The opinion of the court was delivered by: MARSH
This is an action brought under Title 28, 1346(a)(1) of the United States Code to recover $ 5,700.47 of estate tax alleged to have been erroneously and illegally determined against the Estate of Ruth Chambers Benson, which tax has been duly paid under protest by the Estate.
Most of the facts were stipulated, are so found, and are incorporated herein by reference.
The action was originally filed against both the United States of America and A. J. Dudley, former Director of Internal Revenue for the Pittsburgh District, but was dismissed against the latter by stipulation of the parties.
The decedent died on October 2, 1951, at which time she was a member of a partnership known as 'Benson's' which was formed November 1, 1945, for the operation of a going department store business in Beaver Falls, Pennsylvania.
The partnership agreement specifically provided that it would continue for a term of 10 years, and that it would not be dissolved upon the death of any partner. It also provided that in the event of the death of any partner, no part of his capital contribution to the partnership could be withdrawn during the uncompleted term of the partnership, during which time his capital contribution would remain liable to partnership creditors. The agreement further provided that following a partner's death, his estate would be entitled to his share of partnership income as though he had lived; however, his estate would acquire no managerial right other than the right to inspect the partnership books. The estate would not be liable for partnership debts in excess of the amount of the deceased partner's capital contribution at the time of death.
Upon the decedent's death, the plaintiff was duly qualified and appointed executrix of her estate. An estate tax return was timely filed showing the decedent's interest in the partnership at $ 96,416.97 which amount consisted of the decedent's partnership capital account plus the fair market value of the decedent's fractional share of the real estate held by the partnership.
The Revenue Service initially determined that the value of the decedent's interest in the partnership as a going concern should include a valuation of $ 4,000 to cover the good-will of the partnership business. Good-will had not been included as an item in the valuation of the partnership interest returned by the estate. Accordingly, a deficiency was assessed and the estate tax collected based on this determination.
In the usual course of administration by the Internal Revenue Service, and within the period of limitation for deficiency assessments,
the agent's determination was reviewed, and the reviewers eliminated the good-will valuation, but increased the valuation of the decedent's partnership interest by adding thereto the value of the right of the estate to share in post-death partnership income for three years and ten months, the remainder of the partnership term.
The Internal Revenue Service determined the assessment value of the estate's right to share in post-death partnership income by taking the decedent's interest in average partnership earnings for the years 1946 to 1951. This average yearly income was figured by using an allowance for depreciation of the partnership building based on the book value of the building, rather than the fair market value of the building at the time of the decedent's death. The average yearly income was then multiplied by three years and ten months, the remainder of the partnership term. From that result there was deducted 10% as a discount for risks of the business, and the remainder of $ 45,338.30 was considered by the Internal Revenue Service as the fair assessment valuation of the Estate's right to post-death income and includable as such in the decedent's gross estate.
In determining the assessment valuation of the decedent's fractional interest in the partnership building, the Internal Revenue Service used the fair market value of the building at the time of decedent's death, $ 83,000, and from this amount it deducted the total depreciation for the three years and ten months which would accrue on the building before the termination date of the partnership. The Internal Revenue Service allowed this depreciation deduction because the Estate had 'no present right to the building because of the partnership agreement'.
The depreciation figure thus used was based on a 25-year life used in the partnership accounting and was calculated on the fair market value stated above. The ultimate valuation of the decedent's interest in the partnership building was $ 70,273 and this amount was included by the Internal Revenue Service in the decedent's gross estate
Finally, the Internal Revenue Service allowed a further 4% per year on the valuation of the decedent's entire partnership interest as a 'present value discount'.
There is no evidence before the court with regard to the payment of income taxes on the amounts paid out of partnership income after the decedent's death; however, plaintiff in her brief states that the Estate paid income tax on the share of post-death partnership income paid to it.
Concerning the plaintiff's first contention, it is asserted that because the capital contribution remains fully liable for partnership debts for the duration of the partnership term, it therefore had no value because there was no guarantee that the Estate would receive any income, and there was even the possibility that it would lose some of the decedent's capital contribution. The plaintiff principally relies on the cases of Bull v. United States, 1935, 295 U.S. 247, 55 S. Ct. 695, 79 L. Ed. 1421; Guggenheim v. Helvering, 2 Cir., 1941, 117 F.2d 469; Darcy v. United States, 1936, 15 F.Supp. 251, 83 Ct.Cl. 483, and In re Borden's Estate, 1916, 95 Misc. 443, 159 N.Y.S. 346, in support of her position. As is often the case, the defendant ...