Burns v. Commissioner

FRANCIS L. BURNS AND LILLIAN BARRY, EXECUTORS, ESTATE OF MICHAEL F. BURNS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Burns v. Commissioner

Docket Nos. 14986, 21389.

United States Board of Tax Appeals

13 B.T.A. 293; 1928 BTA LEXIS 3276;

September 5, 1928, Promulgated

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1. A limited partnership of New York is a partnership under section 218, Revenue Act of 1921.

2. The failure of such a partnership to comply with statutory requirements of recording and publication does not take from the limited partner his liability for income tax as a partner.

Harry Cohen, Esq., and Louis H. Moos, Esq., for the petitioners.

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

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STERNHAGEN

These proceedings were consolidated and involve deficiencies for the calendar years 1920 and 1923 and for the period from January 1 to April 28, 1924. The deficiency for 1920 has been conceded by petitioner.

Respondent treated as decedent's income from a partnership during 1923 amounts received by decedent in subsequent periods, and petitioners attack this determination on the ground that decedent was not a member of a partnership and therefore not taxable in respect of these amounts until they were received.

FINDINGS OF FACT.

Under date of April 21, 1923, the decedent, Michael F. Burns, entered into the following agreement:

AGREEMENT made this 21st day of April, 1923, between JAMES M. CURRAN, of 78 Clinton Avenue, Montclair, New Jersey, and BARTHOLOMEW J. BARRY of 16 East 63rd Street, New York, N.Y., hereinafter described as the General Partners, and MICHAEL F. BURNS of 16 East 63rd Street, New York, N.Y., hereinafter described as the Limited Partner:

WITNESSETH. - 1. Said parties hereby form a limited partnership for the purpose of conducting a general business in cotton goods and all business incidental thereto, under the firm name and style of CURRAN & BARRY, said partnership to have its principal place of business in the City, County and State of New York.

2. Said partnership shall commence on the 16th day of April, 1923, and shall terminate at the close of business, on the 15th day of April, 1928.

3. The Limited Partner contributes to the capital of the partnership the sum of Two hundred and fifty thousand ($250,000.) Dollars in cash.

4. The Limited Partner shall receive by reason of his contribution a sum equal to one (1%) per cent of the net business invoiced by the partnership during the term thereof specified in Clause "2" of this agreement. The phrase "the net business invoiced" is defined by the parties as meaning the gross or total amount of business invoiced minus trade and cash discounts allowed, mill agents' selling commissions, allowances for goods returned if any, and other incidental deductions customarily made or occurring in the cotton goods business. Payment under this clause shall be made on or about the 15th of each month covering the net business invoiced during the preceding month.

5. The General Partners at all times during the continuance of this copartnership shall devote their and each of their best endeavors to the partnership business and for the joint interest and advantage of the partnership.

6. The Limited Partner shall not have any liability to the creditors of the partnership other than by reason of his capital contribution above specified. as between the parties hereto, all losses, if any, incurred by the partnership shall be borne by the General Partners to the extent of and until their capital contributions to the partnership shall be exhausted; in the latter event, and then only, shall be losses incurred by the partnership be chargeable to the capital contribution of the Limited partner above specified.

7. The General Partners shall at all times during the term of the partnership keep accurate and complete books of account of the partnership business and all the transactions thereof, to which books the Limited Partner shall at all times have free and ready access.

8. The General Partners agree that without the written consent of the Limited Partner, they will not either sell, assign, mortgage or in any manner dispose of the business of the copartnership; nor of its assets except in the regular course of business.

9. No withdrawals shall be made by the General Partners, or either of them, which shall make inroad upon the capital contribution of the Limited Partner above specified.

10. Upon the dissolution of the partnership, under operation of law or by agreement of the parties, the Limited Partner shall be entitled to the return of his capital contribution in cash, as soon as the liquidation of the partnership accounts will permit and in no event later than six months after such dissolution; with absolute priority of payment in full, before any payments shall be made to the General Partners.

11. The death of the Limited Partner during the term of the partnership shall not operate to dissolve the partnership, but the legal representatives of the Limited Partner shall become the substituted Limited Partner under all the terms and conditions of this agreement.

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day year first above written.

J. M. CURRAN. [L.S.] B. J. BARRY. [L.S.] M. F. BURNS. [L.S.]

On January 15, 1924, Burns received from Curran and Barry for December, 1923, the sum of $6,001.20, pursuant to the above agreement and computed in accordance with paragraph 4 thereof.

Burns died on April 28, 1924, and petitioners are the executors of his estate.

On May 20, 1924, the estate of the decedent received from Curran and Barry for April, 1924, the sum of $5,781.68, pursuant to the above agreement and computed in accordance with paragraph 4 thereof.

The decedent and his estate kept their books and made their returns on a cash basis. The estate filed returns on the basis of fiscal years ended April 30 of each year.

In his return the decedent reported the amounts received from Curran and Barry pursuant to this agreement as "income from partnerships * * *."

OPINION.

STERNHAGEN: The Commissioner, acting under section 218(a), Revenue Act of 1921, ¹ determined that the item of $6,001.20 was part of the distributive share of Burns as a partner in the income of the partnership of Curran and Barry in 1923. If this provision of the statute applies, it is immaterial that the amount was actually received in 1924, even though Burns made his individual return on the basis of actual receipts. The petitioners contend, however, that Burns was not a partner and therefore section 218 is not applicable. They concede that if a partnership existed the deficiency is correct. That a New York limited partnership is within section 218, as stated in article 1505, Regulations 62, ² is not disputed.

The agreement sets forth that the parties form a limited partnership. Its terms are those prescribed by the Limited Partnership law of New York, Cons. Laws, ch. 39, art. 8, which are those of the uniform partnership law. It is suggested by petitioners that it does not appear that the State requirements of recording and publication have been fulfilled. The burden of proof being on petitioners, we apply the omission against them and assume the performance of these formal statutory requirements. Were they not performed, authority is lacking to establish that such omission is ipso facto so substantial as to make the relation invalid as a limited partnership.

Assuming, however, as petitioners urge, that these formal matters are requisite and that they have been omitted, the effect would have been not to destroy the partnership relation, but rather to have deprived the decedent of his limitation of liability and to have left him a general partner.

We have considered the petitioners' argument seeking to demonstrate that this was in no event a partnership and that decedent was a mere lender with no interest in the profits. We can not adopt petitioners' reiterated notion that decedent had no proprietary interest in the firm. Looking at the evidence, we find only the bare terms of the agreement, the fact of payment and the fact that both decedent during his lifetime and the firm prior to and after his death stated on their income-tax returns that this was a partnership of which Burns and his estate were members, and that the amount received by Burns and his estate were their shares of partnership income. From the evidence we are of opinion that a partnership existed within the meaning of section 218, and the respondent's determination upon that hypothesis was correct.

Judgment will be entered for the respondent.

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Footnotes

• 1. SEC. 218. (a) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner's net income is computed. ↩

• 2. ART. 1505. Limited partnership as partnership.↩ - So-called limited partnerships of the type authorized by the statutes of New York and most of the States are partnerships and not corporations within the meaning of the statute. Such limited partnerships, which can not limit the liability of the general partners, although the special partners enjoy limited liability so long as they observe the statutory conditions, which are dissolved by the death or attempted transfer of the interest of a general partner, and which can not take real estate or sue in the partnership name, are so like common law partnerships as to render impracticable any differentiation in their treatment for tax purposes. Michigan and Illinois limited partnerships are partnerships. A california special partnership is a partnership.