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. Plaintiff duly filed his income tax return for the calendar year 1931 on a cash basis, indicating thereon a net income of $100,783.54 and tax of $16,177.68, which was paid in four equal installments March 15, June 14, September 15, and December 15, 1932. He paid an additional assessment of $11.86 February 9, 1934, together with interest of $1.29, and on December 14, 1934, filed with the appropriate collector a claim for refund of $3,646.50 of the tax so paid, claiming that amount as excessive under the Revenue Act of 1928 (45 Stat. 791), for the reason that income on account of certain interest items, hereinafter explained, had been improperly included in his return. The Commissioner of Internal Revenue rejected the claim and so notified the taxpayer August 29, 1935, and it has not been paid.
2. In 1931 plaintiff was, and had been for several years, a partner in the firm of Tefft & Co., stockbrokers in the city of New York. The partnership was composed in 1931 of five general partners and two special partners. Erastus T. Tefft, a general partner, was the senior partner in the firm and held approximately a 40 per cent. interest therein. Plaintiff was likewise a general partner and held approximately a 20 per cent. interest in the firm. Tefft organized the firm or its predecessor about 1902 when he became the senior partner. He (Tefft) was the dominating head of the firm until at or about the time of his death in 1935. Plaintiff had been a member of the firm for 13 or 14 years and was an employee of the firm prior to that time.
3. The partnership duly filed its return of income of 1931, which showed a net income of 389,266.67. The partners' shares of the foregoing net income was set out in the return, plaintiff's being shown in three items; namely, Dividends, $520.29, Earned Income, $16,639.95 and Balance of Net Income, $66,039.51. Erastus T. Tefft's share of the net income of the partnership was shown in the same return as Dividends, $1,040.58, Earned Income, $29,150.42 and Balance of Net Income, $115,561.12.
In his income tax return for 1931 (referred to in finding 1) plaintiff included his share of the distributive net income of the partnership in the amounts set out above, and Erastus T. Tefft likewise reported in his return for 1931 the net income shown as distributable to him.
4. The partnership kept its books and rendered its returns on the accrual basis. An item of income accounted for by the partnership was interest on debit balances of its customers, which was accrued on daily balances and charged to the customer's account at the end of each month, thereby increasing the existing debit. The offsetting entry was a credit to the firm's interest account which was subsequently carried into profit and loss as income. This basis of accounting for its income had been followed by the partnership for many years and was its fixed policy.
5. Among the items of income shown on the partnership return for 1931 was one for interest in the amount of $84,272.55, and of that amount $34,496.04 represented interest on certain accounts of the senior partner, Erastus T. Tefft, which accounts were guaranteed by Tefft to the partnership. Interest on the Tefft accounts was accrued in a manner similar to that outlined in finding 4, and was included in the partnership income in the same manner as other interest items. Plaintiff's share of the distributive income by the partnership attributable to accrued interest on the Tefft accounts was $6,992.79, and that amount was included in the distributive income from the partnership which he reported in his return.
6. About 1930 Erastus T. Tefft was becoming involved in financial difficulties to the end that by or before the close of 1931 his liabilities were in excess of the value of his tangible assets. A substantial part of his liabilities represented indebtedness, either direct or indirect, by Tefft to the partnership, and the accrued interest item referred to in finding 3 served to increase this indebtedness at the close of 1931. The partnership, however, made no effort to collect the indebtedness either in 1931 or for some time thereafter, and the accrued interest has never been collected.
The partnership, however, was solvent in 1931 and 1932, showing net income for 1931 of $389,266.67, as heretofore shown, and substantial net income for 1932. Erastus T. Tefft reported a gross income for 1932 of $105,522.70, which included income from the partnership of $25,502.73, and a net income for that year of $15,179.32.
7. At the beginning of 1930 plaintiff loaned $100,000 to Erastus T. Tefft. At that time plaintiff had a credit balance of at least that amount on the books of the partnership, and the loan was consummated by a transfer on the books of the partnership of a credit of $100,000 from plaintiff's account to Tefft's account. Tefft gave his note for the amount loaned, but gave no security therefor.
At the end of 1931 interest in the amount of $8,277.81 was accrued on the loan of $100,000, and that amount was credited at the direction of Tefft to plaintiff on the books of the partnership and charged to Tefft. The amount of the credit was not withdrawn by plaintiff in 1931 nor has it since been paid to him. Knowlton Durham, of New York City (Stanton C. Peelle, of Washington, D. C., on the briefs), for plaintiff.
John W. Blalock, of Washington, D. C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D. C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
WHALEY, Judge.
In this income tax case plaintiff seeks to recover $3,656.50 for 1931 on the ground that an item of interest was erroneously accrued by a partnership of which he was a member and included in his distributive share of the partnership income which he reported and that another item of interest was erroneously considered as having been received by him.
During 1931, and for many years prior to that time, plaintiff had been a member of a partnership which was engaged in the stock brokerage business. There were other members of the partnership, both general and special, and the senior member was one Erastus T. Tefft, who owned an interest therein of approximately 40 per cent. Plaintiff had an interest of approximately 20 per cent. The partnership kept its books and rendered its return on an accrual basis. On that basis it accrued interest on debit balances of its customers as well as on the debit balances of the partners. Among the debit balances appearing on the books in 1931 was a substantial debit balance of Erastus T. Tefft, and the interest accrued thereon for that year, which was accounted for as income of the partnership, was $34,496.05. The entire net income of the partnership for 1931, as reported on the partnership return, was $389,266.67 which included, in one item thereof, the accrued interest on the debit balance of Tefft. Plaintiff's distributive share of the foregoing net income of the partnership was reported by him in his return for 1931 and the tax paid thereon.
Plaintiff's first contention s that the amount so reported by him was excessive to the extent that it represented income from the partnership on account of the interest accrued on the debit balance of Tefft for the reason that any accrual of interest in favor of the partnership against Tefft was improper because of his financial condition in that year. The partnership was on an accrual basis, and since, under section 182(a) of the Revenue Act of 1928, 26 U.S.C.A. § 182 and note, a partner is taxable on his distributive share of the net income of the partnership, whether distributed or not, our one question is to determine whether the interest item was properly accrued by the partnership. We are of the opinion it was properly accrued. It is true that during 1931 Tefft did not have tangible assets of a sufficient value to meet his outstanding obligations and, if he had been forced to liquidate, he may have been insolvent. He did, however, have a 40 per cent. interest in a partnership which earned for that year some $389,000 and his income from the partnership amounted to approximately $145,000. The partnership was solvent, and there is no suggestion in the record that any thought was being given to a liquidation of the partnership or a liquidation of Tefft's holdings with a view of satisfying his outstanding obligations. Just how Tefft's income from the partnership was treated with respect to his obligations to the partnership does not fully appear, but, apparently, a substantial part thereof was being used to satisfy his obligations. Certainly plaintiff, and perhaps the other members of the partnership had every confidence in Tefft and had every reason to believe in 1931 that his obligations, including interest, would be met in full. The partnership continued for some time after 1931, perhaps until the death of Tefft in 1935. It showed a substantial income in 1932, plaintiff's share thereof being some $25,000. It is true that the interest in question was never collected from Tefft, but we must judge the propriety of the accrual on the basis of the facts as they existed in 1931 rather than on the basis of what consequently occurred. An item of income accrues when all events have occurred which fix its amount and determine the liability of the party from whom it is forthcoming to pay. United States v. Anderson et al., 269 U.S. 422, 423, 46 S.Ct. 131, 70 L.Ed. 347.
There can be no question in this case of the amount of the interest involved or the liability of Tefft to pay it. In view of the circumstances outlined above, we are also convinced that there was at the close of 1931 a reasonable expectation that such interest would be paid. Cf. American Cigar Company, 21 B.T.A. 464. Since this item was therefore a proper accrual on the books of the partnership, it follows that it was properly included in the income of the plaintiff.
The other item in controversy is somewhat similar, although it does not involve partnership income. In 1930 plaintiff made a loan to Tefft of $100,000. The loan was accomplished by a transfer from plaintiff to Tefft and the giving of a note by Tefft to plaintiff as evidence of the loan. In 1931 accrued interest on the loan for that year was credited on the books of the partnership to plaintiff and charged to Tefft. This method was followed on the express instructions of Tefft and was the same method pursued in making the loan itself available for Tefft. Plaintiff did not withdraw the amount credited in 1931 nor was it thereafter paid. Since plaintiff filed his return on a cash basis, his contention is that this amount was not received by him either actually or constructively, and therefore it was improper to include this amount in his return. We can find no merit in this contention. When the amount was credited by the partnership to plaintiff, it became an amount which plaintiff could withdraw from the partnership at any time he desired and, therefore, in a real sense became income constructively received by him. It was subject to his control and demand. That plaintiff did not withdraw this amount is beside the point and that it was not paid to him in future years is immaterial.
In connection with the other point we have commenced on the financial situation as relating to Tefft, and it is equally applicable as far as this is concerned. The partnership was earning large amounts, and a very substantial share thereof belonged to Tefft. There is no suggestion in the record that plaintiff could have withdrawn this amount in 1931 had he so desired or that there were any restrictions placed on the credit, in so far as its availability for Tefft was concerned. The amount credited to him accordingly became his own income constructively received in 1931 and was therefore properly reported by him in his return for that year. The petition must be dismissed. It is so ordered.