Foxman v. Comm'r of Internal Revenue, Docket Nos. 93416

Citation41 T.C. 535
Decision Date16 January 1964
Docket NumberDocket Nos. 93416,93472,93460.
PartiesDAVID A. FOXMAN AND DOROTHY A. FOXMAN, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Bernard J. Long, for the petitioners in docket Nos. 93416 and 93472.

Sidney L. Cramoy, for the petitioners in docket No. 93460.

Alvin C. Martin, for the respondent.

1. Held, petitioner J on May 21, 1957, ‘sold’ his one-third interest in a partnership to his two partners, petitioners F and G, under section 741, I.R.C. 1954. The transaction did not constitute a ‘liquidation’ of J's interest under sections 736 and 761(d).

2. Held, amount of J's share of distributive partnership income for the short fiscal period March 1,-May 21, 1957, determined to be $16,790 in accordance with final agreement among partners which modified to that extent the prior partnership agreement. Sec. 761(c).

3. Held, partnership did not ‘terminate’ on June 2, 1958, as a result of certain transactions consummated on that day, section 708; F and G were therefore not required to report in their 1958 returns their distributive shares of partnership income for the short fiscal period March 1,1958-June 2, 1958.

The Commissioner determined deficiencies in income tax for 1958 in the amounts of $57,754.29, $57,735.46, and $129,092.04 against David A. and Dorothy A. Foxman, Horace W. and Judith Grenell, and Norman B. and Laura Jacobowitz, respectively. By amended pleadings the Commissioner revised the first two of these determinations, claiming total deficiencies in the amounts of $144,754.44 against the Foxmans and $144,441.45 against the Grenells.

The principal issue common to all three cases is whether an agreement dated May 21, 1957, between petitioner Jacobowitz and petitioners Foxman and Grenell resulted in a ‘sale’ of Jacobowitz's interest in a partnership to the two remaining partners under section 741, I.R.C. 1954, or whether the transaction must be considered a ‘liquidation’ of Jacobowitz's partnership interest under sections 736 and 761(d). A second issue is whether $16,790 received by Jacobowitz represents his share of the partnership earnings for the period March 1-May 21, 1957, in accordance with the partnership agreement, as modified by the foregoing agreement of May 21, 1957, pursuant to section 761(c). The third issue, involving only Foxman and Grenell, is whether the partnership ‘terminated’ on June 3, 1958, under section 708, by reason of a certain transaction, so as to render them accountable in their 1958 returns for their respective shares of distributive partnership income during the period March 1-June 2, 1958. If the partnership did ‘terminate’ on June 2, 1958, then a number of other questions are presented involving the determination of the partnership's income for the period March 1-June 2, 1958; these include nonrecognition of gain under section 351 realized upon the transfer of partnership assets to a corporation, the determination of the amount of that gain if it is to be recognized, and the proper allowance for depreciation of the partnership's assets prior to such transfer.

FINDINGS OF FACT

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

The petitioners in each case, David A. and Dorothy A. Foxman, Horace W. and Judith Grenell, and Norman B. and Laura Jacobowitz, are husband and wife, all residing in New Jersey. They timely filed their respective 1958 joint income tax returns with the district director of internal revenue, Newark, N.J. The wives are parties herein merely by reason of the joint returns.

Prior to 1954, Abbey Record Manufacturing Co. was a partnership composed of petitioner Jacobowitz and two associates named Zayde and Brody, engaged in the business of custom manufacturing of phonograph records. The enterprise had been founded about 1948, with Jacobowitz as the active principal. Prior to 1954 the partnership, hereinafter referred to as Abbey, manufactured primarily 10-inch 78 r.p.m. records on contract for various companies. Petitioner Grenell purchased the interests of Zayde and Brody on December 31, 1953, and became an equal partner with Jacobowitz on January 2, 1954. Early in 1954 the partners agreed to enter the business of manufacturing 12-inch long playing records, known as LPs. Petitioner Foxman, who had been a consultant to the business when it was originally formed in 1948, was hired as a salaried employee in June 1954 to provide the necessary technical assistance for the changeover in machinery and production methods. Thereafter, as a result of certain agreements dated February 1, 1955, and January 26, 1956, Foxman, Grenell, and Jacobowitz became equal partners in Abbey, each with a one-third interest.

Abbey kept its accounts and filed its Federal income tax returns on an accrual basis of accounting and on the basis of a fiscal year ending February 28.

A related venture commenced by Jacobowitz, Foxman, and Grenell, individually, was represented by Sound Plastics, Inc., a corporation in which each owned one-third of the stock; it was engaged in the business of manufacturing ‘biscuits' or vinyl forms used in the making of records.

During the early period of the changeover to LPs, Abbey faced many problems in production and quality control. However, with Foxman and Jacobowitz in charge of production and with Grenell responsible for much of the selling, Abbey's fortunes were on the upswing. Its net income for the fiscal year ending February 29, 1956, was approximately $108,000, and for the fiscal year ending February 28, 1957, was approximately $218.000. Grenell, who acted as consultant and repertory director for two mail-order record companies, Music Treasures of the World and Children's Record Guild, was able to get these companies as customers of Abbey and they accounted for approximately 50-75 percent of Abbey's business.

The Agreement of May 21, 1957

Notwithstanding Abbey's success there was considerable disharmony among and between the partners. As a result there were discussions during the spring of 1956 relating to the withdrawal of Jacobowitz from Abbey. These negotiations did not lead to any agreement and the partners continued to work and to quarrel. Early in 1957, Foxman and Grenell decided to resolve the conflict by continuing the partnership without Jacobowitz and discussions were resumed again in March 1957. It was at about this time that Foxman offered Jacobowitz $225,000 in cash, an automobile which was in Abbey's name, and Foxman's and Grenell's interest in Sound Plastics, Inc., for Jacobowitz's interest in Abbey. Jacobowitz prepared a draft of an option agreement providing for Foxman's purchase of his one-third interest in the partnership and sent it to Foxman. Foxman never signed the option agreement. During the latter part of March or early April 1957, the negotiations of the three partners led to a tentative agreement whereby Jacobowitz' partnership interest would be purchased for $225,000 plus the aforementioned auto and stock in Sound Plastics, Inc. Jacobowitz, who did not trust either Foxman or Grenell, initially desired cash. Foxman and Grenell explored the possibilities of $200,000 bank loan from the First National Bank of Jersey City, hereinafter referred to as First National, and informed First National of their tentative agreement to buy Jacobowit's interest for $225,000; they had further discussions with First National concerning a possible loan on May 1, 1957, and on May 3, 1957. First National indicated, on the basis of an examination of the financial assets of Abbey, that it would consider a loan of approximately only $50,000.

The negotiations of the three partners culminated in an agreement dated May 21, 1957, for the ‘sale’ of Jacobowitz's partnership interest; the terms of this agreement were essentially the same terms as the terms of the option agreement which Foxman did not execute.

Relevant portions of the May 21, 1957, agreement are as follows:

AGREEMENT, made this 21st day of May 1957, between NORMAN B. JACOBOWITZ, hereinafter referred to as the ‘First Party, and HORACE W. GRENELL, and DAVID A. FOXMAN, individually, jointly and severally, hereinafter referred to as the ‘Second Parties' and ABBEY RECORD MFG. CO., hereinafter referred to as the ‘Third Party, WITNESSETH:

WHEREAS, the parties hereto are equal owners and the sole partners of ABBEY RECORD MFG. CO., a partnership, hereinafter referred to as ‘ABBEY’, and are also the sole stockholders, officers and directors of SOUND PLASTICS, INC., a corporation organized under the laws of the State of New York; and

WHEREAS, the first party is desirous of selling, conveying, transferring and assigning all of his right, title and interest in and to his one-third share and interest in the said ABBEY to the second parties; and

WHEREAS, the second parties are desirous of conveying, transferring and assigning all of their right, title and interest in and to their combined two-third shares and interest in SOUND PLASTICS, INC., to the first party;

NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:

FIRST: The second parties hereby purchase all the right, title, share and interest of the first party in ABBEY and the first party does hereby sell, transfer, convey and assign all of his right, title, interest and share in ABBEY and in the moneys in banks, trade names, accounts due, or to become due, and in all other assets of any kind whatsoever, belonging to said ABBEY, for and in consideration of the following:

A) The payment of the sum of TWO HUNDRED FORTY TWO THOUSAND FIVE HUNDRED & FIFTY ($242,550.00) DOLLARS, payable as follows:

$67,500.00, on the signing of this agreement, the receipt of which is hereby acknowledged;

$67,500.00 on January 2nd, 1958;

$90,000.00 in eighteen (18) equal monthly installments of $5,000.00 each, commencing on February 1st, 1958 and continuing on the first day of each and every consecutive month thereafter for...

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