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Girard Trust Co. v. United States.

decided: June 7, 1950.

GIRARD TRUST CO. ET AL.
v.
UNITED STATES.



Author: Hastie

Before BIGGS, Chief Judge, and GOODRICH and HASTIE, Circuit Judges.

HASTIE, Circuit Judge.

This controversy concerns the income tax status of the distributive share of a deceased partner in partnership profits. We are asked to decide whether, in the circumstances of this case, this distributive share must be included in the final period income tax return for the deceased partner or whether it may be included in a subsequent return of the decedent's estate.

At the time of his death, Samuel P. Kenworthy was a member of a partnership, composed of himself and three others, engaged in the business of importing and selling wool. The partnership had operated of several years under a written agreement, which provided that the firm should continue until dissolved by mutual consent on June 30 of any following year. It also provided that the death or withdrawal of any of the partners should not prevent or interfere with the continuance of the partnership business by the remaining partners, or necessitate its winding up, but rather that the interest of any deceased partner in the business should continue subject to all the risks of the operation of the business, and that the proportionate share of the deceased partner in the profits or losses would only be determined as of the following June 30.

Kenworthy filed his income tax returns on a cash and calendar year basis. He died November 15, 1942. A return filed for him after his death covered the final period from January 1, 1942 to November 15, 1942.

The partnership kept its books and filed its income tax returns on an accrual basis and on the basis of a fiscal year ending June 30. The record contains no showing or suggestion that a partnership return was filed for the period ending with the death of Samuel Kenworthy. However, as of June 30, 1943 the firm filed a return reflecting partnership income for the entire fiscal year and showing the distributive shares of the decedent and the surviving partners for that period. Consistent with that return, and in accordance with the terms of the partnership agreement, the firm paid the executors of the deceased partner a sum representing his proportionate share of profits for the entire partnership fiscal year. The partnership was formally dissolved June 30, 1943.

The executors have consented to the inclusion of the share of partnership profits thus received by them in their own income tax return as income taxable to the estate.*fn1 Earlier, however, upon the death of Samuel Kenworthy his executors had requested the firm to determine the decedent's proportionate share of the profits earned during the period July 1, 1942 to November 15, 1942. This was done and the sum so determined was reported as last period income in the final return of the decedent. Now the executors contend that this inclusion was erroneous and claim a refund for the decedent measured by the reduction of his last period tax which would result from excluding from gross income these undistributed partnership profits earned from July 1 to November 15, 1942.

The Commissioner of Internal Revenue rejected this claim.*fn2 Thereupon the executors filed the present suit for a refund of tax. The government filed a counter-claim for additional tax based on its computation of last period partnership earnings. The case was disposed of on motion and cross-motion for summary judgment. The District Court denied the refund and allowed the additional tax.

The executors found their position upon the provisions of Sections 188 and 126(a) (1) of the Internal Revenue Code, 26 U.S.C.A. §§ 188, 126(a)(1). Section 188 reads as follows:

" § 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 executors contend that the income in question was partnership income for a taxable year of the partnership which ended June 30, 1943 at a time not within the final taxable year of the decedent which ended with his death on November 15, 1942. The government claims that a partnership taxable year ended when a partner died. Decision on this issue is conclusive of the controversy on appeal. If the executors are correct in their contention that a partnership taxable year did not end until June 30, 1943, then the income in question is covered by the language of Section 126(a)(1) which requires that an executor include in the gross income of the estate of a decedent for the taxable year when received "income in respect of a decedent * * * not properly includible in respect of the taxable period in which falls the date of his death", where "the right to receive the amount is acquired by the decedent's estate from the decedent".

We think the contention of the executors is correct. We hold that under the circumstances of this case a taxable year of the partnership did not end with the death of partner Samuel Kenworthy.

The proprietors of the partnership business did all within their power to make the twelve-month period ending June 30, 1943 a partnership taxable year. The relevant parts of the articles of association have already been outlined. The document makes clear the purpose and undertaking of the partners that in the event of the death of one of them neither accounting, nor determination of distributive shares, nor winding up of the business should occur sooner than the end of the normal partnership fiscal year. Consistent with this agreement there was in fact an annual partnership accounting as of June 30 for each fiscal year including the year ending June 30, 1943. Partnership income tax returns were filed for each such year including the year ending June 30, 1943. No partnership return was filed for a period ending with the death of Samuel Kenworthy.A so-called "accounting" upon the death of Kenworthy is revealed in the record to have been no more than a response to a request of the executors of the deceased that the accountants of the firm determine what his ...


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