Court Opinion

ID: 4624074
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:54:24.722098+00
Date Added: 2024-06-11T07:56:28.385905
License: Public Domain

SOL M. STOCK, PETITIONER, v.. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stock v. CommissionerDocket No. 11409.United States Board of Tax Appeals10 B.T.A. 1169; 1928 BTA LEXIS 3948; March 5, 1928, Promulgated *3948  Upon withdrawal of petitioner from the copartnership of which he was a member he received, in addition to a return of his capital investment, a sum equal to 2 per cent of gross sales from the date of the last regular inventory to the date of retirement, which latter figure petitioner claims was paid to him for his interest in good will of the business.  Held, that the amount represents a payment in lieu of actual profits of the firm and is taxable as income derived from partnership profits.  W. W. Spaulding, Esq., for the petitioner.  J. L. Deveney, Esq., for the respondent.  ARUNDELL*1169  By this proceeding the petitioner seeks a redetermination of his income tax for the year 1921 for which the respondent has declared a deficiency of $482.03.  The only question before us is whether the sum of $4,246.10 received by the petitioner in 1921 upon his retirement from the copartnership of which he was a member should be treated as income for that year.  The other issue raised by the pleadings was abandoned by the petitioner at the hearing in view of the decision in the case of *3949 . The facts were stipulated. FINDINGS OF FACT.  The petitioner is an individual residing in San Francisco, Calif.Some time prior to the year 1910 the petitioner, together with Andrew A. Jacob and Henry R. Jacob, formed a copartnership under the firm name of Andrew A. Jacob & Co., to engage in the wholesale millinery business at San Francisco.  The capital invested and net income of the firm for the years 1910, 1911 and 1912 were as follows: YearPartnership invested capitalPartnership net income1910$144,414.90$21,457.761911135,872.6719,975.521912128,848.1917,628.46Total409,135.7659,061.74Average per year136,378.5819,687.24By the terms of a written agreement entered into some time in the year 1919 among the members of the firm, the copartnership was continued for six years commencing July 1, 1919.  The pertinent clauses of the contract read as follows: Said parties heretofore joined and have joined, and by these presents do again join themselves to be copartners together in the business of wholeasale *1170  millinery, and all things thereunto belonging; *3950  and also buying and selling all sorts of goods, wares and merchandise and commodities usually kept and sold in the wholesale millinery store and in such commission business as may be appurtenant to the same.  The said copartnership is to be conducted at 753 Market Street, City and County of San Francisco, State of California, and elsewhere, as may be hereafter determined upon under the firm name and style of ANDREW A. JACOB & CO., and shall continue from the first day of July 1919 up to and during and until the 1st day of July 1925, thence fully to be completed and ended, unless otherwise determined upon.  And to that end and purpose, the said parties to these presents have the day and date hereof delivered in as capital, the stock of goods, wares and merchandise book accounts, bills receivable, and all assets of the business, at the date hereof conducted between the parties hereto, at the City and County of San Francisco, State of California, as aforesaid, under the name and style of Andrew A. Jacob & Co., share and share alike, to be used, laid out and employed in common between them, for the management of the said business, as aforesaid, to their mutual benefit and advantage. *3951  It is agreed between the parties, that the said capital stock, together with all goods, ware or commodities bought or obtained by the said firm by barter, or otherwise, shall be kept, used and employed in and about the business aforesaid.  That should either of the partners wish to dissolve the said partnership, he shall offer to the remaining partners, the privilege of buying his interest, or selling to him their interest in the business on the basis of the amount of their capital, and accumulated profits, to his or their credit, as the case may be, remaining in the business as shown by the books of account, plus 2% of the gross sales from the date of the last regular inventory to the date of the acceptance of the offer, after deduction of any amounts due to the partnership by the retiring partner or partners.  In the event of the death of any of the parties hereto during the partnership, it is agreed that the surviving partners shall have the privilege of buying the interest of the deceased partner on the following basis: - There shall be paid to the heirs, executors, administractors or assigns of said deceased partner, the amount of his capital in said business, plus accumulated*3952  profits, if any thereon to his credit remaining in the business, as shown by the books of account, plus 2% of the gross sales from the date of the last regular inventory to the date of the payment of the amount, after deduction of any amounts due to the partnership from said deceased partner.  That all gains, profits and increase, that shall come, grow or arise from or by means of the said business, shall be divided between them, share and share alike; and all loss that shall happen to their said joint business, by ill commodities, bad debts, or otherwise, shall be borne and paid equally between them.  The copartnership operated under the aforementioned agreement until May 31, 1921, when the petitioner retired from the firm and there was paid to him for his interest therein, pursuant to the provisions of the articles of copartnership above quoted, an amount equal to his capital investment, plus the sum of $4,246.10, representing 2 per cent of the gross sales of the firm from November 30, 1920, the date of the last regular inventory, to May 31, 1921, the date of petitioner's retirement.  The copartnership did not take an inventory at May 31, 1921, or at any time between December 1, 1920, and*3953  November 30, 1921.  *1171  Neither the partnership assets nor the accounts of the partners on the firm's books contained any item of good will.  In his return for the year 1921 petitioner claimed that his one-third interest in the good will of the partnership at March 1, 1913, was of a value of $13,443.  This value was arrived at by first deducting from the average earnings of the partnership for the years 1910, 1911 and 1912, an amount equal to 10 per cent of the average capital invested during those years and then capitalizing the remainder at 15 per cent.  From the sum of $13,443, as determined by him, he deducted $4,246.10, leaving under his calculation a loss of $9,196.90 on the sale of his one-third interest in the partnership.  On an audit of the petitioner's return for 1921 respondent treated the amount of $4,246.10 as income derived from partnership profits.  OPINION.  ARUNDELL: The petitioner argues that the sum of $4,246.10 does not represent his share of the profits of the partnership from December 1, 1920, to May 31, 1921, the date of his retirement from the firm, as contended by the respondent, but that the amount was paid him by the remaining members of*3954  the partnership as part of the purchase price of his individual interest, including alleged good will.  If this be true and the good will be valued at the amount claimed, then there would be no income from this transaction, as the March 1, 1913, value of the petitioner's interest in the partnership would be greater than the sales price.  In support of his position petitioner calls attention to the following clause of the articles of copartnership, pursuant to the terms of which the petitioner's interest in the concern was sold and the money was paid: That should either of the partners wish to dissolve the said partnership, he shall offer to the remaining partners, the privilege of buying his interest, or selling to him their interest in the business on the basis of the amount of their capital, and accumulated profits, to his or their credit, as he case may be, remaining in the business as shown by the books of account, plus 2% of the gross sales from the date of the last regular inventory to the date of the acceptance of the offer, after deductions of any amounts due to the partnership by the retiring partner or partners.  The copartnership kept its books and filed its return for*3955  1921 on the basis of the fiscal year ended November 30.  It did not take an inventory at May 31, 1921, the date of petitioner's withdrawal from the business, or at any time between December 1, 1920, and November 30, 1921.  It is quite evident, therefore, that the profits of the firm had not been determined at May 31, 1921, and were not computed, if at all, until the end of the fiscal year.  Having withdrawn from the business on a date falling within the fiscal year, according to the terms of the clause of the articles of copartnership above quoted, under which settlement was to be made in *1172  such a case, the petitioner became entitled to a return of his capital investment, profits credited to his account, and, in addition thereto, a sum equal to 2 per cent of gross sales from the date of the last regular inventory.  He was paid for his capital investment and in addition thereto a sum of $4,246.10, equivalent to 2 per cent of gross sales from December 1920, to and including May 31, 1921.  We are concerned only with the latter amount.  The petitioner, in contending that the sum does not represent profits of the copartnership or a payment in lieu thereof, says that the figure*3956  was paid to him by the remaining partners for his one-third interest of the good will of the business.  It is entirely probable that the firm may have possessed good will, although the item was not reflected in its books of account and there is no evidence in the record to indicate that the remaining members of the copartnership recognized its existence, or that they paid their money for such an asset.  The provisions of the agreement under the terms of which the money in question was paid is limited in its operation to retirements on a date other than a regular inventory period.  What was its purpose?  If it were inserted as a measure of the value of each partner's interest in the good will, the value thereof would depend upon when a partner withdrew.  It he withdrew on a regular inventory date, the good will would have no value, or at least the retiring partner would receive nothing for his interest therein.  However, if the retirement took place between the dates the inventory was taken, then, to the extent of the gross sales between those dates, the good will would be of value.  The argument proves too much.  We think the provisions of the agreement under which the payment was*3957  made was a method adopted by the copartnership to settle with a retiring member without closing its books.  Petitioner's interest in the copartnership appears to have been confined to his capital investment and right to a pro rata share of the profits.  We are of the opinion that the sum represents a payment in lieu of actual profits and that the respondent did not err in treating the figures as income of the petitioner for the year 1921.  Judgment will be entered for the respondent.