Guaranty Trust Company of New York v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 78362.
| Decision Date | 21 April 1936 |
| Docket Number | Docket No. 78362. |
| Citation | 34 BTA 384 |
| Parties | GUARANTY TRUST COMPANY OF NEW YORK, EXECUTOR, ESTATE OF LAMAR L. FLEMING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Weston Vernon, Jr., Esq., for the petitioner.
Harold Allen, Esq., for the respondent.
The petitioner, as executor of the estate of Lamar L. Fleming, deceased, seeks redetermination of a deficiency in income tax of $39,874.31 for the taxable period from January 1 to December 16, 1933. The petitioner alleges that the respondent erred in including in the decedent's income for that period, his distributive share of the profits of a partnership, of which he was a member, from July 31 to December 16, 1933, when he died. He makes the same contention as to certain commissions earned by the partnership, and certain interest due decedent from the partnership. The facts have been stipulated and from them we make the following findings of fact.
FINDINGS OF FACT.
The decedent, Lamar L. Fleming, died December 16, 1933. For a number of years prior to his death he was a member of the partnership of Anderson, Clayton & Fleming, engaged in the cotton business, with its principal place of business in New York City and branches in other cities of the United States and Europe.
The business of the partnership was operated on the cash receipts and disbursements basis with a fiscal year ending July 31 of each year. The decedent likewise kept his accounts on the cash receipts and disbursements basis, but kept his accounts and made his tax returns on a calendar year basis.
On August 1, 1933, a new partner was admitted to the firm and a new partnership agreement was made, which was identical with the previous one, except as to the division of the profits. This new agreement provided that its fiscal year should begin August 1, 1933, and end July 31, 1934.
In accordance with the contract of partnership an account was taken at the end of the fiscal year July 31, 1933, and decedent was notified of his share of the profits for the preceding 12 months. A large portion of his share was allowed to remain to his credit with the partnership. No part of the earnings of the partnership for the period between the end of the fiscal year July 31, 1933, and his death was paid to or received by the decedent. The partnership agreements provided for but one yearly accounting and settlement, which was at the end of the fiscal year.
After the death of Lamar L. Fleming the business of the partnership was continued by the surviving partners under the same name. In May 1934, they entered into a new contract of partnership taking over the business as of December 18, 1933, and providing for a fiscal year ending July 31, 1934, and from year to year thereafter.
Shortly after the death of decedent an account was taken covering the period from August 1 to December 16, 1933, and on or about January 9, 1934, decedent's executors received in partial distribution and liquidation of the partnership $298,730.19, which consisted of the $100,000 capital invested by the decedent, the credit balance on deposit due decedent of $162,795.67, and decedent's share of the profits of the partnership between the end of its fiscal year July 31, 1933, and decedent's death, December 16, 1933, in the sum of $35,150.88, and interest of $783.64.
In February 1934, decedent's executors received a final distribution of $15,067.39 and interest of $82.56. This latter sum included $13,894.74 as decedent's share of commissions earned by the partnership between the end of its fiscal year and the death of decedent, but not collected until 1934 in accordance with a trade custom.
Decedent's executors duly filed his income tax return for the period January 1 to December 16, 1933, date of his death, and included therein his distributive share of the profits of the partnership for the fiscal year ending July 31, 1933, but did not include therein his share of the profits of the partnership earned between July 31, 1933, the end of its fiscal year and the date of his death, December 16, 1933. Likewise the decedent's share of the open commissions earned during that period and interest on his capital investment and credit balance with the partnership were omitted.
In determining the deficiency the respondent included in decedent's income the sum of $63,494.46 representing partnership profits for the period between July 31 and December 16, 1933, and $5,559.19 unreported interest. The item of $63,494.46 included the cash earnings of the partnership during the period and also the uncollected commissions earned during that period in the sum of $13,894.74. The unreported interest of $5,559.19 consisted of $3,209.19 interest on decedent's credit balance for that period, $2,300 interest on his capital investment, and $50 from some other source.
The executors of the estate of the decedent duly filed an estate tax return, which included decedent's credit balance with the partnership, his capital interest therein and his share of the profits earned during the period August 1 to December 16, 1933, and paid the estate tax thereon.
On February 28, 1934, the survivors of the partnership filed a return for it in liquidation for the fiscal year beginning August 1, 1933, and ended December 16, 1933, and on October 28, 1934, they filed a return for the fiscal year December 17, 1933, to July 31, 1934. Both of these were made without permission or direction of the respondent.
On or about March 5, 1935, the executors of the estate of the decedent waived the restrictions upon the assessment of $37,917.39, out of a total deficiency in tax determined by the Commissioner in his letter of October 25, 1934, amounting to $39,874.31. Such waiver was made after the petition to the Board of Tax Appeals had been filed herein, and was made without prejudice to the right of the executors to prosecute the pending appeal and to recover any amount refundable under the final decision of the Board herein. Following the waiver of the restrictions upon the assessment of $37,917.39, the Commissioner assessed such amount against the executors of the decedent, together with interest thereon in the amount of $2,318.67, making a total of $40,236.06. The Commissioner applied as a credit against such taxes and interest the amount of an overassessment in the decedent's income tax for the calendar year 1932, amounting to $1,956.92, together with interest thereon amounting to $149.02, and issued a notice and demand upon the decedent's estate for a total of $38,130.12, consisting of $35,811.45 in tax and interest of $2,318.67, which was paid by the decedent's executors on April 15, 1935.
The dominant issue is whether decedent's return for the period from January 1 to December 16, 1933, the date of his death, should include decedent's share of the partnership profits for the interval between July 31, 1933, the end of the partnership's fiscal year, and December 16, 1933, when decedent died. Both decedent and the partnership were on a cash receipts and disbursements basis.
The Revenue Act of 1932 is controlling. Section 182 (a) provides:
SEC. 182. TAX OF PARTNERS.
(a) GENERAL RULE. — There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. If the taxable year of a partner is different from that of the partnership, the amount so included shall be based upon the income of the partnership, for any taxable year of the partnership ending within his taxable year.
The "taxable year" of the partnership differed here from the "taxable year" of the decedent, since such year of the partnership was its fiscal year ended July 31, 1933, and that of the decedent was the calendar year. Sec. 48 (a).1 Thus the determination of decedent's taxable income for the period from January 1 to December 16, 1933, when he died, "shall be based upon the income of the partnership for any taxable year of the partnership ending within his taxable year." Sec. 182 (a), supra. A taxable year of the partnership ended on July 31, 1933. No other such year ended before decedent's death, unless decedent's death, ipso facto, terminated a second "taxable year" of the partnership.
The partnership contract provided for only one accounting period, which was at the close of the fiscal year. A provision for any other termination of the taxable year, except by mutual agreement, was not included in the contract. Article nine of the agreement reads in part as follows:
In the event of any dissolution of the co-partnership under any provision of this agreement or in any manner or for any cause whatsoever, the assets thereof shall be applied first, to the payment of the debts thereof; second, to the return of the capital invested therein by any partner hereto; and third, to the distribution of the profits or surplus in accordance with the provisions hereinabove set forth for the distribution of net gains and profits.
The surviving partners, after decedent's death, carried on the partnership for the purpose of its liquidation, which was not completed until 1934. None of the proceeds of that liquidation were received by or available to decedent, and were not available to or received by petitioner, his representative, until 1934.
This partnership was a New York firm. Under the law of that state, not only the addition of a partner does not effect the dissolution of a partnership, (Helvering v. Archbald, 70 Fed. (2d) 720), but the death of the decedent partner, though it may cause dissolution, certainly does not terminate the "taxable year" of the partnership where, as here, the surviving partners continue it for purposes of liquidation. Partnership Law of New York, secs. 60, 61, and 62.2
As this Board held in Abe De Roy et al., Executors, 19 B. T. A. 452, upon identical facts arising under section 218 (a) of the Revenue Act of...
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