Court Opinion

ID: 4615551
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:32:35.784449+00
Date Added: 2024-06-11T07:54:58.261637
License: Public Domain

WALTER T. GUDEON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  P. W. COOK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  ARTHUR P. WOODWARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Gudeon v. CommissionerDocket Nos. 54739-54741, 60227-60229.United States Board of Tax Appeals32 B.T.A. 100; 1935 BTA LEXIS 1000; February 19, 1935, Promulgated 1935 BTA LEXIS 1000">*1000  Where estate of a deceased member of a partnership, which was the general agent of a life insurance company, was entitled under the agency contract to deceased partner's share of renewal commissions on business written by the agency during his life, and where the partnership agreement, which made terms of agency contract a part thereof, provided surviving partners should collect renewal commissions and liquidate partnership or might continue business under same partnership agreement and could liquidate deceased partner's interest by paying to his estate each year for 15 years, out of the net profits derived from commissions on both old and new business, a diminishing sixteenth of the percentage of the net profits of the partnership to which the deceased partner was entitoled at his death, and where evidence shows such provision was adopted by the partners and approved by the insurance company as being a simplified method of determining the portion of renewal commissions to which the estate of a deceased partner was entitled under the agency contract; held, renewal commissions collected by continuing partnership are charged with right of deceased partner's estate to his share thereof; 1935 BTA LEXIS 1000">*1001 held, further, net income of partnership which is taxable to petitioners is net profits from commissions on old and new business less amount required to be paid to estate of deceased partner.  Henry Ravenel, Esq., and Lawrence A. Baker, Esq., for the petitioners.  John D. Kiley, Esq., for the respondent.  MATTHEWS 32 B.T.A. 100">*101  These six cases were consolidated for hearing and report.  The respondent determined deficiencies in income tax due from petitioners as follows: PetitionerDocketYearAmountNo.Walter T. Gudeon547391927$2,171.17Do5473919282,223.82Do6022919291,519.26P. W. Cook5474019272,139.91Do5474019282,195.27Do6022819291,511.45Arthur P. Woodward5474119275,157.83Do5474119282,206.65Do6022719291,527.21Two issues were raised in each petition, but one was conceded by the respondent at the hearing, leaving the single issue of whether the respondent erred in adding to petitioners' distributive shares of the income from a partnership for each year the amount paid by the partnership to the estate of a deceased partner.  FINDINGS OF FACT.  1935 BTA LEXIS 1000">*1002  The three petitioners, Gudeon, Woodward, and Cook, are all individuals, resident in New Jersey, and are copartners of the firm of Goulden, Woodward, Cook & Gudeon, New York City, acting as general agent of the Connecticut General Life Insurance Co. of Hartford, Connecticut.  Charles J. Goulden, founder of the firm and a copartner at the time of his death, died on November 4, 1926.  The copartnership of Goulden & Millar, composed of Charles J. Goulden and Hugh G. Millar, was formed on April 1, 1904, and continued until its dissolution by Millar's death in November 1911.  This firm was general agent of the Connecticut General Life Insurance Co.  The business continued under Goulden's sole proprietorship until May 1, 1915, when he took in Gudeon under the old name.  On December 1, 1918, Cook came in as a copartner and the name was changed to Goulden, Cook & Gudeon.  In 1922 a new partnership agreement between these three partners was drawn up, effective from January 1, 1921, and under this contract as modified by an amendment in 1925, admitting Woodward as a partner, and changing the name to Goulden, Woodward, Cook & Gudeon, the firm was operating in the taxable years.  The relevant1935 BTA LEXIS 1000">*1003  parts of the partnership agreement of 1922, as amended, are hereafter set out.  32 B.T.A. 100">*102  Goulden and his copartners who have constituted the several partnerships have successively acted as general agents of the Connecticut General Life Insurance Co. in Greater New York City, under an agent's contract with such company, appointing the copartners under the firm name its general agent for selling life insurance on certain terms and conditions.  Under the terms of the contract in force at the time of Goulden's death it was agreed that as full compensation for the services of the agent and his assistants, the company was to pay or allow certain commissions at the rates stipulated on all business written.  On that part of new premiums paid by allowance for surrender of policies, the agent was to receive renewal commissions only and at the same rate as he would have received on the surrendered policy.  While the agent remained in the service of the company, renewal commissions at stated rates would be paid on renewal premiums when collected on business done under the contract.  The commissions were to accrue only when the premiums on which they were computed were paid in to the insurance1935 BTA LEXIS 1000">*1004  company.  If the agent should leave the service of the company, renewal commissions did not thereupon cease but were to continue to be paid, or first applied to the extinction of any indebtedness of the company, until upon each policy which should remain premium-paying he or his executors or administrators should have received nine years renewal commissions, less a small collection charge by the company.  No assignment of any commissions earned or accrued or to accrue under the contract was valid unless authorized in writing by the company.  After the payment of ten premiums on any policy the renewals were free from any agreement or promise of renewal commissions, but if the agent had been since the date of the contract in the exclusive service of the company under such agreement or any subsequent agreement covering the same territory as general agent, a collection fee of 5 percent was allowed on the collection of renewals for the eleventh to the fifteenth years, inclusive, on policies written under the contract.  After the payment of the fifteenth premium the collection fee was 3 percent.  No sale, transfer, or deed of said renewal interest could have any effect without the written1935 BTA LEXIS 1000">*1005  consent of the insurance company.  The moneys collected for the company were to be remitted to it at the end of each month.  A monthly report was required to be made of all transactions.  Each party reserved the right to terminate the contract on 30 days' notice in writing.  The partnership agreement in effect at the date of Goulden's death was the agreement made January 6, 1922, as amended in November 1925 to admit Woodward into the partnership and to 32 B.T.A. 100">*103  change the name to Goulden, Woodward, Cook & Gudeon.  This agreement was approved by the Connecticut General Life Insurance Co.  The business of the copartnership was to be the soliciting and underwriting of accident, group, health, and life insurance, and acting as general agents for the Connecticut General Life Insurance Co. in the manner and for the period described in and subject to the conditions and provisions of the several contracts and amendments thereto made between the insurance comapny and the copartners.  None of the partners was to engage in any other business without the written consent of each of the other partners.  Goulden, Cook, and Gudeon turned in to the partnership all business written by them1935 BTA LEXIS 1000">*1006  while they were trading under former firm names and such business was made a part of the business of the partnership, the income and expenses of which were to be included in the determination of the net profits for distribution to the partners.  Paragraph 12 provided that the net profits of the partnership were to be divided between the partners as follows: For the year commencing January 1, 1926 and terminating December 31, 1926 Charles J. Goulden, forty-six per cent (46%); Arthur P. Woodward, eighteen per cent (18%); P. Walter Cook, eighteen per cent (18%); walter T. Gudeon, eighteen per cent (18%).  For the year commencing January 1, 1927 and terminating December 31, 1927 each partner shall draw an amount equal to his participation in the net profits for the calendar year 1926.  Any excess in the net profits over the net profit for the year 1926 shall be divided as follows: Charles J. Goulden, ten per cent (10%); Arthur P. Woodward, thirty per cent (30%); P. Walter Cook, thirty per cent (30%); Walter T. Gudeon, thirty per cent (30%).  If the net profits for the year 1927 do not exceed the net profits for the year 1926, they shall be distributed in the manner hereinbefore1935 BTA LEXIS 1000">*1007  provided for the year 1926.  In each succeeding year the net profits shall be divided in the manner provided for the year 1927 until such time as the amount of the share of said Woodward, Cook and Gudeon shall equal the amount of the share of the said Goulden.  From and after that time the profits in each calendar year shall be divided twenty-five per cent (25%) to each partner.  In the event of the death or other termination of the Agreement as provided in paragraphs 9, 14 or 16 the respective shares of the partners shall be determined by ascertaining the ratio of each partner's participation to the net profits of the firm during the calendar year immediately preceding such termination, or if such termination should occur before January 1, 1927, the division provided for the year 1926 shall be used as the basis.  The profits of the partnership were to be drawn by each partner when and as each report was transmitted to the Connecticut General Life Insurance Co.  32 B.T.A. 100">*104  Paragraph 9 provided that in the event of dissolution by any one of the partners withdrawing without the consent of the other partners, or causing a breach of the agreement, the interest of the withdrawing1935 BTA LEXIS 1000">*1008  partner or partners was to be liquidated upon the following terms: The share or shares which the withdrawing partner or partners should have in the net profits of the partnership on the date of his or their withdrawal as set forth in paragraph 12 was to be taken as a basis.  During the period of one year from the date of withdrawal he or they were to receive from the net profits eight ninths of the proportionate share or shares, and during each further period of one year, a diminishing ninth until the period of the eighth year, when he or they were to receive from the net profits one ninth of the proportionate share or shares.  The intent of this provision was expressed to be that at the end of eight years from the date of such dissolution the interest of the withdrawing partner or partners in the business of the copartnership and the good will thereof should cease and be limited to the provisions of this paragraph.  By paragraph 14 it was provided that in the event of the death of one of the partners, the interest of the partner so dying was to be liquidated as follows: The share which the partner so dying had in the net profits of the copartnership at the date of his death as set1935 BTA LEXIS 1000">*1009  forth in paragraph 12 was to be taken as a basis; during the period of one year from the date of his death his estate was to receive from the net profits fifteen sixteenths of such proportionate share; and during each further period of one year from the date of his death his estate was to receive from the net profits a diminishing sixteenth of such proportionate share, until the fifteenth year, when his estate was to receive from the net profits one sixteenth of such proportionate share.  The share of the partner so dying was to be paid to his estate at such times as the net profits were distributed to the surviving partner or partners, but at least every three months during the period of 15 years.  It was expressly provided: * * * the intent being that at the end of fifteen years from the date of death the interest of the decreased partner in the business of the co-partnership and the good will thereof shall cease and be limited to the provisions of this paragraph.  In the event of the dissolution of the copartnership either by withdrawal or by death, the surviving partner or partners were to take possession of all books, documents, etc., collect all premiums and renewal premiums, 1935 BTA LEXIS 1000">*1010  commissions and renewal commissions, collection fees, and all other money due the partnership and have entire charge of the liquidation and winding up of the copartnership affairs, and also have the right to continue for his or their own use or benefit 32 B.T.A. 100">*105  the business of the copartnership under the existing name or under such other name or names as they might elect to use.  Paragraph 15 provided: In the event of the withdrawal or death of any partner the amount deducted from his share of the net profits and retained by said co-partnership in accordance with the provisions of paragraphs 9 or 14 above shall be divided as follows: * * * in the event that the surviving partners shall consist of arthur P. Woodward, P. Walter Cook and Walter T. Gudeon, the amount deducted shall be divided in equal shares amongst the surviving partners.  Said amount deducted shall be paid to the surviving partners at such time as the profits are distributed in accordance with paragraph 13 above.  By paragraph 16 it was provided that should the insurance company for any cause terminate the agency the income and assets of the partnership from business conducted in pursuance of the agency1935 BTA LEXIS 1000">*1011  with the insurance company "shall thereafter be divided amongst said partners, their executors, administrator or assigns in proportion to the sahres which they were respectively drawing at the date of the termination of said agency contract." The scheme of diminishing payments to a deceased partner, which was put into the partnership agreement of June 6, 1922, and approved by the Connecticut General Life Insurance Co., was devised by Woodward, who was then secretary of the insurance company, working in conjunction with the then members of the partnership.  The figures were worked out with the aid of the actuarial department of the insurance company.  The purpose and intent was to adopt a basis for determining a deceased partner's interest in commissions and fees to be paid after his death on business written prior thereto, which would simplify the accounting of the company and of the partnership.  The period of 15 years was adopted because there is no profit in the commissions or fees paid after 15 years.  After Millar's death in 1911 there was paid to his representative his share in the renewal commissions paid to the agency by the insurance company on business written while he1935 BTA LEXIS 1000">*1012  was a member of the firm.  Since Goulden's death distributions have been made to his representative in accordance with the partnership agreement.  So far as can be determined, these distributions have accomplished the purpose for which they were devised.  No new partners have been taken into the firm since Goulden's death.  The surviving partners continued to operate under the same contract with the insurance company and under the same partnership agreement.  The business has been conducted under the same name at the same location and the books of account have carried the Goulden estate as a partnership interest.  At the end of each month 32 B.T.A. 100">*106  all expenses are paid and the commissions left over are distributed to the partners and to the estate in accordance with the percentages provided in the partnership agreement.  The partnership has never owned any tangible assets, its office furniture and equipment being provided by the insurance company.  The office operation is financed directly from commissions received from the insurance company.  The partnership as such had no good will, whatever good will there was in the business being due to the kind of policies offered by the1935 BTA LEXIS 1000">*1013  Connectivut General Life Insurance Co.  During the years 1927, 1928, and 1929 the petitioners determined their distributable shares of the partnership income and the share which went to Goulden's representative under the partnership agreement as follows: 192719281929Estate of C. J. Goulden$47,450.57$45,803.70$42,266.95P. W. Cook20,859.9122,664.7623,939.78Arthur P. Woodward20,859.9122,664.7623,939.78Walter T. Gudeon20,859.9122,664.7623,939.78These amounts were returned by petitioners and the Goulden estate as gross income in the several years.  The respondent added to the distributable share of each petitioner one third of the amount distributed in each year to Goulden's estate.  The payments to the Goulden estate after 1929 were as follows: 1930$36,303.24193131,840.98193223,933.27The value of Goulden's interest in the partnership at the time of his death was returned as part of his estate under both the inheritance tax law of Connecticut and under the Federal estate tax law at $125,000.  This value was increased to $156,000 for Federal estate tax purposes.  Such value was arrived at by estimating1935 BTA LEXIS 1000">*1014  the amount which would be received in each year, taking the present worth of such amounts and adding them together.  OPINION.  MATTHEWS: The real question in this case is, what is the net income of the partnership consisting of Woodward, Cook & Gudeon for the taxable years before us?  Section 218 of the Revenue Act of 1926 and sections 181, 182, and 183 of the Revenue Act of 1928 provide that: "Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity"; that "There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net 32 B.T.A. 100">*107  income of the partnership for the taxable year * * *"; and that the net income of the partnership shall be computed in the same manner and on the same basis as in the case of an individual except that the so-called "charitable contribution" deduction shall not be allowed.  Respondent in determining the deficiencies took the position that Goulden's estate was not a member of the partnership, since it was not liable for partnership debts and had no voice in the partnership management, and held that the full amount of the commissions1935 BTA LEXIS 1000">*1015  received by the partnership was includable in the distributive shares of the three partners surviving.  He contends that the case is governed by ; affd., ; ; affd., in part sub nom ; ; and . The petitioners contend that under the statute the net income of the partnership distributable to the partners is that portion of the net commissions remaining after the payment to the Goulden estate of the amount required to be paid by the partnership agreement.  Conceding that upon the death of Goulden there was a technical dissolution of the partnership composed of Goulden, Woodward, Cook & Gudeon, and the immediate formation of a new partnership composed of the surviving partners, they argue that it is necessary further to consider the rights of the deceased and the rights and obligations of the petitioners; that it is clearly established that upon Goulden's death his estate became entitled to have paid1935 BTA LEXIS 1000">*1016  to it a portion of the commissions paid by the insurance company on renewal premiums on insurance which had been written up to the time of his death; and that if the partnership agreement had not provided for payment through the surviving partners, the estate, in an appropriate proceeding, could have required the payment direct from the Connecticut General Life Insurance Co. and the money would not have gone through the hands of the petitioners.  Petitioners refer to that paragraph of the partnership agreement which provides that, upon dissolution of the copartnership by withdrawal or death, the surviving partners shall take and retain possession of all the books, papers, etc., collect all premiums and renewal premium commissions and have entire charge of the liquidation and winding up of the partnership affairs, and contend that in the absence of paragraph 14 in the agreement they would be collecting the renewal commissions but, having collected them as liquidating partners, would be under the necessity of making prompt and periodical payment of Goulden's share under the partnership agreement to his estate.  Petitioners further contend that the only difference between the acts now1935 BTA LEXIS 1000">*1017  being done by them in liquidating the interest 32 B.T.A. 100">*108  of the Goulden estate and what they would be doing on a strict dissolution is that they themselves are carrying on new business obtained by them since Goulden's death; that it is clear from the testimony that the basis arrived at for liquidating a deceased partner's interest was never contemplated by the partners to do anything other than pay a deceased partner's estate exactly what he had earned although not received up to the time of his death; that the partners did not intend to buy anything from a deceased partner's estate; and that so far as they were able to determine the agreement was working out in a practical manner in accordance with the intent.  Petitioners also contend that the facts in the cases relied on by respondent are easily distinguishable from the facts in the instant case.  We agree with the petitioners that the facts in the instant case are distinguishable from the facts in the cases cited by the respondent.  the Hilmer case involved a stock brokerage business and the deceased partner owned the good will, furniture and fixtures, and seats on various stock exchanges.  The partnership agreement provided1935 BTA LEXIS 1000">*1018  that his estate was to be paid the amount of his interest in the firm, the amount of his furniture and fixtures account, the then market value of his membership and seats in exchanges and boards of trade, and in addition thereto "annually an amount equal to 25% of the net profits of the business" conducted by the new firm for three years from the date of death of the partner.  In each of the other three cases the business conducted by the partnerships was that of insurance brokers, but it does not appear from the facts stated in any of the cases that they were life insurance brokers or that the copartners were operating under a contract with the insurance company similar to the contract here involved.  The Pope case involved fire insurance brokers, and for aught the record shows the partnerships involved in the Hill and Benedict cases may have been fire insurance brokers also.  In fire insurance there is no true renewal premium, but the writing of a new policy which gives rise to a new claim of compensation.  Certainly if the partners involved in these three cases had had any such rights under contracts with the insurance companies which they represented as the deceased1935 BTA LEXIS 1000">*1019  agent of the Connecticut General Life Insurance Co. had in the instant case, such fact would have been brought out.  In the Hill and Pope cases the record shows that there had been contributions of capital to the partnerships and that new members were taken in after the death of a partner and new partnership agreements were executed.  In the Benedict case the partnership had assets and good will.  The instant case cannot be decided solely by reference to the partnership agreement, but must take into consideration the agency 32 B.T.A. 100">*109  contract.  Furthermore, the partnership here in question had no good will and no capital.  The only asset was the agency contract under which a deceased agent's right to renewal commissions on business written up to the time of his death passed to his estate.  The surviving partners of Goulden continued to act as general agent of the Connecticut General Life Insurance Co. under the same contract with the insurance company and under the same partnership agreement at the same place.  The partnership agreement was so drawn that such could be done.  On Goulden's death there was the dissolution of the partnership composed of himself and the1935 BTA LEXIS 1000">*1020  three petitioners and the immediate formation of the continuing partnership consisting of the petitioners, the surviving partners.  Under the contract with the insurance company, the right to commissions on renewal premiums is earned when the business is written and the first premium paid.  Commissions on renewal premiums do not accrue, however, until the renewal premium is paid to the insurance company.  On all business written prior to Goulden's death, his estate and the surviving partners were jointly entitled to the commissions on renewal premiums to be paid after his death.  Under the partnership agreement, in case of dissolution by death, the surviving partners were to collect the renewal premiums and renewal commissions and have entire charge of the liquidation of the partnership affairs and also had the right to continue for their own benefit the business of the partnership under the existing name.  Since none of the partners of the old partnership had contributed any capital to the partnership and the partnership had no assets other than the right under the agency contract to renewal commissions and collection fees on renewal premiums, and since under this agency contract1935 BTA LEXIS 1000">*1021  a deceased agent's right to renewal commissions passes to his estate, the continuing partnership collected the renewal commissions on business written during Goulden's life subject to his interest therein.  The effect of the partnership agreement on a deceased partner's rights under the agency contract was that if the surviving partners continued the business of the partnership for their own use and benefit, they could liquidate the deceased partner's interest in the renewal commissions collected by paying to his estate the portion of the net profits set forth in paragraph 14.  Based on actuarial tables it had been determined that a diminishing portion of the net profits of the business each year for a period of 15 years would be equivalent to a deceased partner's share of the renewal commissions and fees on renewal premiums which would be collected during each of the 15 years.  Since there is no profit in the collection fee paid after the fifteenth renewal premium, the interest of a deceased partner in renewal commissions and fees would be liquidated at the end of the fifteenth year.  This method of computing 32 B.T.A. 100">*110  a deceased partner's interest in the renewal commissions1935 BTA LEXIS 1000">*1022  and collection fees simplified the accounting records to be kept by the insurance company and the partnership.  The evidence is clear that the provision in paragraph 14 was adopted by the partners as a simple method of determining a deceased partner's share of the renewal commissions received on business written during such partner's life and that it was not intended by such provision to purchase anything from the deceased partner.  After Goulden's death, therefore, although his estate was not a partner in the new partnership, the share of the net commissions collected by the partnership to which the estate was entitled was computed the same as if it had been a partner and all commissions belonged wholly to the partnership.  The profits of the new partnership to which the surviving partners were entitled were not the total net commissions, but the total net commissions less the amount which all agreed should go to the estate of a deceased partner.  The continuing partnership therefore did not receive the total commissions as partnership income.  It was entitled in the first instance to receive as partnership income only the net commissions remaining after paying to Goulden's estate1935 BTA LEXIS 1000">*1023  the equivalent of his share of the net renewal commissions collected.  . See also ; . We hold that the net income of the partnership consisting of the three petitioners, which is taxable to them, is the net profits from all commissions collected less the amount required to be paid to Goulden's estate.  Reviewed by the Board.  Judgment will be entered under Rule 50.GOODRICH concurs in the result.