Commissioner of Internal Revenue v. Goldberger's Estate. Trounstine v. Commissioner of Internal Revenue, 213 F.2d 78, 3rd Cir. (1954)
Commissioner of Internal Revenue v. Goldberger's Estate. Trounstine v. Commissioner of Internal Revenue, 213 F.2d 78, 3rd Cir. (1954)
Commissioner of Internal Revenue v. Goldberger's Estate. Trounstine v. Commissioner of Internal Revenue, 213 F.2d 78, 3rd Cir. (1954)
2d 78
54-1 USTC P 9359
The facts were stipulated and were found accordingly by the Tax Court.
In 1933 Goldberger entered into a joint venture with Bauer, Pogue & Co., Inc.,
In 1933 Goldberger entered into a joint venture with Bauer, Pogue & Co., Inc.,
a brokerage company, and George E. Tribble. The purpose of the venture was
to trade in the stock of Fidelio Brewery, Inc. Each of the venturers contributed
to substantial number of Fidelio shares, and Bauer, Pogue & Co., Inc., were the
managers of the trading account. By the terms of the agreement, Goldberger
was to receive 50/115ths of the net profits of the venture, which was active
from June 8 to August 2, 1933. In September of that year, an accounting was
rendered to Goldberger which showed that his share of the net profits of the
venture was $71,847.58. This sum was paid to him. He died in 1936, believing
that the accounting rendered in 1933 was correct. In 1939 his executrix,
petitioner Trounstine, discovered that Bauer, Pogue & Co., Inc., had not dealt
honestly with Goldberger in 1933. Trounstine brought suit in New York against
Bauer, Pogue & Co., Inc., and Bauer, individually for an accounting of the joint
venture profits. Following removal of the suit, the district court found that,
during the operation of the joint venture and in violation of its terms, Bauer,
Pogue & Co., Inc., and Bauer and Pogue, individually, secretly traded in Fidelio
shares and failed to account to Goldberger for the profits of those sales. After
an accounting before a special master, the court found that in addition to the
sum paid to Goldberger in 1933, he should have received $60,163.73. Final
judgment was then entered in favor of the estate.2 In 1944 the estate received, in
satisfaction of the judgment, $108,453.59, which included the $60,163.73
which Goldberger should have received in 1933, plus interest from August 11,
1933, and costs and disbursements. Expenses of the litigation amounted to
$64,855.02, leaving a net recovery of $43,598.67.
Petitioner Trounstine is Goldberger's widow and the executrix of his estate. His
will left his entire residuary estate in trust for his widow. The trustees were to
pay to her all income from the res (with an irrelevant exception), and, if any
year's income was less than $12,000, a sufficient amount from corpus to make a
total annual payment of $12,000. Prior to receipt of the proceeds of the
judgment, Goldberger's entire residuary estate, aggregating $79,272.61, had
been paid over to her as trust beneficiary. The net recovery was deposited in an
account maintained by her as ancillary executrix between December, 1944, and
February, 1945. Between February and May of 1945, that amount was
transferred to her domiciliary executrix account, and was transferred to her,
individually, between March and May of 1945.
The estate did not file a return for 1944, and Trounstine's 1944 return, did not
report any of the amount received on the recovery. The Commissioner assessed
deficiencies against both the estate and Trounstine and 25 per cent penalty
against the estate for failure to file a return. On petitions for redetermination the
Tax Court held that the recovery was gross income to the estate in 1944 but that
it was entitled to deduct the litigation expenses and the net amount of the
The Revenue Act of 1932 governs this phase of the case. Its Section 1111(a)
(3)3 includes a joint venture within the meaning of the term 'partnership.' Thus,
for simplicity's sake, we will use partnership language here. That Act treated
the firm and the individual partners substantially as does the present Code. That
is, for income tax purposes, the common law, aggregate theory prevailed. The
firm was not a taxable entity; its return was informational only. Sections 181
and 189. Its net income was computed, except as to the deduction for charitable
contributions, in the same manner as that of an individual. Section 183. The tax
was imposed upon the individual partner, who must include in computing his
net income, his distributive share of the firm's net income, whether or not
distributed to him.4 That is the determinative point here. The joint venture
made certain profits in 1933, but Goldberger did not receive his entire share. By
the express words of Section 182(a), however, that nonreceipt makes no
difference, taxwise. Once the joint venture realized net income, Goldberger
became taxable upon his distributive share, in spite of the fact that he did not
actually receive it in that year. This court so decided in First Mechanics Bank v.
Commissioner of Internal Revenue, 3 Cir., 1937, 91 F.2d 275, on facts which
are on all fours with those of this case. There, the petitioner's decedent was a
member of a joint venture which realized income in 1916. A dispute arose
between the venturers, and the decedent did not receive any of his share until
1928, and that in a compromise amount, pending appeal from a judgment in his
favor. This court held that the decedent had realized taxable income in 1916 in
the full amount of his distributive share. That holding governs here. Moreover,
in Stoumen v. Commissioner of Internal Revenue, 3 Cir., 1953, 208, F.2d 903,
we held that a partner was taxable, in the year of realization by the firm, upon
his full distributive share of the firm's net income even though he received very
little of his share and was wholly unaware of its existence. On the record in that
case, there was every reason to believe that he never would receive his full
distributive share. The footnote contains some of the many cases applying the
rule of Section 182(a) in a variety of factual settings.5
8
But, says that Commissioner, all that Goldberger had in 1933 was an inchoate,
contingent claim, which is not income. The leading case of United States v.
Safety Car Heating & Lighting Co., 1936, 297 U.S. 88, 56 S.Ct. 353, 80 L.Ed.
500, is relied upon. We think that case and its progeny inapplicable here for the
same reason this court held it inapplicable in First Mechanics Bank, supra, 91
F.2d at page 279-280. The Safety Car Heating case did not involve a
partnership or joint venture. Here, the profits were realized by the joint venture
in 1933. There was nothing conditional or contingent about their receipt. They
were earned and paid in 1933. Goldberger, therefore, was legally entitled to his
share of those profits and was taxable on that share although he did not actually
receive it in that year. The statute made his nonreceipt irrelevant. The fact that
he was deceived and was ignorant of the full extent of the gain did not change
the fact that profits had been received in 1933 by the joint venture, and his
share was income taxable to him in that year.
Swastika Oil & Gas Co., v. Commissioner of Internal Revenue, 6 Cir., 1941,
123 F.2d 382, certiorari denied 1942, 317 U.S. 639, 63 S.Ct. 30, 87 L.Ed. 515,
and Parr v. Scofield, 5 Cir., 1950, 185 F.2d 535, certiorari denied 1951, 340
U.S. 951, 71 S.Ct. 571, 95 L.Ed. 686, relied upon by the Commissioner, do not
bear on this case. In those cases there was no partnership or joint venture.
10
Finally, we think the Commissioner distorts the nature of the 1944 judgment.
He argues that what the estate recovered in 1944 never became joint-venture
profits in 1933 but were the profits of the individual wrongdoers, made in
breach of their fiduciary duty. The opinion and findings of fact in the 1944
action, which are part of the stipulated facts here, and the Tax Court's opinion
show, however, that joint-venture profits, made in 1933 but wrongfully
withheld from Goldberger in that year, are exactly what the estate recovered in
1944. The fact of their nonappearance on the books of the venture, if it is a fact,
is not determinative here, for book entries are 'no more than evidential, being
neither indispensable nor conclusive.' Doyle v. Mitchell Brothers Co., 1918,
247 U.S. 179, 187, 38 S.Ct. 467, 62 L.Ed. 1054; Northwestern States Portland
Cement Co. v. Huston, 8 Cir., 1942, 126 F.2d 196, 199; Commissioner of
Internal Revenue v. North Jersey Title Ins. Co., 3 Cir., 1935, 79 F.2d 492.
11
Having been so recently convinced in the Stoumen case, supra, that Section 182
required that the taxpayer lose there, we remain convinced that that section
requires that the taxpayers win here. The Commissioner's brief in that case
presents a compelling argument in the taxpayers' favor here. Thus, although
there may be no requirement that the Commissioner argue consistently from
case to case, we must decide consistently, so far as we are able. We hold that
$60,163.73, the principal amount of the 1944 judgment, was not taxable income
to the estate or Trounstine in 1944 but was income to Goldberger in 1933.
12
13
14
The Tax Court held that the net recovery was currently distributable to
Trounstine as trust beneficiary and that it was, therefore, deductible by the
estate and taxable to Troustine under Section 162(b).10 We think, however, that
that view not only ignores Goldberger's will but rewrites it. By his will nothing
was currently distributable by his estate, in any year. The residue of his estate
was left in trust. But how determine what is residuary until the executor pays
the taxes, debts, expenses of administration, and specific legacies? Thus, the
only duty on the executrix was to turn over to the trustees what was finally
found to be residuary. Whatever that amount would be, it would be turned over
by the estate and received by the trust as corpus. Only in the hands of the
trustees was anything currently distributable to the trust beneficiary. The only
year involved here is 1944. In that year Trounstine received the total recovery
but in her capacity as executrix and in the exercise of her duty to gather the
assets of the estate. Consequently, in 1944, the fund did not get into position to
be currently distributable to the trust beneficiary, and in any event, Troustine
would be taxable only upon the amount properly paid or credited out of income
of the trust to her as beneficiary.11 But in 1944 nothing was so paid or credited
to her. Thus, she had no taxable income in 1944. Smith's Estate v.
Commissioner of Internal Revenue, 6 Cir., 1948, 168 F.2d 431; Estate of
Bruner, 1944, 3 T.C. 1051; Buckner, 1941, 45 B.T.A. 544. There is no
intimation here that the administration of this estate was unduly or
unreasonably delayed, as was the case of Chick v. Commissioner of Internal
Revenue, 1946, 7 T.C. 1414, affirmed 1 Cir., 166 F.2d 337, certiorari denied
1948, 334 U.S. 845, 68 S.Ct. 1514, 92 L.Ed. 1769; on the contrary, it was well
within the period contemplated by Treasury Regulation 111, Section 29.1621(i). 26 Code Fed.Regs. 29.162-1(i) (1949). In the Chick case, the Tax Court
and the Court of Appeals upheld the action of the Commissioner in
disregarding, for tax purposes, the estate entity and considered the income of
the estate as income of the trust.
15
16
We hold that there was no deficiency against either the estate or Trounstine for
1944. The decision of the Tax Court in No. 11,077, entered December 4, 1952,
will be affirmed. The decision of the Tax Court in No. 11,110, entered January
19, 1953, will be reversed.
'(a) General Rule.-- There shall be included in computing his distributive share,
whether distributed or not, of the net income of the partnership for the taxable
year. * * *' Ibid.
5
Heiner v. Mellon, 1938, 304 U.S. 271, 58 S.Ct. 926, 82 L.Ed. 1337; Neil v.
United States, 9 Cir., 1953, 205 F.2d 121; Caldwell v. United States, 7 Cir.,
1939, 102 F.2d 607; Bourne v. Commissioner of Internal Revenue, 4 Cir., 62
F.2d 648, certiorari denied 1933, 290 U.S. 650, 54 S.Ct. 67, 78 L.Ed. 1048;
DeCousser, 1951, 16 T.C. 65; Halkias, 1949, 12 T.C. 1091; Freudmann, 1948,
10 T.C. 775; Hoffman, 1943, 2 T.C. 1160, 1174, affirmed sub nom. Giannini v.
Commissioner of Internal Revenue, 9 Cir., 148 F.2d 285, certiorari denied
1945, 326 U.S. 730, 66 S.Ct. 38, 90 L.Ed. 434; Byrd, 1935, 32 B.T.A. 568;
Bartlett, 1933, 28 B.T.A. 285, affirmed 4 Cir., 1934, 71 F.2d 601; Steffey,
1931, 23 B.T.A. 1295 affirmed 8 Cir., 56 F.2d 917, certiorari denied 1932, 287
U.S. 606, 53 S.Ct. 10, 77 L.Ed. 527; West, 1928, 12 B.T.A. 725; Faesy, 1925, 1
B.T.A. 350; Truempy, 1925, 1 B.T.A. 349
'Sec. 23. Deductions from gross income. In computing net income there shall be
allowed as deductions:
'(a) Expenses
'(2) Non-trade or non-business expenses. In the case of an individual, all the
ordinary and necessary expenses paid or incurred during the taxable year for
the production or collection of income, or for the management, conservation, or
maintenance of property held for the production of income.' 26 U.S.C.A.
23(a)(2) (1952).
T.D. 5513, Int.Rev.Bull. 1946-11, p.3. The amendment was made retroactive
10
11