Helvering v. Smith, 329.
| Decision Date | 07 June 1937 |
| Docket Number | No. 329.,329. |
| Citation | 90 F.2d 590 |
| Parties | HELVERING, Commissioner of Internal Revenue, v. SMITH. |
| Court | U.S. Court of Appeals — Second Circuit |
James W. Morris, Asst. Atty. Gen., and Sewall Key and Charles A. Horsky, Sp. Assts. to the Atty. Gen., for appellant.
Kirlin, Campbell, Hickox, Keating & McGrann, of New York City (James R. Roberts and H. Maurice Fridlund, both of New York City, of counsel), for appellee.
Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.
The Commissioner appeals from a ruling by the Board of Tax Appeals, allowing the taxpayer to compute his tax under section 101 (a) of the Revenue Act of 1928, 26 U.S.C.A. § 101 note; that is to say, holding that the transaction involved resulted in a "capital net gain," section 101 (c) (5), 26 U.S.C.A. § 101 note, derived from the sale of "capital assets," section 101 (c) (8), 26 U.S.C.A. § 101 note. This issue arose from the following situation. The taxpayer, on January 1, 1925, had become a member of a firm of attorneys in New York City, and so continued until December 31, 1929, when he retired, and the firm was dissolved. The firm property consisted of furniture and fittings such as lawyers use, and a law library; but chiefly of accounts receivable, some of which had been "billed" to clients, and some of which were for services rendered, not yet ripe for collection. The articles provided that upon dissolution — which might be at the will of any partner — the majority of those remaining should liquidate the firm, and that any retiring partner should "not be entitled to any part of any earnings * * * for services performed after such dissolution, but * * * to receive in full satisfaction * * * only such partner's due proportion of all earnings actually collected * * * and * * * of all earnings * * * for services performed." "The lease * * * and all furniture and fittings and all records, * * * and the law library" were to belong to those who continued the business, and the retiring partner got nothing for his share in the good-will. The taxpayer, who, like the firm, filed his returns upon a cash basis, released his partners from all liability for a cash payment of $125,000, which recited that he had received "all earnings * * * actually collected prior to said dissolution" and that "the amount of his proportion of said earnings received after such dissolution for services performed prior thereto has been estimated at the sum of $125,000." He had contributed nothing to the firm when he entered it five years before.
The cause was tried upon a stipulation which declared that the remaining partners had orally agreed that "they would purchase his interest in the firm for a lump sum of $125,000" which was "carried out" when he "retired from the firm and received * * * payment of said $125,000 of which documentary proof is to be submitted at the hearing." The stipulation spoke of this transaction as a "Sale of Partnership Interest." The Board adopted the taxpayer's theory that his interest in the firm was merely a claim against it as an entity, and that, as he had held it for more than two years, it was "capital assets," section 101 (c) (8), 26 U.S.C.A. § 101 note. The Commissioner insisted that the claim was all income, and the payment merely an immediate liquidation of future income.
The Uniform Partnership Act which is the law of New York (Partnership Law N.Y. Consol.Laws N.Y. c. 39), did not, as the taxpayer supposes, make the firm an independent juristic entity. The Commission did indeed start out to do so, and if Dean Ames had lived, considering his partiality for the mercantile conception of a partnership (Cory on Accounts, 1839), he might have succeeded in impressing that mould upon the act. But after his death, the Conference in 1911 after a very full discussion chose to retain the pluralistic notion of the firm, as the English chancellors had painfully worked it out from the bare common-law, which recognized only joint owners and joint obligors. Harris v. Commissioner (C.C.A.) 39 F.(2d) 546; Helvering v. Walbridge (C.C.A.) 70 F.(2d) 683. That was procedurally full of difficulties, and permitted some injustice, both of which it was the purpose of the Act to abate; but the essentials of the old model were preserved. Indeed, many of the supposed innovations were not such; for example, the limitation upon a partner's power to assign firm property (section 25 (2) (b) Partnership Law N.Y. § 51 (2) (b)),...
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