*67 Decision will be entered for the respondent.
At the time of his death, petitioner's decedent was an active partner in the partnership of Neare, Gibbs and Company. This partnership was engaged in the insurance and underwriting business. Capital and tangible assets were not of importance to the creation and retention of partnership business. By virtue of the partnership contract extant at the time of decedent's death, petitioner (as decedent's estate) was given an option entitling it, inter alia, to become a partner on the same basis as its decedent in a new partnership with the surviving partners for a period of 2831 days. The option was duly exercised and a new partnership formed.
Held: The right to become a partner in the partnership and to receive decedent's distributive share of the income thereof was not capital in nature and afforded no basis for depreciation. Bull v. United States, 295 U.S. 247">295 U.S. 247.
*627 The petitioner seeks a redetermination of asserted deficiencies*68 in income taxes for the taxable year 1944 in the amount of $ 11,968.30 and for 1945 in the amount of $ 10,575.85, plus $ 1,057.59 in penalty for failure to file a timely fiduciary return.
FINDINGS OF FACT.
All of the facts have been stipulated and as stipulated are so found and made a part hereof.
The petitioner is the Estate of Boyd C. Taylor, Deceased, and its address is 4710 Cooper Road, Blue Ash, Ohio. It keeps its books and files its Federal fiduciary income tax returns on the basis of the calendar year with the collector of internal revenue for the first district of Ohio. Petitioner failed to file a timely fiduciary income tax return for the calendar year 1945 and it has been stipulated and agreed that a delinquency penalty as provided by law of 10 per cent of any deficiency determined in this proceeding for the year 1945 shall be added thereto.
Boyd C. Taylor (hereinafter referred to as "decedent") died on November 28, 1943, at which time he owned a partnership interest in *628 Neare, Gibbs and Company, Cincinnati, Ohio (hereinafter sometimes referred to as "the partnership"). This partnership was engaged in the insurance underwriting business, the principal source *69 of its income being from river marine business. The representation of insurance companies by the partnership was upon verbal or written contracts by which the insurance companies retained the right to revoke such representation upon 90 days' notice. The personal services and contacts of the partners were the basis of the retention of the representation of such insurance companies. Capital and tangible assets were not of importance to the creation and retention of partnership business.
By virtue of the partnership contract of decedent with the other partners in the partnership, the petitioner herein (decedent's estate) became entitled to (1) a certain portion of the accumulated profits of such partnership, and (2) an option to become a partner with the other partners in a new partnership to engage in the same type of business for a period of 2831 days.
The accumulated profits to which petitioner was so entitled amounted to $ 11,649.70, and that amount was received by the petitioner herein.
Petitioner duly exercised its option and entered into a new partnership for the period of 2831 days, beginning November 28, 1943, and ending August 31, 1951.
After assessment by the collector of*70 internal revenue for the first collection district of Ohio, petitioner paid Federal estate tax computed upon the inclusion in decedent's gross estate of the aforementioned option at a valuation of $ 140,000. This value was returned by petitioner in its estate tax return as $ 125,000, and upon examination by the Bureau of Internal Revenue was increased to $ 140,000.
During the calendar year 1944, petitioner realized $ 39,718.54 as taxable ordinary income as a partner in the partnership and not as payment for any share which petitioner may have had in the assets of the firm. This was the amount before any allowance for the depreciation claimed by petitioner.
During the calendar year 1945 petitioner realized $ 31,529.26 as taxable ordinary net income as a partner in the partnership and not as payment for any share which petitioner may have had in the assets of the firm. This was the amount before any allowance for the depreciation claimed by petitioner.
The partnership contract which was in effect at the time of decedent's death provides, in part, as follows:
(10) Upon the death of a partner there shall be no inventory or appraisal of the partnership assets and no sale of the deceased*71 partner's interest therein, but such interest shall be settled and disposed of as provided in this agreement.
(11) At the time of the termination of the partnership because of the death, * * * of any partner, the remaining partners shall make and render a true, *629 just and final account of all partnership transactions to the executor, administrators, * * *. Such accounting shall be made as expeditiously as circumstances will permit.
After provision is made, or secured, for the performance of all contracts and obligations of the firm then outstanding and unperformed, the remaining partners shall pay to the party to whom said accounting was due the proportionate share of all accumulated profits of the firm to which said deceased, * * * partner may be entitled under the percentages hereinbefore stated.
The business of the firm is a service business requiring the employment of no capital or property and to which the partners have not contributed capital, and in distributing the accumulated profits of the firm no valuation shall be made of good will, trade name or future profits based upon any possible continuation of said service business and the representative of any deceased*72 partner, * * * shall have no interest in the good will or trade name of the firm which shall become the exclusive property of the remaining partners upon the death, retirement, insolvency, bankruptcy, or permanent total disability of any partner.
(12) In the event of the termination of the partnership because of the death, * * * of any partner, the parties hereto agree with each other that immediately on such termination of any partner's interest the remaining partners shall be among themselves a new partnership to continue the firm and its business upon the same terms and conditions herein set forth. The respective interests of the remaining partners in the new partnership and its profits and losses shall be in the identical ratio that their respective interests in this partnership bear to each other.
(13) In the event of the death of a partner, his administrators or executors or nominee, * * * shall have the option of participating in the business of the new partnership formed by the remaining partners as specified in the preceding paragraph by becoming for a ten year term, beginning on the date of his election, an inactive partner in said new partnership. Said option to become*73 a member of said new partnership shall be exercised by said person having said option within ninety days after the termination of this partnership, but said option shall not expire earlier than thirty days after the remaining partners have given written notice of this option to the person having the option.
(14) Any person exercising the option set forth in the preceding paragraph shall participate in the new partnership on the terms hereinafter stated.
(a) Such partner shall be known as an inactive partner and he shall not be required to contribute any capital to the partnership and he shall not be required or permitted to devote his time or attention to the partnership business but such inactive partner or his representative at all times shall have free access to all books, papers, documents and writings belonging to the firm without interference or interruption by any other partner or person.
(b) Such inactive partner shall not act for or on behalf of the firm and shall exercise no general agency as a partner, nor any special agency, except such as may be conferred by the express act of the active partners.
* * * *
(e) The share of any inactive partner in the profits of the business*74 shall be for each day the same percentage that said inactive partner, or his decedent or nominor or ward, would have been entitled to if he or his decedent or nominor or ward, and other partners who were active partners at the time said inactive partner or his decedent or nominor or ward terminated active partnership had continued sole active partners for the term of his inactive partnership. All losses and expenses suffered or incurred in the partnership business, without fraud on the part of any partner, shall be borne and paid by all partners in proportion to the *630 respective interests of all partners in the profits of the business. All active partners shall reduce their percentages in the new partnership pro rata to permit the participation by any inactive partner on the basis stated for the term of the new partnership.
(f) The new partnership shall continue for a period of ten years following the date of the election of the executor or administrator of a deceased partner, * * * to enter into a new partnership. * * *
OPINION.
The sole question is whether the petitioner is entitled to a deduction for depreciation of its right to share in the income of Neare, Gibbs and*75 Company for a period of 2831 days as an inactive partner therein.
Petitioner argues that it is a partner in the partnership by reason of the exercise of the option; that the option has a basis of $ 140,000 which it is entitled to depreciate over the partnership term of 2831 days; and that the annual allowance for depreciation thus computed is deductible from its net taxable income received from the partnership business.
It is the respondent's position that petitioner is not entitled to any depreciation. Nor does respondent concede the correctness of the valuation of $ 140,000 placed upon such option for estate tax purposes.
Petitioner cites no authority and we are entirely unimpressed with its reasoning. On the other hand, the ruling of the Supreme Court in , stands as a barrier to the allowance. In order to sustain petitioner we would be obliged to find that this right held by petitioner constituted a capital asset which it received from the decedent. We are unable to make such a finding.
The partnership was a personal service concern requiring no capital or tangible property and to which none of the partners*76 had contributed capital. , is peculiarly apposite and disposes of petitioner's contention. We hold that the right inuring to petitioner to receive decedent's share of the partnership income was not capital. Since this right does not constitute capital, petitioner is not entitled to any depreciation thereon. .
Accordingly, we hold that the respondent did not err in his determination.
Decision will be entered for the respondent.
Kern, J., dissenting: Prior to the opinion in the case of Bull v. United States, 295 U.S. 247">295 U.S. 247, there would have been little doubt but that the value of the option or right of decedent's estate to participate *631 in the earnings of the partnership for 10 years after the death of the decedent partner would have been properly included as a capital asset in the decedent's gross taxable estate, and only that part of the partnership income received by the estate would be subject to income tax which was in excess of the value of the contractual right or chose in action constituting part*77 of the decedent's estate. See William P. Blodget, 13 B. T. A. 1243; John F. Degener, Jr., 26 B. T. A. 185; Grahame Wood, 26 B. T. A. 533.
However, the Bull case (which is described by the First Circuit in , as "a peculiar case on its facts and in the way the case came up") appears to hold that if the partnership itself has no capital investment and no tangible assets, the contractual right to share in its earnings after the death of a partner can not be considered capital and can not be included at any value in the deceased partner's gross estate. It should be noted that this conclusion was not necessary to a decision of that case; that it was later referred to somewhat questioningly by the Supreme Court in , footnote 9; that it was construed by the First Circuit as a conclusion to be strictly limited to its own peculiar facts ( ); and has been construed by us as not applying*78 to situations where the partnership had any tangible assets (see , and .)
In the instant report it is found as a fact that "capital and tangible assets were not of importance to the creation and retention of partnership business." The inference is that some capital and tangible assets existed. The parties themselves have considered the Bull case as not applicable in that the value of the option was included in decedent's gross estate for estate tax purposes at a figure of $ 140,000.
I am loathe to conclude that this right which was valued at this amount for estate tax purposes did not constitute "a capital asset which it received from the decedent," and am unwilling to agree that we are forced to this conclusion by the Bull case.