Appeal from the Board of Tax Appeals.
Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The petitioner Munson was a bond and stock broker from 1915 to December 31, 1928. On July 1, 1925, he and one Adrian agreed in writing to form a partnership "for the transaction of the business of brokers and dealers in stocks, bonds and other securities, under the firm name of Munson & Adrian" and to divide all profits and losses equally. While there was no provision in the agreement for a capital contribution by Munson he contributed $50,000 in cash plus certain securities. By 1928 his capital contributions had increased to $100,000. He also furnished about 98% of the customers. Adrian contributed to the partnership a seat on the New York Stock Exchange which he had purchased for $96,000 in 1924. It was of like value at the time when the partnership was formed and was so set up on the books of the firm. Either partner could terminate the agreement by giving ten days' notice in writing to the other.
It was provided in the articles of partnership that the Stock Exchange seat of Adrian should be carried on the firm books at $96,000 but that in the event of dissolution such membership should be "sold or retained" by him "at his option"; that if sold, the gain or loss, being the difference between the sale price and the cost value, should be apportioned between the partners; that if retained by Adrian the difference between the liquidating value and the cost value should be equally divided between the parties, and that, if the liquidating value should "show a substantial profit", Adrian might discharge his obligation to Munson by annual payments of $10,000 plus interest.
To comply with regulations of the Stock Exchange the parties, on November 1, 1927, entered into a supplemental agreement which confirmed the original partnership articles and provided in addition that Adrian "by contributing the use of his membership in the New York Stock Exchange * * * expressly agrees that in so far as it is necessary for the protection of the creditors of said partnership said membership shall be an asset of said partnership."
On June 12, 1928, Munson and Adrian entered into an agreement to terminate the partnership at the end of the month which provided that " with reference to the New York Stock Exchange membership of the party of the second part (Adrian) the liquidating value" was to be determined by the sale price of other Stock Exchange memberships. By the agreement Adrian elected to retain his membership, acknowledged "his personal indebtedness" to Munson in a sum equal to 50 per cent of the difference between $96,000 and the liquidating value of the membership and agreed "to pay and satisfy the * * * indebtedness" in annual instalments of $10,000 each with interest.
Munson's one-half of the increment in value of the membership amounted to $130.750. Accordingly Adrian paid him $10,000 in each of the years 1928 and 1929 and the balance, or $110,750, in 1930.
In Munson's 1928 return, which was made on a cash basis, he included his share of the firm profits realizedd from sources other than the Exchange membership, but did not include the $10,000 of profit thereon received from Adrian that year because counsel had advised him that his profit on the membership was not taxable until he had received the full amount of $130,750.The Commissioner thereafter, with the consent of Munson, assessed the $10,000 paid in 1928 as part of the income for that year and an additional tax of $1,745.59 was paid therefor.He included the $10,000 received in 1929 in his return for 1929. He likewise included the $110,750 paid in 1930 in his return for 1930, less $2,500 paid as counsel fees, namely, $108,250 and paid a tax on it as capital gain at 12 1/2%.In his return for that year was the following statement:
"In setting the affairs of Munson & Adrian, members of the New York Stock Exchange, a profit or loss on the seat was to be divided equally between the two partners. There was a profit of $261,500, fixed by the Arbitration Committee of the Exchange. My share of the profit was $130,750, less counsel fees of $2500. In 1928, I received $10,000 and in 1929, $10,000, as shown in my tax returns for those years. The remaining $10,750, I am r eporting on this return. Counsel fees of $2,500 were paid by me on December 1, 1930."
The Commissioner held that the item of $108,250 was taxable as ordinary income at normal and surtax rates, disallowed the deduction of $4500 which Munson had claimed in his return on a account of an investment in the Wild Elk Conservation Range of Montana, said to have become worthless in 1930, and assessed a deficiency of $2,577.75 which the Board of Tax Appeals sustained. The Board reached the conclusion that the item of $108,250 was taxable at normal and surtax rates because it was income resultng from the payment of Adrian's personal indebtedness to Munson and not from any gain realized by the partnership.
Thereafter the taxpayer filed a claim for the refund of all taxes paid for the year 1930, namely, of $11,363.02, on the ground that he had erroneously reported $108,250 as income for that year, when it represented income for the year 1928. The refunding claim was disallowed by the Commissioner.
The question before us are:
1. Whether the sum of $108,250 paid the taxpayer by Adrian in 1930 in connection with the retention by the latter of the membership in the New York Stock ...