Court Opinion

ID: 9442550
Source: CourtListenerOpinion
Date Created: 2023-08-03 18:51:19.296362+00
Date Added: 2024-06-11T17:29:07.721646
License: Public Domain

KERNER, Circuit Judge,
dissenting.
In this case the facts are not in dispute. The law firm of which petitioner was a member was dissolved pursuant to a written agreement, and at his withdrawal in 1944, he owned a thirty per cent capital interest in the firm representing a net unrecovered capital investment of $18,602.26. Petitioner valued his interest in the firm at $43,686.30 including $35,667.90 of billed and unbilled fees exclusive of the Midland fee. He sold the whole, except the Midland fee, for $40,000 in cash and property worth $506.18, or a total of $40,506.18, under an *661agreement which defined his share in the firm to include a share in “the name and good will of the Firm, all furniture, fixtures, library, cash, fees earned whether or not billed, and accounts receivable, excluding, however, the Midland fee.”
The Tax Court assumed that petitioner’s proprietorship interest of $18,602.26 was a capital asset. It allocated the difference between the $40,506.18 and his net unrecovered capital investment to the sale of hisdistributive share of past earnings and held that the part of the $40,506.18 sale price received for his right to a distributive share of past earnings of the firm was ordinary income.
Petitioner raises no question as to the proper allocation of the $40,506.18 sale price. He contends that the entire amount paid to him was capital gain — paid to him for a capital asset consisting of his “partnership interest.” He argues that the sale .of a “partnership interest” is the sale of a capital asset regardless of the nature of the underlying assets. With this contention I cannot agree. Nor am I able to say that Estate of Nitto v. Commissioner, 13 T.C. 858, and United States v. Shapiro, 8 Cir., 178 F.2d 459, support the decision of the majority.
In the Nitto case, Joseph Nitto, during the years before his death, was one of the leaders of an underworld gang in and around Chicago, Illinois. In 1936 one Edward Vogel and Nitto entered into a partnership for the purpose of operating a slot machine business. In 1939 Nitto sold out his interest to Vogel for $20,000. The basis for his interest in the business at the time of the sale was $10,000. On his income tax return Nitto reported the $10,000 gain from the sale as a long term capital gain. Thus it is clear the case did not involve uncollected earnings, and the opinion of the Tax Court did not discuss, nor hold, that a sale of a “partnership interest” is the sale of a capital asset regardless of the nature of the underlying assets.
In United States v. Shapiro, 8 Cir., 178 F.2d 459, four parties purchased an apartment building and jointly operated the property for rental purposes, and in addition purchased jointly a few bonds issued by another apartment operator, and thereafter, Shapiro, one of the partners, sold his interest in the building. The District Court, 83 F.Supp. 375, concluded that the sale of Shapiro’s one-fourth interest in the apartment building was “the sale of a capital asset resulting in a long-term capital gain.” The Court of Appeals affirmed. But since the case did not involve uncollected earnings, I am not convinced that the case must be viewed as supporting petitioner’s contention in this case.
It cannot be gainsaid that fees earned for services performed constitute ordinary income, and that upon petitioner’s withdrawal from the partnership, he had the right to receive his distributive share of the uncollected fees, or past earnings, of the partnership. Had he remained a partner, his share of the fees would have been taxable as ordiary income to him when collected. Helvering v. Smith, 2 Cir., 90 F.2d 590, and Doyle v. Commissioner, 4 Cir., 102 F.2d 86. Compare Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81; and Austin v. Commissioner, 6 Cir., 161 F.2d 666. The courts have said that the sale of a right to receive ordinary income is not the sale of a capital asset. This is so even if the sale is of something which may be termed “property.” In such a situation the sale price simply replaces the future income, but the sale price does not convert the ordinary income into capital gain. Hort v. Commissioner, 313 U.S. 28, 61 S.Ct. 757, 85 L.Ed. 1168. The rule is illustrated by a decision holding that when a dividend on corporate stock has been declared, a sale of the dividend rights prior to the time the dividend is payable results in ordinary income and not capital ^gain. Rhodes’ Estate v. Commissioner, 6 Cir., 131 F.2d 50.
I have not been convinced that petitioner’s share of the uncollected fees was a part of his proprietary interest in the partnership, hence I cannot say that the finding and conclusion of the Tax Court is clearly erroneous. On the contrary, I believe the evidence adequately supports the finding that petitioner upon his withdrawal from the partnership received an amount which *662covered both his proprietary interest ánd his interest in the uncollected fees, that is, capital gain and ordinary income, and since the Tax Court made an allocation between the two which is not questioned by petitioner, I would affirm the decision.