Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Aug 9, 1946
7 T.C. 519 (U.S.T.C. 1946)

Docket No. 6569.



Walter A. Barrows, Esq., for the petitioner. Carl A. Stutsman, Esq., for the respondent.

In the taxable year petitioner was one of the surviving partners of a law partnership. The partnership agreement provided that upon any partner's decease his estate would be entitled to a payment, within one year, equal to one-fourth of the amounts distributed to the deceased during the two years preceding his death. The firm had no capital assets in the strict sense, and it was expressly provided that the firm should not be deemed to possess any good will. A majority of surviving partners who continued in business were to have the right to use the books, typewriter, office supplies, and other incidentals. All the partners had always considered that upon their death or retirement their rights would be limited to their share of earned but uncollected fees, and they interpreted the partnership agreement as providing a convenient rule of thumb for ascertaining or approximating the amount thereof. Held, that the deceased partner's estate was not a partner in the continuing or successor firm and had no right to a share of partnership income, as such; held, further, that the petitioner is taxable upon his distributive share of partnership income, without any deduction for payment to the estate, in the absence of a showing as to what amounts of the fees in which the deceased had an interest were collected in the taxable year. Walter A. Barrows, Esq., for the petitioner. Carl A. Stutsman, Esq., for the respondent.

This proceeding involves a deficiency in income tax for the taxable year 1941 in the amount of $914.65. The petitioner denies the deficiency and claims an overpayment of $15.14.

The sole issue is whether the respondent erred in including in the taxable income of the petitioner, on the ground that it was a capital expenditure, his proportionate share of partnership income which had been paid by the partnership to the estate of a deceased partner.


The petitioner is Raymond S. Wilkins, an individual, who resides at Winchester, Massachusetts, and who filed his income tax return with the collector for the district of Massachusetts.

In 1941 the petitioner was a member of the law firm of Palmer, Dodge, Barstow, Wilkins & Davis, in Boston. He had been a partner in that firm or in predecessor firms since 1922, and had been connected with it since 1915. The petitioner resigned from the firm in January 1944, at which time he was appointed a justice of the Massachusetts Supreme Judicial Court. The partnership agreement in effect at January 1, 1941, had been operative since January 1, 1934.

On March 3, 1941, one of the partners, Francis V. Barstow, died. A new partnership made up of the surviving partners was formed April 1, 1941.

Paragraph 5 of the agreement in effect at the date of Barstow's death provided as follows:

5. In case of the death of any partner, the partnership shall not be deemed to be dissolved and the value of such partner's interest in the assets and business of the firm shall be taken to be a sum equivalent to his percentage of one quarter of the amount distributed by this firm and its predecessors as net profits during a period of two years next preceding the death, the term ‘his percentage‘ meaning the percentage of the profits to which he was entitled at the time of his death. The sum thus determined to represent the value of such partner's interest in the assets and business of the firm shall be paid to his estate in such installments as the surviving partners shall find convenient, provided that at least one half of the sum shall be paid within six months and the whole within a year. The partnership shall not be deemed to possess any good will, and if upon the death of any partner the surviving partners, or a majority in interest of them shall continue the practice of law as a firm they shall have the right to use the name of the deceased partner as a part of the firm name if they so desire.

Pursuant to the provisions above set out, and in line with a provision in the new agreement entered into on April 1, 1941, to the effect that the interest of the estate of Francis V. Barstow in the profits of the firm should be satisfied by a payment of $1,537.46 on April 15, 1941, and further payments of $1,050 on the 15th day of each of the succeeding 10 months, the partnership distributed the aggregate sum of $10,587.46



Respondent contends that the case of W. Frank Carter, 36 B.T.A. 60, is controlling of decision here. That case, like this one, involved a law partnership and the effect upon the tax liability of surviving partners of payments made to the estate of a deceased partner. In that case the partnership agreement provided for the payment to the deceased partner's estate of a sum equal to one-half the amount actually received by the deceased partner during the two years immediately preceding his death, in lieu of all interest of his representatives in uncollected fees and in the library and office equipment of the firm, and in full payment for his ‘interest in the firm and its assets.‘ Here the partnership agreement provided for a payment equal to the deceased partner's percentage of one-fourth of the net profits distributed by the firm during the two years preceding death, such sum representing his ‘interest in the assets and business of the firm.‘ There, as here, the payment was of a definitely ascertainable sum, not payable out of fees subsequently collected by the firm; and in case no fees had been collected within the time fixed for payment, the estate would still have been entitled to receive the amount agreed upon.

It is thus apparent that there are many points of similarity between the two cases. The decision in the Carter case, however, was rested on the conclusion that the surviving partners ‘purchased all of the interest of the deceased (partner) in the firm and its assets.‘ While the written agreement in the instant case speaks of the payment as representing the deceased partner's ‘interest in the assets and business of the firm,‘ thus indicating that it was, at least in part, in consideration for an interest in partnership assets, the evidence is overwhelmingly to the effect that such a literal reading does not reflect the true agreement and understanding of the partners. Each partner had long understood that upon his death or retirement the only right he or his estate had was to his share of earned but uncollected fees. All the members had interpreted the agreement as providing a convenient rule of thumb for ascertaining or approximating the amount thereof and a means of avoiding an administration of the partnership or a long accounting drawn out over a period of several years.

No incoming partner had ever paid in any capital upon his admission to the firm. The nature of the firm's business activity was such that capital was not a factor of any real significance. The books, typewriters, office supplies, etc., were merely incidental. The firm had no lease on its office space. In the partnership agreement it was expressly provided that the firm should not be deemed to possess any good will. In these circumstances, we can not agree with respondent that the Carter case is a complete answer to the problem presented here. In no true sense can the transaction before us be characterized as the purchase and sale of a partnership interest.

On the other hand, it does not follow that the surviving partners are entitled, as they did in the partnership return for 1941, to treat Barstow's estate as a partner in a continuing or successor firm and the payment made to the estate as a distributive share of partnership income. The agreement neither provided nor contemplated that his estate should be a partner in the firm, or that it should have a share in or percentage of partnership profits, as such, for a period of year or other fixed time following his death. The payment to which the estate was entitled was of a sum certain, payable at all events, having no aspects of a distributive share of partnership income. In this respect the instant case is unlike Bull v. United States, 295 U.S. 247, and Walter T. Gudeon, 32 B.T.A. 100, upon which petitioner relies. For the same reason, our recent decision in Charles F. Coates, 7 T.C. 125, is also distinguishable.

Nor does it follow that the surviving partners, in computing partnership income, are entitled as a matter of course to deduct the payment to Barstow's state in its entirety in the year the payment was made. Although the partners considered that the formula agreed upon provided for a payment equivalent to a deceased partner's share of earned but uncollected fees, it is not suggested that all such fees in which the deceased had an interest were collected in the period in which payment was made to his estate. According to their own past experience in the death of one former partner, a period of almost seven years was required to complete the collections. If none, or only a small part thereof, were collected in the year before us, to permit a deduction of the entire payment to the estate in that year would distort, and not clearly reflect, the partnership income for the period.

In substance, under the partnership agreement and by virtue of the payment made, the surviving partners acquired from the decedent or his estate the right to collect in future years when due, and keep as their own, fees in which the decedent had an interest. For practical purposes it was equivalent to the acquisition of a receivable for a cash consideration. If an individual, for example, should purchase an account receivable to be collected in a future period, clearly there would be no warrant under the revenue laws for deducting, against his current income from other sources, his capital outlay in the year he made it. We think the same is true of a partnership. Both the statute and the regulations provide that, in general, the net income of a partnership is to be computed in the same manner and on the same basis as in the case of an individual. Sec. 183, Internal Revenue Code; sec. 19.183-1, Regulations 103.

It follows, however, that in future periods as the fees are collected they will not be income in toto to the partnership, but only to the extent that they exceed the pro rata part of the capital outlay allocable thereto; and, if they do not exceed, but are less, a loss will result. If this record afforded any evidence as to what amounts, if any, of the fees in which Barstow had an interest were collected in the taxable year, we could perhaps make an appropriate downward adjustment of the partnership income for the year before us. But there is no evidence at all in this connection. It would be an assumption of fact, without any foundation in the record, and doubtless even a perversion of fact, to say that all such fees were collected within the year.

It is apparent that, as a result, a detailed and possibly intricate accounting process will be required on the part of the firm; and, to that extent, the purpose for which the particular provision of the partnership agreement here under consideration was adopted will not be accomplished. Doubtless, under the circumstances of such a case as we have before us, that result is a regrettable one; but we know of no other way under the law as it now exits in which the matter may be handled properly. We may observe, however, that the Bull, Gudeon, and Coates cases, supra, point to a method under which the purpose might be accomplished with the desired result.

For the reasons stated, the respondent's determination is approved.

Decision will be entered for the respondent.

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