Stilgenbaur v. United States, 9478.

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtDENMAN, MATHEWS, and STEPHENS, Circuit
Citation115 F.2d 283
PartiesSTILGENBAUR v. UNITED STATES (two cases). SAME v. ROGAN, Collector of Internal Revenue (two cases).
Docket NumberNo. 9478.,9478.
Decision Date08 November 1940

Thomas R. Dempsey, A. Calder Mackay, and H. B. Thompson, Jr., all of Los Angeles, Cal., for appellants.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Michael Gould, and George H. Zeutzius, Sp. Assts., Ben Harrison, U. S. Atty., E. H. Mitchell, Asst. U. S. Atty., and Eugene Harpole, Sp. Atty., Bureau of Internal Revenue, all of Los Angeles, Cal., for appellee.

Before DENMAN, MATHEWS, and STEPHENS, Circuit Judges.

DENMAN, Circuit Judge.

These appeals are from judgments of the district court denying appellants, plaintiffs below, income tax refunds of taxes claimed to have been erroneously assessed and collected as additional income taxes and interest for the tax year 1934.

The taxpayers, Roy R. Stilgenbaur and Grace Stilgenbaur, are now and at all pertinent times have been husband and wife and residents of the State of California. The separate returns of the husband and wife are due to the interest of each in the profits of the partnership under the California Community Property Law. Because of the facts and principles upon which these appeals are decided, the difference between the claims of husband and wife become immaterial.

On July 1, 1922, Roy G. Stilgenbaur, Harry B. Sears and Elmer M. Sears associated themselves together as general co-partners for the purpose of carrying on a general produce business under the firm name and style of Sears Brothers & Company. Stilgenbaur thereupon became and at all material times has been entitled to a one-third share of the profits and losses of the partnership. In 1922 and 1923 he contributed in all $2,000 to the partnership, which sum was returned to him before the end of the year 1923.

On December 31, 1934, Stilgenbaur's net share of the undivided profits of the partnership amounted to $282,890.94. The partnership was agreed to be dissolved on that day, the two remaining partners continuing the business. Stilgenbaur agreed with his two partners to retire on the conclusion of the partnership business on that day. For a money consideration and an agreement from the continuing partners to hold him harmless from the partnership debts, he transferred to them all his right, title and interest in and to the specific partnership property.1 He made no assignment of his interest in the partnership itself.

In this transfer it is admitted by the government that there was a loss of $67,485.94, constituting a separate property loss of Stilgenbaur to the extent of $50,803.36 and a community property loss to the extent of $16,682.58. The appellants based their claims for refund on the failure of the Commissioner to compute and assess these losses as deductions from ordinary income and his treatment of them as a loss through a sale of capital assets. The district court sustained the Commissioner's assessment, its judgments denied the refunds, and these appeals followed.

All the parties agree that the partnership was governed by the California law which contemplates that as a part of the dissolution of a partnership there may be a transfer of the interest of the partner in the specific property of the partnership to the continuing partners without a liquidation of the business. In this respect the Civil Code of California, § 2435(1) provides: "§ 2435. Liability of persons continuing the business in certain cases. (1) * * * when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs, creditors of the first or dissolved partnership are also creditors of the partnership so continuing in the business." (Italics supplied.)

Under the California law a partner has three distinct interests arising from his partnership. One is his co-ownership in the specific property of the partnership property, another is his interest in the partnership as such, and the third is his right to participate in the management. The Civil Code of California describes these three interests as: "§ 2418. Extent of property rights of a partner. The property rights of a partner are (1) his rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management."

The Civil Code of California provides that the partner's rights in the specific partnership property as distinguished from his interest in the partnership are:

"§ 2419. Nature of a partner's right in specific partnership property. (1) A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership.

"(2) The incidents of this tenancy are such that:

"(a) A partner, subject to the provisions of this chapter and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners.

"(b) A partner's right in specific partnership property is not assignable except in connection with the assignment of the rights of all the partners in the same property.

"(c) A partner's right in specific partnership property is not subject to attachment, or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws.

"(d) On the death of a partner his right in specific partnership property vests in the surviving partner or partners, except where the deceased was the last surviving partner, when his right in such property vests in his legal representative. Such surviving partner or partners, or the legal representative of the last surviving partner, has no right to possess the partnership property for any but a partnership purpose.

"(e) A partner's right in specific partnership property is not subject to dower, curtesy, or allowances to widows, heirs, or next of kin, and is not community property."

As distinguished from the co-ownership in the specific partnership real and personal property described above is the partner's interest in the partnership as such. The latter interest is personal property. The Civil Code of California, § 2420 provides: "§ 2420. Nature of partner's interest in the partnership. A partner's interest in the partnership is his share of the profits and surplus, and the same is personal property."

The California Code provisions embody the uniform partnership laws of the Commission on Uniform Laws and adopted by some 19 states, including New York. As stated in Judge Learned Hand's opinion in Helvering v. Smith, 2 Cir., 90 F.2d 590, 591, concerning a New York partnership, the Uniform Act does not create a new juristic entity but retained the "pluralistic notion of the firm" as the chancellors had worked it out from the common law, which recognized only joint owners and joint obligors.

With regard to the partner's co-ownership in the specific partnership property, the general provisions of § 2419 that it is not assignable must yield to the specific provision of § 2435, supra, providing for the assignment of the partner's co-ownership in the partnership property to the partners continuing the business.

In this case the specific partner's property consisted of cash, bonds, real estate, accounts receivable, merchandise and supplies and other assets. There were also...

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