Sugar v. State Through Collector of Revenue, 45921

• Decision Date: 04 June 1962
• Docket Number: No. 45921,45921
• Citation: 243 La. 217,142 So.2d 401
• Parties: L. L. SUGAR et ux. v. STATE of Louisiana, through the COLLECTOR OF REVENUE of the State of Louisiana.
• Court: Louisiana Supreme Court

Page 401

142 So.2d 401

243 La. 217

L. L. SUGAR et ux. v. STATE of Louisiana, through the COLLECTOR OF REVENUE of the State of Louisiana.

No. 45921.

Supreme Court of Louisiana.

June 4, 1962.

Rehearing Denied June 29, 1962.

John B. Smullin, Emmett E. Batson, Frederick S. Haygood, Levi A. Himes Chapman L. Sanford, Baton Rouge, Albert L. Dietz, Jr., Shreveport, and Albert S. Rose, New Orleans, for applicant.

Steven N. Cowel, Shreveport, for respondent.

HAMLIN, Justice.

In the exercise of our supervisory jurisdiction (Art. VII, Sec. 11, La.Const.1921, LSA), we granted certiorari in this tax matter to review a judgment of the Court of Appeal, Second Circuit, ¹ which affirmed a judgment of the trial court in favor of plaintiffs in the sum of $5,712.18, together with interest until paid. ²

Plaintiffs, L. L. and Charlotte W. Sugar, husband and wife, excluded from their 1955 Louisiana Income Tax Return, a certain item which they claimed was exempt from Louisiana Income Tax under LSA-R.S. 47:51. The correctness of their contention is the question posed for our determination.

For a proper understanding of this opinion, we reiterate the undisputed facts found by the Court of Appeal:

'In 1952 plaintiff taxpayer, L. L. Sugar, husband of Charlotte W. Sugar, became a member of a partnership for the operation of a general texicab business under the name of Yellow Cab Company of San Antonio; by instrument dated December 31, 1954, all members of the general partnership doing business as Yellow Cab Company of San Antonio, and United Cab Company, both being taxi cab operations in Bexar County, Texas, sold all of the physical assets then being used in said business operations; the distributive share realized by plaintiff was not reported by the taxpayers as taxable income to the State of Louisiana; ³ after audit of the taxpayers' state income tax return for the taxable year of 1955, the Department of Revenue of the State of Louisiana took the position that the exclusion of the sale of capital assets outside the State did not apply to the transaction in question; the resulting assessment of a tax deficiency was paid under protest and this suit was duly filed for refund thereof.' See, LSA-R.S. 47:1576.

The Court of Appeal, relying almost exclusively upon the case of Hatch's Estate v. Commissioner of Internal Revenue, 9 Cir., 198 F.2d 26, found that the transaction, supra, 'clearly constituted a sale of capital assets accruing to the individual partners, in accordance with which the taxpayer would be required only to make the same type of return as if the ownership of the property had been vested in him individually rather than in the partnership entity.' It construed the provisions of LSA-R.S. 47:51, ⁴ 'Gains from the sale or exchange of capital assets located outside the State of Louisiana shall not be included in gross income and shall be exempt from taxation under this Chapter,' in favor of plaintiffs and held that the case of Peters v. Cooper, La.App., 90 So.2d 892, was not apposite to the instant matter. (Emphasis ours.)

The Collector of Revenue contends that:--(1) the Court of Appeal erred in its interpretation of the decision in the case of Hatch's Estate v. Commissioner of Internal Revenue, 198 F.2d 26; (2) the Court should not have considered the Hatch case, supra, as being decisive of the issues in the present case though the decision is pertinent; (3) the Court erred in failing to recognize the opinion in Peters v. Cooper, supra, as being authority for the proposition that intangible property must have its situs outside the State of Louisiana for the exemption provided by LSA-R.S. 47:51 to apply; and (4) the Court failed to recognize the distinction between a sale by partners of their interest in a partnership and a sale by the partnership of its assets and, further, failed to recognize that the situs of intangibles is one of the principal points involved in the present case.

Plaintiff L. L. Sugar argues that the profit he received resulted from the sale of a capital asset, which had its situs outside the State of Louisiana and was therefore exempt from Louisiana income tax liability. He further urges that the judgment of the Court of Appeal be affirmed by this Court.

In determining whether plaintiff L. L. Sugar sold a capital asset or a partnership interest, we must first consider the nature and character of the contract of partnership.

In 1848, in the case of Smith v. McMicken, 3 La.Ann. 319, 322, this Court stated: '* * * The partnership once formed and put into action, becomes, in contemplation of law, a moral being, distinct from the persons who compose it. It is a civil person, which has its peculiar rights and attributes. Une personne fictive et morale se pare e des associe s. * * * therefore, the partners are not the owners of the partnership property. The ideal being thus recognized by a fiction of law, is the owner; it has a right to control and administer the property, to enable it to fulfil its legal duties and obligations; and the respective parties, who associated themselves for the purposes of participating in the profits which may accrue, are not the owners of the property itself, but of the residuum which may be left from the entire partnership property, after the obligations of the partnership are discharged.' In Toelke v. Toelke, 153 La. 697, 96 So. 536, we said that 'partnership property belongs to the partnership, and not to the partners, whose interest is only in the residue after liquidation.' The foregoing principles were reiterated, affirmed, and enlarged upon, in the case of Trappey v. Lumbermen's Mutual Casualty Co., 229 La. 632, 86 So.2d 515. In Quarles v. Albritton, La.App., 116 So.2d 175, it was said, 'The Courts of Louisiana have consistently, in many varied types of cases, held strongly to the civil law concept that a partnership is a separate legal entity entirely distinct from its individual members.' See, also, 40 Am.Jur., Sec. 114, p. 209, wherein it is stated: 'It is well settled that the joint effects of a partnership belong to the firm, and not to the partners, and that a partner has no individual property in any specific assets of the firm, and no right during the existence of the partnership to the exclusive possession or use of any of its property. Instead, the interest of each partner in the partnership property is his share in the surplus after the partnership debts are paid, and after the partnership accounts are settled and the rights of the partners inter se are adjusted. Nothing is to be considered as the share of a partner but his proportion of the residue or balance after an account has been taken of the debts and credits, including the amounts paid by the several partners in liquidating firm debts or in making advances to the partnership. This interest in the surplus alone is available for the satisfaction of the separate debts of the partner.'

An examination of the jurisprudence of Texas discloses that its appreciation of the nature and character of the contract of partnership is similar to that of Louisiana. In Miller v. Howell, 234 S.W.2d 925, 930, Court of Civil Appeals of Texas, the court stated: '* * * The joint effects of a partnership, including realty, belong to the firm, and not to the partners, and a partner has no individual property in any specific assets of the firm, and no right during the existence of the partnership to the exclusive possession of any of its property. The interest of each partner in the partnership property is his share in the surplus after the partnership debts are paid, and after partnership accounts are settled and the rights of the partners inter se are adjusted. * * *' In Egan v. American State Bank, Tex.Civ.App., 67 S.W.2d 1081, the court held that partnership assets belong to the partnership, the interest of each member of the partnership being limited to his share in the surplus after payment of partnership debts and adjustment of rights of partners per se. See, Megert v. Barnes, Tex.Civ.App., 259 S.W.2d 774; Littleton v. Littleton, Tex.Civ.App., 341 S.W.2d 484; Phillips v. C. Palomo & Sons, 5 Cir., 270 F.2d 791.

The Yellow Cab Company of San Antonio was properly formed and legally constituted; its Articles of Partnership set forth its purposes, its assets and its liabilities, and recite in Article 10(c) that, 'The purchase price of the partnership interests shall be the book value as disclosed by the books of the partnership every year as of December 31, and in the event of a sale, the partners hereby agree to sell their Interest at said value.' (Emphasis ours.)

We find from the law, jurisprudence, and Articles of Partnership of the Yellow Cab Company of San Antonio, that L. L. Sugar did not own any specific asset of the company; his interest was specifically a partnership interest.

The facts set forth in the case of Hatch's Estate v. Commissioner of Internal Revenue, 198 F.2d 26, supra, are almost identical to those of the instant matter; the liability to be determined, however, was federal tax liability, not situs nor state income tax liability. Therein the court said, 'the controversy here is reduced to a determination of whether what the taxpayers sold were the business assets, and as such the source of ordinary income, or their partnership interests, and as such the source of capital gains.' As a conclusion, the court stated: 'We conclude that what was sold here was each partner's partnership interest. See Thornley v. Commissioner, 3 Cir., 1944, 147 F.2d 416. The sale of a partnership interest constitutes a sale of a capital asset, and thus gives rise to a capital gain.'

L. L. Sugar testified that he paid to the federal government a capital gains tax on the transaction herein involved; the weight of federal authorities is to the effect that the sale of a partnership interest is the sale of a capital asset. This authority is codified in the Internal Revenue Code of 1954, Section 741. ⁵ In cases...