*919 In 1928 the petitioner sold his entire interest in a partnership, fractional portions of which had been acquired in 1918, 1924, and 1926, at a cost of $11,294.34. Held, that the basis for computing the gain upon the sale is $11,294.34.
*590 The respondent has determined a deficiency in petitioner's income tax for the calendar year 1928 in the amount of $11,478.83. In an amended answer he has asserted a claim for an increase in the deficiency. The only question at issue is the amount of capital gain realized by the petitioner from the sale of his interest in the partnership.
FINDINGS OF FACT.
Prior to 1918 the petitioner was employed by the firm of OBrion, Russell & Co. on a salary and commission basis. His earnings from 1914 to 1917, inclusive, averaged $4,100 per year.
Obrion, Russell & Co. is a partnership of insurance underwriters and brokers which was started in 1878. In 1900 the partners of OBrion, Russell & Co. and the partners of two other insurance firms, Field & Cowles and John C. Paige & Co., formed an association for the purpose*920 of cooperating and pooling their net profits and dividing them on a specified basis. An association agreement made January 1, 1914, which was modified from time to time to reflect withdrawals, deaths, admission of new partners, and adjustments incident thereto, remained in effect from 1914 to 1928, inclusive.
The net earnings of the association for the years 1908 to 1928, inclusive, averaged $475,432 per year.
The association operated without capital and the net profits were distributed monthly as earned. The tangible assets of the association were negligible, the worth of the business consisting of commissions to be paid upon the business on the books and good will.
A fair capitalization rate to apply to the net earnings of the association to determine its capital worth is 10 percent, after deducting 20 percent of the net earnings as attributable to the personal efforts of the partners. (Stipulated.)
On January 1, 1918, the petitioner was admitted to the partnership in OBrion, Russell & Co. and, on the same date, to partnership in the association above referred to. The petitioner's interest in the property of the association and the proportion of the net profits payable*921 to him was 6000/285,950 or .018634. The petitioner paid nothing *591 at the time of his admission to the partnership and association for his interest.
The value of the partnership interest acquired by the taxpayer on January 1, 1918, was $59,098.58, computed as follows:
| Average net income of association 1913-1917 | $396,443.19 |
| Less 20% "Salaries to Partners" | 79,288.64 |
| 317,154.55 | |
| 10% capitalization rate | 10 |
| 3,171,545.50 | |
| Taxpayer's interest acquired January 1, 1918 | .018634 |
| Value | 59,098.58 |
On June 2, 1924, the taxpayer's interest in the association was increased to 8500/329,250 or .025816. This additional interest of .007182 on June 2, 1924, was worth $37,250.28, computed as follows:
| Average net income of association 1919-1923 | $648,327.11 |
| Less 20% "Salaries to Partners" | 129,665.42 |
| 518,661.69 | |
| 10% capitalization rate | 10 |
| 5,186,616.90 | |
| Taxpayer's additional interest acquired June 2, 1924 | .007182 |
| Value | 37,250.28 |
The additional interest acquired by the taxpayer on June 2, 1924, came from the other members of the association, who acquired their interests prior to March 1, 1913, and whose bases were therefore March 1, 1913, value. *922 The March 1, 1913, value of the additional .007182 interest acquired by the taxpayer on June 2, 1924, was $16,485.73, computed as follows:
| Average net income of association 1908-1913 | $286,927.84 |
| Less 20% "Salaries to Partners" | 57,385.57 |
| 229,542.27 | |
| 10% capitalization rate | 10 |
| 2,295,422.70 | |
| Taxpayer's additional interest acquired June 2, 1924 | .007182 |
| Value | 16,485.73 |
Upon receipt of the additional interest on June 2, 1924, the petitioner paid $1.25 per share or $3,125, which was the regular transfer charge payable by a member who was permitted to acquired additional shares. The $3,125 paid in by the petitioner on June 2, 1924, was distributed among the members of the association, other than the *592 OBrion, Russell & Co. partners, in proportion to their interests in the association.
The association agreement provided for payments to be made to the estates of deceased partners for six months following death in an amount equal to one half of that which they would have received had they remained alive. The portions thus chargeable to petitioner for the period 1918 to the date of the sale of his interest in 1928 was $7,669.34.
The petitioner*923 paid $500 in connection with the acquisition of a portion of the interest of a deceased partner on August 1, 1926, after which date the petitioner was the owner of 8,900 shares of the total.
The profits received by the petitioner on his interest in the association from January 1, 1918, to July 9, 1928, amounted to $134,441.73.
In July 1928 a disagreement arose between the petitioner and one or more of the other partners of OBrion, Russell & Co. as to how the business should be conducted. One Bayard Tuckerman, Jr., desired to acquire the petitioner's interest. On July 9, 1928, the petitioner wrote a letter to the surviving members of the firm of OBrion, Russell & Co., reading as follows:
In accordance with Article Fifth of our partnership agreement dated June 1, 1922 I hereby notify you that I withdraw from the firm of OBRION RUSSELL & COMPANY as of August 1, 1928. It is understood that this notice shall be considered the three months' notice called for in said Article Fifth and that any further notice is waived by you by your acceptance of the offers hereinafter made.
In consideration of your paying to me, or to my legal representative in case I die prior to August 1, 1933, for*924 five years from August 1, 1928 a salary at the rate of TEN THOUSAND (10,000) DOLLARS a year, the same to be paid monthly in arrears, I hereby agree to use my best efforts to hold for the firm of OBRION RUSSELL & COMPANY all existing insurance business of any kind and nature in which I am in any way interested as a member of that firm or which may arise in the future from clients who may have been primarily mine as a member of said firm and also to endeavor to secure for the benefit of the firm such other insurance business as may in the future come to me, although it is understood that I shall be under no affirmative duty to seek out such business, and that my duties in connection therewith shall be restricted to a loyal effort to secure to the firm of OBRION RUSSELL & COMPANY the continuance and expansion of any business that may fairly be attributable to me personally, and it is further understood that I and members of my immediate family shall be entitled to place any insurance on property of ours of any nature as we may desire and not necessarily with the firm of OBRION BUSSELL & COMPANY. For the same considerations I hereby agree that I will not prior to August 1, 1938 engage*925 in the insurance business in any capacity as broker, agent or otherwise, in the City of Boston or in New England or in the State of New York, nor thereafter in the City of Boston and the cities and towns adjoining the same without your consent expressed in writing, except in so far as may be necessary to carry out my engagements to you hereinbefore mentioned.
*593 For the same considerations and the additional consideration of ONE HUNDRED THOUSAND (100,000) DOLLARS to be paid to me not later than August 1, 1928 I further hereby release all my right, title and interest under said agreement of June 1, 1922 or otherwise in and to my proportionate part of the assets of every nature and description of the firm of OBRION RUSSELL & COMPANY and agree that the same may be allocated among the remaining partners as you may determine.
On the same date the offer of the petitioner was accepted as follows:
We, HENRY E. RUSSELL, ROBERT J. DUNKLE, SAMUEL B. REED and BAYARD TUCKERMAN, JR. hereby accept the withdrawal of WILLIAM GORDON MEANS hereinbefore offered and accept all the other offers of said WILLIAM GORDON MEANS hereinbefore contained and jointly and severally agree to carry*926 out all of the obligations entailed upon us by this acceptance, and we hereby jointly and severally release said MEANS from all his obligations under our Agreement of June 1, 1922 as amended and agree to hold him harmless and indemnified against any and all liabilities to which he might otherwise be subject as a member of the firm of OBRION RUSSELL & COMPANY. We further jointly and severally agree that all releases, covenants and agreements in this letter contained on the part of any party shall not take effect until the payment of the ONE HUNDRED THOUSAND (100,000) DOLLARS to be paid not later than August 1, 1928 and further agree that if the said ONE HUNDRED THOUSAND (100,000) DOLLARS shall not be paid by the date stipulated we will jointly and severally use our best efforts to procure the cancellation of a document of even date herewith executed by said MEANS and various other subscribers to an Agreement dated December 1, 1926 as amended, and that if we should not be successful in effecting such cancellation we will hold said MEANS harmless and indemnified against any loss or damage resulting therefrom.
In 1928 the petitioner received $100,000 from Bayard Tuckerman, Jr., and*927 also a payment from Obrion, Russell & Co. representing salary at the rate of $10,000 per year from the date when his interest was acquired by Tuckerman. In his income tax return for 1929 the petitioner did not report any profit received from the $100,000 cash payment, but did report the salary paid to him by OBrion, Russell & Co. from the date that his interest was acquired by Tuckerman. In the determination of the deficiency the respondent has held that the petitioner had a capital net gain of $91,830.66 from the sale of his partnership interest for $100,000. He has found that the cost to the petitioner of the partnership interest was $7,669.34 representing the amount paid by the petitioner to deceased partners plus $500 representing the cost of 400 shares or units acquired in 1926.
OPINION.
SMITH: In this proceeding the respondent contends that the correct basis for the determination of the gain realized by the petitioner from the sale of his partnership interest in OBrion, Russell & Co. is $11,294.34, the cash outlay made by the petitioner in the acquisition *594 of the fractional parts of the interest sold. The petitioner, on the other hand, contends that the correct*928 basis is $86,878.65, representing the cash outlay of $11,294.34 plus $59,098.58, the claimed value of the interest acquired without any cash outlay on January 1, 1918, plus $16,485.73, the claimed March 1, 1913, value of the interest acquired on June 2, 1924.
The basis of the petitioner's contention is that there was a gift to him of the above mentioned values of the interests acquired in 1918 and in 1924, the petitioner admitting that so far as the interest acquired in 1924 is concerned the basis for the computation of the gain upon the sale is the March 1, 1913, value of the interest. The methods of computing the January 1, 1918, value of the interest acquired on that date and of computing the value on March 1, 1913, of the interest acquired in 1924 is set forth in our findings as stipulated by the parties.
There is no evidence that the petitioner's associates had any donative intent in permitting the petitioner to acquire the interests in 1918 and in 1924. The facts appear to be that the petitioner had proved his value as an insurance man. In order to make his employment attractive they permitted him to acquire an interest in the partnership, which was operated without*929 capital and with tangible assets of a negligible value. The arrangements made with the petitioner were apparently to the mutual advantage of all concerned. There is no evidence that the petitioner could have sold his interests immediately after acquisition. In any event it was not contemplated that he should do so.
The petitioner testified that when he acquired his additional interest in 1924 he paid $1.25 a share upon the acquisition of 2,500 units or shares; that "it was a custom to pay that amount of money to the other subscribers outside of" his own firm when a member was permitted to increase his interest by the acquisition of additional shares. This testimony to our minds indicates that there was no intention on the part of the petitioner's associates to make a gift to the petitioner.
We sustain the respondent's contention that the basis for the computation of the gain upon the sale of the petitioner's interest in 1928 was $11,294.34, the cost to the petitioner of acquiring his total interest.
The respondent has moved to increase the deficiency determined for the year 1928 upon the ground that the sale price of the petitioner's interest was not $100,000, but was*930 in truth $150,000, $100,000 of which was paid in cash in 1928 and the balance of $50,000 to be paid at the rate of $10,000 a year for a period of five years.
*595 The burden of proving that the petitioner received a consideration of more than $100,000 in 1928 is upon the respondent. In our opinion he has not carried that burden. The evidence shows that the petitioner was required to perform services for the company during the five-year period in question and that it was for those services that the petitioner was to be paid $10,000 a year. It is furthermore to be noted that the cash paid to the petitioner in 1928 was paid by Bayard Tuckerman, Jr., and not by the firm of OBrion, Russell & Co. The firm paid the compensation at the rate of $10,000 a year, and not Tuckerman, who acquired the petitioner's interest. The petitioner testified that he had always considered the amounts paid to him by OBrion, Russell & Co. during the five-year period as compensation for services rendered and so reported that compensation on his income tax returns. We are of the opinion that the petitioner properly reported such compensation.
Judgment will be entered under Rule 50.