Saul v. Commissioner , 13 B.T.A. 705 ( 1928 )

MAURICE B. SAUL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JOSEPH NEFF EWING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Saul v. Commissioner

Docket Nos. 14067, 14068.

United States Board of Tax Appeals

13 B.T.A. 705; 1928 BTA LEXIS 3204;

October 1, 1928, Promulgated

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Upon the dissolution of a law partnership in 1921, of which the petitioners were members, they received from the sale of certain interests in the partnership amounts of money in excess of the cost of their pro rata interests in the tangible assets, which the Commissioner held constituted taxable income. Held, that the petitioners derived no taxable income from the sale.

J. A. Lamorelle, Esq., and J. Marvin Haynes, Esq., for the petitioners.

J. E. Mather, Esq., for the respondent.

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SMITH

These proceedings, consolidated for the purpose of disposition, are for the redetermination of deficiencies in income tax of $15,270.02 in the case of Maurice B. Saul, and of $314.60 in the case of Joseph Neff Ewing. The question in issue is whether the petitioners derived $30,150 and $2,250, respectively, from the sale in 1921 of certain interests in a law partnership of which they were members.

FINDINGS OF FACT.

The petitioners are residents of the State of Pennsylvania. John G. Johnson, now deceased, practiced law in the City of Philadelphia for many years prior to his death and attained the reputation of being one of America's leading lawyers. For 14 years immediately prior to his death on April 14, 1917, he had occupied a suite of offices at 1335 Land Title Building, Philadelphia.

For a period of 11 years immediately prior to Johnson's death Maurice B. Saul was associated with him in the practice of the law and in addition to Saul there were associated with him at the time of his death Frank P. Prichard, James W. Bayard, Ralph B. Evans, Carlyle H. Ross, and Benjamin O. Frick.

Johnson took a fatherly interest in Saul. He told him that his practice would come to him after his death, and advised him to practice law alone and not to take in anyone as a partner.

Shortly before his death, however, he advised Saul that he had changed his mind as to Saul practicing law alone after his death. He said that some of the clients would probably think that he was too young a man to take care of their affairs and therefore he advised Saul to enter into a partnership with Prichard, who was a much older man than Saul, and who had been associated with Johnson some 30 or 40 years. He told Saul that he was going to advise Prichard to that effect.

Johnson, in the sixth and seventh paragraphs of his will, provided as follows:

To FRANK P. PRICHARD, if he shall survive me, I give all Law books and law papers and pamphlets to such extent as he shall not be the owner of duplicates. All duplicates I give to MORRIS B. SAUL, and, if MR. PRICHARD does not survive me MR. SAUL will take what MR. PRICHARD, as a survivor, would take.

My office shall be kept up, at the expense of my estate, for six months after my decease, so that those who have been associated with, or helping me, may make their future arrangements carefully. If MR. PRICHARD survives me, he will be in the control of my office, during the time. If he does not, MR. SAUL will control.

As both Prichard and Saul survived Johnson, all of the law books, law papers and pamphlets pertaining to Johnson's law practice were received by Prichard and Saul.

After the death of Johnson, those who had been associated with him in the practice of the law formed a partnership under the name of Prichard, Saul, Bayard & Evans, which firm consisted of Frank P. Prichard, Maurice B. Saul, James W. Bayard, Ralph B. Evans, and Benjamin O. Frick, and continued the practice of law in the offices formerly occupied by Johnson.

At the time of the formation of this firm all of the assets from the law practice formerly carried on by Johnson which were received by Prichard from Johnson were transferred to the firm of Prichard, Saul, Bayard & Evans by Frank P. Prichard as a voluntary contribution.

Frank P. Prichard died during the year 1918, at which time all his interest in the assets of the firm, which assets had been bequeathed to him by Johnson, passed to the other members of the firm. The remaining members of the firm continued the practice of law under the name of Prichard, Saul, Bayard & Evans.

It was the custom of John G. Johnson in writing wills to retain a duplicate original of the will in his office. These signed copies were kept in his vault, as were also many private and valuable papers belonging to his clients. At the time of his death there was a very large accumulation of such wills and private papers of clients who had formerly consulted Johnson, many of whom had not been in the office for years. The accumulation of these papers was so great that prior to his death Johnson had rented a very large store room on the twenty-fourth or twenty-fifth floor of the Land Title Building, where they were filed away and were referred to from time to time as it became necessary.

In many cases the wills which were in Johnson's vault at the time of his death were wills of influential and wealthy clients. In addition to these wills and valuable papers which Johnson had in his files and which he bequeathed in his will to Prichard, there were between 2,000 and 3,000 pending cases in Johnson's office at the time of his death. The papers pertaining to the said cases were bequeathed to Prichard.

For the years 1913 to 1917, inclusive, Johnson's income from his law practice was as follows:

1913 March 1 to Dec. 31	$111,227.69
1914	156,200.00
1915	171,383.00
1916	207,199.40
1917 Jan. 1 to Apr. 14 (date of his death)	89,469.65

During the years 1914 to 1917, inclusive, the income of Maurice B. Saul from the practice of law was as follows:

1914	$14,286.00
1915	16,725.67
1916	20,959.81
1917	65,690.68

On January 1, 1920, Joseph Neff Ewing and Raymond M. Remick were each given a 2 1/2 per cent interest in the tangible and intangible assets of the firm by the other members thereof.

The firm of Prichard, Saul, Bayard & Evans continued to practice law in the suite known as 1335 Land Title Building, Philadelphia (formerly occupied by John G. Johnson), until March, 1921, at which time differences arose between certain members of the firm and the firm was dissolved. The dissolution agreement was executed February 24, 1921. This provided that the firm should be dissolved "on the first day of March, 1921, or as soon thereafter as the partners not retaining the present offices can establish themselves in new offices." It further provided that no partner or combination of partners should use the firm name of Prichard, Saul, Bayard & Evans or hold himself or themselves out or represent himself or themselves as successors of the old firm. It further provided:

3. DISPOSITION OF OFFICES AND FIRM ASSETS:

The lease for the firm's present offices 1335-43 Land Title Building, and the books, furniture, equipment and supplies, rugs and fixtures therein contained, shall, with the exceptions hereafter specified, be sold to the highest bidder on the evening of Thursday, February 24th, 1921, by open bidding at a firm meeting to be held at the office of the firm.

One person shall make the bids for each group of the partners.

* * *

4. PROPERTY EXCLUDED FROM SALE.

The following property shall be excluded from said sale and shall remain the property of the individual partner concerned: -

(a) Furniture and fixtures in each partner's room, exclusive of bookshelves, as per schedules annexed.

(b) Books the individual property of M. B. Saul, including those purchased by him and those bequeathed to him by Mr. Johnson.

(c) Books the individual property of each of the other partners.

5. PAPERS.

The present files, both alive and dead, shall be open at all reasonable times to all of the partners of the old firm or their representatives. In case clients signify their preference for one of the new firms, such firm shall have delivered to it all of such client's papers, both alive and dead. The partners retaining the present offices shall see that all the files are accessible at all reasonable times to all of the present partners or their representatives, and shall maintain the files as now maintained or in a manner equally available. No files shall be destroyed without the consent of all of the present partners.

6. TENTATIVE DIVISION OF CURRENT FILES.

On or before the date fixed for dissolution, the files shall be divided between the partners not retaining the offices and the partners retaining the offices, in so far as a division can be agreed upon. Any files, the disposition of which cannot be agreed upon, shall remain in the present offices, but any files in the possession of either of the new firms shall immediately be delivered to the other firm upon written request of the client.

7. PAPER BOOKS.

The partners not retaining the offices may take as complete a file as possible of duplicate Paper Books. The bound and unbound Paper Books shall be open for inspection and use in the same manner as heretofore set forth in respect to the files.

8. PETITIONS.

The partners not retaining the offices may take as complete a file as possible from the duplicate copies of all petitions, bills in equity, mortgages and all other papers. Petitions, bills in equity, mortgages and other papers connected with the business of any client selecting one or the other of the new firms shall be delivered to such new firm with the privilege on the part of the other partners of retaining duplicate copies, if available.

9. OPINIONS.

The opinions of Mr. Johnson shall be open to inspection to all of the partners. If any duplicates exist, the partners not retaining the originals may take such duplicates or may make copies of unduplicated opinions.

10. RETAINERS.

Retainers shall be apportioned between the old firm and the firm retaining the business as of the date of dissolution. If no preference is indicated, no apportionment shall be made.

11. UNFINISHED BUSINESS.

All fees for business unfinished at the date of the dissolution shall be apportioned between the old firm and the firm concluding the business and receiving the fee, as of the date of dissolution, on the basis of the fee earned before and after the dissolution. Accounts shall be rendered by each of the new firms to the old firm every three months and all amounts due, paid and distributed. The amount of the fee shall be in the sole discretion of the firm concluding the business, making the charge and receiving the fee.

12. FIRM BOOKS OF ACCOUNT.

The Check Books, Cash Book, Ledger, Fee Book and other books of account of the old firm shall remain in the present offices and the accounts of the old firm shall be kept by the bookkeeper of the firm retaining the present offices.

13. DISSOLUTION NOTICES.

On the date fixed for dissolution, each of the new firms shall send out a notice, which shall be in substantially the following form: -

Date.

"The firm of Prichard, Saul, Bayard & Evans has been dissolved. The undersigned members of said firm and associates have formed a partnership for the general practice of law under the firm name of with offices at "

Either firm shall be at liberty to enclose with the notices sent out by it a notice substantially in the following form: -

"The firm of Prichard, Saul, Bayard & Evans having been dissolved, if you desire this firm to conclude your legal matters which were pending at the date of dissolution you are requested to so indicate by signing and returning the enclosed slip."

The slip referred to shall be in substantially the following form:

"TO PRICHARD, SAUL, BAYARD & EVANS:

Please deliver all papers in your possession belonging to me or connected with my matters to who will present me upon the dissolution of your firm."

14. COMMUNICATIONS ADDRESSED TO THE FIRM, ETC.

All letters and other communications addressed to John G. Johnson, Frank P. Prichard or Prichard, Saul, Bayard & Evans shall be received and opened by or under the supervision of one of the partners retaining the offices.

All such communications which relate to business which is being conducted by one of the partners not retaining the offices or to the business of a client who has indicated, in the manner above provided, his preference that the partners not retaining the offices shall take charge of his legal matters, shall be immediately turned over to them.

All such communications relating to new matters shall be answered by a letter in substantially the following form: -

Date.

"DEAR SIR: -

Your letter dated and addressed to the firm of Prichard, Saul, Bayard & Evans, has been duly received.

That firm was dissolved on 1921, Messrs. former members of that firm and their associates have formed a partnership for the practice of the law under the name of with offices at .

The undersigned, the remaining members of that firm, and their associates, have formed a partnership for the practice of the law under the name of retaining the offices at 1335 Land Title Building, Philadelphia.

We shall be glad if you will advise us which firm you would prefer to take charge of this matter."

The partners retaining the offices shall have the right to answer any communication which in their judgment requires prompt action, without first sending the foregoing notice; provided that in any such answer (or, in the case of a telegram, in the letter of confirmation) they embody the substance of such notice.

Ralph B. Evans, heading one faction of the partners, bid $110,000 for the assets to be sold. Maurice B. Saul, heading the other faction of the partners, consisting of himself, Joseph Neff Ewing and Raymond M. Remick, bid $105,000. Evans was the successful bidder and pursuant to the agreement paid to the partnership group headed by Saul $42,350, or 38 1/2 per cent of the total bid price. The tangibles of the partnership at the time had a value of $20,000, which was in excess of cost. Of the bid price of $110,000, $90,000 represented the price bid for the intangibles. Saul had a 33 1/2 per cent interest in the assets of the firm at date of dissolution and, accordingly, received $30,150 from Evans as his proportionate part of the sale price of the intangibles. Ewing and Remick each received $2,250 as their shares of the sale price of the intangibles. The petitioners did not include in their tax returns for 1921 any amount representing taxable income from the sale of their interests in the partnership. The Commissioner amended these returns by adding to the net income reported by Saul $30,150 and to the net income reported by Ewing $2,250, computing the deficiencies accordingly.

Under the contract of dissolution the faction headed by Ralph B. Evans acquired, in addition to the tangibles of the firm, the lease on the offices at 1335 Land Title Building and the right to occupy the offices theretofore occupied by the firm of Prichard, Saul, Bayard & Evans, and the right to the possession of all of the papers of the partnership where the clients of the partnership did not specify that the papers should be turned over to the new partnership composed of Saul, Ewing and Remick. After the dissolution of the partnership the Evans' faction carried the name "John G. Johnson" on its letterhead with a black line underneath, on their door and in legal directories in which the firm name appeared.

John G. Johnson's legal papers and good will had a value to the firm of Prichard, Saul, Bayard & Evans at the date of its organization in 1917 of $350,000. During the first year after Johnson's death from 80 to 90 per cent of the business done by the firm consisted of business which they did for former clients of Johnson. As the years went on a portion of the business done by the firm for former clients of Johnson decreased and the proportion of business done for new clients increased.

During the first year after Johnson's death 25 per cent of the value of the legal papers and the intangible assets attaching to them in the nature of good will acquired from Johnson by the new firm disappeared or spent itself and during the following years this intangible asset disappeared or, in the opinion of Saul, would disappear or spend itself as follows:

	Per cent
Second year	20
Third year	15
Fourth year	10
Fifth and sixth years	5
Seventh and eighth years	4
Ninth and tenth years	3
Eleventh and twelfth years	2
Thirteenth and fourteenth years	1

After the dissolution of the firm of Prichard, Saul, Bayard & Evans in March, 1921, Saul, Ewing and Remick moved to a suite of offices on the eighteenth floor of the Land Title Building, which suite occupied the same position on the eighteenth floor as the suite which they had left occupied on the thirteenth floor of the same building. The lease in existence for the suite of offices known as 1335 Land Title Building was for a term of three years and on March 5, 1921, the actual date of the dissolution of the partnership of Prichard, Saul, Bayard & Evans, had approximately 1 1/2 years to run, the rental under the lease being at the rate of $5,625 per years. The lease had no value in excess of the rentals to be paid thereunder.

OPINION.

SMITH: The question presented by this proceeding is whether the petitioners derived any taxable income from the sale by them in 1921 of certain interests in the law firm of Prichard, Saul, Bayard & Evans. The sale price of the assets sold was $110,000. The cost of the tangibles included in those assets was $20,000 and it is conceded that the petitioners derived no income from their pro rata shares of the $20,000 bid for the tangibles. It is contended by the respondent, however, that the intangibles of the partnership were acquired without cost to it and that the amounts of money received by the petitioners representing their pro rata interests in the intangibles constituted taxable income of the petitioners in 1921. These amounts were, in the case of Maurice B. Saul, $30,150, and, in the case of Joseph Neff Ewing, $2,250. The petitioners' contentions are that they received their interests in the partnership by bequest and gift and that therefore the amounts received by them representing the sale price of the intangibles are exempt from income tax.

The evidence indicates that what was sold by the petitioners in addition to their interests in the tangibles of the partnership was the right of the partnership to continue to occupy the offices theretofore occupied by John G. Johnson and by the successor firm of Prichard, Saul, Bayard & Evans, and the right to the possession of all of the files of the Johnson office and of the office of the successor firm except where the clients indicated their wish that the files should be transferred to the outgoing partners.

The assets for which Evans and the group of partners represented by him bid $110,000 is indicated by the following testimony of Maurice B. Saul:

The bidding took place, I think, on the 28th of February of that year [1921]. All of these papers and documents were in that office, and it was agreed that the documents and the papers which had come to us from Mr. Johnson should remain with the firm or group of members of this firm that retained the offices. We had a lease on the offices for three years, and that lease had eighteen months to run. The outgoing firm, or whoever did not stay in the offices had no right to any possession of the papers except duplicates of any opinions or paper books, printed paper books, printed briefs that were in that office, or such clients' papers as the client should designate in writing should be delivered to the group who went out of the office. Papers, wills, or valuable documents belonging to clients that the client did not so designate by written authority to deliver to those partners who did not retain the offices were to remain in the offices.

The bidding, - I bid as representing the group, for the right to those papers, the possession of those papers, and the resultant good that would flow to me as the possessor of those papers which I turned over to the firm on Mr. Johnson's death with Mr. Prichard, $105,000; Mr. Evans and his group bid $110,000. I did not bid any higher and he got the possession to the offices, books and the papers belonging to clients, wills and private papers, and Mr. Ewing, Mr. Remick, Mr. Lamorelle and myself left the offices and formed this new firm with my brother and some of his associates, and moved to an identical suite on the eighteenth floor of the same building where we started the practice of law, and secured such papers as the clients authorized us to receive.

Q. Mr. Saul, what was the principal asset that you were bidding $105,000 for?

A. The principal asset was the - what has been called good will, but it is, - it was the right to the possession of the various papers that had been bequeathed to Mr. Prichard and to me by Mr. Johnson, and the value of those papers, as far as future client were concerned, - the clients to my experience, come in to the firm where their papers are, and to the firm that has possession of those papers, especially of a private nature, they do not want their private affairs disclosed to everybody, and they want to go to the firm that has the possession and continues to have possession of their wills and their private papers. That was the right that I was bidding for, - the asset of that firm that I was bidding for - that mass and great bulk of legal papers that belonged to the clients of John G. Johnson.

The value of the legal papers bequeathed to Prichard by Johnson was at the date of the receipt of them by Prichard in 1917, in the opinion of Saul, approximately $350,000 and at the date of the dissolution of the partnership of Prichard, Saul, Bayard & Evans approximately $120,000. These estimates of value were confirmed by the testimony of Owen J. Roberts, a witness for the petitioners. Evidence of this character is competent to prove value. . Whatever value the law papers had at the date of their receipt by Prichard was contributed to the partnership by Prichard upon the organization of the partnership of Prichard, Saul, Bayard & Evans. Saul acquired his interest in those papers either by bequest from Johnson or by gift from Prichard. Ewing acquired his interest in the partnership assets by gift on January 1, 1920, The value of the law papers and the good will attaching thereto decreased from the date of Johnson's death but that value had not entirely disappeared at the date of the dissolution of the partnership of Prichard, Saul, Bayard & Evans on March 5, 1921, and we are convinced by the evidence that the value of the right to the possession of the law papers, the good will attaching thereto, the right to occupy the offices formerly occupied by John G. Johnson and to be considered as the successors of Johnson, had a value on March 5, 1921, of at least $90,000, the amount paid therefor by Evans and his associates and that therefore the petitioners derived no taxable income from the sale by them of the assets sold.

It appearing that the amounts in controversy in these proceedings are not the entire amounts of the deficiencies determined by the respondent -

Judgment will be entered under Rule 50.