Opinion
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. James Temple Gwathmey, a citizen of the United States and a resident of New York City (hereinafter sometimes referred to as the decedent), died June 11, 1924. He left a will naming, as executors, Gaines Gwathmey, Archiball Binford Gwathmey, Jr., Archiball Binford Gwathmey, 2d, and James S. Darcy, to whom letters testamentary were issued July 26, 1924, and they are now the duly qualified executors of the decedent's estate and plaintiffs herein.
2. At the time of his death the decedent was a member of the partnership of George H. McFadden & Bro. with its principal office at Philadelphia, Pa., where it was engaged in business as cotton and merchandise brokers. The partnership operated on a fiscal year basis with such year ending August 31st. The articles of partnership which were in effect at the time of the decedent's death were entered into August 1, 1922, and by reference are made a part of this finding.
The articles of partnership read in part as follows:
"The parties hereto agree to form a partnership under the firm name of George H. McFadden & Bro., for the purpose of conducting the business of dealing in cotton and general merchandise, said partnership being entered into upon the understanding of all that they consider, as they always have done, that George H. McFadden, is, as he always has been, the absolute head of the house of George H. McFadden & Bro., and upon the understanding that when any difference of opinion shall arise between the members of the firm as to its policy or management, George H. McFadden's decision shall be absolute and final. * * *
"Article IV.
"The interest of J. Temple Gwathmey shall be limited solely to participation in the profits of the New York Office of George H. McFadden & Bro. to the extent of fifty per cent (50%) thereof. Said Gwathmey, as between the partners of George H. McFadden & Bro., shall be liable only for the losses of the New York Office of George H. McFadden & Bro. in the same proportion as he is entitled to share in said profits. Said Gwathmey shall have no interest or participation in the profits other than the above recited share of profits of the New York Office, nor in the assets, firm name, or good will of the firm of George H. McFadden & Bro. The amount of profits and losses and the amount of business of the New York Office of George H. McFadden & Bro. shall be determined from time to time by the partners of George H. McFadden & Bro. other than said Gwathmey, and such determination shall be final and conclusive on the said Gwathmey. * * *
"Article VIII.
"In case of the death of one of the partners during the currency of any business year, his interest shall be continued until the expiration of said year, being credited with profits less withdrawals, or charged with losses plus withdrawals. At the expiration of said year the estate of said partner shall be credited with the amount which was to his credit at the last periodical ascertainment of values plus said profits less withdrawals, or minus said losses plus withdrawals.
"If the business of the partnership be continued by some or all of the remaining partners by a firm composed of some or all of the remaining partners, either alone or in connection with others, the new firm shall put to the credit of the estate of the dead partner the amount thus ascertained, together with any interest upon his capital accruing since the last ascertainment of his contribution. The estate shall be a creditor of the new partnership and shall be entitled to be paid one-fifth in cash at the end of the business year and the residue in four equal annual installments, with interest at the rate of eight per centum (8%) per annum, payable quarterly. "The provision is upon the condition that in any new firm thus entitled to credit there shall be members of the old firm entitled to seventy per centum (70%) of the total amount to the credit of all the partners exclusive of the dead partner at the time of ascertainment of values at the expiration of the current year during which said partner died.
"It shall be optional with the new firm to anticipate the payment of the whole or any part of the principal due to the deceased partners upon the expiration of thirty (30) days' notice to the personal representative of such deceased partners. * * *"
March 9, 1925, following decedent's death, pursuant to the terms of the partnership agreement referred to above, the partnership determined the net amount of the decedent's interest in the partnership on that date (March 9, 1925) to be $181,775.28, which was arrived at in the following manner:
EXHIBIT A.
J. Temple Gwathmey, March 9, 1925
| Dr. | Cr. | |||
| 1923 | ||||
| Sept. | 1 | Balance | $103,671.76 | |
| Dec. | 23 | Proportion of Amfranco capital stock | $31,438.22 | |
| 1924 | ||||
| Feb. | 4 | Proportion of Haiti-Providence J/A | 751.48 | |
| Feb. | 28 | Proportion of McFadden-Bigio J/A | 571.33 | |
| July | 31 | Transfer of Personal a/c from New York | 59,856.78 | |
| Aug. | 31 | Interest to August 31st, 1924 | 4,587.50 | |
| Aug. | 31 | Proportion of N. Y. P. & L. 1920/21 | 1,121.62 | |
| Aug. | 31 | Proportion of N. Y. P. & L. 1923/24 | 164,199.22 | |
| Oct. | 28 | Transfer of Personal a/c from N. Y. C/D 8/31/24 | 1,042.50 | |
| Nov. | 21 | Additional compensation to N. Y. employees for season 1923/24--C/D 11/21/24 | 8,948.75 | |
| Dec. | 12 | Adjustment with W. D. Stuart of payment made by W. A. Mayer--C/D 5/16/23 | 489.74 | |
| Dec. | 12 | Proportion of additional coffee dept. profits for season 1923/24--C/D 12/12/24 | 680.33 | |
| Dec. | 12 | Proportion of adjustment with W. D. Stuart and C. Arndt, Jr., account of Haitian Merc. Co. overhead expenses season 1923/24--C/D 7/31/24 | 370.97 | |
| 1925 | ||||
| Jan. | 7 | Proportion of H. T. Dumbell a/c charged off account of settlement of all claims of Mr. Dumbell C/D 8/31/21 | 2,075.21 | |
| Jan. | 30 | Proportion of additional compensation to N. Y. employees, season 1923/24--C/D 11/26/24 | 25.00 | |
| Feb. | 16 | Proportion of payment made by C. D. Freeman C/D 1/2/25 | 5,399.30 | |
| Feb. | 27 | Proportion of W. D. Stuart balance | 1,935.35 | |
| Feb. | 27 | Difference between 8% allowed Estate and 6% charged W. D. Stuart from 8/31/24 to 3/9/25 | 20.19 | |
| Feb. | 27 | Interest to March 9, 1925--8%--since 8/31/24 | 6,995.45 | |
| ------------ | ------------- | |||
| $106,202.71 | $287,977.99 | |||
| ------------- | ||||
| 106,202.71 | ||||
| ------------- | ||||
| Balance due Estate March 9, 1925 | $181,775.28 |
3. The decedent's share of the profits of the partnership for the fiscal year ending August 31, 1924, was $157,694.90, of which amount $32,174.53 accrued from the date of decedent's death (June 11, 1924) to August 31, 1924. The amount of $157,694.90 was included in the amount of $181,775.28, which was determined on March 9, 1925, as due to the decedent's estate from the partnership, and no part of such amount was paid to the decedent's estate prior to March 9, 1925.
4. After the death of the decedent plaintiffs duly filed an estate tax return and on August 10, 1925, paid the tax shown to be due thereon of $2,303.46. Plaintiffs included in the gross estate decedent's share of the earnings of the partnership for the fiscal year ended August 31, 1924 ($157,694.90), without making any deduction for the part of such earnings ($32,174.53) which accrued from June 11, 1924, to August 31, 1924. After an audit of that return in which certain adjustments were made, which are not material to the issues in this case, the Commissioner determined a deficiency of $862.73, which was paid April 23, 1928, with interest of $143.52. In the aforementioned audit the Commissioner included decedent's share of the partnership profits for the fiscal year ended August 31, 1924, as a part of the decedent's gross estate without any reduction of such earnings on account of the part thereof which accrued from June 11, 1924, to August 31, 1924.
5. The decedent kept his books and rendered his returns on the receipts and disbursement basis. He filed his income tax returns on the basis of a calendar year. Subsequent to the death of the decedent his executors used the same basis and method of reporting both the income of the decedent and the income of his estate.
6. Plaintiffs, as executors of the estate of the decedent, filed an income tax return for the period from June 12, 1924, to December 31, 1924, but that return included no part of decedent's share of his interest in the earnings of the partnership for the fiscal year ending August 31, 1924.
7. Upon an audit of the return referred to in finding 6 for the period June 12, 1924, to December 31, 1924, the Commissioner added to the net income shown on such return $32,174.53, which represented decedent's share of the partnership profits which accrued from June 11, 1924, to August 31, 1924.
8. As a result of the foregoing action by the Commissioner, a deficiency of $4,848.16 was determined and plaintiffs were notified thereof by letter dated March 14, 1929. No proceedings were instituted by plaintiffs before the Board of Tax Appeals on account of such deficiency, and after appropriate assessment the deficiency was paid June 14, 1929, together with interest thereon in the amount of $1,225.59.
9. September 9, 1929, plaintiffs filed a claim for refund of $4,848.16, income tax for the period June 12, 1924, to December 31, 1924, and assigned as a basis therefor that the decedent's share of the earnings of the partnership ($32,174.53) which accrued for the period from June 12, 1924, to August 31, 1924, had been erroneously included in the gross income of the estate of decedent for the period June 12, 1924, to December 31, 1924. The claim further alleged that the amount of $32,174.53 (decedent's share of the earnings of the partnership from June 12, 1924, to August 31, 1924) had been included as a part of the gross estate of the decedent for estate tax purposes and such action had been approved by the Commissioner, and it was therefore urged that what had previously been reported, and accepted as a part of the corpus of the estate, could not when received be considered as income to the estate. The Commissioner rejected the claim for refund March 14, 1930.
10. As a result of the action set out above, decedent's share of the partnership profits for the period June 11, 1924, to August 31, 1924 ($32,174.53), has been taxed twice; namely, first, as corpus of the estate on which the estate tax was paid; and, second, as income of the estate on which an income tax was paid. The amount of the estate tax which was collected from the estate as the result of the inclusion therein of the foregoing item of $32,174.53 was $791.68.
Conclusion of Law.
Upon the foregoing special findings of fact which are made a part of the judgment herein, the court decides, as a conclusion of law, that the plaintiffs are entitled to recover the sum of $791.68, with interest as provided by law.
It is therefore adjudged and ordered that the plaintiffs recover of and from the United States the sum of $791.68, with interest as provided by law from April 23, 1928.
Allen G. Gartner, of Washington, D.C., for plaintiffs.
Joseph H. Sheppard, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
WHALEY, Judge.
James Temple Gwathmey died June 11, 1924. He had been a member of a partnership engaged in the business of cotton and merchandise brokers. The partnership agreement provided:
"In case of the death of one of the partners during the currency of any business year, his interest shall be continued until the expiration of said year, being credited with profits less withdrawals, or charged with losses plus withdrawals. At the expiration of said year the estate of said partner shall be credited with the amount which was to his credit at the last periodical ascertainment of values plus said profits less withdrawals, or minus said losses plus withdrawals.
"If the business of the partnership be continued by some or all of the remaining partners by a firm composed of some or all of the remaining partners, either alone or in connection with others, the new firm shall put to the credit of the estate of the dead partner the amount thus ascertained, together with any interest upon his capital accruing since the last ascertainment of his contribution. The estate shall be a creditor of the new partnership and shall be entitled to be paid one-fifth in cash at the end of the business year and the residue in four equal annual installments, with interest at the rate of eight per centum (8%) per annum, payable quarterly. * * * "
The fiscal year of the partnership ended on August 31. The decedent's share of the partnership profits for the fiscal year ended August 31, 1924, was $157,694.90. Of this amount $125,520.37 accrued to the date of his death and $32,174.53 accrued in the period from the date of his death to the end of the fiscal year of the partnership, June 11 to August 31, 1924.
The representatives of the decedent duly filed an estate tax return in which the total profits from the partnership were included as corpus of the estate, and they paid the estate tax shown due thereon. Subsequently the estate tax return was audited by the Commissioner and certain changes were made, which are not material here, but the Commissioner did not allow a deduction from the gross estate of the decedent's share of the partnership profits from the date of the death of the decedent to the end of the partnership year. As a result of this audit the Commissioner determined a deficiency which was paid.
The decedent had kept his books and made his income tax returns on the calendar year basis, and after his demise his representatives accordingly filed an income tax return for the period from the date of his death to the end of the calendar year. The profits of the partnership which had accrued for that period were not included. After the audit of the estate tax return, the Commissioner audited the income tax return and found a deficiency of $4,848.16. This deficiency was created because the Commissioner included in the decedent's gross income the item of $32,174.53 which was decedent's share of the partnership profits for the interim between his death and the end of the partnership year and which had heretofore been included and taxed by the Commissioner for estate tax purposes. This deficiency was paid and a refund claim was duly filed and rejected.
The plaintiffs contend that it was error of law on the part of the Commissioner to include the decedent's share of the partnership profits from his death to the end of the partnership year (June 11 to August 31, 1924) in gross income of the estate for the period June 11 to December 31, 1924, for the reason "that the right of the estate to receive the decedent's distributive share of his interest in the partnership determined under the articles of partnership constituted an asset of the estate which passed to it upon decedent's death and therefore was not income to the estate," and recovery is sought for the amount of income tax paid thereon by the estate.
In Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421, a similar situation was presented, and the court held that the amount paid to the estate after the death of decedent was income and not a part of the estate, and that was true whether the executor was considered a member of the old firm for the remainder of the year or that the estate was a partner in a new association formed upon decedent's death. The Commissioner was correct in including the profits earned after decedent's death in gross income for income tax purposes; it was income to the estate and was only taxable as part of gross income of the decedent's estate.
It is further contended, however, that even if this sum is income to the estate it was not taxable in the year 1924 because the estate was on the receipt and disbursement basis and this amount not actually paid during that calendar year. Suffice it to say that partnership profits are taxable to the partner whether actually distributed or not (section 218(a) Revenue Act, 1924, 43 Stat. 275). In this case the partnership agreement, in definite terms, provides that, at the end of the year in which a partner dies and in the event the surviving partners desire to continue the business, the share of the deceased partner, including his proportion of the profits, shall be placed to the credit of his estate and the estate shall become a creditor of the new firm, and that interest be paid on the credit amounts. The final settlement shows interest was computed and paid from the end of the partnership year in 1924.
The further situation was presented in the Bull Case, supra, which exists in this case; namely, the inclusion, under similar conditions, of income for income tax purposes which had previously been considered corpus and taxed for estate tax purpose, and the court held that the Bull estate was entitled to recoupment of the amount erroneously collected as estate tax. As in that case, the claim for refund and pleadings of plaintiffs in the case at bar fairly place in issue a similar right of recovery, and a like decision must be reached. We do not understand that the estate tax was used as a deduction in determining the amount of income tax due, and accordingly no adjustment is required on that account. The amount of estate tax which resulted from the inclusion in the gross estate of the item on which an income tax was likewise collected was $791.68.
Judgment will accordingly be entered in favor of plaintiffs for $791.68, with interest as provided by law from April 23, 1928.
It is so ordered.