Opinion
No. 189.
February 17, 1944.
Petition to review a decision of the Tax Court of the United States.
Petition by H. Lewis Brown to review a decision of the Tax Court, 1 T.C. 760, determining a deficiency in income tax pursuant to a deficiency notice by the Commissioner of Internal Revenue.
Decision of the Tax Court affirmed.
H. Lewis Brown, of New York City, for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Helen R. Carloss, and Newton K. Fox, Sp. Assts. to the Atty. Gen., for respondent.
Before L. HAND, AUGUSTUS N. HAND, and FRANK, Circuit Judges.
Beginning in 1920, the petitioner, Brown, a lawyer, and one Burroughs, a lawyer, members of the law firm of Burroughs, Brown Kerfott, represented Southern Electro-Chemical Company, the plaintiff in a patent infringement suit. On July 2, 1923, Brown and Burroughs as successors to that law firm, entered into a partnership agreement. That agreement provided that the death of either partner should not affect a dissolution of the firm until a period of six months thereafter and that, as payment of the goodwill of the deceased partner in the partnership, his estate should, for such six months, share in the income of the firm to the same extent that he would have done if he had lived. The partnership agreement was amended on May 9, 1927 by adding the following provision: "As to work being done by the firm at the time of dissolution, whether pursuant to notice or six months after the death of one of the partners as provided in the contract, the fees and compensation for such work when and as collected shall be apportioned as follows: (1) to the firm such part thereof as will fairly represent the value of the service rendered during the existence of the firm, having in view the amount and character of such service as compared with the entire service; and (2) the rest to the partner completing the service after dissolution, or if both partners participate in the work after dissolution, then to each of them in proportion to the fair value of the service rendered by them respectively. This method of division shall be applicable whether the compensation be on a contingent basis or otherwise."
The new firm continued, from 1923 until January 25, 1929, to represent Southern Electro-Chemical in the patent suit, receiving from that client during those years a retainer principally for services in that litigation and in supervising and giving advice regarding that company's general affairs. On January 25, 1929, the partnership made a fee agreement by which it became entitled to a contingent interest in the ultimate recovery from the patent litigation; the agreement was with Alper Chemical Corporation, whose interest in the matter arose from an agreement between it and Southern Electro-Chemical as to the conduct of that litigation.
About five months later, on June 19, 1929, Burroughs died, and a bank became the executor of his estate. As surviving partner, Brown continued in the litigation for some eight years, until September 21, 1937, when the patent suit was finally settled. Pursuant to the contingent fee agreement of January 25, 1929, Brown received a fee by check for $228,068.44, payable to the order of Burroughs and Brown. He deposited the check in a bank account which he still maintained in that firm name.
On October 28, 1937, Brown sent to the executor of Burroughs' estate a check, drawn on that account, in the sum of $7,982.40, together with a letter. The letter stated that Brown had reached the conclusion that the Burroughs' estate was entitled to that amount which was 3½% of the fee; that the check represented Brown's "idea of a fair division" but was "not intended in any manner to bind" the estate, as Brown recognized that the executor was not yet sufficiently informed to form a judgment as to the correctness of Brown's conclusions; and that Brown wished to have a representative of the executor go over the pertinent files so as to be able to ascertain whether Brown's conclusion was reasonable. Negotiations then ensued in which Brown contended that the period of joint interest in the fee covered only the eleven-month period from January 25, 1929 to December 19, 1929 (the end of the six-month period following Burroughs' death), while the executor contended that the fee represented compensation for the whole period of the infringement litigation and that, therefore, the period of joint interest extended from the inception of the litigation in 1920 until December 19, 1929, a period of about ten years.
On March 10, 1938, the executor, by letter, claimed a total of $46,052.65. From this amount there was deducted the $7,982.40 which Brown in 1937 had paid the estate; the balance of the $46,052.65 or $38,069.85, was deposited in a bank in a joint account between Brown and the estate, to await a final division after agreement between the parties. On April 27, 1938, they finally agreed that the period of joint interest extended from October 15, 1925 to December 19, 1929, a period of about fifty months, and that, accordingly, the estate was entitled to the total sum of $14,995.50. Thereupon, out of the joint account, the estate received $7,013.10 (being the $14,995.50 less the $7,982.40 previously received from Brown) and the balance of that account went to Brown.
Brown made his income tax returns on a cash basis. In his return for the year 1937, filed March 15, 1938, he included as income, on account of the fee, the sum of $182,016.19, that being the full amount of the fee ($228,068.44) less the sum of $46,052.25, the amount which the executor on March 10, 1938 had claimed as the estate's share of the fee.
The Commissioner, on February 14, 1941, served Brown with a deficiency notice. The Commissioner treated the total period of joint interest in the fee between Brown and the estate as extending only from January 25, 1929 to December 15, 1929, a period of about eleven months. On a time basis, the Commissioner determined that five-elevenths of $14,995.50, or $6,816.15, was applicable to services rendered before Burroughs' death, and that six-elevenths, or $8,179.35, was applicable to services rendered during the six-months' period immediately after his death. The Commissioner included in Brown's gross taxable income for 1937 the entire fee of $228,068.44 less the sum of $6,816.15 allocated by the Commission to the period of joint interest before Burroughs' death. The deficiency in tax for 1937 the Commissioner determined to be $25,774.81.
The Tax Court, in its opinion, stated that Brown and the Commissioner agreed that any amount due the estate for the six-month period after Burroughs' death was an obligation of Brown for part of Burroughs' interest in the partnership assets and did not, therefore, constitute an item deductible from Brown's taxable gross income.
Brown, in his 1937 return, had computed his tax liability as $101,921.32 which he paid. On February 26, 1940, he filed a claim for the refund of $43,450.48 on the following ground: He was taxable in 1937 on only one-half of the total fee, or $114,034.22; the other half he had held as trustee, pending an agreement as to its allocation; as no such agreement was reached until 1938, his share of the remaining one-half (i.e., of $114,034.22) was not taxable in 1937.
On Brown's petition to the Tax Court, that Court held that the period of joint interest was fifty months; that, on that basis, of the $14,995.50 paid by Brown to the estate, $13,196.04 should be allocated to the period of joint interest before Burroughs' death, and that six-fiftieths, or $1,799.46, should be allocated to the period of joint interest after Burroughs' death; and that, accordingly, $214,872.40 (being $228,068.44 less $13,196.04) was part of Brown's gross taxable income in 1937. The case is here on Brown's petition to review the Tax Court's decision.
In the course of its opinion, the Tax Court said: "We have before us evidence as to what the division of the fee turned out to be. On April 27, 1938, an agreement was reached between petitioner and the legal representatives of the Burroughs estate under which the Burroughs estate's share of the fee was fixed at $14,995.50, and the remainder of the fee, it was agreed, belonged to petitioner. Now that we have that information at hand, it would seem proper to use it in determining petitioner's income tax liability for 1937 rather than to make some kind of a theoretical allocation of the fee between the parties when it was received in 1937, for, as we have already said, it was clear that petitioner was entitled to much more than one-half of the fee."
As the entire fee did not belong to Brown, and as he did not claim all of it, it cannot, in its entirety, be included in his taxable income for any year. But, as he received the fee in 1937, that portion of it which did then legally (or equitably) belong to him must be included in his taxable income for that year. The ascertainment of that portion required a valuation of that part of the fee which in 1937 legally (or equitably) belonged to the Burroughs estate. Since all the pertinent facts needed for that purpose were fully available in 1937, no occasion existed for postponing that valuation until a later year. An ascertainment of that value did not necessitate a settlement agreement with the estate. It follows that Brown mistakenly asserts that the year 1937 cannot "include what first became known in April 1938"; he errs in his basic premise that, beyond the amount legally (or equitably) due the estate in 1937, the fee, or any part of it, remained in trust until the parties agreed on that amount.
The fallacy of Brown's contention is illuminated by the consequences of the rule which he would have us adopt: It must have been obvious in 1937 to any reasonable person, fully acquainted with the facts, that by no possibility could the estate assert a successful claim to anything like one-half the fee. Yet Brown argues that more than one-half could become his taxable income only for that subsequent year in which by reasonable diligence, he could settle with the estate — even if such a settlement (because for instance, of the inability to consult some of the interested persons on account of the war) had not been reached, say, for a decade. Were that contention valid, Brown, in such circumstances, would, until 1947, have paid no tax on money that legally (and equitably) became his sole property in 1937, although in that interval the earnings of that money would also have been his property. Fortunately, nothing in the statute compels such an unreasonable result.
The evidence discloses no lack of diligence by Brown in his efforts to bring about a settlement. The Tax Court said that "a real dispute" existed between him and the estate during the negotiations.
Brown points to the fact that the executor reasonably felt obliged to consult beneficiaries who were widely scattered, some of them living in Mexico and Austria.
The sole issue here is whether the Tax Court erroneously determined the 1937 value of the estate's claim. On his petition to that Court, Brown had the burden of showing error in the Commissioner's determination. That Court, holding that the Commissioner had erred in part, increased the valuation of that claim. On this appeal, Brown has the burden of showing that the Tax Court's valuation is erroneous. He has not discharged that burden. He has merely argued that it was not easy to arrive at a precise valuation in 1937.
See, e.g., Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 79 L.Ed. 623; Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212.
As Brown has not shown error in the Tax Court's valuation, and especially as the Commissioner has not appealed from its decision, we need not consider whether the Tax Court, in arriving at its conclusion, properly relied upon the settlement made in 1938, after the expiration of the taxable year.
Cf. Helvering v. Gowran, 302 U.S. 238, 245, 246, 58 S.Ct. 154, 82 L.Ed. 224; Dobson v. Com'r, 64 S.Ct. 239; Corning v. Commissioner, 6 Cir., 104 F.2d 329, 333.
Affirmed.