*2466 1. The contention of the petitioners that the Board should not determine the deficiency for 1920 without determining a refund for 1919, when the Board has no jurisdiction for 1919, is without merit.
2. Held, partnership good will not shown to have had any value on March 1, 1913.
*1022 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income tax as follows:
| Docket No. | Year | Deficiency |
| 1920 | $5,721.92 | |
| 17653 | 1921 | 6,137.69 |
| 24717 | 1922 | 1,747.31 |
With respect to the deficiency for 1920, the petition alleges (1) that the deficiency is erroneous to the extent of $3,236.74 unless the tax liability for 1919 is readjusted by allowing as a deduction for 1919 one-half of the amount of $11,068.21 representing bonuses for the year 1919 paid in 1920 to employees of Sanderson & Son, a partnership of which Lloyd B. Sanderson, deceased, was a member; (2) that the respondent erred in including in the income of Sanderson one-half of an amount of $4,313.59*2467 which did not become distributable income of the partnership of Sanderson & Son until December, 1922. With respect to (2), it was stipulated at the hearing that the $4,313.59 constituted income of the partnership for 1920; consequently, there is now no controversy as to the inclusion of one-half of the amount in the income of Sanderson for that year.
With reference to the deficiency for 1921, it is alleged that the respondent erred in determining that the entire amount or any part *1023 thereof received by Sanderson upon the sale of his interest in the good will of the partnership of Sanderson & Son was taxable income. At the hearing, it was stipulated that an amount of $11,068.21 which was erroneously allowed by the respondent to the partnership as a deduction in 1921 for bonuses should be restored to income for that year.
With respect to the year 1922, it was stipulated at the hearing that there is a deficiency of $878.43, and that the Board may enter an order of redetermination for that amount.
FINDINGS OF FACT.
The petition in Docket No. 17653 was filed by Lloyd B. Sanderson, who has since died. By order of the Board, upon suggestion of death and notice of*2468 appointment of executors, the proceeding was revived and continued in the names of Robert Monro Sanderson, Lloyd Bowen Sanderson, Jr., and Ottilie F. Sanderson, the executors of the estate of Lloyd B. Sanderson, deceased. The petition in Docket No. 24717 was filed by the executors.
During 1919, 1920, and 1921, Lloyd B. Sanderson, hereinafter referred to as the decedent, was a member of the partnership of Sanderson & Son, of New York City. The partnership was composed of the decedent and A. Maclay Pentz, each partner having a one-half interest. The partnership acted as agents for steamship owners and also operated on its own account by chartering steamers. The agency business was on a commission basis. To a certain extent the partnership was a "personal service partnership." It did not require the use of much capital to carry on its operations and its earnings were dependent upon the partners and business conditions.
The business of Sanderson & Son as a steamship agency was begun about 1878, when a partnership by that name was organized, the partners being Richard Sanderson and Harold Sanderson. While the partners changed from time to time, the business and the firm name*2469 continued. Harold Sanderson afterwards became the manager of the White Star Line. Oswald Sanderson, who at one time was a member of the partnership, became manager of the Wilson Line in England. The decedent became a member of the partnership in 1895 and at that time there was among the assets of the partnership, an item of good will.
On March 1, 1913, the partnership was composed of the decedent and Pentz. On that date, the principal office of the partnership was in New York. It also had offices in Chicago and Boston. On March 1, 1913, the partnership represented the following steamship owners: the Ellerman's Wilson Line, Royal Mail Steam Packet Co., Gillimore & Co., British Ship Owners Co., the Union Castle Line, the Nelson Line, and the Steam Pacific Navigation Co.
*1024 The profits of Sanderson & Son from 1897 to 1913, inclusive, were as follows:
| 1897 | $51,853.60 |
| 1898 | 69,334.23 |
| 1899 | 19,715.26 |
| 1900 | 33,098.26 |
| 1901 | 19,946.03 |
| 1902 | 18,287.08 |
| 1903 | $18,669.99 |
| 1904 | 1,551.32 |
| 1905 | 9,544.14 |
| 1906 | 14,834.41 |
| 1907 | 5,891.25 |
| 1908 | 18,721.42 |
| 1909 | $9,126.32 |
| 1910 | 7,319.54 |
| 1911 | 25,117.32 |
| 1912 | 34,310.87 |
| 1913 | 40,243.95 |
In 1913 Sanderson*2470 & Son had a good staff and also had good connections. The firm was well known throughout the country and had a high standing.
Under date of October 10, 1921, the decedent and Pentz entered into an agreement with the Royal Mail Steam Packet Co., a corporation of London, England, providing for the sale to the Packet Company of the good will of the partnership of Sanderson & Son, the full benefit thereof and of all of its agencies and business connections (other than those connected with the Ellerman's Wilson Line) together with the right to continue the business as successor thereto and to use the name and style of "Sanderson & Son" therefor as a corporate title or otherwise. The consideration to be paid was $125,000. The agreement also provided that the Packet Company would organize a corporation in the United States, under the title of "Sanderson & Son, Incorporated," to consummate the purchase in behalf of the Packet Company, and that the sale should be consummated as of April 1, 1921. It was further provided that pending the completion of the purchase the decedent and Pentz were to carry on the business in the same manner so as to maintain it as a going concern, and that they*2471 should, from April 1, 1921, be deemed to have been and to be carrying on the business on behalf of the Packet Company and/or Sanderson & Son, Inc., and should account and be entitled to be indemnified accordingly. The agreement contemplated that the decedent would enter the service of the Packet Company under an agreement of even date. As an inducement for the purchase of the good will for $125,000 by the Packet Company and the corporation to be organized it was provided that the decedent should agree that he would not directly or indirectly enter into the business of steamship agent in the United States for a period of 10 years after leaving the service of the Packet Company, and that Pentz would not enter into such business in the United States, for a period of 10 years from the date of the contract. The books and records of the partnership were to be deposited with the corporation to be formed and be open to inspection by the parties.
Subsequent to the making of the foregoing agreement, the Packet Company caused the corporation of Sanderson & Son, Inc., to be *1025 organized under the laws of Delaware. All of the stock of Sanderson & Son, Inc., was and still is owned*2472 by the Packet Company.
On November 23, 1921, Sanderson & Son, Inc., the decedent and Pentz, executed an instrument which provided in part as follows:
NOW, THEREFORE, under and pursuant to said contract of October 10, 1921, and in consideration thereof and of the sum of One Hundred and twenty-five thousand Dollars ($125,000) with interest thereon at six per cent (6%) from April 1, 1921, in hand duly paid by said Sanderson & Son, Incorporated, to the said Sanderson and Pentz (Forty-one thousand six hundred and sixty-six and 68/100 Dollars, $41,666.68, thereof, with interest thereon at six per cent, 6%, from April 1, 1921, to the said Sanderson, and Eighty-three thousand three hundred and thirty-three and 32/100 Dollars, $83,333.32, thereof, with interest thereon at six per cent, 6%, from April 1, 1921, to the said Pentz), the receipt of which sums at or before the ensealing and delivery hereof is hereby acknowledged by the said Sanderson and Pentz, the said Sanderson and Pentz have sold, assigned, transferred, set over and delivered, and by these presents do sell, assign, transfer, set over and deliver, as of and from April 1, 1921, unto the said Sanderson & Son, Incorporated, the*2473 good will of the copartnership of Sanderson & Son of the City of New York, U.S.A. and the full benefit thereof, and all of its agencies and business connections (other than those connected with Ellerman's Wilson Line), together with the right to continue the business as successor thereto and to use the name and style of Sanderson & Son, therefor as a corporate title or otherwise.
The instrument also provided that the decedent and Pentz would do everything necessary to give Sanderson & Son, Inc., the full benefit of the contract of October 10, 1921, and that they would perform all conditions and agreements on their part to be observed and performed according to the terms of such contract. The instrument also provided that Sanderson & Son, Inc., was to observe and perform all the conditions and agreements on its part or on the part of the Packet Company to be observed and performed according to the contract of October 10, 1921.
The good will of the partnership was not carried as an asset on the books of the partnership, but was considered to be the individual property of the partners. No reference was made in the partnership return for 1921 to the sale of the good will, and the*2474 decedent while attaching to his 1921 return a statement in reference to the sale of the good will reported no profit therefrom, on the ground that the good will had as great a value on March 1, 1913, as the amount for which it was sold in 1921. In an audit of the returns the respondent determined that the entire amount of $125,000 received for the good will represented income to the partnership and determined the decedent's tax liability accordingly.
On March 1, 1913, the good will of the partnership had no fair market price or value.
Under date of April 16, 1919, a letter was issued by the partnership Sanderson & Son to the heads of departments concerning an *1026 arrangement whereby the department heads were to receive a bonus of 25 per cent of the net earnings of the firm after a deduction of a certain amount for the firm. The bonus for 1919 amounted to $39,068.21, of which $28,000 was paid in December, 1919, and the remainder, $11,068.21, was paid in June, 1920, after the profits for 1919 had been determined. The entire amount of $39,068.21 was entered in the partnership books as an expense for 1919 and was deducted in the partnership return for that year. Pursuant*2475 to the above mentioned letter, the bonus for 1920 was $42,568.93, of which $24,500 was paid in 1920 and $18,068.93 was paid in 1921 after the profits for 1920 had been ascertained. The entire amount of $42,568.93 was entered on the partnership books as an expense for 1920 and was deducted in the partnership return for that year. No part of the bonus for 1919 was deducted in the partnership return for 1920. The deductions for bonuses for 1919 and 1920 by the partnership reduced the decedent's distributable share of the partnership profits for the respective years, resulting in his reporting a smaller taxable income.
The accounts of the partnership and of the decedent for 1919, 1920, and 1921 were kept and their returns were made on the accrual basis.
In an audit of the partnership return for 1919 the $11,068.21 representing bonus for 1919 paid in June, 1920, was disallowed upon the ground that being paid in 1920 it constituted a deduction for that year and not for 1919. This action increased the decedent's distributive share of the partnership profits for 1919 and upon an audit of his return for that year an additional tax of $3,303.52 was assessed. Of the additional tax, *2476 $2,321.95 was attributable to the disallowance to the partnership of $11,068.21 bonus for 1919 paid in 1920. The additional tax was assessed in 1923.
The partnership return and the decedent's individual return for 1920 having already been filed without making deduction of the $11,068.21 bonus disallowed for 1919, the decedent thereupon filed a claim for credit of $3,236.74, which amount represented the reduction in his tax liability for 1920 resulting from an additional deduction for that year of one-half of the $11,068.21 disallowed to the partnership for 1919. Upon an audit of the petitioner's 1920 return the claim was allowed and the $3,236.74 was applied as a credit against the additional tax of $3,303.52 assessed for 1919, the difference of $66.78 being paid by the petitioner.
Subsequently, the decedent took up the matter with the Income Tax Unit, which took the position that it was improper to allow the partnership a deduction for 1920 of the $11,068.21 bonus for 1919 paid in 1920 and also to allow a deduction of $18,068.93 bonus for 1920 paid in 1921, and that the credit in the amount of $11,068.21 *1027 should properly be computed upon the basis of the partnership*2477 income for 1919 and a restatement of the decedent's tax should be made for that year.
In determining the decedent's tax liability for 1920, the respondent determined that the $11,068.21 representing bonus for 1919 paid in 1920 and previously allowed as a deduction to the partnership for 1920 was not a proper deduction to the partnership for 1920. After determining the decedent's tax liability for 1920, the respondent determined that there had been assessed against the decedent originally the amount of $32,582.50 which had been reduced by $3,236.74, the amount previously allowed as a result of the decedent's claim.
OPINION.
TRAMMELL: Since no deficiency for 1919 is before the Board for redetermination, we are without authority to make a determination with respect to the decedent's tax liability for that year. The fact that there has been no adjustment of the 1919 tax liability or that the respondent so far has not allowed the claim for refund for 1919 would not justify us in reducing or modifying a deficiency correctly determined for 1920. We think the contentions of the petitioners with respect to 1920 must be denied. At the hearing counsel for the petitioners conceded*2478 that the respondent was correct, but contended otherwise in his brief.
The remaining issue relates to the value of the good will of the partnership of Sanderson & Son on March 1, 1913. Apparently whatever good will the partnership had on that date had been developed by the partnership, as there is nothing in the record to indicate that any part of the good will had been acquired by purchase. The petitioners contend that the good will had a value on March 1, 1913, of more than $125,000, the amount for which it was sold in 1921 and urge that the partnership earnings for prior years and the testimony of witnesses support such contention.
The testimony of the witnesses indicates that the value testified to was a potential value or a value the good will might have at some subsequent time, providing the organization acquiring the good will properly handled and developed the business theretofore carried on, and does not relate to the actual market value at March 1, 1913. The testimony of these witnesses is not supported by facts as to earnings or other matters. There is no evidence as to the value of any tangible assets which might have been used in the production of income. Considering*2479 the earnings shown for previous years, the evidence does not disclose whether reasonable salaries for partners or officers were considered or how many partners or officers there were. With respect to the agencies or contracts with shipowners, *1028 the evidence does not disclose the nature or tenure thereof. From the entire record we are unable to determine the value of any good will possessed by the partnership on March 1, 1913.
The determination of the respondent in that respect is therefore approved.
Judgment in Docket No. 17653 will be entered under Rule 50. Judgment will be entered for $878.43 in Docket No. 24717.