Court Opinion

ID: 4488929
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:01:34.786272+00
Date Added: 2024-06-11T15:03:53.550337
License: Public Domain

Trussell,
dissenting: I am unable to agree with that portion of the majority opinion and decision holding that the percentages of net profits actually distributed to the estates of Gilmore and Ulman must be treated for the purposes of the enforcement of income-tax liabilities as partnership profits distributable to Arthur K. Pope, and I am also in disagreement with the determination of the respondent holding that these same percentages of profits should have been treated as partnership profits distributable to the four petitioners herein in the proportions set forth in the respondent’s deficiency notices.
As I read it, the record of this action clearly establishes that on or about February 10, 1917, the four petitioners herein named, together with one Alfred M. Bullard and the representatives of the estates of Arthur B. Gilmore and William T. Ulman, entered into a business agreement by virtue of which they all agreed to participate in the carrying on of a general insurance agency business under the name and style of Cyrus Brewer & Co., and to continue said business from January 1, 1917, to December.31, 1920. Toward the carrying on of this business the two estates and the four petitioners contributed an office leasehold and such office equipment as is commonly required by a concern carrying on a fire insurance agency business. Arthur K. Pope contributed his interest in the good will of the name of Cyrus Brewer & Co. which he had inherited from his father in June, 1905. Arthur B. Gilmore had come into a prior partnership upon an agreed *598basis with, petitioner Pope upon payment to the estate of the elder Pope of a cash consideration of $9,000, and thereupon petitioner Pope and the said Gilmore participatéd equally in the profits of the then organization of Cyrus Brewer & Co. In 1907 William T. Ulman came into that organization, whereupon the interests were modified so that Pope and Gilmore were entitled to 37½ per cent each and Ulman to 25 per cent of the gains and profits. In 1910 Alfred M. Bullard was taken into this organization as a special partner contributing the assets and insurance business theretofore conducted under the name and style of A. M. Bullard & Co., and the organization agreed to pay said Bullard the sum of $6,600 per year so long as the agencies constituting the assets of his contributed business were not withdrawn.
The record of this action further establishes that the insurance agency business is a business of personal service and that any person connected with an insurance agency organization over a period of years by virtue of the intimate knowledge which he obtains through the solicitation of business, the adjustment of losses, and all his contact with purchasers of insurance protection, builds up for himself a personal good will and that upon the withdrawal of such person, either by death or otherwise, from the organization with which he has been connected, such personal good will is a continuing factor in the getting of business, and that custom has established that such personal good will has a capital value for a period of approximately three years after the withdrawal or death of the person creating it and that at the end of such period of three years any capital value of that personal good will ceases to exist as a recognizable factor in the getting of insurance business.
Arthur B. Gilmore had been connected with the predecessor organization since prior to 1905; William T. Ulman had been connected with this prior organization since 1907. In the business agreement of February 10, 1917, all the facts herein above outlined, together with the established customs of the insurance agency business, were duly recognized and thereupon the estates of Arthur B. Gilmore and William T. Ulman, through their legal representatives, contributed to the continuing organization the personal good will of the deceased limited to the period of three years.
The previously existing arrangements with Alfred M. Bullard were continued and Pope, Hallahan, Snow, and Perkins contributed to said business by virtue of said agreement their personal services and thus were made up the total of the capital elements and personal services contributed to the business to be conducted under the business agreement of February 10, 1917.
The record further shows that there were distributed to the two estates by the organization thus created, in addition to the shares of *599profits agreed to be paid them for the three years in question, the capital interests of those estates in the tangible assets, and it can not be said, in my opinion, that there remained after the period in question any asset, tangible or intangible, in the possession or ownership of these petitioners representing an interest formerly belonging to Gilmore or Ulman or their estates.
When men make agreements for the carrying on of a business in which profits are anticipated, they provide for the distribution of such profits to the persons or the estates contributing business-getting elements to such business. This is what was done in the instant cases. No one purchased or agreed to purchase the contributions of others; they only agreed to divide the gains and profits in a ratio deemed by them to be proportionate to the contributions of each contributor, whether as general partners, special partners, or as in these actions the estates of former associates, and the relations with respect to gains and profits, as established by the agreement, fixed the rights of all the contributors and during the period of the continuance of said agreement no one of these contributors received or had any right to receive any quantum of gains and profits other than the amount fixed by the agreement. The United States in its capacity as a sovereign levying and collecting income taxes is not now and never has been endowed with authority either to modify or ignore the established, fixed and lawful agreements of men engaged in carrying on a business which produces or is capable of producing taxable income, unless or until it shall be established that such agreements necessarily result in the escape of some part or all of taxable income from bearing its just share of Federal taxation, and no indication of such result can be discerned in the record before us. The agreement has not been hidden and a mere glance at its provisions will disclose to any tax-enforcing official where he can find the persons subject to the tax and the amounts of the gains and profits received or distributable to each of such persons.
A situation similar in many respects to the one here presented was before us recently in James Brown, 10 B. T. A. 1036. In that case one member of a partnership died on April 2, 1920. The articles of partnership provided that in such cases the estate of the deceased member should be paid his proportionate share of the profits of the business for the balance of the year in which the death occurred and the salary to which he would have been entitled for services rendered during that period had he lived, and that at the close of the year his estate should be paid his capital interest less his interest in the name and good will of the business, the last named asset remaining the property of the surviving partners. This provision of the articles of partnership was carried out and, in determining the distributive *600shares of the remaining partners in the profits of the partnership for that year, we held that the sums paid the estate representing profits and salary for the period from the date of death to the close of the taxable year should be excluded. In that case we said:
The profits of the partnership to which the surviving partners were entitled were not the total profits, but the total profits less the amount which all agreed should go to the estate of a deceased partner. There was not, therefore, receipt by these surviving partners of the total profits and then a distribution to the estate, but they were entitled in the first instance to receive only their share of the partnership profits and the remainder was a share of the profits which accrued to the Delano estate.
However, the question, in my opinion, goes further than this and the liability of the partners, for tax upon the total profits of that partnership would not be determined by a showing that capital assets were contributed by the two estates under an agreement whereby those estates would receive a certain proportion of the net profits for a fixed period, without becoming partners, and without a capital interest distributable to them at the termination of that period.
The fact that a partnership relation does not exist because the intention of the parties is to the contrary does not preclude the making of an agreement whereby one not a partner shares in the profits of a partnership. As the court said in London Assurance Co. v. Drennan, 116 U. S. 461:
Persons cannot be made to assume the relation of partners as between themselves, when their purpose is that no partnership shall exist. There is no reason why they may not enter into an agreement whereby one of them shall participate in the profits arising from the management of particular property without his becoming a partner with the others, or without his acquiring an interest in the property itself so as to effect a change of title.
The rights of the estates under this agreement were to receive profits alone and to receive these as such. If there were no profits they would be entitled to nothing. No obligation was placed upon petitioners by the contract to pay any specified amount. It is not thought questionable that the estates under this arrangement could maintain against the partnership a suit for an accounting of the profits. Coward v. Clawton, 55 Pac. 147; 122 Cal. App. 451; Clark v. Pierce, 17 N. W. 780; 52 Mich. 151; Hallet v. Cumston, 110 Mass. 32.
Under such circumstances, can it be said that these profits, to which the estates were entitled by the formal agreement made, were distributable to the partners ? I think not. I can not accept a theory holding that profits are distributable to and constitute a portion of the individual taxable income of a partner upon facts which show that such profits were not only never received by him, but that he had at no time a beneficial or other interest in them and that the right *601to receive and the beneficial interest was at all times in other parties to whom they were actually distributed.
In the case of R. E. Thompson v. Commissioner of Internal Revenue, 28 Fed. (2d) 247, the court held that where a partnership sold certificates entitling the holders to a share in its future earnings, the certificate holders did not become partners, nor did they obtain under the terms of the certificates a capital interest in the partnership assets, but were during the period of participation the beneficial owners of the money which they contributed, and the relation created was one of agency on the part of the partners, to manage the property, and that the money paid in by the certificate holders was capital in so far as the partnership was concerned and the profits distributed to them were the earnings of such capita].
In the present case, if the conclusion of fact in the foregoing opinion that the two estates contributed capital assets for which they were to receive a proportion of the earnings of the partnership, is correct, the condition would be analogous, in that respect, to the one presented in the cited case, as the partnership did not take title to those assets upon the conclusion of that arrangement, for the agreement provided for the participation by the two estates in the earnings of the partnership as thereby constituted, and the partners in the new firm had no right of alienation, as to these assets, during the period of participation in earnings by the two estates.
The effect of the decision in the present case is that where one acquires propérty from another, who reserves, however, the income therefrom for a certain period, the one acquiring the property, although he does not receive the income during that period and at no time had a right to receive it, is nevertheless considered, for income-tax purposes, as having actually received it and his taxable income is to be increased to that extent.
A situation in many respects similar to the one in the case at bar was recently before the United States District Court for the Western District of Louisiana in the suit of Frank J. Looney v. United States, 26 Fed. (2d) 481. In that case the plaintiff and another party had both claimed the right to drill for oil on a certain property and the dispute had been settled by an agreement whereby plaintiff received all rights in the property belonging to such other party and in consideration of the transfer the latter was to receive $200,000 to be paid out of the oil produced from the property. The $200,000 was so paid and in determining plaintiff’s income-tax liability the Commissioner had included such amount a,s income received by him, treating, as he had done in the case before us, the purchase by plaintiff of the other party’s rights as a capital transaction and similar in all respects to one in which he had received the full return from the *602property and then paid the sum in question for the interest conveyed to him. The court in its opinion, after distinguishing those ca,ses in which one possessed of a right to receive income directs that it be paid another, said:
However, I do not think the situation is different to what it would have been had the firm of Foster, Looney & Wilkinson purchased a valuable building and in doing so agreed that the vendors should receive the rents of 1T21, either as a part of the purchase price or in settlement of some adverse claim against the said building. In either event, their right to receive and enjoy the whole revenues would have been reduced just so much and being so reserved, would never have passed to the purchasers’ income. In other words, both in the illustrated instance and in the case at hand, I think the result was to convey the property subject to the right on the part of the vendors to take the revenues to the extent indicated and that they would not and did not pass to Foster, Looney & Wilkinson as income, for which they were bound to account.
I think the reasoning of the court in the above case is correct. The theory of the majority opinion in the present case, and the conclusion reached is, in my opinion, unsound.
Sxepkin agrees with this dissent.