dissenting: Although the statutory provisions are complicated, there is no dispute that, pursuant to section 736(b)(2)(B), an amount paid to a retiring partner in respect of his share of the firm’s goodwill is not to be charged to him as a distribution of ordinary income if “the partnership agreement provides for a payment with respect to good will.” And, concomitantly, such payment is not deductible in determining the distributive shares of the remaining partners. This, too, is not in dispute.
The reason for making the tax consequences turn upon the agreement of the parties was spelled out in V. Zay Smith, 37 T.C. 1033, 1037-1038, affirmed 313 F. 2d 16 (C.A. 10), and further elaborated in David A. Foxman, 41 T.C. 535. It was to permit the partners themselves, in a field where the partners’ interests in respect of tax liability are antagonistic to one another, to fix such tax liabilities inter sese by arm’s-length bargaining. In terms of the present case, it was left to the partners to determine the tax consequences of a payment for goodwill by the manner in which the partnership agreement was written. If the partnership agreement specifically provided for such payment, that was to be the end of the matter. Cf. V. Zay Smith, supra. What was the situation here in respect of the partnership agreement?
Admittedly, there was no provision for goodwill payments in the original partnership agreement. But the heart of this case is section 761(c), which defines “partnership agreement” as follows:
(c) Partnbkship Agreement. — For purposes of this subchapter, a partnership agreement includes any modifications of the partnership agreement made prior to, or at, the time prescribed by law for the filing of the partnership return for the taxable year (not including extensions) which are agreed to by all the partners, * * *. .[Italics supplied.]
And it seems all too clear to me that the agreement of May 7, 1956, herein, which did specifically provide for a goodwill payment, was such modification. The majority opinion does not dispute the fact that there may be a “modification” of the partnership agreement in the instrument that terminates the status of one of the partners as a member of the firm. Indeed, a familiar example of such modification is a provision, changing the withdrawing partner’s ’distributive share of partnership income for the final period during which he remained a partner. David A. Foxman, 41 T.C. 535 (second issue). The pivotal question herein then becomes simply whether the May 7, 1956, agreement is to be treated as a “modification” of the partnership agreement. I think that question admits of only one reasonable answer.
The May 7, 1956, agreement was entitled “Amendment of Limited Partnership Agreement of George W. Carter Company” and provided in part: “Whereas, the parties hereto now wish to amend said Limited Partnership Agreement, and to agree to amend said Certificate of Limited Partnership.” The plain language of the agreement indicates that the parties intended it to be treated as an amendment to the original partnership agreement and certainly this express provision by them should not go unrecognized by us.
To fail to give effect to the plain language thus used by the parties is, I think, to defeat the very purpose of the pertinent partnership provisions of the statute, namely, to permit the partners themselves to fix their tax liabilities inter sese. Although the May 7,1956, agreement may be inartistically drawn, and indeed may even contain some internal inconsistencies, the plain and obvious import of its provisions in respect of the present problem was to amend the partnership agreement so as to provide specifically for a goodwill payment. This is the kind of thing that section 736(b)(2)(B) dealt with when it allowed the partners to fix the tax consequences of goodwill payments to a withdrawing partner. And this is what the partners clearly attempted to do here, however crude may have been their effort. I would give effect to that effort, and would not add further complications to an already overcomplicated statute.
Tietjens, Pierce, Mulroney, Drennen, and Hoyt, JJ., agree with this dissent.