Gillette v. Commissioner , 14 B.T.A. 580 ( 1928 )

KATHARINE K. GILLETTE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Gillette v. Commissioner

Docket No. 18754.

United States Board of Tax Appeals

14 B.T.A. 580; 1928 BTA LEXIS 2952;

December 6, 1928, Promulgated

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A practicing physician who had built up a large private practice, desiring to withdraw from active practice and to provide for the continuation of said business along his established lines, associated himself with an assistant under a contract which provided for the continuation of said business under an expense and profit-sharing basis, for a period of ten years. During the term the associate was to assume the major burdens of the work connected with the business, in consideration for which at the end thereof he, having fulfilled all of his obligations under the contract, was to become the sole owner of the business. In the event of the death of the founder of the business before the expiration of the ten years, the portion of profits payable to him under the contract was to be paid to his widow. Held, the transaction constituted a sale of the business, and the payments made in accordance therewith to the widow of the founder were a part of the purchase price, and not income to her.

W. H. Oppenheimer, Esq., for the petitioner.

Arthur H. Murray, Esq., for the respondent.

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LANSDON

Respondent asserted deficiencies in the income tax of petitioner for the years 1921, 1922, and 1923, in the respective amounts of $1,417, $451.47, and $230.14, all of which are in dispute.

The only question involved is whether certain payments made by the survivor of a partnership to the widow of the deceased member, out of the profits of the business thereafter continued by him, constituted income to the recipient.

FINDINGS OF FACT.

On June 1, 1919, Arthur J. Gillette, the husband of petitioner, then a practicing physician and surgeon in St. Paul, Minn., entered into a contract with his professional associate Carl C. Chatterton, the pertinent portions of which are as follows:

WHEREAS, ARTHUR J. GILLETTE and CARL C. CHATTERTON, for some years last past have been associated together in the practice of medicine under the firm name and style of GILLETTE AND CHATTERTON, and

WHEREAS, under the agreement existing between the said GILLETTE and the said CHATTERTON, said CHATTERTON has received a fixed compensation, but has had no other interest in the earnings of the said firm and has not been liable for the expenses thereof, and

WHEREAS, it has been mutually agreed by and between the said GILLETTE and the said CHATTERTON that a new agreement shall be entered into by and between them, pursuant to which the said GILLETTE and CHATTERTON shall share the profits, expenses and losses incident to the said practice according to the percentages hereinafter set forth, during the period of ten (10) years from the first day of June, A.D., 1919, at the end of which period the said CHATTERTON - if living - is to become the owner of the said co-partnership business (except uncollected accounts, notes or other indebtedness due the firm) upon the terms hereinafter set forth;

Now, THEREFORE, in order to evidence the said agreement, it is hereby mutually agreed by and between the said Gillette and the said Chatterton, as follows:

From and after the first day of June, A.D., 1919, they shall be co-partners associated in the practice of medicine under the name of GILLETTE AND CHATTERTON, with offices in the City of St. Paul, Minnesota.

Said co-partnership and the agreement hereby made, shall continue for a period of ten (10) years from said first day of June, A.D., 1919, and during the said ten-year period the said GILLETTE (or his successor in interest) and said CHATTERTON shall share the profits and pay the expenses and losses on the following basis, namely:

	GILLETTE'S PERCENTAGES.	CHATTERTON'S PERCENTAGES.
During the First Year	75%	25%
During the Second Year	70%	30%
During the Third Year	65%	35%
During the Fourth Year	60%	40%
During the Fifth Year	55%	45%
During the Last Five Years	50%	50%

The profits earned hereunder shall include all moneys earned prior to the expiration of the ten years hereinbefore specified but collected thereafter. All moneys collected by the said GILLETTE on account of professional services heretofore rendered by him, shall be treated as earnings of the co-partnership, notwithstanding the fact that the same shall have been earned prior to the date hereof. In consideration of the fact, it is EXPRESSLY UNDERSTOOD AND AGREED that the said GILLETTE shall be required to give only such time to the affairs of the co-partnership as he sees fit to devote thereto, IT BEING PARTICULARLY UNDERSTOOD that one of the purposes of the said GILLETTE entering into this agreement is to relieve himself from professional cares and responsibilities and to provide for the continuance of the practice built up by him in the event of his sickness or death.

Said CHATTERTON agrees to devote all of his time and attention to the affairs of the co-partnership; save and except during a vacation period or periods not exceeding thirty (30) days in extent, each year.

* * * In case of the sickness or death of the said GILLETTE, IT IS EXPRESSLY AGREED that the said CHATTERTON shall continue to conduct the business of the firm as nearly as practicable in the same manner as theretofore, continuing under the firm name of GILLETTE AND CHATTERTON. That, if the said GILLETTE shall die, BUT NOT IN ANY OTHER EVENT, the percentages of said CHATTERTON hereinbefore fixed, shall be increased five (5) per cent. during the unexpired term of the contract, and that KATHARINE KENNEDY GILLETTE, the wife of said ARTHUR J. GILLETTE, shall receive five (5) per cent. less than the percentages of said GILLETTE above fixed, out of the partnership earnings. If at the end of ten (10) years from the date hereof, said CHATTERTON is still alive and shall have in all respects fully performed all the terms and agreements by him to be performed hereunder, then and in that event said GILLETTE if living, will assign and transfer to the said CHATTERTON all of his interest in and to the good will of the business and all right to the future earnings thereof (not including, however, uncollected accounts, notes or other indebtedness for professional earnings), and all interest in and to the office furniture, library and equipment, with the exception of the small safe in the library, which said GILLETTE RESERVES. In case, prior to the expiration of said ten-year period, said GILLETTE shall have died, KATHARINE KENNEDY GILLETTE, his wife, and the person to whom said GILLETTE by will has bequeathed his interest in said co-partnership, shall deliver to said CHATTERTON a good and sufficient Bill of Sale and Transfer of all interest, of every kind, in and to the property which said GILLETTE if living would have transferred to said CHATTERTON, as hereinbefore provided.

It is, however, expressly agreed that all accounts or notes, or other indebtedness representing earnings and pertaining to the business transacted hereunder, which shall be uncollected at the expiration of the ten-year period hereinbefore fixed, shall form and be a part of the earnings and returns hereunder, and shall be divided as and when collected upon the same basis as the earnings actually collected during the last five (5) years of said ten-year period.

In case said CHATTERTON shall die prior to the expiration of the ten-year period hereinbefore fixed, it is expressly understood and agreed that neither the said CHATTERTON, nor his personal representatives, shall have any interest in or to any of the earnings of the said firm or of the said CHATTERTON, which shall have accrued prior to his death, IT BEING UNDERSTOOD that all such earnings shall belong to the said GILLETTE if living, or, if not living, to KATHARINE KENNEDY GILLETTE, his wife, and legatee, or her personal representatives, IT BEING CONSIDERED BY THE PARTIES HERETO that such accrued earnings will no more than offset the accrued earnings of said GILLETTE which he is permitting the said co-partnership to enjoy, as hereinbefore set forth.

AND IT IS FURTHER EXPRESSLY UNDERSTOOD AND AGREED that in case of the death of said CHATTERTON, prior to the expiration of said ten-year period, or in case for any reason he shall not continue faithfully to perform and carry out this agreement during said period of ten (10) years, that then and in that event this agreement shall cease to be operative and all the earnings of the said co-partnership, as well as all other property, hereinbefore referred to, or which shall have been acquired by the said copartnership, shall be and become without any other act or ceremony the property of the said KATHARINE KENNEDY GILLETTE, or her personal representatives.

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In case during any year while this contract is in effect the percentage of said CHATTERTON shall amount to less than Seventy-two Hundred Dollars ($7200.00) in cash received out of the professional receipts for said year, then and in that event the said CHATTERTON may, at his option, be relieved from the further performance of this contract, by giving sixty (60) days notice in writing to the said GILLETTE (or to his successors in interest), of the desire of said CHATTERTON to be so relieved. In the event said CHATTERTON avails himself of the option hereby reserved so to terminate this contract, he shall receive his agreed percentage of all receipts up to the date the aforesaid notice of termination becomes effective, but after that date he shall have no interest in the prior earnings of the business conducted hereunder, or in or to the good will of the said business, or in or to the library, equipment, or other assets of the said co-partnership, all of which shall belong to the said GILLETTE (or to his successor in interest); IT BEING THE PURPOSE AND INTENTION of the said CHATTERTON hereby to assure to himself in case he shall choose to do so, earnings of not less than Seventy-two Hundred Dollars ($7200.00) a year, which amount he is now receiving under the contract existing between himself and said GILLETTE. * * *

Arthur J. Gillette died on March 24, 1921, and upon appraisal of his estate for Federal estate-tax purposes the respondent included the contract in controversy in the assets of the estate and fixed its value at $57,000, which was conceded by the representatives of said estate. By the will petitioner was made beneficiary under the unexpired contract.

Thereafter Chatterton, in accordance with the provisions of said contract, continued in the conduct of the business and paid to the petitioner, from the profits thereof, the sums of $19,939.78 for the year 1921, and $17,844.19 for 1922. In January, 1923, by agreement Chatterton and petitioner modified the terms of payments provided for in the original agreement, by reason of which she received on account thereof, for the year 1923, the sum of $11,678.12.

In determining the deficiency taxes in controversy for the years 1921, 1922, and 1923, respondent included in the gross income of petitioner for said years the payments hereinabove set forth, less the sums of $5,343.75, $7,125, and $7,125, as depreciation of petitioner's interest in said contract for the respective years.

OPINION.

LANSDON: The contract between Gillette and Chatterton was clearly one of sale and purchase of the business theretofore owned solely by the former. The selling price was to be a portion of the profits spread over a period of ten years, to be paid as earned. During this period expenses and profits were to be shared; but no vested interests accrued either to Chatterton or his personal representatives in the business before the expiration of this term, and then only on condition that he fulfill all of his obligations under the contract. At the end of this term, Chatterton having complied with all of his terms of the obligations, and having paid to Gillette or his successor in interest that portion of the profits agreed upon, Gillette or his successor was obligated to convey unto Chatterton, by bill of sale, the business and good will, together with all office furniture, fixtures and equipment, except a small safe which was reserved. Petitioner, under the terms of the will of her late husband Gillette, became his successor in interest to this contract, and as such she was entitled to receive the deferred payments upon the purchase price of said business under its terms. In accordance with its terms, she will be obliged to execute the conveyance of said business to Chatterton at the proper time, and thus carry out the intent of the parties thereto. As successor to these rights, petitioner was fully competent to enter into the contract of January, 1923, with Chatterton, modifying the terms of said contract affecting future payments, and such act in no way affected rights involved herein. The payments, therefore, made and to be made by Chatterton to petitioner, in accordance with these contracts, are parts of the purchase price of the business, and no income to her can result therefrom until the amounts thereof exceed $57,000. Cf. .

Reviewed by the Board.

Decision will be entered for the petitioner.

MARQUETTE, STERNHAGEN, ARUNDELL, and MURDOCK dissent.