Court Opinion

ID: 4604115
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:33:30.00015+00
Date Added: 2024-06-11T07:52:57.687162
License: Public Domain

CHARLES H. STEFFEY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Charles H. Steffey, Inc. v. CommissionerDocket Nos. 41290, 42266.United States Board of Tax Appeals23 B.T.A. 913; 1931 BTA LEXIS 1782; June 30, 1931, Promulgated 1931 BTA LEXIS 1782">*1782  A certain agreement held to have created a partnership; the petitioner, being a member thereof, is taxable upon its distributive share of the partnership net income, whether distributed or not.  Walter C. Mylander, Esq., Elmer L. Hatter, C.P.A., and Louis C. Schulte, C.P.A., for the petitioner.  B. M. Coon, Esq., for the respondent.  MORRIS23 B.T.A. 913">*913  These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax of $370.98, $1,208.18, $3,209.67, and $629.40 for the years 1922 to 1925, inclusive, respectively.  The respondent is alleged to have erred in his determination that the petitioner is taxable in the said several years upon 50 per cent of the profit derived from the sale of lots in the "Anneslie" development.  FINDINGS OF FACT.  The petitioner is a corporation, organized and incorporated under the laws of the State of Maryland, and has its principal office in Baltimore, where it is engaged in the real estate development business.  At or some time prior to March 31, 1922, an opportunity was presented to acquire a certain tract of land, situated at the intersection of York Road and Register1931 BTA LEXIS 1782">*1783  Avenue, baltimore County, maryland, comprising about 98 1/2 acres, then about to be platted into 1,050 lots, more or less, which site or subdivision, then known as the "Birckhead" property, was subsequently named and commonly known as "Anneslie." The petitioner, through its president, Charles H. Steffey, who thought well of the proposition, called upon William M. Maloy and George M. Brady, of the law firm of Maloy & Brady, and Oscar B. Coblentz and Frank B. Beasman, president and treasurer, respectively, of the McLean Contracting Company, men whom he knew very well, and all of whom were interested in said contracting company, and laid the proposition before them, resulting in their oral agreement to furnish the required capital if the petitioner would do the developmental work.  On May 23, 1922, the property aforesaid was deeded to the petitioner, and its successors and assigns, in fee simple, by Charles and Mary Mulligan, the then record owners thereof, they being mere "straw" or nominal parties for the purpose of relieving the petitioner of the necessity for making a mortgage.  Comtemporaneously 23 B.T.A. 913">*914  with the deeding of said property, that is on May 23, 1922, a noninterest-bearing1931 BTA LEXIS 1782">*1784  mortgage was placed upon the property by said Mulligans in the sum of $95,000, being the amount of the balance due the Birckheads, the real parties in interest, upon the purchase price, which said mortgage was paid off in 1927 with $19,000, money borrowed from the other contracting parties, which has not yet been repaid, and a release was executed thereon by the said original owners on May 23, 1927.  A formal agreement was prepared, in consummation of the aforementioned oral agreement, which was first dated March 31, 1922, but finally changed and dated July 31, 1922, the date of its actual execution between the petitioner, party of the first part, and the aforesaid Maloy, Brady, Coblentz and Beasman, parties of the second part, which recited that the party of the first part, petitioner, was "the owner or about to become the owner" of the above mentioned property, subject to a purchase-money mortgage of $95,000, and that "said parties of the first and second part have heretofore mutually agreed, that they would together develop said tract of land under this instrument or agreement which is intended to be an agreement of equal co-partnership in the development, sale and division of1931 BTA LEXIS 1782">*1785  profits and losses arising in, from, or out of the development of said land, as herein set forth." It was agreed therein that the petitioner should have full charge and management of the improvement and sales of the lots into which the property was to be divided, that it should collect and receipt for all moneys paid for or on account of lots sold by it for which it should "retain 5% as compensation for services rendered in the collections thereof." That agreement provided: That out of the funds so collected, said party of the first part, shall further pay and distribute as follows: - (a) All expenses incurred in the development of the said property, including advertising and salesman's commissions.  (b) From time to time apply the remainder to the payment of such sum or sums as may be due or payable under said Purchase money mortgage hereinabove mentioned or of any other or further mortgage or mortgages that may later be placed thereon in replacement thereof either in whole or in part.  (c) The remainder, or balance, if any such there be after payments as aforesaid, toward reimbursements of all monies advanced hereunder by said parties of the first and second parts, but without1931 BTA LEXIS 1782">*1786  interest, same being waived by said parties of the first and second parts.  (d) If any surplus be on hand, after making payments as aforesaid same shall be applied in extinguishment and prepayment of all mortgages then on said property.  And after said mortgages have been fully paid off and discharged, and after and repayment to all the parties hereto, of all monies advanced by them or either of them and not before, the said Chas. H. Steffey Incorporated, will 23 B.T.A. 913">*915  disburse all funds thereafter received, and not needed for the purpose of the development as follows that is to say: - (aa) 5% retained by said Chas. H. Steffey, Incorporated, for collection.  (bb) 47% after deducting 1/2 of the current expenses, to the said Chas. H. Steffey Incorporated, absolutely.  (cc) 47% after deducting the remaining 1/2 of the current expenses to the said parties of the second part.  After all mortgages now or hereafter placed on said property are fully paid and discharged and all disbursements or advancements made by either or both of the parties hereto are fully repaid (with interest) and all other debts of the development are fully paid and satisfied then thereafter said1931 BTA LEXIS 1782">*1787  Chas. H. Steffey Incorporated shall hold 1/2 of all the unsold or forfeited lots and unexpired contracts and 1/2 of the other monies or assets accruing from said development, in trust for the uses and benefits of the said parties of the second part, and shall on the request of the said parties of the second part, transfer and set over unto the said parties of the second part, said 1/2 interest therein.  Said Chas. H. Steffey Incorporated retaining the remaining 1/2 Interest therein absolutely as its own, freed and cleared from all the provisions of this agreement.  That said parties of the second part, covenant and agree for themselves, their heirs, personal representatives, to furnish unto the said Chas. H. Steffey Incorporated, the sum of $5,000.00 at time of obtention of title by said Chas. H. Steffey, Inc. of title to said property, same to be used as part of the purchase price of said land; and thereafter, to furnish from time to time, and as called for, by said Chas. H. Steffey Incorporated such further sum or sums, with interest as said Chas. H. Steffey Incorporated, in its sole discretion and judgment, may deem proper or necessary, for the development of said tract of land, 1931 BTA LEXIS 1782">*1788  and the sale of building lots therein.  Said advancements to be repaid from time to time as hereinabove set forth.  But the repayment of any advance either in whole or in part shall not be deemed or considered as a bar to further advances thereafter in the future.  And all such advances shall be made on five days notice of the necessity therefor, given by said party of the first part to said parties of the second part.  Said Chas. H. Steffey Incorporated shall render an account on the 1st day of each week, correctly setting forth the amounts of moneys collected and disbursed, and said parties of the second part covenant and agree to reimburse said party within two days thereafter, for all such disbursements as shown by such weekly statements.  Said Chas. H. Steffey Incorporated, shall make all payments when due out of collected funds, or advancements by said parties of the second part, as may be necessary in the proper development of said tract of land; including therein, taxes, interest on mortgage indebtedness installments of mortgage debt &c.  And from time to time, as the several lots into which said tract is to be subdivided, are fully paid by the Purchaser or purchasers thereof, 1931 BTA LEXIS 1782">*1789  said Chas. H. Steffey Incorporated, shall and is hereby authorized to execute and deliver proper deeds therefor to such purchaser or purchasers.  And for the better execution of the functions by this agreement devolved on said party of the first part, the said parties of the second part, do hereby authorize and empower said party of the first part, to place such mortgage or mortgages thereon, (in replacement either in whole or in part of the purchase money mortgage for $95,000.00 heretofore mentioned) as in the sole judgment and discretion of said party of the first part, may be desirable or necessary in order to promote the proper development of said tract of land, and to do so, notwithstanding any 23 B.T.A. 913">*916  sum or sums advanced by said parties of the second part, and without prejudice to the right of said party of the first part to secure further advances from said parties of the second part, under the terms of this agreement.  * * * The total purchase price of the Anneslie property was $100,000, payable $5,000 in cash, plus the said purchase-money mortgage of $95,000.  Whenever it became necessary for the petitioner to advance moneys in connection with the Anneslie development1931 BTA LEXIS 1782">*1790  it rendered its account thereof, conformably with the agreement aforesaid, to the other contracting parties and was promptly reimbursed therefor.  The $5,000 initial payment was advanced by the petitioner and it too was reimbursed within a few days.  The only books kept by the petitioner were a combination cash book and journal, a lot book and a general ledger.  The lot book recorded the individual lots, the names and addresses of the purchasers and the total consideration, together with installment payments as made.  When all the payments had been completed and the contract fully performed the individual account in that book was closed.  As installment payments were made they were first recorded in the cash book, the entry of which ultimately found its way to the general ledger and also into the lot book to the credit of the individual purchaser.  The cash book contained only entries for cash actually received or disbursed.  The general ledger contained, among other accounts, the Anneslie Syndicate account, Annapolis Road Lots account, and Boulevard Apartments account, transactions in which the petitioner acts as agent in the collection and disbursement of rents.  The Anneslie1931 BTA LEXIS 1782">*1791  Syndicate account is headed "(Lennox Birckhead and Mary A. Birckhead) Chas. H. Steffey, Inc., agents, for Steffey Birckhead Syndicate 'Anneslie' lots." The headnote of that account bears the amount of consideration for the purchase of Anneslie.  The account contains columns for the recordation of all payments made on account by purchasers of lots and loans and other receipts in connection therewith; also, disbursements for roads, improvements, advertising and other expenses and costs incident to the development of said properties, including a commission of 5 per cent for collections to which the petitioner was entitled under its agreement of July 31, 1922.  That account has always shown an excess of expenditures over income; for instance, as of December 31, 1924, there was an excess of $63,126.74; December 31, 1925, $38,846.95; and April 24, 1930, $13,327.55.  That is, the continuing balance brought forward from year to year has shown an excess of disbursements over receipts.  At no time in the course of the Anneslie development has it been free from indebtedness; consequently, no distributions have been made 23 B.T.A. 913">*917  to the syndicate members under their agreement, nor has the1931 BTA LEXIS 1782">*1792  petitioner received any distribution from said venture except the said commission of 5 per cent for collections, nor has any entry ever been made upon its books crediting it with any of the proceeds of lots sold.  The manner in which the petitioner's books of account were kept more nearly resembles the cash receipts and disbursements basis than the accrual basis, and its statements contained in its returns for the several years in controversy that they were kept on the accrual basis were incorrect.  The respondent has increased the petitioner's net income for the several years in controversy by 50 per cent of the profit upon the sale of lots in the Anneslie development.  The costs as prorated to the several lots, the receipts as determined and the computation of the tax by the respondent are concededly correct.  OPINION.  MORRIS: The question here presented is whether the petitioner is taxable during the years in controversy upon alleged profits derived from the sale of lots in the Anneslie development.  The respondent contends that the agreement of July 31, 1922, created a copartnership between the petitioner and the other contracting parties, and that under the law the1931 BTA LEXIS 1782">*1793  profits derived therefrom were taxable to the individual members thereof in the year or years in which earned, whether actually distributed or not.  The petitioner contends, on the other hand, that it is not taxable on the amounts in question, because there is nothing due it under the agreement until certain conditions, therein laid out, are complied with; that until then no partnership existed; and that from the time of the oral agreement in March, 1922, it was a mere agent for the "syndicate." The petitioner, it appears, was a specialist in the handling of real estate developments and it had an opportunity, which it thought well of, to acquire the Anneslie acreage, then about to be platted into 1,050 lots for future sale, and it, through its president, placed the matter before Maloy, Brady, Coblentz and Beasman, who, in or some time prior to March, 1922, orally agreed to furnish the necessary capital for the acquisition of the property, provided it would do the necessary developmental work, which agreement was finally reduced to writing on July 31, 1922.  In the meantime, that is, on May 23, 1922, the property had been deeded to the petitioner, in fee simple, for $100,000, payable1931 BTA LEXIS 1782">*1794  $5,000 cash and the balance of $95,000 by a noninterest-bearing purchase-money mortgage upon the property.  By the written agreement of July 31, 1922, the parties agreed that "they would together develop said tract of land," and, furthermore, 23 B.T.A. 913">*918  that the said instrument or agreement was "intended to be an agreement of equal copartnership in the development, sale and division of profits and losses arising in, from, or out of the development of said land." That agreement, after providing for the retention of 5 per cent of all collections made by the petitioner, as compensation for such services, provided for the payment of developmental expenses, mortgage indebtednesses and borrowed money owing to the parties to the agreement, the interest upon which was specifically waived by the said parties, after which, that is after the payment and satisfaction of those obligations, "and not before," all funds received were to be distributed, 47 per cent to the petitioner, "absolutely," and an equal amount to the other contracting parties, and finally, after the satisfaction of all mortgage indebtednesses and borrowed money "(with interest)" and other debts, "then thereafter" the petitioner1931 BTA LEXIS 1782">*1795  to hold one-half of the unsold or forfeited lots and unexpired contracts and moneys, in trust, for the other contracting parties, subject to their right to request a transfer of said one-half interest, and the petitioner to retain the remaining one-half interest as its own.  We can not agree with the petitioner that the copartnership status was in futuro and that it did not exist during the taxable years in question.  Even granting that the parties to the agreement have never received any distribution of profits thereunder does not alter the fact that a copartnership was intended to result instantly and, in fact, did so result, nor does that fact necessarily prove that no profits were earned within the meaning of the taxing statute.  Indeed it is entirely possible, and even probable, that ultimate losses may prevent there ever being a distribution.  In other words, the mere fact that personal enjoyment of the fruits of the venture was postponed until all expenses and obligations were met, including the paying off of the purchase price of the property, does not postpone the contractual relationship of the parties to the agreement.  The element of delay between the time a venture1931 BTA LEXIS 1782">*1796  begins and ultimate division of profits or losses is ever present, varying in length, of course, according to the economic exigencies with which a business may be confronted.  The profits or losses of the individual parties to a partnership agreement, however, accrue from year to year as the conduct of the venture progresses, notwithstanding they may deem it unwise to make a physical division thereof until the happening of certain specified events.  Counsel for the petitioner refers to the fact that the petitioner would be ultimately rewarded for the work which it rendered (in the performance of the conditions precedent to the partnership status) with "an undivided half interest in that property." Such an interpretation is entirely too restricted.  The agreement, as we 23 B.T.A. 913">*919  have already pointed out, provided for the disbursement of funds, after the payment of all expenses, etc., which, in fact, was a provision for the distribution of profits from the venture.  Had the venture proved successful from the start, enabling the payment of all obligations, distributions would have been immediately forthcoming.  The clause in the agreement providing for the undivided one-half1931 BTA LEXIS 1782">*1797  interest in the property itself was merely a residuary clause, so to speak, by which the rights of the parties could be determined upon conclusion of the venture or undertaking.  Therefore, since the parties have expressly provided that the arrangement was one of "equal co-partnership," not only in ultimate "profits" arising from, but "in the development," which covers every phase of the venture, and since it appears that all of the essential elements of a copartnership are present and have been clearly provided for, and, furthermore, since the language used is in the present tense and is in no sense conditional or equivocal, we hold that a copartnership existed and has continued throughout the years in question.  Even granting, for the sake of discussion, that there was an intention to postpone the partnership status until some future time when all of the conditions of the agreement had been complied with, and that the agreement as now worded does not set forth the true intention of the parties, we certainly could not vary its positive and unmistakable terms without more proof than has been presented.  It seems to us, if a different construction was intended from that which we1931 BTA LEXIS 1782">*1798  are forced to place upon the language used, that the other contracting parties, that is, Maloy, Brady, Coblentz and Beasman, should have been present at the hearing in order to have given us the benefit of their unbiased views of what the true intention of the parties was.  They were neither present at the hearing nor accounted for.  The petitioner's counsel devoted considerable time and attention toward proving the manner in which the petitioner's books of account were kept, that is, whether upon the accrual or the cash receipts and disbursement basis, and feeling as we do that it has some characteristics common to both bases, as is true in a great many instances, we have found as a fact that the method employed more nearly resembles the cash basis of accounting.  However, since we have concluded that the agreement in question created a copartnership, its basis of accounting becomes immaterial for the reason that section 218 of the Revenue Act of 1921, in so far as applicable, provides: 23 B.T.A. 913">*920  (a) * * * There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership * * *.  The1931 BTA LEXIS 1782">*1799  petitioner concedes that the costs prorated to lots, the receipts as determined, and the computation of the tax are correct.  Decision will be entered for the respondent.