Archbald v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 28 February 1933 |
| Docket Number | 61673,61672,65062-65064.,61661,Docket No. 61660 |
| Parties | EDWARD B. ARCHBALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JOSEPH A. ARCHBALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EMILY A. GALE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JOSEPH A. ARCHBALD, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Joseph H. Morey, Esq., Robert A. Littleton, Esq., and W. W. Spalding, Esq., for the petitioners.
Prew Savoy, Esq., for the respondent.
These petitioners were all members of a partnership, and the controversy is as to the taxable gain to be imputed to each of them as the result of a sale by the partnership of property contributed by them to the firm's capital at the time it was organized. The facts in detail are set forth in a written stipulation, but it is not necessary either to restate the stipulation or to set forth all the facts in order to indicate clearly the nature of the issue or the basis of the decision.
The Archbald Securities Company was organized as a partnership under New York law on July 20, 1928, to buy, sell and otherwise deal in stocks, bonds and other securities and other property. The organizing partners were Edward B. Archbald, Joseph A. Archbald, and Joseph A. Archbald, Jr. On November 6, 1928, Emily A. Gale (nee Archbald) became a partner. Each of these individuals contributed to the partnership certain securities theretofore owned by him which had been acquired either by purchase or by gift. These contributions were entered by the partnership upon its accounts at their fair market value at the time of contribution, and upon this basis the individual partners' proprietary interests were fixed. The market value of the contributed securities was in each instance greater than the cost or other proper basis to the contributor. During 1928 and 1929 the partnership sold some of these securities at prices sometimes in advance of and sometimes equal to their value at the time of contribution, such prices being greater than the cost or other basis to the individual contributing partner.
A concrete instance will be sufficient to exemplify. Edward B. Archbald, in December, 1927, acquired by gift from his father 900 shares of the common stock of Noranda Mines, Ltd., which the father had purchased at a cost of $15.56 per share. This figure, $15.56, was therefore Edward's basis for determining gain or loss, whenever that determination should be made, Revenue Act of 1928, section 113 (a) (2). These 900 shares of Noranda were contributed by Edward to the partnership at the time of its organization, July 20, 1928, and his proprietary or capital account was credited with the market value thereof on that date, which was $50 per share. The other partners, including Emily when she entered, likewise contributed Noranda common shares in divers amounts and were credited with the same market value per share. Eight thousand eight hundred shares were thus contributed by the original three partners in July and 1,200 by Emily in November. In August and October, 1928, the partnership sold 4,000 shares for $224,877.50, a rate of over $56 a share, and in November and December, 1928, after Emily's admission to the firm, 2,200 shares were sold for $136,827, a rate of over $62 a share. The remaining 3,800 shares were sold in 1929 for $240,873.25, a rate of over $63 a share.
The partnership remained in existence without change through 1928 and 1929, and still continues. When dissolution occurs, each partner will be entitled, by the agreement, to the "return of his contribution," which, by the context, means the value and not the identical property contributed. The accounting period and method apparently used by the partnership and by the individuals were the calendar year and the actual receipts or cash method, and the case is free from any difficulty attributable to disparity in these respects between the practice of the partnership and that of any partner.
The partnership filed its returns for the period July 20, 1928, to December 31, 1928, and for the calendar year 1929, as provided in the Revenue Act of 1928, section 189, and included in its net income as gain the difference between the amount received in the sale of the Noranda shares and their market value when contributed. The net income so computed was shown as distributable among the several partners in accordance with their distributive shares; and this distributive share was in turn included by each partner in the net income shown on his individual return. No more than this was actually distributed by the partnership in respect of such sales.
The Commissioner added to each individual petitioner's income the increment in value of the shares between the time of the petitioner's original purchase (or that of his donor), and the time of contribution to the partnership. This he computed by apportioning the number of shares sold among the partners in the same ratio as their contributions of such shares were to the whole number of such shares contributed, and to such proportionate number of shares applying the aforesaid increment. Thus, since Edward contributed 900 of the first 8,800 shares, to him were assigned 9/88 of the first 4,000 sold, or 409.09086 shares, and to his distributive share of partnership income was added the increment of $34.44 per share ($50-$15.56) multiplied by 409.09086, or $14,089.09. The Commissioner's determination is mathematically more complicated by reason of the change in ratio resulting from Emily's entrance into the firm on November 6 with an additional contribution and the sale thereafter of 2,200 shares of the 6,000 then owned in November and December, and also by the contribution and sale of shares in other corporations. But such additional facts do not illumine the consideration of the issue.
In the notices of deficiency issued December 28, 1931, to the several petitioners, the determination of deficiency for 1928 was predicated upon the "opinion that the taxable gain to the contributing partner is the difference between cost and value of securities at date turned into and used as a basis for determining profit or loss by the partnership at date of sale by the partnership." After the publication, under date of January 11, 1932, of an opinion by the General Counsel of the Bureau of Internal Revenue, G. C. M. 10092, XI-2-5349, the deficiencies for 1929 were expressly predicated upon that opinion, the conclusion of which is "that the basis of computing gain or loss upon the sale by a partnership of an asset contributed in kind to the partnership enterprise is cost or other basis to the contributing partner." The petition and answer joined issue on that view, and respondent stands upon G. C. M. 10092 here. By an amendment to the answer, the respondent presents the alternative contention that if the individual partner's basis is not to be used in determining partnership distributable income, then it must be held that the contribution by each partner was in 1928 a taxable realization of income to him of the increment reflected in the then market value; and this view with its undisputed facts, the petitioner traverses.
The Commissioner's argument is largely predicated upon the idea that because a partnership is not separately taxable, its existence must be disregarded entirely in the chain of ownership, so that the sale, although admittedly made by the partnership, imports as the basis for measuring the gain or loss the cost to the contributing partner. We find nothing to support that idea. The taxing acts have, since the adoption of the Sixteenth Amendment, recognized the existence of partnerships, expressly providing, however, except in the Revenue Act of 1917, that partnership income should be taxed distributively to the individual partners. W. J. Burns, 12 B. T. A. 1209, 1222; T. D. 1957, March 12, 1914, 16 T. D. 37. The profits tax of 1917 was imposed directly upon the partnership. The duty of withholding has since 1913 been imposed as well upon copartnerships as upon others. The income of partnerships has been required to be computed quoad the partnership before ascertaining the taxable distributive shares, and this partnership income is so far distinct from that of the individual partners that it takes its own fiscal year whenever that year is different from that of the partner, L. O. 816, 1 C. B. (1919) 168; L. O. 972, 2 C. B. (1920) 163; and this, even when it results in a different credit for an individual in partnership from that of an individual sole proprietor. Shearer v. Burnet, 285 U. S. 228; Charles Colip, 5 B. T. A. 123. The fact that the tax imposed upon corporations and associations carried an express exception — "not including partnerships"—implies a recognition of the unity of a partnership; and the exclusion is only applicable to "ordinary partnerships," Burk-Waggoner Oil Assn. v. Hopkins, 269 U. S. 110.
If the law of New York were controlling, it could not be said that the partnership has no separate standing, for by her own decisions applying her own statute, the uniform partnership act, ownership by the partnership is not identical with ownership by the partners. Costello v. Costello, 209 N. Y. 252; 103 N. E. 148. Cf. Harris v. Commissioner, 39 Fed. (2d) 546; and see Sam H. Harris, 11 B. T. A. 871, 874. The very income which is by the Federal Government taxed to the individual members, irrespective of actual distribution, is, before partnership distribution, withheld from their individual...
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