Before GOODRICH, STALEY and HASTIE, Circuit Judges.
These petitions for review of decisions of the Tax Court present the question of whether the payment of a certain proportion of partnership profits to the estate of a deceased partner was intended as part of the consideration for a sale of all of the interest of the decedent to the surviving partners or represented a partner's distributive share.
Deficiencies in the income tax of petitioners were determined as follows:
Leon R. McKelvey and Hilda E. McKelvey $11,315.98 $508.88
Robert K. Pulsifer and Dorothy Pulsifer 2,188.36 97.76
The McKelvey Motor Company was a partnership formed on February 1, 1946, and engaged in the sale of new and used cars and the servicing of automobiles in the Lakewood, New Jersey, area. Until his death on November 9, 1948, Matthew R. McKelvey held a 361/2 per cent interest in the partnership; his son, Leon R. McKelvey, held 51 per cent, and Robert K. Pulsifer owned 121/2 per cent. The partnership agreement provided that if either Leon or Pulsifer became bankrupt or died, their respective shares were required to be sold to Matthew, the value to be determined by the book value of the assets. In the event of Matthew's death, however, his legal representatives had the option of continuing as partners if they so desired. Matthew's will contained a similar provision:
"I hereby authorize and empower my Executrix to carry on and continue my share of the business of the partnership of which I am a member, conducted under the name of McKelvey Motor Company for a period to be determined by my Executrix. I further authorize my Executrix, in her discretion, may offer [sic ] my share in the aforesaid partnership to the two remaining partners, Leon R. McKelvey and Robert K. Pulsifer. The value of my said share shall be determined by the provisions of the partnership agreement relating to method of ascertaining the value of the respective shares of the partners."
Philomena McKelvey, the widow and executrix of Matthew McKelvey, was desirous of continuing as a partner in accordance with the provisions of the partnership agreement and the will. An obstacle was placed in her path by a representative of the Buick Motor Company who informed her that no franchise would be issued to a partnership in which an estate was one of the partners. The franchise from Buick which was issued to Matthew McKelvey expired October 31, 1948. Upon request by Philomena McKelvey, however, Buick agreed to continue the franchise on a temporary basis.
After the stand taken by Buick, Leon and Pulsifer began negotiations for the purchase of Philomena McKelvey's 361/2 per cent interest in the enterprise. These negotiations culminated in an agreement entered into by the parties on December 28, 1948. The agreement, contemplating the formation of a new partnership composed solely of Leon and Pulsifer, was conditioned upon the issuance of the Buick franchise to Leon, and provided in pertinent part:
"1- The party of the First Part [Philomena McKelvey] agrees to sell the interest of the Estate of Matthew R. McKelvey in and to the partnership known as 'McKelvey Motor Company', consisting of a thirty-six and one-half (361/2%) per cent interest in the said partnership, to the parties of the Second and Third Parts, on the terms and for the consideration hereinafter specified.
"2- The consideration for the sale of said interest shall be a total cash consideration of Fifty Thousand ($50,000.00) Dollars. The said Fifty Thousand Dollars shall be paid Twenty Five Thousand ($25,000.00) Dollars in cash on signing this Agreement. The said Leon R. McKelvey shall pay Sixteen Thousand Four Hundred Thirty Eight and 35/100 ($16,438.35) Dollars, and Robert K. Pulsifer shall pay Eight Thousand Five Hundred Sixty One and 65/100 ($8,561.65) Dollars, making the aforesaid total of Twenty-five Thousand Dollars.
"3- As of January 3rd, 1949 the real estate in which the said Buick Sales Agency is conducted at 202 Main Street, Lakewood, New Jersey, shall be conveyed to Philomena McKelvey, Executrix as aforesaid, and she shall in turn, lease the said premises to the said Leon R. McKelvey and Robert K. Pulsifer, (the new partnership) for the term of one year. The lease shall specify a rental of thirty-six and one-half (361/2%) per cent of the net profits of the said new partnership realized during the term of said lease. The lease shall provide a further rental consideration in that the lessee will transfer title to the lessor of a Buick Sedan, 1949, Model 56S ...