the last dividend. When his share of the next dividend was received, it would be income, and would belong to the assignor of the stock as soon as it came to the hands of the new stockholder who would receive it to his use. It would not follow, however, that it would be taxable as income received as of the date he assigned his stock.
The fallacy which underlies the whole argument is that the nature of what a thing is can be changed by changing the name by which you choose to call it; in other words, anything can be made income by the simple expedient of calling it by that name. The underlying inquiry is, What is an interest in a partnership? It is nothing more nor less than the right to call upon the copartners for an accounting. The sole right of the representative of a deceased partner is to call upon the surviving partners to account for the assets of the partnership in their hands. There might have been gains or losses, and almost surely both gains and losses, with a net result one way or the other. A balance could be struck in favor of or against the deceased partner. If in his favor, it might be made up of the accumulations of undistributed profits for many years. It might develop that the profits of the last year's business made up the whole balance; the business up to the last year showing in the red. In the settlement of the decedent's estate, his interest in the partnership would be inventoried at its appraised value. His executor would be chargeable with what he received for it. The question is whether the decedent's estate would in either of the events we have instanced be chargeable with an income tax on the sum eventually received from the partnership as income received by him. That it was part of his estate, and taxable as such, could readily be found, but that what the value of his partnership interest turned out to be was income which the decedent had received and upon which he owed an income tax is a thought difficult to grasp. The argument advanced to support the thought is that it is income, because the taxing act of 1926 calls it income and taxes it as such. We cannot find this in the act, and it emphatically is not in the regulations. They express the contrary thought. Furthermore, a law which imposes a tax on income imposes no tax on what is not income, and the interest of a deceased partner in a firm, while it is part of his estate, is not taxable income within the meaning of the income tax laws, nor is any part of it.
The argument that it is taxable income would seem to be based upon the concept that the profits accruing to the partnership are received by the partners per diem et die as they accrue, and ergo his share is received by each partner much as if paid over to his agent for his use.
We accept the proposition that profits, if paid to an authorized agent, are received by the principal as if paid to him, but we must reject the concept upon which the application of the proposition is based. A partnership is an entity. It may have received gains, but those gains (or his proportionate share of them) do not become income to the individual partner until set apart to, and received by, him. Before that they are income to the partnership but not income to the individual partners. If the partnership is dissolved by the death of a partner, the sole right of the estate of the deceased partner, as we have already said, is to require the surviving partners to account for the share of the decedent in the partnership assets. That share is part of his estate, but is assuredly not income.
It only remains to check up the conclusions indicated by reference to the adjudged cases upon which plaintiff relies. First Trust Co. of Omaha v. United States (Ct. Cl.) 1 F. Supp. 900.
This case was ruled upon the doctrine that a partner's share in partnership profits is taxable income whether actually received or not. Profits had been made by the partnership for the year of the death. Decedent's interest in the partnership was bequeathed to a son. The bequest did not include the decedent's share of the profits. These were subsequently apportioned to the date of decedent's death and paid to the estate. The question was whether these profits should have been included in the income tax return of the decedent for the year of his death. It was held that they should.
The case is near the line of the instant case, but is clearly to be distinguished. The analogue is that of a partner who assigns his interest in the partnership, reserving his share to date of earned profits. What he gets may be said to be income because he has a right to it only as income. Such is not the instant case.
In Darcy v. Commissioner (C.C.A.) 66 F.2d 581, the like distinction can be made. There the yearly income of the partner was measured by the partnership profits for the whole of the year of the death. It was given to him as profits and was received as profits, and hence might be said to be income. The distinction made is admittedly tenuous, but is a real one.
Accepting the doctrine that a partner's share of partnership profits is taxable income whether distributed or not, the share of profits may be said to be income because it is income. When, however, a partner's share in a dissolved partnership is ascertained by the difference between what is realized from its assets and the sum of its debts, how can such a balance be held to be income?
The whole argument may be summed up in this very narrow distinction. If a sum of money comes to a decedent's estate from a partnership of which the decedent was a member as money to which the decedent in his lifetime had a right as income, it is income upon which a tax may be assessed against the decedent's estate precisely as it might have been assessed against him had he lived. If, however, the sum received represents the share of the decedent in the assets of the partnership, it is principal, and no part of it is made income to the decedent by the mere fact that included in the assets were moneys which came to the firm as profits. To express this thought in the concrete, if the partnership had made profits his share in which was demandable by a partner, such sum would be income to the individual partner, but, if the firm was dissolved, then the share of each partner in the net assets would not be income to him, notwithstanding the fact that the assets included what were profits to the firm.
The rule for a new trial is discharged, and the usual judgment may be entered on the verdict.
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