Opinion
Docket Nos. 701 703 704.
1946-06-24
MARY D. WALSH (MRS. F. HOWARD WALSH), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WM. FLEMING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WM. FLEMING, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harry C. Weeks, Esq., for the petitioners. J. Marvin Kelley, Esq., and John W. Alexander, Esq., for the respondent.
Petitioner Mary D. Walsh reported on a calendar year basis. Her husband was a member of a partnership which reported on the basis of a fiscal year ending May 31. Petitioner and her husband returned their income in accordance with the community property law of Texas. One Elliott was also a member of this partnership until his death on July 7, 1939. Held, the respondent erred in including in petitioner's income for the calendar year 1939 and in excluding from petitioner's income for the calendar year 1940, any part of the income of the partnership for the period beginning June 1, 1939, and ending July 7, 1939; held, further, the ‘taxable year of the partnership‘ as that phrase is used in section 188, I.R.C., as far as the surviving partners are concerned, was not affected by Elliott's death, and, therefore, such ‘taxable year‘ began June 1, 1939, and ended May 31, 1940. Harry C. Weeks, Esq., for the petitioners. J. Marvin Kelley, Esq., and John W. Alexander, Esq., for the respondent.
These consolidated proceedings involve deficiencies in income tax in amounts and for taxable years as follows:
+--------------------------------------------------------------------+ ¦Petitioner ¦Docket No.¦Taxable year ¦Deficiency¦ +--------------------+----------+-------------------------+----------¦ ¦Mary D. Walsh ¦701 ¦Calendar 1939 ¦$484.10 ¦ +--------------------+----------+-------------------------+----------¦ ¦Mary D. Walsh ¦701 ¦Calendar 1940 ¦2,209.98 ¦ +--------------------+----------+-------------------------+----------¦ ¦Wm. Fleming ¦703 ¦Calendar 1939 ¦10,854.93 ¦ +--------------------+----------+-------------------------+----------¦ ¦Wm. Fleming ¦703 ¦Calendar 1940 ¦8,697.59 ¦ +--------------------+----------+-------------------------+----------¦ ¦Wm. Fleming, Trustee¦704 ¦Fiscal year ended 8/31/39¦12,241.50 ¦ +--------------------------------------------------------------------+
In a joint motion ‘The parties have effected a settlement of all issues involved in Docket Nos. 701, 703 and 704, with the exception of one issue, common to all cases.‘ That one issue is whether the respondent erred in determining petitioners' (except Wm. Fleming) share of the income of two partnerships known respectively as Hardesty-Elliott Oil Co. and Elliott-Walsh Oil Co. R. A. Elliot was a member of these partnerships until his death on July 7, 1939, and the issue turns on what effect, if any, his death had on the determination of petitioners' (except Wm. Fleming) share of the income of the two partnerships. The parties have also agreed that for 1939 Wm. Fleming should report one-half of the income of Wm. Fleming, Trustee, for the fiscal year ended August 31, 1939. Wm. Fleming was not a partner in either partnership. Effect will be given under Rule 50 to the issues agreed upon.
FINDINGS OF FACT.
Petitioners Mary D. Walsh and Wm. Fleming are individuals who reside in Fort Worth, Texas. Mary D. Walsh is the wife of F. Howard Walsh and the daughter of Fleming. Petitioner Wm. Fleming, Trustee, is a trust of which Fleming is the sole trustee. The trust was created in 1933 for the benefit of Mary D. Fleming, now Mrs. F. Howard Walsh. The trust has its principal office in Fort Worth, Texas. The returns of all three petitioners for the taxable years here involved were all filed with the collector for the second collection district of Texas at Dallas, Texas. Petitioners Mary D. Walsh and Fleming filed on the calendar year basis. Petitioner Wm. Fleming, Trustee, filed on the basis of a fiscal year ending August 31. All three petitioners kept their books and made their returns on the cash receipts and disbursements basis.
The partnership of Hardesty-Elliott Oil Co. was composed of Wm. Fleming, Trustee, Wm. Fleming Trustee No. 2, and R. A. Elliott, and it reported its income on a calendar year basis. The beneficiaries of Wm. Fleming Trustee No. 2 were Mary D. Walsh and Elliott.
The partnership of Elliott-Walsh Oil Co. was composed of Wm. Fleming, Trustee, Elliott, and F. Howard Walsh, and reported its income on the basis of a fiscal year ending May 31.
Both partnerships were formed by verbal agreement. The business of both partnerships was drilling oil wells and producing and selling oil and gas. Fleming in his individual capacity was not a partner in either partnership. Both partnerships kept their books and made their tax returns upon the basis of cash receipts and disbursements.
Elliott died on July 7, 1939. He was survived by his wife and three minor children. The executors of his estate were his wife and his wife's brother, Cecil Tolvert.
The verbal partnership agreements contained no provisions as to what was to happen in the case of the death of a partner.
Fleming operated both partnerships before the death of Elliot and thereafter continued to operate the business previously conducted by the partnerships, without consulting the heirs or executors of Elliott. After Elliott's death, Fleming, as manager, did not buy any new property or drill any new wells for others, but continued to operate what the partnerships owned at the time Elliott died. Debts of both firms existing at the date of Elliott's death were paid off after his death out of subsequent operations. The assets of the two partnerships were not distributed between the date of Elliott's death and the close of 1939.
In determining the deficiency for the fiscal year ended August 31, 1939, of Wm. Fleming, Trustee, the respondent included its distributive share of the income of Hardesty-Elliott Oil Co. for the period from January 1 to July 7, 1939, and also its distributive share of the income of Elliott-Walsh Oil Co. from June 1 to July 7, 1939, in addition to its share of each partnership's income for the preceding partnership taxable year.
In determining the deficiency of Mary D. Walsh for the calendar year 1939, the respondent included in the community income of her husband and herself their distributive share of the income of Elliott-Walsh Oil Co. from June 1 to July 7, 1939, in addition to their share of partnership income for the preceding partnership taxable year.
In determining the deficiency of Mary D. Walsh for the calendar year 1940, the respondent excluded from the community income of her husband and herself their distributive share of the income of Elliott-Walsh Oil Co. from June 1 to July 7, 1939.
OPINION.
BLACK, Judge:
There is one issue remaining to be decided in these proceedings: Does the death of a partner in a partnership cut short the ‘taxable year of the partnership‘ as that phrase is used in section 188 of the Internal Revenue Code,
as far as the surviving partners are concerned? As indicative and controlling for all, we may consider specifically only petitioner Mary D. Walsh, hereinafter sometimes referred to as ‘petitioner,‘ and the partnership of which her husband was a member, the Elliott-Walsh Oil Co., hereinafter sometimes referred to as the partnership. Petitioner and her husband returned their income in accordance with the community property law of Texas. Petitioner filed her return on the calendar year basis and the partnership filed its return on the basis of a fiscal year ending May 31. In petitioner's return for the calendar year 1939 she included her share of the partnership's income for the fiscal year ended May 31, 1939. This was proper and in accordance with section 188, supra, and there is no question here concerning such income. In petitioner's return for the calendar year 1940 she included her share of the partnership's income for the fiscal year ended May 31, 1940. Petitioner contends that this was proper and in accordance with section 188. The respondent contends that, because of Elliott's death on July 7, 1939, the ‘taxable year of the partnership‘ referred to in section 188 that would have normally ended on May 31, 1940, was cut short and in fact and in law ended on July 7, 1939; that this ‘taxable year of the partnership‘ which began on June 1, 1939, and ended on July 7, 1939, was within petitioner's taxable calendar year 1939; and that petitioner's share of the income of the partnership for this short ‘taxable year‘ should also be included in petitioner's return for her taxable year ended December 31, 1939. The parties are in entire agreement upon the figures necessary for a determination of income upon either petitioner's theory or respondent's theory, and they agree that they will be supplied in the computation to be had under Rule 50.
SEC. 188. DIFFERENT TAXABLE YEARS OF PARTNER AND PARTNERSHIP.If the taxable year of a partner is different from that of the partnership, the inclusions with respect to the net income of the partnership, in computing the net income of the partner for his taxable year, shall be based upon the net income of the partnership for any taxable year of the partnership (whether beginning on, before, or after January 1, 1939) ending within or with the taxable year of the partner.
The respondent relies upon Guaranty Trust Co. of New York v. Commissioner, 303 U.S. 493. That decision is not controlling here. If Elliott had also filed on the calendar year basis, the respondent's contention herein, as far as Elliott's tax liability would be concerned, would be in accord with the holding of the Supreme Court in the Guaranty Trust Co. case. We express no opinion as to what effect section 134 of the Revenue Act of 1942 might have on the determination of Elliott's final tax liability, as his case is not before us. Because of the necessity of the situation, there are special rules for determining the income in respect of decedents that do not apply to living taxpayers. The Supreme Court recognized this in the case of another decedent who was also a member of a partnership at the time of his death in the case of Helvering v. Enright's Estate, 312 U.S. 636, wherein the Supreme Court in footnote 9 said ‘We do not consider or decide whether this accounting for a fractional year may affect the individual returns of surviving partners. ‘ Petitioner's husband herein is a surviving partner.
Both petitioner and respondent agree that Elliott's death dissolved the partnership.
The partners here had no agreement to the contrary. The respondent in his brief states his position as follows:
In Johnson v. Smith, 35 S.W.(2d) 798, the Court of Civil Appeals of Texas said: ‘The law is well settled that the death of one partner, in the absence of an express agreement to the contrary, dissolves the partnership. 20 R.C.L. 989; 47 C.J. 1040; Roberts v. Nunn (Tex. Civ. App.) 169 S.W. 1086.‘
After the death of R. A. Elliott, Hardesty-Elliott Oil Company and Elliott-Walsh Oil Company continued to do business. It is the respondent's position that such continuance was by new and distinct co-partnerships, and not by the same business entities for the purpose of liquidation.
The evidence here is clear that after Elliott's death there were no new partnerships created. Although the old partnerships were dissolved by Elliott's death, they were not terminated. Dial v. Martin (Tex. Civ. App.) 37 S.W.(2d) 166, 177. The business being conducted by the partnerships had to be wound up by the surviving partners and an accounting made to the heirs and personal representatives of the deceased partner. Dial v. Martin, supra. In that case the court, among other things, said:
Where a partnership is dissolved by the death of one of the parents, the surviving partner or partners have the right, and, moreover, it is their duty, to wind up the firm's business, and he is, in the eyes of the law, a trustee of the firm assets for that purpose, and as such trustee is entitled to the exclusive possession of all firm assets. Gaut v. Reed Bros. & Co., 24 Tex. 46, 76 Am.Dec. 94; Crescent Ins. Co. v. Camp, 64 Tex. 521; Shivel & Stewart v. Greer Bros., 58 Tex.Civ.App. 115, 123, S.W. 207; Amarillo National Bank v. Harrell (Tex. Civ. App.), 159 S.W. 858; Roberts v. Nunn (Tex. Civ. App.) 169 S.W. 1086.
Unless the articles of partnership provide otherwise, the surviving partner must proceed at once to wind up the partnership affairs, because there can be only a limited continuance of the business and that for the sole purpose of winding it up. He must wind it up within a reasonable time and account to the heirs and personal representatives of his business associate for any surplus remaining in his hands after the payment of the partnership debts, and, to enable him to effectively wind up the affairs of the partnership, he is entitled to quiet and exclusive possession of all of the firm assets.
To the same effect as above is Heiner v. Mellon, 304 U.S. 271. This case was decided by the Supreme Court some forty-eight days after it decided Guaranty Trust Co. of New York, supra, and in our opinion, throws more light on the issue which we have here to decide than does the Guaranty Trust Co. case. In Heiner v. Mellon, supra, A. W. Mellon, R. B. Mellon, and H. C. Frick owned all the stock of two distilling corporations; in 1918 these corporations were dissolved and the assets transferred to A. Overholt & Co. and West Overton Distilling Co., partnerships in which the three individuals were equal partners, for the purposes of liquidation. Frick died December 2, 1919, but the Mellons continued the businesses and kept the books for 1920 and subsequent years in the same manner as prior to Frick's death. In the 1920 partnership returns it appeared that the partnerships had made substantial profits from the sale of whiskey, but the Mellons in their individual returns included no part of this profit upon the theory that such income was not taxable income, due to the fact that the partnerships were liquidating. The Court said in part:
The fact that the partnerships had been dissolved by Frick's death before 1920 does not affect the liability of the Mellons as surviving partners for income taxes on their distributive shares of the net profits made in that year. Compare Rossmoore v. Anderson * * * 67 F.2d 1009; Rossmoore v. Commissioner, 2 Cir., 76 F.2d 520. The business of A. Overholt & Company did not terminate on Frick's death. Although dissolved, the partnerships and the business continued, since, as stated in the Pennsylvania Uniform Partnership Act: ‘On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. ‘ Throughout the year 1920, the business of selling stock on hand and deriving income therefrom was carried on precisely as it had been theretofore, and for the same purpose. Article 424 of Regulations 45 recognizes that even in the hands of a receiver a partnership must file a return.
It will be noted that the Supreme Court expressly distinguished between the dissolution and termination of a partnership, in so far as surviving partners are concerned, and in so doing approved the Rossmoore cases, 1 Fed.Supp., 35; affd., 67 Fed.(2d) 1009; 76 Fed.(2d) 520. These cases are authority for the propositions that dissolution of a partnership does not terminate it where liquidation is continued and that a partner remains liable for income taxes on his distributive share of the partnership income after dissolution.
In the instant proceedings there was no distribution of assets between the date of Elliott's death and the close of the calendar year 1939. We think the evidence shows that the business of the old partnerships was being wound up and liquidated in accordance with the Texas laws, and there is no evidence to the contrary.
In C. A. Tooke, 17 B.T.A. 690, and J. E. Reynolds, 17 B.T.A. 693, petitioners were equal partners in two partnerships having a fiscal year ending March 31. The partners reported on a calendar year basis. On September 30, 1922, both partnerships were dissolved and their combined business was incorporated in one corporation, the stock of which was issued to petitioners Tooke and Reynolds. In those cases the respondent contended that the last taxable year of the partnerships ended on September 30, 1922, and that the partners should include in their taxable income for the calendar year 1922 the income of the partnerships for the full fiscal year ended March 31, 1922, and also for the six-month period beginning April 1 and ending September 30, 1922. We held that the accounting period of the dissolved partnerships continued until March 31, 1923, and that the income of the partners from the partnerships for the period April 1 to September 30, 1922, should be reported in the returns of the partners for the calendar year 1923. The respondent acquiesced in both of those decisions. Cumulative Bulletin IX-1, pp. 46 and 54. The respondent in his reply brief says the Tooke and Reynolds cases are ‘irrelevant‘ because ‘There was no continuation of business by surviving partners after the death of one partner * * * .‘ We do not think this is a valid distinction. We do not think it makes any difference, as far as the present issues is concerned, whether the old partnerships are dissolved by agreement of the partners or by the death of one of the partners. In either case the partnerships stand dissolved. We think the Tooke and Reynolds cases are controlling in the instant proceedings.
We, therefore, hold that the respondent erred in including in the income of Mary D. Walsh for the calendar year 1939 and in excluding from her income for the calendar year 1940 any part of the income of the Elliott-Walsh Oil Co. for the period from June 1 to July 7, 1939, and in including in the income of Wm. Fleming, Trustee, for the fiscal year ended August 31, 1939, any part of the income of the Elliott-Walsh Oil Co. for the period from June 1 to July 7, 1939, or any part of the income of the Hardesty-Elliott Oil Co. for the period from January 1 to July 7, 1939. As previously stated, the parties have agreed that for 1939 Fleming should report one-half of the income of Wm. Fleming, Trustee, for the fiscal year ended August 31, 1939.
Decisions will be entered under Rule 50.