1928 BTA LEXIS 3730">*3730 1. During the taxable years the petitioners carried on a business established by their father many years prior to his death on March 5, 1920. Pursuant to the terms of their father's will they paid to their sisters certain amounts out of the profits of the business. Held, that the portion of the profits payable to their sisters in accordance with the provisions of the will did not constitute taxable income of the petitioners.
2. In 1920 the petitioners received $3,360 in compensation for services rendered by them in negotiating a sale of merchandise, which sale was not consummated. Held, that the amount received was a part of the gross income of the business and not a mere gratuity.
3. One of the petitioners advanced money to a brother during the years 1920, 1921, and 1922 upon promissory notes given by the brother. The notes which became due in 1920 and 1921 were not paid when due and were charged off as debts ascertained to be worthless in 1921. Held, that the evidence does not show that the debts were ascertained to be worthless in 1921 and hence not a legal deduction from gross income.
11 B.T.A. 789">*789 These are proceedings for the redetermination of deficiencies in income tax as follows:
| James M. Hutchinson | 1920 | $556.92 |
| 1921 | 366.59 | |
| 1922 | 182.75 | |
| 1923 | 126.34 | |
| William N. Hutchinson | 1920 | 409.52 |
| 1921 | 537.08 | |
| 1922 | 250.16 | |
| 1923 | 76.90 |
The appeals were consolidated for hearing and decision. The following questions are involved in both cases:
(1) Whether certain payments made to petitioners' sisters out of the profits of a business conducted under the name and style of James Hutchinson & Sons were income of the petitioners;
(2) Whether a payment received by James Hutchinson & Sons in 1920 in connection with the cancellation of a sale of sugar was taxable income of the business; and
11 B.T.A. 789">*790 (3) In the case of William N. Hutchinson whether certain loans made by him to his brother and charged off the individual's books of account in 1920 are deductible from gross income in his individual tax return for 1920 as bad debts.
FINDINGS OF FACT.
The petitioners are residents of St. Louis, Mo., and since March 5, 1920, have been engaged in the1928 BTA LEXIS 3730">*3732 sugar brokerage business in said city under the name of James Hutchinson & Sons. The petitioners' father, James Hutchinson, died on March 5, 1920, leaving a will which was duly probated and which provided, among other things, as follows:
SECOND: I direct that my sons, W. N. Hutchinson and James M. Hutchinson, continue the business established by me over fifty years ago under the name and style of James Hutchinson & Sons.
THIRD: I direct that my executors hereinafter named pay to my three daughters, Eleanora Hutchinson, Emma Hutchinson Knox, widow of John B. Knox and Gertrude V. Hutchinson, the sum of One Hundred Dollars ($100.00) each, monthly, so long as they shall remain single and unmarried; said sums to be taken out of the business of James Hutchinson & Sons, aforementioned.
FOURTH: I give and bequeath to my granddaughter Bettie Elizabeth Hutchinson, and to my grandson John Walter Hutchinson the sum of Five Hundred Dollars ($500.00) each, said amounts to be taken from my life insurance.
FIFTH: I give, devise and bequeath to my said sons W. N. Hutchinson and James M. Hutchinson, all the rest, residue and remainder of my estate, whether real, personal or mixed and wheresoever1928 BTA LEXIS 3730">*3733 situated, including the remainder of my life insurance left after the payment of the two bequests of $500.00 each mentioned in Article 4th hereof, IN TRUST, however, for the following purposes: to collect all rents, dividends on stocks and income generally, which when so collected shall be divided semi-annually, equally between my said children George H. Hutchinson, William N. Hutchinson, James M. Hutchinson, Emma Hutchinson Knox, widow of John B. Knox, Eleanora Hutchinson and Gertrude V. Hutchinson, share and share alike, after deducting all necessary expenses of maintaining the real estate, paying taxes, etc. This trust shall continue for a period of five years from the date of my demise, at which time my property of every kind, character and description may be sold if deemed advisable by my said heirs, and the proceeds thereof shall be divided between my said children share and share alike.
SIXTH: I declare that I have but six children living and that their names are George H. Hutchinson, William N. Hutchinson, James M. Hutchinson, Emma Hutchinson Knox, Eleanora Hutchinson and Gertrude V. Hutchinson.
SEVENTH: I appoint my sons William N. Hutchinson and James M. Hutchinson1928 BTA LEXIS 3730">*3734 executors of this my last will and request that no bond be required of them.
James M. Hutchinson and William N. Hutchinson were the executors of the will.
The petitioners' father, James Hutchinson, was engaged in the sugar brokerage business under the name of James Hutchinson & Sons, with office at St. Louis, at the time of his death. He had been engaged in such business for over 50 years. The petitioners worked 11 B.T.A. 789">*791 for their father but had no interest in the business. The petitioner, James M. Hutchinson, had been engaged in the sugar brokerage business for approximately 30 years.
The business of James Hutchinson & Sons consisted of selling sugar on a commission or brokerage basis. No capital was required, as it was not necessary to carry a stock of goods or to finance any of the sales. The tangible property consisted of office furniture and was appraised at the date of James Hutchinson's death at about $150.
The father was successful in conducting the business, and was well known as a sugar broker in business circles, not only in St. Louis, but generally over the United States. The business had some value but it was impossible to compute that value in dollars1928 BTA LEXIS 3730">*3735 and cents, because there was no tangible property and the relative value of the services of the father and the petitioners was uncertain. It was returned as of no value in the Federal estate-tax return of James Hutchinson, deceased.
The petitioners continued the business of James Hutchinson & Sons after their father's death at the same address, under the same name and in the same office, without a reorganization of any kind. Since March 5, 1920, petitioners have divided the profits of the business in equal shares; have regarded the business as a partnership composed of two members (the petitioners) and have filed partnership returns. The distributive income of the concern as determined by the Commissioner for the years involved was as follows: $02,06,12
1920 $29,705.31
1921 28,217.23
1922 26,252.71
1923 15,679.69
The petitioners paid $100 a month to each of their sisters from the time they started to operate the business, which was immediately after their father's death, in accordance withe the second and third clauses of their father's will directing such payments, the total amount of the payments for each of the years involved being as follows:
| 1920 | $2,700 |
| 1921 | 3,600 |
| 1922 | 2,400 |
| 1923 | 2,400 |
1928 BTA LEXIS 3730">*3736 These payments were made out of the profits of the business and were treated as an expense on the books of the concern and in the returns filed as partnership returns, and were reported as income by the sisters in their individual returns.
11 B.T.A. 789">*792 When the revenue agent examined the petitioners' books of account for the purpose of verifying their returns he interpreted the will of James Hutchinson as giving a one-sixth interest in the business to each of his children, and so informed the petitioners and their sisters. Due to the uncertainty as to the interest which the sisters had in the business, which uncertainty had been increased by the interpretation placed upon the will by the revenue agent, the petitioners and their sisters, under date of October 10, 1924, entered into an agreement whereby, in consideration of the sisters giving up whatever interest they might have in the business under the terms of their father's will, the petitioners bound themselves absolutely to make the payments directed in the will so long as they continued to operate the business and the payments could be made out of the profits without sacrifice to themselves.
During 1920 the petitioners, 1928 BTA LEXIS 3730">*3737 acting in the capacity of brokers, arranged for the sale of a quantity of sugar by the firm of Ham & Seymour Co. to the Liggett & Myers Tobacco Co. of St. Louis. The sugar was never delivered to the Tobacco Co., although the petitioners rendered all the services required of them in closing the contract, and in November, 1920, a check was received from Ham & Seymour Co. in the amount of $3,360 to compensate them for their services in the negotiation of the sale.
During the years 1920 and 1921 William N. Hutchinson made the following loans to his brother, George H. Hutchinson, said loans being evidenced by promissory notes:
| Date. | Amount. | Maturity. |
| Sept. 24, 1920 | $100.00 | Sept. 24, 1921 |
| Oct. 16, 1920 | 100.00 | Oct. 16, 1921 |
| Nov. 6, 1920 | 100.00 | May 6, 1921 |
| Nov. 27, 1920 | 100.00 | May 27, 1921 |
| Dec. 23, 1920 | 100.00 | June 23, 1921 |
| Jan. 12, 1921 | 100.00 | July 21, 1921 |
| Feb. 9, 1921 | $100.00 | Aug. 9, 1921 |
| Mar. 4, 1921 | 100.00 | Sept. 9, 1921 |
| Apr. 8, 1921 | 100.00 | Oct. 8, 1921 |
| May 3, 1921 | 100.00 | Nov. 3, 1921 |
| Aug. 25, 1921 | 500.00 | Dec. 31, 1921 |
These loans, in the amount of $1,500, were charged off during the year 1921 by William N. Hutchinson as worthless. 1928 BTA LEXIS 3730">*3738 During the years 1921 and 1922 William N. Hutchinson made the following loans to his brother, George H. Hutchinson, said loans being evidenced by promissory notes:
| Date. | Amount. | Maturity. |
| Nov. 10, 1921 | $100.00 | May 10, 1921 |
| Jan. 26, 1922 | 100.00 | Demand. |
| Mar. 25, 1922 | 100.00 | Sept. 25, 1922 |
| Apr. 26, 1922 | 100.00 | Oct. 26, 1922 |
| July 26, 1922 | $100.00 | Oct. 24, 1922 |
| Sept. 23, 1922 | 100.00 | Dec. 22, 1922 |
| Nov. 23, 1922 | 100.00 | Dec. 23, 1922 |
These loans, in the total amount of $700, were charged off during 1922 by William N. Hutchinson as worthless.
11 B.T.A. 789">*793 In the determination of deficiencies the respondent disallowed as deductions from the gross income of the business conducted under the name of James Hutchinson & Sons the amounts of money paid to the sisters of the petitioners, in accordance with the provisions of the will of their father, and included in gross income of 1920 $3,360 received from Ham & Seymour Co. In the determination of the deficiencies in the case of William N. Hutchinson, the respondent disallowed the deductions from gross income of alleged bad debts due to the petitioner from his brother, George H. Hutchinson.
OPINION.
1928 BTA LEXIS 3730">*3739 SMITH: 1. The first question presented is whether the amounts of money paid by the petitioners from the profits of a business conducted by them under the name and style of James Hutchinson & Sons are taxable income of the petitioners. The petitioners filed partnership returns and claimed the amounts paid as deductions from gross income in such returns.
We have no doubt that the petitioners' sisters had an interest in the business conducted. The business was subject to an annual charge of $100 per month to each of the petitioners' three sisters so long as they should remain "single and unmarried." The entire profits of the business did not belong to the petitioners but only the excess of the profits over the amounts reserved to the decedent's daughters by his will. The profits of the business payable to the unmarried daughters were received by the petitioners as trustees for the daughters and not as income to themselves. The facts are similar to those which obtained in , wherein we held that the member of a partnership is not individually taxable on so much of the partnership income as it attributable to an interest in his interest1928 BTA LEXIS 3730">*3740 in the partnership which, at the date of the formation of the partnership, he had sold to a third person, although such purchaser was not a member of the partnership. In that opinion we stated:
While the daughter was not entitled to share as a member of the Drilling Company in the profits of that partnership, and while such share was payable in the first instance to petitioner, yet the instant he received what was in realty her share he at once held her share as trustee for her. * * * This income was, as to her, taxable income and as such has been properly returned and taxed. This income which was taxable to the daughter was not, under the facts of this case, at the same time taxable also to petitioner. He held it as trustee, and since it was at once distributable, he had the right under section 219 of the Revenue Act of 1918 to deduct it from the gross income of the trust.
The same principle applied to the facts in this case compels the conclusion that the portion of the income of the business paid over 11 B.T.A. 789">*794 to the petitioners' sisters during the taxable year was not income of the petitioners.
2. The petitioners allege that the sum of $3,360 received by James Hutchinson1928 BTA LEXIS 3730">*3741 & Sons in 1920 from Ham & Seymour Co. was a mere gratuity and should not be included in gross income for that year. The evidence does not, however, support the proposition thus advanced. The petitioners negotiated the sale of a contract for the sale of sugar by Ham & Seymour Co. to Liggett & Myers Tobacco Co. The petitioners performed all the services required of them and Ham & Seymour Co. sent them a check for $3,360 to compensate them for those services. The contention of the petitioners that Ham & Seymour Co. was not legally liable for the payment of the money and that it sent the check merely to retain the good will of the petitioners with regard to other contracts is beside the question. The amount was received for services performed and constituted a part of the taxable income of the petitioners in 1920.
3. William N. Hutchinson seeks a deduction amounting to $1,500 for 1921 and $700 for 1922 for alleged bad debts of his brother, George. The evidence discloses that although his brother had not repaid the money advanced to him in 1920 and 1921, nevertheless, the petitioner continued to advance him money in 1922. George H. Hutchinson was one of the heirs of his father1928 BTA LEXIS 3730">*3742 and had an interest in a considerable amount of property held by the petitioners as trustees. The record fails to show what efforts if any were made by the petitioner to collect the debts in question. Since apparently he had security for valid claims against his brother, George, the action of the respondent in disallowing the deduction of the alleged bad debts is sustained.
Judgment will be entered on 15 days' notice, under Rule 50.