Kelley v. Commissioner

HARRY P. KELLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kelley v. Commissioner

Docket No. 6891.

United States Board of Tax Appeals

9 B.T.A. 832; 1927 BTA LEXIS 2501;

December 23, 1927, Promulgated

---

Petitioner held not to be a partner in Kelley Brothers Coal Co. and not entitled to share in the income of that partnership or of Lucas Coal Co.

George D. Wick, Esq., for the petitioner.

P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent.

---

PHILLIPS

This proceeding is instituted for the purpose of securing a redetermination by the Board of the determination by the Commissioner of a deficiency in income taxes for the calender year 1920 amounting to $64,459.85.

FINDINGS OF FACT.

Petitioner is a resident of Bellefonte, Pa. In 1920, he resided in Snow Shoe, Pa.

Kelley Brothers Coal Co., a partnership, was organized and began the operation of coal mines about 1888. The partners were petitioner and his brother, M. D. Kelley. On December 22, 1919, petitioner, with the consent of his partner, transferred his interest in the partnership to his seven children - John P. Kelley, Logan M. Kelley, Thomas F. Kelley, Mary Kelley Krapper, Justina Kelley Vogt, George A. Kelley, and Victor H. Kelley. On December 24, 1919, petitioner executed and delivered an assignment of all his interest in said partnership to the above-named persons, which assignment was properly recorded with the recorder of the county.

Kelley Brothers Coal Co. advanced the money for the purchase of a one-quarter interest in the Lucas Coal Co., another partnership. This one-quarter interest was carried on the books of the Kelley Brothers Co. as an asset of that company at the time that petitioner assigned his interest in Kelley Brothers Coal Co. to his children. Subsequent to the execution of this assignment, petitioner's seven children treated a one-eighth interest in the Lucas Coal Co. as their property.

In computing the deficiency, the Commissioner included as income to the petitioner one-half of the income of Kelley Brothers Coal Co. or $117,513.66, and a portion of the 1920 profits of Lucas Coal Co.

OPINION.

PHILLIPS: The evidence conclusively establishes that the petitioner in 1919, with the consent of his partner, assigned his partnership interest in the Kelley Brothers Coal Co. to his children and ceased to be a partner in that company and that he was not such a partner in 1920. The respondent was in error in treating one-half of the income of the partnership as taxable to petitioner.

It is also contended that this partnership owned a one-quarter interest in another partnership known as the Lucas Coal Co., which interest passed under the assignment of petitioner's interest in the Kelley Brothers Coal Co. It appears that the investment made in the Lucas Coal Co. by the Kelley Brothers Coal Co., or by the individual members of the latter partnership, was from funds advanced by the Kelley Brothers Coal Co. and that this investment was carried on the books of this partnership as a partnership asset. The assignees treated the one-eighth interest in the Lucas Coal Co. as their property. Whether it can properly be said that an assignment of an interest in one partnership will create the assignees partners in another partnership may be doubted. The assignment would, however, be sufficient to entitle the assignees to receive the profits. (See Uniform Partnership Act of Pennsylvania, P. L. 18, part 5, section 26, Act of March 26, 1915; .) Moreover, it seems that the assignees have been treated as partners in the Lucas Coal Co., all of the partners being of the same family. In such circumstances, we are of the opinion that error was committed in computing income upon the basis of treating petitioner as entitled to receive any part of the profits from the Lucas Coal Co.

Decision will be entered accordingly upon 15 days' notice, under Rule 50.

Considered by MARQUETTE, MILLIKEN, and VAN FOSSAN.