*252 Decisions will be entered under Rule 50.
During the early part of 1951, William and Harry Goldstein were equal partners in a business which bought, stored, processed, and sold scrap metal. The partnership used the calendar year in reporting income. By an agreement dated April 21, 1951, William purchased Harry's interest in the partnership for $ 125,000. Held, that the income of the business for the period January 1 through April 21, 1951, is the distributable income to the partners, 50 per cent to William and 50 per cent to Harry, and is to be accounted for as such in computing the gain realized by Harry from the sale of his partnership interest.
*931 The respondent determined deficiencies in income tax for the taxable year 1951 against the Estate of William Goldstein, deceased, et al., in the amount of $ 56,999.26, and against the Estate of Harry S. Goldstein, deceased, et al., *253 in the amount of $ 14,679.45.
The sole question for decision is whether the income of L. Goldstein's Sons for the period January 1 through April 21, 1951, was partnership income, distributable 50 per cent to Harry Goldstein and 50 per cent to William Goldstein, or in total amount was the income of William Goldstein.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
William Goldstein and Matye Goldstein were husband and wife, and at all times material herein, were residents of Philadelphia, Pennsylvania. They filed a joint income tax return for the year 1951 with the collector of internal revenue for the first district of Pennsylvania. The return was filed on a cash basis and by calendar year.
Harry S. Goldstein and Anna L. Goldstein were husband and wife, and at all times material herein, were residents of Philadelphia, Pennsylvania. They filed a joint income tax return for the year *932 1951 with the collector for the first district of Pennsylvania. The return was filed on a cash basis and by calendar year.
William and Harry Goldstein were brothers, who, during the period January 1 through April 21, 1951, were engaged in the business of*254 buying, storing, processing, and selling scrap metal through a partnership, known as L. Goldstein's Sons.
The partnership had originally been formed by Charles S. Goldstein, another brother, Harry Goldstein, and William Goldstein on January 5, 1948, with each owning a one-third interest. The partnership agreement provided, in part, as follows:
2. The parties, CHARLES S. GOLDSTEIN, WILLIAM GOLDSTEIN and HARRY S. GOLDSTEIN, shall be known as partners and they hereby associate themselves together in a partnership to be known by the name, style and title of L. GOLDSTEIN'S SONS.
* * * *
6. The net profits of the partnership shall be divided among the partners in equal one third shares, and the losses of the said partnership shall be borne by them in equal one third shares.
* * * *
12. This partnership shall continue unless dissolved by mutual written agreement of the partners, or by written notice given by any one of the partners to the others, at least ninety days prior to the date on which it is desired to terminate such partnership. The right to dissolve the partnership shall be by notice or agreement and is limited to the partners who have executed this agreement and may be exercised*255 only by them. No successor to a partner's interest, however, acquired, shall have any such rights, and shall be limited to such rights as hereinafter provided under paragraph 15.
* * * *
14. The death of any partner shall not work a dissolution thereof, but the surviving partner or partners shall continue to carry on the said business as herein provided. Within ninety days of the death of any partner, the value of the interest of such deceased partner shall be determined from an audit and an examination of the books of the partnership and the book value ascertained. This book value shall be deemed conclusively to be the value of such deceased partner's interest in the business. During the year following the death of such partner, the surviving partner or partners shall determine whether the business shall be continued as a partnership, if there be two surviving partners; or individual ownership if there be only one surviving partner; or whether business shall be liquidated; or whether the business shall be continued as a corporation.
(a) If the survivors or survivor shall elect to continue the business as a corporation, then appropriate action shall be taken to incorporate a Pennsylvania*256 corporation under the name of L. Goldstein's Sons Company, and all the assets of the partnership heretofore existing by virtue of this agreement shall be transferred to such corporation. Each partner shall have issued to him by the duly authorized officers of the corporation shares of stock representing the value of his interest in the partnership which has been sold and transferred to the corporation, provided, however, that in the case of the interest of the deceased partner, the shares of stock representing the interest of the deceased partner, as hereinbefore determined, shall be issued to such person or persons as the deceased partner shall have provided by his last will and testament, or, in *933 the absence of such provision, then to such person or persons as would inherit under the intestate laws of the Commonwealth of Pennsylvania.
(b) If the survivors or survivor shall elect not to organize a corporation for the purposes of continuing the business, but shall instead elect to continue the business under a partnership, in the event that there are two surviving partners, or under individual ownership in the event that there shall be only one surviving partner, then the*257 interest of such deceased partner or partners may, at the option of the survivors or survivor, be purchased within a period of five years. The purchase price shall be the book value of the deceased partner's or partners' interest determined as hereinbefore provided. The purchase agreement shall provide inter alia that not less than one fifth of the deceased partner's or partners' interest shall be paid annually, with interest on unpaid balance at four percent per annum to such person or persons who have acquired his interest, as provided by his last will and testament, or as provided under the intestate law, or to his personal representatives, as the case may be.
* * * *
16. The survivors or survivor may, at their election, by agreement in writing with the personal representative of the deceased partner, or person or persons who have acquired the interests of the deceased partner in the partnership, alter or modify the provisions of this agreement with regard to the sale of the interest of the deceased partner to the survivors or survivor.
17. If the survivors or survivor shall elect not to purchase the interest of a deceased partner, but shall elect to liquidate the business conducted*258 by the partnership, then, after written notice to the personal representatives of the deceased partner, such survivors or survivor shall convert the assets of the business of L. Goldstein's Sons into cash and, after paying all debts of the partnership, shall pay the proportionate share to the person or persons entitled thereto.
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19. If any disagreements shall arise among the partners in respect to the conduct of the partnership business, or of its dissolution, or in respect of any other matter, cause or thing whatsoever not herein otherwise provided, the same shall be decided and determined by arbitrators. Each partner shall select one arbitrator, and the decision of majority of arbitrators, when made in writing, shall be conclusive and binding upon the parties hereto. * * *
Partnership returns were filed for the partnership on an accrual basis and by calendar years.
Charles S. Goldstein died on February 9, 1949, and Harry and William continued the business as copartners, dividing the profits and losses equally between them.
After the death of Charles, William sought to persuade Harry to have the partnership incorporated. Failing this, he served a notice of dissolution of*259 the partnership on Harry, on May 3, 1950. On or about June 22, 1950, he suggested as an alternative that one partner purchase the interest of the other. It was later suggested that they enter into a new partnership agreement. Prior to the end of 1950, no decision had been reached as to the future status of the partnership.
*934 On January 9, 1951, Harry served a notice of dissolution of the partnership on William.
On March 12, 1951, William offered to purchase Harry's interest in the partnership for $ 85,000, but on or about April 5, 1951, Harry made a counterproposal that he sell his interest to William for $ 100,000 net, and that such payment "be exclusive of any tax assessments which might be levied against the individual members of the partnership," such "tax deficiency," whatever it might be, "to be assumed by those who remain in the business." In payment of the $ 100,000, Harry was "to receive $ 50,000 in cash and a $ 50,000 mortgage on the plant amortized over a 5 year period." A further condition was that a prior mortgage be eliminated, making Harry's mortgage a first lien. Harry was also to receive the offer of a contract on a 3- to 5-year basis at a salary of $ *260 250 per week, with Harry not to be subject to controls by those remaining in the business. The counterproposal was rejected. William made another offer on or about April 12, 1951, to purchase Harry's interest in the partnership.
During the period here in question, January 1 to April 21, 1951, both William and Harry were in ill health.
At a meeting held on April 21, 1951, an agreement providing for the sale of Harry's interest in the partnership to William, for $ 125,000, was executed. The provisions of the agreement were, in part, as follows:
1. Harry S. Goldstein hereby agrees to sell all his right, title and interest of in and to the said copartnership of L. Goldstein's Sons unto William Goldstein for the sum of $ 125,000. payable as hereinafter mentioned.
2. William Goldstein agrees to purchase the right, title and interest of Harry S. Goldstein in said copartnership for the sum of $ 125,000. payable as hereinafter set forth.
3. As part consideration for the sale Harry S. Goldstein agrees to accept a first mortgage in the sum of $ 50,000. said mortgage to be amortized in twenty semi annual payments of $ 2500.00 each, with interest at 6% upon the unpaid balance at each of said*261 payment periods, the mortgage shall bear even date herewith and the first payment shall be due October 21, 1951, secured upon the premises owned by L. Goldstein's Sons on the Southwest side of Allegheny Avenue East of Richmond Street, Philadelphia, clear of all incumbrances and easements except certain liens filed by the United States against one or both of said copartners or the Estate of Charles S. Goldstein, deceased, for the payment of income taxes as to be hereafter determined by the Collector of Internal Revenue.
4. William Goldstein agrees that in addition to the purchase price of $ 125,000 he shall assume all liability for goods purchased or claims against the said copartnership or otherwise howsoever so that the sale price to Harry S. Goldstein shall be net and clear of all claims properly charged against the said copartnership.
5. Each of the parties hereto shall pay such income taxes for past years to the date of this agreement which may be assessed against each of them by the Collector of Internal Revenue upon completion of his field survey of their accounts. The parties hereto also agree that they will each pay one half of *935 any such sum to be assessed by the*262 said Collecter as income tax against the Estate of Charles S. Goldstein, deceased, formerly a member of this partnership and assessed against him as a copartner hereby agreeing to save and keep harmless the said Estate of Charles S. Goldstein from any such liability.
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9. From and after the date of this agreement the business of L. Goldstein's Sons as presently carried on by the copartnership shall cease and all business hereafter done under the trade name of L. Goldstein's Sons shall be at the risk and at the profit of William Goldstein, solely, provided, however, that if settlement be not made by the payment of the cash consideration and/or delivery of the mortgage as herein stipulated then this agreement shall be null and void and all rights of both parties shall be ascertained as of the date of this agreement and the liquidation shall proceed forthwith.
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11. William Goldstein agrees for himself and for any successor in the business being purchased by him that he or it will upon request and without further charge to Harry S. Goldstein give such information as respects to the operation, assets and business of the partnership as Harry S. Goldstein may require for tax*263 and other purposes up to April 21, 1951.
During the period January 1 to April 21, 1951, the partnership issued the following checks in payment of Harry's personal expenses, which were charged on the books of the partnership to an account entitled "Harry G. Goldstein":
| Date | Check No. | Amount | Payee and purpose |
| 1951 | |||
| Jan. 12 | 3057 | $ 7,809.84 | Collector of internal revenue; fourth |
| quarterly installment of estimated | |||
| 1950 Federal income tax. 1 | |||
| Mar. 12 | 3485 | 15,059.98 | Collector of internal revenue; balance |
| due for 1950 Federal income tax. 1 | |||
| Mar. 12 | 3486 | 1,250.00 | Collector of internal revenue; first |
| quarterly installment of estimated | |||
| 1951 Federal income tax. 1 | |||
| Jan. 1-Apr. 21 | (8 checks) | 420.35 | Miscellaneous. |
| Total | 24,540.17 |
During the same period, *264 the partnership issued the following checks in payment of William's personal expenses, which were charged on the books of the partnership to an account entitled "Wm. Goldstein":
| Date | Check No. | Amount | Payee and purpose |
| 1951 | |||
| Jan. 12 | 3058 | $ 8,280.74 | Collector of internal revenue; fourth |
| quarterly installment of estimated | |||
| 1950 Federal income tax. 1 | |||
| Mar. 14 | 3489 | 14,610.56 | Collector of internal revenue; balance |
| due for 1950 Federal income tax. 1 | |||
| Mar. 14 | 3490 | 1,250.00 | Collector of internal revenue; first |
| quarterly installment of estimated | |||
| 1951 Federal income tax. 1 | |||
| Jan. 1-Apr. 21 | (21 checks) | 324.39 | Miscellaneous. |
| Total | 24,465.69 |
*936 During the period January 1 to April 21, 1951, Harry was present at the partnership's principal place of business and performed his regular duties almost every working day. During this period he signed checks on the partnership bank account as follows:
| Month | Number of checks |
| January | 73 |
| February | 92 |
| March | 104 |
| April | 94 |
| Total | 363 |
During the period in question, Harry and William each received $ 250 per week from the partnership, *265 which was charged on the partnership books to an account styled "Partner's Salaries." The total of such withdrawals received by Harry for this period was $ 4,000.
During this same period the partnership made payments of $ 40 per week to Harry, which were charged on the partnership books to an expense account. The total of such payments received by Harry for this period was $ 680.
Mathieson, Aitken and Company, a firm of certified public accountants, had been the accountants for the partnership for many years and had prepared its income tax returns. This firm, at the request of William, prepared statements covering the operations of the partnership for the period January 1 to April 21, 1951. They were submitted to William and Harry in a report dated June 28, 1951.
The accountants prepared a partnership return for the period January 1 to April 21, 1951, showing net income for the period of $ 143,268.84, apportioned one-half, or $ 71,634.42, to William and one-half to Harry. The partnership return was filed by William on July 31, 1951.
Reconciliation of the partners' capital accounts at January 1 and April 21, 1951, was shown on the partnership return as follows:
| William | Harry S. | |
| Goldstein | Goldstein | |
| Capital account -- Jan. 1, 1951 | $ 50,034.85 | $ 50,034.84 |
| Ordinary net income | 71,634.42 | 71,634.42 |
| Unallowable deductions | 463.34 | 463.33 |
| Withdrawals | 7,748.07 | 8,072.55 |
| Capital account -- Apr. 21, 1951 | 113,457.86 | 113,133.38 |
*266 In their joint return for 1951, filed on March 14, 1952, William and Matye Goldstein reported $ 71,634.42 as William's distributable share of partnership income from L. Goldstein's Sons for the period January 1 to April 21, 1951.
In their joint 1951 return, filed June 16, 1952, Harry and Anna L. Goldstein reported $ 27,775.27 as Harry's distributable share of partnership *937 income from L. Goldstein's Sons for the period January 1 to April 21, 1951. 3 From the sale of his partnership interest, they reported $ 51,866.62 as the amount of gain realized, being the difference between the selling price of $ 125,000 and $ 73,133.38 reported as the cost or other basis of the said interest. Of the capital gain so shown, $ 25,933.31 was taken into account in computing the tax reported.
*267 On or about August 3, 1954, Harry and Anna L. Goldstein filed an amended return for 1951, wherein no amount was reported as a distributive share of partnership income. $ 83,037.71 was reported as Harry's gain from the sale of his partnership interest, being the excess of the selling price of $ 125,000 over a stated basis of $ 41,962.29. In computing the tax, $ 41,518.86 of the gain reported was taken into account. The basis of $ 41,962.29 was $ 50,034.84, the amount shown on the partnership return filed by William as the balance in Harry's capital account at January 1, 1951, reduced by $ 8,072.55, also shown by the said partnership return, as the amount withdrawn by Harry from the partnership between January 1 and April 21, 1951.
The respondent in his determination of deficiencies herein disallowed $ 1,900 of the deductions claimed on the partnership return, thereby increasing the partnership net income as determined from the $ 143,268.84, as reported, to $ 145,168.84. In his determination of deficiency against Harry and Anna L. Goldstein, he included in income one-half of the partnership income so determined, or $ 72,584.42, as Harry's distributive share of the income of L. Goldstein's*268 Sons for the period January 1 to April 21, 1951. As the basis for computing Harry's gain upon the sale of his partnership interest, the respondent used $ 113,133.38, being the amount of Harry's capital account at April 21, 1951, as shown, see finding above, on the partnership return, to arrive at $ 11,866.62 as the amount of Harry's gain from the sale of his partnership interest.
In his determination of deficiency against William and Matye Goldstein, the respondent included in income the entire amount of the partnership income for the period January 1 to April 21, 1951. This resulted in an increase in William's income of $ 73,534.42.
William and Harry Goldstein were and continued to be equal partners of L. Goldstein's Sons until April 21, 1951, when William purchased Harry's partnership interest for $ 125,000.
*938 OPINION.
On the facts of record, decision must be against the Estate of Harry Goldstein and for the Estate of William, and for the respondent in the Harry Goldstein case and against him in the William Goldstein case.
From and after the death of their brother Charles, in 1949, Harry and William were equal and the only partners of L. Goldstein's Sons. Their association*269 in the business was not harmonious, and almost continuously until the agreement of April 21, 1951, there were proposals and counterproposals for the incorporation of the business, its liquidation, or the purchase by one or the other of the partners of the other's interest.
The partnership agreement contained a provision requiring the settlement of disagreements with respect to the conduct of the partnership business or of its dissolution, by arbitrators, but, so far as appears, this provision was ignored by William and Harry. Dissolution was to be either by mutual agreement, or by written notice, given by any one partner to the other, at least 90 days prior to the date on which it was determined that the partnership be terminated, and during 1950 and 1951 Harry and William each gave one or more notices of dissolution to the other. But so far as appears, no steps were ever taken toward actual dissolution pursuant to any such notice, the usual result being a counterproposal from the other.
The last notice of dissolution appears to have been given by Harry to William on January 9, 1951. William responded on March 12, by an offer to purchase Harry's interest for $ 85,000. On April*270 5, Harry made a counterproposal to sell his interest for $ 100,000 net and for other specified considerations, as set forth in our Findings of Fact, including the provision that the purchasing partner should assume any tax assessments which might be levied against the individual members of the partnership. This proposal by Harry was rejected by William, and on April 12, William responded with a counteroffer, the terms of which are not shown of record.
The end result was the sale by Harry to William of his partnership interest for $ 125,000, pursuant to the agreement of April 21, 1951. The contention is made on behalf of Harry's estate that the negotiations and sale of his interest were based upon the business as it existed at January 1, 1951; that under the sale and the agreement with respect thereto the business became that of William at or as of January 1, 1951, and that Harry had no participation in the business as a proprietor from that date; that the business was that of William, and that Harry had no right to or interest in the profits from such date. In support of that position, it is argued that the logic of the situation requires the conclusion that no one would, under*271 any circumstances, be willing to sell for $ 125,000 a partnership interest which in a period *939 of approximately 4 months would produce a profit of $ 72,584.42, particularly where the major part of such profit was to be accounted for in the $ 125,000 to be paid.
Beyond question, much of what transpired in the negotiations culminating in the April 21, 1951, agreement does not appear of record, and it may well be that the transaction as reflected by the written instrument was not what Harry desired or hoped for and that his reporting of income as he did was with a view to bringing the end results more in line with what he thought the transaction should have been, but we find no persuasive support of record for the conclusion that the instrument as executed did not reflect the agreement reached and did not fix and determine the terms of the sale and the rights of Harry and William with respect thereto.
On the facts as shown, it is patent that the partnership and the operation of the business thereof continued in full force and effect until it was terminated and ended by the April 21, 1951, agreement, and that up to that date, Harry was a full 50 per cent partner in every respect. *272 The agreement contained nothing whatever to indicate that it was to relate back so as to take effect at a prior date, but to the contrary, it purports to and does in fact resolve the rights and liabilities of the parties as they existed at the date of the agreement. It was provided, for instance, that the business "as presently carried on by the copartnership shall cease," and that all business thereafter done should be at the risk and profit of William alone. (Emphasis supplied.) It was also provided that each of the partners should "pay such income taxes for past years to the date of this agreement which may be assessed against each of them by the Collector of Internal Revenue upon completion of his field survey of their accounts," and further, that William Goldstein, for himself or any successor, should give to Harry "such information as respects to the operation, assets and business of the partnership as Harry S. Goldstein may require for tax and other purposes up to April 21, 1951." (Emphasis supplied.)
However unhappy Harry may have been with the terms of disposition of his partnership interest after the execution of the agreement, and however much his feeling*273 may have been justified as between him and William, we find no basis in the evidence or under the law for any conclusion other than that he was a full partner in L. Goldstein's Sons up to April 21, 1951, and that his share of the partnership income, taxable to him as such for the said period, was as determined by the respondent. ; ; ; and . For cases where the result was to the contrary, see , and . In that connection, see and compare .
By the same token, the respondent erred in his determination of deficiency against William.
In view of the conclusion reached, it becomes unnecessary to consider and determine the income tax effect on the question herein of an agreement which would have related the sale of the*274 partnership interest back to January 1, 1951, and made it as of that date. See and compare, however, , and
Any adjustment in the computation of gain realized by Harry from the sale of his partnership interest to William which results from the respondent's determination of increased partnership net income for the period January 1 to April 21, 1951, will be given effect in the computations under Rule 50.
Decisions will be entered under Rule 50.
Footnotes
1. Counsel for petitioners in Docket No. 60018.↩
2. Counsel for petitioners in Docket No. 60385.↩
1. The balance sheet of the partnership as of Jan. 1, 1951, as shown by the partnership return, shows a liability of $ 46,000, described as reserve for partners' income taxes. The balance sheet as of Apr. 21, 1951, showed no amount as such a reserve. Presumably the payments to the collector of internal revenue as shown above were charged to such reserve to the extent thereof.↩
1. See footnote 1 to preceding table.↩
3. There is testimony tending to show that the $ 27,775.27 so reported as Harry's distributable share of the income of L. Goldstein's Sons for the period January 1, 1951, to April 21, 1951, was as computed or determined by the accountant who represented Harry and prepared his returns; and though not supported by the evidence of record, it is alleged by the Estate of Harry Goldstein in its petition herein that Harry at June 12, 1952, caused an amended return to be filed by the partnership for the period January 1 to April 21, 1951, in which return the partnership income was reported as $ 55,550.53 and "the share allocable to Harry S. Goldstein" was set forth as $ 27,775.27.↩