Hellman v. United States, E-199.
| Decision Date | 20 October 1930 |
| Docket Number | No. E-199.,E-199. |
| Parties | HELLMAN v. UNITED STATES. |
| Court | U.S. Claims Court |
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J. S. Y. Ivins, of Washington, D. C. (Holmes, Brewster & Ivins, of Washington, D. C., on the brief), for plaintiff.
McClure Kelley, of Washington, D. C., and Herman J. Galloway, Asst. Atty. Gen. (C. M. Charest and Eldon O. Hanson, both of Washington, D. C., on the brief), for the United States.
A new trial was allowed in this case. The partnership, Smith & Kaufmann, made a return for 1919 on which plaintiff's distributive share of the partnership profits for that year was shown as $121,701.25. Plaintiff had withdrawn from the partnership in November, 1919, and had nothing to do with the preparation of this return. Upon receipt of information that the return showed his 1919 distributive share as stated, he objected to it, but the return as prepared was filed, and the Commissioner of Internal Revenue held that in addition to certain other income, consisting of his salary of $7,500 and 6 per cent. interest upon his capital in the partnership, included by plaintiff in his original individual income-tax return, the amount of $121,701.25 represented his distributive share of the net earnings of the partnership for 1919 and increased his income accordingly. Plaintiff insists that he was not taxable in 1919 upon the $121,701.25, and as a result of the action of the commissioner plaintiff brings this suit to recover $44,194.79.
Plaintiff contends, first, that the two documents, Exhibits C and B, referred to in the findings and executed by all of the partners on July 26, 1918, upon the retirement of John Roberts, constituted in legal effect only one partnership agreement and fixed his interest in the partnership profits at 1/10 of 1 per cent. of the net earnings until the date of death of Wackerhagen on August 20, 1919, and thereafter until he withdrew he was taxable upon 20 per cent. of the net earnings under said partnership agreement; that even if these two instruments be regarded as separate contracts, the result is the same, for the transfer by plaintiff to each of the other partners of 199/800 of the 20 per cent. interest in the net earnings to which he would otherwise have been entitled in consideration of the assumption by each of the other partners of such proportionate amount of any losses that might result was an agreement between all the partners fixing their distributive share; secondly, that on November 18, 1919, he withdrew and retired from the partnership and agreed with the other partners, as evidenced by Exhibit D referred to in the findings, to sell and transfer all of his interest in and claims against the partnership to a corporation to be organized by certain of the other partners in exchange for the issuance by such corporation to him of $450,000, par value of its first preferred stock; that this agreement was not a sale completed in 1919 giving rise to a taxable gain, because the corporation to which he agreed to sell was not organized and the stock was not authorized or issued therein until January 2, 1920; that the action of the other partners in showing the amount of $121,701.25 on the partnership return for 1919 as his distributive share of the partnership earnings for 1919 was wrong; that the figure of $121,701.25 was purely an arbitrary one representing merely the difference between $450,000, at which he agreed to sell, and $328,298.75, his tangible capital and his share of the reserve of the partnership; that, in no event, could his distributive share of the partnership net earnings have exceeded 20 per cent. of the net earnings of $531,141.26, or $106,228.25; thirdly, that the action of the other partners in showing his distributive share of the partnership profits for 1919 at $121,701.25 and the action of the commissioner in including that amount in his income resulted in shifting the burden of the other partners for their lawful taxes to him.
Defendant contends, first, that plaintiff was bound by the partnership return showing his distributive share as $121,701.25; and, secondly, assuming that the amount did not represent his share of the partnership earnings, it was nevertheless taxable to him as a gain realized in 1919 upon the sale by him in that year of his interest in the partnership.
The two instruments executed by plaintiff and the other members of the partnership on July 26, 1918, forming a new partnership arrangement upon the retirement of John Roberts, constituted in our opinion but one agreement between the new partners fixing their distributive shares. Under them, plaintiff's distributive share was 1/10 of 1 per cent. of the net earnings until December 31, 1921, the date fixed for termination of the partnership unless before that time it should be terminated for any reason, in which event it was provided that plaintiff's distributive share should become the full 20 per cent. of the net earnings. Partners may adjust between themselves their distributive share in such proportion and in such manner as they may desire. Cf. Leo Schwartz, 7 B. T. A. 223. The facts show that when the new partnership arrangement was formed in July, 1918, the plaintiff was contemplating retiring and desired only a small interest sufficient to produce a nominal return in addition to his salary and the interest which he was receiving upon his capital. It was understood by all that his distributive share was to be only 1/10 of 1 per cent. of the net earnings and it was plaintiff's desire that the partnership agreement provide for this. The partnership agreements were prepared by the attorneys for the partners and they deemed it best to embody the understanding of the partners with respect to their distributive shares in the two instruments in question. They were prepared at the same time and were executed simultaneously by all of the partners.
The defendant, relying upon Ormsby McKnight Mitchel, 1 B. T. A. 143, Mitchel v. Bowers (C. C. A.) 15 F.(2d) 287, and Bing v. Bowers (D. C.) 22 F.(2d) 450, contends that the fixing of plaintiff's distributive share at 1/10 of 1 per cent. of the net earnings of the partnership was merely an assignment by him of 199/800 of his interest in the partnership profits to each of the other partners and did not relieve him of the tax upon full 20 per cent. of the net earnings. These cases are not in...
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