*2695 1. The petitioners, attorneys at law, making their returns on the cash receipts basis, performed numerous separate legal services for a dealer in coal properties, such services extending over a period from 1909 to 1915, when their client's affairs were placed in the hands of receivers. In the latter year the petitioners acquired a judgment for the value of their services and interest. The judgment, plus interest to date of payment, was paid in cash in 1920 and the Commissioner determined that the entire amount received in cash was income to the petitioners for that year. Held, that the portion of the amount received in 1920 which represented the value of the completed services performed prior to March 1, 1913, plus interest thereon to that date, was not taxable income in 1920 where the evidence showed that the March 1, 1913, value of such portion equaled the amount received therefor.
2. The determination of the Commissioner in respect to the remainder of the amount received in 1920 is sustained.
*1247 These two cases*2696 which were consolidated for hearing and decision are proceedings for the redetermination of deficiencies in the petitioners' income taxes for the calendar year 1920 in the following amounts:
| William J. Kyle | $1,796.12 |
| Patrick D. Reinhart | 1,509.08 |
The only error alleged is the act of the Commissioner in including in the 1920 income of a partnership of which the petitioners were the sole members, the entire amount received in cash by the partnership during the taxable year in satisfaction of a judgment acquired in the year 1915.
FINDINGS OF FACT.
The petitioners, attorneys at law, residing in Waynesburg, Greene County, Pa., in 1908 formed a partnership, under the firm name of Kyle & Reinhart, which thereafter engaged in a general practice with offices in Waynesburg. Beginning with the year 1899 William J. Kyle, one of the petitioners, had performed numerous legal services for J. V. Thompson, a resident of Uniontown, Fayette County, Pa., who up until his property was placed in the hands of receivers *1248 in January, 1915, had been extensively engaged in purchasing and selling coal lands in western Pennsylvania. After its formation until the date of*2697 the receivership the partnership continued to represent Thompson in certain of his purchases of coal property in Greene County. The services rendered consisted principally of examining titles, preparing deeds and mortgages, closing the transactions and recording the various instruments. Fees were charged for each transaction in proportion to the amount of time involved and bills were rendered from time to time, generally at periods requested by Thompson. Thompson never objected to the amounts of the fees charged but at the time of the receivership he had not paid some of the bills on the ground that the money was not then available.
In 1915, shortly after Thompson's affairs were placed in the hands of receivers, the petitioners were granted leave of court to institute suit against Thompson. Suit was entered in Fayette County and a judgment was recovered thereon for want of an affidavit of defense on November 3, 1915, in the amount of $19,209.62. Of this amount $7,035.10 represented the value of completed services performed by the partnership for Thompson from 1909 until March 1, 1913, and $1,055.27 represented interest upon such amounts from the average due date to March 1, 1913. *2698 An exemplified copy of the record was entered in Greene County on November 5, 1915. At Thompson's solicitation the petitioners did not issue execution on the judgment. They considered at that time that Thompson would eventually be able to pay off his indebtedness. In September, 1920, Thompson's trustees in bankruptcy paid the petitioners the amount of $24,320.27 representing the face amount of the judgment, together with interest from the date of judgment to the date of payment. In making their returns for 1920 the petitioners included therein the amount of such interest, or $5,110.65. The Commissioner determined that the entire amount of cash received in 1920 was income to the partnership and that one-half of this amount was income of each of the petitioners for the taxable year. The petitioners' returns have been made on the cash receipts and disbursments basis.
On March 1, 1913, Thompson was reputed to be a wealthy man and was considered perfectly solvent. No suits had been brought against him at that time. He was prompt in the payment of interest on mortgages and loans and his creditors had no difficulty in collecting the amounts of their debts. Early in the year 1914*2699 rumors began to circulate that he was in financial straits, and at the time the judgment was recovered the bank of which he was president had failed and he had defaulted in payment of interest on his mortgages and bank loans. As of November 5, 1915, he was the owner of 7,190.875 acres of unmortgaged coal lands and 831,887 acres of unmortgaged *1249 surface property in Greene County in addition to a large amount of encumbered property both in Greene County and other counties. The total amount of judgment and tax liens of record in Greene County prior in date to the petitioners' judgment was $699,928.69. The fair value of the above unencumbered coal and surface property was greatly in excess of the amount of such liens. At some undisclosed time the petitioner Kyle was offered an interest in an operating mine which had just been opened in return for the partnership judgment and two other judgments which Kyle had entered against Thompson. The person making the offer agreed to take these judgments at their face value. The offer was not accepted by the petitioner.
OPINION.
MURDOCK: The petitioners contend that the respondent erred in determining that the entire amount*2700 of $24,320.27 received in cash by the partnership in 1920, as payment of its judgment and interest thereon, was income for the year 1920 to the partnership and to the petitioners to the extent of their pro rata share. It is their position that of the amount so received only that portion which represented interest upon the judgment from the date on which the judgment was entered was partnership and individual income during the taxable year.
As to that portion of the amount received which represents payment for completed services performed prior to March 1, 1913, and for interest accrued to that date, we think that the petitioners' position is correct and that they are not taxable thereon in 1920. In this connection their method of making returns is immaterial since such method is only determinative of the year in which they are to be charged with income for tax purposes of these things which are income in fact under the various revenue acts. In the case of these petitioners, the services performed in each purchase of real estate represented a separate transaction, the compensation for which was earned upon the completion of the transaction. Their right to income accrued at that*2701 time and was not uncertain or contingent. They then had an assignable chose in action and there was a debt of a certain amount owing to them from their client. In Pennsylvania, interest is recoverable on a claim for legal services from the date when the claim becomes due and payable. See Gray v. Van Amringe, 2 W. & S. (Pa) 128; Commonwealth v. Terry, 11 Pa.Sup.Ct. 547. This is in accordance with the general rule in this country. See ; ; ; and see . For the purposes of the revenue acts the March 1, 1913, value of such rights to compensation in a definite amount and *1250 interest accruing before that date on this amount represents capital and is not taxable income when received. Cf. ; ; *2702 ; ; ; .
The evidence discloses that at March 1, 1913, Thompson was reputedly a wealthy man of sound financial responsibility who was habitually prompt in payment of his interest obligations and whose creditors had no difficulty in collecting their claims. The amount of the petitioners' claim for services was further protected by the legal right to receive interest thereon, while the amount of such interest could in turn be protected by suit and judgment in the event of a refusal to pay. We are satisfied that the March 1, 1913, value of the claims for services with interest thereon to March 1, 1913, was the full amount of the claims plus the full amount of the interest and that the petitioners are not taxable in 1920 upon amounts received in that year which represented such accrued rights. These amounts we have found as a fact were $7,035.10 and $1,055.27, or a total of $8,090.37.
The remaining portion of the amount received in*2703 cash presents a different situation, for here the petitioners' method of accounting is material. They have admitted that their individual returns were made upon the basis of cash receipts and disbursements. The Commissioner has determined the deficiency on the theory that the partnership kept its books upon the same basis, and in the absence of evidence to the contrary it must be presumed that this was the partnership's basis for its returns. Being on the cash basis, the amount received in cash in 1920, which represented payment for services performed and interest accrued after March 1, 1913, is taxable income for the year 1920, unless it appears that all or portions of the amount received represented income chargeable to the petitioners in prior years. The petitioners allege and have the burden of proving that portions of this amount represented taxable income to them not in 1920 but in 1915, when the judgment was entered.
Evidently the petitioners did not consider themselves chargeable with income for those services performed after March 1, 1913, as of the dates when the services were performed and their right to compensation accrued. Nor could they properly be chargeable*2704 for tax purposes at such time, except upon an accrual basis. This being true, it is difficult to see in what manner the change in the form of their claim to a judgment represents the receipt of income chargeable to them on the cash receipts basis. It is true that the claim is merged in the judgment in the sense that no suit can thereafter be brought upon the original liability, but only for the enforcement of the judgment. *1251 But this is because it is to the public interest to curtail litigation and to avoid the inconvenience of preserving the original liability as a continued cause of action. Therefore, the satisfaction of the claim must be sought through the judgment, see , and when the judgment is sought to be enforced the courts may inquire as to the nature of the original claim where necessary for the purpose of such enforcement, see ; . The judgment is a superior form of the original claim possessing additional security but not representing the payment thereof. See *2705 . It is merely a step in the enforcement of the claim.
The petitioners attempt to draw an analogy between their judgment and those cases in which promissory notes and similar forms of property given in payment for services have been held to represent income to one on the cash basis. However, it may be pointed out that notes so held to be income are different in some material respects from judgments. They are negotiable and frequently pass from hand to hand. Generally they can be readily discounted and in the hands of a bona fide holder are free from defenses which the maker may have against the original payee, whereas the assignee of a judgment takes it subject to all the defenses that existed against it in the hands of the assignor. See ; ; . Article 34 of Regulations 45, promulgated under the Act of 1918, provides that promissory notes constitute income when received in payment for services and not merely as security for such payment. This provision would seem to*2706 be a proper one, for when given in payment as distinguished from security, such notes take the place of the claim for which they have been given. The claim is entirely extinguished and the person receiving the notes looks to them alone. They are not merely another form of the original claim but represent a payment of the claim in property by the debtor.
For the reasons heretofore given we are of the opinion that the judgment did not represent income in 1915 to the petitioners who were on the cash basis. The determination of the Commissioner is sustained in respect to that portion of the amount received in cash in 1920, which represented payment for services rendered after@ March 1, 1913, together with interest upon all amounts from March 1, 1913, to the date of payment in cash.
Reviewed by the Board.
Judgment will be entered under Rule 50.
STERNHAGEN dissents.