1958 U.S. Tax Ct. LEXIS 230 | Tax Ct. | 1958
Lead Opinion
OPINION.
The parties are in accord on a number of subordinate questions. Respondent apparently concedes that a partnership agreement can be amended during the term of a partnership to alter the respective interests in partnership income or loss. See, e. g., John G. Curtis, 12 T. C. 810, affd. (C. A. 7) 183 F. 2d 7; Frederick S. Klein, 25 T. C. 1045. Petitioner on the other hand appears to accept the proposition that a partner may not deduct as a personal expense or loss any part of tRe partnership expenditures. Western Construction Co., 14 T. C. 453, 471, affirmed per curiam (C. A. 9) 191 F. 2d 401. The essence of the controversy appears to be whether after a partnership has ceased to exist, agreement by one of the partners to assume a liability of other partners is effective as anything more than a voluntary renunciation of the right of contribution which the paying partner would otherwise inevitably have acquired.
Four different types of payments are in issue but basically they involve a similar situation, with one exception. Petitioner paid the New York State unincorporated business tax levied on the partnership which was a joint and several obligation of all of the parties, N. Y. Partnership Law, sec. 26; N. Y. Tax Law, sec. 386-a; the New York State personal income taxes of the partners, which were their own separate liability; interest which had accrued on both of the foregoing; and the fee of the attorneys who ultimately arranged for the payment of the two types of taxes without penalty and in installments. To complicate the situation further, the taxes were paid with respect to partnerships which were no longer in existence by the express terms of the individual partnership agreements, which had been constituted of a number of varying partners, none of whom, with one exception, continued into the taxable year in any partnership relation with petitioner, and a number of whom were close relatives of petitioner, and others longtime employees of the family business.
Respondent contends that under these circumstances the petitioner’s payments of taxes due from others were gifts to them. In spite of petitioner’s denials there is substantial evidence to support such a conclusion. But we need not go so far. The only present question is whether these payments were deductible by petitioner either as ordinary and necessary business expenses, as taxes paid, or as a loss sustained in a transaction entered into for profit. They were certainly not petitioner’s taxes and as such could not be deducted by him. Rita S. Goldberg, 15 T. C. 696; Magruder v. Supplee, 316 U. S. 394. They were not the ordinary nor indeed any necessary expense of any business then being conducted by petitioner personally.
It is apparently conceded, and in fact contended by petitioner, that since this was a joint and several obligation of all of the ex-partners, petitioner could in the first instance have been held liable for the full amount. N. Y. Partnership Law, sec. 26; N. J. Stat. Ann., sec. 42:1 — 15. There is no showing that such a payment if made by petitioner would not under the applicable New York and New Jersey law have conferred upon him full rights of contribution from those jointly liable. See Helvering v. Fitch, 309 U. S. 149; Helvering v. Leonard, 310 U. S. 80; Bonney v. Commissioner, (C. A. 2) 247 F. 2d 237, affirming 24 T. C. 199, certiorari denied 355 U. S. 906.
A diffei’ent conclusion, however, seems to us required with respect to the counsel fees paid by petitioner. While it is true that the subject matter of the work of the attorneys included a settlement of the claim ultimately payable by petitioner’s ex-partners as well as by him, the total amount of the partnership tax could as we have said have been collected from Mm in the first instance. Whatever success the attorneys had in eliminating the penalties and making provision for installment payments was an advantage to him for which they were entitled to compensation. Any benefit to the other obligors seems to us to have been merely incidental. There is no suggestion that the fee charged was not reasonable for the services performed. The entire amount of the attorneys’ fee was in our view, accordingly, a proper deduction.
Decisions will l>e entered irnder Rule 50.
“The taxpayer has the burden of showing by ‘clear and convincing proof’ that the local law supports his contentions.” (Bonney v. Commissioner, 247 F. 2d 237, 239).
What we have said applies primarily to the unincorporated business tax. With respect to the New York State personal income taxes, the case is even weaker and the non-deductibillty of the payment even more clearly demonstrated. Petitioner’s attorney was Instructed by him to pay the personal Income taxes “for the account of the other partners.” They took deductions themselves for such taxes thus paid.