Burns v. Commissioner , 13 B.T.A. 579 ( 1928 )

SAMUEL BURNS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Burns v. Commissioner

Docket No. 8673.

United States Board of Tax Appeals

13 B.T.A. 579; 1928 BTA LEXIS 3228;

September 26, 1928, Promulgated

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">*3228 Under the terms of a partnership agreement, the petitioner loaned certain percentages of his net distributive earnings to the partnership. By endorsement and for value, he transferred the evidences of such loans to his wife. Thereafter the partnership paid the interest on such loans directly to the wife of the petitioner. Held, that such interest payments were not income to the petitioner in the taxable year.

Edgar M. Morsman, Jr., Esq., for the petitioner.

Benton Baker, Esq., for the respondent.

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LANSDON

">*579 The respondent has asserted deficiencies in income taxes for the years 1920 and 1921 in the respective amounts of $642.38 and $320.67. The only issue is whether interest payments on certain notes given to the petitioner as evidences of money advanced by him to a partnership of which he was a member were income to the petitioner or to his wife, to whom such notes were transferred by endorsement and delivery.

">*580 FINDINGS OF FACT.

Petitioner is an individual and is a resident of Omaha, Nebr. In the taxable years he was a member of the partnership of Burns, Brinker & Co., a firm engaged in the investment and brokerage">*3229 business in Omaha.

, he partnership agreement of Burns, Brinker & Co. contained the following provision:

Article 8. The partners hereby agree that of their earnings they will loan to the copartnership the following per cent of their undivided earnings or profits:

(a) When the earnings of the business are between $15,000 and $30,000, as follows:

S. L. Burns, 20 per cent; L. Brinker, 10 per cent; A. C. Potter, 5 per cent;

(b) When the net earnings of the business are $30,000 and over the following per cent of the partners undivided earnings and profits must be loaned to the copartnership, as follows:

S. Burns, 30 per cent; L. Brinker, 15 per cent; A. C. Potter, 12 per cent.

This rule shall be in effect until there shall be loaned to the company by S. Burns, $50,000; L. Brinker, $30,000; A. C. Potter, $20,000.

It is further agreed that these notes will be due and payable only on dissolution of the copartnership and after all indebtedness of the partnership has been paid, or upon unanimous consent of the partners.

Said partners notes to draw eight per cent interest, payable semi-annually.

In case of agreed withdrawal of a partner, the note will be due">*3230 and payable after six months, provided, however the copartnership is solvent.

In conformity with the provision set forth above the petitioner loaned the partnership the amounts of $9,000 on December 31, 1919, $3,000 on January 13, 1920, $3,500 on January 31, 1921, and $8,000 in April, 1921. Such loans were evidenced by receipts given to Burns which in form were substantially identical with the following:

OMAHA, Jan. 2, 1920.

BURNS, BRINKER & CO.

Omaha, Nebr.

Received of Samuel Burns: Twelve Thousand ($12,000.00) Dollars to draw interest at 8% per annum, payable quarterly, not subject to withdrawal, except as provided under the terms of partnership agreement.

BURNS, BRINKER & CO.

By E. M. OLSEN.

Non-Negotiable Receipt.

* * *

[Endorsed as follows:]

For value received assigned to Marguerite P. Burns.

SAMUEL BURNS.

">*581 The receipts received by Burns as evidence of money advanced to the partnership in conformity with article 8 of the partnership agreement were immediately endorsed by him in the form set forth above and placed in an envelope marked with the name of the wife, and deposited and kept in a safety deposit box to which both Burns">*3231 and his wife had access.

During the years 1920 and 1921 interest payment were made by the partnership on account of the money advanced by Burns in the amounts of $1,138.69 and $1,694.78, and all such payments were made directly to Mrs. Burns either through credits on her account with the partnership or by the checks of the partnership.

In his income-tax returns for the taxable years Burns did not include in his gross income the amounts of interest paid by the partnership on account of the receipts or notes evidencing his advances. Upon audit of such returns the Commissioner added the amounts of $1,138.69 and $1,694.78 to the gross income reported by Burns for the respective years and determined the deficiencies here in controversy.

Marguerite P. Burns, the wife of the petitioner, was possessed of substantial individual property, much of which was borrowed by the petitioner and used by him in his business operations. In the taxable years petitioner's debt to his wife was approximately $60,000.

OPINION.

LANSDON: In this controversy the respondent contends that interest on the notes in question was income to the petitioner and that the payment of such interest to the">*3232 wife, Marguerite. P. Burns, was no more than periodically recurring gifts of income by the recipient thereof. He bases this conclusion on two alternative contentions: (1) That by the terms of the partnership agreement no partner could dispose of any part of his interest in the partnership without the consent of the remaining partners and upon the fact that the receipt evidencing the amounts left in the business of the partnership expressly states that it is a nonnegotiable receipt, and (2) that the principal amounts left in the business by the petitioner were in fact additional contributions of capital.

In support of his position the respondent cites not only that part of the partnership agreement which provides that certain percentages of the distributive net earnings shall be loaned to the firm by the distributees, but also article 13 of the agreement, which is as follows:

During the existence of the copartnership, no partner shall in any wise or to any extent assign, transfer or encumber any of his interest whatever in the copartnership or in the copartnership property, without the consent in writing ">*582 of the other partners, and no person or concern whatever can">*3233 acquire any rights in or any lien upon any interest without such consent.

It is obvious that if the principal amounts in question were loans to the partnership, article 13 of the agreement has no bearing on the issue here, since the evidences of loans made to the partnership are not interests therein, but are obligations or liabilities thereof and the property of the partners to whom they are given. We think it is also equally clear that the statement thereon that the evidence of the loan is a nonnegotiable receipt has no bearing on the merits of this controversy. The petitioner transferred such evidences of the loan to his wife. Since the interest on such transferred obligations was paid by the partnership directly to the wife, it must be presumed that the other partners not only knew of the transfer of the paper alleged to be nonnegotiable, but consented thereto. This being true, the Commissioner as a third party and a stranger to the transaction may not take advantage of a provision that has been waived by all the parties in interest.

The receipts for money left in the business by the petitioner were his property and, the other parties in interest consenting, he transferred">*3234 them to his wife in part payment of the debt which he owed to her. The endorsement was regular and for value, and the evidence establishes delivery to the wife of the receipts or notes and payment by the partnership of the interest to her as it accrued. In our opinion the amounts in question were not additional capital contributions but were loans by the petitioner to the partnership. The petitioner transferred such loans to his wife, and the interest thereon was not income to him in the taxable years.

Reviewed by the Board.

Decision will be entered for the petitioner.