The opinion of the court was delivered by: LEVET
This action is brought pursuant to Section 3746(b) of the 1939 Internal Revenue Code, 26 U.S.C.A. § 3746(b). The United States is seeking to recover $ 25,155.09 and interest upon the ground that this sum was erroneously refunded to the defendant.
Practically all of the facts were stipulated by the parties.
The action was tried before this court without a jury. After hearing the testimony, examining the exhibits, briefs and pleadings of the parties, I hereby find as follows:
1. The defendant is the widow of Alexander Ellis, who died a resident of the Commonwealth of Massachusetts on November 5, 1943.
2. Defendant at the time of service of process herein resided within the Southern District of New York.
3. At the time of his death, the said Alexander Ellis was a member of the partnership of Fairfield & Ellis, which was engaged in the business of insurance brokerage in Boston, Massachusetts, under certain Articles of Partnership, which were introduced in evidence.
4. Prior to his death in 1943, Alexander Ellis had been continuously engaged in the insurance brokerage business as a licensed broker in Boston, Massachusetts, for more than 20 years; from 1926 to 1930, in the partnership of Russell & Fairfield, and subsequently from 1930 to July 1, 1937, a member of the successor partnership of Russell, Fairfield & Ellis.
5. At some time prior to 1942, Herbert Fairfield, a member of the said partnership, had loaned $ 6,000 and the decedent, Alexander Ellis, had loaned $ 3,000 in original capital to one of the partnerships; no other capital was invested or loaned. The capital was not a substantial income-producing factor for the firm of Fairfield & Ellis or its predecessors.
6. For the period between January 1, 1936 and July 1, 1937, Herbert Fairfield received 53% and Alexander Ellis 47% of the net partnership income of Russell, Fairfield & Ellis after payments to the junior or salaried partners. The net income of Russell, Fairfield & Ellis and Alexander Ellis' share of that income for this period was as follows:
Net Income of Alexander Ellis
Jan. 1, 1936-June 30, 1936 $ 92,220.25 $ 37,197.98
July 1, 1936-Jan. 31, 1937 104,505.88 36,866.32
Jan. 31, 1937-June 30, 1937 87,395.98 30,118.08
7. The first fiscal year of Fairfield & Ellis ran from July 1, 1937 to January 31, 1938. Thereafter the partnership reported its income on the basis of a fiscal year which began on February 1 and ended on January 31 of the following calendar year. The defendant reported her income on a calender year basis.
8. Substantially all income earned by the firm after July 1, 1937 was derived from commissions earned on the sale of insurance as agent for various insurance companies and as brokers. The partnership profits for the fiscal year July 1, 1937 to January 31, 1938 were $ 106,724.38, all of which was derived from commissions earned on the sale of insurance. Alexander Ellis' distributable share of this income was $ 24,350.64. Thereafter the profits and Alexander Ellis' distributable share to the date of his death were as follows:
Year Ending Net Commission Alexander Ellis
1/31 Income Distributable Share Capital Gain
1939 $ 195,488.32 $ 36,458.53
1940 175,529.12 32,960.19
1941 203,713.68 54,087.98
1942 188,130.70 54,151.61 $ 1,825.00
1943 217,025.28 59,695.99
1944 262,247.36 54,606.10(11/30/43)
1945 263,135.19 66.66
1946 219,285.61 30,000.00
9. Prior to the death of Alexander Ellis, the major portion of the commission income of Fairfield & Ellis and the predecessor partnership of Russell, Fairfield & Ellis was derived from the sale of fire, casualty, liability and marine insurance which was written for three and five-year periods. The commission which the firm received was a percentage of the total premium on any policy written for one of its customers. Generally speaking, the firm was paid a smaller percentage on the renewal of an outstanding policy than it was for the placement of a policy for a new insured, but, for the years before and after Alexander Ellis' death, a substantial part of the firm's income came from commissions on renewal business.
10. The firm of Fairfield & Ellis and the predecessor firm of Russell, Fairfield & Ellis maintained an extensive organization numbering at least 40 employees and including experts and specialists in insurance matters, which was devoted to servicing its customers. Among the services which the firm provided through its experts and specialists were these: it would give advice as to the kind and amount of insurance which would best meet its customer's need and what insurance company could best meet the need; it would keep abreast of recent developments in the insurance field, would suggest to its customers how premiums might be trimmed in light of these developments, and would otherwise suggest the modification of outstanding or expiring policies in the light of changed conditions; and it would process claims of loss for its customers and prepare new policies when old ones expired.
11. Prior to his death, Alexander Ellis by virtue of his own personal efforts in the sale of insurance was directly or indirectly responsible for a substantial portion of the total commission income earned by Fairfield & Ellis and the predecessor firm of Russell, Fairfield & Ellis.
12. In November, 1936, Alexander Ellis nominated one John H. Good as a dormant partner, pursuant to Section 18 of the said Articles of Partnership as amended, and the said John H. Good accepted the said nomination and it was agreed that the said John H. Good should receive certain amounts payable from the partnership of Fairfield & Ellis as trustee for Catherine H. Ellis, wife and later widow of Alexander Ellis, to be paid over to her absolutely. On March 31, 1944, the said John H. Good signed an Agreement of Trust, whereby he agreed to hold in trust any funds he received as said dormant partner in the firm of Fairfield & Ellis for the late Alexander Ellis and to pay them currently to Catherine H. Ellis during her life, and in the event of her death to pay them to such persons and in such shares as she will appoint by will. (See affidavit of John H. Good, Exhibit E, and Paragraph 11 of stipulation, Government's Exhibit 6.)
13. The firm of Fairfield & Ellis accepted the nomination of John H. Good as the dormant partner representing the interest of Alexander Ellis. In accordance with the partnership agreement John H. Good as dormant partner became entitled to receive for a period of ten years after the death of Alexander Ellis one-half of the share of the profits of the partnership that Alexander Ellis was receiving at the time of his death and to bear the burden of one-half of the share of any losses which Alexander Ellis was obliged to share at the time of his death, with the condition that John H. Good as dormant partner was entitled to receive not less than $ 25,000 out of the firm's profits for each year or such smaller sum as the profits should amount to so long as Herbert Fairfield continued as an active partner of the firm. Mr. Fairfield did so continue.
14. As of the date of Ellis' death the balance sheet of Fairfield & Ellis contained no entry on account of firm name or good will.
15. At the date of his death Alexander Ellis' account with Fairfield & Ellis showed an overdraft as of November 30, 1943 after appropriate adjustments, including a credit for the $ 3,000 which Ellis had loaned to the business as aforesaid and after a credit for Mr. Ellis' share of the capital assets of the firm. This overdraft amounted to $ 15,811.42. It was paid in 1944 by deducting $ 15,811.42 from the amounts payable to the dormant partner for the benefit of the defendant under the Articles of Partnership as amended.
16. The executrix of the estate of Alexander Ellis did not include in her federal estate tax return the right which his widow had acquired through the medium of Mr. Good as dormant partner appointed under Section 18 of said Articles of Partnership as amended. Upon audit of the return, the Commissioner of Internal Revenue included said right in the gross estate and valued it at $ 221,261.54. This change, together with other minor adjustments, produced a deficiency in estate tax of $ 58,044.47, of which $ 57,034.44 was attributable to the inclusion of the right under the partnership agreement; this estate tax deficiency together with interest of $ 6,292.55 attributable to that portion of the deficiency resulting from the inclusion of the right was paid on April 8, 1947.
17. The share of the firm profits which were distributable to the dormant partner for Alexander Ellis for the ...