Opinion
Docket No. 51993.
1956-06-8
PETER P. RISKO AND MARGARET M. RISKO (HUSBAND AND WIFE), PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George J. Schaefer, Esq., for the petitioners. William F. Chapman, Esq., for the respondent.
George J. Schaefer, Esq., for the petitioners. William F. Chapman, Esq., for the respondent.
Payment made by petitioner to his partner to acquire her interest in their partnership held a capital expenditure rather than a deductible expense, and held, further, on the facts, amortizable over the remaining life of their partnership agreement, petitioner's partner having no interest beyond that.
Respondent determined a deficiency of $4,523.01 in petitioners' income tax for the calendar year 1950. The only issue is the deductibility, either in full or in part, of a payment made in 1950 by Peter Risko to the person with whom he had entered into a partnership agreement.
FINDINGS OF FACT.
Some of the facts have been stipulated and hereby found.
Peter Risko, hereafter called petitioner, and his wife, Margaret Risko, now residing in Irvington, New York, filed a joint income tax return for the calendar year 1950 with the collector of internal revenue for the second district of New York.
Petitioner is engaged in the employment agency business. He was employed by an agency from 1925 to 1932, and continuously since then he has been the owner and operator of an agency under the trade name Provident Employment Service. On July 18, 1947, petitioner purchased the employment agency business known as Approved Personnel Service from the then owner who had operated the business for about 6 years prior to the purchase date. The purchase price of $3,000 was paid by a check of Provident Employment Service and signed by petitioner.
From about July 18 to August 1, 1947, Mrs. Mary Backus was employed by Approved Personnel Service at a salary of $50 a week. Prior to this employment she had been employed for about 6 months by another employment agency. After hiring Mrs. Backus, petitioner discussed with his attorney the possibility of arranging some sort of agreement with Mrs. Backus who wanted years of consecutive employment and some assurance of a permanent job at a guaranteed stipulated salary in the event the business progressed, and in such event petitioner wanted to share his profits with her as long as she ran the business according to the rules that were outlined.
Petitioner's attorney prepared an agreement, dated August 1, 1947, between petitioner and Mrs. Backus by which they agreed to form a partnership under the name Approved Personnel Service to conduct the business of an employment agency. This agreement, executed by petitioner and Mrs. Backus, provided in part as follows: The partnership was to begin on August 1, 1947, and continue for a term of 5 years, after which time it would continue from year to year unless and until terminated by either party. Petitioner agreed to contribute all of his interest in the predecessor business of the same name and Mrs. Backus agreed to contribute $500 which she subsequently obtained by a bank loan on the co-signature of petitioner. The profits and losses of the partnership were to be shared 60 per cent by petitioner and 40 per cent by Mrs. Backus, with petitioner to have sole control and direction of all the affairs of the partnership including the sole right to draw checks on the business. Mrs. Backus agreed to devote all of her time and attention to the partnership business and petitioner to give such attention and supervision as he considered expedient. In case of dissolution of the partnership, it was agreed that the only interest in the assets to which Mrs. Backus would be entitled was the sum of $500. The New York City license to operate Approved Personnel Service was registered during the years 1947 through 1950 in the names of petitioner, his wife, and Mrs. Backus. When additional funds were needed to operate the business in 1950, petitioner advanced about $500 from his personal funds and $2,000 from the funds of Provident Employment Service. Partnership returns were filed on behalf of the period ended November 28, 1950.
In 1950, while petitioners were in Florida, a competing employment agency was formed by Mrs. Backus's husband, who had lost his previous job and had had no previous experience in employment agency work, and a former employee of Approved Personnel Service, who left its employ during petitioner's absence. Upon petitioner's return and discovery of the competing agency, petitioner tried to persuade Mrs. Backus to leave Approved Personnel Service and join her husband in the latter's agency. After Mrs. Backus had refused petitioner's requests that she leave, petitioner stopped giving her any salary checks. She then employed an attorney, demanded payment and threatened to sue petitioner. After consultations with his attorney and accountants, petitioner offered Mrs. Backus $7,500 to leave Approved Personnel Service. Mrs. Backus accepted and she and petitioner signed an agreement dated November 28, 1950, which provided in part as follows: It was agreed that the partnership would be dissolved and terminated as of that date; petitioner agreed to and did pay Mrs. Backus $7,500 which Mrs. Backus agreed to and did accept in satisfaction of all claims she had against petitioner and ‘also her interest in said partnership to the day and date of these presents'; the name of Approved Personnel Service and all assets belonging to the partnership were to be the property of petitioner; and Mrs. Backus agreed to assign to petitioner ‘all her right, title and interest in the partnership in and to any leases of space occupied by the partnership business, and warrants that she is under no legal disability to do so.’ Mrs. Backus also executed a general release, dated November 28, 1950, in favor of petitioner. At the date of this agreement the capital account of Mrs. Backus in Approved Personnel Service was overdrawn in the amount of $1,043.
After the termination of his association with Mrs. Backus petitioner continued as the sole owner to operate Approved Personnel Service and employed as office manager, to perform the same functions as previously performed by Mrs. Backus, a man from his Provident Employment Service. Petitioner employed an office manager to take charge of both a branch of his Provident Employment Service and the Best Employment Service which he founded in 1948.
Petitioners' tax return for 1950 contains the following statement:
+-------------------------------+ ¦Income From Partnerships, Etc. ¦ +-------------------------------¦ ¦ ¦ ¦ +-------------------------------+
Schedule G Distributive share of net income from Approved Personnel Service (a partnership at 7 E. 42nd Street, New York, N. Y.): Year ended June 30, 1950 $4,520.18 Period ended November 28, 1950 2,778.52 Total $7,298.70 Less payments to Mary C. Backus (copartner) to secure her withdrawal as a partner from Approved Personnel Service prior to the date fixed for the termination of the partnership 8,543.00 Net loss from partnership activities ($1,244.30) Respondent disallowed petitioners' deduction of $8,543 on the ground that it represented a capital expenditure rather than an expense of the partnership business.
OPINION.
OPPER, Judge:
It is impossible to distinguish these facts from those in Ethel Sperling, 20 T.C. 1014. See also Kenworthy v. Commissioner, (C.A. 3) 197 F.2d 525, affirming per curiam Memorandum Opinion of the Tax Court, filed January 25, 1952. The cases relied on by petitioner
are unlike this case and require rejection as authority here on the same grounds as those stated in the Sperling case:
A. King Aitken et al., 12 B.T.A. 692; Charles F. Mosser, 27 B.T.A. 513.
In the Aitkin and Mosser cases, the remaining partners acquired no increased interests in their respective partnerships by virtue of their payments to the retiring partners. In the Aitkin case, the partnership was dissolved by the withdrawal agreement and the retiring partner took his clients * * * In the Mosser case, the retiring partner received compensation for his withdrawal and in a separate transaction his partnership interest was purchased by others not previously partners.
We must conclude here, as in Ethel Sperling, supra, that the transaction under consideration was no more than the sale of Bonder's partnership interest to the remaining partners in the business * * *
If anything, the Sperling case was weaker for respondent than are the facts shown here. There the agreement expressly set a figure for Bonder's capital balance and referred to the additional sum of $6,500 in dispute as being ‘to induce the Party of the First Part to retire from the said partnership.’ Nevertheless, we said in the Sperling case:
Therefore, we hold that the entire sum of $22,500 paid to Bonder for his partnership interest, including the $6,500 in excess of his capital account * * * to be a capital expenditure.
Here Mrs. Backus assigned all her right in the partnership, warranted that she was under no legal disability to do so, and agreed to and did accept the entire sum of $7,500 in satisfaction of her claims against petitioner and ‘also her interest in said partnership.’
Petitioners' insistence that Mrs. Backus had nothing to sell because at the end of the partnership term she was only entitled to a return of her initial investment takes no account of the 20 months that still remained before that time could arrive, and during which whatever interest she had would continue. In the Sperling case, the partnership was at will and the retiring partner was only entitled to his capital account, yet the additional payment was held to be a capital expense.
In coming to this conclusion we are accepting the characterization of their relationship which the parties themselves adopted. See Maletis v. United States, (D.C., Ore.) 97 F.Supp. 562, affd. (C.A. 9) 200 F.2d 97, certiorari denied 345 U.S. 924. It would be indeed difficult to reach any conclusion other than that a partnership existed and was intended, and petitioners themselves say in their brief:
It is our view that it is not necessary to determine whether or not the agreement of August 1, 1947, between the husband petitioner and Mary Backus * * * constituted them true partners * * * under the laws of the State of New York * * *
Petitioner's alternative claim made in their petition to depreciation over the remainder of the life of the agreement, however, requires a contrary result. All that Mrs. Backus had to sell was her interest in the partnership, its income and its assets for the 20 months that remained for the agreement to run. At the end of that time, by the terms of the arrangement, her interest in all the assets would cease except perhaps for the return of her original $500 investment.
Petitioner's basis for the Backus partnership interest was the amount he paid for it. Cf. Anderson v. United States, (S.D. Cal.) 131 F. Supp. 501, affd. (C.A. 9) 232 F.2d 794, with Nathan Blum, 5 T.C. 702. See also Specialty Engineering Co., 12 T.C. 1173. The interest purchased would terminate in a determinable period of 20 months. At that time petitioner's ownership of the partnership interest of Mrs. Backus or of her interest in the income and assets would become valueless.
Respondent makes no point of this comparatively unimportant detail.
If what petitioner obtained by the payment to Mrs. Backus was her interest in the partnership property, see Nathan Blum, supra, the situation seems to us comparable to the purchase by a landlord of the remaining term of an outstanding lease. See Henry B. Miller, 10 B.T.A. 383. Here petitioner would obtain all the partnership asserts by the terms of the agreement when its term expired just as the landlord would obtain a full interest in his property at the termination of the lease. In such circumstances where the landlord proceeds to use the property so acquired, he is permitted to amortize the expenditure over the remaining term of the acquired lease. Clara Hellman Heller Trust No. 7610, 7 T.C. 556, reversed on other grounds sub nom. Wells Fargo B. & U. Trust Co. v. Commissioner, (C.A. 9) 163 F.2d 521. And if what petitioner obtained was Mrs. Backus' interest in the partnership profits during the balance of the term of the agreement, this was merely a wasting asset to be recovered out of the income produced, Eleanor S. Howell, 24 T.C. 342, as in the case of the purchase of a life estate by the owner of the remainder. Bell v. Harrison, (C.A. 7) 212 F.2d 253. Under either analogy or on a combination of the two, we conclude that the expenditure was recoverable over the life of the interest acquired and that depreciation as claimed should be allowed.
This is not like an ordinary case where the purchaser of an interest in a partnership seeks to amortize the payment. In such a case, since the partnership would exist for an indeterminate period, possibly no anticipated life for the payment could be fixed. Cf. Ethel Sperling, supra. Petitioner here was not buying an interest in a partnership of indeterminate duration, nor was he buying the assets themselves. These would become his in any event at the termination of the agreement. All that he was buying was the interest that Mrs. Backus owned. All that she owned would completely terminate at the conclusion of the 20 months. To the extent indicated, we view the determination as erroneous.
Decision will be entered under Rule 50.