Barton v. Commissioner ( 1928 )

HUMPHREY BARTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Barton v. Commissioner

Docket No. 26177.

United States Board of Tax Appeals

13 B.T.A. 1184; 1928 BTA LEXIS 3096;

October 23, 1928, Promulgated

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Alleged capital value of law cases turned in to a partnership by the petitioner disallowed.

Humphrey Barton, Esq., pro se.

L. A. Luce, Esq., for the respondent.

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LANSDON

The respondent has asserted a deficiency in income tax for the year 1922, in the amount of $1,436.49. The only issue raised is whether certain amounts received by petitioner in the taxable year were distributable net income of a partnership of which he was a member or were, in part, a return of his capital contribution to such partnership.

FINDINGS OF FACT.

The petitioner is a resident of the city of St. Paul, where he has been engaged for many years in the practice of law. On December 31, 1919, he entered into the following partnership agreement:

THIS AGREEMENT, made and entered into this first day of December, 1919, by and between Humphrey Barton, party of the first part and M. F. Kinkead, party of the second part, Witnesseth,

That said parties do hereby associate themselves together for the general practice of law, under the firm name of Barton & Kinkead. That said partnership shall begin on said December 1, 1919. That the term of said partnership shall be for the period of five years unless terminated sooner as herein provided. That said partnership may be terminated by either party on the 31st day of December of any year during the said term by the giving of a sixty day written notice therefor.

That when said partnership ends or is terminated the unfinished business on hand at such time shall be finished and wound up by first party or under his supervision and direction, as he shall determine, and he shall receive reasonable compensation therefor, and be reimbursed for the expenses of so doing, and the books and records of said partnership shall be retained by and be the property of said first party.

That until changed by mutual agreement, the net proceeds of said law business shall be divided as follows: said first party receiving four fifths and said second party one fifth.

That the employment of all help shall be by said first party with the advice and consent of said second party.

That all moneys received by said co-partnership shall be deposited in a Bank to be selected by said first party, and to be drawn out upon check signed either by said first party or the clerk of said firm.

That Elijah Barton, of Minneapolis, may be called in to assist in said law business any time by said first party or by said second party in the absence of said first party, he to be paid a reasonable sum for his services, to be charged as expenses of said partnership.

That division of profits shall be made from time to time and as there are moneys on hand that can be divided, always keeping a reasonable amount for expenses.

That neither party shall do or be interested in any law business save and except for the sole benefit of said firm, save personal business relative to the individual property or personal rights of either party hereto.

That said first party is to turn over to said co-partnership, a certain amount of law business which he now has on hand, which is to become co-partnership business, a list of such business being hereto attached.

That any other business which said first party had on hand on November 30, 1919, shall be deemed his private personal business, and he is to have the right to attend to and finish the same without interference and without turning over to or paying said co-partnership any portion of the results thereof.

The Law Library is to be the individual property of the parties hereto as they now own the same, and as hereinafter bought. The firm is to pay for keeping up the West Publishing Company subscriptions and Shepard's Annotations as office expenses, but the books so acquired are to be the individual property of said first party.

Signed the day and year first above written.

Humphrey Barton

Michael F. Kinkead

On December 31, 1921, the partnership created by the above agreement terminated so far as it related to new business, but its business was not finally settled, and distribution of partnership income was not finally made until some time in the year 1925.

During the year 1922, the gross income of the partnership was $26,785.35, and the net distributive income thereof was $20,419.23, of which the petitioner, under the terms of the agreement, retained the amount of $16,768.08, and paid to his partner the amount of $3,651.15.

Upon the formation of the partnership the petitioner turned in to it 25 law cases in which he had been retained previous thereto, and thereafter the proceeds or income from such cases became partnership income.

OPINION.

LANSDON: The sole contention of the petitioner is that the 25 law cases which he turned over to the firm at December 31, 1919, were in the nature of a capital contribution to the partnership, and that after the termination of the partnership he was entitled to receive the value, if any, of such capital contribution before becoming liable to income tax on any partnership receipts that he received subsequent to December 31, 1921, when the partnership was terminated.

In support of his contention the petitioner introduced his former partner as a witness, and such partner testified that in his opinion the law cases in question had a value of at least $12,000 when taken over by the partnership. The petitioner also testified in his own behalf that, in his opinion, such cases had a value of from $10,000 to $15,000 when he turned them in to the partnership.

Although this proceeding is submitted as nothing more than a controverted question of fact, it is clear that there are legal phases of the transaction in question that require consideration. A partnership has somewhat peculiar characteristics. It may be, and probably is, a business entity for the purposes for which it was established, but the taxing statutes pass it over and assess taxes against its members as individuals in proportion to their respective shares of distributable net income. There is some question, then, as to whether an individual parts with anything when he makes a capital contribution to a partnership. He still has exactly what he had before, but under modified conditions as to the control or dominion thereof. It may be that on dissolution the only thing returned to him is the complete control or dominion over his property that for a time had been used, but not owned by the partnership. Apparently the law recognizes this situation in the well-established principle that each member of a partnership is responsible individually for all the obligations thereof not in proportion to his contributions of capital or service, but without limit.

There is also much doubt as to the nature of the alleged contributions of capital involved herein. If the cases turned in to the partnership had any value in excess of the fees, less expenses subsequently resulting therefrom, such value much have been in the nature of good will. So far as the record shows all these cases may have been settled prior to the dissolution of the partnership and the returns therefrom collected and distributed to the partners. In such an event it is clear that if anything remained of the alleged contributions of capital originally made it was the good will that was attached to them when they were turned over to the partnership. No evidence as to the value of the good will contributed by the petitioner was offered.

In this proceeding, however, it is not necessary to decide any of the questions above suggested, since we are not convinced, even if the law cases in question were taken into partnership assets as a capital contribution by the petitioner, that the uncontradicted opinion evidence adduced if considered in connection with facts disclosed by the record establishes the value claimed. ; . The greater part of the business consisted of personal injury suits that were handled on a contingent fee basis. The books of account show the amounts received from settled cases, but there is nothing in the record to prove the costs of securing and prosecuting them or the net amounts received therefrom. Even if there is any legal basis sufficient to support the claim of the petitioner the value of the law cases was contingent and highly speculative and can not be regarded as a capital contribution to the partnership in any amount which the evidence enables us to determine.

Reviewed by the Board.

Decision will be entered for the respondent.

PHILLIPS concurs in the result.