Ward v. Comm'r of Internal Revenue, Docket Nos. 31416

Citation20 T.C. 332
Decision Date14 May 1953
Docket NumberDocket Nos. 31416,31417.
CourtUnited States Tax Court


1. During the taxable year petitioners sold their interest in a partnership through a receiver for cash. The entire sale price was paid by the buyers with no strings attached, but receipt by petitioners of $17,000 of the sale proceeds from the receiver was deferred until subsequent taxable year because of an attachment unrelated to the sale. Petitioners were on the cash basis. Held, even though receipt of a portion of sale proceeds is deferred to a subsequent taxable year by reason of an attachment by a creditor of the seller, the gain is ‘realized‘ in the taxable year within the meaning of section 111 of the Code.

2. Petitioners' attorney rendered services to petitioners in connection with the partnership receivership and business matters related thereto and also in connection with the receivership sale. Held, $6,000 of the $10,000 fee is deductible under section 23(a)(1)(A) of the Code and $4,000 of the fee is allocable to the sale and is to be used as an offset against the selling price.

3. Petitioners engaged the services of a broker and appraiser to assist in the sale of partnership assets and after the receivership sale paid him a fee of $5,000 for his services. Held, though the fee paid was not a selling commission, the services rendered were so tied up with the sale that the fee paid is by its nature a selling expense and must be used as an offset against the selling price.

4. Petitioner paid in excess of $1,000 in the taxable year for the care of his secretary who was seriously ill, an employee of the partnership business who had left the business with the petitioner. Held, this expense is deductible under section 23(a)(1)(A), Internal Revenue Code, as an ordinary and necessary business expense.

5. Petitioner expended $2,075 in research, engineering plans, and travel preliminary to the organization of a corporation. The corporation was organized and commenced manufacturing concrete blocks. Held, petitioner is not entitled to a deduction under section 23(a)(1)(A) or (a)(2), Internal Revenue Code, for the expenditure because the expenditure was made on behalf of the corporation. Adam Y. Bennion, Esq., for the petitioner.

Donald P. Chehock, Esq., for the respondent.

Respondent determined deficiencies in petitioners' income tax for the taxable year 1946 as follows:

                ¦Docket No.  ¦Name          ¦Deficiency  ¦
                ¦31416       ¦Dwight A. Ward¦$11,221.46  ¦
                ¦31417       ¦Hanna P. Ward ¦1,965.95    ¦

Certain of the adjustments made in the deficiency notice were not contested and, therefore, are not issues here. Several of the deficiency notice adjustments were put in issue by the petitioners; however, all but five have been settled by stipulation. As set forth in petitioners' assignments of error, as amended, these five issues are:

1. The Commissioner erred in determining that $17,069.63 (sic) representing profit derived from the sale of petitioner's interest in Ward Refrigerator & Mfg. Co. (a partnership) was constructively received in the taxable year.

2. The Commissioner erred in including $10,000 of legal fees as an expense in the sale of the partnership assets of Ward Refrigerator & Mfg. Co., and in disallowing said fees as ordinary and necessary business expenses and/or expenses incurred for the production of income or for the management, conservation, or maintenance of property held for the production of income, and/or as losses incurred in an unsuccessful effort to purchase assets.

3. The Commissioner erred in including $5,000.00 counselor fees as an expense of the sale of said partnership assets and in disallowing said fees as ordinary and necessary business expenses of petitioner and his wife.

4. The Commissioner erred in disallowing (as an ordinary and necessary business expense) a deduction of $1,085.41, representing sums paid to or for the benefit of a former employee of the Ward Refrigerator & Mfg. Co.

5. The Commissioner erred in disallowing as ordinary and necessary business and/or nonbusiness expense deductions, expenditures for so-called research, engineering plans and travel in the amount of $2,075.00.

These issues are common to both proceedings.


The proceedings have been consolidated.

Certain of the facts have been stipulated and are so found and the stipulation of facts is incorporated herein by this reference.

Petitioners are husband and wife. Hereinafter, for convenience when we refer to the petitioner we mean the petitioner Dwight A. Ward. For the taxable year petitioners, residents of California, filed separate income tax returns with the collector for the sixth district of California. Petitioners' returns were filed on a cash basis.

For many years prior to November 1, 1945, petitioner was an equal partner with his two brothers (Harry Ward and D. T. Ward) in a partnership which conducted a business of manufacturing and selling refrigerators under the firm name of Ward Refrigerator & Mfg. Co. Prior to November 1, 1945, a dispute arose between the petitioner and his two partners as to the management of the partnership business. On November 1, 1945, petitioner's brothers filed a petition in the Superior Court of the State of California, Los Angeles County, for a dissolution of the partnership and appointment of a receiver. On the same day the court appointed R. E. Allen receiver and ordered him to operate the business and, upon proper application to the court, to sell it. The business was eventually sold by the court at a public sale to petitioner's two brothers for the bid price of $820,000. An order confirming the sale was signed by the court on February 14, 1946.

The cost basis of petitioner's one-third interest in the partnership on the date of sale was $140,756.64. Petitioner's one-third share of the net proceeds of sale was $211,111.26, without taking into account the effect thereon, if any, of the suit and attachment proceedings referred to hereinafter. Petitioner received the proceeds from the sale on the following dates and in the following amounts:

                ¦(1) Feb. 5 to Apr. 3, 1946¦$2,800.00  ¦
                ¦(2) Mar. 12, 1946         ¦14,500.00  ¦
                ¦(3) Apr. 22, 1946         ¦173,000.00 ¦
                ¦(4) Apr. 25, 1946         ¦2,785.17   ¦
                ¦(5) May 14, 1946          ¦956.46     ¦
                ¦(6) Jan. 2, 1947          ¦2,073.34   ¦
                ¦(7) Jan. 2, 1947          ¦14,926.66  ¦
                ¦(8) Paid sometime in 1947 ¦69.63      ¦
                ¦Total                     ¦$211,111.26¦

Facts Relating to Issue 1.

The above dates represent the dates upon which petitioner actually received the payments from R. E. Allen, the partnership receiver. The sale itself was was confirmed on February 14, 1946, and the purchase price for petitioner's partnership interest was paid to the receiver in cash on or before May 14, 1946.

The payment of $17,000 (see items (6) and (7) appearing in the above schedule of payments) was delayed because of an attachment served against Allen, the receiver. The attachment made on or about April 19, 1946, arose in connection with a suit filed by Walter Webb against the petitioner. In this suit Webb alleged that petitioner was indebted to him in the amount of $17,000 for personal services rendered. Such services were rendered during the 2 years prior to April 1946. Immediately following the attachment the receiver drew a check for $17,000 to himself as trustee upon the receivership funds. The check was deposited in a separate bank account as a special trust account pending the outcome of the litigation of Webb vs. Ward. Appropriate entries were made on the receiver's books to reflect a segregation of the $17,000. The receivership fee earned by R. E. Allen was paid to him on April 5, 1946. Though he had carried out substantially all his duties by April 1946, R. E. Allen was not discharged as receiver until March 21, 1947.

Petitioners excluded $17,069.63 from the reported selling price of their partnership interest, but used the total cost basis thereof as an offset in computing the amount of taxable gain reported on their returns. After a trial of the issues in Webb vs. Ward, a ‘Notice of Decision‘ of the court awarded the plaintiff Webb $11,000 for personal services performed for petitioner. The ‘Notice of Decision‘ allowed an offset of only $8,280 as the portion already paid to Webb by Ward. Both sides were dissatisfied with the decision. The attorney for Webb, on December 31, 1946, petitioned the court to reopen the case, but the court declined to disturb its prior ruling. However, the court, pursuant to stipulation that Ward had made payments to Webb totaling $8,926.66, reduced the award to plaintiff Webb from $2,720 to $2,073.34 on account of the additional payments. After a court hearing held on December 31, 1946, the attorneys for the parties conferred regarding possible settlement of the case without further litigation. On this date both attorneys agreed to recommend to their respective clients a settlement, followed by immediate payment, on the basis of a judgment of $2,073.34. Documents reflecting the settlement were prepared on December 31, 1946, but they were not signed on that day. On January 2, 1947, petitioner's attorney contacted petitioner and after some persuasion...

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