Brown v. Commissioner of Internal Revenue

• Decision Date: 06 February 1933
• Docket Number: No. 6812.,6812.
• Citation: 63 F.2d 66
• Parties: BROWN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

63 F.2d 66 (1933)

BROWN v. COMMISSIONER OF INTERNAL REVENUE.^*

No. 6812.

Circuit Court of Appeals, Ninth Circuit.

February 6, 1933.

Arthur B. Dunne, of San Francisco, Cal. (Peter F. Dunne, J. E. Cook, and Dunne, Dunne & Cook, all of San Francisco, Cal., of counsel), for petitioner.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Wm. Cutler Thompson, Sp. Assts. to the Atty. Gen. and C. M. Charest, Gen. Counsel, and Charles E. Lowery, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before WILBUR and SAWTELLE, Circuit Judges, and CAVANAH, District Judge.

CAVANAH, District Judge.

These are three appeals from a decision of the Board of Tax Appeals denying the petitioner a redetermination of alleged deficiencies in his income taxes for the years 1923, 1925, and 1926, in the respective sums of $17,923.03, $1,520.19, and $944.30. The cases were consolidated for hearing and decision before the Board, and are so presented here on a single transcript of record.

The tax involved is the individual, normal income tax and surtax of the petitioner, Arthur M. Brown, for the years thus stated. In 1923 the petitioner was conducting, alone, the business of a general insurance agent, and, during the taxable years 1925 and 1926, it was carried on by a partnership composed of him and his son, Arthur M. Brown, Jr., under the name of Edward Brown & Sons.

On June 1, 1902, Edward Brown, Herbert H. Brown, and the petitioner executed a written agreement, by the terms of which they declared their respective interests in the business, and then provided: "Before any division of profits is made the said partners mutually agree to pay monthly to Jessie H. Jones, Edith H. Halton, and Ethel Brown (the three daughters of Edward Brown and Sisters of Arthur M. Brown and Herbert H. Brown) the sum of Two Hundred and Fifty Dollars (250) and, Further, that whenever the net income from the business of the said firm shall exceed the sum of Eighteen Thousand Dollars per annum they will pay a one-sixth proportion of such excess to the said Jessie H. Jones, Edith H. Halton, and Ethel Brown."

On May 28, 1907, Edith H. Halton and Ethel Crandell, the two surviving sisters, executed a written agreement in which they agreed to accept from the firm $250 per month, beginning June 1, 1907, and ending only by mutual agreement, "in full satisfaction of all amounts which may be due, or may become due, to us, or either of us, or to the survivor of us," under the agreement of May 27, 1905, which provided: "That any further amounts to which we, or either of us, or the survivor of us, might be entitled from said firm under said agreement shall be retained in the net profits of said firm as the property and to the credit of said Arthur M. Brown and Herbert H. Brown, members of said firm, to be divided between them as they may agree."

In 1923 the petitioner made a payment of $3,000 to his sister, Edith H. Halton, in accordance with the agreement, and claimed the same as a deduction from business income in his tax return for that year. The deduction was disallowed by the Commissioner on the ground that the payment constituted a capital expenditure.

The surviving daughters of Edward Brown, of whom Edith H. Halton is one, having in the agreement of May 28, 1907, agreed to accept $250 per month in satisfaction of all amounts which may become due to them from the firm under the agreement of May 27, 1905, the terms of which are not in the record, and for that reason we are unable to determine what interest, if any, Edith H. Halton had in the business of Edward Brown & Sons, as a partner, or rendered at any time any service to petitioner or the firm which would authorize the allowance of the item as a deductible business expenditure within the contemplation of the taxing statute.

The second issue is whether the Board of Tax Appeals adopted the proper method of treating the overriding commissions received by the firm of Edward Brown & Sons during the taxable years in dispute where it held that petitioner, accounting on the accrual basis, was obliged to report the full amount of the overriding commissions received in the three years in controversy, without deducting, either as a reserve or otherwise, on account of a contingent liability to refund certain portions of such commissions in later years on account of reinsurance or cancellation.

This method adopted by the Board is challenged by petitioner, who asserts that he should be permitted to pay his tax on the basis of earned income computed under the actuarial computation. In other words, that there should be returned as income upon the basis of a pro rata apportionment of such commissions to the policy years.

The firm of Edward Brown & Sons acted as general agents for six fire insurance companies during the taxable years in controversy, and the duties required of it were the appointment and removal of local agents; issue, countersign, and cancel policies; adjust losses under policies, receive and receipt...