Court Opinion

ID: 9650984
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:59:44.240295+00
Date Added: 2024-06-11T18:12:28.316329
License: Public Domain

ANDERSON, Circuit Judge
(dissenting). In my view, article XIV of the partnership articles of May 28,1912, effectually prevented the shares of the profits paid to the Soule estate from' being beneficially or for taxation purposes a part of the income of the surviving partners. The Tax Board finds that after Soule’s death on March 18, 1920, “his share in the profits of the business to-which he would have been entitled had he lived was paid to his estate over a period of years in accordance with the terms of the agreement signed May 28, 1912. The profits of the firm were divided month by month the same as before his death and a cheek was sent to his estate just as if it were a member of the partnership. The share paid to the estate was set up in the books of the firm in the same manner as it had been during the lifetime-of Soule and in the same manner as the shares of the partners. The sum of $43,547.81 was distributed to Soule’s estate during the year 1920. For the year 1921 there was distributed.to his estate the sum of $34,823.24.”
The course taken by the survivors and the new partnership — of recognizing the financial and equitable rights of Soule’s estate *169—was simply the course which any court of equity would have compelled them to follow; if the succeeding concern had failed to make the payments provided for in said article XIV, a court of equity would have made these payments a charge upon the profits of the new partnership. In equity, these profits belonged to the Soule estate. Even if the surviving partners and the new firm took legal title, they took nothing more.
I entirely dissent from the view in the majority opinion that:
“The mere fact that the petitioners, after having assumed the obligation contained in article XIV, elected to have it discharged out of the undistributed profits of the new firm did not create a charge upon those profits, nor diminish the petitioners’ distributive shares therein.”
The succeeding partnership took the business absolutely subject to the obligation to pay the Soule estate as provided in article XIV. There were no divisible profits for the survivors and the new partnership unless and until they made these payments. Theoretically, they might have paid out of their other asests; but they were bound to pay the amounts provided in article XIV before they could divide beneficially — for their own use — the remainder of the profits of the succeeding partnership. This theoretical right to pay from other sources has no relevancy. Perhaps the fundamental defect in the logic of the majority opinion is the assumption that all the profits of the firm belong to, and must be divided among, the partners. This is not so. Frequently the estate of a deceased partner having a continuing right or interest in the firm is entitled to share in the profits, although not a partner. This was held in the ease of Robinson v. Simmons, 146 Mass. 167, 175, et seq., 15 N. E. 558, 4 Am. St. Rep. 299. Section 224 of the Revenue Act of 1918, 40 Stat. 1074, seems to contemplate the same situation. It provides:
“That every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this title,, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall be sworn to by any one of the partners.”
See, also, Thompson v. Commissioner (C. C. A.) 28 F.(2d) 247; Rutan v. Coolidge, 241 Mass. 584, 598, 136 N. E. 257. Essentially the same doctrine was applied by the Board of Tax Appeals in Brown v. Commissioner, 10 B. T. A. 1036. Compare, also, Bull v. Commissioner, 7 B. T. A. 993.
I can find nothing in the statute or in the decisions of the Supreme Court holding income taxable unless it belonged to the taxpayer beneficially and was subject to his own spending proclivities. Cf. Eisner v. Macomber, 252 U. S. 189, 203, 206, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570— where the Supreme Court considered elaborately whether a stock dividend is income within the taxable sense. The majority said no, because a stock dividend simply diminishes the value of the stockholders’ shares. The minority said yes, because they held that the surplus profits of a corporation, when put in the form of additional stock, became available to the stockholder in a way sufficiently analogous to a real cash dividend so as to increase his income. But the present point is that both majority and minority dealt with taxable income as a real thing, —something the taxpayer may keep and use for himself and his family — not a myth.
It is at least doubtful whether under the Sixteenth Amendment Congress could tax, as the income of the petitioners, profits in which they never had the slightest beneficial interest. But I am clear that Congress has made no such attempt. Compare Tax Commissioner v. Putnam, 227 Mass. 522, 526, 116 N. E. 904, L. R. A. 1917F, 806; and United States v. Phellis, 257 U. S. 156, 168, 42 S. Ct. 63, 65, 66 L. Ed. 180, where the Supreme Court said:
“We recognize the importance of regarding matters of substance and disregarding forms in applying the provisions of the Sixteenth Amendment and income tax laws enacted thereunder. In a number of eases besides those just cited we have under varying conditions followed the rule. Lynch v. Turrish, 247 U. S. 221, 38 S. Ct. 537, 62 L. Ed. 1087; Southern Pacific Co. v. Lowe, 247 U. S. 330, 38 S. Ct. 540, 62 L. Ed. 1142; Gulf Oil Corporation v. Lewellyn, 248 U. S. 71, 39 S. Ct. 35, 63 L. Ed. 133.'”
The result reached by the Board of Tax Appeals now affirmed is grossly inequitable; the incomes of the surviving partners are padded by adding the shares of the Soule estate, thus artificially increasing the base on which their income taxes are reckoned, and also, very likely, the rate under the graduated scale. Nor does this result exonerate the *170Soule estate from any tax, — -inheritance or income, — Federal or State. It amounts to imposing a heavy, additional tax, on the share of profits of the Soule estate in his firm, in large part payable by persons having no beneficial interest in those profits.
But when a partnership is dissolved by death, the surviving partners are quasi-trustees, to account to the estate of the deceased partner for his rights in the firm; if, as an incident of such survivorship and accounting, they pay taxes upon profits accruing under the partnership articles to the estate of the deceased partner, then such payments ought to be allowed them in their account with the Soule estate, and to exonerate, pro tanto, the Soule estate from income tax on the same profits. Under a trust under a written instrument, the trustee who pays the income tax of course pays it out of shares otherwise accruing to his beneficiaries.
However viewed, the results now reached are, in my opinion, unjust, inequitable and illegal. If the case were otherwise doubtful, as I think it is not, it would plainly fall within the doctrine of Gould v. Gould, 245 U. S. 151, 38 S. Ct. 53, 62: L. Ed. 211, where it is laid down:
“In the interpretation of statutes levying taxes it is the established rule not to- extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In ease of doubt they are construed most strongly against the government, in favor of the citizen. United States v. Wigglesworth, 2 Story, 369, Fed. Cas. No. 16,690; American Net & Twine Co. v. Worthington, 141 U. S. 468, 474, 12 S. Ct. 55, 35 L. Ed. 821; Benziger v. United States, 192 U. S. 38, 55, 24 S. Ct. 189, 48 L. Ed. 331.” See, also, United States v. Merriam, 263 U. S. 179, 187, 188, 44 S. Ct. 69, 68 L. Ed. 240, 29 A. L. R. 1547.