Knipp v. Comm'r of Internal Revenue (In re Estate of Knipp)

• Decision Date: 31 October 1955
• Docket Number: 50153,50154.,Docket Nos. 42545
• Citation: 25 T.C. 153
• Parties: ESTATE OF FRANK H. KNIPP, DECEASED, HOWARD F. KNIPP, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTHOWARD F. KNIPP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

25 T.C. 153

ESTATE OF FRANK H. KNIPP, DECEASED, HOWARD F. KNIPP, EXECUTOR, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTHOWARD F. KNIPP, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 42545

50153

50154.

Tax Court of the United States.

Filed October 31, 1955.

1. The decedent and petitioner Howard F. Knipp were on the calendar year basis for reporting income, and the partnership, of which they were the sole members with equal rights to share in profits, operated on the basis of a fiscal year ending January 31. The partnership agreement provided, in effect, that if a partner died during a taxable year of the firm his share of the profits would be the amount which he was entitled to receive as ‘salary.’ Held, that the death of decedent on November 21, 1947, terminated the partnership's taxable year. Held, further, that one-half of the partnership's profits to the date of death of the decedent less the amount withdrawn as ‘salary,‘ is not includible in the gross estate of the decedent as value of a property interest in the earnings of the partnership.

2. The partnership held 11 policies of insurance on the life of the decedent, 10 of which had been assigned to it by the insured. It was the beneficiary of the unassigned policy but the insured had the right to change the named beneficiary. The partnership paid the premiums on all of the policies. Held, that the proceeds of the 10 assigned policies are not includible in gross estate of the decedent under subsections (A) or (B) of section 811(g), I.R.C. 1939, and that the proceeds of the unassigned policy are a part of the decedent's gross estate under subsection (B). Randolph E. Paul, Esq., Julian N. Stern, Esq., and Carolyn E. Agger, Esq., for the petitioners.

Paul Waring, Esq., for the respondent.

These consolidated proceedings involve deficiencies in income and estate tax as follows:

+-----------------------------------------------------------------+
                ¦Docket¦                          ¦        ¦          ¦           ¦
                +------+--------------------------+--------+----------+-----------¦
                ¦No.   ¦Petitioner                ¦Tax     ¦Year      ¦Deficiency ¦
                +------+--------------------------+--------+----------+-----------¦
                ¦42545 ¦)                         ¦( Estate¦          ¦$120,980.52¦
                +------+--------------------------+--------+----------+-----------¦
                ¦50154 ¦) Estate of Frank H. Knipp¦( Income¦1/1/47 to ¦18,500.36  ¦
                +------+--------------------------+--------+----------+-----------¦
                ¦      ¦                          ¦        ¦11/21/47  ¦           ¦
                +------+--------------------------+--------+----------+-----------¦
                ¦50153 ¦Howard F. Knipp           ¦Income  ¦1947------¦351,892.70 ¦
                +-----------------------------------------------------------------+
                

Refunds are claimed in Docket Nos. 42545 and 50154. The issues not conceded on brief or settled by stipulation are:

Docket Nos. 50153 and 50154.

1. Whether the death of Frank H. Knipp terminated the partnership for income tax purposes.

Docket No. 42545

1. Whether the value of the interest of the decedent in the partnership of John C. Knipp & Sons should include the amount of $154,972.05 representing one-half of the partnership income in 1947 prior to his death on November 21, 1947;

2. Whether the proceeds of certain insurance policies on the life of decedent, totaling $90,512.32, are includible in his gross estate; and

3. Whether the value of the decedent's interest in the partnership should be reduced by the amount of $4,328.34 as his share of the partnership liability to the United States Maritime Commission for interest as of January 31, 1947.

FINDINGS OF FACT

The facts set forth in the stipulation of facts are so found.

Howard F. Knipp, the petitioner in Docket No. 50153, hereinafter referred to as Howard, is the executor of the Estate of Frank II. Knipp, deceased, his uncle, hereinafter referred to as Frank, who died testate on November 31, 1947. Howard kept his books and filed his income tax returns for 1947 and 1948 on the calendar year basis. His income tax returns and the estate tax return were filed with the collector of internal revenue for the district of Maryland.

The firm of John C. Knipp & Sons has been engaged in the retail furniture, interior woodwork, and ship-fitting business since 1868. On July 7, 1943, Frank, Howard, and John C. Knipp, a brother of Howard, hereinafter referred to as John, entered into a partnership agreement for the conduct of the firm hereinafter referred to for convenience as the partnership. Profits and losses of the partnership were to be shared on the basis of 40 per cent to Frank and Howard, and 20 per cent to John. An annual salary of $25,000 each was to be paid to Frank and Howard and $15,000 to John, payable on a monthly basis. Paragraph Eleven of the partnership agreement reads as follows:

Eleven. It is agreed among the partners hereto, anything in this agreement to the contrary notwithstanding, that in the event of any partner's death, the amount to the credit of said deceased partner on the firm's books on February 1, 1943, or on February 1st in any subsequent year, provided the partnership has run for twelve consecutive months; otherwise the date of settlement shall be as of the prior February 1st, less the amount of his withdrawals over salary, shall be paid to the Executors for Administrators of said deceased partner, and same shall be in full settlement of the deceased partner's interest in said partnership.

The purpose of the provision was business convenience.

The partners had an oral understanding that the capital account of a deceased partner at the start of the fiscal year in which his death occurred would be subject to any adjustments made by the partnership on work completed and reflected in the account.

The agreement did not contain a provision for continuation of the partnership in the event of death of a partner.

Under the partnership agreement, Frank had no right to share in partnership earnings for its fiscal year in excess of his contractual drawings unless he survived to the end of the partnership's fiscal year. Similarly, if the partnership income was insufficient to cover the partners' contractual drawings in any year, a partner who died during the year could not be charged with any part of the decrease in net partnership assets and was entitled to his full contractual drawings or ‘salary.’

The partnership kept its books and filed returns on the basis of a fiscal year ending January 31.

John withdrew from the partnership as of August 1, 1945. The settlement agreement entered into with Frank and Howard provided that John's share of profits and losses would be 20 per cent of the profits and losses on contracts outstanding on August 1, 1945, ‘whether completed, re-negotiated subject to re-negotiation or in the course of re-negotiation or uncompleted.’

On August 1, 1945, the partnership had uncompleted contracts, including contracts with the United States Maritime Commission, hereinafter referred to as Maritime, for the fitting of ships, which contracts were subject to renegotiation. On October 30, 1947, Maritime filed a claim against the partnership for $322,461 for progress payments erroneously made for work canceled on March 8, 1944. The payments were reported as income in the year of receipt. On November 21, 1947, the partnership made a counterclaim for additional amounts due to it for work on ships. The counterclaim was allowed on February 21, 1949, in the amount of $177,733.05 as an offset against the overpayment of $322,461. The balance of 4144,727.95 was paid by checks issued in 1949 and 1950 by John C. Knipp & Sons.

After John withdrew from the partnership Frank and Howard continued to operate the business under the partnership agreement of July 7, 1943, except for an oral amendment to provide for an equal division of the profits.

About September 1945 Maritime canceled further work by the partnership on 10 vessels. Thereafter, the partnership filed a termination claim against Maritime which was still unsettled on November 21, 1947.

In April 1951 ‘Howard F. Knipp, as partner and as executor of the estate of Frank H. Knipp, deceased partner and John C. Knipp, as partner, doing business as John C. Knipp & Sons (herein called ‘Contractor’) signed a final settlement agreement as of March 6, 1950, with Maritime in respect to a termination claim on the contracts canceled in 1945. The agreement took into account certain credits to Maritime for supplies which had been taken over by the contractors on the termination of the contracts and progress payments which the contractor had received before the contracts were terminated. In settlement the parties agreed that Maritime had overpaid the contractor by $81,064.09 and that the contractor owed Maritime $16,005.25 for interest on an overpayment made on April 20, 1946, in the amount of $185,500, which overpayment the contractor had repaid in September and October, 1947. The compromise settlement was approved by the Department of Justice on October 1, 1951. Of the agreed liability for interest, $8,656.67 was for the period to January 31, 1947. Such interest was not claimed as a deduction in the partnership return filed for the year ended January 31, 1947, but was allowed by the respondent as accrued interest in adjusting the net income of the partnership for that period. The amount reported in the estate tax return as the value of Frank's interest in the partnership was not reduced by one-half, or $4,328.34, of such interest of $8,656.67. The capital account of Frank on the books of the partnership was charged as of January 31, 1947, with $4,328.34 for his alleged share of the interest to that date.

On November 21, 1947, the partnership had contracts with Maritime which were subject to profit limitations under the Vinson-Trammel Act. Its work under some of the contracts was completed during the fiscal year ended January 31, 1947. The excessive profits...