Waddell v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 13 March 1939
• Docket Number: No. 8895.,8895.
• Citation: 102 F.2d 503
• Parties: WADDELL et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

102 F.2d 503 (1939)

WADDELL et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 8895.

Circuit Court of Appeals, Fifth Circuit.

March 13, 1939.

Geo. S. Atkinson, of Dallas, Tex., for petitioners.

Mills Kitchin, Sewall Key, and Lee Jackson, Sp. Assts. to Atty. Gen., Jas. W. Morris, Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Frank M. Thompson, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before FOSTER, HUTCHESON, and McCORD, Circuit Judges.

HUTCHESON, Circuit Judge.

On the assumption that certain instalment obligations, resulting from the sale of mineral interests, were partnership properties, the Board¹ found that by the death of W. N. Waddell, one of the partners, the obligations, at least as to his interest in them, were, within Sec. 44(d) Revenue Act of 1932,² distributed, transmitted or otherwise disposed of, with a resulting taxable gain for that year of the unpaid instalments.

Petitioners are here vigorously controverting this conclusion. They urge upon us that the obligations as to which the tax was imposed, were not owned by W. N. Waddell individually, but by the partnership, and therefore were not and could not have been transmitted by his death. They point out that particular properties of a firm are owned, not by the partners in individual moieties, but by the partnership, the interest of the members being merely a chose in action, an interest in the firm's net worth, with no right in or to individual properties, except after dissolution, and in liquidation after the business of the firm is wound up and all debts paid. Martin v. Dial, Tex.Com.App., 57 S.W.2d 75, 89 A.L.R. 571; 32 Texas Jurisprudence, 487-505; Altgelt v. Alamo National Bank, 98 Tex. 252, 83 S.W. 6; Ramon v. Ramon, Tex.Civ.App., 10 S.W.2d 584; Diamond v. Gust, Tex.Civ.App., 206 S.W. 366; Moore v. Steele, 67 Tex. 435, 3 S.W. 448; Oliphant v. Markham, 79 Tex. 543, 15 S.W. 569, 23 Am.St.Rep. 363. They insist, therefore, that Waddell's death had no effect to transmit, distribute, or otherwise dispose of the instalment obligations, or any other firm property as such. It had only the effect of bringing the activities of the firm to an end, with no other consequences than those incident to partnerships thus terminated, dissolution, liquidation, ascertainment and distribution of net worth. They as vigorously deny to the formation of the new partnership, with the estate of Waddell as partner, the imputed effect of a distribution of the instalment obligations, so as to make them taxable to Waddell. Urging upon us that an estate in Texas is without capacity to assume partnership relations, 32 Texas Jurisprudence 531; Alexander's Executors v. Lewis, 47 Tex. 481; Lowenstein v. Keller, Tex.Civ.App., 46 S.W. 878, they insist that no new partnership was or could be formed. But they urge further that if the formation of a new partnership was possible, it did not occur here, for here there was no real distribution, or attempted distribution, of the instalment obligations, or of any particular property as such. There were merely formal entries on the books, crediting to the estate of Waddell the interest in the partnership which stood in Waddell's name at his death; an interest which, not an interest in Waddell in particular property, was not made such an interest merely by recognizing his estate as partner in his place, and therefore now the owner of his interest.

In addition, they insist that if making the estate a partner had any effect, it was not to accrue income to Waddell, because occurring after his death if any income was realized by it, which is denied, it was income not to Waddell, but to his estate. They therefore insist that neither Waddell's death nor the formation of the new partnership, nor both together, had or could have the effect imputed by the Commissioner and the Board of accruing instalment obligations, under Sec. 44(d) Revenue Act of 1932, and making them taxable in the year of his death.

Here the Commissioner, conceding all that is claimed by petitioners as to the general nature of partnerships, and the interest of each partner in them, insists that these matters are without bearing on or significance in, the determination of the issue presented here. That issue is whether a member of a partnership which has made a sale on the instalment basis, can both have his cake and eat it too; can take the benefits of Sec. 44 by reporting on the instalment basis, Roy v. Com'r, 5 Cir., 69 F.2d 786, while remaining free of the burdens of the section, that gains shall result in case of a distribution, transmission, or disposition otherwise than by sale or exchange.

To petitioners' insistence that the Commissioner's position begs the question, for the instalment obligations were not by Waddell's death either distributed, transmitted or otherwise disposed of, but his death only transmitted his interest in the net worth of the firm, the Commissioner replies, not so. The death of Waddell effected a dissolution of the firm, and within Sec. 44(d) an immediate transmission to his estate of a two-thirds interest in all of the property of the partnership including the instalment obligations.

In addition to their reliance upon the general principles, of partnership, petitioners cite Ferguson v. Com'r, 34 B.T.A. 522, and Detroit Trust Co. v. Com'r, 34 B.T.A. 586, holding in the one case, that the transfer, in the other, that the transmission, by death, of beneficial interests in a trust, the corpus of which consisted of instalment obligations, was not a transmission or disposition of instalment obligations within the meaning of the Section. The Commissioner, on his part, relies on the general principle that the death of a partner dissolves the partnership, and vests in his estate, and in each surviving partner, an immediate interest in the properties of the firm, subject only to liquidation. Carroll v. Com'r, 5 Cir., 70 F.2d 806. Pointing out the clear and consistent recognition throughout the taxing laws of the difference between a trust and a partnership that a trust is a taxpayer, separate and apart from its beneficiaries, and a partnership is not; that the profits of a trust are not taxable to its beneficiaries, unless...