Before MEDINA, LUMBARD and WATERMAN, Circuit Judges.
Petitioners, executors of the estate of Charles A. Riegelman, seek reversal of a decision of the Tax Court sustaining a deficiency assessed by the Commissioner in the estate tax reported by the executors. The sole issue is whether the gross estate of the deceased includes the value of the right of his estate to receive from a law partnership of which he had been a member certain payments which represented a share of post-death partnership income.
The relevant facts are not in dispute. Charles A. Riegelman on the date of his death, July 20, 1950, was the senior partner of the law firm of Riegelman, Strasser, Schwarz and Spiegelberg. The partnership owned no significant tangible property, though it did own nominal assets such as office furniture, fixtures, and a library. Decedent had not made any capital contributions to the partnership. The partnership agreement in effect at Riegelman's death provided that upon the death of a partner the partnership should not thereby be dissolved, but that the estate of the deceased partner should be entitled to receive specified payments. Specifically, these payments (as found by the Tax Court) consisted of
"(i) The deceased partner's share of the undistributed profits realized and collected by the partnership prior to his death, plus his share of the profits realized and collected after his death which were attributable to work completed prior to his death, and
"(ii) A share, for a specified period of time, of the post-death partnership fees and profits which were attributable to work completed after the deceased partner's death on matters in process at the date of his death and matters upon which work was commenced and completed after the date of his death."
The petitioners timely filed an estate tax return and included therein, as part of the gross estate, the value of the payments to which they were entitled under (i) above, and, in addition, the value of any further payments which they were entitled to receive for the work done during the lifetime of the decedent. They did not include as part of the gross estate the value of payments to be received by the estate for work done subsequent to Riegelman's death. The Commissioner concluded that the latter sums, the value of which was stipulated by the parties at $95,000, should have been included in the gross estate, and accordingly assessed a deficiency. The Tax Court sustained the Commissioner.
The rationale underlying inclusion in the gross estate of the value of an estate's right to receive a portion of the income earned by a partnership subsequent to the death of a deceased partner has been adequately considered elsewhere and does not require an extended discussion here. See McClennen v. Commissioner, 1 Cir., 1942, 131 F.2d 165, 144 A.L.R. 1127; 1 Paul, Federal Estate and Gift Taxation § 4.08 (1942); Rabkin and Johnson, The Partnership Under the Federal Tax Laws, 55 Harv.L.Rev. 909 (1942). Section 811 of the Internal Revenue Code of 1939, 26 U.S.C. § 811, states that:
"The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States -
"(a) Decedent's interest. To the extent of the interest therein of the decedent at the time of his death * * *"
The right of Riegelman's estate to share in the profits of the partnership for the stipulated period after his death was a chose in action, in lieu of that to which it would have succeeded in the absence of an agreement, which passed from Riegelman to his estate as a part of his wealth and hence was properly includable in his gross estate for the purpose of computing an estate tax. McClennen v. Commissioner, supra.
The petitioners, however, rely upon Bull v. United States, 1935, 295 U.S. 247, 55 S. Ct. 695, 79 L. Ed. 1421 as controlling authority for the proposition that the value of such payments is not subject to an estate tax unless capital was a material income-producing factor in the business conducted by the partnership or the deceased partner had made capital contributions to the partnership. The decedent there was a partner in a firm of shipbrokers, the business of which did not require the use of a significant amount of capital. The articles of partnership provided that upon the death of a partner his estate should have "'the option of withdrawing his interest from the firm within thirty days after the probate of will'" and that if it did not so elect "the survivors should continue the business for one year subsequent to his death, and his estate should 'receive the same interests, or participate in the losses to the same extent,' as the deceased partner would, if living * *" 295 U.S. 247, 251, 55 S. Ct. 695, 696, 79 L. Ed. 1421. Bull's executors did not exercise the option of withdrawing, and the business continued as contemplated by the agreement. The estate tax return filed by the executors included only the partnership profits earned prior to Bull's death; but, upon the assessment of a deficiency by the Commissioner, they paid an estate tax on the entire amount paid to Bull's estate by the partnership. Subsequently, the estate filed its income tax return and did not include therein the amounts received after Bull's death as post-death partnership income. The Commissioner determined that an income tax was payable on the amounts so received. The Court of Claims sustained him, and rejected the estate's demand for refund of the estate tax on the ground that a refund was barred by the statute of limitations. On certiorari the Supreme Court sustained the Court of Claims as to the imposition of income tax, holding that since the firm had no capital assets the payments made to the estate could not constitute the purchase price of decedent's interest in the partnership - therefore the payments were income to the estate. In addition, the Court held the Commissioner erred by including in the decedent's gross estate the exact amount of the payments so received.
In the present case the Tax Court distinguished Bull on the ground that the present agreement, unlike that in Bull, does not provide for the continuation of the partnership with decedent's estate as a partner. We agree. In the course of its opinion in Bull the Supreme Court said that "In the light of the facts it would not have been permissible to place a value of $212,718.99 [the amount received by the estate attributable to partnership earnings subsequent to Bull's death] or any other value on the mere right of continuance of the partnership relation enuring to Bull's estate." 295 U.S. 247, 256, 55 S. Ct. 695, 698, 79 L. Ed. 1421. (Emphasis supplied.) And, in Helvering v. Enright's Estate, 1941, 312 U.S. 636, 641, 61 S. Ct. 777, 780, 85 L. Ed. 1093, the Supreme Court characterized Bull as involving "the effect of agreements for continuation of an interest in the partnership after death." The agreement under which Riegelman's estate received a share of the income earned after Riegelman's death did not provide for a continuance of the partnership relation, and, in the absence of such a provision, we agree with the Tax Court that Bull is not controlling here.
We think, however, that there is a more fundamental reason for holding Bull inapplicable to the case at bar. That decision was handed down in 1935 and involved estate tax liability accruing during the year 1920. During the intervening years Congress has enacted substantial changes in the Internal Revenue Code. We deem of particular importance § 134(e) of the Act of October 21, 1942, 56 Stat. 831, incorporated as § 126 of the Internal Revenue Code of 1939, 26 U.S.C. & 126. That section introduced ...