1942 BTA LEXIS 916 | B.T.A. | 1942
Lead Opinion
The Commissioner added $24,533.19 to the gross estate of the decedent because of the fact, alleged in the petition and admitted in the answer, that the petitioners duly elected to have the property includable in gross estate valued in accordance with the method authorized by subdivision (j) of section 302 of the Kevenue Act of 1926, as added by section 202 of the Eevenue Act of 1935, that is, because the property was to be valued as of one year after the death
The Commissioner also added $34,069.99 to the decedent’s gross estate. The explanation of the item in the notice of deficiency is “Interest in partnership Nutter, McClennen & Fish.” The figure is the amount of 8 percent of the profit of the firm from March 1, 1937, to August 31, 1938. Upon brief the respondent takes the position that the amount represents the value of the decedent’s interest in the partnership of which, he was a member at the time of his death, and under the agreement of partnership.
The petitioners, relying upon Bull v. United States, 295 U. S. 247, and language therein as to partnerships with no capital investment and no tangible assets, contend in substance that the partnership was one for the practice of law, that no capital was invested, that there were no more than negligible tangible assets, that receipt of the percentage by the estate aftfer the death was contingent upon continuance of the partnership and the earning of profits, that therefore amounts derived from or growing out of the partnership can be included in the gross estate only to the extent of partnership income prior to the decedent’s death, and that amounts paid to the estate based upon partnership earnings after the decedent’s death constitute -xjnot gross estate, but income to the estate. In our opinion, this view disregards the fact that there were in this case capital and tangible assets in amounts not negligible, and further neglects the specific agreement between the partners and the language of the Bull case as to just such an agreement. First: In this matter there appear to have been both an investment of capital in, and tangible property owned by, the partnership and a clear recognition by the partnership in the partnership agreement that each partner had a capital interest; whereas in the Bull case there was neither capital interest nor tangible property owned by the partnership. In the instant proceeding, the partnership balance sheet on February 28, 1937, the date nearest the death of the decedent, sets up for the partnership a “Capital Account”
* * * Where the effect of the contract is that the deceased partner’s estate shall leave his interest in the business and the surviving partners shall acquire it by payments to the estate, the transaction is a sale, and payments made to the estate are for the account of the survivors. It results that the surviving partners are taxable upon firm profits and the estate is not. * * *
In this proceeding we have just the kind of contract referred to by the Court, for it is clearly true that “the effect of the contract is that the deceased partner’s estate shall leave his interest in the business and the surviving partners shall acquire it by payments to the estate”, for the partnership agreement specifically provides that in case of the death of a partner his estate shall receive the usual percentage of net profits for 18 months “and this shall be in full of the retiring or deceasing member’s interest in the capital, the assets, the receivables, the possibilities and the good will of the Firm.” This is an un-^ ambiguous provision for the “s£¿e” of the deceased partner’s interest in the capital, assets, etc., in consideration of the percentage of net profits for 18 months by which “the surviving partners shall acquire it”, in the language of the Bull case. It is not only a plain recognition by all of the partners signing such agreement of the fact of partnership capital and assets, but a careful provision for disposition thereof for a consideration. We can not and should not disregard such agreement and are by the -above language from the Bull case forbidden so to do. In Pope v. Commissioner, 39 Fed. (2d) 420, cited in the Bull case, the Court said that whether there was a sale “depends largely upon what the parties intended”, and the agreement was regarded as evidence of sale.
The decedent here died at a time when the above quoted contractual provisions were in full force and effect. There was consideration for the agreement to pay, in tangible assets, and intangibles, including the lease, and “receivables” upon completed and uncompleted services
In M. W. Dobrzensky, Executor, 34 B. T. A. 305, we considered a situation where a partnership of attorneys paid insurance premiums on the life of a member under a contract that the proceeds should be received by his estate, in case of his death, in consideration of certain interests of deceased in the firm, including good will, and right to participation in partnership profits, as well as right to use his name; and we held that the insurance proceeds were properly included in gross estate, on the theory that the partnership agreement effected an assignment, upon death, of the interests of the deceased in the law partnership, and that in consideration thereof and in lieu thereof his estate included the insurance policy.
The above quoted language from the Bull case cites Hill v. Commissioner, 38 Fed. (2d) 165; and Pope v. Commissioner, supra, in each of which it was held, affirming in that respect the Board, that a partnership contract and the acquisition thereunder by the survivors of the interest of the deceased partner and the receipt by his estate of a percentage of the profits for á certain period, constituted sale of the interest of the deceased partner, and that net profit paid therefor was paid in purchase of a capital asset and was not expense deductible by the new partnership. The petitioners herein, however, in substance seek to distinguish a law partnership as a “personal service partnership” from situations where, as in the Hill and Pope cases of insurance brokerage partnerships, there were capital investment and an interest in tangible and intangible assets. Passing the question whether the law partnership is any more of a personal service partnership than that of an insurance brokerage business (the Pope case says that insurance brokerage depends for success largely upon personal solicitation of business by members), the answer to such contention is that in the instant situation capital interest was recognized and disposed of by the partnership agreement, and further that the principle has been applied in several cases to law partnerships. In W. Frank Carter, 36 B. T. A. 60, the partnership agreement was that the estate should receive in full payment of the deceased partner’s interest in the firm and its assets a sum equal to one-half of the last
The Bull Case, in line with earlier decisions in the lower courts, recognized that there is a distinction between measuring the value of a contract right which accrued for the decedent at the date of death and taxing income which arises in the future by virtue of the contract. * * *
Such language indicates clearly, we think, what took place in the instant case. The Commissioner did “measure the value of a contract right which accrued for the decedent at the date of death” and did not merely tax income. He explained the item as “interest in partnership” in the deficiency notice. At trial he offered evidence of past "^partnership earnings to show what would “constitute a fair value of 8 percent of what is expected to be received in the succeeding 18 months”; on brief he contends that “the amount actually received by A the estate of the decedent by reason of the terms of the partnership agreement represents a fair measure for the value of the decedent’s v. interest in the partnership * * Though the Commissioner uses the figure $34,069.99, the amount of payments after death as provided by the partnership agreement, that agreement considers the payments as purchase price for decedent’s “contract right”, and effect is to be given to the contract under the Bull case.
In Estate of Bavier C. Miller, 38 B. T. A. 487, we considered an insurance partnership agreement under which a deceased partner’s
* * * The yardstick that the parties agreed to use in measuring the value of a deceased partner’s interest was the share of the profits which the decedent would have been entitled to had he lived an additional 30 months * * *
We referred elsewhere to the recognition by the partners that their interest in the firm had value. Certainly the partners in the instant proceeding likewise recognized such value, and provided for its transfer, for a consideration, at death.
Upon brief the petitioner argues that the expression “ — the others continuing the business — ” appearing in the partnership agreement, as above quoted, indicates that the whole contract and provision for payment to the estate for 18 months was conditional upon the other partners continuing the business, and therefore nothing of value passed to the estate at death. To us the above-quoted language indicates rather an agreement to continue the business and we can not believe that there was any thought in the minds of the partners that death of one partner would cause the discontinuance of a lucrative law practice. The income tax returns filed for the partnership from 1930 to 1935, inclusive, are in evidence, and none indicates a net yearly income of less than $235,000. We decline to view the expression last above quoted as the expression of condition as to whether such a business should continue. If there was condition, it was fulfilled, for the business was not discontinued.
Having concluded that there should be included in decedent’s gross estate the value of the contract between him and the partnership, we next inquire whether $34,069.99, the amount set by the respondent,^ represents the fair value thereof. The presumption is that the Commissioner’s determination is correct. Obviously it was not arbitrary.* Under petitioners’ election, we are required to consider the value of the estate as of one year after death. At that date the 8 percent amounted to $28,069.46, and the contract still had six months to run. Charles R. Nutter had actually received during 1937, $23,279.73 representing and out of the 8 percent profits. Though under the Maass
It follows that petitioners Charles It. Nutter and Medora A. Nutter, his wife, are not taxable upon the $23,219.13, which as sole heir and devisee of the estate he was entitled to receive and did receive during the year 1937 from the executors out of the $34,069.99 above held to be gross estate. When received by Charles ft. Nutter, the amount was not income, 'but principal received as sole heir and under the will of George R. Nutter, and therefore was properly excluded from gross income. Sec. 22 (b), Revenue Act of 1936.
Reviewed by the Board.
Decisions will be entered under Rule 50.
Dissenting Opinion
dissenting: The essence of the Commissioner’s determination is that the decedent’s gross estate includes his share of the partnership income for the 18 months after his death. This is contrary to the decision of Bull v. United States, 295 U. S. 247, that “the sums paid his estate as profits earned after his death were not corpus but income received by his executor and to be reckoned in computing income tax.”
When it appears that the so-called “interest in partnership” is but a misnomer for the percentage of posthumous earnings, the taxpayer has demonstrated the Commissioner’s error. The Board, however, postulates the decedent’s interest in an assumed good will of the law firm with an assumed but unknown value and in a lease of unknown value, and adding this to decedent’s percentage interest in furniture, library, and current operating fund, finds that the decedent at the time of his death owned, and by his death transferred to his estate, this percentage interest, the value of which is taken to be not less than the percentage of later profits. .1 think the decision is incorrect.