Seatree v. Commissioner of Internal Revenue
| Decision Date | 27 January 1932 |
| Docket Number | 33640.,Docket No. 22094 |
| Citation | 25 BTA 396 |
| Parties | WILLIAM ERNEST SEATREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Board of Tax Appeals |
Edward B. Burling, Esq., and William Merrick Parker, Esq., for the petitioner.
John D. Foley, Esq., for the respondent.
In these proceedings, which were consolidated for hearing, petitioner contests deficiencies asserted by respondent as follows:
1922 _____________________________________ $10,956.99
1923 _____________________________________ 4,012.69
1924 _____________________________________ 5,111.88
Respondent having confessed error as to certain of the items included by him in his computation of petitioner's taxable income, there remains but one issue for our determination, namely, whether there should be included in petitioner's income amounts paid by the partnership of which he formerly was a member to a trustee under the terms of an assignment for the benefit of petitioner's daughters.
FINDINGS OF FACT.
Petitioner is a citizen of the United States, but since June 30, 1921, has resided abroad, and filed his Federal income-tax returns for the periods here involved in accordance with statute for such case provided. For many years prior to July 1, 1920, he was a member of a partnership engaged in the practice of accountancy on the Continent of North America and in the West Indies under the name of Price, Waterhouse & Company, hereinafter called the partnership. During the latter part of that period petitioner was entitled to 20 shares of the partnership profits.
On July 1, 1920, new articles of partnership were duly executed by petitioner and the eighteen other members of the firm, and thereafter petitioner was entitled to 16 shares of the partnership profits. Under these new articles of partnership, which are in evidence, six of the partners, including petitioner, had the right to retire from the firm on June 30 of any year upon giving the specified notice of such intention. In the event of such retirement, or upon the death of one of the partners so named, the retiring partner, or his estate, was to receive under section 1 of Article IV, of the articles of partnership, "the amount of his capital contributed to the partnership, and any unpaid interest thereon at the rate of seven per centum per annum to the date of his retirement, or death, and his share of the profits of the partnership * * *, after deducting the amount of any claims which the partnership may have against him or his estate," to the date of his retirement, or death.
In addition to these payments, it was provided (sec. 2, Art. IV) that these six partners should be entitled to the following:
* * * in each of the three years (commencing July 1) next immediately following his death or retirement, to receive from the partnership, in addition to the other amounts which shall be payable to him as in this Article provided. a portion of the profits of the partnership for each of such three years as if he were the owner of shares in the partnership, in addition to the shares of the continuing partners, as follows:
* * * * * * *
In the case of said Seatree, 4 shares
* * * * * * *
Such payments shall be made to such retiring partner, or to his legal representatives as the case may be, at the same time that profits for each of such three years, when determined, shall be paid to the continuing partners.
The payments provided by section 2 of Article IV of the partnership agreement were separate and distinct from the distributions to which the several partners were entitled while they remained members of the firm. While members, all the partners shared in the firm's earnings on the basis of the shares each held as set out in the agreement. These provisions for additional payments upon death or retirement applied to only six of the partners, including petitioner, and the payments were to be made without the rendition of further services by the retiring partner after his retirement, or by his representatives after his death. They were to be reduced by $3,000 per share unless the retiring partner gave a written undertaking to refrain for the next seven years from practicing his profession in the territory in which the firm operated. Section 4 of Article IV of the partnership agreement provided that the partnership should determine as to any partner attempting to sell, assign, transfer, or otherwise alienate his shares in the partnership, or any interest therein or part thereof.
In the spring of 1920 the petitioner was urged by the senior partner of the American firm of Price, Waterhouse & Company to accept a responsible position with the Continental firm of the same name located in Paris. As an inducement to him to give up his connection with the American firm and undertake this new position, the American firm agreed to take an active interest in the Continental firm, to insist on his being made senior partner thereof, with a share of the profits commensurate with his position, and to make the payments to which Seatree was entitled under section 2 of Article IV direct to a trustee for his two daughters. The petitioner retired from the partnership as of June 30, 1921, and became senior partner of the Continental firm.
The partnership during the years 1922, 1923, and 1924 kept its books of account and made its returns of income on the accrual basis of accounting and on the basis of a fiscal year ending June 30.
In the period between July 1, 1921, and April 30, 1923, the partnership paid to petitioner from time to time in accordance with the articles of partnership, the capital sum which on June 30, 1921, stood to the petitioner's credit under the capital and shares agreement of the partnership, together with interest thereon from that date to the dates of payment, and his share of the firm profits to the date of his retirement. The interest so paid amounted to $9,098.40 in the year 1922 and $3,360 in the year 1923. In including these items of interest in petitioner's income for the periods in which received respondent erroneously subjected one-half of the item of $9,098.40 to 1921 rates of surtax instead of 1922 rates, and has twice included the item of $3,360 in petitioner's income for 1923. These errors respondent now confesses.
On June 29, 1922, which was after his retirement, but before the payments were due under section 2 of Article IV of the articles of partnership, the petitioner executed a written instrument under seal, by which, "in consideration of the sum of one dollar, the receipt whereof is duly acknowledged, and other good and valuable considerations," he transferred and assigned to the Equitable Trust Company of New York in trust for his two minor daughters "all my right, title and interest in and to four undivided shares of the profits or income now due, or which may hereafter become due and payable to me for the three years ending June 30, 1924, under and by virtue of" the partnership agreement.
The instrument, which is in evidence, gave the trustee power to manage and invest the funds coming into its hands, subject to the advice and consent of George Oliver May, or his successor; to divide such funds into two separate trusts, one for each of petitioner's daughters, and to accumulate such funds during the minority of the beneficiaries, thereafter to distribute to them the income or interest arising therefrom, free from the control or intervention of husband or creditors. The beneficiaries were given the right to dispose of the corpus of their respective trust funds only by testamentary disposition. The grantor reserved the right to add to the principal of the trust funds; to direct the investments of the funds should he so desire, and to remove or change the trustee. No power to revoke the trust was reserved. Broad powers of management were granted the trustee and it was provided that upon the death of the grantor the powers reserved to him were to vest in May, or his successor. The sum of $1 recited as a consideration was not in fact paid by the Trust Company to the petitioner. The instrument was delivered to the Trust Company, which, under date of August 3, 1922, accepted the assignment upon its trusts and terms. The partnership was fully advised with respect to the matter, and gave its consent to the assignment.
The amounts equal to four shares of the profits of the firm payable under the provisions of section 2 of Article IV of the articles of partnership for the fiscal years ended June 30, 1922, 1923, and 1924, were respectively $22,378.30, $24,964.40, and $26,086.40. These amounts respondent has included in petitioner's income for said years, which action petitioner contends is erroneous. Payments on account of these amounts were made by the partnership to the Equitable Trust Company, as trustee, totaling, in 1922, $19,578.30, of which $17,978.30 was paid on July 25 and $1,600 was paid on October 24; in 1923, $26,474; in 1924, $27,200.
Respondent now confesses error in subjecting to 1921 rather than 1922 rates of surtax the sum of $11,189.15, being one-half of the amount payable in 1922 under section 2 of Article IV of the articles of partnership.
Petitioner contends that no part of the amounts paid or payable by the partnership to the Trust Company during these years is income to him.
It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property or property rights are assigned the income subsequently arising therefrom is not taxable to the assignor, for the reason that the property no longer belongs to him and therefore the income from such property belongs, not to him, but to the new owner. J. V. Leydig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494; Wallace Huntington et al., 15 B. T. A. 851; Marshall Field, 15 B. T. A. 718; Grace Scripps Clark, 16 B. T. A. 453; Arthur F. Hall, ...
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