Docket No. 8614 9623.
04-30-1928
SAM H. HARRIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Arthur F. Driscoll, Esq., J. S. Y. Ivins, Esq., Leland T. Atherton, Esq., and Dennis F. O'Brien, Esq., for the petitioner. George G. Witter, Esq., and E. C. Algire, Esq., for the respondent.
Arthur F. Driscoll, Esq., J. S. Y. Ivins, Esq., Leland T. Atherton, Esq., and Dennis F. O'Brien, Esq., for the petitioner.
George G. Witter, Esq., and E. C. Algire, Esq., for the respondent.
Proceedings for the redetermination of deficiencies in income taxes as follows:
----------------------------------------------------------------------- Docket No. | Year or period involved. | Deficiency. ------------|---------------------------------------------|------------ 8614 ____ | Calendar year 1919 ________________________ | $5,478.62 | Calendar year 1920 ________________________ | 12,755.96 9623 ____ | Period Jan. 1, 1921-June 30, 1921 _________ | 13,649.14 | Fiscal year July 1, 1921-June 30, 1922 ____ | 704.81 | Fiscal year July 1, 1922-June 30, 1923 ____ | 21,994.96
The petition contained numerous allegations of error, but at the hearing all were abandoned except the following:
(1) As to 1920, whether respondent erred in refusing to allow the partnership of Cohan and Harris a deduction of $10,000 paid in to a so-called strike fund, and a proportionate reduction of petitioner's distributive share of partnership income.
(2) As to 1920, whether petitioner properly excluded from income that portion of the profits of the partnership which was credited to his wife, pursuant to an assignment.
(3) As to the period January 1, 1921, to June 30, 1921, whether the respondent erred in computing the tax in accordance with the provisions of section 226(c) of the Revenue Act of 1921.
FINDINGS OF FACT.
Petitioner is an individual, and for a number of years prior to June 30, 1920, was a member of the partnership of Cohan and Harris theatrical producers, his interest therein being one-half.
In 1919 petitioner and his partner, George M. Cohan, were members of the Producing Managers' Association. That association was negotiating with the Actors Equity Association in an effort to prevent the enforcement of a closed shop on its members and to forestall a threatened strike of actors. The strike, however, was suddenly called. At a meeting of the Producing Managers' Association a fund was raised to combat the demands of the strikers, by assessment upon the members. The sum of $10,000 was assessed against the partnership of Cohan and Harris, which sum was paid during the partnership's fiscal year ended June 30, 1920. The fund raised was used to pay counsel fees, for publicity, police protection, and to finance the small producers who could not afford to be inactive during the period the strike continued. The strike affected several of the plays of Cohan and Harris. The Producing Managers' Association was strictly a business organization and had no social features. No part of the assessment paid by Cohan and Harris has ever been returned.
No deduction for the item of $10,000 was claimed in the partnership return, but claim therefor was subsequently made in a protest filed and at a hearing in the Income Tax Unit. The respondent refused to allow the deduction.
On June 30, 1919, the partnership of Cohan and Harris was engaged in producing a number of shows or theatrical entertainments among which were: "A Tailor Made Man," "Royal Vagabond," "A Prince There Was," "Three Faces East," and "Wake Up, Jonathan." It is customary in the theatrical business for a producer to sell or assign a part of his interest in the shows he is producing. On July 2, 1919, petitioner executed the following instrument:
TO WHOM IT MAY CONCERN:
For and in consideration of the sum of One Dollar and other valuable consideration to me, the undersigned, in hand paid by Alice Harris of the Village of Great Neck, County of Nassau, State of New York, I do hereby transfer, set over and assign and by these presents have transferred, set over and assigned to the said Alice Harris a full and undivided interest in and to the following theatrical enterprises in which I am either the sole or part owner, to wit: "A Tailor Made Man" one-fourth of my 37½% interest "The Royal Vagabond" one-fourth of my 50% interest "The Acquittal" one-fourth of my 50% interest "A Prince There Was" one-fourth of my 50% interest "Three Faces East" one-fourth of my 45% interest "Mis' Nelly of N'Orleans" one-fourth of my 50% interest "Wake Up Jonathan" one-fourth of my 100% interest
Subject to the said Alice Harris being responsible for the same proportion of any losses that may be incurred by the undersigned in the operation of said theatrical enterprises; statements and settlements of the profits and losses to be made at the end of each fiscal year by the undersigned and the said Alice Harris.
To have and to hold the same unto the said Alice Harris, her legal representatives and assigns.
IN WITNESS WHEREOF I hereby set my hand and seal this 2nd day of July, 1919. (Signed) SAM H. HARRIS. CITY OF NEW YORK | COUNTY OF NEW YORK > ss: STATE OF NEW YORK |
On this 2nd day of July, 1919, before me personally appeared Sam H. Harris and he acknowledged to me that the above signature is his signature and that his execution of the same was his free act and deed. (Signed) DANIEL L. McCARTHY. Notary Public. New York County Clerk #11. New York County Register No. 1188.
Alice Harris was the wife of the petitioner. Prior to 1919 an account in the name of Alice Harris was opened in petitioner's ledger. At June 30 of each year the amount of partnership profits of the firm of Cohan and Harris was determined and carried to a profit and loss account and the amount shown in that account was then divided equally between the partners, the petitioner's share being set up thereafter in his books. At June 30, 1920, when the profits were so determined, there was credited to the Alice Harris account in petitioner's ledger a portion of petitioner's share of the profits from the shows above listed. The amounts so credited to the Alice Harris account at the close of the year ended June 30, 1920, were as follows:
The Tailor Made Man _____________________________ $112.80 Royal Vagabond __________________________________ 1,949.39 The Acquittal ___________________________________ 7,151.63 A Prince There Was ______________________________ 3,122.65 Three Faces East ________________________________ 9,464.08 Wake Up, Jonathan _______________________________ 4,984.96 _________ Total _____________________________________ 26,785.51
Alice Harris had a drawing account of about $300 per week, which was charged to her account at the end of the fiscal year, and amounts paid to her at various times by the petitioner were likewise charged to her account at the end of the year.
In filing his return for the year 1920 petitioner excluded from his share of the partnership earnings of Cohan and Harris the amount of $26,785.51 credited on petitioner's individual ledger to the account of Alice Harris. The respondent added that amount to petitioner's income as a portion of his share of the profits of the partnership.
Petitioner changed from a calendar year to a fiscal year basis of making returns pursuant to permission obtained from the Treasury Department and on October 11, 1921, filed a return for the period January 1 to June 30, 1921. The computation of tax for that period, as made by a revenue agent and approved by the respondent, is upon the basis of reducing petitioner's entire income to an annual basis and computing the tax accordingly. In the income thus reduced to an annual basis are the following items which were already on an annual basis in that they fell in or occurred but once in any single year:
Share of profits of Cohan & Harris partnership ________________________ $33,879.53 Executive salaries of various companies fixed at end of fiscal year ___ 76,767.48 Dividend from George M. Cohan's Grand Opera House Co __________________ 4,242.06 Dividends from 149th Street Opera Co __________________________________ 1,516.70 Dividends from S. H. Harris Theater Co ________________________________ 16,966.03 ___________ Total ____________________________________________________________ 133,471.80
In petitioner's return for the period January 1 to June 30, 1921, he reported as income from the firm of Cohan and Harris the amount of $33,879.53, which is the amount shown on the partnership books.
OPINION.
ARUNDELL:
The item of $10,000 paid by the partnership of Cohan and Harris as its share of the so-called strike fund raised by the Producing Manager's Association is the same item considered in the case of George M. Cohan v. Commissioner, 11 B. T. A. 743, and held therein to be allowable as a business expense. Petitioner's distributive share of partnership income for the year 1920 should be adjusted accordingly.
The record, in so far as it relates to the purported assignment of an interest in theatrical enterprises, is in an unsatisfactory state. It is not at all clear what the petitioner was attempting to assign, or who owned it. We do not know whether he and his partner owned the plays outright or merely the right to produce them. Throughout the proceedings these enterprises were spoken of as partnership property, yet in the assignment the petitioner refers to his "100% interest" in one of them, "Wake Up, Jonathan."
We will assume, however, for the purpose of deciding the question presented, that these "enterprises" were property of some sort and that they were partnership property. Working on these assumptions, did the assignment operate to give the assignee such a right in the partnership property that a proportionate part of the partnership income was no longer income to the petitioner?
It has been declared by the Supreme Court and the courts of the State of New York that partnership property belongs to the firm and not to the partners. The partners are entitled only to a share of what may remain after payment of the partnership debts and after settlement of the accounts between the partners; and no greater interest than this can be acquired by a party coming into the right of a partner, no matter how the right be acquired, whether by assignment, by purchase, as a personal representative, under an execution, or commission of bankruptcy. The utmost that can be acquired by anyone acquiring the interest of a partner is an interest in the surplus, if any, which remains after payments of all partnership debts. An assignment or a sale (whether the sale be voluntary or under execution) of the interest of an individual partner will not operate to transfer to the assignee or purchaser any part of the firm property. United States v. Hack, 8 Pet. 271; Clagett v. Kilbourne, 1 Black, 346; Bank v. Carrollton Railroad, 11 Wall. 624, 628; Menagh v. Whitwell, 52 N. Y. 146; 11 Am. Rep. 683; Costello v. Costello, 209 N. Y. 252; 103 N. E. 148. See also In re Bertenshaw, 85 C. C. A. 61; 157 Fed. 363; 2 Rowley, Law of Partnership, § 830.
While an assignee may sue for an accounting after the dissolution of the partnership and join the former members as parties defendant (Nirdlinger v. Bernheimer, 133 N. Y. 45; 30 N. E. 561) such an action can not be maintained during the existence of the partnership. As long as the partnership continues, the remedy of an assignee of one of the members is against such member. Mathewson v. Clark, 6 How. 121, 141.
Having, as we have seen, no interest in the partnership property, the assignee's position in this case is no different from that of the assignee in the case of Mitchel v. Bowers, 15 Fed. (2d) 287. The opinion in that case reads in part:
As a subpartner the wife through the agreement got no present interest, equitable or legal, in the firm assets; the assent of the other partners would have been necessary for this as to constitute her a partner, for ownership follows the status. Until by distribution the profits became the separate property of the plaintiff, her rights were upon the contract, not in re. This does not run counter to Nirdlinger v. Bernheimer, 133 N. Y. 45, 30 N. E. 561, which distinguished Burnett v. Snyder, 81 N. Y. 550, 37 Am. Rep. 527, for that reason. Therefore the plaintiff was in any event obliged to include all undistributed profits in his return; the statute so directed, and the profits pro tanto were still his.
In the case of Burnett v. Snyder, cited above, the members of a partnership, Strong, Platt, and Ryley, had proposed to Snyder that he become a partner with them. Snyder declined to do so. It was then proposed that he should take a share of Ryley's interest and the arrangement was concluded on that basis. In a suit to recover a debt of the firm the question arose whether Snyder was a partner. It was held that:
He Snyder had no interest in the profits as profits, but a right simply to demand of Ryley that he should account to him for one-third of his profits, accompanied with an obligation to pay one-third of his losses. He had no joint proprietorship with the members of the firm in the profits before division, was not entitled to an account as a partner, and had no lien on the partnership assets * * *. Strong, Platt & Co. the partnership were not his agents for carrying on the business of the firm, and he had no power or right to interfere in its management.
In Stokes v. Stokes, 13 N. Y. S. 407, a partner had assigned to his son "an undivided fifth part of his interest" in the firm. Respecting the assignment, the court held:
It is clear that by such assignment he obtained no rights as a partner and was not responsible for the debts of the firm * * *. (Citing Burnett v. Snyder, supra .)
We do not understand the claim to be that petitioner's wife, by virtue of the assignment, became a partner in the firm of Cohan & Harris. At any rate, it is quite obvious that she did not become a partner for neither she nor the partners intended such a result (Kent v. Universal Film Mfg. Co., 193 N. Y. S. 838, 844), and neither the partners nor anyone else so regarded her. Whatever part of the partnership profits ultimately come to her, come not from the partnership but from the petitioner. Burnett v. Snyder, supra ; Rockafellow v. Miller, 107 N. Y. 507; 14 N. E. 433. Mrs. Harris did not sign the instrument and it is open to question whether she could be held responsible for losses that might be sustained in the operation of the several enterprises. After the execution by petitioner of the assignment there were still only two members of the partnership and they alone were entitled to any profits it made. The respondent did not err in including in petitioner's income for 1920 the portion of partnership profits which petitioner, on his books, credited to the wife's account.
The third issue involves items of income for the period January 1 to June 30, 1921, from the same source (with the exception of the dividends from the Harris Theatre Co.) as the items concerning which there was a dispute in the Cohan case, supra. What we said there is applicable to this case and we can not find that the respondent erred in placing the items of income listed, together with other income, on annual basis and computing the tax accordingly. In the present case the additional argument is made that, as the return for the 6-month period was filed October 11, 1921, the Revenue Act of 1921, which was not enacted until November 23, 1921, can not apply, and the Revenue Act of 1918 did not require a taxpayer making returns for a period less than a year to place income for such period on an annual basis. The answer to this is that Title II of the 1921 Act, within which section 226 falls, is by section 263 made retroactive to January 1, 1921, and Title II of the 1918 Act is repealed as of the same date by section 1400 (a) of the Revenue Act of 1921.
At the hearing one of the counsel for petitioner in examining a witness read the amount of $33,979.53 as purporting to be the amount reported as petitioner's share of the profits of the partnership of Cohan and Harris for the period January 1 to June 30, 1921. We are asked now to find as a fact that petitioner's income was overstated by $100 as the partnership books show petitioner's share of profits to be $33,879.53. Petitioner's original return for this period was placed in evidence and the amount of income from the partnership stated thereon is $33,879.53. The reading of the larger amount was quite evidently an unintentional error. We accordingly deny the request for a finding that income was overstated by $100.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.
PHILLIPS dissents.