On Petition for Review of the Decision of the United States Board of Tax Appeals.
Before BIGGS, MARIS, and GOODRICH, Circuit Judges.
This is a petition by Alexander J. Cassatt to review a decision of the Board of Tax Appeals sustaining a deficiency in income tax for the year 1936 determined against him by the Commissioner. The relevant facts as found by the Board may be summarized as follows:
The taxpayer was a membor of Cassatt and Company, a limited partnership, which for many years prior to 1935 engaged in the stock brokerage business in New York and Philadelphia. The firm had twelve general and two limited partners. Because of the impairment of its capital through losses it was decided in 1934 to liquidate Cassatt and Company. It had a large clientele - some 9,513 stock exchange customers were on the books on January 14, 1935. Pursuant to the decision to liquidate, Cassatt and Company on January 2, 1935, entered into a contract with E. A. Pierce and Company, another stock brokerage house, undertaking to attempt to transfer its customers to the latter. In return Pierce undertook to pay to Cassatt and Company for a six-years' period 25% of the commissions received on sales of securities to former Cassatt customers. Payments, however, were contingent under the terms of the agreement on (1) Pierce's continuation in the brokerage business and continued handling of the Cassatt accounts, neither of which it was obligated to do, (2) Cassatt and Company's abstinence from reentry into the brokerage business, and (3) compliance with rules of the security exchanges, notably those prohibiting payment of brokerage commissions to non-members of the exchange.
Pursuant to this agreement Cassatt and Company, on or about January 15, 1935, transferred its customers' accounts to Pierce and the latter retained about 95% of these customers for the six-years' period covered by the agreement. Commissions paid to Cassatt and Company under the agreement amounted to $78,706.93 in 1936.
In the early part of January, 1935, Cassatt and Company was obligated on several leases of office space for terms not expiring until 1940. The aggregate prospective rentals for these leases was $1,076,000. A settlement was effected with the various landlords whereby for $346,524.06 the leases were cancelled for the unexpired terms. Of this sum all but $121,575 was paid in January, 1935. The balance was payable before January 15, 1941.
It connection with the proposed liquidation Cassatt and Company borrowed some $160,000 from two banks. By the terms of the loan agreement the Pierce contract was assigned to a trustee who received the commissions paid thereunder charged with a duty to apply them (1) to the expenses of Cassatt and Company during the period of its liquidation not exceeding $7,500 per annum, (2) to repayment of the bank loans, (3) to payment of the balance of $121,575 owed the landlords, (4) to pay taxes, (5) to return the two limited partners' remaining investment, and (6) to pay any balance to Cassatt and Company.
The books of Cassatt and Company were kept and its income tax returns were filed on an accrual basis. On its return for 1935 the firm reported as income commissions paid under the Pierce contract of $67,133.37. No valuation of the taxpayer's rights under the Pierce contract appeared in gross income. A deduction of $69,583.30 was taken representing 120/725ths of the aggregate of the cost of terminating the leases, $346,524.06, and $73,875.02, being the unamortized cost of improvements to the leased premises surrendered. This deduction was taken on the theory that these sums of $346,524.06 and $73,875.02 should be amortized over the life of the Pierce contract ending January 15, 1941. In auditing this return the Commissioner increased the deduction of $69,583.30 by the sum of $350,815.78, which was the aggregate of the balance of the unamortized lease improvements and the money settlement with the landlords. The net loss of the firm for 1935 was thus increased to $390,398.03.
In its return for the year 1936 the firm also deducted the sum of $69,583.30, computed in the same manner and on the same theory as was the similar deduction for 1935. In its return for that year the firm likewise included in gross income the amount received in 1936 on the Pierce contract, $78,706.93. That return reflected a loss of $11,055.49.
In its return for the years 1937 to 1940, inclusive, the firm consistently continued to treat its receipts from the Pierce contract and the settlement with the landlords in cancellation of leases as it had in the years 1935 and 1936.
In auditing the 1936 return of the firm in 1938, the Commissioner disallowed the deduction of $69,583.30 because that item, as well as the balance of the cost to partnership of its cancellation of the leases, had been included by him in its return for 1935. By reason of this disallowance and other adjustments not here in question, the Commissioner changed the loss of $11,055.49, as shown on the return, to a net income of $84,967.96. He included in the gross income of each of the partners for 1936 his respective share of the firm income so computed.
From a deficiency assessment for 1936 of $875.26 so computed against him the taxpayer appealed to the Board of Tax Appeals. The Board, two members dissenting, sustained the Commissioner's action. 47 B.T.A. 400. From that decision the taxpayer has prosecuted this petition for review.
The first question for our determination is whether Cassatt and Company, the Commissioner and the Board were correct in including in the firm's income for 1936 the sum of $78,706.93 received by the firm as its share of the commissions earned by Pierce from business with former Cassatt customers in that year. We think ...