*2022 The decedent, until his death on December 30, 1926, was a member of a partnership which provided in its articles of agreement that in case of the death of a partner during the year the partnership business should be continued until the end of the year. The partnership was on the accrual basis and both the partnership and the decedent filed their returns on the calendar year basis. Held that the income of the partnership allocable to the decedent to the date of his death should be included in the income-tax return filed on his behalf for 1926.
*857 This proceeding involves a deficiency in income tax as determined by the Commissioner for 1926 in the amount of $27,041.08. The question at issue is whether there should be included in decedent's return for income-tax purposes for 1926 his distributive share of the income of a partnership of his death on December 30, 1926. The January 1, 1926, to the date of his death on December 30, 1926. The facts were stipulated by the parties, from which we make the following*2023 findings.
FINDINGS OF FACT.
Levis W. Minford (hereinafter referred to as the decedent) died on December 30, 1926. The decedent at the time of his death was, and for a long period prior thereto had been, a member of a partnership doing business under the name of Minford, Lueder & Co.
The partnership agreement provided that on account of the capital contributed by each partner, such partner should be credited every six months with interest thereon at the rate of 6 per cent per annum on the amount standing to his credit not exceeding $100,000, and at the rate of 7 per cent per annum on any excess over and above said sum of $100,000. The said agreement also contained the following provision:
In the case of the death of either co-partner in the course of any calendar year the business shall be continued hereunder by the surviving co-partners to the end of the calendar year for account of themselves and the estate of the deceased co-partner, and the good will of the business and the right to continue the use of the same firm name and to continue the business as successors to this co-partnership shall belong exclusively to the surviving co-partners continuing the business together*2024 without compensation therefor to the estate of the deceased co-partner. In case of the continuation of the business for account of the estate of a deceased co-partner as above provided, the capital to the credit of the deceased co-partner at the time of his death shall be continued in the business to the end of the calendar year, and the estate of the deceased co-partner shall be entitled to receive such share of the profits of the business as the deceased co-partner would have been entitled to receive if living, but the estate of the deceased co-partner shall not, except to the extent of such capital to its credit in the business, be in any wise responsible for the liabilities or other obligations incurred in the business after the death of such co-partner.
*858 The partnership kept its books, determined its profits, and rendered its return on the accrual basis. Both the partnership and the decedent rendered their returns on the calendar year basis.
An income-tax return was filed on behalf of the decedent for the period beginning January 1, 1926, and ending December 30, 1926, and there was included therein an item of income in the amount of $43,089.74, which represented*2025 interest credited by the partnership to the decedent prior to his death on account of his capital contributions to the partnership. In the determination of the deficiency here in question the Commissioner computed the share of the partnership profits to which the decedent would have been entitled had he lived and remained a member of such partnership until December 31, 1926, and included 364/365 of such amount in decedent's gross income for the period from January 1, 1926, to December 30, 1926. The determination of net income as shown in the deficiency notice follows:
| Net income reported in return | $40,566.48 | ||
| Plus: | |||
| 1. Earned income, Minford, Lueder & Co | $20,000.00 | ||
| 2. Partnership income | 137,595.70 | ||
| 3. Additional dividends | 4,517.46 | ||
| 4. Interest on United States bonds | 584.36 | ||
| Total | 162,697.52 | ||
| Less: | |||
| 5. Interest | 1 $43,089.74 | ||
| 6. Contributions | 208.60 | ||
| 43,298.34 | |||
| 119,399.18 | |||
| Adjusted net income | 159,965.66 | ||
| Less: | |||
| Dividends | $11,567.47 | ||
| Liberty bond interest | 584.36 | ||
| Exemption | 3,900.00 | ||
| 16,051.83 | |||
| Subject to normal tax | 143,913.83 |
*2026 OPINION.
SEAWELL: While in the return as filed on behalf of the decedent there was included interest credited by the partnership to the decedent prior to his death on account of his capital contributions, the petitioners now contend that not only was it error on the part of the Commissioner to increase the income to the decedent in the manner indicated in our findings, but also that the item of interest referred to above was erroneously included in the return as originally filed. In effect, what the petitioners contend is that since the deceased *859 partner died prior to the end of the calendar year (which was the accounting period for both the partnership and the decedent), no income from the partnership is taxable in the return of the decedent, regardless of how much income it may have been determined was earned by the partnership during the year. We do not understand that the parties are in disagreement as to the amount of profits of the partnership business for the entire calendar year 1926 (or the inclusion therein of interest on capital contributions as a part of such profits), and the petitioners have offered no evidence in opposition to the correctness of the*2027 Commissioner's determination that the amount of such profits attributable to the period prior to the decedent's death is represented by 364/365 of the profits for the entire year. What the petitioners object to is the inclusion of any profits from the partnership in the return of the decedent for 1926. We are unable to agree with this contention.
The applicable statute is section 218(a) of the Revenue Act of 1926, which reads as follows:
Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the taxable year upon the basis of which the partner's net income is computed.
In the first place, we think it well established that the death of a partner*2028 brings about the dissolution of a partnership, and this general rule prevails in New York. (Laws 1919, ch. 408.) Nor do we think an exception to the foregoing principle arises in this case because of the agreement among the partners for the continuation of the partnership business after the death of a partner. The most that can be said is that the agreement provided for a continuation of the business theretofore carried on by the partnership, which is certainly not necessarily the same thing as continuing the existence of the partnership. ; . And, besides, under the agreement the good will of the business, the right to continue the use of the same firm name, and to continue the business as successors to the old partnership would belong to the surviving partners, and while the estate of the deceased partner would be entitled to receive the same share of the profits which the deceased partner would have been entitled to have received had he lived until the end of the year, the estate of the deceased partner was specifically excepted from responsibility for the liabilities or obligations incurred in the business*2029 after the death of such partner.
*860 The fact that the partnership business was to be continued by agreement until the end of the partnership's accounting period does not, in our opinion, mean that when the profits of the business for the year are finally determined at the end of the year a part thereof may not be properly attributed to the period when the decedent was alive and a part to the period after his death. Here, we have no question such as we had in , where the decedent was on a calendar year basis and the partnership on the fiscal year basis. In that case the Board held that since the accounting period of the partnership for the year in which the partner died did not end until after the close of the calendar year for which a return was required to be filed for the decedent for the year of his death, no share of the profits of the partnership which were determined after the calendar year for which the decedent's return was required to be filed should be included in such return. But here, the accounting periods of the partnership and the deceased partner were identical and therefore the considerations which there*2030 led us to exclude the decedent's share of partnership profits from the return filed on his behalf are not present. A case closely analogous to that with which we are concerned is , where both the partnership and partner who did during the year were on the calendar year basis and the Board there held that the share of partnership profits allocable to the decedent for the period of the year prior to his death should be included in the return filed for the decedent for such year.
The petitioners seek to distinguish the Goldman case from the case at bar on the ground that the partnership was on the receipts and disbursements basis in that case, whereas in the present case the accrual method is being followed, but we fail to see that a distinction can be drawn on this ground which would in one instance exclude from the return of the decedent the income of the partnership attributable to such decedent to the date of his death and in the other instance include it. In either event, what we are seeking to arrive at is the decedent's share of the partnership net income as of the date of his death. Even though such*2031 share, in the case at bar, might not be distributable until the end of the partnership's accounting period, such end would be within the calendar year for which a return was required to be filed on behalf of the decedent and all income of the partnership for such accounting period properly attributable to the decedent would be includable in such return whether distributed or not. And this would be true whether the decedent was on the cash or accrual basis. .
*861 In view of the foregoing, we are of the opinion that the action of the Commissioner in including in the return of the decedent the share of the partnership profits allocable to the decedent for the period prior to his death should be sustained.
Judgment will be entered for the respondent.
Footnotes
1. Represents the interest item reported in the original return but included in item (2) above as partnership income. ↩