DocketNumber: Docket No. 11399.
Citation Numbers: 16 B.T.A. 927, 1929 BTA LEXIS 2494
Judges: Murdock
Filed Date: 6/5/1929
Status: Precedential
Modified Date: 1/12/2023
*2494 Before the Commissioner's determination of the individual tax liability of a partner involving his liability for excess-profits tax on his salary as a partner will be disturbed, it must appear that the salary assigned to him upon which the Commissioner has computed an excess-profits tax, is in an amount larger than would be reasonable under all the circumstances.
*928 The Commissioner determined a deficiency of $1,851.58 in income and profits taxes for 1917 and a deficiency of $3,127.37 in income taxes for 1918. There is but one issue raised in this proceeding, namely, the right of the respondent to increase the petitioner's tax liability by permitting the partnership of Martin-Whitehill Co., of which the petitioner was a partner until June 30, 1918, additional deductions for partners' salaries for the fiscal years ended September 30, 1917, and June 30, 1918. Most of the facts were stipulated.
FINDINGS OF FACT.
The petitioner is an individual residing at Pittsburgh, Pa. In 1916 he formed a partnership with W. W. *2495 Martin known as Martin-Whitehill Co. Martin owned a 65 per cent interest in the partnership and the petitioner owned a 35 per cent interest therein. The partnership continued until June 30, 1918, when it was dissolved. On July 7, 1918, the former partners entered into an agreement whereby the petitioner was to receive a certain amount of cash in consideration of the assignment and transfer by him of his interest in the partnership business to Martin who was to assume the partnership liabilities at the date of the agreement. The agreement contained the following clause:
It is likewise agreed and understood that the purpose of this agreement is to absolutely and completely sever all business relations and connections whatsoever of the said ELMER WHITEHILL with the said business known and conducted as the MARTIN WHITEHILL COMPANY with the same force and effect as if the partnership had never been in existance.
The petitioner for the years in question kept his books and made his returns on the cash receipts and disbursements basis. For the calendar year 1917 he reported $9,250 as salary from the partnership and $15,248.57 as his distributive share of the net income of the partnership. *2496 For 1918 he returned $2,500 as salary from the partnership and $25,463.26 as his distributive share of the net income of the partnership.
Subsequent to the sale of his partnership interest and the receipt of the proceeds therefrom, the petitioner has not received any money or benefit from the partnership and no book entries have been made on the partnership books with reference to the salaries of the partners.
*929 In determining the tax liability of the partnership, the Commissioner at the solicitation and upon the representations of W. W. Martin made in December, 1924, permitted a total salary deduction of $45,000 for each of the fiscal periods ending September 30, 1917, and September 30, 1918, and allocated $25,000 to W. W. Martin and $20,000 to the petitioner. The request for the allowance to the partnership of the salary deductions indicated above was made by W. W. Martin without the knowledge or consent of the petitioner and was made to protect the interests of Martin as successor to the partnership.
On August 8, 1925, the petitioner received his first information that an increased salary allowance had been made to the partnership. Thereafter he received a*2497 notice of deficiencies in his tax for the calendar years 1917 and 1918. In the determination of these deficiencies the Commissioner used the same allocation of salaries as he did in determining the tax liability of the partnership. Attached to the deficiency notice dated November 30, 1925, eceived by the petitioner, there is a statement containing the following paragraph:
In reply you are advised that information on file in this office discloses that the partnership of Martin-Whitehill Company, 5847 Center Ave., Pittsburgh, Pa., of which you are a member, requested under date of May 15, 1924, and supplement to the protest filed March 11, 1924, to have the salary allowance for yourself and Mr. W. W. Martin increased from $2,500 and $5,850 to $20,000 and $25,000 respectively.
OPINION.
MURDOCK: The petitioner during all of the calendar year 1917 and the first half of the calendar year 1918, was a member of a partnership known as Martin-Whitehill Co. In 1918 he discontinued his connection with the partnership business. He complains that thereafter and without his knowledge or consent, his former partner, W. W. Martin, prevailed upon the Commissioner to have the salary allowance*2498 for the two partners increased, which increase forms the basis for a part of the deficiency for the year 1917 now in controversy, due to the fact that on the salary allocated to him an excess-profits tax is computed. He also claims that his tax liability for 1918 was increased because of this same salary reallocation. In regard to the year 1918 the petitioner is clearly in error, for the provisions of the 1917 Act relating to excess-profits taxes on partnerships and individuals was repealed and no corresponding provisions were reinacted in the Revenue Act of 1918. Also, it appears from the Commissioner's deficiency notice that in the computation of the petitioner's tax liability for the year 1918 he did not include any excess-profits tax.
*930 The Revenue Act of 1917, section 201, provided for a tax, with some exceptions, on the income of every partnership or individual equal to specified percentages of the net income in excess of deductions. It further provided, in section 206, the basis on which the net income of a partnership or individual should be ascertained and allowed certain deductions, including the necessary expenses actually paid in carrying on any business*2499 or trade not including personal, living or family expenses. Immediately upon the enactment of this Act the Commissioner, with the approval of the Secretary of the Treasury, promulgated Regulations 41, which, in article 32, provided that in computing the net income for purposes of the excess-profits tax a partnership should be allowed to deduct as an expense with respect to any period prior to March 1, 1918, salaries or compensation for services actually rendered by individual partners during the taxable year. We have heretofore held that this provision was reasonable and proper in the light of the intent and purpose of the Revenue Act of 1917. . The same article of the regulations further provided that a partner in his individual capacity was, however, subject to the excess-profits tax, if any, at a certain rate with respect to any salary or compensation from the partnership for personal services. The Commissioner thus avoided double taxation of the same income, and in our opinion this latter part of this article of the regulations was reasonable and proper under the Revenue Act of 1917. We have also held that under this Act and*2500 these regulations a partnership was entitled to deduct an amount, reasonable under all the circumstances, as salaries or compensation for the services of the partners.
In the case of each partnership which did business during 1917, it was the duty of the Commissioner to determine the amount of the net income of such partnership subject to excess-profits tax, and in this connection it was his duty to determine the amount to be deducted by the partnership representing a reasonable salary for each of the partners who performed services for the partnership during such year. This was his duty, no matter what was shown on the returns of the partnership or what was shown on the returns of the individual partners,