*3012 1. Nonnegotiable notes, the payment of which is contingent, are not the equivalent of cash.
2. Where no payment was made on such notes in the year in which they were issued, the recipient, on a cash receipts and disbursements basis, need not include any part of such notes as income for that year.
*980 The petitioner, Joseph G. Beeler, appeals from the determination of a deficiency of $325.89 in income tax for 1919 and the petitioner, Mainard E. Crosby, from the determination of a deficiency of $294.28 in income tax for 1919. The two proceedings, arising out of the same transaction, were consolidated for hearing. Petitioners allege (1) that the Commissioner committed error when he determined that any part of a certain note of $5,000, executed by one Baskins, represented income or, in the alternative, (2) that no part of any income which might have arisen out of the transaction in which such note was given was realized in 1919.
FINDINGS OF FACT.
Joseph G. Beeler and Mainard E. Crosby, petitioners herein, from July, 1913, until November, 1919, *3013 had been engaged in the general *981 practice of law at North Platte, Nebr., under the firm and style of Beeler & Crosby. In November, 1919, Beeler & Crosby and C. L. Baskins, a younger man, who had been practicing law in North Platte for a period of approximately six or seven years, entered into a written contract of partnership, the material portions of which read as follows:
This agreement made and entered into this 8th day of November, 1919, by and between Beeler & Crosby, a partnership composed of J. G. Beeler and M. E. Crosby, as the sole partners thereof, J. G. Beeler, M. E. Crosby, and C. L. Baskins,
WITNESSETH:
1. That the said above parties hereby agree to become partners as Attorneys at law, said partnership to begin on Monday November 10, 1919, and to continue until terminated by the death of one or the other of said partners, or by their mutual agreement of termination and said partnership shall be conducted subject to the conditions hereinafter contained.
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3. That the said parties hereto shall be entitled to the net income of the business in equal shares.
4. That for and in consideration of the above division of profits and other presents*3014 herein contained, the said Beeler & Crosby, a partnership, agree to bring in and turn to the account of said partnership, herein formed, as assets thereof, the lease hold of the office above referred to, all office furniture and fixtures therein contained belonging to said partnership, together with the entire law library of said partnership; and the said C. L. Baskins, agrees to bring in to said business as assets thereof, all his office furniture, and fixtures together with his entire law library.
5. That as a further consideration for the above division of income and the turning to the partnership account of all of the said office furniture and fixtures, together with the respective libraries of the parties hereto, Beeler & Crosby, a partnership, agrees to sell to the said C. L. Baskins, and the said C. L. Baskins agrees to buy a 1/3 interest in the said lease hold, office furniture and fixtures, law library, good will, law business and all future law business of said partnership, at an agreed price representing the difference in value of the physical property, good will, and business of the respective parties hereto, in the sum of $5000.00, said sum being the agreed price of*3015 an undivided 1/3 interest of the business and good will of said partnership. That the said C. L. Baskins in payment of the above sum shall execute and deliver to the said Beeler & Crosby his five certain non-negotiable promissory notes in the respective sums of $1000.00 each of said notes bearing even date with this agreement and payable on or before five years after date thereof with interest at the rate of 6% from date, payable annually. And in case of the death of the said C. L. Baskins before the payment in full by him, of the moneys above agreed to be paid, as represented by said notes, and in further consideration of the covenants herein the said Beeler & Crosby agree to cancel all further obligations of the said C. L. Baskins on his notes, and release his estate from the payment thereof; and further in consideration of the above agreement of cancellation, the said C. L. Baskins, agrees to pay to Beeler & Crosby upon his said notes, each year, the sum of $1000.00 conditioned upon the income of the said C. L. Baskins from the partnership for said year equalling or exceeding the sum of $3000.00.
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10. *982 If either of said above partners shall happen to die, *3016 during the continuance of said partnership, the surviving partners agree to pay to the widow of the deceased, or to his legally acting executor or administrator for the interests of said deceased, in the physical property and business of the partnership, the sum of $2000.00, but in case the said C. L. Baskins should die before the payment in full of his obligation on the 1/3 interest of the physical property and business, the said remaining partners would be required to pay to the widow or legal representatives of the said C. L. Baskins, only that proportion of the said $2000.00 above stated that the amount the said C. L. Baskins has paid on said physical property and business, as represented by notes above set forth bears thereto. And it is further agreed by and between the parties hereto, that the surviving partners shall, upon the death of any member of the firm, pay to his widow or to his legally acting executor or administrator for the benefit of his said estate, a 1/3 of the income derived from all unfinished business of the firm at the time of such death, such sums to be paid as the business is closed and fees received therefor.
This contract was carried out in accordance*3017 with its terms. The notes of the said C. L. Baskins, given in accordance with the provisions of the contract of partnership, were paid as follows:
| November 10, 1920 | $1,000 on principal | $300 on interest |
| December 1, 1921 | 500 on principal | |
| December 3, 1922 | 500 on principal | |
| January 31, 1923 | 350 on principal | |
| January 2, 1924 | $200 on interest | |
| March 5, 1924 | 110 on interest | |
| November 8, 1924 | 120 on interest | |
| January 1, 1925 | $500 on principal | 5.16 on interest |
| August 4, 1925 | 500 on principal | 22 on interest |
| September 5, 1925 | 210 on principal | |
| November 3, 1925 | 550 on principal | 108 on interest |
| December 24, 1926 | 890 on principal | 444.37 on interest |
which last payment of principal and interest was included in a final settlement between the parties whereby Beeler & Crosby took over a certain note payable to the firm of Beeler, Crosby & Baskins, which note has not yet been paid.
Joseph G. Beeler and Mainard E. Crosby each made his individual income-tax return for the year 1919, neither of them reporting as income, the notes of the said C. L. Baskins evidencing his purchase of a one-third interest in the new firm. Neither of said petitioners in*3018 their subsequent individual income-tax returns reported principal payments on said notes as income but made report of interest payments as made by the said C. L. Baskins, reporting the same as income.
The Commissioner determined that one-half of said purchase price as agreed to be paid by the said C. L. Baskins, or $2,500, should have been reported by each of the said petitioners as income for 1919 and computed the deficiency accordingly.
*983 The books of account kept by the petitioners and by the firm of Beeler & Crosby and, subsequent thereto, by the firm of Beeler, Crosby & Baskins, have always been kept on the basis of cash receipts and the individual income-tax returns and the partnership returns as made and filed by the respective individuals and the partnerships have always been made on the basis of cash receipts.
OPINION.
PHILLIPS: Petitioners kept their accounts upon the basis of cash receipts and disbursements and are entitled to make their returns upon the same basis. The notes which they receive dfrom Baskins were nonnegotiable and, in certain contingencies, were not to be paid. Aside from the contention that no taxable income resulted from the transaction, *3019 which question we find it unnecessary to decide, it it urged by them that in the circumstances which here exist no income was received in 1919 because no portion of the notes was paid in that year. This position they seek to sustain on two grounds; first, that the notes were not the equivalent of cash to one on a cash receipts and disbursement basis, since they were nonnegotiable and contingent as to payment and, second, that they are entitled to report any gain on the installment sales basis. Section 1208, Revenue Act of 1926. The application of either of these methods reaches the same result. It is our opinion that these notes were not the equivalent of cash, that the income of the petitioners is more accurately reflected by accounting for these payments in the year of receipt, and that the Commissioner erred in including them in income for 1919.
Decision will be entered under Rule 50.