DocketNumber: Docket No. 89865
Citation Numbers: 42 T.C. 974, 1964 U.S. Tax Ct. LEXIS 51
Judges: Arundell
Filed Date: 8/27/1964
Status: Precedential
Modified Date: 1/13/2023
*51
*975 Respondent determined a deficiency in income tax for the calendar year 1956 in the amount of $ 2,773.03. Petitioner alleges that instead of a deficiency he has overpaid his taxes for 1956 in the amount of $ 251.11.
One error is assigned as follows:
*53 (a) The Commissioner determined that the petitioner's income from the Emerson Engineers, a partnership, was $ 14,115.06, and erroneously allocated $ 13,562.79 to income from domestic sources and $ 552.27 to income from foreign sources.
FINDINGS OF FACT
Some of the facts were stipulated and are so found.
Petitioner is an adult citizen of the United States and resides in New York, N.Y. He filed his Federal income tax return for the calendar year 1956 with the district director of internal revenue in Upper Manhattan, New York City, on April 11, 1957.
Petitioner became a nonresident of the United States on January 10, 1952, and remained a nonresident until July 29, 1956, being a nonresident for the required period mentioned in
Petitioner became a partner of Emerson Engineers on December 1, 1950, and was a partner of Emerson Engineers during the entire taxable year 1956.
The method of accounting of the Emerson Engineers partnership was the accrual basis, and the accounting period was the fiscal year ending on November 30 of each year.
Paragraph Fourth*54 of the partnership agreement provided that all profits and all losses shall be divided between and borne by the copartners in the following proportions. 1
Name of partner | Percent |
Alonzo Flack | 30.6123 |
Elmer C. Fremont, Sr | 24.4898 |
Charles O'C. Sloane | 10.2041 |
Alfred M. S. Strohm | 8.1633 |
Elmer C. Fremont, Jr | 10.2041 |
Roland B. Anderton, Sr | 4.0816 |
Dana Devereux | 4.0816 |
Thomas B. Foster | 4.0816 |
John C. Martin, Jr | 4.0816 |
Total percentage | 100.0000 |
*976 On October 6, 1951, the partnership agreement, dated December 1, 1950, was amended to read as follows:
Twelfth: Each partner shall be entitled to a monthly drawing account, the amount of which shall be determined and fixed by*55 the majority in interest of all the partners, and shall further be entitled to a distributive share of the ordinary net income based upon his percentage interest of the profits, after subtraction of drawing account.
Emerson Engineers were engineering management consultants of the Arabian American Oil Co. (hereinafter called Aramco) during the years 1952 through July 29, 1956.
Petitioner represented Emerson Engineers in Saudi Arabia during the period January 10, 1952, through July 29, 1956.
The only source of revenue for Emerson Engineers was fees from professional services rendered to various corporations throughout the world.
Paragraph Fifth of the partnership agreement provided: "Fifth: The partners shall devote all their time and attention to the affairs of the copartnership."
On March 8, 1956, the managing partner of the partnership advised petitioner by letter that "Beginning April 1st, 1956, your monthly drawing will be raised from $ 750.00 per month to $ 800.00 per month."
Petitioner's income for the period beginning January 1, 1956, through July 29, 1956 (first period), and for the period beginning July 30, 1956, through December 31, 1956 (second period), was as follows:
Item | First period | Second period | Total |
Fixed drawings | $ 6,200.00 | $ 3,200.00 | $ 9,400.00 |
Outside-of-the-country expenses | 608.06 | 608.06 | |
Distributive share | 2,738.00 | 1,369.00 | 4,107.00 |
Subtotal | 9,546.06 | 4,569.00 | 14,115.06 |
Dividends | 709.14 | 709.14 | |
Gain from capital assets | 170.56 | 170.56 | |
Grand total | 9,546.06 | 5,448.70 | 14,994.76 |
*56 The foreign income of the partnership for the year 1956 was in the sum of $ 18,538.70, all of which was received from Saudi Arabia, and this was for the services that petitioner rendered to Aramco.
The partnership's fee income from foreign services for the fiscal year ending November 30, 1956, was $ 18,538.70. The income from domestic sources of the partnership was $ 455,274.11, and the percentage of gross fees received from foreign sources is 3.9126 percent.
Petitioner reported on his 1956 individual Federal income tax return the amount of $ 4,869.02 as his distributive share of partnership income. The respondent determined that petitioner's total distributive share of partnership income was the previously mentioned subtotal *977 of $ 14,115.06; that 3.9126 percent of this latter amount, or $ 552.27, represented receipts from foreign sources which were excludable from gross income; and that the remainder, or $ 13,562.79, was received from sources within the United States and formed a part of petitioner's reportable distributive share of partnership gross income. In a statement attached to the deficiency notice, respondent explained the adjustment thus:
Year | Income from U.S. | Income from U.S. | Increase |
sources per return | sources corrected | ||
1956 | $ 4,869.02 | $ 13,562.79 | $ 8,693.77 |
*57 Your contention that drawings constitute salaries under the existing partnership agreements is disallowed and the percentage of the total partnership income allocable to U.S. sources has been applied before the deduction of these drawings or salaries from distributable income.
ULTIMATE FINDINGS OF FACT
Petitioner's monthly drawings received from his domestic partnership while he was a resident of Saudi Arabia during the months of January 1, 1956, to July 29, 1956, inclusive, are includable in his distributive share of partnership gross income.
Under the exclusion provisions of
OPINION
The ultimate question is how much of the $ 14,115.06 of petitioner's income from the partnership during the calendar year 1956 is excludable from petitioner's income under
*59 This identical issue 4 involving the years 1953, 1954, and 1955 was tried before the U.S. District Court (S.D.N.Y.) in
In arguing his case before the District Court, petitioner claimed that his monthly receipts from the partnership were "guaranteed payments" within the meaning of
The plaintiff claims *60 that his monthly receipts were guaranteed payments within the meaning of
There is no basis for any contention that the plaintiff was not acting in his capacity as partner in Saudi Arabia so as to render applicable
Since the amounts received by Foster during the years 1953 and 1954 were, in fact, distributions of partnership income, *61 he is not entitled to any refund.
*979 Petitioner did not pursue the same argument before the Court of Appeals. At this point it should be noted that
Upon appeal, petitioner argued that conceding that the entire amount received from the partnership was part of his distributive share, it was nevertheless wholly excludable from his gross income. He asserted that under
Although the first part of taxpayer's argument, that his distribution consisted of foreign earned income regardless of what the partnership provisions may say, is ingenious, we *63 cannot accept it. We think it is impossible not to consider the partnership provisions of the statute in any case where the tax liability of a partner is at stake, without doing violence to the statutory scheme. Furthermore, the argument is inconsistent with the specific provisions of the articles of partnership. The partnership agreement gave appellant a right to 4.0816% of the total net profits, and required him to sustain the same proportion of net losses. Thus, if the Saudi Arabian operations in which he was engaged sustained a loss, he would still have received a share of the profits if the rest of the business was profitable and the converse is also true. Whatever compensation he received depended on the overall operations of the firm. We think, therefore, that the mere facts that appellant performed services abroad and received income from the partnership do not entitle him to regard the distribution entirely as earned income from sources outside the United States.
* * * *
In the last analysis, taxpayer cannot escape the implications of the fact that his income did not depend solely on his own services in a foreign country, but on the services rendered by his fellow partners*64 and the employees of the partnership both in the United States and abroad. In order properly to reflect this,
This "proportion" for 1956 is the previously mentioned amount of $ 552.27 which is 3.9126 percent of petitioner's total income of $ 14,115.06 from the partnership for 1956.
In the instant case now before us for 1956, petitioner has returned to the argument he made before the District Court to the effect that his monthly receipts from the partnership were "guaranteed payments" within the meaning of
While it is probably true that the opinion of the District Court concerning the application of
We see nothing in the
We sustain the respondent's determination.
1. The exact language of the agreement, as far as petitioner is concerned, is as follows: "Fourth: All profits and losses shall be divided between and borne by the copartners in the following proportion, that is to say * * * Thomas B. Foster shall be entitled to 4.0816 of the profits and shall bear 4.0816 of the losses * * *"↩
2.
(a) General Rule. -- The following items shall not be included in gross income and shall be exempt from taxation under this subtitle: * * * * (2) Presence in foreign country for 17 months. -- In the case of an individual citizen of the United States, who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period, amounts received from sources without the United States * * * if such amounts constitute earned income (as defined in subsection (b)) attributable to such period; * * *
(b) Definition of Earned Income. -- For purposes of this section, the term "earned income" means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered * * *↩
3. The amount of $ 7,093.95 would be computed as follows:
Fixed drawings, first period | $ 6,200.00 |
Outside-of-the-country expenses | 608.06 |
3.9126% of $ 7,307 ($ 4,107 + $ 3,200) | 285.89 |
Total | 7,093.95 |
4. Except that petitioner claimed under
5.
(a) Partner Not Acting in Capacity as Partner. -- If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this section, be considered as occurring between the partnership and one who is not a partner.
* * * *
(c) Guaranteed Payments. -- To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of
6. See sec. 771 of the 1954 Code dealing with the effective date for subchapter K.↩