Opinion
No. 41938.
March 4, 1935.
Alexander C. Tener, of Pittsburgh, Pa. (Thomas N. Griggs, of Pittsburgh, Pa., on the brief), for plaintiff.
John W. Hussey, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Action by the People's-Pittsburgh Trust Company, executor of the estate of William S. Masten, deceased, against the United States.
Petition dismissed.
Plaintiff sues to recover income tax of $8,784.10 alleged to have been erroneously and illegally collected for the period January 1 to October 11, 1929, with interest. It contends that the decedent was a member of a partnership, and that, in view of the provisions of a written agreement between the members of the alleged partnership, the death of Masten did not give the defendant the right to tax him on any portion of the profits from the business of A.E. Masten Co. for the period January 1 to October 11, 1929, the date of his death, on the ground that the partnership did not terminate at the death of Masten and that the income upon which he was taxed for the period mentioned was neither distributable to the decedent in his lifetime or to his personal representatives upon his death. It is also contended that the defendant erred in not assessing the tax upon the proportion of decedent's share of the net earnings of A.E. Masten Co. for the entire calendar year 1929 which the period January 1 to October 11, 1929, bore to the entire calendar year.
The defendant contends (1) that the business known as A.E. Masten Co. was a private enterprise of William S. Masten; (2) that, if a partnership had existed, it would have been automatically terminated for the purpose of taxation on the death of William S. Masten; and (3) that Masten's share of the profits of the business for the period January 1 to October 11, 1929, was properly determined and subjected to tax by the defendant.
Special Findings of Fact.
1. William S. Masten, a resident of Pittsburgh, Pa., died testate on October 11, 1929. His will was duly admitted to probate in Allegheny county, Pa., and on October 17, 1929, letters testamentary upon his estate were issued to the plaintiff, a Pennsylvanian corporation, which letters are still in full force and effect.
2. March 1, 1928, William S. Masten, as party of the first part, and Fred C. Masten, William J. Fleming, and Louis F. Brand, as parties of the second part, entered into a written agreement effective as of January 1, 1928, and extending to January 1, 1929. Such agreement, reciting the intention of the first party to continue the business of broker formerly carried on by the partnership of A.E. Masten Company with the parties of the second part, is Plaintiff's Exhibit 4 and is made a part hereof by reference. The pertinent parts of the agreement are as follows:
"First. The business is to be carried on under the firm name and style of A.E. Masten Company.
"Second. It is the understanding of all the parties to this agreement, that the entire capital engaged in the business, including all its assets, moneys, seats on all exchanges, goodwill, furniture, fixtures, leaseholds, and other property of whatsoever kind, are the sole and exclusive property of the party of the first part. * * *
"Third. In consideration of faithful services to be rendered by each of the parties hereinafter named in the conduct of said business of A.E. Masten Company, first party agrees to pay annually to each of the parties of the second part, respectively, in addition to monthly salary to be agreed upon, the percentage of the net profits of said business as hereinafter set forth, and upon the terms and conditions hereinafter set forth:
"To Fred C. Masten, twenty percent (20%);
"To Louis F. Brand, ten percent (10%);
"To William J. Fleming, ten percent (10%);
and the remaining profits, or sixty per centum (60%) of the total net profits, shall belong to and be the property of the first party hereto. Said portions of said net profits are to be paid to said parties annually.
"Fourth. The fiscal year of the business shall be from January 1, 1928, to January 1, 1929, * * *
"Fifth. On January 1st, 1929, or as soon thereafter as the net profits of said business for the preceding year can be determined, the proportion of the net profits as hereinabove set forth shall be paid to each of the parties of the second part, and there shall be no other division of the net profits from said business during the fiscal year except as hereinafter provided.
"Sixth. The party of the first part shall have the right to terminate this agreement at any time during the period herein limited and he shall have the right also to terminate this agreement as to any one of the parties of the second part at any time during the period herein limited (a) in case of the violation of any of the terms and conditions of this agreement, and (b) in case any of the said parties of the second part should for any conduct or reason become objectionable to any exchange or board of trade with which the said firm of A.E. Masten Company is now or hereafter may be connected by membership, or otherwise. * * *
"Ninth. If any of the parties of the second part should die or for any reason whatsoever cease to be actively connected with the business of A.E. Masten Company, the interest of such party in the net profits of said business under this agreement shall immediately cease and determine, but the personal representative of the one so dying, or the party ceasing to be actively connected with the said business shall, as soon as practicable after the happening of either event, be entitled to and shall be paid the amount of the net profits of the fiscal year up to the date of the death, or the date of ceasing connection with said business, of any one of said parties of the second part. * * *
"Tenth. If at any time during the continuance of said partnership of A.E. Masten Company, William S. Masten, party of the first part, should die or desire to withdraw from said partnership, then the said Fred C. Masten shall have the first option and privilege of purchasing and buying, either from the personal representative of said William S. Masten, or from the said William S. Masten, all the capital assets of said partnership belonging to the said William S. Masten at the then value thereof, but nothing shall be paid for the goodwill of the said partnership of A.E. Masten Company; provided, however, that said Fred C. Masten shall exercise said option and pay said purchase price therefor within ninety (90) days from either the date of the death of said William S. Masten, or from the tender of the same by William S. Masten to Fred C. Masten, and provided, further, that after the happening of either event and for the said period of ninety (90) days William S. Masten or his personal representative shall continue the business of the said firm of A.E. Masten Company, preserve the assets and goodwill and protect the same until the option herein given to said Fred C. Masten shall have been exercised by him or shall have expired."
3. The aforesaid agreement was by supplemental agreement in February, 1929, renewed and continued for a further period of time, to wit, from January 1, 1929, to January 1, 1930. The supplemental agreement is Plaintiff's Exhibit 5 and is made a part hereof by reference.
4. Upon the death of William S. Masten, the plaintiff, as his executor, together with the surviving parties to the agreement of January 1, 1928, continued until November 8, 1929, the business of A.E. Masten Co. and preserved its assets and good will. The business of trading in securities and commodities was continued in the name of A.E. Masten Co. from October 11, 1929, to November 8, 1929; the executor, plaintiff in the instant action, acting in the place of William S. Masten, deceased.
5. November 8, 1929, Fred C. Masten exercised the option given him by the terms of the agreement of March 1, 1928, to purchase the capital assets engaged in the business of A.E. Masten Co., which assets were owned exclusively by William S. Masten. Such assets were conveyed to Fred C. Masten under the option by a written agreement of April 25, 1930.
6. On November 8, 1929, the liquidation of the business theretofore operated under the name of A.E. Masten Co. was begun. The liquidation continued throughout the remainder of the year 1929, and is not yet completed.
7. The business of A.E. Masten Co. throughout its existence consisted of trading in stocks, bonds, securities, commodities, and the like. Subsequent to October 11, 1929, heavy losses were sustained through marginal accounts, syndicate accounts, and securities. The net profits of the business for the period January 1 to December 31, 1929, were negligible. The business of A.E. Masten Co. earned net profits to the credit of William S. Masten of $94,210.71 for the period January 1 to October 11, 1929.
8. The plaintiff, as executor of the estate of William S. Masten, deceased, neither demanded nor received any accounting of the share of William S. Masten in the net profits of A.E. Masten Co. for the period beginning January 1 and ending October 11, 1929.
9. March 15, 1930, the plaintiff, as executor, filed a tentative return of the income of William S. Masten for the period January 1 to October 11, 1929, the date of his death, and paid an income tax thereon in the sum of $300.
10. April 15, 1930, the plaintiff filed the final income tax return in behalf of William S. Masten for the period January 1 to October 11, 1929. This final return disclosed a net loss for that period of $12,284.84, and upon that basis there was no tax liability reported.
11. November 20, 1931, the Commissioner of Internal Revenue refunded to plaintiff the amount of the tax paid by it at the time of filing a tentative return, to wit, $300 and interest thereon of $4.60.
12. March 3, 1931, the Commissioner by letter notified the plaintiff that a review of the report submitted by the internal revenue agent in charge at Pittsburgh, Pa., for the period January 1 to October 11, 1929, disclosed a deficiency in the income tax against William S. Masten, deceased, of $8,784.10. The basis of this deficiency was the failure to include in William S. Masten's income tax return for this period the sum of $95,392.37, all of which sum, except $1,181.66 arising from other items of income, was the share of William S. Masten in the net profits for said period of the business of A.E. Masten Co.
13. March 31, 1931, plaintiff filed a protest against the assessment of the proposed deficiency, and was given a hearing April 22, 1931.
14. May 6, 1931, plaintiff was given formal notice of the deficiency in accordance with section 272 of the Revenue Act of 1928 [26 USCA § 2272], and on July 20, 1931, such deficiency was duly assessed.
15. July 23, 1931, the plaintiff on behalf of William S. Masten, deceased, paid under protest the deficiency of $8,784.10, together with interest of $682.91.
16. July 23, 1931, the plaintiff on behalf of William S. Masten, deceased, filed a claim for refund of the tax of $8,784.10, together with interest of $682.91 as aforesaid. This claim for refund was rejected February 12, 1932.
This suit involves the question whether the defendant was correct in computing the income tax of the decedent, from a business with which he was connected, from the beginning of his taxable year 1929 to the date of his death within that year when there was a provision in an agreement with others, under which the business was carried on, that such business should continue for a time in the event the decedent should withdraw therefrom or should die.
We think it is not important in this case whether the business known as A.E. Masten Co. was a partnership or the private business of William S. Masten, for, in either event, we think the income of William S. Masten was properly computed and the tax thereon correctly exacted. Plaintiff bases its case upon paragraph tenth of the agreement of March 1, 1928, between William S. Masten, Fred C. Masten, William J. Fleming, and Louis F. Brand, set forth in finding 2, which provision was that, should William S. Masten die or desire to withdraw from the business, then Fred C. Masten should have the first option and privilege of purchasing, either from the personal representative of William S. Masten or from the said Masten, all the capital assets belonging to Masten at the then value thereof, provided Fred C. Masten exercised such option and paid the purchase price therefor within 90 days either from the date of death of William S. Masten or from the tender of the same by him to Fred C. Masten, and provided further that, after the happening of either event and for the period of 90 days, William S. Masten or his personal representative should continue the business of the firm of A.E. Masten Co., preserve the assets and good will, and protect the same until the option therein given to Fred C. Masten should be exercised by him or should expire. Agreements of this character are not uncommon, and while, as the Supreme Court of Pennsylvania has held in a number of cases, such provision may affect the rights of the surviving persons interested in the business, or the estate or personal representatives of the decedent, to terminate the business or demand an accounting and settlement prior to the expiration of the period specified, such agreements have no controlling effect in the matter of determining the amount of income of the decedent for the period prior to his death and the income tax payable thereon. When a man dies, his entire taxable year for the purposes of the Federal Taxing Act is the period from the beginning of his taxable year to the date of his death, whether or not that period consists of twelve calendar months, and for the purpose of taxation no income accruing after that date can be added to his income and no losses or deductions arising subsequent to the date of death can reduce it.
Upon the date of death a new taxable entity consisting of the estate of the decedent comes into being and that taxable entity is the taxpayer with reference to subsequently earned income from the business or property, and is the person entitled to the deductions for losses and expenses occurring subsequent to the death of the first taxpayer. It is not important whether the estate continues in business alone or in association or co-operation with others, or whether the business with which the decedent was connected is continued by the surviving persons interested therein. Where two or more persons are connected with the business and one dies, such event may not affect the taxable periods or the income from the business of the survivors, but this can have no effect upon the amount of income received by and taxable to the deceased member for the period to the date of his death or the deductions to be taken from such income for the purpose of computing the tax payable upon the deceased member's income during his lifetime. This conclusion is consistent with the decisions concerning the matter of taxation which have been rendered upon the subject. First Trust Co. of Omaha v. United States, 1 F. Supp. 900, 76 Ct. Cl. 481; Darcy et al. v. Commissioner (C.C.A.) 66 F.2d 581; Goldman et al. v. Commissioner, 15 B.T.A. 1341; and Hall et al. v. Commissioner, 25 B.T.A. 1.
Upon the question whether the income, upon which the tax in question was exacted, was properly determined, it does not appear that the net profit of $94,210.71, upon which the defendant collected a tax, was not the correct amount of income of the decedent for the period January 1 to October 11, 1929, nor does it appear that the defendant failed to allow any proper deductions for this period. In such circumstances, there is no basis for the proration of the income of the business for the entire calendar year 1929 to the period January 1 to October 11, 1929. Such a method of proration is justifiable only where the net taxable income of the decedent cannot otherwise be correctly determined.
The petition must be dismissed, and it is so ordered.