Opinion
Docket No. 36435.
1953-04-14
JOSEPH PURSGLOVE, JR., AND JOSEPHINE L. PURSGLOVE, HIS WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William J. Kenney, Esq., for the petitioners. James A. Anderson, Esq., for the respondent.
1. CAPITAL ASSET.— A partnership sold coal lands, held for less than 6 months, rather than an interest in a lease and option held for more than 6 months.
2. PARTNERSHIP INTEREST— CAPITAL ASSET— CAPITAL LOSS.— The sale of an interest in a West Virginia partnership, held for more than 6 months, is the sale of a capital asset and the resulting loss is a long-term capital loss. William J. Kenney, Esq., for the petitioners. James A. Anderson, Esq., for the respondent.
The Commissioner determined a deficiency of $11,554.23 in the income tax of the petitioner for 1944. The issues for decision are whether the petitioner's distributive share of the gain of a partnership was taxable as a short-term capital gain, as determined by the Commissioner, and whether his loss, when he retired from the partnership, was a long-term capital loss, as determined by the Commissioner.
Findings OF FACT.
The petitioners, husband and wife, filed a joint return for 1944 with the collector of internal revenue for the district of West Virginia. Virginia. Hereafter the word petitioner will refer to Joseph Pursglove, Jr.
The petitioner and three other individuals entered into an oral agreement of partnership on April 1, 1942, to do business under the name of Cornell Coke Company. Subsequently, one of the partners withdrew and a new man took his place. The latter four partners entered into a written agreement of partnership on December 1, 1942, which they antedated to April 1, 1942. The petitioner was to manage the partnership property and the other partners were to supply the money.
The partners had discovered some coal lands east of Morgantown, West Virginia, which had a valuable metallurgical quality and the partnership leased a small country mine. It had to ship its coal about 20 miles by truck to coke ovens. They found the quality of the coal good but they desired nearby ovens in which to make it into coke. They found 200 ovens within 3 miles of their mine. Those ovens were owned by Donald McCormick as nominee of the Central Iron & Steel Company of Harrisburg, Pennsylvania. The ovens were a part of a property consisting of over 2,000 acres of coal and over 300 acres of surface on which was located the coke ovens, mine installations, equipment and supplies, and the shaft to a mine, all of which had not been used during the preceding 20 years.
The partnership entered into an agreement with McCormick dated April 6, 1942, in which McCormick leased to the partnership real estate, plant and equipment, including approximately 2,060 acres of the Upper Freeport vein of coal, approximately 310 acres of surface land, about 200 coke ovens, a coal tipple and bins, shaft opening with head frame and bin, equipped with electrical hoist, self-dumping cages, weight pan, picking tables and all of the machinery and equipment in and about the mine, including pumps, mining machines, coke drawer, supplies, equipment, appliances and machinery, contained in an inventory made a part of the agreement. Miners' houses were not included. The lease was for 5 years unless sooner terminated. The agreement also gave to the partnership an option at any time within 6 months to purchase the property covered by the lease for $105,000. Another agreement between McCormick and the partnership, dated December 1, 1942, recited the agreement of April 6, 1942, another lease dated May 28, 1942, in which McCormick had leased to the partnership the miners' houses and other improvements which were excluded from the original lease, the fact that one partner had retired and another had taken his place and provided for certain modifications and changes in the lease agreement, including an extension of the time in which the option to purchase could be exercised.
The partnership began an extensive job of rehabilitating the ovens and preparing the mine and other equipment for use. The ovens were put in use but the partnership decided it was not feasible to use the mine. Instead, it made an opening to the coal at another point and hauled coal from that opening, as well as from its other property, to the ovens for coking.
Steel companies had been looking for coal with metallurgical qualities in the area for some time. The petitioner, through a contact with George Humphreys, Chairman of the Executive Committee of the National Steel Company, entered into negotiations with representatives of that company and its subsidiary to sell the vein of coal which the partnership had under lease and option from McCormick. The partnership, on August 27, 1943, made a written offer to sell the coal. The subsidiary of National drilled and tested the property and accepted the offer on February 4, 1944, to buy the coal for $240,535.
McCormick meanwhile, on January 27, 1944, executed a deed dated January 27, 1944, conveying to the Cornell Coke Company partners all of the property covered by the agreement dated April 6, 1942. The partnership did not have sufficient funds to exercise its option to buy the properties. A meeting was held in the office of the attorney for National on February 10, 1944. A check of National for $105,000 made out to the partnership was turned over to the partnership and endorsed by it to McCormick who then turned over the deed for the entire property to the attorney for National to be held until an examination of the title to the properties to be transferred was completed. The partners executed a deed dated February 28, 1944, conveying to National Steel Company only the coal lands covered by the agreement of April 6, 1942. The deeds dated January 27 and February 28, 1944, were recorded on March 23, 1944. Meanwhile, National paid to the partnership the balance of the purchase price of $240,535.
The petitioner, by an instrument dated December 30, 1944, in which his wife joined, assigned to the other three partners ‘his undivided one-fourth interest in and to said partnership and all the assets, real, personal and mixed, thereof,‘ with certain exceptions and reservations, for which assignment he received $12,500.
The Commissioner, in determining the deficiency, took $26,671.32, the net income disclosed on the original tax return of the petitioners, and made various adjustments thereto, one of which was the addition of $34,670.23 which he described as ‘short-term capital gain‘ and explained ‘It is determined that the capital gain of $34,670.43 distributable to Joseph Pursglove, Jr., by the partnership Cornell Coke Company for the taxable year 1944, was a short-term capital gain which was 100% taxable.‘ Another adjustment was to allow $14,082.42 as a long-term capital loss. A part of the explanation of that adjustment was ‘It is determined that the loss of $14,656.35, incurred by Joseph Pursglove on the disposition of his partnership interests in Cornell Coke Company and Cornell Supply Company on December 30, 1944, was a long-term capital loss of which 50% thereof was deductible.‘
Cornell Coke Company filed a partnership return for 1944 on March 14, 1945, in which it reported a short-term capital gain of $138,680.93 from the sale of the coal for $240,535 and showed the petitioner's distributive share of its ordinary net income as $12,108.95 and his share of the net short-term gain as $34,670.23. The petitioner had no part in the filing of that return.
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
The petitioner contends that the lease from McCormick, dated April 6, 1942, was property used in the trade or business of the partnership, within the meaning of section 117(j), which was held for more than 6 months and the transfer of the coal lands covered by that lease was in fact and in law a sale of a portion of the lease to National so that the resulting gain was a long-term as opposed to a short-term capital gain. It may be assumed for the purpose of discussion that the lease was property used in the trade or business of the partnership held for more than 6 months, within the meaning of section 117(j). It is clear, however, that the partnership did not, as the petitioner contends, sell a portion of that lease to National Steel Company. The argument of the petitioner in this connection is that since National furnished the $105,000 with which the partnership exercised its option to buy all of the properties covered by the lease of April 6, 1942, ‘a resulting trust arises in favor of the party furnishing the consideration‘ and ‘the holder of legal title then possesses his title solely as trustee and not as owner‘ with the result that ‘the conveyance of the coal by the partnership was a conveyance of property to which National Steel Company already possessed equitable title ‘ and ‘Cornell Coke Company cannot be held to have realized capital gain on a capital asset, viz.: the coal, which it did not own and could not sell.‘ It further states ‘All that Cornell Coke Company ever owned was the lease and option, and this is all that it sold.‘
The facts in the record clearly refute this contention of the petitioner. The coal lands which the partnership conveyed to National were not the only properties which it purchased from McCormick pursuant to the option. Instead, it purchased from McCormick, pursuant to the option, all of the properties covered by the lease of April 6, 1942, which included, inter alia, in addition to the coal acreage, over 300 acres of surface, 200 coke ovens and a substantial quantity of other property. The partnership, after becoming the owner of all of that property, conveyed only the coal lands to National. It is true that National furnished the $105,000 which the petitioner used to exercise the option, but that $105,000 was a part of the purchase price for the coal lands which the petitioner subsequently transferred and was then under contract to transfer to National. National acquired its title to the coal lands not by a resulting trust, but solely under the contract with and the deed from the partnership for a consideration of $240,535. The partnership never attempted or purported to sell and National never purported or attempted to buy an interest in the lease and option. The whole subject of the negotiations and sale between the partnership and National was the coal. Since this is the only argument made by the petitioner and the only apparent difference between the parties on this issue, the determination of the Commissioner is sustained.
The other issue raised by the petitioner is that his ‘loss on sale of an undivided interest in specific partnership assets of Cornell Coke Company is not a capital loss.‘ He concedes that there are judicial decisions holding that a sale of a partnership interest is a sale of a capital asset and the resulting gain or loss is to be treated as capital gain or loss. He argues, however, that his case is to be distinguished from those because the partnership was created under the laws of West Virginia, which is one of the few states which has not enacted the Uniform Partnership Act and does not subscribe by statute to the entity view that a partner's interest in a partnership is limited to the right to receive his share of the surplus remaining after payment of debts. This Court holds that the sale of an interest in a West Virginia partnership results in the same tax consequences as did the sale of a partnership interest in the following cases and, upon authority of those cases, the petitioner's loss was a long-term capital loss as determined by the Commissioner. Allan S. Lehman, 7 T.C. 1088, affd. 165 F.2d 383, certiorari denied 334 U.S. 819; Dudley T. Humphrey, 32 B.T.A. 280; George R. McClellan, 42 B.T.A. 124, affd. 117 F.2d 988; H. R. Smith, 10 T.C. 398, affd. 173 F.2d 470, certiorari denied 338 U.S. 818; Shapiro v. Commissioner, 125 F.2d 532; Estate of Daniel Gartling v. Commissioner, 170 F.2d 73; Thornley v. Commissioner, 147 F.2d 416; and Joseph L. Merrill, 9 T.C. 291, affd. 173 F.2d 310. Judge Learned Hand, in the Lehman case, supra, rejected the strict theory of the common law that a partnership is no more than a joint ownership of the assets by the partners so that a sale by a partner of his interest in the firm is a sale of his interest as joint owner of each firm asset. He called attention to the facts that in equity and in bankruptcy, modifications had long since been imposed upon the rights and liabilities of the partners as the common law conceived them, the firm became for most purposes an entity and it was upon this structure that Congress fitted the taxation of partnerships, although it imposed a tax upon a separate partner. He further pointed out that ‘The Uniform Partnership Law codified this congeries of rights and obligations as it had developed; and made no substantial change, when it declared in so many words that 'a partner's interest in the partnership is his share of the profits and surplus'.‘ He decided that case upon the basis of the law as it was before it was codified. It is not clear that the law of West Virginia is any different from the law on which the Lehman case was decided. Furthermore, Congress must have intended to tax all sales of partnership interests in a similar fashion regardless of the state in which they were made.
Decision will be entered for the respondent.