1932 BTA LEXIS 1531">*1531 1. Under articles of partnership petitioner was entitled to receive amounts equal to four shares of the firm profits for a period of three years after his retirement from the partnership. By irrevocable instrument he assigned all his right, title and interest therein to a trustee for benefit of his minor daughters. Held, that petitioner's interest was in the nature of a capital asset; that the assignment thereof transferred, not income but a property right, and that income subsequently arising therefrom was not taxable to petitioner.
2. Stipulation as to date of delivery of assignment rejected in view of facts to the contrary appearing upon the record and held that payments from firm for first year after retirement were taxable to petitioner, his interest not having been assigned before accrual of such payments.
25 B.T.A. 396">*396 In these proceedings, which were consolidated for hearing petitioner contests deficiencies asserted by respondent as follows:
| 1922 | $10,956.99 |
| 1923 | 4,012.69 |
| 1924 | 5,111.88 |
1932 BTA LEXIS 1531">*1532 Respondent having confessed error as to certain of the items included by him in his computation of petitioner's taxable income, there remains but one issue for our determination, namely, whether there should be included in petitioner's income amounts paid by the partnership of which he formerly was a member to a trustee under the terms of an assignment for the benefit of petitioner's daughters.
25 B.T.A. 396">*397 Petitioner is a citizen of the United States, but since June 30, 1921, has resided abroad, and filed his Federal income-tax returns for the periods here involved in accordance with statute for such case provided. for many years prior to July 1, 1920, he was a member of a partnership engaged in the practice of accountancy on the Continent of North America and in the West Indies under the name of Price, Waterhouse & Company, hereinafter called the partnership. During the latter part of that period petitioner was entitled to 20 shares of the partnership profits.
On July 1, 1920, new articles of partnership were duly executed by petitioner and the eighteen other members of the firm, and thereafter petitioner was entitled to 16 shares of the partnership profits. Under these1932 BTA LEXIS 1531">*1533 new articles of partnership, which are in evidence, six of the partners, including petitioner, had the right to retire from the firm on June 30 of any year upon giving the specified notice of such intention. In the event of such retirement, or upon the death of one of the partners so named, the retiring partner, or his estate, was to receive under section 1 of Article IV, of the articles of partnership, "the amount of his capital contributed to the partnership, and any unpaid interest thereon at the rate of seven per centum per annum to the date of his retirement, or death, and his share of the profits of the partnership * * *, after deducting the amount of any claims which the partnership may have against him or his estate," to the date of his retirement, or death.
In addition to these payments, it was provided (sec. 2, Art. IV) that these six partners should be entitled to the following:
* * * in each of the three years (commencing July 1) next immediately following his death or retirement, to receive from the partnership, in addition to the other amounts which shall be payable to him as in this Article provided, a portion of the profits of the partnership for each of such1932 BTA LEXIS 1531">*1534 three years as if he were the owner of shares in the partnership, in addition to the shares of the continuing partners, as follows:
* * *
In the case of said Seatree, 4 shares
* * *
Such payments shall be made to such retiring partner, or to his legal representatives as the case may be, at the same time that profits for each of such three years, when determined, shall be paid to the continuing partners.
The payments provided by section 2 of Article IV of the partnership agreement were separate and distinct from the distributions to which the several partners were entitled while they remained members of the firm. While members, all the partners shared in the firm's earnings on the basis of the shares each held as set out in the agreement. These provisions for additional payments upon 25 B.T.A. 396">*398 death or retirement applied to only six of the partners, including petitioner, and the payments were to be made without the rendition of further services by the retiring partner after his retirement, or by his representatives after his death. They were to be reduced by $3,000 per share unless the retiring partner gave a written undertaking to refrain for the next seven years from1932 BTA LEXIS 1531">*1535 practicing his profession in the territory in which the firm operated. Section 4 of Article IV of the partnership agreement provided that the partnership should determine as to any partner attempting to sell, assign, transfer, or otherwise alienate his shares in the partnership, or any interest therein or part thereof.
In the spring of 1920 the petitioner was urged by the senior partner of the American firm of Price, Waterhouse & Company to accept a responsible position with the Continental firm of the same name located in Paris. As an inducement to him to give up his connection with the American firm and undertake this new position, the American firm agreed to take an active interest in the Continental firm, to insist on his being made senior partner thereof, with a share of the profits commensurate with his position, and to make the payments to which Seatree was entitled under section 2 of Article IV direct to a trustee for his two daughters. The petitioner retired from the partnership as of June 30, 1921, and became senior partner of the Continental firm.
The partnership during the years 1922, 1923, and 1924 kept its books of account and made its returns of income on the1932 BTA LEXIS 1531">*1536 accrual basis of accounting and on the basis of a fiscal year ending June 30.
In the period between July 1, 1921, and April 30, 1923, the partnership paid to petitioner from time to time in accordance with the articles of partnership, the capital sum which on June 30, 1921, stood to the petitioner's credit under the capital and shares agreement of the partnership, together with interest thereon from that date to the dates of payment, and his share of the firm profits to the date of his retirement. The interest so paid amounted to $9,098.40 in the year 1922 and $3,360 in the year 1923. In including these items of interest in petitioner's income for the periods in which received respondent erroneously subjected one-half of the item of $9,098.40 to 1921 rates of surtax instead of 1922 rates, and has twice included the item of $3,360 in petitioner's income for 1923. These errors respondent now confesses.
On June 29, 1922, which was after his retirement, but before the payments were due under section 2 of Article IV of the articles of partnership, the petitioner executed a written instrument under seal, by which, "in consideration of the sum of one dollar, the receipt whereof is1932 BTA LEXIS 1531">*1537 duly acknowledged, and other good and valuable considerations," 25 B.T.A. 396">*399 he transferred and assigned to the Equitable Trust Company of New York in trust for his two minor daughters "all my right, title and interest in and to four undivided shares of the profits or income now due, or which may hereafter become due and payable to me for the three years ending June 30, 1924, under and by virtue of" the partnership agreement.
The instrument, which is in evidence, gave the trustee power to manage and invest the funds coming into its hands, subject to the advice and consent of George Oliver May, or his successor; to divide such funds into two separate trusts, one for each of petitioner's daughters, and to accumulate such funds during the minority of the beneficiaries, thereafter to distribute to them the income or interest arising therefrom, free from the control or intervention of husband or creditors. The beneficiaries were given the right to dispose of the corpus of their respective trust funds only by testamentary disposition. The grantor reserved the right to add to the principal of the trust funds; to direct the investments of the funds should he so desire, and to remove or1932 BTA LEXIS 1531">*1538 change the trustee. No power to revoke the trust was reserved. Broad powers of management were granted the trustee and it was provided that upon the death of the grantor the powers reserved to him were to vest in May, or his successor. The sum of $1 recited as a consideration was not in fact paid by the Trust Company to the petitioner. The instrument was delivered to the Trust Company, which, under date of August 3, 1922, accepted the assignment upon its trusts and terms. The partnership was fully advised with respect to the matter, and gave its consent to the assignment.
The amounts equal to four shares of the profits of the firm payable under the provisions of section 2 of Article IV of the articles of partnership for the fiscal years ended June 30, 1922, 1923, and 1924, were respectively $22,378.30, $24,964.40, and $26,086.40. These amounts respondent has included in petitioner's income for said years, which action petitioner contends is erroneous. Payments on account of these amounts were made by the partnership to the Equitable Trust Company, as trustee, totaling, in 1922, $19,578.30, of which $17,978.30 was paid on July 25 and $1,600 was paid on October 24; in 1923, 1932 BTA LEXIS 1531">*1539 $26,474; in 1924, $27,200.
Respondent now confesses error in subjecting to 1921 rather than 1922 rates of surtax the sum of $11,189.15, being one-half of the amount payable in 1922 under section 2 of Article IV of the articles of partnership.
Petitioner contends that no part of the amounts paid or payable by the partnership to the Trust Company during these years is income to him.
25 B.T.A. 396">*400 OPINION.
GOODRICH: It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property or property rights are assigned the income subsequently arising therefrom from is not taxable to the assignor, for the reason that the property no longer belongs to him and therefore the income from such property belongs, not to him, but to the new owner. ; affd., ; ; ; ; 1932 BTA LEXIS 1531">*1540 ; reversed ; ; ; affd., ; ; ; ; ; ; ; ; ; ; reversed, .
The difficulty in applying this rule lies in determining in each case precisely what has been assigned. Upon consideration, it is our opinion that in the case at bar, petitioner transferred, not income, but a property right. It is conceded that petitioner and the other five partners named in section 2 of Article IV were largely responsible for the establishment, growth, and good will of the firm and that the purpose of the provisions of that1932 BTA LEXIS 1531">*1541 section was to compensate them upon their retirement, or their estates in event of death, for their respective interests in that good will. Their interests were in the nature of capital assets. The payments provided were in the nature of a three-year annuity. It is true as respondent points out, that the amounts of the payments were to be measured by the future profits of the firm and that they might be great or small accordingly as the partnership prospered. But the method of measuring the payments does not determine the nature of the source thereof. The partnership contract gave petitioner a right to four shares of the firm profits for a period of three years after his retirement. That right was a property right, a chose in action, and it could be transferred or assigned in praesenti.It was independent of the rendition by him of any further services to the firm and it was to vest in him immediately upon his retirement or in his heirs in event of his death. It was not the right of a partner while such to a share of partnership profits, but was a contractual right to compensation for his interest in the good will of the firm, built up by his services in the past, accruing1932 BTA LEXIS 1531">*1542 to him in consideration of his retirement, whether by his own volition or by death. In law it is of the same nature 25 B.T.A. 396">*401 as an interest in a contract of sale or lease (;); a share of an estate (; ); royalties (, and ); a right to income from a trust (; ), and other property rights or choses in action which have heretofore been considered and held capable of complete alienation.
It is true that the instrument in precise language did not assign the contract itself. Petitioner did not intend to assign the whole of the contract for he had other payments due him thereunder - his capital investment with interest and his share of the firm profits earned prior to his retirement - which he retained for himself. We think, however, that it, in effect, assigned an interest therein. The instrument describes the1932 BTA LEXIS 1531">*1543 subject of the assignment as "all my right, title and interest, in and to four undivided shares of the profits or income" arising under the partnership agreement. When read with the articles of partnership, there is no ambiguity. After his retirement, petitioner's only right to the earnings upon four shares of the firm arose under section 2 of Article IV. We think the granting clauses of the assignment sufficient to transfer that right and interest and, as we consider them in the nature of a capital asset, we think the assignment thereof was equivalent to an assignment of petitioner's interest in that part of the contract of partnership. Cf. ;Beyond doubt the assignor was divested of all right thereunder; beyond doubt the assignee could have demanded an accounting from the firm, and had the right to examine its books and records upon reasonable suspicion that it had failed to comply strictly with the terms of the agreement. Such a right, with respect to section 2 of Article IV, we think, was lost to petitioner by his assignment, for he had relinquished all ownership in the property right created1932 BTA LEXIS 1531">*1544 by that section of the agreement when he transferred it by an irrevocable instrument.
However, petitioner had not divested himself of his contractual right before the payments for the first year were due thereunder. It is stipulated that the assignment was executed and delivered to the Equitable Trust Company on June 29, 1922. We refuse to be bound by that stipulation, for it appears to be contrary to fact as disclosed by the record. The instrument was executed in Paris on June 29, 1922, but it was accepted by the Trust Company on August 3, 1922, in New York. Petitioner testified that the matter had been taken up with the Trust Company's foreign agents, but it does not appear that the instrument was delivered or accepted by them on June 29. On the contrary, the testimony is that it was mailed by petitioner 25 B.T.A. 396">*402 in Paris to May in New York, who delivered it to the Trust Company. As this transaction was clearly in the nature of a gift, the delivery of the instrument to and the acceptance of it upon its terms by the trustee was essential to the completion thereof. Despite the stipulation, we are convinced that the transfer was not completed before August 3, 1922. The1932 BTA LEXIS 1531">*1545 record does not disclose the basis upon which petitioner kept his accounts for the year 1922, nor does it disclose any basis of cost, beyond that of services rendered in the past, for petitioner's right to four shares of the firm earnings after his retirement. Therefore, for lack of evidence proving the same to be erroneous, we sustain respondent's action in including in petitioner's income for the year 1922 the sum of $22,378.30, regarding the assignment as effecting a transfer of accrued income in that amount in that year.
We are not impressed by respondent's contention that, because the recited nominal consideration of $1 was not in fact paid, there was no valuable consideration for the assignment and that, consequently, petitioner could have avoided it had he so desired. As we have indicated, we regard this transfer as a gift, and a gift needs no consideration. Moreover, the instrument, which was irrevocable, also recited "other valuable considerations" and, in such case, the fact that the nominal consideration was not paid does not establish a failure of consideration. 1932 BTA LEXIS 1531">*1546 ; ; ; .
Furthermore, the petitioner could not have avoided the assignment by claiming that the instrument was without consideration, even if that were true. The law of New York is controlling upon this point. In the case of ; , the plaintiff was entitled to a residuary interest of one seventh under his father's will. He assigned his interest by an instrument under seal, reciting a valuable consideration, to two of his brothers and executed and delivered the assignment to another brother, the defendant, who was the executor. Thereafter, he claimed the assignment was without consideration, and that no consideration was ever given by the defendant or paid by the assignees. The court in its opinion stated:
While it is true that under the provisions of Section 840 of the Code of Civil Procedure an executory instrument under seal is only presumptive evidence of consideration, which may be rebutted, an assignment is not an executory instrument. 1932 BTA LEXIS 1531">*1547 It is completed by delivery of the assignment, and the statute has not changed the rule of the common law with respect to such instruments. The allegations of the complaint that the instrument was without consideration can, therefore, have no bearing upon the question. The declaration that the instrument 25 B.T.A. 396">*403 was signed and delivered and the instrument itself being set forth and being under seal, it is conclusive upon the plaintiff insofar as the question of consideration is concerned.
In the light of this decision it is clear that petitioner could not have revoked his assignment to the Equitable Trust Company on the theory that there was no valuable consideration for it, since the assignment was signed, sealed and delivered to the Equitable Trust Company, which, in writing accepted the same upon its terms.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MORRIS, LANSDON, STERNHAGEN, TRAMMELL, ARUNDELL, and MURDOCK dissent.