, Miriam H. Gott-heil, and the two daughters, Elsie G. Culman and Eleanor H. Gottheil, were to receive a certain sum or percentage from the business.

IY. The firm of Funch, Edye & Co. in 1916 was carrying on a large, well-organized, and lucrative business. Its character was such that it did not require much capital, as it was largely a personal business, representing foreign shipowners who had business in New York. The firm looked after the interests of the ships of such foreign owners, discharged the cargoes brought by such ships, and obtained cargoes to transport outward. It also for about three-quarters of a century had done a chartering business as brokers, bringing shipowners and merchants together. The entire capital of the firm amounted to $80,000, invested in office furniture, membership in the Maritime and Produce Exchanges, shares of steamship stock, and sufficient cash to pay weekly salaries in case of need.

V. In June, 1916, Thomas Ashley Sparks was requested by one of the directors of the Cunard Steamship Co. to come to England. Prior to his arrival there the Cunard company’s officials had proposed to him that he accept the agency of that company in New York, and he had declined to give up *3bis association with the members of Funch, Edye *&*its business. After considerable negotiations a proposition was made by it that the Cunard company purchase the business of Funch, Edye & Co. for the sum of $2,400,000. This amount was arrived at, as a fair valuation of the firm’s business, by taking as a basis its profits in the preceding year and a ten years’ average of them. Two of the directors of the Cunard company had before this requested Mr. Sparks to leave Funch, Edye & Co. and become their agent in America, but he declined the offer. Immediately on receipt of this offer of the Cunard company to purchase the business of Funch, Edye & Co. Mr. Sparks cabled to his partner, Mr. Walther, stating the Cunard proposition, and stipulating that if the business should be sold, Messrs. Bobert H. Goodwin, Clement H. Betts, and George Bossen, who had long been trusted employees of the firm, should be protected by being taken into partnership, and also suggested that he should consult freely and frankly with these employees.

YI. Mr. Sparks returned to New York in September, 1916, bringing the offer with him. He and Mr. Walther then decided to take Messrs. Goodwin, Betts, and Bossen in as members of the firm of Funch, Edye & Co. on the basis of a one-tenth interest in the business, each to contribute $8,000 to the capital of the firm, and he and Mr. Walthers to contribute $28,000 each under the new partnership.

VII. During the negotiations between Mr. Sparks and the Cunard company, which resulted in their offer of $2,400,000, nothing had been said of the capital of $80,000. When Mr. Sparks presented the offer to him Mr. Walther insisted that the Cunard company should add this amount to their offer. Mr. Sparks on September 21, 1916, cabled the Cunard Steamship Co. that the firm would accept its offer if it added the $80,000 and would allow the “present interests to be in control as officers and directors at yearly salaries aggregating $150,000 until payments completed, purchasing interests to guarantee this, also protection against all copart-nership obligations which also to be assumed by new corporation.”

*4September 25 and 27, the Cunard company accepted all of the proposition of Funch, Edye *&*Co. of September 21, 1916, except the sum of $150,000 for salaries, and a counter proposal of $100,000 for salaries was suggested. On September 29, 1916, Funch, Edye *&*Co. accepted $100,-000 for salaries, the other conditions of the cablegram of September 21, 1916, to stand. On September 30, 1916, the Cunard company sent a cablegram to Mr. Sparks, stating in part “ very glad you can accept modification of salaries; we accept other conditions your telegram of twenty-first so far as understood, but you will make everything clear in agreements.”

VIII. On September 29, 1916, a partnership agreement was entered into between William L. Walther, T. Ashley Sparks, George Eossen, Clement H. Betts, and Eobert H. Goodwin, by which the said Eossen, Betts, and Goodwin were to each contribute, in cash, $8,000 to the copartnership capital of $80,000, and the contributions to said capital of the said Walther and Sparks were to be reduced to $28,000 each, and the said copartners were to share in the profits and losses of the said business in the proportions set out in the contract. The contract also provided for the sale and transfer of the entire business of Funch, Edye & Co. by the said Walther and Sparks and the payment to the new copartners of 10 per cent of the purchase price, and such settlement for the interest of the widow of Paul Gottheil, the deceased partner, as they might be able to effect.

Copy of the contract of September 29, 1916, is attached to these findings as Appendix A and is made part of this finding by reference thereto.

IX. On December 4, 1916, the Cunard Steamship Co., party of the first part, entered into an agreement with William L. Walther, T. Ashley Sparks, George Eossen, Clement H. Betts, and Eobert H. Goodwin, constituting the firm of Funch, Edye & Co., parties of the second part, and Miriam H. Gottheil, widow, and Elsie Gottheil Culman and Eleanor Gottheil, children of Paul Gottheil, parties of the third part, by which the parties of the second part agreed to cause a new company, under the title of Funch, Edye & Co., in*5corporated, to be organized under the laws of the State of Delaware, with a total authorized capital stock of $600,000, for the purpose of the acquisition by it of all the good will, business, and assets of such firm of Funch, Edye & Co. as a going concern, and the continuation of such business; the sale, transfer, and delivery to the corporation of all contracts and assets and capital of said firm as the same existed on December 31, 1916, “ together with all the good will appertaining to the business of said firm and the exclusive right of said corporation to the use in all parts of the world of said firm name of Funch, Edye *&*Co. as a corporate title or otherwise, and to continue said business of said firm as a going concern, as the successors thereto, as, of, and from said 1st day of January, 1917.”

The parties of the second part were to ascertain in their usual way and distribute the profits for the current year among themselves. The contract further provided in detail how the purchase price of $2,400,000 should be paid, 8 per cent to Mrs. Gottheil, 10 per cent each to Messrs. Goodwin, Betts, and Rossen, 32 85/100 per cent to Mr. Sparks, and 29 15/100 per cent to Mr. Walther, in six annual installments of $400,000 each, the first installment on January 1, 1917, and the other five on January 1 of each succeeding year, the parties of the second part to hold the capital stock in proportion to their interest until payment in full of the purchase price of $2,400,000, when the entire capital stock of 12,000 shares was to be surrendered to the party of the first part.. At the same time as the payment of the first installment of the purchase price, the party of the first part was to pay the $80,000 capital to the parties of the second part, according to their contributions thereto at the date of sale. The firm of Funch, Edye & Co. was to continue business in the usual way, T. Ashley Sparks to be president at $29,000 a year, William L. Walther as first vice president at $29,000 a year, Clement H. Betts, second vice president at $14,000 a year, Robert H. Goodwin, treasurer at $14,000 a year, and George Rossen, secretary at $14,000 a year.

A copy of the contract of December 4, 1916, is attached to these findings as Appendix B and is made part, hereof by reference thereto.

*6X. About June 15,1917, tbe plaintiff filed with the United States collector of internal revenue for the year 1916 an income tax return stating his net income as $123,966.24 and a tax thereon in the sum of $5,559.36, which was duly paid by plaintiff. Subsequently an additional tax for the year 1916 was assessed and demanded by the collector and this also was paid by plaintiff.

XI. A dispute having arisen between the Commissioner of Internal Revenue and plaintiff as to the amount of income tax due from plaintiff for the years 1916 to 1919, inclusive, the plaintiff signed a waiver of the limitation of five years as provided by section 250 (d) of the revenue act of 1921, 42 Stat. 264, which was duly accepted by the Commissioner of Internal Revenue.

XII. Thereafter, in February, 1924, the Commissioner of Internal Revenue notified plaintiff that his net income for the year 1916 had been increased by $240,000, claiming that amount represented the profits realized by him on the sale of a one-tenth interest in the stock of Funch, Edye & Co., and on June 2, 1924, the collector of internal revenue demanded an additional tax of $22,462.11, by reason of such increase to his net income. This tax was paid by plaintiff on the same day under a written protest, stating as the grounds thereof that the addition of $240,000 to his net income for 1916 made by the commissioner was illegal as that was not profits on the sale of the business of Funch, Edye & Co., but represented 10 per cent of the good will of the business of the firm and was transferred to him as a gift.

The court decided that plaintiff was not entitled to recover.

1

 Writ of certiorari deni-e-cl.

Campbell, *Chief*Justice,

delivered the opinion of the court:

The plaintiff became a partner in the firm of Funch, Edye & Co. in September, 1916, at which time articles of co-partnership between parties in interest were executed. The firm was an old one and had conducted a profitable business for many years. Its business was that of representing foreign ship owners who had business in New York, looking after their ships’ interests, discharging the cargoes, and obtaining for them outward cargoes. It was very largely a *7personal business that required a comparatively small capital, usually invested in seats in one or more of the exchanges, in furniture and some stock in steamship and other companies. The amount of this capital was $80,000. Two of the partners owned or controlled the business of the firm in the summer of 1916. It appears that the heirs or legal representatives of a deceased partner had some interest in the business, but just what it was does not definitely appear.

For the purposes of this case the business may be treated as belonging to the two surviving partners. In September, 1916, the plaintiff arid two other persons, all of whom had been for a long time employees of the firm, were admitted into the firm as copartners under articles of copartnership which defined the interests of each. Plaintiff agreed to contribute, as did each of the new partners, $8,000 in cash to the copartnership capital. The articles provided that at the option of the two original partners the business and assets of the partnership could be transferred to a corporation in consideration of its entire capital stock, of which plaintiff would be entitled to one-tenth. These two partners were also authorized to enter into an agreement for the sale of the capital stock of the corporation proposed to be organized for not less than $2,400,000. Subsequent to the making of this copartnership agreement another agreement was entered into between the Cunard Steamship Co. (Ltd.) and all the members constituting the firm of Funch, Edye & Co., and to which the widow and children of a former member of the firm were “ parties of the third part,” whereby the Cunard company agreed to purchase all of the capital stock of the corporation which the partners agreed to organize for the object and purpose of the acquisition by it of all the good will, business, and assets of the firm of Funch, Edye & Co., as a going concern and the continuation of its business.

The partners agreed to sell and deliver to the proposed corporation on or about January 1, 1917, the contracts and assets of the firm, representing capital invested and the good will pertaining to its business, the exclusive right of the corporation to. use. the firm’s name as a corporate title, and *8to continue its business as a going concern as successors thereto. This agreement was finally consummated. Plaintiff, as the holder of ten per cent of the capital stock of the corporation, was entitled to receive $248,0.00 of the purchase price paid by the Cunard company for the entire capital stock, as stated. Upon this statement it is clear that plaintiff realized a profit which was taxable. He acquired an interest in the firm’s assets when he became a copartner, for which he paid $8,000. He sold that interest to a corporation for shares of its stock and then sold the stock. He did not receive all of the $248,000 at one time, but no question is made as to the amount he is liable for, if taxable’ at all. But plainly there was a taxable gain accruing to him out of the transaction as stated. The contention of plaintiff, however, is that he paid $8,000 for an interest in the “ hard assets ” or capital of the firm of Funch, Edye & Co., that the interest he acquired in the good will of the business was a gift to him from the two former partners in the firm, and being a gift was exempt under section 4 of the revenue act of 1916, 89 Stat. 156. The basis of this contention apparently is that the Cunard company agreed to purchase or did purchase the “ good will ” of the firm as an item distinct from the firm’s assets and business. The valuation arrived at was based upon the earnings of the firm for a number of years. These earnings grew out of the business of the firm because of its management and its activities. The new members admitted into the firm had been no doubt important factors in the development of that business. It was. desirable that they be continued with the firm if it was to continue as a growing concern.

What the Cunard company acquired was not merely the good will but the entire business of the firm, including all its assets and the right to use its name. The. contention that the good will was a separate item that was given a large value, and that the so-called hard assets, which, in fact, represented the firm’s tangible assets used in its business, were a thing apart from the good will, leads to a conclusion which can not be maintained. Its good will can not be thus carved out of a firm’s business and leave it a going concern. “ It is *9tangible only as an incident, as connected with a going concern or business having locality or name and is not susceptible of being disposed of independently.” *Metropolitan Bank*v. *St. Louis Dispatch Co.,*149 U. S. 436, 446. When plaintiff became a partner he acquired an interest in the business of the firm and in its good will as an incident. These were not separate or separable from it as a going concern. Good will has been said to be intangible property, which in the nature of things can have no existence apart from a business of some sort that has been established and carried on at a particular place and that it can not be sold by judicial decree or otherwise unless it be in connection with a sale of the business on which it depends. See *Metropolitan Bank*v. *St. Louis Dispatch Co.,*36 Fed. 722, 724. The taking of two new members into the firm upon the terms of their paying a tenth of the valuation of the firm’s capital at $80,000, if that was the sole consideration, did not constitute in legal contemplation a gift to them of interest in the good will of the firm or its business. “When a partner retires from a firm, assenting to or acquiescing in the retention by the other partners of possession of the old place of business and the future conduct of the business by them under the old name, the good will remains with the latter as of course.” *Menendez*v. *Holt,*128 U. S. 514, 522; *Brown Chemical Co.*v. *Meyer,*139 U. S. 540. Having, as partners, acquired an interest in the firjaja_business Jby piircEase“EEey'acquired-at the same time as an incident an interest' in' whatever-pertainecTto” that business, including its good will.

While the foregoing disposes of the' case, it is deemed proper to refer to a contention of the Government that a determination of the “ taxable gain ” by the Commissioner of Internal Kevenue is conclusive “ at least to the extent that his determination of the question is an exercise of executive discretion.” The contention has been repeatedly made, and in the instant case goes to the extent that the commissioner’s conclusion upon the facts found by him is not to be questioned. This view is entirely without merit. It was thought to have been put at rest by the ruling of this court in the recent case of *Sara Leavitt Meyer,*60 C. Cls. 474, decided *10April 6, 1925, in which it is said that such a contention seems so clearly untenable as to obviate any need of discussion, and that to sustain it would be to deprive taxpayers of a right accorded them by statute and leave them without remedy where remedy is provided. The jurisdiction of the Court of Claims in such cases has been exercised for many years, as is attested by many decisions of this court and of the Supreme Court of the United States.

Replying to the argument for the Government that suits on account of taxes erroneously or illegally collected could only be brought against the collector, the Supreme Court says that it has become accepted law that such claims are “ founded upon ” the revenue law. The Court of Claims has jurisdiction of claims founded upon a law of Congress. (Sec. 145, Judicial Code.) In the case just referred to it is said by the Supreme Court: “ The argument that there is a distinction between claims £ arising under ’ (Judicial Code, §24 First) and those ‘ founded upon ’ *(id.*§24 Twentieth) a law of the United States, rests on the inadmissible premise that the great act of justice embodied in the jurisdiction of the Court of Claims is to be construed strictly and read with an adverse eye.” *United States*v. *Emery et al.,*237 U. S. 28, 32. When'the case is brought here the court must make its findings of facts as in other cases and the case is to be determined upon its merits. See *Medbury case,*173 U. S. 492, 500; *Singles case,*61 C. Cls. 433.

An expression by the court in a memorandum in the case of *Texas Pacific Coal & Oil Co.*v. *United States,*59 C. Cls. 984, decided October 30, 1924, has apparently given rise to some misapprehension, because it is quoted as if it had some bearing on the finality of the commissioner’s ruling in the instant case. In the case mentioned a demurrer to the petition, based largely on the ground of a want of protest when the taxes were paid, was overruled, without prejudice, however, to the right to present the question again on the coming in of all the facts. In the memorandum following this ruling the court observed that it was “ inclined to the view that the commissioner’s findings in tax cases are conclusive as to the facts.” Nothing there said had any reference to his conclusions of law or deductions from the facts. This court *11has jurisdiction in tax cases to find the facts and apply to them the law, and so far as the expression quoted can be supposed to qualify this unquestionable right and duty, it must be regarded as overruled.

The petition should be dismissed. And it is ordered.

Graham, *Judge;*Hat, *Judge;*Downet, *Judge;*and Booth, Judge, concur.