Court Opinion

ID: 4588593
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:23:20.534584+00
Date Added: 2024-06-11T07:50:06.084208
License: Public Domain

RICHARD P. HALLOWELL, 2ND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  DURHAM JONES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  WILLIAM E. JONES AND LILLIAN D. JONES, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  FRANK A. MASON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  THOMAS C. THACHER, JR., AND VERA M. THACHER, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hallowell v. CommissionerDocket Nos. 84777, 84778, 84779, 84780, 84781.United States Board of Tax Appeals39 B.T.A. 50; 1939 BTA LEXIS 1080; January 5, 1939, Promulgated *1080  A share of partnership profits was distributed to the estate of a deceased partner pursuant to a provision of the articles that the partnership be projected for a period beyond a member's death and that the share of profits to which the deceased partner would have been entitled if living be distributed to his estate.  Separate settlement was prescribed for the deceased partner's capital interest.  Held, the estate's distributive share of partnership income is not to be regarded as distributed to remaining partners and used by them to purchase the decedent's interest.  Malcolm Donald, Esq., and Harold L. Clark, Esq., for the petitioners.  Hartford Allen, Esq., and Arthur Clark, Esq., for the respondent.STERNHAGEN *51  The Commissioner determined deficiencies of $16,227.14, $14,512.90, $20,876.70, $6,306.20, and $3,970.44 in income taxes of the several petitioners for 1933.  They assail the determination that their distributive shares of the income of a partnership, of which they were members, should include proportionate parts of the share of such income payable to the estate of a deceased partner.  FINDINGS OF FACT.  Petitioners, *1081  residents of Boston, Massachusetts, or its vicinity, were with Frank W. Hallowell, now deceased, members of the partnership of Hallowell, Jones & Donald, engaged in the purchase, sale, and marketing of wool.  The partnership agreement was dated January 1, 1930, and ran for a period of two years.  It succeeded a predecessor partnership of the same name and carried on an old established business.  The aggregate capital was $1,696,171.13, of which Hallowell's contribution was $650,000 and William E. jones', $750,000.  The partners were to share profits and losses in fixed proportions, of which decedent's was 16 percent.  The agreement provided: Article Eighth. In case either said William E. Jones or said Frank W. Hallowell dies during the term of the co-partnership or both die at the same time, the co-partnership shall - (a) Terminate six (6) months from the date of such death (even though said period extends beyond December 31, 1931), or, if a majority in interest of the surviving partners notify the representatives of the deceased partner or partners (within sixty (60) days of the appointment of such representatives) of the desire of such surviving partners to terminate the*1082  co-partnership earlier, then the co-partnership shall terminate on the date so specified by them; or (b) If all the surviving partners within six (6) months of the death of any such partner elect in writing to continue the co-partnership, then it shall continue as to the remaining partners until December 31, 1931, or until the interest of the deceased partner terminates, whichever is longer.  The interest of the deceased partner shall in such case cease and be determined six (6) months after the date of his death, or, if the surviving partners notify the representatives of the deceased partner within sixty (60) days of the appointment of such representatives of such surviving partners' desire that the interest of the estate of the deceased partner cease and be determined on an earlier date, then the interest of his estate in the co-partnership shall terminate on the date so specified.  Until the co-partnership is terminated, or in case the surviving partners so elect to continue the co-partnership, then until the date when the interest of the estate of the deceased partner in the co-partnership terminates as above provided, but no longer, the estate of the deceased partner shall*1083  continue to *52  have the same interest in the co-partnership profits and be responsible for the same share of co-partnership losses as the deceased partner would have had or borne if he had lived, but the representatives of his estate shall have no voice in the management of the business of the co-partnership.  In case the surviving partners so elect to continue the co-partnership, settlement shall be made of the interest of the estate of the deceased partner in the co-partnership as provided in Article Tenth.This provision was designed to obviate a withdrawal by Hallowell or Jones of his capital when during an active season it might be needed to support the firm's credit.  The partnership customarily borrowed heavily in the late spring and summer to pay for purchases of wool and to make advances to consignors.  Article tenth of the agreement directed that upon "the termination of the interest of * * * [a] deceased partner": * * * the partners who continue the business shall be and become entitled to all co-partnership assets and shall assume all of its liabilities, and the interest in the co-partnership assets of * * * the estate of the deceased partner, shall*1084  be deemed a loan to the surviving partners, * * * determinable in amount as provided in article fourth and payable in installments, with interest.  Article fourth prescribed the method of computing distributive profits and allocating losses and directed that an amount equivalent to 5 percent interest be added to the amount standing to each partner's credit on the books.  On January 2, 1932, and again on January 3, 1933, the six partners executed instruments extending for one year the agreement of January 1, 1930, making, however, some modifications in the amounts of their respective capital contributions and percentages of interest.  By the last instrument Hallowell's contribution was reduced to $623,668.49, and his interest was increased to 19 percent.  On June 1, 1933, Hallowell died, and executors of his will were duly appointed.  As the buying season for wool was then beginning, and as the surviving partners anticipated the necessity for large loans, which in fact reached $1,900,000 by July, they did not elect to terminate the "interest of the deceased partner" in the business, but continued to operate for the six-month period under the primary provision of article eighth. *1085  On December 1, 1933, they and the estate's representatives by mutual agreement extended the period to December 31, 1933, so that its termination would conveniently fall on the date when the partnership's books were normally closed.  The books were closed on December 31; net profits of the business were determined as of that date for the year 1933, and were credited to the surviving partners and the decedent's estate as though decedent had lived throughout the year.  Under date of January 2, 1934, petitioners entered into a new partnership agreement to carry on the business under the same firm name.  *53  By it each transferred all amounts "standing to his credit on the books of the former co-partnership" as his capital contribution.  Decedent's executors and petitioners executed an agreement which provided that the executors: * * * hereby assign, transfer, and set over to said New Partnership all right, title and interest which they have as Executors in the assets and good will of said Old Partnership.  The estate was to: * * * be credited with all amounts to which said Frank W. Hallowell would have been entitled had he continued to live and remain a partner until said*1086  December 31, 1933, including any credits to which he would have been entitled for salary on said date.  To determine this amount more accurately, it was provided that a revaluation be made of furniture, automobiles, and similar property; that account be taken of any unrecorded assets and of the net profit or loss on the disposition of inventory belonging to the old partnership, and that 19 percent of the amount of such adjustments be reflected in the estate's account.  The estate was entitled to no credit: * * * on account of good will, trade names or books, correspondence, and records of the Old Partnership, or its leases or contracts with employees for services.  The credit on the books, so adjusted: * * * shall be deemed a loan to the New Partnership which shall be paid to the Executors by the said New Partnership * * * with 5 percent interest in installments payable at any time.  The new partnership was not: * * * required to make any payments (except Five Thousand Dollars ($5,000) a month) prior to March 1, 1934 and shall not thereafter be required to make any payments which would exceed nineteen per cent (19%) of the cash of the Old Partnership as of December 31, 1933, plus*1087  credits to the account representing the executors' share in items not to be liquidated, plus nineteen per cent (19%) of the net proceeds of liquidation after that time which, as above provided, are to be credited to the Executors' account, provided that if, on June 1, 1934, the Executors shall require additional funds to pay inheritance taxes, the New Partnership will advance to the Executors sufficient to make such payments, but not in excess of Fifty Per Cent (50%) of the then value of nineteen per cent (19%) of the unliquidated inventory and accounts receivable of the Old Partnership taken over by the New Partnership.  When the partnership's books were closed on December 31, 1933, there was credited to decedent's estate $696,115.17, which was paid to the executors.  This credit included $146,449.38 representing the estate's part of the net taxable profits of the partnership's business, $707,136.74, for 1933.  The Commissioner determined that $29,827.89 of the income so credited represented decedent's share of partnership profits for the period January 1 to June 1, 1933.  The remaining *54  $116,621.49 he determined to be distributable to petitioners and added to their respective*1088  taxable incomes parts of it proportionate to their interests in the partnership as sole partners.  For the period June 1 to December 31, 1933, the executors reported $91,771.36 as the estate's distributive share of partnership income.  They did not report an unrealized profit of $24,448.19, representing 19 percent of the partnership's write-up of its merchandise inventory on June 1, 1933, reflecting the increase of market value over cost.  OPINION.  STERNHAGEN: The question to be decided is whether the petitioners are to be treated as having been entitled distributively to the $116,621.49 of the partnership income earned in 1933 after Hallowell's death on June 1, 1933, and actually paid to his estate in accordance with the partnership agreement.  According to the agreement, Hallowell's estate was in its own right entitled to the $116,621.49 as its distributive share of partnership earnings of 1933, and it is in recognition of this right that the estate received the amount.  The Commissioner, however, constructs a theory by which the amount of 1933 earnings is to be treated as distributable in the first instance to the petitioners as the sole partners after Hallowell's death and*1089  in turn used by them to purchase from the estate Hallowell's interest in the partnership.  In our opinion it clearly appears that the Commissioner's determination is both contrary to fact and unsupported in law.  The manner of taxing partnership income is found in Revenue Act of 1932, section 182: 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 for the taxable year.  * * * The partnership agreement which governed the distribution of income clearly provides for the projection of the partnership six months beyond Hallowell's death, and that the share to which Hallowell would have been entitled had he lived should be distributable to his estate.  This six-month period was properly extended until the end of the calendar year 1933.  It was by virtue of these agreements that the estate had its direct right to the share of the partnership income here in question.  Looking at the later agreement of January 2, 1934, whereby the petitioners alone organized a new successor partnership and agreed upon a method of payment to the estate for Hallowell's interest in the earlier partnership, *1090  the Commissioner infers that the share of 1933 income to which the Hallowell estate was already entitled was recognized by the partnership as being payable by the new partners *55  in settlement of Hallowell's capital interest.  We find nothing, however, to support this view.  It is true that the 1934 agreement recognizes the estate's share in the 1933 earnings, but there is no reason to confuse the character of this agreement with the amount which the estate was entitled to receive from the new partnership as Hallowell's capital contribution in the old.  The petitioner argues with much force that Hallowell's estate received the amount as compensation for the use of his capital contribution; that the estate was during 1933 a continuing partner in the firm and received the $116,621.49 as its distributive share of partnership income; that, if not a partner, it had such a direct beneficial interest in the amount as to impose a trust obligation upon the surviving partners which would preclude their having any right in the $116,621.49 as a distributive share of partnership income; or that the estate's right to the amount under the agreement was so definite as to amount to a contractual*1091  charge on partnership earnings which the partnership was required to pay before the distributable income could be determined.  We refrain from adopting any of these characterizations as the reason for decision, since it is clear for the reasons already stated that the amount attributed to each partner may not be regarded as "his distributive share, whether distributed or not, of the net income of the partnership for the taxable year." The respondent cites ; ; ; , but all of those cases are distinguishable because the circumstances showed a payment by the surviving partners to the representative of the deceased partner for the acquisition of the capital interest in the partnership.  Both parties cite , but we think that the reasoning supports the petitioner's rather than the respondent's view.  As to the amount paid in recognition of Hallowell's capital interest in the partnership, the opinion clearly indicates that this*1092  amount may not be used to reduce the taxable income of the surviving partners in firm profits; but as to the portion of the current profits paid directly to the estate, it is its income and not corpus, "and this is so whether we consider the executor a member of the old firm for the remainder of the year or hold that the estate became a partner in a new association formed upon the decedent's demise." The language of the Board in , can well be applied here to the same effect: * * * The plain intent of the partnership agreement was that regardless of the time during a year in which a partner might die, his estate would share in the partnership profits for the remainder of the year in the same manner as if he had lived throughout the year, and the capital which he had invested in the business would remain in, and at the risk of, the business until the end *56  of the year.  * * * After the end of the year, settlement was to be made with the estate not only on account of the profits for the year, but also for the capital which the deceased partner had in the business.  * * * The profits of the partnership to which the surviving partners*1093  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 estate.  See also . The Commissioner's determination is reversed.  Decision will be entered under Rule 50.