Docket No. 58544 58545 58774-58777 58793-58801.
10-31-1932
HOWARD W. RAYMOND, PETITIONER, ET. AL., v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Randolph E. Paul, Esq., Charles B. McInnis, Esq., and Simon Brett, Esq., for the petitioners. A. H. Fast, Esq., for the respondent.
Randolph E. Paul, Esq., Charles B. McInnis, Esq., and Simon Brett, Esq., for the petitioners.
A. H. Fast, Esq., for the respondent.
The petitioners challenge the respondent's determination of deficiencies in their several income taxes for 1927 and 1928, all of which result from the single determination that in those years the partnership of E. A. Pierce & Company erroneously deducted among its ordinary and necessary expenses amounts paid monthly to two individuals and treated as compensation for services. The respondent held the amounts to be expenditures for the good will of the partnership formerly conducted by the individuals.
FINDINGS OF FACT.
The petitioners are all partners or derive income through partners in the stock brokerage firm of E. A. Pierce & Company. In January, 1927, Pierce & Company, acting through Edward A. Pierce, made an agreement with the partnership of Swartwout & Appenzellar, the primary purpose of which was the transfer to Pierce & Company of the business of Swartwout & Appenzellar. The following letters are the only writings covering the transaction: January 10, 1927. Messrs. E. A. PIERCE & Co., 11 Wall Street, New York, N. Y.
GENTLEMEN:
In an interview today between your Mr. E. A. Pierce and our Mr. R. H. Swartwout an arrangement for the amalgamation of the two firms was agreed upon and this letter is intended to set forth in general the terms of that arrangement. Necessarily many details must remain uncovered and subject to a fair adjustment.
The business of Swartwout & Appenzellar as of January 24th, 1927, shall be merged with the business of E. A. Pierce & Company and the entire organization of Swartwout & Appenzellar shall be taken over by E. A. Pierce & Co., each individual starting with the salary which he or she is now receiving from Swartwout & Appenzellar except that the arrangement with Mr. Swartwout and Mr. Appenzellar is more definitely described below, and the arrangement with Mr. Benton, Mr. Turner, Mr. Kenneth Appenzellar, Mr. Cullinan and Mr. Gray shall be described on an attached memorandum.
None of the present members of the firm of Swartwout & Appenzellar shall become members of the firm of E. A. Pierce & Company, nor shall the members of the firm of Swartwout & Appenzellar contribute any capital to the firm of E. A. Pierce & Company or be liable in any way for its obligations.
Mr. R. H. Swartwout and Mr. Paul Appenzellar shall be employed for a period of three years by E. A. Pierce & Company, each to receive during that period the sum of $50,000 per annum. Mr. Swartwout and Mr. Appenzellar will use their best efforts to transfer all of the business of Swartwout & Appenzellar to the firm of E. A. Pierce & Company, but as the primary purpose of the trade on the part of Mr. Swartwout and Mr. Appenzellar is to give each more leisure and less responsibility they will be held to no fixed agreement as to the amount of time they devote to the business of E. A. Pierce & Co. beyond the effort and time required to deliver the business of Swartwout & Appenzellar.
At the expiration of the three year period above referred to it shall be a matter of further negotiation whether Mr. Swartwout and Mr. Appenzellar, each or both, shall continue on a salary basis with the firm of E. A. Pierce & Co., but if Mr. Swartwout and Mr. Appenzellar elect to continue and give a satisfactory part of their time to the business of that firm and if such continuation be satisfactory to E. A. Pierce & Co. the compensation shall continue on the same basis as that of the three years covered by this letter.
Any payment to Mr. Swartwout and to Mr. Appenzellar is in no way to be considered a payment for good will. It is to be a payment for services, and both Mr. Swartwout and Mr. Appenzellar will receive the stated payment during the three year period either by payment to themselves or to their nominees, or in the event of the death of either one, to his Estate or as designated by his will.
The leases of the head office, branches, and store room by Swartwout & Appenzellar shall be assumed by the firm of E. A. Pierce & Co. and the office equipment shall be taken over at its depreciated book value, which is $7,262.16. Yours very truly, SWARTWOUT & APPENZELLAR.
ATTACHED MEMORANDUM
Mr. Kenneth Appenzellar from the date of the consolidation is to receive a salary at the rate of $18,000 a year, and in addition thereto one-half of 1% of the net profits of E. A. Pierce & Co. In this case, subject to your approval, it would be nice if we could say to Mr. Kenneth Appenzellar, who, as stated to you, is a key man, that one-half of 1% would not make his net return for any year less than $25,000, which he has been receiving.
Mr. F. H. Turner is to receive a salary of $10,000 and a bonus at the end of the year which is to be fixed by Mr. R. H. Swartwout.
Mr. D. A. Cullinan is to receive a salary of $9,000 a year and a bonus at the end of the year which is to be fixed by Mr. R. H. Swartwout.
Mr. Andrew Gray is to receive a salary of $8,000 a year and a bonus at the end of the year which is to be fixed by Mr. R. H. Swartwout.
With reference to Mr. C. V. Benton, we understand that you are to take care of him by giving him floor brokerage. January 11, 1927.
CONFIDENTIAL
Swartwout & Appenzellar, 141 Broadway, New York City.
Gentlemen:
We have your letter of the 10th instant conveying your understanding of the arrangement under which it is desired that your business be merged with ours and, in the main, are pleased to confirm our concurrence. We feel, however, that it would be in order for us to place on the record a few qualifying modifications, as to the fairness of which proposition you doubtless will agree with us, we think.
In the second paragraph of your letter you stipulate that we shall take over your entire organization, "each individual starting with the salary which he or she is now receiving from S. & A." etc. This is quite in line with our intention but we assume it to be understood that we are not bound to retain indefinitely any S. & A. employe who, after fair investigation, we find is not essential to the proper handling of our business, save, as a matter of course, the five individuals specifically mentioned in the memorandum attached to your letter of yesterday. It is understood that we are to use our best efforts to place in our own organization as many of your deserving employes as we consistently can, likely enough, all.
We assume that the $50,000 per annum payments to Mr. Swartwout and Mr. Paul Appenzellar are to be made in equal monthly installments of $4,167 each.
We purpose handling such features as cannot be definitely fixed at this time with the same degree of fairness and liberality that we would expect at your hands, and we think our record with our employes is such as to ensure our according to those who may be incoming from your organization fair treatment in every instance. We are loath, however, to commit ourselves to any definite guarantee in the case of Mr. Kenneth Appenzellar, for it is conceivable that general business conditions might be such in any one year that it would be far from the part of good business to give large bonuses in that particular year. On the other hand we feel that if Mr. Kenneth Appenzellar develops a value to us comparable with that which you attach to him it is more than likely that his net return would substantially exceed the figure suggested by you as a guarantee in a year when general business were good.
We feel, too, that inasmuch as we purpose leaving it to Mr. Swartwout to fix the bonuses for Messrs. Turner, Cullinan and Gray, that a qualifying stipulation would be in order; namely, that in no year should the bonus allotted to any one of these three exceed an amount that would raise his income from us to a figure exceeding his average received from you in the years 1924-1925-1926 unless such excess were agreed to by our firm.
Furthermore, we assume it to be understood that the stipulations regarding the five individuals mentioned in the memorandum attached to your letter of yesterday are to be limited to a three-year period beginning on the 24th instant. This should in no sense be interpreted as indicating that we expect the connection between the five individuals and our firm to be terminated at the end of three years, for we hope, and confidently believe, that they will be glad to continue with us indefinitely beyond the end of the three-year period, and that we shall be glad to have them. Yours truly, E. A. PIERCE & CO. JANUARY 11TH, 1927.
CONFIDENTIAL
Messrs. E. A. Pierce & Company, 11 Wall Street, New York, N. Y.
Gentlemen:
We hereby acknowledge receipt of your favor of aJnuary 11th and confirm herewith that it is in accordance with our understanding. Yours very truly, SWARTWOUT & APPENZELLAR.
In accordance with this agreement, the partners and employees of Swartwout & Appenzellar became employees of Pierce & Company, the offices of the former were closed within a short time, and the customers' accounts were substantially all transferred to the books of Pierce & Company. The transfer of such accounts was made with the consent of each customer, pursuant to the following circular sent by Swartwout & Appenzellar:
TO THE CUSTOMERS OF SWARTWOUT & APPENZELLAR:
On or about January 24, 1927 the business of Swartwout & Appenzellar will be merged with that of E. A. Pierce & Co. That firm is itself a merger of the old firms of A. A. Housman & Co. and Gwathmey & Co., which have occupied for years a commanding position on the New York Stock, New York Cotton and other Exchanges.
The entire organization of Swartwout & Appenzellar will, after the above date be a part of the E. A. Pierce & Co. organization and there will be no change in any personal relationship with our customers. We anticipate that there will be substantial advantages for our customers through the wider facilities offered by the larger organization whose activities and sources of information will be nation wide.
Will you accordingly mail us the necessary consent for the transfer of your account to the firm of E. A. Pierce & Co., signing also the enclosed letter which authorizes E. A. Pierce & Co. to accept your account as it will stand on your books on the date of transfer.
Until we later notify you of the change of address and telephone, please use the old address. Yours very truly,
All open orders with Swartwout & Appenzellar will be automatically transferred with the account.
The average net income of the firm of Swartwout & Appenzellar for the four years ending October 31, 1926, was $279,485.15, and the figure of $300,000 was fixed with regard to such prior earnings and the fact that the entire personnel would be taken over.
After the aforesaid agreement both Swartwout and Appenzellar regularly performed substantial services for Pierce & Company, devoting their time and attention to the business of the customers of their former partnership and of the few new customers whom they secured. Pursuant to the agreement they each received $4,167 per month from January, 1927, to January, 1930, which was the reasonable value of their services. Thereafter for a time they received $18,000 a year, which was reduced to $9,000, and later all payments were discontinued. Throughout the period after the agreement both have continued to have offices with Pierce & Company.
OPINION.
STERNHAGEN:
The entire dispute between the parties in this controversy is in respect of the proper treatment of the $50,000 a year paid by Pierce & Company to Swartwout and to Appenzellar. The petitioners treated the amounts as salaries or compensation paid by the partnership to Swartwout and Appenzellar for their individual services. The respondent held that these amounts were partial payments of the total of $300,000 which was a capital expenditure for the business, or more specifically the good will of the former partnership, and that it is therefore not deductible. He made no determination that the payments, if compensation, were more than reasonable for the services.
The evidence is to some extent conflicting, but the conflict is not in veracity, but in the conception of Pierce, on the one hand, and Swartwout, on the other, as to what their transaction actually was. There is plenty of room for their difference of opinion as to the proper characterization, but there is no conflict as to what took place. Both wanted a transfer of the accounts, a discontinuance of the firm and business of Swartwout & Appenzellar, and the employment by Pierce & Company of everybody in the organization. This could no doubt have been achieved in a variety of ways to the satisfaction of all. The way, however, that was chosen was that of having everyone employed by Pierce & Company at agreeable fixed salaries, and of having Pierce & Company take over the willing accounts and assume their benefits and burdens. The agreement expressly provided that nothing was to be paid for good will, and there is enough in the record to explain this as attributable to Pierce's opinion that in the nature of the brokerage business good will is too elusive to command a substantial price. We need not express an opinion as to the soundness of this view, cf. In re Brown, 242 N. Y. 1; 150 N. E. 581, in order to recognize that the parties to the agreement expressly excluded good will from the subject matter of their transaction. In order to override this express provision of the agreement, it would be necessary to hold either that as a matter of law every such transaction perforce embodies the sale of good will for some part or all of the money consideration, or that the fact is contrary to the agreement. Clearly there is no such principle of law. While good will in such a partnership is within judicial recognition, and dealings in respect of it are likewise cognizable, the law does not force the postulate that any disposition of the partnership business embraces a sale of good will. In re Brown, supra ; Pfleghar Hardware Specialty Co. v. Commissioner, 30 Fed. (2d) 614. The trier of the facts must determine from the evidence whether the writing is in accordance with the actual agreement, and whether in fact a price was paid for good will. Here we find no reason to believe that the parties did other than their contract provided. Cf. Rotan v. United States, 43 Fed. (2d) 232. By employing Swartwout and Appenzellar individually and agreeing to pay them $50,000 each for each of three years, Pierce & Company were getting all they sought, and the fact that this carried with it the increased business is not enough to justify treating the transaction as a purchase of good will. In the face of the express provision of the written agreement, it may at least be doubted whether either Swartwout or Appenzellar could in his lifetime have demanded any part of the $300,000 in payment for good will irrespective of his service.
The respondent cites several decisions of the Board holding that no part of the amount expressly paid by a bank for the deposit accounts of another bank is deductible as an ordinary and necessary expense. See People's National Bank, 23 B. T. A. 815. There is no conflict between those decisions and this, because the transaction was different, in that the banks did nothing more than purchase valuable deposit accounts with no contract of employment at a specified compensation. The respondent also urges that if any part of the $100,000 paid in each year by Pierce & Company was in payment for the business or good will, the Board is required to determine from the evidence how much is so assignable and to this extent affirm the disallowance of the deduction. We are, however, unable from the evidence to find that any part of the $300,000 was other than reasonable compensation paid for the services of Swartwout and Appenzellar, and there is therefore no support for an allocation.
Upon this issue the respondent's determination is reversed. Other matters originally involved have been adjusted by agreement.
Judgment will be entered under Rule 50.
Proceedings of the following petitioners are consolidated herewith: Jerome C. Cuppia; Frederick Housman; Juliet C. White; Sidney J. White; Edward K. Cone; Robert Cassels; Arthur L. Kerrigan; Edward L. Burrill; Edward A. Pierce; J. H. Goadby Mills; Clarence J. Housman; William Mitchell; Latham R. Reed; Simon J. Shlenker.