The opinion of the court was delivered by: BRENNAN
Plaintiffs seek a judgment in effect directing the refund of an income tax item paid for the taxable year 1943. The terms 'plaintiff' and 'taxpayer' as they hereinafter appear refer to the plaintiff, Laurence Sovik.
In 1935 the law firm in which the plaintiff was a partner purchased an account receivable owned by a predecessor law partnership, which had been previously dissolved. Thereafter the amount due on said account was fixed by agreement at $ 100,000, and it was agreed that the account would be paid within ten years from 1937. In 1943 the account was paid in full and plaintiff's distributive share was reported in his income tax return for the year 1943, as a long term capital gain, and the tax computed accordingly. The Commissioner rejected the contention that the item constituted a long term capital gain and assessed the item taxable as ordinary income. It is conceded for the purpose of argument that the account receivable in the hands of the purchaser was a capital asset.
The question then presented may be concisely stated; viz: Is an account receivable paid in full prior to the expiration of the agreed time within which payment should be made a long term capital gain within the provisions of Section 117 of the Internal Revenue Code, as amended? The answer appears to be found in the wording of Section 117(a)(4), of the Code, 26 U.S.C.A. § 117(a) (4), which requires the sale or exchange of a capital asset in order that the gain come within the definition of a long term capital gain. Here, there was no sale or exchange of the account receivable by the partnership of which the taxpayer was a member. The account was held and eventually paid in full. There would seem to be no valid distinction between the redemption of bonds before maturity and the payment by the creditor of his financial obligation prior to the date when payment could have been enforced. Fairbanks v. United States, 306 U.S. 436, 59 S. Ct. 607, 83 L. Ed. 855; Lee v. Commissioner of Internal Revenue, 7 Cir., 119 F.2d. 946; Bingham v. Commissioner of Internal Revenue, 2 Cir., 105 F.2d 971.
1. The facts as they appear in the stipulation and in the allegations of the complaint as admitted in the answer are adopted as the findings of fact here.
1. The Court has jurisdiction in this action.
2. The complaint is dismissed.
This case was reargued to afford the plaintiffs the opportunity to raise a new legal contention which was neither urged nor passed upon in the decision of January 31, 1950.
The controversy involves the taxation of a single item of the taxpayer's income reported in the taxable year 1943. The original decision rejected the taxpayer's claim that the item constituted a long-term capital gain, and sustained the Commissioner's determination that the item constituted ordinary income and was taxable as such. Upon reargument the taxpayer takes the position that the item in question represents the total compensation received by him in one taxable year for personal services covering a period in excess of thirty-six calendar months, and that he is, therefore, entitled to the benefit of the provisions of Section 107(a) of the Revenue Act as it existed in 1943, as to such item.
The above position is, of course, inconsistent with the claim that the item constituted a long-term capital gain, and it is apparent that the complaint herein was based upon the long-term capital gain theory. It does not appear that the Commissioners in any manner passed upon the present contention, or that it was in fact urged in the proceedings before him. The stipulation, however, contains a copy of the claim for refund, and taxpayer's contention upon this reargument was raised therein. No question is raised as to the sufficiency of the complaint or as to any deficiency in the prior proceedings, so that the present contention will be determined upon its merits.
The background of facts pertinent to the decision will be briefly referred to.
The taxpayer was a special partner in a law firm which represented the executors of the estate of Daniel M. Edwards, deceased, from May 27, 1929 until June 13, 1932. As such special partner, the taxpayer had no interest in any accounts receivable or other assets of the firm at any time; his interest being confined solely to a weekly cash payment for services, plus an annual percentage of the net cash income of the firm. His interest was confined to a percentage of actual cash received for services during each year. In June, 1932, the firm was dissolved due to the bankruptcy of one of the partners. The same parties immediately organized a second firm in which the taxpayer had the same interest as above mentioned. The second firm continued from June 13, 1932 to November 16, 1934, when same was dissolved because of the death of one of the partners. On January 2, 1935, the third firm was formed by a written partnership arrangement, the details of which are unnecessary for this decision. It is sufficient to say that the taxpayer became a general partner and an owner of a percentage interest in the assets thereof. The claim of the first firm for services rendered to the Edwards Estate as above mentioned remained its property until June 27, 1935, when such claim, together with other uncollected accounts and some articles of personal property such as office furniture, etc., were sold at public auction. The exact amount received on account of the Edwards Estate claim is not determinable from the stipulation, which shows that all uncollected accounts, including the claim against the Edwards Estate, were sold for the sum of $ 21,248.25. The third firm was the purchaser thereof. The moneys received from the sale of the assets of the first firm mentioned above were distributed as follows: one-third to the trustee of the estate of the bankrupt partner, one-third to the executors of the estate of the deceased partner, and the remaining one-third to the surviving partner. On October 16, 1937 by a written agreement the claim for services rendered by the first firm to the Edwards Estate and purchased and held by the members of the third firm was ...