1933 BTA LEXIS 1267">*1267 The petitioner and five other individuals entered into a partnership agreement in 1923 which, due to the death during the term of a member of the partnership and controversy between the surviving partners and the representatives of the deceased, was construed by the Supreme Court of the State of New York in 1929 to the effect that the deceased partner's estate was not liable for any of the losses occurring in the years 1925 to 1928, inclusive. A certain portion of said losses had been charged to the deceased partner's capital account. In 1929, after the judgment of the Supreme Court, the petitioner paid his proportional part of the entire amount representing losses charged to the deceased partner's capital account as above stated and claimed the same as a deductible loss in his 1929 return, which the Commissioner disallowed. Held, the Commissioner's action is approved.
27 B.T.A. 1012">*1012 The Commissioner determined a deficiency in income tax for the calendar year 1929 in the sum of $836.80, which is due to the disallowance by the Commissioner of an alleged loss1933 BTA LEXIS 1267">*1268 of $12,190.10 sustained by the petitioner as a member of a partnership in that year and the disallowance of an asserted automobile expense item of $494.05 in the same year. The disallowance of the automobile expense item of $494.05 is not, however, now contested. The case is submitted on the pleadings, exhibits and stipulation.
FINDINGS OF FACT.
The petitioner, an individual residing in the city of New York, N.Y., under date of June 7, 1923, entered into a copartnership agreement with Gustav Kaufmann, Max Mayer, Maurice S. Bondy, Joseph Meyer and Otto S. Mayer, constituting the firm of Kaufmann Bros. & Bondy, for the purpose of carrying on the business of importing, manufacturing and otherwise dealing in pipes and other smokers' articles.
The copartnership was to take effect as of the first day of January, 1923, and continue to and through the 31st day of December, 1925.
Gustav Kaufmann agreed to contribute to the capital of the partnership the sum of $120,000; Max Mayer, $120,000; Maurice S. Bondy, $160,000; Mortimer J. Kaufmann, $200,000; Joseph Meyer, $200,000; and Otto S. Mayer, $200,000. Upon each of said persons contributing the respective amounts indicated, the1933 BTA LEXIS 1267">*1269 agreement provided 27 B.T.A. 1012">*1013 he should be credited with the same on the capital account of the partnership and the profits of the business were to be distributed among the partners in the same proportion in which they agreed to contribute to the capital of the partnership. All losses and expenses were to be borne and paid by the parties in precisely the same proportion as profits were to be distributed among them and interest at the rate of six per cent per annum was to be allowed the parties on the amount of their respective capital accounts.
The partnership agreement contained numerous provisions not necessary to be here set forth in detail, to wit: To what extent or in what amount each of the partners might draw from the business for his personal and private use; that certain of the parties should devote all their time, skill and attention to said business and exert themselves selves to the utmost in efforts to promote and advance the interests of the business for the mutual benefit of all the parties and that none of said parties should, during the continuance of said partnership, engage in any other business, enterprise or speculation of any kind. Proper books of account1933 BTA LEXIS 1267">*1270 were to be kept; none of the parties were to make, accept or endorse any note, check, bill of exchange or other commercial paper in his own name or on the firm's name for the accommodation of any one or in any manner become surety for any person, except with the written consent of all the parties, and on December 31 of each year during the continuance of the partnership there should be had a full and complete inventory and accounting of the affairs of the partnership, upon the basis of which profits or losses should be ascertained and credited or charged, as the case might be, in accordance with the provisions of the partnership contract. The partnership agreement further provided:
In case of the death of any of the parties hereto during the continuance of this agreement, such death shall not dissolve said partvership, and neither the heirs nor the legal representatives of the deceased shall have any right to take part or interfere with such business, provided the surviving partners do and perform as hereinafter provided.
After such death the survivors shall cause the account of such deceased to be balanced on the books of said partnership with interest added, and all the interests1933 BTA LEXIS 1267">*1271 of the deceased in said partnership shall be determined at the time of his death.
No new inventory shall be taken for that or any other purpose, but instead of it, there shall be added to the so ascertained balance on the capital account of said deceased, as profits due him since the last preceding account, for each month, and for the fractional part of any month elapsed since the last preceding December 31st, as follows: * * * eight hundred (800) dollars in case of the decease of the party hereto of the third part [Maurice S. Bondy - similar provisions becoming operative in the event of the death of other partners.] * * * The total amount so ascertained shall be deemed the interest of the deceased in the capital of said partnership at the time of his death.
27 B.T.A. 1012">*1014 The surviving partners shall pay the same unto the legal representatives of the deceased in the manner following:
(1) Ten (10) per cent. thereof in cash to said legal representatives within thirty days after the death of said deceased.
(2) The balance, by delivering to said legal representatives within such thirty days nine promisory notes made by the partnership composed of the said survivors, to the1933 BTA LEXIS 1267">*1272 order of said legal representatives, date the day of said death, each for a sum equal to ten (10) per cent. of said balance, respectively payable in six, nine, twelve, fifteen, eighteen, twenty-one, twenty-four, twenty-seven and thirty months after said date, with interest at the rate of six per cent. per annum, with the provilege, however, on the part of said survivors to pay the same at any time after giving sixty days' prior notice of their intention so to do.
On making such payments in the manner and form above provided, said surviving partners shall become and be the absolute owners of all the right, title and interest of said deceased and of his estate in and to the assets, effects, rights, property and good will of said partnership and business, subject, however, to the payment of the deceased partner's shares of all the debts and liabilities of said firm, which said survivors shall pay and from which they shall keep the estate of said deceased harmless.
Such ownership shall be as and from the day of the death of said deceased, and said business shall be conducted by said surviving partners as said business was theretofore conducted, until the time for making such payments1933 BTA LEXIS 1267">*1273 has arrived.
But should the said surviving partners not make such payments then the partnership hereby formed shall be deemed dissolved and its affairs shall be wound up, and the legal representatives of the deceased shall have the right to take his place, by one representative, in said business, for the sole purpose of liquidating the same.
And it is expressly understood that from the time of such death the share of the profits and losses which the deceased would have been entitled to had he survived until the end of said copartnership, shall be distributed and borne among and by the survivors in the proportion which the share of the profits and losses of said surviving partners as above fixed bear to one another.
In case the payments in this paragraph provided for, be made to the legal representative of the deceased as therein provided, said legal representative shall make, execute and deliver to said surviving partners a proper and valid instrument transferring and releasing to such survivors, all the right, title and interest of said deceased and of his estate in and to the assets, effects, rights, property and good will of such co-partnership and business, subject to1933 BTA LEXIS 1267">*1274 its debts at the time of his death, but as and of the day of his death.
TWELFTH: At the end or sooner termination of this agreement, unless the partnership hereby formed be continued by mutual consent, a full and final inventory and accounting shall be had between the parties hereto and upon the basis thereof the rights of the several parties ascertained and stated. The assets of said firm shall be reduced to cash and the proceeds shall be applied in the order following: to the payment of the debts of said firm, then to the payment of the capital accounts of the parties hereto, and the residue shall be distributed among the parties hereto in the same proportion as they are then entitled to have the profits distributed among them.
Maurice S. Bondy, one of the partners, died December 9, 1925. A dispute arose between the surviving partners, of whom petitioner 27 B.T.A. 1012">*1015 was one, and the representatives of the estate of the deceased partner, Maurice S. Bondy, as to the interpretation of certain clauses of the partnership agreement which provided for the payment to be made in case of death to a deceased partner's estate. The legal representatives of Maurice S. Bondy contended1933 BTA LEXIS 1267">*1275 that under said agreement the estate of Maurice S. Bondy was entitled to receive from the surviving partners the value of the share of Maurice S. Bondy in the partnership as of December 31, 1924, which was $161,422.05, whereas the surviving partners contended that under said agreement Maurice S. Bondy was responsible for a portion of the operating losses incurred by the partnership during the year 1925 and thereafter. In 1925 the legal representatives of Maurice S. Bondy demanded the payment from the surviving partners of the entire value of the share of Maurice S. Bondy as of December 31, 1924, which demand was refused by the surviving partners.
The partnership sustained operating losses during the years 1925 to 1928, inclusive. On the partnership books of account the value of Maurice S. Bondy's share in the partnership as of December 31, 1924, was reduced at the end of each of the years 1925 to 1928, inclusive, by an amount representing sixteen per cent of said operating losses incurred in those years. The proportion of the losses charged to Maurice S. Bondy's capital account in each of said years was as follows:
| 1925 | $21,013.58 |
| 1926 | 29,249.06 |
| 1927 | 1,192.64 |
| 1928 | (256.85) |
| Total | 51,198.43 |
1933 BTA LEXIS 1267">*1276 On or about June 10, 1927, suit was begun in the Supreme Court of the State of New York, County of New York, by the executors of the last will and testament of Maurice S. Bondy against the surviving partners of the firm of Kaufmann Bros. & Bondy, of whom petitioner was one.
The Supreme Court of the State of New York held that Maurice S. Bondy was not liable for any part of the operating losses sustained by the partnership in 1925 to 1928, inclusive, and on February 7, 1929, a judgment was rendered in favor of the legal representatives of Maurice S. Bondy. Accordingly, the surviving partners in 1929 made payment of the sum of $51,198.43 to the legal representatives of Maurice S. Bondy. The petitioner's share of the payment was $12,190.10, which amount he claimed in his tax return for the calendar year 1929 as a deduction from his gross income.
Prior to January 1, 1929, the surviving partners had made payment to the representatives of Maurice S. Bondy of substantially the 27 B.T.A. 1012">*1016 entire value of his share in the partnership as of December 31, 1924, except to the extent of the proportion of the operating losses charged to him as heretofore stated.
OPINION.
SEAWELL: 1933 BTA LEXIS 1267">*1277 The record shows that petitioner was a member of a copartnership under an agreement containing provisions whereby in the event of the death of one of the partners the surviving partners were to undertake certain obligations to the legal representatives of any partner dying during the term of the agreement. One of the partners, Maurice S. Bondy, died December 9, 1925, during the term, which covered the period January 1, 1923, to December 31, 1925.
After the death of Maurice S. Bondy, a dispute arose between the surviving partners, of whom the petitioner was one, and the representatives of the estate of said Bondy as to the amount to be paid his estate in satisfaction of his interest in the partnership. The legal representatives of the Bondy estate contended that the surviving partners were bound absolutely to pay the estate of Maurice S. Bondy the value of the interest which he had in the partnership as of December 31, 1924, which was $161,422.05. The surviving partners insisted that under the partnership agreement it was optional with them either to purchase the interest of the deceased partner by the payment to his estate of the value of his interest in the partnership as of1933 BTA LEXIS 1267">*1278 December 31, 1924, or to liquidate the business of the partnership, in which event the deceased partner's estate would be liable for a portion of any losses incurred in the course of liquidation.
In 1927, the legal representatives of the Maurice S. Bondy estate instituted suit in the Supreme Court of State of New York to recover from the surviving partners aforesaid the amount asserted to be due from them to the estate of said Bondy, and in 1929 a judgment in favor of said representatives was rendered to the effect that Maurice S. Bondy was not liable for any part of the operating losses sustained by the partnership in 1925 to 1928, inclusive. In 1929, after the rendition of that judgment, the surviving partners made payment to the legal representatives of Bondy in the sum of $51,198.43, being the total amount of loss charged to Maurice S. Bondy's capital account during the years 1925 to 1928, inclusive, and allocated to the aforesaid years in the proportion and amounts heretofore indicated in our findings of fact. Prior to January 1, 1929, the surviving partners made payment to the representatives of the estate of Maurice S. Bondy of substantially the entire value of his interest1933 BTA LEXIS 1267">*1279 in said partnership as of December 31, 1924, except as to the extent of the proportion of the operating losses charged to him as heretofore stated in our findings of fact. The petitioner's share 27 B.T.A. 1012">*1017 of the operating losses (amounting to $51,198.43), paid as aforesaid by the surviving partners in 1929, was $12,190.10 and such amount he claimed as a deduction from his gross income in his tax return for the calendar year 1929.
The question for our determination is whether or not the respondent committed error in disallowing such amount ($12,190.10) as a deduction from petitioner's gross income for 1929. It is the insistence of the respondent that this amount is allocable to the years 1925 to 1928, inclusive, rather than to the year 1929, as contended by the petitioner.
Partnerships as such are not subject to Federal taxation, but the individuals carrying on business as a partnership are taxable upon their distributive shares of net income of such partnership, whether distributed or not, and are required to include such distributive shares in their individual tax returns. Where the result of partnership operations is a net loss, the loss is divisible by the partners in1933 BTA LEXIS 1267">*1280 the manner agreed upon between them and may be taken as a deduction by the individual partners in their income tax returns for the year in which the same occurs.
In the instant case, it is stipulated that in carrying on the business operating losses were sustained during the years 1925 to 1928, inclusive, and that on the partnership books of account the value of Maurice S. Bondy's share in the partnership as of December 31, 1924, was reduced at the end of each of the years 1925 to 1928, inclusive, by an amount representing sixteen per cent of said operating losses incurred in those years. The proportion of the losses charged to said Bondy's capital account in each of those years is stipulated and set out in our findings of fact.
In support of the contention that petitioner is entitled to deduct from his 1929 income tax return the amount ($12,190.10) which he paid in that year pursuant to the judgment rendered by the Supreme Court of the State of New York, as indicated in our findings of fact, numerous authorities are cited in the brief of his counsel. The attempt is made to make applicable and controlling in the instant case 1933 BTA LEXIS 1267">*1281 (other cases also relied on cite same), but in our opinion the facts and circumstances of the instant case are not such as to bring it within the principle therein enunciated. In , for instance, the court was considering a single item claimed as a deduction from gross income and resulting from liability for a breach of contract that had nearly eighteen more years to run at the time of the breach and where the amount of damages, "if any, was wholly unpredictable." In the instant case, the item we are dealing with represents a part of alleged operating net losses, covering a period of 27 B.T.A. 1012">*1018 several years, none of which years is the same as the year in which the deduction is claimed. Under the principle that each year's return must stand alone, no part of the losses occurring in 1925 to 1928, inclusive, as indicated in our findings of fact, may be deducted in 1929, when the alleged loss is now asserted to have been sustained by reason of the payment of the amount thereof to the representatives of the deceased member (Maurice S. Bondy) of the partnership, pursuant1933 BTA LEXIS 1267">*1282 to the judgment of the Supreme Court of the State of New York, which held said Bondy was not liable for any part of the aforesaid losses. See ; affirmed in .
Viewing the facts in a different light from that discussed in the briefs of counsel, the payment made in 1929 to the representatives of Bondy's estate appears to have been merely the return of money to the Bondy estate which the Supreme Court of the State of New York decreed was rightfully Bondy's and that he was not chargeable with any part of the losses occurring in the years 1925 to 1928, inclusive. The payment so made in 1929 was merely the payment or return of money really due and owing Bondy's estate and was made pursuant to judgment as stated and was in no sense a deductible loss from petitioner's gross income in the year 1929.
In our opinion, viewed in either of the aspects stated or in any other aspect, the petitioner is not entitled to the deduction claimed nor has the respondent committed error in his determination.
Judgment will be entered for the respondent.