Court Opinion

ID: 4486610
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:34.080974+00
Date Added: 2024-06-11T08:48:30.340552
License: Public Domain

HALPERN, J., dissenting: The majority perceives a conflict between the anticipatory assignment-of-income doctrine, see Lucas v. Earl, 281 U.S. Ill (1930), and the principle that partners may pool their earnings and report partnership income in amounts different from their contribution to the pool. With respect, I believe the conflict to be illusory, except insofar as the majority here today creates one where heretofore none existed. According to the majority, the mere redistribution of income within a partnership is inconsistent with the assignment-of-income doctrine. “In partnerships and personal service corporations an individual performs the services that earn income. In both, a separate entity — the partnership or personal service corporation — is cast as the ‘earner’ for tax purposes. That characterization in both situations is, in essence, an assignment of income.” (Majority op. p. 659; fn. ref. omitted.) This analysis wholly ignores the doctrine of agency. When a partner, acting as agent for the partnership,1 performs services for a client, the partnership is the earner of the income: the instrumentality (in this case the partner) through which the partnership has earned its fee is of no consequence. Therefore, the focus of the anticipatory assignment-of-income analysis ought to be on whether the partner acted for himself individually or as agent of the partnership. This is entirely consistent with the lattitude accorded partnerships to disproportionately distribute partnership income: the pertinent requirement is merely that the partnership income so distributed have been earned by the partnership. In this case, it is quite clear that petitioner earned the fees in question pursuant to an agreement he entered into, on his own behalf, with Ballon, Stoll & Itzler— an agreement that was consumated before petitioner’s relationship with Bandler & Kass.2 Consequently, petitioner is the true earner of the income and should not escape taxation by means of an anticipatory assignment. Lucas v. Earl, 281 U.S. Ill (1930). The majority’s “resolution” of the perceived conflict is unsatisfactory. The majority considers the determinative question to be whether the income is “of a type normally earned by the partnership. Only in such situations has the partner acted as part of the partnership entity.” Majority op. p. 661. The majority requires merely that income “be earned from an activity which can reasonably be associated with the partnership’s business activity.” Majority op. pp. 662-663. Thus, the majority would allow a partner to assign fees to the partnership if the work performed for such fees is similar to that performed by the partnership, but not if the work is different. Majority op. pp. 653-654. The majority’s distinction is unprincipled.3 The majority observes that “The name and reputation of a professional partnership plays a role in the financial success of a partnership business” suggesting that partners, even acting individually, can further the business of the partnership by adding to its reputation. Majority op. pp. 661-662. But, that may be so even if the partner acts individually, doing work entirely dissimilar to that normally performed by the partnership. In any event, the majority fails to explain why such an obviously incidental benefit to the partnership should permit us to frustrate the assignment-of-income doctrine. The majority asserts that “The lack of structure inherent in the partnership form does not lend itself to easy resolution of the assignment-of-income question.” Majority op. p. 662. I must respectfully disagree. The lack of structure of the partnership form is irrelevant. All that matters is whether the partner has acted on his own behalf or on behalf, and as agent of, the partnership. Moreover, even if the lack of structure were relevant, the majority fails to explain why such would mandate the distinction between the type of income normally earned by the partnership and the type of income that is not. It would make far more sense to ask, with agency principles in mind, whether the income in question was earned by the partnership or by the partner acting as an individual. Furthermore, I must disagree with Judge Beghe’s concurring opinion on several grounds. First, section 721 would seem to prohibit any deduction for petitioner’s contribution of money to the partnership.4 Second, the issue of a deduction under section 162 was not raised by the parties and thus is an inappropriate basis for decision. Third, the majority opinion does not set forth sufficient facts to determine, under the theory of the concurring opinion, the timing of any available deduction. For the foregoing reasons, I respectfully dissent.  The Uniform Partnership Act, sec. 9(1), provides that a (general) partner is an agent of the partnership. Moreover, a partner has the power to bind the partnership to any act that is “for apparently carrying on in the usual way the business of the partnership of which he is a member,” unless the third party knows of some restriction on that power. 1 A. Bromberg & L. Ribstein, Partnership, sec. 4.01(b), pp. 4:3-4:4 (1988) (quoting Uniform Partnership Act, sec. 9(D).   Had there been a novation, substituting the partnership for petitioner, then the partnership could properly be considered the earner of the income. In this case, however, there is no basis set forth in the majority opinion for concluding that a novation has taken place or that a substitution of Bandler & Kass for petitioner had been even discussed with Ballon, Stoll & Itzler. We are not privileged to simply assume a novation, since petitioner bears the burden of proof. Rule 142(a).   The majority fails to explain why the similarity of the work done by the partner to earn the fees to the work of the partnership is determinative. That failure not only casts doubt upon the correctness of this decision, but foreshadows the difficulty future courts will have in resolving the question: how similar is similar enough? Without any inkling of why similarity has been deemed important, future courts will lack any effective guidelines for answering that question.   The article cited by Judge Beghe deals with contracts that are not partnerships for'tax purposes. See Kamin, “Partners Dealing With Each Other Through Partnerships,” 46th Annual N.Y.U. Inst, on Fed. Tax 27-3, n.5 (1988). Consequently, that article does not address the argument that sec. 721 precludes a deduction in this case.