Court Opinion

ID: 4629318
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:05:09.105626+00
Date Added: 2024-06-11T07:57:21.986787
License: Public Domain

ETHEL D. HEARN, ADMINISTRATRIX, ESTATE OF BENJAMIN F. HEARN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hearn v. CommissionerDocket No. 10285.United States Board of Tax Appeals9 B.T.A. 1362; 1928 BTA LEXIS 4231; January 17, 1928, Promulgated 1928 BTA LEXIS 4231">*4231  1.  One of the two partners with equal interests in a business died on January 4, 1921.  The decedent, the partnership, and the estate of the decedent all kept their accounts on the cash receipts and disbursements basis.  Held, that one-half the amount of certain profits earned by the partnership prior to December 31, 1920, but not collected until after January 4, 1921, is not income to the decedent for the period from January 1 to January 4, 1921.  2.  A partnership was terminated by the death of one of its members on January 4, 1921.  The business was continued by the surviving partner during the remainder of the year.  Held, that the income of the estate of the deceased partner should be increased by the addition thereto of one-half the profits realized during such period.  John E. McClure, Esq., for the petitioner.  L. C. Mitchell, Esq., for the respondent.  LANSDON 9 B.T.A. 1362">*1362  The respondent has asserted deficiencies in income and surtaxes for the years 1919 and 1920, and for the periods January 1 to January 4, 1921, and January 5 to December 31, 1921, in the respective amount of $670.06, $1,300.54, $1,198.26, and $77.54.  The petitioner1928 BTA LEXIS 4231">*4232 9 B.T.A. 1362">*1363  alleges that the respondent erred in allocating certain amounts as income to Benjamin F. Hearn, and to the estate of Hearn, respectively, in the periods from January 1 to January 4, 1921, and from January 5 to December 31, 1921.  The parties have stipulated that the net income of Caughy, Hearn & Co. for the calendar year 1919 was $39,201.29, and, for the calendar year 1920, $21,372.49, as shown by the books of the partnership.  FINDINGS OF FACT.  The petitioner is the duly qualified and acting administratrix of the estate of Benjamin F. Hearn, who died on January 4, 1921.  For several years prior to his death, the decedent, and Frank J. Caughy, were equal owners in a partnership business, known as Caughy, Hearn & Co., hereinafter called the partnership, and were engaged in dealing in real estate and securities in the City of Baltimore.  Such partnership existed during the years 1919 and 1920, and until January 4, 1921, when it was dissolved by operation of law by the death of Hearn.  During the taxable years in question, Hearn kept his books and made his income-tax returns on the cash receipts and disbursements basis.  Similarly, the estate of Hearn was on the1928 BTA LEXIS 4231">*4233  cash receipts and disbursements basis.  The partnership during its entire existence was on the cash receipts and disbursements basis.  After the death of Hearn, the respondent made an audit of the books of the partnership, and, as a result of such audit, added the amount of $14,701.32 to the income of Hearn for the period January 1 to January 4, 1921, and the amount of $2,938.43 to the income of the estate of Hearn for the period January 5 to December 31, 1921.  The amount of $14,701.32 so added to the income of Hearn represents his share of profits earned by the partnership in 1920 or prior years, but uncollected at January 4, 1921, either by Hearn or the partnership.  The amount of $2,938.43 so added to the income of the estate for the period January 5 to December 31, 1921, represents one-half the profits earned and received by Caughy, the surviving partner, during such period.  The estate received no liquidating payments from the surviving partner during the year 1921, but, in 1922, in conformity with an agreement of settlement, made by the parties in interest, received from the said surviving partner, the full agreed value of its interest in the partnership assets.  OPINION. 1928 BTA LEXIS 4231">*4234  LANSDON: The parties having stipulated that the books show that the net income of the partnership for the years 1919 and 1920 was 9 B.T.A. 1362">*1364  $39,201.29 and $21,372.49, respectively, and neither having produced any evidence that such amounts were not the true not income for such several years, and, it having been proved that Hearn and Caughy owned equal interests in the partnership, it remains only for us to direct that the tax liability of the decedent for such years shall be recomputed under Rule 50, in conformity with the facts so established.  It is not disputed that the amount of $14,701.32, which the respondent added to the income of the decedent for the period January 1, 1921, to January 4, 1921, represents one-half of profits earned by the partnership, but not realized by collection or otherwise prior to December 31, 1920.  Inasmuch as it is proved that Hearn kept his books and made his income-tax returns on the cash receipts and disbursements basis, and that a similar procedure was followed by the partnership, we are of the opinion that the respondent was in error in making such addition to Hearn's income for the period in question.  The respondent added $2,938.431928 BTA LEXIS 4231">*4235  to the income of the petitioner for the period January 5 to December 31, 1921.  It is not disputed that this amount represents one-half the net profits of the business conducted by Caughy, the surviving partner, during such period.  The evidence is clear that the petitioner received no such amount during the period in question; but the respondent contends that whether distributed or not, one-half the profits of the business for such period should be taxed to the estate of Hearn, since all its assets remained in and were used in the business for the entire time involved.  The petitioner appears to rely on the fact that the partnership of Hearn and Caughy was terminated by action of law at January 4, 1921, and offers no evidence that the estate of Hearn was not entitled to share in the distributive profits of such business earned in the remainder of the year.  This contention is not in accord with the well-established law of Maryland, applicable to the facts herein.  In the case of , et seq., the court said that "If the surviving partners continue the trade or business, it is at their own risk and they will be liable, at the option1928 BTA LEXIS 4231">*4236  of the representatives of the deceased partner, to account for the profits made thereby, or to be charged with interest upon the deceased partner's share of the surplus, besides bearing all losses." Since it appears that the representatives of the deceased partner had the right to demand and recover the proportionate part of the profits of the business during the period here involved, attributable to the interest of the estate in the assets employed, we are of the opinion that such profits, whether or not distributed, were income to the estate.  Judgment will be entered on 10 days' notice, under Rule 50.