Opinion
No. 87.
January 6, 1944.
Appeal from the District Court of the United States for the Southern District of New York.
Action by Ruth A. Benjamin and others, as executrix and executors of the last will and testament of Hamilton Fish Benjamin, deceased, against Jane M. Hoey, as executrix of the estate of James J. Hoey, individually and as United States Collector of Second Internal Revenue Collection District of New York, to recover an amount of a deficiency assessment for income taxes levied against plaintiffs' testator. From a judgment in favor of plaintiffs, 47 F. Supp. 158, the defendant appeals.
Reversed and remanded.
During the taxable year 1932, Hamilton Fish Benjamin was the senior partner of the firm of Benjamin Ferguson, stock brokers, which was engaged in the business of buying and selling securities in New York City. Under the partnership articles, he was entitled to receive 38% of the net profits of the partnership. During 1932, the firm made a profit of which his distributive share was $31,045.79. During 1932, he was personally engaged in buying and selling securities on his own account. He ran these transactions through the partnership and paid to the partnership the usual commissions upon purchases and sales. For the year 1932, these commissions paid to the partnership totaled $66,947.13. He filed an individual Federal income tax return for 1932 showing no final taxable income by reason of a claimed loss of $74,369.99 from trading in securities. This sum of $74,369.99 included the above-mentioned sum of $66,947.13.
The Commissioner refused to allow the deduction of these commissions and asserted a deficiency tax against Benjamin in the amount of $12,017.59. This sum, together with interest in the amount of $953.13, making a total of $12,970.72, was paid on August 4, 1934 to the Collector.
Thereafter, the taxpayer filed a claim for refund and after its rejection the present action was commenced. The taxpayer having died and the Collector also having died, the parties to this action are now Benjamin's executrix and executors, as plaintiffs, and the former collector's executrix, as defendant.
Both in the claim for refund and in the complaint herein, it was claimed on behalf of the taxpayer that the commissions paid by Benjamin to his partnership were deductible in their entirety as business expenses under § 23(a) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 489, but that, in any event, so much of those commissions as constituted Benjamin's proportionate share of partnership income were deductible as monies paid to himself, and therefore not a part of his income.
Wellman, Smyth, Lowenstein Fennelly, of New York City (Melvyn Gordon Lowenstein and F. Van Siclen Parr, Jr., both of New York City, of counsel), for plaintiffs.
James B. McNally, of New York City (William L. Lynch, of New York City, of counsel), for defendant.
Before L. HAND, CHASE, and FRANK, Circuit Judges.
The question is whether 38% of the commissions paid by Benjamin to his firm and which the firm repaid to him constitutes part of his income. The argument that it is not runs thus: The moneys Benjamin paid for commissions were capital outlays. If, without partners, he had conducted the brokerage business, he would have paid the entire amount of those commissions to himself and no one would then have thought of saying that those payments constituted part of his taxable income. Because he had partners, he paid out an amount equal to 62% of the commissions. The balance, 38%, or $25,439.91, always remained his. To put it differently, that sum he paid to himself, and what one pays to one's self cannot be part of one's income. Nothing in any statute or decisions relating to a partner's income leads to a different conclusion. Indeed, if the statute called for a tax here, it would perhaps be unconstitutional, i.e., not authorized by the Sixteenth Amendment.
Neuberger v. Commissioner, 311 U.S. 83, 61 S.Ct. 97, 85 L.Ed. 58, while not directly in point, serves to show that, generally speaking, a partnership is not to be regarded as a distinct entity for tax purposes.
With the foregoing argument we generally agree. But it is not entirely sustained by the record. For the evidence fails to show that the net income of the partnership, 38% of which belonged to Benjamin, included 38% of the commissions he paid. It may be that the firm's commission business was not the sole source of its gross income, that, for instance, a portion of that income derived from interest and dividends in connection with which little or no expense was incurred. We therefore reverse and remand for a new trial at which the plaintiffs may offer evidence to show what portion of the $66,947.13 net partnership income came from the commissions which Benjamin paid.
Reversed and remanded.