Opinion
Docket Nos. 66018 69450 73169.
1961-05-31
JOHN SUMERS AND MOLLY SUMERS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Albert D. Jordan, Esq., for the petitioners. Herbert Rothenberg, Esq., for the respondent.
Albert D. Jordan, Esq., for the petitioners. Herbert Rothenberg, Esq., for the respondent.
In 1951, petitioner and another radiologist formed a partnership to practice radiology. Petitioner's partnership interest cost him $30,000, and he also agreed that the partnership would pay $18,000 due on certain equipment and a lease and agreement assigned to it. The lease and agreement, dated July 2, 1941, granted an exclusive right to practice radiology at a hospital. The hospital occupied its premises under a lease with a fixed term of 21 years from December 27, 1940, and an additional term of 15 years at the option of the hospital. The lease and agreement of July 2, 1941, ran for the full term of hospital's lease and any renewal term. By the terms of the partnership agreement, the partnership was to continue until the death of either partner, with provision for payments by the surviving partner for the interest of the deceased partner. Held, that the interest acquired by petitioner did not have a limited or fixed life but had life of indefinite duration and was not of such character as to bring it within the depreciation provisions of the Code.
The respondent determined deficiencies in income tax against the petitioners for the taxable years herein as follows:
+----------------------------+ ¦Docket No.¦Year ¦Deficiency¦ +----------+------+----------¦ ¦69450 ¦1952 ¦$1,142.00 ¦ +----------+------+----------¦ ¦66018 ¦1953 ¦1,720.96 ¦ +----------+------+----------¦ ¦ ¦( 1954¦1,811.04 ¦ +----------+------+----------¦ ¦73169 ¦( 1955¦1,779.55 ¦ +----------------------------+
The sole issue is whether petitioner John Sumers is entitled to depreciate his $30,000 investment in a professional medical partnership over the term of a certain lease and agreement covering the use and occupancy of space in a hospital where the partnership conducted its practice of radiology.
FINDINGS OF FACT.
Some of the evidence and some of the facts have been stipulated and the facts stipulated are found as stipulated.
The petitioners are husband and wife, and residents of Roslyn Heights, Long Island, New York. They filed their joint income tax return for 1952 with the district director of internal revenue for the Upper Manhattan District of New York, for 1953 and 1954 with the director for the Lower Manhattan District, and for 1955 with the director for the Brooklyn district.
John Sumers, hereafter referred to as petitioner, is and at all times pertinent hereto has been a licensed physician and radiologist.
Under date of July 2, 1941, Henry Friedland, a practicing radiologist, entered into a written lease and agreement with Kew Gardens Sanitarium, Inc., a New York corporation, operating Kew Gardens General Hospital. After reciting that Sanitarium was the lessee of certain lands and buildings under an indenture of lease, dated December 27, 1940, for a fixed term of 21 years, ‘together with an additional term of fifteen (15) years at the option of Sanitarium,‘ and that Sanitarium would alter and equip the leased premises for use and occupancy as a private hospital ‘during the full term of the said lease and any renewal term (the said leased premises being hereinafter referred to as the ‘Hospital’),‘ the agreement set forth the rents reserved and the agreements, conditions, and terms to be kept and performed by the parties.
By paragraph 1, Sanitarium leased to Friedland and Friedland hired from Sanitarium certain designated space ‘to be used and occupied by Dr. Friedland only as and for the conduct of a radiologic department.’
Paragraph 2 of Friedland's lease agreement with Sanitarium provided as follows:
2. Sanitarium covenants and agrees that during the term hereof and any renewal term Dr. Friedland shall have the sole and exclusive right to render any and all services of every kind, nature and description customarily performed by a roentgenologist, including but not limited to x-ray examinations, diagnosis and radiotherapy, for all persons admitted to and in the Hospital and who are hospitalized therein. Dr. Friedland shall also have the right to render all of the services above set forth for persons not hospitalized at the Hospital and originating from other sources. Sanitarium agrees that it will not maintain or permit to be maintained in the Hospital any radiologic department other than the one to be operated by Dr. Friedland as aforesaid, not perform or permit to be performed any roentgenologic work of any kind, nature and description, by any person, firm or corporation other than by Dr. Friedland and/or his assistants or assigns as provided in this agreement.
Paragraph 3 provided that Sanitarium and Friedland would purchase jointly certain equipment, apparatus, and accessories necessary for ‘the operation of a modern radiographic department,‘ which equipment and accessories ‘shall be used solely by Friedland and his professional assistants in said department.’
Paragraph 4 granted Friedland a 5-year option to sell, assign, and transfer his undivided interest in jointly owned equipment to Sanitarium in exchange for preferred stock, or at Sanitarium's option, half stock and half cash. Even if Sanitarium acquired complete ownership of the X-ray apparatus and accessories, Friedland was ‘entitled to the sole and exclusive use’ thereof ‘for and during the term of this agreement and any extension thereof without cost or charges to him.’
Paragraph 5 provided that Friedland could purchase and install at his own cost and expense roentgenotherapy equipment and apparatus deemed necessary and requisite, and any equipment so purchased remained the sole property of Friedland.
Paragraph 6 provided, in part, as follows:
6. Dr. Friedland agrees to pay Sanitarium as rental for the leased space a sum of money equivalent to the proportions of the income resulting from the operation of the said radiographic department, more particularly set forth in this paragraph, viz:
For the purposes of accountings and to determine the amounts payable to Sanitarium hereunder, patients shall be classified as follows:
A. Those hospitalized at the Hospital under the Associated Hospital Plan and/or The Community Plan;
B. All other patients hospitalized at the Hospital, including workmen's compensation cases;
C. Patients coming from outside sources and not hospitalized at the Hospital at the time of the x-ray examination;
D. All patients treated with radiotherapy at the Hospital.
As to class A patients, Friedland was to do all necessary X-ray diagnostic work provided under their policies without charge, but Sanitarium was to pay for all expendable materials used in the examinations and a proportionate part of the cost of technical and clerical help.
As to class B patients, Friedland was to charge them the customary private rates and submit his bill through Sanitarium. When Sanitarium collected the bill, it turned the money over to Friedland, who returned 50 percent thereof to Sanitarium, after deducting the cost of expendable materials used and the proportionate part of technical and clerical costs applicable thereto. Friedland was to bill the insurance carrier for compensation work and divide collections equally with Sanitarium after deducting costs of materials and help. Fees for work done on class A patients in excess of the amount provided by their policies were governed by the same provisions as class B patients.
As to class C and class D patients, Friedland was to receive his fees directly from the patients and pay Sanitarium 7 1/2 percent thereof whenever his total fees exceeded $5,000 per annum. If such fees failed to equal $5,000 or more for any year, Sanitarium was not entitled to participate in the fees collected from the patients for that year.
Other provisions of the agreement of July 2, 1941, authorized Friedland to employ medical assistants at his own expense and provided for equal sharing with Sanitarium of the cost of clerical and technical employees; defined deductions and charges for operating expenses as used in the agreement and provided generally that the costs attributable to persons hospitalized would be borne equally by Sanitarium and Friedland, but that the costs attributable to Friedland's private work would be borne solely by him; provided for monthly accounting and settlement of fees collected from class A and class B patients; required each party to maintain accurate books and accounts, subject to inspection and audit by the parties, their accountants, and representatives; required Sanitarium to supply Friedland with electricity, water, janitor, and cleaning service, without charge, and to make all necessary repairs; and authorized Friedland and his medical assistants to place a professional shingle or shingles at the private entrance to the radiologic department.
Paragraphs 13, 14, and 16 of the said agreement provided as follows:
13. The term of this lease shall commence as of the date when the Hospital shall be open to the public, and shall extend for the full term of the occupancy of Sanitarium under its lease with its landlord.
14. In the case of the illness, physical incapacity or death of Dr. Friedland this agreement shall, nevertheless, remain and continue in full force and effect until the expiration thereof. Upon the happening of any of the foregoing contingencies, Dr. Friedland, or in the event of his death his executors or administrators, shall have the right to designate a qualified roentgenologist to continue the operation of the leased space and said radiologic department under the terms and conditions herein set forth. The designation of such qualified roentgenologist as aforesaid shall be subject to the approval of the medical board of Sanitarium, but such approval shall not be unreasonably withheld.
16. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Dr. Friedland and the Sanitarium, and their respective heirs, executors, successors and assigns, except as otherwise provided in this lease.
Friedland formed a partnership with Murray Fuhrman, also a radiologist, for the practice of radiology and to operate the radiologic department at Kew Gardens General Hospital as provided by the agreement of July 2, 1941. Fuhrman devoted full time to the partnership practice; Friedland devoted part time thereto and part time to his radiologic practice in the Bronx. This partnership will hereinafter be referred to as the Friedland-Fuhrman partnership.
From 1941 through 1950, the Friedland-Fuhrman partnership rendered radiological services to persons referred to the radiologic department at Kew Gardens General Hospital, sometimes hereafter referred to as the hospital. The partnership examined or treated only persons referred to it by physicians. Such persons were either inpatients, that is, persons hospitalized at the hospital, or outpatients, that is, persons not hospitalized at the hospital and ambulatory who were referred to the partnership by their physicians. The partnership rendered services to more inpatients then to outpatients. Many outpatients were persons who required therapy following surgery or required diagnosis of their ailments to determine whether hospitalization was needed. During 1948, 1949, and 1950 outpatients constituted 46, 43, and 43 percent respectively of the cases handled by the Friedland-Fuhrman partnership.
In or about 1949, petitioner completed his residency in radiology. During 1950 he was attempting to build a private practice in the Borough of Manhattan. In addition, he was on the staff of the Polyclinic Hospital, and was employed by Fuhrman as an assistant at Kew Gardens General Hospital. Petitioner and Fuhrman worked well together in the radiologic department and petitioner found his work there interesting and attractive. He became acquainted with the type of practice carried on by the Friedland-Fuhrman partnership and with the physicians on the staff of the hospital.
In the summer or fall of 1950, Friedland indicated a desire to withdraw from the Friedland-Fuhrman partnership. Thereupon Fuhrman proposed to petitioner that they form a partnership to practice radiology and operate the radiologic department at the hospital. Friedland withdrew at the end of 1950. Negotiations between Fuhrman and petitioner began in the summer or fall of 1950, and continued until an agreement was reached late in March 1951.
Friedland and Fuhrman terminated their partnership by written agreement, effective January 1, 1951. Under the terms of the agreement, Fuhrman agreed to pay Friedland the sum of $22,000 for his interest in the partnership. The provisions of paragraph Seventh of the termination agreement were stipulated by the parties herein to be as follows:
SEVENTH: The parties agree that the said sum of Twenty-two thousand ($22,000.00) Dollars, set forth in Article ‘FIFTH’ hereof is arrived at between them as follows: (a) The sum of Sixteen thousand Eight Hundred Seventy-four ($16,874.00) Dollars, represents the consideration for the transfer by the First Party to the Second Party of the said lease; (b) The sum of Three Thousand Six Hundred Seventy-two and 33/100 (3,672.33) Dollars represents the share of the First Party in and to the cash on hand in the partnership as of January 1st, 1951; (c) The sum of One Hundred ($100.00) Dollars represents the consideration for the transfer by the First Party to the Second Party of the goodwill of the said partnership, and (d) The balance of One thousand three hundred fifty-three and 67/100 ($1,353.67) Dollars represents the consideration for the transfer by the First Party to the Second Party of all the right, title and interest of the First Party of, in and to each and every other asset of the partnership.
Pursuant to the termination agreement, Friedland executed an instrument under date of March 27, 1951, in favor of Fuhrman, which provided in part that Friedland
hereby assigns unto the Assignee (Fuhrman), a certain lease agreement * * * , dated July 2, 1941, covering certain space in the building and premises known as the Kew Gardens General Hospital, * * * for the conduct of a radiologic department in said premises, all as more particularly designated and described in said lease agreement, as modified from time to time.
TO HAVE AND TO HOLD the same unto the Assignee, his heirs, executors, administrators, and assigns from the first day of January, 1951 for all the rest of the term and renewal term, if any, mentioned in said lease agreement, and subject to the terms, covenants and conditions therein contained and mentioned.
Fuhrman also executed the instrument, agreeing thereby to perform ‘all of the terms, covenants and conditions contained in the said lease,‘ and relieving Friedland from any liability by reason of any breach of the assigned lease subsequent to the date of assignment.
Under date of March 26, 1951, Sanitarium consented, in a written instrument, ‘to the assignment of the aforementioned agreement of lease, as modified from time to time, by Dr. Henry Friedland to Dr. Murray Fuhrman,‘ and released Friedland from any further liability thereunder.
Under date of March 27, 1951, Friedland executed a release and waiver of any and all claims that he might have against Sanitarium ‘arising under the said lease.’ The execution of this release and waiver by Friedland was one of the considerations upon which Sanitarium was willing to consent to the assignment.
Pursuant to the agreement dissolving the Friedland-Fuhrman partnership, Friedland withdrew $4,000 therefrom, and to cover the $18,000 balance of the sales price, Fuhrman issued four promissory notes, in series form, to Friedland, with due dates and in amounts as follows:
+-----------------------+ ¦Due date ¦Amount ¦ +--------------+--------¦ ¦Aug. 15, 1951 ¦$3,000 ¦ +--------------+--------¦ ¦Mar. 15, 1952 ¦5,000 ¦ +--------------+--------¦ ¦Mar. 15, 1953 ¦5,000 ¦ +--------------+--------¦ ¦Mar. 15, 1954 ¦5,000 ¦ +--------------+--------¦ ¦Total ¦18,000 ¦ +-----------------------+
Under date of March 29, 1951, Fuhrman, as assignor, assigned to himself and petitioner ‘individually and as copartners conducting the practice of radiology under the firm name and style of ‘Dr. Murray Fuhrman and Dr. John Sumers' (both together hereinafter referred to as Assignees), * * * a certain Lease-Agreement * * * , dated July 2, 1941, covering certain space’ in the hospital ‘for the conduct of a radiologic department in said premises, all as more particularly designated and described in said Lease-Agreement, as modified from time to time.’ The assignment was ‘from the first day of January, 1951 for all the rest of the term and renewal term, if any, mentioned in said Lease-Agreement, and subject to the terms, covenants, and conditions therein contained and mentioned.’ The assignees, individually and as copartners, agreed to indemnify and save the assignor harmless from any breach ‘of the terms, covenants and conditions of the said Lease hereby assigned.’
During his negotiations with Fuhrman, petitioner was shown a copy of the agreement of July 2, 1941, and a statement of the gross receipts of the Friedland-Fuhrman partnership. Petitioner ascertained therefrom that the agreement of July 2, 1941, had about 11 years of its original term remaining, that gross annual receipts of the partnership were approaching $100,000 annually, and that the agreement of July 2, 1941, excluded other radiologists from providing professional services to persons in or at the hospital. After further negotiations, petitioner agreed to pay Fuhrman $30,000 for an interest in the partnership, and, in addition, agreed that their partnership would pay the $18,000 that Fuhrman owed Friedland.
Under date of March 29, 1951, effective January 1, 1951, petitioner and Fuhrman entered into a lengthy written agreement with respect to their partnership, which is hereinafter referred to as the Fuhrman-Sumers partnership.
After reciting that on or about July 2, 1941, Friedland ‘entered into a certain lease, as Tenant,‘ with Sanitarium, as ‘Landlord, covering certain space in the’ hospital ‘for the conduct of a radiologic department in said Hospital’; that Friedland and Fuhrman entered into a partnership in 1941, ‘in the operation of the radiologic department in’ said hospital, which continued until January 1, 1951; that such partnership was dissolved, and Friedland assigned and transferred to Fuhrman ‘as of January 1st, 1951, all of the right, title and interest of DR. FRIEDLAND, in and to the aforesaid lease for the full unexpired term thereof’; that ‘the parties hereto recognize that the said practice of radiology in the Hospital is a very lucrative practice, which has been built up from its inception by and through the efforts, diligence and ability of the First Party (Fuhrman), who has established and built the good will of such practice to its present value’; that each of the parties were licensed physicians, specializing in the practice of radiology; that petitioner had been an employee of the Friedland-Fuhrman partnership for approximately 12 months prior to January 1, 1951; that the parties desired to form a partnership, ‘to continue to conduct the aforesaid radiologic department in the’ hospital; that petitioner ‘is purchasing from’ Fuhrman ‘a one-third undivided interest in and to the capital belonging to’ Fuhrman ‘with which the partnership shall commence the conduct of its said business, said capital being as set forth in the Schedule ‘A’ hereto annexed,
showing the assets and liabilities comprising said capital, for the sum of' $30,000, payable as thereafter provided, that Fuhrman would have a two-thirds interest in the partnership (subject to increases) as provided in the partnership agreement, the parties mutually covenanted and agreed to and with each other as follows:
This amount includes $100 for goodwill. See paragraph Seventh of the termination agreement of Friedland and Fuhrman, effective Jan. 1, 1951. -------- Notes:
Schedule A attached to the partnership agreement was as follows:
ARTICLE FIRST:
The parties hereto have agreed and do hereby agree to become partners to and with each other, and by these presents, do hereby agree to be partners together, in the practice of radiology and in the operation and conduct of the radiologic department in the said Hospital. Neither party shall, during the term of this partnership, write or publish any medical books from which he may receive royalties, without the written consent of the other party, nor shall either party, with the written consent of the other, engage in the practice of medicine or radiology except on behalf of the partnership in the said Hospital. Each party may give lectures to students or other physicians, but any fees received therefor shall belong to the partnership.
ARTICLE SECOND:
Subdivision (a): That the capital with which the partnership shall begin business shall consist of all of the assets that are enumerated in a schedule marked Schedule ‘A’, and annexed hereto and made a part hereof, having the book values set forth therein, subject to the liability of Eighteen thousand Three hundred twenty-seven & 67/100 ($18,327.67) Dollars, as set forth in said Schedule ‘A’, which the partnership hereby formed, agrees to assume and pay as hereinafter more particularly set forth, together with the said lease with the Hospital, which the First Party agrees to assign to the partnership as more particularly hereinafter set forth. The word ‘business' whenever used in this agreement shall be deemed for all purposes of this agreement to mean the practice of radiology and the conduct of the radiologic department in the said Hospital.
Subdivision (b) of Article Second provided that the partnership capital belonged two-thirds to Fuhrman and one-third to petitioner. In order to vest such portion of the capital in petitioner, Fuhrman assigned to petitioner ‘an undivided one-third part of the capital as set forth in Schedule ‘A’, for the purchase price of' $30,000. Fuhrman and petitioner then transferred, set over, and assigned all of their ‘right, title and interest of, in and to’ said assets to the partnership, subject, as to Fuhrman, to the liabilities assumed by the partnership.
In Article Third it was provided that:
The said partnership hereby created and formed shall be deemed to have commenced, for all purposes on the 1st day of January, 1951, and the term of the said partnership hereby created is hereby made retroactive to January 1st, 1951, as if this agreement was actually executed on the 1st day of January, 1951, instead of as of the date of this agreement, and the said partnership shall end and terminate upon the death of either partner, unless said partnership shall be sooner terminated as herein provided. The said partnership shall be conducted at the Kew Gardens General Hospital, No. 80-02 Kew Gardens Road, Kew Gardens, New York, being the same premises from which the partnership between DR. FRIEDLAND and the First Party was so conducted prior to its dissolution, the purpose of this partnership being to continue the same business as was conducted therein by the First Party in partnership with DR. FRIEDLAND, prior to January 1st, 1951.
In Article Eleventh, Fuhrman assigned, set over and transferred to the partnership, as of January 1, 1951, ‘all his right, title and interest in and to’ the ‘lease entered into between’ Friedland and Sanitarium, 475 dated July 2, 1941, covering certain space in the hospital then occupied by Fuhrman
for the conduct of a radiologic department therein for the full unexpired term of the said lease. Concurrently with the execution of this agreement the First Party shall execute, acknowledge and deliver to the partnership a formal assignment of said lease, the terms, covenants and conditions of which formal assignment, are hereby made a part hereof as though fully set forth herein at length. The parties understand that said lease hereby assigned does not now represent the terms under which said radiology department is now operating, and that an agreement with the Hospital which will reduce to writing the present working arrangement under which the parties hereto are operating, will be executed shortly and the parties agree to execute such modification of said lease with the Hospital. * * *
In consideration of Fuhrman's transfer to it of the lease, the partnership agreed to pay Fuhrman $18,327.67, in installments, the last four installments being due at the same time as Fuhrman's notes to Friedland became due. To prevent any misconstruction of the intention of the parties, Article Eleventh provided that the $18,327.67 payment ‘is strictly a partnership obligation to’ Fuhrman and the $30,000 payment ‘is a separate and wholly independent obligation’ of petitioner to Fuhrman.
Article Twelfth provided for the purchase by petitioner from Fuhrman and the sale by Fuhrman to petitioner of ‘an undivided one-third part of the capital described in Schedule ‘A’, subject to the liabilities therein set forth (all of which liabilities are hereby assumed by the partnership), for the purchase price of' $30,000. Petitioner was to pay $5,000 with the execution of the instrument and $3,000 on the 15th of each March thereafter until the $30,000 was paid. However, if petitioner's share of partnership profits equaled or exceeded $20,000 in any calendar year, he had to pay Fuhrman $5,000 for each such calendar year until he became an equal partner. Anything to the contrary notwithstanding, if at the time petitioner became an equal partner there was still due and owing any part of the $30,000 purchase price, petitioner was to pay over half thereof on March 15 next and the remaining half 1 year later.
In Article Thirteenth, petitioner agreed that he would devote all of his time and attention to the business of the partnership and would not ‘either directly or indirectly engage in any other business or enterprize of whatsoever kind or nature without the written consent of’ Fuhrman, ‘nor practice medicine or radiology except for and on behalf of the partnership, without the like written consent of’ Fuhrman.
Article Fourteenth provided that Fuhrman owned a thirty-six fifty-fourths undivided interest and petitioner owned an eighteen fifty-fourths undivided interest ‘in and to the said partnership business, the goods, capital, good will, income and profits thereof,‘ and were responsible in the same proportion for the debts and other liabilities of the partnership. On January 1, 1952, and on the first day of January of each succeeding year, Fuhrman's undivided interest decreased one fifty-fourth and petitioner's undivided interest increased one fifty-fourth, until such time as each owned an equal interest in the partnership, i.e., an undivided twenty-seven fifty-fourths. Notwithstanding the above provisions to achieve an equality of interest in the partners, it was agreed that if, in any 2 successive calendar years, the net income of the partnership equaled or exceeded $58,000 in each such successive calendar year, petitioner became an equal partner as of the beginning of the second such successive year. The rights and liabilities of each partner increased or decreased as his proportionate interest in the partnership increased or decreased.
In Article Fifteenth, petitioner agreed to purchase all of Fuhrman's undivided interest in ‘the property, good will, firm name, said lease, and all of the assets of whatsoever kind or nature belonging to the partnership’ if Fuhrman predeceased him and the partnership agreement was in force. A formula for computing the selling price of Fuhrman's undivided interest was spelled out, the initial and 60 equal monthly installment payments evidenced by a promissory note were provided for, and a confession of judgment and a chattel mortgage were to be executed by petitioner to secure payment of the promissory note. Concurrently with the receipt of the initial cash payment and the three documents mentioned Fuhrman's legal representatives were to execute and deliver a bill of sale and/or any other document necessary to effectuate the sale. Subdivision (e) of Article Fifteenth provided as follows:
Subdivision (e): The parties understand that the said lease of said radiologic department runs for the full term of the occupancy of the Hospital in said building and premises, under its major lease with its major Landlord, and that the original term of said major lease between the Hospital, as major tenant and its major landlord expires December 27th, 1961, with an option on the part of the Hospital to renew said lease for an additional period of fifteen (15) tears therefrom. It is therefor agreed that if the death of the First Party shall occur prior to the expiration of said original term, (i.e. December 27th, 1961), and the Hospital fails to exercise its option to renew its said lease, and at the expiration of said original term vacates said premises and consequently the said radiologic department must then be abandoned by reason thereof, then and in such event it is specifically agreed that all of the installments under the aforesaid note to be given by the Second Party (petitioner) to the Estate of the First Party, which installments by its terms become due after December 27th, 1961, (i.e. the date of the expiration of the original term of the major lease in the premises), shall be, for all of the purposes of this agreement, waived by the Estate of the First Party, and in such event, the Second Party shall not be required to pay any of such installments, if any, under said note, which shall become due after December 27th, 1961, unless within one year from December 27, 1961, the said Hospital enters into a new lease with its then major Landlord, or otherwise enters into occupancy of said building and premises, and again commences the conduct of a Hospital therein, and within the same period of one year from December 27th, 1961, the Second Party by a new and separate agreement or otherwise, enters into occupancy and conducts a radiologic department in said building as sub-tenant or otherwise of the Hospital then in said building. Immediately upon the happening of such event last mentioned, such note shall ipso facto be revived and the Second Party shall again be required to pay the installments of said note monthly until the same is fully paid, commencing one month from the date when such occupancy by the Second Party of said radiologic department shall take place, even though the Second Party shall then occupy such radiologic department together with a partner or partners or in association with other physicians. * * *
The remaining provisions of Article Fifteenth provided for waiver of installment payments to Fuhrman's estate if petitioner was prevented from conducting a radiologic department at the hospital by reason of Sanitarium's default under its major lease, by reason of the destruction of the hospital building and demised premises by fire, bomb, explosion, earthquake, or other catastrophe, or for any other reason other than default by petitioner in fulfilling the terms of the lease, his death, or disability. Payments by petitioner under this article were to be in addition to payments provided for in Article Twelfth.
In Article Sixteenth, Fuhrman agreed to purchase all of petitioner's undivided interest in the partnership in the event the latter died during the term of the partnership. The provisions thereof are similar to the provisions of Article Fifteenth, with the positions of the parties reversed, except that if petitioner died before he became an equal partner, the selling price of his undivided interest
shall be only such sum as shall be equal to the amount which the Second Party had theretofore, prior to his death, paid to the First Party on account of the purchase price for the Second Party's interest in the partnership, less the sum of One thousand Two hundred ($1,200.00) Dollars, to be deducted therefrom as an adjustment; * * *
The provisions of Subdivisions (d) and (e) of Article Fifteenth were specifically incorporated in this article with the position of the partners reversed.
Article Seventeenth provided that each partner had the absolute right to retire voluntarily from the partnership by giving the continuing party not less than 30 days' notice in writing of his intention. If Fuhrman retired, the purchase price of his share in the partnership to petitioner was ‘such amount as shall be equal to 66 2/3% (i.e. 2/3rds) of the amount which the Second Party would have been obligated to pay to the Estate of the First Party upon the death of the First Party, had he died instead of retired, as computed’ under Subdivision (b)(1) of Article Fifteenth. Similarly, if petitioner retired, the purchase price of his share in the partnership to Fuhrman was two-thirds of the amount Fuhrman would have been obligated to 478 pay petitioner's estate as provided under Subdivision (b)(1) or (b)(2) of Article Sixteenth, depending upon whether petitioner owned less than or an equal interest in the partnership. Payment of the purchase price by cash, note, confession of judgment, and chattel mortgage was to be the same as it would be in case of the death of a partner as provided in Articles Fifteenth and Sixteenth. The continuing partner assumed all accounts payable of the partnership and the retiring partner was to execute any and all instruments necessary to transfer his entire interest. In the event that either party desired
to retire from the partnership in accordance with the provisions of this Article, the other party, (i.e. the continuing party), shall be under a firm, fixed, definite and absolute obligation to purchase the share of the retiring partner of, in and to all the assets of the partnership for the price and upon the terms, covenants and conditions contained in this Article.
The remaining articles of the partnership agreement provided for other contingencies and matters which need not be set forth or summarized.
The opening debit and credit entries on the books and records of the Fuhrman-Sumers partnership, which were effective as of January 1, 1951, and which were posted to its ledger, were as follows:
+------------------------------------------+ ¦Cash—Regular ¦$6,369.47 ¦ ¦ +--------------------+----------+----------¦ ¦Cash—Special ¦19,081.49 ¦ ¦ +--------------------+----------+----------¦ ¦Equipment ¦2,973.52 ¦ ¦ +--------------------+----------+----------¦ ¦Goodwill ¦100.00 ¦ ¦ +--------------------+----------+----------¦ ¦Leasehold ¦16,874.00 ¦ ¦ +--------------------+----------+----------¦ ¦Due to Dr. Fuhrman ¦ ¦$3,672.33 ¦ +--------------------+----------+----------¦ ¦Due to Dr. Friedland¦ ¦3,672.33 ¦ +--------------------+----------+----------¦ ¦Due to Dr. Friedland¦ ¦18,327.67 ¦ +--------------------+----------+----------¦ ¦Dr. Fuhrman—Capital ¦ ¦1,619.86 ¦ +--------------------+----------+----------¦ ¦Due to KGG Hospital ¦ ¦18,106.29 ¦ +--------------------+----------+----------¦ ¦ ¦$45,398.48¦$45,398.48¦ +------------------------------------------+
The Fuhrman-Sumers partnership set up a leasehold account on its books and records in the amount of $16,874, which was the same amount agreed to by Friedland and Fuhrman in the written agreement terminating their partnership.
For each of the years 1951 to 1955, inclusive, the partnership returns filed by the Fuhrman-Sumers partnership claimed a deduction of $1,534 for amortization of the leasehold based on the remaining life of the original lease, viz, 11 years. Respondent allowed those deductions.
The gross receipts of the Fuhrman-Sumers partnership and the distributive share of each partner of the partnership profits, as reported on the partnership returns, for the calendar years 1951 to 1955, inclusive, were as follows:
+-------------------------------------------------+ ¦ ¦ ¦Share of partnership profits ¦ +----+--------------+-----------------------------¦ ¦Year¦Gross receipts¦ ¦ ¦ +----+--------------+--------------+--------------¦ ¦ ¦ ¦Petitioner ¦Fuhrman ¦ +----+--------------+--------------+--------------¦ ¦1951¦$112,688.27 ¦$14,552.63 ¦$29,105.26 ¦ +----+--------------+--------------+--------------¦ ¦1952¦129,490.20 ¦21,863.81 ¦26,064.91 ¦ +----+--------------+--------------+--------------¦ ¦1953¦139,128.49 ¦18,093.26 ¦27,463.27 ¦ +----+--------------+--------------+--------------¦ ¦1954¦129,737.27 ¦22,321.96 ¦22,499.47 ¦ +----+--------------+--------------+--------------¦ ¦1955¦134,561.24 ¦23,005.03 ¦19,670.95 ¦ +-------------------------------------------------+
By reason of the increased volume of business, the partnership agreement, and other aspects of their partnership, Fuhrman felt that petitioner should be made an equal partner earlier than provided for in their agreement. Accordingly, petitioner became an equal partner in 1953.
An analysis of the caseload summaries of the Fuhrman-Sumers partnership reveals that numerically hospital patients continued to be larger than nonhospital patients as was true in the caseload summaries of the Friedland-Fuhrman partnership for 1948, 1949, and 1950. During 1951 and the taxable years 1952 to 1955, inclusive, the nonhospital or outpatients constituted 43, 47, 49, 46, and 43 percent, respectively, of the cases handled by the Fuhrman-Sumers partnership. Despite the numerical superiority of the hospital patients the fees received therefrom by the Friedland-Fuhrman partnership and by the Fuhrman-Sumers partnership were less than the fees received from outpatients in all years from 1948 through 1955, except 1951.
During the taxable years the practice of the Fuhrman-Sumers partnership was of about the same type as the practice of the Friedland-Fuhrman partnership in 1950, with possibly some increase in radiological services to inpatients. After Friedland's departure, physicians continued to refer their hospitalized and other patients to the successor partnership of Fuhrman-Sumers.
During the taxable years petitioner paid Fuhrman the following amounts on the purchase of his partnership interest: 1952, $3,000; 1953, $5,000; 1954, $5,666.67; 1955, $5,666.67. On the joint returns, petitioner reduced his distributive share of partnership income for each taxable year by the amount paid Fuhrman for the ‘right to practice in partnership and share in their net fees.’ In his determination of deficiencies herein, respondent disallowed the deductions claimed, on the ground that the payments to Fuhrman constituted capital expenditures.
In entering into partnership with Fuhrman, petitioner acquired an undivided interest which was a capital asset. The partnership formed by petitioner and Fuhrman was of indefinite duration, and petitioner's undivided interest therein was not a wasting asset.
OPINION.
TURNER, Judge:
The petitioner, on brief, concedes that the payments made by him to Fuhrman in the acquisition of his interest in the Fuhrman-Sumers partnership were capital in nature, and did not constitute allowable deductions for the years in which they were made, as he had claimed on his returns. In keeping with allegations contained in his petition, he now contends that his interest in the said partnership is a dissipating asset, all benefits of which will have been exhausted on December 27, 1961, ‘the day when the partnership lease at the Hospital expires,‘ and having thus a life of 11 years from January 1, 1951, the effective date of his purchase, he is entitled to a depreciation deduction for each of the years herein of one-eleventh of $30,000, or $2,727.27.
Section 23(l) of the Internal Revenue Code of 1939 and section 167(a) of the Internal Revenue Code of 1954 provide for the deduction of a ‘reasonable allowance for the exhaustion, wear and tear * * * (1) of property used in the trade or business, or (2) of the property held for the production of income.’
After pointing out that the necessity for a depreciation allowance arises from the fact that certain property used in the business or held by the taxpayer for the production of income gradually approaches a point where its usefulness is exhausted, section 39.23(l)-2 of Regulations 118, relating to taxable years beginning after December 31, 1951, provides that the allowance for depreciation ‘should be confined to property’ of that nature. In section 39.23(l)-3, it is stated that ‘Intangibles, the use of which in the business or trade or in the production of income is not so limited, will not usually be a proper subject of such an allowance.’ It is further provided, however, that if ‘an intangible asset acquired through capital outlay is known from experience to be of value in the business or in the production of income for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance.’
Based on the premise that the useful life or existence of the practice of the partnership is limited to the period of its operations at the hospital, it is the position of the petitioner that the life of such practice is contemporaneous with the hospital lease, that the lease expires on December 27, 1961, and upon such expiration ‘all benefits purchased by petitioner will have been exhausted and petitioner's ability to recoup any portion of his investment will at that time be extinguished,‘ and will be ‘devoid even of salvage value.’
In our opinion, the position of the petitioner is not well taken. In the first place, the hospital lease was not limited to a term expiring on December 27, 1961, as petitioner contends, but was for a fixed term of 21 years from December 27, 1940, ‘together with an additional term of fifteen (15) years at the option of Sanitarium.’ In the second place, Sanitarium and Friedland did not limit their agreement to the term of Sanitarium's lease covering the hospital property, but after reciting that the hospital lease was for a fixed term of 21 years, plus an additional 15 years at the option of Sanitarium, Sanitarium represented and warranted to Friedland that it would alter and equip the leased premises for use and occupancy as a private hospital ‘during the full term of the said lease and any renewal term.’ Thereafter, in paragraph 2 of the agreement, it was agreed by and between Sanitarium and Friedland that during the term thereof and ‘any renewal term,‘ Friedland should have ‘the sole and exclusive right’ to render any and all services of every kind, nature, and description customarily performed by a roentgenologist and that Sanitarium would ‘not maintain or permit to be maintained in the Hospital any radiologic department other than the one to be operated by Dr. Friedland.’ Furthermore, the right acquired by Friedland was not to be terminated by his illness, incapacity, or death, but was to remain in full force and effect until its expiration, which, as already noted, was for the term of Sanitarium's lease and ‘any renewal term.’ Upon the happening of any of the contingencies stated, Friedland, or, in the case of his death, his executors or administrators, had the right to designate the roentgenologist to continue the operation under the terms and conditions set forth in the agreement, subject only to the right of the hospital to approve the roentgenologist so designated. Such was the right to which Fuhrman had succeeded through his purchase from Friedland and of which Sumers had acquired an undivided interest through purchase from Fuhrman. That right was not only a continuing right but an increasingly valuable right, as indicated by the fact that Fuhrman was willing to pay to Friedland therefor the sum of $22,000 and Sumers in 1951 was willing to pay Fuhrman $30,000 for a one-third interest.
It is also significant, we think, that Fuhrman and petitioner, in drawing up the terms of the partnership through which they were to exercise and utilize the exclusive rights which they then owned to carry on a radiologic practice at the hospital, did not limit the life of their partnership to the term of the existing lease of Sanitarium covering the hospital property or even any renewal term thereof, but agreed that the term of the partnership should be until the death of either partner. Furthermore, at the death of either Fuhrman or Sumers the interest of the deceased partner did not thereby become an exhausted interest but the surviving partner in succeeding to the rights of the deceased partner was required to make payment therefor as specified and agreed to between them in the partnership agreement. They did recognize the possibility that one or the other might desire to withdraw from the arrangement and did make provision therefor, but as in the case of termination of the partnership by the death of one of the partners, the interest of the withdrawing partner was not extinguished by reason of his withdrawal but provision was made whereby the partner succeeding to the rights of the other would make payment therefor according to terms agreed to in advance and contained in the partnership agreement. In short, we find no proper factual basis for a conclusion that petitioner's interest in the practice of the Fuhrman-Sumers partnership was of fixed or limited duration. To the contrary, its life was continuing and indefinite and patently it was not exhausted by being exercised.
Petitioner cites and relies on C. E. Silling, Sr., 27 T.C. 701; Peter P. Risko, 26 T.C. 485; Eleanor S. Howell, 24 T.C. 342; Raymond S. Wilkins, 7 T.C. 519, affd. 161 F.2d 830; Flynn, Harrison & Conroy, Inc., 21 B.T.A. 285. The Silling, Risko, Howell, and Wilkins cases did involve partnership interests, but the facts and circumstances in each were such that the partnership interests were definitely limited in duration or the duration could be estimated from experience with reasonable certainty and at termination would be devoid of substance. Furthermore, in the Silling case, we pointed out that ‘The general rule is that a partnership interest is a capital asset and its purchase price is not recoverable from gross income. * * * It is regarded as having an indefinite life and the recovery of its basis must await its ultimate disposition.’ The facts in the instant case bring it within the general rule and not within any of the exceptions thereto. Petitioner's partnership interest was of indefinite duration and it cannot be considered a wasting or depreciable asset. Recovery of his capital outlay must await the ultimate disposition of his partnership interest. Anderson v. United States, 232 F.2d 794; Watson v. Commissioner, 82 F.2d 345, affirming a Memorandum Opinion of this Court.
The Flynn case involved a contract which had a fixed term, and we held that the taxpayer was entitled to exhaust the cost of the contract over its remaining useful life. Since petitioner's partnership interest was of indefinite duration, the Flynn case is inapposite.
Decisions will be entered for the respondent.
+---------------------------------------------+ ¦1 ¦ ¦ ¦ +--------------------+-------------+----------¦ ¦Equipment ¦$2,973.53 ¦ ¦ +--------------------+-------------+----------¦ ¦Leasehold ¦1 16,974.00¦ ¦ +--------------------+-------------+----------¦ ¦Total Assets ¦ ¦$19,974.53¦ +--------------------+-------------+----------¦ ¦Due to Dr. Fuhrman ¦$327.67 ¦ ¦ +--------------------+-------------+----------¦ ¦Due to Dr. Friedland¦18,000.00 ¦ ¦ +--------------------+-------------+----------¦ ¦Total Liabilities ¦ ¦18,327.67 ¦ +--------------------+-------------+----------¦ ¦Net Worth ¦ ¦$1,619.86 ¦ +---------------------------------------------+