*967 The decedent was a member of a partnership which made its income tax returns upon the basis of cash receipts and disbursements. The partnership agreement provided that the death of a partner should not effect a dissolution of the partnership, but that the partnership should be continued for a period of six months thereafter, and that the estate of the deceased partner for such period and "as payment for the good will of the deceased partner in the practice" should share in the income and expenses of the firm to the same extent that he would have done if he had lived. Subsequent to the death of the decedent on June 19, 1929, the surviving partner paid over to the executor the decedent's share of profits which had accrued up to the date of the death of the decedent but which had been collected thereafter, and also an amount representing his estate's share of the earnings of the business during the six-month period following the death of the decedent. Held, that the amounts received by the petitioner are not liable to income tax.
*968 *190 This is a proceeding for the redetermination of a deficiency in income tax of the estate of the decedent in the amount of $14,039.64 for the period June 20 to December 31, 1929. The point in issue is whether the estate is liable to income tax in respect of amounts paid to it by the surviving partner of a partnership, of which the decedent was a member, representing amounts collected by the surviving partner for services performed by the partnership prior to the death of the decedent and also representing an amount paid constituting a share of the profits of the business earnings within the six-month period following the date of death of the decedent.
*191 FINDINGS OF FACT.
The petitioner, successor of the Farmers Loan & Trust Co., is the executor of the estate of Ambrose H. Burroughs, deceased, with its executive offices in New York City.
Ambrose H. Burroughs died June 19, 1929. Prior to his death, he and H. Lewis Brown were members of the partnership of Burroughs & Brown, counsellors at law, under a partnership agreement dated July 2, 1923. This agreement provides in paragraphs VII and VIII as follows:
VII. The death of either of the parties hereto*969 at any time after the date of this agreement shall not effect a dissolution of the partnership, which shall on the contrary be continued for six months thereafter; and the estate of such deceased partner, for such period of six months, and as payment for the good will of the deceased partner in the practice, shall share in the income and expenses of the firm to the same extent that he would have done if he had lived.
VIII. In case of the dissolution of the firm by the death of one of the partners, the survivor may continue the practice alone or in conjunction with others in which that of the deceased partner may be a part, without paying anything therefor to the estate of the deceased partner.The original agreement of July 2, 1923, was amended by a mutual agreement dated May 9, 1927, and further supplemented on March 19, 1929, by adding the following:
As to work being done by the firm at the time of dissolution, whether pursuant to notice of six months after the death of one of the partners as provided in the contract, the fees and compensation for such work when and as collected shall be apportioned as follows: (1) to the firm such part thereof as will fairly represent the*970 value of the service rendered during the existence of the firm, having in view the amount and character of such service as compared with the entire service; and (2) the rest to the partner completing the service after dissolution, or if both partners participate in the work after dissolution, then to each of them in proportion to the fair value of the service rendered by them respectively. This method of division shall be applicable whether the compensation be on a contingent basis or otherwise.
The petitioner, as executor of the estate of Ambrose H. Burroughs, was paid and received during the period June 20 to December 31, 1929, the sum of $67,701.56 from the business conducted under the name of Burroughs & Brown, of which $55,567.31 represented compensation for services rendered by the partnership in the lifetime of the deceased partner, Ambrose H. Burroughs, but not received by the partnership until after his death; and the remainder, $12,134.25, represented profits earned by the business during the six months immediately following the death of Ambrose H. Burroughs and received by the business within such period.
The partnership of Burroughs & Brown, Ambrose H. Burroughs, *971 and the estate of Ambrose H. Burroughs kept their books of account and made their income tax returns on the cash receipts and disbursements basis.
*192 The income from the partnership actually paid and received by Ambrose H. Burroughs prior to the date of his death from January 1 to June 19, 1929, was reported for him for income tax purposes for the period January 1 to June 19, 1929, by his executor. The petitioner did not report any income from the business conducted under the name of Burroughs & Brown in the income tax return filed by it for the estate for the period June 20 to December 31, 1929.
The respondent added to the income reported on the income tax return filed by the petitioner as executor of the estate of Ambrose H. Burroughs for the period June 20 to December 31, 1929, the sum of $67,701.56 as "income from partnership, Burroughs & Brown," and the adjustment of income was explained in the deficiency notice as follows:
1. The increase in income received from the partnership Burroughs and Brown, is based upon the contention that the Estate of Ambrose H. Burroughs should be considered as a partner in the firm for the six-months' period from June 20, 1929 to*972 December 31, 1929.
The sum of $67,701.56 was cash actually paid to and received by the petitioner as executor of the estate of Ambrose H. Burroughs in the period June 20 to December 31, 1929.
A Federal estate tax return was filed for the estate of Ambrose H. Burroughs, which included in the gross estate the sum of $84,900.27, explained as follows: "Interest in the copartnership of Burroughs & Brown, 200 Fifth Avenue, fixed by written agreement; see rider attached, $84,900.27." The rider attached to the return discloses the following analysis and explanation of the $84,900.27 item:
| BURROUGHS & BROWN | |
| Statement of value of interest of A. H. Burroughs in the firm asof June 19, 1929, date of death. | |
| Value of firm's entire interest | |
| I. Fixed retainers: | |
| (a) earned from June 1 to June 19, 1929 | $3,166.22 |
| (b) prospective from June 19, 1929 to December 19, 1929 | 28,495.98 |
| (c) bonus on United States Tobacco stockholdings | 13,801.08 |
| II. Fee accounts for services already rendered | 21,800.00 |
| III. Prospective value to December 19, 1929 of work on hand June 19, 1929 and not completed, taken on fee basis | 21,000.00 |
| IV. The firm's 5% interest in the award of the Mixed Claims Commission in favor of United Cigarette Machine Company against the German Govt | 6,000.00 |
| V. Contingent contracts: | |
| (a) with Porto Rican American Tobacco Company in connection with claim of American Tobacco Company | 75,000.00 |
| (b) Alper Chemical Corporation in connection with claim of Southern Electro Chemical Company v. du Pont for Pauling infringement | 10,000.00 |
| 179,263.28 | |
| Less six months expenses | $9,462.75 |
| NET BALANCE | 169,800.53 |
| One half to the estate | 84,900.27 |
*973 The taxable year of the partnership and the decedent and the estate was the calendar year.
*193 OPINION.
SMITH: Were it not for the fact that the partnership agreement between Burroughs & Brown specifically provided that the death of one of the partners should not effect a dissolution of the partnership, no fair contention could be made by the respondent, we think, that any portion of the $67,701.56 in issue in this proceeding constituted taxable income of the estate during the period of administration or settlement of the estate, as provided by the statute; for the amount received by the estate from June 20 to December 31, 1929, was less than the value of the decedent's interest in the partnership, which was returned for estate tax purposes at $84,900.27. The last named amount represented the value of the claim of the estate against the business of Burroughs & Brown, and the collection by the estate of a claim owned by it at the date of death of the decedent does not give rise to taxable income - at least until such capital value has been recovered. *974 ; ; ; ; certiorari denied, ; ; .
It should be noted that the deficiency with which we are concerned in this proceeding is that of the estate of Burroughs for a period subsequent to Burroughs' death. The decedent was liable to income tax upon his pro rata share of the net income of the partnership up to the date of his death. ; affd., ; ; Truman v. United States,U.S. Dist. Ct., N. Dist. Ill., E. Div., Sept. 7, 1933. But we have not that period before us.
There remains to be considered the effect upon this case of the provision in the partnership agreement above referred to. The respondent submits*975 that the estate of the deceased partner is subject to income tax for the period from date of death, June 19, 1929, to the end of the year 1929 upon profits (a) earned by the partnership during decedent's lifetime and received by the partnership after decedent's death and paid to his estate in 1929, and (b) upon gains *194 and profits earned and received by the "partnership" after decedent's death and paid to his estate before the end of the year 1929, the said gains and profits being paid to the decedent's estate under the provisions of the partnership agreement expiring, by its terms, six months after death of either party - the partnership, the decedent, and the estate being on a cash receipts and disbursements basis. In elucidation of this claim, the respondent sets forth that under the terms of the partnership agreement the partnership continued for six months after the date of death of Burroughs; that the "estate and the surviving partner were in effect a new partnership"; that section 161(a)(3) of the Revenue Act of 1928 imposes an income tax upon the income of estates, including "income received by estates of deceased persons during the period of administration or settlement*976 of the estate"; and that the act further provides that the executor shall be responsible for making the return of income for the estate, the net income to be computed in the same manner and on the same basis as in the case of individuals, with an exception not here material.
We think it clear that the death of Burroughs put an end to the partnership existing between Burroughs & Brown. It was the rule at common law that the death of a partner always operated to dissolve the partnership. The rule is not different in New York. Section 62 of the Partnership Law of that state (Laws 1919, ch. 408) specifically states that one of the causes of the dissolution of a partnership is the death of one of the partners. In ; , it was stated:
It is a general rule that a contract of partnership is dissolved by the death of one of the parties, whether entered into for a fixed time or not, and that after his death the former partner cannot bind the estate of the decedent by new contracts, and, although the partnership be expressly extended to executors, they could not be compelled to carry it on, and would*977 be entitled to a dissolution and an account of the assets, subject to the liabilities of the firm incurred up to the time of dissolution. * * *
Cf. also ; . It must therefore be held that the partnership of Burroughs & Brown was dissolved on June 19, 1929, by the death of Burroughs.
With respect to the contention of the respondent that immediately upon the death of Burroughs a new partnership was formed between Brown and the executor of the estate of Burroughs and that the estate is liable to income tax in respect of distributions made to the estate by Brown from June 20 to December 31, 1929, there is nothing in the record showing any partnership agreement between the executor and Brown. In , it appeared that one Colwell was in partnership with one Hepworth. The partnership agreement provided that:
Should either partner die during the term of said copartnership, the firm shall not be deemed dissolved thereupon, but the wife and children of the *195 decedent shall immediately succeed to his interest in the business, which thenceforward shall*978 be prosecuted for the remainder of the term for the benefit of them and the surviving partner. Either partner may designate by will what interest his wife and children, as between themselves, shall have in his said copartnership interest in the event of his death as aforesaid.
It further provided that:
In the event of the death of either, the business shall be continued by the survivor until the expiration of five years from the 1st day of February next succeeding such death; the estate of the deceased partner to have the same share and interest in the profits, and to bear the same share of the losses of the business, as would have been received and borne by the deceased partner had he lived; * * *
The surviving partner, Hepworth, continued the business that had theretofore been carried on by the partnership and the partnership became insolvent. Creditors of the partnership sought to hold Colwell's estate liable for the losses. The Court of Appeals for the State of New York stated:
* * * There is in fact no partnership, for there are no partners. There is a surviving partner. Under the first article it might be said that, if the wife and children assented, they would*979 have become partners. The executors cannot be deemed partners, for that capacity has not been put upon them, nor have they assumed it directly or indirectly by taking any part of the management of the business. They knew of its continuance, and loaned Hepworth money upon security. Nothing more. A new partnership was not formed; nor can one be implied. But it is said the "estate" of the deceased partner is to share in profits or bear a portion of the losses. Of what? Not a partnership, but a business conducted by a surviving partner. An estate cannot be a partner. * * *
We think that the principles laid down by the court in the above cited case are equally applicable to the determination of the issues raised in this proceeding. The estate of Ambrose H. Burroughs is not liable to income tax as a partner in the law business conducted by Brown.
It is apparent from the partnership agreement between Burroughs & Brown that a portion of the profits of the business during the sixmonth period following the death of a partner which was to be paid over to the deceased partner's estate was "payment for the good will of the deceased partner in the practice." It appears that the petitioner, *980 during the period June 20 to December 31, 1929, received $12,134.25 representing such portion of the profits. In , the Board held that a partnership was not entitled to deduct from its gross income as an ordinary and necessary expense of doing business an amount paid to the estate of a deceased partner pursuant to a partnership agreement, but that the amount represented a capital expenditure for the acquisition of the good will of such deceased partner. Our decision was affirmed by the , the court saying:
The estate of Soule was not a partner in the new firm and the payments to it out of the firm's profits were not the receipt of a partner's distributive share in the net income of the firm. The old firm was dissolved by Soule's death and his interest in it passed to the petitioners, subject to the payments they were to make under article XIV. The payments contracted for were to be made by the individual petitioners, not by the new firm, and are in no sense an expense of the firm. And as regards the individual petitioners the payments made to*981 the estate are not deductible as ordinary or necessary expenses for they were made by the petitioners in the purchase of a capital asset.
Cf. .
Reviewed by the Board.
Judgment will be entered under Rule 50.