DocketNumber: Docket Nos. 5075, 5076.
Citation Numbers: 5 T.C.M. 559, 1946 Tax Ct. Memo LEXIS 143
Filed Date: 7/2/1946
Status: Non-Precedential
Modified Date: 11/21/2020
1946 Tax Ct. Memo LEXIS 143">*143 Where law partnership agreement provided for payment of a percentage of the partnership earnings to the senior partner for a limited period, and in the event of his prior death such percentage should go to his estate for the remainder of the calendar year in which his death occurred, and thereafter, if the earnings permitted, $500 per month should be paid to his wife for a period of four years or until her prior death, held, income of the partnership, paid pursuant to such agreement, not taxable to surviving partners.
Memorandum Findings of Fact and1946 Tax Ct. Memo LEXIS 143">*144 Opinion
LEECH, Judge: These consolidated proceedings involve deficiencies in income tax for the calendar year 1940 and the taxable period January 1, 1941 to November 30, 1941, as follows:
Taxable period | ||
Docket No. | Year 1940 | 1/1/41 to 11/30/41 |
5075 | $2,176.97 | $1,586.70 |
5076 | 322.44 | 860.48 |
The issues are: (1) whether a distribution of 28 per cent of the partnership profits of the law firm of Madden, Freeman and Madden, for the period June 29, 1940 to December 31, 1940, to the Estate of Terrence J. Madden, who died June 29, 1940, constitutes taxable income to the petitioners, the surviving partners, and (2) whether the amount of $5,500, claimed as a deduction by the partnership for the taxable period January 1, 1941 to November 30, 1941, representing money paid to Blanche G. Madden, widow of the deceased partner, should be added to the distributive income of petitioners. The case was submitted on oral testimony and exhibits.
Findings of Fact
Petitioners, John G. Madden and Anne Madden, are husband and wife. Petitioner, Harry R. Freeman, is an individual. All reside in Kansas City, Missouri. During the years 1940 and 1941, John G. Madden and Harry1946 Tax Ct. Memo LEXIS 143">*145 R. Freeman (hereinafter referred to as "petitioners") were partners in the law firm of Madden, Freeman and Madden, of Kansas City, Missouri. Their respective income tax returns for the taxable periods involved were filed on the cash basis with the collector of internal revenue at Kansas City, Missouri.
Terrence J. Madden, deceased, was the father of petitioner, John G. Madden. For some years the decedent engaged in the practice of law, independently, in Kansas City. In 1918 or 1919, he formed a law partnership with petitioner, Harry R. Freeman. In about 1926, John G. Madden became associated with the firm and soon thereafter the partnership of Madden, Freeman and Madden was formed. The partnership has always operated under an oral agreement. The practice of the law firm of Madden, Freeman and Madden has largely been that of trial work. In the early part of 1935, Terrence J. Madden suffered a collapse. Although he quickly recovered, it became apparent to the other partners later in that year that he was unable to carry on his activities as theretofore and the major burden of the trial work was assumed by his son, John G. Madden. During the period 1935 to 1939, the interest of the1946 Tax Ct. Memo LEXIS 143">*146 decedent in the profits of the firm was 44 per cent, and that of the two other partners, 28 per cent each. Owing to his diminished activities, the decedent felt that his interest in the firm profits exceeded his contributions and he proposed a new arrangement. The proposal, in substance, was that as of January 1, 1939, Terrence J. Madden should receive 28 per cent of the net income of the law partnership for a limited period; should he die before the termination of such period such percentage of the net income of the firm should go to his estate during the remainder of the calendar year in which his death occurred and thereafter be paid to Blanche G. Madden, his wife, if she survived him and such income permitted such payment, at the rate of $500 per month for four years thereafter. Such distribution of net income was to cease in the event of her prior death. The question of capital assets was not at any time considered or discussed. The firm kept no capital account.
The Federal income tax returns filed by the firm of Madden, Freeman and Madden for the years 1939, 1940 and the period January 1, 1941 to November 30, 1941, disclose gross income and deductions for depreciation on law1946 Tax Ct. Memo LEXIS 143">*147 book and office equipment on a ten-year basis, as follows:
Year | Income | Depreciation |
1939 | $125,567.14 | $738.25 |
1940 | 102,632.99 | 803.28 |
1/1/41 to 11/30/41 | 90,374.73 | 791.70 |
Terrence J. Madden died on June 29, 1940. The net income of the firm for the period June 30, 1940 to December 31, 1940 was $26,186.76, which was distributed as follows:
John G. Madden | $11,522.18 or 44% |
Harry R. Freeman | 7,332.29 or 28% |
Estate of Terrence J. Madden | 7,332.29 or 28% |
The respondent determined that the sum of $7,332.29, paid to the Estate of Terrence J. Madden for the period June 30, 1940 to December 31, 1940 was income of the surviving partners and increased the income of John G. Madden in the sum of $5,820.75 and that of Harry R. Freeman, $1,369.58, totaling $7,190.33. The difference of $141.96 represents increase in deductions for partnership contributions.
In computing partnership net income for the taxable period January 1, 1941 to November 30, 1941, a deduction representing payments to Blanche G. Madden of $500 per month was claimed by the partnership. The respondent disallowed the deduction and increased the interest of John G. Madden in the sum1946 Tax Ct. Memo LEXIS 143">*148 of $3,666.67, and the interest of Harry R. Freeman in the sum of $1,833.33.
The estate of Terrence J. Madden paid an estate tax upon the income distributed to the estate and to decedent's widow under a nonwaiver agreement. The respondent assessed income taxes against the estate and the widow for the amounts paid under the agreement and such taxes were paid. Consents under the Revenue Act of 1942 were duly filed, whereby the decedent's estate and the beneficiary accepted the payments under the agreement as income.
Opinion
The question presented is whether the respondent properly included in the income of the respective petitioners their pro rata share of all the income of the law partnership of Madden, Freeman and Madden, during the taxable periods involved.
There is no material dispute as to the terms of the oral contract made between the partners of that firm which became effective January 1, 1939, which is fully set forth in our findings of fact. Terrence J. Madden died on June 29, 1940 and the terms of the agreement were fully performed. It is the position of the respondent that the partnership was dissolved by the death of the senior Madden; that the payments thereafter1946 Tax Ct. Memo LEXIS 143">*149 made, pursuant to the 1939 agreement, were income of the new partnership, belonging to the petitioners, as surviving partners, which were used to purchase the interest of the decedent in the capital assets and good will.
While ordinarily the death of a partner puts an end to the partnership, as the respondent argues, the partners may by agreement provide otherwise.
The respondent points to the fact that on the 1941 partnership income tax return only the names of two partners are shown and since depreciation was claimed, the petitioners asserted ownership of decedent's interest in the tangible assets. This, he claims, is inconsistent with their assertion that no tangible property was transferred or acquired. Petitioners reply that, if error was made, it was an accounting error. This seems plausible since it appears that on the return of the partnership covering the last six months of 1940, following decedent's death, the estate of decedent was listed as a partner. We do not think this circumstance justifies the inference the respondent suggests. We find upon this record that the parties were concerned only with the distribution of income which was regarded as belonging to the decedent if he had lived, and were not purchasing his interest in the partnership as of the date of his death. In the cases of
Decisions will be entered under Rule 50.