Guaranty Trust Co. v. Commissioner , 34 B.T.A. 384 ( 1936 )

GUARANTY TRUST COMPANY OF NEW YORK, EXECUTOR, ESTATE OF LAMAR L. FLEMING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Guaranty Trust Co. v. Commissioner

Docket No. 78362.

United States Board of Tax Appeals

34 B.T.A. 384; 1936 BTA LEXIS 707;

April 21, 1936, Promulgated

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1. Decedent, until his death on December 16, 1933, was a member of a New York partnership. Both decedent and the partnership were on the cash receipts and disbursements basis. Decedent reported his income on a calendar year basis and the partnership, on that of a fiscal year ending July 31, 1933. The partnership contract provided for only one accounting period, which was at the close of its fiscal year. Decedent died December 16, 1933. Under a provision of the partnership contract, the surviving partners continued the firm for the purposes of liquidation, which was completed during 1934. Held, only the distributive share of the profits of the partnership for its fiscal year ended July 31, 1933, is includable in decedent's taxable income for the period January 1 to December 16, 1933. Abe De Roy et al., Executors,19 B.T.A. 452">19 B.T.A. 452; R. W. Archbald, Jr., et al., Executors,4 B.T.A. 483">4 B.T.A. 483, followed.

2. Id. - Commissions earned by such partnership between the end of its fiscal year and decedent's death, but not collected by the partnership nor received by or available to decedent prior to his death, are not includable as income of decedent for the period prior to his death.

3. Id. - Interest on decedent's contributed partnership capital, as well as interest on his credit balance with the partnership for the period between the end of the partnership's fiscal year and his death, is merely partnership profits (Billwiller's Estate, 31 Fed.(2d) 286; certiorari denied, 279 U.S. 866">279 U.S. 866; John A. L. Blake,9 B.T.A. 651">9 B.T.A. 651), and, as such, is likewise here not taxable as income to decedent for the period prior to his death.

Weston Vernon, Jr., Esq., for the petitioner.

Harold Allen, Esq., for the respondent.

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LEECH

The petitioner, as executor of the estate of Lamar L. Fleming, deceased, seeks redetermination of a deficiency in income tax of $39,874.31 for the taxable period from January 1 to December 16, 1933. The petitioner alleges that the respondent erred in including in the decedent's income for that period, his distributive share of the profits of a partnership, of which he was a member, from July 31 to December 16, 1933, when he died. He makes the same contention as to certain commissions earned by the partnership, and certain interest due decedent from the partnership. The facts have been stipulated and from them we make the following findings of fact.

FINDINGS OF FACT.

The decedent, Lamar L. Fleming, died December 16, 1933. For a number of years prior to his death he was a member of the partnership of Anderson, Clayton & Fleming, engaged in the cotton business, with its principal place of business in New York City and branches in other cities of the United States and Europe.

The business of the partnership was operated on the cash receipts and disbursements basis with a fiscal year ending July 31 of each year. The decedent likewise kept his accounts on the cash receipts and disbursements basis, but kept his accounts and made his tax returns on a calendar year basis.

On August 1, 1933, a new partner was admitted to the firm and a new partnership agreement was made, which was identical with the previous one, except as to the division of the profits. This new agreement provided that its fiscal year should begin August 1, 1933, and end July 31, 1934.

In accordance with the contract of partnership an account was taken at the end of the fiscal year July 31, 1933, and decedent was notified of his share of the profits for the preceding 12 months. A large portion of his share was allowed to remain to his credit with the partnership. No part of the earnings of the partnership for the period between the end of the fiscal year July 31, 1933, and his death was paid to or received by the decedent. The partnership agreements provided for but one yearly accounting and settlement, which was at the end of the fiscal year.

After the death of Lamar L. Fleming the business of the partnership was continued by the surviving partners under the same name. In May 1934, they entered into a new contract of partnership taking over the business as of December 18, 1933, and providing for a fiscal year ending July 31, 1934, and from year to year thereafter.

Shortly after the death of decedent an account was taken covering the period from August 1 to December 16, 1933, and on or about January 9, 1934, decedent's executors received in partial distribution and liquidation of the partnership $298,730.19, which consisted of the $100,000 capital invested by the decedent, the credit balance on deposit due decedent of $162,795.67, and decedent's share of the profits of the partnership between the end of its fiscal year July 31, 1933, and decedent's death, December 16, 1933, in the sum of $35,150.88, and interest of $783.64.

In February 1934, decedent's executors received a final distribution of $15,067.39 and interest of $82.56. This latter sum included $13,894.74 as decedent's share of commissions earned by the partnership between the end of its fiscal year and the death of decedent, but not collected until 1934 in accordance with a trade custom.

Decedent's executors duly filed his income tax return for the period January 1 to December 16, 1933, date of his death, and included therein his distributive share of the profits of the partnership for the fiscal year ending July 31, 1933, but did not include therein his share of the profits of the partnership earned between July 31, 1933, the end of its fiscal year and the date of his death, December 16, 1933. Likewise the decedent's share of the open commissions earned during that period and interest on his capital investment and credit balance with the partnership were omitted.

In determining the deficiency the respondent included in decedent's income the sum of $63,494.46 representing partnership profits for the period between July 31 and December 16, 1933, and $5,559.19 unreported interest. The item of $63,494.46 included the cash earnings of the partnership during the period and also the uncollected commissions earned during that period in the sum of $13,894.74. The unreported interest of $5,559.19 consisted of $3,209.19 interest on decedent's credit balance for that period, $2,300 interest on his capital investment, and $50 from some other source.

The executors of the estate of the decedent duly filed an estate tax return, which included decedent's credit balance with the partnership, his capital interest therein and his share of the profits earned during the period August 1 to December 16, 1933, and paid the estate tax thereon.

On February 28, 1934, the survivors of the partnership filed a return for it in liquidation for the fiscal year beginning August 1, 1933, and ended December 16, 1933, and on October 28, 1934, they filed a return for the fiscal year December 17, 1933, to July 31, 1934. Both of these were made without permission or direction of the respondent.

On or about March 5, 1935, the executors of the estate of the decedent waived the restrictions upon the assessment of $37,917.39, out of a total deficiency in tax determined by the Commissioner in his letter of October 25, 1934, amounting to $39,874.31. Such waiver was made after the petition to the Board of Tax Appeals had been filed herein, and was made without prejudice to the right of the executors to prosecute the pending appeal and to recover any amount refundable under the final decision of the Board herein. Following the waiver of the restrictions upon the assessment of $37,917.39, the Commissioner assessed such amount against the executors of the decedent, together with interest thereon in the amount of $2,318.67, making a total of $40,236.06. The Commissioner applied as a credit against such taxes and interest the amount of an overassessment in the decedent's income tax for the calendar year 1932, amounting to $1,956.92, together with interest thereon amounting to $149.02, and issued a notice and demand upon the decedent's estate for a total of $38,130.12, consisting of $35,811.45 in tax and interest of $2,318.67, which was paid by the decedent's executors on April 15, 1935.

OPINION.

LEECH: The dominant issue is whether decedent's return for the period from January 1 to December 16, 1933, the date of his death, should include decedent's share of the partnership profits for the interval between July 31, 1933, the end of the partnership's fiscal year, and December 16, 1933, when decedent died. Both decedent and the partnership were on a cash receipts and disbursements basis.

The Revenue Act of 1932 is controlling. Section 182(a) provides:

SEC. 182. TAX OF PARTNERS.

(a) GENERAL RULE. - There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. If the taxable year of a partner is different from that of the partnership, the amount so included shall be based upon the income of the partnership, for any taxable year of the partnership ending within his taxable year.

The "taxable year" of the partnership differed here from the "taxable year" of the decedent, since such year of the partnership was its fiscal year ended July 31, 1933, and that of the decedent was the calendar year. Sec. 48(a). ¹ Thus the determination of decedent's taxable income for the period from January 1 to December 16, 1933, when he died, "shall be based upon the income of the partnership for any taxable year of the partnership ending within his taxable year." Sec. 182(a), supra. A taxable year of the partnership ended on July 31, 1933. No other such year ended before decedent's death, unless decedent's death, ipso facto, terminated a second "taxable year" of the partnership.

The partnership contract provided for only one accounting period, which was at the close of the fiscal year. A provision for any other termination of the taxable year, except by mutual agreement, was not included in the contract. Article nine of the agreement reads in part as follows:

In the event of any dissolution of the co-partnership under any provision of this agreement or in any manner or for any cause whatsoever, the assets thereof shall be applied first, to the payment of the debts thereof; second, to the return of the capital invested therein by any partner hereto; and third, to the distribution of the profits or surplus in accordance with the provisions hereinabove set forth for the distribution of net gains and profits.

The surviving partners, after decedent's death, carried on the partnership for the purpose of its liquidation, which was not completed until 1934. None of the proceeds of that liquidation were received by or available to decedent, and were not available to or received by petitioner, his representative, until 1934.

This partnership was a New York firm. Under the law of that state, not only the addition of a partner does not effect the dissolution of a partnership, (Helvering v. Archbald, 70 Fed.(2d) 720), but the death of the decedent partner, though it may cause dissolution, certainly does not terminate the "taxable year" of the partnership where, as here, the surviving partners continue it for purposes of liquidation. Partnership Law of New York, secs. 60, 61, and 62. ²

As this Board held in Abe De Roy et al., Executors,19 B.T.A. 452">19 B.T.A. 452, upon identical facts arising under section 218(a) of the Revenue Act of 1924, which is substantially the same as section 182(a) of the Revenue Act of 1932, supra, here applicable:

* * * The death of the partner did not terminate or shorten the accounting period of the partnership and there was only one accounting period of the partnership ending in the decedent's taxable year before us. * * * See R. W. Archbald, Jr., et al., Executors,4 B.T.A. 483">4 B.T.A. 483, where we said:

"It seems clear to us that the death of a partner does not shorten the partnership's fiscal or calendar year to an accounting period terminating at the death of the partner and that only a complete liquidation during the calendar or fiscal year terminates the accounting period. This partnership has but one accounting period ending in 1920. The statutory net income of the partnership could not in this instance be computed before the close of its fiscal year. This being our view, we must hold that there should be included in the deceased's return of income for 1920 only his distributive share of the partnership net income for its fiscal year ending January 31, 1920."

To sustain respondent and include in decedent's taxable income, for the period prior to his death, the partnership income earned between July 31, 1933, the end of the partnership's fiscal year, and December 16, 1933, the date of decedent's death, would require our violation of the basic tenet of income tax law that such tax is assessed on the basis of a period of 12 months. See Helvering v. Morgan's, Inc.,293 U.S. 121">293 U.S. 121; General Machinery Corporation,33 B.T.A. 1215">33 B.T.A. 1215. The Revenue Act of 1932, section 47, specifically provides for "Returns for a period of less than twelve months." See also section 48(a), supra.The statute does not include a provision permitting returns for a period of more than twelve months. This Board refused to increase such period in the De Roy case, supra, and in R. W. Archbald, Jr., et al., Executors,4 B.T.A. 483">4 B.T.A. 483. Both of those cases are directly in point. The De Roy case involved facts identical with those here, and it was decided after the appeal of Maurice L. Goldman et al., Executors,15 B.T.A. 1341">15 B.T.A. 1341, which qualified the rule adopted in the Archbald case. See United States v. Wood, 79 Fed.(2d) 286; G.C.M. 2308, vol. VI-2 C.B. 229, 1927. Respondent cites Maurice L. Goldman et al., Executors, supra;Clarence B. Davison, Executor,20 B.T.A. 856">20 B.T.A. 856; affd., 54 Fed.(2d) 1077; J. L. Hall et al., Executors,25 B.T.A. 1">25 B.T.A. 1; Beverly W. Smith, Administrator,26 B.T.A. 778">26 B.T.A. 778; affd., 67 Fed.(2d) 167; First Trust Co. of Omaha v. United States,1 Fed.Supp. 900; Peoples-Pittsburgh Trust Co. v. United States,10 Fed.Supp. 139. None of these cases, nor any other to which our attention has been directed, disturbs the rule followed in the Archbald, and De Roy cases in its application to the facts presented here.

The argument that the disputed income thus escapes income tax should be addressed to Congress, not to this Board. See Commissioner v. City Bank Farmers Trust Co.,296 U.S. 85">296 U.S. 85; Sawtell v. Commissioner, 82 Fed.(2d) 221.

Respondent's contention, that the returns filed by the surviving partners estop petitioner from taking his present position, is untenable. Those returns were filed without the consent of the Commissioner. In our view of the law just stated, which, of course, the surviving partners could not alter, these returns were neither authorized nor required. Revenue Act of 1932, sec. 189; ³ Regulations 77, art. 941. ⁴ But, aside from other frailties, the argument falls because it is not established that respondent relied upon any act of the decedent or petitioner to respondent's detriment. When petitioner took the position upon which he now stands, on instituting these proceedings, respondent could have then availed himself of any steps possible to him which were so prior to the filing of these returns. No statute of limitations prevented such steps. Revenue Act of 1932, sec. 275(a). ⁵ The absence of that detriment here, alone, defeats the plea of estoppel. Helvering v. Brooklyn City R. Co., 75 Fed.(2d) 274. The petitioner is sustained on the first and controlling issue.

The second issue relates to the propriety of respondent's action in including in decedent's prior-to-death return the open or uncollected commissions on sales by the partnership which were earned subsequent to the end of the partnership's fiscal year, and not collected until 1934, after the death of the decedent. Since the partnership was on a cash basis and the practice of the trade, in which the partnership was engaged, was that such commissions were not payable to the firm until 1924, after delivery in the execution of the sale, it is at least doubtful whether these commissions could be held to have been constructively received, even by the partnership before that year. Revenue Act of 1932, sec. 42. ⁶Avery v. Commissioner,291 U.S. 657">291 U.S. 657. In any event, these commissions, even if constructively received by the partnership between July 31, 1933, and decedent's death, were earnings of the partnership. Thus, respondent's inclusion of them in decedent's income for the questioned period is precluded by the same rule applied above. R. W. Archbald, Jr., et al., Executors, supra;Abe De Roy et al., Executors, supra.The suggestion of respondent, that this item was not mentioned in the pleadings and therefore should not be considered now, is without merit. These commissions were merely a part of the partnership profits for the disputed period, all of which are in controversy. They were included in the stipulated facts upon which the case was submitted for determination.

Respondent refers to section 42 of the Revenue Act of 1934 ⁷ as a "clarification of existing law." We disagree with that construction. That provision, in our judgment, changed the law. Nichols v. United States,64 Ct.Cls. 241; Report of the Ways and Means Committee, p. 24, H.R. No. 704, 73d Cong., 2d sess. Neither the provision itself, nor the cited report, indicates its operation was intended to be retroactive. Thus it can not be so construed. Shwab v. Doyle,258 U.S. 529">258 U.S. 529. Cf. Goldfield Consolidated Mines Co. v. Scott,247 U.S. 126">247 U.S. 126.

The third issue involves the correctness of respondent's inclusion of two items of interest in decedent's taxable income for the period immediately prior to his death. These items consist of interest in the amount of $2,300 on his capital investment in the firm, and interest in the amount of $3,209.19 on the credit balance which decedent had left with the partnership.

The fourth article of the contract of the partnership is that:

All capital shall bear interest at the rate of six percent (6%) per annum, or at such other rate as mutually may be agreed upon between the partners, which interest shall be credited or paid at the end of each fiscal year during the continuance of the co-partnership and shall be charged to the expenses of the business.

But despite this proviso concerning the first item, we think both items, denominated interest, were merely partnership profits and taxable to decedent just as any other such profits. Billwiller's Estate v. Commissioner, 31 Fed.(2d) 286; certiorari denied, 279 U.S. 866">279 U.S. 866; John A. L. Blake,9 B.T.A. 651">9 B.T.A. 651. These items were, therefore, also improperly included by respondent in decedent's taxable income here. R. W. Archbald, Jr., et al., Executors, supra;Abe De Roy et al., Executors, supra.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 48. DEFINITIONS.

  When used in this title -

  (a) TAXABLE YEAR. - "Taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Part. "Taxable year" includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made. The first taxable year, to be called the taxable year 1932, shall be the calendar year 1932 or any fiscal year ending during the calendar year 1932. ↩

• 2. § 60. Dissolution defined. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.

  § 61. Partnership not terminated by dissolution. On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.

  § 62. Dissolution is caused:

  * * *

  (4) By the death of any partner; ↩

• 3. SEC. 189. PARTNERSHIP RETURNS.

  Every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this title, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the distributive share of each individual. The return shall be sworn to by any one of the partners. ↩

• 4. ART. 941. Partnership returns.↩ - Every partnership must make a return of income, regardless of the amount of its net income. The return shall be on Form 1065 and shall be sworn to by one of the partners. Such return shall be made for the taxable year of the partnership, that is, for its annual accounting period (fiscal year or calendar year, as the case may be), irrespective of the taxable years of the partners. (See sections 182 and 183 and articles 901-903.) If the partnership makes any change in its accounting period, it shall make its return in accordance with the provisions of section 47 and article 371. (See also article 744.)

• 5. SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.

  Except as provided in section 276 -

  (a) GENERAL RULE. - The amount of income taxes imposed by this title shall be assessed within two years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. ↩

• 6. SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.

  The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. ↩

• 7. SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.

  The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. ↩