Decisions will be entered under Rule 50.
1. Payments by petitioner of State unincorporated business taxes, personal income taxes, and interest thereon, allocable to his former partners, and for which he was not ultimately liable, held, not deductible by him as taxes paid, as ordinary and necessary business expense, or as losses in a transaction entered into for profit.
2. Payments by petitioner for legal services in connection with the foregoing, coupled with claims against himself and penalties thereon, held, on the facts, deductible in full.
*1131 In these consolidated proceedings respondent determined deficiencies in petitioners' income tax for 1952 and 1953 of $ 13,577.45 and *1132 $ 17,554.44, respectively. By amended answer, respondent claimed an increased deficiency for 1952 of $ 14,761.37, an increase of $ 1,183.92. For 1953 petitioners claim an overpayment of income tax of $ 7,731.62. If the increased deficiency for 1952 is approved, the deficiency for 1953 will be reduced to an amount to be determined under Rule 50. Certain other stipulated allowances for 1953 will be *231 accounted for in the Rule 50 computation.
The issues to be resolved are (1) whether petitioners are entitled to deduct New York State unincorporated business taxes paid by petitioner Daniel W. Farnsworth arising from partnerships in which he was a member, (2) whether they are entitled to deduct State individual income taxes assessed against other members of the partnership and paid by Farnsworth, and (3) whether they are entitled to deduct legal fees paid in connection with settlement of the State tax liabilities.
FINDINGS OF FACT.
Certain facts have been stipulated and are hereby found.
Daniel W. Farnsworth, hereafter referred to as petitioner, and Gertrude A. Farnsworth, husband and wife, reside at Montclair, New Jersey. They filed joint individual income tax returns for 1952 and 1953 with the district director of internal revenue at Newark, New Jersey. Gertrude is here solely because she joined in the joint returns.
In 1939, petitioner formed the partnership of Farnsworth & Farnsworth, located at Montclair, New Jersey. Its principal business was that of textile consultant for woolen mills in North Billerica, Massachusetts, Bridgewater, Vermont, and elsewhere.
Petitioner, from 1940 *232 through 1953, participated in successive partnerships, all known as Farnsworth & Farnsworth and all in the same business. Each partnership agreement provided that after payment and discharge of all legitimate claims and liabilities, the partnership earnings were to be divided according to the interest percentage stated therein. The partnerships kept their books and reported income for fiscal years ended November 30, and used the cash basis of accounting.
Petitioner's interests in the partnerships for fiscal years ended November 30, 1940 through 1953, were as follows:
| Fiscal years | Percentage |
| ended | petitioner's |
| November 30 | interest |
| 1940 | 35.0 |
| 1941 | 20 |
| 1942 | 8 |
| 1943 | 9 |
| 1944 | 7 |
| 1945 | 7 |
| 1946 | 10 |
| 1947 | 16.4 |
| 1948 | 23 |
| 1949 | 18 |
| 1950 | 20.3 |
| 1951 | 34 |
| 1952 | 60 |
| 1953 | 60 |
*1133 The partnerships, during the fiscal years ended November 30, 1940 through 1953, included the following partners, together with their relationships to petitioner:
Claribel F. Sulzberger, daughter
Josephine Farnsworth, daughter
James H. Hastie, not related
Frederick C. Farnsworth, brother
Helen F. Schneidewind, daughter
Frances F. Jaeckel, daughter
A. Louise Gordon, not related
Janet C. Emslie, granddaughter
Howard B. Schneidewind, son-in-law
Claribel C. Farnsworth, *233 first wife (deceased)
Robert M. Sharpe, not related
Peter J. Egan, not related
F. J. Foyt, not related
R. Anderson, not related
G. H. Taub, not related
H. I. MacCracken, not related
The partnerships derived their income principally from the North Billerica Company of North Billerica, Massachusetts, the Bridgewater Woolen Company of Bridgewater, Vermont, and the Hartford Woolen Company of Hartford, Vermont. Petitioner, and later his daughters, controlled the Bridgewater Woolen Company and the North Billerica Company.
Because Farnsworth & Farnsworth had its legal situs in New Jersey, petitioner and the other partners assumed it was not subject to taxation in New York where the partnership maintained an office. In 1946, upon consultation with their attorneys, the partnerships filed New York unincorporated business tax returns allocating partnership income between New York and New Jersey. In 1950, the New York State Tax Commission, hereafter referred to as the commission, refused to accept the proposed income allocation. The commission also refused to accept a subsequent settlement proposed by petitioner through the attorneys.
During 1951, the commission determined that the partnerships owed *234 New York State unincorporated business tax and assessed the tax against the partners individually and as partners. On December 3, 1951, the State of New York caused five warrants to be issued for the tax, plus penalties and interest, against the partners for the following years in the following total amounts: *1134
| Fiscal year ended November 30 | Tax, etc. due | Amount of |
| warrant | ||
| 1940 | $ 5,373.64 | $ 5,373.64 |
| 1941 | 13,128.57 | 13,128.57 |
| 1942 | 14,528.76 | 14,528.76 |
| 1943 | 16,330.82 | |
| 1944 | 26,035.34 | |
| 1945 | 18,894.42 | |
| 1946 | 22,355.67 | |
| 1947 | 4,373.42 | 87,989.67 |
| 1948 | 12,663.26 | |
| 1949 | 9,704.71 | 22,367.97 |
| Total | 143,388.61 |
On December 3, 1951, judgments for the above amounts were entered against the individuals who had been partners during the periods for which the tax was due.
Petitioner's allocable shares of tax, interest, and penalties assessed against the partners were as follows:
| Taxable year | Petitioner's allocable |
| ended | partnership share of |
| November 30 | tax liability |
| 1940 | $ 1,880.77 |
| 1941 | 2,625.71 |
| 1942 | 1,162.30 |
| 1943 | 1,469.77 |
| 1944 | 1,822.47 |
| 1945 | 1,322.61 |
| 1946 | $ 2,235.57 |
| 1947 | 717.24 |
| 1948 | 2,912.55 |
| 1949 | 1,746.85 |
| Total | 17,895.84 |
The commission also determined that the partners were subject to the New York State income tax on individuals on their distributable share of partnership *235 income for 1940 through 1949.
During 1951, petitioner became aware of the New York State tax assessments.
On April 24, 1952, petitioner, then recovering from a recent heart attack, called a conference at his home. He advised the three other partners present that he would assume the entire responsibility for settling the New York State tax controversy. After the conference, petitioner authorized the partnerships' attorney to settle the entire matter with the commission.
On November 28, 1952, all affected partners offered to settle the unincorporated business taxes together with their own personal income taxes. They acknowledged their liabilities for the personal income taxes, penalties, and interest asserted against them and for the unincorporated business income taxes, penalties, and interest for the years during which they were members of the partnerships. The offer further provided for abatement of all assessed penalties and *1135 interest applicable to both unincorporated business taxes and personal income taxes. It also provided a payment schedule and for the deposit of confessions of judgment by the partners as security for the payments. The commission accepted this offer.
Pursuant *236 to the settlement, the partners executed confessions of judgment and deposited them with the commission. The confessions of judgment varied in amount depending on the years during which the various partners were members of the partnerships.
The total amount finally agreed to be paid was reduced from $ 143,388.61 to $ 115,942.34 because the penalties were remitted entirely.
Petitioner paid to the commission the following amounts in satisfaction of the following liabilities:
| Year 1952 | |||
| Paid to the commission | $ 40,203.85 | ||
| Liabilities satisfied: | |||
| Unincorporated business tax | $ 31,153.98 | ||
| Petitioner's personal income tax | 8,900.00 | ||
| Personal nonresident income tax | 149.87 | ||
| 40,203.85 | |||
| Year 1953 | |||
| Paid to the commission | $ 38,424.69 | ||
| Personal income taxes of other partners | 1 $ 18,941.44 | ||
| Unincorporated business tax | 11,256.79 | ||
| Interest on unincorporated business tax | 8,226.46 | ||
| 38,424.69 |
The $ 31,153.98 which petitioner paid during 1952 as unincorporated business tax applied to the earliest years for which that tax was due. The portion allocable to petitioner's partnership interests is as follows:
| Unincorporated | Portion | |
| Partnership year ended November 30 | business | allocable to |
| tax paid | petitioner | |
| 1940 | $ 1,178.43 | $ 412.45 |
| 1941 | 3,039.02 | 607.80 |
| 1942 | 3,560.97 | 284.88 |
| 1943 | 4,252.82 | 382.75 |
| 1944 | 7,232.04 | 506.24 |
| 1945 | 5,623.34 | 393.63 |
| 1946 | 6,267.36 | 626.74 |
| Total | 31,153.98 | 3,214.49 |
Part *237 of the $ 11,256.79 paid by petitioner during 1953 as unincorporated business taxes is allocable to petitioner's partnership interests as follows: *1136
| Unincorporated | Portion | |
| Partnership year ended November 30 | business | allocable to |
| tax paid | petitioner | |
| 1946 | $ 897.92 | $ 89.79 |
| 1947 | 1,518.55 | 249.04 |
| 1948 | 4,796.69 | 1,103.24 |
| 1949 | 4,043.63 | 727.85 |
| Total | 11,256.79 | 2,169.92 |
The $ 8,226.46 paid by petitioner during 1953 in satisfaction of interest on New York State unincorporated business taxes is allocable to petitioner's partnership interests as follows:
| Total unincoporated business tax | $ 42,410.77 | ||
| Portion of unincorporated business tax allocable to petitioner: | |||
| 1952 | $ 3,214.49 | ||
| 1953 | 2,169.92 | ||
| 5,384.41 | |||
| Percentage allocable: | |||
| 5,384.41/42,410.77 = 12.6958% | |||
| Portion of interest on unincorporated business tax allocable to | |||
| petitioner for 1953: | |||
| 12.6958%X8,226.46 = | 1,044.41 |
The same law firm represented petitioner, partner Egan, and the partnerships during the settlement of the New York State tax controversy. The settlement negotiated by the law firm included personal income taxes of all partners and the unincorporated business taxes assessed against them.
The law firm submitted three bills to the partnerships for legal services rendered in *238 connection with the unincorporated business taxes and the partners' personal income taxes. It rendered the services from May 25, 1950, to October 19, 1951, and from December 18, 1952, to August 6, 1953.
The law firm billed petitioner for legal services rendered from October 19, 1951, through December 18, 1952. The services rendered during this period continued the services previously billed to the partnerships and included services relative to petitioner's personal income taxes and the unincorporated business taxes. By checks dated October 21 and December 23, 1953, petitioner paid that bill for legal services.
The $ 7,519.59 paid during 1953 by petitioner to the law firm for legal services in connection with the tax controversy is allocable to petitioner as follows: *1137
| Total taxes and interest payable to the State of New York | $ 115,942.34 |
| Petitioner's personal income tax and interest due State of New | |
| York | 11,821.20 |
| Portion of legal fees allocable to petitioner as legal expense: | |
| 11,821.20/115,942.34 x 7,519.59 | 766.68 |
| Unincorporated business tax and interest payable to the State of | |
| New York | 50,637.23 |
| Portion of legal fees allocable to partnerships: | |
| 50,637.23/ 115,942.34X7,519.59 | 3,284.14 |
| Petitioner's composite interest in the partnerships | 12.6958% |
| Portion of legal fees allocable to petitioner as loss from | |
| partnerships: 3,284.14X.126958 | $ 416.95 |
*239 On January 26, 1953, his attorney advised petitioner to pay the other partners' personal income taxes so as to allow the partners to obtain a Federal income tax deduction therefor. Petitioner forwarded a check for $ 38,424.69 which included $ 3,000 for personal income taxes of Schneidewind, the balance of $ 78.08 due from him to be satisfied personally by Schneidewind.
Schneidewind paid the $ 78.08 balance of his agreed personal income tax liability to New York State. He deducted $ 3,078.08 on his 1953 Federal income tax return.
Partner Egan claimed a deduction on his 1953 Federal income tax return for his personal income tax liability satisfied by petitioner. Partner Gordon, upon the advice of petitioner's attorney, deducted on her Federal income tax return her personal income tax liability satisfied by petitioner.
Payments by petitioner in satisfaction of New York State personal income taxes of his partners and unincorporated business taxes of the several partnerships, known as Farnsworth & Farnsworth, were not ordinary and necessary business expenses of petitioner, nor partnership losses to petitioner, except to the extent that the latter taxes are allocable to his interest in *240 each partnership.
Payments by petitioner for legal services rendered in connection with the tax claims were his legal expenses and deductible in full as such.
OPINION.
The parties are in accord on a number of subordinate questions. Respondent apparently concedes that a partnership agreement can be amended during the term of a partnership to alter the respective interests in partnership income or loss. See, e. g., John G. Curtis, 12 T. C. 810, affd. (C. A. 7) 183 F. 2d 7; Frederick S. Klein, 25 T. C. 1045. Petitioner on the other hand appears to accept the proposition that a partner may not deduct as a personal *1138 expense or loss any part of the partnership expenditures. Western Construction Co., 14 T. C. 453, 471, affirmed per curiam (C. A. 9) 191 F.2d 401">191 F. 2d 401. The essence of the controversy appears to be whether after a partnership has ceased to exist, agreement by one of the partners to assume a liability of other partners is effective as anything more than a voluntary renunciation of the right of contribution which the paying partner would otherwise inevitably have acquired.
Four different types of payments are in issue but basically they involve a similar situation, with one exception. *241 Petitioner paid the New York State unincorporated business tax levied on the partnership which was a joint and several obligation of all of the parties, N. Y. Partnership Law, sec. 26; N. Y. Tax Law, sec. 386-a; the New York State personal income taxes of the partners, which were their own separate liability; interest which had accrued on both of the foregoing; and the fee of the attorneys who ultimately arranged for the payment of the two types of taxes without penalty and in installments. To complicate the situation further, the taxes were paid with respect to partnerships which were no longer in existence by the express terms of the individual partnership agreements, which had been constituted of a number of varying partners, none of whom, with one exception, continued into the taxable year in any partnership relation with petitioner, and a number of whom were close relatives of petitioner, and others longtime employees of the family business.
Respondent contends that under these circumstances the petitioner's payments of taxes due from others were gifts to them. In spite of petitioner's denials there is substantial evidence to support such a conclusion. But we need not go so *242 far. The only present question is whether these payments were deductible by petitioner either as ordinary and necessary business expenses, as taxes paid, or as a loss sustained in a transaction entered into for profit. They were certainly not petitioner's taxes and as such could not be deducted by him. Rita S. Goldberg, 15 T. C. 696; Magruder v. Supplee, 316 U.S. 394">316 U.S. 394. They were not the ordinary nor indeed any necessary expense of any business then being conducted by petitioner personally. 1*243 Nor on this record can we conclude that they were uncompensated losses sustained by petitioner in a profit transaction. It is, to be sure, contended that petitioner could not settle his own liability for the taxes *1139 in question without disposing of all of the New York State claims in one arrangement and that his ex-partners were unwilling to concede their liability. But as the case is presented, we are unable to find that any defense the ex-partners may have had would have been effective, nor indeed that it was necessary for petitioner to relinquish his rights of contribution had he made the settlement by paying the entire amount and seeking to recover from the ex-partners.
It is apparently conceded, and in fact contended by petitioner, that since this was a joint and several obligation of all of the ex-partners, petitioner could in the first instance have been held liable for the full amount. N. Y. Partnership Law, sec. 26; N. J. Stat. Ann., sec. 42:1-15. There is no showing that such a payment if made by petitioner would not under the applicable New York and New Jersey law have conferred upon him full rights of contribution from those jointly liable. See Helvering v. Fitch, 309 U.S. 149">309 U.S. 149; Helvering v. Leonard, 310 U.S. 80">310 U.S. 80; *244 Bonney v. Commissioner, (C. A. 2) 247 F. 2d 237, affirming 24 T.C. 199">24 T. C. 199, certiorari denied 355 U.S. 906">355 U.S. 906. 2 The indications are, in fact, to the contrary. Hewlett v. Van Voorhis, 196 App. Div. 322, 187 N. Y. S. 533, 539, affirmed per curiam 233 N.Y. 642">233 N. Y. 642, 135 N. E. 952; see Jarvie v. Arbuckle, 199">163 App. Div. 199, 148 N. Y. S. 189, affirmed per curiam 220 N. Y. 731, 116 N. E. 1053; see also Awtry v. Hilman193 Misc. 693">193 Misc. 693, 85 N. Y. S. 2d 146; Clayton v. Davett, (N. J. Ch.) 38 Atl. 308; In re Pangborn, (W. D., Mich.) 185 F. 673">185 F. 673; 68 C. J. S., sec. 557. His voluntary relinquishment of the payments which he could thus otherwise have exacted 3 leaves him in no better position than any taxpayer who fails to pursue his rights of recoupment where payment of the obligation of another has been made. Herman Axelrod, 18 B. T. A. 927; Thom v. Burnet, (C. A., D. C.) 55 F. 2d 1039, affirming 17 B. T. A. 1185; Charles J. Matthews, 8 T. C. 1313, 1319; Hal E. Roach, 20 B. T. A. 919, 925; Glendinning, McLeish & Co., 24 B. T. A. 518, affd. (C. A. 2) 61 F. 2d 950; Horace E. Podems, 24 T. C. 21. We conclude that the unincorporated business tax, the income tax, and the interest thereon, which were not the *245 ultimate liability of petitioner, are not proper deductions.
A different conclusion, however, seems to us required with respect to the counsel fees paid by petitioner. While it is true that the subject matter of the work of the attorneys included a settlement of the claim ultimately payable by petitioner's ex-partners as well as by him, the total amount of the partnership tax could as we have said *1140 have been collected from him in the first instance. Whatever success the attorneys had in eliminating the penalties and making provision for installment payments was an advantage to him for which they were entitled to compensation. *246 Any benefit to the other obligors seems to us to have been merely incidental. There is no suggestion that the fee charged was not reasonable for the services performed. The entire amount of the attorneys' fee was in our view, accordingly, a proper deduction.
Decisions will be entered under Rule 50.
Footnotes
1. Stipulated as $ 18,941.64.↩
1. "Ordinary and necessary expenses of a partnership business are properly deducted on the partnership return, and the partner then returns as an individual his distributive share of the net income of the partnership after making such deductions. He can not take ordinary and necessary expenses of the partnership as a deduction on his individual return. In the present case * * * the expenditures seem to have been made on behalf of the partnership, and, if they were ordinary and necessary expenses paid or incurred in the operation of any trade or business, it was the partnership business and not an individual business * * *." ( Hiram C. Wilson, 17 B. T. A. 976, 979↩.)
2. "The taxpayer has the burden of showing by 'clear and convincing proof' that the local law supports his contentions." ( Bonney v. Commissioner, 237">247 F. 2d 237, 239↩).
3. What we have said applies primarily to the unincorporated business tax. With respect to the New York State personal income taxes, the case is even weaker and the nondeductibility of the payment even more clearly demonstrated. Petitioner's attorney was instructed by him to pay the personal income taxes "for the account of the other partners." They took deductions themselves for such taxes thus paid.↩