In re Deutz's Estate

• Decision Date: 21 February 1930
• Citation: 149 A. 257
• Parties: In re DEUTZ'S ESTATE.
• Court: New Jersey Supreme Court

149 A. 257

In re DEUTZ'S ESTATE.

Prerogative Court of New Jersey.

Feb. 21, 1930.

Syllabus by the Court.

Proceeding to assess transfer inheritance tax on the estate of Henry Deutz, deceased. From an assessment made by the comptroller, decedent's administrator appeals.

Modified and affirmed.

Wm. D. Lippincott, of Camden, for appellant.

Wm. A. Stevens, Atty. Gen., and William A. Moore, of Trenton, for respondent.

BUCHANAN, Vice Ordinary.

Henry Deutz, resident of New Jersey, died intestate February 7, 1925. In assessing the tax due from his estate under the Transfer Inheritance Tax Act (P. L. 1909, c. 228 [4 Comp. St. 1910, p. 5301 et seq., § 537 et seq., as amended]) the comptroller included an item of $1, 195.32 for tax assessed on an alleged transfer from decedent to his brother Joseph one-half the good will of a partnership between the two brothers (which one-half share of good will was appraised at $23,906.47).

Decedent and his brother entered into a partnership in 1919, in Mexico; the business was to be, and was, carried on in Mexico, by Joseph as the active partner. Decedent was an inactive partner and lived in New Jersey. The partnership agreement was (essentially) for ten years; and it continued until Henry's death. The agreement provided (inter alia) as follows:

"Ninth: * * * The company will not dissolve in case of the death of one of the partners happening within the term of the company or one of its extensions, and will continue as agreed, between the surviving partner and the legal representative of the deceased one, without doing violence to what is stipulated in the following clause; said representative will have the same rights as the deceased partner had as per this document, but the survivor alone will continue as administrating partner, he being the only one to use the company's signature; and he being the only one possessing the powers treated of in clause 7th.

"Tenth: In case of the death of one of the partners within the time of the company's existence or one of its extensions, the heirs of the deceased will be paid the capital belonging to deceased as per the next forthcoming balance in five annual installments each equaling the 5th part of said capital; said heirs will likewise enjoy the assets and suffer the losses in proportion to the capital remaining in the company in virtue of the annual payments spoken of above. Six months at the latest after the death takes place, the general balance will be made which was to be made at the end of the year, so as to fix the liquid assets belonging to each partner, so that the heirs of the deceased may have at their disposal those belonging to him."

It will be observed that by this agreement the partnership is not dissolved at the death of one partner; after such death the partnership assets are owned by the surviving partner and the legal representative of the deceased partner; the proportionate share or fractional interest in the partnership assets owned by the "heirs" or legal representative of the deceased partner being reduced annually by the payments to be made by the surviving partner.

The total partnership capital is to be determined by a balance to be arrived at on an account stated by the surviving partner and the legal representative of the deceased partner.

This account was stated, and the balance arrived at, between the surviving partner and the present appellant (as administrator of the deceased partner, Henry), some seven weeks after Henry's death. This balance sheet showed the decedent's share of the capital to be $153,228.61, Mexican, or $76,614.31, United States. The assets specified on this balance sheet include only merchandise inventory, furniture, and fixtures, real estate, cash, and accounts receivable. No item of good will is included.

In the comptroller's computation and assessment of transfer inheritance tax with respect to the estate of Henry, he determined that the partnership did have a valuable good will, which he appraised at $47,812.94 (United States), and he therefore added this item to the assets on the balance sheet, and thus increased the net assets by the same amount. He determined that, by virtue of the provisions of the partnership agreement, the entire good will at decedent's death became the property of the surviving partner, without any compensation or allowance therefor to decedent's estate. Accordingly he assessed a tax of $1, 195.32, as on a transfer to the surviving partner of one half the good will.

From this assessment the decedent's administrator appeals.

His contentions are substantially as follows:—

1. Good will is not an asset.

2. The partnership had no asset of good will.

3. If there was an asset of good will, it was of no value or not of the value placed upon it by the comptroller.

4. There was no transfer of good will.

5. If there was a transfer of good will it was not taxable.

6. If there was a taxable transfer of good will, the tax should not be levied against appellant.

Good will of course is an asset—In re Bottomley, 92 N. J. Eq. 202, 111 A. 605 (an asset of a corporation); In re Hall, 99 N. J. Law, 1, 125 A. 246 (an asset of a partnership) —although of course not every corporation or partnership has such an asset.

That this partnership had an asset of good will is amply justified by the record. It was engaged in an established mercantile business (retail hardware) and in the year prior to decedent's death had made a profit of $24,990.52 (20 per cent. on its capital), and for each of the two years before that had likewise made a profit of about 20 per cent. on its capital. There was no proof before the comptroller tending to show the absence of an asset of good will, except the mere fact that it was not carried on the books of the partnership as an asset.

An agreement between partners that there is no good will, or that it is of no value, may well be binding on the partners and their representatives, but it cannot preclude the state from taxing at actual value. In re Hellman (Sur.) 172 N. Y. S. 671, affirmed 226 N. Y. 702, 123 N. E. 869; In re Halle's Estate, 103 Misc. Rep. 661, 170 N. Y. S. 898.

The value of the good will was appraised at $47,812.95. This valuation was arrived at by taking the yearly average net profit (after deducting 6 per cent interest on the capital) for the normal years previous to decedent's death and multiplying by three. Gleason & Otis, Inheritance Taxation (4th Ed.) pp. 599, 600. This is a generally accepted method of determining the value of good will, and was approved by this court in Re Hall, supra; and also, inferentially, in the same case on certiorari, 99 N. J. Law, 1, at page 5, 125 A. 246.

It is urged that Mexico was in a state of revolution, and that by reason thereof the value of the good will was destroyed or greatly lessened. There is no evidence in the record to show that a condition of revolution existed in Mexico at the time of decedent's death. Such evidence would therefore not be available before this court on appeal, even if produced and offered. In re Pierce, 89 N. J. Eq. 171, 104 A. 298. No such evidence is in fact offered to this court, but it is contended that it is a fact of which this court will take judicial notice. This may at least be doubted, but, assuming that it is so, it must also be assumed that the tribunal below took the same judicial notice and gave it due weight and consideration in arriving at its conclusion. There is nothing to show the contrary, and the burden is upon appellant to establish error. In re Pierce, supra. Appellant argues that the good will was valueless, because decedent could not have borrowed money upon his share thereof. This argument fails, not only because that which is asserted as a premise is itself not proven, but because it is nonsequitur. An appurtenant right of way could not be separately sold or borrowed against, and yet might add greatly to the value of the property to which it was appurtenant.

The partnership had an asset of good will; decedent owned an interest therein, as in all the partnership assets. The business did not cease at decedent's death, hence the good will did not then cease to exist as an asset. It follows necessarily that there must have been a transfer to some one, at decedent's death, of the interest he had in that asset in his lifetime.

It would appear from the ninth and tenth paragraphs of the partnership agreement quoted earlier herein that on the death of Henry his "legal representative" became a member of the partnership in Henry's place, (being however rather a silent partner than an active partner); and that this legal representative, "having the same rights as the deceased partner had," therefore succeeded to Henry's interest in the partnership. To the "heirs" of Henry there accrued the right to be paid Henry's share of the capital in five annual installments, and they are to receive profit or suffer loss in the continuation of the partnership business proportionately to the share of capital remaining in the company from time to time as diminished by these annual payments. The interest of the "heirs" and of the "legal representative" in the assets of the firm would of course be reduced each time one of the annual payments was made, and the interest of the surviving partner correspondingly increased—ultimately of course to total ownership.

Presumably "legal representative" means executor or administrator—in this case the administrator; and "heirs" means beneficiaries under a will or next of kin—In this case the next of kin. Such was the tacit assumption by both sides on the argument.

Obviously then there are three transfers resulting under the terms of the agreement at or after the death of the partner—(1) a transfer of some interest in the partnership assets ...