The opinion of the court was delivered by: BRYAN
Plaintiff taxpayers, husband and wife, sue to recover the sum of $906.49 assessed by the Internal Revenue Service as an addition to their 1957 income tax by reason of alleged underpayments of the first three installments of estimated tax for that year. The addition so assessed represented 6% upon the amount by which these instalments were alleged to have been underpaid for the periods of the underpayments. Int. Rev. Code of 1954, § 6654(a), (c).
The taxpayers now move for summary judgment under Rule 56, F.R.C.P. Jurisdiction lies under 28 U.S.C. § 1346(a)(1).
While the amount involved here is relatively small the case raises questions of some importance bearing on the circumstances under which members of a general partnership are required to include partnership earnings in calculating instalments of estimated income tax.
The taxpayers rely on the following facts:
During 1957 Percy Stewart, the husband taxpayer, was a general partner in the investment banking and underwriting firm of Kuhn, Loeb & Co. (Kuhn Loeb). His income from the partnership in that year totalled $124,905.08. Of that sum $35,000 was guaranteed salary under the partnership agreement, received by him in monthly instalments during the course of the calendar year. The balance represented Mr. Stewart's share of the partnership's net profits, which he claims were not ascertained or distributed under the partnership agreement until December 31, 1957.
For the year 1957, Mr. and Mrs. Stewart, cash basis taxpayers, filed a joint declaration of estimated income tax and a joint tax return. Their 1957 taxable year, like that of the Kuhn Loeb partnership, was the calendar year. Their declaration of estimated tax, filed on April 15, 1957, see Int. Rev. Code of 1954, § 6015(a), estimated a tax liability of $5,207.36 for the twelve month period. Accordingly they paid one-fourth of this amount, or $1,301.84, for each of the first three quarterly instalments due April 15, June 15 and September 15, 1957, respectively. Insofar as receipts from Kuhn Loeb were concerned, the taxpayers' calculations of their instalment payments were based solely upon the expected guaranteed salary of $35,000, and did not include any part of Mr. Stewart's share of accruing, but undistributed Kuhn Loeb profits. On January 15, 1958, after Mr. Stewart's share of the Kuhn Loeb net profits had been distributed, taxpayers filed an amended declaration of estimated tax showing an actual tax liability of $59,207.36 for the year 1957. See Int. Rev. Code of 1954, § 6015(e). They made a final payment of $54,000 on that date. Their income tax for 1957 in the amount of $59,598.95
has now been fully paid and is not in dispute.
On June 26, 1961, plaintiffs were informed by the Revenue Service that they had underpaid the first three 1957 instalments, and the Service imposed the addition to tax of $906.49 here in dispute. The alleged underpayments resulted from the failure of the taxpayers to include Mr. Stewart's share of the undistributed earnings of the partnership for the months preceding the due date of each instalment in calculating the amount of estimated tax payable.
Plaintiffs paid the $906.49 under protest on December 15, 1961, and on May 6, 1963, filed with the Revenue Service a claim for refund which was subsequently disallowed on June 22, 1964. This action followed.
The taxpayers assert that the facts as stated entitle them to summary judgment in their favor. The Government contends that summary judgment should be denied on either one of two grounds. It urges first, that on the facts as stated the addition to tax was properly assessed as a matter of law. Second, it is urged that if this is not so there are material questions of fact as to the interpretation and operation of the Kuhn Loeb partnership agreement and practices followed thereunder which require trial.
Section 6654 of the Internal Revenue Code, as it applies to the 1957 taxable years,
provides generally for an addition to tax of 6% per annum upon any underpayment of estimated tax by a taxpayer who pays his instalments in an amount that proves to be less than 70% of his ultimate actual income tax for the year.
Section 6654(d), however, offers four different escape routes for the taxpayer who might otherwise be subjected to the addition to tax imposed in the event of underpayment. The first two, not material here, in substance permit a taxpayer to make his estimated payments on the basis of the facts stated on his return for the preceding taxable year.
The last two exceptions generally authorize a taxpayer to gear his instalment payments - according to the alternative formulae in subsections 6654(d)(1)(C) and (d)(2) - to his "taxable income" or "actual taxable income" for the "months in the taxable year ending before the month in which the installment is required to be paid."
It is these two exceptions upon which the taxpayers here rely though they do not specify which.
The issue thus presented is whether the touchstone terms "taxable income" and "actual taxable income" in these subsections include not only the actual payments of Mr. Stewart's guaranteed Kuhn Loeb salary but also the undistributed share of the partnership income attributable to the months in the taxable year preceding taxpayers' instalment dates. The parties agree - as § 702 of the Internal Revenue Code of 1954 explicitly states - that a partner's "taxable income" or "actual taxable income" includes his "distributive share" of the partnership earnings, as well as his guaranteed salary. See also Treas. Reg. § 1.6654-2(d). The ultimate question is limited to whether "distributive share" as it relates to the obligation of these ...