Humphrey v. Commissioner of Internal Revenue

• Decision Date: 28 March 1935
• Docket Number: Docket No. 64376.
• Citation: 32 BTA 280
• Parties: DUDLEY T. HUMPHREY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

32 B.T.A. 280 (1935)

DUDLEY T. HUMPHREY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 64376.

Board of Tax Appeals.

Promulgated March 28, 1935.

Alex M. Hamburg, Esq., for the petitioner.

F. M. Thompson, Esq., for the respondent.

OPINION.

ARUNDELL:

This proceeding is to test the correctness of respondent's determination of a deficiency in income tax in the amount of $12,749.93 for the calendar year 1929. The deficiency arises primarily from respondent's action in determining the profits on the sale by petitioner of his interest in a partnership. Petitioner alleges as error the increase of his net income in the sum of $70,000, representing the face value of three nonnegotiable notes received in connection with the sale, and the failure of the respondent to tax the profit from the sale as a capital gain. The third error alleged is the inclusion in income of the sales price of certain American and Foreign Power stock without an allowance of petitioner's cost. No evidence was offered on this third point, and as to it we must sustain the respondent.

In February 1926 the partnership of Waterman & Co. was formed, with offices at Albany, New York, and the partnership immediately entered into the business of buying and selling securities. Petitioner had approximately a one-ninth interest in the capital and the profits of the partnership. The other partners were W. V. A. Waterman, S. E. Vail, and Alida L. Waterman, the latter being a limited partner.

On February 1, 1929, an agreement was entered into between petitioner, as party of the first part, and W. V. A. Waterman, S. E. Vail, and Alida L. Waterman, as parties of the second part, wherein it is recited that petitioner is withdrawing from the partnership, that his interest in the partnership on January 31, 1929, amounted to the sum of $142,626.99, that he transfers and assigns unto the parties of the second part "all his right, title and interest in the aforesaid limited copartnership and in the good will thereof" in consideration of $72,626.99 in cash and the balance:

* * * by notes of the parties of the second part, bearing date this first day of February, 1929, and maturing on the first day of February, 1930, bearing interest at five per cent per annum which notes shall be non-negotiable in form and to be executed for the following amounts by the following parties of the second part respectively, viz: a note for Fourteen thousand dollars ($14,000.) executed by William V. A. Waterman, a note for Twenty-eight thousand dollars ($28,000.) executed by Sheldon E. Vail, and a note for Twenty-eight thousand dollars ($28,000.) executed by Alida L. Waterman. The receipt of said cash and notes is hereby acknowledged by the party of the first part.

The agreement was carried out and petitioner received the cash and the three nonnegotiable promissory notes described in the agreement. These notes were duly paid on February 1, 1930, when they fell due, and petitioner included the sum received in his income tax return for 1930.

It is petitioner's position that, being on the cash receipts and disbursements basis, the nonnegotiable notes should not be included in his income for the year 1929. The notes were unsecured and were received by petitioner as evidence of the indebtedness due him and not in satisfaction of this indebtedness. The testimony is that the notes had no fair market value. In John B. Atkins, 9 B. T. A. 140, we said: "* * * in the case of one reporting income on the cash receipts and disbursements basis only cash or its equivalent constitutes income." A mere promise to pay in the future which is not accepted in payment, but only as an evidence of indebtedness, is not ordinarily the equivalent of cash. Taxation, as the courts many times have said, is eminently practical; and in determining taxable income we must view obligations for future payments from a practical point of view. As stated by Judge Learned Hand in Bedell v. Commissioner, 30 Fed. (2d) 622, 624:

If a company sells out its plant for a negotiable bond issue payable in the future, the profit may be determined by the present market value of the bonds. But if land or a chattel is sold, and title passes merely upon a promise to pay money at some future date, to speak of the promise as property exchanged for the title, appears to us a strained use of language when calculating profits under the income tax. * * * It is absurd to speak of a promise to pay a sum in the future as having a "market value", fair or unfair. Such rights are sold, if at all only by seeking out a purchaser and higgling with him on the basis of the particular transaction.

In our opinion it was error to include the three nonnegotiable notes in petitioner's income for the year 1929.

The next matter in issue is whether the gain realized in 1929 on the sale of petitioner's interest in the partnership was capital gain or ordinary income. Petitioner's view is that, having owned an interest in the partnership more than two years, it was a capital asset and the gain realized was a capital gain. Respondent's argument against this is based on the theory that a partner's interest in the partnership consists of a joint ownership with the other partners of the partnership assets. The assets in this case consisted of securities held by the partnership primarily for sale; hence, respondent argues, they were not capital assets.

There are expressions in the cases to the effect that a partner "is a joint owner of the firm assets", Harris v. Commissioner, 39...