October 5, 1942.
Herbert Stern, of New York City (Aaron W. Berg, of New York City, on the brief), for plaintiffs.
Elizabeth B. Davis, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by City Bank Farmers Trust Company and others, as trustees under the last will and testament of Clarence J. Housman, deceased, Trust for Ruth H. Cowen, against the United States, to recover alleged overpayment of income taxes and interest.
Judgment for defendant.
See, also, Ct.Cl., 47 F. Supp. 98.
In this case plaintiffs seek to recover $7,326.11 alleged overpayment of income tax and interest, on the ground that their "interest" in a partnership acquired upon the death in 1932 of a member of the partnership and sold by them December 31, 1936, was a capital asset under and within the meaning of the capital gains section 117, Revenue Act of 1936, 26 U.S.C.A. Int.Rev. Acts, page 873, and that since they had held such "interest" for more than two years and not for more that five years, they were taxable only on 60 percent of the gain realized from the sale.
The defendant contends that plaintiffs, who continued, after the death of C.J. Housman, to share in the profits and losses of the partnership of E.A. Pierce Company, should be considered, for Federal income tax purposes and the purposes of section 117, as having acquired and held a pro-rata interest in the specific assets constituting the property of the partnership from the acquisition by the partnership of such assets to the date of sale by plaintiffs of their interest.
Special Findings of Fact.
1. Plaintiffs are the duly appointed, qualified, and acting trustees of the trust for Ruth H. Cowen, under the will of Clarence J. Housman, deceased, who died a resident of Monmouth County, New Jersey, November 13, 1932, and whose will was admitted to probate before the Surrogate's Court, Monmouth County, November 29, 1932. At the time of his death Clarence J. Housman was a limited partner of the firm of E.A. Pierce Co., by virtue of a partnership agreement made and executed in the City of New York January 18, 1930, and thereafter amended from time to time by supplemental agreements made and executed in the City of New York. The partnership agreement and the amendments thereto provided that the assignee of a limited partner shall have the right to become a substitute limited partner with all the rights and obligations of his predecessor and further that the term assignee shall include the executor, administrator, committee and other legal representative of a limited partner. The decedent herein was entitled to share in the profits of the partnership in the proportion of 3 1/3 % and to bear the losses in like proportion, it being provided "that in no event shall any of the limited partners be liable for said losses, or any part thereof, in excess of their respective capital contributions," such excess losses to be borne by the general partners.
By agreement, December 16, 1933, it was further agreed that the capital contribution of Clarence J. Housman, deceased, was being continued by his estate and that the estate as assignee should continue to share in the partnership profits and losses to the same extent as he had prior to his death.
At no time herein mentioned did the plaintiffs' testator, or his successors in interest, ever take an active part in the management of said partnership, nor were they entitled to do so under the terms of the aforesaid agreements. January 18, 1930, the date of the first agreement mentioned above, the firm of E.A. Pierce Co. consisted of twenty-three general partners and five limited partners, the above named decedent being one of the latter, and at all times thereafter said firm was composed of at least twenty general partners, and at least three limited partners, the above named decedent, and following his death, the executors and trustees of his estate, always being one of the latter. The firm of E.A. Pierce Co. was at all times herein mentioned a limited partnership duly organized and existing under and by virtue of the Partnership Law of the State of New York, Laws of 1919, Chapter 408, as amended, Consol. Laws N.Y. c. 39, and was engaged in transacting a general brokerage business in stocks, bonds and other securities and commodities, having its principal place of business and office in New York City, New York.
2. Upon the death of Clarence J. Housman, his above mentioned interest as a limited partner in E.A. Pierce Co. passed to the executors of his estate, pursuant to the terms of the agreement of January 18, 1930, and the amendments thereto, and was so held by said executors until August 1, 1936, on which date, pursuant to the terms of the will, one-half of his interest in said partnership was transferred to the plaintiffs herein, as trustees of the trust for Ruth H. Cowen. Plaintiffs, as such trustees, held pursuant to the terms of said agreement of January 18, 1930, and the amendments thereto, said partnership interest until December 31, 1936, on which date they sold it for $189,550.25.
On the date of sale, the cost base of the above mentioned partnership interest held by plaintiffs herein was evaluated at $119,364.45, said figure representing the fair evaluation of said interest as of the date of testator's death, as approved by the estate tax authorities of the Treasury Department, and as reflected in the estate tax return filed by the estate and upon which a federal estate tax was paid, plus all gains and minus all losses which were included in the income tax returns regularly and properly filed by said estate, upon which income taxes had been fully and properly paid from the date of his death to December 31, 1936.
3. March 15, 1937, plaintiffs, as trustees, herein, filed with the Collector for the District of Newark, New Jersey, an income tax return setting forth a $44,819.58 taxable income as having been received by their trust during 1936. In the fiduciary return, Form 1041, upon which this return was based plaintiffs reported as taxable income to their trust only 60% of the gain realized upon the aforementioned sale of their partnership interest on the ground that the provisions of section 117(a) and (b) of the Revenue Act of 1936 were applicable thereto, since the gain realized from said sale had been the result of the sale of a capital asset, which had been held by the taxpayers for more than two and for not more that five years, i.e., from November 13, 1932 (the date of testator's death) to December 31, 1936 (the date of sale by plaintiffs). With the filing of said return the plaintiffs paid $7,939.07, the income tax due, as computed in said return.
4. Thereafter plaintiffs received a report from the Internal Revenue Agent, Newark, New Jersey, May 10, 1937, accompanied by a thirty-day letter, August 28, 1937, recommending an additional tax of $1,015.08 due from the above mentioned estate of Clarence J. Housman, deceased, based upon the income of said estate for 1935. This additional sum was paid by said estate to the collector September 14, 1937. As a result of this payment the above mentioned cost base of plaintiffs' interest in the firm of E.A. Pierce Co. was increased to $124,230.25. Had this increased cost base been reflected in the return filed by plaintiffs herein for 1936, the net taxable income which would have been reported would have been $41,900.11, instead of the above mentioned sum of $44,819.59. Consequently, if plaintiffs are correct in their computation of the tax on the return as orginally filed, the income tax payable by the plaintiffs for 1936 would have been reduced from $7,939.07 (the sum actually paid) to $6,972.03 (the sum which should have been paid), a difference of $967.04.
5. September 23, 1937, within the time allowed by law, plaintiffs herein duly filed with the collector a claim for the refund of approximately $1,000.
This claim set forth that the plaintiffs had sold or exchanged their partnership interest in the firm of E.A. Pierce Co., December 31, 1936, this partnership interest being one of the assets of the estate of Clarence J. Housman, deceased, who died November 13, 1932; that the executors of the estate had continued this interest in the partnership and on August 1, 1936, had transferred one-half thereof to the plaintiff-trustees, pursuant to the terms of the will of Clarence J. Housman, deceased, and that the plaintiff-trustees had continued in the partnership until the termination of their interest by sale or exchange on December 31, 1936; that the cost base of the plaintiffs' interest in the firm of E.A. Pierce Co. was evaluated at $119,364.45, and the price received therefor was in the sum of $189,550.25; that the report of the Internal Revenue Agent in Charge had recommended an additional income tax assessment against the estate of Clarence J. Housman, deceased, for 1935, in the sum of $1,015.08, which sum had been paid September 14, 1937; that this report and the resultant additional assessment were based upon changes in the taxable income of E.A. Pierce Co. for 1935, which changes resulted in a substantial increase in the cost base of the plaintiffs' interest in E.A. Pierce Co., with the attendant decrease in the amount of taxable profits thereon for 1936, resulting in the decrease in the amount of income tax payable for 1936 from $7,939.07, the amount paid, to $6,972.03, the sum due and payable, namely, the sum of $967.04, the payment of which sum, together with legal interest from March 15, 1937, is now sought in this action.
6. Thereafter the Commissioner of Internal Revenue notified the plaintiffs September 12, 1939, by registered mail that the above mentioned claim for refund had been rejected in full. By letter November 2, 1939, the Commissioner explained that the claim was disallowed "for the reason that additional taxes were found due, which you state you have paid." The two aforesaid letters by this reference thereto are incorporated herein by reference.
7. By letter July 22, 1938, the Revenue Agent in Charge advised the trust for Ruth H. Cowen that a field investigation disclosed a deficiency in tax of $8,363.01 for 1936. In arriving at this deficiency the profit from the sale of the partnership interest was held 100 percent taxable. A formal protest was filed August 12, 1938, and conferences were subsequently held in the revenue agent's office September 9, 1938, October 27, 1938, and January 4, 1939. In connection therewith on November 29, 1938, John Humm, the auditor for the partnership, filed an affidavit, showing the dates of acquisition of the various individual partnership assets, thus reflecting the length of time the various individual assets of the partnership had been held. As a result of these conferences, the proposed deficiency in tax was reduced from $8,363.01 to $5,691.46. In arriving at this deficiency, a cost basis for the sale of the partnership asset of $124,230.24 was used and the total profit of $58,985.57 attributable to this taxpayer subject to tax was computed as follows:Assets held 1 to 2 years ...... (3 1/3 %) $1,469.83 80% of profit to be taken into account. Assets held 2 to 5 years ...... (3 1/3 %) 91,173.60 60% of profit to be taken into account. Assets held less than 1 year .. (3 1/3 %) 286,457.06 100% of profit to be taken ___________ into account. Aggregate proceeds received by both Trusts from sale ................ $379,100.49 Cost Base ................................ 248,460.48 ___________ Gains on Sale ............................ $130,640.01 One-half of gain to Trust for Ruth H. Cowen ........ $65,320.01 One-half of gain to Trust for Virginia H. Berg ..... 65,320.00 ___________ $130,640.01
Percentage for application of limitation section 117(a) of the 1936 Act: Total Net Profit Percentage Profit on Applicable to be Sale Each to each Percentage Profit Applied to Trust Period of Subject Subject Period Held Net Profit Separate Ownership to Tax to Tax 1 to 2 years ..... $1,469.83 ----------- × $65,320.01 = $253.26 80% $202.61 379,100.49 2 to 5 years ..... 91,173.60 ----------- × 65,320.01 = 15,709.45 60% 9,425.67 379,100.49 Less than 1 year 286,457.06 ----------- × 65,320.01 = 49,357.30 100% 49,357.30 379,100.49 __________ __________ $65,320.01 $58,985.58 Profit previously included in income ................................ 65,320.01 __________ Adjustment .......................................................... $6,334.43 These figures and calculations were reflected in the revised schedules of the Treasury Department, Office of the Internal Revenue Agent in Charge, March 23, 1939.
A waiver assenting to the assessment and collection of the tax of $5,691.46 was filed by the trust for Ruth H. Cowen February 2, 1939.
8. Plaintiffs on April 5, 1939, pursuant to the above mentioned revised schedules and waiver paid to the Collector $5,691.46, on account of additional taxes demanded, plus the sum of $667.61, as interest for the period March 15, 1937, to March 1, 1939, totaling $6,359.07.
9. Thereafter, July 8, 1940, within the time allowed by law, plaintiffs filed with the Collector a claim for the refund of the $6,359.07 paid by plaintiffs, as set forth in the next preceding paragraph, together with legal interest thereon from March 30, 1939. More than six months at the time the petition was filed had elapsed since the plaintiffs herein filed their claim for refund and the Commissioner had not advised plaintiffs of any action thereon. June 14, 1941, plaintiffs were advised by registered mail that the claim had been disallowed and no part of the amount herein sought to be recovered has been refunded to the plaintiffs.
10. Plaintiffs' above mentioned claim for refund set forth that the taxpayers had sold or exchanged their partnership interest in E.A. Pierce Co. December 31, 1936, said partnership interest being one of the assets of the estate of Clarence J. Housman, deceased, who died November 13, 1932; that the executors of said estate had continued this interest in the partnership until August 1, 1936, when they transferred one-half thereof to plaintiffs, pursuant to the terms of the testator's will, and that plaintiffs had continued to hold said partnership interest until the sale thereof on December 31, 1936; that the taxpaying trustees had reported only 60% of the gain realized upon the sale of said partnership interest in its return for 1936, pursuant to section 117(a) and (b) of the Revenue Act of 1936, inasmuch as said interest had been held as a capital asset for more than two, but for not more than five years; the Collector of Internal Revenue maintained that the tax due under section 117(a) and (b) of the Revenue Act of 1936 from the plaintiff-taxpayers was determined by and measured from the date of acquisition by and the date of disposal by the partnership of E.A. Pierce Co. of the specific assets belonging to the partnership of E.A. Pierce Co., in which plaintiffs herein, it was claimed, owned a pro rata interest.
The facts in this case and the question presented therein are identical with the facts and question presented in the case of these plaintiffs, as trustees, under the trust for Virginia H. Berg, City Bank Farmers Trust Co. v. United States, Ct.Cl., 47 F. Supp. 98.
Upon the authorities there cited and discussed, and for the reasons therein stated, the plaintiffs are not entitled to recover in this case. The petition is therefore dismissed. It is so ordered.