Ransohoffs Inc. v. Comm'r of Internal Revenue
| Decision Date | 19 September 1947 |
| Docket Number | Docket No. 8930. |
| Citation | 9 T.C. 376 |
| Parties | RANSOHOFFS INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In about 1902 the father of Robert, James, and Howard Ransohoff established the business of Ransohoffs. Later Robert and James and their father formed a partnership to conduct the business. The father died and in the early 1920's Howard joined the firm. In 1930 a written partnership agreement was executed by the three brothers. On May 20, 1938, they executed a further partnership agreement, providing for the continuation of the partnership after the death of a partner. On October 9, 1938, Howard died. Upon his death no liquidation of the firm occurred, its assets were not distributed, and it was continued in operation exactly as it had been prior thereto. Robert and James owned the partnership equally. In 1940 petitioner was incorporated, with Robert and James as owners of an equal amount of its stock. Held, that under section 740, Internal Revenue Code, petitioner is entitled to compute its excess profits tax credit by the income method as provided in section 713. Lawrence Livingston, Esq., and H. W. S. Leeker, Esq., for the petitioner.
R. E. Maiden, Jr., Esq., for the respondent.
The respondent determined a deficiency of $5,341.68 in the petitioner's excess profits tax liability for its taxable year ended July 31, 1942.
The single issue is whether or not the petitioner is entitled to compute its excess profits tax credit by the use of the income method, pursuant to the provisions of Supplement A of subchapter E, chapter 2, of the Internal Revenue Code.
Certain facts were stipulated. The portions thereof material to the issue are as follows:
The petitioner is a corporation, organized by the surviving partners of Ransohoffs on April 23, 1940, under the laws of the State of California, with its principal place of business in San Francisco. It is known as Ransohoffs Inc. It filed its original and amended income tax returns for the taxable year with the collector of internal revenue for the first district of California. The petitioner filed its returns on the income method, under the provisions of Supplement A, subchapter E, chapter 2, of the Internal Revenue Code.
On May 20, 1938, Robert Ransohoff, James B. Ransohoff, and Howard J. Ransohoff formed a partnership, doing business under the firm name and style of Ransohoffs. The three persons were brothers. Each brother owned a one-third interest in the partnership. The partnership was a continuation of a partnership among the same brothers as copartners, established by an agreement of partnership executed April 29, 1930. The partnership which was established in 1930 continued from the date of its inception until the formation of the partnership under the agreement of May 20, 1938. The business of the partnership was the purchasing and selling of women's apparel of all kinds and kindred merchandise.
Howard J. Ransohoff died on October 9, 1938. At the time of his death the partnership was operating under the terms of the agreement of May 20, 1938, which had never been terminated, amended, or modified. At the time of the death of Howard, each brother owned a one-third interest in the partnership. Immediately upon his death the surviving partners, Robert and James, took possession of all of the property of the partnership and assumed liability for all its obligations. They continued the partnership and continued the operation of the partnership business under the terms and provisions of the agreement of May 20, 1938.
After the death of Howard, the surviving partners, Robert and James, paid to the estate of the deceased partner an amount equal to one-third of the book value of the partnership as shown on its books as of the last day of the month immediately preceding the date of the death of the deceased partner, plus or minus appropriate credits to or charges against the deceased partner, as shown by the books of the partnership. The payments have heretofore been made by the surviving partners without awaiting the full ten years allowed them by the agreement of May 20, 1938. (The contract provided for ten annual payments.)
On July 31, 1940, the partners, Robert and James, transferred all of the assets of the partnership to the petitioner in exchange for all its capital stock, each brother receiving 50 per cent of such stock. The corporation continued the operation of the business of the predecessor partnership without change or interruption.
The articles of partnership of May 20, 1938, provided, among other things, as follows:
The partnership shall continue in existence until the death of two of the parties hereto, unless sooner terminated by the parties hereto or the survivors of them, and the partnership may, notwithstanding the foregoing, continue in existence after the death of two of the parties hereto if prior to such time the parties, or the survivors thereof, shall so provide. For the purposes of this paragraph, the withdrawal of a partner pursuant to the provisions of this agreement shall have the same force and effect as the death of a partner.
In the event of the death of any partner, the two survivors shall continue as partners under the same firm name and subject to the terms, covenants, and conditions of this agreement as then existing, or as hereafter amended or modified, and the interest of the deceased partner shall be compensated for in the manner hereinafter provided.
Upon the death of the partner first to die, the surviving partners shall thereupon and immediately become the sole owners of all of the assets of the partnership and liable for all liabilities thereof, and said survivors agree to protect and save harmless the successors of such deceased partner against any and all such liabilities, whether presently then existing or future or contingent.
No successor of a deceased partner shall have any interest, right or title in or to the business or management of said partnership or the assets thereof.
The record discloses the following additional facts:
The business of Ransohoffs was started by the father of Robert, James, and Howard Ransohoff and has been maintained under that name to the present time. Robert and James were associated with their father as partners in the venture until their father's death. In the early 1920's Howard joined the firm as a partner. No written partnership agreement was executed until 1930, but verbally the partners agreed to share the profits and losses. The written agreement was made with the understanding that the partners were to continue the business and, if one should die, the other two would succeed him, take over his interest and duties, and carry on the business just as theretofore.
After the death of Howard, the surviving partners, Robert and James, continued the partnership and its operation under the terms of the agreement of May 20, 1938. The conduct of the business was not altered in any manner, its assets were not distributed; it was not dissolved; its affairs were not terminated or wound up; there was no distribution of assets or profits; there was no liquidation of the firm; and the partnership continued in every respect exactly as it had prior to the death of Howard, except that the surviving brothers, Robert and James, owned the assets of the partnership in equal shares, with the obligation to compensate the heirs or successors of a deceased partner.
It was stipulated at the hearing that the petitioner did not make the elections required by section 228(f) of the Revenue Act of 1942 in order to have the provisions of section 740(f) of the Internal Revenue Code made applicable retroactively to all taxable years beginning after December 31, 1939.
It is unnecessary to enter into any extended discussion of sections 740 and 744 of the Internal Revenue Code, under which the controversy in the case at bar arises. The precise issue is whether the petitioner is entitled thereunder to compute its excess profits credit by the income method, as provided in section 713, or by the invested capital method, as provided in section 714. The petitioner contends that it is entitled to use the income method. In order to do so the preceding partnership must be regarded as a ‘qualified component corporation‘ as defined in section 7401 and it must have been in existence on the date of the beginning of the petitioner's base period, August 1, 1936.
The petitioner and the respondent agree that the partnership composed of Robert and James was a component corporation as defined by the statute. The respondent argues that the partnership was not a ‘qualified component corporation‘ because it was not in existence on August 1, 1936, due to the fact that the death of Howard in October 1938 terminated the prior partnership of Robert, James, and Howard, and that the partnership of Robert and James became a new entity.
Therefore, the issue before us is narrowed to one of law— Did the death of Howard dissolve the partnership...
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