Opinion
Docket No. 45928.
1958-11-7
VIRGIL L. BEAVERS AND MILDRED BEAVERS, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Claiborne B. Gregory, Esq., for the petitioners. Robert L. Liken, Esq., for the respondent.
Claiborne B. Gregory, Esq., for the petitioners. Robert L. Liken, Esq., for the respondent.
Agreement to liquidate partnership with continuing partner collecting and dividing proceeds of completed work on incompleted contracts, held, to give rise to ordinary income rather than capital gain as to retiring partner's share of such amounts collected and distributed to him in tax year.
Respondent determined a deficiency in income tax for 1949 of $5,250.02 which is here in issue because petitioners reported as capital gain the proceeds received when their partnership liquidated rather than as ordinary income as respondent has determined.
FINDINGS OF FACT.
Some of the facts have been stipulated and are hereby found accordingly.
The petitioners, Virgil L. Beavers, hereafter called petitioner, and Mildred Beavers, his wife, reside at San Antonio, Texas.
In their joint individual income tax return for the calendar year 1949 filed with the collector of internal revenue for the first district of Texas, petitioners reported the receipt of ordinary income consisting of petitioner's share of partnership income of the partnership of Beavers and Lodal in the amount of $6,366.28, and reported the sale of petitioner's equity in the partnership of Beavers and Lodal as the sale of a capital asset held for more than 6 months, the proceeds of which in the amount of $16,777.22 were reported as a long-term capital gain.
In the fall of 1939, petitioner and Olaf T. Lodal entered into a partnership to conduct a consulting engineer business, known as ‘Beavers and Lodal,’ hereafter called the partnership. The partnership kept its books and reported its income on a cash receipts and disbursements basis. Under the partnership agreement petitioner was entitled to one-half the profits and Lodal was entitled to the other one-half. The service performed by the partnership consisted of preparing designs for construction to be performed and supervising the construction work to see that it was performed according to specifications. In the Federal partnership income tax return for the partnership for the short fiscal year 1949, petitioner's share of the income and credits amounted to $6,366.28.
On October 1, 1947, Beavers and Lodal, Inc., hereafter called the corporation, was organized under the laws of the State of Texas. At about the time of the organization of the corporation, petitioner moved a part of the operation of the partnership from the 14th floor of the building where the partnership business was located to the 16th floor, and commenced to devote his entire time to the new business. When petitioner moved, Lodal remained on the 14th floor in charge of the partnership. Petitioner thereupon devoted his entire time to the exclusion of the partnership, and Lodal devoted his entire time to the management of the partnership.
At the time the corporation was formed, approximately one-half of the equipment used by the partnership in its business was removed though the whole of the furniture, fixtures, engineering equipment, and automotive equipment continued to be carried on the books of the partnership as partnership assets. Lodal retained approximately one-half of the equipment for use in the business of the partnership.
About this time petitioner handed to Lodal a formal notice of desire to dissolve the partnership. On February 23, 1948, petitioner and Lodal executed an agreement stating the partnership had been ‘dissolved’; that Lodal should manage ‘the termination of the partnership business * * * and liquidation of the partnership interests'; that he should complete work on contracts then in existence; that for such services Lodal should receive a salary of $650 per month ‘in addition to his share of the profits' of the former partnership; that he was privileged to enter into new contracts with the Rural Electrification Administration in his own name, but that no new contracts were to be entered into in the name and on behalf of the partnership; that he should endeavor to collect the outstanding accounts due the partnership and discharge loans due by the partnership to the R.F.C. and Local personally, and that any balance would be divided evenly between the partners.
On December 30, 1948, the parties entered into a final agreement as to division of the partnership equipment and furniture on an approximately equal value basis. The partnership dissolved on January 3, 1949, and Lodal announced that the affairs of the partnership had been wound up. Petitioner and Lodal jointly contacted each of the holders of the contracts covering their performance of services as consulting engineers; advised them that Lodal had assumed the responsibility for the performance of the contracts; and obtained the approval of the lending agencies.
During the period February 23, 1948, to January 3, 1949, the partnership, under the direction of Lodal, carried on its work in the ordinary manner. Petitioner retained his partnership interest and realized his share of the profits of the business up to January 3, 1949.
As of January 3, 1949, the assets of the partnership remaining on hand and undivided were the goodwill, reputation, and trade name of the partnership, amounts due from clients for work performed on completed contracts and work performed as consulting engineers in the construction, installation, and erection of electrical generating and distribution systems on incompleted contracts in the then estimated amount of $42,322.47, as follows:
Jackson Electric Coop., Inc.
Victoria County Electric Coop.
Karnes Electric Coop., Inc.
McCulloch Electric Coop., Inc.
Southwest Texas Electric Coop.
Bartlett Electric Coop., Inc.
Rio Grande Electric Coop.
Belfalls Electric Coop., Inc.
Otero Electric Coop., Inc.
Sierra Electric Coop., Inc.
Central Valley Electric Coop.
Mohave Electric Coop., Inc.
Navopache Electric Coop., Inc.
Graham County Electric Coop.
Kit Carson Electric Coop.
Central New Mexico Electric Coop.
Southwest Engineers
Hill County Electric Coop.
Sulphur Springs Valley
Fort Belknap Electric Coop.
Concho Valley Electric Coop.
J.A.C. Electric Coop., Inc.
South Texas Electric Coop.
Trico Electric Coop., Inc.
The estimate of the value of the various incompleted contracts was based on the anticipation of petitioner and Lodal that the work provided for under the contracts would be carried to completion and upon the anticipation of petitioner and Lodal that the fees provided for under the contracts would be earned if the contracts were carried to completion.
Between January 3, 1949, and December 31, 1949, Lodal collection $34,932.62. The proceeds of the collections to December 31, 1949, after deduction of collection expenses, were applied to pay obligations of the partnership and the remainder was paid to the partners. The net proceeds of collection of accounts receivable at December 31, 1949, were $33,554.44, and each of the partners realized one-half thereof, or $16,777.22. Each of the partners, Lodal and petitioner, reported the amount of $16,777.22 on his income tax return (Form 1040) for the calendar year 1949 as gain from the sale or exchange of capital assets held for more than 6 months. Petitioner reported his receipt of proceeds of the collection of accounts receivable of the partnership as a sale of his partnership interest to Lodal, and Lodal reported his share of the proceeds of collection of accounts receivable as sale of his partnership interest to petitioner. In reporting the gain petitioner claimed a basis of $1,000.
Petitioner and Lodal never discussed a purchase by Lodal of petitioner's partnership interest.
The $16,777.22 received by petitioner during the calendar year 1949 was ordinary income and not gain from the sale of a capital asset.
OPINION.
OPPER, Judge:
Although the parties at times refer to the transaction involved here as the ‘sale’ of petitioner's partnership interest, the arrangement particularly as it was carried out by the participants shows unequivocally, that what they did was to liquidate and wind up the partnership, collect the outstandings, and divide the proceeds. Under this procedure, petitioner did not receive from his ex-partner a lump sum to compensate for a transfer of something to his ex-partner,
but all that happened was that the liquidating partner continued to collect the receivables, and as the proceeds were received he gave petitioner his share (one-half).
This characterization follows not so much from the testimony of the ex-partner that there was no sale as from the inescapable operation of the transaction itself.
In other words, there was here no ‘lump-sum'
consideration for a business whose assets include accounts receivable with the connected questions of whether the latter are ‘sold’ as a capital asset on the one hand or transformed into cash but as ordinary income, on the other. See, e.g., Tunnell v. United States, (C.A. 3) 259 F.2d 916.
Certain agreements were made as to the tangible assets, such as furniture and equipment, but that phase is not in dispute.
Nor, for the same reason, do we have present here any problem of valuation. See Tunnell v. United States, Supra. True, the uncollected items of services already performed were given an estimated figure by the parties in connection with the agreement of dissolution. But that was not what petitioner received, nor what the respondent seeks to tax. Irrespective of the previously estimated amount, what petitioner was paid during the instant tax year— and that is all that is here involved— was exactly half of the total net proceeds actually collected by the liquidating partner, which, incidentally, was less than the earlier estimate.
Petitioner earnestly contends that this is a case of first impression, because the receivables allocated to him, while they derived from services already performed and completed, arose out of continuing contracts which had to be finally concluded before the amounts contracted for could be collected; and that the agreement of dissolution required his ex-partner, and not petitioner, to complete the contracts and absolved petitioner from further participation. It may be remarked parenthetically that the evidence is by no means convincing to that effect and, for all that appears, at least some of the collections were from contracts already wound up when the firm dissolved. We have been unable to make any specific finding in that respect one way or the other.
But be that as it may, the question propounded by petitioner does not arise on this record for the reasons already given. As to what would be the result if petitioner's ex-partner had paid him a specified amount in advance for the privilege of completing the contracts and collecting the entire compensation at their conclusion we need intimate no opinion. But see Berry v. United States, (W.D. Tenn., July 21, 1958) . . . F. Supp. . . . . That this did not occur has already been pointed out. The agreement of dissolution was in the simplest possible form, and while an amount had to be estimated for the portion of the total receipts attributable to past services,
petitioner's share of that amount was in substance and in fact not paid him at all by his ex-partner, who was merely a collecting agent, but by the client for whom he and his ex-partner had both performed the services for which payment was being made;
To put it another way, it was agreed that the fees for any work performed after the dissolution date would belong entirely to the ex-partner. ‘I acquired the remaining work in those contracts and carried them on to completion and that is what was meant by that statement.’
and petitioner, as he would in a continuing partnership, received for those services only the partnership share to which the original transaction would have entitled him. Presumably if the ex-partner had collected nothing for the previously completed services, he would owe nothing to petitioner and the latter would have received nothing in spite of his agreement to let his ex-partner continue the business. The latter thus passed without consideration.
It is hence inapposite even to attempt to invoke here the doctrine of such cases as Helvering v. Horst, 311 U.S. 112, 116, that: ‘the rule that income is not taxable until realized has never been taken to mean that the taxpayer, even on the cash receipts basis, who has fully enjoyed the benefit of the economic gain represented by his right to receive income, can escape taxation because he has not himself received payment of it from his obligor.’
It is hence entirely appropriate to say here, as it was in the words of Judge Kalodner in Tunnell v. United States, supra, that:
In the instant case, at the time taxpayer sold his partnership interest, fees had been earned. Although these were not then collected, taxpayer's right as to them was complete, and the collection of the fees would have resulted in ordinary income.
For the reasons stated, we find no error in respondent's determination.
Decision will be entered for the respondent.