Rudd v. Comm'r of Internal Revenue , Docket No. 6162-77.

• Decision Date: 09 August 1982
• Docket Number: Docket No. 6162-77.
• Citation: 79 T.C. 225
• Parties: ARTHUR G. RUDD, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

79 T.C. 225

ARTHUR G. RUDD, PETITIONER
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 6162-77.

United States Tax Court

Filed August 9, 1982.

Petitioner was a partner in a public accounting firm that was well established and well known in the Muskegon, Mich., area. The firm was dissolved in 1971. Upon dissolution of the firm, the rights to the use of its name were distributed to petitioner and four other partners, who then abandoned the use of the name. In 1971, petitioner and two other partners of the dissolved firm became partners in a national public accounting firm. Held:

1. The partnership's name was a clearly identifiable and severable intangible asset for which petitioner is entitled to a loss deduction under sec. 165, I.R.C. 1954, on the name's abandonment in 1971.

2. Portion of goodwill embodied in the partnership's name determined. Petitioner's adjusted basis in goodwill determined under sec. 732(d), I.R.C. 1954.

[79 T.C. 225]

Louis W. Kasischke, for the petitioner.

Thomas E. Ritter, for the respondent.

CHABOT, Judge:

Respondent determined a deficiency in Federal individual income tax against petitioner for 1971 in

[79 T.C. 226]

the amount of $17,098. The issue for decision is whether petitioner is entitled to a loss deduction under section 165 ¹ in 1971 for abandonment of a partnership name and, if so, in what amount.

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.

When the petition in this case was filed, petitioner resided in Fruitport, Mich.

Maihofer, Moore & DeLong (hereinafter sometimes referred to as the partnership) was formed by Raymond C. Maihofer, C. Claire Moore, and Wesley DeLong (hereinafter sometimes referred to individually, as Maihofer, Moore, and DeLong, respectively, and collectively as the name “partners”) on November 1, 1932, to engage in the practice of public accounting in the Muskegon, Mich., area.

The partnership maintained its primary office in Muskegon and drew clients from an area along the Lake Michigan shoreline which extends from South Haven, Mich. (approximately 60 to 65 miles south of Muskegon), to Charlevoix, Mich. (approximately 180 miles north of Muskegon). Clients were considered clients of the partnership rather than clients of individual partners or employees. Audit reports (including reports of cities, school districts, and townships) and tax returns prepared by the partnership's partners and employees regularly carried the partnership's name.

The partnership's name was well recognized in the Muskegon area. The reputation associated with the partnership's name attracted new clients to the partnership. New clients also were referred to the partnership by existing clients. The partnership encouraged its professionals to participate in speaking engagements to keep the partnership's name in front of the public. After the partnership's name had remained the same for about 25 years, the partners voted down an attempt

[79 T.C. 227]

by a partner, J. Roger Holmstrom (hereinafter sometimes referred to as Holmstrom), to add his name to the partnership's name because they feared that any change in the name might jeopardize the partnership's business.

The name partners were also partners with William P. DeLong in another partnership (hereinafter sometimes referred to as the Holland firm) which was engaged in the practice of public accounting in Holland, Mich., approximately 35 miles south of Muskegon. The Holland firm used the same name as the partnership from the late 1940's into the 1970's. The name partners did not perform any services for the Holland firm, but shared in its net profits in return for the use of the name.

Before December 30, 1967, the partnership operated without a written partnership agreement. On that date, all the then partners executed a written partnership agreement, which provides, in part, as follows:

PARTNERSHIP AGREEMENT

AGREEMENT made December 30, 1967, effective as of January 1, 1967, between RAYMOND C. MAIHOFER, C. CLAIRE MOORE, WESLEY DeLONG, J. R. HOLMSTROM, JAMES I. MISH, ARTHUR G. RUDD, EDWARD N. NAPERALSKY and RONALD W. DeLONG.

I Name and Business

Some of the parties have, for a period of many years, conducted a partnership for the practice of public accounting, but without a written agreement. The parties hereto are the present partners and herein reduce their understandings to writing. The name shall continue to be “MAIHOFER, MOORE & DeLONG” and their principal office shall continue on the 4th floor of the Hackley Union National Bank Building, Muskegon, Michigan. *ss

V Management, Duties, Fees and Restrictions *ss

No partner shall, directly or indirectly, engage in any other business or occupation without the consent of the other partners; provided, that Raymond C. Maihofer, C. Claire Moore and Wesley DeLong may continue as partners of MAIHOFER, MOORE & DeLONG of Holland, Michigan, but shall not, hereafter, be more active in the affairs of that partnership than they have been heretofore. *ss

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IX Voluntary Withdrawal *ss

The value of the withdrawing partner's interest in the partnership shall be paid to him at such times and shall be computed in such manner (and his interest shall be assigned) as is provided herein upon the death of a partner under the assumption he died on the date of withdrawal; provided, the value assigned to goodwill shall be reduced by half; and provided, further, that if he withdraws to accept employment by a client or former client of this partnership, no value shall be assigned to goodwill.

X Retirement (Partners Emeritus) *ss

The value of each of the partner's interest [released due to retirement] shall be paid to him at such times and shall be computed in such manner (and his interest shall be assigned) as is provided herein upon the death of a partner under the assumption he died on the date of such release. *ss

XI Death *ss

The value of the deceased partner's interest shall be his undrawn earnings, any salary due him, his share of net profits to the time of death, his share of work in process (based on appraisal by the surviving partners), the book value of his capital interest and his share of goodwill (based upon goodwill for the entire partnership of $140,000 or such other figure as may hereafter be set forth in the schedule at the end of this agreement and initialled by the partners). *ss

XIV Competition

After the voluntary withdrawal or the retirement of any partner, he shall not, without the consent of the partners, for a period of five years, and within a radius of 75 miles of Muskegon, Michigan, engage in the public accounting profession (or, after retirement, become employed by a client of the partnership); provided, this shall not preclude Raymond C. Maihofer, C. Claire Moore and Wesley DeLong from continuing as partners of Maihofer, Moore & DeLong of Holland, Michigan, as hereinabove provided.

[79 T.C. 229]

XV Common Disaster

All of the foregoing provisions for sale on death shall be voidable by the partnership in the event partners having 40% or more of the capital interests shall die within a period of ninety (90) days.

If such provisions are voided, the partnership shall stand dissolved and the surviving partners shall proceed diligently to wind up the affairs of the partnership. The partnership name may be disposed of as a part of the assets, but, should any two or more of the surviving partners organize a new firm, they may not, unless they have purchased the name, continue to use the partnership name or refer to it in any manner in connection with the organization or operation of the new partnership.

The partnership filed its Federal income tax information returns on a calendar year basis using the accrual method of accounting. The partnership did not make the election provided by section 754.² The partnership maintained “fixed capital” and “undrawn earnings” accounts for each partner.³ Each partner's share of partnership earnings⁴ was credited to his undrawn earnings account, and withdrawals were charged to this account. The prices for purchased partnership interests were recorded in the fixed capital accounts. The partnership recorded goodwill on its books (see note 2 to table 1 infra) and reported goodwill as an asset on the balance sheet of its tax returns for 1955 through 1971. However, the partnership, itself, paid nothing for the goodwill so recorded or reported.

Petitioner was employed by the partnership in 1952 as a staff accountant; he became a partner in 1958. Beginning in 1958 and from time to time through 1971, petitioner purchased interests in the partnership from the name partners. ⁵ The amounts paid by petitioner for his interests exceeded the proportionate share of the net book value of the partnership's net assets excluding goodwill. The excess amounts were

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considered payments for goodwill. Petitioner's purchases are summarized in table 1.

+----------------------------------------------------------------------+
                ¦TABLE 1 ¦
                +----------------------------------------------------------------------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦ ¦ ¦ ¦Proportionate share ¦Premium ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦ ¦Percent ¦Purchase ¦of net book value of net ¦paid for ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦Year ¦purchased ¦price ¦assets excluding goodwill1 ¦goodwill2 ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦1958 ¦10 ¦$20,000 ¦$10,600 ¦$9,400 ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦1965 ¦5 ¦12,300 ¦5,300 ¦7,000 ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦1967 ¦5 ¦12,300 ¦5,300 ¦7,000 ¦
                +------+-----------+----------+----------------------------+-----------¦
                ¦1969 ¦1

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