Mitchel v. Bowers, 22.

• Decision Date: 01 November 1926
• Docket Number: No. 22.,22.
• Citation: 15 F.2d 287
• Parties: MITCHEL v. BOWERS, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

15 F.2d 287 (1926)

MITCHEL v. BOWERS, Collector of Internal Revenue.

No. 22.

Circuit Court of Appeals, Second Circuit.

November 1, 1926.

Parker & Aaron, of New York City (Herman Aaron, of New York City, of counsel), for plaintiff in error.

Emory R. Buckner, U. S. Atty., of New York City (Nathan R. Margold, Asst. U. S. Atty., of New York City, of counsel), for defendant in error.

Before HOUGH, MANTON, and HAND, Circuit Judges.

HAND, Circuit Judge (after stating the facts as above).

We start with the assumption, agreed upon by both sides and well settled by the law of New York, where the agreement was made and the business of the firm was carried on, that the contract of January 1, 1916, did not make the plaintiff's wife a partner in the firm. Burnett v. Snyder, 76 N. Y. 344, Burnett v. Snyder, 81 N. Y. 550, 37 Am. Rep. 527. The result is no different when the other partners in the firm know and assent to the arrangement. Rockafellow v. Miller, 107 N. Y. 507, 14 N. E. 433. It is only when the subpartner acquires some interest in the firm assets as such that he may sue the partners for an accounting. Nirdlinger v. Bernheimer, 133 N. Y. 45, 30 N. E. 561.

The question, therefore, is whether, his wife not being a partner, the plaintiff falls within section 1204 (e) of Act of 1917, amending the Revenue Act of 1916 (Comp. St. § 6336h) and section 218 (a) of the Act of 1918 (40 Stat. 1070 Comp. St. § 6336 1/8i), to the extent of the half covered by the agreement. The first section provides that "persons carrying on business in partnership shall be liable * * * only in their individual capacity, and the share of the profits of the partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation." The second is not in substance different, the important clause being: "There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership."

As a subpartner the wife through the agreement got no present interest, equitable or legal, in the firm assets; the assent of the other partners would have been as necessary for this as to constitute her a partner, for ownership follows the status. Until by distribution the profits became the separate property of the plaintiff, her rights were upon the contract, not in re. This does not run counter to Nirdlinger v. Bernheimer, 133 N. Y. 45, 30 N. E. 561, which distinguished Burnett v. Snyder, 81 N. Y. 550, 37 Am. Rep. 527, for that reason. Therefore the plaintiff was in any event obliged to include all undistributed profits in his return; the statute so directed, and the profits pro tanto were still his.

At most, then, his exemption was confined to such profits as were distributed, to such as "came to" him as his separate property. As to these it may be plausibly argued that, since she could get nothing till the profits should "come to" him, and since he was to "hold for and pay to" her all that he got, the profits must be his before they became hers. On the other hand, since they became hers, at least in equity (Barnes v. Alexander, 232 U. S. 117, 34 S. Ct. 276, 58 L. Ed. 530), as soon as he got them, it must be admitted that there was no instant of time after their distribution at which she was not entitled to them. Whatever might be the dialectical escape from the dilemma so raised, it seems to us that in any view the provision which allowed him at his pleasure to denounce the agreement put the absolute disposition of the profits always within his power. Whether the contract lacked consideration, and was void, we need not decide. It seems to us enough that the plaintiff retained the power to resume his title to the profits when he chose.

As to profits not yet distributed, in which the wife had acquired no proprietary interest, we do not see that there can be a dispute. As to those distributed there may be some doubt, depending upon whether the contract had consideration, without which equity will not create an equitable assignment. But, even if the wife's interest in these was unconditional, the plaintiff's inaction until their distribution was the exercise of an option to allow them to pass to her. The situation remained no different from the voluntary cession periodically to her of one-half of whatever was distributed. Throughout the period the right of disposition remained his, as it does in community property, and this was the ground of the decision in U S. v. Robbins, 269 U. S. 315, 46 S. Ct. 148, 70 L. Ed. 285. In substance the cases appear to us indistinguishable.

Moreover, taken more at large, the sections were in our judgment meant to read comprehensively. Their purpose was to reach all the firm income by taxing the partners individually. It would be a denial of that purpose to suppose that all the firm profits might not be taxable against the partners, but might have to be reached under other sections of the statute. Certainly it cannot be argued that the wife could be taxed under these sections. Therefore, if the plaintiff be right, they allowed some part of the firm income to escape, and left it to be caught elsewhere. This we think they pretty clearly forbid. Any mediate arrangement by which a partner shared what he might get after he got it did not, therefore, put him outside the scope of such provisions, even if he reserved no power to terminate the contract.

Finally, we attach no significance to the action of the firm upon the contract. Nobody supposes that these made the wife a partner; they accomplished no more than to recognize formally and on the books obligations which the law would have imposed upon the firm in any case. Mere notice would have charged them at their peril with a respect for her rights.

Judgment affirmed.

MANTON, Circuit Judge (dissenting).

The tax here considered was imposed under the Revenue Act of 1916, as amended by subdivision 1, § 1204, of the Revenue Act of 1917 and section 218 of the Act of 1918, which read as follows:

"(e) Persons carrying on business in partnership shall be liable for income tax only in their individual capacity, and the share of the profits of the partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid under the provisions of this title. * * *"

"(d) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. * * *"

The complaint, which was dismissed on motion below, alleges that the firm of Power, Son & Co. was a partnership, the interest of which was owned, 51 per cent. by the plaintiff in error, and 49 per cent. by one Kneeland, and that said copartnership continued throughout the year 1917 and several years thereafter. It pleads that on January 1, 1916, the plaintiff in error and his wife entered into an agreement which provided, among other things, that for a consideration she was entitled to one-half of the profits which would come to the plaintiff in error from said firm, and was likewise liable to pay to the plaintiff in error one-half of the losses that might be sustained by reason of his partnership in said firm. Profits were defined in the agreement to include all interest and allowances to the plaintiff in error for capital invested and accumulations to his credit therein, including such capital and accumulations as might be represented by property which, as between the plaintiff in error and his wife, is the property of the wife; that, upon receiving the profits therein mentioned, the plaintiff in error agreed to hold them for and pay them to his wife, as she was entitled to them pursuant to this agreement. Upon sustaining losses, it was provided that the wife would pay to the husband her share according to her percentage interest. Settlements were to be made accordingly at the expiration of the year. The agreement might be terminated at any time by either party.

Paragraph V of the bill of complaint alleged:

"V. That upon the making of said agreement an original thereof was promptly filed by the parties thereto with said firm of Power, Son & Co., and thereupon the parties to said agreement did direct said firm to credit and pay over to said Elizabeth P. Mitchel, as they accrued, the profits to which, under the terms thereof, said Elizabeth P Mitchel became entitled, viz. twenty-five and one-half per cent. (25½%) of the profits of said firm, and said firm did undertake and promise and agree so to do, and since said time said firm did duly credit to the account of said Elizabeth P. Mitchel, as they accrued, the said twenty-five and one-half per cent. (25½%) of said profits, making the same forthwith, upon their accrual, subject to her absolute disposition, and the said Elizabeth P Mitchel has...