Rossmoore v. Anderson

• Decision Date: 27 July 1932
• Citation: 1 F. Supp. 35
• Parties: ROSSMOORE v. ANDERSON, Collector of Internal Revenue.
• Court: U.S. District Court — Southern District of New York

1 F. Supp. 35

ROSSMOORE v. ANDERSON, Collector of Internal Revenue.

District Court, S. D. New York.

July 6, 1932.

Supplemental Opinion July 27, 1932.

Zeiger & Berliner, of New York City, and Nelson T. Hartson, of Washington, D. C., for plaintiff.

George Z. Medalie, U. S. Atty., of New York City (H. G. Herman, of New York City, and F. W. Dewart, of Washington, D. C., of counsel), for defendant.

COXE, District Judge.

This is an action to recover $34,876.70, paid under protest September 22, 1927, on account of additional income taxes of $27,882.77, assessed against the plaintiff for 1921, together with interest of $6,993.93 to the date of payment. The facts have all been stipulated, and the issue is purely one of law.

The plaintiff was one of three members of the firm of Rossmoore & Abbott, engaged in the accounting business in New York City. On November 1, 1920, the three partners signed a dissolution agreement providing that no new business should be undertaken, and for the completion and liquidation of the pending commitments. This agreement constituted the plaintiff liquidator of the business at a compensation of $12,000 for his entire services; it specified that the cash on hand, amounting to $70,732.92, including capital contributions, should forthwith be distributed, except for a $5,000 reserve for disbursements; and it further provided that upon completion of the liquidation the firm name should cease to be used.

By January 3, 1921, the sole assets of the firm, exclusive of office furniture and supplies, and of the disbursement reserve, consisted of (1) moneys receivable for services rendered by the firm prior thereto, and (2) moneys to become due for services by reason of the completion of service contracts on hand on that date.

On January 3, 1921, the plaintiff executed and delivered to his wife, Sarah Rossmoore, a written instrument by which he transferred to her, individually, one-third, and to her, as trustee for their two minor children, the remaining two-thirds of "all his right, title and interest, in and to the profits, and any and all other moneys, advantages, interests and benefits to be derived and realized from and out of the said partnership business now in liquidation, which shall be received on and after the date hereof," exclusive of the $5,000 reserve and the $12,000 to be paid the plaintiff for his services as liquidator. The trusteeship with respect to the fund for the children was subsequently taken over by the plaintiff. The instrument of transfer contains, however, no provisions for revocation, and is by its terms absolute.

During the liquidation, Sarah Rossmoore, individually and as trustee for the two children, received in 1921 $54,259.86, representing the distributive share of the plaintiff in the firm income for that year, and she returned as income the amounts so received, and paid taxes thereon. The plaintiff in his individual return for 1921 reported the amount of his compensation as liquidator received in that year, but did not return anything representing his distributive share in the firm; it being his contention that the assignment to his wife effectively transferred to her, individually and as trustee, his entire interest in the firm in liquidation, and that the amount distributed in 1921 was in no sense income to him. The commissioner, on the other hand, disregarded for tax purposes the transfer of January 3, 1921, and assessed to the plaintiff, as his individual income, the entire amount distributed in 1921 on account of the plaintiff's interest in the firm. It is to recover the additional tax due to the inclusion of these amounts in the plaintiff's return, together with the interest thereon, that this action has been brought.

Section 52 of the New York Partnership Law (Consol. Laws, c. 39) provides that "a partner's interest in the partnership is his share of the profits and surplus and the same is personal property." This was also true under the common law. Blodgett v. Silberman, 277 U. S. 1, 48 S. Ct. 410, 72 L. Ed. 749. It is further provided in section 53 of the New York act that "a conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership * * *; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled." This modified the common-law rule with respect to partnerships in general, Meinhard v. Salmon, 249 N. Y. 458, 471, 164 N. E. 545, 62 A. L. R. 1; but the "conveyance" mentioned in the statute gives no interest in the firm assets as such, and, during the continuation of the partnership, is ineffective to remove from the transferring partner his income tax burden on subsequent profits. Mitchel v. Bowers (C. C. A.) 15 F. (2d) 287; Harris v. Commissioner (C. C. A.) 39 F.(2d) 546.

Is the situation different by reason of the execution of the liquidating agreement of November 1, 1920? This agreement is referred to in the stipulation as "a...