Court Opinion

ID: 4612297
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:50:51.253118+00
Date Added: 2024-06-11T07:54:24.850447
License: Public Domain

Doyle J. Dixon, Petitioner, v. Commissioner of Internal Revenue, Respondent.  Flavia R. Dixon, Petitioner, v. Commissioner of Internal Revenue, Respondent.  Richard O. Atkinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.  Lee Lane Atkinson, Petitioner, v. Commissioner of Internal Revenue, RespondentDixon v. CommissionerDocket Nos. 22165, 22166, 22167, 22168United States Tax Court16 T.C. 1016; 1951 U.S. Tax Ct. LEXIS 197; May 14, 1951, Promulgated *197 Decisions will be entered for the respondent.  1. Section 107 (a) -- Compensation for Personal Services -- Building and Selling Houses.  -- Section 107 (a) does not apply to the distributive shares of partnership income of partners who contributed only services to the partnership engaged in subdividing land and building thereon and selling low cost houses.2. Section 44 (d) -- Transmission or Disposition.  -- Section 44 (d) applies where a partnership, reporting sales of real estate on the installment method, transferred its installment obligations to a trust created by the partners who then terminated the partnership. Arthur Armstrong, Esq., for the petitioners.L. C. Aarons, Esq., for the respondent.  Murdock, Judge.  MURDOCK *1016  The Commissioner determined deficiencies in income tax for 1944 as follows:Docket No.PetitionerAmount22165Doyle J. Dixon$ 3,121.8322166Flavia R. Dixon3,490.7222167Richard O. Atkinson3,156.5822168Lee Lane Atkinson3,506.50The issues are whether the distributive shares of Dixon and Atkinson of the 1944 net income of a partnership come within section 107 (a), Internal Revenue Code, and, if section 107 (a) does not apply, whether the partnership income for 1944 is affected by section 44 (d).*1017  FINDINGS OF FACT.The petitioners, domiciled in California, filed separate income tax returns on a cash and community-property basis with the collector of internal revenue for the sixth district of California.  The Dixons are husband and wife and the Atkinsons are husband and wife. The husbands will be referred to as the petitioners. *199  The petitioners entered into a partnership agreement on July 3, 1941, under which they were general partners and five other individuals were limited partners. Later, another limited partner was admitted.  The purpose of the partnership, known as Alamitos Circle Company, was to purchase land, subdivide it, build low-cost homes on it, and sell the separate properties.  Fifty-one per cent of any profits derived by the partnership was to be divided among the limited partners and 49 per cent was to be shared equally by the petitioners.  The petitioners were to have monthly drawing accounts of $ 300 each during the development operations which were to be charged against their shares of the profits.Dixon contributed an option to buy the land, acquired by him at no cost, but otherwise he and Atkinson contributed only their services to the partnership. The limited partners contributed the capital of the partnership amounting to $ 49,000.  The record does not indicate that the limited partners contributed any services.  The partnership borrowed about $ 1,000,000 to carry on its business.  It built and sold 205 houses.  The last sale was in the early summer of 1944.  The partnership received*200  second-trust notes from the purchasers.Each petitioner devoted his entire time to the business of the partnership at least from July 3, 1941, until shortly after the last house was sold.  They each drew $ 300 per month from about September 15, 1941, until the end of August 1944.  They did not report their drawings of $ 300 per month as current income for 1941, 1942, or 1943.The partners, during the summer and fall of 1944, discussed what they would do with the partnership assets after September 15, 1944, when the partnership was to terminate.  They executed a declaration of trust on October 17, 1944, naming a bank as trustee.  The partnership assigned to the trustee all of the second-trust notes which it had received from purchasers of property.  The partnership also transferred to the trustee a small amount of unimproved land and cash.  The partnership, at that time, made provisions for the payment of all of its remaining liabilities, except its secondary liability under the first-trust deeds on the properties sold.  The trustee was to collect the second-trust notes assigned to it by the partnership, to make any necessary payments, and to pay over the net proceeds to the partners*201  in such a way that ultimately each would receive the amounts to which he was entitled under their partnership agreement as amended.  The *1018  total amount due on the second-trust notes assigned to the trustees as of September 15, 1944, was about $ 100,000.The first return filed by the partnership was for 1943.  Gross profits of $ 45,927.84 from numerous sales of properties were shown on that return, of which $ 8,331.76 was reported as income for 1943 on the installment method. The net income of $ 1,691.16 was shown on the return as distributable one-half to each of the petitioners.  The partnership was dissolved as of September 15, 1944, and it filed a final return for the period January 1 to September 15, 1944.  It reported $ 57,496.09, its entire profit from sales made in 1944, and it also reported as income for 1944 $ 37,596.08, representing the unreported profit on the 1943 sales.  The net income of $ 85,209.86 was shown on that return as distributable $ 27,795.17 to each of the petitioners and the remainder to the limited partners.The accountant for the partnership advised it that, since it was dissolving, it would have to accrue the face amount of the second-trust notes*202  which it held and it would have to take into income for the period ended September 15, 1944, all income theretofore unreported on those second-trust notes.Each petitioner attached to his return for 1944 a schedule showing income of $ 27,795.17 from the partnership of which $ 5,851.61 was allocable to 1944 and the remainder was allocable to prior years under section 107.  Each spouse then reported as taxable income one-half of the amount shown as allocable to 1944.  The Commissioner, in determining the deficiencies, held that section 107 did not apply and the entire $ 27,795.17 was income for 1944 to be reported one-half by each spouse.The facts stipulated by the parties are incorporated herein by this reference.OPINION.The petitioners first contention is that section 107 (a) applies.  They cite no cases in point.  Section 107 (a) provides:If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income *203  of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.No large amount was received or accrued in 1944 either by the petitioners or their partnership exclusively for continuous personal services rendered to any outsider. The petitioners did not render personal services to or receive compensation from any outsiders. They were *1019  members of the partnership. They were allotted interests in the partnership earnings upon the basis of services to be rendered by them, not to outsiders, but to the partnership. Their distributive shares of the net income of the partnership were earned through many sales of houses and lots.  The partnership acquired land, subdivided it, built houses, and sold the houses and lots.  The services of the petitioners and capital, both invested and borrowed, were used in the business to produce profits.  The gross receipts were received, not from one source, but from many purchasers of many properties.  The purchasers paid for houses and lots.  They made no payments*204  solely for personal services, as contemplated by section 107 (a).  Large items, such as cost of land, building costs, and selling expense, had to be subtracted before the net profit of the partnership from sales could be determined.  This was obviously not the kind of a situation to which section 107 (a) was intended to apply.  The Commissioner did not err in refusing to apply it.Section 44 (b) provides that the income from a sale of real property, in which the initial payments do not exceed 30 per cent of the selling price, may be returned on the installment basis under regulations prescribed by the Commissioner.  The partnership elected in 1943 to report its profits from sales of real estate on the installment basis. The Commissioner concedes that it had the right to report its income in that way.  The partnership dissolved during the next calendar year and in that year transmitted or otherwise disposed of the second-trust notes which were the installment obligations.  Section 44 (d) provides that if an installment obligation is transmitted or otherwise disposed of, gain or loss shall result at that time to the extent of the difference between the basis of the obligation and the*205  fair market value of the obligation at the time of such transmission or disposition.  The partnership followed that provision of the law in its return for the period ended September 15, 1944.  It does not now claim that it erred either in respect to the basis or the fair market value which it used in reporting its profit from the transmission or disposition of the second-trust notes.  The determination of the Commissioner is consistent with the method used by the partnership in filing its return for the period ended September 15, 1944, and the Commissioner insists that the method was proper.  However, the petitioners now claim that they should continue to report their profits from the installment obligations on the installment method. They say that section 44 (d) does not apply, because the installment obligations were not disposed of within the meaning of that section when they were transferred to the trust.  The facts show, however, that the partnership, which owned the installment obligations and was reporting on the installment method, completely disposed of all of the installment obligations and transmitted them to the trust, following which the partnership went out *1020 *206  of existence.  This is just the kind of a situation to which section 44 (d) was intended to apply and expressly applies.  Certain exceptions are made in section 44 (d) and there are others resulting from other provisions of the Code.  But none of those exceptions applies in the present case, which makes it more apparent that the general rule of section 44 (d) applies.  Cf.  F. E. Waddell, 37 B. T. A. 565, affd., 102 F. 2d 503; Estate of Henry H. Rogers, 1 T.C. 629">1 T. C. 629, affd., 143 F. 2d 695, certiorari denied, 323 U.S. 780">323 U.S. 780; Estate of Meyer Goldberg, 15 T.C. 10">15 T. C. 10.Decisions will be entered for the respondent.