The opinion of the court was delivered by: DICKINSON
This rule should be discharged.
The question in this cause is whether the sum claimed is due for income tax. The state of English politics following the Revolution of 1688 made current a phrase of gibberish which ran "Box it about; it will come to its father." The question here has been "boxed about." The tax in dispute was levied; paid, its return demanded; the return made, and this suit for its repayment entered. Whether the sum in dispute is lawfully due is a question of law; the facts being undisputed. Binding instructions were asked in favor of the plaintiff, and were also asked in favor of the defendant. The latter request was granted. If there was error in this, there must be a new trial, but the only result would be like binding instructions for plaintiff. An appeal is sure to be taken from any judgment entered. The practical bearing of this is that all we determine is which side shall assume the burden of appeal. This in turn means that a new trial should not be granted unless the law is clearly with the plaintiff.
Defendant's decedent was a member of a partnership. Had he lived, it may be assumed that a sum representing his share of partnership profits would have been allotted to him at the first of the year following the date of his death. At the time of his death, such allotment had not been made, although in the offing. The regular time for the closing of the books was the end of the year. The decedent died February 17, 1926. When the books were closed in December, 1926, it became known that decedent's share of the profits from the last profit-sharing date to the date of his death was the sum for which suit is brought. This sum was included in the value of his estate as principal, and death taxes paid thereon. The United States now claims it was income and taxable also as such.
The very practical fact that the United States treated the sum in controversy as principal and taxed it as such, and is now seeking to tax it again as income, gives the zealous counsel for plaintiff no concern, because they say the two taxes "are of different kinds, separately imposed on entirely different events." We think this to be in a measure true. Had the decedent received this money as income and has he died immediately thereafter, leaving it as part of his decedent's estate, the fact that it was part of the estate of which he had died possessed would not affect the other fact that it had come to him as taxable income. If the situation is reversed, the fact that the whole estate of a decedent consists of his savings out of income upon which he had paid an income tax would be no answer to a demand for the payment of an estate tax. Thus far we can follow the argument on behalf of the plaintiff. We are not so sure of our ability to follow the rest of the argument to the conclusion that the sum in dispute was taxable income, nor can we accept the soundness of its logic. This, as we understand it, as taken from their printed brief is as follows:
(1) Under the provisions of the Pennsylvania Uniform Partnership Act of March 26, 1915 (59 PS Pa. § 1 et seq.), the death of the partner ended the partnership, and it had no existence thereafter. The provision in the partnership agreement that the death of a partner should not work a dissolution of the partnership did not affect this result. The executor of the deceased partner might thereby become a member of a partnership, but it would be a new firm, not a survival of the old.
We may comment in passing that this would seem to cut against the plaintiff not in its favor. Treating the decedent and his estate as distinct entities, the thought can be followed that the share of profits paid by the firm to the estate was income to the estate from its investment in the partnership, but it surely does not follow that profits paid by the new partnership, of which the decedent was not a member, was income received by the decedent. We could understand the proposition, whether it be sound or unsound, that under the partnership agreement the firm was not dissolved, and that the partnership profits, when paid at the end of the year, was income received by the estate. This proposition, however, the argument repudiates. The effect of an acceptance of the plaintiff's proposition that the partnership was dissolved we will recur to later.
(2) A partnership is treated by the Revenue Act of 1926 (section 218 [ 26 USCA § 959]), not as a separate entity (contrary to the common concept), but as individual members, each of whom is "the agent of the other partners." The partnership in consequence does not receive any profits, but they are received by the individual members, and in further consequence, when they come to the partnership, they come to the individual members according to their respective shares therein.
If this concept be the true one, we can accept the corrollary that, the profits having been received by the partners as individuals, the fact that they did not divide up until later does not change the fact, if it be one, that they had received income.
(3) It makes no difference, however, whether the firm was dissolved or whether it was not dissolved. The decedent and the ...