1929 BTA LEXIS 2118">*2118 Where after the death of one partner a surviving member of the firm purchased the interest of the deceased partner and also part of the interest of a second partner and the firm took no steps toward winding up the old partnership, but continued its business operations without change, no new basis for determining gain or loss is created and the same should be computed on the basis of original cost of securities purchased by the old firm and sold by the new firm.
18 B.T.A. 27">*27 These proceedings are brought for redetermining the deficiencies in income taxes for the year 1922 found by the respondent to be due from Henry W. Healy and Raymond Healy in the sums of $37,866.58 and $4,974.67, respectively. Both proceedings involve the same question and were duly consolidated for hearing and decision.
The sole issue appearing in these cases is whether the cost at time of acquisition by the original partnership or the market value as of December 31, 1921, when the reorganization of the partnership occurred, should be taken as the basis1929 BTA LEXIS 2118">*2119 under the Revenue Act of 1921 to compute the gain derived or loss sustained by A. Healy & Sons, a partnership composed of the petitioners, upon the sale in 1922 of certain securities.
FINDINGS OF FACT.
On or about April 1, 1919, A. Augustus Healy and Henry W. Healy and Raymond Healy, his sons, formed a copartnership under the laws of the State of New York, under the firm name of A. Healy & Sons, for the purpose, among other things, of buying 18 B.T.A. 27">*28 and selling securities for its own account. The partners' respective interests in the firm and capital contributions were as follows:
| Partners' interests | Capital contribution | |
| Per cent | ||
| A. Augustus Healy | 50 | $80,000 |
| Henry W. Healy | 25 | 10,000 |
| Raymond Healy | 25 | 10,000 |
| 100 | 100,000 |
On September 28, 1921, the said A. Augustus Healy died and the copartnership thereby was dissolved. Thereafter and until December 31, 1921, the petitioners, as surviving partners, continued to operate the business of the partnership just as it had been conducted prior to the death of their father. The estate of A. Augustus Healy received its 50 per cent share of the profits made by the partnership during this period. 1929 BTA LEXIS 2118">*2120 For State and Federal estate-tax purposes an appraisal was made of the securities and other property owned by the partnership on September 28, 1921. An inventory of the same securities and property was made on December 31, 1921, the date on which the partnership was reorganized.
By agreements of December 31, 1921, between the petitioners and also between Henry W. Healy and Mary T. Healy, widow of A. Augustus Healy and a residuary legatee under his will, it was determined that the partnership should be continued as a business enterprise. In order to accomplish this end and to distribute to the persons entitled thereto their proper proportion of the estate of A. Augustus Healy, the executor of the estate transferred to Henry W. Healy the entire interest of the estate in the partnership and also, by appropriate bookkeeping entries, Mary T. Healy was given credit for her proper share of the estate, including certain sums advanced by it to the partnership. After this transaction Mary T. Healy owned no share in the partnership. On the above date also Raymond Healy assigned to his brother, Henry W. Healy, a 15 per cent interst in the partnership so that during the year 1922 Henry1929 BTA LEXIS 2118">*2121 W. Healy owned 90 per cent and Raymond Healy 10 per cent of the partnership.
There was no change whatever in the method of conducting the partnership business following the death of A. Augustus Healy or subsequent to the reorganization on December 31, 1921. By this reorganization the respective partnership interests were changed but there was no attempt to dissolve the firm, to alter its business status or to wind up its affairs. Its liabilities to creditors were not extinguished nor were any of its assets distributed to the surviving partners. The reorganized firm paid nothing for the property and other 18 B.T.A. 27">*29 securities acquired by it on December 31, 1921, and it assumed the liabilities of the old firm as of that date.
The securities listed on the inventories of December 31, 1921, and January 1, 1922, are identical. No sales were made during the period from September 28, 1921, to December 31, 1921, except of Danish and Chili bonds. No notice of dissolution of the partnership or the creation of a new partnership was given to the corporations issuing the stocks and bonds contained in such inventories nor to anyone dealing with the partnership in any manner.
The following1929 BTA LEXIS 2118">*2122 additional facts were stipulated:
The certain securities which it is alleged in the petitions herein were acquired by the dissolved partnership prior to its dissolution and sold by the partnership of January 1, 1922, referred to in this stipulation as the reorganized partnership, during the year 1922 and as to which it is alleged in the petitions and denied in the answers herein that the respondent erred in determining the gain derived or the loss sustained from the sale thereof, were the following:
2500 shares of the preferred stock of Central Leather Co. (acquired April 1919 and March 1921).
200 shares of the preferred stock of Welch Grape Juice Co. (acquired July 1919).
200-M francs, French Internal 6's of 1920 (acquired October 1920).
That the following balance sheets, subject to the stipulation set forth in paragraph 5 hereof, represent (a) the balance sheet of the dissolved partnership as at December 28, 1921, with the item of securities shown at cost; (b) the balance sheet as at December 31, 1921, immediately prior to the organization of the partnership of January 1, 1922, with the items of securities acquired by the dissolved partnership at cost; and (c) the balance1929 BTA LEXIS 2118">*2123 sheet as at January 1, 1922, of the reorganized partnership of January 1, 1922, with the item of securities shown at their market value at the date they were taken over by the reorganized partnership of January 1, 1922.
| (A) | (B) | (C) | |
| Sept. 28, 1921 | Dec. 31, 1921 | Jan. 1, 1922 | |
| ASSETS | |||
| Cash | $2,133.36 | $7,862.65 | $7,862.65 |
| Securities | 428,384.77 | 399,026.99 | 263,725.00 |
| Furniture and fixtures | 466.24 | 466.24 | 466.24 |
| 430,984.37 | 407,355.88 | 272,053.89 | |
| LIABILITIES | |||
| Notes payable | 5,000.00 | 5,000.00 | 5,000.00 |
| Accounts payable | 310,487.40 | 256,168.24 | 256,168.24 |
| Reserve for depreciation on | |||
| furniture and fixtures | 106.60 | 118.26 | 118.26 |
| A. A. Healy - capital | 97,084.52 | ||
| Estate of A. A. Healy - capital | 67,825.00 | ||
| H. W. Healy - capital | 8,887.86 | 49,851.89 | 16,252.58 |
| Raymond Healy - capital | 9,417.99 | 28,392.49 | 1 5,485.19 |
| 430,984.37 | 407,355.88 | 272,053.89 |
18 B.T.A. 27">*30 4. With respect to the foregoing balance sheets:
(a) That the balance sheet as at December 31, 1921 ("B" in paragraph 3), and the opening balance sheet of the reorganized partnership of January 1, 1922, as at January 1, 1922 ("C" in paragraph 3), are identical1929 BTA LEXIS 2118">*2124 in all items except that the securities account in the latter is lower or less by the sum of $135,301.99 than in the former and the aggregate capital accounts are also lower by the same amount to balance. In the former the securities are set up at cost, in the latter the market value on December 31, 1921.
(b) This reduction of or shrinkage in the value of said securities in the said sum of $135,301.99 has not been allowed by the respondent, in whole or in part, as a loss or other allowable deduction to the reorganized partnership, or the petitioners for the year 1922.
5. That the item of securities disclosed in the respective balance sheets (A), (B), and (C) (shown above in paragraph 3) as at September 28, 1921, December 31, 1921, and January 1, 1922, respectively, were acquired and cost as set forth below:
| Item | Securities | Date acquired | Number of | Price | Cost |
| shares | |||||
| 1 | Central Leather Pfd | Apr. 1, 1919 | 2,746 | $108.00 | $296,568.00 |
| 2 | do | Mar. 28, 1921 | 100 | 83.00 | 8,315.00 |
| 3 | do | Mar. 29, 1921 | 100 | 82.00 | 8,215.00 |
| 4 | do | Mar. 30, 1921 | 100 | 81.00 | 8,115.00 |
| 5 | Mar. 31, 1921 | 100 | 80.00 | 8,015.00 | |
| 6 | Welch Grape Juice | Jul. 25, 1919 | 300 | 95.83 1/3 | 28,750.00 |
| 7 | Canadian Conn. Cotton | ||||
| Mills | Jan. 21, 1920 | 200 | 20.00 | 4,000.00 | |
| 8 | do | do | 200 | 91.25 | 18,248.99 |
| 9 | do | Mar. 5, 1920 | 65 | 90.00 | 5,850.00 |
| 10 | French internal 6's | Oct. 27, 1920 | Fcs. 200M | 64.75 | 12,950.00 |
| 11 | Danish municipal 8's | Feb. 14, 1921 | 20M | 97.00 | 19,457.78 |
| 12 | Republic of Chili 8's | May 12, 1921 | 10M | 99.00 | 9,900.00 |
| 13 | Cost of securities Sept. 28, 1921 | 428,384.77 | |||
| Deduct sales for period ended Dec. 31, 1921, at cost: | |||||
| 14 | Danish Municipal 8's (Item 11) | 20M | 19,457.78 | ||
| 15 | Republic of Chili 8's (Item 12) | 10M | 9,900.00 | ||
| 16 | Total cost of sales - period Sept. 28 | ||||
| to Dec. 31, 1921 | 29,357.78 | ||||
| 17 | Cost of securities Dec. 31, 1921 | 399,026.99 | |||
| 18 | Market value of same securities | ||||
| Jan. 1, 1922 | 263,725.00 | ||||
| 19 | Reduction from cost to market value | ||||
| of same securities by respondent as | |||||
| between closing balance Dec. 31, | |||||
| 1921, and opening balance Jan. 1, | |||||
| 1, 1922 | 135,301.99 |
1929 BTA LEXIS 2118">*2125 6. That during the year 1922 the reorganized partnership of January 1, 1922, bought the following shares of the preferred stock of the Central Leather Co., and that during the year 1922 there were sold by the reorganized partnership of January 1, 1922, 400 shares of the said stock shown in group "A."
| Group "A" | ||
| Purchased Mar. 22, 1922, 100 shares | $7,265.00 | |
| Purchased Apr. 3, 1922, 100 shares | 7,165.00 | |
| Purchased May 1, 1922, 100 shares | 7,115.00 | |
| Purchased May 9, 1922, 100 shares | 7,065.00 | |
| $28,610.00 | ||
| Group "B" | ||
| Purchased June 19, 1922, 100 shares | 7,115.00 | |
| Purchased July 27, 1922, 100 shares | 7,165.00 | |
| Purchased Sept. 19, 1922, 100 shares | 8,115.00 | |
| Purchased Oct. 10, 1922, 100 shares | 7,902.50 | |
| Purchased Oct. 25, 1922, 100 shares | 7,715.00 | |
| 38,012.50 | ||
| 66,622.50 |
18 B.T.A. 27">*31 7. That in the year 1921 the said dissolved partnership deposited with United States Fidelity & Guarantee Co. 600 shares of the said Central Leather Co. preferred stock which it then owned as security, and the said 600 shares remained continuously so on deposit until the year 1924, when they were taken back by the reorganized partnership of January 1, 1922. That the1929 BTA LEXIS 2118">*2126 said 600 shares so deposited were not included in the sales herein involved.
8. The parties to these proceedings are in agreement as to the cost and the market value of the respective securities bought and sold as are involved in this appeal and such amounts and values are not at issue herein, the only issue being the basis upon which the gains derived or losses sustained upon such sales must be computed under the Revenue Act of 1921.
9. That the respondent has determined the gain or loss derived from the said foregoing sales on the following basis:
| 2,500 shares of Central Leather preferred stock at 65 per | |
| share which was the market value thereof on Dec. 31, 1921 | $ 162,500.00 |
| 400 shares of Central Leather preferred stock which were | |
| bought by the reorganized partnership in the year 1922 as | |
| above set forth at various prices | 28,610.00 |
| 200 shares of Welch Grape Jice preferred stock at 72 1/2 | |
| which | |
| 200 shares of Welch Grape Juice preferred stock at | |
| 72 1/2 which | |
| 200M francs - French Internal 6's - at 72 1/2 which was | |
| the market value thereof on Dec. 31, 1921 | 14,500.00 |
| Total | 220,110.00 |
10. That the actual cost of said securities so sold when1929 BTA LEXIS 2118">*2127 and as acquired by the said dissolved partnership or by the said reorganized partnership, as the case may have been, was as follows:
| 2,100 shares Central Leather preferred at 108 per share | |
| which was the cost thereof to the dissolved partnership | |
| as set forth in paragraph 5 above (more than market value) | $226,800.00 |
| 400 shares Central Leather preferred at various prices | |
| which was the cost thereof to the dissolved partnership | |
| as set forth in paragraph 5 above (more than market value) | 32,660.00 |
| 400 shares Central Leather preferred acquired in 1922 by | |
| the reorganized partnership at the same cost as used by | |
| respondent as set forth in paragraph 9 above | $28,610.00 |
| 200 shares Welch Grape Juice preferred at 95.83 1/3 per | |
| share which was the cost thereof to the dissolved | |
| partnership as set forth in paragraph 5 above (more than | |
| market value) | 19,166.67 |
| 200-M francs - French Internal 6's, at 74.75 per share, | |
| which was the cost thereof to the dissolved partnership | |
| as set forth in paragraph 5 above (less than market value) | 12,950.00 |
| 320,186.67 |
18 B.T.A. 27">*32 OPINION.
VAN FOSSAN: The sole issue in these cases is whether the original cost to the old1929 BTA LEXIS 2118">*2128 firm or the market value as of December 31, 1921, the date of reorganization, should be taken as a basis for computing gain or loss arising from the sale of securities in 1922.
The respondent's position is that as to the 25 per cent interest owned by Henry W. Healy throughout the entire period and the 10 per cent so owned by Raymond Healy, the original cost of the securities should govern the computation of profit or loss. The respondent maintains, however, that as to the 50 per cent interest in the partnership originally owned by A. Augustus Healy and acquired by Henry W. Healy on December 31, 1921, after his father's death, the market value of the securities on December 31, 1921, should be used. A similar position is taken as to the 15 per cent interest acquired by Henry W. Healy from his brother, Raymond Healy.
While Congress ignored, for taxing purposes, the existence of a partnership as a taxable entity, yet it recognized it as a business unit and provided specifically for the method of computing the income derived from its business dealings. 1929 BTA LEXIS 2118">*2129 .
It is evident that it was not the intent of Congress to relate the various transactions of a partnership to the several owners thereof, but rather to consider it as a going concern or integral enterprise in determining the income, gains and losses. In , we held that the death of a partner does not terminate its accounting period for tax purposes. See also .
Under the facts presented in these cases it appears that the death of A. Augustus Healy on September 28, 1921, interfered in no way with the actual operation of the partnership. While under the laws of the State of New York the death of a partner automatically dissolves a partnership, yet the partnership operations are not terminated until the winding up of the partnership affairs is complete. . During the period from September 28 to December 31, 1921, the partnership was conducted 18 B.T.A. 27">*33 just as it had been prior to the death of A. Augustus Healy, with the view either of future liquidation or continued operation. On the latter1929 BTA LEXIS 2118">*2130 date it was determined that the partnership should be continued. Therefore, during the entire period under discussion the partnership suffered no change of status as a business enterprise.
Partnership property belongs to the partnership and not to the partners. The property acquired by Henry W. Healy from the estate of A. Augustus Healy was an undivided partnership interest in the firm of A. Healy & Sons and not a direct ownership in the securities owned by the partnership. .
Applying these principles to the facts before us, it is our opinion that the correct basis for computing gain or loss derived from the sale of certain securities in 1922 is their original cost to the partnership at the time of their acquisition by it, disregarding the subsequent changes in the personnel of the firm.
Reviewed by the Board.
Decision will be entered under Rule 50.
MURDOCK concurs in the result.
SMITH and TRAMMEL dissent.
Footnotes
1. Red. ↩