Wilmot Fleming Eng'g Co. v. Comm'r of Internal Revenue , Docket Nos. 8657-73

• Decision Date: 29 January 1976
• Docket Number: 8757-73,8758-73.,Docket Nos. 8657-73
• Parties: WILMOT FLEMING ENGINEERING CO., ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

65 T.C. 847

WILMOT FLEMING ENGINEERING CO., ET AL.,1 PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 8657-73

8757-73

8758-73.

United States Tax Court

Filed January 29, 1976.

[65 T.C. 847]

Lloyd J. Schumacker and Paul W. Lunkenheimer, for the petitioner in docket No. 8657-73.

Richard N. Weinstein, for the respondent.

Partnership was dissolved and two partners sold assets of the partnership business to corporation which continued the business. Held, no part of the sale price was attributable to goodwill or ‘deferred sales'; excess of sale price over book value was allocable to machinery and equipment; partners' gain from sale was ordinary income under secs. 735(a)(1) and 751(c) (effectively, recapture of accelerated depreciation under sec. 1245); and one partner is liable for additional tax under sec. 47, I.R.C. 1954.

DRENNEN, Judge:

Respondent determined deficiencies in petitioners' Federal income tax as follows:

+----------------------------------------------------------------+
                ¦Docket No. ¦Petitioner(s) ¦TYE ¦Deficiency ¦
                +------------+------------------------------+-------+------------¦
                ¦ ¦ ¦ ¦ ¦
                +------------+------------------------------+-------+------------¦
                ¦8657-73 ¦Wilmot Fleming Engineering Co.¦9/30/68¦$18,141.69 ¦
                +----------------------------------------------------------------+
                

 9/30/69 12,722.53
                8757-73 Wilmot E. Fleming and
                 Pauline B. Fleming 12/31/68 29,183.88
                8758-73 Estate of Wilmot Fleming
                 deceased, Provident
                 National Bank, Wilmot E
                 Fleming and William M.B
                 Fleming, Coexecutors
                 and Ruth G. Fleming 12/31/68 1,641.75
                

[65 T.C. 848]

Petitioner Wilmot Fleming Engineering Co. has conceded that a claim bad debt deduction shall be disallowed for fiscal 1970 in order to compute the correct net operating loss deduction for fiscal 1968; accordingly, the following specific issues remain for decision:

(1) Whether petitioner Wilmot Fleming Engineering Co. used the proper basis for certain purchased assets in computing the depreciation thereon claimed for fiscal years 1968, 1969, and 1970;

(2) Whether petitioners, Wilmot E. and Pauline B. Fleming and the Estate of Wilmot Fleming, deceased, Provident National Bank, Wilmot E. Fleming and William M. B. Fleming, Coexecutors, and Ruth G. Fleming, properly characterized the respective gain recognized from the sale of certain partnership assets ² as capital gain; and

(3) Whether, upon the sale of partnership assets, petitioners Wilmot E. and Pauline B. Fleming realized an investment credit recapture pursuant to section 47, I.R.C. 1954,³ in excess of the amount reported on their return. In essence, resolution of these issues depends on our determination as to whether goodwill and/or ‘deferred sales' were included among the partnership assets purchased by Wilmot Fleming Engineering Co. from Wilmot and Wilmot E. Fleming and if so, the proper allocation of the sale price to those assets purchased. If all of the gain realized by Wilmot and Wilmot E. Fleming on the sale of their interests in the partnership assets to the corporation was attributable to machinery and equipment, the gain will be ordinary income

[65 T.C. 849]

under sections 735(a)(1) and 751(c) (in essence, to effect depreciation recapture under section 1245), and Wilmot E. Fleming will be liable for additional tax under section 47 (recapture of investment credit).

FINDINGS OF FACT

Certain facts have been stipulated by the parties and are accordingly so found.

The petitioner in docket No. 8657-73 is Wilmot Fleming Engineering Co., a Pennsylvania corporation with its principal office located in Philadelphia, Pa. It filed its income tax returns based on the accrual method of accounting for its fiscal years ended September 30, 1968, and September 30, 1969, with the Internal Revenue Service Center, Mid-Atlantic Region, Philadelphia, Pa. Wilmot Fleming Engineering Co. will hereinafter be referred to as the corporation.

The petitioners in docket No. 8757-73 are Wilmot E. Fleming and Pauline B. Fleming, Husband and wife, residing in Jenkintown, Pa. Their joint Federal individual income tax return for the year ended December 31, 1968, was filed with the Internal Revenue Service Center, Mid-Atlantic Region, Philadelphia, Pa. Pauline B. Fleming is a party solely by reason of having filed a joint return with her husband; therefore, these petitioners will hereinafter be referred to as Wilmot.

The petitioners in docket No. 8758-73 are the Estate of Wilmot Fleming, deceased, and Ruth G. Fleming. Wilmot Fleming died February 4, 1970, and Provident National Bank, Wilmot E. Fleming, and William M. B. Fleming were appointed executors of his estate by the Register of Wills of Montgomery County, Pa. The petition was filed and verified on behalf of the estate solely by Wilmot E. Fleming coexecutor. The joint Federal individual income tax return of Wilmot and Ruth G. Fleming for the calendar year 1968 was filed with the Internal Revenue Service Center, Mid-Atlantic Region, Philadelphia, pa. Ruth G. Fleming is a party solely by reason of having filed a joint return with her husband and will not hereinafter be referred to. Wilmot Fleming will hereinafter be referred to as ‘the father’ or ‘decedent.’

From October 29, 1948, to March 31, 1968,⁴ decedent and his sons, Wilmot E. and William M. B. Fleming, operated a

[65 T.C. 850]

manufacturing machine shop business as partners trading as Wilmot Fleming Iron & Steel Co., then, during the later years, as Wilmot Fleming Engineering Co. (hereinafter referred to as the partnership), pursuant to a written agreement by which each partner was entitled to share in one-third of the profit and bear one-third of the loss.

The partnership business was started by decedent in 1922⁵ and from its inception involved primarily the machining of parts and equipment, which material was usually supplied by the particular customer. Except for the period 1948-56 when it built special chemical equipment to order, the partnership did not have a product line nor did it own any trademarks or patents. The partnership did, however, engage in some design work.

William joined the business in June 1938, Wilmot thereafter in 1944; both had worked in the business periodically during their high school and college years, thereby acquiring a basic familiarity with the business operations. There was no formal division of responsibilities between William and Wilmot because their activities overlapped considerably and varied according to the exigencies of the business although, as a general matter, William was responsible for the running of the plant, the production, and the quality and service of the operations, while Wilmot devoted himself primarily to the administration and sales aspects. In this capacity, Wilmot worked to broaden the client base of the business in order to make the partnership less dependent on economic conditions in general and on certain customers in particular. Wilmot procured almost all accounts of the partnership from the time he became a partner to the partnership dissolution (March 31, 1968), except for a few in existence prior to his becoming a partner and with the possible exception of a few others. While a partner, Wilmot serviced all accounts, which included: E. I. DuPont, Hercules Powder, Philadelphia Electric, Rohm & Haas, Owens Illinois, Owens Corning, FMC-American Viscose, General Electric, and Atlantic Refining. Such customers did not, however, deal exclusively with the partnership but also did business with its local competitors.

[65 T.C. 851]

Although the business became increasingly competitive, particularly in the later years prior to March 31, 1968, the partnership developed and maintained an excellent reputation for quality workmanship, prompt deliveries, and superior service. The name Fleming was used throughout the existence of the partnership and was well known. The corporation, since its incorporation March 27, 1968, used and continues to use the same name as the partnership; i. e., Wilmot Fleming Engineering Co.⁶

Sometime prior to August 1967, William had become dissatisfied with the partnership arrangement; his father, who by March 31, 1968, had reached 89 years of age, had not actively participated in the business affairs of the partnership for more than 5 years, and Wilmot, serving since January 1963 as a representative, and subsequently as a senator, in the General Assembly of the Commonwealth of Pennsylvania, could no longer devote full-time efforts to the partnership. Accordingly, from August 1967 to mid-March 1968, William and Wilmot,⁷ each with the benefit of counsel, engaged in negotiations to effectuate the transfer of the business to William. Initially, Wilmot proposed a figure...